[Senate Hearing 108-771]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 108-771

                 COUNTERFEITING AND THEFT OF TANGIBLE 
                 INTELLECTUAL PROPERTY: CHALLENGES AND 
                               SOLUTIONS

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

                                HEARING

                               before the

                       COMMITTEE ON THE JUDICIARY
                          UNITED STATES SENATE

                      ONE HUNDRED EIGHTH CONGRESS

                             SECOND SESSION

                               __________

                             MARCH 23, 2004

                               __________

                          Serial No. J-108-62

                               __________

         Printed for the use of the Committee on the Judiciary



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                       COMMITTEE ON THE JUDICIARY

                     ORRIN G. HATCH, Utah, Chairman
CHARLES E. GRASSLEY, Iowa            PATRICK J. LEAHY, Vermont
ARLEN SPECTER, Pennsylvania          EDWARD M. KENNEDY, Massachusetts
JON KYL, Arizona                     JOSEPH R. BIDEN, Jr., Delaware
MIKE DeWINE, Ohio                    HERBERT KOHL, Wisconsin
JEFF SESSIONS, Alabama               DIANNE FEINSTEIN, California
LINDSEY O. GRAHAM, South Carolina    RUSSELL D. FEINGOLD, Wisconsin
LARRY E. CRAIG, Idaho                CHARLES E. SCHUMER, New York
SAXBY CHAMBLISS, Georgia             RICHARD J. DURBIN, Illinois
JOHN CORNYN, Texas                   JOHN EDWARDS, North Carolina
             Bruce Artim, Chief Counsel and Staff Director
      Bruce A. Cohen, Democratic Chief Counsel and Staff Director


                            C O N T E N T S

                              ----------                              

                    STATEMENTS OF COMMITTEE MEMBERS

                                                                   Page

Biden, Hon. Joseph R., Jr., a U.S. Senator from the State of 
  Delaware.......................................................    19
    prepared statement...........................................   111
Cornyn, Hon. John, a U.S. Senator from the State of Texas, 
  prepared statement.............................................   124
Hatch, Hon. Orrin G., a U.S. Senator from the State of Utah, 
  prepared statement.............................................   140
Leahy, Hon. Partick J., a U.S. Senator from the State of Vermont.     2
    prepared statement...........................................   142
Specter, Hon. Arlen, a U.S. Senator from the State of 
  Pennsylvania...................................................     1

                               WITNESSES

Buckles, Brad, Executive Vice President for Antipiracy, Recording 
  Industry of Association of America, Washington, D.C............    26
Donohue, Thomas J., President and Chief Executive Officer, 
  Chamber of Commerce, Washington, D.C...........................    22
Dudas, Hon W., Acting Under Secretary of Commerce for 
  Intellectual Property, and Acting Director, Patent and 
  Trademark Office, Washington, D.C..............................     5
Mendenhall, James, Assistant U.S. Trade Representative for 
  Intellectual Property, Office of the U.S. Trade Representative, 
  Washington, D.C................................................     9
Price, Vanessa, Intellectual Property Specialist, Burton 
  Snowboards, Burlington, Vermont................................    27
Trainer, Timothy P., President, International AntiCounterfeiting 
  Coalition, Inc., Washington, D.C...............................    29
Wayne, Earl Anthony, Assistant Secretary of State for Economic 
  and Business Affairs, Department of State, Washington, D.C.....    12
Willard, Richard K., Senior Vice President and General Counsel, 
  the Gillette Company, Boston, Massachusetts....................    24
Wray, Christopher A., Assistant General, Criminal Division, 
  Department of Justice, Washington, D.C.........................     7

                         QUESTIONS AND ANSWERS

Responses of Brad Buckles to questions submitted by Senator Leahy    41
Responses of Jon W. Dudas to questions submitted by Senator Leahy    43
Responses of James Mendenhall to questions submitted by Senator 
  Leahy..........................................................    49
Responses of Vanessa Price to questions submitted by Senator 
  Leahy..........................................................    51
Responses of Timothy P. Trainer to questions submitted by Senator 
  Leahy..........................................................    53
Responses of Earl Anthony Wayne to questions submitted by Senator 
  Leahy..........................................................    80
Responses of Richard K. Willard to questions submitted by Senator 
  Leahy..........................................................    92
Responses of Christopher A. Wray to questions submitted by 
  Senator Leahy..................................................    95

                       SUBMISSIONS FOR THE RECORD

Buckles, Brad, Executive Vice President for Antipiracy, Recording 
  Industry of Association of America, Washington, D.C., prepared 
  statement......................................................   117
Donohue, Thomas J., President and Chief Executive Officer, 
  Chamber of Commerce, Washington, D.C., prepared statement......   126
Dudas, Hon W., Acting Under Secretary of Commerce for 
  Intellectual Property, and Acting Director, Patent and 
  Trademark Office, Washington, D.C., prepared statement.........   135
Mendenhall, James, Assistant U.S. Trade Representative for 
  Intellectual Property, Office of the U.S. Trade Representative, 
  Washington, D.C., prepared statement...........................   145
Price, Vanessa, Intellectual Property Specialist, Burton 
  Snowboards, Burlington, Vermont, prepared statement............   154
Trainer, Timothy P., President, International AntiCounterfeiting 
  Coalition, Inc., Washington, D.C., prepared statement..........   157
Vargo, Franklin J., Vice President, International Economic 
  Policy, Washington, D.C., prepared statement and attachments...   164
Wayne, Earl Anthony, Assistant Secretary of State for Economic 
  and Business Affairs, Department of State, Washington, D.C., 
  prepared statement.............................................   184
Willard, Richard K., Senior Vice President and General Counsel, 
  the Gillette Company, Boston, Massachusetts, prepared statement   196
Wray, Christopher A., Assistant General, Criminal Division, 
  Department of Justice, Washington, D.C., prepared statement....   201

 
COUNTERFEITING AND THEFT OF TANGIBLE INTELLECTUAL PROPERTY: CHALLENGES 
                             AND SOLUTIONS

                              ----------                              


                        TUESDAY, MARCH 23, 2004

                              United States Senate,
                                Committee on the Judiciary,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 2:38 p.m., in 
Room 226, Dirksen Senate Office Building, Hon. Arlen Specter, 
presiding.
    Present: Senators Hatch, Specter, Leahy, and Biden.
    Senator Specter. Good afternoon, ladies and gentlemen. The 
hearing of the Committee on the Judiciary will now proceed. 
Senator Hatch, the Chairman, has asked me to preside. Senator 
Hatch is recovering from back surgery from last week, but he is 
on the premises today, but is taking it just a little easier.
    The first question I want to address today is one which is 
on many minds in this room, and that is what happened to me. I 
was walking down Market Street in Philadelphia, the 200 block, 
after dinner on Saturday night, and I tripped on a defect in 
the sidewalk, and customarily there is a reflex action to put 
your hands out. Well, I did not do that, and the first contact 
was my nose and the cement. And I am pleased to report that I 
am fine, although bruised, and the cement is cracked. 
[Laughter.]
    Senator Leahy. Mr. Chairman, if I might, I am glad you made 
the explanation because I know that it sometimes gets 
contentious in the Judiciary Committee, and I did not want 
anybody thinking, insofar as Senator Specter and I have been 
friends for more than a quarter of a century, I did not want 
the wrong impression to be here.
    Senator Specter. Senator Leahy and I have had no tough 
moments in the 24 years I have been here. He has been here 6 
years longer. Our paths first crossed at a National District 
Attorneys Association meeting in Philadelphia, when he was the 
district attorney of Burlington, Vermont, and I was the DA of 
Philadelphia. In those days, we had important jobs.
    That is a laugh line.
    [Laughter.]

 OPENING STATEMENT OF HON. ARLEN SPECTER, A U.S. SENATOR FROM 
                   THE STATE OF PENNSYLVANIA

    Senator Specter. Today, we are going to proceed with our 
hearing on intellectual property theft and counterfeiting, a 
subject of really great importance in the United States today 
and growing. A broad range of American industries are affected, 
including pharmaceuticals, automotive, music, movies, software 
and virtually every type of consumer product. There are 
enormous lost corporate revenues and profits, lost tax 
revenues, lost American jobs in the hundreds of thousands and a 
genuine threat to public safety from counterfeit drugs, foods, 
airplane and car parks.
    The International Chamber of Commerce estimates that some 
$350 billion a year in counterfeit goods are sold worldwide. 
The automobile industry loses $12 billion a year, software 
another $12 billion, movies $3.5-, and in the music industry 
between $4- and $5 billion in losses and, globally, 2 in 5 
recordings are pirated. There is a real public safety threat, 
and perhaps surprising to some, there are links to terrorism.
    During a House International Relations Committee hearing 
last summer, the secretary general of Interpol testified that 
intellectual property crime is ``becoming the preferred method 
of funding for a number of terrorist groups.'' It has been 
reported that the captured al Qaeda terrorist training manuals 
revealed the organization recommends the sale of counterfeit 
goods as a means to support terrorist operations and reports 
that Sheikh Omar Abdul Rahman, the blind Egyptian cleric linked 
to the 1993 World Trade Center bombing, relied upon 
counterfeiting to fund his operation.
    So this is an issue of enormous importance, and we have 
assembled a very distinguished panel of witnesses from all 
branches of the Federal Government and then from many branches 
of the private sector to make an in-depth analysis here to find 
out what is being done and what the Congress can do further to 
try to deal with this enormous problem.
    I am delighted now to yield to my good friend and 
colleague, the Ranking Member of this Committee, Senator Pat 
Leahy.

  STATEMENT OF HON. PATRICK J. LEAHY, A U.S. SENATOR FROM THE 
                        STATE OF VERMONT

    Senator Leahy. Thank you, Mr. Chairman. I want to thank you 
and Senator Hatch for agreeing to hold this hearing. Both of 
you have had a long interest in this type of counterfeiting. We 
have spent a lot of time in recent years focusing on the many 
problems of intangible piracy, and that is what it is, piracy, 
particularly the theft of copyrighted works on the Internet, 
but I am pleased the Committee will also address the problems 
of tangible piracy: knockoff goods that violate the rights that 
are in trademarks, patents and copyrights, and then deprive the 
owners of the fruits of their efforts and investments, and 
often present consumers with very shoddy knockoffs.
    Several years ago, Senator Hatch joined me in sponsoring 
the Anticounterfeiting Consumer Protection Act from 1996. That 
law addressed this problem. It amended a number of our criminal 
and tariff codes. The law made important changes, particularly 
by expanding RICO, the Federal antiracketeering law, to cover 
crimes involving counterfeiting, and copyright and trademark 
infringement. Even with that, more enforcement is needed in 
light of these practices that involve the theft of goods based 
on intellectual property rights.
    Then, as now, trafficking in counterfeit goods hurts 
purchasers, State and Federal Governments, and economies at 
every single level. Indeed, this form of theft has become a 
method of choice for organized crime syndicates, as Chairman 
Specter pointed out, terrorist organizations--they do it for 
profit, to launder money to fund their criminal activities. I 
think Mr. Wray would agree, if we were in a closed-door 
hearing, and we could discuss that at even greater length, as 
he knows.
    Just last year, I joined with Senator Allen in sponsoring 
an amendment to the foreign operations bill for 2004. It 
provides $2.5 million to the State Department in order to 
establish programs that will help developing Nations protect 
intellectual property rights--theirs and ours. These programs 
will strengthen intellectual property laws, educate and train 
law enforcement officers, and they will help our Customs 
officials to combat trafficking. It is going to give 
flexibility to the people who actually combat piracy in the 
field. So, Mr. Wayne, I am going to be very interested in 
knowing how this is being implemented at the State Department, 
and what other steps we might take.
    We ought to remember that consumers feel the effects of 
counterfeit goods when they think they are buying a ``brand 
name,'' spend the money to buy a brand name, and end up with a 
shoddy imitation instead. We are going to be hearing today from 
Vanessa Price of Burton Snowboards--back in my home State--who 
will bring home the kind of damage this does. I am very 
disturbed by the story she is going to tell, but I am glad she 
is here. Burton is a small company. Through a lot of work, a 
lot of trial and error, a lot of innovation, it has become the 
industry leader in snowboarding equipment and apparel, but you 
can find knockoff products labeled ``Burton'' all over the 
world. And this theft and free-riding on the reputation of such 
a creative company threatens to undermine the efforts of years 
of hardworking Vermonters.
    I see similar stories all of the time in my office. SB 
Electronics in Barre, Vermont, has a niche area of capacitors, 
brilliantly put together, but now they see them reverse 
engineered, and its customers lost worldwide to inferior 
copycat models. Vermont Tubbs, a furniture manufacturer in 
Rutland, has seen its designs copied and then produced offshore 
with inferior craftsmanship and materials and then reimported 
to undermine their own sales. Hubbardton Forge in Castleton, 
Vermont, makes beautiful and very original lamps--again, a 
niche market--but they are being counterfeited, and then they 
are sold within the United States, with a lesser quality and at 
prices that undercut their own.
    And some of the stuff being taken is amazing. At trade 
shows, cameras are prohibited. Well, at one trade show, a 
competitor--a competitor--hired the night cleaning crew to take 
pictures of showcased furniture, so then they could make 
knockoffs.
    Of course, in some cases, these counterfeit goods pose a 
significant public health risk. According to the International 
AntiCounterfeiting Coalition, counterfeit parts have been 
discovered in helicopters sold to NATO, in jet engines--think 
about that the next time you get on a plane--bridge joints, and 
fasteners in equipment designed to prevent a nuclear meltdown. 
We all know about the stories of counterfeit pharmaceutical 
drugs.
    What does it cost us? Three hundred and fifty billion 
dollars a year. That constitutes between 5 and 7 percent of 
world trade. Again, think about that in this country, when we 
have a $500-billion trade deficit this year alone. We are the 
world leader in intellectual property. So, if there are 
knockoffs, American companies suffer a disproportionate amount. 
In 2002, the movie industry lost $3.5 billion in pirated 
videos. To put that in perspective, that is a 60-percent jump 
from 1997. In a study examining the impact on trademarks, 
researchers for the International Trademark Association 
estimated that trademark holders worldwide lost $2 billion in 
1995 as a result of this policy.
    The Business Software Alliance estimates that pirated 
software alone cost the U.S. economy 118,000 jobs and $5.7 
billion in lost wages in the year 2000. In my little State of 
Vermont, we lost $15.3 million in retail sales of software in 
2002. That is 267 fewer jobs. Of course, it is lost revenues to 
our State, and that is just from computer software. You can go 
all the way down.
    So think of what we have here--counterfeit and pirated 
music, software, T-shirts, clothing, fake drugs--and then think 
also of terrorist organizations using that money. There are 
thousands of reasons, thousands of reasons to work harder to 
end the trafficking and counterfeit goods: thousands of jobs 
lost, consumers harmed, trademarks and patents infringed, 
businesses threatened, and illegal enterprises enriched.
    We all understand drug trafficking, international drug 
trafficking. We all understand arms trafficking. This is 
something we better start understanding because it is hurting 
us at every single level, including our personal and national 
security.
    So, Mr. Chairman, thank you for having this hearing. It is 
extraordinarily important.
    [The prepared statement of Senator Leahy appears as a 
submission for the record.]
    Senator Specter. Thank you very much.
    We now turn to our distinguished panel. The rule of the 
Judiciary Committee is 5 minutes on opening statements.
    I might comment about recent memorial services for 
Ambassador Walter Annenberg in Philadelphia. We had a very 
distinguished array of speakers, including former President 
Ford, and Secretary of State Colin Powell, and I was there, 
Governor Rendell, and the limit was 3 minutes of speech. So I 
want you to understand that 5 minutes is a very generous 
allocation based on that analogy.
    We now turn to our first witness, who is Acting Under 
Secretary of Commerce for Intellectual Property, Jon Dudas, who 
has been in this position since early this year. Last week, 
President Bush announced his intention to nominate Mr. Dudas 
for the appointment of Under Secretary of Commence for 
Intellectual Property and Director of the U.S. Patent and 
Trademark Office.
    Before his current responsibilities, he served as council 
to the Subcommittee on Courts and Intellectual Property for the 
House Committee on the Judiciary for 6 years. So he is well-
versed in Judiciary Committee hearings.
    Thank you for joining us, Mr. Dudas, and we look forward to 
your testimony.

