[Senate Hearing 108-587]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 108-587
 
       PIRATES OF THE 21ST CENTURY: THE CURSE OF THE BLACK MARKET

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

                                HEARING

                               before the

                  OVERSIGHT OF GOVERNMENT MANAGEMENT,
    THE FEDERAL WORKFORCE AND THE DISTRICT OF COLUMBIA SUBCOMMITTEE

                                 of the

                              COMMITTEE ON
                          GOVERNMENTAL AFFAIRS
                          UNITED STATES SENATE


                      ONE HUNDRED EIGHTH CONGRESS

                             SECOND SESSION

                               __________



                             APRIL 20, 2004

                               __________

      Printed for the use of the Committee on Governmental Affairs


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                           WASHINGTON : 2004
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                   COMMITTEE ON GOVERNMENTAL AFFAIRS

                   SUSAN M. COLLINS, Maine, Chairman
TED STEVENS, Alaska                  JOSEPH I. LIEBERMAN, Connecticut
GEORGE V. VOINOVICH, Ohio            CARL LEVIN, Michigan
NORM COLEMAN, Minnesota              DANIEL K. AKAKA, Hawaii
ARLEN SPECTER, Pennsylvania          RICHARD J. DURBIN, Illinois
ROBERT F. BENNETT, Utah              THOMAS R. CARPER, Delaware
PETER G. FITZGERALD, Illinois        MARK DAYTON, Minnesota
JOHN E. SUNUNU, New Hampshire        FRANK LAUTENBERG, New Jersey
RICHARD C. SHELBY, Alabama           MARK PRYOR, Arkansas

           Michael D. Bopp, Staff Director and Chief Counsel
      Joyce A. Rechtschaffen, Minority Staff Director and Counsel
                      Amy B. Newhouse, Chief Clerk

                                 ------                                

   OVERSIGHT OF GOVERNMENT MANAGEMENT, THE FEDERAL WORKFORCE AND THE 
                   DISTRICT OF COLUMBIA SUBCOMMITTEE

                  GEORGE V. VOINOVICH, Ohio, Chairman
TED STEVENS, Alaska                  RICHARD J. DURBIN, Illinois
NORM COLEMAN, Minnesota              DANIEL K. AKAKA, Hawaii
ROBERT F. BENNETT, Utah              THOMAS R. CARPER, Delaware
PETER G. FITZGERALD, Illinois        FRANK LAUTENBERG, New Jersey
JOHN E. SUNUNU, New Hampshire        MARK PRYOR, Arkansas

                   Andrew Richardson, Staff Director
   Marianne Clifford Upton, Minority Staff Director and Chief Counsel
                      Kevin R. Doran, Chief Clerk


                            C O N T E N T S

                                 ------                                
Opening statements:
                                                                   Page
    Senator Voinovich............................................     1

                               WITNESSES

                        Tuesday, April 20, 2004

Jon W. Dudas, Acting Under Secretary of Commerce for Intellectual 
  Property, and Acting Director, U.S. Patent and Trademark Office     5
Francis Gary White, Unit Chief, Commercial Fraud Division, 
  Immigration and Customs Enforcement, Department of Homeland 
  Security.......................................................     7
Daniel C.K. Chow, Professor, The Ohio State University College of 
  Law............................................................    22
Jeff Gorman, President and CEO, The Gorman-Rupp Company, 
  Mansfield, Ohio................................................    25
Phillip A. Rotman, II, Assistant Patent and Trademark Counsel, 
  Dana Corporation...............................................    27

                     Alphabetical List of Witnesses

Chow, Daniel C.K.:
    Testimony....................................................    22
    Prepared statement with attachments..........................    65
Dudas, Jon W.:
    Testimony....................................................     5
    Prepared statement...........................................    43
Gorman, Jeff:
    Testimony....................................................    25
    Prepared statement...........................................    85
Rotman, Phillip A., II:
    Testimony....................................................    27
    Prepared statement with attachments..........................    91
White, Francis Gary:
    Testimony....................................................     7
    Prepared statement...........................................    54

                                APPENDIX

Questions and Responses for the Record from:
    Mr. Dudas....................................................   115
    Mr. White....................................................   119


       PIRATES OF THE 21ST CENTURY: THE CURSE OF THE BLACK MARKET

                              ----------                              


                        TUESDAY, APRIL 20, 2004

                                     U.S. Senate,  
          Oversight of Government Management, the Federal  
           Workforce, and the District of Columbia Subcommittee,   
                        of the Committee on Governmental Affairs,  
                                                    Washington, DC.

    The Subcommittee met, pursuant to notice, at 9:33 a.m., in 
room SD-342, Dirksen Senate Office Building, Hon. George 
Voinovich, Chairman of the Subcommittee, presiding.

    Present: Senator Voinovich.

    Staff Present: Amanda Nichols, Counsel; Andrew Richardson, 
Staff Director; Kevin Doran, Chief Clerk; Marianne Upton, 
Minority Staff Director, and Deborah Parkinson, Minority Staff 
Assistant.

             OPENING STATEMENT OF SENATOR VOINOVICH

    Senator Voinovich. The meeting will come to order. Good 
morning, and thanks very much for being here today.
    The title of this hearing this morning is, ``Pirates of the 
21st Century: The Curse of the Black Market.'' It's a pretty 
serious title. It could be a movie title, and if somebody would 
make a movie about it, I think the American public might be so 
engaged that we would really start getting something done about 
the problem that we have.
    We're going to focus on the effectiveness of the Federal 
Government's efforts to enforce intellectual property rights. 
Specifically, this hearing is going to examine the activities 
of the Department of Commerce, the Office of the U.S. Trade 
Representative (USTR), and the Department of Homeland Security, 
to protect U.S. intellectual property interests both at home 
and abroad.
    I want to begin by noting that the Office of the United 
States Trade Representative was unable to send a witness. This 
is very distressing to me, as the USTR plays a prominent role 
in intellectual property issues, and I believe their testimony 
is crucial to uncovering why it seems that we are not getting 
the job done in enforcing our intellectual property rights. I 
also find it ironic that they did not have anyone to send.
    One topic I wanted to cover with them today is their lack 
of resources, particularly their staffing levels. This is an 
office of 225 people, with a budget of roughly $40 million. In 
my December hearing, where I focused on the human capital 
challenges at USTR and Commerce, I was shocked to learn that an 
office as small as USTR had so many responsibilities. I was 
also shocked to hear that USTR testified that it relied heavily 
on personnel from other agencies to perform their functions.
    If USTR were present today, I would again ask questions 
concerning their small staffing and funding levels and whether 
they have the right number of people, with the right amount of 
resources, to protect U.S. intellectual property rights and 
subsequently U.S. manufacturing jobs.
    This is a very important issue. This agency needs to be 
examined to determine if it has the resources to successfully 
carry out its mission. I intend to ask the General Accounting 
Office to look into the issue and report back to me what they 
find. I would also like to add that although USTR is not here, 
they have agreed to answer questions from Subcommittee Members 
after the hearing in writing, and I certainly have some 
questions for them.
    The importance of our hearing today is underscored by the 
fact that the United States has lost over 2.7 million 
manufacturing jobs since July 2000. In July 2000, there were 
more than one million manufacturing jobs in the State of Ohio. 
Yet, by October 2003, this had fallen to 840,000. This is a 
loss of 17.6 percent of the State's manufacturing employment, a 
loss of more than one out of every six Ohio factory jobs.
    These numbers represent a crisis for Ohio's economy, 
especially since the manufacturing sector in Ohio accounts for 
the second highest weekly earnings of any economic sector and 
supports local communities and schools with more than $1 
billion in corporate franchise and personal property taxes.
    Ohio's manufacturing companies are distressed by our 
current trade priorities, especially with regards to China. I 
have heard it over and over and over again. As I meet with 
business leaders throughout the State, one of their top 
concerns is their inability to compete on a level playing field 
with their Chinese competitors. Many of them are for free 
trade, but they really don't believe that we have fair trade, 
as they feel that our government's policies with respect to 
intellectual property rights are not helping to level the 
playing field and affecting their bottom line.
    This is not surprising, however, when you look at the 
statistics on the subject. The International Chamber of 
Commerce estimates that counterfeiting drains between $300-$350 
billion annually from the world's economy. This is roughly 5 to 
7 percent of total world trade, and each dollar lost to 
American citizens and companies ends up lining the pockets of 
people I refer to as criminals. They are criminals. Actually, 
they are stealing ideas from other people and selling them on 
the marketplace. That's theft.
    For U.S. manufacturers, protection of intellectual property 
is not an abstract concept. America's competitive edge is 
derived from innovation and rising productivity, and the 
protection of intellectual property remains one of the best 
means for ensuring that American manufacturers enjoy the 
benefits of their investments.
    The very foundation of our economy is the American 
entrepreneur, but who will want to continue on this path if 
your work product can be stolen out from under your nose at 
every turn? In fact, the International Anti-Counterfeiting 
Coalition puts revenue loss--this is a stunning number--to U.S. 
trademark holders at $200 billion a year.
    While USTR's Special 301 report contains a lengthy list of 
countries with deficient intellectual property protection, this 
hearing will place a specific emphasis on counterfeit goods 
from China, which remains the leader in counterfeit goods 
production for the majority of U.S. companies. It is estimated 
that 15 to 20 percent of all products made in China are 
counterfeit, and this accounts for roughly 8 percent of the 
Chinese gross domestic product. In fact, the Bureau of U.S. 
Customs and Border Protection seizure statistics show that 
about one-half of all intellectual property related seizures 
for anywhere in the world involving goods entering a U.S. port 
are from China.
    I am not surprised by these numbers. This has been an 
ongoing problem with China for some time now. USTR cited 
China's failure to provide adequate protection of patents, 
copyrights and trademarks back in 1991, when it threatened to 
impose a billion-and-a-half dollars in trade sanctions.
    When I was in China on a trade mission as governor of the 
State of Ohio in 1995, this was an issue that I talked about 
constantly with Chinese Government officials.
    At that time, the International Intellectual Property 
Alliance, an association of major U.S. copyright-based 
industries, had estimated that intellectual property rights 
piracy by Chinese firms cost U.S. firms $2.3 billion in lost 
trade. The terms of China's WTO accession required that China 
immediately bring its intellectual property laws into 
compliance with the WTO agreement on Trade Related Aspects of 
Intellectual Property Rights. But I haven't seen any evidence 
that China's behavior has changed a bit since then. We need to 
stop standing by and watching as, year after year, China 
continues to counterfeit U.S. products, costing many Americans 
their jobs.
    While a wide variety of manufacturing industries have 
experienced job losses related to intellectual property rights, 
I would like to focus specifically on one industry which has a 
large presence in my State: The automobile industry. According 
to a 2003 report from the U.S. Federal Trade Commission, the 
counterfeit auto parts industry accounts for $3 billion in 
business to the United States alone, and $12 billion per year 
globally. The Commission has also estimated a related loss of 
about 250,000 domestic jobs in the auto industry as a result. 
Automotive suppliers across the country have identified this 
rising illegal practice as a risk to their global sales and 
operations. Many U.S. automobile parts manufacturers have 
sustained damage to their international branding and 
reputations as a result of active efforts to copy their 
packaging and trademark protected materials. Senator Levin and 
I are co-chairs of the Senate Auto Caucus and we are very 
concerned about this issue.
    The purpose of this hearing is to learn what the Executive 
Branch is doing about this and whether their efforts are 
succeeding. I was encouraged to see some progress on the issue 
in the January 2004 Commerce Department manufacturing report, 
which stated that: ``to the extent that U.S. investment in 
research and development provides a competitive edge in the 
marketplace, the protection of the intellectual property 
developed by U.S. manufacturers which embodies the product of 
that research becomes critical to the future of the 
manufacturing sector.'' I just wonder, though, how many other 
Commerce Departments have said this over the years. I will be 
interested to hear how the Commerce Department today plans to 
follow through on that statement.
    I was also encouraged to read in the same report that 
Commerce will be reinforcing the efforts of the National 
Intellectual Property Law Enforcement Coordination Council, 
which has been around since 1999, whose mission is ``to 
coordinate domestic and international intellectual property law 
enforcement among Federal and foreign entities.'' With so many 
agencies, namely Commerce, Homeland Security, USTR, Justice and 
the FBI all involved in efforts to fight counterfeiting, I 
believe this Council will be crucial to maximizing the 
government's effectiveness in this area. I am interested to 
learn everyone's opinion on how successful this Council has 
been and the prospects for its future success.
    I am looking forward to hearing the testimony of all of our 
witnesses today and learning what more we can do to find 
solutions to this challenge. American manufacturers, including 
those in Ohio, have run out of patience as they see jobs lost 
to intellectual property piracy and the flourishing black 
market of the 21st Century.
    We have a nice line up of witnesses today. On our first 
panel we have two witnesses representing the Bush 
Administration. First is John Dudas, Acting Under Secretary for 
Intellectual Property within the Department of Commerce, and 
Director of the U.S. Patent and Trademark Office. We also have 
Francis Gary White, Unit Chief of Commercial Fraud, Immigration 
and Customs Enforcement, U.S. Department of Homeland Security.
    I am really glad to have both of you here. Mr. White, I am 
also very happy that you're here because you are actually 
``hands on'' in terms of the operation. So often we get people 
that are higher up and when you start asking questions about 
what happens, they really don't know because they have so many 
other responsibilities on their plate.
    James Mendenhall, the Assistant U.S. Trade Representative 
for Intellectual Property, was scheduled to testify but 
cancelled at the last minute. As I said, I am very disappointed 
that the USTR isn't here today because they are very much a 
part of this whole issue.
    Our second panel consists of three Ohio witnesses. First 
we're going to hear from Professor Daniel C.K. Chow of the 
Michael E. Moritz College of Law at Ohio State University, my 
alma mater. Michael Moritz, who the college was recently named 
after, was one of my classmates, in my graduating class. In 
fact, it's interesting, that we both ran for president of the 
law school Young Republican Club. I won and he lost. We had a 
class reunion 2 years ago here in Washington. They said, well, 
Moritz might be the Senator and Voinovich might be in Moritz' 
position. I said there is no way in the world that if I was a 
practicing lawyer I would have been able to contribute $30 
million into the Ohio State University College of Law.
    Joining Professor Chow is Phillip A. Rotman II, Assistant 
Patent and Trademark Counsel for Dana Corporation. Dana is 
based in Toledo and is celebrating its 100th anniversary this 
year. Finally, we're going to hear from Jeff Gorman, President 
and CEO of the Gorman-Rupp Company, headquartered in Mansfield, 
OH.
    I want to thank all of you for making the trip to 
Washington today. Again, thank you for coming.
    If all the witnesses would please stand, I will administer 
the oath. Our testimony is sworn to before this Subcommittee. 
So if you would stand and raise your right hand.
    Do you swear that the testimony you are about to give 
before the Subcommittee is the truth, the whole truth, and 
nothing but the truth, so help you, God?
    [Affirmative responses.]
    Let the record show that the witnesses have answered in the 
affirmative.
    Mr. Dudas, will you begin, please.

