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addressed by these bills-the need to accommodate copyright to the shifts in market realities caused by advantageous new technologies. We don't want to stop the technologies-I agree with Professor Lange that they cannot be stopped. But there should be a possibility of sharing revenues as these new technologies open up new uses of copyrightable works. We think if the rentals are moving the viewing audience from the film theater to the home, then the copyright box office should follow in order to recoup investments and secure to copyright owners the rewards previously taken in at the theater box office. This relocation of the box office would provide a steady stream of support for creativity flowing back through distributors, actors, producers, studios, scenarists, and all those who contribute to the creation of motion pictures and, of course, of sound recordings.

Now, briefly, I would like to consider the general arguments that have been made against the bill. We have grouped these into four points in our testimony. First, the first-sale doctrine is such a fundamental principle of copyright law that it should not be disturbed in any way.

Second, that passage of the bill would lead to violations of the antitrust law.

Third, that there are other business arrangements including perhaps surcharges that the motion picture producers especially could follow under the current law, obviating any need for the present legislation.

Last, that the copyright owners have not made a case showing they are in any way detrimentally affected by the rental market that has been created.

As to the first sale doctrine, there is no question that elements of the first sale doctrine represent fundamental principles of copyright law. The distinction between conveyance of the copyright itself and of the property in the material object, and the free alienability by resale of lawfully acquired copies should not and would not be changed by these bills.

Consumers could continue to purchase copies and continue to resell them, and there would be no effect under these bills. The copyright law, however, must be responsive to new and significant markets for the exploitation of copyrighted works, and we see a need to adjust the law in response to development of the rental market.

The first sale doctrine would not be abandoned in any way, but it would be modified to meet these new commercial realities, just as the original restrictions on alienation of property were modified in the case, for example, of real estate, to permit restrictions on transfer.

Turning to antitrust considerations, it is true that under existing law, copyright owners could control the rental market if they prohibited sales. With some exceptions, they have not prohibited sales. At this point, the Copyright Office is willing to believe that if rentals are profitable, and if efficient distribution agreements can be reached, copyright owners will exploit the rental market through numerous distributors.

We do suggest that to facilitate retailer adjustment to rentals under a commercial lending right, Congress may wish to clarify

that the bills have no retroactive effect as to the particular copies that have already been distributed. In addition, Congress could delay the effective date, perhaps as much as 6 months, in order to allow for adjustment of the market.

We also believe that if monopolistic practices should develop, the current antitrust laws provide a remedy. If we are wrong on this, Congress, of course, can review the situation in a few years and if necessary repeal the commercial lending right.

Third, as to the possibility of other business arrangements under the current law, it seems to us that any system of business arrangements based on contract between the copyright proprietor and a retailer or distributor would be doomed to failure because the contract would not bind those who are not party to it.

Although copyright owners could in theory control the rental market under current law by following a rental only policy, the Copyright Office does not believe that this would be a socially desirable policy. The law should not discourage sales to those consumers who want to buy.

The Copyright Office does not believe that a surcharge would solve the problem. First, an artificially high sales price is unfair to consumers who purchase and who do not rent. And we think it is very difficult, if not impossible, to enforce a two-tier pricing system under the current law, since those who want to rent could always go to a market where they could get the cassette at a lower price. Second, it is difficult, we think, to gauge in advance what would be a reasonable surcharge to cover future rentals. Obviously, the motion picture companies have been making some estimates and have in some cases increased the price to try to compensate for rentals. But this is at best a cumbersome approach, especially absent cooperation between the video rental shops and copyright owners. Copyright owners would need some additional market data in order to have a realistic basis for the surcharge.

Third, the current price which, as I noted, frequently does include a kind of surcharge itself exacerbates the problem of rentals. Piracy or bootlegging of motion pictures and sound recordings reached endemic proportions some time ago. Overpricing any item that can be easily copied or obtained illicitly tends to increase the market for illegal copies.

