copyrighted works. On the other hand, given that the ultimate goal of copyright is to further knowledge, I would be hesitant to endorse a system that either denied for-profit educational institutions access to the same background materials available to non-profits, or made such access cost-prohibitive. I would suggest, however, that the issue is not as black or white as the Report makes it seem. Although it would be difficult to administer, Congress might want to consider the use of some sort of compulsory licensing regime for for-profit educational institutions. If works were available to those institutions at a reasonable cost, perhaps based on marginal profit, it would go a long way toward ensuring that for-profit and nonprofit educational institutions could utilize the same materials.

Section (g) suggests that the categories of works that qualify for the §110(2) exception be expanded, but in only a very limited way. I strongly disagree with this particular recommendation. As noted above, distance education may open up a number of new vistas in the education process. Most significantly, it may give those of limited means, or those with limiting personal or family circumstances, the chance to obtain a college education. In order for distance education to realize its promise, however, the educational process must mirror as closely as possible the traditional classroom environment. In fact, most of the technological development in distance education is geared toward making the virtual classroom as much like traditional face-to-face education as possible. If the technology is there, it would be terribly unfortunate if the law placed greater restrictions on a teacher providing distance education than it did on the teacher in the classroom setting. Section 110(1) allows a teacher in the classroom to perform or display any work. The teacher providing that same class to a distant audience should have the same freedom.

Of course, distance education that is based on digital technology poses greater risks to the copyright owner. As long as effective technological controls can be developed, and educational institutions are required to utilize those controls, we can achieve a balance between the economic interests of the copyright owner and society's need for furthering knowledge.

A More Comprehensive Proposal. The observations of the last two paragraphs lead directly into my last recommendation. The mandate given to the Copyright Office specifically called for it to consider ways in which § 110(2) might be amended. Therefore, although the Report did deal with § 110(1) to some extent, the vast majority of the discussion focused on § 110(2). That focus, however, is unnecessarily confining. Were the whole question of how copyrighted works could be used in education to be considered anew, the result might be something more comprehensive than an amendment to § 110(2). In fact, a more sweeping change would actually do a better job in striking a proper balance between the needs of education and the legitimate interests of copyright owners.

I propose that §110(2) be merged into an amended § 110(1). The new provision would apply equally to all education, regardless of whether it takes place in the traditional classroom or over a network. Like the current § 110(1), the new provision should allow the performance of any copyrighted work, not merely nondramatic or musical works. The other requirements of current § 110(1), such as the requirement that only lawful originals be used, should of course be retained. The new provision could also incorporate the $110(2)(A) requirement that the performance or display be part of the education activities of the institution.

In addition, the new provision could incorporate many of the specific proposals that the Report makes concerning § 110(2). Because distance education poses greater risks to the copyright owner, an educational institution should be required to limit access to authorized students. Likewise, the institution should be required to use available technological controls to prevent unauthorized archiving or printing of works, or the dissemination of copies to third parties.

The goal of my proposal is for the law to treat traditional and distance education alike. That is, in fact, the direction that the technology is heading. Although I personally wonder whether distance education can ever fully recreate the dynamic that exists in the traditional face-to-face classroom, the technology may prove me wrong. If so, it would be unfortunate for the law to stand in the way of a process that could make quality education available to all. Therefore, the distance educator should have exactly the same prerogatives as the in-class educator.

In closing, I commend the Copyright Office for its comprehensive report and specific proposals for change. That Report will be a valuable tool for Congress when it decides whether the problems posed by distance education warrant a legislative solution.

Federal Intellectual Property Security Act

The proposal for a Federal Intellectual Property Security Act deals with a technical, but important, problem facing a wide variety of businesses. Federal patent,

trademark, copyright, and similar laws turn inventions, works, and business symbols into valuable assets. By providing a limited monopoly for these assets, Congress has in essence created a new form of business capital. In fact, for many start-up companies, especially those in the biomedical industry, the capital represented by a patent or copyright is the company's main asset.

Marketing a new invention or copyrighted work often requires significant startup costs. Because many authors and inventors simply do not have the money, they simply license their innovation to another. In many cases, these deals prove unsatisfactory to the author or inventor, as the royalty that they receive may be only a small share of the ultimate proceeds attributable to the invention or work. Realizing this, a growing number of inventors and authors forego the standard channels of distribution and attempt to market their intellectual property themselves. To obtain the start-up costs, these inventors and authors typically borrow money from a commercial lender. As the federal intellectual property right is the heart of the fledgling business enterprise, the institutional lender quite naturally takes a security interest in that intellectual property right as collateral for the loan.

