[Senate Hearing 108-632]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 108-632

      INTERNATIONAL AND DOMESTIC INTELLECTUAL PROPERTY ENFORCEMENT

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

                                HEARING

                                before a

                          SUBCOMMITTEE OF THE

            COMMITTEE ON APPROPRIATIONS UNITED STATES SENATE

                      ONE HUNDRED EIGHTH CONGRESS

                             SECOND SESSION

                               __________

                            SPECIAL HEARING

                     APRIL 29, 2004--WASHINGTON, DC

                               __________

         Printed for the use of the Committee on Appropriations


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                               __________
                      COMMITTEE ON APPROPRIATIONS

                     TED STEVENS, Alaska, Chairman
THAD COCHRAN, Mississippi            ROBERT C. BYRD, West Virginia
ARLEN SPECTER, Pennsylvania          DANIEL K. INOUYE, Hawaii
PETE V. DOMENICI, New Mexico         ERNEST F. HOLLINGS, South Carolina
CHRISTOPHER S. BOND, Missouri        PATRICK J. LEAHY, Vermont
MITCH McCONNELL, Kentucky            TOM HARKIN, Iowa
CONRAD BURNS, Montana                BARBARA A. MIKULSKI, Maryland
RICHARD C. SHELBY, Alabama           HARRY REID, Nevada
JUDD GREGG, New Hampshire            HERB KOHL, Wisconsin
ROBERT F. BENNETT, Utah              PATTY MURRAY, Washington
BEN NIGHTHORSE CAMPBELL, Colorado    BYRON L. DORGAN, North Dakota
LARRY CRAIG, Idaho                   DIANNE FEINSTEIN, California
KAY BAILEY HUTCHISON, Texas          RICHARD J. DURBIN, Illinois
MIKE DeWINE, Ohio                    TIM JOHNSON, South Dakota
SAM BROWNBACK, Kansas                MARY L. LANDRIEU, Louisiana
                    James W. Morhard, Staff Director
                 Lisa Sutherland, Deputy Staff Director
              Terrence E. Sauvain, Minority Staff Director
                                 ------                                

   Subcommittee on Commerce, Justice, and State, the Judiciary, and 
                            Related Agencies

                  JUDD GREGG, New Hampshire, Chairman
TED STEVENS, Alaska                  ERNEST F. HOLLINGS, South Carolina
PETE V. DOMENICI, New Mexico         DANIEL K. INOUYE, Hawaii
MITCH McCONNELL, Kentucky            BARBARA A. MIKULSKI, Maryland
KAY BAILEY HUTCHISON, Texas          PATRICK J. LEAHY, Vermont
BEN NIGHTHORSE CAMPBELL, Colorado    HERB KOHL, Wisconsin
SAM BROWNBACK, Kansas                PATTY MURRAY, Washington
                                     ROBERT C. BYRD, West Virginia
                                       (ex officio)
                           Professional Staff
                              Scott Gudes
                          Katherine Hennessey
                             Dennis Balkham
                           Jill Shapiro Long
                            Shannon O'Keefe
                         Lila Helms (Minority)
                        Kate Eltrich (Minority)
                        Chad Schulken (Minority)

                         Administrative Support

                            Jessica Roberts


                            C O N T E N T S

                              ----------                              
                                                                   Page
Statement of Jack Valenti, President and Chief Executive Officer, 
  Motion Picture Association of America..........................     3
    Prepared Statement...........................................     5
Statement of Mitch Bainwol, Chairman and Chief Executive Officer, 
  Recording Industry Association of America......................     9
    Prepared Statement...........................................    11
Statement of Douglas Lowenstein, President, Entertainment 
  Software Association...........................................    17
    Prepared Statement...........................................    18
Statement of Robert W. Holleyman, II, President and Chief 
  Executive Officer, Business Software Alliance..................    25
    Prepared Statement...........................................    27
Prepared Statement of Senator Ted Stevens........................    33

 
      INTERNATIONAL AND DOMESTIC INTELLECTUAL PROPERTY ENFORCEMENT

                              ----------                              


                        THURSDAY, APRIL 29, 2004

                           U.S. Senate,    
  Subcommittee on Commerce, Justice, and State,    
               the Judiciary, and Related Agencies,
                               Committee on Appropriations,
                                                    Washington, DC.
    The subcommittee met at 10:03 a.m., in room SD-192, Dirksen 
Senate Office Building, Hon. Judd Gregg (chairman) presiding.
    Present: Senators Gregg, Stevens, and Murray.
    Senator Gregg. We are going to get started. We have votes 
coming up and I want to make sure we have time for our 
witnesses. Mr. Valenti, I know, is on the way, so there will be 
plenty of time for him to get here and make his statement. But 
I did want to proceed with discussion.
    This meeting today is about intellectual property rights 
and the many ways it is being managed and abused and pirated by 
the international community and the concerns we have in the 
United States, the fact that the intellectual property rights 
are being stolen once produced.
    As a society, I think we understand that one of the primary 
engines of our economic growth and especially of our trade 
balances is the intellectual property that is produced here in 
the United States. We are a value-added society when it comes 
to the issue of producing goods, which we are competitive in in 
the international market, and one of the places where we are 
most effective at adding value is in intellectual property.
    That being said, we also recognize that many of the 
products of our society in the area of intellectual property, 
whether it is recording, software, movies, or other activity, 
is being stolen and pirated by various communities across the 
country and across the world and it is in some cases a very 
orchestrated theft. That is having a huge impact on us. We are 
talking hundreds of billions of dollars of lost income for 
American entrepreneurs and inventors as a result of this piracy 
and theft.
    The reason our committee has decided to pursue this is that 
we are uniquely situated. This committee has jurisdiction over 
all the major Federal agencies which have a role in asserting 
our rights on intellectual property. We fund the Commerce 
Department, and the USTR. We fund the PTO. We fund the Justice 
Department, obviously a key agency in this exercise. And we 
fund the State Department. So if you list the agencies which 
can have an impact, especially in the area of how our 
intellectual property is used internationally, it is this 
committee which draws them all together and we are the only 
committee in the Senate that has that sort of jurisdiction on 
this issue.
    So I felt it would be important for us to hear from the 
industry, specifically as to how we are going to proceed, and 
then as a practical matter, what I am most interested in 
hearing about is how these Federal agencies are coordinating. 
My concern is that many of these Federal agencies are 
approaching it as a stovepipe and that they do not have the 
overlapping communications and coordination which is so 
critical to accomplish a coordinated policy.
    We set up a number of years ago a group called NIPLECC, the 
National Intellectual Property Law Enforcement Coordinating 
Council. I am anxious to hear how that council is doing. I did 
ask one day how that council was doing of an individual who, it 
turned out, was serving on the council and didn't know that 
they were. I am not sure that that council, which is set up 
basically to get everybody in an operating pattern that was 
coordinated, has had the impact it was supposed to have.
    So what we are basically interested in in these hearings is 
hearing about some of the specifics of how the theft is 
occurring, obviously, especially relative to the international 
part, but more importantly, hearing about how our Federal 
agencies which come under the jurisdiction of this committee--
the Justice Department, the Commerce Department, State 
Department, USTR, PTO--are doing as agencies in responding to 
the theft and the piracy and whether they are adequately 
coordinated, and if there is a problem here, what suggestions 
does the industry have for how we can improve the effort. If 
they are legislative, we can address those, and if they are 
appropriations, we can address those. As for management, we can 
also address those.
    So this is a hearing to get hopefully action, move from not 
just making a record but to actually use the capacity of this 
committee to help across jurisdictions within the Federal 
Government to accomplish something, which is hopefully a more 
coordinated and aggressive approach towards protecting 
intellectual property.
    So I appreciate this panel coming forward. We had had a 
second panel scheduled for today, but because there are going 
to be three votes and the rest of the day is going to be 
disjointed, I would just try this presentation. Actually, it is 
not a bad idea to have this panel come forward, give us some 
thoughts, and then we can digest them a little bit, and then 
next week or the following we can have the agencies come 
forward and we will discuss with them the ideas that you 
volunteered on how we can better execute in this area.
    So I very much appreciate this very distinguished panel and 
appreciate your participation. Obviously, it is led by the dean 
of the Washington community, Mr. Valenti. We are very honored 
to have him here today as he is winding down his relationship 
with the Motion Picture Association he has been involved with 
for eons. His history in this city is epic, so it is a pleasure 
to have him testify before us today.
    Also, Doug Lowenstein, President of the Entertainment 
Software Association. We appreciate Doug coming.
    Robert Holleyman, head of the Business Software Alliance, 
which is clearly the future industry in this area, especially 
as an engine for our economy.
    And Mitch Bainwol of the Recording Industry Association of 
America, which has been fighting this issue aggressively 
domestically, especially, so we very much appreciate your 
participation.
    We would like to hear from you and why don't we start with, 
if you are ready, Mr. Valenti, we will start with you and get 
your thoughts, then move down the line.

STATEMENT OF JACK VALENTI, PRESIDENT AND CHIEF 
            EXECUTIVE OFFICER, MOTION PICTURE 
            ASSOCIATION OF AMERICA

    Mr. Valenti. Thank you, Mr. Chairman. In my 5 minutes, I am 
not going to take----
    Senator Gregg. Take as much time as you feel you need to 
make your presentation.
    Mr. Valenti. I will try to be brief because I think that is 
probably more salutary from your standpoint.
    I think it is fair to say that the American movie industry 
faces parallel challenges, both here and abroad, in the kind of 
thievery that is going on, and it has been relentless and 
consistent.
    Right now, about--I would say that one of our problems 
abroad is the intrusion by organized crime into the theft of 
movies. We find that the theft of movies in foreign countries 
right now is high reward and low risk. Indeed, our 
investigators tell us that drug dealers are finding they can 
make a larger profit without the bleak prospect of being shot 
in gang wars or going to long terms in prison by giving up the 
drug business and going to the stealing of movies.
    Also, our investigators tell us that they believe that 
immense sums are being funded to terrorists. Now, they don't 
have specific evidence of it, but so far, they think that is 
pretty clear.
    If you add to that a rapidly growing thievery that is going 
on in the Internet, and Mr. Bainwol will tell you about the 
devastation reaped on the music industry, but it is beginning 
to happen with us. This thievery is going to grow more 
malignant in the future with this rapid avalanche and this 
increased velocity of take-down times. Cal Tech has had an 
experiment called FAST when I visited with their labs in 
October. Last summer, they brought down a DVD-quality movie in 
5 seconds.
    Internet II, which is a consortium of scientists headed by 
Dr. Molly Broad, President of the University of North Carolina, 
also conducted experiments. They sent 6.7 gigabytes, 6.7 
billion bytes of graphics and text, which is about one-third 
longer than the average movie. They sent it halfway around the 
world, 12,500 miles, in 1 minute.
    So you take these unbelievable and bewildering speeds that 
can be in the marketplace in 18 months to 2 years, you can see 
why it gives us in the media industry more than a few Maalox 
moments.
    This a really dark and menacing threat for this economy. 
You might ask, why? Because intellectual property composes 
about 5-plus percent of the gross domestic product of this 
country. We bring in more international revenues than 
agriculture, than aircraft, than automobiles and parts. Most 
people don't know that. We are creating new jobs at three times 
the rate of the rest of the economy, Mr. Chairman. These are 
not minimum-wage jobs.
    The movie industry alone has a surplus balance of trade 
with every single country in the world with whom we do 
business. I don't believe that any other American enterprise 
can make that statement, and I don't have to tell you that this 
is a time when we are suffering of over $400 billion in deficit 
balance of trade.
    So we are an awesome engine of economic growth, no question 
about it. No one can again say that. So I think what would be 
more interesting to you on trade would be what are our 
recommendations? What do we think ought to be done? In my 
written testimony, I give, I think, some vivid detail on that, 
but let me just sketch out for you some of the things we ought 
to do.
    One, increase funding to the FBI and earmark that for 
properly equipped and trained agents for work in the field. 
Just developing a small group of agents, and I know the FBI has 
got tremendous, formidable problems out there, but just a tiny 
group of agents dedicated to this would make a significant 
difference. I want to pay tribute to the Federal Bureau of 
Investigation and to the U.S. Attorneys around this country and 
to the Justice Department. They have been magnificent in trying 
to help, but they are, I don't have to tell you, overwhelmed 
themselves.
    Number two, raise the profile of intellectual property 
enforcement among the international agencies. Now, the United 
States Trade Representative and his merry band of warriors do a 
tremendous job. They have been very effective and relentless in 
their energetic approach to this, but that is only with the 
trade tools at their disposal. They need beefing up. They 
really do, and especially in the Intellectual Property 
Division. Their resources are stretched to the stretching 
point, snapping point.
    So we suggest creating a new Office of Intellectual 
Property Protection within the USTR and headed by a new 
Assistant USTR with a suitable staff. If they want to go higher 
than that, that is fine. Right now, this IP function is being 
handled by a group that is responsible not only for 
intellectual property, but for investments and service. That is 
a huge undertaking. It is too much to handle. The portfolio is 
too large.
    And given the State Department's important role, we 
recommend a larger profile for the State Department's 
Intellectual Property Division. I think that is necessary. We 
think you have to lift it, giving it, in the jargon of the 
State Department, an officer director level, to allow them to 
recruit more experienced Foreign Service officers to be 
involved in the situation.
    And three, I think you need to revitalize the 301s to help, 
Special 301s to help on international lobbying efforts. We need 
to use, and again using jargon of the USTR, out-cycle reviews 
to make sure that these nations sustain the commitments they 
have made and the pledges they have offered. But this takes 
time. There needs to be staffing for that. And therefore, we 
hope the administration also is going to act quickly on our 
GSP, Generalized System of Preferences Petitions, such as the 
ones confronting Russia and Lebanon and Brazil at this time.
    And number four, we need to explore innovative approaches 
to our Embassies abroad. The Patent and Trademark Office has 
done something I think quite inventive. They have assigned one 
of their most experienced international intellectual property 
lawyers to the U.S. Embassy in Beijing, working very closely 
with similarly put people in China. That is a terrific thing. I 
applaud that. A Federal prosecutor is now finishing up an 
assignment with the Beijing Embassy, working with prosecutors 
in China and helping them understand how best to do prosecution 
of this time. Our Ambassadors have just got to lift the level 
of the intensity of intellectual property protection.
    Thank you, Mr. Chairman of the Appropriations Committee, 
for coming here.
    Our Ambassador to Russia, I might point out, has been 
wonderful, has been splendidly effective in working this. He 
has really gone above and beyond the call of duty of a U.S. 
Ambassador in this area, and well he might because Russia is 
one of the most troubled arenas in the world so far as piracy 
is concerned.
    There are a lot of other things that I think could be done, 
but I will stop here now and let my colleagues inform you 
further. Thank you, Mr. Chairman, for letting me speak to you.
    Senator Gregg. Thank you. That is important. We appreciate 
it.
    [The statement follows:]

                   Prepared Statement of Jack Valenti

    The challenges of ensuring effective protection of intellectual 
property have skyrocketed in recent years. The large-scale involvement 
of organized crime in the international replication and export of 
pirated DVDs, and the large and rapidly growing threat of Internet 
piracy represent major challenges for the filmed entertainment industry 
and other copyright industries to overcome.
    Motion picture production and services employment growth has been 
more than double the rate for all Non-Farm jobs since 1972: 4.8 percent 
for motion picture production and service jobs, compared with 1.9 
percent for all non-farm jobs.
    The cumulative effect over the past 30 years is even more striking. 
Motion picture production and services jobs grew 292 percent, while all 
non-farm jobs grew 78 percent over that period. Ensuring the continued 
health of the filmed entertainment industries, and the U.S. copyright 
industry as a whole, is in the national interest.
    I welcome your interest, Mr. Chairman, in ensuring that the Federal 
Government is organized and equipped to confront the growing challenges 
of protecting intellectual property, both at home and abroad. And 
increasingly, piracy knows no boundaries. The line between domestic and 
international piracy is becoming increasingly blurred.

                          DOMESTIC ENFORCEMENT

    Over the last several years, the Department of Justice, and the 
various federal law enforcement investigative agencies, have devoted 
increased attention to enforcing the laws prohibiting copyright and 
other intellectual property crimes. We greatly appreciate these 
efforts. Stepped-up prosecution not only addresses the serious matter 
of intellectual property crimes committed in the United States, but 
also serves as a positive example for our trading partners, who 
understand that our country not only exhorts other nations to protect 
intellectual property, but also exerts substantial efforts itself.
    Much of the augmented resources devoted to domestic intellectual 
property enforcement has gone toward establishing prosecutorial 
interest and expertise. For instance, the Computer Crime and 
Intellectual Property Section of the Justice Department's Criminal 
Division has significantly increased its staffing. Over a dozen U.S. 
Attorney's Offices around the nation have established ``CHIP'' 
(Computer Hacking and Intellectual Property) Units to ensure that 
prosecutors are trained to investigate online criminal activity, 
including intellectual property crimes. Indeed, through the ``CTC'' 
(Computer and Telecommunications Coordinator) program, there are 
prosecutors in every jurisdiction in the country prepared to address 
this important crime problem. These efforts are vital to sustain and 
grow: as the key evidence necessary to convict is increasingly found in 
computer hard drives and ISP records, we need prosecutors adept at 
understanding these crime scenes and at explaining them to judges and 
juries.
    Unfortunately, the investigative resources devoted to this issue 
have not kept pace with this welcome expansion of prosecutorial 
attention. In fact, with the migration to the Department of Homeland 
Security of agencies that had previously been able to devote more 
attention to criminal intellectual property enforcement, such as the 
Bureau of Immigration and Customs Enforcement and the U.S. Secret 
Service, the FBI is increasingly the only choice for investigating 
intellectual property crime. Yet, we are receiving a consistent message 
that promising leads in intellectual property cases are not being 
pursued because of a lack of trained tech-savvy investigators who are 
familiar with how to conduct intellectual property investigations.
    We do, of course, understand that the war on terror and the 
imperative to keep our people safe properly consume the lion's share of 
investigative attention at the FBI and other investigative agencies. 
But this is not an ``either/or'' proposition: we have the resources and 
we have the need to stop terrorism and combat intellectual property 
crime.

