Statement of Marybeth Peters
The Register of Copyrights
before the
Subcommittee on Courts and Intellectual Property
Committee on the Judiciary

United States House of Representatives
105^th Congress, 1^st Session

September 11, 1997

No Electronic Theft (NET) Act of 1997 (H.R. 2265)

Mr. Chairman, members of the Subcommittee, thank you for the opportunity to testify on this important piece of legislation, the “No Electronic Theft (NET) Act of 1997.” The bill would amend the provisions of current law dealing with criminal liability for copyright infringement to cover willful piracy that may cause serious commercial harm despite the infringer’s lack of a profit motive.

The Copyright Office supports the purpose and approach of the proposed changes. We agree with the sponsors of the bill that a significant loophole exists in current law, which permits deliberate and destructive piracy to escape criminal penalties where it is done for motives other than financial gain. In order to preserve legitimate markets for copyrighted works, it is critical, especially in the era of digital transmission, to close this loophole quickly. While we have some concerns with respect to specific language of the proposed changes, we are confident that these concerns can be resolved.

Introduction and Background

The Copyright Act provides for both civil and criminal liability for acts of copyright infringement. 17 U.S.C., Chapter 5. Infringement is a crime only where it is done “willfully and for purposes of commercial advantage or private financial gain.” 17 U.S.C. § 506(a). The penalties for criminal infringement, set forth in Title 18 of the U.S. Code, are determined by its extent: if the infringer has made, in any 180-day period, ten or more copies of one or more copyrighted works with a total retail value of $2,500, the crime is a felony entailing up to five years imprisonment and/or a fine of up to $250,000 for individuals and $500,000 for organizations. 18 U.S.C. §§ 2319(a), 3571(b). For cases not meeting this threshold, the crime is a misdemeanor, with the maximum penalty of imprisonment for up to one year and/or a fine of up to $25,000 for individuals and $100,000 for organizations. Id. §§ 2319(c), 3571(b). There is also an increased penalty for repeat offenders, authorizing a sentence of up to 10 years. Id. § 2319(b).

This general approach to criminal liability dates back to the first criminal infringement provision in the copyright law, which required the infringement to be “willful and for profit.” Act of January 6, 1897, 54th Cong., 2d Sess., 29 Stat. 481. The profit element was maintained in the 1909 Copyright Act, but was elaborated in 1976 to read “for purposes of commercial advantage or private financial gain.” 17 U.S.C. § 506(a). Although Congress did not explain the change,see H.R. Rep. 1476, 94th Cong., 2d. Sess. 163 (1976), courts have pointed out that the current language conforms to judicial interpretation of the prior law’s “for profit” requirement as covering infringers who intended to make a profit but did not actually do so. See United States v. Cross, 816 F.2d 297, 301 (7th Cir. 1987); United States v. Moore, 604 F.2d 1228, 1235 (9th Cir. 1979).

The damage from piracy has grown over the years as technology has developed, making it easier and easier to produce higher quality copies of copyrighted works in various formats. Copyright owners today lose substantial sums of money to piracy. The advent of digital technology has the potential to exacerbate greatly the impact of piracy, as it allows users to make multiple perfect copies in an instant, without requiring a major investment in physical manufacturing and distribution facilities. As it becomes easier to transmit large amounts of information quickly over the NII, it becomes easier for those without a commercial stake or profit motive — a disgruntled former employee, a dissatisfied customer, an Internet user opposed to the fundamental concept of copyright law — to inflict tremendous damage to the market for a copyrighted work. Unlike the traditional analog world, substantial commercial harm can be caused without a commercial aspect to the piracy itself. Moreover, for such infringers, civil remedies are less likely to serve as an effective deterrent and criminal sanctions may be needed to deter these individuals from causing serious harm to the value of copyrighted works.

The case of United States v. LaMacchia, 871 F. Supp. 535 (D. Mass. 1994), has drawn attention to current law’s shortcomings. David LaMacchia, a student at the Massachusetts Institute of Technology described by the court as a “computer hacker,” id. at 536, created and operated electronic bulletin boards on the Internet and encouraged users to upload and download copies of popular copyrighted commercial software. The illegal copying that took place on the bulletin boards resulted in alleged losses to the copyright owners of over one million dollars. Because LaMacchia lacked a commercial motive, however, the government charged him with wire fraud rather than criminal copyright infringement. Id. at 541-42. The court dismissed the indictment, holding that copyright infringement can only be prosecuted under the Copyright Act. Id. at 545 (relying on Dowling v. United States, 473 U.S. 207 (1985)).

