[House Hearing, 106 Congress]
[From the U.S. Government Publishing Office]
``VIOLATIONS OF INTELLECTUAL PROPERTY RIGHT: HOW DO WE PROTECT AMERICAN
INGENUITY?''
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON
INTERNATIONAL RELATIONS
HOUSE OF REPRESENTATIVES
ONE HUNDRED SIXTH CONGRESS
FIRST SESSION
__________
OCTOBER 13, 1999
__________
Serial No. 106-79
__________
Printed for the use of the Committee on International Relations
U.S. GOVERNMENT PRINTING OFFICE
63-466 CC WASHINGTON : 2000
COMMITTEE ON INTERNATIONAL RELATIONS
BENJAMIN A. GILMAN, New York, Chairman
WILLIAM F. GOODLING, Pennsylvania SAM GEJDENSON, Connecticut
JAMES A. LEACH, Iowa TOM LANTOS, California
HENRY J. HYDE, Illinois HOWARD L. BERMAN, California
DOUG BEREUTER, Nebraska GARY L. ACKERMAN, New York
CHRISTOPHER H. SMITH, New Jersey ENI F.H. FALEOMAVAEGA, American
DAN BURTON, Indiana Samoa
ELTON GALLEGLY, California MATTHEW G. MARTINEZ, California
ILEANA ROS-LEHTINEN, Florida DONALD M. PAYNE, New Jersey
CASS BALLENGER, North Carolina ROBERT MENENDEZ, New Jersey
DANA ROHRABACHER, California SHERROD BROWN, Ohio
DONALD A. MANZULLO, Illinois CYNTHIA A. McKINNEY, Georgia
EDWARD R. ROYCE, California ALCEE L. HASTINGS, Florida
PETER T. KING, New York PAT DANNER, Missouri
STEVE CHABOT, Ohio EARL F. HILLIARD, Alabama
MARSHALL ``MARK'' SANFORD, South BRAD SHERMAN, California
Carolina ROBERT WEXLER, Florida
MATT SALMON, Arizona STEVEN R. ROTHMAN, New Jersey
AMO HOUGHTON, New York JIM DAVIS, Florida
TOM CAMPBELL, California EARL POMEROY, North Dakota
JOHN M. McHUGH, New York WILLIAM D. DELAHUNT, Massachusetts
KEVIN BRADY, Texas GREGORY W. MEEKS, New York
RICHARD BURR, North Carolina BARBARA LEE, California
PAUL E. GILLMOR, Ohio JOSEPH CROWLEY, New York
GEORGE RADANOVICH, California JOSEPH M. HOEFFEL, Pennsylvania
JOHN COOKSEY, Louisiana
THOMAS G. TANCREDO, Colorado
Richard J. Garon, Chief of Staff
Kathleen Bertelsen Moazed, Democratic Chief of Staff
Subcommittee on International Economic Policy and Trade
ILEANA ROS-LEHTINEN, Florida, Chairman
DONALD A. MANZULLO, Illinois ROBERT MENENDEZ, New Jersey
STEVEN J. CHABOT, Ohio PAT DANNER, Missouri
KEVIN BRADY, Texas EARL F. HILLIARD, Alabama
GEORGE RADANOVICH, California BRAD SHERMAN, California
JOHN COOKSEY, Louisiana STEVEN R. ROTHMAN, New Jersey
DOUG BEREUTER, Nebraska WILLIAM D. DELAHUNT, Massachusetts
DANA ROHRABACHER, California JOSEPH CROWLEY, New York
TOM CAMPBELL, California JOSEPH M. HOEFFEL, Pennsylvania
RICHARD BURR, North Carolina
Mauvicio Tamavgo, Subcommittee Staff Director
Jodi Christiansen, Democratic Professional Staff Member
Yleem Poblete, Deputy Staff Director
Victor Maldonado, Staff Associate
C O N T E N T S
----------
WITNESSES
Page
Hon. Raymond Kelly, Commissioner, U.S. Customs Service,
Department of the Treasury................................. 3
Mr. Del Richburg, Special Agent, U.S. Customs Service........ 5
Hon. Richard Fisher, Deputy U.S. Trade Representative........ 8
Mr. Q. Todd Dickinson, Acting Assistant Secretary of
Commerce, Acting Commissioner of Patents and Trademarks.... 11
Mr. Jeremy Salesin, Senior Vice President and General
Counsel, Lucas Arts Entertainment.......................... 18
Mr. Charles Caruso, International Patent Counsel, Merck &
Company, Incorporated...................................... 20
Mr. Salvatore Monte, President, Kenrich Petrochemicals,
Incorporated............................................... 22
Lt General Gordon Sumner..................................... 24
APPENDIX
Prepared statement:
Chairmwoman Ros-Lehtinen..................................... 34
Mr. Raymon Kelly............................................. 36
Mr. Richard W. Fisher........................................ 40
Mr. Q. Todd Dickinson........................................ 50
Mr. Jeremy Salesin........................................... 60
Mr. Charles M. Caruso, Esq................................... 70
Mr. Salvatore J. Monte....................................... 77
``VIOLATIONS OF INTELLECTUAL PROPERTY RIGHT: HOW DO WE PROTECT AMERICAN
INGENUITY?''
----------
WEDNESDAY, OCTOBER 13, 1999
House of Representatives,
Subcommittee on International
Economic Policy and Trade,
Committee on International Relations,
Washington, D.C.
The Subcommittee met, pursuant to call, at 1:30 p.m., in
room 2172, Rayburn House Office Building, Hon. Ileana Ros-
Lehtinen [Chairwoman of the Subcommittee] presiding.
Ms. Ros-Lehtinen. [presiding] The Subcommittee will come to
order. Thank you so much for your patience, both the witnesses
and the visitors today.
In much the same way that the Eli Whitney's cotton gin is
credited with igniting the Industrial Revolution, intellectual
property industries are propelling us into a new age of
discovery and growth. According to the report, ``Copyright
Industries in the U.S. economy,'' the core copyright industries
accounted for $278 billion in value added to the U.S. economy,
or almost 4 percent of the GDP. For all copyright industries,
the report cites that the total value added amounted to close
to $434 billion, or almost 6 percent of GDP.
The core industries grew at nearly twice the annual growth
rate of the U.S. economy as a whole between 1987 and 1996.
Employment in these industries grew at close to 3 times the
level in the overall economy. Further, they accounted for an
estimated $60 billion in foreign sales and exports in 1996--a
13 percent gain over the previous year.
The American formula for excellence and success in the area
of intellectual property is one many would like to emulate.
Unfortunately, some across the world are seeking to repeat the
U.S. experience through stealing, pirating, counterfeiting, and
other unauthorized uses of American products.
The impact of piracy on the U.S. economy is widespread. As
industry leaders have stated: ``Piracy puts breaks on the
development of the national producers, generates tax evasion,
reduces the creation of employment on the part of American
companies, and provokes serious losses for the national
economy.''
The pervasiveness of this infringement, despite the growth
of the copyright industries, is resulting in significant losses
worldwide. The International Intellectual Property Alliance
estimated that, in 1998, losses were about $5 billion for
business applications; over $3 billion for entertainment
software; almost $2 billion for the motion picture industry;
and close to $2 billion for the record and music industries.
Focusing on just two countries, the Pharmaceutical Research and
Manufacturers of America reports that its members companies
lose over $1 billion annually.
Intellectual property rights issues continue to be at the
heart of U.S. relations with industrialized countries such as
Japan and the European Union members; allies such as Russia,
and Israel; as well as developing countries in Latin America,
Asia, and the Middle East. Violations of intellectual property
rights are a direct infringement on free trade, as it creates
distortions in the market and creates parallel black market
systems, which, in the end, will hurt, not just the United
States but the global economy as a whole. In turn, as a Finnish
copyright specialist has argued, the global phenomena of
intellectual property industries ``can only be dealt with by a
global approach and, where necessary, by global rules.''
One agreement considered by experts to be a good first step
was the Uruguay Round (WTO) Agreements on Trade Related Aspects
of Intellectual Property Rights (TRIP's) which took effect in
January 1996. It established international obligations for the
protection and enforcement of intellectual property rights, and
established enforcement and dispute settlement mechanisms.
However, there were still issues relating to protection of
intellectual content in cyberspace, loopholes regarding
duplication of sound recordings, and other challenges posed by
global networks that needed to be addressed.
In December 1996, the World Intellectual Property
Organization Diplomatic Conference concluded negotiations on
two multilateral treaties-one, to protect copyrighted material
in the new digital environment and another, to provide stronger
international protection to performers and producers of
phonograms. The implementing legislation was passed last year.
Nevertheless, the differences in deadlines for
implementation of international requirements and the failure of
our trading partners to effectively address the issue,
translate into an escalation of violations and the creation of
an environment where piracy is becoming rampant. Our
enforcement, monitoring, and investigative agencies--some of
which are represented here today--are doing an outstanding job
within the limitations imposed by the pervasiveness and
magnitude of the problem.
The Intellectual Property Law Enforcement Coordination
Council, established by a Fiscal Year 2000 treasury/postal
appropriations Bill will certainly help as enforcement of
intellectual property is coordinated domestically and
internationally among the U.S. Federal agencies, as well as
foreign entities.
But more needs to be done on the preventive side of the
equation. I look forward to the recommendations of our
witnesses today as we search for a cure to this growing
epidemic.
[The statement of Ms. Ros-Lehtinen appears in the
appendix.]
Ms. Ros-Lehtinen. I am very proud to introduce our first
witness, Mr. Raymond Kelly, who is the Commissioner of the U.S.
customs service. I thank him for being here today and for the
opportunity to participate earlier in the demolition of
counterfeit CD's.
As a Customs Commissioner, Mr. Kelly directs over 19,000
employees responsible for enforcing hundreds of laws and
international agreements, which protect the American public.
Prior to this prestigious appointment, Commissioner Kelly
served as the Under Secretary for enforcement at the Treasury
Department. Commissioner Kelly brings to the position more than
30 years of experience and commitment to the public service. A
former marine who served in combat in Vietnam, he was part of
the team investigating the World Trade Center bombing in 1993,
the year in which he was recognized as New York State's
official of the year.
Because of the delay and the constraints on the
Commissioner's schedule, we will be submitting questions in
writing, Commissioner, to Customs upon the conclusion of the
testimony. I will excuse you, because I know that you have
other commitments, and we thank you for being here today,
Commissioner. Thank you. We will enter you statement in full in
the record.
STATEMENT OF RAYMOND KELLY, COMMISSIONER, U.S. CUSTOMS SERVICE,
DEPARTMENT OF THE TREASURY
Mr. Kelly. Thank you very much, Madam Chairwoman. Thank you
for the opportunity to testify.