 STATEMENT OF JON W. DUDAS, ACTING UNDER SECRETARY OF COMMERCE 
FOR INTELLECTUAL PROPERTY, AND ACTING DIRECTOR, U.S. PATENT AND 
               TRADEMARK OFFICE, WASHINGTON, D.C.

    Mr. Dudas. Thank you, Mr. Chairman.
    Mr. Chairman, Ranking Member Leahy, thank you for the 
opportunity to discuss the problem of intellectual property 
theft and the Department of Commerce's role in protecting 
intellectual property here and abroad. I want to begin by 
commending you and the Committee for holding today's hearing. 
Your longstanding commitment to protecting U.S. intellectual 
property and your consistent support of the United States 
Patent and Trademark Office are tremendously important.
    Secretary Evans is keenly aware of the increasing 
significance of intellectual property protections for American 
businesses and innovators and has made combatting 
counterfeiting and piracy a top priority for the entire 
Department. As acting Under Secretary of Commerce for 
Intellectual Property, I am dedicated to marshalling U.S. 
Government efforts to reduce the toll that IP theft takes on 
American IP owners and American consumers. Far too many jobs 
are lost and far too many companies are hurt because of 
intellectual property theft.
    More and more, intellectual property is a key driver of 
economic growth. For example, the U.S. copyright industry 
continues to lead the economy in their contributions to job 
growth, GDP, and exports. Between 1977 and 2001, their share of 
GDP grew more than twice as fast as the rest of economy. These 
same companies depend upon their brands and trademarks to 
compete effectively in the marketplace. Unfortunately, the 
economic benefits of capitalizing on intellectual property 
rights have captured the attention of pirates, organized crime, 
and as you mentioned, in some limited, but increasing, cases, 
terrorists. The Secretary General of Interpol testified last 
year, again, that IP crime is becoming the preferred method of 
funding for a number of terrorist groups.
    The illegal duplication of software, music, DVDs and other 
digitized information and the trafficking in counterfeit 
products is widespread. In China, an estimated 90 percent of 
business software, valued at $1.5 billion, is pirated. In 
Russia, the bulk of video and audiotapes are counterfeit. 
Because of this piracy, the U.S. software industry has lost 
billions of dollars in 2002 alone. Global trademark 
counterfeiting totals about $500 billion a year. Counterfeit 
automotive parts production alone costs the auto industry $12 
billion a year. Commonly prescribed drugs, such as Lipitor and 
Viagra, are increasingly counterfeited, posing health risks to 
consumers.
    Given these threats, the USPTO and our colleagues in the 
Department of Commerce are working hard to curb intellectual 
property crime and strengthen intellectual property enforcement 
in every corner of the globe. Through our Offices of 
International Relations and Enforcement, the USPTO works to 
ensure that American IP owners have sufficient legal tools to 
fight piracy. We provide technical assistance and training to 
foreign entities on implementing and enforcing effective 
intellectual property laws. We also serve as co-chair of the 
National Intellectual Property Law Enforcement Coordination 
Council, which coordinates domestic and international 
intellectual property law enforcement here in the U.S.
    The focus of USPTO's efforts are: one, addressing the 
difficulties Governments face in meeting international 
intellectual property obligations; and, two, bringing together 
local authorities to address enforcement issues.
    For example, we help countries establish adequate 
enforcement mechanisms to meet their obligations under the WTO 
TRIPs Agreement. The TRIPs Agreement sets minimum standards of 
protection for IP and requires WTO members to provide for 
effective enforcement of intellectual property rights. In 
negotiations on Free Trade Agreements, we push for a ``TRIPs-
Plus'' format that expands the minimum standards that are set 
out in TRIPs.
    China, as the Committee is well aware, is a major concern 
on intellectual property piracy. Last fall, Secretary Evans led 
a mission to China and highlighted China's lack of intellectual 
property enforcement. The Secretary met with high-ranking 
Chinese officials and reiterated that effective IP protection 
requires that criminal penalties and fines be large enough to 
serve as a deterrent rather than a mere business expense.
    As a follow-up to the Secretary's trip, the USPTO recently 
led a delegation to China for consultations with senior Chinese 
officials and U.S. companies operating on the ground in China. 
A primary focus of this trip was to further the 
administration's goals of reducing widespread counterfeiting 
and piracy. Many industries have noted that the Chinese 
Government, by restricting market access for certain products, 
is providing free reign for counterfeiters, pirates and 
criminals to exploit the void created by the lack of legitimate 
products.
    Given these trends, we are continuing to press hard for 
enhanced steps by the Chinese Government to significantly 
reduce the extent of intellectual property violations.
    Mr. Chairman, Ranking Member Leahy, the demands on the 
Department of Commerce and the USPTO's expertise in combatting 
IP piracy have grown dramatically in the last few years. I am 
hopeful that with the continued support of this Committee, and 
in partnership with the Congress, we will be able to do even 
more to provide American businesses and entrepreneurs with the 
IP protection they need and deserve.
    Clearly, in terms of the economy and national security, 
much is at stake. That is why our dedicated team of experts 
will continue to work tirelessly to protect American products 
in every corner of the globe.
    Thank you.
    [The prepared statement of Mr. Dudas appears as a 
submission for the record.]
    Senator Specter. Thank you very much, Mr. Secretary Dudas.
    We turn now to the assistant general for the Department's 
Criminal Justice Division, Christopher Wray. Over the past 
years, the Division has developed an institute of the joint 
initiative with the FBI and U.S. Customs to combat piracy and 
counterfeiting.
    Before General Wray was appointed to his current position, 
he served as U.S. attorney for the Northern District of Georgia 
and was the director of a special task force investigating 
Enron Corporation.
    Thank you for coming in today, General Wray, and we look 
forward to your testimony.

 STATEMENT OF CHRISTOPHER A. WRAY, ASSISTANT ATTORNEY GENERAL, 
   CRIMINAL DIVISION, DEPARTMENT OF JUSTICE, WASHINGTON, D.C.

    Mr. Wray. Thank you for inviting me to testify before you 
today, and this is an extremely important topic, and I commend 
you, Mr. Chairman and Senator Leahy, for holding this hearing. 
My full written statement has been submitted to the Committee, 
so I will just summarize briefly here.
    We are, I think it is clear, at a pivotal time in the 
history of intellectual property rights enforcement. A number 
of factors have come together to create unprecedented 
challenges to intellectual property rights holders and to law 
enforcement. The Internet and technology have made piracy and 
counterfeiting easier and less expensive than ever before.
    At the same time, the quality of the illicit goods is often 
near perfect. Detecting these illegal operations is more 
difficult than in the past and is compounded by sporadic and 
inconsistent enforcement throughout the world. Piracy and 
counterfeiting are often deemed low-risk, high-reward endeavors 
that are beginning, not surprisingly, to attract organized 
crime syndicates throughout the world.
    The harm caused by these criminals is real. Businesses 
cannot survive in an environment where black-market goods are 
more available and cheaper than legitimate goods. Small 
businesses, as Senator Leahy noted, are forced to close and 
bigger businesses must downsize.
    Piracy also deprives consumers of their important right to 
be assured that the products they buy are safe and legitimate. 
Since the beginning of his tenure, Attorney General Ashcroft 
has worked to ensure that the Department has the prosecutorial 
resources necessary to fight intellectual property crime.
    With the assistance of Congress, he has expanded the number 
of Computer Hacking and Intellectual Property Units--what we 
call our CHIP Units--operating nationwide from just 1 to 13. 
These specialized units consist of dedicated Federal 
prosecutors whose primary focus is prosecuting high-tech 
crimes, including intellectual property crimes. The CHIP Units 
complement the already existing network of over 200 specially 
trained Computer and Telecommunications Coordinators--or CTCs--
that now serve in every U.S. Attorney's Office across the 
country. Like the CHIP Units, the CTCs also focus on the 
prosecution of high-tech crimes, again, including intellectual 
property crimes.
    Working closely with the CHIP Units and the CTC network is 
our Criminal Division's Computer Crime and Intellectual 
Property Section, also known as CCIPS. And, again with the 
support of Congress, the size of CCIPS has increased 
significantly over the past 2 years, allowing us to 
substantially enhance our intellectual property enforcement 
efforts. CCIPS is developing and implementing a focused and 
aggressive long-term plan to combat intellectual property 
crime. So, working in concert, CCIPS, the CTCs and the CHIP 
Units create a formidable, multi-pronged approach to 
prosecuting intellectual property crimes.
    As my written testimony highlights, our efforts are having 
an impact. We have successfully prosecuted piracy and 
counterfeiting cases that are resulting in significant 
penalties. Recently, for example, in the Eastern District of 
Virginia, a man received 70 months in prison and was ordered to 
pay $1.7 million in restitution for trafficking in high-quality 
Microsoft products. And last year in South Carolina another 
defendant was sentenced to 7 years in prison and ordered to pay 
over $3.4 million in restitution to Nike and Tommy Hilfiger for 
trafficking in thousands of counterfeit T-shirts and other 
products and engaging in money laundering.
    These are significant prison terms that send the clear 
message that counterfeiting is no longer a consequence-free 
enterprise. Such severity is essential, for the damage from 
intellectual property offenses can go beyond lost sales and cut 
right at the heart of public health and safety. For example, we 
have successfully prosecuted a number of individuals for 
selling counterfeit baby formula, as well as a man in Alabama 
for selling misbranded pesticides, intended to stop West Nile 
Virus, to municipalities all across the Southern United States.
    Counterfeit products, such as pharmaceuticals, pesticides 
and food products not only deprive consumers of their right to 
safe and legitimate products, but they threaten society's most 
vulnerable members, including our children and those who are 
ill or injured. We are actively exploring additional ways in 
which we can increase the use of criminal trademark and 
counterfeit labeling laws to help protect the health and safety 
of our citizens.
    Our efforts do not stop at our borders, however. Piracy and 
counterfeiting are global crimes that ignore geographic 
boundaries. The Department is committed to working with our 
foreign law enforcement colleagues to improve international IP 
enforcement. For example, later this month, a Ukrainian man is 
scheduled to be extradited to the United States from Thailand 
to face prosecution for his piracy and counterfeiting 
activities involving the online sale of over $3 million in 
counterfeit software. The Department is also in the process of 
seeking the extradition of a man from Australia for his 
leadership role in an international piracy conspiracy.
    We are working closely with law enforcement from around the 
globe to identify and assist in the prosecution of IP criminals 
in their native lands, and this will become increasingly 
important in the years ahead, as we are seeing an increasing 
emergence, particularly in Asia, of organized crime involvement 
in IP crime. Organized crime has the resources and distribution 
methods to operate sophisticated counterfeiting operations. 
These groups do not hesitate to threaten or injure anyone, 
ranging from industry representatives to Government officials 
who attempt to interfere with their illegal operations.
    Information from overseas indicates that it is not uncommon 
for enforcement raids on illicit factories to degenerate into 
full-blown shootouts. There is no doubt that these worldwide 
criminal syndicates are formidable foes and that we must be 
just as formidable in our response to truly attack the problem 
of hard goods intellectual property piracy. Effective IP 
enforcement must be global, and we are working daily to set 
standards in international cooperation.
    In closing, I want to reaffirm the Department's commitment 
to combatting IP crime aggressively, both domestically and 
overseas. In the prosecutions that we have undertaken, and 
those that lie ahead, we will continue to send a strong message 
to those engaged in piracy and counterfeiting that their 
conduct will not be consequence free.
    Thank you, Senator.
    [The prepared statement of Mr. Wray appears as a submission 
for the record.]
    Senator Specter. Thank you very much, General Wray. Your 
full statement will be made a part of the record, as will all 
of the statements.
    We now turn to Assistant United States Trade Representative 
James Mendenhall, who handles the services, investment and 
intellectual property in the Office of Trade Representative. 
Prior to his current duties, he served as deputy general 
counsel to the trade representative and has a very extensive 
career in private practice, concentrating on international 
trade law.
    Thank you for coming in today, Representative Mendenhall, 
and we look forward to your testimony.

