aber.htm

Testimony

of

Robert E. Aber

Senior Vice President and General Counsel

The Nasdaq Stock Market, Inc.


on behalf of the

INFORMATION INDUSTRY ASSOCIATION



before the

SUBCOMMITTEE ON COURTS AND INTELLECTUAL PROPERTY


HOUSE COMMITTEE ON THE JUDICIARY


Hearing on

H.R. 2652, the Collections of Information Antipiracy Act


February 12, 1998


Introduction


Thank you, Mr. Chairman and Members of the Subcommittee for the opportunity to appear before you today. I am Robert Aber, Senior Vice President and General Counsel of The Nasdaq Stock Market, Inc. ("Nasdaq"). I currently serve as Chairman of the Board of Directors of the Information Industry Association ("IIA") and I am pleased to have the opportunity to present the views of IIA and its constituencies on H.R. 2652, the Collections of Information Antipiracy Act.

IIA is composed of a broad cross section of information/database collectors, distributors, value-added redisseminators and users from a number of different industries. Given my background and the nature of my participation in IIA, I am most familiar with financial information and the issues facing the financial information industry. Participants in IIA include, among a variety of diverse interests, representatives of all the major U.S. equities, options and futures markets that collect and process financial information, the major information vendors that disseminate financial information, and the financial intermediaries who receive and use financial information.

First, Mr. Chairman, let me state IIA's appreciation to you for introducing this legislation and for the Subcommittee's continued interest and attention to the issue of how best to protect databases. As the Subcommittee is aware, IIA submitted a detailed written statement following last October's hearing on this legislation. I appear today to reinforce the views we expressed at that time and to address additional issues in more detail.

The Nasdaq Stock Market is a wholly owned subsidiary of the National Association of Securities Dealers (NASD), the largest self-regulatory organization for the

securities industry in the United States. Every broker/dealer that does a securities business with the public is required by law to be a member of the NASD.

Founded in 1971, Nasdaq is today the largest electronic, screen-based market in the world, capable of handling trading levels well in excess of one billion shares a day. It accounts for more than one-half of all equity shares traded in the nation and is the second largest stock market in the world in terms of the dollar value of trading. It lists the securities of more than 5,500 domestic and foreign companies, more than all other U.S. stock markets combined.

A critical component of the success of the Nasdaq Stock Market is the integrity and wide spread availability of information that we provide about quotations and trading activity. A fundamental tenet of securities regulation is disclosure and the hallmark of securities markets in the U.S. is the transparency of quotes and trades. The Nasdaq Stock Market, New York Stock Exchange (NYSE), American Stock Exchange (AMEX), Chicago Board Options Exchange, Chicago Board of Trade, Chicago Mercantile Exchange, New York Cotton Exchange, and New York Mercantile Exchange, all process and disseminate the highest quality, most transparent and widely available, financial information in the world. These financial markets continually strive to provide the highest quality information to the greatest number of people at reasonable cost. Like other members of IIA, we operate in a global marketplace where the quality and accuracy of our data is essential to the economy and society as a whole. And like our colleagues in the database industry, we feel strongly that a law to protect databases is both necessary and beneficial to the continued general availability of information that is essential to the lives and livelihoods of millions around the world.

IIA is a 30 year-old trade association representing all sectors of the information industry. The Association's 550 member companies include organizations, large and small, that create, manage and distribute information products and services. IIA members serve every conceivable market, domestic and international, including businesses, governments, libraries, educational institutions and, increasingly, the general public. The Association's public policy program focuses on fostering an environment favorable to the growth and widespread availability of high-quality, timely and reliable information products and services. The industry provides information in a variety of traditional formats -- print-on-paper, microfiche and microfilm -- but like Nasdaq, many other IIA members are using digital formats to meet the ever-growing demands of the marketplace for delivery of comprehensive collections of information.


The Need to Establish a Supplemental Legal Protection for Databases


IIA has long urged that the Congress adopt enhanced protection for databases. IIA has done so because it is concerned about both international and domestic developments in this area. The financial markets share these concerns.



The U.S. Database Industry Faces the Threat of Unfair Competition From Europe.

