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



 
 INTERNATIONAL IPR REPORT CARD--ASSESSING U.S. GOVERNMENT AND INDUSTRY 
  EFFORTS TO ENHANCE CHINESE AND RUSSIAN ENFORCEMENT OF INTELLECTUAL 
                            PROPERTY RIGHTS

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

                                HEARING

                               BEFORE THE

                 SUBCOMMITTEE ON COURTS, THE INTERNET,
                       AND INTELLECTUAL PROPERTY

                                 OF THE

                       COMMITTEE ON THE JUDICIARY
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED NINTH CONGRESS

                             FIRST SESSION

                               __________

                            DECEMBER 7, 2005

                               __________

                           Serial No. 109-88

                               __________

         Printed for the use of the Committee on the Judiciary


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



                                 ______

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                       COMMITTEE ON THE JUDICIARY

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

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

    Subcommittee on Courts, the Internet, and Intellectual Property

                      LAMAR SMITH, Texas, Chairman

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

                     Blaine Merritt, Chief Counsel

                         David Whitney, Counsel

                          Joe Keeley, Counsel

                          Ryan Visco, Counsel

                    Shanna Winters, Minority Counsel


                            C O N T E N T S

                              ----------                              

                            DECEMBER 7, 2005

                           OPENING STATEMENT

                                                                   Page
The Honorable Lamar Smith, a Representative in Congress from the 
  State of Texas, and Chairman, Subcommittee on Courts, the 
  Internet, and Intellectual Property............................     1
The Honorable Howard L. Berman, a Representative in Congress from 
  the State of California, and Ranking Member, Subcommittee on 
  Courts, the Internet, and Intellectual Property................     3
The Honorable Darrell Issa, a Representative in Congress from the 
  State of California, and Member, Subcommittee on Courts, the 
  Internet, and Intellectual Property............................     4

                               WITNESSES

The Honorable Chris Israel, Coordinator for International 
  Intellectual Property Enforcement, U.S. Department of Commerce
  Oral Testimony.................................................     7
  Prepared Statement.............................................     8
The Honorable Victoria Espinel, [Acting] Assistant U.S. Trade 
  Representative for Intellectual Property, Office of U.S. Trade 
  Representative
  Oral Testimony.................................................    13
  Prepared Statement.............................................    16
Mr. Eric H. Smith, President, International Intellectual Property 
  Alliance
  Oral Testimony.................................................    23
  Prepared Statement.............................................    26
Ms. Joan Borsten, President, Films by Jove, Inc.
  Oral Testimony.................................................    52
  Prepared Statement.............................................    54

           LETTERS, STATEMENTS, ETC. SUBMITTED FOR THE RECORD

Written response to question posed by Representative Issa from 
  the Honorable Chris Israel, Coordinator for International 
  Intellectual Property Enforcment, U.S. Department of Commerce..    70
Written response to question posed by Representative Issa from 
  Mr. Eric Smith, President, International Intellectual Property 
  Alliance (IIPA)................................................    72
Written response to question posed by Representative Issa from 
  Ms. Joan Borsten, President, Films by Jove, Inc................    74

                                APPENDIX
               Material Submitted for the Hearing Record

Statement of the Honorable Howard Berman, a Representative in 
  Congress from the State of California, and Ranking Member, 
  Subcommittee on Courts, the Internet, and Intellectual Property    79
Statement of the Honorable Bob Goodlatte, a Representative in 
  Congress from the State of Virginia............................    80
News Article by the Honorable Lamar Smith, a Representative in 
  Congress from the State of Texas, and Chairman, Subcommittee on 
  Courts, the Internet, and Intellectual Property: ``Defense 
  Contrator Held in Spy Case,'' from the November 30, 2005 
  edition of The Washington Times................................    82
News Article by the Honorable Lamar Smith, a Representative in 
  Congress from the State of Texas, and Chairman, Subcommittee on 
  Courts, the Internet, and Intellectual Property: ``Envoy: 
  Licensed DVDs Cost Too Much,'' from the December 1, 2005 
  edition of The Moscow Times....................................    84
News Article by the Honorable Lamar Smith, a Representative in 
  Congress from the State of Texas, and Chairman, Subcommittee on 
  Courts, the Internet, and Intellectual Property: ``U.S. and EU 
  to Battle Chinese Counterfeiting,'' from the November 30, 2005 
  Dow Jones Newswires............................................    85
Exhibit submitted by Joan Borsten: ``Corruption in the Russian 
  Arbitrazh Courts: Will There Be Significant Progress in the 
  Near Term?''...................................................    88
Exhibit submitted by Joan P. Borsten: ``The Circumstances 
  Surrounding the Arrest and Prosecution of Leading Yukos 
  Executives.''..................................................   131
Statement and Exhibits from the Honorable Dan Glickman, Chairman 
  and Chief Executive Officer, Motion Picture Association of 
  America, Inc. (MPAA)...........................................   152


 INTERNATIONAL IPR REPORT CARD--ASSESSING U.S. GOVERNMENT AND INDUSTRY 
  EFFORTS TO ENHANCE CHINESE AND RUSSIAN ENFORCEMENT OF INTELLECTUAL 
                            PROPERTY RIGHTS

