Mr. Kevin McGuiness

Executive Director and General Counsel
NetCoalition
July 22, 2004

NETCOALITION
JULY 22, 2004

Good afternoon, Chairman Hatch, Senator Leahy, and Members of the
Committee. My name is Kevin McGuiness, and I am the Executive Director of
NetCoalition. On behalf of the members of my organization, thank you for the
opportunity to testify on S. 2560, the ?Inducing Infringement of Copyrights Act of 2004?
(?Induce Act? or ?IICA?). NetCoalition serves as the public policy voice for some of the
world?s most innovative Internet companies on the key legislative and administrative
proposals affecting the online world.

The members of NetCoalition appreciate the interests of the sponsors of S. 2560
in protecting children by addressing certain types of activities that infringe copyrights.
Moreover, we agree that the law must enable copyright owners to seek relief from those
who unlawfully download and distribute their work.

As currently drafted, however, S. 2560 is much broader in its scope than
described by its proponents and open to multiple interpretations. As a result, it would
have severe repercussions on Internet companies, products, and services; jeopardize the
introduction of new technologies; and trigger a flood of litigation. This result is not
beyond the realm of possibility. If the past is any indication, the entertainment industry
has proven its willingness to litigate no matter the cost or consequences.

Therefore, we commend Chairman Hatch and Senator Leahy for convening a
hearing to more fully explore the legislation and its consequences. Given the concerns
raised by such divergent interests?the Internet community, hardware and software
manufacturers, telecommunication services, network providers, chip makers, publishers,
consumer electronic manufacturers, wholesalers, retailers, and consumers, libraries and
universities, financial service companies, and venture capitalists to name a few?it is
imperative that the Committee ensure that the legislation successfully targets the conduct
it intends to prohibit without jeopardizing the promise and potential of the Internet.

INTRODUCTION
Today, it is hard to imagine the world without the Internet. This dynamic,
relatively new medium provides an open, democratic and international means of
communication. Any user can surf or engage in a transaction with literally millions of
different web sites that represent everything from large corporations, governments, and
public interest sites to individuals, social organizations and families. The Internet
connects people all over the world in a manner, scope, and ease that would be impossible
anywhere but online. It provides a voice for even the most modest members of society to
disseminate ideas on a scale traditionally reserved only for the most powerful.

Today, any of the Internet?s more than 500 million users worldwide can become a
publisher, set up an online business, create a web log (or ?blog?), organize a chat room,
and communicate his or her ideas anywhere in the world instantaneously. Search engines
and web portals provide a tremendous opportunity to discover new content. Leading
search engines in the United States perform over 625 million searches every day and can
link users to literally tens of billions of web pages. Amazingly, this represents only a
fraction of what can be found on the Web.

Simply put, there is no other communications medium that permits such diverse
activities. And yet, we know that the very qualities that make the Internet an
indispensable tool for worldwide commerce and communication also attract those
seeking to exploit new technologies to engage in unlawful behavior. So it is not
surprising that the Internet, which is used by most people for lawful and constructive
activities, is also used improperly.

It is also true that concerns are raised whenever new technologies are developed
that empower consumers to generate, share and distribute information in new and more
efficient ways. It was true five hundred years ago, when Gutenberg developed the
moveable type press. It was true with the advent of radio and television. And it was true
two decades ago, when Hollywood called for legislative relief to address copying
technologies it condemned with terminology normally associated with serial killers.
Fortunately, those demands were ignored, and today, the movie studios have come to
embrace digital versatile disks (?DVDs?) and videocassette tapes. In fact, profits from
the sale of pre-recorded media now exceed those derived from in-theater viewing.1

Today, the recording industry, among others, is calling for legislative relief to
address illegal file sharing over Internet peer-to-peer networks, or P2P networks. While
the members of NetCoalition strongly oppose the unlawful downloading and distributing
of copyrighted works over P2P networks, we also caution against the summary adoption
of what purports to be a simple legislative fix to complex online problems. The Internet
is essentially a peer-to-peer network, a tool that allows users to connect with other users.
Technologies such as email, instant messaging, search engines, web browsers, and
broadband, to name just a few, are basically peer-to-peer platforms. Any proposal
designed to eliminate one kind of a P2P platform has the potential of barring comparable
communications platforms that are considered by most users to be not only lawful but
essential.

