[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]



 
                       FIRST SALE UNDER TITLE 17
=======================================================================



                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON

                     COURTS, INTELLECTUAL PROPERTY,

                            AND THE INTERNET

                                 OF THE

                       COMMITTEE ON THE JUDICIARY

                        HOUSE OF REPRESENTATIVES

                    ONE HUNDRED THIRTEENTH CONGRESS

                             SECOND SESSION

                               __________

                              JUNE 2, 2014

                               __________

                           Serial No. 113-98

                               __________

         Printed for the use of the Committee on the Judiciary


      Available via the World Wide Web: http://judiciary.house.gov





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                       COMMITTEE ON THE JUDICIARY

                   BOB GOODLATTE, Virginia, Chairman
F. JAMES SENSENBRENNER, Jr.,         JOHN CONYERS, Jr., Michigan
    Wisconsin                        JERROLD NADLER, New York
HOWARD COBLE, North Carolina         ROBERT C. ``BOBBY'' SCOTT, 
LAMAR SMITH, Texas                       Virginia
STEVE CHABOT, Ohio                   ZOE LOFGREN, California
SPENCER BACHUS, Alabama              SHEILA JACKSON LEE, Texas
DARRELL E. ISSA, California          STEVE COHEN, Tennessee
J. RANDY FORBES, Virginia            HENRY C. ``HANK'' JOHNSON, Jr.,
STEVE KING, Iowa                       Georgia
TRENT FRANKS, Arizona                PEDRO R. PIERLUISI, Puerto Rico
LOUIE GOHMERT, Texas                 JUDY CHU, California
JIM JORDAN, Ohio                     TED DEUTCH, Florida
TED POE, Texas                       LUIS V. GUTIERREZ, Illinois
JASON CHAFFETZ, Utah                 KAREN BASS, California
TOM MARINO, Pennsylvania             CEDRIC RICHMOND, Louisiana
TREY GOWDY, South Carolina           SUZAN DelBENE, Washington
RAUL LABRADOR, Idaho                 JOE GARCIA, Florida
BLAKE FARENTHOLD, Texas              HAKEEM JEFFRIES, New York
GEORGE HOLDING, North Carolina       DAVID N. CICILLINE, Rhode Island
DOUG COLLINS, Georgia
RON DeSANTIS, Florida
JASON T. SMITH, Missouri
[Vacant]

           Shelley Husband, Chief of Staff & General Counsel
        Perry Apelbaum, Minority Staff Director & Chief Counsel
                                 ------                                

    Subcommittee on Courts, Intellectual Property, and the Internet

                 HOWARD COBLE, North Carolina, Chairman

                TOM MARINO, Pennsylvania, Vice-Chairman

F. JAMES SENSENBRENNER, Jr.,         JERROLD NADLER, New York
Wisconsin                            JOHN CONYERS, Jr., Michigan
LAMAR SMITH, Texas                   JUDY CHU, California
STEVE CHABOT, Ohio                   TED DEUTCH, Florida
DARRELL E. ISSA, California          KAREN BASS, California
TED POE, Texas                       CEDRIC RICHMOND, Louisiana
JASON CHAFFETZ, Utah                 SUZAN DelBENE, Washington
BLAKE FARENTHOLD, Texas              HAKEEM JEFFRIES, New York
GEORGE HOLDING, North Carolina       DAVID N. CICILLINE, Rhode Island
DOUG COLLINS, Georgia                ZOE LOFGREN, California
RON DeSANTIS, Florida                SHEILA JACKSON LEE, Texas
JASON T. SMITH, Missouri             STEVE COHEN, Tennessee
[Vacant]

                       Joe Keeley, Chief Counsel

                    Heather Sawyer, Minority Counsel


                            C O N T E N T S

                              ----------                              

                              JUNE 2, 2014

                                                                   Page

                           OPENING STATEMENTS

The Honorable Bob Goodlatte, a Representative in Congress from 
  the State of Virginia, and Chairman, Committee on the Judiciary     1
The Honorable Jerrold Nadler, a Representative in Congress from 
  the State of New York, and Ranking Member, Subcommittee on 
  Courts, Intellectual Property, and the Internet................     2

                               WITNESSES

Stephen M. Smith, President and Chief Executive Officer, John 
  Wiley & Sons, Inc.
  Oral Testimony.................................................     6
  Prepared Statement.............................................     8
John Ossenmacher, Founder and Chief Executive Officer, ReDigi
  Oral Testimony.................................................    19
  Prepared Statement.............................................    21
Ed Shems, Illustrator and Graphic Designer, edfredned 
  Illustration & Design
  Oral Testimony.................................................    39
  Prepared Statement.............................................    41
Jonathan Band, Counsel, Owners' Rights Initiative
  Oral Testimony.................................................    46
  Prepared Statement.............................................    48
Greg Cram, Associate Director, Copyright and Information Policy, 
  The New York Public Library
  Oral Testimony.................................................    63
  Prepared Statement.............................................    65
Matthew B. Glotzer, Media Consultant
  Oral Testimony.................................................    80
  Prepared Statement.............................................    82
Sherwin Siy, Vice President, Legal Affairs, Public Knowledge
  Oral Testimony.................................................    87
  Prepared Statement.............................................    89
John Villasenor, Nonresident Senior Fellow, The Brookings 
  Institution, and Professor of Electrical Engineering and Public 
  Policy, University of California, Los Angeles
  Oral Testimony.................................................    95
  Prepared Statement.............................................    97
Emery Simon, Counselor, BSA l The Software Alliance
  Oral Testimony.................................................   108
  Prepared Statement.............................................   110

                                APPENDIX
               Material Submitted for the Hearing Record

Prepared Statement of the Association of American Publishers 
  (AAP)..........................................................   138
Letter from ACT l The App Association............................   155
Prepared Statement of Sandra M. Aistars, Chief Executive Officer, 
  Copyright Alliance.............................................   157
Prepared Statement of Keith M. Kupferschmid, General Counsel and 
  Senior Vice President, Intellectual Property Software & 
  Information Industry Association...............................   166
Letter from the United Network Equipment Dealers Association 
  (UNEDA)........................................................   181
Prepared Statement of Kim Fender, Director of the Public Library 
  of Cincinnati and Hamilton County, OH..........................   182


                       FIRST SALE UNDER TITLE 17

                              ----------                              


                          MONDAY, JUNE 2, 2014

                        House of Representatives

            Subcommittee on Courts, Intellectual Property, 
                            and the Internet

                       Committee on the Judiciary

                            Washington, DC.

    The Subcommittee met, pursuant to call, at 9:41 a.m., in 
Ceremonial Courtroom 9C, Daniel Patrick Moynihan Southern 
District of New York Courthouse, 500 Pearl Street, New York, 
New York 10007, the Honorable Bob Goodlatte (Chairman of the 
Committee) presiding.
    Present: Representatives Goodlatte, Chaffetz, Holding, 
Nadler, Deutch, and Jeffries.
    Staff Present: (Majority) Joe Keeley, Subcommittee Chief 
Counsel; Olivia Lee, Clerk; (Minority) Heather Sawyer, Chief 
Counsel; and Jason Everett, Counsel.
    Mr. Goodlatte. Good morning. The Subcommittee on Courts, 
Intellectual Property, and the Internet will come to order.
    And without objection, the Chair is authorized to declare 
recesses of the Subcommittee at any time.
    We welcome all of our witnesses today. I will begin with an 
opening statement.
    This morning, the Subcommittee on Courts, Intellectual 
Property, and the Internet of the House Judiciary Committee 
will hold its first field hearing in our ongoing comprehensive 
review of our Nation's copyright rights.
    First, let me thank the Southern District of New York for 
their willingness to host this Congressional hearing, along 
with the efforts of the staff of the court as well as Mr. 
Nadler's district staff to ensure that this hearing would be a 
success.
    New York City is an appropriate location for this hearing. 
As a business hub for decades, this city has witnessed the 
growth of international commerce that has enabled American 
copyrighted works to have a positive balance of trade in our 
economy. As a growing eCommerce hub, this city is also at the 
heart of several copyright policy challenges that have arisen 
in the digital era. One could even say that this hearing 
returns to the birthplace of first sale jurisprudence.
    In a 1908 decision in a case of first impression, the 
United States Supreme Court heard arguments involving the 1897 
Copyright Act between a book seller and two brothers by the 
names of Isidor and Nathan Straus. In the early 1900's, the 
Straus brothers had just opened a new location of their store 
nearby in Harold Square, where they sold books at a lower price 
than that desired by the publisher. The publisher had printed a 
minimum resale price directly below the copyright notice. That 
retailer was then and is still known today as R.H. Macy and 
Company.
    In its 1908 decision, the Supreme Court held that the first 
sale doctrine prevented such conditions of sale. In the 
following year, the first sale doctrine was codified as Section 
47 of the 1909 Copyright Act and continues today at Section 109 
of Title 17.
    Building upon this 1908 case and several others after that, 
in 2013, the Supreme Court provided additional interpretation 
of the first sale doctrine in the context of reimported items. 
The Kirtsaeng case is something we will learn more about this 
morning, including from the CEO of the company that was the 
opposing party in this case. Although some legal doctrines may 
be invisible to Americans, the first sale doctrine is not one 
of them.
    First sale has been such an integral part of our economy 
that entire businesses have been built upon it, such as 
Blockbuster video stores and Netflix by mail. Consumer 
expectations have also been built on this doctrine. Laws and 
consumer expectations are developed independently, but they can 
help shape each other. This morning we will hear about both as 
they apply in the first sale context.
    As digital business models have grown and in many cases 
supplanted analog business models, the role of licensing has 
become more important. From software offered at lower prices in 
educational settings to movies offered at lower prices for 24-
hour viewing periods, licensing enables a greater range of 
business models that benefit consumers.
    Expectations in the digital context are still developing. 
For example, consumers seem to have embraced business models 
that set a lower price for educational uses than commercial 
uses of software. Consumers are also accustomed to files such 
as apps, songs, and movies being accessible on any device on a 
consumer's home network at one purchase price without having to 
pay for multiple copies.
    Consumer expectations in other areas appear to be more 
fluid. For example, do most consumers expect to be able to sell 
their digital files? One of our witnesses this morning provides 
such a service, but has been involved in litigation over his 
business model.
    Finally, several of our witnesses have ongoing experience 
in the business-to-business context where consumer expectations 
do not necessarily apply. The Subcommittee looks forward to 
hearing their perspective on first sale as well.
    In closing, the first sale doctrine is an essential part of 
our Nation's commerce, and understanding its impact in the 
digital age is something this Committee looks forward to 
hearing more about.
    It is now my pleasure to recognize the Ranking Member of 
the Courts and Intellectual Property Subcommittee, Mr. Nadler 
of New York, for his opening statement.
    Mr. Nadler. Thank you, Mr. Chairman and welcome to New 
York. I also want to welcome my other colleagues, 
Representative Deutch from Florida, my colleague from New York 
City, Representative Jeffries, Representative Chaffetz from 
Utah, and Representative Holding from North Carolina. We 
appreciate your traveling to be with us in the greatest city in 
the world.
    I would have liked to say, ``welcome to my district.'' This 
was my district for 20 years, but my district is across the 
street.
    I would also like to welcome and thank our witnesses and 
everyone else with us today. Many of you also traveled to be 
here today. Thank you for doing so. And welcome.
    New York City is home to thousands of creators, song 
writers, performers, musicians, playwrights, journalists, 
authors, and inventors. It is the heart of the publishing 
industry. Some of the Nation's leading technology companies 
call New York City their home, or at least one of their homes. 
Several of the country's leading colleges and universities are 
located here, including my alma mater, Columbia University, and 
we have one of the finest public libraries in the Nation.
    Given the wealth of talent, experience, and expertise in 
the city, it is fitting that Chairman Goodlatte chose to hold 
one of the Subcommittee's comprehensive Copyright Act review 
hearings here.
    Today we explore the first sale doctrine codified in 
Section 109 of the Copyright Act. First sale allows the owner 
of a particular copy of a copyrighted work to resell or 
otherwise dispose of that copy without the right-holder's 
consent. Once a copyright owner sells or transfers ownership of 
a particular copy of the work, the exclusive right to 
distribute that particular copy is exhausted, and the person 
who now owns that copy is free to gift, resell, or otherwise 
dispose of it.
    Because of first sale, I can give a book that I have 
purchased and read to a friend, donate it to my public library, 
or sell to it a secondhand book store. Our public libraries 
rely heavily on first sale to lend books, thus providing access 
to thousands of creative works that help inspire lifelong 
learning and greater engagement in this Nation's rich cultural 
and historical heritage.
    First sale had its origins in a world of physical, not 
digital, goods. The Supreme Court first announced the doctrine 
in the 1908 case of Bobbs-Merrill Company v. Straus. And 
Congress first codified it in the Copyright Act of 1909. It is 
a gross understatement to say that much has changed since that 
time, more than a century ago.
    Innovative technologies have made it possible to create, 
access and share content through digital platforms. At the same 
time, the marketplace for physical goods has become 
increasingly international, raising questions about whether the 
law currently strikes the proper balance between first sale and 
the right to control importation of one's creative works. 
Today's hearing gives us an opportunity to explore these 
critical issues.
    More than a decade ago, the Copyright Office reported to 
Congress on the first sale doctrine in the digital age, 
concluding in 2001 that the first sale doctrine in Section 109 
does not extend to digital works. Because first sale exhausts 
the right of distribution but not the right of reproduction, 
and because the transmission of digital works results in the 
creation of a new digital copy, the Copyright Office concluded 
that first sale was not a defense to infringement for digital 
transmissions.
    More recently, in August of last year, the Department of 
Commerce's Internet policy task force reached the same 
conclusion. The Internet policy task force also recently 
announced that it will conduct roundtables in Nashville, 
Tennessee; Cambridge, Massachusetts; Los Angeles and Berkeley, 
California; to discuss numerous topics, including the relevance 
and scope of the first sale doctrine in the digital 
environment. These roundtables will provide an opportunity to 
continue to hear from relevant stakeholders about this issue.
    After concluding that Section 109 does not protect digital 
transmissions, the Copyright Office recommended against 
expanding Section 109 to do so. It noted that because a digital 
transmission results in a perfect copy, the market for original 
goods would be harmed significantly. It also raised concerns 
that digital distribution would introduce vast numbers of 
pirated copies into the marketplace. At that time, the 
Copyright Office also felt that the likely harm of expanding 
Section 109 outweighed any need for doing so.
    I am interested in hearing from our witnesses today whether 
they believe this remains true today. Is there any greater need 
for expansion now? And if so, how would any changes impact 
copyright holders, consumers, and the existing marketplace for 
digital works?
    In addition to exploring first sale in a digital 
environment, I am also interested in hearing whether the 
Supreme Court's recent decision in Kirtsaeng v. John Wiley & 
Sons appropriately interpreted and applied the first sale 
doctrine to imported goods. In that case, books manufactured 
and sold abroad were imported without the copyright holder's 
consent and resold in the United States. At issue was the 
interplay between the first sale doctrine and the prohibition 
on importation without consent of the copyright owner in 
Section 602 of the act.
    The court ruled that the first sale doctrine applies to 
copies of works lawfully made abroad, and that importation and 
resale of such goods is therefore permissible without the 
copyright owner's consent. In so ruling, the court noted that 
book sellers, libraries, museums, and secondhand stores rely on 
first sale to protect them when lending or reselling 
copyrighted works made outside the United States.
    At the same time, the court acknowledged that its ruling 
would make it impossible for copyright holders to produce and 
price works differently for domestic and foreign markets. 
Several amici warned that this would discourage U.S. copyright 
owners from competing in foreign markets at all because goods 
sold abroad could be imported to compete in the domestic 
market. They cautioned that this would harm American workers 
and businesses and reduce access to works, both here and 
abroad.
    While it may be too soon to know the full impact of the 
Kirtsaeng decision, I am interested in hearing from the 
witnesses on how, if at all, publishers and other rights 
holders have modified their business practices to accommodate 
the ruling, the impact on consumers as well as American workers 
and companies, and whether any response from Congress is 
warranted.
    These are just a few of the many issues that we'll begin 
grappling with today as part of Subcommittee's ongoing 
comprehensive review of the Copyright Act.
    Once again, we are fortunate to have a broad range of 
witnesses to provide a diversity of perspectives and wide range 
of experience, and I look forward to hearing from them.
    With that, I yield back the balance of my time. I thank 
you.
    Mr. Goodlatte. Thank you, Mr. Nadler.
    Mr. Goodlatte. And, without objection, other Members' 
opening statements will be made a part of the record.
    We have a very distinguished panel today, and I will begin 
by swearing in our witnesses before introducing them.
    So if you could all please rise.
    [Witnesses sworn.]
    Mr. Goodlatte. Thank you.
    Let the record reflect that all of the witnesses answered 
in the affirmative.
    Each of the witnesses' written statements will be entered 
into the record in its entirety. We have an extremely large 
panel, nine witnesses. So I ask that each witness summarize his 
testimony in 5 minutes or less. To help you stay within that 
time, there is a timing light on your table. When the light 
switches from green to yellow, you will have 1 minute to 
conclude your testimony. When the light turns red, that's it. 
Your 5 minutes have expired.
    Our first witness this morning is Mr. Stephen Smith, 
President and Chief Executive Officer of John Wiley & Sons, a 
global publishing company that specializes in academic 
publishing. Mr. Smith joined Wiley in 1992 as Vice President, 
where he oversaw all operations in the Asia region. He received 
his bachelor of science degree in psychology from Oxford 
Brookes University.
    Our second is Mr. John Ossenmacher, Chief Executive Officer 
of ReDigi, the world's first marketplace for the resale of used 
digital goods. He holds his M.S. in economics from Trinity 
College and his B.S. in electromechanical engineering from 
Michigan State.
    Our third witness is Mr. Ed Shems, founder, illustrator, 
and graphic designer of edfredned illustration & design. He is 
an award-winning graphic designer and freelance illustrator, 
specializing in editorial illustrations and kids books. Mr. 
Shems has also served as head of the Boston Graphic Artists 
Guild. He received his degree from Rhode Island School of 
Design.
    Our fourth witness is Mr. Jonathan Band, Counsel for the 
Owners' Rights Initiative. Mr Band has long been active in 
intellectual property and Internet policy issues. He received 
his J.D. from Yale Law School and his B.A. from Harvard 
College.
    Our fifth witness is Mr. Matthew Glotzer, a media 
consultant. Mr. Glotzer helped found the Digital Media Group at 
20th Century Fox and spent 15 years with the company. Mr. 
Glotzer received his M.B.A. from Anderson School at the 
University of California, Los Angeles, and his B.A. in 
economics from Wesleyan University.
    Our sixth witness is Mr. Greg Cram, Associate Director of 
Copyright and Information Policy for the New York Public 
Library. In his position, Mr. Cram assists the library in its 
efforts to make its collections more broadly available to 
researchers and the general public. Mr. Cram received his J.D. 
from the Cardozo School of Law and his B.A. in political 
science from Boston University.
    Our seventh witness Mr. Sherwin Siy, Vice President of 
Legal Affairs for Public Knowledge. Before joining Public 
Knowledge, he served as Staff Counsel for the Electronic 
Privacy Information Center, working on consumer and 
communications issues. Sherwin received his J.D. with a 
certificate in law and technology from U.C. Berkeley's Boalt 
Hall School of Law.
    Our eighth witness today is Mr. John Villasenor, professor 
of electrical engineering and public policy at the University 
of California, Los Angeles. He is also a fellow at the 
Brookings Institution back in Washington, D.C. He received his 
Ph.D. and M.S. from Stanford University and his B.S. from the 
University of Virginia.
    A very good school, I might add.
    Our ninth witness and final witness is Mr. Emery Simon, 
Counselor at BSA l The Software Alliance. In his position, Mr. 
Simon advises BSA and its member companies on a broad range of 
domestic and international policy issues, including 
intellectual property, technology, and trade. Mr. Simon holds 
his J.D. from Georgetown University, his master's degree from 
Johns Hopkins University School of Advanced International 
Studies, and his bachelor's degree from Queens College.
    Welcome to you all.
    And we will start with you, Mr. Smith.

