BILL ANALYSIS Ó
SENATE COMMITTEE ON PUBLIC SAFETY
Senator Loni Hancock, Chair S
2011-2012 Regular Session B
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SB 550 (Padilla)
As Introduced February 17, 2011
Hearing date: May 3, 2011
Business and Professions Code
JM:mc
MANUFACTURING OF OPTICAL DISCS (CDs AND DVDs)
HISTORY
Source: Recording Industry Association of America
Prior Legislation: AB 819 (Calderon) - Ch. 351, Stats. 2010
AB 568 (Lieu) - Ch. 453, Stats. 2009
AB 2750 (Krekorian) - Ch. 468, Stats. 2008
AB 64 (Cohn) - Ch. 9, Stats. 2006
SB 1506 (Murray) - Ch. 617, Stats. 2004
Support: Valley Industry and Commerce Association; Los Angeles
Area Chamber of Commerce
Opposition:None known
KEY ISSUES
SHOULD AN OPTICAL DISC MANUFACTURER, AS SPECIFIED, BE SUBJECT TO
WARRANTLESS, UNANNOUNCED INSPECTIONS BY LAW ENFORCEMENT TO
VERIFY THAT THE MANUFACTURER IS COMPLYING WITH GOVERNING LAWS?
SHOULD LAW ENFORCEMENT BE AUTHORIZED TO PERFORM OPTICAL DISC
MANUFACTURING INSPECTIONS WITH THE ASSISTANCE OF INTELLECTUAL
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PROPERTY RIGHTS ORGANIZATIONS?
(CONTINUED)
SHOULD LAW ENFORCEMENT BE AUTHORIZED TO INSPECT OPTICAL DISC
MANUFACTURING EQUIPMENT AND PRODUCTION PARTS AND TO INSPECT AND
RETAIN COPIES OF DISCS, PRODUCTION PARTS AND BUSINESS RECORDS, AS
SPECIFIED?
SHOULD FINES FOR THE MISDEMEANORS APPLICABLE TO OPTICAL DISC
MANFACTURERS RANGE BETWEEN $2,500 AND $25,000 FOR A FIRST OFFENSE
AND BETWEEN $25,000 AND $250,000 FOR A REPEATED OFFENSE?
SHOULD A MANDATORY FINE OF $1,000 BE IMPOSED FOR KNOWING PURHASE OF
OR COMMERCE IN OPTICAL DISCS FROM WHICH IDENTIFYING MARKS HAVE BEEN
REMOVED OR ALTERED, AS SPECIFIED, OR FOR ALTERING, REMOVING OR
DEFACING AN OPTICAL DISC IDENTIFYING MARK, AS SPECIFIED?
SHOULD NUMEROUS OPTICAL DISC MANUFACTURING AND REGULATORY TERMS BE
DEFINED?
PURPOSE
The purposes of this bill are to 1) subject optical disc
manufacturers to warrantless administrative searches of
manufacturing sites, as specified; 2) authorize law enforcement
to employ intellectual property rights representatives, as
defined, to assist in optical disc administrative searches; 3)
authorize law enforcement to inventory equipment, inspect and
copy business records and to take exemplars in conjunction with
these administrative searches, as specified; 4) require optical
disc manufacturers to keep detailed records concerning specified
equipment; 5) set fines for certain misdemeanors by optical disc
manufactures, as specified; and 6) provide for a mandatory fine
of at least $1,000 for purchase of or commerce in, as specified,
optical discs from which the manufacturer's identifying mark has
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been removed or altered, or for removing or altering such a
mark.
Optical Disc Manufacturing Regulatory Statutes in Existing Law
Existing law provides that any person who manufactures optical
discs for commerce shall permanently mark each disc with a mark
that identifies the manufacturer and the state in which the disc
was made. Alternatively, the manufacturer may mark the disc
with a unique identifying code that will allow law enforcement
to determine the manufacturer and the state of origin. (Bus. &
Prof. Code § 21800.)
