Mr. KARP. Those aren't derivative parties, Congressman. That is a direct use. Derivative use involves somebody who created a play from the book and wants to perform the play or a movie and wants to show the movie. This is a direct use, just a reproductive use.

Mr. BERMAN of California. They are not copies of derivative works. They are copies of the work.

Mr. KARP. That is just ducking a minor problem in order to obscure a major one. The major one is the people who create the work.

Mr. BECERRA. Let's call the people who create the work, wholesalers.

Mr. KARP. No, they are not wholesalers. Wholesalers just buy books from a publisher and distribute them to retailers. That isn't the real problem here. No wholesaler in real life is sitting on the shelf with 50,000 copies of anybody's book or books. The big problem here is the publisher who has invested a lot of money, in some cases, to prepare the book or several books, produce copies, pay authors where there is a translation, and is going to be choked off after a year and may not have even recovered his costs, no less the profits he would have been entitled to earn on his investment. This wholesale problem is a little pimple on whatever aspect of a whole you want to call it.

Mr. BECERRA. So the party most hurt here is the retailer if there is no opportunity to sell off the works.

Mr. VOLOKH. I understood your question to apply to the situation of somebody making pretty much literal copies. In that situation, I think everybody along the chain would be hurt by the Hughes' bill.

Mr. BECERRA. And under the DeConcini bill?

Mr. VOLOKH. Under the DeConcini bill, basically some people along the chain. The original copier will suffer, the retailer won't suffer much. The consumer will actually benefit a little bit.

Mr. BECERRA. Do you think that the DeConcini bill would be sufficient to allow a court to decide that there in fact has been no taking?

Mr. VOLOKH. As to somebody making literal copies, yes, I think so. As to somebody making a derivative work, which, remember, can involve millions of dollars in investments, such as a movie based on a book, the DeConcini bill will not be helpful.

Mr. BECERRA. We are talking after the fact. If all this takes effect and we have the DeConcini language enacted and we are really talking about only those who produced something before DeConcini took effect

Mr. VOLOKH. That is right. Those who have produced derivative works before DeConcini took effect but want to continue exploiting them after its effect.

Mr. BECERRA. So the playwright who wants to continue with a play

Mr. VOLOKH. Exactly.

Mr. BECERRA [continuing]. How would the DeConcini language, if enacted, play out for, say, the playwright?

Mr. VOLOKH. Well, the playwright has produced a play based on a book. The DeConcini language will help him if he, let's say, has a bunch of printed copies of the play that he wants to sell to peo

ple. There he will have more than a year, perhaps, to sell them one at a time. But that is not the way a playwright makes his money. The playright, like the movie maker or the writer of another book, makes the money off the derivative work itself, by staging the play or perhaps by authorizing other people to stage the play. So the DeConcini bill won't make much of a difference to the playwright; its main difference from the Hughes' bill has to do with the saleability of previously made copies.

Mr. BECERRA. The movie maker. What about the movie maker? Mr. VOLOKH. Nor to the movie maker. The movie maker might have a whole bunch of videotapes that he has made beforehand that he wants to sell off. The DeConcini bill will help him some. He wants more than that. He also wants to be able to license the movie for showing on television or on cable.

Mr. BERMAN of California. Will the gentleman yield?

Mr. BECERRA. Sure.

Mr. BERMAN of California. Can somebody tell me of a movie that has been made from a work that has fallen into the public domain not because of the end of a limited time period but because of a failure to comply with a formality? I wonder how much time we are debating a nonexistent issue.

MS. PERLMUTTER. It does happen. I know it happened in my practice once or twice.

Mr. BERMAN of California. What is the movie?

Ms. PERLMUTTER. Well, I would rather not say.

Mr. KARP. You are putting us in a very difficult position for this reason. Publishers who use public domain work don't want anybody to know they do it. I will give you one example.

We have been conducting a series of symposiums as part of our study. We did one on literary works. One of the participants, an active practitioner, said, Oh, I know one publisher who has a long list of public domain works. And I said, What is its name? He said, I can't tell you that. Because he doesn't

Mr. BERMAN of California. Can you amend your notion of reliance party to include people who don't feel guilty about

Mr. KARP. You are looking for criminal intent when it doesn't exist. They don't tell people, because if other publishers know it is in the public domain, some are likely to publish.

