[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]





   INTELLECTUAL PROPERTY PIRACY: ARE WE DOING ENOUGH TO PROTECT U.S. 
                           INNOVATION ABROAD?

=======================================================================

                                HEARING

                               before the

                              COMMITTEE ON
                           GOVERNMENT REFORM

                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED EIGHTH CONGRESS

                             SECOND SESSION

                               __________

                           SEPTEMBER 23, 2004

                               __________

                           Serial No. 108-225

                               __________

       Printed for the use of the Committee on Government Reform


  Available via the World Wide Web: http://www.gpo.gov/congress/house
                      http://www.house.gov/reform

                                 ______

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                     COMMITTEE ON GOVERNMENT REFORM

                     TOM DAVIS, Virginia, Chairman
DAN BURTON, Indiana                  HENRY A. WAXMAN, California
CHRISTOPHER SHAYS, Connecticut       TOM LANTOS, California
ILEANA ROS-LEHTINEN, Florida         MAJOR R. OWENS, New York
JOHN M. McHUGH, New York             EDOLPHUS TOWNS, New York
JOHN L. MICA, Florida                PAUL E. KANJORSKI, Pennsylvania
MARK E. SOUDER, Indiana              CAROLYN B. MALONEY, New York
STEVEN C. LaTOURETTE, Ohio           ELIJAH E. CUMMINGS, Maryland
DOUG OSE, California                 DENNIS J. KUCINICH, Ohio
RON LEWIS, Kentucky                  DANNY K. DAVIS, Illinois
TODD RUSSELL PLATTS, Pennsylvania    JOHN F. TIERNEY, Massachusetts
CHRIS CANNON, Utah                   WM. LACY CLAY, Missouri
ADAM H. PUTNAM, Florida              DIANE E. WATSON, California
EDWARD L. SCHROCK, Virginia          STEPHEN F. LYNCH, Massachusetts
JOHN J. DUNCAN, Jr., Tennessee       CHRIS VAN HOLLEN, Maryland
NATHAN DEAL, Georgia                 LINDA T. SANCHEZ, California
CANDICE S. MILLER, Michigan          C.A. ``DUTCH'' RUPPERSBERGER, 
TIM MURPHY, Pennsylvania                 Maryland
MICHAEL R. TURNER, Ohio              ELEANOR HOLMES NORTON, District of 
JOHN R. CARTER, Texas                    Columbia
MARSHA BLACKBURN, Tennessee          JIM COOPER, Tennessee
PATRICK J. TIBERI, Ohio              BETTY McCOLLUM, Minnesota
KATHERINE HARRIS, Florida                        ------
MICHAEL C. BURGESS, Texas            BERNARD SANDERS, Vermont 
                                         (Independent)

                    Melissa Wojciak, Staff Director
       David Marin, Deputy Staff Director/Communications Director
                      Rob Borden, Parliamentarian
                       Teresa Austin, Chief Clerk
          Phil Barnett, Minority Chief of Staff/Chief Counsel


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on September 23, 2004...............................     1
Statement of:
    Papovich, Joseph, senior vice president-international, 
      Recording Industry Association of America; John G. Malcolm, 
      senior vice president and director for worldwide anti-
      piracy operations, Motion Picture Association of America; 
      and Robert Cresanti, vice president, public policy, 
      Business Software Alliance.................................    54
    Simmons, Hon. Rob, a Representative in Congress from the 
      State of Connecticut.......................................    12
    Yager, Loren, Ph.D., Director, International Affairs and 
      Trade, U.S. Government Accountability Office...............    20
Letters, statements, etc., submitted for the record by:
    Cresanti, Robert, vice president, public policy, Business 
      Software Alliance, prepared statement of...................    83
    Cummings, Hon. Elijah E., a Representative in Congress from 
      the State of Maryland, prepared statement of...............   136
    Davis, Chairman Tom, a Representative in Congress from the 
      State of Virginia:
        Article dated September 23, 2004.........................    42
        Prepared statement of....................................     5
    Malcolm, John G., senior vice president and director for 
      worldwide anti-piracy operations, Motion Picture 
      Association of America, prepared statement of..............    69
    Papovich, Joseph, senior vice president-international, 
      Recording Industry Association of America, prepared 
      statement of...............................................    57
    Simmons, Hon. Rob, a Representative in Congress from the 
      State of Connecticut, prepared statement of................    14
    Waxman, Hon. Henry A., a Representative in Congress from the 
      State of California, prepared statement of.................     9
    Yager, Loren, Ph.D., Director, International Affairs and 
      Trade, U.S. Government Accountability Office, prepared 
      statement of...............................................    24

 
   INTELLECTUAL PROPERTY PIRACY: ARE WE DOING ENOUGH TO PROTECT U.S. 
                           INNOVATION ABROAD?

                              ----------                              


                      THURSDAY, SEPTEMBER 23, 2004

                          House of Representatives,
                            Committee on Government Reform,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 11 a.m., in room 
2154, Rayburn House Office Building, Hon. Tom Davis (chairman 
of the committee) presiding.
    Present: Representatives Davis, Blackburn, Waxman, Maloney, 
Cummings, Clay, Watson, Sanchez, Ruppersberger, Norton, and 
Cooper.
    Staff present: David Marin, deputy staff director/
communications director; Keith Ausbrook, chief counsel; Ellen 
Brown, legislative director and senior policy counsel; Jennifer 
Safavian, chief counsel for oversight and investigations; Jack 
Callender, John Hunter, and David Young, counsels; Rob White, 
press secretary; Drew Crockett, deputy director of 
communications; John Cuaderes and Victoria Proctor, senior 
professional staff members; Jaime Hjort, professional staff 
member; Sarah D'Orsie, deputy clerk; Allyson Blandford, office 
manager; Corinne Zaccagnini, chief information officer; Phil 
Barnett, minority staff director; Karen Lightfoot, minority 
communications director/senior policy advisor; Anna Laitin, 
minority communications & policy assistant; Michelle Ash, 
minority senior legislative counsel; Nancy Scola, minority 
professional staff member; Earley Green, minority chief clerk; 
Jean Gosa, minority assistant clerk; and Cecelia Morton, 
minority office manager.
    Chairman Tom Davis. The committee will come to order. A 
quorum being present, the Committee on Government Reform is now 
in order.
    I would like to welcome everybody to today's hearing on 
intellectual property rights and the effectiveness of our 
efforts to protect U.S. interests from privacy abroad. The 
committee will focus on counterfeiting and piracy in foreign 
countries of software, movies, music, and designs for consumer 
industrial products that are protected by U.S. intellectual 
property laws.
    Everybody knows that the United States is the greatest 
source of creativity in the world. Our products, whether they 
are movies, music recordings, design of clothing, ship and 
airplane parts, fast food, or computer software, can be found 
in every market in almost every country in the world. If 
markets for U.S. goods derived from intellectual property are 
to be sustained and expanded, our products must be adequately 
protected in every market where they are found; otherwise, jobs 
will be lost, not only the jobs of executives or movie stars or 
recording artists, but also the technicians, the carpenters, 
the factory workers, and the retailers.
    Moreover, consumer safety will also be in jeopardy if we 
get knock-off goods such as airplane, ship or auto parts, or 
consumer products get into the mainstream of commerce and fail 
to perform as expected. Incentives to stimulate and encourage 
innovation will also be diminished, as capital necessary to 
foster this creativity will be lost to illegitimate interests.
    Counterfeiting and piracy of U.S. intellectual property in 
foreign countries is rampant. Counterfeited editions of U.S. 
software, movies, music, and designs for consumer and 
industrial products can be found in markets throughout the 
world. I know because I witnessed it along with Mrs. Blackburn 
in China just last month. Several of my staff also saw it in 
Russia and Poland recently.
    On the table to my left you can see both real and 
counterfeit movies, music, and consumer goods provided by the 
GAO. The real and counterfeit goods appear indistinguishable. 
In addition, the manufacture and sale of these items has become 
a significant global business. It is difficult to assess the 
exact economic losses, but the Office of the U.S. Trade 
Representatives report that U.S. companies lost between $200 
and $250 billion in 2003 because of piracy and counterfeiting.
    Our copyright, patent, and trademark laws protect 
intellectual property domestically, but foreign intellectual 
property laws are often totally lacking or woefully inadequate 
to protect legitimate U.S. intellectual property interests. 
Those countries that do have laws often don't enforce them. 
Enforcement efforts by many foreign governments have come under 
increased criticism as being ineffective.
    Federal law charges a number of different U.S. Government 
agencies with responsibility for securing more comprehensive 
and effective protection of U.S. intellectual property rights 
abroad. These functions really fall into three categories: 
first, policy initiatives, such as negotiating trade agreements 
with foreign governments in coordination with international 
organizations such as the World Trade Organization and the 
World Intellectual Property Organization; second, Federal law 
enforcement actions, including multi-country investigations, 
seizure of goods at U.S. ports of entry, and patent and 
trademark infringements; and, third, training and technical 
assistance for foreign governments.
    The agencies that have responsibility for these activities 
include the USTR, the Trade Rep., the Departments of State, 
Commerce, Justice, Homeland Security, the U.S. Patent and 
Trademark Office, U.S. International Trade Commission, the U.S. 
Agency for International Development, the Federal Bureau of 
Investigation, and the Library of Congress's Copyright Office.
    The complexity of this issue requires coordination of 
specific functions among the Federal agencies involved. Formal 
efforts include the National Intellectual Property Law 
Enforcement Coordination Council, which was created in 1999 by 
Congress to coordinate law enforcement efforts among the 
various responsible Federal agencies.
    The USTR also coordinates efforts to protect U.S. 
intellectual property through the Special 301 review, which 
consists of annual assessments on the effectiveness of foreign 
countries' efforts to protect U.S. intellectual property. Less 
formal coordination is ongoing at individual U.S. embassies in 
countries where intellectual property violations are severe.
    Private industry has also taken action to enforce and 
protect its intellectual property rights abroad. A number of 
industry associations engage in collaborative efforts to 
advance foreign governments' protection of U.S. interests.
    Because of the severity of the piracy problem and the vital 
importance of protecting U.S. innovation throughout the world, 
we asked the Government Accountability Office [GAO], to review 
and assess Federal agencies' responsibilities and efforts to 
combat intellectual property piracy in foreign countries. GAO 
has complied with its study and the report, which is entitled, 
``Intellectual Property-U.S. Efforts Have Contributed to 
Strengthened Laws Overseas, But Challenges Remain,'' confirms 
the severity of the piracy and counterfeiting problem. The 
report finds that agencies are actively engaged in combating 
this problem and have made progress in persuading foreign 
governments to strengthen their intellectual property laws; 
however, the report concludes that enforcement of these laws 
remains a major challenge. The report recommends that the 
NIPLECC's authority, structure, membership, and mission should 
be strengthened.
    The committee will first welcome Congressman Rob Simmons 
from Connecticut, who will tell us about a manufacturer in 
Connecticut in his district that has experienced piracy and 
counterfeiting on its fuel gages.
    We will then receive GAO's assessment of the intellectual 
property piracy problem as it relates specifically to U.S. 
software, movies, music, and designs for consumer and 
industrial products, and its recommendations for strengthening 
U.S. efforts to protect those problems.
    Although we invited Federal Government agencies responsible 
for intellectual property protection to be here today to 
testify, they were unable to do so. While I am disappointed by 
their absence, we are going to continue to work with the 
administration to develop coordinated and effective reforms 
that will enhance the protection of U.S. intellectual property 
rights abroad.
    Finally, the committee will hear from the private sector 
that is victimized by intellectual property piracy and 
counterfeiting in the world markets. We particularly want to 
receive their assessment of not only the situation they face in 
international markets, but also their own enforcement efforts 
in foreign countries.
    This is an important issue that will receive increased 
attention in government and industry circles. In particular, we 
need to focus on enhancing foreign governments' enforcement 
efforts. The fact that the Senate CJS Appropriations bill for 
fiscal year 2005 includes $20 million for the NIPLECC and 
directs that entity to take more specific action to enhance 
intellectual property law enforcement internationally is one 
vehicle to consider.
    Over the next few weeks we will be in a better position to 
determine whether enhancing the NIPLECC is the best solution or 
whether other measures should also be taken. In light of this 
urgency, I felt that it was essential to proceed with this 
hearing today to hear GAO's findings and the industry's 
assessments.
    So I want to thank all of our witnesses for appearing 
before the committee.
    [The prepared statement of Chairman Tom Davis follows:]