                     FIGHTING INTERNATIONAL PIRACY

Trade Tools
    Effective use of trade tools has been, and remains, an essential 
part of our strategy to protect American intellectual property abroad. 
Over the past two decades during which global piracy emerged as a major 
concern for the U.S. creative industries, trade tools have played a 
critical role in establishing legal norms of effective copyright 
protection and in providing the impetus for foreign countries to take 
these legal obligations seriously.
    Special 301 remains a key tool for industry to communicate its 
priorities for combating intellectual property problems with the U.S. 
Government, for the U.S. Government to set its own priorities for 
tackling these problems, and for the U.S. Government to communicate and 
influence foreign government responses to international piracy. For 
example, last year USTR's effective use of Special 301 helped prompt 
Taiwan to monitor more closely its optical disc factories and to launch 
effective raids against the night markets, which had teemed with pirate 
products. However, for the past two years, one key tool that evolved 
informally under the Special 301 program--the so-called ``Out-of-Cycle 
Review''--has been used with decreasing frequency. These ``Out-of-Cycle 
Reviews'' are a mechanism for reviewing progress in addressing piracy 
in key countries at an appropriate internal partway through the annual 
Special 301 cycle. We believe that resource constraints may have led to 
the decision to decrease the number of countries with which the U.S. 
Government holds these interim reviews of progress under Special 301.
    The Generalized System of Preferences (GSP) represents another 
trade tool provided by Congress that has proven to be an effective 
point of leverage in motivating countries to take their intellectual 
property obligations seriously. Unfortunately, a combination of 
factors, including several temporary lapses in the GSP program, helped 
weaken the effective use of this leverage. However, the GSP program is 
currently authorized and a major review under the GSP program is 
scheduled for July 1. It is time to reinvigorate this unilateral trade 
benefits program to help encourage countries to find the political will 
to enforce effectively their intellectual property laws.
    The conclusion of the WTO Agreement on Trade-Related Aspects of 
Intellectual Property Rights in May of 1994 established enforceable 
global standards for copyright protection. USTR immediately tested 
those standards in a series of dispute settlement cases in the mid-90s, 
leading to improvements in copyright laws and standards of protection 
in a number of countries in Western Europe. Now that inadequate 
enforcement has replaced statutory deficiencies as the key TRIPS-
related problem, the copyright industries are working with USTR to find 
a good case to test the fairly broad enforcement standards of TRIPS.
    Over the past two years, the U.S. Trade Representative's Office has 
negotiated a network of Free Trade Agreements that lift the 
international copyright standards to a whole new level, helping to 
ensure that our trading partners have the tools to help us confront the 
new piracy challenges that color our international working environment. 
MPAA is a big fan of these Free Trade Agreements. While individually, 
several of the countries are small, collectively, the FTAs negotiated 
to date cover export markets worth at more than $742 million to the 
filmed entertainment industries. Taken together, our FTA partners 
provide the eighth largest market for American filmed entertainment.
Traditional Diplomacy
    The threat of trade sanctions is a useful weapon, but not 
sufficient to arm the United States for an effective fight against 
piracy. Not every problem is covered by trade agreements or best 
addressed by threats of sanctions. Good old-fashioned high-level 
advocacy can solve a lot of problems.
    The U.S. Commerce Department has demonstrated effective and 
impressive leadership in ensuring that piracy remains at the top of our 
bilateral commercial agenda with key countries. Assistant Secretary 
William Lash, in particular, deserves commendation, and certainly has 
my personal respect, for his tireless advocacy efforts on behalf of the 
copyright industries. His pressure on the Philippines may not have won 
him friends in some Philippine circles, but it certainly helped move 
forward a long delayed optical disc law.
    The U.S. State Department, both through headquarters and the U.S. 
Embassies, also brings the weight of U.S. diplomacy to bear on 
international piracy problems. Several U.S. Ambassadors have shown 
exceptional leadership in the fight against piracy. Ambassador 
Alexander Vershbow in Russia has been particularly active in the fight 
against piracy. His hard-hitting speeches and editorials keep a beam of 
light focused on the unpleasant truth of Russia's endemic piracy. He 
and his staff have tirelessly pressed for key legislative and policy 
reforms. The fight against piracy in Russia is far from over; however, 
the pieces of a solution may finally be coming together. In addition to 
the Embassy's diplomatic efforts, other key pieces are the threat of 
trade sanctions, the carrot of WTO accession, and the realization by 
President Putin that Russian economic interests are best served by 
protecting intellectual property.
Intelligence gathering and analysis
    Fighting the organized crime groups, and perhaps even the terrorist 
organizations that currently profit from piracy requires intelligence 
gathering tools that are far beyond what private industry can employ. 
There may be a larger role for the Government agencies, whether it is 
Treasury, Justice, State Department's Intelligence and Research Bureau, 
or the CIA, to help track the money flows and uncover possible links 
between piracy, organized criminal rings and terrorism.
Training and Capacity Building
    Many agencies of the U.S. government play important roles in 
training and building the capacity of foreign governments to address 
intellectual property challenges. The Copyright Office of the Library 
of Congress, the Patent and Trade Office, USAID, Justice Department's 
Overseas Prosecutorial Development Assistance and Training Office, and 
State Department's International Narcotics and Law Enforcement Affairs 
are all involved in training and capacity building in the area of 
intellectual property law and enforcement. In one of the more 
commendable efforts in good government, the Intellectual Property 
Division in State Department's Economic Bureau took the lead in 
organizing a regular, informal series of meetings aimed at ensuring 
that those agencies that choose to participate are aware of the 
training programs others have organized. This effort has helped ensure 
a minimum of duplication and the maximization of taxpayer dollars. To 
our delight, the State Department also actively seeks participation of 
U.S. industries and trade associations, which are also deeply involved 
in anti-piracy training efforts.
    The U.S. State Department has two new, innovative programs for 
capacity building that deserve close inspection. Utilizing $2.5 million 
allocated by Congress for this fiscal year, the State Department is in 
the process of identifying recipients among foreign law enforcement 
agencies that could use start-up funds to build out their enforcement 
capacities in order to better meet their obligations under 
international copyright and intellectual property treaties. Helping 
foreign governments build effective copyright enforcement capabilities 
helps them and helps us. We are hopeful that this program will prove 
its worth and merit ongoing Congressional funding.
    The U.S. State Department is to be commended for experimenting with 
a new, cultural outreach tool to get the message out regarding the 
importance of protecting intellectual property. Just last Friday, U.S. 
State Department's Bureau of Educational and Cultural Affairs published 
a request for grant proposals entitled ``Intellectual Property Rights 
For Artists'' soliciting project proposals to increase awareness among 
filmmakers, writers, composers, musicians, and other experts of the 
need to protect against unauthorized replication and distribution of 
their cultural works to protect each nation's cultural heritage as well 
as safeguard the individual property rights of its artists. Using 
hands-on workshops, the project aims to assist artists in Brazil, 
China, Egypt, Israel, Lebanon, Morocco and/or Russia to navigate the 
legislative systems in their countries in order to influence their 
governments to adopt and/or enforce good copyright laws. If this 
project yields innovative responses and proves itself to be effective, 
this may be a type of capacity building that could provide a useful 
supplement to other sorts of more technical training.

    MPAA RECOMMENDATIONS FOR STRENGTHENING THE ABILITY OF THE U.S. 
                       GOVERNMENT TO FIGHT PIRACY

Increase funding to the FBI and earmark it for properly equipped and 
        trained agents to work cases in the field
    Even devoting a relatively small number of agents to investigating 
domestic piracy can make a significant difference. It will deliver the 
crucial message, necessary for deterrence, that the U.S. government 
recognizes the importance of intellectual property, and will treat 
theft of intellectual property with the same attention as other types 
of serious economic crime.

Raise the profile for intellectual property enforcement among the 
        international agencies
    There is no denying that USTR's resources have been stretched to 
the breaking point. This subcommittee could significantly enhance 
USTR's ability to meet its enforcement mandate by raising the profile 
of the intellectual property function at USTR, increasing its staffing 
levels and resources, and dedicating some staff specifically to the 
enforcement function. There are several options for raising the 
intellectual property profile at USTR. These include creating a new 
Ambassadorial position that would be subject to advice and consent of 
the Senate; and/or creating a new Office of Intellectual Property 
Protection to be headed by a new Assistant U.S. Trade Representative 
for Intellectual Property. Currently the intellectual property function 
is headed by a Deputy Assistant U.S. Trade Representative, who is part 
of an office that is also responsible for services and investment--an 
enormous portfolio of issues. Whether an Ambassador or an AUSTR heads 
the intellectual property efforts, either option, to be effective, will 
require an additional Senior Executive Service slot, additional staff, 
at least one of whom should be solely dedicated to enforcement of 
existing agreements, and the associated financial resources.
    Similarly, a heightened profile for the U.S. State Department's 
Intellectual Property Division might be beneficial. Heading this office 
at the Office-Director level could help them recruit even more 
experienced Foreign Service Officers and lend greater weight to their 
voice in intra-agency and inter-agency debates.

Reinvigorate key trade tools
    Given the central importance of Special 301 to our international 
lobbying efforts, the subcommittee may wish to assure itself that the 
key Special 301 agencies have adequate resources to support ``Out-of-
Cycle Reviews'' to ensure that countries sustain their efforts to 
improve the protection throughout the year.
    Petitions are pending to suspend GSP benefits for Russia, Lebanon, 
Brazil, and other countries. An important Presidential review under the 
GSP program is due for completion on July 1. We hope the Administration 
will act upon our petitions, unless of course these countries make 
meaningful and sustained progress prior to this date.

Explore Innovative Approaches to Staffing at U.S. Embassies
    Two interesting experiments in melding legal expertise and strong 
language skills may also prove to be interesting precedents to be 
considered for other countries. The Patent and Trademark Office will be 
assigning one of its experienced international intellectual property 
lawyers to the U.S. Embassy in China later this summer to bolster the 
Embassy's expertise and ability to work directly with Chinese 
intellectual property experts. Similarly, a federal prosecutor is 
currently finishing up an assignment to Beijing where he worked 
directly with Chinese prosecutors and judges on a range of legal reform 
issues, including intellectual property. Both of these assignments seem 
to us to be quite innovative. These experiences may provide some 
insights into how to move beyond putting trade pressure on the 
executive branches of foreign governments to find effective ways to 
help strengthen and motivate prosecutors and judges, who play a 
critical role in effective intellectual property enforcement.

Hone USG efforts at international intellectual property training and 
        capacity building
    We encourage Congress to fund a significant expansion of the $2.5 
million capacity-building program for State Department for fiscal year 
2004, so that resources continue to be available to aid foreign law 
enforcement efforts.
    We also encourage continued efforts at coordination among all the 
training agencies. With the growing importance of trade-related 
capacity building as well as the law reform projects funded by the 
Agency for International Development, strengthening the information 
sharing among AID and the rest of the federal agencies and involved 
U.S. industries would be particularly worthwhile.

                           MPAA/MPA'S EFFORTS

    Lest I leave you with the impression that we expect our government 
to do all the heavy lifting, I want to remind you that MPAA and its 
sister organization outside the United States, the Motion Picture 
Association (MPA), operate anti-piracy programs in over 60 countries. 
These anti-piracy programs help investigate and cooperate with local 
authorities in raiding pirate replication and distribution sites. In 
2003 MPA in cooperation with local law enforcement initiated almost 
66,000 investigations and inspections, participated in 32,000 raids, 
and seized over 16 million DVDs and 28 million VCDs. We also oversaw 
civil litigation, especially against commercial sellers of DVDs 
decryption software and websites selling pirated DVDs. In appropriate 
circumstances, MPA also brings civil cases, whether against Internet up 
and downloading, or in some cases against cable operators, hotels or 
other legitimate companies that are simply cutting corners. Our anti-
piracy experts present expert testimony in criminal prosecutions. We 
also help organize educational and public relations campaigns to inform 
the public about the evils of piracy, as well as lobby for appropriate 
copyright reform and other legal tools, such as ensuring that organized 
crime statutes include copyright as an actionable offense.

                               CONCLUSION

    Your leadership, Mr. Chairman, in reviewing whether all these 
agencies have enough resources at an appropriate level to ensure 
effective response is key to ensuring that the U.S. Government remains 
adequately equipped to aid us in our fight against worldwide piracy.

    Senator Gregg. Mr. Bainwol.
STATEMENT OF MITCH BAINWOL, CHAIRMAN AND CHIEF 
            EXECUTIVE OFFICER, RECORDING INDUSTRY 
            ASSOCIATION OF AMERICA

    Mr. Bainwol. Mr. Chairman, Mr. Chairman, thank you both for 
focusing Congress' attention on the devastating impact of 
piracy, and more important, on the steps Government can take to 
address this enormous problem.
    I am the CEO of the Recording Industry Association of 
America. Our members create and distribute 90 percent of the 
recorded works in the United States. The United States 
represents about 40 percent of a 32.7 billion unit global 
market.
    The 1980s and the 1990s were terrific decades for music 
sales. Domestic shipments soared from about $4 billion in 1980 
to about $15 billion in 1999. The pattern globally was similar, 
soaring from $11 billion in 1980 to about $39 billion in 1999. 
And then things went south.
    Part of the explanation is the pervasiveness of 
international piracy professionally, the old fashioned way, 
factory produced cassettes and CDs. But there are two new and 
more salient triggers. First, the enormous wave of illegal file 
sharing that began with the centralized Napster was followed by 
a surge of decentralized P2P networks. And second, the 
widespread proliferation of CD marketing that made it so very 
easy to reproduce high-quality sound recordings.
    We found ourselves in a rapidly evolving market defined by, 
one, widespread ambiguity about what you can and can't do to 
share music, and two, a dramatic decline in the barriers to 
piracy with either a CD burner or physical piracy or a home 
computer hooked up to the Internet for a P2P piracy and 
recently for broadband. It became easier than ever to get music 
without paying for it.
    In rough terms, the combination of global physical piracy, 
user Internet piracy, and illegal CD burning generated a 20 
percent decline in shipments since 1999. The impact of the 
revenue crash has been profound, both in human and in creative 
terms. A thousand jobs lost at Warner in March. Several weeks 
ago at EMI, 1,500 jobs lost. Last year at Sony, another 1,000. 
Over the last 2 years at Universal, 1,500. There were major 
losses at BMG, as well. And none of this takes into account the 
impact of the thousands of closures of regional outlets. Lots 
of jobs have been lost there, as well.
    Yet the creative loss is even more troubling. Artists' 
rosters have been slashed dramatically as companies no longer 
can afford to carry as many dreams. Piracy robs industry of the 
capital it needs to invest. As a result, fewer artists are 
finding the financial support they need to put food on the 
table. The path to artistic success in music has never been 
linear, speedy, or terribly predictable. A performer can break 
with his first album, his second album, or never at all. In 
today's world, however, smaller rosters accommodate fewer 
starting performers. The price? Perhaps the next Norah Jones or 
Willie Nelson or the next Beyonce.
    We have talked about the online problem. The most important 
thing this Congress can do is recognize the true nature of the 
technological challenge. It isn't a case of digital versus 
plastic. It is not content versus technology or old versus new. 
It is legitimate versus illegitimate. Shine the spotlight and 
here is what you will find.
    The legitimate industry: We pay taxes, we provide jobs. We 
contribute positively to the trade balance. We label our 
content and we compensate songwriters and artists unfailingly 
who bring to the market great new products that fans everywhere 
enjoy.
    The illegitimate industry: They have hijacked the neutral 
technology P2P. They don't pay taxes. They don't provide jobs. 
They don't impact trade. They don't label. They don't even 
effectively shield kids from pornography. And they certainly 
don't pay songwriters or artists. Moreover, these networks do 
compromise user privacy. They do jeopardize computer security. 
And they do induce illegal behavior without anything remotely 
close to adequate disclosure. New product? They don't do that.
    Shine the spotlight through the fog and demand 
accountability and help us educate parents, teenagers, and pre-
teens how to enjoy music in ways that preserve the future of 
the creative enterprise. There will always be ways to steal 
music technically. There will always be ways to do that. So 
what we have got to do is jointly spread the message that IP 
matters, that the future of music for the creators and fans 
alike is predicated on the simple principle that you pay for 
what you get.
    While nothing is more vital than sending the right message 
that IP matters, enforcement would be a close second, so we 
were very heartened last week with Operation Fastlink, the 
announcement by Attorney General Ashcroft. They deserve 
enormous credit for the 11-nation coordinated strike on the 
pre-release groups that make it sport to put content on the 
Internet before it is even released commercially.
    We think there is a real promise in the new task force that 
the AG has announced under the capable leadership of David 
Israelite, and of course we are delighted with the recent 
announcement of the United States-China Joint Commission on 
Commerce and Trade. USTR and the Commerce Department deserve 
great praise for achieving tangible specific commitments from 
the Chinese. Moving forward, we think it wise that Congress 
seek to elevate the status of international IP protection and 
we offer these specific suggestions that parallel much of what 
Mr. Valenti had to say.
    One, elevate the status of trade-related IP at USTR by 
creating a special Ambassador for Intellectual Property.
    Two, consider separating out from the USTR Office that 
manages service and investment a stand-alone IP Office with 
sufficient staffing to ensure the obligations made by our 
trading partners are honored.
    Three, ensure that Commerce, PTO, and State have adequate 
resources to assist USTR on these issues. USTR is obviously 
tiny and needs the help.
    Four, as Jack suggested, consider elevating the State 
Department Intellectual Property Division to office-level 
status, and the $2.5 million investment made last year for IP 
capacity building may be maintained and extended.
    On behalf of the music community, we thank you for your 
focus and attention on this issue and look forward to working 
with you.
    Senator Gregg. Thank you very much.
    [The statement follows:]

                  Prepared Statement of Mitch Bainwol

    The Recording Industry Association of America (RIAA) is the trade 
group that represents the U.S. recording industry. Our mission is to 
foster a business and legal climate that supports and promotes our 
members' creative and financial vitality. Our members are the record 
companies that comprise the most vibrant national music industry in the 
world. RIAA members create, manufacture and/or distribute approximately 
90 percent of all legitimate sound recordings produced and sold in the 
United States.
    Music is the world's universal form of communication. It touches 
every person of every culture on the globe to the tune of $32 billion 
annually, and the U.S. recording industry accounts for more than one-
third of that world market. Our members create employment for thousands 
of people, including singers, musicians, producers, sound engineers, 
record promoters and retail salespersons, to name only a few.

