[House Hearing, 109 Congress]
[From the U.S. Government Publishing Office]


 
                      INTELLECTUAL PROPERTY THEFT 
                          IN CHINA AND RUSSIA

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

                                HEARING

                               BEFORE THE

                 SUBCOMMITTEE ON COURTS, THE INTERNET,
                       AND INTELLECTUAL PROPERTY

                                 OF THE

                       COMMITTEE ON THE JUDICIARY
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED NINTH CONGRESS

                             FIRST SESSION

                               __________

                              MAY 17, 2005

                               __________

                           Serial No. 109-34

                               __________

         Printed for the use of the Committee on the Judiciary


      Available via the World Wide Web: http://judiciary.house.gov


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                       COMMITTEE ON THE JUDICIARY

            F. JAMES SENSENBRENNER, Jr., Wisconsin, Chairman
HENRY J. HYDE, Illinois              JOHN CONYERS, Jr., Michigan
HOWARD COBLE, North Carolina         HOWARD L. BERMAN, California
LAMAR SMITH, Texas                   RICK BOUCHER, Virginia
ELTON GALLEGLY, California           JERROLD NADLER, New York
BOB GOODLATTE, Virginia              ROBERT C. SCOTT, Virginia
STEVE CHABOT, Ohio                   MELVIN L. WATT, North Carolina
DANIEL E. LUNGREN, California        ZOE LOFGREN, California
WILLIAM L. JENKINS, Tennessee        SHEILA JACKSON LEE, Texas
CHRIS CANNON, Utah                   MAXINE WATERS, California
SPENCER BACHUS, Alabama              MARTIN T. MEEHAN, Massachusetts
BOB INGLIS, South Carolina           WILLIAM D. DELAHUNT, Massachusetts
JOHN N. HOSTETTLER, Indiana          ROBERT WEXLER, Florida
MARK GREEN, Wisconsin                ANTHONY D. WEINER, New York
RIC KELLER, Florida                  ADAM B. SCHIFF, California
DARRELL ISSA, California             LINDA T. SANCHEZ, California
JEFF FLAKE, Arizona                  ADAM SMITH, Washington
MIKE PENCE, Indiana                  CHRIS VAN HOLLEN, Maryland
J. RANDY FORBES, Virginia
STEVE KING, Iowa
TOM FEENEY, Florida
TRENT FRANKS, Arizona
LOUIE GOHMERT, Texas

             Philip G. Kiko, Chief of Staff-General Counsel
               Perry H. Apelbaum, Minority Chief Counsel
                                 ------                                

    Subcommittee on Courts, the Internet, and Intellectual Property

                      LAMAR SMITH, Texas, Chairman

HENRY J. HYDE, Illinois              HOWARD L. BERMAN, California
ELTON GALLEGLY, California           JOHN CONYERS, Jr., Michigan
BOB GOODLATTE, Virginia              RICK BOUCHER, Virginia
WILLIAM L. JENKINS, Tennessee        ZOE LOFGREN, California
SPENCER BACHUS, Alabama              MAXINE WATERS, California
BOB INGLIS, South Carolina           MARTIN T. MEEHAN, Massachusetts
RIC KELLER, Florida                  ROBERT WEXLER, Florida
DARRELL ISSA, California             ANTHONY D. WEINER, New York
CHRIS CANNON, Utah                   ADAM B. SCHIFF, California
MIKE PENCE, Indiana                  LINDA T. SANCHEZ, California
J. RANDY FORBES, Virginia

                     Blaine Merritt, Chief Counsel

                         David Whitney, Counsel

                          Joe Keeley, Counsel

                          Ryan Visco, Counsel

                    Shanna Winters, Minority Counsel


                            C O N T E N T S

                              ----------                              

                                HEARINGS

                                                                   Page
Part Ifirst hearing deg.
  Intellectual Property Theft in China...........................     1

Part IIsecond hearing deg.
  Intellectual Property Theft in Russia..........................   105

                           OPENING STATEMENT
               Part I (China)first hearing deg.

The Honorable Lamar Smith, a Representative in Congress from the 
  State of Texas, and Chairman, Subcommittee on Courts, the 
  Internet, and Intellectual Property............................     1
The Honorable Howard L. Berman, a Representative in Congress from 
  the State of California, and Ranking Member, Subcommittee on 
  Courts, the Internet, and Intellectual Property................     2

              Part II (Russia)second hearing deg.

The Honorable Lamar Smith, a Representative in Congress from the 
  State of Texas, and Chairman, Subcommittee on Courts, the 
  Internet, and Intellectual Property............................   105
The Honorable Howard L. Berman, a Representative in Congress from 
  the State of California, and Ranking Member, Subcommittee on 
  Courts, the Internet, and Intellectual Property................   106

                               WITNESSES
               Part I (China)first hearing deg.

Ms. Victoria Espinel, Acting Assistant U.S. Trade Representative 
  for Intellectual Property, Office of U.S. Trade Representative
  Oral Testimony.................................................     4
  Prepared Statement.............................................     7
Mr. Ted C. Fishman, Author and Journalist, China, Inc.
  Oral Testimony.................................................     8
  Prepared Statement.............................................    10
Mr. Myron Brilliant, Vice President, East Asia, U.S. Chamber of 
  Commerce
  Oral Testimony.................................................    13
  Prepared Statement.............................................    15
Mr. Eric H. Smith, President, International Intellectual Property 
  Alliance (IIPA)
  Oral Testimony.................................................    22
  Prepared Statement.............................................    24

              Part II (Russia)second hearing deg.

Ms. Victoria Espinel, Acting Assistant U.S. Trade Representative 
  for Intellectual Property, Office of U.S. Trade Representative
  Oral Testimony.................................................   108
  Prepared Statement.............................................   111
Mr. Eric J. Schwartz, Vice President and Special Counsel, 
  International Intellectual Property Alliance (IIPA)
  Oral Testimony.................................................   113
  Prepared Statement.............................................   115
Ms. Bonnie J.K. Richardson, Senior Vice President, International 
  Policy, Motion Picture Association of America
  Oral Testimony.................................................   139
  Prepared Statement.............................................   140
Mr. Matthew T. Gerson, Senior Vice President, Public Policy and 
  Government Relations, Universal Music Group
  Oral Testimony.................................................   148
  Prepared Statement.............................................   150

                                APPENDIX
               Material Submitted for the Hearing Record
               Part I (China)first hearing deg.

Prepared Statement of the Honorable Howard L. Berman, a 
  Representative in Congress from the State of California, and 
  Ranking Member, Subcommittee on Courts, the Internet, and 
  Intellectual Property..........................................   163
Prepared Statement of the Honorable Bob Goodlatte, a 
  Representative in Congress from the State of Virginia..........   164
Prepared Statement of the Honorable Elton Gallegly, a 
  Representative in Congress from the State of California........   165
Prepared Statement of the American Chamber of Commerce People's 
  Republic of China..............................................   166
Article from the New York Times entitled ``The Pirate Kingdom'' 
  by Pat Choate..................................................   176

              Part II (Russia)second hearing deg.

Dear Colleague and Article entitled ``In Russia, Politicians 
  Protect Movie and Music Pirates'' from the Honorable Lamar 
  Smith, a Representative in Congress from the State of Texas, 
  and Chairman, Subcommittee on Courts, the Internet, and 
  Intellectual Property..........................................   178
Prepared Statement of the Honorable Howard L. Berman, a 
  Representative in Congress from the State of California, and 
  Ranking Member, Subcommittee on Courts, the Internet, and 
  Intellectual Property..........................................   182
Prepared Statement of Tom Thomson, Vice President, Coalition for 
  Intellectual Property Rights (CIPR)............................   183
Letter from the Recording Industry Association of America (RIAA) 
  to President George W. Bush....................................   188


                                 Part I

                  INTELLECTUAL PROPERTY THEFT IN CHINA

                              ----------                              


                         TUESDAY, MAY 17, 2005

                  House of Representatives,
              Subcommittee on Courts, the Internet,
                         and Intellectual Property,
                                Committee on the Judiciary,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 10:08 a.m., in 
Room 2141, Rayburn House Office Building, the Honorable Lamar 
Smith (Chair of the Subcommittee) presiding.
    Mr. Smith. The Subcommittee on Courts, the Internet, and 
Intellectual Property will come to order.
    I am going to recognize myself and the Ranking Member for 
opening statements, and then we will proceed quickly to hear 
from the witnesses. And we very much look forward to their 
testimony.
    Today, in what may be a first for the Judiciary Committee, 
this Subcommittee will conduct two back-to-back oversight 
hearings on the subject of international intellectual property 
theft. The first will examine the massive piracy and 
counterfeiting that persists in China. The second will focus on 
the Russian Federation which, according to one of our witnesses 
today, ``is the largest unregulated and unenforced producer of 
private optical discs in the world.''
    One of the purposes of these hearings is to begin an 
examination of the role of intellectual property rights in 
promoting international respect for the rule of law. In 
whatever form it takes, the theft of intellectual property 
inflicts substantial economic harm on our country, our 
entrepreneurs, our innovators and, ultimately, on the American 
consumers.
    The losses incurred are not limited to those sustained by 
the traditional ``core'' copyright industries, but extend to 
virtually all manufacturers and industries throughout our 
economy.
    The circumstances in China and Russia are unique, and 
clearly present separate challenges for U.S. policymakers. 
However, it is possible that the persistent failures of these 
two governments to adequately protect and enforce IP rights may 
be systemic and deliberate, rather than mere ``growing pains'' 
associated with the development of market economies.
    We need to determine for ourselves whether it is credible 
to believe the Chinese government is serious about enforcing 
the legitimate IP rights of U.S. companies, when copyright 
piracy levels continue to average 90 percent, and the 
government refuses to even police their own computers by 
removing unlicensed software.
    We need to assess whether the Chinese government has 
determined that they can continue to simply take without 
compensation the fruits of the investment, innovations, and 
industriousness of our most creative citizens.
    We must begin to consider the true cost of IP theft; not by 
merely calculating the effects of lost revenues, but by 
assessing the competitive advantage that Chinese companies 
wrongfully acquire by paying pennies for the exact same tools 
and software that cost U.S. and other manufacturers thousands, 
and sometimes millions, of dollars.
    Finally, we must ask whether we have done everything in our 
power to impress upon the Chinese government the seriousness we 
attach to respect for the rule of law and the protection of our 
most valuable commercial property.
    Our witnesses today will present overwhelming evidence that 
the theft of intellectual property in China has increased 
exponentially. This is in spite of the fact that successive 
U.S. governments have sought to engage China in the 
international rules-based trading system, and despite our 
active support for their accession to the WTO. In return, China 
committed to adequately and effectively protect the rights of 
intellectual property owners, something that to date the 
Chinese government has failed or chosen not to do.
    At the conclusion of these two hearings, I hope we will not 
simply be asking, ``What is happening in China and Russia?'', 
but will have begun to focus on the more difficult question of, 
``How do we solve this problem?''
    That concludes my comments. And the gentleman from 
California, Mr. Berman, is recognized for his.
    Mr. Berman. I thank you very much, Mr. Chairman, for 
scheduling these back-to-back hearings on this scourge of 
intellectual property piracy, with a focus on China and Russia. 
The problem we confront with both countries is the same: how to 
prevent billions of dollars in losses to the American economy 
as a result of an unfettered ability to pirate.
    From almost the beginning of recorded history, China has 
served as a provider of desired goods. Marco Polo traveled the 
world to bring back goods made in the Orient. Today, China's 
economy has grown to include the manufacture of many different 
products, including clothing, purses, software, computers, and 
movies.
    While just as desired as the goods of Marco Polo's day, 
these modern goods often are not the legitimate product of the 
original source. Instead, these are goods that are copied, 
reverse engineered and, with limited investment and no payment 
to the creator, sold for a negligible price for China's 1.3 
billion citizens, and exported in massive quantities to other 
countries, including America.
    The impact of counterfeiting and piracy on American 
innovators and the general public is impossible to quantify 
with precision, but it is enormous. The Chinese government, and 
some Chinese companies, appear to have an interesting 
philosophy about piracy. They point to their robust laws on 
intellectual property, show you attempts at enforcement with a 
televised raid of a market stall, and describe their 
involvement in the issue by lending you educational materials 
for high schools on the importance of respecting intellectual 
property.
    Piracy, they claim, is not to be tolerated. Yet the reality 
is that not only is piracy tolerated, but the government 
typically turns a blind eye to allow the benefits of piracy to 
accrue to Chinese consumers.
    These cheaper products, it is argued, provide the Chinese 
population with the luxury items they desire but may not be 
able to afford. I have heard some in the Chinese government 
assert that the pirates are merely providing cheaper products 
for those who cannot afford to buy bread, in essence, 
functioning as ``Robin Hoods'' for these goods. Yet this 
argument holds little credence when those goods are openly 
exported around the world, disrupting existing markets for 
legitimate products.
    As noted by the Chamber of Commerce, in the year ending 
October 31, 2004, the value of Chinese counterfeits coming into 
U.S. markets seized by the U.S. increased 47 percent. This 
Saturday, the Washington Post reported that--well, no.
    If the government in China sincerely wanted to stop piracy, 
it could; because they have. Clearly, when piracy hurts Chinese 
interests, the government has been motivated to step in. When 
teeshirt knockouts of the Beijing 2008 summer games were being 
sold, the government was quick to close down the shops and find 
the counterfeiters. In 2001, the government tore down 690 
billboards that illegally associated products with the event, 
and ripped fake Olympic emblems off 67,000 taxis. When they 
want to, they can.
    This Saturday, the Washington Post reported that the 
Administration will likely cap imports of clothing as a result 
of the glut of Chinese products entering the American market. 
There is a far more compelling case for the Administration to 
be forceful with China about its willingness to tolerate 
intellectual property violations.
    A precondition to China entering the World Trade 
Organization was that it implement intellectual property 
protections. They have been given time to address this concern, 
and have failed. It is time for the Administration to bring a 
WTO case and confront China in a meaningful way. If we provide 
the will for them to put a stop to piracy, they'll find a way.
    I look forward to hearing from our witnesses, Mr. Chairman, 
and especially from the U.S. Trade Representative's Office on 
what steps they are taking to protect America's most valuable 
treasure, our ideas and creations.
    Mr. Smith. Thank you, Mr. Berman. Without objection, other 
Members' opening statements will be made a part of the record.
    And before I introduce the witnesses, I would like to ask 
you all to stand and be sworn in.
    [Witnesses sworn.]
    Mr. Smith. Thank you. Please be seated.
    Our first witness is Victoria Espinel, who is the Acting 
Assistant U.S. Trade Representative for Intellectual Property 
in the Office of the United States Trade Representative. In 
that capacity, Ms. Espinel serves as the principal U.S. trade 
negotiator on IP. Ms. Espinel's office chairs the intra-agency 
committee that conducts the annual Special 301 review of the 
international protection of intellectual property rights. The 
latest report was published on April 29, 2005. Ms. Espinel 
holds an LLM from the London School of Economics, a JD from 
Georgetown University, and a BS in foreign service from 
Georgetown University School of Foreign Service.
    I am told that this is Ms. Espinel's first time testifying 
before Congress. She'll be doing double-duty today, since she 
will also be testifying at our Russia hearing, as well. Now, we 
look forward to hearing her testimony, and welcome her to the 
Committee today.
    Our second witness is Ted Fishman, the author of the best-
selling book, ``China, Inc.: How the Rise of the Next 
Superpower Challenges America and the World.'' Provocative, 
timely, and insightful, Mr. Fishman's book has been favorably 
reviewed by numerous business and general interest 
publications. In addition to his book, Mr. Fishman has written 
for The New York Times, the Times of London, Harper's, and USA 
Today. Mr. Fishman is a graduate of Princeton University.
    Our next witness is Myron Brilliant. Mr. Brilliant serves 
as the Vice President for East Asia at the United States 
Chamber of Commerce. In that capacity, he is responsible for 
overseeing the U.S. Chamber's programs and policy in that 
region. His focus has been on strengthening and promoting the 
U.S.-China relationship. Towards that end, he formed the U.S. 
Chamber's China WTO Implementation Working Group in 2001; led 
efforts to secure congressional support for PNTR for China--we 
may ask you if you still are happy you did that--and currently 
heads the U.S. Chamber's international IPR initiative. Mr. 
Brilliant received his JD from American University's Washington 
College of Law; his BA in government and politics from the 
University of Maryland.
    Our final witness is Eric Smith, who serves as the 
President of the International Intellectual Property Alliance, 
IIPA, which is based in Washington, D.C. IIPA is a private-
sector coalition of six U.S. trade associations which 
represents over 1,300 companies that produce and distribute 
materials protected by copyright laws throughout the world. A 
co-founder of IIPA, Mr. Smith frequently serves as the 
principal representative of the copyright industries in WTO, 
TRIPS, and free trade agreement negotiations. Mr. Smith has a 
JD from the University of California at Berkeley, a BA from 
Stanford, and an MA from the School of Advanced International 
Studies at Johns Hopkins.
    We welcome you all. Without objection, your entire 
statements will be made a part of the record. As you know, 
please try to limit your testimony to 5 minutes, both because 
that's the rules and because we're expecting votes in about 35 
minutes.
    Again, we appreciate you all being here. And Ms. Espinel, 
we'll begin with you.

  TESTIMONY OF VICTORIA ESPINEL, ACTING ASSISTANT U.S. TRADE 
REPRESENTATIVE FOR INTELLECTUAL PROPERTY, OFFICE OF U.S. TRADE 
                         REPRESENTATIVE

    Ms. Espinel. Thank you very much. Chairman and Members of 
the Committee, thank you for the opportunity to address your 
concerns over ineffective protection of intellectual property 
in the People's Republic of China.
    As Ambassador Portman stated in his confirmation hearing 
testimony, we face major challenges in China. Our trade 
deficit, as you well know, with China last year alone was $162 
billion, and part of that deficit is because the Chinese do not 
always play by the rules.
    Estimates on copyright piracy, for example, from the 
copyright software and music industries are illustrative of the 
scope of the problem, with reports that 90 percent of all 
software installed on computers and over 90 percent of the 
market for sound recordings in China was pirated in 2003. These 
disconcerting statistics are emblematic of the problems that 
can be found in other industries.
    After being sworn in just a couple of weeks ago, Ambassador 
Portman immediately reiterated his commitment to enforcing our 
trade agreements and the international obligations of our 
trading partners. He has ordered a top-to-bottom review of all 
trade issues with China, and plans to shift resources and 
people as appropriate to address these pressing concerns.
    I am here today because Ambassador Portman and this 
Administration place the highest priority on stemming the tide 
of IPR infringement in China. Counterfeiting and piracy in 
China are at record levels, and are affecting a wide range of 
U.S. business interests.
    Our companies report billions of dollars in lost revenue, 
irreparable harm to their brands and future sales, all of which 
ultimately affects U.S. workers who design and produce 
legitimate products forced to compete against Chinese fakes. We 
want and look forward to working closely with you and your 
staff in combatting the theft of American intellectual property 
in China.
    On April 29, USTR reported the results of its Special 301 
out-of-cycle review on China. In this report, we concluded that 
while China has undertaken a number of serious efforts at the 
national level to address its IPR theft epidemic, particularly 
by amending laws and increasing raids against those selling 
pirate and counterfeit goods and by operating illegal 
production facilities, China is still not deterring rampant 
piracy and counterfeiting.
    Piracy and counterfeiting rates in fact continue to grow, a 
situation that is hitting our small- and medium-size business 
the hardest. As a consequence, in our April 29 report we 
outlined a series of actions to ratchet up the pressure on 
China.
    These include working with U.S. industry and other 
stakeholders, with an eye toward utilizing WTO procedures to 
bring China into compliance with its WTO TRIPS obligations, 
including the possibility of WTO litigation;
    Invoking the transparency provisions of the WTO TRIPS 
Agreement, which will require China to produce detailed 
documentation on certain aspects of IPR enforcement that affect 
U.S. rights under the TRIPS Agreement;
    Elevating China onto the Priority Watch List, on the basis 
of serious concerns about China's compliance with its TRIPS 
obligations and commitments that China has made at the JCCT;
    Continuing to monitor China's commitments made under our 
1992 and 1995 bilateral agreements;
    And intensifying the JCCT process, including the 
Intellectual Property Working Group which is scheduled to meet 
next week to significantly improve IP protection and 
enforcement in China.
    China must expend the political capital necessary to 
deliver on its promise to substantially reduce IP infringement. 
China's Vice Premier Wu Yi recommitted to this at the April 
2004 JCCT. We will work with our counterparts on the Chinese 
side, beginning with the upcoming meeting of the IPR Working 
Group, to impress upon China that patience within the 
Administration and on Capitol Hill has run and now is the time 
for results. We will also share our technical expertise with 
China, where possible, to overcome the many challenges that lie 
ahead.
    Supplementing these bilateral IP efforts, we will continue 
outreach activities to U.S. stakeholders and our trading 
partners being harmed by the growth in counterfeit and pirate 
goods. One avenue through which we are seeking cooperation on 
this shared problem is the Administration's Strategy Targeting 
Organized Piracy, otherwise known as the STOP Initiative.
    Since the announcement of STOP in October 2004, we have 
been working with the Departments of Commerce, including the 
U.S. Patent and Trademark Office, Homeland Security, including 
Customs and Immigration and Customs Enforcement, Justice, and 
State, to build international cooperation for a series of 
proposals that will stop the trade in fakes.
    Last month, a delegation representing these seven Federal 
agencies visited Singapore, Hong Kong, Japan, and Korea, 
generating much interest and fruitful discussions. In the 
coming months, we will continue our outreach so as to determine 
the activities that provide opportunities for cooperation to 
demonstrate tangible results. We would very much like China to 
participate in STOP, if it is prepared to do so and its 
participation would be useful.
    On the domestic front, we will continue to work with U.S. 
industry to identify problems and address trade complaints 
related to China, as we did during the out-of-cycle review. 
This includes cooperating with industry on China's WTO TRIPS 
implementation and on the use of WTO procedures to address our 
serious concerns about China's compliance.
    Industry's daily operations throughout the country provide 
us insight into China's IP regime at the local and provincial 
levels. We hope Congress will join us in encouraging industry's 
robust participation on this front, including those companies 
and associations representing the recording industry, motion 
pictures, software, chemicals, pharmaceuticals, and information 
technology. Their engagement and support on IP issues this year 
is key to our efforts to improve IP protection in China.
    Lastly, we appreciate and will continue to work closely 
with Congress on these matters. We will press forward with the 
bilateral and multilateral strategy laid out before you, with 
the goal of improving the situation for American owners of 
intellectual property in China and worldwide.
    We will continue to reach out to our trading partners to 
develop mechanisms to comprehensively combat IPR theft through 
multilateral fora such as APEC, the OECD, and the WTO. And we 
will continue to conclude agreements such as our free trade 
agreements that reflect the level of protection and enforcement 
of intellectual property in the United States.
    Mr. Chairman and Members of the Committee, thank you for 
providing me with the opportunity to testify. I look forward to 
your questions.
    [The prepared statement of Ms. Espinel follows:]

                 Prepared Statement of Victoria Espinel

    Chairman Smith and members of the Committee, thank you for the 
opportunity to address your concerns over ineffective protection of 
intellectual property rights (IPR) in the People's Republic of China.
    As Ambassador Portman stated in his confirmation hearing testimony, 
we face major challenges with China. Our trade deficit, as you well 
know, with China last year alone was $162 billion. And part of that 
deficit is because the Chinese do not always play by the rules. 
Estimates on copyright piracy, for example, from the computer software 
and music industries are illustrative of the scope of the problem, with 
reports that 90 percent of all software installed on computers and over 
90 percent of the market for sound recordings in China was pirated in 
2003. These disconcerting statistics are emblematic of the problems 
that can be found in other industries.
    After being sworn in just a couple of weeks ago, Ambassador Portman 
immediately reiterated his commitment to enforcing our trade agreements 
and the international obligations of our trading partners. He has 
ordered a top-to-bottom review of all of our trade issues with China, 
and plans to shift resources and people as appropriate to address these 
pressing concerns.
    I am here today because Ambassador Portman and this Administration 
place the highest priority on stemming the tide of IPR infringement in 
China. Counterfeiting and piracy in China are at record levels and are 
affecting a wide range of U.S. business interests. Our companies report 
billions of dollars in lost revenue, irreparable harm to their brands 
and future sales, all of which ultimately affects U.S. workers who 
design and produce legitimate products forced to compete against 
Chinese fakes. We want and look forward to working closely with you and 
your staff in combating the theft of American IP in China.
    On April 29, USTR reported the results of its Special 301 Out-of-
Cycle Review on the IPR situation in China. In this report, we 
concluded that while China has undertaken a number of serious efforts 
at the national level to address its IPR theft epidemic, particularly 
by amending laws and increasing raids against those selling pirated and 
counterfeit goods and operating illegal production facilities, China is 
still not deterring rampant piracy and counterfeiting. Piracy and 
counterfeiting rates continue to grow, a situation that is hitting our 
small and medium size businesses the hardest. As a consequence, we 
outlined a series of actions to address our concerns:

        1)  Working with U.S. industry and other stakeholders with an 
        eye toward utilizing WTO procedures to bring China into 
        compliance with its WTO TRIPS obligations.

        2)  Invoking the transparency provisions of the WTO TRIPS 
        Agreement, which will require China to produce detailed 
        documentation on certain aspects of IPR enforcement that 
        affects U.S. rights under the TRIPS Agreement.

        3)  Elevating China onto the Priority Watch List on the basis 
        of serious concerns about China's compliance with its WTO TRIPS 
        obligations and commitments China made at the April 2004 U.S.-
        China Joint Commission on Commerce and Trade (JCCT) to achieve 
        a significant reduction in IPR infringement throughout China, 
        and make progress in other areas.

        4)  Continuing to monitor China's commitments under our 1992 
        and 1995 bilateral agreements (including additional commitments 
        made in 1996).

        5)  Using the JCCT, including its IPR Working Group, to secure 
        new, specific commitments to significantly improve IPR 
        protection and the enforcement environment in China.

    China must expend the political capital necessary to deliver on its 
promise to ``substantially reduce IPR infringement.'' China's Vice 
Premier Wu Yi committed to this at the April 2004 JCCT and in our 1995 
bilateral Memorandum of Understanding on IPR. We will work with our 
counterparts on the Chinese side, beginning with the upcoming meeting 
of the JCCT IPR Working Group scheduled for the week of May 22nd, to 
impress upon China that patience within the Administration and on 
Capital Hill has run and that now is the time for results. We will also 
share our technical expertise with China where possible to overcome the 
many challenges that lie ahead.
    Recently, the Chinese Government has increased its efforts to 
promote better IPR protection in China. We expect China to demonstrate 
these efforts will yield tangible results on IPR. In our OCR Report, we 
identified for China six specific results that in our view would be 
evidence that these efforts are succeeding, and have provided 
suggestions on how to achieve them. China must now take ownership of 
the problem and exercise the political leadership needed to show 
improvements in these areas, particularly at enhancing criminal 
enforcement, providing for a deterrent administrative enforcement 
system, allowing for fair market access for legitimate products, 
securing China's borders against exports of pirated and counterfeit 
products, protecting copyrights in the context of the Internet, and 
increasing the transparency of its legal system.
    Supplementing these bilateral IPR efforts, we will continue 
outreach activities to U.S. stakeholders and our trade partners being 
harmed by the growth in trade of counterfeit and pirated goods 
originating from countries such as China. One avenue through which we 
are seeking cooperation on this shared problem is the Administration's 
Strategy Targeting Organized Piracy, or STOP!.
    Since the announcement of STOP! in October 2004, we have been 
working with the Departments of Commerce,(including the U.S. Patent and 
Trademark Office), Homeland Security (including both Customs and Border 
Protection, and Immigration and Customs Enforcement), Justice, and 
State to build international cooperation for a series of proposals to 
that will stop the trade in fakes. Last month, a delegation 
representing these seven federal agencies visited Singapore, Hong Kong, 
Japan and Korea generating much interest and fruitful discussions. In 
the coming months, we will continue our outreach so as to determine the 
activities that provide opportunities for cooperation to demonstrate 
tangible results. We would very much like China to participate in STOP! 
if it is prepared to do so and its participation would be useful.
    On the domestic front, we will continue working with U.S. industry 
to identify problems and address trade complaints related to China, as 
we did during the Out-of-Cycle Review. This includes cooperating with 
industry on China's WTO TRIPS implementation and on the use of WTO 
procedures to address our serious concerns about China's compliance. 
Industry's daily operations throughout that country provide us insight 
into China's IPR regime at the local and provincial levels. We hope 
Congress will join us in encouraging industry's robust participation on 
this front, particularly those companies and associations representing 
the recording industry, motion pictures, software, chemicals, 
pharmaceuticals and information technology. Their engagement and 
support on IPR issues this year is key to our efforts to improve IPR 
protection in China.
    Lastly, we appreciate and will continue to work closely with 
Congress on these matters. We will press forward with the bilateral and 
multilateral strategy laid out before you with the goal of improving 
the situation for American owners of IPRs in China and world-wide. We 
will continue to reach out to our trade partners to develop mechanisms 
to comprehensively combat IPR theft through multilateral fora such as 
the APEC, OECD, and the WTO and will continue to conclude agreements 
such as our free trade agreements that reflect the level of protection 
and enforcement of IPRs in the United States.
    Mr. Chairman and members of the Committee, thank you for providing 
me with the opportunity to testify. I look forward to your questions.

    Mr. Smith. Thank you, Ms. Espinel.
    Mr. Fishman.

TESTIMONY OF TED C. FISHMAN, AUTHOR AND JOURNALIST, CHINA, INC.

