Statement of National Association of Recording Merchandisers “The Voice of Music Retailing”

 for the record in Oversight Hearing on “The Digital Millennium Copyright Act Section 104 Report”

 Subcommittee on Courts, the Internet and Intellectual Property

Committee on the Judiciary U.S. House of Representatives

 December 12-13, 2001

   Summary of NARM’s Response To the Copyright Office DMCA Section 104 Report  

The Copyright Office Report on Section 104 offers important clarifications that could help facilitate electronic commerce in copyrighted works, but it also offers suggestions that, if followed, would seriously undermine public rights while offering additional rights to copyright owners without adequate justification.  The Report correctly responds with concern about mounting evidence of practices by copyright owners to expand their copyright control beyond the limits imposed by Congress, but suggests that market forces be given a chance to correct the problem.  When the Copyright Office and NTIA conducted the study last year, PressPlay and MusicNet had not yet been formed, and there was still hope that free market principles would come into play.  In the year since then, we have witnessed the failure of free market forces, and we respectfully suggest that it is no longer premature for Congress to step in to restore the necessary balance.  We applaud the Copyright Office for recognizing that the first sale doctrine does, indeed, apply to all lawfully downloaded (reproduced) works, but we are disappointed that its Report suggests that copyright holders may enjoy carte blanche to nullify the rights granted copy owners in Section 109(a) of the Copyright Act.

America’s retailers of music, represented by the National Association of Recording Merchandisers,

AGREE with the conclusion that a mechanical royalty should be paid when a reproduction is made (a download), and that a performance royalty should be paid when a public performance is made (streaming).  No reproduction infringes the performance right unless someone can actually hear the performance.  No public performance infringes the reproduction right unless a “copy or phonorecord” remains after the public performance is over.

AGREE with the conclusion that lawfully made digital downloads of sound recordings are entitled to the full application of Section 109(a).  Section 109(a) entitles the owner of a lawfully made copy to sell it or give it away without the consent of the copyright owner.

DISAGREE with the Copyright Office’s assertion in Footnote 41 that Section 109(a) is a right without a remedy. There is absolutely no legal basis for concluding that Congress didn’t mean what it said in enacting Section 109(a), or that Congress intended Section 109(a) to be voidable at the discretion of a copyright owner.

AGREE with the Copyright Office's conclusion that Section 109(a) should not be interpreted to authorize the sale of other disposition of archival copies apart from the originals.  If an archival copy is sold separately from a legally downloaded copy it is no longer archival, and therefore, it no longer enjoys Section 109 rights.

AGREE that consideration be given to the creation of a new archival exemption that provides expressly that backup copies may not be distributed (option 2), but with care to avoid unintended results.  The proposal to amend Section 109(a) to require that copies be lawfully made “and lawfully distributed” (Option 1) would have the effect of completely nullifying Section 109(a)’s applicability to digital downloads, and should be rejected.  Such language would give copyright owners control over perfectly lawful downloaded copies for which retailers and consumers have already paid.

QUESTION the wisdom of continuing to just let the marketplace try to solve these issues.  In recent months the music industry has announced plans in which consumers will be limited to one of only two similar business models, two media players, little or no price competition, and an incomplete selection of music through a handful of retail channels.  Contrary to the first sale doctrine’s principles, copyright monopolies are being leveraged to eliminate or restrict all competition in the retailing of copyrighted content.  The Copyright Office Report fails to note the potential harm to the public of limiting exclusively to the copyright owners the right to develop new business models.

DISAGREE with the suggestion that use by copyright owners of Section 1201 to protect business models rather than copyrights does not warrant Congressional concern.  Congress never intended for Section 1201 to permit copyright owners to neutralize the limitations Congress justifiably placed upon their copyrights, or to use technology to create for themselves rights never before conferred, such as the right of private performance.  Today, Section 1201 is being used to shield the unauthorized usurpation of public rights by copyright owners.  Copyright owners are claiming that though the owner of a lawfully made copy may legally sell or give away that copy, the copyright owner may nevertheless use access control technology to prevent the buyer or gift recipient from privately and lawfully performing the work.  Such power upsets the careful balance of public and private interests that Congress has historically preserved in crafting the Copyright Act.

