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



     PRODUCT COUNTERFEITING: HOW FAKES ARE UNDERMINING U.S. JOBS, 
                    INNOVATION, AND CONSUMER SAFETY

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

                                HEARING

                               before the

                            SUBCOMMITTEE ON
                COMMERCE, TRADE, AND CONSUMER PROTECTION

                                 of the

                    COMMITTEE ON ENERGY AND COMMERCE
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED NINTH CONGRESS

                             FIRST SESSION

                               __________

                             JUNE 25, 2005

                               __________

                           Serial No. 109-26

                               __________

      Printed for the use of the Committee on Energy and Commerce


 Available via the World Wide Web: http://www.access.gpo.gov/congress/
                                 house


                               __________

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                    ------------------------------  

                    COMMITTEE ON ENERGY AND COMMERCE

                      JOE BARTON, Texas, Chairman

RALPH M. HALL, Texas                 JOHN D. DINGELL, Michigan
MICHAEL BILIRAKIS, Florida             Ranking Member
  Vice Chairman                      HENRY A. WAXMAN, California
FRED UPTON, Michigan                 EDWARD J. MARKEY, Massachusetts
CLIFF STEARNS, Florida               RICK BOUCHER, Virginia
PAUL E. GILLMOR, Ohio                EDOLPHUS TOWNS, New York
NATHAN DEAL, Georgia                 FRANK PALLONE, Jr., New Jersey
ED WHITFIELD, Kentucky               SHERROD BROWN, Ohio
CHARLIE NORWOOD, Georgia             BART GORDON, Tennessee
BARBARA CUBIN, Wyoming               BOBBY L. RUSH, Illinois
JOHN SHIMKUS, Illinois               ANNA G. ESHOO, California
HEATHER WILSON, New Mexico           BART STUPAK, Michigan
JOHN B. SHADEGG, Arizona             ELIOT L. ENGEL, New York
CHARLES W. ``CHIP'' PICKERING,       ALBERT R. WYNN, Maryland
Mississippi, Vice Chairman           GENE GREEN, Texas
VITO FOSSELLA, New York              TED STRICKLAND, Ohio
ROY BLUNT, Missouri                  DIANA DeGETTE, Colorado
STEVE BUYER, Indiana                 LOIS CAPPS, California
GEORGE RADANOVICH, California        MIKE DOYLE, Pennsylvania
CHARLES F. BASS, New Hampshire       TOM ALLEN, Maine
JOSEPH R. PITTS, Pennsylvania        JIM DAVIS, Florida
MARY BONO, California                JAN SCHAKOWSKY, Illinois
GREG WALDEN, Oregon                  HILDA L. SOLIS, California
LEE TERRY, Nebraska                  CHARLES A. GONZALEZ, Texas
MIKE FERGUSON, New Jersey            JAY INSLEE, Washington
MIKE ROGERS, Michigan                TAMMY BALDWIN, Wisconsin
C.L. ``BUTCH'' OTTER, Idaho          MIKE ROSS, Arkansas
SUE MYRICK, North Carolina
JOHN SULLIVAN, Oklahoma
TIM MURPHY, Pennsylvania
MICHAEL C. BURGESS, Texas
MARSHA BLACKBURN, Tennessee

                      Bud Albright, Staff Director

        David Cavicke, Deputy Staff Director and General Counsel

      Reid P.F. Stuntz, Minority Staff Director and Chief Counsel

                                 ______

        Subcommittee on Commerce, Trade, and Consumer Protection

                    CLIFF STEARNS, Florida, Chairman

FRED UPTON, Michigan                 JAN SCHAKOWSKY, Illinois
NATHAN DEAL, Georgia                   Ranking Member
BARBARA CUBIN, Wyoming               MIKE ROSS, Arkansas
GEORGE RADANOVICH, California        EDWARD J. MARKEY, Massachusetts
CHARLES F. BASS, New Hampshire       EDOLPHUS TOWNS, New York
JOSEPH R. PITTS, Pennsylvania        SHERROD BROWN, Ohio
MARY BONO, California                BOBBY L. RUSH, Illinois
LEE TERRY, Nebraska                  GENE GREEN, Texas
MIKE FERGUSON, New Jersey            TED STRICKLAND, Ohio
MIKE ROGERS, Michigan                DIANA DeGETTE, Colorado
C.L. ``BUTCH'' OTTER, Idaho          JIM DAVIS, Florida
SUE MYRICK, North Carolina           CHARLES A. GONZALEZ, Texas
TIM MURPHY, Pennsylvania             TAMMY BALDWIN, Wisconsin
MARSHA BLACKBURN, Tennessee          JOHN D. DINGELL, Michigan,
JOE BARTON, Texas,                     (Ex Officio)
  (Ex Officio)

                                  (ii)




                            C O N T E N T S

                               __________
                                                                   Page

Testimony of:
    Arthur, Stephen C., Vice President, Government Affairs, 
      Grocery Manufacturers Association..........................    15
    Christian, James, Head of Corporate Security, Novartis 
      International AG...........................................    19
    DelBianco, Steve, Vice President, Association of Competitive 
      Technology, Member, U.S. Chamber of Commerce, Coalition 
      Against Counterfeiting and Piracy..........................    29
    Emmer, Scott, Brand Protection Manager, Federal-Mogul 
      Corporation, on Behalf of the Motor and Equipment 
      Manufacturers Association..................................    11
    Pearl, David S., II, Executive Vice President, Uniweld 
      Products, Inc..............................................    24

                                 (iii)

  

 
     PRODUCT COUNTERFEITING: HOW FAKES ARE UNDERMINING U.S. JOBS, 
                    INNOVATION, AND CONSUMER SAFETY

                              ----------                              


                        WEDNESDAY, JUNE 15, 2005

              House of Representatives,    
              Committee on Energy and Commerce,    
                       Subcommittee on Commerce, Trade,    
                                   and Consumer Protection,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 2:59 p.m., in 
room 2123 of the Rayburn House Office Building, Hon. Cliff 
Stearns (chairman) presiding.
    Members present: Representatives Stearns, Cubin, 
Radanovich, Bass, Ferguson, Rogers, Murphy, Blackburn, Barton 
(ex officio), and Schakowsky.
    Staff present: Chris Leahy, policy coordinator; Brian 
McCullough, professional staff; Will Carty, professional staff; 
Lisa Miller, deputy communications director; Billy Harvard, 
clerk; Michael Abraham, clerk; David Nelson, minority 
investigator; Jessica McNiece, research assistant; and Jonathan 
Cordone, minority counsel.
    Mr. Stearns. The subcommittee will come to order. Good 
afternoon, everybody.
    Today, counterfeiters have become just another competitor 
for legitimate U.S. businesses in the high stakes world of 
global commerce and remain busy in every industry and in every 
region of the world, developing new ways to exploit and steal 
the hard work, creativity, and knowledge of others. 
Unfortunately, in many areas of the world, the traditional 
practice of branding goods and registering trademarks no longer 
adequately protects the brand value and know how that is 
associated with distinctive and innovative products from the 
thieves and from the criminal organization.
    My colleagues, as we hear from the distinguished panel 
before us today, global counterfeiting is not just limited to 
fake, high end watches, movie, DVDs, and designer apparel, it 
is a multi-billion dollar criminal enterprise that has 
infiltrated virtually every section of the United States 
economy, targeting our industrial know how in cars, computers, 
medicine, aircraft parts, and frankly just about everything. 
What is even more disturbing is that counterfeiting thieves are 
no longer content with just undercutting the inexpensive labor 
intensive product with cheaper fakes; they are going after high 
value products that represent a large part of the current U.S. 
intellectual capital and know how.
    According to the World Custom Organization in Interpol, 
product counterfeiting and copyright privacy have increased 
from $5.5 billion a year enterprise in 1982 to one that costs 
almost $600 billion annually. In the United States, product 
counterfeiting alone costs United States businesses between 
$200 and $250 billion annually and that is a figure statistic 
according to the FBI.
    Now if these numbers don't alarm you, be aware that 
counterfeiting is not a victimless crime. In terms of U.S. 
jobs, those sterile economic statistics translate into layoffs, 
plant closings at our home here in the United States. U.S. 
Customs and border protection calculate that the resulting loss 
in revenue from counterfeiting translate into the loss of more 
than 750,000 United States jobs. Companies both large and small 
are faced with sharply reduced revenue and of course lost 
profits when counterfeiters strike. This, in turn, translates 
into less capital to invest in expansion, research and 
development, and innovation. In the auto sector alone, the 
Federal Trade Commission estimated that by eliminating fakes, 
the U.S. auto industry could create at least 200,000 more auto 
related jobs all of the time when many of these jobs are being 
lost.
    My concern today is about how fakes are robbing our U.S. 
companies of the hard earned intellectual property and 
ingenuity that they own and need to compete globally. Consumer 
safety is another area that greatly concerns our committee. 
Counterfeiters have attempted to sell fake baby formula, 
pharmaceuticals, phony aircraft parts just quickly to turn a 
fast buck. Those are frightening revelations that should 
concern all of us.
    The World Health Organization figures that over 10 percent 
of the world's medicines are simply counterfeit with 
percentages reaching as high as 60 percent in the developing 
world. There also have been product recalls including consumer 
products like shampoo and lifestyle pharmaceuticals, increased 
technology capability has made counterfeiters even more brazen 
to push their way into lucrative intellectual property driven 
industries like healthcare, goods, and of course, 
pharmaceuticals. Deaths and injuries are inevitable if the 
current rate of counterfeiting continues.
    The auto industry is starting to see more critical safety 
components like brake pads and windshields being counterfeited. 
And there are even reports from the FAA that over 2 percent of 
all aircraft replacement parts are counterfeited each year with 
some linked to fatal crashes.
    My colleagues, this is a massive and pervasive problem that 
demands a massive and global response. I applaud the 
administration for action like STOP, the Strategic Targeting 
Organized Privacy Plan and for aggressively using the USGR 
Special 301 Report to call our countries out that should be 
doing better. According to the U.S. Custom Service, over 60 
percent of sized counterfeit goods last year originated from 
China. As we learned last week, the administration is taking 
China to task for its lack of intellectual property rights 
enforcement placing it on the USGR Special 301 Priority Watch 
List.
    But before we direct all the blame, we should also 
understand that counterfeiting is clearly a global phenomena 
and not just a Chinese one. Counterfeiting hotspots in Eastern 
Europe, South America, even in the United States are just 
capable of inflicting serious damage on U.S. economy as any 
other region. Unfortunately, with today's advances in computer 
technology, global supply chain management, and the Internet, 
even the smallest counterfeiting operation based anywhere in 
the world can be a major problem for our companies.
    As I said in last week's hearing on the U.S./China Joint 
Commission on Commerce and Trade, intellectual property rights 
are critical to our economy and to the engine of innovation. 
The fortress around our ingenuity, technological leadership, 
and creativity is the rule of law. And as we will hear today, 
it is time to insure that our laws are just as robust as they 
can be, that they are aggressively enforced, and that all 
relevant parties be required to live up to our international 
agreements regarding IPR especially obligations under WTO and 
the trade related aspects of intellectual property right 
agreement.
    Again, I would like to welcome our distinguished panel of 
witnesses here today. I would especially like to welcome Dr. 
David Pearl of Uniweld, Incorporated, a family owned 
manufacturing company based in Fort Lauderdale, Florida for 
joining us today. Your story gives a voice to all the U.S. 
small companies that are also feeling the brunt of this global 
problem.
    I would also like to thank the U.S. General Accounting 
Office for the samples of counterfeit products they provided to 
us this afternoon. They are on the table there and we look 
forward to the testimony from our witnesses. And I would say we 
will be showing a video, a 5-minute video after the opening 
statement on counterfeiting so I look forward to that.
    With that, the ranking member, Ms. Schakowsky.
    [The prepared statement of Hon. Cliff Stearns follows:]

Prepared Statement of Hon. Clifford Stearns, Chairman, Subcommittee on 
                Commerce, Trade, and Consumer Protection

    Good afternoon. Today, counterfeiters have become just another 
competitor for legitimate U.S. businesses in the high-stakes world of 
global commerce, and remain busy in every industry and in every region 
of the world developing new ways to exploit and steal the hard work, 
creativity, and knowledge of others. Unfortunately, in many areas of 
the world, the traditional practice of branding goods and registering 
trademarks no longer adequately protects the brand value and know-how 
associated with distinctive and innovative products from thieves and 
criminal organizations. As we will hear from the distinguished panel 
before us today, global counterfeiting is not just limited to fake 
high-end watches, movie DVDs, and designer apparel, it is a multi-
billion dollar criminal enterprise that has infiltrated virtually every 
sector of the U.S. economy--targeting our industrial know-how in cars, 
computers, medicines, aircraft parts, or just about anything.
    What's even more disturbing is that counterfeiting thieves are no 
longer content with undercutting inexpensive, labor-intensive products 
with cheaper fakes; they are going after high-value products that 
represent a large part of current U.S. intellectual capital and know-
how. According to the World Customs Organization and Interpol, product 
counterfeiting and copyright piracy have increased from a $5.5 billion 
dollar a year enterprise in 1982 to a one that costs almost $600 
billion annually. In the U.S., product counterfeiting alone costs U.S. 
business $200-$250 billion annually, according to the FBI.
    If the numbers don't alarm you, be aware that counterfeiting is not 
a victimless crime. In terms of U.S. jobs, those sterile economic 
statistics translate into layoffs and plant closings at home. U.S. 
Customs and Border Protection calculate that the resulting loss in 
revenue from counterfeiting translates into the loss of more than 
750,000 U.S. jobs. Companies, both large and small, are faced with 
sharply reduced revenue and lost profits when counterfeiters strike. 
This, in turn, translates into less capital to invest in expansion, 
research and development, and innovation. In the auto sector alone, the 
Federal Trade Commission estimated that by eliminating fakes, the U.S. 
auto industry could create at least 200,000 more auto-related jobs, all 
at a time when many of these jobs are being lost. Our concern today is 
about how fakes are robbing our U.S. companies of the hard-earned 
intellectual property and ingenuity that they own and need to compete 
globally.
    Consumer safety is another area that greatly concerns the 
Committee. Counterfeiters have attempted to sell fake baby formula, 
counterfeit pharmaceuticals, and phony aircraft parts to turn a fast 
buck. Those are frightening revelations that should alarm all of us. 
The World Health Organization (WHO) figures that over ten percent of 
the world's medicines are counterfeit, with percentages reaching as 
high as 60% in the developing world. There also have been product 
recalls involving consumer products like shampoo and life-style 
pharmaceuticals. Increased technological capability has made 
counterfeiters even more brazen to push their way into lucrative, 
intellectual property-driven industries like healthcare goods and 
pharmaceuticals. Deaths and injuries are inevitable if the current rate 
of counterfeiting continues. The auto industry is starting to see more 
critical safety components like brake pads and windshields being 
counterfeited, and there are even reports from the Federal Aviation 
Administration (FAA) that over 2% of all aircraft replacement parts are 
counterfeited every year, with some linked to fatal crashes.
    This is a massive and pervasive problem that demands a massive and 
global response. I applaud the Administration for action like the STOP! 
(Strategy Targeting Organized Piracy) Initiative and for aggressively 
using the USTR Special 301 Report to call out countries that should be 
doing better. According to the U.S. Customs Service, over 60% of seized 
counterfeit goods last year originated from China. As we learned last 
week, the Administration is taking China to task for its lack of 
Intellectual Property Rights (IPR) enforcement, placing it on the USTR 
Special 301 Priority Watch List. But before we direct all the blame, we 
should also understand that counterfeiting is clearly a global 
phenomenon not just a Chinese one. Counterfeiting hot spots in Eastern 
Europe, South America, and even in the U.S. are just as capable of 
inflicting serious damage on U.S. economy as any other region. 
Unfortunately, with today's advances in computer technology, global 
supply chain management, and the Internet, even the smallest 
counterfeiting operation based anywhere in the world can be a major 
problem for our companies.
    As I said at last week's hearing on the U.S.-China Joint Commission 
on Commerce and Trade (JCCT), Intellectual Property Rights (IPR) are 
critical to the U.S. economy and its engine of innovation. The fortress 
around our ingenuity, technological leadership, and creativity is the 
rule of law. And as we will hear today, it is time to ensure that our 
laws are as robust as they can be, they are aggressively enforced, and 
that all relevant parties be required to live up to our international 
agreements regarding IPR, especially obligations under the WTO and the 
TRIPs (Trade-Related Aspects of Intellectual Property) agreement.
    Again, I would like to welcome our distinguished panel of witnesses 
here today. I would like to especially welcome Mr. David Pearl of 
Uniweld Inc., a family-owned manufacturing company based in Fort 
Lauderdale, Florida for joining us today. Your story gives a voice to 
all the U.S. small businesses that are also feeling the brunt of this 
global scourge. I also would like to thank the U.S. General Accounting 
Office for the samples of counterfeit products they provided us for 
this hearing. We look forward to the important testimony from all of 
our witnesses. Thank you.

