```

[Senate Hearing 109-1115]
[From the U.S. Government Publishing Office]

                                                       S. Hrg. 109-1115
 
                            MGM v. GROKSTER

=======================================================================

                                HEARING

                               before the

                         COMMITTEE ON COMMERCE,
                      SCIENCE, AND TRANSPORTATION
                          UNITED STATES SENATE

                       ONE HUNDRED NINTH CONGRESS

                             FIRST SESSION

                               __________

                             JULY 28, 2005

                               __________

    Printed for the use of the Committee on Commerce, Science, and 
                             Transportation

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       SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION

                       ONE HUNDRED NINTH CONGRESS

                             FIRST SESSION

                     TED STEVENS, Alaska, Chairman
JOHN McCAIN, Arizona                 DANIEL K. INOUYE, Hawaii, Co-
CONRAD BURNS, Montana                    Chairman
TRENT LOTT, Mississippi              JOHN D. ROCKEFELLER IV, West 
KAY BAILEY HUTCHISON, Texas              Virginia
OLYMPIA J. SNOWE, Maine              JOHN F. KERRY, Massachusetts
GORDON H. SMITH, Oregon              BYRON L. DORGAN, North Dakota
JOHN ENSIGN, Nevada                  BARBARA BOXER, California
GEORGE ALLEN, Virginia               BILL NELSON, Florida
JOHN E. SUNUNU, New Hampshire        MARIA CANTWELL, Washington
JIM DeMINT, South Carolina           FRANK R. LAUTENBERG, New Jersey
DAVID VITTER, Louisiana              E. BENJAMIN NELSON, Nebraska
                                     MARK PRYOR, Arkansas
             Lisa J. Sutherland, Republican Staff Director
        Christine Drager Kurth, Republican Deputy Staff Director
                David Russell, Republican Chief Counsel
   Margaret L. Cummisky, Democratic Staff Director and Chief Counsel
   Samuel E. Whitehorn, Democratic Deputy Staff Director and General 
                                Counsel
             Lila Harper Helms, Democratic Policy Director

                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on July 28, 2005....................................     1
Statement of Senator Boxer.......................................    48
Statement of Senator Ensign......................................    43
Statement of Senator Inouye......................................     1
Statement of Senator Pryor.......................................    41
Statement of Senator Stevens.....................................     1
    Editorial, dated July 16, 2005, from Billboard Magazine, 
      entitled ``After Grokster, Can Music Business Save 
      Itself?''..................................................     2

                               Witnesses

Attaway, Fritz E., Executive Vice President and Washington 
  General Counsel, Motion Picture Association of America.........    32
    Prepared statement...........................................    33
Bainwol, Mitch, Chairman and CEO, Recording Industry Association 
  of America.....................................................    28
    Prepared statement...........................................    29
Baker, David N., Vice President, Law and Public Policy, 
  EarthLink, Inc.................................................    24
    Prepared statement...........................................    26
Eisgrau, Adam M., Executive Director, P2P United, Inc., on behalf 
  of the Electronic Frontier Foundation (EFF)....................     4
    Joint prepared statement of Adam M. Eisgrau, Executive 
      Director, P2P United, Inc.; and Fred von Lohmann, Senior IP 
      Attorney, Electronic Frontier Foundation (EFF).............     5
Heesen, Mark G., President, National Venture Capital Association.    18
    Prepared statement...........................................    19
Kerber, Gregory G., Chairman and CEO, Wurld Media, Inc...........    14
    Prepared statement...........................................    16

                                Appendix

Lafferty, Marty, CEO, Distributed Computing Industry Association 
  (DCIA), prepared statement.....................................    55

                            MGM v. GROKSTER

                              ----------                              

                        THURSDAY, JULY 28, 2005

                                       U.S. Senate,
        Committee on Commerce, Science, and Transportation,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 2:34 p.m. in room 
SR-253, Russell Senate Office Building, Hon. Ted Stevens, 
Chairman of the Committee, presiding.

            OPENING STATEMENT OF HON. TED STEVENS, 
                    U.S. SENATOR FROM ALASKA

    The Chairman. This afternoon, we want to examine the issues 
related to the MGM-Grokster decision and the appropriate 
balance between copyright protection and communication 
innovation.
    The Supreme Court decision cleared the way for peer-to-peer 
and other communication technologies to be liable for 
contributory or vicarious copyright infringement. Going 
forward, we'll all have to balance the competing interests of 
encouraging innovative services like peer-to-peer that spur new 
services, jobs, and economic growth against protecting content 
providers from piracy to ensure return on investment and 
continued innovation in the content space.
    Now, I know it's a very controversial subject we're dealing 
with this afternoon, and we have a series of witnesses here.
    First let me turn to our Co-Chairman, Senator Inouye.

              STATEMENT OF HON. DANIEL K. INOUYE, 
                    U.S. SENATOR FROM HAWAII

    Senator Inouye. I thank you very much, Mr. Chairman, for 
holding this hearing on the Supreme Court's recent decision. As 
we all know, it was unanimous. It's unusual in Washington these 
days to get a unanimous decision on anything, especially an 
issue as important as copyright.
    In my view, the Supreme Court has struck the proper balance 
between protecting the rights of copyright holders and creating 
an environment for technological innovation, and, in doing so, 
has made the American consumer the ultimate winner. With its 
ruling, the Supreme Court has sent an important message that 
the law does not allow companies to induce others to steal.
    Given that millions of Americans have downloaded or swapped 
files using peer-to-peer technology, the Department of Justice 
observed that it appears many people have come to view piracy 
over peer-to-peer networks as different and less objectionable 
compared to stealing a physical copy of a CD or DVD from the 
store. By holding companies that promote copyright infringement 
by clear expression or other affirmative steps taken to foster 
infringement, the Supreme Court has made it very clear that 
stealing is unacceptable.
    The recording industry, motion picture, and computer 
software industries are key components of our Nation's economy. 
According to a recent study by the International Intellectual 
Property Alliance, the copyright industries are strong and 
growing. In 2002, these industries accounted for 6 percent of 
the gross domestic product and employed 4 percent of the 
workers of the United States. In addition, these industries 
recorded more than $89 billion in foreign sales and exports in 
2002, which is well ahead of other major industry segments.
    Given the importance of these industries by our economy, I 
applaud the Supreme Court's decision to hold persons 
accountable for actions that encourage unlawful behavior.
    And so, I thank you, Mr. Chairman, for holding this 
hearing.
    The Chairman. Thank you very much.
    Senator Pryor, do you have a statement? Do you have a 
statement, Senator?
    Senator Pryor. I don't, thank you.
    The Chairman. Thank you very much.
    Just so the record will disclose the extent of this 
conflict, I'm going to put into the record the Billboard 
editorial of July 16 by Fred Goldring.
    [The information previously referred to follows:]

                   Billboard Magazine--July 16, 2005

            After Grokster, Can Music Business Save Itself?

                            By Fred Goldring

    Last week, the Supreme Court handed down a decision in the MGM vs. 
Grokster case that the news wires immediately heralded as a ``sweeping 
victory'' for our industry. Then, of all people, former Recording 
Industry Assn. of America head Hilary Rosen spoiled the party, pointing 
out that while the ruling ``maybe [sic] important psychologically, it 
just won't really matter in the marketplace.'' She clarified that 
``knowing we were right legally really still isn't the same thing as 
being right in the real world.''
    Then The New York Times piled on, insisting that ``[h]owever valid 
the industry's desire to protect its products, trying to stop file 
sharing has become a Sisyphean exercise.'' Rosen got the last word in 
that story, too, calling the Grokster decision ``meaningless.''
    Next, a Los Angeles Times piece suggested that the recording 
industry might try making MP3 music legitimately available rather than 
trying to sell files ``that restrict copying, deter sharing and limit 
portability.'' People in our industry found this last suggestion 
``outrageous.'' It reminded me that I made a similarly outrageous 
suggestion--nearly 2 years ago--in a piece I wrote for these pages, 
``Abandon the `Shock and Awe' Tactics: An Eight-Step Recovery Program 
for a Healthier Music Industry.''
    At the time, the recording industry had initiated the first few 
hundred of what would become a monthly round of John Doe lawsuits filed 
against accused music uploaders. I posited that the strategy of suing 
customers (thieves) and building ever-better locks for CDs and digital 
singles simply was not working, and that everything we had done thus 
far had in fact made the problem much worse.
    Sales were down. File swapping was up. Alarmed by our strategic 
direction, I wrote as someone who earns his living working with 
musicians, record companies and publishing companies (and as a musician 
myself) that an industry intervention was needed, to offer ``tough 
love'' as one would to ``a good friend or family member who is not 
thinking clearly, hell-bent on a collision course of self-
destruction.''
    In 2003, I suggested a few immediate steps that would put us on the 
path to recovery, specifically:

   Admit you're powerless. File sharing is not going away. 
        Downloading is already more popular than the CD.

   Give up on anti-piracy technologies--they don't work.

   Stop attacking your own customers. (Bad PR, worse business.)

   Focus less on finger-pointing and more on immediate, 
        practical, fair solutions.

   Give the people what they want, even if it requires that 
        laws be changed.

   Support initiatives that will allow unlimited access to 
        every piece of music in the MP3 format whenever and wherever 
        someone wants it, with no conditions or restrictions, in an 
        easy-to-use interface. People will pay for this.

    Glancing over my tough-love recommendations of 2 years ago, I have 
to point out the obvious: 2005 sure looks a helluva lot like 2003. The 
cynic in me would almost think that the industry had read my 
suggestions and decided to do the exact opposite.
    So now, we are far worse off, even perhaps to the point of no 
return. And we are busy celebrating the ``mother of all Pyrrhic 
victories'' when file sharing is at an all-time high.
    This is not just the latest in a long history of missed 
opportunities for our business. It is truly a defining moment.
    It is no accident that The New York Times, Los Angeles Times, 
Newsweek and Reuters are reporting that the music industry emperor is 
not wearing any clothes. Business is down another 8 percent this year, 
and we have pinned our hopes again on the deus ex machina. The industry 
has received its long-awaited vindication on paper by the U.S. Supreme 
Court, and yet the pundits--even Rosen (who ironically originally led 
this charge)--insist we are tilting at windmills. We are finally out of 
practical options, because there is no higher authority to appeal to.
    Two years ago, I ended with this simple recommendation: ``Stop your 
futile efforts to change the behavior of millions of music fans. Spend 
all your efforts on designing a system that gets everyone paid around 
the overwhelming behavior that exists.''
    Today, I'm asking the hard questions: Will the recording industry 
save itself? Or are we too far gone? Is there a realistic scenario for 
withdrawal, a retreat from the ``lawsuits and locksmiths'' mentality 
and a swift about-face? Can we swallow our pride and prevail over 
hubris long enough to embrace the real world and the real market 
opportunity? Or is The Motley Fool correct in predicting a not-so-
distant future when ``the major labels won't be the same batch of old-
school vinyl-pushers . . . the real power brokers in the music industry 
will be Google, Yahoo! and Microsoft?''
    Wall Street analysts and the mainstream press do not like our 
prospects, and so more than ever I fear we are living in a bubble and 
kidding ourselves about this war and the definition of winning.
    Two years ago I advocated change, and 2 years later I see status 
quo. So now I can only envision a frustratingly bleak future where we 
publicly celebrate shutting down a few peer-to-peer businesses like 
Grokster, though like shuttering Napster, doing so will be a useless 
exercise. I envision us marking 500 million songs sold in the course of 
a couple of years at Apple Computer's iTunes Music Store, remaining 
blind to the reality that (even the RIAA admits) nearly 3 billion free 
MP3s are swapped every month. I envision us continuing to hold out hope 
for a turning of the tide, an improvement in our position and a 
validation of our strategy that, like a desert oasis shimmering on the 
horizon, is always just 2 years away.
    It turns out I was right in 2003. Going forward, I hope I am wrong. 
Because we don't have another 2 years.
    Fred Goldring is a founding partner of Goldring, Hertz & 
Lichtenstein, a Beverly Hills, California-based entertainment law firm.

    The Chairman. We have, as witnesses this afternoon, a 
series of people that we've selected to try and bring a balance 
in terms of the comments on this issue. First is Adam Eisgrau, 
Executive Director of P2P United.
    May I call on you, please, sir?

 STATEMENT OF ADAM M. EISGRAU, EXECUTIVE DIRECTOR, P2P UNITED, 
               INC.; ON BEHALF OF THE ELECTRONIC 
                   FRONTIER FOUNDATION (EFF)

    Mr. Eisgrau. You certainly may. Thank you, Mr. Chairman.
    Good afternoon, Mr. Chairman, Co-Chairman Inouye, Senator 
Pryor. I thank you for the opportunity to appear here today on 
behalf of P2P United and the Electronic Frontier Foundation.
    For the record, I am not, and do not, appear here today as 
counsel for any individual or company.
    We appreciate the Committee's prospective focus, Mr. 
Chairman, on the larger policy implications of the Supreme 
Court's decision in MGM v. Grokster; most particularly, how to 
continue to promote technology, including peer-to-peer 
technology and technological innovation. I'm pleased to 
underscore that the value and legality of P2P technology, 
itself, was expressly recognized by the court in its opinion. 
Clearly, however, the misuse of this powerful and neutral 
communications technology continues to pose significant 
challenges. Notwithstanding a massive and ongoing campaign of 
lawsuits against consumers--11,000, and counting--the 
unvarnished facts are that new open peer-to-peer software 
programs will, and should continue to be, lawfully produced 
every day around the globe. And, as reported last month in 
Rolling Stone, ``The lawsuits have failed to stop, or even 
slow, illegal file sharing.'' As a practical matter, the high 
court's recent decision will not alter this landscape at all.
    Ms. Hillary Rosen, Mr. Bainwol's predecessor at the RIAA 
wrote, the day before the Court's recent ruling, and I quote 
her, ``It is said that the Supreme Court's decision will be one 
of the most important copyright cases ever on the books. I 
think it has all the makings of being famous,'' she said, ``for 
another reason. It just won't really matter in the marketplace. 
So, here is the crux of the problem,'' as Rosen explained, 
``P2P services have traffic at a rate 40 to 50 times the 
traffic of legitimate sites. This volume needs to be embraced 
and managed because it cannot be vanquished. And a tone,'' Ms. 
Rosen continued, ``must be set that allows future innovation to 
stimulate negotiation and not just confrontation.''
    Editorializing in Billboard Magazine on July 16--and I 
thank you for placing that in the record, Mr. Chairman--
prominent music industry attorney Fred Goldring felt compelled 
to reiterate advice he had given his industry in 2003, ``Stop 
your futile efforts to change the behavior of millions of music 
fans. Spend all your efforts on designing a system that gets 
everyone paid around the overwhelming behavior that exists.''
    We fully agree, Mr. Chairman, with both Ms. Rosen's and Mr. 
Goldring's bottom lines and urge the Committee, therefore, to 
take a proactively pragmatic view of how to help the market 
move forward.
    We have two requests. First, bring all relevant 
stakeholders together in a series of meetings or hearings to 
intelligently and civilly discuss the possibility that a system 
of voluntary--and I do emphasize ``voluntary''--collective 
licensing may be a useful mechanism, among others, to help meet 
consumer demand for online music while also encouraging 
innovation and maximizing the compensation of music copyright 
owners, both big and small.
    A similar system has, in fact, already worked well for 
decades, Mr. Chairman. Songwriters originally viewed radio 
exactly the way the music industry today views many P2P users, 
as pirates. Ultimately, however, they formed ASCAP, and, later, 
BMI and SESAC. Under this voluntary licensing system, radio 
stations pay a fee and, in return, get to play whatever music 
they like, using whatever equipment they feel works best.
    Today, the performing rights societies, like ASCAP, BMI, 
and SESAC, pay out literally hundreds of millions of dollars 
annually to their artists, and virtually all eligible rights-
holders opt to participate. Some difficulties over time 
notwithstanding, there is no question that the system that has 
evolved for radio is far preferable to the songwriter's 
original strategy of trying to sue radio into extinction.
    But there is a catch, Mr. Chairman. The entertainment 
industries, I'm sorry to say, have unilaterally declared any 
kind of collective licensing for P2P, even voluntary systems, 
to be an absolute nonstarter, and have refused multiple 
invitations to discuss the concept systematically in any forum. 
Without passing or changing any laws, therefore, this committee 
has the power to do consumers, and potentially the economy, a 
great service by simply convening such talks under its auspices 
and making clear that it expects invitees to participate in 
good faith.
    Second, for reasons detailed in our written testimony, we 
also ask that this committee initiate an inter-committee 
process meant to produce targeted statutory reform that will 
insulate technology innovators from potentially astronomical 
and crippling statutory damages under secondary liability 
doctrines made murkier by the court's recent ruling in 
Grokster. Originally designed to deter large-scale direct 
copyright infringers and other true commercial pirates, 
statutory damages of up to $150,000 per work infringed can now 
be imposed on individual inventors, technology companies, or 
even venture investors without proof of economic harm. This 
can, and we believe should, be changed without depriving 
copyright owners of powerful injunctive remedies and, 
potentially, very large actual damages awards in secondary 
liability cases, or, for that matter, of continued access to 
statutory damages in cases of real commercial piracy.
    We appreciate the opportunity to be here, Mr. Chairman. We 
thank you for placing the material in the record. And I look 
forward both to the Committee's questions and its ongoing 
direct involvement in these issues.
    Thank you.
    [The prepared statement of Mr. Eisgrau follows:]

 Joint Prepared Statement of Adam M. Eisgrau, Executive Director, P2P 
  United, Inc.; and Fred von Lohmann, Senior IP Attorney, Electronic 
                       Frontier Foundation (EFF)

    Good afternoon, Chairman Stevens, Co-Chairman Inouye and members of 
the Committee. Thank you, and your staffs, for the opportunity to 
participate in these proceedings.
    My name is Adam Eisgrau. I am a Vice President of Flanagan 
Consulting (established by former Congressman Michael Flanagan), and I 
appear before you today both as Executive Director of P2P United and on 
behalf of the Electronic Frontier Foundation (EFF), which co-authored 
this testimony.
    P2P United was founded 2 years ago this month as a resource for 
legislators, other policymakers and the media in need of accurate 
information regarding peer-to-peer software (P2P) and its tremendous 
potential. Our members include the developers of the Grokster and 
Morpheus software programs at issue in the Supreme Court's recent 
decision which has brought us together today. Much more about our group 
and its work is available online at www.p2punited.org. The Electronic 
Frontier Foundation, as detailed online at www.eff.org, was established 
15 years ago this month to defend the public's right to think, speak, 
and share ideas using all manner of new technologies, particularly the 
Internet and World Wide Web.
    In the four weeks since the Supreme Court's ruling in MGM v. 
Grokster, many pundits, analysts and advocates have concluded that the 
Court's unanimous opinion obviated any necessity for Congressional 
action to address the issues before the Court. P2P United and the 
Electronic Frontier Foundation respectfully disagree for reasons 
articulated by the Court itself. As a unanimous Court observed at the 
very outset of its legal analysis in MGM v. Grokster: ``[t]he more 
artistic expression is favored, the more technological innovation may 
be discouraged; the administration of copyright law is an exercise in 
managing the tradeoff.'' MGM v. Grokster, 545 U.S. 125 S. Ct. 2764, 
2770 (2005).
    The task of striking the right balance, however, is 
constitutionally delegated to Congress. Congress now has an important 
opportunity--indeed an ongoing responsibility--to examine the balance 
between copyright law and innovation with an eye toward affirmatively 
protecting and promoting the kind of technological innovation in 
communications that has been responsible for advancing our society and 
our economy so dramatically in the Internet Age.
    Accordingly, as this committee monitors the import and impact of 
the Court's ruling--which we applaud it for doing today and hope that 
it will continue to do regularly for some time to come--our 
organizations urge the Committee's members to adopt a de facto policy 
of ``proactive pragmatism'' in the public interest. Specifically, P2P 
United and EFF urge the Committee to affirmatively embrace two 
overarching public policy goals:

        1) proactively protect communications technology innovators 
        from the likely chilling effects of potentially crippling 
        liability in the uncertain legal environment created by the 
        Supreme Court's holding; and

        2) pragmatically promote new marketplace solutions that move us 
        toward a world where Internet users can obtain licenses that 
        give them lawful access to the broadest variety of copyrighted 
        material using the most efficient and convenient technologies 
        available.

    In particular, we propose that the Committee convene and task all 
relevant stakeholders with exploring--merely publicly discussing in 
good faith--the potential of a voluntary ``collective licensing'' 
system for music to fairly compensate all rightsholders for currently 
unlawful and unpaid downloads. Significantly, such a system would 
profit not only the four (soon to be three) megalithic overseas 
corporations that control much of the world's commercial music, but 
also for the first time would empower and compensate the thousands and 
thousands of individual musical performers and writers now 
unaffiliated--and statistically unlikely at any point to become 
affiliated--with what Joni Mitchell aptly called the ``star maker 
machinery of the popular song.'' \1\

I. Given the Uncertainties Left by the Supreme Court's Decision in MGM 
        v. Grokster, Disproportionate Statutory Liability for Secondary 

        Copyright Infringement Will Chill Innovation if Not 
        Congressionally Reformed

(A) Clarity about Confusion: The Consequence of the Court's Ruling
    In MGM v. Grokster, the question asked by the parties and dozens of 
amici was direct and critically important: ``When will a technology 
vendor be held secondarily liable for the direct copyright 
infringements committed by third parties using its products?'' Asked 
specifically to clarify the reach of copyright law's existing secondary 
liability doctrines of ``contributory'' and ``vicarious'' liability,\2\ 
the Court instead announced a new doctrine called ``inducement,'' 
holding that ``one who distributes a device with the object of 
promoting its use to infringe copyright, as shown by clear expression 
or other affirmative steps taken to foster infringement, is liable for 
the resulting acts of infringement by third parties.'' MGM v. Grokster, 
545 U.S. 125 S. Ct. 2764, 2771 (2005).
    While the new doctrine of inducement presents its own uncertainties 
for prospective litigants and lower courts to grapple with in the years 
to come,\3\ P2P United and EFF believe that the more significant 
prospective difficulty for technology innovators and investors now lies 
in the continued uncertainty surrounding the traditional copyright 
doctrines of contributory infringement, on which the Court was deeply 
split,\4\ and vicarious liability, on which it was essentially 
silent.\5\
    For many years, technologists and their financial backers relied on 
what seemed to be a relatively ``bright line'' test for secondary 
copyright liability announced in the Supreme Court's landmark 
``Betamax'' ruling in 1984.\6\ Unfortunately, the spate of litigation 
launched against P2P companies since 1999 has muddied the waters, with 
the rulings in the Napster, Aimster, and initial Grokster cases 
charting different courses though each of three branches of secondary 
liability.
    The Supreme Court's opinion now leaves technology companies, their 
attorneys and their backers to pick their way through a dangerous 
minefield of legal uncertainties profoundly antagonistic to economic 
progress and deeply hostile to continued innovation. Even if they 
assiduously avoid so much as the appearance of ``inducing'' copyright 
infringement, America's innovators must still guess as to whether or 
when they might be held liable for distributing a multipurpose 
electronic device or software program.
    Moreover, not only can they still be sued under either or both of 
the doctrines of contributory infringement and vicarious liability, but 
history tells us that they probably will be sued. That's exactly what 
happened as the first VCR and the first digital audio tape recorder 
came to market. More recently, ReplayTV was sued in 2001 for their 
improved digital video recorder because, according to the then-CEO of 
the Turner Broadcasting System, commercial skipping by consumers 
constituted ``theft.'' \7\
    Even as the Committee meets today, entertainment industry 
executives are making threatening statements about the latest 
electronic marvel. Called the Slingbox, the device and its associated 
software will enable you to watch your TV programming from wherever you 
are by turning virtually any Internet-connected computer into your 
personal TV.\8\

(B) Remedy Remediation: A Measured and Targeted Solution
    P2P United and EFF do not propose that the Commerce Committee 
undertake to rewrite the doctrines of secondary copyright liability. We 
do believe, however, that there is one sphere in particular in which 
Congress can and should act in a targeted fashion to reduce the 
chilling effect on innovators of ongoing uncertainty in this area of 
the law.
    Almost uniquely in American jurisprudence, our copyright laws 
permit a plaintiff in an action for infringement to opt out of actually 
proving the extent to which they were harmed by copyright infringement 
in favor of receiving so-called ``statutory damages.'' Under Section 
504(c) of U.S. Code Title 17, anytime up to the moment that judgment is 
handed down, the plaintiff may invoke its rights to collect (in the 
court's discretion) between $750 and $150,000 for every individual 
copyrighted work infringed. This legal regime makes good sense when 
brought to bear against a commercial pirate making and selling millions 
of counterfeit music CDs, for example. It may well be dangerously 
counterproductive, however, if applied in secondary liability cases to 
a technology company that makes electronic products used by millions of 
consumers over whom the companies have no control.
    This danger is especially sobering when made concrete. Apple 
initially promoted its phenomenal iPod with an extensive ad campaign 
exhorting the public to ``Rip, Mix & Burn'' and 1,000,000 iPods were 
sold in its first 20 months on the market even though it worked only 
with Apple's own Macintosh computers! As of the beginning of this 
month, Apple had reportedly sold over 21 million iPods since the first 
calendar quarter of 2002.\9\ Even the earliest version of the device 
could store well over 1,000 songs and the largest, with a 60gB drive, 
now holds upwards of 15,000 songs.
