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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.
Hon. ROBERTt KastenmeiER,
U.S. HOUSE OF RepresentATIVES,
COMMITTEE ON THE JUDICIARY,
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.,
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."
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
ual works and would, in the long run, benefit the public. Moreover, S. 33 confers no immunity from antitrust laws, it merely gives video copyright owners the same legal rights which manufacturers of other goods now have.
The Cabinet Council on Commerce and Trade has established a Working Group on Intellectual Property to consider the increasing number of important issues in this field. This Working Group, which I am privileged to chair, considered these bills at its first two meetings. The Working Group recommended to the Cabinet Council that it endorses both measures.
Subject to a suggestion with respect to the effective date of these measures, the Cabinet Council endorsed the "Record Rental Amendment of 1983," as passed by the Senate, and the "Consumer Video Sales Rental Amendment of 1983," as introduced. The first-sale doctrine, as applied to copyrighted phonorecords and audiovisual works, seriously undermines the incentive to create fostered by the copyright system. The Cabinet Council is convinced that enactment of these measures would enhance the incentive to create. It would require no amendment to existing antitrust laws. In addition, it would leave the first-sale doctrine intact with respect to copies of works other than sound recordings and audiovisual works and with respect to resale, personal use or dispay, or other nonprofit use or lending of the copies. Accordingly, the Administration believes that the strengthened protection for intellectual property embodied in H.R. 1027 (amended in the same fashion as S. 32) and H.R. 1029 will restore the incentives which new audio and video technologies have taken from the creators of these works. Such protection clearly will be beneficial to the public and should be provided.
TECHNICAL SUGGESTION REGARDING EFFECTIVE DATE
Section 3 of both H.R. 1027 and H.R. 1029 provides that these measures would become effective upon enactment. It is our understanding that the intent of this provisions is that neither amendment would apply to any work purchased by someone prior to the enactment of these measures. Accordingly, anyone who had acquired ownership of a copyrighted audio or video work prior to enactment of H.R. 1027 or H.R. 1029 could continue to rent that work without the obligation to share the rental income with the copyright owners.
While this approach is certainly logical and equitable in that it would not apply retroactively, the Cabinet Council believes and the Administration agrees that the Committee should consider an alternative. Specifically, we believe that H.R. 1027 and H.R. 1029 should only apply to new titles, that is, works copyrighted after the date of enactment. These bills are intended to stimulate creativity and it seems unnecessary to provide the added protection for existing works, that is, works copyrighted prior to the date of enactment. While the Administration believes that, on balance, this approach would be preferable to the approach presently contained in the bills, this is only a suggestion and the Administration would support the bills with the effective date provision presently contained in Section 3.
The Office of Management and Budget has advised that there is no objection to the submission of the report from the standpoint of the Administration's program. Sincerely,
GERALD J. Mossinghoff, Assistant Secretary and Commisioner of Patents and Trademarks.
CONGRESS OF THE UNITED STATES,
HOUSE OF REPRESENTATIVES, Washington, DC, November 8, 1983.
Hon. ROBERT W. KASTENMEIER,
DEAR MR. CHAIRMAN: I wanted to make you aware of my concern regarding two bills under your jurisdiction as Chairman of the Subcommittee on Courts, Civil Liberties and the Administration of Justice. H.R. 1027, the Record Rental Amendment and H.R. 1029, the Consumer Video Sales-Rental Amendment of 1983 are both very important pieces of legislation to their respective affected industries.
We have held hearings on these issues during this session and the 97th. I feel both pieces of legislation are responsible and I respectfully request that you bring
these bills to mark-up so that they can then be considered by the full House. It is also my hope that you do not delay the mark-up of either bill as a result of the other. As you are fully aware, the issues are related, but separate.
I want to express my support for your dedication to the problems of copyright Mr. Chairman. You and your staff have been very persistent in attacking the unending domino effect inherent in amending the Copyright Act. I appreciate you perseverance and would welcome hearing from you regarding the future of these two pieces of legislation. Sincerely,
HAROLD S. SAWYER,
SUBCOMMITTEE ON COURTS, CIVIL LIBERTIES
December 2, 1983.
Hon. HAROLD S. SAWYER,
U.S. House of Representatives,
DEAR HAL: Please excuse the delay in responding to your letter regarding H.R. 1027, the Record Rental Amendment, and H.R. 1029, the Consumer Video SalesRental Amendment.
As you are aware, the Subcommittee has been making steady progress on these two legislative proposals, having already had one day of hearings on each. In addition, I have scheduled a hearing during the recess on December 14. This should complete hearings on H.R. 1027; an additional day is contemplated for H.R. 1029. I do not intend that this should delay Subcommittee consideration of H.R. 1027.
I want you to know how much I appreciate your interest in this subject. Your incisive questioning has been a tremendous help in getting to the heart of these issues in Subcommittee hearings.
I hope this will clarify my intentions on processing these bills.
ROBERT W. KASTENMEIER, Chairman.
Hon. ROBERT W. KASTENMEIER,
CONGRESS OF THE UNITED STATES,
HOUSE OF REPRESENTATIVES, Washington, DC, February 14, 1984.
Chairman, Subcommittee on Courts, Civil Liberties and the Administration of Justice, 2137 Rayburn Building, Washington, DC.
DEAR MR. CHAIRMAN: In reviewing the list of witnesses scheduled to appear before the Subcommittee at our hearing on February 23rd, I note that while the major producers of videocassettes will give testimony, the independent producers have not been included.
I understand that three such independents are most anxious to present testimony. These producers, while independent, are by no means small in size, and have produced such popular videocassettes as "Jane Fonda's Workout Series" and features of Michael Jackson.
It is my thought that these witnesses would give testimony of considerable value and interest to the Subcommittee, and I am requesting that they be extended an invitation to testify on February 23rd:
Austin Furst, Chairman, Vestron Video, 1011 High Ridge Road, Stamford, Connecticut 06907, (203) 968-0000.
Stuart Karl, President, Karl Video, 899 West 16th Street, Newport Beach, California 92663, (714) 645-7053.
Louis Kwiker, National Association of Recording Merchandisers, 1008-F Historia Boulevard, Cherry Hill, New Jersey 08034, (609) 424-7404.
I am hopeful that it will be possible to include these witnesses on February 23rd, and thank you in advance for your consideration.
With best personal regards,
Very truly yours,
HENRY J. HYDE.