The Federal Report is prepared by the California Institute annually. It details legislative issues the Institute has worked on recently and the products and services that the Institute provides to its Advisory Board, the California Congressional delegation, and others.

Legislative Activity

Since January 1999, the Institute has engaged in activities regarding a number of significant legislative matters, including:

	�Information Technology Issues - The Institute continues to analyze the impact of federal legislation on the state's information technology industry, because of its significant importance to the state's economic health. Among the issues followed this year were: Year 2000 technology liability protection; and exports of encryption products and high performance computers.
	�Intellectual Property Issues - Because of its importance to the state's entertainment and information technology industries, the Institute worked with the delegation and California organizations regarding several intellectual property issues, including increasing copyright damages and stemming international piracy.
	�Immigration - The Institute continues to follow key issues in this area, including: increasing H-1B visas, and reimbursing states for certain costs of illegal immigrants.
	�Tax Policy - The Institute continues to advise the delegation regarding tax issues important to the state's technology community and other interests, including a permanent research and development tax credit and exclusion from income of employee education assistance.
	�Disaster Insurance - The Institute continues to work with the delegation and several California public entities to ensure that California's unique needs will be recognized as FEMA promulgates a rule requiring all public buildings to carry insurance against earthquakes and other natural disasters.
	�Federal Formula Grants - The Institute advises the delegation and others regarding the formula grant programs and the fairness of funding allocations to the state.
	�Education - The Institute continues to play an assistive role as the delegation seeks the state's fair share of funding under federal K-12 education programs, many of which are due to be reauthorized in 2000.
	�Health, Social Services and Welfare - The Institute follows key issues in these areas and advises the Congressional delegation on such issues as medical records privacy, and child support and foster care.
	�Resources, Environment and Agriculture Issues - The Institute tracks and advises the delegation regarding legislation to exempt California from the use of MTBE and federal participation in efforts to restore the San Francisco Bay-Delta. It also monitors selected issues related to California's agricultural sector, such as Pierce's Disease.
	�Science, Research and Development - The Institute advises the delegation regarding the importance of federal science and R&D appropriations to the state.
	�Transportation - The Institute worked with the delegation and others to prevent the imposition of a 12.5 percent cap on federal transit funding.
	�Housing - With home prices continuing to rise faster than incomes in many areas, and with transportation and other infrastructure needs outstripping the abilities of these areas to maintain services, the Institute monitors federal developments regarding housing.
	�Utility Industry Restructuring - California has led the nation in implementing broad restructuring in the electric utility industry, and the Institute continues to monitor federal activities in order that the state's progress can be maintained.

Institute Products and Services

To promote the exchange of policy views among the Congressional delegation, the Institute's Advisory Board members and others, the Institute provides timely information on legislative issues of importance to California through the following products and services:

	�Member Breakfasts - Advisory Board members are invited to attend regular breakfasts hosted by the Institute featuring one or two members of the delegation.
	�Briefings - The Institute has sponsored briefings on a variety of issues, including medical records privacy, population and demographic trends, and education formula grants.
	�Capitol Hill Bulletins - The Institute continues to monitor and report on federal issues of significance to California in its weekly California Capitol Hill Bulletin.
	�Other Events and Products - The Institute from time to time sponsors or cosponsors other events, such as receptions, luncheons and forums, and it produces special reports on topics such as California's balance of payments with the federal treasury, the state's share of federal spending, and formula grant factors.

California Institute

Spring 2000 Federal Report

In conjunction with its 2000 Spring Meeting, the California Institute has prepared the following Spring 2000 Federal Report which reviews recent federal activities with significant impacts on California.

I. Institute Issues Coverage

Information Technology

Y2K Liability

Three bills dealing with the issue of liability for Y2K related computer problems were introduced in the House and Senate early in 1999. The "Year 2000 Readiness and Responsibility Act" was introduced in both the House (H.R. 775) and Senate (S. 461) in February 1999. Also, S. 96, a similar bill, was introduced by Sen. John McCain (AZ). The bills encouraged private companies to resolve Year 2000 computer problems through remediation and not litigation. The House bill, H.R. 775, was introduced on February 23 by Reps. Tom Davis (VA) and Jim Moran (VA). California Reps. David Dreier (Covina), Cal Dooley (Visalia) and Chris Cox (Huntington Beach) were original co-sponsors of the bill, and a broad bipartisan cross-section of other California delegation members also co-sponsored. The Senate bill, substantially similar to the House bill, was introduced by Sens. Orrin Hatch (UT) and Dianne Feinstein on February 24.

Among other provisions, both H.R. 775 and S. 461 called for a 90-day "cooling off" period if a company has a Y2K complaint against an information technology company. The aggrieved company must give written notice to the other business within 30 days, and then the prospective defendant has 60 days to resolve the problem before suit can be filed. Lawsuit pleadings, under the bills, must contain specific facts regarding the amount and nature of money damages and the basis for calculating damages, and must show specific facts demonstrating material Y2K defects. The bills also limited punitive damages to either: (1) the lesser of three times actual damages or $250,000 for individuals whose net worth is $500,000 or less and for any small businesses; or (2) the greater of three times actual damages of $250,000 for all other defendants.

On March 3, the Senate Commerce Committee reported its Y2K litigation legislation, S. 96, by a vote of 11-9, after substituting a manager's amendment offered by Chairman John McCain (AZ). McCain's amendment brought the bill closer in line with S. 461, including the 90 day cooling off period before litigation could be initiated, and setting limits on punitive damages. Earlier, on March 1, the Senate Judiciary Committee held a hearing on S. 461. Eleanor Acheson, Assistant Attorney General, Office of Policy Department, testified that, although the Administration supported the intent of deterring frivolous lawsuits from being filed over Y2K problems, it concluded that S. 461 was too broad and may prevent small businesses and consumers from justified legal recourse in some situations, and undermine efforts to encourage technology companies to fix their Y2K problems. Harris Miller, President of the Information Technology Association of America testified, however, that the bill's requirement that companies take reasonable efforts to anticipate and mitigate potential contractual and tort claims created clear incentives for a company to address Y2K problems in a timely fashion.

On March 9, the House Government Reform Committee's Subcommittee on Government Management, Information and Technology (chaired by Rep. Steve Horn (Long Beach)), and the Science Committee's Technology Subcommittee also held a joint hearing addressing the issue. Among other witnesses, the Subcommittees heard from Tom Donohue, President and CEO of the U.S. Chamber of Commerce. Mr. Donohue pointed out the Chamber represents business interests on both sides of the Y2K problem -- those likely to be plaintiffs, as well as defendants in any litigation. Nevertheless, the Chamber supported expeditious passage of H.R. 775, as an effective way to encourage businesses to remediate Y2K problems, rather than spend tremendous resources litigating them. Mr. Donohue also testified that the Giga Information Group, a technology-consulting firm, estimated that Y2K litigation may cost $2 to $3 for every dollar spent fixing the problem.

In the Senate, the Special Committee on the Year 2000 Technology Problem, met on March 11, 1999 to consider the liability issue. Among other witnesses, the Committee heard from George Scalise, President of the Semiconductor Industry Association (SIA).Mr. Scalise pointed out that there are a myriad number of issues to consider when evaluating the semiconductor industries Y2K readiness, because of the thousands of different kinds of semiconductors, and the fact that in many cases the date processing software is either owned by the customer or is manufactured to the customer's specifications. Nevertheless, the industry is cooperating fully with its customers to provide information so that the manufacturer of the finished electronic product can determine how the elements of the system function together as an integral unit and whether the product is Y2K ready.

John McGuckin, Exec. Vice President on Union Bank of California, testified on behalf of the American Bankers Association (ABA) and stated that the banking industry is on track to resolve any Y2K problems before January 1, 2000.Nevertheless, the ABA supported passage of legislation, such as H.R. 775, to allow businesses to remediate any Y2K problem before litigation is filed.

On March 25, the Senate Judiciary Committee, by a vote of 10-7, favorably reported out an amendment in the nature of a substitute to S. 461.During the markup, the Committee rejected two amendments. The first, offered by Sen. Patrick Leahy (VT), would have exempted individual consumers from the requirements of the bill. It was defeated by a vote of 7-10. The second, offered by Sen. Russ Feingold (WI), would have prohibited state law preemption on punitive damage awards and the liability of company officers and directors. It was defeated, 8-9.

The Committee's substitute left intact the major provisions of the bill, including the 90- day cooling off period, and proportionate, rather than joint and several liability. It changed the cap on punitive damages to three times compensatory losses, rather than actual losses, and clarified that the doctrine of comparative, not contributory, negligence would govern suits.

On March 26, Rep. Anna Eshoo (Atherton) (joined by Sen. Chris Dodd (CT) on the Senate side) introduced another Y2K bill. Rep. Eshoo's bill, H.R. 1319, the "Y2K Fairness and Litigation Act," retained the 90-day cooling off period and proportional, rather than joint and several, liability. However, unlike H.R. 775 and S. 461, it did not put a cap on attorneys' fees and contained no provisions limiting the liability of officers and directors.