    At even the minimum $750 per infringing song, and a now paltry 
1,000 songs per device sold to date, it is thus a mathematical fact 
that--under contributory infringement, vicarious liability, or 
``inducement'' theories--Apple still could be sued for statutory 
damages in excess of $15 trillion for its users' allegedly unlawful 
copying of music! We do not suggest that this result is likely, but the 
fact that it is even legally possible should be profoundly troubling, 
to say the least.
    Faced with potentially crippling statutory liability, what will the 
next generation of garage inventors, like Apple's own founders, or 
their possible investors choose to do with their as-yet-uninvented 
breakthrough devices? What price will our economy pay for highly 
rational risk-aversion on the part of young geniuses, their expert 
counsel, and savvy investors?
    Most critically, is the somewhat extraordinary status quo with 
respect to available statutory damages really where the balance between 
protecting intellectual property and encouraging innovation and 
economic growth should be struck?
    EFF and P2P United believe that the answer to this last inquiry 
should and can be a resounding ``no.'' We respectfully urge you and Co-
Chairman Inouye to lead a collaborative committee (and inter-committee) 
process designed to produce a meaningful copyright statutory damages 
clause in the current Congress. Specifically, we request and recommend 
that statutory damages be limited by law to cases of direct copyright 
infringement as perpetrated by commercial pirates, and thus made 
expressly unavailable in cases involving secondary liability (including 
those brought under the Court's new inducement test). We respectfully 
submit, that such reform would strike the appropriate balance that 
today's hearing was expressly designed to illuminate.
    On the one hand, it would still permit copyright owners to obtain 
both injunctive relief and actual damages, thus putting them in the 
same position as litigants under most other areas of common law. On the 
other, corporate and individual technology innovators and investors 
once again would be able to make reasonable business decisions about 
manageable levels of legal risk, rather than face the all-too-real 
specter of corporate capital punishment in an unpredictable legal 
environment. The real beneficiaries of such a balance, of course, will 
be American consumers, the Nation's economy and, ultimately, copyright 
owners whose fortunes also depend on new technologies (their many 
attempts to kill them in the cradle notwithstanding) to create new and 
market-making business opportunities.

II. The Supreme Court's Ruling in MGM v. Grokster Will Have Virtually 
        No Practical Effect on the Digital Downloading of Music, but 
        Congress Can and Should Take Rational, Non-Statutory Steps Now 
        to Maximize the Potential of Peer to Peer Technology for all 
        Music Rightsholders

(A) Lawsuits and Traditional Licensing are Poor Instruments of Public 
        Policy
    In the past 2 years, the digital music marketplace has seen 
significant activity and change. However, it simply cannot be credibly 
argued that the music industry has not experienced--and continues to 
face--an enormous failure of both imagination and the market for 
licensed digital downloading.
    To be sure, the four companies that control 90 percent of the 
current music ``catalog'' have licensed a relative few new services to 
distribute what mostly amounts to presently popular music online. 
Apple's iTunes, for example, recently celebrated the 500,000th a la 
carte download of a $0.99 song. Moreover, in that same period, the 
Recording Industry Association of America has brought over 11,000 
lawsuits against individuals accused of illegal downloading and, if 
present trends continue, will collect more than $36 million in 
settlement of those claims.\10\
    The music and movie industries have spent millions more to 
otherwise educate the public that such downloading is wrong and has 
serious consequences, both for downloaders, and for artists and 
copyright holders, not compensated for their works. Not incidentally, 
P2P United--as an organization and through its individual members' 
websites--also has done its best to get out that message while our 
members also affirmatively promote the work of independent artists who 
have embraced P2P distribution of their music. Certainly not least of 
course, the entertainment industries have now obtained a unanimous 
ruling from the Supreme Court which after further litigation, they 
hope, will shutter the doors of P2P United's members and dissuade other 
software developers from inventing even more efficient peer-to-peer 
programs.
    As the June issue of Rolling Stone magazine put it, however, ``One 
thing is clear: The lawsuits have failed to stop, or even slow, illegal 
file-sharing.'' \11\ Indeed, the unvarnished fact is that peer-to-peer 
usage is much more widespread than it was a year ago and well more than 
double what it was this time in 2003. According to the most recent 
independent analysis by Big Champagne (essentially the Nielsen or 
Arbitron ratings of the Internet)--and notwithstanding massively 
publicized litigation against individuals and companies--P2P usage last 
month reached nearly 9 million simultaneous users with access to over a 
billion song files. In August of 2003, a month prior to the first round 
of RIAA consumer lawsuits, there were 3.85 million P2P users.
    By contrast, it has recently been estimated that the total number 
of songs now available for download through the iTunes and Rhapsody 
subscription services total fewer than 2.75 million tracks. Even if 
only a far-too-conservative one in five music files available through 
peer-to-peer software each day are taken to be unique songs, at least 
60 times more music files are available each day through P2P technology 
than are presently available to consumers through the two primary 
licensed channels.
    More lawsuits are not going to change that reality. Writing the day 
before the Supreme Court's ruling in MGM v. Grokster, Ms. Hillary 
Rosen, former head of the RIAA, made a forceful case for new thinking 
and a new view of P2P software developers by her former colleagues in 
the music industry:

        ``It is said that the Supreme Court's decision will be one of 
        the most important copyright cases ever on the books. I think 
        it has all the makings of being famous for another reason. 
        Because while the victory of whoever wins maybe important 
        psychologically, it just won't really matter in the 
        marketplace. . . .

        ``So why won't this case matter now in the marketplace? Because 
        by now SEVERAL HUNDRED MILLION copies of this software that the 
        entertainment industry would like to vanquish have been 
        downloaded to individual computers around the world. . . . And 
        now, a majority of them are hosted outside the United States. 
        There is no court ruling whose enforcement can keep up with 
        this. Sure, it might affect some venture capitalist deciding 
        where to put money for a product. But none of these services 
        since Napster have required venture money. They grow 
        organically, because they are serving a still unserved desire. 
        Do people like free content, sure, but they also like content. 
        All the stuff--when they want it--to feel like free even if it 
        might not be free. . . . And the entertainment industry is 
        still far too often spending time comparing the profit margins 
        and risk of new ideas to an earlier time when the world was 
        less digital. . . .

        ``So here is the crux of the problem. [P2P] services have 
        traffic at a rate 40 to 50 times the traffic of legitimate 
        sites. Yet, the amount of time and money wasted on besting the 
        game by the entertainment and technology industries is huge. 
        This volume needs to be embraced and managed because it cannot 
        be vanquished. And a tone must be set that allows future 
        innovation to stimulate negotiation and not just confrontation 
        (emphasis added).'' \12\

    Ms. Rosen was equally emphatic in her appeal for a pragmatic view 
of the marketplace after the Court's opinion was handed down the 
following day:

        `` . . . knowing we were right legally really still isn't the 
        same thing as being right in the real world. We had that 
        euphoria with the first Napster decision. I hope my former 
        colleagues remember that. The result was lots of back and forth 
        and leverage hunting on both sides and continued litigation and 
        then a great service shut down to make room for less great 
        services. And more legal victories didn't bring more market 
        control no matter how many times it was hoped it would.

        ``The euphoria of this decision does not and should not change 
        the need for the entertainment industry to push forward and 
        embrace these new distribution systems. . . .\13\ For today, I 
        hope all sides will take a deep breath and realize that this 
        Supreme Court decision doesn't change one bit their 
        responsibility to move forward together on behalf of their 
        consumer.'' \14\

    P2P United and EFF share Ms. Rosen's clear (and clear-eyed) view 
that P2P technology will only become more available with time, that 
demand for its convenience and content will continue to increase, and 
that the current battles surrounding P2P file sharing thus are a losing 
proposition for all parties concerned, including consumers. We believe 
that the path forward lies in aligning the incentives of the 
entertainment industry with those of new Internet technologies in 
pursuit of a marketplace in which all musical artists and copyright 
holders are fairly compensated and such compensation is maximized 
because consumer demand in all its present and future forms is truly 
met.
    With this goal and these realities in mind, P2P United and EFF urge 
the Committee to begin considering ways in which Congress might clear 
the path for solutions based on voluntary collective licensing.

(B) Voluntary Collective Licensing for Downloaded Music Merits Serious, 
        Congressionally-Convened Discussion by All Relevant 
        Stakeholders
    What we propose is not unusual, unknown in the marketplace or 
conceptually complex. Indeed, the concept is familiar and simple.
    First, the music industry (labels and music publishers) with 
representatives of artists and songwriters would form one or more 
voluntary collecting societies. These societies then would offer music 
consumers the opportunity to download music lawfully in exchange for a 
modest regular payment, perhaps $5-$10 per month.\15\
    So long as they pay into the collective, consumers would be free to 
keep doing what they now do by the millions every day . . . and are 
clearly going to do anyway: download and share the music they love 
using whatever software they like on whatever computer platform they 
prefer. Under this system, however, they would be able to do so without 
fear of litigation. Moreover, the money collected would be divided 
among all rightsholders--whether signed to a major record label or 
not--based upon the professionally measured popularity of their music.
    The more people who share, the more money will be available to 
rightsholders. The more competition in competing file-sharing products, 
the more rapid technological innovation and improvement will be. The 
more freedom for music aficionados to share what they care about, the 
deeper the available catalog to the benefit of all parties' in the 
system.
    If this system of voluntary collective licensing seems familiar, 
that's because it has been in use to excellent effect for decades. In 
the face of a seemingly intractable impasse between a then-new 
technology and copyright owners, ASCAP, BMI and SESAC were brought into 
existence by songwriters to bring broadcast radio in from the copyright 
cold in the first half of the twentieth century. Songwriters originally 
viewed radio exactly the way the music industry today views P2P users--
as ``pirates.'' After trying to sue radio out of existence, songwriters 
ultimately formed ASCAP (and later BMI and SESAC). Radio stations 
interested in broadcasting music stepped up, paid a fee, and in return 
got to play whatever music they liked, using whatever equipment worked 
best.
    Today, the performing rights societies pay out hundreds of millions 
of dollars annually to their artists. Although these societies also 
have received some criticism, there can be no question that the system 
that has evolved for radio is preferable to one based on fruitlessly 
trying to sue radio into extinction one broadcaster at a time.
    Beginning in this respected committee, P2P United and EFF believe 
that Congress can and should encourage detailed and serious evaluation 
of the potential of voluntary collective licensing in at least two 
important ways:
    First, the Register of Copyrights, Marybeth Peters, recently 
proposed reforms to copyright law that would make it easier for 
existing collecting rights societies like ASCAP, BMI and SESAC to grant 
blanket licenses for digital downloads.\16\ We believe that her 
proposal is sound and, if adopted, would have the added benefit of 
establishing marketplace prerequisites for testing the full-range of 
collective licensing possibilities.
    For example, as we read the Register's proposal, it would create 
``music rights organizations'' legally empowered to grant blanket 
licenses directly to music consumers on behalf of songwriters. Because 
this proposal requires adjustments to both copyright and antitrust law 
within the purview of the Federal Trade Commission, it would appear to 
present a productive opportunity for inter-committee collaboration on 
these matters.
    While adoption of the Register's proposal would be an important 
first step, it only addresses the music publishing side of the music 
industry. Any comprehensive solution must also involve major and 
independent record labels. Presently, no collecting society represents 
the major labels or can grant a blanket license directly to music 
consumers. Under current law, the highly concentrated nature of the 
industry, with just four companies controlling more than 90 percent of 
the market, such coordination presents antitrust challenges. Here, too, 
we see an opportunity for this committee to begin collaboratively 
exploring options that might remove this obstacle to an otherwise 
viable and desirable market-oriented licensing solution for the 
burgeoning digital music sector of the economy.
    The advantages of such a collective licensing approach are 
potentially legion and mutually reinforcing:

   Artists and rightsholders will get paid for what are now 
        literally billions of non-compensable music downloads not 
        likely to cease or slow;

   Government intervention in the market will be minimal 
        (limited to encouragement and oversight), and collecting 
        societies will set their own prices in response to market 
        forces; \17\

   Broadband deployment will get a real boost as the so-called 
        ``killer app''--music file sharing--is legitimized and actively 
        encouraged; \18\

   Investment dollars will pour into the newly legitimized 
        market for digital music file-sharing software and services, 
        prompting an explosion of different service offerings and 
        devices; \19\

   Music fans finally will have completely legal access to the 
        essentially unlimited selection of music that only a network 
        built from the collections of other fans can provide. With the 
        threat of litigation and defensive file ``spoofing'' 
        eliminated, these networks will rapidly improve and grow, 
        affording millions more consumers access to rare recordings 
        long unavailable in the marketplace;

   The distribution bottleneck that has limited the 
        opportunities of independent artists and placed them at the 
        economic mercy of the major record labels for decades will be 
        eliminated. Artists will be able to choose any road to online 
        popularity--including, but no longer limited to, a major label 
        contract. So long as their songs are being shared among fans, 
        they will be paid; \20\ and

   Payment will come only from those who are interested in 
        downloading music, and only so long as they are interested in 
        downloading.

Conclusion
    As sensible as we hope the idea of voluntary collective licensing 
now seems, the RIAA and the major corporations that it represents have 
dismissed the idea and have refused to engage in any discussion of the 
subject with appropriate stakeholders. Accordingly, we respectfully 
request that this committee either hold hearings on this issue, or--at 
minimum--formally invite all relevant parties (public and private 
sector alike) to a series of roundtable discussions of collective 
licensing's potential to unleash the true market power and potential of 
peer-to-peer technology and, with it, the genius of American 
technological innovation.
    P2P United and the Electronic Frontier Foundation thank you again 
for the opportunity to participate in these proceedings, Mr. Chairman. 
As proposed, we hope for similar opportunities in the near future.

ENDNOTES
    \1\ J. Mitchell, ``Free Man in Paris'' released on ``Court & 
Spark'' ( 1973; Crazy Crow Music).
    \2\ Each theory of liability is independent of the other and 
requires proof of two elements. Contributory infringement may arise 
when a defendant knows about infringing activity and materially 
contributes to it, while vicarious liability requires proof that a 
defendant profits directly from the infringement and has a right and 
ability to supervise the direct infringer.
    \3\ EFF and P2P United believe that the attached Consumer 
Electronics Association ``one-pager'' on the MGM v. Grokster decision 
(recently solicited by the Congressional Internet Caucus Advisory 
Committee) states these concerns very well. We here submit it for the 
record and wish to underscore CEA's conclusion that: ``This new legal 
ambiguity [as to what constitutes culpable inducement] will not enhance 
America's competitiveness. Foreign firms will continue to receive 
funding and ship products free from concern about overreaching IP 
litigation, while their American counterparts will need to demonstrate 
compliance with Grokster's ambiguous legal test.''
    We also concur with the recently reported remarks of Mr. James 
Burger, outside counsel to Intel, who warned against the potential that 
the discovery-intensive litigation required by the Court's new 
inducement standard could give rise to a form of ``greenmail'' directed 
at small companies by large plaintiffs who might demand significant 
settlement fees in exchange for dropping baseless, but potentially 
ruinous, litigation. N. Graham & A. Mazumdar, ``Parsing Grokster . . . 
,'' BNA Patent,Trademark & Copyright Journal, Vol. 7 No. 1728 at 327 
(July 15, 2005).
    \4\ Concerning contributory liability standards, Justice Breyer, 
joined by Justices O'Connor and Stevens, adopted and endorsed the views 
expressed by EFF and many of the other technology sector amici, 
declaring that ``Sony's rule is strongly technology protecting . . . . 
Sony thereby recognizes that the copyright laws are not intended to 
discourage or to control the emergence of new technologies, including 
(perhaps especially) those that help disseminate information and ideas 
more broadly or more efficiently.'' MGM v. Grokster, 125 S. Ct. at 
2791. Justice Ginsburg, joined by Chief Justice Rehnquist and Justice 
Kennedy, rejected the bright-line interpretation. Unmoved by the 
argument that Sony bars a finding of contributory infringement unless a 
technology is almost exclusively used for infringement, Justice 
Ginsburg declared, ``Sony, as I read it, contains no clear, near-
exclusivity test.'' Id at 2784 n.1.
    \5\ Having disposed of the case on inducement grounds, the Court 
did not reach the vicarious liability theories briefed by the parties, 
merely restating that the doctrine ``allows imposition of liability 
when the defendant profits directly from the infringement and has a 
right and ability to supervise the direct infringer.'' MGM v. Grokster, 
125 S. Ct. at 2776 & n.9. By contrast, the lower courts in MGM v. 
Grokster responded in some detail to the diametrically opposing views 
of the parties regarding vicarious liability. The entertainment 
industry had argued that the ability to redesign a product to reduce 
infringing uses ought to be deemed equivalent to a ``right and ability 
to supervise'' the customers who use the technology. The P2P defendants 
replied that such a ``could have designed it differently'' test would 
effectively force technology companies to redesign their products to 
suit the demands of copyright owners. On this point, the Solicitor 
General's amicus brief before the Supreme Court sided with the 
defendant/respondents: ``The `right and ability to supervise' element 
of vicarious liability . . . has never, to our knowledge, been held to 
be satisfied by the mere fact that the defendant could restructure its 
relations or its product to obtain such an ability.'' Brief for the 
United States as Amicus Curiae Supporting Petitioners at 20 n.3, 
available at: www.eff.org/IP/P2P/MGM_
v_Grokster/050124_US_Amicus_Br_04-480.pdf.
    \6\ When two motion picture studios sued Sony in 1976 for selling 
the first Betamax VCR, they did so under a contributory liability 
theory. In that case, Sony v. Universal City Studios, 464 U.S. 417 
(1984), the Supreme Court announced the ``Betamax doctrine,'' holding 
that a technology vendor could not be held liable for distributing a 
technology ``capable of substantial noninfringing uses.'' Because the 
Betamax VCR was plainly capable of noninfringing uses, the Supreme 
Court did not hold Sony liable. Since the Court's Sony ruling, the 
technology and entertainment industries characterized the scope of the 
``Betamax defense'' very differently. Technologists saw a bright-line 
rule: so long as a technology is merely capable of noninfringing uses 
in commerce, it is legal to distribute, regardless of how some (or even 
most) customers might actually use it. Hollywood movie studios and the 
music industry, in contrast, read the case much more narrowly, 
reasoning that Sony was only excused from liability because a principal 
use of the Betamax device (as they have interpreted the decision) was 
noninfringing.
    \7\ See extended interview with Mr. Jamie Kellner entitled 
``Content's King,'' Cableworld (April 29, 2002) [``JK: It's theft. Your 
contract with the network when you get the show is you're going to 
watch the spots. Otherwise you couldn't get the show on an ad-supported 
basis. Any time you skip a commercial or [press] the [30-second 
advance] button you're actually stealing the programming.'' The full 
text of this sobering interview is available online at: www.2600.com/
news/050102-files/jamie-kellner.txt.
    \8\ The ``crime'' Slingbox's developers may have committed is 
permitting a consumer who has paid for programming at home to ``sling'' 
that same programming to a single remote location or portable device so 
that it may be enjoyed while the consumer is away from home. See A. 
Wallenstein, ``Slingbox Could Spark New Lawsuit,'' Hollywood Reporter 
(July 6, 2005), also at: www.hollywoodreporter.com/thr/article
_display.jsp?vnu_content_id=1000973572.
    \9\ See generally Apple's online archive of such data at 
www.apple.com/pr/library.
    \10\ As of early last month, the RIAA reportedly had brought 11,456 
lawsuits and collected an average of $3,600 from each of almost 2,500 
defendants. See S. Knopper, ``RIAA Will Keep On Suing,'' Rolling Stone 
(June 9, 2005) at: www.roll
ingstone.com/news/story/_/id/7380412/
?pageid=rs.Home&pageregion=single1&rn
d=1122320285908&has-player=true&version=6.0.12.872.
    \11\ See S. Knopper, ``RIAA Will Keep On Suing,'' Rolling Stone 
(June 9, 2005), cited above at n.10.
    \12\ See H. Rosen, ``The Supreme Wisdom of Not Relying on the 
Court,'' The Huffington Post (June 26, 2005) at: 
www.huffingtonpost.com/theblog/archive/hilary-rosen/the-supreme-wisdom-
of-not_3221.html.
    \13\ The absence in the current market of P2P software providers 
licensed to promote the labels' own online music downloading services, 
or to make licensed music available directly to the public, is not due 
to a lack of effort by P2P developers to obtain such contracts. As 
early as 2001, the original Napster pleaded with the major labels for 
such a license, reportedly offering a billion dollars in royalties. 
More recently, as Chairman Smith's Competition Subcommittee heard in 
direct testimony in June of last year, P2P United member Streamcast 
(the makers of the Morpheus software also at issue in the Supreme 
Court's opinion) was poised to finalize a contract with RealNetworks to 
promote the major labels' own ``Rhapsody'' subscription service to 
millions of Morpheus' P2P software users. With only a signature between 
Streamcast and such a license, the Streamcast business development 
executive who sought the deal was told twice in a voice mail recording 
previously provided to the Commerce Committee that Streamcast had been 
``blacklisted'' by ``the labels'' and that RealNetworks thus could not 
consummate the otherwise fully negotiated deal. A transcript of that 
voice mail recording is again submitted for the record and the full 
Committee's consideration.
    \14\ See H. Rosen, ``The Wisdom of the Court, Part II,'' The 
Huffington Post (June 27, 2005) online at: www.huffingtonpost.com/
theblog/archive/hilary-rosen/the-wisdom-of-the-court-_3259.html.
    \15\ This hypothetical price is based upon Yahoo's Y! Music 
Unlimited, which offers consumers unlimited access to more than 1 
million songs for as little as $4.99 per month. See http://
music.yahoo.com/unlimited/.
    \16\ Statement of Marybeth Peters, Register of Copyrights, hearing 
on ``Music Licensing Reform'' before the Subcommittee on Courts, the 
Internet, and Intellectual Property, Committee on the Judiciary, U.S. 
House of Representatives, 109th Congress, 1st Session, June 21, 2005. 
See www.copyright.gov/docs/regstat062105.html.
    \17\ The $5 per month figure noted above is a suggestion, not a 
proposed mandate. Because collecting societies will make more money 
with a palatable price and a larger base of subscribers than with a 
higher price and expensive enforcement efforts, the market may be 
relied upon to keep consumer pricing reasonable.
    \18\ Moreover, such a system will further drive demand for 
broadband communications services and, with greater broadband delivery 
of musical content, the more revenue major corporate copyright 
industries will get paid. Under such circumstances, the entertainment 
industries' powerful lobby may be expected to begin affirmatively 
working for an expansive and innovation-driven Internet, instead of 
against it.
    \19\ Rather than being limited to a handful of ``authorized 
services'' like Apple's iTunes and Napster 2.0, the market is likely to 
give rise to competing file-sharing applications and ancillary 
services. Moreover, so long as individual consumers are licensed, 
technology companies need not worry about negotiating the nearly 
impossible maze of current music licensing requirements and may focus 
instead on providing the public with the most attractive products and 
services in a competitive marketplace.
    \20\ Indeed, the ability of independent artists to negotiate as 
they may choose with one or more record labels will only be enhanced by 
their ability to document and quantify their revenue-generating 
potential and overall popularity with certified download royalty data. 
For the fist time in history, under a voluntary collective licensing 
regime, independent artists may well be able to truly bargain at arm's 
length with major music industry conglomerates.

     Impact of the Supreme Court Grokster Decision by the Consumer 
                        Electronics Association

    About CEA: The Consumer Electronics Association (CEA) is the 
preeminent trade association promoting growth in the consumer 
technology industry through technology policy, events, research, 
promotion and the fostering of business and strategic relationships. 
CEA represents more than 2,000 corporate members involved in the 
design, development, manufacturing, distribution and integration of 
audio, video, mobile electronics, wireless and landline communications, 
information technology, home networking, multimedia and accessory 
products, as well as related services that are sold through consumer 
channels. Combined, CEA's members account for more than $121 billion in 
annual sales.
    CEA Position: We are pleased that the Supreme Court preserved the 
core principle of the ``Betamax'' decision, where as the mere 
distribution of a product that has substantial non-infringing uses does 
not expose a distributor to contributory infringement. In other words, 
the Court said that infringing business models, rather than the 
technology itself, should determine liability.
    However, we are concerned with the Court's establishment of an 
inducement standard and how it will be interpreted by the lower courts. 
The ambiguity created by this standard will generate an uncertain legal 
environment for innovators and investors, since the Court provided 
minimal guidance as to what acts qualify as ``bad behavior.''
    For example, does the marketing phrase ``Rip, Mix, Burn'' qualify 
as inducement to infringe? What if you are developing a product with 
knowledge that you could make your technology more ``infringement proof 
'' merely by tripling the cost of development? If you don't do so, are 
you inducing?
    We expect that corporate counsels and investors will now err on the 
side of caution when deciding whether to introduce innovative new 
products and services. This is especially true now that litigation will 
go to the issue of intent, making it very difficult to have an 
infringement suit dismissed quickly on summary judgment. Instead, 
entrepreneurs will face expansive discovery rules examining the notes 
of engineering meetings, marketing plans and e-mails of executives.