                              ----------                              


                      WEDNESDAY, DECEMBER 7, 2005

                  House of Representatives,
              Subcommittee on Courts, the Internet,
                         and Intellectual Property,
                                Committee on the Judiciary,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 10:17 a.m., in 
Room 2141, Rayburn House Office Building, the Honorable Lamar 
Smith (Chairman of the Subcommittee) presiding.
    Mr. Smith of Texas. The Subcommittee on Courts, the 
Internet, and Intellectual Property will come to order.
    I'm going to recognize myself for an opening statement, 
then the Ranking Member, Mr. Berman of California, for an 
opening statement. Then I want to represent the gentleman from 
California, Mr. Issa, for comments, as well, because he is the 
author of a resolution that was approved on the House floor 
recently to deal with the subject at hand.
    I also want to compliment the gentleman from California, 
Mr. Issa, because I believe, with the exception of the Chairman 
and the Ranking Member, that he has the best attendance record 
on this Subcommittee of anyone. And that is both appreciated 
and will be remembered. I'll recognize myself for an opening 
statement.
    The evidence continues to show that the government of the 
People's Republic of China is engaged in a long-term effort to 
steal sensitive and proprietary technologies from U.S. 
industry. Last week, Federal judges in Los Angeles ordered Chi 
Mak, an electrical engineer who worked as a defense contractor, 
and his brother Tai Mak, who also is in the Chinese military, 
to be held without bond in a case prosecutors believe could be 
among the most damaging cases of Chinese technology spying.
    In court papers, Chi Mak has reportedly admitted passing 
restricted data for 22 years--including sensitive information 
on the DBX destroyer, the Aegis weapons system, and a U.S. 
study that reveals the methods to be used by U.S. warship 
personnel to continue operating after being attacked--to 
Chinese military intelligence handlers.
    This kind of technology spying and theft of intellectual 
property pose serious threats to our country's long-term 
economic and national security interests. No two governments 
are more adept at exploiting U.S. weaknesses in protecting 
technology than the governments of China and the Russian 
Federation.
    U.S. policy is motivated by a sincere desire to encourage 
these governments to respect individual rights, including the 
right to profit from the legitimate use and licensing of 
intellectual property rights. Our hope is that the Chinese and 
Russian governments will ultimately develop into reliable and 
dependable allies in the fight to protect intellectual property 
rights. Yet that hope must be grounded in reality, and not 
motivated by wishful thinking.
    Unfortunately, there is little in the present record to 
indicate a sincere desire by the political leadership of these 
nations to respect the rights of U.S. intellectual property 
owners. In numerous international and bilateral agreements, 
China and Russia assume the duty to provide adequate and 
effective enforcement of intellectual property rights in return 
for the United States and other nations lowering trade barriers 
to their goods. The political leadership of each nation has 
prospered by being permitted to reap the benefits of 
international trade, without being held accountable for their 
own commitments.
    Their record stands in stark contrast to the countless 
assurances, guarantees, and commitments to honor their 
obligations that have been made to the most senior officials of 
the United States Government.
    One of the most offensive examples of intransigence was 
reported in the December 1st edition of the Moscow Times. In an 
article entitled, ``Envoy: Licensed DVDs Cost Too Much,'' 
Alexander Kotenkov, who is President Putin's representative in 
the Russian Parliament's upper chamber, stated at a conference 
``devoted to the fight against piracy'' that he often purchased 
illegally-made discs for plane trips, paying the equivalent of 
$3.12 for a DVD that contains five or six films.
    President Putin's representative went on to blame copyright 
owners for piracy, by stating that Russian citizens are not at 
fault for being unable to buy licensed discs, because the costs 
of legitimate discs are too high.
    I am confident, in connection with any future consideration 
of Russian accession to the WTO, the United States Congress 
will consider the extension of permanent normal trade relations 
with Russia. In the absence of a real, sustained, and 
verifiable commitment by the highest levels of the Russian 
government to protect the legitimate rights of intellectual 
property owners, I will continue to oppose U.S. support for the 
extension of PNTR and for Russia's admission to the WTO.
    I have no intention of watching while Russia becomes the 
next China; a result that I am concerned could ultimately lead 
to an erosion of U.S. public support for the WTO and the rules-
based trading system that it was intended to implement.
    Our witnesses today will bring the Subcommittee up to date 
on the developments that have transpired since May 17, when 
this Subcommittee held back-to-back hearings on Chinese and 
Russian IP theft.
    That concludes my opening statement, and the gentleman from 
California, Mr. Berman, is recognized for his.
    Mr. Berman. Thank you very much, Mr. Chairman, for 
scheduling this hearing on international intellectual property 
piracy. I actually hope the Subcommittee can institutionalize 
the practice of having at least one hearing a year that focuses 
on international trade and products protected by intellectual 
property rights.
    I particularly want to thank you for inviting Joan Borsten 
to testify. She is a long, longstanding good friend, a 
constituent, and has a very compelling story. She brings a 
valuable perspective to the hearing: that of an individual 
American entrepreneur whose business has been dramatically 
impacted by a foreign government's sustained campaign to steal 
her rights to intellectual property.
    Because of the massive copyright piracy that occurs daily 
in China and Russia, the sales of black market goods cause an 
annual loss of revenue to American creators that is truly 
staggering. According to the International Intellectual 
Property Alliance, piracy rates in the copyright industries 
range from a low of 70 percent to a high of 95 percent. And 
American industries annually lose over $2\1/2\ billion in 
China, and almost $2 billion in Russia.
    But it is not only the copyright industries, entertainment, 
software, book publishing, etcetera, that suffer. We could 
probably have an entire hearing only on counterfeiting of 
motorcycle parts, purses, and pharmaceuticals. No industry is 
immune from the endemic intellectual property violations 
occurring in these two countries.
    The problem in both China and Russia is similar. While the 
laws may be on the books, actual enforcement of those laws is 
sorely lacking. Few criminal prosecutions have taken place, and 
even fewer sentences have been meted out. There's currently no 
true deterrent for the pirates. In fact, piracy has become the 
foundation for new businesses that export these black market 
goods.
    The one effective tool the current Administration has to 
incentivize the Chinese government to address its piracy 
problem is pursuing a WTO case. At the last hearing on this 
issue, the USTR testified that they were, ``committed to ensure 
that China is compliant with its obligations. And we will take 
WTO action if, in consultation with you and with our industry, 
we determine that this is the most effective way to fix the 
problem that we are resolved to fix.''
    When I asked whether 6 months would be a reasonable time 
frame to reach a conclusion, the answer was that it could be. 
So here we are, 6 months later, and I'm looking forward to an 
update from that office.
    Furthermore, have additional avenues for mitigating the 
effect of piracy in China been explored by the current 
Administration? Currently, the Chinese government engages in 
vast restrictions on market access for American copyrighted 
goods. They restrict the number of American films that can be 
shown, and severely curtail the right of our companies to do 
business in their country. These barriers make the impact of 
piracy that much greater, and virtually impossible for our 
companies to counteract piracy.
    With Russia, there is still some leverage, because they 
have not joined WTO yet. I took note of the Chairman's comments 
in his opening statement on this subject.
    A number of months ago, I, along with a number of other 
Democrats, wrote Ambassador Portman advising him. And these 
were Democrats who were inclined--on a number of occasions
    have been willing to support free trade agreements. We 
wrote a letter to Ambassador Portman, advising him that in 
order to obtain our support for any future trade agreement, we 
would have to be assured that the lesson taught from allowing 
China to join the WTO without provision for adequate 
enforcement against intellectual property violations has been 
learned.
    In fact, just last week, IIPA submitted comments for the 
