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would be very helpful if this Berne Protocol goes forward with a distribution right, as many countries in the world do not have such a right at this point.

The distribution right also provides the appropriate foundation for the right of importation, and as a consequence of the territorial nature of copyright law also permits the copyright owners to control the first distribution in a different territory from that where the work was first distributed. This is also very important.

We also agree with the conclusion of the international bureau in its proposal that the right of first distribution is an inseparable corollary to the right of reproduction, and that such obligation already exists in the current 1971 text of the convention. In this regard, the protocol proposal is consistent with U.S. law in section 106(3).

If I might now turn to the first sale doctrine, or as the Europeans would call it, or the term used in the international marketplace, the exhaustion of the distribution right through first sale.

The international bureau proposes, consistent with U.S. law and international practice generally, that in effect the right of distribution be limited to the copyright owner's right to control only the first authorized distribution of a work, but that once the first sale or other transfer of ownership, and in some cases transfer of possession, is made by the copyright owner, any subsequent transfer of that copy by its owner, or in some cases possessor, exhausts the right.

We generally support this proposal, Mr. Chairman, but as discussed further below, we believe that we must be constantly vigilant to ensure that limitations on the distribution right do not conflict with the normal exploitation of the work or otherwise prejudice the legitimate interests of the copyright owner.

Under U.S. law, in section 109, there are two exceptions to the so-called first sale doctrine, or to the theory of exhaustion of the distribution right. They provide that the distribution right continues to pertain to any subsequent rental of each copy so transferred. This is in the case of a sound recording, musical work on a sound recording, or a computer program. This is commonly termed a "rental right" and is a critical feature of any modern copyright law. The IIPA wholeheartedly supports the principle underlying the proposal to adopt rental rights. The U.S. Congress has repeatedly recognized through enactment and extension of the record rental amendment to the Copyright Act and through the more recent computer software rental amendment that, in some circumstances, exceptions to the first sale doctrine in respect to rental are necessary to avoid unreasonable prejudice to the legitimate interests of copyright owners in the exercise of their reproduction rights.

In the international arena, the IIPA has worked with U.S. negotiators and policymakers to secure inclusion of exclusive rental rights, at least as to sound recordings, musical works embodied in sound recordings, and computer programs, in the proposed GATT agreement and TRIPS, and as well in the NAFTA agreement, the intellectual property text there, and in numerous bilateral IPR agreements between the United States and individual trading part

ners.

If I might now turn to aspects of WIPO's proposal to extend rental rights beyond those now existing in U.S. law. But let me say

first of all that the proposal is clearly to create rental rights that are exclusive.

We strongly concur in this assessment that rental rights must be exclusive, and we strongly oppose the bracketed text in the international bureau's proposal, which would afford states that have adopted a right of remuneration in respect to rental a reprieve from the obligation to provide an exclusive right.

Only Japan has indicated an unwillingness-and this has come up in the TRIPS context-to repeal its system of remuneration in favor of full exclusive rights. But even in this case, as was mentioned before, Japan's law provides for a 1-year period of exclusivity. Of course it is our hope that Japan will see the light and in the future as we move through the protocol process they will amend their law even further to create exclusive rights for the full term of 50 years.

The proposal lists five specific categories of works subject to postfirst sale rental and lending rights. The Register talked about musical works in the form of graphic notation, or sheet music, audiovisual works, works embodied in sound recordings, computer programs, and the last, or fifth, any other kind of works stored in electronic, including digital, format. And I will get to that important topic in a minute.

First, sheet music. Today within the United States there exists a narrow market for the rental of musical works in the form of graphic notation, or sheet music. It is customary for publishers to rent but not to sell scores directly to orchestras for the performance of symphonic works, operatic works, ballets and musicals. Rental is frequently the primary, if not the only way, in which orchestral works are made available to their limited public.

Under current U.S. law, it is lawful for third parties to engage in the commercial rental of scores which they purchase, and commercial rental libraries do in fact exist. Their catalogs compete directly with publishers' marketing efforts, sometimes employing photocopied scores obtained without authorization. Such a rental right would encourage publishers to increase the number of scores available for purchase without having to bear the risk that third parties would then rent them without authorization, and it would thereby promote the fuller dissemination of orchestral works.