      STATEMENT OF JAMES MENDENHALL, ASSISTANT U.S. TRADE 
 REPRESENTATIVE FOR INTELLECTUAL PROPERTY, OFFICE OF THE U.S. 
             TRADE REPRESENTATIVE, WASHINGTON, D.C.

    Mr. Mendenhall. Thank you, and good afternoon, Mr. Chairman 
and Senator Biden.
    The theft of intellectual property worldwide is an enormous 
and growing problem. U.S. industry losses due to piracy and 
counterfeiting are conservatively estimated to be around $200- 
to $250 billion a year. As a result of this criminal activity, 
many foreign markets are simply evaporating. In China and 
Russia, industry estimates that piracy levels in many sectors 
are close to or exceed 90 percent of the market.
    USTR and other agencies are working around the clock to 
resolve this problem, a problem made complex not only by its 
sheer scale, but by multiple underlying causes. I will outline 
four key challenges facing the United States in this area and 
five tools that we have brought to bear on the issue.
    First, pirates and counterfeiters exploit technological 
advances and employ modern business models to streamline and 
expand their operations. Sophisticated copying technology is 
now available off the shelf, and pirates have been quick to put 
it to illicit use. For example, CD and DVD burners enable 
pirates to churn out thousands of illegitimate copies of music, 
software and movies without significant investment in equipment 
and facilities.
    Pirates have also become globalized. If they are shut down 
in one country, they simply move to the next. They run global 
production and distribution chains, exporting their illicit 
goods and displacing legitimate products from markets around 
the world.
    We have begun our counteroffensive on this front, for 
example, through the development of new enforcement rules in 
our Trade Agreements, as I will explain later.
    Second, the unshackling of markets and economies, such as 
China and Russia, present tremendous opportunities, but 
unfortunately not always for the good. Criminal enterprises, 
including small operators and sophisticated organized crime 
syndicates, are growing up side-by-side with legitimate 
business operations. Yet these countries have failed to provide 
adequate means and incentives to prosecute criminal offenders 
in all cases or to deter future criminal activity. The solution 
to this problem runs much deeper than the protection of 
intellectual property and requires the creation of a legal 
system and culture built on the rule of law.
    A third challenge is the creation of international legal 
rules to deal with enforcement. Enforcement is perhaps the 
chief complaint that we hear today from our IP-intensive 
industries. Yet enforcement obligations, by their nature, are 
not as black and white as other obligations in that it is 
difficult to determine, for examine, whether a country has in 
place effective deterrent remedies to prevent IPR infringement. 
We have tackled this issue head on in our FTAs, which contain 
extensive provisions designed to strengthen IPR enforcement.
    The final challenge is to rebut the skeptics in other 
countries who question the value of intellectual property 
rights. Obviously, the infringement of intellectual property 
rights has deep adverse impacts on our economy and on our 
industries, but it is more than that. For example, trademarks 
are not simply names and symbols, but measures of quality, 
trustworthiness and the value of a product. IPR protection 
promotes consumer protection and safety. Trademark infringement 
can result not only in the counterfeiting of handbags and 
shoes, but can lure unwary consumers into purchasing defective 
windshields that shatter on impact. We have all heard the 
horrible stories, such as counterfeit pharmaceuticals filled 
with paint or baby shampoo filled with industrial solvents.
    IPR protection also promotes development. As long as local 
artists cannot make a living in their home markets because of 
rampant piracy, local talent will remain undeveloped. Patent 
and copyright infringement can cause the flight of investment 
out of a country, thereby curbing development of a local 
technological base.
    Now, the complexity of this problem calls for a 
comprehensive, multi-faceted solution, and USTR and other 
agencies have employed all tools at our disposal to deal with 
the problem, and we will continue to do so.
    First, we require that our Free Trade Agreement partners 
bring their IPR regimes up to world-class standards. Our FTAs 
contain provisions dealing with a whole range of IPR, including 
such issues as curbing the use of equipment used to circumvent 
anticounterfeiting technology and dealing with sector-specific 
problems, such as optical disk or broadcast piracy. They also 
facilitate the bringing of cases and strengthen domestic 
criminal and civil enforcement measures.
    Second, the USTR annually issues the Special 301 Report, 
which catalogues the IPR problems in dozens of countries around 
the world and places them in a hierarchy of wrongdoing, ranging 
from the lowest-ranking of ``Watch List'' to the ranking 
reserved for the worst offenders, a ``Priority Foreign 
Country.''
    As a result of this exercise, countries come forward each 
year with reforms and reform proposals to avoid elevation on 
the list. In the most serious cases, countries identified as 
Priority Foreign Countries can be subjected to a Section 301 
investigation and face the possible threat of trade sanctions. 
We used the threat of trade sanctions in the mid 1990's to win 
an IPR agreement with China, and we have more recently imposed 
Section 301 sanctions on the Ukraine.
    Third, USTR is the lead agency, working closely with other 
agencies, in addressing IPR issues multilaterally through the 
WTO. The initiation of dispute settlement proceedings is the 
most forceful expression in the WTO of dissatisfaction with a 
country's IPR protection and can be an effective way to achieve 
reform. In nearly all cases that USTR has initiated, U.S. 
concerns were addressed via changes in laws and regulations by 
the other party. We also regularly review countries' IPR laws 
and practices through the WTO Trade Policy Review mechanism and 
in the TRIPs Council.
    Fourth, USTR administers the Generalized System of 
Preferences program and other similar programs which allow us 
to withhold tariff preferences if a country fails to adequately 
protect IPR. The ``carrot'' of preserving tariff preferences is 
an effective incentive for countries to protect intellectual 
property rights.
    Finally, USTR, the State Department, the Department of 
Commerce and others have used diplomatic pressure to encourage 
IPR reform around the world. For example, Ambassador Zoellick 
has repeatedly emphasized the importance of this issue with the 
Chinese Government, and Deputy USTR Josette Sheeran Shiner has 
had multiple visits to China in the past few months alone to 
deal with this matter. In the coming days, she will return to 
China to prepare for the U.S.-China Joint Commission on 
Commerce and Trade meeting next month, where IPR will be high 
on the agenda.
    Dealing with the problem of piracy and counterfeiting 
requires a comprehensive, intensive and sustained effort. 
Ambassador Zoellick is strongly committed to continuing to 
bring all of USTR's weapons to bear on this issue and to 
maintain the pressure in the coming years. We have made 
progress, but enormous challenges remain, and I look forward to 
working with you and your staffs to continue to devise 
solutions for dealing with this critical matter.
    Thank you.
    [The prepared statement of Mr. Mendenhall appears as a 
submission for the record.]
    Senator Specter. Thank you very much, Mr. Mendenhall.
    Our next witness is assistant secretary of State for 
Economic and Business Affairs, Earl Anthony Wayne. Mr. Wayne 
has had a distinguished career in international trade and 
foreign service. He had been first secretary to the embassy in 
Paris, a very extensive background in Western European Affairs 
at the National Security Council.
    We thank you for joining us, Secretary Wayne, and the floor 
is yours.

 STATEMENT OF EARL ANTHONY WAYNE, ASSISTANT SECRETARY OF STATE 
    FOR ECONOMIC AND BUSINESS AFFAIRS, DEPARTMENT OF STATE, 
                        WASHINGTON, D.C.