Existing law provides that the identifying mark or code shall be
affixed by a permanent method and shall be visible without
magnification or special devices. (Bus. & Prof. Code § 21801.)
Existing law provides that the manufacturing of 10 discs in a
180-day period by storing information on the disc for resale
constitutes manufacturing. (Bus. & Prof. Code § 21802.)
Existing law provides that a manufacturer is a person who
replicates the physical disc or produces the master used in the
replication process. A manufacturer does not include a person
who masters blank discs or one who manufactures discs for
internal use, testing, or review. (Bus. & Prof. Code § 21802.)
Existing law defines an optical disc is one capable of being
read by a laser or other light source on which data is digitally
stored. It includes, but is not limited to, CDs, DVDs, or
related mastering materials. (Bus. & Prof. Code § 21803.)
Crimes and Penalties Under Existing Law Concerning Optical Discs
Existing law provides that a person who violates a disc
manufacturing statute, as specified, is guilty of a misdemeanor,
punishable by a fine of between $500 and $5,000 for a first
offense. A subsequent offense is punishable by a fine of
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between $5,000 and $50,000,<1> except where a different penalty
is specified. (Bus. & Prof. Code § 21804.)
Existing law provides that any person who buys, sells, receives,
transfers, or possess for purposes of sale or rental an optical
disc knowing that the disc was manufactured in California
without the required identification mark, or with a false mark,
is guilty of a misdemeanor, punishable by imprisonment in county
jail for up to a year, a fine of up to $10,000, or both. (Bus.
& Prof. Code § 21805.)
Existing law provides that it is a misdemeanor to knowingly
remove, deface, cover, alter or destroy the required
identification mark on an optical disc. The crime is punishable
by a jail term of up to one year, a fine of up to $10,000, or
both. (Bus. & Prof. Code § 21806.)
Regulations, Definitions and Crimes and Penalties in This Bill
This bill provides that any violation of the requirements for
optical disc manufacturer is a misdemeanor, punishable by a fine
of between $2,500 and $25,000 for a first offense. The fine for
a subsequent offense shall be between $25,000 and $250,000.
This bill provides that any person who buys, sells, receives,
transfers or possesses for sale or rental an optical disc
knowing that the disc was manufactured in California without the
required identification mark, or with a false mark, is guilty of
a misdemeanor, punishable by imprisonment in county jail for up
to a year, a fine of between $1,000 and $10,000, or both.
This bill provides that it is a misdemeanor to remove, deface,
cover, alter or destroy the required identification mark on an
optical disc. The crime is punishable by a jail term of up to
---------------------------
<1> It appears that a jail term cannot be imposed for this
offense, whether the first or subsequent violation. Because the
crime is deemed to be a misdemeanor, the defendant would be
entitled to a jury trial and an indigent defendant would be
entitled to counsel at public expense. Such rights do not apply
for infractions. (Pen. Code § 19.6.)
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one year, a fine of between $1,000 and $10,000, or both.
This bill provides that the mark shall be affixed by molding,
diestamping, etching or other permanent method such that the
mark can be seen without magnification or special devices.
This bill provides that any person who manufactures optical
discs for a commercial purpose shall not do the following:
Possess, own, control or operate any equipment or
optical disc mold unless it is adapted to apply the
required identifying marks or identifying code.
Make, possess, or adapt an optical disc mold for
applying a forged or false identifying mark or code, or
mark that is so similar to a manufacturer's mark or code as
likely to deceive.
This bill includes the following definitions:
"Commercial purpose" means manufacture of at least 10
optical discs in a 180-day period by storing information on
the disc for purposes of resale.
"Manufacturer" means one who replicates the physical
optical disc or produces the master used in any disc
replication process. It does not include one who
manufactures optical discs for internal use, testing, or
review. It does not include a maker of blank optical
discs.
"Manufacturing equipment" means a machine, equipment or
device, including mastering equipment, used to manufacture
optical discs or production parts.