The importance of the U.S. recording industry, and intellectual 
        property protection, to the U.S. economy
    International markets are vital to our companies and our creative 
talent. Exports and other foreign sales account for over fifty percent 
of the revenues of the U.S. record industry. This strong export base 
sustains American jobs.
    In this respect, the protection of our intellectual property rights 
abroad is vital to promoting America's competitive advantages in world 
commerce. As our trade deficit has soared, we call upon Congress to 
consider more closely the relationship between our widening trade and 
current account deficits and copyright piracy and to take steps to 
enable us to more effectively protect our intellectual property rights 
at home and abroad.
    An important part of our nation's competitive strength lies in the 
creation of knowledge-intensive intellectual property-based goods and 
services. This is one of those economic activities that Americans do 
better than the people of any other nation. The ``core'' U.S. copyright 
industries account for more than five percent of U.S. GDP. Employment 
in our industries has doubled over the past 20 years, growing three 
times as fast as the annual growth rate of the U.S. economy as whole. 
The foreign sales and exports of U.S. copyright industries were nearly 
$90 billion in 2001, an amount greater than almost any other industry 
sector, including automobiles and auto parts, agriculture and aircraft.
    In a sense, the intellectual property of the United States is like 
a warehouse of ideas and creativity. For people to walk in and steal 
them is no more tolerable than theft of physical goods. And the sale of 
our recordings abroad makes a major contribution to America's current 
account balances. Each and every sale of a pirated product abroad that 
substitutes for the sale of a legitimate American product increases our 
current account deficit. As a result, Americans employed in competitive 
industries like ours are denied financial benefits that should have 
occurred but did not.

The Effect of Music Piracy
    The piracy of music is almost as old as the music industry itself, 
but historically it was difficult for the criminal to reproduce copies 
as good as the real thing. Now with the advent of digital recordings 
criminals can reproduce near perfect copies of any recording. There is 
massive manufacture and traffic of illegal CDs, both in the form of 
molded CDs that are produced in large plants, and CD-R's produced with 
blank optical discs and readily available computer CD-R burners.
    Annual world-wide pirate sales approach 2 billion units; worth an 
estimated $4 to $5 billion. Globally, 2 in 5 recordings are pirate 
copies. Total optical disc manufacturing capacity (video/audio CDs, CD-
ROMs and DVD)--stands at well over 40 billion units, having quadrupled 
in the past five years and greatly exceeds legitimate demand. This 
creates a business environment ripe for exploitation by criminal 
syndicates and even international terrorist groups, at times shielded 
by governments hostile to our interests. Given that the pirate producer 
has few or none of the overheads associated with genuine production, 
the profit margin is substantial.
    The battle against intellectual property theft must be unrelenting. 
Digital technology and internet piracy have greatly exacerbated our 
problems. Our country must employ every tool at its disposal, including 
the critically important leverage provided by international trade 
agreements.

Recording Industry Actions to address Piracy
    Through our international affiliate, the International Federation 
of Phonographic Industries, or ``IFPI'', the recording industry 
maintains a global anti-piracy team of investigators and analysts, made 
up largely of ex-law enforcement personnel who develop civil litigation 
and work with law enforcement personnel in pursuit of criminal 
prosecutions. We also have an active online anti-piracy program. We 
work in close collaboration with governments, police forces and customs 
departments worldwide.
    We also are engaged in extensive educational efforts, designed to 
increase public understanding of the value of intellectual property and 
to improve overall awareness of copyright laws, on a global basis.
    We work closely with national and international bodies to encourage 
adoption of laws that strengthen copyright protection and promote an 
environment in which our industry can continue to innovate.

            Forensic analysis
    We maintain a unique forensics laboratory at the IFPI headquarters 
in London that traces the manufacturing source of pirate CDs through 
microscopic examination and measurement. This has helped link 
infringing discs to source factories and resulted in many raids on 
suspect plants worldwide. This in turn encouraged several governments 
including Malaysia, Poland, Bulgaria and Russia to establish their own 
forensic programs.

            International co-operation
    Primarily through the IFPI we work with government enforcement 
agencies and international crime investigation organizations on a 
global basis. Interpol has recently created the Intellectual Property 
Crime Action Group (IIPCAG) in response to the growing incidence of 
counterfeit or copyright infringing goods. We are very active within 
this group, and also maintain an important partnership with the World 
Customs Organization's intellectual property strategic group to make IP 
protection a priority for customs authorities worldwide.

            Tackling piracy at source
    Increasingly, enforcement actions are being concentrated at the 
source of pirate operations, where raids and seizures can result in the 
confiscation of manufacturing or copying equipment. In 2002, 71 CD 
manufacturing lines were de-commissioned, 49 of them in Asia, up from 
42 the year before. This represents a production capacity of over 300 
million units, bigger than any legitimate music CD market except the 
United States.
    Nearly 7,000 CD copying machines were seized, with a production 
capacity of 250 million pirate discs per annum--up from 4,500 seized in 
2001.
    Seizures of blank discs and artwork inlays also rose sharply. In 
2002 just over 90 million blank discs were seized with nearly 80 
percent of these found in Latin America. They included huge one-off 
seizures of 13 million discs in Paraguay, 12.5 million in Mexico, 3 
million in Colombia and 1.2 million in Argentina.
    As you can see from the above, the recording industry is not 
sitting back and waiting for others to act. We are investing millions 
of dollars around the world to protect our products, but we are 
battling forces far beyond our ability, acting alone, to solve. First, 
government corruption in many other countries denies us any possibility 
of criminal or civil justice. In addition, and perhaps as part of this, 
there is a well-established link between piracy, organized crime, and 
even international terrorism which uses music piracy to divert huge 
sums of money to other criminal enterprises. Recent testimony by a 
Mafia boss from Forcella, Naples (February, 2003), clearly illustrated 
that the Mafia are directly involved in the production and distribution 
of pirate music, carving up the territory between various gangs and 
paying a share of profits to godfathers'.

The Importance of the U.S. Government to our industry
    America's music composers, performers and producers could not 
survive in the battle against piracy, domestic and international, but 
for the absolutely critical and splendid assistance that we have 
received over the past 15 years from the United States Government, 
Executive and Legislative branches--Republican and Democrat.
    We rely heavily upon our government for our very survival in 
combating the plague of music piracy. The U.S. Government does more 
than any other government in protecting its nation's intellectual 
property, and does so with vigor and determination, albeit with limited 
resources.
    Since the passage of the 1988 Omnibus Trade and Competitiveness 
Act, intellectual property issues have been an integral part of our 
country's international trade agenda. When it comes to U.S. Government 
efforts in this regard, it all starts at the Office of the U.S. Trade 
Representative. USTR develops, coordinates and implements our nation's 
trade policy. With its small but highly dedicated staff of only 200 
individuals, USTR provides leadership and negotiating expertise in 
nearly all trade policy areas.
    It is in the context of the massive size and scope of our nation's 
international trade activity that we look for so much help in 
protecting our nation's creative wealth. Of course, USTR is not tasked 
with doing all these things alone. Its mission is to develop, 
coordinate and implement our nation's trade policy in conjunction with 
other relevant and highly interested agencies, including the 
Departments of State and Commerce and, within Commerce, the U.S. Patent 
and Trademark Office, as well as the Copyright Office in the Library of 
Congress. Ultimately, helping us battle piracy abroad requires the 
involvement of these and other agencies of the U.S. Government, 
including the Ambassadors and officers in many of our embassies abroad.

Existing Tools for Addressing International Piracy Problems
    Congress has already provided several ``tools'' for our government 
to use in helping us better protect our intellectual property abroad.
    Special 301.--The first and most important tool for doing this, and 
one that is extremely important to us, is the annual ``Special 301'' 
review and report issued in just a few days. This annual review and 
report, mandated by the 1988 amendments to the Trade Act of 1974, 
requires USTR, with the active assistance of these other agencies, to 
identify foreign countries that deny adequate and effective protection 
of intellectual property rights or fair and equitable market access for 
U.S. persons that rely on intellectual property protection.
    Once this pool of countries has been determined, the USTR, again 
with the active involvement of other agencies, is required to decide 
which, if any, of these countries should be designated ``Priority 
Foreign Countries.'' Priority Foreign Countries are those countries 
that: (1) have the most onerous and egregious acts, policies and 
practices which have the greatest adverse impact (actual or potential) 
on the relevant U.S. products; and (2) are not engaged in good faith 
negotiations or making significant progress in negotiations to address 
these problems. If a trading partner is identified as a Priority 
Foreign Country, USTR must decide within 30 days whether to initiate an 
investigation of those acts, policies, and practices that were the 
basis for identifying the country as a Priority Foreign Country. A 
Special 301 investigation is similar to an investigation initiated in 
response to an industry Section 301 petition, except that the maximum 
time for an investigation under Special 301 is shorter in some 
circumstances.
    This annual review is an outstanding tool for leveraging other 
countries into making needed improvements to their intellectual 
property laws and/or enforcement. It also serves as the mechanism for 
the executive branch to set its annual agenda for how it will address 
intellectual property matters in our bilateral, regional and 
multilateral trade relationships, and how it will allocate its 
resources in combating intellectual property problems globally.
    USTR and the other agencies do a tremendous job with the limited 
resources available to them, but there is little doubt that this 
program could be more effective if there were additional resources. For 
example, an extremely effective aspect of Special 301 is conducting 
``out-of-cycle'' reviews of selected countries over the course of the 
year, and other less structured but intensive bilateral engagement. 
Otherwise, some countries conduct a flurry of activity prior to April 
30 in order to avoid an undesirable designation in the report, then 
turn a blind eye to piracy once the report is issued. This can be 
remedied by re-visiting the most problematic countries over the course 
of the year by announcing that they will be reviewed again after a 
certain number of months. However, limited resources at several 
agencies, including at USTR, in recent years have limited the 
utilization of the very effective tool of out-of-cycle reviews.
    ``GSP'' Trade Benefits.--Another important tool in our trade policy 
arsenal is the conditioning of the grant of duty-free importation to 
developing countries under the Generalized System of Preferences (GSP) 
on adequate and effective intellectual property protection in such 
countries. The law authorizes the President to suspend or revoke all or 
part of a country's GSP benefits if he determines that it denies 
adequate and effective intellectual property protection to U.S. right-
holders. In the past, suspension of such benefits has been an extremely 
effective tool in achieving meaningful IPR improvements in these 
countries. We have pending petitions to suspend GSP benefits for 
Russia, Brazil, and other countries. An important Presidential review 
is due for completion on July 1. We hope the Administration will act 
upon our petitions, unless of course these countries make meaningful 
and sustained progress prior to this date.
    The TRIPS Agreement in the WTO.--An important multilateral tool is 
active U.S. Government participation in the World Trade Organization's 
Agreement on Trade-Related Intellectual Property Rights, or the ``TRIPS 
Agreement. All 146 members of the WTO are obligated to provide and 
enforce minimum standards of intellectual property protection to all 
the other members. If they fail to do so, the WTO provides an effective 
dispute resolution process that provides with imposition of trade 
sanctions against countries that fail to comply with TRIPS obligations. 
The TRIPS Agreement, which came into effect in 1995, ensured that 
scores of countries adopted and committed to enforce fairly modern, 
substantive copyright laws. This was a tremendous achievement. 
Monitoring full implementation of the TRIPS Agreement, and aggressive 
use of WTO dispute settlement against non-compliance, remains a top 
priority for our association and our members.
    The WIPO Digital Treaties.--Digital technology, much of which came 
onto the market after the TRIPS Agreement came into effect, has brought 
many changes and challenges to international trade and perhaps none 
more so than with respect to the protection of intellectual property 
rights. In this new digital environment, entertainment products, 
legitimate and pirated, can be transmitted across the internet in 
perfect digital form from one corner of the globe to another in a 
matter of seconds. Revolutionary new technologies of this nature 
sometimes demand that revolutionary new rules be included in the 
agreements that govern trade between nations.
    Two significant treaties to this effect were concluded at the World 
Intellectual Property Organization in 1996. Ratification and 
implementation of these treaties is a high priority for our 
organization. We are pleased that our government has made achieving 
ratification of these treaties an important element of its bilateral 
intellectual property agenda.
    Bilateral Trade Agreements.--The Administration's ambitious agenda 
to negotiate bilateral free trade agreements has proven to be an 
excellent mechanism for achieving legally-binding bilateral obligations 
from certain trading partners to ensure that digitized content and 
transmissions are correctly and adequately provided full copyright 
protection. The FTAs negotiated thus far with Jordan, Singapore, Chile, 
Australia, Morocco, and the five Central American countries under the 
CAFTA address this urgent need. We look forward to significant 
improvements in addressing rampant copyright piracy in such countries 
as Thailand, Colombia, Bolivia and Peru, where FTA negotiations begin 
this summer. The FTA negotiating process is the best avenue currently 
available to us for ensuring that these important digital copyright 
issues are adequately addressed. We praise USTR, Commerce, PTO, the 
U.S. Copyright Office and other agencies for doing so and congratulate 
them for achieving significant results in these negotiations.
    At present, it is the view of RIAA that the global political 
environment will not, at the multilateral level, accommodate the 
significant revision of laws and practices necessitated by changes in 
technology, and it is therefore necessary to address these on a 
bilateral, and occasionally regional, basis. This is extremely time and 
resource consuming--but absolutely necessary if we are to preserve the 
U.S. economic competitiveness created by American ingenuity, know how, 
and creativity. We thus strongly support the negotiation of free trade 
agreements to introduce laws and practices consistent with the needs of 
today's business world.
    In addition, we have major music piracy problems in countries with 
which the U.S. Government is not negotiating free trade agreements. 
China, Russia, Taiwan and Pakistan are particularly egregious examples, 
but there are many others. It thus is critically important that the 
U.S. Government have adequate resources to actively press these 
countries using, when appropriate, the tools already granted by 
Congress to do much more to significantly reduce music piracy in these 
countries. The recently concluded U.S.-China Joint Commission on 
Commerce and Trade included potentially significant new commitments by 
China in this regard. But significant follow-up efforts will be 
required to ensure that they live up to these new commitments.
    Other Activities.--Traditional diplomacy is also very important, 
bringing the weight to USG power to play quickly when we encounter 
foreign governments unwilling to enforce their laws against those 
pirating our products.
    Cultural outreach is useful to help empower local cultural 
communities to lobby for IP protection. Education/technical assistance 
are also important. Beyond the simple transfer of information and 
enforcement methods, such training can reinforce links among IPR 
officials within a region and build working relations between U.S. and 
foreign law enforcement.
    Intelligence gathering/analysis is also increasingly important to 
deal with the organized criminal element or terrorist financing links 
associated with international piracy.