    TESTIMONY OF JON W. DUDAS,\1\ ACTING UNDER SECRETARY OF 
COMMERCE FOR INTELLECTUAL PROPERTY, AND ACTING DIRECTOR OF THE 
                U.S. PATENT AND TRADEMARK OFFICE

    Mr. Dudas. Thank you, Mr. Chairman. Thank you for the 
opportunity to appear before you and discuss the problem of 
counterfeiting and intellectual property theft and piracy and 
the Department of Commerce's role in protecting intellectual 
property abroad.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Dudas appears in the Appendix on 
page 43.
---------------------------------------------------------------------------
    Secretary of Commerce Don Evans is keenly aware of the 
increasing significance of intellectual property protection for 
American businesses and innovators and has made combating 
counterfeiting and piracy a top priority for the entire 
Department.
    As you know, intellectual property is a net export of the 
United States and is responsible for creating and sustaining 
tens of millions of jobs in the United States. As Acting Under 
Secretary of Commerce for Intellectual Property and Acting 
Director of the Patent and Trademark Office, I am dedicated to 
coordinating U.S. Government efforts to reduce the toll that IP 
theft takes on American IP owners and users. I commend you for 
holding today's hearing and am grateful to the Subcommittee for 
its interest in finding additional ways to protect U.S. 
intellectual property owners' assets overseas and, as you 
mentioned, informing people of the importance of this issue and 
these problems that we face.
    Increasingly, both the United States and our trading 
partners are relying on intellectual property to drive economic 
growth. This is because competitive success in a market economy 
depends heavily on intellectual property assets held by an 
institution.
    Piracy and counterfeiting threaten to undermine some of the 
strongest areas of growth in the U.S. economy. According to the 
International Intellectual Property Alliance, U.S. copyright 
industries continue to lead the U.S. economy in their 
contributions to job growth, gross domestic product, and 
foreign sales/exports. Between 1977 and 2001, the U.S. 
copyright industries' share of the GDP grew more than twice as 
fast as the rest of the U.S. economy.
    The costs of counterfeiting and piracy are not merely 
economic. Consumer health and safety is at stake as well. U.S. 
Food and Drug Administration counterfeiting investigations have 
jumped from about 5 in the late 1990's to 22 in 2002. 
Counterfeit drugs very often contain no active ingredient, or a 
mixture of improper active ingredients. Counterfeit batteries 
can explode in electronic equipment or children's toys. Even 
product approval marks certifying a product's safety are now 
being counterfeited widely.
    To make matters worse, the global criminal nature of IP 
piracy is all too real. During a House International Relations 
Committee hearing in 2003, the Secretary General of Interpol 
identified a disturbing potential trend when he testified that 
IP crime is becoming the preferred method for funding a number 
of terrorist groups. A customs expert with the European 
Commission recently stated that al-Qaeda and Hezbollah are 
among organizations believed to be using counterfeit goods to 
launder money and fund their activities.
    The USPTO is directed by statute to advise the President, 
through the Secretary of Commerce, and advise all Federal 
agencies on national and international intellectual property 
policy issues, including intellectual property protection in 
other countries. The USPTO also serves as the co-chair, as you 
mentioned, with the Criminal Division of the Department of 
Justice of the National Intellectual Property Law Enforcement 
Coordination Council, or NIPLECC, which is tasked with 
coordinating domestic and international intellectual property 
law enforcement.
    The USPTO provides intellectual property enforcement 
training and technical assistance on a truly global basis. Over 
the last several years, the USPTO has assisted countries around 
the world in establishing adequate enforcement mechanisms to 
meet their obligations under TRIPs. We provide technical and 
legal advice to the USTR through the annual Special 301 
process, the TRIPs council review of implementing enforcement 
legislation, and in the negotiation of free trade agreements.
    Our approach to the ongoing FTA negotiations has been to 
follow a TRIPs-plus format by expanding the minimum standards 
set out in TRIPs. One way of achieving the TRIPs-plus goal is 
be enhancing the enforcement provisions contained in the TRIPs 
agreement and combining them with the enforcement provisions 
contained in the World Intellectual Property Organization 
Internet treaties.
    As I am sure the Subcommittee is aware, and as you noted, 
one of the areas of greatest concern with respect to 
intellectual property piracy is Asia, and particularly mainland 
China. Despite China's membership in the WTO, and its 
requirement to comply with the TRIPs agreement, the lack of 
effective IP enforcement in China is a major problem for U.S. 
business interests, costing potentially billions and billions 
of dollars in lost revenue.
    Last fall, Secretary Evans led a mission to China and 
highlighted China's lack of intellectual property rights 
enforcement. The Secretary met with high-ranking Chinese 
officials and reiterated a continuing concern, that effective 
IPR protection requires that criminal penalties for stolen 
intellectual property theft and fines are large enough to be a 
deterrent rather than a mere business expense. Secretary Evans 
has carried a strong message of the need for results, results 
that can be measured so that progress can be identified. That 
is perhaps the most important issue in China, to see a trend 
where results are identified and we can see progress.
    As a follow up to the Secretary's October 2003 trip, I 
recently led a delegation to China with other members of the 
USPTO China team for consultations with senior officials at 
China's patent and trademark office and other intellectual 
property agencies, as well as customs and enforcement. While 
our visits were well-received and we were pleased to note a 
continuing and increasing awareness among Chinese officials of 
the importance of IP protection and enforcement, we have not 
yet seen significant progress on most of the key issues we have 
been urging China to act on for some time. These issues include 
enhanced criminal enforcement, protecting copyrights over the 
Internet, and stopping the export of counterfeited goods.
    Mr. Chairman, the demands on Commerce and USPTO's expertise 
in the international arena have grown dramatically in the last 
few years. These demands will certainly increase in the next 
few years, as well as our obligations to meeting our core 
missions.
    I am hopeful that with the continued support and 
partnership of this Subcommittee, we will be able to provide 
American intellectual property owners with the protection they 
deserve and need.
    In terms of the economy and national security, much is at 
stake. That is why our experts will continue to work tirelessly 
to protect American products in every corner of the globe.
    Thank you very much for this opportunity to answer your 
questions.
    Senator Voinovich. Thank you very much. When was it that 
you visited China?
    Mr. Dudas. The first week of March.
    Senator Voinovich. Mr. White.

  TESTIMONY OF FRANCIS GARY WHITE,\1\ UNIT CHIEF, COMMERCIAL 
FRAUD DIVISION, IMMIGRATION AND CUSTOMS ENFORCEMENT, DEPARTMENT 
                      OF HOMELAND SECURITY