"Mastering equipment" means a machine, equipment or
device for mastering optical discs or production parts
consisting of a signal processor or laser beam recorder or
other recorder used to record data on the glass or polymer
master disc from which production parts are produced or to
directly record data on a production part.
"Optical disc" means a disc readable by a laser or other
light source on which data is digitally stored. It
includes, but is not limited to, CDs, DVDs or related
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mastering source materials. It does not include blank
optical discs.
"Production part" means the item usually described as a
"stamper" that that embodies digital data and can be used
to mold optical discs. Production part also means any
other item, usually referred to as a master, father or
mother, embodying data from which a stamper may be produced
by electroplating.
"Professional organization" is one whose membership
consists wholly or substantially or intellectual property
rights owners, and which is mandated by the members to
enforce their rights against counterfeiting and piracy.
Administrative Search Provisions in This Bill
This bill provides that law enforcement officers may inspect the
facilities of commercial optical disc manufacturers to verify
compliance with the regulations governing such businesses.
This bill provides that inspections of optical disc facilities
"may be carried out with the assistance of a professional
organization designated by law enforcement."
This bill provides the following as to inspections of optical
disc manufacturing facilities:
Inspections shall occur during regular business hours.
Inspections shall be limited to areas where
manufacturing equipment is located and where optical discs
and production parts are manufactured and stored.
Inspections shall be restricted to physical review of
items and collection of information necessary to verify
compliance with applicable regulations.
Officers may perform inspections without prior notice or
a warrant.
This bill provides that inspecting officers may do the
following:
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Inventory all manufacturing equipment, including the
identification mark or identifying code that the equipment
applies.
Review any optical disc manufacturing equipment, disc
mold or production part.
Review any record, book or document the manufacturer
must maintain as specified, regardless of document or
record format.
Inspect, remove and detain for examination any optical
disc, production part or record, book or document
maintained, as specified.
Seize any optical disc or production part manufactured
in violation of applicable statute.
Remove four samples each of optical discs molded by each
mold that has been or could be used to manufacture discs.
This bill provides that no one shall evade, obstruct or refuse
an inspection authorized by this bill.
This bil l provides that employees or agents of the manufacturer
shall cooperate in the inspection as follows:
Provide and explain any record, book or document, as
specified.
Point out and provide access to all optical discs,
manufacturing equipment, disc molds and production parts,
and demonstrate that they include or have been adapted to
apply the required identifying mark or unique code.
Surrender four sample discs, as specified.
This bill provides that any person who commercially manufactures
optical discs shall maintain full and accurate records of
manufacturing equipment. Records shall be available for
inspection by law enforcement, as specified. Records shall
include a current inventory of equipment and every purchase,
lease, sale, disposal, or other transaction relating to the
equipment. The records shall specify the make, model and serial
number of the equipment, the identification mark or identifying
code the equipment has been adapted to apply, the date and
nature of every transaction concerning the equipment, and the
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full name and address of parties to the transactions.
This bill provides that every commercial optical disc
manufacturer shall keep the following for not less than five
years from the date of production:
One sample of each manufactured optical disc.
One copy in a retrievable form of the content of each
production part.
The name and physical address of the customer.
RECEIVERSHIP/OVERCROWDING CRISIS AGGRAVATION
For the last several years, severe overcrowding in California's
prisons has been the focus of evolving and expensive litigation.
As these cases have progressed, prison conditions have
continued to be assailed, and the scrutiny of the federal courts
over California's prisons has intensified.
On June 30, 2005, in a class action lawsuit filed four years
earlier, the United States District Court for the Northern
District of California established a Receivership to take
control of the delivery of medical services to all California
state prisoners confined by the California Department of
Corrections and Rehabilitation ("CDCR"). In December of 2006,
plaintiffs in two federal lawsuits against CDCR sought a
court-ordered limit on the prison population pursuant to the
federal Prison Litigation Reform Act. On January 12, 2010, a
three-judge federal panel issued an order requiring California
to reduce its inmate population to 137.5 percent of design
capacity -- a reduction at that time of roughly 40,000 inmates
-- within two years. The court stayed implementation of its
ruling pending the state's appeal to the U.S. Supreme Court.