Throughout its long history, the United States Customs
Service has protected the Nation from the harmful effects of
unfair and predatory trade practices. In recent years, we have
taken on the rising threat against intellectual property
rights.
IPR theft hurts not only our national economy but the world
economy as well. This crime is already costing industry
approximately $200 billion a year in lost revenue and nearly
750,000 jobs.
In Fiscal Year 1998, the Customs Service seized almost $76
million worth of counterfeit and pirated merchandise and
conducted 484 criminal IPR investigations. China and Taiwan
were the source countries for nearly half of all the
merchandise seized.
In just the first half of Fiscal Year 1999, we seized over
$73 million of pirated merchandise and conducted 505 criminal
IPR investigations. Again, China and Taiwan accounted for 56
percent of this seized merchandise. Motion pictures, computer
software, and music were the products that were illegally
copied the most.
Our investigations have shown that organized criminal
groups are heavily involved in trademark counterfeiting and
copyright piracy. They often use the proceeds obtained from
these illicit activities to finance other, more violent crimes.
These groups have operated with relative impunity. They
have little fear of being caught for good reason. If
apprehended, they face minimal punishment. We must make them
pay a heavier price.
Customs continues to raise awareness of the importance of
protecting our intellectual property rights. This past summer,
our Fraud Investigations Division sponsored two conferences on
methods to recognize and investigate IPR violations. Our agency
teamed up with private industry and trade associations to
provide advanced training for approximately 200 Customs special
agents and inspectors. Twenty special agents from the Federal
Bureau of Investigation were also included in this training.
Our Federal law enforcement agencies are stepping up to the
challenge, but we can't do it alone. We need international
cooperation. We need the help of our foreign partners.
Accordingly, we have conducted training for customs and
Federal police officers in nine different countries. We also
provided training to six additional foreign law enforcement
agencies under the auspices of the International Law
Enforcement Academy in Bangkok, Thailand.
U.S. customs has also forged a close working relationship
with those industries most affected by IPR violations. We are
working with these corporations to train personnel at airports,
seaports, mail facilities, land borders, and other locations
where foreign imports are received on ways to spot counterfeit
merchandise.
Our partners in this effort have included the Interactive
Digital Software Association, the Motion Picture Association of
America, the Recording Industry Association of America, the
Software Publishers Association, Lucas Arts, Microsoft, Novell,
Nintendo, Sega, and Sony Entertainment.
In recent months, we have contacted major pharmaceutical
manufacturers to learn about their IPR concerns. As a result,
we have developed training for our Customs officers to help
them identify shipments of imported pharmaceuticals that
violate manufacturers' IPR rights as well as Food and Drug
Administration regulations.
Customs mandate now extends to the borderless world of
cyberspace as well. The Internet has opened up vast new
opportunities for legitimate business and criminal smugglers
alike. In this new environment, our traditional enforcement
remedies simply won't suffice.
U.S. industries, particularly those involved in computer
software, motion pictures, and sound recordings, are at great
risk from Internet piracy. Cyber criminals are difficult to
track with a few simple keystrokes from a computer anywhere in
the world, they can ship stolen trademarks, traffic pirated
music, or download copyrighted software.
U.S. customs is tackling this new breed of criminal on a
variety of fronts. Our main weapon in this fight is the Customs
Cybersmuggling Center, or C-3, located in Fairfax, Virginia.
The center is devoted to combating Internet crime, including
IPR violations.
Currently, this center is conducting about 100
investigations involving the sale of counterfeit goods through
the Internet. With the help of Congress, we have expanded the
center, and we will continue to devote our resources to its
important work.
President Clinton included the protection of intellectual
property rights in his 1998 international crime control
strategy. Customs, along with the FBI, Co-Chair a working group
charged with implementing the IPR strategy and strengthening
the enforcement of IPR laws.
Members of this group include the Departments of Treasury,
Justice, and State, the Patent and Trade Office, the Copyright
Office, the U.S. trade Representative, the Central Intelligence
Agency, and the National Security Council.
I would also like to take this opportunity to announce the
opening of the National Intellectual Property Rights
Coordination Center. The center, based at Customs headquarters
here in Washington, will synchronize the joint efforts of our
Federal agencies in IPR investigations. Investigative personnel
from Customs and the FBI will provide the core staffing for the
center. Other interested agencies have been invited to
participate.
The main objective of the center will be to eliminate
duplication of investigative efforts between agencies and to
coordinate multinational investigations. The center will
provide one-stop service for industry to raise potential
violations of IPR law. It will centralize intelligence
gathering, including data and information collected by foreign
government agencies and disseminate intelligence where needed.
We will also utilize the 44 Customs mutual assistance
agreements we have signed with our international partners to
help in our IPR efforts. These agreements provide for the free
exchange of information and assistance in areas of mutual
concern. The IPR Coordination Center will tap our attache
offices worldwide to gain intelligence under the mutual
assistance agreements for IPR investigations.
This center will begin limited operations within 30 days.
Additional funding has been requested in our Fiscal Year 2001
budget to provide adequate staffing and resources.
Madame Chairwoman, with the continued support of the
Congress, U.S. customs will remain a force in the battle
against IPR piracy. Every day we gain in fighting those who
subvert legitimate commerce and destroy livelihoods by stealing
the creative works of others. Ever day we build new
partnerships to help us in this battle.
But as much as we have done, we need to do more. IPR crime
is an increasing global threat. We need to educate consumers on
the dangers of counterfeit and pirated goods. U.S. customs look
forward to working with the Congress to raise public awareness
of the IPR threat and to enhance the defense of our cultural
and commercial interests. The fact is, IPR crime affects more
than those whose copyrighted works are stolen. In some way, it
affects us all.
With your consent, I would like now to offer a brief
demonstration of our work on this important front. This
demonstration is being conducted U.S. customs special agent Del
Richburg. Special Agent Richburg is currently assigned to the
Customs Cyber Crime Center in Newington, Virginia, and he
specializes in IPR investigations.
[The prepared statement of Mr. Kelly appears in the
appendix.]
STATEMENT OF DEL RICHBURG, SPECIAL AGENT
Mr. Richburg. Thank you, Commissioner Kelly.
Madam Chairwoman, I would like to show several Internet
which demonstrate IPR violations. The web sites were captured
earlier in the week, but we will be viewing the sites as if
they are live.
This first site is called the Software Depot. It is located
in Russia and offers pirated business software for sale. As you
can see in the questions and answers area, they even let you
know up-front they are located in Moscow, Russia.
One of the issues--one of the problems with this web site
is that it looks very professional. It gives the appearance of
a legitimate software site, so the average consumer may not
realize they are purchasing pirated software from this site.
How would an investigator or the public know that the
products offered on this site are pirated? One of the first
clues is this word here ``warez.'' It is here again, and
located several other areas on this web site. The word
``wares'' is an accepted word on the Internet for pirated
software.
This area of the web page, serials, it is an area where you
can download en mass serial numbers for software. Serial
numbers for software are normally not offered until you
purchase software. They are not available for mass download.
If we actually look at the type of products that the
Software Depot offers, you will note they have an extensive
list of software--Adobe Complete, the super bundle they are
offering for $99. That is a ridiculously low price. Some of the
software that they offer easily runs into the thousands of
dollars.
They offer mixed compilations, meaning the software that
they offer is software from competing companies. You may see a
Microsoft product with a competing software, for example, and
that is just not going to happen on a legitimate software site.
Another example of Internet piracy involves music piracy in
the popular in MP3 format. MP3 pirated music can be located on
many areas of the Internet. One of the areas we are going to
look at is the World Wide Web. This is a popular common search
engine called scour.net. It is a multimedia search engine, and
it allows you to locate MP3 music. You would simply type in
either the name of the song or the name of the musical group
you are interested in and click search, and it will locate all
of the occurrences on the World Wide Web of that particular
song or group.
In this particular case I searched for the Dire Strait song
Sultans of Swing. As you can see here, there is 441 pages where
this particular song occurs. There is about 10 songs per page.
That is well over 4,000 songs.
Then if we continue, you would simply click on the song you
want to download, and the song is now downloading. This is
called the URL. This is an interesting piece on the software.
What it is, is it is an address. It is the address where this
site is located at. One of the first steps an investigator
would take if we were to look into this site would be to run a
common search, a trace program. We are running the program,
this trace software, and it is telling us that this particular
site is located in Chicago. It is on a university server. What
has happened in this particular case, more than likely, is a
student has probably placed his content on the university
server without the university's consent.
If we continue on, we will see that the download is in
progress--it is at 6 or 7 percent. In less than a minute, we
would have downloaded the song. Now, if we wanted to hear that
recording in MP3 format, you would hear a near-CD quality
version of that Dire Strait song. We will go ahead and play
that song and get an idea of the quality.
We will fast forward a little bit. You see it is a near-CD
quality sound of that song.
Obviously, there is literally thousands of these types of
sites on the Internet, thousands. In the interest of time, I
only showed a few today.
Thank you for your interest.
Ms. Ros-Lehtinen. Thank you so much, Commissioner. Thank
you for that presentation, and we apologize again to all of our
witnesses for the delay. The Export Promotion Act is on the
floor today, which is of extreme interest to our Trade
Subcommittee, and that is where most of our Members are. If you
see C-Span, you will see them all on the floor talking. I got
in early and left so I could Chair this meeting, but that is
where we are, and we apologize to all of you today.
We will submit our questions in writing to you,
Commissioner. We thank you so much----
Mr. Kelly. Thank you, Madam Chairwoman.
Ms. Ros-Lehtinen [continuing]. For being with us and for
the presentation that you made.
Mr. Kelly. Thank you. We have some items on the table over
there that have been confiscated by Customs Service. They are
all manifest IPR violations.
Ms. Ros-Lehtinen. Thank you so much. We will take a look at
those.
Mr. Kelly. Thank you very much.
Ms. Ros-Lehtinen. Thank you.
We are very proud to now present our second panel, headed
by Ambassador Richard Fisher, the Deputy United States Trade
Representative with primary responsibility for Asia, Latin
America, and Canada. Ambassador Fisher also serves as vice
Chairman of the Board of Directors of the Overseas Private
Investment Corporation, and we were just discussing your bill a
few minutes ago.
Ambassador Fisher. Thank you.
Ms. Ros-Lehtinen. Before joining the USTR, Ambassador
Fisher was managing partner of Fisher Ewing Partners and Fisher
Capital Management. He was Executive Assistant to the Secretary
of the Treasury during the Carter Administration and was
founding Chairman of the Dallas Committee on Foreign Relations,
among many other distinguished groups, and we thank Ambassador
Fisher for being with us today.
