FEDERAL PROSECUTION VIOLATIONS OF INTELL. PROP. RIGHTS

FEDERAL PROSECUTION OF
VIOLATIONS OF INTELLECTUAL
PROPERTY RIGHTS

(COPYRIGHTS, TRADEMARKS AND TRADE SECRETS)

III. CRIMINAL REMEDIES FOR COPYRIGHT VIOLATIONS

As previously noted, the criminal law now assumes greater significance in the protection of copyrights. This development is, in part, a consequence of the burgeoning trade in unlawfully reproduced records, tapes, films, and computer software. It is also a direct result of the increased attention paid to copyright issues by Congress and by federal law enforcement authorities.

The federal copyright statute, contained in Title 17 of the United States Code, provides for several separate criminal sanctions. At the outset, 17 U.S.C. § 506(a) imposes criminal penalties on certain acts of copyright infringement, and carries the most severe penalties of any Title 17 offense. Section 506(a) makes reference to 18 U.S.C. § 2319, which contains specific penalties and additional criminal elements. Section 506 also provides lesser criminal sanctions for conduct which does not constitute copyright infringement but which nonetheless undermines the integrity of the copyright system. See 17 U.S.C. § 506(c)-(e). Further, in 1994, Congress created 18 U.S.C. § 2319A, which expressly covers the unauthorized fixation of and trafficking in sound recordings and musical videos of live musical performances. Pub. L. No. 103-465, Title V, § 513(a), 108 Stat. 4974 (1994). These criminal provisions are discussed in seriatim.

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A. CRIMINAL COPYRIGHT INFRINGEMENT: 17 U.S.C. § 506(a) AND 18 U.S.C.

§ 2319

The principal criminal statute protecting copyrighted works is 17 U.S.C. § 506(a). In 1982, special provisions for motion pictures and sound recordings were added to provide felony penalties for first-time offenders. While the criminal prohibition remained enumerated at 17 U.S.C. § 506(a), the felony penalties for unlawfully reproducing or distributing motion pictures or sound recordings were placed in § 2319 of Title 18. Individuals convicted for the first time of large-scale infringement ⁽²⁹⁾ involving sound recordings or audiovisual works were subjected to a maximum penalty of up to five years' imprisonment, a $250,000 fine, or both.

In 1992, Congress again amended § 2319. Pub. L. No. 102-561, 106 Stat. 4233 (1992). This section, as amended, now provides in part:

(a) Whoever violates section 506(a) (relating to criminal offenses) of title 17 shall be punished as provided in subsection (b) of this section and such penalties shall be in addition to any other provisions of title 17 or any other law.

(b) Any person who commits an offense under subsection (a) of this section --

(1) shall be imprisoned not more than 5 years, or fined in the amount set forth in this title, or both, if the offense consists of the reproduction or distribution, during any 180-day period, of at least 10 copies or phonorecords, of 1 or more copyrighted works, with a retail value of more than $2,500;
(2) shall be imprisoned not more than 10 years, or fined in the amount set forth in this title, or both, if the offense is a second or subsequent offense under paragraph (1); and
(3) shall be imprisoned not more than 1 year, or fined in the amount set
forth in this title, or both, in any other case.

These new penalties make 17 U.S.C. § 506(a), which incorporates 18 U.S.C. § 2319 by reference, an effective criminal deterrent against the infringement of copyrights. ⁽³⁰⁾

The 1992 amendments have made it possible to pursue felony sanctions for infringements of all types of copyrighted works, including computer software and copyrighted digitally encoded works. ⁽³¹⁾ Felony penalties, however, only attach to violations involving reproduction or distribution in the quantity stated. It is a misdemeanor violation if the numerical and monetary thresholds are not met, or if the defendant is involved in the infringement of the right to prepare derivative works, or the right to publicly display or perform a copyrighted work.

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1. The Elements of Criminal Copyright Infringement

There are four essential elements to a charge of criminal copyright infringement. In order to obtain a conviction under § 506(a), the government must demonstrate:

(1) that a valid copyright exists;

(2) that it was infringed by the defendant;

(3) willfully; and

(4) for purposes of commercial advantage or private financial gain.⁽³²⁾

See, e.g., United States v. Manzer, 69 F.3d 222, 227 (8th Cir. 1995) (infringement of computer program used in satellite descrambler modules); United States v. Hux, 940 F.2d 314, 319 (8th Cir. 1991); United States v. Wise, 550 F.2d 1180 (9th Cir.), cert. denied 434 U.S. 929 (1977). Conspiracies to violate the Act can be prosecuted under 18 U.S.C. § 371.

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a. Existence of a valid copyright

The initial element of a criminal prosecution under 17 U.S.C. § 506(a) is that the victim has a valid copyright, which may be established by demonstrating that the formal requisites of copyright registration have been satisfied. In many instances, registration of a copyright can be proven simply by obtaining a certificate of registration from the Register of Copyrights. By law, a certificate of registration "made before or within five years after the first publication of the work shall constitute prima facie evidence of the validity of the copyright. . . ." 17 U.S.C. § 410(c); see also United States v. Taxe, 540 F.2d 961, 966 (9th Cir.) (in criminal case, certificate of registration provided prima facie proof of date of fixation), cert. denied, 429 U.S. 1040 (1976) . Where a copyright registration certificate is produced, the burden shifts to the defendant to present evidence of copyright invalidity, existence of a license, or a defense to the infringement. See e.g., Autoskill Inc. v. National Educational Support Systems, Inc., 994 F.2d 1476, 1487 (10th Cir.), cert. denied, 510 U.S. 916 (1994). If the defendant contests the validity of a copyright, the prosecutor must make an independent evidentiary showing that a copyright is valid. This would involve showing that the copyright was not obtained by fraud and the registration certificate is genuine.

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b. Infringement

Once the validity of the copyright is established, the government must then prove that the defendant "infringed" that copyright. Although the term "infringement" is not defined, per se, in the copyright statute, 17 U.S.C. § 501(a) provides that: "[a]nyone who violates any of the exclusive rights of the copyright owner as provided by [17 U.S.C. §§ 106 to 120] . . . is an infringer of the copyright." Thus, the concept of infringement is defined by reference to the exclusive rights conferred on a copyright owner by 17 U.S.C. § 106. Those exclusive rights include the right to prepare derivative works, or to display or perform the work publicly, 17 U.S.C. § 106(4)-(5), along with the right to reproduce and distribute copies of the work. 17 U.S.C. § 106(1) & (3). Therefore, any unauthorized exercise of these rights will constitute an act of infringement and will give rise at least to a civil infringement claim by the copyright holder.

Note, however, that the felony provisions of 18 U.S.C. § 2319 apply only when the offense "consists of the reproduction or distribution, during any 180-day period, of at least 10 copies ⁽³³⁾ or phonorecords, of 1 or more copyrighted works, ⁽³⁴⁾ with a retail value of more than $2,500." ⁽³⁵⁾ 18 U.S.C. § 2319(b)(1) (emphasis and footnotes added). Infringement of rights other than the right of reproduction or distribution (such as infringement of public performance rights or the production of derivative works) remains a misdemeanor. Similarly, if the government fails to prove that the offense involved the requisite number of infringing copies (10 or more), reproduced or distributed within the requisite period (180 days), or did not meet the requisite retail value (more than $2,500), the offense will be treated as a misdemeanor. See 18 U.S.C. § 2319(b)(3).

In cases alleging felony violations, proof of infringement typically involves evidence that the defendant produced or sold unauthorized copies of one or more works. Note that infringement can exist even when the defendant has not "stolen" the original work -- indeed, even when he bought a legal copy from which he has made the illegal ones. The copyright owner need not be deprived of possession of, or use of, his or her work in order for infringement to occur. Rather, the copyright laws protect an individual's rights in a creative work, which may include the right to distribute, or not distribute, as the owner pleases.

Generally, infringement is established by direct evidence of copying. Sid & Marty Krofft Television v. McDonald's Corp., 562 F.2d 1157, 1162 (9th Cir. 1977). However, since the actual copying of the copyrighted work is not often provable, circumstantial evidence may be used to prove that (1) the defendant had access to the copyrighted work and (2) that defendant's work is substantially similar to the copyrighted material. Computer Associates Intern., Inc. v. Altai, Inc., 982 F.2d 693, 701 (2d Cir. 1992); See also Kamar Intern. Inc. v. Russ Berrie & Co., 657 F.2d 1059 (9th Cir. 1981).

It is unnecessary to demonstrate that an allegedly infringing article is identical to the original work in all respects. See United States v. O'Reilly, 794 F.2d 613, 615 (11th Cir. 1986). Instead, infringement may be shown by simply demonstrating a "substantial similarity" between the original work and the suspect copy. See, e.g., Hoehling v. Universal City Studios, Inc., 618 F.2d 972, 977 (2d Cir.), cert. denied, 449 U.S. 841 (1980); McCullock v. Albert E. Price, Inc., 823 F.2d 316 (9th Cir. 1987). A copy has been held to be "substantially similar" to an original work where "the [copy] is so similar to the [original] work that an ordinary reasonable person would conclude that the defendant unlawfully appropriated the [copyright owner's] protectible expression by taking material of substance and value." Atari, Inc. v. North American Philips Consumer Elec. Corp., 672 F.2d 607, 614 (7th Cir.) (citation omitted), cert. denied, 459 U.S. 880 (1982). This standard focuses on the similarities between the two works, rather than on any differences that may exist between them. Thus, "it is enough that substantial parts [of a copyrighted work] were lifted; no plagiarist can excuse the wrong by showing how much of his work he did not pirate." O'Reilly, 794 F.2d at 615 (quoting Sheldon v. Metro-Goldwin Pictures Corp., 81 F.2d 49, 56 (2d Cir.), cert. denied, 298 U.S. 669 (1936)). It should be emphasized that a finding of substantial similarity between a copyrighted work and an alleged infringing work requires more than evidence of adherence to the general ideas expressed, because ideas in and of themselves cannot be copyrighted. See 17 U.S.C. § 102(b). ("In no case does copyright protection . . . extend to any idea, procedure, process, system, method of operation, concept, principle, or discovery. . . .").

In practice, this substantial similarity is generally demonstrated through a side-by-side comparison of the suspect copy with an authentic original. In several instances, defendants have argued that the government must compare these allegedly infringing copies against the originals maintained on file at the Registry of Copyrights in order to satisfy its burden of proof on this issue. See O'Reilly, 794 F.2d 613 (11th Cir. 1986); United States v. Shabazz, 724 F.2d 1536, 1539 (11th Cir. 1984). While some courts have agreed "that it is 'better practice' for the government to compare the counterfeit material with the duplicate registered with the copyright office," O'Reilly, 794 F.2d at 615, no court has accepted this defense argument. Thus, any authentic duplicate of the original may be used for the purpose of making this comparison.

In cases of copyright violations involving computer programs, it must also be determined whether or not existing copies were lawfully made pursuant to the provisions of 17 U.S.C. § 117. ⁽³⁶⁾ If so, there has been no infringement.