    Mr. White. Good morning, Mr. Chairman, and thank you for 
the opportunity to testify about the Department and ICE's, the 
Immigration and Customs Enforcement's efforts undertaken to 
investigate intellectual property right violations. I would 
also like to note the strong interest of the Department's 
leadership in this area and the support they have provided ICE 
as we move forward in our mission to detect IP violations.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. White appears in the Appendix on 
page 54.
---------------------------------------------------------------------------
    With the creation of the Department of Homeland Security in 
2003, the investigative and intelligence functions of the 
former U.S. Customs Service and the Immigration and 
Naturalization Service were merged into ICE, now the second 
largest Federal law enforcement agency. ICE's mission is to 
protect the United States and its citizens by detecting, 
interdicting and investigating threats arising from the 
movement of people and goods into and out of the country, and 
to detect and shut down vulnerabilities in our Nation's border, 
aviation system, and economic systems.
    Today's increasing demand for products protected by 
intellectual property rights has escalated. The losses to the 
U.S. economy in revenue and jobs due to IPR violations are 
staggering. In 1982, the International Trade Commission 
estimated the loss in counterfeiting and piracy at $5 billion. 
By 1998, the International Chamber of Commerce estimated that 5 
to 7 percent of the world trade was comprised of counterfeit 
goods, a market worth $350 billion.
    In many cases, the profit of counterfeit merchandise is 
used to fuel additional criminal activities. Some of these 
profits are laundered and invested in legitimate business 
enterprises. Both ICE and the Customs and Border Protection 
(CBP), have modified enforcement strategies that were 
originally aimed at simply seizing counterfeit goods before 
they entered the U.S. market. Now ICE coordinates targeted 
seizures with follow-up criminal investigations and forfeiture 
of assets. Our ultimate goal is to dismantle the smuggling 
organizations and to halt the flow of counterfeit merchandise 
into the commerce of the United States.
    To help us with this mission, in July 2003, ICE created the 
financial investigative initiative identified as Operation 
Cornerstone. This program is dedicated to the U.S. economic 
security and highlights the DHS mission to protect the United 
States by securing its borders, transportation sector, ports, 
and critical infrastructure.
    Cornerstone protects the integrity and security of the U.S. 
economy by identifying, targeting and eliminating systematic 
vulnerabilities in the financial, commercial, trade, 
manufacturing, and transportation sectors that could be 
exploited by criminal or terrorist organizations.
    To attack the counterfeiting problem, a multi-agency, the 
National Intellectual Property Rights Coordination Center, was 
developed in 2000, comprised of both investigative and 
intelligence research personnel from ICE, CBP, and the FBI.
    The IPR Center works with copyright owners and trade 
associations on an ongoing basis, and has conducted outreach 
presentations to both trade associations and foreign 
governments. This year, in April 2004--April 28 to be exact--
the IPR Center will host its inaugural industry anti-
counterfeiting coalition working group in conjunction with 
IACC. They will meet with trade associations and business to 
better identify and address the growing IP issues and to 
identify criminal trends. In addition, the IPR Center personnel 
have provided training in IP enforcement, as well as legal 
requirements necessary to successfully prosecute IPR 
violations.
    The IPR Center also plays a key role in international IPR 
enforcement by participating in worldwide IPR working groups 
and committees. Since the majority of counterfeit goods are 
produced in foreign countries, ICE attache offices around the 
world work closely with their host country law enforcement 
counterparts. Their efforts in developing information regarding 
the manufacture and shipment of counterfeit goods have resulted 
in numerous seizures of containers of these illegal goods in 
the United States. Computer parts, toys, video games, wearing 
apparel, and watches are a few examples of counterfeit 
merchandise routinely seized by ICE and CBP.
    But IPR violations can take many forms and may also involve 
health and safety concerns. Counterfeit pharmaceuticals, tools, 
electrical cords, as well as aircraft and automobile parts, all 
have a significant impact on the public safety. For example, 
laboratory testing of imported counterfeit batteries have 
revealed inferior manufacturing practices that create improper 
ventilation, causing increased risk of explosions.
    In conclusion, as much as we have done to protect 
intellectual property rights, we must do more in staying ahead 
of the perpetrators. Greater interaction among ICE, industry, 
intellectual property right owners, and the public, as well as 
domestic and international law enforcement organizations, is 
critical to our effort in combating the increasing threat posed 
by IPR violations.
    I would like to thank you, Mr. Chairman, and the 
distinguished Members of the Subcommittee, for their support 
and the opportunity to testify before you today.
    I request my full written statement be included in the 
record, and will be glad to address any questions you might 
have.
    Senator Voinovich. Thank you very much, Mr. White.
    It's interesting to me that both of you have mentioned 
organizations, terrorist organizations that are taking 
advantage of this to generate money for their organizations. 
That's an aspect of this that I was unaware of.
    Is that pretty rampant? I mean, ordinarily we just think of 
a country doing a lax job of enforcing their trademark, to kind 
of wink and pay lip service to doing something about it, and 
people continue to do it. They know they're doing it, but they 
are benefiting from it because of the money they're generating.
    But you're saying we have organizations that are actually 
in various countries that are counterfeiting goods and then 
selling them on the open market, generating the cash, and then 
using it to fund their illegal activity?
    Mr. Dudas. There certainly are links that have been 
identified outside the USPTO with law enforcement nationally 
and internationally with ties to organized crime, primarily, 
from what I understand, because it is more profitable than even 
selling drugs in many ways, which is another way of funding 
organized crime.
    Also the criminal thresholds are much lower in many nations 
and the enforcement is less enthusiastic in many nations. Some 
have testified, including Interpol, that they believe that some 
of the terrorist organizations are also finding this to be a 
preferred method for funding because of how attractive it is, 
with the lower cost of prosecution and higher profitability.
    Mr. White. We, at ICE, are aware of the allegations of 
potential terrorist funding. We have no sustainable evidence to 
link IPR violations to terrorist activity and terrorist 
funding. However, because of the allegations that are being 
provided to us, we take this issue very seriously. We 
constantly are looking at this as a possibility. This is part 
of our investigative process and it is a concern to ICE as well 
as to the Department. It is not one we're taking very lightly.
    We are very aggressively trying--as we receive allegations 
now of IP violations, we look at the bigger picture. We look at 
the people. We look at the goods. We look at the funding, 
trying to again focus on the economic security.
    Senator Voinovich. It's interesting, because I had a 
hearing last year in my capacity on the Foreign Relations 
Committee, a hearing on corruption and organized crime in the 
southeastern Europe area. In fact, my feeling is that that's 
even a greater threat over there with corruption and organized 
crime than terrorism.
    It was interesting that during the testimony it never came 
up that counterfeiting was a way they are operating to raise 
money. They talked about drugs, they talked about arms, they 
talked about prostitution rings and so forth, but never got 
into the issue of counterfeiting.
    With regard to the National Intellectual Property Law 
Enforcement Coordination Council, which has been around since 
1999, do you feel that this Coordination Council is achieving 
its mission of coordinating domestic and international 
intellectual property law enforcement among Federal and foreign 
entities?
    Mr. Dudas. That's a very good question. I think the answer 
depends on what is expected from NIPLECC. NIPLECC arose out of 
an expectation that there is a need for more coordination among 
government agencies, certainly within the United States, what 
agencies are doing, how effective are they.
    NIPLECC has been extremely effective in terms of becoming a 
reporting mechanism from agency to agency, so that agencies 
know what other agencies are doing. It has not been something 
that has--it has no staff of its own, no dedicated staff, nor 
particular resources. It has not, in and of itself, become a 
leading force in intellectual property enforcement, in my 
opinion, nor has it become something that has been the primary 
coordination throughout the U.S. Government.
    What it does right now, it's primarily again agencies 
coming together, reporting what they're doing, coordinating 
activities, understanding where resources are being spent to 
make sure it's not duplicative nor redundant, to make sure that 
we understand the full force of what the U.S. Government is 
doing.
    It has increased in importance. There has been an agreement 
among agencies to come together to talk about public awareness 
campaigns within the United States and internationally. But I 
believe to take the next step, to make it an even more 
effective coordination council, it may require looking at 
funding from within, and certainly that's one of the 
responsibilities PTO has, as well as the co-chair of the 
council.
    Senator Voinovich. Mr. White.
    Mr. White. I believe, as an organization and a coordination 
council, it is effective, but is it as effective as it could 
be? I think there is room for improvement.
    We participate. It's meetings are scheduled. It's an 
excellent coordination tool, but I believe that it can improve.
    Senator Voinovich. What's troubling is that the charter 
says its mission is to coordinate domestic, international, and 
intellectual property law enforcement among Federal and foreign 
entities. Obviously, this responsibility is split up with 
Commerce, Customs, USTR, the FBI, and so forth.
    It seems to me that if this problem is as significant as it 
is, as you have now added a new dimension of terrorism, that 
one person/agency should be in charge of knowing what's going 
on in all the agencies in order to better coordinate the 
government's efforts. This is necessary because from what I'm 
hearing today, each agency comes and listens to what the other 
is doing, so they're aware of what they're doing, but there is 
nobody looking at the big picture, to coordinate everyone's 
efforts.
    When I was governor, I had coordinators of a cabinet 
council comprised of four or five departments. Because these 
departments had some synergism going on, they, in effect, had a 
symbiotic relationship. They tried to make sure they knew what 
was going on, to direct things, and keep everyone working 
together as a team.
    It is just reminiscent of the 9/11 hearings, that the left 
hand didn't know what the right hand was doing, there wasn't 
coordination. There wasn't the sharing of information--somebody 
was not paying attention to the big picture.
    Would you agree that we ought to perhaps look at staffing 
NIPLECC and having somebody there that is looking at the big 
picture to assess what everybody is doing?
    Mr. Dudas. I think that any time you would have dedicated 
staffing or resources that would help coordinate that better, 
that is something that should be considered. It is something 
that, as Acting Under Secretary, I have been out speaking to 
folks. The co-chair is also the Department of Justice and we 
have begun discussions about how we would go about doing that, 
either from within our agencies or how we may want to go about 
doing that.
    So I would agree that dedicated staff and dedicated 
resources to NIPLECC is something that would make it more 
effective.
    Senator Voinovich. If you were sitting down and designing 
an organizational structure from scratch, and looked at the 
respective responsibilities of the various agencies involved, 
do you feel that we are organized in the best way that we can 
be organized?
    In other words, what happens in organizations is that 
things change sometimes and you're a lot busier, and then less 
busy, and you try to organize things to deal with the problem. 
But as the problem moves and changes, ordinarily what you do is 
you look at your structure to see whether or not it is 
responding to the challenge that's there, and also the issue of 
shaping your workforce to make sure you've got the right people 
with the right skills and knowledge at the right place in time.
    At this stage of the game, with your plate seeming to be 
growing with items, if you were to look at this today and step 
back for a moment, is it organized the way it ought to be 
organized? Or do you think it should be looked at differently?
    Mr. Dudas. I can say that, from a philosophical 
perspective, the idea that you have different organizations 
with a particular expertise coming together and providing that 
expertise to each other, and maintaining separate entities, I 
think probably is the right approach.
    Do I think it's perfect, or do I think it can't be improved 
in individual areas? I absolutely think it can, and I can 
identify areas at USPTO where it can be improved from a 
resource perspective, etc.
    But I think one of the issues that comes up in intellectual 
property rights enforcement is there are so many different 
agencies that are involved, and is that the right way to do it, 
or should it be one central agency that deals completely with 
intellectual property rights? To some degree, that is the 
USTPO, but certainly we are not an enforcement agency of the 
likes of the Department of Justice or Customs or anything along 
those lines.
    I can share with you just an experience from the USPTO why 
I think being able to tap into the expertise of the USPTO 
without having separate expertise--and I certainly think this 
probably plays out in other areas, like the Department of 
Justice and Customs. Much of what we do at the PTO is try to 
lead by example in the United States. Our office continues to 
be the envy of the world as far as how to set up an 
intellectual property system in an office. So much of what we 
do is work with other nations to develop their intellectual 
property offices. That's literally hundreds of people within 
our office.
    What we do in treaty negotiations, what we do in terms of 
working with other offices to help them set up a patent system, 
really plays a significant role even in what we do for FTA 
agreements and what we do elsewhere. I would say there's room 
for improvement, but the idea of having an area that has 
enforcement and an area that offers technical expertise, being 
able to tap into other areas of the government, is probably the 
most efficient way to do it, in my opinion.
    Senator Voinovich. Mr. White.
    Mr. White. I believe our organizational structure right now 
for the enforcement of IP violations is effective and well 
organized. With the creation of the Department of Homeland 
Security and the Immigration and Customs Enforcement as an 
investigative tool within the Department, by providing the 
expertise that has been brought together by legacy Customs and 
legacy Immigration agents, I have personally seen a change in 
the dynamics, the quality of the work, and the quality of the 
investigations. I am pleased and very comfortable in the 
direction we're moving down the road.
    Also, from an enforcement perspective, we have looked very 
seriously at intellectual property rights for some time. With 
the creation of the Intellectual Property Rights Center, it was 
our intention of bringing together our separate functions, even 
within the legacy customs role. I believe that organization, 
although I can see an expanding role for it, right now is 
effective and can continue to be effective. My concern is the 
public perception of the role, the public knowledge of the IPR 
Center.
    We, in the law enforcement community, are familiar with it, 
but do we need to do something more to bring it to the public's 
attention?
    Senator Voinovich. What do you mean by that?
    Mr. White. Well, recently I began to research with our 
Office of Public Affairs the possibility of public service 
announcements that would be geared to communities. I have heard 
that there is a concern that outside of the law enforcement 
community, the public, and the trade, is not aware of the IPR 
Center. So we are looking at what can we do to publicly 
advertise ourselves, to make ourselves known.
    That is one of the reasons why our April 28 conference, 
partnershipping with the international anti-counterfeiting 
coalition, is going to Atlanta. That maybe is what we need to 
do: Move ourselves, and rather than hosting all our meetings in 
Washington, go where the industries are, making it more 
convenient for them to participate.
    These are just some of the thoughts. Organizationally, I 
think we're organized correctly. But I also think that there is 
more we can do to take the message out, that maybe we have not 
done as well as I would like us to have done.
    Senator Voinovich. One of the questions I was going to ask 
is nobody seems to know what you're doing. You have the Small 
Business Administration and other Federal agencies that have 
outreach organizations that are helping inform people about 
what's going on.
    I will never forget when I was governor, I was concerned 
that not enough of our businesses were involved in 
international trade. With regard to the Export-Import Bank, I 
found out that we were at the bottom of the list in taking 
advantage of Export-Import funds. I looked into it and found 
out the reason why is because nobody was really paying 
attention to it.
    Now, I would have thought maybe the Export-Import Bank 
might have been hustling and making their services available. 
I, subsequently, hired two people in my administration to 
advertise the availability of funds and process applications. 
We went from being at the bottom to the top because there was 
an aggressive effort to go out and market it.
    If you did that, do we have the people in place that could 
respond to these complaints that are coming in?
    For example, I read an article in the Cleveland Plain 
Dealer this Sunday about an Oregon business where somebody is 
absolutely copying their product and so forth. It's Videx, Inc. 
The Chinese changed the name to Vdiar. Instead of dealing with 
this thing as an individual company, they basically said to 
them we can't deal with you individually but we can deal with 
the whole industry. You know, we don't have the staff to just 
deal with your particular problem.
    If you go out and do what you're saying, do you have the 
people available to follow through?
    Mr. White. From an investigative perspective, I do believe 
we do. Obviously, we would look to prioritize our 
investigations, and we would assess the actual complaint 
allegation. But I believe, yes, we do.
    In our partnership with other law enforcement agencies, 
with the criminal statutes that are provided within the State 
law enforcement, is where I think we can improve on. I'm 
working towards that, because that is a concern of mine.
    I think what we have done is a very good job of developing 
our international work relationships. I think we've done a very 
good job here, with the trade associations, but not necessarily 
have we hit the State and local law enforcement officers that I 
would like to go to. That is a partnership that I think we need 
to really work on and hopefully we can do in the near future.
    Senator Voinovich. This stuff over here that you brought 
with you, what is that? It looks like the Dollar Store. 
[Laughter.]
    Mr. White. It's counterfeit merchandise, merchandise seized 
by ICE agents and CBP inspectors, just as examples of some of 
the material that we have been able to seize over the last 
year.
    Senator Voinovich. That tennis shoe is supposed to be what?
    Mr. White. It should be Nikes, but they're not.
    Senator Voinovich. Then I see a little bottle. Is that some 
kind of medicine that is counterfeited?
    Mr. White. Yes, Chairman. It is counterfeit Viagra.
    Senator Voinovich. They'll find out quickly whether it 
works or not. [Laughter.]
    Mr. White. Yes, Chairman.
    Senator Voinovich. And then it looks like there's some 
cigarettes, also counterfeited cigarettes?
    Mr. White. Yes, sir. These are the concerns of ours on 
public health and safety. Even the Oakleys, the counterfeits, 
do not provide eye protection. There are so many issues that 
come forward. These are not just simple t-shirt counterfeits. 
They are public health and safety concerns. When you begin to 
look at the aircraft industry, the auto parts industry, these 
are extremely sensitive to us.
    Senator Voinovich. With our terrorism responsibilities as 
they are--I talked to a former head of Customs, a good friend 
of mine, Frank Keating, former governor of Oklahoma who now 
heads up a large group here in Washington. He said that when 
they were Customs, they really did the job of stopping this 
stuff at the border.
    With the new responsibilities that Customs has under the 
reorganization, how many additional people do you have in your 
agency to get the job done? Have you increased the number of 
people that are involved?
    Mr. White. Yes, sir, although I don't have the exact 
statistics with me. In previous allocations we were able to 
bring additional agents on board to do the work of intellectual 
property rights, and I believe that number showed an increase 
last year and the year before. They are focused on intellectual 
property rights.
    We have seen an enforcement area of intellectual property 
rights alone. In preparation, I was looking at our statistics, 
and just on the criminal enforcement perspective in 2003, as I 
recall, we had 132 arrests on intellectual property rights 
violations. In year-to-date, by mid-year of 2004, we had 125. 
So I believe we've got a focused effort on criminal 
enforcement, and by that criminal enforcement and the results, 
it helps us develop trends in the import process that allows us 
to have a better focused enforcement at the border for 
seizures, by understanding when we get into the actual analysis 
of the case, how they found the system to be vulnerable. We 
share that with CBP.
    Senator Voinovich. What I would like you to do, is to give 
me a written breakdown of the agents assigned to intellectual 
property issues within Customs, both before and after the 
reorganization. I would also like to see a breakdown of the 
budget.
    Mr. White. Yes, sir.
    Senator Voinovich. This is maybe a little bit redundant, 