         TESTIMONY OF STEPHEN M. SMITH, PRESIDENT AND 
        CHIEF EXECUTIVE OFFICER, JOHN WILEY & SONS, INC.

    Mr. Smith. Mr. Chairman, Members of the Committee, good 
morning.
    At the risk of appearing to be the witness from the quaint 
old world of print, I would like to spend most of my 5 minutes 
talking about the impact of the Kirtsaeng ruling on Wiley's 
business, on our authors, our customers, and on the U.S. 
political, cultural, and economic interests around the world. I 
will briefly touch on the issue of digital first sale. Given 
that Wiley now earns 55 percent of its revenues from digital 
products, that is also of paramount importance to us.
    I speak to you as Wiley's 11th president and CEO in our 
200-year history but also as someone who has personal 
experience selling, publishing, and distributing books into 
international markets for over 35 years. I have personally 
spent much of my career with hands-on experience selling books 
in over 40 countries in Asia, the Middle East, Africa, and 
Latin America.
    At the point when I joined the industry in the late 1970's, 
piracy was a major issue, and I have spent a lot of time 
working together with publisher associations, such as the AAP 
and others, on anti-piracy issues. Where available to us, we 
have used enforcement remedies and the law in countries where 
we face heavy piracy. But, of course, we also have sought to 
build our market by pricing differentially by offering market-
based pricing to enable us to compete in international markets 
and serve the needs of students, teachers, and consumers in 
those markets.
    For most of my career, we were able to depend on those 
copyright laws and enforcement remedies to protect our 
interests. We were able to price differentially based on 
consideration of those international sales as being incremental 
to the overall life of a title or a publication. We were able 
to operate international pricing on the basis that this was a 
market entry strategy. We have invested heavily to create brand 
awareness, to create trust around our content and our products 
to bring the work of our authors to those markets with the 
expectation that as economic conditions improved around the 
world we would be able to benefit from that as prices 
increased.
    The Kirtsaeng ruling has changed all of that. As a result 
of the Kirtsaeng ruling, we are no longer able to use 
enforcement remedies to protect our core markets against those 
who would seek to use arbitrage to create a gray market and 
reimport those books for commercial gain into the U.S. and 
European markets.
    As a result, we have changed our policies, and in many 
cases, we are no longer operating in important emerging and 
international markets. We have either sought to address the 
challenge by moving to parity pricing, and moving to parity 
pricing effectively means withdrawal from certain markets, or 
in some markets, where we have good knowledge of the 
distribution network and trusted distributors, we have been 
able to operate on a basis of restricted access. But it means 
that we are selling fewer copies into those markets. And we 
have also sought to get around the impact of Kirtsaeng by 
creating unique and clearly differentiated international 
editions for specific markets. But that is a substantial, 
significant further investment.
    So we feel that the Kirtsaeng ruling is not in accordance 
with the initial intention of Congress. It has had no benefit 
on pricing in the U.S. What, in fact, it has done is damage 
export revenues for the country. It has limited the ability of 
our authors to reach their audience around the world, and in 
many cases it has taken away valuable content from students and 
teachers in strategically important marketplaces where 
previously we were building awareness and friendship for the 
United States and U.S. scholarship.
    So, in addition to the impact of Kirtsaeng, as I said, we 
do see digital products as being potentially a way to continue 
to operate in international markets, but of course, that would 
depend on us being able to continue to have protection for 
copyright for digital products in the marketplace as well. 
Thank you.
    Mr. Goodlatte. Thank you, Mr. Smith.
    [The prepared statement of Mr. Smith follows:]
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
                               __________
    Mr. Goodlatte. Mr. Ossenmacher, welcome.

          TESTIMONY OF JOHN OSSENMACHER, FOUNDER AND 
                CHIEF EXECUTIVE OFFICER, ReDigi

    Mr. Ossenmacher. Thank you, Chairman and Ranking Member 
Nadler and other Congressional members.
    Thank you for the opportunity to testify today before the 
Subcommittee on an issue of significant importance to the 
American economy and culture and to approximately 200 million 
Americans who buy digital goods.
    I am the founder and CEO of a company called ReDigi. Our 
company has been on the front lines of digital copyright and 
first sale doctrine, which this panel is addressing.
    For those of you who are not aware of it, ReDigi started 
technological initiatives about 5 years ago and launched its 
service just over 2 years ago.
    Our company has built an innovative mechanism that verifies 
digital ownership and authenticity. We then built a technology-
enabled marketplace that allows users to transfer title of 
their lawfully acquired preowned digital goods to a willing 
buyer or charity without making copies.
    American consumers have responded to ReDigi 
enthusiastically. They do so because of the frustration they 
feel, that we all feel, when we buy digital goods. When we buy 
a digital song from iTunes or an eBook from Amazon, we expect 
the same deal we have always been offered when we buy a 
physical book or song: to own the song or book until we are 
done with it and take advantage of the free market to resell 
it, donate it, or give it away.
    Yet this deal isn't available to us from digital vendors 
today. So ReDigi was created to give consumers that option for 
digital goods and to ensure that first sale doctrine, the right 
to sell what you have purchased, a fundamental principle from 
early common law and a long mainstay of commerce, lives into 
the digital age.
    Every year, American consumers lose billions of dollars in 
resale value because digital goods they lawfully purchased 
remained locked up on devices without a mechanism to permit 
them to resell or donate the books or music they no longer want 
simply because the goods are in digital form. That is wrong.
    During the 106 years since the first sale doctrine was 
applied by the U.S. Supreme Court in a case involving the 
resale of books, the combination of case law and statutory law 
worked well. The balance between consumers and copyright 
holders began to tilt away from consumers. Consumers found they 
could no longer make use of software they thought they owned.
    The same thing is happening now with digital books and 
music. Consumers are given the option to buy music, movies, and 
books on the screen and the ``buy'' button looks identical for 
digital and physical items alike. But in largely unintelligible 
legalese that no one reads, the rights of ownership are watered 
down or, worse, dissolved altogether. Content holders are 
attempting to take away a fundamental consumer choice by 
styling what they call long-term leases, or licenses, into 
their less-than-forthright marketing strategies.
    If the consumer wants a lease, that is fine. But ownership 
has always been and always should remain an option. More 
importantly, if a transaction involves an upfront payment for a 
digital good, not limited in time, then it should be considered 
a sale. The European Court of Justice took exactly this 
approach to apply the principle of copyright exhaustion to 
cases in which a publisher sought to prevent sales of software 
originally licensed.
    The first sale doctrine is premised on a simple concept: 
You bought it, you own it. And has never concerned itself on 
the issue of ownership with a specific format or technology, 
nor with the condition of the goods being sold. It establishes 
the legal and commonsense principle that the creator deserves 
to be paid once, and then the buyers and subsequent buyers have 
the right to resell that good, to donate it, to give it away, 
without further compensation to the copyright holder.
    This is the status quo. It is not an extreme position. It 
is a logical, conservative position. It applies to every other 
type of good. The reason it applies to those goods are the same 
reasons that should apply here as well. I am always surprised 
when I hear, unlike paper, a book or physical medium, digital, 
does not get old, so we cannot allow a used market. Friends 
have purchased used diamonds for fiances. From what I have been 
told, none of the fiances objected. The diamonds are as perfect 
as they were they were first cut. Should we no longer allow a 
used jewelry market because the quality is too good? And, 
unlike books or music, the diamonds always remains in favor, 
regardless of the cut; whereas, with the passage of time, 
books, songs, may be outdated because culture has shifted, not 
because the paper has become tattered or yellowed or the vinyl 
scratched. It is the copyright item that has aged, not the 
method of delivery.
    Those who claim first sale for digital goods would destroy 
the publishing industry because digital material does not 
deteriorate and fail to take into account an obvious and simple 
truth: the secondary markets have always existed and have 
always supported primary markets.
    Mr. Goodlatte. Thank you, Mr. Ossenmacher.
    [The prepared statement of Mr. Ossenmacher follows:]
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
                               __________
    Mr. Goodlatte. Mr. Shems, welcome.