    Mr. Fishman. Thank you so much. I'm honored to be here. My 
written statement, and my book, China, Inc., and the attached 
New York Times articles that I provided offer a comprehensive 
view of why I think the Chinese intellectual property regime is 
so difficult to tackle.
    In my spoken remarks, I'm going to focus on why I think the 
problem is going to grow, and just what kind of force I think 
this Committee will need to encourage the United States to 
exert in order to overcome it. And the underlying issue there 
is China's growth.
    The more China grows, the richer its people get, the more 
global its industries grow, the more difficult it is going to 
be to enforce intellectual property; because there'll be more 
people willing to pay for pirated goods, more businesses in 
demand of pirated goods. This is part of China's low-cost 
manufacturing machine and part of its industrial growth.
    Over the last 20 years, there has been no enforcement of 
intellectual property rights in China, virtually none. And yet, 
China has still attracted about a trillion dollars in foreign 
direct investment. It has not been a disincentive for foreign 
investment to date. In fact, if anything, it's been an 
incentive; because when the world's manufacturers move to 
China, they also take advantage of factories that work on 
machines that are created on pirated platforms, on computer-
aided design work stations that run on pirated platforms, on 
virtually everything inside a factory that is protected by some 
intellectual property somewhere else. Those move to China at no 
cost, and are an essential part to how China produces goods for 
the world at low prices.
    If you want to assert an intellectual property protection 
regime in China, you're going to have to drive a wedge in 
between the interest in keeping China the world's low-cost 
manufacturing center, and the interest in keeping the United 
States a vital knowledge economy in which innovation is 
primary.
    Look at China's growth. It is impressive by any measure. It 
is urbanizing and industrializing at a pace faster than any 
country in the history of the world. Within a generation, 300 
million people will move off the farm, in which there is no 
technology virtually and it is the most basic of economies, 
into a rapid urban industrializing future. Every aspect of that 
urban industrialized future relies in some essential way on 
pirated technology--every aspect of it.
    And, you know, we shouldn't overlook how China's 
industrialization is also benefitting America's consumers. The 
China price, which is the lowest price available for goods in 
the world, has saved American consumers, on average, about $600 
each a year over the last year and a half. Those numbers come 
from economist Gary Hufbauer at the Institute for International 
Economics.
    And when you assert an intellectual property regime in 
China, you're going to see prices go up, and it's going to be 
the consumer that pays the price. But you're also going to have 
a conflict of interest among those who buy those goods in the 
United States. Any time you walk into a big-box store, say a 
large discounter, what you are seeing is seven out of ten of 
the goods on those shelves coming from China. Often, those 
goods are made on entire production lines that are created with 
pirated intellectual property. It is simply a fact. It is a 
component of the Chinese economy.
    And China has very strong interests in not strengthening 
its IP. Do a thought experiment. If you were the leader of 1.3 
to 1.6 billion people who were mostly desperately poor, in need 
of the world's best educational resources, in need of the 
world's best technology, and you could grant them this 
technology virtually for free, without consequence, and borrow 
the jewels from the rest of the world's economies and deliver 
them to your people, and put them on an equal plane with the 
world's most advanced industrial economies, would you make that 
choice?
    That is the choice that the Chinese regime has made. And 
reversing that choice, or stopping that choice, requires an 
extreme willingness on the part of the United States to form a 
consensus on China, to drive a wedge between those strong 
interests which deliver wealth to the Chinese people, in the 
area of pharmaceuticals it delivers better health to the 
Chinese people, and in the area of education it delivers the 
most advanced technological products available in the world. 
That is a strong interest to overcome.
    And yet, right now we are at a juncture. In order to save 
our economy and the innovative nature of our economy, we have 
to make that choice. Thank you.
    [The prepared statement of Mr. Fishman follows:]

                  Prepared Statement of Ted C. Fishman

    Let me start with two bold statements. Intellectual property is now 
the most important issue in the economic relations between the United 
and China. Convincing the Chinese to consistently enforce laws that 
protect intellectual property, especially intellectual property held by 
foreigners, will impossible without a powerful assertion of American 
interests. My hopes for my testimony are to explain why China's 
current, exceedingly loose intellectual property regime is one of the 
engines of the country's amazing economic growth and thoroughly in that 
nation's interest. I will offer what I think are the essential choices 
we Americans must make in addressing China's intellectual property 
regime, choices that often pit one strong interest--such as our 
interests as consumers in search of low prices--against others--such as 
our need to protect America's knowledge economy.
    Let me describe briefly the Chinese economic miracle that must be 
the backdrop for this discussion. Ever since the Chinese economic 
reforms began in earnest a little more than two decades ago, China has 
been growing faster than any large economy in the history of the world. 
China's actual growth statistics are a source of considerable 
controversy, but even conservative estimates are impressive. As a 
nation, China has almost certainly enjoyed an average growth rate above 
8 percent for two decades running. China has lifted 400 million people 
out of the lowest depths of poverty, and in twenty years has seen the 
incomes of the average household climb four-fold. In a country where 
recently private enterprise was strictly forbidden, and where the 
government owned every business, the land under every home, and even 
the pots, pans forks and knives in the kitchen, there are today 85 
million private businesses. The United States, in contrast, has around 
25 million private businesses. In other words, the Chinese Communist 
Party has overseen the one of the greatest capitalist flowerings the 
world has ever seen. It is hard for Americans to imagine leaders who 
proudly call themselves Communists allowing such rampant and successful 
commercialization, and harder still to see how communism has 
nevertheless informed China's transformation. Yet, when looking at how 
China's government will act in the future, it pays to see how the 
country's communist leaders act for their country's welfare, rather 
than to take to usual tact, which is to demonize the Communists and to 
see them at odds with the best interests of the Chinese people. Make no 
mistake: I have strong reservations about China's government and 
sincere hope that China will look more like our democracy over time. 
Even so, in the context you are addressing today, we must acknowledge, 
and grudgingly admire how the Chinese have improved their lot and moved 
to the forefront of the world's economic powers.
    China's loose intellectual property regime allows the government to 
pass on to its citizens goods that make the Chinese people richer, 
smarter and healthier. They have solid reasons for doing business the 
way they do, and many of us would act in much the same way were we in 
the position the Chinese now find themselves in. Here's a simple 
thought experiment. Imagine you were the leader of between 1.3 and 1.6 
billion people, most of them desperately poor and modestly educated. 
Suppose you could transfer to your people the jewels of the world's 
advanced industrialized nations, paying nothing for much of it and 
pennies on the dollar for some more. Suppose, in other words, you could 
steal the best technology, copyrighted materials, brand names and top 
entertainment for your wanting people. And imagine further that you had 
little expectation of being held to account for that theft. To the 
contrary, you would be rewarded for it. In fact, that theft would make 
your country an ever-more desirable home for the very international 
fashion, technology and knowledge enterprises you were so liberally 
borrowing from. Anyone here would make that choice--the choice which 
the Chinese government and people made and still do make every day. One 
of the precepts of good leadership is to make one's people prosperous 
and capable, and the Chinese practices have followed that hands down. 
The Chinese are indisputably richer today than ever before, the use of 
personal computers is widespread and expert and Chinese factories 
routinely run on the very same software that their competitors in 
America use. In all, China's creation of an extremely loose 
intellectual property regime has paid off handsomely. It is now time we 
exercise what means we have to enforce global rules that will also 
serve the American economy.
    All of Hollywood, Bollywood and even French, Italian and Russian 
cinema is available for a pittance in the streets of China. Everyone on 
this committee knows about DVD pirating, but how many have seen how the 
markets work in the streets of China. One soon sees why there are only 
a handful of movie theaters in China. Travel up a crowded escalator at 
the entrance to a Shanghai subway stop on a Friday evening after work, 
and there at the top is a woman with a medium-sized duffle bag. She 
steps to the side, opens the bag and with great speed lays out hundreds 
of DVDs of the latest American movie hits. Immediately, she is rushed 
by commuters who snap up the disks at $.70 a piece. There are few movie 
theaters in China because women with gym bags, and men with crates of 
DVDs on their bicycles and stores in alleys, and sometimes on busy 
business streets are, in essence, China's movie theaters. The trade is 
so open that Chinese policeman can regularly be seen rifling through 
the bins of DVDs shops, not shutting them down, but shopping for a 
weekend's entertainment.
    China's lax policies on copyright protection offer the country the 
advantages of both bread and circuses. One expert I interviewed for my 
book, China, Inc. is Andrew Mertha, a political scientist at Washington 
University. Mertha, who has worked with Chinese and American officials 
on Chinese intellectual-property law, summarizes the circus side of 
things: ``If you're the Chinese leadership, do you want people idling 
around in the street, complaining about how unhappy they are, or do you 
want them home watching Hollywood movies?'' In other words, the 
government is slow to crack down on the piracy of entertainment 
products because these serve its social agenda. But is there any doubt 
that if vendors suddenly found a brisk market for DVD's promoting 
Tibetan independence or the virtues of Falun Gong, the outlawed 
religious sect, the DVD business would shrivel up overnight and all 
those anticounterfeiting laws on the books would find ready 
application? Indeed, when Sega's new online fantasy sports game 
``Football Manager 2005'' had the gall to suggest that imaginary soccer 
leagues in Hong Kong, Taiwan and Tibet could be governed locally, 
rather than by the central government, China's Ministry of Culture 
banned the game on the grounds that it posed ``harm to the country's 
sovereignty and territorial integrity.'' Fines reached $3,600.
    The two most cited examples of China's disregard for intellectual 
property are movies sold on pirated DVDs and software copied and sold 
at low cost in Chinese shops. Nearly every movie, and every piece of 
software in China (except those used by multinational companies 
operating in China) is somehow stolen. It seems right to criticize 
these practices, but Americans must also acknowledge how we are 
complicit in them. Anyone who has shopped for a DVD player in an 
American store in the last two years knows that prices have dropped 
dramatically. During their first few years on the market, DVD players 
were manufactured by a handful of large global consumer electronics 
companies, and the technology that went into them was protected by 
patents held by a few of the companies. Any company that wanted to make 
a DVD player had to pay the consortium that held the patent rights a 
license fee. Then, about four years ago, Chinese manufacturers began to 
make players without paying the license fees. They simply copied the 
technology and assembled the machines. In fact, they added functions to 
the players that made them better then any others on the market. One of 
those function was the ability to read poor quality DVD disks, the 
kinds that sell out of gym bags. The original intent of the Chinese 
makers was to sell to Chinese consumers, who make up the largest group 
of consumers of recorded entertainment in the world. Soon, instead of 5 
or 6 foreign companies making and licensing DVD players, their were 
hundreds of Chinese manufacturers turning them out. Prices dropped from 
nearly $1,000 to around $50. Of course, the players did not stay in 
China. Today, there are $26 players for sale at America's big box 
stores and chain pharmacies and grocers. That is roughly the price of 
two movies. The chipset and license fee for a DVD player costs about 
$11. When one sees a $26 Chinese-made player on the selves of a 
discount store or drugstore, it is worth wondering how it could get 
there unless there were winks and nudges from American retailers who 
insist on ever-lower prices from their Chinese suppliers, but do not 
always insist that the goods they buy have the proper IP bona fides.
    The motion picture industry and the American software industry 
suffer in China. I have noticed, however, that when I bring up the 
issue of counterfeiting and piracy in China it is almost impossible to 
get the average American to feel pity for Hollywood or for software 
giants like Microsoft. Or even for big pharmaceutical companies that 
face their own China challenges. There is group for whom there is lots 
of sympathy, however. It is American manufacturers who face intense 
competition from China's low-cost manufacturing machine. And it is this 
group that may suffer the most from China's lax intellectual property 
regime.
    American companies are not just creators of intellectual property, 
they are buyers of it. It can cost millions, or tens of millions or 
dollars to purchase and service the software to run an American 
company. Yet, Chinese competitors often pay nothing for the same 
technology, because it is simply stolen. Walk into the vast majority of 
Chinese firms that run computers and one will see one work station 
after another stuffed with $2 version of software that costs Western 
competitors hundreds of dollars to run. Or walk into any company that 
designs and manufactures highly engineered parts. A metal caster that 
has built a reputation for making precision parts--the kind that 
American companies excel at--typically designs its parts at engineering 
work stations manned by highly trained engineers who run proprietary 
software that can cost $50,000 to $60,000 a year to run. It is likely 
to have several such workstations, perhaps dozens or hundreds. Chinese 
competitors run the same software, but they are unlikely to have paid 
anything for it. It is easy to understand how low-cost labor 
contributes to China's low-cost manufacturing. So far, the low-cost of 
technology has been entirely overlooked. I cannot offer numbers of the 
total cost of this mismatch, but it is an essential part of the dynamic 
that drives manufacturing to China. The cost would almost certainly 
dwarf the losses in sales suffered by Hollywood or the software 
industry. As China moves up the economic feeding chain, this level of 
piracy will play against American companies more and more. Our economic 
health demands that we address this. One place to look is toward 
American companies that bring in Chinese-made goods that are made on 
pirated platforms. That's a daunting task, because nearly everything 
America buys from China achieves some of its cost competitiveness from 
China's loose intellectual property regime.
    China's loose intellectual property rules also transfer to Chinese 
industry valuable intellectual assets that can take American companies 
years and cost significant sums to develop. American automobile makers 
can spend half a billion dollars developing and building anew car, and 
take two years to do it. As soon as the car hits the market, Chinese 
manufacturers study it and look at how to copy it. Chery Motors, the 
company which will soon introduce Chinese built cars into the U.S. 
market has been accused by General Motors of pirating an entire GM car 
and beating GM to market with the Chery copy. It is not unusual for 
whole assembly lines to get duplicated in China, where the copiers need 
not worry about the cost of developing and designing the lines. Big 
business in the U.S. is vulnerable, but so are smaller firms where 
often one good idea, patented or kept proprietary in some other 
fashion, is the only truly valuable asset the firm has.
    China's failure to police its intellectual property rules often 
looks less like ineffective government than a conscious policy to shift 
the highest value goods from other economies into the country. It is, 
in essence, the largest industrial subsidy in the world, and 
brilliantly, it costs the Chinese nothing. In 2005, China will most 
likely be the world's third-largest trading nation, and counterfeiters 
give the country's increasing number of globally competitive companies 
the means to compete against powerful foreign rivals that pay for their 
use of proprietary technologies. In a broader geopolitical context, 
China's counterfeiters deny the world's advanced economies, especially 
in the U.S. and Japan, the opportunity to sell to China the valuable 
designs, trademarked goods, advanced technology and popular 
entertainment that the Chinese urgently desire but cannot yet produce 
on their own. For the U.S., this mismatch is particularly punishing. 
Japan and Germany, which also suffer from China's policies, do not have 
the huge trade deficits with China that the U.S. does. One reason is 
because our export economy is far more dependent on the sale highly 
valuable, intangible and easily copied goods. Japan and Germany make 
the machines China needs to run. America makes the software that runs 
those machines. It is far more difficult for us to paid by Chinese 
users for what we make, though most of the rest of the world pays 
handsomely for it. Until we can get paid for what we make and the 
Chinese use, our deficits will worsen, not improve. Say, for example, 
that the value of the dollar drops against the Chinese yuan. Economists 
predict our trade situation will level out, but do not take into 
account that no matter what our goods cost, the Chinese will most 
likely continue to pay nothing for some of the most useful goods we 
make. And, as a result, their factories will continue to be able to 
beat even the most efficient American factories on price.
    We now have a golden moment in which we can still use our power as 
China's most important customer to enforce a change in its intellectual 
property regime. Action ought to be forceful and unequivocal. Our trade 
deficit with China alone--not counting the rest of our trade with the 
country--is more than ten percent of the entire Chinese economy. That 
is an astonishing figure, and in it we can find strength to exert rules 
over our trade with China. That may require a radical rethinking of 
past agreements, some brinksmanship with quotas and tariffs and other 
remedies. Without action, however, the U.S. is likely to find our 
entire economy copied in China and Americans paid little for the 
brainwork imported to make it run.

    Mr. Smith. Thank you, Mr. Fishman.
    Mr. Brilliant.

         TESTIMONY OF MYRON BRILLIANT, VICE PRESIDENT, 
              EAST ASIA, U.S. CHAMBER OF COMMERCE

    Mr. Brilliant. Mr. Chairman, Members of the House Judiciary 
Subcommittee, good morning. The U.S. Chamber appreciates your 
invitation today to appear at this important hearing on China's 
intellectual property record.
    As the world's largest business federation, representing 
more than three million businesses, the U.S. Chamber of 
Commerce is keenly aware of the global threat of counterfeiting 
and piracy to American firms and workers. Counterfeiting and 
piracy is not a victimless crime. Counterfeiting and piracy are 
costing the U.S. consumers and American companies billions of 
dollars every year, and those numbers are going up.
    It damages investment and innovation, has devastating 
economic consequences for small businesses, puts a severe 
strain on law enforcement agencies, nearly always escapes 
taxation, threatens public and health safety, diverts 
government resources from other priorities, and has links to 
terrorism and organized crime.
    IP theft will continue to be rampant without a concerted 
effort on the part of business and government. The U.S. Chamber 
has launched a three-part strategy aimed at mobilizing business 
and government to fight against counterfeiting and piracy. As 
part of our efforts, we have launched country-specific IPR 
initiatives in China, Brazil, Russia, India, and Korea, where 
the problems are particularly acute for American companies.
    Let me now turn to offer specific views on China, the 
subject of today's hearing. The U.S. Chamber fully recognizes 
the importance of China's successful integration into the world 
economy. U.S.-China trade has boomed in recent years since 
China's accession into the World Trade Organization. U.S. 
exports to China have grown by 114 percent since 2000, five 
times faster than exports to any other country.
    While the U.S.-China commercial relationship is of immense 
and growing importance to our membership, the U.S. Chamber 
feels strongly that China must do significantly more to comply 
fully and on time with its WTO, World Trade Organization, 
commitments; and in particular, in critical areas such as 
intellectual property rights.
    And we are communicating our views directly to the Chinese. 
This week, U.S. Chamber President and CEO, Tom Donohue is 
visiting Beijing with a business delegation for high-level 
delegation discussions with the Chinese government, including 
Premier Wen Jiabao and Minister Bo Xi Lai, and talking to the 
Chinese about the need for more tangible immediate steps to 
crack down on counterfeiting and piracy.
    Next week, we will play host to a senior Chinese IPR 
delegation led by Vice Minister Ma Xiuhong, and we will again 
use the opportunity to seek clarification and assurances about 
their enforcement efforts.
    Where do we stand? It is clear that the protection which 
China is actually providing fails to meet the standards of 
effectiveness and deterrence set out in the WTO TRIPS 
Agreement. IPR violations in China now severely affect all 
American industries, from consumer industrial goods, including 
medicine; to autos and auto parts, food and beverages and 
cosmetics; to copyright works, including entertainment and 
business software, movies, music, and books.
    China is the single largest source of counterfeit and 
pirated products worldwide, and we believe that the scope of 
counterfeiting and copyright piracy in China worsened for most 
of our member countries in 2004. Infringement levels are at 60 
to 90 percent, or even higher, for virtually every form of 
intellectual property in China. In the copyright industry 
alone, for instance, USTR estimates U.S. losses are between 2.5 
billion and 3.8 billion annually.
    The U.S. Chamber was heartened by the promises of Vice 
Premier Wu Yi at the April 20, 2004 Joint Commission on 
Commerce and Trade meetings, on the intention of the Chinese 
government to significantly reduce IPR violations. We 
acknowledge that the PRC government is taking important and 
constructive steps to improve coordination.
    In a further positive development, we acknowledge that they 
have issued a long awaited judicial interpretation that covers 
frankly criminal prosecutions--could cover--and could 
strengthen, deter, and impact China's criminal enforcement 
efforts in the IP field.
    In 2004, China's government modestly improved its 
regulatory environment for IPR protection, and carried out 
raids and other enforcement actions at the central, local, and 
provincial levels.
    Administrative penalties, however, mainly limited to fines 
and confiscation of fake products, remain too small to create 
deterrence. And despite some signs that new efforts are 
underway in 2005, China has not significantly reduced IPR 
infringement levels as Vice Premier Wu Yi promised at last 
year's JCCT meeting.
    The U.S. Chamber remains concerned that the limited legal 
reforms and enforcement campaigns which commenced in China in 
2004 are insufficiently bold. If tangible progress is not made 
in the months ahead, we believe that USTR should conduct a 
second Special 301 out-of-cycle review of China later this 
year, to assess China's implementation of the judicial 
interpretation and other enforcement efforts.
    We would encourage the U.S. Government to continue to work 
through the JCCT and through other appropriate forums in the 
months ahead to identify specific action items for China to 
undertake. Those are outlined in our written testimony, but in 
the interest of time, I would note that we will be looking in 
particular to see if the Chinese take steps to add police 
resources in critical regions; criminalize export-related 
cases; introduce new enforcement guidelines that will 
significantly boost fines and other penalties imposed by 
administrative enforcement agencies. We want to see significant 
increases in the number of criminal IPR investigations, 
prosecutions, convictions, and deterrent sentencing.
    Let me just briefly touch upon Russia, the subject of the 
second hearing, as I was asked to do by the Committee. Russia's 
efforts to join the World Trade Organization in 2005 gives the 
U.S. Government a critical window of opportunity to seek from 
that country important commitments and progress on IPR 
enforcement. There is no question Russia's IPR problems, like 
China, are growing, and this is of concern to our membership.
    We fully support USTR's decision to keep Russia on the 
Priority Watch List and to conduct an out-of-cycle review to 
monitor Russia on IPR in 2005, but--but--the U.S. Chamber also 
encourages our government to make it a priority to engage 
Russia on how that country will improve its IPR enforcement 
efforts in the context of its WTO accession talks. We must not 
lose that opportunity.
    Thank you, Mr. Chairman, Members of the Committee. The U.S. 
Chamber and our members appreciate the opportunity to 
participate in today's House Judiciary Subcommittee hearing on 
intellectual property rights. Given the importance of this 
matter to the American business community, we look forward to 
staying engaged with this Committee. Thank you.
    [The prepared statement of Mr. Brilliant follows:]

                 Prepared Statement of Myron Brilliant

    Mr. Chairman, members of the House Judiciary Subcommittee, good 
morning. The U.S. Chamber appreciates your invitation to appear at this 
important hearing today on the importance of intellectual property 
rights to American companies.
    As the world's largest business federation representing more than 3 
million members, the U.S. Chamber of Commerce is keenly aware of the 
global threat of counterfeiting and piracy to American firms and 
workers. In the Information Age, intellectual property (IP) is the 
``gold standard.'' It must be protected as it is the cornerstone for 
economic prosperity in this new era. Yet, IP is under attack here in 
the United States and globally.
    The problem goes by many names--counterfeiting, piracy, or 
knockoffs. The fact is the problem is getting worse worldwide. IP theft 
will not go away without a concerted effort on the part of business and 
government.

                         BREADTH OF THE PROBLEM

    Counterfeiting and piracy are costing the U.S. consumers and 
American companies billions of dollars every year. But the problem is 
more insidious than that. It damages investment and innovation; has 
potentially devastating economic consequences for small businesses; 
puts a severe strain on law enforcement agencies; nearly always escapes 
taxation; threatens public and health safety; diverts government 
resources from other priorities; and has links to terrorism and 
organized crime.
    Counterfeiting and piracy, once viewed, as ``victimless'' crimes 
mainly consisting of selling cheap products such as sunglasses and 
watches, have mushroomed in recent years to endanger every product. 
From dangerous substandard replacement parts for airplane engines, to 
ineffective pharmaceuticals, to illegally copied compact discs 
manufactured in clandestine factories around the world, sales of 
counterfeit and pirated products are skyrocketing. Profits from these 
illicit sales are being funneled worldwide into the pockets of 
everyone, from groups associated with known terrorists to organized 
crime elements.
    The problem of counterfeiting and piracy goes beyond the 
manufacture, distribution, and sale of cheap, unauthorized goods. It 
threatens our national security, lessens the value of legitimate brand 
names, and erodes the profits of nearly every business in America.
    Some statistics might be helpful to illustrate the magnitude of the 
problem we face today. Approximately 5% to 7% of world trade is in 
counterfeit goods, according to the FBI, Interpol, and the World 
Customs Organization. That's the equivalent of as much as $512 billion 
in global sales. Of that amount, U.S. companies lose between $200 
billion and $250 billion in global sales. U.S. Customs and Border 
Protection estimates that counterfeit merchandise is responsible for 
the loss of more than 750,000 American jobs. Finally, we would note 
that the World Health Organization (WHO) has estimated that counterfeit 
drugs account for 10% of all pharmaceuticals. Incredibly, in some 
developing countries, WHO suggests that this number is as high as 60%.
    These statistics exemplify the U.S. Chamber's concerns about the 
growing epidemic of IP theft globally. It is time to act, to take real 
measures to thwart the growing threat of counterfeiting and piracy.

                 THE U.S. CHAMBER: MAKING A DIFFERENCE

    The U.S. Chamber has launched a three-part strategy aimed at 
mobilizing business and governments to fight against counterfeiting and 
piracy.
    Part one is education. We are working in the United States to 
educate businesses, the media, and lawmakers about the growing threat 
of this issue.
    Part two is enforcement. The U.S. Chamber is committed to bringing 
these criminals to justice. We are working with manufacturers, 
retailers, and law enforcement to disrupt the ability of counterfeiting 
networks to use legitimate distribution channels.
    As part of our efforts, the U.S. Chamber established the Coalition 
Against Counterfeiting and Piracy (CACP) with the National Association 
of Manufacturers (NAM) to coordinate the efforts of the business 
community to stop counterfeiting and piracy. CACP is committed to 
increasing the understanding of the negative impact of counterfeiting 
and piracy by working with Congress and the administration to drive 
government-wide efforts to address this threat.
    Part three is international. The roots of counterfeiting and piracy 
extend far beyond U.S. borders. The U.S. Chamber therefore recognizes 
the importance of tackling this issue in foreign markets. We have 
launched country-specific initiatives in priority countries, where the 
problems are particularly acute for American companies. Our initial 
efforts have focused on China, Brazil, Russia, India and Korea. But we 
will also be working with our members in other countries where the 
problem is also prevalent.
    The remainder of my testimony will focus on our efforts in the 
international arena, in particular, on China and Russia which is the 
focus of today's hearing.

                                 CHINA

    The U.S. Chamber fully recognizes the importance of China's 
successful integration into the world economy. It is perhaps the 
greatest foreign policy challenge facing our country today.
China as an Opportunity and a Challenge
    As we noted previously during a recent Congressional hearing on 
U.S.-China economic relations, it is now trite to say that the U.S.-
China commercial relationship is of immense and increasing importance 
to both the U.S. and Chinese business communities. U.S.-China trade has 
boomed in recent years. The United States ranked second among China's 
global trading partners in 2004, and China was once again the 3rd 
largest trading partner for the United States. U.S. exports to China 
have grown by 114% since 2000--five times faster than exports to any 
other country.
    Year-on-year increases of U.S.-manufactured exports from 2003 to 
2004 reveal positive trends: exports of U.S. power generation equipment 
increased by 34%; exports of electrical machinery and equipment 
increased by 27%; and exports of optics and medical equipment jumped by 
more than 30%. These statistics underscore the opportunities that China 
offers to U.S. exporters, to investors, and, more broadly, to U.S. 
economic development.
    Yet, we also recognize that concerns are rising in many quarters 
over the U.S. trade deficit with China, rising competition from Chinese 
imports, and concerns about China's currency policy. The U.S. Chamber 
feels strongly that China must do significantly more to comply fully 
and on time with its World Trade Organization (WTO) commitments and, in 
particular, in critical areas such as intellectual property rights 
(IPR).
    In our view, China has failed to adequately enforce its own laws 
and regulations when it comes to piracy and counterfeiting violations. 
This is an endemic problem with immense consequences for the U.S. 
economy, our companies, particularly for small and medium-size 
businesses, and public safety. We are committed to constructive 
engagement with the Chinese government on this and other issues; 
however, we want to see China move beyond words to actions that crack 
down on IPR infringements.
    This week, U.S. Chamber President and CEO Thomas Donohue is 
visiting Beijing with a business delegation for high-level discussions 
with China's government and business community. In particular, Mr. 
Donohue will be building upon recent discussions with Chinese officials 
in Washington, D.C. and China on the full range of issues in our 
commercial relationship, including the issue of IP protection and 
enforcement.
China's WTO Implementation Efforts
    Briefly, let us turn to China's overall efforts to develop a market 
based on the rule of law and in accordance with WTO principles and 
disciplines.
    Now in year four of China's WTO implementation, the U.S. Chamber 
believes that China's WTO implementation process is fostering positive 
changes in its trade and investment regimes.
    We agree with the United States Trade Representative's (USTR's) 
December 2004 report to Congress, which stated that China ``deserves 
due recognition for the tremendous efforts made to reform its economy 
to comply with the requirements of the WTO.'' Moreover, we continue to 
believe firmly that engaging China in the rules-based trading system 
has resulted in important progress in key areas, particularly in tariff 
reduction, revising existing laws and drafting and passing new ones as 
well as educating its officials and companies about its WTO 
obligations.
    Positive steps by China to implement outstanding and new WTO 
commitments not only improve the Chinese business environment for the 
benefit of U.S. and Chinese companies alike, but also underscore 
China's broader credibility in the global trading system. If China 
falters in meeting its commitments and its adherence to WTO 
disciplines, such as in the areas of intellectual property (IP) and 
transparency, there will be ramifications that will constrain the full 
potential of this relationship to the detriment of both countries as 
well as companies from both countries.
Intellectual Property Rights
    Upon its accession to the WTO over three years ago, China agreed to 
fully comply with Trade Related Aspects of Intellectual Property Rights 
(TRIPS) Agreement obligations. Yet, it is clear that the protection 
which China is actually providing fails to meet the standards of 
``effectiveness'' and ``deterrence'' set out in TRIPS. IPR violations 
now severely affect virtually all industries, from consumer and 
industrial goods--including medicines, autos and auto parts, food and 
beverages, and cosmetics--to copyright works, including entertainment 
and business software, movies, music, and books. The scope of 
counterfeiting and copyright piracy in China worsened for most of our 
member companies in 2004, and we believe that this problem has reached 
epidemic proportions.
    China is the single largest source of counterfeit and pirated 
products worldwide. Failure to control exports of these products is 
eroding our companies' profit margins, diminishing brand value, and, in 
many cases, endangering public safety. U.S. Customs statistics showed 
an increase of 47% in the market value of counterfeit goods seized in 
the year ending October 31, 2004. Statistics compiled for 2004 by other 
governments are expected to reflect a similar trend.
    Increasingly, counterfeiting in China is harming small and medium-
size U.S. enterprises. Many of these SME's do not have operations on 
the Mainland and confront a flood of Chinese knockoffs in the U.S. 
market or in third-country markets where they export. Smaller companies 
clearly have fewer resources to deal with investigations and legal 
action against pirates in China and their middlemen in other countries. 
Thus the need for more convincing and proactive government intervention 
is becoming increasingly apparent.
    The U.S. Chamber was heartened by the promises of Vice Premier Wu 
Yi at the April 2004 Joint Commission on Commerce and Trade (JCCT) 
meetings on the intention of the Chinese government to significantly 
reduce IPR violations. We also acknowledge that the PRC government, at 
the central level and under the leadership of Vice Premier Wu Yi and 
the Market Order Rectification Office of the Ministry of Commerce, is 
taking important and constructive steps to improve coordination among 
relevant agencies responsible for IP protection and enforcement.
    The U.S. Chamber also notes some recent progress in the Chinese 
government's willingness to engage directly with companies and industry 
associations in addressing problem cases and cooperating on capacity-
building.
    In a further positive development, China's Supreme People's Court 
and Supreme People's Procuratorate issued a long-awaited Judicial 
Interpretation on December 21, 2004. This interpretation included a 
number of important changes that can strengthen the deterrent impact of 
China's criminal enforcement efforts in the IP field.
    Regrettably, though, the Judicial Interpretation contains a number 
of problems that leave potentially gaping loopholes for infringers, and 
industry is closely monitoring their impact. Key examples include the 
following:

          Unclear methods for calculating case values, 
        including the lack of standards for valuing semifinished 
        products and raw materials.

          Lack of clarity whether trading companies caught 
        dealing in fakes can be held criminally liable for 
        counterfeiting and piracy.

          Lack of provisions to clarify the conditions under 
        which vendors and accessories meet the requisite knowledge 
        requirements to be held criminally liable.

          Lack of provisions to criminalize repeat offenses by 
        smaller-scale infringers.

          Whether sound recordings are even covered by the 
        Judicial Interpretation.

          Significantly higher monetary thresholds for 
        enterprises than for individual persons.

    As the U.S. Chamber stated in its fall 2004 report on China's WTO 
implementation record, enforcement of IPR will not be effective until 
civil, administrative, and criminal penalties are routinely applied to 
IPR infringers. China's government modestly improved its regulatory 
environment for IPR protection and carried out raids and other 
enforcement actions at the central, local, and provincial levels in 
2004. Administrative penalties, however, mainly limited to fines and 
confiscation of fake products--remain too small to create deterrence. 
Despite some signs that new efforts are under way (and there is an 
increased level of arrests and raids), China has not ``significantly 
reduced IPR infringement levels'' as Vice Premier Wu Yi promised at 
last year's JCCT meetings.
    The U.S. Chamber remains concerned that the limited legal reforms 
and enforcement campaigns, which commenced in China in 2004, are 
insufficiently bold. More focused action plans are needed at both the 
national and local levels in order to bring counterfeiting and 
copyright piracy under control. While it will take time to design and 
implement such plans, we do not yet see a commitment on the part of the 
Chinese to developing them.
    Based on inadequate levels of IPR protection and enforcement in 
China, causing adverse impact on U.S. economic interests, the U.S. 
Chamber recommended earlier this year that USTR request consultations 
with China through the WTO and place China on the Priority Watch List 
in its 2005 Special 301 Report.
    USTR elected a slightly different approach. As noted in its Special 
301 Report released in April, USTR elevated China to the Priority Watch 
List for ``failure to effectively protect IP rights and to meet its 
commitment to significantly reduce infringement levels.'' While USTR 
did not act to immediately take China to the WTO for consultations, it 
did clearly note that it will work with American business to establish 
the basis for utilizing WTO procedures to bring China into compliance 
if infringement levels remain unacceptably high and if China fails to 
take robust enforcement actions.
    The U.S. Chamber welcomes working with USTR and other government 
agencies further on this important issue. We believe that USTR should 
conduct a second Special 301 Out-of-Cycle Review of China later this 
year to assess China's implementation of the Judicial Interpretation 
and other enforcement efforts. Particular focus should be on reviewing 
the value of adding police resources in critical regions, criminalizing 
export-related cases, and introducing new enforcement guidelines that 
will significantly boost fines and other penalties imposed by 
administrative enforcement authorities.
    In reporting its findings, USTR noted that overall counterfeiting 
and piracy rates are not declining since China's WTO accession. Some 
alarming statistics underscore our need to see more immediate robust 
actions in China.
    According to submissions made to USTR, infringement levels are at 
90 percent or above for virtually every form of intellectual property 
in China. In the copyright industry alone, USTR estimates U.S. losses 
are between $2.5 billion and $3.8 billion annually. U.S. Chamber 
members in this area also note that internet piracy is quickly becoming 
an immense threat and serves to remind us that the lost sales could be 
even higher in years to come if the problem is not addressed.
    The problem is not unique to industries impacted by piracy. USTR 
observed that in 2004 the ``value of Chinese counterfeits coming into 
U.S. markets seized by the United States increased 47 percent from 
US$94 million to US$134 million.'' Seizures from China accounted for 67 
percent of all U.S. Customs' IPR seizures in 2004.
    Given the facts noted above, the U.S. Chamber and its members seek 
convincing evidence from Chinese authorities that the IPR climate is 
improving and creating a climate of deterrence. This should include 
data that confirms a much more substantial increase in proactive 
government investigations into cases, and substantial increases in 
prosecutions, convictions, and incarcerations of counterfeiters and 
copyright pirates.
    Aside from liaising with China in the WTO context, the U.S. Chamber 
strongly supports continuing efforts by the U.S. government to address 
China's failure to comply with its IPR commitments through the JCCT, 
other bilateral forums, and multilateral policy mechanisms. The U.S. 
government should continue to work through the JCCT and through other 
appropriate forums in the months ahead to identify specific action 
items for China to undertake that:
    (a) Demonstrate a significant increase in the number of criminal 
IPR investigations, prosecutions, convictions and deterrent sentencing;
    (b) Implement administrative IPR enforcement actions that are 
deterrent;
    (c) Demonstrate specific steps to combat copyright and trade 
infringing activities, including internet piracy;
    (d) Make public available case rulings and IPR-related statistical 
data;
    (e) Demonstrate steps Chinese customs authorities are undertaking 
that are leading to significant declines of exports of infringing 
products;
    (f) Ensure that China removes administrative and other market 
access impediments that support illegal infringing activities and 
prevent the sales of legitimate foreign products; and
    (g) Resolve high profile cases involving infringements of foreign 
IP owners thus establishing the primacy of the rule of law.
    If China were to take such actions, tangible results could be 
achieved.

U.S. Chamber Action Plan
    The U.S. Chamber is prepared to support the Chinese and U.S. 
governments in its efforts to extend greater protection to foreign and 
Chinese IP owners. We have embarked on a targeted program offering on 
the ground capacity--building efforts in the provinces, fostering 
public awareness of the importance of IPR protection among the Chinese 
public, and advising on policy changes to better strengthen the legal 
framework.
    The four main components of the U.S. Chamber action plan include:

        (1)  Spearheading high level dialogues with Chinese business 
        and government leaders including here in Washington DC in late 
        May with the Vice Minister of MOCOM and other ministries on 
        IPR;

        (2)  Engaging local and provincial Chinese leaders on best 
        practices, judicial and administrative training or related 
        educational programs;

        (3)  Benchmarking progress with our American Chamber of 
        Commerce in Beijing;

        (4)  Promoting public awareness in China by implementing a 
        media strategy for re-branding IPR as not a ``victimless 
        crime.''
    To achieve these goals, the U.S. Chamber is also working closely 
with U.S. and Chinese governments, our corporate members, and 
counterpart associations, including with the AmCham network in China.
    As noted above, we want to benchmark China's progress in 
implementing the new Judicial Interpretation through monitoring the 
number of judicial prosecutions, convictions, and jail sentences for IP 
crimes in 2005. In addition to monitoring the criminal enforcement, we 
want to collaborate with these partners to track enforcement by 
administrative authorities, including administrative fines, 
confiscations of production equipment, export enforcement, and the 
success of the government in transferring cases from administrative 
enforcers to the police for criminal prosecution.