Special 301 Out-of-Cycle review on Russia. It's not encouraging 
news: ``In short, Russia is not complying with its commitments 
to provide adequate and effective copyright protection and 
enforcement.''
    Furthermore, the House in a bipartisan vote--I believe that 
was the gentleman from California, Mr. Issa's resolution--
recognized Russia's failure to adequately protect intellectual 
property, and cautioned that without change they are at risk of 
losing GSP benefits and accession to the WTO.
    The last time, we discussed the complexity of denying GSP 
benefits to a country, a process which requires consultation of 
most agencies within the Executive Branch. It's clear that in 
Congress we all agree that this situation is quite outrageous, 
and that a country that flagrantly violates American 
intellectual property rights should not receive GSP duty-free 
benefits. So I ask, since the last hearing, has there been any 
movement on the status of Russia's GSP benefits?
    If motivated, these countries can protect intellectual 
property rights. When piracy hurts the Chinese interests, the 
Chinese government has been motivated to step in. When knock-
offs of the Beijing summer 2008 game logos on T-shirts were 
being sold, the markets were quickly cleared. In short, China 
can deal with this problem, if it has the political will, and 
when it has the political will.
    In Russia, it seems incredible that the Russian government 
actually controls the facilities and land on which many of 
these pirate optical disc plants operate. How can it simply do 
nothing to shut down the plants operating on these government-
run installations?
    I'm looking forward to hearing from the witnesses to learn 
what benchmarks or time lines have been established to help 
guide a decision on a WTO case against China, the withdrawal of 
GSP duty-free benefits from Russia, and whether Russia is aware 
that they will be denied admission to the exclusive WTO club 
unless the piracy problem is addressed. I'm looking forward to 
hearing about other steps that are being taken to protect 
American creativity. Thank you, Mr. Chairman.
    Mr. Smith of Texas. Thank you, Mr. Berman. The gentleman 
from California, Mr. Issa, is recognized for his comments.
    Mr. Issa. Thank you, Mr. Chairman and Ranking Member 
Berman. Thank you for your leadership in seeing that the 
resolution, which had to be pushed through the Ways and Means 
Committee, saw the floor, and certainly showed the 
Administration, in addition to the Russians, that we are 
determined not to make the same mistake we made with China.
    I, personally, voted in support of the Permanent Normalized 
Trade; and obviously, it led to WTO admission for China. That 
is a vote that I deeply regret. I'm a dyed-in-the-wool free-
trader; but free trade is about fair trade.
    Briefly, I wanted to echo some of the comments that the 
Ranking Member and the Chairman made, which are if you have 
countries which believe, support, and in fact participate in 
theft, it doesn't matter what their justification is. The truth 
is that Russia and China hide under the theory that they cannot 
afford--that they are poor countries; they cannot afford to pay 
that, as was said in the opening statements. The fact is, 
Russia has become the number-two, soon to be the number-one 
seller into Europe of counterfeit goods.
    Obviously, Russia believes that Europe can also not 
afford--Luxembourg, with a per-capita GDP similar to the United 
States, cannot afford--to pay a fair price, unless of course 
Russia is making a profit on it.
    There is no question that this behavior is part of a 
culture in the old Soviet Union and the still technically 
communist China, that intellectual property is not real 
property, and that in fact it is a right of the state. That 
attitude and the legislation and the enforcement have to be 
changed.
    I believe that with the Chairman's leadership, that we can 
continue to echo the message to the Administration, Trade 
Representative here today, that we shall not, under any basis, 
allow for accession to the WTO--which I do have to disagree 
with the Ranking Member slightly. I'd like to say it was 
exclusive, but with over 140 members, the truth is Russia 
stands out by its absence as a country prohibited--rightfully 
so--prohibited from entering this no longer so exclusive club 
because of their action. Their action is reprehensible.
    And I'll close with this. Less than 6 months ago, I was in 
Russia; and I've been assured by a group that was there over 
the break, it's still the same. If you can drive the main 
streets of Moscow and see them offering MPEG-4, MP-3, formats 
for movies and for music that are not offered from the makers 
in their original form, on the main streets in large neon 
signs--and of course, offering an opportunity to buy ``Star 
Wars'' long before it was out on DVD--it is very clear that 
they are unapologetic for their theft of intellectual property.
    And as Mr. Berman, I believe, noted, also, they don't have 
a problem at all stealing other property from us in the defense 
industry, and in fact in every area of manufacturing. And I 
thank the Chairman and the Ranking Member.
    Mr. Berman. Would the gentleman yield?
    Mr. Issa. I'd be glad to yield.
    Mr. Berman. On the issue of the exclusivity, it reminds me 
of the Groucho Marx line: ``Why would you want to get in any 
club that would take you?''
    Mr. Issa. ``That would have you as a Member.'' Absolutely. 
And with that, I yield back.
    Mr. Smith of Texas. Thank you, Mr. Issa. It's nice of us to 
have a united front up here.
    Before we hear from the witnesses, I'd like to ask you to 
stand and be sworn in.
    [Witnesses sworn.]
    Mr. Smith of Texas. Please be seated. Our first witness is 
Chris Israel, who serves as the Coordinator for International 
Intellectual Property Enforcement. Mr. Israel was appointed to 
this newly created position, which is housed at the U.S. 
Department of Commerce, in July 2005, by President George W. 
Bush. In this capacity, Mr. Israel is tasked with coordinating 
and leveraging the resources of the Federal Government to 
improve the protection of U.S. intellectual property at home 
and abroad.
    Before accepting his current position, Mr. Israel served in 
a variety of assignments at the Department of Commerce, many of 
which focused on advancing U.S. innovation and technology 
leadership.
    I am told that today's testimony will mark the first time 
that Mr. Israel has testified before a Committee of Congress 
since accepting his new responsibilities.
    His ability to ensure the development of a sustainable and 
comprehensive national and international enforcement policy for 
the protection of U.S.-based intellectual property rights is of 
vital and continuing interest to this Subcommittee.
    Mr. Israel received his BA from the University of Kansas, 
and his MBA from the George Washington University.
    Our second witness is Victoria Espinel, who is the [Acting] 
Assistant U.S. Trade Representative for Intellectual Property 
in the Office of the United States Trade Representative. In 
that capacity, Ms. Espinel serves as the principal U.S. trade 
negotiator on intellectual property.
    Ms. Espinel's office chairs the intra-agency committee that 
conducts the annual Special 301 Review of international 
protection of intellectual property rights. The latest report 
was published on April 29, 2005. Subsequent to its publication, 
Ms. Espinel appeared before the Subcommittee to deliver 
testimony on the subjects of intellectual property theft in 
China and Russia. She will be providing this Subcommittee with 
an update on developments, as well as a status report on the 
substantial challenges that remain.
    Ms. Espinel holds an LLM from the London School of 
Economics, a JD from Georgetown University, and a BS in foreign 
service from Georgetown University's School of Foreign Service.
    Our third witness is Eric H. Smith, who serves as the 
President of the International Intellectual Property Alliance, 
a private-sector coalition of seven U.S. trade associations 
which is based in Washington, D.C. IIPA represents over 1,900 
companies that produce and distribute materials protected by 
copyright laws throughout the world. A founder of IIPA, Mr. 
Smith frequently serves as the principal representative of the 
copyright industries in WTO, TRIPS, and Free Trade Agreement 
negotiations.
    Mr. Smith has a JD from the University of California at 
Berkeley, a BA from Stanford, and an MA from the School of 
Advanced International Studies at Johns Hopkins.
    Our final witness is Joan Borsten, who is President of 
Films by Jove, Inc., a California-based production and 
distribution company that acquired worldwide rights to much of 
the animation library of Moscow's--is it Soyuzmultfilm?--Studio 
in 1992.
    Ms. Borsten received her BA in comparative literature from 
the University of California at Berkeley, and her MS in 
bilingual education at USC.
    Welcome to you all. We have witness statements from all of 
the witnesses on this panel. Without objection, their complete 
testimony will be made a part of the record.
    As you all know, we trust that you will limit your 
testimony to 5 minutes; which we look forward to. And Mr. 
Israel, we will begin with you.