but if I was a small- to medium-sized manufacturer of widgets, 
and I just found out that a Chinese company was stealing my 
widget design and shipping it to the United States, with the 
exact same packaging as my widgets, what would be my recourse 
today?
    Mr. White. I would always encourage someone who finds their 
process, their identity, has been counterfeited, that they 
notify the local law enforcement for immediate attention. 
Because again, States do have appropriate criminal statutes, as 
well as we and ICE have 25 SAC offices, and 171 resident agent 
offices. As I recall, there are three in the Ohio area--
Cleveland, Columbus and Cincinnati----
    Senator Voinovich. Wait a second. You're talking about 
contacting your officers in Customs, not some other law 
enforcement agency?
    Mr. White. Correct. So that we could begin to immediately 
analyze the allegation.
    The local offices know to contact us in the IPR Center, the 
Commercial Fraud and Investigations Unit. Our role is to help 
coordinate their national and international, to help facilitate 
their investigative case at the lowest level, at the ground 
level, at the actual site of the allegation. That would be one 
way that I would recommend it.
    The other way I would recommend for some of the smaller and 
mid-sized businesses are the trade associations. I suspect most 
who have IP issues are members of trade associations, to help 
them facilitate and getting the information to us. Those would 
just be a couple of recommendations that I might make.
    Senator Voinovich. Isn't the latter you just mentioned kind 
of going around the barn? Let's say I have a friend of mine 
that makes the best mixer in the world. This is an actual case. 
And several years ago, a company in China copied this. Moving 
on that was like going through the Maginot Line to get anything 
done about it.
    It would seem to me that there should be some mechanism 
that, if I can demonstrate that somebody has actually done what 
you have here, that you ought to be able to stop that from 
coming into the country. The issue is how soon after this has 
been found to be true--I mean, how long does it take for 
somebody to say yes, you're right, they did counterfeit your 
patent, they are manufacturing your product. How much time does 
it take for something like that to stop?
    Mr. White. I would hope it would be quickly, but I cannot 
guarantee it. I don't know--in actuality, I have never looked 
at the date and time period. I have to apologize.
    Senator Voinovich. I would like to find out. That's really 
what this is about. These are little guys, a lot of them. They 
haven't got a lot of wherewithal. They don't have a big 
corporate staff of individuals that can go ahead and do this. 
They feel like they're all by themselves and lonely. They're 
the people who need to be able to turn to the government and 
say, I need your help.
    To say go see a trade organization or something like that, 
I don't think that's a very good answer for them, Mr. White.
    Mr. White. I would not want them to see the trade 
organization for a resolution; only for possibly assistance to 
get their allegation--some of the smaller companies do not 
know, as you say, and the organization might be able to give 
them information about how to get a hold of us. It was only a 
possible recommended solution about how to get their complaint 
to us, not how to fix their problem.
    Please, if I left it like I was suggesting that would be a 
fix to their problem, I apologize. It was only----
    Senator Voinovich. So the first thing is go and see the 
local person, if I'm in Cleveland, Ohio--I think we have 
Customs people there. I go to see them, talk to them about it, 
and say this is what's happening. You think they would be able 
to help them move along with the process?
    Mr. White. I do, yes, sir.
    Senator Voinovich. OK. What I would like to do is get some 
statistics on the last couple of years of cases that have 
individually come in and how long has it taken for something to 
happen in terms of dealing with that situation.
    What Keating told me is that if somebody brought that to 
his attention, they could move on it very quickly, and when it 
came into the country, they were able to stop it right there. I 
think if somebody knew that it could happen that quickly, they 
might be reluctant to go ahead and steal somebody's product, 
because they figure why steal it, because if you get it back to 
the United States, they're not going to----
    I talked to another friend of mine who's an investor in a 
golf club. They manufacture golf clubs. He said that within 2 
or 3 days after they put a new golf club on the market, it's 
being duplicated and manufactured in China and sent back to the 
United States. It seems to me that if they have that 
information and it's verifiable, the government ought to be 
able to step in immediately and stop that from coming into the 
United States.
    Then the next issue is following through, taking the 
action, legal, criminal, or otherwise, in the particular 
country where they're operating. But if it takes forever and a 
day--you were talking in your testimony about the fact that 
these fines and criminal penalties have got to be significant, 
and the fines have to be made very high, because if you get 
fined $60,000 and you make $6 million, you'll do it every time.
    That's what I'm getting at, that there doesn't seem to be 
enough of this dotting the I's and crossing the T's and really 
letting people know that we're serious about this.
    I know in the Department of Commerce I talked to Don Evans 
about this. He said, yes, we're really serious about it, but it 
seems to me that at this stage of the game we should be 
aggressively going out and trying to let people know that we're 
there and how can we help you.
    Mr. Dudas. Mr. Chairman, if I might just add, one of the 
points you made at the very beginning was having people aware. 
You talked about the title and having people aware of what's 
going on.
    One of the things we're trying to do at the Patent and 
Trademark Office, and we need to do more of, is informing small 
and medium enterprises about what kind of environment they are 
operating in if they operate in China.
    It has come as some surprise to some of us, that both small 
and medium enterprises, and in some cases multinational 
companies, have not availed themselves of the intellectual 
property rights that may be available in China or are unaware 
of this. I think they believe the trade relationship is such 
that you just go from the Untied States to China and don't 
recognize the risks. So that's another area where we have had 
discussions, we've had seminars, etc., with small and medium 
enterprises.
    Again, I think that's where one of the areas I have seen 
more in the last year, areas like the U.S. Chamber of Commerce, 
certainly the International Anticounterfeiting Coalition and 
ITA, the International Trademark Association who are doing more 
and has done a great deal in the past to inform their 
businesses and their member companies of what they need to do, 
both in terms of operating in China or operating in the United 
States, and the problems they face. And some of it is a public-
private partnership on that level as well.
    Senator Voinovich. It seems to me that there ought to be--
well, first of all, in the United States, when something like 
that happens, to be able to move on it quickly. But also, Mr. 
Dudas, following up on your suggestion, I know when I visited 
foreign countries, we sat down with the folks from the AmCham, 
their business. I sit down with them and confidentially tell 
them what the scoop is.
    I know in one case--and I won't mention the country--that 
the courts are corrupt, forget them. I'll never forget it, 
because the newspaper people were in the meeting at that time 
and they were going to report it. I said please don't do that. 
Then we went to the embassy and they did it again, and the 
newspaper people said they would report it. I thought we were 
going to have an international incident. But they were pretty 
blunt about the country and their court system and so forth.
    But I think this is some stuff that you really need to get 
out to people before they venture over there. As I say, some of 
them are smaller. We're encouraging them to get involved in 
exports, but we need to make sure that they know what they're 
doing when they get involved.
    Personnel again. I hate to do this to USTR, but they're not 
here to defend themselves and that's their fault. I don't know 
whether you'll be candid with me or not. But when we had the 
hearing on the capacity of the Department of Commerce and the 
USTR, in terms of enforcing our trade laws, I was told by USTR 
that they've got about the same number of people they've had 
forever.
    From your experience with USTR, do you feel they need some 
more people over there to get the job done? Mr. Dudas, I think 
you mentioned that when they're negotiating their trade 
agreements, they call upon your folks to help them with getting 
the right language to protect intellectual property rights and 
copyright trademarks.
    At this stage of the game, having the same number of people 
they've had forever, what's your reaction?
    Mr. Dudas. I certainly don't feel qualified to speak to 
their budget and resources as an expert, but I can say that, as 
an agency that's working on intellectual property rights, we 
have seen an increase in activity certainly with just free 
trade agreements with the Special 301 process, etc. I'm 
guessing that USTR could use additional resources. I'm certain 
they would know what to do with those resources.
    Again, I think the model that we have is one that I believe 
works, because it's an opportunity for the USTR, at least with 
our agency, to work with us to get the technical and legal 
expertise that is necessary. We can provide more people when 
necessary, and I know we certainly are taxed but are able to 
provide what we need to provide now.
    Senator Voinovich. Well, let's start off with your own 
agency. USTR goes to you folks for advice, right?
    Mr. Dudas. Yes.
    Senator Voinovich. Would you say that within the last year 
that the requests for your help have increased measurably?
    Mr. Dudas. Yes.
    Senator Voinovich. How about your department? Are you able 
to handle those increased requests coming in?
    Mr. Dudas. We are able to handle them, but it is certainly 
taxing on our agency as well. The free trade agreements in 
particular, we have structured in a way that we are 
prioritizing, quite honestly, to make certain that the free 
trade agreements and the Special 301 process are important.
    I think there has been more activity of late, in the last 
few years, because of the free trade agreements, and because of 
nations throughout the world having to come to terms with their 
WTO obligations and TRIPs obligations.
    But I can certainly speak with some expertise, that in our 
own office we are continuing to staff slightly more. I think we 
will add maybe 2 percent more--I'm sorry, about 10 percent 
more--to our area, to make certain we're giving the appropriate 
support.
    Senator Voinovich. Do you think they might be better off 
having one or two people stationed full time at USTR, so that 
they wouldn't have to constantly keep coming back to you?
    Mr. Dudas. I actually think the model works better to have 
them come to our office, because of the expertise that is there 
for each of the areas. I mean, when it comes to free trade 
agreements or a Special 301 process, sometimes we are asked to 
help negotiate and participate.
    I think, from the USTR perspective, there are so many 
issues on which they have to work, my belief is that at least 
in the IPR perspective it would be redundant to have USTR staff 
up at that level if they did it throughout. I believe that so 
long as the model works and we're being efficient in how we 
employ it--and I think to a large degree that has occurred--it 
is the right model.
    We sometimes will draw from areas of people that were 
examiners in the Japanese Patent Office, if we're dealing with 
the Japanese office. There is certainly a great amount of 
experience to draw from. We have relationships upon which we 
can leverage.
    For instance, in China, we are able to go to China with a 
good degree of ``carrots'' as well. They are the fastest 
growing patent office and the largest trademark office in the 
world.
    Senator Voinovich. What is the office?
    Mr. Dudas. Their trademark office is the largest trademark 
office in the world. Their patent office is the fastest growing 
patent office in the world. I believe it's the fourth or fifth 
largest. And they're growing at an incredible rate.
    I think they need the expertise that the U.S. Patent and 
Trademark Office can offer, to talk about the type of growth 
we've had, and also talk about the appropriate ways to deal 
with biotechnology issues or to deal with other patent issues. 
Those are relationships that we can leverage again.
    We also find that these are agencies within any government, 
and China in particular, that are pro-intellectual property 
rights, that understand it. Again, these are the benefits, I 
think, of going to areas of expertise.
    Senator Voinovich. Well, if I'm prioritizing in an agency, 
it means that some of the things that some people were doing 
are not being done, and the issue is what are the things they 
were doing that have fallen down to a lower priority and where 
does that stack up. I'm really interested in the capacity that 
you have to respond to the challenges that you have, just as I 
am in the case of Mr. White. How many people do you have, and 
how many did you have before, and what's the new responsibility 
and demands that are being made. You have to have the people to 
get the job done.
    I think one thing is that, on this side of the aisle, we 
don't pay enough attention to that. My problem is I'm an old 
mayor and governor, and administrator. I know that agencies, in 
order to get the job done, if you give them a lot more work to 
do and you don't give them the budget, the people, or the 
resources to get the job done, it doesn't get done. That's 
really the real issue here today. This subject is very serious 
to our economy.
    Mr. Dudas, you said that in the Department of Commerce 
manufacturing report it stated that Commerce would like to 
reinforce the efforts of the National Intellectual Property Law 
Enforcement Coordination Council. We just talked about that. 
They would like to reinforce the efforts.
    Does that mean getting some staff people over there?
    Mr. Dudas. It certainly means we're considering how we can 
move beyond being more than just a reporting mechanism, what 
does it take, in particular, what proposals do we want to have 
in order to consider, from a staffing perspective or a resource 
perspective, what would make NIPLECC a more effective 
coordinating agency.
    It also means really redoubling our efforts, particularly 
with the Department of Justice, the Criminal Division, who was 
co-chair, to determine what areas do we really need to focus on 
in particular and how do we make certain that we have the level 
of involvement that we want to get from each of the agencies 
that's involved.
    I really think it's a matter of taking a look at what 
NIPLECC is doing, saying yes, we've been successful for what's 
been expected of NIPLECC, but it's an ideal arena in which to 
take it to a much higher level, to make it more of, I think, 
the kind of coordination that you're talking about, the kind of 
coordination that we think we could see, to use it to develop 
particular projects that will be beneficial to intellectual 
property owners. It involves all of that, and discussions have 
begun with the Department of Justice. Certainly the co-chairs 
have to be on board to consider taking it to a higher level, 
and to some degree, we'll either need additional resources, but 
we'll need commitment from each and every agency within NIPLECC 
on a particular project or on a mission of the Council.
    Senator Voinovich. Don Evans, the Secretary of Commerce, 
was in Beijing on October 28, 2003. He stated that the U.S. 
patience on China's WTO compliance was ``wearing thin'' and 
warned of growing protectionist sentiments in the United States 
against China.
    I have to say to you, as a Member of the U.S. Senate, that 
my patience has worn thin. I have no more patience. All I have 
heard is talk, talk, talk, talk, and I haven't seen action. It 
seems that we go over there and we talk to these folks, and 
they don't seem to get it.
    I'll never forget, when I was in South Korea in 1997, and I 
was there with a group of business people to promote joint 
ventures, as well as to convince the South Korean Government 
that they should allow in non-South Korean made vehicles, I 
spent 3 days with government officials. I can't remember the 
exact statistics, but you'll understand. I said you've got to 
do better at allowing in more non-South Korean vehicles. And 
they said we're doing better--they had increased it 100 percent 
from one-tenth of one percent to two-tenths of one percent.
    Today we import more vehicles from South Korea into the 
United States than all of the non-South Korean vehicles that go 
into South Korea in a year. Think about that. If you buy a non-
South Korean vehicle, you can pretty well be assured, if you're 
a South Korean, that you're going to have your tax return 
audited, and you may get a few more parking tickets or traffic 
tickets.
    The point I'm making is that it doesn't seem they get it. 
You just said you came back from China in March and you were 
over there again, but it's still not happening. What does it 
take for us to get the Chinese to understand that they've got 
to do something about this problem?
    Mr. Dudas. I understand completely your concern, and I can 
tell you Secretary Evans is tremendously results-oriented. This 
week the Joint Commission on Commerce and Trade meets. I think 
what is important that the Chinese understand--the Chinese 
Government believes they have done a great deal, and they can 
show quantitative enforcement and they can show certainly 
millions of CD's or other products that have been destroyed.
    But we have our own measures in the United States, and 
we've seen the seizures of counterfeit goods that we seize at 
our borders grow from 16 percent to 66 percent from mainland 
China over the last 5 years. So in an area like that, where 
things are clearly getting worse from our own measures, what we 
need to see is progress. In China, we're not seeing progress. 
What we're seeing is the opposite.
    I think what we have always pushed for in the U.S. Patent 
and Trademark Office is we need to see how you will measure 
results. That's what we're trying to do in the JCCT, is to make 
certain the Chinese Government understands how important this 
situation is, how dire it truly is.
    Senator Voinovich. But it's not in your power to do 
anything about enforcement. You can talk to them about the 
situation and point it out to them----
    Mr. Dudas. That's correct.
    Senator Voinovich. But the enforcement of it has to come 
from them, or when they try to bring the goods into the United 
States, it has to come from the Department of Commerce----
    Mr. Dudas. Ultimately, there are trade sanctions that can 
be placed. Right now I think the Chinese Government 
understands--I certainly believe they understand the message 
from Secretary Evans, that they need to show concrete results. 
We need to see progress. Right now we're not seeing progress.
    I think, beyond that, if progress isn't shown, then the 
United States considers all of the options it has on----
    Senator Voinovich. I just want to say this to you.
    I have been asking now for about a year for a Special 301 
investigation into the fact that the Chinese, in my opinion, 
are pegging their currency to the U.S. dollar. It's having an 
enormous impact on the competitiveness of their products.
    I feel the information is solid as a rock; I understand the 
National Association of Manufacturers considers it solid as a 
rock; that the AFL-CIO considers it solid as a rock. And yet, 
our government has done nothing about going forward with a 
Special 301 investigation.
    A lot of these things that need to be done are very 
expensive for businesses to try and do it on their own. Even 
trade organizations. If I'm sitting back and I'm the Chinese, 
and I know that the facts are there and nobody seems to be 
doing anything about it, I'm just going to keep doing what I've 
been doing, because I'm going to think that these people aren't 
serious.
    When are we going to do a Special 301 investigation?
    Mr. Dudas. I'm sorry, I can't answer that question on that 
area. It's outside my area of expertise. It is an incredibly 
important issue--and it's important to manufacturers and you 
have been involved in that.
    I can carry the message back of your concern that's been 
reiterated, and I do understand that area of concern. It's 
outside my area of expertise, but I understand what your point 
is and I can certainly relay it.
    Senator Voinovich. Well, I have a lot more questions here 
for you, and I could keep you here for another hour-and-a-half, 
but it wouldn't be fair to the other witnesses that we have and 
the clock is running.
    I want to thank you very much for you both being here 
today. I consider what you're doing to be very serious, and 
there will be some other questions that I will be submitting to 
you for the record.
    As a Member of this Subcommittee, I am genuinely interested 
in a candid response to these questions. If you need more help 
from this side, if it's an issue of more money, of staffing, 
flexibility or whatever the case may be, let me know. I don't 
know if you're familiar with this or not, but I'm very much 
involved with the whole area of human capital, trying to give 
you guys the flexibility so you can keep the folks you have and 
pay them the bonuses when they're supposed to get them, to 
allow you to go out and get the best and brightest people to 
come work for you in your respective agencies.
    But I would like to do more to help you get the job done. 
If you need more money or more staff, I want to know that. 
Somebody has got to be candid with us about it. I know 
sometimes you go to OMB and they say, well, your budget has got 
to be here and there. But we spent a lot of money on a lot of 
things, and one thing I think we're not spending enough money 
on is people. We want the best and brightest people in 
government today. So I would really appreciate your candid 
response to these questions.
    Thanks very much.
    Mr. Dudas. Thank you.
    Senator Voinovich. We are now going to proceed to the 
second panel. We would like Professor Chow to begin the 
testimony, if you will. And if you could, please try to limit 
your presentation to around 5 minutes. If you go over a little 
bit, that's OK, too. Then we can open it up for questions.
    I am glad that all three of you have had a chance to hear 
the testimony of the people from the U.S. Patent Office and 
also from Customs, and would welcome, in the question and 
answer period, your observations and comments about some of the 
answers to the questions that I raised with them, and your 
opinion about some of the things they talked about.
    Professor Chow.