On Monday, June 14, 2010, the U.S. Supreme Court agreed to hear
the state's appeal of this order and, on Tuesday, November 30,
2010, the Court heard oral arguments. A decision is expected as
early as this spring.
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In response to the unresolved prison capacity crisis, in early
2007 the Senate Committee on Public Safety began holding
legislative proposals which could further exacerbate prison
overcrowding through new or expanded felony prosecutions.
This bill does not appear to aggravate the prison overcrowding
crisis described above.
COMMENTS
1. Need for This Bill
According to the author:
The manufacture and distribution of high quality
counterfeit music and movie products on pressed CDs
and DVDs in California has grown exponentially in
recent years. This trend has flooded California and
the nation with millions of high-quality counterfeit
recordings that are finding their way into retail
locations.
To make matters worse, pirates are now ordering
pressed CDs containing hundreds of unauthorized mp3
files of hit songs by popular artists of all genres.
This has the potential to further undermine the music
industry and the growing market for digital music.
The plants that choose to manufacture illicit
recordings tend to produce illegal optical discs and
profit handsomely. They work to ensure that the
illegal goods they produce cannot be traced back to
them.
Allowing for inspections of plant manufacturing
equipment and the collection of sample discs would
allow state authorities to verify compliance with
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existing regulations. These safeguards would advance
the state's interest in creating a level playing field
amongst disc manufacturers and retailers and protect
California's global leadership in the entertainment
industry.
2. Piracy and Economic Harm in Los Angeles County and the State
The 2010 Report on the Entertainment Industry by the Los Angeles
Economic Development Corporation (LAEDC)<2> discussed piracy in
entertainment and other businesses:
Piracy: Despite lots of well meaning reports and task
forces, piracy of filmed production continues to be a
major problem. The studios have watched in horror the
pain inflicted on the recorded music industry. One
problem is that technology keeps racing ahead making
it difficult for the law to keep up.
The 2007 LAEDC report on piracy in Los Angeles County in 2005<3>
found the following industry losses:
-----------------------------------------------------------------
|Overall piracy losses in nine |$5.2 |
|at-risk business sectors (not |billion |
|movie and music alone) | |
| | |
|--------------------------------+--------------------------------|
|Movie piracy |$2.7 billion |
|--------------------------------+--------------------------------|
|Sound recording |$851 million |
|--------------------------------+--------------------------------|
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<2> http://www.laedc.org/reports/Entertainment-2010.pdf
<3>
http://www.oit.umd.edu/PlayFair/materials/2007_piracy-study_LA.pd
f
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|Apparel, accessories and |$617 million |
|footwear | |
|--------------------------------+--------------------------------|
|Software publishing |$355 million |
| | |
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The 2010 LAEDC report on piracy in Los Angeles County found the
following government tax losses from all piracy (not just movie
and music):
-----------------------------------------------------------------
|State tax revenue (income and |$407 million |
|sales) lost | |
|--------------------------------+--------------------------------|
|L.A. County sales tax |$40 million |
|--------------------------------+--------------------------------|
|L.A. City sales and business |$17 million |
|taxes | |
|--------------------------------+--------------------------------|
|Other L.A. County cities sale |$19 |
|tax |million |
| | |
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In discussions with Committee staff, RIAA representatives noted
the following:
There are approximately 25 optical disc manufacturers in
Los Angeles and approximately 70 optical disc manufacturers
in the state.
Recorded music sales are roughly equal for CDs and
Internet downloads.
RIAA estimates that pirated CDs constitute over 75% of
Latin market. There is increasing piracy of CDs in
mainstream pop music.
Pirated CDs from optical disc manufacturers tend to be
very high quality.
High quality pirated CDs and DVDs can penetrate the
retail market without the knowledge of consumers and
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retailers. Except for the lack of the required identifying
mark of the manufacturer, pirated CDs can be
indistinguishable from legitimate works.