    [GRAPHIC] [TIFF OMITTED] T6748.001
    
    [GRAPHIC] [TIFF OMITTED] T6748.002
    
    Chairman Tom Davis. I will now yield to our ranking member, 
Mr. Waxman.
    Mr. Waxman. Thank you very much, Mr. Chairman, for this 
opportunity today to examine the serious challenge facing some 
of the most dynamic industries in the United States.
    America's thriving intellectual property industry is a 
driving force of economic growth in this country. Revenues from 
movies, music, video games, computer software, digital and 
media technology constitute a significant percentage of our 
gross domestic product, contributing billions of dollars 
annually to the U.S. economy.
    Despite this success and the popularity of these U.S. 
products worldwide, the industry's growth is imperiled by 
losses to piracy each year.
    According to the Recording Industry Association of America, 
one out of every three music CDs sold in the world is pirated. 
And in July 2004, the Business Software Alliance released a 
report finding that one-third of software installed on 
computers last year was pirated.
    U.S. Government activism has garnered increased protection 
for copyrighted works through the World Trade Organization's 
Agreement on Trade-Related Aspects of Intellectual Property 
Rights, bilateral free trade agreements, and global standards 
for recognized intellectual property rights. But these laws are 
only as useful as their enforcement.
    Many of the world's worst offenders--who counterfeit and 
traffic millions of illegally copied CDs, videos, and 
software--operate undetected and undeterred. In countries like 
China and Russia, where property law is still in an early stage 
of development, corruption is also a tremendous obstacle.
    Elsewhere, enforcement efforts suffer from a lack of 
training for investigators and prosecutors, competing 
priorities for law enforcement resources, or an inability to 
catch criminals because technology makes it so easy for them to 
hide.
    The U.S. Government has had some success in using trade 
sanctions or even the threat of trade sanctions to pressure 
countries to crack down on IP theft. U.S. law enforcement has 
also been able to take advantage of the tremendous amount of 
investigative work originating from the IP industry itself. The 
Motion Picture Producers Association now has anti-piracy 
programs in over 60 countries and is an active participant in 
inspections, raids, and seizures.
    Unfortunately, as the findings of the GAO report that 
prompted this hearing indicate, overseas enforcement efforts 
continue to suffer because of limitations on our own resources 
and lack of coordination between agencies. Interagency councils 
like the National Intellectual Property Law Enforcement 
Coordination Council and the National IPR Coordination Center, 
which were put in place at the end of the Clinton 
administration, have not been well organized or used to their 
full potential. Offices at the USTR and the State Department 
that handle IPR issues may not have a high enough profile to 
give this issue the constant level of attention it needs.
    I look forward to the testimony of our panelists today to 
help us explore what is necessary for the United States to 
develop a comprehensive and effective strategy to combat piracy 
and advance international intellectual property protection.
    Thank you, Mr. Chairman.
    [The prepared statement of Hon. Henry A. Waxman follows:]

    [GRAPHIC] [TIFF OMITTED] T6748.006
    
    [GRAPHIC] [TIFF OMITTED] T6748.007
    
    [GRAPHIC] [TIFF OMITTED] T6748.008
    
    Chairman Tom Davis. Thank you very much.
    Mrs. Blackburn, you have been very active on this issue. 
Any opening statement? All right. If not, we will proceed to 
our first witness. We have the Honorable Rob Simmons from the 
Second District of Connecticut.
    Rob, welcome. It is good to have you here today. Please 
proceed.

  STATEMENT OF HON. ROB SIMMONS, A REPRESENTATIVE IN CONGRESS 
                 FROM THE STATE OF CONNECTICUT

    Mr. Simmons. Thank you, Mr. Chairman. I thank the ranking 
member and the members of the committee for convening today to 
discuss this critically important issue. I have a prepared 
statement that I would request be placed into the record as 
prepared, and I would like to summarize my remarks, Mr. 
Chairman.
    Chairman Tom Davis. Without objection.
    Mr. Simmons. We hear a lot about counterfeiting and piracy 
in the context of very large corporations, in the context of 
Hollywood and other well-known institutions, but the problem I 
am going to present to you today is that counterfeiting and 
piracy is hitting at the heart of small business. And whereas 
you may not hear a lot of publicity about it, it is having a 
crippling effect on the survival of small business and small 
manufacturing in America today, and it is the kind of thing 
that, quite frankly, angers me.
    Earlier this year I met with David Blackburn, who lives in 
my hometown and who runs a small manufacturing company called 
Faria, which, for over 40 years, has produced gauges, initially 
for the automotive industry, more recently for the maritime 
industry. And, in fact, as this photo shows, they actually make 
gauges for Humvees and other types of military equipment.
    A few months ago Mr. Blackburn told me that his products 
were being counterfeited by China and sold to some of his 
customers overseas; and he has customers in 22 countries 
overseas. The counterfeit gauges that were being sold were 
virtually exact replicas of his gauges, and I would ask my 
staff person to take these up to the chairman and have him take 
a look and see if he can tell the difference between the two 
gauges. And don't be fooled by the lettering on one of them.
    The only area where we found that the counterfeit model was 
not exactly the same as the real thing was that the nuts did 
not go easily onto the bolts. But they even had an employee 
inspection sticker that was exactly the same as the employee 
inspection stickers used by the company. There is no question 
in my mind that the people that produced these counterfeit 
gauges were doing it knowingly and willingly, and this is a 
criminal act. These are criminals that are doing this.
    Furthermore, when an overseas supplier discovered that 
these counterfeit gauges were flooding the market, the overseas 
supplier indicated to Mr. Blackburn that he would try to obtain 
one of the gauges, and then the person that sold the gauges to 
him threatened him and his family with violence if they 
``created any problems'' and tried to stop the racket.
    This is an outrageous situation that Mr. Blackburn and the 
Faria company have found themselves in.
    After I learned of this problem, I scheduled a visit to the 
factory and was briefed by officials of Faria that they 
estimate they are losing about $2 million annually because of 
these counterfeit gauges that are flooding the markets around 
the world. And beyond the loss of sales, Faria has a lifetime 
guarantee for its gauges, because it is a quality name in gauge 
production. They are getting the phony gauges back, which are 
defective, to them, and then they are having to replace it with 
a real gauge at no cost.
    When I returned back to Washington, I scheduled a meeting 
with the Department of Commerce, and I presented officials 
there in the Patent and Trademark Office, as well as the Office 
of Market Access and Compliance, with the counterfeit product, 
with the real product, and I asked them to initiate an 
investigation into the matter, which they did; and they 
actually sent an official over to China to look into the 
matter.
    Nonetheless, the problem remains. Counterfeit gauges from 
Faria are flooding the market around the world. These gauges do 
not meet our high standards. Many of them are defective. They 
don't even reflect the information that the gauge is supposed 
to reflect. So the personal safety of the people using these 
gauges, perhaps our troops in Iraq or Afghanistan driving their 
Humvees, perhaps somebody driving an inboard or an outboard 
motorboat, where these gauges are telling them important 
information, perhaps these individuals are at risk because the 
information in the phony gauges is not coming across to the 
operator of the equipment. And then what happens if there is an 
accident, if somebody is hurt or somebody is killed? Who gets 
sued? Faria, of course. Faria.
    Counterfeiting is a global challenge. We all know that. It 
is costing businesses' profits, worker's jobs, government's 
revenue; it is costing consumers and customers their safety. I 
am told that up to $200 to $250 billion annually is lost by 
U.S. companies because of counterfeiting. But, Mr. Chairman, 
the message that I am trying to convey to you today is this 
isn't just hitting the big companies. This isn't just hitting 
the name recording stars. This is hitting small and medium-
sized manufacturing outfits all across this country.
    Now, I love the Chinese people, I love their culture, I 
love their food. I lived in China for 3 years. I just came back 
from a trip to China a year or so ago. I spent 2 years of my 
life studying Chinese. But it is clear that over 50 percent of 
the counterfeits identified in America today are coming from 
China, and this has to stop. This is not competing, this is 
cheating. And cheating has no place in world trade, especially 
when it comes to the safety of our customers, especially when 
it comes to the security of the jobs of our workers. There is 
no place for cheating.
    Mr. Chairman, again I thank you for having this important 
hearing, and I would be happy to answer any questions you may 
have.
    [The prepared statement of Hon. Rob Simmons follows:]