   TESTIMONY OF CHRIS ISRAEL, COORDINATOR FOR INTERNATIONAL 
 INTELLECTUAL PROPERTY ENFORCEMENT, U.S. DEPARTMENT OF COMMERCE

    Mr. Israel. Thank you, Mr. Chairman. Chairman Smith, 
Ranking Member Berman, and Members of the Committee, I'm 
pleased to be able to be here today to join you and my 
counterparts on this panel to discuss the challenge of 
international intellectual property rights enforcement.
    I want to first thank the Committee for their continued 
support and leadership on issues concerning the protection of 
intellectual property. I look forward to the opportunity to 
work together to ensure that the heart of America's thriving 
innovation economy, its intellectual property, is effectively 
protected around the world.
    Combating piracy and counterfeiting is a top priority for 
the Bush Administration. President Bush has consistently raised 
IP enforcement with foreign leaders; placed it on the agenda of 
the G8; and made it a key part of the recent U.S./EU summit. He 
has also discussed our ongoing concerns with leaders of 
critical markets such as China and Russia. In addition, he has 
directed his Administration to address the issue actively, 
aggressively, and with a results-oriented approach.
    The reasons IP enforcement is a priority for this 
Administration are very clear. Few issues are as important to 
the current and future economic strength of the United States 
as our ability to create and protect intellectual property.
    Enforcement of intellectual property also carries great 
consequence for the health and safety of consumers around the 
world, because fake goods don't just hurt business; they hurt 
people.
    Finally, the theft of American intellectual property 
strikes at the heart of one of our greatest comparative 
advantages: our innovative capacity.
    The Office of International Intellectual Property 
Enforcement is located at the Department of Commerce, and I 
report to Secretary Gutierrez. We also work under the 
leadership of the White House, and we have been met with 
tremendous cooperation from all Federal agencies that 
contribute to our overall IP enforcement efforts.
    A very critical element of our overall coordination is the 
Strategy Targeting Organized Piracy, the STOP Initiative, 
launched by the Bush Administration in October 2004. This 
initiative brings together USTR, Commerce, Justice, Homeland 
Security, and the State Department. STOP has yielded tangible 
results and received attention around the world.
    The STOP Initiative and our new Office of International 
Intellectual Property Enforcement allows us to deliver a clear 
message: The United States takes the issue of intellectual 
property enforcement very seriously; we are leveraging all of 
our resources to address it; and we have very high expectations 
of all of our global trading partners.
    As this Committee clearly understands, the problem of 
global piracy and counterfeiting exists in many industries and 
countries, and demands continuous attention. With finite 
resources and seemingly infinite concerns, how we focus our 
efforts is critical.
    The Bush Administration is focused on six key priorities. 
First, we are working to empower America's innovators. Through 
specific tools and broad education efforts, we are getting the 
word out to American businesses that they must be aggressive 
and proactive in protecting their rights.
    Secondly, we are focused on preventing counterfeit and fake 
goods from penetrating our borders. This means casting a wider 
net, utilizing technology, and working with our trading 
partners to share information.
    Third, we are working to prevent fake and counterfeit goods 
from corrupting legitimate supply chains. We have worked 
closely with the Coalition Against Counterfeiting and Piracy to 
develop voluntary guidelines companies can use to ensure their 
supply and distribution chains are free of counterfeits.
    Fourth, U.S. law enforcement is leading efforts to 
dismantle criminal enterprises around the world that steal 
intellectual property. The Justice Department has pursued 
numerous operations targeting criminal organizations involved 
in online piracy and trafficking in counterfeit goods.
    Fifth, we are working with our trading partners to build 
international support for IP enforcement. Through the Joint 
Committee for Commerce and Trade, the JCCT, for example, we 
have worked extensively with China to address rampant IP 
concerns. And just last week, we reached an agreement to work 
much more closely with the European Union to combat global 
piracy.
    Lastly, we are educating other governments about 
intellectual property rights and how important IPR is to the 
global economy. To date, over 100 IPR enforcement projects and 
290 IPR technical assistance projects have been conducted 
around the world.
    Mr. Chairman, the Bush Administration is committed to 
stopping intellectual property theft and providing businesses 
with the tools they need to flourish in a global economy. As I 
work to coordinate the U.S. Government's efforts, and with your 
continued support and the partnership of this Committee, we 
will be able to do even more on behalf of American innovators, 
researchers, entrepreneurs, artists, and workers.
    We must take advantage of the opportunity to work together 
to better protect the knowledge industries of today, so that we 
may continue to see the innovations and growth of tomorrow. 
Thank you, Mr. Chairman.
    [The prepared statement of Mr. Israel follows:]