We will then also hear from Mr. Todd Dickinson, the Acting
Assistant Secretary of Commerce and Acting Commissioner of
Patents and Trademarks. Prior to these distinguished
assignments, he served as counsel with a Philadelphia-based law
firm and as chief counsel for Intellectual Property and
Technology at Sun Company. Commissioner Dickinson is
responsible for managing the agency's growth and ensuring
quality products and services.
Among the initiatives implemented during his tenure as head
of the agency was the launching of the Quality Council to
provide guidance in aligning PTO with established quality
criteria. Commissioner Dickinson also established the Office of
Independent Inventor Programs aimed toward inventors working
for themselves or for small businesses.
We thank Mr. Dickinson as well as Ambassador Fisher, and we
thank you mostly for your patience today. Thank you. We will be
glad to enter your statements in full in the record. Thank you.
You are recognized now.???
???[The prepared statement of Mr. Richburg, Kelly appears
in the appendix.]
STATEMENT OF HON. RICHARD FISHER, DEPUTY U.S. TRADE
REPRESENTATIVE
Ambassador Fisher. Madame Chair, you eloquently summarized
the economics of piracy in your opening statement. The value of
intellectual property rights, however, goes well beyond its
present economic value. A system of strong intellectual
protection is referred to by the Commissioner in his
presentation just now is fundamental to ensure that artists and
inventors and scientists and even the group Dire Straits are
rewarded for their work and thus incentivized to push the
envelope of artistic creativity and scientific advancement in
the future.
To paraphrase Thomas Edison, ``The greatest machine ever
invented is the human mind.'' Our commitment is to intellectual
property rights, that is to products of the American mind, at
home and abroad as a foundation of our ability to create the
manufacturing successes, the distribution systems, the computer
programs, the medicines, the defense systems, and the films and
recordings of music of the future.
In a sense, the intellectual property of the American
economy is like a warehouse of ideas. For people to walk into
that warehouse and be able to steal from it is no more
tolerable than the theft of goods, and this is why we at the
U.S. Trade Representative's Office place such an emphasis on
ensuring that our trading partners pass, enforce, and continue
to enforce laws that ensure respect for our property rights,
our intellectual property rights.
Among our most effective bilateral tools, Madam Chair, in
combating piracy is the annual Special 301 review mandated by
Congress in the 1988 Trade Act. Publication of the Special 301
list warns the country of our concerns, and, importantly, it
warns potential investors in that country that their
intellectual property rights are not likely to be
satisfactorily protected.
In many cases, these actions lead to permanent improvement
in the situation. Bulgaria, for example, was once one of
Europe's largest sources of pirated CD's. We worked through the
301 process to raise awareness of the problem in Sophia, and
Bulgaria has, at this point, almost totally eliminated pirate
production.
China is another example where we used both the listing and
actual retaliation to win bilateral intellectual property
agreements in 1995 and 1996. As a result, China has a
relatively functioning system which protects copyrights much
more effectively than ever before, and, importantly and
recently, in March, the China State Council followed our
example here in the United States in issuing a directive to all
government ministries mandating that only legitimate software
be used in government and quasi-government agencies.
That said, we do of course have continuing concerns in
China. Pirate production is down, but imports from other pirate
havens are increasing in that country, and restrictions on
market access have hindered our ability to replace pirate
products with legitimate goods in many cases. As in all our IPR
work, continuous follow-up and review is essential for success
as it is elsewhere.
In 1999, Madam Chair, we reviewed--or we have reviewed 72
countries in our Special 301 review, with 54 countries
recommended for specific identification and 2 subject to sector
306 monitoring. In this review, we focused on 3 major issues:
First, we are working to ensure full implementation of the
World Trade Organization commitments on intellectual property,
a subject I will expand upon in just a moment; second, we are
addressing new issues raised by the rapid advance of
technology, in particular, the control of piracy and newly
developed optical media, for example, music and video CD's and
software CD-Roms, and we have made some significant success on
this issue over the past year with Hong Kong and Malaysia being
cases in point; and, third, we have mounted a major effort to
control end user software piracy; that is, the unauthorized
copying of large numbers of one or two illegally obtained, or
perhaps legally obtained, programs in particular by government
agencies around the world.
We have used the example set by Vice President Gore's
announcement of a U.S. Executive Order mandating the use of
only authorized software by U.S. Government agencies to win
similar commitments from Colombia, Paraguay, the Philippines,
Korea, Thailand, Taiwan, and Jordan, in addition to China,
which I referred to earlier. Spain and Israel are actively
considering such decrees.
The bilateral negotiations are and will remain central to
our efforts to improve copyright standards worldwide. However,
as time has passed, our trading partners have begun the
positive effect of stronger standards in their own home
countries, and this allowed us to make a fundamental advance
with the TRIP's agreement, which you referred to in your
introduction to today's hearing.
This required that all WTO members pass and enforce
copyright patent and trademark laws and give us a strong
dispute settlement mechanism to protect our rights. This
agreement will soon be fully in force. The Uruguay Round, which
you referred to, Madam Chair, granted developing countries
until January 1 of the year 2000 to implement most provisions,
including copyright protection for computer software. as we
approach 2000, we are working to ensure that developing
countries are taking steps to ensure that they will meet their
obligations.
In the interim, we have been aggressive and successful in
using WTO dispute settlement procedures to assert our rights in
13 specific cases stemming from the very first TRIP's-related
dispute settlement case against Japan in 1996. The more recent
cases include one with Portugal for failing to apply TRIP's
levels of protection to existing patents; another against
Pakistan and India for their failure to provide a so-called
mailbox and exclusive marketing rights for pharmaceutical
products; a third case with Denmark and another with Sweden
over the lack of ex parte civil search procedures; one with
Ireland for their failure to pass a TRIP's-consistent copyright
law; one with Greece dealing with their rampant broadcast
piracy; with Argentina over exclusive marketing rights data
protection for agricultural chemicals; with Canada for failing
to provide a 20 year patent term in all rather than certain
specific cases, and with the EU regarding regulations governing
geographical indicators.
These cases, Madam Chair, illustrate the range of issues
that are involved in using WTO settlement procedures and
processes to protect American property rights.
In the year ahead, we expect to be equally active. As part
of our annual Special 301 report, we announced that USTR would
conduct a Special 301 out-of-cycle review of developing
countries toward full TRIP's compliance this December, and we
are hopeful that many instances of less than full
implementation can now be resolved through consultations. If
not, we are prepared to address the problems through dispute
settlement proceedings beginning in January where necessary.
In fact just last week, I met in Buenos Aires with the
economic advisers to the three leading Presidential candidates.
I told them that unless the Argentine Congress provides the
wherewithal to address our concerns regarding pharmaceutical
piracy and patent piracy between now and year-end, their
government, to be elected next month, may well be subject to a
TRIP's suit early next year.
At the same time, Madam Chair, our negotiations on the
accession of 32 economies to the WTO offer us a major
opportunity to improve intellectual property standards
worldwide. The economies applying to enter the WTO include a
number of countries in which our intellectual property
industries have experience very significant piracy problems
over the years, as you may seen in this morning's paper. For
example, Jordan is keen on stressing progress on this front as
part of their WTO accession effort in order to attract
investment to the kingdom. In each case, we consider acceptance
of the WTO requirement for passage and enforcement of modern
intellectual property laws a fundamental condition of entry and
accession to the WTO.
Our overriding objective at the moment is to secure full
and timely implementation of the TRIP's agreement by all WTO
members and to broaden this to new members. WTO's so-called
built-in agenda includes a review of the TRIP's agreement
scheduled to begin after implementation, and this will help us
build consensus for the next steps at the WTO. We foresee the
possibility of improvements to the TRIP's agreement in due
course. Among other things, we believe that it will important
to examine and ensure that standards and principles concerning
the availability, scope, the use, and enforcement of
intellectual property rights are adequate and effective, and
are keeping pace with the rapid changing technology, which we
just saw illustrated, including further development of the
Internet and digital technologies.
We also expect that once members have the benefit of
experience gained through full implementation of the agreement,
we will want to examine and ensure that members have fully
attained the commercial benefits which were intended to be
conferred by the TRIP's agreement and the protection it
affords. In any event, no consideration will be given or should
be given to the lowering of standards in any future
negotiations.
Looking forward, Madam Chair, we are giving careful
consideration to our options for protecting intellectual
property associated with rapidly evolving new technologies and
the fast developing information society. For example, we are
consulting with United States industry to develop the best
strategy to address problems such as Internet piracy. We began
an effort to address this issue through the multilateral
negotiations under the auspices of the World Intellectual
Property Organization, or WIPO, which you referred to in your
opening statement. This resulted in the signature of two 1996
WIPO copyright treaties, which will help raise the minimum
standards of copyright protection around the world particularly
with respect to Internet-based delivery of copyrighted works.
With the recent approval by the U.S. Senate of these
treaties, the Administration is committed to work with industry
to encourage ratification of these treaties by other
signatories as soon as possible.
Madam Chairwoman, intellectual property protection is one
of our most important and challenging tasks. To protect U.S.
intellectual property rights is to protect the product of the
American mind. It protects America's comparative advantage in
the highest-skill, highest-wage fields. It helps to ensure that
the extraordinary scientific and technical progress of the past
decades continues and accelerates in the years ahead and all of
woman and mankind prospers from it.
Congress, through the passage of the Special 301 law,
through the passage of the Digital Millennium Copyright Act
implementing the WIPO treaties, and through hearings such as
this deserves great credit for bringing public focus to these
issues, and we thank you for it. USTR has worked very closely
with the responsible Committees over the years, and we look
forward to continuing that effort together in the years ahead.
Thank you, Madam Chair and Members of the Committee. Be
happy to answer any questions you have and happy to turn this
over to my friend, the Commissioner.
[The prepared statement of Ambassador Fisher appears in the
appendix.]
Ms. Ros-Lehtinen. Thank you so much, Mr. Ambassador.
Mr. Commissioner, we will also include your full statement
into the record.
STATEMENT OF Q. TODD DICKINSON, ACTING ASSISTANT SECRETARY OF
COMMERCE AND ACTING COMMISSIONER OF PATENTS AND TRADEMARKS
Mr. Dickinson. Thank you very much, Madam Chairman and
Members of the Committee.
Let me start by commending you for holding this hearing on
the protection of intellectual property. Echoing what my
colleague, Ambassador Fisher, and Commissioner Kelly said, I
firmly believe that no issue is more important in shaping the
future growth and development of our economy and the global
economy than to the development and the maintenance of an
effective intellectual property protection system.
Within our national intellectual property system, the
Patent and Trademark Office is basically responsible for
examining and granting patents and registering trademarks. We
also serve an important policymaking role. Specifically, the
PTO is the primary adviser in the Administration and Congress
on all domestic and international IP matters, including the
international agreements. To that end, we work closely with our
colleagues here at USTR and Customs and the U.S. copyright
office, the Departments of State and Justice and other Federal
agencies to secure and expand protection of U.S. intellectual
property throughout the world.