Proposals for Reform--International
    First, given the critical nexus between intellectual property 
piracy and international trade, we propose that Congress elevate the 
status of international intellectual property protection on our 
nation's trade policy agenda. Here are our suggestions:
    USTR.--Given their central role in the trade-policy making process, 
I suggest elevating the status of trade-related intellectual property 
policy at USTR. This could be accomplished by creating a special 
Ambassador for intellectual property. Such a person would be able to 
advocate strongly on behalf of U.S. trade-related intellectual property 
interests internationally and inside the U.S. Government. A similar 
position already exists at USTR with respect to agricultural issues and 
has existed in the past with respect to textiles and apparel that could 
serve as useful models. The copyright industries alone account for over 
5 percent of U.S. GDP. While I have not seen the precise figures, IP 
industries writ large must account for well over 10 percent of U.S. 
GDP. Protection of the leading edge of the U.S. economy demands no 
less.
    The creation within USTR of a stand-alone intellectual property 
office with adequate staff to conduct multilateral and bilateral 
negotiations and to ensure that our trading partners honor their IPR 
obligations to the United States would also be useful. IPR issues are 
presently included in an office within USTR that also covers services 
and investment issues. Services and investment account for two-thirds 
of the U.S. economy. The incumbent Assistant USTR is thus responsible 
for trade and investment issues covering an enormous swath of the U.S. 
economy in addition to intellectual property issues.
    So it might be time to separate intellectual property from services 
and investment. With adequate staff, an IPR office would be able to 
ensure that the Special 301 program is used to its potential, as 
described earlier in my testimony, including through the more 
aggressive use of out-of-cycle reviews. Similarly, this expanded office 
could help ensure that the GSP program is used more aggressively to 
leverage countries to better protect American intellectual property 
rights.
    Separately, we note and are pleased that USTR is creating a 
separate and expanded Office of China Affairs to accommodate an 
increase in staff dedicated to the many China trade issues confronting 
our country. In the Consolidated Appropriations Act, 2004, Congress, 
through the leadership of Chairmen Gregg and Congressman Frank Wolf, 
provided additional funds to USTR for this purpose. Just as the 
magnitude of our trade relations with China necessitates a separate 
China office, the enormous effect of foreign piracy of American 
intellectual property argues for establishing a separate, high profile 
intellectual property office at USTR. .
    Department of Commerce.--We are very grateful for the role that 
Under Secretary Grant Aldonas and Assistant Secretary for Market Access 
and Compliance William Lash have played in helping us address music 
piracy issues in various countries. Under Secretary Aldonas played a 
critical role in IPR negotiations with China as part of the 
preparations for last week's meeting of the Joint Commission on 
Commerce and Trade. Assistant Secretary Lash has been outstanding in 
actively confronting many countries with significant piracy problems. 
We are most grateful for their personal involvement, and for the hard 
work of numerous other Commerce Department officials in helping us 
address piracy around the globe.
    Department of State.--The State Department's Ambassadors, embassy 
staff and officials here in Washington have been consistently extremely 
helpful in addressing our problems abroad. The State Department has 
consistently instructed its embassies to help us wherever problems 
arise. They have worked closely with us to ensure that their officers 
in the field are adequately trained to be able to advocate to their 
foreign counterparts about our concerns.
    State has a broad range of foreign policy issues to resolve and 
balance. Within the context of foreign policy problems competing for 
resolution, copyright piracy issues must be given the prominence they 
deserve. To better ensure this outcome, one possible improvement might 
be to elevate the State Department's Intellectual Property Division to 
``Office-level'' status, thereby granting this unit greater authority 
to carry arguments with other offices within the State Department.
    In addition, during this fiscal year, the State Department began 
playing a critical role in providing funding for helping other 
countries improve their law enforcement against copyright piracy. 
Specifically, Congress directed that State should provide $2.5 million 
on building the capacity of foreign law enforcement officials to better 
enable these countries to comply with their obligations under 
international copyright and intellectual property treaties. This was a 
one-year allocation. However, we strongly urge the Congress to continue 
and significantly expand this allocation in subsequent years so that 
this $2.5 million for fiscal year 2004 becomes the seed money for what 
will ultimately be a truly effective, ongoing program. At the same time 
that we are demanding that foreign countries prepare themselves for the 
protection of IP in the 21st century, we need to recognize that many of 
them have 19th century technology and know how. Arming them so that 
they can establish effective IPR protection helps them and helps us.
    The Patent and Trademark Office.--PTO does an excellent job in 
reaching out and promoting effective intellectual property protection 
and enforcement internationally. We appreciate its efforts in providing 
technical assistance and training to foreign IP officials and helping 
USTR negotiate strong IP provisions in the FTAs. We hope that the 
Congress will provide full funding for PTO and enact PTO's fee 
modernization bill.

Proposals for Reform--Domestic
    Here in the United the low-cost, low-risk, high-return nature of 
intellectual property theft like music piracy, when compared to other 
criminal endeavors, is attracting more criminals. Increased law 
enforcement resources to the Department of Justice Computer Crime and 
Intellectual Property (CCIPs) investigative units and Computer Hacking 
and Intellectual Property (CHIPs) prosecutorial units ensure more 
vigorous enforcement of existing laws. We applaud the Justice 
Department's recent formation of an Intellectual Property Task Force 
designed to look at ways the Department can strengthen and improve its 
efforts to combat theft of intellectual property. Because of the 
expanding geographical scope and sophistication of the organized 
criminal enterprises behind the piracy problem, cooperation among 
local, state, federal and international law enforcement entities will 
continue to be important.
    There clearly is no silver bullet answer to solving the problem of 
physical piracy. However, there are several things that can be done 
that would help change the risk/reward calculation for pirates. These 
include, among other things, increased asset forfeiture, lower criminal 
thresholds, increased sentencing guidelines, as well as easier and more 
definite loss calculations. In other contexts, these tools have 
provided law enforcement with greater flexibility and authority to 
crack down on the epicenter of criminal enterprises as opposed to 
continually dealing with the problem further downstream. It will come 
as no surprise that attacking these criminal enterprises higher ``up 
the ladder'' (i.e. acting against manufacturers and distributors as 
opposed to low-level street vendors) not only increases our deterrent 
impact, but is also a much more efficient use of our limited resources.

    Senator Gregg. Mr. Lowenstein.

STATEMENT OF DOUGLAS LOWENSTEIN, PRESIDENT, 
            ENTERTAINMENT SOFTWARE ASSOCIATION

    Mr. Lowenstein. Thank you, Mr. Chairman. I would like to 
start, I think I have testified over the years about 10 or 15 
times on a panel with Jack Valenti and I am fearful that this 
may be the last time, so I just want to say what a privilege it 
has been to follow you all the time. And the problem with 
following Jack is one tends to simply want to say, I agree with 
what he said, and move on, and he usually says it better, so 
indulge me if I say some of the same things but perhaps not as 
articulately.
    I do appreciate the opportunity to share the views of the 
American video game industry on the U.S. Government's efforts 
to control intellectual property piracy. Worldwide video game 
revenues now exceed $25 billion and the industry has been the 
fastest growing of all entertainment sectors since the late 
1990s. With the average age of game players now 29, the 
industry is poised to sustain double-digit growth in the next 5 
years, and the growth potential is even greater if we can begin 
to open up the vast expanses of markets currently closed due to 
rapid piracy.
    The typical video game now costs between $5 and $10 million 
to make, often double that, and 2 or 3 years of development 
time. But the opportunity to recover this investment through 
sales in Asia, Eastern Europe, the Middle East, and Central and 
South America is virtually nonexistent. Piracy rates in these 
regions are at 80 percent and sometimes 90 percent or even 
higher, and they serve as an effective barrier to entry, let 
alone to the establishment of a viable, legitimate market.
    The value of pirated products circulating in these markets 
is easily in the billions. Piracy in these regions includes 
illegal optical disk and video game cartridge replication and 
manufacturing facilities, the mass exporting of pirated games, 
Internet piracy, and so-called burn-to-order operations. In 
many cases, organized criminal enterprises are at the center of 
the global piracy and counterfeit rings.
    Our members are aggressive and proactive on the anti-piracy 
front, but unfortunately, our efforts alone are not enough. For 
this reason, we have been grateful for the engagement of the 
Congress and in particular this subcommittee and several 
executive branch agencies, including the State Department, the 
Commerce Department, the U.S. Trade Representative, and the 
Department of Justice in the global anti-piracy campaign.
    But I submit to you that the investment our Government 
makes in protecting the intellectual property assets of 
America's creative industries ultimately enhances this Nation's 
economic growth and vitality. For every dollar invested to 
protect entertainment software or movies or music or business 
software, every dollar invested to protect those products from 
piracy promotes export sales, contributes to a positive balance 
of trade, and the continued creation by our industry of highly 
skilled, well-paying jobs right here in the United States. In 
fact, about 40 to 50 percent of the revenue of a typical game 
company comes from overseas sales.
    Let me briefly highlight some recommendations that we think 
would build on the good work done to date by this committee, 
the subcommittee, and the Government agencies engaged in the 
fight to protect U.S. intellectual property.
    First, we recommend that the subcommittee provide 
additional resources for USTR to hire personnel dedicated to 
monitoring and enforcing compliance by signatory countries with 
the multilateral agreements and recent bilateral agreements, 
such as the new FTAs with Australia, Singapore, Morocco, and so 
forth. It is critical to recognize--critical--that negotiating 
agreements is only the beginning of the process, not the end.
    Second, we recommend that the subcommittee provide 
additional resources dedicated to intellectual property 
investigations by the Department of Justice, including the 
Computer Fraud and Intellectual Property Section and the 
various CHIPs units in several U.S. Attorneys' offices. DOJ's 
announcement last week, as we have said, Operation Fastlink, 
offers impressive evidence of the value of this kind of 
investment. Fastlink was an investigation whose roots actually 
involved game piracy and it resulted in the take-down of more 
than 200 computers in the United States and 10 other countries.
    Third, we recommend additional resources for the FBI to 
train more agents to pursue intellectual property 
investigations into the larger-scale Internet and hard goods 
piracy operations. Such investigations are the key to smashing 
the global piracy syndicates.
    Finally, we recommend that the subcommittee provide 
resources for U.S. law enforcement agencies to coordinate 
investigative operations against criminal organizations 
involved in large-scale factory-level manufacturing of pirated 
game product in Asia and Eastern Europe.
    Given America's leadership in the field of law enforcement 
in this area and the inadequate capabilities in many countries 
where piracy flourishes, the simple fact is that if the United 
States does not lead this enforcement effort against the 
organized criminal syndicates that are at the root of the 
global piracy problem, genuine long-term progress will be 
difficult to achieve.
    Mr. Chairman, the U.S. Government has been a strong and 
effective partner in the battle against global entertainment 
software piracy, but it is equally clear that the global piracy 
problem remains deeply entrenched and that it directly 
endangers America's economic security, as U.S. companies' 
survival in potential markets close off due to the proliferated 
of pirated and counterfeit goods. We need your continued help. 
We thank you for your continued interest and support.
    Senator Gregg. Thank you.
    [The statement follows:]

                Prepared Statement of Douglas Lowenstein

                              INTRODUCTION

    Mr. Chairman and members of the Subcommittee, thank you for the 
opportunity to discuss international and domestic intellectual property 
enforcement as it relates to the entertainment software industry. Our 
industry values its working relationship with Congress, the Office of 
the United States Trade Representative, and the Departments of 
Commerce, Justice, State, and Homeland Security, as we work 
cooperatively to ensure that one of America's greatest assets--its 
intellectual property--receives adequate protection, domestically and 
abroad.
    I appear on behalf of the members of the Entertainment Software 
Association (ESA). The ESA serves the business and public affairs 
interests of companies that publish video and computer games, including 
games for video game consoles, personal computers, handheld devices, 
and the Internet. ESA members produced more that 90 percent of the $7 
billion in entertainment software sold in the United States in 2003. In 
addition, ESA's member companies produced billions more in exports of 
American-made entertainment software, helping to power the $20 billion 
global game software market. The entertainment software industry is one 
of the nation's fastest growing economic sectors, more than doubling in 
size since the mid-1990s and in so doing, has generated thousands of 
highly skilled jobs in the creative and technology fields.
    Our industry makes a tremendous investment in its intellectual 
property. For an ESA member company to bring a top game to market, it 
often requires a team of 20 to 30 professionals--sometimes twice that 
number--working for two or three years to fuse together the work of 
writers, animators, musicians, sound engineers, software engineers, and 
programmers into an end product which, unlike any other form of 
entertainment, is interactive, allowing the user to direct and control 
the outcome of the experience. On top of these research and development 
costs, publishers will invest at least $5 to $10 million to market and 
distribute the game. The reality is that only a small percentage of 
these titles actually achieve profitability, and many more never 
recover their front-end R&D costs. In this type of market, it is easy 
to understand how devastating piracy can be as it siphons the revenue 
required to sustain the enormously high creative costs necessary to 
produce successful products.
    In this testimony, I would like to focus on a number of domestic 
and international intellectual property challenges we face today, 
including, most formidably, from large-scale, for-profit piracy of 
industry products. I will share with you what ESA and its member 
companies are doing to combat these problems, how government has 
responded, and what we all must do protect our industry and the nation.

                           THE PIRACY PROBLEM

    Entertainment software piracy is an international problem occurring 
both in the United States and abroad. It takes many forms, which fall 
into two basic types: hard goods piracy and Internet piracy. Billions 
of dollars worth of pirated entertainment software products--including 
some produced by organized criminal syndicates--are present in 
worldwide markets today.
Hard Goods Piracy
    Entertainment software programs are produced for a variety of 
platforms, including video game consoles, personal computers, handheld 
devices, and the Internet. Hard goods piracy involves the illegal 
manufacturing of counterfeit optical discs for use in personal 
computers (PCs) and consoles for the home, such as Microsoft Xbox, the 
Sony PlayStation2, as well as counterfeit cartridge manufacturing for 
handheld devices such as the Nintendo Game Boy.
    Optical media piracy is a growing problem for the industry. In many 
parts of the world, especially Malaysia, China, Thailand, and Russia, 
pirate optical disc factories produce huge numbers of illegal copies of 
popular games. In its Special 301 report to the United States Trade 
Representative this February, the International Intellectual Property 
Alliance (IIPA) (of which ESA is a member) reported a ``staggering'' 
growth in the number and capacity of these optical disc factories 
across the globe. The ``burning'' or copying of compact discs and DVDs 
is also a global problem, not only in Asia, but in Europe and Central 
and South America as well. In addition, console game publishers are 
victimized by the growing prevalence of so-called ``mod chips'' \1\ and 
other devices designed to circumvent technological protection measures 
built into entertainment software products.
---------------------------------------------------------------------------
    \1\ ``Mod chips'' are a particular type of circumvention device 
that are installed into video game consoles chiefly for the purpose of 
rendering the console capable of playing pirated games.
---------------------------------------------------------------------------
    As with optical discs and mod chips, there is large-scale piracy of 
game cartridges used for handheld units. This piracy is committed in 
factories as well as smaller workshops which produce huge numbers of 
illegal products.
    The extent of this problem cannot be overemphasized. In some 
nations, these large pirate enterprises operate in the open, raking in 
millions in illegal profits. For example, Professor Daniel Chow of Ohio 
State University said in recent congressional testimony that the 
intellectual property piracy problem in China has reached a crisis 
level, with virtually the entire economy of the Chinese city of Yiwu in 
Zhejiang Province now based on the trade of pirated products. The 
problem is widespread in China. As I testified before a House 
Subcommittee last month, enforcement undertaken by just one ESA member, 
Nintendo, resulted in the seizure of 4.7 million counterfeit items in 
China during 2003.

Internet Piracy
    While pirate factories tend to be an offshore problem, Internet 
piracy is a problem both domestically and internationally. Internet 
piracy has been a problem for several years, but is becoming an ever 
more serious threat due to advancing technology. While broadband 
Internet communication has created tremendous opportunities for 
consumers to enjoy high-speed communication and entertainment, it has 
also been a boon to pirates. High-speed Internet has given pirates the 
ability to readily distribute entertainment software around the globe. 
Some of the main Internet piracy problems include so-called ``warez'' 
sites, ``cracker'' groups, and peer-to-peer (P2P) distribution.
    There are a number of ways in which the Internet is used to 
facilitate piracy of entertainment software products. It is a highly 
efficient distribution tool for the software and video games 
themselves. Each day, our investigators uncover hundreds of instances 
in which unauthorized copies of our members' products are made 
available through the use of virtually all popular Internet protocols, 
including through websites, FTP sites, chat sessions and, increasingly, 
through a growing number of peer-to-peer protocols. The Internet is 
also used as an advertising vehicle for services that offer pirated 
hard copies of disc and cartridge-based games, circumvention devices, 
and circumvention services.
    ``Warez'' is a name given to sites where software and other content 
is distributed illegally. Often, these warez sites are operated by 
teams of software ``crackers,'' individuals and groups skilled in 
``cracking'' technological protection measures, thus allowing 
infringers to distribute unlimited copies of the games around the 
world. These sites represent a major threat to our industry. We have 
been extremely gratified with the Justice Department's aggressive 
enforcement actions against these warez groups, including last week's 
announcement of Operation Fastlink, an internationally coordinated 
investigation which resulted in the closing of warez servers and the 
seizure of pirated products. The Department of Justice reported that 
Operation Fastlink resulted in the seizure of more than 200 computers 
in the United States and 10 other countries. We are most appreciative 
for these actions that have effectively shut off illegal access to 
approximately $50 million of pirated works.
    Internet piracy also fuels hard goods piracy by serving as an early 
source of the ``cracked'' version of game titles. Internet pirates 
generally obtain legitimate copies of games on the day of release or, 
in some cases, even prior to the commercial release of a game title. 
These copies are then farmed out to crackers, who, within 12 to 24 
hours are often able to bypass the access and copy protection 
technologies included in the game software and produce a ``cracked'' 
version of the game, i.e., one stripped of these protection 
technologies. These cracked versions are immediately made available 
throughout the Internet and often are sold directly to different 
criminal organizations, which dominate the global trade in pirated 
entertainment software through a network of replication facilities in 
Southeast Asia and Eastern Europe. These organized crime syndicates are 
able to use these ``cracked'' versions of game software obtained 
illegally from the Internet to manufacture and sell pirated games on 
the streets, either in competition with legitimate versions or, as in 
most countries around the world, two to three weeks in advance of the 
time that legitimate goods are available.
    Internet cafes offering computers for temporary use have become 
ubiquitous fixtures around the world. They provide a quick and easy way 
for people to check e-mail or use the web. Unfortunately, they also 
provide a quick and easy vehicle for piracy. For example, in countries 
throughout Asia, many Internet cafes buy only one licensed copy for use 
by hundreds of users in the cafe, while the cafe owner is making a 
profit from each and every user. In addition, many cafe operators turn 
a blind eye to customers who use their facilities to commit further 
infringements, such as burning software and other copyrighted works 
onto CDs.