We think it is better that the copyright owner's royalty should be measured directly on rental income rather than attempt to do so indirectly through surcharges.

Finally, I turn to the question of economic harm and who must bear the burden of proof.

Opponents of the commercial lending right have generally urged that the copyright proprietors have the burden of showing economic harm and that the proprietors have not in fact suffered economic harm thorugh the current audio and video rental markets. In fact, some, I believe, suggest that copyright proprietors get quite enough revenue from the sale of a video cassette, for example, to compensate them no matter how many times a retailer rents the cassette. The views of the Copyright Office are these: While the rental market responds to consumer wishes and video retailers have played a significant role in meeting those wishes, the Office is persuaded that current law and marketing practices deprive creative

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artists and copyright owners of a fair share of rental income. We note that both sides can cite statistics to support their diverse contentions about the fairness of the division of income from sales and rentals of video cassettes.

The compelling factors to us are that a motion picture, and to a lesser extent a sound recording, requires an enormous capital investment and the creative contributions of hundreds and thousands of people, but production costs are recouped only in some cases, of course, depending on public appeal.

On the other hand, a video rental operation requires little capital investment-as I said, one retailer claimed to have recouped capitalization costs in a month of rentals-and we think this is primarily because the retailer pays only a fraction of the real value of the product he or she rents, and, in addition, benefits from the advertising campaign of copyright owners who advertise their works for distribution and performance in nonrental markets.

Most of the entreprenurial risks in the creation, production, distribution cycle fall on the owners of copyright. The risk assumed by the retailer seems small compared to the profit potential. On principle, the Office believes this is inequitable to creative people.

The Office therefore supports the grant of a commercial lending right to owners of copyright in sound recordings and motion pictures and other audiovisual works. The owners of these works and the authors and artists who participate in their creation should have the right under the copyright law to benefit from the rental of copies for profit, and thus assure they will be compensated for this important new means of exploiting their creative properties. The Office believes that equity demands the sharing of income, even if sales of the prerecorded product are strong, but there is also reason to believe that rental practices will have a direct adverse impact on the sales market. The person who rents will usually not buy the prerecorded product. At least some renters, we think, make their own copies or phonorecords.

The first-sale doctrine we believe was never intended to encourage growth of a second-hand rental market that may eventually replace a primary sales market or traditional public performance markets. The doctrine was intended primarily to benefit the ultimate consumer who purchased a copy of the copyrighted work.

Enactment of the commercial lending right proposed in H.R. 1027 and H.R. 1029 would not affect the core of the first-sale doctrine. Resale of lawfully made copies would be unaffected. Consumers who purchase copies would have essentially the same rights as under existing law. They could destroy the copy, retain it permanently, loan it to friends or dispose of it by sale or gift. The problem of public libraries has been adjusted as you have heard from the previous witness. It was the view of the Copyright Office that the intention of the bills had been that they would not affect public libraries, and the amendment would seem to make that clear. I would support that amendment on behalf of the office.

We stress that the new lending right does apply only to rentals for commercial purposes. In this narrow context, and affecting three categories of works essentially, we think that the legislation is warranted.

Thank you. I will be pleased to respond to your questions.

[The statement of Ms. Schrader follows:]



Before the Subcommittee on Courts, Civil Liberties,

and the Administration of Justice
House Committee on the Judiciary
98th Congress, First Session
December 13, 1983

Mr. Chairman and members of the Subcommittee, I thank you and the Subcommittee staff for the opportunity to appear here today and give testimony on H. R. 1027 and H.R. 1029. These bills would amend title 17 of the United States Code (the Copyright Act) with respect to the rental, lease, or lending for purposes of direct or indirect commercial advantage (hereafter commercial lending) of sound recordings and motion pictures and other audiovisual works, respectively.

I appear in support of these bills and urge their early and favorable consideration by the Subcommittee, the Committee on the Judiciary, and the House. The Senate has already considered and passed S. 32, a bill that establishes a commercial lending right in sound recordings.

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