Finally, the concept of infringement includes a host of statutory exceptions to the exclusive rights created by copyright. For the most part, these statutory exceptions do not create problems of proof in criminal cases. In fact, many of these limitations involve conduct which is already specifically exempted from criminal liability by the heightened proof requirements of 17 U.S.C. § 506(a) and 18 U.S.C. § 2319. For example, 17 U.S.C. §§ 110 and 118, which concern non-profit performances and displays of a copyrighted work, do not affect criminal prosecutions, since such prosecutions are limited to acts of infringement undertaken "for purposes of commercial advantage or private financial gain." See 17 U.S.C. § 506(a).

Other limitations, while theoretically applicable in criminal cases, have little practical impact on the government's burden of proof. For example, the equitable "fair use" doctrine, codified at 17 U.S.C. § 107, limits the exclusive rights of a copyright owner. ⁽³⁷⁾ While serious questions of fair use may and often do arise in civil copyright infringement cases, as a practical matter, the fair use doctrine should not impose any additional burden on the government in a criminal infringement action. The prosecution is already required by 17 U.S.C. § 506(a) to demonstrate willful infringement conducted for purposes of commercial advantage or private financial gain. Proof of these elements, if sufficient, would virtually preclude any defense of non-infringing fair use. ⁽³⁸⁾

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c. Willfulness

To establish criminal intent, the government must prove that the defendant willfully infringed the copyright. See 17 U.S.C. § 506(a). The Supreme Court has recognized that the meaning of the word "willful" in criminal statutes has many meanings and "its construction is often . . . influenced by its context." Ratzlaf v. United States, 510 U.S. 135, 114 S. Ct. 655, 659 (1994) (quoting Spies v. United States, 317 U.S. 492, 497 (1943)). Courts are in general agreement that in the copyright context a willful act must be "an act intentionally done in violation of the law." United States v. Wise, 550 F.2d 1180, 1194 (9th Cir.), cert. denied, 434 U.S. 929 (1977). Willful infringement also implies that "the act was committed by a defendant voluntarily, with knowledge that it was prohibited by law, and with the purpose of violating the law, and not by mistake, accident or in good faith." United States v. Cross, 816 F.2d 297, 300 (7th Cir. 1987); see also United States v. Manzer, 69 F.3d 222, 227 (8th Cir. 1995) (evidence that the copyrighted material bore a copyright notice was sufficient to put defendant on notice and "refute a defense based on innocent infringement").

But when defining willfulness, courts have differed in their interpretation of which of the two acts -- copying or infringing -- requires willful intent. The minority view, endorsed by the Second and Ninth Circuits, holds that "willful" means only intent to copy, not intent to infringe. See United States v. Backer, 134 F.2d 533, 535 (2d Cir. 1943) ("The [defendant] deliberately had the copies made . . . ."); United States v. Taxe, 380 F. Supp. 1010 (C.D. Cal. 1974), aff'd in part and vacated in part, 540 F.2d 961 (9th Cir. 1976), cert. denied, 429 U.S. 1040 (1977). Or, put another way, there is no defense for mistake of law.

The majority view, however, requires intent to infringe (rather than intent to copy), and the government must demonstrate a "voluntary, intentional violation of a known legal duty." United States v. Moran, 757 F. Supp. 1046, 1049 (D. Neb. 1991) (defendant successfully persuaded finder of fact that he believed his practice of "insuring" legitimately owned copyrighted works by producing one and only one additional copy was permitted by copyright law). This construction, then, provides a significant exception to the maxim that "ignorance of the law is no excuse." Indeed, under this construction, if a trier of fact was satisfied that a defendant was not aware of the laws prohibiting copyright infringement, or was satisfied that the defendant did not believe his acts infringed, it might constitute a defense to the criminal charge. It would not, however, constitute a defense to civil infringement, as civil infringement remains a strict liability tort. It is thus crucial, in criminal cases, to amass evidence of intent in order to anticipate and rebut this "lack of intent" defense.

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d. Commercial advantage or private financial gain

Beyond demonstrating willfulness, the government must prove that the defendant engaged in an act of infringement "for purposes of commercial advantage or private financial gain." See 17 U.S.C. § 506(a). Here the emphasis should be placed on "purposes," for it is irrelevant whether any profit was, in fact, realized. See United States v. Taxe, 380 F. Supp. 1010, 1018 (C.D. Cal. 1974), aff'd in part and vacated in part, 540 F.2d 961 (9th Cir. 1976), cert. denied, 429 U.S. 1040 (1977). All that is required is that the defendant engage in the infringing conduct with the hope or expectation of profit. See, e.g., United States v. Cross, 816 F.2d 297, 301 (7th Cir. 1987); United States v. Shabazz, 724 F.2d 1536, 1540 (11th Cir. 1984); United States v. Wise, 550 F.2d 1180, 1195 (9th Cir.), cert. denied, 434 U.S. 929 (1977). The drafting committee's long-held purpose in retaining this requirement has been to exclude from criminal liability those individuals who willfully infringe copyrights solely for their own personal use. H.R.Rep. No. 997, 102 Cong., 2d Sess. at 5 (1992), reprinted in 1992 U.S. Code Cong. & Admin. News 3569, 3573 (1992).

In some cases courts have found the requisite commercial or financial purpose to be implicit in the conduct of the parties. See United States v. Cross, 816 F.2d 297, 301 (7th Cir. 1987) ("[W]e find that the presence of these seventeen second-generation videocassettes on [subject's] business premises may rationally give rise to the inference that they were maintained for commercial advantage or private financial gain."). Similarly, the court stated in United States v. Shabazz:

An employee identified specific tapes made in bulk under appellant's direction as
reproduced for local and out of state sale. The appellant sold pirate tapes,
solicited wholesale customers, and shipped large quantities of tapes out of state.
This evidence is sufficient to show that the tapes produced were made with the
intention to make a profit. It is not necessary that he actually made a profit. The
only requirement is that he engaged in business 'to hopefully or possibly make a
profit.'

724 F.2d 1536, 1540 (11th Cir. 1984) (citing United States v. Wise, 550 F.2d 1180, 1195 (9th Cir. 1977), cert. denied, 434 U.S. 929 (1977)); United States v. Moore, 604 F.2d 1228 (9th Cir. 1979).

Two different methods of showing profit are often relevant in copyright cases: discrete monetary transactions and bartering.

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(1) Discrete monetary transactions

Evidence of discrete monetary transactions (i.e., the selling of infringing works for a particular price) provides, of course, the best evidence of financial gain. Nonetheless, it is not necessary to present such direct evidence; indeed, such a stringent requirement would ignore the plain wording of the statute, which requires only the showing of commercial or financial purpose. Thus, for example, in a computer bulletin board context, the requisite commercial purpose may be established by showing that the offenders displayed an intent to use software "libraries" they have assembled to attract subscribers to their bulletin board, who are then required to pay a fee for the privilege of accessing the copyrighted material. ⁽³⁹⁾ Another example would be a computer store or an original equipment manufacturer ("OEM," see "Computer Software," supra p. 12) that bundles or includes infringing software with computer hardware, and thus undercuts its competitors who include licensed copies of software in the price of a complete computer system.

(2) Bartering

A similar rationale should support the appropriate prosecution of so-called "bartering" cases. In bartering schemes, people trade infringing copies for other infringing items on either a one-for-one exchange or through the use of credit or "points" systems. It is a common misconception that if infringers fail to charge subscribers a monetary fee for infringing copies, they cannot be held to have engaged in criminal copyright infringement. Prosecutors should argue that the term "for purposes of commercial advantage or private financial gain" does not require the payment in money for the infringing merchandise, but includes payment by trading anything of value. Further, "it is irrelevant whether there was an exchange for value so long as there existed the hope" of some gain. United States v. Moore, 604 F.2d 1228, 1235 (9th Cir. 1979). Thus, when "bartering" results in the unauthorized dissemination of substantial amounts of infringing product without recompense to the copyright holders, vigorous prosecution is fully consistent with the purposes of the criminal copyright statute. ⁽⁴⁰⁾

Further, several civil cases lend support for the criminal prosecution of "bartering" schemes that are run through computer bulletin board systems. In Sega Enterprises, Ltd. v. Maphia, 1996 WL 734409 (N.D. Ca., Dec. 18, 1996), the plaintiff accused the defendant, an owner and operator of a bulletin board system, of distributing the plaintiff's copyrighted computer programs. The district court granted plaintiff's motion for summary judgment for copyright infringement. The court first reasoned that the defendant did not directly infringe Sega's copyrights by operating the BBS, because there was no evidence that the defendant himself was actually uploading or downloading infringing copies. Id. at 8. According to the court, whether the defendant was aware that the users of his BBS were infringing Sega's copyright was not relevant on whether the defendant directly caused the copying to occur. The court, however, found the defendant liable on the theory of contributory copyright infringement because defendant knew that his users were uploading and downloading copyrighted computer games, and the operation of the BBS induced, caused, or materially contributed to the infringing activity. Id. Of particular importance, the court noted that defendant did more than provide the site facilities for known infringing conduct, he actively solicited users to upload unauthorized games, provided instructions on how to download infringing software and sold copiers to facilitate the downloading of games. Id. In a finding relating to the barter issue, the court denied defendant's fair use defense emphasizing that the unauthorized copying of Sega game cartridges caused a substantial adverse impact on the potential market for the copyrighted work. The commercial character of the unauthorized copying weighed against a finding of fair use. Id. at 10. The court also found defendant liable for federal trademark infringement. See "CHARGING BOTH CRIMINAL COPYRIGHT AND TRADEMARK VIOLATIONS," p. 68.

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e. The first sale doctrine in criminal cases

The first sale doctrine is one of the specific statutory restrictions that Congress has placed on the exclusive rights of copyright owners, and it can constitute an issue in criminal copyright prosecutions. Criminal defendants frequently contend that they believed that the works they were selling had been the subject of a legitimate first sale. Moreover, in several instances copyright convictions have been overturned because of inadequacies in the government's proof on this issue. See, e.g., United States v. Goss, 803 F.2d 638 (11th Cir. 1986); United States v. Atherton, 561 F.2d 747 (9th Cir. 1977). For this reason, federal prosecutors should have a clear understanding of the first sale doctrine when considering whether to bring a criminal copyright case.

The first sale doctrine limits the copyright owners "exclusive rights" to authorize or distribute copies of a copyrighted work to the public under 17 U.S.C. § 106(3). ⁽⁴¹⁾ It provides that a sale of a "lawfully made" copy terminates the copyright holder's authority to interfere with or control subsequent sales or distributions of that particular copy. 17 U.S.C. § 109(a). ⁽⁴²⁾ See United States v. Moore, 604 F.2d 1228, 1232 (9th Cir. 1979) ("where a copyright owner parts with title to a particular copy of his copyrighted work, he divests himself of his exclusive right to vend that particular copy."). In short, through the first sale doctrine, the first purchaser and any subsequent purchaser of that specific copy of a copyrighted work receives the right to sell, display or dispose of his copy of it. He does not, however, receive the right to reproduce and distribute additional copies made from that work. Thus, if copyright owner A sells a copy of a work to B, B may sell that particular copy without violating the law. But if B makes any unauthorized copies of that work, he violates the law.