Piracy and Organized Criminal Syndicates
    Many organizations, including law enforcement agencies such as 
Interpol, have concluded that organized criminal enterprises are 
involved in intellectual property piracy. In its February Special 301 
report, the IIPA reported that because of the immense profits that 
pirates can make by stealing intellectual property, criminal 
organizations have taken over pirating operations in many countries. In 
addition, the relatively weak penalties for intellectual property 
crimes in many nations make it an attractive funding source for 
organized criminal enterprises. Noting that intellectual property 
piracy gives organized criminal enterprises far greater profits and 
much less risk than dealing narcotics, the IIPA report cited organized 
crime involvement in intellectual property piracy in numerous nations, 
including Malaysia, Taiwan, Russia, Mexico, and Spain. Indeed, the 
cross-border nature of organized crime's involvement in software piracy 
presents an additional challenge.

         ESA AND MEMBER COMPANY RESPONSES TO THE PIRACY PROBLEM

    The entertainment software industry has taken the initiative to 
protect its intellectual property with a variety of anti-piracy 
measures, including international enforcement programs, online 
monitoring efforts, civil litigation, support and assistance to law 
enforcement and border control agents, technological measures, policy 
interaction, training of law enforcement and intellectual property 
education programs.

International Enforcement
    Internationally, ESA and its members companies have targeted game 
piracy through the establishment of local enforcement programs in 
countries across the world. For its foreign programs, ESA typically 
will engage local attorneys and investigators to work with and support 
local law enforcement and customs officials in pursuing enforcement 
actions against local individuals and entities engaged in game piracy. 
In Asia, ESA established programs in Hong Kong and Singapore several 
years ago to address burgeoning game piracy in those countries. These 
programs have successfully curtailed the spread of street-level and 
retail piracy, with the Hong Kong program now focused on addressing 
upstream targets which are involved in the import/export of pirated 
goods to other markets. In South America, ESA initiated an industry 
program in Brazil two years ago as a joint effort with a local software 
industry association. This program is quite active, with monthly 
actions against retail venues in Sao Paulo and other major Brazilian 
cities as well as actions against local labs that routinely burn copies 
of games for distribution in the local market place. More recently, ESA 
has begun work on launching new enforcement programs in Canada and 
Mexico to address growing piracy situations there.
    ESA's programs complement local enforcement programs established by 
some of our larger members, including Electronic Arts, Microsoft, 
Nintendo, Sony Computer Entertainment, and Vivendi Universal Games. 
These member programs similarly involve the retention of local 
attorneys and investigators who focus on the pirate trade in that 
member's game products, and work with local police and customs 
officials to seize pirate game product and arrest and prosecute the 
responsible parties. Periodically, member companies will also undertake 
civil actions against pirate groups. Collectively, these member 
companies have programs operating in more than 30 countries.

Online Monitoring and Enforcement
    ESA has implemented an online monitoring program to enforce its 
members' intellectual property rights against Internet piracy. Under 
the online monitoring program, ESA has tracked an average of 400,000 
new incidents of infringements per month and, over the last year, 
issued more than 130,000 takedown notices to Internet service providers 
(ISPs) under the provisions of the Digital Millennium Copyright Act 
(DMCA) and related authorities. These notices were addressed to ISPs 
both in the United States and abroad regarding instances of infringing 
activity engaged in by their users.
    In addition to its online monitoring activities, ESA and its 
members have availed themselves of civil remedies available under law--
including cease and desist notices, and when necessary, civil 
litigation--in enforcing member company rights against individuals 
engaging in online piracy.

U.S. Law Enforcement Support and Assistance
    ESA and its member companies cooperate with United States customs 
and law enforcement officials on a number of levels, including 
preliminary investigative work, examination of seized products, and the 
preparation and submission of relevant documentation and affidavits in 
support of criminal prosecutions. ESA also assists law enforcement by 
providing trial testimony, identifying infringing game material found 
on servers, and assisting in high-level investigations of criminal 
organizations involved in game piracy. The U.S. Attorney's Office for 
the Eastern District of Virginia cited the entertainment software 
industry's assistance in obtaining a conviction of a member of the 
highly organized ``DrinkorDie'' piracy group targeted in ``Operation 
Buccaneer.'' Last week, Attorney General Ashcroft credited ESA and 
other associations with providing vital assistance in ``Operation 
Fastlink,'' an investigation that resulted in the coordinated takedown 
of more than 200 computers, including more than 30 servers that acted 
as storage and distribution hubs for warez groups, including Fairlight, 
Kalisto, Echelon, Class, and Project X.

Technological Measures
    The entertainment software industry uses an array of technological 
protection measures (TPMs) to protect its various products, including 
those for personal computer, console, and handheld games. These self-
help protection methods act as ``digital locks,'' preventing 
unauthorized access to the game content. However, criminal enterprises 
manufacture, create, and distribute illegal circumvention devices to 
disable or bypass these games' TPMs, and use the Internet to advertise 
and distribute these tools as well as the ``cracked'' (unprotected) 
products.
    However, it has become clear that technology is not enough. We must 
have laws that protect not only the intellectual property, but the 
technological protection measures that facilitate distribution while 
safeguarding industry products. Furthermore, we must have meaningful 
enforcement of these laws in order to deter the often highly organized 
criminal enterprises from engaging in the piracy.

Policy Engagement
    The entertainment software industry is also engaged--at both the 
association and member company levels--in legal and policy reform. In 
this capacity, we work closely with U.S. and foreign government 
officials to help provide an effective legal and commercial framework 
for the healthy growth of the industry and to promote the increased 
availability of entertainment software products.

Training of Law Enforcement
    The entertainment software industry has assisted government in the 
area of intellectual property enforcement by having ESA conduct 
training sessions across the nation and internationally to help educate 
law enforcement on intellectual property issues. Over the past year, in 
over 70 training sessions involving approximately 1,400 officials and 
agents in the United States and three foreign countries, ESA provided 
training on methods of detection and identification of pirated game 
products.

Intellectual Property Education
    Recently, the ESA and its member companies have undertaken a number 
of different initiatives to educate different segments of the public, 
in particular, younger age groups, regarding the importance of 
intellectual property, the harm that game piracy and other forms of 
intellectual property infringement can cause, as well as the risks 
inherent in engaging in pirate activities. Most of these efforts have 
focused on providing children a deeper appreciation of the value and 
importance of intellectual property such as copyright and trademarks.

              GOVERNMENT'S RESPONSE TO THE PIRACY PROBLEM

    USTR and other key offices in the Departments of Commerce and State 
tasked with enforcing U.S. trade law and--as part of the trade agenda--
intellectual property law, have consistently demonstrated their strong 
and continuing commitment to creators generally and the entertainment 
software industry specifically, pressing for the highest attainable 
standards of protection for intellectual property rights through the 
successful negotiation of multilateral and bilateral agreements with 
other nations. These agencies have also stood firm in monitoring, 
rewarding, and in notable instances, penalizing countries for failing 
to achieve compliance with U.S. trade law and international 
intellectual property norms.
    One especially valuable tool has been the ``Special 301'' review 
process, which the U.S. government utilizes effectively to target 
countries that must improve their efforts to protect intellectual 
property. In addition to Special 301, by requiring countries in the 
Generalized System of Preferences (GSP) program to ensure adequate and 
effective protection of intellectual property rights as a condition of 
obtaining the program's tariff free status for their exports to the 
United States, the United States has also raised awareness of 
intellectual property rights as a national policy priority.
    Several U.S. agencies also monitor and help to dismantle market 
access barriers that hinder the flow of U.S. products to overseas 
markets. The market access problems facing the entertainment software 
industry include compliance with legitimate product identification 
formalities (such as so-called ``stickering'' regimes), protracted 
content review periods, and other trade or import restrictions against 
U.S. computer and video game products. These regimes not only increase 
the cost incurred by U.S. publishers in getting legitimate product to 
market but also add considerable delay before products are actually 
made available for sale. This delay, in turn, works to the advantage of 
pirates who bypass processes required of legitimate publishers.
    The Department of Commerce, through its International Trade 
Administration (ITA), has made it a priority to gather information from 
our industry on trade barriers and other impediments to commerce, chief 
among them being endemic piracy, and to bring these barriers to the 
attention of U.S. and foreign officials. We are similarly appreciative 
of the resources dedicated year-round by the Department in support of 
the government's international negotiations (such as the recently 
concluded Joint Commission on Commerce and Trade with China), and steps 
taken by the Department's Trade Compliance Center to ensure that 
American exporters overcome foreign trade barriers.
    The Commerce Department's Patent and Trademark Office also 
contributes immensely to the work of USTR, by providing, for instance, 
the necessary technical expertise and advice during free trade 
negotiations and discussions of intellectual property issues at the 
multilateral level. In addition, the PTO provides training and 
technical assistance programs, not only to promote intellectual 
property protection, but also to foreign governments to improve their 
intellectual property laws and to train their law enforcement agencies 
to better address intellectual property infringement.
    With respect to domestic enforcement, intellectual property 
rightsholders have been increasingly better served by the efforts of 
the investigative arms of the Departments of Justice and Homeland 
Security and the prosecutorial capabilities of the Department of 
Justice. Investigative agencies contributing to this mission include 
the FBI and Customs' Bureau of Investigations and Criminal Enforcement 
(ICE), as well as its Bureau of Customs and Border Protection (CBP). 
The prosecutorial offices contributing to the success of this mission 
include the Computer Hacking and Intellectual Property (CHIPs) units 
within several key U.S. Attorneys' offices and the Computer Crime and 
Intellectual Property Section (CCIPS) of the Department of Justice.
    The Department of Justice has recently taken two important actions 
in the fight against piracy. First, it has established the Intellectual 
Property Task Force to coordinate the department's intellectual 
property enforcement activities. Second, as mentioned earlier, the 
Attorney General last week announced Operation Fastlink, a coordinated 
effort with law enforcement agencies around the world to stop Internet 
piracy. Operation Fastlink is an important example of the positive 
results that can be achieved when our government works together with 
other governments to coordinate response to piracy problems. With the 
global nature of the Internet, this type of international cooperation 
is vital.
    In sum, we are extremely grateful that so many U.S. government 
agencies have taken action in the fight against global piracy. We 
believe, overall, that existing roles and responsibilities are 
allocated appropriately to assure that agencies with the greatest 
subject-matter expertise are on the job. That said, we believe there 
are a few actions that this Subcommittee can take to strengthen the 
U.S. Government's ability to strike additional blows that weaken the 
global pirate trade.

                            RECOMMENDATIONS

    The entertainment software industry will continue to use 
technological and legal measures to protect its intellectual property, 
but private efforts are not enough. It is imperative that the U.S. 
government remain firm in its commitment to fight the rampant 
international and domestic piracy of intellectual property. The various 
government agencies responsible for the protection of intellectual 
property are doing a remarkable job in many ways, but can be hindered 
in their efforts to focus on enforcing the intellectual property 
provisions of international treaties and domestic laws due to 
insufficient resources and personnel. Following are some concrete steps 
we believe will arm our government with additional tools and 
authorities to win the war on piracy.

Office of the U.S. Trade Representative
    In recent years, the Office of the U.S. Trade Representative (USTR) 
has done a tremendous job of successfully negotiating free trade 
agreements that raise intellectual property protection standards to the 
highest levels. We thank the Subcommittee for the $5 million that 
Congress added to the fiscal year 2004 budget for USTR, and acknowledge 
USTR's efforts to reorganize its China office in order to make best use 
of these resources. However, with the increasing burden of broadening 
the free trade sphere, USTR has not had the resources or personnel to 
devote to its other mission: monitoring compliance with and enforcing 
U.S. trade law and bilateral trade agreements.
    USTR, to its benefit, relies on personnel from other federal 
agencies to perform its monitoring duties. Moreover, intellectual 
property rights issues are currently included in an office within USTR 
that also covers services and investment issues. Given the enormous 
importance of intellectual property to our economy, ESA recommends that 
the Subcommittee create a stand-alone intellectual property office with 
dedicated and adequate staff to conduct multilateral and bilateral 
negotiations and also to ensure that our trading partners comply with 
their intellectual property-related obligations to the United States. 
Additionally, the Subcommittee could consider creating a special 
ambassador for intellectual property and provide that official with 
adequate staff and resources dedicated to the enforcement of existing 
agreements.
    Whatever approach is taken, the addition of new staff dedicated to 
enforcement of agreements will materially strengthen USTR's ability to 
monitor WTO/TRIPS compliance, and to fulfill the potential of the 301 
program by more aggressive use of out-of-cycle reviews. Similarly, 
dedicated intellectual property staff could help ensure that the GSP 
program is used as effectively as possible to induce foreign nations to 
better protect American intellectual property rights. (A reinvigoration 
of the GSP review process would be much desired as the prospect of 
losing tariff-free trade benefits that reach into the billions for 
certain nations would certainly prove to be a great incentive to 
improving intellectual property protections.)

Department of State
    The State Department is playing a critical role in providing funds 
to foreign countries to help improve their law enforcement against 
copyright piracy. During this fiscal year, Congress provided a one-year 
allocation of funds to the State Department and directed it to spend 
the $2.5 million on building the capacity of foreign law enforcement 
agencies to better enable certain countries to comply with their 
obligations under the international intellectual property treaties.
    ESA believes it is critical to sustain and grow this funding in the 
new fiscal year to help ensure that foreign enforcement programs will 
become fully developed and effective. The United States can only do so 
much, and this program recognizes that an investment in enhancing the 
ability of other nations to assume a greater role in enforcement may 
reduce demands on our own government in future years.
    Furthermore, as helpful as the State Department has been, the fact 
remains that it is responsible for a broad range of foreign policy 
issues. Understandably, intellectual property issues often do not take 
priority. We believe the Subcommittee should consider elevating the 
State Department's Intellectual Property Division to ``Office-level'' 
status, thereby granting this unit greater authority to advocate for 
enforcement of intellectual property protections with other offices 
within the State Department.

Department of Justice
    As noted elsewhere, the Justice Department has been increasingly 
aggressive and effective in the fight against piracy. Therefore, we 
recommend strongly that the Subcommittee allocate sufficient funds for 
Justice to continue its recent efforts and undertake new initiatives, 
such as the Intellectual Property Task Force and Operation Fastlink. We 
believe that the investigative capabilities of the FBI and the 
prosecutorial resources of the Department of Justice, including the 
Computer Crime and Intellectual Property Section (CCIPS) and the 
Computer Hacking and Intellectual Property (CHIPs) sections of the U.S. 
Attorneys' Offices should be fully funded to accomplish their vital 
missions.
    We thank the Subcommittee for the support it has already given to 
the Department by setting aside a portion of the DOJ's appropriation 
for cybercrime and intellectual property crime enforcement. However, we 
recommend that Congress provide additional resources to the Justice 
Department to expand these efforts. Specifically, we recommend 
additional funding for the investigation of intellectual property 
crimes by the FBI. We believe that additional agents specifically 
trained in online investigations are essential to fighting domestic 
intellectual property piracy. This will enhance and support the efforts 
of U.S. Attorneys engaged in prosecuting intellectual property 
offenses.

                               CONCLUSION

    Mr. Chairman and members of the Subcommittee, it is clear from my 
testimony that our industry has in the U.S. Government a strong and 
effective partner in the battle against global entertainment software 
piracy. Your Subcommittee's commitment to fighting piracy is well-
documented. We are grateful for your commitment, especially at a time 
when our nation faces so many other threats to our security. But it is 
equally clear that the global piracy problem remains deeply entrenched, 
and that it directly endangers America's economic security as U.S. 
companies see viable potential markets closed-off due to the 
proliferation of pirated and counterfeit products. We need your 
continued help, and we appreciate the opportunity to share some ideas 
on additional steps that can be taken to protect America's greatest 
export: our creative and intellectual property. Working together, I 
believe we can fight piracy to protect what is one of America's most 
dynamic and fastest growing creative industries.

    Senator Gregg. Mr. Holleyman.