The information marketplace is competitive and global. As the thirst for information grows in all parts of the world and technology makes it easier to deliver information across borders, other nations are seeking to usurp the U.S. lead in database production. Nowhere is the threat to the American database industry more evident than in Europe.

The European Union's Directive on the Legal Protection of Databases ("EU Directive"), adopted in March 1996, went into effect on January 1, 1998, and is being implemented by EU member states. Both the United Kingdom and Germany -- two of our largest trading partners -- have already written their own national laws to implement the EU Directive, and IIA's understanding is that many other EU countries are moving forward in a similar manner.

Many aspects of the EU Directive trouble the financial markets and other IIA members, but I will refer to only one, which poses a substantial threat to U.S. database producers. The EU Directive was clearly designed to promote increasing investment in Europe's database industry, in the hope of overcoming its shortcomings in competition with U.S. industry.(1)

The chosen means for achieving this is the law's reciprocity provisions. The EU Directive requires that each EU member extend protection to all databases produced in any EU country. However, it does not extend similar protection to a database producer in a non-EU nation, unless that producer has a significant operational presence in an EU country(2)

or unless its home country offers comparable protection to EU database producers.(3)

Since the United States produces by far the majority of the world's databases, the onerous reciprocity provision in the EU Directive, may soon be interpreted as a virtual "license to steal" by unscrupulous overseas competitors. Without U.S. database protection legislation, there is little hope that American providers will receive the protection necessary if their products and services are misappropriated by overseas competitors and marketed against them -- whether pirated copies appear in Europe, the United States or elsewhere in the world.

Enactment of a U.S. law to protect databases would not only mitigate potential threats arising from the EU Directive, but would also have a positive influence on international developments outside the European Union. The World Intellectual Property Organization ("WIPO") was scheduled to take up a draft treaty for the protection of databases at its December 1996 diplomatic conference but, because of time constraints, did not. Instead, WIPO has deferred formal negotiations on database protection, pending further information exchange among the member nations of WIPO. IIA believes that at this juncture, Congress must enact database protection legislation to assure that the United States continues its leadership role at WIPO. In that role, the U.S. can lead other nations toward reasonable and workable treaties that encourage the wider availability of valuable information products to citizens of all nations. If supported by Congressional action, U.S. leadership can make strong international protection of databases a reality. But without such leadership on this important issue, it is likely that the process will continue to founder in WIPO, leaving the EU Directive -- with its aggressive reciprocity provision -- as the only model for others to follow.


In the United States, Database Investment needs Enhanced Protection.

Apart from the concerns that the financial information industry and other IIA members have about developments internationally, there is also a compelling domestic need to enact legislation similar to H.R. 2652 in order to establish adequate protection for databases. Today, the database industry is faced with an intolerable situation under domestic copyright law. Legal protection for databases -- essential to foster their development and dissemination -- changed dramatically with the Supreme Court's decision in Feist Publications v. Rural Telephone Service Co., 499 U.S. 340 (1991). Prior to Feist, producers believed their databases to be entitled to copyright protection under the "sweat of the brow" doctrine. As noted in the Report on Legal Protection for Databases prepared earlier this year by the U.S. Copyright Office ("Copyright Office Report"), this doctrine was cited by many courts to "prevent the copier from competing unfairly with the compiler by appropriating the fruits of the compiler's efforts or creativity. In this sense, courts treated copyright protection for compilations much like a branch of unfair competition law."(4)

In addition to eliminating the sweat of the brow doctrine, Feist clarified that "originality" forms the linchpin of copyright protection in compilations. Even where sufficient originality exists for protection, its scope is thin because it extends only to the original selection, arrangement and coordination of the database. Therefore, the factual contents of the database are not protectible and may be copied with impunity. These sweeping pronouncements in Feist -- and subsequent lower court decisions -- significantly altered the legal landscape for database producers. The conclusion reached by the Copyright Office bears special emphasis:

"Consistent with Feist's pronouncement that copyright affords compilations only 'thin' protection, most of the post-Feist appellate cases have found wholesale takings from copyrightable compilations to be non-infringing. This trend is carrying through to district courts as well."(5)