    Mr. Wayne. Thank you very much, Mr. Chairman, Senator 
Biden. It is a pleasure to be here to talk about this important 
set of problems.
    In the State Department's Economic and Business Affairs 
Bureau, we have a mission statement on the wall, and one of the 
top priorities in that statement reads: ``Increase market 
access for U.S. goods and services, protect intellectual 
property and promote global information and technology 
communications.''
    So I would like to talk a little bit today, complementing 
my colleagues, on three interrelated activities that we are 
undertaking to try to put this statement into action, working 
with our missions around the world. That involves three types 
of building: building knowledge, building capacity and building 
will.
    By building knowledge, I am talking about the need to 
increase awareness of intellectual property rights. That starts 
at home. It starts in the training. When new foreign service 
officers come in to the Department of State, in their 
introductory courses, they now learn about pharmaceutical data 
protection, about optical disk piracy, about counterfeit Levi 
jeans, about the problems this poses for American businesses. 
That training now continues for economic and commercial 
officers, for deputy chiefs of mission, for ambassadors. We 
have built this in to drive home how important these issues are 
for America's prosperity.
    Of course, an even greater problem is building that 
understanding overseas, where sometimes the perception is that, 
``gee, IPR, that only benefits big American companies. It does 
not really concern us in this country.'' But we are trying to 
use all of the diplomatic tools that we have in our tool chest 
to get the message out, from bilateral meetings, sending 
foreign journalists to the U.S. to understand the issues 
better, sending academic experts overseas to talk with people, 
using digital video conferences to bring people together and to 
get our ambassadors and economic counselors out on the stump 
and really explaining this to all sorts of audiences, from 
academics and officials to students overseas, so they start 
understanding how important these things are.
    Attached to my written testimony, I have included an op-ed 
that our ambassador to Russia, Sandy Vershbow, wrote last year 
specifically tailored to the Russian cultural heritage and how 
a lot of this cultural heritage was being lost, and their 
artists were not being able to build on this because of the 
piracy and counterfeiting that was going on and how a lot of 
the Russian intellect in software and other things just could 
not be profitable because they had so much piracy and 
counterfeiting. Those are the kind of things our embassies 
around the world are doing to build understanding.
    The second, key front is building capacity. At home, we are 
working to use the Internet much more effectively ourselves, to 
connect with our embassies, and to put embassies in touch with 
each other when they are facing similar problems around the 
world. We are bringing officers together to talk about best 
practices. We are having a conference in Brussels next month, 
where we are bringing officers from all over Europe, North 
Africa and the Middle East, so we can learn together with 
officials from Washington, what are the best arguments, what 
are the best practices, how can we be more effective overseas?
    Now, the other kind of capacity building is helping 
developing and transitional economies. That is where the 
funding that Senator Leahy mentioned earlier is so important as 
we try to really build the chain that is so key between judges 
and prosecutors and Customs officials and cops on the street, 
so really we can fight this problem overseas. We know from our 
own experiences, one weak link can make that a flawed process, 
and there are a lot of weak links in these developing economies 
and transitional economies We are trying to use the means that 
we have to address that challenge.
    We have a number of coordinating efforts to make sure that 
we work with industry, with other agencies to find the best 
kind of programs to go forward, to use the funds that we have 
available for training well. And we very much appreciate the 
congressionally appropriated money for this, which will be 
very, very helpful in this effort.
    Finally, building will. Often building will is a key part 
of what we are doing, maybe even the most important part. This 
is the will in foreign capitals to really take action. As my 
colleagues have mentioned, we use a lot of different tools in 
this process--bilateral meetings, for example. The Secretary of 
State, my boss, the Under Secretary of State, our ambassadors 
around the world and I are complementing what our colleagues in 
the U.S. Government are doing on a regular basis. We see this 
as a very important part of our foreign policy portfolio.
    All of the trade negotiations that are going on constitute 
another tool. USTR is in the lead in that effort, but it is 
often our missions overseas that are, on a daily and weekly 
basis, reinforcing that message from USTR and working very 
closely with them to reach out to try to build the coalitions 
in those local Governments that really understand why this is 
in their interests.
    And that is similarly true in the 301 process--often very 
important to get the attention of countries overseas, as we are 
moving forward, to really address the problems that they have. 
And, as Jim Mendenhall mentioned, when other methods do not 
work, we do consider imposing sanctions, using the Special 301, 
the Generalized System of Preferences or going to the WTO in 
certain cases.
    We do not pretend to have all of the answers to this, Mr. 
Chairman, but we do know that we need to keep working hard on 
these three aspects: knowledge, capacity and will. We also know 
this has to be a team effort. It has to be a team effort within 
the U.S. Government. It has to be a team effort with industry 
and, Senators, with you and your colleagues in going forward. 
When you all pay attention to these issues, when you speak out 
on your foreign trips and communicate with your foreign 
colleagues, it does have a big impact. We very much appreciate 
your attention and interest in this and look forward to working 
with you.
    [The prepared statement of Mr. Wayne appears as a 
submission for the record.]
    Senator Specter. Thank you very much, Secretary Wayne.
    We are going to now go to questioning of the panel, and we 
are going to establish a 7-minute limit. We have another panel 
of 5 distinguished witnesses, so we are going to be running 
late, in any event. And we are uncertain as to whether there 
are going to be votes later this afternoon, but when you get 
near the 4 o'clock range, you are in jeopardy of votes. And 
once they start, it is pretty hard to keep people waiting a 
long time and to come back. So I appreciate your staying within 
the time limits, generally.
    As I hear your testimony, I see a breakdown which I would 
specify: Actions against Nations, number one; individual 
violators, number two; organized crime, number three; and 
terrorists, number four.
    General Wray, you have stated an impressive list of 
prosecutions by the Department of Justice. What is your 
evaluation of the sufficiency and deterrent quality of those 
prosecutions? Stated differently, is the message getting 
across? Do you have sufficient resources to bring enough 
prosecutions to let the violators, the pirates know that they 
are subject to tough prosecutions to have a deterrent effect on 
would-be violators?
    Mr. Wray. Senator, I--Mr. Chairman, I should say--I would 
think that there--
    Senator Specter. Senator is okay.
    Mr. Wray. I would answer on a couple of fronts. On the 
success I think we are having, in terms of getting the message 
out, we are trying to focus our cases primarily on the biggest 
organizations, the most sophisticated ones, the ones that we 
think are having the greatest and most harmful impact.
    Senator Specter. Are you sending some of them to jail of 
that size?
    Mr. Wray. We are. We are sending individual defendants to 
jail. One of the things--
    Senator Specter. What is the longest sentence you have got?
    Mr. Wray. I think that is--
    Senator Specter. Pardon me if I get down to nitty-gritties, 
as a former prosecutor.
    Mr. Wray. The longest one that I know of, off the top of my 
head, is the 7-year sentence I mentioned in my opening 
testimony.
    Senator Specter. A good sentence?
    Mr. Wray. One of the things that we have seen over the last 
couple of years is increasingly stiff penalties. For example, 
in fiscal year 2000, I do not think we had a single defendant 
who went to prison for more than 3 years. Last year, fiscal 
year 2003, we had I believe at least 10 who went for more than 
3 years. So we are starting to see--
    Senator Specter. Do you sense a deterrent effect from the 
success you have had on sentencing?
    Mr. Wray. We think we are starting to see the message 
getting through that we are serious about this and that we are 
cracking down.
    You also mentioned things that we could do to improve 
enforcement, and I think obviously, as a former prosecutor 
yourself, you can never have too many good investigators, and 
we would certainly always appreciate more agent resources to 
work on it because that would enable us to do more proactive 
investigations which, as you know, in an organized crime-type 
of setting enables us to penetrate the organizations in a more 
effective way.
    The other thing that I and all of my colleagues here on the 
panel are all recognizing is that this is a truly international 
problem. If you think of it like the weed in your yard, if you 
just focus on it domestically, all we are really doing is 
cutting off the blade that is above the soil, and we are not 
getting down into the roots of it. And by doing it in a multi-
agency, international way, we are really trying to get at it 
everywhere because intellectual property crime in other 
countries has a direct impact on victims, businesses and 
consumers here.
    Senator Specter. General Wray, let me turn to that. With 
respect to suggestions about sanctions, which Mr. Mendenhall 
has mentioned, and China as being a major violator, which Mr. 
Dudas has mentioned, what would you think of the prospect of 
revoking China's Most Favored Nation status? I did not like 
that in the first place. I was one of fifteen Senators to vote 
against that.
    Mr. Dudas, you say that China has a lack of piracy 
enforcement, and it is getting worse. Why not get tough with 
them and revoke their Most Favored Nation status?
    Mr. Dudas. I think that is something that would have to be 
thoroughly discussed. I can tell you I think right now the 
initial step with China is to make clear that there are 
measurable, deliverable results that the United States must 
see.
    Senator Specter. Secretary Evans is a tough guy. What 
effect did he have when he jaw-boned him?
    Mr. Dudas. I think he has had a fairly dramatic effect. 
When I went out in the last week, the sense I got, I think, is 
that the jury is out on what the Chinese will come in and want 
to discuss, and perhaps what they will deliver at the JCCT.
    Senator Specter. The jury is out? You are going to have to 
poll the jury. They are pretty hard to figure, even after they 
come back.
    Mr. Dudas. I think what we are discussing now is what 
specifically does China need to show. We have found that the 
statistics that we see are not improving. The statistics show 
that our Customs seizures since 1997, 16 percent of seized 
goods came from mainland China. That has grown to over 66 
percent of seized counterfeit goods coming from mainland China.
    I think, in the absence of seeing improvement in our 
statistics, the discussions we had with Chinese Government 
officials are: you will need to show specific improvement along 
the following lines.
    Senator Specter. Mr. Mendenhall, let me turn to you because 
I have two more questions, and I want to conclude within my 
time limit. If Most Favored Nation status is not tough enough, 
what can we do tougher under 301 sanctions to Chinese? Just 
start there. They are the leading nominee for tough sanctions.
    Mr. Mendenhall. Well, I would like to reiterate the 
comments that Mr. Dudas has made already. I think there is very 
little question that we are at that point where getting tough 
with China is where we ought to be
    There are processes that are in train that will hopefully 
get us to the point where we can make a fully considered 
decision about what the next steps would be; the next one being 
the JCCT meeting in mid-April, where we have, as Mr. Dudas 
explained, provided the Chinese with very concrete steps that 
we would expect them to take, concrete measures that we would 
expect them to take to move forward until that process is 
working.
    Senator Specter. What tough sanction, Mr. Mendenhall?
    Mr. Mendenhall. I am sorry?
    Senator Specter. If they do not comply, what tough 
sanction?
    Mr. Mendenhall. Well, there are multiple options that would 
be presented to us. I mean, there is the multilateral option of 
going to the WTO, if we feel that that is appropriate at that 
point. There is this Section 301 process available under U.S. 
law, but that is--
    Senator Specter. How about closing our markets to them or 
tariffs like on steel?
    Mr. Mendenhall. Well, there are I think things that we 
would have to consider that would have to factor into that 
decisions.
    Senator Specter. Mr. Mendenhall, let me ask you to 
supplement your answer in writing because I want to ask Mr. 
Wayne a question, and I have only got 33 seconds left.
    Mr. Mendenhall. Yes.
    Senator Specter. Mr. Wayne, as I listen to the four of 
you--Treasury, Justice, Commerce, State--four potent 
operations, do your four powerful organizations sit down in a 
joint cooperating Committee to figure out what they are doing 
and figure out ways to act in a joint way with all of the power 
that your four departments have?
    You can have the balance of my time on answering.
    [Laughter.]
    Senator Specter. The red light went on when I finished the 
question.
    Mr. Wayne. Thank you, Mr. Chairman. We do sit down. We sit 
down regularly, and we sit down to look at it from several 
different angles.
    One, in the Special 301 process, we work very closely 
together. We are right now in the midst of getting reports from 
all of our embassies overseas, hearing from industry, hearing 
from other interested parties, and then we sit down together, 
and we work through what has the performance been over the past 
year, what makes the most sense vis-a-vis number of these key 
actors to really enforce the need for action.
    Secondly, we have a Committee that sits down on a monthly 
basis, at a working level, and looks at the different kind of 
training programs that are going on, from industry, from the 
various agencies, and we try to figure out what is working. 
Where should we put our priorities for the months ahead? Are 
there a set of trainings that really did produce results? 
Should we try and do that somewhere else?
    And then we have the NIPLECC process, which is led by USPTO 
and Justice, where we get together at a policy level and look 
at what is working overall, in our macro approach.
    So, in those three examples, and then in a number of other 
specific examples, especially, if we are considering going 
forward on the WTO process, I would say we are in really pretty 
much constant contact and constant discussion about what is 
working, what is not working, what is the best way to take on 
some of these ongoing problems.
    Senator Specter. Thank you, Mr. Wayne.
    Senator Leahy?
    Senator Leahy. Well, to follow up a little bit--I wanted to 
thank you--on what the Chairman said, Mr. Dudas and Mr. 
Mendenhall, I thought he asked very clear questions about 
China. I am not quite sure I got a clear answer, so I will be 
submitting more questions, but China has been ripping us off 
for years, and we keep saying, ``Boy, next year, wow, it is 
going to be so much better.'' They have an artificially set 
currency, which hurts us. A lot of American jobs are going over 
there, and I happen to be one who strongly believes in as much 
free trade as possible, if it is fair. I voted for a lot of the 
things to allow trade with other countries.
    And this has gotten beyond the question of ``let us have 
another meeting'', and ``let us put the highest level in our 
meetings,'' and ``let us have the highest discussions, and let 
us consider our options, of which there are many.'' It is 
actually time to do something. They have made a laughingstock 
of us. They steal hundreds of millions, even billions of 
dollars from us every single year. I do not see where we do 
anything that is actually going to stop them.
    Take a place like Singapore--put a 3-inch graffiti mark on 
the wall somewhere, and you can go to jail. Steal hundreds of 
millions of dollars of American intellectual property, and you 
are probably going to get ``businessperson of the year.'' We 
really look like saps around the world with what happens.
    Mr. Wray, the Department of Justice plays a critical role 
in the enforcement of intellectual property rights. And of 
course whatever amount of time you spend on it, there are 
priorities--and of course in the Department of Justice you have 
to set priorities--that determines how effective our 
intellectual property will be. Obviously, if we had somebody 
who walks into a bank, and stole a billion dollars and made a 
clean get-away, the Department of Justice would put enormous 
resources to go after him. We have billions of dollars being 
stolen all the time.
    The AG's Annual Report from 2002 cites 81 investigative 
matters that resulted in 52 cases filed in regard to 
trafficking in counterfeit goods. I am going to ask 
specifically for the record, does the Department have any plans 
to increase the number of investigative matters? What resources 
were devoted to counterfeit goods and IP piracy investigations 
in 2003? I will have those for the record.
    But we had a lot of publicized prosecution of the bootleg 
film of ``The Incredible Hulk.'' Well, big whoop, they could 
have just waited. That movie sank like a rock at the box 
office. Within a couple of weeks, they probably could not have 
given away the copies. But I do not remember a significant 
prosecution in the intellectual property area over the past 3 
years. What would you say are your 10 most significant 
intellectual property prosecutions in the last 3 years--the 10 
most significant intellectual property prosecutions in the last 
3 years? I am not saying the last year. I will give you 3 whole 
years, at 3-and-a-third a year?
    Mr. Wray. I think one of the biggest ones was something 
called ``Operation Buccaneer,'' which was a large piracy 
conspiracy that involved search warrants all over the world, 
has resulted in I think 26 convictions so far, as well as some 
prosecutions overseas, working in partnership with overseas--
    Senator Leahy. How many of those convictions were here in 
the United States?
    Mr. Wray. I am sorry?
    Senator Leahy. How many convictions in the United States?
    Mr. Wray. Twenty-six in that operation so far.
    Senator Leahy. What was the nature of the intellectual 
property being stolen?
    Mr. Wray. I believe it was movies, and CDs, and that sort 
of thing. I can try to see if I can find the specifics on that.
    Senator Leahy. How many people went to prison?
    Mr. Wray. I believe that a significant number of those 26 
have gotten prison sentences. I do not have the specifics for 
that.
    Senator Leahy. Do you have any idea of how long?
    Mr. Wray. As I mentioned before, the sentences we are 
seeing are going up more, so, increasingly, for example I think 
we got a 70-month sentence, which is more than historically we 
have been getting in those types of cases.
    Another sig--
    Senator Leahy. If a bank robber stole $100 million, what 
would they get for a prison sentence?
    Mr. Wray. If it was armed, he would of course--
    Senator Leahy. No, just--
    Mr. Wray. Just a ``note job'' kind of thing? With $100-
million loss, I would have to look at the sentencing guidelines 
for $100-million loss, but you would look at the loss table 
under the sentencing guidelines, and my guess is probably 7, 8, 
something like that, years.
    Senator Leahy. You have got a black kid in the inner city 
who sells a couple grams of crack cocaine to his classmate for 
$40, what do they get?
    Mr. Wray. I am sorry. How much cocaine? I did not--
    Senator Leahy. A couple grams. Five grams. Say five grams, 
and say they make a $40 profit on it overall between what they 
paid for it and what they sold it to one of their classmates at 
school, how long are they going to go to jail?
    Mr. Wray. In excess of 5 years.
    Senator Leahy. Well, you know, we probably have a lot of 
businesspeople who might say, well, look at those kids and see 
what we might do, but maybe the person who stole several 
million dollars' worth of counterfeit goods ought to go--but 
give me a couple more of your, you have given me one of the 
most significant prosecutions. You can give the 10 over the 3 
years for the record, but give me a couple more.
    Mr. Wray. A couple more would be a case that we recently 
brought in Alabama involving counterfeit pesticide, in which 
the defendant sold the pesticide, passing it off as legitimate 
pesticide to deal with West Nile Virus. So, of course, you had 
all of these municipalities all over the Southern United States 
buying this stuff, thinking that they were going to protect 
their communities with it, and in fact it was not the real 
stuff. That defendant, I do not have his sentence off the top 
of my head, but that was another significant case.
    Senator Leahy. You see what I am leading to, and also 
overseas, if you can address that, because I mentioned my 
provision to put $2.5 million to address IP piracy overseas, 
and I want to make sure that really is a priority of the FBI, 
which is under your Department.
    Mr. Wray. Our international focus has been primarily on 
working, forging partnerships with our law enforcement 
counterparts overseas. So, more and more, we are trying to 
engage in things like Operation Buccaneer. There is another one 
called ``Operation Safehaven,'' where we are working with law 
enforcement partners in other countries to try to make it a 
coordinated take-down, where they take down some of the people 
there, we take down some of them here, searches are being 
executed all over the world. It is an effort to try to get at 
the entire organization and dismantle it, much the same way we 
would in situations that you are also familiar with, with drug 
organizations, major organized organizations, and other 
contexts, suck as terrorist organizations. The idea is to try 
to dismantle the organization.
    And so working with our international partners on the law 
enforcement-to-law enforcement relationships, that is kind of 
where our focus is on that front.
    Senator Leahy. Thank you.
    I will submit the other questions for the record, Mr. 
Chairman.
    Senator Specter. Thank you very much, Senator Leahy.
    Senator Biden?

