[Senate Hearing 107-457]
[From the U.S. Government Publishing Office]
S. Hrg. 107-457
EXAMINING THE THEFT OF AMERICAN
INTELLECTUAL PROPERTY AT
HOME AND ABROAD
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON FOREIGN RELATIONS
UNITED STATES SENATE
ONE HUNDRED SEVENTH CONGRESS
SECOND SESSION
__________
FEBRUARY 12, 2002
__________
Printed for the use of the Committee on Foreign Relations
Available via the World Wide Web: http://www.access.gpo.gov/congress/
senate
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COMMITTEE ON FOREIGN RELATIONS
JOSEPH R. BIDEN, Jr., Delaware, Chairman
PAUL S. SARBANES, Maryland JESSE HELMS, North Carolina
CHRISTOPHER J. DODD, Connecticut RICHARD G. LUGAR, Indiana
JOHN F. KERRY, Massachusetts CHUCK HAGEL, Nebraska
RUSSELL D. FEINGOLD, Wisconsin GORDON H. SMITH, Oregon
PAUL D. WELLSTONE, Minnesota BILL FRIST, Tennessee
BARBARA BOXER, California LINCOLN D. CHAFEE, Rhode Island
ROBERT G. TORRICELLI, New Jersey GEORGE ALLEN, Virginia
BILL NELSON, Florida SAM BROWNBACK, Kansas
JOHN D. ROCKEFELLER IV, West MICHAEL B. ENZI, Wyoming
Virginia
Edwin K. Hall, Staff Director
Patricia A. McNerney, Republican Staff Director
(ii)
C O N T E N T S
----------
Page
Allgeier, Hon. Peter, Deputy U.S. Trade Representative........... 9
Prepared statement......................................... 12
Gordon, John S., U.S. Attorney, Central District of California... 25
Prepared statement......................................... 27
Holleyman, Robert, II, President and CEO, Business Software
Alliance--Statement Submitted for the Record................... 5
Larson, Hon. Alan P., Under Secretary for Economic, Business, and
Agricultural Affairs, Department of State...................... 19
Prepared statement......................................... 21
Lowenstein, Douglas, President, Interactive Digital Software
Association.................................................... 62
Prepared statement......................................... 64
Raikes, Jeffrey, Group Vice President, Productivity and Business
Services, Microsoft Corporation................................ 41
Prepared statement......................................... 43
Rosen, Hilary, President and CEO, Recording Industry Association
of America..................................................... 56
Prepared statement......................................... 59
Valenti, Jack, President and CEO Recording Industry Association
of America..................................................... 48
Prepared statement......................................... 53
Appendix
``Theft of American Intellectual Property: Fighting Crime Abroad
and At Home,'' a report from Senator Joseph R. Biden, Jr....... 93
(iii)
EXAMINING THE THEFT OF AMERICAN
INTELLECTUAL PROPERTY
AT HOME AND ABROAD
----------
Tuesday, February 12, 2002
U.S. Senate,
Foreign Relations Committee,
Washington, D.C.
The committee met, pursuant to notice, at 2:33 p.m.
inBuilding SD-419, Hon. Joseph Biden (chairman) presiding.
Present: Senators Biden, Boxer, Smith, and Allen.
The Chairman. The hearing will come to order, please. I
welcome our witnesses and all our guests. I welcome you to
today's hearing on the theft of American intellectual property,
fighting crime at home and abroad.
While this hearing is taking place here in the Foreign
Relations Committee, I am also wearing my hat today as chairman
of the Judiciary Committee, Subcommittee on Crime and Drugs,
because we are discussing an issue that is not only a matter of
international dimension, but it is also a crime, pure and
simple.
The New York Times recently reported that illegal copies of
the ``Lord of the Rings,'' a film just recently released in
movie theaters here in the United States, are already on sale
in the streets of Jalalabad, Afghanistan. Windows XP was
available for illegal use on the streets of Moscow two months
before it was released in the U.S. by Microsoft. Every episode
of ``Seinfeld'' is now available for download free to anyone
with access to the Internet. In September of 2001 alone, 1.5
million songs were downloaded by Web sites which enable users
to steal music. Video games that would cost $50 each in the
United states are sold for the equivalent of 75 cents on the
streets in some of China's cities every day. Thieves steal
millions of dollars of American intellectual property from its
rightful owners, and hundreds of thousands of American jobs are
lost as a result.
American innovation and the protection of innovation by the
government has been the critical component of America's
economic growth throughout our history. The founding fathers
were pretty smart, and they had the foresight to provide for
protection of intellectual property, giving Congress the power,
``to promote the progress of science and useful arts'' by
providing copyrights and patents.
The Federal Government's vigilance in shielding
intellectual property rights remains essential. Innovation
would slow, business would suffer, and jobs would dissolve if
technological advances were left unprotected. The American arts
and entertainment industry could not survive without the
ability to protect and earn income from its ideas. Would U2
continue to make records and go on tour if all the records,
videos, and fan paraphernalia were given out for free? As much
as they love music, they might, but it would not be fair.
Copyrights and trademarks mean nothing if government
authorities fail to enforce the protection they provide
intellectual property owners. It has been estimated that
software piracy alone cost the U.S. economy over 118,000 jobs
and $5.7 billion in wage losses in the year 2000 alone. Even
more, the International Planning and Research Corporation
estimates that government loses more than a billion dollars
worth of revenue as a result of piracy.
To put this in perspective, with a billion dollars in
additional revenue, the American Government could pay for
childcare services of more than 100,000 children annually.
Alternatively, one billion dollars could be used to fund a
Senate proposal to assist schools nationally with emergency
school renovation and repairs, and a thousand other things we
could usefully use it for.
This is a crime, a crime against which we have made some
progress, but against which we can do more. The purpose of
today's hearing is to focus on this crime, review what is being
done to fight it, and discuss what more can or should be done
in light of the continued growth of piracy and counterfeiting
abroad and at home.
Fighting crime is not merely in the interest of the United
States. As software and entertainment companies begin to
flourish in foreign countries, foreign governments are starting
to realize that intellectual-property theft possesses a
significant economic threat to them. The Indian film industry,
as it matured, became increasingly aware that its product was
being pirated. It successfully pushed the Indian government to
institute adequate protections for intellectual property. One
of the challenges we face is to help other countries follow in
India's footsteps.
When an American owns property, the government has the
responsibility to protect that property from theft. When that
property is an idea, it deserves our protection no less than if
it were land or a personal object. Who among us would want to
see expanded the efforts that have been made by the pirates
against those who expend so much effort, the effort required to
develop a new product, if the government were not prepared to
punish those who would steal it?
If we want to protect American innovation--and, by
extension, American jobs--we need to maintain a vigilant stand
against intellectual-property theft. American intellectual
property is of immense value, perhaps our most valuable
resource. Not to protect it is the equivalent of letting coal
be stolen from our mines or water taken from our rivers. How
will we protect the creative genius of America? How will we
preserve the creativity and experimentation that are America's
inexhaustible oil wells?
I look forward to discussing these and other questions
today. If nothing else, it is my hope that this hearing will
educate all of us on the need to respect intellectual property
rights in the cyber age and the particular challenge posed by
high-tech pirates.
A Federal judge, in a recent court opinion upholding the
constitutionality of the Digital Millennium Copyright Act,
captured perfectly, in my view, the challenge we face. He said,
``We live in an age in which the excitement of ready-access to
untold quantities of information has blurred, in some minds,
the fact that taking what is not yours and not freely offered
to you is stealing.''
I would like to thank all of our witnesses for taking the
time to join us today. I look forward to this hearing.
At this time, I would like to recognize Senator Allen, who
also has an opening statement, and then I will introduce the
witnesses.
Senator Allen. Thank you, Mr. Chairman, and I want to
thank you particularly for holding this hearing today. I think
it is terrific to see the Foreign Relations Committee
discussing the protection of intellectual property, both
domestically and internationally.
As we try to spread American ingenuity and innovation
abroad and have that innovation benefit those in other
countries, one of the impediments to our technologists and
those who develop it is the concern that it will be stolen, it
will be copied and they will not get a return. And then some of
that copyrighted material or software will come back into this
country, obviously at a lower price than what would be sold to
consumers.
So this is an issue, obviously, of concern to the Commerce
Committee, to the Judiciary Committee, and, yes, also to the
Foreign Relations Committee, because this very much deals with
some of the intrigues and concerns that we have with certain
countries around the world.
As you know, Mr. Chairman, I am chairman of the Republican
High-Tech Task Force, and one of the principles of our task
force is to enhance the deterrents to Internet piracy and
counterfeiting of intellectual property and also bolstering
international cooperation against computer crimes. This hearing
will be very helpful in advancing this goal, which I know is
shared by many members of this committee.
And, indeed, I agree with what you said, Mr. Chairman, on
the issue of property rights when you talk about the rule of
law and it is part of our Constitution that people's property
is to be protected. And, indeed, in a draft statement report--I
will quote from your report, Mr. Chairman:
American innovation and the protection of that
innovation by government has been a critical component
of American economic growth throughout our history. The
founding fathers had the foresight to provide for
protection of intellectual property, giving Congress
the power to, quote, ``promote the progress of science
and useful arts by providing copyrights and patents.''
And obviously our vigilance as a government in
protecting these copyrighted acts or this intellectual
property has an impact on the growth of innovation, it
has an impact on business and investment, and it also
clearly has an impact on jobs in this country.
Now, the unauthorized use of intellectual property is a top
concern for publishers and users. New technologies and
distribution models are--made possible by the Internet--are
wonderful, but they also have created opportunities for
companies in the software and information industries to get
jobs and new ideas. Unfortunately, the wrong side of it, it has
become a fertile hunting ground for online pirates.
First, let me mention some successes of the Bush
administration. In an effort to combat piracy, the Department
of Justice last month announced the formation of one of the
largest cyber-crime units in the country. It is comprised of
six assistant U.S. Attorneys who will specialize in computer
and intellectual property crimes in San Francisco, Los Angeles,
San Diego, Atlanta, Boston, New York, Dallas, and Seattle. And
I am pleased we have today with us U.S. Attorney John Gordon
who will give us some of the details, I suspect, as the battle
goes on in the front lines in the Los Angeles area.
Our U.S. Customs Office is engaged in Operation Buccaneer,
the largest anti-piracy operation ever, which is bringing down
a Trans-Atlantic ring of hackers believed to be the major
providers of illegal software on the Internet. We are told that
the hackers who are the target of this effort are responsible
for 95 percent of all pirated software available online,
causing at least $1 billion in lost revenues each year.
But lost revenue to content producers and content providers
is only one part of the problem. Piracy is not a private
offense. It hurts everyone. Consumers have to pay more for
their product. Producers may be less inclined to be as creative
with their artistic endeavors. Software engineers will either
have less compensation or possibly less incentive to be
innovative and creative when they know their product cannot be
protected. And all of this, obviously, adversely affects our
families, good-paying jobs, and communities all across our
country.
I hope, Mr. Chairman, that the product of this hearing will
be an answer to the question that many Americans may ask,
``Well, how does the sale of a pirated video in China hurt
me?'' I understand that Jack Valenti, in the second panel, will
show us some pirated videos that were recently purchased in
China, and I know our other witnesses will focus on the cost of
piracy to people here and abroad.
With these distinguished people on both panels, who are
very knowledgeable, have good insight, I hope that they will
relate how the harm from the piracy of intellectual property
actually harms American people in a way that normal people
that--in other words, non-lawyers--would understand.
People, when you are talking about trademarks, intellectual
property means a lot of things. It is trade names, trademarks.
It is licenses, it is copyrights, it is patents. The
infringements or the theft of any of those or the unauthorized
use has an impact. And the better you can explain how that
affects Americans and their jobs and our prosperity and our way
of life, the better we will be to get the public support behind
this important issue.
I would like to add two final points, Mr. Chairman.
I was pleased by yesterday's news report on today's hearing
and by your call for stronger law enforcement. I spoke with
Jeff Raikes--Jeff Raikes' colleagues in Microsoft in Redmond,
Washington--last month, and they shared with me a proposed
modification to Section 2318 of Title 18 of the U.S. Code,
which will strengthen anti-tampering legislation to protect the
authentication features of copyrighted works. I am eager to
work with you and our colleagues to enact this proposal into
law.
Finally, I would like to submit, for the record, a
thoughtful written statement by Robert Holleyman on behalf of
the Business Software Alliance, which is a strong voice of the
world's software and Internet industry and a leader in anti-
piracy efforts.
[The prepared statement of Mr. Holleyman follows:]
Prepared Statement of Robert Holleyman II, President and CEO, Business
Software Alliance
Mr. Chairman and Members of the Committee,
On behalf of the members of the Business Software Alliance (BSA)
\1\, I submit this statement concerning a related threat to the
American software industry, software piracy and counterfeiting. BSA
members have been fighting the piracy of our products since our
companies were founded. BSA pursues both criminal and civil cases on
behalf of its members in over 65 countries around the world. Unlike
most other forms of intellectual property, software has always been
created in digital form, making it relatively easy to produce perfect
duplicates. Since software is a high value good, it also represents the
greatest share of pirated American intellectual property on a dollar
basis.
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\1\ The Business Software Alliance (www.bsa.org) is the voice of
the world's software and Internet industry before governments and with
consumers in the international marketplace. Its members represent the
fastest growing industry in the world. BSA educates computer users on
software copyrights; advocates public policy that fosters innovation
and expands trade opportunities; and fights software piracy. BSA
members include Adobe, Apple Computer, Autodesk, Bentley Systems,
Borland, CNC Software/Mastercam, Compaq, Dell, Entrust, IBM, Intel,
Intuit, Macromedia, Microsoft, Network Associates, Novell, Sybase,
Symantec, and UGS.
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the contribution of the american software industry to america's economy
U.S. software publishers earn more than half of their total revenue
from overseas sales of software. BSA estimates that the U.S. software
industry supplies 70 percent of the world's demand for legitimate
packaged software. Since 1990, the industry's trade surplus has grown
at an average rate of 17.9 percent annually. In contrast, the U.S.
economy has posted increasingly large trade deficits throughout the
past decade, as a growing number of major U.S. industries moved
manufacturing facilities and jobs offshore.
Software industry growth, fueled by the ever-increasing demand for
software, has generated a significant number of U.S. jobs. According to
a study by Nathan Associates, a Virginia-based consulting firm, the
U.S. software industry employed more than 800,000 U.S. workers in 1998,
with aggregate wages of $55.6 billion. By the year 2008, the software
industry is expected to employ more than 1.3 million workers in the
United States. No other industry is providing employment opportunities
at such a rapidly increasing rate and at such high wages.
software piracy overview
In 2001, we estimate that over $11 billion in software sales were
lost due to software piracy. This loss is more than just a loss to our
member companies' bottom lines. It is also a huge tax revenue and
employment loss to the U.S. and foreign treasuries. I am sad to report
that in some countries, such as China and Vietnam, over 90 percent of
software in use has been pirated. While the piracy rate is lower in
other countries, in far too many places in Asia, Latin America and
Eastern Europe, the rate still exceeds 50 percent.
Over the past decade, the most significant change that our industry
has seen in software piracy has been in the means by which it occurs.
Until recently, software piracy was most often a local or regional
issue. Software piracy in Latin America had little to do with software
piracy in Asia. This is no longer the case. With the widespread reach
and use of the Internet, pirates now operate on a global basis. A
software pirate can advertise his stolen American-developed software
from Asia while offering downloads from a South American server and
accepting payment on a European based payment service. All of the
activity has occurred outside of the United States even though the
company, and in fact the country, most directly harmed by the activity
is here.
international issues
The success of the U.S. software industry is due in large part to
this country's historical commitment to strong copyright protection. As
noted above, piracy severely limits--and in some countries virtually
blocks--development of a strong local copyright industry.
The ability of countries to reap high economic benefits from e-
commerce is highly dependent on their ability to promote protection and
enforcement of intellectual property rights. Multi-lateral and
bilateral trade alliances must be fully backed by governments' firm
commitment to respect and enforce intellectual property rights within
the public and private sectors; to treat the manufacture and sale of
counterfeit software as a crime warranting tough enforcement and
penalties; and to ensure that its laws and enforcement regimes
adequately address Internet piracy. Worldwide governments can help
promote this commitment to intellectual property protection and fight
Internet piracy by:
ensuring that they fulfill their obligations under the WTO
TRIPs Agreement by adopting and implementing laws that provide
for effective enforcement against piracy;
encouraging ratification of the WIPO Copyright Treaty and
strong criminal enforcement;
advocating government legalization policies and other
reforms that will fundamentally reduce piracy rates; and
Dedicating resources to the investigation and prosecution of
Internet piracy, training, technical assistance and mutual
cooperation.
the critical importance of trips implementation
Given the emergence of organized criminal counterfeiting
operations, it is imperative that all governments fulfill their
obligation under WTO TRIPs to enact and enforce strong criminal
remedies against piracy, including tough, effective penalties.
Moreover, to combat rampant piracy among end users, these criminal laws
must be supplemented by civil remedies that allow software publishers
to obtain civil ex parte search orders along with adequate damages,
without significant judicial delays or overly burdensome bond
requirements.
The TRIPs Agreement is the first major international treaty to
recognize that intellectual property rights are meaningful only if
accompanied by adequate enforcement procedures and remedies. In
addition, TRIPs requires that intellectual property right enforcement
regimes meet specific ``results-oriented'' performance standards.
Specifically, each member's enforcement regime must ``permit effective
action against infringement'' and ``constitute a deterrent to further
infringements.'' Moreover, enforcement procedures cannot be
``unnecessarily complicated or costly,'' or ``entail unreasonable time
limits or unwarranted delays.'' Thus, in assessing TRIPs compliance, it
is critical to review and monitor all aspects of a country's
enforcement regime, including the adequacy of procedural remedies and
penalties, as well as their effectiveness in deterring piracy.
implementation of wipo copyright treaty
In order to promote a safe, legal environment for e-commerce, it is
critical that governments implement laws that guard against piracy on
the Internet. In direct response to the growing threat of Internet
piracy, the international community in 1996 adopted the WIPO Copyright
Treaty to ensure protection of copyrighted works in the digital age.
Among other things, the WIPO Treaty (i) makes clear that a copyrighted
work can be placed on an interactive network only with the consent of
the relevant rightsholder; (ii) makes clear that the Berne Convention's
reproduction right applies to electronic uses of works; (iii) protects
all forms of expression of computer programs; and (iv) prohibits
``hacking'' of technical protections that have been applied to works.
The United States was one of the first countries to implement the
WIPO Copyright Treaty by enacting the Digital Millennium Copyright Act.
In addition, Congress has enacted legislation that criminalizes online
distribution of pirated software and increases penalties for Internet
piracy. To ensure that these laws have real impact, U.S. law
enforcement agencies have elevated the priority given Internet piracy
and other copyright offenses, resulting in important prosecutions
against criminal pirates and counterfeiters. Similar measures are
urgently needed on a global basis.
government software management
Government agencies and public institutions are typically among the
largest users of computer software. As such, government leaders have an
obligation to establish legalization policies and procedures that both
prevent software piracy within the public sector and set an example for
the private sector to follow. At a minimum, a government legalization
policy should require government agencies and recipients of government
funds to (i) comply with software copyright and licensing requirements;
(ii) establish systems and controls to manage software use; (iii)
ensure that adequate funds are budgeted for software procurement; and
(iv) require all recipients of government funds to comply with software
copyright and licensing requirements in connection with government-
funded projects and government grants.
On September 30, 1998, President Clinton signed an Executive Order
on Computer Software Piracy, which for the first time clearly
articulates legal software use and procurement requirements for Federal
agencies and recipients of Federal funds. Several American governors
have issued similar executive orders for their states.
Foreign governments are now beginning to consider the adoption of
decrees modeled after the U.S. Executive Order (the most notable
example being China's ``Red-Top Decree''). BSA urges other governments
to follow suit and adopt policies that mandate legal software use by
government agencies and public institutions. Moreover, to ensure that
these policies have more than symbolic value, each government should
designate a system for oversight and explicitly require agencies to
implement a software asset management program. To assist in these
efforts, BSA has published an international ``Government Guide for
Software Management,'' which is designed to help foreign governments
adopt and implement software asset management programs.
Electronic commerce promises a new revolution in the development,
distribution and use of products and services protected by intellectual
property. It also poses monumental new risks. The WIPO Treaties, full
implementation of the WTO TRIPs agreement, strong government management
software policies and commitment of resources to investigation and
prosecution of Internet piracy will provide a healthy environment for
the development of e-commerce.
On a similar note, passage of Trade Promotion Authority is
supported by my industry as another vehicle for boosting the protection
of intellectual property around the world. I encourage this Committee
to be a leader in the Senate in support for Trade Promotion Authority.
Finally, as part of the State Department's outreach on
international development issues around the world, I would point out
that the creation of intellectual property depends only upon individual
creativity that every country has. Intellectual property does not
require huge startup or investment costs. Nor does it shift
environmental burdens to third world countries. In sum, intellectual
property is an opportunity for every country around the world to
prosper from. America's economic strength is often viewed as a role
model for developing countries. I encourage the State Department
through its Foreign Service Officers and employees in conjunction with
the international development programs that it oversees to highlight
the economic development potential of intellectual property.
conclusion
Mr. Chairman and Members of this Committee, thank you again for the
opportunity to submit a statement on software piracy for the record.
Our industry depends upon the U.S. government to make the case for
protecting America's intellectual property assets worldwide.
______
The Need for Anti-Tampering Legislation
Microsoft and other software publishers face a substantial
challenge from the worldwide distribution of high quality counterfeit
software. The software industry annually loses an estimated $12 billion
in revenues because of counterfeiting activities. Such intellectual
property crimes drain the U.S. economy of thousands of jobs, millions
in lost tax revenues and billions in lost wages.
Among the practices of counterfeiters and pirate resellers is
tampering with authentication features of software and other
copyrighted works. These components, such as holograms, certificates of
authenticity (COAs), and other security features, are affixed to or
embedded in the copyrighted work to allow the rightholder to
distinguish genuine works from counterfeits. Highly sophisticated
counterfeiters engage in tampering activities both to make counterfeit
software appear genuine and to increase the selling price of genuine
software and licenses. Examples of such tampering activities in the
software industry include:
Genuine certificates of authenticity and other
authentication features are stolen from replicators or removed
from genuine packaging and affixed to counterfeit packaging and
CD-ROMs.
Genuine academic and original equipment manufacturer (OEM)
products are altered and mislabeled to resemble retail product.
End user licenses are altered and mislabeled to specify a
higher license quantity.
Cunently, Federal law does not provide adequate civil and criminal
remedies to combat such tampering activities. For example, Federal law
fails to criminalize the distribution or sale of genuine authentication
features to software counterfeiters. This gap in Federal law makes it
increasingly difficult for copyright holders to combat counterfeiting
activities.
In order to strengthen Federal intellectual property enforcement
efforts to combat counterfeiting activities, legislation should be
enacted that protects the authentication features of copyrighted works.
Section 2318 of title 18 should be amended to (i) prohibit trafficking
in authentication features that have been altered or removed from the
genuine product, affixed to counterfeit products, or distributed or
imported without the authorization of the copyright owner; and (ii)
require forfeiture of equipment, devices or materials used to
manufacture counterfeit labels or illicit authentication features.
Authentication features would include holograms, certificates of
authenticity, and similar physical components used by rightholders to
distinguish genuine copyrighted works from counterfeits.
Senator Allen. So, again, I thank our witnesses. And I
thank you, Mr. Chairman, especially, for your leadership in
bringing this issue to the attention of all Americans. Thank
you. I look forward to the testimony.
The Chairman. Thank you, Senator.
The reference made by Senator Allen to a report that we are
filing today and making available is this report. And I think
there are probably copies out there. If they are not, it is
``Theft of American Intellectual Property, Fighting Crime
Abroad and at Home,'' and it lays out the status of the
problem, at least as we see it, and some of the attempted ways
to deal with the problem.
[The report to which the Chairman referred, ``Theft of
American Intellectual Property, Fighting Crime Abroad and at
Home,'' appears in the Appendix on page 93.]
Now, our first witness--and I will introduce each witness
individually--well, I will introduce all three of you now, and
I would ask you to testify in the order that I introduce you,
if you would.
First of all, the Ambassador Peter Allgeier, is Deputy U.S.
Trade Representative. He's held a variety of positions in the
office of the United States Trade Representatives since joining
in 1980, focusing both in Asia and European trade issues until
U.S. Trade Rep. Mickey Kanter appointed him Associate U.S.
Trade Representative for the Western Hemisphere in '95.
President Bush appointed him Deputy Trade Representative last
year. And in his current position, he supervises trade
negotiation in Europe, the Middle East, and most of the Western
Hemisphere. He also supervises negotiations in the World Trade
Organization. We look forward to his testimony.
Our next witness, Ambassador Alan P. Larson, assumed his
duties as the United States Secretary of State for Economic
Business for Agricultural Affairs November 24th of 1999, and he
continues to serve in that position. The Undersecretary serves
as the senior economic official at the Department of State. He
advises the Secretary of the international economic policy and
leads the work of the department on issues ranging from trade
and aviation to bilateral relations of American's economic
partners. Welcome back to the committee, Mr. Ambassador.
The next witness, John Gordon, currently serves as the
United States Attorney for the Central District of California.
Having been a Federal Prosecutor in Los Angeles for 17 years,
he now serves as the chief Federal law enforcement officer in
the Nation's most populous Federal District, with over 16
million residents. Previous to his current appoint, he served
as Chief of the Narcotics Division and Chief of the Criminal
Division in the same office. I welcome him.
So if you will proceed in the order of--you, Mr. Allgeier,
then Mr. Larson, and then Mr. Gordon.
STATEMENT OF HON. PETER ALLGEIER, DEPUTY U.S. TRADE
REPRESENTATIVE
Ambassador Allgeier. Thank you very much, Mr. Chairman. I
would ask that I could summarize my remarks and have the full
testimony submitted for the record.
The Chairman. Without objection, your entire statement
will be placed in the record.
Ambassador Allgeier. Thank you. More importantly, thank
you very much for offering the opportunity to testify before
you and with Senator Allen on this very important issue, which
is so crucial to American prosperity and international
competitiveness.
Creating an environment for innovation is perhaps our
strongest comparative advantage internationally. We certainly
appreciate very much the support and the work together with the
Congress over many years in fighting piracy internationally.
We share with you an appreciation of the immense economic
importance to the United States of protecting intellectual
property. The copyright industries alone, it is estimated,
contributes something like $457 billion a year to our gross
domestic product. That's roughly five percent of our gross
domestic product. And so we also see theft of ideas as serious
a crime as theft of physical assets or financial assets.
And just to give some dimension to that, just
internationally alone, our copyright industry is estimated to
lose between $20 and $20 billion to piracy.
The Chairman. Can you imagine if $20 billion had been
taken out of the international banking system by theft, what
interest that might generate here?
Ambassador Allgeier. That's right. Our job as USTR, and we
are just part of the overall interagency approach to dealing
with international piracy, is to negotiate strong intellectual
property protection in our trade agreements and our investment
agreements and then to ensure that those provisions of those
agreements are enforced vigorously. What I would like to do is
to just briefly go over the types of negotiating tools we have
in carrying out this mission.
Of course, the premier trade negotiation affecting
intellectual property was the TRIPs agreement in the World
Trade Organization. But I want to assure you that we are not
just sitting on our laurels because of that agreement. As we
continue to negotiate free-trade agreements such as the
bilateral agreement we are negotiating with Singapore and Chile
and the regional free trade agreement of the Americas, we are
insisting that strong intellectual-property protections, even
beyond what is already in the TRIPs, be included in those
agreements and be subject to dispute settlement.
This, of course, I think underlines how important it is for
us to obtain the trade promotion authority that will strengthen
our hand in negotiations. And we are very mindful of the fact
that the pending bills on trade promotion authority contain
strong mandates for negotiating objectives on intellectual
property, including an emphasis on protections for the--against
intellectual property piracy of--aimed at the new forms of
intellectual property, the high-tech forms of intellectual
property that are so important to our economy.
Now, we do not just negotiate agreements. We also intercede
in situations where piracy is especially prevalent in foreign
countries. Two ways in which we do that, I will discuss in a
minute, the Special 301 process that we have, which was
provided by Congress in the Trade Act of 1988. But we also use
the preference programs, the trade preference programs of GSP,
the Carribean Basin Initiative, the ANDEAN Trade Preference
Act, and the African Growth Opportunities Act, because they all
have provisions for adherence to intellectual property
protection. So we use the--frankly, the leverage of those
programs to promote stronger intellectual property protection
in the countries that benefit from those programs.
I mentioned the Special 301. The Special 301 provision of
U.S. law is the framework in which we pursue our international
intellectual-property objectives. This past year, in April, we
reviewed the practices of 80 countries. I think that is more
countries than we have ever reviewed before. And as a result of
that review, we obtained stronger protection and stronger
enforcement.
In the review, the current review of 2001, we are focusing
on three areas. One is ensuring proper and timely
implementation of the TRIPs agreement. The second is
controlling piracy of optical media products such as music and
video CDs, software, CD-ROMS and so forth. And third is
ensuring that governments worldwide observe intellectual
property protection in their own offices, that they are using
only legitimate software. So these are our three major----
The Chairman. You mean in their government offices?
Ambassador Allgeier [continuing]. ----Yes. So, just to go
over those priorities--with respect to the implementation of
the TRIPs agreement, this is an important focus of our efforts.
Many of the developing countries had until January of 2000 to
implement the obligations. So since that time, an important
focus of our effort has been to bring developing countries into
compliance with their obligations. Part of that is working
cooperatively with them on training programs and basically
raising the level of political awareness of the importance of
intellectual property. Part of it, however, is moving more
aggressively, as I said, removing trade preferences or pursuing
dispute settlement in the WTO. And we use whatever tools we
feel will be most effective.
A very important focus, as I said, are the new forms of
intellectual property and the pirates--as you pointed out, Mr.
Chairman--the pirates are barely a step behind the innovation
of new forms of intellectual property, whether it is in
software or in these optical media that we are talking about.
We have seen progress there. For example, Hong Kong has
taken additional legislative and enforcement actions in this
area to combat optical media piracy, but we have much work to
do with other countries.
In the case of Ukraine, just recently we removed their
benefits under the GSP. I think that was worth something like
$40 million in trade. And we also imposed additional trade
sanctions on Ukraine for failure to eliminate piracy on sound
recordings and optical media piracy. And we also--these trade
sanctions we imposed, in addition to the GSP removal, covered
about $75 million of trade. But we are pressing other
countries, as well--Russia, Thailand, Indonesia, and the
Philippines--to address this important area.
Another tool that we have is the recent copyright treaties
that were negotiated in the World Intellectual Property
Organization. There are two treaties. The WIPO Copyright Treaty
and the WIPO Performances and Phonograms Treaty. And important
emphasis of our work has been to get, first of all, countries
to ratify those agreements, and then to enforce them.
One of the ways we do that is--in these new free-trade
agreements that I mentioned, such as with Chile and Singapore
and in the FTAA, we insist that part of those agreements be the
obligations that are contained in the WIPO treaties.
Now, you might say, well, why do you do that if they
already have ratified the WIPO treaties? The principal reason
is the WIPO treaties do not have dispute settlement, whereas
our trade agreements do. And so that is--that is an important
element in the new trade agreements that we are negotiating.
Similarly, we seek to have the strongest possible
intellectual property commitments in the commitments that
countries make as they are negotiating their accession to the
World Trade Organization. We have a number of those
negotiations going on now, one of the most important of which,
of course, is Russia. And their intellectual property
protection is a very important component.
This past year, at the Doha Ministerial, we saw China and
Taiwan join the WTO. They now have obligations within the WTO
that are enforceable under dispute settlement. And in the case
of China, for example, we will be reviewing their enforcement
each year until the 10th anniversary of their entry of the WTO.
I mentioned the government says ``use of software'' here.
It is really ``misuse of software'' that we are seeking to
eliminate. And in the last few years, we have worked with a
number of countries, and some 19 countries have adopted decrees
or regulations making it against their rules to use software
illegally within government offices.
These, Mr. Chairman, are the primary vehicles that we use
in the Office of the U.S. Trade Representatives to promote
protection for United States intellectual property overseas.
One thing I would like to emphasize is, we are not just
doing this alone. All of these efforts, whether they are
negotiating in the WTO, working bilaterally with other
countries, are done on an interagency context where we have the
experts from the Patent Office and the Copyright Office. We
have the diplomatic support from the State Department. We have
the enforcement support from the Justice Department and
Customs. And so it is very much a coordinated effort among the
different agencies.
So, in closing, I would simply like to thank you once again
for the opportunity to discuss this important subject. I do
want to highlight how the Congress, over the years, has
provided strong tools for us to do our job. I mentioned the
1988 Trade Act, the passage of the Special 301. There is, of
course, the ratification of the WIPO treaties and the passage
of the Digital Millennium Copyright Act. The strong
intellectual property mandates in Trade Promotion Authority
that we look forward to and hearings like this which raise the
level of consciousness, not just of the American people, but of
our trading partners as to the importance that we attach to
this important subject. Thank you.
[The prepared statement of Ambassador Allgeier follows:]
Prepared Statement of Ambassador Peter Allgeier,
Deputy U.S. Trade Representative
Good morning, Mr. Chairman and Members of the committee. Thank you
for the opportunity to speak to you today about the role played by the
Office of the United States Trade Representative (USTR) in protecting
intellectual property.
Mr. Chairman, as our Constitution recognizes, intellectual property
rights are at the heart of scientific and technological progress and
artistic creation. As part of the U.S. Government's overall dedication
to ensuring respect for intellectual property, the USTR is committed to
ensuring market access and fighting piracy overseas. We appreciate the
support and interest we have received from Congress over the years, and
today I would like to review with you our policy.
importance of intellectual property rights
Ensuring respect for intellectual property rights is an immensely
important American economic interest. According to industry estimates,
the core American copyright industries--software, films, music, books
and other works accounted for $457.2 billion in value added to the U.S.
economy, or approximately 4.94% of the Gross Domestic Product.
Virtually all of our manufacturing industries, as well as
pharmaceutical firms and others, rely upon patent protection to
encourage innovation. Trademark protection is equally important for
firms and for protecting consumers.
The value of intellectual property rights, however, goes well
beyond these issues. A system of strong intellectual property
protection promotes future innovation by ensuring that artists,
inventors, and scientists are rewarded for their work. Strong copyright
protection for business and entertainment software, for example, is
essential for a simple reason: software programs are technical marvels
that require large investments to create, but can be copied at
virtually no cost. Likewise, patent laws that protect inventions in
pharmaceuticals and other fields encourage discovery and invention by
providing exclusive rights, for a limited period, to those who disclose
the results of their work. Disclosure, in turn, enables others to
understand the advances made and to extend those advances both in the
original field of technology and in other fields.
The results of our policy are clear in practice. Computer programs
developed in the past two decades have vastly changed American life:
they have improved productivity, created jobs and improved safety in
our factories; created new products in countless fields; improved
health treatments; made tax filing easier; developed new forms of art
and entertainment; strengthened our military and much more. Innovations
in drug therapies developed by our pharmaceutical industry have saved
millions of lives both at home and abroad.
the threat of piracy
Almost all types of intellectual property, however, are highly
vulnerable to piracy. The American copyright industry reported losses
through piracy overseas at between $20-22 billion last year. Our
patent-dependent pharmaceutical industry estimates that it loses a
billion dollars annually in India and Argentina alone. Other U.S.
industries dependent on patents, trademarks, trade secrets, industrial
designs and other forms of intellectual property suffer similar
unquantified losses.
Toleration of piracy in America can swiftly remove incentives to
create. The result would be erosion of America's comparative advantage
in high technology; and ultimately loss of the benefits of new advances
in health, public safety, education, defense and freedom of information
for the entire world. In a sense, the intellectual property of the
American economy is like a warehouse of ideas. For people to walk in
and steal them is no more tolerable than theft of goods. That is why we
at USTR place such an emphasis on ensuring that our trading partners
enact, enforce and continue to enforce laws that ensure respect for our
rights.
Toleration of piracy by our trading partners, in addition to the
harm it causes American interests, can also swiftly remove incentives
for their citizens to innovate. Equally important is the role
intellectual property plays in developed and developing country
economies by providing the foundation for promoting investment,
technology transfer, and economic growth in the long run.
In this work, we consult closely with Congress on our priorities
and strategies; we use domestic trade law; regional initiatives in
Europe, Asia, Latin America and Africa; existing institutions, notably
the World Intellectual Property Organization; and the World Trade
Organization (WTO). Our goal is to control piracy through strong laws
and effective enforcement worldwide, and to ensure that protection
remains effective as technology develops in the future. It is complex
work: effective protection of inventions in the pharmaceutical area,
protection of copyrighted works like software, music, and movies, and
protection of the trademark reputation of our firms requires a
coordinated effort involving not only trade officials but entire
governments. Effective protection of intellectual property rights
involves customs, courts, prosecutors and police, commitment by senior
political officials; and a general recognition that to copy is to steal
and to deprive finance ministries of revenue. But although it is
complex and the work is never done, the effort, over the years, has
been quite successful.
Let me now review our major initiatives and policy tools.
bilateral initiatives and special 301
The United States is committed to a policy of promoting
intellectual property protection, in this regard we are making
significant progress advancing the protection of these rights through
the negotiation of free trade agreements. As part of the negotiations
with Jordan, Chile and Singapore, as well as in the hemispheric Free
Trade Area of the Americas, we are seeking higher levels of
intellectual property protection in areas covered by the TRIPs
Agreement, as well as in new areas not covered by TRIPs. This gives us
the opportunity to ensure that the intellectual property provisions of
these new agreements reflect the technological changes that have
occurred since the TRIPs Agreement was negotiated in the late 1980s and
early 1990s.
We also intercede directly in countries where piracy is especially
prevalent or governments are exceptionally tolerant of piracy. Among
our most effective tools in this effort is the annual ``Special 301''
review mandated by Congress in the 1988 Trade Act.
This tool has vastly improved intellectual property standards
around the world, including for software. Publication of the Special
301 list warns a country of our concerns. And it warns potential
investors in that country that the intellectual property rights in
their investment may not be satisfactorily protected.
The listing process has often helped win improvements in
enforcement. One fascinating aspect of the Special 301 process occurs
just before we make our annual determinations, when there is often a
flurry of activity in those countries desiring not to be listed or to
be moved to a lower list. Intellectual property laws are suddenly
passed or amended, and enforcement activities increase significantly.
In many cases, these actions lead to permanent improvement in the
situation. Bulgaria is a notable example. Several years ago it was one
of Europe's largest sources of pirate CDs, and a major cause of concern
for us. Since then, we have worked to raise awareness and concern about
the problem, and Bulgaria has at this point almost totally eliminated
pirate production.
Similarly, progress has occurred in Hong Kong, Macau and Malaysia,
as discussed later in my testimony.
At times, however, we must use the sanction authority granted to us
for worst case offenders.
China is a prime example. In 1995 and 1996, persistent tolerance of
piracy--in particular growth of pirate production for both the domestic
market and export--led us to threaten $1 billion in trade sanctions.
These helped us to win a bilateral IP agreement in 1995 and further
action in 1996. Our follow-up work since has been to ensure that all
relevant Chinese agencies including trade, customs, judiciary, police
and senior political officials are involved.
Today, China has an improved system that protects U.S. copyrights
more effectively than before. Enforcement of intellectual property
rights has become part of China's nationwide anti-crime campaign,
involving the Chinese police and court system in fighting piracy.
Production (but unfortunately not the availability) of pirated
copyrighted works has dropped significantly.
Lack of enforcement of intellectual property rights remains a
significant problem in China, particularly for trademarked products and
copyrighted works. China's leaders recognize the need for more
effective action to address this continuing problem. Ambassador
Zoellick welcomed the initial progress they have made through such
actions as the new anti-counterfeiting ``campaigns'' initiated in late
2000 and continued through today. In recent consultations, Chinese
officials reported that they had seized 119 million CDs and DVDs, and
shut down 15 illegal CD production lines during 2001, bringing to well
over 100 the number of such lines closed since 1996.
Nevertheless, piracy and counterfeiting remain rampant in China.
The United States continues to actively engage China to address these
problems through bilateral consultations to ensure that the laws as
enacted are consistent with China's WTO obligations and that China
applies its laws in a manner that provides more effective protection of
intellectual property rights. In fact, AUSTR Joseph Papovich and a full
interagency team just returned from week long consultations in China.
We will also be undertaking a review of China's implementation of its
WTO TRIPs obligations in Geneva this year, and annually thereafter over
the next 10 years.
Specifically, in this most recent visit to China, we discussed the
steps China is taking to implement its commitments in the WTO on the
protection of intellectual property rights. This is a normal process
among WTO members. One of China's WTO commitments is to share
information and consult upon request with other WTO members about such
implementation efforts. In our consultations we have been stressing
issues of particular importance to us.
2001 Special 301 Review
In the 2001 Special 301 review, we analyzed approximately 80
countries, the largest number of countries ever reviewed, with 49
countries recommended for specific identification and two subject to
Section 306 monitoring. In this review we are focusing on three major
issues:
Ensuring proper and timely implementation of the TRIPs
Agreement.
Second, controlling piracy of optical media products (music
and video CDs, and software CD-ROMs).
Third, ensuring that government ministries worldwide ensure
enforcement of the use of legitimate software.
While piracy and counterfeiting problems persist in many countries,
progress has occurred in other countries. Significant positive
developments are highlighted below:
In February 2001, Turkey enacted long-awaited amendments to
its Copyright Law, with the goal of bringing Turkey into
compliance with the TRIPs Agreement.
In February 2001, President Kim of Korea issued public
orders to the Ministries of Information and Communications and
the Ministry of Justice designed to strengthen their copyright
enforcement efforts.
On March 20, 2001, the Danish Parliament approved
legislation making civil ex parte searches available. This is a
particularly important enforcement tool for the U.S. software
industry in fighting against unauthorized use of computer
software programs by commercial entities. The legislation was
signed into law on March 28, 2001.
Hong Kong's amendments to its Copyright Ordinance,
clarifying end-user software piracy as a criminal offense,
became effective on April 1, 2001.
In November 2001, Taiwan's legislature passed an optical
media management law, in response to the U.S. Special 301
process. Under the bill, fines were increased and the
government has the authority to seize machinery and products.