  TESTIMONY OF DANIEL C.K. CHOW,\1\ THE OHIO STATE UNIVERSITY 
                         COLLEGE OF LAW

    Mr. Chow. Thank you, Mr. Chairman.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Chow with an attachment appears 
in the Appendix on page 65.
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    I'm going to talk about counterfeiting in China, which has 
come up several times already. Counterfeiting in China is the 
most serious counterfeiting problem in world history. The 
government estimates in China put counterfeiting at $19-$20 
billion per year, and about 8 percent of its gross national 
product. U.S. industry estimates that they lose billions to 
tens of billions of dollars per year.
    Now, no problem like this could exist without the direct or 
indirect involvement of the State. In fact, I will discuss the 
involvement of government in this problem.
    Exports from China make this into a global problem. I want 
to flag this point because, Mr. Chairman, we're about to see a 
significant increase in exports of counterfeit goods from China 
beginning in the year 2004, and I'll explain why.
    The reason for this problem--how did this problem come 
about--first it's the growth of China's economy, which is the 
most spectacular growth of an economy of this size in history. 
But it is also the role of foreign direct investment and 
technology transfer. China now is the world's largest recipient 
of foreign direct investment.
    Foreign direct investment is also the best way to get 
technology transfer. Thus, China now gets unprecedented access 
to patents, trademarks and copyrights. In fact, in many cases 
today, the intellectual property component is the most 
important part of the foreign direct investment. Proctor & 
Gamble, where I used to work, their trademarks in China are 
worth many more times than their capital investment in all of 
their joint ventures in wholly owned enterprises. In fact, the 
value of their trademarks is worth 10 times the value of their 
capital, 100 times, maybe 1,000 times--and maybe you can't even 
count it.
    So thus, what really has caused this problem is two things: 
It is this increase in foreign direct investment--China now is 
the world's largest recipient--and the unprecedented access to 
advance technology. You combine that with a weak legal system 
and now you've got the world's most serious commercial piracy 
problem.
    It is no accident, it is no coincidence, that China is the 
world's largest recipient of foreign direct investment, and it 
also has the world's most serious commercial piracy problem.
    Now, I'm going to focus on just what I think is the most 
crucial aspect of the problem, because I know my time is 
limited, and I want to talk a little bit in this chart about 
the trade in counterfeit goods. The chart itself really divides 
the trade into two aspects. One is the manufacture, and then 
the second is the distribution.\1\
---------------------------------------------------------------------------
    \1\ The chart referred to appears in the Appendix on page 70.
---------------------------------------------------------------------------
    The manufacture that you see here on the chart is in the 
shaded areas. These are in Guangdong Province and Fujian 
Province, which these are the first areas that were open to 
foreign direct investment in China, and this is where the 
counterfeiting problem started. A lot of this activity is 
financed by criminal organizations from Hong Kong and Taiwan. 
Guangdong Province is the ancestral home of many people in Hong 
Kong. Fujian Province is the ancestral home of many of the 
people in Taiwan.
    Now, the chart also points out--and I want to focus in on 
this issue--in addition to manufacture, there is also 
distribution. You see the chart points to five major wholesale 
markets which distribute goods all over China.
    I want to make this point, that these wholesale markets are 
set up by the Administration of Industry and Commerce, which is 
the government entity, the local government entity which is in 
charge of developing trade and commerce. So the government 
actually invests in the markets which sell these counterfeit 
goods.
    Also, the Administration of Industry and Commerce is also 
charged with enforcement against counterfeiting, so you can see 
the direct conflict of interest in that the government is 
supposed to suppress an activity in which it has a direct 
financial interest.
    Let me just talk a little bit about a town here called 
Yiwu, which you see on the chart. It is well known as the 
counterfeit capital of China.
    Senator Voinovich. Where is that on the chart?
    Mr. Chow. It's this town right here [indicating].
    Senator Voinovich. OK. I have a copy of this in front of me 
here, too. Go ahead.
    Mr. Chow. I want to focus in on this just to really point 
out what the problem is.
    In this town, the entire economy is built on the trade in 
counterfeit goods. This used to be a small farming community in 
the middle of nowhere, and now it's got a bustling business 
center, it's got a four-star hotel, and it really depends 
entirely on the trade in counterfeit goods for its economic 
development.
    Every day, 200,000 customers from all over China visit 
Yiwu, and they visit the 33,000 wholesale stores and outlets 
which sell 100,000 varieties of products. Ninety percent of 
them are counterfeit and infringing. I know that because when I 
worked in China I spent many weeks in Yiwu investigating this 
and compiled these facts. Two-thousand tons of products are 
ordered, and the roads are congested day and night as the 
traffic goes in and out.
    Now, the entire economy of this town is based on 
counterfeit product, the trade in counterfeit goods, and it's 
been integrated into the legitimate economy of this town. So 
not only do you have this trade, but you have restaurants, you 
have hotels, you have night clubs, you have warehouses. All of 
this is supported by the trade in counterfeit goods.
    Now, what would happen if there was a serious crackdown on 
the trade in counterfeit goods in this town? It would shut down 
the local economy. It would cause the dislocation through the 
loss of jobs, the closing down of business. Indeed, it may 
result in social turmoil and chaos, which is something that the 
Chinese Government really fears. So, for that reason, because 
the town itself has a financial interest in this trade, 
counterfeiting is heavily defended at local levels.
    This is really where the problem is. The problem is one of 
local protectionism because the government has a direct stake, 
the local governments have a direct stake in this illegal 
trade. And it is very difficult, it has become very difficult 
for the national government--and I believe the national 
government is sincere, that the authorities in Beijing are 
sincere. But it is very difficult for them to control what goes 
on at the local level, because the people in Beijing are 
policymakers, they're lawmakers. But enforcement occurs on the 
ground, at the local level. This is where I think the crux of 
the problem is.
    I'm going to skip some of this because I know my time is 
limited. I want to focus on the export issue because I 
mentioned this earlier. I want to make sure that enough 
attention is paid to this.
    Counterfeits from China probably account for about 80 
percent of all exports to the United States. I know that the 
Customs statistics talk about 66 percent, but a lot of goods 
are transshipped----
    Senator Voinovich. Wait. You're saying counterfeits from 
China may account for 80 percent----
    Mr. Chow. Of all the counterfeit exports to the United 
States.
    Senator Voinovich [continuing]. Of all the counterfeits in 
the world?
    Mr. Chow. Well, I'm talking specifically about exports now, 
Mr. Chairman. U.S. Customs seized, in the year 2003, 
counterfeit product from China consisting of 66 percent of the 
total of the counterfeit product that was seized. We believe 
that the actual total is probably higher, and that is because 
many of these goods are transshipped through other countries, 
such as countries in South America, through Canada, that come 
into the United States. So we believe that probably a more 
realistic figure is about 80 percent.
    The value of the counterfeits seized by U.S. Customs in 
2003 was valued at $62.4 million. Of course, what is seized can 
only represent a tiny percentage of what actually gets into the 
market. If it is 1 percent of what actually gets into the 
market, then the value of the counterfeit product from China is 
between $6-$8 billion.
    I believe we're going to see a significant increase in the 
export of counterfeits from China starting in 2004. And why is 
that? Well, it's ironic, but as part of China's WTO 
obligations, China in December 2003 had to eliminate the state 
monopoly on export privileges in accordance with its WTO 
obligations.
    Now, under prior law, only certain state trading companies 
could export because only they had the state license to export 
product. So if you were a counterfeiter, you had to find a 
compliant state trading company to work with you. Of course, to 
be honest, there was no lack of state trading companies willing 
to work with the counterfeiters, but still there was an added 
expense and added obstacle.
    But in 2004, because of the elimination of this 
requirement, it means that anybody can export, and I believe 
what we're going to see is we're going to see many 
counterfeiters now turn to export as an opportunity to increase 
their profits.
    There are no criminal laws against export of counterfeit 
products in China. There are criminal laws against 
counterfeiting within the country, but none for exports. So if 
you're a counterfeiter and you're faced with the possibility of 
civil and criminal penalties for counterfeiting within China, 
and you're faced with no civil or criminal penalties for 
export, I think the choice is pretty obvious of where they're 
going to increasingly turn for their profits.
    I just want to make two points now with respect to the 
future. I believe the real issue here, as I hope I've pointed 
out, is an issue of political will. The issue is really the 
will of the national government to deal with the problem of 
protection at local levels. I believe the national government 
is sincere, but it is a very difficult problem to force these 
local governments to crack down on counterfeiting because the 
social costs of cracking down are very serious. The national 
government fully understands that, and I believe they don't 
want to incur those costs until they absolutely have to.
    Finally, with respect to the WTO and TRIPs--and I guess 
you'll have other folks speaking about this--I think that most 
people, including myself, believe that China really is in 
substantial compliance--excuse me, that it's laws are in 
substantial compliance with TRIPs. It's really the enforcement 
of those laws which I think falls short, and that is something 
I think we have to take a very close look at.
    Thank you, Mr. Chairman.
    Senator Voinovich. Thank you very much.
    Mr. Gorman, thank you for coming this morning. I have to 
say, I'm impressed with these witnesses from Ohio.