STATMENT OF HON. JOSEPH R. BIDEN, JR., A U.S. SENATOR FROM THE 
                       STATE OF DELAWARE

    Senator Biden. Thank you, Mr. Chairman, and thank you for 
holding this hearing.
    The three of us, and others, have done an awful lot of work 
in this area. In speaking for myself, Senator Smith and I 
started a caucus of now 70 Members of the House and Senate to 
deal with this issue. The reason I bother to say that is not to 
say we have done this, it is to acknowledge that we know how 
difficult this is. This is a very difficult problem.
    And some of the answers asked are of above your pay grades 
to be able to answer, we understand, because there are policy 
decisions that have to be made. But, Mr. Chairman, I would ask 
unanimous consent that my statement be placed in the record.
    Senator Specter. Without objection.
    [The prepared statement of Senator Biden appears as a 
submission for the record.]
    Senator Biden. We have done this. We have held other 
hearings. We have written reports. We have made suggestions. 
But let me get to what I think is one of the core problems 
here.
    In a sense, advances in technology have outrun our 
enforcement capabilities. It is awful hard to catch up, and I 
understand that. But if you are willing, and I am not being 
solicitous when I say this--and I understand if you do not want 
to take a chance and answer these questions--but what are the 
tradeoffs that you all have to make on the enforcement side? 
Let us talk about the Special Trade Representative, the State 
Department, the Commerce Department.
    The truth of the matter is I introduced a bill last year 
that had a lot of support until I decided to try and make it 
more difficult, and all of a sudden I found I had a split 
between software manufacturers and the industries, and it broke 
off.
    The Chamber of Commerce does not know what they are talking 
about here, and the AFL-CIO does not know what they are talking 
about here either because they have real problems internally. 
There are great splits. The harder you come down on this, the 
more you are going to make my chemical manufacturers angry, the 
more you are going to make my--I see the head of the Chamber of 
Commerce. He cannot give you a straight answer, and I love him, 
and the reason he cannot is his constituency is split. And if 
he does not know it, he should come to Delaware, and I will 
explain to them why they are split.
    Because if you enforce 301, then there is a backfire. You 
may very well deal with these guys. You may crack down, but all 
of a sudden he is going to have all of these guys on his 
doorstep from the Business Roundtable saying, ``Whoa, whoa, 
whoa, wait a minute. You are talking about this intellectual 
property stuff. You have got everybody all ginned up. They went 
ahead, and they imposed sanctions, and now, guess what?'' You 
guys know the rest of the story.
    Tell me what the competing interests are. Not good guys/
bad, what are the competing interests? The truth of the matter 
is we have not imposed 301 Sanctions to any degree that it hurt 
and anybody yelled, ``Uncle.'' Why? There is a good reason. 
Tell me the reason why. I think there is a good reason. I am 
being serious. I am not trying to--but explain to the public, 
so I am not doing it because they do not believe Senators, but 
they will believe very impressive bureaucrats. And I mean that 
sincerely, you are an impressive bunch. I give you my word. I 
mean that sincerely.
    What are the reasons, Mr. Mendenhall?
    Mr. Mendenhall. Well, I would like to say actually two 
things about that.
    Senator Biden. Do not give me a State Department answer, 
okay?
    [Laughter.]
    Mr. Mendenhall. I will turn to my colleague for that.
    There are two things: One, at times the threat of 301 
Sanctions has had some impact. It did with China in the mid-
1990's.
    Senator Biden. Well, it can have a lot of impact. Why do 
you not, in fact, use it?
    Mr. Mendenhall. Right. Well, the domestic reason, of 
course, is that imposing sanctions also has implications for 
our own folks. If we block--
    Senator Biden. Explain that. What do you mean? Give me an 
example of implications.
    Mr. Mendenhall. If we impose sanctions on or raise tariffs 
or otherwise block imports, it does have repercussions through 
the economy for those who need to import their raw materials 
for production, those who otherwise purchase the goods, sell 
them in the United States, that type of thing. So there are 
political tradeoffs that have to be made.
    Senator Biden. And by the way, I want to make clear, I am 
not saying they are Democrat-Republican political tradeoffs.
    Mr. Mendenhall. Right.
    Senator Biden. But there are tradeoffs, there are economic 
tradeoffs, right?
    Mr. Mendenhall. Yes. There are tradeoffs, yes.
    Senator Biden. Now, a second question is, I am going to 
make a statement, and if any one of you disagree with me, do 
not just disagree. Tell me why you disagree.
    I would posit that the reason why we have not moved in the 
way we should move is, quite frankly, on the scale of economic 
interest, this is at the lower end of the scale. The tradeoffs 
that we have to pay for, for imposing sanctions that were 
legitimately able to be imposed, would exceed the benefit we 
perceive would come from getting international piracy 
significantly stunted in its growth.
    The short-term and mid-term tradeoffs will be significant 
for the economy, right? Who are you going to hear from if, in 
fact, you go ahead and impose 301 Sanctions against China on 
this issue?
    Mr. Mendenhall. I do not think we can say categorically 
that the tradeoffs are such that it would necessarily be a bad 
thing, not result in the results that we want at the end of the 
day. I think, at this stage of the game, we should not take any 
options off the table, and we should consider--
    Senator Biden. With all due respect, then, if they would 
not, then you are doing a very bad job. You are doing a very 
bad job. Unless you--Commerce, State and Special Trade Rep--
cannot demonstrate that the economic impact to the United 
States, by imposing what we legitimately could impose on in 
terms of sanctions for piracy far exceed the cost of the 
piracy, then you are derelict and irresponsible--flat out, you 
are derelict and irresponsible.
    It has cost us 750,000 jobs. Forget the money, 750,000 
jobs. The Chamber and a lot of other people think outsourcing 
is not such a bad idea, and from an economic model, they may be 
right, but from the terms of the impact on the economy and 
people, it is devastating--750,000 jobs.
    And let me explain to folks who are listening. It is a real 
simple reason. When we do not have someone in a factory making 
that little disk, when we do not have someone reproducing that 
movie, it is being reproduced overseas, so no one else 
reproduces it. They are manufacturing jobs, they are high-tech 
jobs, and we are losing them, and 750,000, according to our 
estimates, this administration's estimates from the U.S. 
Customs Service.
    So I am supposed to sum up now. Folks, look, we have got to 
get honest with the American people. There is no question that 
we are not for using the tools available to us. There may be a 
good reason why we do not use them all, but let us explain to 
people. They are smart. They are smart. Tell the truth.
    My time is up, and no one can believe I actually stopped 
within my time. So that is why there is this stunned silence 
here.
    [Laughter.]
    Senator Specter. Thank you very much, Senator Biden.
    Senator Biden. Surprised, huh?
    Senator Specter. Well, that is emphasis which we have come 
to expect from Senator Biden. He and I ride the train from 
Washington to Wilmington, where he gets off and I go on to 
Philadelphia. I have had more time today, equal time. 
Occasionally, I get in a word with Senator Biden when we ride 
the train, but only occasionally. Senator Leahy concurs, I 
think. [Laughter.]
    Well, thank you very much, gentlemen. We are glad to see 
the Treasury Department, and the Justice Department, and the 
Trade Representative, and the State Department going after this 
issue. This Committee is very deeply concerned about it, and we 
are ready, willing and able to help you further. We like the 
idea of tough prosecutions and the sanctions as a deterrent.
    Speaking for myself, I believe there could be more done on 
sanctions dealing with China as an example. Secretary Snow was 
in China, as well as Secretary Evans. Senator Biden was in 
China as well, and from the reactions that I got when I was 
with Senator Biden, I have doubts as to the impact and would be 
looking for something tougher.
    So thank you very much. We will continue to work together.
    Senator Biden. Thanks, guys.
    Senator Specter. We will now turn to our next panel: Mr. 
Thomas J. Donohue, Mr. Richard K. Willard, Mr. Brad Buckles, 
Ms. Vanessa Price, and Mr. Timothy Trainer.
    While the panel is being assembled and seated, I will start 
with the introduction of our first witness, Mr. Thomas J. 
Donohue, President and CEO of the U.S. Chamber of Commerce, one 
of the strongest--perhaps the strongest--advocacy group 
representatives of American business in the country. He has 
held that position since 1997. For 8 years before, he was group 
vice president for the Chamber, and prior to that he had worked 
13 years as president and CEO of the American Trucking 
Association, the national organization of that industry.
    Mr. Donohue has had a very keen interest in this subject 
and recently held a long symposium in the Chamber on it, and we 
welcome him here today to continue the exploration of this 
important subject and to figure out what more can be done to 
deal with it.
    Thank you for joining us, Mr. Donohue, and we look forward 
to your testimony.

 STATEMENT OF THOMAS J. DONOHUE, PRESIDENT AND CHIEF EXECUTIVE 
               OFFICER, U.S. CHAMBER OF COMMERCE

    Mr. Donohue. Thank you, Mr. Chairman and Members of the 
Committee. I am glad Senator Biden is here. Maybe we can carry 
on with his discussion.
    First, Mr. Chairman, let me thank you for participating in 
our program, where we kicked off the Chamber's massive long-
term effort on intellectual property and counterfeiting issues 
here and around the world. Your interest, I would say 
accelerated interest after your participation in that event, 
has had a lot to do with bringing us here today, and we very 
much appreciate your efforts.
    For the members of the panel, Senators, let me say that the 
Chamber's program has got three parts to it:
    First, we are going to mass a large educational effort to 
explain to people what is at stake here, what is being lost 
and, by the way, how many of our fellow citizens are helping--
inadvertently, perhaps--helping the counterfeiters.
    Second, we are going to spend a good deal of time on cross-
industry domestic coalition building to protect our supply 
chain. What that means, we have got to bring the people 
together on these issues in a way that does the type of 
research, the top economic analysis and answers the very 
question that Senator Biden asked.
    And, finally, we are launching a whole series of 
international issues to go where the problem is, some of it 
being overseas, some of it being here, and to create a 
tremendous amount of pressure, including, by the way, 
notwithstanding the Senator's point, a willingness on our part 
to play serious hardball. I am not sure, Mr. Chairman, that I 
would join your view of saying that we ought to get rid of our 
relationship with China, but I would suggest a number of ways 
in the discussion that we might use our relationship with China 
and the rules-based organization to light a fire under them. 
Action not talk.
    But I do appreciate the opportunity to come up here and to 
say in very simple terms that the American people do not 
understand this problem. Some of our own family will go out and 
buy a knockoff watch or go out and buy a purse, and they do not 
think much about that, but you need to understand that this is, 
if we wanted to go into the criminal business together, this 
would be a great crime to get involved with because the 
sanctions and the costs are very light and the opportunities to 
make a ton of money are there, but folks have to understand 
this is a well-financed effort. These are groups of people, 
criminal in nature, large investment capabilities. Do you know 
what it costs to buy a truckload of disks to steal? You need a 
million dollars. So there is a lot of money in here.
    And the other thing we have to educate our fellow citizens 
on, that this is a very sophisticated issue that is hurting us 
in pharmaceuticals, automobile parts, airplane parts, 
components for technology. This is a serious matter with many 
risks.
    I have heard--and I am not going to repeat what some of the 
people said here--but we are talking about a three-quarter of a 
trillion dollar problem, and we are talking about, as Senator 
Biden indicated, a lot of lost jobs.
    On the other hand, by the way, if the panel would allow it 
during the discussion, we are bringing far more jobs into this 
country, on in-sourcing and other ways to be discussed at 
another time, than we are losing on outsourcing. Outsourcing 
and in-sourcing we have discussed, but criminal activity that 
is costing us three-quarters of a million jobs, and it is 
taking three-quarters of a trillion dollars out of the 
taxpaying systems in our countries is a dumb idea.
    What we need to do is--and I appreciate the point you made 
to the fellows and the representatives of the Government 
agencies--we have got to make this an expensive crime to get 
involved in. This is not a victimless-type crime. There are 
people being hurt on this all of the time. One of the major 
pharmaceutical companies had to recall all of their drugs on 
cholesterol because there were some phony drugs. So these are 
the kinds of issues that we need to get involved in.
    Mr. Chairman, the time always runs very, very quickly on 
these clocks. I simply want to say that we are going to invest 
a lot of money, over a long period of time, to go out and 
dramatically increase the communication on this issue and 
understanding, to interrupt supply chains that we think are 
fraudulent and protect supply chains that are not, and to push 
domestically and internationally to make this an expensive 
crime to get involved in.
    May I end with just one sentence, sir? The Chamber of 
Commerce of the United States, we have gotten pretty good at 
forcing American business into a coalition of interests, and 
there are some times we do not, so on behalf of the whole 
business community, we are not going to listen to the 
complaints of some. I think we have demonstrated our 
willingness to lead on this deal, not follow.
    Thank you very much.
    [The prepared statement of Mr. Donohue appears as a 
submission for the record.]
    Senator Specter. Thank you very much, Mr. Donohue.
    We turn now to Mr. Richard Willard, senior vice president 
and general counsel of The Gillette Company, chairs the Product 
Counterfeiting Working Group of the National Association of 
Manufacturers. For 5 years, between 1983 and 1988, he served as 
assistant attorney general in the Department of Justice Civil 
Division.
    Thank you for being with us today, Mr. Willard, and we look 
forward to your testimony.