    This new legal ambiguity will not enhance America's 
competitiveness. Foreign firms will continue to receive funding and 
ship products free from concern about overreaching IP litigation, while 
their American counterparts will need to demonstrate compliance with 
Grokster's ambiguous legal test.
    We will not realize the overall impact of this decision until it is 
tested in the lower courts. We hope that the 9th Circuit interprets 
this decision narrowly, implicating only the specific marketing 
statements at issue in this case.
    CEA will continue to work for a pro innovation environment, while 
cooperating with the content industry on developing legitimate business 
models.

  Transcript of Voicemail Message Forwarded to Michael Weiss, CEO of 
   Streamcast by Streamcast Vice President of Business Development, 
  Elizabeth Cowley Left by Real Networks' General Manager of Consumer 
              Products, Ryc Brownrigg (September 8, 2003)

    ``Hey, Elizabeth. It's Ryc [Rick] Brownrigg. Rhapsody and Listen 
are one in the same. Rhapsody is the service that's offered by the 
Listen team, which is now our San Francisco team.
    Unfortunately, the licenses for the ability to stream to Rhapsody 
come from the labels, as you are aware. And the labels have blacklisted 
you guys. So that is the problem we've got. Basically, what they're 
saying is you've got to denounce P2P and/or resolve the lawsuit--is 
what you have to do.
    And so, until they resolve the lawsuit they're going to keep you on 
the blacklist, which means I'm probably not going to get much latitude 
to do anything as far as Rhapsody goes. So, I mean, I'm still willing 
to give you the client and work with you on the client, but 
unfortunately, I'm not going to be able to do anything as far as 
helping you with the service in any short order.
    So if you want to give me a call [NUMBER OMITTED], we can chat 
about it more, but I don't know if this is still of interest to you to 
work with us being as you have this limitation. Talk to you later. 
Bye.''

    The Chairman. Thank you very much.
    Our next witness is Gregory Kerber, Chairman and CEO of 
Wurld Media, Incorporated, which is the creator of a peer-to-
peer platform currently in its test phase and has signed 
partnerships with Sony, BMG, Music Entertainment, Universal 
Music Group, Warner Music Group, and EMI.
    We're interested in your comments, Mr. Kerber.

STATEMENT OF GREGORY G. KERBER, CHAIRMAN AND CEO, WURLD MEDIA, 
                              INC.

    Mr. Kerber. On behalf of Wurld Media, I'd like to thank the 
Chairman and Co-Chairman and every member of the Committee of 
Commerce, Science, and Transportation for conducting this 
hearing and the effects of the U.S. Supreme Court decision in 
MGM v. Grokster, as delivered by the Justice Souter on June 27, 
2005.
    My name is Greg Kerber. I'm Chairman and CEO of Wurld 
Media, an advanced technology company located in Saratoga 
Springs, New York, and that's Upstate New York.
    Wurld began in 1999 as a small technology company and was 
funded and capitalized by family, friends, and founders who 
believed in the future of the industry and believed in the 
future of this new economy, called ``digital media.'' Wurld has 
developed a platform for the secure sale and scalable 
distribution of copyrighted protected digital media. The 
company's platform is called Peer Impact, which he will be 
launching to the public on August 5th, next week--features an 
architecture and enables music copyright holders, computer 
gaming companies, video producers, movie studios, book 
publishers, and other digital media owners to securely 
propagate their content across a peer impact network for 
legitimate sale to, and download from, any Peer Impact-
connected computer on our network.
    The advancement in peer-to-peer technology creates an 
endless capability to provide every kind of digital media to 
consumers in a safe environment free from viruses, unauthorized 
content, child pornography, spyware, and identity gatherers, 
while at the same time providing the ability to have parental 
controls and ensuring that all the rights-holders in the value 
chain receive payment for their creative works. This is just 
the tip of the iceberg, as far as we are concerned. These 
advanced technologies are now beginning to enable the 
virtualization and creation of the supply chain through new and 
emerging businesses.
    This hearing is important, because it is exploring the 
effects of the decision in the Grokster case. Without going 
into any kind of legal analysis of the case, because I'm not an 
attorney, I can say that, as a business person running a 
legitimate peer-to-peer business, this decision clearly 
illustrates that our system of government is working to achieve 
the correct balance between protecting the consumer, the 
creators of intellectual property, and that of advancing 
technology.
    Prior to the decision, the primary motivating elements in 
any evolution of peer-to-peer technology was the avoidance of 
culpability, not for the sake of innovation or enhancing the 
consumer experience. It was acceptable and lawful to allow 
illegal activity to exist and to thrive within a network if the 
system was simply designed to appear uncontrollable, something 
we called the Frankenstein Monster Scheme.
    One of the many negative outcomes of this lawlessness is 
the rampant content of child pornography that proliferates on 
illegal peer-to-peer networks. The United States General 
Accounting Office, in conjunction with many others, the Customs 
CyberSmuggling Center detailed study of peer-to-peer networks 
and discovered that when using innocuous searches, with search 
terms routinely used by children, 56 percent of the results 
returned were pornographic in nature. This decision now forces 
these bad actors to be accountable. There are no longer--they 
can no longer ignore laws that have been put in place to 
protect the economy, the development of intellectual property, 
and, most importantly, the future: our children.
    This decision allows companies like ours to be able to grow 
and prosper and compete fairly in the marketplace based upon 
meeting consumers' needs, providing a safe environment and not 
having to compete with business models that are based upon 
stealing content.
    The benefits from this decision include what--that we will 
be able to provide employment opportunities to citizens of 
Upstate New York, Southern California, and right here in 
Washington, D.C., as we rapidly expand our staffing to keep up 
with new content partners and to continue the evolution of our 
network.
    Innovation is not gone, but, rather, it's just beginning. 
In addition to providing jobs for U.S. citizens, we will be 
able to contribute to the Nation's gross national product, pay 
taxes, and, as we launch our services in other areas of the 
globe, contribute to the reversal of the balance of payments.
    The benefits from this decision include that of the 
consumer. The consumer wins as we will be able to provide a 
product to consumers that creates convenience, choice, and 
family safety.
    Our peer-to-peer partnership include not only the 
copyright-holder and the creator of the original works, but the 
consumer, as well, who can now be involved in the economic 
distribution of digital media. The consumer will find a 
limitless choice in a world connected by a network that 
contains all the content they want, but not having to be 
concerned about their personal information at risk, that their 
children are going to be viewing inappropriate material, or 
that they're downloading viruses or Trojan horses that will, at 
some point in the future, take over their operating system, or 
that they are doing something online that they would never 
dream of doing at a store, which is stealing works that others 
have created, without paying for them.
    The benefits from this decision include that venture 
capital can once again feel safe in investing in advanced 
technologies in legitimate peer-to-peer services without the 
fear of impending litigation. Anecdotally, I should note that 
the interest in our company from top-tier venture capital 
community immediately following this decision has been pretty 
overwhelming. The decision finally provides firm basis upon 
which the pirates and bad actors can be distinguished from the 
legitimate businesses, permitting capital flow once again into 
those advanced Technology companies that we can be proud of on 
the world stage; businesses that will provide employment for 
U.S. citizens instead of those businesses that hide themselves 
in the dark corners of other countries to avoid the laws of the 
U.S.; companies that will now be able to convert their nascent 
industry into one that the country can be proud of and can 
exist without relying on illegal, immoral activities.
    The benefits from this decision include that legitimate 
industry can solidly emerge and prosper. The industry is an 
advanced technology industry that respects the intellectual 
property of the content creator by properly remunerating those 
who make contributions throughout the value chain. It's 
unlimited and global in nature, and now provides a level 
playing field in which innovation can flourish and a business 
can compete fairly.
    Let me summarize by saying this. The decision will 
positively affect the future development of advanced technology 
for media distribution and the associated hardware and software 
industries. This decision puts to rest that they serve to hold 
the consumer-friendly new advances in stasis. Venture capital 
can now invest in legitimate businesses, knowing with certainty 
they will be able to compete fairly on the quality of their 
offerings.
    We look forward to continuing to provide a safe place for 
intellectual property, so that the creation of original works 
can be inspired and retain its valued place in our society.
    Thank you.
    [The prepared statement of Mr. Kerber follows:]

      Prepared Statement of Gregory G. Kerber, Chairman and CEO, 
                           Wurld Media, Inc.

    On behalf of Wurld Media, Inc., I thank Chairman Stevens and Co-
Chairman Inouye--and every Member of the Committee on Commerce, 
Science, and Transportation--for conducting this hearing on the effects 
of the U.S. Supreme Court decision in MGM v. Grokster as delivered by 
Justice Souter on June 27, 2005.
    I am Greg Kerber, Chairman and CEO of Wurld Media, an advanced 
technology company located in Saratoga Springs, New York. Wurld began 
in 1999 as a small technology company, capitalized by family and 
friends, who believe in the future of this industry. Wurld Media has 
developed a platform for the secure sale and scalable distribution of 
copyright-protected digital media. The company's platform, Peer 
ImpactTM, features an architecture that enables music 
copyright holders, computer gaming companies, audio book publishers and 
other digital media owners to securely propagate their content across 
the Peer Impact network for legitimate sale to, and download from, any 
Peer Impact connected computer. This advancement in peer-to-peer 
technology creates endless capabilities to provide every kind of 
digital media to consumers, in a safe environment, free from: viruses, 
unauthorized content, child pornography, spyware, and identity 
gatherers, while at the same time providing the ability to have 
parental controls and ensuring that all rightsholders in the value 
chain receive payment for their creative works. This is just the tip of 
the iceberg as far as we are concerned. These advanced technologies are 
now beginning to enable the virtualization of the supply chain through 
new and emerging businesses.
    This hearing is important because it is exploring the effects of 
the decision in the Grokster case. Without going into any kind of legal 
analysis of the case, as I am not a lawyer, I can say that as a 
businessman, running a legitimate peer-to-peer business, this decision 
clearly illustrates that our system of government is working to achieve 
the correct balance between protecting the creators of intellectual 
property and that of advanced technology. Prior to this decision, the 
primary motivating elements in any evolution of peer-to-peer technology 
was the avoidance of culpability, not for the sake of innovation or 
enhancing consumer experience. It was acceptable and lawful to allow 
illegal activity to exist and to thrive within a network if the system 
was simply designed to appear to be uncontrollable. One of the many 
negative outcomes of this lawlessness is the rampant child pornography 
that proliferates on the illegal peer-to-peer networks. The United 
States General Accounting Office, in conjunction with, among others, 
the Customs CyberSmuggling Center, conducted a detailed study of peer-
to-peer networks and discovered that when using innocuous searches, 
with search terms routinely used by children, 56 percent of the results 
returned were pornographic in nature. \1\ This decision now forces 
these bad actors to be accountable. They can no longer ignore laws that 
have been put into place to protect the economy, the development of 
intellectual property, and, most importantly, our children. This 
decision allows companies like ours to be able to grow and prosper and 
compete fairly in the marketplace based upon meeting consumer needs, 
providing a safe environment and not having to compete with business 
models that are based upon stealing content.
---------------------------------------------------------------------------
    \1\ ``File-Sharing Programs, Peer-to-Peer Networks Provide Ready 
Access to Child Pornography,'' United States General Accounting Office, 
February 2003.
---------------------------------------------------------------------------
    The benefits from this decision include that we will be able to 
provide employment opportunities for the citizens of upstate New York 
and beyond as we rapidly expand our staffing to keep up with new 
content partners and to continue the evolution of our network. 
Innovation is not gone, but rather, just beginning. In addition to 
providing jobs for U.S. citizens, we will be able to contribute to this 
Nation's gross national product, pay taxes, and as we launch our 
services in other areas of the globe, contribute to the reversal of the 
balance of payments.
    The benefits from this decision include that the consumer wins as 
we will be able to provide a product to consumers that creates 
convenience, choice and family safety. Our peer-to-peer partnerships 
include not only the copyright holder and the creator of original 
works, but the consumer as well, who can now be involved in the 
economics of distribution. The consumer will find a limitless choice in 
a world connected by a network that contains all the content they want 
but not having to be concerned that their personal information is at 
risk, that their children are going to be viewing inappropriate 
material or that they are downloading viruses or Trojan horses that 
will, at some time in the future, take over their operating system, or 
that they are doing something online that they would never dream of 
doing in a store; stealing works that others have created without 
paying for them.
    The benefits from this decision include that venture capital can 
once again feel safe in investing in advanced technologies, in 
legitimate peer-to-peer services, without the fear of impending 
litigation. Anecdotally, I should note that the interest in our company 
from the venture capital community immediately following the decision 
has been overwhelming. This decision finally provides a firm basis upon 
which the pirates and bad actors can be distinguished from legitimate 
businesses, permitting capital to flow once again into those advanced 
technology companies that we can be proud of on the world stage; 
businesses that will provide employment of U.S. citizens instead of 
those businesses hiding themselves in the dark corners of other 
countries to avoid the laws of the U.S.; companies that will now be 
able to convert this nascent industry into one that this country can be 
proud of and that can exist without relying on illegal and immoral 
activities.
    The benefits from this decision include that a legitimate industry 
can solidly emerge and prosper. That industry is an advanced technology 
industry that respects the intellectual property of content creators by 
properly remunerating those who make contributions throughout the value 
chain, is unlimited and global in nature, and now provides a level 
playing field upon which innovation can flourish and businesses can 
compete fairly.
    Let me summarize by saying that this decision will positively 
affect the future development of advanced technology for media 
distribution and the associated hardware and software industries. This 
decision puts to rest questions that had served to hold many consumer-
friendly new advances in stasis. Venture capital can now invest in 
legitimate businesses, knowing with certainty that they will be able to 
compete fairly and on the quality of their offerings. We look forward 
to continuing to provide a safe place for intellectual property so that 
the creation of original works can be inspired and retain its valued 
place in our society.

    The Chairman. Thank you very much.
    Our next witness is Mark Heesen, President of the National 
Venture Capital Association, representing 450 venture capital 
and private equity firms, accounting for more than 85 percent 
of U.S. venture funding.
    Mr. Heesen?

            STATEMENT OF MARK G. HEESEN, PRESIDENT, 
              NATIONAL VENTURE CAPITAL ASSOCIATION

    Mr. Heesen. Thank you very much, Mr. Chairman.
    The venture-capital sector has grown, since its inception 
just 50 years ago, to become a major force in the U.S. economy. 
In fact, in 2003, venture-capital-funded companies were 
directly responsible for 9.4 percent of all U.S. private-sector 
employment, as well as 9.6 percent of all companies' sales in 
the United States.
    To be able to make this type of impact on the U.S. economy, 
as well as on the lives of every American, VCs invest with a 
particular emphasis on emerging companies in the information 
technology, communications, and life-science industries. These 
areas, in particular, have been where we have found that 
destructive technologies, those which upset the status quo, but 
in the long run produce exponential societal, financial, and 
technological advances, reside.
    Disruptive technologies, by their very nature, often put on 
notice entrenched older interests that their primacy in a 
particular area is at risk. If they wish to continue to 
succeed, they have a decision to make, whether they move 
forward in helping to usher in the new model or to stay wedded 
to a business model no longer accepted in the marketplace.
    Such a dynamic makes the venture-capital community the 
financial lynchpin to technology and medical advances, and, 
thus, a hero to many, while simultaneously making us a black 
hat as the destructors of the status quo on the other. The MGM 
v. Grokster decision is emblematic of this.
    Prior to the Supreme Court's decision in Grokster, the 
venture community was deeply concerned that any erosion of the 
bright-line protection provided in Sony v. Universal for 
disruptive products that are capable of substantial non-
infringing uses would have a chilling effect on innovation and 
product design by developers of multi-use technologies and 
services. We believe that the Supreme Court's decision in 
Grokster is favorable to the venture-capital industry, insofar 
as the court rejected the studio's strong efforts to cut back 
on the protections for innovative technologies that have the 
potential for substantial non-infringing uses.
    With the Sony bright-line rule intact, hopefully only those 
players who willfully promote copyright infringement will be 
subject to, and should be subject to, potential liability for 
secondary infringement of copyrights.
    Unfortunately, the entertainment industry has never been 
satisfied with attacking direct instances of infringement. For 
more than a century, the industry has attacked, in turn, each 
new development, each destructive technology that facilitates 
copying and distribution, from phonographs to mimeographs, from 
audiotape players to VCRs, from compact discs to mp3 players. 
As each new technology has developed the industry has sought to 
destroy or control it, sometimes extending their attacks to the 
inventors who created, and the investors who funded, that 
product or service.
    The Grokster decision reaffirmed the principle that new 
products and services will be protected, provided they are 
capable of substantial non-infringing uses. Entrepreneurs and 
their investors should be able to move forward in developing 
novel products without constant concern that some unforeseen 
future use could impose ruinous liability.
    Venture capitalists believe in the power of the market. The 
market, rather than the Federal courts, should drive investment 
decisions. Unfortunately for everyone involved, the Supreme 
Court left many liability questions outside of the Sony bright-
line protection unanswered in Grokster. For venture capital 
firms, this additional legal uncertainty will continue to make 
us less inclined to invest in this critical information 
technology at a time when the rest of the world is quickly 
catching up to our expertise in this area.
    As lower Federal courts begin to study and apply the 
Grokster decision, NVCA believes that we all have an 
opportunity here for some breathing space, one in which 
technologies can continue to emerge. There should be no rush to 
judgment from any sector, be it from the entertainment or 
technology communities or investors or Congress. However, if 
the entertainment industry decides to initiate even greater 
volumes of litigation against inventors, investors, and their 
destructive technologies, Congress may need to return its focus 
to this issue.
    Thank you very much.
    [The prepared statement of Mr. Heesen follows:]

           Prepared Statement of Mark G. Heesen, President, 
                  National Venture Capital Association

    Thank you for the opportunity to share the views of the National 
Venture Capital Association (NVCA). NVCA represents the interests of 
more than 470 venture capital firms in the United States, which 
together account for more than 85 percent of venture funding. As the 
only national trade group for the venture community, the NVCA's mission 
is to foster public awareness of the vital role that venture funding 
plays in driving the United States economy and to advocate public 
policies that stimulate entrepreneurship and innovation.
    While the importance of venture capital firms and the companies 
they fund to the United States economy is difficult to quantify, recent 
studies estimate that, in 2003, venture-backed businesses were 
responsible for more than 10.1 million American jobs and accounted for 
more than $1.8 trillion of the United States Gross Domestic Product 
(GDP).\1\ Such economic mainstays as Intel, Federal Express, Home 
Depot, Genentech, Google, and Starbucks were incubated with venture 
funding. Each year, venture firms invest more than $18 billion in 
start-up companies across the country, which accounts for an estimated 
72 percent of all venture investment worldwide. A decidedly American 
phenomenon, venture capital funds and the companies they back provide a 
key differentiator animating American economic growth.
---------------------------------------------------------------------------
    \1\ See Global Insight, Venture Impact 2004: Venture Capital 
Benefits to the U.S. Economy 1 (2004).
---------------------------------------------------------------------------
    The NVCA's members invest with a particular emphasis on emerging 
companies in the information technology, communications, and life 
sciences industries. In addition to providing early funding to young 
businesses unable to secure capital from more traditional sources, 
NVCA's member firms take an active role in guiding nascent businesses 
through their start-up and middle phases. They work with the 
entrepreneurs and management, lending their experience and expertise 
while developing long-term partnerships.
    NVCA's member firms accordingly have a unique perspective on the 
hurdles that emerging businesses confront and the background conditions 
that promote or stifle growth and innovation. Prior to the Supreme 
Court's decision in MGM v. Grokster, NVCA's member firms were deeply 
concerned that any erosion of the bright-line protection provided in 
Sony Corporation of America v. Universal City Studios, Inc. for 
products that are ``capable of substantial noninfringing uses'' would 
have a chilling effect on innovation and product design by developers 
of multiple-use technologies and services.
    We believe that the Supreme Court's decision is favorable to the 
venture capital industry in so far as the Supreme Court rejected the 
studios' strong efforts to cut back on the protections for innovative 
technologies that have the potential for substantial non-infringing 
uses. With this bright-line rule intact, hopefully only those players 
who willfully promote copyright infringement will be subject to--and 
should be subject to--potential liability for secondary infringement of 
copyrights. A company or a venture capital firm that brings to market 
technologies that have the potential for legitimate, non-infringing 
uses, and that markets the technologies based on those non-infringing 
uses, should remain protected from secondary liability, even though 
other third parties might discover ways with the technologies to 
infringe on copyrights.
    NVCA's members are pleased that a new standard for contributory 
infringement as proposed by the petitioners in Grokster was not 
created. Such a standard would have been virtually impossible for 
venture capital firms to accommodate in making their initial investment 
decisions, when the potential commercial applications of a promising 
concept are still far in the future. Having said this, NVCA is 
concerned that Grokster's  long-term impact could still be very 
problematic for technology advancement in general and the VC community 
specifically. Such malleable standards--vague in their formulation and 
unpredictable in their application--could invite courts to second-guess 
design decisions and expose venture firms to potentially ruinous 
litigation.

Attacking Innovation
    Any technology or service that makes it possible to copy or 
distribute information can be used for copyright infringement. The list 
of such technologies--which today includes computers, the Internet, and 
e-mail, as well as CD burners, iPods, and peer-to-peer file sharing--is 
extensive, as is the range of their legitimate uses. Modern life would 
be impossible to envision without such ``dual use'' technologies. 
Indeed, these ``technologies of freedom''--which allow the rapid spread 
of information free of decentralized control--are critical to our 
modern democracy, as well as to our productivity and economic well-
being.
    Freedom, however, is sometimes abused. There are, and always have 
been, those who would abuse the power afforded them by new technologies 
to copy and distribute works that belong to others. Existing copyright 
laws provide severe penalties for such direct infringement, recognizing 
that the few who are caught must provide an example and deterrent for 
others.
    But the entertainment industry has never been satisfied with 
attacking direct instances of infringement. For more than a century, 
when it first claimed that the player piano spelled the death of 
American music, the industry has attacked in turn each new development 
that facilitates copying and distribution, from phonographs to 
mimeographs, from audiotape players to VCRs, from compact disks to mp3 
players. As each new technology has developed, the industry has sought 
to destroy or control it, often extending their attacks to the 
inventors who created and the investors who funded the product or 
service.
    Fortunately, these attacks have been largely unsuccessful. (And 
their failure, ironically, has been good for the entertainment industry 
itself, which has in the long run benefited hugely from the new methods 
of distribution.) Under the bright-line rule established by the Court 
in Sony, technologies and services that are ``capable of substantial 
noninfringing uses'' are protected from secondary copyright liability, 
regardless of whether (or how many) others use those technologies and 
services for direct infringement of copyrights. Responsibility for 
copyright infringement rests where it belongs: on the shoulders of 
those who abuse products to infringe copyrights, not on those who 
create or invest in products capable of substantial non-infringing 
uses.
    This bright-line protection has been critical to technological 
progress. Entrepreneurs have been able to develop novel products 
without worrying that illegitimate uses could impose ruinous liability. 
Because markets take time to develop, and because the future uses to 
which a product may one day be put (both legitimate and illegitimate) 
are not necessarily evident in its early phases, Sony allows an 
innovation to incubate without fear that third-party infringement 
(present or future) will invite litigation.
Sony Bright-Line Rule Critical To Capital Investment
    ``[E]very invention is born into an uncongenial society, has few 
friends and many enemies.'' \2\ In Sony, the Supreme Court fashioned a 
margin of protection for such nascent technologies. The Court 
articulated a bright-line rule for determining liability under the 
doctrine of contributory infringement that armed inventors and product 
developers--and those who fund them--with the knowledge that a 
technology or service with legitimate uses would not be driven out of 
the market because some or even most customers may use the product to 
infringe copyrights.
---------------------------------------------------------------------------
    \2\ Joel Mokyr, The Lever of Riches: Technological Creativity and 
Economic Progress 183 (1990) (internal quotation marks omitted).
---------------------------------------------------------------------------
    The Court's bright-line rule in Sony has been the midwife for the 
technological revolution of the past two decades. It is not by chance 
that the Sony decision coincided with a period of unprecedented 
innovation and technological progress. By establishing a bright-line 
rule that protects new products and services--and the investors--
provided they are ``capable of substantial noninfringing uses,'' Sony 
has provided critical assurance to entrepreneurs that they could 
develop novel ideas and products without worrying that some unforeseen 
future use could impose ruinous liability.
    Entrepreneurs frequently invent new products without any clear 
picture of their potential uses, secure in the belief that a good idea 
will eventually find a market. That others could use the invention for 
copyright infringement is and should be irrelevant to the question 
whether the product or process can be placed in service of alternative, 
legitimate ends. One cannot even begin to count the staples of modern 
life--radios, typewriters, tape recorders, cameras, photocopiers, 
computers, fax machines, cassette players, cell phones, CD burners, DVD 
players, e-mail, cable modems and DSL for high-speed Internet access, 
Internet search engines such as Google and Yahoo, TiVos, and mp3 
players such as the iPod--that can be used to infringe copyrights and 
yet have perfectly legitimate uses that we increasingly could not do 
without. Peer-to-peer networks are another such innovation, whether 
used to share photos among family and friends, to promote the music of 
a new band, or to share research among scholars.