Due to the six-month transition period, it will be some time
before the effectiveness of Taiwan's enforcement effort will be
seen.
TRIPs Implementation
Among our top priorities this year has been to ensure full
implementation of World Trade Organization commitments on intellectual
property. The WTO requires all members to enact and enforce copyright
and other intellectual property protection. Obligations for developing
countries became effective on January 1, 2000, while least-developed
Members have until 2006 to implement most of the Agreements provisions
and until 2016 for certain others.
Progress continues to be made by developing countries toward full
implementation of their TRIPs obligations. Nevertheless, a number of
countries are still in the process of finalizing implementing
legislation and establishing adequate enforcement mechanisms. The
United States will continue to work with such countries and expects
further progress in the very near future to complete the TRIPs
implementation process. However, in those instances where additional
progress is not achieved in the near term the United States will pursue
our rights through WTO dispute settlement proceedings.
Not only is compliance a legal matter under the WTO TRIPs
Agreement, but it is an essential element in creating a favorable
climate for investment, especially in Latin American countries facing
economic slowdown.
Pirate Optical Media Production
At the same time, however, our work must keep up with the very
rapid advance of technology: as new software products and services
develop, pirates quickly take advantage of them. Thus, we are focusing
on the control of piracy in optical media--for example, music and video
CDs, and software CD-ROMs.
We have had some significant successes on this issue in recent
years. Hong Kong is one case in point. Our expressions of concern were
joined by a number of Hong Kong artists and copyright industry figures.
In part because of this, Hong Kong has taken additional legislative and
enforcement actions to combat optical media piracy, having already
implemented model controls on optical media production.
Malaysia, Macau and Taiwan are other examples. Having identified
them as a growing source of pirate optical media production, we
dispatched teams to Kuala Lumpur and Taipei to press them on the
problem. As a result, Malaysia and Taiwan have enacted legislation and
are completing the process of implementing controls on optical media
production. Macau has also enacted such legislation and has taken
important steps to reduce the magnitude of the problem.
However, in certain cases persuasion and diplomatic pressure are
not sufficient to ensure our trading partners implement controls on
optical media production. Last month, after several years of
negotiations, we imposed $75 million in sanctions on Ukrainian exports
to the United States for Ukraine's failure to crack down on sound
recording and optical media piracy, particularly its failure to pass an
optical disc licensing law.
We are also pressing the governments of Russia, Thailand,
Indonesia, and the Philippines to implement such laws.
Internet Piracy
As serious as the problem of optical media piracy is, the Internet
is potentially even more problematic in that it has provided an
efficient global distribution network for pirate products. Several
approaches must be taken by governments to address this problem,
including full implementation of the TRIPs Agreement's enforcement
obligations to provide effective action and adequate deterrence against
commercial piracy whether it occurs in the on-line environment or in
the physical world.
WIPO Copyright Treaties
We are actively consulting with U.S. industry to develop the best
strategy to address Internet piracy. An important first step was
achieved at the World Intellectual Property Organization, when it
concluded two copyright treaties in 1996; the WIPO Copyright Treaty
(WCT) and the WIPO Performances and Phonograms Treaty (WPPT). These
Treaties help raise the minimum standards of intellectual property
protection around the world, particularly with respect to Internet-
based delivery of copyrighted works.
These Treaties represent the consensus view of the world community
that the vital framework of protection under existing treaties,
including the TRIPs Agreement, should be supplemented to eliminate any
remaining gaps in copyright protection on the Internet that could
impede the development of electronic commerce.
Throughout the world, countries have recognized the importance of
the Internet as a vehicle for economic expansion. In order to realize
the enormous potential of the Internet a growing number of these
countries are implementing the WIPO Treaties and are thus creating a
legal environment conducive to investment and growth in Internet-
related businesses and technologies. In the competition for foreign
direct investment in these industries, these countries now hold a
decided advantage. Therefore, governments should ratify and implement
the two WIPO ``Internet'' treaties, which clarify exclusive rights in
the on-line environment and specifically prohibit the circumvention of
technological protection measures for copyrighted works.
Of the 159 members of WIPO, 28 have ratified the WPPT and 31
countries have ratified the WCT. The United States deposited its
instrument of ratification on September 14, 1999. As you know Mr.
Chairman, the Senate Foreign Relations Committee was instrumental in
this effort. This committee passed the resolution of ratification on
October 21, 1998. Each of the Treaties requires that 30 countries
ratify the treaty before it becomes effective. The WCT will come into
force in March of this year. Ambassador Zoellick is committed to
working internationally to promote ratification of these Treaties by
our trading partners in close coordination with the Department of
Commerce, the Patent and Trademark Office, the Copyright Office, and
the Department of State.
We are pursuing this goal in several ways. We are seeking to
incorporate the highest standards of protection for intellectual
property into every bilateral and regional trade agreement. We have
already had our first success in this effort by incorporating the
standards of the WIPO Treaties as substantive obligations in our FTA
with Jordan. The Jordan FTA has laid the foundation for pursuing this
goal in the free trade agreements we currently have under negotiation
with Chile and Singapore as well as the Free Trade Area of the Americas
(FTAA), and other FTAs yet to be launched. Moreover, our proposals in
these negotiations will further update copyright and enforcement
obligations to reflect the technological challenges we know today as
well as those that may exist at the time negotiations are concluded
several years from now.
One additional way in which USTR is pursuing this objective is
through negotiations with governments seeking to join the World Trade
Organization. In accession negotiations with Albania and Croatia, for
example, USTR obtained formal commitments from these governments to
ratify the WIPO Copyright Treaties as a part of their protocol of
accession.
Finally, one of our longer term objectives is to bring the
substantive obligations of the WIPO copyright treaties into the WTO as
obligations for all WTO Members under the TRIPs Agreement. At that
time, we would also intend to further update the TRIPs Agreement to
ensure that it provides adequate and effective protection for
intellectual property in the light of technological challenges that may
occur in coming years.
Other Initiatives Regarding Internet Piracy
As the next step in our effort to keep pace with the very rapid
advance of technology, we are focusing our Special 301 reviews on
Internet piracy. This is a major focus of the 2002 Special 301 Annual
Review that we launch in March. Ambassador Zoellick will announce the
results of this review at the end of April.
In part because of USG efforts to raise awareness of the need for
countries to enforce against all forms of piracy, several countries are
moving beyond their fight against traditional forms of piracy to
address the serious and growing problem of Internet piracy.
As part of our intensive on-going interaction with China on piracy
issues, in 2000 USTR wrote to Chinese Vice Premier Li Lanqing urging
that China include in its current reform of its copyright law
amendments to address Internet piracy, including implementation of the
WIPO Copyright Treaties. China's new copyright law addresses certain of
these Internet-related issues. We look forward to China's issuance of
detailed implementing regulations and rules in the near future. We have
identified some additional provisions which we believe will further
enhance protections in the internet environment and clarify the new
copyright law.
Beyond this, the Chinese Ministry of Culture has issued a circular
regarding on-line business activities of audio-video (A/V) products.
The circular stipulates that the A/V products sold on-line must be
legal AV products and that sales of smuggled, pirated, and other
illegal AV products are prohibited.
The Supreme People's Court and certain Chinese courts have issued
interpretations and rendered decisions involving copyright and piracy
in the internet environment which have reinforced the rights of owners
in the online environment is an act of infringement under their
copyright law.
Government Use of Software
The third component of this year's Special 301 initiative is
government use of software. Our goal is to control ``end-user''
piracy--that is, the unauthorized copying of large numbers of legally
obtained programs by government agencies.
In October 1998, the President of the United States issued a new
Executive Order directing U.S. Government agencies to maintain
appropriate, effective procedures to ensure legitimate use of software.
The President directed USTR to undertake an initiative to work with
other governments, particularly those in need of modernizing their
software management systems or about which concerns have been
expressed, regarding inappropriate government use of illegal software.
The United States has achieved considerable progress under this
initiative since October of 1998. Countries that have issued decrees
mandating the use of only authorized software by government ministries
include China, Colombia, France, Greece, Ireland, Israel, Jordan,
Hungary, Hong Kong, Lebanon, Macau, Paraguay, the Philippines, Spain,
Taiwan, Thailand and the UK.
Preference Programs
Another bilateral tool is preferential tariff treatment, such as
the Generalized System of Preferences, the Caribbean Basin Initiative,
the Andean Trade Preferences Act, and the Africa Growth and Opportunity
Act. These programs provide duty-free treatment to certain products of
beneficiary countries, subject to certain conditions, including
adequate and effective protection of intellectual property rights. The
threat of loss of GSP and ATPA benefits has proven to be an effective
point of leverage with some of our trading partners.
For example, we took action against Honduras because of the
unauthorized broadcasting of U.S. satellite-carried television
programing in response to a petition filed by the Motion Picture
Association. After we withdrew $5 million dollars in GSP and CBI trade
benefits Honduras agreed to address our concerns.
More recently, on August 7, 2001, we suspended all of Ukraine's GSP
benefits in response to Ukraine's failure to crack down on rampant
sound recording and optical media piracy. 2001. We are currently
reviewing a petition filed by the International Intellectual Property
Alliance to revoke Brazil's GSP status as a result of it's inadequate
protection of intellectual property rights.
Problem Countries
We continue, however, to face serious problems in a number of
countries in each part of the world.
In Eastern Europe, our concerns include the Ukraine and Russia. In
January, we sanctioned Ukraine for failure to shut down pirate CD
manufacturing plants.
In Latin America, we are focused on Brazil, Mexico, and Paraguay,
where enforcement is dangerously weak and causes billions of dollars in
losses for U.S. right holders annually. In Brazil, U.S. industry
reports that in 2001 its trade losses from copyright piracy were over
$900 million--the largest losses due to piracy in the hemisphere.
Mexico has acted in previous years to improve its laws by enacting new
legislation and has taken steps to increase its enforcement efforts.
Regrettably, these efforts have not had a significant impact on
reducing rampant piracy in Mexico and we will soon be reinitiating a
bilateral working group with the Government of Mexico to press for more
effective action.
Paraguay was identified as a Priority Foreign Country in January
1998. The subsequent Section 301 investigation terminated with the
signing of a comprehensive Memorandum of Understanding (MOU) on the
protection of intellectual property. Unfortunately, the implementation
of the MOU has been inadequate and Paraguay continues to be a regional
center for piracy and counterfeiting. The United States is concerned
with these lapses in the implementation of the MOU and will seek
consultations. If no progress is made on these issues in the coming
year, then we may have no choice but to reactivate the Section 301
investigation.
We also remain focused on several economies in Asia, notably China,
as I mentioned, but also Taiwan, Thailand, the Philippines, Indonesia,
and Malaysia.
multilateral trade initiatives
Bilateral negotiations are and will remain central to our efforts
to improve intellectual property standards worldwide. However, as time
has passed, our trading partners have begun to see the effect of
stronger standards at home--that is, that strong intellectual property
standards allow nations to develop their own high-tech and artistic
industries.
This allowed us to make a fundamental advance with the TRIPs
agreement at the creation of the World Trade Organization in 1995. This
was an historic achievement: it has required all WTO members to pass
and enforce copyright, patent and trademark laws, and given us a strong
dispute settlement mechanism to protect our rights. Thus we created a
set of standards enforceable between governments and subject not only
to our own trade laws but to multilateral rules.
Meeting Obligations
The TRIPs Agreement granted developing countries until January 1,
2000 to implement most provisions of the Agreement, and granted least
developed countries until 2006. In past years, we have pressed
countries wherever possible to accelerate implementation of these
obligations. Now we are working to ensure that developing countries at
a minimum are taking steps to finalize implementation of their
obligations. We are also working with least-developed countries through
bilateral and multilateral technical assistance to assist them in their
effort to implement the agreement in a timely fashion.
Use of Dispute Settlements
In the interim, we have been aggressive and successful in using WTO
dispute settlement procedures to assert our rights in developed
countries of American works, beginning with our initiation of the first
TRIPs-related dispute settlement ease against Japan in 1996. We have
since initiated an additional twelve cases, including:
With Portugal for failing to apply TRIPs-levels of
protection to existing patents,
Against Pakistan and India for it failure to provide a
``mailbox'' and exclusive marketing rights for pharmaceutical
products,
With Denmark and Sweden over the lack of ex parte civil
search procedures,
With Ireland for failure to pass a TRIPs-consistent
copyright law,
With Greece over rampant broadcast piracy,
With Argentina over exclusive marketing rights and data
protection,
With Canada for failing to provide a 20-year patent term in
all cases, and
With the EU regarding regulations governing geographical
indications.
We have brought complaints to address the failure of countries to
implement TRIPs obligations of particular importance to the
pharmaceutical, copyright, and trademark industry.
For example, a significant success for us is the ease we brought
against Ireland for failure to pass a TRIPs-consistent copyright law.
As a result of our dispute settlement consultations, Ireland adopted
the needed amendments to its copyright law and the U.S. and Ireland
announced resolution of the WTO ease brought by the United States. The
new law became effective on January 1, 2001.
On March 20, 2001, the Danish Parliament approved legislation
making civil ex parte searches available. The legislation was signed
into law on March 28, 2001. In addition, the WTO Appellate Body decided
in favor of the United States in a dispute with Canada regarding the
term of protection for patents applied for prior to October 1, 1989,
and recommended that Canada implement the recommendations of the
dispute settlement panel within a reasonable time. Effective July 12,
2001, Canada announced that it had enacted an amendment to its Patent
Act to bring it into conformity with its obligations under the TRIPs
Agreement.
On March 22, 2001, the United States and Greece formally notified
the WTO of the resolution of the dispute settlement case regarding
television piracy. This was possible due to the sharp decline in the
level of television piracy in Greece, passage of new legislation
providing for the immediate closure of infringing stations, closure of
several stations that had pirated U.S. films, and the issuance of the
first criminal convictions for television piracy in Greece.
New Dispute Settlement Cases
In the year ahead, we expect to be equally active at the WTO. We
are aware of U.S. industry's concerns regarding compliance problems in
a number of specific countries.
We are hopeful that many of these situations can be resolved
through consultations. If not, we are prepared to address the problems
through dispute settlement proceedings, where necessary.
Accessions to the WTO
The year 2001 saw the completion of over fifteen years of
negotiations for the WTO Membership of the People's Republic of China.
Three other long-term accession applicants, Lithuania, Moldova, and
Taiwan also completed the accession process in 2001, bringing total WTO
Membership to 144 as of January 1, 2002.
Our negotiations on the accession of these economies and twenty-
eight other applicants seeking WTO membership offer us a major
opportunity to improve intellectual property standards worldwide. These
include a number of the countries in which our intellectual property
industries have experienced significant piracy problems over the years
such as Russia. With Russia, and all other applicants, we consider
acceptance of the WTO requirement for enactment and enforcement of
modern intellectual property laws as set out in the TRIPs Agreement a
fundamental condition of entry.
Achieving Further Progress in the WTO TRIPs
Finally, let me offer a few thoughts on the Doha Development
Agenda.
The next year presents us with an opportunity to make fundamentally
important advances in intellectual property protection worldwide,
including through further implementation of existing WTO obligations in
many developing countries and through the accession negotiations.
Furthermore, under the WTO's ``built-in agenda,'' we will complete a
thorough review in TRIPs Council of developing-country implementation
of TRIPs obligations. And, as I mentioned, begin a multi-year review of
China's implementation of the TRIPs Agreement.
In close coordination with U.S. industry, we chose not to seek new
TRIPs negotiations as a priority in Doha. At a time when we are urging
WTO Members to complete their efforts to fully implement the TRIPs
Agreement, we felt it was premature to launch new negotiations. That
being said, like other Members, we foresee the possibility of
improvements to the TRIPs Agreement, in due course. Among other things,
we believe that it will be important to examine and ensure that
standards and principles concerning the availability, scope, use and
enforcement of intellectual property rights are adequate, effective,
and are keeping pace with rapidly changing technology, including
further development of the Internet and digital technologies. But
first, we will seek to establish these standards bilaterally and
regionally through our FTA negotiations.
We also expect that, once Members have the benefit of the
experience gained through full implementation of the TRIPs Agreement,
we will want to examine and ensure that Members have fully attained the
commercial benefits which were intended to be conferred by the TRIPs
Agreement. In any event, ``no consideration will be given to the
lowering of standards in any future negotiation below those set forth
in the TRIPs Agreement.''
conclusion
Mr. Chairman, intellectual property protection is one of our most
important and challenging tasks. We protect U.S. intellectual property
rights to protect the research, investments and ideas of some of
America's artists, authors, and private-sector and academic
researchers. Protecting intellectual property rights also enhances
America's comparative advantage in the highest-skill, highest-wage
fields; and helps ensure that the extraordinary scientific and
technical progress of the past decades continues and accelerates in the
years ahead to the benefit of all mankind.
In the past century, the commitment we have shown to enforce
respect for intellectual property rights at home has helped to create
the world's most technologically advanced economy; a flowering of new
artistic forms from films to sound recordings and computer graphic art;
and inventions in fields from medicine to aerospace that have improved
lives and opened new worlds of experience.
The implications of our international intellectual property
policies--for prosperity, creative innovation and improved lives
throughout the world--are no less. Congress, through passage of the
Special 301 law in 1988, passage of the Digital Millennium Copyright
Act in 2000 implementing the WIPO Internet Treaties, by providing
strong intellectual property mandates in Trade Promotion Authority
legislation, and in hearings such as this, deserves great credit for
bringing public focus to these issues. We look forward continuing the
effort together in the years ahead.
Thank you, Mr. Chairman and Members of the Committee.
The Chairman. Mr. Larson.
STATEMENT OF HON. ALAN P. LARSON, UNDER SECRETARY FOR ECONOMIC,
BUSINESS, AND AGRICULTURAL AFFAIRS, DEPARTMENT OF STATE
Mr. Larson. Mr. Chairman, I also have a written statement
which, with your permission, I would submit for the record.
The Chairman. It will be placed in the record.
Mr. Larson. Thank you. Mr. Chairman, we very strongly
agree with what you and Senator Allen said at the outset, that
the United States, as a knowledge-based and innovation-driven
economy, has a profound interest in the protection of
intellectual property rights. I would like to focus on how the
State Department is part of the team that Ambassador Allgeier
described by outlining some of the things we are doing in
Washington, but also in the field, to support this effort.
It begins the first day a foreign service officer walks
into the State Department. We have training on IPR as an
integral part of the training program. We also are training our
mid- and senior-level people in IPR issues. And I am speaking
with every outgoing ambassador about commercial advocacy and
IPR issues. We used our awards program to draw attention to
some of the success stories of both our younger officers as
well as our ambassadors in pressing the case for IPR protection
abroad.
We support the Special 301 process that Ambassador Allgeier
described by using our embassies to monitor other countries'
activities, to report to the interagency process, but we also
try to use the Special 301 not just as a report card but also
as leverage to get improved performance out of our trading
partners.
The State Department is chairing an interagency group that
is devoted to training for foreigners. This is an effort
designed to prioritize and coordinate the various agencies that
can contribute to training foreign government officials in IPR
protection.
The Chairman. Training the foreign government officials?
Mr. Larson. Correct.
The Chairman. Teaching them how to----
Mr. Larson. Working with customs officials, working with
regulatory officials. Some of it is just helping judges
understand these issues. In Jordan, for example, we had a very
effective training session that focused on judges.
The Chairman. Is it a hard sell?
Mr. Larson. Well.
The Chairman. I am not being facetious when I ask that.
Mr. Larson. No. I mean, I think part of what----
The Chairman. I am sorry to interrupt you.
Mr. Larson [continuing]. ----my testimony is about is that
we need a combination of pressure, but also persuasion. We
profoundly believe that, for these countries, if they want to
have an investment climate that works, if they want to attract
foreign capital, if they also want to be an innovation economy,
that they have to protect intellectual property. So we are
involved in--as part of our effort--in a process of persuasion.
I received a letter--two letters, in fact--late last year--
one from Jack Valenti and the other from Hilary Rosen, who you
will hear more from later--about an initiative taken by our
Public Affairs section in San Paolo, Brazil, which was designed
to have a public-private partnership that brought in large
segments of Brazilian society to discuss the benefits to Brazil
of having stronger IPR protection. And it was a very successful
effort, because it was really pitched from the standpoint of
what was in their interests.
Another initiative we have in this vein is to launch a Web
site about IPR protection. It has been in the works for awhile.
By coincidence, we got it up today. But it is--I think it is
very good, and it is something that obviously we can build on
as we go forward.
It is important to just underscore quickly one of the
points that Ambassador Allgeier raised about the international
legal structure. I had the honor of testifying before this
committee in 1998 on behalf of the two WIPO Internet treaties.
And we do think those are very important initiatives. We were
grateful that the Senate moved promptly to give advice and
consent. And the copyright--the WIPO copyright treaty, has now
been ratified by enough governments that it will enter into
force next month.
Without going into too much detail, Mr. Chairman, because
it is outlined in my testimony, I do want to highlight that we
have had a number of success stories. Ambassador Allgeier
mentioned the persistent efforts that have resulted in Hong
Kong in the passage of a good optical disk law and the shutting
down of pirating production lines. In Greece we had an
ambassador that pressed this issue strongly and was able to
convince to the government to pass tougher enforcement laws.
Similarly, in the United Arab Emirates, one of our ambassadors
got very, very active on these issues and persuaded the
government to launch raids on stores that were selling pirated
computer software. In Paraguay, we had a young officer who just
very, very actively pushed the government to accede to the WIPO
Copyright Treaty as well as the WIPO Performances and
Phonograms treaty. And there are many other examples, as well,
where we are using our embassies abroad to support the
government-wide effort to persuade other countries to respect
intellectual property rights. We really do think we have made
some progress, but we would be the first to acknowledge that we
have an awful lot that we need to do in the future.
[The prepared statement of Mr. Larson follows:]
Prepared Statement of Alan Larson, Under Secretary of State for
Economic, Business and Agricultural Affairs
Thank you for the opportunity to meet with you today to discuss
intellectual property policy and enforcement. The United States is a
knowledge-based, innovation-driven economy. The protection of
intellectual property rights is critically important to our prosperity
and economic leadership.
The Department of State is fully committed to the Administration's
goal of advancing the protection of intellectual property worldwide. At
all levels of the Department, we are actively engaged in a cooperative
effort that involves other Washington agencies, the private sector, and
foreign governments.
What I would like to do today is to touch on some recent trends in
intellectual property protection, and then describe briefly the role of
the Department of State.
recent trends in intellectual property protection
In assessing the state of intellectual property protection
overseas, we see two complementary and positive trends in recent years.
First, we observe a significant, if not readily quantifiable, increased
appreciation of the benefits inherent in effective protection of
intellectual property. More and more of our trading partners are coming
to understand that their future growth and development depends in large
part on their becoming active players in the knowledge-based economy.
They also are coming to appreciate that strong intellectual property
protection is necessary to create an attractive investment climate. In
short, economic self-interest is becoming a very important factor in
enhancing intellectual property protection overseas.
Recent statistics about our own economy are illustrative. The
copyright industries now account for about five percent of our GDP, and
this sector has grown at twice the rate of the rest of the U.S.
economy. The positive impact of intellectual property protection can
also be seen in India's emergence as a dynamic competitor in the
world's computer software sector after that country adopted higher
levels of copyright protection. However, Indian scientists do not yet
enjoy similar levels of patent protection for pharmaceutical products.
As a result, domestic innovation and growth in that sector remain
stymied.
Although much more remains to be done, we believe we have made
tangible progress in improving the level of intellectual property
protection around the world. Many developing country WTO Members have
passed domestic legislation and begun to implement enforcement measures
to comply with their obligations under the TRIPs Agreement.
Several years ago, I testified in support of the World Intellectual
Property Organization (WIPO) ``Internet'' Treaties. The Senate did
promptly give its advise and consent to these treaties. As a result,
they are expanding the protection afforded by the TRIPs Agreement to
the new technological environment and are providing a legal framework
to facilitate the further development of e-commerce.
I thank the members of the Committee for promptly ratifying these
treaties. I am pleased to note the WIPO Copyright Treaty has been
ratified by enough governments for it to enter into force in March. We
continue to urge other governments to ratify as well the companion WIPO
Performances and Phonograms Treaty.
Although the trends for effective intellectual property protection
are positive, significant challenges remain. The focus of this year's
Special 301 review will be the growing problem of piracy of optical
media (music CDs, video CDs, CD-ROMs, and DVDs).
This pernicious form of piracy spreads quickly, infecting whole
regions unless strong and effective measures are taken to prevent
illicit operators from setting up shop. But piracy of optical media can
be stopped if governments are willing to act--as did the Government of
Bulgaria several years ago.
When the pirates moved into new fields of opportunity in Ukraine,
the Department and our Embassy in Kiev began working intensively with
USTR, other government agencies and the private sector to press the
Government of Ukraine to close down pirating facilities. For a time,
our efforts were somewhat successful, but the commitment of the
Government of Ukraine unfortunately did not last. Last year's
designation of Ukraine as a Priority Foreign Country and the recent
imposition of sanctions sends a strong signal that we will not tolerate
wanton piracy of our intellectual property.
Another priority will be implementing initiatives to proactively
combat computer software piracy. The Department of State is working
closely with USTR and the private sector to get our trading partners to
require government ministries and offices to use only authorized
software.
In addition, we are working closely with USTR and other Washington
agencies to help ensure that WTO Members comply fully with their
legislative and enforcement obligations under the TRIPs Agreement.
These obligations came due for developing countries on January 1, 2000.
The success we achieve through these and other intellectual
property initiatives depends on the close and constructive relationship
we enjoy with the private sector. The progress we have made to date has
been and will continue to be a joint enterprise.
the state department's role in intellectual
property policy and enforcement
The Department of State has as its primary mission using U.S.
foreign policy tools to protect Americans' security and prosperity. The
protection of intellectual property abroad figures prominently among
our international economic objectives. Our Ambassadors and embassy
country teams around the world are devoted to promoting the protection
of intellectual property, by mobilizing government agencies in the
field, host government officials and the private sector.
Internal Preparation
New Foreign Service officers learn about the Department's policy in
this area as they enter on duty. Members of each orientation class are
briefed on the importance of intellectual property protection, and the
key place it occupies in our international economic policy agenda.
We also provide intellectual property training as part of our mid
and senior level professional courses. Specialized training for
economic officers includes instructional modules on intellectual
property. We also provide a stand-alone course on intellectual property
that is geared specifically to economic officers being assigned to
positions in countries where intellectual property issues are
particularly challenging.
Chiefs of Mission and Deputy Chiefs of Mission are briefed on
intellectual property issues before assuming their duties. They and
Economic officers headed to overseas posts receive briefings from other
agencies and the private sector. A number of representatives from the
intellectual property organizations we receive briefings from are
testifying before the Committee today.
Finally, I have made it a practice to meet with outgoing Chiefs of
Mission. The importance of intellectual property protection is high on
my agenda in all these sessions.
Cooperative Activities
The Department of State plays a strong role in the annual Special
301 review of country intellectual property practices. Participating
agencies rely heavily on the accurate, up-to-date information we
receive from our posts abroad. The objective of the review is not
simply to give our trading partners an intellectual property report
card. Rather, we seek to employ Special 301 to leverage real progress
with host governments. In this regard, our Ambassadors and embassy
officers overseas play a critical role. They are well positioned to
effectively convey our views and they have the on-the-ground contacts
needed to work the issues with host governments and the private sector.
Our participation in the Special 301 process is a year-long
commitment to bilateral engagement with countries worldwide. Our posts
are continuously looking for ways to bring together all parties of the
intellectual property community, and to help them work together more
effectively.
With growing evidence of links between intellectual property crime,
organized crime and funding for terrorist activities, embassy country
teams are seeking to foster closer ties between U.S. Government
agencies and the foreign counterparts who work these enforcement
issues.
Another focus of the Department of State's work is our active
participation in international negotiations. At the WTO Ministerial in
Doha, I worked closely with my USTR colleagues and the private sector
to reach agreement on a Declaration on TRIPs and Public Health. The
Declaration fended off efforts to weaken TRIPs by reaffirming the
commitment of WTO Members to the TRIPs Agreement and by drawing
attention to the flexibilities the Agreement already affords WTO
Members in pursuing their public health objectives.
The Department of State has joined with other U.S. Government
agencies in working closely with the World Intellectual Property
Organization (WIPO). WIPO saves our inventors and innovators countless
dollars as well as time in registering patents overseas. WIPO also
provides a valuable service in training developing countries to improve
their intellectual property regulatory regimes.
Training, Technical Assistance and Public Diplomacy
As developing countries strive to improve their intellectual
property regimes, the U.S. Government and the private sector are
receiving an increasing number of requests for intellectual property
training and technical assistance.
The U.S. Agency for International Development (USAID) estimates it
provided $7.1 million in assistance over the period 1999-2001 to
developing and transition countries to support their implementation of
the TRIPs Agreement. The Department of State's Bureau of International
Narcotics and Law Enforcement allocated about $377,000 for IPR training
in FY 2001. Our Bureau of Educational and Cultural Affairs brings to
the United States officials, academics, journalists and business people
from developing countries to show them the benefits of protecting
intellectual property rights--thereby creating advocates for stronger
intellectual property protection.
The U.S. Customs Service, U.S. Patent and Trademark Office, the
Federal Bureau of Investigation, the Department of Justice, the
Department of Commerce, the Copyright Office of the Library of
Congress, and the Office of the U.S. Trade Representative participate
in these training and assistance activities by providing experts for
programs funded by USAID, the Department of State, and by their own
budgets. U.S. industry also funds and provides significant amounts of
training to developing countries.
The Department of State chairs an Intellectual Property Rights
Training Coordination Group that is working with other U.S. agencies
and the private sector to prioritize program proposals and to ensure we
get the most out of our training and assistance investments. It
responds to training and assistance recommendations from both our
embassies overseas and industry. To enable government and the private
sector to more effectively pool their efforts, the Group is working to
improve a database of training programs. Examples of some of these
programs include;
Seminars sponsored by USAID for the Jordanian public and
private sector on benefits of intellectual property protection
and training for Jordanian judges on intellectual property
laws.
International Law Enforcement Academies' IPR enforcement
programs, where State provides the facility and program funding
and USG enforcement agencies provide the substantive expertise.
Conferences sponsored by the Department of Commerce under
its Commercial Law Development Program (CLDP), which bring in
officials from foreign governments. A recent conference in
Croatia brought together officials from Albania, Bosnia and
Herzegovina, Bulgaria, Croatia, FYR Macedonia, and Romania.
Our embassies and consulates also have hosted assistance programs
sponsored by the private sector. For example, in Bulgaria, the Motion
Picture Association of America (MPAA) sponsored a program to train
border control police and customs officers on identification of pirated
product. In Croatia, the Business Software Alliance (BSA) provided
training on software piracy for Croatian trade inspectors.
Some of the most effective training programs are educational
efforts organized or sponsored by the Department of State's public
diplomacy corps. A recent example of this was a conference organized by
the Public Affairs Section of our Consulate General in Sao Paulo. The
purpose of the conference was to explore ways to combat piracy in the
Brazilian market, including better training and public/private
collaboration.
The conference was itself a shining example of the partnering that
is possible with the private sector. The Consulate General staff worked
with the Brazilian government and industry representatives to organize
the conference, drawing in law enforcement officials, representatives
of anti-piracy groups, and leaders from the entertainment and software
industries. The value of this conference--and this type of initiative--
was confirmed by positive post-conference comments from both the Motion
Picture Association of America (MPAA) and the Recording Industry
Association of America (RIAA).
Other examples of public diplomacy efforts include:
Sponsoring officials from developing countries to travel to
the United States as part of the State Department's
International Visitors Program to study intellectual property
protection in the United States.
Sending intellectual property experts abroad as speakers to
various developing countries.
Hosting our widely appreciated WorldNet interactive
videoconferences, which enable intellectual property experts to
reach audiences in several countries at the same time.
Creating an intellectual property web site for foreign
audiences which will include key reports, international
agreements, links to relevant U.S. Government web sites, fact
sheets, and original articles on current intellectual property
issues. This web page will be launched today.
Success Stories
The educational work of our embassies and consulates, their
reporting and their interventions with foreign government officials
have helped the U.S. Government in many other instances to advance
intellectual property protection. Following are several examples:
In Hong Kong, persistent efforts on the part of consulate officers
paid off when authorities passed a good optical disk law, shut down
pirating production lines and drove pirating distributors out of
business.
In Singapore, embassy interventions convinced the local authorities
to shut down ``night markets'' which sold pirated merchandise.
In Greece, ambassadorial pressure in a sustained campaign played a
key role in convincing the government to pass tougher enforcement laws.
As a result, audio/visual piracy--specifically TV stations showing
movies without paying royalties--have declined from $100 million to
near zero.
In the UAE, repeated representations by the Ambassador resulted in
successful raids on stores selling pirated computer software. Also, the
Ambassador was given the Department's Charles E. Cobb Award for helping
PhRMA and the UAE reach agreement ending UAE piracy of U.S.
pharmaceutical products.
In Slovenia, embassy interventions, using Special 301 as leverage,
convinced the government to pass legislation protecting test data
submitted to obtain marketing approval for pharmaceuticals.
In Paraguay, embassy efforts helped convince the government to
accede to both the WIPO Copyright Treaty and the WIPO Performances and
Phonograms Treaty. The officer who led this effort was given the
Department's Charles E. Cobb, Jr. Award for Initiative and Success in
Trade Development.11In South Africa, embassy initiatives led to the
founding of a group representing all intellectual property industries
and companies in the country. The group then developed ways for customs
agents at remote borders to better identify counterfeit goods.
In Argentina, the Deputy Chief of Mission was honored by PhRMA for
his outstanding support as a determined advocate for adequate and
effective intellectual property protection for pharmaceutical products
in that country.
conclusion
The State Department's contribution to intellectual property
protection rests in large part on our ability and commitment to work
with all relevant parties, public and private, both here and abroad. We
welcome this broad responsibility and opportunity. The challenge for
the United States and for other countries throughout the world to
strengthen their ``innovation economies'' relies not only on protection
of intellectual property, but also on the free flow of information and
ideas that is characteristic of democracy.
The Chairman. Thank you very much. Mr. Gordon, welcome.
Thanks for--did you come in today? Or yesterday?
Mr. Gordon. Yesterday.
The Chairman. Thank you for making the trip. It's a long
haul. We appreciate it.
Mr. Gordon. Mr. Chairman----
The Chairman. Before you begin, I have one question. Is
this job you are doing out there now easier than when you were
running the drug unit?
Mr. Gordon. More political. [Laughter.]
The Chairman. Probably more interesting.
Mr. Gordon. Everyone in our side gets on the side of drug
enforcement. It's harder to balance the other things when you
are the U.S. Attorney.
The Chairman. Thank you.
Mr. Gordon. Thank you very much for having me.
STATEMENT OF JOHN S. GORDON, U.S. ATTORNEY, CENTRAL DISTRICT OF
CALIFORNIA
Mr. Gordon. Mr. Chairman and Senator Allen, I am pleased
to testify today on the efforts of the Department of the
Justice and the U.S. Attorney's office in Los Angeles to combat
the high-tech piracy of intellectual property.
Our country leads the world in the creation and export of
intellectual property, or IP. The IP sector of our economy
faces grave threats from high-tech pirates who counterfeit or
copy computer chips and computer software programs, motion-
picture video tapes and DVDs, and music CDs. IP criminals also
manufacture and sell unauthorized access devices which allow
people to receive satellite TV programs without paying for
them. In each case, criminals steal the profits that rightfully
belong to the creators or makers of the IP being infringed or
stolen.
High-tech IP pirates operate throughout the U.S. and around
the world. Based on our experience in Los Angeles, the largest-
scale IP pirates operate out of Asia, and Asian organized crime
is believed to bankroll and reap the lion's share of profits of
many IP infringement schemes that we have uncovered in the
central district.
In large part due to the funding and the personnel
allocations provided by Congress to fight computer and IP
crime, the Department has set up ten units around the country
referred to earlier by Senator Allen, dubbed ``Computer Hacking
and Intellectual Property,'' or CHIPS units, composed of
prosecutors specially trained to combat computer and IP crime.
Such units have been established in San Jose, Los Angeles, San
Diego, Seattle, Dallas, Atlanta, Boston, Brooklyn, Manhattan,
and Alexandria, Virginia.
In Los Angeles, we formally established our CHIPS unit last
year. Over the last two years our office has prosecuted more
than 50 defendants for a variety of high-tech IP offenses.
Those have included the trafficking of high-quality counterfeit
versions of the latest Microsoft software programs, the
smuggling from Far East countries of counterfeit Microsoft
software and accompanying packaging and licensing paperwork,
illegally copying software and high-security computer chips for
arcade-style video games and illegally modifying Intel computer
chips to run at higher speeds, then re-marking the chips to
reflect the higher speeds without informing the consumer,
thereby allowing the seller to command a higher price while the
consumer and Intel are both defrauded, and finally
manufacturing and selling counterfeit DirecTV access cards
which allow people to steal satellite programming without
paying for it.
In the Central District of California, we recently
convicted the first two defendants in an international anti-
piracy investigation that has been directed and is being
directed by DOJ's Computer Crimes and Intellectual Property
Section, or CCIPS. Operation Buccaneer targeted a high-level
Warez organization, an international underground network that
obtains software, rips it--that is, removes the security
devices that are designed to prevent unauthorized duplication--
and then posts it on the Internet for use by other members of
the group, sometimes before the software is commercially
released--again, referring to what the Chairman talked about in
his opening statement.
These organizations are believed to be responsible for the
vast majority of pirated software, games, and movies available
on the Internet today. In Operation Buccaneer, CCIPS is working
with my office in Los Angeles, as well as several other U.S.
Attorney's offices, the Customs Service, and various foreign
law-enforcement agencies to mount a coordinated international
attack on major Warez leaders and members. Approximately 20
foreign searches have been conducted in the U.K., Australia,
Finland, Norway, and Sweden. We're working to form and solidify
international relationships and interagency cooperation that
are required to successfully conduct such investigations.
We're also working with industry victims such as the Motion
Picture Association of America to identify and apprehend
individuals using the Internet to illegally distribute
copyrighted motion pictures and other creative works. We're
working with DirecTV and other satellite TV companies to
identify and apprehend computer hackers who circumvent the
security features that allow people to steal satellite
programming. We're infiltrating software piracy and trafficking
rings that use the Internet to carry out crimes.
The Customs Service continues to aggressively target and
intercept organized rings which smuggle goods into our country
through Los Angeles and Long Beach Harbors and LAX. And in the
Central District, we also intend to continue to conduct
industry outreach and facilitate interagency cooperation and
conduct IP crime training for our agents and prosecutors.
CCIPS at DOJ intends to continue to conduct specialized IP
training for prosecutors and investigators from all over the
world who both come here and are trained elsewhere. That
training is designed to help solidify the effective
international alliances that are necessary to combat IP piracy.
I thank you for the opportunity to address the committee on
these important issues, and I would be happy to answer any
question you might have.
[The prepared statement of Mr. Gordon follows:]
Prepared Statement of John S. Gordon, United States Attorney, Central
District of California
computers, cyberspace, and the global reach of ip crime
Mr. Chairman and Members of the Committee, my name is John Gordon.
I am the United States Attorney for the Central District of California
(CDCA), the nation's most populous Federal judicial district with over
fifteen million residents. It is my privilege to appear before you
today to discuss the national and international efforts of the
Department of Justice (DOJ) as a whole and the U.S. Attorney's Office
(USAO) in Los Angeles in particular to combat the infringement of
intellectual property. This is an extremely important topic, and I
commend the Committee for holding this hearing.
Intellectual property, often referred to as ``IP,'' is a vital part
of our economy. As we continue to shift from an industrial economy to
one that is more dependent on information technology, the assets of
this country, including software, music, and other digital products,
are increasingly IP-based. Additionally, the health of the U.S. economy
depends on consumers trusting that the products they buy are legitimate
and safe, which in turn requires the vigorous protection of registered
trademarks. Furthermore, the incentive of American businesses to
produce innovative products and designs depends in part upon protection
of their trade secrets from theft by other domestic and foreign
businesses. The protection of copyright, trademark, and trade secrets
is the protection of IP.
The United States leads the world in the creation and export of IP
and IP-related products. Not surprisingly, the infringement of IP
rights is particularly harmful to our economy. High-tech thieves
counterfeit computer chips and computer software programs and
accompanying packaging and pass the products off as authentic. Software
pirates obtain computer source code or strip the encryption features of
software, movie, or music CDs or DVDs, and unlawfully duplicate and
distribute virtually identical copies of such copyrighted goods.
Crooked computer programmers obtain the code used in satellite TV
access device cards and manufacture and sell unauthorized access cards
to people who don't want to pay monthly fees for satellite programming.
In each case, criminals are stealing the profits that rightfully belong
to the creators or makers of the copyrighted, trademarked, or otherwise
protected property.
High-tech counterfeiters, software pirates, and those who engage in
economic espionage are as different as the intellectual property they
counterfeit or steal. They can be computer administrators or computer
hackers, or members of organized criminal groups that have moved into
the IP field. Many copyright and trademark pirates operate out of
countries, often located in Asia or Eastern Europe, where counterfeit
and imitation products can be made inexpensively by using underpaid
laborers.
DOJ is charged with investigating and prosecuting Federal IP
violations. Primary investigative and prosecutorial responsibility
within DOJ rests with the USAOs and the Federal Bureau of Investigation
(FBI), with the support and coordination of DOJ Criminal Division's
Computer Crime and Intellectual Property Section (``CCIPS''). CCIPS is
DOJ's highly specialized team of over two dozen attorneys who focus on
computer and high-tech crime. CCIPS works cooperatively with the 93
USAOs across the country through the Computer and Telecommunications
Coordinators (CTCs) who work in each USAO. CTCs are Assistant U.S.
Attorneys who have been specially trained in investigating and
prosecuting computer crime cases and IP matters. In addition to the
nationwide CTC network, in July 2001, DOJ announced the formation of
ten highly specialized prosecutorial units dedicated to fighting
cybercrime in districts with a targeted need. These units have been
dubbed Computer Hacking and Intellectual Property (or ``CHIPs'') units.
CDCA is one of the districts that has formed a CHIPs unit to mount a
focused and specialized attack on cybcrcrime.
The USAO in Los Angeles is on the front line of IP rights
enforcement. Los Angeles and Long Beach are major international ports
serving as the gateway for billions of dollars of imports from Asia. A
significant proportion of counterfeit goods entering the country
travels through those ports. Accordingly, we work closely with the U.S.
