APPENDIXES APPENDIX 1 MS. DEBORAH LEAVY, EDUCATORS' AD HOC COMMITTEE ON COPYRIGHT LAW, Assistant Counsel, Subcommittee on Courts, Civil Liberties, and the Administration of Justice, RHOB 2137B. Dear Ms. Leavy: I have enclosed for you five copies of my corrected addendum to my statement on Copyright Law Before the Subcommittee on Courts, Civil Liberties and the Administration of Justice of the Committee on the Judiciary, House of Representatives on H.R. 1027 and H.R. 1029. Please see paragraph six of the addendum for the correction. Thank you. Enclosures. AUGUST W. STEINHILBER, Chairman. ADDENDUM TO STATEMENT OF AUGUST W. STEINHILBER FOR THE EDUCATORS' AD HOC COMMITTEE ON COPYRIGHT LAW BEFORE THE SUBCOMMITTEE ON COURTS, CIVIL LIBERTIES AND THE ADMINISTRATION OF JUSTICE OF THE COMMITTEE ON THE JUDICIARY, HOUSE OF REPRESENTATIVES ON H.R. 1027 AND H.R. 1029 The Educators' Ad Hoc Committee on Copyright Law met all morning in an effort to negotiate language on H.R. 1027 and H.R. 1029 which would remove our objection to these bills. I am pleased to announce that we have reached an agreement with the music industry (The Coalition to Save Americas' Music) on the following language: "Nothing in the foregoing proviso shall apply to the rental, lease or lending of a phonorecord for nonprofit purposes by a nonprofit library or nonprofit educational institution." By agreeing with this language as part of H.R. 1027 we obtain the complete exemptions and would no longer oppose the bill. However, as in nearly every commercial copyright issue, we do not support the proposed legislation-on the issue we become neutral. We have also met with a representative of the Motion Picture Association of America on H.R. 1029. And I am pleased to say that we have agreed on the following language: "Nothing in the foregoing proviso shall apply to the rental, lease or lending of a copy of a motion picture or other audiovisual work for nonprofit purposes by or to a nonprofit library or nonprofit educational institution." The slight difference in language was necessary to protect the current lawful distribution arrangements which education institutions enjoy with firms such as Films Inc. and to guarantee our exemption from the rest of H.Ř. 1029. As is the case with H.R. 1027, we no longer object to H.R. 1029, however, under our general rules of not supporting commercial interests we do not support H.R. 1029. STATEMENT OF WILL ESPIN IN OPPOSITION TO H.R. 1029, THE CONSUMER VIDEO SALES RENTAL AMENDMENT OF 1983 Mr. Chairman and distinguished members of this Subcommittee, I am appreciative of this opportunity to offer my views in opposition to H.R. 1029. My name is Will Espin and I currently am the President of Multi-Video, Inc., a North Carolina (704) corporation. My experience in the video industry for the past four years has allowed me to closely witness the growth of the pre-recorded tape industry and to come to know the video consumer. My interest lies in the pursuit of a fair and just resolve to this issue. You may, of course, discount my comments since I am part owner of a video store in North Carolina and may have a slanted view of this issue. Please look past my involvement in this business and instead evaluate the points I make on their own merit. This morning I attended the hearing in Rayburn 2226 and felt compelled to submit this testimony. As an eyewitness to the proceedings it seemed to me that the Subcommittee members had some difficulty in maintaining a high interest level in the testimony being presented. Please understand that I am not criticizing the distinguished members of the Subcommittee. I too had trouble concentrating on the proceedings. There is an explanation and it has a great deal of relevance to the discussion surrounding H.R. 1029. It is my opinion that the Subcommittee is faced with what may appear to be two greedy factions at odds over the money being generated by video cassette rentals. In the spirit of justice and fairness it seems almost ludicrous to hear so much ado about money. This distraction has caused many people to overlook the underlying issues and principles involved. The main question should be, "Is it fair and just to extend to the owners of copyrights of video cassettes the protection they seek under H.R. 1029?" There are several reasons why I feel it is unjustified. 1. The enactment of H.R. 1029 would be no more than a patchwork remedy. We as a nation would be amending our copyright laws to cover just one aspect and one product that has evolved in modern day technology. It is simply not feasible to amend our laws each time a new product or product form is introduced to the marketplace. Would the Subcommittee be eager to hear proposals for amendments to the law to cover copyright provisions for computer programs, for cable t.v. services, for telecommunication developments for microprocessor applications? I think not. The problem that needs to be addressed is how to amend our copyright laws so that broad definitions can be enacted to bring our legislation up to date with advancing technology. The principle of the first sale doctrine has stood the test of time and has served as a foundation