   TESTIMONY OF ED SHEMS, ILLUSTRATOR AND GRAPHIC DESIGNER, 
                edfredned ILLUSTRATION & DESIGN

    Mr. Shems. Thank you. Mr. Chairman, Ranking Member Nadler, 
Members of the Subcommittee, thank you for the opportunity to 
testify today about the experiences of visual artists in making 
their work available to clients and consumers in the digital 
age.
    It is important when making policy decisions that will 
impact authors of all types of copyrighted works to hear from 
creative people from all parts of the creative community, so I 
thank you all for holding this hearing in New York City. As we 
have heard already, it is one of the most vibrant centers of 
creativity and the visual arts and home to the Graphic Arts 
Guild, as well as for understanding that your deliberations 
will have far-reaching impacts on artists, such as myself.
    Before I received my diploma from RISD 23 years ago, I had 
already decided to own my own business for one reason: it was 
important to me that I retain control over the work that I 
create, and this is something you cannot do when you are a 
salaried employee. The artwork an employee creates becomes the 
property of the employer to do with as they will. But an 
independent business owner is bound only by the contract he or 
she negotiates with the clients.
    Graphic artists are service providers, and we provide a 
service to our clients through our creativity to enhance their 
businesses in the marketplace. Our exclusive rights and our 
original artwork and the potential to earn income from 
licensing our work to different clients, businesses, and media 
in different forms and formats are essential to our income as 
creative professionals and small business owners.
    Graphic artists, illustrators, and photographers generally 
license rather than sell their work commercially, and this 
allows us to provide our clients exactly the rights that they 
need and set a price that fairly compensates for those rights 
while allowing us to retain control over the copyright in our 
work for other purposes.
    This is beneficial to us both because it keeps the costs 
for the client reasonable and the compensation of the artist 
appropriate to the rights licensed. We set prices for our work 
based on how it will be used. If the design or illustration 
will be featured over an extensive geographical graphical area, 
fees are significantly higher than when a design or 
illustration is used only locally or limited usage.
    I am not a lawyer, but it is my understanding that two 
related ideas have been floated which would be relevant to my 
work: one, whether the first sale doctrine should be expanded 
in order to grant users greater rights in the digital world, 
and, two, whether some elements of the first sale doctrine 
should be imposed even on businesses that are based on 
licensing rather than selling work.
    I am concerned about proposals to expand the first sale 
doctrine in the digital world to allow reselling of creative 
works over the Internet. There is no such thing as a used book 
in the digital world; every copy of a file is as good as the 
original, doesn't degrade over time. So every digital book sold 
under the first sale doctrine would compete directly with my 
client sales. This means my clients will have fewer sales and 
fewer resources to devote to hire illustrators, photographers, 
and designers.
    As a result, I would likely have fewer clients, and we 
might see a decline in the industry in which I make my living.
    I am also concerned that infringement will become even 
harder to police than it is now. How will we know that all 
copies of the original file have been deleted before it has 
been sold or given away under a digital first sale doctrine? If 
my artwork is infringed, it may also be altered by an end user 
in a manner to which I may object. This may include reworking 
the art in an objectionable way or using it to promote or 
convey a message with which I do not agree. My artwork 
represents me and my point of view, and changes unapproved by 
me might impact negatively upon my reputation and my ability to 
attract clients.
    As a creative professional and small business owner, I am 
able to choose which clients I will work with. And if 
requirements of the first sale doctrine were imposed on my 
licensing relationships and my clients could legally sell 
copies of my work to others, that right would be taken away 
from me.
    The proposal to expand the first sale doctrine in the 
digital world would make it wholly unmanageable for creative 
professionals to oversee the distribution of our work. A change 
to this doctrine is something that the visual arts community is 
not asking for and, more importantly, is not something our 
clients are asking for either.
    The second related question is whether artists and other 
copyright owners should be able to write the terms of our 
license agreements with our clients based upon their actual 
needs, without terms being dictated by law. Licensing is core 
to the business of so many visual artists who work 
commercially. Intervening in the license agreements we 
negotiate with our clients would be incredibly destructive to 
the livelihoods of commercial visual artists and would raise 
prices for clients.
    To sum up, a law expanding first sale could easily cut 
creators out of value change for their own work and 
artificially force the price of our work below sustainable 
levels. It would almost certainly increase sky-high levels of 
infringement in a way that is impossible to police. If first 
sale requirements were imposed on licensing relationships 
allowing my clients to resell my work, it would commoditize 
that work to the point where it would lose its value for my 
business.
    The effects of such a change would also force me, an 
independent entrepreneur, into the equivalent of a work-made-
for-hire world, where I no longer manage rights to my own 
artworks. This is a path I explicitly rejected and have been 
rallying against throughout my career. I would be forced to 
surrender my most precious economic asset, my copyright. The 
impact on me as a small business would be monumental.
    Thank you.
    Mr. Goodlatte. Thank you, Mr. Shems.
    [The prepared statement of Mr. Shems follows:]
    
    
    
    
    
    
    
    
    
    
                               __________
    Mr. Goodlatte. Mr. Band, welcome.

             TESTIMONY OF JONATHAN BAND, COUNSEL, 
                   OWNERS' RIGHTS INITIATIVE

    Mr. Band. Chairman Goodlatte, Ranking Member Nadler, 
Members of the Subcommittee.
    The Owners' Rights Initiative is an organization of over 20 
companies and associations dedicated to protecting the first 
sale doctrine.
    The first sale doctrine reflects a basic feature of 
property rights. When you own a physical good, you can have the 
right to dispose of it as you please. You can sell it, lend it, 
or give it away. The fact that some aspects of the good are 
covered by copyright does not diminish your rights in the good. 
If I purchase a legal copy of a novel written by Elmore 
Leonard, his estate owns the copyright on the novel, but I own 
the physical copy. Leonard's copyright prevents me from copying 
the novel, but it doesn't prevent me from selling it or giving 
it away.
    The first sale doctrine protects my property rights in my 
copy. If I buy a North Face jacket, with is its distinctive 
logo, North Face's copyright in the logo doesn't prevent me 
from donating the jacket to the Salvation Army or the Salvation 
Army from selling the jacket.
    The first sale doctrine works because it matches consumer 
expectations relating to their property. They understand that 
they can't copy the novel or make counterfeit copies of the 
North Face jacket. At the same time, they fully expect to be 
able to sell or give away these products. Whether the copies of 
the novel are printed in the United States or in Canada makes 
no difference to the consumer. He expects to be able to resell 
it regardless of where it was printed or purchased.
    The Supreme Court's decision in Kirtsaeng makes sense 
because it is consistent with consumer expectations. The 
purchaser's right to transfer the copy of the novel or the 
North Face jacket should not turn on where the copy was made or 
where it was first sold but on whether the copy was 
manufactured lawfully. Any other rule would be counterintuitive 
and impossible to implement.
    In today's global market, downstream sellers often have no 
way of knowing where a product was manufactured or first sold. 
Mr. Smith, with Wiley, argues that the rule adopted in 
Kirtsaeng will prevent copyright owners from price 
discriminating against American consumers. But the Supreme 
Court ruled that nothing in the Constitution suggests that 
copyright should include the right to price discriminate. 
Furthermore, price discrimination will not help American 
workers because most copyrighted products are made overseas, 
increased foreign sales will not lead to more manufacturing 
jobs in the U.S.
    Remember, we are not just talking about books. The previous 
Supreme Court cases in this area dealt with the logo on a watch 
and the label on a shampoo bottle. Even after Kirtsaeng, 
publishers can still price discriminate. They just can't use 
copyright law to enforce it. Publishers can use contract to 
prohibit foreign distributors from shipping to the U.S.; 
publishers can sell only enough copies in any country to meet 
local demand; publishers can make minor changes in products to 
discourage importation. In short, they can act exactly as every 
other business that can't rely on copyright to enforce price 
discrimination.
    Our coalition would like the Subcommittee to examine an 
aspect of first sale that affects a specific category of 
tangible good, of products that are distributed with software 
essential to their operation. Even though consumers buy the 
physical products, ranging from computers to toasters, some 
manufacturers claim that they are just licensing the software 
essential to the product's operation. The manufacturers further 
claim that because the consumers are just licensees, they do 
not have the first sale right to transfer the software when 
they sell the rest of the product. These licenses may have 
other restrictive terms that interfere with the resale of the 
products, for example, specifying that only the original 
licensee will receive security patches or bug fixes. But 
interfering with resale, these license terms harm both the 
consumers who want to sell the products and the secondary 
consumers, often government agencies, that want to buy them.
    The license terms are also harmful to cybersecurity. If a 
manufacturer refuses to provide the secondary consumer with 
security patches, the security of the computer system could be 
compromised. Resale rights also help the environment by keeping 
recycled products out of landfills.
    This is a concrete problem of manufacturers attempting to 
leverage their copyright in a component into control over a 
much larger device. We believe that this problem can be fixed 
by relatively simple amendment to the Copyright Act. Thank you 
for this opportunity to testify.
    Mr. Goodlatte. Thank you, Mr. Band.
    [The prepared statement of Mr. Band follows:]
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
                               __________
    Mr. Goodlatte. Mr. Cram, welcome.

   TESTIMONY OF GREG CRAM, ASSOCIATE DIRECTOR, COPYRIGHT AND 
        INFORMATION POLICY, THE NEW YORK PUBLIC LIBRARY

    Mr. Cram. Chairman Goodlatte, Ranking Member Nadler, and 
Members of the Subcommittee. Thank you for the opportunity to 
testify today. My name is Greg Cram, and I am the Associate 
Director of Copyright and Information Policy at the New York 
Public Library. My testimony has been endorsed by the Library 
Copyright Alliance.
    The New York Public Library system encompass four world-
class research centers and 88 community branches located in 
Manhattan, Staten Island, and the Bronx. NYPL serves 50 million 
users annually of all ages, backgrounds, and needs, offering 
free programs, classes, exhibitions, and, of course, access to 
our circulating and research collections. NYPL's collections 
contain more than 57 million books, eBooks, CDs, DVDs, and 
other archival materials.
    The first sale doctrine is critical to the operation of 
libraries. It makes clear that transferring a legally acquired 
copy of a work to another individual by sale or lending is not 
an infringement of the distribution right of the copyright 
owner.
    First sale supports and protects something American 
libraries have been doing for almost 400 years: lending books 
and other materials to the public. This function is the 
cornerstone of public libraries and public education, allowing 
citizens to become informed and participate in our democracy.
    If the scope of the first sale exception were narrowed or 
reduced, libraries would face a difficult policy decision, 
accrue significant copyright liability exposure by continuing 
to lend affected collections, or deprive a public hungry for 
knowledge by ceasing circulation of those materials. Many 
libraries with limited and constrained legal budgets would 
choose to limit access to the affected items to avoid 
potentially costly copyright liability.
    Unfortunately, libraries faced this scenario after the 
Second Circuit's decision in the Kirtsaeng case. The Second 
Circuit agreed with the publisher John Wiley & Sons that the 
first sale doctrine did not apply to copies of its textbooks 
printed outside the U.S. By limiting the doctrine to copies 
manufactured in the U.S., the Second Circuit's decision 
threatened the ability to libraries to continue to lend 
materials in their collections.
    Many books have foreign publishers or are printed by U.S. 
publishers in other countries. Although some books indicate 
where they were printed, many do not. Libraries, therefore, 
have no way of knowing whether these books comply with the 
Second Circuit's rule. Thankfully, the Supreme Court rightly 
overturned the Second Circuit's discussion and ruled that the 
first sale doctrine applies to all non-infringing copies, 
regardless of where they are made.
    This means that libraries throughout the U.S. could 
continue their existing purchasing and lending practices with 
new confidence. The rule set by the Supreme Court is the right 
rule for libraries and their users. Congress should not disturb 
it.
    Libraries are increasingly licensing electronic resources, 
including trade eBooks and databases of academic journals. The 
license, not copyright laws set the terms under which the 
library is permitted to make the content available to its 
users. This is a major shift from the traditional model where 
libraries buy physical copies of books and other materials and 
lend them to users pursuant to the first sale doctrine or 
preserve them for future access.
    This new digital model has both advantages and drawbacks. 
The library license rate for an eBook can be more expensive, 
both initially and over time, than its print counterpart, 
putting additional strain on already tight budgets.
    Moreover, if the publisher or content provider goes out of 
business, the library may no longer be able to license or 
access the content. This would have serious preservation 
consequences, leaving large holes in the cultural and scholarly 
record. Libraries preserve materials to ensure they can be 
studied and enjoyed by future generations. If libraries are 
unable to access and preserve digital content, then they will 
be unable to fulfill their preservation mission.
    The good news is that libraries and publishers are working 
collaboratively to resolve digital transition issues. Business 
models are evolving and experimentation is occurring. NYPL has 
taken an active role in encouraging publishers to responsibly 
participate in the library market for eBooks and explore new 
ways to address their concerns and the needs of library users.
    Furthermore, a consortia of libraries have formed 
partnerships with publishers for digital preservation. NYPL was 
an early participant in Portico, a digital preservation service 
that operates in partnership with publishers to protect digital 
journals others materials.
    At the same time, as progressively more content is licensed 
rather than sold, Congress needs to consider whether to 
prohibit enforcement of contractual limitations on copyright 
exceptions in certain circumstances. Congress, therefore, needs 
to closely monitor the evolving and complex digital marketplace 
to ensure that it is sufficiently competitive to provide 
widespread access works.
    Thank you, Mr. Chairman.
    Mr. Goodlatte. Thank you, Mr. Cram.
    [The prepared statement of Mr. Cram follows:]
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
                               __________