On April 13, 1999, the House Judiciary Committee held a hearing on H.R. 775. Reps. David Dreier (Covina) and Cal Dooley (Visalia), co-sponsors of the bill, testified in support, stressing its bipartisan nature, and the need for the legislation in order to prevent costly and frivolous litigation over the issue. The Committee also heard from two panels of witnesses, including Marc Pearl, Sr. Vice President and General Counsel of the Information Technology Association of America. Mr. Pearl strongly supported quick passage of the bill, stating the fear of , and preparation for, litigation was already driving too many decisions in the information technology industry.

Eleanor Acheson, Assistant Attorney General at the Department of Justice Office of Policy Development submitted testimony for the record. She stated the Administration's concerns that H.R. 775 made significant changes in both federal and state procedural and substantive law. However, the Administration remained committed to working with the Committee to formulate "mutually agreeable principles that would form the basis for a needed, targeted, responsible, and balanced approach to Y2K litigation reform."

After voting 94-0 on April 26, to take up the Year 2000 liability bill (S. 96), the Senate narrowly rejected, by a vote of 52-47, a motion to invoke cloture and move forward on the legislation. The eight-vote failure to invoke cloture came as a result of the efforts of Sen. Edward Kennedy (MA) to force the Senate to vote on a proposal to increase the minimum wage. He had vowed to hold the Y2K bill hostage until the Senate leadership agreed to a minimum wage vote. In response to the failed cloture motion, Senate Majority Leader Trent Lott (LA) pulled S. 96 from further consideration for the time being.

In the meantime, on April 28, the Clinton Administration announced that it opposed S. 96, as well as the compromise substitute being offered by Sens. John McCain (AZ) and Ron Wyden (OR). Later in the day, however, those sponsors agreed to a further compromise proposed by Sens. Chris Dodd (CT) and Dianne Feinstein, among others, which they hoped would dampen the Administration's opposition. The Dodd language called for capping punitive damages only for small business defendants, with net assets of less than $500,000 or fewer than 50 employees, and for governmental entities. The damages would be capped at three times actual damages or $250,000, whichever is less. The McCain-Wyden version had placed that cap on all punitive damage awards regardless of the defendant's size or financial worth. The new bill also eliminated the personal liability caps for officers and directors of corporations and retained state evidentiary standards for fraud claims.

On the House side, the Judiciary Committee began its markup of H.R. 775 on April 29, but after a few hours postponed further consideration until May 4. The Committee had two amendments in the nature of a substitute pending, prior to adjourning. The first, offered by Rep. Bob Goodlatte (VA), retained the 90-day cooling off period, and required that material defects and state of mind be pled with specificity, where relevant. It also retained a complete "reasonable efforts" defense in tort actions, and limited it to instances where the defendant raised the defenses of impossibility or impracticability in contract actions.

The second substitute was offered by Rep. Zoe Lofgren (San Jose). It would have stripped out some of the more controversial provisions in the legislation, such as limits on attorneys' fees. However, it retained the 90-day cooling off period, and required pleading with specificity with regard to material defects. It also contained a provision allowing for injunctive relief in cases of a catastrophic failure because of the Y2K glitch. On the contentious issue of joint and several liability, Rep. Lofgren's substitute would have limited several liability to cases where a finding of material fault is made.

During the markup, Rep. Asa Hutchinson (AR) offered an amendment to the Goodlatte substitute to strike some of the limits on attorneys' fees, such as those limiting the maximum hourly rate to $1,000 per hour and contingency fee arrangements to three times the attorney's hourly rate. During discussion of the amendment, Reps. Goodlatte and Hutchinson indicated they would support further striking the limits on attorney-client fee arrangements. As a result, Rep. Barney Frank (MA) successfully moved for unanimous consent to strike the provision limiting contingency fees to one-third of the judgment, and Rep. Goodlatte received unanimous consent to strike the provision prohibiting any contingency fee payment to an attorney in cases where settlement or judgment is reached within 90 days of filing suit. During debate on the Hutchinson amendment, the Committee rejected, by a vote of 14-17, an amendment to the amendment proposed by Rep. Mel Watt (NC) that would have struck all of the attorney-client fee and disclosure provisions. The Hutchinson amendment was then adopted by voice vote.

When the Committee adjourned for the day, the Hutchinson amendment to the Goodlatte substitute, as well as the Goodlatte and Lofgren substitutes were still pending.

On May 4, by a vote of 15-14, the House Judiciary Committee reported H.R. 775, after accepting the amendment in the nature of a substitute offered by Rep. Bob Goodlatte (VA). Before approving the substitute, the Committee considered several amendments. The Committee defeated by voice vote an amendment by Rep. Jerry Nadler (NY) to strike the provisions regarding certification of class actions and removal of such actions to federal court, and defeated another Nadler amendment, by a vote of 4-13, that would have struck the provision requiring individual notification to each member of a class.

An amendment offered by Rep. Bobby Scott (VA) to delete the provisions limiting the liability of officers and directors was defeated by voice vote, as was another Scott amendment to make the individualized notice requirements in a class action suit voluntary, rather than mandatory. The Committee approved by voice vote two other Scott amendments clarifying provisions of the bill on staying discovery and dismissal without prejudice where the requisite specificity is not contained in the pleadings.

Before reporting the bill, the Committee defeated the Lofgren substitute by a vote of 9-15, and approved the Goodlatte substitute by a vote of 15-13, with one member voting present.

By a vote of 236-190, the House on May 12, 1999, passed H.R. 775. Prior to passage, the full House defeated a more narrowly drawn substitute amendment offered by Reps. Zoe Lofgren (San Jose), John Conyers (MI), and Rick Boucher (VA). The Lofgren substitute would have retained the 90-day cooling off period, specificity of pleadings, and proportional liability, but would have struck the provisions limiting punitive damages and class action lawsuits. The substitute was defeated by a vote of 190-236. The House also rejected an amendment by Rep. Robert Scott (VA), by a vote of 192-235, that would have stripped the bill of the punitive damage limits, and an amendment by Rep. Jerrold Nadler (NY), by a vote of 180-244, that would have stripped the class action provisions from the bill.

Three minor amendments were added to the bill by voice votes. The first, offered by Rep. Tom Davis (VA), included restitution in the definition of awards capped under the bill and made the bill applicable to suits filed by January 1,1999. The second, offered by Rep. Jim Moran (VA), exempted from the bill all third-party claims in personal injury cases. The final amendment, offered by Rep. Sheila Jackson-Lee (TX), clarified that class action notices to individuals should be written in laymen's terms.

An attempt to recommit the bill with instructions to include an amendment granting U.S. jurisdiction over foreign manufacturers of non-Y2K compliant products was defeated 184-246.

On May 18, the Senate again failed to gain the 60 votes needed to continue the debate on S. 96, Sen. John McCain's bill. The attempt failed 53-45 (seven votes short of the 60 needed to invoke cloture). The bill was ensnared in a dispute over consideration of the juvenile justice crime bill, and was expected to garner the 60 votes needed when that issue was resolved.

After several fits and starts, however, the Senate considered the bill the week of June 7, using as the underlying bill a compromise worked out by Sens. John McCain (AZ), Christopher Dodd (CT), and Dianne Feinstein. On June 9, the Senate tabled, 57-41, an alternative to the McCain/Dodd/Feinstein proposal offered by Sen. John Kerry (MA) that would have eliminated punitive damage caps in favor of limiting economic damages to cases where they were contractually imposed. The Kerry amendment also would have conditioned proportionate liability on cases where the defendants had taken action to inform customers of potential problems and remedies.

The Senate also defeated, 32-65, an amendment by Sen. Patrick Leahy (VT) that would have made it easier for plaintiffs to sue in state courts. The Senate accepted by voice vote, however, an amendment by Sen. Wayne Allard (CO) that clarifies that federal law will not preempt stronger state liability laws.

On June 10, two amendments offered by Sen. John Edwards (NC) were defeated. One, defeated, 41-57, would have allowed a plaintiff to seek economic damages for Y2K-induced losses. The second amendment would have subjected a company to full liability if it sold non-Y2K compliant equipment after January 1, 1999.

On June 15, the Senate finally passed the legislation, after substituting a compromise version for the House-passed H.R. 775. The substitute was authored by Sens. John McCain (AZ), Dianne Feinstein, Christopher Dodd (CT), and Orrin Hatch (UT). The substitute retained the 90-day cooling off period and eliminated joint and several liability in favor of proportional liability, following the House bill provisions. However, it only capped punitive damages in cases where the defendant has 50 or less employees, or a net worth of $500,000 or less. In those cases, the punitive damages may not exceed $250,000 or three times the compensatory damages, whichever is less.