QUESTION some of the unsubstantiated allegations of economic harm (or threats to possible future economic harm) to copyright owners that have colored the Report.  Retailers of music are the first to feel the sting of sales lost to pirates. We share the concern of copyright owners about potential harm to our industry. Nevertheless, retailers are reluctant to attribute every lost sale to piracy.  Sales are also lost to free CDs from record clubs, to lousy weather, a soft economy, and poor releases.  Retailers know that Napster did not kill the singles market.  Before Napster came along, record companies were killing the singles market by not releasing singles. We need independent studies which can help us all better evaluate the impact of new technologies on the economics of our business.

QUESTION the conclusion that Section 109(a) should not be updated so that the principles of the first sale doctrine may carry forward to prevent copyright owners from exercising control over individual copies that they do not own.  The Constitution and the public policy foundations of copyright law lend no support for allowing copyright owners to expand their control over electronic commerce once they have been fully compensated for the license to their exclusive rights.

Additional support for and explanation of NARM’s position is set forth below.

NARM – The Voice of Music Retailing

The National Association of Recording Merchandisers (NARM) represents music retailers that share both the enthusiasm of the recording industry for digital distribution as well as concerns about the potential negative impact of digital piracy.  NARM supported the RIAA litigation against Napster with an amicus brief and has a long history of supporting copyright enforcement and  anti-piracy efforts.  We do not, however, believe that the rights of owners of lawful copies need be sacrificed to protect the rights of copyright owners.  We do not believe that the only way copyright owners can receive adequate compensation for their properties is through total control over distribution and use.

Our segment of the music industry is most intimately involved with the workings of the first sale doctrine and Section 109(a) of the Copyright Act.  Our members are beneficiaries of the right to sell sound recordings without the consent of the copyright owner, thereby preserving vigorous competition for price, service, selection and customer loyalty.  Our customers also enjoy the right to sell, lend or give away the CDs they purchase, thereby preserving avenues for others to acquire lawfully made sound recordings by second-hand sales, lending (including library lending), gifts and bequests.  By keeping such activity beyond the control of copyright holders, the constitutional objective of the Copyright Act – to encourage wide dissemination of creative works to the public – is carried out.

The First Sale Doctrine

When Congress first codified the first sale doctrine in Section 27 of the Copyright Act of 1909, the House Committee on Patents stated that “it would be most unwise to permit the copyright proprietor to exercise any control whatever over the article which is the subject of copyright after said proprietor has made the first sale.” H.R. Rep. No. 2222, 60th Cong., 2d Sess. (1909).  Though still referred to as the “first sale doctrine,” the current codification in Section 109(a) of the 1976 Act, as amended, no longer requires a sale, but merely the ownership of a lawfully made copy.  The Constitution’s purpose for copyright law (the promotion of science and the useful arts) is better served if copyright owners are denied control over retail distribution and redistribution, leaving such commerce to a free and competitive marketplace.  Likewise, consumers who purchase CDs should never have to be the “ultimate” consumers, but should instead be free to pass along their lawfully made copies to others, whether by gift, bequest, lending, barter or resale.  The first sale doctrine is, then, one of the most critical parts of the balance struck in the Copyright Act.  In exchange for a grant of certain limited exclusive rights, authors are required to give up the right to control who can buy or otherwise obtain a lawful copy of a work, and also give up the right to control to whom it may be transferred and under what terms.

Section 109 is a Right

One of the most curious portions of the Copyright Office report is footnote 41, which declares that Section 109(a) is a right without a remedy.  There is, in fact, no legal support for such a statement.  To the contrary, Section 109(a) itself is cast in terms of rights, and statements to the effect that Section 109(a), like Section 107 (fair use), is merely a limitation on the rights of copyright owners but not a right in itself are simply wrong.  (Even the Bill of Rights is cast largely in terms of limitations upon the rights of the government.)