Thus, in sharp contrast to the situation before Feist, the database industry today can count on only limited protection for databases. A database qualifies for copyright protection only if the information it contains is selected, coordinated or arranged in a manner that expresses originality. Increasingly, databases whose producers attempt to meet the growing market demand for comprehensive, logically organized collections of information -- like the financial markets quote and trade information reports -- risk falling short of the originality standard, at least as it is applied in some circuits. Even if a database qualifies for copyright protection, the courts have refused to stop wholesale copying of the information they contain. In some cases, the courts have held that the entire product may be replicated with abandon by others, including unscrupulous competitors looking to make a quick profit by reaping where they have not sown.(6)

There has also been evidence of "cyberpranksters" who copy and disseminate databases via the Internet without a profit motive, although the resulting harm to database providers remains. (7)


Alternatives to Statutory Protection are not Sufficient

The weakness of copyright law leaves database producers with only a few possible, but limited, legal means of protecting their investment of money, time and diligent effort. None of these offer the general protection that H.R. 2652 would provide. I will comment on three of the methods that the financial markets and other database producers must resort to, absent federal statutory protection.

The first is the set of state laws and judicial doctrines that are lumped under the heading of misappropriation and unfair competition. Certainly in terms of the Nasdaq database, whose value is primarily in its timeliness, this is an important form of protection and one on which we rely wherever possible. However, these state law doctrines suffer inevitably from a lack of national uniformity. As the Copyright Office Report noted, misappropriation is "somewhat ill-defined and uncertain in scope."(8)

Moreover, it is not available in all states and virtually non-existent in many other countries -- a big disadvantage in today's global database market.

Moreover, last year's decision of the Second Circuit in National Basketball Association v. Motorola, Inc., 105 F.3d 841 (2d Cir. 1997), underscored some of the shortcomings of the misappropriation doctrine. Under the Second Circuit's opinion, a misappropriation claim can succeed only if the information taken is "time-sensitive" and only if the data pirate is "in direct competition with a product or service offered."(9)

Many valuable databases contain information that is not "time-sensitive" -- it may even be historical in nature. Further, as the LaMacchia decision demonstrated, the commercial value of a work can be seriously undermined if misappropriated by someone other than a competitor and not for any commercial purpose.

Another crucial protection that financial markets and other IIA members rely on is contract law. It is an important component of any adequate legal regime, but it has its shortcomings. Opponents of database protection contend that information providers can simply rely on contract to control misuse, but the most obvious defect in that argument is that you can't enforce a contract against someone who's not a party to it. Once the information is accessed and used by someone not bound by the contract, any contractual control over misuse is lost irrevocably.

Moreover, like misappropriation, contract law is a state-based form of protection, and there are variances among state laws in this area. Even if current attempts to create a new Article 2B of the Uniform Commercial Code to govern information contracts are successful, and even if the resulting uniform law is eventually adopted in all states, that will give little protection to American database products and services delivered in other nations whose traditions and legal protections differ from ours.

Finally, database producers are relying more on technological protections to help assure that their databases are used responsibly. However, while technology is helpful for assuring that information is not misused, it's also an impediment to increased availability of databases. Both producers and users must incur additional costs in equipment and software to "encrypt" and "decrypt" protected information.(10) Users will also have to employ greater sophistication in operating digital systems. The end result will be to make access to valuable data sources more difficult, expensive and time-consuming. Furthermore, many user systems will not be able to accept a vendor-specified complex encryption architecture.

Increased emphasis on technological protection will divert resources from the development of efficient, comprehensive databases. Moreover, technological protections apply only to products and services disseminated in digital form and offer no safeguard for printed works -- the most commonly used format today (and for the foreseeable future), that are easy to duplicate using scanning technologies.

The misappropriation doctrine, contract law, and technological controls all help to safeguard the huge investments needed to create, maintain, disseminate and support commercially valuable databases. But even taken together, they do not fill the gap in protection left by the erosion of copyright law in the wake of Feist and its progeny. A new federal statute to outlaw database piracy -- a statute like H.R. 2652 -- is still needed.