The White House had threatened a veto of the bill, but after a flurry of negotiations, it reached an agreement with Congress limiting liability for potential Y2K glitches. The compromise contained in the conference report on H.R. 775 was approved by the House July 1, by a vote of 404-24, and by the Senate, 81-18, later in the day. Although it narrowed the scope of the liability limits in the bill, is was still strongly supported by the information technology industry.

Under the agreement, the 90-day cooling off period before suing is retained, and caps on punitive damages continue to be limited to small businesses. The degree of proportional liability was changed, however, and defendants may have to pay more than their share of the damages, if another defendant is insolvent or cannot be found. Also, willful failure to fix a Y2K problem subjects a defendant to treble damages. The compromise will allow most class action suits to continue to be filed in state court, with only suits involving over 100 plaintiffs or $10 million in damages required to be filed in federal court. The President signed the bill into law in July.

Passage of legislation encouraging remediation rather than litigation relating to Y2K problems was very strongly supported by California's information technology community. Some industry studies estimated that the cost of litigation associated with Y2K problems could have reached $1 trillion.

Y2K Small Business Loan Bill

On a related measure, Congress also passed a bill, which was signed by the President, to assist small businesses in preparing for the Y2K computer transition. The legislation authorizes the Small Business Administration (SBA) to establish a program guaranteeing loans for small businesses attempting to either fix their computers or cope with economic losses resulting from its own or supplier computer breakdowns as a result of the Year 2000 problem. Current law limits loan guarantees by the SBA to $750,000, but S. 314 allows the SBA to guarantee loans of up to $1 million for Y2K readiness.

Studies showed that up to 750,000 small businesses could be significantly hurt or forced to shut down because of Y2K problems. Under S. 314, the SBA was expected to guarantee approximately $500 million in loans through the completion of the program on December 31, 2000. The Senate passed S. 314 by a vote of 99-0 on March 2, and the House passed the identical measure by voice vote on March 23.

Encryption

On February 25, 1999, Reps. Zoe Lofgren (San Jose) and Bob Goodlatte (VA) re-introduced the "Security and Freedom Through Encryption (SAFE) Act. The bill, H.R. 850, was substantially similar to their earlier legislation easing U.S. export controls on encryption products and software. Over 200 members were original co-sponsors of the 1999 bill, including: Majority Leader Richard Armey (TX), Minority Leader Richard Gephardt (MO), Majority Whip Tom DeLay (TX), Minority Whip David Bonior (MI), House Republican Conference Chair J.C. Watts (OK), and Democratic Caucus Chair Martin Frost (TX), among others. The co-sponsors also included a strong, bipartisan, cross-section of 35 California members.

The bill would codify that it is legal for any person in the United States or any U.S. citizen in a foreign country to use or sell any form of encryption. It would also prohibit the federal government from requiring a key recovery system to provide access to the system through a third-party. Finally, it would allow the export of very strong, generally available, encryption technology after a one-time, 15-day technical review by the government. The bill was referred jointly to the Judiciary Committee and the International Relations Committee; sequential referrals were made to the Commerce, Armed Services, and Intelligence Committees.

The House Judiciary Subcommittee on Courts and Intellectual Property reported out H.R. 850 on March 11, 1999. The bill was approved by voice vote without amendment. The full Judiciary Committee marked up the bill on March 24, 1999, and again was approved by voice vote without amendment. During consideration in the Judiciary Committee, Rep. Bill McCollum (FL) offered an amendment that would have required all exported encryption products to contain the capability to make plain text accessible to law enforcement authorities under a court order. The amendment, in effect, would have required that a key recovery, or comparable system, be contained in encryption products. The amendment, however, was ruled non-germane and, thus out of order, because it fell within the provisions of the bill under the jurisdiction of the International Relations Committee, not the Judiciary Committee.

The House International Relations' Subcommittee on International Economic Policy and Trade held a hearing on May 18 on H.R. 850. As expected, the Administration testified that it continued to oppose the legislation. Under Secretary for Export Administration William Reinsch testified that the bill would not maintain the balance between commercial interests and law enforcement interests supported by the Administration and would also put the United States in violation of the Wassenaar Arrangement's cryptography note - an international agreement aimed at controlling the export of encryption technology. Under questioning, however, several members of the Subcommittee took exception with the Administration's view -- stressing that with high-level encryption becoming more and more readily available throughout the world, United States' attempts to place restrictions on U.S. manufacturers are ineffective because wrongdoers will obtain their encryption technology from other sources.

The Subcommittee also heard from several witnesses endorsing enactment of H.R. 850, including: Edward Black, President & CEO, Computer & Communications Industry Association; Ira Rubinstein, Sr. Corp. Attorney, Microsoft Corp., on behalf of the Business Software Alliance; Jeffrey Smith, Counsel, Americans for Computer Privacy; Alan Davidson, Staff Counsel, Center for Democracy and Technology; and Dinah PoKempner, Dep. General Counsel, Human Rights Watch.

The Telecommunications, Trade, and Consumer Protection Subcommittee of the House Commerce Committee then turned its attention to the bill, holding a hearing on May 25. Subcommittee Chairman Billy Tauzin (LA), a co-sponsor of the bill, stated that the Administration's policy of attempting to contain encryption hamstrings U.S. companies. As expected the Administration witnesses from the Departments of Commerce and Justice, and the National Security Agency continued to oppose the bill.

The Senate Commerce Committee, chaired by Sen. John McCain (AZ), held a hearing on S. 798, the bill to Promote Reliable On-Line Transactions to Encourage Commerce and Trade (PROTECT) Act, on June 10 and the House Select Committee on Intelligence held a hearing on H.R. 850, the SAFE Act, on June 9. Both bills would ease export controls on encryption products, although they also differ in several substantive ways. The committees heard from Administration witnesses, which continued to oppose both bills, as well as private sector interests. Testifying before the Commerce Committee, William Reinsch, Under Secretary for Export Administration, Department of Commerce (DOC) cited several provisions of S. 798 to which the Administration objected. Among them are: leaving to a private-public advisory board decisions on removing controls from generally available encryption; removing the Department of Justice from the license consultation process; decontrolling all encryption up to 64-bit length; and the automatic approval of a license if the government fails to make a decision within 15 days. In his testimony, however, Secretary Reinsch stated that the Administration was once again reviewing its current export controls and could further ease the rules sometime later in the year.

On June 16, 1999, the House Commerce Committee's Telecommunications Subcommittee reported H.R. 850, by voice vote, after amending it with a substitute offered by Chairman Tauzin. The substitute retained the major provisions of the bill easing the export of encryption products of any strength that are generally available on the world market. However, it would require the Secretary of Commerce to relinquish control over encryption exports to the National Telecommunications and Information Administration (NTIA), within the Department of Commerce, within two years of the bill's enactment. It also would establish within NTIA, the National Electronic Technologies Center ("NET Center") to bring together federal national security and law enforcement agencies with the private sector to help the agencies develop state-of-the-art decrypting capabilities. The substitute would also prohibit the federal government from requiring that a government contractor must use encryption products that contain a key recovery system. The substitute was adopted by voice vote.

The subcommittee adopted an amendment, by a vote of 19-4, offered by Rep. Michael Oxley (OH). The amendment allows the Department of Commerce to deny a license in cases where it believes the encryption product will be used by drug traffickers, child pornographers, or organized crime. It also accepted by voice vote an amendment offered by Rep. Heather Wilson (NM) that increases the 15 calendar-day license review period contained in the substitute to 30 working days. The subcommittee defeated by voice vote two amendments offered by Rep. Cliff Stearns (FL). The first would have prohibited the export of any encryption products to China. The second would have required any third party in possession of encrypted information to provide a plain text translation of the material to law enforcement authorities under a court order. Opponents of the amendment argued that it would have, in effect, mandated a key recovery system by requiring unrelated third parties, such as Internet service providers, to have some method of decrypting its users' data.

On June 23, both the Senate Commerce, Science, and Transportation Committee and the House Commerce Committee reported differing versions of the encryption legislation. The Senate Committee reported out by voice vote S. 798, the PROTECT Act, after approving, also by voice vote, an amendment in the nature of a substitute offered by Chairman McCain. The McCain substitute would allow the export of encryption products of unlimited strength to U.S. allied countries, but restricted exports to other countries to a 64-bit strength. The bill also established an Encryption Export Advisory Board responsible for reviewing unlimited strength encryption applications and granting the President a veto power over the Board's decisions for national security reasons. During the mark-up, the Committee rejected by voice vote an amendment offered by Sen. Ernest Hollings (SC) that would have banned the importation into the United States of encryption products from countries that do not enforce the Wassenaar international agreement on encryption exports.