  STATEMENT OF RICHARD K. WILLARD, SENIOR VICE PRESIDENT AND 
  SENIOR COUNSEL, THE GILLETTE COMPANY, BOSTON, MASSACHUSETTS

    Mr. Willard. Thank you, Mr. Chairman and Members of the 
Committee. It is a pleasure for me to be here today to talk 
about this important issue to my company. I am also here on 
behalf of the Grocery Manufacturers of America, a trade 
association representing a lot of consumer product companies as 
well.
    Our company, Gillette, we manufacture and market a broad 
range of products, not just the famous Gillette shaving 
products, but also Duracell batteries, Oral-B toothbrushes, and 
a number of other lines of products.
    We also participate and work with the U.S. Chamber of 
Commerce and the International AntiCounterfeiting Coalition, 
both of which are represented here today as witnesses.
    I would like to make my brief time for my spoken remarks to 
make a few quick points:
    First of all, counterfeiting is not a problem limited to 
luxury goods. In fact, that is a tiny fraction of it. I have 
here in front of me two packages of what appear to be Duracell 
batteries. The one on the right I can tell you a lot about. I 
know where it was manufactured, I know what is in it, I know 
how long it will last. The one on my left is counterfeit. It 
was one of one million counterfeit batteries we seized in a 
single seizure in China, recently.
    Senator Biden. One million.
    Mr. Willard. One million at one time. Other than that, I 
cannot tell you much about it. I do not know what is in it. I 
suspect it will last maybe a tenth as long as the real Duracell 
battery, but that is about it.
    The danger to consumers, of course, is that they can 
unknowingly buy counterfeit products that will underperform. 
More seriously, as testimony has already brought out, they can 
buy counterfeit products that are actually dangerous to their 
health and safety.
    I would like to turn briefly to what I think this Committee 
should look into doing.
    First of all, we need to close some loopholes in U.S. laws. 
We need to outlaw trafficking in counterfeit labels and 
packaging in the U.S. and overturn the recent decision of the 
Tenth Circuit in the Giles case, which said it was not a crime 
to traffic in counterfeit labels unless they were actually 
attached to a counterfeit product. That is a loophole that the 
counterfeiters know how to exploit here and in China in our 
experience, where they simply bifurcate the counterfeiting 
process, and thus insulate the manufacturing and the more 
expensive equipment from any liability because it only becomes 
a counterfeit when the label is put on it.
    We also need to make, under our U.S law, mandatory the 
seizure and destruction of machinery used to make counterfeit 
products and labels.
    If we can make these changes in U.S. domestic law, then we 
can leverage that through Free Trade Agreements to make other 
countries make these changes in their law. USTR understandably 
takes the position it will not negotiate requirements in FTAs 
that would require a change in domestic U.S. law, and so we 
cannot get other countries to make these changes in their laws 
unless we first make them in our own laws if we want to impose 
that requirement under Free Trade Agreements.
    And then, finally, my last suggestion is that our 
Government needs to be explicit in its pressure on China, not 
just to say we want you to do something, but to tell them what 
to do. And the one thing they could do that would make a big 
difference is to implement an enforcement program at the point 
of export. They should be examining cargos, as they are shipped 
out of China, to discover counterfeit goods and, at that point, 
to seize the goods, destroy them and prosecute the people who 
are exporting the goods. There is no such enforcement program 
in existence now.
    And so it is really not such a matter of just telling China 
we want you to do something, it is a matter of telling them 
what to do and giving them the assistance, law enforcement 
training and other resources to help them do the job 
effectively.
    We have been doing business in China for a number of years. 
It is a very valuable market for our company, and we do not 
want to antagonize the Chinese Government. What we ought to do 
is help them develop an effective enforcement policy, and I 
believe the top leadership in China recognizes that 
counterfeiting is bad for their country as well as for others. 
What they do not have is the competence to implement an 
effective enforcement program, and I think we can help them 
develop that.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Willard appears as a 
submission for the record.]
    Senator Specter. Thank you very much, Mr. Willard.
    Our next witness is Mr. Brad Buckles, executive vice 
president for Antipiracy at the Recording Industry Association 
of America. He formerly worked as Director of the Bureau of 
Alcohol, Tobacco, Firearms and Explosives.
    We thank you for being here today, Mr. Buckles, and the 
floor is yours.

    STATEMENT OF BRAD BUCKLES, EXECUTIVE VICE PRESIDENT FOR 
    ANTIPIRACY, RECORDING INDUSTRY ASSOCIATION OF AMERICA, 
                        WASHINGTON, D.C.

    Mr. Buckles. Thank you, Mr. Chairman, Senator Leahy, 
Senator Biden, for holding this hearing on the devastating 
effects of counterfeiting and theft of tangible intellectual 
property.
    The Recording Industry Association of America is a trade 
association that represents the U.S. recording industry, and 
our members create, manufacture and distribute approximately 90 
percent of all of the legitimate sound recordings sold in the 
United States. One of the primary missions of our trade 
association is to protect the intellectual property of our 
members from theft.
    Intellectual property is our country's number one export 
and comprises more than 5 percent of the U.S. gross domestic 
product over the last few years. And our creative and artistic 
genius in America is what fuels the intellectual property 
industries, and it is one of our most precious commodities. Yet 
everyday in our country intellectual property is stolen here in 
the United States and around the world through the sale of 
pirate and counterfeit copies of music, movies and software. We 
cannot permit criminals to openly steal this country's greatest 
assets.
    Piracy is not a private offense against those businesses 
that produce intellectual property. In the case of the industry 
I represent, piracy and counterfeiting hurts everyone, those 
who make music and those who love it, in diminishing the 
incentive for others to invest in the creation of that music. 
Moreover, like other underground businesses, pirate sales also 
deprive Governments of tax revenues. Intellectual property 
pirates do not invest in recorded music, they steal it. They do 
not pay taxes. Like drug dealers, they launder their proceeds 
to hide their profits.
    The counterfeiting of music is almost as old as the 
recording industry itself, but with the advent of the compact 
disk, the nature of piracy was radically altered by providing a 
pirate producer with the opportunity to produce near-perfect 
qualities of a recording. There is now massive manufacturing 
and international trafficking in illegal CDs and DVDs. The 
recent proliferation of inexpensive, recordable optic disks--or 
CD-Rs--combined with readily available CD burning capability 
has only served to compound the problem.
    Our partners in the International Federation of 
Phonographic Industries--the IFPI--report that worldwide music 
pirate sales approach 2 billion units annually, with an 
estimated value of $4- to $5 billion. Globally, the IFPI 
estimates that two in five recordings are pirate or counterfeit 
copies.
    This new manufacturing capacity clearly exceeds the amount 
of legitimate demand and creates a business environment right 
for exploitation by criminals. The physical production of a 
pirate CD costs as little as 35 cents. Given that the pirate 
producer has none of the overhead associated with the creating 
of the intellectual content on the disk, the profit margin is 
enormous.
    To address this problem, the music industry, the IFPI, the 
RIAA, and other industry associations around the world have 
established Antipiracy Units to work with law enforcement 
agencies to combat music theft. The IFPI's unit specifically 
targets organized criminals who operate in transnational piracy 
schemes. They have found evidence of organized criminal 
involvement that is incontrovertible and examples are given in 
my written testimony.
    In the U.S., we have also seen that as music piracy has 
become more lucrative, the organizations that produce, 
distribute and sell counterfeit and pirate music have become 
more complex and more sophisticated. The most extreme form of 
organized crime affecting our society is terrorism, and the 
clandestine nature of terrorist organizations requires large 
sums of money to maintain their operation, and the high profit 
margins on intellectual property have been particularly 
attractive.
    Law enforcement officials have called for more careful 
attention to this problem. Taking a leadership role, Interpol 
General Secretary Ron Noble has pledged the full support of 
Interpol in addressing what he describes as the intensive 
involvement of organized crime and terrorist groups in 
intellectual property crimes.
    The music industry is committed to confronting the 
organized groups that now threaten the very survival of our 
business, and no other business invests so much energy or 
capital, and no industry has such a wide range of professionals 
and investigative resources dedicated to this problem around 
the world.
    I look forward to working with the Committee on these 
important issues, and thank you again for your attention to 
these matters.
    [The prepared statement of Mr. Buckles appears as a 
submission for the record.]
    Senator Specter. Thank you, Mr. Buckles.
    Our next witness is Ms. Vanessa Price, intellectual 
property specialist of Burton Snowboards Corporation, based on 
Vermont.
    Thank you for making the trip down, Ms. Price. I had 
occasion to be in Burlington recently. Our younger son is a 
second-year medical student. Senator Leahy is a Vermonter. I 
commented to him that I thought the 5-degree-below-zero weather 
was brisk and refreshing, and came back to Philadelphia, where 
it was 24 and a heat wave. So it must be nice for you to be 
down South today.
    The floor is yours, Ms. Price.
    Senator Leahy. Senator Specter did not mention that he was 
there in May.
    [Laughter.]

 STATEMENT OF VANESSA PRICE, INTELLECTUAL PROPERTY SPECIALIST, 
             BURTON SNOWBOARDS, BURLINGTON, VERMONT

    Ms. Price. It is a pleasure to come down here today. It 
feels like summer compared to what we have had in Vermont.
    Thank you, Mr. Chairman, Senator Leahy, for inviting me to 
come down and speak today.
    Despite vigorous measures to protect our intellectual 
property through trademark and patent registrations, Burton has 
seen significant counterfeiting recently, and we expect that 
counterfeiting will increase dramatically as our brand 
continues to grow. As a smaller company, Burton is deeply 
concerned about the rise in theft of our IP since we do not 
have the resources that it takes to combat or offset the 
effects of large-scale counterfeiting.
    I would like to also tell you a little bit about Burton. 
The Burton name has become synonymous with snowboarding. We 
were founded in 1977, and we are a Vermont-based company that 
employs 350 people in Vermont and 160 people at offices in 
Japan and Austria. The board sports industry credits Burton 
Snowboards with the founding and popularization of snowboarding 
as a legitimate sport. Snowboarding is growing rapidly 
worldwide. Snow Sports Industries of America, our trade group, 
estimates that participation in snowboarding has increased 300 
percent since 1998.
    Burton has seized this opportunity to grow its brand and 
has expanded to include Gravis Footwear, Analog casual apparel, 
Anon Optics, and R.E.D. Protective Gear. However, this growth 
in popularity is not without a significant downside. Our 
industry has gone through considerable consolidation in recent 
years. Most of the snowboarding manufacturers are seasoned 
competitors at this point. Competition is keen and profits are 
shrinking, even as the sport grows in popularity.
    Unfair competition from counterfeiters significantly 
compounds the problems of seasonality and severe sensitivity to 
economic downturns that our industry already faces. Virtually 
none of the companies that manufacture ski and snowboard 
equipment are large enough to have the resources or tools 
necessary to fight counterfeiting, leaving a growing portion of 
what should be domestic revenue going to foreign 
counterfeiters. We could not even guesstimate the amount of tax 
revenue that the U.S. Treasury loses to these unrealized gains.
    Burton has taken all available and appropriate steps to 
register our trademarks both in the U.S. and internationally. 
Currently, we maintain more than 60 trademark registrations in 
the U.S. alone. We have also taken the additional steps of 
registering our trademarks with Customs officials in the U.S., 
Chile, Argentina, Brazil, Hong Kong, China, as well as several 
other countries. Unfortunately, filing with Customs has offered 
us very scant protection. Burton also holds patents worldwide 
relating to our snowboard technology, including boots, 
bindings, snowdecks, and snowboards. So we have really availed 
ourselves of all possible protection. However, despite the 
measures that we have taken, we see growing evidence that our 
brand is suffering from counterfeiting and illegitimate sales.
    Burton has noticed growing problems with small-scale 
counterfeiting in the U.S. Typically, this involves the 
manufacture and sale of fake stickers, accessories and clothing 
on Internet auction sites, specifically eBay. We can find these 
goods almost any day of the week continuously. All the time, if 
you check eBay, you can find Burton. eBay affords us the 
opportunity to get these auctions taken off of their site, but 
again, after they are off the site, we really do not know where 
the goods go. We do not know who is making them. We have no way 
of really going after them, small scale or large scale. This 
might not appear to be a big problem for us, but we manufacture 
limited editions of certain things, and when they show up on 
eBay in a large quantity, it just causes our brand to lose 
commercial appeal really.
    Burton right now is in the process of expanding from one-
season business, moving beyond snowboarding into the apparel 
business, expanding our sales of T-shirts, fleeces, sweatshirts 
and accessories. As this aspect of our business grows, we see 
significant counterfeiting. Relative to our boards, bindings, 
our engineering technology, these items are easier to 
counterfeit and sell worldwide. Typically, we see them showing 
up in markets in Asia, China, Taiwan, et cetera. We see them 
all over the place.
    This is not unique to Burton. This is a problem that is 
pervasive in the board sports industry.
    My time is up, but that is mostly it.
    Thank you.
    [The prepared statement of Ms. Price appears as a 
submission for the record.]
    Senator Specter. Thank you very much, Ms. Price.
    Our final witness on the panel is Mr. Timothy Trainer, 
president of the International AntiCounterfeiting Coalition, a 
group which concentrates on protection of industry from 
counterfeiting and piracy. Mr. Trainer has been an order with 
Arder & Hadden and worked at the U.S. Patent and Trademark 
Office.
    We look forward to your testimony, Mr. Trainer.

   STATEMENT OF TIMOTHY P. TRAINER, PRESIDENT, INTERNATIONAL 
      ANTICOUNTERFEITING COALITION, INC., WASHINGTON, D.C.