    [GRAPHIC] [TIFF OMITTED] T6748.009
    
    [GRAPHIC] [TIFF OMITTED] T6748.010
    
    Chairman Tom Davis. Representative Simmons, thank you very 
much. You make the case factually and passionately. Of course, 
these gauges also hurt Faria's reputation, don't they, in the 
marketplace?
    Mr. Simmons. Absolutely. If you are a boat builder, if you 
are a manufacturer that relies on panels of gauges for your 
product, and you discover that the ``Faria gauge'' that you 
bought is defective, that it isn't working, that you are going 
to have to send it in for a replacement, not knowing it is a 
counterfeit, after a while you are going to say, well, you 
know, there is something wrong with the quality of Faria; they 
are not as good as they used to be, they are cutting corners, 
the bolts don't fit; we are going to go to a Swiss 
manufacturer, we are going to go to a German manufacturer, we 
are going to go to somebody else, we are going to go another 
name brand.
    And what happens is this company, that was started in my 
district over 40 years ago, where the founder of the company 
had a bunch of patents on gauges, where 300 people continue to 
make the best gauges in the world, the name brand gauges, they 
are being undercut, and eventually put out of business, by 
counterfeits and cheating.
    Chairman Tom Davis. Does the Chinese Government know the 
source of these phony gauges?
    Mr. Simmons. The investigation continues. Originally, the 
company that was suspected of being the source was taken off a 
Web page that was managed by the government. Now there is some 
discussion as to whether the Faria Corp. should have had an 
agent in China to somehow establish a legal relationship with 
the Chinese Government.
    Let me ask you this, Mr. Chairman. How many of our small 
companies must place an agent in China to prevent China from 
cheating and counterfeiting? I don't think that is a fair thing 
to say. So the bottom line is----
    Chairman Tom Davis. It doesn't work, either.
    Mr. Simmons. It doesn't work. The bottom line is that the 
investigation continues. But I consider this matter so 
important and so significant that I took those gauges right 
down to the Commerce Department myself and presented it to them 
and asked them for an investigation. To their credit, they have 
been to China on the issue; they have been up into my district 
on the issue. But it has not been resolved to my satisfaction 
at this point in time.
    Chairman Tom Davis. Has the Chinese Government done 
anything about this that you are aware of?
    Mr. Simmons. Not to my knowledge.
    Chairman Tom Davis. Have they given you a letter at least?
    Mr. Simmons. Not to me, no.
    Chairman Tom Davis. We have, right down here in the front 
left, some items that I am not going to single out any 
particular country, but--well, I will, a couple. If you want a 
pair of Nike shoes, we have some from $3 that you can buy in 
Brazil, complete with the label. You can get a math CD program 
from Russia for $3.33, a Lord of the Rings for $6.67. I was 
tempted to take that one, but it is in Russian; it wouldn't do 
me any good. All kinds of shampoos and detergent for cut rate 
costs. Christina Aguillera tape for $1.50; Britney Spears for 
$1.50, which, in my opinion, is overpriced even at that. Don't 
tell my teenage daughter.
    But the fact is this is going on in some of the countries; 
it is not just China, unfortunately, it is Russia, it is the 
Ukraine, it is Brazil, it is all over the world.
    We appreciate your bringing this to our attention, and I am 
sorry that the USTR and some of our enforcement groups are not 
here today to react to this before this committee, but we will 
get them back here and we will try to help you as you stay on 
your case. We appreciate your being here.
    Mr. Simmons. Thank you, Mr. Chairman, and, yes, it is 
unfortunate because these people are charged with this 
responsibility, and the confidence that we have, or the lack of 
confidence, goes to the issue of how aggressively they are 
going to pursue these things.
    Again, one can say that this is only a small company in a 
little State up in New England, 300 workers; it doesn't really 
matter in the big scheme of things. But I guarantee you there 
are hundreds, if not thousands, of the same small companies 
that are falling victim to this cheating and to this 
counterfeiting, and they slowly go off the map one at a time; a 
little one here, a little one there, a little one over there, 
and nobody is counting. Nobody is counting. But if you add it 
all up, it is a huge hit to our country and to our working men 
and women, and we need to fight back.
    Chairman Tom Davis. Thank you very much.
    Mrs. Blackburn, any questions?
    Mrs. Blackburn. Thank you, Mr. Chairman.
    Representative Simmons, I want to thank you for bringing 
the issue forward and working so closely with your constituent. 
Where I come from in Tennessee, with the music industry, we see 
a lot of this. Our tool and dye manufacturers are also 
beginning to have a problem with this, as they are suppliers 
for the auto industry for many things that are manufactured 
there.
    I do have just one quick question I would like for you to 
address because, as the chairman mentioned, we were in China 
recently, or through Southeast Asia, working on this and had a 
couple of conversations with some folks as we looked at this 
issue and thought, well, maybe there is a role for some NGO's 
in this process, as far as helping with education and with kind 
of rooting out the causes of this. You know, you mentioned in 
your testimony that whomever makes these is knowingly, 
willingly doing this and putting Faria and their employees at 
great risk, as well as the consumers of the Faria gauge.
    Now, has Faria been able, at their own expense, which, of 
course, all of this, for small business, this always lands on 
their back; they have to pay for finding out who is doing wrong 
to them. Have they been able to go back and trace what a link 
may have been or why a counterfeiter would have picked up? Did 
they have association at one point in time with someone in 
Southeast Asia, or was this just like a bad thing that happened 
to come their way?
    Mr. Simmons. First of all, I think you have put your finger 
right on the heart of the subject, which is this is not 
happening because it is an accident; this is happening on 
purpose. Faria is a name brand, just like Britney Spears, like 
it or not, it is a name brand. So they are imitating name 
brands. Point two: they are a small business. The only reason 
they found out about the gauges that are in that magazine is 
because a customer in a foreign country was offered a batch of 
``Faria gauges'' at a discount. They were counterfeit. And that 
customer had the courage to report that back to the 
headquarters in Connecticut and was subsequently threatened by 
the Chinese vendor with physical violence if they ratted out 
the racket.
    So, you see, it was a series of fortuitous circumstances 
that actually brought this to the attention. They knew they 
were losing market share in these countries; they weren't quite 
sure how. But how does a company of 300 employees, locally 
based in a small State, how do they have the resources to track 
down what really is an international conspiracy of criminal 
activities that is condoned with a wink and a nod by a major 
nation? How can they do that? They can't.
    Mrs. Blackburn. So Faria still does not know the location 
of the plant or the individual funding, putting the money into 
the plant making the counterfeit goods.
    Mr. Simmons. Absolutely correct. And if there is to be any 
followup, my feeling is if you can find that company and those 
people, you not only shut them down, but you confiscate the 
equipment.
    I lived in Taiwan for 3 years a number of years ago. The 
issue of counterfeits and fakes is well known; it has plagued 
American industry for 30, 40 years. We are all familiar with 
that. These things don't happen by accident. You don't have a 
bunch of free enterprising entrepreneurs somewhere over there 
just doing this on their own. It doesn't happen by accident. 
The government condones it with a wink and a nod.
    If you expose a case, as we are trying to do here, there 
will be many apologies: very sorry; big mistake; we didn't know 
about it. That is just a bunch of nonsense. Over 66 percent of 
the counterfeits coming into America today are coming in from 
China. That is not a mistake. And it is incumbent upon us, the 
Congress, the executive branch of the United States of America, 
to address and confront the problem, because these little guys 
just can't do it on their own; they just don't have the 
resources.
    And I give Mr. Blackburn and his employees high marks for 
having the courage to bring this to our attention and publicize 
it because, again, one of his customers in a foreign country 
was physically threatened with violence if they disclosed the 
situation.
    Chairman Tom Davis. Ms. Sanchez, do you have any questions?
    Ms. Sanchez. Yes, thank you.
    I read with interest about the new developments and how 
technologically potentially can help hinder piracy, but going 
back to the issue of piracy, who would you say are the United 
States' best allies in trying to combat international piracy?
    Mr. Simmons. I think our best allies in that are other 
countries like us who invest a lot of money into research and 
development, who bring new products online at great cost, who 
have an educated and a creative work force who have free 
enterprise systems where creativity is rewarded and we try to 
protect it through patents and other sorts of protections for 
intellectual property.
    I think it is the western democracies and what I call the 
free world. We must do this together. We must work to enforce 
this together. And I think that we have to work on a global 
basis. And I also think, and I have not seen to my 
satisfaction, that we have to punish those nations who 
willfully engage in these activities with a wink and a nod. We 
must have a system in place to punish them for that; 
punishment, not just saying, you know, you shouldn't do that, 
please don't do it again.
    Ms. Sanchez. I read with interest about international trade 
agreements, and some of the procedural protections that they 
try to build in to help encourage countries that are interested 
in doing trade with the United States, serious enforcement of 
piracy and intellectual property rights. And I missed part of 
your testimony, so I apologize, but how would you say China is 
doing in their serious investigation and prosecution of piracy?
    Mr. Simmons. I have no evidence of that. And in my 
discussions with the Commerce Department, I have asked to see 
how we are doing in enforcement. You know, you can pass all the 
laws in the world, but if there is no enforcement, it doesn't 
work. You can sign all the treaties in the world and have a 
nice glass of champagne, that we have just signed this 
wonderful treaty; isn't it great; it is going to be fair trade, 
free trade, whatever it is.
    But if there is no enforcement of labor regulations, if 
there is no enforcement of environmental codes, if there is no 
enforcement against piracy and counterfeiting, if there is no 
enforcement and if there is no punishment for doing that, it is 
a worthless piece of paper.
    Ms. Sanchez. So would it be your testimony that you don't 
think that trade agreements, in and of themselves, can be a 
type of leverage used to help thwart piracy that is going on 
internationally?
    Mr. Simmons. I think they can, but they must be enforced. 
My concerns about counterfeiting and pirating go back several 
years, in fact, but I never could find a concrete example of it 
in my own experience, in my own district. So all I could do was 
talk about it.
    But when this issue came up of counterfeit gauges 
pressuring a company in my district, my neighbors, a man who 
lives in my home town, who runs this company, that they are at 
risk, over the long term, of being put out of business by 
counterfeiting, that is why I took these gauges down to the 
Commerce Department. That is why I put them on the table. I 
said, here is an example. Show me what you are going to do 
about it.
    You know, I am from Connecticut, but let us say I am from 
Missouri, the Show Me State. Show me. Show me what you are 
going to do about it. This is a little case; not complicated, 
not big, it is a little case. Show me what you can do with a 
little case. And, quite frankly, if you can't be successful 
with a little case, you are not going to be successful with a 
big case. And that tells you the nature of the problem.
    Ms. Sanchez. And I would venture to guess, and correct me 
if I am wrong, that it would be more difficult for U.S. 
agencies to enforce these laws than for foreign governments to 
enforce them in their own home jurisdictions.
    Mr. Simmons. If the home governments aren't willing to 
cooperate with enforcement, it is simply not going to work. I 
think we know that. And that is why I say governments may 
condone the activity with a wink and a nod, but when 
confronted, maybe they will accommodate you.
    But that is not good enough; they have to be 100 percent 
with the program. And the time will come. My guess is the time 
will come when China and other countries that are engaged in 
counterfeiting may begin to create things on their own, and 
then suddenly they will have an interest in protecting those 
creations. But they ain't there yet.
    Ms. Sanchez. Thank you. I have no more questions.
    Chairman Tom Davis. Thank you very much, Rob. We appreciate 
your calling this to our attention, and we will continue to 
work with you on this. Good luck.
    Mr. Simmons. Thank you, Mr. Chairman, and thank you and the 
members of your committee for addressing this important issue.
    Chairman Tom Davis. Thank you.
    We have our second panel up. We have GAO up now.
    We will take a 1-minute break.
    [Recess.]
    Chairman Tom Davis. We will now call Loren Yager, who is 
the Director of International Affairs and Trade at the 
Government Accountability Office.
    Dr. Yager, it is our policy we swear you in. If you would 
just raise your right hand.
    [Witness sworn.]
    Chairman Tom Davis. Thank you very much for being here. You 
have done a good study on this thing that I had occasion to 
read last night. The entire report is in the record, so if you 
could proceed to sum it up, then we can move right to 
questions. Thank you very much for your work on this.

   STATEMENT OF LOREN YAGER, PH.D., DIRECTOR, INTERNATIONAL 
    AFFAIRS AND TRADE, U.S. GOVERNMENT ACCOUNTABILITY OFFICE

    Mr. Yager. Thank you, Mr. Chairman, members of the 
committee. Thank you for the opportunity to discuss our work on 
U.S. efforts to protect U.S. intellectual property rights 
overseas. The statement that I will give today is drawn from 
the GAO report that was just released by the committee today, 
and copies are available on the table by the door. I will 
summarize a few of the key points in my oral statement, and I 
also ask that the written statement be entered into the record.
    To understand more fully how U.S. agencies have performed 
in protecting IP abroad, you asked us to identify and review 
U.S. agency activities. This testimony addresses three things: 
the specific efforts of U.S. agencies to improve IP protection 
in other nations, the means that they use to coordinate these 
efforts abroad, and, finally, the challenges facing enforcement 
efforts abroad.
    To address these issues, we met with key government 
officials from agencies, including USTR, Commerce, Justice, 
FBI, State Department, and Homeland Security, among others. In 
addition, we met with officials from key intellectual property 
industry groups, including those represented here today at the 
hearing.
    We also conducted research in four countries where serious 
problems regarding the protection of intellectual property have 
been reported: Brazil, China, Russia, and the Ukraine. And as 
you mentioned, Mr. Chairman, we brought a few items back which 
demonstrate some of the problems associated with piracy.
    As to the first types of efforts, U.S. agencies' efforts to 
improve protection of intellectual property in foreign nations 
fall into three categories: policy initiatives, training and 
assistance activities, and law enforcement actions. USTR leads 
policy initiatives with an annual assessment known as the 
Special 301 review, which results in an annual report detailing 
global IP challenges and identifying countries with the most 
significant problems. This report involves input from many U.S. 
agencies and industry.
    In addition to conducting policy initiatives, most agencies 
involved in IP issues also engage in training and assistance. 
Further, although counterterrorism is the overriding priority 
of U.S. law enforcement agencies, agencies such as the 
Departments of Justice and Homeland Security conduct law 
enforcement activities regarding IPR. I understand that the 
committee has requested work from GAO on the subject of 
seizures of counterfeit cigarettes and other illegal goods, so 
you are aware of agency efforts in this area.
    As to the second item on coordination mechanisms, let me 
talk about two mechanisms that have very different results. For 
example, on the policy side, formal interagency meetings are 
conducted each year as part of the U.S. Government's annual 
Special 301 review.
    Mr. Chairman, I am sorry that the agency witnesses are not 
available for this hearing, as we can report quite positive 
findings on the Special 301 process. Both the Government and 
industry sources that we met with view this effort as effective 
and thorough. This effort focuses the attention of a variety of 
private sector, U.S. agency, and foreign officials on this 
subject each year, and this attention does lead to changes and 
improvements overseas.
    Conversely, the National Intellectual Property Law 
Enforcement Coordination Council [NIPLECC], has struggled to 
find a clear mission. NIPLECC was established to coordinate 
domestic and international IP law enforcement among U.S. 
Federal and foreign entities, but it has undertaken few 
activities and is perceived by officials from both the private 
sector and in some U.S. agencies as having little impact. This 
mechanism needs the attention of the Congress, as it is not 
working. To that end, we have a matter for congressional 
consideration on the NIPLECC in our report.
    On the final point, Mr. Chairman, both you and the ranking 
member stated that enforcement is now the key issue. We 
certainly agree with that. As we detail in the report, economic 
factors, as well as the involvement of organized crime, pose 
significant challenges to United States and foreign 
governments' enforcement efforts, even in countries where the 
political will exists for protecting intellectual property.
    In addition, economic factors, including low barriers to 
producing counterfeit or pirated goods, potentially high 
profits for producers of such goods, and large price 
differentials between legitimate and counterfeit products for 
consumers, create huge incentives for piracy. In some 
industries the problem of IP theft is getting worse despite 
these U.S. Government efforts.
    Mr. Chairman, this concludes my testimony. I would be happy 
to answer any questions you or other members of the committee 
may have. I also have some specific observations and insights 
from our field work in those four countries that I would be 
able to summarize for the committee, if you are interested.
    Chairman Tom Davis. Well, why don't you take a second and 
summarize that, because I think that is important for you to do 
that?
    Mr. Yager. OK. Some of these relate directly to the 
examples that Representative Simmons gave earlier, and also 
some of the things in your statement.
    One thing that I could start out by mentioning is the wide 
range of quality in pirated and counterfeit goods that is 
immediately evident from the various items that we have on 
display here. It reflects the fact that many of these goods 
copies might either be produced in a large, sophisticated 
factory or they might be produced in someone's apartment on a 
DVD or a CD burner. You can see some of that range of quality 
on display with some of the CDs and videos in very rudimentary 
packaging, while others could easily be mistaken for an 
original.
    This presents significant problems for enforcement. Let me 
mention too. Authorities cannot focus on one particular site or 
source of pirated goods, since they can be produced cheaply in 
a variety of locations. As a result, shutting off the supply is 
enormously difficult, particularly for digital products, where 
reasonable copies can be produced on very inexpensive 
equipment.
    Another problem is that in some cases authorities may have 
difficulty in distinguishing the real goods from the fake 
goods, making the process much more time-consuming and 
requiring significant expertise. For example, I visited with 
Hong Kong Customs authorities when they were inspecting goods 
coming across the border from China, and they indicated that 
the high quality of some goods makes it impossible for them to 
determine the authenticity of those goods. In fact, they 
indicated that even the product representatives of the firms 
that were shipping those goods often had to consult their order 
and shipping information in order to determine whether the 
goods coming across the border were legitimate or whether they 
were pirated goods.
    A second issue is the enormous volume of pirated and 
counterfeit goods. When countries do undertake a vigorous 
effort to seize and prosecute these crimes, they quickly run 
into problems associated with storage and management of all the 
items. Single raids of small-time shops or markets can yield 
hundreds of CDs and DVDs, handbags, cigarettes, or other goods; 
and raids on factories or distribution centers can create many 
times that much merchandise.
    In a number of the police stations and other locations that 
we visited, this rapidly overwhelms their storage capacity and, 
depending upon the evidentiary requirements of their legal 
systems, it may be necessary for eventual prosecution. Given 
the slow pace of many of the judicial systems in many nations, 
you can see how this creates some fairly daunting practical 
problems.
    The third and final issue I want to raise is that not all 
countries are equal in their self interest to actively combat 
intellectual property crimes. While most governments would see 
this as one more way to reduce opportunities for corruption and 
crime, they might differ greatly on what priority to assign to 
these activities, and to what extent the interest groups in 
these countries would support this effort.
    For example, in a country where the domestic industry is 
also losing sales and royalties, they can be effective in 
campaigns to educate the public on the cost of privacy. Brazil 
is a very good example of this, as a large share of their 
domestic music sales are from Brazilian artists, and they have 
been outspoken in their own anti-piracy campaign. Brazilian 
musicians are obviously held in very high esteem in that 
country, and we understand that this public relations campaign 
with those artists has been effective.
    On the other hand, in nations where there is no confluence 
of interest between foreign and domestic firms, the situation 
is much different. If the only earnings are from the export of 
pirated items, it is much more difficult to convince the 
nations that it is in their interest to make IP enforcement a 
priority and tools such as the Special 301 must be used.
    Mr. Chairman, those are the insights we had from our field 
work. I would be happy to answer any further questions.
    [The prepared statement of Mr. Yager follows:]