On the House side, the Commerce Committee reported H.R. 850 by voice vote. The full committee accepted the changes made by the Telecommunications Subcommittee the week before to transfer the decision-making process on encryption exports to the NTIA. During the markup, the Committee also approved several amendments by voice vote. Two, offered by Rep. Michael Oxley (OH), would grant the Departments of Defense (DOD), State, and Justice, and the CIA, a role in reviewing encryption exports, and clarify that encryption exports are not exempt from U.S. sanctions. A Dingell amendment required that countries importing U.S. encryption products must be able to obtain the equivalent products from other foreign suppliers. Rep. Cliff Stearns (FL) also was successful in adding two amendments to the bill. The first made it illegal to knowingly export encryption over 54-bits to the Chinese army or a military company. The second required that encryption data subpoenaed by a court must be decrypted into plain text. Rep. Oxley also withdrew his version of an amendment to allow the federal government to require a contractor to use encryption with a key-recovery system.

On July 1, 1999, the House Armed Services Committee held a hearing on H.R. 850. The Committee heard from Deputy Secretary of Defense John Hamre, and Barbara A. McNamara, Deputy Director, National Security Agency. The witnesses continued to oppose the bill because of national security and law enforcement concerns. Secretary Hamre testified that the bill's provision prohibiting DOD or any other federal agency from requiring a key recovery system in encryption products it purchased from U.S. companies was highly onerous, because it would deny DOD the ability to investigate any employees suspected of spying. During his opening remarks Chairman Floyd Spence noted his continuing opposition to the bill, which was echoed by several other members of the committee.

The House International Relations Committee then marked up the SAFE Act, and the House Armed Services Committee held another hearing on the bill on July 13, while the Select Intelligence Committee held a hearing on the bill on July 14, and marked it up in closed door session on the 15th.

The International Relations Committee reported the bill by a vote of 33-5, despite the opposition of Chairman Ben Gilman (NY). During the markup, several amendments were agreed to, although ones that would have effectively gutted the bill were defeated. The committee accepted a Gejdenson (CT) amendment that requires the Secretary of Commerce to consult with the Department of Justice and other law enforcement agencies to ensure that exports are not going to U.S. designated, drug-transit countries. They also agreed to an amendment clarifying that supercomputers were not excluded from export restrictions merely because they contained excluded encryption software. Both were accepted by voice.

Rep. Howard Berman (Valley Village) offered several amendments. One, which was agreed to by voice vote, amended the definition of "generally available" to ensure that it did not include instances of the limited transmittal of encryption software over the Internet. Another would allow the U.S. government to require that its government contractors use encryption containing a key recovery system. This also was approved by voice vote. Another Berman amendment would have increased the length of Commerce's technical review period from 15 to 30 working days, and allowed Commerce to determine other facts regarding the export, such as the destination country and end user. Gejdenson offered a substitute to the Berman amendment, which retained the 30-day review period, but struck the other factors Commerce could investigate. The Gejdenson substitute was approved by a vote of 21-11, prior to the Berman amendment being adopted by voice vote. The Committee also defeated, by a vote of 15-22, another Berman amendment that would have preserved the Administration's right to exercise export controls on encryption should the U.S. become a party to a multilateral export control regime.

At the House Armed Services Committee and House Select Intelligence Committee hearings on July 13 and July 14, respectively, Attorney General Janet Reno and FBI Director Louis Freeh testified. Both continued to oppose H.R. 850. Their reasoning appeared to have shifted somewhat, however, as they admitted that 128-bit encryption is now available on foreign markets, but continued to oppose U.S. exports of that strength on the grounds that it speed up the pace at which criminals and terrorists around the world begin to utilize encryption. Nevertheless, Thomas Constantine, former Administrator of the Drug Enforcement Administration, conceded in his testimony that drug lords have been increasingly relying on encryption to encode conversations since 1995. Select Intelligence then marked up the in closed door session on the 15th.

After its hearing, the Select Intelligence Committee marked up H.R. 850 on July 15 in a closed door session. It reported the bill by voice vote after approving several substantive changes. Among other things, the Committee adopted an amendment that would give the President broad-based authority to ban encryption exports on national security grounds, and would give law enforcement authorities the right to seek court orders to gain access to decrypted information or plaintext, where available. The Committee, like the International Relations Committee, also amended H.R. 850 to allow the U.S. government to require its contractors to use encryption products that contain a key recovery system. Finally, it authorized funding to assist law enforcement agencies in improving their technical capabilities in decrypting data. Proponents of the SAFE Act argued that the national security amendment was too broad, and the amendment authorizing access to decrypted or plaintext data would effectively require companies to include a key recovery system in their products.

On July 21, 1999, the House Armed Services Committee (HAS) marked up its encryption bill, adopting a substitute amendment by Rep. Curt Walden (PA) which was vastly different from the versions approved by Judiciary, Commerce, and International Relations. The Walden substitute, approved 46-6, would allow the President to limit the export level of encryption strength on a broad-based national security basis. The substitute also would create an Encryption Advisory Board with public and private sector members, require semi-annual presidential declarations regarding permissible export strengths for encryption products, and place requirements on end-user and end-use disclosure.

The Armed Services Action ended consideration of H.R. 850 by the five House committees with jurisdiction, but the versions reported out of the committees differed so significantly that extensive negotiations would have been required to agree on a vehicle to bring to the House floor. So the issue languished as Congress turned its attention to appropriations issues.

The impasse in Congress eased somewhat when the Administration announced on September 16, 1999, that it would ease export control regulations on encryption policy. At the time, the details remained vague, but the new regulations were to have three prongs aimed at reaching a balance between information technology realities and law enforcement needs. First, under the plan, the Administration announced it would request $500 million in funding over three years to increase the Defense Department's information technology security.

Second, exporters of strong encryption, even with 128 bit levels, would only need a one-time technical review in most cases before exports are allowed. However, they would be required to report the foreign purchaser of the product, although not necessarily the end-user. Technology companies had opposed end-user requirements, because many mass market encryption products are sold to wholesale distributors and then on to thousands of individual retail buyers. Exports under the proposal also would not be allowed to so-called "rogue" nations, and a specific license would be required before sales are allowed to foreign armed forces or governments.

Finally, the Administration announced it would propose legislation to establish a process for law enforcement officials to get court orders for release of unencrypted data by third parties. The legislation would also request $80 million over four years for the FBI to enhance its ability to decrypt data.

As often happens, the devil is in the details, and when the draft regulations were circulated in the winter by the Commerce Department to some members of the California delegation and industry representatives, concerns were raised over several issues. Rep. Zoe Lofgren (San Jose), a leading proponent of easing outdated encryption controls, wrote a letter to President Clinton noting that the regulations made a distinction between "retail" outlets sales and Internet sales. The regulations would have prohibited the sale of encryption online, except for that "specifically designed for individual consumer use which are sold directly by the manufacturer." Therefore, retail stores would have had no proscription on selling another's encryption, but only the actual encryption manufacturer could sell the product online. The draft also raised the issue of whether encryption could be distributed for free by the manufacturer; as the regulations state it must be "sold" by the manufacturer directly.

Action in 2000

After listening to the concerns expressed by members of Congress and the industry, the Commerce Department issued its final regulations on January 12, 2000. The new regulations eliminate artificial limits placed on the strength of encryption products that may be exported, and instead will allow exports of all readily available retail products, whether online or by retail sale. The products can be exported to any foreign user, including foreign governments, with the exception of the so-called rogue nations, which support terrorism. Although some concerns remain that the regulations are complex and cumbersome, most industry parties agree that they are substantially better than the regime previously in place.

The new regulations mark a significant victory for encryption product manufacturers and the information technology industry, which has been fighting for several years to bring U.S. policy in line with the realities of increased encryption abilities on a wide-scale commercial basis.

Electronic Signatures

On October 7, 1999, the Judiciary Committee's Courts and Intellectual Property Subcommittee reported by voice vote H.R. 1714, the Electronic Signatures in Global and National Commerce Act, establishing the validity of electronic signatures, after endorsing an amendment in the nature of a substitute offered by Chairman Howard Coble (NC). The bill establishes that signatures executed electronically have the same binding, legal effect as handwritten signatures on paper documents. The Coble substitute was adopted by voice vote as a substitute for H.R. 1714 as it was reported by the House Commerce Committee. The substitute is designed to ensure that state laws are preempted by the federal legislation only until a state adopts either the Uniform Electronic Transactions Act (UETA) or a similar electronic signatures statute.

During consideration of the substitute, Reps. Howard Berman (Valley Village), John Conyers (MI), and Zoe Lofgren (San Jose) offered an amendment to further limit the scope of the bill's preemption provisions, and ensure that federal and state entities have the flexibility to determine that handwritten signatures continue to be necessary for certain official records and documents. After discussion of the issue, Chairman Coble agreed to work with the amendment's authors before the full Committee's markup to draft language to achieve the same result. Reps. Berman, Conyers, and Lofgren then withdrew the amendment.

On October 13, 1999, the Judiciary Committee reported H.R. 1714 by voice vote. During the markup, the Committee approved by voice vote an en bloc amendment offered by Rep. Howard Coble. The amendment clarifies that federal preemption of state law ceases when a state adopts the Uniform Electronic Transactions Act. It also explicitly includes insurance records and contracts in the coverage of the bill, and corrects a drafting error.