Customs Service to stem the flow of such contraband. Many high-tech
industries are also located in the CDCA. Los Angeles is the
entertainment capital of the world. It is home to the motion picture
and recording industries, as well as numerous high-tech developers,
manufacturers, and distributors, big and small. While large businesses
are often victimized by IP crime, small businesses, which comprise a
sizeable portion of the Southern California economy, can be devastated
by organized commercial-scale piracy. Unfortunately, technology has
made such large-scale piracy more common in the U.S. and around the
globe.
The burgeoning use of the Internet and digital media has spurred
the international growth of IP. Software, music, and movies have all
benefitted from technological advancements related to computers and the
Internet. However, these technological advances have also produced new
means of illegally reproducing and distributing copyright and trademark
protected material. Congress has responded to this mounting problem by
enacting new criminal laws and amendments to the criminal copyright
statute that prohibit such misappropriation. The 1997 amendments made
by the No Electronic Theft (NET) Act extended Federal criminal
copyright law to large-scale, not-for-profit, unlawful reproduction and
distribution of copyrighted works. However, IP infringers are evolving
with the pace of technology.
For example, there is a new brand of organized high-tech IP piracy,
discussed in detail below, that operates internationally and engages in
the large-scale infringement of digital media using the Internet. The
Internet's emerging role in IP infringement virtually guarantees that
we will witness a growth in such conduct, requiring many more such
investigations. Furthermore, because the Internet has no borders, these
cases will necessarily require a greater focus on international
investigations. Fortunately, we are already experiencing success in
tackling these new challenges.
the evolution of doj's ip enforcement program
The enforcement of IP rights has been a DOJ priority since July
1999, when the Attorney General's Intellectual Property Rights
Enforcement Initiative was announced. Since then, the USAOs, working
cooperatively with DOJ, CCIPS, the FBI and Customs, have been making
criminal IP enforcement a priority by increasing the number and quality
of criminal IP investigations and prosecutions. Today's IP enforcement
effort is a multi-pronged, multidisciplinary effort.
As I mentioned earlier, the formation of the CHIPs units represents
DOJ's evolving effort to fight crime in the digital age. New CHIPs
units have been established in Los Angeles, San Diego, Atlanta, Boston,
New York (Brooklyn and Manhattan), Dallas, Seattle and Alexandria,
Virginia. The units are based upon a model pioneered by the USAO in the
Northern District of California, where the concept has proven effective
in prosecuting cybercrime and IP crimes. Districts such as the CDCA
were chosen for the CHIPs program because of a significant
concentration or explosive growth of high-tech industry, or the
presence of other likely targets for IP or computer crimes. In the
CDCA, we have six prosecutors in Los Angeles and two in our Orange
County branch office dedicated to prosecuting complex computer crimes,
including high-tech IP offenses. The expertise of the prosecutors in
these units, as well as in CCIPS, will allow us to continue the success
we have had to date and to ensure that in the future, DOJ will continue
to battle effectively against IP crime.
In the meantime, CCIPS has coordinated prosecutions with the USAOs,
focused on creating specialized IP training courses for investigators
and prosecutors, streamlined the victim-industry referral process,
developed relationships with affected industries, and worked with
Congress and the Sentencing Commission to improve the sentencing
guidelines for IP crimes. CCIPS has also been tackling the
international IP issues that are becoming increasingly important to
American IP rights enforcement.
Realizing the significant international aspects of IP enforcement,
the Department has concentrated its international efforts on boosting
the visibility and attention given to IP enforcement in four important
areas: coordinating international training efforts to address specific
enforcement-related issues; identifying bilateral and multilateral
forums to promote investigative cooperation; coordinating efforts with
other agencies charged with promoting effective IP enforcement regimes;
and integrating the latest empirical data and trends involving
transborder IP crime into DOJ's enforcement operations. Where
appropriate, the U.S. government has encouraged our foreign
counterparts to create specialized units devoted to investigating and
prosecuting IP crime. DOJ has also participated in numerous training
courses sponsored by the U.S. Government and industry, both within the
U.S. and overseas, especially in targeted countries where IP crime is
prevalent.
These multi-pronged efforts together encompass DOJ's IP program.
Together they are advancing our campaign to prevent and, where
necessary, prosecute IP crime in the U.S. and abroad.
the cdca's ip enforcement efforts
Over the past two years, under the IP initiative, the USAO in Los
Angeles has prosecuted a wide variety of IP crime. We have prosecuted
more than 50 defendants for an array of high-tech IP offenses.
Summarized below are examples of cases that we have successfully
prosecuted:
Software Piracy
September 2000--a defendant from Plano, Texas was convicted
of running a trafficking ring that purchased and distributed
counterfeit Microsoft software through a company in Cincinnati,
Ohio. The black-market value of the software was over $600,000.
Defendant was sentenced to one year in prison and ordered to
pay more than $650,000 in restitution to Microsoft.
February 2001--a man who sold approximately $30,000 in
counterfeit software from his home was convicted of selling
counterfeit Microsoft software. The defendant previously
entered into a pre-trial diversion agreement with the
government to avoid the filing of charges against him if he no
longer engaged in selling counterfeit software. Within weeks of
signing the agreement, however, defendant once again was
advertising, manufacturing and selling counterfeit software.
June 2001--a woman was arrested by U.S. Customs agents for
selling cutting-edge pirated software including Windows
Millennium Edition. Search warrants were executed, resulting in
the seizure of over $7 million in counterfeit software. The
woman has pled guilty and is pending sentencing.
August 2001--FBI agents raided several locations after a
year-long operation to infiltrate a Microsoft software piracy
ring. Agents found over 10,000 units of counterfeit Windows
operating systems as well as counterfeit certificates of
authenticity. Through the use of a confidential informant,
investigators were able to learn of the ring's operation to
import counterfeit products from Asia and sell them in the
United States. Four defendants were indicted, have pled guilty
to IP offenses, and are awaiting sentencing.
Counterfeit Computer Chips
June 2000--Two defendants were arrested and later were
convicted of copying software and high-security computer chips
for arcade-style video games. Defendants developed a method of
circumventing the security technology in the original chips
which enabled the defendants to copy the software and chips.
1999-2000--defendants obtained low-speed Pentium II computer
chips and modified the chips to enable the chips to run at a
higher speed. The chips were then repackaged into counterfeit
Pentium II cases and retail boxes which reflected the new
higher speed and were sold to small computer retailers in Los
Angeles, San Jose, Boston, and North Carolina. The counterfeit
chip casings were obtained from suppliers in Taiwan. The chips
were destined for or sold in the domestic retail chip market
through small computer retailers. The re-markers typically set
up front companies in nominee names to sell to these retailers.
While the retailers often knew they were buying re-marked chips
because they purchased the illegal chips at prices
substantially below the normal market price, consumers
purchased the chips at the full retail price and believed they
were purchasing an authentic Intel product along with Intel's
customer support. Intel received numerous calls from consumers
who believed that they purchased an authentic Intel product.
Not only did consumers get defrauded, but in some instances,
the counterfeit chips may have caused computer fires because
the chips were running faster than they were designed to run.
In a related case, chips were stamped with a red lobster, which
is the mark of a specific Taiwanese organized crime group
(reminiscent of kilos of cocaine being stamped with a specific
mark or word to designate the particular Colombian organization
that manufactured the cocaine). Intel has seen similar marks in
other cases.
Satellite Signal Theft--DirecTV
August 2000--14 defendants in a nation-wide sweep were
arrested for stealing satellite signals in connection with
selling unauthorized and counterfeit DirecTV access cards. All
of the defendants were convicted and received sentences ranging
from probation to 15 months imprisonment.
Our newly formed CHIPs Unit has a number of other cases currently
under investigation that will continue our aggressive pursuit of IP
crime.
recent national success in ip enforcement: internet software piracy
The intersection of IP infringement and the burgeoning use of the
Internet has produced a new high-tech means of committing large-scale
copyright infringement. International underground networks with
thousands of members from countries spanning the globe have organized
themselves into competitive gangs that obtain software, ``up'' it (that
is, remove various security features designed to prevent unauthorized
duplication of the software) and post it on the Internet for use by
other members of the group--sometimes before the software has been
commercially released. These high-level ``Warez'' (as in soft-warez)
organizations are believed to be responsible for the vast majority of
the pirated software, games and movies available on the Internet today.
The top-level groups are highly structured, security-conscious
organizations. Frequently, the members of these groups never meet and
know each other only through their screen names. The top Warcz groups
use the latest technology to expand their reach and avoid detection by
law enforcement.
To provide some idea of the volume of illegal material available on
these sites, many archive sites contain 2,000 gigabytes or more of
pirated software. 2,000 gigabytes of software is equivalent to 1.5
million, 3 1/4-inch diskettes full of copyrighted material. The
estimated retail value of the material expected to be seized from a
major archive site is in the millions of dollars.
In December 2001, DOJ and the Treasury Department dealt a major
blow to Warez organizations. DOJ, in conjunction with the U.S. Customs
Service, the FBI, and various foreign law enforcement agencies,
simultaneously executed over 100 search warrants in three operations in
what is to date, the most significant Federal law enforcement action
ever taken against copyright piracy on the Internet. These operations,
dubbed ``Buccaneer,'' ``Bandwidth,'' and ``Digital Piratez,'' struck at
all aspects of the Warez illegal software, game and movie trade. The
CDCA, which participated in Operation Buccaneer, recently took the
first guilty pleas in the case from two defendants who used UCLA's
computer systems to support the group's software piracy. As part of
their pleas, the defendants agreed that their activities caused $5
million in loss to industry.
An important and unprecedented aspect of the December 2001
operations is that the investigation did not stop at this nation's
borders. U.S. law enforcement worked closely with law enforcement from
six foreign countries to identify, target and execute searches against
major Warez leaders and membership conducting their illegal activity
from overseas. Our foreign counterparts should be commended for their
efforts in what has been a truly significant cooperative effort to
combat global piracy. In Operation Buccaneer, over 20 foreign searches
were conducted in the United Kingdom, Australia, Finland, Norway and
Sweden against major players in these international syndicates. We
anticipate future success in the investigation of these sorts of
transborder IP crimes and are working to form and solidify the
international relationships and inter-agency cooperation that are
required to successfully conduct such investigations. We cannot
effectively combat software piracy unless it is confronted on an
international scale.
the road ahead
The CDCA's goal is to increase the quantity and quality of high-
tech IP investigations and prosecutions. We are working with industry-
victims such as the Motion Picture Association of America to identify
and apprehend individuals using the Internet to illegally distribute
copyrighted motion pictures and other creative works. We are working
with DirecTV and other companies to identify and apprehend computer
hackers who are circumventing security features to steal satellite
programming and other satellite signals. We are infiltrating software
piracy and trafficking rings that use the Internet to carry out their
crimes. The Customs Service continues to aggressively target and
intercept organized rings that smuggle goods into this country through
our major ports and through our major airport--LAX. We will also
continue to conduct industry outreach and facilitate inter-agency
cooperation in IP enforcement, and will continue to conduct IP crime
training in our district for agents and prosecutors.
The funding that Congress recently provided for additional
Assistant U.S. Attorneys is greatly appreciated by the CDCA and by DOJ.
It will help us more effectively pursue our law enforcement
initiatives. In addition, the USA Patriot Act has provided prosecutors
valuable tools to streamline the collection of essential electronic
evidence and identify high-tech IP pirates. We greatly appreciate your
support for our work as it continues to produce results.
Thank you for the opportunity to address this Committee on these
important issues. I would be pleased to answer any questions you might
have.
The Chairman. Thank you very much. With the permission of
my colleagues, we will do--what time is the first vote? We
could do ten-minute rounds. We'll do ten-minute rounds.
Senator, I do not know why you are so far down. You are
welcome up here.
Senator Boxer. That's okay. I have got my little props,
and I am ready to go.
The Chairman. You just wanted to be next to Jack in his
orange shirt. [Laughter.]
Well, let me begin with you, Mr. Gordon. What can you tell
us in an open session about the criminal organizations that are
involved in large-scale piracy and counterfeiting? Are they the
only types of activities these organizations are involved in,
or do they also get involved in other criminal enterprises? Are
they specialized, or are they part of broader operations? Are
there any links you are aware of?
Mr. Gordon. I think it is both. I just met with the FBI
and Customs people in Los Angeles who are most familiar with
our current investigations and trends that they are seeing, and
they tell me that in Los Angeles, on the West Coast, Asian
organized crime is the number-one perpetrator. And Asian
organization crime, as you are probably aware, does not limit
itself to any particular type of crime. They go where the money
is, and they oftentimes try to engage in a calculus of what
makes the most money at the least risk, both of getting caught
and, if you do get caught, how much time you are going to get.
And while drug trafficking is extremely heavily penalized
in this country, IP piracy, while it is improving, is still not
at that level. So it is a fairly low-cost way of making a whole
lot of money.
The Chairman. Quite frankly, that was my next question,
and I would invite either of our other witnesses to respond.
And that is that we have, for a long time--and this is not a
criticism of anyone in the Senate, in the administration, or
past administrations--but for the longest time, we have seemed
to look at this, I think--having been Chairman of the Judiciary
Committee for so many years prior to this and Chairman of the
Criminal Law Subcommittee for two decades, I am part of the
problem, what I am about to say--we have viewed, in terms--
there is an old expression. If you want to know what a society
values most, take a look at what it punishes the harshest if
that value is, in fact, infringed upon. And there is very
little correlation between the punishment that flows from
piracy of intellectual property and a similar punishment that
would flow for doing something that affected the property value
or had the same amount of money that was attendant to it if it
were done in another form.
For example, you know, you go to law school--as the U.S.
Attorney will tell you, and my friend from Virginia--and, you
know, we learn about petty theft and grand theft that relates
to the amount of the value of the thing stolen. And yet if, in
fact, you were to pirate, you know, a half a million dollars
worth of intellectual property, notwithstanding the fact you
may not have made a half million dollars from that piracy, you
get one penalty. If you were to literally go out and rob a bank
or rob--if you were to burglarize someone's home and steal a
half million dollars in property, the penalty is much more
severe.
Do any of you have any view on whether or not the severity
of the penalty and the treatment of this as a crime more than
as an economic or trade issue would have any impact on the
dimension of the problem?
Mr. Gordon. I did want to say that a big change in the IP
piracy fight came when the penalties under the sentencing
guidelines changed from just looking at the value of the knock-
off good, for example, rather than the value of the good that
is being infringed. When that change was made and you start
looking at how much the actual Microsoft product is worth, how
much the actual movie that is being infringed, is worth, rather
than the value of the knock-off, that increased penalties
considerably, and I think predictably will have some greater
deterrent value than just punishing someone for the value of
the knock-off.
The Chairman. Gentlemen?
Ambassador Allgeier. Yes. I would say if you are
concerned, Mr. Chairman, about the disparity in levels of
punishment for intellectual property crimes in the United
States, versus other crimes, that disparity is a multiple of
that, internationally. And frankly, that is, I think, it is the
biggest obstacle that we face in dealing with--especially in
developing countries--the appreciation that this is really a
crime.
And you see that very clearly--countries that adhere to the
TRIPs, they have the laws in place, but the penalties --you
probably could get a worse penalty by parking illegally out
here in the District of Columbia.
Mr. Larson. Yeah, I agree with that. I think it is both--
the issue of the penalty and then the predictability that the
penalty will be imposed, that both are a problem in many of
these countries.
The Chairman. One of the things that I find when you talk
to people about this issue, otherwise very decent, honorable
people, people who if you dropped your wallet in the line to
pay your groceries and money fell out, they would pick it up
and give you your money back, those same people do not think
much of whether or not they are going to tie illegally into a
satellite reception for their television or whether they are
going to do a lot--and there seems to be a sort of moral
equivalency that is applied here, and that is the notion that,
well, the amount of money these artists get is so obscene that
we are really not doing really anything much at all here, that
denying the artist or the company, you know, the ability to
sell these additional billion dollars worth of CDs, or whatever
it may be, abroad--that is not a big deal because they make so
much money anyway.
When you are sitting down as a trade rep--when you are
sitting down as the chief economic officer in the Department of
State meeting with your counterparts, give me--and this is
going to sound like a silly question, but I have been doing
this job a long time--tell me what it is? What's the
conversation like? You're sitting with your counterpart,
whether it is in Asia or Latin America or Europe, and saying,
``Look, you have got to change this. You have got to stiffen
this. You have got to''--what response do you get?
Mr. Larson. I will give you one example. You mentioned in
your opening remarks, Mr. Chairman, India. Part of what I try
to do is appeal to their sense of self-interest. And you
mentioned that they have a movie industry. And due to pressures
within their own country, they began to see this in a different
light and began to strengthen some of these protections and the
enforcement of them. But they have other knowledge-based
industries--software, but also potentially pharmaceuticals.
And what we have tried to stress throughout is, yes, there
is a--first of all, it is the law. You know, there are
international regimes that you belong to. But in addition to
that, you have a self-interest. And the argument that your
country is poor and people can't afford to pay full price is
not really a compelling argument.
The Chairman. Is that the argument that is made sometimes,
too?
Mr. Larson. Yes.
The Chairman. Go ahead. I didn't mean to interrupt you.
Mr. Larson. No, but that is the argument that is made
sometimes, and, you know, I think the industries involved do
make an effort to recognize income levels when they go in and
try to market their products, but they expect that their
copyrights and patents will be respected. And I think what we
are beginning to see, in fits and starts, is that more and more
countries are recognizing that they have intellectual property,
too, and they could develop even more intellectual property if
they had the regime that protected it.
The Chairman. Mr. Ambassador?
Ambassador Allgeier. Yes. We can use the leverage of trade
agreements and dispute settlement and preferential tariffs and
so forth to leverage countries to a certain extent. But until
they realize that it is in their own interest, they will only
take that so far.
I would mention two things. One, Ambassador Larson spoke
about the--convincing them that this is part of the environment
for them to attract investment, especially in the high-tech
area. The other thing is, it is part of having a rule of law in
the society. And, you know, countries will say, ``Well, we want
to have the rule of law.'' Well, the rule of law is not
divisible. You can't say we are going to have the rule of law
in this area, and we are going to have rampant illegality in
that area.
There are resource problems in these countries. A lot of
them have judicial systems that do not operate well, even
under, you know, capital crimes such as murders. That said, the
solution is to improve the judicial system and to work with
them on it and to convince them that--well, as the U.S.
Attorney was saying, just as in the west coast, criminals who
are operating in narcotics in South America, their operations
in piracy are helping to fuel their narcotics operations, as
well. And so it is all part of an assault on the rule of law.
The Chairman. Well, is there one area of the world--well,
I will withhold my question in the interest of time. I yield to
my friend from Virginia and then Senator Boxer. And there is a
vote at--I guess in about 20 minutes or 15 minutes, at which
time we will break, and then we will all go vote and come right
back.
Senator Allen. Thank you, Mr. Chairman. This question is
mostly addressed to Mr. Larson and Mr. Allgeier. I was looking
at an analysis. I want to hear your analysis. The Business
Software Alliance had a--in 1999, there as a review of various
states of our union, as far as piracy rights. I was happy to
see Virginia had the lowest piracy rate, which was only--it was
16.2 percent. Delaware, the Chairman's state, was also one of
the better states and had a 19.9 percent--or 19.8 piracy rate.
The total in the U.S. was 25.1 percent. All of this represents
a lot of dollars lost, thousands of jobs--4,290 in Virginia--in
California, 13,859 jobs in Senator Boxer's state. So this had
that impact in those states.
Now, also the Business Software Alliance had an
international study, and they went through all sorts of
countries, and they did it by region, but it had everyone, from
Austria and Poland, Brazil, Chile, African countries,
Australia, and so forth.
Which countries--I would ask these two gentlemen--which
countries, in your view, are the biggest threat to American's
copyright interests worldwide? And what are you all doing, or
your agencies doing, to respond to these international pirates?
I assume you have seen this Business Software Alliance report.
Ambassador Allgeier. I am generally aware of it, but what
I --
Senator Allen. Well, what--in your view, from your--which
country--say, the top three major concerns for those who are
pirating our intellectual property, our copyrighted materials?
Ambassador Allgeier. First of all, let me say that I think
that the types of countries in which this is the biggest
problem are the more advanced developing countries, because
what you have there is you have a combination of rising
affluence, people who are interested, you know, in buying
either the products of the entertainment industry or the
computer industry. But the systems of enforcement and so forth
have not kept pace, and so they are generally weaker.
Also a number of these countries--if you think of countries
like China and Brazil, Mexico, and so forth--they are large
countries, so the markets there are quite large, and there is
quite a penetration of, frankly, U.S. cultural interest, and so
there is this huge market for it. And I would say that those
are the types of countries where we have the biggest challenge
right now.
Senator Allen. Well, what are you all doing--would you
agree with that, Mr. Larson?
Mr. Larson. Broadly, yes.
Senator Allen. Alright. Now, what are you all specifically
doing--whether it is China, whether it is Brazil, whether it is
Mexico, or any others that fit that large category--I
understand the trepidations and reluctance to name countries,
but some of them pay no attention, maybe, to these matters of
enforcing the law. What are you doing to make sure that they do
enforce the law?
Ambassador Allgeier. Well, we pursue them through their
obligations within the WTO. We pursue it through programs--if
they are beneficiaries of our tariff preference programs. In
the case of where we have a bilateral agreement, such as the
NAFTA, we have the provisions there. And basically we work with
these countries mostly to enhance the enforcement.
It's less a question of new legislation, although there is
certainly improvements that can be made in legislation. And it
is a long-term effort, because it is convincing them to devote
the resources. It's also training people, as Ambassador Larson
mentioned. Those could be judges, they can police officials,
they can be customs officials. And it is trying to convey to
them their own interest in protecting their own intellectual
property.
Senator Allen. Well, in all crime matters, in combating
crime--and certainly our U.S. Attorney, Mr. Gordon, understand
this--and you hit on it indirectly--is in trying to deter
criminal behavior, you need to have tough penalties, clearly,
and there needs to be also a certainty of punishment. You can
have tougher penalties, but if it is not --they are not
enforced or they are not caught, and if when the people are
caught, they are not getting the full sentence, that doesn't
help. So you need tougher penalties and certainty of
punishment.
It sounds to me, though, from your testimony, that this is
simply not happening. Not only are you trying to trying to
train judges, but so often it seems like when they--when
somebody may be caught, you are talking about--the guy should
get a worse penalty for illegal parking or whatever sort of
traffic infraction you gave as an example.
And I think that, clearly, you'd like them to enforce those
laws. If not, there is going to have to be some way of those
countries seeing the importance that we place on it in trade
agreements, and some of them are going to have to get
sanctioned, one way or the other--again, they are different
treaties, whether they are multi-country treaties or bilateral
agreements.
Yes, Mr. Larson?
Mr. Larson. Just to comment very briefly, Senator, on that
last point, I stressed in my remarks the importance of
training, the importance of persuasion, but I also agree with
you that there are times when we have to act. We worked very
hard, for example, on Ukraine. I pushed them several times,
talked with their trade ministers, their finance ministers, and
we thought for a time that we had begun to turn around this
problem of piracy. But they didn't persist and turn it around,
and so we were quick to support the policy that Ambassador
Allgeier discussed, which was really taking back a significant
amount of trade benefits from them.
At the same time, I did want to underscore the importance
of the WTO as a tool to move this process forward. This is an
effort that we are going to have to make over a decade. And in
the case of two very big countries--China, we have the fact
that they have just joined the WTO, and so they have
obligations which they have accepted, and now it is going to be
very important for the WTO and, I think, the business
community, as well, to work with the various provinces and
localities that have the responsibility to enforce these
obligations and, frankly, at this stage, may not fully
understand what these obligations are. This is going to take
persistence and effort.
In the case of Russia, we have a WTO accession negotiation
underway where we will be pushing for them to accept fully the
international obligation of the TRIPs agreement. And this gives
us an opportunity to get the sort of standards written into
their laws that we would like to see all over the world.
Senator Allen. Thank you. And you will have this Senator's
and I think many other Senators' support in those efforts.
That's one of the values of bringing some of these countries
into the World Trade Organization is it actually a method of
enforcing their obligations and responsibilities. And I am
confident that both of you two have that prioritization. Just
understand you will get reinforcements here.
Well, I would like to ask Mr. Gordon a question or two,
depending on the amount of time left. Do you see in other U.S.
Attorneys' Offices the same sort of prioritization of
intellectual-property violations? I went through the
international, but I also went through the states. It's not
just a problem overseas. It's a problem here in our own
country. Do you see U.S. Attorneys' offices making this a
priority, or not?
Mr. Gordon. The Attorney General has made clear that it is
one of his priorities. And generally when the Attorney General
says it is a priority, it is a priority. I will say I know that
in the ten CHIPS cities, it unquestionably is a demonstrated
priority. They've created--and we have created--specialized
units with numerous AUSAs trained and dedicated to doing that
type of work.
Even a part from that, though, I think, given the Attorney
General's stated preference for prioritizing the matter, that
other districts, as well, even if they are not in the middle of
a high-tech or high-IP industry center, are making it more of a
priority.
Senator Allen. Let me ask you this questions, then. Thank
you. I am glad they are all listening and making it a priority.
In fighting drugs, obviously you drill the drug dealers, you
try to get as much--high up the chain as you can and make sure
they get a penalty, but you also get after their assets, the
illegal drugs, or any of the profits therefrom--art objects,
yachts, cars, whatever.
In this fight against pirated intellectual property, would
there be changes in the law that may make it easier for you to
at least--regardless of the proving guilt beyond a reasonable
doubt, if you know the property is stolen or illegal property,
the destruction of that on the spot, would that help in
thwarting--or would they just--it is just so much of it being
made, it just--it doesn't matter?
In other words, if you see the videotapes, if you see
what--maybe the software, but regardless of what it is, if you
could separate that, the property, the illegal property from
the criminal and the destruction of that, how would that deter
or reduce the volume or frequency of this pirated intellectual
property?
Mr. Gordon. Well, I do not think destruction right now is
a problem. When we get it, I think it is fairly easy to destroy
it. I think there are a couple of problems. Number one, in the
era of digital reproductions, you can destroy 5,000 copies. But
when it is digital, and they've got it electronically
formatted, it can be reproduced like that all around the world,
in bulk. So that is a much different world than drugs, where
you can burn 10,000 kilos and really put a dent in a drug
lord's inventory.
Second, we are definitely trying to get up to speed and
trying to get ahead of the curve on tracing assets of the
people who are running the large-scale rings. I think we are
much further ahead. We've got a lot more experience doing it in
the drug arena. We've learned really a lot about MOs of where
they put the money, how they move the money. We do a better
job, so far, of moving our way up the chain by flipping people
at the lower ends--the money launderers, et cetera.
It's definitely proving to be a challenge for us, I think,
to find the money side of the large-scale organized crime
ring's IP profits. But that, of course, is part and parcel of
our effort, and that is what we want to, I think, try and
improve on.
And I mentioned the international cooperation that we got
in a number of countries and our efforts to improve training
and coordination. With all that training and coordination, we
are hopeful that we will improve our efforts on the money side
of IP piracy.
Senator Allen. Well, I hope you will do that, because I do
think that the forfeiture of drug-dealer assets has worked in
drug dealing, to some extent, but at least you take the profit
motive out of it. And obviously it is a business--it is an
illegal business, and they way to hit them is in the
pocketbook, and that is one way to at least to export our
judicial reach, so to speak, or our jurisdiction, to those that
may be offshore in countries that may not handle it. But if you
can seize those assets, then maybe here--or somehow get
jurisdiction of it, at least you will get that much in denting
it.
Well, my time's up. I am co-chairman of this committee, and
I would like to recognize Senator Boxer, from California.
Senator Boxer. Thank you so much, Senator. I want to thank
this panel very much, not only for your testimony, but for the
work you do. From reports I hear, you are working hard on this,
and I want to--as one Senator on this committee and one of the
two from California--encourage you to continue your efforts.
This is noble work and important work.
I also--I wanted to thank Chairman Biden. I thought--I read
his opening statement, and I just think it is eloquent, and I
was going to quote, just to underscore, a couple of sentences.
``If we want to protect American innovation and, by extension,
American jobs, we need to maintain a vigilant stand against
intellectual-property theft. American intellectual property is
an immensely valuable, perhaps our most valuable, resource. Not
to protect it is equivalent to letting coal be stolen from our
mines and water taken from our rivers.''
And I just want associate myself with that, because, as has
been stated, if you go out and ask an average person on the
street, ``What's intellectual property,'' they won't know the
answer. It is up to all of us to talk about it and make the
case that Senator Biden made, which is that it is property,
just the same as if there was a bicycle here and somebody
walked out with it.
And you know that, and you are working on it. I am
particularly proud of our U.S. Attorney for the work that you
are doing.
Let me say that on our next panel, we are going to hear
from people who see, you know, the adverse impact of
intellectual property theft. They've been working for years,
and they've been trying to sound this clarion call for help for
a long time. So it is good that they are here.
Intellectual property rights form the foundation of two of
California's most exciting industries--the entertainment
industry and the high-tech industry. And sometimes those two
clash. But on this one, you know, they are together. These twin
engines of commerce are far too vulnerable to theft, and their
loss means lost jobs and lost tax revenues. It also means
illegitimate profits for international criminal organizations.
In some cities in Asia, you can walk down main street and
buy DVDs or optical disks for a couple of dollars or less. You
can buy DVDs of Black ``Hawk Down,'' ``Harry Potter,'' ``Ali,''
in China for the equivalent of $1.21 per copy. The software
industry loses an estimated $12 billion each year--$12
billion--because of counterfeiting activities alone, and we
know that since people usually pay income taxes, that means we
do not have funding for some of the things we are tying to do
here, like protect this country against terrorism, and all the
other important things we have to do.
It's wrong that a pirated copy of a film like ``Monsters,
Inc.'' can be bought on a street in Malaysia for $3.00 before
it is even available legitimately on the market in the U.S. So
I have this pirated copy here from Malaysia--before it was even
available, here it was.
And you also have the Microsoft Office 2000 here. I mean,
you can't tell the difference between these two. This one is
the counterfeit. This one is real. It's thievery.
And people, by the way, can also be caught in the situation
where they are buying a counterfeited copy, and they do not
think it is a counterfeited copy.
We have a lot of work to do here. I have been on this for
awhile, even before I was on this committee, and this gives us
a chance here to do something about it with our friends and
people who are allies with us in so many areas. They have to
help us. They have to help us on this. And it seems to me, as
they develop, they are going to want protection for their
intellectual properties. So they've got to start working with
us.
Ambassador--and you may have said this before I came in, so
forgive me if you answered this--but what do you think are the
main reasons for the poor enforcement in these countries?
Ambassador Allgeier. I think there are two reasons. The
first one is still a lack of appreciation of the seriousness of
the crime of piracy. And the second is resources in developing
countries, an overall shortage of resources, but not applying
sufficient resources to this part of law enforcement and the
judicial activity.
Senator Boxer. It is just not a priority. Do you have
something to add to that, Mr. Larson?
Mr. Larson. I agree with what Ambassador Allgeier said. I
do think that some of the new technologies, as we have
discussed, have made this a tougher problem for governments,
even where they would feel it is a priority. It's easier to
make these knock-off products. It's harder to police. That
means you need more vigilance. And that is really the purpose
that the programs that the government has been pursuing, to try
to raise the profile of this issue for foreign governments,
help them understand why it is in their interest to devote the
resources that are needed to police and stop these sorts of
activities.
Senator Boxer. Now, I do not know if this was asked. If it
was, please tell me. But what is the status of free-trade
negotiations with Chile and Singapore? And how will we protect
intellectual property in those agreements?
Ambassador Allgeier. We are negotiating a chapter--
intellectual property chapters in both of those agreements. And
we use those agreements to seek protection even beyond the
level of obligations that these countries already have in the
WTO. The specific example I will give of that is these
obligations under the new WIPO copyright treaties. We are
insisting on incorporating those obligations into our trade
agreements with Singapore and with Chile and in the free-trade
agreement of the Americas. And the advantage to that is there
will be a dispute settlement mechanism in those trade
agreements, where there is not in the WIPO treaties themselves.
Senator Boxer. Mr. Gordon, do you have anything you'd like
to add? Is this an issue that--do you feel that--where are we
on the graph of this situation? I mean, has it topped out? Is
it getting worse? Where do you see the problem?
Mr. Gordon. I think, from talking to the people who run
the computer crime section of our office and the FBI and
Customs people who are running the investigations in the
Central District, they expect the problem to get worse, far
worse, before it gets better, and largely because of the
digital nature of reproduction. It's just so much easier to do.
You do not have to have massive amounts of inventory kept at
once. You can reproduce it from a master very easily, and it is
a virtually identical copy that can be sold for just about the
same amount.
Senator Boxer. So this is a $12 billion problem that could
be even worse for us.
Mr. Gordon. According to our people--they think it is
going to get worse.
Senator Boxer. Okay. Those are all my questions, Mr.
Chairman.
Senator Allen. Thank you, Senator Boxer. I have no further
questions of this panel and would thank you, all three of you,
for your insight, for your dedication to this effort.
I think what you are doing, Mr. Gordon, is an example for
U.S. Attorneys elsewhere. Granted you are in some of the
largest cities and probably where the problem is most
prevalent. Hopefully, you will drill those folks. And if you
find there is any law on the books in our country that harms
you, come back, whether to this committee or to Commerce or
Judiciary, because I think you will find good bipartisan
support to have you drill them internationally.
Gentlemen, keep working for this. Some of these countries
are so poor and just starting off, they do not make it a
priority. They're worrying about other things. But to the
extent that we can somehow either get jurisdiction, entice them
to do what's right. It's absolutely essential.
Sometimes there will need to be sanctions. And that is not
just for criminals, that is also for governments so that they
understand the importance that we apply to protecting the
intellectual property of the technologists, the innovators, and
the creators in this country. So I thank you all so very much.
Now, what we were--what I was going to say to the second
panel--we were expecting to have a vote on the Farm Bill.
Gentlemen, you can be at ease. You're dismissed. You'd better
get out before the Chairman gets back. [Laughter.]
If everyone would just stand down for a moment. We're
trying to determine when this next vote is. It may not have
been at 3:35. It may be at 4:30. So I am going to just have
everyone stay at ease here. If the second panel--if you'd just
be kind of wandering around the starting gate and ready to go
when the Chairman gets back. Fortunately, you all do not run
your businesses the way the Senate does, as far as its timing.
So everyone just be at ease for awhile and we will probably
proceed shortly.
[Brief recess.]
Senator Allen. I tried to filibuster til you got back here.
The Chairman. I apologize. I thanked the first panel on
the way out. I really did think we were going to vote at 3:45.
We have a very distinguished private panel of--beginning
with--and I would like to welcome them all--with Mr. Jeffrey
Raikes. He's vice president of productivity and business
services for Microsoft Corporation. Obviously, you have been
very productive. He joined Microsoft in 1981 when he was 3
years old as a product manager, and has risen in the ranks. In
his current position, he is responsible for knowledge, worker
productivity, and business process applications and services.
He's a member of Microsoft's senior leadership and the business
leadership teams which developed Microsoft's core direction in
broad, strategic and business planning respectively. I would
like to welcome Mr. Raikes.
And in full disclosure, I would like to welcome a guy I
consider a personal friend, I have known him for a long time,
Jack Valenti. He's president and CEO of the Motion Picture
Association of America, a decorated veteran of the Second World
War. He served as a special assistant to President Lyndon
Johnson before taking his current position, which he has held
since 1966. He also was a very young man when he took that job.
His efforts through the years have played a significant role in
allowing the film industry to grow as it has, and we look
forward to his testimony.
Hilary Rosen has been president and CEO of the Recording
Industry Association of America since 1998. Prior to joining
that organization, she was a private consultant and a lobbyist.
She has worked with former New Jersey Governor Brendan Byrne,
and served on the transition teams of two of my colleagues here
in the Senate, Bill Bradley and Dianne Feinstein. She has
worked for years to nurture partnerships between the music and
technology companies. We thank her very much for joining us.
Douglas Lowenstein became president of Interactive Digital
Software Association in 1994 and has been instrumental in
developing a world-wide anti-piracy program for the computer-
and video-game software industry. Previously, he had been a
journalist, legislative director for my esteemed colleague,
Howard Metzenbaum, and a private strategic communications and
public policy consultant. Mr. Lowenstein, I thank you, as well,
for being here.
It's great to have you all. And should we just begin with
the panel? Let's begin in the order that I introduced you.
Jeff, please.
STATEMENT OF JEFFREY RAIKES, GROUP VICE PRESIDENT, PRODUCTIVITY
AND BUSINESS SERVICES, MICROSOFT CORPORATION
Mr. Raikes. Thank you, Mr. Chairman and members of the
committee. My name is Jeff Raikes, and I am group vice
president of productivity and business services at Microsoft
Corporation. And I really want to thank you and the committee
for holding these hearings. Microsoft commends you for
recognizing that intellectual property crime is a problem of
global dimension that really undermines economic growth and
legitimate international trade. At Microsoft, we work closely
with other members of the IP industry, including the panelists
here as well as the Business Software Alliance, and we all work
to fight theft.
And I want to thank you, Senator Allen, for asking that we
include the BSA's written testimony today. And, Mr. Chairman, I
hope that you will accept my written testimony, as well.
The Chairman. Without objection, we will.
Mr. Raikes. For more than a decade, the software industry
has battled against software theft, recognizing that widespread
piracy really threatens the existence of our industry. Now,
despite these efforts, software piracy is rampant, accounting
for almost 40 percent of the software that is used around the
world. And in some parts of the world, piracy exceeds 80
percent in those countries.
And as a whole--and as Senator Boxer mentioned--the
software industry loses almost $12 billion each year from
counterfeiting and other forms of software piracy. And these
revenue losses directly translate into lost jobs and, of
course, opportunities for the U.S. economy.
We believe that by the end of this decade, piracy-related
losses will rob the U.S. economy and its workers of 175,000
jobs and, very important to you and your goals, $1.6 billion
annually in tax revenue.
Now, today I am going to focus my testimony on the
proliferation of counterfeit software. Unlike Internet piracy,
software counterfeiting involves the physical manufacture of
fake CD-ROMs and other components that may accompany legitimate
Microsoft software. Software counterfeiters go to great lengths
to make products look genuine, the goal being to deceive the
consumer, to avoid detection by law enforcement, and to
maximize their illicit profits.
As Senator Boxer demonstrated with the two copies of retail
versions of Microsoft Office 2000 Pro, one genuine, one
counterfeit, even the most sophisticated consumer would have
great difficulty in distinguishing the counterfeit package from
the genuine item.
Now, there is no question that sophisticated counterfeits
defraud consumers and displace legitimate sales of Microsoft
products. And I just want to hold up this box of Microsoft
Office '97 to point your attention to the fact that we estimate
that our company lost more than $1.3 billion in sales on this
one product alone.
Now, software counterfeiters use state-of-the-art
technology to create counterfeit CD-ROMs and packaging that
bear all of the hallmarks of the genuine product. For many
years, Microsoft has worked to outpace counterfeiting
technology by developing authentication features that help
consumers and law enforcement distinguish legitimate software
from sophisticated counterfeits. The certificate of
authenticity on the side of the package incorporates security
features--for example, special inks, micro-text--to
authenticate genuine software. And another example of some of
the work that we are doing to try and keep ahead of these
criminals is shown here with the edge-to-edge hologram that you
see on the CDs that we use for Windows and Microsoft Office.
But increasingly, the most sophisticated counterfeits
combine fake CD-ROMs and packaging with some of the genuine
authentication features. In the past year, nearly 100,000
genuine Microsoft certificates of authenticity were stolen from
authorized replicators in Southern California. Now, these
certificates are then sold to counterfeiters, and they are
affixed to the counterfeit software package, thus deceiving the
consumers and increasing the selling price or the illicit
profits for these criminals.
Currently, Federal law does not provide adequate civil and
criminal remedies to combat trafficking in these software-
authentication features or the combination of the stolen
features with counterfeit CD-ROMs and packaging. So to close
this gap, Microsoft urges Congress to enact legislation that
would prohibit trafficking in the genuine authentication
features.
With potential profits in the billions, it is hardly
surprising that organized crime is deeply involved in the
software counterfeiting trade. Software counterfeiting
operations are organized in many similar respects to the global
narcotics trade. Financiers will base their operations in
countries with generally weak IP, or intellectual property,
laws, and then they assemble a global network of low-level
distributors that market the counterfeit software. What's more,
these counterfeiters commit a host of other violent crimes to
protect their operations.
Now, although Asia continues to be the major source of
sophisticated counterfeit software, manufacturing facilities
exist throughout the world, even here in the United States.
Global counterfeiting flourishes because counterfeiters face
little risk of prosecution or meaningful punishment.
Now, at Microsoft, we invest millions of dollars each year
to investigate global counterfeiting activity and to assist law
enforcement in criminal prosecutions. To win the war against
counterfeiting, it is critical that law-enforcement agencies in
the United States and throughout the world treat software
counterfeiting as a major crime priority. That requires
multilateral cooperation, a sustained commitment of resources,
and a continued and deeper partnership between government and
industry.
I would be happy to answer any questions, and I thank you
very much for this opportunity.
[The prepared statement of Mr. Raikes follows:]
Prepared Statement of Jeffrey Raikes, Group Vice President,
Microsoft Corporation
i. introduction
Mr. Chairman, members of the Committee, my name is Jeff Raikes, and
I am Group Vice President of Productivity and Business Services at
Microsoft Corporation. I am responsible for Microsoft Office,
the Business Tools Division, Business Solutions and eMerging
Technologies. Let me begin by thanking you and the Committee for
holding this hearing. Microsoft commends you for focusing congressional
attention on the serious threat posed by global intellectual property
crimes. We appreciate the opportunity to discuss with you one aspect of
intellectual property theft of particular concern to Microsoft--
software counterfeiting.
Software counterfeiting and other forms of piracy cost our industry
several billions of dollars each year, and yet enforcement and
penalties are uniformly weak throughout the world. The highly effective
Intellectual Property Rights Center cannot address the piracy problems
alone. Globally, the failure to treat software theft as a serious crime
is largely due to the misperception that intellectual property crime is
a ``victimless'' crime. In fact intellectual property crime has many
victims, not just the software industry or the other industries
represented here today:
Lost Jobs and Tax Revenues: When you consider that one-
quarter of the software used in this country is illegal, it is
hardly surprising that software counterfeiting and other forms
of piracy are a significant drain on our economy. ln the
1990's, software theft robbed our economy of more than 100,000
jobs and a billion dollars in tax revenues each year. These
annual losses are expected to double this decade.