    The Sony case itself provides the best illustration of the fact 
that products often arrive before their primary markets emerge. At the 
time that case was decided, the Betamax was used primarily for copying 
shows from over-the-air broadcasts, either to build a library of such 
shows or simply to engage in time-shifting.\3\ The primary dispute 
between the majority and the dissent concerned whether time-shifting 
was itself a fair use of the copyrighted material.\4\ But the Betamax 
and its ultimately more successful competitor, the VHS VCR, quickly 
evolved into something quite different: a means of viewing lawfully 
rented movies. A whole industry grew up to provide legitimate materials 
for a product that the entertainment industry sought to crush in its 
infancy. That was possible only because the Court in Sony provided a 
protected space in which these legitimate uses could grow. In that 
case, as in many others, the product created its own legitimate market.
---------------------------------------------------------------------------
    \3\ See 464 U.S. at 423 (surveys by both respondents and Sony 
``showed that the primary use of the machine for most owners was `time-
shifting,' '' although surveys also showed ``that a substantial number 
of interviewees had accumulated libraries of tapes'').
    \4\ Id. At 442, 447-56; id. At 477-86 (Blackmun, J., dissenting).
---------------------------------------------------------------------------
    The entertainment industry in its Supreme Court brief on Grokster 
suggested that the Sony test encourages bad behavior by inventors and 
product designers who hide behind its protections in order to make 
money off infringement.\5\ That is certainly possible but, as we argued 
in our Amicus Curiae brief, that it is not a reason to change the Sony 
bright-line test established by the Supreme Court. The Justices agreed 
with our line of thinking in Grokster. As long as a product is capable 
of substantial, non-infringing uses, it is a socially useful product, 
whose development should be encouraged. Abuse of the product should be 
attacked, not the product itself, nor the inventor behind it, nor the 
venture capitalist who funded the venture. If a company materially 
assists or encourages specific acts of infringement--whether through 
customer support mechanisms or other communications--secondary 
liability might well be appropriate.\6\ But the mere acts of 
developing, advertising, marketing, upgrading, and supporting a multi-
use product that is capable of substantial non-infringing uses should 
be protected, without necessitating a fact-specific, inherently 
amorphous inquiry into the motivations and incentives of the 
inventor.\7\
---------------------------------------------------------------------------
    \5\ See Motion Picture Studio Pet. Br. 9-11, 27-29; U.S. Br. 17; 
Am. Tax Reform Br. 13-15.
    \6\ See, e.g., Cable/Home Communication, 902 F.2d at 837-39 (active 
promotion of television signal de-scrambling chips); Sega Enters. Ltd. 
v. MAPHIA, 948 F. Supp. 923, 933 (N.D. Cal. 1996) (Internet bulletin 
board operator actively encouraged users to upload copyrighted games).
    \7\ NVCA takes no position on whether, on the record here, the 
defendants in Grokster materially assisted or encouraged specific acts 
of infringement.
---------------------------------------------------------------------------
    It is critical to understand that the threat of secondary liability 
from copyright suits is qualitatively different from most other sorts 
of business risk that investors can insure against or build into their 
risk calculations. The mandatory mechanism of statutory damages--
designed to discourage direct infringement--has crushing implications 
for vendors of multi-purpose technologies, where damages from 
unforeseen users can quickly mount in the millions and even billions of 
dollars. And the indeterminate reach of such secondary liability means 
that not merely start-up capital is at risk, but also the personal 
wealth of start-up's officers, directors, and investors.\8\ The 
litigation risk in such circumstances is wholly one-sided: minimal 
attorneys' fees for the plaintiffs versus financial annihilation for 
the defendants. It would be impossible to create a more chilling 
environment for creativity and product development.\9\
---------------------------------------------------------------------------
    \8\ The prospect of such litigation is far from theoretical. In 
addition to suing Napster, for example, the recording industry has 
brought suit against venture capital firms and other investors that 
provided early funding. See In re Napster, Inc. Copyright Litig., Nos. 
C-MDL-00-1369-MHP & C-04-1166-MHP, 2005 WL 273178, at *1 (N.D. Cal. 
Feb. 03, 2005) (discussing suit versus venture capital firm Hummer 
Winblad Venture Partners); UMG Recordings, Inc. v. Bertelsmann AG, 222 
F.R.D. 408, 413-14 (N.D. Cal. 2004) (discussing suit against investor 
Bertelsmann). Indeed, after driving mp3.com into bankruptcy and 
acquiring its assets, the studios have even brought suit against the 
lawyers that performed corporate work for mp3.com in its start-up 
phase. Jon Healey, MP3.com Sues Former Copyright Counsel, L.A. Times, 
Jan. 19, 2002, at C2. These scorched-earth litigation tactics are 
expressly designed to discourage the development of any product that is 
capable of infringing uses--a complete inversion of the Sony rule.
    \9\ See Mark A. Lemley & R. Anthony Reese, Reducing Digital 
Copyright Infringement Without Restricting Innovation, 56 Stan. L. Rev. 
1345, 1388 (2004) (discussing how the threat of liability has deterred 
innovation among computer programmers); Joseph P. Liu, The DMCA and the 
Regulation of Scientific Research, 18 Berkeley Tech. L.J. 501 (2003) 
(discussing ways in which threat of liability under the Digital 
Millennium Copyright Act deters innovation in field of encryption); 
Assaf Hamdani, Who's Liable for Cyber-wrongs?, 87 Cornell L. Rev. 901 
(2002) (demonstrating that threat of secondary liability has led to 
over-deterrence); Matthew Fagin, Frank Pasquale & Kim Weatherall, 
Beyond Napster: Using Antitrust Law to Advance and Enhance Online Music 
Distribution, 8 B.U. J. Sci. & Tech. L. 451, 500 (2002) (``Innovation 
in the technologies of distribution will decline markedly if potential 
new innovators are chilled by a threat of legal action'').
---------------------------------------------------------------------------
Standards Proposed By Entertainment Industry Would Deter Investment And 
        Innovation
    In their Grokster briefs before the Supreme Court, both the 
petitioners and the United States asked the Court to replace Sony's 
clear rule of law with malleable legal standards that would trade 
certainty for legal risk. Moving from the bright-line Sony rule to any 
sort of malleable standard--with its attendant loss of certainty--would 
undermine investment in innovative technology.
    The evolution of the business model for the VCR at issue in Sony 
demonstrates the danger of predicting a future pattern of use. While 
the studios predicted on the basis of early experience that the VCR 
would destroy the movie business, video and DVD rentals and sales 
currently generate substantially more revenue than movie theaters.\10\ 
When industry executives cannot accurately predict the direction of the 
market, a legal standard that asks the Federal courts to engage in such 
predictions has little to recommend itself.
---------------------------------------------------------------------------
    \10\ See note 8, supra.
---------------------------------------------------------------------------
    The iPod, which has been responsible for the resurgence of Apple, 
has a similar story line. Apple first invited customers to ``rip, mix, 
and burn'' their favorite music when releasing its iTunes software in 
January 2001 and then embedding it on the latest version of the iMac 
personal computer.\11\ The iPod followed later that year, with an 
initial 5 gigabit version that could hold up to 1,000 songs. Apple was 
immediately attacked by the major studios and accused of inciting 
theft.\12\ But it was not until April 2003 that Apple launched its 
iTunes online music store, after reaching agreements with all of the 
major studios to sell the ability to download individual songs or 
entire CDs. In the first quarter of 2005 alone, Apple reported licensed 
online music sales of roughly $275 million, and it is now selling 1.25 
million songs per day. Just as licensed video sales and rentals have 
eclipsed movie theaters in revenues, it appears clear that licensed 
online downloads will eclipse CDs. But neither could do so without the 
protection afforded by Sony for mixed-use technologies.
---------------------------------------------------------------------------
    \11\ See Dennis Sellers, Jobs: iTunes Is New, Free Jukebox Software 
(Jan. 9, 2001), available at http://www.macworld.com/news/2001/01/09/
itunes/index.php. The first mp3 commercial players were developed 
several years earlier, and the music industry immediately filed suit to 
enjoin their sale. See Recording Indus. Ass'n of Am. v. Diamond 
Multimedia Sys., Inc., 180 F.3d 1072 (9th Cir. 1999) (suit against Rio 
portable mp3 music player). It is only because of the legal protection 
afforded by this Court's Sony decision that the iPod could be 
developed, marketed, and released.
    \12\ See Brooks Boliek, Mouse Grouse: Dis Boss Lays Into Computer 
Biz, The Reporter.com, Mar. 1, 2002, available at http://www.larta.org/ 
pl/NewsArticles/02Marc01_HR_Eisner.htm.
---------------------------------------------------------------------------
    Peer-to-peer sharing is likely to provide yet another example if 
permitted to develop. Thanks to a file-sharing technology called 
BitTorrent, millions of users were able to quickly download and view 
``lengthy amateur videos documenting the devastation of the December 
tsunami in the Indian Ocean, helping to spur an outpouring of 
charitable aid.'' \13\ BitTorrent's main use, however, appears to be 
among those who want to trade Hollywood movies and TV shows, thus 
``putting it in the cross hairs of the entertainment industry.'' \14\ 
The technology obviously is capable of substantial non-infringing uses; 
subjecting the inventor to ruinous liability would deprive the 
marketplace and consumers of the opportunity to develop a legitimate 
market for those uses.\15\
---------------------------------------------------------------------------
    \13\ Jonathan Krim, High-Tech Tension Over Illegal Uses, Wash. 
Post, Feb. 22, 2005, at E1, available at http://www.washingtonpost.com/
wp-dyn/articles/A42401-2005Feb21.html?sub=AR.
    \14\ Id.
    \15\ While the United States and petitioners contend that it would 
be more efficient for users seeking publicly available material to go 
directly to the website that houses it than to use peer-to-peer file-
sharing software, neither has offered any evidence to support this 
factual assertion. The Ninth Circuit, by contrast, found that peer-to-
peer arrangements ``significantly reduc[ed] the distribution costs of 
public domain and permissively shared art and speech.'' Pet. App. 16a. 
While legitimate arguments may support these competing conclusions, the 
prior question that the United States fails to address is whether the 
Federal courts have the institutional capabilities to weigh the 
competing evidence in such complex areas as computer software and the 
life sciences. The marketplace performs this same function 
automatically.
---------------------------------------------------------------------------
Conclusion
    The clear rule of law that the Supreme Court articulated in Sony 
has provided the backdrop for an unprecedented period of technological 
growth and innovation. That revolution in informational technology, in 
turn, has been responsible for the creation of millions of jobs in the 
United States, directly and indirectly contributing billions of dollars 
to the GDP. Replacing the Sony rule with a more amorphous, fact-
specific standard, as advocated by many in the entertainment industry 
in Grokster, would have placed these industries, and the nascent 
businesses that are their life blood, at risk. The Supreme Court 
refused to go down this path. Supreme Court Justice Stephen Breyer 
along with Justices Sandra Day O'Conner and John Paul Stevens argued 
that ``Sony's rule is strongly technology protecting. . . . Sony 
thereby recognizes that the emergence of new technologies, including 
(perhaps especially) those that help disseminate information and ideas 
more broadly or more efficiently.''
    The market, rather than the Federal courts, should drive investment 
decisions. Unfortunately, the Supreme Court left many liability 
questions unanswered in Grokster, and those issues will now have to 
again be addressed by the lower courts in continuing litigation. For 
venture capital firms, the additional layer of legal uncertainty--a 
risk that can be neither measured nor managed--will discourage 
investment in critical information technologies in the near term post 
Grokster. We have now an opportunity for a breathing space, one in 
which technologies can continue to emerge and further answers emerge 
from the courts without a rush to judgment from any sector, whether it 
is the entertainment industry, Congress or investors. However, if the 
entertainment industry decides to initiate even greater volumes of 
litigation against inventors and investors, Congress may need to return 
its focus to this issue.
    Thank you again for the opportunity to testify here today on these 
critical issues. I look forward to answering any questions.

    The Chairman. Thank you.
    Our next witness is Dave Baker, Vice President, Law and 
Public Policy, of EarthLink. EarthLink is an Internet service 
provider with over five million subscribers.
    Mr. Baker?

         STATEMENT OF DAVID N. BAKER, VICE PRESIDENT, 
             LAW AND PUBLIC POLICY, EarthLink, INC.

    Mr. Baker. Thank you.
    Chairman Stevens, Co-Chairman Inouye, and members of the 
Committee, thank you for inviting me to testify today.
    I'm Dave Baker. I'm Vice President for Law and Public 
Policy with EarthLink. EarthLink is one of the Nation's largest 
Internet service providers, serving 5.4 million customers with 
broadband, dial-up, web-hosting, wireless Internet, and voice 
services.
    We appreciate this committee's interest in peer-to-peer 
file sharing and the issues related to the Supreme Court's 
recent decision in MGM v. Grokster. You will hear from other 
witnesses today about the importance of protecting copyrights. 
EarthLink agrees and supports the rights of copyright owners to 
protect their intellectual property and to do so in a manner 
that does not compromise the ability of Internet providers to 
deliver broadband and other Internet services to as many 
Americans as possible.
    Indeed, if we are to realize the promise of the emerging 
broadband future, we should all want to develop means to make 
online music, movies, and video more widely available to 
consumers while protecting the copyrights of those who create 
such content.
    In studying the issues of peer-to-peer file sharing, I 
would like to offer the Committee some insights from our 
experience with the Digital Millennium Copyright Act. The goal 
of the DMCA is to give copyright owners a mechanism to protect 
their intellectual property from online infringement while 
creating counter-notification safeguards for website owners and 
a safe-harbor provision for ISPs. The DMCA affirms the 
longstanding principle that ISPs are but conduits for 
information. As such, they are not liable for the content that 
travels over their networks.
    Having said that, EarthLink, as other ISPs, does not 
tolerate activities which violate copyrights. Where ISPs host 
websites which contain infringing content, we can, and do, play 
a part in protecting copyrights.
    Under the DMCA's notice and takedown provisions, an ISP 
will disable or block access to a website it hosts if it 
receives a notification of a good-faith belief that such 
website infringes a party's copyrights. The website owner has a 
similar opportunity to file a counter-notification to get his 
website restored. The DMCA's notice and takedown procedure has 
worked well for over 6 years. ISPs like EarthLink handle DMCA 
notices almost every day. Copyright owners are given reasonable 
opportunity to protect their intellectual property. website 
owners are given reasonable opportunity to protect their 
content. And ISPs are given reasonable opportunity to aid 
copyright owners without themselves becoming liable for content 
they host.
    However, ISPs faced challenges a few years ago when 
copyright owners tried to stretch the use of the DMCA to 
include peer-to-peer file sharing. The RIAA tried to use the 
subpoena power of Section 512(h) to require ISPs to divulge the 
identity of Internet users who were alleged to have transmitted 
copyrighted materials across the ISP's network. Using the DMCA 
in this fashion allowed administrative subpoenas to be issued 
in blank, with no judicial oversight.
    Compounding this problem were the use of bots, automated 
programs which scour the web looking for files which contain 
names of copyrighted materials. But bots are indiscriminate. 
For instance, a notice sent in 2001 to UUNet sought to cutoff 
Internet access to all users who had downloaded files 
containing ``Harry Potter.'' One of these files was titled 
harry_potter_book_report.rft and was, in fact, just what it 
purported to be, a child's book report on Harry Potter, yet the 
notice, if enforced, would have cutoff all Internet access, not 
just for this child, but for his or her entire family.
    Unlike websites, which ISPs host and can, therefore, 
control access to, peer-to-peer files reside on the computers 
of individual Internet users. Short of canceling the accounts 
of all of these users, which would work in undue hardship, ISPs 
cannot control this. What's more, attempts to force ISPs to 
disclose the identity of individuals upon a mere allegation of 
copyright infringement unnecessarily compromises the privacy of 
all Internet users.
    As EarthLink has stated many times before, we support the 
rights of the RIAA and other copyright owners to protect their 
intellectual property. We just must do so in a way that 
protects the privacy of legitimate users and which does not 
shoot the messenger, the ISP, which makes online communications 
possible in the first place.
    In the Grokster case at hand, the Supreme Court unanimously 
held that Grokster and StreamCast are potentially liable for 
copyright infringement by their users. The court focused on the 
element of intent to induce infringement.
    Further, the court held that Grokster and StreamCast did 
not meet the Sony standard of commercially significant non-
infringing use, and the overwhelming evidence of an intent to 
induce infringement could not be disregarded. The Supreme Court 
went on to say that the Sony standard remains, but it also said 
that you cannot use the Sony safe harbor if you are clearly 
inducing others to infringe copyrights.
    As the Supreme Court noted, peer-to-peer is an immensely 
useful technology. The lesson from the Grokster case is not to 
limit the technology, but to use it in a way that does not 
intentionally infringe on copyrights.
    As I noted in the foreword I wrote to the Giga Law Guide to 
Internet Law regarding Grokster's predecessor, Napster, Napster 
provides a great example of a killer app, killed by its failure 
to address legal realities. A brilliantly simple application, 
it took full advantage of the Internet's very nature as an 
information service to create a means of distributing music far 
more efficiently than the conventional process of pressing and 
shipping CDs. But as good as its technology was, Napster failed 
to address vital legal issues. Rock stars, songwriters, and 
music publishers are entitled to be paid for their work, as 
Federal courts in the Napster lawsuit repeatedly ruled. 
Napster, and now Grokster, will always serve as a reminder that 
just because you can do something online doesn't mean you can 
ignore existing laws.
    I thank the Committee, again, for inviting me here today, 
and I look forward to any questions you may have.
    [The prepared statement of Mr. Baker follows:]

         Prepared Statement of David N. Baker, Vice President, 
                 Law and Public Policy, EarthLink, Inc.

    Chairman Stevens, Co-Chairman Inouye and members of the Committee, 
thank you for inviting me to testify today. My name is Dave Baker and I 
am Vice President for Law and Public Policy with EarthLink. 
Headquartered in Atlanta, EarthLink is one of the Nation's largest 
Internet Service Providers (ISPs), serving approximately 5.5 million 
customers with broadband, dial-up, web hosting, wireless Internet and 
voice services.
    We appreciate this committee's interest in peer-to-peer file 
sharing and the issues related to the Supreme Court's recent decision 
in MGM v. Grokster. You will hear from other witnesses today about the 
importance of protecting copyrights. EarthLink supports the rights of 
copyright owners to protect their intellectual property and to do so in 
a manner that does not compromise the ability of Internet providers to 
deliver broadband and other Internet services to as many Americans as 
possible. Indeed, if we are to realize the promise of the emerging 
broadband future, we should all want to develop means to make online 
music, movies and video more widely available to consumers while 
reasonably protecting the copyrights of those who create such content.
    In studying the issue of peer-to-peer file sharing, I would like to 
offer the Committee some insights from our experience with Federal 
copyright legislation. In 1998, Congress passed the Digital Millennium 
Copyright Act (DMCA). The goal of the DMCA is to give copyright owners 
a mechanism to protect their intellectual property from online 
infringement while creating safeguards such as counter-notification 
procedures for website owners and a safe harbor provision for ISPs.
    The DMCA affirms the long-standing principle that ISPs are but 
conduits for information. As such, they are not liable for the content 
that travels over their networks. Having said that, EarthLink, as other 
ISPs, does not tolerate activities which violate copyrights. Where ISPs 
host websites which contain infringing content, they can and do play a 
part in protecting copyrights.
    Under the DMCA's notice and takedown provisions, an ISP will 
disable or block access to a website it hosts if it receives a 
notification of a good-faith belief that such website infringes a 
party's copyright(s). The website owner has a similar opportunity to 
file a counter-notification to get his website restored.
    The DMCA's notice and takedown procedure has worked well for over 6 
years now. ISPs like EarthLink handle DMCA notices almost every day. 
Copyright owners are given reasonable opportunity to protect their 
intellectual property, website owners are given reasonable opportunity 
to protect their content, and ISPs are given reasonable opportunity to 
aid copyright owners without themselves becoming liable for content 
they host.
    However, ISPs faced challenges a few years ago when copyright 
owners tried to stretch the use of the DMCA beyond notice and takedown 
of hosted websites to include peer-to-peer file sharing. The RIAA tried 
to extend the subpoena power of Sec. 512(h) of the DMCA to require ISPs 
to divulge the identity of Internet users (not necessarily even 
customers) whom the RIAA alleged to have transmitted copyrighted 
materials across the ISP's network.
    Using the DMCA in this fashion allowed administrative subpoenas to 
be issued in blank with no judicial oversight. Compounding this problem 
was the use of ``bots'', automated programs, which scour the web 
looking for files which contain names of copyrighted materials. But 
these bots are indiscriminate in both the breadth and specificity of 
the information they seek. For instance, a subpoena sent by 
copyright.net to UUNet on January 2, 2001 sought personally identifying 
information for 2,635 individual subscribers. And in another example, 
notices sent by Mediaforce to UUNet on December 3, 2001 sought to 
cutoff Internet access to all users who had downloaded files containing 
``Harry Potter.'' One of these files was titled 
harry_potter_book_report.rtf and was 1k in size. Not only was this 
magnitudes smaller than even the legal clips of the movie, much less 
the megabytes needed for bootleg copies of the whole film, but closer 
inspection showed it to be just what it purported to be, a child's book 
report on Harry Potter. Yet the notice, if enforced, would have cutoff 
all Internet access not just for this child, but for his or her entire 
family.
    Unlike websites which ISPs host, and can therefore control access 
to, peer-to-peer files reside on the computers of individual Internet 
users. Short of canceling the accounts of all these users, which would 
work an undue hardship, ISPs can not control this. What's more, 
attempts to use the ministerial subpoena power of the DMCA to force 
ISPs to disclose the identity of individuals upon a mere allegation of 
copyright infringement unnecessarily compromises the privacy of all 
Internet users.
    As EarthLink has stated many times before, we support the rights of 
RIAA, the MPAA and other copyright owners to protect their intellectual 
property. But the DMCA must not be used in ways that compromise the 
privacy of Internet users more than it would protect copyrights.
    In sum, we have to balance protecting the intellectual property of 
copyright owners while protecting the privacy of Internet users, all 
while not shooting the messenger (ISPs) that provide the very access 
that makes online communications possible.
    In the Grokster case at hand, the Supreme Court unanimously held 
that Grokster and StreamCast are potentially liable for copyright 
infringement by their users. The Court focused on the element of 
intent, holding that ``one who distributes a device with the object of 
promoting its use to infringe copyright, as shown by clear expression 
or other affirmative steps taken to foster infringement, is liable for 
the resulting acts of infringement by third parties.''
    Further, the Supreme Court held that Grokster and StreamCast did 
not meet the Sony standard of ``commercially significant non-infringing 
use'' and the overwhelming evidence of intent to induce infringement 
could not be disregarded. Said the Court, ``Here, evidence of the 
distributors' words and deeds going beyond distribution as such shows a 
purpose to cause and profit from third-party acts of copyright 
infringement.'' The Supreme Court went on to state that the Sony 
standard of ``substantial non-infringing use'' remains. But it also 
stated that one cannot use the Sony safe harbor if they are clearly 
inducing others to infringe copyrights.
    Peer-to peer is an immensely useful technology. As the Supreme 
Court noted in Grokster, there are several advantages to peer-to-peer 
networks. Because they need no central computer server for users to 
exchange information, they don't need the high bandwidth communications 
capacity a central server would require. Similarly, the need for costly 
server storage space is eliminated. Since copies of a file 
(particularly a popular one) are available on many users' computers, 
file retrievals may be faster than on other types of networks. And 
since file exchanges do not travel through a server, communications can 
take place between any computers that remain connected to the network 
without risk that a glitch in the server will disable the whole 
network. Given these benefits in security, cost, and efficiency, peer-
to-peer networks are used by universities, government agencies, 
corporations, and libraries, as well as by millions of individual 
users.\1\ The lesson from the Grokster case is not to limit the 
technology, but to use it in a way that does not intentionally infringe 
on copyrights.
---------------------------------------------------------------------------
    \1\ MGM v. Grokster, 545 U.S. _____ (2005) at 1-2.
---------------------------------------------------------------------------
    As I noted in my foreword to the Giga Law Guide to Internet Law 
regarding Grokster and StreamCast's predecessor, Napster:

        Napster provides a great example of a ``killer app'' killed by 
        its failure to address legal realities. A brilliantly simple 
        application, it took full advantage of the Internet's very 
        nature as an information service to create a means of 
        distributing music far more efficiently than the conventional 
        process of pressing a CD, wrapping it, boxing it, shipping it, 
        unloading it, and displaying it in a store just so a customer 
        could drive to that store, buy the CD, take it home, and put it 
        in a player to decode the CD's digital information in order to 
        finally hear music. But as good as its peer-to-peer file-
        sharing technology was, Napster failed to address vital legal 
        issues such as copyrights, licenses, and royalty payments. Rock 
        stars, songwriters, and music publishers are entitled to be 
        paid for their work, as the Federal courts in the Napster 
        lawsuits repeatedly ruled. Napster will always serve as a 
        reminder that just because you can do something online doesn't 
        mean you can ignore existing laws. \2\
---------------------------------------------------------------------------
    \2\ The Giga Law Guide to Internet Law by Doug Isenberg. Random 
House Trade Paperbacks 2002 at xi.

    I again thank the Committee for inviting me here today and I look 
---------------------------------------------------------------------------
forward to any questions you may have.

    The Chairman. Well, thank you very much.
    The next witness, Mitch Bainwol, Chairman and CEO of the 
Recording Industry Association of America. This is a trade 
group representing the U.S. recording industry and its members. 