Section 109(a) states that notwithstanding the distribution right, the owner of a lawfully made copy or phonorecord is “entitled,” without the consent of the owner of the distribution right, to transfer ownership or possession of that copy or phonorecord.  (In fact, the distribution right in Section 106(3) is made “subject to” Section 109(a).)  Section 109(d) refers to the provisions of 109(a) and 109(c) as “privileges.”  These important terms mean what they say, and elevate the first sale doctrine to more than a mere defense to a claim of copyright infringement

Public debate has often lumped the first sale doctrine in with “fair use” rights, but Congress was careful to treat it separately and distinctly, and with good reason.  Fair use relates to the use of the work (that is, the intellectual property itself), regardless of who owns the copy or phonorecord being used, or even whether a copy or phonorecord is being used.  Section 109(a), in contrast, codifies a doctrine aimed at protecting retail competition and encouraging infinite re-distribution.  It provides that the right to dispose or transfer possession of a lawfully made copy or phonorecord is a right belonging to the owner of the copy or phonorecord.  It is not cast as a defense to a claim of infringement of the distribution right but, rather, as an entitlement and a privilege that serves to exhaust the distribution right as to any particular copy or phonorecord.  The Copyright Office acknowledges that Congress was careful to point out in Section 202 that there is a significant distinction in the Copyright Act between ownership of intangible work protected by copyright and ownership of a tangible copy that embodies the work.

Section 109 and Contract Preemption

The Copyright Office Report concluded that the general issue of contract preemption was outside the scope of the report.  While we disagree with that conclusion, we are encouraged that they acknowledged the possibility that rights holders, rather than Congress, may potentially determine the landscape of consumer privileges in the future.  We agree, and believe the time for statutory change is now.

During the Copyright Office and NTIA inquiry into this issue, the Copyright Industry Organizations made it clear that, though they acknowledged that the first sale doctrine applied to copies and phonorecords made by means of a licensed reproduction, including downloading, they nevertheless believed that they could nullify the public’s rights under Section 109(a) by use of restrictive end-user license agreements (“EULAs”).  This view is contrary to law.

As recently stated by Judge Pregerson, a significant effect of Section 109(a) is to “negate copyright owner control over further or ‘downstream’ transfer to a third party.”  Softman Products Co. v. Adobe Sys., Inc., 2001 U.S. Dist. LEXIS 17723, at *11 (C.D. Cal. October 19, 2001) (citing Quality King Dist. v. L’anza Research Int’l, Inc., 523 U.S. 135, 142-44 (1998)).  “The first sale doctrine vests the copy owner with statutory privileges under the Act which operate as limits on the exclusive rights of copyright owners.”  Id. (emphasis added). 

In Softman, the District Court had little patience for Adobe’s insistence that its “license to use” could trump the first sale doctrine:

Adobe asserts that its license defines the relationship between Adobe and any third-party such that a breach of the license constitutes copyright infringement.  This assertion is not accurate because copyright law in fact provides certain rights to owners of a particular copy.  This grant of rights is independent from any purported grant of rights from Adobe.  The Adobe license compels third-parties to relinquish rights that the third-parties enjoy under copyright law.

Id. at *11-12 (emphasis added, footnote omitted).  The EULA used by Adobe to limit those Section 109(a) rights “conflicts with the first sale doctrine in copyright law, which gives the owner of a particular copy of a copyrighted work the right to dispose of that copy without the permission of the copyright owner.”  Id. at *13 (emphasis added).

(Though the posture of Softman was that the owner of the lawfully made copies was able to enforce its Section 109(a) rights once it was sued by Adobe, the only reason that case made it to court was that the owner was free to ignore the EULA in the exercise of those rights.  If, however, Adobe had employed access control technology to prevent the owner of the lawfully made copies from even having the option of selling the products separately, justice compels the conclusion that the owner of the lawfully made copy should have had the right to seek declaratory and injunctive relief against Adobe’s infringement.)

In its consideration of the public interest in the dispute, Judge Pregerson offered words of wisdom we commend to this Committee:  “The Court finds that the provisions contained in Adobe’s EULA purport to diminish the rights of customers to use the software in ways ordinarily enjoyed by customers under copyright law.  Therefore, these restrictions appear to be inconsistent with the balance of rights set forth in intellectual property law.”  Id. at *35 (footnote omitted).  Because the balance in copyright law is already tilted heavily in favor of copyright holders, the need to protect the rights retained for the public is more important than ever. Id. at *35-36.  Almost as though it was speaking of the major record companies as they prepare to control all distribution through PressPlay and MusicNet, the Softman court found that Adobe was seeking “a vast and seemingly unlimited power to control prices and all channels of distribution.”  Id. at *37.  “A system of ‘licensing’ which grants software publishers this degree of unchecked power to control the market deserves to be the object of careful scrutiny.”  Id.