Consumer Fraud: Unlike the cheap fakes sold on street
corners, counterfeit software is manufactured to look like the
genuine product and marketed to unsuspecting consumers, who
would never knowingly purchase illegal software. In fact, many
victims of fraudulent software sales are legitimate businesses
and government agencies.
Organized Crime: Software counterfeiting operations are
controlled at the highest levels by sophisticated criminals
that rely upon an organized, global network of manufacturers
and distributors to produce and market massive volumes of
counterfeit software CD-ROMs. These criminal networks commit a
host of other crimes to protect their operations--money
laundering, corruption, and violence--which exact a heavy cost
on society.
Until the United States and its global trading partners treat
intellectual property crime as a major law enforcement priority,
counterfeiters will continue to threaten our economic prosperity, our
consumers and society as a whole.
ii. background on software industry and counterfeit problem
A. Economic Contributions of U.S. Software Industry
Over the past 25 years, computer software has fundamentally
reshaped every facet of our lives and helped secure this country's
economic leadership. By the late 1990s, the software industry employed
more than 800,000 U.S. workers with aggregate wages of $55.6 billion.
By the year 2008, the software industry is expected to employ more than
1.3 million workers in the United States alone. No other high-tech
industry is providing employment opportunities at such a rapidly
increasing rate.
The economic contribution of the U.S. software industry can also be
measured in terms of Federal and state tax dollars benefiting a host of
national and community programs. Annually, the software industry
contributes more than $28 billion in tax revenues to Federal and state
governments. This tax contribution is expected to reach $50 billion by
the year 2008. Of equal significance is the industry's contribution to
the U.S. balance of payments. While the U.S. trade deficit reached new
record highs, the U.S. software industry generated a trade surplus of
more than $20 billion in the year 2000. The software industry's growing
trade surplus means more jobs and more tax revenues for the U.S.
economy.
The success of the U.S. software industry is due in large part to
this country's historical commitment to strong intellectual property
protection. Indeed, it is no coincidence that the United States--the
world's leading advocate for intellectual property rights--is also home
to the world's largest software industry. The software industry's
continued growth and its continued economic contributions are directly
dependent on our ability as an industry and a notion to eliminate theft
of computer software.
B. Software Counterfeiting Activity Worldwide
(i) Extent of Problem
The forces that drive growth in the software industry--technology
advances, high market demand, and the emergence of E-commerce--also
create new opportunities for software pirates to manufacture and sell
massive quantities of counterfeit software to unsuspecting consumers.
The software industry estimates that 40 percent of the software used
throughout the world has been illegally copied; and in many regions,
the average piracy rate exceeds 60 percent. Even in the United States,
which boasts a high level of intellectual property protection, the
software industry confronts a 25 percent piracy rate, meaning that one
out of every four copies of software is illegal.
In addition to the software industry, all industries are
vulnerable, including the music, pharmaceuticals and automobile
industries. The proliferation of organized criminal counterfeiting
operations has reached such alarming proportions that the estimate of
lost revenues to such industries has reached $328 billion annually.
(ii) Economic Impact
The software industry loses an estimated $12 billion in revenues
because of counterfeiting activities. In one recent twelve-month
period, almost 5 million units of counterfeit Microsoft software and
hardware were seized worldwide, with an estimated retail value of over
$1.7 billion. Each year, such intellectual property crimes drain the
U.S. economy of thousands of skilled high paying jobs and billions of
dollars in tax revenues. According to a study conducted by the
International Planning & Research Corp. annual software theft costs the
U.S. economy 118,000 jobs, $5.6 billion in wages, and over $1.5 billion
in tax revenues. If the U.S. were to eliminate software piracy by the
year 2008, the U.S. economy would gain more than 170,000 new jobs, $7.3
billion in wages, and $1.6 billion in tax revenues.
(iii) Trends in Growth in Software Counterfeiting
Operations
At least three converging phenomena have contributed to the
explosive growth in software counterfeiting operations:
Technological developments that make it possible to
replicate cheaply and profitably large volumes of counterfeit
CDs;
Growth in global manufacturing and distribution networks;
and
The emergence of organized criminal counterfeiting
enterprises, often with multinational operations and ties to
criminal gangs.
a. Technological Advances
The manufacture and distribution of counterfeit software involves
the production of fake or ``look-a-like'' products. Typically, the
packaging or labeling of the original software product is forged as
well. Computer software is uniquely susceptible to counterfeiting
because with new CD-ROM technologies, near-perfect copies can be
manufactured for a few dollars per copy, but resold for many times that
amount.
It is particularly profitable for the counterfeiter who bears none
of our research and development marketing or support costs that
primarily determine the retail price of legitimate software.
Accordingly, the counterfeiter is able to sell counterfeit CDs at a
price that is significantly lower than it costs to produce the legal
products, but far higher than the per-unit cost of replication. The
accessibility of CD replicating technology, as well as the
profitability of pirate sales, has made the production of counterfeit
CDs attractive to large organized crime syndicates and petty criminals
alike. Victims of counterfeit fraud run the gamut from small businesses
to large, sophisticated government agencies, which unwittingly purchase
counterfeit software believing they are getting a good deal on genuine,
discounted product.
b. Global Network of Counterfeit Manufacturers and
Distributors
Although manufacturing plants for high quality counterfeit software
are located throughout the world, the major manufacturing centers
appear to be in Asia, most notably China, Singapore, Malaysia, Thailand
and Indonesia. Large counterfeiting facilities, however, also exist in
the former Soviet Republic (the Ukraine, Russia and Bulgaria); Latin
America (Paraguay, Colombia and Mexico); and even the United States
(California). Plants in these areas produce hundreds of thousands of
high quality counterfeit CDs, which are then distributed throughout the
developed markets worldwide.
Over the past several years, Microsoft has worked closely with law
enforcement agencies to initiate raids against major counterfeiting
operations in southern California. In the mid-to-late 1990's,
California-based criminal enterprises were a major source of the high
quality counterfeit Microsoft CD-ROMs and packaging distributed
throughout North America and exported to Europe, Australia, and other
developed markets. Due to the success of these enforcement efforts,
many of the major California-based plants were put out of business,
forcing counterfeit production to move to Asia and other markets.
Nevertheless. California remains a major entry and assembly point for
counterfeit software CD-ROMs and other components imported from Asia.
Similarly, as law enforcement pressure has been brought to bear
against operations in Hong Kong, Singapore, and in parts of China, new
manufacturing centers have sprung up in other parts of Asia to meet the
demand for high quality counterfeit software. We recently learned of
major counterfeiting operations in Indonesia, Macau, Malaysia, and
Thailand, all of which are producing high quality product for export to
developed markets. There is also evidence that counterfeit
manufacturing is moving into Vietnam, the Philippines, Mynamar, and
Brunei.
c. Emergence of Organized Crime
The very nature of the business of producing and distributing high
quality counterfeit software requires a high level of planning, funding
and organization; and access to replicating equipment, raw materials,
packaging, shipping facilities, and money laundering avenues.
Because of the enormous opportunities for profits and the low risk
of prosecution or significant punishment strong evidence suggests that
software counterfeiting has become part of an intricate web of
organized crime, with links to Asian gangs and drug cartels.
The Federal Government explicitly acknowledged the growing
involvement of organized crime when it created a new ``Intellectual
Property Rights Initiative'' to strengthen enforcement against
intellectual property crime. At a congressional hearing, former Customs
Commissioner Ray Kelly stated that--
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.
There are several examples of these threatening links:
Over the past several years, Microsoft has worked closely
with law enforcement agencies to initiate raids against major
counterfeiting operations in southern California. Just last
November, the Los Angeles Sheriff's office and police
department, U.S. Customs Service and the U.S. Secret Service
executed the most significant raid and seizure of Microsoft
software and components in U.S. history. A preliminary
inventory of the seized products puts the estimated retail
value at $60 million. The raid has interrupted a major
counterfeit software distribution pipeline that moves
containers of counterfeit software and other illegal components
from Taiwan.
California police raided a suspected ``stash pad'' for Asian
gang members. Instead of finding narcotics, the police found
counterfeit Office 97 media and packaging with an estimated
value of $8.5 million. Police arrested 4 alleged members of the
Wah Ching.
A Los Angeles raid netted $10.5 million in counterfeit
software, holograms, shotguns, handguns, TNT and plastic
explosives. Three Asian organized crime groups, including the
Wah Ching, were believed to be involved.
As these cases demonstrate, counterfeit seizures often reveal an
organized network of distributors and manufacturers, requiring an
ongoing investigation into each arm of the distribution network and
coordination between Federal and state law enforcement agencies
throughout the country. Given this level of sophistication within
criminal counterfeiting operations, it is imperative that the Federal
Government assume a leadership role in anti-counterfeiting enforcement
efforts.
iii. microsoft's commitment to combating counterfeiting
Microsoft invests literally millions of dollars each year to
support law enforcement efforts and protect its products and the
consumer from counterfeiting activities. Microsoft investigators and
counterfeiting experts work closely with state and Federal law
enforcement agencies to investigate and prosecute counterfeit
manufacturers and resellers. In addition, Microsoft each year brings
hundreds of civil actions against counterfeit resellers throughout the
United States. In addition, Microsaft works with a number of industry
organizatians to address the counterfeiting challenge and software
piracy generally. For example, the Business Software Alliance, an
organization representing the leading U.S. software publishers, pursues
both criminal and civil cases on behalf of its members in over 65
countries around the world. With the Committee's permission, I would
like to submit a statement by BSA's President Robert Holleyman for the
record. Consumer education is a critical component of Microsoft's anti-
counterfeiting efforts, particularly given the increasing
sophistication of counterfeiters and the great difficulty most
consumers experience in distinguishing between counterfeit and
legitimate software. Many organizations and individuals--as well as
Federal, state and local governments--are unaware that counterfeit
software is so pervasive in the marketplace an that its use can expose
the user to various business risks, such as viruses and manufacturing
defects. To increase public awareness, Microsoft sponsors worldwide
campaigns that teach consumers to recognize the warning signs
associated with counterfeit software, disreputable resellers and
fraudulent software offers.
Microsoft and other software publishers are also experimenting with
a number of copyright technologies designed to prevent the unauthorized
reproduction and distribution by software products. As with our law
enforcement investigations. Microsoft spends millions of dollars on
research and development of highly sophisticated security features,
including certificates of authenticity (COAs), and inner mirror band
and edge-to-edge holograms on CD-ROMs. In order to prevent
counterfeiting, Microsoft relies upon a variety of these security
features that are affixed to, or embedded in, the software, user
manuals and packaging. With each new version of our software, Microsoft
incorporates state-of-the-art technologies that are extremely difficult
and expensive to replicate. For a brief period, at least counterfeiters
are unable to duplicate new products in a credible way.
We also are taking steps to protect against a form of piracy known
as ``casual copying'' or ``softlifting.'' Casual copying is the sharing
of software between people in a way that infringes on the software's
end user license agreement (EULA). This form of piracy is prevalent and
has been estimated by industry trade groups to account for a staggering
50 percent of the economic losses due to piracy. To combat this
problem, we have incorporated Product Activation technology in
Microsoft Office XP, Visio 2002 and
Windows XP operating system in an effort to reduce software
piracy as well as ensuring that Microsoft's customers are receiving the
product quality that they expect.
Only software acquired as packaged product will require activation.
Customers required to activate their software must complete a simple
and anonymous activation process that takes less than one minute when
completed over the Internet. Activatian can also be completed by
telephoning Microsoft and speaking with a customer service
representative. To make activation convenient, the products do not
require activation immediately after installation. Office XP and its
components will allow up to 50 launches before requiring activatian.
Visio 2002 will allow up to 10 launches before requiring activation.
Windows XP will allow 30 days from first boot before requiring
activation.
As a result of Microsoft's investment in security features,
however, the demand for genuine components has increased resulting in
an increase in robberies, thefts and fraudulent schemes. Recently, for
example, there has been a rash of thefts of COAs in Europe and the
United States. These genuine COAs are then sold to counterfeiters who
affix them to counterfeit products to make them appear genuine. In
addition to these thefts, Microsoft now faces the pervasive practice
among counterfeiters of tampering with components of our software
product. Counterfeiters engage in such tampering both to make
counterfeit software appear genuine and to increase the selling price
of genuine software and licenses.
iv. law enforcement is critical
Given the presence of organized crime and the international scope
of counterfeiting operations, there is a critical need to treat
counterfeiting as a global law enforcement priority. Existing levels of
commitment by law enforcement agencies are not sufficient to meet the
growing challenge of global counterfeiting operations. And existing
levels of civil damages and criminal penalties do not pose a serious
deterrent especially to the organizers and financiers of counterfeiting
operations.
There have been a few recent initiatives, however, which Microsoft
appreciates and supports. Microsoft applauds the efforts at the
Intellectual Property Rights Center (``IPR Center'') which serves as a
critical resource in coordinating multi-agency, multi-jurisdictional
investigations of software counterfeiting manufacturers and
distributors.
By coordinating the investigative efforts by U.S. and foreign law
enforcement agencies and acting as a clearinghouse for relevant
intelligence, the IPR Center strives to provide the kind of
sophisticated law enforcement response necessary to combat
international software counterfeiting operations.
We strongly urge Congress to maintain funding for the IPR Center
and to encourage its investigators to target their efforts on organized
counterfeiting operations worldwide. We appreciate Congress providing
the recent increase of $5 million in funding for the U.S. Customs
Service and the IPR Center that was included in the FY 2002 Treasury
appropriations legislation. We look forward to learning of Custams'
plans for expending the new funds. We encourage the IPR Center to use a
portion of the funds to establish a clearinghouse for all intellectual
property rights information gathered from other Federal, as well as
state and local law enforcement agencies.
Microsoft also appreciates the increase in FY 2002 funding for
additional attorney positions at the Department of Justice to augment
the investigation and prosecution of intellectual property crimes. We
look forward to working with the new dedicated Federal agents and
prosecutors assigned to this task.
v. recommendations
A. Strengthen Federal Anti-Counterfeiting Laws
Microsoft strongly encourages Congress to amend existing Federal
anti-counterfeiting laws to prohibit trafficking in, or tampering with,
the authentication features used by software publishers and other
copyright owners to distinguish genuine software. Currently, Federal
law does not provide adequate civil and criminal remedies to guard
against these types of tampering activities, which directly facilitate
counterfeiting activity. Federal law also fails to criminalize the
distribution or sale of genuine authentication features to software
counterfeiters and distributors. In order to strengthen Federal
intellectual property enforcement efforts, Microsoft recommends that
legislation be enacted that protects authentication features of
copyright works by providing adequate civil and criminal remedies for
trafficking in components affixed to or embedded in software or other
copyright works.
B. Strengthen U.S. and Global Anti-Counterfeiting Enforcement
In addition, in order to achieve greater enforcement of
intellectual property laws, Microsoft urges Congress to:
Direct our Federal law enforcement agencies, including the
U.S. Customs Service and the Department of Justice, to treat
software counterfeiting and other intellectual property crime
as a law enforcement priority; and continue to provide these
agencies with the resources needed to crack down on
sophisticated criminal counterfeiting operations.
Promote international enforcement of intellectual property
crimes through training programs (e.g., the International Law
Enforcement Academies) and technical assistance. These types of
international initiatives are critical, particularly with
respect to counterfeiting and Internet piracy, which often
involve multiple jurisdictions. Training programs are
particularly critical in software counterfeiting centers,
including parts of Asia, Bulgaria and Paraguay, as well as
counterfeit transshipment points, such as Panama, Singapore and
Amsterdam.
Promote greater mutual cooperation among national
authorities: Counterfeiting networks may link financiers in
Asia, manufacturers in the United States, and distributors
throughout the world. Unless prosecutors and law enforcement
agencies in each relevant jurisdiction have the authority and
obligation to cooperate and share information without the red
tape and formalities that so often hinder multi-jurisdictional
investigations, there is little hope of identifying and
prosecuting each of the links that farm criminal networks of
counterfeiters. Microsoft urges the Federal Government to
explore avenues to facilitate mutual cooperation among national
law enforcement agencies and prosecutors, whether through
existing multi-lateral or bilateral treaties an other
cooperative agreements. Whatever the appropriate mechanism, it
must allow field agents and prosecutors to operate effectively
in a global environment.
Partner with the software industry to identify and prosecute
counterfeiters: Microsoft fully recognizes that the
proliferation and increasing sophistication of counterfeit
manufacturers and distributors calls for an even closer
partnership between industry and government. To that end,
Microsoft pledges to assist Federal law enforcement in
identifying and investigating counterfeiters and to provide
technical support and training.
Mr. Chairman, thank you again for the opportunity to appear before
the Committee this afternoon. Microsoft looks forward to working with
you and others on the Committee in addressing this important issue.
The Chairman. Thank you very much. Why don't we proceed in
the way you were introduced. Jack.
STATEMENT OF JACK VALENTI, PRESIDENT AND CEO RECORDING INDUSTRY
ASSOCIATION OF AMERICA
Mr. Valenti. Mr. Chairman, first, I want to really thank
this committee, Mr. Chairman, Senator Boxer, Senator Allen,
Senator Smith, because you are illuminating an extraordinary
and grotesque threat to the future life of America's greatest
trade export prize, the copyright industries, which are movies,
television programs, home video, music, books, and computer
software is an incredible machine of growth.
We are responsible for almost five percent of the gross
domestic product, I think, as Senator Allen, that you pointed
out, almost $500 billion. We gather in more international
revenues than aircraft, than automobiles and auto parts, and
more than agriculture. We are creating new jobs at three times
the rate of the rest of the economy. And the movie industry
alone has a surplus balance of trade with every single country
in the world. No other American enterprise can make that
statement, except in the copyright industries. And to have this
huge engine of growth to be squandered by piracy, it would be
more than a crime; it would be a blunder.
Now, what I want to tell you today is that we estimate that
our piracy loss around the world is about three to three and a
half billion dollars annually. And that, to us, is very serious
money. The fact is that much of this piracy occurs in Asia. And
where a new threat has reared its illegal head, it is called
optical-disc piracy--optical discs where you are using very,
very inexpensive technology to make the discs in the machine,
although the quality of the viewing is inferior to DVD. But it
has spread throughout China and Asia with the rapidity of
rabbits in a warren.
Now, China, I must say, in response to our entreaties, has
really tried to crack down on pirates, and they've sent most of
them fleeing offshore. Pirates never die; they just change
locations. Our big problem in China now is street-vendor
piracy. And before I do anything else, I want to show you
something. This is ``Black Hawk Down.'' This was bought ten
days ago in Southern China and, as Senator Boxer said, a ``buck
twenty-five.'' Here is ``Ali''--same thing, on the streets. You
can buy them by the long ton, and here is ``Harry Potter.''
Now, I want to show you something that is happening in this
country. You have got to see this to believe it. I want to show
you a Web site, just for about 20 seconds, called Morpheus. It
is illegal, and I am proud to say that the recording industry
of America and the MPAA are taking it court. And I want you to
see this, because this was taken down by our anti-piracy
forces. It is----
[Video was shown]
Mr. Valenti [continuing]. ----This is ``Black Hawk Down''
and it is imminently watchable. It makes you want to cry out in
frustration. Thank you very much, Troy.
As a result, though----
The Chairman. Was that downloaded?
Mr. Valenti [continuing]. ----Downloaded by--one of our
people in Encino, California, took it down I think, about three
or four days ago, and its this Web site called Morpheus, and it
is chock full of first-class movies. I might also add it is
also brimming over with pornographic material, as well. And
this is owned by a company in the Netherlands, and they have
licensed American companies and people all over the world, and
we are going after them in the courts of the United States.
The Chairman. Jack, how does it work? Is there a fee or
can your staff tell us--is there a fee to download it?
Mr. Valenti. No. You just go up there and download it.
Ms. Rosen. We actually have a demonstration, Mr. Chairman,
that starts from the download, if you wanted to----
The Chairman. I would like--I think we'd like to see it.
Senator Allen. If I may, whatever this Web site is--I hate
to mention the name.
Mr. Valenti. Well, every student in America knows about it.
Senator Allen. Well, some non-students, of course, aren't
watching this hearing. Regardless, they did not--those who have
this did not get it off the Internet. Did they get it from
somebody who was filming the film?
Mr. Valenti. It's called file sharing, and this is the
unruly son of Napster that did it on music.
Senator Allen. But did you put this, or did whomever, did
they put this on the Internet?
Mr. Valenti. Absolutely.
Senator Allen. How did they get the copy?
Mr. Valenti. Oh, I see. The copy can come from going into a
theater and camcording the theater or bribing somebody in a
theater and taking it overnight and reproducing it. It could be
taken from many different places. The ease with which this is
done, it scares you.
Senator Allen. But they did not get it over the Internet.
They got it----
Mr. Valenti. But it is on the Internet right now.
Senator Allen. I was talking to folks from Warner Brothers
who were telling me how they were going to the premier in New
York City of ``Harry Potter,'' and there was someone selling
the videos on a blanket on the sidewalks in New York City as he
is walking to see the premier of it.
Mr. Valenti. He probably got it from a screener or could
have got it from a premier in a theater. These people are quite
ingenious and quite indefatigable when they do it.
The Chairman. Jack, you know this place well, and I
apologize for this interruption. One of the purposes of this
hearing is to explain to our colleagues in simple terms exactly
how easy this is. So please do not be hesitant about being
elementary in explaining in detail how this physically happens.
Most of our colleagues are so busy doing every other thing,
they do not even watch television, let alone get around how to
figuring out how to play with a computer, other than Pat Leahy,
to download anything. [Laughter.]
He lives in his computer, and he does well on it. But all
kidding aside, it is really important that you tell us and you
communicate to anybody who's listening here exactly just how
simple this is to get a sense of--my mother, for example, would
have no notion how simple this is. She would think you had to
have pretty sophisticated equipment, you'd have to be awful
smart to figure out how to do this--and so as elementary as you
can be, and this is the last time I will interrupt--would be
useful. Don't worry about taking the committee's time.
Mr. Valenti. Well, Mr. Chairman, I am by nature,
inclination, and heritage, elementary. So it is very simple.
There are lots of ways you can do it. Let me just--let me count
the ways.
For example, there is a thing called ``file sharing
protocols,'' and that is like a Napster or a Morpheus, where
young kids can go on here and get on top of the Web site and
then open up their hard drive to all the movies they have, and
they share them with other people. And it is millions and
millions of these. File sharing goes on every day.
As a matter of fact, Viant, which is a Boston-based
consulting firm, estimates that 350,000 movies are downloaded
every day, and all of them illegal, and that is just an
estimate. My judgment is it is a half a million to a million,
because it goes on all over the country.
I will give you a good example. I am not going to name the
university, because it is one of the most prestigious and
important universities in this country. Now, all these
universities have state-of-the-art, large-type computer
systems, the best you can find. All of these universities do.
So many students were going on that university computer system
and using Gnutella, which is also like Morpheus, file sharing--
you can get movies, music, everything--that the university, in
order to relive the burden on its computer system, if you can
believe this, set up a separate server for Gnutella. It is kind
of Enron going off the balance sheet to set up subsidiaries to
relieve the pressure on their debt. And that is what the
university did.
I found out about it by reading an editorial in the daily
newspaper of the campus on the Internet, and I went ballistic.
And I wrote a letter to the President saying, ``This action of
yours is a piece of disreputable plausibility which collides
with the moral compact that governs this society. Is this why
people go to your university, to learn this kind of ethics?
Parents pay $150,000 so their children can learn to steal? What
kind of a university do you have?'' Well, to their credit, they
took it down, but that is a good example. That is happening all
over America and universities right now.
A second place is that you can get in a camcorder, you can
go into a theater and camcord it, and people throw it up on the
Internet just for fun, and then they share that with everybody
else. And all of a sudden, it is like a viral contagion that
moves around this country.
The criminals--the organized criminals will go bribe some
fellow in the laboratory, get the negative overnight, reproduce
it, give it back the next morning, do it with a corrupt
projectionist in some theater or--sometimes you'd go in and
take a Blockbuster you go in and rent legitimately and copy
that, but that is not very good. You do not get that great a
watchable quality on it.
But the ways are myriad, and they go up to this Internet.
Now, get this. Think of--with a click of the mouse, anybody can
send a two-hour movie hurtling around the globe to every nook
and cranny of this weary planet, and do it at the speed of
light--386,000 miles per second. Now, if that is not scary, I
do not know what is.
Now, that is what we are enduring right now, and it is
going on every day, and multiplying. Now, get this. If you have
a regular 56K modem in your computer, which most of us have--
that is what you get--isn't that right, Mr. Raikes? That's what
most computers have. Mr. Raikes is the expert on this. I am
going to him.
The Chairman. Well, until they change their software, and
it may change.
Mr. Valenti. If I want to bring down a move with a 56K
modem, I probably would--if I went to bed at 10:00 o'clock, I
would set my computer whirring, and about 12 to 24 hours later,
I would have a movie. If you have got broadband access, a DSL
line or a cable modem, you can bring down a two-hour movie,
depending on the speed of that line or that modem, in about 45
minutes.
But the next generation of Internet that is rapidly upon
us, you will be able to bring down a two-hour movie in 45
seconds. That's the kind of grotesquery we are looking at in
the future. And it is very, very frightening. Now, are there
any questions about this?
The Chairman. No. [Laughter.]
Got it.
Mr. Valenti. I want to point out that Malaysia and Taiwan,
because this is in your territory, Mr. Chairman, and members of
this committee, are really the breeding grounds for DVD piracy,
which is digital piracy--and it is high resolution, and its
marvelous fidelity to sight, sound, and color. And that was the
breeding ground. However, I must say those two countries have
now revised and reinforced their copyright laws. However, now
we have to find out if they can demonstrate the political will
and the resolve to enforce those laws. They claim that they are
going to try to do it, and for the time being, I am going to
take them at their word and feel confident that they will do
that.
But it is digital piracy, though--digital piracy that gives
movie producers these multiple-Maalox moments, I can tell you
that, because, as I said earlier, with a click of a mouse, you
are all over the world. Now, that is something that causes us
great despair.
Right now--Senator Boxer would probably know this--in
California, the average cost, average total cost, of the
average movie put out by the major studios--that is to make it
and to market it--is a mind bending $84 million. Now, who on
earth is going to continue to invest these huge sums of
private-investment capital, Senator Allen? Who is going to do
that if they know that movie is going to be intercepted and
stolen early in its journey from domestic theatrical exhibition
to cable to satellite to television stations and to
international, because that is what we have to do in order to
retrieve this huge investment in these various market segments.
And if you can't do that, if it is stolen early in that
journey, how do you get your money back? This is causing great
despair, great concern, and sleepless nights on a lot of people
who are in this business.
Now, we are operating on three fronts. First is in the
courts. We have to go into the court to resolutely defend the
copyright laws of this country. And Hilary Rosen and Doug and
all of us are trying to do this to make sure these copyright
laws are not loosened or shrunk or diminished, because if they
are, we are gone.
No. 2, we are using a highly sophisticated search engine
named Ranger Online. This is like a bloodhound that ferrets out
and sniffs out illegitimate movies on the Internet. And we do
that because you program this sophisticated search engine with
the names--all kind of names of, say, the hundred movies that
are being mostly pirated, and they are the popular movies. And
we give that to this bloodhound of an Internet searcher, and it
roams the Internet. And whenever it finds one of these movies,
it tells us, ``Uh-uh, we got one.'' It's like these dogs
sniffing out drugs when you have got them at an airport. And
then we send out cease and desist letters.
I am not a lawyer, but I always love to say lawyer-talk. It
gives me a kind of sense of surreal confidence here--cease and
desist letters.
Senator Boxer. Jack, you do not need any more confidence.
You are the most confident person I have ever met. [Laughter.]
Mr. Valenti. Now, we sent out last year 54,000-plus of
these cease and desist letters, to 1,680 Internet service
providers, ISPs. And our anti-piracy people tell me we have
about 80 percent compliance with this. The ISPs have been very
good and take them down.
But there is a wonderful game that kids play. And all of
you who have small kids know about Whack-a-Mole where a little
peg comes up and the kid hits the peg and then it pops up over
here. That is what happens in piracy. You banish them in this
little distance, and they pop over there. So that is why every
day we have to be vigilant, because, like virtue, we are every
day besieged, and it is really tough. [Laughter.]
Now, the third front, though, because none of the above is
going to do this job, and now, I am getting to the really core
of this, Mr. Chairman, and this is where I am really appealing
to you and your colleagues. None of this is going to work until
we get a really seamless protective clothing that we can put on
our movies so they won't be stolen. The only way we can do that
is two ways.
One is--I have been trying to get the IT community, the
computer manufacturers, the chip designers, the video-device
recording people--I flew to Menlo Park, California, on
September 20--Silicon Valley--nine days after 9-11--with all
these people assembled in a room, and I said, ``Please, let us
sit down and talk this thing through, see if we can't together
find some common ground to form some standards that we can put
in every machine around the world, in this country
particularly, and then that machine will give us the kind of
sturdy protection we need.
And when we do that, the Internet is going to grow faster,
because movies now, legitimate movies, will be on the Internet.
That is the great, glaring omission today. There are no
legitimate movies up there. As I have said to the people of
Sysco--and it goes to Microsoft--they will sell more software
because more people will be using the Internet to bring down
legitimate movies.
Now, so far, in Menlo Park, I thought I was going to get it
moving, but no follow-up meetings. I haven't been able to put a
follow-up meeting together. I am still trying. I am urging--I
am entreating these people. Let's sit down together and then if
we can find a concord, then we go to the Congress and let it be
mandated by law.
Now, I am still trying, Mr. Chairman, but I am saying this,
that all my Texas charm has been to no avail, because I haven't
been able to put those meetings together. Now, if we can't put
the meetings together, if we can't find this, what's the
answer?
I remember when I was working for Lyndon Johnson, you'd go,
and you'd say, ``Let's do this, that,'' and somebody would say,
``We can't do that.'' Then you would say, ``Well, if not this,
what?'' The only alternative left is to go to the Congress and
say, ``We've tried, but you have got to do this. You have to
make sure we protect this huge economic asset to this
country.``
Mr. Valenti. My final comment is this. There is nothing
more that movie producers and distributors want more than to
have another new delivery system to send movies to consumers so
they have another choice as to how they want to watch a movie
at a fair and reasonable price, which would be defined by the
consumer, not by us. And then we would dispatch these movies to
the customers in their home. And if they wanted to see it
there, if they wanted to go to a theater, or they wanted to see
it some other way--but it is the new delivery system.
To turn away from this delivery system would be fiscal
lunacy. And while I think you can say a lot of things about the
movie industry, they are not fiscal lunatics, I can tell you
that. That's what we are about, Mr. Chairman, and that is why
Hilary and Doug and Mr. Raikes are here today; it is to plead
with you. We've got to find a way to save this unique,
uncommon, and almost un-duplicatable asset. I am done.
The Chairman. You done good.
[The prepared statement of Mr. Valenti follows:]
Prepared Statement of Jack Valenti, Chairman and Chief Executive
Officer, The Motion Picture Association
a present and future danger--the potential undoing of america's
greatest export trade prize
An accounting of movie thievery in the analog and digital format, in
the U.S. and around the world
This text of my testimony is titled ``A Present and Future Danger--
The Potential Undoing of America's Greatest Export Trade Prize.'' And
for good reason. Which is why it is entirely suitable and necessary
that the Senate Committee on Foreign Relations illuminate and seriously
examine the impact of any erosion of the worth of the Copyright
Industries (consisting of movies, TV programs, home videos, books,
music and computer software) on the economy of this country.
The Economic Worth of the Copyright Industries
The facts are these: The Copyright Industries are responsible for
some five percent of the GDP of the nation. They gather in more
international revenues than automobiles and auto parts, more than
aircraft, more than agriculture. They are creating NEW jobs at three
times the rate of the rest of the economy. The movie industry alone has
a Surplus balance of trade with every single country in the world. No
other American enterprise can make that statement. And all this at a
time when the U.S. is bleeding from some $400 billion in deficit
balance of trade.
The Peril Now and in the Future
Brooding over the global reach of the American movie and its
persistent success in attracting consumers of every creed, culture and
country is thievery, the theft of our movies in both the analog and
digital formats.
Let me explain. Videocassettes, the kind we all use and enjoy, are
in the analog format. Worldwide, the U.S. movie industry suffers
revenue losses of more than $3 billion annually through the theft of
videocassettes. That is a most conservative estimate. We are everyday
vigilant in combating this analog thievery because, like virtue, we are
everyday besieged. We are trying to restrain this pilfering so that its
growth does not continue to rise to intolerable levels.
But it is digital piracy that gives movie producers multiple Maalox
moments. It is digital thievery, which can disfigure and shred the
future of American films. What we must understand is that digital is to
analog as lightning is to the lightning bug. In analog, the pirate must
be provisioned with equipment, dozens, even hundreds of slave-video
recorders, because after repeated copying in analog on one machine, the
finished product becomes increasingly un-watchable. Not so in digital
format. The 1,000th digital copy is as pure and pristine as the
original. The copy never wears out. It is that durability which
provides the DVD (Digital Versatile Disc) with its grandest asset and
at the same time provokes such anxiety within the movie industry
because copying retains its high resolution.
Then there is the mysterious magic of being able, with a simple
click of a mouse, to send a full-length movie hurtling with the speed
of light (386,000 miles per second) to any part of this wracked and
weary old planet. It is that uncomprehending fact of digital life that
disturbs the sleep of the entire U.S. film industry.
Movies have, until recently, been sheltered from the incessant
pilfering visited on the music industry. Music on the Net has no
graphics and can be brought down with normal computer modems since most
songs are no more than three or four minutes. Not so with movies chock
full of graphics. With a normal 56K computer modem, it could take
between 12 to 24 hours to bring down a two-hour movie. Or to put it
another way, one movie takes up the same space on a hard drive as do
600 songs. The moat that has slowed a wide-spreading assault on movies
in digital form is the languor with which American computer-homes have
valued broadband access. With broadband access, a two-hour movie can be
taken down, depending on the speed of the DSL line or cable modem, in
20 to 40 minutes. (But the next generation Internet will be able to
download a two-hour movie in some 45 seconds!) Only some 9.5 million
American computer homes have current high-speed, large pipe connections
to the Internet. But that moat will gradually be drained as broadband
grows, both in its speed-power and in the deployment of broadband to
homes. Once that happens, the moat will flatten, and all barriers to
highspeed takedowns of movies will collapse. The avalanche will have
begun. It is the certainty of that scenario which concerns every movie
maker and distributor in the land.
A new threat has entered the arena, called Optical Disc Piracy.
This new thievery design first reared its fraudulent head in China with
VCD (Video Compact Disc), a cousin to DVD though its quality is
inferior to DVD but cheaper to reproduce on machines that are far less
costly than those that play DVD only. China, in response to our
entreaties, has cracked down on pirates, forcing them off-shore. The
huge problem in China at this writing is the street vendor malady. We
are working with the Chinese government to shrink this problem.
Meanwhile, mostly in Asia organized thieves are busily involved in
stealing DVD movies, reproducing them and distributing them everywhere.
In 2001, the MPA's Anti-Piracy forces conducted 74 raids against
facilities in China, Hong Kong, Indonesia, Malaysia, the Philippines,
Taiwan and Thailand, happily engaged in manufacturing illegal copies of
both VCD and DVD. Happily, that is, until our Anti-Piracy people, along
with local law enforcement officers, moved in for the raid. In some
cases arrests were made and in some cases equipment confiscated. But
not in all, because of porous attention by authorities in some
countries to really crack down hard on these pirates. It is an ongoing
problem for us.
More ominously, just recently, with the sturdy aid of the FBI, a
factory was raided in New Jersey which was illegally reproducing DVDs.
This was the first time we have located a U.S. site dealing in
illegitimate DVDs. But it won't be the last.
I report quite joyously that we are receiving first class
assistance from the FBI, the U.S. Secret Service, the Department of
Justice, U.S. Customs Service as well as local U.S. Attorneys' offices.
Comes Now the Internet, Future New Delivery System, but Now a Piracy
Haven
It is the Internet, that all-embracing technological marvel, which
is putting to hazard our attempts to protect precious creative
property. Viant, a Boston-based consulting firm, has estimated that
some 350,000+ movies are being downloaded from the Internet every day--
all of them illegal.
We are deploying our defenses on three fronts.
First, we have taken on the task of protecting copyright in the
courts. We have to insist that copyright laws cannot be casually
regarded, for if those laws are shrunk or loosened, the entire fabric
of costly creative works is in deep trouble. We have moved swiftly and
decisively against all those Web sites which harbor and inspire theft
of movies. We took on Scour, iCrave, RecordTV, all of which were either
promoting the takedown of illegal movies or, as iCrave did, sucking up
Canadian and U.S. television signals illegitimately, transporting them
to the iCrave Web site, and then selling advertisements. iCrave was
promptly shut down by the courts, but its clones will not go away.
Scour, and RecordTV are no longer functioning. Whenever a new site
appears whose prime allurement is the availability of movies,
illegitimately file-shared or readied for download, it is our intention
to move with celerity to bring them to the courtroom.
Second, we are using Ranger, a sophisticated search engine, to
track down movies illegitimately on the Web. Once Ranger sniffs out an
illegal site, we send ``cease and desist'' letters to the Internet
Service Provider or the site itself. In 2001, we dispatched 54,000 such
letters to 1,680 ISPs around the world.
What is even more perfidious is the ascending growth of on-campus
illegitimate downloads of brand-new movies. Students operating off
their university's broadband, high-speed, state-of-the-art computer
systems have a merry old time bringing down movies, none of which are
up there legally. We're not talking about old, classic films. These are
new films, many of which are still in theaters: ``Ali,'' ``Harry
Potter,'' ``Lord of the Rings,'' ``Monsters, Inc.,'' ``Ocean's
Eleven,'' ``Vanilla Sky,'' ``Brotherhood of the Wolf,'' ``Mothman
Prophecies,'' ``Snow Dogs,'' and the list goes drearily on. The result
is immensely attractive to students, downloading and viewing new movies
without paying for them, with fine fidelity to sight, sound and color.
Just two months ago we learned that one of America's most
prestigious and preeminent universities, vexed by the burden of heavy
persistent student use of its computer system, actually set up a
special Web site for Gnutella, a well known mightily used site for
filesharing (a discreet description of taking films which don't belong
to you). This astonishing action was taken by this University to
relieve the swollen student use of its computer system. I swiftly
dispatched an unambiguous letter to the President of that University
chiding him for ``a disreputable plausibility'' which collided with the
moral compact that informs a stable, free, democratic society. The
University, to its credit, immediately cancelled the Web site.
Just a few weeks ago, in Taiwan a new Web site came on stream. It
is steadily streaming brand new movies, mostly American, all without
permission of their owners. That site is charging $1 per movie, and
steadfastly claiming they are protected by Taiwan copyright laws. I do
not choose to give its name, else it would be over-run by the newly-
minted ethics in too many young people which says that if films are
available on the Net, they ought to be downloaded, no matter the
illegality. We are now in the process of urging the Taiwan government
to shut down the site, so plainly and clearly operating outside the
copyright laws of Taiwan.
How to Transform the Net Into a Thriving New Delivery System, With More
Choices for Consumers, and Full Protection for Movies
Keep in mind that movie producers and distributors are filled with
optimism over the prospect of the Internet as another new delivery
system to dispatch their movies to consumers, at a fair and reasonable
price (the defining of ``fair and reasonable'' to done by the
consumer). To resist or to turn away from that new Internet delivery
system would be fiscal lunacy. Why? Because the movie-making cost has
risen to nerve-shattering heights. In 2000, the total cost to the major
studios of making and marketing their films was, on the average, some
$84 million per film! Only two in ten movies ever retrieve its total
investment from domestic U.S. theatrical exhibition. Each film must
journey through various marketplace sequences--airlines, home video,
satellite delivery, premium and basic cable, over the air TV stations
and internationally--in order to break even or make a profit.
How, then, can America's most valued creative works find it
possible to make those works available to consumers on the Net, giving
consumers another choice for the way they want to view movies?
This brings us to the third front: To sit down in good faith
negotiations with the Information Technology (IT) community, makers of
computers and video recording devices, to search--TOGETHER--for an
agreement on standards which would be part of every computer and
device. Those standards would be similar to standards in so many
industries and appliances in our country--all railroads have the same
width, all electrical outlets accept all electrical devices, etc. These
standards would allow for the protective garments of content
encryption, watermarking and other necessities for guarding the life of
movies. All this to the ultimate benefit of American consumers, 99.9
percent of whom are not hackers, who have moral standards which inhabit
their daily conduct. Consumers would readily rent or buy movies on the
Net--at fair prices. They would have an additional choice, how they
want to watch movies, when they want to watch them.
I have tried, personally, to enlist others into the beginning of
these talks. On September 20, 2001, I flew to Silicon Valley, in Menlo
Park, California to meet with the IT community, computer makers, chip
designers, etc. Disappointingly, no further meetings emerged from that
first gathering. I continue to try. I have suggested that no one on
either side of the table will agree to anything that is not in each
other's best interests, so no one can lose by talking. If all groups
could find common ground on which an agreement would sit firmly,
perhaps we could then come to the Congress to mandate that concord.
Alas, so far there is no meeting in progress which is considering
the all-embracing solution to what everyone knows to be a totally
unacceptable morass, which offends both ethical precepts and rational
business judgments.
I close this document with Mr. Churchill's exhortation: ``Truth is
incontrovertible; panic may ignore it, malice may distort it, ignorance
may deride it, but there it is.''
A singular truth exists in the movie industry: ``If you can't
protect what you own, you don't own anything.''
The Chairman. Ms. Rosen.
STATEMENT OF HILARY ROSEN, PRESIDENT AND CEO, RECORDING
INDUSTRY ASSOCIATION OF AMERICA
Ms. Rosen. I just hate that I've been following this guy,
my entire career.
I associate myself with everything my friend, Mr. Valenti,
just said. I wanted to talk about two things. And while I can't
match Jack's flash, perhaps I can add a little educational
flesh around the Internet part of it. So, Mark, why don't you
set up while I make a couple of points.
