[House Hearing, 109 Congress]
[From the U.S. Government Printing Office]
INTELLECTUAL PROPERTY THEFT
IN CHINA AND RUSSIA
SUBCOMMITTEE ON COURTS, THE INTERNET,
AND INTELLECTUAL PROPERTY
COMMITTEE ON THE JUDICIARY
HOUSE OF REPRESENTATIVES
ONE HUNDRED NINTH CONGRESS
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
Part Ifirst hearing deg.
Intellectual Property Theft in China........................... 1
Part IIsecond hearing deg.
Intellectual Property Theft in Russia.......................... 105
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
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
Oral Testimony................................................. 13
Prepared Statement............................................. 15
Mr. Eric H. Smith, President, International Intellectual Property
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
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
INTELLECTUAL PROPERTY THEFT IN CHINA
TUESDAY, MAY 17, 2005
House of Representatives,
Subcommittee on Courts, the Internet,
and Intellectual Property,
Committee on the Judiciary,
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
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
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
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
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
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
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.
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
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
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
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
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
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
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
[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
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.
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
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
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
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
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
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.
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
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
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
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
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
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.
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
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.
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
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
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
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
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
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-
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
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
Whether sound recordings are even covered by the
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
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
(c) Demonstrate specific steps to combat copyright and trade
infringing activities, including internet piracy;
(d) Make public available case rulings and IPR-related statistical
(e) Demonstrate steps Chinese customs authorities are undertaking
that are leading to significant declines of exports of infringing
(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
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
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
(2) Engaging local and provincial Chinese leaders on best
practices, judicial and administrative training or related
(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
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.
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.
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,
2) Educating the public; and
3) Making IPR a priority public policy issue that needs to be
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
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,
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
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.
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
It is not a victimless crime. It hurts legitimate established
businesses, innovators, consumers, and governments that lose tax
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
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
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
[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
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
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
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
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
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
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
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
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
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
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
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
Mr. Brilliant. Well, I mean, I think we looked at all
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
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
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
Ms. Espinel. Well, I hate to make promises that I can't
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
Mr. Smith. Perhaps that's the first step. And maybe you'll
get to the next-higher step, given the response by China,
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
Mr. Smith. Realistic? Okay.
Ms. Espinel.--based on where we are with industry at this
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
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.
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
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
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
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
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
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
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
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
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
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
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
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
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.
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
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
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
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
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
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
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
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
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
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
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
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
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
Mr. Smith. Thank you.
Mr. Issa. You know, funny he should note that----
Mr. Smith. Thank you, Mr. Issa. No response is necessary
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
[Whereupon, at 12:15 p.m., the Subcommittee was adjourned.]
INTELLECTUAL PROPERTY THEFT IN RUSSIA
TUESDAY, MAY 17, 2005
House of Representatives,
Subcommittee on Courts, the Internet,
and Intellectual Property,
Committee on the Judiciary,
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
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
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
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
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.
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
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
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
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
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
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
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
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.
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
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
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
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
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
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
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
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
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
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.
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
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
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
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
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
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.
Mr. Smith. Thank you, Mr. Schwartz.
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
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
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
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
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
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
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
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.
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
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
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
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,
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
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
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
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
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
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
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.
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.
Mr. Smith. Thank you, Ms. Richardson.
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
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
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
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
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
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
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
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
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
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
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
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.
(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
``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
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
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
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
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
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
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
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.
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
Mr. Berman. Is it done in the context of intellectual
property issues, or is it done in the context of U.S.-Russia
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
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
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,
But the type of piracy that Mr. Gerson was talking about,
this is a hosted server, the MP3. This is not a difficult
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
Mr. Berman. Was that Russian guy who broke the DVD
encryption, was he an agent of the government at the time? No,
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
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
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
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
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
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
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.
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
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
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,
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
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
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
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
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
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
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
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