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Week Ending December 10, 2004

HR 3632 to prevent and punish counterfeiting of copyrighted copies and phonorecords and for other purposes.

BRIEF

The bill would expand provisions governing the counterfeiting of intellectual property products. The CBO concluded that ‘H.R. 3632 would establish new Federal crimes against trafficking in licensing documents or other authentication components for sound recordings, computer programs, audiovisual works, and similar products, and would permit copyright owners to bring civil actions in Federal court for violations of these laws.’

Basically the bill further defines what rights intellectual property owners have and what constitutes a violation of those rights.

Sponsor: Rep. Lamar Smith (R-TX-21^st)

Vote: Passed House by voice vote (Sept. 21, 2004); Passed Senate by Unanimous Consent (Dec. 8, 2004); Signed by President Bush as Public Law 108-482 (Dec. 23, 2004)

Cost to the taxpayers: CBO estimates that implementing H.R. 3632 would have no

MORE INFORMATION

‘From the report of the Subcommittee on Courts, the Internet, and Intellectual Property,’ Counterfeiting of intellectual property continues to grow because of its high profitability and the difficulty of prosecuting individuals and groups connected with it. H.R. 3632 arises from a new activity associated with software counterfeiting. To deter counterfeiting, software companies increasingly use sophisticated identification features to verify product authenticity. Since the authentication features cannot be added to the actual product, they are bundled with, or placed on, the product packaging. Many of these features are found in U.S. and foreign currency, including holograms, micro-printing, and special ink.

‘Because of the enormous opportunities for profits and the low risk of prosecution and significant punishment, the bundling of authentic labeling components with counterfeit software has become part of an intricate web of international organized crime. Although crime groups based in Asia produce the largest quantity of sophisticated counterfeits, manufacturing and distribution centers exist throughout the world. In fact, the State of California is a major entry and assembly point for counterfeit software, CD-ROMs, and components. In November 2001, Operation `White Horse' led to a U.S. Customs seizure of approximately $100 million in counterfeit software that was brought into the port of Long Beach, California. However, other such components were not seized by U.S. Customs in northern California due to questions surrounding the existence of legal authority to seize such components that were not affixed to or bundled with counterfeit items.

‘Consumers are now accustomed to looking for these authentication features to protect themselves from being defrauded into buying counterfeit products. Legitimate authentication features are in high demand by those who seek to pass off counterfeit software as authentic. There has been a sharp increase in the theft of legitimate authentication features from factories that produce them and from shipment facilities that store and transport them. One American software company estimates that over 500,000 of its legitimate authentication features have been stolen from authorized replicators. These features are then bundled with counterfeit products. At times, the legitimate authentication features are trafficked online so that the person or groups who originally obtained the authentication features have no actual knowledge of how the authentication feature will be used in the future. The Committee is also aware of a recent case in which U.S. Attorneys declined to prosecute an individual trafficking in legitimate authentication features due to the difficulty in proving his intent to bundle them with counterfeit software. The Committee believes that in almost all instances, those who handle counterfeit authentication features are extremely likely to be engaged in fraudulent activity.

‘The Committee was primarily aware of this problem in crimes involving software counterfeiting, although there have been occurrences where it exists with other types of intellectual property. The Committee fully intends that this law apply to other products not just software.

‘The legislation creates a new definition of illicit labels as genuine labels that are:

1) being used or otherwise distributed without the authorization of the copyright owner, or

2) knowingly falsified to indicate a higher number of licensed users or copies than authorized by the copyright owner unless the certificate or document is used by the copyright owner solely to monitor or track the copyright owner's distribution channel.

‘H.R. 3632 also requires the forfeiture and destruction of any equipment, device, or material used to manufacture, reproduce, or assemble the counterfeit labels or illicit labels. The Committee intends this requirement to apply broadly to ensure that illegal actors do not resurface months or years after conviction using the same equipment another individual used previously.

‘The Committee consulted with the Justice Department to ensure that the legislation does not create additional burdens for legitimate businesses. The Committee accepted all of the recommendations of the Justice Department, except its recommendation to place the civil provisions in Title 17. Noting the existence of other civil provisions in Title 18, the Committee felt that placement of the civil provisions in the legislation in Title 18 instead of Title 17 would avoid the potential for confusing the traditional Title 17 civil actions regarding online activities with those engaged in the illicit trafficking of authentication features.

‘The `grey-marketing' community alerted the Committee to their concerns that early drafts of this legislation might penalize the sale of `grey-market' goods. The legislation is drafted in a manner to avoid any potential impact on the `grey-marketing' community, with the following exception: the legislation would prohibit the changing of a label that would indicate an increase in the number of authorized users. For example, it would be illegal under this act to add a `0' to a `10-user' license authentication label in an attempt to make the label appear to be for a `100-user' license. It is not the Committee's intent at this time to expand, limit, or otherwise modify existing jurisprudence of Congressional intent on grey marketing operations.

‘The Committee does not intend that a legitimate, general-purpose Internet marketplace site, such as eBay, Amazon, Froogle, or Yahoo!, through which third parties may list a wide variety of items for sale be considered to `otherwise dispose' of those items within the meaning of section 2318(b)(2) if the Internet marketplace site does not direct or request the offer or sale of the specific item, but rather it is initiated by an unaffiliated third party, and the Internet marketplace site does not own or take custody of the item. The Committee expects that such legitimate sites will have terms of service that prohibit the use of their sites to sell illegal items and reasonably implement these terms of service.

Similar legislation was not enacted during the last Congress because of a dispute over its application to digital authentication features. Some advocacy groups were concerned that unintended consequences would arise if digital authentication features were covered. The Committee is not aware of any digital authentication features that have been counterfeited at this time and did not include them in the scope of the legislation at this time. The Committee is likely to hold additional hearings and possibly introduce legislation related to this issue if it is made aware of such activity actually occurring. This legislation does not cover goods distributed or sold electronically.’ ##All Rights Reserved. No reproduction or distribution without written permission from TheWeekInCongress.com.