An amendment, offered by Reps. Howard Berman (Valley Village), John Conyers (MI), Zoe Lofgren (San Jose), and William Delahunt (MA), was approved by a vote of 15-14. The amendment tightens up the preemption provisions in the bill to ensure that state laws are not preempted where a state decides that certain written documents or records continue to be necessary. H.R. 1714, as amended, was then reported out favorably by voice vote.

On November 1, the House failed under suspension of the rules to pass H.R. 1714. The vote, 122-234, was mostly along party lines and fell four votes short of the two-thirds vote needed under the expedited procedure. Opponents of the bill are concerned that it does not establish sufficient safeguards to protect consumers from fraud.

After the failure under suspension, the House leadership decided to bring the bill to the floor under a modified rule, where only a majority vote was needed. Thus, the House voted 356-66 to pass H.R. 1714, on November 9, after amending the bill to include protections for consumers. In addition to establishing the validity of electronic signatures for contracts, the bill would allow businesses to send out notices and records electronically, and preempts state contract laws, except those governing health and safety protections.

The consumer protection amendment was offered on the floor by Reps. Jay Inslee (WA), Anna Eshoo (Atherton), and Zoe Lofgren (San Jose). It requires that consumers be allowed to "separately and affirmatively" consent to accept electronic records and requires that the consent be "conspicuous and visually separate" from the other terms of the contract. It also ensures that federal and state consumer protection laws are not preempted by the bill. The amendment passed overwhelmingly by a vote of 418-2. An amendment that would have limited the validity of electronic signatures to commercial transactions affecting interstate commerce was defeated 126-278.

On November 19, the Senate passed by unanimous consent its version of the bill, S. 761.

Action in 2000

House conferees were appointed in February and Senate conferees in March 2000. The conference committee has not completed its report on the bill.

MTOPS Rule For Computers

The International Trade and Finance Subcommittee of the Senate Banking Committee held a hearing on April 14, 1999 on "Export Licensing -- Bottleneck or Rubber Stamp". Sen. Mike Enzi (WY), the Chairman of the Subcommittee, examined various export control issues prior to introducing legislation to reauthorize the Export Administration Act. In his opening remarks, Sen. Enzi stated that, among other issues, he was concerned about the utility of wholesale end use checks, as required by the 1998 National Defense Reauthorization Act. He hoped that the hearing would at least highlight some of the problems and difficulties in producing a system that must balance both business interests and national security.

For the Administration, the Subcommittee heard from Roger Majak, Asst. Secretary for Export Administration at the Department of Commerce and Dave Tarbell, Deputy Under Secretary of Defense for Technology Security Policy and Director of Technology Security for the Defense Threat Reduction Agency. Mr. Majak argued that the export licensing process works in a timely and efficient manner and that 96 percent of all applications are processed and resolved within the 90-day target specified by regulations. Mr. Tarbell stressed that the Department of Defense (DOD) considers it essential that an interagency review process, such as the current one, remains in force and that DOD continues to be a full participant in that process.

The Subcommittee also heard from James Jarrett, President of Intel-China. Mr. Jarrett strongly supported enacting an export license exemption for mass marketed dual-use products, such as its Pentium microprocessors. He related how Intel first began to have problems with Commerce's licensing requirements in 1998 when the performance of Pentium processors began to exceed the 500 MTOPS (million theoretical operations per second) level then set by Commerce. Intel, which ships 2 million microprocessors every week, had to file numerous applications for civilian end-use exports to countries such as China and the Soviet Union. Only one of those applications was granted before the government raised the MTOPS level to 1,200, thereby allowing license-free exports.

Rather than try and stay ahead of the rapidly accelerating MTOPS levels for PCs, Mr. Jarrett argued that a license exemption for commodity information products would be a significant improvement. He offered that eligibility for the exemption could be based on the following indices: high volume; general purpose application; wide availability; and commodity-like characteristics (e.g., no particular installation or maintenance required). Mr. Jarrett stated that this concept is also supported by the American Electronics Association, the Semiconductor Industry Association, and the Computer Coalition for Responsible Exports.

Based on the concerns raised by the information technology industry, the Clinton Administration announced on July 1, 1999 that it would again ease export controls on computers. Prior to the Administration's announcement, individual export licenses were required for so-called Tier II countries (most of Southeast Asia, South America, and South Africa) in order to sell computers with speeds over 10,000 MTOPs. Exports to Tier III countries (e.g. China and most Middle East countries) are limited to computers with 2,000 MTOPs or less to military users, and 7,000 MTOPs or less to civilian users. Today's mass-marketed, personal computer technology, however, was in imminent striking distance of those limits. For instance, Intel expects to unveil a new microprocessor chip for use in personal computers that will have a speed exceeding the 2,000 MTOPs level; and the next general Sony PlayStation will also have a speed greater than 2,000 MTOPs.

Under the 1999 regulations, exports to Tier II countries would not require individual licenses unless the computers exceed 20,000 MTOPs. Tier III country exports would be raised to 12,300 MTOPS for civilian use, and 6,500 MTOPs for military use. The Administration also said it would review the Tier II 20,000 MTOPs level before the end of the year, and expected to raise it to somewhere between 32,000 and 36,000 MTOPs.

In addition, the Administration moved Brazil, the Czech Republic, Hungary, and Poland from the Tier II country list to Tier I (where the United States' closest allies are listed), thus, removing all restrictions on the speed of computers that can be exported to them.

The House Armed Services Committee held a hearing on October 28 to review the Administration's proposal. Under the 1998 National Defense Authorization Act, Congress has 180 days to review the proposed rule change before it can take effect.

The General Accounting Office (GAO) briefed the committee on its report, Export Controls 1998 Legislative Mandate for High Performance Computers (GAO/NSAID 99-209). The report concluded that the current restrictions have limited the export of high-performance computers (HPCs) to Tier III countries. Between February 1998 (the beginning of the export notification requirement) and March 1999, GAO found that of the 938 export notifications, over ten percent raised sufficient concerns about national security to warrant a formal license application by the exporter. Of the 101 requiring applications, only 16 were ultimately approved.

Mr. Dan Hoydysh, Co-Chairman, Computer Coalition for Responsible Exports, testified in support of the Administration's proposal to increase the MTOPS threshold. He also strongly supported working with the Committee and the Administration to develop a more efficient export control regime that would restrict exports to potentially dangerous end-users without harming the global competitiveness of U.S. computer companies.

The Honorable William Reinsch, Under Secretary for Export Administration, Department of Commerce also testified in support of the Administration's proposal and the need to reduce the 180-day review period to 30 days, so that the industry's competitiveness is not harmed.

Because the Committee did not take legislative action against the rule change, in January, it went into effect as proposed by the Administration.

Action in 2000

Recognizing the speed with which computer capabilities are outstripping federal regulations, the Administration announced at the beginning of February 2000 that it would again

increase the MTOP strength allowable for export. Under the proposal, exports to Tier II countries would rise from 20,000 MTOPS to 30,000, and exports to Tier III countries would go to 20,000 MTOPS for civilian use and 12,300 MTOPs for military use.

The House International Relations Subcommittee on International Economic Policy and Trade reported H.R. 3680 on April 6, 2000. The bill, introduced by Reps. David Dreier (Covina) and Zoe Lofgren (San Jose), reduces from 180 days to 30 days the congressional review period for adjustments made in the allowable strength of high performance computers. The subcommittee's voice vote to report the bill was unanimous. On April 13, the full International Relations Committee followed suit and favorably reported the bill with two technical amendments. Further action is pending.

Internet Tax Moratorium

By a vote of 423-1, the House passed H.Con.Res. 190 on October 26, 1999. The resolution, authored by Rep. Chris Cox (Newport Beach) urges the President to seek a global consensus in support of a permanent international ban on tariffs on electronic commerce and on certain e-commerce taxes. Currently, the World Trade Organization has agreed to a moratorium on the imposition of duties on electronic transmissions. H.Con.Res.190 applies to the international arena the principle of the Internet Tax Freedom Act -- that taxes that discriminate against electronic commerce and the Internet should not be levied.

The resolution had three main elements. First, it called on the World Trade Organization, during its December Ministerial meeting in Seattle to enact a permanent moratorium on e-commerce tariffs. Second, it established the principle of no multiple or discriminatory foreign taxes on electronic commerce and urges the Organization for Economic Cooperation and Development and its 29 member countries to subscribe to the principle of no multiple discriminatory or special Internet taxes. Third, it condemned the bit tax proposal of the United Nations and calls for a permanent ban on such Internet specific taxes. A bit tax is a tax on every bit of information, all the digital 0s and 1s. The more 0s and 1s, the greater the file size, and therefore the greater the tax.

The Senate agreed to H.Con.Res. 190 by unanimous consent on November 19, 1999 before adjourning for the year.