    Ms. Schakowsky. Thank you, Mr. Chairman. I appreciate you 
calling today's hearing.
    Counterfeiting poses a threat not only to our present and 
future economic wellbeing, but also to the health and safety of 
all Americans. Many Americans think of counterfeits as limited 
to poor copies of luxury products that are sold on city street 
corners. However, we know that the problem is much bigger than 
a fake Kate Spade bag and has serious consequences that we must 
explore. I am pleased that we will be discussing counterfeit 
auto parts and prescription drugs. Our witnesses' testimony, 
which I look forward to hearing, should add urgency to the task 
of dealing with foreign pirates that steal intellectual 
property and undermine the healthy of the economy.
    While stealing our movies is wrong, selling defective 
medicines, auto brake parts, or helicopter rotor components to 
Americans or people anywhere in the world is a heinous crime, 
yet such crimes occur every day. The question we must ask is 
what is this administration doing about it. Where is the 
commitment to defend this country from those that would profit 
from counterfeit goods regardless of the human consequences? 
The Food and Drug Administration is charged along with customs 
to protect us from counterfeit drugs.
    I support re-importation and I believe that we could do it 
safely while the administration continues to block 
comprehensive re-importation legislation obstensively to 
guarantee safety. It is not doing its job with drugs that are 
coming into the country already. The oversight committee has 
discovered that the real policy of this administration seems to 
be to allow virtually any knockoff pharmaceutical into the 
United States unimpeded. The FDA has tested counterfeits, found 
them to be subponent and yet still allowed them to proceed into 
the commerce of the United States.
    When confronted with hard facts regarding this problem by a 
committee, the administration chose to solve the problem by 
directing that no more packages containing prescription drugs 
shipped to individuals be opened at the international mail 
facility in Miami. I guess they figure that if they don't see 
it, they cannot be blamed. Even when we try to stop 
counterfeits, we are facing an uphill battle. Customs has been 
overwhelmed by years with too many containers and too few 
inspectors. And that was before 9/11. Now with those scarce 
resources shifted to the detection of possible chemical, 
biological, or nuclear weapons, we are increasingly vulnerable 
to the threats posed by fake auto and aircraft parts and other 
counterfeit products with the potential to do serious harm.
    The Internet has made shopping for substandard goods very 
easy. Visa and MasterCard have made their entry into the 
commerce of the United States simple and virtually without 
consequence. What can we do about it? Should the transporters 
and financiers of these often dangerous products take some 
responsibility for their involvement in illegal commerce?
    The entry and sale of counterfeit goods in the United 
States is already a crime. Nonetheless, it may be that the laws 
do need to be tightened. We know that more resources must be 
devoted to this fight; however, the problem with counterfeit 
goods appears to be more likely a case of tragically misplaced 
priorities by the executive branch. That this administration 
chooses not to devote the necessary enforcement resources is 
what has enabled the swelling wave of privacy--piracy, excuse 
me, piracy.
    Last week, we had a hearing on trade with China. The 
Department of Commerce witness sent here with little or no 
preparation or ability to answer many of our questions on most 
subjects did tell us that despite paper promises, 
counterfeiting in China continues unabated. Why hasn't the 
administration taken concrete action to stop this?
    Mr. Chairman, I would like to see the officials from HHS, 
Homeland Security, and the Commerce Department that are 
responsible for the lax enforcement of existing laws and the 
appeasement trade policy come before us to tell us why they are 
failing to protect our workers, companies, and the public as a 
whole from counterfeit products. I hope that we will be able to 
hear from them as we continue our work on trade.
    Mr. Chairman, I thank you for today's hearing. I believe 
this committee should get to the root cause of the rip offs 
that are rapidly displacing jobs and threatening the safety of 
all Americans. And I believe that the administration must be 
called to account.
    Mr. Stearns. I thank the gentlelady.
    Mr. Rogers?
    Mr. Rogers. Thank you, Mr. Chairman.
    I want to thank the panelists for being here today and I 
hope this does not become a partisan argument about what 
policies do and do not work. Every product that we see up on 
that table cost an American a job. It costs financial 
reinvestment in that particular business or growth.
    This is a serious problem that really has exploded over the 
last few years exponentially. And together, I think we can come 
up with a very good common sense solution to target these folks 
who are costing American jobs. And the climate has changed.
    It used to be in America we did not have to worry about 
folks who were doing knockoffs and other things because we were 
going to be more innovative and more competitive. Well the 
world has caught up and we have to do a couple of things. We 
need to stand up for the world and every country that 
participates in commerce saying hey, look, you need to live by 
the rule of law. We need to abide by the sanctity of contracts, 
and we need to protect intellectual property rights. If we do 
those things, we will have commerce for generations that 
benefit not only every American, but certainly our trading 
partners as well.
    So again, I appreciate your being here. I don't believe 
that there is a single person at fault in this process. I 
commend the chairman for having this hearing and setting us on 
a course to take some pretty tough and aggressive action in 
protecting these American jobs and your products and your 
ability to protect your intellectual property.
    So Mr. Chairman, I thank you again, and I yield back the 
remainder of my time.
    Mr. Stearns. I thank the gentleman.
    The gentlelady from Tennessee, Ms. Blackburn.
    Ms. Blackburn. Thank you, Mr. Chairman. And I want to thank 
you for holding this hearing today and for your attention to 
the importance of intellectual property. I will tell you among 
my constituents in Tennessee, you are building a pretty good 
fan base but we are not ready to let Florida Gators take on UT. 
We are going to reserve that one.
    Mr. Stearns. Okay.
    Ms. Blackburn. But they do appreciate the attention that 
the subcommittee is putting to protecting those whose 
production of their product and practicing their trade depends 
on being able to apply a value to their intellectual property.
    And Mr. Chairman, this weekend, I held a listening session 
in Nashville on intellectual property theft and on our trade 
with China. And in the room we had songwriters, we had record 
labels, we had recording engineers, we had film producers, 
music publishers, book publishers, and artists. And they all 
came together and shared their thoughts on how this theft and 
how counterfeiting impacts them and their ability to earn a 
living practicing their craft. And it is important for us to 
point out that this does not just impact big business. In my 
district and in my state, it impacts small business and 
independent contractors.
    Mr. Chairman, I look forward to hearing the testimony of 
our witnesses. I thank our panel for being with us today and I 
look forward to working with you and the administration as we 
address the issues that we are going to discuss here today.
    Thank you. I yield back.
    Mr. Stearns. Thank you.
    Mr. Ferguson, New Jersey.
    Mr. Ferguson. Thank you, Mr. Chairman for holding this 
hearing on an issue that is really of immense importance to 
many of the industry sectors in our country and many of them 
are represented today.
    The all out theft of intellectual property and copyrights 
and the blatant copying of products innovated in our country 
presents grave threats both to our economy and to the health 
and safety of our citizens. Whether it is the widespread 
copying of American movies and songs in places like China, to 
the counterfeiting of pharmaceuticals practically everywhere 
throughout the world, stealing these patent processes is a 
tremendous threat.
    The committee has held hearings over the past few years 
looking into the harm that comes from counterfeiting and patent 
and copyright infringement. The legal and dangerous fake 
pharmaceuticals account for hundreds of deaths and many other 
health complications around the world. These killer drugs find 
their way to our shores today even with the stringent controls 
that we have on pharmaceutical imports.
    This issue further underscores the threat that is present 
and that our vigilance--continued vigilance is really 
necessary. We have to know for certain where our 
pharmaceuticals actually are coming from and not let this 
supposed specter of savings from imported drugs from other 
countries allow us to forget the dangers that are present with 
drugs coming into our country from other countries.
    And I have to respectfully suggest to my friends in this 
Congress who say they support the re-importation of drugs into 
our country yet are very concerned about the issue of 
counterfeits. Wake up and smell the coffee. Let us get a clue, 
folks. If you like counterfeit drugs, you will love re-
importation.
    When you--we are going to hear today from some of our 
witnesses about the poorest borders of the EU. We are going to 
hear about counterfeit drugs being made in Russia and how they 
make their way into the EU and eventually of course will make 
their way into the United States. We have folks who say well 
importation from Canada is no problem. Well where is Canada 
getting their drugs? We are seeing huge increases of imports 
from places all around the world into Canada. Canada cannot 
possibly supply their drugs needs and ours. So where is Canada 
getting the drugs?
    If you like counterfeit drugs, you will love drug re-
importation. And we have to deal with that. We have to wake up 
and smell the coffee on that because saying that we are going 
to simply start importing our drugs from other countries and 
that somehow is going to solve the counterfeit problem. We are 
having a tough enough time dealing with the counterfeit 
problem, even with the tough laws and stringent standards that 
we have in this country today. We are kidding ourselves if we 
think we are going to help solve the counterfeit problem. We 
are going to make it exponentially worse.
    Today I also want to make sure I welcome Mr. Jim Christian, 
who is here from Novartis. I am looking forward to his insights 
based on the counterfeiting issue. His insights are, of course, 
based on over 30 years of fighting counterfeiting.
    Welcome to all of our panelists today, we look forward to 
hearing all of your insights.
    Thank you, Mr. Chairman, I yield back.
    Mr. Stearns. Thank you, gentleman.
    The gentleman from New Hampshire, Mr. Bass.
    Mr. Bass. Mr. Chairman, I think this is an interesting 
hearing and I am eager to hear the witnesses, so I will waive.
    Mr. Stearns. All right. The gentleman waives.
    And with that, we welcome--I think we are going to play the 
video first, so with that, we will shut the lights off so we 
can see the video.
    [Video.]
    Mr. Stearns. Well that was a pretty good introduction here. 
The chairman of the full committee, Mr. Barton is recognized.
    Chairman Barton. Mr. Chairman, I am not going to be here 
very long. I appreciate the hearing and I have scanned the 
testimony. This is a serious issue, and I appreciate you doing 
it.
    [The prepared statement of Hon. Joe Barton follows:]

 Prepared Statement of Hon. Joe Barton, Chairman, Committee on Energy 
                              and Commerce

    Thank You, Chairman Stearns, for holding this important hearing 
today. This subcommittee had a hearing last week on U.S.-China trade 
issues, and particularly intellectual property issues. This hearing on 
how counterfeiting hurts the American economy and American consumers is 
a natural extension of that discussion.
    Intellectual property (IP) is one of our country's biggest exports. 
From movies and music to pharmaceuticals and manufactured goods, our 
innovation, creativity, and entrepreneurship are some of our most 
important cultural and economic strengths. Given our growing trade 
deficit--not to mention other concerns such as currency manipulation--
it is increasingly important that we protect the economic rights of our 
inventors, engineers, and designers. In that spirit, I would like to 
commend the Administration for its interagency ``STOP! Initiative,'' 
and specifically, the United States Trade Representative for recently 
placing China on the Special 301 Priority Watch List because of the 
rampant rate of counterfeiting and piracy in that country. Last year, 
more than 66% of counterfeit goods seized by U.S. Customs were traced 
to China. I trust that the administration will continue to keep a 
vigilant eye on this issue in China and elsewhere.
    The growth of the global market for illegal goods has grown 
exponentially in the last 20 years, estimated now to be more than $600 
billion dollars a year. More than one third of that amount is in fake 
American goods, which is estimated to cost the U.S. economy over \3/4\ 
of a million jobs. We all enjoy cheaper goods, but nobody wants to lose 
U.S. jobs. We expect our trade partners to enforce international law 
with regard to copyrights, patents and trademarks in order to prevent 
these losses. Importantly, the members of the World Trade Organization 
and signatories to the Trade-Related Aspects of Intellectual Property 
Agreement (``TRIPs Agreement'')--including the U.S., China, and India--
agree to abide by minimum standards for IP protection, including 
requiring enforcement procedures for any IP infringement. These 
agreements need to be adhered to and enforced.
    Regardless of whether counterfeit products come from China, Russia, 
Ukraine, Brazil, India, or elsewhere, there is significant economic 
impact to American companies. However, there is sometimes less 
discussion of an equally important concern regarding the safety of some 
of these products for consumers. When fake automobile brake pads or 
counterfeited airline parts are thought to be genuine, they are 
installed and presumed safe. When this happens, all of us are at risk. 
Furthermore, counterfeit pharmaceuticals--which may account for as much 
as 60% of the market in some countries--frequently do not have the 
proper ingredients or the proper amounts of those ingredients, 
rendering them at the very least ineffective, and at worst potentially 
lethal. Our country has an economic, regulatory, and legal system that 
ensures a high degree of safety and accountability. When products come 
into this country that do not abide by the same rules, the entire 
system is undermined. This must not be allowed to continue as it does.
    Simply put, Mr. Chairman, this is a serious concern for our 
country. Our economy relies heavily on our ability to innovate and 
improve American products for sale here and around the world. If the 
economic incentives to ``build a better mousetrap'' are eroded, it 
could have devastating effects on our economy. Additionally, the 
American people expect their government to protect them against unsafe 
products whatever they may be. We have a responsibility to keep 
dangerous counterfeits out of the market.
    I want to thank the Chairman for putting this panel together to 
help us understand the extent of these problems and the implications 
for American industries and consumers. I look forward to their 
testimony.
    I yield back the balance of my time.

    Mr. Stearns. I thank the distinguished chairman. Ms. Cubin 
is recognized.
    Ms. Cubin. Thank you, Mr. Chairman. I will pass at this 
time so that I will have more time in questions.
    [The prepared statement of Hon. Barbara Cubin follows:]

Prepared Statement of Hon. Barbara Cubin, a Representative in Congress 
                       from the State of Wyoming

    Thank you, Mr. Chairman.
    In their wisdom, the founders of our Nation gave Congress the 
constitutional power to protect the Intellectual Property of ``Authors 
and Inventors'' in order to ``promote the Progress of Science and the 
useful Arts.'' Among the many political and legal innovations of the 
Constitution, the addition of this enumerated power to Article I was 
agreed to unanimously. The spirit of ownership contained in this clause 
as well as throughout our country's founding document lives on today as 
a cornerstone of our economy.
    Patents encourage groundbreaking innovation and development by 
protecting the IP that is even more valuable than material components. 
Copyrights serve the cause of the arts by rewarding creativity. 
Trademarks protect consumers from confusion and deceptive marketing 
practices by allowing them to identify and distinguish unique goods and 
services.
    But we still have much work to be done in protecting IP to keep up 
with technological innovations and meet the challenges presented by the 
global marketplace, in which some of our fellow World Trade 
Organization members and trading partners, like China, fail to comply 
with their IP protection obligations. The astonishing rates of 
counterfeiting and piracy in countries like China, to go along with a 
lack of effective deterrents, casts a long dark shadow on our efforts 
to promote fair and open global trade. From software and artistic 
content to auto parts and pharmaceuticals, the lack of IP protection 
abroad harms U.S. industries and small business owners and in many 
instances poses a danger to consumer safety.
    I look forward to our panel's insight into the efficacy to date of 
IP protections in international trade agreements. I hope their 
expertise will help us identify how to better enforce these obligations 
abroad, as well as provide guidance as to how we can best protect IP in 
future trade agreements.
    Mr. Chairman, I yield back the balance of my time.

    Mr. Stearns. Okay. All right. With that, we welcome Mr. 
Scott Emmer, Brand-Protection Manager of the Federal-Mogul 
Corporation; and Mr. Stephen Arthur, Grocery Manufacturers 
Association; and Mr. James Christian, Head of Corporate 
Security at Novartis International; and Mr. David S. Pearl, 
Executive Vice President, Uniweld Products; and Mr. Steve 
DelBianco, Vice President, Association of Competitive 
Technology, Member of U.S. Chamber. And before you start your 
testimony, I think the ranking member has a request.
    Ms. Schakowsky. Thank you, Mr. Chairman.
    I just ask for unanimous consent to submit the testimony of 
the ranking member, John Dingell into the record.
    Mr. Stearns. By unanimous consent, so ordered.
    [The prepared statement of Hon. John Dingell follows:]

    Prepared Statement of Hon. John D. Dingell, a Representative in 
                  Congress from the State of Michigan

    Mr. Chairman, thank you for calling this hearing today. During my 
tenure as Chairman, the Subcommittee on Oversight and Investigations 
held 35 days of hearings on unfair foreign trade practices over some 
six Congresses. Those hearings detailed many of the same problems we 
are examining today--counterfeiting, customs fraud, market entry 
barriers, and other unfair and illegal practices undertaken by foreign 
pirates aided and abetted by their governments. These scoundrels have 
continued to steal our jobs, our technology, our very economic future, 
and endanger the safety and health of American consumers.
    Those hearings in the 1980s did see a modicum of change in the 
approach to this piracy. We passed a stringent law to prevent the entry 
of counterfeit drugs that unfortunately goes unenforced by this 
Administration.
    We conditioned certain trade preferences upon respect for American 
patents, copyrights, and trademarks. This was targeted at the emerging 
economic powers of Southeast Asia. Today, our intellectual property 
problems in Taiwan, Korea, Singapore, and even Hong Kong are apparently 
greatly diminished.
    In a single Appropriations bill, we managed to add and fund 1,500 
new U.S. Customs officials to fight fraudulent entry of contraband 
goods at our borders. They were used to good effect.
    But the last decade or so has seen a growing deterioration in the 
concern for the well-being of American jobs and health and safety. Free 
trade agreements have become purposes unto themselves with little or no 
care for the consequences paid by American workers and their employers 
in this country.
    Yes, we have negotiated intellectual property protection in these 
agreements as well as in the multinational setting of the WTO. But the 
paper acquiescence of certain of our trading partners, notably China, 
has not diminished their appetite for stealing American ideas or 
American jobs. And we still have those U.S. Customs agents, but they 
are now trying to prevent the infiltration of weapons of mass 
destruction rather then policing our borders for commercial contraband.
    This Administration has reached new heights of inaction. Last week 
we held a hearing on China trade and the Commerce Department could not 
even be bothered to send knowledgeable witnesses. The Director of the 
Patent Office did testify and confirmed that counterfeiting continues 
unabated in China despite repeated promises of reform. He told this 
Committee that if he were the owner of a business that was dependent 
upon intellectual property protection, he would not open an office in 
China. Yet he could not tell us if the U.S. could or would file a WTO 
case against that country that not only protects but actually 
encourages pirates.
    The most recent estimate is that 15 percent of the total 
manufactured goods produced in China are counterfeit, totaling some 8 
percent of that country's GNP. Counterfeiters are not targets of the 
Chinese Government; they apparently are valued partners.
    Yet we stand by hoping that somehow the Chinese will mend their 
ways as their economic power and our debt to them grows. Meanwhile, our 
trade agreements with Mexico and other developing countries and the 
proposed Central American Free Trade Agreement just open back doors for 
Chinese goods, counterfeit or not, and often produced with stolen 
American ideas, to enter our commerce virtually unimpeded.
    Among the victims of this epidemic of piracy are the workers, 
manufacturers, and consumers of auto parts. It is estimated that 
counterfeit auto parts is a $12 billion business worldwide with $3 
billion of lost sales within the United States, and possibly as many as 
200,000 jobs have been lost. But consider the unknown dimensions of 
this tragedy. There are no National Transportation Safety Board 
investigations of auto accidents. How many deaths and crippling 
injuries are caused by defective parts? We do not know but we do know 
that no one has ever made money selling counterfeits that were superior 
in quality to the original.
    Mr. Chairman, I am pleased that we will have the Commerce Secretary 
before us soon. I hope we will also have the Food and Drug 
Administration, the U.S. Trade Representative, and the U.S. Customs and 
Border Protection before us in the near future, as I have some 
questions for those Agencies. Our constituents are demanding that their 
Government protect them from illegal trade practices and we should hold 
the Administration accountable to them.

    Mr. Stearns. So with that, Mr. Emmer, we will start with 
you.