There is already a well-established practice of granting security interests in intellectual property. The Proposal before the Subcommittee today deals not with the validity of the practice, but in the seemingly more mundane question of how the secured lender provides notice of its interest to others. Most security interests, regardless of whether they involve tangible or intangible collateral, are accompanied by the filing of a financing statement with a state registry. That filing "perfects" the interest, giving the lender priority over subsequent transferees and other security interests.

In theory, that same system would work for federal intellectual property rights. However, each of the federal laws dealing with intellectual property contains a provision governing how the right may be transferred. All of these provisions require that notice of the transfer be filed with the federal office responsible for overseeing that form of intellectual property. A transferee who fails to file the required notice runs the risk that the transfer will not be effective against a subsequent transferee of the same intellectual property right.

Although there is a difference between the grant of a security interest and an outright conveyance, most lenders already file notice of security interests in federal intellectual property with the appropriate federal office, usually in addition to a state filing. Because a default on the underlying loan may lead to foreclosure, this federal filing helps to ensure that the lender will take good title to the intellectual property interest in the event of foreclosure. All of the federal offices routinely accept these

notices.

However, the current filing system has certain problems. First, as the Proposal acknowledges, there is some disagreement among the courts as to whether a federal filing is necessary to safeguard the lender's interest, especially in the field of copyright. Second, many commercial lenders take a security interest in all business assets, including property acquired by the debtor afer the date of the loan. While state filing systems based on the Uniform Commercial Code allow the lender to file a financing statement containing a general description of the collateral, the federal offices do not.

The Proposal has two basic goals. The first goal is substantive: to make filing in the federal office alone sufficient to protect the lender's rights. Although a lender would still be free to file in a state office, only the federal filing would ensure the lender priority over subsequent transferees. The second goal is to make the federal filing system more like current state UCC-based systems, by allowing for general descriptions of collateral.

The proposal is very well thought-out and carefully drafted. However, there are a few areas in which the Proposal might be improved. To this end, I have one general suggestion, and a handful of more specific recommendations.

General Comment. The Proposal makes a great deal of sense for security interests in copyrights, patents, boat hull designs, mask works, and plant variety protection. However, it is more problematic with respect to marks. Because there are significant differences between marks and other forms of intellectual property, making a federal filing an absolute prerequisite to priority is at best unnecessary, and quite possibly detrimental to the interests of lenders, owners of marks, and even consumers. I therefore recommend that if the proposal is introduced as a bill, it should be amended to exclude coverage of marks. Although filing notice of a security interest with the Patent and Trademark Office should by all means be allowed, it should not be a prerequisite for obtaining priority over junior interests in the mark.

Most federal intellectual property rights involve discrete, ascertainable interests. A patent is the exclusive right to make and sell a particular invention, as defined by the claims. A copyright grants a set of exclusive rights in a certain identifiable

work. The laws governing mask works, plant variety protection, and boat hull designs also fit this basic paradigm. There is a one-to-one relationship between the federal right and the creation. In addition, the right granted by federal law is separable from the underlying object. An author or inventor may sell the physical embodiment of his creation without losing his copyright or patent. Therefore, the federal right and the physical creation each have a separate value.

A mark also relates to an identifiable business asset. Trademarks, service marks, collective marks, and certification marks are all symbols that represent the value of the goodwill that the owner of that mark has garnered over the years. But the similarity between marks and other forms of federal intellectual property ends there. First, unlike other federal intellectual property rights, a mark cannot be separated from the goodwill that it represents. A "naked" assignment of a mark (that is, a transfer of a mark without the goodwill of the transferor) is considered an abandonment of the mark, resulting in the loss of all rights in the mark. Section 10 of the Lanham Act (15 U.S.C. §1060) incorporates this concept, and allows a mark to be assigned only along with the associated goodwill.

A second difference between marks and other federal intellectual property rights is that the protection of marks is not exclusively federal. Both federal and state laws afford protection to marks. Although registration of a mark under the Lanham Act does afford the owner of that mark certain additional rights, federal registration is not required for legal protection. A significant number of marks, especially service marks, are protected only by state law.

A third unique feature of marks is that there is not necessarily a one-to-one relationship between the right and the underlying asset. A person has only one patent in a given invention. A business may, by contrast, have a series of marks relating to the same good or service. It may, for example, claim rights not only in the stylized trademark it uses on its product, but also on the unadorned words alone. It may similarly use a symbol on the same product. In some cases, the distinct packaging or even a unique product design may function as a mark. It is not uncommon for a firm to register only some of its marks, relying on state law to protect the oth

ers.