Action in 2000

Sen. Ron Wyden (WA) introduced an identical version, S.Con.Res. 90, in the Senate, which was passed by unanimous consent on March 2, 2000. The House then took up the Senate resolution and passed it by voice vote on March 14, 2000.

Export Administration Act

On a related issue, the Senate Banking Committee took up consideration of the reauthorization of the Export Administration Act (EAA) with a hearing on June 10,1999. At the time, Committee Chairman Phil Gramm (TX) and Sen. Michael Enzi (WY), Chair of the International Trade and Finance Subcommittee, were still in the process of drafting a reauthorization bill, and intended to hold several days of hearings, before marking it up.

The only witnesses before the Committee at the June 10 hearing were Rep. Chris Cox (Newport Beach) and Norm Dicks (WA), Chair and Ranking Member of the House's Select Committee on U.S. National Security and Military/Commercial Concerns with the People's Republic of China. The Select Committee investigated Chinese espionage of U.S. high technology. Its report, known as the Cox Report, made several recommendations concerning the Export Administration Act. Notably, it called for the immediate reauthorization of the Act, which lapsed in 1994, and has been implemented in the interim through the President's authority under the International Emergency Economic Powers Act (IEEPA). In addition, Rep. Cox testified that pending a complete overhaul of the EAA, he would support bringing a clean bill to the floor that just reinstates the penalties allowable under the EAA, because they are substantially higher and more in keeping with the gravity of export control violations than those contained in IEEPA.

Additionally, Reps. Cox and Dicks testified that the report supports the sale of high performance computers to China, as long as there is in place a comprehensive program for ensuring that they will only be used for commercial purposes. Rep. Cox stated this would require imposing reasonable terms on the buyer and seller to the transaction, as well as involvement and agreement by China to allow verification of commercial use.

Another conclusion of the report, according to their testimony, is that the United States must prioritize technology hardware and software in terms of national security concerns and develop its export controls to put more focus on controlling highly sensitive technology and less focus on controlling technology that does not have serious potential consequences on U.S. national security.

The Committee held a second hearings on the EAA reauthorization on June 17. A panel of industry experts testified, including: Michael Maibach, Vice President, Intel; Tom Arnold, Chief Technology Officer, Cybersource; and, Eric Hirschhorn, Exec. Sec., Industry Coalition on Technology Transfer. Mr. Maibach, as well as several other witnesses, urged the adoption of an export control system for computers based on the world-wide availability of comparable machines, rather than on a definition based on technical performance. Mr. Maibach testified that Intel's current Pentium III performs at about 1,200 MTOPS, but by next year, its Merced microprocessor will perform at 5,622 MTOPS, almost three times the 2,000 MTOPS cap to Tier III countries allowed by the Administration prior to the July 1999 rule change (see article above). Because of the rapid advances in computer performance, Intel argued that the U.S. export control system should not limit the export of computers or components that are available on the worldwide market. Moreover, assessments of foreign availability by the Department of Commerce should be based on a prospective look at the products that will be available several months down the road. Otherwise, any limits set will be quickly overtaken by the rapid advances in the technology available.

The Committee again met on June 23 and 24. On the 23rd, several officials representing the Departments of Commerce, Defense, Agriculture, Energy, and State testified for the Administration. DOC Undersecretary William Reinsch expressed concern with several provisions in the Committee's draft bill. Among them were requiring the full consensus of all pertinent departments and agencies through Cabinet level before a license application decision could be made, requiring Congressional approval of all international cooperative efforts on export controls, and establishing five country groups based on what the Administration considers inflexible criteria. Deputy Undersecretary James Schroeder of the Agriculture Department opposed the Committee's proposal forbidding the President from imposing export controls on agricultural commodities and medicine on the basis of national security or foreign policy concerns.

On the 24th, the Committee heard from several private sector witnesses. John Douglass, President of the Aerospace Industries Association listed several key items that should be included in the reauthorization package, including that U.S. companies should be allowed to export any product that is available, or expected to be available, from foreign sources, and that unilateral controls should only be imposed as an interim measure leading to multilateral controls.

Karen Murphy of Applied Materials testified on behalf of Semiconductor Equipment and Materials International. She stressed that export controls should be multilateral, and only imposed on technologies that can and should be controlled. She stated that although semiconductor manufacturing equipment is inherently generic in nature, it is often subjected to controls merely because it is advanced technology. She also urged that export controls be flexible enough to respond quickly to evolving technological and commercial realities, to avoid the problem now faced because the industry's ability to produce high-speed mass-market computers is outpacing the Administration's control levels.

Three months later, on September 23, after extensive negotiations with interested parties, the Senate Banking Committee, by a vote of 20-0, reported the Export Administration Act of 1999 (S. 1712), streamlining export licensing procedures and establishing the legal framework for the Department of Commerce to implement export controls for both national security and foreign policy reasons.

Under the bill, the Department of Commerce would have nine days to review an export application and refer it to other appropriate agencies, such as the Departments of Defense and State. With limited exceptions, if the agency did not provide a recommendation within 25 days to approve or deny the license, it would be deemed consent.

The bill also provides a "mass market" exemption, as well as a foreign availability exemption. If a product meets the criteria for either of these exemptions, it would be removed from the National Security Control List, and a specific license to export would not be required. The criteria for mass market status are that the item is: 1) produced and available for sale in large volumes; 2) widely distributed through marketing channels; 3) conducive to shipping by generally accepted commercial means; and 4) usable for its intended purpose without substantial or specialized service. The foreign availability criteria are that the product is: 1) available from sources outside the U.S.; 2) sold at a comparable price to the controlled item; and 3) available in such quantity that the control would be ineffective.

Of great importance to the agriculture industry and others are the provisions in the bill forbidding the use of foreign policy sanctions on the export of agricultural commodities, medicine, and medical supplies. Additionally, all current foreign policy sanctions on those goods would be terminated on the date of enactment. These exemptions, however, do not apply to Cuba or North Korea.

The bill also includes 17 recommendations made by the Cox report on China, including substantial increases in criminal and civil penalties for violating U.S. export laws.

During the markup, the committee accepted an amendment to require the Commerce Department to report to Congress on the effectiveness of tracking the end use of dual-use technology. The report would cover the activities of the Department's overseas investigators; the types of goods or technologies subject to end-use verifications; and the ability of department investigators to detect the illegal transfer of high-risk dual-use goods and technologies.

Action in 2000

The Senate began debate on bill on the floor on March 8, 2000, but did not complete action on the bill.

Internet Privacy

The Senate Judiciary Committee, chaired by Sen. Orrin Hatch (UT), held a hearing on privacy issues with regard to the Internet on April 21. 1999. The purpose of the hearing was two-fold. First, it was intended to educate the public and the members of the Committee on the nature of the privacy issues surrounding consumer use of the Internet, and steps the industry is taking to address them. Second, it allowed the committee to begin a dialogue with those interested in the privacy issue, in order to develop policy that takes into account both private and public interests.

Testifying before the committee were: Katherine Borsecnik, Senior Vice President of Networks, America Online, Inc.; Michael Sheridan, Vice President for Strategic Businesses, Novell, Inc.; Irving Wladawsky-Berger, General Manager-Internet Division, IBM; Jerry Berman, Executive Director, Center for Democracy and Technology; Russell Bodoff, Senior Vice President and Chief Operating Officer, BBB Online; and Greg Fischbach, Chairman and CEO, Acclaim Entertainment, Inc.

All members of the panel agreed that the Internet has not evolved enough for the imposition of government regulations at this point. They believe self-imposed regulations are the best way to proceed for the time being. Many of the panelists pointed to the establishment of groups, such as the Online Privacy Alliance (OPA), and BBB Online, that are dedicated to promoting privacy online. The panelists also talked about larger companies setting the standard of privacy for new and expanding Internet companies. Many members on the panel agreed that it is the responsibility of the larger companies to develop standards for others to follow, and only if the standards are not followed would it be appropriate for the government to step in and set basic boundaries.

Senator Diane Feinstein had two areas that primarily concerned her: privacy -- giving out personal information over the Internet and then having that information brought into the public arena without consent; and, information -- undesirable people, such as pedophiles, or terrorists, getting access to or transmitting information that is not in the public's interest. The panelists agreed that these were important areas, and with continued policing by the private sector, they would eventually weed out these problem areas.

Stock Options

An advisory letter released in January 2000 by the Department of Labor's Wage and Hour Division raised concerns about its potential impact on the stock options paid to lower-wage employees. Under the advisory, employers would have to include the options' profits in the wage base for hourly employees when calculating overtime pay. Although this would result in higher overtime wages for the employees, it may discourage employers from offering stock options to hourly workers. Because overtime pay is a factor of base pay, such as "time and a half," the employers would have to track the profits realized on exercised stock options by their hourly employees and add that into the base pay before calculating overtime.