STATEMENT OF ROBERT W. HOLLEYMAN, II, PRESIDENT AND 
            CHIEF EXECUTIVE OFFICER, BUSINESS SOFTWARE 
            ALLIANCE
    Mr. Holleyman. Chairman Gregg, Chairman Stevens, thank you 
very much for the opportunity to talk with you this morning 
representing the Nation's business productivity software 
industry. Our members are the leading developers of 
productivity software and their partners, and collectively 
based here in Washington, we represent their efforts in more 
than 60 countries around the world engaged in support of strong 
intellectual property protection, technology innovation, and 
the day-to-day fight against piracy.
    It is a pleasure for me to participate on this panel 
because we share broadly with the copyright community interest 
in promoting intellectual property protection and also in the 
fight that you care about, the fight against piracy.
    I will be blunt in saying that piracy is in many ways too 
delicate a term for what we are dealing with. It is theft. It 
is pure and simple theft. For the business software industry, 
nearly 40 percent of the products in use today from our member 
companies are pirated around the world or stolen. It is hard to 
imagine any other industry that could sustain those losses and 
still make the types of investments for the future that our 
industry is committed to.
    There are really two key aspects to this problem, the 
domestic aspect and the international aspect. Last week, the 
announcement by the Attorney General of Operation Fastlink, I 
would say is a major announcement with 120 searches, 27 States, 
10 foreign countries. That came about through concerted efforts 
at DOJ, and that came about through the very deliberate efforts 
of this committee in ensuring through appropriations measures 
that money earmarked for DOJ went and created the type of 
enforcement units that allowed the operation to be successful.
    It is also important to internationally prosecute, because 
the expertise that we have in this country is important to 
share, particularly in the Internet environment, where we 
depend on the assistance of our trading partners and try to 
prevent the widespread global piracy operations.
    The software industry has been a huge engine of economic 
growth. One of the things that BSA released last year was a 
study by the research firm IDC of over 57 countries where they 
analyzed the size of IT markets. They also analyzed the impact 
of piracy on those markets to show what reductions in piracy 
could mean for job growth and for tax revenues, not only in the 
United States, but to show our partners in the software 
industry in other countries what this global fight can mean for 
them.
    We use that as an important tool. In the United States 
alone, there are 2.6 million people working in the IT industry, 
paying $342 billion in taxes generated, and its impact on the 
U.S. economy is $405 billion.
    To look at the theft problem, the piracy problem, over the 
past 3 years, global piracy for productivity software has, on 
average, generated losses of $12 billion each year. In the 
United States alone, because this is the single biggest pirated 
market in dollar losses of any country in the world, in that 
period of time, we have averaged $2 billion of losses due to 
piracy in the United States.
    Software piracy takes many forms. Perhaps a good advantage 
of coming at the end of this panel is I can say I share many of 
the concerns with counterfeit products and Internet-based 
piracy that my colleagues have talked about. But in business 
software, the biggest single problem we face is from end user 
piracy, organizational end user piracy. It is when a business 
may have one or two legal copies of software and they load it 
all on computers in their office where they have many more 
employees accessing a corporate network than they have license. 
It can happen in otherwise legitimate businesses. It can happen 
in university environments. And indeed, we find that in many 
foreign countries, Governments themselves as software users are 
not complying with the copyright laws.
    The counterfeit problem is one we see globally. It is 
particularly acute in a number of Asian countries, such as 
China, Thailand, Taiwan, and the Philippines, and it is 
something that we share a common interest in fighting with our 
brothers in the copyright community.
    And Internet-based piracy is, while for us still the 
minority of our losses, of the $12 billion in losses each year, 
it is the fastest growing form of piracy. In February of this 
year, our office identified 174,000 infringing software 
programs of BSA members from 149 different countries, and that 
ranges from pirated websites, peer-to-peer networks, to 
distribution of pirated codes allowing people to break copy 
protection measures.
    But we are quick to point out that the solution to this is 
not to ban the technology but to deal with the irresponsible, 
illegal behavior. Indeed, P2P technology is providing many 
positive benefits in the university research community. Our 
member companies are using it as a means of distributing 
legitimate software, including security software upgrades. So 
we need to address the problem of illegal behavior, not the 
technology.
    There are a variety of ways of dealing with this, including 
education. We have launched a whole series of programs at BSA 
ranging from the school level students to university students 
to work with the corporate community, working with our 
international trade partners to copyright treaty adoption, WTO, 
our bilateral agreements. But we also think that in the United 
States, the investigation and prosecution of copyright piracy 
is a central part of the problem.
    Again, the resources that your committee has for many years 
now successfully earmarked for DOJ has led to the establishment 
of the computer hacking and IP units, the CHIPs units, in 10 
districts around the country, and that has led to the rapid 
increase in prosecutions that we are seeing that is now 
happening, in fact, and spilling over to our international 
partners.
    We also believe that as we look at this internationally, 
there are a number of other key steps that we can take. We 
support very much the leadership that USTR has historically had 
in this area, working with Commerce Department and the State 
Department. We share the belief of other members of this panel 
that additional resources in USTR for an office devoted to 
intellectual property protection could be an important aspect 
of increasing their arsenal of what I think has been previously 
the single most effective agency in the U.S. Government in 
opening markets by reducing piracy, by reducing the theft of 
U.S. software.
    We also support efforts to create a specialized office 
within the Department of State, reporting to the Assistant 
Secretary for Economic and Business Affairs, and we support the 
effort to ensure that there are dedicated resources within the 
FBI to supplement the existing CHIPs units, CCIPs, and U.S. 
Attorneys' organizations that you have dealt with in the past.
    Collectively through our research with IDC, which works on 
a global basis studying the technology industry that has the 
most credibility, we were able to determine last year that a 
10-point drop, 10 point decline in the level of software piracy 
in the United States alone could create 130,000 more high-tech 
jobs in America, generate $142 billion in additional U.S. GDP 
growth, and generate an additional $23 billion in tax revenues 
for the United States. That is magnified when we then take that 
to our trade partners and talk about what a 10-point drop in 
piracy in their countries could mean both for their employment, 
but also from the spillover to the United States.
    Thank you and this committee for your continuing efforts in 
this area in fighting theft, for looking at new innovative 
means of doing it. It is important for not only our industry, 
for the U.S. economy, but to job growth and job creation and 
promotion of one of this country's premier export industries, 
the American software industry. Thank you.
    Senator Gregg. Thank you.
    [The statement follows:]

             Prepared Statement of Robert W. Holleyman, II

    Good morning. My name is Robert Holleyman. I am the President and 
CEO of the Business Software Alliance.\1\ The Business Software 
Alliance is an association of the world's leading software companies. 
BSA's members create approximately 90 percent of the office 
productivity software in use in the United States and around the world.
---------------------------------------------------------------------------
    \1\ The Business Software Alliance (www.bsa.org) is the foremost 
organization dedicated to promoting a safe and legal digital world. BSA 
is the voice of the world's commercial software industry and its 
hardware partners before governments and in the international 
marketplace. Its members represent one of the fastest growing 
industries in the world. BSA programs foster technology innovation 
through education and policy initiatives that promote copyright 
protection, cyber security, trade and e-commerce. BSA members include 
Adobe, Apple, Autodesk, Avid, Bentley Systems, Borland, Cisco Systems, 
CNC Software/Mastercam, HP, IBM, Intel, Internet Security Systems, 
Intuit, Macromedia, Microsoft, Network Associates, PeopleSoft, RSA 
Security, SolidWorks, Sybase, Symantec, UGS PLM Solutions and VERITAS 
Software.
---------------------------------------------------------------------------
    I thank the subcommittee for the opportunity to testify here today. 
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 innovation. And it harms national 
economies including our own.
    In my testimony, I will give a brief overview of the contributions 
that the business software industry has made and continues to make to 
the global economy and to describe how piracy has undermined those 
contributions. I will next describe the evolving challenges the 
software industry faces with respect to piracy and explain the steps 
industry is taking to address these challenges. Finally, I will 
summarize the lessons that we have learned regarding how best to end 
piracy both here at home and abroad, including certain steps the 
government can take to more effectively stem the tide of piracy.
    First, I want to thank the members of the subcommittee for holding 
this hearing. BSA and each of its member companies commend you for 
recognizing the software industry's important contributions to the 
global economy and the serious threat posed to the industry by software 
piracy.
Software Industry Contributions and the Impact of Piracy
    Information technology has changed the world in which we live. It 
has made us more efficient, more productive and more creative. Software 
has been at the heart of this technology revolution. Software 
facilitates the dissemination of knowledge, drives global communication 
and promotes continued innovation. It helps us to solve problems and 
generate new ideas, gives us the power to create and to collaborate and 
fosters self-expression in a range of spheres.
    The software industry has also proven to be a remarkable engine for 
global economic growth. A recent economic survey (attached) by IDC, a 
major IT research firm, reports that worldwide the IT sector employs 
more than nine million people in high-wage, skilled jobs, raises more 
than $700 billion in taxes annually and contributes nearly a trillion 
dollars each year to global economic prosperity. Between 1996 and 2002, 
the IT sector grew 26 percent, creating 2.6 million new jobs and adding 
a cumulative $6 trillion to economies around the world. Each year, the 
packaged software sector alone contributes $180 billion to the global 
economy.
    This sector has yet to reach its full economic potential. This is 
due, in large part, to piracy. Initial estimates for 2003 put the 
global piracy rate at 42 percent. In many countries the piracy rate 
exceeds 75 percent, reaching highs of over 90 percent in some markets. 
Although piracy levels in the United States historically have been low 
as compared to other countries, the figure is far from negligible. 2003 
estimates put the U.S. piracy rate up 6 percent from 2002, to 29 
percent. More than one in every four copies of business software in use 
in this country today is stolen. There are few industries that could 
endure theft of its products at this level.
    Piracy inflicts significant financial harm on U.S. software 
companies. Piracy in the United States alone cost the software industry 
almost $2 billion in 2002. Worldwide, piracy led to estimated losses of 
over $8 billion last year.
    Of course, the impact of piracy extends beyond lost sales. Pirates 
steal jobs and tax revenues as well as intellectual property. The IDC 
survey cited above found, as a general rule, that there is an inverse 
relationship between software piracy rates and the size of the IT 
sector as a share of the gross domestic product. As piracy is reduced, 
the software sector grows. This creates a ripple effect that stimulates 
other parts of the IT sector and of the economy overall. The equation 
is a basic one: the lower the piracy rate, the larger the IT sector and 
the greater the benefits. Putting this into real numbers, the IDC 
survey concludes that a 10 point reduction in the global piracy rate 
between 2002 and 2006 could deliver 1.5 million new jobs, $64 billion 
in taxes and $400 billion in new economic growth. In North America 
alone, benefits would include 145,000 new jobs, $150 billion in 
additional economic growth and more than $24 billion in tax revenues.
    Reducing piracy delivers indirect benefits as well. Society 
benefits from new technological innovations. Consumers benefit from 
more choices and greater competition. Internet users benefit from new 
ways of communication and expanded creative content made available 
online. And national economies benefit from enhanced productivity 
leading to higher standards of living.
Piracy: Defining the Problem
    In its simplest terms, ``software piracy'' generally refers to the 
reproduction or distribution of copyrighted software programs without 
the consent of the copyright holder. Piracy of software can take 
several forms:

            Corporate end-user piracy
    The business software industry's worst piracy problem traditionally 
has involved its primary users--large and small corporate, government 
and other enterprises--that pirate our members' products by making 
additional copies of software for their own internal usage without 
authorization. We commonly refer to this activity as ``corporate end-
user piracy.''
    Corporate end-user piracy occurs in many different ways. In what is 
perhaps the most typical example, a corporate entity will purchase one 
licensed copy of software, but will install the program on multiple 
computers. Other forms of end-user piracy include copying disks for 
installation and distribution, in violation of license terms; taking 
advantage of upgrade offers without having a legal copy of the version 
to be upgraded; acquiring academic or other restricted or non-retail 
software without a license for commercial use; and swapping disks in or 
outside the workplace. Client-server overuse--when too many employees 
on a network have access to or are using a central copy of a program at 
the same time, whether over a local area network (LAN) or via the 
Internet--is another common form of end-user piracy.
    Corporate end-user piracy goes on in enterprises large and small, 
public and private. While corporate end-user pirates do not generally 
make copies for resale or commercial distribution, they nonetheless 
receive an unfair commercial advantage because the money that they save 
on legitimate software licenses reduces their operating costs and 
increases the profitability of their enterprise. In many cases, the 
piracy is attributable to negligence and poor asset management 
practices. Enterprises can also be victimized by unscrupulous computer 
manufacturers and dealers who install copies of software onto the 
internal hard drive of the personal computers they sell without 
authorization from the copyright holder. In some cases, however, 
corporate end-user piracy is undertaken willfully, with management 
fully aware and supportive of the conduct.

            Counterfeiting
    Counterfeit software continues to pose a serious problem for BSA's 
members. The most flagrant software counterfeiters produce CD-ROMs that 
look very similar to those of the software publisher. These counterfeit 
CD-ROMs often bear reproductions of the manufacturer's logo and other 
labeling, and are distributed with counterfeit packaging, manuals, 
security features and other documentation. Sophisticated counterfeiters 
often replicate these CD-ROMs at dedicated pirate facilities, using the 
same type of equipment and materials used by legitimate software 
manufacturers. A single CD-ROM replication facility can produce more 
than a million discs every day, at a per unit cost of less than two 
dollars. In other cases, counterfeit CD-ROMs have been traced to 
``legitimate'' replicating plants that have contracted directly with 
counterfeiters.
    Over the past several years, BSA has seen a dramatic increase in 
the amount of high quality counterfeit software imported into the 
United States from overseas, especially from Asia. International 
counterfeiting rings have become even more sophisticated in their 
methods of producing ``look alike'' software and components. For 
example, raids in Hong Kong uncovered evidence of advanced research and 
development laboratories where counterfeiters reverse-engineered the 
security features of at least one member company's software media. 
These activities are often connected with serious criminal 
organizations, as investigations in Asia, Europe, and Latin America 
have revealed. Indeed, evidence suggests that proceeds of 
counterfeiting have been used to fund terrorist groups. Compared to 
other similarly lucrative crimes like narcotics trafficking or arms 
dealing, software piracy is easy to pursue and low-risk; chances of 
getting caught are slim and, if caught, penalties are often light.
    Compilation CD-ROMs also pose a problem. These CDs typically 
contain a large selection of software programs published by different 
software companies. Compilation CDs are typically sold for very little 
money (relative to the value of the legitimate software) at swap meets, 
flea markets, mail order houses, and over Internet auction and software 
web sites. Compilation software can be replicated using a relatively 
inexpensive (less than $1,000) CD recorder which, when connected to a 
personal computer, employs a laser to ``burn'' installed software 
programs onto a blank disc. Although compilation CDs do not exactly 
replicate the packaging and logos of genuine software, unsophisticated 
consumers are often led to believe that compilation CDs are legitimate 
promotional products.

            Internet piracy
    The Internet is the future of global communication and commerce. It 
creates tremendous opportunities for faster, more efficient and more 
cost-effective distribution of information, products and services 
across the globe. As technology innovators, BSA's members are at the 
forefront of these developments. Software is not only sold and 
delivered over the Internet, but also comprises a key component of the 
Internet infrastructure and provides the basic tools used to offer 
virtually any good or service online.
    Unfortunately, in addition to creating significant social and 
economic opportunities, the borderless and anonymous character of the 
Internet makes it an ideal forum to engage in criminal conduct. As we 
have seen, the emergence of the Internet has added a new dimension to 
software piracy by permitting electronic sales and transmission of 
illegal software on a global scale. Instead of pirated copies being 
sold one at a time, millions of pirated copies can be downloaded every 
day. Geography no longer matters. A pirate based in Washington, D.C. 
can sell to someone in Australia or Norway with ease. Internet users 
can readily employ a search engine to find both legitimate and 
illegitimate sellers of software and the resulting transaction can take 
place in the privacy of their home or office. The ability of Internet 
pirates to hide their identities or operate from remote jurisdictions 
often makes it difficult for right holders to find them and to hold 
them accountable.
    Over the past two years, BSA's Internet investigators have 
witnessed the global spread and growth in the online piracy of 
software. Today, computer users can and do download infringing copies 
of BSA members' products from hundreds of thousands of locations on the 
Internet--from websites in China to shared folders on peer-to-peer 
systems in France. Pirated software is available on auction sites in 
Brazil and is offered through spam email solicitations that originate 
in Russia. To cite but one figure, during the month of February, BSA's 
Internet crawler system identified 173,992 infringing software programs 
being offered in 149 different countries.
    There are three primary forms of Internet piracy: (i) the 
transmission and downloading of digitized copies of pirated software, 
through web sites, IRC channels, newsgroups and peer-to-peer systems; 
(ii) the advertising and marketing of pirated software on auction and 
mail order sites and through e-mail spam, involving delivery on 
physical media through the mails or other traditional means; and (iii) 
the offering and transmission of codes or other technologies used to 
circumvent copy-protection security features. There are, of course, 
many variations on these general themes. All of these activities cause 
significant harm to our industry, as they do to other creative sectors.
    Among these variants of Internet piracy, peer-to-peer piracy (P2P) 
has been the subject of significant public debate over the past two 
years. BSA takes P2P piracy very seriously. We are engaged in concerted 
action to address this threat. While BSA and its members deplore this 
activity, however, we believe it is essential to distinguish the 
illegal uses of the technology from the technology itself. There is no 
doubt that P2P technologies have been abused to spread illegal content 
including pirated software, pornography and personal information. At 
the same time, however, P2P technologies have also created exciting new 
opportunities for legitimate users. One of the earliest examples of P2P 
technology is the SETI@Home project, which uses over 4 million 
computers worldwide to search radio signals captured from space for 
signs of intelligent life. Stanford is using P2P technology to help 
find cures for diseases such as Alzheimer's, cystic fibrosis and BSE 
(mad cow disease). Software companies are also looking to P2P 
technologies to undertake routine tasks such as distributing updates 
for installed software including anti-virus and firewall software; in 
this way, software can be constantly updated in response to new 
Internet threats.