 STATEMENTS OF SCOTT EMMER, BRAND PROTECTION MANAGER, FEDERAL-
    MOGUL CORPORATION, ON BEHALF OF THE MOTOR AND EQUIPMENT 
 MANUFACTURERS ASSOCIATION; STEPHEN C. ARTHUR, VICE PRESIDENT, 
 GOVERNMENT AFFAIRS, GROCERY MANUFACTURERS ASSOCIATION; JAMES 
 CHRISTIAN, HEAD OF CORPORATE SECURITY, NOVARTIS INTERNATIONAL 
   AG; DAVID S. PEARL II, EXECUTIVE VICE PRESIDENT, UNIWELD 
     PRODUCTS, INC.; AND STEVE DELBIANCO, VICE PRESIDENT, 
ASSOCIATION OF COMPETITIVE TECHNOLOGY, MEMBER, U.S. CHAMBER OF 
     COMMERCE, COALITION AGAINST COUNTERFEITING AND PIRACY

    Mr. Emmer. Thank you, Mr. Chairman and members of the----
    Mr. Stearns. I would just have you pull the mike a little 
closer to you. Is that better? I think it is, great.
    Mr. Emmer. Thank you, Mr. Chairman and members of the 
committee for this opportunity to testify today.
    My name is Scott Emmer and I am Brand Protection Manager at 
Federal-Mogul Corporation. We are a global manufacturer of 
automotive products such as brake, ignition, and chassis 
products for original equipment manufacturers and the 
aftermarket which are sold under our well-known brand names to 
include Champion, MOOG, FERODO, and Wagner. Federal-Mogul is 
headquartered in Southfield, Michigan and is a global 
corporation with 55 manufacturing facilities in the United 
States and a total of 196 facilities worldwide employing 45,000 
workers. I appreciate this opportunity to testify today on the 
problem of product counterfeiting.
    First, I just wanted to give a mention of my background 
which consists of a master's degree in criminal justice, as 
well as 4 years with the Central Intelligence Agency. Now as 
Brand Protection Manager for Federal-Mogul, I have a 
responsibility for all anti-counterfeiting initiatives to 
include pursuing enforcement against violators of Federal-
Mogul's intellectual property both in the U.S. and abroad. Also 
for raising public awareness within Federal-Mogul and the 
general public regarding the negative impact caused by 
counterfeit automotive products, as well as developing a 
proactive brand protection solution encompassing a product 
marketing technology for authentication, tracking and tracing.
    Federal-Mogul Corporation and its workers are proud to 
provide high quality products to our customers in the United 
States and abroad. We are proud to be part of a network of 
thousands of automotive suppliers in the United States 
providing the technologies and products that go into making and 
servicing the safest and most technologically advanced motor 
vehicles available anywhere in the world. Today our company and 
our industry are helping to keep drivers safe and enjoying 
better technologies and products for their motor vehicles year 
after year. Due to the assault on intellectual property by 
Chinese counterfeiters, continuing that record of safety and 
value to American consumers is going to require the diligent 
attention and involvement of the U.S. Government. We believe in 
the integrity of the U.S. market and we aim to do our part to 
keep it that way. But we need the U.S. Government's help to 
stop Chinese counterfeiters, as well as counterfeiters from 
other countries from exporting fake product to America.
    Our company and many other automotive suppliers like us are 
equipped to compete in the global market. Now in China, as well 
as other markets, we are forced to compete not just against 
other legitimate manufacturers but against a strong determined 
criminal element that makes money by stealing our brand names 
and making off in inferior and defective copies of our 
products.
    Companies work for years building a brand reputation and 
brand loyalty. Inferior counterfeit products can ruin years of 
hardworking investment. Destruction of a producer's brand name 
and good reputation in the market from counterfeit products can 
be even more serious to a supplier over the long term than the 
direct loss of sales. Furthermore, legitimate American 
manufacturers cannot get a foothold in the Chinese market or in 
other markets where counterfeiters get deep market coverage and 
often exist out in the open.
    As a global corporation, we need to be able to offer 
products and technologies appropriate to each market. However, 
introduction of a new product or technology to China to buildup 
our business in that market creates a huge risk that the 
product or technology will be copied and counterfeited on a 
massive scale.
    Keeping counterfeit products out of the American market is 
a first and foremost concern to our company. We believe it will 
not be enough just to play defense protecting the U.S. market 
from counterfeiters; we believe the U.S. Government with the 
support of industry must also go on the offensive and track the 
counterfeit products back to their source in China. We 
appreciate all of the efforts the Government has made up to 
this point, but we believe continued diligence and more action 
will be required.
    I would like to show you some of the products that Federal-
Mogul has found and discuss each one briefly. One of our 
biggest problems involves counterfeit Champion spark plugs, 
which are mainly produced in China. I have a couple on display 
on the front table and on the table----
    Mr. Stearns. If you don't mind, why don't we have the staff 
just pick them up and then the members could see them. Is that 
possible?
    Mr. Emmer. These counterfeit products or spark plugs rather 
are exported from China worldwide to include the Middle East, 
Africa, and North America. Those are the two spark plugs. If 
they are passed around--Federal-Mogul in this particular case, 
Federal-Mogul was actually contacted by a counterfeit 
distributor in Canada who offered to sell us our own Champion 
spark plugs at a cost far below what we actually--or at a price 
far below our actual costs. We have since initiated enforcement 
against this distributor but this example shows a blatant 
disregard for intellectual property rights to genuine brand 
owners.
    Mr. Stearns. Are both of these counterfeits?
    Mr. Emmer. I believe the one in your left hand is 
counterfeit. On the package, it should have a tag that says 
genuine, as well as counterfeit.
    Mr. Stearns. Okay.
    Mr. Emmer. The shinier of the two is the counterfeit spark 
plug.
    Mr. Stearns. I see, I can tell. This one is a counterfeit, 
okay.
    Mr. Emmer. The quality of those are suspect and often fell 
after 50, 100, upwards of 1,000 miles, also posing severe 
safety risks to render a vehicle inoperative, as well as 
potentially projecting out of the engine like a bullet would, 
so there are some clear safety issues involved with these. You 
will note from looking at those the similarities in it and it 
is often extremely different to tell the two apart.
    The second example I have, and there is simply some digital 
pictures on the table as well, but these are the infringing 
MOOG chassis products which are found or are being sold 
rampantly in the Middle East, as well as on the East Coast of 
the United States. Those parts are actually chassis and 
suspension products that aid the vehicles steering and 
suspension and when they fell, a vehicle can easily get 
involved in an accident. Those particular parts that we found 
are--post a very significant safety threat to the general 
public since those parts are found on taxi cabs, commercial 
vans, as well as school buses, so our kids are also at risk.
    Federal-Mogul and other automotive suppliers have taken 
steps to protect our intellectual property. For example, we 
have pursued joint enforcement action against counterfeiters to 
seize products. In addition, we worked with U.S. Customs to 
seize infringing products and we also worked with foreign 
Customs to include China to seize counterfeit products intended 
for export. We are also taking steps to include product 
marketing technologies for easier packaging authentication.
    Unfortunately, the profit motive for criminals dealing in 
counterfeit goods is huge and they are working every day to 
thwart our efforts.
    The House of Representatives recently passed by unanimous 
consent H.R. 32, the Stop Counterfeiting in Manufactured Goods 
Act. Federal-Mogul and the automotive supplier industry 
strongly supported that legislation and were heartened by your 
action. Our industry is presently seeking similar action in the 
Senate.
    Measuring the impact of this criminal activity is very 
difficult and beyond the ability of any one company or 
industry. We would, therefore, urge you to support efforts by 
the OECD to study global counterfeiting.
    Federal-Mogul appreciates your attention to this important 
industry problem and urges you to combat product counterfeiting 
with diligent enforcement and constructive but firm discussion 
with the Chinese Government for the good of our company, our 
industry, our customers, and the general public.
    I appreciate this opportunity to testify today and I will 
be happy to answer any questions that you may have.
    [The prepared statement of Scott Emmer follows:]

      Prepared Statement of Scott Emmer, Federal-Mogul Corporation

    Thank you Mr. Chairman and members of the committee for this 
opportunity to testify today. My name is Scott Emmer. I am the Brand 
Protection Manager for Federal-Mogul Corporation. We are a global 
manufacturer of automotive products, such as brake, ignition and 
chassis products for Original Equipment Manufacturers and the 
Aftermarket, which are sold under our well-known brand names to include 
Champion, MOOG, Wagner and FERODO. Federal-Mogul, headquartered in 
Southfield, MI is a global corporation with 55 manufacturing facilities 
in the United States and a total of 196 facilities worldwide, employing 
45,000 workers. I appreciate this opportunity to testify today on the 
problem of product counterfeiting.
    As brand protection manager for Federal-Mogul, I have 
responsibility for all anti-counterfeiting initiatives including: 
pursuing enforcement against violators of Federal-Mogul's intellectual 
property both in the US and abroad; raising public awareness within 
Federal-Mogul and the general public regarding the negative impact 
caused by counterfeit automotive products; and developing a proactive 
brand protection solution encompassing product marking technologies for 
authentication, tracking and tracing.
    Federal-Mogul Corporation and its workers are proud to provide high 
quality products to our customers in the United States and abroad. We 
are proud to be part of a network of thousands of automotive suppliers 
in the United States providing the technologies and products that go 
into making and servicing the safest and most technologically advanced 
motor vehicles available anywhere in the world. Today, our company and 
our industry are helping to keep drivers safe and enjoying better 
technologies and products for their motor vehicles year after year. Due 
to the assault on intellectual property by Chinese counterfeiters, 
continuing that record of safety and value to American consumers is 
going to require the diligent attention and involvement of the U.S. 
Government. We believe in the integrity of the U.S. market and we aim 
to do our part to keep it that way. But we need the US Government's 
help to stop Chinese counterfeiters, as well as counterfeiters from 
other countries, from exporting fake product to America.
    Our company, and many other automotive suppliers like us are 
equipped to compete in the global market. Now, in China, as well as 
other markets, we are forced to compete not just against other 
legitimate manufacturers, but also against a strong, determined 
criminal element that makes money by stealing our brand name and making 
often inferior and defective copies of our products.
    Companies work for years building a brand reputation and brand 
loyalty. Inferior counterfeit products can ruin years of hard work and 
investment. Destruction of a producer's brand name and good reputation 
in the market from counterfeit products can be even more serious to a 
supplier over the long term than the direct loss of sales. Furthermore, 
legitimate American manufacturers cannot get a foothold in the Chinese 
market, or in other markets, where counterfeiters get deep market 
coverage and exist out in the open.
    As a global corporation, we need to be able to offer products and 
technologies appropriate to each market. However, introduction of a new 
product or technology to China, to build our business in that market, 
creates a huge risk that the product or technology will be copied and 
counterfeited on a massive scale.
    Keeping counterfeit products out of the American market is of first 
and foremost concern to our company. We believe it will not be enough 
just to play defense, protecting the U.S. market from counterfeiters. 
We believe the U.S. government, with the support of industry must also 
go on the offensive, and track the counterfeit products back to their 
source in China. We appreciate all the efforts the government has made 
up to this point, but we believe continued diligence and more action 
will be required.
    I would like to show you some of the counterfeit products Federal-
Mogul has found and discuss each one briefly. One of our biggest 
problems involves counterfeit Champion spark plugs, which are mainly 
produced in China. These plugs are then exported worldwide to include 
the Middle East, Africa and North America. Federal-Mogul was actually 
contacted by a counterfeit distributor in Canada who offered to sell 
Champion spark plugs at a price below our actual costs. We've since 
initiated criminal enforcement against this distributor, but this 
example shows the blatant disregard for intellectual property rights of 
genuine brand owners.
    I've brought a couple of sample counterfeit products for your 
review. First, please find two genuine and two counterfeit Champion 
spark plugs that were imported into Latin America from China. Please 
note that the counterfeit packaging and plugs are nearly identical to 
the genuine product. Second, please find pictures of genuine and 
infringing MOOG Chassis Products found not only in the Middle East, but 
also on the East Coast of the United States. These infringing MOOG 
parts pose a significant safety threat to the general public, 
especially in this case since these counterfeit parts are used to 
repair taxicabs, commercial vans and school buses.
    Federal-Mogul and other automotive suppliers have taken steps to 
protect our intellectual property. For example, we pursue joint 
enforcement action against counterfeiters to seize products. In 
addition, we work with US Customs to seize infringing products and we 
work with foreign Customs including China to seize counterfeit products 
intended for export. Further, we are taking steps to incorporate 
product-marking technologies into our packaging for easier 
authentication.
    But the profit motive for criminals dealing in counterfeit goods is 
huge and they are working everyday to thwart our efforts.
    The House of Representatives recently passed by unanimous consent 
HR 32, ``The Stop Counterfeiting in Manufactured Goods Act.'' Federal-
Mogul and the automotive supplier industry strongly supported that 
legislation and were heartened by your action. Our industry is 
presently seeking similar action in the Senate.
    Measuring the impact of this criminal activity is very difficult, 
and beyond the ability of any one company or industry. We would, 
therefore, urge you to support efforts by the OECD to study global 
counterfeiting.
    Federal-Mogul appreciates your attention to this important industry 
problem and urges you to combat product counterfeiting with diligent 
enforcement and constructive, but firm discussion with the Chinese 
government for the good of our company, our industry, our customers and 
the general public.
    Thank you for this opportunity to testify. I will be glad to answer 
your questions.

    Mr. Stearns. Thank you.
    Mr. Arthur?

                 STATEMENT OF STEPHEN C. ARTHUR

    Mr. Arthur. Thank you.
    I am Steve Arthur. I am Vice President of Government 
Affairs for GMA, the Grocery Manufacturers Association. And I 
am pleased here to be today to talk about this issue of great 
concern to our member companies and we very much appreciate the 
chairman's interest and the interest of the committee in this 
issue.
    Just a little background. GMA is the world's largest 
association of food, beverage, and consumer product companies. 
With U.S. sales of more than $500 billion, GMA members employ 
more than 2.5 million employees in all 50 States.
    Unfortunately, they are also victims of many counterfeiting 
operations that have the potential to do serious harm to their 
reputations and to their bottom lines. I have submitted formal 
comments for the record so what I wanted to do is simply 
highlight the main issues surrounding the counterfeiting issues 
that I raised in that testimony.
    We see three key problems associated with counterfeiting. 
The first is the increasing scope and danger of counterfeiting. 
And I think the video and a number of the opening statements 
highlighted those some of the legal barriers to punishing 
offenders here in the United States and the lack of adequate 
enforcement abroad.
    As the chairman mentioned, more than $200 billion of 
counterfeiting activity--or $200 billion of economic activity 
costs through counterfeiting each year and I think it was also 
mentioned by another of the members that 750,000 jobs are 
believed to have been lost because of counterfeiting.
    Just recently, just to give you an example of some of the 
members from our member companies just in the last 3 months 
things that have been found: milk drinks, wine, and rum, soy 
sauce, detergents, insecticides, perfumes, and cosmetics and 
that is just in the last few months. And there is--it is 
costing our member companies millions of dollars every year.
    And our member companies who make those products, they have 
rigorous quality control procedures in place to ensure that 
their products are safe for proper human use and consumption. 
And I can almost guarantee that the counterfeit products don't 
live up to those same quality standards as I think Mr. Fox on 
the video referenced or also the Better Business Bureau person. 
And if the product does not taste good or perform as well as 
expected, our companies could end up losing that customer for 
life. And I think Mr. Emmer mentioned in his testimony the 
types of things that can happen when the brand reputation can 
suffer as a result of counterfeiting.
    And also as you have heard, the counterfeiting criminals 
are also part of organized retail theft. They can mix 
counterfeit goods with stolen goods and get them more easily 
back into the supply chain. And as the--I believe it was the 
video mentioned, a lot of that money ends up going to fund 
organized crime and even terrorist groups.
    One of the first things that can be done to help improve 
the fight of counterfeiting worldwide is to improve enforcement 
at home. And again, Mr. Emmer beat me to the punch by praising 
the House by passing H.R. 32 to make sure that we close that 
loophole that allows counterfeit goods to be--and the labels to 
be brought in separately without fear of any serious 
punishment. It also allows the stricter remedies to be enforced 
on those caught counterfeiting. And GMA also strongly supported 
its passage in the house and will be working to move it through 
the Senate as well. GMA also supports the administration's 
inner agency STOP Initiative that was mentioned by the 
chairman. And we are working with other key associations on one 
element of the STOP Initiative to develop purchasing guidelines 
for manufacturers and retailers to insure that the global 
supply chains are free of illicit goods.
    In addition to protecting the supply chain, it is 
absolutely essential that we do more to stop the production of 
counterfeit products in the first place. Again, the chairman 
mentioned there is a big problem worldwide in China especially. 
And we do urge the United States to continue to work with the 
Chinese Government to try to create an effective program to 
stop the trafficking of counterfeit goods both in their country 
and at the point of export.
    One of the things that GMA has long advocated for is more 
engagement with the OECD to address the counterfeit issue. And 
we are pleased that with the support recently of the U.S. 
Government, the organization recently announced that it will 
conduct a new study to determine the scope of the problem and 
the damage product counterfeiting does on a global basis. The 
project will also develop a set of best practices to guide 
future efforts in the fight against counterfeiting. And we 
believe this is really going to be very helpful in pushing 
countries to improve their anti-counterfeiting initiatives as 
they look to join the OECD. And I would point to the example of 
China and Russia trying to get in the OECD that with those best 
practices there, there may be a real opportunity to really push 
the real anti-counterfeiting initiatives there.
    To conclude, this is not a problem that we can solve 
overnight and it is not a problem that we can solve alone. We 
need global cooperation between industry and Governments around 
the world. And with the adoption of H.R. 32, we will be able to 
more credibly push our trading partners to tighten their end by 
counterfeiting laws. And with the OECD now engaged in the 
issue, there will be better information and increased pressure 
on countries to crack down on counterfeiting.
    And I also thank you for your time and welcome your 
questions.
    [The prepared statement of Stephen C. Arthur follows:]

Prepared Statement of Steve Arthur, Vice President, Government Affairs, 
                   Grocery Manufacturers Association

    I am Steve Arthur, Vice President of Government Affairs for GMA, 
the Grocery Manufacturers Association, and I am very pleased to be here 
today to talk about an issue of intense concern to our member companies 
and manufacturers across the country.
    GMA is the world's largest association of food, beverage and 
consumer product companies. Led by a board of 42 Chief Executive 
Officers, GMA applies legal, scientific and political expertise from 
its more than 120 member companies to vital public policy issues 
affecting its membership. The association also leads efforts to 
increase productivity, efficiency and growth in the food, beverage and 
consumer products industry. With U.S. sales of more than $500 billion, 
GMA members employ more than 2.5 million workers in all 50 states.
    GMA has been fighting counterfeiting for a long time and is a 
member of the Coalition Against Counterfeiting and Piracy, an industry 
group created by a joint initiative between the U.S. Chamber of 
Commerce and the National Association of Manufacturers to act as the 
interface between business and the U.S. Government's Strategy Targeting 
Organized Piracy (STOP!) program.
    Today I would like to focus my comments on three problems: the 
increasing scope and danger of counterfeiting, the legal barriers to 
punishing offenders here in the United States, and the lack of adequate 
enforcement abroad.