Since the first sale doctrine never protects a defendant who makes unauthorized reproductions of a copyrighted work, the first sale doctrine can only be a successful defense to an allegation of copyright infringement by distribution. In such instances, a defendant may argue that he merely redistributed an otherwise authorized and legally made copy of a copyrighted work. It is important to note that the first sale doctrine can be successfully invoked by a defendant only if he has been involved in the distribution of legitimately produced, authorized copies. If copies are unauthorized, the first sale doctrine does not apply. See United States v. Drum, 733 F.2d 1503, 1507 (11th Cir.), cert. denied, 469 U.S. 1061 (1984). "Thus, where the source of copies is unlawful, the doctrine is not implicated." Id. (citing United States v. Moore, 604 F.2d 1228, 1232 (9th Cir. 1979) ("[a] pirated copy that is reproduced from the original recording without authorization is plainly not the subject of a first sale.")); see also United States v. Powell, 701 F.2d 70, 72-3 (8th Cir. 1983). Therefore, if B knows that the copies he possesses are unauthorized, he cannot defend an infringement claim by arguing that other, unrelated copies were the subject of a first sale. Accordingly, it may be sufficient to show, as is possible with some types of programs, that the particular program was not licensed to the individual who possessed it. Many software companies keep records of authorized licensees for just this purpose. Note, too, that when the defendant later distributes a legally acquired copy, if he keeps an additional copy, even a "backup" copy, this unauthorized copy can serve as the basis for a charge of infringing reproduction.

Further, the privileges created by the first sale principle do not "extend to any person who has acquired possession of the copy or phonorecord from the copyright owner, by rental, lease, loan, or otherwise, without acquiring ownership of it." See 17 U.S.C. § 109(d). Most computer software is distributed through the use of licensing agreements. Under this distribution system, the copyright holder remains the "owner" of all distributed copies. For this reason, alleged infringers should not be able to establish that any copies of these works have been the subject of a first sale. Thus, if A, the copyright owner, simply loans a copy of his work to B, B obtains no ownership interest in the work and is unable to assert first sale as a defense to an infringement action. This is an important limitation, as the distribution systems for some artistic works, most notably motion pictures and computer software, rely on licensing agreements, leases or other devices to transfer possession of copies of a copyrighted work. Under these distribution systems, the copyright holder remains the "owner" of all distributed copies.

Although courts agree that the first sale principle applies to criminal prosecutions, they do not agree on the burden of proof. Several cases suggest that in criminal copyright prosecutions, the United States must prove that copyrighted work was not the subject of a first sale. See, e.g, United States v. Sachs, 801 F.2d 839, 842 (6th Cir. 1986); United States v. Powell, 701 F.2d 70, 72 (8th Cir. 1983); United States v. Wise, 550 F.2d 1180 (9th Cir.), cert. denied, 434 U.S. 929 (1977); United States v. Atherton, 561 F.2d 747, 749 (9th Cir. 1977); United States v. Drebin, 557 F.2d 1316, 1326 (9th Cir.), cert. denied, 436 U.S. 904 (1978). Other cases, however, hold that the issue of a first sale is an affirmative defense that must be raised by the defendant. See, e.g., United States v. Larracuente, 952 F.2d 672, 673-4 (2d Cir. 1992) (holding that, as in a civil case, the government need only prove ownership of a valid copyright and unauthorized copying); United States v. Goss, 803 F.2d 638, 643-44 (11th Cir. 1986); United States v. Drum, 733 F.2d 1503, 1507 (l lth Cir.), cert. denied, 469 U.S. 1061 (1984). ⁽⁴³⁾

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(1) Proving absence of first sale

In circuits where the first sale doctrine is considered an element of the offense, demonstrating the absence of a first sale can present significant problems of proof because the evidence on this point may often be circumstantial. Some defendants have argued that the government must completely account for the distribution of all copies of a work in order to carry its burden on this question. This would require, in effect, that the government trace the distribution of every lawful copy of a copyrighted work, an unreasonable burden because the most frequently pirated works also tend to be among the most frequently purchased and widely distributed.

This argument has been consistently rejected by the courts. As stated in United States v. Moore, 604 F.2d 1228, 1232 (9th Cir. 1979):

[T]he government can prove the absence of a first sale by showing that the [copy] in question was unauthorized, and it can establish this proof not only by evidence tracing the distribution of that [copy] but also by circumstantial evidence from which a jury could conclude beyond a reasonable doubt that the recording was never authorized and therefore never the subject of a first sale.

See also, United States v. Sachs, 801 F.2d 839, 843 (6th Cir. 1986); United States v. Drum, 733 F.2d 1503, (11th Cir.), cert. denied, 469 U.S. 1061 (1984); United States v. Whetzel, 589 F.2d 707, 711 (D.C. Cir. 1978).

Evidence of reproduction of unauthorized copies is the best and easiest way of meeting the government's burden under the "first sale" doctrine, whether it presents itself as an element or as an affirmative defense. In cases involving violation of distribution rights, two types of circumstantial proof typically demonstrate the absence of a first sale. First, when a defendant's actions indicate that copies have been obtained illegitimately, a jury may infer that no valid first sale has occurred. See Moore, 604 F.2d at 1232; Whetzel, 589 F.2d at 711. Factors which indicate that copies were obtained illicitly include: sale of copies at a price far below legitimate market value; distribution of copies of inferior quality; and presence of false information on the copies, such as a false address for the manufacturer. See Drum, 733 F.2d at 1503; Whetzel, 589 F.2d at 711 (sale of copies of tapes at night from the back of a truck in a parking lot).

Second, the nature of the distribution system employed by the copyright holder may negate the possibility of a first sale. This is particularly true of copyright cases involving film industry products. In a number of cases the absence of a first sale has been established by showing that the works in question were distributed exclusively through loans and leases. Since the first sale defense is premised on a sale and the transfer of title, evidence that the copyright holder sold no copies of the work effectively negates this claim. Compare United States v. Drebin, 557 F.2d 1316, 1326 (9th Cir.), cert. denied, 436 U.S. 904 (1978) (government proved the absence of first sale through evidence that the copyrighted movies had never been sold or transferred; licenses transferred limited rights for distribution and exhibition of the films for a limited time, which are not "sales" for purposes of the first sale doctrine) with United States v. Atherton, 561 F.2d 747 (9th Cir. 1977) (government failed to prove the absence of first sale of a number of films including "Airport" because, although the copyright owner never "sold" copies, it permitted ABC Television Network to permanently retain copies. These transfers fell within the definition of first sale, and ABC Television could have been the source of the movie copies sold by defendant.). See also United States v. Sachs, 801 F.2d 839 (6th Cir. 1986).

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2. Drafting the Indictment

To support felony charges, the government must show that a defendant engaged in the "reproduction or distribution, during any 180-day period, of at least 10 copies or phonorecords, of 1 or more copyrighted works, with a retail value of more than $2,500." 18 U.S.C. § 2319(b)(1). If fewer than ten copies have been copied or distributed, or if the copies have a combined value of less than $2,500, the offense is a misdemeanor. See 18 U.S.C. § 2319(b)(3). However, because a defendant often makes unauthorized copies of numerous copyrighted works or infringes a number of different rights held by a copyright owner, it is not always easy to draft an indictment that accurately reflects a defendant's actions. ⁽⁴⁴⁾ While there are no hard and fast rules, there are a number of general factors that are worth noting.

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a. 10 or More Copies

As a basic matter, while reproducing or distributing ten or more copies of a copyrighted work may constitute a felony violation, a prosecutor should not maximize the number of counts by calculating the total number of infringing acts and dividing by ten. The United States Attorneys' Manual states that in order to promote the fair administration of justice as well as the appearance thereof:

all U.S. Attorneys should charge in indictments and informations as few separate counts as are reasonably necessary to prosecute fully and successfully and to provide for a fair sentence on conviction. To the extent reasonable, indictments and informations should be limited to fifteen counts or less, so long as such a limitation does not jeopardize successful prosecution or preclude a sentence appropriate to the nature and extent of the offenses involved.

U.S.A.M. 9-2.164.

In the simplest cases where the defendant infringed only one type of the same copyrighted work, the defendant should be charged with a single count. This amounts to counting the number of illegal copies made or distributed by the defendant in the requisite period and charging them as a single count in the indictment.

However, because the criminal copyright statute does not require that all the copyrights infringed be in the same class or be held by the same copyright owner, a defendant can still be convicted of a felony for reproducing or distributing a total of 10 copies of different copyrighted works, as long as they are of the required value and if done in the specified time. According to the legislative history:

the phrase 'of one or more copyrighted works' is intended to permit aggregation of different works of authorship to meet the required number of copies and retail value. For example, a defendant's reproduction of 5 copies of a copyrighted word processing computer program having a retail value of $1,300 and the reproduction of 5 copies of a copyrighted spreadsheet computer program also having a retail value of $1,300 would satisfy the requirement of reproducing 10 copies having a retail value of $2,500, if done within a 180 day period.

H.R. Rep. No. 997, 102 Cong. 2d Sess., at 6 (1992), reprinted in 1992 U.S. Code Cong. & Admin. News 3569, 3574 (1992).

Where the defendant met the felony minimum by reproducing one class of copyrighted materials (e.g., 10 copies of a copyrighted word processing program having a retail value of $2,600), and also reproduced 10 copies of another computer program copyrighted by a different author and worth more than $2,500, he should be charged with two felony counts. The legislative history of the criminal copyright statute and its successive revisions makes clear that the statute seeks to protect each individual's copyrighted work. Therefore, as a general rule, charging a defendant with separate counts for violating each of the different copyrights best reflects the underlying purpose of the statute.

Further, since reproducing a "collective work" ⁽⁴⁵⁾ or a" compilation" ⁽⁴⁶⁾ constitutes multiple violations of the Copyright Act, and one of its goals is to protect the individual's copyrighted work, it is proper to charge separate infringing acts against each individual victim as separate offenses. Thus, for example, where multiple copies of separate copyrighted works are contained on a single videocassette tape or CD-ROM disk, the statute permits multiple charges, assuming of course that the other requirements of the statute can be met.

Also, computer software is often sold with accompanying instruction manuals. These guides and manuals often are costly to produce and are usually copyrighted. Illegal reproductions of both the software and the instruction manual can and should be charged as two separate counts of infringement.