Looking Ahead
    In our view, the burden of ensuring a reduction in China's piracy 
and counterfeiting levels in 2005 will ultimately hinge on the 
political will of local Chinese authorities as much as the national 
government. Police investigations into new cases need to be proactive 
and adequately resourced in order to send a proper message to criminal 
networks that are increasingly behind the problem.
    The sincerity of China's pronouncements that it is serious about 
protecting and enforcing IP rights will further be tested by its 
willingness to eliminate loopholes for infringers in existing and new 
regulations and to resolve high-profile cases, such as the Pfizer 
patent case on Viagra and the General Motors auto case, that impact 
domestic and foreign IP owners.
    Full protection under PRC law and enforcement of IPR in China as 
set forth in China's TRIPS obligations are critical to the interests of 
foreign and PRC companies in China, as well as to China's public health 
and safety, the integrity and attractiveness of China's investment 
regime, and its broader economic development goals. We hope that the 
PRC government will accelerate IP enforcement in 2005 by further 
enhancing national leadership and dedicating additional capital and 
resources. Only through aggressive measures will China's IPR protection 
enforcement regime be effective and respected.
    China's accession to the WTO afforded it an opportunity to sell 
increasing quantities of products where it has a comparative advantage 
to the United States. But by tolerating massive counterfeiting and 
piracy, China is denying U.S. companies the chance to do the same in 
China. Moreover, by tolerating the export of such counterfeits, China 
strips our companies of the opportunity to use their comparative 
advantage--and thus WTO benefits--in third countries as well.
    Ultimately, it is essential that China purchase the foreign IP-
based products it is illegally using. That would translate into 
billions of dollars in sales and exports by U.S. and other foreign 
companies and more accurately reflect the balance of trade between the 
U.S. and China.

                                 RUSSIA

    In addition to China, the U.S. Chamber has great interest in seeing 
significant progress in Russia's intellectual property enforcement 
efforts. This is made all the more pressing as Russia proceeds toward 
entry into the World Trade Organization (WTO) in 2005. This process 
gives the U.S. government a critical window of opportunity to require 
that, as part of its WTO accession, Russia make considerable efforts on 
its IPR-related commitments and their implementation.
    Unfortunately, the sense of urgency that we all feel here today 
does not appear to fully register in the upper echelons of the Russian 
government. The Russian government has acknowledged that there is an 
intellectual property problem in Russia, and it has created government 
commissions and introduced meaningful legislation. However, new laws 
are not enough. The governmental commissions have so far achieved 
little and there is no consistent political will to address the real 
fundamental issues such as:

        1)  Better enforcement at all levels (e.g., customs, police, 
        etc.);

        2)  Educating the public; and

        3)  Making IPR a priority public policy issue that needs to be 
        addressed immediately.

    In short, the IP problem in Russia is not the law, except for 
geographical indications and a few other issues, it is enforcement.
    The U.S. Chamber believes that Russia is at a critical crossroads, 
where it can turn from the significant source of IPR violations it is 
today, to becoming a key partner in the ongoing global efforts to 
safeguard IPR as the foundation of innovation. At the eve of its 
accession to the WTO, Russia faces a critical choice, where it can 
choose to invest in research and development and expand its 
intellectual assets, or go the other direction. The U.S. Chamber is 
committed to a constructive engagement with the Russian Federation to 
help it make the right choice and reform before it is too late.
    The U.S. Chamber is therefore actively supporting and engaging with 
companies, government agencies, officials, business associations, 
especially the American Chamber of Commerce in Russia, and other groups 
dedicated to IPR protection and enforcement in Russia, especially the 
Coalition for Intellectual Property Rights (CIPR). The goal is to 
encourage the Russian government to take steps that will achieve 
tangible results in the fight against this economic plague.
Dimensions of the IP problem in Russia:
    Although there is much need for better and more comprehensive 
statistical information on IP issues in Russia, the following trends 
should be highlighted.
    Clearly, there is a sense in the American business community that 
the Russian government has recognized that it has an IP problem. 
However, we feel that there is no consistent will to address the real 
fundamental issues such as better enforcement, educating the public, 
and making IPR a priority policy issue that needs to be addressed 
immediately.
    As part of its 2004 reorganization, the Russian government 
restructured the regulatory structure for IP regulation and 
enforcement. Many Russian government officials who were IP experts and 
dealt with IP issues were removed from their positions. In their place 
appeared new officials with less knowledge and experience on major 
issues affecting industrial property and copyright protection. Other 
administrative changes resulted in decreased enforcement. There is also 
a latent lack of coordination between government agencies, which 
further worsens the problem. In addition, there is no strong political 
will to address IP issues from the top down in the Russian government.
    IP rights-holders and consumers take very little action to defend 
their rights and resolve their problems. The Russian government clearly 
needs to focus on educating the public, and the business community 
needs to motivate its customers and its companies to become more 
involved in this issue.
    The U.S. Chamber believes that IP violations are truly a global 
crime issue, and that no country can solve the problem alone, 
especially due to widespread border control issues. Russian IP problems 
are having a direct impact on other former Soviet republics, notably in 
Ukraine, in Eastern and Western Europe (countries now part of the 
European Union), and in the Middle East. Fake goods are produced in 
Russia, but Russia is also a transit point for fake goods made in Asia, 
notably China.
    Russia's exports of counterfeited and pirated product to the United 
States and other markets have a significant effect on the U.S and our 
businesses.

Statistics on IP in Russia:
    USTR noted in its 2005 301 Report that:
    ``Certain aspects of Russia's IPR regime, including enforcement and 
data protection, appear to be inconsistent with Russia's obligations 
under the 1992 U.S.-Russian Federation Trade Agreement and thus would 
not conform to obligations which Russia needs to fulfill in order to 
join the WTO.''
    USTR 301 Report points to staggering figures concerning piracy, 
which corroborate the urgency of the actions mentioned above. ``Piracy 
in all copyright sectors continues unabated, and the U.S. copyright 
industry estimated losses of $1.7 billion in 2004.'' ``The U.S. 
copyright industry reports the following levels of piracy: 66% in the 
recording industry, 80% in the motion picture industry, 87% for 
business software, and 73% for entertainment software.''
    USTR 301 Report does not emphasize trademarks as an IP problem in 
Russia; however, industry associations, like the Moscow-based Coalition 
for Intellectual Property Rights (CIPR), have reported that trademarks 
violations (particularly counterfeits) are today no less important.
    Russian government officials acknowledge that there is an IP 
problem, while also acknowledging that they have no good data to detail 
the scope of the problem. According to the Russian Agency for Patents 
and Trademarks (Rospatent) official 2004 data, the turnover of 
counterfeit goods on the Russian market is 80 to 100 billion rubles 
(US$2.89 to $3.61 billion), and the government's budget loses up to 30 
billion rubles (US$1.08 billion) in tax revenue. Russian Federation 
Deputy Head of the Federal Service for Consumer Rights Protection, 
Nadyezhda Nazina, spoke at an IP related Parliamentary hearing to the 
Russian Federation State Duma in November 2004. She stated that 
counterfeit and false products on the market are likely between 30% and 
40%. Some Russian experts have speculated that counterfeit and pirated 
products make up at least 60% of the retail ``grey'' market in Russia.
    We believe that Russian officials do not yet really have a full 
picture of the scope of the problem in their market. This is supported 
by statements made in March 2005 by Russian Federation Deputy of 
Culture and Mass Media, Leonid Nadirov, to the press when summarizing 
the results of a meeting of the governmental commission to fight IP 
violations. He stated ``we ourselves can't imagine how much counterfeit 
products are produced in Russia, in what geographic regions the 
production is occurring in, how much money is being stolen and how much 
taxes have not been paid.'' However, Mr. Nadirov said that by October 
2005, the government ``should receive a real picture of the market 
situation, so that we can, in an understandable language, communicate 
with partners both inside the country and internationally.''
    The U.S. Chamber encourages our government to make it a priority to 
engage Russia on how that country will improve its IPR enforcement 
efforts and data protection. We also fully support USTR's decision to 
keep Russia on the Priority Watch List and to conduct an ``out-of-
cycle'' review to monitor Russia on IPR in 2005.

                               CONCLUSION

    The U.S. Chamber and our members appreciate the opportunity to 
participate in today's House Judiciary Subcommittee hearing on 
intellectual property rights.
    As noted at the outset, IP theft is a global problem. Business and 
governments need to continue to work together to address the growing 
proliferation of intellectual property theft in the United States and 
globally. Once seen as a threat mainly to a few select industries, 
today, the theft of intellectual property is now so widespread that it 
touches nearly every industry and every country, including China and 
Russia.
    It is not a victimless crime. It hurts legitimate established 
businesses, innovators, consumers, and governments that lose tax 
revenues.
    With particular regard to China, we note that while China is now 
the fastest-growing trading partner of the United States, it also the 
single largest source of counterfeit and pirated products worldwide. 
Rapidly expanding bilateral economic and commercial ties underscore the 
market opportunities that China potentially offers to U.S. exporters 
and investors, which support the creation of high value-added jobs at 
home. Yet, the failure of Chinese authorities to date to crack down 
effectively on the manufacture, distribution and export of 
counterfeited and pirated products is eroding legitimate Chinese and 
foreign companies' profit margins, diminishing brand value, and, in 
many cases, endangering public safety.
    China can and must do more to stop IP theft. The U.S. business 
community and others that vigorously advocated China's WTO membership 
premised their support on expectations that China is evolving into a 
more open and transparent market based on the rule of law. China's 
unsuccessful efforts to consistently enforce its IPR laws and to 
vigorously deter IP theft represent the most visible examples of these 
expectations remaining unfulfilled.
    Similarly, we believe that Russia should take aggressive steps to 
stem its counterfeiting and piracy problem. Our government should 
require Russia to show demonstrable evidence of efforts to crackdown on 
counterfeiting and piracy before it formally supports that country's 
accession into the WTO. This is an important opportunity to encourage 
more tangible actions on the part of Russia.
    The U.S. Chamber, the world's largest business organization, will 
remain fully engaged on doing our part in waging a campaign against 
counterfeiting and piracy on behalf of American business. We will 
continue to lend our strong voice to ensure that China, Russia, and 
other countries take even more robust measures in this critical area.
    Thank you, Mr. Chairman and members of the committee, for the 
opportunity to express the views of the U.S. Chamber and our members on 
this important topic. Be assured the protection of IP is a top priority 
of our organization and we look forward to working with the members of 
this Committee and Congress in finding constructive solutions.

    Mr. Jenkins. [Presiding.] Thank you, Mr. Brilliant.
    We'll now hear from Mr. Eric Smith.

     TESTIMONY OF ERIC H. SMITH, PRESIDENT, INTERNATIONAL 
                 INTELLECTUAL PROPERTY ALLIANCE

    Mr. Smith. Chairman Smith, Ranking Member Berman, Members 
of the Subcommittee, it's an honor to appear before you at this 
very timely moment, shortly after USTR elevated China to the 
Priority Watch List, and just a few days before the Chinese IPR 
working group arrives in Washington to continue a dialogue with 
the U.S. Government on China's enforcement of IP rights and its 
failure to accord broader market access to U.S. copyright 
industries. We know that they will be listening to what this 
Subcommittee says about the current situation in China.
    Mr. Chairman, the copyright industries--business and 
entertainment software, filmed entertainment, recordings, and 
books and journals--are in dire straits in China. Piracy rates 
have hovered at over 90 percent in the more than 15 years that 
IIPA has been engaged with the U.S. and the Chinese 
governments.
    Indeed, with new digital copying technologies and the 
Internet, the situation has even worsened. Every year, 
industries have lost conservatively between one and a half and 
two and a half billion dollars; in 2004, it was over two and a 
half billion dollars. These losses will grow unless this 
unacceptable situation is quickly reversed.
    Before I elaborate on the difficult situation our 
industries face in China, let me note again what we have said 
before. The copyright industries now represent over 6 percent 
of U.S. GDP, and that number increases every year. We employ 4 
percent of the U.S. workforce, and generated in 2002 over $89 
billion in revenue in export--from exports and foreign sales.
    This growth is fueled by the huge global demand for U.S. 
creative and high-tech products, with 50 percent of our revenue 
generated coming from international trade. It is the ability to 
enter and prosper in foreign markets that will allow us to 
continue this growth and employ new highly-paid workers at a 
rate that is double the economy as a whole.
    In trade jargon, the U.S. has a huge comparative advantage 
in trade and copyrighted products. But as we know, in China, 
potentially the largest market in the world, that advantage 
hasn't even begun to be realized; while, as we know, China is 
continually taking advantage of their comparative advantage in 
so many areas, with a trade surplus of $162 billion.
    Of all the industry sectors represented in the U.S. 
economy, the copyright industries face a market more closed to 
them than to any other. Not only are nine-tenths of the Chinese 
market closed through piracy, but our industries suffer under 
onerous and sometimes discriminatory market access barriers. 
China's denial of effective market access prevents us from 
getting to know the market and establishing a presence that 
would enhance our ability to fight piracy.
    Even if we were to reduce piracy by half in China, under 
the present circumstances, most of our industries could not 
satisfy the huge local demand, because of these barriers to 
effective market entry. In short, these two problems are 
indelibly interlocked.
    About a year ago, Vice Premier Wu Yi was here with the U.S. 
in the JCCT process. The government committed at that time to 
``significantly reduce IPR infringements,'' by taking a number 
of tough enforcement and regulatory measures. The bottom line 
is that 1 year later, even though more raids were run and 
products seized and the criminal thresholds, as was mentioned, 
reduced somewhat, there has been little effect on the market, 
and piracy rates have not come down.
    Why? The answer is not new. There is still no deterrence in 
the Chinese enforcement system, no disincentive to continue to 
engage in piracy. Even exports of pirate product which slowed 
to a trickle after the 1996 section 301 action against China, 
have resumed, and are growing again.
    China relies on an ineffective and uncoordinated 
administrative enforcement system which has not succeeded in 
all these years in reducing the rate of piracy. The system is 
characterized by woefully low fines. A study done by one of our 
members in raids they were involved in revealed that the 
average fine per unit of product seized exceeded only 
marginally the cost of a blank CD. To expect such a system to 
deter one of the most lucrative economic crimes is a flight of 
fancy. But China has to date simply refused to do what all 
other countries in the world do; namely, bring criminal actions 
with deterrent fines and jail terms.
    While it is difficult to be certain on these matters, our 
industries know of only a handful of cases involving criminal 
piracy prosecutions involving U.S. works in the last 10 years. 
Countries like South Korea, Singapore, and even Taiwan, have 
been able in the late '90's to reduce audio and video piracy, 
for example, from over 90 percent to less than 20 percent of 
the market, with aggressive and deterrent criminal enforcement. 
The Chinese can do the same.
    We believe that the failure to use the criminal law to 
fight piracy is a violation of China's TRIPS obligations. We 
believe that the Chinese criminal law, because it does not 
encompass all acts of copyright piracy on a commercial scale, 
which is the TRIPS standard, also violates that agreement.
    Because of the failure, despite repeated bilateral 
engagements, of the Chinese government to show the political 
will to lower these staggering piracy rates, IIPA urged USTR to 
engage in a new multilateral dialogue with China. Following 
USTR's announcements of the results of their out-of-cycle 
review, we are working closely now to develop the elements of a 
possible WTO case against China; unless China takes immediate 
action, making such a course unnecessary.
    In my written testimony, Mr. Chairman, we have tried to 
give this Subcommittee a flavor of how hard it is to do 
business under these circumstances. Copyright theft in China is 
hurting America, and hurting China. Since I do not have time to 
detail these specific problems, I hope our written statement 
will cover those issues.
    We ask two things: first, that China immediately commence 
criminal actions against pirates, with deterrent penalties; and 
second, that China now eliminate the onerous and destructive 
market access barriers that prevent U.S. copyright-based 
companies from doing real business in China.
    Thank you, Mr. Chairman, and I look forward to a lively and 
productive dialogue.
    [The prepared statement of Mr. Smith follows:]

                  Prepared Statement of Eric H. Smith

    Mr. Chairman, Ranking Member Berman and other distinguished 
Committee members, IIPA and its members thank you for the opportunity 
to appear today to review China's record on enforcement of its 
copyright law against widespread piracy including China's compliance 
with its WTO-TRIPS obligations. This oversight hearing is extremely 
timely. Madam Ma, head of China's delegation to the IPR Working Group 
of the Joint Commission on Commerce and Trade (JCCT), will be in 
Washington next week, discussing these issues with the United States 
Government. Your interest in China's record is certain to illuminate 
those talks.
    IIPA represents the U.S. copyright industries. Its six member trade 
associations consist of over 1,300 U.S. companies, accounting for 
millions of U.S. jobs. The copyright industries, in 2002, contributed 
over $625 billion to the GDP, or 6% of the U.S. economy and almost 5.5 
million jobs or 4% of U.S. employment. These companies and the 
individual creators that work with them are critically dependent on 
having strong copyright laws in place around the world and having those 
laws effectively enforced. On average, the copyright industries 
generate over 50% of their revenue from outside the U.S., contributing 
over $89 billion in exports and foreign sales to the U.S. economy. 
Given the overwhelming global demand for the products of America's 
creative industries, all these numbers would be significantly higher if 
our trading partners, including China, that continue to allow piracy to 
flourish in their own economies were to significantly reduce piracy 
rates by enforcing their copyright law vigorously.

              IIPA'S SPECIAL 301 REPORT ON PIRACY IN CHINA

    I have appended to our written testimony a copy of IIPA's 
comprehensive February 2005 Special 301 submission on China to the U.S. 
Trade Representative. In that submission we called for entering into a 
new, multilateral dialogue in the WTO with the Chinese government as a 
way to persuade it to take aggressive action--as promised in the Joint 
Commission on Commerce and Trade (JCCT) meetings over one year ago--to 
significantly reduce the rate of piracy in all IPR sectors including 
the copyright sector. We then provided a summary review of what had 
happened in China over the last year to redeem that commitment. Our 
conclusion: China has failed to comply with its commitment made over 
one year ago in the JCCT to significantly reduce piracy rates. While 
some modest reductions have occurred in some sectors, by no measure 
have piracy rates been significantly reduced. In fact little has 
changed in the marketplace for our members and their companies, despite 
reports of increased raiding activity and seizures of many pirate 
products. In my testimony today, I would like, for the record, to 
update that report and in the process to summarize it where 
appropriate. Our report tells the sad, frustrating story of the failure 
of an enforcement system to deter rampant piracy in the potentially 
largest market in the world.

             RECENT ACTIONS BY THE U.S. GOVERNMENT ON CHINA

    On April 29, 2005, USTR issued its decision resulting from the out-
of-cycle review of China's enforcement practices announced on May 3, 
2004. USTR reflected in this decision its deep concern over China's 
lack of progress in the enforcement area by elevating China to the 
Priority Watch List. It also announced a number of other initiatives, 
one of which was to work closely with our industries with an eye on 
utilizing WTO procedures to bring China into compliance with its WTO 
obligations. Since that time we have met with USTR to begin this 
process and will work intensively with USTR toward the mutual goal of 
bringing China into compliance with its WTO TRIPS obligations, its 
bilateral obligations to the U.S. in the 1995 and 1996 IPR agreement 
and action plan, and its commitments made to our government in the JCCT 
process.
    This process has now commenced in earnest. USTR will also be 
seeking information from the Chinese government under the transparency 
provisions of the TRIPS agreement, and is committed to using the JCCT 
process to encourage the Chinese government to implement key reforms on 
both the enforcement and the all-important market access front.

THE CHINESE MARKETPLACE FOR COPYRIGHT PRODUCTS: A RECORD OF FRUSTRATION 
                              AND FAILURE

    Mr. Chairman, our industries are deeply frustrated by the lack of 
real progress by China in taking effective action to deter piracy and 
to open up its market to legitimate cultural and high technology 
copyright products. China remains one of the most closed markets in the 
world for the U.S. copyright industries. Onerous market access 
restrictions affect all our industries. Notwithstanding Premier Wen's 
pledge to address the $162 billion trade imbalance between the U.S. and 
China by increasing China's imports from the U.S., China is retaining--
and, in some sectors, augmenting--market access restrictions for 
creative and high-tech products that represent America's comparative 
advantage.
    Copyright piracy represents perhaps the largest barrier to 
effective market access in China. An average (and truly staggering) 90% 
piracy rate has persisted for years despite repeated ``strike hard'' 
enforcement campaigns, steamroller campaigns, and public statements 
from many high level government officials supporting stronger 
enforcement. While our Special 301 submission highlights the current 
situation in China, I wanted to give you a brief flavor of what 
copyright companies confront in trying to do business in China in face 
of these trade barriers and these inexcusably high piracy levels.

     THE PLIGHT OF THE COPYRIGHT INDUSTRIES DUE TO PIRACY IN CHINA

The Business Software Industry
    Taking the business software industry first--one of our nation's 
most productive and important creative sectors: The software industry 
faces piracy rates in China of 90%, one of the highest in the world for 
that industry. China leads the world in the production and export of 
counterfeit software--software packages that are purposely designed to 
replicate the original legitimate product. Losses to U.S. software 
publishers were estimated by IIPA member, the Business Software 
Alliance (BSA), at $1.47 billion in 2004. China was the 6th largest 
market in the world for personal computers and ranked 26th in 
legitimate software sales. This increasing disparity not only damages 
the U.S. industry but hurts Chinese software developers as well.
    China has failed to criminalize the most damaging type of piracy to 
the business software industry--the unauthorized use of software within 
businesses and government institutions. This is a violation of the 
TRIPS Agreement. Combined with the total absence of a criminal remedy 
is the absence of all but a few administrative actions against this 
type of piracy with woefully low and non-deterrent fines. As a 
consequence, piracy rates continue to remain at staggering levels.
    To make matters worse, China is on the verge of shutting down 
access for U.S. and other foreign companies to the largest purchaser of 
software in China: the Chinese government. It would accomplish this by 
adopting draft government procurement regulations that would expressly 
favor Chinese software only. In short, the situation for this critical 
copyright sector is truly dire in China with no significant improvement 
in sight.

The Motion Picture Industry
    The U.S. motion picture industry is facing a 95% piracy rate in 
China (the highest in the Asia Pacific region, and among the highest in 
the world) which represents a worsening of the situation from the 
previous year. Losses to just the motion picture industry, from 1998 
through 2004, are estimated at over $1 billion (not including losses 
from Internet piracy, which are growing alarmingly). While raids and 
seizures have increased somewhat following Vice Premier Wu Yi's 2004 
enforcement campaign, administrative fines remain far too low to deter 
pirate activity and, as I will describe later, criminal cases have been 
extremely rare despite Chinese promises to use this TRIPS-required 
remedy. According to a recent newspaper report, the legitimate home 
video market in China represents about 5% of the estimated total market 
of $1.3 billion (which is itself a very conservative estimate). Of the 
83 optical disc factories licensed by the government (and an unknown 
number of ``underground'' unlicensed plants), many continue to churn 
out pirate DVDs. The export of pirated home video product, which had 
slowed to a trickle after the U.S. Section 301 action (and threatened 
retaliation) in 1995-96, has resumed and is growing. The total optical 
disk plant production capacity, a significant amount of which is 
devoted to producing pirate product, is now close to 2.7 billion units 
annually. Optical disks sourced in China and containing pirated films 
have been seized in over 25 countries around the world. The massive 
quantity of pirated movie product available in China is evidenced by 
the fact that pirate prices start around $0.60 per unit, the lowest 
price in Asia. As with the other copyright industries, any enforcement 
that occurs is conducted by administrative agencies, with overlapping 
jurisdiction and often little coordination, and fines imposed are a 
mere ``cost of doing business.'' A recent anecdotal study, conducted by 
IIPA member, the Motion Picture Association (MPA) revealed that the 
average fine imposed per pirate home video product (DVD, VCD) seized in 
raids resulting from MPA complaints is only slightly higher than the 
cost of purchasing a blank disk--clearly of no deterrent value. The 
lack of deterrent administrative penalties is a key reason, in addition 
to the almost complete lack of criminal enforcement that piracy rates 
persist at 90% of the market and above.
    Accompanying and reinforcing this piracy situation are onerous 
market access restrictions, including a Government-owned, monopoly 
importer, very limited competition in distribution, and a quota of 20 
theatrical films allowed into China annually on commercial terms. The 
pirates capture 100% of the market for films not permitted legally in 
China. Even those films permitted theatrical release suffer piracy 
rates of 70-75%, because of the long delays before most American films 
are given screen time. Another consequence of the lack of competition 
in importation and distribution is the non-competitive pricing in the 
Chinese market. Cumbersome licensing requirements burdens the retail 
sale of legal home entertainment product, holding down revenue 
potential and helping keep the market in the hands of the pirates. 
These barriers and those to all our industries must be removed in the 
JCCT process.

The Entertainment Software Industry
    The entertainment software industry, one of the fastest growing 
copyright-based industries, faces similar high piracy rates and 
estimates the value of pirated videogames in the market at $510 million 
in 2004. Demand for entertainment software products is growing rapidly 
but is being soaked up primarily by the pirates. This demand is 
exemplified by the exploding popularity of ``massively multiplayer 
online role-playing games'' (MMORPGs) where literally thousands of 
players can compete against one another simultaneously. Demand for 
MMORPGs in China grew at 40-45% over expectations in 2004. This 
increasing demand has fueled, in part, the growth of Internet cafes in 
China. (It is estimated that there are close to 200,000 Internet cafes 
in the country, with a seating capacity of between 100-300 seats, of 
which 60% are involved in game play.) While U.S. game publishers, 
represented by IIPA member, the Entertainment Software Association 
(ESA), have engaged in some licensing of the cafes, the vast majority 
of the product used is pirated, either available at the cafe or 
downloadable from the Internet. This dire situation has been all the 
more exasperating since the Chinese government extensively regulates 
the activities of these Internet cafes and often and vigorously revokes 
licenses for actions the government deems inappropriate. However, as 
far as we know, the government has never sought to include in this 
extensive regulatory scheme prohibitions against the widespread and 
blatant piracy at these cafes in its business licenses (which are 
otherwise very thorough). Moreover, no copyright enforcement of any 
kind has occurred. The legal infrastructure governing the Internet 
still is not helpful to copyright enforcement. Takedown of pirate sites 
is negligible; penalties non-existent.
    Cartridge-based handheld games are also hard hit by the pirates 
with manufacturing and assembly operations throughout China with 
exports throughout Asia, Latin America, the Middle East and Europe. 
Enforcement attempts have been relatively successful in terms of raids 
and seizures but, like with other industries, administrative fines are 
non-deterrent and criminal enforcement action very rarely undertaken, 
even against factories generating millions of dollars in illicit 
profits. Entertainment software products are also subject to a 
protracted content review process, by two separate agencies 
contributing to market entry delays. Given the immediate nature of the 
demand and lifecycle of best selling games, this leaves the pirates 
virtually uncontested in the market prior to the official release of a 
new title. There are also Internet and investment restrictions that 
must be significantly eased or abolished.

The Book Publishing Industry
    The U.S. book publishing industry, represented by IIPA member, the 
Association of American Publishers (AAP), faces both significant offset 
printing of pirated books, primarily in translated editions, and 
massive commercial photocopying of textbooks and reference books on and 
near University campuses. There are 580 licensed state-owned publishers 
in China, 50 of which are considered major. There are only a few 
privately owned publishers but they must buy publishing rights from the 
state-owned publishers. U.S. publishers issued 4500 translation 
licenses in 2004, a significant number but far below China's potential. 
All the best selling books are then virtually immediately pirated by 
outlaw ``printers'' and made available through independent bookstores, 
stalls and street vendors. To give an example, the famous self-help 
bestseller ``Who Moved My Cheese'' sold over 3 million copies in China. 
It is estimated, however, that the pirates sold another 6 million 
copies. The Harry Potter books, and other best sellers like Hilary and 
Bill Clinton's books ``Living History'' and ``My Life,'' John Grisham's 
books and others all face a similar fate from the pirates. Former 
General Electric President, Jack Welch's biography, ``Winning,'' has 
sold over 800,000 copies but with an equal number of pirate copies 
available in the market. English language textbooks are also heavily 
photocopied in their entirety and there are six known websites which 
make available entire copies of textbooks that are downloaded and then 
photocopied. Enforcement against this vast piracy is spotty and all 
done administratively through the local and national copyright bureaus. 
Any resulting administrative fines are non-deterrent. We know of no 
criminal enforcement. The book publishing industry also faces market 
access barriers--U.S. publishers are not permitted to publish, sign 
authors, or print their books in China.

The Recording Industry
    The recording industry, represented by IIPA member, the Recording 
Industry Association of America (RIAA) did experience a minor reduction 
in the piracy rate for sound recordings, from 90% in 2003 to 85% in 
2004 in ``hard goods'' piracy, but with significant increases in 
Internet piracy. Losses remain in excess of $200 million per year from 
continued optical disk manufacture and distribution within the Chinese 
market and significant levels of audiocassette piracy (still an 
important format in China). The recording industry faces many of the 
same problems with optical disk piracy confronting the motion picture 
industry. Millions of pirated music CDs are readily available 
throughout China. Some of these pirate products have found their way 
into the export market. China continues to rely on its failed 
administrative enforcement system, which relies on numerous 
inspections, product seizures and, when the pirate doesn't flee, the 
imposition of small, non-deterrent fines.
    Internet piracy in China, as in other countries in the world, has 
become a huge problem for the recording industry. Thousands of active 
websites such as www.9sky.com and www.chinaMP3.com are giving away, or 
offering links to, thousands of pirated songs. (These not-for-profit 
acts of piracy are not criminalized in China, as they are, for example, 
in the U.S.). International criminal syndicates are apparently using 
Chinese servers to hide their illicit activity (www.boxup.com) and many 
Asian pirate sites are doing a thriving business in China, such as 
www.kuro.com from Taiwan.
    Market access restrictions are severe, contributing to piracy and 
market losses. U.S. record companies cannot ``publish'' or release a 
recording without permission of a state owned company and cannot 
manufacture, distribute or engage in retailing of its products, which 
artificially segments the market and makes it extraordinarily difficult 
for this world class industry to participate in the Chinese market. Its 
products are subject to censorship while domestic (as well as pirate) 
recordings are not--a national treatment violation.
                                 ______
                                 
    All in all, the copyright industries estimate their total losses in 
excess of $2.5 billion in 2004 due to piracy in China. The simple fact 
remains that these losses and the 90% piracy rates will NOT be 
significantly reduced without subjecting major piracy to criminal 
enforcement accompanied by deterrent penalties and substantially 
increasing the administrative fines specified in the copyright law and 
imposing them in practice. To date, even after the JCCT commitments, 
this has NOT happened and there is a real question whether the Chinese 
government as a whole (Vice Premier Wu Yi has been a staunch defender 
of better enforcement) can muster the political will to take these 
absolutely necessary actions--actions that have been key to significant 
reductions in piracy levels in other countries in which our companies 
operate. China cannot exempt itself from the rules--that enforcement 
against piracy requires deterrence and criminal remedies. The global 
community recognized this when it fashioned the Article 61 criminal 
obligation in TRIPS and it has proven to be the case in practice.

             ACTIONS TO BE TAKEN BY THE CHINESE GOVERNMENT

    If piracy rates are to be significantly reduced as committed by 
Vice Premier Wu Yi in the JCCT and if China is to come into compliance 
with its TRIPS obligations, it must take the following actions.

          China should significantly liberalize and implement 
        its market access and investment rules, including and in 
        addition to those already made in the WTO, and improve the 
        overall business climate in China to permit effective 
        operations by all copyright industries. This should be a major 
        objective in the JCCT.

          Immediately commence criminal prosecutions using both 
        the monetary and new copy thresholds and carry these forward 
        promptly to impose deterrent penalties. The Economic Crime 
        Division of the Public Security Bureau should be made 
        responsible for all criminal copyright enforcement and be 
        provided sufficient resources and training to very 
        substantially increase criminal enforcement under the new 
        Judicial Interpretations. Further amendments should be made to 
        those Interpretations, particularly to include sound 
        recordings.

          Under the leadership of Vice Premier Wu Yi, 
        constitute a single interagency authority at the national and 
        provincial/local levels to undertake administrative enforcement 
        against piracy of all works. This authority would have the 
        would have the full authority to administer fines and to refer 
        cases to the Ministry of Public Security and the Supreme 
        People's Procuratorate for criminal prosecution, under referral 
        guidelines that are equal to or better than the Judicial 
        Interpretations. Such authority must have the full backing of 
        the Party Central Committee and the State Council. Far greater 
        resources must be provided to this enforcement authority. All 
        administrative enforcement, and enforcement by Customs at the 
        border, must be significantly strengthened.\1\
---------------------------------------------------------------------------
    \1\ In the area of trademark enforcement undertaken by one ESA 
member company and involving handheld and cartridge based games, the 
new Judicial Interpretations are unclear on whether the authorities are 
able to seize components and parts that make up the counterfeit 
products. This is essential and must be clarified.

          Adopt, in a transparent manner with the opportunity 
        of public comment, a full and comprehensive set of regulations 
        governing protection and enforcement on the Internet, including 
        the liability of Internet Service Providers, which follow the 
        recommendations made in IIPA's Special 301 submission, 
        including effective ``notice and takedown'' mechanisms and 
        without unreasonable administrative evidentiary burdens. 
        Establish within this single interagency authority described 
        above special units (at the national, provincial and local 
        levels), whose purpose is to enforce the law and these new 
---------------------------------------------------------------------------
        regulations against piracy on the Internet.