They're responsible for approximately 90 percent of all 
legitimate sound recording produced and sold in the United 
States.
    Mr. Bainwol?

    STATEMENT OF MITCH BAINWOL, CHAIRMAN AND CEO, RECORDING 
                INDUSTRY ASSOCIATION OF AMERICA

    Mr. Bainwol. Thank you, Mr. Chairman, Mr. Co-Chairman, 
Senator Smith, Senator Kerry, and Senator Pryor. I appreciate 
the opportunity to testify here today.
    I am the CEO of the RIAA. Sometimes I think we should be 
called the MVCA, instead, the Music Venture Capital 
Association, because that's what record companies do. We invest 
in music. We put the proceeds from the sale of recorded music 
back in to new art. It's a risky business, and it doesn't pay 
off all the time, but, when it does, it's a great experience, 
and we're able to generate this wonderful music for fans across 
the globe.
    Two things make all of this work. First, there is no 
substitute for quality music. The product has to sell. Second, 
you have to be able to do just that: sell. An investment-based 
business that cannot reap the value of its investment is a 
business that cannot sustain itself. It's that simple. That's 
why these past few years have been tough and why we're hopeful 
about the coming years. In 1999, the domestic sale of music 
reached nearly $15 billion. By 2003, that figure had plummeted 
to under $12 billion. 2004 was pretty much flat, and 2005 is 
down again, another 7 percent. Much, but not all, of the 
problem is due to Internet piracy. Piracy sounds romantic, but 
if you work in the music business, it's anything but. Piracy is 
a job killer, it's a culture killer, it's a lesson learned by a 
generation that stealing is OK.
    Our beef, though, is not with the Internet, and it sure 
isn't with technology. Our beef is with the conduct--the 
conduct of bad actors who built a business by giving away our 
property for free and then making money from spyware and from 
advertising. That's precisely what Grokster is all about. The 
case centered on whether these bad actors could pull what I 
call the Sergeant Schultz defense, ``see nothing, do nothing,'' 
but profit all along from the infringement that they encourage. 
It's a business model predicated on theft.
    We felt good about the oral arguments in March. We had 40--
40 state attorneys general with us. We had the Solicitor 
General speaking for the U.S. Government on our side. We had 
property-rights groups, technology groups, family groups, 
artists, and broad editorial support. Our mainstream position 
won out, as the Vice President once said, big time. With a 
nine-zero ruling by a court that can't agree on what to have 
for lunch, a clear message was sent, ``Thou shalt not steal, 
and businesses that profit by encouraging others can't evade 
liability.'' It was stunning. From Ginsburg to Scalia, from 
Stevens to Rehnquist, from Thomas to the most tech-savvy guy on 
the bench, Breyer, everyone--everyone agreed.
    The majority opinion, written by Souter, said it all, ``The 
unlawful objective is unmistakable. This case is significantly 
different from Sony. Sony dealt with a claim of liability based 
solely on distributing a product with an alternative lawful and 
unlawful uses. Here, evidence of the distributor's words and 
deeds going beyond distribution shows a purpose to cause and to 
profit from third-party acts.''
    When confronted with a tension between two important 
values, creativity and innovation, the court struck a perfect 
balance. Tech voices like Apple, HP, and even Mark Cuban, who 
funded the Grokster defense, applauded the decision. So did we. 
Editorials echo that praise. Imagine, The New York Times and 
The Wall Street Journal singing together. The Washington Times 
and The Washington Post hitting the same note, more rare than 
even a nine-zero decision. As my fellow panelist Mark Heesen 
properly observed, only those players who willfully promote 
copyright infringement will be subject to potential liability.
    So, what does the decision mean? It means that similarly 
situated businesses that encourage infringement need to do some 
serious reflection, and they need to do that fast, and reach 
the obvious conclusion that it's time to go straight or face 
the consequences. It means venture capital will flow to 
technology companies, like Mr. Kerber's, that respect property 
and reward the future of music. It means nascent technologies 
that operate within the law will have a chance to get traction, 
attract investors, and appeal to fans. It means that we 
increasingly will be able to sell and invest in new artists and 
more music. And that's why we're optimistic about the future.
    Two years ago, there was no legitimate digital marketplace. 
We're watching the rapid emergence of a quintessentially 
American dynamic competition in this space--iTunes, Real, 
Napster, Wal-Mart, and others competing for the download 
segment of the market; Yahoo!, Rhapsody, Napster, and others 
competing for the subscription segment of the market; Wurld, 
iMesh, Mashboxx, P2P Revolution, and others competing for the 
important legitimate peer-to-peer market.
    And the wireless market, already advanced around the world, 
is poised to take off here, as well. Grokster plays into this 
dynamic in a very big way, legally and culturally. Legally, 
those who don't play by the rules know that the Sergeant 
Schultz defense won't fly any more. If it walks like a duck and 
quacks like a duck, you know you've got a turkey. And, 
culturally, we've pierced the nonsensical notion that somehow 
the taking of property is OK when it comes to music.
    All we want is a chance to compete. No one thinks that our 
road to recovery is easy or automatic. But a chance for our 
investment to earn a return is a pretty darn good first step.
    Thank you for listening.
    [The prepared statement of Mr. Bainwol follows:]

        Prepared Statement of Mitch Bainwol, Chairman and CEO, 
               Recording Industry Association of America

    Mr. Chairman, Co-Chairman Inouye, I appreciate the opportunity to 
testify today on the Supreme Court's Grokster decision.
    One month ago, the Court took a major step toward safeguarding and 
advancing one of this country's greatest resources--intellectual 
property. In a rare 9-0 decision, the Justices held unanimously in 
Grokster that those who encourage others to steal may be held liable 
themselves. The resulting message is straightforward and simple: theft, 
in any medium, is unacceptable.
    Grokster is a peer-to-peer (P2P) file-sharing network that allows 
members to copy songs, movies, software, and other creative works over 
the Internet without paying for them. The result has been, in the words 
of the Supreme Court, ``infringement on a gigantic scale.'' These 
illicit networks have enabled the illegal copying of millions upon 
millions of exact duplicates of valuable works with the click of a 
mouse. Every day.
    This massive theft has been particularly devastating for the music 
industry. In 1999, the domestic sale of music reached $14.5 billion. By 
2003, that figure had plummeted to $11.8 billion. 2004 was virtually 
flat, and 2005 is down again, another 7 percent. Record companies are 
essentially venture capitalists, investing proceeds from the sale of 
recorded music back into new artists. It's a risky business, with only 
about a 10 percent success rate. Yet, releases from the most popular 
artists (which make up most of that successful 10 percent) are often 
the ones most heavily pirated on illegal file-sharing networks. 
According to Soundscan, the top 10 albums sold 54.7 million units in 
1999, compared to 37.4 million units in 2004. The top 100 albums sold 
194.9 million units in 1999, compared to 153.3 million units in 2004. 
The result is less money to invest in new artists and new music.
    A handful of studies have shown the direct correlation between 
illegal file-sharing and this decline in sales. David Blackburn of 
Harvard University found that ``file sharing has had large, negative 
impacts on industry sales.'' \1\ Stanley Liebowitz of the University of 
Texas at Dallas concluded that, ``there is strong evidence that the 
impact of file-sharing has been to bring significant harm to the 
recording industry.'' \2\ Other researchers have echoed similar 
findings.
---------------------------------------------------------------------------
    \1\ ``On-line Piracy and Recorded Music Sales,'' David Blackburn 
(2004).
    \2\ ``File Sharing: Creative Destruction or Just Plain 
Destruction?'' Stanley Liebowitz (2005).
---------------------------------------------------------------------------
    Piracy sounds romantic, but not if you work in the music business. 
It's a job killer. In addition to the decline in artist rosters, there 
have been thousands of layoffs of industry employees, and hundreds of 
shuttered music store doors. The effect of illegal file-sharing has 
been felt by songwriters, technicians, artists, and musicians, not to 
mention filmmakers, programmers, and scores of others who make their 
living from the creation and lawful sale of their products. The U.S. 
economy and the industries that employ over 5 million Americans have 
taken a massive hit from the billions of dollars lost annually through 
illegal file-sharing. Further, piracy on these networks is teaching an 
entire generation that stealing is acceptable.
    It's not. Unfortunately, standing against theft in the digital 
world has provoked some to label us anti-technology or against 
innovation. Such claims may make for good soundbites, but they are far 
from the truth. Technology is making the music experience better and 
better. From iTunes to ringtones, the music industry is continuously 
looking for new ways to get music to fans and is embracing new 
technology that allows for the widest lawful distribution of creative 
works.
    The problem is with the behavior of bad actors who have used this 
amazing P2P technology to build businesses predicated on theft. They 
have reaped millions--and, indeed, stayed in business--by giving away 
our property and the property of thousands of others for free, 
receiving revenue from third party spyware and advertising aimed at 
those looking to steal. It has been estimated that over 90 percent of 
the file-sharing on Grokster and similar services is illegal copyright 
infringement. This is no accident. The more songs, movies, computer 
games, and other creative works that are stolen through their network, 
the more money these services make. As the Court noted, ``the unlawful 
objective is unmistakable.'' Without this illegal downloading, these 
services go broke. This is an unacceptable business model.
    And that's precisely what the Grokster case was all about. The 
Court recognized that companies, like Grokster, that provide the tools 
and promote massive online infringement must be held responsible. As 
Senator Patrick Leahy observed, ``This decision means that companies 
can no longer, with a wink and a nod, absolve themselves from any 
responsibility for what their products do. Just as consumers bear a 
responsibility for using these products to illegally download files, 
the companies that fashion and promote these tools must share in that 
obligation.''
    The Court also noted the need for legitimate technological 
innovation and creativity, saying that their ruling ``does nothing to 
compromise legitimate commerce or discourage innovation having a lawful 
purpose.'' This is not about technology. The decision of the Court was 
technology-neutral, focusing instead on behavior and separating the 
good actors from the bad actors. It put the emphasis exactly where it 
should be--on those who ``encourage infringement'' while looking the 
other way as they reap the rewards.
    The Court did not alter the standard established in its 1984 Sony 
case. In its own words, ``nothing in Sony requires courts to ignore 
evidence of intent if there is such evidence, and the case was never 
meant to foreclose rules of fault-based liability derived from the 
common law.'' Grokster and other bad actors can be held liable without 
threatening legitimate technological innovation or the Sony standard 
that has served creators and consumers so well.
    Our position in this case was bolstered by incredibly wide-ranging 
support. The coalition against Grokster's enabling of intellectual 
property theft includes the creative community, the law enforcement 
community, the family values community, and the technology community. 
During the Sony case in the 1980s, 20 Attorneys General from around the 
country were with the other side; this time, 40 were with us. The U.S. 
Government filed on our side with a compelling brief by the Solicitor 
General. Key Members of Congress, property rights groups, family 
groups, artists, technology companies, and others also filed in support 
of protecting property rights. There was enormous editorial support, 
from The New York Times and The Wall Street Journal to the Washington 
Times and The Washington Post. Broad consensus, capped off with a 
unanimous Court decision.
    Those who still claim that the law is not clear are few and far 
outside the mainstream. This is now a settled question. File-sharing 
copyrighted works without permission is illegal; encouraging it is also 
illegal. Sony is not a ``get out of jail free'' card. It will not 
protect you if you encourage theft. Grokster and similarly situated 
businesses that enable infringement need to realize that it's time to 
go straight or face the consequences.
    The turn of the new millennium, and the emergence of file-sharing, 
marked the first stage of P2P--an era of lawlessness where the 
excitement of a new medium and a lack of viable legal online 
alternatives paved the way for massive online theft. The second stage 
brought ambiguity, as education and enforcement of copyright by content 
owners was continuously thwarted by the misinformation and lure of free 
goods from Grokster and others. Now, with the decision of the Supreme 
Court, we have entered the third stage--and the bright future--of 
legal, responsible P2P file-sharing.
    The legal and moral clarity provided by the Grokster decision is a 
shot of adrenaline for the legitimate marketplace. Capital will now 
naturally flow to technology companies that respect property and reward 
the future of music--companies such as iMesh, Snocap, Mashboxx, and 
Passalong, as well as Wurld Media, who is represented at this hearing 
today. In other words, the purpose of intellectual property protection 
as an investment lure is being met. Nascent technologies that operate 
within the law will have a chance to gain traction, attract investors, 
and appeal to fans. And we can increasingly sell, and thus invest, in 
new art, benefiting creators and consumers alike.
    We are optimistic about the future. Two years ago, there was no 
legitimate digital marketplace to speak of. Today, we are watching the 
rapid emergence of quintessentially American competition for this new 
marketplace. iTunes, BuyMusic, Wal-Mart, Sony Connect and others are 
battling it out for the download segment of the market. The result: in 
March 2005, 26 million songs were purchased from digital music stores 
in the United States.\3\ Yahoo!, Rhapsody, Napster, MSNMusic and others 
are battling it out for the subscription segment of the market. Many of 
the above and others offer both. Forty-three percent of music 
downloaders in 2005 have tried legitimate online music services \4\ and 
34 percent of current music downloaders say they now use paid 
services.\5\ On college and university campuses across the country--
hotbeds of illegal activity on exceedingly fast networks--
administrations and students are embracing the legitimate offerings of 
these services and others.
---------------------------------------------------------------------------
    \3\ NPD MusicWatch Digital Service.
    \4\ Pew Internet and American Life study, March 2005.
    \5\ Pew, March 2005.
---------------------------------------------------------------------------
    More than 50 schools have entered into deals with companies like 
Ruckus Networks. Just last week, the University of California and 
California State networks signed with Cdigix, potentially providing 
hundreds of thousands of new students with the opportunity to legally 
obtain music and movies on campus. And, of course, the wireless market, 
already advanced elsewhere around the world, is poised to take off here 
as well.
    But these legitimate businesses are able to thrive only by 
controlling the illicit services that directly compete with them. 
Grokster plays into this dynamic--legally and culturally. Legally, 
those who don't play by the rules know that it is no longer acceptable 
to reap ill-gotten gains while burying their head in the sand. And, 
culturally, we've pierced the nonsensical notion that somehow the 
taking of property is acceptable when it's music. All we want is a 
chance to compete, a chance for our investment to earn a return, and a 
chance to make great music for fans everywhere.
    Thank you.

    The Chairman. Thank you.
    Last witness, Fritz Attaway, Executive Vice President, 
Motion Picture Association of America, serving as the voice and 
advocate of the American motion picture, home video, and 
television industries.
    Thank you. Mr. Attaway?

         STATEMENT OF FRITZ E. ATTAWAY, EXECUTIVE VICE

           PRESIDENT AND WASHINGTON GENERAL COUNSEL,

             MOTION PICTURE ASSOCIATION OF AMERICA

    Mr. Attaway. Thank you, Mr. Chairman, Co-Chairman Inouye, 
Senator Snowe, Senator Smith, Senator Kerry, Senator Pryor. I'm 
very pleased to be here today to represent myself, Dan 
Glickman, the members of the Motion Picture Association and 
present our views on this landmark decision.
    I wish I would have brought my kiddie seat, but I'm very 
pleased to be here today.
    It should be of particular interest to this committee that 
the best way I know of to characterize this Supreme Court 
decision is that it is good for commerce and it is good for 
consumers. The Court's unanimous decision, like the adoption of 
the Digital Millennium Copyright Act, establishes a rational 
and balanced basis for the evolving digital environment which 
will remove uncertainty and spur investment in creative content 
and the technology with which it is created, delivered, and 
displayed. As a result, consumers will have more and better 
viewing choices. It is a win-win-win decision.
    And, contrary to what Mr. Eisgrau suggested, there is no 
need to bring the parties together in the wake of this 
decision. The legitimate content distributors and the content 
creators are talking, as Mr. Kerber will attest to. What was 
needed is to get the free-riders out of the way, which this 
Supreme Court decision will go a long ways in doing, and allow 
the legitimate business interests to proceed with new viewing 
choices for consumers.
    In its Grokster decision, the Court declined to revisit the 
Sony case decided almost a decade earlier, but did provide very 
important clarification. It said, as it did in Sony, that the 
mere manufacture and distribution of a device with knowledge 
that it may be used to infringe does not create liability; 
however, it went on to say that where there is evidence of 
purposeful, culpable conduct directed at promoting 
infringement, liability does attach. In the case at hand, the 
Court found that defendants had marketed their services to an 
audience likely to commit infringing acts, had taken no steps 
to prevent infringement, and had profited from the infringing 
acts of their customers. The court struck a careful balance 
between the need to foster creative content and the need to 
encourage technological innovation. Its rational balance has 
been recognized both by the content and the technology 
communities, receiving praise not just from MPAA and RIAA, but 
also from the Information Technology Industry Council and the 
Business Software Alliance, organizations that represent many 
of the major high-tech companies in the United States.
    In clarifying its Sony decision, the Grokster court 
stressed the importance of secondary liability to meaningful 
application of the copyright law. The Court said that, in the 
digital environment, rights against direct infringers may be 
impossible to enforce, and that remedies for secondary 
liability may be the only practical means to protect copyrights 
against massive infringement.
    The Court, in Grokster, sent a resounding message to users 
of the Internet, as Senator Inouye pointed out earlier: theft 
of intellectual property is wrong, whether it takes place by 
stealing a physical copy of a movie or by stealing a movie in 
cyberspace, and those who encourage such theft will be held 
liable.
    The Internet provides great opportunities, but the Internet 
is not, and should not be, an environment immune to the rules 
of a civil society. The distribution of child pornography is no 
less vile on the Internet than it is anywhere else. The 
invasion of personal privacy is no less objectionable on the 
Internet than elsewhere. And the theft of property is no more 
acceptable on the Internet than it is offline.
    Content owners look to the Grokster decision to usher in a 
new age of cooperation among content providers, technology 
providers, and ISPs aimed at providing consumers with safe, 
legal, flexible, and convenient choices for entertainment and 
information.
    Again, I thank you for affording me this opportunity to 
appear before you, and I look forward to answering your 
questions.
    [The prepared statement of Mr. Attaway follows:]

 Prepared Statement of Fritz E. Attaway, Executive Vice President and 
   Washington General Counsel, Motion Picture Association of America

    Chairman Stevens, Co-Chairman Inouye, members of the Committee, 
thank you for giving me this opportunity to appear before you today on 
behalf of Dan Glickman and the Motion Picture Association of America.
    The decision of the Supreme Court in MGM v. Grokster, 125 S. Ct. 
2764 (2005)., like Congressional enactment of the Digital Millennium 
Copyright Act, establishes rational and balanced rules for the evolving 
digital environment which will encourage creativity and technological 
innovation, and result in more and better choices for consumers.
    The DMCA provided content owners tools to maintain the integrity of 
technological measures essential for the secure delivery of high value 
content to consumers. It contributed mightily to the market launch of 
the DVD, which has been the most successful consumer electronics device 
in history, providing a vast new market for content creators and for 
consumer electronics device and computer manufacturers, and providing 
consumers with a new, technologically superior, more convenient option 
for viewing movies.
    The Supreme Court's landmark decision in MGM v. Grokster will have 
a similar effect by providing incentives for constructive innovation 
and a more secure environment in which to deliver movies, music and 
other content to consumers over the Internet. It will spur investment 
in new, legitimate delivery services, which in turn will provide a new 
source of revenue to content creators and encourage the sale of 
consumer electronics devices and broadband access. And most 
importantly, it will stimulate new, easy-to-use consumer options for 
accessing entertainment and information in a variety of formats through 
a host of new delivery platforms.
    In its Grokster decision, a unanimous Supreme Court declined 
invitations to revisit its narrowly decided, five-to-four decision in 
the Sony case a decade earlier. It made clear, however, that the Sony 
decision does not preclude liability where the conduct at issue goes 
beyond the mere manufacture and distribution of a device with knowledge 
that it may be used to infringe. The Grokster Court said liability DOES 
attach when there is evidence of purposeful, culpable conduct directed 
at promoting infringement. In the Court's words, ``one who distributes 
a device with the object of promoting its use to infringe copyright, as 
shown by clear expression or other affirmative steps taken to foster 
infringement, is liable for the resulting acts of infringement by third 
parties.'' 125 S. Ct. 2764 at 2780 (2005). Such a ruling is neither 
extraordinary, nor at odds with long-established rules of fault-based 
liability derived from the common law. And as the Court made explicit, 
such a rule ``does nothing to compromise legitimate commerce or 
discourage innovation having a lawful promise.'' Id. at 2780.
    In other words, the Court stated, as it had in its Sony decision, 
that technology capable of substantial non-infringing uses is not 
inherently bad, but those who traffic in such a technology with the 
intent of inducing others to infringe are bad actors and subject to 
remedies for contributory infringement. It found in the case before it 
that the defendants had intentionally marketed their software to former 
users of the Napster ``file sharing'' service which had been found to 
be in violation of the copyright laws; had made no effort to limit the 
infringing activities of their customers; \1\ and had established a 
business model whose success was directly tied to the infringements of 
their customers. Under these circumstances, the Court said there was a 
clear basis for a finding of contributory infringement.
---------------------------------------------------------------------------
    \1\ ``[T]here is no evidence that either company made an effort to 
filter copyrighted material from users' downloads or otherwise impede 
the sharing of copyrighted files.'' Id. at 2774.
---------------------------------------------------------------------------
    In crafting its decision, the Court was sensitive to any possible 
impact on technological innovation and carefully distinguished between 
simply knowing that a device could be used to infringe and culpable 
conduct.\2\ The Court's careful articulation of what is, and what is 
not, permissible will remove uncertainty in the marketplace and 
stimulate capital investment in the technology sector as well as the 
distribution marketplace. Its success in reaching an appropriate 
balance that protects both creative and technological innovation is 
evidenced by the fact that its decision has been overwhelmingly praised 
by the technology community.\3\
---------------------------------------------------------------------------
    \2\ ``We are, of course, mindful of the need to keep from trenching 
on regular commerce or discouraging the development of technologies 
with lawful and unlawful potential. Accordingly, . . . mere knowledge 
of infringing potential or of actual infringing uses would not be 
enough here to subject a distributor to liability. Nor would ordinary 
acts incident to product distribution, such as offering customers 
technical support or product updates, support liability in themselves. 
The inducement rule, instead, premises liability on purposeful, 
culpable expression and conduct, and thus does nothing to compromise 
legitimate commerce or discourage innovation having a lawful promise.'' 
Id. at 2780.
    \3\ ``This decision strikes a balance between encouraging 
innovation and discouraging piracy.'' Statement of Rhett Dawson, 
President of the Information Technology Industry Council, June 27, 
2005. ``The application of this new standard should make a real and 
positive difference in combating online piracy.'' Statement of Robert 
Holleyman, President and CEO of The Business Software Alliance, June 
27, 2005.
---------------------------------------------------------------------------
    The standard set by the Court is very similar to the standard set 
by the Congress in the DMCA, where Congress prohibited trafficking in 
devices with the purpose of enabling the circumvention of technical 
measures used to prevent copyright infringements. In drafting the DMCA 
Congress was careful not to discourage technological innovation or the 
exercise of ``fair use'' by consumers, while enabling content owners to 
use technology to protect their rights. And in the period since 
enactment of the DMCA there has been no evidence that technological 
innovation has been suppressed, or that consumers have not been able to 
engage in fair uses of copyrighted works. Indeed, the Copyright Office 
has undertaken two exhaustive inquiries into the impact of the DMCA on 
the exercise of fair use, and has twice concluded that the ability of 
consumers to exercise fair use has not been impinged.
    In clarifying its decision in Sony, the Court stressed the 
importance of theories of secondary liability to ensuring meaningful 
application of the copyright law. Indeed, the Court recognized that in 
the environment of cyberspace effective enforcement of rights against 
direct infringers may be impossible, and the application of remedies 
for secondary liability may be the only practical means to protect 
copyrights against massive infringement.\4\
---------------------------------------------------------------------------
    \4\ ``The argument for imposing indirect liability in this case is, 
however, a powerful one, given the number of infringing downloads that 
occur every day using StreamCast's and Grokster's software. When a 
widely shared service or product is used to commit infringement, it may 
be impossible to enforce rights in the protected work effectively 
against all direct infringers, the only practical alternative being to 
go against the distributor of the copying device for secondary 
liability on a theory of contributory or vicarious infringement.'' 125 
S. Ct. 2764 at 2776 (2005).
---------------------------------------------------------------------------
    The Court in Grokster not only clarified its Sony decision, it 
voiced a very clear message to users of the Internet: theft of 
intellectual property is wrong, whether it takes place by stealing a 
physical copy of a movie from a video store or by stealing a movie in 
cyberspace. As Justice Breyer said in his concurring opinion, 
``deliberate unlawful copying is no less an unlawful taking of property 
than garden-variety theft.'' 125 S. Ct. 2764 at 2793 (2005).
    The Internet has opened up heretofore unimagined opportunities for 
consumers to communicate and access information. It has dramatically 
changed our lives. But the Internet is not, and should not be, an 
environment immune to the rules of a civil society. The distribution of 
child pornography is no less vile on the Internet than anywhere else. 
The invasion of personal privacy is no less objectionable on the 
Internet than elsewhere. And the theft of property is no more 
acceptable on the Internet than it is off-line.
    In Grokster the Court made a clear and forceful statement that 
theft on the Internet is wrong and the law provides remedies against 
both those who engage in Internet theft and those who entice others to 
steal copyrighted works. Content owners hope that Grokster will usher 
in a new age of cooperation among content providers, consumer 
electronics manufacturers, information technology providers and ISP's, 
all aimed at providing consumers with legal, flexible and convenient 
choices for entertainment and information.