                   Prepared Statement of Chris Israel

    Chairman Smith, Ranking Member Berman and members of the Committee, 
I am pleased to join you today to discuss the challenge of 
international intellectual property rights enforcement.
    I want to thank the Committee for its continued support and 
leadership on issues concerning the protection of intellectual 
property. I look forward to the opportunity to work together to ensure 
that the heart of America's innovation economy, its intellectual 
property, is effectively protected around the world.
    The Bush Administration is keenly aware of the significance of IP 
protection for American businesses, workers, entrepreneurs and 
innovators. It is estimated that IP theft costs U.S. businesses 
approximately $250 billion annually and results in the loss of hundreds 
of thousands of American jobs. Combating piracy and counterfeiting is a 
top priority for this Administration. This prioritization is evident in 
the leadership shown by President Bush. He has consistently raised IP 
enforcement with foreign leaders, placed the issue on the agenda of the 
G8 and made it a key part of the recent U.S./EU summit. He has also 
discussed our ongoing concerns with leaders of critical markets such as 
China and Russia. He has directed his Administration to address this 
issue actively, aggressively and with a results-oriented approach.
    I appreciate the opportunity to discuss this leadership, to address 
our efforts to maximize the Federal government's role in protecting 
American intellectual property and to share our results-oriented 
strategy.
                             * * * * *

                     LEADERSHIP AND PRIORITIZATION

    The reasons for the Administration's leadership on IP enforcement 
and for its prioritization are clear.
    First, few issues are as important to the current and future 
economic strength of the United States as our ability to create and 
protect intellectual property. U.S. IP industries account for over half 
of all U.S. exports. They represent 40% of our economic growth and 
employ 18 million Americans who earn 40% more than the average U.S. 
wage, and a recent study valued U.S. intellectual property at 
approximately $5 trillion--or about half of U.S. GDP. Quite simply, our 
ability to ensure a secure and reliable environment for intellectual 
property around the world is critical to the strength and continued 
expansion of the U.S. economy.
    The enforcement of intellectual property rights also carries great 
consequence for the health and safety of consumers around the world. 
The World Health Organization estimates that 10% of all pharmaceuticals 
available worldwide are counterfeit. The U.S. Federal Aviation 
Administration estimates that 2% of airline parts installed each year 
are fake--or about 520,000 parts. And we have seen counterfeit circuit 
breakers that overheat and explode, brake linings made of wood chips 
and cardboard, and fake power cords. In the world of today's 
sophisticated criminal IP operations, if a product can be easily 
counterfeited, has an immediate demand and provides a good profit 
margin it will be copied. Consumer safety and product quality are 
concerns obviously not on the minds of global IP thieves.
    Finally, the theft of American intellectual property strikes at the 
heart of one of our greatest comparative advantages--our innovative 
capacity. Through the applied talents of American inventors, 
researchers, entrepreneurs, artists and workers we have developed the 
most dynamic and sophisticated economy the world has ever seen.
    And I truly believe the world is a much better place due to these 
efforts. We have delivered life-saving drugs and products that make 
people more productive. We have developed entirely new industries and 
set loose the imaginative power of entrepreneurs everywhere. And, we 
set trends and market best-of-class products to nearly every country in 
the world.
    We value our heritage of innovation and exploration--it is not only 
part of our history; it is the key to our future.
    And this future--a future of innovation, exploration and growth 
that benefits the entire world--rests on a basic, inherent respect for 
intellectual property rights and a system that protects them.
    The Bush Administration's effort to provide a secure and 
predictable global environment for intellectual property is driven by a 
commitment to foster U.S. economic growth, to secure the safety and 
health of consumers everywhere, and an abiding respect for the great 
American innovative spirit that has driven our nation since its 
founding and will determine our future.
                           * * * * *