I want to follow up on something that Ambassador Allgeier
and Al Larson said, in terms of international piracy. We have
some problem countries, and it is important for this committee
to know what those priority countries are and what our
recommendations are for making some progress there.
Brazil--we have had a problem in the record industry in
Brazil for years. It is the sixth largest music market. It is
being killed by piracy. Brazilian music is loved all around the
world. There's just no excuse for the lack of the Brazilian
government's attention to this. And so hopefully GSP is going
to be renewed quickly, but I urge this committee to continue to
bolster our government's efforts with respect to Brazil, and
that Brazil should be denied GSPs in--when it is renewed.
Mexico--again, another place where the laws are fine. Their
problem is enforcement. We have made some progress with the
Attorney General's office. We've had some raids. We can't get
judges to impose any sentences. It has become sort of an
unpunishable crime in Mexico, and it is a significantly
important market for American products, for American Latino
artists who are quite popular in Mexico, who would normally be
selling significantly, just at this point do not even want to
release their music there.
China--keep the pressure on. We've made some progress,
because the government finally recognizes there is a problem.
This is no longer a problem of export in China, which is
different than several years ago. It is a problem of not being
able to take advantage of how exciting and huge this domestic
sales market is, because the marketplace is so piratical, so
China is quite important.
And finally, I would just say something about Russia.
Russia wants to be in the WTO, another place where the
marketplace simply precludes American investment in any
significant form because there is just too much piracy and
corruption there. Russia shouldn't be allowed into the WTO
until they address this problem. And this committee's support
for those priorities with our administration and with
government leaders as you meet with them, as I know you do on a
regular basis, would be very much appreciated. This committee
has always had a leadership role in intellectual property
through ratification of trade treaties and copyright treaties
as well as things that each of you do in other contexts in the
Senate.
I want to address Senator Allen's point early on, which is
why should most Americans who do not work in the entertainment
industry care about piracy. And I think the answer is very
simple. And Jack said it eloquently from a movie business side.
Ours is a risk-based business. Our companies spend millions
of dollars taking a chance on artists that they think have the
opportunity to be successful. Ninety percent of those are going
to fail to make back their costs. Ten percent of those are
going to pay for all the failures. And what to the pirates want
to copy? The successes. So they are essentially creaming the
successes, which deny opportunity to new artists.
If you love listening to a great album by a new artist you
have never heard before as much as I do, then you know how
important it is to be able to continue to generate the revenue
to invest in new artists. In the new technology area,
businesses are clearly being stifled by the Internet piracy
area, whether it is legitimate subscription services, whether
it is digital rights management companies, technology-
protection companies, even Internet service provider
alternatives--nobody can compete with the amount of money that
is being lost in opportunity to Internet piracy.
And these are hundreds of jobs in the high-tech sector.
Internet music is a perfect example. Investment in Internet
music has stalled. Several years ago, it was one of the biggest
generators of investment and new jobs and new opportunities. It
has stalled because it is virtually impossible to compete with
the pirates, and all of our companies have begun their
legitimate offerings. But it is still extremely difficult to
get a foothold in the marketplace.
Let me try and illuminate a little bit where Jack
summarized on the Internet side. I will give you an example.
This company called Fast Track that Jack referred to, it is
based in the Netherlands. And what they did was, they created a
piece of software that they own and they then--it is a system
called KaZaA.
And it is more than software, actually. It's a system that
essentially maintains and profits from this web of piracy.
They've licensed this system to a company in Tennessee called
Music City and to a company in the West Indies called Grokster.
And how it works is individuals will download onto your PC at
home what's called a client software. And we downloaded it onto
our system. And what that means is that now we are connected to
the centralized search engine of KaZaA. So you can see up in
the left, it says KaZaA. It's sort of hard to read. And, Troy
or Mark, can you read there and tell me how many people were
connected at the same time when this was turned on?
Voice. 509,000.
Ms. Rosen. So yesterday, when we went to get our sample,
over 500,000 people were also online connected to this software
and to this search engine, because once you download the client
software, it connects everybody together, all looking for
files. And how many files are available for download from those
people?
Voice. About 79 million.
Ms. Rosen. Seventy-nine million files at one point last
night. This system is generating 3.6 billion downloads a month.
So now why don't we show you how it works. Once you have the
system on your place, we go in and add in to the ``Search
For.'' And you can search for audio files, you can search for
software, you can search for movies.
We're searching for audio files, because that is what we
do. We're searching for Billy Joel. So you key in Billy Joel.
You push ``Search.'' All of those are Billy Joel's songs, that
instantly come up, that are available for download.
The Chairman. Is there any cost for this?
Ms. Rosen. No. In fact, on the bottom, you can see there is
advertising. KaZaA is selling advertising space on their site,
so they are making money by attracting people to the site. But
they are offering the downloads for free.
If you looked closer at this, you could see that virtually
Billy Joel's entire catalog is available here online. And so we
picked something--I forgot what we picked. We are keying onto
``Moving Out.'' That's the one we want to download. So you move
your mouse to the ``Moving Out.'' You click on it, and this is
what comes up. And you can actually watch it being downloaded
as it is happening. See, that line is--in the middle that is
moving across to the right shows the download as it occurs.
That is how simple it is. That's how fast it is. Unlike a
motion picture, music takes two minutes to download a song.
The Chairman. How long would it take to download a full-
length feature movie off of this?
Ms. Rosen. It depends on your bandwidth size.
The Chairman. On the computer most kids have at home.
Mr. Valenti. I mentioned earlier, Mr. Chairman, if I may,
that if you have a 56K modem, it would take you 12 to 24 hours
for a two-hour movie. If you have a DSL line or a cable modem
that is pretty fast, you can bring it down to about 45 minutes.
But within weeks and months, you have got the next generation
coming where you can bring it down in 45 seconds.
The Chairman. Thank you.
Senator Allen. Mr. Chairman, just for the record, I
visited with Napster. And I know Mr. Valenti brought them up,
and I know that is a great fear of the motion picture industry
is that happening, that what happened originally with Napster.
As I understand, Napster's business model now, it is actually
people paying for it. At least that is the way I understood
what they are trying to do now.
Ms. Rosen. I am sick of picking on Napster. Napster
actually has begun to secure licenses for music. They have
switched over to a legitimate business model. Ultimately, when
people are in this long enough, they want to make money. These
guys want to make money. They just haven't figured out--you
know, they are selling advertising.
And when ultimately the force of law gets brought down on
them, hopefully they will seek to make money in a legitimate
way. But Napster has done that, and they are currently in
negotiations. They have gotten licenses from several companies.
They're in negotiations with several others.
Once you have this on your system, you can see that what it
turns into is essentially a file list very much like your other
software programs on your computer. You just click on it, and
you can play the song.
[Playing song.]
Ms. Rosen. Even on these speakers it sounds fine. Thanks,
Mark.
Let me just tell you one more thing about this system in
particular, this KaZaA system, which is owned by a company
called Fast Track in the Netherlands. I said it had a World
Wide Web because of the licensees in various parts of the
world. Several weeks ago, a Dutch court enjoined them to shut
them down in the Netherlands to prevent their system from being
used. They immediately sold the company to an Australian entity
and closed down their company in the Netherlands to avoid the
jurisdiction of the Dutch court.
So we are going to end up chasing these guys all around the
world and doing what we can, but the pirates clearly take too
much comfort in their ability to search for the lowest common
denominator around the world in terms of legal protection.
That is why, unlike physical piracy, where you really are
subject to the laws of the jurisdiction you are in, in Internet
piracy, with a global information link, you are vulnerability
is the weakest point anywhere in the world. And that is why I
think the U.S. Attorney, Mr. Gordon, made the point that the
digital world of piracy is a significantly different game.
Thank you.
[The prepared statement of Ms. Rosen follows:]
Prepared Statement of Hilary Rosen, President and CEO, Recording
Industry Association of America [RIAA]
Thank you, Chairman Biden and Senator Helms, for holding this
hearing and asking me to appear before you today to discuss the issue
of piracy, a problem that has threatened the vitality of American
creative works for a very long time. The Recording Industry Association
of America is comprised of hundreds of labels that produce, manufacture
and distribute over 90% of the sound recordings in the United States
and are affiliated with companies that produce 70% of the world market.
Let me also express our sincere thanks to this Committee for its long
history of protecting the intellectual property sector of our economy
through the ratification of important trade and copyright treaties.
Stifling piracy levels in many parts of the globe undermine the
stability and growth of U.S. entertainment industries, affecting not
only U.S. creators and jobs, but also robbing other countries of much
needed foreign investment and cultural and economic development. Our
international affiliate, IFPI, currently estimates that the sale of
pirate sound recordings exceeds $4.5 billion, a number that I view as
conservative in light of the growing CD-R piracy that we confront in
multiple markets around the world. Let me also point out that this
number does not include losses dues to Internet piracy--a subject that
I will return to later on. In any event, it should be clear that
addressing this large and growing problem has fundamental importance to
the U.S. economy and to our overall competitiveness. There is no
country that can compete with us in the production of creative
materials. We cannot permit our trading partners to openly steal this
country's greatest assets.
Piracy is not a private offense. It hurts everyone by diminishing
the incentive to invest in the creation of music. It should not
therefore be viewed as a crime only against songwriters, performers,
musicians, record companies, distributors, wholesalers and retailers,
but against each of us. It deprives each of us access to diverse
musical entertainment at the same time that it deprives governments of
tax revenues. Pirates do not invest in recorded music and pirates do
not pay taxes. And our member companies invest everywhere in the world
in local artists. So, while American music represents 30% of the world
market, piracy of music does not just affect American interests, it
really is a global problem. And, as is often the case, where problems
are global, American leadership is essential.
I would like to highlight today two distinct but equally important
forms of piracy--the piracy of physical recordings, and Internet
piracy.
For physical recordings, there are unfortunately many places around
the world where the market for recorded music is overwhelmingly
pirate--indeed piracy claims in excess of 90% of the market in all too
many locations. In Russia, China and Brazil alone--the world's three
leading pirate marketplaces, the music industry loses more than $1
billion per year--for our community that is a staggering sum. In each
of these countries, the story is pretty familiar--sufficient, if not
perfect, laws, exists, but the respective governments have simply not
paid enough attention to their enforcement.
There is cause for some optimism in China, as officials are no
longer denying the existence of the problem--a critical first step in
the possible resolution of this long-standing concern. We have seen
China ebb and flow over the years as international pressure is great,
and then subsides. Russia too has begun to address its copyright
enforcement deficiencies, but it will require significant prodding from
its future World Trade Organization (WTO) partners to ensure progress.
I would ask that this Committee work together with the Administration
to communicate to the Russian Government that WTO admission will take
place only after our copyright protection issues have been addressed. I
also urge you to work with the Administration in conveying to our
trading partners, including Russia, China, Brazil, Taiwan and others,
that compliance with the Trade Related Aspects of Intellectual Property
(TRIPs) Agreement is non-negotiable.
In Brazil, the Government has demonstrated remarkably, and
inexplicably, little resolve to deal with a piracy problem that is
destroying its own copyright industries. Brazil is a frustrating
example of years of efforts that have produced no results. Brazilian
music is loved around the world, yet in Brazil, our members have given
up selling cassettes to the pirates and the CD market is slowly being
strangled. Brazil's neglect, unlike China and Russia whose markets are
just getting started in some ways, is killing a thriving industry--
formerly the sixth largest in the world.
The U.S. copyright industries have filed a petition with USTR
asking for withdrawal of Brazil's benefits under the General System of
Preferences (GSP). If and when the GSP program is renewed, and I
certainly hope that it is, I would ask that this Committee and the
Administration jointly convey a message that Brazil will not be
permitted to enjoy unilaterally extended trade benefits from the U.S.
if it stands idle and allows the open and notorious theft of U.S.
intellectual property.
There are many other countries whose enforcement practices leave a
great deal to be desired. Ukraine, Taiwan, Pakistan, Philippines,
Paraguay and Thailand all harbor organized criminal syndicates that are
involved in the manufacture and global distribution of pirate CDs. You
may have noted that Ambassador Zoellick recently imposed sanctions on
Ukraine in connection with their involvement in this illicit trade, and
I want to thank USTR for the aggressive use of the tools that the
Congress provided to the Administration in the 1988 Trade Act. Ukraine
has been a manufacturing point for CD's that traveled throughout
Western and Eastern Europe and even fed the pirate markets in Latin
America. I would also like to publicly thank U.S. Ambassador to Ukraine
Carlos Pascual for his superhuman efforts to persuade the Government of
Ukraine to assert control over the production and export of pirate CDs.
Ukraine's failure to adopt the necessary practices to control illegal
CD production and exports was certainly not the consequence of a lack
of effort on the part of the Ambassador and his staff, and they deserve
recognition for their work.
I should point out that we, through an umbrella group of the
copyright industries known as the International Intellectual Property
Alliance (IIPA) (including the RIAA, the MPAA, the Business Software
Alliance, the Interactive Digital Software Association, and the
Association of American Publishers), will be filing a report with USTR
this Friday detailing the lack of effective enforcement in key foreign
markets and urging various forms of U.S. sanctions under Section 301 of
the U.S. Trade Act. I will ensure that a copy of this report gets to
the Committee. But you can be sure the countries mentioned will be the
focus of our efforts.
While much remains to be accomplished in the fight against the
piracy of music in physical forms (such as CD-R burning), a great deal
must also be done to combat Internet piracy.
Internet piracy poses a global and borderless threat to the future
success of American creators. The unauthorized digital transmission of
a sound recording on the Internet is no less prejudicial to the
financial incentives in creating music, and thus no less damaging in
drying up creativity. As a consequence, today's unauthorized digital
broadcast, or unauthorized Internet transmission is no less piratical
than their physical counterparts. And with Internet piracy, the lack of
real protection is actually stifling the development of a new
marketplace. It is extremely difficult to support the investment in new
on-line systems that require payment by the consumer for music when so
many existing sites are providing free services without licenses or
compensation to the creators of that music. There is no substitute for
serving our consumers on-line and that is what we have been trying to
do. But these businesses are facing classically unfair competition from
the pirates. While the music industry has struggled with this question
for several years and in several high profile legal cases, the
situation continues to remain critical. We must be vigilant in ensuring
that standards of protection are not outdated by technology, and that
financial rewards remain a realizable goal for American creators of
copyrighted materials.
These rewards are put at risk by commercial enterprises that
develop and maintain systems that allow for the unauthorized use of
recorded music. One such commercial enterprise that seeks to profit by
giving away music in which others invest is a company called FastTrack.
FastTrack is based in the Netherlands, but recently, after an
injunction was issued by a Dutch court prohibiting its continued
operation, it was suddenly sold to an entity based in Australia.
FastTrack developed, maintains and profits from a computer system that
encourages the free copying of music, movies, images, software, and
videogames. FastTrack's proprietary service is known to many users
around the world as KaZaA. FastTrack also licensed the system to Music
City, a company based in Nashville, Tennessee. That system is known as
Morpheus. Finally, FastTrack licensed the system to a company in Nevis,
West Indies, which operates under the name Grokster. Together, these
systems are distributing 3.63 billion songs or files a month around the
world. In order to protect our rights, we joined with the Motion
Picture Association of America and the National Music Publishers
Association in a suit against FastTrack, Music City and Grokster to
prevent further theft of our recordings.
This Committee helped take a major step in combating Internet
piracy when it ratified the World Intellectual Property Organization
Copyright Treaty and the Phonograms Treaty.
These treaties contain four critical provisions:
(1) sound recording copyright holders must have the ability
to authorize or prohibit the transmission of their works
through interactive media;
(2) states must ensure that technological systems used by
copyright holders to guard against unauthorized uses may not be
circumvented;
(3) states must prohibit interference with rights management
information used by copyright holders to identify their works;
and
(4) states must, and this is especially important so I am
going to quote the language of the treaty itself, provide
``expeditious remedies to prevent infringements and remedies
which constitute a deterrent to further infringements.'' This
means there must be adequate penalties for those that enable
and profit form the pirate activity.
Promoting international legal order through the adoption and
implementation of the WIPO Treaties is a critical step in creating the
conditions under which U.S. copyright owners can prevent piracy in the
online environment, and I urge you to use every opportunity to convince
other countries to ratify and properly implement these treaties. This
Committee should pay particular attention to issues of enforcement. You
can play an important role in requiring governments to understand the
need to ensure that Internet Service Providers and other entities must
be held to reasonable standards of liability, like they are in the
U.S., ensuring that they cannot turn a blind eye to what is taking
place through their systems. Partnerships and the adoption of
reasonable business practices by all sectors will be critical in
ensuring the vitality of America's creative sector.
If we are able to construct a new global marketplace dominated by
legitimate businesses rather than pirates, we will be able to reach new
markets with unprecedented efficacy. More than ever before, the music
industry will become a global enterprise based on local creativity.
This hinges, however, on maintaining an environment in which copyright
protection is effective, and continues to fuel investment in the
creation and distribution of creative materials.
Global sales of recorded music last year exceeded $40 billion. But
we sold less music than we did the year before despite the fact that
consumer interest in music has, according to reliable surveys, never
been higher. They are getting it around the world supplied by a pirate
network of services and manufacturers. Preserving markets and creating
opportunities for expansion is now a primary imperative to sustain one
of the worlds most vital, diverse and competitive industries. Our
future is wholly dependent upon achieving adequate and effective
protection for our recordings in global markets. While this task has
traditionally been fraught with difficulty--witness the well-known
piracy problems in China or Mexico--it becomes increasingly more
complex with developments in technology that permit the instantaneous
and global distribution of materials with the touch of a button.
In a global information network, protection of the creative
materials that are such a critical part of this globe's economic
backbone is only as strong as the weakest link in the information
communication chain. Thus, there is an absolute necessity to eliminate
existing gaps in the international legal structure that undermine the
protection enjoyed by copyright holders in national and international
channels of commerce.
I urge you to stay involved in the fight against piracy. The
Congress, together with the Administration, should communicate directly
with world leaders about the importance that the United States
government attaches to effective copyright protection--both on and off
line. Thank you very much.
The Chairman. Thank you. Mr. Lowenstein.
STATEMENT OF DOUGLAS LOWENSTEIN, PRESIDENT, INTERACTIVE DIGITAL
SOFTWARE ASSOCIATION
Mr. Lowenstein. Mr. Chairman, Senator Allen, Senator Boxer,
Senator Smith. I think I first wanted to commend you, Mr.
Chairman, for the remarkable insightful report you referred to
earlier. I thought it was an extraordinary and exceptional
piece of work. And if I had any sense, after listening to Jack
and Hilary and reading your report, I would just say I
associate myself with everything in your report and everything
they said, and I would just shut up and let everybody go home.
But I am going to plunge forward nonetheless.
I want to start very briefly with a word about our industry
which may not be as well known as the film industry, the
business software industry, and the record industry, to members
of this committee.
It is now estimated by Wall Street analysts that video game
sales in the United States could top $16 billion within the
next four years. That is in the United States alone. World-
wide, Bear Sterns estimates that the games software industry
will generate $112 billion in sales over the next four years.
Equity markets, as everybody knows, were depressed in 2001, but
the entertainment software industry index was up 40 percent
last year, which I think is another measure of how dynamic and
fast-growing this industry is.
Now, the remarkable thing about the growth of this industry
is that it has really occurred in essentially four areas of the
world, and that is it--North America, Australia, New Zealand,
Western Europe, and Japan. There are over a hundred countries
around the world where our industry essentially makes no effort
to market its product. It is impossible to imagine how fast
this industry could grow and how much we can grow if we had
access to legitimate markets around the globe.
The piracy and counterfeiting activities we face fall into
the categories we have heard here today. One is hard-goods
piracy--optical disc piracy, the illegal manufacturing of
optical disks around the world and their distribution--and
Internet piracy. And we have all the same problems that you
have been hearing about.
I want to focus just for a second on the optical disk
piracy problem because sometimes the sexiness of the Internet
makes us lose track of this, but this still is a huge area of
concern, I think, for all of our industries. And as has been
alluded to here today, the optical disk piracy networks are
controlled by international crime syndicates who have the money
and the political muscle to build and locate pirate replication
factories around the world.
They have the distribution networks required to move those
goods to all corners of the globe, where they sell, as we have
heard this morning, for as little as one or two dollars. We
can't--our members can't compete, which is why we are not
making an effort in so many countries to do so. And I want to
call out some countries here today.
Senator Allen asked about it. Hilary has mentioned some.
But countries like Malaysia, Thailand, Taiwan, Indonesia, the
Philippines, the Ukraine, and Russia are among the winking and
nodding host countries for these pirate syndicates. And I do
not think we should mince any words about that.
I thought one way to dramatize exactly what goes on in this
area is to perhaps walk you through 24 hours in the life of a
pirated game. I do not have any visual displays here, so try to
use your imagination. It starts with a member of a cracker gang
who will purchase a game at 9:00 a.m. on the day of its
release, if they haven't already gotten a pre-release beta
copy, perhaps from an internal leak from a company, perhaps a
reviewed copy that went to a magazine.
But as soon as the game buyer is back home, he runs a
program that produces a mirror copy of the CD, perhaps a ten-
or fifteen-minute process. Then his work is done, and the pros
take over. The mirror copy is transmitted, usually through a
broadband connection, to the next level of the illegal scheme,
a game cracker. It is now, say, about 11:00 a.m., two hours
after release, and the cracker is working on breaking the copy
protection. This is not easy, but it is not uncommon, depending
on the skill level of the cracker, for the copy protection to
be broken in 12 hours or less.
So now, run the clock ahead, we are 12, 14 hours into our
day. The cracked game is now ready for distribution and use
without the original disk. It is now, say, midnight, and IRC
and news groups are advertising its availability on the
Internet for purchase and download, and the cat is out of the
bag.
Now, we are not done yet, because, assuming the game is a
hot title, it will be sold by the crackers to replicators for
anywhere from a few thousand dollars, because many of these
crackers are kind of, they are really not in it for the money,
but they will sell it for a few thousand dollars or, in some
cases, considerably more, to the replication facilities that I
have been talking about, the organized crime syndicates.
So now, as early as 9:00 o'clock on day two, 24 hours after
the game was released, organized crime's network of pirate
replicating factories in Asia and elsewhere have got the game
and they are stamping out tens of thousands of copies for
shipment throughout the world, and the game is off to Europe
and Africa and the Middle East and even North America and
Canada.
So that is kind of a quick run through of this. My
testimony has some suggestions of things that I think we can do
about the problem. I do not want to take too much of your time
to address those. I do want to touch very quickly on two things
that have come up here this afternoon.
Like Hilary, I wanted to comment on Senator Allen's point
about impact and essentially echo what she said. You know, it
takes two to three years now to make a video game. It takes
typically not the same as a motion picture, but we are now
pushing $10 million to make a typical video game. You have
teams of animators, programmers, software engineers, and so
forth working on this process. Many of them are in small to
mid-sized development studios around the country.
Yeah, the industry is dominated by large software
publishers, but we have hundreds of small developers who feed
those software publishers. And so essentially when you--and the
other point that is certainly important to realize about this
industry is that most games make their money in the first
couple of months. If they are not selling one or two months
after release, they are off the shelf. Just like the record
industry, most games do not make money. It's a hits-driven
business.
So when you pull all that together, what piracy is doing is
it is sucking money out of the industry. It is depriving the
industry of the R&D dollars required to make that next game
that is going to cost $10 or $15 million. And with 145 million
Americans who are playing computer games and video games, not
just a bunch of adolescent boys these days, that means millions
of Americans are being deprived, potentially, of entertainment
options. And, of course, the economic impact that results from
developers and the publishers not being able to maximize their
revenue.
And with that and the lateness of the hour, I will wrap up
my remarks and welcome any questions.
[The prepared statement of Mr. Lowenstein follows:]
Prepared Statement of Douglas Lowenstein, President, Interactive
Digital Software Association
introduction
The Interactive Digital Software Association (IDSA) is the U.S.
trade association representing the business and public affairs
interests of the world's leading publishers of interactive games for
video game consoles, handheld devices, personal computers, and the
Internet. IDSA members collectively accounted for nearly 90 percent of
the $6.35 billion in entertainment software sales in the United States
in 2001, and billions more in export sales of American-made
entertainment software. Our industry has just entered a new era of
dynamic growth. After doubling in size between 1994 and 2000, Wall
Street analysts now estimate that industry sales in the U.S. will
double again to at least $12 billion by 2005, with some estimating that
retail sales will reach a staggering $16 billion that year. Worldwide,
Bear Stearns forecasts that the game software industry will generate
$112 billion in revenue over the next four years. A recent survey by
Peter Hart & Associates found that 145 million Americans now play
interactive games on their PCs, their game consoles, and/or their cell
phones on a regular basis.
The industry's growth has been a boon to the U.S. economy, and to
our exports. Industry sales have grown at an annual rate of 15% a year
over the last several years, double the rate of growth of the U.S.
economy as a whole, and far outpacing the growth in other entertainment
and technology industries. A recent report in ``Red Herring'' Magazine
identified video games as one of the two or three most impressive
performing sectors in U.S. equity markets in 2001, with the index of
video game stocks up more than 40% for the year. All of this led
journalist Ted Fishman, writing in ``Worth'' Magazine to conclude,
``For investors, for businesses, and even for national economies, video
games aren't child's play. They are becoming a dominant medium.''
In today's modern era of video games, it typically costs more than
$5 million to make a top game, with a development process that spans
two years from start to finish. Teams of 20-30 animators, software
engineers, writers, sound engineers, and other crafts come together to
create an artistic achievement that is the most technologically
advanced form of entertainment available, where players are the authors
and directors, and where passivity, the hallmark of 20th century
entertainment, is replaced by interactivity. Once the game is
completed, IDSA members pour millions of marketing dollars into
supporting the new title, knowing that in this hits-driven business,
most games have but a month of shelf life to capture consumer mind
share and take off, or else join the vast majority of titles that do
not return a profit to the publishers.
The worldwide growth and expansion of the U.S. game software
industry is impressive on any terms. But it's even more remarkable when
you consider that this growth has largely occurred in only four
markets: North America, Western Europe, Australia/New Zealand, and
Japan. There are at least 100 other countries around the globe where
there is virtually no legitimate market for our products due to rampant
piracy. It is no exaggeration to say that the growth of the U.S. video
game business is limitless if we can reduce piracy in these untapped
markets to incidental levels. The potential was vividly illustrated in
a ``New York Times'' photograph of newly liberated Kabul in October.
Here in one of the world's most repressed and isolated cities, a
picture taken just a few days after the expulsion of the Taliban,
showed a group of kids gathering excitedly around several Game Boy
handheld video game consoles. If the kids in Kabul can't wait to get
their hands on video games, it's safe to say the same is true in
country after country in Asia, the Middle East, Eastern Europe, and
South and Central America.
piracy and counterfeiting: a global primer
Interactive game software is created and distributed in digital
format, making it susceptible to electronic theft, unauthorized
reproduction, mass duplication and Internet transmission. To prevent
such abuses, almost all game publishers seek to protect their product
by incorporating into the game software one or more different
technologies aimed at restricting unauthorized access to, and copying
of, the digital content of these products. However, despite the
millions of dollars that have been invested in such access and copy
protection technologies, intrepid pirates have been able to penetrate
these defenses and access the digital game content for their illicit
purposes. Once these defenses have been compromised, the digital game
content is then subjected to active global channels of piracy and
counterfeiting that result in the almost instantaneous availability of
illegal copies of this game product in all four corners of the world.
This instant piracy is especially devastating because in our industry,
given the hundreds of releases per year, limited retail shelf space,
and the competition for consumer mindshare, a title's fate is
determined within a month or two of launch. Massive piracy at launch
thus can have a material impact on the financial success of a given
game.
The piracy and counterfeiting activities plaguing the game industry
fall into two general categories: (1) the illegal manufacture and
global distribution of optical disc copies of games; and (2) the
posting and worldwide transmission of illegal copies of games as
digital files via the Internet.
Optical Disc Piracy
Optical discs known as CD-ROMs have for some time been the
predominant format for games played on personal computers. Starting
with the PlayStation in 1994, there has also been a deliberate trend
towards putting console games on optical discs, as this format offers
greater storage capacity on which to hold the large quantities of
digital information required for the newer more powerful game
platforms. The latest console technologies, such as the Xbox,
PlayStation 2, and GameCube, use optical discs as the carriers for
their game software. This trend for game software paralleled the rapid
expansion in the use of optical discs for other entertainment media,
including music CDs and motion pictures on DVD.
This universal medium has proven to be an irresistible opportunity
for international crime syndicates, for which the economics of optical
disc replication and global distribution has tied in comfortably with
existing strengths within their organizations. These criminal
enterprises have easy access to the necessary capital to acquire
multiple optical replication lines and the required connections in
certain countries to establish replication facilities, often in
clandestine settings, where they are being allowed to operate with
little interference or interruption from any government or law
enforcement authorities.
Many of these criminal organizations have selected countries in
Southeast Asia as the home base for these replication facilities.
Optical disc facilities engaged in illegal replication activities have
been found at one time or another in every country in this region.
While progress in certain countries has been made in controlling
illegal optical disc replication, such as in Singapore and Hong Kong,
other countries continue to be active hosts of such facilities, in
particular, Malaysia, Thailand, Taiwan, Indonesia and the Philippines.
Pirate optical disc replication facilities are also frequently found in
Eastern Europe, Russia and some of the former CIS countries, Ukraine in
particular.
As our colleagues in the film and music industries have estimated,
the average annual production capacity of a replication line is over 3
million discs per year, a capacity that typically far outstrips any
demand for legitimate product. Given the massive mismatch between
demand and capacity, it's fair to conclude that the concentrated
presence of replication lines in many of these countries is indicative
of the fact that their illegal output is intended for export to other
markets. Of course, the criminal organizations base their manufacturing
facilities in these countries because they know that they will have
considerable freedom in replicating and exporting the pirate optical
discs to their export markets. The host countries frequently turn a
blind eye to such activity, either because of the political and
economic influence of the criminal enterprises that own the facilities
or because the problem is so large and pervasive that they are
reluctant to enact the measures and commit the resources to deal with
the problem.
The international distribution channels of these pirate and
counterfeiting operations are widespread. Pirate game product
manufactured in Southeast Asia has been found in Europe, Africa, the
Middle East and throughout the western hemisphere, from Argentina north
through Canada. U.S. Customs seizure statistics for 2001 reveal that
there were over 1,300 different seizures involving optical media
product, many of these from Southeast Asian countries. And these are
U.S. seizures--representing only a fraction of shipments made directly
from Asia into other markets.
The criminal organizations running these operations have clearly
been able to take advantage of the inadequacy of the customs operations
and border controls in many countries around the world. Not only are
the criminal organizations involved in the optical disc trade effective
at securing the export of their pirate products from their country of
manufacture, but they have also carefully arranged for multi-step
shipments for such product in mapping its global distribution. On
several occasions, we have found game product that had been
manufactured in Asia shipped through Europe and then on to countries in
South America. Frequently, such ``trans-shipment'' schemes are done to
avoid scrutiny and detection as shipments from certain countries are
more likely than others to arouse suspicion and possible inspection. In
addition, the pirate exporters have also taken to reducing the number
of units in each shipment as the smaller quantities are more likely to
elude detection and, even if found and seized, would represent a
smaller loss to the pirate trader.
The global counterfeiting operations have had a devastating effect
on the distribution of legitimate game product to international
markets. As these pirate ``entrepreneurs'' sustain neither development
costs, nor royalty expenses, nor marketing costs, they enjoy untold
advantages over the publishers and sellers of legitimate game product.
Adding this to the fact that pirates never pay applicable taxes and
import duties, it is not difficult to understand how in almost every
international market a pirate copy of a game is offered at a fraction
of the price that the legitimate version of the same game would command
and usually reaches that market well in advance of the legitimate
version. This has resulted in pirate product overwhelming legitimate
sales in certain markets and even preempting legitimate market entry in
others. Many IDSA members remain skeptical of their ability to compete
against pirates in countries such as Thailand, Malaysia, the
Philippines or Indonesia because of the huge predominance of pirate
product in the marketplace. The same holds true for many countries in
Eastern Europe, where IDSA members would like to establish a foothold
but are reluctant to assume the risk given the current piracy climate.
Even in other countries where many IDSA members are working to sell
legitimate versions of their games, it is common to find piracy rates
of over 90%, such as in Mexico and Argentina.
While the United States ranks as the world's largest market in the
consumption of interactive game software, most IDSA members now
generate 40-50% of total revenue from foreign markets. It is very clear
that the international pirate and counterfeiting trade in interactive
game product, if left to grow unabated, will have a profoundly harmful
effect in dampening the growth of the interactive game industry.
Poland Stadium: Organized Crime Piracy Up Close and Personal
Let me take this from the abstract to the real world. An excellent
example of the scope and scale of optical media piracy and its
ascendance in certain countries is the ongoing presence and visibility
of the 10th Anniversary Stadium in Warsaw, Poland. This stadium, a
former football stadium, centrally located in Warsaw, has served as an
open marketplace for the sale of a huge volume and variety of illegal
goods and pirated products, whether game software, pirate movies,
illegal music CDs, as well as applications software.
Sellers from Poland, Russia, Estonia and Eastern European countries
come to the stadium to rent out selling space within or around the
stadium and sell illegal merchandise, much of which is likely
manufactured in optical disc facilities in their home countries. Each
of these ethnic groups is reportedly tied in with organized crime
groups who are active in the pirate trade and who use the stadium as a
high volume outlet for their optical disc product. The volume of
illegal transactions is huge and has been estimated at over $3 billion
per year (not all of this represents sales of pirate product), helping
to make the stadium, by some estimates, the second highest income
producing enterprise in the country.
The most telling aspects of this story are the following facts: (1)
the Stadium has been operating in this fashion for a number of years;
(2) the Stadium and the European Fair operating in the Stadium are
managed by an international board of foreign representatives under a
contract that they have entered with the Stadium authority as well as
the board of the local Warsaw police district; (3) the illegal
activities at the Stadium are the subject of monitoring and
surveillance by Polish law enforcement authorities for some time; (4)
these authorities claim that, despite undertaking occasional actions
against Stadium businesses, they are unable to meaningful enforcement
efforts against the illegal businesses operating in the Stadium due to
the control maintained by the Stadium security and police force, as
well as the protection afforded the Stadium businesses by a local
organized crime group; (5) the Stadium and its pirate sales of millions
of dollars in infringing products has been the subject of the copyright
industries' annual filings to the U.S. Trade Representative for a
number of years; (6) despite the attention that the U.S. government has
focused on the Stadium in response to these filings, it continues to
operate freely, with local Embassy reports confirming the Polish
government's refusal to close down the Stadium because of the benefits
it provides to the local economy.
One last point about these organized crime syndicates. We are
concerned about reports, admittedly anecdotal, that suggest that the
organizations involved in the piracy and counterfeiting trade are also
involved in other forms of criminal endeavors. For example, on October
13 the ``Washington Post'' reported that Paraguayan commandos raided a
video game store linked to international terrorists in Ciudad del Este,
a hotbed for video game piracy. I cannot say for sure that there is a
clear link between terrorism and piracy--in contrast to the
unimpeachable certainty about the link between organized crime and
piracy. Unfortunately, there are limits to the resources that private
industry can put to this problem and therefore concrete information in
this area is hard for us to come by. In this case, only the U.S.
Government has the resources and the ability to pursue this potential
link between those who would endanger America's national security by
undermining its economic security. I hope this Committee will encourage
the U.S. Government to actively investigate this as part of its broader
attack on terrorism.
Internet Piracy of Game Product
While the video game industry has been a pioneer in distributing
entertainment content for free and for pay over the Internet, this
medium has unfortunately proven to be a terribly effective outlet for
the worldwide dissemination of pirate version of games. Here's one
example of how the system works:
A member of a ``cracker'' gang--a gang of people who ``hack'' or
``crack'' the access and copy protection controls in games--will
purchase a game the first day of its release, first thing in the
morning--if they haven't already obtained a pre-release beta version.
As soon as they're back home, they run a program that produces a mirror
copy of the CD, perhaps a 10-15 minute process. The hacker will then
transmit this mirror copy, usually through a broadband line, to a game
cracker in the gang. So within an hour or two of release, the cracker
is hard at work breaking the copy protection. It is not uncommon,
depending on his or her skill, for the cracker to remove copy
protections in 12 hours or less. The cracked game is now ready for
distribution and use without an original disk. By late evening of the
release day, IRC and newsgroups are advertising the cracked game's
availability and, depending on demand, the cracked game may also be
sold to replicators for anywhere from a few thousand dollars to
considerably more. Thus, within 24 hours of release, the pirate
replication factories I described earlier may be stamping out tens of
thousands of illegal copies for shipment throughout the world,
resulting in untold lost sales for the publisher and artists involved
in making the game.
Unfortunately, law enforcement has found it difficult to
investigate and penetrate these hacker rings, even more so because many
of these groups' members reside and operate from overseas. However,
three separate operations by U.S. Customs, the Department of Justice,
the Federal Bureau of lnvestigation and the Office of the Inspector
General of the Environmental Protection Agency in December 2001
targeted raids and search warrants against individual members of some
of these rings. Of particular note to this Committee, and particular
encouragement to us, is the fact that in two of these operations, the
Federal agencies involved were able to coordinate their investigative
efforts with foreign law enforcement agencies in five countries (United
Kingdom, Sweden, Finland, Australia, Canada), some of whom executed
search warrants against local residents. These investigations are still
ongoing, but I submit to you that this is the kind of international
cooperation this Committee should encourage and stimulate if we are to
have a coordinated worldwide attack on pirates of all stripes.
It is fortunate that U.S. law offers IDSA members, as well as other
copyright holders, the legal means to address Internet sites that
feature illegal copies of their product through the remedies offered by
the Digital Millennium Copyright Act (DMCA). Such remedies help
facilitate a fairly rapid takedown of infringing product from Internet
sites, which is quite important given the difficulty and protracted
effort required to investigate and prosecute the hacker rings described
above. Unfortunately, the vast majority of foreign countries do not
offer a similar system for the removal of infringing product. These
countries' adoption of similar ``notice-and-takedown'' systems as part
of their legal codes would go a long way to help the game industry and
copyright holders in general pursue their own efforts to rid the
Internet of infringing product.
policy recommendations
1. Renewal of the GSP trade benefit program
Although there are many important considerations underlying the
renewal of the Generalized System of Preferences (GSP) program, the
IDSA believes that the availability of GSP trade benefits has been an
effective incentive for countries to improve their efforts to protect
and enforce U.S. intellectual property rights. Every year, the U.S.
Trade Representative (USTR) reviews petitions submitted by the
copyright industries with respect to trading partners who enjoy GSP
trade benefits but who fail to provide adequate and effective
enforcement of American intellectual property rights, one of the
qualifying criteria for GSP eligibility. Because one of the possible
sanctions available to USTR and its review of these countries' IP
protection efforts is the suspension of GSP benefits, this review of
GSP beneficiaries' IP performance is an effective way to pressure these
countries to improve their enforcement efforts against local piracy and
counterfeiting operations. The current inactive status of the GSP
program has therefore removed one of the more effective mechanisms for
obtaining significant improvements in countries' efforts to address
local optical disc and Internet piracy. Accordingly, we would urge this
Committee to play a leadership role in securing GSP renewal.
2. Assisting law enforcement overseas/Mutual Legal Assistance Treaties
(MLATs)
As many of the significant players in the optical disc and Internet
piracy trades are resident and operating overseas, Congress should
consider approaches that would allow U.S. law enforcement officials to
aid in the pursuit of foreign nationals for commission of U.S. IP
crimes. Particularly in the optical disc piracy trade, most of the
players are operating in countries where they are unlikely to fear
local prosecution or efforts to curtail their pirate activities.11In
this regard, there are a number of foreign law enforcement agencies who
are quite active and effective in pursuing investigations against
optical disc operations and, to a lesser extent, Internet pirates. Many
foreign police forces have also indicated a strong interest in becoming
more active in these areas. Federal law enforcement officials should
develop a better level of communication and coordination with such
officials as such relationships will inevitably become necessary in
pursuing investigations into optical disc enterprises as well as
Internet piracy rings, both of which have extensive trans-national
connections and links.
These cooperative investigations are based on mutual legal
assistance treaties (MLAT's) that specify the conditions under which
U.S. law enforcement agencies cooperate with non-U.S. law enforcement
agencies, and which require Senate ratification. We encourage this
Committee to play a major role in reviewing these MLATs and, where
necessary, strengthening them to ensure cooperation is forthcoming in
internet-related investigations and those involving ``hard-goods''
piracy, particularly in those counties in Asia and Eastern Europe where
factory-style production of pirate optical media product remains our
greatest concern.
Still another effective way to build foundations for these
relationships is through increased technical training of foreign law
enforcement officials and agents. Such training should focus on the
technical and forensic aspects of optical disc and Internet piracy. The
IDSA is committed to participate and/or provide whatever technical
support would be required to develop a technical curriculum for such
training programs. In addition to such training, a greater effort needs
to be made to reach out and share intelligence and information with
foreign law enforcement bodies, particularly when the information
implicates a local resident or national.
3. Foreign countries' adoption of notice and takedown provisions to
address Internet piracy
As noted previously, the absence of statutory provisions on ISP
liability and notice and takedown in foreign countries similar to those
found in the DMCA severely limits IDSA members' abilities to address
foreign Internet sites which are hosting infringing activity or
offering pirate versions of their game product. Statutory recognition
of the liability of an ISP for infringing product being made available
through its systems has been a crucial factor underlying the effective
system of notice and takedown that has enabled U.S. copyright holders
to obtain ISPs' removal of pirate product from their systems. Congress
should take an active role in promoting the adoption of such measures
by U.S. trading partners as this would give U.S. copyright holders a
better chance to try and address instances of Internet piracy which
arise overseas.
4. More effective deployment of Federal law enforcement resources
We have been gratified by recent stepped up efforts within the U.S.
Government to focus more resources on large scale optical media and
Internet piracy. Since mid-1999, we have seen an increased focus on IP-
related crimes through greater allocations of dedicated manpower and
resources within a number of Federal agencies, including the Department
of Justice, the Federal Bureau of Investigation, the U.S. Customs
Service and a number of U.S. Attorneys' Offices across the country.
Attorney General Ashcroft's announcement last year of the Computer
Hacking and Intellectual Property (CHIP) units within key U.S.
Attorney's Offices was another helpful step towards ensuring the
dedication of an appropriate amount of resources to cover this growing
and complex area of economic crime.