            Industry Efforts against Piracy
    The Business Software Alliance and its individual members devote 
significant financial and human resources to preventing piracy 
worldwide. Our efforts are multi-faceted.
    First, we are engaged in extensive educational efforts, designed to 
increase public understanding of the value of intellectual property and 
to improve overall awareness of copyright laws, on a global basis. For 
example, just last week BSA launched ``Netrespect,'' a free educational 
resource to encourage responsible Internet behavior amongst young 
people. This initiative, first rolled out in Ireland, responds to a 
growing need to promote cyber education, beginning with encouraging 
teenagers to value creativity, respect intellectual property and 
practice responsible computer behavior. In addition to our broad-reach 
educational campaigns, BSA offers many tools to facilitate compliance. 
Among other resources, we provide guides and technologies that assist 
end-users in ensuring that their installed software is adequately 
licensed. We likewise offer tips to consumers so that they can be 
confident that the software they acquire on-line is legitimate.
    Second, we work closely with national and international bodies to 
encourage adoption of laws that strengthen copyright protection and 
promote an environment in which the software industry can continue to 
innovate. BSA has provided input into the most important international 
agreements protecting intellectual property, including the World 
Intellectual Property Organization's Copyright Treaty and the World 
Trade Organization's Agreement on Trade-Related Aspects of Intellectual 
Property Rights (TRIPs). We are active at the national level as well, 
both in the area of law reform and through the provision of training 
and other assistance to public authorities including police, 
prosecutors and judges. And we have worked directly with governments 
worldwide, including the U.S. Government, to adopt and implement 
software asset management programs in order to prevent software piracy 
in the public sector and to set an example for the private sector to 
follow.
    Finally, where appropriate, BSA undertakes enforcement actions 
against those involved in the unlawful use, distribution or sale of its 
members' software. On the Internet, for example, BSA conducts a far-
reaching ``notice and takedown'' program. Operating on the basis of 
referrals from members, complaints from consumers and infringing 
activity identified through our own proactive searches, BSA's team of 
Internet investigators identifies infringing sites and takes action to 
have these sites removed or disabled. Last year alone, BSA sent over 
170,000 notices to Internet service providers. BSA's members have also 
filed suit against individuals offering pirated software for free 
download and over auction sites. BSA also engages in civil litigation 
against corporate end-users who are using our members' products without 
authorization. To this end, and consistent with the WTO TRIPs 
Agreement, we conduct civil ``ex parte'' (surprise) searches against 
corporate targets across the globe. We also work closely with local, 
national and international law enforcement bodies to protect the 
intellectual property rights of our members.
    Technology plays a role in protecting intellectual property rights 
as well. Content owners must take responsibility to ensure that their 
works are not easily subject to theft, rather than rely wholly on 
others to protect their intellectual property. Accordingly, BSA's 
members have invested hundreds of millions of dollars and thousands of 
engineering hours in developing technologies to protect content and 
intellectual property. Our companies have worked diligently, 
voluntarily and cooperatively with content providers and consumer 
electronics companies to create systems that will foster the legitimate 
distribution of digital content. Experience clearly demonstrates, 
however, that there is no silver bullet technological solution that 
will solve the problem of piracy. Nor are government mandates the 
answer. Technology develops most effectively in response to market 
forces; government mandates would stifle innovation and retard 
progress.

The Role of Government
    Of course, the government does have an essential role to play. 
Domestically, the investigation and prosecution of IPR-related 
offenses, using the legal tools provided by Congress, is a vital 
complement to our own enforcement efforts. We look to the government to 
continue to expand its IP law enforcement activities here at home. 
Internationally, the software industry looks to the U.S. government to 
persuade foreign governments to commit to protect and enforce 
intellectual property rights, and to ensure that these countries meet 
their commitments.

            Domestic
    Software piracy in the United States is a serious problem--make no 
mistake. Even though the piracy rate in the United States compares 
favorably with most other parts of the world, it still represents a 
loss of nearly two billion dollars annually for our industry.
    Investigation and prosecution of copyright piracy is an essential 
part of the solution to this problem. We wish to thank you, Mr. 
Chairman, and the members of this subcommittee for the support you have 
given these efforts by setting aside of a portion of the Justice 
Department appropriation for cybercrime and intellectual property 
enforcement. These funds have permitted DOJ to form Computer Hacking 
and Intellectual Property (CHIP) units in 10 districts around the 
country. We urge the subcommittee to continue to dedicate substantial 
resources to these vital law enforcement efforts.
    This investment is paying off. BSA congratulates the Justice 
Department and the FBI for the success last week of Operation Fastlink. 
This major enforcement action was coordinated by the Computer Crimes 
and Intellectual Property Section (CCIPS) of the Criminal Division of 
DOJ, and carried out in cooperation with right holder organizations, 
including BSA. It resulted in the execution of more than 120 searches 
in 27 states and 10 foreign countries, as well as the seizure of more 
than 200 computers that were allegedly used in the illegal 
dissemination of computer software and other copyrighted works on the 
Internet. It demonstrates in the most dramatic fashion our government's 
commitment to tackling the problem of internet piracy.
    Last month's announcement of a new Intellectual Property Task Force 
under the leadership of David Israelite, Deputy Chief of Staff and 
Counselor to Attorney General Ashcroft, is another important 
affirmation of DOJ's commitment to fighting domestic and international 
piracy and counterfeiting. BSA commends the Department of Justice for 
its increased emphasis on IPR and cybercrime enforcement.
    As I have already mentioned, Internet piracy is one of the major 
areas of concern for BSA's members. Congress has wisely enacted 
legislation that criminalizes online distribution of pirated software 
and increases penalties for Internet piracy. To ensure that these laws 
have real impact, U.S. law enforcement agencies have elevated the 
priority given copyright offenses including Internet piracy, resulting 
in important prosecutions against criminal pirates and counterfeiters. 
Following on these measures, the number of Americans on the Internet 
has nearly doubled, from 70 million people to 137 million. The 
copyright industry has expanded at a rate of 10 percent each year. And 
last year, copyright industries contributed $535 billion to the U.S. 
economy--more than 5 percent of the gross domestic product.
    But, just as the Internet has evolved rapidly, so has Internet 
piracy. New methods of Internet piracy are constantly testing the 
limits of the legal tools that Congress has provided to right holders 
and prosecutors. BSA is eager to work with the Congress and the Justice 
Department to ensure that legal tools such as the NET Act keep up with 
the challenges of the rapidly-changing Internet environment.
    Legal tools are one part of the equation, but they must be 
complemented by adequate resources to investigate and prosecute IPR 
theft. Specifically, BSA urges this subcommittee to increase funding 
for the investigation of intellectual property crimes by the FBI. We 
believe that expanded investigatory assistance by the Bureau will 
support and enhance the efforts being made by U.S. Attorneys around the 
nation in prosecuting intellectual property offenses.

            International
    Intellectual property products, including computer software, have 
become a vital part of international trade. In 2001 the copyright 
industries generated more than $88 billion in foreign sales and 
exports. The nexus between IP and trade has also provided one of the 
principal levers for moving foreign governments into compliance with 
international norms for protection and enforcement of IP rights. The 
U.S. government has had great success in using a variety of tools at 
its disposal for achieving this goal--principally the negotiation of 
strong IP provisions in new trade agreements, enforcement of the TRIPs 
Agreement though WTO dispute settlement procedures, the Special 301 
program, and administration of trade preference programs such as GSP.
    These efforts have been led by a small but dedicated professional 
staff at USTR. USTR has been ably supported in this work by the State, 
Commerce and Justice Departments; and the USPTO and the Copyright 
Office have provided essential subject matter expertise. BSA commends 
the entire interagency team for their efforts to ensure foreign market 
access for goods and services with U.S. intellectual property and 
compliance with international agreements protecting intellectual 
property rights. In particular, we wish to recognize the efforts and 
leadership of Under Secretary Aldonas, Assistant Secretary Wayne, and 
Acting Under Secretary Dudas. Their hard work is paying off--not only 
for the United States, but for our foreign trading partners as well, 
since the ability of countries to reap high economic benefits from the 
software sector is highly dependent on their ability to promote 
protection and enforcement of intellectual property rights.
    These efforts can and 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 
would support the creation of a new and separate Intellectual Property 
Office within USTR, with increased staff, to enable USTR to continue to 
place a high priority on IPR negotiation and enforcement.
    Similarly, BSA believes that an Intellectual Property Office should 
be created within the Department of State, under the Assistant 
Secretary for Economic and Business Affairs. 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.

            PTO Funding and Patent Quality
    BSA strongly supports the work that Acting Under Secretary of 
Commerce and Director of the USPTO Jon Dudas and his predecessors have 
done to seek to strengthen and modernize the U.S. patent system, to 
improve patent quality, and to reduce the increasingly lengthy time it 
takes to get a patent. Our members are among a large number of 
companies who support the framework contained in H.R. 1561, the Patent 
and Trademark Fee Modernization Act of 2004, and who are willing, 
collectively, to pay an additional $200 million per year to help the 
PTO achieve these objectives. The agreement reached in H.R. 1561 raises 
fees significantly, and, if enacted, would retain this subcommittee's 
oversight of the PTO, by continuing to require that funds for the PTO 
be appropriated by this subcommittee. H.R. 1561 would also provide for 
refunds to users of fees collected by the PTO, but not appropriated for 
its use. Under this scenario, the PTO would get only the funds it could 
reasonably and effectively use, and excess fees would be returned to 
the users who paid them. BSA encourages the members of this 
subcommittee, and the full Appropriations Committee to endorse this 
solution as an equitable approach to get the PTO the funds it needs to 
keep up with the increasing demands placed upon it, and to give us 
timely patents of good quality that reward inventors and do not impose 
unfair burdens upon the U.S. economy.

Conclusion
    Software contributes profoundly to the world in which we live. It 
allows us to share, to create and to innovate in ways previously 
unimaginable. Software-driven productivity strengthens national 
economies, including our own, and makes them more competitive and more 
prosperous. Unfortunately, piracy prevents the software industry from 
realizing its full potential. We urge the U.S. Government and other 
governments worldwide to help us solve this problem. We thank you for 
the efforts made to date.
    Thank you again for the opportunity to testify here today. I look 
forward to your questions and to continued dialogue on this important 
topic in future.

    Senator Gregg. You have given us a whole series of really 
excellent ideas. Let me turn to the chairman of the full 
committee for questions which he may have, then I will ask 
questions. It is nice to be joined by the Senator from 
Washington.
    Senator Stevens. Mr. Chairman, I want to request that you 
put my opening statement in the record as though I was here.
    [The statement follows:]

               Prepared Statement of Senator Ted Stevens

    I'd like to thank the Chair, my good friend from New 
Hampshire, for holding this hearing today.
    The piracy of intellectual property is something that 
certainly harms those in the industry. And, it of course harms 
the consumers downstream as well.
    Improved technology affects our lives in many positive 
ways--making our lives easier, more enjoyable and safer. But, 
one of the pitfalls of improved technology is that it can 
sometimes make the criminal's job easier. In this instance, it 
is used for the piracy of content--whether it is movies, songs 
or software.
    It is good to learn that the Department of Justice has been 
able to use more resources to combat copyrighting and other 
piracy crimes.
    I look forward to hearing from those on the industry 
panel--to not only learn about the effects that piracy has on 
their business but also to hear what they have been doing 
internally to combat this problem.
    Senator Gregg has put together an interesting group of 
witnesses today and I look forward to hearing their testimony.