The Proposal fails adequately to address the consequences that flow from these differences between marks and other forms of federal intellectual property. As written, the proposal applies only to marks that have been registered under the Lanham Act (although the Proposal fails to specify, I assume that this means registration under either the Principal or the seldom-used Supplemental Register of the Lanham Act). As a result, it applies neither to unregistered marks nor to the underlying goodwill of the firm. Security interests in these unregistered marks and goodwill must be perfected by state filings. Because a lender who takes a mark as collateral will invariably also take an interest in both the underlying goodwill and all other marks that pertain to that goodwill, the Proposal in effect creates a "dual-filing" system for marks, in which the lender will file in both the state office and the Patent and Trademark Office.

At best, this dual-filing system is an unnecessary redundancy. Admittedly, the burden of establishing and maintaining the system will not be that great. The Patent and Trademark Office already allows notices of security interests to be filed. The cost of converting that system to accommodate the new federal financing statement should not be that significant. Assuming that the filing fees remain reasonable, the additional cost to the lender of the second filing will be minimal.

On the other hand, what does the requirement of a second filing accomplish? As noted above, a mark cannot be separated from the goodwill with which it is associated. Therefore, any potential purchaser of an ongoing business will search for security interests in both the underlying goodwill and all marks associated with that goodwill. Because a state filing is necessary to perfect a security interest in the goodwill and any unregistered marks, the prudent buyer will automatically conduct a search of the state registry. If that search discloses that the goodwill is encumbered, that buyer has no need to conduct a second search in the appropriate federal office, for a mark is worthless without the underlying goodwill. Therefore, in the case of a mark, the requirement of a federal filing seems redundant.

Moreover, in certain situations the dual-filing system may actually have a detrimental effect. Although a careful lender would file with both the Patent and Trademark Office and the state registry, it is possible that a lender might comply with the requirements of one system but not the other. Suppose, for example, that a lender files a proper federal financing statement, but fails to make a proper state filing (it might, for example, have filed with the wrong state). That lender would have a perfected interest in the federal mark, but not any state marks or the underlying goodwill. Suppose further that the debtor later sells its business, including the goodwill, to a third party, pursuant to a sales agreement that makes no mention

of any federally-registered marks. As the Proposal is drafted, if that third party had no actual notice of the lender's interest, it would take free and clear of the security interest. Although the federal filing might otherwise serve as constructive notice, the third party would have no reason to search the Patent and Trademark Office filing system, as it was not purchasing any federal marks.

Of course, it might seem as if the lender in this situation has merely suffered the consequences of its carelessness. However, one other consequence may result from this sequence of events. After the conveyance to the third party, the federal mark and the goodwill are owned by different parties. This separation of the mark and the goodwill results in abandonment of the mark, destroying its entire value. This possibility of abandonment certainly affects the lender, and will invariably be reflected in lending rates. Moreover, abandonment of the mark may also affect innocent consumers. After abandonment, anyone is free to adopt the mark for use on its own goods or services. Because consumers rely extensively on marks to make purchasing decisions, the unintended dissociation of the mark and the goodwill of the original seller is likely to cause customer confusion-precisely the sort of confusion that the Lanham Act is designed to prevent.

Admittedly, the scenario set out just above is somewhat unlikely. But given that the requirement of a federal filing is redundant anyway, the risk of customer confusion is a further reason to question the desirability of a dual-filing system. Although allowing a federal filing for marks is commendable, actually requiring that filing as a prerequisite to protecting the lender's interest may well prove to be unwise. I therefore suggest that any future federal intellectual property security act omit marks from the compulsory filing provision.

Specific Comments. I also have a few specific comments concerning the Proposal, which I have referenced by the section numbers used in the Proposal.

Section 2(6)(b). If the act is to include federally-registered marks, this clause must be amended to include a reference to the Commerce Clause. The Patent and Copyright Clause of Article I, §8, cl. 3 cannot serve as the basis for federal laws dealing with marks. That clause allows Congress to provide protection "for limited Times." Protection of a mark is not limited in term, but continues for as long as the owner uses the mark. Moreover, Article I, §8 allows Congress to give rights only to "Authors and Inventors.” Authors and inventors innovate. Legal protection of a mark, by contrast, does not require innovation. Rights in a mark vest in the person who has used that mark in connection with a given good or service for the longest time. That senior user has rights even if she copied the mark from someone else who used it for a different good or service.