LaMacchia demonstrates that the lack of criminal penalties for willful, noncommercial infringement has become a significant loophole in the digital environment. The court itself decried this loophole, expressing frustration with the confines of section 506(a):

[O]ne might at best describe [the defendant’s] actions as heedlessly irresponsible, and at worst as nihilistic, self-indulgent, and lacking in any fundamental sense of values. Criminal as well as civil penalties should probably attach to willful, multiple infringements of copyrighted software even absent a commercial motive on the part of the infringer. . . . But, it is the legislature, not the Court which is to define a crime, and ordain its punishment.

Id. at 545 (quotations omitted).

H.R. 2265 responds to the court’s call for a legislative solution to its dilemma. The bill would close the loophole in current law by making two main changes. First, it clarifies that the “private financial gain” element of criminal infringement includes barter — that is, situations where the illegal copies are traded for items of value such as other copyrighted works, not only where they are sold for money. Second, it redefines criminal infringement to include willful infringement by reproduction or distribution, including by electronic means, that lacks a commercial motive but has a substantial commercial effect.

Analysis

A. Definition of “Financial Gain”

Section 2(a) of the bill would introduce a new definition in section 101 of the Copyright Act for the term “financial gain.” Under the current section 506(a), the standard for criminal liability is that the infringer acted “willfully and for purposes of commercial advantage or private financial gain.” The new definition of “financial gain” would clarify that the term “includes receipt of anything of value, including the receipt of other copyrighted works.” This language ensures that criminal liability will not turn on the technicality of whether the infringing copies were sold for money, as opposed to other valuable benefits.

The Copyright Office believes that the proposed clarification is desirable. The new definition will be particularly important in protecting copyright owners from piracy on the Internet, where a multitude of economic models have developed to compensate infringers fortheir illegal copies. It has become common, for example, for electronic bulletin boards to facilitate bartering systems where users contribute copies of infringing software in exchange for the ability to download copies of other software. See, e.g., Sega Enters. Ltd. v. MAPHIA, 948 F. Supp. 923, 927-28 (N.D. Cal. 1996); LaMacchia, 871 F. Supp. at 536.

B. Substitution of Commercial Impact for Commercial Purpose

Other sections of the bill allow criminal liability for willful infringement to be based on the commercial impact on the copyright owner rather than the commercial purpose of the infringer.

Section 2(b) of the bill renumbers the existing criminal infringement provision in section 506(a) as subsection 506(a)(1), and adds a new subsection 506(a)(2). Under the new subsection, any person who infringes a copyright “willfully . . . by the reproduction or distribution, including by electronic means, of 1 or more copies, of 1 or more copyrighted works” is subject to the criminal penalties set forth in Title 18. The core of this subsection is its omission of any requirement of commercial purpose or financial motive. In addition, it makes explicit that reproduction and distribution of electronic copies via the Internet can qualify for criminal sanctions.

The bill also revises section 2319 of Title 18 to set forth the penalties for violation of the proposed new subsection. Under the revisions, the criminal infringement would be a felony if the offense involves the copying or distribution, in any 180-day period, of ten or more copies of one or more copyrighted works with a total retail value of $5,000. See H.R. 2265, § 2(d) (adding new section 2319(c) to Title 18). The maximum sentence is up to 3 years in prison and/or a fine of up to $250,000 for individuals and $500,000 for organizations (the bill does not amend the existing fine amounts found in 18 U.S.C. § 3571). Repeat felony offenders could receive a sentence of up to 6 years. A less extensive violation of section 506(a)(2) would be a misdemeanor, with the maximum sentence of up to one year in prison and/or a fine of up to $25,000 for individuals and $100,000 for organizations. See H.R. 2265, § 2(d) and 18 U.S.C. § 3571.

As discussed above, the Copyright Office supports the goal of the proposed revisions in addressing damaging piracy that is motivated by non-commercial purposes. While the existing “commercial purpose” requirement, in the the world of physical copies, has served to limit criminal liability to piracy on a commercial scale, a new standard is needed in the digital environment, where significant economic damage can be caused without a commercial purpose.