          Amend the Criminal Law to comply with the TRIPS 
        Article 61 requirement to make criminal all acts of ``copyright 
        piracy on a commercial scale.'' These must include infringing 
        acts not currently covered, such as end user software piracy 
        and Internet offenses conducted without a profit motive. Also 
        amend the Criminal Code provisions requiring proof of a sale, 
        to require instead proof of commercial intent, such as 
        possession with the intent to distribute.

          Significantly increase administrative penalties/
        remedies, including shop closures, and monetary fines and 
        impose them at deterrent levels.

          Permit private companies and trade associations to 
        undertake anti-piracy investigations on the same basis as local 
        companies and trade associations.

          Through amended copyright legislation or regulations, 
        correct the deficiencies in China's implementation of the WCT 
        and WPPT, and ratify the two treaties.

          Significantly ease evidentiary burdens in civil 
        cases, including establishing a presumption with respect to 
        subsistence and ownership of copyright and, ideally, permitting 
        use of a U.S. copyright certificate, and ensure that 
        evidentiary requirements are consistently applied by judges and 
        are available in a transparent manner to litigants.

    The copyright industries will be working closely with USTR to 
prepare the necessary elements of a WTO case should the TRIPS 
obligations of China described above and in our submission not be fully 
implemented. This work is now ongoing. We are grateful for the support 
of the Chairman and members of this Subcommittee in working with us to 
monitor China's progress and to ensure that it takes these actions and 
avoids further confrontation with its trading partners on the issue of 
copyright piracy.
    Thank you.

                               ATTACHMENT




    Mr. Jenkins. Thank you, Mr. Smith.
    Since I have ascended to the Chair this morning, I'll 
recognize myself for the first questions.
    Ms. Espinel, shortly after I started a law practice down in 
Tennessee, a really nice lady came into my office. A national 
company, a storage and moving company, had lost her Oriental 
rug. She had moved from Washington, D.C., to Rogersville, 
Tennessee. And previously, she had been represented in this 
loss by a big, 50-member law firm.
    She came into my office, and I inquired about--but the 
negotiations had gone on for months and months and months, and 
nothing had happened. So I inquired about whether anybody had 
talked to her about filing a lawsuit. She said ``No.'' And that 
very day, I filed a lawsuit. And within a very short period of 
time, there was a recovery.
    Now, to bring that to this situation, I liked Mr. Berman's 
suggestion. I liked his question in his opening remarks. You 
know, why are we not in the WTO court? That's the only 
jurisdiction that's available to us; isn't it?
    Ms. Espinel. Thank you. As outlined in my testimony, we 
have made clear in the OCR report that was issued about 2 weeks 
ago that we are prepared to fight aggressively to protect our 
intellectual property in China. We have--our overall goal, I 
think the goal that we all share, is to significantly reduce 
the rampant piracy and counterfeiting in China. That may be 
through an intensified JCCT process; that may be through WTO 
litigation. There may be other means. There will probably, 
likely, I think, be a combination of means. And we are actively 
considering all of those options.
    But beyond mere consideration of those options, we are also 
actively engaged with our industry now, including the recording 
industry, the motion picture, IIPA; including specifically some 
of the people testifying for you here this morning. They have 
been working very hard with us to develop our options, 
including the option of WTO litigation. And we look forward to 
their continued cooperation and hard work with us.
    We are--this is a top priority for the Administration. This 
is a top priority for Ambassador Portman, as he has made clear 
in his confirmation hearings and also to his staff. He is in 
the process of reassessing our strategy, to see if there are 
ways in which it can be improved. But I can assure you that we 
are looking for the most effective mechanism that we can use to 
address this very significant concern.
    Mr. Jenkins. Well, I, personally, don't have as much 
confidence in the WTO as I have in the courts in east 
Tennessee. But I don't think this matter of inaction will lead 
us anywhere, and I think it's time that we took some action 
somewhere, based upon everything that we heard this morning.
    And I would ask Mr. Fishman, Mr. Brilliant, Mr. Smith, if 
they would agree with that. Or what do you think the best 
strategy is? Mr. Fishman?
    Mr. Fishman. Well, certainly, you shouldn't give up your 
WTO options. But there are other options. You know, one of the 
groups that's very complicit in China's intellectual property 
regime, loose as it is, is our American buyers of Chinese 
products, big buyers of Chinese products.
    If you look at a DVD player, before the Chinese entered the 
market, a DVD player made with a licensed chipset and licensed 
software cost about a thousand dollars. The Chinese decided to 
enter that market. In very short order, there are about 300 
companies in China producing DVD players without any licensed 
technology below it. The price went down to about $30.
    Those players are now in American stores. And if you don't 
think that there's a wink and a nudge on the part of American 
buyers of those DVD players, the big-box stores that line their 
shelves with them, for the Chinese manufacturers to drive 
prices down by not paying the intellectual property license 
fees that they owe them, then you have something else coming.
    Maybe one course to consider is: How do you address the 
problem by looking at American companies, who feed our $170 
billion trade deficit with China by bringing in goods that are 
made in virtually every Chinese factory which uses pirated 
technology?
    Mr. Jenkins. Thank you, Mr. Fishman. Mr. Brilliant?
    Mr. Brilliant. I'd make a couple of observations. First of 
all, I think the U.S. Government is prodding China along, and 
is continuing to put pressure on the Chinese government to act 
in this area--with mixed results to date, no question. But I 
think the Chinese government understands this is a top priority 
of the U.S. government.
    I think the American business community has also over the 
last year and a half, 2 years, amplified its voices on this 
issue. I mentioned already in my oral remarks that our 
president/CEO, Tom Donohue, was in discussions this week with 
Premier Wen Jiabao and Minister Bo Xi Lai.
    More importantly, though, I think there is a broad array of 
industry associations and companies that are engaged in this 
issue today, that perhaps were not engaged a couple of years 
ago. The issue is that important to CEOs of big and small 
companies.
    In terms of next steps, we actually did encourage USTR to 
seek WTO consultations. In our submission to the USTR as part 
of the out-of-cycle review, we encouraged WTO consultations 
because we do believe that China is falling short of its 
obligations under the WTO, and that we do believe that they 
need to do more, specifically in the area of enforcement and 
police investigations. And so we did encourage China--sorry, 
USTR to take that next step, and proceed with WTO 
consultations. We continue to believe that may be a necessary 
step. And we would urge USTR to exhaust all options, including 
perhaps a second out-of-cycle review later in the year.
    I think the JCCT is an important process, and I think we 
are looking to that as well, to see what assurances and what 
actions China is taking to really deal with this issue. But as 
others have testified, and as I have already indicated, what we 
need to see is Chinese political action. And we need to see it 
at the local as well as the provincial level.
    What we need to see is prosecutions. And what we need to 
see is not just the street vendors put away but, frankly, the 
owners of these illegal operations. And until we see real 
evidence of that, then we don't have the deterrence in the 
marketplace that we need.
    And then, finally, I would just say that we should test the 
market ourselves. U.S. companies should press in China for 
enforcement actions. If we press for enforcement actions in 
China, and China fails to follow through on those actions, that 
would be more evidence that their enforcement mechanisms are 
not working.
    Mr. Jenkins. Thank you, Mr. Brilliant.
    My time has expired. The Chair will now recognize the 
Ranking Member from California, Mr. Berman.
    Mr. Berman. Thank you very much, Mr. Chairman. I have 
several questions. I'd appreciate it if the witnesses could 
respond rather quickly.
    But the first one that just comes to mind, Mr. Brilliant, 
in your very forceful answer to the previous question, and your 
testimony, you seem to blithely ignore the suggestion of Mr. 
Fishman that one strategy for dealing with what's going on is 
to--is essentially to go after American companies selling 
products not because--cheaper not because of labor costs or 
other kinds of comparative advantage, but because they are 
built on pirated and counterfeited intellectual property; and 
holding the stores and the retailers and the distributors of 
those products in this country accountable, apart from what 
else we might do with China. What do you think of that 
suggestion?
    Mr. Brilliant. Well, I mean, I think we looked at all 
options.
    Mr. Berman. Well, what about that one?
    Mr. Brilliant. I think the short answer would be that we 
have had discussions with our own industries about steps that 
they can undertake to ensure that we are not selling 
counterfeit and pirated products. That's not a simple process, 
but I think that is an important step that we can undertake 
here in the United States. And certainly, we welcome----
    Mr. Berman. Well, if a Chinese DVD is using counterfeited 
chips in its product, and it's being sold in U.S. stores, 
should the companies that own those stores have any 
accountability for that?
    Mr. Brilliant. Well, I think those stores that perhaps are 
selling those products should, first of all, be made aware of 
that. And second, they should take steps to make sure that 
those products are not being sold in their stores. That's 
accountability to begin with.
    In terms of legal liability, I'm not in a position comment; 
except that I will say that U.S. companies need to clean their 
own house, as well.
    Mr. Berman. Okay. Ms. Espinel, in a column a couple of days 
ago in the New York Times, Pat Choate, who I don't generally 
agree with on trade issues, writes a compelling couple of 
paragraphs, which I'd like to read to you. First of all, on the 
issue of the WTO and bringing actions, he points out that the 
Clinton Administration brought 17--13 intellectual property 
cases at the WTO against other nations. All of them were 
resolved to the U.S.'s satisfaction. We've seen not one in the 
past 4 years.
    And essentially, he concludes that China hasn't met its 
intellectual property obligations, which you seem to agree 
with, and that the U.S. has failed to leverage the WTO 
mechanisms that might bring China into compliance.
    Although China has passed laws that accord with WTO 
requirements, the Trade Representative has reported--and as you 
said here--that enforcement of those laws was inconsistent, 
ineffective, and discriminatory against foreigners. It found 
intellectual property infringement in China to be rampant, with 
violations worsening. This is your agency.
    China has created a Potemkin Village of intellectual 
property protections. The WTO provides a way to confront that 
problem. If the U.S. can prove to a three-judge WTO panel that 
China is out of compliance and is harming intellectual property 
owners, it can seek damages. If WTO grants such a judgment, the 
U.S. can impose tariffs on Chinese goods.
    Understanding that there's more dialogue and more meetings 
and more rounds and more watch lists, in the end, aren't all of 
those avenues more effective if China thinks that such a 
decision is imminent? And to the extent that those things 
haven't produced success, isn't that the way to go? And what 
could we expect, in terms of that kind of action by the 
Administration?
    Ms. Espinel. Thank you. I'd be happy to respond. And with 
your permission, I'd also like to respond briefly to the 
question that you put to Mr. Brilliant, or at least give you 
another aspect of it.
    With respect, though, to the question that you just asked, 
I think it's important to remember that a WTO case against 
China would be a new area for WTO litigation, in the sense that 
this would be a case not necessarily just against deficiencies 
in the Chinese statutes, but also against their enforcement. 
And that is one of the reasons why----
    Mr. Berman. We have never brought a case against a country 
with good statutes and no enforcement?
    Ms. Espinel. The intellectual property cases that we have 
brought have hinged on facial deficiencies in statutes. And 
this is one of the reasons why our very close cooperation with 
industry is key to this. However, I can tell you that we are 
committed to ensure that China is compliant with its 
obligations. And we will take WTO action if, in consultation 
with you and with our industry, we determine that this is the 
most effective way to fix the problem that we are resolved to 
fix.
    Mr. Berman. And what would--on the horizon, when would such 
a conclusion be reached?
    Ms. Espinel. Well, we are actually at the moment involved 
in very intense discussions with certain sections of our 
industry; in particular, the copyright industry. They have 
been--as I noted, they have been working very hard with us to 
develop our WTO options, so----
    Mr. Berman. Is 6 months a reasonable time frame?
    Ms. Espinel. I think it might be. I think to some extent it 
will be--the time line will be guided by our consultations with 
our industry. But given the focus and the hard work that is 
going into this, both on the part of USTR and with our 
industry, I think that that could be a reasonable time line.
    Mr. Berman. Thank you.
    Mr. Smith. [Presiding.] Thank you, Mr. Berman. Let me 
recognize myself for questions, and say I'm sorry for my brief 
absence, but I had to go to another Committee to vote on a 
markup of a piece of legislation. As a result, my questions may 
overlap some of the questions that you've already been asked, 
and let me know if that's the case.
    Ms. Espinel, let me begin with you. And it sounds like I'm 
following up on a couple of things that had been raised. I was 
going to page 2 of your written testimony, where you list a 
series of five actions that you think need to be taken to 
address our concerns; the concerns being, as you pointed out 
and as other witnesses have pointed out, that basically 
counterfeiting and piracy in China are at record levels. And I 
assume that that means unacceptable to everybody involved.
    What I'm interested in, you list these as a series of 
actions. I'd like to know specifically what actions you intend 
to take, and when you intend to take them. And let me pick out 
four of these five. The first is utilizing WTO procedures to 
bring China into compliance with WTO TRIPS obligations. What--
you say you have an eye toward using those procedures. I'm 
really more interested in not looking, but in acting. And what 
specific actions might you take?
    Ms. Espinel. I think we are resolved to go to WTO 
litigation if we determine that that's the most effective 
strategy to accomplish what our overall goal is, which is 
reducing piracy and counterfeiting. And that goes to the answer 
to the question----
    Mr. Smith. Right.
    Ms. Espinel.--I gave to Congressman Berman. We are working 
with our industry to develop these options, right now.
    Mr. Smith. When Mr. Berman asked you if 6 months was a 
reasonable time frame, you didn't really answer that question 
specifically. I hate to be too hard on you your first time to 
testify before Congress, but could you be explicit in the time 
frame?
    Ms. Espinel. Well, I hate to make promises that I can't 
keep.
    Mr. Smith. You're learning fast. All right. [Laughter.]
    Ms. Espinel. Because I think a lot of that will depend on 
our consultations with industry. But I certainly think that 
could be a reasonable time line.
    Mr. Smith. Okay. Let me go to a couple of other items here. 
You say you want to require China to produce detailed 
documentation on certain aspects of IPR enforcement. When will 
those requests and documentation be made?
    Ms. Espinel. Very soon. There is no time line under the WTO 
procedures for us to make that request, but this is something 
that we have announced that we are going to do. We are in the 
process of preparing the request, and we are planning to file 
it very soon.
    Mr. Smith. Right. And also, of course, with the recent 
appointment of Rob Portman, you're, I'm sure, reviewing a lot 
of the policies and taking additional initiatives that you 
might not otherwise take as a result of Mr. Portman's personal 
interest. And I'm sure that's the case, too.
    What about elevating China onto the Priority Watch List. 
You put China sort of in the middle position, but chose not to 
put China in a priority foreign country category. Why was that, 
when its violations are so egregious and it's so obvious?
    Ms. Espinel. Well, as you probably know, China hasn't been 
on the watch list in any category for the last decade or so. 
And we thought, frankly, given the level of disappointment, and 
seriousness of the concerns that we had with China, it was 
important that they be returned to the Priority Watch List. And 
we felt that that was a strong signal, frankly, of the level of 
unhappiness.
    Mr. Smith. Perhaps that's the first step. And maybe you'll 
get to the next-higher step, given the response by China, 
perhaps?
    Ms. Espinel. Yes.
    Mr. Smith. Okay. Good. Thank you. Let me ask you a question 
that--or to respond to a recommendation made by Mr. Brilliant 
in his testimony. He said USTR should conduct a second Special 
301 out-of-cycle review of China later this year, to assess 
China's implementation of the judicial interpretation and other 
enforcement efforts. You've talked about that a little bit, but 
what about that suggestion?
    Ms. Espinel. Frankly, all options are on the table at this 
point. I think we're willing to consider any approach that we 
think would effectively address that, in consultation with our 
industry. So we will take, as we always do, any suggestions 
made by our industry quite seriously.
    Mr. Smith. I can't fault you for saying all options are on 
the table; since that's the phrase President Bush used with 
regard to Social Security reform. But can you tell us when you 
might take some of those options?
    Ms. Espinel. Well, with respect--as I said, with respect to 
the request for additional information, the transparency 
procedures under the WTO, that's a request that we're planning 
to make very soon.
    In terms of whether or not we decide to initiate a second 
out-of-cycle review, or decide to go to WTO litigation, I think 
the time lines that we've discussed earlier are probably 
reasonable ones----
    Mr. Smith. Realistic? Okay.
    Ms. Espinel.--based on where we are with industry at this 
point.
    Mr. Smith. Okay. Very good. Thank you, Ms. Espinel.
    Mr. Fishman, I wish we had more time to talk about your 
book. You've no doubt read Thomas Fishman's--Thomas Friedman's 
book, The World is Flat. And you saw the cover article--I think 
it was Newsweek--a couple of weeks ago on China, as well. We 
underestimate China at our peril, I think, in many, many ways.
    In my time remaining--I don't know what happened to my 30-
second warning yellow light, but we'll work on that. And if the 
Members will indulge me, what I'm going to ask the remaining 
three witnesses to do, very quickly--Mr. Smith, Mr. Brilliant, 
and Mr. Fishman, if you had one suggestion for what the U.S. 
should do to try to engage China in enforcing and respecting 
our intellectual property rights, what would be that suggestion 
for our Administration?
    Mr. Smith, we'll start with you, and work down real 
quickly. And then, Ms. Espinel, we're not going to have time 
for you to respond, but perhaps you can in writing, to their 
three suggestions. And I also have two other questions to 
submit to you in writing, as well.
    Mr. Smith. I think we have to make clear to the Chinese 
government that they're in jeopardy. We can do that both 
bilaterally, and we need a credible--we need to take--the U.S. 
Government needs to take a credible position with respect to 
moving toward a WTO case in the next few months, as Ms. Espinel 
said.
    I think that China needs to feel a lot of pressure, before 
they're going to move on this issue. There are a lot of 
domestic forces that are against it. And the more pressure we 
can bring to bear, and the more that this Congress can do to 
help in that effort, the closer we will come to that objective.
    Mr. Smith. Okay. Thank you, Mr. Smith.
    Mr. Brilliant, go beyond, if you will, your four 
suggestions in your testimony. You talk about spearheading, 
engaging, benchmarking, and promoting. Specifically, what would 
you want the Administration to do?
    Mr. Brilliant. Well, our testimony does cover both our 
actions as well as what we suggest that the USTR does. But what 
I would just say is follow up on previous comments, and just 
say we need to continue the pressure and we need the 
Administration to build toward a WTO case, if the facts warrant 
it. That means industry supporting it, but it also means that 
USTR needs to let the Chinese understand that these are 
challenging times, that we need tangible evidence of progress.
    And that's the second point I'd make; which is we need to 
get out of the JCCT some sort of contract from the Chinese 
saying exactly what they're going to do in terms of dealing 
with the prosecution issue, dealing with police investigations, 
dealing with custom enforcements. We need some sort of litany--
or really, a line-by-line contract from the Chinese to show 
that they're really serious about taking action.
    Mr. Smith. Thank you, Mr. Brilliant. And finally, Mr. 
Fishman.
    Mr. Fishman. My one suggestion is a two-step process. The 
first is to form a domestic consensus on China. And part of 
that has to do with the future of our economy; stressing that 
the future of our economy is both industrial and innovative, 
and that needs to be protected. And that means asking consumers 
to make a sacrifice in order to maintain our standard of 
living.
    And the second is to rethink all of the mechanisms that 
you've talked about today. There's a lot of dickering that can 
go on in the context of WTO, but the stakes are enormously 
huge. And there's billions and billions of dollars coming into 
this country based on counterfeit platforms. You might have to 
put a tax on all of that stuff, in order to force a change.
    We have a small window when this can happen. The window is 
now. Our trade deficit with China right now--our deficit alone, 
not our total trade--is 14 percent of their economy. If we put 
a tax on that 14 percent of the economy, you will see rules 
change very, very quickly.
    Mr. Smith. Okay. Thank you, Mr. Fishman. I appreciate all 
your responses.
    The gentleman from Virginia, Mr. Goodlatte, is recognized 
for his questions.
    Mr. Goodlatte. Mr. Chairman, thank you very much for 
holding this very important hearing. I have an opening 
statement that I didn't have an opportunity to give, and I'd 
ask that that be made a part of the record.
    And I'd like to just point out a couple of figures that I 
have. It's estimated that in China 95 percent of motion 
pictures and 90 percent of business software are pirated. And 
in Russia, 80 percent of all motion pictures and 87 percent of 
business software are pirated.
    Considering that the core copyright industries account for 
6 percent of the U.S. gross domestic product, and the total 
copyright industries account for approximately 12 percent of 
U.S. GDP, it's clear that America's businesses are facing a 
very serious problem.
    Mr. Smith, what evidence have you found that piracy and 
counterfeiting are being used to fund organized crime in Russia 
and China? And why are piracy and counterfeiting such 
attractive funding mechanisms in those countries?
    Mr. Smith. Piracy has become one of the most lucrative 
businesses in Asia; indeed, throughout the world. By our best 
information, organized criminal syndicates, organized 
principally out of Taiwan, Hong Kong, and into the mainland, 
and in other countries in East Asia, have a solid lock on this 
business. And their lock is so solid that it is very difficult 
for governments to unlock it. And it's going to require major 
political will of those governments to break these syndicates.
    Now, that process has started in many of the countries in 
Asia. I don't believe it's started in China. And we need to get 
about that business immediately. I know the STOP Initiative 
that the U.S. Government has initiated is an effort at least to 
get at international organized crime through international 
cooperation of justice departments in those regions.
    But there is no question that organized crime and terrorism 
and gun running and money laundering are all part of a piece, 
and it's growing. And until we--this becomes an urgent matter 
and a zero-tolerance issue, it's going to continue to grow, 
because there's just too much money in this business.
    Mr. Goodlatte. Thank you. Mr. Brilliant, are you aware of 
instances where counterfeit goods have actually caused serious 
bodily injury or death?
    Mr. Brilliant. I know in the case of China that has 
happened. There was the instance involving baby formula, but 
there are other examples. There have been examples regarding 
auto parts----
    Mr. Goodlatte. Brakes.
    Mr. Brilliant. Brakes.
    Mr. Goodlatte. And airplane parts, too.
    Mr. Brilliant. Right. So there are examples where faulty 
equipment has been cited as a cause for bodily harm. I think 
there is a real public health and safety component to this 
issue. We've all highlighted that. And certainly it's true, not 
just in the pharmaceutical area, but across a wide range of 
industries.
    And that just adds to our concern that this be not just a 
priority of the U.S. private sector, but also the U.S. 
Government; which it is, I think, today.
    Mr. Goodlatte. Thank you. Ms. Espinel, we heard Mr. 
Fishman's very forceful arguments about some of the things that 
we could do. I wonder if you could tell us what remedies are 
available to better ensure that China and Russia live up to 
their domestic and international obligations to protect 
intellectual property rights. And what more can the U.S. do in 
this regard?
    Ms. Espinel. Well, with China there are a number of steps 
that we outlined a couple of weeks ago in the OCR report that 
we released. And those include our elevation of China to the 
Priority Watch List; intensifying the JCCT process, in 
particular with respect to the Intellectual Property Working 
Group meeting that is going to be meeting next week; working 
with our industry in order to develop our WTO options; invoking 
the transparency procedures of the TRIPS Agreement, in order to 
require China to give us detailed information about its 
enforcement actions. I think we'll also require it to take a 
serious look at the deficiencies in its system.
    These are a number of actions that we have already 
announced that we are going to take, but of course, we are 
also--and as Ambassador Portman has made clear, this is a top 
priority for him. And he made that clear at his confirmation 
hearing. He's made that quite clear to his staff. So we are 
also in the process, in consultation with our industry, of 
discussing what other options they might be. And of course, we 
would also be looking to this Committee for leadership and 
guidance in that process.
    Mr. Goodlatte. How close do you think we are to imposing 
tariff sanctions on China, along the lines of what Mr. Fishman 
suggested?
    Ms. Espinel. With respect to intellectual property?
    Mr. Goodlatte. Yes.
    Ms. Espinel. I think the range of options that we're 
looking at right now include the ones that I've just outlined. 
Of course, at the conclusion----
    Mr. Goodlatte. How long would it take? If we were to start 
that process today, how long would it take before we would see 
actual sanctions imposed on China?
    Ms. Espinel. Well, WTO litigation generally takes somewhere 
between--I mean, it's a little hard to say, as in all 
litigation--but somewhere, I'd say, between a year and two. And 
partly, that depends on whether or not the trial court 
decision, so to speak, is appealed by China.
    Of course, there may be progress made by China. And we will 
absolutely be pressing them to continue to make progress, if we 
go down the WTO road; that we not wait till the conclusion of a 
case and the imposition of sanctions to see progress from 
China.
    Mr. Goodlatte. Well, thank you. I know Mr. Portman is brand 
new to the job, but I hope the ambassador will take a close 
look at making some of those decisions very quickly in this 
regard.
    Ms. Espinel. He absolutely will.
    Mr. Goodlatte. Thank you very much, Mr. Chairman.
    Mr. Smith. Thank you, Mr. Goodlatte.
    The gentleman from California, Mr. Schiff, is recognized 
for his questions.
    Mr. Schiff. I thank the Chairman. And I just had the 
opportunity--one of the reasons I'm late this morning, I just 
had the opportunity to meet with the Chinese ambassador today, 
and to raise this issue personally.
    I want to get your thoughts--and I apologize if we're 
covering ground we've covered already--but what is--what steps 
do you believe that China could effectively take to curtail 
this problem? My impression is that China is very capable of 
cracking down on dissenting viewpoints. They have the 
capability, certainly, of cracking down on illegal products.
    What should China be doing that they're not doing? What 
evidence do we have that this is a conscious economic decision 
on China's part? And what are the constructive steps that we 
can take here in Congress to change China's behavior vis-a-vis 
pirated goods?
    Mr. Fishman. I'd like to tackle that. I regard China's 
loose intellectual property regime as the largest industrial 
subsidy in the world. It transfers to China all of the gems of 
the world's advanced economies at no cost to the Chinese 
government. So it's a large subsidy that costs them nothing, 
and costs us everything.
    If you want to know what the Chinese can do more of, it's 
virtually everything. But there's no will there to do it. And 
the will has to come from somewhere else. It has to come in the 
form of a cost. Because right now, their intellectual property 
regime enriches its people and benefits its people greatly. And 
we ought to have some grudging admiration for how they've run 
this so far, because it's gotten them to where they are and 
it's also created a country which we would love to do business 
with now because it's increasingly wealthy.
    But right now, we're at an inflection point, where we have 
to act in order to preserve what we have. And you could get any 
action that you want. If pirated DVDs included something about 
Falun Gong or Tibetan independence, you would see enforcement 
happen on day two.
    Mr. Schiff. Right.
    Mr. Fishman. But it's a little bit more mysterious when you 
go into a manufacturing plant that's making ``widgets,'' but 
they have 20 or 30 or 100 engineering stations, each of which 
in the United States would cost 50 or 60 thousand dollars a 
year to run, a proprietary piece of software; but they run for 
zero cost in China. Those factories are the kinds of factories 
that churn out goods to us. And unless you look to the world's 
customers of those goods, those Chinese factories have no 
incentive to spend extra millions on intellectual property 
license fees.
    Mr. Schiff. And what's the most effective pressure point 
that the U.S. can bring to bear to get China convinced that 
it's in their economic interest?
    Mr. Fishman. Well, there's been a lot of talk on this among 
the witnesses, about what individual companies can do to bring 
pressure. But individual companies have very few options, 
because there are so many ways to pressure them in China to 
transfer technology there.
    You really need a public solution, and a widespread 
solution from the United States. And that has to be some kind 
of extreme brinksmanship or actual action that taxes everything 
in China that's made on a pirated platform that comes into the 
United States. And until you get that kind of broad-scale 
action, you will get no turn of sentiment in China on 
intellectual property.
    Mr. Schiff. Can you address, any of you on the panel--I 
know this is a little bit off-topic--but the issue of Chinese 
restrictions, for example, on the type of software that their 
government agents--vendors purchase, that essentially excludes 
American exports in that area?
    Mr. Smith. Let me see if I can answer that. Right now, 
there's a pending regulation before the Chinese government to--
for the Chinese ministries to procure only Chinese software. 
And there was a hearing last Friday before the Government 
Reform Committee, I believe, that dealt exactly with this 
problem, discrimination against American software publishers.
    I mean, this is the kind of thing--following up on what Mr. 
Fishman said--that is exactly the wrong strategy. Maybe right, 
from a very narrow point of view; but it is our view that 
China's ultimate economic welfare does not lie in continuing to 
build a copying nation.
    They are never going to go up the value chain, if they 
continue to do what they are now doing. They will continue to 
have trade friction with the rest of the world. We're trying to 
elicit the Japanese and the Europeans now to work with us to 
try to fight this problem.
    And the mechanics of fighting it aren't that difficult. 
Other countries have done it. Other countries have reduced 
piracy rates. China can do it. I think Mr. Fishman is right: 
What are the incentives?
    Part of those incentives are disincentives; and that 
includes the possibility of retaliation through a WTO case, and 
things like that. I believe----
    Mr. Schiff. Is the WTO the most effective leverage that we 
have in dealing with--or are there interconnections between 
issues of the valuation of the Chinese currency or other 
economic issues that are a more powerful lever for us to use?
    Mr. Smith. I mean, I think there's a lot of pressure that 
can be brought to bear that's outside the IP area. I mean, 
everybody is now talking about the Chinese currency and all 
and--you know, and there's defense issues. There are a number 
of intersections. And the importance of China--or the 
interrelationship of China and the United States and that trade 
relationship is extremely important.
    And China cannot continue to just thumb their nose at the 
United States on these issues, when our most productive 
industries can't even get into the market or, as Mr. Fishman 
said--and this is not so much true in the copyright area--
product is coming out of--just flowing out of China that's 
counterfeit. There are remedies to that at the border of the 
United States. And I'm not speaking to what recommendations Mr. 
Fishman has made.
    But there is no question that China must--it's not a 
question of whether; it's a question of when. They have to deal 
with this problem. We hope that the U.S. Government, and all of 
us, and the U.S. Congress, are in a position to convince the 
Chinese that it should be now, before this gets to the brink of 
disaster.
    Mr. Brilliant. If I could just briefly comment, industrial 
policy is at the heart of some of this. I mean, government 
procurement issues, standards, intellectual property, that 
folds into an industrial targeting policy of the Chinese 
government. We have to not only deal with this issue 
bilaterally; we have to deal with it multilaterally.
    The WTO is a multilateral system for dealing with it. But 
another component, we need to bring in the Europeans and 
Japanese and others to increase the pressure on the Chinese to 
act. Because if we act just bilaterally--unilaterally--in our 
actions, that won't--the Chinese will go elsewhere. They'll 
deal with other markets. And that would cost American 
businesses, as well.
    So we need to bring in the multilateral community into our 
fold. And I think the U.S. Government needs to do more on that 
front. I know there's actions underway, but that's an area 
where we need to progress further, is bringing in the Europeans 
and the Japanese and others who share our concerns about the 
policies in China.
    Mr. Schiff. Thank you.
    Mr. Smith. Mr. Schiff, the gentleman's time has expired. 
Thank you for your questions.
    Mr. Forbes and Mr. Issa, would you all be able to come back 
in 15 minutes, if we take a quick recess for these two votes? 
And then we'll finish up at that point. That'll be great. I 
hope the witnesses can stay, as well.
    We'll recess for about 15 minutes, and then reconvene about 
25 or 20 of 12:00, and finish up the questions then. Thank you.
    [Recess.]
    Mr. Smith. The Subcommittee on Courts, the Internet, and 
Intellectual Property will reconvene, and we will resume our 
questions. And we will go to the gentleman from Virginia, Mr. 
Forbes, for his.
    Mr. Forbes. Thank you, Mr. Chairman. And thank all of you 
for being here today. This is an important topic. Mr. Smith 
said earlier that he hoped we could have a lively and 
productive dialogue, and in the time periods we've got, it's 
very difficult to do that. But I just want to throw out a 
couple of things to you. And I'm going to ask you two questions 
at the end of that.
    But I remember years ago going to a high school baseball 
game. And I got there a little bit late, and it was the fourth 
inning. And when I sat down on the bleachers, the team that was 
supposed to win, that was going to the State championship 
supposedly, was down eight-to-nothing, and it was the fourth 
inning. And this old man sitting beside me looked at me, and he 
said, ``Don't worry. Don't worry. They're taking this very 
seriously.'' He said, ``They're going to do everything it takes 
to win.''
    In the seventh inning, they were down 12-to-nothing. And he 
looked at me and said, ``Don't worry. Don't worry. They're 
taking this very seriously. They're going to do everything it 
takes to win.''
    At the bottom of the ninth inning, it was 15-to-nothing. 
And he looked at me and he said, ``They should have taken this 
more seriously.'' He said, ``They didn't do what it took to 
win.'' And I don't want us to be in the ninth inning of this 
ball game, and be saying the same thing.
    And some of the concepts are simple, and some are very 
complex. The simple ones are these. You know, we have ideas and 
creative talent that springs from the investment we put in a 
free society. China has cheap labor. You can steal ideas and 
creative thoughts. You cannot steal cheap labor.
    My big concern is, when you look at this $162 billion trade 
deficit, it's more now than just dollars and cents in the 
economy. Just 5 years or so ago, when the Chinese went to the 
Soviets to buy weapons, they were using IOUs. Today, they're 
using our cash to modernize their military. And their weapons 
are pointed at us. They don't have anybody else to point them 
to.
    And my question is that the word games just don't seem to 
be working. I led a delegation to China in January. We'd just 
started a China Caucus. And you all know what happens is, when 
you meet with them to have a little chat, if you've got an 
hour, for the first 50 minutes, they talk; and then they give 
you 10 minutes, and you know they're not paying attention to 
anything you say in those 10 minutes.
    Mr. Brilliant, you know, you raised some good ideas here. 
And you indicate if we enforce intellectual property rights, 
consumers will pay more. But that would be true here, too. If 
we didn't enforce intellectual property rights here, consumers 
wouldn't pay as much.
    And when we talk about it being difficult to form a 
consensus because consumers would pay more, I have never had a 
consumer call me and say, ``I want you to vote for a particular 
issue, because I'm going to get a DVD player $30 cheaper.'' 
It's the businesses that are selling the DVD players that are 
calling us and pushing some of these policies. So, you know, I 
feel that it's time for us to stop ``going to be doing 
everything that's necessary to do this and win this.'' But it's 
important for us to actually take some steps to do something.
    And my two questions to you are these. I measure a whole 
lot about what we're going to do in the future by what we've 
done in the past. When I was in China, I asked the embassy 
people, I asked everybody I met with, ``What have we done 
right, and where are we winning?'' And I didn't get many good 
answers.
    And so the question that I would ask for you is--again, not 
putting a whole lot of stock in ``going to study this,'' and 
``going to do something down the road''--when we're dealing 
with China, what have we specifically done right in this 
matter? And where are we winning?
    And if each of you would give me--Mr. Brilliant, if you 
could give me--since you've got such a great name, we'll just--
you have a brilliant name.
    Mr. Brilliant. A brilliant name. First of all, what we've 
done right is getting China into the multilateral trading 
system. By getting them in the WTO, we do have opportunities to 
bring cases and----
    Mr. Forbes. But help me with that, because when I talk to 
the average citizen--and you know, I supported--I mean, you 
know, so I'm not arguing--but I'll look at people, and they 
just laugh at me now and they say, ``See, we told you. You were 
going to be able to get them in there and get them to 
enforcement.'' We haven't been able--we're not winning on that 
argument.
    Mr. Brilliant. Well, I think, first of all, it's a lot 
better to have them in the camp than to have them out of the 
camp. Prior to 2000, we had less options in our arsenal than we 
do today. So I'm not arguing that we haven't--we need steps 
further to deal with this issue of intellectual property 
rights; but we have made progress by having them in the WTO. 
First of all, it binds them to rules that are internationally 
recognized.
    Mr. Forbes. But that they're not abiding by.
    Mr. Brilliant. Well, I think, first of all, they have made 
some important cuts in the area of tariffs. They've improved 
transparency. There are things they are doing. It's not a 
perfect situation. By no means are they complete in their WTO 
accession process. But there are things they are doing. They 
are making tariff cuts; they are improving transparency; they 
are implementing trading rights; they're dealing with 
distribution issues. But by no means does that mean we have 
complete market access. But it would have been a lot worse if 
they had stayed out of the world trade system.
    The other thing is that China benefits, itself, from being 
part of a multilateral community. And that, I think, helps move 
them, and modernizes their economy. They see the benefit, as 
well. They're bringing cases, as well. And that means 
something. That means that they understand the value of playing 
by the same game.
    Now, they're not abiding by all the rules that we want them 
to abide by. And certainly, in the topic of this hearing, they 
have fallen well short of our understanding and expectations in 
the area of intellectual property rights. But I think they 
have--I think it is to our benefit to have them in the trading 
system.
    Mr. Smith. In a few minutes, you're going to have a hearing 
on Russia, and Russia is not yet in the WTO. Hindsight is easy; 
but if we go back and look at what the situation was when China 
joined the WTO, for the IP industries we would probably want to 
do a lot more in that protocol than we did do.
    And we hope to God that we do it in the Russia protocol, 
and we don't allow Russia to join with a totally ineffective 
enforcement system, and then drag this thing out. That's 
probably what we should have done back then.
    I would only add that before China joined the WTO, we had 
the one example where I think there was a success with China. 
And China, faced with $2 billion worth of retaliation in 1995 
and '96, closed their CD factories and stopped the export of 
pirate product. And that lasted five or 6 years. So that was a 
success.
    And hopefully, we can not only convince the Chinese that it 
is in their interest to do this--and Mr. Fishman's rather bleak 
view is quite disturbing. We think we can convince them. We 
think it's the right answer. A lot of countries have also 
agreed that it's the right answer to protect intellectual 
property for the long-term growth of their country. But if we 
can't convince them, then we have the WTO.
    Mr. Fishman. I think one thing we ought to look at is the 
trade deficit number. The trade deficit number is impressive 
for a lot of reasons; just impressive because it says how much 
more we spend on Chinese goods than they spend on us. But it's 
also the most direct measure we have of how much American 
companies are profiting in China.
    It's American companies that bring in that $162 billion 
worth of extra goods. This year, the statistics might rise far 
beyond that. I've seen numbers running as high as $240 billion 
as a trade deficit with China in the next year.
    That is the barrier that we face. There's a lot of profit 
being made by doing business with China. And they are growing 
richer from it, and American companies are growing richer from 
it. And if we need to move in to protect American industry, we 
have to look at which industries you're going to protect.
    Right now, it is the large companies in the United States 
which are moving as fast as they can to China, to change their 
supply chains and move them to China as fast as they can, and 
cut the rugs out from under medium- and small-sized businesses 
in this country.
    Well, for most medium- and small-sized manufacturers in 
this country and many service businesses, the only valuable 
piece of property that they own is some core piece of 
intellectual property that they've developed in-house. And they 
are extremely vulnerable to that moving to China and feeding 
the large companies which are trying to move all their 
production over there.
    Ms. Espinel. One of the things the Administration has done 
in the last year is intensify the JCCT process. And we have 
seen some real successes coming out of that. For example, the 
new judicial interpretations that were issued by the Chinese at 
the end of last year.
    However, I would say that we agree with you that we need to 
do more, and that we need to engage with China in a new way. I 
think it is fair to say that we are entering into a new phase 
of our relationship with China.
    Ambassador Portman is well aware of the concern that you 
have, the criticalness of this issue to our economy, to our 
industry, to Congress. And we have--as I've mentioned before, 
we announced a couple of weeks ago a series of actions that we 
are taking to intensify the pressure on China.
    But at the same time, Ambassador Portman is reexamining our 
strategy and our options, to find the most effective way we can 
to address this problem.
    Mr. Smith. Thank you, Mr. Forbes.
    The gentleman from California is recognized. And I might 
say, to my knowledge, he's the only Member of the Judiciary 
Committee that actually holds patents, himself. And we look 
forward to his questions.
    Mr. Issa. Thank you, Mr. Chairman. And I got those patents 
by founding an electronics company 25 years ago. And I no 
longer own the company. I divested when I came to Congress. And 
I'm glad I did, because in preparation for this hearing I 
received from the general counsel of the company I founded, but 
do not own, something that's--and I would ask that this 
material be allowed to be inserted in the record.
    Mr. Smith. Without objection.
    Mr. Issa. Thank you. So ordered.
    [The information referred to follows:]