TESTIMONY OF JEFF GORMAN,\1\ PRESIDENT AND CEO, THE GORMAN-RUPP 
                    COMPANY, MANSFIELD, OHIO

    Mr. Gorman. Thank you, Chairman Voinovich. I appreciate the 
opportunity to testify and leave you with an important message 
regarding the issues facing many American manufacturers.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Gorman appears in the Appendix on 
page 85.
---------------------------------------------------------------------------
    Senator Voinovich. Mr. Gorman, would you tell us where your 
company is located?
    Mr. Gorman. Mansfield, Ohio.
    When you hear of pirated and knock-off products, you may 
think initially of computer software, movies, music and CDs. 
I'll assure you the problems go much deeper than that and are 
affecting job retention and growth at the core of American 
manufacturing.
    Our company has steadily seen a growth of pirated items 
produced in foreign countries aimed directly at stealing our 
products, our after-market parts, and frankly, our identity in 
the marketplace.
    A real quick overview of our company. Gorman-Rupp is a 
Mansfield, Ohio based manufacturer of pumps and pumping systems 
for applications including water, wastewater, petroleum, 
government, agricultural, and many other markets. The company 
was founded in Mansfield in 1933 by two gentlemen, one of whom 
was my grandfather, who during the Great Depression had some 
new ideas about how to design, manufacture and sell pumps. They 
borrowed $1,500 and started the company. Today we have about 
1,000 employees and sell on a global basis.
    Competition has always been keen in the pump industry. 
Until recently, most competition from pump manufacturers came 
from those manufacturers vying for their own market share with 
their own ideas, designs, engineering, and manufacturing.
    Today, some foreign pump manufacturers have taken a less 
ethical approach. Call it copying, counterfeiting, reverse 
engineering, knocking off, pirating or whatever, it basically 
comes down to stealing your identity, your engineering, for 
monetary gain in pump and after-market parts sales.
    Pumps may not be a great item of beauty to some, but they 
are essential to everyone's everyday lives. Shown on the screen 
is one of our main product lines, a 4-inch pump, primarily used 
by municipalities for sewage handling.\1\ Shown on this screen 
is a knock-off version of the same pump. This pump is 
manufactured in Brazil and is not only nearly identical in 
looks, but functionally interchangeable in dimension.
---------------------------------------------------------------------------
    \1\ The charts referred to appear in the appendix on page 86 and 
87.
---------------------------------------------------------------------------
    Closer examination of the knock-off pump shows not only the 
pirate's imitation of the Gorman-Rupp design, but notice the 
name and logo. I submit that it was neither a mistake nor a 
mere coincidence.
    Technology has simplified the reverse engineering of 
products. It has become much easier to copy or steal the 
engineering and trade dress of a product than in the past. All 
that is really needed is to have one of the original products 
and the proper measuring equipment, and you can be in business 
without the need for expensive research and development. Add to 
this inexpensive labor, much lower overhead than many U.S. 
manufacturers face, such as health care, litigation costs, 
excess litigation and regulations, etc., and it's quite easy 
for the pirate companies to sell pumps and parts at a 
considerably lower price, all at the expense of the original 
American manufacturer and developer.
    Pirates many times use the sales tactic that it's just the 
same as the original product or part, and in some cases, 
outright confuse the customer that it is the original OEM 
product or part. Pirates have deceived Gorman-Rupp's U.S. 
customers who learned to their expensive dismay, after 
purchasing the pirated parts, that they were not 
interchangeable in quality or performance.
    Patents are helpful, but they do not eliminate pirating. In 
some cases, they even explain information and technology and 
trade secrets to the pirating company. It is also very 
prohibitive to patent your product in every country around the 
world.
    Pirating does not just stop with the physical products, 
either. We recently learned of a Chinese company that not only 
copied the looks, design and manufacture of our pumps, they 
even stole our advertising literature. How do we know? The 
Gorman-Rupp logo is still displayed on the products in their 
literature. The next step is that these Chinese knock-off pumps 
will probably find their way to the American market if we do 
not have some legislation to protect our engineering investment 
and identity. The Brazilian pirates have also copied and 
exploited Gorman-Rupp product manuals and product performance 
specifications.
    Legal recourse against knock-off products in foreign courts 
is very time consuming, very expensive, and in some cases, 
almost impossible. We find little or no help from the 
government in dealing with these issues.
    I would ask for the following to be considered: A single 
point of contact within the Department of Commerce that is 
specifically directed and funded to assist U.S. manufacturers 
that have had their products reverse engineered. Second, the 
responsibility and authority of the Commerce Department to 
instruct the Customs agencies to levy stiff fines or duties on 
proven importers of pirated parts.
    Gorman-Rupp does not want to stand in the way of honest 
competition. In fact, we welcome it. But we need a level 
playing field against pirating of our own products and our 
identity.
    Mr. Chairman, we have a common goal: That is, retention and 
creation of jobs. With legislation and procedures that will 
seriously impede the importation of these pirated products and 
parts, we will and we can expand in the USA.
    Thank you.
    Senator Voinovich. Thank you very much, Mr. Gorman. Mr. 
Rotman.