As I said, we are certainly gratified by this increased Federal
commitment. But we would like to suggest that adding manpower and other
resources is not by itself sufficient to the task at hand, and
therefore offer the following recommendations to enhance the efficacy
of the national government's drive to defeat the worldwide pirate
enterprises.
CHIP Mandate
First, the CHIP units' resources must be devoted to both ``hard
goods'' or packaged goods piracy, not exclusively on online offenses as
some statements have suggested may be the case. Such a narrow focus on
the Internet will give an unfortunate free pass to the organized
criminal piracy rings operating with impunity today. As optical media
piracy currently poses an even greater danger to the interactive game
industry, we would urge that priority also be assigned to pursuing
investigations into the sources of pirate optical discs in this
country, many of which will likely begin with the information derived
from Customs seizures of optical disc shipments. Application of law
enforcement resources to such cases could prove useful in deriving
additional information on both foreign and U.S.-based sources of such
optical disc product, providing a basis for additional investigations
aimed at the pirate manufacturers.
Inter-Agency Coordination
While it is helpful to have increased Federal resources available
to address the multiplicity of leads and intelligence on the growing
optical disc and Internet piracy problems, there is a continuing need
for the resources addressing these problems to be carefully
coordinated, particularly establishing the business connections between
different illegal operations can be more easily achieved if
investigative efforts by different offices and different agencies are
tracked so that shared intelligence can help facilitate building the
case against individual targets. This past December's raids against
Internet piracy rings were a good example of how effective such
coordination can be as three separate investigations involving
different Federal agencies benefited from a coordinated approach on
execution of search warrants and sharing of investigative intelligence.
We would like to see such coordination expanded, centralized and
implemented on a more systematic basis so that we can maximize the
effectiveness of the investigative and enforcement resources applied to
Internet and optical disc piracy.
Training
While increasing the number of investigative and prosecutorial
staff to focus specifically on IP-related offenses is valuable, it is
crucial that such individuals receive the proper training and
orientation in the areas of optical disc and Internet piracy,
particularly in the technological facets of the problem and in computer
forensics. As the offenses in these areas as well as the evidentiary
aspects of the cases are heavily influenced by technological factors
and considerations, it is extremely important that the agents and
prosecutors assigned to work in these areas have a full understanding
of the technological components of the software and the related
hardware systems. IDSA and its members are prepared to provide whatever
training resources are required to help provide such background and
know-how to Federal law enforcement officials.
Technology
It is critical that law enforcement officials working in these
areas be furnished with computers, devices, machines and other
equipment that will enable them to conduct effective investigations
into the activities of those engaged in Internet and optical disc
piracy. Those who are active in these pirate trades are generally
technologically sophisticated and frequently well-equipped with the
latest and best in computers and Internet access. It is crucial that
the law enforcement agents who we task with tracking these people down
and gathering evidence on their illegal activities are provided a
roughly equal footing on a technological level.
conclusion
Mr. Chairman, it's clear from my testimony that global piracy is
both a drag on the growth of U.S. businesses, and the U.S. economy, and
that it is a legitimate American foreign policy concern. In this
testimony, I have tried to share with you some concrete sense of our
industry, the nature of the global piracy problem, and some easily
achieved ways to make an even greater dent in the pirate networks.
At the same time, it must be said that pirates tend to flourish
most in countries where any potential respect for IP is overwhelmed by
harsh economic realities. In this sense, the single greatest action we
can take as a government is to pursue a foreign policy that seeks to
raise the standard of living and build viable, sustainable, free
market, national economies. I believe that if countries stamp out IP
theft, they create a climate where IP-based industries can thrive; a
growing IP-based economy, in turn, perfectly aligns with greater
economic growth and opportunity. So while we must continue to wage the
enforcement fight, we must also acknowledge that only when the
underlying economic conditions around the world improve will we create
an environment where incentives for piracy truly diminish. That may
take decades, but it is a case where our industry's interests coincide
with our national and economic security interests as well.
The Chairman. At what point does the Internet and
increased access to broadband begin to pinch on the
counterfeiters? In other words, at what point does it get that
you can't make money setting up these counterfeiting operations
that stamp out ten thousand, or fifty or hundred or two-hundred
thousand of these games, movies, or CDs, records, or any other
software, that because you can just pull it right out of the
ether, you know? Yes, Jeff?
Mr. Raikes. Well, Mr. Chairman, it is like Jack said, it is
Whack-a-Mole. These are criminal organizations which are quite
versatile, and they continue to evolve themselves. So what they
do is, they prey on consumers, and so their step will be to set
up what appears to the consumer to be a legitimate site to
distribute software or distribute other types of technologies,
yet, in fact, they will be illegal businesses, just like you
are seeing today. So it would be my expectation that the
criminal element will continue. It is just that they will have
to change their business model.
The Chairman. The arrival and the growth of broadband
strikes me as a double-sided development for all your
industries. I mean, in one sense, it gives you, Jack, what the
industry and all the industries have been looking for: direct
access to the consumer with high-quality capability and the
market will determine, absent piracy, be able to allow you to
market directly to consumers. But how without--I mean it gives
the pirates the same--and the counterfeiters the same access.
Mr. Valenti. Mr. Chairman, let me speak to that, because
you put your finger on something that is quite elusive, and it
is a good-news-bad-news kind of thing. For every gain, there is
a loss; for every loss, there is a gain, the Amazonian doctrine
goes. The window of opportunity we have to protect ourselves is
the languishing of broadband in this country. That is the moat
that has been protecting us for some time.
Yet in order for us to really make use of the Internet, we
must have more broadband. Today, there are nine and a half
million broadband users in this country--66 million computer
homes, only nine and half million have broadband. That is DSL
line or cable modem. We do know that the use of the Internet
has begun to flatten. It's not growing with the exponential
speed it once had. And I keep saying--I do not know how the
rest of the world feels about this--but I am saying that the
great omission on the Internet today is the lack of movies.
That is what people want, and that is the thing that drives it.
It is not there.
The only way we are going to do this, Mr. Chairman, and we
know what is required to protect our movies. You've got to have
a broadcast flag that protects over-the-air television from
being re-transmitted on the Internet. You have to have content
encryption. You have to have watermarking, which allows you to
plug what is called the analog hole.
We know the ingredients that are required to protect us.
And until you get those ingredients all put together in an all-
embracing solution, we are going to suffer in a lamentable way
the slow undoing of one of America's great economic assets,
whether they be video games or music or Microsoft software or
whatever. It's going down the drain sooner or later unless we
can stop it.
I am saying to you if we can't get all the IT communities
and chip makers and the home recording device people together
in a room and let us work it out privately then bring it to the
Congress, if we can't do that, then the Congress has to do it.
Mr. Lowenstein. Senator, if I may just add a couple of very
quick comments. Our industry, I think, is perhaps farther ahead
in its use of the Internet as a distribution tool than some of
our colleagues here. We've been using the Internet to
distribute game content for years, at least five years. And in
the lifetime of the Internet, that is a lifetime.
Games are made available for free. Games are made available
for monthly fees. They're made available for hourly charges.
There are games where literally ten and twenty thousand people
are playing simultaneously--several of those enormously
successful commercially. There are 50 million Americans who say
they play games online, anything from card games like Hearts
all the way up to very intensive games. Even with a fairly
proactive effort to embrace the Internet technology, our
industry is obviously still facing tremendous piracy problems,
nonetheless. It's not simply a question of making the content
available through legitimate channels. Broadband, you have
absolutely right, will compound the problem.
It is, as you say, absolutely a double-edged sword. But it
is inevitable. And so as we march toward that, we are going to
have to find ways, both through the legal systems and through
technology. Our industry, again, if I can just say for one
second--we have proprietary platforms. Again, we are a little
different from our colleagues.
Microsoft has the X-Box. Sony has the Play Station.
Nintendo has the Game Cube. Each one of those has hundreds of
millions of dollars in R&D invested in encryption to prevent
the playing of illegal games. And unfortunately,
notwithstanding the investment of some of the most talented
people in R&D in the world in these companies, these copy
protections are routinely cracked. So I am not even as sanguine
as Jack, that even if you can come up with a standard it is
going to ultimately solve this problem.
That is a rather pessimistic note, but I wanted to share it
with you.
Mr. Raikes. I think we absolutely share Jack's goals, and I
agree with Mr. Lowenstein that--we are a content provider, too.
So, you know, we may not be really in the movie business, but
we care a lot about trying to protect content. And so,
therefore, we take a very proactive position on this. We're
spending more than $50 million annually on digital rights
management technology, the kind of technology that will help to
secure content. But again, we are dealing with people who also
are going to try and continue to advance their skill, their
criminal skill.
And so I think one of the important things is to have the
technical community working together and also the business
community. And, in fact, Jack's efforts have energized a group,
the Content Protection Technology Working Group are getting
together and having these discussions.
The important thing to remember is that whatever sort of
standards are put in place, the mechanism has to be flexible
enough to encourage the innovation. You have to strike a
balance that encourages people to innovate on digital rights
management technology, because, again, you have to understand
the criminal elements are going to be trying to crack the copy
protection, the digital rights management technology, on an
ongoing basis. And so we have got to keep moving, moving,
moving in order to make sure that we deliver on this.
So, there is no lack of energy or enthusiasm for what Jack
said, certainly from our perspective and I think many of our
colleagues in the industry. The key issue is how can we make
sure that we come together as an industry and get the right
technologies in place and keep one step ahead of the bad guys.
The Chairman. Senator Allen.
Senator Allen. Thank you, Mr. Chairman. No. 1, I fully
understood, having visited some of the studios and others,
especially the motion-picture business, whether that is Disney
or Warner Brothers or others, the tens of millions of dollars
that are invested in these wonderful creations and the
thousands of jobs they provide. And when they are shooting in
other places other than, say, Burbank, and so forth, what the
impact is on communities. And just like any other business,
when one takes a risk, whether it is in the recording industry
or motion picture industry or the game--my children--my son, in
particular, is the one that keeps you all in business.
[Laughter.]
All of that, you have to get a return on your investment.
And if you are not going to get a return, if there is thievery,
so to speak, you have to increase the price. But in the long
run, you kill off that creativity, because they are simply not
going to make those investments which are risky to begin with.
And the ones that are profitable, and if you have made, like, a
pharmaceutical, once you finally get something that has a
market, that gets stolen, it is hardly going to be conducive to
more creativity and risk taking and making a better product,
whether it is music or whether it is television or whether that
is also--of course, in motion pictures.
I think that this panel here is very representative, and
the comments, particularly of Mr. Valenti as you were going
forward, and that of Mr. Raikes and Lowenstein and Ms. Rosen,
as well, on the issue of broadband. In looking at broadband, it
is interesting that all of us, at least many of us are trying
to get broadband to more areas, especially to rural areas,
sometimes inner-city areas. It's looked as an economic
development, modern day rural electrification matter.
Interestingly, I have read--and I can't remember the source--
but about half the country has access to broadband, more than
half. But the actual utilization and desirability is around ten
percent.
And why is that? People like to get the Internet, but I
think what makes the difference is, and why they do not want to
pay more for broadband, whether it is cable modem or DSL,
regardless, the reason they do not want to pay more is they do
not see anything compelling to make a difference. Sure, you can
download a newspaper a little bit quicker to read, whatever
your newspaper is or maybe you get the sports scores a little
bit quicker. Maybe get a better broadcast of the Raiders game
or something like that. But that is still not enough to make
you pay more.
The difference is the content, and that is what will make
the difference, being and visiting with Microsoft and seeing
their flat screen projecting Disney's ``Dinosaurs,'' I believe
it was, the movie, seeing the digital TV, the great creativity,
the preciseness, the clarity, and so forth of that film and how
you would enjoy it on one of those large, flat-screen digital
screens. It seems to me everyone--everyone, whether you are a
computer maker, whether you are a consumer of electronics,
whether you are a software programmer, so to speak, software
manufacturer, obviously the music industry, the recording
industry, the motion-picture industry, everyone--and the
Internet companies, for that matter, and those who are
investing tons and tons of money into broadband--and there is a
lot of dirt to dig up to put in the fiber optics if you are
using fiber as opposed to wireless or satellite, there is a lot
of money into that, and they've got to get a rate of return.
And so it is in every single party's interest to come to a
solution. And it may not be just one solution. It may be
several solutions. The folks at Warner Brothers, the folks at
Disney, the folks at MGM, regardless, all have to be
comfortable with it to put that risk of that production of that
property on the Internet. And so I would hope that all the
parties would get together as quickly as possible. My solution
generally is not one of saying, ``Let's get the Congress to
come up with it.'' And I understand the frustration. Sometimes
you need to have a kind of an axe over someone's head to get
them to pay attention and come together. But it is really in
everyone's interest for the return on the investment on
broadband and also to get people utilizing broadband, not just
for entertainment, but entertainment is what will drive it, but
it also will be beneficial for education. It will be beneficial
for economics and jobs in areas. So there is a reason for the
Internet Service Providers, or the broadband whether it is
again, the fiber optics to be laid, because they will say,
``Hey, look. If we put this out here, folks are going to want
it.'' And the digital rights and the innovation on it, I think
is absolutely essential.
But these standards, whether it is content or whatever you
want to call it--content encryption, watermarking, the point is
it is protecting copyright laws, so to speak, or copyrighted
property--is vitally important for this whole country.
Yes, it is great for business, but it is also very
important for the development of our country. And these
communities that are very concerned about getting broadband,
and there is others, such as Senator Rockefeller in West
Virginia and myself, have been working on various incentives.
But you can have all the incentives you want, you can have
these companies digging the dirt to get the fiber all over, but
if the consumers aren't going to want it, why should anyone do
it? Just to get a tax break? No. They need to get a return on
their investment.
I would encourage each and every one of you all to listen
to Mr. Valenti. I may not be exactly wanting to use that
quickly the axe on it to get the government in it, but you all
do need to get together as quickly as possible. To me, that
will really spur on the technology sector of our economy while
also providing consumers what they would want. And I think it
would also help roll out the digital TV, the digital products
in the consumer electronics area where they were all thrilled
last year when they said, ``Gosh, we sold our one-millionth
digital TV, high-definition HDTV.'' And I said, ``Well, that is
great. How many TVs are out there in this country?'' You know,
it is hundreds and hundreds of millions.
We need to keep moving in technological advancements. And
so to the extent the recording industry and the motion-picture
industry is going to help, we all need to get together, and do
it as quickly possible, because if you all do not get agreement
on it, I think there will a great impetus to get the government
developing that standard. And it is best that the innovators in
the private sector are the ones whose creativity needs to solve
this problem.
That's all I have to say. And I want to thank each of you
all for your testimony and what you are doing to help our
country along--entertain us or educate us, but mostly allow us
to have a good quality of life. And I want to thank you, Mr.
Chairman, for these series of hearings you have had. I have
never had a chance to listen to Mr. Valenti at a hearing. What
a pleasure. You could charge admission for that, as well.
The Chairman. He sort of does, but we will talk about that
later. [Laughter.]
Senator Allen. But again, Mr. Raikes, Mr. Lowenstein, Ms.
Rosen, Mr. Valenti, thank you so much, and I encourage you all
to work together as quickly as possible to get that watermark
or digital protection done as quickly as possible.
The Chairman. Senator Boxer.
Senator Boxer. Thanks, Mr. Chairman. I will be very brief.
As I sit here looking at this again, because I have done so
individually with you, but just to hear you all present it and
read over my Chairman's statement which, when you were out of
the room, I said was right to the point, I think it is not an
overstatement to say that our economy is being threatened by
this thievery of intellectual property. Now, we have been able
to quantify it, and I am going to ask you again, our Microsoft
person, to repeat, because I am not sure the Chairman was
there--looking out into the future, what is the loss that you
see to the American economy if this continues?
Mr. Raikes. Well, at the current rate--I mean, today we are
seeing annual losses of $12 billion and 100,000 jobs and $1.6
billion in tax revenue. And we would expect that to increase to
175,000 jobs and right in that range of $1.5 billion to $2
billion in tax revenues towards the end of this decade. And
keep in mind a lot of----
Senator Boxer. What is the loss to the industry?
Mr. Raikes. Well, to the industry today----
Senator Boxer. Today you said $12 billion. What did you say
it would be in the future?
Mr. Raikes. I am not sure. We're hoping that we can tread
water as fast as we can.
Senator Boxer. You said something in your opening
statement----
Mr. Raikes. Today it is $12 billion. What I did estimate in
the future was the amount of jobs and the annual tax revenues.
And I would say that on that basis you are looking at something
like potentially $20 billion just in the software industry. And
we have colleagues here--we all feel a part of the community,
which is the IP industry or industries--and you put us
together, you are looking at $20 to $22 billion today. So I
suppose you could be looking at $40-$50 billion. I do not have
a precise estimate at this time for the revenue before the end
of this decade.
Senator Boxer. Bit it is possible if we do nothing--and by
that, Senator Allen, I am not saying government, I am saying
we, Americans do not do something about protecting this
property, we could be looking at annual losses to business in
the range maybe of $40-60 billion--that is not an exaggeration,
altogether. And you said 175,000 jobs. Was that just in
software?
Mr. Raikes. Just in the software industry.
Senator Boxer. So if you add on others, you are looking at
a hefty loss of jobs. If we were threatened in some other way,
we would move on this. This is huge. This is a lot of families
that are going to not realize their potential. The jobs won't
be available, or they will loss the job. So I think we are
talking about jobs in this century.
We're talking about wealth creation. And we are frankly
talking about revenues to this government to keep paying for
the programs, the things that we all believe in, whether it is
education or others. So we need to address this. And one of the
great things about Senator Biden is he sits as the chair here,
and he is the senior member on Judiciary, and so this is a
wonderful, I think, opportunity to see us match our domestic
laws and our foreign policy.
I just hope that we are going to do something, because
thievery is thievery, and there are laws against thievery. I
mean, I know, Senator, you support those laws and penalties.
Now, we have to look to you to set the standard. That I agree
with. I do not have a problem with that. But we are going to
have to have to be tough and strong and come behind that, it
seems to me, just as we would if somebody was stealing a
bicycle or a car or anything else.
Let me just close by saying that every time I am subjected
to this presentation, which I do voluntarily, it makes me get
more and more upset, because we are really not doing anything
about it, Mr. Chairman. And it is going to be like other things
we have happen in this country where we are told about
something and we do not act.
We are coming to the point where we have to do something. I
would like to be kept informed, as a member of this committee,
on how these negotiations are going. I would offer my offices,
and I am sure other colleagues would. If we can help bring the
parties together in any fashion, I am happy to do so. I know
that colleagues on both sides would be willing to do that
because I think Senator Allen is right. You need to have all
the stakeholders in the room. You have to cut to the chase. And
a lot of us are pretty good at doing that because we have to
be, because we write legislation, and it is hard to get it
enacted. We know how to make it happen.
But I just want to say, again, thank you for this. I think
this is a wake-up call and I thank you, Mr. Chairman and
Senator Allen, for this. With all the problem we have in this
problems we have in this country today--God knows, we have so
many--and we have had to divert attention to those issues, and
we will have to for a long time. We can't forget this, because
if you really strip it all away, these industries are what is
putting us--keeping us in economic leadership in the world.
How tragic it would be if, through foolishness, and because
maybe we are just too occupied, that we just let this slip by,
and then suddenly we do not have the great music and the
movies--we know they are not all perfect, but many of them are
great. We want to see them happen. We want to see the
leadership in software--we want to retain our leadership.
And so I just say, Mr. Chairman, I want to work with you.
If you consider legislation, I would like to be part of that.
If you want to work and help get these groups together, I want
to be part of that. My state--this is key to my state. You've
come to my state a lot. So have all of you.
You know how crucial it is to my state. So I stand ready,
willing, and able to help. But we just can't have this and say,
``Well, we did our thing.'' We must follow through. And I
pledge I will do that, working with my Chairman.
Mr. Lowenstein. Senator, may I make a modest suggestion,
just a very modest one and very brief.
The Chairman. Modesty is not required in this chamber.
[Laughter.]
Mr. Lowenstein. We have a very serious culture of
disrespect in this country for intellectual property, and it is
getting worse. The Napster situation really fed it. It is also
in existence overseas. We probably have lost the generation of
kids between over 16 years old, in terms of using services like
that. They know it is wrong. They do not care. We do need to do
something, from an educational standpoint, in this country, and
maybe it is something that everybody can rally around.
Perhaps there is a role for the Department of Education.
Jack has talked about this over the years. Hilary has. We need
to do something to get at young kids today and create a culture
of respect for intellectual property, because otherwise we are
going to have another whole generation grow who do not care
that it is stealing. Just as you were saying earlier, Mr.
Chairman, millions of Americans would not think of stealing a
toothbrush who routinely steal works of art. And I think that
may be something to work cooperatively on. I just wanted to
share that with you.
The Chairman. Thank you. Senator Smith?
Senator Smith. Thank you, Mr. Chairman. I often take the
subway. And this city has the Red Line out to Bethesda where I
live. And as you go down Union Station there is always a guy
down there playing a trumpet. And he is actually very good. And
occasionally, if I have got some change I will throw it in his
case there. And I think, if what I am hearing what Senator
Boxer is describing--is if we do not figure this out, all the
artists are going to be like that guy blowing the trumpet.
That's what you are telling us, isn't it? I think kids
actually would understand that, that they are not going to have
anything if we do not figure out how to reinforce what came off
Mount Sinai, that thou shalt not steal. Somehow, apparently, we
have lost that ethic. But how do artists get paid, how do
Microsoft employees get paid, if everything that you produce is
quickly stolen?
Ms. Rosen. I think that is, particularly in music, a very
interesting point, because clearly artists are not going to
stop making music. If an artist is compelled to create, they
are going to create. I think the issue is, will we all lose the
opportunity to maybe hear that artist? Because record companies
certainly do not create artists. What we do is give them a
chance to have their music developed, to produce their albums,
to distribute their albums, to help them develop long-term
careers so maybe they can be making music full-time and not
doing something else.
Senator Smith. They will have to go to Union Station to
hear it.
Ms. Rosen. I think nobody should mistake the need for
addressing the issue by saying that art will stop. Art won't
stop. It's our access to art that will be limited.
Senator Smith. Is there something we could do in terms
of--see, I like the fact that, Jack, you are having these
meetings. But sometimes work expands to the time allotted for
its completion. If there is no deadline, maybe there is no
pressure on the competing industries. Would it be helpful if we
set a deadline?
Ms. Rosen. Yes.
Mr. Valenti. The answer is absolutely. I am always
reminded--I think in movie parables--I am always reminded of
the scene in ``The Godfather'' where Al Pacino is telling his
girlfriend about a certain fellow named Lucco Brazzi and how he
got to be a friend of his father. He said that his father went
to a fellow, and he wanted to get one of his proteges out of a
contract, and so he had Lucco Brazzi put a .357 magnum to the
guy's head and made him an offer he couldn't refuse.
In a strange way, I think, Senator Allen that might have
said, you need some push. I think it would be very helpful if a
group of important Senators, like yourself, would make it very
clear to everybody that you need to sit down and work this out
in private negotiations. And it may take a few months. It is
not going to take a year or two, because if you do not have a
deadline, you will have the tendency to dawdle and delay and
relentlessly keep speaking without ever coming to a conclusion.
I think there ought to be a deadline, I really do. Congress is
the absolute last resort, as Senator Allen said. He's
absolutely correct. You do not want the Congress, with all due
respect, messing around in something that they have only a
cursory knowledge of, although some of these young people
sitting against the wall may have a hell of a lot more than a
cursory knowledge.
But I think it needs to be done with the Microsofts of the
world, with the Dells and the Compaqs and the Hewlett-Packards
and with the Intels and with the hardware manufacturers. And if
we could just do that in an orderly way--now, Jeff Raikes says
the CPWG, and I hate these acronyms, I never can remember what
the hell they mean.
But there is this working group, it is going on now, but
they are discussing one thing. As you know, Jeff, they are
discussing the broadcast flag. What does that mean? Over-the-
air television and televison programmers worry that television
programs will be redistributed on the Internet and vitiate the
worth of the television program. So they are trying to avoid
redistribution on the Internet. And that is called a broadcast
flag, and it is inserted in the computer. It's inserted in the
program. And it says to the computer, you can't redistribute
this. That is all it says.
Now, there is, and I can understand this, there is some
reluctance on the part of computer makers. They do not want to
have anybody telling them what to put in their computer. I
understand that. But when you are nearing the precipice and you
are about to fall off, you hope somebody might throw you a
lifeline every now and then. And this is what we need.
Senator Smith. Mr. Raikes, is there something that
Microsoft has that is imminent, and if you were already asked
that question, you do not need to reanswer it, but when I was
at your campus six or so months ago, I was very impressed with
what I was hearing that persuaded me that government shouldn't
get involved, that the marketplace would solve this. And that
is my strong preference.
But I am saying perhaps a date only in the sense that we
are facilitating the private sector to solve this, because we
will do it much less efficiently than you will.
Mr. Raikes. Yeah, it is a very good question, Senator
Smith. And again, we share the enthusiasm that Jack and others
have, but there is, if I may just offer a little bit of a ray
of sunshine. Today there are legitimate movies online that are
being protected by our digital rights management technology. So
there are examples today of digital rights management work that
is working and it is effective. But again, we have to keep
going.
The Chairman. Excuse me. Give me an example of a movie
that, where that is the case. And if that is the case, why
don't all movie manufacturers go to you to get that done?
Mr. Raikes. Well, there is a site--I am actually not sure
of it; in fact, maybe some of other people can help with me
some of the movies--but it is called Intertainer, with an I, I-
n-t-e-r-t-a-i-n-e-r, dot com, which is a site that exists
today.
Now, I haven't had the opportunity to hear what the movie
industry might think of that particular use of the digital
rights management technology, and I can understand their desire
to have even higher levels of security, because we do know that
there are risks here. And so some people would suggest, for
example, that you need to add things, like unique identifiers
in the hardware in order to try to improve the security
schemes. Those are the kinds of good discussions that our
industry has underway and needs to continue to have the
dialogue on.
While not everybody--not every party in the industry would
agree on what is the right strategy for balancing, sort of,
consumer obtrusiveness with the desire to protect the content,
or standards with the desire to encourage innovation--not
everybody is going to agree. But the good news is there is some
promise that has already been shown by some of the technologies
that are in place. We've used this same technology in our e-
book area, where today we are able to secure content of
authors. And to my knowledge, that system has not had a system-
wide crack where people are able to take a book and then just
freely distribute it after cracking that digital rights
management. So there are those indicators of progress. I think
the movie industry, appropriately, is setting a very high bar.
And that is why I think that having the dialogue is good. I
think that the challenge with, say, setting a date is--the
question becomes a date for what?
Because, again, we are going to have to continue to push
the progress forward. And so, you know, what we will have to do
is we will have to decide what kind of progress, additional
progress needs to occur by what given time? But in no situation
should any one of us, or any of you, view that we hit that
date, we deliver on some technology, and our work is done.
That'll never be the case.
Senator Smith. Well, I want to say, I am loathe to set a
date. I am anxious to be helpful, and I think that is what we
are all saying, because we are even more loathe to lose all the
economy that is represented in this hearing today. If your
industries go in the tank because everything is stolen and none
of your employees can be paid, I think that is the real thing
that we loathe.
I know, Jeff, you go after a bunch of people stealing your
stuff. When you get settlements, what happens to the money
there? What do you do with it?
Mr. Raikes. You know, that is a very important point, and I
am glad you bring it up because in part because it brings us
back to some of the immediate things that we can also be doing.
Your support for funding U.S. Customs, the Intellectual
Property Rights Coordination Center, has been extremely
important. It led to, in November, an arrest by a cooperation
of U.S. Customs, U.S. Secret Service, and the L.A. Sheriff's
office made a $60 million bust in Los Angeles--counterfeit
software, certificates of authenticity. And that was an 18-
month investigation.
So just to kind of give you a sense of some of the
immediate things that we can be doing today and that you are
supporting. And we hope, as I mentioned, with the anti-
tampering action, we hope for continued support. There is
progress. What we do is, we look at whatever recoveries we get
from either, well, in particular from a civil actions that can
occur from busting software pirates. We look at that as an
opportunity to reinvest.
We are going to invest approximately $25 million back into
these communities to close the digital divide. We look at this
as an opportunity, these recoveries as a way to give back to
the communities. We also reinvest in our support for the
actions of government and law enforcement agencies here in the
United States and around the world because a big part of this
is to be able to take the leads, identify the possible criminal
activities that are underway and then work cooperatively in
partnership with government in order to do that. So our
approach, in terms of the recoveries, is to do both of those
elements--give back to the communities, help close the digital
divide, and to reinvest in the work that does help to keep this
part of our economy vibrant.
Senator Smith. Mr. Chairman, I know my time is up. I would
suggest including in the record an editorial that was in the
Washington Post by woman named Roslyn Maser about--and it is
entitled ``From T-shirts to Terrorism,'' and she makes an
incredible case that piracy of these trademarks is one of the
sources of revenue for Mr. Bin Laden. So it is even beyond just
stealing for money; it is stealing for terrorism.
[The editorial referred to follows:]
[From the Washington Post, Sept. 30, 2001]
From T-Shirts to Terrorism; That Fake Nike Swoosh May Be Helping to
Fund Bin Laden's Network
(By Roslyn A. Mazer)
It was sickening to learn that one of the World Trade Center
hijackers had booked his deadly flight as an airline frequent flyer,
turning a benevolent perk of our free, mobile society to such
malevolent use. But we could be in for more appalling news of the ways
in which terrorists turn the fruits of our economic powerhouses against
us: It's highly likely that some of the funds used to finance terrorist
networks are being derived from the sale of products ripping off iconic
American companies, such as Microsoft or Nike.
President Bush took the first important steps last week to freeze
the assets of organizations known to be financial supporters of Osama
bin Laden and the al Qaeda network. But even more concerted action will
be necessary to seal off the financial pipelines that nourish
terrorists' activities. Recent developments suggest that many of the
governments suspected of supporting al Qaeda are also promoting, being
corrupted by, or at the very least ignoring highly lucrative
trafficking in counterfeit and pirated products capable of generating
huge money flows to terrorists and other organized criminal groups.
While serving in the Criminal Division at the Department of Justice
from 1998 to 2001, I helped catalogue disturbing trends in this area.
With cooperation from our copyright and trademark industries--the
producers of software, music, film, books, apparel, pharmaceuticals and
other highly sought-after American products--we documented the links
between intellectual property (IP) crimes and the even more nefarious
crimes they pay for. We found that the post-Cold War landscape of open
borders has combined with the anonymity and speed of the Internet, as
well as modern telecommunications and the lure of huge, risk-free
profits, to give rise to some startling developments:
According to 1995 testimony before the Senate Judiciary Committee,
New York's Joint Terrorist Task Force had reason to believe that high-
level players who controlled a counterfeit T-shirt ring were using the
proceeds to support terrorist groups such as the one that bombed the
World Trade Center in 1993.
Last year, in the notorious piracy haven of Ciudad del Este,
Paraguay, Ali Khalil Mehri, a naturalized Paraguayan citizen born in
Lebanon, was charged with selling millions of dollars of counterfeit
software, the proceeds from which he allegedly funneled to the militant
Islamic group Hezbollah in Lebanon. He fled to Paris. FBI agents and
their counterparts from several countries are now pursuing rumored
links between groups within the city's 12,000-member Arab community and
the Sept. 11 attacks.
Last December, several news organizations reported that trademark
pirates based in Pakistan were filling orders from Afghanistan to
produce T-shirts bearing counterfeit Nike logos and glorifying bin
Laden as ``The great mujahid (holy warrior) of Islam.''
In April, Microsoft officials based in London alleged that
counterfeiters were using the Internet to sell pirated software, and
that some of the same criminals were using the proceeds to fund
terrorism and drug running.
In 1999, an International Chamber of Commerce official cited
``compelling evidence of the involvement of organized crime and terror
groups'' in commercial-scale piracy and counterfeiting, including
accounts that the Irish Republican Army was financing its activities
with pirated videos such as ``The Lion King.''
Losses at the hands of the far-flung criminal organizations that
produce high-quality fakes cost U.S.-based copyright industries $20
billion to $22 billion in 2000, and cost the country in lost jobs,
sales taxes and customs duties. Rivers of fakes are flooding Asia, the
Middle East, China, Russia and India, as well as Pakistan, Egypt,
Kazakhstan and Uzbekistan--countries believed to be harboring cells
supporting al Qaeda and other terrorist groups. Eight of 10 countries
identified by a trade group as having the highest business software
piracy rates in the world--Pakistan, China, Indonesia, Ukraine, Russia,
Lebanon, Qatar and Bahrain--have links to at Qaeda.
Eyeing the lucrative music market in Latin America, the music
industry reports that organized syndicates are moving pirated optical-
media products (CDs, DVDs, CD-ROMs) from Thailand, Malaysia and the
Philippines to Brazil through Paraguay. The industry, which estimates
that piracy cost it $4.2 billion worldwide last year, has documented
links between commercial-scale piracy and organized criminal activity.
The Internet, itself a key communications tool for terrorists, also
facilitates high-volume piracy, with up to $11 billion in pirated
software products sluicing through computer networks worldwide last
year. McAfee, the Internet security services provider, warns parents on
its kids Web site that organized crime ``is very involved in Internet
piracy.''
In the wake of the latest terrorist attacks, policy-makers are
understandably focusing on the catastrophic losses to the nation's
airline industry, which directly or indirectly contributed about 10
percent of the nation's gross domestic product in 2000. But consider
this: The Commerce Department reports that the copyright industries
generated more foreign sales and exports than the aircraft and aircraft
parts industry; indeed, they generated more foreign sales than the
automobile, automobile parts and agriculture sectors combined.
With the stakes so high, the 20th-century paradigm of thugs using
the rackets to finance drugs and other contraband has shifted in the
21st century to include our prized exports: the cultural products noted
above as well as shoddy knockoff products that endanger public health
and safety, such as airplane parts and brake pads, drugs and baby
formula.
As the ingenuity and productivity of our knowledge-based industries
soared throughout the 1980s and 1990s, reports of large-scale
counterfeiting and piracy generated growing concern on the part of
industry. At first, law enforcement officials were dismissive, if not
hostile to the challenge, arguing that software giants like Microsoft
could use their private armies to shut down the counterfeiters, or that
counterfeiting is a ``victimless crime'' that permits low-end consumers
to purchase cheap, but adequate, goods.
Criminals were poised to exploit this period of neglect. The
result: ``[A] fully fledged criminal activity . . . not peripheral to
other criminal activities but at the very heart of them,'' according to
Interpol's former secretary general, R.E. Kendall.
U.S. law enforcement is only now trying to overcome the historic
bias against IP crime and is playing catch-up. Since July 1999,
investigators at the FBI and Customs Service have joined with Federal
prosecutors in elevating IP crimes to a higher priority in regions with
a high incidence of such crimes (including New York and New Jersey,
Silicone Valley, Boston and other metropolitan areas) and the resources
to combat them.
In February 2000, the FBI and Customs Service launched the National
Intellectual Property Rights Coordination Center, designed to be a
central repository for collecting and disseminating information about
serious IP crimes. And the United States is carrying the message abroad
as well. As a champion of the World Trade Organization's Trade-Related
Aspects of Intellectual Property (TRIPs) Agreement, the U.S. trade
representative presses our trading partners, with the threat of
sanctions, to have the basic laws on the books, to provide necessary
law enforcement training and resources, and to encourage prosecutors
willing to seek--and judges willing to impose--deterrent sentences on
criminals who are caught and convicted. Last year, under the auspices
of the G-8 nations, the United States hosted the first meeting of law
enforcement experts to explore ways of sharing investigative
information and cataloguing trends.
The convergence of our economic security and our national security
became starkly apparent on Sept. 11. The staggering economic losses to
America's copyright and trademark industries--alarming unto
themselves--now are compounded by the opportunistic trafficking in IP
products to finance terrorism and other organized criminal endeavors.
We can only dismantle the links between terrorists and their
financing through robust intergovernmental cooperation in the U.S.,
pan-industry alliances, and coordinated investigative and intelligence-
sharing networks with our allies. Like the military and civil defense,
for which new strategies are already in the works, law enforcement and
industry alliances must be upgraded, too, if one of the feeder lines of
terrorism is to be cut off and the engines of our economic prosperity
are to flourish.
Mr. Raikes. Yeah. If I may add to Senator Smith's remarks,
in her article she pointed out that a counterfeiter, exactly
the kind of criminal enterprise that I was describing earlier,
was shut down in Paraguay and the local authorities there
believed that that was funding Hezbollah. She also indicated
that the--in 1995, the New York Terrorist Division indicated
that the people who attempted to bomb the World Trade Center in
1993 were funded by copyright violations and T-shirts, and that
is where it came from, T-shirts to terrorism.
If you look at the highest software piracy rates in the
world--the highest business software piracy rates in the
world--eight of those ten countries are connected to Al Qaeda.
With all due respect to the comments about focusing in on
digital rights management--very important initiative--but I
would also want us to not lose sight of the fact that in
addition to loss of jobs, in addition to loss of tax revenues,
in addition to defrauding consumers, in effect here you have a
double whammy. You have a situation where not only do we have
all of those negative impacts, but we also then have the
support for criminal enterprises in all of the types of
activities they would undertake.
The vigilance for anti-tampering, for supporting U.S.
Customs, those are all extremely important initiatives, as well
as the cooperative efforts of the industry. And that is why we
personally at Microsoft put such a huge investment in all of
these areas, because it is all about protecting intellectual
property and the vibrant economy that that is going to help to
build.
Senator Smith. Thank you.
The Chairman. Let me conclude by saying that--and asking
one question of each of you, the same question. But speaking of
the movies, Jack, there was the movie ``Cool Hand Luke'' where
it was said, ``what we have got here is a failure to
communicate.'' One of the problems here is that when you talk
about the loss of jobs, it doesn't compute to most people,
because your industries are all growing.
So what you are doing is lost opportunity. And that never
works to convince people that there is a problem. To say that--
I will give you an example. Years ago, there was a Senator who
headed up what was then called the Public Works Committee,
Jennings Randolph. And Senator Randolph, from West Virginia, a
wonderful old fellow, put me on the committee and gave me a
subcommittee chairmanship because I had said I wanted to make
it the environmental committee. And he did not like that idea
at all.
So he put me on a committee, and he gave me a subcommittee
on technology so I could hold hearings but couldn't write
legislation, but I could make a recommendation. He assigned me
the first topic, and he said he wanted me to write a report on
whether or not we should phase out lead in gasoline. And a
little company called the DuPont Company--that at that time to
Delaware was what Microsoft is to Redmond, not the whole
state--had invested tens of millions of dollars on a copyright
for a lead trap that would trap the lead, retrofit it to every
automobile in the world, with projected revenues of several
billion dollars. And I got to write the report. I wrote the
report truly thinking I was about to enter the second edition
of ``Profiles in Courage''--not with great glee, because I
wrote a report after six months of hearings saying we should
phase out lead in gasoline. Had DuPont already been selling
that retrofitted item, they would have lost several billion
dollars, and I would have lost the election. But because it was
projected revenues that they were losing, the management of the
company disliked me for a long time, but the average DuPont
employee who didn't lose a job didn't feel compelled to go
campaign against Joe Biden.
I cite that as a practical problem. It does not compute to
people when we say we have lost 175,000 jobs. It doesn't
compute to people when all these folks show up at the Emmys and
the Oscars with gowns that cost more than what people make in a
year--I am not criticizing it--to say these poor artists are
losing their income.
It does not compute when Microsoft's profits continue to
increase, which they should, at significant numbers, and people
say, ``Oy veh! Microsoft, poor Microsoft.'' And we have a
problem, a communications problem.
That is, as Hilary, you point out. If you didn't pay a
single artist on the come, if you asked them to pay you their
entire life savings to be able to appear at a Hollywood Bowl,
they would give it to you. They'd give you all they had just to
get up on the stage before two, five, ten, twenty, or fifty
thousand people.
We are at a real disadvantage here. We're at a real
disadvantage, in terms of being able to generate the kind of
enthusiasm to deal with what is a gigantic problem. The reason
I am holding these hearings is to try to get attention on this
item for people to understand, not what is at stake, but what
opportunity costs there are out there. The opportunity costs
are astounding. Astounding.
And I do not know quite how to get my hands around this,
because one of the reasons why we have such situational ethics
today is people are able to rationalize. They're able to
rationalize, ``I am not doing much. All I am doing is''--I do
not believe any of this; I am just telling you what they say,
``All I am doing is keeping Gates from having fifty zillion
dollars. He'll only have forty zillion dollars. All I am doing
is keeping some''--with a relatively conservative person--
``some rap music punk from making $60 billion instead of $40
billion. This comes from people who wear suits like we do, and
dress like we do, and would not steal so much as a toothbrush.
I am really at a loss here trying to figure out what to do.
I do not suggest that this committee has the primary
jurisdiction. I am not trying to grab the jurisdiction from
Commerce or from Judiciary or whatever. I am not interested in
that at all. What I want to do, and I would like you to think
about, is if we can turn this into--this is an awful thing to
say, but I am going to be completely honest with you--if we can
turn this into America versus the world, we may get a very
different focus on it.
Excuse me for being a Johnsonian politician here, but the
truth of the matter is if it is America versus what Americans
are doing to your industries, nobody's shedding a tear. Nobody.
Zero. None. They could care less. But if it is in the context
of the rest of the world is doing something that damages the
United States of America, we may be able to get some traction
on this issue.
I am not looking for whipping boys; what I am trying to do
is, to the extent that we internationalize this and make it and
put it in stark relief as it relates to the foreign policy
consequences of what we are doing, including Al Qaeda and
anything else, it is a useful thing. You all are creative
people.
Separate and apart from the issue of timetables, we need a
fairly creative solution here, because what is gaining some
currency are the apologists for why this is not bad--why this,
in fact, generates creativity. You know the arguments, the
arguments they actually have on those college campuses, among
the brightest of the bright young women and men. There is some
cachet out there for Lawrence Lessing.
There's some cachet out there. You know, it is sort of like
your point, Jeff. You indicated that--or maybe it was you--I do
not know. One of you said the hackers do this not for the
money. They do it like Willy Sutton, ``Why do you rob banks?''
``That's where the money is.'' Why do they do this? ``It's an
intellectual challenge, man, and I am going to show you how to
do it.''