Without identifying marks, it is very difficult to
determine which manufacturer produced a pirated CD or DVD.
3. Law Enforcement Access to Manufacturing Sites and Business
Records - Warrantless Optical Disc Business Inspections,
Record Review and Sample Disc Takings
The Fourth Amendment protection from unreasonable searches and
seizures applies to commercial premises as well as residences.
Therefore, law enforcement officers or other government agents
generally must obtain a warrant before entering a business.
(New York v. Burger (1987) 482 U.S. 691, 699; Marshall v.
Barlow's Inc. (1978) 436 U.S. 307, 312-313.)
A warrant is required for "general regulatory inspections."
(See v. Seattle (1967) 387 U.S. 541.)
There are two classes of businesses subject to valid
administrative searches where warrants are not required:
Businesses that open to the public.
Closely-regulated industries. (Donovan v. Dewey (1981)
452 U.S. 594, 598-600; People v. Potter (2005) 128
Cal.App.4th 611, 618.)
The administrative searches or inspections authorized by this
bill would likely be judged under the closely-regulated industry
exception. Optical disc manufactures would generally sell to
wholesale distributors, not members of the public, except
through special contracts.
A closely regulated business owner is "deemed to be on notice
that his business premises will be subject to periodic
warrantless searches by government agents pursuant to a
statutory inspection scheme." The government interest in
regulating certain businesses can outweigh a business owner's
expectation of privacy. (People v. Potter, supra, 128
Cal.App.4th at pp. 618-619.)
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A valid regulatory inspection scheme must meet these
requirements or standards:
The statute must be so comprehensive and defined that
the property owner would necessarily know that the property
will be subject to administrative searches.
To properly limit government discretion, the statute
must be carefully limited in time, place and scope.
A valid closely-regulated-business inspection statute must also
contain the following:
The scheme must serve a substantial government interest.
Warrantless inspections must be necessary to further the
regulatory scheme.
Inspections must perform the basic functions of a
warrant: 1) advise the owner that the search is being done
according to the law; 2) the search has a proper scope; and
3) it must limit the discretion of the inspecting officers.
If the administrative search statute does not satisfy the above
requirements, an administrative search can only be conducted to
the extent the business is open to the public. (Ibid.)
4. Industries and Services Subject to Valid Administrative
Searches
The most widely known administrative search statute in
California concerns the automobile repair industry. (Veh. Code
§ 2805.) The justification for that scheme is that auto repair
shops can be used to facilitate auto theft, a serious problem
across California. Inspections are only allowed "for the
purpose of locating stolen vehicles." Only officers "whose
primary responsibility it is to conduct vehicle theft
investigations" may perform inspections. The statute requires
that inspections minimize interference with the business.
Government agents cannot use administrative searches as a
pretext to search for criminal activity. (People v. Valenzuela
(1999) 74 Cal.App.4th 1202, 1209.)
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Other industries and entities subject to administrative searches
include the following:
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Liquor license holders : Searches of bars for drug
activity advanced the purposes of Alcoholic Beverage
Control Act. (People v. Paulson (1990) 216 Cal.App.3d
1480, 1489.)
Firearms dealers : Effective regulation of the arms trade
requires that inspections be frequent and unannounced. Gun
dealers understand and expect frequent inspections.
(U. S. v. Biswell (1972) 406 U.S. 311.)
Mines : Mining is a dangerous activity. Inspections of
mines must be frequent and unannounced to advance mine
safety. (Donovan v. Dewey (1981) 452 U.S. 594.)
Nursing homes : People v. Firstenberg (1979) 92
Cal.App.3d 570, 581: "ÝT]he nature of the industry and of
the abuses to which it is subject require that inspections,
to be effective, be both frequent and unannounced. ?
ÝS]uch inspections are crucial to the effective oversight
of the physical wellbeing of patients, to assure that they
are not neglected or even abused. Frequent, unannounced
inspections are also essential to effective protection of
patients' financial welfare."