       TESTIMONY OF MATTHEW B. GLOTZER, MEDIA CONSULTANT

    Mr. Goodlatte. Mr. Glotzer, welcome.
    Mr. Glotzer. Thank you. Chairman Goodlatte, Ranking Member 
Nadler, Members of the Subcommittee.
    I appreciate the opportunity to participate in today's 
hearing, and I recognize the need to regularly review 
copyright, given the near constant flux in media landscape.
    For content-driven companies, emerging technology 
represents a mix of opportunity and challenge. And it is 
incumbent upon IP creators to be proactive in leveraging these 
new tools to sustain growth.
    Any business, no matter how established it may be, is 
better off working to adapt itself to the future landscape than 
blindly trying to preserve the past. In the course of such 
adaptation, the content industry has embraced online licensing 
as a means to provide consumers the flexibility they demand in 
the Internet era.
    With this forward-leaning view, I submit that the creation 
of a new first sale doctrine that applies to electronically 
delivered content is both unnecessary and potentially 
detrimental to the long-term health of many content markets. I 
have spent more than two decades working within large 
organizations designing products and distribution models that 
are responsive to technological change.
    Although I do not appear on behalf of any particular 
company today, my views are based on firsthand experiences in 
navigating market shifts and will focus more on commercial and 
economic reality than legal theory.
    There are three primary reasons for my opposition to 
creating a new first sale doctrine for electronically delivered 
content. To begin, consumers have eagerly adopted the array of 
flexible electronically delivered models that are now available 
alongside physical media. Since the delivery of Internet video 
became available in the mid-2000's, consumers have led the 
shift toward access-based models, in sharp contrast to the 
rabid collection of the tapes and disks that had been prevalent 
for many years prior.
    Screen Digest reports that by 2009, U.S. Households were 
already accessing to 376 million films and 20 billion 
television programs online per year. By 2013, annual 
consumption ballooned to 5.7 billion movies and 56 billion TV 
shows via electronic delivery.
    To be sure, the traditional proposition to own physical 
media has historically been one of the industry's most potent, 
and I suspect it will continue to offer this model as long as 
consumers demand it. But today, consumers increasingly 
demonstrate a preference for the broad choice and ubiquitous 
accessibility that is offered by popular online services. The 
marketplace has turned a corner.
    Secondly, the distribution challenges inherent in physical 
media addressed by the first sale doctrine do not exist in the 
electronic realm; in other words, there is no incremental 
problem to solve. Content distribution by a physical technical 
host, such as paper, tapes, and disks, is subject to a series 
of costs, including manufacturing inventory risk; there is the 
degradation of copies over time; and the costs of 
dissemination, which itself includes the need for a consumer to 
maintain possession of a copy in order to access the content.
    But electronic delivery is highly efficient, such that 
these costs are greatly reduced or eliminated outright. Most 
importantly, electronic content can be transferred from user to 
user almost instantaneously, much faster than any physical host 
could be transferred hand to hand, and with no degradation in 
quality.
    Thirdly, unlike secondary markets for physical media, those 
for electronic licenses are actually efficient enough to 
disrupt their primary counterparts. A secondary market for 
physical media can coexist with the primary market because the 
inherent costs and limitations of that physical media make used 
copies a separate value proposition from new ones.
    But the hyper efficiency of electronic delivery is rooted 
in the speed, ubiquity, and anonymity of Internet-based 
communications. In this realm, parties wishing to exchange 
goods need not be co-located and, in fact, need not be known to 
one another. Low-cost intermediary service could automatically 
effectuate not only permanent transfers of licenses but also 
temporary loans of them.
    So it is easy to imagine that a single instantiation of a 
content license could provide utility to hundreds of users as 
long as only one user wanted the content at any given time.
    Such a mechanism would force content owners to price each 
license based on its capability to serve many rather than one. 
But how many willing buyers would there be if a film cost 10 to 
100 times its customary price? The result would be a failure of 
the primary market.
    My fellow witness, Dr. John Villasenor, has acknowledged 
this problem and suggests limiting the frequency with which 
secondary market licences could be exchanged so transfers might 
be allowed but loans would not.
    But where do we draw that line? How would we analyze the 
problems so that demarcation between a loan and a transfer 
would be something more than an arbitrary distinction?
    In summary, content producers have embraced the efficiency 
of electronic delivery, arguably at the expense of some of the 
those most time-tested business models. And they will continue 
to do so as long as the markets for their products remain 
robust. Currently, studios are working on exciting mixes of 
content and services around their intellectual property that 
are intended to deepen the engagement with fans. But this 
sustained innovation relies on the elegant balance of producer 
and consumer incentives. The rise of secondary market for used 
electronic goods that are indistinguishable from their new 
equivalents would harm this balance and eventually result in a 
market failure.
    Mr. Goodlatte, Mr Nadler, my opinions today are not in any 
reflexive defense of old models. I offer them out of a genuine 
interest in maintaining the market dynamics that have fostered 
so much innovation to date. The continued investment and 
experimentation by content creators will yield myriad benefits 
to the entire value chain.
    Again, I appreciate your time, and I look forward to any 
questions you may have. Thank you.
    Mr. Goodlatte. Thank you, Mr. Glotzer.
    [The prepared statement of Mr. Glotzer follows:]
    
    
    
    
    
    
    
    
    
    
                               __________
    Mr. Goodlatte. Mr. Siy, welcome.

           TESTIMONY OF SHERWIN SIY, VICE PRESIDENT, 
                LEGAL AFFAIRS, PUBLIC KNOWLEDGE

    Mr. Siy. Thank you. Chairman Goodlatte, Ranking Member 
Nadler, Members of the Subcommittee. Thank you for inviting me 
to testify here today on the critical issue of the first sale 
doctrine.
    In my testimony today, I would like to emphasize one 
crucial point, that the first sale doctrine is not just a 
technical exception or limitation to copyright law but a 
fundamental principle that balances consumers' basic rights to 
their personal property with authors' rights to their 
intellectual property.
    The way the Copyright Act is structured today, it grants 
broad, exclusive rights to copyright holders, rights that are 
so broad that, without exceptions, the result would be absurd 
if not intolerable. The exclusive rights of distribution and 
display, for example, would give copyright holders rights that 
violated our basic understanding of personal property. The 
author of a book, for example, would be able to prevent a buyer 
from giving it to her daughter, lending it to a friend, or 
donating it to a library.
    In other words, first sale is a limitation or exception to 
copyright that is necessary because copyright creates big 
exceptions to the ordinary rules of personal property.
    While Bobbs Merrill stands as a foundational case in the 
first sale doctrine, over a hundred years later, we can see it 
be undermined in a number of ways today. One notable example of 
this happened recently, when Aspen Publishers said they would 
require students who bought certain legal textbooks to return 
them at the end of the semester. In essence, Aspen was claiming 
that these printed books were being licensed and not sold to 
the students. The point of this presumably was to make sales of 
the used books copyright infringements and therefore eliminate 
the market of used books. So more than 100 years after Bobbs-
Merrill, we see publishers still trying to use disclaimers 
attached to books to limit ownership and resale. Basically, 
consumers need to know that they own what they buy. Owning it 
in this case means being able to distribute it and also the 
ability to simply use it as intended.
    But the use of external language to limit ownership is even 
more prevalent in the world of software. Typically, software 
comes with an end-user license agreement that will, among other 
things, characterize a transaction as a license rather than a 
sale. Even if the exchange looks in all aspects like a sale and 
may even be called such in a store or on a Web site, a 
disclaimer attached to the work will claim otherwise. This not 
only puts restrictions on the initial buyer, but it also places 
potential liability on anyone else downstream who might in turn 
receive the copy, even if they never even signed or never even 
saw that agreement.
    To prevent consumers from being saddled with these burdens, 
the law should not enforce contracts that result in 
noncontracting parties facing liability. And it should resist 
enforcing the text of fine-print agreements that deny a sale is 
taking place when every other indication from the producer is 
that the transaction is a sale.
    It may even be worth investigating whether certain types of 
licensing structure should be avoided altogether, the way 
certain type of interests in land are not recognized under 
property law.
    Next, ownership of copies is not just the ability to sell 
and distribute them. After all, those rights are useless if the 
copies themselves cannot be used. Yet, often, the owners of 
digital copies could still infringe copyright by merely using 
those copies. This is because practically any use of a digital 
file, merely loading or running it, results in copies of that 
file being made inside the digital device. Every time you play 
music or movies on your phone, load an eBook or open up a Web 
site on your laptop, you are making reproductions of likely 
copyrighted works.
    Currently, a first-sale-like rule in Section 117 prevents 
owners of the computer programs from becoming inadvertent 
infringers due to those essential step copies. However, that 
rule does not extend to other types of digital works, like 
MP3s, movie files, or eBooks. A simple update of Section 117 
would allow for these necessary and harmless reproductions to 
be made.
    As Congress continues its review of copyright law, Section 
117 could also be a useful model for addressing the issue of 
first sale in digital downloads. Just as Section 117 allows you 
to make reproductions that are essential to the use of a 
computer program, we can see a provision that would allow for 
limited and temporary reproductions that are essential for the 
transfer of a file from one party to another. I believe such a 
provision would permit the first sale doctrine to continue to 
be relevant in the digital space, even as so much of our media 
comes to us only in a digital form.
    Every day, thousands of people hand copies of their works 
that they love to one another. As loans, as gifts, in 
transactions that are under the law but unseen by commerce. 
Every day, millions of more people use and thus copy the 
digital movies, music, and books, that they own. Preserving 
their first sale and ownership rights is therefore not just 
important in terms of commercial interactions but to make sure 
that all of these millions of people continue to have a vibrant 
cultural world into the future.
    Thank you for your time, and I look forward to your 
questions.
    Mr. Goodlatte. Thank you, Mr. Siy.
    [The prepared statement of Mr. Siy follows:]
    
    
    
    
    
    
    
    
    
    
    
    
                               __________
    Mr. Goodlatte. Mr. Villasenor--is that correct? Say it to 
me so all of us know when we question you how to pronounce your 
name.

 TESTIMONY OF JOHN VILLASENOR, NONRESIDENT SENIOR FELLOW, THE 
BROOKINGS INSTITUTION, AND PROFESSOR OF ELECTRICAL ENGINEERING 
    AND PUBLIC POLICY, UNIVERSITY OF CALIFORNIA, LOS ANGELES