Ms. PERLMUTTER. Let me say, publishers and movie companies do spend a significant amount of time researching the status of public domain works they are interested in using, so this is something that comes up fairly often.

Mr. BERMAN of California. Many times they get clearance of the people who produce those works even though they don't have a protected work.

Mr. VOLOKH. Actually

Mr. KARP. They may not for this reason. First of all, we are not privy to all of the made-for-television-movie situations of small producers who make pictures that are shown in art houses which may later make money or not. And as I say that, I stop to think, making money isn't the only point here, at least a lot of money, from the point of view of big Hollywood studios.

Mr. BERMAN of California. I grabbed the question from Mr. Becerra.

Mr. BECERRA. That is OK. You can conclude the answer.

Mr. KARP. Therefore, it is not that easy to do. In the motion picture distribution industry, some people make a lot of money out of pictures in the public domain. There are videocassette distributors who have large catalogues of videocassettes and movies that fell into our public, Italian, French, and even American domain. A lot of Americans movies, because Hollywood isn't really that careful, a lot of American movies have fallen into the public domain after first term and people have exploited them.

Now, one of the problems with this bill on the takings point is that it really isn't in the public interest to restore copyright to public domain works on draconian terms to reliance interests. It doesn't serve anybody's purpose except a few big industries, and it doesn't serve it in any tangible or practical way from the point of view of the takings clause.

Mr. BERMAN of California. What big industry would it serve?
Mr. KARP. Motion pictures, recordings, and software.

Mr. BERMAN of California. Why? You just sat here and told me why the most costly of the shaftings that can come from this is the expensive motion picture made from a work in the public domain, and you are saying that that is the industry that is

Mr. KARP. I never said that. I didn't talk about

Mr. BERMAN of California. Well, the panel

Mr. KARP. No, no. Movie companies who spent a lot of money don't usually use public domain works. Sometimes they do. But that is a different problem. They can get two elephant men if they both use public domain works. But that isn't the problem we are concerned with.

The interests in movie companies I am talking about, movies, record companies, and computer software people, involve what they think will be the mirror image abroad. They don't care about what happens here. They are only concerned about what happens abroad. And I think that the process helped them because they had two very sympathetic ears, Mr. Kantor and Mr. Lehman, who both represented those industries before they took public office. I don't know that they had anything to do directly with this process, but I do know this.

Mr. BERMAN of California. I think if they were around to rebut your attack on their motivations, then I think they might want

Mr. KARP. I haven't attacked them. If I were, I would talk about the appearance of conflict of interest, which is probably more important than actual conflict. I would talk about a judge who, in their situation, would never sit on a case involving that issue. The other point

Mr. BERMAN of California. All right. I yield back to Mr. Becerra with the notion that I really appreciate your interest in keeping this on the merits.

Mr. KARP. I am. I was trying to. I was trying to get to the other point.

Mr. BECERRA. Thank you, Mr. Berman.

Let me ask one final question. If we find that a court decides that under either bill-let's work mostly with the DeConcini bill because it is less clear there is a takings problem under DeConcini versus the House bill. What would be your recommendations to try

to preempt the major problems that we would have if, in fact, the Government would be straddled with the cost of now compensating someone who has suffered a taking?

Mr. VOLOKH. To try to preempt right now at the drafting stage, or afterward when the court finds a taking?

Mr. BECERRA. Let's take both.

Mr. VOLOKH. I think that there is not a lot to be done afterward when the bill for constitutionally mandated compensation comes in. By then, the damage to the reliance party would have been done.

Mr. BECERRA. If we pass, if we enact the legislation and before anyone files any claim in court on a taking we come up with some belief, we are still-the Government would be covered.

Mr. VOLOKH. Oh, yes, if you change the law before anybody files a claim, then they would be covered by the new law. I guess one of the problems then is to the extent the new law diminishes the rights that were granted by the first law, you could say the new law itself works a taking. Because here you gave somebody these pretty broad rights and then you narrow them. Then somebody else would start complaining.