    The Chairman. Yes, we have a vote on, gentlemen, 
unfortunately. We'll stand in recess for about 10-15 minutes, 
until we get back, please. Thank you.
    [Recess.]
    The Chairman. I'm sorry for the delay.
    Mr. Kerber, you mentioned there could be appropriate 
initiatives to follow up on the Supreme Court decision that 
would solve some of the problems. What do you mean?
    Mr. Kerber. I think what gets mixed up in the whole concept 
of this--and, as I said, I'm a business person, the problem has 
never been technology, in our experience with the entertainment 
industry. When we went to the--I'm going to just use this as an 
example--when we went to the entertainment industry, we are 
as--about--far out on the outside of the--I wouldn't know a 
record executive if I fell over the top of him at that point 
when we had gone to the entertainment industry, and the labels. 
And what we did was, we went in with a demonstrated business 
model that we thought would make money within the industry. We 
thought that if you do certain things, this model will work on 
the consumer basis it's compelling to give the consumer.
    Now--then what we did was, we went and said, ``This is the 
technology we're going to put underneath this business model in 
order to enable it.'' And it was received with every major 
label in most of the indies and moving on to all of the other 
digital media opportunities we have.
    I think a lot of times what is mistaken here, and I say the 
appropriate--I think you have to go in--these people are 
business people, they run publicly traded companies, they have 
responsibilities to their shareholders. They have to be sure 
that the folks that they're doing business with will succeed. 
If you're in business, you want your partners to succeed. And I 
think that there's just a lot of misconception out there. So 
when I say the appropriate--being appropriate about it is 
following the right protocol in order to gather up these folks 
and become partners in the distribution of digital media.
    The Chairman. I'm really looking for the question of 
whether any of you at the table will seek to have Congress 
address this decision and alter the course of events in any 
way. Any of you seek to have a change, following this court 
decision, of the way Congress addresses the issue of privacy on 
the Internet?
    Mr. Bainwol?
    Mr. Bainwol. No. We believe the Court struck the right 
balance, and Congress should leave well enough alone. As Mr. 
Baker suggested, if we live life a little bit and see that 
there are issues down the road--but right now it's very clear 
that you have a very broad consensus. Tech companies are happy. 
Content's happy. The Court did the right thing, and they found 
the right balance, so let's let it go and see how it works.
    The Chairman. But if you own some of those rights, 
copyrights, would you be happy?
    Mr. Bainwol. We are happy with this outcome. Yes, sir. I 
mean, that's the point.
    The Chairman. I said if you owned the copyrights, would you 
be happy?
    Mr. Bainwol. Yes, sir. No, as we--we are companies that 
have copyrights, and we believe that the right balance was 
struck here. Our view is that we want to be able to engage in 
business in the digital space with responsible partners, and 
those are folks like Greg Kerber, from Wurld Media, who believe 
that we ought to be compensated for our property. So, there is 
a way to have a bright future for peer-to-peer that provides 
music for fans and also provides compensation for creators.
    Mr. Eisgrau. Mr. Chairman?
    The Chairman. Yes, sir, Mr. Eisgrau?
    Mr. Eisgrau. Thank you, sir.
    I would simply note, for the Committee's consideration, 
that the collective--the voluntary collective licensing model 
that we're suggesting--which would not require legislation, to 
answer your question, but probably would require some committee 
encouragement in order to explore more fully--has the potential 
to provide revenue to copyright holders, by the millions, who 
are not presently within the large record-label system. There 
are many--I can't quantify it for you exactly, Mr. Chairman, 
but I have to believe there are many songwriters, there are 
many performers who are out there waiting on tables and working 
other jobs, perhaps hoping for a record contract, and who are 
using peer-to-peer to a good degree to get their music out 
there, but presently, without a voluntary collective licensing 
setup, there is no way for them to receive compensation. So, to 
the extent that there is a role for the Committee to play, I 
suppose the good news for the moment is, it is not legislative 
with respect to copyrights, but exploration, we believe, of a 
collective--voluntary collective license of this kind has the 
potential to maximize peer-to-peer technology not just for the 
major record labels and companies, of which there are four, 
soon to be three, but literally for thousands and thousands of 
individuals. And we hope that's of interest to all of the 
appropriate committees of jurisdiction, perhaps even small 
business, that I note a number of members of this committee 
also sit on, sir.
    The Chairman. Mr.--Heesen?
    Mr. Heesen. Correct, thank you.
    As I said in my statement. We are not coming to Congress to 
look for any legislative changes here, but we would urge 
Congress to continue to look at the suits that are filed as a 
result of this decision, and the numbers that are filed, and, 
at the appropriate time, if it becomes to the point of another 
area where the entertainment industry continues to sue and sue 
and sue, then I think we may have to come back and look at 
that. But, at this point, we think, as we stated, that there 
should be some breathing room here and everyone, kind of, look 
at the decision and let the courts and the marketplace work 
things out.
    The Chairman. Well, do you believe--do you all believe that 
we should just, sort of, accept the fact that there's going to 
be illegal file-sharing, and it will increase over the years?
    Mr. Bainwol?
    Mr. Bainwol. Yes--no, sir. We--illegal file-sharing is 
wrong. It needs to be contained. And we need to----
    The Chairman. How do you----
    Mr. Bainwol.--help foster----
    The Chairman.--propose to do that? How do you propose to do 
that?
    Mr. Bainwol. Well, with Grokster--the Grokster decision was 
a good first step, because it provided moral clarity, and it 
tells the world and it tells parents and teachers that there's 
a right way and a wrong way. What we've got to do is de-
mythologize this whole question. And you've got companies, like 
those that my fellow panelist represents, who basically are the 
equivalent of Jesse James robbing the bank and then coming back 
to the bank and saying, ``we want the franchise to provide 
security for that bank.'' They take our property, and then say 
they want to be licensed. If--there are legitimate players out 
in the marketplace. They are doing fine with licenses.
    Now, what we can do to protect and to move toward a world 
that is more legitimate is simply to use--we've got to enforce 
the laws that are on the books. We do that--self-help--we 
engage in our own litigation to make sure that there's a 
deterrent. The Government is stepping up in a huge way. The 
Department of Justice has done a great job in going after these 
networks. And that's really the secret. We've got to create a 
society, foster society, where the value of IP is recognized 
and appreciated and kids are taught that there's a right way to 
do this, and you ought to pay for it.
    Mr. Eisgrau. Mr. Chairman, may I respond? The people I 
represent were just impugned to a pretty serious degree.
    The Chairman. I'm out of time, but go ahead.
    Mr. Eisgrau. Thank you, I appreciate that.
    Very briefly, these are very complicated issues, and I have 
to make a respectful plea for precision in language.
    The companies that were at issue in the Supreme Court's 
decisions, the other companies who are members of Peer-to-Peer 
United, do not take anybody's property. They are software 
developers, sir. They have developed pipes, pipes in the way 
that the Internet is a pipe and broadband connectivity is a 
pipe. They have created a product that people do, in fact, 
misuse--and do, in fact, significantly misuse--to infringe the 
copyrights of the companies Mr. Bainwol represents. But there 
are no thieves in P2P United, sir. There are companies who have 
attempted, over years, to work with the labels, going back to 
2003. This committee heard evidence a year ago, in the 
Competition Subcommittee, of potential blacklisting by the 
labels in the form of a deal between RealNetworks and 
StreamCast, one of the cases--one of the parties to the Supreme 
Court's case.
    So, my point is simply, Mr. Chairman, that we need to be 
very focused on exactly what this technology is, what kind of 
actions parties in this space are pursuing. And if we're going 
to maximize the potential of this technology, then I would 
respectfully suggest to Mr. Bainwol that his hope--and Mr. 
Goldring, the Hollywood music lawyer, backs me on up on this--I 
would hope that we would look at the realities of the 
marketplace, not just as we hope they might be, but as they 
are, and maximize the potential for all copyright holders, not 
just the institutional ones Mr. Bainwol represents.
    The Chairman. I'm out of time, but I'm really concerned 
that the Internet service providers seem to be telling us, 
``Look, we provide this service, but we can't control what goes 
on, on it.'' It reminds me of the old story about the piano 
player in the gambling hall, or the house of you-know-what, not 
knowing what was going on. Now, you know, somewhere there's a 
responsibility here to look at the Supreme Court opinion and 
say that there's a way to move forward and say, ``We're not 
going to condone the illegal use of intellectual property.'' 
Now, I don't know where it is, but I hope we can find some 
response to that.
    Senator----
    Mr. Eisgrau. You will find that, exactly, on our website, 
for starters, Mr. Chairman.
    The Chairman. Senator Inouye?
    Senator Inouye. Thank you, Mr. Chairman.
    Mr. Bainwol, Mr. Attaway, Mr. Eisgrau suggested that this 
decision will have no practical effect or impact on our 
marketplace. What are your thoughts?
    Mr. Attaway. Senator, I think he is wrong. I think it will 
have a huge impact on the way that the parties behave and on--
ultimately, on the amount of piracy on the Internet. I think 
this case, even though it was a compromise between the various 
interests, creates strong incentives for all of the parties, 
including the ISPs, to work together to address the problem of 
piracy.
    And, to respond to the Chairman's earlier question, I think 
right now that's good enough. If, ultimately, this decision 
does not create the appropriate atmosphere to deal with the 
piracy problem, then I think maybe the Congress does need to 
act. But, for right now, this decision, I think, provides what 
we need to deal with--with piracy on the Internet today.
    Mr. Bainwol. Let me just simply add, there are a lot of 
numbers flying around about usage, and it gets very confusing, 
because you have files that are spoofed, you've got users that 
are not real. The best set of numbers that I've seen come from 
an outfit called MPD, because it's not attitudinal, it's 
actually a monitor of 10,000 households, so the data's fairly 
reliable. And what that tells us is, over the past 2 years, the 
P2P illegal use has gone up just a touch, but has basically 
been flat, as broadband has gone up by--Mr. Baker, what, by 
about 50-55 percent in the last couple of years? So, broadband 
has been soaring, but P2P use has been relatively constant in 
the very best measure that we can identify.
    Two years ago, if you looked at the percent of households 
that engaged in the legal acquisition of music over the 
Internet, it was zero, basically zero. That's about 4 percent 
today. Those lines are going to cross. The illegal household 
numbers, 9 or 10 percent, that's going to hold flat. With the 
Grokster decision, that will probably even come down. The legal 
marketplace is going to go up, and shoot up toward 25-30 
percent over time. And the question is how fast those lines 
intersect.
    But Grokster provides the societal message that there's a 
right way and there's a wrong way. Those lines are going to 
cross sooner as a consequence, and that means we'll be able to 
invest more in new art.
    Senator Inouye. Then your predecessor was wrong, in your 
mind, as to her comments?
    Mr. Bainwol. I think my predecessor may have been 
mischaracterized. She has told me that. We believe that, in the 
end, this is about the marketplace. There's no question. But 
the question here is whether it's a legitimate marketplace or 
an illegitimate marketplace. And this decision will help create 
a day where the legitimate marketplace can take off. That's why 
it was so important that Mr. Kerber said that, after this 
decision, venture capitalists started calling him with a 
greater level of interest. Capital will flow. Once we respect 
property, then the basis of our great system has a chance to 
take off.
    Senator Inouye. Thank you.
    Mr. Kerber, in your testimony, you suggested that your 
technology will enable you to download--customers to download 
and share every kind of digital media without viruses, without 
child pornography, unauthorized content, et cetera, et cetera. 
You really believe that you can have a pristine environment 
like that?
    Mr. Kerber. Absolutely. We--it's built, and it has been in 
beta for 7 months, and it's about to go out to the public on 
Friday of next week.
    The bottom line with this, in our minds, from a business 
standpoint, technology is not the equivalent of anarchy. The 
thing that is so dynamic and great about technology is--I mean, 
if you could imagine eBay, and if you could imagine Wal-Mart 
for that instance, where they lose control of their supply 
chain and how they would service their customer, the 
scalability of a peer-to-peer is--there's nothing equivalent to 
it in the distribution of content. In a centrally controlled 
peer-to-peer, with what we call traffic cop that knows what's 
out on the network, and that allows consumers a centralized 
search with decentralized distribution, meaning that the 
consumer participates in the distribution, is absolutely 
doable, and we have succeeded in building that system.
    Senator Inouye. Mr. Heesen, you commented that this 
decision will have an impact upon your investors. It makes no 
difference what the technology is?
    Mr. Heesen. Venture capitalists invest in those 
technologies that they believe, at the end of the day, will 
give them a significant return on investment for pension funds 
and colleges' endowments, while, at the same time, making sure 
that the technologies that they are investing in have as few 
roadblocks to success as possible. You lower the roadblocks, 
the more likely the venture capitalist is going to invest in 
that particular technology.
    So, right now we have invested heavily in the life-science 
area. If suddenly Congress decides to change healthcare policy, 
you could very easily see that money leave the life-science 
area and go into another area that has fewer roadblocks.
    So, when you have certainty and fewer roadblocks, you are 
going to have a venture capitalist looking much more seriously 
at that particular technology, particularly in an area where 
they think, at the end of the day, there is, once again, a 
destructive technology out there that can change the way we 
live, while, at the same time, making a very handsome return 
for its investors.
    Senator Inouye. Would your investors believe that 
technology to prevent illegal downloading will make money or 
lose money?
    Mr. Heesen. You know, frankly, I couldn't tell you what a 
venture capitalist would be thinking in that mind. I would 
think that they would be looking at it from the point of view 
as there is probably thousands of companies trying to do that 
today, and the venture capitalist would look at it and say, of 
those thousands of companies, which two or three have the 
potential to take control of that market and then try to work 
specifically with those companies to make those companies 
successful.
    Senator Inouye. What are the benefits, Mr. Eisgrau, of 
this--convening this convention of relevant stakeholders? What 
would you--what would be the outcome of that now----
    Mr. Eisgrau. I appreciate that question.
    Senator Inouye.--that people like Mr. Bainwol and Mr. 
Attaway say it won't work?
    Mr. Eisgrau. I think the outcome, first and foremost, 
Senator, will be knowledge. It will be a group of people 
convened by the Committee with substantive technical knowledge, 
with experience in the marketplace, who, with no disrespect to 
my fellow advocate, Mr. Bainwol, are not simply advocates, but 
folks who actually understand, in great detail, how the systems 
might work.
    If I might share with you, Senator, in the event that that 
process somehow did manage to produce a voluntary collective 
licensing system to serve alongside with every new technology, 
such as that of Wurld Media, that might come along, no 
contradiction between that, sir. Let me share just a couple of 
quick bullet points of what might come about with that sort of 
a system:
    Artists and rights-holders will get paid for what are now 
literally billions of noncompensable music downloads.
    Government intervention in the market will be limited, 
because it's a voluntary system.
    Broadband technology will get a very significant boost, 
because the so-called ``killer application'' of broadband--
namely, Internet file-sharing--will be lawful and enabled.
    Investment dollars, one might presume, will pour into the 
newly legitimized system.
    Music fans will finally have completely legal access to an 
essentially unlimited selection of music, whether it's offered 
from a major label or not.
    The distribution bottleneck, as I alluded to earlier, that 
has limited opportunities for independent artists, will be 
removed.
    And payment will come only from those persons who choose to 
participate in the system.
    I can't promise you, Senator, that all of those things will 
come to pass. I think the potential that they might warrant at 
least serious discussion, and, conversely, should not entitle 
any individual stakeholder to say, ``We're simply not coming.''
    Senator Inouye. Thank you. My time is up.
    Mr. Eisgrau. Thank you, sir.
    The Chairman. Senator Pryor?

                 STATEMENT OF HON. MARK PRYOR, 
                   U.S. SENATOR FROM ARKANSAS

    Senator Pryor. Thank you, Mr. Chairman.
    Mr. Eisgrau, if I may start with you, just--and I may have 
missed this, because I had to step out for the vote, and I may 
have missed what you said in your opening statement, but just 
give us, if you can, the bottom-line impact that the Grokster 
decision has on your industry.
    Mr. Eisgrau. Litigation. The----
    Senator Pryor. Does it create uncertainty for you?
    Mr. Eisgrau. It certainly does, sir. The one certain thing 
is that there will be additional litigation regarding the 
parties to that specific case. There is much that remains 
uncertain about the law of secondary liability and how this new 
inducement test the court articulated will play out.
    Senator Pryor. Do you see that the growth in the industry 
that you've had in the last several years, which has been 
fairly phenomenal----
    Mr. Eisgrau. Yes, sir.
    Senator Pryor.--has it not? Do you think that growth will 
be sustained, or do you see steady growth, or what do you see?
    Mr. Eisgrau. We certainly do see steady growth. The Rolling 
Stone article I alluded to in my testimony also reported that 
the current level of peer-to-peer usage would be about nine 
million uses per month, Senator.
    Senator Pryor. Are you--if you can speak for the industry, 
is your industry happy with the decision, or not?
    Mr. Eisgrau. I'd have to say that, based on the statements 
of the parties to the case, the public statements that were 
made, that they were certainly disappointed in the Court's 
focus on what the court believed to have been established facts 
in the record. They are hopeful and confident that when this 
goes back to the District Court, that some of those 
misunderstandings may be clarified. I think they were also 
disturbed, as many technologists, the Consumer Electronics 
Association among them, noted, with the uncertainties in the 
secondary liability standards that we're now living with that 
will have to be played out in the courts.
    Senator Pryor. All right. Let me ask about Grokster in 
terms of domestic versus international considerations there, 
particularly with offshore peer-to-peer companies. What does 
Grokster do with domestic versus offshore?
    Mr. Eisgrau. If I understand your question, Senator--please 
interrupt me if I don't--Grokster, itself, is incorporated in 
Nevis, West Indies. That did not stop them from voluntarily 
fully participating, quite clearly, all the way to the Supreme 
Court in this litigation. One other member of Peer-to-Peer 
United is based in Spain, and the others are absolutely born-
and-bred U.S. companies from the State of Oregon, the State of 
Florida, and the State of New York.
    Senator Pryor. So, you don't see any differentiation 
depending on what nation they're----
    Mr. Eisgrau. Doesn't appear to be, sir. What I can tell you 
is, there is a big difference between the companies that 
founded P2P United two years ago and the companies that said, 
``You know what? We can hide in the shadows. We don't have to 
deal with anybody. We don't have to try to negotiate licenses 
with the recording industry, only to have the plug pulled on 
the deal as a result of a black list.'' What we do find is that 
this problem that scholars have referred to as the imminent 
``Darknet'' is a very significant danger. And the continuing 
attitudes that the members of my association have are, that 
they not to be dealt with because they're pirates, or worse, we 
believe, with respect, is highly counterproductive.
    Senator Pryor. Well, just for the whole panel, I'd like to, 
after the hearing or whenever it's convenient, if you all ever 
want to talk about the Darknet and some of the issues that he's 
referred to, I'd enjoy doing that.
    Let me ask, if I can, Mr. Kerber, what impact does Grokster 
have on your business, in your industry?
    Mr. Kerber. I think what it has done, coming from the 
financial world, in my background, certainty is a good thing 
for the financial world. So, what it has done for investment 
is, it's made a clear path for those venture capitalists, any 
type of investor--equity investors, hedge funds--that would 
come in and invest in the potential of a small company that can 
flourish in the potential growth that digital media offers. It 
allows that to occur now. I think that from what we can see in 
the marketplace, just based on our own experience, that what 
it's enabled and what it has done is, it's made the equity 
investor, who has a fiduciary responsibility to their 
investors, to--comfortable with investing in what was a rogue 
technology for a very long time.
    Senator Pryor. OK. Mr. Heesen, we've been talking about the 
changes that Grokster has brought to all of you. Let me ask you 
this question. I assume, with the changes that we've all talked 
about, there could be new business opportunities. Do you see 
some new business opportunities, or do you see a--what do you 
see for the future, in light of Grokster?
    Mr. Heesen. Well, I agree that I think there is a bit more 
certainty. There are some issues regarding secondary liability 
that we continue to be concerned about. Frankly, if I were 
going to tell you what technologies are going to come out as a 
result of Grokster, I would not be representing my membership 
well, because they're the ones who want to be finding those 
technologies and creating those jobs and finding those good 
companies out there to invest in. So, all of that is being 
worked on, frankly, in garages all across the country by 
entrepreneurs right now, and they're not going to tell me that 
answer, and they certainly aren't going to tell you, Senator.
    Senator Pryor. OK. If I may, Mr. Bainwol, flip over to you 
very quickly, because I know we're--the clock is running here. 
But, as we all know, throughout the course of the music 
industry, there have been technologies out there, things like 
cassette tapes and even people pressing unauthorized vinyl 
copies, et cetera. I know that, like back in the 1960s and 
1970s, you had the basement tapes, you know, from various 
groups, including Bob Dylan and a bunch of others. But how--as 
a--in comparison with that type of piracy, you know, where 
people were copying albums and distributing to friends or sold 
them, kind of, black market--compare that sort of regime to 
what we're looking at with the peer-to-peer. Compare that.
    Mr. Bainwol. Yes, there are two huge differences. One is 
quality. When you taped off the radio, you had a degradation of 
quality. Now you can get perfect digital copies. And, two, your 
ability to share exponentially with millions of people around 
the world is immediate and automatic. So, that's the challenge. 
The nature of the piracy is far more virulent, and the velocity 
of the piracy is far faster.
    I'd like to take a second, if I could, on a point that Mr. 
Eisgrau raised. We have licensed, happily, lots of legitimate 
players throughout the digital space, including the peer-to-
peer world. Licensing's not a problem. There are songwriters 
who have lost their livelihoods--and artists and musicians--not 
because of that--some of these illegitimate folks in the P2P 
space have not been licensed. They have lost it precisely 
because they have set up systems that are predicated on theft. 
The Supreme Court said the objective is unmistakable.
    The fix here is for these companies to say, ``We're going 
to embrace legitimate commerce. We're going to go straight. 
We're going to convert. And we're going to shut down our 
systems and go straight.'' That's the answer.
    Senator Pryor. Mr. Attaway, last question, and that is, 
pirating movies is a growing phenomenon. We know that. We see 
that all over the world. Are there any differences in--from 
your standpoint, in the illegal sharing of music files versus 
video files? And I guess what I'm asking is, if there is, tell 
us what they are and tell us whether you think Congress should 
be involved in that in any way.
    Mr. Attaway. Well----
    Senator Pryor. That's it.
    Mr. Attaway. There are no legal differences. Fortunately 
for the motion picture industry, there are technical 
differences, in that it takes a much bigger pipe to download a 
full-length motion picture than it does a musical work. But, 
either way, it is theft, it is piracy, and it needs to be dealt 
with. As I said earlier, I think the Supreme Court decision, in 
Grokster, has given us tools to deal with that issue, and I 
don't think that there are major things that Congress needs to 
do right now to help us. If the tools we have turn out to be 
inadequate, we very well may be back up here asking you to help 
us deal with this problem.
    Senator Pryor. Thank you, Mr. Chairman.
    The Chairman. Thank you very much.
    Senator Ensign?

                STATEMENT OF HON. JOHN ENSIGN, 
                    U.S. SENATOR FROM NEVADA

    Senator Ensign. Thank you, Mr. Chairman. And thank you for 
holding what I consider to be a very important hearing on a 
difficult issue, as we're seeing here at the table. 
Intellectual property is one of our biggest exports from 
America. Intellectual property is very valuable, and I agree 
with those who think that intellectual property rights need to 
be protected. Whether you are a recording artist or a motion 
picture producer or software developer or whatever it is, 
somebody who has created something--just like somebody who has 
a patent--must have adequate protection for his or her 
intellectual property.
    Having said that, if we could explore this idea of 
disruptive technologies--not just with the idea of peer-to-
peer, but disruptive technologies from an investing standpoint. 
From venture capitalist perspective, Mr. Heesen, can you 
address how tertiary liability could potentially affect 
investing in disruptive technologies in the future. Such 
disruptive technologies have the potential to foster huge 
breakthroughs in healthcare that could save lives. Similarly, 
disruptive technologies can impact the economy in ways that 
extend beyond what we're just talking about today.
    Mr. Heesen. It's an absolute major issue. If the venture-
capital firm, itself, and the individuals of that venture-
capital firm, can be sued because they invested in a technology 
that is perfectly legal, but that somebody other than--and that 
technology move forward, and they invested in that company, and 
that company was doing perfectly legal things, and somebody 
else comes along and starts doing illegal things as a result of 
that new technology, and we are sued because of that, that 
would shut down our interest in that area. I mean, it's just--
it would very quickly dissipate. And venture capitalists are 
very agile in shutting down companies and moving on to 
something else. I mean, it's something that we don't like to 
do, but it's done very quickly. And so----
    Senator Ensign. Can you----
    Mr. Heesen.--we would move into another area of technology, 
absolutely.
    Senator Ensign. Along those lines, can you give me your 
thoughts on the distinctions between being a passive investor 
as a venture capitalist, versus an active investor with 
management responsibilities or the appearance of management 
responsibilities.
    Mr. Heesen. Well, venture capitalists will take an active 
role in the overall operation of a company, in the respect that 
they are putting money in, and it's very often substantial 
amounts of money, and they're saying, you know, ``We want to 
see this company go in this direction over the next 10 years.'' 