   Informated Provied by KC Bean, Vice President & General Counsel, 
                       Directed Electronics, Inc.




    Mr. Issa. And what they did, which I think is noteworthy 
here, to show you just how bad--and particularly, for our Trade 
Representative--things are, after I left the company, Directed 
Electronics bought a company called ADS--famous speaker 
manufacturer, speaker and amplifier, very high-end. And they 
were already manufacturing some of their products--and had been 
for decades--in China; actually, for more than a decade, almost 
two decades. And so I have a picture of the authentic ADS 
product, and I'll send it down. This is going to be included in 
the record. And I have a picture of the counterfeit.
    Now, the amazing thing is, it's less than 20 miles from the 
real factory to the fake factory. And when the company, 
according to the general counsel that sent me this, began the 
process of making them aware that a product that is trademarked 
all over the world was being counterfeited in China, sent into 
China, and that as a result the trademark, which had been 
acquired by the fake company, was invalid and fraudulently 
applied for, in every sense, they got a resounding ``No 
Answer'' from China. And that continues till today.
    And there actually was--I only brought this part, but if 
you'd like, I do have that many inches that they've gone so 
far. And this was because I mentioned in a conversation that we 
were going to hold a hearing. China is not, in my opinion, 
going to do anything, unless we pull the trigger on some of 
those sanction capabilities.
    And I would--I think I would be remiss if I didn't mention 
that the DVD example, from my standpoint, makes no sense. Those 
are patents, U.S. patents. You can get an injunction against 
Circuit City, Best Buy, or the person supplying them, in a 
matter of hours. Phillips and others could do that.
    So I would hope that that not go in the record as the best 
example. Because I think that most of China's violations have 
more to do with when there is no patent, when the intellectual 
property is not easily seen. And certainly, when it comes to 
their domestic market--and much of this product is being sold 
to the domestic market--what they've decided to do is not let 
us into the domestic market at all; but rather, supply it 
themselves. And ignoring intellectual property gives them that 
ability.
    And that market, as chairman Bill Gates and others have 
noted, is going to be huge. And that's why so many companies 
are putting an emphasis on getting access. And that, perhaps, 
is the story not told today.
    I would have a specific question for Ms. Espinel. Isn't 
there a tendency--and if there absolutely isn't, please say it 
in those terms. Isn't there a tendency for our ongoing problems 
with North Korea to cause us to soft-pedal the trade portion, 
the valuation portion?
    When I was there with Chairman Hyde in China, now over 2 
years ago, that 1-hour discussion was 50 minutes on North 
Korea. And some note-taker, you know, put a check mark when we 
started talking about intellectual property.
    Isn't that one of our challenges with China? That if this 
were the country of my grandparents, Lebanon, we'd demand that 
they change their rights and they enforce them and they do it, 
or we sanction them. With China, isn't their size and their 
strength and their geopolitical influence part of our problem?
    Ms. Espinel. I think the situation in China is very 
complex, for all of the reasons that you just mentioned. And I 
would add another one to that. I think, given the size of 
China, I think it is a difficult market even for the Chinese 
government to control the problem that they're facing.
    That said, I agree with what other people have said here 
today, that this is a time for the Chinese government to 
demonstrate the political will that I think they can 
demonstrate to get a handle on the problem before it goes any 
further, and to correct the problem and reverse the situation 
that they've created.
    In terms of USTR's relationship with China, Ambassador 
Portman has made quite clear, I think feels quite strongly, 
that IP protection is one of the top priorities that we have 
with China. And I think he is quite willing to press that issue 
with China as far as we need to, in order to effectively 
address this problem.
    Mr. Issa. And just one follow-up question. This problem--I 
know that just in one area, you cited 2.5 billion; but this 
problem represents a substantial portion of the trade deficit. 
How do we get whole, when we're talking about tens of billions 
of dollars of losses to our economy? And that's not to our 
economy in the abstract; that's to particular individuals, to 
particular companies, to particular workers, that are going on 
every day.
    It has been more than--I mean, to be honest, Rob Portman's 
predecessor came in with exactly the same statements that 
you're giving us today about why this was important. And how 
many--how many hundreds of thousands of U.S. jobs and how much 
was lost as a result of saying we were going to act; but 
inaction?
    Why is it that this Committee should believe that, until 
you actually show us action, that you're going to show us 
action? What's different now than it was 2 years ago?
    Ms. Espinel. Well, one thing that I think is different, 
actually in the last couple of weeks, is the out-of-cycle 
review determination that we've made. As I've mentioned before, 
we have intensified pressure in the JCCT in the last twelve 
months.
    We also conducted this extraordinary out-of-cycle review 
against China, and announced the results of that and the 
aggressive actions that we would take as a result of that, a 
couple of weeks ago. And those include things like elevating 
China to the Priority Watch List, which I think has sent a very 
clear signal to China; one that, I might add, they are quite 
unhappy about.
    We have publicly announced that we are working with our 
industry to develop our WTO options, and we are actively 
engaged in that process. We have publicly announced that we 
will be invoking the WTO TRIPS Agreement procedures for 
transparency, in order to acquire information from China. So I 
think we have already outlined a fairly aggressive series of 
actions that we will be taking.
    And in addition to that, I mean, we are looking very 
actively to see what our other options are. I think it seems to 
me that it's clear, given the scope of the problem in China, 
there is not going to be one single effective approach; but 
rather, a combination of approaches that we have already either 
started in train, or maybe, in consultation with you and with 
our industry, able to develop over the next few months.
    Mr. Issa. Thank you, Mr. Chairman. This could go on, if 
only we had time.
    Mr. Smith. Thank you, Mr. Issa. That was a very good 
question, and a good response, as well.
    Mr. Berman has one more quick question to ask, and as I do. 
And then we'll adjourn.
    Mr. Berman. I think I'm not asking you to respond here, but 
if you could respond in writing, Mr. Smith in his testimony--he 
didn't really touch on it much in his testimony, but in his 
written testimony, talks about at least two different 
limitations on market access for films and music--one quotas; 
the other one, requirement of permission to retail music--and 
raises issues of discrimination, tests put on here that aren't 
put on Chinese produced music.
    I'd like to know, number one, to your mind, do those 
violate China's international commitments? And secondly, what 
efforts are being made specifically on those market access 
limitations by the Trade Representative's Office? And if you 
would be willing to put that in writing, I'd be very grateful.
    And I'd only say that, Mr. Issa, notwithstanding the 
problems, at least China is being very helpful with respect to 
North Korea.
    Mr. Smith. Thank you.
    Mr. Issa. You know, funny he should note that----
    Mr. Smith. Thank you, Mr. Issa. No response is necessary 
right now.
    I do have a quick question to ask, myself, Ms. Espinel, and 
that is this. What can American industry do to help you make 
the case that you need to make in order to get the enforcement 
we need from China?
    Ms. Espinel. As I mentioned, we have been working closely 
with some segments of the industry. And I would encourage them 
to continue to cooperate with us, as they have been doing, to 
continue the hard work that they have been doing, to help us 
build the factual record that we need in order to bring the 
best case possible.
    Mr. Smith. Okay. You need specific examples, specific 
figures, documentation, and so forth?
    Ms. Espinel. Yes. Exactly.
    Mr. Smith. Okay. Thank you, Espinel [sic].
    Ms. Espinel. Thank you.
    Mr. Smith. All right. Thank you all for being here. We 
appreciate your testimony. It's been very, very helpful. And I 
might add, I think this is the first such hearing that this 
Subcommittee has had on this important subject in probably 
many, many years. But we intend to go forward and work with--
work with Ms. Espinel and our new ambassador to try to 
effectuate change of the kind that we want.
    We are going to adjourn this hearing now, and then in about 
5 minutes we will resume our hearing schedule and start the 
next hearing.
    [Whereupon, at 12:15 p.m., the Subcommittee was adjourned.]


                                Part II



                 INTELLECTUAL PROPERTY THEFT IN RUSSIA

                              ----------                              


                         TUESDAY, MAY 17, 2005

                  House of Representatives,
              Subcommittee on Courts, the Internet,
                         and Intellectual Property,
                                Committee on the Judiciary,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 12:26 p.m., in 
Room 2141, Rayburn House Office Building, the Honorable Lamar 
Smith (Chair of the Subcommittee) presiding.
    Mr. Smith. The Subcommittee on Courts, the Internet, and 
Intellectual Property will come to order. I will recognize 
myself and the Ranking Member for opening statements, and then 
we will get to the witness testimony.
    This, the second of our two back-to-back oversight hearings 
on the subject of international intellectual property theft, 
will focus on the state of IP enforcement in the Russian 
Federation. In our first hearing, the Subcommittee received 
testimony that China, the single largest source of counterfeit 
and pirated products worldwide, has accelerated their theft of 
intellectual property and failed to adopt enforcement 
procedures that are designed to deter such actions.
    The Russian Federation now seeks to become a member of the 
World Trade Organization, and is counting on the support of the 
United States Government and the American people for that 
privilege. Recently, Secretary of State Condoleezza Rice 
acknowledged the reality that Russia lacks ``the legal 
framework to prosecute those who engage in piracy,'' and stated 
that this ``really must be taken care of before WTO 
accession.''
    However, the adoption of a legal framework alone, which is 
not accompanied by a demonstrated and sustained commitment to 
criminal enforcement of large-scale commercial piracy and 
counterfeiting, is not enough to gain U.S. support for Russian 
accession. This commitment must be made at the highest levels, 
and it must be made before the American people endorse Russian 
accession to the WTO.
    Russian President Putin stated last month ``Our bureaucracy 
is still to a large extent isolated, and is undermined by 
corruption, irresponsibility, and incompetence.'' Anyone 
familiar with the Russian Federation track record for 
protecting and enforcing intellectual property would concur 
with President Putin's statement.
    Last Thursday's Wall Street Journal contained a report 
entitled, ``In Russia, Politicians Protect Movie and Music 
Pirates.'' It describes how certain Russian elected officials 
thwart police investigations of IP crimes, and in fact profit 
by doing so.
    As our witnesses today will testify, the grim reality is 
that lawlessness, physical danger, and corruption are part of 
the daily challenges faced by businesses and individuals who 
seek to conduct business or protect their IP rights in Russia. 
They will provide compelling evidence that the situation has 
actually worsened, rather than improved, in recent years.
    The Members of this Subcommittee will receive evidence that 
the Russian government is the landlord for as many as 18 
optical disc plants that annually produce tens of millions of 
illicit copyrighted works for export to mature markets, and 
that the government has failed to even inspect the vast 
majority of these facilities, let alone investigate or 
prosecute any of the criminals. On the rare occasion when 
someone is investigated for IP theft in Russia, the most likely 
outcome is that no prosecution will occur and that any 
conviction will result in a suspended sentence.
    If Russia is permitted to join the WTO without first 
demonstrating a sustained and serious commitment to the 
enforcement of IP rights, then the real winners will be the 
criminal syndicates. We owe it to the Russian people and to the 
American people to consider this record before the U.S. 
advocates that the Russian government be rewarded with 
accession to the WTO.
    That concludes my statement, and the gentleman from 
California is recognized for his.
    Mr. Berman. Thank you, Mr. Chairman. Russia is considered 
by the copyright industries as second only to China as an 
intellectual property pirate. In fact, that Wall Street Journal 
article that you sent around, Mr. Chairman, its paragraph says, 
``While China may be the world's top producer of illegal 
computer software, CDs, and DVDs, at least authorities there 
are getting serious about cracking down.'' Well, I'm not sure 
that's established. But then it points out, ``In Russia, the 
Kremlin has been promising to deal with the problem for years, 
but industry officials say under President Vladimir Putin it's 
gotten worse, not better.''
    Almost 2 years ago, a number of Members of Congress sent a 
letter to President Bush to focus his attention on the 
escalating problem in Russia. Yet Russian plants are still 
producing tens of millions of pirated optical discs for export. 
U.S. copyright industries continue to lose billions of dollars, 
and the piracy rates are estimated at 70 percent for every 
copyright sector.
    In February, the International Intellectual Property 
Alliance released its 2005 Special 301 Recommendations, a 
document that Mr. Schwartz will address in his testimony. The 
options laid out are time-sensitive. We must consider one or 
all of the following actions: Recommending the designation of 
Russia as a priority foreign country; or conditioning Russia's 
entry into WTO on meaningful copyright enforcement; or denying 
Russia its GSP benefits.
    We must move quickly, because each day that goes by without 
a firm stance by the Administration on these possibilities 
lessens the importance of this issue in Russia's eyes.
    When we had a hearing on international copyright piracy 2 
years ago, a constituent of mine testified to her own personal 
experience of intellectual property theft by the Russian 
government. Before us today are representatives of the movie 
and music industry who will testify to the effect Russian 
piracy has had on that segment of the American economy.
    Whether one pirates from an individual or from a 
corporation, the act of piracy must be stopped. The same holds 
true whether the piracy is sponsored by the government itself, 
or funded by individual citizens. While the concept of private 
ownership of property is relatively new in many of the formerly 
communist countries, the value has not been lost on them.
    Any government that wants the benefits of trade with 
America and who is currently benefitting from trade 
preferences, like Russia, has a responsibility to respect 
American innovation. Any citizen of a state must recognize 
basic rules of law, such as a prohibition on theft.
    The Russian government has pointed to the high price of 
legitimate products coming from the U.S. as a justification for 
piracy. This is tantamount to blaming the victim for the crime. 
It is clear that price is not the cause of piracy. The pirated 
goods contain language tracks that include languages that are 
not Russian. The goal, therefore, is not simply to help 
Russians afford DVDs of movies; piracy is providing a business 
opportunity to services--to service those that live outside of 
Russia.
    We have an opportunity now, in trying to address the piracy 
situations in Russia, to learn from our failures with 
intellectual property enforcement in China. This came up at the 
last hearing. Before permitting Russia's accession to the WTO, 
we must require stricter enforcement of intellectual property 
rights.
    I look forward to hearing the witnesses describe the extent 
of piracy in Russia, and any suggestions they have to curtail 
the problem. And I look forward to working with you, Mr. 
Chairman, to address the importance of achieving significant 
reform of Russian intellectual property enforcement before 
admitting Russia into the WTO. Thank you, Mr. Chairman.
    Mr. Smith. Thank you, Mr. Berman. And may I ask the 
witnesses to stand and be sworn in, if you will.
    [Witnesses sworn.]
    Mr. Smith. Thank you. Please be seated.
    Our first witness is Victoria Espinel, who is the Acting 
Assistant U.S. Trade Representative for Intellectual Property 
in the Office of the United States Trade Representative. In 
that capacity, Ms. Espinel serves as the principal U.S. trade 
negotiator on IP. Ms. Espinel's office chairs the interagency 
committee that conducts the annual Special 301 Review of 
international protection of intellectual property rights. The 
latest report was published on April 29, 2005.
    She holds an LLM from the London School of Economics, a JD 
from Georgetown University, and a BS in foreign service from 
Georgetown University School of Foreign Service. After serving 
as the government witness in our China hearing earlier this 
morning--or this morning--Ms. Espinel is now a veteran who is 
seasoned in delivering testimony to Congress. We look forward 
to her return testimony, as well.
    Our second witness is Eric Schwartz, Vice President and 
Special Counsel to the International Intellectual Property 
Alliance, IIPA, a private-sector coalition of six U.S. trade 
associations which represents over 1,300 companies that 
produce, and distribute materials protected by copyright laws 
throughout the world.
    Mr. Schwartz is a partner at Smith and Metalitz, where he 
specializes in copyright, entertainment, and information law. 
Mr. Schwartz was the principal negotiator of the copyright 
provisions in the U.S.-USSR trade agreement of 1990, and he is 
the subject matter expert for IIPA on copyright matters that 
involve the Russian Federation and Eastern and Central Europe. 
A graduate of Johns Hopkins University, Mr. Schwartz obtained a 
JD from the American University's Washington College of Law.
    Our next witness is Mrs. Bonnie Richardson, who serves as 
the Senior Vice President for International Policy at the 
Motion Picture Association of America, where she is responsible 
for international policies affecting the production and 
distribution of filmed entertainment in worldwide markets.
    Before joining MPAA, she served as the director for 
services negotiations for USTR, and as a foreign service 
officer at the Department of State. Mrs. Richardson earned her 
master's degree at Johns Hopkins School of Advanced 
International Studies, and her undergraduate degree from the 
University of Delaware.
    Our final witness is Matthew T. Gerson, the Vice President 
for Public Policy and Government Relations at the world's 
largest music company, the Universal Music Company. Mr. Gerson 
has been with Universal for 10 years. Prior to that, he worked 
at the MPAA. He is a graduate of Georgetown University Law 
Center, and Tufts University.
    We welcome you all, and look forward to your very expert 
testimony. And as before, Ms. Espinel, we'll begin with you.

  TESTIMONY OF VICTORIA ESPINEL, ACTING ASSISTANT U.S. TRADE 
REPRESENTATIVE FOR INTELLECTUAL PROPERTY, OFFICE OF U.S. TRADE 
                         REPRESENTATIVE

    Ms. Espinel. Thank you. Chairman Smith and Members of the 
Committee, thank you for the opportunity to address your 
concerns over inadequate protection and enforcement of 
intellectual property rights in Russia.
    Protection and enforcement of America's IP rights in Russia 
is an issue that is of the utmost concern to USTR and to the 
Administration, and is one that we take very seriously. Due to 
the importance of this issue and the prevalence of piracy in 
Russia, Presidents Bush and Putin have discussed improving 
protection of intellectual property in Russia at several recent 
summits, including most recently at their meeting earlier this 
month in Moscow. Successfully combatting the rampant piracy and 
counterfeiting that currently exists in Russia is a top 
priority.
    The level of copyright piracy in Russia has increased 
dramatically, and the adverse effects on American owners of 
copyrights are compounded by the fact that Russia has become a 
major exporter of pirated materials. In addition to sales in 
Russia of illegal music, movies, and computer software, 
Russia's pirates are exporting large volumes of illegal 
products to other markets. As a result, Russia is on the 2005 
Special 301 Priority Watch List announced on April 29.
    In addition, due to the severity of the problem in Russia, 
USTR announced that the Administration will conduct an out-of-
cycle review this year to monitor progress by Russia on a 
number of IP issues. We are also continuing interagency review 
of a petition filed by the U.S. copyright industries to 
withdraw some or all of Russia's benefits under the U.S. 
Generalized System of Preferences program.
    USTR and other agencies have been, and will continue to be, 
very engaged with the Russian government at all levels to 
develop an effective IP regime and strengthen enforcement in 
Russia. We have an ongoing bilateral working group with the 
Russian Federal Service for Intellectual Property, Patents, and 
Trademarks, Rospatent, the agency responsible for most IP 
matters in Russia, which has convened several times this spring 
to discuss a wide range of IP issues. Recent discussions have 
focused on Russia's enforcement regime; legislative 
deficiencies, including the need for a comprehensive regulatory 
regime on optical media production; and Internet piracy.
    Through these and other ongoing efforts, we have seen an 
improvement in cooperation at the working level on IP issues, 
especially from Rospatent and the Ministry of the Interior. 
Based upon case information provided by our industry, embassy 
officials meet regularly with senior representatives of the 
Ministry of Interior, the prosecutors, Rospatent, and the 
Supreme Court, to track and press for enforcement in major 
criminal cases involving optical disc manufacturing facilities 
and Internet piracy.
    We are also working on IP issues in the context of Russia's 
WTO accession negotiations. We have continuing concerns that 
Russia's current IP regime does not meet WTO requirements 
related to protection of undisclosed information, geographic 
indications, and IP enforcement. We are raising these and other 
concerns in the accession negotiations, and have made it clear 
to the Russian government that progress on IP will be necessary 
to complete the accession progress.
    Supplementing these efforts directly with Russia, the 
Administration is taking comprehensive action to block trade 
around the world in counterfeit and pirated goods through the 
Strategy Targeting Organized Piracy, or STOP, initiative. STOP 
is a U.S. government-wide initiative begun in October 2004 to 
empower U.S. businesses to secure and enforce their rights 
overseas, to stop fakes at our borders, to expose international 
counterfeiters and pirates, to keep global supply chains free 
of infringing goods, to dismantle criminal enterprises that 
steal U.S. intellectual property, and to reach out to like-
minded U.S. trading partners that are facing similar problems 
in order to build an international coalition to stop 
counterfeiting and piracy worldwide. Addressing Russia's 
growing exports of pirate and counterfeit products is part of 
this initiative.
    Our work has brought about some improvements, particularly 
with respect to the content of Russia's laws; but much more 
will need to be done in order to reduce the level of piracy and 
counterfeiting. As part of its effort to bring Russia's IP 
regime into compliance with the TRIPS Agreement, Russia amended 
its copyright law in 2004 to provide protection for preexisting 
works and for sound recordings. Russia has amended a number of 
other laws as well, including its law on patents and protection 
of computer software and databases. Although these amendments 
demonstrate some commitment to strengthening its intellectual 
property laws, further improvements in Russia's laws are 
necessary.
    On the enforcement side, we have seen far less progress. 
While Russian law enforcement agencies have taken some actions, 
including an increased number of raids by police, these actions 
have not resulted in the kind of robust prosecution and 
meaningful penalties that would deter the significant increase 
in piracy that our industry has observed in Russia.
    Enforcement efforts in Russia must increase dramatically in 
order to combat the rising piracy and counterfeiting levels. We 
need to see improvements in enforcement of Russia's criminal 
law against piracy; improved enforcement at the border; and 
better administrative and civil procedures, such as providing 
for ex parte procedures in civil cases.
    We are very concerned with the amount of excess optical 
media capacity in Russia and with Russia's lack of a 
comprehensive regulatory regime to control illegal optical 
media operations. Although Russian authorities have recently 
taken some positive steps to strengthen optical disc licensing 
procedures, Russia must establish an effective system for 
inspecting the optical media plants, to ensure that only 
authorized product is being made.
    On the criminal enforcement side, we see frequent delays in 
prosecutions and then imposition of minimal penalties, 
including many suspended sentences. Frequently, pirated goods 
that have been seized are not destroyed, but are returned to 
the market. We have raised these issues with Russia, and are 
seeking decisive actions to address these growing problems, 
such as inspecting optical media plants, permanently shutting 
down illegal production, and taking down Internet sites that 
are spreading pirated material.
    We share in our industries' frustration--and your 
frustration, I would imagine--over the lack of significant 
progress on the part of Russia's authorities. USTR is committed 
to utilizing effectively the tools currently available to us to 
press Russia to implement immediate concrete measures to combat 
piracy and counterfeiting and reduce the losses to our 
industry.
    Despite our close engagement and continued work with the 
Russian government, Russia has made little progress in 
permanently closing down illegal production plants and bringing 
offenders to justice. Political will at the highest levels will 
be needed in order to see a reduction in piracy levels in the 
near term.
    USTR will continue to monitor Russia's progress in bringing 
its IP regime in line with international standards through the 
Special 301 out-of-cycle review that we have just announced, 
the ongoing GSP review, and the WTO accession discussions.
    Progress will be critical for our bilateral relationship 
with Russia, and will have implications for Russia's accession 
to the WTO. Ultimately, success will depend on the political 
will of Russia's leaders to tackle the underlying problems of 
corruption and organized crime. The STOP initiative will also 
be employed to address the significant intellectual property 
problem.
    We remain committed to working with Congress, and this 
Committee in particular, in pressing Russia to effectively 
combat and reduce the unacceptable levels of piracy and 
counterfeiting which plague our industry.
    Mr. Chairman and Members of the Committee, thank you for 
providing me with the opportunity to testify. And I look 
forward to your questions.
    [The prepared statement of Ms. Espinel follows:]
                 Prepared Statement of Victoria Espinel
    Chairman Smith and members of the Committee, thank you for the 
opportunity to address your concerns over ineffective protection and 
enforcement of intellectual property rights in Russia.
    Protection and enforcement of American's intellectual property 
rights (IPRs) in Russia is an issue that is of utmost concern to USTR 
and the Administration and is one that we take very seriously. Due to 
the importance of this issue and the prevalence of piracy in Russia, 
Presidents Bush and Putin have discussed improving protection of IPRs 
in Russia at several recent summits, including at their meeting earlier 
this month in Moscow. Successfully combating the rampant piracy and 
counterfeiting that currently exists in Russia is a top priority.
    As you have heard from other witnesses here today, U.S. copyright, 
trademark, and patent-based industries are experiencing huge losses 
resulting from ineffective or, in some cases, non-existent 
enforcement--losses that, in some cases, are continuing to increase 
over the past year.
    The level of copyright piracy in Russia has increased dramatically 
and the adverse effects on American owners of copyrights are compounded 
by the fact that Russia has become a major exporter of pirated 
materials. In addition to sales in Russia of illegal music, movies and 
computer software, Russia's pirates are exporting large volumes of 
illegal products to other markets. As a result, Russia is on the 2005 
Special 301 Priority Watch List announced on April 29. In addition, due 
to the severity of the problem in Russia, USTR announced that the 
Administration will conduct an out-of-cycle review this year to monitor 
progress by Russia on numerous IPR issues. We are also continuing 
interagency review of a petition filed by the U.S. copyright industries 
to withdraw some or all of Russia's benefits under the U.S. Generalized 
System of Preferences (GSP) program.
    USTR and other agencies have been and will continue to be very 
engaged with the Russian Government at all levels to develop an 
effective IPR regime and strengthen enforcement in Russia. We have an 
ongoing bilateral working group with the Russian Federal Service for 
Intellectual Property, Patents, and Trademarks (Rospatent), the agency 
responsible for most IPR matters in Russia, which has convened several 
times this spring to discuss a wide range of IPR issues. Recent 
discussions have focused on Russia's enforcement regime, legislative 
deficiencies--including the need for a comprehensive regulatory regime 
on optical media production, and Internet piracy.
    We are working with other U.S. Government agencies and our Embassy 
in Moscow to more actively engage senior Russian officials and law 
enforcement representatives. Our Embassy has increased efforts on the 
ground, such as conducting a series of regional workshops on IPR 
enforcement. We will have held a workshop in every Russian region by 
the end of 2005. These conferences are designed to more actively engage 
Russian officials from the Ministry of the Interior's economics crimes 
unit, Russian customs, local prosecutors' offices and the judiciary at 
the regional level. Through these and our other ongoing efforts, we 
have seen an improvement in cooperation at the working-level on IPR 
issues, especially from Rospatent and the Ministry of Interior. Based 
upon case information provided by U.S. industry, Embassy officials meet 
regularly with senior representatives of the Ministry of Interior, the 
Procuracy (prosecutors), Rospatent, and the Supreme Court to track and 
press for enforcement in major criminal cases involving optical disk 
manufacturing facilities, as well as in Internet piracy cases.
    We are also working on IPR issues in the context of Russia's WTO 
accession negotiations. We have continuing concerns that Russia's 
current IPR regime does not meet WTO requirements related to protection 
of undisclosed information, geographic indications and enforcement. We 
are raising these and other concerns in the accession negotiations and 
have made it clear to the Russian Government that progress on IPR will 
be necessary to complete the accession process.
    Supplementing these efforts directly with Russia, the 
Administration is taking comprehensive action to block trade around the 
world in counterfeit and pirated goods through the Strategy Targeting 
Organized Piracy (STOP!). STOP! is a U.S. government-wide initiative 
begun in October 2004 to empower U.S. businesses to secure and enforce 
their intellectual property rights in overseas markets, to stop fakes 
at U.S. borders, to expose international counterfeiters and pirates, to 
keep global supply chains free of infringing goods, to dismantle 
criminal enterprises that steal U.S. intellectual property and to reach 
out to like-minded U.S. trading partners in order to build an 
international coalition to stop counterfeiting and piracy worldwide. 
Addressing Russia's growing exports of pirated and counterfeit products 
is part of this initiative, and Russian officials have repeatedly 
express interest in cooperating with us on the initiative.
    Our work has brought about some improvements, particularly with 
respect to the content of Russia's laws, but much more will need to be 
done in order to reduce the level of piracy and counterfeiting. As part 
of its effort to bring Russia's IPR regime into compliance with the 
obligations of the TRIPS Agreement, Russia amended its Copyright Law in 
2004 to provide protection for pre-existing works and sound recordings. 
Russia has amended a number of other laws as well, including its laws 
on patents and protection of computer software and databases. Although 
these amendments demonstrate Russia's commitment to strengthening its 
IPR laws, further improvements in Russia's laws are necessary.
    On the enforcement side, we have seen far less progress. While 
Russian law enforcement agencies have taken some actions, including an 
increased number of raids by police, these actions have not resulted in 
the kind of robust prosecution and meaningful penalties that would 
deter the significant increase in piracy that our industry has observed 
in Russia. Enforcement efforts in Russia must increase dramatically in 
order to combat rising piracy and counterfeiting levels. We need to see 
improvements in enforcement of Russia's criminal laws against piracy 
and counterfeiting, improved enforcement at the border to prevent 
exports of pirated and counterfeit products and better administrative 
and civil procedures for IPR enforcement, such as providing for ex 
parte procedures in civil cases.
    We are very concerned with the amount of excess optical media 
capacity in Russia and with Russia's lack of a comprehensive regulatory 
regime to control illegal optical media operations. Our industry 
estimates that the capacity of known plants in Russia is 371.6 million 
discs while legitimate domestic demand is around only 30 million discs. 
Illegal optical media from Russia has been found in markets around the 
world. Russia lacks an effective system for inspection of optical media 
production plants to ensure that only authorized product is being made. 
However, Russian authorities recently have taken some positive steps to 
strengthen optical disc licensing procedures.
    On the criminal enforcement side, we see frequent delays in 
prosecutions and then imposition of minimal penalties, including many 
suspended sentences. Frequently, pirated goods that have been seized in 
a case are not destroyed, but are returned to the market. The U.S. 
copyright industry estimates that 70 percent of seized pirated products 
go back into the stream of commerce. We are also seeing an increase in 
piracy on the Internet. Several major illegal websites are operating 
out of Russia, one of which our industry reports is now the largest 
portal for pirated product in the world. We have raised these issues 
with Russia and are seeking decisive actions to address these growing 
problems such as inspecting optical media plants, permanently shutting 
down illegal production, and taking down Internet sites that are 
spreading pirated material.
    We share in our industries' frustration over the lack of 
significant progress on the part of Russia's authorities. USTR is 
committed to utilizing effectively the tools currently available to us 
to press Russia to implement immediately concrete measures to combat 
piracy and counterfeiting operations and reduce the losses to U.S. 
industries. Despite our close engagement and continued work with the 
Russian Government, Russia has made little progress in permanently 
closing down illegal production plants and bringing offenders to 
justice. Political will at the highest levels will be needed in order 
to see a reduction in piracy levels in the near term.
    USTR will continue to monitor Russia's progress in bringing its IPR 
regime in line with international standards through the Special 301 
out-of-cycle review, the ongoing GSP review, and WTO accession 
discussions. Progress will be critical for our bilateral relationship 
with Russia and will have implications for Russia's accession to the 
WTO. Ultimately, success will depend on the political will of Russia's 
leaders to tackle the underlying problems of corruption and organized 
crime. The STOP! initiative will also be employed to address this 
significant IPR problem. We remain committed to working with the 
Congress and this committee in particular in pressing Russia to 
effectively combat and reduce the unacceptable levels of piracy and 
counterfeiting which plague our industry.
    Mr. Chairman and members of the Committee, thank you for providing 
me with the opportunity to testify. I look forward to your questions.