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    Chairman Tom Davis. Thank you. Let me ask you. The internal 
pressures from these countries as they start to develop more 
and gain more IP within their countries, they are going to 
really be conflicted, the governments, at that point, aren't 
they?
    Mr. Yager. That is right. I think one of the things that we 
recognized much more when we went abroad is that there are 
often situations where the United States can gain the support 
of certain groups within those countries and help them make 
their own points and be effective within their internal 
systems. The United States obviously needs those kinds of 
domestic allies in those foreign nations in order to be 
effective. The Brazilian example of music is one, but also with 
many of the manufactured goods such as cigarettes, their 
domestic manufacturers are losing because those goods are being 
produced outside of the country and brought in, and obviously 
the jobs and the wages and all the other benefits that go with 
that production is lost.
    Chairman Tom Davis. My impression is that the economics 
over the long-term takes care of this as these countries get to 
a higher level of industrialization and into the IP markets, 
but we can hasten that with good protection, writing good 
rules, and pressures on the government. And in the meantime, of 
course, innocent companies like this one in Connecticut that 
was cited by Representative Simmons, go by the wayside, and it 
is not fair. So I think we need to take a look at the long-
term, but in the short-term we need to just keep the pressure 
on.
    Your report praises the Special 301 review process. Are 
there any interagency lessons that can be learned from the 
success of the Special 301 process?
    Mr. Yager. Well, that is really a good question. I think 
that one of the things that we observed that is good about the 
Special 301 process is, one, it is credible. They have used the 
strongest form of protection on a number of occasions, and they 
have found countries like the Ukraine and, earlier, Paraguay 
and China, at the highest level and put them on the list, which 
put the United States in a position of being able to use 
sanctions. So the process has credibility because they have 
shown that they are willing to use it.
    A second thing about it is that it really does get the 
attention of U.S. agency officials, foreign officials, and the 
industry one time a year to try to revisit this issue. So it 
brings together the right people; they take a look at the 
evidence, they revisit the kinds of issues and the changes from 
the last year. So that is another characteristic of this 
particular effort that we think makes it successful.
    And, finally, the right people are involved. You have all 
the major trade agencies, as well as some of the domestic 
technology agencies, the patent office and things like that. 
These groups are all involved.
    So you have the right people, the mechanism seems to be 
working, and I think even the threat of sanctions with the 
Special 301 seems to be having a good effect in capturing 
people's attention both in the United States, as well as 
abroad, and getting some effective changes.
    Chairman Tom Davis. I just got a notice off the wires. This 
is an Associated Press story that says, ``Bootleg wares account 
for between 50 percent to 90 percent of the products on Russian 
shelves, depending on the category of goods,'' Leonid Vetenoff, 
the Deputy Chief of the Interior Ministry's Public Order 
Department told TAS, ``billions, tens of billions of dollars of 
fake goods are in circulation.'' He says, ``Russia has taken 
some measures,'' he said, ``but piracy is still rife.'' I am 
going to ask unanimous consent to put this story in the record. 
But he notes that ``While Russia has its own booming 
counterfeit industry, fakes are mostly imported from Southeast 
Asia, Bulgaria, and the Ukraine, with some smuggled in from 
Poland.''
    So, as you note, everybody is having problems, without some 
kind of world order on this.
    [The information referred to follows:]