for the way business is conducted in America. There is no justification in running the risk of judicial chaos as would be inevitable following the weakening of first sale. If H.R. 1029 is passed, many copyright owners will petition for equal protection under the law-as guaranteed in the first section of the Fourteenth Amendment-seeking to share in after sale revenues whenever their products are used to generate profits. I must agree with the argument that actors and other creative people involved in the movie industry deserve to be fairly compensated for their talents and efforts. However, there is no basis for the assumption that this compensation is not possible without H.R. 1029. Any actor or creative talent becoming involved in the production of movies and video cassettes is well aware of the rental industry that exists today and should take this into consideration when signing their contract. Anyone involved has a freedom of choice in agreeing to produce a film or not. The consumer should not be compelled by law to relinquish any of his ownership rights to guarantee a more lucrative atmosphere for those involved specifically with the movie industry. The concept of justice is difficult to measure and define. A simple test for fairness might be to pose the question, "Is the person or group seeking privilege willing to concede the same privilege to others?" For example, is the motion picture industry also willing to become liable to reimburse the copyright and patent holders on the cameras they use for movie production? After all, the creative talents that went toward the develoment of sophisticated camera equipment may argue that their efforts are not being rewarded and the movie industry is taking advantage of their inventions for commercial gain. The same would apply for the copyright and patent holders on typewriters, copiers, clothing used on screen, etc. I tend to think that the movie industry would oppose such an arrangement. 2. The passage of H.R. 1029 would result in an increase in crime. The incidence of movie piracy and copyright infringement will drastically increase. The consumer will not pay higher prices for the acquisition of video tapes. Their budgets are limited but their appetites for video cassettes are not. As it becomes more expensive to rent tapes consumers will be enticed to make illegal copies and circulate them among friends and relatives. Bootlegging will flourish as the cost of obtaining legitimate rental video cassettes increases. Drawn to bootleg tapes by lower prices, consumers will be drawn into supporting illegal operations. This situation is simply unjust. The purpose of any legislation should be to reduce the incidence of crime-not to entice the general citizenry into becoming lawbreakers. 3. A Pandora's Box will have been opened releasing a threat upon the American economy. Not only video tape producers but the copyright holders of any item that is used to generate a profit will be lining up at the pay window for their share. For years our economy has flourished by people purchasing a wide variety of items from manufacturers and producing other products or services based on the items they bought. For example, a cosmetologist purchases hair care products and uses them in the service they provide to earn a living. This type of purchase and use exists in practically any business venture. It could be argued that the copyright owners and patent holders of these hair care products, who have already been compensated through the purchase of their product, are entitled to a share of the revenues generated from each customer that walks out the door. A never ending chain could develop in which everyone wants a piece of everyone else's pie. Do we want to enact legislation that would throw into question the very manner in which America does business? In closing, I implore you to carefully consider the implications of H.R. 1029. I will avoid addressing the issues surrounding how much money is at stake—who will and won't go out of business and instead try to keep attention on pursuing a just resolve. Thank you. APPENDIX 2 Hon. ROBERT KASTENMEIER, U.S. HOUSE OF REPRESENTATIVES, Chairman, Subcommittee on Courts, Civil Liberties, and the Administration of Justice, 2232 Rayburn House Office Building, Washington, DC. DEAR BOB: We understand and support your decision to delay subcommittee consideration of most intellectual property matters until later in the session. We do believe, however, that one copyright issue, the proposed modification of the first sale doctrine as it relates to the commercial rental of records and video cassettes, merits earlier consideration. This issue presents a set of legal and political considerations which are quite separable from the other copyright matters before us. We believe that it is an important issue, yet one which brief hearings could air. Our colleagues Don Edwards and Carlos Moorhead have authored legislation that addresses the issue. The Senate Judiciary Subcommittee on Copyrights, Patents, and Trademarks has scheduled a hearing on similar Senate legislation for May 5. We would like for you to schedule hearings and appropriate action on