    Mr. Smith. Thank you, Ms. Espinel.
    Mr. Schwartz.

TESTIMONY OF ERIC SCHWARTZ, VICE PRESIDENT AND SPECIAL COUNSEL, 
      INTERNATIONAL INTELLECTUAL PROPERTY ALLIANCE (IIPA)

    Mr. Schwartz. Thank you, Chairman Smith, Mr. Berman, and 
Members of the Subcommittee, for giving IIPA the opportunity to 
testify on the copyright problems we're confronting in Russia.
    I've provided a detailed report on some of the problems, 
and will use my time to just give you a brief overview across 
all the copyright sectors of the problems our industries are 
facing in Russia, as well as some suggestions that we think the 
U.S. Government could take to improve the situation there.
    We've provided a lot of statistics, and the statistics only 
tell a part of the story. What they do not show is the poor 
reaction over the past 10 years of the Russian government to 
the piracy problem. The optical disc production and 
distribution problem, which is our most serious problem--that 
is, the making of CDs and DVDs at the 34 plants--did not spring 
up overnight. And this problem is not unique to Russia. It has 
been successfully addressed in other countries. So we know that 
it can be fixed.
    IIPA first raised this problem with the Russian government 
in 1996, when there were two plants. The reason the problem has 
been allowed to escalate to the 34 current plants--that is, 34 
known plants--eight of which are dedicated to making DVDs, and 
with a total plant capacity over 400 million discs a year, has 
been because the Russian government has failed to properly act. 
In short, what we have is a legacy of failed commitments.
    On a personal note, I can tell you the piracy situation in 
Russia is the worst it has been in the 16 years I've been 
working on Russian and, before that, Soviet copyright issues. 
Let me show you a few of the statistics that we're confronting.
    First, we estimate that the copyright industries lost over 
$1.7 billion last year alone to copyright piracy in Russia; 
over $6 billion in the last 5 years. At the same time that 
we're losing $1.7 billion last year, Russia enjoyed over $515 
million in GSP benefits, $430 million in 2003. In short, Russia 
has not earned the right to enjoy these benefits. They are 
neither in compliance with the GSP requirements for enjoyment 
of the benefits, and they are not taking the necessary actions 
to reduce piracy.
    Our rate, as noted in the opening statements, hover around 
70 percent at the low end, and 87 percent on the high end. We 
know from forensic evidence that at least 24 of the 34 plants 
are known to be producing some pirate product. We don't know 
how much, because there is not proper plant inspections 
ongoing. We also know that Russian-produced optical discs have 
been positively identified in 27--at least 27--countries.
    Let me give you an example of some of the actions that were 
undertaken last year, and the results. In 2004, the Russian 
government and our industry agreed that there were eight 
actions taken against the Russian plants. But they were 
unsuccessful, for three reasons: One, most of the seized 
material ends back in the marketplace--by some industry 
experts, as much as 70 percent. Two, every single plant that 
was raided remained in operation throughout the year; they have 
never closed a plant. And third, there were few, if any, 
criminal prosecutions; almost all end in suspended sentences. I 
was looking back at my notes, and I believe it may be the case 
that in the last 10 years there have only ever been two 
criminal convictions that ended in served sentences.
    We've suggested six steps to the Russian government on how 
to improve the optical disc problem. Step number one is easy. 
All they have to do is conduct surprise raids at 34 plants. 
This could be done in a matter of weeks.
    As for new legislation, which Ms. Espinel has mentioned, we 
can't wait for new legislation. Yes, there are deficiencies in 
their optical disc regulatory scheme, but it took them 12 years 
to fix the deficiencies in their copyright law, and all the 
while the U.S. Government was pressing them, as well as the 
IIPA, on these shortages.
    The legacy of failed commitments, though, is very serious. 
At all levels of the Russian government--as you've heard, even 
at the presidential level--these issues have been discussed 
without success. Beginning in 1999, when the Russian government 
first acknowledged that it had an optical disc problem--and 
remember, we raised it with them in 1996, so three years 
before--they acknowledged a problem; they acknowledged they 
would take care of the problem.
    In 2002, they agreed in negotiation with the U.S. 
Government to create an action plan, something comprehensive to 
fix the optical disc problem. They never provided the action 
plan, and we never heard about the plan ever again after those 
rounds of negotiations. Instead, they created an inter-
ministerial commission, which meets quarterly and issues 
reports on the ``progress'' that they're making on optical disc 
piracy problems.
    As one example of the shortcomings of the government. This 
last October, we spent a considerable amount of time in 
discussions with them. And the Russian government officials 
told us that they would convene a meeting in December with the 
18 plants known to be on leased or limited-access government 
property.
    The meeting never took place. And the reason the meeting 
never took place: The government later acknowledged they 
couldn't identify who the owners of the plants are. Because 
they have no effective plant licensing system, they don't even 
know how to identify who they should be meeting with to stop 
these actions.
    So we've suggested three things to the U.S. Government. For 
the past 9 years, Russia has been on the priority watch list, 
and it's time to take some different course of action. The 
first is to condition Russia's entry into the World Trade 
Organization on meaningful copyright enforcement.
    The second is, when the out-of-cycle review is over, to 
designate Russia as a priority foreign country, and to get to 
the business of forcing them with deadlines, to either fix the 
problem or to face trade sanctions.
    And the third, and probably simplest for the U.S. 
Government, would be to suspend or deny their eligibility for 
GSP benefits; which could be done immediately. We filed the 
petition in 2000 with the U.S. Government. It was accepted in 
2001. I've testified twice on the issue, and regularly file 
updates on the shortcomings of the Russian government. And we 
think they could just suspend the GSP benefits.
    In short, we think that the time for the Russian government 
is up. And looking at the clock, my time is up, as well. So I 
will thank you, and be happy to answer any questions.
    [The prepared statement of Mr. Schwartz follows:]
                 Prepared Statement of Eric J. Schwartz
    Mr. Chairman, Ranking Member, and Members of the Subcommittee, the 
International Intellectual Property Alliance (IIPA) and our members 
thank you for the opportunity to testify today on the piracy problems 
we are confronting in Russia.
    The IIPA is a private sector coalition representing the U.S. 
copyright-based industries in bilateral and multilateral efforts to 
improve protection and enforcement of copyrighted materials worldwide. 
The IIPA is comprised of six trade associations representing over 1,300 
U.S. companies who produce and distribute materials throughout the 
world. The copyright industries contributed over $625 billion to the 
U.S. GDP, or 6% of the U.S. economy, and almost 5.5 million jobs or 4% 
of U.S. employment, in 2002.
    The copyright businesses and the individual creators that work with 
them are critically dependent on having strong copyright laws in place 
in foreign countries and having those laws effectively enforced. In 
fact, most of the copyright sectors generate over 50% of their revenue 
from outside the U.S. This is why we are so concerned with the problems 
of weak legal regimes and poor enforcement in China, Russia, and the 
many other countries detailed in our annual Special 301 Report to the 
U.S. government.
    Simply put, Russia's current copyright piracy problem is enormous. 
I have worked on U.S.--Russian copyright matters for over 16 years 
trying to improve the legal regime in Russia--including adoption of 
better copyright and related enforcement laws, as well as working to 
improve on-the-ground enforcement. The present piracy problem in Russia 
is the worst it has been in my 16 years experience. Piracy of all 
copyright materials--motion pictures, records and music, business and 
entertainment software, and books--is at levels ranging from a low of 
about 66% to a high of 87%--totally unacceptable for a country and 
economy the size and sophistication of Russia.
    Let me begin by describing the scope and nature of the problem in 
Russia from our vantage point.
            scope and nature of the piracy problem in russia
    Russia has one of the worst piracy problems of any country in the 
world, second only to China. The IIPA estimates that the copyright 
industry lost over $1.7 billion due to piracy last year, and over $6 
billion in the last five years in Russia. As noted, the piracy rates 
hover around 70% of the market or higher for every copyright sector. In 
short, Russia's criminal enforcement system has failed to stem 
persistent commercial piracy.
    The number of optical disc (i.e., CD and/or DVD) plants in Russia 
has more than doubled in just the last three years to number at 
present, at least 34 plants, including eight dedicated DVD plants. 
There are a total of 80 known operational production lines. Production 
capacity has nearly tripled as criminal operations have encountered 
little hindrance in expanding their activities. Even more troubling, 
IIPA is aware of nine production plants located on the facilities of 
the Russian government, so-called restricted access regime enterprises 
(although the Russian government has publicly acknowledged that there 
may be as many as 18 such plants). Russia's annual manufacturing 
capacity now stands conservatively at over 370 million CDs and 
additionally over 30 million DVDs, despite the fact that the demand for 
legitimate discs is unlikely to exceed 80 million in all formats.
    Forensic evidence indicates that at least 24 of the 34 plants are 
known to be producing pirate product. Of course, without proper 
surprise inspection procedures in place, there is no way of knowing for 
certain the size and scope of what all the plants are producing. 
Russian-produced optical discs (CDs) have been positively identified in 
at least 27 countries. So, the harm illegal Russian plants are doing 
far exceeds the Russian marketplace.
    In 2004, there were eight actions taken by the Russian government 
against the optical disc (``OD'') CD/DVD plants, including raids and 
seizures of illegal materials according to our industry, and Russian 
government, reports. The raids are obviously a positive step. But, the 
outcome of the raids is telling:
    First, much of the seized material ends up back in the marketplace 
either through lax enforcement (or corruption), laws permitting 
charitable sales of such property, or the conclusion without 
prosecution of criminal investigations. As an example, over half of the 
one million illegal CD and DVD copies seized in a raid last year 
``disappeared'' before the case went to trial.
    Second, all of the optical disc plants that were raided in 2004 
remained in operation after those raids. In some cases, truckloads of 
illegal material were seized from the same plants by Russian government 
enforcement officials--and still these same plants remain in operation.
    Third, the plant owners remain unscathed by the criminal justice 
system. A few people employed by the plants were convicted--after 
extensive delays in criminal investigations--but virtually all received 
suspended sentences. So, there is no deterrence to continuing to 
conduct commercial piracy in Russia at present.
    In fact, the record industry (International Federation of Phonogram 
Producers, IFPI) reports that in the past two years, of the 24 cases 
IFPI is cooperating on, 21 of those 24 cases remain without a 
resolution--that is, no prosecutions of the operators of illegal CD 
plants, as investigations have dragged on. In the other three cases, 
the pirate CDs were destroyed, but no deterrent sentences were handed 
down. The only exception to this pattern (which has been true for 
years) was in June 2002 when the Disc Press MSK plant (raided in 
September 1999) was finally closed and a Zelenograd court handed down 
4-year prison sentences to two operators of the plant. In February 
2004, there was a one-year conditional sentence given to a manager of 
the Zelenograd plant which was raided in December 2002, resulting in 
the seizure of 234,493 pirate CDs (over 59,000 were music CDs). The 
more typical case is that of the Synograph plant, raided in October 
2000. There was a four year criminal investigation aimed at the 
director of the plant; a court hearing is scheduled for 2005, and the 
plant is still in operation.
    The optical disc problem that IIPA confronts in Russia is one that 
has been regulated in virtually all other countries where we have found 
these levels of massive production of pirate product--countries like 
Taiwan, China, Hong Kong, Macau, Bulgaria and Malaysia. Russia's 
regulation of the plants is virtually non-existent, and based on a weak 
2002 licensing law. Quite simply, Russia is the largest un-regulated 
and un-enforced producer of pirate optical disc product in the world.
    To solve this problem, Russia must undertake vigorous criminal 
enforcement backed by the highest political officials in the 
government, since much of the piracy is undertaken by organized 
criminal syndicates. For example, according to the Entertainment 
Software Association (ESA), Russian crime syndicate pirates of 
videogame material are so well-entrenched that they ``label'' their 
product. The Motion Picture Association of America (MPAA) reports that 
producers of motion picture DVDs produce export-only copies of DVDs 
because they are in seven or eight foreign languages, not including 
Russian.
    Most of our testimony today is limited to problems pertaining to 
hard-copy piracy, but there are growing problems related to digital 
piracy as well. In fact, the world's largest server-based pirate music 
website--allofmp3.com--remains in operation after a criminal prosecutor 
in early 2005 reviewed the case and determined (wrongly) that current 
Russian copyright law could not prosecute or prevent this type of 
activity. In fact, this interpretation of the Russian law is contrary 
to all the assurances the Russian government gave the U.S. government 
and private sector during the years-long adoption of amendments to the 
1993 Copyright Law; those amendments were finally adopted in July 2004.
    The business software industry (Business Software Alliance, BSA) is 
confronting its own unique digital piracy problem relating to copyright 
enforcement. In short, the Russian government has failed to take 
effective action against the broad distribution of counterfeit software 
over the Internet, primarily through unsolicited e-mails (spam) 
originating from groups operating in Russia. Separately, the BSA has 
had success with Russian law enforcement agencies taking action against 
channel piracy (i.e., illegal software preloaded on computers sold in 
the marketplace), not only in the Moscow area, but also in other 
Russian regions, and has made some progress in software legalization in 
the public sector.
    The book industry, the Association of American Publishers (AAP) 
reports widespread piracy of an array of reference works and textbooks, 
increasingly a large market in Russia as the penetration of English-
language materials in the market grows. Lax enforcement, including poor 
border enforcement--endemic to all copyright sectors--results in the 
import (and export) of illegal materials. In the book industry this 
includes unlicensed imports of pirated reprints from neighboring 
countries, and pirated reference books and medical texts; there is also 
widespread illegal commercial photocopying, especially in the academic 
sector.
    We have indicated the devastating consequences to the U.S. 
copyright owners and authors. The harm to the Russian economy is 
enormous as well. The motion picture industry alone estimates lost tax 
revenues on DVDs and videos in Russia was $130 million last year. In 
another study undertaken by the software industry, it was estimated 
that if levels of piracy could be reduced to regional norms (that is, 
realistic levels), ten of thousands of jobs and several hundred million 
dollars in tax revenues would be realized from that sector alone in 
Russia.
         the russian government's legacy of failed commitments
    The performance of the Russian government over the past decade can 
be summed up as representing a legacy of failed commitments on 
obligations to the United States and the broader international 
community. A short list of these failed commitments is as follows:
    Optical Disc Enforcement Commitments: The most egregious problem is 
that illegal production has devastated the domestic Russian market, and 
exports of Russian-produced pirated optical media (CDs, DVDs, etc.) are 
causing serious damage to legitimate market worldwide, as witnessed by 
the huge amount of pirated material originating in Russia that is found 
abroad.
    In 1996, the IIPA first identified optical disc plant production as 
a problem and suggested the need for an enforcement ``action plan'' to 
address this problem, including legislative reforms. Two optical disc 
(``OD'') plants were identified in the IIPA's February 1996 Special 301 
Report. As noted, there are now 34 CD plants, with a total capacity of 
370 million discs per year.
    At all levels of the Russian government there have been promises to 
address this problem (starting in 1999) including a pledge, never met, 
in 2002 to issue an ``action plan''--but to date, there has been 
virtually no action taken against the plants, no comprehensive plan of 
action issued by the Russian government, and no legislative reforms on 
this point have even been introduced. Now ten years after IIPA (and the 
U.S. government) raised the issue, there is no excuse for why the 
Russian government has been unable to properly license and inspect all 
the known (now 34) plants, and to close and repeal the licenses of 
those engaged in illegal production and distribution, as well as to 
criminally prosecute the plant owners and operators.
    As one example of the failure to regulate the plants: late in 2004, 
in bilateral talks with the U.S. government and IIPA, the Russian 
government promised it would ``meet with the 18 plants'' (their figure) 
on restricted access (i.e., military) property to ascertain the legal 
or illegal status of their production, and to report back to the U.S. 
government. The meeting, scheduled for December, was cancelled and has 
not been rescheduled. The reason: the Russian government confessed it 
was unable to determine all the owners of the plants from its records 
(because of its inadequate licensing law) and therefore could not 
identify with whom the government needed to meet.
    Promised Legal Reforms: The Russian government has for 13 years, 
obligated itself in bilateral and multilateral negotiations to adopt 
necessary legal reforms. A short list of the failed commitments 
relating to legal reforms includes:
    In 1995, the Russian government agreed to provide ex parte search 
provisions--critical enforcement tools, especially in the software 
industry. These were adopted in part in the Arbitration Procedures Code 
in 2002, however the proper provisions were never implemented and are 
absent from the Civil Procedure Code (enacted in 2003).
    In 1995, the Russian government agreed to provide the police and 
prosecutors with proper authority to confiscate illegal material and ex 
officio authority to commence criminal investigations. The 1996 
Criminal Procedure Code reversed that authority, and required 
rightholders to formally press charges to commence investigations in 
some instances, thus thwarting effective enforcement.
    In 1995, Russia acceded to the Berne Convention but failed to 
comply with Article 18 to provide protection for pre-existing works. 
That same year, Russia acceded to the Geneva Phonograms Convention but 
provided no protection for pre-existing foreign sound recordings prior 
to the accession date of March 13, 1995. These were commitments Russia 
made to the U.S. government in the 1992 Bilateral NTR Trade Agreement--
Russia agreed to have these commitments in place by the end of 1992. 
Finally, in July 2004, Russia adopted provisions to its law to provide 
protection for foreign pre-existing works and sound recordings--
however, the 12 year delay in adopting these provisions has resulted in 
flooding the marketplace with illegal product that will take years to 
enforce, even if Russian enforcement were effective (which it is not).
    In the 1992 Bilateral NTR Trade Agreement, the Russian government 
committed to provide effective criminal penalties and enforcement. In 
1996, Criminal Code amendments were adopted (after a 1995 veto) but a 
deficient provision (a ``grave harm'' threshold) prevented effective 
enforcement. In 2003 an amendment to ``fix'' the grave harm provision 
was finally adopted, but implementation of these criminal provisions 
remains a matter of concern, and there is no initiative to use these 
tools, if they even work properly, as part of effective enforcement.
    In short, the Russian government has made promise after promise to 
the U.S. (and other foreign) governments to develop an effective legal 
regime, including strong copyright and enforcement laws, and strong on-
the-ground enforcement. It has failed to meet its commitments while it 
has enjoyed trade benefits and preferences with the U.S. that are the 
quid pro quo for these benefits and preferences.
 steps the russian government can take to properly enforce ipr crimes--
                    focusing on optical disc piracy
    There are six critical steps that the Russian government could take 
immediately to effectively confront its optical disc piracy problem:

        1.  Inspect, on a regular, unannounced and continuous basis, 
        each of the 34 known OD plants, and immediate close and seize 
        the machinery of any found to be used to produce pirate product 
        (some of these steps require additional legislative or 
        regulatory measures);

        2.  Announce, from the office of the President, that fighting 
        copyright piracy is a priority for the country and law 
        enforcement authorities, and instruct the Inter-Ministerial 
        Commission, headed by the Prime Minister, to deliver reports 
        every three months to the President on what steps have been 
        taken to address the problem;

        3.  Adopt in the Supreme Court a decree setting forth 
        sentencing guidelines for judges--advising the courts to impose 
        deterrent penal sanctions as provided under the penal code as 
        amended (Article 146);

        4.  Immediately take down websites offering infringing 
        copyright materials, such as allofmp3.com, and criminally 
        prosecute those responsible;

        5.  Initiate investigations into and criminal prosecutions of 
        organized criminal syndicates that control piracy operations in 
        Russia (including operations that export pirate material to 
        markets outside Russia); and

        6.  Introduce either via executive order or legislation, the 
        necessary modifications of the optical disc licensing regime so 
        that it clearly provides more effective control over the 
        operations of the plants, including the granting of licenses to 
        legal plants and withdrawing and sanctioning of illegal plants; 
        stricter controls on the importation of polycarbonate and 
        machinery; mandatory seizure and destruction of machinery used 
        to produce pirate materials; and the introduction of criminal 
        penalties for the owners of such plants.

    There are, obviously, may other steps the Russian government could 
take to combat commercial piracy in Russia, including, but not only 
related to, optical disc piracy. These steps, including other 
enforcement and legal reforms necessary in Russia, are detailed in our 
Special 301 Report of February 2005 (attached).
    We also want to address one issue that has been raised by certain 
senior members of the Russian Government in our meetings, which raises 
serious questions about its commitment to fighting piracy. We have seen 
a number of reports in which Russian officials have suggested that the 
prices for legitimate goods and the lack of local manufacturing of 
legitimate products are to blame for the piracy problem. This comment 
reflects both an ignorance of what is happening in the marketplace, and 
a misunderstanding of the nature of the problem that we confront in 
Russia. The organized criminal enterprises manufacturing and 
distributing pirate product are largely servicing foreign markets 
(local manufacturing capacity is at least a multiple of six or seven 
times that of local demand), making the Russian price for legitimate 
materials wholly irrelevant to their motivation or profitability. As 
noted earlier, Russian manufactured product has been found in over 27 
countries over the past two years.
    In addition, existing efforts by certain industries to offer low 
cost Russian editions have not had the effect of reducing local piracy 
rates. The record industry, for example, is already manufacturing 
locally, and sells legitimate copies for an average price of $6.00 to 
$8.00 U.S. dollars--a price that is extremely low not just in relation 
to prices for music elsewhere, but also with respect to other consumer 
goods sold in Russia. It is not the price of legitimate product that is 
creating opportunities for piracy--it is the opportunity for easy 
profits that has brought criminal enterprises into this business, and 
Russia should stop offering such excuses for its continuing inaction.
    Another matter that the Russian government continues to raise is 
the need for the U.S. copyright industries to use civil remedies for 
effective enforcement. The copyright industries (especially the record 
industry) have recently attempted to bring civil cases against illegal 
plant operators--although procedural hurdles are significant.
    However, in no country of the world, including Russia, can 
copyright owners be left to civil remedies in lieu of criminal remedies 
to effectively address large-scale organized crime commercial piracy. 
The government of Russia needs to play a major role in an effective 
criminal enforcement regime. The copyright industries generally report 
good police cooperation with raids and seizures, mostly of smaller 
quantities (with some exceptions) of material, but prosecutorial and 
other procedural delays and non-deterrent sentencing by judges remains 
a major hindrance to effective enforcement.
                    what can the u.s. government do?
    There are three things the U.S. government can do to mandate Russia 
compliance with international norms and obligations to provide 
``adequate and effective protection and enforcement'' for U.S. 
copyright material:

        1.  Condition Russia's entry into the World Trade Organization 
        (WTO) on meaningful copyright law enforcement;

        2.  Designate Russia as a Priority Foreign Country (PFC) after 
        the on-going out of cycle review by U.S.T.R.; and

        3.  Deny Russia's eligibility for the Generalized System of 
        Preferences (GSP) duty-free trade benefits.
1. Condition Russia's Entry into the World Trade Organization (WTO) on 
        Meaningful Progress in Enforcing its Copyright Laws
    The Russian IPR regime is not in compliance with the WTO TRIPs 
obligations, especially pertaining to enforcement. As a consequence, 
the U.S. government should not assent to Russia's accession into the 
World Trade Organization until its copyright regime, both legislative 
and enforcement, is brought into compliance with the WTO TRIPS 
obligations.
    Russia is not providing adequate and effective enforcement as 
required for entry into the WTO, certainly not the enforcement 
standards required as ``effective'' (Articles 41 through 61 of TRIPs).
    The U.S. can and should condition Russia's entry into the WTO on 
Russia making positive and meaningful enforcement progress--for 
example, by licensing and inspecting all the known 34 optical disc 
plants, closing those engaged in illegal activities, and criminally 
prosecuting those involved in this commercial illegal activity, and 
ensuring imposition of deterrent (not suspended) sentences.
2. Designate Russia as a Priority Foreign Country (PFC) When the 
        Current Out-of-Cycle Review is Complete
    The U.S. Trade Representative's announcement on April 29, 2005 that 
Russia would be left on the Priority Watch List (for the ninth straight 
year) noted ``[w]e will continue to monitor Russia's progress in 
bringing its IPR regime in line with international standards through 
out-of-cycle review, the ongoing GSP review that was initiated by USTR 
in 2001, and WTO accession discussions.''
    The situation has gotten significantly worse, not better, in the 
past few years. IIPA recommended in February, and continues to 
recommend as part of the out-of-cycle review, that it is time to 
designate Russia a Priority Foreign Country to force Russia to properly 
enforce its laws or face the trade sanction consequences.
3. Remove Russia's Eligibility for Generalized System of Preferences 
        (GSP) Benefits
    In August of 2000, IIPA filed a petition asking the U.S. government 
to open an investigation into Russia's practices and outlining a 
variety of ways in which Russia failed (and continues to fail) to meet 
the GSP criterion of providing adequate and effective protection for 
intellectual property. That petition was accepted by the U.S. 
government on January 10, 2001. IIPA has since testified twice before 
the U.S. government GSP interagency committee (March 2001; September 
2003) and submitted a number of materials and briefs in this matter 
since then.
    IIPA believes it is time to revoke Russia's eligibility from the 
GSP program. Russia is not providing the U.S. GSP mandated ``adequate 
and effective protection'' as required by Sections 502(b) and 502(c) of 
the 1974 Trade Act (the intellectual property provisions in the GSP 
statute are at 19 U.S.C. Sec. Sec. 2462(b) and (c)).
    It has been almost five years since the IIPA petition was filed, 
and over four years since the U.S. government accepted the petition, 
which at least as a threshold matter, acknowledged the potential of 
Russia's shortcomings under the GSP program. The Russian government has 
had years to move to fix these problems and they have not done so 
adequately.
                              conclusions
    Unfortunately, the Russian piracy problem has been allowed to grow 
significantly worse in the past ten years, and the IIPA members' losses 
have continued to increase. Most obviously, the past five years have 
witnessed an explosion of optical disc manufacturing capacity without 
the concomitant controls to ensure that this capacity was used only for 
legitimate purposes.
    Russia's anti-piracy efforts remain severely hampered by flawed 
legislation, ineffective enforcement by the Russian authorities and 
insufficient deterrent penalties in the courts. The Russian government 
needs to address legal reforms in the copyright law (even after the 
adoption of the 2004 amendments), the criminal code, the criminal 
procedure code, and the administrative code, but more importantly, it 
needs to provide stronger and more effective enforcement compatible 
with international norms, and WTO TRIPs (and the WIPO digital 
treaties). The Russian government has taken some steps towards 
addressing copyright piracy, such as adopting improvements in its 
copyright law in 2004, and including by taking some actions against 
pirate optical disc plants, adopting a ban on the sale of certain 
products at kiosks and other street locations. This is a start, but it 
is only that. IIPA suggests that the U.S. government should adopt 
positions, and a timetable, to ensure that Russia is significantly 
moving towards achieving meaningful and lasting progress to meet its 
international obligations--especially IPR enforcement.
    In sum, Russia's commercial piracy problem must be addressed 
immediately by the Russian authorities. IIPA recommends that the U.S. 
government take the necessary trade steps to deny Russia trade benefits 
(such as GSP) and entry into the World Trade Organization until Russia 
takes clear and effective steps to bring this illegal activity under 
control. This country can no longer afford inaction.

                               ATTACHMENT




































    Mr. Smith. Thank you, Mr. Schwartz.
    Mrs. Richardson.