Issues to Consider


As I noted earlier, Mr. Chairman, IIA submitted a lengthy written statement for the October 1997 hearing record. That statement contained several specific suggestions for the Subcommittee's consideration in its further refinement of H.R. 2652. Today, I will offer additional perspectives on two important issues that have been widely discussed since the Subcommittee's first hearing: (1) unique collections of information and (2) the treatment of government databases.

Some critics of H.R. 2652 express concern about protecting databases that are unique or contain information not available from other sources. Some critics have gone so far as to suggest that federal law should force database providers to offer such products on terms and conditions dictated by users who rely on unique data sources.(11)

IIA stands by its earlier response that such forced subsidization will prove detrimental to the development of quality products and services for all users.

This legislation need not create any special rules for databases that are -- or that users may consider to be -- unique collections of information. Antitrust law already provides safeguards against anti-competitive licensing practices. Under appropriate circumstances and well-settled Sherman Act precedent, if a monopolist controls an "essential facility" that cannot practically be duplicated, the monopolist may not unreasonably deny the use of that facility to a competitor who is economically and technically capable of using it.(12) Under the appropriate circumstances, information under the exclusive control of one party can be treated as an essential facility for the purposes of the Sherman Act.(13) The essential facilities doctrine is firmly established in our antitrust law, and as proposed Section 1205(a) makes indisputably clear, enactment of H.R. 2652 would not change antitrust law in any way. Thus, a special provision undercutting the rights of proprietors of unique collections of information is unnecessary as well as unwise. If Congress feels it necessary to emphasize this point, IIA would be pleased to work with the Subcommittee and other interested parties to clarify the issue.

In addition, Congress and the independent regulatory agencies have already determined that certain unique databases are of such public importance that they require special regulation of the terms and conditions under which they are available. As a self-regulatory organization under the Securities Exchange Act of 1934, Nasdaq is subject to Securities and Exchange Commission (SEC) oversight. The NYSE, AMEX and other markets are subject to equivalent oversight. One aspect of this SEC review is that the markets are required for the "protection of investors or maintenance of fair and orderly markets. . [to assure that]. . . all . . . persons may obtain on terms which are not unreasonably discriminatory such information with respect to quotations for and transactions in such securities."(14) We therefore operate under the scrutiny of the SEC and also under our own self-regulatory processes. Both are designed to assure that The Nasdaq Stock Market database is provided under non-discriminatory terms and conditions that achieve greatest availability to investors and other securities industry participants. Similarly, Congress has already directed the FCC to regulate white pages telephone directory information as recognized in proposed Section 1205(d) of H.R. 2652. Nothing in this legislation would change the special treatment accorded to these unique databases, nor would Congress be precluded from taking similar action with respect to other unique databases in the future. However, these special situations are much different from those of most database producers.

IIA believes that proposed Subsection 1203(a), which excludes government databases from the scope of this legislation, is sound in its premise. However, the Association also recognizes that some believe it may have unintended consequences in relation to state universities. Databases are created by university employees in the conduct of research whose focus may lie far outside traditional governmental functions. IIA believes that there is justification for clarifying this question in order to avoid any unintended consequences of this subsection of H.R. 2652. Some states have already grappled with this issue in their open records laws; these statutes could be instructive in helping determine when information created by employees of taxpayer-funded universities should be deemed to come under the exclusion for government information. In addition, provisions contained at 44 U.S.C 3506(d) (The Paperwork Reduction Act Amendments) may be relevant. This issue deserves further study.


Conclusion


In conclusion, Mr. Chairman, I want to thank you and the Subcommittee for holding this second hearing on the Collections of Information Antipiracy Act. It demonstrates real progress toward enactment of a federal statute that will provide adequate protection for the investment in commercially significant databases. In recent years, the situation for American database producers has continued to worsen, both internationally and domestically. Many have advocated that Congress await market failure in the database industry before acting. That is not a solution. It is a recipe for disaster.

I urge you to ask those who fear new database legislation one simple question: What legitimate uses of databases are you making today that enactment of a new law like H.R. 2652 would prevent? While I believe the honest answer is "none," a response from critics would move the debate beyond general speculation to specific problem solving.

The American database industry already sees the potential threat from Europe. Thankfully, we have not yet witnessed the type of legalized piracy that the EU Directive seems to invite, but we cannot wait until that happens.