    Senator Stevens. I am sad I didn't get here quickly enough 
to hear my good friend Jack Valenti. I don't see Jack Valenti 
as leaving the scene. He just may not be at the table. He will 
be behind the table in the years to come.
    I am reminded that some time ago, I assisted in setting up 
the National Intellectual Property Law Enforcement Coordination 
Council. I don't think any of you mentioned that, and I think 
there is some element missing from that. None of you are going 
to like what I am going to say, but you mentioned pure and 
simple theft and piracy. So is train robbery. It ended 
primarily when Government and the industry got together. The 
Pinkerton agency led the fight, but there were Government 
agents behind them.
    I think we have to go back and crank up that council and 
get the ingredient that was missing, and that is a coordinated 
support from the industry itself to assist these agencies to do 
some of the basic investigation and some of the details that 
you are asking us to put up money to do, because I have got to 
tell you, there isn't much money here to add to the accounts 
that the chairman has already made available. As a matter of 
fact, I seriously wonder whether he is going to have the money 
to continue what he has done in the past in terms of the budget 
process we are going through right now with two major 
engagements going on, a war on terrorism and a war in Iraq. It 
is just not going to be increased in a substantial amount.
    However, I do believe we can continue to fund the 
activities of the council and the activities of agencies, the 
Federal agencies involved in the council. But I would encourage 
you to get your legal departments working to see how we can 
authorize you to cooperate and to really be part of the 
enforcement mechanisms and have people that are working for you 
share your information and to make it more readily available to 
the Federal agencies so it can be pursued and this piracy can 
be reduced, if not totally stopped.
    It is, I think, one of the worst types of piracy because it 
is a disincentive to our further expansion of knowledge and our 
further development of new technology and our further 
implementation of that technology. I just was reading this 
morning about the basic area of communications and digital 
application is starting to expand again. Well, the losses that 
you are suffering now, I think, are one of the things that are 
a drawback as far as the investments your companies could be 
making in that new technology.
    I urge, Mr. Chairman, we take a look at that council and 
work with the members of this group and the agencies that are 
involved to see if there is any way we can bring about greater 
coordination and eventually greater application of the legal 
processes so the departments can continue to pursue these 
people and stop this tremendous drain on our economy that is 
taking place because of this problem of piracy.
    I would recommend that our staff get together with the 
staff of this panel and see if there is some way we can blend 
some money here. I think we can earmark some money, but we 
can't meet the needs that you outlined. You gave us four 
different areas for funding, for investigation, for training 
new agents to give us additional ability to coordinate the 
investigation and prosecution. I think those things can happen 
better if we have more coordination from the industry itself 
and more involvement from your people in terms of the basic 
investigation.
    So I guess what I am really saying is we ought to create a 
new Pinkerton service for your industries and let them 
coordinate with the Federal agencies and bring about a more 
cohesive attack against these pirates.
    It is something that bothers us considerably, I think all 
of us, and as I travel around the world and look at our 
military installations, I am impressed that you can't walk on a 
main street in any country in the world without seeing pirated 
copies on just little stands on the corner, of the intellectual 
property that has come from our country and been reproduced 
illegally and being sold to the world.
    We ought to be more involved and we want to get more 
involved, but I am sorry to say that I think there is a limited 
amount of money we can pledge and I hope you would think about 
a partnership. Thank you very much.
    Senator Gregg. Thank you, Mr. Chairman.
    I would like to follow up on that point on a similar group 
which I mentioned in my opening, Mr. Chairman. I hadn't 
realized the chairman had created this entity. I have this 
chart which actually puts it right in the middle of everything. 
Theoretically on this organizational chart, Justice, State, 
USTR, Commerce, Homeland Security, all flow into NIPLECC which 
then flows out to the industry as a coordinating agency.
    I guess my question would be to follow on the chairman. My 
first question would be to each of you to give me your reaction 
to what this NIPLECC group is doing, whether it is serving a 
function, whether it--none of you mentioned it in your opening 
statements, so I am assuming it is not doing a heck of a lot. 
Is it a worthwhile approach to continue this type, and if it 
is, what should we do to energize it?
    Mr. Valenti. Mr. Chairman, we are aware of that agency and 
perhaps we have not made the best use out of it we should. I 
just talked to my colleague here from the manager's office and 
she is going to begin to confer with this committee.
    But let me just say, in answer to Chairman Stevens' 
remarks, I think that he is right on about industry should be 
doing their own bit. I want to let you know that MPA has anti-
piracy operations in 60 countries around the world. We have 
what we call pacts. We have federations with Japan, Great 
Britain, Spain, Portugal, Italy, Germany, Mexico, France, and 
other countries in the world where we join with them in a joint 
anti-piracy federation.
    We have conducted over 66,000 investigations last year. We 
participate in 32,000 raids. We have confiscated 16 million 
counterfeit DVDs, 28 million counterfeit VCDs. We have been 
deeply involved with prosecutors and with police authorities in 
all these countries in the world. We spend a considerable 
amount of time doing investigation and surveillance and then 
turning over to the FBI and U.S. Attorneys information we have 
found, which saves them hundreds of thousands of man hours 
every year, for which they are grateful.
    So we have spent a lot of money, a lot of time. Indeed, the 
prime priority of the MPA right now, my singular objective is 
to deal with thievery. We didn't mention too much about 
Internet, which has grown malignantly over the years.
    And finally, I have before me a bulletin put out by the 
Department of the Army from their Network Computer Intelligence 
Section which says that the use of what we call peer-to-peer 
networks that presides in the Morpheuses and the iMesh and the 
eDonkeys and the Nutellas of the world, constitute, and I 
quote, ``a threat to national security because''--I am not 
talking about secure networks now, where there is legitimate 
work being done. I am talking about the peer-to-peer, which is 
unsecure, insecure, and where a lot of this is going on now.
    You get a movie--if I can go into a theater and camcord a 
movie--about 70 to 80 percent of the movies are pilfered that 
way--and then I upload it to the Internet, it can be taken down 
instantly, and because it is a digital movie, it is eminently 
watchable. And then unauthorized DVDs are stamped from that and 
flown around the world.
    In 2002, we sent out to members of the Academy, screeners, 
68 titles sent out so people in the industry could look at that 
for their awards ceremony, and about half of those were stolen, 
we found out, in 2002, and most of them wound up in Russia, 
where millions and millions of counterfeit DVDs were sent all 
over the world.
    But I want to emphasize again that the growing malignancy 
is going to be stemming from these peer-to-peer services and I 
think the Government has got to deal with this. Government 
computers, corporate computers, are just as bad in their 
intrusions. And now the Army has said this is a threat to 
national security.
    So we are doing everything we can, but we will get with 
this coordinating committee and see what more we can do, Mr. 
Chairman.
    Senator Gregg. I am not sure--I guess my question is more 
generic than just how--my question is how are the Federal 
agencies doing in coordinating their efforts? Are they 
communicating with each other? Does USTR deal effectively with 
the FBI or it needs to improve? Does the State Department 
adequately deal with the Justice Department, Commerce with 
Justice? Is there a flow of information and a reasonably 
centralized strategic approach to fighting the theft of 
intellectual property, or is it just being done by agency, with 
each agency doing their own niche effort, and should there be a 
coordinating effort? I guess that is what this NIPLECC group 
was set up to do, was to do a coordinating effort. Does anybody 
have any thoughts on that?
    Mr. Lowenstein. What I would like to do is respond to you 
fully after we consult with some of our investigative people 
for the record. But I would say this.
    I think that the coordinating role is a terribly important 
one, and I think NIPLECC is at least playing a positive role. I 
have no doubt that there can be improved coordination. We need 
to be careful not to confuse coordination and information 
exchange with creating some sort of grandiose centralized place 
that manages all of this effort, because the agencies involved 
do have their own functions. USTR negotiates and enforces trade 
agreements. The Justice Department does law enforcement 
investigations and criminal investigations. And it would be 
very difficult to sort of funnel all that into a single 
operation.
    Yes, there needs to be coordination, and I think NIPLECC 
has a role to play there, and no doubt can play an improved 
role there, even though I think they are making the effort. But 
I think, as I said, we need to be careful not to sort of 
confuse coordination and information exchange with creating 
some sort of centralized czar that is managing the entire anti-
piracy effort for the United States Government. But I would 
like an opportunity to give you a more thorough response on 
NIPLECC for the record.
    Senator Gregg. Mr. Holleyman.
    Mr. Holleyman. Mr. Chairman, I think that the goals by 
NIPLECC are certainly to be commended. All our organizations 
work closely with various--with the Justice Department, with 
State, USTR, with PTO and ITA-Commerce on these issues. I think 
in terms of general U.S. trade policy, there is a coordinated 
approach.
    In terms of U.S enforcement, I think that one of the 
challenges of this is when you give a specific mandate to a 
specific group of people, then there is the greatest 
responsibility and the greatest connect. But when 
responsibility is diffused among a large number of people, in 
Government as in organizations, it is hard to have 
accountability.
    So again, I come back to the very clear earmarks that this 
committee has made for the Justice Department, for the type of 
prosecutions and investigations in IP crime, and that has had a 
direct correlation to substantial increase in prosecutions 
within DOJ, coming out of DOJ in the last several years. So it 
is a very specific request, very specific result, and we think 
that that is a good model going forward.
    Senator Gregg. Now, I notice that there seems to be a 
consensus on at least three thoughts which were initiated, 
which were first mentioned by Mr. Valenti, that USTR set up a 
special office on intellectual property, that there be an 
Assistant USTR and is earmarked funding, that the State 
Department increase its office to the director level and that 
there be more clarity as to their responsibility and that the 
FBI have more of a specific funding stream directed at this 
issue for their efforts. There is consensus on those three, all 
of which this committee can do almost unilaterally, which are 
good recommendation and I suspect we will follow through on 
them, except for the FBI, which may follow through.
    I have this question. The FBI's number one focus right now 
is counterterrorism. Their job is to find and protect those 
kind of people who want to harm us and stop them before they 
harm us, and we really have given them a huge new portfolio 
there and they are trying to work their way through it, and 
Justice is doing as best they can. This really has been a 
complete reorientation of the efforts of the FBI.
    I am wondering if this responsibility for pursuing 
intellectual property theft, which is clearly a law enforcement 
role, there is a law enforcement role here, would be more 
effectively done in an agency other than the FBI that also has 
the international contacts and which has an overlapping role 
relative to organized crime, specifically the DEA. Has anybody 
given anything like that any thought, because to say to the 
FBI, we are saying do counterterrorism, and then we say, well, 
do intellectual property theft, too, may be a little bit of a 
mixed message coming from us as a society, as a Government, 
whereas an agency like DEA, which is picking up even more 
responsibility in the organized crime areas as it picks up part 
of the FBI role on drugs, might be a more logical agency and an 
agency which would have more capacity to focus on this than, 
say, the FBI. And it has the overseas agents, just like the 
FBI. In fact, it probably has more of them.
    Mr. Valenti. I will respond briefly. I don't know whether 
it should be the FBI, the DEA, or whomever, but I think there 
are some central facts that we can all agree on.
    One, this problem is huge. It is mammoth and it is growing. 
That is the problem. And it has a direct effect on the decay of 
the U.S. economy. No one in this country would want to suggest 
that there be any less attention given to the war on terrorism. 
That is for our actual safety in this country. That should be 
number one.
    But somewhere, somewhere in the wealth of things that we 
do, we have to attack this problem and we have to attend it 
with a great deal of intensity because it is a terrible, 
terrible peril for the future.
    There are two ways. One, there has to be a USTR, a 
Department of Commerce where you have trade agreements with 
countries where the two essentials are a strong copyright law 
with stern penalties and the political will to enforce those 
laws. Without a lariat, we don't have anything. The USTR has 
done a great job in putting the diplomatic-economic coverlet 
over this platform from which springs the future.
    But then there has to be the investigatory, prosecutory 
role, side of it, that people who break the law matter and they 
must be brought to justice. But in most of these countries of 
the world, it is a slap on the wrist.
    So I think that the way to attack this thing is to have 
more people involved in the United States to deal with it. The 
State Department, for example, in their Economic Bureau, the 
Intellectual Property Division, recently started a series of 
meetings and bringing together all the agencies and departments 
of this Government to see what we could trade in the way of 
training and kind of initiatives which are taken, which I 
thought was quite commendable.
    But to answer your question directly, it would be good if 
there was some central authority with enough trained people to 
deal with the investigations of these crimes that the FBI has 
been doing. If somebody else can do it, that is fine. But there 
has to be some, right now, funding, Mr. Chairman, trained 
agents and equipment to do the job or else we are just kidding 
ourselves.
    Mr. Lowenstein. Mr. Chairman, if I may briefly respond to 
that, I think there may well be a role for DEA and I think we 
need to look at this in a couple of ways. It is important to 
understand the FBI has, over their recent past, devoted a 
considerable amount of resources and energy to developing 
expertise in this particular field. So I think we don't want to 
lose that investment. So I think there is a continuing role for 
them.
    I also think that you mentioned the role on 
counterterrorism, and as Jack said in his opening statement, 
there certainly is mounting evidence now that there is a nexus 
between piracy and terrorism. I read a recent report from 
Interpol in which they document some of those links. So I think 
there certainly is an appropriate ongoing role for the FBI just 
on that basis alone.
    Certainly, the DEA, as Jack also said, there is increasing 
evidence that some of the drug syndicates are migrating from 
drugs over to piracy, so there may be a very natural flow for 
DEA. It is something I think that is well worth looking at, but 
not at the expense of removing that portfolio from the FBI.
    Senator Gregg. Mr. Holleyman.
    Mr. Holleyman. I will add one thing. There is important 
recognition of this for at least the domestic aspect. In most 
areas of crime in this country, the Federal Government acts as 
a safety net when State and local police and prosecutors either 
fail, need additional assistance, or there is some unique 
Federal interest. In intellectual property enforcement, whether 
for hard goods or particularly for Internet piracy, the only 
cop is the Federal Government.
    And so one of the challenges here is that whether it is at 
FBI, which we support, at Justice, or your suggestion of DEA or 
some appropriate place both here and abroad, the Federal 
Government has a unique responsibility in this area which is 
very different from most areas of law enforcement that we deal 
with at the Federal level. So we urge you to continue to make 
that a priority.
    Senator Gregg. I am not questioning the need for priority 
or the point that Mr. Valenti makes, which is that it needs 
focused resources as versus just cursory sources. I am just 
throwing out for a point of discussion as to what is the right 
place. We are going to significantly increase the stand-up and 
more aggressive effort in law enforcement. If we continue with 
the FBI, which is right now totally involved in reorganizing 
its efforts, we consider maybe creating another entity. 
Logically, it would go to be under the DEA or maybe under the 
Criminal Division of the Attorney General's office that would 
be just intellectual property oriented. But it was just for 
discussion and I appreciate the initial reaction.
    Senator Murray.
    Senator Murray. Mr. Chairman, thank you very much for this 
hearing, and to all of our witnesses, certainly, this is an 
incredibly important issue. I listened to the full chairman of 
the Appropriations Committee and his cautioning all of us that 
we have no money whatsoever to deal with and even less than we 
probably think we do. That deeply concerns me.
    I know that everybody wants to move to private companies to 
deal with this, but I just caution this committee that a small 
entertainment software company can't take on a country's 
enforcement or investigation. We need to tackle this as a 
country because we do need to protect our economy and this is 
having an incredible impact on our economy with the draining of 
dollars that all of you talked about in your testimony today 
from our country. The real fear is that it will take away our 
willingness to be creative and create new companies, because if 
you can't make profits on your company because you lose your 
intellectual property, it will discourage a lot of good start-
up companies out there from even getting started.
    And so I think it is an issue that we do need to invest in 
from our end, whether it is more prosecution and investigation, 
as Mr. Valenti talked about, but I also think we need 
enforcement in our country to combat it. I would like to ask 
the witnesses today, on the international level, are we using 
the tools that we have effectively, whether it is bilateral 
trade agreements or the Special 301 process at WTO or treaties? 
Is anything being used effectively to negotiate with other 
countries and enforce the laws that we have?
    Mr. Valenti. Senator Murray, I think the USTR has done an 
extraordinary job with a small, small group of people. They 
have concluded free trade agreements now, particularly in 
Singapore and Chile and others, and now the Congress is going 
to have to approve Morocco and, what's the other one? 
Australia. So they just need more staffing in order to do this, 
because their job is enlarged with such rapidity that they 
can't deal with it.
    I think the State Department has done a great deal in 
trying to alleviate this, and particularly by instilling a new 
intensity of efforts in the Embassies, and I think that is 
good. Certainly, we have had good cooperation from the Justice 
Department and getting information that we need, and 
particularly here at prosecution.
    But we have a problem abroad. The Special 301, I think has 
been good, and I think that your trips, for example, with 
Senator Stevens and Senator Inouye to Taiwan had a beneficent 
effect on changing their attitude about dealing with this. I 
think CODELs have been a big, big help. We inform the Senators 
and Congress, but meet with the presidents and prime ministers 
of these countries and lay it out very simply, instructing, 
here, we will not tolerate this.
    Senator Murray. So diplomacy is important?
    Mr. Valenti. Yes, ma'am.
    Mr. Bainwol. And I would just concur. The tools are there. 
They need to be backed with diplomacy and backup, where 
possible, with money. It all comes down to enforcement.
    I think the structural questions you asked earlier are 
highly relevant. And then today, though, I think you have to 
ask the question, what is the best way to enforce? That ought 
to drive the structural questions.
    I have one other point that is a bit unrelated. That is, I 
understand this is the Appropriations Committee, but there are 
things that you can do that do not require money. This is--the 
nature of the piracy problem really is that there is this whole 
side, there is the Internet side. We have to recognize there 
are bad actors out there. It is not that, oh, gee, it has been 
hijacked. The bad actors need to be focused on. Shine a 
spotlight on them. We need to send a message. This is as much 
about teaching kids right and wrong and sending the right 
signals as it is about enforcement.
    Mr. Lowenstein. Senator Murray, I think you heard the 
comment about a single company about a single company can't 
take on a government, let alone organized criminal enterprises 
that are basically at the root of this. Even the local 
governments in those countries often don't have the will to 
take on these very large criminal syndicates, and that is one 
of the things that is terribly critical here and which I think 
we can do more in the United States.
    We have tremendous expertise in this country at 
investigating organized criminal syndicates. We need to press 
some of these foreign countries to adopt laws like our RICO 
statutes. They have been in Hong Kong, for example. We need to 
press other governments to create more tools so they have 
indigenous ability to pursue organized syndicates.
    And we need to take our expertise and coordinate and share 
with these foreign governments in terms of getting them the 
tools, the know-how, the ability to conduct these 
investigations. That doesn't necessarily mean money. That is 
knowledge. That is something we know a lot about in this 
country and we need to do a better job focusing on this.
    If we don't nail these criminal organizations, we will be 
here year after year after year after year. That is the root of 
the problem and it is going to take a very focused effort not 
only in this Government but in cooperation with foreign 
governments in solving the problem.
    Senator Murray. But I would assume that most of these 
countries would want that kind of control in their countries, 
too, because piracy is as much a problem for people who develop 
software in China as it is for people here when they lose their 
economic value.
    Mr. Lowenstein. It is absolutely true, and in the Fastline 
Operation, which we all referred to and the Justice Department 
announced last week, they did coordinate it with 10 other 
countries and they made a huge impact. So I think they 
understand the problem. I think it just needs to be sustained, 
and yes, ideally, additional resources, but I understand that 
may not be possible. But if not, it needs to be a continuing 
priority focus of this Government and the FBI, the Justice 
Department, U.S. Department of Commerce has less of a law 
enforcement function than some of these other agencies.
    Senator Murray. Mr. Holleyman.
    Mr. Holleyman. Over the past decade, we have seen software 
piracy rates come down from about 60-something percent of all 
business software being pirated to about 40 percent today. 
Forty percent is still a huge loss. Of course, the dollar 
losses haven't gone down much because the market has grown. But 
the bulk of that success in reducing rates of piracy has been 
attributable to U.S. trade policy consistently over the years 
in efforts, both bilaterally and multilaterally. So everything 
you can do to reinforce that, we believe can make progress in 
reducing the unacceptable 40 percent rate that we currently 
face.
    Senator Murray. Thank you. Thank you, Mr. Chairman. I do 
have another hearing I want to go to, but I really appreciate 
your having this hearing and I want to work with all of you. I 
think we can't lose sight of this issue and we need to keep it 
a priority both domestic and internationally and want to work 
with you to do that.
    Senator Gregg. Thank you, Senator Murray.
    It would be helpful to our staff if each of you could 
designate in your organization somebody who will work with our 
staff. There have been some very specific recommendations that 
have been made today which there appears to be consensus on. We 
are going to want to try to execute on those, if possible, 
certainly the USTR issue, the State Department issue. I want to 
figure out where we should put this--if we can find some money 
to put into this effort for enforcement, how we structure that. 
Maybe we set up a joint effort under the Criminal Division in 
the Justice Department with both DEA and FBI.
    In any event, we want to get your expertise as we go down 
this road to try to support you in and your staff in protecting 
intellectual property.
    I guess my last question would be, next week, we are going 
to have all the agencies here that our Government--the 
Government agencies that have jurisdiction in this issue. Is 
there anything specific that you think we should be asking 
these folks, USTR, Commerce, Justice, PTO, or have we already 
gone through that? I know you have made specific suggestions 
urging----
    Mr. Valenti. You know, I think that in the testimony we 
presented here, there were specific suggestions as to what 
could be done. I think some of these agencies are already 
coming to you for help in expanding their own operations. I 
realize that there are budgetary restraints, but I think if you 
take the war on terror and the war in Iraq and put that aside, 
those are the two top priorities.
    I really don't know of anything that affects the future of 
this country more than what we have been trying to explain here 
today and to eliminate it. I think it is a distressing and 
troubling thing. It has to do, as Doug Lowenstein said, with 
behavior. I have spoken at nine campuses over the last year and 
I am just stunned by what I find. You people don't believe that 
stealing music or software or movies, there is anything wrong 
with that. There is a terrible contradiction, a great grand 
omission in the kind of values these young kids have.
    And then number two, these P2P services out there, they 
even have the chutzpa to have an association formed in this 
city trying to tell how great P2P is. I am going to say, I 
congratulate them on their gall for this because it stuns me.
    But this is a threat to national security, the Army has 
found out. This is something I think that we as a Government 
have got to deal with. You can't sit inert and mute. I don't 
mean you, I am talking about the editorial ``you'' here. As a 
people, we can't sit by inert and not do anything about this.
    Senator Gregg. Well, I certainly agree that this is a core 
issue for the vitality of our economy and our competitiveness 
as a Nation, protection of intellectual property which 
energizes the creation of intellectual property, which is where 
we as a Nation must go if we are going to remain competitive in 
the environment. That goes to good jobs and it goes to good 
lifestyles. So this is at the essence of us as a culture.
    So this committee is going to try to do our little part, 
and we certainly appreciate your participation today. You have 
some really good, significant ideas and I intend to follow up 
on them. Thank you very much.

                         CONCLUSION OF HEARING

    We will have a hearing with the departments and agencies 
within the next week or two.
    Thank you. We are recessed.
    [Whereupon, at 11:14 a.m., Thursday, April 29, the hearing 
was concluded, and the subcommittee was recessed, to reconvene 
subject to the call of the Chair.]

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