Fish and Game inspections : Because fish and game
inspections typically are done in open fields, or in the
water or at the shore, any invasion of privacy is minimal.
Fishing and hunting are highly regulated activities as
these activities concern public resources. (Betchart v.
Dept. of Fish & Game (1984) 158 Cal.App.3d 1104 -
inspection of agricultural land during deer season.) Fish
game laws are unenforceable without frequent, unannounced
inspections. (People v. Harbor Hut (1983) 147 Cal.App.43d
1151, 1155 - commercial fishing operation.)
5. Major Factors Relevant to Whether this Bill Creates a Valid
Administrative Search Scheme for Manufacturers of Optical
Discs
Does optical disc piracy constitute a substantial government
interest?
The sponsor argues that optical disc piracy is a substantial
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public concern. Piracy results in significant losses of income,
sales and business tax revenue for state and local government.
Piracy reduces employment in an important economic sector in
California, exacerbating numerous state problems. Copyright and
consumer protection are clearly interests advanced by federal
and state law respectively. State law can protect intellectual
property interests if the state law serves another purpose, such
as consumer protection. (Anderson v. Nidorf (9th Cir. 1994) 26
F.3d 100.)
On the other hand, it can be argued that this bill creates a
system of warrantless searches that protects a single industry.
Arguably, the provision in the bill that authorizes law
enforcement to partner with an industry representative such as
RIAA indicates that the bill places the power of administrative
searches at the service of a private industry. The bill could
set a precedent under
which other industries could demand that administrative searches
be authorized so as to give that industry equal footing with the
entertainment industry. Clothing makers and auto manufacturers
could make such an argument.
Are administrative searches necessary to advance public
interests?
The sponsor argues that it is very difficult to determine who
produced a pirated CD or DVD. Unlike Internet piracy, there is
no digital trail for optical discs. A pirated CD or DVD is
indistinguishable from legitimate works, except for the lack of
an identifying mark that would be the main focus of an
administrative search. Without administrative inspections, this
piracy will continue unabated.
A counter argument can be made that the administrative search
provisions essentially create a presumption that any optical
disc manufacturer is involved in piracy. If law enforcement has
probable cause that a manufacturer is involved in piracy, a
warrant can be obtained.
Does the bill limit the discretion of law enforcement in
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conducting administrative searches?
The sponsor has argued that the bill is narrowly tailored and
faithfully follows existing administrative search laws.
However, the automotive repair shop administrative search laws
provide that only officers who specialize in investigating auto
theft may be involved in such searches. This bill does not
limit administrative searches to officers who specialize in
intellectual piracy crimes. It can thus be argued that the bill
could provide a pretext for more general searches.
Further, the authority for law enforcement to inspect and remove
any business record or optical disc equipment appears to be very
broad. The bill appears to allow inspection and removal of any
business record or equipment, even those not plausibly involved
in piracy.
DOES OPTICAL DISC PIRACY CREATE A PUBLIC INTEREST THAT JUSTIFIES
THE ENACTMENT OF AN ADMINISTRATIVE SEARCH SCHEME FOR OPTICAL
DISC MANUFACTURERS?
DOES THE ADMINISTRATIVE SEARCH AUTHORITY CREATED BY THIS BILL
GRANT LAW ENFORCEMENT TOO MUCH DISCRETION TO TAKE BUSINESS
RECORDS AND MANUFACTURING EQUIPMENT, RATHER THAN LIMITING SUCH
AUTHORITY TO RECORDS AND EQUIPMENT PLAUSIBLY RELATED TO PIRACY?
SHOULD THE BILL STATE THAT ONLY LAW ENFORCEMENT OFFICERS WHO
SPECIALIZE IN INTELLECTUAL PIRACY INVESTIGATIONS MAY CONDUCT
ADMINISTRATIVE SEARCHES OF OPTICAL DISC MANUFACTURERS?
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