It's--we don't care about what's happening in a--frankly, in a 
day-to-day operation, but from a 5- to 10-year perspective, we 
want to see that company grow to the point where it can be 
acquired by a larger company or it can go public. And so, 
anything that comes along that is going to change that outcome, 
we want to know about, and we're going to take an active role 
in making sure that the long-range goals of that company remain 
the way we'd like to see them. We don't always have a majority 
stake in companies. Most of the time we might have 10 to 15 
percent, and there might be a couple of venture-capital firms 
that, together, may have a majority ownership of a company. But 
it depends on the technology, actually, very often.
    Senator Ensign. Mr. Bainwol, I want to be fair to your 
industry in this regard, and I know you have a different 
opinion about this. If you could address the concern that I 
just raised about disruptive technologies, the idea of things 
that could tremendously change people's lives for the better, 
and the fear of venture capitalists that if there is tertiary 
liability it could shut down the investment necessary to 
develop disruptive technologies.
    Mr. Bainwol. Right.
    Senator Ensign. Please discuss this issue from your 
industry's perspective.
    Mr. Bainwol. Sure. I think the key thing is--I guess there 
are two points. One is to distinguish technology from conduct. 
Grokster is not about technology. Grokster, the decision, 
itself, is tech neutral. The decision is about conduct. They 
said the objective of these entrepreneurs was unmistakable, 
which was basically to perpetrate a fraud, it was to induce 
second--to induce illegal behavior; and, therefore, they said, 
they're responsible for it. So, the question here is conduct, 
not technology.
    I'm not an attorney, so I can't speak to questions of 
tertiary liability. But if you engage in that conduct, then 
that's probably not tertiary. And that's really the relevant 
question. When you get involved, and you actively manage and 
you make choices, and you are responsible for that conduct, 
then it's not tertiary. And then you're, I think, well within 
the grasp of this decision.
    Senator Ensign. Mr. Eisgrau, you wanted to comment?
    Mr. Eisgrau. Just a brief word, sir. I don't disagree with 
Mr. Bainwol's characterization about what the court said about 
the potential culpability of conduct after further judicial 
proceedings. I would take respectful issue, however, to say 
that the uncertainty that is left in the wake of the Supreme 
Court's recent ruling with respect to exactly what the 
parameters of secondary and, as you point out, tertiary 
liability for investors might be, ought to be of some concern. 
And certainly P2P United and the Electronic Frontier 
Foundation, with which we co-prepared our testimony, would 
concur with that of the National Venture Capital Association in 
flagging this for the Committee and urging it to, kind of, keep 
a weather eye out for potential disincentives to invest based 
on the uncertainty of those legal standards.
    Senator Ensign. To finish out on this, is this something 
that needs to be clarified in law?
    Mr. Heesen. At this point, we would say that it's best 
for--as I said, to have some breathing room here. We would not 
be run--we do not believe that we should be running to Congress 
at this point to have any changes made. I think that the courts 
have a responsibility right now, and we were--take a wait and 
see attitude at this point.
    Mr. Eisgrau. Senator, if I may, again, very briefly, we 
would agree with that, insofar as the standards of liability 
are concerned. But both the Venture Capitalist Association and 
our testimony points out that potentially crushing an 
astronomical statutory-damage liability may no longer have a 
place in this now-uncertain environment, and that is something 
that could be statutorily reformed and, we think, merits 
discussion both in this committee and other committees of 
jurisdiction.
    Senator Ensign. I want to ask Mr. Kerber a question.
    Mr. Kerber. Yes, I--if I could respond----
    Senator Ensign. Hold on. Maybe in your response----
    Mr. Kerber. OK.
    Senator Ensign. Let me get my question in first, because my 
time is about to run out.
    Mr. Kerber. OK. Go ahead.
    Senator Ensign. In your testimony, you state that the 
Grokster decision clearly illustrates that our system of 
government is working to achieve the correct balance between 
protecting the creators of intellectual property and advancing 
technology. Do you believe that the inducement standard 
provided in the Grokster decision is clear enough to guide your 
future activities as a peer-to-peer company?
    Mr. Kerber. Yes, I do. And I also would add, the protection 
of the consumer in that statement, also. It's very clear how 
you get investment. The rules are there. We're a P2P. We're a 
real peer-to-peer. It's centrally controlled. We can control 
that and put out on it. We can respect the copyright holder's 
wants during--through a contractual process. And the way that 
investors realize that is when they--when we go out and get 
deals with the record labels, movie studios, and they do their 
due diligence, the venture capitals do their due diligence, 
they call, and they find out that, yes, these guys--in our 
minds, the content owners of these assets, yes, we will allow 
this to be transferred and distributed and sold on the network.
    So, you know, going back to the clarity issue, there is 
one. It's very, very clear. If you have a contract from a major 
label, indie label, movie studio, publisher, what they have 
said is, ``We will allow the content to be sold in this manner 
across our network.'' So, I'm a little confused by--there's an 
absolute clear path for an investor to understand what's right 
and wrong in the process.
    Senator Ensign. Well, Mr. Chairman, this hearing is very 
important, because it also illustrates--and this is something 
Mr. Bainwol talked about--that we have a generation of kids who 
grew up thinking it's OK to steal music, it's OK to steal 
movies, it's OK to steal video games, whatever the intellectual 
property is. And I think that the Grokster decision could be a 
turning point, as far as morality is concerned in this country. 
The Grokster decision may help to teach the next generation to 
respect private property--the same as it's wrong to break into 
somebody's home, it's wrong to break into an artist's library 
and steal their content. I think that is an important lesson to 
teach the next generation as it matures. I don't know how much 
we can do about the generation that just grew up and is in its 
20s now. But certainly--you know, I've got a 13-year-old at 
home, and younger, and they are actually talking about it now 
differently than kids were talking about it even 5 years ago. 
They're understanding that they need to purchase music and the 
like if they're going to download it legally. And I think that 
that's a dramatic change that we need to continue to enforce 
and look for ways that we can encourage that type of behavior 
in this country.
    And I thank you, again, for holding this hearing.
    The Chairman. Well, the Senator's--you're right, but the 
real problem that I have--we were informed that--there was a 
discussion here this last week about the European Commission 
and what they're trying to do and bring about a gradual 
response to--from the providers, themselves, to illegal file-
sharing. It doesn't sound to me like there's any motivation 
here for a mechanism to bring about some standards for the 
future, as far as these organizations are concerned, some type 
of body that would come into being by mutual desire to sort of 
set standards that will look toward copyright protection. Am I 
wrong? Is there any motivation here in the industry to do 
something, because of Grokster, that will give us a concept of 
pushing back a little bit and saying, ``Look, this is not 
right, and we're not going to condone it, we're not going to 
deal with people who do encourage this type of activity''?
    Mr. Baker. If I may, Mr. Chairman, I don't think that a 
European Commission-style impetus is necessary here. I think 
we're all in agreement that we don't condone it, and I think 
that the Court was abundantly clear that one may not induce 
others to infringe on copyrights. And so, I think that this is 
being dealt with----
    The Chairman. Well, I'm informed that the commission has 
taken the position that they want to bring about a situation 
where the ISPs notify their clients that they're going to be 
watching to see whether they, in fact, condone illegal 
activity. Am I wrong?
    Mr. Baker. That--I'll agree with your characterization of 
what the European Commission said. But, again, here, we've all 
made abundantly clear to all of our members--and not just our 
company, but Internet providers, across the board, whether 
they're independent Internet providers, phone companies, cable 
companies, whoever--that we don't condone this. But the problem 
is that you can't take the provider of the pipe and make them a 
policeman. We transmit literally terabytes of information every 
hour. It would be absolutely--I mean, it's physically 
impossible to monitor all of the traffic that crosses our 
network. I mean, we do monitor--we're able to filter out 
viruses, we're able to filter out spam, we're able to filter 
out spyware, things like this, but there's no way, when there's 
just a music file or something that's just coming across the 
network, number one, to readily identify what those bits of 
information are, number two, to know whether a--whether there 
is a copyright on that, whether somebody's downloading it 
legally, illegally, et cetera.
    The Chairman. Wait a minute. Do you mean to tell me the 
provider won't know that--if there's constant illegal activity 
going on in its system?
    Mr. Baker. That's what I'm saying, Mr. Chairman. Trillions 
of bits of information every hour transmit across our network, 
and----
    The Chairman. But--you're telling me they don't know? Is 
that what you're saying?
    Mr. Baker. I'm saying that, as an Internet provider, we 
don't know when just these bits of information flow across our 
servers and routers and off to other carriers and across 
backbones that--to know what that content is, much less if it 
is a--if it is, say, a music file, whether that's been paid for 
by a legal service, or illegal. Now, some products, such as 
Apple iTunes, for instance, have a different format; and so, 
are readily identifiable. And so, there's a pretty high level 
of confidence that those have been paid for. But if it's just 
something like an mp3 file, it's just a generic format. There 
are, again, just by looking at those bits of information, 
though, you can't tell whether a fee has been paid on that or 
whether that was pirated.
    The Chairman. Well, I've got to yield to the Senator from 
California, but one of the reasons that this hearing is being 
conducted is, we want to, sort of, send a notice, we are going 
to be watching. We want to know, What are you going to do to 
follow up on this to take the path the Court seems to think 
could be taken to give greater protection to this copyrighted 
material? And I don't hear much, myself, that indicates that 
there's going to be any attempt to find some ways to set some 
standards and to do what the Senator from Nevada suggests, to 
bring into the new generations a concept that we do not condone 
stealing property. Now, I hope that we're being heard. I do 
hope we're being heard, because there are people in the Senate 
who want us to move now, and we're holding a hearing to try to 
see what is going on in these industries to see what might be 
done to terminate this illegal activity.
    The Senator from California?

               STATEMENT OF HON. BARBARA BOXER, 
                  U.S. SENATOR FROM CALIFORNIA

    Senator Boxer. Thank you, Mr. Chairman.
    I want to associate myself with the remarks that you just 
made. And I just want to take a minute to talk about the way I 
see the Grokster decision. And if I get something wrong, I'd 
appreciate if any of the members of the panel, our 
distinguished panel, will let me know if I'm not interpreting 
it right. And then I have a question of Mr. Eisgrau.
    Grokster was a unanimous decision, and that's very rare, 
that the court's justices, who represent a range of judicial 
philosophies and personal perspectives come together in 
agreement. And, to me, it's easy to see why, notwithstanding 
Mr. Eisgrau's comments--but I have disagreements with Mr. 
Eisgrau on a number of issues.
    Fundamentally, the Court was simply saying that theft is 
wrong, no matter how you dress it up. And I would agree with 
Senator Ensign that we do have a generation out there that 
says, ``The best things in life are free, and it's mine.'' But 
I think they are learning. Even that generation is beginning to 
see the light, because of the work of companies like Apple, for 
example, who's now making money doing something right. They 
help us understand that property is property. If somebody 
steals a bike in front of your house, they're a thief, and if 
they steal your music, they're a thief. And that's just as 
simple as it gets. And especially theft of intellectual 
property, which is the strongest commodity that we have. Mr. 
Chairman, at this point what makes America so great is our 
intellectual property.
    Companies that create a business based on promoting the 
theft of intellectual property, and advertise their technology 
for such illegal uses, should be held accountable. And I don't 
think venture capital should go to them. It's ridiculous. And I 
appreciate Mr. Heesen's comments, that he doesn't think we 
should have, legislation at this particular point. That he is 
not that worried, because venture capitalists don't want to put 
their money in something that's involved in thievery or that 
will, in fact, result in pornography getting to our children, 
which is the most despicable thing I've ever seen in my life.
    You know what I'm talking about, Mr. Eisgrau. You've seen 
the problem there. You have kids thinking that they're going to 
get somebody's music, and they click on a link, and what do 
they get? They get something horrific that could damage them 
forever. It's a disgrace. And it has to be stopped.
    I sent you a letter, along with a bipartisan group--it was 
Senators Durbin, Gordon Smith, Feinstein, Lindsey Graham, and 
John Cornyn. That's the range of Senators around here. And what 
we basically asked is, ``what are you doing to prevent or 
reduce copyright infringement and illegal access to 
pornography? '' We've written you on more than one occasion. 
When I say ``you,'' let me say exactly who it was--the letter 
was to the owner of Grokster, the president of BearShare, the 
president of eDonkey 2000--I don't like that name, as a 
Democrat--president, Lime Wire, president StreamCast Network's 
Peer-to-Peer United. And it was delivered to Ms. Nicki Hemming, 
CEO, Sharman Networks. We don't have an answer from you. We're 
very concerned about this.
    Now, the court distinguished between situations where a 
company produces a technology that can be used to violate 
copyright laws but has other legitimate uses and a situation 
like Grokster's, where a company actively encourages 
infringement of copyright through the use of its technology. 
It's kind of like the intended use and the side-label use. What 
is the intended use? That's what the Court was getting at.
    And it's important to remember that the Court merely 
clarified the legal situation. The Court didn't find Grokster 
or anyone else liable. The case was remanded for further 
consideration by a lower court.
    A true understanding of the issue will not be known until 
the lower courts have had time to interpret and apply the 
decision in different cases. In a year or so, the content 
industry will have a better idea of whether the ruling has 
decreased illegal file-sharing, and the technology industry 
will be able to assess whether innovation and funding has been 
impacted.
    So, it seems to me this next year is key, but, I agree with 
the Chairman. In a year's time, if you don't move to protect 
copyright, if you don't move to protect our children, it's not 
going to sit well, regardless of what the court has said.
    I think the whole world is watching now, after the Grokster 
decision, and, in that post-Grokster world, I hope both 
industries flourish. Look, for me, it's like choosing between 
children. In my state, I've got Hollywood, I've got Silicon 
Valley. This is a nightmare for me. I've got the venture 
capitalists. I've got everybody.
    So, what do I want? I want everybody to come out of this in 
good shape. But there is a right and wrong here. That would be 
the end of my comments.
    But I do have a question, to Mr. Eisgrau. Can you tell me 
what steps you're taking to respond to my letter, the letter of 
the six of us? In light of the case, how can companies such as 
BearShare and LimeWire continue to promote infringement? 
Shouldn't they take active steps now to stop infringement, even 
though the Court, kind of, said, ``Well, figure it out.'' 
Shouldn't they be moving now? And, if they are, what are they 
doing?
    Mr. Eisgrau. Thank you, Senator. There are a number of 
parts to that question. Let me see if I may respond to them in 
turn.
    First, with regard to your invitation to make a minor point 
with respect to the characterization of the Grokster opinion, 
itself, the Court did not find--it's my understanding--that if 
a technology does not have--that it must demonstrate legitimate 
use to a broadscale degree. In other words, it left the initial 
Sony fundamental premise intact. What I can tell you, Senator, 
with respect to the technologies of P2P United--which do not 
include, regrettably, LimeWare and Sharman, so I can't speak 
for them--on a number of the issues you've raised, starting 
with pornography, first of all, the individuals, many of whom 
are parents and grandparents, that run the companies that are 
members of P2P United, believe that the people who prey on our 
children and who perpetrate child pornography belong in prison, 
or worse. And that's why we've been cooperating with law 
enforcement, to an extensive degree, to try to deal with that 
problem. We mounted a parent-to-parent resource center on our 
own website, which is linked to from every website of the 
members, which provides resources, including how to report 
suspected child pornography, including links to outside 
resources so that parents and others may find out what it is, a 
number of additional resources, as well. We don't support that. 
We do not run computers that house child pornography. We do not 
run computer networks that have servers that, for that matter, 
house copyrighted information, Senator.
    So, the question, if I understood it correctly, that you 
were posing is--in the sense of, What are we doing?--is, How 
might we modify the technology--which, as I said earlier, 
perhaps before you arrived, is a neutral pipe, in the same way 
the Internet and the phone system is a neutral pipe--how might 
we modify that technology to affect what individuals do to use 
it is, frankly--we cannot, and we are not. We believe that the 
solution here lies--particularly with respect to copyrighted 
information--in, perhaps, the kind of system of collective 
voluntary licensing that we were discussing earlier.
    And, if I may take just a half-minute, literally, to flesh 
out what that means, in practical terms, it's a little, 
perhaps, unbelievable, at first blush, to realize that what we 
are proposing is a system that artists and copyright owners 
would elect to participate in. That would mean that it would--
they were saying it's OK for their material to be accessed by 
individuals without their advance permission, as long as those 
individuals pay into a collective. That would mean that what is 
now unlawful downloading activity on the part of these 
individuals would, under such a system, be lawful. In the same 
way that it was illegal to take a drink during Prohibition, it 
would now become legal for that download to occur, because a 
royalty system of compensation would be in place, administered 
by something like ASCAP, and measured by companies that the 
recording industry, itself, now uses, similar to Nielsen and 
Arbitron, to determine what is being downloaded.
    Senator Boxer. Sorry----
    Mr. Eisgrau. Yes, ma'am.
    Senator Boxer.--you lost me somewhere. I'm sorry. You lost 
me.
    [Laughter.]
    Mr. Eisgrau. I apologize.
    Senator Boxer. I want to follow what you----
    Mr. Eisgrau. My point, Senator, is, first, with respect to 
copyright infringement, there are ways to rationalize this that 
do not involve modifying the technology so that the neutral 
pipe is somehow outfitted with a system that allows oversight 
of content. We would share many of the same difficulties in 
looking--in fact, more so than content than the gentleman from 
EarthLink described earlier.
    Senator Boxer. OK.
    Mr. Eisgrau. With respect to pornography----
    Senator Boxer. Would you----
    Mr. Eisgrau.--we're part of the solution, not part of the 
problem. And we agree with you that it is a giant problem. But 
as the General Accounting Office pointed out, it's an Internet 
problem, not just a peer-to-peer problem, as well.
    Senator Boxer. Well, everybody's got to fix it. This is 
damaging, number one. So, let's not say, ``It's not mine.'' 
Yes, it's part mine, it's part theirs, it's part--you know 
what? It's over, here, with this. This has got to end. I don't 
care that you don't like pornography. I don't like--I believe 
that. You're a dad. I'm a grandmother. This is good. But, you 
know what? We're here talking about the public. There's a lot 
of people who make cars who are wonderful, and, you know, they 
don't want to be in a dangerous car, but maybe they're not 
doing their best. And that's why we have standards. So, let's 
just--this isn't about us, personally. When I talk to you, I 
don't mean it personally.
    Mr. Eisgrau. Not taken that way, Senator. Thank you.
    Senator Boxer. But just answer this question. Would you 
agree with this, that several developments have taken place 
which highlight the technological capacity to filter? Would you 
agree that that has happened?
    The Chairman. We have to wind this up, Senator.
    Senator Boxer. I'll wind it up.
    Well, do you agree with that?
    Mr. Eisgrau. No. And if I may drop a very----
    Senator Boxer. OK. Well, then if----
    Mr. Eisgrau.--brief footnote, Senator----
    Senator Boxer.--you don't agree with it----
    Mr. Eisgrau.--it's important.
    Senator Boxer. I have asked you to look at--Wurld Media, 
Mashboxx, and P2P Revolution which have announced licensed 
legitimate direct-to-consumer P2P distribution services that 
will filter for unauthorized works. My time is up. My Chairman 
has been patient. I think we're moving along, and I sense a 
resistance here. Maybe I'm missing it, but that's what I sense.
    The Chairman. Senator Inouye?
    Senator Inouye. Mr. Chairman, I'll try to follow up with 
you and Senator Boxer.
    In the decision, I believe the Supreme Court made it rather 
clear that the P2P activity occurring online is illegal and 
amounts to theft, much of it.
    Mr. Eisgrau. Yes, sir.
    Senator Inouye. Now, you have responded to Senator Boxer 
that you were suggesting a summit meeting to resolve this 
question. My question is, what have you done with your clients 
to discourage them or to prevent your clients from engaging 
further in illegal activity?
    Mr. Eisgrau. Thank you, Senator.
    The illegal activity that might be applicable in this case, 
according to the Supreme Court, would be activity by the 
software developer to encourage users of that software to use 
it in order to infringe copyright. That's the inducement 
language in the Supreme Court's opinion, sir. The members of 
P2P United do not now--and since I have been involved with 
them, I would respectfully submit, do not induce anybody to 
commit copyright infringement.
    With respect to StreamCast, the makers of Morpheus and 
Grokster, the two pieces of software at issue with the Supreme 
Court's case, the Senator from California is correct, that will 
be going back to the trial level to see whether, years ago, an 
earlier version of their software was marketed under past 
practices that might subject them to liability under the 
Supreme Court's new test. But the bottom line, Senator, despite 
what you may hear from elsewhere, we do not induce, we do not 
encourage or condone, copyright infringement. Indeed, if you go 
to our website, there is an unmistakable, very large ``C'' in a 
circle, with a very stern copyright warning, smack in the 
middle of the page, sir.
    With respect to whether we can or--modify, technologically, 
the software in order to somehow filter copyrighted material, 
the systems that Senator Boxer just alluded to, and the 
gentleman from Wurld Media produces, are essentially closed 
systems, as just described here before you. They are not 
traditional open peer-to-peer architecture. That's a 
significant distinction. There would be very serious social, 
scientific, educational, all kinds of ramifications if, in 
fact, Congress were to require or suggest that only so-called 
``closed'' peer-to-peer operating systems were now lawful.
    Mr. Attaway. Senator Inouye, we agree with Senator Boxer, 
and are just as frustrated, that it's not enough simply to say 
that infringement or pornography is bad. There has to be 
something done about it. And that's one of the good things 
about the Supreme Court decision. The Supreme Court looked at a 
number of factors. One of them was the fact that the defendants 
in this case took no action to prevent the massive infringing 
activity that was taking place. We hope that, as a result of 
the Supreme Court decision, there will be incentives for all 
players on the Internet to not just condemn pornography and 
infringement, but to do something about it. And we look forward 
to that happening.
    Mr. Eisgrau. Senator, may I call your attention to 
footnote----
    Mr. Bainwol. I think it's my turn, Adam, if I may. And let 
me just add a precision to your comments. Adam's laid out a 
very elaborate, kind of, scheme to dodge the fundamental 
reality that his companies have not accepted what's gone on 
here. These companies have the ability to shut this illegal-
taking down right now. They're choosing not to. Let's be clear. 
He then goes to this notion of this, kind of, fancy collective, 
which sounds good, but it's less filling. It doesn't work. I 
mean, what he's really saying, at the end, to make it work, 
he's talking about a compulsory license. He's saying, 
``Congress, pass a compulsory license, and let's go ahead and 
take revenue from a mandatory tax on ISPs, and let's take it 
and give it to music rights-holders.'' But--oh, but there's a 
problem. What do you do about movies and software and games? 
You've talked about the size of the intellectual property 
segment of this economy. There is no real practical way to 
follow that suggestion. That's a dodge. It is a failure to 
accept responsibility for the fundamental fact that his 
companies have a business model predicated on theft. They need 
to deal with that fundamental question.
    Mr. Eisgrau. If I may, Senator Inouye, you've been 
affirmatively misled in two respects that are important to 
clarify.
    First, as emphasized in my testimony, a voluntary 
collective licensing system--there is substantial scholarship 
on this--a voluntary collective licensing system is inherently 
different than a compulsory license. The principal difference 
being, one requires legislation, one requires simply having a 
series of good-faith discussions to see if we can get there. We 
are not, absolutely, for the record, calling for legislation or 
a compulsory license of the kind to which Mr. Bainwol 
responded.
    Second, the claim that there is a technological magic 
bullet that a peer-to-peer software developer that makes its 
product available to the public can engage in that creates a 
watertight copyright protection system is simply false, and I 
would urge you and this committee not to take the word of any 
advocate for that, but, rather, convene technical experts who 
can tell you the truth.
    Third and finally, very quickly, footnote 12 of the Supreme 
Court's opinion is important to emphasize. What it says--and 
it's brief--is as follows: In the absence of other evidence of 
intent, a court would be unable to find contributory 
infringement liability merely based on a failure to take 
affirmative steps to prevent infringement if the device was 
otherwise capable of substantial non-infringing use. Such a 
holding would tread too close to the Sony safe harbor.
    The standard for liability in this instance, although it's 
been suggested otherwise at this panel, is not that Company X 
fails to install a filter that meets the approval of an 
entertainment company. If that were the standard, we would 
seriously threaten innovation and capital investment. And that 
ought to be of enormous concern to this committee, sir.
    Senator Inouye. Obviously, I know very little about 
technology, but Mr. Bainwol said that you could stop it right 
now. Is that realistic?
    Mr. Eisgrau. No, sir. That is not. That is not. And Mr. 
Goldring, the entertainment lawyer in the editorial in the 
record, says as much.
    Senator Inouye. Mr. Bainwol?
    The Chairman. Wait, wait, wait. Now, let's take our time 
here, please.
    Are you finished, sir?
    Well, we've got to wind this up sometime, because we've 
been in session here now 5 hours, almost 6 hours, in this 
Committee today alone.
    I do want to say this. Senator Boxer and I rarely agree, 
but when we do I think people ought to listen a little bit.
    [Laughter.]
    The Chairman. We're going to have a hearing this fall about 
the pornography aspect of this. We're talking right now about 
the business models of trying to contain illegal activity. But 
we've got--we're going to get specific about this pornography 
over the Internet. People tell me we can't do anything about 
it. I don't believe that. So, we'll see that this fall.