In addition, almost everything on the Internet involves, allows, or perhaps more
accurately, requires the copying of information or data. Emails and web site content are

1 ?Hollywood Sees the Big Picture with DVDS,? Frank Ahrens, Washington Post, October 7, 2002,
Page A01 (?In today?s Hollywood, box office revenue makes up less than a quarter of a film?s total take.
The largest piece of a movie?s money pie comes from sales and rentals of its DVDs.?).
routinely copied and stored, at least temporarily, as content moves through the
infrastructure of the Internet to reach its ultimate destination. Online communications
systems are intentionally designed to permit ?copying and pasting? of content which can
then be shared with intended recipients. Therefore, any legislative proposal to regulate
or prohibit copying hardware, devices, or software can jeopardize the essential
architecture of the Internet.

As the Committee considers S. 2560, or whether additional legislation is even
necessary, we respectfully suggest that it embrace the following five key principles which
are critical to a balanced and effective solution:

o Legislation must be premised on the Supreme Court?s ruling in Betamax2
that a provider of a technology that is capable of substantial legal uses
cannot held liable for copyright infringement simply because the
technology can be used by third parties for unlawful purposes.

o Legislation should target unlawful behavior and uses of technology rather
than the technology itself.

o Legislation must provide a bright line between lawful and unlawful
conduct so that litigation cannot be used as an economic weapon against
innovators and entrepreneurs.

o Legislation that attempts to codify concepts of secondary liability for
copyright infringement should incorporate current case law relating to
contributory infringement, vicarious liability, and the Betamax standard.


2 Sony Corp. v. Universal City Studios, 464 U.S. 417 (1984).
o Legislation should ensure that entities that advertise and provide product
reviews that simply demonstrate how a product can be used are not swept
into the scope of possible defendants under any new cause of action.

This Committee has repeatedly worked with NetCoalition and other interested
parties to fashion solutions to complex intellectual property issues and the myriad
problems associated with legislating in both the online and off-line worlds. This
collective approach has proven effective as Congress considered the Digital Millennium
Copyright Act, the USA Patriot Act, the Electronic Communications Privacy Act, the
Computer Fraud and Abuse Act, as well as legislation relating to privacy, spam, and
identity theft.

We stand ready to join other interested stakeholders to work with the Committee
to make sure there are adequate online protections against copyright infringement.
Chairman Hatch, as you observed a few years ago in a similar context:
We need policies that foster innovation and creativity, and that the users of
the technology can enjoy. In the field of entertainment, for example,
artists can potentially connect more directly with their audience using new
digital delivery systems like the Internet. Music fans can more easily
enjoy music on wireless devices, taking all of their music with them
wherever they go without having to lug cases of CDs with them?. With
creative thinking there is substantial synergy to brighten the lives of all of
us in the more interconnected future.3

S. 2560 UNDERMINES THE SUPREME COURT?S BETAMAX DECISION
As currently drafted, S. 2560 would undermine the Supreme Court?s 1984
decision in Sony Corp. of America v. Universal City Studios, Inc., 464 U.S. 417
(1984)(the ?Betamax? decision). There, the court ruled that a manufacturer of a product
could not be held secondarily liable for infringing uses of the product by others so long as
the product was ?capable of substantial noninfringing uses.? In other words, the
3 Utah?s Digital Economy and the Future: Peer-to-peer and other emerging technologies, before the
Senate Comm. on the Judiciary, 106th Congress (2000)(Statement of Senator Orrin G. Hatch, Senate
Judiciary Committee).
production and distribution of technology by itself could rarely be considered unlawful in
the copyright context.

This clear standard has been one of the cornerstones of the growth of the Internet,
because it strikes a reasonable balance between the interest of copyright holders and the
technical realities of the online world. Indeed, the Betamax decision has widely been
described as the Magna Carta of the technology industry. As noted before, almost
everything on the Internet involves, allows, or perhaps more accurately, requires copying
of information or data. As a result, in almost every instance, the investors and
manufacturers of a new online technology have realized, at some point prior to
marketing, their product may be used by some consumers to infringe certain types of
copyrights.