The IIPA sees merit in continuing international and, hopefully, domestic dialog on the extension of the exclusive rental right to musical works in graphic notation.

If I might turn now to audiovisual works. As Ralph mentioned, rental rights in audiovisual works were recently implemented by the EC in its rental directive and must be implemented in the national laws of the 12 member states by July 1, 1994. Such rights also exist in a few other countries, and it represents a growing trend.

Under U.S. law there is no rental right in an audiovisual work, as we know. While the motion picture industry sought at one time to persuade Congress to adopt such a right, the then absence of the same kind of widespread home copying which affected the recording industry at that time and the existence of a thriving market in video rental were determining factors in Congress' decision not to adopt such a right.

At this point the IIPA and its motion picture industry members, MPAA and AFMA, see no need to reopen the question of whether a rental right is appropriate for audiovisual works, nor do we believe the U.S. Congress would be favorably disposed to enact such a right at this time. However, changes in technology and in the marketplace for audiovisual works warrants careful monitoring of this issue.

The industry is concerned about a number of developments which may necessitate treating audiovisual works in the same manner as we now treat sound recordings and computer software with respect to the rental right. While not yet fully developed, for example, video in digital format may soon be upon us. Digital technology applied to video will allow the making of perfect copies of valuable films as it now does for music and sound recordings and computer software. We are only beginning to see the development of improved video copying technology. The dual port VCR is already here, but soon digital VCR's and laser disks with magnificent high speed copying capability will be developed, which will allow perfect copies to be made in seconds.

A second principal reason, Mr. Chairman, is that the market for audiovisual works is increasingly moving away from rental. Already 60 percent of the European market is a sell-through market, and my understanding is that about 55 percent of the U.S. market is sell-through as opposed to rental. These are astounding numbers, and I was unaware of them myself, but that's the way the market is going, to sale and away from rental, due in part to the very low prices that are now being charged for many films moving into the video cassette market.

If these predictions are correct, there will be little difference between the prejudice occurring to the film producers' reproduction right due to unauthorized rental than now exists for record producers or software publishers. This causes us to lean heavily toward supporting a rental right for digital video when that technology is upon us, and we urge the chairman and the subcommittee to work with us to closely monitor these developments.

I would also add, and I think the Register mentioned it, there is a provision in the TRIPS text which mirrors our testimony. The TRIPS Dunkel text says that while there is no immediate requirement to impose a rental right in the area of audiovisual works, should there be widespread copying in this area, as there has been widespread copying in the sound recording and computer area, that countries would have an obligation to adopt a rental right in this

case.

Finally, works stored in electronic format, a very important issue. As we know, this would include musical works, audiovisual works, literary works, compilations and collections, like electronic data bases, as well as other works, like digitally stored photographs. The IIPA would support the extension of the rental right to works in digital format.

We note that the legislative history of both the Record Rental and Software Rental Act amendments evidences Congress' recognition that the threat that commercial rental will undermine the legitimate and other market for works is particularly high for works which, like sound recordings and compact disks and computer pro

grams, are made available to the public in digital form. We are concerned in particular that the unauthorized rental of electronic data bases and other literary works made available in CD-ROM or similar digital format will inevitably result in home copying of the kind that would severely undermine the normal market for such works. Congress dealt with the issue of sound recording and software rental before an ongoing rental market for these works had begun, in contrast to the video situation. For this reason, we agree that the issue warrants further careful consideration both at the international as well as the domestic level.

We have been talking about rental which is defined in the proposed protocol as involving for-profit or commercial uses. I want to talk a minute about the issue of the lending right as defined in the protocol. We believe that the same analysis applies not only to forprofit rental, but also to nonprofit lending. Such lending also can lead to the same type of private copying transactions which can undermine the normal market for the work. IIPA would therefore support removal of the brackets in the text and would extend the right beyond just for-profit rental also to nonprofit lending. And U.S. law would support this result. The international bureau in paragraph 49(b)(5) suggests narrow exceptions to the right of lending. We believe that those exceptions are appropriate for certain kinds of limited nonprofit, cost-based lending activities. Such exceptions are contained in section 109 for sound recordings and computer programs.

Turning now briefly to the importation right, Mr. Chairman, we strongly support the proposal of the international bureau to provide a right to control both the piratical and parallel importation of copyrighted works. We agree that this right of importation should be included in the protocol as an interpretive provision as well as in the new instrument.