Section 3(b)(2)(B). This provision is the heart of the entire Proposal, and therefore warrants close scrutiny. As written, filing a federal financing statement protects the secured party against subsequent transfers of the federal intellectual property. "Transfer" is defined in section 3(a) to exclude security interests. Therefore, as written, the Proposal nowhere provides that filing a federal financing statement gives the lender priority over junior security interests. Lenders could, of course, obtain that priority under state law by making a second filing with the state office. To eliminate that need, however, this provision should be amended to provide that a federal filing gives the lender priority not only over subsequent transferees, but also over junior security interests.

Section 3(b)(3)(B). I would recommend that the parenthetical phrase (“and, in the case of Federal marks, the goodwill of the business connected with the use of and symbolized by such Federal marks") be deleted. Goodwill is not a federal intellectual property right. Therefore, even if the Proposal becomes law, lenders will continue to perfect security interests in goodwill by filing with state offices. A potential purchaser of that goodwill will continue to search the state filing systems to determine if the goodwill is encumbered. The wording of this section, however, could be construed as allowing a lender to perfect a security interest in goodwill by filing either a state or federal financing statement. This in turn would force all purchasers of an ongoing business concern to conduct a separate search in the Patent and Trademark Office, in the off chance that the seller also has a federally-registered mark connected with that goodwill. Due diligence would require a federal search even if the purchase agreement did not mention federal marks.

Second, I am somewhat uncomfortable with the last clause of this section, which provides that a reference to "intellectual property" or "general intangibles" in a federal financing statement is sufficient to cover not only intellectual property that already exists, but also any federal intellectual property produced at a later date. I realize that whether that after-acquired property is actually subject to the security interest is governed by the security agreement, not the financing statement. However, if an author or inventor should later produce another work or invention, a subsequent lender may be hesitant to lend money out of fear that the new invention

is already subject to a senior security interest. Without this clause, subsequently produced intellectual property would be covered by a financing statement only if that statement contained a specific after-acquired property clause. Requiring a specific reference would give the author or inventor who foresees acquiring additional copyrights or patents the chance to negotiate the language employed in the financing statement.

Admittedly, section 3(b)(3)(6) could address this problem. That section makes the lender responsible for any damages that the debtor suffers due to an improper financing statement. However, as the Proposal is written, a lender is perfectly free to file a federal financing statement containing broad language like "general intangibles," even if the security agreement does not actually reach after-acquired property. Therefore, if the damages action provided by section 3(b)(3)(6) is deemed an adequate deterrent, it should be amended to cover the problem of after-acquired property.

I thank the Subcommittee for the opportunity to present my views on these matters, and hope that my comments will help you in any further action you may take on these proposals.

Mr. COBLE [Presiding]. Thanks to each of you.

We have been joined by the distinguished gentlemen from Tennessee, Virginia, and Massachusetts, Messrs. Jenkins, Boucher, and Delahunt. Good to have them with us.

Ms. Schroeder, how do you respond to concerns of educators that it is too difficult and too impractical to license works for use in digital distance education?

Ms. SCHROEDER. Well, I think iCopyright answered that. They are tying to make it easier, and licensing certainly is going on. There are many of our publishers very excited about distance education, wanting to get into that market.

But the other point I was trying to make, too, not only in licensing but orphan works, a lot of these things are issues where we need to update rights holders being able to participate, and do it quickly. And I guess what I am saying is where you really find that we are going in distance education, is moving very rapidly with good products right now and they are getting-they are getting there by either producing it themselves or by public domain or by using fair use or by using licensing. So licensing is very broad based, and people are using them a lot.

Mr. COBLE. Mr. Attaway, if Congress followed the recommendations of the Copyright Office and expanded the categories of works covered by 110(2) to include audio-visual works, how would the market of audio-visual works be affected?

Mr. ATTAWAY. It is unclear. If the requirements of effective technological protection against unauthorized access and use actually are met, I think there would be very little impact. Our concern is that until this technology actually exists, it is very dangerous to change the law permitting this type of activity without defining precisely the kind of technological safeguards that need to be applied. And if they are not applied, the impact can be horrendous. You can imagine recent motion pictures appearing on the Internet. That is going to be a problem for us in any case, but it will be materially exacerbated if educators have the legal right to transmit this type of programing to their students digitally and then it leaks out onto the Internet and elsewhere. That is our concern.

Mr. COBLE. Ms. Gasaway, the Copyright Office Report suggests amending section 110(2) to cover certain digital distance education activities. It has also been suggested that in lieu of amending the law, that Congress should encourage the parties to continue pursu