Counterfeiting is a Devastating Global Problem
    Counterfeiting is not a victimless crime. On the contrary, it 
causes devastating financial and physical harm to United States 
companies, employees, investors, consumers, patients, and citizens. 
Many industries are affected, including consumer products, automotive, 
pharmaceutical, electronics, textiles and others.
    When the average American thinks about counterfeit goods, he or she 
may think of phony Rolex watches, fake high-fashion handbags, or cheap 
knock-offs of designer T-shirts. The purchasers of these items usually 
know the products are not originals, so they may readily conclude that 
buying a fake is no big deal. However, counterfeiting is far more 
pervasive and dangerous than street vendors selling fake luxury items. 
In fact, only a minute portion of counterfeit goods are luxury items.
    For example, in December, 2003, Australian customs officials 
stopped 52,000 containers of counterfeit shampoo at port. Last week, 
officials in India seized a large quantity of bottled water with 
spurious marks as well as many counterfeit personal care consumer 
products. Canadian based Gieschen Consultancy, which tracks counterfeit 
product enforcement incidents, reports that in the first quarter of 
2005, there were 279 incidents of intellectual property theft world 
wide, valued at a loss of $396 million dollars. Of particular interest 
to GMA member companies, this total included counterfeit milk drinks, 
wine, rum and soy sauce, as well as industrial goods and supplies such 
as insecticides and detergents and counterfeit perfumes and cosmetics.
    Our member companies who make food, beverage and consumer products 
have rigorous quality controls to ensure their products are safe for 
proper human use and consumption. Counterfeit products are not subject 
to those same quality standards. As long as the packaging looks 
similar, it might enter the supply chain without any quality controls 
at all.
    To put the enormity of the problem in financial terms, the U.S. 
Customs Service estimates that counterfeiting activity costs the U.S. 
more than $200 billion annually and has resulted in the loss of 750,000 
American jobs. If you compare that to the earlier number I referenced 
regarding enforcement actions, its clear that only a small percentage 
of counterfeit products are caught and the counterfeiters prosecuted. 
Recently, the FTC stated that eradicating counterfeit auto parts could 
create 200,000 new jobs in the U.S. auto industry alone. The 
International Chamber of Commerce estimates that counterfeiting drains 
more than $350 billion each year from the world's economy--this is 7 to 
9 percent of total world trade. And each dollar lost by law-abiding, 
hard-working Americans and companies winds up lining the pockets of 
criminals.
    Counterfeiting frequently is part of a larger criminal enterprise 
involving the theft of legitimate goods. Criminals responsible for 
distributing counterfeit goods are also often the ringleaders of 
organized retail theft. They have become expert in mixing counterfeit 
goods with stolen goods to ``sanitize'' the stolen property and move 
them back into the supply chain. These criminals feed on those buyers 
or distributors who are willing to turn a blind eye in return for a 
good deal. In other cases, the buyer is truly unaware that the goods he 
or she is purchasing are stolen or counterfeit. In addition, the same 
networks used to distribute counterfeit products also ease the 
transport of illegal drugs into U.S. markets.
    The danger of counterfeiting goes beyond mere financial harm and 
theft. Organized crime and terrorist groups use the sale of counterfeit 
goods to raise money for illegal activities and violence. Paramilitary 
groups in Northern Ireland have funded terrorist activities through the 
sale of pirated products. Protection rackets in Italy no longer demand 
just money from retailers; instead, they want shelf space to sell 
counterfeit goods. In testimony before the Senate Homeland Security 
Committee, the Los Angeles Sheriff's Department testified that many 
arrested for counterfeit product crimes in Los Angeles are Hamas and 
Hezbollah sympathizers and supporters. Most alarming is that those who 
aim to terrorize United States citizens look to counterfeiting to help 
them achieve their deadly goal: Seized Al Qaeda training manuals 
recommend the sale of fake goods as a financing source for its 
terrorism.
    It is clearly not just the food, beverage and consumer products 
industry that is targeted. This committee is also hearing about 
counterfeit pharmaceutical and automotive products. These counterfeits 
can and have caused serious injury and even death.

Domestic Efforts
    The first step in combating counterfeiting worldwide is to improve 
enforcement at home. We need to close some of the legal loopholes that 
allow counterfeiters to escape prosecution, and we need laws that give 
enforcement agencies better tools to fight counterfeiting.
    GMA is pleased that the House has taken this first step by 
approving HR 32, the Stop Counterfeiting in Manufactured Goods Act, by 
Congressman Knollenberg. As this committee knows, this bill will close 
a loophole in the federal criminal code that allows phony products to 
be shipped to the United States without brand markings, so they can 
pass through customs without any apparent violation. Counterfeit labels 
are then added and the products are sold through a variety of channels. 
HR 32 will allow authorities to prosecute the people who do the 
labeling and packaging here. It will also allow for the forfeiture and 
destruction of any confiscated counterfeit labels or products that 
would bear those labels.
    In addition, the bill gives law enforcement officials the ability 
to seize and confiscate the equipment and assets--such as machine tools 
and computers--used to produce counterfeit products, labels, and 
packaging. Without this ability, law enforcement officers are forced to 
chase the same counterfeiters over and over again. The counterfeiters 
can simply continue to use their infrastructure to replace seized 
inventory and resume their trade. GMA strongly supported the passage of 
HR 32 and will now work just as vigorously for its passage in the 
Senate.
    GMA also supports the Administration's Strategy Targeting Organized 
Piracy (STOP!) initiative, which was launched in 2004 and brings 
together the U.S. Trade Representative, the Departments of Commerce, 
Justice, and Homeland Security to stop the distribution of counterfeit 
goods. The effort is broad in scope and brings a new approach, new 
tools and new pressure to bear through a coordinated effort from the 
federal government, the private sector and America's international 
trading partners.
    A key element of the STOP! initiative is the development of 
purchasing guidelines for manufacturers and retailers to ensure that 
global supply chains are free of illicit goods. As a coordinator for 
the Coalition Against Counterfeit Products task force, GMA is working 
with other associations that represent food, beverage and consumer 
product manufacturers and retailers to accomplish this objective. The 
task force is developing voluntary guidelines to prevent illicit goods 
from entering the supply chain and prevent criminals from exploiting 
alternate sourcing strategies. The final document is expected to be 
completed by September, 2005. These guidelines will then be available 
for use by other industries.

Change Domestically Provides Leverage Globally
    Passage of HR 32 is essential to our ability to improve anti-
counterfeiting efforts abroad. The Office of the U.S. Trade 
Representative has made clear that it is not prepared to negotiate for 
mandatory confiscation and destruction abroad when U.S. law does not 
contain these provisions. Not surprisingly, our trade negotiators are 
loath to negotiate with other countries an agreement with which the 
United States could not comply under existing laws. We need to have 
domestic mandatory seizure and destruction so our trade negotiators 
have a foundation to press for this minimum necessary enforcement 
around the world.
    In 2004, the Office of the U.S. Trade Representative, in a 
``Special 301'' annual review, reported that more than 66% of 
counterfeit goods seized by the U.S. Customs Service at ports of entry 
into this country were traced to China. In addition to combating 
counterfeiting within its borders, the Chinese government also must 
stop the export of counterfeit products. The United States should 
continue to work with the Chinese government to create an effective 
program to stop the trafficking of counterfeit goods at the point of 
export.
    GMA is encouraged that the U.S. Government is taking the issue of 
intellectual property theft and counterfeit products seriously. In 
April 2005, as part of the Administration's Strategy Targeting 
Organized Piracy (STOP!), the United States traveled to Singapore, Hong 
Kong, Tokyo and Seoul to explore avenues for increased cooperation, 
improved coordination, and expanded information exchanges as an initial 
step in garnering international support to work together to stem the 
trade in fakes. A series of 17 U.S. proposals were shared with 
government officials from these countries generating fruitful 
discussions, interest and commitments to continue working together on 
this shared concern. And just last week, officials representing seven 
United States Government agencies traveled to Europe to meet with 
German, United Kingdom, French and European Commission officials to 
discuss cooperation to crack down on global piracy and counterfeiting.
    In addition to having appropriate prosecutorial powers in the U.S. 
and other countries, it is important to understand the scope of product 
counterfeiting globally in terms of damage to rights holders and 
countries that harbor counterfeiting. GMA has long advocated engagement 
with the Organization for the Economic Cooperation (OECD) to address 
this issue. With the support of the U.S. government, the Organization 
for Economic Cooperation and Development announced in April 2005 that 
it will conduct a study to determine the scope of the problem and the 
damage product counterfeiting does on a global basis. The project will 
also analyze existing public and private anti-counterfeiting efforts to 
develop a set of best practices to guide future efforts in the fight 
against counterfeiting.
    The project will include a three-phase study on the adverse impacts 
of counterfeiting and piracy; a series of four regional workshops, 
envisioned to take place in Russia, Brazil, India and China in 2006; 
and two Global Forums, focusing on various aspects of the problem, one 
planned for 2006 and the second in 2007.
    OECD is scheduled to co-host a two-day meeting with the World 
Intellectual Property Organization in October, 2005 in Geneva to 
develop metrics and examine statistical issues, and also plans to 
circulate an outline for the Phase one study to governments, asking 
them to circulate more widely for feedback. A final report is expected 
in May, 2006.
    Now, around the globe, brand owners, industry coalitions, and 
governments are joining the fight against counterfeiting. This is not a 
problem we can solve overnight, and it is not a problem we can solve 
alone. We need global cooperation. To get it, however, we first need to 
close the loopholes in current federal criminal laws to criminalize 
trafficking in fake labels and packaging for all goods. We also need to 
provide our law enforcement agencies with authority to seize the 
machinery of counterfeiting. And we need to devote the resources to 
study this problem comprehensively, so that we can arm ourselves with 
more information about this problem in ways that will allow us more 
effectively to fight it.

    Mr. Stearns. Thank you.
    Mr. Christian?

                  STATEMENT OF JAMES CHRISTIAN

    Mr. Christian. Mr. Chairman and members of the committee, 
my name is James Christian and I am Vice President and Head of 
Global Security for Novartis International. Novartis is a world 
leader in pharmaceuticals and consumer health. The Novartis 
Group invested over $4 billion in research and development in 
2004.
    Prior to joining Novartis, I spent 20 years with the United 
States Secret Service, the last five as a Special Agent in 
Charge. While in Government service, one of my duties was to 
suppress the international counterfeiting of U.S. currency. At 
Novartis for the last 16 years, one of my responsibilities has 
been to oversee the companies worldwide anti-counterfeiting 
operations.
    In the past several years, Novartis has participated with 
law enforcement and health authorities in over 200 
counterfeiting investigations in 33 countries involving 
hundreds of drug products. I have witnessed firsthand the great 
ingenuity and resourcefulness that unlawful enterprises utilize 
to manufacture and distribute ineffective and often unsafe 
counterfeit products. I have also witnessed the hardship and 
misery counterfeit medicines bring to patients and their 
families. There can be no doubt that drug counterfeiters 
present a severe and growing threat to the health and safety of 
U.S. citizens.
    Counterfeit drugs are fake medicines, produced and packaged 
to look like the genuine article. They include products 
including correct ingredients although they may be adulterated 
on in the wrong dosage strength, incorrect ingredients, no 
active ingredient, and usually have phony packaging and 
labeling. Counterfeit drugs may be made in garages, basements, 
warehouses, often under horrific conditions.
    Counterfeiters are able to produce labels that are 
basically indistinguishable from the authentic materials. They 
can also make stamp tablets with company logos and put them in 
special packaging such as blister packs.
    We have scores of examples of counterfeit, expired, and 
adulterated medicines. In one case, our anti-counterfeiting 
efforts interjected millions of yellow tablets of a popular 
pain reliever that were virtually indistinguishable from a 
genuine product including the company logo. These tablets were 
made of boric acid, floor wax, and lead-based yellow paint. You 
now the see mixture that was used to make the tablets. The 
yellow based paint was used for road markings. Sacks of these 
raw materials were stacked throughout the counterfeiter's 
ramshackle warehouse in Bogota, Columbia.
    Production of counterfeit medicines is pervasive outside 
the United States and is growing in an alarming rate. Before I 
review some international examples of counterfeiting, let us 
take a look at the difference between a Novartis manufacturing 
plant and a counterfeit manufacturing lab. There you see a 
sterile facility typical of an ethical pharmaceutical company. 
There you see a lab blister pack with some of the chemicals 
used in the counterfeiting in the background. And there we have 
their counterfeit shipping and distribution area.
    Russia is a drug counterfeiter's paradise. Politically 
connected organized crime elements in that country face little 
resistance from the Government and the laws and penalties for 
counterfeiting pharmaceuticals are weak or non-existent. With 
its recent expansion, the European Union's border in the east 
is no longer the well-controlled German border, but instead is 
a more porous Polish border. Russian counterfeit drugs which 
cross into Poland have virtually unobstructed access to the 
markets in the rest of EU. These counterfeit drugs could easily 
find their way to pharmacy shelves in the U.S. Indeed, some 
counterfeit Russian pharmaceuticals have already been 
discovered in this country.
    Counterfeiting is also a burgeoning problem in China where 
seizures have secured large quantities of fake drugs. What is 
unique about counterfeiting in China is that many of the 
counterfeiting operations are publicly traded and often health, 
regulatory, and law enforcement officials are shareholders. 
More recently, Novartis has become aware of a Hangzhov-based 
website called Alibaba where major players in an underground 
counterfeiting network surface to buy and sell counterfeit 
products including prescription drugs.
    In Latin America, the counterfeit problem is staggering. 
Last November, four children died from counterfeit drugs in the 
Dominican Republic. In Venezuela, six children died from 
counterfeit drugs, including counterfeit anesthesia, in 2004. 
Six months ago in Argentina, Veronica Diaz suffered acute liver 
failure and died after being injected with a counterfeit iron 
supplement while hospitalized. A review of the hospital records 
disclosed that two other women had died after being injected 
with the same product.
    Two months ago, police in Lima, Peru seized four tons of 
adulterated and counterfeit pharmaceuticals, including ampoules 
for injection which contained feces and dangerous bacteria. In 
Columbia, the length and breath of the counterfeiting problem 
is mind boggling. Novartis alone is responsible for the seizure 
of a counterfeit lab every month. The problem is often referred 
to as ``El Otro trafico de drogas,'' or ``The other drug 
trafficking.'' Many hospital administrators have no faith in 
their drugs in the hospital pharmacy and efforts to switch 
suppliers are often met with threats of violence.
    Pharmaceutical companies and non-U.S. law enforcement 
authorities have an extremely difficult time suppressing 
international counterfeiting operations. Many counterfeit 
pharmaceuticals are manufactured so cleverly that it is 
virtually impossible for consumers, Government officials, and 
law enforcement agencies to identify them as counterfeit 
without elaborate testing. Detection is made more difficult by 
the criminal practice of mingling counterfeit, adulterated, 
expired, stolen, and genuine product. When this occurs, random 
or sample testing is totally ineffective.
    Here you see a transplant drug in the oral which present--
which prevents organ rejection after a transplant and as you 
can see, these packages look legitimate from the outside. 
Internally, they contain Chinese beans.
    The United States relies on foreign countries to protect 
American citizens from counterfeit medicines. This reliance is 
misplaced. Many governments lack the interest, resources, and 
technological sophistication to address the problem.
    While certain covert and overt technologies may improve the 
distribution system and the supply chain management, no one has 
yet demonstrated the ability of such technology to protect 
against counterfeiting. New anti-counterfeiting technologies 
have numerous shortcomings, including the following. In almost 
every case, the technology, be it a hologram, tamper proof 
labels, embossing, thermo-reactive ink, RFID tags, DNA markets 
enable companies to track cardboard. That is the packaging not 
the product. It is not unusual to find genuine product in 
counterfeit packaging and counterfeit product in genuine 
packaging.
    Additionally, in the United States and in the European 
Union, the two largest pharmaceutical markets in the world 
repackaging is legal; thus without violation of any law, 
packaging of all types of expensive state-of-the-art secure 
devices can end up in the trash, or worse in the hands of a 
counterfeiter, while genuine product is legally distributed in 
packaging with no security features.
    RFID technology which was featured in an FDA task report is 
more of an inventory management tool than an anti-category 
device.
    Well where do we go from here? Now is the time to do a 
realistic assessment of the problem. In my view, there is no 
quick fix. There is no solution around the corner. If we place 
our trust in the hope that a solution will be available soon, 
we may well neglect to take the incremental steps necessary to 
make progress against the terrible plague of counterfeit 
medicines.
    I cannot say strongly enough that drug counterfeiters, 
blackmarketeers, and other organized criminal elements are 
ready, willing--drug counterfeiting severely imperils public 
health and safety across the globe and in the United States. 
Now is the time to strengthen our commitment to keeping our 
medicines the best and safest in the world.
    Thank you.
    [The prepared statement of James Christian follows:]

   Prepared Statement of James Christian, Vice President and Head of 
          Global Corporate Security, Novartis International AG