As part of that international effort, we and our colleagues
within the Administration engage in policy consultations and
educational programs with our foreign counterparts. The goal is
not only to convey the advantages of effective intellectually
property enforcement systems, including full compliance with
the TRIP's agreement, but also to promote understanding of the
critical role that intellectual property protection plays in
building strong and vital economies.
Our educational programs and discussions regularly take
place here in Washington and abroad; in fact, just last week
the PTO and the World Intellectual Property Organization's Asia
bureau Co-sponsored a study program of the enforcement of IP
rights for customs officers from 12 Asian countries. Next
month, we will hold another enforcement program with
intellectual property officials from over 15 other nations.
The PTO traditionally consults with other Federal agencies
on intellectual property related enforcement activities. I am
very pleased that Congress has recently gone further and
formally initiated a new interagency coordination effort. The
law, which creates the National Intellectual Property Law
Enforcement Coordination Council, signals a strong commitment
on behalf of the United States to improve the coordination of
domestic and international intellectual property law
enforcement among Federal and foreign entities.
The Council, which is Co-Chaired by us at the PTO and the
Assistant Attorney General for the Criminal Division, also
includes the USTR, State Department, the Department of
Commerce, and the Customs Service. It is directed to consult
with the register of copyrights on copyright-related issues and
reports annually no its activities to the President and the
House and Senate Committees on Appropriations and the
Judiciary. We look forward to working with our colleagues on
this new, important effort.
Securing effective patent protection as expeditiously as
possible is critical to all U.S. industries but particularly
the pharmaceutical, computer, and other high-technology
sectors. On that point, Madam Chair, I can report that the U.S.
patent business is booming. Patent applications are up 25
percent in just the last 2 years; almost 50 percent since the
start of the Clinton Administration. In the fiscal year that
just ended, we received nearly 270,000 patent applications.
To handle the rapid growth in patent applications and to
address our customers' concerns, we have hired in the last 2
years more than 1,600 new patent examiners. At the same time,
we are expanding staff training and aggressively automating our
operations to improve the efficiency and the quality of our
service.
Our international efforts on patent protection include
ongoing consultations with our international partners through
the Patent Cooperation Treaty and the Patent Law Treaty as well
as with our trilateral partners, the European and the Japanese
patent offices. The culmination of these efforts will
streamline the procedures for and--for filing for and
maintaining patent protection throughout the world. We also
look forward to the day when there is a complete international
regime for patent protection, the so-called global patent.
With respect to our trademark operations, we are also
experiencing significant growth. Trademark are up nearly 25
percent in this year alone. Our efforts in this area include
hiring more trademark examiners, promoting electronic filing,
and improving our searchable data base.
On the international front, we expect that the
implementation of the Trademark Law Treaty this November will
substantially aid U.S. trademark owners by simplifying and
harmonizing requirements for acquiring and maintaining a
trademark registration in member countries.
While our publishing, computer software, information, and
entertainment industries continue to face serious challenges in
terms of piracy and infringement in foreign markets, progress
is being made to promote international cooperation in the
protection of intellectual property in the global economy. For
example, the Digital Millennium Copyright Act, passed by the
Congress and signed into the law by the President last October,
implements the WIPO copyright treaties mentioned by Ambassador
Fisher.
They were recently negotiated by my predecessor,
Commissioner Lehman, and it was my pleasure to join Secretary
Daley in depositing our instruments of ratification for these
new treaties last month in Geneva. These treaties will help
ensure that other nations provide copyright protection for
electronic commerce at a level equivalent to the protection
provided under U.S. law. We are working to encourage other
nations to ratify and implement them.
As we prepare to enter the next millennium, the PTO will
continue its efforts to secure and expand protection of U.S.
intellectual property throughout the world. With some hard work
and good will, we are confident that we can buildup on existing
systems so that they can reflect the realities of a new
marketplace, one that is increasingly electronic and global.
This task is not without its challenges, Madam Chairman, but we
believe our Nation's ever-evolving IP systems will continue to
serve our citizens well during the next century and beyond.
Thank you.
[The prepared statement of Mr. Dickinson appears in the
appendix.]
Ms. Ros-Lehtinen. We thank you so much for joining us as
well.
Commissioner Dickinson, your office will be Co-Chairing the
new Enforcement Council. Can you tell us what progress has been
made in the establishment of that Council? What recommendations
has the industry provided, and what are some of the specific
goals that you wish to achieve through this Council?
Mr. Dickinson. Thank you, Madam Chairman. The legislation
which established this Council just passed and was recently
signed by the President, so we are in the very early stages. I
did speak actually just this morning with my Co-Chair,
Assistant Attorney General Robinson, and we will shortly issue
an invitation to our colleagues on the Council to come to the
very first meeting, and we are looking very much forward to
that. We have our staffs turning their attention to the various
matters that the Council would take up----
Ms. Ros-Lehtinen. What are your expectations to come with
this?
Mr. Dickinson. Are expectations, frankly, are fairly high.
We believe that one of the key benefits from this is to have
the kind of coordination activities which have not heretofore
formally existed, and I am hopeful that the kind of--perhaps
some of the redundancies and overlap that may have existed
before will be streamlined and that we will have the
opportunity to work together to come up with new creative ways
of dealing with these issues, because, as Commissioner Kelly
indicated and Ambassador Fisher indicated and others certainly
do, this is an extraordinarily growing problem and one we need
to take a coordinated approach to.
Ms. Ros-Lehtinen. Ambassador Fisher, if you could address
that as well.
Ambassador Fisher. Just a comment on this idea and the
importance of having a unified view and eliminating overlap.
One of the most difficult problems we have with enforcement
overseas is that intellectual property protection cuts across
several cabinet portfolios or ministries in any one country.
For example, if we look at CD piracy in Brazil, a lot of these
CD's are stamped out in Macao; their shipped across the Pacific
Ocean; they actually enter into Brazil from a small country
that borders it to the north on donkey back. A recording artist
like Susha, for example--one of my favorites; one of my wife's
least favorites, by the way--is denied her hard earned earnings
in Brazil. Then you find out, of course, that tax authorities
are bringing on finance revenue. It is a border and customs
issue; it is a law enforcement issue, and so on, which the
Commissioner well knows.
We have had tremendous difficulty in getting countries to
understand that trade ministers cannot in and of themselves
effect the kind of enforcements necessary to implement the laws
that they are beholden to, internationally or bilaterally or
the agreements that they have made. I want to also just add
that it is important that we get other countries and use our
own example for other countries as we have with the Vice
President's issuance of orders on software for legitimate
software to be used; set an example for others, and then expect
to hold their feet to the fire.
Mr. Dickinson. Madam Chairman, if I could elaborate just a
little bit, I concur with what Ambassador Fisher said. We
consult bilaterally regularly, and very recently was in Europe,
in Geneva, with the WIPO governing bodies. Many of the European
countries approached us about this--the establishment of this
Council, because they would like to emulate it. This is an
issue which they would like to bring back to their own
countries. We are at the forefront, and we are to be
congratulated for doing that.
Ms. Ros-Lehtinen. That is great. Commissioner, how will the
$50 million reduction in the CJS appropriations bill affect
PTO's processing capabilities?
Mr. Dickinson. Thank you, Madame Chairman, for that
question. The budget process is a difficult one, as I think we
all understand, particularly this year, and I know Congress is
taking--has seen it as a particularly challenging one in this
cycle. The House-passed version would take $51 million our of
our request and place it into what is called a carryover.
One of the issues which concerns our customers and our
constituents the most is that the fees which they pay--and we
are the only fully fee-funded agency in the Federal Government;
we don't receive any taxpayer dollars whatsoever, just the fees
that are paid to do the work that we do--those constituents, as
you can imagine, when they pay those fees, small inventors in
particular, are concerned that those fees get taken away for
other governmental purposes.
The impact of that $51 million can be very significant. We
are studying that question now, but it looks like we may have
to slow down or possibly stop the hiring of new examiners,
hiring new judges on our boards, the backlogs and pendancies
that we have may increase significantly, and when we are in a
regime now where your term for a patent runs from the day you
file it as opposed to the day it issues, each day longer we
take to examine an application is 1 day less that somebody gets
on their term. It would be a shame, I think, if this led to a
significant or any reduction in the amount of a term that a
patent owner is entitled to.
Ms. Ros-Lehtinen. Thank you. Ambassador Fisher, in some
cases, violation of intellectual property rights are
accompanied by market access issues whereby a lengthy
regulatory approval process not only discriminates against our
American products but if affords the opportunity for stealing
of research data. How can this problem be addressed?
Ambassador Fisher. You point to a very important part of
this exercise, which is the systems that are set up, for
example, I referred to the mailbox system before when we are
applying for a patent to be applied in a country to make sure
that while it is in the system, first, it will progress through
the system; second, while it is in the system, we will be
granted exclusive marketing rights, and, again, the perfection
of TRIP's and of WIPO will assist us tremendously in this
process.
We know when we are being robbed. Our industry is diligent;
our industry reports whether it is in the visual or optical
media or the pharmaceutical industry to us, and we use every
tool we can as I refer to in my testimony and at greater length
in my written testimony, Congresswoman, to make certain that we
can use the full effect of our own laws, and, for example,
under the 301 sections that I mentioned earlier.
Again, this is not a seamless process. It is not easy to
put your finger in every single leak in the dike, but we use
every effort we can to make sure that while we are awaiting
approval or once something is approved that, indeed, our
intellectual property is protected, our rights are upheld, and
we seek to perfect this as we go through time.
Ms. Ros-Lehtinen. USTR has authority under the generalized
system of preferences to deny GSP benefits to nations that
aren't providing adequate and effective protection of
intellectual property rights. Does USTR plan to aggressively
use this authority?
Ambassador Fisher. We do, and we have.
Ms. Ros-Lehtinen. You had mentioned that you had already
discussed some of these items with other ministers in
Argentina, you had mentioned. What progress have we made in
other countries, and do they believe us when we say that we are
going to exercise the authority?
Ambassador Fisher. I think they definitely believe us,
without a doubt. Let me give you an interesting case that I
raised last week in Latin America, because it shows you again
the breadth of this problem. It deals with Ecuador. The
intellectual property protection is provided for varieties for
flowers. We have heard reports from Ecuador that a judge has
arbitrarily canceled all the varietal flower registrations and
patents of United States and foreign flower breeders in
Ecuador. Many of these varieties are not indigenous to Ecuador,
but the growing climate is quite attractive. So science has
been brought to bear and patents have been provided and
protection had been in place for these various varieties and
the registration of those varieties. It is being threatened by
a court ruling. This is a perfect example of a country where we
have significant leverage. We will see how this court case
works its way through the system. We have raised our protests.