Another exception to this "one count per work" rule may well lie in the area of sound recordings. The infringement of sound recordings generally involves not one, but two separate acts of infringement -- one for the musical work (i.e., the notes and lyrics) and another for the separately copyrighted public performance of the work. Thus, each type of infringement should be charged in different counts. In addition, some courts have held that the appropriate units of prosecution for infringing a record album can be each individual band or song. See United States v. Taxe, 540 F.2d 961, 966 (9th Cir. 1976), cert. denied, 429 U.S. 1040 (1977).

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b. Retail Value

In order to charge a felony violation of the criminal copyright statute, the government must also prove that the infringing copies have a total retail value of more than $2,500. In an era where, for example, even the most basic computer programs often can cost more than $100, this rarely proves difficult. However, the value of the infringing goods becomes more of an issue in sentencing. See "Sentencing Guidelines," infra, p. 37.

c. Equitable charging considerations

In addition to the statutory elements, equitable factors may affect charging choices. Scarce investigative and prosecutive resources have prompted many offices to set strict monetary thresholds in copyright cases as well as other economic crimes. The guidelines may be keyed to the amount of the defendant's financial gain or the amount of the victim's financial loss. Some United States Attorneys' Offices set guidelines of $100,000 or more.

Although resources are limited, intellectual property crimes may merit some exceptions to strict dollar thresholds for several reasons. First, guidelines keyed to the amount of a defendant's profit may vastly understate the victim's loss. ⁽⁴⁷⁾ Second, copyright prosecutions can be important in protecting nascent technologies. Third, because copyright infringement is a federal crime with state preemption, if a defendant is not prosecuted federally, he or she will not be prosecuted at all.

Further, some charging decisions demand careful consideration of the specific rights violated by the defendant. In other words, if the defendant has engaged in the counterfeiting of an existing work, as compared to "bootlegging" ⁽⁴⁸⁾ or "piracy," ⁽⁴⁹⁾ serious consideration should be given to charging the defendant even if the conduct does not meet the statutory minimum imposed by the United States Attorney's Office. Counterfeiting is usually more serious than bootlegging and piracy because counterfeiters not only reproduce and distribute the underlying copyrighted work, but also imitate its packaging to make it look like genuine merchandise. Thus, counterfeiting not only detracts from potential market share of the copyright holder, but also may create additional harm by defrauding the consumer and injuring the victim's reputation by leading the consumer to believe that he is purchasing an authentic product. ⁽⁵⁰⁾ Often such counterfeiting schemes can be charged both as copyright infringement and trademark counterfeiting. See "CHARGING BOTH CRIMINAL COPYRIGHT AND TRADEMARK VIOLATIONS," infra p. 68.

Another factor to consider when making a charging decision is the extent of the civil remedy. Because both the copyright and trademark schemes create extensive civil remedies for holders of intellectual property rights, prosecutors should consider what civil remedies have already been obtained or may be available, and whether such remedies might be sufficient to deter similar behavior. For example, in the trademark context, the Lanham Act expressly provides for the ex parte seizure of offending material by an aggrieved party, see 15 U.S.C.§ 1116, and much the same result may be sought by a diligent victim of copyright infringement who is well-versed in extraordinary remedies. ⁽⁵¹⁾

The availability of a civil remedy, however, should not be the only factor to consider when making a charging decision. Civil remedies may prove futile under certain circumstances. Infringers may be judgment proof, or may have transferred their money outside the United States. This may be particularly true in software infringement cases, because an infringer can reproduce large numbers of high quality copies with only minimal investment. ⁽⁵²⁾ In such instances, a criminal sanction may be the only meaningful deterrent. Further, the infringer's actions may be so egregious as to warrant criminal prosecution.

Finally, if infringement continues after entry of a permanent injunction or civil consent decree, civil sanctions clearly have failed. The existence of a previous civil order also supports a charge of criminal contempt under 18 U.S.C. § 401. ⁽⁵³⁾

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3. Other Possible Charges: Money Laundering and RICO

In 1994, Congress added copyright infringement under 18 U.S.C. § 2319 to the list of violations that constitute "specified unlawful activity" under the money laundering statute, 18 U.S.C. § 1956. Thus, proceeds earned by a defendant from copyright infringement can now form the basis for a charge of money laundering. ⁽⁵⁴⁾

This is an important development because the penalties for a violation of § 1956 are substantially greater than for a copyright violation. A violation of § 1956 carries maximum potential of a twenty-year prison sentence and a fine of $500,000 or twice the amount involved in the transaction. There is also a civil penalty of not more than $10,000 or the value of the funds involved in the transaction, whichever is greater.

More recently, Congress enacted The Anticounterfeiting Consumer Protection Act of 1996. Pub. L. No. 104-153, 110 Stat. 1386 (1996). The Act, inter alia, amended 18 U.S.C. § 1961 to include § 2319 within the definition of "racketeering activity." A violation of RICO carries a maximum penalty of twenty years imprisonment and includes a possible fine of "twice the gross profits or other proceeds" of the racketeering activity. 18 U.S.C. § 1963. In light of the greatly increased penalties under §§ 1956 and 1963, it is strongly recommended that prosecutors consider charging money laundering and a RICO violation in connection with a serious violation of 18 U.S.C. § 2319. ⁽⁵⁵⁾

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4. Juvenile Prosecutions

Federal criminal law does not permit prosecution of juveniles (defined as those who have not attained their eighteenth birthday, 18 U.S.C. § 5031), absent narrowly defined exceptions. While some of the violations described in this manual may be committed by juveniles, these cases will rarely be prosecuted federally.

Where violators are later found to be juveniles, federal investigators should consider turning over available evidence to state agencies for consideration under state "truth-in-labeling" or "true-name-and-address" laws. ⁽⁵⁶⁾ Federal prosecutors may also consider initiating federal in rem forfeiture actions against the instrumentalities used by juvenile violators. These in rem actions depend only on whether certain property was used to manufacture infringing copies, not on any criminal proceedings. 17 U.S.C. § 509. See "Civil forfeiture," infra p. 48.

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5. Penalties for Criminal Copyright Infringement

a. Statutory penalties

The penalties available for criminal infringement are found at 18 U.S.C. § 2319. A defendant, convicted for the first time of violating 17 U.S.C. § 506, can be imprisoned for up to 5 years and fined $250,000 or both for the unauthorized reproduction or distribution, during any 180-day period, of at least 10 copies or phonorecords, or 1 or more copyrighted works, with a retail value of more than $2,500. 18 U.S.C. §§ 2319(b), 3571(b)(3).

The maximum sentence is increased to 10 years' imprisonment, a $250,000 fine, or both for defendants who previously have been convicted of copyright infringement under 18 U.S.C. § 2319(b)(1). ⁽⁵⁷⁾

Finally, a defendant found guilty of a misdemeanor violation can be sentenced to up to one year imprisonment and fined up to $100,000. See 18 U.S.C. §§ 2319(b)(3); 3571(b)(5). A misdemeanor violation occurs if the defendant violated rights other than those of reproduction or distribution; if he made or distributed fewer than the requisite number of copies; or if the copies did not meet the statutory minimum value; so long as the other elements of 17 U.S.C. § 506(a) are satisfied.

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b. Sentencing guidelines

Sentences for the offenses of criminal copyright infringement and trademark counterfeiting are now both determined by reference to § 2B5.3 of the United States Sentencing Commission Guidelines Manual ("Sentencing Guidelines") which sets the Base Offense Level at 6. ⁽⁵⁸⁾ It also establishes, as a Specific Offense Characteristic, that if "the retail value of the infringing items exceeded $2,000," then the guideline level is to be increased by the corresponding number of levels from the table in § 2F1.1 (Fraud and Deceit) which are based on "loss." The Commentary further makes clear that the term "infringing items," as used above, "means the items that violate the copyright or trademark laws (not the legitimate items that are infringed upon)."

The Sentencing Guidelines thus unequivocally require consideration of "the retail value of the infringing items." It is not entirely clear, however, what "retail value" means in this context. "Retail value" is usually associated with the sale of the legitimate items because such items are normally sold after considering the manufacturer's suggested retail price, and are distributed through conventional retail channels. By comparison, the "retail value" of infringing items is established by their prices on the black or "thieves'" market.

The background commentary does little to clarify this issue, noting only that "the enhancement is based on the value of the infringing items, which will generally exceed the loss or gain due to the offense." If the retail value of the infringing items is the price at which such products are normally sold by the infringer, however, the resultant amount will not exceed, but will be about the same as defendant's gain. In addition, such an accounting does not adequately reflect the "loss" attributable to the offense, because it reflects only the cost to public consumers, and not the potentially greater loss to sellers of legitimate, non-infringing marks. ⁽⁵⁹⁾

Courts in several copyright infringement cases have, at least implicitly, recognized these difficulties, and employed various theories to achieve equitable results. In United States v. Larracuente, 952 F.2d 672 (2d Cir. 1991), for instance, the defendant was convicted of criminal copyright infringement for having trafficked in "bootleg" videotapes of movies. The Second Circuit found that, under U.S.S.G § 2B5.3, the sentencing court "was correct in applying the guidelines to the normal retail price, rather than the lower bootleg price paid by those who presumably are aware that the copies they are buying are not legitimate." Id. at 674. The court reasoned that "[w]here, as here, unauthorized copies are prepared with sufficient quality to permit their distribution through normal retail outlets, the value of the infringing items is their normal retail price to ultimate consumers who purchase from such outlets." Id. ⁽⁶⁰⁾

By contrast, in United States v. Kim, 963 F.2d 65 (5th Cir. 1992), which addressed similar issues under the trademark counterfeiting act, 18 U.S.C. § 2320, the Fifth Circuit determined that the trial court erred in its finding "that the retail value that is intended to be taken into consideration by the guideline § 2B5.4(b)(1) is the retail value of the legitimate item rather than the counterfeit item." Id. at 67 n.3. The Court of Appeals held "that the clear and unambiguous phrase 'retail value of the infringing items' refers to the counterfeit merchandise. The phrase does not, by its terms, refer to the retail value of genuine merchandise -- the items subject to infringement." Id. at 68. The court did not remand the case, however, because while the defendant objected to the use of the retail value of the genuine merchandise, he made no attempt to submit evidence concerning the retail value of the infringing items. The court therefore permitted, as not clearly erroneous, the court's reliance on the probation officer's assessment of value. Id. at 69.

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c. Other possible enhancements

Prior to November 1, 1992, it was uncertain whether the "enhancements" contained under the table in U.S.S.G § 2F1.1 were applicable in calculating a defendant's sentence for criminal infringement of copyright. Compare United States v. Hernandez, 952 F.2d 1110 (9th Cir.) (court upheld trial court's partial reliance on U.S.S.G. § 2F1.1, Application Note 7, to increase the calculation of "loss" under the U.S.S.G. § 2F1.1 table), ⁽⁶¹⁾ cert. denied, 506 U.S. 920 (1992), with United States v. Payne, 952 F.2d 827 (4th Cir. 1991) (it was error to apply a two-level adjustment under U.S.S.G. § 2F1.1(b)(2) to defendant's conviction for counterfeiting). The guidelines have since been amended to make clear that the reference in § 2B5.1 to the table contained in § 2F1.1 applies only to the actual table and not to the entire offense guideline. U.S.S.G. § 1B.5(b)(2). ⁽⁶²⁾

Thus, it is not appropriate to apply additional enhancements from the commentary to § 2F1.1, notwithstanding that several would seem to often arise in the context of intellectual property violations. See, e.g., U.S.S.G. § 2F1.1(b)(2)(A) (defendant's role involved more than minimal planning); U.S.S.G. § 2F1.1(b)(3)(B) (offense involved a violation of an existing judicial or administrative order).