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    Mr. Yager. That is right.
    Chairman Tom Davis. Your report offered criticism of the 
NIPLECC and says that the group lacks impact. What can we do to 
make it work? As we noted, the Senate has put money into the 
budget to strengthen it, but if you don't change the 
organization, sometimes money alone doesn't solve the problem. 
What can we do to make this work, given that the Special 301 
process seems to work well in bringing agencies together?
    Mr. Yager. Well, I think your first question also had to do 
with what are the characteristics that make the Special 301 so 
successful, and think about how those could be applied to the 
NIPLECC, because obviously it has not been successful. So a 
couple of things we raised in our report as potential areas to 
focus on.
    One is a change in membership, because as we note in the 
report, despite the FBI's importance in law enforcement 
efforts, both domestically as well as abroad, the FBI is not 
included in NIPLECC. So that is obviously an oversight and that 
needs to be considered.
    A second thing is that at this point the NIPLECC has no 
authority or staffing, so one of the issues that you mention is 
the fact that now, at least in the Senate bill, there is a 
chance to give them some funding to have an organization. That 
certainly could be a way to provide them with additional 
impetus and get more done.
    Third, there was an issue about their mission. It doesn't 
seem clear from a lot of the materials that they have put out, 
both their annual reports as well as their call for public 
comment on their mission, that they have really established 
what it is that they should be doing within this process. As we 
mentioned, the USTR-led Special 301 process gets a lot of the 
key players involved to talk about the policy issues, but if 
this is supposed to be an operational group rather than a 
policy group, then I think that mission has to be clarified.
    I think the final thing that I would mention is that we 
have to consider the nature of those agencies and any cultural 
or legal constraints that prevent them from effectively sharing 
information within a forum like the NIPLECC. And we have some 
recommendations that we put in prior reports, particularly to 
the FBI, because we found in other reports that the FBI does 
not necessarily collect and analyze and share information the 
way that you would like them to do in a group like the NIPLECC.
    So this is quite similar to an issue that we brought up in 
a report that was published 1 year ago, where we have made a 
recommendation to the FBI that they do a better job of 
systematically analyzing the information and making it 
available to others in order to try to prevent this kind of 
activity.
    Chairman Tom Davis. And, last, what role does litigation 
play in enforcing intellectual property rights? I am talking 
about suing abroad, not just suing here. Could industry use 
civil litigation abroad as an effective tool to fight the 
intellectual property piracy, or are the courts just as 
corruptible and out of touch on this as the governments seem to 
be enforcing it sometimes?
    Mr. Yager. I think certainly many of the representatives of 
the private sector would have some direct experience on that, 
but my comment on that is that it would depend greatly on the 
country that you are dealing with, as to whether the legal 
protections are there and whether using the judicial system 
would be the most effective way to go about trying to curb 
these kinds of efforts. Obviously, that could be a very costly 
route, it could be a very time-consuming route, so before those 
kinds of efforts are made and those kinds of expenditures are 
made, you would have to see whether that in fact is the best 
way to combat that crime.
    Chairman Tom Davis. Thank you very much.
    Ms. Norton, any questions?
    Ms. Norton. Thank you very much, Mr. Chairman.
    Thank you, Dr. Yager, for your testimony. I must say that I 
despair of our ability to get a hold of this kind of piracy 
either through law enforcement efforts or diplomatic efforts. 
There does seem to be open season on the intellectual property 
of those who have invested so much and taken the leadership in 
our own country. The extent to which technology seems to make 
giant leaps forward, while we do what we can to catch up with 
it is at the major reason that I wonder at our ability to get a 
hold of this kind of piracy.
    In light of that, I guess I have two questions. One relates 
to your last comment about whether law enforcement efforts 
usually, of course, are seen not as systemic efforts in the 
first place, are worthwhile, because the GAO has called for the 
increased use of FBI agents trained in IPR in embassies abroad, 
and I wonder whether or not we are looking at a deterrent 
effect if there was law enforcement. And I think your notion of 
whether or not this is the best place to put whatever resources 
we have is an important question, so I would like to know why 
train the FBI agents. How could they be used in a way to 
leverage or galvanize that use?
    But then I would like to ask you, in light of how 
technology moves ahead far faster than we can catch up to what 
it allows in piracy, I turn to what a university here in this 
city has done, I think a number of universities have begun to 
do across the country, and to realize that fighting to catch up 
with the pirates will leave you not a step behind, but miles 
behind.
    So, I don't know, G.W. makes available some of the CDs to 
youngsters. The industry has tried prosecuting some, high-
profile prosecutions, so people know you are home-free just 
because you are a student. But then some of the universities 
are saying let us try an approach that gives some access to try 
to ward off some of the piracy which we think is going to go on 
in any case.
    Now, I can't come out of my head with analogies in the 
intellectual area. I guess it is the basic concept I am asking 
about. So first I want to know how FBI agents, since you 
recommend their training and use, are likely to be used; and, 
second, whether there is any analogy that you can think of to 
what some of the universities have been doing, because they 
have just been given up, essentially, on high-profile 
prosecutions, warnings, you are going to be expelled; no, no, 
no, that is not ethical. All of that seems not to have worked 
enough, so they have found this way. I don't know if it is 
working, but I would like to know your thoughts on that and 
what potential it may or may not have in the international 
sphere.
    Mr. Yager. Let me answer your first question by saying that 
one of the things that we have noticed is that there is the 
potential for not just criminals and other profitmaking 
entities to use counterfeiting and other types of alternative 
financing mechanisms, but there is also the possibility that 
terrorists might be using these same kinds of ways to either 
earn assets, for example, outside of the United States and then 
shift them to other parts of the world.
    So one of the things that we did in a report that came out 
about a year ago, and we are actually further pursuing this 
particular issue, is the extent to which terrorists might be 
using these kinds of methods to fund their own activities. And 
for that reason we think that some of the training and some of 
the activities that are the highest priority for these law 
enforcement agencies, such as Homeland Security and the FBI, 
are already putting them in a position where they may have 
information and they may be collecting information which could 
be very useful to this particular effort.
    And as I mentioned before, we have a report that came out, 
and one of the things that we recommended to the Federal Bureau 
of Investigation was that they do a better job of analysis. In 
particular, we said, they should establish a basis for an 
informed strategy to focus resources on the most significant 
mechanisms that terrorists use to finance their activities. 
Certainly, counterfeit goods are one potential way that they 
can earn money for those types of activities.
    So I think that some of the agencies are in fact pursuing 
very similar kinds of issues. They may be doing it for 
terrorist reasons, but while they are doing that they could be 
collecting information which could be quite useful to other 
U.S. agencies or, in some cases, to foreign entities to pursue. 
So we may actually have the information in the agencies, but at 
this point it is not being effectively analyzed and it has not 
been distributed or communicated with other groups. So we think 
there are some opportunities there. We are still working with 
the FBI as to whether they will fully implement this particular 
recommendation, but I think it goes to some of the points that 
you raised.
    With regard to the changing economics and the changing 
technology and the effect that this might have on the 
strategies that are either led by the U.S. Government or also 
by the industry associations, it is certainly clear that the 
technology is creating new challenges, particularly in some of 
the digital areas. And I am sure that some of the industry 
representatives can talk further about this, but our view was 
that the main problem at this point in the four countries that 
we visited was still the production of manufactured goods such 
as CDs and DVDs, which certainly has been made easier through 
digitalization of all these products.
    They haven't even gotten to the point where downloading is 
a problem because most of the people in those countries do not 
have access to high speed equipment that would make that kind 
of an option available. But that certainly would not be far off 
for some of these countries, and there is just no question that 
the industry and the government have to adapt their enforcement 
priorities to try to adjust and to counter the new types of 
techniques that now are available to them, and other techniques 
that will be available in the near future.
    Chairman Tom Davis. Thank you.
    The gentlelady's time has expired.
    Mrs. Blackburn.
    Mrs. Blackburn. Thank you, Mr. Chairman. I do have just a 
couple of little questions I wanted to get to.
    In your report, page 41, the footnote, you reference the 
Trade Secrets Act as a potential hindrance to IPR enforcement, 
and I would like for you just to touch on that and talk about 
why you would see that as a barrier. At the same time, let us 
go on and talk about what other components of the legal process 
could be either a help or a hindrance.
    Mr. Yager. OK, with regard to the Trade Secrets Act, there 
really are two issues that could prevent this kind of complete 
sharing of information between not just U.S. agencies, but U.S. 
agencies and foreign counterparts, and a couple of those have 
to do either with the Trade Secrets Act or also the fact that 
many of these investigations are ongoing.
    And there may actually be quite a bit of activity that is 
related in one way or another to IP allegations or problems, 
but those are not in the public domain because those could be 
involved with ongoing investigations, and obviously much of 
that information cannot be released, particularly in a public 
forum. So there could be quite a bit of activity and some of 
that legitimately cannot be shared during the investigations.
    But we think that there are additional opportunities to 
provide that information, even within these law enforcement 
agencies. They could be looking at their own information 
internally to look for patterns to see whether there are 
opportunities to see that all of a sudden you are seeing more 
activity, for example, in a particular type of counterfeiting, 
or that kind of money all of a sudden seems to be shifting its 
locus of production from one country to another.
    Because one of the things that we noticed in doing the work 
in the Ukraine and observing the effects of the pressure on the 
Ukraine to reduce its copyrighting and pirating problems, that 
many of those factories appeared to have moved to Russia as a 
result and are now operating out of Russia. So having agencies 
that have a bigger picture view of where this activity is is 
certainly important in trying to reduce their activity.
    Mrs. Blackburn. Let us go back to the example of Mr. 
Simmons' constituent, Mr. Blackburn, who I will say for the 
record is no relation to me at all, or to my husband. But 
finding the source, being able to pinpoint the specific factory 
in the specific province that is replicating your product, is 
there a barrier there that would prohibit them from being able 
to find that information in a timely manner and have an avenue 
of recourse?
    Mr. Yager. I think that would depend on a number of issues 
on the specific case. For example, if it is a large 
manufacturing outfit and if, for example, the products are 
fairly sophsticated products, then I think there would be a 
much greater chance to be able to go and trace and find that 
particular manufacturing outlet, because it is not easy to move 
those things around. So there might be opportunities, for 
example, in large-scale manufacturing, whether it is of gauges 
or even of cigarettes, where the scale of operation would be so 
large that you would have time to go back, find that factory 
and try to take action against it.
    Unfortunately, that is not the only type of activity that 
we are talking about here. Some are just a matter of people 
having some DVD or CD burners in an apartment and doing this on 
a very small scale. And in situations like that, going to the 
source and trying to shut that down would be enormously 
difficult.
    Mrs. Blackburn. Well, I appreciate that, and I think the 
Golden Sciences Technologies case out of Hong Kong was 
something we were glad to see come to completion, and then of 
course the sentencing there.
    I want to just touch on one other thing. What are we not 
doing that we ought to be doing to be certain that agents can 
spot the counterfeit goods, because they are rampant and it is 
a matter of learning what you are looking for? And when the 
chairman and I were on the CODEL, which we have referenced, and 
I spent some time in Hong Kong and went to a market area, 
within 45 minutes someone from the embassy and I listed over 50 
items that I knew were knock-off, fraudulent, counterfeit 
items.
    Mr. Yager. There are some challenges in identifying some of 
these products. The better the fake, obviously the more 
expertise that you might need to try to identify it. In some 
cases you can walk up to the shop and look at the items and 
realize immediately that they are knock-offs, but that is 
obviously not true in all cases.
    We think that there are some opportunities to improve the 
training and technical assistance that U.S. agencies provide to 
their counterparts, including being able to spot those things 
and then how to pursue leads to find the actual producers and 
the suppliers. The United States has been actively pursuing 
those kinds of training and assistance activities but we did 
feel that there could be some improvements there.
    For example, it doesn't appear that they are checking back 
to see whether the people that have taken these training 
courses or benefited from U.S. assistance are actually using 
those systematically to improve their domestic jurisdictions. 
In addition, we feel that important agencies, such as USAID, 
are not working closely with the other agencies to ensure that 
they are hitting the most high-priority items. So we think that 
among their training and technical assistance activities there 
are some opportunities for making better use of those dollars.
    Chairman Tom Davis. OK. Thank you very much.
    Yes, ma'am, Ms. Watson.
    Ms. Watson. I want to thank you, Chairman Davis, for 
convening this particular panel.
    As Chair of the Congressional Entertainment Caucus and a 
member representing a number of entertainment studios in Los 
Angeles, the protection of our U.S. intellectual property 
rights abroad is extremely important to me and many of my 
constituents that are working in the industry. Indeed, the 
health and vitality of the entertainment sector is critical to 
the overall health of our economy, since it contributes an 
estimated $535.1 billion to the U.S. economy, and that happened 
in the year 2001; and it remains one of our Nation's biggest 
export sectors.
    Since I have been here, I have tried to champion greater 
protection of U.S. IP products, both domestically and abroad, 
and earlier this year I introduced H.R. 576, a bill urging the 
Chinese Government to take further and immediate steps to 
improve the IPR mechanism, especially in the enforcement of 
such rights, by changing and updating its criminal law and 
enforcement procedures. China, a country featured in the GAO 
report, has one of the worst records in the world on 
intellectual property rights violations. It is now subject to 
an out-of-cycle review by the USTR in the year 2005. And I am 
delighted that our chamber has recognized the importance of 
global IPR enforcement by passing my resolution on China in 
July, but we must do more.
    So the release of the GAO cannot be more timely. The 
existing mechanisms among the U.S. agencies to coordinate 
efforts by global IPR protection have been instrumental in 
advancing foreign laws and enhancing international obligations. 
Yet the losses from piracy and counterfeiting of U.S. IP 
products, from film, recorded music, published products and 
software, pharmaceuticals, electronic equipment, industrial 
products, research results, to auto parts and even cars 
themselves, continue to undermine American creativity and 
threaten our economy. IPR theft has reached epidemic levels in 
many countries around the world, and our Government must step 
up efforts to protect U.S. intellectual property with greater 
resources and a prioritized focus on enforcement.
    I look forward, Director Yager, to what you are doing 
regarding how the National Intellectual Property Law 
Enforcement Coordination Council, as created by this Congress, 
can play a greater role. And I am sorry to have come in late, 
and I am sure that the first part of your testimony addressed a 
lot of what I am asking for, particularly the first panel.
    But equally important are the initiatives by private 
industries to enforce and protect their own intellectual 
property products abroad. So the testimony from the trade 
associations today on the response to the GAO report and its 
recommendations, and how Congress can further implement their 
initiative with new legislative efforts, I am really interested 
in hearing about. I think progress is being made. I want to 
thank you for what has been done to this point, and I just have 
a couple of questions that you might want to address in light 
of my statement.