I do not know the answer. I do not want to claim--I am
proud of the report my staff put together. But if you look at
Page 39--and I mean this sincerely--about the best we could
come up with, if we do everything that is suggested, I have to
tell you honestly, as the guy who has literally been the author
of every major crime bill since 1979, every single one, one
thing I never did do on the crime stuff, Jack, is over-
promise--never over-promised what it was going to do.
If we do everything that exists on Page 39, which is a
compilation of most of the generally accepted notions of
positive things we can do, we still have ourselves a
communications problem, because someone else can be taking our
communications, your communications, and making a lot of money
off of it. And so I do not know whether it ultimately rests in
what you all are wrestling with within the jurisdiction of the
Commerce Committee about the manufacturers of the hardware and
the producers of the artistic content--I do not know, but it
seems to me that is where a lot of this lies in terms of its
ultimate resolution.
I would like to ask you all one question, if you could be
more brief than we have been, and that is if you had just one
thing you could have us do--just one--you get to pick one--what
one thing--and if it is a generic thing, do not bother taking
the time, but if there is any one specific thing on a wish list
that you could have, wave a wand, and it would happen as a
consequence of a legislative initiative, you know, with the
President signing onto it, what is it you think is the single-
most important thing we could do at this point other than try
to generically educate the public as to the extent and depth of
the problem? Anybody?
Ms. Rosen. Well, I was going to say I think the points that
you made before were eloquent and accurate, and that is why it
is so important to distinguish the issue of physical piracy
globally from this Internet piracy that so vexes the future
opportunities. My industry, for one, happens to be losing
money, not growing these days, and so we are particularly
conscious of the distinction.
So for American music's growth, historically, has been
overseas, not in the U.S. market. U.S. market, we have been
growing single digits for ten years. Internationally, we have
been growing significantly more than that. So the most dramatic
thing you could do as the Foreign Relations Committee for our
industry is to condition all international loans of the IMF and
the World Bank on piracy enforcement.
The Chairman. That's the kind of thing I am asking about.
Is there a distinction made between when based on your
discussions with counterparts and officials from other
countries, is there a distinction made between those products
that have a copyrighted proprietary interest that relate to the
physical well-being of people in their country and those
products that relate to the psychic remuneration they get from
engaging in using them--i.e. the difference between patented
medicine for AIDS versus, you know, a copyright on, you know,
Billy Joel's music?
Ms. Rosen. I think the answer is no, because the consumer
doesn't care if they are listening to a digital pirated copy or
a digital legitimate copy of a song. Globally the issue is U.S.
economic pressure on our trading partners. That is clearly the
number one thing that can make a difference for us on a
physical piracy basis. The Internet piracy issue, I agree with
everything you said. It's so consumer based, it is so connected
with other emerging technology industries, it is a much more
vexing problem.
The Chairman. Doug?
Mr. Lowenstein. This is vague, but the notion would be to
find a way either to bring our law enforcement resources
together with international law enforcement resources to go
after the international crime syndicates in a way that has to
happen. And I do not know whether that requires a law. Maybe it
does. But ultimately that is the source of most of the hard-
goods piracy we see, and they are implicated in the Internet
piracy. And foreign governments lack the will and often the
resources to attack the problem. And so I would suggest we find
a way to facilitate that.
The Chairman. Jack?
Mr. Valenti. Three quick things. One is, I think to
encourage all the various parties in this intellectual property
community to sit down and work this out privately, it can be
done, with a set of standards on which Microsoft and others
could build their own proprietary additions.
No. 2 is to make sure particularly this committee will not
entertain any kind of a treaty where that country is indulging
in discriminatory actions toward the United States. I would
bring up Korea, Mr. Chairman, I have talked to you about, where
we have a screen quota there that is abysmal, and yet they are
trying to get a bilateral treaty with the United States. That
should not happen until these discriminatory obstacles are
wiped out before we sign--before you entertain it.
Third, I think Doug has a good point, and that is to make
sure that we are dealing with--that the punishment fits the
crime. Most of these countries in the world have a flimsy,
slenderized Jenny Craig type national will to deal with piracy,
nor the resolve to enforce the kind of punishment there ought
to be.
The Chairman. Jeff?
Mr. Raikes. The issue at hand is huge. You said it
yourself. You drew the analogy to what would happen to the
monetary system if $20 billion got sucked out of it? And so in
terms of one thing, it is difficult to point to just one thing,
but if there is one thing, it is resources.
You have done things that have been incredibly helpful,
incredibly effective. It's resources--resources for U.S.
Customs, support for the Department of Justice in this area,
support for people like John Gordon, the resources that do into
negotiating these trade agreements to put pressure on our
partners, the resources that go into helping educate our
society, our culture, about respect for intellectual property
law. I am sorry it is not maybe as tangible, but I can point to
the tangible use of resources and actually applaud you, your
colleagues, for the impact that it has had.
I think it is very important to remember that with
something you said, American intellectual property is immensely
valuable, perhaps our most valuable resource. If it is that
important to our country, then we have to make sure that we put
in the resources in each of those areas to ensure success.
The Chairman. Quite frankly, not to in any way disparage
the other recommendations, I think that is the single-most
important thing. I had to struggle to get five million bucks
put in to add the resource base for the U.S. Attorney's offices
to train and to have people focus on this area, five million
bucks.
We should--if this were a problem that related to bank
robberies, I would have no problem convincing the Congress for
half a billion dollar increase in the FBI's budget or in the
number of prosecutors. But that is just one piece.
I truly appreciate the fact you have all given us your
time. I must tell you, I do not know--I do not think there is a
single answer. I do not know what it is. But I know one thing.
We cannot stop trying to--notwithstanding the fact that mole is
in the hole and we know he is going to pop up, we can't fail to
continue to hit the sucker. So long. We're finished.
[Whereupon, at 5:30 p.m., the committee was adjourned.]
Responses to Additional Question Submitted for the Record by the
Committee to Peter F. Allgeier, Deputy U.S. Trade Representative
questions submitted by senator helms
Question. Mr. Allgeier, I understand that U.S. proposals for Free
Trade Agreements (FTAs) with Singapore and Chile include provisions
that would substantially improve the standards of copyright protection
in international trade agreements. I also understand that Chile, for
example, is contemplating broad ``cultural'' carve-outs, which means
that films, books, and music could be left unprotected. Can you give us
a sense of what progress has been made to date on these issues in the
FTAs to ensure that these agreements are beneficial ones?
Answer. We met with Chile last month, and we indicated to Chile
that any such ``cultural carve-out'' is unacceptable. We have also made
very clear to our partners that we are seeking higher levels of
protection for intellectual property rights, and that an FTA without
these higher standards is not in our national interests.
Question. Because Intellectual Property (IP) protection isn't worth
much unless we have access to a market to sell our products, what
progress are you making in countries like Korea, which has unacceptable
high quotas on the number of American movies that can be shown in their
cinemas?
Answer. Removing or reducing Korea's film quotas is a major
priority in our bilateral trade relationship. This issue was raised
most recently in January, 2002 when Deputy USTR Huntsman met with his
Korean counterpart. One clear point of leverage is in ongoing
negotiations with Korea over a bilateral investment treaty, which has
been a priority for Korea. In this negotiation we are insisting that
Korea commit to reduce these quotas.
Question. How successful has the effort been to reduce piracy
within foreign governments? Have other governments agreed to use only
legitimate copies of U.S. software products and restrict improper
copying within their governments?
Answer. As you know, in October 1998, the President of the United
States issued a new Executive Order directing U.S. Government agencies
to maintain appropriate, effective procedures to ensure legitimate use
of software. In this decree, the President directed USTR to undertake
an initiative to work with other governments, particularly those in
need of modernizing their software managements systems or about which
concerns have been expressed, regarding inappropriate government use of
illegal software.
The United States has achieved considerable progress under this
initiative since October of 1998. Nineteen countries so far have issued
decrees mandating the use of only authorized software by government
ministries. These include: China, Chile, Colombia, France, Greece,
Ireland, Israel, Jordan, Hungary, Hong Kong, Lebanon, Macau, Paraguay,
the Philippines, Singapore, Spain, Taiwan, Thailand and the United
Kingdom.
Question. What efforts have been made to encourage more countries
to ratify the WIPO copyright treaties? Why has it taken over three
years for the WIPO Treaties to enter into force? Why have the European
countries not yet ratified?
Answer. USTR is pursuing this goal in several ways in the trade
arena. One manner in which we are pursuing this goal is by seeking to
incorporate the standards of the WIPO Treaties as substantive
obligations of our FTAs. We achieved this result in the Jordan FTA. The
success of incorporating these standards in the Jordan FTA has laid the
foundation for pursuing this goal in the free trade agreements we
currently have under negotiation with Chile and Singapore as well as
the Free Trade Area of the Americas (FTAA), and other FTAs yet to be
launched.
We are also pursuing this objective through negotiations with
governments seeking to join the World Trade Organization. In accession
negotiations with Albania and Croatia, for example, USTR obtained
formal commitments from these governments to ratify the WIPO Copyright
Treaties as a part of their protocol of accession.
As for why it has taken over three years for the Treaties to enter
into force, there are two reasons. First, it requires 30 countries to
ratify each treaty before they come into force. Second, these are
complicated treaties dealing with high tech issues. I believe our own
legislation, the Digital Millennium Copyright Act (DMCA) (Pub. L. No.
105-304, 112 Stat. 2860), took substantial time to draft and enact.
As for the EU, all 15 Members States must ratify, and that process
is not yet complete.
Question. Mr. Gordon, let me ask you a related question about
``valuation'' in prosecuting IP crimes--especially in pre-release cases
or cases where the infringed-upon work is not commercially available to
the public at retail--like when the movie is still in the theater. In
order to be a felony, copyright law requires the prosecutor both to
find 10 or more copies of the illegally obtained film and to prove that
the total retail value of those copies is more than $2500. I am told
that in many U.S. Attorney's offices, they will not even consider
bringing a case unless there is at least $40,000 in harm. Now, this
sort of threshold is extremely difficult to meet particularly when you
don't have possession of the criminal's computer to know how many
downloads there have been of a particular film, or when the movie is
still in the theaters so that the $19 average retail price of a DVD
grossly underestimates the actual harm to the copyright owner. Do you
have any thoughts about how we better solve the ``valuation'' issue for
film piracy? And, if not, would you be willing to work with me and this
Committee to help solve the problem?
Answer. Valuation is a crucial determination in any intellectual
property prosecution. It significantly affects not only the preliminary
decision whether to open an investigation or the ultimate decision
whether to bring a criminal prosecution, but also the sentence the
defendant will receive after conviction. We realize that, particularly
in intellectual property cases, it is impossible to determine an
accurate loss figure at the outset of an investigation, and that the
amount of loss alone may not adequately describe the severity of the
crime. It is the policy of the U.S. Attorney's Office in the Central
District of California to evaluate intellectual property cases on a
case-by-case basis and to work diligently to bring appropriate cases
for prosecution. The Computer Crime and Intellectual Property Section
at the Department of Justice has encouraged United States Attorneys
nationwide to adopt a similar approach in these cases.
Determining a proper valuation for pre-release movies is a
particularly complex issue. It has been, and will continue to be, the
Department's goal to work closely with the motion picture industry and
other copyright industries to understand the true amount of loss
associated with piracy, recognizing, of course, that the amount of loss
in a particular case is ultimately determined by the sentencing court.
We look forward to working with you and other concerned Members of this
Committee and the Congress on this important issue.
Question. What other areas of inter-agency coordination need to be
improved to better enforce intellectual property?
Answer. The U.S. Attorney's Office in the Central District of
California has prosecuted intellectual property offenses in cases
investigated by the FBI and the U.S. Customs Service. Based on that
experience, law enforcement does work effectively together in
prosecuting criminal IP cases in Southern California. As mentioned in
our written testimony, the Department is also working in a number of
other areas, on an interagency basis, to improve the overall
enforcement of intellectual property rights. We will continue to work
with our colleagues in other agencies to improve the coordination of
international training efforts, particularly in regard to specific
criminal enforcement issues. It is essential that our training
resources are used effectively. We will also continue to identify
opportunities for the United States to work with foreign countries to
enhance investigative cooperation, to promote the development of
effective IP enforcement regimes, and to share information on trends in
intellectual property crimes that will strengthen the ability of law
enforcement worldwide to combat these crimes.
Question. What channels are used for the importation of pirated or
counterfeit articles into the United States?
Answer. Although pirated and counterfeit articles are circulated in
markets abroad in direct competition with the legitimate products of
U.S. firms, counterfeiters and pirates continue to attempt to import
such goods into the United States through all the channels available to
otherwise legal commerce, such as airports, seaports, mail facilities,
land borders and other locations where foreign imports are received. In
addition, the Internet has opened up vast new opportunities for
criminal enterprises which engage in counterfeiting and piracy. With a
few simple keystrokes from a computer anywhere in the world, criminals
can ship counterfeit trademarked goods, traffic pirated music, or
download copyrighted software.
Question. Is there any commonality with those channels used for the
smuggling of drugs or currency?
Answer. While there is a commonality between channels used for
smuggling drugs or currency and those used for importing pirated and
counterfeit articles, the Internet has become a medium particularly
well suited for IPR crimes, especially copyright piracy. As
globalization has enabled organized crime groups to diversify their
criminal activities, these groups have become major players in all
types of IPR crime.
questions submitted by senator dodd
Question. The Office of the United States Representative has long
been a champion for the protection of U.S. intellectual property rights
abroad. Yet in United States Section 211 Omnibus Appropriations Act
(WT/DS 176), your office expounded arguments that led a WTO panel to
interpret the TRIPs Agreement and the Paris Convention for the
Protection of Industrial Property in a restrictive manner that
threatens to make it more difficult for U.S. nationals to protect and
enforce their intellectual property rights abroad.
Please explain how the USTR reconciles its policy of promoting
effective intellectual property standards with its legal arguments in
favor of limiting the scope of TRIPs and the Paris Convention.
How does narrowing international obligations to protect
intellectual property serve U.S. interests?
Answer. USTR and other USG agencies have a firm and long-standing
commitment to protecting U.S. intellectual property rights. We have
been pressing our trading partners for years to implement the
provisions of the TRIPs Agreement, which we negotiated to protect U.S.
intellectual property rights abroad. This commitment continues. In its
challenge to section 211, which the U.S. Congress passed in 1998, the
EU contended that the United States was powerless under the TRIPs
Agreement and the Paris Convention to question the ownership in the
United States of trademarks registered--or sought to be registered--in
the United States. This interpretation of the TRIPs Agreement would
have rendered fundamental aspects of U.S. trademark law--and not just
section 211--inconsistent with the TRIPs Agreement, because, under U.S.
law, trademark registration is not conclusive of ownership, and not
everyone seeking to register a trademark is its owner. Notably, in
contrast to the EU ``registration-based'' system of trademark
protection, trademark ownership in the United States is based on use of
the trademark. For this reason, the United States argued, and the panel
and Appellate Body agreed, that the TRIPs Agreement and the Paris
Convention did not mandate that anyone who registers a trademark be
considered the owner of that trademark, and indeed did not impose
exhaustive mandatory trademark ownership criteria on WTO Members. We do
not consider this to be a restrictive interpretation of the TRIPs
Agreement or the Paris Convention, but the correct one--and the WTO
panel, WTO Appellate Body, and World Intellectual Property Organization
secretariat (which administers the Paris Convention) agreed. Nor is
there any indication that the TRIPs Agreement, interpreted correctly in
a manner that accommodates U.S. trademark law, threatens the ability of
U.S. nationals to protect and enforce their rights abroad. Therefore,
we do not see any inconsistency between this view of the TRIPs
Agreement obligations and our long-standing and firmly held policy of
promoting effective intellectual property rules. To the contrary,
interpreting the TRIPs Agreement and the Paris Convention in a manner
that accommodates U.S. trademark law, as was intended by U.S.
negotiators, does serve U.S. interests.
Question. The panel agreed with U.S. arguments at paragraphs 4.26,
4.27, and 4.28 that WTO members are free to deny registration and
protection of exclusive rights in trademarks on grounds other than
those provided in the TRIPs Agreement and the Paris Convention. In
doing so, the panel acknowledged that arbitrary treatment and abuse
could arise from such measures.
How does the USTR plan to curtail the arbitrary treatment or abuse
that could occur from the use of this exception?
How does it serve the interests of the United States to exploit
loopholes in the TRIPs obligations to protect intellectual property?
Answer. Both the TRIPs Agreement and the Paris Convention contain
numerous provisions designed to prevent arbitrary treatment and abuse
with respect to intellectual property rights, among them that nationals
of other WTO Members cannot be treated worse than one's own nationals
(``national treatment'') and that nationals of WTO Members cannot be
treated worse than other nationals (``most favored nation treatment'').
In addition, the TRIPs Agreement contains obligations with respect to
fair and equitable procedures aimed at guarding against abuse and
arbitrary treatment. USTR intends to ensure that its trading partners
comply with these obligations to guard against any abuse or arbitrary
treatment. Further, we do not believe that the provision of the TRIPs
Agreement referenced in the question--Article 15--contains
``exceptions'' or ``loopholes.'' This provision prohibits Members from
denying trademark registrations based on certain enumerated grounds. It
expressly does not limit the right of Members to deny trademark
registrations on other grounds (unless those other grounds are
prohibited elsewhere).
Question. At the urging of the United States, the panel adopted a
very narrow interpretation of the longstanding Paris Convention
obligation to protect trademarks duly registered in the country of
origin. According to the panel at paragraphs 4.44 through 4.48, the
U.S. argued that this obligation is limited to instances in which a
trademark registered in one WTO member might not otherwise be
registrable in another member because of its form, e.g. because it is
in a foreign language or comprises numbers or proper names. The U.S.
also argued that nothing therein prevents a WTO member from applying
other provisions of their domestic law to trademark applications.
Because such a narrow obligation would only apply to a small number
of trademarks, on what provision of TRIPs do U.S. nationals rely in
registering the vast majority of their trademarks in other countries?
Doesn't the panel ruling leave each WTO member complete freedom on
determining who is entitled to trademark protection? What safeguards
are there to prevent other countries from making trademark registration
conditional upon criteria other than a U.S. trademark registration,
such as use in the territory prior, to registration or approval by
foreign regulators? How could national treatment be an adequate
safeguard if these requirements also apply to the trading partner's own
nationals? What would be the effect of such national criteria on
registration abroad of trademarks owned by U.S. nationals?
Answer. As discussed above, the TRIPs Agreement and the Paris
Convention contain numerous provisions with respect to the protection
of trademarks, which would apply to U.S. nationals registering
trademarks abroad. For instance, Article 15.3 of the TRIPs Agreement
provides that ``[m]embers may make registrability depend on use.
However, actual use of a trademark shall not be a condition for filing
an application for registration.'' Whether other requirements of
foreign regulators are consistent with the TRIPs Agreement would depend
on the requirements. In particular, as your question notes below, the
principle of national treatment has operated for years to protect U.S.
intellectual property right holders against discrimination, which is a
bedrock principle of both the TRIPs Agreement and the Paris Convention
and which offers substantial protections to U.S. intellectual property
rights holders. Finally, we do not believe this is a narrow
interpretation of the TRIPs Agreement obligations, but the correct one.
As noted above, the interpretation adopted by the WTO panel and
Appellate Body was also shared by the secretariat of the World
Intellectual Property Organization, the body that administers the Paris
Convention. This interpretation is based on a thorough analysis of the
agreements, and accurately reflects that these agreements were intended
by U.S. negotiators to accommodate fundamental elements of U.S.
trademark law.
Question. The panel predicated its decision on representations by
the United States that Section 211 is subject to an abandonment
defense. This understanding, however, contrasts with decisions by both
a U.S. district court and a U.S. court of appeals that Section 211 is
not subject to an abandonment defense.
If it is the Administration's position that the question of whether
a trademark was abandoned is relevant under Section 211, what steps is
the Administration prepared to take to effectuate this interpretation?
Does the court finding require a legislative change to Section 211 to
correct its misinterpretation of the statute?
Answer. There is no finding of the WTO panel or the Appellate Body
suggesting the need for an amendment of section 211 relating to
``abandonment.'' Both the panel and the Appellate Body were aware of
the judicial decisions in the United States concerning section 211, and
made no findings concerning these decisions or their interpretation of
section 211.
Question. Although a spokesman for the U.S. told reporters that the
U.S. won the Section 211 case, it appears that the real losers in the
long run will be U.S. intellectual property owners, whose ability to
protect and enforce their rights will be constricted by the prevailing
U.S. argument.
What are you prepared to do to ensure that U.S. intellectual
property rights are not undermined by the Section 211 decision? What
steps will USTR take to ensure that established U.S. public policy does
not again become a victim of zealous advocacy?
Answer. As discussed above, both the TRIPs Agreement and the Paris
Convention offer significant protections to U.S. intellectual property
right holders, which are unaffected by the section 211 decision. USTR
has for years been a champion of international intellectual property
right protections, and U.S. positions in the section 211 dispute were
aimed at both supporting these protections and defending the statute
passed by Congress, based on correct readings of U.S. international
obligations. As it has consistently in the past, USTR intends
vigorously to enforce the rights of U.S. intellectual property right
holders abroad under the TRIPs Agreement and to urge those Members not
in compliance with the TRIPs Agreement to come into compliance.
Question. The Appellate Body concluded that key provisions of
Section 211 violate two fundamental principles of WTO rules--national
treatment and most-favored-nation (MFN) treatment.
For over 100 years, these principles have obligated our trading
partners to protect U.S. trademark and trade name holders from
discrimination abroad. The Appellate Body found, however, that Section
211 violated these longstanding U.S. obligations by imposing obstacles
on foreign intellectual property right holders that do not exist for
U.S. and other nationals and recommended that the United States bring
its laws into conformity with its obligations under TRIPs.
Wouldn't the repeal of Section 211 in its entirety bring the U.S.
back into compliance with its obligations under the TRIPs Agreement?
Answer. As the question notes, certain aspects of section 211 were
found to be inconsistent with the TRIPs Agreement, but other
significant aspects were not. Repeal of section 211 would of course
eliminate those aspects found inconsistent, but would also eliminate
aspects not found inconsistent.
Question. Section 211 calls into question the United States
commitment to providing strong intellectual property protections and
undermines efforts to encourage our trading partners to adopt similar
protections for American intellectual property abroad. Given the
potential damage to the foreign policy of the United States and the
threat of possible retaliation against U.S. interests if the U.S. does
not comply, wouldn't repeal of Section 211 in its entirety be
preferable to any effort to merely revise Section 211?
Answer. USTR and other interested agencies are currently
considering options for implementing the recommendations and rulings of
the WTO Dispute Settlement Body, and will consult with Congress as to
the best manner of doing so.
A P P E N D I X
----------
Theft of American Intellectual Property: Fighting Crime Abroad and at
Home
A Report From Senator Joseph R. Biden, Jr.
______
Executive Summary
American innovation--and the protection of that innovation by the
government--has been a critical component of American economic growth
throughout our history. The Founding Fathers had the foresight to
provide for protection of intellectual property, giving Congress the
power to ``promote the progress of science and useful arts'' by
providing copyrights and patents. According to at least one source,
American intellectual property represents the largest single sector of
the American economy, employing 4.3 million Americans. Yet, the theft
of American intellectual property, through piracy and counterfeiting,
has cost American jobs numbering in the hundreds of thousands and has
cost the U.S. government tax revenues and U.S. corporations billions of
dollars. Piracy rates (the percentage of copies of an item that are
illicit) exceed 80% in a number of countries.
Theft of intellectual property is increasing and accelerating as
the medium through which companies transmit software, movies, books,
music and other forms of intellectual property evolves. As the medium
move from analog (audio and video cassettes) to digital (CDs, DVDs) to
cybermedia (Internet downloading), the ease of piracy and
counterfeiting, and the quality of the product offered, continually
improves. With the advent of CDs and DVDs, a sound or video recording
no longer deteriorates with each successive copy; the 100th copy is
identical to the original. With the advent of the Internet, and
particularly the arrival of broadband, an individual can download a
full-length feature movie in less than 15 minutes, without ever
stepping out the front door. As a result, it is becoming ever more
difficult to fight this crime.
It is important to bear in mind that lax enforcement of
intellectual property rights in a particular country does not merely
harm our interests. In the long run, it harms the interests of those
developing countries, because it will preclude the development of their
creative industries.
Unfortunately, once a country enacts the requisite laws, summons
the adequate will, and provides the necessary resources to combat
piracy and counterfeiting, the criminals who profit from stealing
intellectual property often simply change venue. Combating intellectual
property theft is like squeezing a balloon: when you apply pressure in
one area, the air inside simply adjusts and moves elsewhere. Thus, to
crack down effectively, we cannot merely focus on a few egregious
countries.
Federal laws have long proscribed the intentional infringement of
intellectual property, including criminal and civil statutes aimed at
protecting copyrights and trademarks. Congress has responded to the
particular challenges posed by new and emerging technologies by
enacting legislation aimed at high tech piracy. These new statutes can
be used to combat, for example, the illegal copying of software, music
CDs, and movie DVDs, or the dissemination of decryption codes to
``unlock'' protected works. Responsibility for overseeing federal law
enforcement falls to the Justice Department, which uses specialized
units to assist federal prosecutors around the country in bringing
suits against high tech pirates.
Much international law is just now coming into effect. The
Agreement on Trade-Related Aspects of Intellectual Property, or
``TRIPS,'' concluded during the 1990s, imposes upon World Trade
Organization countries obligations to adequately enforce intellectual
property rights. It also provides a mechanism for resolving disputes
between countries. The World Intellectual Property Organization's
Copyright Treaty and Performances and Phonograms Treaty will also add
to the arsenal of international legal instruments. The former will come
into force next month, while it is expected that the latter will take
effect by the end of the year.
Enforcement efforts have met with some success. The Justice
Department has an entire section of its Criminal Division devoted to
computer crimes and intellectual property. Other agencies are
coordinating their diverse efforts at prosecuting criminals
domestically, stopping the influx of illicit materials from overseas,
and stopping the crime in foreign countries. This is being
accomplished, among other things, through special prosecutorial units
in United States Attorneys' Offices, trade negotiation tools such as
Special 301, and training assistance to foreign countries.
While substantial domestic and international laws exist, proposals
abound to improve the working of our intellectual property system both
at home and abroad. At home, we can dedicate more funding to the fight
against intellectual property theft, and better coordinate among
federal agencies involved in the effort, as well as between federal and
state authorities. Moreover, we can do a better job of making it clear
to all Americans that the theft of intellectual property is a crime,
and that it hurts us all.
Abroad, we can bring pressure to bear on countries that are
recalcitrant in efforts to rein in piracy and counterfeiting; we can
encourage the development of intellectual property laws and enforcement
through targeted foreign aid for training and equipment; and we can
prevail on all countries (including our own) to eliminate the use of
illicit intellectual property within their own governments.
Billions of dollars are being stolen, hundreds of thousands of jobs
lost. It is worth the effort to do all we can to stem the tide.
Introduction
The New York Times recently reported that illegal copies of ``The
Lord of the Rings,'' a film just recently released to movie theaters
here in the United States, are already on sale on the streets of
Jalalabad, Afghanistan.\1\ Windows XP was available for illegal use on
the streets of Moscow two months before it was released in the U.S. by
Microsoft.\2\ Every episode of ``Seinfeld'' is now available for
download free to anyone with access to the Internet.\3\ In September of
2001 alone, 1.5 billion songs were downloaded from Grokster.com, an
Internet website that enables users to steal music.\4\ Video games that
would cost $50 each in the United States are sold for the equivalent of
75 cents on the streets of some Chinese cities.\5\
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\1\ Chivers, C.J. ``Afghan City, Free of Taliban, Returns to Rule
of the Thieves.'' New York Times. January 6, 2002.
\2\ Judiciary Staff briefing with the Business Software Alliance,
January 17, 2002.
\3\ Judiciary Staff briefing with the Motion Picture Association of
America, December 17, 2001.
\4\ Judiciary Staff briefing with the Recording Industry
Association of America, January 14, 2002.
\5\ Lazarus, David. ``Lazarus at Large.'' The San Francisco
Chronicle. October 19, 2001.
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Everyday, thieve steal millions of dollars of American intellectual
property from its rightful owners, and hundreds of thousands of
American jobs are lost as a result.
American innovation--and the protection of that innovation by the
government--has been a critical component of American economic growth
throughout our history. The Founding Fathers had the foresight to
provide for protection of intellectual property, giving Congress the
power to ``promote the progress of science and useful arts'' by
providing copyrights and patents.\6\ The federal government's vigilance
in shielding intellectual property rights remains essential: innovation
would slow, businesses would suffer, and jobs would dissolve if
technological advances were left unprotected. The American arts and
entertainment industry could not survive without the ability to protect
and earn income from its ideas. Would U2 continue to make records and
go on tour if all of their records, videos, and fan paraphernalia were
given out for free? Would the tens of thousands of Americans who staff
their concerts and produce their CDs keep their jobs?
---------------------------------------------------------------------------
\6\ U.S. Constitution, Art. I, Sec. 8, cl. 8.
---------------------------------------------------------------------------
Copyrights and trademarks mean nothing if government authorities
fail to enforce the protections they provide intellectual property
owners. It has been estimated that software piracy alone cost the U.S.
economy over 118,000 jobs and $5.7 billion in wage losses in the year
2000.\7\ Even more, it estimated that the government loses a billion
dollars in revenue to piracy each year.\8\ To put that in perspective,
with the $1 billion in lost revenue, the American government could pay
for child care services for more than 100,000 children annually.\9\
Alternatively, $1 billion could be used to fund a Senate proposal to
assist schools with emergency school renovation and repair
projects.\10\
---------------------------------------------------------------------------
\7\ Note that this does not include losses incurred in the
entertainment industry.
\8\ International Planning and Research Corporation study for the
Business Software Alliance, ``U.S. Software State Piracy Study.''
November 2001.
\9\ Full-day child care costs between $4,000 and $10,000 per year.
At $10,000 per year, $1 billion would pay for 100,000 children.
Children's Defense Fund website: [http://www.childrens defense.org/
cc__facts.htm], citing 13 K. Schulman (2000), Issue Brief: The High
Cost of Child Care Puts Quality Care Out of Reach for Many Families.
Washington, DC: Children's Defense Fund. 14 U.S. Census Bureau (2000),
Money Income in the United States: 1999 (Current Population Reports,
P60-209), Washington, DC: U.S. Government Printing Office.
\10\ The proposal was included in the Senate's Labor-HHS-Education
Appropriations bill. Senate Report 107-84 to accompany S.1536, p. 262.
However, it was cut from the final Conference Agreement, presumably due
to budgetary issues. House Report, 107-342, p.123./
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This report aims to (1) highlight some of the problems that have
emerged in America's continuing struggle to protect innovators from
those who would steal their products, and (2) list some potential
solutions for combating piracy at home and abroad.
If we intend to nurture growth and development, the government will
have to take a long look at how best to approach the global
technological marketplace, and address those who would take advantage
of American innovation.
II. The Problem
When an American owns property, the government has a responsibility
to protect that property from theft. When that property is an idea, it
deserves our protection no less than if it were land, or a personal
object. Who among us would want to expend the effort required to
develop a new product if the government were not prepared to punish
those who would steal it? If we want to protect American innovation,
and by extension American jobs, we need to maintain a vigilant stand
against what is commonly known as ``intellectual property theft.''
American intellectual property is an immensely valuable--perhaps
our most valuable--resource. Not to protect it is equivalent to letting
coal be stolen from our mines or water taken from our rivers. With that
concern in mind, the American government has developed an
infrastructure to protect Americans who rightfully own pieces of
intellectual property.
Copyrights protect the authors of ``original works of authorship,''
including literary, dramatic, musical, artistic, and certain other
intellectual works.\11\ Trademarks provide businesses with exclusive
use of ``any word, name, symbol, or device'' to indicate the source of
the goods and to distinguish them from the goods of others.\12\
---------------------------------------------------------------------------
\11\ 18 U.S.C. 102.
\12\ Koppers Co. v. Krupp-Koppers, 517 F. Supp. 836, 840 (W.D. Pa.
1981); see also 15 U.S.C. 1127.
---------------------------------------------------------------------------
Unfortunately, the integration of the global economy and emergence
of the Internet have eroded some of the walls which protect
intellectual property rights from thieves: some of our efforts to
protect intellectual property at home have become outmoded, and certain
nations around the world are not doing enough to combat the problem.
Advances in digital media have made it tremendously easy to steal and
reproduce a variety of media.
This report addresses two types of intellectual property theft: (1)
``piracy'' is the unlawful theft of a protected product; \13\ and (2)
counterfeiting, a type of piracy, is the unauthorized reproduction of a
good, in an attempt to pass it off as the original.\14\ If criminals
reproduced a copy of Microsoft Windows and sold it, they would be
committing an act of piracy. If, before selling the reproduction, they
also reproduced the software's packaging so as to give the purchaser
the false impression that they were buying a legitimate copy of
Windows, they would also be guilty of counterfeiting.\15\ Both types of
crime represent an enormous threat to the software and entertainment
industries. It is clearly the responsibility of governments around the
world to protect intellectual property owners from those who would
steal their goods.
---------------------------------------------------------------------------
\13\ Most items generated by the software and entertainment
industries are protected by copyrights. Piracy is the violation of that
protection.
\14\ In the case of most items generated by the software and
entertainment industries, product names are protected by
``trademarks.''
\15\ Similarly, if a criminal copies a Madonna CD and sells it,
without any attempt to make it appear like the original, he is
violating Madonna's ``copyright'' protections, and committing an act of
piracy. If a different criminal manufactures fake brake pads, places a
``General Motors' insignia on them, and then sells the brakepads as if
they were authentic, she would be violating General Motors''
``trademark protections,'' and committing an act of counterfeiting.
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Let me begin by illustrating the breadth and pervasiveness of
intellectual property theft. The International Intellectual Property
Alliance estimates that the world of intellectual property represents
the largest single sector of the American economy, almost 5% of the
nation's gross domestic product.\16\ By comparison, defense spending
occupies approximately 3% of U.S. GDP.\17\ While I could provide an
endless list of industries affected by piracy and counterfeiting around
the world, this report will focus primarily on the following
industries: computer software including business applications and
entertainment software; motion pictures; television programs; DVDs and
home videocassettes; music, records, CDs, and audiocassettes; and
textbooks, tradebooks, reference and professional publications, and
journals (in both electronic and print media).\18\ What makes these
industries particularly vulnerable is the degree to which their
products can be stolen, reproduced, and distributed with ease through
emerging technologies like the Internet, CD-Rs, \19\ and DVDs.\20\
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\16\ Stephen E. Siwek, Copyright Industries in the U.S. Economy:
The 2000 Report, prepared for the International Intellectual Property
Alliance by of Economists, Incorporated, 2000.
\17\ Department of Defense. Figures are for 1999.
[www.defenselink.mil/pubs/allied__contrib 2000/chartIII-3.html.]
\18\ These are the industries represented by the International
Intellectual Property Alliance. Issues affecting these industries
represent only a tip of the iceberg, and I certainly look forward to
delving into the issues surrounding the protection of other
intellectual property.
\19\ Traditionally, consumers have been unable to record or copy
music or data onto CDs, or compact discs. CD-Rs are compact discs, just
now becoming widely available, onto which consumers can record or copy
music.
\20\ Digital Versatile Discs (DVDs) are high-capacity optical discs
on which movies and television shows can be recorded. They are often
viewed as the next generation of video cassette.
---------------------------------------------------------------------------
The Business Software Alliance estimates that ``the market value of
this stolen (or `pirated') software alone was $11.75 billion'' in
2000.\21\ According to the International Intellectual Property
Alliance, trade losses for five industries in 58 countries amount to
almost $8 billion:
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\21\ Business Software Alliance, ``Software Theft--Stopping the
Piracy of Intellectual Property,'' 2000. A note on numbers: Because the
theft of intellectual property covers so many fields, takes place in so
many places, and is an underground activity, numbers for losses of
revenue, profits and jobs vary considerably. Although the figures in
this report are consistent with their particular context, the most
important point is the sense of scale they convey.
Estimated Trade Losses Due to Copyright Piracy in 58 Selected Countries
in 2000 *
------------------------------------------------------------------------
Estimated Revenue
Industry Losses
------------------------------------------------------------------------
Motion Pictures..................................... $1,242,500,000
Sound Recordings and Musical Compositions........... 1,835,600,000
Business Software Applications...................... 2,490,900,000
Entertainment Software.............................. 1,658,400,000
Books............................................... 675,100,000
===================
Total............................................. $7,903,300,000
------------------------------------------------------------------------
* International Intellectual Property Alliance, 2001 Special 301 Report,
February 16, 2001. Note that these figures do not represent piracy
over the Internet. If such figures did exist, one can only assume that
loss figures would be even more staggering. Also note that these
figures represent only losses in the 58 nations being watched as part
of the Special 301 process (discussed further below).
But what is most important is not the sheer enormity of the
intellectual property sector, but rather the number of people it
employs here in the United States. 4.3 million Americans are employed
by the intellectual property sector, representing 3.24% of total U.S.
employment.\22\ To provide some perspective, intellectual property
businesses export more American value to the world than the automobile,
automobile parts, agricultural, and aircraft industries combined. In
other words, theft of intellectual property does not just affect media
moguls or software titans; it robs the American economy of valuable
jobs.
---------------------------------------------------------------------------
\22\ Copyright Industries in the U.S. Economy: The 2000 Report, by
Stephen E. Siwek of Economists incorporated, prepared for the
International Intellectual Property Alliance. 2000.
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III. Piracy
Piracy has had a particularly dramatic effect on American
businesses and the entertainment software industry. Their products are
stolen via at least three distinct avenues:
Disks and CD-ROMS are copied illegally, and then re-
sold.
A program can be transferred from one business work-
station to another without the purchase of another version of
the software, i.e., intra-business piracy. This latter form of
piracy does not receive the attention it deserves, though the
Business Software Alliance believes that it is the most
economically damaging, accounting for as much as half of the
industry's losses.\23\ Some foreign governments are
particularly hesitant to crack down on intra-business
violations because in doing so they will inevitably interfere
with firms that are doing legitimate business.\24\
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\23\ Business Software Alliance, ``Software Theft--Stopping the
Piracy of Intellectual Property,'' available at [http://www.bsa.org/
usa/policy/copyright/software__theft.phtml].
\24\ Judiciary Staff briefing with the United States Copyright
Office, January 18, 2002.
Software and entertainment can be sent illegally
from one user to another through the Internet.\25\ By accessing
so-called ``warez'' sites, pirates can transfer any sort of
digital media electronically.
---------------------------------------------------------------------------
\25\ Copyright Industries in the U.S. Economy: The 2000 Report, by
Stephen E. Siwek of Economists incorporated, prepared for the
International Intellectual Property Alliance.
Together, these three forms of piracy have taken a real bite out of
intellectual property industry revenues. And to what degree does
software affect the American economy? The Business Software Alliance
estimates: ``In 1998, software piracy cost the U.S. economy 109,000
jobs, $4.5 billion in wages and nearly $991 million in tax revenues. By
2008, those numbers will rise to 175,000 lost jobs, $7.3 billion in
lost wages and $1.6 billion in lost tax revenues.'' \26\ The
Interactive Digital Software Association estimates that $3 billion in
revenue was lost to the entertainment software industry in 2000, money
which industry experts believe could have been used to develop 1,600
new games.\27\
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\26\ Business Software Alliance, ``Software Theft--Stopping the
Piracy of Intellectual Property.''
\27\ Interactive Digital Software Association, ``The IDSA's Anti-
Piracy Program: Combating Piracy around the World and on the
Internet,'' [http://www.idsa.com/piracy.html].
---------------------------------------------------------------------------
The music industry has also been victimized by piracy. Modern
technology has enabled thieves to employ inexpensive, portable, CD
factories which take up no more space than a small room to manufacture
illegal reproductions; such facilities, each of which can produce
upwards of 100,000 CDs per year, have been built all over the world.
Additionally, user-friendly, piracy-enabling websites like Grokster in
the West Indies, Imesh in Israel, Morphius in Tennessee, and KaZaA in
the Netherlands, allow users all over the world to download music
illegally at no expense. In addition, the advent of decentralized
``peer-to-peer'' technology, such as that used by the Gnutella network
to permit maintenance of large databases of music without any central
location, makes pursuit and prosecution of these criminal activities
exceedingly difficult.\28\ To date, over 100 million copies have been
made of commonly used peer-to-peer software for downloading music.\29\
The music industry estimates that piracy cost it $4.2 billion worldwide
in 2000.\30\
---------------------------------------------------------------------------
\28\ Judiciary Staff Briefing with the Recording Industry
Association of America, January 14, 2002.
\29\ Judiciary Staff Communication with the Recording Industry of
America, February 8, 2002.
\30\ Mazer, Roslyn A. ``From T-Shirts to Terrorism.'' Washington
Post 30 Sept. 2001.
---------------------------------------------------------------------------
Finally, the movie industry is yet another victim of the growing
spate of piracy. The Motion Picture Association of America estimates
that as many as one million movies are downloaded illegally from the
Internet each day.\31\ DVD copies of ``Harry Potter and the Sorcerer's
Stone'' were available in parts of China even before the film had hit
theaters anywhere in the world, let alone been released for home
viewing. Imagine the number of people who choose not to go to the movie
theater or rent a film because they are able to retain a pirated copy;
imagine the amount of money sapped from our economy; and imagine the
number of jobs lost as a result.
---------------------------------------------------------------------------
\31\ Valenti, Jack. ``Alert to the Senate Judiciary Committee to
Protect Copyright Industries in the U.S. 1 April, 2001.
---------------------------------------------------------------------------
IV. Counterfeiting
In their attempts to develop a customer base, companies often
``trademark'' their product names or symbols. ``Coke,'' for instance,
is the trademarked name of the popular American soft drink. Customers
often purchase a product simply because they identify with the label;
the name on the product ensures its quality. For that reason,
trademarks are extremely valuable. Oftentimes, criminals attempt to
fool consumers into believing that their pirated wares are legitimate
by reproducing the original product's trademark. In such cases, the
producer is guilty not only of having ``pirated'' copyrighted material,
but also of ``counterfeiting'' a trademark.
The same industries which have been victimized by piracy are
getting hammered by counterfeiting. Counterfeiters flood markets with
their underpriced products, and steal a great deal of revenue.
