systems. But I think there will be some industry standards developing and I like the idea of freeware or very inexpensive software that might come along that would help school districts.

I have no idea what it might cost to do this but if, you know, if you have an institution that is willing to go off and develop their own, even at great expense, maybe they should have the right to do it earlier than those that are going to have to depend on freeware. I don't know.

Mr. BOUCHER. Well, the institutions in my district can barely afford the technology for distance learning itself. The rent on the fiberoptic lines, for example, is about 1,500 per month. Even that is a deeply discounted rate, but that is a struggle for these very financially unfortunate school districts where the distance learning really makes the greatest difference.

Well, we need to explore the subject of technology further and I very much value your answers to these questions. Thank you. Thank you, Mr. Chairman.

Mr. COBLE. Thank you.

Mr. Berman, I think, has one final question.

Mr. BERMAN. Thank you, Mr. Chairman. One more time, explain to me this issue of accepting the balance of expansion-broadening the exemptions in the digital context when the technological controls are meaningful and real, and how that is decided. What if someone says, oh, we have a requirement, everyone has to have a password to get it. Is the fact that they say it enough to make it available? Is everybody going to be subject to litigation afterwards about whether it was really an effective protection? Doesn't the legislation need some kind of standard, Professor Cross?

Mr. CROSS. I would suggest a standard that may be vague, something like the reasonable use of available technological controls, and specify the purpose of those controls.

Mr. BERMAN. But available-what if available controls aren't effective?

Mr. CROSS. If the available controls aren't effective to meet the specified goals, namely preventing downloading and dissemination, then I think-

Mr. BERMAN. Preventing access to somebody who didn't pay the cost, preventing retransmission.

Mr. CROSS. Exactly. You specify in those goals that you must use reasonable efforts to prevent these sorts of things from happening based on the available technology.

Mr. BERMAN. What if there is no available technology?

Mr. CROSS. If there is no available technology, then educators, until such technology becomes available, will resort to other means, transmission sorts of means, as Professor Gasaway discussed. Mr. BERMAN. Who decides?

Mr. CROSS. Anytime there is an imposition of a reasonable standard, it is decided by the courts.

Mr. BERMAN. So it is an after-the-fact litigation, case-by-case determination of whether there is an alternative, whether it was reasonable, and whether it was limited to the goals specified.

Mr. CROSS. Unless the Copyright Office or some agency wants to get involved in rubber-stamping; in saying this sort of control is, per se, effective; yes.

Mr. COBLE. I thank you all. These are early steps of many steps to follow. I am sure this discussion will be continued and we thank you for your contribution.

I will now call the second panel to the table and introduce them as they make their way forward. The first witness of panel two will be Susan Montgomery who is a partner of the law firm of Foley, Hoag & Eliot, LLP. She is testifying on behalf of the American Bar Association. She has experience in the areas of intellectual property, international transactions and commercial law. Ms. Montgomery received a B.F.A and M.A.E. From Rhode Island School of Design and her J.D. from the Northwestern University School of Law. Our next witness is Mr. Charles G. Johnson who is the President and Chief Executive Officer of the Allstate Financial Corporation. He is testifying on behalf of the Commercial Finance Association. Mr. Johnson is First Vice President of the Commercial Finance Association, the national trade association of the factoring and assetbased lending industry, and will become its President in the year 2000.

Our next witness is Lorin Brennan who is a California attorney testifying on behalf of the American Film Marketing Association. Mr. Brennan specializes in international intellectual property licensing with an emphasis on motion picture distribution and financing. He received his B.A. In mathematics from the University of California, Santa Cruz and his law degree from the University of California Hastings College School of Law.

Our next witness is Anne Chasser who is the Director of the Office of Trademark and Licensing Services at Ohio State University. She is testifying on behalf of the International Trademark Association. She is a recognized expert in trademarks and collegiate trademark licensing and manager of the commercial use and positioning of university trademarks. Ms. Chasser earned her M.A. From the Ohio State University.

And our final witness is our old friend, Mike Kirk, that is not to say that you others are not friends as well, but Mike is an old friend. He is the Executive Director of the American Intellectual Property Law Association. Mr. Kirk served as the Deputy Assistant Secretary of Commerce and Deputy Commissioner of Patents and Trademarks from May 1994 through March 1995; and in 1993, Mr. Kirk also served as the Acting Assistant Secretary of Commerce and Acting Commissioner of Patents and Trademarks.

Mr. Kirk earned his bachelor of science at the Citadel in South Carolina and his J.D. from the Georgetown University Law Center and his master of public administration from Indiana University.