Stock options have been gaining popularity with companies, especially high technology companies, as part of the overall package of benefits provided an employee. A 1997 survey reported that 6 million non-executives received stock options, and average option grant values were $37,000 for professional employees, $41,000 for technical employees, and $12,500 for administrative employees.

After the release of the advisory letter, Reps. Randy "Duke" Cunningham (San Diego) and Steve Kuykendall (Rancho Palos Verdes) separately wrote Labor Secretary Alexis Herman voicing their concerns with the policy. Rep. Cunningham's letter asked for a clarification of Department policy; whereas Rep. Kuykendall asked that the advisory letter be rescinded. Advisory letters deal with individual cases, but are generally considered by employers as the Department's interpretation of the laws. Rep. Cunningham also sent a Dear Colleague out seeking bipartisan support for developing legislation to deal with the issue, if Labor did not.

On March 2, the House Education Subcommittee on Workforce Protections met to examine the issue. In a joint statement, Reps. Cunningham, Kuykendall and Cal Dooley (Visalia) argued that enforcing the DOL interpretation "would result in prohibitively complicated and expensive challenges for employers and employees alike. The result of this situation would most likely be that fewer employers would offer the opportunity afforded by stock and equity options to their employees."

Witnesses at the hearing included T. Michael Kerr, Administrator of DOL's Wage & Hour Division; J. Randall MacDonald, an Executive Vice President at GTE; Beth Martinko, a Vice President at Merant and a representative of the Information Technology Association of America; Alan Nadel with Arthur Andersen; Patricia Nazemetz, a Vice President of Xerox Corporation and a representative of the U.S. Chamber; and Abigail Rosa, representing San Jose-based Xilinx, Inc.

On April 12, the Senate unanimously passed S. 2323, providing that stock options do not have to be factored into an employee's wages when determining overtime pay. The bill is identical to H.R. 4182, the Worker Economic Opportunity Act, introduced in the House by Rep. Cunningham and other Californians. S. 2323 had such overwhelming support in the Senate that the leadership took it up on the floor without referring it to committee. The Administration also supports the legislation. House action is pending.

Intellectual Property

Database Copyright

On May 20, the House Judiciary's Subcommittee on Courts and Intellectual Property favorably reported by voice vote H.R. 354, the "Collections of Information Antipiracy Act," which would extend copyright protection to database collection. A substitute amendment, worked out by Chairman Howard Coble (NC), Howard Berman (Valley Village) and interested parties, was approved by voice vote. It made several changes aimed at addressing some industry concerns. Rep. Zoe Lofgren (San Jose), while supporting the bill, expressed interest in working on further changes before the full Committee markup.

On May 26, the Judiciary Committee reported H.R. 354, providing a 15-year copyright term to database collections. Although the bill was approved by voice vote, Rep. Zoe Lofgren (San Jose) voiced some concerns, which were also shared by the Administration. Among them are the treatment of sole source databases, comprised of information originally collected from free government data which no longer exists, and the definitions for several key terms, such as "material harm," "primary market," and "related market." Reps. Howard Coble (NC) and Howard Berman, chair and ranking members on the Courts and Intellectual Property Subcommittee, pledged to keep working on the bill to iron out any remaining issues.

Following the Judiciary Committee action, on June 15, 1999 the House Commerce Committee's Telecommunications, Trade, and Consumer Protection Subcommittee held a hearing on its version of the bill, H.R. 1858, the Consumer and Investor Access to Information Act of 1999. The bill would grant some copyright protection to database compilations, such as stock quotes, but is intended to ensure that the protection granted does not prevent the use of that information. The bill, introduced by Commerce Committee Chairman Tom Bliley (VA), is a more narrowly focused alternative to H.R. 354.

Among other witnesses, the Subcommittee heard from Andrew J. Pincus, General Counsel, U. S. Department of Commerce, and Frank Politano, General Attorney and Trademark and Copyright Counsel for AT&T. Mr. Pincus testified that the Administration supports efforts to draft a targeted bill to protect database collections. However, he expressed concern over several provisions in H.R. 1858, such as the broadness of certain definitions, the extent to which the fair use doctrine was preserved, and the failure to establish a private right of action to enforce the bill.

Mr. Politano, on the other hand, fully supported H.R. 1858. Citing AT&T's need to access many databases in many of its operations, he testified that H.R. 1858 represented the necessary balance between preserving protection for the database compiling community and promoting the growth of databases and innovation generally.

On July 21, 1999, the Finance and Hazardous Materials Subcommittee favorably reported the bill, followed by the Telecommunications Subcommittee on July 29. On August 5, 1999, the full Commerce Committee favorably reported the bill. No further action was taken on either bill in 1999.

Copyright Damages

On May 26, the Judiciary Committee approved H.R. 1761, the Copyright Damages Improvement Act, by voice vote. The bill, introduced by Rep. James Rogan (Glendale), increases the statutory damages for copyright infringers to reflect inflation. At the markup, Rep. Rogan offered an amendment in the nature of a substitute that, among other things, codifies that the U.S. Sentencing Commission develop sentencing guidelines for infringement using the retail price of the infringed-upon goods and the quantity of items to determine total retail value, not the actual value of the pirated item. Rep. Howard Berman (Valley Village) offered an amendment, which was unanimously agreed to, that struck the provision in the bill making a willful copyright violation a per se willful and malicious judgment for purposes of U.S. bankruptcy law, and therefore non-dischargeable in bankruptcy.

On July 1, 1999, S. 1257, a similar measure, was reported by the Senate Judiciary Committee, and was unanimously approved by the full Senate later that same day. No further action was taken in 1999.

Patent Reform

The Courts and Intellectual Property Subcommittee of the House Judiciary Committee held a hearing on March 25, 1999 on proposed legislation to reform U.S. patent laws to bring them into harmony with those of other countries. The bill, H.R. 1907, the American Inventors Protection Act, had not yet been introduced by Rep. Howard Coble (NC), Chair of the Subcommittee. Congress considered similar legislation in 1997, but did not complete action on the bill because of controversy over several provisions, including the length and start date of the patent term, how to reform the U.S. Patent and Trademark Office's re-exam process, the prior domestic commercial use defense, and when a patent application should be published.

At the March hearing, the Subcommittee heard from two California members: Reps. Tom Campbell (Campbell) and Dana Rohrabacher (Huntington Beach). Rep. Campbell testified that he continued to have concerns with the bill's provisions concerning the re-exam process, prior domestic commercial use, and the requirement that applications be published 18 months after filing. Rep. Rohrabacher thanked the Chair for working with him on his concerns, such as the length of the patent, and expressed hope that they would be able to agree on a unified House position on the legislation. He testified that his goal has always been to guarantee a 17-year patent term, whether by delaying the term start until the patent is issued or by requiring the Patent and Trademark Office (PTO) to grant term extensions to non-dilatory applicants during the issuance process. He also stressed that publication in the United States must not be required prior to publication abroad, and the content of the application published in the United States must be no greater than that published by the foreign patent system. On the issue of re-exam reform, Rep. Rohrabacher testified that reform should not expose the PTO to an adversarial courtroom setting, and, therefore, no oral arguments should be permitted.

On May 20, the Subcommittee marked up H.R. 1907 and favorably reported it by voice vote after reaching an agreement with the parties that had previously opposed the bill. The revised bill reflected compromises on several issues, particularly that of patent publication. Under the approved Chairman's Mark, the PTO will publish a patent application 18 months after it is filed, unless one of three exceptions applies: one, if the application is under a secrecy order; two, if it is withdrawn; or, three, if a patent application will not be filed abroad in a country requiring 18 month publication. Additionally, an application will not be published in the United States before publication abroad, and the scope of the application material published will not be greater than that of the foreign publication. The compromise also calls for a patent term of 20 years from initial filing, as opposed to the standard U.S. term of 17 years from issuance of the patent. However, the bill ensures that any delays in issuing a patent that are not attributable to dilatory practices on the part of the applicant will not count against the 20-year term.

These provisions were supported by both those who had previously opposed pre-issuance publication on the grounds that it would allow an inventor's technology to be stolen, and those who argued that delaying publication until patent issuance failed to deter "submarining." ("Submarine" patents are cases where an erstwhile inventor fails to prosecute an application filed with the PTO until another entity has begun to develop the technology. The applicant then prosecutes the previously filed patent and sues the later party for infringement.) The bill also establishes a new defense for a first inventor who has made a good faith use of his or her technology prior to the filing of an application for the technology by a third-party and allows for the extension of patent term in cases of delay.

During an extended markup on May 26, the House Judiciary Committee favorably reported the bill. At the markup, Rep. Bob Goodlatte (VA) complemented California Reps. Dana Rohrabacher (Huntington Beach) and Tom Campbell (Campbell) for their contributions to the compromise reflected in H.R. 1907. Rep. Goodlatte then offered an en bloc amendment that was essentially technical in nature. Among other things, it clarified that during a reexamination proceeding neither the holder nor challenger of the patent can contest any fact previously established in PTO proceedings. The amendment was approved by voice vote, and the bill was reported by voice vote.