    Mr. Chairman and members of the Committee, my name is James 
Christian and I am Vice President and Head of Global Corporate Security 
for Novartis International AG (``Novartis''). Prior to joining 
Novartis, I spent 20 years with the United States Secret Service, the 
last five as a Special Agent in Charge. While in Government service, 
one of my duties was to suppress the international counterfeiting of 
U.S. currency. At Novartis, for the last 16 years, one of my 
responsibilities is to oversee the company's worldwide anti-
counterfeiting operations.
    In the past several years, Novartis has participated with law 
enforcement and health authorities in over 200 counterfeiting 
investigations in 33 countries and involving hundreds of drug products. 
I have witnessed firsthand the virtually limitless ingenuity and 
resourcefulness that unlawful enterprises utilize to manufacture and 
distribute ineffective and often unsafe counterfeit products. I have 
also witnessed the hardship and misery counterfeit medicines bring to 
patients and their families. There can be no doubt that drug 
counterfeiters present a severe and growing threat to the health and 
safety of U.S. citizens.
    Novartis has a compelling interest in protecting the medicines that 
it currently markets as well as those now under development. This year 
alone, Novartis will spend more than $4.2 billion on drug research and 
development. More importantly, patients using Novartis products must 
have every confidence that the drugs are safe and effective.
    Counterfeit drugs are ``fake'' medicines, produced and packaged to 
look like the genuine article. They include products containing correct 
ingredients, although they may be adulterated or in the wrong dosage 
strength; incorrect ingredients; no active ingredient; or an 
insufficient quantity of active ingredient; and usually have phony 
packaging and labeling. Counterfeit drugs may be made in garages, 
basements, or warehouses, often under horrific conditions.
    Counterfeiters are able to produce labels that are virtually 
indistinguishable from the authentic materials. They can also make and 
stamp tablets with company logos and put them in special packaging such 
as blister packs.
    We have scores of examples of counterfeit, expired, and adulterated 
medicines. In one case, our anti-counterfeiting efforts interdicted 
millions of yellow tablets of a popular pain killer that were virtually 
indistinguishable from the genuine product--including the company logo. 
These tablets were made of boric acid, floor wax, and lead-based yellow 
paint used for road markings. Sacks of these ``raw materials'' were 
stacked throughout the counterfeiters' ramshackle warehouse in Bogota, 
Columbia.
    Production of counterfeit medicines is pervasive outside the United 
States and is growing at an alarming rate. We can provide the Committee 
with detailed information on the extent of counterfeiting activity in 
Latin and Central America, Asia, Russia, China, and India. First, let's 
look at a Novartis manufacturing facility, and then a counterfeit 
manufacturing plant.
    Russia is a drug counterfeiter's paradise. Politically connected 
organized crime elements in that country face little resistance from 
the government, and the laws and penalties for counterfeiting 
pharmaceuticals are weak or non-existent. With its recent expansion, 
the European Union's border in the East is no longer the well-
controlled German border but instead is the more porous Polish border. 
Once counterfeit drugs have crossed into Poland, they have virtually 
unobstructed access to the markets in France, Germany, Spain, and the 
rest of the European Union countries. These counterfeit drugs, which 
have passed through nations in the European Union, could easily find 
their way to pharmacy shelves in the United States. Indeed, some 
counterfeit Russian pharmaceuticals have already been discovered in 
this country.
    Europe has also developed an internet sales problem, with hundreds 
of web sites selling counterfeit medicines, often from China.
    Counterfeiting is also a burgeoning problem in China where seizures 
have secured large quantities of fake drugs. Novartis and other 
pharmaceutical companies participated in a raid with authorities in 
Shantou that resulted in the seizure of over 1800 cartons of 
counterfeit pharmaceutical products from 14 multinational companies. 
What is unique about counterfeiting in China is that many of the 
counterfeiting operations are publicly traded, and often have health, 
regulatory, and law enforcement officials as shareholders. More 
recently, Novartis has become aware of a Hangzhov-based website called 
Alibaba (w) where major players in an underground counterfeiting 
network surface to buy and sell counterfeit products including 
prescription drugs.
    In Latin America, the counterfeiting problem is staggering. Last 
November, it was determined that four children died from counterfeit 
drugs at the Jose Maria Cabral y Baez Hospital in the Dominican 
Republic. In Venezula, six children are known to have died from 
counterfeit drugs, including counterfeit anesthesia in 2004. Six months 
ago, in Argentina, Veronica Diaz, suffered acute liver failure and died 
after being injected with a counterfeit iron supplement while 
hospitalized. A review of the hospital records disclosed that two other 
women had died after being injected with the same product.
    Two months ago police in Lima, Peru seized four tons of adulterated 
and counterfeit pharmaceuticals, including ampoules for injection which 
contained feces and dangerous bacteria. These seizures took place after 
numerous epileptic and diabetic patients were hospitalized after taking 
counterfeit medicines.
    In Colombia, the length and breadth of the counterfeiting problem 
is mind boggling. Novartis alone is responsible for the seizure of a 
counterfeit lab every month. The problem is referred to as ``El Otro 
trafico de drogas'', or ``The other drug trafficking''. Many hospital 
administrators have no faith in the drugs in the hospital pharmacy, and 
efforts to switch suppliers are often met with threats of violence.
    Pharmaceutical companies and non-U.S. law enforcement authorities 
have an extremely difficult time suppressing international 
counterfeiting operations. Many counterfeit pharmaceuticals are 
manufactured so cleverly that it is virtually impossible for consumers, 
government officials, and law enforcement agencies to identify them as 
counterfeit without elaborate testing. Detection is made more difficult 
by the criminal practice of mingling counterfeit, adulterated, expired, 
stolen, and genuine product. When this occurs, random or sample testing 
is totally ineffective. Counterfeiters do not care about the quality 
and safety of the product. Their goal is to sell a fake drug to an 
unsuspecting patient.
    The United States relies on foreign countries to protect American 
citizens from counterfeit medicines. This reliance is misplaced. Many 
governments lack the interest, resources and technological 
sophistication needed to address the problem.
    While certain overt and covert technologies may improve the 
distribution system and increase a manufacturer's ability to manage the 
supply chain and to track and trace products, no one has yet 
demonstrated the ability of such technology to protect against 
counterfeiting.
    New anti-counterfeiting technologies have numerous shortcomings 
including the following:

 In almost every case, the technology, be it a hologram, tamper proof 
        labels, embossing, thermo-reactive ink, RFID tags, DNA markers, 
        and the like, enable companies to track cardboard, not product. 
        It is not unusual to find genuine product in counterfeit 
        packaging and counterfeit product in genuine packaging.
 In the United States and in the European Union, the two largest 
        pharmaceutical markets in the world, repackaging is legal; 
        thus, without violation of any law, packaging, with all types 
        of expensive, state of the art secure devices, can end up in 
        the trash or worse, in the hands of a counterfeiter, while 
        genuine product is legally distributed in packaging with no 
        security features.
 RFID technology which was featured in a FDA task force report is more 
        of an inventory management tool than an anti-counterfeiting 
        device.
     A counterfeiter or diverter could purchase RFID tags and attempt 
            to mimic manufacturers' RFID codes.
     Industries which have and are using RFID products have noted that 
            when their products enter the ``grey market'', their RFID 
            tags are often ``zapped'' rendering them unreadable.
     Counterfeiters generally deal, not only with counterfeit product, 
            but with diverted, expired, and stolen product as well. 
            Envision the scenario where a counterfeiter steals product, 
            removes genuine product from the ``secure packages'', and 
            then puts the counterfeit product in these packages, and 
            then reinserts the counterfeit product back into the 
            system. The counterfeit product would pass through all the 
            readers successfully. What then happens to the genuine 
            product? The irony is that the genuine product would most 
            likely be repackaged in counterfeit packaging with 
            unreadable tags and entered into the distribution system. 
            If the RFID system works correctly, the genuine product 
            would be kicked out of then system, but later determined to 
            be genuine, undermining any confidence in the system.
    Where do we go from here? Now is the time to do a realistic 
assessment of the problem. In my view there is no quick fix. There is 
no ``solution'' on the horizon. If we place our trust in the hope that 
a ``solution'' will be available in the near future, we may well 
neglect to take the incremental steps necessary to make progress 
against the terrible plague of counterfeit medicines.
    I cannot say strongly enough that drug counterfeiters, 
blackmarketeers, and other organized criminal elements are ready, 
willing, and able to exploit any perceived weakness in the U.S. 
pharmaceutical system. Make no mistake, drug counterfeiting severely 
imperils public health and safety across the globe, including the 
United States. Now is the time to strengthen our commitment to keeping 
our medicines the best and safest in the world.
    Thank you.

    Mr. Stearns. Thank you.
    Mr. Pearl?

                 STATEMENT OF DAVID S. PEARL II

    Mr. Pearl. Mr. Chairman and members of the subcommittee, my 
name is David Pearl II. I am Executive Vice President of 
Uniweld, a small family owned manufacturing company located in 
Fort Lauderdale, Florida. I am pleased to appear before the 
subcommittee today and to testify on behalf of the National 
Association of Manufacturers.
    Uniweld was founded by my father in 1949. Currently we 
employ over 260 people who are producing many industrial 
products including refrigeration testing and charging 
manifolds. That is testing instruments used by refrigeration 
technicians to determine the condition of an air conditioning 
or refrigeration system. The National Association of 
Manufacturers, the NAM on whose behalf I am testifying today, 
is the Nation's largest industrial trade association 
representing small and large manufacturers in every industrial 
sector in all 50 States.
    Exports are important to Uniweld. In 1976, I went to the 
Middle East to establish Uniweld's products in that 
marketplace. Our good American reputation made selling this 
market possible and profitable. Persistence and diligence in 
selling our testing and charging manifolds resulted in the 
gradual buildup of our business and we found ourselves a market 
leader for this product in the Middle East. We have exported to 
about 80 countries around the world and today the number has 
dwindled to 30. The net result of counterfeiting has already 
cost our company a significant number of jobs. Continued 
worldwide counterfeiting could even put small companies like 
mine out of business.
    Currently, however, Uniweld Products has lost over $1 
million a year in sales in the Middle East due to Chinese 
counterfeits in the Saudi Arabian market. The cheap imitation 
manifolds look like ours. The instruction sheets we provide 
with our product are copied with our name, address, and 
telephone numbers and the package even carries the American 
flag that we put on our own box. The product and the packaging 
are copied to a ``T'' and I have brought two pairs of samples 
with me of genuine and fake products and they are right at the 
table in front me that you can see. And if you did not know 
what you were looking at, there is no way you could tell.
    Mr. Stearns. Do you have any objection if we just pass them 
around?
    Mr. Pearl. Absolutely, please take a look.
    Mr. Stearns. Okay. Just make sure we know which one is the 
counterfeit.
    Mr. Pearl. Okay. The one in your left hand is the 
counterfeit, the one in the right hand is original. You can see 
that they actually just photographed the boxes, they didn't go 
through the process to make it a true multi-colored separation.
    We have registered our trademark in six countries in the 
Middle East and 17 other countries elsewhere around the world. 
Not only has this not worked, but the counterfeiting has 
recently expanded into the United Arab Emirates, the UAE.
    We are losing business and the quality of our counterfeit--
of the counterfeit product is so poor that our hard earned 
reputation for producing a quality product is being destroyed 
in one of the most promising marketplaces in the world.
    When the United States negotiates treaties such as the 
CAFTA, it is critical that strong anti-counterfeiting 
provisions be built into the treaty. Trademark counterfeiting 
must be considered a criminal offense.
    It is virtually impossible for a small company like mine to 
address problems like these halfway around the world. The U.S. 
Government needs to intervene and assist small businesses 
trying to protect themselves from piracy and counterfeiting.
    I want to note that the Commerce Department and the Office 
of the U.S. Trade Representative have been working with my 
company and have been providing advice we have been following 
and we appreciate that. But companies like mine need more. 
Removing the restrictions and allowing them to do more would 
save thousands of American jobs.
    A fresh look has to be taken at what the U.S. Government 
can do. Perhaps by initiating public defender programs or by 
finding ways that diplomatic means could be utilized to a 
greater degree. The NAM wants to sit down with Government 
officials and explore possibilities. Embassies should have an 
IPR advocate who should do more than assisting the small 
business in getting a local lawyer and going through the 
foreign countries legal system, but should also have the 
responsibility for assisting that small business in defending 
its good name, its market share and its employment base.
    We have a choice. We can either stick our heads in the sand 
and hope that counterfeiters in China or elsewhere go away, or 
we can be intelligent and use our national resources and 
influence to stop the counterfeiting. If American industry is 
to be preserved and Americans employed, we need your help and 
we need it now. Here are immediate action steps that as a 
representative of a small business I believe we should take.
    First, customs authorities need to look for phony ``Made in 
the U.S.A.'' attributions on imported products that do not come 
from the United States. It is a tip off for which goods are 
counterfeit. Counterfeiters are getting better and better at 
mimicking genuine packaging and ``Made in the U.S.A.'' is a key 
part of the mimickery. Such vigilance needs to be a part of 
accepted best practices by custom services around the world. 
U.S. Customs and border protection should urge greater 
vigilance through the World Customs Organization.
    Second, trade agreements being negotiated should pick up on 
this point as well. It is very pertinent that the Office of the 
U.S. Trade Representative is negotiating a free trade agreement 
right now with the UAE and this is where we can make a big 
impact. If customs officials in the UAE, or elsewhere for that 
matter, do not have the authority or guidance to seize goods 
solely on the basis of fraudulent ``Made in the U.S.A.'' 
printing, then we should ensure that they do as that agreement 
is negotiated. We need to help them get the tools that they 
need to do their jobs, too.
    Third, the U.S. Government as a whole, the U.S. embassies 
in particular must find a way to be more helpful to small and 
midsize companies that encounter flagrant counterfeiting and 
other IPR violations. We appreciate the establishment of a 
point of contact for small and mid-size companies in the patent 
and trademark office, but we also need more on the ground 
support overseas.
    Fourth, the U.S. Government needs to keep the pressure on 
foreign Governments, especially the Chinese Government to 
enforce their IRP laws and stop the flagrant counterfeiting of 
U.S. products by their companies. It would be helpful to have a 
link for each country on the annual Special 301 List put out by 
the USTR so that we could better track IPR problems. Getting 
like minded trading partners like Europe and Japan to cooperate 
and send the same message to these Governments would also help.
    I and other NAM members certainly appreciate the 
Government's new initiatives, such as the STOP Program, which 
is a good start to developing a global strategy on 
counterfeiting. The NAM though wants to sit down with the U.S. 
Government agencies to move things further and to put more of a 
focus on doing things that will really help small businesses 
that are faced with the scourge of counterfeiting.
    Every time a counterfeit of an American product is sold 
somewhere in the world, it costs American prestige, reputation, 
worsens our balance of trade, and costs American jobs. By 
reducing worldwide counterfeiting, we can reduce our trade 
imbalance.
    Thank you, Mr. Chairman.
    [The prepared statement of David S. Pearl II follows:]

  Prepared Statement of David S. Pearl II, Executive Vice President, 
 Uniweld, Inc., on Behalf of the National Association of Manufacturers

    Mr. Chairman, Members of the Subcommittee: My name is David Pearl 
II. I am the Executive Vice President of Uniweld Products, Inc., a 
small family-owned manufacturing company located in Ft. Lauderdale, 
Florida. I am pleased to appear before the subcommittee today, and to 
be testifying on behalf of the National Association of Manufacturers. 
Uniweld was founded by my father, David S. Pearl Sr. in 1949. Starting 
with 20 employees he expanded the business to as many as 375. 
Currently, we employ over 260 people who are producing many industrial 
products, including refrigeration testing and charging manifolds, that 
is, testing instruments used by refrigeration technicians to determine 
the condition of an air conditioning or refrigeration system.
    The National Association of Manufacturers (the NAM), on whose 
behalf I am testifying today, is the nation's largest industrial trade 
association, representing small and large manufacturers in every 
industrial sector and in all 50 states. The NAM also represents over 
350 vertical industry associations and state manufacturing associations 
and their members. The NAM's mission is to enhance the competitiveness 
of manufacturers by shaping a legislative and regulatory environment 
conducive to U.S. economic growth and to increase understanding among 
policymakers, the media and the general public about the vital role of 
manufacturing to America's economic future and living standards.
    In 1976, I went to the Middle East to establish Uniweld's products 
in the market place. Our good American reputation made selling this 
market possible and profitable. Persistence and diligence in selling 
our testing and charging manifolds resulted in the gradual build up of 
our business and we found ourselves a market leader for this product in 
the Middle East.
    Currently, however, Uniweld Products, Inc. has lost over $1 million 
a year in testing and charging manifold sales in the Middle East due to 
the Chinese counterfeits in the Saudi Arabian market. The cheap 
imitation manifolds look like ours. The instructions sheets we provide 
with our product are copied with our name, address and telephone 
numbers, and the packaging even carries the American flag that we put 
on our own box. The product and the packaging are copied to a ``T.'' I 
have brought two pairs of samples with me of genuine and fake products.
    We have registered our trademark in six countries in the Middle 
East and 17 other countries elsewhere around the world. Having a 
product's trademark being registered is supposed to offer some 
protection from infringement. Not only has this not worked, but the 
counterfeiting was discovered to have expanded to the United Arab 
Emirates (UAE) by our sales manager during a trip in November 2004. Two 
appendices to my statement provide further particulars.
    Not only are we losing business, but also the quality of the 
counterfeit product is so poor that our hard-earned reputation for 
producing a quality product is being destroyed in one of the most 
promising market places in the world.
    Traders hold the ultimate responsibility as they find the 
manufacturers to make the product and travel the world to sell without 
scruples. Traders collect commissions on what is sold and are extremely 
hard to track down. The actual Chinese manufacturers may not even know 
anything about our company as they appear to be manufacturing to the 
traders' specifications.
    Something must be done to stop China from counterfeiting 
trademarked American goods. Customs authorities in all countries must 
be alert to any goods that fraudulently state ``Made in U.S.A.'' yet 
have other countries of origin, such as China. When these goods are 
found the importer should be sanctioned and arrested if possible and 
the goods confiscated and destroyed. The real manufacturer along with 
the trader involved should be located and the entire counterfeit ring 
could then be eliminated. Counterfeiting should be treated as a serious 
crime everywhere.
    It's impossible for a small company like mine address problems like 
these halfway around the world. The U.S. Government needs to intervene 
and assist small businesses trying to protect themselves from piracy 
and counterfeiting. Intellectual property rights (IPR) must be 
protected. Small businesses do not have the financial resources or the 
wherewithal to fight global counterfeiting. Our government, through its 
embassies, can make a real difference in how the governments of other 
countries view these issues. Embassies should have an IPR advocate who 
does not just tell the small business to get a local lawyer and go 
through the foreign countries legal system, but he should have 
responsibility of assisting that small business in defending its good 
name, its market share and its employment base.We have a choice. We can 
stick our heads in the sand and hope that counterfeiters in China or 
elsewhere go away, or we can intelligently use our national resources 
to stop the counterfeiting. If American industry is to be preserved and 
Americans employed, we need your help and we need it now. Here are 
immediate action steps that as a representative of a small business I 
believe we should take:
    First, customs authorities need to look for phony ``Made in the 
U.S.A.'' attributions on imported products that do not come from the 
United States. This is a tip-off for which goods are counterfeit. 
Counterfeiters are getting better and better at mimicking genuine 
packaging, and ``Made in the U.S.A.'' is a key part of this mimicry. 
Such vigilance needs to be a part of accepted best practices by customs 
services around the world. U.S. Customs and Border Protection should 
urge greater vigilance through the World Customs Organization.
    Second, trade agreements being negotiated should pick up on this 
point as well. It's very pertinent that the Office of the U.S. Trade 
Representative is negotiating a free trade area agreement with the UAE 
right now. If customs officials in the UAE--or elsewhere, for that 
matter--do not have the authority or guidance to seize goods solely on 
the basis of fraudulent ``Made in the U.S.A.'' printing, then we should 
ensure that they do.
    Third, the U.S. Government as a whole, and U.S. embassies in 
particular, must find a way to be more helpful to small and mid-size 
companies that encounter flagrant counterfeiting and IPR violations. We 
appreciate the establishment of a point of contact for small and mid-
size companies in the Patent and Trademark Office but we also need more 
on-the-ground support overseas.
    Fourth, the U.S. Government needs to keep the pressure on foreign 
governments, like the Chinese government, to enforce their IPR laws and 
stop the flagrant counterfeiting of U.S. products by their companies. 
The annual Special 301 list is one tool. It would be helpful to have a 
link for each country on the annual Special 301 list put out by USTR so 
that we could better track IPR problems. Today, you can find links to 
only three of the almost 40 countries. Getting like-minded trading 
partners, like Europe and Japan, to cooperate and send the same message 
to these governments would also help.
    You need to understand that small businesses like ours operate on 
relatively small margins. It is a major financial commitment to develop 
a market overseas. To lose a market because of counterfeiting is a 
difficult loss to incur. We don't have the resources to challenge 
counterfeiters in countries around the world.
    The STOP initiative is a good start to developing a global strategy 
on counterfeiting. But small businesses can't afford to wait long. We 
needed to see practical progress soon.
    We appreciate the Committee's interest in these concerns and ask 
that Congress provide the resources and support needed for U.S. 
agencies to carry out the STOP initiative and move ahead further in the 
areas that I have noted.
    This concludes my statement, Mr. Chairman, and I look forward to 
your questions.