  TESTIMONY OF PHILLIP A. ROTMAN, II,\1\ ASSISTANT PATENT AND 
              TRADEMARK COUNSEL, DANA CORPORATION

    Mr. Rotman. Good morning, Mr. Chairman. My name is Phillip 
Rotman, and I am the Assistant Patent and Trademark Counsel at 
Dana Corporation. One of my job responsibilities is to enforce 
our intellectual property rights around the world.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Rotman with attachments appears 
in the Appendix on page 91.
---------------------------------------------------------------------------
    I am here today to testify on behalf of the company, and 
will be sharing some of our views and experiences with dealing 
with counterfeit products around the world. In some of my 
written submissions, I not only focus on China, but also focus 
on our experiences in other parts of the world, including the 
United States.
    Dana Corporation is a global leader in the design, 
development, and engineering of products and systems for the 
automotive, commercial and off-highway vehicle. As you noted, 
we are 100 years old this month. Counterfeiting of automotive 
products appears to be on the rise for us. In fact, in the last 
5 years, we have noticed a steady increase.
    Since 2000, we have instituted over 40 actions around the 
world, including China, Taiwan, the United States, and other 
countries in Africa. We also have currently a number of ongoing 
investigations. It is hard to quantify this problem because we 
only know what we know. But during this time, we seized about a 
quarter-of-a-million sets of parts--and our parts tend to be 
packaged as a kit. We value that the parts that we have 
prevented from coming into commerce is about $5 million. 
Unfortunately, fines have been rather minimal. They have 
totaled about $25,000, and our civil recoveries against the 
counterfeiters have only totaled around $200,000. We spend 
significant resources to fight this issue. It's hard to 
quantify management time and resources, but one way we can 
quantify it is what do we pay outside counsel and it averages 
about a quarter of a million dollars a year just on 
counterfeiting. This doesn't include other forms of 
intellectual property disputes.
    About two-thirds of our anticounterfeiting activities have 
been in China. We have been successful in China in fighting the 
problem. We are well organized in China. We have trusted people 
working for us, and we do find that we have good relations with 
some of the government agencies we work with, partly because we 
are back before them time and time again in various locations 
seeking to enforce our rights.
    Unfortunately, however, most of our actions have been 
against small shops. As Professor Chow noted in his written 
materials, he describes the way in which parts are distributed 
in China and it's very different than anything I have ever 
encountered in the United States. To visit a marketplace like 
this is truly unbelievable. But we have not been successful at 
finding factories which are the source.
    Part of that problem is the counterfeiters are smart. They 
know that if they create the product at one place, and they 
create the packaging at another place, and then they bring the 
two components together typically at the shop itself, they can 
avoid detection and liability.
    Our concern in China has not been with the government's 
unwillingness to act. They do take prompt action. In fact, when 
we bring a matter to the Chinese Government's attention and we 
can prove our case, we generally get results the same day. They 
will go seize the product that very day, which I suspect is a 
surprise to a lot of people.
    Once the product seized has been confirmed as counterfeit, 
the product is destroyed. In fact, I was in China last month 
dealing with a number of these issues and attended a 
destruction ceremony. They are publicized by the local 
government on occasions.
    But as everyone else has noted, the fines are low. I think 
as you noted, Mr. Chairman, when the fine is just the cost of 
doing business versus a deterrent, it's a cost of doing 
business and it's something they will continue to do.
    Another concern in China is the ability to obtain 
information. Because it is a state run society, we don't get 
access to a lot of the books and records when we conduct a 
raid. We are interested in the source of the counterfeit 
product and its distribution channel. We want to follow the 
product. A lot of times it's very difficult to get access to 
that information. We can act on it if we have the information.
    I also want to turn our attention to the United States. We 
have had some experiences in the United States. As I mentioned 
in my written material, we identified counterfeit product in 
this country last year. We took it upon ourselves to do 
something about it. Interestingly enough, when we filed our law 
suit, the first question from the court was, have you given the 
other side notice, which we thought was a peculiar question, 
given that the reason we moved ex parte for the seizure order 
is we were concerned that the products and records would be 
destroyed once they learned of the law suit. It turned out that 
that didn't occur, that the individual in this country had been 
misled as well and was terribly cooperative. However, it could 
have been a lot worse.
    Unfortunately, we don't see that the criminal laws are 
being enforced by the U.S. Government. They are on the books in 
Title 18, but if these government agencies have done things, 
it's not being well publicized. We view ourselves a leader in 
this industry and, frankly, we were surprised to learn of some 
of the activities in the last month when we were requested to 
come testify. We suspect that outreach is an area that the 
government could do a better job on promoting its services, 
especially to small companies. We suspect that many companies 
and attorneys, frankly, just wouldn't know who to call if they 
had a problem.
    Also, U.S. law could be improved. As you may be aware, 
there is a U.S. Court of Appeals circuit case that overturned 
the conviction of a man who was shipping counterfeit fake 
labels for designer purses, but because the labels weren't on 
or in connection with the goods, his conviction was overturned. 
While part of the criminal statute deals with the trafficking 
of counterfeit labels and packaging, it's limited to albums, 
computer programs, motion pictures, and other audio-visual 
works. It frankly doesn't help the manufacturing community to 
protect its parts. This deficiency could be addressed by 
Congress in revising several sections of Title 18.
    Finally, we believe that counterfeit crimes need to be 
brought to the same level as drugs and other high-profile 
crimes. Governments need the right to seize the assets used in 
counterfeiting, such as equipment, tooling, and computers. 
Furthermore, it would be beneficial and a deterrent to the 
counterfeiters if their assets could be forfeited such as 
houses, cars, boats, jewelry, and cash.
    In summary, while the United States has good laws on its 
books, it needs to become a leader in this area, frankly, 
before it can ask other countries to enforce the IP laws on 
their books.
    Dana would like to thank the Subcommittee for the 
invitation to testify. Your support and attention to this 
matter strengthens our resolve to fight, and we would be 
willing to answer any questions you have. Thank you.
    Senator Voinovich. Thanks very much.
    Mr. Rotman, you fundamentally are saying that your company 
is large enough that you are handling this problem overseas and 
here in the United States. A quarter of a million dollars for 
outside counsel is a bit of money. Professor Chow, that's more 
work for your graduates at Ohio State University.
    The fact is, how many employees does Dana have? Just so we 
get a sense of this, how large is it?
    Mr. Rotman. Sure. Dana has----
    Senator Voinovich. Let's say your sales.
    Mr. Rotman. About $10 billion a year.
    Senator Voinovich. OK. Ten billion dollars is a big 
company.
    Mr. Rotman. Yes. We have about 60,000 employees worldwide.
    Senator Voinovich. Sixty thousand employees. So you're 
large.
    Mr. Rotman. Yes.
    Senator Voinovich. How long have you been in China?
    Mr. Rotman. Dana has had a presence in China since the 
early 1990's.
    Senator Voinovich. Your feeling is that you're handling the 
problem in China because you've got the connections and you can 
get action pretty rapidly?
    Mr. Rotman. There are several reasons we believe we're 
successful in China. We think we've found good people to work 
for us in China, people we trust. We also have employees in 
China who can help us, who are on the lookout for counterfeit 
products.
    They are incentivized, frankly, to help because if a 
counterfeit product is sold, we don't sell a genuine product. 
So they are there on the ground and they are in touch with 
distributors and retailers who will pass information on to us.
    Senator Voinovich. So the bottom line is they have an 
incentive to work with you because the counterfeiting is 
hurting their distributors for you and that's hurting their 
business, so they want to work with you to make sure you do 
something about counterfeiting.
    Mr. Rotman. That's correct.
    Senator Voinovich. And they have the connections with the 
government to get the job done?
    Mr. Rotman. I wouldn't say we have connections, but----
    Senator Voinovich. Well, they have and you have.
    Mr. Rotman. I think we've had enough experience that, when 
it's time--when we do our homework and we have done our own 
internal investigation, and we have determined it is a 
counterfeit product or packaging, we believe, we use local 
lawyers. We know what government agency to go to.
    China has a number of state agencies that have overlapping 
responsibilities, and I've heard in the industry of our 
counterparts going to the wrong government agency and not 
getting results and being frustrated.
    Senator Voinovich. So if you were really going to get the 
job done in China, would you try to replicate what Dana has 
done in China? In other words, we've got a lot of people in 
this country that are very small individuals, that have 
problems with counterfeiting. They don't have the legal folks 
to help them and the connections and so forth.
    But if you could take a company like Dana or some other 
company of the United States doing fairly well over there, in 
terms of dealing with this problem, and tried to replicate that 
for the small people, do you think we might make more progress? 
I mean, we heard Mr. Dudas basically say he's been over there, 
they've been talking to these folks, and nothing is happening.
    Mr. Rotman. It's hard to say whether our model would work. 
Our model is, I think, unique to us because we do have 
employees in China helping us. They are Dana employees. They're 
looking out for Dana.
    I guess the other issue is that Dana laid the groundwork 
many years ago to protect IPR in China by registering IPR in 
China, so we have the rights in China to go out and enforce it.
    I do think it is possible for a small company to be 
successful in China, possibly with some assistance, with us 
sharing some information with them about, frankly, how we 
investigate and who we work with.
    Senator Voinovich. Well, it seems to me it might be very 
smart for the Federal Government to look at it, how you're 
organized over there and how you get the job done, and maybe 
look at some other businesses to institutionalize this so they 
can do some work on behalf of companies like Mr. Gorman's, who 
don't have the resources and the connections and the rest of it 
to get the job done for them.
    Mr. Rotman. One thing, Mr. Chairman, if I might add, we 
have, I think, as an industry, what the automotive industry has 
attempted to do perhaps in the last year or so, is look out for 
one another. While a lot of us are competitors, we are 
legitimate competitors, but we do believe that counterfeiters 
hurt us all. So what we have instructed our people to do is 
that, if they find products that they believe to be counterfeit 
of another company, they should pass the information back to us 
so that we can share that information with others.
    We suspect that the counterfeiters are much better 
organized than we are, and we're trying as an industry to be 
more organized and to share information amongst ourselves to 
help each other out.
    Senator Voinovich. So the fact of the matter is that you're 
recognizing that you have to work more together to get the job 
done. In my opening statement I talked about the fact that 
we've got $3 billion of auto parts that are coming into the 
United States, which we estimate is costing us about 250,000 
jobs. So what you're saying is that companies like yours would 
be interested in those parts coming in and try to help those 
folks?
    Mr. Rotman. You mean help others in our industry police for 
counterfeiters?
    Senator Voinovich. Yes.
    Mr. Rotman. Yes. We believe that the counterfeit products 
coming in, even from a competitor, hurt us all.
    Senator Voinovich. What kind of help do you get at all from 
our government?
    Mr. Rotman. Not much. We tend to go it alone. In the past, 
we've had experience where we were contacted by the government 
when they suspected some product was being imported, but the 
communication was sporadic, and trying to, frankly, get some 
information in order to assess the situation and provide 
feedback was difficult.
    Senator Voinovich. So, in effect, you took your destiny in 
your own hands and said we'll take care of it?
    Mr. Rotman. Yes.
    Senator Voinovich. Professor Chow, before agreeing to 
testify before this Subcommittee, had you heard of the National 
Intellectual Property Law Enforcement Coordination Council? If 
so, what had you heard about it, and if you knew about it, have 
you seen any changes since the inception of the Council in 
1998?
    Mr. Chow. Well, to be quite honest, I really didn't know 
very much about it. I have actually done work for private 
clients as well, and we really didn't find that to be a very 
helpful resource.
    Senator Voinovich. You heard the testimony from the other 
witnesses and the questions I asked about their coordinating 
their activities. There seems to be several agencies that are 
involved.
    Do you think it would be valuable if that agency were 
provided the staff and the resources to do a better job of 
coordinating?
    Mr. Chow. It seems to me, based upon my own experience 
working in the field here in the United States, that there 
really is a lack of coordination and that would be helpful.
    Senator Voinovich. So it's your opinion that, from your 
observation, these various agencies, in spite of the fact it 
was said today they are coordinating and working together, your 
impression is that, in fact, there is not very good 
coordination and cooperation?
    Mr. Chow. Not in particular cases, based on my own 
experience. I have worked on several cases in which we found 
very little cooperation from some of these agencies, such as 
the FBI and Customs, for example, in a couple of cases.
    Senator Voinovich. If you were in my shoes and the Members 
of this Subcommittee, what would you be doing in order to 
handle this?
    One of the things you mentioned in your testimony was the 
fact that you've got a whole province, Yiwu, that the whole 
deal is based on counterfeiting. They've got a problem there 
with that community because, if they start doing things, 
they're going to have civil unrest and so on and so forth. 
They're reluctant to do that because of a lot of people being 
unhappy.
    Mr. Chow. Yes. Well, I think it's really an issue of 
priority for the Chinese Government. Currently, as far as I can 
see, the Chinese Government does not have the political will to 
force the local jurisdictions, such as Yiwu, to crack down. It 
doesn't have the political will because I don't believe the 
Chinese Government really feels enough pressure, especially 
from brand owners in China, to take that kind of step. It's a 
very drastic step to impose a crack down against the will of a 
local town or jurisdiction. The national government can do it, 
if it wishes to do so, but to do that, it has to expend a lot 
of political capital and it has to absorb some very serious 
costs.
    Now, the government is not going to do that unless it feels 
it absolutely has to. I don't believe, currently, that the 
government in China is feeling enough pressure or is getting 
enough heat from brand owners, or the U.S. Government, to make 
it take that drastic step.
    Senator Voinovich. One of the other issues we've got in 
this country is some of our businesses now are being told that, 
in order to stay in business, they have to meet the global 
market price. This is very difficult for a U.S. company to do 
because the global market price includes Chinese manufacturers, 
who don't have to worry about excessive regulations or health 
care costs.
    The question I've got is, how do we get the Chinese 
attention that this is a serious problem and we want something 
done about it? What would really be a way of bringing it right 
to their attention so that they snap back and say, these folks 
are serious about this issue.
    For example, one of the things I would like to see happen 
is a Special 301 investigation. That takes a long time. But it 
just seems that all we do is talk, talk, talk, talk. And my 
little bit of relationship with the people over there is that 
doesn't get it done. They need to see something more than that.
    What is that something more that we need to do to get them 
to understand that we're serious about this problem?
    Mr. Chow. Mr. Chairman, to be honest, I think there is some 
conflict and ambiguity within the industry itself. I think that 
the brand owners in China do not want to offend the Chinese 
Government. This is one of the things that you see very 
clearly, that they are tiptoeing around this issue. They don't 
want to do anything to offend the Chinese Government, so they 
form an industry group called the Quality Brands Protection 
Committee, to work cooperatively with the Chinese Government. 
They don't want to do anything confrontational.
    Senator Voinovich. Who are they?
    Mr. Chow. It's call the Quality Brands Protection 
Committee, the QBPC for short. It consists of about 80 multi-
national companies. Their stance--and I was involved in this 
when I was working in China--their stance is to work 
cooperatively with the Chinese Government. They don't want to 
offend the Chinese Government.
    The Chinese Government, of course, is very smart and they 
can see that they don't want to do anything to the industries 
in China, they don't want to take drastic steps. So, thus, I 
really think that the industry itself has to determine how far 
they're willing to go.
    You mentioned a Special 301 action against China. That 
would get China's attention. That would bring it right to the 
top of its agenda.
    Another thing that would bring it right to the top of the 
agenda is a WTO dispute resolution petition, challenging 
China's compliance with TRIPs. That would bring it immediately 
to the top of China's agenda. But that can't occur, Mr. 
Chairman, unless industry fully supports it.
    Senator Voinovich. What's the latter thing you said, the 
WTO----
    Mr. Chow. It's a WTO dispute settlement petition, whereby a 
complaining country can challenge China's compliance with the 
WTO, and TRIPs specifically, that counterfeiting exports from 
China of counterfeit products violate China's obligations under 
the WTO. That type of petition, brought by the United States, 
with the WTO, would put this right at the top of the Chinese 
agenda. It will draw their attention, as would a Special 301 
action.
    Senator Voinovich. I want to go back, because I'm thinking 
about the figure you gave us was what? You think it's 66 
percent of the counterfeit goods that come into the United 
States are from China, is that right?
    Mr. Chow. The U.S. Customs, by their own statistics, seized 
in 2003, counterfeit product from China worth $62.4 million. 
That consisted of 66 percent of the total of the counterfeit 
product that was seized from all countries around the world.
    I believe that figure is probably a little bit higher 
because a lot of the counterfeit product from China is 
transshipped through South America and other countries and 
comes into the United States. It's probably about 80 percent of 
the product that enters into the United States, the counterfeit 
product that enters into the United States is from China.
    Senator Voinovich. In other words, you believe that there 
is enough information available today that a dispute settlement 
petition, complaining that they aren't complying with the 
intellectual property parts of WTO, would be well taken?
    Mr. Chow. Well, it's a process where we have to do 
information gathering, but I think it's a viable--and others 
may disagree--but I think it's a viable claim. I don't think it 
would be easy to prove. There are many issues with that, but 
that is a strategy that the United States can take.
    If you want to draw this to their attention, I assure you 
this will draw this to their attention, as would a Special 301 
action brought against China for the failure to protect U.S. 
intellectual property rights.
    But I believe there is no industry support for either one 
of those two actions, at least as far as I can see, and I 
believe that the U.S. Government is not about to go and do that 
without full industry support. And there is no industry 
support, I believe, because most industries do not want to 
offend the Chinese Government. So we're in a position where I 
think the industry has to, really for themselves, clarify 
exactly how far they're willing to go.
    Senator Voinovich. Based on your reading and study, do you 
feel there is a basis for us to file a Special 301 action?
    Mr. Chow. Well, this is also a complicated issue, but 
although China is a member of the WTO, it also has other 
intellectual property obligations that it entered into under 
bilateral agreements with the United States, specifically in 
1995 and previously. So on the basis of separate agreements in 
which China made separate obligations, specifically with 
respect to export in these agreements, which are outside the 
WTO, I believe there may be a basis for a Special 301 action.