    Mr. Villasenor. It is Villasenor. Yes.
    Good morning, Chairman Goodlatte, Ranking Member Nadler, 
and Members of the Subcommittee. Thank you very much for the 
opportunity to testify today regarding the first sale doctrine 
and U.S. copyright law.
    I am a Nonresident Senior Fellow at the Brookings 
Institution, and I am also on the faculty at UCLA. However, the 
views I am expressing here are my own and do not necessarily 
represent those of the Brookings Institution or the University 
of California.
    In my testimony, I would like to make two main points. 
First, modification of U.S. copyright law to introduce a broad 
digital first sale doctrine would lead to unintended 
consequences that would dramatically reduce the ability of 
content creators to be properly compensated for work sold 
digitally. For example, consider what would happen if loans 
that might last only a few minutes or even a few seconds could 
be made instantly, without the authorization of the copyright 
holder, and among parties who might be separated by thousands 
of miles.
    A recording artist who sells only a few hundred copies or 
digital copies of a song might find that 1 million people are 
sharing those few hundred copies. How could this be possible? 
Because those few hundred copies could be aggregated into a 
lending pool serving 1 million people. Listeners would only 
need to borrow from the lending pool at the very moment when 
they want to hear the song.
    I am not aware of any statutory language that could be used 
to craft a digital first sale doctrine that would somehow avoid 
these sorts of unintended consequences while also being 
practical and workable.
    Secondly, the question of digital first sale, as important 
as it has been, is becoming less so with each passing year. We 
are moving and in fact have largely already moved to a license-
based ecosystem for digital content distribution. And when 
there is no sale, the first sale doctrine does not apply. 
Instead, the permissible downstream uses of digital content in 
a license-based ecosystem are addressed through a combination 
of contract law and intellectual property law.
    Today's consumers have access to a remarkable and quickly 
growing range of license-based content offerings. But there are 
also some concerns. Consumers who shop at content-provider Web 
sites featuring opportunities to ``buy'' a digital version of a 
song, movie, or book, can reasonably expect that when the 
transaction is completed, they will own a copy of the work. But 
in many cases, that is not what occurs. Instead, consumers who 
buy digital copies, copies of digital works, are often subject 
to terms-of-use agreements specifying that they are, in fact, 
licensees, not owners. Consumers can find these agreements to 
be mind-numbingly complex, often containing clauses with 
ambiguous wording susceptible to conflicting interpretations, 
even among attorneys who specialize in contract law.
    I am not sympathetic to the argument that the onus is on 
consumers to resolve these ambiguities as a pre-condition to 
obtaining new digital content. I believe that content providers 
have at least an ethical obligation and quite possibly a legal 
obligation under consumer protection laws to clearly structure 
offerings so that consumers are informed about restrictions 
accompanying their purchase of digital copies of copyrighted 
works.
    When consumers are weighing offers enabling them to ``buy'' 
content that they in fact will not own, that information should 
be clearly and explicitly conveyed before the transaction is 
completed.
    When consumers are considering acquiring content that they 
will be prohibited from loaning, selling, giving as a gift, or 
bequeathing to an heir, that information should be presented in 
easy-to-understand, unequivocal language before the purchase is 
completed.
    These issues are of vital importance to the creative 
content ecosystem. But my view is that they cannot and should 
not be addressed through changes to copyright law. And I do not 
believe these issues should be addressed through new 
legislation that would restrict or otherwise alter American 
contract law.
    Instead, they should be addressed by ensuring what in fact 
should be common sense, that consumers who license copyrighted 
works have access to clear, upfront descriptions regarding the 
permitted and prohibited uses of the content. Once that occurs, 
I am optimistic that market forces will lead to future license 
space content offerings giving consumers many more options than 
those commonly available today.
    And in contrast with attempting to address digital content 
dispositions through a one-size-fits-all statutory approach, 
allowing the market to experiment with the diversity of 
solutions is more likely to result in balanced approaches. 
Among other things, this could lead to a growing number of 
offerings permitting licensees to engage in dispositions of 
digital content analogous to those that have long been 
available to owners of tangible copies of works.
    Thank you very much, and I look forward to answering your 
questions.
    Mr. Goodlatte. Thank you.
    [The prepared statement of Mr. Villasenor follows:]
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
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    Mr. Goodlatte. Mr. Simon, you get the last word.

             TESTIMONY OF EMERY SIMON, COUNSELOR, 
                  BSA l THE SOFTWARE ALLIANCE

    Mr. Simon. Thank you, Mr. Chairman. It is good for me to be 
here today. I am a product of New York City Public Schools. I 
am a product of New York City public universities. And when I 
stood up to say ``I do,'' it reminded me of being sworn in as a 
citizen, in I think this very building, some 40 years ago. So 
it is a little bit of a homecoming for me; it brings back a lot 
of memories.
    So probably of the many issues that this Committee is 
considering in the area of copyright, this issue, first sale, 
is the most important to the software industry. Software 
industry relies on copyright law for three basic purposes: to 
prevent piracy, to fight piracy; to fight people who freeload 
by copying code and cloning it; but most importantly, it is the 
foundation stone on which we build our licensing agreements.
    Software is licensed, in most instances, not always. It is 
a contract. That contract is enforceable. That contract gives 
rights to the consumer while preserving obligations on the part 
of the software developer.
    So it is in that context that we look at this discussion 
today, which is, how do you continue to respect the freedom of 
the parties to engage in contractual relationships? How do you 
continue to promote the kind of success that the American 
software industry has had?
    BSA members are the dream team of the world's most 
innovative companies. IBM, Microsoft, Intel unleashed an era of 
unparalleled change; now we work and live by developing the PC. 
Apple transformed the smartphone and broke new ground with 
tablets. And today, we are at the center of the next wave of 
innovation as we transition to a data-centric economy. Data and 
analytics powered by software providing insights and 
unprecedented opportunities from the factory floor, to 
medicine, to classrooms. All these things are possible because 
the copyright law provides a sound foundation for licensing.
    We have heard that first sale applies only to the owner of 
a copy of work, and that is right. This Committee, when it 
issued its report some years back, made it crystal clear, it 
said, ``first sale applies only to outright sales.'' That is 
what it should be. It should apply to sales, not to licenses.
    Converting the first sale doctrine into a first license 
doctrine, as some argue, by extending to its licensed copies 
would brush aside existing law. Such an extension would upturn 
a cornerstone of our economy, our ability to contract and our 
ability to rely on contracts. And I agree with Mr. Villasenor 
on that point very strongly.
    And it would especially create confusion among consumers 
about the rights and quality associated with secondhand 
software. Buyers of secondhand software will be unable to tell 
whether the copy they paid for is genuine or counterfeit or, 
even worse, suffer irreparable harm if the copy is infected 
with spyware or viruses, as they often are, and purport to be 
genuine.
    Just this morning, I saw a report from one of my colleagues 
in the Czech Republic, where we are having a slew of illicit 
copies being distributed by people who allege they are re-
selling, they are selling used copies.
    Courts are not confused. The courts have been clear. Most 
recently, in Vernor v. Autodesk, the Ninth Circuit said 
unequivocally, if it looks like a license, if contains use 
restrictions, and if it restricts transfer, it is an 
enforceable license. We think that is the right case. There are 
some other cases, Krause here in the Second Circuit, which 
previously had a different point of view. But what that 
distinguishes was not based on enforcement of a license.
    Finally, today, nearly one in five copies of software used 
in the United States is unlicensed. We lose about $10 billion 
just in the U.S. Threats of infringing use of software would be 
significantly exacerbated if the first sale doctrine or the 
first sale rule were applied to licensed copies. Because it is 
nearly impossible to police whether the person purporting to 
transfer has actually done so.
    I would like to say three things in conclusion. One is, 
applying the first sale doctrine to licensed copies would 
substantially increase the infringement risk. Two, it would 
reduce consumer choice by undermining the legal foundation that 
software developers rely on. And, finally, it would shake the 
very notion that licensing, which is completely recognized by 
the Copyright Act as a legitimate way to commercialize, it 
would undermine the concept that licensing is an integral part 
to be protected and nurtured by the Copyright Act.
    Thank you very much.
    Mr. Goodlatte. Thank you, Mr. Simon.
    [The prepared statement of Mr. Simon follows:]
    
    
    
    
    
    
    
    
    
    
    
    
    