    The first one is what is the level of coordination between 
Federal agencies and organizations, such as the World 
Intellectual Property Organization [WIPO], in updating and 
implementing strong IP laws in developing in underdeveloped 
countries? That is No. 1.
    And why hasn't the National IPR Coordination Center, 
consisting of the FBI and the DHS officials, focused on the 
collection of intelligence involving IP infringement, and why 
has this not been utilized by the IP industry? And how can 
Congress encourage greater public-private partnership, 
especially through formal coordination in which Federal moneys 
have already been invested in the staffing of the resources?
    So if you would address those two concerns, it will satisfy 
my inquiry.
    Mr. Yager. Yes, Representative Watson. On three things, 
actually, let me respond. We have actually also done a lot of 
work which relates specifically to China's compliance with its 
entry into the WTO. And certainly when we did the work, both at 
the initial time at compliance, we identified about 55 
paragraphs in its document which had reference to intellectual 
property. Certainly this was something that was of primary 
importance to those who negotiated this for the United States.
    In addition to that, when we went to China and talked to 
businesses about what their biggest issues are, IPR is always 
at the top of that list. So we have reported that in some of 
the reports that we have done on China's commitments, and we 
will certainly continue to do that. We have an additional 
report coming out on China relatively shortly.
    With regard to your two questions, let me talk briefly 
about the IPR Center. We did talk to a number of the agencies, 
as well as to some of the industry officials, about the 
effectiveness of the IPR Center. We got very mixed views on 
that. There were some who told us that it had an important role 
to play, but that one of the things that happened was that 
information was provided to the IPR Center, but nothing ever 
came out of it.
    So it was difficult for them to tell whether there was 
action being taken on this kind of information or just what was 
happening after they made the effort to inform them. So I think 
it would probably be a very good question to ask of the 
industry to find out what do they think about a center that 
does seem to be interested in their information, but ultimately 
they get very little back from it. So I think that is one of 
the issues that could be brought up.
    As to the use of some of these international organizations 
such as WIPO, it was certainly our indication that the United 
States is by far the most aggressive pursuer of intellectual 
property rights and changes abroad, and I think that is one of 
the reasons why, in addition to participating in groups like 
the WIPO, that the United States is also working very hard with 
its Special 301 process and with some bilateral agreements to 
try to enforce and better improve intellectual property 
protection abroad. I don't know that those kinds of efforts 
really move quickly enough for the USTR or, in fact, for the 
Congress, to be putting all of your efforts into those areas, 
and that is why there is so much emphasis on the Special 301 
process.
    Ms. Watson. Do I still have some more time, Mr. Chairman?
    Chairman Tom Davis. No, your time has expired.
    Ms. Watson. Can I just raise one issue?
    Chairman Tom Davis. Without objection.
    Ms. Watson. OK, thank you.
    We were in Athens for the Olympics this summer, and I was 
in a neighborhood where they had a swap meet, and one of the 
Greek citizens said, oh, I will take you down there. Well, I 
was amazed. I could get every CD that is available in my local 
store for 2 and 3-year-olds. And I pointed it out to my 
friends, I said, look at this piracy. I mean, they had every 
latest hit. This was over in Athens, and I understand all you 
needed to do was go to Turkey to get anything in the world that 
was copied.
    So we have a real serious problem, and I have been working 
with WIPO, which is a subsidiary of the United Nations, on 
these issues, and whatever we can do legislatively, we are 
here, and I am particularly interested through my caucus. I 
just wanted to mention that.
    Mr. Yager. Yes. It certainly is not hard to find these 
things, and I think the whole emphasis of the hearing is that 
enforcement is really now the key: to try to get others to 
understand the importance of this, gain their support from 
domestic interest groups, and try to move forward that way.
    Chairman Tom Davis. Thank you very much.
    Mr. Ruppersberger.
    Mr. Ruppersberger. Thank you, Mr. Chairman. This is a very 
important issue, as we know.
    Marsha Blackburn, I know this is very important to you, and 
I have learned a lot from being with you on the issue that is 
happening in Tennessee, with all of your companies.
    We have talked about all the stories. We have talked about 
China here today. Recently, one of my staff persons was in 
China, and it was amazing to him the amount of bootleg DVDs 
that were on the street. I believe Spiderman 2, that just came 
out in August, was on the street in China and looked like 
professional packaging.
    So we talk about China or other countries passing laws, but 
what about the enforcement issue? And I think right now the 
figure--and you might correct me--is close to $25 billion that 
we are losing throughout the world as far as piracy, that U.S. 
business are losing. And if that is the case, we really have a 
tough issue.
    Now, what is the root of piracy? If you look at it, it is a 
cultural issue, I am sure. The black market allows any 
entrepreneurial person to come in and provide a service, and 
the products and demand. So let us ask ourselves if we are 
doing enough to educate consumers about not purchasing illegal 
products.
    Are we educating the international governments, not only 
China, but there is a long list of governments? And until we 
start setting a strategy to deal with the cultural issue, 
because as long as there is a demand, people are going to buy 
something cheaper; that is just the way it is going to be 
throughout the world. So do we need to focus more on 
enforcement? That is an issue that we have to deal with.
    Let me ask you this. Do our trade imbalances force out U.S. 
goods because of excessive tariffs?
    Mr. Yager. OK, let me make a couple comments on what you 
have said. I think what is interesting is that you said that 
many of these movies are available very soon after their 
release. In fact, in some cases they are available even before 
the release in Hollywood, which shows that somehow these 
products are getting out there, and it is really quite 
startling how fast they are put into distribution through these 
counterfeit methods.
    In terms of the dollar value of losses associated with 
piracy, we actually looked into the numbers that had been 
printed and provided by USTR of $200 to $250 billion as 
potential losses, as well as some of the other numbers. It is 
enormously difficult to come up with a good estimate of just 
what the losses are. We certainly know that they are enormous; 
they are obviously of policy significance; they do mean jobs 
and production in the United States.
    But it is very difficult to try to estimate how many goods 
would be sold at legal prices in those countries. So for that 
reason I think all the estimates need to be taken with a 
certain grain of salt and certain amount of caution, because it 
is enormously difficult to come up with a particular dollar 
value. We tried to find the source of some of the numbers, the 
$250 billion number, but we actually were not able to do that, 
and we spent some time trying to track that down. But, in any 
case, we obviously know that the number is a very large one and 
the losses are very large and they are obviously of policy 
significance, so we didn't do anything in terms of trying to 
estimate that number.
    In terms of the cultural issues, one of the items that I 
mentioned earlier in my statement was that trying to gain the 
support of many of the local groups and the local companies 
within these other countries is obviously very important, 
because there could be these interests that the United States 
shares with producers in these other countries. So by allowing 
them to also voice their concerns and the problems associated 
with piracy, whether it is a loss of tax revenues for the 
governments, whether it is a loss of production in jobs for the 
companies, I think it is very important for the United States 
to look to allies in those countries to try to gain their 
support in order to have a more effective campaign to really 
convince people in those countries that it is in their interest 
to not buy counterfeit goods.
    Mr. Ruppersberger. OK, two other things, because my light 
is coming on. I want to know whether you feel that the trade 
imbalances force out U.S. goods because of excessive tariffs, 
and do we need to look at that. And the other thing, before my 
red light comes on, we have talked about countries that we are 
having problems with throughout the world. Is there any example 
of a country that is working with us where we have been able to 
turn around the culture and where we could look to as a model 
to try to develop a program that works? So if you could answer 
those two questions.
    Mr. Yager. In terms of the excessive tariffs, I do not 
believe that is really the issue in this industry. I think the 
fact is that many of these goods are relatively high priced. 
When you look at the median income for many of the people 
around the world that are currently purchasing some of these 
illegal goods, the prices that are being charged in countries 
like Brazil and Russia and the Ukraine, the legal prices are 
relatively high. So one of the issues there is that some of 
these goods are possibly priced out of the range of the typical 
consumer in some of these countries.
    And the other question was? I am sorry.
    Mr. Ruppersberger. Is there a country out there. We talk 
about all the problems. Even though China has passed laws, it 
really hasn't done a lot; there hasn't been a lot of 
enforcement. Is there a country we could look to that we have 
worked with where we feel that we are doing a good job as it 
relates to this issue?
    Mr. Yager. I think that by looking at that Special 301, 
even some of the efforts that have gone on within the Ukraine 
have been positive. They have become much more aggressive at 
trying to shut down some of those big producing firms. Many of 
these countries have in fact passed laws. I think there is also 
a directive by 22 nations, although it doesn't seem like a lot 
of countries, that all government agencies are required to use 
legitimate goods.
    Mr. Ruppersberger. But why does it work there and not in 
other places?
    Mr. Yager. Well, that is a good question. I think again it 
has to do with gaining support of those domestic industries in 
order to be effective.
    Mr. Ruppersberger. So more of a domestic industry than it 
is government-to-government.
    Mr. Yager. I think both have to be involved. In order to be 
effective in enforcement, there has to be that domestic support 
for this kind of activity, because if these kinds of groups 
don't feel it is in their own interest to pursue it, then it is 
not going to be very effectively pursued.
    Mr. Ruppersberger. OK, thank you.
    Chairman Tom Davis. Mr. Cooper, any questions?
    Mr. Cooper. Yes, please.
    Let us cut to the chase. Companies in Nashville, TN and 
companies across America are being robbed blind by many of the 
nations across the world, some of whom call themselves our 
allies. The GAO has come up with a report that, in my opinion, 
largely whitewashes the issue. We have contributed to some 
strengthened laws in other nations, but when you say challenges 
remain, we are still being robbed blind, whether it is music, 
movies, pharmaceuticals, you name it. Intellectual property is 
the greatest store of wealth on the plant, and we as a Nation 
have not figured out how to protect that adequately.
    You say, in the summary of your report, ``Competing U.S. 
policy objectives take precedence over protecting intellectual 
property in certain regions.'' In other words, we chicken out 
in protecting U.S. property rights in certain nations for other 
reasons. And, granted, property rights are not the only 
interest that we have, but this has lasted for so long and it 
has been so systematic, and our efforts even to document the 
problem pale in comparison to the problem. So I am worried that 
GAO--and you are a fine person and it is a fine agency--we are 
going to study this thing to death; meanwhile, American jobs 
are being shipped overseas, the American economy is being 
seriously damaged, and no real effective action is taking 
place.
    I would love to see the Secretary of State here, top 
administration officials really doing something about the 
problem, not just talking about it again, as we have done for 
so many years, because this has to stop. And I don't see any 
real hope that you are offering here today; we will study it 
some more, we will look at it, we will try to do incrementally, 
here and there, some things. But in the end this administration 
has largely allowed other policy considerations to take 
precedence. Previous administrations have allowed other policy 
considerations to take precedence. Meanwhile, we are still 
being robbed blind.
    So why can't we do more about this? Why can't this 
Government take more action, firmer action, more successful 
actions to stop theft of property wholesale, widespread, 
systematic theft of property? That is what this hearing is 
really about. What are we going to do about it? What is this 
administration going to do about it?
    Mr. Yager. We certainly agree that enforcement is the 
challenge. I think that is the key point that you are making. I 
did outline some comments in the beginning of the hearing where 
we talked about the kinds of changes that could be made to this 
coordinating group, the NIPLECC, that has the responsibility 
for trying to achieve greater levels of cooperation within the 
U.S. law enforcement community as well as between the U.S. law 
enforcement community and their counterparts abroad. We 
certainly mentioned in our report that group is not working 
well; it is not functioning effectively and it has very little 
to show for its first 3 or 4 years of operation.
    So we think that by pointing out the kinds of systems that 
have been effective, which is the Special 301, and contrasting 
it to a group that has clearly not been effective, despite the 
fact that the enforcement is the area that is of greatest 
importance right now, we feel that that is a step forward in 
trying to focus the government's attention and activities on a 
mechanism that is not working.
    Mr. Cooper. Most Americans have never heard of the agency 
you describe. You say it has not been especially effective. 
That is bureaucratese for saying it has been an abject utter 
failure after three or 4 years. Why can't we do better? Where 
is the FBI? Where is the CIA? I don't know, call in other 
agencies so that it can get the attention it deserves, because 
American companies and the American people should no longer be 
robbed blind by nations around the world, some of whom call 
themselves our allies.
    Mr. Yager. We agree that there needs to be attention on 
this NIPLECC. We have a matter for congressional consideration 
in which we basically are saying to the Congress that this 
particular group has not been effective, it has failed, and it 
needs to have attention by the Congress, because ultimately 
some of the things that should be required are outside the 
bounds of what the agencies can do alone.
    For example, the membership. Congress would have to 
authorize or instruct the FBI to become a member of this group. 
Those are the kind of things that we have directed and we have 
pointed out in the report which we feel would make some forward 
progress and make this group more effective in the area of 
enforcement, where it is obviously needed.
    Mr. Cooper. Isn't there a warning label on every U.S. 
videotape, FBI warning, copying this tape or whatever brings 
sanctions? Why is that only on U.S. videotapes only used 
against American efforts to copy these tapes? What is the deal?
    Mr. Yager. Well, we have some examples over on the table 
which show just how close the copies are, and in some cases I 
believe they do include the same kind of warning labels that 
exist domestically. But I think the issue is whether people pay 
attention to those warning labels; and the answer right now is 
that in many countries they do not.
    Chairman Tom Davis. Thank you.
    The gentleman's time has expired.
    Mr. Cooper. Thank you, Mr. Chairman.
    Chairman Tom Davis. One of the problems is the labels on 
there, but people think they are legitimate.
    Mr. Yager. Right.
    Chairman Tom Davis. You don't know for sure, when you are 
buying it out there in the marketplace.
    Mr. Yager. In some cases that is true. In some cases it is 
pretty clear, when you are buying something in a little 
cellophane bag, that it is a pirated copy.
    Chairman Tom Davis. In China we could buy a whole bag of 
just the alligators for Izod, and then you could sew them on 
the shirts, or you could buy the shirts with the Izod on them. 
I don't think they know anything about it.
    Well, thank you very much. I appreciate your being here. 
Your report has been very, very useful to us.
    We will take a 2-minute recess as we move to our third 
panel.
    Oh, I am sorry. Mr. Cummings, did you have any questions?
    Mr. Cummings. No, thank you, Mr. Chairman.
    Chairman Tom Davis. OK, we will move to our third panel at 
this point. We will take a 2-minute recess.
    [Recess.]
    Chairman Tom Davis. We are now going to move to our third 
panel and hear from the industry members. We have Joe Papovich 
here, the senior vice president of the International Recording 
Industry Association of America; John Malcolm, the senior vice 
president of Worldwide Anti-Piracy from the Motion Picture 
Association of America; and Robert Cresanti, who is the vice 
president for public policy for the Business Software Alliance.
    It is our policy to swear you in. If you would just rise 
and raise your right hands.
    [Witnesses sworn.]
    Chairman Tom Davis. Thank you very much for your patience. 
You have heard the previous testimony, being here with us 
today. Your entire statements are going to be part of the 
record; they are already in the record. So questions will be 
based on this, but we will give you about 5 minutes to kind of 
sum up what is important, and then we will move to questions.
    Mr. Papovich, we will start with you, then we will move on 
down the line. Thank you for being with us.