    I mean, just to clarify, the WTO, once you're a member of 
the WTO, like the Untied States and China, the WTO framework 
prohibits its members from taking unilateral action, such as a 
Special 301 action. But because the United States and China 
have agreements outside the framework of the WTO, which 
predates the WTO, that may provide a basis for the United 
States to bring a Special 301 action. But that's a very drastic 
step, Mr. Chairman, and it would severely elevate the 
seriousness and tension of this problem, and as I mentioned, I 
don't believe there is industry support for that.
    Senator Voinovich. Well, there is support for it in the 
Congress and we're going to have to really get on that. I have 
introduced legislation, and it's been introduced in the House 
and it's just kind of laying there, but we're going to have to 
bring this up and move maybe in our direction if the government 
is not willing to go forward with it. Although I understand the 
AFL-CIO and the National Association of Manufacturers is 
thinking about filing a Special 301 action. That would deal 
with one of the problems, and that is the industry, at least 
with regard to that issue, understands how serious it is to 
manufacturing in this country.
    Mr. Chow. But I believe those petitions would not be based 
upon--I'm not sure, but from what you're telling me, I don't 
think those petitions are based upon the counterfeiting 
problem, right?
    Senator Voinovich. No, they're based on currency, not 
counterfeiting.
    Mr. Chow. Right. So that's, I think--just specifically on 
intellectual property, bringing a Special 301 action, I don't 
think there's any industry support for that.
    Senator Voinovich. But you think there's adequate support 
for the Special 301 investigation in terms of currency fixing?
    Mr. Chow. I think there's a legal--I guess I don't feel I'm 
in position to really comment on that, but it appears from what 
you say, yes.
    Senator Voinovich. Mr. Gorman, prior to your agreeing to 
testify, had you heard of the National Intellectual Property 
Law Enforcement Coordination Council?
    Mr. Gorman. No, sir.
    Senator Voinovich. Mr. Gorman, tell me about how much help 
you have gotten from your government in terms of the problems 
you've been confronted with over the last number of years and 
how much has this cost your business, roughly, and how many 
jobs do you think we've lost as a result of the fact that we 
haven't taken action?
    Mr. Gorman. Regarding the government question, I have to 
say that I probably haven't pursued it at all. In going to 
trade organizations and asking them, are you familiar with 
anything that we can do or contact within the government to 
address these issues, mostly the answers that come back are 
``good luck, you're on your own.'' That's pretty much the 
unilateral response that you get from the manufacturing 
organizations. So I have to say, in all honesty, no, I have not 
really addressed any direct involvement from the government. We 
have taken it on by ourselves.
    Senator Voinovich. Have you ever asked any government 
agency, have you asked the Department of Commerce or the U.S. 
Trade Representative, or have you asked the Patent Office, for 
any help?
    Mr. Gorman. Only indirectly through manufacturing 
organizations, who really couldn't come up with any agency that 
really addressed the situation of the problems that we were 
having.
    Senator Voinovich. Do you think there's a lot of other 
people in this country that are in the same boat as you are?
    Mr. Gorman. I would.
    Senator Voinovich. So from your perspective--we had two 
people testify, and you heard them testify, that in terms of 
what they were testifying to, you didn't relate to what they 
were talking about here today?
    Mr. Gorman. Well, I have not had any personal experience 
with it, but we're going to try it and see what happens.
    Senator Voinovich. Do you believe that we need to get more 
aggressive in this area, to make information available to 
people like you about what help is available to you from the 
government?
    Mr. Gorman. It would certainly be an advantage. If the 
trade organizations aren't familiar with the help that the 
government can give, then I don't see how you can expect 
especially smaller manufacturers to be aware, either.
    Senator Voinovich. It seems to me you've had a problem with 
pumps from Brazil for how long?
    Mr. Gorman. It's been going on now from 3 to 5 years.
    Senator Voinovich. Based on what I saw here today, there 
ought to be somebody that could look at that information and 
say these people are copying your pump and we are not going to 
allow those pumps into the United States.
    Mr. Gorman. That would be our suggestion. Give us somebody 
that we can go to that has the authority to level out the 
playing field. If you can stop it, fine.
    Senator Voinovich. And then after a determination has been 
made, then whoever in the government is responsible ought to be 
able to go after the people in Brazil and the people in China 
in terms of their violating their commitments in terms of 
intellectual property.
    Mr. Gorman. Whether the answer is--we're trying to go after 
the company in Brazil now. I'll tell you, it's a very uphill 
battle. Months and months of work and expense even to get the 
paper----
    Senator Voinovich. Are those pumps still coming into the 
United States?
    Mr. Gorman. Oh, absolutely.
    Senator Voinovich. They're still coming in here?
    Mr. Gorman. Oh, yes, daily. But trying to stop it on our 
own accord, I'll tell you, it's no small task to try and bring 
an IP case against a company in Brazil. It's very expensive, 
very time-consuming, and we'll see what happens.
    Senator Voinovich. Let's start off with the big picture. 
Have you calculated what counterfeiting has meant to your 
business in terms of lost income?
    Mr. Gorman. It's difficult to put a specific number on it 
because you're dealing with small companies that don't have 
that specific information available, but it's clearly in the 
millions of dollars of imported product, and especially the 
after-market parts.
    Senator Voinovich. So we're just talking about the pump you 
showed me here?
    Mr. Gorman. Right.
    Senator Voinovich. So with the pump, you would say it's 
costing you $3-$4 million?
    Mr. Gorman. I would say in that area.
    Senator Voinovich. In lost sales?
    Mr. Gorman. Clearly, yes, probably much more than that over 
the last 3 to 5 years.
    Senator Voinovich. Could you calculate the impact that it 
has on your employment?
    Mr. Gorman. I wish I could. We're the type of company that 
takes a lot of pride in not laying people off, even in tough 
times. We have not hired as many people as we could have if we 
wouldn't have been faced with these situations. But I'm sure 
it's 20 to 25 people for our small company, just directly 
related to the importation of product. This is not just one 
company in Brazil. We have a couple in Brazil that are doing 
it. So it's very difficult to put a specific number on it, to 
say we have lost ``x'' jobs because of it. But clearly, we have 
not been able to grow. It's been a situation of not letting us 
grow as much as we could have, or hire new people to replace 
those people that have retired.
    Senator Voinovich. In your association with other 
manufacturers, do you come in contact with other people that 
are experiencing the same kind of problem that you have 
experienced?
    Mr. Gorman. I know it's pretty rampant in the pump industry 
itself. You hear other examples pretty much daily in trade 
journals and whatever, that it's a very pronounced problem.
    But I go back to my suggestion. I think we've got to take 
the results into our own hands and stop them from coming into 
the country. We can work with the Governments of China or 
Brazil and hopefully make some headway there, but I think, 
until we have some legislation and some means that clearly 
stops it, or at least levels out the playing field, with 
increased stiff tariffs at the border, that's going to be the 
most immediate thing that you can do.
    Senator Voinovich. The best thing would be to just stop the 
products from coming in, period. That would be the simplest 
thing.
    Professor Chow, again, how do you rate the U.S. Government 
and all the agencies involved in this whole issue of 
intellectual property rights on a scale of 1 to 10, in terms of 
what they're doing?
    Mr. Chow. Well, I mean----
    Senator Voinovich. With No. 1 being the worst and No. 10 
being the best.
    Mr. Chow. Well, I don't want to seem unfair to them because 
I have worked with the U.S. Government and specifically I have 
worked with the U.S. Government agencies in attempting to 
exclude product from coming to the United States. But quite 
honestly, Mr. Chairman, it is very difficult to attempt to 
exclude the entry of counterfeit product because a lot of it 
comes in under false documentation. The container says it's 
full of plastic toys and it's full of counterfeit cigarettes. 
It's placing, I think, frankly, an unreasonable burden on the 
part of the U.S. Customs Service to expect them to be able to 
catch and seize all of the illegal containers at the border.
    There are really two choke points. One choke point is to 
prevent it from being exported from China or any other country, 
and the second choke point is to prevent it from being 
imported. You have got to do both of those. You can't place the 
entire burden on the U.S. Customs Service because they really 
don't have the resources to go and U.S. Customs would grind to 
a halt if they had to go and inspect the number of containers 
they would have to in order to make a real dent in this 
problem.
    The other issue, frankly, is that when I met with U.S. 
Customs about a year ago, they made it very clear that this was 
not their priority, that seizing infringing product at the 
border was not their priority. Their priority was terrorism. So 
it was clear that, as we were there, brand owners--and I was 
representing a brand owner--it was clear, and Customs made it 
very clear, that this was not a top priority for them and they 
would give it whatever priority they felt it deserved.
    Senator Voinovich. The things I want to find out--as I 
said, I talked with a former Customs official, who said they 
were doing a very good job, and this is why I'm interested in 
knowing how many people they have, what are their priorities, 
and what's their budget? I am also concerned that in the 
process of dealing with the issue of terrorism, that we may be 
neglecting dealing with this counterfeit product challenge.
    The fact of the matter is that if what both those other 
witnesses talked about, in terms of terrorist organizations 
using counterfeiting to help pay for their terrorism 
activities, it seems to me that gives it even more of a 
heightened interest on their part to stop the counterfeiting 
that is going on.
    Mr. Chow. Well, just to make a comment on that, it was 
clear to us, when we met with Customs--and I was representing a 
brand owner at that point--it was clear that we were not going 
to be their top priority, and we were going to be maybe their 
second, third or fourth priority. They said we're very sorry. 
And that was clear. They also made it clear that their top 
priority was terrorism.
    Now, with respect to terrorism, I just want to make a 
comment, that at least with respect to China, just to be clear 
on this issue, we have seen no evidence that links 
counterfeiting from China to terrorism.
    Senator Voinovich. Right.
    Mr. Chow. OK. I just want to make that clear, that we don't 
make that connection. It may be there, but we have not seen any 
evidence of it.
    Senator Voinovich. From what they said, that counterfeiting 
is a way for some of these terrorist groups to fund their 
respective organizations. It seems to me, if you're talking 
about containers, and you're saying you don't know what's in 
them--that's something we have been talking about for quite 
some time around here, that we don't know what's coming in in 
these containers. If we can get counterfeit goods through 
Customs and into the hands of people who will distribute them 
in the United States, who says that we can't bring in all kinds 
of devices and get them in the hands of terrorists in this 
country. That's a question that a lot of us are asking.
    It seems to me you've got a ``two-fer'' here. If you 
increase the number of people in Customs, you would enhance 
your ability to preclude things that could get in the hands of 
terrorists while also dealing with the counterfeiting problem 
that is impacting negatively on the economy of our country.
    We've got two problems right now. We have the problem of 
terrorism and we've got the problem of an economy, that if 
we're not careful, we may lose.
    Mr. Chow. Mr. Chairman, I just want to make a comment on 
that. I think it's a natural inclination to link, if you can, 
terrorism to counterfeiting. But I do believe that more work 
needs to be done there before we can say that connection has 
been established. I understand that some groups of brand owners 
are trying to make that connection, and that connection may be 
there. But I don't think enough work has been done to show that 
it's a real established connection.
    Senator Voinovich. You said that the choke point is at 
Customs and also in the countries where these goods are coming 
in. Would you like to repeat what you think--I'm interested in 
hearing from you, Mr. Rotman. You're doing all of this on your 
own.
    Mr. Rotman. Yes.
    Senator Voinovich. And you are not getting a lot of help 
from Uncle Sam, even though we're apparently spending a lot of 
money dealing with the problem.
    What would you do if you were running the government in 
terms of dealing with this problem?
    Mr. Rotman. I do agree with the Professor, that expecting 
Customs to look at the product, compare original to counterfeit 
and make a determination is asking a lot of somebody. As was 
detailed in some of our written material--there was a side-by-
side picture of an engine bearing. We ourselves had trouble 
telling the difference between a counterfeit product and an 
original. In fact, in some instances, we have to do 
metallurgical studies on the product to tell because the 
counterfeit is so good. So asking a government agency to do 
something that, while we can do it, it takes time, effort, and 
a lot of just knowing your product, as almost knowing your 
child. That's a lot to ask of a government agency.
    I do think that their heart's in the right place, but their 
resources just aren't there. As the Professor indicated, in our 
experience their priorities are elsewhere.
    Senator Voinovich. What was the industry group you were 
talking about, Professor?
    Mr. Chow. It's the Quality Brands Protection Committee, the 
QBPC.
    Senator Voinovich. Are you familiar with that?
    Mr. Rotman. I am familiar, but we are not a member.
    Senator Voinovich. Why not?
    Mr. Rotman. Cost. It's expensive to belong.
    Senator Voinovich. And the alleged purpose of that is what? 
Is it to try and work something out with the government in a 
diplomatic fashion so that something will get done?
    Mr. Chow. Well, the QBPC is working with the government 
specifically on legal reform. In other words, to revise or 
amend some of China's laws to give them more bite, because 
that's the real issue. The issue of deterrence. So the QBPC is 
making that one of its major objectives. They have a number of 
other objectives as well, including increasing training for the 
local officials and education for the consumer.
    Senator Voinovich. OK. So what you're saying is that they 
are conscientiously trying to build the infrastructure for 
intellectual property rights, the respect for intellectual 
property rights, the body of law, the enforcement and so on.
    Mr. Chow. Well, the impetus for the QBPC--and I was 
actually working in China when it was formed with a group of 
companies, and Proctor & Gamble took the lead in forming this--
the idea was that individual companies felt that they were 
completely helpless in attempting to resolve this problem. So 
by forming an industry group and getting everyone together, you 
have now 80 of the most powerful multinational companies, the 
biggest names, in China now that belong to the QBPC. To have 
that type of presence, to raise the level of--to raise 
attention to this problem, that was the idea, and then to work 
for long-term reform, to over a longer period of time to 
improve the environment for the enforcement of intellectual 
property rights in China, that was the basic idea.
    Senator Voinovich. How about influencing our government to 
take action?
    Mr. Chow. Well, the QBPC is basically a China group, and 
it's not--frankly speaking, I think some of these companies 
have conflicts between their China management on the ground in 
China and their U.S. management. The China management is always 
taking the position that we can't do anything to offend the 
Chinese Government. The U.S. management says but you're losing 
all this money over there, why don't we go do something and go 
to the U.S. Government? So there's actually some conflict 
there, I think.
    Senator Voinovich. I think there is obviously some 
conflict. The fact is that our government should be doing a 
whole lot more than what they're doing. They seem to be 
reluctant to take the action that should be taken. Can you 
explain that?
    Mr. Chow. I honestly believe that, at least with respect to 
China, that the U.S. Government will take its direction from 
industry. I think that if industry wants drastic action, and it 
made it clear to the U.S. Government, that would occur.
    I think U.S. industry is giving some conflicting signals, 
quite honestly, and the government isn't quite sure what to do.
    Senator Voinovich. Well, we do have laws on the books, and 
they shouldn't have to take their cues from industry groups to 
do what the law requires them to do.
    Mr. Chow. Well, if we're talking about specific enforcement 
of U.S. laws, for example, I think more can be done there. But 
if we're talking about a broader diplomatic, political, 
international strategic move, that's where I think the U.S. 
Government needs clear direction from industry.
    If we're talking about specific border enforcement of 
Customs regulations, or if we're talking about enforcement of 
the Trademark Counterfeiting Act of 1984, for example--and 
there are some real issues with the interpretation of that, 
which Mr. Rotman talked about, and there were some other issues 
with that--I think those are specific legal issues for which 
the U.S. Government could be doing more.
    Senator Voinovich. So to put it in a nutshell, one of the 
biggest companies in this country, the Dana Corporation, 100 
years today, is it?
    Mr. Rotman. April 1st.
    Senator Voinovich. Of what they're getting in terms of 
their Federal Government and the departments that are dealing 
with this whole issue of intellectual property rights is very 
little.
    Mr. Rotman. That would be correct.
    Senator Voinovich. And we have Mr. Gorman, who represents a 
smaller company, that's been around since 1933, a family 
business, very competitive, and the answer to the question 
about how much help you're getting is zippo?
    Mr. Gorman. Correct.
    Senator Voinovich. There seems to be a big conflict between 
what these two gentlemen who first testified had to say about 
what they were doing and what the perception is of the people 
who are supposed to be their customers. It might be good if 
they went out and spent some time with their customers, to find 
out how they feel about things, and maybe they could do a 
better job of servicing those customers.
    I am very disappointed, because I believe in quality 
management. Quality means that you go out and you talk to your 
customers and you find out what they think, and you try to take 
care of them. Then you also try and take care of your internal 
customers and make sure the people that you have are ready and 
able to get the job done.
    Apparently we have a failure in both areas. They're not 
talking to their customers, and it appears they don't have the 
people inside to get the job done that they're supposed to be 
doing. So we have a real genuine problem on our hands here, and 
unless we get on it, we're going to continue to see the loss of 
jobs and a negative impact on the economy of the United States.
    That's just one of the things. I am very interested in 
manufacturing, because Ohio is a manufacturing State. But if we 
don't deal with this and we don't deal with the issue of 
currency, if we don't deal with the other problems--Mr. Gorman 
and I have talked about health care and energy costs and so 
on--we're in for some rough times here in our country, 
particularly in economies like Ohio and other manufacturing 
States.
    I want to thank you very much for coming today. It has been 
very enlightening for me. I'm going to do what I can to convey 
this to my colleagues and see if there isn't something that we 
can do to get going.
    I once talked to a very important person in this country, 
who is a big man, and said that unless we do something about 
the Chinese problem, it's going to be an issue in this 
presidential campaign. If something doesn't happen fast, it 
will become a major issue, one that all of us should be 
concerned about. Because if we don't do enough about enforcing 
our trade laws, then we don't have fair trade. If we don't have 
fair trade, the protectionism in this country is going to grow 
and grow and grow--and international trade is very important to 
the economy of the United States. So it's in the best interest 
of all of us that we enforce the trade laws. I hope that 
somebody can get the message, because I doubt any new trade 
agreements are going to get through the U.S. Congress this 
year, and maybe next year, unless the American people and their 
representatives see that there is something happening and that 
the response to what's being done by our agencies to deal with 
international property rights isn't that, in terms of the 
customers, doing zippo, nothing.
    Thank you very much for being here.
    Mr. Chow. Thank you.
    Mr. Gorman. Thank you.
    [Whereupon, at 12 Noon, the Subcommittee adjourned.]


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