                               APPENDIX A

    UNIWELD PRODUCTS, INC.--CHRONOLOGICAL HISTORY OF COUNTERFEITING

    In the late 1990s, Uniweld noticed counterfeit refrigeration 
testing and charging manifolds (with hoses) showing up in the market 
place in Saudi Arabia. Our Mid-East Sales Manager scoured the shops and 
was able to purchase counterfeit Uniweld manifolds. These manifolds 
were packaged almost exactly like the original. This included Uniweld's 
name, part number, address, and instruction sheets with Uniweld's name, 
address and phone number and of course the American flag.
    After several years of investigation, we were able to determine 
that a former customer of Uniweld had taken our product to China for 
counterfeit duplication. This very same customer owes us several 
hundred thousand dollars and has been using every trick in the book to 
delay his final day in court. The judge in the case has said, in open 
court, that he does not like liars and the defendant will answer for 
his crimes. We have been in litigation with our current lawyer for more 
than 2 years. During the previous 2 years we had several other 
attorneys that were ineffective. The wheels of justice in Saudi Arabia 
move very, very slowly. The judge has indicated that there are two 
issues:

1. Payment for the product acknowledged and received
2. Counterfeiting violations, including Trademark Infringement (Uniweld 
        has numerous trademarks registered in Saudi Arabia).
    As of May 5, 2005, the legal case is moving forward. The Saudi 
Chamber of Commerce, Ministry of Trade (Department of Counterfeiting 
and Trademark Infringement) and the Saudi National Commercial Bank were 
involved to establish a solid basis for this case. Our Middle East 
Sales Manager has contacted officials at the United States Embassy in 
Riyadh to inform the embassy of the situation. We asked for United 
States Government assistance at the time; the only response we received 
at the time was to get a lawyer, which we did. We had hoped, though, 
that the United States Government could intervene through diplomatic 
channels to assist us.

                               APPENDIX B

               COUNTERFEITING IN THE UNITED ARAB EMIRATES

    In November, 2004, Uniweld participated in The Big Five Show (an 
annual five-country trade fair) in the United Arab Emirates in Dubai. 
At this show, our Sales Manager noticed numerous Uniweld counterfeit 
manifolds. Potential customers and our distributors approached him to 
let him know that Uniweld products (manifolds) were being sold in shops 
in large quantities at a cheaper rate (50% cheaper than prices sold to 
distributors). He proceeded to investigate the claim by visiting the 
local markets and discovered that what we were told was true. 
Counterfeit Chinese manufactured manifolds with Uniweld's name, 
packaging, design, trademarks and even the American flag were being 
sold in large quantities in Dubai.
    There were three major distributors selling counterfeit Uniweld 
manifolds. Our sales manager immediately contacted Uniweld's Trademark 
attorneys in Dubai, United Arab Emirates. We presented our lawyer with 
counterfeit manifolds (with receipts) that were purchased in the three 
shops. Our lawyer advised us to take action as per local procedures. 
This we have done. Step one was to send the three offenders a cease and 
desist letter. As of today, May 5, 2005, two have responded that they 
did not import the counterfeit manifolds. They claim they are buying 
them from our authorized Uniweld distributors in Dubai, which they are 
not. Our attorney has advised us to wait a few weeks before we send 
agents to determine if they are still carrying and selling counterfeit 
Uniweld manifolds. One of the offenders has not yet responded to our 
legal letter. We are waiting a little while longer for his response 
before we send him an additional letter.
    If any of the offenders are found selling counterfeit Uniweld 
manifolds, a police raid, which includes confiscation of counterfeit 
goods and closing of the shop, will be instituted immediately without 
warning.
    Our salesman is willing to meet with any U.S. Government official 
willing and able to help. We hope someone in our government is willing 
to stand up and put pressure on the U.A.E. Government to stop 
counterfeiting. We will help all we can.

    Mr. Stearns. Thank you.
    Mr. DelBianco?

                  STATEMENT OF STEVE DELBIANCO

    Mr. DelBianco. Mr. Chairman and members of the 
subcommittee, my name is Steve DelBianco. I am Vice President 
for Public Policy, the Association for Competitive Technology 
or ACT. I want to thank the committee for holding this 
important hearing and I am pleased to testify on the impact on 
counterfeiting on small business.
    ACT is an active member of the U.S. Chamber of Commerce 
Coalition Against Counterfeiting and Piracy. And I am here 
today as a coalition member.
    ACT is an education and advocacy group for the tech 
industry where we promote a healthy tech environment which 
includes innovation, competition, and investment. We are a 
3,000 IT and eCommerce firms and professionals, many like the 
small software consulting firm that I started in Virginia in 
the 1980's and unfortunately sold in the 1990's.
    Today's other distinguished witnesses described the 
devastating effects of counterfeiting on manufacturers of brand 
name products, but we cannot forget the effect on the retailer 
who makes a final sale to the customer. Here for instance is a 
fake X-Box game and we are still a fake of an Apple iPOD 
shuffle. The customer who buys and later learns that these are 
counterfeits might never come back to that retailer again. If a 
counterfeit product fails, the retailer often takes the blame. 
He has got to deal with an angry customer who wants a 
replacement or a refund. Does he send the fake back to the 
manufacturer, the wholesaler, the distributor? And all this 
assumes that the customer returns the counterfeit to talk to 
the retailer. Often, they just get angry and the retailer is 
passed by the next time his former customer goes shopping.
    Small retailers depend on customer trust; that is no 
surprise. But in the growing world of e-commerce, establishing 
and maintaining that trust is even more of a challenge. It 
really says something that so many of us will proffer a credit 
card for an online purchase from a supplier that we simply 
selected from an online search results list. Yet more consumers 
do it every day and they are overwhelmingly satisfied with the 
quality, convenience, and value of e-commerce. Online selling 
is attractive for large businesses and small but it is also 
attracting counterfeiters who want to exploit the reach and 
anonymity of the Internet.
    This fight has to be taken beyond the retail level, 
however. It has got to be taken to the source of counterfeit 
goods and the primary source as you have heard before was 
China. Last week in preparation for this hearing, we hired a 
consultant in Shin-Jen, a market between Hong Kong and China, 
to scour the Shin-Jen market for what some know is the Holy 
Grail of a consumer counterfeit item which was a bag of 
Calloway golf clubs that retail for $2,500 here in the States. 
Well, thanks to a crack customs agent in Memphis, Tennessee 
this morning, that golf bag is still at Federal Express. I 
assure members of the committee though that when the bag gets 
here, we will host a long drive contest on the Capitol Mall to 
see which is the real and which is the fake Calloway.
    As Mr. Christian mentioned, Alibaba is a virtual 
marketplace for the underground counterfeiting network. Alibaba 
fails miserably to police its marketplace for counterfeit goods 
and counterfeit sellers. Consequently, sellers in Alibaba 
openly seek worldwide distributors for their counterfeit goods 
including prescription drugs, golf clubs, apparel, and 
software.
    And when it comes to software, please take a moment to 
appreciate the distinction between piracy and counterfeiting. 
People download pirated copies of software every day from file 
sharing services like Grokster. And they know without a 
question that they are stealing that software. Now contrast, if 
you would, that pure digital piracy with the counterfeit 
software copies that come on a CD in a package that looks 
authentic. On street corners and websites, you can buy a CD-ROM 
with a copy of Microsoft or Symantec, Adobe, and other forms of 
software and these counterfeits go further. They create huge 
new security risks. One Eastern European counterfeit software 
site contains this piece of fine print ``You will not be able 
to register the software with the manufacturer and get their 
support.'' Now that means the users of that counterfeit 
software may not get critical security updates to prevent 
identity theft, viruses, and it might even open a backdoor to 
their PC.
    Now the next generation of e-commerce will see even more 
goods that are delivered in an entirely digital form with no 
packaging whatsoever. Digital delivery of music, software, 
books, art, and movies relies on a trust that is created and 
maintained by technology. Sellers need to know that you are a 
bona fide buyer and you as a buyer need to know that you are 
getting a legal copy from a legitimate distributor or seller. 
This future will turn the wisdom of President Reagan on its 
ear. He said trust but verify, but I think the future of that 
becomes verify in order to create trust.
    Today e-commerce infrastructure players like VeriSign, 
eBay, and Microsoft, they have tools to authenticate the 
legitimate identify behind emails, websites, and products. 
Looking further ahead, things will come full circle from 
physical to digital, and back to the physical world again. A 
technology called stereo lithography allows a digital design to 
be downloaded to a fabrication shop that could be thousands of 
miles away where they create an airline part or even a medical 
implant. You can see there where authentication of the digital 
file is absolutely essential.
    To summarize, we see three critical points for 
policymakers. One, counterfeiting is a huge drain on the 
economy and it affects everyone from the manufacturer to the 
retailer and it destroys the most valuable commodity we have, 
customer trust.
    No. 2, illegitimate exchanges like Alibaba move counterfeit 
goods from the streets of China to markets worldwide, and our 
Government must pressure trading partners to shut down this 
activity.
    And third, the next war in counterfeiting will not be wages 
with physical packages but with digital seals and certificates. 
Goods delivered electronically will depend on digital 
certificates and physical goods bought from stores. It may even 
use authentication to create and maintain their own customer 
trust.
    ACT joins the chorus at this table and our support of H.R. 
32 and the administration's STOP Program and we look forward to 
working with Congress and the administration to encourage 
aggressive enforcement against counterfeiters and convince our 
trading partners to do the same.
    Thank you, Mr. Chairman. I look forward to your questions.
    [The prepared statement of Steve DelBianco follows:]

   Prepared Statement of Steve DelBianco, Vice President for Public 
             Policy, Association for Competitive Technology

    Mr. Chairman, Members of the Subcommittee, My name is Steve 
DelBianco, and I am Vice President for Public Policy for the 
Association for Competitive Technology (ACT). I would like to thank the 
Committee for holding this important hearing and I'm pleased to have 
the opportunity to testify on the impact of counterfeiting on small 
business.
    ACT is an active part of the US Chamber of Commerce--Coalition 
Against Counterfeiting and Piracy (CACP), and I am here today as a CACP 
Member.
    ACT is an international education and advocacy group for the 
technology industry. Focusing on the interests of small and mid-size 
entrepreneurial technology companies, ACT advocates for a ``Healthy 
Tech Environment'' that promotes innovation, competition and 
investment. ACT represents nearly 3000 IT and eCommerce businesses and 
professionals.
    Today's other distinguished witnesses will better describe the 
devastating economic effects of counterfeiting on the industries that 
manufacture or create the name brand products we all know and respect. 
Without question, this half a trillion dollar drain on the global 
economy is felt by big business. But we cannot forget the effect on the 
retailer who makes the final sale to the customer, and the small 
business for whom even 5% in lost sales will turn the lights out for 
good.

For small retailers, whether online or on main street, counterfeiting 
        can be devastating.
    Counterfeits can ruin the most important relationship we have--
customers who trust us. The small retailer depends on his wholesale 
suppliers to provide legitimate products, and is caught unaware when 
counterfeit goods make it onto his shelves.1
---------------------------------------------------------------------------
    \1\ Tim Trainer, president of the International AntiCounterfeiting 
Coalition, in http://www.pcworld.com/news/article/
0,aid,111319,pg,3,00.asp
---------------------------------------------------------------------------
    If a counterfeit product fails, the retailer takes the blame. We 
have to deal with an angry customer who wants a replacement, or worse, 
a refund. If it's clearly counterfeit, our in-store managers have to 
figure how and where to return the product. Do we send it back to the 
wholesaler? Do we need to contact the manufacturer? Most often, we just 
absorb the cost and work to regain the customer's trust.
    All of this presupposes the customer decides to return the 
counterfeit. More often than not, the customer gets angry but doesn't 
bring the item in for replacement. Instead, the local store gets passed 
by the next time our former customer goes shopping.
    Small retailers depend heavily on customer trust and respect, 
whether they're selling on main street or online, but in the growing 
world of e-commerce, establishing and maintaining that trust is even 
more challenging. Frankly, it says a lot about the growing consumer 
confidence in ecommerce that so many Americans will proffer their 
credit card for an online purchase from a supplier they've just 
selected from a list of search results. Yet, more consumers do it 
everyday, and they're overwhelmingly pleased with the quality, 
convenience, and value of e-commerce.
Small business is relying more on online distribution
    Small manufacturers and specialty retailers are turning to e-
commerce for their distribution and sales. According to Gartner 
Research, 30% of businesses with fewer than 20 employees and a Web 
presence now generate more than 25% of their sales online.2
---------------------------------------------------------------------------
    \2\ Mika Krammer, research director of the small and mid-size 
business group at Gartner.
---------------------------------------------------------------------------
    E-commerce doesn't just benefit sellers of DVDs, software, iPods, 
and other technology-related goods. The benefits of e-commerce extend 
to industries that might not first come to mind. For example, a 2002 
study confirmed that small farms value the Web as a business tool for 
reaching new customers, buying supplies, and streamlining their 
administrative processing.3
---------------------------------------------------------------------------
    \3\ Ohmart, Jeri L.,``Using E-commerce to Add Value to Small 
Farming Businesses in California,'' Study on Retail Farmers' Markets 
and Rural Development, Cornell University & Iowa State University, 
funded by the Fund for Rural America and the USDA, May 2002.
---------------------------------------------------------------------------
    Small software companies can also take advantage of digital 
delivery, without the need to create and ship costly packaging or hefty 
paper manuals that go out of date with the next update. For any 
manufacturer, the ability to send a product to a customer the instant 
he wants it, with no warehousing or shipping costs, is the Holy Grail.

Online is the future, but online distribution attracts counterfeiters, 
        too.
    Online selling is attractive for large and small businesses, but 
it's also attractive to counterfeiters who want to exploit the instant 
reach and relative anonymity of the Internet. Counterfeiters have a 
long history of exploiting and undermining traditional distribution 
channels, whether by infiltrating the supply chain or circumventing it 
entirely through flea markets and street vendors. But now they're 
learning that online selling offers some advantages over selling from 
physical locations.
    In the physical world, a store can't pretend to be something it 
isn't. Unless you are attempting to pull-off `The Sting', one doesn't 
construct an artificial storefront to lure people into purchasing 
counterfeit goods. Online stores, on the other hand, are relatively 
simple to create and operate. And the Internet lets a website in 
Singapore be instantly visible to the entire world.
    The fight against counterfeit goods has to be taken beyond the 
retail level. Industry and law enforcement efforts have to focus on the 
source--producers, wholesalers, and distributors of counterfeit goods. 
And the primary source is, not surprisingly, China.
    The Hangzhou-based Alibaba website (www.alibaba.com) is a virtual 
market where major players in the underground counterfeiting network 
connect and trade. While some authentic goods are traded on Alibaba, 
counterfeiters are in evidence all over this website, in both English 
and Chinese language renditions.
    On Alibaba, many sellers are explicitly seeking worldwide 
distributors for their counterfeit goods, including software, 
prescription drugs, golf clubs, apparel, and even batteries. Below is 
an actual Alibaba screen offering large lots of counterfeit Duracell 
batteries, claiming they were produced using ``good materials'' and 
promising ``value for money''.
    Counterfeit exchanges like Alibaba will undoubtedly harm China's 
consumers and impair the future of legitimate e-Commerce there. But 
Alibaba can also drag other economies down with it, by injecting 
wholesale quantities of counterfeit goods into the worldwide supply 
chain.
    While Alibaba has created a growing marketplace for counterfeit 
physical goods, there is another side to counterfeiting that is 
especially destructive to ACT's small software developers: digital 
distribution sites that claim to be legitimate, but aren't.

Software piracy and counterfeiting: double jeopardy
    It's important to note that there is a real distinction between 
piracy and counterfeiting when it comes to software. We are all aware 
that strictly-digital pirated copies of software are downloaded every 
day from file-sharing services like Grokster and eDonkey. When a user 
grabs a free digital download of Microsoft Word from these file-sharing 
sites, he knows without question that he's stealing a pirated copy of 
the software. There is not the least pretense of legitimacy from the 
person giving the copy, from the file-sharing service, or in the mind 
of the person downloading the copy.
    Contrast that pure form of digital piracy with counterfeit software 
copies that come in tangible form, complete with packaging. On street 
corners and websites worldwide, you can buy CD-ROM copies of leading 
software from Microsoft, RedHat, Symantec, Norton, Adobe, and Corel.
    For example, SoftwareNow draws people to its website through emails 
claiming ``Prices slashed to the bone on original U.S. PC software!'' 
SoftwareNow's slick website shows pictures of packaged software 
available at a fraction of retail prices. On their site, here's how 
SoftwareNow answers the wary consumer wondering how they can sell so 
low:

How can you sell this software as OEM ? It seems too good to be true--
        is there a catch?
    There is no catch--the software versions that we sell are OEM 
(Original Equipment Manufacturer) which means you will receive the 
installation CDs only (they do not come in their original retail 
packing and do not include the manual). We do guarantee that all 
programs are the 100% full working retail versions--no demos or 
academic versions! When you order, you will receive all materials 
required for a complete installation--or your money back! Why pay 
hundreds of dollars more when you can get exactly the same but OEM-CD? 
You don't have to pay that much for the fancy box and manuals.
    Although SoftwareNow claims they're selling OEM versions of 
software from manufacturers like Microsoft, you cannot buy so-called 
OEM software without buying the computer itself from the OEM. But not 
many consumers are aware of that, so many are taken-in by the ruse.