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B. TRAFFICKING IN SOUND RECORDINGS OF LIVE MUSICAL PERFORMANCES:

18 U.S.C. § 2319A

In 1994, Congress enacted 18 U.S.C. § 2319A to expressly prohibit the unauthorized trafficking in recordings of live musical performances. ⁽⁶³⁾ Pub. L. No. 103-465 § 513(a), 108 Stat. 4974 (1994). This statute is primarily intended for use against the burgeoning trade in "bootlegged" musical recordings. Such cases might otherwise be prosecutable as criminal infringement of the copyrights in the underlying musical compositions. In passing the act, Congress evinced its clear intent that the unauthorized trafficking in bootlegged sound recordings and musical compositions, when done for the purposes of commercial advantage or private financial gain, should be treated as a serious offense.

The statute contains three subsections, each of which protects a different right of the performing artist. Section 2319A(a)(1) prohibits "fixing" ⁽⁶⁴⁾ the "sounds" or "images" of a live musical performance, § 2319A(a)(2) prohibits transmitting the "sounds" or "images" of a live musical performance to the public, ⁽⁶⁵⁾ and § 2319A(1)(3) prohibits distributing to the public or trafficking in any fixed recording of a live musical performance. Under each subsection, the government must also prove beyond a reasonable doubt that the defendant acted: (1) without authorization from the performer involved; (2) knowingly; and (3) for purposes of commercial advantage or private financial gain. (For a detailed discussion of this element under 18 U.S.C. § 2319, see "Commercial advantage or private financial gain," supra p. 24. The maximum penalty for a first-time violation of § 2319A is five years' imprisonment, a $250,000 fine or both. Defendants who have previously been convicted under this statute may be sentenced to a maximum of 10 years' imprisonment, a $250,000 fine, or both. 18 U.S.C. § 2319A(a). In addition, the statute provides for mandatory forfeiture and destruction of all infringing items upon a defendant's conviction. 18 U.S.C. § 2319A(b). Copies fixed outside the United States and imported into the United States are also subject to seizure and forfeiture. 18 U.S.C. § 2319A(c). Further, a violation of § 2319A is now specifically listed in 18 U.S.C. § 1961(1)(b) as a "racketeering activity" and is subject to the RICO provisions of the Organized Crime Control Act of 1970. Pub. L. No. 104-153, 110 Stat. 1386 (1996).

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C. OTHER TITLE 17 CRIMINAL PROVISIONS PROTECTING COPYRIGHTS

In addition to the prohibition against willful copyright infringement, the Copyright Act also contains three lesser criminal sanctions (found at 17 U.S.C. §§ 506(c), (d) and (e)) which share several characteristics. Unlike 17 U.S.C. § 506(a), which gives rise to civil as well as criminal liability, these three sections proscribe conduct which is not civilly actionable. See Evans v. Continental Homes, Inc., 785 F.2d 897, 912-13 (l lth Cir. 1986) (no private right of action exists to enforce 17 U.S.C. § 506(c)). Each offense is an infraction, imposing a maximum fine of $2,500, is discussed briefly below:

1. Protection of Copyright Notices, 17 U.S.C. §§ 506(c) and (d)

Although it is no longer a prerequisite to receiving protection, there are advantages to placing copyright notices on copies of copyrighted works. The purpose of 17 U.S.C. § 506(c) and (d) is to protect the integrity of these copyright notices. 17 U.S.C. § 506(c) provides that:

Any person who, with fraudulent intent, places on any article a notice of copyright or words of the same purport that such person knows to be false, or who, with fraudulent intent, publicly distributes or imports for public distribution any article bearing such notice or words that such person knows to be false, shall be fined not more than $2,500.

Thus, § 506(c) prohibits three distinct acts: (1) placing a false notice of copyright on an article; (2) publicly distributing articles which bear a false copyright notice; and (3) importing for public distribution articles which bear a false copyright notice. Any one of these acts, if committed "with fraudulent intent," violates 17 U.S.C. § 506(c).

Additional protection of copyright notices is provided by § 506(d) which provides that:

Any person who, with fraudulent intent, removes or alters any notice of copyright appearing on a copy of a copyrighted work shall be fined not more than $2,500.

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2. False Representations in Copyright Applications, 17 U.S.C. § 506(e)

As part of the copyright process, individuals who wish to claim statutory remedies for infringement of a work must file an application for copyright registration with the Register of Copyrights. These applications must identify the copyright claimant, explain how the claimant obtained the work, and identify and describe the work. See 17 U.S.C. § 409(1)-(11). The purpose of § 506(e) is to protect against false copyright applications. This section provides that:

Any person who knowingly makes a false representation of a material fact in the application for copyright registration provided for by section 409, or in any written statement filed in connection with the application, shall be fined not more than $2,500.

The government must prove that the defendant (1) knowingly made; (2) a false representation; (3) of a material fact; (4) in a copyright application or any written statement filed in connection with an application.

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D. OTHER TITLE 18 OFFENSES

1. Trafficking in Counterfeit Labels, 18 U.S.C. § 2318

There are other criminal statutes aside from the copyright statute that can be used to protect copyrighted works. The most important of these is 18 U.S.C. § 2318, which Congress amended on July 2, 1996, as part of the Anticounterfeiting Consumer Protection Act of 1996. Pub. L. No. 104-153, 110 Stat. 1386 (1996). This Act enhances the integrity of the copyright system by specifically prohibiting trafficking in counterfeit labels designed to be affixed to phonorecords, copies of computer programs, motion pictures or audiovisual works. It also contains a separate prohibition for trafficking in counterfeit documentation or packaging for computer programs.

Section 2318 is not a copyright statute, and the scope of the protections under the statute is broader than those afforded by the Copyright Act. The predecessor to the current § 2318, for example, clearly encompassed trafficking in counterfeit labels on both copyrighted and uncopyrighted works, see United States v. Sam Goody, Inc., 506 F. Supp. 380, 386 (E.D.N.Y. 1981), and this Act continues that coverage. It is important to note, however, that the legislative history suggests that the statute is intended to be applied to violations involving documentation, packaging or labels for computer programs only if affixed or designed to be affixed to "copies of copyrighted computer programs." H.R. 104-556 at 6, 104th Cong., 2d Sess. (1996).

To obtain a conviction under § 2318, the government must prove five elements. They are:

(1) The defendant was trafficking in labels for phonorecords, motion pictures, audiovisual works or computer programs or the packaging for computer programs. "Traffic" means "to transport, transfer or otherwise dispose of, to another, as consideration for anything of value or to make or obtain control of with intent to so transport, transfer or dispose of."
18 U.S.C. § 2318(b)(2).

(2) The labels were "counterfeit." Counterfeit labels are labels which appear to be genuine when, in fact, they are not. See 18 U.S.C. § 2318(b)(1). The requirement that these labels be counterfeit distinguishes this offense from the "bootlegging" or "pirating" of recordings or tapes. Counterfeit records or tapes are works which are made to appear legitimate. Bootleg or pirated records and tapes are copies with no pretense of legitimacy. (For a further discussion of the differences between bootlegging, piracy, and counterfeiting, see "Equitable charging considerations," supra p. 33 and p. i. Under 18 U.S.C. § 2318, only trafficking in counterfeit items is prohibited. See United States v. Schultz, 482 F.2d 1179, 1180 (6th Cir. 1973). The legislative history to § 2318 clarifies, however, that this section can be applied when "counterfeiters have simulated 'genuine' labels that have not previously existed," insofar as these simulated labels share the same basic criminal purpose as any counterfeit product -- to defraud the consumer with regard to the authenticity of the product.
Pub. L. No. 97-180, at 9 (1981).

(3) The counterfeit label was "affixed or designed to be affixed to a phonorecord, a computer program or documentation or packaging for a computer program, or a copy of a motion picture or other audiovisual work." For purposes of 18 U.S.C. § 2318, the terms "copy," "phonorecord," "computer program," "motion picture" and "audiovisual work" have the meanings given those terms by the copyright statute at 17 U.S.C. § 101. See "Fixed medium of expression," supra p. 8. Moreover, the prohibitions of 18 U.S.C. § 2318 include counterfeit labels" designed to be affixed or affixed" to one of these four enumerated categories of works. ⁽⁶⁶⁾ Therefore, it is not necessary that the label actually be attached to a work.

(4) The defendant knew the labels were counterfeit. Thus, this is a general intent crime.

(5) The offense occurred in the special maritime or territorial jurisdiction of the United States, involved the use of the mails or facilities of interstate or foreign commerce, ⁽⁶⁷⁾ or involved a copyrighted computer program. See 18 U.S.C. § 2318(c)(1)-(4).

The maximum penalty for a violation of § 2318 is five years' imprisonment, a $250,000 fine, or both. See 18 U.S.C. § 2318(a). Prosecutors also should consider the applicability of the criminal trademark counterfeiting statute, as labels intended to be affixed to counterfeit works often carry counterfeit reproductions of federally registered trademarks. See "CHARGING BOTH CRIMINAL COPYRIGHT AND TRADEMARK VIOLATIONS," infra p. 68. Further, a violation of § 2318 now can be a predicate offense under the RICO statute. Pub. L. No. 104-153, 110 Stat. 1386 (1996).

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2. Interstate Transportation of Stolen Property, 18 U.S.C. § 2314

Prior to 1985, some prosecutors had also charged a defendant who violated the copyright statute with interstate transportation of stolen property, 18 U.S.C. § 2314, on the theory that the intangible copyright interests that were being violated constituted "goods, wares [or] merchandise" which were "stolen, converted or taken by fraud." See 18 U.S.C. § 2314. The Supreme Court, however, rejected this theory in Dowling v. United States, 473 U.S. 207 (1985). In Dowling, the Court reversed the defendant's conviction for the interstate transportation of copyrighted Elvis Presley records, holding that it was not Congress's intention that § 2314 function as a criminalization of copyright infringement. The Court reasoned that an infringer of a copyright neither assumed physical control over the copyright, nor wholly deprived the owner of its use. The statute "seems clearly to contemplate a physical identity between the items unlawfully obtained and those eventually transported, and hence [requires] some prior physical taking of the subject goods." Dowling, 473 U.S. at 216.