    
                               __________
    Mr. Goodlatte. Thank you all for excellent testimony.
    Before I begin the questioning, I wanted to introduce to 
our New York audience and our online audience the other Members 
of the Committee, who have been able to travel to be here in 
New York. In addition to Mr. Nadler not having to travel very 
far, since his district is a stone's throw away, across the 
street--don't throw stones here--the gentleman from New York, 
Hakeem Jeffries' district is just a few miles away in Brooklyn. 
And he is a new Member of the Judiciary Committee and keenly 
interested in intellectual property and technology issues.
    As is the gentleman from Florida, Peter Deutch, who spends 
a lot of time in intellectual property, particularly copyright 
issues. We are glad to have both of them with us today.
    Congressman George Holding from North Carolina, just 
introduced a significant copyright reform bill last week in the 
Congress. He is also a new Member.
    And Congressman Jason Chaffetz has the record of having 
traveled the farthest distance to be with us, or at least has 
to travel the farthest distance to get home to his district in 
Utah. He also has an obligation later on this morning, so I am 
going to give him the opportunity to begin the questioning so 
that he can not feel too much pressure when he has to slip away 
to get to his other meeting.
    Congressman Chaffetz recognized for 5 minutes.
    Mr. Chaffetz. Thank you. And thank you, Chairman, for 
holding this hearing.
    And to Mr. Nadler and Mr. Jeffries, we appreciate always 
being in the city. It may be a stone's throw across the street, 
but I don't think 50 Cent could make that all the way across 
the street. I would love to try to see him throw a rock all the 
way across the street.
    Listen, we do appreciate it. It is a very difficult issue. 
If this was simple, we would not be gathered here this day.
    And I really appreciate all of the people on this panel. I 
know Mr. Deutch, in particular, has been very thoughtful on 
this issue. We have looked at it from some different angles. 
But I really do want to come to a resolution.
    Mr. Band, I would like to start with you, as sort of a two-
part question, if I could.
    How widespread is the problem you identified with the 
transfer of software essential to the operation of products? 
Because that--so many of our products have literally hundreds 
of different applications involved with them. And then are 
these restrictions on essential software a copyright issue, a 
contract issue, or a bit of both?
    Mr. Band. Thank you, Mr. Chaffetz, for that question. With 
respect--or the two questions.
    With respect to the first question, right now, the problem 
is mainly in sort of the computer and the telecommunications 
industries. So you see these kinds of restrictions with the 
sale of computer hardware or telecommunications devices.
    But particularly because, as you indicated, the software is 
everything. I mean, I am sure this microphone probably has some 
software. That timer probably has software. Our watches have 
software it in. The problem now is sort of relatively limited. 
But it is going to be a bigger and bigger problem as we go 
forward. Cars, of course, have software in it. And so it 
doesn't take a lot of imagination to see the restrictions that 
are now used with respect to computers could very soon be 
applied more broadly.
    So I think this is a very appropriate time for Congress to 
focus and figure out how to resolve it.
    With respect to your second question, yes, I think it is a 
combination of both contract and copyright law. It is in the 
first order of copyright question because the first sale 
doctrine, the manufacturers are saying the first sale doctrine 
does not apply because they are considering it a license of the 
software rather than a sale of the software when it is part of 
this bigger product.
    But then also you do have a license. And so you are 
arguably breaching both the copyright and the license when you 
sell the product. So I think it is one of these overlapping 
areas, which of course makes it more complicated.
    Mr. Chaffetz. And that is the concern, right? That 
ultimately you have got a consumer who is trying to do the 
right thing. They are not going to weave their way through, you 
know 72 pages of disclaimers and questions.
    And we also have a piracy problem. I mean, let's be honest. 
We have a big piracy problem in this Nation and certainly 
globally. So how do we address that? I mean, are we going to 
facilitate more piracy? How do we solve that?
    Mr. Band. I think with the specific--with the larger 
digital first sale issue that others have talked about, I mean, 
I think that is a complicated issue that needs to be 
considered.
    Fortunately, with the specific issue that we are addressing 
about, you know, the essential--the software essential to the 
operation of hardware products, you don't really have to worry 
about that. Because either the software is already embedded in 
firmware or it is already contained in some manner in the 
hardware. So you don't--you don't have the proliferation of 
copies or the potential for the proliferation of copies that 
you do in the other examples that we have heard about on this 
panel.
    Mr. Chaffetz. Mr. Siy, you talked about a simple update of 
Section 117. Can you elaborate on that a little bit, how simple 
this could be?
    Mr. Siy. Certainly. Well, there is a couple of different 
things. One of them will account for the sale of used digital 
goods, which is maybe not as simple.
    The simpler part would simply be to--currently, it says 
that the owner of a computer program can make essential step 
copies, so that they are not an infringer. Two small changes, 
one is to change ``computer program'' to ``works or copies of 
works generally.'' So that it applies to other forms of digital 
media that aren't defined as computer programs, like video 
files, music files, and eBooks. The other one would be so that 
users of the program aren't found to be infringers.
    If I simply hand somebody my phone and they open up a game 
on it, they wouldn't have the protections of Section 117. So if 
they are a legitimate, lawful user of that software, they 
should also be able to afford that protection.
    Mr. Chaffetz. Mr. Chairman, I think that the court got 
Kirtsaeng right. I am a big proponent of that. I believe 
strongly in it. I also understand and respect the idea that we 
have a major piracy problem. That innovation and technology is 
a good thing. That speed, efficiency, and anonymity, as you 
talked about in your testimony, Mr. Siy, these are all good 
things for American consumers. And how we find that proper 
balance, I just don't want the Congress to screw it up.
    So thank you, yield back.
    Mr. Goodlatte. I thank the gentleman.
    And I am now pleased to recognize the gentleman from New 
York, Mr. Nadler, for 5 minutes?
    Mr. Nadler. Thank you, Mr. Chairman.
    In its 2001 report, the Copyright Office concluded that 
there was no demonstrated need to extend first sale digital 
works that would outweigh likely harms of such an extension.
    Professor Villasenor, has the landscape changed since that 
report? Is there enough of a need now to warrant extension of 
first sale of digital works, in your opinion?
    Mr. Villasenor. I respectfully do not believe that there 
is. As I mentioned in my testimony, we have largely already 
moved to a license-based ecosystem, and first sale doctrine 
doesn't apply when there is no sale.
    I think it is very important to respect contract law. And 
the concerns I have with respect to the license-based 
distribution content is not that licenses themselves are 
improper; it is that the disclosures accompanying the delivery 
of license-based content to consumers are, frankly, often 
lacking. And I think that consumers have a right to clear 
disclosures about what the content of those licenses are. And 
that when that occurs, I think that we will find the market 
will respond and provide a wealth of solutions, giving 
consumers the ability to choose to get content on terms that 
are more favorable to them.
    Mr. Nadler. Thank you.
    Mr. Smith, are you seeking a legislative fix to the 
Kirtsaeng decision? And, if so, what fix could also adequately 
protect the interests of entities like libraries and museums, 
those entities the Supreme Court recognizes as needing and 
relying on first sale?
    Mr. Smith. Our interest would be to see Congress revisit 
that decision to look at clarifications in the law around first 
sale to really protect against distribution and resale into.
    Mr. Nadler. Probably a legislative fix.
    Mr. Smith. We think it would be advisable for Congress to 
look at that again.
    In terms of the impact on libraries and downstream uses, we 
believe that there are legislative options that can protect the 
interests of those who have legitimate cases to reuse similarly 
to the way they reused them always. It is really the attrition 
of copyright protection through the allowance of large-scale 
redistribution and reimportation that we seek to remedy.
    Mr. Nadler. Thank you.
    Back to Professor Villasenor.
    When I buy a book, I know that I own it and can resell it 
or give to it a friend. Should this same principle, you buy it, 
you own it, apply to digital works? And why not?
    Mr. Villasenor. I think that content providers and 
copyright holders have the option of choosing to provide 
content under licenses that could allow various levels of 
flexibility, and I think consumers have a right to make that 
choice.
    I don't think--and as I mentioned earlier in my testimony, 
I do not think that it is proper to market to consumers with 
terms that clearly suggest ownership when in fact the ownership 
is not what happens.
    But I don't think that it would be appropriate for Congress 
to require that content distributors or content providers own 
or must offer their content pursuant to ownership.
    I think that copyright holders should have the flexibility 
to offer the content under the terms that they see fit, and the 
market will respond. Consumers have an enormous amount of power 
over copyright holders because if no one buys or licenses the 
content, the content will not get into the hands of consumers.
    Mr. Nadler. Okay.
    Mr. Cram, if the law allowed copyright owners to prevent 
unauthorized importation, but also kept protections for owners 
of foreign-made copies once imported and allowed distribution 
once in the United States, thus penalizing the original 
importation only, would that have a negative effect on 
libraries?
    Mr. Cram. It still might. So libraries--when the Kirtsaeng 
decision was being contemplated, we did an analysis on our 
research collection and found that close to about two-thirds of 
our research collection could have been manufactured outside 
the U.S. So we brought that collection in, or we purchased it, 
or however we acquired the collection, we would be concerned 
about an importation right that would prevent us from importing 
those things in. And we are a first buyer. So even those, it 
might protect downstream uses, we would still be subject to it.
    Mr. Nadler. You----
    Mr. Cram. We would be the first importer, the one who 
brought the works into the country. So we would still be 
concerned if there weren't adequate exceptions and limitations 
to that importation right.
    Mr. Nadler. Okay. And probably my last question, given that 
the orange light is on. Mr. Ossenmacher, Professor Villasenor 
predicted if loans, sales, or other dispositions of digital 
content could be made instantly through first sale for digital 
works, then those transactions would largely replace the market 
for initial sales, to the harm of copyright owners. What is 
your response? Is this not a risk? And how can it be mitigated?
    Mr. Ossenmacher. Congressman, my response to that would be, 
I understand his point. But first sale doctrine didn't look at 
method of delivery or speed of delivery. First sale doctrine 
was more about how to extinguish----
    Mr. Nadler. Maybe now in the digital world, it should?
    Mr. Ossenmacher. I don't think so either. Because I think 
by doing that, the balance that we all talked about changes 
greatly. And I think one of the things we worry about is there 
was always the issue of a physical sale. And in a physical 
sale, certain rights existed. Everybody marketed their business 
based on those rights and consumers responded to those rights.
    In a digital world, I think there is a lot of hype about 
the speed of delivery. I mean, I can literally go to Amazon and 
buy something right now physically, and it almost happens as 
quickly. I mean, it is shipped--a drone will be delivering it 
shortly. Does that mean that shouldn't happen? And so I think 
speed of delivery is kind of a red herring in terms of 
copyright law.
    And I think, again, it is more the issue of ``if I do 
acquire something or I believe I am acquiring something, what 
are my rights with that,'' not ``how quickly did I get it or 
how quickly can I dispose of it.'' So that is how I would 
respond, Congressman.
    Mr. Nadler. My time has expired. I thank you.
    I yield back.
    Mr. Goodlatte. I thank the gentleman.
    I have a question that I will--since there are nine of you, 
I am not going to ask each of you to answer it. But I am going 
to ask those of you who want to volunteer to answer three 
questions.
    First one is, should the law expressly provide some 
definition as to what constitutes a sale and what constitutes a 
license?
    Do I have volunteers?
    Is this something we need to clarify?
    Mr. Siy. I am not entirely sure that the law needs a 
specific definition. However, I do think the law does need to 
recognize that something might not be a license simply because 
one of the parties asserts that it is, that the characteristics 
of the transaction between the two parties should be taken into 
account.
    Mr. Goodlatte. In what respect are you trying to draw that 
distinction?
    Mr. Siy. So, for instance, Mr. Simon mentioned the Vernor 
decision. And in the Vernor decision, the court drew up a test 
to determine whether or not you had a license or a sale. And it 
looked at a number of factors: Was there a transfer of title? 
Were there usage restrictions? Were there restrictions on 
distribution?
    But the question is, how is it determining where those 
restrictions came from? Is it just because the manufacturer put 
them in a long, fine-print license? Are we going to take their 
word for that, that that is what the transaction looked like? 
Or are we going to also account for whatever conversation 
happened between buyer and seller, or what the Web site looked 
like. Did they click a giant button that said ``buy''?
    So I think the difference is, you know--I don't know that 
Congress necessarily needs to draw a bright-line definition. 
But the law does need to recognize that simply because one 
party says it is so doesn't make it so.
    Mr. Goodlatte. Mr. Simon.
    Mr. Simon. I don't know. But I think it is going to get 
more complicated over time. And here is why. We know that all 
content is quickly moving to license-based distribution, 
whether it is streaming, whether it is in other forms.
    A single payment, arm's-length transaction under a license, 
feels like a sale. That is the Weiss case in the Ninth Circuit 
from 30 years ago. That is the European Court of Justice 
opinion in the Oracle UsedSoft case.
    A lot of content is going to be distributed that way, on a 
single payment, no ongoing relationship. Software is different, 
because software does have an ongoing relationship.
    But I think you have hit on the right question. And I think 
figuring out how you maintain the validity of licenses over 
time when courts are going to have this attraction to turn them 
into sales is a real challenge.
    Mr. Goodlatte. Let's take it to the point that Mr. Siy 
raised. Does it matter for consumers if the on-screen button 
says ``license'' or ``buy''? What are the impacts for 
consumers?
    Mr. Simon. I bought an Amtrak ticket to come here. I didn't 
think I bought the seat. I think I licensed the right to sit on 
the train. So this notion of ``buy'' buttons being ``buy'' 
buttons I find a little fanciful. Because we buy all kinds of 
things which we know to be licenses. Customers, consumers are 
pretty smart.
    Mr. Goodlatte. Do we need to clarify that in the law?
    Mr. Simon. I don't think so.
    Mr. Goodlatte. Mr. Band.
    Mr. Band. But I think the example that Mr. Simon gave is a 
good example of the bigger point. So you--the question is 
obviously you don't buy the seat, you buy a license to use the 
seat. But then the question is, is your license transferrable? 
Should you be able, if you decide you cannot use the ticket, 
should you be able to let someone else use the ticket? And 
Amtrak I think says no.
    But, you know, those are--the kinds of issues one needs to 
get into. And at least in the specific issue that I was raising 
of the installed software, you know, the essential software, 
rather than start to figure out is it a license, is it is a 
sale, I think it is better to simply say, you know, if you are 
the rightful possessor of the hardware, then you are able to 
transfer that hardware and the software with it.
    Mr. Goodlatte. What about the consumer's expectations? Do 
users expect to be able to sell digital copies of all works, or 
do they simply expect to be able to move it around to various 
devices tied to that user's account?
    Mr. Band. Well, I think----
    Mr. Goodlatte. When I buy a digital book, and I view buying 
it, because I am going to be on those devices permanently, I 
don't do it with the expectation that I can do what I do with 
my hard copies, which is, once I am finished reading this, I 
can take it down to Too Many Books in Roanoke, Virginia, and 
they will give me one-quarter of the face value of this, and 
they will sell it in their bookstore for one-half the face 
value.
    But I don't view my online book as something that I am 
going to be able to take somewhere and sell it to somebody. Mr. 
Villasenor.
    Mr. Villasenor. Can I respond to the question about license 
sales?
    Mr. Goodlatte. Sure. Whatever.
    Mr. Villasenor. I think the, you know, it is hard to see 
what is going to happen in the future. But the courts recently 
have actually I think had the right decisions on that. There 
are two cases in the Ninth Circuit. There is the Vernor case, 
which affirmed the licensees' obligations under a license. And 
the licensee in this case was an organization called CTA. And 