  TESTIMONY OF BONNIE J.K. RICHARDSON, SENIOR VICE PRESIDENT, 
  INTERNATIONAL POLICY, MOTION PICTURE ASSOCIATION OF AMERICA

    Ms. Richardson. Mr. Chairman, Mr. Berman, Members of the 
Subcommittee, thank you for inviting me to testify today, and 
for holding these back-to-back hearings on China and Russia.
    As the witnesses outlined this morning, the problems in 
China are very serious. But the challenges we face in Russia--
lawlessness, physical danger, and corruption--are even more 
daunting. Until Russia reforms its ways, the U.S. Government 
should stop considering, and start removing, the special breaks 
we give to Russian exports into the United States under the 
Generalized System of Preferences.
    And I agree with you, Mr. Chairman. Before the United 
States supports Russia's accession to the WTO, Russia needs to 
reduce theft at home and stem exports of pirated goods. As 
Members of Congress, you are key players in Russia's bid to 
join the WTO. Please, let Russia know and let the 
Administration know that your vote on permanent normal trade 
relations will be in question unless Russia makes meaningful 
progress in protecting intellectual property.
    I'm going to say some tough things about Russia today. But 
before I do, I want to acknowledge that there are also honest 
officials in Russia who put their lives on the line in trying 
to protect against intellectual property. They must be as 
frustrated as we are with the high levels of corruption.
    Last October, police raided a warehouse and found it full 
of pirated video games. According to the Wall Street Journal, 
which you cited in your letter, the pirate got help from a 
corrupt Russian legislator, who then charged the police with 
running an illegal raid. For the next 3 months, the police had 
to defend themselves, instead of fighting piracy. And the 
pirate? Probably remains in business today.
    Let me give you a few examples of how organized and 
dangerous piracy is in Russia. Polish customs officials working 
on the border with Russia have uncovered false-bottomed 
compartments in both trains and cars, full of pirated copies of 
our films destined for markets all over Europe. This isn't 
``mom and pop'' investment. This is organized crime.
    At least nine of the 34 factories that replicate CDs and 
DVDs, and possibly considerably more, are located on 
government-owned property in Russia, the so-called ``restricted 
access regime enterprises.'' Given the location of these 
plants, civilian authorities have serious difficulties in 
gaining prompt access. Any delay in access during a raid allows 
the pirates time to destroy the evidence of infringing 
activity.
    Nor are the pirates afraid to use violence. Two years ago, 
a thug shot at the car that was driven by our anti-piracy 
investigator. The incident occurred just after a major raid 
against a pirate facility. It was a clear effort to intimidate 
our anti-piracy team. Fortunately, our employee was not hurt. 
The assailant now resides in a psychiatric hospital. And the 
person who funded the attack? No doubt, he's still making money 
from our films.
    Corruption has become endemic at every level of the 
enforcement system in Russia. As Eric Schwartz mentioned, 70 
percent or more of the pirated goods that are seized during 
raids find their way back into the marketplace. And what's 
worse, often the pirated goods are sold by the trade houses 
that are associated with the justice ministry or by their 
veterans' funds.
    Prosecutors often shelve cases resulting from major optical 
disc plant raids. Even the rare cases that end up in sentencing 
have no deterrent value. Of the eight raids conducted last year 
against pirated factories, all of the plants remain in 
operation today, and continue to pirate. In half of the cases 
that were prosecuted--and only four were prosecuted--lower-
level employees were targeted; not the owners. All of the 
cases--all three of the cases--that reached judgment, resulted 
in suspended sentences. There is no deterrence in the system.
    My written testimony provides a summary of several anti-
piracy actions last year. Any one of these cases could have 
been an innocent mistake or could have another honest 
explanation. But taken as a whole, they create a disturbing 
fact pattern that can only be understood as corruption or 
massive indifference.
    In one case, local prosecutors closed the criminal case. 
The regional prosecutor ordered it reopened. The local 
prosecutor again closed the case; ordered the seized stampers 
returned to the plant operator. And the plant remains in 
operation today.
    In another case, two and a half million pirated discs were 
seized from two related warehouses on one of these restricted 
access facilities. Within days of the raid, over a million of 
the discs had mysteriously disappeared from the sealed 
warehouses. The owner got a 2-year sentence--suspended, of 
course.
    We will see no progress in enforcing against intellectual 
property crime in Russia unless President Putin himself demands 
accountability from his senior officials. Until then, corrupt 
officials will continue to afford protection to the pirates.
    Mr. Chairman, on behalf of the Motion Picture Association 
of America, and the thousands of law-abiding Americans who work 
in the movie industry and whose livelihoods are threatened by 
piracy, I want to thank you for inviting me to testify and for 
your support to this industry over the years.
    [The prepared statement of Ms. Richardson follows:]
              Prepared Statement of Bonnie J.K. Richardson
    Mr. Chairman, Ranking Member, Members of the Committee:
    I would like to thank you for inviting me to testify before you 
today on the important topic of international intellectual property 
theft in Russia. I commend you for holding back-to-back hearings this 
morning to illuminate the problems of IP theft in China and Russia. As 
serious as problems are in China, and they are serious indeed, the 
challenges we face in protecting our intellectual property in Russia 
are even more daunting. Lawlessness, physical danger, and corruption 
are part of the daily challenges we face in trying to protect our 
rights in Russia.
    Russia is one of the largest producers and exporters of pirated 
DVDs and other copyrighted products in the world. Russia needs to lower 
the incidence of copyright theft at home and stem the export of pirated 
goods before the United States supports Russia's accession to the WTO. 
Our Government also needs to use all the tools in its bilateral arsenal 
to send this message, including suspending Russia's eligibility for 
preferential trade benefits under the Generalized System of 
Preferences.
    If the United States Government acts now, it won't have to choose 
between American economic interests and our geopolitical goals. If the 
US Administration tells the Russians, clearly and unambiguously, that 
the United States will not accept Russia as a WTO partner until they 
have taken effective actions to control the rampant optical disc 
piracy, then the choice will not be ours--it will be Russia's. Russia 
will have to choose between coddling criminals and tolerating 
corruption on the one hand and joining the world trade community on the 
other. Congress can help ensure that both Russia and the Administration 
know that a grant of Permanent Normal Trade Relations to Russia, which 
is a prerequisite to WTO relations, will be endangered without 
meaningful progress on protecting intellectual property.
                      the ``good guys'' in russia
    In my remarks today I will focus on what is wrong in the fight 
against piracy in Russia today. But, I want first to acknowledge the 
dedicated and courageous officials in Russia who have fought hard to 
secure adoption of good copyright laws, and who put their own safety on 
the line in trying to enforce those laws against the organized 
criminals who run the piracy business in Russia. These honest men and 
women must be as frustrated as we when their laws aren't implemented, 
when their raids aren't prosecuted, or when their prosecutions result 
in paltry sentences.
    Chairman Smith cited a May 12 article from the Wall Street Journal 
from May 12 in his ``Dear Colleague'' letter of the same date. I would 
like to append this article to my testimony, because it vividly 
illustrates the price that honest officials in Russia can pay for 
trying to do their jobs. After a raid last October on a warehouse full 
of pirated videogames, the pirate enlisted the help of a Russian 
legislator, who complained to prosecutors, city officials, and police's 
own internal affairs office. The police, who were trying to enforce 
Russian copyright law, ended up spending the next three months 
defending themselves. And the pirate remains in business.
    Certainly the Russian film industry, who have basked in the light 
of such local and international successes as last year's superhit 
``Night Watch'' or this year's all time box office record holder 
``Turkish Gambit,'' have to be angered that the revenues from the 
successful home video sales of their fine films go to the pirates 
instead of to the Russian creators.
                     the american economic interest
    The US filmed entertainment industry has a surplus trade balance 
with almost every country in the world. No other American industry can 
make that claim. Ensuring the continued economic health of the film 
industry, and of other U.S. intellectual property rightsholders, is in 
our national interest and in the interest of the ordinary Americans who 
enjoy those films, as well as the costumers, the carpenters, the set 
painters, the sound technicians, the fire safety workers, whose jobs 
rely on the creation of filmed entertainment and other forms of 
copyrighted works. Piracy, massive thievery really, threatens the 
continuing viability of this important economic engine.
                           an organized crime
    In Russia, the people procuring, producing, and distributing 
pirated copies of our movies are affiliated with large and dangerous 
international criminal syndicates and gangs. Organized crime figures 
own the modern factories that cost well in excess of a million dollars, 
and operate 24 hours a day, seven days a week, cranking out millions of 
pirated discs. They ensure protection for the distributors and 
retailers who sell eight pirated copies to every two legal copies my 
members manage to sell in Russia.
    No small-scale, independent operator could afford the false-
bottomed compartments in trains and cars which Russian organized crime 
uses to export pirated copies of our films to other organized criminal 
syndicates all across Europe. Pirated movie discs from Russia are 
readily available throughout Europe and the Middle East. The odds are 
high that every dollar or euro spent on these pirated goods is put into 
the pockets of bad people who will spend it in a way that is not 
consonant with our safety and security.
    Another example of the failures of the Russian enforcement regime 
comes from IIPA's annual Special 301 report and relates to the control 
that criminal syndicates have over entertainment software piracy in 
Russia. There are four principal criminal syndicates that control the 
production and distribution of pirated entertainment software in 
Russia. The syndicates attach ``logos'' or ``brand'' names to their 
illegal product and localize the illegal copies they produce--before 
the legitimate product is released into the market. These same groups 
control illegal distribution networks in Russia, as well as in the 
surrounding countries. It is widely believed that the Russian groups 
control piracy operations in much of Eastern Europe including the 
markets in Poland and Latvia, and that they also have ties with 
syndicates operating in Ukraine. One ESA company reports that in 2004, 
one of these piracy syndicates attempted to register one of the 
company's trademarks for a videogame product that was being pirated by 
the syndicate.
              a large, growing, and very dangerous problem
    In 1996 there were two known optical disc plants in Russia. The 
subsequent years of inaction by the government of Russia allowed the 
number of factories to mushroom to today's 34 known plants, resulting 
in a serious problem--production capacity that far exceeds legal demand 
in Russia. The excess capacity is, of course, devoted to illegal 
production for the local market and for export. Unfortunately, Russia 
has yet to put in place an effective optical disc regulatory regime to 
fight illegal production at its source.
    According to our data, at least nine of these factories are located 
on property owned by the Russian military, or ``restricted access 
regime enterprises.'' The location of these plants creates serious 
difficulties for ensuring prompt access to these plants for the 
civilian authorities. Any delay in access allows the pirates time to 
destroy evidence of infringing activity.
    Let me be clear, the people heading these organizations have no 
qualms about resorting to violence or bribery to conduct their 
operations. Two years ago, shortly after a major raid against a pirate 
facility, in what clearly was designed as an intimidation effort, a 
thug shot at the car in which one of our anti-piracy investigators in 
Russia was driving from work. Fortunately our employee was not harmed. 
The assailant now resides in a psychiatric hospital, while the funder 
of the attack likely grows ever more wealthy from the lucrative--and in 
Russia--extremely low risk, piracy game.
                           the export problem
    Russia is now one of the world's largest exporters of illegally 
copied optical discs. Exported Russian pirated discs have been found in 
over 27 international markets. The exported DVDs generally contain 
multiple language tracks. Frequently the exported discs do not include 
a Russian language track--a clear indication that the pirated discs 
were produced solely for the export market. The result is a serious 
erosion of legitimate sales in Europe that threatens the lucrative 
Western European markets.
                         widespread corruption
    Corruption has become endemic at every level of the enforcement 
system in Russia. The lure of a bribe has long been common among poorly 
paid police. By now, many prosecutors have succumbed to corruption. 
There is even reason to suspect that some judges may have been 
influenced by the pirates.
    One indication of prosecutorial corruption is the number of 
requests prosecutors make of rightsholder organizations to return 
seized material to prosecutors because they ``need to show the evidence 
to the judges.'' In fact, the goods confiscated during raids on 
factories and warehouses are returned to commercial channels to which 
the prosecutors are connected.
    The Wall Street Journal article cited above estimates that 70% of 
confiscated merchandise winds up back on the market. MPAA has estimated 
that up to three quarters of the pirate product seized in raids finds 
its way back onto the market via Veterans' Funds and the Trade Houses 
of the Justice Ministry.
    The number of times prosecutors have tried successfully to shelve 
cases resulting from major OD plant raids or ducked prosecution of the 
public and notorious pirate website ``Allofmp3.com'' also points to 
rampant corruption.
    In 2004, there were eight raids against optical disc plants, 
including raids and seizure of illegal materials. In all cases, the 
factories remain in operation to this day with evidence of continued 
piracy. When prosecutions took place, the prosecutors tended to target 
lower-level employees, instead of the owner. Three of the cases that 
reached judgment resulted in suspended sentences and the fourth still 
awaits a final decision.
    In fact, the only time MPA has been able to get an unsuspended 
prison sentence for a pirate in Russia, the defendant was a video shop 
owner, not a large-scale factory owner. The video shop owner was 
sentenced to three years and two months in prison. The defendant was a 
repeat offender, having received a two year suspended sentence in his 
first conviction.
    Below is a brief summary of several of the factory cases that 
together create a disturbing fact pattern that can only be understood 
as a reflection of corruption or massive indifference.
     a disturbing pattern of sentencing and failure to close plants
          The UVK Stimul plant in Zelenograd was raided June 
        21, 2004, the second raid against this plant in ten months.

            37,000 pirate CDs and DVDs and 8 stampers were 
        seized.

            The plant continues to operate, reportedly working 
        24 hours a day.

            On January 14, 2005, a Moscow court imposed a one-
        year suspended prison sentence on the plant's chief technician, 
        after he confessed to ordering the plant's personnel to 
        replicate pirate DVDs. The prosecution claimed the accused 
        acted alone, without reporting to the management of the 
        company. The defendant pleaded guilty and the court ruled under 
        simplified procedures without full consideration of the case.

          Data Media plant in Koroliov, raided on April 30, 
        2004.

            The plant operator pleaded guilty in December 2004 
        to replicating pirate discs. Sentenced on February 28 to a 
        suspended two year prison term.

            Despite an alleged closure of the plant by police, 
        trucks full of illegal DVDs intercepted leaving the plant in 
        July 2004, were found with 22, 771 pirated CDs and DVDs.

            Two further criminal cases are pending against the 
        same accused arising from these subsequent seizures.

            Plant remains in operation, continues to work 
        illegally.

          ZZMT plant in Zelenograd, raided December 2002

            234,493 counterfeit CDs seized.

            The defendant, the human resources officer not 
        believed to be an owner or major organizer, was sentenced 
        February 2004, to one year suspended sentence.

            Defendant ordered to pay $180,000 damages to 
        rightsholder.

            Plant continues to operate. A disc matched by 
        forensics to this plan was found in Kiev in March 2005.
                    examples of cases not prosecuted
          T3The Okapi plant, Puskino, raided February 2004,

            25,000 pirate DVDs and computer games discs, and 
        800 stampers seized.

            Situated on a government owned, restricted access 
        facility.

            Closed in early 2004--after equipment was returned 
        by court order to its alleged owners and moved it to an unknown 
        site to continue manufacturing.

          Samara plant, found to be a pirate DVD plant during a 
        routine tax inspection at a cement factory in April 2004;

            7,000 pirate DVDs and 30 stampers uncovered.

            Plant director was questioned, a criminal 
        prosecution prepared.

            Local prosecutor closed the criminal case.

            Regional prosecutor ordered the case re-opened.

            Local prosecutor again closed the case, ordered the 
        seized stampers returned to the plant operator.

            The plant, an unlicensed plant, remains in 
        operation.

          Warehouse in Odintzovo near Moscow raided August 
        2004, over 1 million pirate discs seized. A nearby second 
        warehouse contained an additional 1.5 million pirate discs.

            Located on a military camp.

            Within days of the raid, over a million of the 
        discs mysteriously disappeared from the ``sealed'' warehouses.

            Industry anti-piracy group nevertheless managed to 
        get legal guardianship of over 100,000 of the seized, pirated 
        DVDs.

            On March 15, 2005, a court in Odintzovo imposed a 
        suspended two year prison term on the owner.

            The one bit of good news--remaining DVDs still in 
        legal custody were ordered to be destroyed August 2004.

    Given the extent of corruption, seeking enforcement from within the 
bureaucracy is largely a waste of time. We will not see progress in 
enforcement against intellectual property crimes in Russia unless 
President Putin directs all relevant agencies to make the fight against 
copyright piracy a priority. Until the President himself demands 
accountability from his senior officials, corrupt officials will 
continue to afford protection to the pirates.
                               conclusion
    Mr. Chairman, on behalf of the Motion Picture Association of 
America, as well as the thousands of law-abiding people who work in the 
movie industry and whose livelihoods are threatened by piracy, I want 
to thank you again for inviting me to testify today and for your 
support to this industry over the years. As I have attempted to 
describe today, piracy in Russia is a large, growing and dangerous 
problem. Russian enforcement institutions have not demonstrated any 
intention to deal with this problem seriously. We need your help to 
ensure that Russia does not continue to benefit from US trade 
preferences, while continuing to coddle the pirates who rob us blind. 
We also need your help to ensure that Russia addresses its piracy 
problems before it is permitted to join the WTO.

                               ATTACHMENT






    Mr. Smith. Thank you, Ms. Richardson.
    Mr. Gerson.

 TESTIMONY OF MATTHEW T. GERSON, SENIOR VICE PRESIDENT, PUBLIC 
     POLICY AND GOVERNMENT RELATIONS, UNIVERSAL MUSIC GROUP

    Mr. Gerson. Mr. Chairman, Congressman Berman, thank you 
very much for inviting me to testify today on behalf of the 
Universal Music Group and the Recording Industry Association of 
America, and for taking the time to dedicate today's hearings 
to two very important problems that we face: piracy in China 
and piracy in Russia.
    In my years knocking around this Committee, I've learned a 
few things; and among the most important is to recognize that 
the people sitting behind me are starting to get hungry. So I'm 
going to be brief, and I'm going to try not to repeat some of 
the things that have already been said.
    We envision Russia as a terrific market for both local and 
international businesses, and have made significant investments 
in the arts, and have made investments in the many businesses 
that it takes to bring CDs to market. We've signed and 
distributed local bands; we've promoted them outside of Russia. 
We manufacture our product locally in Russia through Russian-
owned businesses. We've developed special budget lines to bring 
legitimate product within the buying power of the average 
Russian citizen.
    We've also tried to raise awareness within Russia of the 
social, cultural, and economic costs of piracy. Through IFPI, 
the federation of music trade associations from around the 
world, the industry invests millions in a wide variety of anti-
piracy, pro-music activities. But we're frustrated.
    And as you observed, Mr. Chairman, all our efforts are 
stymied when law enforcement fails to prosecute the crimes that 
they can identify and easily find. Our best intentions and best 
efforts are undermined when the few convictions lead to slaps 
on the wrist or penalties that are insignificant and really 
just a cost of doing business.
    Despite our work with the Administration, despite 
interactions between the United States and Russia at the 
highest levels, as cited by Ms. Espinel, piracy is growing. The 
Russian government sees our bill of particulars. They can read 
our Special 301 submissions. They can read what we say about 
GSP. They know exactly what we know, and they're failing to 
act.
    Now, Bonnie and Eric gave you a sense of what's happening 
with physical piracy. We're starting to see the same disregard 
when it comes to Internet piracy. Through online servers based 
in Russia, a site called ``allofmp3.com'' sells music to anyone 
in the world willing to pay about 10 cents a song. The problem 
is that ``allofmp3.com'' has not secured the rights to do so, 
and doesn't bother to pay the people who wrote the songs or 
recorded the songs or own the copyrights.
    There's no question about the law. At the very least, 
``allofmp3.com'' is violating the reproduction rights afforded 
by Russian copyright law and the criminal code, and the laws of 
country where those songs are downloaded.
    Now, industry observers--industry investigators looked at 
the website; worked closely with the Moscow city high-tech 
crime unit; and submitted a substantial body of evidence to the 
Moscow prosecutor. In February, the prosecutor dismissed the 
case. And in doing so, he conveyed a damaging message to the 
public and, frankly, a damaging message to those of us trying 
to establish legitimate businesses there.
    We need to do some messaging of our own. And by that I mean 
the copyright industries and U.S. policymakers need to make it 
clear that failure to control piracy has clear ramifications 
for the Russian government. First, as has been said, USTR 
should really reexamine Russia's eligibility for GSP. It's 
wrong that U.S. taxpayers should, in effect, be helping to 
finance Russian exports to the United States, while the rights 
of U.S. intellectual property owners are being systematically 
neglected.
    Second, we really do have to learn from the China 
experience. By every measure, by every expert and every 
witness, the China WTO has failed. The commitments that were 
made, the efforts that were made before China entered WTO 
haven't done what's necessary for America's patent, copyright, 
and trademark industries. And we just have to learn what went 
wrong, and correct it when it comes time for Russia to be 
admitted, or to be considered for admission, into WTO.
    Third, I believe Congress should delay consideration of 
PNTR for Russia. As with admission to WTO, Russia should not be 
rewarded with Permanent Normal Trade Relations until it has 
demonstrated sufficient and sustainable reform. The word 
``sustainable'' is one that you used, Mr. Chairman. That's 
really what's at stake here.
    Let me make a few final observations. WTO accession is not 
a political prize. It represents a commitment to abide by 
international rules. WTO as an institution and global 
confidence in free and fair trade are quickly undermined when 
agreements and commitments go unenforced.
    In addition, we have to face facts. Today, the 
Administration and the Congress has a certain amount of 
leverage because Russia wants PNTR and Russia wants WTO. And 
once they attain those goals, the leverage that we have is 
going to diminish significantly.
    I've got a few seconds left so, you know, Congressman Issa 
mentioned the problem he's having with patents over amplifiers. 
It is not so long ago that in this room we talked only about 
music and movies and software being pirated. But today, we can 
talk about Congressman Issa's amplifiers, or somebody who 
manufactures altimeters in Mr. Goodlatte's district. Or I loved 
the example in the L.A. Times a couple of weeks ago about hot 
sauce. It's a favored brand in L.A., and is being imported 
illegally from China, as well. It is touching every aspect of 
the American economy, and we really need to take aggressive 
steps.
    And finally, just to follow up on a point that Myron 
Brilliant made, it's not just U.S. industries getting hurt. 
There are industries in China and businesses in Japan and 
businesses in Europe that are being hurt by the piracy that 
takes place in China and in Russia. And maybe there are things 
that we can do on a multilateral basis with our trading 
partners, with other businesses who are trying to succeed in 
the global marketplace.
    Thank you. And I really want to thank you, Mr. Chairman, 
Congressman Berman, and your staffs, for doing so much over so 
many years to help the U.S. creative industries.
    [The prepared statement of Mr. Gerson follows:]
                  Prepared Statement of Matthew Gerson
    Mr. Chairman and Members of the Committee, my name is Matthew 
Gerson and I am Senior Vice President for Public Policy and Government 
Relations at the Universal Music Group. I appreciate the opportunity to 
appear before you today on behalf of my company and the Recording 
Industry Association of America to discuss the problems that we 
confront as we attempt to establish and build businesses in the Russian 
Federation.
    Universal Music Group [UMG] is the world's leading music company 
with wholly owned record operations or licensees in 77 countries. Its 
businesses also include Universal Music Publishing Group, one of the 
world's largest music publishing operations.
    Universal Music Group consists of record labels Decca Record 
Company, Deutsche Grammophon, DreamWorks Records, Interscope Geffen A&M 
Records, Island Def Jam Music Group, Lost Highway Records, MCA 
Nashville, Mercury Nashville, Mercury Records, Philips, Polydor, 
Universal Music Latino, Universal Motown Records Group, and Verve Music 
Group as well as a multitude of record labels owned or distributed by 
its record company subsidiaries around the world. The Universal Music 
Group owns the most extensive catalog of music in the industry, which 
is marketed through two distinct divisions, Universal Music Enterprises 
(in the U.S.) and Universal Strategic Marketing (outside the U.S.). 
Universal Music Group also includes eLabs, a new media and technologies 
division.
    The Recording Industry Association of America (RIAA) is the trade 
group that represents the U.S. recording industry. Its mission is to 
foster a business and legal climate that supports and promotes its 
members' creative and financial vitality. Its members are the record 
companies that comprise the most vibrant national music industry in the 
world. RIAA members create, manufacture and/or distribute approximately 
90% of all legitimate sound recordings produced and sold in the United 
States. In support of this mission, the RIAA, among other things, works 
to protect intellectual property rights worldwide.
    International markets are vital to RIAA's companies and our 
creative talent. Foreign sales account for over fifty percent of 
industry revenues. This strong export base sustains and creates 
American jobs and is a key reason that the core copyright industries--
including music, movies, software and videogames--account for some 6 
percent of U.S. GDP.
    However, as this subcommittee well knows, America's creative 
industries are under attack. Piracy has grown in recent years with the 
advance of digital technology that facilitates both physical and online 
piracy. Indeed, high levels of piracy and trade barriers that 
complicate our efforts to enter or operate in foreign markets plague 
all of America's copyright owners and creators.
    Despite the enormous challenges that the copyright industries face, 
I want to highlight one great benefit that we enjoy--the consistent and 
committed work of this subcommittee. Your work over the years is in no 
small measure responsible for the extraordinary success of America's 
creators. Your focus has enabled us to entertain, educate and inspire 
people all over the globe. I would also like to recognize the State 
Department, the U.S. embassies around the world, the United States 
Trade Representative, the Department of Commerce, the Patent and 
Trademark Office and other agencies staffed with dedicated and talented 
officials committed to the continued vitality of this uniquely 
successful sector of the U.S. economy.
    The other witnesses on this panel will elaborate on the current 
state of piracy in Russia. To avoid repetition, I will describe some of 
the efforts that Universal has taken to build a business in Russia, and 
the industry's efforts to bring our piracy problems to the attention of 
U.S. policymakers as well as officials in Russia.
    But the position of the music industry and many in the content 
community is easy to summarize--the piracy situation in Russia is 
untenable, as made clear in the Thursday, May 12 Wall Street Journal 
article circulated by Chairman Smith.
    To protect the American businesses that invest in creativity, and 
the artists and others who earn their livelihoods in the production and 
distribution of intellectual property, the U.S. Government should take 
a hard look at the economic and political mechanisms at its disposal. 
Until we can be certain that there is a demonstrated and sustainable 
commitment to enforcing intellectual property laws, the Congress and 
Administration should--

          reexamine the GSP benefits currently afforded Russia;

          delay its consideration of PNTR--and the benefits 
        that come with Permanent Normal Trade Relations;

          withhold support for Russian membership within the 
        World Trade Organization (WTO).
                        doing business in russia
    Russia is a very exciting music market that is ripe with 
opportunities for both local and international business. But these 
opportunities are stymied by the second largest pirate music market in 
the world--estimated at $330 million U.S. dollars--where two-thirds of 
all recordings are illegal copies.
    Universal Music is the biggest record company in Russia and we have 
made very significant investments in the arts in Russia as well as the 
many disciplines involved in bringing a CD to market. We have signed 
and distributed local bands, and have promoted them outside of Russia. 
We manufacture our product locally through Russian-owned third parties. 
We have developed special budget lines to bring legitimate product 
within the buying power of the average Russian citizen. And we have 
tried to raise awareness within Russia of the social, cultural and 
economic costs associated with their failure to create more favorable 
conditions for investing in creativity.
    The cultural impact of American music and the role of a U.S. record 
company is exemplified by a Russian act called Bering Strait. I saw 
them a couple of years ago at Wolf Trap where they were opening for 
another Universal band. The band plays country music--that's right, 
country music--and was on their first American tour. The tour was a 
real success as they were embraced by audiences--most of which never 
thought they would see Russian musicians putting their own spin on 
familiar bluegrass melodies.
    Because we are so committed to the Russian market, we have joined 
with industry allies to do everything in our power to address music 
theft. Through IFPI--the International Federation of the Phonographic 
Industry, a federation of music trade associations from around the 
world--the industry invests millions in anti-piracy activities. 
However, those efforts are stymied when law enforcement fails to 
prosecute the crimes and criminal enterprises that are identified. We 
have agonized over the few judicial sentences that have been granted, 
which each time result in a relatively small fine easily assumed as a 
cost of doing business. We have struggled as the Russian Government 
refuses to act against fraudulent collecting societies that grant 
``licenses'' to pirate internet sites.
                            an ongoing trend
    Russian piracy is not a new problem for the recording industry, and 
our interaction with the U.S. Government on this point is long 
standing. For the past several years, the International Intellectual 
Property Alliance [IIPA] has, through its Special 301 and GSP 
submissions, documented the extensive copyright violations going on in 
Russia. This year the U.S. copyright industries urged the U.S. 
government to suspend Russia's eligibility for any duty-free trade 
benefits accorded through GSP, and were disappointed when the 
Government decided not to do so. It was equally dismaying when the U.S. 
Government did not identify Russia as a ``priority foreign country'' 
under Special 301, and instead choose to keep them on the priority 
watch list.
    Nearly two years ago, on September 16, 2003, RIAA CEO Mitch Bainwol 
joined the CEO's of America's major record companies in writing to 
President Bush. A complete copy of that letter is attached to this 
testimony, but the main points were:

          To ask President Bush to raise piracy during an 
        upcoming Summit with Russian President Vladimir Putin and urge 
        him to ``take immediate steps to curtail his country's illegal 
        production and export of pirate products--an activity that has 
        been on the rise for the past three years and which severely 
        harms American and Russian creators alike.''

          To emphasize that, ``the success or failure of 
        initiatives to strengthen copyright protection on the global 
        stage has a profound bearing on U.S. economic competitiveness. 
        It will dictate whether the global economic and legal 
        environment will sustain America's artistic and intellectual 
        heritage. No less is at stake than the genius and individuality 
        that lie at the core of our national soul, and the dangers 
        posed are great and immediate.''

          To set out the facts. At that time--just two years 
        ago--Russia was ``home to 28 known optical disc plants 
        (``optical discs'' refers to CDs, DVDs, CD-ROMs, and other disc 
        based products) with a production capacity of over 330 million 
        discs a year. Demand for legitimate discs in Russia, on the 
        other hand, is unlikely to exceed 30 million discs per year. 
        This excess capacity is used to produce and then export pirate 
        materials, and investigations have led to the seizure of 
        Russian manufactured pirate discs in over 25 countries. The 
        U.S. copyright industries have been losing more than $1 billion 
        a year to piracy in Russia, and we have been sustaining this 
        level of loss for 5 years.''

          To clarify why more action was necessary. ``President 
        Putin has taken certain steps over the course of the past year, 
        but they have not been adequate to address this intolerable 
        situation. The thrust of our request to the Russian 
        Government--oft repeated by the excellent and dedicated 
        Ambassador of the United States to Russia, Ambassador 
        Vershbow--has been to introduce and implement effective 
        controls over the operations of the CD plants . . . Ambassador 
        Vershbow delivered a document to the Government of Russia more 
        than one year ago that listed the names and addresses of the 
        [pirate] facilities [but they continue in operation today].''
    I urge you to read the entire text of that letter from industry 
CEO's because an understanding of what we have tried is critical if we 
are to properly respond today. President Bush did indeed raise his 
concerns about copyright piracy with President Putin on several 
occasions, and President Putin in turn pledged to address it. To date, 
the response has been inadequate.
    In fact, the statistics demonstrate a dramatic increase in music 
theft, certainly not a crackdown. According to RIAA:

          The 28 replication plants in 2003 have grown to 34 
        plants in 2005. Five plants would be sufficient to meet the 
        needs of the legitimate Russian market. As a result of that 
        excess capacity, Russia is the world's largest exporter of 
        pirated music.

          Production capacity which stood at an alarming 330 
        million a year in 2003 now stands at 488 million units.

          At least 9 of these production plants are located on 
        so-called ``Russian State Restricted Access Regime 
        Enterprises'' in which the Russian Government itself is the 
        owner of the premises.

          Russia is now home to some of the world's only 
        Internet-based pirate pay download services--such as 
        allofmp3.com.

    The case of allofmp3.com helps illustrate the music industry's 
frustration. Through online services based in Russia, it sells music to 
anyone in the world willing to pay ten cents a song. The problem is 
that allofmp3.com has not secured the rights to do so--and doesn't 
bother to pay the people who wrote and own the songs being sold. There 
is no question about the law--at the very least allofmp3.com is 
violating the reproduction rights afforded by Russian Copyright Law and 
Criminal Code, and the laws of the countries where the songs are being 
downloaded.
    Once again, IFPI investigated and in 2004 began working in close 
collaboration with the Moscow City High-Tech Crime Unit. Both IFPI and 
the High-Tech Unit submitted formal complaints--including supporting 
documentation--to the Moscow City Prosecutor's office.
    In February 2005, without much explanation, IFPI received notice 
that a regional Moscow City Prosecutor declined to accept the matter 
for further investigation. Clearly the Prosecutor failed to appreciate 
the seriousness of the matter and misapplied the law. In doing so, he 
conveyed two incorrect and damaging messages to the public--that the 
service is legal and that it is legal to download from the service 
wherever you may be. Similarly, the Prosecutor sent yet another clear 
signal to those trying to establish legitimate businesses.
                          what should be done?
    We need to change the political calculus so that failure to control 
piracy has clear ramifications for the Russian Government--
ramifications that outweigh the costs associated with stopping piracy. 
Specifically:
    (1) USTR should reexamine Russia's eligibility to participate in 
the Generalized System of Preferences until it has satisfactorily 
protected intellectual property from theft. It is wrong that U.S. 
taxpayers should, in effect, be helping to finance Russian exports to 
the U.S. while the interests of U.S. intellectual property owners are 
being systematically undermined. The United States needs to point out 
how failure to address copyright piracy will impede Russia's goals, 
whether such goals relate to attracting foreign investment, joining the 
WTO, or other matters.
    (2) We must learn from the China experience. Congress should insist 
upon demonstrated and sustainable reform before supporting Russia's 
accession to the WTO. By every measure, the steps taken before China 
was admitted to WTO have failed America's patent, trademark and 
copyright industries. The U.S. should ensure that relevant legal and 
enforcement measures are in place and implemented before we accept 
Russia into the WTO. WTO accession is not a political prize--it 
represents a commitment to abide by international rules. The WTO 
institution and global confidence in world trade rules is quickly 
undermined when WTO parties openly mock trade discipline.
    Let's face it--today Congress has some bilateral leverage because 
Russia wants to enter WTO. Once they are in, the leverage diminishes 
significantly. Secretary of State Rice alluded to that reality in an 
April 20, 2005 interview in Moscow in response to a question about 
WTO--

        ``We are very supportive of Russia's effort to join the WTO. We 
        think this would be good for world trade, good for Russia. 
        There are certain performance criteria in the WTO that have to 
        be met. And we need to resolve the issue of intellectual 
        property rights. At this point, the legal framework in Russia 
        to prosecute those who engage in piracy is not very strong, and 
        that really must be taken care of before WTO accession . . .

        It has to be understood, and I hope the Russian people will 
        understand that when the United States supports WTO accession, 
        this also has to be accepted by the American Congress. And so 
        we have to have performance on these outstanding issues so that 
        when we go to the American Congress, the WTO accession can go 
        through without difficulty.''

    (3) Delay consideration of PNTR for Russia. As with admission to 
the WTO, Russia should not be rewarded with Permanent Normal Trade 
Relations until it has demonstrated sufficient, meaningful and 
sustainable reform.
                               conclusion
    Mr. Chairman, I will do the safest thing on earth--I will conclude 
by quoting you. When you circulated the May 12 Wall Street Journal 
article you observed that the article, ``underscored the importance of 
achieving significant reform of the Russian intellectual property 
rights enforcement system before admitting Russia into the WTO.''
    We agree completely, and appreciate the seriousness with which this 
Committee will approach WTO accession if it is presented to the 
Congress.
    Thank you for inviting me to participate in this hearing. I would 
be glad to answer any questions you may have.