We have written statements from each of these witnesses and I ask unanimous consent that they be submitted into the record in their entirety.

Again, I remind you folks, please comply with the 5-minute rule as we are advancing late in the afternoon. Ms. Montgomery, we will begin with you.

I recognize the gentleman from California.

Mr. BERMAN. I unfortunately am going to have to leave and I— we have the testimony. I have staff here. I am interested in what the witnesses have to say and we will refer to their testimony.

I did want to make one point. A draft, sort of a preprint of a bill, was distributed with my name on it, I think, going along with this notion of changing the method of-overturning the court decision and changing the method of recordation, and I never consented to that. I think-I believe it was, I am sure-I hope it was inadvertent, but I just wanted to make clear I have some concerns about the legislation that was being circulated and did not ever authorize my name be placed on it as a co-sponsor.

Thank you, Mr. Chairman.

Mr. COBLE. Folks, this is a little irregular and a little informal. Howard, I have got to return a phone call. If you could, assume the chair and I will be back momentarily. Ms. Montgomery, if you will proceed.

STATEMENT OF SUSAN BARBIERI MONTGOMERY, ATTORNEY AT LAW, FOLEY, HOAG & ELIOT, LLP, ON BEHALF OF THE AMERICAN BAR ASSOCIATION

Ms. MONTGOMERY. Thank you, Mr. Chairman. Before you go, as someone who is here for the first time, I thank you for calling me a new friend.

Mr. COBLE. You are indeed a new friend and I will be back.

Ms. MONTGOMERY. Although I am here for the first time, I as well as others may recall that this issue of security interest in intellectual property has been addressed in the past several times, usually in connection with only one of the Federal intellectual property statutes, and there has been a great deal of disagreement with those past proposals. It was for that reason that in 1993 the Business Law Section of the ABA and the Intellectual Property Law Section of the ABA together set up a joint task force to work together to represent the different attorneys practicing in those sections and the different clients and industries represented by those sections, to come up with an approach that would not be controversial and would meet the needs of the different constituencies.

I am here today as a co-chair of that joint task force and I am joined by my co-chair, Larry Engel, who is also here, and we are here to talk to you about the result of the efforts since 1993 of that joint task force. I do want to talk to you about the proposal we have which we see as a solution, but I think that I better first spend a little bit of time describing what we perceive as a problem and what was presented to this joint task force as a problem, and what we are trying to address and provide a solution for in the Federal Intellectual Property Security Act, which is one of drafts that you have seen.

Basically it is a problem that seems to have two types of roots in the existing law. There is a lack of clarity in the Federal statutes with respect to the handling of security interests in intellectual property and it is important here to note the difference. I am not talking about assignments, and I am not talking about ownership. In fact, when the statutes were drafted, care was taken, and they are rather clear on those points, and it is for that reason that I also believe that those who are owners and are not interested in using their assets for lending purposes have less problem here. However, there is a lack of clarity and there is also a diver

gence in handling of these issues and that has led to various interpretations by the courts.

One case that has been talked about and will be talked about more is the Peregrine case, and while some will find not all of the Peregrine case controversial, certainly those who have unregistered copyrights are concerned about the fact that the case makes it no longer possible to use unregistered copyrights for perfected security interests.

And also that case, and the Avalon case that followed, has raised problems regarding proceeds from intellectual property that apply to all types of intellectual property patents, copyrights, and trademarks alike. This has led to a great deal of uncertainty. There is a lack of uniformity across the different types of intellectual property. Each one must be handled differently in the lending environment and there is a lack of sufficient information in an accessible system right now. It is not possible to find out as much as you would like to find out about ownership or those who might be claiming liens. There are also lookback periods and delays in the filing system that make information completely unavailable at crucial periods of time.

Now, this isn't a problem for every owner of intellectual property and I am not here to say that it is. Some owners of intellectual property do not use their assets and need not use their assets to raise funding, but for many, many owners of intellectual property, this is a problem. The uncertainty and the current complexity in the law means that for some types of intellectual property, and in particular if the collateral you are offering up is mixed intellectual property (if it is a combination of copyrights, trademarks, and patents), then no funding is available or devalued funding is available, and sometimes a lender will even insist on a transfer of ownership. This insecurity is particularly acute in the development environment where there is, as you asked earlier, Chairman Coble, there is no specific identifiable work because it is a work in progress and it may change from being a trade secret to a copyright or patent. It is not identifiable at the very time when those who are working on it and using it would like to take an advantage, get some funding and use it as security, and it is not available.