    Mr. Trainer. Thank you, Mr. Chairman and Senator Leahy. On 
behalf of the IACC and its members, I thank the Committee for 
the opportunity to address the issue of product counterfeiting 
and piracy that generates revenues for criminals and impacts 
our National economic security, consumer safety and economic 
health of the companies that develop, make and distribute 
products that incorporate intellectual property assets. Our 
members represent a cross-section of industries from autos and 
medicines to toys and entertainment.
    Due to time constraints, I will summarize my full written 
submission.
    The IACC, respectfully, requests that the Committee and 
Congress consider implementing the following package of 
recommendations to combat counterfeiting and piracy:
    Strengthen the Federal criminal statute against trafficking 
in counterfeit goods;
    Encourage Federal law enforcement agencies to increase 
investigations and prosecutions of manufacturers, distributors 
and others involved in the trafficking of counterfeit goods;
    Increase vigilance at the U.S. border regardless of the 
products involved;
    Impose higher IP enforcement standards on trading partners;
    And support Interpol's effort to combat international 
trafficking in counterfeit goods.
    The last three IACC Special 301 submissions to the U.S. 
Trade Representative have identified nearly 40 countries that 
have woefully inadequate and ineffective systems against 
product counterfeiting and piracy. The products targeted by 
counterfeiters in the global market are, at times, shocking 
because of the reckless disregard counterfeiters have for 
consumers in their effort to profit off of famous trademark 
goods.
    There are no industries exempt from counterfeiting and no 
country spared. Although consumers may generally be aware of 
the counterfeit watches, handbags, shirts, hats and sunglasses 
offered at flea markets and on big city streets, they are not 
well aware of the fact that the global counterfeiting industry 
has moved into pharmaceuticals, auto parts, toys, batteries, 
extension cords, cosmetics, beverages, body lotions, home 
electrical appliances, tools, pesticides and vision wear.
    This sample list underscores the products that are now 
counterfeited here and around the world. Highlighting a few 
examples, one auto industry member found 7,000 sets of 
counterfeit brake pads in China intended for export to Egypt. 
Another auto industry member reported raids resulting in the 
seizure of thousands of counterfeit windshields and several 
thousand suspension control arms valued at nearly $4 million.
    Another member, whose certification mark is relied upon as 
a mark of safety, reported that U.S. Customs seized 91 
shipments of counterfeits bearing its mark in fiscal year 2003. 
These seizures included air compressors valued at $1.5 million 
that had counterfeit ground fault circuit interrupters, a 
$700,000 seizure of counterfeit extension cords, power strips 
and hair trimmers that, in turn, led to an additional $7-
million seizure of counterfeit extension cords and power 
strips, and there are examples here on the table. In addition 
to the Customs seizures, another million-dollar seizure of 
Chinese-made counterfeit portable and hand tools was made by 
police in Southern California.
    In Australia, an investigation led to the discovery of 
massive counterfeit operations of Chinese-made counterfeit 
batteries and razors. Three containers heading to different 
ports--Dubai, Oman, and Los Angeles--were seized having 
counterfeit goods valued at $1.5 million. Australian 
authorities also seized two shipments of counterfeit shampoo 
from China bearing the trademark of a famous brand.
    In 2003, counterfeit vodka in the U.K. caused 
hospitalization and induced coma for consumers who unknowingly 
purchased the counterfeit vodka containing dangerous levels of 
methanol.
    Turning to counterfeit batteries for a moment, a boy 
playing with a toy that had a counterfeit battery suffered 
facial injuries from an exploding battery, and a man suffered 
injuries to a hand when his remote control exploded from the 
use of a counterfeit battery, both incidents in Malaysia. Nokia 
found that counterfeit batteries used in connection with their 
cell phones were exploding as reports of such incidents were 
widespread--from Vietnam to the Netherlands.
    Russia's chief trade inspector noted that for certain 
categories of consumer items, 30 to 50 percent of the market 
consists of counterfeits. These product lines include alcohol, 
juices, butter, vegetable oil, canned foods, tea, coffee and 
cosmetics.
    Domestically, in addition to the auto parts, substandard 
and counterfeit heavy-duty truck replacement parts are also 
getting into the U.S. aftermarket in significant numbers, and 
the problem is likely to get worse, according to the industry.
    In the power tool industry, counterfeits pose risks due to 
the substandard parts and their failure to stand up to the type 
of use that genuine-tested products can withstand. In one case 
involving civil and criminal judicial proceedings, the focus 
was on theft of trade secrets and the sale of counterfeit fiber 
optics products and lighting.
    Product counterfeiting affects all industries and all 
countries. The volume of seized goods is a clear indication of 
large-scale manufacturing and a sophisticated distribution 
sales network. Thus, the challenge of global counterfeiting is 
one that must be fought with the cooperation of our trading 
partners and relevant intergovernmental organizations. The 
recommendations that we have proposed are only a few of the 
many things that need to be done.
    In conclusion, we cannot treat any type of counterfeiting 
as a victimless crime or we risk attracting criminal elements 
to this type of ``easy money'' activity. The present situation 
begs the question: Where does the money go? We have yet to 
learn exactly where the money goes, but do we dare to take the 
risk that some of the funds land in the hands or accounts of 
individuals or groups that will do the unthinkable?
    A multi-pronged effort is needed to take more aggressive 
enforcement actions, implement a broad strategic plan to target 
sources, educate consumers and train Government officials and 
business leaders in ways to make IP enforcement more effective.
    Thank you very much, and I am happy to answer any questions 
you may have.
    [The prepared statement of Mr. Trainer appears as a 
submission for the record.]
    Senator Specter. Thank you, Mr. Trainer.
    Without objection, Chairman Hatch's statement will be made 
a part of the record.
    Mr. Donohue, when you say you would not want to end our 
relationship with China, I certainly think that is a correct--I 
think we could not end our relationship with China if we wanted 
to. They are the oncoming superpower. And we talk about China 
because they seem to threaten us the most. They were trying to 
influence our 1996 presidential election. They take a librarian 
from Dickinson College and do not relent until there is 
pressure in a Sense of the Senate Resolution. And we try to 
structure what we think are civilized, but tough, sanctions. 
What would you suggest as to how we deal with China?
    Mr. Donohue. Well, China has 1.3 billion people. We have a 
lot of companies--and by the way the Congress would encourage 
this--that would like over time to be able to sell those people 
things.
    We compete with the EU, whose economy is probably going to 
be 20-percent greater than ours after their enlargement, and so 
our work with the Chinese have to be twofold, one is 
engagement, and inducement and correction, and the other is 
economic advance for both countries and the positive benefit of 
keeping China in a rules-based system, and we ought to use that 
rules-based system.
    We also must understand that the central Government in 
China is making a lot of progress on this. The provinces run by 
very strong Governments are a little more liberal, as you know. 
But as you know, Senator, from your participation in our 
program, we intend to let the American people and everybody 
around the world know what is being talked about here, what the 
cost is, what it is doing to our country.
    We intend to interdict the supply chain and the logistics 
chain with a lot of action to make it more difficult for them 
to do what they want to do, and that requires the help of our 
Government. But we very much intend to put a lot of pressure on 
China--not only China--China, Russia, Brazil, Korea, India to 
play by the rules.
    And you raised a lot of issues with the first panel, and I 
do not know why anybody would get excited about all of the 
things we talk about in terms of intellectual property and 
counterfeiting theft because nobody goes to jail. I mean, there 
are a few good examples here, and domestically that is a lot 
easier, but my view is, if you make enough noise, if you put 
enough pressure on our own Government and on Governments 
overseas, if you put enough pressure on American business that 
it is going to become more difficult, more expensive, more 
embarrassing, and much less attractive to have anything to do 
with this counterfeiting issue.
    Senator Biden was kind enough to come down and say a word 
before he left. As you know, the Chamber works very hard to 
have a consensus within our members, but there are no group of 
members that are going to get us off this issue. We have made a 
5-year, very significant commitment to go out there and ring 
this bell until people hear it.
    And my issue, in dealing with the Chinese, is constructive 
engagement and very, very tough enforcement. Do not ask me if I 
want to do a 301 because that has all kinds of other 
implications. There are lots of ways to ring their bell in the 
domestic and in the international market, and we are prepared 
to do it.
    Senator Specter. Well, when you talk about enforcement, 
both Mr. Willard and Mr. Buckles have talked about Interpol. 
Mr. Willard, when you have asked that the loopholes be 
tightened, our staffs will be in touch with your office to get 
the specifics. That is something that, speaking for myself--and 
I believe I would have co-sponsors--we would be glad to do.
    But when you talk about, as you articulated it, inspect, 
seize, destroy and prosecute, that is a pretty good quartet. 
How about it, Mr. Willard, Mr. Buckles, both of you, might 
Interpol be used? They are investigative, and fact-finding and 
pooling agencies, but what would you think of some effort at 
international prosecution? Too ambitious, Mr. Buckles? ATF 
would probably like to do that.
    Mr. Buckles. Right. Well, we are making some significant 
inroads to prosecutions around the world, working with 
representatives of Interpol.
    Senator Specter. But will China prosecute?
    Mr. Buckles. Well, we have in selective locations. We were 
successful in Hong Kong, for example, in having laws changed in 
Hong Kong that resulted in a change of--
    Senator Specter. A pretty sophisticated part of China. How 
about the rest of China?
    Mr. Buckles. Well, there are still problems in the rest of 
China, there is not any question.
    Senator Specter. Mr. Willard, how about it, could we use 
Interpol to take an aggressive lead there?
    Mr. Willard. Well, Senator, I think that the most promising 
avenue would be to get the Chinese Government itself, perhaps 
in cooperation with the United States, to implement an 
enforcement program at the point of export. That is kind of a 
choke point, and there is no enforcement there now.
    We do get a fair amount of enforcement inside China. Every 
week that goes by, our company conducts raids on factories that 
are making counterfeit products. We do get seizures. We get 
prosecutions. We have even had people sentenced to prison in 
China for counterfeiting our products.
    What the Chinese Government does not do is conduct a 
program of surveillance at the point of export. So, if they had 
agents on the docks in Shanghai and other key ports who would 
go through cargos before they leave the country and seize the 
counterfeit products, we think that would make a big dent in 
the problem, and that is something that is not happening at all 
right now. I do not think that requires Interpol; it just 
requires a commitment--a financial commitment--as well as 
expertise on the part of the Chinese Government.
    Senator Specter. Ms. Price, you have outlined what you have 
done to try to investigate infringements on your property, have 
you taken those facts to prosecutors and gotten any results?
    Ms. Price. No, we have not. We have not taken those facts 
to prosecutors, not in terms of--
    Senator Specter. You might do that. You have articulated 
quite a long list of investigative actions you have undertaken.
    Ms. Price. On our counterfeiting side, we have not taken 
very much to prosecution. However, on our patent infringement 
side, we have had substantial litigation in terms of--
    Senator Specter. Thank you.
    Mr. Trainer, I think I have time to ask a question before 
my red light goes on.
    How about the Patent Office, could we deny entrepreneurs 
from other countries access to our Patent Office as a sanction 
to make them enforce and respect our property rights?
    Mr. Trainer. Well, I think there may be a problem just 
because people who are applying for a patent, if they fit 
within the framework of the legal requirements to obtain a 
patent, we would need to have some other mechanism as a penalty 
with our trading partners.
    So, under the current scheme, we probably could not without 
additional legislation.
    Senator Specter. We could change the law.
    [Laughter.]
    Senator Specter. We have been joined by our distinguished 
Chairman, Senator Hatch.
    First, Senator Hatch, I think there is an interest in 
knowing how your back is. And with an operation last week, how 
could he be on the bench here so early?
    Senator Leahy. I do not know why you are not back home 
resting.
    Chairman Hatch. Well, I have been trying to rest, but it is 
tough to get over two back operations in 6 months. So I am a 
little bit behind the curve right now. But do you mind if I ask 
just one question?
    Senator Specter. No, take all of the time you want.
    Chairman Hatch. First of all, I want to thank the 
distinguished Senator from Pennsylvania and my friend from 
Vermont for holding this hearing. It is a very, very important 
hearing, as you all know. These are some of the most 
interesting aspects to me as well. So I am grateful to all of 
you for being here and to the prior panel for being here as 
well.
    Let me just ask you a question, Mr. Willard, because it is 
a question that I am very concerned about, and that is the 
health and safety implications of various product 
counterfeiting. The health and safety ramifications are very 
profound, and yet most of the information that is presented 
seems anecdotal, at least to me.
    Now, are there efforts being made to quantify the impact of 
product counterfeiting on health and safety, to the best of 
your knowledge, or anybody else on the panel who would are to 
answer that as well.
    Mr. Willard. As I understand it, Members of Congress tried 
to get the Department of Commerce to do a more rigorous study 
of this problem a couple of years ago, and they have failed to 
set aside the money to do so. And you are right, most of the 
evidence we have is anecdotal or involves numbers that are 
based on estimates rather than rigorous statistically valid 
market sampling and analysis, That is expensive to do, but we 
certainly think it would be appropriate for Congress to 
designate money and try to get that kind of study done by the 
Commerce Department or some other appropriate agency.
    Chairman Hatch. I think we ought to try and work on that 
because that is important.
    Does anybody else care to comment?
    Mr. Donohue. Well, Senator, you know when you see the 
smoke, we might have a new pope, and when you find brake pads 
made out of sawdust, when you find one of the major 
pharmaceutical companies in this country having to call back 
their cholesterol drugs, when you find airplane parts that have 
been made in ways that will not stand the tension and the wear 
and tear, when you find, as Mr. Willard talked about, batteries 
that blow up, I mean, wow, that is anecdotal. If you find one, 
you can believe there are 10 or 100 or 1,000 or 10,000.
    What we are going to try and do is to get people to 