     STATEMENTS OF JOSEPH PAPOVICH, SENIOR VICE PRESIDENT-
INTERNATIONAL, RECORDING INDUSTRY ASSOCIATION OF AMERICA; JOHN 
 G. MALCOLM, SENIOR VICE PRESIDENT AND DIRECTOR FOR WORLDWIDE 
ANTI-PIRACY OPERATIONS, MOTION PICTURE ASSOCIATION OF AMERICA; 
 AND ROBERT CRESANTI, VICE PRESIDENT, PUBLIC POLICY, BUSINESS 
                       SOFTWARE ALLIANCE

    Mr. Papovich. Thank you, Mr. Chairman and members of the 
committee. Thank you very much for focusing Congress's 
attention on the devastating impact of piracy and the actions 
our Government should take to address this enormous problem. As 
you pointed out, I am the senior vice president for 
International at RIAA. I also worked for 21 years at the Office 
of the U.S. Trade Representative, the last 9 of which I handled 
these issues there. So I have been on both sides of the issues, 
as has Mr. Malcolm.
    RIAA's members create, manufacture, and distribute 90 
percent of all the legitimate sound recordings produced and 
sold in the United States. The United States is the world's 
biggest producer of intellectual property products and 
services. It is our Nation's comparative advantage. It is 
something we do better than any other nation. Copyright 
industry exports and foreign sales approach $90 billion a year. 
That is even despite the piracy.
    The 1980's and 1990's were terrific decades for music 
sales, and then things went south for our industry. There are 
three reasons. The first was the increased involvement of 
organized criminal syndicates in the production and global 
distribution of pirate CDs and other optical disc products. 
These syndicates quickly shift their activities to the most 
accommodating country and they use the complexity of multi-
jurisdictional law enforcement to their advantage.
    The second was the widespread proliferation of what is 
called CD burners, that made it so very easy to reproduce high-
quality sound recordings and for criminal syndicates to further 
diversify the manner in which pirate materials are replicated 
and distributed. The third was and is the wave of illegal file 
sharing on the Internet, caused by a surge of decentralized 
peer-to-peer networks. In rough terms, the combination of 
growing global physical piracy, illegal CD burning, and 
Internet piracy generated a 20 percent sales decline in our 
industry since 1999.
    The impact of the revenue crash has been even more profound 
in human and creative terms. There has been successive rounds 
of job losses at our member companies: 1,000 jobs were lost at 
Warner Music in March, another 1,500 at EMI, last year Sony cut 
1,000 jobs, 1,500 jobs were lost at Universal in less than 2 
years. The creative cost is even more troubling. Artist rosters 
are being slashed dramatically as companies no longer can 
afford to carry as many dreams as they did in the past.
    My testimony sets out the many efforts we make to combat 
piracy in other countries. In the world of physical piracy, our 
enemy is the organized criminal syndicates who mass-produce our 
recordings and governmental indifference or corruption in other 
countries that enables these syndicates to thrive. We cannot 
combat this double whammy on our own; we need Government's help 
to protect our Nation's comparative advantage.
    We get as much help as current government resources permit, 
and I mean current U.S. Government resources permit. The 
problem is not indifference by our Government, the problem is 
that piracy and counterfeiting abroad are so pervasive and the 
resources that our Government makes available are so small.
    In addition, as was pointed out by Congressman Cooper, our 
issues sometimes do become casual to use abroad or foreign 
policy concerns. We recommend that Congress elevate the status 
of international intellectual property protection in the 
executive branch and expand the human and financial resources 
made available to combat this nasty problem. We offer these 
suggestions.
    First, do two things at USTR: one, elevate the status of 
trade-related intellectual property at USTR and create a 
special standalone intellectual property office; second, 
provide sufficient IP staffing at USTR in order to obtain 
better and more up-to-date commitments from our trading 
partners and to ensure that such commitments are enforced.
    Second, ensure that Commerce, the Patent and Trademark 
Office, and State have adequate resources to assist USTR and to 
carry out their own functions in this area.
    Third, consider elevating the State Department's 
Intellectual Property Division to an office level status so 
that it has the necessary resources to ensure that intellectual 
property is adequately considered in our Nation's foreign 
policymaking.
    Fourth, provide additional and new financial resources to 
the State Department's INL Bureau for intellectual property 
capacity-building in other countries.
    Fifth, direct FBI agents in relevant U.S. embassies to 
become more involved in copyright piracy matters.
    And sixth, expand the ability of U.S. Customs to intercept 
imports of piratical product.
    On behalf of the music community, we appreciate your focus 
on the piracy problem and welcome the opportunity to work with 
you on this. Thank you very much.
    [The prepared statement of Mr. Papovich follows:]

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    Chairman Tom Davis. Well, thank you very much.
    Mr. Malcolm.
    Mr. Malcolm. Mr. Chairman, members of the committee, I 
would like to thank you for inviting me to testify before you 
today on this important topic of international intellectual 
property theft. As a former Deputy Assistant Attorney General 
at the Department of Justice who oversaw the Computer Crime and 
Intellectual Property Section, and as the current director of 
the Motion Picture Association of America's Worldwide Anti-
Piracy Program, I have perhaps a unique vantagepoint that I 
would like to share with you with respect to this problem.
    The copyright industries employ 3.5 percent of the American 
work force and earn more money abroad than automobiles, planes, 
and agriculture. The movie industry has a surplus trade balance 
with every single country in the world, and no other American 
industry can make that claim. Ensuring the continued economic 
health of the film industry and of other U.S. intellectual 
property rightsholders is in our national interest and in the 
interest of ordinary Americans, the costumers, the carpenters, 
the set painters, sound technicians, fire safety workers, whose 
jobs rely on the creation of filmed entertainment and other 
forms of copyrighted works.
    I understand, Mr. Chairman, that you have in fact a brief 
videotape that shows this, and I would ask that you consider 
playing that at this time.
    Chairman Tom Davis. All right.
    [Videotape played.]
    Mr. Malcolm. Thank you for playing that, Mr. Chairman.
    Chairman Tom Davis. Thank you. They show that at the 
movies, don't they? I think I have seen that at the theaters.
    Mr. Malcolm. Yes, they do.
    Piracy, massive thievery, really, threatens the continuing 
viability of this important economic engine. Last year, our 
investigators participated in nearly 32,000 raids and seized 
over 52 million pirated optical discs. I fully expect the 
number of raids and seizures to go up significantly this year. 
Despite improvements in some markets and the often heroic 
efforts of our investigators, the worldwide piracy situation 
isn't getting better; it is getting worse.
    With rare exceptions, the people procuring, producing, and 
distributing this pirated material are affiliated with large 
and dangerous international criminal syndicates and gangs. 
Camcorded copies of movies are reproduced on expensive 
replicators, costing well in excess of $1 million, that operate 
24 hours a day, 7 days a week, cranking out thousands and 
thousands and thousands of pirated discs. These discs are then 
distributed by ``mules'' and through courier services to pirate 
stores and street vendors.
    This is not being done by mom and pop operations; it is 
being done by business-minded thugs who fund this activity 
through money raised from other illicit activity such as drug 
dealing, gun running, and human trafficking, utilizing, by the 
way, the same distribution networks, and who, in turn, fund 
these other activities through the money they raise from 
piracy.
    Drying up the funds and stopping the illegal activities of 
international criminal syndicates, gangs, and terrorist 
organizations are also obviously in our national interest.
    There is also the exploding problem of movie piracy 
occurring on the Internet. Sophisticated international encoding 
groups, often referred to as warez groups, take a perverse 
pride in being the first to steal copyrighted material, 
stripping it of its protection, and then distributing it to 
their members, where it quickly finds its way onto peer-to-peer 
networks, often within 24 hours.
    At any given moment there are 8.3 million people trading 
copyrighted material over the Internet, taking what does not 
belong to them and depriving artists and those who invest in 
them of the opportunity to make a reasonable return on their 
creative endeavors. Earlier this month, scientists were able to 
send 859 gigabytes of information halfway around the world in 
less than 17 minutes. At that speed, somebody can download a 
full-length feature film in 4 seconds.
    Still, despite the grim realities that we face, I choose to 
see the glass as half full, rather than half empty. We are 
grateful to the Department of Justice and to the Attorney 
General for expanding the CHIP, which stands for Computer 
Hacking and Intellectual Property, program, and for 
establishing an Intellectual Property Task Force. We are also 
grateful for increased law enforcement efforts such as 
Operational Digital Gridlock, Operation Fastlink, and Operation 
Buccaneer, which help combat piracy and which shine a spotlight 
on this scourge, and which establish new contacts and 
strengthen old ones with law enforcement counterparts and other 
government officials overseas.
    We commend the Department of Homeland Security's Bureau of 
Immigration and Customs Enforcement for its role in a recent 
unprecedented and successful joint operation labeled Operation 
Spring with the Chinese Ministry of Public Security that 
resulted in the arrest of six individuals, including a U.S. 
citizen, and the seizure and destruction of hundreds of 
thousands of pirated discs and the warehouses in which they 
were stored. We applaud all these efforts and pledge to do 
anything we can, anywhere, and at any time to support these and 
future investigative endeavors.
    We have to continue to use every arrow in our quiver to 
combat this international crime problem, which threatens to 
cripple a vital part of our economy and which imperils our 
national security.
    I have several specific recommendations which are contained 
in my written statement, which I realize is part of the record, 
that I would urge you to consider.
    Mr. Chairman, I want to thank you again for inviting me to 
testify today and for your support over the years. I would be 
happy to answer any questions you may have.
    [The prepared statement of Mr. Malcolm follows:]

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    Chairman Tom Davis. Thank you very much.
    Mr. Cresanti.
    Mr. Cresanti. Thank you, Mr. Chairman. And thank you, 
members, for staying through this hearing.
    Good afternoon. The theft of intellectual property, 
commonly known as piracy, is a matter of great concern to the 
business software industry. Piracy costs the industry billions 
of dollars in lost revenues each year; it reduces investment in 
creativity and it harms national economies, including our own.
    The software industry is a remarkable engine of growth. I 
have submitted for the record two reports which we have 
produced over the last year detailing relevant economic 
statistics, one on the economic impact of software piracy and 
one that details the scope of the software piracy problem 
worldwide. Together, these studies dramatically illustrate how 
software piracy harms our economy.
    The Business Software Alliance and its individual members 
devote significant resources to preventing piracy worldwide. 
First, we engage in extensive educational efforts designed to 
increase public understanding of the value of intellectual 
property, and improve the awareness of copyright laws on a 
global basis. We operate in almost 60 countries.
    Second, we work closely with governments to encourage 
adoption of laws that strengthen copyright protection and 
promote an environment in which the software industry can 
continue to innovate. Finally, where appropriate BSA takes 
enforcement actions against those individuals who are engaged 
in the unlawful use, distribution, and sale of our member 
companies' software.
    Clearly, industry cannot solve this issue alone; the 
Government has an essential role to play, both domestically and 
internationally. Investigation and prosecution of copyright 
piracy is an essential part of the solution to the piracy 
problem. BSA commends the Department of Justice for its 
increased emphasis on IPR and cybercrime enforcement.
    This year, DOJ has carried out a number of major operations 
against Internet piracy. Operations Fastlink and Digital 
Gridlock particularly illustrate the importance of cooperation 
between domestic and foreign law enforcement bodies. Given the 
global nature of the problem, these are the steps that we think 
work. Adequate resources to investigate and prosecute IPR theft 
are essential in order to continue these successes.
    As in the years past, BSA supports a congressional 
designation of DOJ funds directed at combating cybercrime and 
intellectual piracy. In addition, we support increased 
resources for FBI investigations of these crimes. There are 
other areas that could benefit from increased resources as 
well, and as you have noted, Mr. Chairman, Senator Gregg has 
taken a step in that direction. In the international arena, the 
U.S. Government has had great success in using a variety of 
tools, including those that link continued and expanded trade 
benefits with IP protection.
    These efforts have been led by small, but dedicated 
professional staff at USTR. USTR has been ably supported in 
this work by State, Commerce, Justice Departments, while the 
U.S. PTO and the Copyright Office have often provided essential 
subject matter expertise.
    These efforts should be enhanced by providing USTR with 
additional resources for negotiating and enforcing strong norms 
and obligations for the protection of intellectual property 
rights. BSA supports the creation of a new and separate 
intellectual property office within USTR, with an increased 
staff to enable USTR to continue to place the high priority on 
IPR negotiation and enforcement that it has in the past.
    Similarly, BSA believes that a separate intellectual 
property office should be created within the Department of 
State. This would assist the State Department in continuing to 
place a high priority on ensuring foreign market access for 
U.S. intellectual property products and services, and 
compliance with international agreements protecting 
intellectual property rights.
    Thank you for the opportunity to testify before you today, 
and I look forward to answering your questions.
    [The prepared statement of Mr. Cresanti follows:]