Whether it is through GSP or other means, tools that we have
are meaningful to these countries in providing access to our
market, and if need be--and we have not been shy,
Congresswoman, as you know--we are perfectly willing to use
those tools in order to enhance our leverage in cases such as
these.
I mention this only because it is a rather bizarre and
interesting case. It shows you the breadth and reach of
intellectual property. But, again, here is a case where we will
see how it goes. It is now being reviewed by a higher court. We
will see if our interests are being upheld, and in this case
and in other cases, we can use the tools that you mentioned,
and this is a very powerful tool particularly with regard to
countries that want access to our markets that are in lesser
stages of development but where the principle still needs to be
applied.
Ms. Ros-Lehtinen. Let us hope so. Thank you so much.
Mr. Chabot?
Mr. Chabot. Thank you. I will be brief with my questions. I
just noticed some of the knock-off goods over here, the
counterfeit items, and my son, my 10 year old, is thoroughly
caught up in this Pokemon craze, and if he saw that peekachoo
sitting down there, even though it is fake, I am sure he would
want me to take it home with me. For the parents, those that
have kids, they are familiar with peekachoo and all the rest of
these things. If you don't have kids that age, you don't have a
clue as to what I am talking about.
I just have one question and that is that do the penalties
imposed under international agreements offer sufficient cost to
violators to deter the piracy, and are penalties and remedies
sufficient to compensate the rightholder or are there changes
that should be made?
Ambassador Fisher. Congressman, we expect that they are.
Again, as I mentioned in my prepared statement, also my spoken
statement, one of the things we will be evaluating with regard
to TRIP's, for example, is to make sure that the implementation
of TRIP's, and particularly as it kicks in for all countries on
1-1-2000--the developing nations are then enveloped by this
discipline--is to have a review to make sure that we indeed are
seeing the commercial interest or the interests of our
intellectual property producers are indeed being protected and
that the system holds water, so to speak.
I am sure there will always be critics that we are not
being adequately compensated. We have labored mightily to make
sure that we are. I can tell you that the reaction to using
tools like GSP but also the direct penalties that we can bring
to bear using our laws and implementing these international
rules and regulations have been effective, and I think we just
need to continue to monitor the situation and make sure that
they stay effective.
Mr. Chabot. Thank you. I yield back the balance.
Ms. Ros-Lehtinen. Thank you.
Mr. Hoeffel? Thank you.
Thank you so much, gentlemen. We appreciate your patience.
We will be voting on the OPIC bill in about an hour, so let us
see how we do.
Thank you so much.
Mr. Dickinson. Thank you.
Ms. Ros-Lehtinen. Our third panel leads off with Mr. Jeremy
Salesin who is the director of Business Affairs and general
counsel for Lucas Arts Entertainment Company. Mr. Salesin
advises company management on a full range of business,
corporate, and legal issues. In addition to handling Lucas Arts
patent, copyright, trademark, and other intellectual property
related issues, he negotiates and documents business
arrangements and strategic alliances in the areas of
development, distribution, manufacturing, marketing, and
licensing. Prior to joining Lucas Arts in November 1996, Mr.
Salesin was vice president, Business Affairs, general counsel,
and secretary of Sanctuary for Woods Multimedia Corporation.
He will be followed by Mr. Charles Caruso and Mr. Salvatore
Monte who are the guest of the Ranking Member, Mr. Menendez,
and Mr. Hoeffel of Pennsylvania is going to be introducing them
for us, because Mr. Menendez is on the floor handling our bill.
Thank you so much.
Mr. Hoeffel. Thank you, Madam Chairman, and it is a
pleasure to stand in for Mr. Menendez today to introduce Mr.
Charles Caruso from Merck & Company, the international patent
council. Mr. Caruso represents Merck in various United States
and international organizations and conferences for the
protection of intellectual property rights. He also reviews and
monitors those issues around the world and counsels members of
Merck's law department regarding those developments.
Merck employs 5,000 scientists and has spent nearly $2
billion since 1998 for research and development covering nearly
every major field of therapeutic research, representing about
10 percent of all U.S.-based pharmaceutical companies in that
area, and, Madam Chairman, employed 10,000 people in my
district and are a very good corporate neighbor as well.
Mr. Caruso holds a juris doctor degree in law from Rutgers;
has been a patent attorney and a member of the bar since 1976.
Mr. Salvatore Monte, President and owner of Kenrich
Petrochemicals, of Bayonne, New Jersey; I gather, a personal
friend of Mr. Menendez', and he would be here except he is
leading the debate on the floor of the House at the moment. Mr.
Monte has championed the need for our Government to challenge
the Japanese Government to adhere to international treaty
obligations for the protection of intellectual property rights
by ending the notorious practice of patent flooding.
As an inventor, Mr. Monte has patented and developed
several globally used chemicals, including chemical titanites--
I hope I said that right--in the early 1970's. In an attempt to
expand in 1980, Mr. Monte contacted a Japanese firm to
manufacture and distribute his invention and was required to
share his formula with the Japanese. Now, 20 years and millions
of dollars in losses later, at least 40 Japanese patents have
been based upon Mr. Monte's licensed technology. I understand
in 1990, Congresswoman Helen Bentley first spoke about the
problems faced by Kenrich Petrochemicals. At that point,
Kenrich represented--or, rather, had 90 employees, and now is
down to 30, if this information is correct. Mr. Monte,
obviously fighting hard against the negative impact on his
company by the patent flooding that has occurred to him.
Thank you for the opportunity, Madam Chairman, to introduce
our--a few of our constituents.
Ms. Ros-Lehtinen. Thank you so much. That is an incredible
story. We look forward to that testimony.
Mr. Salesin? All of your statements will be entered in full
in the record. Thank you.
STATEMENT OF JEREMY SALESIN, SENIOR VICE PRESIDENT AND GENERAL
COUNSEL, LUCAS ARTS ENTERTAINMENT, ALSO REPRESENTING THE
INTERACTIVE DIGITAL SOFTWARE ASSOCIATION
Mr. Salesin. Thank you, Madam Chairwoman and distinguished
Committee Member. I want to thank you for the opportunity to
testify----
Ms. Ros-Lehtinen. If you could perhaps move the mic just a
little bit closer.
Mr. Salesin. I want to--is that on? There we go.
As you said, my name is Jeremy Salesin. I am the general
counsel of Lucas Arts Entertainment Company. You may know Lucas
Arts as the producer of dozens of best-selling entertainment
software games with titles such as Rogue Squadron and most
recently the games based on Star Wars Episode I, the Phantom
Menace.
I am testifying today on behalf of the Interactive Digital
Software Association, which is the trade association that
represents the publishers of entertainment software for video
consoles, computers, and the Internet.
In 1998, U.S. entertainment software publishers had $5.5
billion in U.S. sales. Furthermore, the U.S. entertainment
software industry and other core copyright industries are
collectively responsible for over $60 billion in foreign sales
and exports, more than any other industry sector. That is the
good news. The bad news is that intellectual property piracy
threatens the continued health of my industry.
Piracy has cost us over $3 billion in losses in 1998 alone.
That is right. An industry with $5.5 billion in U.S. sales has
lost over $3 billion due to piracy. What is more, in many
otherwise promising markets, such as China, Argentina, Brazil,
Turkey, and Thailand, the piracy rate is in excess of 90
percent, meaning that virtually all entertainment software sold
is pirated. I might add, these piracy numbers are conservative.
They don't actually include losses due to Internet piracy,
which are very hard to measure.
Some anecdotes about piracy of Lucas Arts titles can
demonstrate this reality. We have not released a single game
this year that was not available in a pirate version on the
Internet within a week of arriving on store shelves. In some
cases, the products are even available on the Internet before
they reach stores. In addition, with each new release of one of
our games, it is common to find that individuals have burned on
their home CD burners 20 or 30 copies and put them up for a
dutch auction on auctionsites such as eBay or Yahoo.
Lucas Arts also released two games to coincide with the May
release of the Phantom Menace film, and, within days, in Hong
Kong, you could get a three-pack--two games and the film--on
VCD for a mere $15.
Some of the level of piracy has actually led my industry to
change its method of producing games where, before, we would
release a U.S. version, and then we would release foreign
versions. Now, we will actually develop and localize the title
completely for all the languages in countries that we feel are
major markets, and then release it simultaneously in order to
avoid pirating in many of the foreign markets. Even that
doesn't help a great deal.
The vast majority of entertainment software piracy occurs
outside the United States and is increasingly dominated by
organized crime rings. The crime syndicates have become so big
that they market their own brands. For instance, the Players
Ring, operating out of Southeast Asia, stamps its CD's with its
own logo, which often replaces the trademarks of the true game
publishers. These international crime rings mass produce and
assemble pirated entertainment software in countries such as
China, Bulgaria, Macao, and Taiwan, and ship through nations
such as Paraguay and Panama that have spotty customs
enforcement, and, finally, sell, in addition to these
countries, in places like Russia, Brazil, Argentina, and
Indonesia, among others.
This pervasive illegal trade in U.S. entertainment software
effectively bars my industry from entering many markets. We
simply cannot compete with pirates who sell entertainment
software at a mere fraction of our break even price.
With this breadth and depth of entertainment software
piracy, the question remains, what can be done? I believe there
are a number of things Congress and the U.S. Government can do
to help us control this piracy. First, as we discussed a little
bit earlier with the U.S. Trade Representative, nations that
are a source of major piracy and in particular those identified
in the annual Special 301 report as providing inadequate and
ineffective protection of intellectual property, should not be
given preferential trade benefits under the Generalized System
of Preferences Program. Currently, the GSP Program provides
USTR discretionary authority to withhold GSP benefits from
nations that fail to provide adequate and effective protection
of intellectual property. But unlike the Special 301 statute,
the GSP Program does not define this phrase. If Congress
harmonizes the definitions, it may provide the USTR with much
clearer guidance that Congress intends countries listed under
Special 301 to be denied the GSP benefits.
A second thing which Congress can do is to continue to
support the criminal prosecution of intellectual property
theft. This is vital, because many pirates are effectively
judgment proof, and because intellectual property theft is
widely perceived to be a minor and victim less crime. In a move
that my industry welcomed and applauded, the Department of
Justice, the U.S. customs, and other Federal agencies recently
announced a Federal initiative to prosecute intellectual
property crimes, and we have talked about that some today.
Through the exercise of its oversight and appropriations role,
Congress should ensure that the executive branch remains
committed to this IPR initiative and has the resources to
pursue it.
Finally, Congress should support and encourage the
continued efforts to make meaningful international agreements
protecting intellectual property rights. Congress should
encourage the executive branch to aggressively press developing
nations, which have already had a 5 year transition period to
meet their obligations, to fully implement the WTO agreement on
trade related aspects of intellectual property rights by
January 1, 2000. There should not be any additional grace
period.