Counterfeit Software is a security risk
    Consumers who are unfortunately duped into buying counterfeit 
software may never discover that they're running counterfeit code. 
After all, digital copies are perfect copies, so the software looks and 
performs like the real thing. But that only helps lure users into a 
false sense of security when it comes to getting notifications and 
updates to respond to new cybersecurity threats.
    Returning to the SoftwareNow example, there's a dangerous 
disclaimer buried on the website, warning buyers, ``Note, that you will 
not be able to register the software with the manufacturer and get 
their support, but we will do our best to support you any way 
possible.''
    Not many consumers would be as alarmed as they should be by this 
``disclaimer''. Those who purchase and install the counterfeit software 
could go for months without knowing they are missing critical notices 
and software updates to prevent security vulnerabilities. This 
compromises their own security against viruses, spyware, and identity 
theft.
    Moreover, their unsecured PC can serve as a platform for other bad 
actors to exploit for spam relays, virus proliferation, and denial of 
service attacks. Counterfeit software can contain Trojan Horses or open 
``back doors'' that let criminals into a user's computer.
    Taken together, piracy and counterfeiting are costing the software 
industry $30 billion each year, and IDC estimates that 1 in every 3 PCs 
worldwide contains some pirated or counterfeit software. In 2002, 
seizures of pirated Microsoft products alone exceeded $1.7 
billion.4 And these costs don't include the wider costs to 
businesses and consumers of vulnerable PC software that's not 
registered with the manufacturer and not getting timely notices and 
security updates.
---------------------------------------------------------------------------
    \4\ Statement of Richard C. LaMagna (Microsoft Corporation) before 
the House Subcommittee on Courts, the Internet, and Intellectual 
Property, Oversight Hearing on International Copyright Piracy: Links to 
Organized Crime and Terrorism, (March 13, 2003)
---------------------------------------------------------------------------
Government and Industry are fighting back
    A Justice Department study in October 2004 describes several 
examples of how industry and the U.S. Government are battling software 
counterfeiters. In 2003, a Virginia man was sentenced to five years in 
prison and ordered to pay $1.7 million in restitution for selling more 
than $7 million in counterfeit software over the Internet. In a 2004 
prosecution, a Ukrainian man was charged with illegally distributing 
millions of dollars of unauthorized copies of software from Microsoft, 
Adobe, Autodesk, Borland, and Macromedia. And in September 2004, DOJ's 
``Operation Digital Marauder'' seized over $56 million in counterfeit 
Microsoft software, and charged 11 people with manufacturing 
counterfeit software and counterfeit packaging.

The next generation of e-commerce and of counterfeiting
    The next generation of e-commerce will see more goods delivered in 
entirely digital form--with no packaging at all. Digital delivery of 
music, software, books, art, and movies will all depend on trust 
relationships that are created and maintained by technology.
    Digital content will be streamed via broadband, but the creators 
will need a way to know that you are a bona fide buyer, and buyers will 
need to assure they are acquiring a legal copy from a legitimate 
vendor. This future world will turn President Regan's adage ``trust, 
but verify.'' on its ear--the future of digital goods will ``verify, to 
create trust''.
    We all know what the breakthrough success of Apple's iTunes service 
has done to legitimatize digital music downloads. But what you might 
not realize is that iTunes relies on digital seals and certificates, 
the electronic means of authenticating that you are who you say you 
are.
    To make this possible, e-commerce infrastructure leaders like 
VeriSign, eBay, and Microsoft are developing certification technologies 
and programs to authenticate the legitimate identity behind emails, 
websites, and the products themselves. Automated authentications occur 
quickly and without human intervention, so shoppers are notified only 
when there's a question about certifications claimed on a store 
website. If a consumer has to telephone the manufacturer or check lists 
of authorized dealers, he loses some of the convenience that makes e-
commerce attractive in the first place.
    Digital seals and certificate services are used by e-commerce sites 
to prove identity and show they're using secure communications. 
VeriSign's Secured Seal, for instance, shows that a website has been 
approved by VeriSign to protect credit card and other confidential 
information with SSL encryption. Similar technologies help to assure a 
customer that his bank website really is his bank.
    New technology behind RFID (Radio Frequency Identification) tags 
and the Electronic Product Codes network will help stop fakes from 
penetrating supply chains. Drug shipments, for instance, can be 
automatically scanned and authenticated as they travel from 
manufacturer to pharmacy. The pedigree and location of drug shipments 
will be accessible to all parties, preventing copies from being 
introduced into the supply chain.
    However, these certification technologies could themselves be 
subject to elaborate counterfeit schemes. Criminal email phishing 
schemes are luring users to a website that has the marks and logos of 
legitimate security providers, and some present a ``certificate'' that 
the user can accept or refuse. Unfortunately, many users don't read the 
certificate closely, and are duped into believing it's real. This gives 
small software firms an abiding fear that a criminal could fake the 
security certificates for a sales page, and sell digital downloads of 
software to people who really are trying to buy a genuine product.
    For the digital future to fulfill its promise, customers will need 
to trust the person at the other end of the wire. And if you can't 
shake their hand, you'll need digital certificates and authentication 
methods to give you the same sense of trust. When--not if--criminals 
begin to forge security keys, hash codes and security certificates, 
industry will need to work even more closely with law enforcement to 
investigate and aggressively prosecute counterfeiters.

Conclusion
    To summarize, we see three critical points for policymakers to 
consider when confronting the problems posed by counterfeit goods:

1. Counterfeiting is a huge drain on the economy--it affects everyone 
        from manufacturer to final retailer, destroying the most 
        valuable commodity we have: the trust of our customers.
2. Illegitimate exchanges like Alibaba are moving counterfeit goods 
        from the streets to websites. The U.S. Government needs to 
        exert pressure on foreign nations to shut this activity down.
3. The next war in counterfeiting will be waged not with physical boxes 
        but with digital seals and certificates. Goods that can be 
        delivered digitally will depend on digital signatures, physical 
        goods will be bought and sold from stores using authentication 
        to create and maintain trust relationships with customers.
    The technology industry is constantly driven by market forces to 
help its business partners solve problems quickly and cost-effectively. 
We look forward to working with Congress and the Administration to 
encourage aggressive enforcement against counterfeiters, and convincing 
our trading partners to do the same.

                CACP Membership List As of June 14, 2005

                              ASSOCIATIONS

Advanced Medical Technology Association (ADVAMED); AeA, Advancing the 
Business of Technology (AeA); Aerospace Industries Association (AIA); 
Alliance of Automobile Manufacturers (AAM); American Apparel & Footwear 
Association (AAFA); American Association of Exporters and Importers 
(AAEI); American Council of Independent Laboratories (ACIL); American 
Intellectual Property Lawyers Association (AIPLA); American Society of 
Association Executives (ASAE); Association for Competitive Technology 
(ACT) ; Association of Equipment Manufacturers (AEM); Automotive 
Aftermarket Industry Association (AAIA); Center for Health 
Transformation (CHT); The Cosmetic, Toiletry and Fragrance Association 
(CTFA); Consumer Electronics Association (CEA); Electronic Industries 
Alliance (EIA); Entertainment Software Association (ESA); Food 
Marketing Institute (FMI); Gas Appliance Manufacturers Association 
(GAMA); Global Business Leaders Alliance Against Counterfeiting 
(GBLAAC); Grocery Manufacturers of America (GMA); International Anti-
counterfeiting Coalition (IACC); International Federation of 
Phonographic Industries (IFPI); Intellectual Property Owners 
Association (IPO); International Communications Industries Association 
(ICIA); International Trademark Association (INTA); Motion Picture 
Association of American (MPAA); Motor & Equipment Manufacturers 
Association (MEMA); Motorcycle Industry Council (MIC); National 
Association of Manufacturers (NAM); National Electrical Manufacturers 
Association (NEMA); National Marine Manufacturers Association (NMMA); 
Outdoor Power Equipment Institute (OPEI); Pharmaceutical Research and 
Manufacturers of America (PhRMA); Recording Industry Association of 
America (RIAA); Specialty Equipment Market Association (SEMA); Toy 
Industry Association (TIA); U.S. Chamber of Commerce (USCC); U.S. 
Council for International Business (USCIB); and Vision Council of 
America (VCA).

                              CORPORATIONS

Altria Corporate Services, Inc.; Altria Group, Inc.; American Standard 
Inc.; Amgen Inc.; AOL Time-Warner; Aspen Systems Corporation; Baker & 
McKenzie; BellSouth Corporation; British American Tobacco; C&M 
International, LTD; Dayco Products, LLC; deKieffer & Horgan; DuPont 
Security & Solution; Eastman Kodak Company; Gallup; Gillette; Intel 
Corporation; Jones Day; Kent & O'Connor, Incorporated; National 
Broadcasting Corporation (NBC); News Corporation; Oakley; Pernod Ricard 
USA; Pfizer; Robert Branand International; Stanwich Group LLC.; The 
Fairfax Group; Tiffany & Co.; Torys, LLP; Transpro, INC; Underwriters 
Laboratories, Incorporated; USA For Innovation; Verizon; and Xerox 
Corporation.