On August 4, the House passed H.R. 1907 under suspension of the rules by a vote of 376-43.

On the Senate side, by a unanimous vote of 18-0 on November 2, the Senate Judiciary Committee reported both S. 1798, its version of the patent bill, and H.R.1907, the House version substituted with the language of S. 1798. Although the Senate bill differs slightly from the version passed by the House in August, the major intent of the bill remains the same: to bring U.S. patent laws in line with those of other countries. The bill guarantees a patent term of 17 years from issuance, by tolling the time period during any delays in the application process. It also requires publishing the patent application within 18 months of the file date in cases where the patent is also filed abroad, but insures that the published material will not disclose more information than the foreign application, and will not disclose information subject to secrecy orders or national security rules. It also requires that royalties be paid by anyone using or selling the invention until the patent is issued.

The bill also establishes a "first inventor defense" to a legal action for patent infringement for someone who has used a business practice for at least one year before the filing date of the patent. This provision is intended to protect institutions from patent infringement suits generated by the recent court decision in State Street Bank v. Signature Financial.

With time running out in the first session of the 106th Congress, the text of S. 1798 was included in the conference report to H.R. 1554, the satellite television bill, which in turn was attached to the omnibus FY00 appropriations measure and signed by the President late in 1999.

Digital Copyright

The House Committee on Commerce Telecommunication, Trade, and Consumer Protection Subcommittee held a hearing on October 28, 1999 to review the Digital Millennium Copyright Act (DCMA), signed the year before. The DCMA was established to protect copyright owners in today's digital environment by preventing circumvention of technological measures. The DCMA seeks to foster electronic commerce while protecting intellectual property rights.

Although DCMA has made strides in protecting copyright owners, committee members and some witnesses focused on concerns that have arisen in the past year. One concern was the confusion between home recording and what is considered commercial piracy. While pirates compete with authorized program distributors, consumers are allowed to record for time shift benefit. Due to the increase in Internet piracy, however, copyright owners are seeking technologies, such as 5C technology, which would prevent all copying capabilities by temporarily disabling VCR record buttons. With 5C technology, consumers would have no way of recording a particular TV show or movie. High definition sales and technologies have been delayed as a result of this conflict, according to several witnesses.

In his testimony, Michael Moradzadeh from Intel Corporation, outlined some of the objections to 5C technology, which was developed by Intel, Hitachi Ltd., Matsushita Electrical Industrial Co., Ltd., Sony Corporation, and Toshiba Corporation. While the technology was formed to protect the motion picture industry, he noted that many studio representatives object to adoption of 5C, partially because studios would have the power to block all consumer copying, including the single copy used by a consumer for time shifting. Mr. Moradzadeh also stated that other objections to the technology include 5Cs ability to encrypt all programming, including broadcast television, so that such programs can not be sent over the Internet.

Rhett B. Dawson, President of the Information Technology Industry Council (ITI) testified in support of 5C technology and the content scrambling system (CSS). CSS allows licensed manufacturers to descramble a video (and therefore allow it to be viewed) under terms that require the licensed device to obey embedded copy control information. The CSS technology and 5C work hand in hand because 5C contains necessary embedded copy control information, according to Dawson.

Another witness, Jack Valenti, President and CEO of the Motion Picture Association of America praised DCMA for its strong legal protection in an industry that faced $18-$20 billion in worldwide losses in 1995. He defined the newest form of Internet piracy as downloadable media, whereby a pirate can load a single copy of a motion picture onto a computer, act as a server and make it available for others to copy onto their own computers. Valenti believes that as a result of DCMA and its enforcement, the federal government has strengthened its fight against this type of piracy, as well as other types.

Peter Harter, Vice President of Redwood City-based Emusic.com Incorporated testified about unintended consequences of the DCMA. He noted that while the anti-circumvention provision in the DCMA has good intentions, it actually fosters an environment that protects circumvention, rather than preventing it. He explained that because copyright security deems it illegal to circumvent technology, even in the name of testing technology for potential flaws, proponents of a security standard can use lawsuits and the threat of criminal prosecution to stop any kind of investigative work on behalf of consumers. In short, Harter stated, some tests and investigations are illegal because of DCMA.

Hillary Rosen, President and CEO of the Recording Industry Association of America encouraged the development of business models that consumers wish to use to obtain music, thereby providing greater consumer choice while securing a creative outlet for artists to create and advertise new works. Rondal J. Moore, Vice President of Business and Legal Affairs of San Jose-based RioPort.com, Inc., testified that the biggest challenge surrounding Internet piracy pertains to international rights. The company designs and sells digital audio delivery platforms, including small memory devices that can store and play digitally recorded music from a computer. Moore noted that a lack of continuity in rates and right holders around the world creates a difficult atmosphere for copyright royalty collecting. However, Moore commended the Committee on the strides taken in securing copyright owners' rights, providing more consumer choice, and assuring predictable legal requirements for online distributors.

Cybersquatting

On October 7, 1999, the Judiciary Committee's Courts and Intellectual Property Subcommittee reported H.R. 3028, the Trademark Cyberprivacy Prevention Act by voice vote. The bill, authored by Reps. Jim Rogan (Glendale) and Rick Boucher (VA), would prevent "cybersquatting." Cybersquatting is the practice of registering, in bad faith, an Internet domain name or a website using the same or confusingly similar trademark of another entity. The cybersquatter then may offer its registered name for sale to the rightful trademark holder at an exorbitant price, or use the name or site in such a way as to exploit or dilute the rightful trademark. Often, rightful trademark holders are unable to identify the cybersquatter, because of misinformation used when registering the mark, and therefore, using current trademark enforcement law and procedures is not effective.

H.R. 3028 grants trademark holders more accessible remedies against Internet infringers without substantively changing current trademark law. It prohibits the registration, use, or trafficking in a domain name that is identical or confusingly similar to, or dilutive of, a distinctive trademark. It establishes: (1) a civil cause of action against an infringer who acts with the bad faith intent to profit from the rightful trademark; and (2) an in rem civil action through which the infringing mark can be forfeited or canceled. It also sets civil damages of up to $100,000 per Internet address. The bill was unanimously supported by the Subcommittee and approved without amendment.

On October 13, the Judiciary Committee reported the bill by voice vote, after approving, also by voice vote, a technical amendment offered by Reps. Rogan and Coble (NC). Then, by voice vote on October 26, 1999, the House passed S. 1255 , the Trademark Cyberprivacy Protection Act, after inserting the language of the House bill, H.R. 3028. Then, as the session wore down, Congress included the language of H.R. 3028 in the omnibus FY00 appropriations bill, which was passed and signed by the President.

Penalties For Copyright Violations

On November 18 and 19, 1999, just before adjourning for the year, the House and Senate respectively passed by unanimous consent H.R. 3456, which increases the minimum statutory damages for copyright infringement and toughens sentencing guidelines. Weak enforcement provisions have discouraged prosecutors from pursuing infringement cases in the past. Also included in the bill is a provision that, among other things, codifies that the U.S. Sentencing Commission develop sentencing guidelines for infringement using the retail price of the infringed-upon goods and the quantity of infringed items to determine total retail value, not the actual value of the pirated item.

The bill incorporated much of H.R. 1761, the Copyright Damages Improvement Act, introduced by Rep. James Rogan (Glendale) and passed by the House by voice vote on August 2. Rep. Howard Berman (Valley Village) commented that toughening copyright infringement penalties is an important issue for many Californians. California's entertainment and software industries as well as research and other creative ventures are injured severely by intellectual property theft.

International Piracy

The Senate Subcommittee on International Economic Policy, Export and Trade Promotion, chaired by Sen. Chuck Hagel (NE), held a hearing on April 29, to discuss international software piracy, and the impact piracy has on the industry and the U.S. economy. Testifying before the committee were: Stuart E. Eizenstat, Under Secretary of State for Economic, Business and Agricultural Affairs; Richard W. Fisher, Deputy United States Trade Representative; Colleen M. Pouliot, Senior Vice President and General Counsel, Adobe Systems Inc.; Bradford L. Smith, Associate General Counsel, International, Microsoft Corporation; and Robert E. Lohfeld, Vice Chair for Information Technology, High Technology Council of Maryland.

Mr. Eizenstat and Mr. Fisher focused on the government's role in preventing piracy in other countries. Both said that protecting intellectual property rights internationally is critical to the United States' competitiveness in the 21^st century, and, therefore, is one of the highest priorities of U.S. international economic policy. They also pointed out that the software industry is vital to the continued economic development of the United States. Mr. Eizenstat spoke of many instances where U.S. ambassadors have witnessed the sale of pirated goods first hand on foreign streets and in various technology market places. Based on this first-hand evidence, the United States can better negotiate with those foreign countries about developing better "policing" methods to prevent further offenses, according to Secretary Eizenstat.

Ms. Pouliot reported on the financial aff