then also in the Ninth Circuit, there was a case called UMG 
Recordings, where someone had received a promotional CD that 
said, you know, you are bound by the terms of the license, but 
then the court found that the person was not bound, in fact, 
because the person, the recipient, had never actually agreed to 
the terms of the license. So there is some, you know, generally 
good case law on that.
    And I think my personal view is that for Congress to wade 
in as this point and try to tackle that would potentially 
create more confusion than clarity. I don't see that the system 
has broken to the extent that it needs fixing in that 
particular respect.
    Mr. Goodlatte. My time has expired, but I know Mr. 
Ossenmacher wants to respond to my last point there.
    Mr. Ossenmacher. Thank you very much, Chairman.
    I think, should there be a ``buy'' button? A ``lease'' 
button? A ``rent'' button? I think yes. I mean, our experience 
is directly with consumers. And unlike most people in this 
room, the average consumer, when they push a ``buy'' button, 
believes they are owning something. And I think that is really 
important. Because we are not against licensing. I don't think 
that consumers are against licensing. Consumers are about pro 
choice. They want to choose, do I own something? Can I choose 
that I am streaming it? And I think all that we see the 
consumers asking for is just be clear with us, as the professor 
had said, about what we are getting.
    Mr. Goodlatte. Okay. But let's use the example I gave you, 
though. The Amazon book that I have downloaded, I have paid a 
price for it. That price is lower than I would pay for the 
hardbound copy. But it is a price I paid for it, and it will be 
on my devices for as long as I have those devices.
    Mr. Ossenmacher. Unless Amazon deletes it.
    Mr. Goodlatte. What is that?
    Mr. Ossenmacher. Excuse me, sir. Unless Amazon deletes it, 
like in ``1982,'' you know, the book ``1982.'' I mean. Sorry.
    So I think, I guess the issue there is, most consumers like 
the right that when they buy that--when they push that button 
from Amazon to buy, it is different than when they are pushing 
the ``movie'' button to rent a movie. They think they are 
buying that book.
    And many consumers are alienated in digital goods today 
because socioeconomically they may not be able to afford that 
book. And that eBook is not necessarily less expensive than a 
physical book. Used markets in books have helped our society 
become smarter and more knowledgeable because the value of that 
book is less when it is used. And many people in America today 
cannot afford a $14.99 eBook. But maybe if it is sold used for 
$8.99 or $9.99, which helps people want to buy the book because 
they know it has that value, but it also opens the door to 
people of all socioeconomic levels to be able to enjoy digital, 
not just the high-income and the middle-income people.
    Mr. Goodlatte. We will come back to this.
    Next I want to recognize the gentleman from Florida, Mr. 
Deutch.
    Mr. Deutch. Thank you, Mr. Chairman.
    Thanks for holding the hearing. I think it is a really 
important discussion.
    I just wanted to go back to a couple of themes that we have 
heard. Mr. Ossenmacher, I think you touched on both. One is 
this whole idea, if you buy it, you own it. But, two, as a 
number of our witnesses have referred to, the balance that 
exists between consumers and copyright holders.
    And there are, I think it is worth noting that there are 
lots of examples of ways that that balance has been struck in 
very productive and innovative ways. I think that is the case. 
And I know for a lot of us here, myself included, I watch--I 
stream shows, I watch movies on Netflix and Hulu. And I listen 
to music on Spotify, and my kids look to YouTube for their 
music. And there are lots of ways that actually balance these 
competing interests that are alive and well.
    So we are not making it more difficult; we are making it 
easier for people to access the content that they need while at 
the same time protecting the copyright holders.
    And on the issue that you buy it, you own it, again, if we 
look at what currently exists in terms of what we buy, call it 
a license or not, if I buy something, if I buy music, it will 
allow me to do a lot of things that go beyond listen to it. It 
will allow me to sync it across all my devices. I can 
redownload it if I lose it. I can access my library in the 
cloud. For some services, I can share my music--my movies--with 
multiple users in my household or in my family. The mobility 
and the interoperability is much better than just having a 
right to resell one file.
    And I think, lost unfortunately thus far this morning, is 
the fact that there are tremendously innovative approaches that 
provide all kinds of access while at the same time protecting 
the copyrights of the creators and the innovators who provide 
this content.
    I would like to just touch on a couple of points, though. 
Mr. Band, and this gets to Mr. Chaffetz' point, a really 
important one, that there is--a reminder that there is a piracy 
problem.
    Mr. Band, you spoke about, I think you used Elmore Leonard 
as an example. And you said Elmore Leonard, Elmore Leonard's 
copyright prevents you from copying the book. And you said that 
people understand that they can't make counterfeit copies. And 
so they don't make a copy of that book before they donate it to 
someone that they know, love, care about, that they want to 
share their passion for Elmore Leonard with.
    That may be true with respect to the book. It is not true--
I mean, let's not kid ourselves. It is not true. There are 
plenty of people who everyday are working hard to make a lot of 
money by making counterfeit copies. That exists. That is what 
we have to combat. We know that is the case.
    I guess the question I have first is, is there a service, 
is there any service at all that allows for transfer and delete 
without making a copy? Is there any way to do any of this that 
absolutely guarantees that there wouldn't be copies made? And 
if there are copies made, then aren't we only furthering the 
opportunity for counterfeiters to continue to prey upon the 
folks like Mr. Shems and his clients who try to work hard to 
provide this content? Mr. Ossenmacher?
    Mr. Ossenmacher. Yes, sir. Technology exists today to be 
able to do exactly that. And I think in addition to the fact 
that technology exists, one of the things we should----
    Mr. Deutch. Let me just ask. So there is technology that 
ensures that you can't--that one won't copy anything on his--
can't make a copy of his hard drive; right? And still transfer 
after that. Because I am not familiar with it. I have not heard 
of it. I thought the courts have looked at it.
    Mr. Ossenmacher. So let's now, if we want to look at 
technology, we can break it up. There are certain ways. You 
asked if there are ways. There are ways.
    If, for example, the original copy or the sold copy goes 
directly to a user's cloud and that cloud is the only way they 
can then access it and title can transfer from buyer to seller 
through the cloud, the technology absolutely exists to allow a 
digital item to be sold without copies being made.
    Mr. Deutch. If it goes directly to the cloud--isn't that a 
big if?
    Mr. Ossenmacher. No, it is not a big if. This is where 
content providers can decide how the delivery--just like they 
are allowing today, people who sell digital content allow it to 
be downloaded. We started years ago with DRM. We thought by 
putting lots of DRM around things that would control how this 
process worked. Well, what we found is DRM actually created 
piracy because people didn't feel comfortable with the fact 
that the DRM existed. That is why it was removed.
    Mr. Deutch. Mr. Smith, and then I have one more question 
for Mr. Ossenmacher.
    Mr. Smith. So I believe there are technologies that exist 
that may do some of what you suggest. However, I think at the 
moment enforcement would still be a serious concern for 
copyright holders, and from my understanding, there are serious 
privacy issues that are raised by any technology that it seeks 
to identify.
    Mr. Deutch. How do you enforce that without going back and 
checking the computer of the person who transferred it?
    But, Mr. Ossenmacher--just last question, Mr. Chairman, if 
I may.
    You had said earlier that--you used the example of 
diamonds. And you said that the diamonds, diamonds remain 
unchanged when there is a sale, when someone gives a diamond to 
someone else to use. That was your example, I think.
    But the question I have is, every diamond is unique. Right? 
Isn't that the difference? Every single diamond is unique. 
Every copy of a song, every copy of a film is identical to 
every other copy of the song or film, which is what--or book, 
which is what gets us into this piracy morass that we are in 
now.
    Mr. Ossenmacher. So, okay, well, I will respond to that. I 
think actually, to be technically correct, every digital 
download is specifically unique. Every digital download has its 
own unique identifiers. The copyright material may be the same, 
just as it is in a physical good. But each downloaded item is 
completely unique. It is that uniqueness that allows us to do 
certain things with that.
    When we talk about piracy, though--I just want to point 
this out because I think it is very important. You know, today, 
piracy exists in a massive scale, especially in the music 
industry. Not so much in the book industry, but in the music 
industry, it is rampant.
    Now, when we look and say, should we allow or not allow 
first sale, is first sale going to hurt piracy, the fact of the 
matter is piracy is a massive issue that all of us dislike that 
exists today.
    So a simple solution to help piracy, and it may sound too 
simple, is if we give digital goods value, if the people would 
actually buy them, feel they own them, like they are going to 
protect them as their personal property, piracy will decline, 
there will be no reason for piracy, because if a good is stolen 
or pirated, the fact that that good now will have no value.
    So I think one of the ways to actually combat piracy is to 
allow digital first sale to exist, give digital items value so 
that they are not this, you know, thing in cyberspace, and let 
people realize the value of those digital goods. That will help 
everybody.
    Mr. Deutch. Mr. Chairman, I hope as we go forward, this 
will be the opportunity to pursue further this notion that an 
Elmore Leonard book that one gives to someone and--versus 
copies of that, is the same as a musical copy. And the 
differences in the digital, digital copies and whether or not 
anyone is ever able to tell the difference between one copy or 
the other, I would assert not, but I hope that we will give 
others the opportunity to----
    Mr. Goodlatte. I think that is a good part of this 
discussion.
    And we probably won't have time for a complete second 
round. But we will allow Members to ask some additional 
questions.
    First let's go to the gentleman from North Carolina, Mr. 
Holding.
    Mr. Holding. Thank you, Mr. Chairman.
    Picking up what Mr. Ossenmacher left off with, that if we 
give value to these digital works so that they can be resold, 
it will cut down on piracy or eliminate piracy.
    Who agrees with that?
    Mr. Glotzer, do you agree that if they have the--you know, 
construct some first sale ability on these digital works, that 
it will cut down piracy in the movie industry?
    Mr. Glotzer. No, not necessarily, not--I think the 
mechanisms, the economic drivers that create piracy are 
completely separate from what we are talking about here, which 
is the notion of whether or not something that is licensed 
should be re-marketed, essentially, by the holder.
    Mr. Holding. Mr. Ossenmacher, if we had a government-
mandated used market for content in a nonphysical form, you 
know, what kind requirements of surveillance would there be? 
How invasive would that surveillance be to ensure that people 
aren't keeping copies of it or retaining copies?
    Because, obviously, the copyright holders would have to 
have some, you know, assurance that what you are proposing 
would work, and their copies, you know, really are unique and 
being passed on and not just being duplicated.
    So the surveillance, the invasive surveillance nature of 
what you would have to give up in order to participate in your 
business model.
    Mr. Ossenmacher. So, Congressman, I think that is an 
excellent question. But I want to start with an example that 
may help clarify before I answer.
    Today and for many years, it has been very common practice 
to sell CDs. We go to the store, we go online, we buy a CD. 
What is the first thing most American consumers do when they 
buy a CD? They put it in their computer, and they rip a copy. 
So that CD now is on their hard drive. It ultimately ends up on 
cellphones, on other devices. And that CD has multiplied.
    In today's kind of general acceptable practice, whether it 
is right or wrong, general acceptable practice has been, I now 
go to sell my CD on a wonderful site like eBay or Amazon. And I 
sell my CD. And the next thing I know, what enforcement has the 
government required? What have you expected of me in selling my 
CD? That I actually delete and remove copies of that CD I 
subsequently sold, because I no longer have, theoretically, the 
right to have them on my other devices? I think if we explore 
that and look at that, that is what has been happening today.
    With digital, in the way at least our system works, and 
there are many ways to do it, with digital, what we do is we 
help a user--and so, in that case, when the user sold their CD, 
the user was violating copyright law because they got rid of 
their right to access that good.
    So what we have done is we have taken the approach of how 
do we help the consumer be aware of copyright law, which helps 
the piracy, but how do we help them be aware of copyright law, 
so when they go to sell a digital good, if they happen to 
connect their phone or their iPad or any other device, we pop 
up a notification saying, ``Hey, do you know you actually sold 
this? You need to remove it now.''
    And just as the law has always required the users to be 
lawful in their activity, we still give them the tools. We give 
them better tools today to actually maintain compliance with 
copyright law than they have ever had before.
    Mr. Holding. You touch on a point that has come through a 
lot of the testimony, that the problems arise perhaps not with 
the law itself but with the consumer awareness of what the law 
is.
    So is the question more of a consumer protection or 
consumer education issue than actually changing, you know, what 
the law is?
    I mean, Mr. Simon, the software industry, from the get-go, 
I think licensing has been something that your consumers have 
understood, that they are buying a license to this software. 
You can't copy it; you can't pass it on, so forth.
    Perhaps as we move forward with other digital works out 
there, as the consumers become more educated and understand 
that they just have a license to it, it will ameliorate, if not 
come close, to eliminating the problem.
    Mr. Simon. Just a couple of points, Mr. Holding, because I 
guess Mr. Deutch asked a question of, is the technology there?
    So we know from, sad fact, NSA revelations, work this 
Committee and other congressional Committees have done, there 
is a lot of monitoring that can occur out there. We have a lot 
of technology to do so. But there is a price associated with 
it. And we have to balance these things. And we don't want to 
be overly intrusive. But we also want to make sure that people 
do not engage in illicit activity.
    The suggestion that somehow moving everything to the cloud 
solves it all by making it all a streaming business is 
antithetical to the whole concept of what copyright and the 
business models are about, which is we want lots of choice. And 
if we drive everything to a single way of acquiring and 
enjoying, it is the opposite of what this law has done and the 
benefit that I think this Congress has created for all of us.
    So we have got to be very careful here. We want secondary 
markets, but not at any price. And the suggestion that 
secondary markets overwhelm all other considerations I think is 
a little fanciful.
    Mr. Holding. Thank you, Mr. Chairman.
    Mr. Goodlatte. Thank you.
    Gentleman from New York, Mr. Jeffries, is recognized for 5 
minutes.
    Mr. Jeffries. Thank you, Mr. Chairman.
    And thank you, Congressman Nadler, for hosting us here 
today.
    Mr. Ossenmacher, in terms of first sale doctrine, secondary 
owner has the right to sell, loan, or give away any physical 
property that it purchases. Is that correct?
    Mr. Ossenmacher. That is--yes, that is correct.
    Mr. Jeffries. And this is commonly known as the right of 
distribution. Correct?
    Mr. Ossenmacher. It is part of the first sale doctrine, 
yes.
    Mr. Jeffries. Okay.
    Mr. Ossenmacher. It is an exclusion of the copyright 
holder.
    Mr. Jeffries. The first sale doctrine does not provide the 
secondary owner, the initial purchaser with a right of 
reproduction. Is that right?
    Mr. Ossenmacher. That is correct.
    Mr. Jeffries. Okay. Now, in the Capitol Records case, the 
court concluded that in the context of your business, the 
digital reproduction occurs as part of the transaction. Is that 
right?
    Mr. Ossenmacher. In one aspect of our software, yes.
    Mr. Jeffries. But in your view--correct me if I am wrong--
but your position is that the actual transfer of the digital 
item does not constitute a reproduction. Is that right?
    Mr. Ossenmacher. That is correct.
    Mr. Jeffries. Okay. And can you elaborate on that position?
    Mr. Ossenmacher. Yes. So one of the things that the judge 
had said in his ruling was that he didn't completely understand 
technology. And based on his not understanding technology, he 
would go with a conservative approach. So I wanted that to be 
said.
    But the way our system works is we allow two different 
types. We had a type where we called it migration. So a lot of 
times people don't completely understand how things get to our 
computers, but basically computer code is 0s and 1s that 
energize a disk either positively or negatively.
    And what we did is, just as that song originally came down 
to our disk, we literally picked up the same 0s and 1s. We 
reversed the electronic coding going to the disk, the positive 
and negative charges.
    And so, for example, if on my disk I have 100 charges, 100 
percent of a song, and where I want to move it to where there 