Mr. BECERRA. OK, so prior to enactment of any legislation?

Mr. VOLOKH. At the drafting stage, it seems to me that you can go a long way and even make the reliance party squirm a bit before you get to a taking. For example, a mandated royalty on profits after the original investment was recouped would be no problem. A buyout provision, I believe, would be no problem so long as the buyout terms would be reasonable. I think that the fact that such provisions are also present in foreign regimes might give a court some comfort because then they could look at the record of those regimes and say, Well, you know, this hasn't really hurt reliance parties that much. So I think there are a lot of things that you could do working from the DeConcini bill.

Mr. BECERRA. I don't know, Professor Perlmutter, Professor Karp, do you have any comments?

Mr. KARP. No. I agree.

Ms. PERLMUTTER. I think from the copyright clause perspective, one very workable solution might be to have a buyout period followed by a compulsory license for derivative works only, which the Supreme Court has suggested might be a sensible thing to do for transformative works like that.

Mr. KARP. I just wanted to point out that I am not just talking off the top of my head about the alternatives. We submitted them in May. They are reasonable. They parallel other provisions of the Copyright Act in force right now for alleviating the economic problems of people caught up in the same situation, not retroactivity but analagous situations, and no attention was paid.

And I am really concerned by the fact that had this process gone through the copyright subcommittees and the Copyright Office, which was frozen out of the process deliberately, we would not have had the bill we have today. And I don't think it is just coincidence that the Copyright Office was frozen out. One of the things that bothers me is when they did draft a bill for Senator Mathias, they had a much better provision for protecting reliance interests. Maybe that is why they are not allowed into the picture right now. Mr. BECERRA. I have no further questions.

Mr. BERMAN of California. Thank you. I appreciate the testimony of the professors and the conspiracy theories of Mr. Karp.

Mr. KARP. And yours, too. Thank you.

Mr. BERMAN of California. I want to welcome the distinguished panel we have next. We will first hear from Eric Smith, who is general counsel of the International Intellectual Property Alliance.

The last time Mr. Smith testified, he had some problems telling us what was wrong with a Credence Clearwater Revival band parallel import, I am told.

Mr. SMITH. I remember it well, Mr. Berman. Thank you very much, Mr. Berman.

Mr. BERMAN of California. I am happy to tell you, Eric, that that particular album is now available in an authorized U.S. version.

Mr. SMITH. Somebody was very attentive at the hearing and realized that that should have been brought into this country, made here.

Mr. BERMAN of California. OK.

Mr. GERSON. Thank you.

Mr. SMITH. Thank very much.

Mr. BERMAN of California. Let me introduce Mr. Gerson first, because those are my instructions. Our next witness is Jay Berman, chairman and chief executive officer of the Recording Industry of America. I don't know if Jay likes Credence Clearwater, but we always value Jay's advice and assistance.

Mr. JASON BERMAN. It is on my hit list.

Mr. BERMAN of California. His candor and willingness to reach a constructive compromise are far too rare even in his own industry. Our third witness is Matt Gerson of the Motion Picture Association of America. Matt is going to attempt the impossible, to read a speech written by Jack Valenti and still sound like Jack. I look forward to that.

Our final witness is Larry Urbanski, president of Movie Crafts, Inc., testifying as the chairman of the Fairness and Copyright Coalition.

Mr. Smith.

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

Mr. SMITH. Mr. Berman, thank you very much.

First of all, let me just say, there have been a lot of very interesting questions that were asked that the last panel asked and answered, and we look forward to being able to respond to some of those during the question period.

At this point, I just wanted to let all of you know that this legislation is of vital importance to the U.S. copyright industries. As you know, the IIPA is a consortium of eight trade associations which together represent 1,500 companies. And I might add that all of those companies are reliance parties under this bill, so we would like to speak to that issue.

Two of our members are here. Of course you know and you have introduced Jay Berman, chairman, CEO of RIAA; and Matt Gerson, who will sub wonderfully for Jack. We know that already.

I will be brief, Mr. Chairman.