    But we are also told that, on peer-to-peer, for promotional 
activities, the provider puts out a display and tells people 
what they can see if they watch it. And there are ways of 
demonstrating to the public why they should watch--what they 
should use, a portion of the Internet, as opposed to another 
one. I do think that--if that's the case, that your Supreme 
Court footnote has been met, because there's affirmative action 
on the part of the provider to tell people to look at 
something, and, if they provide a list, and on that list are 
some items that they know are not protected--that ought to be 
protected, and they're not, they're participating in this 
activity.
    Now, I hope--again, I'm back to the point where I said, I 
hope you're listening. Senator Boxer has just provided me a 
good example of the comments I've gotten in the room about, 
``Why don't you do something, Mr. Chairman? Why don't you 
follow up on this Supreme Court case?'' Well, all we held this 
hearing for was to say--to listen to you to see if there is any 
indication that the industry is going to do that. And I, again, 
say to you, the difference between this--I hope that you do it, 
because, if you don't do it, I'm going to move over and be with 
Senator Boxer on this. And I think the whole committee will. 
We've got to find some way to meet this concept of protecting 
our intellectual property. We can hardly accuse the people 
abroad of stealing our intellectual property if we can't 
protect it at home.
    Now, that's the message we've got to give you. And, 
unfortunately, I have to adjourn this hearing right now. Thank 
you very much.
    [Whereupon, at 4:40 p.m., the hearing was adjourned.]

                            A P P E N D I X

              Prepared Statement of Marty Lafferty, CEO, 
           Distributed Computing Industry Association (DCIA)

    Dear Chairman Stevens and Ranking Member Inouye:
    Thank you for holding this important and timely hearing on issues 
related to MGM v. Grokster and the appropriate balance between 
copyright protection and technology innovation. We greatly appreciate 
your leadership and that of your Commerce Committee colleagues. We are 
grateful for this opportunity to share the Distributed Computing 
Industry Association's (www.DCIA.info) perspective on this critical 
industry and consumer issue.
Long-Term Benefits of the Supreme Court Ruling
    The DCIA welcomed the Supreme Court's refusal to rework the Betamax 
decision, and remains optimistic that the grounds for secondary 
liability it defined will prove in the fullness of time to be fair and 
workable.
    As the case works its way back through the lower courts, we 
anticipate clarification of the rules of engagement between content 
providers and technology suppliers in the digital realm generally, and 
with respect to peer-to-peer (P2P) file sharing in particular.
    We are confident that the Court's decision in the MGM v. Grokster 
case will ultimately lead to the continued expansion of our industry.
    We should clarify that our vision for that expansion does not 
center on filtering copyrighted works out of the P2P environment, but 
rather on deploying commercial and technical solutions, which the vast 
majority of rights holders will find attractive, for secure licensed 
and profitable redistribution of such works via file sharing.
    Given the pace of broadband deployment and Internet-based software 
development, it is far preferable to focus on achieving the full 
potential of highly efficient P2P technologies for revenue generation--
rather than on shortchanging that potential.
    In the file-sharing environment that we are working to establish, 
rights holders will have the digital rights management (DRM) tools and 
support services to manage key aspects of every transaction--and to 
monetize them through such means as advertising support, sponsorships, 
cross promotion, packaging, subscriptions, and a la carte sales--
whether their works are initially entered into redistribution by 
themselves or by others--including consumers.
    We have already urged all affected parties to focus on deploying 
new business models for content distribution that are non-infringing 
and expand the marketplace for digital content, and not to pursue 
legislative intervention at this time, which would only be counter-
productive. The private sector, with added clarity that will result 
from pending lower court outcomes, should manage the process from here, 
until we reach a later stage as described below.
    The MGM v. Grokster ruling provides impetus for the P2P 
distribution channel to grow and flourish. P2P DRM technologies and 
micro-payment services have been proven with computer games, software, 
and independent music and films. Major labels and studios can avail 
themselves of these tools to develop marketplace solutions--starting 
today.
    To quote Justice Breyer:

        ``The record reveals a significant future market for non-
        infringing uses of Grokster-type peer-to-peer software. Such 
        software permits the exchange of any sort of digital file--
        whether that file does, or does not, contain copyrighted 
        material . . . 

        Such legitimate non-infringing uses are coming to include the 
        swapping of: research information (the initial purpose of many 
        peer-to-peer networks); public domain films (e.g., those owned 
        by the Prelinger Archives); historical recordings and digital 
        educational materials (e.g., those stored on the Internet 
        Archive); digital photos (OurPictures, for example, is starting 
        a P2P photo-swapping service); `shareware' and `freeware' 
        (e.g., Linux and certain Windows software); secure licensed 
        music and movie files (INTENT MediaWorks, for example, protects 
        licensed content sent across P2P networks); news broadcasts 
        past and present (the BBC Creative Archive lets users ``rip, 
        mix and share the BBC''); user-created audio and video files 
        (including ``podcasts'' that may be distributed through P2P 
        software); and all manner of free ``open content'' works 
        collected by Creative Commons (one can search for Creative 
        Commons material on StreamCast) . . . 

        I can find nothing in the record that suggests that this course 
        of events will not continue to flow naturally as a consequence 
        of the character of the software taken together with the 
        foreseeable development of the Internet and of information 
        technology. There may be other now-unforeseen non-infringing 
        uses that develop for peer-to-peer software, just as the home-
        video rental industry (unmentioned in Sony) developed for the 
        VCR.''

    We hope the Court's decision will lead to a shift away from 
conflict and toward commerce, and we encourage everyone to come to the 
table and develop new business partnerships. The MPAA and RIAA and 
their powerful members control ninety percent (90%) of popular 
entertainment content distribution and can now move forward to license 
responsible P2P companies using this highly efficient and extremely 
popular channel for the distribution of their copyrighted works to 
create new markets and revenue opportunities.
    P2P file-sharing technologies are part of the larger movement to an 
increasingly distributed computing environment. As the Court affirmed, 
this kind of technological progress is inevitable--embracing it to 
harness its capabilities will prove to be much more gainful than 
resisting or trying to stop it.
    While it is regrettable that the earliest outcome of the Supreme 
Court's ruling likely will be additional backward-looking litigation--
and even more unfortunate because parties on both sides over time have 
implemented changes in business practices paving the way for them to 
work together--we can now also engage in more constructive activities 
without the uncertainty as to what the Court's decision will be.
    Specifically, the DCIA has embarked on three areas of activity 
comprising development of: (1) a comprehensive best practices regime 
based on analysis of the Supreme Court opinion and concurrences; (2) a 
promotional program highlighting licensed content P2P distribution, 
appropriate software usage, and protection of children online; and (3) 
a technology solution initiative that emphasizes a combination of 
``offensive'' tactics (e.g., placement of DRM-protected and other 
licensed files at top of search results) with ``defensive'' tactics 
(e.g., conversion of unauthorized files into licensed quality-
controlled versions) that have long-term viability.
    While some either cynically or naively propose forcing a migration 
to provisional closed P2P systems and/or continuing to use lawsuits and 
smear campaigns to express their opposition to real industry progress, 
it is right at this moment that we demonstrate our commitment to more 
positive alternatives.
    Trying to drive global Internet users to abandon an ever-increasing 
abundance of open and inter-operable software applications, which 
facilitate the instantaneous transfer of files with greater and greater 
efficiency, ignores marketplace realities, and particularly the effects 
of an ongoing evolution to low-cost open-source program development.
    It makes much more sense to put resources into projects 
concentrating on the third area of activity outlined above, which are 
distinguished by an emphasis on equipping individual files to carry the 
means of their protection and monetization with them as they are 
transported over public networks.
    DCIA Members have relevant experience that can be applied in this 
initiative along with their expertise and capabilities to benefit not 
only legitimate business interests, but also consumers.
    It is clear that certain of our industry's opponents are trying to 
leverage the courts and Congress to perpetuate entrenched but no longer 
optimal business models, temporarily curtail or slow down technological 
advances, and maintain hegemony of now outdated processes for content 
exploitation.
    Our opponents blame others for their own failures to exercise 
responsible stewardship in protecting copyrights during a more than 
two-decades-long conversion to digital content origination and 
distribution. They seek to compel third parties to pay for solutions to 
problems arising from their own neglect, and buttress their campaign 
with intimidation. Instead, we need to come together to complete the 
tasks that must be done for all affected parties to move ahead.
    It is important that those who oppose the growth of the distributed 
computing industry realize that our determination to continue 
developing P2P technologies for legitimate purposes is greater than 
their determination to restrain, obstruct, or suppress these efforts.

Short-Term Concerns About the Ruling
    The divisiveness of what has become a protracted conflict between 
major entertainment conglomerates and current-generation P2P software 
distributors has unfortunately been exacerbated by the Supreme Court's 
decision--indeed the immediate result of the high Court's ruling will 
be renewed litigation among these parties in the lower courts. More 
disturbingly, consumer lawsuits by music and movie industry interests 
are also continuing unabated. None of the entertainment industry's 
prospective new sanctioned P2P applications has yet to launch, and 
reportedly, P2P copyright infringement levels continue steadily to 
increase.
    To make matters worse, the business models and technology solutions 
put forth by the DCIA's now more than fifty (50) Member companies and 
other qualified independent entities, to provide copyright protection 
while also promoting continued technology innovation, have not yet 
received the major entertainment sector support or the media attention 
that they merit. This despite the fact that they are squarely grounded 
in marketplace realities rather than wishful thinking, are focused on 
commercial development that will benefit all affected parties rather 
than just certain entrenched interests, and are gaining traction as 
clearly demonstrated by their promising initial consumer acceptance.
    The DCIA firmly believes that P2P copyright infringement can not 
only be dramatically reduced, but that P2P has the potential to serve 
as a more robust and efficient distribution channel than its 
predecessors for a greater diversity of content offered in a larger 
variety of ways. But to do so will require leading entertainment 
companies, P2P software distributors, and technology solutions 
providers to collaborate rather than litigate or retreat from 
participating in fear of litigation. Service-and-support firms need to 
be allowed to demonstrate that they can provide adequate safeguards 
through such techniques as P2P DRM and micro-payment solutions, and 
entertainment content rights holders need to license their works for 
P2P distribution. Beyond that, P2P can also become an advanced 
communications medium and collaboration platform.
    Fully addressing the P2P copyright infringement problem for the 
long-run will require a coordinated, multi-faceted approach that 
includes content and technology sector collaboration, cross-industry 
self-regulation, and targeted enforcement. But first, appropriate 
activities for companies and consumers alike to use P2P in authorized 
ways for redistribution of copyrighted works need to be established. 
Users need clearly to be shown appropriate ways to utilize P2P to 
access and share popular entertainment content. It should be deemed 
unacceptable, for example, that not a single major label track is yet 
available in a licensed format in today's P2P environment.
    Our view is that it is essential for any proposed solution's 
viability that it be agnostic in terms of working with current and 
foreseeable P2P applications, including open source clients and 
swarming transfer protocols. To be fully effective, it should address 
both the intentional authorized introduction by rights holders and 
their agents of secured files of copyrighted works--and their continued 
protection as they are redistributed from user-to-user no matter what 
software program(s) are being used; as well as the unauthorized 
introduction of unsecured files of such works by third parties 
including end-users--and their continued prevention from being 
redistributed in unauthorized form.
    Not to oversimplify this matter, but it seems to us that two 
fundamental tasks with respect to securely redistributing copyrighted 
works via P2P can be defined as:

        (A) To apply P2P DRM to a file (permitting rights-holder[s] to 
        set price, usage terms, etc.), then create multiple variations 
        of the secured licensed version of the file (supporting robust 
        viral redistribution), and finally seed these initial 
        authorized copies into the file-sharing environment in such a 
        way that they will appear at the top of search results on major 
        P2P software programs (using algorithms unique to each 
        protocol) and other search engines; and

        (B) To support a system that essentially mirrors the 
        decentralized architecture of P2P applications, extended to 
        include torrent technologies which break files into smaller 
        pieces, that blocks redistribution of unauthorized files of 
        registered copyrighted works (without comprising consumer 
        privacy or interfering with redistribution of other files), 
        that reconstitutes usable quality-controlled portions of 
        copyrighted-works files into licensed versions (to optimize the 
        efficiency of a distributed computing environment), and that 
        provides detailed specific measurement data regarding P2P 
        traffic.

    To date, DCIA Members have developed and deployed solutions needed 
for task ``A'' for major P2P software programs including BearShare, 
eDonkey, Grokster, Kazaa, Morpheus, TrustyFiles, etc. as well as some 
search engines and websites, despite being hampered by a very limited 
amount of test content. Examples of companies actively engaged in 
this--and their solutions, include Altnet--TopSearch; INTENT 
MediaWorks--myPeer; Shared Media Licensing--Weed; Trymedia Systems--
ActiveMark; and Unity Tunes--Unified DRIV. P2P DRM, e-commerce, payment 
services, and related solutions providers now include an impressive 
roster of highly qualified firms such as Clickshare, Digital 
Containers, Digital Rivers, Javien, KlikVU, P2P Cash, Predixis, 
Relatable, RightsLine, Softwrap, SVC Financial, and Telcordia.
    Their models work well mechanically and these companies are poised 
for enormous growth as the P2P channel matures. In terms of sales 
volume, which is obviously the more important issue, it is too early to 
draw conclusions, however, and results-to-date are skewed by not yet 
having licenses for major label or studio content and not yet having 
``B'' deployed. New solutions providers are now proposing credible 
approaches to accomplish ``B,'' which augur especially well for P2P's 
future. With these in place, delivery of licensed digital media 
content, such as through methodologies developed by Unity Tunes, will 
evolve into a secure user-friendly model for super-distribution by 
means of most P2P networks. More than anything, the private sector 
needs time and encouragement for ``B'' to be adopted and implemented, 
and for ``A'' to be fully developed with the participation of major 
entertainment rights holders.
    In terms of business models and technology support to realize them, 
DCIA Members are committed to providing the best solutions possible, 
and engaging on every level to find new and better commercial and 
technical means to secure and promote licensed content so that it will 
be possible for every P2P transaction to be monetized with terms and 
conditions established by rights holders, whether the subject content 
is initially entered into redistribution by rights holders or by 
consumers.
    The distributed computing industry is actively exploring innovative 
business models for monetizing copyrighted works in the file-sharing 
marketplace through advertising support, sponsorships, cross promotion, 
packaging, subscriptions, and a la carte sales. The industry is 
building better DRM and payment solutions every day, and is investing 
in research and development to open the door to greater innovation. We 
acknowledge the need for solutions that are more user-friendly, 
transparent, and supportive of fair-use provisions expected by 
consumers. But most of all what has been missing has been major label 
and studio involvement as content licensors.
    While DCIA Members and others have made significant advances in 
commercially developing P2P, we also recognize there is still much work 
to be done beyond attracting the major labels and studios. But these 
efforts are not the only answers. Effective and complementary self-
regulation efforts by the content and technology industries are 
crucial.

Industry Self-Regulatory Efforts
    Specifically, we advocate the establishment of independently 
coordinated authorities around the globe to help establish P2P file-
sharing best practices, and then to serve as an ongoing resource for 
industry participant certification and dispute resolution. In short, 
these authorities should provide mechanisms for registering copyrighted 
works, supporting inter-operability of DRM and payment service 
solutions, plus monitoring and reporting progress to participants in 
reducing instances of copyright infringement as a percentage of the 
universe of P2P transactions. Of course, any technology approved for 
adoption should be based on open standards and developed with broad 
input from the affected industries.
    As a preliminary step toward achieving this objective, interested 
parties are now invited to join the MGM v. Grokster Response Working 
Group (MGRWG), which the DCIA established within weeks of the Supreme 
Court ruling.
    We are especially interested in recruiting additional content 
rights holders, peer-to-peer (P2P) software distributors, and delivery 
solutions providers.
    The principal goal of MGRWG is to recommend a set of best practices 
for the distribution of P2P software with the object of promoting its 
use in ways that do not infringe copyright through affirmative steps 
taken to foster non-infringement.
    Our purposes are to enhance and not diminish benefits in security, 
cost, and efficiency of P2P software for storing and transmitting 
electronic files, and to encourage further commercial development of 
beneficial distributed computing technologies. We intend for end-users 
to be able to prominently employ ad hoc P2P networks for sharing 
copyrighted music and video files--with proper authorization.
    The proposed structure for defining these best practices, subject 
to full discussion by MGRWG, will have four parts: (1) Advertising 
Guidelines; (2) Protection Mechanisms; (3) Business Models; and (4) 
Tracking Studies.
    Questions to be answered by MGRWG include:

   What kinds of consumer communications are recommended to 
        promote non-infringing usage of P2P software;

   What types of P2P digital rights management (DRM) solutions 
        are recommended so that each transaction of a copyrighted 
        work's P2P redistribution can take place on terms-and-
        conditions determined by its rights holder(s);

   What revenue sharing opportunities are recommended for 
        content rights holders to fully exploit the possibilities of 
        P2P for licensed content redistribution (e.g., advertising 
        support, sponsorships, cross promotion, packaging, 
        subscriptions, a la carte sales, etc.) plus what kinds of 
        disclosures, if any, are recommended for non-copyrighted-
        content related P2P revenue generation (e.g., behavioral 
        marketing, VoIP services, paid search, travel applications, 
        collaborative research, blogging, etc.); and

   What industry-wide measurements using such methods as test-
        cell extrapolation are recommended to track growth trends of 
        authorized copyrighted works transactions as a percentage of 
        all P2P transactions, as well as other key metrics.

    Copyright holders should expect that a balance will be struck 
between their legitimate demands for effective--not merely symbolic--
protection of their statutory monopoly, and the rights of P2P software 
distributors and others to freely engage in substantially unrelated 
areas of commerce.
    Users should be able to continue to search for, retrieve, and store 
files without involvement of P2P application providers, who should not 
be expected to monitor or control use of their software with respect to 
actual knowledge of specific content transactions. Involvement of other 
members of the distribution chain, however, should provide the 
requisite controls to enable secure P2P dissemination of registered 
works globally.
    Decentralized P2P software applications should not be expected to 
reveal which files are being copied and when, but rather related 
technology solutions should be supported for affiliated third parties 
to equip individual files to accomplish this as they are redistributed 
across public networks using P2P protocols. Filtering copyrighted 
material out of P2P users' downloads or otherwise impeding 
redistribution by such methods as blocking usage should not be 
advocated as impositions on P2P software suppliers. Advanced 
alternatives will more effectively accomplish the underlying goals that 
previously have led some to suggest these approaches.JLW
    Distributors of P2P programs should be able to clearly voice the 
objective that recipients use their applications to download licensed 
copyrighted works, and take steps to encourage them to do so, because 
the file-sharing environment supports secure redistribution. These and 
other P2P content-reselling entities should be able to competitively 
market their offerings to prospective users.
    P2P distributors should be able to advertise and instruct consumers 
on how to engage in authorized usage of their software to download and 
redistribute licensed copyrighted works and to recommend and directly 
encourage such usage. They should be able to overtly and aggressively 
take steps to respond to consumer demand for online access to 
copyrighted material through highly efficient and very popular P2P 
software.
    As with other DCIA-sponsored working groups, participation in MGRWG 
is voluntary and open to DCIA Members and qualified non-members. 
Confidentiality of MGRWG participation will be maintained unless 
express written authorization for disclosure is given by an individual 
company in advance. Once the work product, in this case, an outline of 
best practices, is completed and publicized by MGRWG, adoption and 
compliance with its recommendations, whether in full or in part, will 
be a separate voluntary action to be independently decided upon by 
MGRWG participants (and others) individually.
    As the step beyond MGRWG, the DCIA would be willing to serve as 
coordinator of a multi-industry group constituted with broad relevant 
multi-industry representation, working in consultation with the Federal 
Trade Commission (FTC) to help codify best practices.
    But in order for self-regulation, business model exploration, and 
technology development efforts to be successful, ultimately they may 
well need to be supported by strong Federal legislation to prohibit 
unacceptable practices and empower consumers without threatening the 
vitality of legitimate P2P usage.

Ultimate Role for the Federal Government
    It is our view that business and technical solutions should be 
encouraged in the private sector, and that a request for any necessary 
enabling legislation should come only as a last resort and only based 
on a consensus among affected parties, in this case primarily content 
rights holders and P2P software providers, but also closely related 
telecommunications and technology firms, once traction for a particular 
solution(s) has clearly been established.
    Global decentralization of the Internet has reached the point that 
it would be virtually impossible to stop the proliferation of P2P file-
sharing technology or prevent its continuing evolution to higher levels 
of efficiency.
    The channel has already been proven to be a highly efficient medium 
for marketing copyrighted works. The availability of licensed 
copyrighted material is assured by the software, which automatically 
makes copies of works available to millions of other users, who each in 
turn are required to acquire a license under rights-holder stipulated 
terms, including usage and price.
    The key issue that has perpetuated copyright infringement by means 
of P2P software continues to be a collusive refusal-to-deal by a 
handful of large, multi-national, very profitable entertainment rights 
aggregators, who by their own admission control more than ninety 
percent (90%) of pop-culture content.
    If this continues, what may ultimately be called for is an 
injunction against ``intentional withholding of licensed content from a 
distribution channel that happens not to be fully controlled by major 
rights holders.''
    Copyright infringement is the natural and inevitable by-product of 
the failure to take necessary steps to protect content from 
unauthorized duplication and distribution in the digital realm, and 
then to refuse to license it to willing distributors with proven 
solutions to problems certain rights holders essentially have created 
for themselves.
    This argument carries through to the fact that these large 
entertainment copyright aggregators knowingly continue to distribute 
unprotected CDs and DVDs by the millions, with their only tactics to 
respond to the massive adoption by consumers of file-sharing 
technologies being to sue hundreds of users per month for alleged acts 
of infringement and to sue small P2P software distributors. They 
themselves are the ones in fact driving consumers to become 
distributors of infringing copies by not licensing a single music track 
or video under their control for authorized distribution by means of 
currently distributed P2P software, as well as failing to take 
reasonable technical precautions to prevent the free and facile 
replication and redistribution of their works.
    It would seem, in these circumstances, that responsible behavior by 
the major rights holders would be to follow the example of more 
progressive independents and license their content for the P2P 
distribution channel, now that the success of such efforts has been 
demonstrated.
    The true problem in the context of P2P software, where program 
developers and distributors and solutions providers have sought to 
negotiate with major rights holders, is that they have been met with a 
refusal to do business or to even engage in technical tests or market 
trials.
    Despite this, these innovative software companies and solutions 
providers have succeeded in ``competing with free'' by licensing and 
successfully facilitating the marketing of lesser known, less popular 
entertainment content offered by an increasing number of small 
independents.
    This condition has scrambled the venerable structure of copyright-
based businesses. There is a growing need to bring the major rights 
holders to the table with such willing intermediaries, rather than 
allowing their litigation against consumers and small P2P developers to 
continue.
    To achieve a more comprehensive solution, Congress may eventually 
want to consider legislative approaches.
    Specifically, Federal legislation should create incentives for P2P 
distribution channel participants to adopt best practices. One way to 
encourage companies to adopt best practices is to provide a ``safe 
harbor'' for those who are members of an FTC-approved self-regulatory 
organization. Under this approach, safe harbor participants would be 
entitled to avoid the burden of additional requirements, based upon 
their compliance with specific guidelines.
    Thus, Federal legislation should identify the basic components that 
industry guidelines must address, but permit the industry to take the 
lead in developing the specific guidelines within these parameters.
    Here is an outline of what can tentatively be called The Peer-to-
Peer Distribution of Copyrighted Works Development Act of 2006:
    First Provision: Copyright owners and rights holders, who desire to 
monetize their copyrighted works by means of digital distribution over 
discovery and transport protocols, shall register digital files of such 
works, in a manner that permits their efficient identification during 
Internet transport, with the Copyright Office, which shall stipulate 
the technical specifications for such file identification, as may be 
reasonably updated from time-to-time.
    Second Provision: Owners and operators of broadband ISP services 
and computer hardware and software manufacturers and distributors, 
shall cause to be deployed, within twelve (12) months of enactment of 
this bill into law, and to maintain, systems to accurately track the 
delivery of files identified in Provision I to individual consumers, in 
a way that will ensure timely billing for registered copyrighted works 
by means of distribution via transport protocols designed to discover 
and deliver digital assets.
    Third Provision: Copyright holders in Provision I and technology 
and telecommunications providers in Provision II shall be entitled to 
establish pricing and revenue-sharing through private negotiations, to 
recover their costs for registering, tracking, billing, collecting, 
etc. and to earn a profit, provided that prices charged to consumers 
for copyrighted works through distribution via transport protocols are 
competitive with alternative distribution channels for such works.
    Please do not interpret this proposal as a recommendation for 
compulsory licensing or a derivative of that type of regime. Rights 
holders would be able to voluntarily license their content or to 
withhold it, to set rates and to determine usage parameters, and 
otherwise to exert control over their copyrighted works, just as they 
do in other distribution channels.
    As a strong proponent of the still nascent distributed computing 
industry, the DCIA is committed to using its resources to help address 
the P2P copyright infringement problem from every perspective: business 
models, technology solutions, self-regulation, legislation, and 
enforcement. We have started to see progress on all fronts, but much 
more work clearly needs to be done.
    We pledge our support to your ongoing legislative efforts, and look 
forward to sharing our proposals and working with others toward viable 
solutions. The DCIA offers whatever assistance this Committee would 
need with respect to such efforts.

                                  
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