The right of the copyright owner to control both pirated as well as parallel imports is firmly a part of U.S. law as reflected in section 602(a).

Underlying the exclusive right to authorize importation is the ability to authorize distribution in a specific territory. The principle of territoriality provides security for the chain of authorizations that permit orderly supply of copies for international distribution. If I may give an example of how this situation can work from a very pertinent and present problem that we have had in Taiwan. Taiwan allowed parallel imports and there was a very powerful association that grew up in Taiwan that imported thousands of copies of laser disks of just released U.S. movies into Taiwan. And as you know, the sequential distribution that exists in the motion picture industry goes from theatrical distribution; about 6 months later to home video release; then to pay TV or cable or release including in hotels; and finally to free television. All these laser disks of firstrun movies that were coming in had not finished their theatrical run in Taiwan.

The reason they hadn't finished their theatrical run is because Taiwan's theater industry has gone down hill. There are very few theaters in which to put a very large number of films. So it takes longer to "play them off" in Taiwan. A "Terminator 2" or other first-run movie might be scheduled to be theatrically shown in

June 1993 in Taiwan, but it had long ago been released in home video in the United States. So all those home videos in laser disk form were coming in, were being used as masters for pirated copies, and were also being shown in video parlors.

This has basically destroyed the theatrical market in Taiwan. It has completely undercut the regular video market. Fortunately, the Taiwan Legislature just amended its law to protect against parallel imports which would allow keeping out these laser disks and allow the theatrical industry to come back up to where it was a few years ago. That's the kind of thing that happens when parallel imports are placed outside the control of the copyright owner.

The same kind of analysis, although different in each area, pertains in the book, sound recording, music area and in the software

area.

I should mention that the international bureau also proposes an exception to the importation right for copies brought in in personal baggage. We agree in principle with this proposal, Mr. Chairman. However, we do not believe it should be made applicable to piratical copies, which should be prohibited completely.

We believe that appropriate limited exceptions may be recognized to the importation right in respect of lawfully made copies. It is important, however, that these be quite carefully considered in order to assure that in today's technologies of mass single reproduction and instantaneous transmission they not swallow or inadvertently provide significant gaps in protection.

We again commend you, Mr. Chairman, for your ongoing interest in these critical international issues and domestic issues facing authors and other copyright owners around the world. Our members look forward to working with the subcommittee on these important matters. Thank you very much.

If I might ask Mr. Holleyman and Mr. Baumgarten to supplement these remarks.

[The prepared statement of Mr. Smith follows:]

PREPARED STATEMENT OF ERIC H. SMITH, EXECUTIVE DIRECTOR AND GENERAL COUNSEL, INTERNATIONAL INTELLECTUAL PROPERTY ALLIANCE

My name is Eric H. Smith. I am Executive Director of the International Intellectual Property Alliance ("Alliance” or “IIPA”). IIPA is an umbrella organization formed in 1984 whose members consist of eight trade associations, each of which, in turn, represents a significant segment of the copyright industries in the United States. IIPA consists of the American Film Marketing Association (AFMA), the Association of American Publishers (AAP), the Business Software Alliance (BSA), the Computer and Business Equipment Manufacturers Association (CBEMA), the Information Technology Association of America (ITAA), the Motion Picture Association of America (MPAA), the National Music Publishers' Association (NMPA) and the Recording Industry Association of America (RIAA).

IIPA represents more than 1500 companies producing, publishing, and distributing throughout the world computers and computer software, motion pictures, television programs and home videocassettes, music, records, CDs and audio cassettes, textbooks, trade books, reference and professional publications and journals. These companies are the leading edge of the world's high technology, entertainment and publishing industries. In a 1992 report commissioned by IIPA, the U.S. total copyright industries accounted for 5.8% of the U.S. Gross Domestic Product and contributed over $34 billion in foreign revenues in 1990, making it one of the U.S.' most important export sectors.

Today I am joined by representatives of two of our members. Robert Holleyman is President of the Business Software Alliance (BSA). BSA's nine member companies provide about 71 percent of the world's prepackaged software for personal computers published by U.S.-based companies. Members include Aldus Corporation, Apple

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