We disagree that the concerns identified by Judge Pregerson are speculative. Some pre-recorded CDs already contain EULAs asserting that if the CD is not returned to the copyright owner within seven days after purchase from the retailer, the consumer agrees never to give it away or play it on a different device.  (The EULA will not even be seen in the ordinary private performance of the CD.)  One Internet site offering licensed downloads required agreement to an eight-page EULA in which Section 109(a) rights would be waived.  The consumer had to agree that the lawful copies would not even be left to the owner’s heirs.

We ask that this Committee heed Judge Pregerson’s admonition, and give careful scrutiny to efforts to use EULAs to obtain unchecked control over pricing and distribution.

Section 109(a) and Technological Controls

Because the same principles Judge Pregerson examined in relation to EULAs also apply to technological restraints such as “tethering” and “time-outs” used in the place of EULAs, we believe that the same scrutiny should be applied to them as well.  We believe that the Congressional mandate in Section 104 of the DMCA included consideration of how use of digital technology is affecting the public’s rights under Section 109(a), and respectfully disagree with the Copyright Office’s conclusion that this impact falls beyond the scope of the study.

Digital technology brings with it the ability of copyright owners to exercise the very control Congress has denied them.  Copyright owners have acknowledged the right of the owner of the lawfully made copy to sell it or give it away, but are attempting to obtain a waiver of that federal right or, failing that, to use technological controls, typically “tethering” or “time-out,” with the object of making the exercise of that right futile.  This use of technological access controls is the equivalent of saying “you can give your book to the library, but the library cannot lend it without paying us to unlock it;” “you can lend your CD to your classmate, but your classmate cannot listen to it without paying us to unlock it;” and “you can sell the DVD movie your kids have outgrown on eBay, but the parents that buys them from you will only get worthless pieces of plastic.” Moreover, when tethering and time-outs are carried out collaboratively by the major copyright industries, the effect not only impacts Section 109(a) rights but permits copyright owners to expand their control beyond the limits of the copyright grant.

a.  Section 109(a) and Tethering

We were encouraged that the Copyright Office report acknowledged that the practice of tethering, if it became widespread, would have the effect of diminishing Section 109.  We believe, however, that Congress should not wait for more serious damage to be done, and encourage the Committee to question the companies behind MusicNet and PressPlay regarding the tethering provisions of their subscription services and the impact on first sale rights.

b.  Section 109(a) and Technological Time-Outs

 The business model of choice of all of the major copyright owners in the music industry is the “subscription” model, otherwise known as a “limited download.”  Touted as a “new” choice, in reality it takes an existing choice and limits it, by timing out access to the consumer’s own copy.  These time-outs are either by time (such as 24 hours or 30 days) or by number of private performances (such as 12 plays).  In the music industry, MusicNet and PressPlay are based upon this model.  What distinguishes the “subscription model” being adopted collaboratively by the major record companies and motion picture studios to the suppression of competing businesses is that, by use of these technological time-outs, the right of reproduction is masquerading as a public performance.  Rather than going to the expense of streaming a performance publicly and having to pay for the cost of transmission each time, they are licensing reproductions that lead to the making of lawful copies and phonorecords, and then, applying technological controls to take away the rights Congress has attached to ownership of those copies, they are collecting a fee for entirely private performances over which the Copyright act grants them absolutely no right of control or remuneration.  Copyright owners have the choice of licensing public performances (Section 106(4)) or licensing reproductions (Section 106(1)), but have no right to leverage the license to reproduce into usurpation of the rights that Congress has granted to the owners of lawfully made reproductions, or to create a de facto right of private performance where none exists under the law.

If the copyright owner can control private performances, it can effectively control retail sales protected by Section 109(a) as well.  Just as buying a used car would be to no avail if the manufacturer retained control of the access, if consumers who buy lawful copies of books, sound recordings or movies must pay the copyright owner for the right to read the book, play the CD or watch the DVD, retailers would be relegated to selling worthless paper or plastic unless they obtained the copyright owner’s permission to unlock the access.