                 ORGANIZATION AND EFFECTIVE ENGAGEMENT

    This is my first opportunity to testify as the Coordinator for 
International Intellectual Property Enforcement, and I appreciate the 
chance to discuss how the Administration is working to focus and 
leverage our vast capabilities and resources.
    The Office of International Intellectual Property Coordination is 
located at the Department of Commerce, and I report to Commerce 
Secretary Carlos Gutierrez. We also work under the leadership of the 
White House, and our efforts thus far have met with tremendous 
cooperation from the all federal agencies that contribute to our IP 
enforcement efforts.
    Reinforcing the commitment and collaboration that exists within 
this interagency process is the fact that a senior Justice Department 
official is currently serving as the Deputy Coordinator for 
International Intellectual Property Coordination and Customs and Border 
Protection and the Patent and Trademark Office have both provided 
detailees to support our efforts.
    A critical element in our overall coordination is the Strategy 
Targeting Organized Piracy (STOP) Initiative launched by the Bush 
Administration in October 2004. STOP has built an expansive interagency 
process that provides the foundation and focus for all of our efforts. 
This initiative is led by the White House and brings together USTR, the 
Department of Commerce, the Department of Justice, the Department of 
Homeland Security and the State Department. STOP is an attempt to play 
offense in the global fight against piracy and counterfeiting. The 
agencies involved have identified ways to empower U.S. businesses to 
better protect their IP, increase efforts to seize counterfeit goods at 
our borders, pursue criminal enterprises involved in piracy and 
counterfeiting, found innovative ways to work with U.S. industry, and 
aggressively engaged our trading partners to join our efforts.
    STOP has yielded tangible results (Fact Sheet is submitted for the 
record), maintained the commitment of senior Administration officials, 
institutionalized an unprecedented level of coordination within the 
federal government and received attention around the world. The message 
that the STOP Initiative, and indeed our new Office of International 
Intellectual Property Enforcement, allows us to deliver is--the United 
States takes the issue of IP enforcement very seriously, we are 
leveraging all of our resources to address it and we have high 
expectations of all of our global trading partners.
    In addition to the infrastructure put in place by the STOP 
Initiative and reinforced by the Office of International Intellectual 
Property Enforcement, the Administration will seek a reinvigorated role 
for the National Intellectual Property Law Enforcement Coordination 
Council (NIPLECC). NIPLECC is tasked with coordinating domestic and 
international intellectual property law enforcement in order to ensure 
the effective and efficient enforcement of intellectual property in the 
United States and worldwide. NIPLECC has made a number of valuable 
contributions since its creation in 1999 including the development of a 
comprehensive database that includes all recent IP law enforcement 
training provided by the U.S. government to developing and least 
developed nations as well as delivering legislative suggestions to 
improve domestic IP laws related to enforcement. However, there is 
unmet potential and in my role as Director of NIPLECC I look forward to 
working with this Committee to ensure that we are maximizing the 
capabilities of NIPLECC. To begin this effort, I can report that we 
will conduct a meeting of all NIPLECC members in January. This will be 
the most comprehensive NIPLECC meeting since its inception in 1999.
    NIPLECC can play a vital role in our effort by bringing together 
the leaders of the key operational entities within the federal 
government that are responsible for IP enforcement. By establishing 
priorities and objectives at a senior level we will reinforce our day-
to-day activities and ensure that all of the agencies critical to the 
federal government's IP enforcement efforts are closely coordinated and 
committed to a common results-oriented agenda. In addition to the 
existing NIPLECC structure--which is comprised of the Department of 
Justice (Assistant Attorney General of the Criminal Division), the 
Commerce Department (Under Secretary for Intellectual Property and 
Director of the Patent and Trademark Office and Under Secretary for 
International Trade), the Office of the U.S. Trade Representative 
(Deputy USTR), the Department of Homeland Security (Commissioner of 
Customs and Border Protection) and the State Department (Under 
Secretary for Economics, Business and Agricultural Affairs).
                               * * * * *

                           STRATEGY AND FOCUS

    As this Committee clearly understands, the problem of global piracy 
and counterfeiting confronts many industries, exists in many countries 
and demands continuous attention. With finite resources and seemingly 
infinite concerns, how we focus our efforts is crucial. I appreciate 
this opportunity to share with you the key areas which make up the 
Administration's overall Strategy for Targeting Organized Piracy.
    First, we are working to empower America's innovators to secure and 
enforce their rights at home and abroad. Our efforts to provide new 
federal services and assistance include:

          A hotline (1-866-999-HALT) to counsel businesses on 
        how to protect their IP.

          A website (www.stopfakes.gov) and brochure, to 
        provide information and guidance to right holders on how to 
        register and protect their IP in markets around the world.

          ``IP toolkits'' to guide businesses through securing 
        and enforcing their rights in key markets around the world. 
        Available at the www.stopfakes.gov website, toolkits for China, 
        Russia, Mexico, Korea and Taiwan are downloadable.

          Extensive education campaigns across the country to 
        teach small and medium sized enterprises how to secure and 
        protect their rights and where to turn for federal resources 
        and assistance. These seminars have occurred in 20 states and 
        more are planned in 2006.

          An online recordation tool for rights holders to 
        record their trademarks and copyrights with Customs and Border 
        Protection.

          We have launched a China Intellectual Property Rights 
        (IPR) Advisory Program in conjunction with the American Bar 
        Association, the National Association of Manufacturers and the 
        American Chamber of Commerce in China to provide legal counsel 
        for SMEs to protect and enforce their IPR in China.

          Training for U.S. embassy personnel to be effective 
        first responders to IPR issues in order to identify problems 
        abroad and assist rights holders before fakes enter the market 
        and/or supply chain.

    Next, we need to increase our efforts to stop fake and counterfeit 
goods at America's borders. This means:

          Casting a wider, tighter net on counterfeit and 
        pirated goods by implementing new risk assessment models and 
        technologies to stop counterfeit goods at our borders.

          Working with trading partners to share information 
        and improve our capabilities to assess and anticipate risks. We 
        have seen results of this effort with the European Union. At 
        the U.S./EU Economic Ministerial last week, leaders of both 
        governments committed to expand information sharing of customs 
        data. Follow-up work on this commitment has already begun.

    We need to build international support and rules to stem the flow 
of fake and counterfeit goods and keep them out of global supply 
chains. Our efforts here include:

          Commissioning a study by the Organization for 
        Economic Cooperation and Development on the impact of global 
        counterfeiting and piracy.

          Conducting outreach to Canada, the European 
        Commission, France, Germany, Hong Kong, Japan, Korea, Mexico, 
        Singapore and the United Kingdom laying the basis for 
        increasing cooperation on IP enforcement. Outreach to other 
        like-minded countries is underway.

          Facilitating the transfer of IP criminals to justice 
        in America by revising and modernizing mutual legal assistance 
        treaties and extradition treaties with Finland, Sweden, 
        Belgium, Spain, the UK and Luxembourg. Additional treaties are 
        under negotiation.