In the United States, database protection continues to erode as a result of court decisions handed down since Feist -- most notably the decision involving Warren Publishing, Inc. Paul Warren was a witness at your October hearing. Despite the fact that the decision of the Court of Appeals to deny Warren any copyright protection for its Cable and TV Factbook was based on reasoning that conflicts with that of other courts, the Supreme Court denied Warren's petition for certiorari to help resolve the conflict.

That left Warren with no copyright protection for an important and useful compilation it invested considerable time, effort and money to create. It sent a message to America's database producers that, short of a new law, they must look to other means to assure that their products are not unfairly copied and distributed.(15)

Those means, while important, are insufficient. In order to protect their resources, database producers may be forced to restrict the availability of some of their materials through tighter contract controls or more onerous encryption methods. They may be discouraged from investing in improving current products and creating new ones. The benefits that wide availability of valuable collections of information bring to our economy and society will be sharply diminished. In the long run, it will be database users -- and that means all of us -- that will suffer.

U.S. law has long encouraged the private sector to create, market, maintain and disseminate valuable collections of information to the general public. These legal incentives have brought enormous benefits to our economy and our society. They must remain a fundamental principle of our legal system. IIA looks forward to working further with the Subcommittee and its members toward continuing the long overdue progress you have begun to make toward developing and enacting fair and balanced database protection legislation.

Thank you.

1. Directive 96/9/EC of the European Parliament and of the Council of the European Union of 11 March 1996 on the legal protection of databases, Recitals (7), (10), (11) and (12).

2. See EU Directive, Art. 11 (2).

3. Id. at Art. 11(3): ("Agreements extending the right ... to databases made in third countries ... shall be concluded by the [European] Council ..." and Recital (56), which notes that protection in Europe "should" be granted to other nations databases only if those nations "offer comparable protection to databases produced by [EU] nationals ....").

4. U.S. Copyright Office, Report on Legal Protection for Databases, August 1997, at 5 [hereinafter Copyright Office Report].

5. Id., at 17-18.

6. See, e.g., Warren Publishing, Inc. v. Microdos Data Corp., 115 F.3d 1509 (11th Cir. 1997), cert. denied, 118 S. Ct. 397 (1997), (a comprehensive listing of cable systems did not exercise sufficient originality in selecting the information and therefore was unprotected against wholesale copying).

7. Cf. United States v. LaMacchia, 871 F. Supp. 535 (D. Mass. 1994).

8. Copyright Office Report, at 83.

9. National Basketball Association v. Motorola, Inc., 105 F.3d 841, 845 (2d Cir. 1997).

10. The prospect of relying on encryption technology is unclear due to the Constitutional challenge to the Department of Commerce rules regulating export of certain encryption, currently pending in the U.S. Court of Appeals for the Ninth Circuit. Compare Bernstein v. United States Department of Commerce, 974 F. Supp. 1288 (N.D. Cal. 1997) with Karn v. United States Department of State, No. 96-5121, 1997 WL 71750 at *1 (D.C. Cir. Jan. 21, 1997). If the export restrictions are upheld by the Ninth Circuit, it is very unlikely that database producers will rely on encryption technology to protect against piracy, as the most reliable encryption products will be precluded from use in international electronic commerce.

11. Statement of J. H. Reichman, Visiting Professor of Law, University of Michigan and Professor of Law, Vanderbilt University concerning H.R. 2652, before the Subcommittee on Courts and Intellectual Property, Committee on the Judiciary, House of Representatives, October 23, 1997, at 10-11.

12. See MCI Communications v. American Tel. & Tel., 708 F. 2d 1081, 1132-1133 (7th Cir.), cert. denied, 464 U.S. 891 (1983).

13.

See Bell South Advertising and Publishing Corp. v. Donnelly Information Publishing, Inc., 719 F. Supp 1551, 1566 (S.D. Fl. 1988).

14. 15 U.S.C.A. 78k-1 (c)(1)(D) (West 1997).

15. Although Warren distributed their factbook with the assumption that it was subject to a valid copyright, the 11th Circuit's decision raises the specter of licensing or "shrink-wrapping" similar print databases in order to preserve redress in state court for breach of contract.