Some copyright owners have protested that if the law prevents copyright owners from charging per play or per view, or to individually charge listeners or viewers, then theater owners would be at risk.  Such an alarmist view requires a complete distortion of copyright law.  The theater owner licenses the right to perform a work publicly, but the patron does not license any right under the Copyright Act to listen or view, for none exists.  If someone sneaks in without paying, the theater owner may get angry and demand payment, but this implicates no rights under the Copyright Act.  Indeed, copyright owners may license public performances of music over the Internet (streaming), but it is the right to perform the work publicly that is implicated – not the ability to listen the public performance.  Just as copyright owners have no right to license anyone to listen to the radio, those who listen to the streamed audio infringe no copyright.  Likewise, the copyright owner may not tax those who listen to their own CDs, for the right of the copyright holder only extends to the right to license public performances.  See, e.g., Allen v. Academic Games League of America, Inc., 89 F.3d 614 (9^th Cir. 1996).  The copyright holder has no right to prevent anyone from singing the copyrighted song in the shower, Twentieth Century Music Corp. v. Aiken, 422 U.S. 151, 155 (1975), or playing a movie at home or in a hotel room, Columbia Pictures Indus., Inc. v. Professional real Estate Investors, Inc., 866 F.2d 278 (9^th Cir. 1989).

Notwithstanding these legal restraints, some copyright owners are moving ahead with efforts to avoid them.  The Recording Industry Association of America (“RIAA”) recently petitioned for the right to pay authors a lower mechanical royalty for reproductions which were timed out (so-called “limited downloads”).  66 Fed. Reg. 14099 (March 9, 2001).  The request was premised on the notion that authors should not receive the full royalty if the consumer was going to be denied full enjoyment of the reproduction. NARM objected to this petition, arguing that the limited download was, in purpose and effect, nothing more than a device to gain control over private performances.  Nevertheless, the RIAA has entered into an agreement with the National Music Publishers Association to accomplish the same result.  If they succeed, not only will consumers have to pay to listen to their own music, but any lawfully made copies sold or given away pursuant to Section 109(a) could not be enjoyed by the new owner unless the copyright holders are paid again, and again.

In short, very real technological and contractual restraints are being placed upon lawfully made copies that have the effect or destroying the public’s rights under Section 109(a) while extending the copyright owner’s control beyond the very clear limits set by Congress.  Nothing in the record suggests that tethering and time-outs contribute to the battle against piracy.  Indeed, the technology to time out a song after a certain number of plays is entirely separate from the technology to prevent unauthorized duplication.  Because the right to listen to what is bought is central to the retail transaction, imposing a “pay-per-listen” model onto lawful copies directly impairs Section 109(a) rights without in any way making copyrights themselves more secure from piracy.

The Need For Modernization of Section 109(a)

Access to Reproduction Licenses

In the five or so years that digital distribution has been viable, we have seen the number of available business models, digital players and compression codecs shrink.  Thanks to the efforts of the five major record companies to amass 85% or more of all distribution through either PressPlay or MusicNet, consumers undoubtedly will be denied access to innovative and highly competitive retail channels. Today, most lawfully made copies are still produced in a factory and resold through various distribution channels before reaching the retailer and, finally, consumers.  Occasionally, one retailer might negotiate an exclusive on a music product.  Thanks to Section 109(a), however, even those exclusives leave ample room for a variety of competitive responses with which other retailers can (and do) respond:  Some will simply refuse to stock the product; others will buy the product at the exclusive outlet and resell it for the same price, hoping that their losses on each resale will be made up in the long run by keeping their customers happy; still others may buy in small quantities from the exclusive outlet, but not promote the title.  Most important in such scenarios is that despite the effort of a content owner to pick and choose which trading partners win in the marketplace, is the ability of the marketplace to protect competition and choice for the consumer.

In the online world, by contrast, “resales” are in reality “sublicenses.”  That is, if the exclusive licensee were to offer licensed reproductions available exclusively from that dealer, its competitors could not offer their own customers the right to download from those copies even if the store paid for the right to download its own, because each download implicates the right of reproduction and requires the copyright owner’s consent.  The first sale doctrine would allow the exclusive licensee’s competitors to download from the exclusive dealer onto a writeable CD and then sell that CD, but the exclusive dealers’ competitors would be unable to compete in the market for digital downloads (sublicensing reproductions) without the copyright owner’s consent. Under this hypothetical scenario, the exclusive dealers’ competitors would be unable to compete at all, and consumers lose all choice in the marketplace.