Moreover, once the products have been on the market, they undoubtedly know
that their products are being used to infringe copyrights. Because of the Betamax
standard, however, they also know they are safe from liability if their product is capable
of substantial noninfringing uses. As a result, new technologies such as email, instant
messaging, web browsing, and search engines have been developed even though in each
instance there is the potential that they could facilitate copyright infringement.

Unfortunately, S. 2560 undermines the bright line in the Betamax decision. The
legislation would create a new cause of action for ?intentional inducement.? It would
allow a copyright holder to sue any entity it believed was intentionally inducing
infringement of someone?s copyrights. The bill also contains additional language that
purports to leave intact current doctrines of vicarious and contributory liability for
copyright infringement, yet nothing in the legislation applies the protections in case law
surrounding these theories of liability to the new cause of action. Consequently, if S.
2560 is enacted, the manufacturer of a new online technology would have no assurance
that it would be free from litigation even if it could prove conclusively that its product
was capable of substantial noninfringing uses.
Moreover, it is unclear whether the entertainment industry is willing to
acknowledge that the Supreme Court?s ruling applies to anything other than Sony
Betamaxes. In fact, in briefs submitted in the Grokster case, the entertainment industry
asked the appellate court to replace the bright line of the Betamax case with a cost-benefit
analysis. They referenced the following non-binding dicta by Judge Posner:
Even when there are noninfringing uses of an Internet file-sharing service?if the
infringing uses are substantial then to avoid liability as a contributory infringer the
provider of the service must show that it would have been disproportionately
costly for him to eliminate or at least reduce substantially the infringing uses. 4

This cost-benefit analysis, if adopted nationwide, would cripple the Internet
industry. In order to avoid copyright liability, a company that marketed a product would
have to constantly assess: (1) whether the infringing uses were substantial; and (2) if they
were substantial, whether the infringements could be reduced or eliminated in a manner
that would not be disproportionately costly. Since virtually all Internet technology
products have some infringing uses, manufacturers and service providers would operate
in a perpetual state of uncertainty and confront unending litigation as copyright owners
and courts second-guessed every engineering decision the manufacturers made.

S. 2560 WOULD TRIGGER A FLOOD OF LITIGATION
As currently drafted, S. 2560 would increase the likelihood of extended litigation
and the potential that lawsuits could be used as an economic weapon against technologies
the entertainment industry finds threatening. For example, although ?intentional
inducement? standard in the bill might sound like a difficult standard to meet, it does not
require proof that the defendant actually intended to induce infringement. Rather, the
defendant?s intent can be inferred, culled from literally any document within the
defendant?s possession.


4 In re Aimster Copyright Litigation, 334 F.3d at 653 (7th Cir. 2003).
Plaintiffs would be allowed to engage in extensive and intrusive discovery,
demanding email, market research data, and depositions of anyone affiliated with the
development, marketing, or management of a product. Such tactics would prove
burdensome for a large corporation. They would be fatal for a start-up company, the very
kind of entrepreneurs that have been the pioneers of the Internet.

In addition, unlike current law, where a defendant can move to dismiss a case
based on the simple fact that its product is capable of substantial noninfringing uses, it is
doubtful that any court would grant a motion to dismiss or summary judgment in cases
alleging intentional inducement, even if it appears clear that a plaintiff is engaged in little
more than a fishing expedition. Many courts would feel compelled to allow a plaintiff
the opportunity to discover evidence that could convince a jury that the defendant
intended to induce infringement, as well as cross-examine a company?s chief executive
officer at trial to demonstrate that he or she intended to induce infringement when
bringing a new technology to market.

Inevitably, copyright owners will be in a very enviable position. They can sue
any developer of a new technology they find threatening. Or, they can use this new cause
of action to force online companies to incorporate digital rights management (?DRM?)
technologies promoted by the copyright owner. Making matters worse, there is no
guarantee that different copyright owners will seek inclusion of the same DRM
technology. It is not inconceivable that within a short period of time, the entertainment
industry will control domestic technologies, and online innovation, until now dominated
by American entrepreneurs, will be shipped overseas.