    Mr. Smith. Thank you, Mr. Gerson.
    My first question I'd like to address to Ms. Espinel. You 
mentioned in your testimony that we are continuing interagency 
review of a petition filed by the U.S. copyright industries to 
withdraw some or all of Russia's benefits under the U.S. 
Generalized System of Preferences, the GSP program.
    It so happens that that particular issue was raised by 
every one of the other witnesses. That's one of two common 
denominators that I've seen. But the question really is this. 
Reviews can only go on so long. When do you think you will 
actually decide something in that regard?
    Ms. Espinel. Well, as you may know, the review of this GSP 
petition has been a longstanding process. And we are 
reconvening an interagency group to review the GSP petition 
with Russia and with some other countries in the coming months.
    I appreciate the frustration that has been expressed with 
the length of time that the GSP review has been outstanding. I 
appreciate hearing the concerns that have been expressed by 
industry. And we will consider all of the suggestions made with 
them with respect to GSP, but also with respect to some of the 
other suggestions they've made.
    I just want to note that this is obviously a deep-rooted 
problem in Russia. This is not just related to intellectual 
property. This will require widespread systemic reform by 
Russia.
    Mr. Smith. Right. But when do you think you will actually 
make a decision whether or not to deny Russia some of the 
benefits? You mentioned the frustration. You certainly felt it 
a minute ago when Mr. Schwartz testified given his experience. 
Do you know of any kind of timetable within your office, USTR, 
that might be of interest to us?
    Ms. Espinel. I'm not aware of any timetable. There is no 
deadline that I can offer you today. But I will just note that 
with Ambassador Portman newly onboard, we are examining our 
strategy with Russia. I think it's very helpful to get this 
input from industry.
    Mr. Smith. Okay.
    Ms. Espinel. And we will consider that.
    Mr. Smith. And you can be assured that we will monitor what 
you all do or don't do in the coming weeks, as well. The second 
common denominator was interesting to me, because all witnesses 
mentioned it, as well. And that was the problem with the 
optical disc plants in Russia which are producing something 
like three or four times the actual number of discs that are 
used or purchased by those who live within the Russian 
Federation themselves. That is clearly a flaunting of U.S. 
interests. What is going to be done about that?
    Ms. Espinel. The problem of optical disc manufacturing in 
Russia is that the scale of the problem is deeply disturbing. 
We have made IP enforcement--but, in particular, this issue of 
optical disc protection--a top priority in our bilateral 
discussions with Russia, and in particular in our accession 
negotiations. Again, we share the concern, we share the 
frustration. One other----
    Mr. Smith. Okay. We're going to give you the benefit of the 
doubt today. You've been sharing our frustrations and sharing 
our concerns. And normally, we'd come back at you for a lack of 
commitment; but you do have a new boss, you do have a new 
ambassador. And I have great faith in him and his willingness 
to address some of these issues. So let's just assume that good 
faith on your part.
    Ms. Espinel. One thing I would like to note that the 
Administration has been doing, which is a new action. It isn't 
directed solely at Russia. In fact, to some extent, it is 
directed at many of our trading partners, including China and 
Russia. But this is the STOP initiative which I alluded to 
briefly.
    I think it's particularly relevant with respect to this 
problem of optical disc manufacture in Russia. Because the 
major purpose of STOP is to try to stop the illegal trade in 
counterfeit pirated goods, to stop exactly the kind of problem 
that we're seeing in Russia, this massive export of illegal 
optical discs.
    So we have been working domestically to tighten our own 
borders. But we have also been reaching out to trading partners 
around the world that are also--that share a perspective on 
this problem and are also facing this, to have them tighten 
their borders, to try to eradicate the market by cleaning up 
the supply chains of legitimate retailers, or retailers that 
would like to be legitimate retailers, and to try to stop these 
goods after they leave Russia and as they move around the 
world.
    Mr. Smith. Okay. Thank you, Ms. Espinel. I'm going to do on 
this panel what I asked the previous panel, and that is to ask 
the other three witnesses what your top priority would be, as 
far as what the United States should be doing, what the United 
States Trade Representative should be doing to change our 
policies.
    And Mr. Gerson, we'll begin with you. You'll need to go 
fairly quickly, since my time is almost up.
    Mr. Gerson. I will be quick about it. We have to make it 
clear that failure to control piracy has clear ramifications 
for the Russian government. There are three items out there 
that we've mentioned: GSP, WTO, and PNTR. There are 
opportunities to make the point, and we should move forward 
using those tools that are at our disposal.
    Mr. Smith. Very good. My thought, real quickly, Russia has 
already been on the Priority Watch List for 9 years. When does 
it finally get to be on the Priority Country Watch List?
    Ms. Espinel. Well, USTR announced this year a special out-
of-cycle review of Russia because of the level of concern that 
we have. So at the conclusion of that out-of-cycle review, we 
will determine whether or not Russia will be moved up to PFC.
    Mr. Smith. Good. That's progress. Thank you. Mrs. 
Richardson?
    Ms. Richardson. I agree with what Mr. Gerson said, so I'll 
go from the general to the specific.
    Mr. Smith. Okay. Good.
    Ms. Richardson. The U.S. Government needs to tell Russia to 
put a comprehensive optical disc regulatory scheme in place 
right away. They need to tell the President of Russia that he 
needs to take ownership of this issue and stop the corruption. 
Only he can do it. And they need guidance from the supreme 
court to get tougher sentences.
    Mr. Smith. Great. Thanks. Mr. Schwartz?
    Mr. Schwartz. This is an agreeable panel. I agree that--I 
think what they need are deadlines. That has worked in the 
past. A year ago, when the U.S. Government suggested to the 
Russian government that June 30, 2004 was going to be a trigger 
date for the removal of some or all GSP benefits--and it was 
just done at an informal level--we saw a lot of activity on the 
Russian side. Probably, it helped produce the Russian copyright 
law amendments of last July. So I think they need a deadline.
    And failing that, I mean, within that deadline, they need 
to go and inspect all 34 plants. This is not that difficult to 
do. And if they don't by that deadline, then they need to 
understand there are consequences. And these deadlines just 
can't keep extending out and extending out.
    Mr. Smith. Okay. Thank you, Mr. Schwartz. I happen to agree 
with you. I don't think anything gets done unless there is a 
deadline. And that's part of the problem.
    Now, that brings us to the end. But Ms. Espinel, you 
haven't given us too many deadlines, but you've mentioned 6 
months several times. So I'm going to take that as a deadline 
for a lot of the actions by the office. And obviously, you can 
expect an oversight hearing in 6 months. We'll hope for a lot 
of progress. Thank you all.
    The gentleman from California, Mr. Berman.
    Mr. Berman. Thank you, Mr. Chairman. In defense of the 
Trade Representative's Office, when a decision to deny GSP 
preferences, or elevate from the Priority Watch List to the 
Country Watch List--I take it, that's important because some 
sanctions flow from being elevated to that list? Automatically?
    Ms. Espinel. Not quite automatically. But it causes the--We 
have to initiate an investigation, and at the end of that 
investigation we could then impose sanctions. So it does sort 
of start a chain of action.
    Mr. Berman. In other words, it has more meaning than a 
Priority Watch List?
    Ms. Espinel. Yes.
    Mr. Berman. All right. So before a decision to take away 
GSP, or elevate to a list, or to say we're not interested in 
beginning accession talks in terms of the WTO, is this a 
decision made by the Trade Representative? Or does he have to 
clear it with some other agencies first?
    Ms. Espinel. We make decisions on all three of those things 
by interagency consensus. So this is not--this is not the sole 
decision of the United States Trade Representative. This would 
be a decision made by the U.S. Government, in consultation with 
our full interagency group.
    Mr. Berman. And who is on that interagency group?
    Ms. Espinel. A range of agencies. But the agencies that 
tend to be most deeply involved in intellectual property 
issues, I would say, are the Department of State, the 
Department of Commerce, with the sort of sister agency of the 
Patent and Trademark Office, the Department of Justice to some 
extent, I think particularly frankly with respect to the 
enforcement issues----
    Mr. Berman. Is it done in the context of intellectual 
property issues, or is it done in the context of U.S.-Russia 
relations?
    Ms. Espinel. There would actually be overlap between both 
groups. But primarily, it's done through a TPSC process--a TPSC 
group, that focuses on intellectual property issues.
    Mr. Berman. And when they've cleared something as 
appropriate from an intellectual property point--I mean, it 
sounds to me like we've got--one would need to do a lot more 
reviews to have a compelling case of both inadequate laws and a 
massive lack of enforcement and a totally inadequate sanctions 
system within Russia. When the interagency intellectual 
property group thinks something has to be done, then what 
happens?
    Ms. Espinel. If the interagency intellectual property group 
decides, at not just the TPSC level, but at the higher 
political level--if we have a consensus from the U.S. 
Government, then the USTR will move forward to implement the 
decisions that the interagency group takes. But I think, 
following up on what you said, the problems that we face with 
Russia are complicated. And there are a lot of competing 
interests that are being weighed in Russia.
    And this is not in any way to undermine or detract in any 
way from the seriousness of the problem that we are facing in 
Russia, but I think that is a partial explanation for why the 
interagency process in this case has been a long one.
    Mr. Berman. But like in the case of the GSP petition, how 
many years now? Five years? Four years. But I guess my point 
is, if we think--which I do--that this situation is quite 
outrageous, that we wouldn't tolerate this in another sector of 
the economy, this kind of action, throwing all our ammunition 
at you may not produce the result.
    We may want to--we may want to get--put pressure on the 
Administration to give greater weight to this issue than they 
are now doing, in order to allow you to move ahead with some of 
the options that have been suggested and that you have 
indicated receptivity towards, but not endorsement of. In other 
words, shall we at least add others to our target list here?
    Ms. Espinel. Well, I think I'm here today because 
Ambassador Portman is very concerned about intellectual 
property in Russia and very interested in hearing the views of 
this Committee specifically. So I would, you know, welcome--we 
welcome input from this Committee.
    But in addition, it is a joint U.S. Government decision 
that will have to be made. So I can't speak for other agencies, 
but I am sure every agency in the U.S. Government would be 
interested in hearing the views of this Committee.
    Mr. Berman. I'm not so sure about that. If performance is--
if the past is prologue.
    One last question, then, on the digital piracy issue, can 
we get a sort of a Grokster kind of decision in--does Russia 
have a copyright framework for indirect and contributory 
infringers that we could legitimately ask them to pursue at 
this point?
    Mr. Schwartz. I'll answer that. The answer is, yes, they 
do. What they did in their 2004 amendments was to adopt 
provisions in their law for eventual implementation of the 
digital treaties. One of the things that they did do, 
unfortunately, was to delay implementation of the making 
available right for sound recordings until September of 2006, 
because of some internal opposition to it. But the answer is, 
yes.
    But the type of piracy that Mr. Gerson was talking about, 
this is a hosted server, the MP3. This is not a difficult 
copyright case.
    Mr. Berman. This is----
    Mr. Schwartz. This is protected under the 1961----
    Mr. Berman. This is not the P-to-P problem?
    Mr. Schwartz. Not at all. It's hosted on a server site. So 
that's why the reproduction right, which has been in the 
Russian law since 1993, would clearly outlaw this type of 
activity.
    Mr. Berman. Was that Russian guy who broke the DVD 
encryption, was he an agent of the government at the time? No, 
never mind.
    Mr. Goodlatte. [Presiding.] I thank the gentleman. Ms. 
Espinel, what lessons would you say the U.S. Trade 
Representative has learned from China's accession to the WTO 
and our subsequent inability to persuade the Chinese to 
meaningfully enforce intellectual property rights, that you've 
applied to the pending Russian application for WTO membership?
    Ms. Espinel. Well, I think China and Russia are actually 
countries that are in very different positions. I think there 
are--I think the governments there have different attitudes. So 
I don't think necessarily what applies to one would apply to 
the other.
    Mr. Goodlatte. What difference in the Russian attitude 
would you perceive that would make them better than the 
experience we've had with China?
    Ms. Espinel. Well, what I was going to--I think in the 
earlier China hearing some of the panel had expressed the view 
that having China in the WTO was helpful, to some extent; that 
it was better to have China in the club, it was better to have 
the obligations of the TRIPS agreement as Chinese commitments 
than it would be to have China without.
    Mr. Goodlatte. But all that was done without China having 
the--not just the legal framework, but really the mindset, the 
kind of judicial structure, the kind of police structure and so 
on, that would be willing to go out and enforce these laws. 
They're now in the WTO and, yes, we can bring a WTO case 
against them, but we're really struggling from very far behind. 
Isn't the same thing true in Russia?
    Ms. Espinel. Well, that's sort of what I was going to. I 
think right now we're at a critical point in accession 
negotiations with Russia. I think we have--you used the word 
``leverage''--but we have an opportunity to impose meaningful 
deadlines on Russia in the accession negotiations. And I think 
we would take very seriously the concerns that we have heard 
from industry about not letting the----
    Mr. Goodlatte. Would we require to see some of this 
activity before we admit them to WTO, or simply get a timetable 
that they would commit to after they join the WTO? Because 
that's the problem we have with China.
    Ms. Espinel. Well, as I was saying, I think we will take 
very seriously, and Ambassador Portman will take very 
seriously, the concerns that were raised from industry to not 
let Russia into the WTO until they have made meaningful 
commitments to us on intellectual property.
    It has, obviously, been a huge priority in the accession 
negotiations, and it's something that we have been pressing 
Russia very hard on. But I will admit there is still a lot of 
progress--we have not seen nearly the progress that we feel 
Russia needs to make. So we will continue to press. And I think 
we see, and will continue to see, the accession negotiations as 
an appropriate forum for us to press Russia to make meaningful 
changes.
    Mr. Goodlatte. And then, on the very specific subject that 
we've been talking about here, the optical disc plants, what 
does the USTR intend to do to ensure that the Russian 
government and Russian officials immediately inspect these 
optical disc plants that are operating on property owned by the 
Russian military, the so-called ``restricted access regime 
enterprises''?
    Ms. Espinel. The optical disc plant is at the top of our 
priority list of IP concerns with Russia. This has--there is 
actually an action plan that we have given to Russia recently 
in dealing with their optical disc products--their optical disc 
problem--including through some of the measures that have been 
discussed here. Like unnotified searches and seizures of the 
production plants has been a key element of that. So it is 
something that we are definitely pressing very hard. It is at 
the very top of the list of issues that we have with Russia.
    Mr. Goodlatte. Thank you. Mr. Gerson, as the world's 
largest music company, you are, I'm sure, aware of the extent 
to which European and Japanese companies are experiencing 
similar difficulties protecting their IP in Russia. I wonder if 
you might indicate whether you think the U.S. alone can 
persuade the Russian government to achieve adequate and 
effective enforcement of IP rights; or do you believe that we 
need to have some multilateral action here?
    Mr. Gerson. No, I agree with the statement made in the 
earlier panel by Myron Brilliant. I think there is an important 
opportunity to work with the Japanese and European businesses 
and parliamentarians, other government officials, to together 
try to come up with a plan to address what's going on in China 
and in Russia.
    And, you know, to answer a question that you asked Ms. 
Espinel, there has to be something to learn from the China 
experience. There has to be another provision, another 
paragraph, another tool to put in there to guarantee 
enforcement of trade agreements.
    WTO as an institution and global confidence in free and 
fair trade are undermined when agreements and commitments 
aren't enforced. And if they can't be enforced, we need to do 
something so that there is the power to enforce them.
    Mr. Goodlatte. I agree with that. What signs do you see of 
European and Japanese governments coming together to cooperate 
with us in such a thing? Do you think they're so anxious to get 
Russia into the WTO that they're going to let this slide? Or do 
you think they really will be willing to hold back and do 
what's necessary to, in a multilateral way, press the Russians 
to do what we've been pressing them to do?
    Mr. Gerson. In some respects, I think that you and 
Congressman Berman might be in a better position to answer 
that. You interact with your counterparts in other governments 
from time to time, and over the years have built up 
relationships with those who are committed to doing something 
in this area.
    We work with other music industry--our music industry 
colleagues in other countries. We hear their frustrations. In 
many cases, they look to the United States as a leader in this 
area.
    But I think it would be terrific to try to identify 
government officials, parliamentarians, others who want to work 
with us to find the right tools to use to deal with piracy 
that's not only affecting America's music and movie industry 
any more; it's affecting everyone, including, you know, the 
manufacturer in your district of an altimeter. Who would have 
thunk it? But that's where this piracy trend is going. It's 
affecting every sector of the economy.
    Mr. Goodlatte. Well, let me ask that question of Ms. 
Espinel, then. What is the U.S. doing to reach out to the 
Europeans and Japanese and others that have a strong interest 
in protecting intellectual property rights, to pull together 
that kind of multinational, multilateral coalition that could 
put this pressure on Russia?
    And as a follow-on to that, do you believe that folks in 
these other countries in a position to join us in that effort 
will see the need to confront Russia now, before they join the 
WTO?
    Ms. Espinel. One of the major things that the 
Administration has been doing, particularly in the last few 
months, is reaching out to trading partners like Japan and Hong 
Kong and Singapore, to try to come up with a collective plan to 
address the problems, the type of problems that we're seeing in 
Russia. We are also going to be reaching out to the Europeans 
in early June, both to the commission and to some of the 
European countries that are facing the same problems that we 
have and share similar concerns that we have.
    I will tell you preliminarily that I have been encouraged 
by discussions that we've had. I think there is actually a lot 
of interest in cooperating. I think there is a growing 
recognition that the United States and certainly no other 
single country can do this alone; that in order for countries 
that care about protecting intellectual property to combat this 
effectively, we are going to have to cooperate together.
    But--so I am hopeful that the STOP initiative is going to 
bear some--in the short term, some very real, concrete results 
with our trading partners in Asia and with Europe.
    Mr. Schwartz. If I could just----
    Mr. Goodlatte. Yes, let me go ahead, and I'll give Mrs. 
Richardson a chance, too. I didn't mean to neglect both of you. 
But go ahead.
    Mr. Schwartz. From my experience, I think that, yes, the 
cooperation makes a lot of sense. But I think in a more 
sophisticated negotiation, the European Union, for one, has 
always understood that these issues are at the forefront of 
importance for the U.S. And therefore, at the end of the day, 
they allow the U.S. to negotiate this issue, in exchange for 
concessions, while the European Union is negotiating for other 
things--for whatever else that they need.
    And so the cooperation idea is a good one. But, in defense 
of Ms. Espinel and the U.S. Government, who do as good a job as 
possible, in trying to get that cooperation, when the 
negotiations are ongoing, that is the bilateral negotiations 
between the EU and Russia on WTO accession, I really think that 
the rest of the world looks to the United States on this issue; 
not only as a leader, but as the one that has to make the tough 
decisions.
    Mr. Goodlatte. Ms. Richardson?
    Ms. Richardson. I just wanted to point out that to the best 
of my knowledge, the Europeans have already closed out their 
WTO negotiations with Russia. They may be willing to lend us 
moral support, but I think their negotiating leverage is gone.
    Mr. Goodlatte. Good point.
    Yes, the gentleman from California.
    Mr. Berman. Just I am reminded, from Mr. Schwartz's 
comments, there have been times--forget the problems with the 
Europeans prioritizing things, hoping that the U.S. will carry 
the day on intellectual property protection. I remember the 
days when the U.S. was twisted between something for the 
farmers, and abandoning the people involved in intellectual 
property protection, so----
    Mr. Goodlatte. Don't put me in a world of hurt, here. 
[Laughter.]
    Mr. Berman. In other words, these pressures come in many 
different places. I mean, it will be interesting to see if we 
can get the Europeans just to uphold the arms embargo they 
agreed to on China; let alone this. So it's--I mean, I wonder 
to what extent we really can get the--particularly in some of 
these intellectual property areas, where we're doing so--we're 
so far ahead of them in terms of product and revenues, whether 
we can get them to step up to the plate.
    And then, when Ms. Richardson points out they've already 
come to terms, that's sort of like saying--maybe our raising 
the issue with the Europeans will at least keep them from 
yelling at us about not moving fast enough on Russia. But I'm 
skeptical about our effectiveness in getting that kind of a 
wide coalition on this particular issue. I think we're going to 
have to make some tough--I hate to say it--sort of unilateral 
decisions here.
    Mr. Schwartz. And that is why, you know, the bilateral 
tools that we have, like providing GSP benefits, I think could 
be successful; because here Russia is gaining $500 million in 
trade preferences from the U.S. as a bilateral matter, and 
obviously, the U.S. has a strong interest in seeing this 
problem fixed. And it would seem to be a quid pro quo here.
    Mr. Goodlatte. And a nice chicken dinner with your trip to 
the movies is a winning combination. They don't have to be at 
odds with each other.
    Mr. Berman. Chicken Kiev.
    Mr. Goodlatte. There you go. Absolutely. Absolutely. Our 
largest export to Russia, by the way, of any kind.
    Well, folks, this has been an outstanding panel. We really 
appreciate your contribution. It's a major challenge. And 
whether the U.S. can pull together some help from Asian and 
other countries to leverage what we need to get from the 
Russians, or whether we have to hold out and do it on our own, 
I don't know; but I believe we should.
    This is too important. It's too much at stake. There are 
hundreds of thousands, if not millions of American jobs 
involved here, with the amount of money that we lose in pirated 
intellectual property in China and in Russia. And we need to 
start fighting back a lot more aggressively than we have.
    So I hope that'll be the watchword of our new U.S. Trade 
Representative, and we look forward to working with him. And I 
thank you all for your participation today.
    [Whereupon, at 1:30 p.m., the Subcommittee was adjourned.]
                            A P P E N D I X

                              ----------                              


               Material Submitted for the Hearing Record

Prepared Statement of the Honorable Howard L. Berman, a Representative 
     in Congress from the State of California, and Ranking Member, 
    Subcommittee on Courts, the Internet, and Intellectual Property
    Mr. Chairman,
    Thank you for scheduling back-to-back hearings on the scourge of 
international intellectual property piracy with a focus on China and 
Russia, two of the countries that present the greatest challenges to 
intellectual property enforcement. Because there are unique enforcement 
issues with respect to each country, it is appropriate to address these 
areas separately. The problem we confront, however, is the same: how to 
prevent billions of dollars in losses to the American economy as a 
result of an unfettered ability to pirate.
    From almost the beginning of recorded history, China has served as 
a provider of desired goods. Marco Polo traveled the world to bring 
back goods made in the Orient. Today, China's economy has grown to 
include the manufacture of many different products, including clothing, 
purses, software, computers, and movies. While just as desired as the 
goods of Marco Polo's day, these modern goods often are not the 
legitimate product of the original source; instead, these are goods 
that are copied, reverse engineered and--with limited investment and no 
payment to the creator--sold for a negligible price to China's 1.3 
billion citizens and exported in massive quantities to other countries, 
including America.
    The impact of counterfeiting and piracy on American innovators and 
the general public is impossible to quantify with precision. 
Pharmaceutical researchers that invest in the development of drugs lose 
the ability to control the safety of their products. Studios that 
produce movies are unable to realize the full measure of profit from 
their creations. Car manufacturers cannot control the quality of their 
parts. But perhaps most egregious is that because of piracy, American 
jobs are lost and American creators lose the benefits of their 
contributions to the world of creativity.
    The Chinese government and some Chinese companies appear to have an 
interesting philosophy about piracy. They point to their robust laws on 
intellectual property, show you attempts at enforcement with a 
televised raid of a market stall, and describe their involvement in the 
issue by lending you educational materials for high schools on the 
importance of respecting intellectual property. Piracy, they claim, is 
not to be tolerated.
    Yet the reality is that not only is piracy tolerated, but the 
government typically turns a blind eye to allow the benefits of piracy 
to accrue to Chinese consumers. These cheaper products, it is argued, 
provide the Chinese population with the luxury items they desire, but 
may not be able to afford. I have heard some in the Chinese government 
assert that the pirates are merely providing cheaper products for those 
who cannot afford to buy bread, in essence functioning as ``Robin 
Hoods'' for these goods. Yet this argument holds little credence when 
those goods are openly exported around the world, disrupting existing 
markets for legitimate product. As noted by the Chamber of Commerce, in 
the year ending October 31, 2004 the value of Chinese counterfeits 
coming into U.S. markets seized by the U.S. increased 47 %.
    Rampant piracy has enabled the Chinese economy to move forward 
rapidly in the race of technology by building off the innovation of 
others without investing the initial time and capital in development of 
the product. Their goal of being a dominant market power is no longer 
in the distant future, but is becoming a reality now in part as a 
result of pilfering the fruit of many American ideas.
    If the government in China sincerely wanted to stop piracy, it 
could. Clearly when piracy hurts Chinese interests, the government has 
been motivated to step in. When t-shirt knockoffs of the Beijing 2008 
Summer Olympics were being sold, the government was quick to close down 
the shops and fine the counterfeiters. In 2001, the government tore 
down 690 billboards that illegally associated products with the event 
and ripped fake Olympic emblems off 67,000 taxis. It is a shame that 
these billboards likely sat on top of markets which sold counterfeit 
Gucci bags and that the taxis were dropping off customers to buy 
pirated DVDs.
    This Saturday, the Washington Post reported that the administration 
will likely cap imports of clothing as a result of the glut of Chinese 
products entering the American market. There is a far more compelling 
case for the administration to be forceful with China about its 
willingness to tolerate intellectual property violations. A 
precondition to China entering the World Trade Organization was that it 
implement intellectual property protections. They have been given time 
to address this concern and have failed. It is time for the 
administration to bring a WTO case and confront China in a meaningful 
way. If we provide the will for them to put a stop to piracy, they will 
find a way.
    I look forward to hearing from our witnesses. I am especially 
interested in hearing from USTR and what steps they are taking to 
protect America's most valuable treasure: our ideas and creations.
                               __________
Prepared Statement of the Honorable Bob Goodlatte, a Representative in 
                  Congress from the State of Virginia
    Mr. Chairman, thank you for holding these important oversight 
hearings on intellectual property theft in China and Russia.
    In China, an estimated 95% of motion pictures and 90% of business 
software are pirated. In Russia, 80% of all motion pictures and 87% of 
business software are pirated. Considering that the core copyright 
industries account for 6% of U.S. GDP and the total copyright 
industries account for approximately 12% of U.S. GDP, it is clear that 
America's businesses are facing a serious problem. In fact, the FBI 
estimates that U.S. businesses lose between $200-250 billion a year to 
counterfeit goods.
    Recently, China and Russia have received attention for intellectual 
property rights violations within their borders. For example, in April, 
the Office of the United States Trade Representative released its 
``Special 301'' report, and elevated China to the ``priority watch 
list'' due to its failure to protect intellectual property rights.
    We must make sure that each nation recognizes that piracy is a 
global problem. The growth of piracy among organized crime rings is 
illustrative of its global scope.
    The combination of enormous profits and practically nonexistent 
punishments by many foreign governments makes copyright piracy an 
attractive cash cow for organized crime syndicates. Often specializing 
in optical disc and business software piracy, these crime rings are 
capable of coordinating multi-million dollar efforts across multiple 
national borders. For example, on December 19, 2001, Mexican officials 
raided numerous locations in Mexico in an effort to bust an organized 
crime ring there. These officials uncovered 12.5 million blank CD-R's 
and arrested eleven members, some of whom were armed with high powered 
weapons. Subsequent investigations revealed that the blank CD's were 
made in Taiwan, shipped to a shell company established in the U.S., and 
then shipped to Mexico, where the actual illegal copying and 
distribution occurred. We must meet this type of highly organized 
piracy with highly organized coordination and enforcement efforts.
    Another disturbing trend is the growing willingness of many foreign 
governments to condone the use of, and even use, pirated materials. At 
its best, government sets the standards for the protection of rights. 
At its worst, government encourages and even participates in the breach 
of those rights. Now is the time for each country in the international 
community to choose which path it will take with regard to intellectual 
property rights.
    We all must realize that copyright piracy and counterfeiting are 
serious problems that do not merely affect private companies' bottom 
lines in the short term. They also discourage investment and innovation 
in the long term, which will eventually lead to fewer consumer 
choices--a repercussion that affects entire societies and economies. 
Governments must work together to reward creators and punish thieves.
    In addition, counterfeit goods can pose serious risks of bodily 
harm and even death. The U.S. Chamber of Commerce estimates that trade 
in counterfeit goods makes up between six and nine percent of all world 
trade. With products as essential as airplane parts and car brakes 
being faked, we must focus attention on this growing problem for the 
sake of our citizens.
    Recent treaties, such as the TRIPS agreement, provide the legal 
framework for member countries to aggressively enforce their copyright 
laws. Article 61 of the TRIPS agreement specifically requires member 
countries to establish criminal procedures and penalties to be applied 
in cases of copyright piracy. We already have many tools to combat 
international piracy. Now we must put these tools to work. The United 
States must lead by example and rigorously enforce our copyright piracy 
statutes. However, we must also work with the international community 
to encourage other countries to do the same. Only when we coordinate 
our efforts to combat piracy will we see substantial results.
    I look forward to hearing the testimony of our expert witnesses 
about the scope of piracy and counterfeiting in China and Russia, and 
learning about the steps we can take to solve these growing problems.
                               __________
Prepared Statement of the Honorable Elton Gallegly, a Representative in 
                 Congress from the State of California
    Thank you for holding these two hearings today, Mr. Chairman.
    Intellectual property is at the heart of the American success 
story. Over the last 200 years, the United States has emerged as the 
leader in innovation and development of new technologies and these 
innovations and developments are in turn the heart of the American 
economy. Intellectual property systems that encourage innovation made 
this possible.
    Unfortunately, bad actors scorn the protection of innovation and 
development and favor systems that foster free riding on the backs of 
others. US trade partners must respect intellectual property. They not 
only must have laws on the books proscribing infringement, but also 
have enforcement mechanisms in place to make them stick. I am 
particularly concerned about recent revelations that pirating 
operations may be operating on land owned by the Russian government.
    California industries have seen billions of dollars of losses. 
These losses do not only involve losses to the recording and movie 
industries, though I am very sympathetic to the particularly large 
losses in those sectors. American products from shaving razors to auto 
parts to pharmaceuticals are also being copied and sold in violation of 
international law. Former Attorney General Ashcroft reported late last 
year that intellectual property crimes cost the US economy $250 billion 
and 300,000 jobs in 2003. DVD piracy alone reportedly accounts for $3 
billion a year in losses to the US economy.
    As the government, we have a duty to protect the rightful owners of 
property, intellectual and otherwise. The health of our economy depends 
on it.
    I am interested in hearing the testimony of the witnesses and 
hearing about what we have learned from our dealings with China that 
can be applied to other countries where piracy is a problem.
    Thank you, again, Mr. Chairman. I yield back my time.
        Prepared Statement of the American Chamber of Commerce 
                       People's Republic of China




















    Article from the New York Times entitled ``The Pirate Kingdom'' 
                             by Pat Choate




 Dear Colleague and Article entitled ``In Russia, Politicians Protect 
      Movie and Music Pirates'' from the Honorable Lamar Smith, a 
   Representative in Congress from the State of Texas, and Chairman, 
    Subcommittee on Courts, the Internet, and Intellectual Property








Prepared Statement of the Honorable Howard L. Berman, a Representative 
     in Congress from the State of California, and Ranking Member, 
    Subcommittee on Courts, the Internet, and Intellectual Property
    Mr. Chairman,
    Russia is considered by the copyright industries, as second only to 
China as an intellectual property pirate. Russia adopted a copyright 
law in 1993, and finally in 2004, remedied some key deficiencies. But 
it has neither enacted appropriate laws to deal with the problems of 
optical disc piracy, nor has it enforced the laws already on its books. 
Because of its poor enforcement, Russia is now one of--if not the 
largest--exporter of pirated music products in the world. Their pirated 
products have surfaced in over 27 countries, including the U.S.
    Almost two years ago, a number of members of Congress sent a letter 
to President Bush to focus his attention on the escalating problem in 
Russia. Yet Russian plants are still producing tens of millions of 
pirated optical discs for export. U.S. copyright industries continue to 
lose billions of dollars and the piracy rates are estimated at 70% for 
every copyright sector.
    In February, The International Intellectual Property Alliance 
released its 2005 Special 301 recommendations, a document that Mr. 
Schwartz will address in his testimony. Many of the suggestions 
provided in the IIPA report and today's testimony describe how the U.S. 
government can address the severity of the situation in Russia. These 
options are time-sensitive. We must consider one or all of the 
following actions: recommending the designation of Russia as a Priority 
Foreign Country, or conditioning Russia's entry into the WTO on 
meaningful copyright enforcement, or denying Russia its GSP benefits. 
We must move quickly because each day that goes by without a firm 
stance by the Administration on these possibilities lessens the 
importance of this issue in Russia's eyes.
    When we had a hearing on international copyright piracy two years 
ago, a constituent of mine testified to her own personal experience of 
intellectual property theft by the Russian government. Before us today 
are representatives from the movie and music industry who will testify 
to the effect Russian piracy has on that segment of the American 
economy. These industries represented 6% of U.S. economic output and 
almost 5.5 million jobs in 2004. However, whether you pirate from an 
individual or from a corporation, the act of piracy must be stopped.
    The same holds true whether the piracy is sponsored by the 
government itself or funded by individual citizens. While the concept 
of private ownership of property is relatively new in many of the 
formerly communist countries, the value has not been lost on them. Any 
government that wants the benefits of trade with America, and who is 
currently benefiting from trade preferences, like Russia, has a 
responsibility to respect American innovation. Furthermore, any citizen 
of a state must recognize basic rules of law, such as the prohibition 
on theft. The Russian government has pointed to the high price of 
legitimate products coming from the United States as a justification 
for piracy. This is tantamount to blaming the victim for the crime. It 
is clear that price is not the cause of piracy. The pirated goods 
contain language tracks that include languages that are not Russian!! 
Therefore, the goal therefore is not to help Russians afford DVDs of 
movies--piracy is providing a business opportunity to service those 
that live outside of Russia.
    The Wall Street Journal article ``In Russia, Politicians Protect 
Movie and Music Pirates,'' points to elected government officials who 
help protect the pirates. As I said two years ago, when a government 
does not exert its authority to stop the theft of intellectual 
property, it is entirely appropriate for the US not to grant special 
trade privileges such as WTO accession or GSP benefits on that foreign 
government. Furthermore, a government that itself is sponsoring 
intellectual property theft represents the essence of organized crime. 
In any nation, there is no bigger organization than its government, and 
there are few clearer prohibitions in any system of law than the 
prohibition on theft.
    We have an opportunity now when trying to address the piracy 
situation in Russia to learn from our failures with intellectual 
property enforcement in China. Before permitting Russia's accession to 
the WTO, we must require stricter enforcement of Intellectual Property 
rights.
    I look forward to hearing the witnesses describe the extent of 
piracy in Russia and any suggestions they may have to curtail the 
problem. I hope to work with Chairman to address the importance of 
achieving significant reform of Russian intellectual property 
enforcement before admitting Russia into the WTO.
                Prepared Statement of the Coalition for 
                  Intellectual Property Rights (CIPR)










  Letter from the Recording Industry Association of America (RIAA) to 
                        President George W. Bush








                                 
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