We are concerned, however, that certain aspects of the language of H.R. 2265 as drafted could cause unintended negative consequences. Because of the placement of all the factors delineating the extent of the infringement in the penalties section in Title 18, the structure of the bill indicates that willful infringement through reproduction or distribution of a single copy of a copyrighted work could lead to criminal liability. While the more serious cases listed in Title 18 would constitute felonies, cases of less severity appear to qualify as misdemeanors.

In our view, it would be preferable to limit criminal liability for infringement without a profit motive to cases of willful infringement that threaten to cause substantial economic harm. When Congress last revised criminal penalties for copyright infringement, the legislative reports made clear that de minimis copying would not be subject to the new criminal penalties. See H.R. Rep. No. 102-997, 102d Cong., 2d Sess. 6 (1992). At that time, the House Judiciary Committee stated that the new felony provisions would not apply to “children making copies for friends as well as other incidental copying of copyrighted works having a relatively low retail value.” Id. We believe a similar distinction is appropriate here.

This result could be accomplished by a change in drafting technique. We would suggest incorporating directly into section 506(a)(2) the limits currently found in the proposed penalty provisions regarding time period, number of copies and retail value. This approach would make clear that the new criminal provisions are limited to situations like LaMacchia, where the infringer’s conduct substantially damages the market for the copyrighted works. The definition of the criminal conduct itself would then contain limitations — requiring the conduct to take place within a 180-day period and involve 10 or more copies of works worth $5,000 or more — that would leave no doubt that minor, isolated instances of willful infringement would not inappropriately be subject to criminal liability. The bill already takes similar precautions in this area by increasing the current felony “retail value” threshold for commercial piracy from $2,500 to $5,000. See section 2(d)(1).

Concern has also been expressed about the impact of the bill on libraries, universities and other nonprofit organizations. Some have suggested that the proposed language, even if limited as proposed above, might expose these organizations inappropriately to the risk of criminal liability, since the retail value limits could easily be surpassed, particularly by large nonprofits.

Much of this concern should be allayed by the requirement that the infringement be “willful,” given the interpretation that courts have given this term in the criminal context. The courts have held that it is not enough for the defendant in a criminal case to have had an intent to copy the work; he must have acted with knowledge that his conduct constituted copyright infringement. See, e.g.,United States v. Cross, 816 F.2d 297, 300 (7th Cir. 1987) and United States v. Moran, 757 F. Supp. 1046 (D. Neb. 1991). In Cross, the Seventh Circuit upheld the following jury instruction for determining willfulness under the criminal provision of the Copyright Act:

‘[W]illfully’ as used in the statute means the act was committed by a defendant voluntarily, with knowledge that it was prohibited by law, and with the purpose of violating the law, and not by mistake, accident or in good faith.

816 F.2d at 300. In Moran, the defendant was charged with criminal infringement for his practice of making backup copies of the videotapes he purchased for his video rental store. The court held that the “willful” element of criminal copyright infringement was similar to that in federal criminal tax statutes, and thus requires a “voluntary, intentional violation of a known legal duty.” Id. at 1049 (citing U.S. v. Cheek, 111 S.Ct. 604, 610 (1991)). The court therefore held that because the defendant believed, albeit incorrectly, that he had a right to make such copies, he could not be convicted of criminal infringement. Id. at 1051-52.

Thus, libraries and other nonprofit organizations that implement a conscientious copyright policy should not be subject to the threat of criminal sanctions under H.R. 2265. In particular, if such an organization believes in good faith that its copying is permissible as fair use or under section 108 or another provision of the Copyright Act, it would not be acting willfully. In order to confirm this interpretation, the legislative history could refer to the case law described above. To the extent that nonprofits may identify specific situations where the bill could create an inappropriate risk of criminal liability, the Copyright Office would be pleased to assist in developing language to meet their concerns while maintaining the intended purpose of the legislation.

The Copyright Office has one additional technical suggestion about the language of the bill. We recommend that the phrase “copies” that appears both in section 506(a)(2) and in section 2319(c) of Title 18 be expanded to read “copies or phonorecords,” in order to cover all forms of material objects in which copyrighted works may be embodied. See definitions of “copies” and “phonorecords” in 17 U.S.C. § 101.

Conclusion

The Copyright Office supports enactment of H.R. 2265, with the minor revisions suggested. The bill would close a gap in existing legal shields against the piracy of copyrighted works, particularly as piracy has evolved into different forms in the Internet context.