Moreover, the cause of action under the proposed legislation is not limited to
manufacturers of technology. Under the bill, anyone who can be considered to be aiding,
abetting, procuring, or inducing someone to engage in copyright infringement is subject
to liability. Consequently, venture capitalists, credit card companies, common carriers,
and even entities providing editorial reviews of products, could find themselves the target
of litigation.

S. 2560 COULD UNDERMINE THE SAFE HARBORS CONTAINED IN THE DIGITAL
MILLENNIUM COPYRIGHT ACT.

The Digital Millennium Copyright Act (?DMCA?) contains safe harbors that limit
the remedies available against Internet service providers (?ISPs?) for infringements that
occur on their systems. These safe harbors ensure that ISPs will not be held liable for
copyright infringement by third parties when the ISPs provide basic Internet functions
such as routing, hosting, and linking.

While these limits would continue to apply with respect to the services offered by
ISPs (i.e., routing, hosting, and linking), they would not apply to software provided by
the ISPs to consumers to enable these services (e.g., instant messaging or Internet access
software). Currently, the provision of the software is protected by the Betamax standard.
But, under S. 2560, an ISP could be sued for inducing infringement by distributing
software that enables infringement, such as software enabling broadband services.

S. 2560 DOES NOT FULLY INCORPORATE THE STATUTORY FRAMEWORK IN THE
PATENT ACT.

The proponents of S. 2560 assert that the inducement standard is taken from the
Patent Act. Unfortunately, S. 2560 borrows from the Patent Act in an incomplete and
inaccurate manner.
Section 271(b) of the Patent Act provides that ?[w]hoever actively induces
infringement of a patent shall be liable as an infringer.? Section 271(c) of the Patent Act
states that any person who sells a component of a patented machine, knowing that the
component is especially made for use in infringement of the patent, and ?not a staple
article or commodity of commerce suitable for substantial noninfringing use, shall be
liable as a contributory infringer.?
The Patent Act does not explain the relationship between 271(b) and 271(c), but
the Federal Circuit in Dynacore v. Philips, 363 F.3d 1263, 1276 n.6 (Fed. Cir. 2004),
stated that ?although a seller of a device that is capable of substantial noninfringing use
will not be liable for contributory infringement, liability may still be established under §
271(b) if, in addition to the sale of that product, active steps are taken to encourage direct
infringement.? (Citations omitted.)
In other words, the manufacturer or seller of a device capable of noninfringing
uses can be liable for inducing patent infringement only if he takes active steps beyond
the sale or manufacture to encourage direct infringement.
S. 2560 paraphrases Section 271(b) by providing that ?whoever intentionally
induces? a copyright infringement ?shall be liable as an infringer.? But it does not codify
271(c), nor the relationship between 271(b) and 271(c) developed by the case law. The
sponsors of S. 2560 assert that codification of 271(c) is unnecessary. They argue that the
Supreme Court in Betamax transposed Section 271(c) to the copyright context when it
ruled that the manufacturer of a device capable of a substantial noninfringing use was not
a contributory infringer, and the Betamax rule is preserved in S. 2560?s savings clause.
But as discussed above, S. 2560 creates a new form of secondary liability to
which Betamax is not a defense. If Congress concludes that the Patent Act is an
appropriate model for secondary copyright liability, then it should import the entire
Patent Act framework: Section 271(b), Section 271(c), and the case law defining the
relationship between Sections 271(b) and 271(c).
Additionally, S. 2560?s definition of ?intentionally induces? is far broader than
the courts? interpretation of ?actively induces? under Section 271(b). If Congress decides
to proceed in the direction of the Patent Act, it should look to the definition of ?actively
induces? in the patent case law.
S. 2560 MAY NOT PROVIDE A REMEDY FOR GROKSTER
The proponents of the legislation assert that S. 2560 was introduced in response to
the District Court?s decision in MGM v. Grokster, Ltd., 259 F. Supp. 2d 1029 (C.D. Cal.
2003). Based on our review of the District Court?s decision, however, we believe there is
a significant question whether the entertainment industry would prevail in an inducement
action under S. 2560 against Grokster and the other P2P defendants.