Certainly this is a problem that has been reviewed by many courts and I have cited and quoted for you in our report a recent court decision noting the need for uniformity in asking for law reform in each of the Federal statutes.

What does our solution do? It introduces a mixed approach. It provides for a notice filing system and eliminates the lookback period. It includes a requirement for prompt filing and it encourages establishment of an electronic filing system and perhaps a single system.

I would welcome questions. I can see that I have run out of time much faster than I thought I would. I would like to address what I think are some misconceptions and misunderstandings that have been presented in some of the materials. I would welcome questions from you and I would also welcome the opportunity to work with this subcommittee, with different industries, and the owners of the different types of intellectual property so we can come up with a solution that works for those who do perceive a problem and

that does not create unnecessary problems for those who perceive

none.

[The prepared statement of Ms. Montgomery follows:]

PREPARED STATEMENT OF SUSAN BARBIERI MONTGOMERY, ATTORNEY AT LAW, FOLEY, HOAG & ELIOT, LLP, AND G. LARRY ENGEL, ON BEHALF OF THE AMERICAN BAR ASSOCIATION

Chairman Coble, Members of the Subcommittee:

Thank you for the invitation to testify at today's oversight hearing on intellectual property security registration. The views we are expressing today represent those of the Section of Intellectual Property Law and the Section of Business Law of the American Bar Association. These views have not been approved by the House of Delegates or Board of Governors of the ABA, and, accordingly, should not be construed as representing the position of the Association as a whole.

We understand that one of the matters the Subcommittee will be examining this afternoon is a legislative proposal prepared and presented to you for your consideration by our two Sections of the ABA, a copy of which is attached. As co-chairs of a Joint Task Force that worked on behalf of the two Sections to develop this proposal, we appreciate the opportunity to appear before the Subcommittee to explain and speak on behalf of our proposal. We believe that this is an important law reform effort to facilitate secured financing, to clarify legal issues adversely impacting commerce, and to ensure uniform treatment of intellectual property security consistent with reasonable business practices.

Our names are G. Larry Engel and Susan Barbieri Montgomery. In addition to co-chairing the Joint Task Force, Larry Engel is also the Chair of the ABA Business Law Section's Ad Hoc Committee on Security Interests in Intellectual Property, and speaks for the Business Law Section from the perspective of commercial lawyers and clients. Business Law Section participants on the Task Force represent a wide range of Committees, such as the Uniform Commercial Code Committee, the Business Bankruptcy Committee, the Commercial Financial Services Committee, the Banking Committee, the Corporate Counsel Committee, the Corporate Practice Committee, the Cyberspace Law Committee and others. Susan Barbieri Montgomery is the chair of the ABA Intellectual Property Law Section's Committee 457, and she speaks for the Intellectual Property Section from the perspective of intellectual property lawyers and their clients, including those whose practices focus on patents, trademarks, copyrights, computer chip mask works, and trade secrets. The diverse perspectives and experiences of the two areas of specialty have been synthesized in the ABA proposal.

In order to facilitate the financing on desirable terms that is needed to fund the operations and growth of U.S. businesses, it is necessary for many businesses to borrow on a secured basis, often using all of their assets as collateral. In the technology development environment, intellectual property collateral may also be needed to secure other types of performance obligations. For technology companies, a bundle of intellectual property may be the only available significant asset. Increasingly, for all types of American businesses, intellectual property assets are a valuable part of any collateral package.

In order to satisfy the needs of commercial lenders and other parties, a security interest in collateral must be capable of certain and cost-effective "perfection," so that the lender can establish its priority over subsequent lenders and the lender's security interest is not avoidable in the event of the bankruptcy of the borrower. See Bankruptcy Code $$544, 547. It is also necessary for a financier to be able to quickly and inexpensively verify the borrower's ownership and the priority of the security interest in comparison to any competing interests and transfers. Unfortunately, in the case of intellectual property collateral, the certainty and predictability required for such financing have been impaired by varying treatment in the different Federal statutes and by several controversial court decisions (discussed below). These problems are addressed and, we believe, resolved by the proposed legislation we have submitted. In addition, related reforms in the ABA proposal facilitate financing by implementing better practices involving notice filings, availability of records and other process changes (e.g. elimination of the uncertainty created by current "lookback" periods for recording of intellectual property transfers) to expedite transactions.

While parallel law reform efforts have been undertaken at the State level with respect to security interests and notice filings pursuant to the Uniform Commercial Code, the Federal intellectual property laws and filing processes have not evolved in a consistent manner. This difference exists in part because the Federal intellec

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