3. Mail and Wire Fraud, 18 U.S.C. §§ 1341 and 1343

Whether the Mail and Wire Fraud statutes, 18 U.S.C. §§ 1341 and 1343, can be used to prosecute schemes to defraud that involve the misappropriation of copyrights is unclear. These two statutes broadly forbid the use of the mails or wire communications in connection with "any scheme or artifice to defraud." Relying upon this broad language, some prosecutors have used the Mail and Wire Fraud statutes to prosecute schemes which involve commercial copyright infringement. See, e.g., United States v. Dowling, 739 F.2d 1445 (9th Cir. 1984), rev'd on other grounds, 473 U.S. 207 (1985); Cooper v. United States, 639 F. Supp. 176 (M.D. Fla. 1986). These prosecutions proceeded on the theory that acts of copyright infringement defrauded the copyright owners of their right to receive income and royalties. Dowling, 739 F.2d. at 1448-50; Cooper, 639 F. Supp. at 180.

While recent legal developments have clouded the application of the Mail and Wire Fraud statutes to copyright infringement cases, they have not eliminated these statutes entirely. The defendants in Dowling v. United States, 473 U.S. 207 (1985), who successfully appealed convictions for interstate transportation of stolen property under 18 U.S.C. § 2314, did not challenge their convictions under the Mail and Wire Fraud statutes. See Dowling, 739 F.2d at 1448. The Supreme Court declined to consider this issue sua sponte. Id. at 209 n.l.

Moreover, following the Supreme Court's ruling, at least one court has permitted Mail and Wire Fraud prosecutions which arise out of copyright infringement schemes. In Cooper v. United States, 639 F. Supp. 176 (M.D. Fla. 1986), the court rejected the contention that Dowling precluded any mail and wire fraud prosecutions of copyright infringers. Instead, the court concluded that "Dowling cannot be interpreted so as to remove from the reaches of the Wire Fraud statute a scheme to defraud copyright owners, musicians and the public from the protection afforded by the copyright laws of this country." Id. at 180.

Similarly, the recent Supreme Court rulings which redefined the scope of the Mail and Wire Fraud statutes seem to permit the continued use of these statutes in copyright matters. In 1987, the Supreme Court issued two separate opinions defining the scope of Mail and Wire Fraud statutes in cases that involved the theft of intangible property. United States v. McNally, 483 U.S. 350 (1987), rejected the view that the Mail Fraud statute reached schemes which denied the public the loyal services of government officials. Relying on the legislative history of these statutes, the Court "read [18 U.S.C. § 1341] as limited in scope to the protection of property rights." Id. at 360. ⁽⁶⁸⁾

Read broadly, McNally might be construed to preclude all prosecutions for schemes to defraud individuals of intangible property like copyrights. In Carpenter v. United States, 484 U.S. 19 (1987), however, the Supreme Court made clear that a scheme to defraud the owner of another type of intangible property -- confidential information -- was protected by the Mail and Wire Fraud statutes. Distinguishing McNally, the Court stated that, "[c]onfidential business information has long been recognized as property." Id. at 26. According to the Court, this intangible interest had received greater legal recognition as property than had the right to honest and faithful services by public employees, a right which the Court characterized as "an interest too ethereal in itself to fall within the protection of the mail fraud statute." Id.

The continued use of the Wire and Mail Fraud statutes to successfully prosecute defendants for schemes to defraud which involve theft of copyrighted property has been clouded by United States v. LaMacchia, 871 F. Supp. 535 (D. Mass. 1994). LaMacchia operated an electronic bulletin board service (BBS) and permitted users to upload and download copyrighted software at no cost. Because LaMacchia did not seek to benefit economically from this scheme, he could not be charged with criminal copyright infringement under 18 U.S.C. § 2319.

The indictment charged LaMacchia with conspiracy to commit wire fraud by entering into a scheme to defraud the computer software developers of their rights to reproduce and distribute their product. The district court dismissed the indictment opining that under Dowling, "the 'bundle of rights' conferred by copyrights is unique and distinguishable from the indisputably broad range of property interests protected by the mail and wire fraud statutes." Id. at 543. The court concluded that Dowling precluded LaMacchia's prosecution for conduct that really constituted copyright infringement, albeit not covered by the criminal copyright statute. ⁽⁶⁹⁾ Id. at 545.

It is unclear whether the rationale of LaMacchia will be adopted by other courts. ⁽⁷⁰⁾ If it is, prosecutors would be precluded from using the Mail and Wire Fraud statutes to charge criminal schemes to defraud which entail, without more, the reproduction and distribution of copyrighted material. However, both statutes could still be used to prosecute schemes to defraud which involve theft of intangible property that is not copyrighted.

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4. Smuggling, 18 U.S.C. § 545

Infringing articles are often manufactured overseas and then shipped into the United States for distribution. Commercial importation of unauthorized copies of copyrighted works constitutes copyright infringement. See 17 U.S.C. §§ 501(a) and 602. In such instances prosecutors should consider also charging the defendant with violating 18 U.S.C. § 545 which makes it a felony to import, receive or transport goods "knowing the same to have been imported or brought into the United States contrary to law."

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E. STATUTE OF LIMITATIONS

It is important to note that copyright violations have only a three-year statute of limitations. 17 U.S.C. § 507(a) ("[n]o criminal proceedings shall be maintained under the provisions of this title unless it is commenced within three years after the cause of action arose."). See United States v. Shabazz, 724 F.2d 1536, 1540 (11th Cir. 1984) ("In copyright infringement actions, the period of limitation begins on the date of the last infringing act. . . . The trial record reflects the unauthorized duplication of legitimate copyrighted tapes in the same year of the indictment, thereby satisfying the three year Statute of Limitations.") (citations omitted). Although cases brought under Title 18 generally have a five-year statute of limitations, 18 U.S.C. § 3282, prosecutions under 18 U.S.C. § 2319 are subject to the three-year statute of limitations because the underlying prohibition is set out in 17 U.S.C. § 506.

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F. FORFEITURE

Federal law also protects copyrights by providing for the forfeiture of both infringing copies and the equipment used to make them. This forfeiture may occur as part of the criminal prosecution or through a separate civil proceeding.

1. Criminal Forfeiture

Criminal forfeiture is available only after convictions. There are three criminal forfeiture provisions which relate to copyright violations. The most significant one is found at 17 U.S.C. § 506(b) which provides that:

When any person is convicted of [criminal copyright infringement], the court in its judgment of conviction shall, in addition to the penalty therein prescribed, order the forfeiture and destruction or other disposition of all infringing copies or phonorecords and all implements, devices, or equipment used in the manufacture of such infringing copies or phonorecords. (Emphasis added.)

Note that this statutory language is mandatory and leaves the judge no discretion.

Section 2318 of Title 18 contains a similar provision, requiring the court to order as part of any judgment of conviction, "the forfeiture and destruction or other disposition of all counterfeit labels and all articles to which counterfeit labels have been affixed or which were intended to have had such labels affixed." See 18 U.S.C. § 2318(d). Note that unlike 17 U.S.C. § 506(b), which requires the forfeiture of the "implements, devices or equipment used" in the offense, the forfeiture mandated by 18 U.S.C. § 2318(d) does not include such devices or equipment, but is limited to counterfeit labels, articles to which those labels have been affixed, and articles to which those labels were intended to have been affixed.

Prosecutors should seek to seize all infringing copies and, in cases under 18 U.S.C. § 506(a), instrumentalities used in their reproduction or manufacture. As a procedural matter, then, search warrant affidavits should cite 18 U.S.C. §§ 506(a) and 2318. In addition, indictments alleging violations of either of these statutes should contain a forfeiture paragraph.

A third forfeiture provision is found at 18 U.S.C. § 2319A(b) and provides for the mandatory seizure, forfeiture and destruction of all infringing items related to trafficking in sound recordings of live musical performances. See "TRAFFICKING IN SOUND RECORDINGS OF LIVE MUSICAL PERFORMANCES: 18 U.S.C. § 2319A," supra p. 40.

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2. Civil Forfeiture

In addition to forfeiture ordered as part of a judgment of conviction, Title 17 provides for civil forfeiture proceedings. See 17 U.S.C. § 509. These proceedings are entirely distinct from the criminal forfeiture authorized by 17 U.S.C. § 506(b) and 18 U.S.C. § 2318. The government can institute a civil forfeiture action under 17 U.S.C. § 509 as an in rem proceeding directed against the property which has been manufactured or used in violation of the law. Therefore, unlike criminal forfeiture, a civil forfeiture is not dependent on a criminal conviction. Moreover, civil forfeiture proceedings are governed by a lower burden of proof than criminal prosecutions. See 19 U.S.C. § 1615.

Three general classes of property are subject to forfeiture under § 509(a): (1) criminally infringing copies; (2) all plates, masters or molds by which such copies may be reproduced; and (3) all devices used to manufacture, reproduce or assemble such infringing copies. The procedures for seizure, forfeiture and disposition of property, are described in 17 U.S.C. § 509(b). This subsection essentially provides that civil copyright forfeitures are governed by the forfeiture provisions of the customs laws (set forth in 19 U.S.C. §§ 1601 et seq.), which provide for both judicial and administrative forfeitures of seized property.

To institute forfeiture proceeding under 17 U.S.C. § 509, the government must first establish probable cause. Once probable cause is established, the burden shifts to the claimant to show, by a preponderance of the evidence, that the defendant property was not involved in illegal activity. See United States v. One Sharp Photocopier, Model SF-7750, 771 F. Supp. 980, 983 (D. Minn. 1991) (forfeiture of copier used to produce infringing copies of software operations manual).

Prosecutors with questions concerning forfeiture practice and procedure should contact the Asset Forfeiture and Money Laundering Section of the Criminal Division at (202) 514-1263.

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G. REPORTING REQUIREMENTS

The Anticounterfeiting Consumer Protection Act of 1996, Pub. L. No. 104-153, 110 Stat. 1386 (1996), requires the Attorney General to provide Congress with detailed information concerning investigations and prosecutions under the criminal intellectual property statutes, 18 U.S.C. §§ 2318, 2319, 2319A, and 2320. 18 U.S.C. § 2320(e). ⁽⁷¹⁾

H. ALTERNATIVE STATE REMEDIES

The federal preemption provision, found at 17 U.S.C. § 301, essentially precludes the states from enforcing penalties for copyright violations if the intellectual property at issue falls within the "subject matter of copyright" as defined by federal law and if the claimed property rights are "equivalent to" the exclusive rights provided by federal copyright law. See Gencraft Homes Inc. v. Sumurdy, 688 F. Supp. 289 (E.D. Tex. 1988). Thus it appears that in most instances criminal prosecution for copyright infringement is possible only under federal law. See "Historical Grounds for Copyright Protection," supra p. 5.

This federal preemption has resulted in an enforcement gap, at least in cases that are deemed insufficient to warrant federal enforcement and prosecutive resources. State statutes that prohibit the sale of goods failing to bear the true name and address of the manufacturer are a possible alternative to federal enforcement. These laws, generically know as "truth-in-labeling" laws or "true-name-and-address" statutes, currently exist in 43 states, and can often support "street market" or "flea market" raids to seize infringing articles that might otherwise escape federal prosecution. Prosecutors are urged to consider referrals to state law enforcement agencies in cases that might not warrant federal resources. See APPENDIX L for a list of state "true-name- and-address" statutes.