the legislation as soon as possible. We all look forward to working with you on this issue. Sincerely, Hon. PETER W. RODINO, JR., PAT SCHROEDER. DAN GLICKMAN. HAROLD SAWYER. HOWARD BERMAN. U.S. DEPARTMENT OF COMMERCE, Chairman, Committee on the Judiciary, House of Representatives, Washington, DC. DEAR MR. CHAIRMAN: This letter is in response to your requests for our views on H.R. 1027, the "Record Rental Amendment of 1983," and H.R. 1029, the "Consumer Video Sales-Rental Amendment of 1983." INTRODUCTION These bills would modify the Copyright Act of 1976 (Title 17 of the United States Code) to permit copyright owners to participate directly in the sound and video recording rental business by receiving royalty income from the rentals. Under the existing "first-sale doctrine" of the copyright law, a purchaser of a sound or a video recording is not liable to the copyright holders for the subsequent rental, sale, or other disposal of that recording. Thus, one who purchases copyrighted sound or video recording may rent it to others in competition with sales of the recording, and the copyright owners derive no benefit from such commercial use of the work. Accordingly, the first-sale doctrine, coupled with advances in recording technology, effectively weakens the protection for intellectual property afforded by copyright and serves as a disincentive to creators. This result is contrary to the rationale underlying copyright protection: to benefit the public by stimulating new works through the incentive of the grant of exclusive rights to authors. These exclusive rights are intended to permit authors, composers, and artists to reap the rewards of their creations when consumers choose them over available alternatives. H.R. 1027, "RECORD RENTAL AMENDMENT OF 1983" Members of the American music industry are concerned that rapidly proliferating commercial record rentals pose a threat to the industry. Rented records, they believe, are almost invariably taped at home, thereby displacing record sales. The record rental business began in Japan in June 1980 and has now grown to more than 1,700 outlets. Record sales by retail stores in the vicinity of rental outlets in Japan have dropped by 30 percent and the Japanese record industry has suffered its first sales decline in 25 years. A recent survey suggests that 97.4 percent of all Japanese rental outlet users tape rented records at home. The U.S. rental record industry is just two years old (starting in September 1981) and consists of only 250 outlets. However, the U.S. music industry projects that the U.S. rental record business will have the same growth and effect on retail record sales as has been experienced in Japan. Music industry spokesmen argue that record rentals will reduce the sales volume of retail stores and will also place such stores at a competitive disadvantage with rental outlets. Further, the owner of the copyright in the sound recording and the owner of the copyright in the musical work receive no compensation from record rentals or unauthorized home taping. Record sales fuel the entire music industry. A decline in sales revenue affects the livelihoods of songwriters, publishers, recording artists, vocalists, musicians, manufacturers, suppliers, distributors, and retailers. The music industry says that consumers will also be hurt by a decrease in record sales-if sales decrease, unit prices will rise, and nonprofitable, subsidized recordings of classical, jazz, ethnic, and gospel music will disappear. The record rental business has grown for several reasons. First, the technology for home taping has become quite good and moderately priced. The development and imminent marketing of the digital "compact disc" may increase record rentals even more. This disc-a technological breakthrough-is a small, virtually indestructible record album which can be rented innumerable times without degradation of quality and which will produce better sound particularly suited to high-quality reproduction. Second, the first-sale doctrine has allowed the purchaser who rents the record to recover the purchase price many times over by rental fees which can be set very low. In this Congress, a proposal similar to H.R. 1027 was introduced in the Senate by Senator Mathias (S. 32) and was the subject of a hearing before the Subcommittee on Patents, Copyrights and Trademarks of the Senate Committee on the Judiciary on April 29, 1983. S. 32, as amended, was reported favorably by the Senate Committee on the Judiciary (S. Rept. 98-162) on June 23, 1983, passed by the Senate on June 28, and was referred to the House on June 29, 1983. We are informed that this legislation is supported by the Copyright Office, the record industry, music publishers, songwriters, performer's unions, record retailers, as well as others involved in the music industry. H.R. 1027 would explicitly allow the owners of copyright in sound recordings and underlying musical works to share in the revenues produced in the rental market. It would not forbid taping of records nor would it change the first-sale doctrine with respect to resale, personal use or display, or nonprofit use or lending of copies. Moreover, H.R. 