Thus far, record companies have shown the most interest in cross-licensing digital rights to each other, or to companies they control or in which they have invested.  They have withheld rights from retailers who are perfectly capable of offering secure, compensated digital downloads, but who they no longer see as partners, but as competitors.  We estimate that over 99% of the repertoire owned by copyright holders today remains off limits to legitimate retailers who are trying to compete with peer-to-peer file sharing.

For these reasons, NARM supports reasonable measures to protect the consumer’s right to vigorous retail competition for their dollars.  The objective should be to bring the historic benefits of the Section 109(a) right to sub-distribute physical goods to the sub-licensing of downloads, which can result in copy virtually identical to the pre-recorded CD. 

This could be done in a number of ways. Congressmen Boucher and Cannon have introduced the Music Online Competition Act which would require any copyright holder that licenses an affiliated retail venture (the right to sublicense reproductions to the public) to license competing retailers on the same basis. Whatever approach is taken, it is imperative that Congress act expeditiously to stimulate the free market in distribution of lawfully made copies outside of the control of copyright holders.

Freedom to Advertise What Is For Sale

Total control over distribution is something Congress has historically insisted must never fall into the hands of copyright owners, because "the policy favoring a copyright monopoly for authors gives way to the policy opposing restraints of trade and restraints on alienation."  M. Nimmer, D. Nimmer, Nimmer on Copyright, § 8.12[A].  Since this freedom of alienation would be severely restrained if a license were required to advertise the product to be transferred under Section 109(a), we recommend codifying the right of retailers to make promotional use of copyrighted works for the purpose of exercising their Section 109(a) rights.

It had long been understood that retailers of copyrighted goods enjoy the right to reasonably copy portions of the works, display them, and publicly perform them, where the purpose is to promote the sale of the works in question.  Notwithstanding the copyright owner’s exclusive right to publicly display a work, it has been standard practice for retailers of books, music and video to display publicly over the Internet those works that are being offered for sale.  Just as the bookseller may allow patrons to leaf through and read books in the store without purchasing them, so too may a music retailer allow patrons to listen to the music in the store.  Just as the bookseller may post a sample of a book’s text on the Internet, so, too, may a music retailer post a sound clip.

All of that is changing now.  Our members are reporting efforts by copyright owners to prohibit these forms of advertising without a license.  The only effective way for retailers to advertise even pre-recorded sound recordings over the Internet, even for physical distribution, is to post an image of the artwork and offer a 30-second or so sound clip as a sample. BMI has taken the novel position that a 30-second sound clip, long considered the industry norm within the bounds of fair and sensible use, is illegal absent authorization from the copyright owner.  Some record companies are demanding that retailers get their permission even to post the graphics of the CD itself.  There cannot possibly be any diminution in value to the copyright owner when retailers promote the lawful sales of the copyright owner’s own works.  The sole purpose for this seemingly irrational behavior appears to be to gain greater control over distribution.  Indeed, at least one record company has offered to license these uses at virtually no cost, yet requiring a written acknowledgment that a license is required, and reserving for itself the right to withhold authorization to show graphics or offer 30-second samples of any songs it chooses.  A major movie studio has sued to prevent one vendor from streaming promotional movie samples to retail customers, while at the same time allowing competitors to do the same thing without charge.  Absolute and total control over distribution appears to be the sole objective, and Congress should act now to preserve the full value of Section 109(a).  The provisions for this in the Music Online Competition act are a god first step.

Conclusion

We thank this Subcommittee for scheduling hearings on the Copyright Office Report and for allowing the views of music retailers to be entered into the record.  We commend the Copyright Office and the NTIA for their hard work over the past many months, and we encourage Congress to continue to ask for  input into these complex issues.

NARM asks that the first sale doctrine be respected for digital downloads just as it is for pre-recorded copies.  We do not believe that protecting the first sale doctrine will result in rampant piracy.  Rather, NARM’s retail members are confident that, given a fair opportunity, they could offer products and services superior to those offered either by free peer-to-peer file copying or by restrictive “subscription” services, such as MusicNet and PressPlay.