[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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