1027 is wholly consistent with the principles that underlie the antitrust laws and it would not create an antitrust exemption. In reporting S. 32, the Senate Committee on the Judiciary added a new Section 3 to make the compulsory licensing provisions which now apply to the sale of sound recordings of musical works also apply to the rental of such recordings. This amendment, which we support, makes it clear that the bill is fully applicable to both the owner of copyright in the sound recording (typically the record company) and to the owner of copyright in the underlying musical work (typically the songwriter/music publisher). Under this provision, if a record company authorizes commercial record rentals, it will pay a royalty to the songwriter/music publisher on any rental revenues in the same proportion as it shares sale revenues under existing Section 115 of Title 17. The Copyright Office would issue implementing regulations as it has done for the existing Section 115. H.R. 1029, "CONSUMER VIDEO SALES-RENTAL AMENDMENT OF 1983" Currently, a burgeoning video tape rental business exists from which the copyright holder derives no economic benefit. This situation has arisen from technological advances of the past decade which have provided consumers with a number of new home video programming possibilities. Home video system sales have grown to nearly $9 billion in 1982, of which video cassette recorders (VCRs) comprised almost $1.9 billion. In 1981, VCR sales, at $1.13 billion, increased 69 percent over 1980 sales and in 1982, VCR sales increased almost 150 percent over 1981. The first successful VCRs were introduced in 1975. Since then, competition and technical developments have helped improve VCR technology, and VCRS have an excellent potential for continued growth. As of June 1982, the cumulative number of VCRs sold was 3.86 million units, an estimated 4.7 percent penetration of the market. Industry estimates are that by 1990 there will be 45-50 million VCR units in U.S. homes. Surveys show that the majority of VCR purchasers buy them for home taping of television programs for later viewing, referred to as "recording off the air." However, the availability of prerecorded tapes of movies has increased use of VCRs for movie viewing. In 1981, the estimated retail sales of prerecorded tapes was $270 million. Because of relatively high purchase prices for thse tapes ($30-$100), and the relatively small number of times one might wish to view a single movie, rentals of prerecorded tapes began several years ago at retail outlets. Retailers are able to rent tapes without permission of the copyright owners due to the "first-sale doctrine," and the copyright holder has no share in the profits from this growing use of copyrighted material. Several years of experience with tape rentals have shown that consumers choose rental over the more expensive tape purchases. Retailers say that rentals outnumber purchases by 6 to 1, but some estimates go as high as 45 to 1. The average price of a prerecorded tape used to be about $50, but that has risen to about $75 with the advent of rentals. Rentals, on the other hand, range from $1 to $10 for a 24-hour period. Movie studios, which are the prime copyright holders for video recordings, have sought to control, or at least derive some profit from tape rentals. Since they had no legal power to prohibit rentals, the major studios tried a number of different plans to overcome the first-sale doctrine. Among those were surcharges tacked on the sale price, rental-only plans whereby the studio would only rent the cassettes, and maintenance of separate inventories of rental and sales tapes with differing purchase prices for each group. Each of these measures served to increase the sale price of tapes and shifted the market further into rentals. A February 1982 survey of 10,000 VCR owners showed that VCR cassette renters comprise almost 40 percent of the sample, up from 16 percent of the sample in the comparable 1981 survey. Cassette purchasers, conversely, went down from almost 20 percent in the 1981 survey to 10.5 percent. The survey also demonstrated that demand for tapes is elastic and that consumers will be willing to purchase more tapes if the price drops significantly (to under $40). At hearings on April 29, 1983, on the companion bill in the Senate introduced by Senator Mathias (S. 33), witnesses in favor of the bill testified that its passage would encourage growth of both rental and sale of VCR cassettes. One witness cited his company's experiment with lowering the price of a popular movie by $30. All available copies of the movie were sold while the rental market remained unaffected. Proponents argued that due to artificially high sales prices now, consumers only have the rental option. Access to a copyright infringement remedy, they argue, could drop wholesale prices by 30-40 percent, opening up a real sales market. Also, video retailers would face much lower costs in maintaining inventories. The strengthened protection for intellectual property provided for in H.R. 1029 will restore the incentives the new technologies have taken from the creators of audiovis |