          Conducting post-entry audits to identify companies 
        vulnerable to IP violations and working with them to correct 
        their faulty business practices.

          Working closely with U.S. industry--namely, the 
        Coalition Against Counterfeiting and Piracy, a U.S. Chamber of 
        Commerce and National Association of Manufacturers led 
        association--on the ``No Trade in Fakes'' program to develop 
        voluntary guidelines companies can use to ensure their supply 
        and distribution chains are free of counterfeits.

    Law enforcement must play a leading role in dismantling criminal 
enterprises that steal intellectual property. We have:

          Pursued numerous operations targeting criminal 
        organizations involved in online piracy and trafficking in 
        counterfeit goods. We have indicted the four leaders of one of 
        the largest counterfeit goods operations ever uncovered in New 
        England--broke up a scheme to sell more than 30,000 luxury 
        goods--including handbags, wallets, sunglasses, coats, shoes, 
        and necklaces, and found the materials to manufacture at least 
        20,000 more counterfeit items.

          Led Operation Site Down, an international online 
        piracy investigation involving more than 90 searches in twelve 
        countries. Such cases have led to numerous arrests and 
        convictions around the globe, seizure of millions of dollars 
        worth of pirated products and the dismantling of criminal 
        operations.

          Led Operation Ocean Crossing, a joint U.S. and 
        Chinese law enforcement action that disrupted an organization 
        trafficking in counterfeit pharmaceuticals. The action resulted 
        in arrests in China and the United States and the capture of 
        hundreds of thousands of fake pharmaceuticals.

          Executed measures to maximize law enforcement's 
        ability to pursue perpetrators of IPR crimes. For example, we 
        increased from 5 to 18 the total number of Computer Hacking and 
        Intellectual Property Units in U.S. Attorneys' Offices across 
        the country. This increased to 229 (one in each federal 
        district) the number of specially trained prosecutors available 
        to focus on IP and high-tech crimes.

          Proposed the Intellectual Property Protection Act of 
        2005 to strengthen criminal intellectual property protection, 
        toughen penalties for repeat copyright criminals, and add 
        critical investigative tools for both criminal and civil 
        enforcement authorities.

    We must reach out to our trading partners and build international 
support. U.S. leadership is critical and we are active on a number of 
fronts:

          We have obtained endorsement of increased protection 
        for IP in multilateral forums such as the G-8 and Asia-Pacific 
        Economic Cooperation forum, and bilateral venues with the 
        European Union and China.

          The past year has resulted in particularly strong 
        commitments from China in a variety of fora. Within the Joint 
        Committee on Commerce and Trade (JCCT) the Chinese have 
        committed to, among other things, address the proliferation of 
        illegal software within government and state-owned enterprises, 
        increase criminal prosecutions for IP violations, enhance 
        cooperation with U.S. law enforcement and join the WIPO 
        Internet Treaties. We have already seen movement on a number of 
        these commitments. Notably, Attorney General Gonzales laid the 
        groundwork for expanded law enforcement cooperation on IP cases 
        during a recent trip to China and China recently sent a 
        delegation to the United States to discuss the steps necessary 
        to accede to the WIPO Internet Treaties. In addition, USTR has 
        recently invoked a procedure under the WTO Agreement on Trade-
        Related Aspects of Intellectual Property Rights to make a 
        formal request for China to provide detailed information 
        regarding their IP enforcement regime. The Japanese and Swiss 
        governments also delivered similar requests to China for 
        enforcement data under the same WTO provision.

          Noting the interest this Committee showed in 
        increased cooperation with the European Union and Japan at its 
        hearing in May, I would like to point to two significant 
        developments. Just last week, Secretary Gutierrez reached an 
        agreement with European leaders to significantly expand the 
        cooperation between the United States and EU to address global 
        piracy through stepped-up commitment to enforcement and 
        information sharing.

          We are increasing the number of U.S. IP attaches 
        abroad in our embassies located in China, India, Brazil and 
        Russia, who will assist U.S. businesses, advocate U.S. 
        intellectual property policy and conduct IPR training.

    Finally, we must educate other governments about intellectual 
property rights:

          The United States has conducted numerous training and 
        capacity building programs working with foreign judges and law 
        enforcement officials from around the world to improve criminal 
        and civil IPR protection. So far, we have conducted over 100 
        IPR enforcement projects and 290 IPR technical-assistance 
        projects around the world, producing real results in IP 
        protection and enforcement.

          We have established a Global Intellectual Property 
        Academy to consolidate and expand intellectual property 
        training programs for foreign judges, enforcement officials, 
        and relevant administrators.
                             * * * * *
    Mr. Chairman, the Bush Administration is committed to stopping 
intellectual property theft and providing businesses the tools they 
need to flourish in the global economy. As I work to coordinate the 
U.S. government's intellectual property enforcement efforts, and with 
your continued support and the partnership of this Committee, we will 
be able to do even more to provide American businesses and innovators 
with the protection they need. America's intellectual property is 
important not just for her national security, but it is also a 
necessary component in ensuring continued U.S. economic growth and 
technological leadership. We must take advantage of the opportunity to 
work together to better protect the knowledge industries of today so 
that we may continue to see the innovations of tomorrow. Thank you very 
much.

    Mr. Smith of Texas. Thank you, Mr. Israel.
    Ms. Espinel.