Likewise, Congress should encourage the Administration to
continue to aggressively press other signatories to ratify and
implement the World Intellectual Property Organization
copyright treaty.
I could recite the economic tax and consumer damage caused
by piracy, both in the United States and abroad, but I want to
focus on what I think is the most important issue for us, which
is that this activity hurts the creators of the intellectual
property. The creative process is injured, and the founders of
this Nation provided specific protection for intellectual
property in the U.S. Constitution, because they recognized that
the creative spirit provides great benefits to society but
needs an environment in which it can flourish, and piracy
destroys the spirit and poisons the environment for these
creators. It is for this reason, above all others, that
Congress must vigilantly adhere to its constitutional directive
to protect intellectual property.
Thank you.
[The prepared statement of Ms. Salesin appears in the
appendix.]
Ms. Ros-Lehtinen. Thank you so much.
Mr. Caruso?
STATEMENT OF CHARLES CARUSO, INTERNATIONAL PATENT COUNSEL,
MERCK & COMPANY, INCORPORATED
Mr. Caruso. Good afternoon, Madam Chairwoman and
Congressman, and thank you for the opportunity to speak with
you today about the very important issue of the need to protect
American intellectual property rights abroad.
I am Charles Caruso, the international patent counsel for
Merck. We are a U.S. research-intensive pharmaceutical company
with operations worldwide, focusing on the discovery,
manufacturing, and marketing of important medicines that treat,
prevent, and cure disease. I would like to briefly summarize my
written testimony.
Merck employs about 5,000 scientists, and, as the
Congressman noted, will spend more than $2.1 billion on
research and development in 1999. This investment has yielded
impressive results. Since January 1995, Merck has introduced 15
new medicines, an unprecedented number. Merck's commitment to
research will also bring new medicines and vaccines to patients
in the future.
Some promising new treatments currently in Merck's research
pipeline are for the treatment of cancer, depression,
infection, osteoarthritis, and pain. As a major discoverer of
vaccines, Merck is currently researching vaccines for the
prevention of HIV infection, and human papilloma virus, a major
cause of cervical cancer.
As Merck's international patent counsel, I am keenly aware
of the link between our ability to invest in research and
intellectual property, especially patent protection. Strong
patent protection is of fundamental importance to the
pharmaceutical industry, because drug research is highly risky,
time-consuming, and expensive. But many pharmaceuticals can be
pirated abroad for a fraction of the research and development
cost.
To encourage risk and innovation, a patent provides an
exclusive right to an invention for a limited time period. The
evidence demonstrates the direct relationship between strong
patent protection and pharmaceutical innovation. Because of its
strong patent laws, the United States is the world leader in
drug development.
In a 1988 World Bank study, it was estimated that about 65
percent of drug products would not have been introduced without
adequate patent protection. Try to imagine modern health care
without 65 percent of the medicines that are available today.
This hearing is particularly timely as the United States
and other members of the World Trade Organization are preparing
for the WTO Ministerial in Seattle later this year. Thanks to
the leadership of Congress and the executive branch, especially
the U.S. Trade Representative, the United States has led the
fight for strong intellectual property protection around the
world.
Two issues are of immediate concern to our industry: the
implementation of existing intellectual property agreements,
especially TRIP's, and, second, the possible attempts by some
WTO members to weaken the TRIP's agreement, particularly as it
relates to pharmaceuticals.
On the implementation issues, the pharmaceutical industry
is facing its own millennium bomb which might explode on
January 1, 2000. We are concerned that a large number of
developing countries will not meet their international
obligations to enact TRIP's consistent intellectual property
laws by January 1, 2000.
The second issue concerns the likely attempt by some
countries to define a WTO trade agenda designed to weaken
TRIP's and to create broad exemptions targeted at
pharmaceutical patents. As I have described, there is a
fundamental link between international property protection and
pharmaceutical innovation. If the intellectual property
foundation of the pharmaceutical industry is threatened, the
result will be fewer medicines and vaccines for patients
everywhere.
I urge this Subcommittee and the Congress to provide as
much support as possible to the U.S. Government negotiators in
Seattle to resist any and all attempts to reopen the TRIP's
agreement for the purpose of diminishing its standards. By
protecting innovation, patents protect innovative medicines
from foreign piracy and preserve incentives for research
leading to tomorrow's discoveries.
Thank you for the opportunity to testify and for holding
this hearing on this highly important topic.
[The prepared statement of Mr. Caruso appears in the
appendix.]
Ms. Ros-Lehtinen. Thank you, Mr. Caruso, and we would like
to now hear from Mr. Salvatore Monte, and he is accompanied by
Lieutenant General Sumner who is here as an expert witness if
needed, and the General is a friend of Congressman Dana
Rohrabacher, so we welcome both of you today.
Thank you, Mr. Monte?
STATEMENT OF SALVATORE MONTE, PRESIDENT, KENRICH
PETROCHEMICALS, INCORPORATED
Mr. Monte. Thank you, Madam Chair. Thank you, Congressman
Menendez, where ever you are, and, Mr. Hoeffel, for stepping in
for him.
General Sumner will finish off my remarks, but I would like
to thank you for this invitation to testify today on a subject
that has come to dominate my life and my wife's, Erica's, life
for the last quarter of a century.
Thanks to Congressman Menendez' effort in having us here at
this hearing today, we have renewed hope that the Government
will see to it that Ajinomoto of Tokyo, Japan pays the price
for stealing intellectual property and that we can have our
case tried in the U.S. Federal court where it belongs and not
in Tokyo where our State Department believes will be treated
fairly in a rigged judicial system that allows corrupt
practices such as patent flooding.
Now, you have my prepared statement, which highlights how
the large $6 billion Japanese company, like Ajinomoto, goes
about stealing from an American inventor, an entrepreneur like
me, by violating intellectual property rights that are supposed
to be protected by a contract written under the laws of the
United States of America, protected by a United States and
worldwide patent portfolio of 220 patents, and protected by
registered trademarks, even in Japan.
Ajinomoto stole my invention technology to provide 1,000
new jobs to Japan while Kenrich was driven into chapter 11 and
went from 90 to 30 employees. I brought some show and tells,
patents and documents, that are in front of me here so that you
can understand why this is a $250 million business for
Ajinomoto and still growing, a business that I developed
through my inventions and which they are gathering all the
benefits of it.
Our titanium-based molecules form a chemical bridge between
the inorganic and organic world. We are the titanium in the
Wilson titanium golf ball. We are responsible for the
continuous wear performance of Revlon and Cover Girl makeup. We
are in everything that is high-tech coming out of Japan--the
magnetic recording media, the Fuji audiotape. In the United
States alone there are three patents by Fuji, TDK, and Sony on
covering magnetic recording media, and I got the word from
Taiwan that they made a deal that Fuji's patent would dominate.
Canon has our technology in their patents, and they have 32
European patents alone, one in Germany that runs 132 pages
long.
I have here also a U.S. patent issued to Xerox on digital
photocopier toner based on a gamma ferric oxide imported from
Japan from Toda Chemicals, and the gamma ferric oxide is
treated with a 0.5 percent of my invention technology called
Ken-React, KR 38S.
Here is how it works. I was forced to license the product
to Ajinomoto in Japan. Ajinomoto then makes the KR 38S on the
license, sells it Toda Chemicals in Japan. They treat the
chemical on the gamma ferric oxide. They give it to Xerox
researchers in the United States They come up with a new and
improved, best-ever digital computer. They file a U.S. patent.
They buy the stuff from Toda--they buy the chemical from Toda,
the gamma ferric oxide. Ajinomoto sells the KR 38S. Ajinomoto
doesn't report the sale to Kenrich. We can't get in and audit
their books. We tried two and a half years, spent $62,400 with
Arthur Andersen, and the net result is we get zero royalties.
I also have here a U.S. patent issued at the time--filed at
the time we went chapter 11, and Gordon Sumner here--General
Sumner is here to explain how we lost $10 million in lyco 12
sales because of the collusion with the Japanese and top-level
Pentagon officials.
I would like to count some of the ways that Ajinomoto uses
the Japanese mercantile system to steal our intellectual
property, and they use patent flooding as one of their
techniques. Japan is a closed market; you really can't sell
into it. I didn't want to contract in Japan. I had to have a
contract if I wanted to do business. I could go on about how
that occurred, but what they did is they forced me into dumping
down my 43 products that I was importing through a trading
company into 15 on the pretension that they were going to
register those 15, and that would cost a lot of money. I found
out after I spent $1,700 that we are not registered in Japan,
and only 2 of the 15 chemicals ever got registered. The whole
process was a sham. There is here a kereitsu report which shows
you all the interlocking of the Japanese kereitsus and how
because of they work together they can patent flood and use
interlocking arrangements so that Nippon Soda, Tokyoma Soda,
Mitsui Mining and Smelting, Kuake, and Fine Chemicals, all in
cooperation with Ajinomoto, can knock off my patents.
When you mentioned that there were 40 patents issued, those
were only the ones issued to Ajinomoto. There are literally 600
flooded patents on my title fossfatal titinates alone which are
used in the magnetic recording media and in videotapes. The
USTR has an annual report on foreign trade barriers. Japan has
the largest section. Everything that Ajinomoto did to us is
mirrored in that report. We have been going on with this case
for 9 years.
Publicly, when Congresswoman Bentley gave a speech on the
House floor on October 1, 1990 attacking Ajinomoto for what
they were doing to us, within 6 weeks, the Daitchi Kangi Bank,
which Ajinomoto's kereitsu bank, bought my bank through CIT,
and they called my notes and put us into a credit squeeze that
put us into chapter 11. That is the hard ball they play. With
Japan, business is war, and CIT gained control of my accounts
receivable financing, my customer list, and reduced my sales
from $12 million, to $6 million in 6 months; caused me to knock
off 60 people, and reduce my sales force from 9 people to 1
person.
We lost the lyco 12 business that I had spent from 1982 to
1990 developing with the U.S. Army through a defeat of our
Public Law 85-804 bid in 1981. A phone excuse was given that
capasi could replace the lyco 12, and that has since been
proven to be a lie. We have a report into the Chairman of the
Joint Chiefs of Staff and the Inspector General of the Army,
and General Sumner talked to the Inspector General this
morning.
I have other stuff I could tell you that just goes on and
on about trademark stealing, but you asked me today to comment
on patent flooding. The ludicrous part of this whole exercise
is that we talk about globalization of intellectual property
laws and patent laws, and we still have this dichotomy of the
Japanese filing valid U.S. patents according to the doctrine of
equivalent, and then in their own country they patent flood to
beat the band, and the allow themselves to play both sides of
the street, and I don't understand how we can tolerate any kind
of globalization or harmonization of intellectual property laws
as it relates to patents unless we address primarily the issue
of patent flooding, because that is the vehicle by which they
undermine every effort you have in order to gain effect of your
intellectual property.