is 0, as I move 1, there is 1 here, there is 99 here, 98/2, and 
so forth.
    Mr. Jeffries. Let me stop you there. That is important, and 
I appreciate that elucidation.
    In terms of your position as it relates to what constitutes 
reproduction and not under first sale doctrine, there is the 
transfer; you just talked about that.
    Mr. Ossenmacher. Yes.
    Mr. Jeffries. But then secondary aspect or the second 
aspect is whether a deletion occurs. This is Ted Deutch's line 
of inquiry. I just wanted to explore that for a minute.
    So the court concluded, I believe, that a deletion in its 
view didn't matter. Though I would tend to hold the position 
and deletion, if it is an actual deletion, is consequential to 
the discussion that we are having here as part of the 
Committee. But I want to explore this notion as to whether an 
actual deletion occurs.
    Now, when you hit the ``delete'' button on an email, is 
that email actually deleted?
    Mr. Ossenmacher. No.
    Mr. Jeffries. Okay. Now, that email content is then 
transferred to a trash folder. Correct?
    Mr. Ossenmacher. Yes.
    Mr. Jeffries. Now, if you hit the ``delete'' button, in 
that trash folder, is that email actually deleted?
    Mr. Ossenmacher. Not necessarily.
    Mr. Jeffries. Right. Because there is a process, I guess it 
is called technically recovery and restore. And obviously, 
there is a ghost of that email that exists that can be 
recovered. Correct?
    Mr. Ossenmacher. Correct. Typically, deletion is basically 
an overwriting process. So it leaves the original material 
there and overwrites it so that it appears it is no longer 
there. That is not what we are talking about.
    Mr. Jeffries. Okay. So how can you assure us in the context 
of the technology that you are talking about that a deletion is 
actually occurring such that someone cannot subsequently 
retrieve the digital file that you contend has been deleted?
    Mr. Ossenmacher. We would be happy with technology to 
submit to forensic people. Our team is primarily MIT-based 
scientists, who are very, very smart. But I think even more so 
than that, I think the issue that we have found is we are not 
actually doing a deletion so that there is nothing left. I 
mean, there is nothing to actually recover, is how the process 
is, that we use.
    Mr. Jeffries. But isn't it possible--and this was pursued 
in an earlier line of inquiry--isn't it possible that the 
original content could have been purchased on a smartphone or 
an iPod, for instance, and then transferred over? In your 
model, you are saying that you would exclude that type of 
secondary sale. Is that right?
    Mr. Ossenmacher. We can identify those as having happened 
that way, yes.
    Mr. Jeffries. And then you would exclude it if you identify 
it as having happened that way?
    Mr. Ossenmacher. If we are aware the user has not caused 
subsequent copies they made to be removed, we would exclude it, 
yes.
    Mr. Jeffries. Thank you.
    Mr. Goodlatte. Chair thanks the gentleman.
    We have 10 or 15 minutes left. So we will, as Mr. Deutch 
had suggested, entertain on additional questions.
    I want to pursue this line. And I will start with you, Mr. 
Ossenmacher.
    So going back to our analogy of the book, the audio book--
or not audio book, but digital book--do you think that Mr. 
Smith and Wiley, have the right to offer that book for sale, 
for sale under two different conditions? One would be for sale 
at a price that limits your use within the devices that--
generally, when I buy something from Amazon today, it is 
limited within those devices--and then a second sale at a 
higher price, presumably, where you could do more with it, 
where you could sell it through the cloud? Does he have the 
right to do much now?
    And if your answer is no, should Congress legislate that 
distinction?
    Mr. Ossenmacher. That is an excellent question. I believe 
Mr. Smith does have the right to offer that now. I think the 
concern is that only one of those is being offered. That the 
right for a consumer to make a choice between those does not 
exist. And so if Mr. Smith were to offer consumers----
    Mr. Goodlatte. He has a right to do it. He also has a right 
to not do it, though. Is that correct?
    Mr. Ossenmacher. Well, I think that is maybe what this 
discussion is about.
    Mr. Goodlatte. Correct.
    Mr. Ossenmacher. I think that is what this discussion is 
about. So if we are only offering a model that, as we have 
heard from others, is a licensed model but is not transparently 
a license, I guess the first recommendation we would have is 
just simply call it a rental. Call it what it is, and let's not 
try to confuse consumers about what they are actually getting. 
If they don't actually own something, don't put a ``buy'' 
button there.
    Mr. Goodlatte. Do you think we need to legislate that? Or 
do you think the law covers that already?
    Mr. Ossenmacher. I think the law covers that. But I think 
there is also confusion, as Mr. Jeffries had pointed out, even 
in our own court cases, where the court system is not really 
aware of how technology maybe works or doesn't work. And even 
back to the original Copyright Office letter that has been 
referred to, in 2001, I know you started off about this, how 
fast things change. And they do change quickly. So I think 
there might be support somewhere in how to help this.
    Mr. Goodlatte. Anybody else want to respond to that? We 
will go to Mr. Smith and Mr. Villasenor.
    Mr. Smith. So I think we are very clear that all of our 
digital products are licensed. The technical, technological 
solution offered by Mr. Ossenmacher's company could actually be 
an interesting and value-added component to that model.
    To actually sell a digital copy for unlimited re-use, I 
can't conceive a business model that would make that work for 
the consumer, if there is no limit to the number of copies that 
can be produced and sold onwards. The point is----
    Mr. Goodlatte. Mr. Ossenmacher is suggesting that you could 
limit the number of copies made available. You could transfer 
your rights within the cloud. Give up your rights and someone 
else takes them. Is that correct?
    Mr. Smith. Again, if we had reliable enforcement, if we 
answered the questions that Mr. Holding raised about 
surveillance, perhaps the technology solution is possible.
    But our belief is that there is no need for Congress to 
legislate around this. We are offering value today. We are 
giving consumers more choice than ever before.
    Mr. Goodlatte. Okay. Mr. Villasenor.
    Mr. Villasenor. The law already provides copyright owners 
with a huge amount of flexibility in structuring their 
offerings, and so there is no need to change it in that 
respect.
    If a copyright owner wants to offer a license specifically 
authorizing resale or transfer, then the copyright owner is 
free to do that. If a copyright owner wants to offer sales, 
actual sales conferring ownership but to allow that ownership 
to be transferred via a reproduction, the copyright owner has 
the right to offer that because the copyright owner has the 
exclusive reproduction right. It is just not automatically 
available to the consumer unless the copyright owner actually 
authorized it. So there is enormous flexibility under the law 
already for copyright owners to offer these kinds of things.
    Mr. Goodlatte. I don't want to monopolize the conversation, 
so let me turn to Mr. Nadler, see if he has questions.
    Mr. Nadler. Thank you. I have two questions. I may now only 
get to one of them.
    The concern with reproduction on digital is that, because 
the product is so identical when digitally reproduced or 
transferred, is the digital copies will compete directly with 
and essentially replace the market for initial sales, thus 
driving creators out of business.
    Does anybody see a way around this if first sale is applied 
digitally? Mr. Shems? Mr. Glotzer?
    Mr. Shems. Yes, sure. If we price our work or price those 
files much higher, which will help us cover the costs of losing 
further business from the secondary use.
    Mr. Nadler. That doesn't help society to suddenly----
    Mr. Shems. No, it does not help society. Right.
    Mr. Glotzer. Yes. As I stated before, you will have a 
market failure at that point. Which, in practical terms, that 
is the price, the customary price of a film or a television 
show, for example, being 10 to 100 times, simply because there 
are mechanisms in place.
    Again, we are not--I think this whole, the construct, needs 
to be recognized that intellectual property delivered via these 
various physical hosts is inherently constrained because of the 
behavior of those hosts. Once you liberate it from that, you 
are delivering it, it is not to say, well, it just happened to 
come via the Internet as opposed to on a tape or a disk. That 
has liberated the content to travel in a way that creates a 
whole different economic proposition for creators. So if the 
balance between creators and consumers is to remain balanced 
and is to remain undisturbed, then we need to treat content 
that travels via this more liberated means in a different way.
    Mr. Nadler. Does anybody want to take a contrary view?
    Mr. Ossenmacher. Yes. I think, you know, that all sounds 
very nice and good. But the fact is the Internet also 
constrains things. So to transfer a digital good means there is 
a full trail of documentation of where it went, how it went. To 
take a physical good and actually illegally make copies of it, 
distribute them on street corners is very easy to do.
    Mr. Nadler. Thank you. Let me very quickly ask one other 
question. That is, would it be useful to treat the software 
that enables this cell phone to function differently than the 
software that you may download onto it?
    Mr. Simon. Let me try, since I am the software guy. Couple 
of thoughts, so the software industry is evolving very rapidly. 
And there are lot of different--so apps. You can get apps for 
free. But if you want additional functions, you pay for it. 
There are a lot of people out there playing a game called Candy 
Crush these days. You get it for free. Right. Candy Crush 
players? I do it.
    You get it for free, but if you want to do additional 
things, you have to pay for it.
    Mr. Nadler. Candy Crush or any game is an app, whether it 
comes with it or not.
    I am simply saying, maybe we should have the same first 
sale doctrine for the software that makes this cell phone other 
than a hunk of metal, but for anything else that you might want 
to play on it, read it, use it, have a different----
    Mr. Simon. So the point I was trying to make, Mr. Nadler, 
and I apologize for being sort of roundabout, is, there are a 
lot of different layers of software that make that cell phone 
work. There is a chip in there, which has layers of software in 
it. There is an operating system in there. There are particular 
applications. And differentiating between those things and 
trying to apply the doctrine to some and not to others I think 
would be enormously complicated.
    The better way to go is to look at whether there is a 
license and enforce the intent of the parties.
    Mr. Nadler. What?
    Mr. Simon. Enforce the intent of the parties, as expressed 
in the license or in the contract.
    Mr. Nadler. Thank you.
    Mr. Goodlatte. I want to let everybody get at least one 
more question in.
    Go to Mr. Holding next.
    Mr. Holding. Mr. Siy, currently, software companies offer 
significant discounts to educational users. And if we went to a 
digital first sale system, you know, wouldn't software 
companies face competition from educational and other 
discounted versions, kind of the same arbitrage problem that 
Kirtsaeng has produced for Mr. Smith over here?
    Mr. Siy. Yes, I think that would be the case if the 
software was offered as a sale. I think in all of these 
proposals, certainly the ones that I have looked at, of 
allowing for there to be a digital first sale, none of them are 
going to prohibit people from offering things as rentals or 
leases. The idea is simply that those things that look like 
sales are sales. And those things that look like rentals or 
leases act that way.
    So if a software company wanted to offer something under a 
lease to an educational provider, they can do that. And the 
educational provider reselling that under different terms is in 
violation of that contract.
    The difference being that you don't have the confusion, and 
the difference being that you are not necessarily going to 
leverage what should be a contract dispute into a copyright 
dispute.
    Mr. Holding. One of the arguments that has been put forward 
regarding the licensing, is, you know, they are complicated. 
Even contract attorneys have difficulty figuring out what these 
licenses mean. So your average consumer, how are they supposed 
to know what the licensing, you know, what the covenants are 
and so forth?
    You know, the market, you know, will dictate ultimately 
what consumers--consumers go, in, you know, they are going to 
purchase what they want. If they find them too complicated, 
they may decide that they don't want to purchase them.
    So, in your view, is it necessary for Congress now to act 
and get into the realm of the licensing? Or should we just step 
back and let the market sort out these issues as consumers 
become more educated in what they are buying?
    Mr. Siy. I think these contracts can be so complicated that 
the consumers acting on their own are not necessarily going to 
influence the market. Because there will be a long delay 
between somebody seeing the existence of that contract--they 
might have already bought it and brought it home and started 
installing it, let alone read it and understand it and had a 
lawyer take a look at it--and their decision to, you know, they 
have already made their purchase decision.
    So I think that there are things that can be done to 
protect consumers other than waiting for the market to act.
    There is also the case of a lot of times the terms where 
they would be technically in violation of these things. Well, 
the copyright holder or the manufacturer isn't going to enforce 
against them until much, much later, until they start doing 
something that they really object to.
    Mr. Holding. Thank you, Mr. Chairman.
    Mr. Goodlatte. Thank you.
    Mr. Deutch.
    Mr. Deutch. Thanks, Mr. Chairman.
    Mr. Villasenor, the fundamental principle behind copyright 
is that intellectual property rights enable creators to learn a 
return on their investment and incentivizes them to make it 
available widely so that that return grows.
    If Congress mandated a resale right for Internet-
distributed content, would that in any way jeopardize the 
balance? Ironically, would it discourage those holders of that 
right from making it more widely available?
    Mr. Villasenor. To ask, so I can properly answer the 
question, would you suggest--is this Congress mandating a 
resale right and then simultaneously prohibiting other methods 
of distribution? Or simply mandating a resale right for that 
content which is sold with ownership?
    Mr. Deutch. Mandating a resale right for Internet-
distributed content.
    Mr. Villasenor. In other words, saying it is--you are no 
longer allowed to offer don't that is nontransferrable under 
licenses. Yes, I think that would frankly be a disaster. I 
think it would basically be trampling all over contract law. 
And I think it would up-end a lot of the dynamic that we have 
with respect to the balance between content creators and 
consumers.
    That said, as I am on record, that consumers need better 
disclosure. But I don't think that the step that you mentioned 
is the right response.
    Mr. Deutch. Mr. Shems.
    Mr. Shems. I agree. Thank you for the question.
    Expanding the first sale online would greatly limit the 
creators' abilities--and creators' abilities to innovate and 
experiment. And I think that that would have a negative effect 
on the industries.
    Mr. Deutch. Thanks, Mr. Chairman. I yield back.
    Mr. Goodlatte. Thank you.
    Mr. Jeffries.
    Mr. Jeffries. Thank you, Mr. Chairman.
    Mr. Band, in terms of your position, is it your position 
that we should create a digital first sale doctrine. Is that 
right?
    Mr. Band. No. My Committee, my coalition--you are the 
Committee. The coalition I represent does not have a position 
on digital first sale, per se.
    Our position is on this narrower issue that Mr. Nadler 
raised of, you know, the software in the iPhone that is 
critical to the operation of the iPhone. So we are just talking 
about that specific piece and that to make sure that, you know, 
that when you transfer the iPhone that the operating system 
goes along with it.
    We don't have a position on the bigger digital first sale 
issue that other people here have been talking about.
    Mr. Jeffries. Okay.
    Mr. Ossenmacher, in terms of, you know, protecting sort of 
the rights of the owner, which presumably is inherent in the 
business model that you have set forth as it relates to the 
person who purchases the digital item from the original owner, 
let's focus on the original owner initially.
    Obviously, I mean, we, I think, Judiciary Committee, 
Congress, we have a constitutional charge, pursuant to Article 
1, Section 8, Clause 8, to create a robust intellectual 
property system to promote the progress of science and useful 
arts.
    In terms of undermining that constitutional charge, piracy, 
would you agree, presents a great threat at the end of the day 
to undermining a robust intellectual property system and isn't 
the risk of piracy greater in the digital context?
    Mr. Ossenmacher. That is a very complicated and complex 
question. But, yes, piracy absolutely undermines the creators 
and the intent of the laws that have been set forth.
    How that is enacted or how we protect against that I think 
is where maybe we differ. We believe that ownership will help 
protect against that. And, you know, I think consumers believe 
that as well.
    Mr. Jeffries. Thank you, Mr. Chairman. I yield back.
    Mr. Goodlatte. Thank you Mr. Chairman.
    I want to thank all of the Members of this panel for a very 
enlightening discussion. And all the Members of the Committee 
for participating today. This concludes today's hearing, and I 
want to thank again all of the witnesses for attending.
    Without objection, all Members will have 5 legislative days 
to submit additional written questions for the witnesses or 
additional materials for the record.
    And this hearing is adjourned.

    [Whereupon, at 11:42 a.m., the Subcommittee was adjourned.]


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