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    Chairman Tom Davis. Thank you.
    Let me ask a question. Aside from all the intellectual and 
economic arguments, how good are some of these pirated things 
that come through, the software?
    Mr. Cresanti. It is perfect. It is 100 percent perfect. The 
only thing that has been stripped out are the protections that 
we have put in place to prevent duplication of.
    Chairman Tom Davis. So they have gotten very good now 
duplicating the stuff. I mean, at one point there was a time 
when you could take some of the software, and it had bugs in it 
and the like.
    Same with the movies?
    Mr. Malcolm. It varies in quality, depending on how it was 
pirated, but well over 90 percent of the pirated movies begin 
with a camcorder, and the trend is for the pirates to use more 
sophisticated camcorders and more sophisticated means of 
getting camcorder product that is leading to increased quality.
    Chairman Tom Davis. How do they get this stuff before it is 
even released in the theaters?
    Mr. Malcolm. There can be a variety of ways, Mr. Chairman. 
Probably the most common way has to do with before a movie 
comes out in a theater--sometimes, by the way, movies open in 
other countries before they open here. But before a movie will 
come out, a studio, despite the extraordinary lengths to which 
they are going to protect their product, will do promotional 
screening, screening for critics, screening with test 
audiences. Sometimes films will be in post-production houses 
that will be preparing publicity or working on editing and 
pirates will pay bribes and pay a lot of money to send in 
camcorders to those screenings or to pay off projectionists or 
pay off insiders to get that product.
    Chairman Tom Davis. The GAO report points out that one of 
the challenges in the optical media sector is the huge price 
difference between legitimate and the pirated products. This is 
not something the Government can change. Any suggestions how we 
meet that challenge?
    Mr. Malcolm. Well, I would start out by saying that, for 
instance, with respect to the Lord of the Rings that you said 
you pay the equivalent of $6.50, that you dramatically 
overpaid. The price differential between a legitimate product, 
assuming legitimate product has been distributed for home 
distribution, and a pirated product is very, very great. You 
are already seeing that the movie industry has been quite 
robust in terms of narrowing windows for release. There are 
online organizations where you can have legitimate video on 
demand. The prices of both CDs and DVDs have come down.
    However, when you are a pirate organization that is paying 
slave labor, not paying any taxes, you don't care about health 
benefits, you pay no tariffs whatsoever, where your biggest 
cost is probably the bribes that you pay, you can cost your 
product very low.
    Chairman Tom Davis. In many of the countries where 
counterfeited sales are the highest, consumers see no ethical 
problems in purchasing these pirated goods. They also can't 
afford sometimes the higher prices of the authentic goods. To 
what extent are foreign governments using public awareness 
campaigns? I have seen it here when I have gone to the 
theaters. I remarked earlier. Are the other countries doing the 
same; are they showing it? Should they do more? And can 
industry help or directly be involved in those efforts?
    Mr. Malcolm. Well, we are directly involved in those 
efforts. I will let Mr. Papovich speak for the RIAA. We are 
directly involved in those efforts. Some countries, for which 
we are very grateful, are doing a lot. France, for instance, at 
the Cannes Film Festival, talked about piracy extensively, and 
they are really taking the lead in terms of trying to highlight 
this issue in terms of harming French products, French culture, 
but also intellectual property rights in general. There are 
other countries that are, as you know, woefully deficient in 
their efforts. You have to really sort of break it down country 
by country, but obviously most countries could do a lot more.
    Chairman Tom Davis. Mr. Papovich, before you reply, also, 
are there countervailing pressures in some of these countries 
as they develop their own movie industry and their own 
recording industry, that start saying we need some protections 
here to help our legitimate artists and creators as well?
    Mr. Malcolm. The economies that thrive do so because they 
recognize the value of property, both tangible and intellectual 
property. And as we frequently argue, sometimes with success, 
that those people who don't take a strong stand on IPR crime 
are ultimately killing themselves, because they are causing 
investment to dry up and express no interest in those 
countries. No one will invest in developing property in a 
country if they don't think anybody is going to do anything to 
protect that property. Eventually, some countries that have 
developed goods and services and intellectual property that is 
worthy of protection, they get it and they beef up their 
efforts.
    Chairman Tom Davis. Mr. Papovich.
    Mr. Papovich. As I said in my oral statement, a huge 
problem has been either indifference or corruption in 
government ministries in other countries, and this has 
manifested itself in us seeing indigenous cultural industries 
dry up. Brazil is a good example. I would differ a little bit 
with what Mr. Yager said previously. I don't think there has 
been that much progress in Brazil. Brazil and Mexico are two 
countries which once had really thriving sound recording 
industries, industries who produced lots of musical 
entertainment, that have seen tremendous reductions in that 
because of government indifference or corruption.
    And I don't know if the theory holds that as other 
countries develop their own intellectual property industries, 
it necessarily will mean improvements. I think in some 
instances it will, but in other instances--it just baffles the 
mind. I don't understand why in Brazil and Mexico, the 
governments see so little importance in protecting their own 
and foreign intellectual property.
    Chairman Tom Davis. What retaliation could we do on this?
    Mr. Papovich. Well, there are two answers, I suppose. One 
is we do already, the U.S. Government has done some. Frankly, 
the problem is, as has been said already, our Government has 
other foreign policy considerations with respect to these 
countries, and quite often the trigger doesn't get pulled 
because while our Government cares about these things, there 
are other important issues at stake that would be disrupted by 
pulling the trigger.
    We also have limitations with respect to the World Trade 
Organization; we can't just raise tariffs or impose quotas on 
goods coming from another country, except in certain prescribed 
processes set out by the WTO.
    Mr. Malcolm. Mr. Chairman, may I just elaborate very 
briefly on that?
    Chairman Tom Davis. Yes.
    Mr. Malcolm. I was going to say in some countries, as well, 
this pirate market is a huge underground economy, and we have 
actually seen instances in which the people who are engaging in 
piracy will have their own PR effort to say why are you harming 
the citizens of your country who are trying to eek out a 
living, just to protect American industries? So sometimes 
governments are caught between a rock and a hard place, but I 
don't disagree with anything Mr. Papovich said.
    Chairman Tom Davis. Ms. Watson, any questions?
    Ms. Watson. No.
    Chairman Tom Davis. Mr. Cooper.
    Mr. Cooper. Thank you, Mr. Chairman.
    Mr. Papovich just mentioned the indifference and corruption 
of other nations. That is a pretty strong statement, but I 
think you hit the nail on the head. What I am worried about is 
the indifference of our Government in facing these other 
nations. You have worked with the USTR. I am a big fan of Bob 
Zellick; I think he is great. But I have never been party to 
these long negotiations.
    Can you tell us what really happens behind closed doors, 
when they have a dozen issues to discuss? Because these 
intellectual property issues seem to be, at best, back burner. 
Most of you gentlemen have asked that we fund an office within 
USTR to give IP issues more prominence, perhaps an office 
within the State Department so they can have more prominence 
there. All this spells back burner, as does this hearing, when 
we can't even fill the room with folks who are concerned about 
this massive systematic theft of U.S. property. So what happens 
behind closed doors with the U.S. Trade Representative and 
these various negotiators?
    Mr. Papovich. Actually, in the negotiations I would say it 
is different than that. In fact, intellectual property takes a 
very prominent position in the negotiations, and other 
governments complain all the time about how much attention is 
paid by the U.S. Government when it comes to trade agreements.
    It is in the enforcement that the problems arise. The other 
country takes on lots of very good commitments and then fails 
to adequately implement, and it will break down when our 
representatives operating in those countries use the provisions 
that those agreements require by going into court in those 
countries and asking for criminal prosecution or asking for big 
civil damages, and the judges won't do it or the prosecutors 
won't even take the case. So it is more complex than just what 
is in the agreements; it is getting these other countries to 
actually live up to what they commit to.
    Mr. Cooper. But when we see a systematic lack of 
enforcement, what actions do we take in response?
    Mr. Papovich. That is when we go back to our Government 
asking for help.
    Mr. Cooper. So our own Government isn't helping our own 
industries enough to solve this problem?
    Mr. Papovich. I would say enough, not helping our 
industries enough. I don't want to say, and I won't say, that 
our Government is not trying to help. The people who are 
employed to do this try very hard to help; there is just not 
nearly enough of them. I will leave it at that; there is just 
not nearly enough of them. And they also don't have the clout, 
if it comes to a major conflict, to impress upon the other 
government that this has to be changed.
    Mr. Cooper. In one of your statements you said you were 
coming to Congress to get us to encourage the executive branch 
to do more in this area. Well, they are a separate branch of 
Government. We can encourage them, we can pass budgets that 
give them more funding, but if they don't have the will to 
protect American industry from this rampant theft, American 
voters need to know about that, because I think most voters are 
interested in protecting American property and making this a 
higher priority.
    Mr. Malcolm. If I may respond briefly. Obviously, both Mr. 
Papovich and I recently were with the administration, but I 
would say that I don't think that it is a question of a lack of 
will on our Government's part. The fact that there are requests 
for additional funding doesn't have anything to do with 
anything being on the back burner; I think it bespeaks to the 
magnitude of the problem.
    Mr. Cooper. Where is the administration request for funding 
for a separate USTR office on IP or a State office on IP, or 
these other things that you are requesting us to fund? Where is 
it in the administration's budget?
    Mr. Malcolm. I no longer speak for the administration, so I 
won't even purport to do so.
    Mr. Cooper. Well, they haven't requested it, right? You are 
having to come to us to ask for it. That is an indication of a 
lack of will.
    Mr. Malcolm. Mr. Papovich having been at USTR and me being 
at DOJ, I can tell you that it was on every bilateral or 
multilateral law enforcement convocation or trade convocation. 
IPR enforcement was high on the agenda. This is a pervasive 
international problem that needs a lot of resources, but I do 
not think that it is a lack of good will or somehow a back 
burner issue on behalf of the administration. I can tell you 
that not only having been in the administration, but having 
dealt with administration officials in my current capacity.
    Mr. Cooper. Well, I am sure there are a few good-hearted 
people who are trying to do the right thing, but overall it 
looks as if the administration has used this issue for window-
dressing. They do enough so that it looks like we are making an 
effort, but I don't know any other area of U.S. foreign policy 
where we have been so systematically ineffective.
    Mr. Malcolm. I would respectfully disagree.
    Chairman Tom Davis. The gentleman's time has expired.
    Let me just, first of all, thank you. We did ask the 
administration to appear today, and they chose not to do that, 
but we are working with them on some things and we will hold 
further hearings on this as we move forward.
    Mr. Cooper. Mr. Chairman, would you yield for questions?
    Chairman Tom Davis. I would be happy to.
    Mr. Cooper. I am glad that you asked the administration to 
come, but I would think that their failure to show up is 
another sign of their lack of priority, lack of interest in 
this issue.
    Chairman Tom Davis. Well, we are working with them on a lot 
of legislative procedures. I would have preferred to have them 
show up today too. This is a massive problem that is not just a 
problem for the United States; it is a problem worldwide, as 
has been noted before. And this hearing, I think, has brought 
out some of the failings we have had at the governmental level 
and some of the successes we have had at the governmental 
level, and some of the work we still have to do.
    But I guess I would just ask where do we go when suing in 
other countries? There are legal systems in other countries. We 
get the agreements intact that our trade leaders negotiate. 
What happens when you sue in other countries and fine people?
    Mr. Papovich. China is the best example there is: a huge 
problem; fair amount of indifference by the government. The 
Chinese have, in their criminal code, the standards for 
initiating a criminal investigation and prosecution of 
intellectual property pirates. They have written it in such a 
way, they have established a threshold over which one must 
climb in order to have a prosecution initiated that is nearly 
impossible to meet.
    One of the things that has been a central demand of us on 
our executive branch and, to their credit, has been the central 
demand of our executive branch on the Chinese, is that this 
threshold has to be either eliminated or substantially reduced 
so the criminal prosecutions can be initiated in China. The 
Chinese are supposedly, right now, as we speak, rewriting the 
interpretation that establishes this threshold. We are waiting 
with baited breath to see what comes out of their process.
    I think the gentleman from the GAO said the USTR says they 
are going to conduct a Special 301 out-of-cycle review later 
this year, and it will be for the purpose of evaluating this. 
So if the Chinese change the standard, lower the threshold, we 
have a shot--there is still a question of will, but we have a 
shot of getting significantly more criminal prosecutions of 
pirates in China. Right now there are almost none. Almost none, 
despite all of the piracy that happens in China. You can get 
administrative fines imposed, modest financial penalties, but 
that is. You can't get anyone put in jail, or it is very 
difficult to get anyone put in jail for copyright piracy.
    Mr. Malcolm. Mr. Chairman, if I may. There are really four 
pillars to this: you need effective laws, you need effective 
investigations, effective prosecutions, and deterrent 
sentencing. That is with respect to criminal enforcement. Many 
countries now are compliant, they have the first, but the other 
three are lacking, and there are problems at each step along 
that cycle.
    With respect to civil lawsuits, there are organizations, 
our organization, the RIAA, that engage in civil lawsuits to 
protect their property rights. People such as Congressman 
Simmons' constituent in Connecticut, it is tough for them. The 
answer to the question is in some countries the civil 
litigation process works fairly well and in others the court 
system is positively byzantine.
    Chairman Tom Davis. Well, thank you very much. I think you 
have given a clarity to the work that has been accomplished and 
the work that needs to be done, the massiveness of this 
problem, and I hope it has been helpful not just to our 
members, but to people watching as well. We look forward to 
continue to work with you on this. Thank you very much.
    The hearing is adjourned.
    [Whereupon, at 1:05 p.m., the committee was adjourned.]
    [Note.--The GAO report entitled, ``Intellectual Property, 
U.S. Efforts Have Contributed to Strengthened Laws Overseas, 
But Challenges Remain,'' is on file with the committee.]
    [The prepared statement of Hon. Elijah E. Cummings 
follows:]

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