Specific to Kenrich, we have a bill in the Congress right
now which we would like to have that would right some of the
wrongs of a 1985 Supreme Court decision called Mitsubishi v.
Soler that will enable Kenrich to bring our Ajinomoto case away
from where it is now in the Japanese Arbitration Association in
Tokyo--and that is another story--back into U.S. Federal court
where we can establish case law on patent flooding and right
some of the wrongs that are going on.
I have other ideas, but I really would like to turn the
balance of my time over to General Sumner so he can make some
comments for me. Thank you for having me here today, and I
would be pleased to answer questions in detail. There is a lot
of stuff I have here I could talk about.
[The prepared statement of Mr. Monte appears in the
appendix.]
Ms. Ros-Lehtinen. Thank you so much, and it is certainly a
tragic story. Thank you, Mr. Monte, for sharing that with us.
General Sumner?
STATEMENT OF LIEUTENANT GENERAL GORDON SUMNER
General Sumner. If I can this on--can you hear me all
right?
All right. Over the past 56 years, I have had the
opportunity to testify before the House, and I appreciate the
opportunity, Madam Chair, to do this, and other Members of the
Committee.
I can't think of a subject that is more important, not only
to the country but to the national security of the country than
this subject today. I have been involved in this particular
case for some over 10 years now, and I would make the point
that the wealth of this Nation is not found in the smokestacks
in the industrial base; it is our intellectual property. That
is the wealth of the Nation, and if we don't begin to
understand this, then the young people sitting here in this
room are going to find that the country is going on to the ash
heap of history, because we are going to be overtaken by people
that are not necessarily our friends nor do they have the same
view or value system that we have.
As an old soldier, I became particularly outraged as I
watched what was happening, and we pick on the people oconus,
overseas, the other countries. We have the same pirates here in
this country doing the same thing. They found out that the
Japanese could get away with it--``Why don't we do here?'' They
have done it. They have taken Sal's patents and refiled them.
They were under security restrictions. They took those security
restrictions away, and I have talked to the Inspector General
of the Army about this at length.
But we really have a major problem here, and one of the
products that Mr. Monte has developed is used in the
insensitive high explosives. The insensitive high explosives
are important not only to the conventional forces but also very
important to the nuclear forces. Now, we have just gone through
a whole bruha up in Los Alamos, and, incidentally, my company,
I have over 100 of what I call the coneheads, and I think Sal
would qualify. These are chemists, physicists, computational
experts, et cetera. They have looked at his products, and the
Los Alamos National Laboratory looked at it, and said, ``This
is important for the insensitive high explosive we use in our
nuclear weapons.''
It is not only just the cosmetics, and it is not just the
tapes and the superficial things; it is the basic science that
is being put at risk here. When someone like Sal Monte figures
out a way to bond organic and inorganic materials, this is a
worldwide application, and it has very important national
security implications.
I sit here and listen to the words of the Administration,
and it is not only this Administration, it is past
Administrations. The words are great, but when it gets down to
the point where you have a real case to go to court, our State
Department steps in and says, ``Oh, no, we can't hazard our
relationships with an important trading partner over some
little company up in New Jersey.'' Of course, they don't
understand what it is all about in the first place. But it
leaves the little entrepreneur hanging out to dry. If you look
back at the history of the last 10 years--and this is not to
take anything away from Merck or any of the other major Fortune
500 companies--it has been the little entrepreneur with the
bright idea who is going to change the world, and the first
thing you know is his idea is stolen, and what does that tell
the young people sitting here in this room? Boy, you better be
careful.
I don't see the executive branch of this Government--and I
said back over several Administrations--doing anything about
it. It is up to the Congress to do something about this and let
the judiciary get their teeth in this, and let us bite
somebody, and bite them hard; make it happen.
I appreciate the opportunity, again----
Ms. Ros-Lehtinen. Thank you.
General Sumner [continuing]. To talk to this group----
Ms. Ros-Lehtinen. I agree. We are here to bite.
Thank you so much, General; we appreciate it.
General Sumner [continuing]. I hope we can make something
happen. Thank you.
Ms. Ros-Lehtinen. Thank you so much.
Mr. Monte. Thanks, General.
Ms. Ros-Lehtinen. I would like to ask whoever would like to
respond, in the worst violating countries, we have seen that
there could be parallel economies at work; that is, illegal,
international trade coinciding with its legitimate counterpart,
and does illegal trade tend to dominate in those cases? What
has been your experience, and do you believe that this actually
demonstrates that the Government is actually complying being
part of this problem in it involvement, corruption, or at the
very least neglect, and do you agree or disagree that piracy
could only be in place in these countries where there is no
political will to end it?
Mr. Salesin. Yes, I would like to take a--attempt to answer
that question. One of the issues facing the pharmaceutical
industry is this issue of parallel trade where goods that are
sold in one country are exported from that country and
reimported in another country, and that has basically been a
serious problem. Intellectual property is designed to give
access to a single market, so the United States patent protects
the market of the United States; the Canadian patent protects
the Canadian market. This concept of parallel trade runs
counter to that territorial theory of patent protection.
One of the problems that the pharmaceutical industry has
faced is that counterfeit goods ride on the back of parallel
traded goods. In fact, what we have seen through a
investigative inquiry that we have undertaken, something called
a pharmaceutical initiative, parallel trade is the door by
which counterfeit goods enter into trade, so there is an
attempt to pass these counterfeit goods off as legitimate
goods.
The problem we face is basically one of parallel trade, and
a concomitant problem is counterfeiting. That is something the
United States does not want to confront in any legislation in
the United States to allow parallel trade is something that is
contrary to the public health interests of the people of our
country.
General Sumner. Could I make a comment on that, Madam
Chair?
Ms. Ros-Lehtinen. Yes, General.
General Sumner. I think a perfect example of this is Panama
where you have the free trade zone at Colon and this parallel
trade he is talking about where it moves from one country into
a free trade zone, and because Panama is such a small country
and because you can really focus on that, I think it is worth
looking into. The Panamanian Government--the past Panamanian
Government, not the new government, I think has been fully a
partner in this conspiracy.
Ms. Ros-Lehtinen. Thank you. Mr. Monte?
Mr. Monte. I have some problems that are like Merck's, but
unique in their own way. You understand that if you go into
market a chemical in today's global economy, there is an
environmental awareness as to the toxicological effect of that
chemical. You have to disclose the chemical structure. Once you
disclose the chemical structure, you have told an intelligent
scientist how to make it. Before you disclose the chemical
structure, you have to file your patent position.
The way the patent laws are set up on a global basis, you
file in the United States, then you PTC it, and you follow
within the year, filing it internationally, which today means a
position of at least 72 countries. The simplest idea, you are
in for $75,000 just on international patent filings. You speak
about me being a small guy, on my last invention, which was
making clear plastic permanently anti-static, I spent over
$110,000 just on the intellectual property position, haven't
got a cent out of it yet.
The problem I have is that I have to--once I disclose the
chemistry of the molecular structure of you achieve this anti-
static effect, the Japanese copy it, they put it into their
plastic. You go prove that your stuff is in there when they
patent flood around it. You do a forensic analysis of it with
atomic absorption, and you chemically destroy the product in
the analysis, so you come up with the arid phosphato group, the
arid sulphano group, but is it yours or is it the 600 different
patents flooded around it? That is the issue. That is the
problem. How in the hell do you defend that? How do you go at
that, and how do you stop them from exporting to all of the
other countries?
Everything--I mean, we code indium oxide and make indium
oxide functional. What the hell is indium oxide? It is what
makes flat panel screens possible, and this demonstration you
saw from the Department of Commerce is what indium oxide does.
My stuff is on the indium oxide. You don't make flat panel
screens in the United States of America; you make them in
Southeast Asia. They come out of Japan or on the Japanese
companies in other Southeast Asian countries. My stuff is in
all that stuff. I don't get anything out of that.
How do you police that? How do you control it when they are
allowed to patent flood, they are allowed to have this sham of
having their intellectual property people in Japan take these
small patent and build around your patents, and then when they
come over to the United States the play the game by the United
States rules, and we allow this parallelism to go on? They can
play the game properly if they are forced to. They are not
forced to, so why should they change? They have got a
mercantile system, a fortress Japan. You can't get at them in
their own judicial system. You can't win in Japan. You can't
win in Japan.
What have you got left? You come here to the Congress and
you talk about it, and you talk about it, and you talk--I have
been talking about it for 10 years. When am I going to get what
is coming to me? When are we going to change the law that we
have asked--Congressman Menendez has put together, Senator
Torricelli has Co-sponsored? All you got to do is pass the law
and get on with it, and we will get this thing straightened out
in U.S. Federal court. We have got everything ready to go. I
have got 37 boxes of file data like this that proves that I
have been screwed, and I don't get a chance to talk about it.
We just talk about principles, and the State Department comes
down and testifies against me. I don't get it.
Ms. Ros-Lehtinen. Do you believe that American interests in
international intellectual property rights are being sacrificed
in order to sustain or expand commercial relations with these
violator countries, whether it is Japan, China, Russia?
Mr. Monte. And it started with Zenith and TV screens, and
it goes on. All of it coming out of South Korea have my stuff
on it. We don't control the video technology of manufacturing.
Even Zenith now makes their tubes in Mexico. We are funneling
out all that high-tech stuff offshore. In automotive it is
following the path of least cost of manufacturer. If you want
to talk to Mattel, you don't go anywhere in the United States.
You don't go to Fisher Price up in Buffalo; you go to Tiajuana.
That is the way it works.
Ms. Ros-Lehtinen. I would like to recognize former
Congresswoman Helen Bentley in the audience. I know that Mr.
Monte had recognized----
Mr. Monte. My champion.
Ms. Ros-Lehtinen [continuing]. In his statement. Thank you
so much, Helen, for being with us.
Mr. Hoeffel?
Mr. Hoeffel. Thank you, Madam Chairman. I didn't recognize
Congresswoman Bentley. It is an honor to see you, and
congratulations for taking up Mr. Monte's case.
I want to thank all of the panel for being here to talk
about intellectual property right problems.
Mr. Monte, I had a prepared question here to--that
suggested that you wanted to--that the State Department, at
least, wanted you to take more legal action in Japan----
Mr. Monte. Yes.
Mr. Hoeffel [continuing]. But from what you are saying, you
don't want to do that. You want to come back to Federal U.S.
district court.
Mr. Monte. The problem with my issue is that you glaze over
with all the detail--they say the devil is in the details. We
negotiated a 1980 contract. Darby & Darby was my attorney. Burt
Lewin, an excellent chemical engineer--the patent is filled
with all the boilerplate that any genius can put into it from
American patent and intellectual property law.