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^28.

^29. The 1982 statute had made it a felony to reproduce or distribute, during any 180-day period, (1) at least 1000 phonorecords or copies infringing the copyright in one or more sound recordings or (2) at least 65 copies infringing the copyright in one or more motion pictures or other audiovisual works.

^30. Note that 18 U.S.C. § 3571 increases potential penalties for certain categories of offenders; therefore, it is necessary to consult both §§ 2319 and 3571 in order to ascertain the maximum fine.

^31. When amending the penalty provisions relating to criminal copyright infringement, Congress eliminated distinctions between types of copyrighted works, some of which, such as phonorecords and motion picture films, had been afforded higher protections. Now, copyrighted computer software and other forms of electronic intellectual property are protected to the same extent as records and motion picture films. These amendments also made criminal provisions more generally applicable to smaller commercial operations by lowering the felony threshold level to 10 copies valued at more than $2,500. See Pub. L. No. 102-561, 106 Stat. 4233 (1992).

^32. A minority of courts also require that the government prove the absence of a first sale, and thus some cases refer to this as a fifth element. However, the majority position is that the defendant must raise the first sale as an affirmative defense, and that the lack of a first sale need not be alleged in the indictment. The doctrine, the uncertainty surrounding its use, and its role in criminal copyright prosecutions are discussed separately at "The first sale doctrine in criminal cases," infra p. 27.

^33. "Copies" are defined as:

material objects, other than phonorecords, in which a work is fixed by any method now known or later developed, and from which the work can be perceived, reproduced, or otherwise communicated, either directly or with the aid of a machine or device. The term 'copies' includes the material object, other than a phonorecord, in which the work is first fixed. 17 U.S.C. § 101.

Requiring a minimum of 10 copies was intended to exclude from felony prosecution "children making copies for friends as well as other incidental copying of copyrighted works having a relatively low retail value." H.R. Rep. No. 997, 102 Cong., 2d Sess., at 6 (Oct. 3, 1992), reprinted in 1992 U.S. Code Cong. & Admin. News 3569, 3574 (1992).

^34. The Committee also noted:

The phrase "of one or more copyrighted works" is intended to permit aggregation of different works of authorship to meet the required number of copies and retail value. For example, a defendant's reproduction of 5 copies of a copyrighted word processing computer program having a retail value of $1,300 and the reproduction of 5 copies of a copyrighted spreadsheet computer program also having a retail value of $1,300 would satisfy the requirement of reproducing 10 copies having a retail value of at least $2,500, if done within a 180 day period.

Id. at 6, U.S. Code Cong. & Admin. News at 3574.

^35. The drafting Committee left the term "retail value" "deliberately undefined, since in most cases it will represent the price at which the work is sold through normal retail channels." H.R. Rep. No. 997, 102 Cong., 2d Sess., at 6 (Oct. 3, 1992), reprinted in 1992 U.S. Code Cong. & Admin. News 3569, 3574 (1992).

The Committee acknowledged, however, that copyrighted works can be infringed before a retail value has been established -- such as is the case with software "beta-test" versions. (Beta test copies of software are those still under development that have not yet been sold to the public. They are circulated to select users for testing and evaluation. At the time they are circulated, however, the copyright holder may not have established the eventual retail price.) The Committee left it to the court, in such cases, to look to the "suggested retail price, the wholesale price, the replacement cost of the item, or financial injury caused to the copyright owner." Id. at 7, 1992 U.S. Code Cong. & Admin. News at 3575. In any case, it seems clear that the term "retail value" in this provision was intended to refer to the retail value of the infringed item, i.e., the legitimate item that was infringed. This seems to be true even though it appears to conflict with the approach taken under the Sentencing Guidelines, which look, for sentencing purposes, to the value of the infringing items. See "Sentencing Guidelines," infra p. 37.

^36. 17 U.S.C. § 117 states:

Notwithstanding the provisions of section 106, it is not an infringement for the owner of a copy of a computer program to make or authorize the making of another copy or adaptation of that computer program provided:

(1) that such a new copy or adaptation is created as an essential step in the utilization of the computer program in conjunction with a machine and that it is used in no other manner, or

(2) that such new copy or adaptation is for archival purposes only, and that all archival copies are destroyed in the event that continued possession of the computer program should cease to be rightful.

Any exact copies prepared in accordance with the provisions of this section may be leased, sold, or otherwise transferred, along with the copy from which such copies were prepared, only as part of the lease, sale, or other transfer of all rights in the program. Adaptations so prepared may be transferred only with the authorization of the copyright owner.

^37. This section provides in full as follows:

Notwithstanding the provisions of sections 106 and 106A [exclusive rights in copyrighted works], the fair use of a copyrighted work, including such use by reproduction in copies or phonorecords or by any other means specified by that section, for purposes such as criticism, comment, news reporting, teaching (including multiple copies for classroom use), scholarship, or research, is not an infringement of copyright. In determining whether the use made of a work in any particular case is a fair use the factors to be considered shall include-

(1) the purpose and character of the use, including whether such use is of a commercial nature or is for nonprofit educational purposes;

(2) the nature of the copyrighted work;

(3) the amount and substantiality of the portion used in relation to the copyrighted work as a whole; and

(4) the effect of the use upon the potential market for or value of the copyrighted work.

The fact that a work is unpublished shall not itself bar a finding of fair use if such finding is made upon consideration of the above factors.

^38. Throughout progressive revisions to the criminal copyright laws, Congress has been careful to emphasize that the heightened mens rea element "serves to leave outside the reach of the criminal law losing parties in ordinary business disputes such as those involving reverse engineering of computer programs or contract disputes over the scope of licenses. . . . In cases where civil liability is unclear -- whether because the law is unsettled, or because a legitimate business dispute exists -- the Committee does not intend to establish criminal liability." H.R. Rep. No. 997, 102 Cong, 2d Sess., at 5, reprinted in 6 U.S. Code Cong. & Admin. News 3569, 3573 (1992).

^39. Even boards that do not overtly advertise a particular fee for access may advertise and collect fees covertly, or may have done so at some time in the past for a particular purpose. Some boards may allow access by the general public, but may operate "pirate areas," known as sub-boards, for the benefit of only a small subset of its subscribers. These privileged subscribers may obtain access to otherwise closely guarded pirate areas through payment of an access fee.

^40. On computer bulletin boards, for example, a system operator may offer to subscribers a certain number of "download points" if the subscriber provides to the operator of the system (the "sysop") certain valued computer programs or information. The subscriber may then redeem his or her accumulated points for other programs or for general "download time." For purposes of prosecution, it should not be relevant whether the subscribers "pay" for access privileges in cash or in kind.

^41. 17 U.S.C. § 106 provides:

Subject to sections 107 through 120, the owner of [a] copyright under this title has the exclusive rights to do and to authorize any of the following:

***

(3) to distribute copies or phonorecords of the copyrighted work to the public by sale or other transfer of ownership, or by rental, lease or lending.

^42. The subsection, entitled "Limitations on exclusive rights: Effect of transfer of particular copy or phonorecord," provides in pertinent part:

Notwithstanding the provisions of section 106(3), the owner of a particular copy or phonorecord lawfully made under this title, or any person authorized by such owner, is entitled without the authority of the copyright owner, to sell or otherwise dispose of the possession of that copy or phonorecord.

^43. The legislative history of the copyright statute supports the view that the first sale doctrine was intended as an affirmative defense to copyright infringement:

During the course of its deliberations . . . the committee's attention was directed to a recent court decision holding that the plaintiff in an infringement action had the burden of establishing that the allegedly infringing copies in the defendant's possession were not lawfully made or acquired. . . . The committee believes that the court's decision, if followed, would place a virtually impossible burden on copyright owners. The decision is also inconsistent with the established legal principle that the burden of proof should not be placed on a litigant to establish facts particularly within the knowledge of his adversary. The defendant in such actions clearly has the particular knowledge of how possession of the particular copy was acquired, and should have the burden of providing this evidence to the court. It is the intent of the committee, therefore, that in an action to determine whether a defendant is entitled to the privilege established by section 109(a) and (b), the burden of proving whether a particular copy was made or acquired should rest on the defendant.

H.R. Rep. No. 1476, 94th Cong., 2d Sess. 1, 80-81, reprinted in 1976 U.S. Code Cong. & Admin. News 5659,

5694-95.

^44. Drafting decisions are less critical, however, since the advent of the Sentencing Guidelines, as additional acts of infringement, whether charged in one or more counts, are likely to be taken into account as relevant conduct, however charged. See Sentencing Guidelines § 2F1.1 application note 6 ("The cumulative loss produced by a common scheme or course of conduct should be used in determining the offense level, regardless of the number of counts of conviction."). Nonetheless, uniformity in charging copyright infringement cases may avoid challenges to the indictment under theories of duplicity or multiplicity.

^45. 17 U.S.C. § 101 defines a "collective work" as a "work, such as a periodical issue, anthology, or encyclopedia, in which a number of contributions, constituting separate and independent works in themselves are assembled into a collective whole."

^46. The copyright statute defines a "compilation" as a "work formed by the collection and assembling of preexisting materials or of data that are selected, coordinated, or arranged in such a way that the resulting work as a whole constitutes an original work of authorship. The term 'compilation' includes collective works." 17 U.S.C.

§ 101.

^47. The copyright holder possesses not only the right to reproduce and distribute a given work, but also a limited right to control its distribution and reproduction. This includes protection against diminution in value of a copyrighted work caused by the mere appearance of infringing works in the marketplace. The value of a copyrighted work is diminished by counterfeit copies regardless of the price for the counterfeit item because the victim loses a share of the potential market. In addition, the copyright holder's market share is further diluted by subsequent reproduction and distribution of infringing products. Such harm, though perhaps provable and foreseeable, is not addressed by guidelines that focus on the initial prices charged or profits made by a defendant for infringing products. Last, the victim may also suffer substantial damage to his or her reputation by having inferior items marketed as genuine licensed products. Thus, it might be appropriate to consider not only the number of infringing items made available or sold, the price at which they were sold, and the normal retail price for non-infringing items, but also the nature of the market to which such infringing items were offered and the threat to potential damage for legitimate items.

^48. Bootlegging occurs most frequently with sound recordings, and traditionally involves releasing copies of public performances not recorded by the copyright holder. However, no effort is made to "legitimize" the unauthorized recording. Consequently, the buyer usually knows exactly what he is purchasing.

^49. Piracy involves the unauthorized reproduction or distribution of an existing copyrighted work. See Dowling v. United States 473 U.S. 207, 209 n.2 (1985). Pirated copies, like bootlegged copies, are generally marketed so their illegal nature is obvious to the public. Piracy is by far the most prevalent type of infringement, as it requires only the copying of an existing work through the use of readily available technology such as a tape recorder, videocassette recorder, or computer disk drive.