understand that this is going on, where it is going on and what 
it is costing people, physically, economically and personally. 
I think what we need to do is follow the anecdotes, and that is 
what we are going to try and do.
    One of the things Senator Specter mentioned about using 
Interpol and others, you know, I ask one question. I visit all 
around the world, and people, you know, the leaders of 
countries say, ``Now, we are working on this, Mr. Donohue.''
    I say, ``Good. Let me just ask you what court in your 
country do I take my complaint to?''
    Well, when they do not have one or when the one that they 
have is not as open as you might find in Hong Kong, then you 
have to ask the second question, ``Okay. I accept that, but to 
what power do we go to try and get some pressure put on this 
issue?''
    Anyway, I appreciate the question, and what we are going to 
do is try and find out some more of the answer.
    Chairman Hatch. I want to thank my friend from Vermont, 
again, for allowing me to interrupt him. I had not thought 
about that, and I apologize to you.
    Could I ask just one more question of Mr. Donohue?
    Opponents of intellectual property protection have begun 
arguing in the international arena that strong intellectual 
property protections will impose American capitalism and 
American culture upon other Nations. Now, I find such arguments 
disingenuous at best. I believe that Nations who respect 
intellectual property rights will expand their domestic 
economies, tax bases, industries and native cultural 
institutions far beyond, and far more effectively, than if they 
allow untaxable black markets, if you will, in pirated goods--
American goods, in particular--to flourish.
    Now, can the Chamber help to coordinate, with our 
intellectual property owners, to make sure that our Government 
policy owners or policymakers are apprised of the ``success 
stories'' of other Governments that have expanded their own 
economies, fought corruption, and built their own domestic 
industries by cracking down on intellectual property theft?
    That might be an area where--
    Mr. Donohue. Thank you, Senator. Before you came in, I 
thanked Senator Specter for coming down to the kickoff of our 
major, long-term effort on addressing these issues. And part of 
what we are attempting to do is to join with other countries 
and to highlight, to intercept and to make very, very difficult 
a culture that allows and condones this type of behavior. And, 
by the way, there are Nations, some of which have been 
mentioned here and others who have not, where it is a cultural 
issue. I mean, it is entrepreneurial. We saw how they made it 
down the street, so we will come over here, we will make it, 
and we can--and some of them, by the way, one of the problems 
with some of the counterfeiting, it is damn good, but everybody 
is being cut out of the system. And I want to assure you--
    Senator Leahy. It is, also, if I might, it is very, very 
good because they have not had to do any of the development 
work--
    Mr. Donohue. Absolutely.
    Senator Leahy. --do any of the other things--
    Mr. Donohue. They do not have any of the liability 
coverage, but when I say it is ``good,'' I know in one instance 
they had to bring the people from Microsoft all the way from 
Washington to tell which one was which.
    But, Senator, I want to assure you that one of the things 
we are going to do is push that, and, quite frankly, I do not 
care what your culture is. If you are stealing American 
products, and American technology, and American profits, and 
American taxes, then you have got a problem. Good luck.
    Chairman Hatch. I agree with you. I think the Chamber can 
help us in this regard, and of course we want to do everything 
we possibly can. I have been all over the world and encouraged 
people to not steal intellectual property, and in particular 
the Chinese, just to mention one country, in particular, and I 
have had mixed results.
    I have had everyone say they will, but mixed results with 
regard to follow-through.
    Mr. Donohue. Well, we will try and make the noise as loud 
as we can to see if we can get a little more response, and we 
will look for your help.
    Chairman Hatch. Thank you.
    Mr. Donohue. Of course, Senator Specter is raring to go, 
and I am sure Senator Leahy is as well. There are some things 
you can do to help here, and I think we need to start at home. 
We need to go after, as our friends from the music industry and 
others indicated, we can send a very loud message by doing the 
domestic thing right. There have been a few people who have 
gone to jail, but this is a slap on a wrist and a civil fine, 
usually. We need to get this real ugly. And then when we can 
demonstrate what we are doing at home, it is going to be a lot 
easier for us to be tough abroad.
    Chairman Hatch. Well, thank you.
    I thank my colleagues.
    Senator Specter. Senator Leahy?
    Senator Leahy. Thank you, too, Chairman Hatch. It is good 
to see you back. We have all been worried about you, but 
Senator Specter assured us all here earlier that you are up and 
about. You are tougher than the rest of us. And I will explain 
later to you about Mr. Donohue's white smoke and the pope. I am 
the one expert on this panel.
    [Laughter.]
    Mr. Donohue. It is the same way they do it in Utah.
    Chairman Hatch. Yes, I am fully aware.
    Senator Leahy. I will fill you in more.
    I did want to say that when Pope John Paul was installed, 
shortly after his installation, President Carter--I was down at 
the White House--and he was saying he had sent every Italian 
American in the Congress over for that.
    I said, ``Wait a minute. What about me? You did not send 
me,'' realizing my mother was first-generation Italian 
American.
    He got very apologetic, and he said, ``Do not worry. Next 
pope you go.''
    I said, ``Great. They are usually there for 20, 30 years.'' 
Unfortunately, in that case, 3 weeks later there was another 
pope, and he kept his word.
    Mr. Donohue, I do not want to go into too much of this, but 
you made a very good point earlier. You said there are a lot of 
things we can do. I mean, you cannot just take automatic 
unilateral action against China, using that as an example, and 
I agree with you. I have been over to China many times in the 
negotiations on everything from arms control to economic 
matters. It becomes a long and careful dance.
    But you also said the Chamber is willing to take some very 
tough steps. I wish you might answer, for the record, to the 
extent you can, what some of those steps might be. I would be 
very interested in hearing from you or to me privately, if you 
would prefer.
    Mr. Donohue. Well, I will make some public comments, and 
then perhaps we might have a chat one time about some other 
things we would like to do.
    First of all, as I said, I think if we start at home with 
people that are counterfeiting and bringing counterfeit goods 
into the country, knowingly, I think we send a very loud 
message.
    Second, I think the gentlemen that were on the first panel 
have to continue to be encouraged to use the tools of 
Government, which we will encourage them to do, in a thoughtful 
and a unified way to send a loud message around the world. And 
one of the ways you do that is by making examples of people 
that you can catch and prosecute, highlight, and you know--
    Senator Leahy. I agree with all of those things, and I have 
stated all of those myself, but I want to know some specific 
actions that we can take if we still face basically a stonewall 
in a lot of the Chinese counterfeiting, which still is a very, 
very significant part of what we face.
    I am going to have to ask--only because I want to go to 
some of the others--I am going to have to ask you to answer 
that--
    Mr. Donohue. I will answer it in one sentence.
    Senator Leahy. Go ahead.
    Mr. Donohue. I would like to use all of the persuasive and 
pressure tactics we could before we go to 301, but this thing 
is getting so big, it is going up about a quarter of a billion 
dollars every year, if we do not put some stop on this, we are 
going to be talking about some very draconian action.
    Senator Leahy. Would that include 301, eventually, if 
nothing else works?
    Mr. Donohue. If nothing else works, we are not going to 
have a choice. This is going to be more expensive than the 
issue we debate all the time, which is on the cost of the 
Nation's legal system.
    Senator Leahy. Thank you.
    Now, Mr. Buckles, you have had 30 years of public service, 
and I commend you for it, at the Bureau of Alcohol, Tobacco and 
Firearms. I am going to give you some questions, which I will 
submit to you for the record, regarding the resources that we 
have here. And I would be interested in getting your responses 
back. They will be part of the record, but I am particularly 
interested in that.
    Mr. Willard, just before we started--we did not have time 
to really go much into it--I talked about a speech I gave at 
Georgetown this morning, Georgetown Law School, about radio 
frequency identification, RFIDs. That is these tiny, tiny 
computer chips--I mean, they are tiny. They are smaller than 
the end of that pen--they can store information, and they 
respond to radio signals. We can use them in identifying, 
tracking and authenticating goods.
    Gillette has actually used them in marketing at WalMart, 
where if somebody picks up an item that has got one of those, 
it triggers a camera that goes to a person that is usually 
watching at a place 700 or 800 miles away.
    Could this be something that could also be used in piracy? 
I mean, the more of these you use, and you are getting them 
down to the price of 2 or 3 cents apiece. Is this something 
that could be used in piracy?
    Mr. Willard. It certainly could, Senator. That is something 
we have identified as one of the strategic benefits of the RFID 
chip when it is used on consumer products.
    Just to make it clear what our company's approach is in 
this area, is initially to use it at the case and pallet level 
in the supply chain between the manufacturer and the stores for 
inventory management and that sort of thing. Before it is 
implemented on a wide-scale basis at the consumer level, we are 
strongly committed to making sure consumer privacy is protected 
in the way it is done. But this could help to overcome the 
problem that we have heard about, which is that counterfeiters 
are getting so good it is hard to recognize what is real and 
what is fake. These chips could do that for you and greatly 
enhance enforcement capability.
    Senator Leahy. I am thinking of things that Mr. Trainer 
talked about, some of the problems with brake pads, things like 
that. When I am going to pay for what I think is, if I am 
buying a brake pad for my car, I am going to pay for something 
which I assume the manufacturer recommends. It is high quality. 
If I hit those brakes, I want it to stop.
    I would think, Mr. Trainer, that sometimes mechanics might 
have difficulty, following what Mr. Willard has said, is this 
fake or is this real; is that not true?
    Mr. Trainer. Well, I think with the kind of technology you 
are talking about, the question really becomes can a 
counterfeiter still make these types of products and somehow 
get it into some type of a retail outlet so that he bypasses 
the authorized distribution channels?
    Of course, that is always going to be possible. So it 
really becomes this issue of companies, and their suppliers and 
manufacturers really pressing their distribution channels so 
that people are actually looking and being forced really to buy 
authentic merchandise.
    Senator Leahy. Ms. Price, in your testimony, I remember one 
time getting on a plane, I believe it was in Chicago, and Jake 
Burton was getting on there, and he was showing me a new ski 
boot for snowboarding. It is somewhat different gear than they 
are from skiing. He spent a lot of time and a lot of effort to 
design it and make it the best, and the safest and so forth.
    He and I were sitting back in coach. He said, ``You see 
that guy that just got up in First Class? He is one of the ones 
that goes to China and rips off, just copies mine. He does not 
have to pay any development. He does not have to do any of the 
work. He does not have to do any of the trial and error. He can 
afford to fly First Class. I am the one that is actually 
creating the jobs here in America. I am the one doing all of 
the work.'' He said, ``Pat, I am glad to see we are back here 
together.''
    Let me show you one thing. This, I am told--I just happen 
to have this knockoff of one of your jackets. If that is in a 
store, look at it as you walk in, that would look like one of 
yours, would it not?
    Ms. Price. It would look like one of ours. Just because I 
work for the company, I know it is not. But if I was a 
consumer, either that fleece or I have several others, and many 
more in my office, these are not actual Burton fleeces, not 
designs we use, but they have been made, and made very well, 
and our name has been put on them. So it is very confusing.
    Senator Leahy. But you had to bring--I mean, I have been in 
the factory. I see your designers go in there, and they might 
spend a couple days trying one design. No, it does not look 
right. Try another design. It does not look right. They bring 
people in, and they test, and they throw things away. They 
finally get something that really works, they spent a lot of 
time doing it.
    Ms. Price. Oh, yes, absolutely.
    Senator Leahy. My youngest son snowboards. We also go 
paragliding together. Mr. Donohue, see there is hope that you 
may end up getting a Republican seat in Vermont after all if I 
keep doing this, and sky diving and things like that with him.
    [Laughter.]
    Senator Leahy. But he likes the Burton things, and this is 
not a paid ad for you, but he just happens to like it, and he 
looks for that brand, partly for safety, but he assumes, when 
he picks it up, that is what he is getting.
    I had a couple of other questions that you actually 
answered before, so I am not going to ask more. But I just want 
to say thank you for coming down. But I would also point out--
and this goes to what Senator Specter quite appropriately 
asked--you are a very small company. Gillette is a very large 
company and will have a significant Legal Department to go 
after counterfeiters. It does not mean you are going to get 
them all or anything else. But I suspect that their Legal 
Department is probably bigger than the whole headquarters of 
Burton. And it is not just Burton, but there are a whole lot of 
other people that make something unique. They may be a cottage 
industry, but their uniqueness becomes cachet in that industry, 
and they are hard-pressed.
    I would assume, to the extent that you can get some of 
these Government agencies that talked before to help you in 
going after counterfeiters, you are a lot better off; is that 
correct?
    Ms. Price. Absolutely.
    Senator Leahy. And I am not suggesting, Mr. Willard, that 
your company should not either. They should be helping all of 
you.
    Thank you very much. I thank all of you.
    Senator Specter. Thank you very much, Mr. Donohue, Mr. 
Willard, Mr. Buckles, Ms. Price, and Mr. Trainer.
    I think that the exploration of the two panels has been 
very informative, and we intend to follow up in a number of 
particulars. I will be introducing the legislation that Mr. 
Willard looks at the loopholes, as he has articulated them. We 
will keep a relationship with China, but we may have to go to 
301, maybe not to revoke Most Favored Nation status, but they 
will hear about the hearing today. They monitor our proceedings 
very, very closely. When we put in a little resolution about 
our--
    Senator Leahy. You may have a call from the Chinese 
Ambassador by the time you get back to your office.
    Mr. Donohue. I hear from him all of the time.
    [Laughter.]
    Senator Specter. When we put in a little resolution about 
the Dickinson librarian, I got a call from the Chinese 
Ambassador to the United States, and we got him out. A little 
appropriate pressure goes a long way.
    Without objection, we will put in the statement by Senator 
Cornyn, and that concludes the hearing.
    Thank you all very much.
    [Whereupon, at 4:42 p.m., the Committee was adjourned.]
    [Questions and answers and submissions for the record 
follow.] 

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