In the agreement, you have two levels. It is written under
the laws of the United States, you have two levels: the Federal
court jury trial, and you have arbitration. You put arbitration
in as a clause, because not every disagreement you anticipate
is going to be a Federal court jury trial level, and
arbitration is cheaper so you put it in. According to the
Japanese, you put it in according to the 1952 United States-
Japan bilateral trade agreement on arbitration. That is 1980.
1985, Mitsubishi and Chrysler have a fallout on an
agreement. It goes to arbitration. The American company,
Chrysler, loses. Chrysler says, ``Screw it. It is an American
contract, American law.'' They take it to the U.S. Federal
court. They win the case. The Japanese Mitsubishi says, ``That
is not fair. Every time we have an arbitration and we lose with
a U.S. Federal Government contract, we lose because of double
jeopardy before an American jury. We think that is patently
unfair. Arbitration clauses should be binding.'' In the
Mitsubishi-Soler case the Supreme Court ruled on a split
decision that arbitration is now binding in all contracts.
So, ex-post fact, 5 years later, I am now bound by this
Supreme Court decision, so now I have to have my case before
arbitration. I am in chapter 11. I am telling everybody we can
pay back everything we owe the creditors if we would just get
our money from Ajinomoto. They say, ``How are you going to
prove that?'' We have got to audit the books, right? The
Federal bankruptcy judge orders a budget of $40,000 to conduct
an audit. We get Arthur Andersen to agree that the could do it
in Tokyo without conflict.
Two and a half years later, $62,400, we don't get a
certified statement. We have no clue as to what the books are
of Ajinomoto. They give us all kinds of garbage excuses that
are really insults to your intelligence like they don't have
computers that can handle it; they didn't split the contracted
goods separate from their own reports, so they would be----
Mr. Hoeffel. Let me ask you this: Where can you best defend
your rights?
Mr. Monte. In U.S. Federal court. So, what happened was
we--Donald Diner from O'Connell & Hanna at the time decided,
``OK, let us go to arbitration. Let us just focus on the fact
that we spent $62,400. Let us do an audit. We have a right to
an audit.'' We conducted the audit; we spent the money; we
didn't get an audit; our contract has been violated. It is
pretty clear, right? We won the argument before the American
Arbitration Association, but they said because it concerned an
audit--concerns the books of Ajinomoto, they are a $6 billion
company, we are going to move the venue to the JAA in Japan and
Tokyo, because you mutually respect each other's venue. By the
way, we found out last year that the panel was two Japanese in
New York City out of three, and I lost 2 to 1 on the vote.
Now I am supposed to go to Tokyo, and I said, ``Hell, I am
not going to Tokyo. This is my invention. It is a U.S.
invention under U.S. law, governed by U.S. law, and I am going
to Tokyo to defend myself?'' I said I wasn't going to go and
Congressman Menendez put together a bill that looked this
oversight of Mitsubishi-Soler, and said, ``OK, let us get this
oversight corrected and open up a 6 month sunset provision to
allow me to into Federal court.''
We had it all set up last year before the Intellectual
Subcommittee--Judicial Committee on Intellectual Property to do
that. The State Department stepped in and said it would be
terrible to Japanese-U.S. trade relations to have this ad hoc
bill passed, and it would be disharmonious to our relationship,
and I have been stymied ever since.
Mr. Hoeffel. All right. I understand.
Mr. Monte. You understand? I mean, that is the explanation.
Mr. Hoeffel. Thank you for the explanation.
Let me ask Mr. Caruso, I assume Merck has the same kinds of
problems that Kenrich Company faces in Japan--you must have
them all over the world. How do you avoid them, if you do, and
do you have this--does Merck have advice for smaller American
companies on how to deal with this?
Mr. Caruso. We deal with these issues of enforcement of
intellectual property rights on a worldwide basis, and it is,
frankly, a very difficult task. Part of it includes education
of people in the country to recognize the benefits of
intellectual property protection. We are--through this TRIP's
agreement, through the World Trade Organization, I think the
United States is involved in a massive global education
campaign to get people to recognize the benefits of
intellectual property and how that drives that innovation.
That is very good for the long-term, but the question is
what happens in the short-term? The answer is there is you need
to employ local counsel to enforce your intellectual property
rights and to vigorously do the job to get the protection that
your entitled to. Merck--we have had some experiences that have
turned out in a positive way; we have had other experiences,
particularly in some of the European countries where we have
had primarily process patents, not product patents, covering
the pharmaceutical product. Because we were limited to methods
of manufacturing, the local companies say, ``We don't use your
method of manufacturing. We use an alternate one.'' The
question became, ``What method do you use? Have the court
reveal to us what manufacturing method is utilized.'' We have
been in litigation in Slovenia for 6 years, and the court still
has not forced the third party copier to reveal what
manufacturing process he uses.
We have enforcement problems. The answer is vigorously
enforce your rights; get local counsel; utilize the U.S.
Government to help assist you, and continue the education
efforts.
Mr. Hoeffel. Of course, the only drawback with that if you
are a very small company is it costs a lot of money.
Mr. Monte. Oh, boy, does it.
Mr. Hoeffel. Right. One quick question for Ms. Salesin--
thank you, Mr. Caruso. Mr. Caruso led into my question by
talking about education and letting people know. Does the
entertainment industry have a particular ability to help here?
I understand the problems you have with pirating, but of course
you guys have a wonderful ability to educate and so forth. Can
the entertainment industry be of help to the Government in
educating and trying to correct this?
Mr. Salesin. As an association, we certainly are trying to
education people through our web site, through our programs in
foreign countries, with the foreign licensees trying to make
people understand that the piracy of our property is not a
victim less crime, that people really do need to get some
return out of their efforts or else jobs will be lost, as you
see. We have, in a sense, the exact same problem, but we are
trying to educate. I don't know. If you are asking us whether
we can help, I am sure we will be willing to try to help.
Mr. Hoeffel. Some television ads in American would go a
long way toward educating our constituents and us regarding the
problem, and obviously that costs money, but you guys have the
money, and you have got the talent and the spokes people that
could really grab public attention.
Mr. Salesin. I would say that our association is looking at
an education campaign. It is not a simple thing to do. A lot of
people don't really understand that when they copy a piece of
software, especially given the U.S. market if you are talking
about educating in the United States, that that is a crime,
that people do get hurt, and it is a very expensive undertaking
to try to educate the entire United States on that point.
Mr. Hoeffel. Certainly the first obligation is ours as a
Government, but I think the entertainment industry could
certainly help.
Mr. Salesin. I think one aspect of education that we are
trying, frankly, is to bring an enforcement case in the United
States on the civil side to try to educate people that there
really are victims, and we have done that as an association,
but in attempting to do that, we also would like the help of
the Government in bringing criminal actions, which are much
more effective because they get much more coverage; they have
much better law enforcement opportunities to seize and to
search people's residences and things like that. So, we do need
the Government's help. We also are trying to do it on our own.
Mr. Hoeffel. Very good.
Madam Chairman, thank you.
Ms. Ros-Lehtinen. Thank you so much.
Mr. Sherman?
Mr. Sherman. Thank you, Madam Chairman. Thanks for having
these hearings. Obviously we need to reorient our foreign
policy establishment. As Madam Chair has heard me say before,
their attitude tends to be that we would like the honor of
defending foreign nations for free, and then in return for that
honor, we would like to make major trade concessions. If this
was a wise policy during the Cold War or not is not longer
relevant to us, but it is certainly not a wise policy today.
I am particularly interested in the bill that you referred
to that was carried by Mr. Menendez. If you could describe that
bill for me and how it gave you access to the U.S. courts?
Mr. Monte. The bill has a 6 month sunset provision, I
believe it is, to simply address the specifics of the
Mitsubishi-Soler case law and say, in effect, that all
bilateral trade agreements with Japan prior to 1985, if
affected by this binding and mandatory arbitration ruling, have
an opportunity to file the case in the U.S. Federal court. It
is pretty simple; it is like two paragraphs, end of story.
Mr. Sherman. I guess our risk was that Japan, which enjoys,
what is it, a $60 billion trade surplus with the United States
would somehow think that our rules were unfair?
Mr. Monte. Yes, right, and that we would be treating them
unfairly. Even though the State Department came down and spoke
out against Kenrich, which I really was infuriated over, they
couldn't produce a number as to how many companies would be
involved if this law were passed. How many companies, in fact,
have a bilateral trade agreement with Japan prior to 1985 that
have been affected by this ruling of mandatory arbitration?
Maybe two? One? Me, for sure. I am raising my hand, ``I need
help, I need help from my Government,'' and my Government is
standing up there saying, ``No,'' and they have stalemated me,
and Ajinomoto's people have told my attorneys we don't have a
prayer in hell of getting that law passed. They are confident
they are going to be able to stalemate me and grind me into
bankruptcy. They are going to win.
Mr. Sherman. Given the natural tendency of this Congress to
simply go along with what the State Department suggests, they
may be right. Others who have served in Congress longer who
might know what the chances of getting this bill passed, but
apparently they weren't good when it was raised last year with
the Judiciary Committee.
I am particularly concerned with Canada's attempt to take
our entertainment industry. They do so with a unique
combination. On the one hand, they won't allow our product on
their stations, because they want to defend their cultural
sovereignty, or so they say. But, at the same time, they are
happy to make--to give tax incentives for American content,
movies, to be made there for the American market, many of which
have strictly U.S. themes. I think one of them was the
President's wife; another one was the Texas Rangers. It wasn't
the Prime Minister's wife; it wasn't the Calgary Rangers; there
were no Mounties in any of these films. Perhaps our Mr. Salesin
can comment on the efforts of Canada to restrict U.S. product
while at the same time entice American producers to make them
American content product in their country.
Mr. Salesin. Your problem is a bigger one than what just my
industry deals with here. You are talking about television; you
are talking about film.
Mr. Sherman. Yes, right.
Mr. Salesin. I don't----
Mr. Sherman. I realize I am talking about your cousins, not
about your----
Mr. Salesin. Right, and I don't fault the Canadians for
trying to create an impressive software industry if in fact
they are trying to do it, but I think what is important here is
that we are a huge part of the American economy, a huge part of
the export economy, and we need the support of the Government
to try to protect that in the foreign countries. I think you
have hit a very good point. I just don't know the specifics of
that tax issue.
Mr. Sherman. This is going to shock the Committee: I have
run out of questions.
Ms. Ros-Lehtinen. Thank you so much for your expert
testimony. We look forward to hearing more about the bill from
Mr. Menendez, and thank you so much for your patience today.
The Committee is now adjourned.
[Whereupon, at 3:42 p.m., the Subcommittee was adjourned.]
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A P P E N D I X
OCTOBER 13, 1999
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