^50. During the redrafting of § 2318 in 1981, the drafting committee expressed the position, shared by the Department of Justice, that counterfeiting is a more serious crime than traditional piracy. "Counterfeiting defrauds not only the . . . industries, but also the consumer by leading him to believe that he is purchasing an authentic product." S. Rep. 274, Pub. L. No. 97-180, at 8 (1981).

^51. David Nimmer has suggested that by combining the Copyright Act's provision for impoundment of infringing articles, 17 U.S.C. § 503(a), with a request under the 1909 Supreme Court rules, and by invoking the All Writs Act, 28 U.S.C. § 1651(a), copyright plaintiffs may be able to obtain a truly ex parte seizure order. See Nimmer, supra note 18, at 10. Note, however, that the mere fact that an ex parte seizure may have been obtained by a victim should not necessarily preclude prosecution. Rather, such might present the opportunity for a relatively simple and cost effective prosecution, since the prosecutor need only subpoena the U.S. Marshal or other party in possession of the seized material to acquire evidence. Id.

^52. In Internet and computer bulletin board cases, a relatively modest expenditure in a personal computer and a modem can result in the reproduction and distribution of hundreds or even thousands of exact duplications of copyrighted works.

^53. A defendant may not assert double jeopardy for simultaneous prosecution of a criminal contempt and the underlying offense, even if same act or acts gives rise to both charges. The contempt is separately charged as an offense against the court's jurisdiction, while the underlying offense remains an offense against the laws of the United States. See, e.g., United States v. Mirra, 220 F. Supp. 361, 365-66 (S.D.N.Y. 1963) (defendant who threw chair at an Assistant United State Attorney during trial summarily held in criminal contempt, then later charged for same act with assault on a federal officer).

^54. For a detailed discussion of the elements of money laundering and for Department of Justice policy see U.S.A.M. 9-105.000 and Money Laundering Federal Prosecution Manual, June 1994, Money Laundering Section, United States Department of Justice.

^55. For a detailed discussion of RICO and Department of Justice policy see U.S.A.M. 9-110.00 et. seq.

^56. The federal preemption provision, found at 17 U.S.C. § 301, essentially precludes states from enforcing penalties for copyright violations if the intellectual property at issue falls within the "subject matter of copyright" as defined by federal law and if the claimed property rights are "equivalent to" the exclusive rights provided by federal copyright law. However, state statutes that prohibit the sale of goods failing to bear the true name and address of the manufacturer are a possible alternative to federal enforcement. See "ALTERNATIVE STATE REMEDIES," infra

p. 50.

^57. Note that by tying the severest sanction to copyright recidivists, 18 U.S.C. § 2319 introduces an additional element into plea negotiations. In cases involving individual and corporate defendants, prosecutors may wish to press for individual pleas, since those pleas could be used in subsequent prosecutions to enhance a defendant's sentence.

^58. Effective November 1, 1993, the previous § 2B5.4 (Criminal Infringement of Trademark) was deleted in its entirety and consolidated with § 2B5.3, which now controls criminal infringement of a copyright or trademark. See Sentencing Guidelines Appendix C, amendments 481 and 482.

^59. The narrow view of "loss" adopted in this portion of the Guidelines fails to recognize the losses suffered by legitimate sellers in the form of lost retail sales. Note that guidelines for similar offenses adopt a broader concept of "loss." See, e.g., U.S.S.G. § 2B1.1 (Larceny, Embezzlement, and Other Forms of Theft) (Commentary, Application Note 2) ("Where the market value is difficult to ascertain or inadequate to measure the harm to the victim, the court may measure loss in some other way, such as reasonable replacement cost to the victim."). See also United States v. Cianscewski, 894 F.2d 74 (3d Cir. 1990) (cost to victim of stolen check is full amount of check, not price at which stolen check is resold); United States v. Wilson, 900 F.2d 1350 (9th Cir. 1990) (stolen documents on black market).

^60. The court noted, however, that it would be a different question "if the infringing items were of obviously inferior quality and were for that reason distributed to consumers who pay far less than the retail price for authentic items." Larracuente, 952 F.2d at 675. Although a witness for the defense testified that the tapes at issue normally sell for between $10 and $15, the trial court credited the prosecution's expert, "who testified that the retail price of the films copied . . . averaged just over $73." Id.

^61. In Hernandez, the Court upheld defendants' convictions and sentences for conspiracy to traffic in counterfeit labels and goods, 18 U.S.C. §§ 371, 2318, 2320, and criminal infringement of a copyright, 17 U.S.C. § 506(a). Upon conviction, the district court arrived at a "probable" or "intended" loss of over $10,000,000, by multiplying the average market value of a counterfeited tape ($4) by the number of "J-cards" (2,613,600), used as inserts in the counterfeited tape boxes, that were found in defendants' warehouse. The sentencing court's use of this figure was upheld despite the fact that it greatly exceeded the profit lost by the recording industry. The Court of Appeals upheld defendants' sentences based at least partially on § 2F1.1, Application Note 7, which provides that, consistent with § 2X1.1, "if an intended loss that the defendant was intending to inflict can be determined, this figure will be used if it is greater than the actual loss."

^62. Subsection U.S.S.G § 1B1.5(b)(2) provides in full:

An instruction to use a particular subsection or table from another offense guideline refers to the particular subsection or table referenced, and not to the entire offense guideline.

^63. 18 U.S.C. § 2319A(a) provides in pertinent part:

(a) Offense - Whoever, without the consent of the performer or performers involved, knowingly and for purposes of commercial advantage or private financial gain -

(1) fixes the sounds or sounds and images of a live musical performance in a copy or phonorecord or reproduces copies or phonorecords of such a performance from an unauthorized fixation;

(2) transmits or otherwise communicates to the public the sounds or sounds and images of a live musical performance; or

(3) distributes or offers to distribute, sells or offers to sell, rents or offers to rent, or traffics in any copy or phonorecord fixed as described in paragraph (1) regardless of whether the fixations occurred in the United States;

shall be imprisoned for not more than 5 years or fined in the amount set forth in this title, or both, or if the offense is a second or subsequent offense, shall be imprisoned for not more than 10 years or fined in the amount set forth in this title, or both.

^64. "A work is 'fixed' in a tangible medium of expression when its embodiment in a copy or phonorecord, by or under the authority of the author, is sufficiently permanent or stable to permit it to be perceived, reproduced, or otherwise communicated for a period of more than transitory duration. A work consisting of sounds, images, or both, that are being transmitted, is 'fixed' for the purposes of this title if a fixation of the work is being made simultaneously with its transmission." 17 U.S.C. § 101. See "Fixed medium of expression," supra p. 8.

^65. This subsection was intended to apply to unauthorized transmission of bootleg performances through radio or television and not to the unauthorized reproduction of previously recorded but unreleased performances, i.e., studio outtakes. The latter should be considered for prosecution under the criminal copyright law, 17 U.S.C.

§ 506(a) and 18 U.S.C. § 2319.

^66. Prior to being amended, it was unclear whether § 2318 encompassed counterfeit labels affixed to computer software, since computer software is usually classified as a "literary work" under copyright law, Whelan Associates, Inc. v. Jaslow Dental Library, Inc., 797 F.2d 1222, 1234 (3d Cir. 1986), cert. denied, 479 U.S. 1031 (1987). However, in some cases these programs may qualify as audiovisual works. They almost certainly qualify as such in the form of video games. See Red Baron-Franklin Park v. Taito Corp., 883 F.2d 275, 278 (4th Cir. 1989), cert. denied, 493 U.S. 1058 (1990).

^67. This provision was intended to expand the reach of the statute beyond the "interstate and foreign commerce" jurisdictional base of the predecessor statute. The third clause was intended to facilitate pendent jurisdiction based upon related claims under the federal copyright law. Pub. L. No. 97-180, at 9-10 (1981).

^68. McNally was superseded by 18 U.S.C. § 1346 on the narrow ground of theft of the intangible right of honest services, see United States v. Stoneman, 870 F.2d 102 (3rd Cir.), cert. denied, 493 U.S. 891 (1989));

United States v. Gray, 96 F.3d 769 (5th Cir. 1996). But see United States v. Brumley, 79 F.3d 1430 (5th Cir. 1996) (section 1346 inadequate to restore intangible right of honest and faithful service to purview of Mail and Wire Fraud statutes.)

^69. The LaMacchia court reasoned that while the Wire Fraud statute does reach schemes to defraud someone of an intangible property right, such as a citizen's right to honest government, non-disclosure to the victim can only serve as the basis of a scheme when a defendant has a fiduciary or statutory duty to make an affirmative disclosure. Here, no fiduciary relationship existed between LaMacchia and the manufacturers whose software copyrights LaMacchia allegedly infringed. Additionally, there was no statutory duty of disclosure because there was no compulsory software licensing scheme similar to the compulsory licensing scheme of the Copyright Act, 17 U.S.C. § 115, which requires vendors to notify copyright owners of the intention to manufacture and distribute protected phonorecords. It was this duty to disclose that formed the basis of the defendant's conviction for fraud in Dowling. 871 F. Supp. at 542 - 43.

^70. For a discussion concluding that LaMacchia was wrongly decided see Aaron Hoog, Note, Defrauding the Wire Fraud Statute: United States v. LaMacchia, 8 Harv.J.L. & Tech. 509 (1995).

^71. Section 2320(e), as amended by the Anticounterfeiting Consumer Protection Act of 1996, Pub. L. No. 104-153, 110 Stat. 1386 (1996), provides as follows:

(e) Beginning with the first year after the date of enactment of this subsection, the Attorney General shall include in the report of the Attorney General to Congress on the business of the Department of Justice prepared pursuant to section 522 of title 28, an accounting, on a district by district basis, of the following with respect to all actions taken by the Department of Justice that involve trafficking in counterfeit labels for phonorecords, copies of computer programs or computer program documentation or packaging, copies of motion pictures or other audiovisual works (as defined in section 2318 of title 18), criminal infringement of copyrights (as defined in section 2319 of title 18), unauthorized fixation of and trafficking in sound recordings and music videos of live musical performances (as defined in section 2319A of title 18), or trafficking in goods or services bearing counterfeit marks (as defined in section 2320 of title 18):

(1) The number of open investigations.

(2) The number of cases referred by the United States Customs Service.

(3) The number of cases referred by other agencies or sources.

(4) The number and outcome, including settlements, sentences, recoveries, and penalties, of all prosecutions brought under sections 2318, 2319, 2319A, and 2320 of title 18.

18 U.S.C. § 2320(e).

FEDERAL PROSECUTION OF VIOLATIONS OF INTELLECTUAL PROPERTY RIGHTS

(COPYRIGHTS, TRADEMARKS AND TRADE SECRETS)

FEDERAL PROSECUTION OF
VIOLATIONS OF INTELLECTUAL
PROPERTY RIGHTS