Additionally, as the Anti-Gray Market Alliance explains, counterfeit
goods often do not maintain the same standards of quality that an
original might; for that reason, marketing is often undermined because
consumers assume that the shoddy product they purchased is authentic.
V. Piracy Around The World--A Snap Shot
Piracy rates around the world are dispiritingly high. The
International Planning and Research Corporation estimates that software
piracy rates are as high as 94% in China, 81% in Bolivia, 97% in
Vietnam, and 89% in the Ukraine. Brazil, Mexico, Paraguay, the
Philippines, Poland, the Netherlands, the Bahamas, South Africa, Egypt
and Indonesia are also known to be afflicted with widespread
piracy.\32\ By comparison, piracy rates in the United States hover
around 24%, a figure which needs to be reduced further, but is
comparatively impressive.\33\
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\32\ International Planning and Research Corporation, Piracy Study
Conducted for Business Software Alliance, 2001.
\33\ Business Software Alliance, International Planning and
Research Council, 2001 Piracy Study.
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That discrepancy points to an important problem: while the American
government is relatively vigilant in trying to stem intellectual
property theft, other countries have not enacted the requisite laws to
prosecute intellectual property thieves. Others willingly look the
other way as property is pirated and stolen, and/or lack the resources
needed to police the intellectual property market adequately.
At first glance, one might assume that developing economies would
benefit from loose intellectual property rights enforcement. Piracy
would appear to enable firms to employ software at a diminished cost,
and foreign governments often expect that any cost savings will advance
economic development by increasing efficiencies and output.
In the long run, however, weak intellectual property protections
stifle local innovation. Music, software, and entertainment companies
simply do not invest in nations that fail to honor or protect
intellectual property rights. Ultimately, that lost investment costs
nations much more than pirating and counterfeiting will ever provide.
As important, local innovators are provided an enormous disincentive to
create new products if they believe that thieves will steal whatever
profit they might make. It is not uncommon for native-born innovators,
such as software engineers, to leave their countries reluctantly,
because their government will not protect their creations. Essentially,
foreign countries that fail to enact and enforce anti-piracy laws end
up doing themselves more harm than good.
Unfortunately, once a country enacts the requisite laws, summons
the adequate will, and provides the necessary resources to combat
piracy and counterfeiting, the criminals who profit from stealing
intellectual property often simply change venue. Combating intellectual
property theft is like squeezing a balloon: when you apply pressure in
one area, the air inside simply adjusts and moves elsewhere. For
example, when Bulgaria, once rampant with illegal piracy operations,
cracked down, much of its pirating industry moved to the Ukraine, which
continues today to be an important haven for intellectual property
thieves.\34\
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\34\ Judiciary Staff Briefing with the United States Copyright
Office, January 18, 2002.
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When China began cracking down on some of the factories producing
pirated compact discs, those production facilities (which, as noted
earlier, are sometimes no more than a roomful of equipment) were
largely moved to Hong Kong. When authorities in Hong Kong began to
crack down, facilities sprouted in Macao and then Malaysia, where a
civil case against a pirate can take six years to be heard in
court.\35\ Hence, the balloon squeezing analogy: when one nation's
government puts pressure on intellectual property thieves, they simply
move to another part of the world.
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\35\ Judiciary Staff Briefing with the United States Copyright
Office, January 18, 2002.
---------------------------------------------------------------------------
Finally, international markets are debilitated by intellectual
property theft on two dimensions. First, significant damage is done
when a government fails to crack down on intellectual property theft
and effectively corrupts its domestic market; this aspect of the
problem is restricted to within a country's borders. Unfortunately,
stolen material often floods across borders and into countries around
the globe--even markets here in the United States--making pirated and
counterfeit goods a problem even for countries doing an adequate job
patrolling their own industries. As such, even when American
authorities successfully prosecute copyright and trademark infringers
here in the United States, our domestic market is affected by foreign
production. Particularly as more theft moves onto the Internet, it will
become difficult for a country to combat intellectual property theft
initiated beyond its own borders. As such, it is tremendously important
that every country participate in efforts to combat the problem.
VI. Advances in Technology
What is it exactly that makes intellectual property so vulnerable
to theft? First, the global economy has expanded tremendously during
the last 20 years, buttressing demand worldwide for international
products (entertainment and software goods in particular). Second,
intellectual property is now most often transferred as digital data,
which pirates can duplicate easily in identical form. Today, criminals
can reproduce discs (CDs in the music business, CD-ROMS in the software
industry, and DVDs in the world of entertainment) without degrading the
quality of the recorded material. In the past, criminals who reproduced
analog recordings (cassette tapes and VHS cassettes, for example)
unavoidably faced a significant loss in sound quality: second
generation copies were not as good as the original, and after a few
generations they became virtually unusable. As a result, consumers were
generally willing to pay more to ensure the highest quality sound. But
the sound of a reproduced CD, even after 100 generations of
reproduction, is identical to that of the original. Thus, improved
technology has broken a barrier that previously limited the scope of
pirated products. That breakthrough has translated into an explosion in
supply: in the year 2001, DVD production increased by 9% and production
capacity in Asia grew by 35%.\36\
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\36\ Motion Picture Association of America, ``2002 Trade Barriers
Report.''
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Second, technology advances enable counterfeiters to produce
packaging that fools even discriminating consumers into believing that
they are buying the legitimate product. Often, a counterfeit CD's
packaging will be nearly identical to that of the original.
Sophisticated software and printing equipment enable counterfeiters to
improve their illegal reproductions of trademarks themselves, copying
even the markings (such as holograms) that trademark holders place on
products to deter counterfeiting. Customs officials have even seen
cases where the counterfeit packaging is of a higher quality than that
of its legitimate counterpart.
Third, digital products can not only be marketed on the Internet,
they can actually be delivered on line. A copy of a popular song, for
example, can itself be transferred immediately through the web.
Certainly, the pervasiveness of Napster's successors, such as Grokster,
Morphius, and Gnutella, indicates the extent to which the music
industry has already been victimized by online piracy; indeed, illegal
downloading of songs is now at its highest level ever, despite any
chilling effect brought about by the industry's suit against Napster
and, as noted earlier, is becoming more difficult to prosecute because
of decentralization.\37\ Until recently, only small files, such as
individual songs, could be downloaded efficiently over the Internet.
But the emergence of ``broadband technologies,'' which dramatically
increase the speed with which web-users can download large files, \38\
empowers consumers to download entire albums, television program, and
even full-length feature movies much more easily and quickly. Thanks to
broadband, a full-length motion picture can be downloaded in less than
15 minutes, as compared to the four to five hours with conventional
Internet access.\39\
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\38\ Judiciary Staff Briefing with the Recording Industry
Association of America, January 14, 2002.
\39\ Broadband refers to high-speed access to the Internet, such as
DSL or cable modems. Broadband does to Internet access what a much
larger pipe does to plumbing: it gives you much more information much
quicker.
\39\ Motion Picture Association of America, 2002 Trade Barrier
Report.
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In turn, groups of pirates who upload products to the web have
developed so-called ``warez'' sites at which one can download all sorts
of stolen digital media at little or no cost to the consumer. As
broadband becomes more pervasive in the U.S., the problem of online
piracy will only grow.\40\ In other countries, such as South Korea and
some northern European countries, where broadband is already more
widely available, the problem has already grown. A simple Internet
search for the word ``warez'' draws over 2 million hits.\41\
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\40\ According to the Federal Communications Commission, 7% of
American households had broadband as of August 2001, a three-fold
increase in 18 months. Federal Communications Commission. Third Report
on the Availability of High Speed and Advanced Telecommunications
Capability, February 6, 2002.
\41\ Search conducted on Google.com. February 10, 2002.
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VII. Current Legal Framework
A variety of laws, both domestic and international, empower
governments around the world to combat, investigate, and prosecute
intellectual property thieves. But the web of protection they provide
is incomplete. Officials at the U.S. Copyright Office have suggested
that nations intending to uphold intellectual property rights must meet
three criteria:
First, they must develop an adequate legal framework
for prosecuting intellectual property theft.
Second, they must have the political will to enforce
intellectual property laws. If prosecuting authorities, or
those involved in the enforcement process, are in league with
those who will profit from intellectual property theft, any
number of well-written laws will be ineffective.
Third, they must devote sufficient resources to
enforcement of piracy laws. Even if adequate laws are on the
books, and the government retains the requisite political will,
prosecutors and judicial systems which do not receive the
resources they need to handle the sheer volume of crimes before
them will be unable to corral the problem.
a. u.s. laws to protect intellectual property
1. In General
Congress has passed several criminal statutes which protect
intellectual property rights, including copyrights, trademarks, and
patents. These statutes include:
The No Electronic Theft (Net) Act, 17 U.S.C. 506
(see below).
Digital Millennium Copyright Act, 17 U.S.C. 1201-
1205 (see below).
Criminal Infringement of a Copyright, 18 U.S.C.
2319. For willful infringement of a copyright for financial
gain, an individual is subject up to five (5) years in prison
and/or a fine of up to $250,000, for the reproduction or
distribution of at least ten (10) copies of a copyrighted work
with a retail value of more than $2,500. The penalty increases
to imprisonment of up to ten (10) years for second or
subsequent offenses. The penalty is imprisonment of up to one
(1) year and/or a fine of $250,000 for all other cases.
Bootlegging Offenses, 18 U.S.C. 2319A. For knowing,
unauthorized recording and trafficking in sound recordings and
music videos of live musical performances, for financial gain,
an individual is subject up to five (5) years in prison and/or
a fine of up to $250,000; and up to ten (10) years in prison
for second or subsequent offenses.
Trademark Offenses, 18 U.S.C. 2320. For knowing
trafficking in counterfeit goods or services, an individual is
subject up to ten (10) years in prison and/or a fine of up to
$2 million ($5 million in the case of a company); and up to
twenty (20) years in prison and/or a fine of up to $5 million
($20 million in the case of a company) for second or subsequent
offenses.
Trade Secret Offense, 18 U.S.C. 1832. For knowing
theft of a trade secret for financial gain, an individual is
subject up to ten (10) years in prison, and/or a fine of up to
$250,000.
Offense Relating to Integrity of Intellectual
Property Systems:
Fraudulent Copyright Notice, 17 U.S.C. 506.
For knowing use and public dissemination of a
fraudulent copyright, or fraudulent removal of a
legitimate copyright, an individual is subject to a
fine of up to $2,500.
Counterfeit Patents, 18 U.S.C. 497. For
knowing forging of a letter of patent, or attempting to
pass a known forged letter of patent, an individual is
subject up to ten (10) years in prison and/or a fine of
up to $250,000.
False Marking, 35 U.S.C. 292. For knowing
use of a patent on a product, without permission, with
the intent of deceiving the public, an individual is
subject to a fine of up to $500.
Offenses Relating to the Misuse of Dissemination
Systems:
Frauds and Swindles, 18 U.S.C. 1341. For
devising a scheme to distribute counterfeit goods
through the mails or interstate commerce, an individual
is subject up to five (5) years in prison and/or a fine
of up to $250,000 (up to thirty (30) years in prison
and/or a fine of up to $1 million if the violation
involves a financial institution.)
Fraud by Wire, Radio or Television, 18
U.S.C. 1343. For devising a scheme to obtain money/
property by false or fraudulent pretenses, which
transmits through wire, radio, or television
communication any signals for executing the scheme, an
individual is subject up to five (5) years in prison
and/or a fine of up to $250,000 (up to thirty (30)
years in prison and/or a fine of up to $1 million if
the violation involves a financial institution.)
Electronic Communication Intercepting
Devices, 18 U.S.C. 2512. For intentional manufacture,
distribution, or advertising, through the mails or
interstate commerce, an electronic communication
intercepting device, an individual is subject up to
five (5) years imprisonment and/or a fine of up to
$250,000.
Unauthorized Reception of Cable Services, 47
U.S.C. 553. For unauthorized, willful interception of
cable services, an individual is subject up to six (6)
months and/or a fine of not more than $1,000. Any
person who commits such violation for the purpose of
private financial gain, is subject up to two (2) years
in prison and/or a fine of not more than $50,000. For
second or subsequent offenses, an individual is subject
up to five (5) years in prison and/or a fine of not
more than $100,000.
Unauthorized Use or Publication of
Communications, 47 U.S.C. 605. For knowing, willful
publication or use of wire or radio communications, in
certain instances, an individual is subject up to six
(6) months in prison and/or a fine of not more than
$2,000. Any person who commits such violation for the
purpose of private financial gain is subject up to two
(2) years in prison and/or a fine of not more than
$50,000. For second or subsequent offenses, an
individual is subject up to five (5) years in prison
and/or a fine of not more than $100,000. Also allows
the aggrieved party to bring a federal civil action
seeking injunctive relief.
2. Recent Criminal Statutes
Congress passed new laws in 1997 and 1998 to specifically target
the theft of intellectual property in cyberspace. These include:
The No Electronic Theft Act (NET Act); and
The Digital Millennium Copyright Act.
Because both Acts have been used by the Justice Department to combat
intellectual property in cyberspace in particular, they are discussed
in greater detail below.
a. No Electronic Theft Act (NET Act)--17 U.S.C. 506
(1) Provisions
The No Electronic Theft Act (``NET Act''), signed into law in 1997,
reflected Congress's determination to protect intellectual property
rights which were being violated by a new phenomenon in cyberspace--
individuals who operated websites which allowed users to download
pirated products for free. Such websites were created either for the
amusement of the webmaster or, in some instances, as acts of self-
described ``cyber civil disobedience.''
A loophole in IP protection statutes was exposed in the case of
United States v. LaMacchia, 871 F. Supp. 535 (D. Mass. 1994). David
LaMacchia, a college student, created an Internet web site where users
could obtain pirated copies of commercial software products for free.
LaMacchia's website reportedly disseminated over $1 million in free
software. The Justice Department could not, accordingly, charge him
with criminal copyright infringement because the statute required that
LaMacchia infringe a protected holder's copyright for the purpose of
financial gain--which he had not done since the items were dispensed
for free. Accordingly, LaMacchia was indicted on wire fraud counts. The
district court granted the defendant's motion to dismiss the
indictment, finding that the defendant's actions did not satisfy the
criminal copyright infringement statute or the wire fraud statute.
Congress responded with the NET Act, which created a new category
in the criminal copyright statute (17 U.S.C. 506(a)(2)) of criminal
infringement that does not require a purpose of commercial advantage or
financial gain. Rather, the willful reproduction or distribution,
during any 180-day period, of copyrighted works with a retail value of
more than $1,000 constitutes criminal infringement, regardless of
whether the defendant enjoys financial gain from his enterprise.
Criminal penalties include:
Imprisonment of up to three (3) years and/or a fine
of up to $250,000, if the offense consists of reproduction or
distribution of ten (10) or more copies of a copyrighted work
which has a retail value of $2,500;
Imprisonment of up to six (6) years and/or a fine of
up to $250,000, if the offense (described immediately above) is
a second or subsequent offense; or
Imprisonment of up to one (1) year and/or a fine of
not more than $250,000, if the offense consists of reproduction
or distribution of one (1) or more copies of a copyrighted
work, which has a retail value of more than $1,000.
The NET Act also added a definition of ``financial gain'' (at 17 U.S.C.
101) to includes the barter of copyrighted works. This new definition
was targeted at Internet ``barter boards'' where pirated products are
traded for other copies rather than for money.\42\
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\42\ U.S. Copyright Office Summary of No Electronic Theft Act (NET
Act).
---------------------------------------------------------------------------
(2) Recent Cases
The Justice Department has aggressively pursued cases under the NET
Act. Below is a summary of some recent cases as quoted from the
Department of Justice's Computer Crime and Intellectual Property
Section website (http://www.usdoj.gov/criminal/cybercrime/iplaws.htm):
The first conviction under the No Electronic Theft
(NET) Act occurred on August 20, 1999 when Jeffrey Levy, a 22
year old University of Oregon senior, pled guilty to illegally
posting computer software programs, musical recordings,
entertainment software programs, and digitally-recorded movies
on his Internet web site; he then allowed the general public to
download these copyrighted products. On November 23, 1999, Levy
was sentenced to a two-year period of probation with
conditions.
On May 4, 2000, seventeen defendants from across the
United States and Europe were indicted in federal court in
Illinois for conspiring to infringe the copyright of more than
5,000 computer software programs.
On October 12, 2000, Brian Baltutat pled guilty in
federal court in Michigan to software copyright infringement.
He had offered approximately 142 software programs for free
downloading on a web site called ``Hacker Hurricane.'' Baltutat
was sentenced on January 30, 2001, to 3 years probation, 180
days home confinement, restitution to software manufacturers,
and 40 hours of community service.
On December 15, 2000, Jason Spatafore pled guilty in
federal court in California to criminal copyright infringement.
The defendant willfully infringed a copyright by reproducing
and distributing by electronic means copies of parts of the
film Star Wars Episode I: The Phantom Menace. He did this by
posting copies of parts of the film on various web sites so
others could download copies of the film from the Internet. He
also encouraged others to download copies of the film from
those sites.
Nine persons--who allegedly were associated with the
underground software piracy group known as ``Fastlane''--were
indicted on February 15, 2001, for pirating more than $1
million of copyrighted computer software, games, and movies
through non-public Internet sites. All nine defendants were
charged in federal court in Chicago in a nine-count indictment.
On May 11, 2001, a federal jury in the Northern
District of Illinois found Christian Morley of Salem,
Massachusetts, guilty of conspiracy to infringe software
copyrights. Morley was indicted last year along with 16 other
defendants from across the United States and Europe for
conspiring to infringe the copyright of more than 5,000
computer software programs available through a hidden Internet
site located at a university in Quebec, Canada.
b. Digital Millennium Copyright Act--17 U.S.C. 1201-1205
The Digital Millennium Copyright Act (``DMCA'') was signed into law
by President Clinton in 1998. Congress passed this statute both to
implement U.S. intellectual property treaty obligations and to move the
nation's copyright law into the digital age. Specifically, the DMCA
implemented two 1996 World Intellectual Property Organization
(``WIPO'') treaties into the U.S. code: the WIPO Copyright Treaty and
the WIPO Performance and PhonographsTreaty. The DMCA also addressed a
number of other significant copyright-related issues. The DMCA created
two new prohibitions in chapter 12 of Title 17 of the U.S. Code:
Circumventing the technological measures used by
copyright owners to protect their works; and
Tampering with the integrity of copyright management
information.
Civil remedies and criminal penalties are established for violating
these prohibitions.
(1) Anti-Circumvention Measures
Section 1201 of the DMCA focuses on providing adequate and
effective protection against circumvention of technological measures
designed to protect copyrighted works. The DMCA divides technological
measures into two categories:
Measures that prohibit unauthorized access to a
copyrighted work; and
Measures that prohibit unauthorized copying of a
copyrighted work.
Making or selling devices or services that are used to circumvent
either category is prohibited in certain instances. (Circumvention
itself is prohibited only in the first category, not the second,
reflecting the doctrine of ``fair use'' which allows copying in certain
circumstances, e.g., a university professor lecturing on cinematography
creates a CD-ROM for use in his class, featuring downloaded clips from
several films.)
An example: a film distribution company develops encryption
software which prevents motion pictures on digital versatile disks
(``DVDs'') from being copied. A hacker utilizing reverse engineering
then discovers the encryption algorithm and keys, thus learning how to
copy encrypted DVDs. The hacker then proposes to post his encryption-
breaking code on the web for others to purchase or use. The DMCA
forbids the hacker from disseminating the encryption-breaking code
which would be used by third parties to copy DVDs.
(2) Integrity of Copyright Management Information
In addition to the anti-circumvention provisions of section 1201,
section 1202 of the DMCA also grants new protection for the integrity
of ``copyright management information--i.e., data identifying works,
their creators, copyright owners, and other key facts (including
licensing information). Copyright management information can be linked
to or travel with works in a networked environment to facilitate
detection of unauthorized uses, promote the payment of royalties, and
provide similar benefits to copyright owners.
Section 1202 addresses both the dealing in false copyright
management information and the removal or alteration of copyright
management information.
Specifically, the section prohibits:
The falsification, alteration or removal of
copyright management information; or
The trafficking in copies of works that are linked
with copyright management information that has been falsified,
altered or removed,
if the offending party knew or should have known that its actions would
facilitate infringement.
(3) Civil Remedies and Criminal Penalties
Any person injured by a violation of section 1201 or section 1202
of the DMCA may bring a civil action in federal court. The court may,
pursuant to section 1203, grant a range of equitable and monetary
remedies similar to those under the Copyright Act, including statutory
damages.
In addition, it is a criminal offense to violate section 1201 or
1202 willfully and for purposes of commercial advantage or private
financial gain. Under section 1204, penalties range up to a $500,000
fine or up to five (5) years imprisonment for a first offense, and up
to a $1,000,000 fine or up to ten (10) years imprisonment for second
and subsequent offenses.
(4) Recent Cases
Three recent cases--one criminal and two civil--have been brought
pursuant to the DMCA:
Criminal
The first indictment under the DMCA was returned in
federal court in California in August 2001 against Dmitry
Sklyarov and Elcom Ltd., both of Moscow.\43\ The defendants
allegedly conspired to develop and traffic a software program
which unlocked an on-line book encryption code; the code
protected the copyright holder's interest in an electronic book
by limiting access to reading--rather than copying and
distributing--an on-line book. The defendants posted the
decryption code on a Moscow website, thus enabling consumers
who purchased an encrypted book to ``unlock'' it, and make
copies. In December 2001, the federal government entered into
an agreement with Sklyarov in which the Justice Department
agreed to defer prosecution of the counts against him in return
for his cooperation and testimony against Elcom Ltd., the
Moscow website.
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\43\ See Department of Justice Website [http://www.usdoj.gov/
criminal/cybercrime/Sklyarovindictment.htm]; and [http://www.usdoj.gov/
criminal/cybercrime/sklyarovAgree.htm].
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Civil
Eight major motion picture studios brought suit in
2000, after computer hackers engineered decryption software to
copy the plaintiffs' motion pictures on digital versatile disks
(``DVDs'').\44\ After a website obtained and posted the
decryption software, the movie studio sought a court injunction
to enjoin the website from distributing the software on the
Internet. Universal Studios v. Reimerdes, 111 F. Supp. 2d 294
(S.D.N.Y. 2000), as amended, aff'd sub. nom. Universal Studios
v. Corley, 273 F.3d 429 (2d Cir. 2001).
---------------------------------------------------------------------------
\44\ Jeweler, Robin and Jennings, Christopher Alan
``Anticircumvention under the Digital Copyright Act: Universal Studios
v. Corley.'' January 23, 2002.
The district court rejected the defendants'
argument that the DMCA's anti-circumvention provisions,
as applied to the posting and dissemination of the
decryption codes, violated the First Amendment. The
court held that the code-breaking software has a
functional, non-speech aspect--namely, that it
permitted consumers to ``unlock'' film DVDs, thereby
bypassing the copyright protections therein.
Accordingly, the district court granted a permanent
---------------------------------------------------------------------------
injunction against posting the decryption software.
The district judge expressed his hope that
the court's ruling would ``contribute to a climate of
appropriate respect for intellectual property rights in
an age in which the excitement of ready access to
untold quantities of information has blurred in some
minds the fact that taking what is not yours and not
freely offered to you is stealing!''
The Second Circuit Court of Appeals affirmed
the district court, upholding the constitutionality of
the DMCA.
The recording industry issued a public challenge in
the spring of 2001 to decrypt copyright protection technology
designed to protect digital music.\45\ Edward Felten, a
Princeton professor, accepted the challenge, cracked the code,
then announced his intentions to present his findings at an
academic conference. The Recording Industry Association of
America (``RIAA'') threatened to sue Professor Felten, claiming
that publication of the decryption code would violate the DMCA.
Felten backed down and the RIAA dropped its law suit threat.
Felten then sued the RIAA, alleging that the DMCA had a
chilling effect which violated his First Amendment rights.
Felten sought a declaratory judgment that publication of his
findings would not violate the DMCA. The federal district court
dismissed his claim, but Felten--represented by the Electronic
Frontier Foundation--may appeal the dismissal.
---------------------------------------------------------------------------
\45\ Jeweler, Robin and Jennings, Christopher Alan
``Anticircumvention under the Digital Copyright Act: Universal Studios
v. Corley.'' January 23, 2002.
---------------------------------------------------------------------------
b. international treaties to protect intellectual property
There is no such thing as ``international copyrights'' or
``international trademarks.'' Rather, copyrights and trademarks are
governed by national laws. That said, nations are obligated to protect
copyrights and trademarks through a number of interrelated
international treaties which impose minimum standards on countries
party to the respective treaties. In this regard, there have been two
important advancements for the international protection of copyrights
and trademarks in the last decade. The first was the approval, during
the Uruguay Round trade negotiations (concluded in 1994), of the
Agreement on Trade-Related Aspects of Intellectual Property Rights, or
``TRIPS.'' The second was the approval of the World Intellectual
Property Organization (WIPO) Copyright Treaty and the WIPO Performances
and Phonograms Treaty (concluded in 1996).
1. TRIPS Agreement
Members of the World Trade Organization are required to comply with
the TRIPS Agreement. Article 66 of the TRIPS Agreement, however,
permits ``least developed countries'' a ten-year transition period for
implementation of the Agreement; at present, 30 members of the WTO
qualify for least developed country status.
The TRIPS Agreement requires all members to comply with substantive
provisions of two baseline treaties--one on copyrights (the Berne
Convention for the Protection of Literary and Artistic Works) and one
on trademarks (the Paris Convention for the Protection of Industrial
Property).
Equally important, the TRIPS Agreement imposes obligations on
members to enforce adequately the intellectual property rights
protected by it. The TRIPS Agreement also provides a means to secure
enforcement, if diplomacy and persuasion prove inadequate: it
incorporates by reference the dispute settlement procedures of the WTO.
The Dispute Settlement Understanding provides a quasi-judicial means
for a member to complain about WTO violations, a process which has
often been successful for the United States in a range of trade areas.
The United States has initiated several proceedings against foreign
governments for TRIPS violations, including against Ireland for its
deficient copyright laws, Greece for television piracy, and Denmark for
its failure to make available ex parte search remedies in intellectual
property enforcement actions. These cases have all been settled to the
satisfaction of the United States.
2. WIPO Treaties
Although the Senate gave its advice and consent to ratification of
the WIPO treaties in October 1998, neither treaty has entered into
force. The WIPO Copyright Treaty will enter into force, however, on
March 6, 2002, and it is expected that the Performances and Phonograms
Treaty will enter into force in 2002 (once the necessary 30
ratifications have been achieved).
VIII. Enforcement
Jurisdiction over piracy spans across not only a host of federal
agencies, but also the community of nations. The Justice Department is
the lead federal law enforcement agency while the State Department
currently chairs a working group of U.S. Agencies that is involved in
coordinating intellectual property rights.\46\
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\46\ In addition, in the hopes of making each organization's
contributions more accessible to those in and out of government, the
State Department is currently working to create a website which will
assist in an effort to better coordinate promotion of intellectual
property rights abroad.
In addition, a 1999 Appropriations Act established the National
Intellectual Property Law Enforcement Coordination Council, with
participation by the Departments of State, Justice and Commerce, as
well as the Patent and Trademark Office, the Customs Service, and the
Office of the U.S. Trade Representative. PL 106-58 653.
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In 1991, the Justice Department created what is now the Computer
Crime and Intellectual Property Section (``CCIPS'') within the Criminal
Division. According to the Department, CCIPS consists of ``two dozen
lawyers who focus exclusively on the issues raised by computer and
intellectual property crime. Section attorneys advise federal
prosecutors and law enforcement agents; comment upon and proposed
legislation; coordinate international efforts to combat computer crime;
litigate cases; and train all law enforcement groups. Other areas of
expertise possessed by CCIPS attorneys include encryption, electronic
privacy laws, search and seizure of computers, e-commerce, hacker
investigations, and intellectual property crimes.'' \47\ CCIPS
attorneys work closely with U.S. Attorney's Office around the country
in enforcing intellectual property laws as they relate to high tech
piracy.\48\
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\47\ See [http://www.usdoj.gov/criminal/cybercrime/ccips.html].
\48\ The CCIPS webpage lists numerous federal criminal prosecutions
brought in intellectual piracy cases. See [http://www.usdoj.gov/
criminal/cybercrime/ipcases.htm].
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Moreover, the Justice Department has raised the profile of
cybercrime, including high tech piracy, by the recent creation of
specialized prosecution units to focus on cybercrimes. In July 2001,
Attorney General John Ashcroft announced that nine additional units are
being added to a program called the Computer Hacking and Intellectual
Property (``CHIPS'') Program that been premiered, to great success, in
San Francisco. According to the Justice Department, ``[t]hat project
demonstrated the benefits of a unit of prosecutors working closely with
the FBI and other agencies to establish a relationship with the local
high tech community and encourage them to refer cases to law
enforcement. The new CHIPS units are the next phase in the Department's
ongoing efforts to combat cybercrime and Intellectual Property theft.''
\49\ For now, the CHIPS units are limited to ten U.S. Attorney's
Offices: San Francisco, Los Angeles, Dallas, San Diego, Seattle,
Atlanta, Alexandria, Virginia, Boston, and New York (Brooklyn and
Manhattan). Together, the 10 units will have a total of 77 positions,
including 48 prosecutors.\50\
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\49\ See [http://www.usdoj.gov/criminal/cybercrime/
enforcement.html#VIb].
\50\ See [http://www.usdoj.gov/criminal/cybercrime/chipfact.htm].
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The Justice Department has worked with other federal and
international law enforcement agencies in bringing criminal
prosecutions against high tech pirates. For example, U.S. authorities
spear-headed a 15-month investigation entitled ``Operation Buccaneer.''
Working in collaboration with officials in the U.K., Australia, Norway
and Finland, the U.S. executed 58 warrants in 27 cities against
``warez'' groups operators, seizing more than 140 computers. The
operation struck at highly structured, security-conscious criminal
groups specializing in ``obtaining the latest computer software, games,
and movies; stripping (``cracking'') copyright protections; and
releasing the final product to hundreds of Internet sites worldwide.''
\51\
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\51\ U.S. Department of Justice Press Release, ``Federal Law
Enforcement Target International Internet Piracy Syndicates.'' 11 Dec
2001. U.S. Customs Service, ``Operation Buccaneer Targets Software
Piracy.'' January 2002. A useful resource for learning about the fight
against intellectual property theft generally is the website of the
Computer Crimes and Intellectual Property Section of the Justice
Department. It can be accessed at [www.cybercrime.gov].
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In another ongoing investigation, entitled ``Operation Bandwidth,''
officials at the Defense Criminal Investigative Service, the Inspector
General Office of the Environmental Protection Agency, the FBI, and the
U.S. Attorney for the District of Nevada set up and maintained a warez
site for 2 years as part of an undercover investigation targeting
online pirates. The site was accessed to transfer over 100,000 files,
including over 12,000 separate software programs, movies and games.
Over 200 people attempted to obtain ``first-run movies, the latest
computer games, and versions of notable software products even before
they were publicly introduced.'' \52\
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\52\ U.S. Department of Justice Press Release, ``Federal Law
Enforcement Targets International Internet Piracy Syndicates.'' 11 Dec
2001.
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IX. Potential Solutions
As discussed above, substantial laws, both international and
domestic, already exist to help fight intellectual property theft. It
is likely, therefore, that any successful proposals at this stage would
not revolutionize the legal landscape so much as enhance our abilities
to enforce the laws and treaties that exist. Based on my discussions to
date with government and industry representatives, it does not appear
that a major sea change is needed with respect to the substantive law.
With that in mind, the following suggestions have been made by experts
in the field.\53\
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\53\ This section sets forth a variety of proposals that have been
made to address the problems discussed above. The list is not meant to
be comprehensive. Also, as I am still studying the issue, I have
neither endorsed nor opposed any of them. My purpose in discussing
these suggestions is merely to inform fully the reader.
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a. domestic
We cannot neglect the needs of those enforcing intellectual
property protections at home and abroad, even as more time and energy
is devoted to fighting international terrorism.\54\ American
representatives around the world need to keep intellectual property
protections high atop their list of priorities. Pirating and
counterfeiting are sometimes subsumed by the variety of other
challenges facing American diplomats and officials the world over. We
need to remind them of the enormous cost incurred when we fail to
protect the interests of America's businesses and workers.
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\54\ Another potential cause for concern is that some evidence is
emerging that organized criminals, and perhaps even terrorist networks,
may be financing themselves in part through theft of intellectual
property. According to a Washington Post article in September 2001,
``eight of the 10 countries identified by a trade group as having the
highest business software piracy rates in the world--Pakistan, China,
Indonesia, Ukraine, Russia, Lebanon, Qatar and Bahrain--have links to
al Qaeda.'' Mazer, Roslyn A. ``From T-Shirts to Terrorism.'' Washington
Post, September 30, 2001. In an article in The Industry Standard,
former Attorney General Janet Reno wrote:
``Criminal organizations appear to be using the proceeds of
intellectual property-infringing products to facilitate a variety of
enterprises, including guns, drugs, pornography and even terrorism.
Invariably, when there is intellectual property crime, there is tax
evasion and money laundering.''
So, while we ought to focus on the extent to which intellectual
property theft affects the business sector, we ought not overlook the
extent to which cracking down on criminal networks internationally may
provide the added benefit of crippling those who would take up arms
against the United States.
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Some specific proposals which others have offered to improve the
fight against piracy and counterfeiting at home include:
Dedicating more funding to the Justice Department's
effort to enforce intellectual property rights.
Enacting statutes to prohibit individuals from
tampering with authentication features.
Requiring that courts impose civil fines on those
known to be importing pirated material.
Better supporting the intellectual property center
within the U.S. Customs Service.
Working to enhance the communication between law
enforcement agencies and coordination between federal and state
authorities.
Creating a fund dedicated to financing efforts to
expand intellectual property enforcement through training,
legislation, and technical assistance.
Some work is already progressing. For example, for fiscal year 2002, we
in Congress have given the Customs Service's Intellectual Property
Rights Center an additional $5 million, and we have funded more
attorney positions at the Justice Department to prosecute these crimes.
Undoubtedly, however, more can be done.
b. international
On the international front, a key question is how can we in the
United States convince foreign governments to join our effort to combat
intellectual property theft. What will compel our counterparts around
the world to institute and enforce proper intellectual property laws
when many foreigners remain convinced that active enforcement will
hobble their local economies?
First, we could use the type of bilateral trade negotiations and
threats available to us in trade disputes, namely the ``Special 301''
process, authorized in Section 182 of the Trade Act of 1974.\55\ That
statute empowers the United States Trade Representative (USTR) to
``identify and investigate'' priority foreign countries that fail to
provide adequate and effective protection of American intellectual
property rights. When foreign countries fail to provide proper relief,
the USTR is empowered to impose trade sanctions.\56\ The U.S. Copyright
Office notes that the process of investigation, in which foreign
countries are placed on a so-called ``watch list,'' has been a
tremendously successful tool.\57\ Foreign countries are often
disinclined to invest in a ``priority country,'' so governments are
often anxious to avoid that designation. Hong Kong and Malaysia were
recently both compelled to do more to enforce intellectual property
rights because the United States promised that failure to do so would
impact their designation in the Special 301 process.\58\
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\55\ Trade Act of 1974, P.L. No. 93-316, as amended by the Omnibus
Trade and Competitiveness Act of 1988, P.L. No. 100-418. See 19 U.S.C.
2242(a)(1)(A) (2001).
\56\ Morrison, Wayne M. ``China-U.S. Trade Agreements: Compliance
Issues.'' Congressional Research Service, December 7, 2000.
\57\ Judiciary Staff Briefing with the United States Copyright
Office, January 18, 2002.
\58\ Judiciary Staff Briefing with the International Intellectual
Property Association, January 10, 2002.
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Second, we could use the power we wield in negotiating free trade
agreements to compel foreign governments to implement and enforce
adequate intellectual property protections. Under the TRIPS agreement,
World Trade Organization members are required only to institute laws
which are ``sufficient to provide a deterrent'' to intellectual
property theft.\59\ We in the United States know that authorities must
do much more than that--most notably, they must prosecute those who
violate the law. So, as we work to shape bilateral free trade
agreements with nations like Peru, Brazil, Chile and Singapore, we
should insist that the laws and policy instituted with our trading
partners conform to the more stringent standards we apply domestically.
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\59\ TRIPS Agreement, Article 61.
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Third, we might provide an expanded arsenal of resources to foreign
governments inclined to write and implement the type of intellectual
property laws which will guarantee, with enforcement, that companies
operating within their market have adequate protection. Many countries
with pervasive problems simply do not have the resources or expertise
necessary to prevent intellectual property theft, even when they
understand that implementing the proper enforcement mechanisms will
spur investment and economic growth. If American advisors, technology
or financial resources are provided to well-meaning foreign
governments, those countries will be better equipped to produce the
sort of legal framework we enjoy here in the United States.\60\ The
United States government provided at least $7.1 million worth of aid to
developing countries in the pursuit of improving their intellectual
property laws between 1999 and 2001.\61\ We should make sure that such
programs are effective, and if they are, make them more available to
countries throughout the globe.
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\60\ The State Department is already doing some work in this area.
For example, in February 2002, the Department will host a three-week
visit to the United States for intellectual property rights officials
from numerous foreign governments.
\61\ United States Agency for International Development, ``United
States Government Initiatives to Build Trade Related Capacity in
Developing and Transition Countries, Chapter Two: WTO Awareness,
Accession, and Agreements,'' available on the USAID website, at
[www.usaid.gov].
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Fourth, developing foreign countries often lack the resources
required to fund and maintain the law enforcement agencies which
prosecute intellectual property thieves. Enforcement agencies are often
ill-equipped to fight high tech, fast-paced, well-financed criminal
enterprises, and they rarely place intellectual property crime at the
top of their enforcement agendas. In turn, piracy and trademark
prosecutions are often given the short shift, despite the economic cost
of failing to regulate the market.\62\ The United States could support
foreign law enforcement, or at least foreign agencies, with some of the
tools and training necessary to do an adequate job of prosecuting
offending parties.
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\62\ Those producing pirated CDs, DVDs, and CD-ROMs are dependent
on a special grade of polycarbonate which is mined in only a few
locations around the world. If the countries that house polycarbonate
production facilities were to place better export controls, or even
look into developing a way to track the polycarbonate they produce, it
would be much easier to stem the production of illegal copies. For
example, governments could monitor whether the amount of polycarbonate
given to a disc manufacturing plant represented the amount needed to
produce the discs the plant purported to produce legitimately. If those
numbers were to differ significantly, a government would have good
reason to suspect that pirated material was coming from the facility.
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Fifth, we can encourage other countries that have already developed
comparatively strong systems for protecting intellectual property to
use their influence to persuade and cajole other governments to rise to
their level. For example, the U.S. Government could press the European
Union to do its utmost to raise the level of intellectual property
protection in countries that seek to join its ranks.
Finally, governments are typically some of the largest purchasers
of computers and computer-related services. Both because they are
market leaders and because prosecution is more difficult when the
authorities are themselves the beneficiaries of pirated goods, it is
terribly important that governments here and around the world police
themselves. In 1998, President Clinton issued Executive Order 13103. It
directs all federal agencies (and that third-party contractors doing
business with the Government) to utilize legal software exclusively.
The United States Trade Representative was tasked with convincing our
trading partners to enact similar decrees.\63\ Despite that Order,
evidence suggests that our government remains one of the largest
violators of intellectual property rights.\64\ As we continue to work
to address that problem--and we must--we can encourage foreign
governments to enact the same sort of policy President Clinton
instituted four years ago. If nothing else, the action a government
takes to stem internal piracy sends a signal to private sector
criminals.
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\63\ Executive Order 13103, September 30, 1998.
\64\ Judiciary Staff Briefing with the Business Software Alliance,
January 17, 2002.
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All of these proposals, of course, are for potential action by our
government. As a Senator, that is logically my focus in reviewing this
issue. Of course, any effort to fight the crime of intellectual
property theft must involve substantial efforts on the part of the
industries involved. For example, industries are currently working on
technologies to protect their materials from illicit copying. Even as
hackers and crooks become ever more sophisticated at cracking the
codes, companies must continue to seek ways to thwart criminal efforts.
X. Conclusion
Intellectual property theft has, through the years, stolen billions
of dollars from American businesses and hundreds of thousands of jobs
from American workers. The robust global economy and the Internet have
enabled worldwide commerce to flourish. As businesses struggle to adapt
to the new economic landscape, we need to ensure that government
authorities throughout the world, and at home, are prepared to address
the new challenges before them.
As this report demonstrates, efforts to protect intellectual
property are lacking, and represent an important hurdle for the
development of economies around the globe. If those who invest in
developing new and innovative ideas are consistently exploited, they
may well give up efforts to improve technology and generate the type of
art, music, literature, and entertainment that animates all our lives.
More than that, if we fail to address this growing problem, millions of
jobs will be lost, and we will have given into thieves and pirates.
Our efforts will inevitably be buoyed by the development of
intellectual property industries around the world. As software and
entertainment companies begin to flourish in foreign countries, foreign
governments will realize that intellectual property theft poses a
significant economic threat. The Indian film industry, as it matured,
became increasingly aware that its product was being pirated. It
successfully pushed the Indian government to institute adequate
protections. In the future, countries may come to the United States
asking for assistance in developing the type of legal framework needed
to combat intellectual property crime. We ought to be prepared to
assist them in our mutual interest.
Here at home, we should continue the strides made by federal law
enforcement in waging an effective battle against high tech piracy. We
must make sure that law enforcement has the legal tools and monetary
resources to investigate fully and aggressively pursue high tech
pirates--including both those who produce the pirated goods, as well as
those that traffic them. We must ensure that federal laws are
sufficient to prosecute all variations of high tech piracy, including
appropriate civil and criminal provisions. We must maximize
coordination among all the federal agencies with oversight for this
crime. And we must make sure that all our citizens know that taking
someone else's protected property through cyberspace is stealing, plain
and simple.
Only by being vigilant in investigating and prosecuting those who
steal intellectual property will we be successful in continuing to
nurture the development of the music, software, and entertainment
industries which employ so many people both here and around the world.
I look forward to assisting our government here at home in its battle
against high tech pirates, as well as urging nations around the world
join the United States in the fight against intellectual property
theft, and I hope that I can continue to be helpful in that endeavor.
Inevitably, the landscape will change, and I intend to reevaluate and
readdress new problems in the coming years to ensure that creators and
innovators are fully protected under the law.
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