    Mr. Stearns. I thank you.
    I will start with the questions here. You know, listening 
to you, it is a little overwhelming on what to do. And 
listening to each of you talk about it, Mr. Christian, you had 
sort of mentioned in your testimony sort of some steps. You 
indicated there is no quick fix but we must take the 
incremental steps to stop this problem.
    I would like you to--and I think you did in your opening 
statement but before you do that, I cannot comprehend, could 
not eBay have a lot of counterfeit products being sold? I mean, 
I think Mr. DelBianco you said eBay has worked out a system 
where they authenticate every product that comes on or 
something?
    Mr. DelBianco. Mr. Chairman, e-Bay has worked tirelessly 
for what they call the trust and security system. And it is a 
system by which immediately upon notification that an item 
might be counterfeit, they take aggressive measures to shut 
down that particular sale. And even after an investigation to 
block that seller from being on the site. I mentioned the 
Calloway golf clubs. And Calloway in its statements have said 
that they get cooperation from eBay the very instant they claim 
that they suspect that a set of clubs could be a counterfeit--
--
    Mr. Stearns. So it looks like to me--and Mr. Christian, you 
can tell me if we could educate the public and we could 
immediately have a data base in place where we could identify 
these counterfeits and this data base was made publicly known 
internationally, wouldn't that be a step to stop this?
    Mr. Christian. Potentially a step, one of many steps. You 
mentioned education certainly very important. What scares me at 
times is the fact that certain people, certain organizations 
seem prepared to declare victory and go home. This problem is 
not about to be solved. In the U.S., we have got to become more 
aggressive. This is an area where we are not a leader. We lead 
the world in so many areas but in this area we are depending 
upon foreign covernments----
    Mr. Stearns. Yes.
    Mr. Christian. [continuing] and authorities to do what 
perhaps we should----
    Mr. Stearns. And you say there is no technology, we cannot 
have technology to prevent this. For example, Mr. Pearl, in 
yours if you put an RFID, a radio frequency and you tell every 
supplier that don't sell this unless it has this RFID, is not 
there--I am asking any one of you, is not there some 
technological solution here that we could have to help prevent 
counterfeiting?
    Mr. DelBianco. I can take a little of that. If they put an 
RFID on our boxes, for example----
    Mr. Stearns. Like your refrigerator manifold?
    Mr. DelBianco. Yes, on one of our manifolds----
    Mr. Stearns. Okay.
    Mr. DelBianco. [continuing] or other products. The problem 
is is that Chinese are very adaptive and they adapt very 
quickly.
    Mr. Stearns. You mean they will put an RFID in?
    Mr. DelBianco. Immediately, the front box that you see was 
our original packaging, the blue and red one and with less than 
6 months after we put our new product on the market in the back 
boxes which are nicer boxes, they had them copied as you can 
see, fake being to your left and to my right, and the original 
to my left and yours, your right. And it is very difficult to 
stop them. They are----
    Mr. Stearns. So no technological advancement will solve 
this problem in your opinion? None that----
    Mr. DelBianco. I don't believe technology will solve it. It 
has to be solved at the source and we have to----
    Mr. Stearns. You could not put a hologram or you could not 
put something on there and----
    Mr. DelBianco. Well in----
    Mr. Stearns. When it comes to safety, I would think there 
must be something, you know.
    Mr. DelBianco. Technology is a tool in the toolbox but 
somehow it got known as the solution. One of the things that 
you mentioned and one of the things the FDA mentioned in their 
task force report was holograms. Well Novartis and a number of 
other pharmaceutical companies are considering putting 
holograms on packaging. In the meantime, the counterfeiters 
have already done so. So we have counterfeit product out there 
with holograms and we don't put holograms. And it says in the 
different languages for your safety on the hologram.
    Mr. Stearns. So they got hubris here, they will put on 
their package. Mr. Emmer and Mr. Arthur, is the problem with 
counterfeiting outside the United States in one sector only or 
are we talking across the board in your opinion?
    Mr. Emmer. Yes, sir.
    Mr. Stearns. Yes.
    Mr. Emmer. Mr. Chairman, the vast majority of automotive 
products that we found are manufactured in China and exported 
worldwide. The key markets that we found are the Middle East.
    Mr. Stearns. So I could go to an automotive shop in Florida 
and probably find some counterfeit parts.
    Mr. Emmer. Probably. We--Federal-Mogul, we are not naive to 
think that we don't have a huge problem or a big problem in the 
U.S. We have identified a couple of issues already. The MOOG 
chassis parts on the East Coast of the U.S., we have identified 
as being a problem and we are taking steps to address that. And 
it is my opinion that you could go into any market in any 
country and find counterfeit products.
    Mr. Stearns. Mr. Arthur?
    Mr. Arthur. I would say our member companies would see the 
same that most of the problem is the counterfeit products are 
being produced overseas and being distributed overseas and 
being imported into the U.S. both on the food side and the 
consumer product side.
    Mr. Stearns. What do you mean the food?
    Mr. Arthur. Well there is counterfeit as I had mentioned 
soy sauce, I mean salsas.
    Mr. Stearns. Okay.
    Mr. Arthur. Just a lot of, you know, even specialty 
products. There are companies that get a premium because they, 
you know, make a good hot sauce or a good salsa and somebody 
will make a cheap imitation of the label and sell it and that 
can really do damage especially to those small regional----
    Mr. Stearns. Well can I go into the local grocery store and 
find a counterfeit salsa today?
    Mr. Arthur. I would like to believe not but I think that 
you probably could.
    Mr. Stearns. So you are saying that we don't even have 
protection of food safety in the United States in our grocery 
stores because you could find counterfeit food?
    Mr. Arthur. I am hesitant to say that you cannot because 
that is a pretty much of an absolute statement.
    Mr. Stearns. Yes.
    Mr. Arthur. I think that we have very good food security 
but I would be hesitant to say that you could not find it if 
you went looking for it. And most of the--and I think that as 
we work with the retailers and look at the supply chain, there 
is a decent system but there are gaps occasionally in the 
system that--and some of it can be in some of the discount 
stores or when products are moved over their----
    Mr. Stearns. Well how would I go about when I go into a 
grocery store to determine whether it is a bad product? I could 
not tell. I could not tell, right? Isn't it up to the grocery 
store to actually come up with a list of suppliers that they 
feel are credible?
    Mr. Arthur. Yes.
    Mr. Stearns. Shouldn't that be protection?
    Mr. Arthur. Yes. In the end, I mean, I----
    Mr. Stearns. I mean, they are going to be sued if myself or 
my family get hurt from buying something in their store.
    Mr. Arthur. I think it is not just the retail, I think it 
is the whole supply chain from the manufacturer to the 
consumer. We need to have a good system in place and that is 
one of the things that we are working. The one part that I had 
mentioned briefly in the STOP initiative is developing some 
guidelines to protect that entire supply chain, and we are 
hoping to have something developed before the end of the summer 
that can then be distributed and then be used more broadly 
beyond the grocery and consumer products industries.
    Mr. Stearns. My time is expired. The ranking member.
    Ms. Schakowsky. Thank you, to all the panelists. Mr. Emmer, 
I had the pleasure of taking a tour of the Federal-Mogul 
facility in my district in Skokie, Illinois not too long ago. I 
wanted to begin with you and then ask the other panelists the 
same question.
    What has the Government done about your company or your 
company's counterfeiting problems and if you have suggestion of 
what more could be done. And I know when we get to you, Mr. 
Christian, you said that we are relying on foreign countries to 
do some of the things that we ought to do. So I am interested 
in sort of what has worked, what has been done, and what more 
could be done in just a couple of sentences during my time. Mr. 
Emmer?
    Mr. Emmer. The--some of the things that we have seen that 
have worked are--or steps in the right direction are one the 
proposals from H.R. 32, seeing an increase in criminal 
penalties, the proposal to seize tooling patches, labels, 
anything that can be used to affix to a generic product thereby 
making it counterfeit. We would like to see it go a step 
further and see an increased funding to not only Department of 
Homeland Security, Department of Justice, increased resources 
for further prosecution and further enforcement of these 
crimes, specifically earmarked for counterfeiting crimes.
    I would also like to see increase in cooperation between 
U.S. Customs and foreign customs agencies since we are able to 
track these counterfeit goods moving from one port to the next 
from say the United Arab Emirates to the U.S. and have some 
sort of interaction in place. I think that would facilitate a 
lot of----
    Ms. Schakowsky. Would you favor retaliation against Chinese 
imports in some way? I mean, we have heard testimony from the 
Commerce Department that it keeps going on.
    Mr. Emmer. It does keep going on. I think the Chinese 
Government, if they truly wanted to take action, they could 
stamp out a lot of this problem. I think a lot of the companies 
that we have found as being involved in the counterfeit 
production are partly owned by the Chinese Government or 
Chinese corporations. I think stronger measures on U.S. 
Government could exert some pressure on China for some positive 
results.
    Ms. Schakowsky. Thank you. Mr. Arthur, do you have 
suggestions or what has the Government done?
    Mr. Arthur. Well as I mentioned and a couple of people 
mentioned, getting H.R. 32 passed and in place will really help 
on making our trade position more credible, that we are doing 
what we can here to destroy counterfeit products that are found 
plus the machinery that is used to make them when it is done in 
the U.S. And then I think that stronger--working with the 
international trade community to make sure that those countries 
are doing what we are doing here to find those that are 
counterfeiting and crack down on them. And so I would echo a 
lot of what Mr. Emmer was saying as well.
    Ms. Schakowsky. Okay.
    Mr. Christian. As I mentioned, we need to take the lead. I 
think this is an issue in a way similar to what we--what is 
often heard about terrorism. That we can fight it across the 
ocean in a far off land or we can fight it on Main Street, 
U.S.A. And I think the counterfeiting of medicines falls into 
that category as well.
    If you look at the criminal jurisdictions from the criminal 
code of the United States, most of the agencies, FBI, Secret 
Service, DEA, Customs operate internationally. The purpose of 
doing that is to protect American citizens before the crime 
occurs in the United States. The criminal jurisdiction for 
counterfeiting falls to the--for the FDA and they have a small 
group of professional investigators but that is what it is: a 
small group, they don't operate internationally.
    So while DEA will try and keep a product from being 
planted, they will try and keep it from being harvested, will 
try and keep it from being shipped, and we will track it down 
and investigate it when it is in the U.S., the FDA only has the 
capability of tracking it down once it is in the U.S. So we are 
not giving it as much attention. We are not leadership.
    If you go out around the globe, whether it is Bogota or 
Bangkok, if the authorities think the U.S. law enforcement 
agencies are interested in a problem, they will work hard on 
it. When nobody ever comes to them and talks about 
counterfeiting, they back off a little bit. So I think we need 
to lead. We need to get out front on this issue and take a 
leadership role around the globe before we are reactive to a 
serious problem here in the U.S.
    Ms. Schakowsky. Thank you.
    Mr. Pearl. In my instance, the USTR has been helpful in at 
least helping me find attorneys in these countries where 
counterfeiting is taking place. The--I think that for us to be 
successful in reducing the amount of worldwide counterfeiting, 
it will be important to get the Governments and the offending 
countries to cooperate. It has to be done. If we have to twist 
their arms, we have to twist their arms, but it has to be done. 
We cannot do it as long as they are getting paid off in their 
own countries. And if there is no reason for them to try and do 
the right thing, we have to try and give them one. If we can do 
that, then they will start stopping the counterfeits before 
they get into their country. They will destroy them and they 
will probably try and find out who is bringing them in. We have 
to make it worth their while because right now it does not make 
any difference to the person looking at containers, he could 
care less. But if he comes--if--in our case, a whole container 
load of product came in from China, the bill of lading said 
China, the product said Made in the U.S.A.
    Now if that does not tell you something and the guy said--I 
mean if he--I would have gladly given him a bonus to stop that 
container. It costs me a fortune when that gets into the market 
and ruins our reputation. And we have to find a way to get the 
other Governments to cooperate and see--make it in their 
interest too. It has to be in their best interest and I think 
it is.
    Ms. Schakowsky. Thank you.
    Mr. DelBianco. Representative Schakowsky, I believe your 
question was what concrete steps has the administration taken 
to combat counterfeits. I will just simply address sort of a 
top down and a bottom up response to your answer.
    From the top down, trade representatives and the 
administration have been aggressive in negotiating strong 
intellectual property protect rights in free trade agreements 
and have been big supporters of pushing through the CAFTA, 
Central America Free Trade Agreement. That, I believe is the 
top down approach.
    From the bottom up, this Justice Department--and to partly 
catalog in a study they did last fall, this Justice Department 
went a long way to document the cases that have been 
prosecuted. In 2004, a prosecution of a Ukrainian man was 
charged with illegally distributing millions of dollars of 
unauthorized copies of software and was extradited to this 
country. And then the Department of Justice conducted operation 
digital marauder last fall and it seized almost $60 million of 
counterfeit Microsoft software and have charged 11 people with 
manufacturing counterfeit software and distributing it. And 
that sort of pubic hanging or a public execution, I think will 
focus the mind of some counterfeiters.
    Ms. Schakowsky. Let me ask you a question though. You talk 
about 11 individuals but if we have companies that are trading 
on Chinese Stock Exchange that are actually making money from--
their business is counterfeiting, then this is kind of out in 
the open and larger than 11 people. What can we do about that?
    Mr. DelBianco. From the top down, we have to negotiate 
heavily with China for intellectual property protection rights 
that would help to shut down the Alibaba exchange. And from the 
bottom up, those prosecutions, they are still going to have an 
effect, Representative, on the distribution channels here in 
the States. Because if someone is taking those Alibaba based 
counterfeits and moving them to a U.S. based market, there are 
going to be folks in that distribution chain. And I know we 
cannot arrest them all, but let us not let the perfect be the 
enemy of the good. I think we can make a difference.
    Ms. Schakowsky. Thank you.
    Mr. Ferguson. [Presiding] Ms. Blackburn for questions.
    Ms. Blackburn. Thank you so much. And I want to thank each 
of you for being here and for your comments on this issue.
    Mr. Christian, I think it was you that mentioned the tools, 
that technology was just one tool in the toolbox. I will remind 
each of you and all of us collectively, I think it was Napoleon 
who said tools belong to those who know how to use them. And I 
think that it is high time we start figuring out how to use 
some of these tools to help protect the creative community in 
this country and I hope that we all will work collectively and 
aggressively on this issue.
    I have four questions and I am going to address them to 
each of--to you all collectively and then you may either 
respond now or respond in writing. I know we are a little close 
on time. And Mr. DelBianco, you can respond for the association 
that you work with.
    And we talk in Tennessee where I am from and as we look at 
this whether it is my entertainment industry, whether it is our 
pharmaceutical development that takes place there, our 
biopharmaceutical industry, our auto engineers that are 
working, we talk about the impact of this. In entertainment 
alone, we know that we have lost half of our songwriters in 
this country over the past decade. Intellectual property theft 
is an expensive business, very expensive business.
    So what I would like to know from each of you with your 
companies is this. No. 1, will you please give me an estimate 
of the economic loss that you incur each year because of piracy 
and intellectual property theft? What is it costing you in raw 
dollars. No. 2, for your industry or your company jobs lost, 
annual jobs lost. What do you estimate that to be? No. 3, would 
you as a company support WTO action against China for their 
infringement and lack of respect for intellectual property and 
counterfeiting. And No. 4, in addition to China, what other 
countries or regions of the world are producing counterfeit 
product or infringements on the intellectual property that many 
in our country own.
    And Mr. Emmer, I will start with you. We will work down and 
if each of you will just briefly respond or either let me know 
that you are responding in writing.
    Mr. Emmer. I will have to submit the response in writing to 
you certainly on the economic loss, the annual job loss, as 
well as the confirmation of the support against--action against 
China. It certainly needs to be considered, as well as the--it 
just needs to be considered. The other areas that we have seen 
counterfeit products being produced, I can--I will include that 
in writing as well but we have seen an increase in the India/
Pakistan Region or India/Pakistan specifically and those areas 
are affecting our company as well.
    Ms. Blackburn. Thank you.
    Mr. Arthur. The job loss numbers and the economic loss 
numbers I have seen as nationwide. I will have to get back to 
see if we have those on an industry basis. And I will also have 
to get back on the--your last two questions.
    Ms. Blackburn. Thank you.
    Mr. Christian. I will have to do as well. To us, this is 
more of a public health issue than an economic issue, although 
it is an economic problem. It does cost money. It does cost 
jobs. There are other areas of concern. One of the areas I did 
not mention today was India but India remains a concern and a 
problem. Certainly in Latin America, Russia is a disaster as I 
mentioned. But as far as the specifics, we will have to get 
back to you because----
    Ms. Blackburn. Excellent, thank you.
    Mr. Christian. [continuing] we are in the public health.
    Ms. Blackburn. Mr. Pearl?
    Mr. Pearl. As far as an economic loss from my small company 
it is at least a million dollars a year. Jobs lost, a few years 
ago we had 375 employees, we now have 260. As far as the World 
Trade Organization, I think that China wants to belong and I 
think we should make them follow the rules. Absolutely force 
them to take some action. And if we don't, we are all going to 
suffer. They want what we have and they have a 20 or 30 year 
plan to get it from us and we are just feeling it now and they 
are not going to stop. If we don't slam them now and get their 
respect, we will never have their respect. Something serious 
has to be done now.
    And you asked about other countries other than China. There 
are many as have already been mentioned. But I believe if you 
really want to slow down the Chinese counterfeit, you can do it 
by making the traders responsible. Traders are people who go 
out and scour the world, find products and customers, have them 
made in China. They don't care about trademark law anywhere. 
They have no scruples whatsoever and no morals and they will 
copy anything that they think they can make a commission on.
    Ms. Blackburn. Thank you.
    Mr. Pearl. And if we can get China to make them 
responsible, then I believe that we can slow down the Chinese 
counterfeiting. Not stop it but we can certainly slow it down 
and make it more difficult. If you--when I go to trade shows 
around the world, I see the Chinese there. They are not 
particularly selling but they are certainly getting all the 
catalogs and talking to people about which one of their 
products is well thought of so that they know which one to 
copy. And before you know it, they have copied it and they are 
in your market and they are producing inferior products.
    Ms. Blackburn. Thank you. Mr. DelBianco?
    Mr. DelBianco. Thank you for your question, Representative 
Blackburn.
    With respect to the first question, the economic losses due 
to the information technology industry to the piracy and 
counterfeiting is estimated by IDC at $30 billion a year. And 
they estimate that one in three computers worldwide contains 
some form of pirated or counterfeit software.
    Representative, I would like to get back to you in writing 
with the number of jobs and the specific WTO actions we would 
recommend against China.
    And with respect to your fourth question, I believe that 
Brazil and at least three nations in Eastern Europe, Russia, 
Poland, and Romania are a source of counterfeit software that 
is plaguing software makers in this country and costing 
American jobs as well and they deserve the same kind of 
scrutiny we are applying to China here today. Thank you.
    Ms. Blackburn. Thank you very much.
    Thank you, Mr. Chairman.
    Mr. Ferguson. The chair recognizes himself for questions.
    A couple of questions for Mr. Christian. You say in your 
testimony that EU's eastern border has become increasingly 
poor. I referenced this in my opening statement allowing for 
Russian counterfeit pharmaceutical cartels to being dangerous 
counterfeit drugs into the EU pharmaceutical supply reaching 
France and Germany. Can you talk a little bit more about that? 
Can you elaborate in what you said in your statement?
    Mr. Christian. Sure. Historically, Western Europe 
particularly has enjoyed the same quality, the same safety that 
the United States has in its medical distribution system. 
Despite the fact it is a little more porous, a little more 
dangerous because of the legal parallel trade that goes on 
among the various northern and southern European countries 
which is encouraged and, of course, the repackaging that I 
mentioned.
    So Europe is beginning to see some of the problems that we 
are beginning to see. You know we have had a series of 
counterfeit cases that have made the news in the United States. 
Europe is beginning to see that. The border issue, Russia is 
just exploding with counterfeiting and some cities it is up to 
25 or 30 percent of the products in the pharmacies are 
counterfeit. And these are coming out into the old Eastern 
European areas. And now with the expansion of the EU, then once 
you are into Eastern Europe, you are into the major markets.
    Additionally in Europe, they are beginning to have the same 
problem with the Internet sales that we have. There are many 
hundreds of Internet sales selling counterfeit products from 
Russia and also from China. So they are going through some of 
the same pains and learning experiences that we are going 
through. It is more dangerous for them at this point in time 
because they are that much closer to a major existing 
counterfeiter.
    Mr. Ferguson. With the EU's development and formation, it 
seems then that the safety of the drug supply, you seem to be 
suggesting is getting less safe rather than more.
    Mr. Christian. That is correct.
    Mr. Ferguson. Any signal that that is not going to continue 
to deteriorate?
    Mr. Christian. No, but I think it is similar to the U.S. It 
is similar to most of the world that the drug supply in general 
is getting less safe. There is a new book out that just deals 
with the issues of the United States called ``Dangerous Doses'' 
and that would be eye opening for members of the committee to 
read because it just devotes itself to the problems in the 
United States that often go unreported or under reported.
    Mr. Ferguson. What about Canada?
    Mr. Christian. Canada has a safe drug supply at this point 
in time. As you may have seen today in the news, the latest 
survey showed that 2 percent of the Canadian websites are 
actually in Canada, and that to me is a precursor of what 
potentially could happen if we have importation, re-
importation, or whatever you want to call it. Back in the 
1980's, it was called American goods returned. And this very 
committee determined that there were major problems with 
counterfeit, adulterated, expired products coming back into the 
United States and passed the Prescription Drug and Marketing 
Act. And the same arguments that we used in the mid-1980's by 
this committee exist today.
    One of the major receipts of the American goods before they 
returned were the Cayman Islands. Now the Cayman Islands had no 
problem with counterfeit, or expired, or adulterated products 
until the criminal organized crime elements decided to use it 
as a launching point. So they would get millions of doses of 
products shipped to the Cayman Islands where the population 
might have been 15,000 people. And after sitting on the dock 
and being messed with, if you will, replaced, or adulterated, 
or liquid products being divided in two and water being added, 
these products came back to the United States. And this 
committee discovered and uncovered that scandal and the 
Prescription Drug and Marketing Act took place.
    Because Canada does not have a problem today, does not mean 
if opportunity for criminal elements to take advantage of the 
situation is created, then they will take advantage of it. If 
the door is opened, then you are going to see what you see with 
the Internet sales where 86 percent of all product entering via 
the Internet is illegal in the United States.
    Mr. Ferguson. The chair recognizes Mr. Bass. No other 
questions.
    Mr. Bass. Thank you very much, Mr. Chairman.
    I regret having missed the chairman's questioning and 
others. I have heard a lot of discussion here about the 
problem. It is unclear to me as to exactly what the solutions 
might be. In fact, it looks like a dam that is sort of being 
broken here and as we get more technologically advanced, the 
problems don't get easier to solve but harder.
    I also think that we need to differentiate between the--
especially in the pharmaceutical field between the issue of re-
importation which is an economic issue and counterfeiting which 
is quite different. Counterfeiting can occur anywhere in the 
world, abroad or here or anywhere else. Manufacturing is 
another story all together because the reason why you get knock 
off products is because they are a lot cheaper to manufacture. 
And as we well know, there are legitimate businesses in the 
country that are subbing out manufacturing abroad but it has 
their name on it so therefore it is okay.
    Is there a nexus between the issue of counterfeiting and 
the whole trade debate that we are having today? Is that--is 
there any--do trade agreements help reduce the issue of 
counterfeiting? Maybe, Mr. Pearl, you could answer. You are 
representing NAM. Is NAM in favor or opposed to CAFTA. Do you 
know?
    Mr. Pearl. They are in favor of it. And I----
    Mr. Bass. That is what your little button is?
    Mr. Pearl. Absolutely. And the reason that I am in favor of 
it also personally is that it will strengthen our IPR issues. 
We can force them. When you are negotiating with someone, you 
have an opportunity and I don't want our country to lose the 
opportunities with every trade agreement. We need to drive home 
IPR issues, counterfeiting issues, and other issues that are 
very important to us.--went to the United Arab Emirates and 
that to me personally is very important because we just in 
November found them counterfeiting our parts there. And we--
temporarily we may have it stopped but it is something constant 
diligence is required.
    Mr. Bass. And Mr. Pearl, the reason your parts are 
counterfeited is because I am going to assume labor is cheaper 
elsewhere. Is that right?
    Mr. Pearl. Correct.
    Mr. Bass. Yes.
    Mr. Pearl. Chinese labor is virtually free.
    Mr. Bass. But you are not worried about counterfeiting 
within the United States of your----
    Mr. Pearl. We have not seen our products counterfeited in 
the United States yet and I am hoping I never do.
    Mr. Bass. All right.
    Mr. Pearl. But in the Middle East definitely.
    Mr. Bass. Did anybody mention any specific legislative 
ideas for dealing with this counterfeiting issue?
    Mr. DelBianco. Representative Bass?
    Mr. Bass. Yes, sir, Mr. DelBianco.
    Mr. DelBianco. Thank you. We, I think as a chorus, all of 
us supported H.R. 32.
    Mr. Bass. Okay.
    Mr. DelBianco. And need to move that through on the 
Senate's side.
    Mr. Bass. But we have done that in the House, didn't we, 
H.R. 32?
    Mr. DelBianco. Yes.
    Mr. Bass. So we have already passed that. Anything else?
    Mr. DelBianco. The digital seals and certificates that I 
spoke of in my testimony----
    Mr. Bass. Okay.
    Mr. DelBianco. [continuing] it is possible that those would 
not be considered the same kind of labels that are named in 
H.R. 32. So it is entirely possible we may need more targeted 
legislation to identify that trafficking in digital seals and 
certificates is every bit as bad as trafficking and physical 
labels and certificates.
    Mr. Bass. Mr. Christian, again, I do not want to talk about 
re-importation so this is not the reason for this question. Is 
there counterfeit-proof packaging technology available? Please 
do not get into re-importation. Is it possible for 
pharmaceutical companies to create, just like we have currency, 
counterfeiting of currency which obviously we try to stay out 
of. Is it possible to do it in your area?
    Mr. Christian. Well if we just use the currency example, 
sir, since 1986, the U.S. Currency has been changed, I think 
seven times because it was being counterfeited. And in that 
particular instance, you have to realize that the security 
features are on the product. And so what we have is we are 
putting security features when we talk about technology, we are 
talking about putting them on the packaging. And at the end of 
the day, we are tracking the cardboard, we are not tracking the 
product and we constantly find counterfeit product in genuine 
packaging and genuine product in counterfeit packaging.
    The changes are being made. Legal repackaging as I 
mentioned is--exists in the U.S. and the EU, the two biggest 
markets. So a pharmaceutical company can put a great deal of 
money into these new secure devices and packaging and they can 
end up on the floor of the repackager as he puts it in his new 
plain packages with no security features and if they just end 
up in the trash that is a good thing. They sometimes end up in 
the hands of the counterfeiter.
    Mr. Bass. Is there as big--is there a significant issue of 
counterfeit pharmaceuticals in American drug stores and if so, 
what measures could be taken to reduce that problem?
    Mr. Christian. Well, I think it can be said that we have 
the safest distribution system in the world but it is very far 
from perfect. And different States most recently and most 
effectively Florida discovered a number of serious problems in 
the distribution system and made a number of arrests and has 
convictions and passed legislation tightening things up in 
Florida and eliminating--in many States, you can become a 
pharmaceutical distributor by filling out a one or two page 
application and sending on a check for $100. And now you are a 
distributor. And in Florida, they discovered these people 
carrying temperature sensitive medicines around in the trunk of 
a car in 90 degree heat.
    Mr. Bass. How do pharmacists tell a counterfeit drug from a 
non-counterfeit drug on--this is an American pharmacist on the 
shelf? Can American pharmacists tell the difference between a 
counterfeit and a non-counterfeit or genuine pharmaceutical 
that arrives at their door from----
    Mr. Christian. No, because what we are seeing and if you 
recall the very well publicized cholesterol lowering case by 
one of the major U.S. manufacturers about 1\1/2\ years ago, 
they mixed in the counterfeit product with the genuine product. 
So right down to the small container of 100 tablets you--one 
day you might take a genuine product and the next day you might 
take a counterfeit product. So we are not seeing what we did 7 
or 8 years ago where the counterfeiters just had counterfeit 
product. Today they have expired, they have adulterated, they 
have stolen product and additionally, they have some genuine 
and some counterfeit and they are mixing it together. And this 
greatly complicates the reinforcement efforts.
    Mr. Bass. Okay. Thank you very much, Mr. Chairman.
    Mr. Ferguson. Seeing no other members who are prepared to 
ask questions, I want to thank all of our panelists for your 
testimony today. You made persuasive and an articulate case for 
some of the challenges that we face and our hopes in addressing 
those so thank you very much for being here today. We will 
adjourn.
    [Whereupon, at 4:34 p.m., the subcommittee was adjourned.]

                                 
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