In Grokster, the court stated that the defendant P2P software providers ?are not
significantly different from companies that sell home video recorders or copy machines,
both of which can and are used to infringe copyrights.? The court did not find that
?Grokster or StreamCast do anything, aside from distributing software, to actively
facilitate ... their users? infringing activity.? Consequently, the court found that ?[a]bsent
evidence of active and substantial contribution to the infringement itself, Defendants
cannot be liable.?

In briefs to the Ninth Circuit, in the press, and in communications to Senators, the
entertainment industry contends that Grokster and other P2P companies not only induce
infringement, but actually ?seduce? children into engaging in infringing acts. However,
the Grokster court found no evidence of such seduction. It did not find a single
advertisement encouraging users to engage in the unauthorized trading of copyrighted
works. It did not find a single email instructing users how to break the copyright laws.
Accordingly, if the entertainment industry were to bring an inducement action under S.
2560 against Grokster, the suit would probably survive motions to dismiss and for
summary judgment, because the industry could argue that Grokster intended to induce
infringement; but the suit would probably fail at trial unless the industry could produce
more solid evidence of intent to induce infringement.

Unfortunately, balanced against this serious question of whether S. 2560 would
provide plaintiffs with an ability to take down Grokster, we know that S. 2560 would
impose tremendous collateral damages on large sectors of the U.S. economy for reasons articulated in this testimony. Any legislation should narrowly target bad behavior while
not imposing these kinds of collateral damages on ?good actors.?

Ultimately, we believe that the Ninth Circuit employed the proper analysis in the
Napster case by making a distinction between behavior and technology. It stated in that
case, ?We are compelled to make a clear distinction between the architecture of the
Napster system and Napster?s conduct in relation to the operational capacity of the
system.? Napster, 239 F.3d at 1020. This distinction between architecture and conduct is
the key to Napster and to contributory copyright infringement analysis in the digital era.

Unfortunately, the entertainment industry is urging this Committee and has urged
the courts to blur the bright line between behavior and technology. This Committee
should not be lured into penalizing technologies that can be used for unlawful purposes,
but rather should focus on illegal behavior. Recently, Howard Beales, the Director of the
Bureau of Competition at the Federal Trade Commission provided testimony before a
Senate committee, which underscored the importance separating behavior from platforms
and technologies that allow unlawful behavior to occur. He stated:
[C]onsumers can use e-mail to send or receive copyrighted materials,
pornography, viruses, and spyware. Similarly, search engine technology
may expose consumers inadvertently to child pornography, viruses, and
spyware. Videotape recorders and compact disk recorders may be used in
violation of copyright laws by individuals who are unaware that they are
doing so. Many risks associated with P2P file-sharing seem to result
largely from the actions of individual users, rather than from the operation
of the P2P file-sharing software itself.5

CONCLUSION
Unlawful peer-to-peer file sharing of copyrighted materials is wrong. Users and
companies who engage in these activities should not be allowed to operate beyond the
reach of the law. The Committee should recognize, however, that bad actors?and not

5 The Future of Peer-to-Peer (P2P) Technology, before the Senate Comm. On
Commerce, Science and Transportation, 108th Cong. (2004)(Statement of Mr. Howard
Beales, Director, Bureau of Consumer Protection, Federal Trade Commission).

technology?are responsible for the illegal activities. If the Committee determines that a
legislative response is appropriate, we urge Members to ensure that legislation be
narrowly focused to target behavior and not put at risk the companies and innovators that
allow most consumers to lawfully enjoy new and exciting technologies.

In addition, the recording industry must recognize that the real solution to the
problem of unlawful file sharing cannot be achieved exclusively through legislation.
Even a complete ban on file sharing in the United States will not prevent consumers from
accessing overseas sites to download music. Any comprehensive solution must involve a
combination of effective legal relief, consumer education, and a reasonably priced,
convenient, and portable distribution system that makes it as possible to download music
legally as can be done today illegally. In the long run, the recording industry will be no
more able to prevent online file sharing than Hollywood could stop the VCR or the DVD.

Thank you for the opportunity to testify, and I would be happy to answer any
questions from the Committee.