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

    Ms. Espinel. Thank you. Chairman Smith, Ranking Member 
Berman, and Members of the Committee, thank you for the 
opportunity to address the important issue of the international 
protection and enforcement of intellectual property.
    Stopping counterfeiting and piracy and protecting our 
right-holders is a top priority of this Administration and of 
USTR. My remarks will focus on China and Russia but, time 
permitting, I would also like to provide you with a brief 
overview of our other activities to fight counterfeiting and 
piracy.
    Turning to China, the protection and enforcement of IP 
remains a top issue in our bilateral trade relationship with 
China. It is an issue that has been raised at the highest 
levels of government with the Chinese by both Ambassador 
Portman and by President Bush.
    As you know, each year USTR issues a Special 301 Report 
that catalogues the IP problems of the world's worst offenders. 
In 2004, because of our level of concern at China's continued 
lack of progress, USTR initiated a more intensive review of 
China's IP regime, known as an Out-of-Cycle Review.
    On April 29th, USTR reported the results of that review. I 
described the results of the review and the actions we 
announced that we would take in my earlier testimony. Today, I 
would like to update you on the progress that has been made 
since then on the actions that we set out in the 301 Report.
    First, we committed to investigate potential WTO dispute 
settlement cases. In the 301 Report, we announced that we would 
be working closely with our industry, with a view toward WTO 
dispute settlement. Cases at the WTO require extensive research 
and data collection.
    We have been working closely with our industry to develop 
the information, and have, for example, sent a USTR legal team 
to China to meet with industry enforcement experts on the 
ground. We anticipate that those industries that have been 
working closely with us will continue to do so.
    We appreciate greatly the Chairman's support of this 
partnership. Our time table for determining whether or not a 
WTO case against China is the most effective approach is 
dependent on the effectiveness of these efforts.
    Second, we elevated China to the Priority Watch List, as an 
indication of our significant level of concern.
    Third, we pledged to intensify work to the JCCT IPR Working 
Group. Since April, we have had three meetings of the JCCT, and 
have seen progress at these meetings.
    My complete testimony sets out a number of commitments made 
by China at the July JCCT following the experts' meeting in 
May, and our elevation of China to the Priority Watch List. I 
will highlight a few of them.
    China agreed, among other things:
    To increase criminal prosecutions;
    To reduce exports of infringing goods;
    To establish an IPR ombudsman in the Chinese Embassy to 
assist small- and medium-sized companies in particular;
    To join the WIPO Internet treaties in 2006; and
    To clarify some deficiencies in the judicial 
interpretations.
    Since July, in order to move these commitments forward, 
China has done several things, including: Making a proposal for 
customs cooperation;
    They have explained to us their process to ensure legal use 
of software by the government;
    They have sent us Internet regulations in order to come 
into compliance with the WIPO Internet treaties, and have 
committed to work with us on them;
    They have told us that the IPR specialist to help small- 
and medium-sized businesses will be in Washington by the end of 
this year; and
    They have been working on regulations that transfer 
administrative cases over to the criminal process, as part of 
the effort to increase criminal prosecutions.
    We have also seen some increased enforcement, particularly 
against counterfeiting; for example, in this year's Mountain 
Eagle campaign. But we have made clear to China that we need 
sustained enforcement and that annual enforcement campaigns 
will not be sufficient.
    Fourth, I would like to highlight the TRIPS Transparency 
Provision commitment that we made. We announced that we would 
be filing a formal request under article 63 of the TRIPS 
Agreement, and we did so on October 26. This request seeks 
additional information on China's IP enforcement efforts.
    In an example of our work to enhance international 
cooperation, we were joined by Japan and Switzerland, who 
submitted simultaneous similar requests. These requests seek 
detailed information from China on its reported IPR enforcement 
efforts.
    China's response to these requests, anticipated in early 
2006, will be a test of whether it is serious about resolving 
the rampant IP infringement throughout its country.
    Turning to Russia, enforcement in both the copyright and 
trademark sectors continues to be a significant problem in 
Russia. As a result, Russia is designated as a Priority Watch 
List country in the Special 301 Report, and an Out-of-Cycle 
Review is being conducted this year to monitor progress. We are 
also continuing inter-agency review of a petition filed by the 
U.S. copyright industries to withdraw some or all of Russia's 
GSP benefits.
    USTR and other agencies have been, and will continue to be, 
very engaged with the Russian government at all levels to 
develop an effective intellectual property regime and 
strengthen enforcement in Russia. Intellectual property has 
been raised as a priority issue by Ambassador Portman and by 
President Bush.
    We are working on IP issues in Russia and on a number of 
fronts, including in the context of Russia's WTO accession 
negotiations. We have made it clear to the Russian government 
that progress on intellectual property will be necessary in 
order to complete the accession process.
    Our work has brought about some improvements; particularly 
with respect to the content of Russia's laws. But enforcement 
of these laws is critical. We have seen some recent indications 
of progress, and we are monitoring to see whether or not Russia 
sustains and increases these efforts. We will continue to push, 
and have made clear to Russia that we need concrete results.
    USTR has a number of other tools at our disposal. I would 
like to give a very brief overview of these. As you know----
    Mr. Smith of Texas. Ms. Espinel, I'm afraid your time has 
expired.
    Ms. Espinel. All right.
    Mr. Smith of Texas. Now, we'll look forward to hearing the 
rest of your testimony when we ask you questions, if that's all 
right.
    Ms. Espinel. Thank you.
    [The prepared statement of Ms. Espinel follows:]

                 Prepared Statement of Victoria Espinel




    Mr. Smith of Texas. Thank you.
    Mr. Smith.

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

    Mr. Smith. Mr. Chairman, Mr. Berman, Members of the 
Subcommittee, the IIPA is a coalition of seven trade 
associations representing now over 1,900 U.S. copyright-based 
companies. Thank you once again for the opportunity to appear 
here to review the record of China and Russia on enforcing 
their copyright laws to reduce among the highest piracy rates 
in the world.
    I'm afraid anything I add here won't even approach the 
eloquence with which the Chairman and the Ranking Member and 
Mr. Issa described the endemic piracy problems that we face in 
these two countries. We reported to you last May that our 
situation in both these countries was dire, at best. Our 
industries were losing at least $2\1/2\ billion a year in 
China, $1.7 billion in Russia; piracy rates were 90 percent in 
China, and between 70 and 90 percent in Russia, depending on 
the sector involved.
    You've asked us to give you a report card on progress over 
the last 6 months. We regret to report that there has been 
negligible progress in China, and the situation in Russia has 
actually gotten worse. Neither country has yet found the 
political will to act.
    Let me turn first to China. In my written statement, we 
outline what has happened--or more accurately, not happened--in 
the last 6 months. Some report that the government is showing 
greater awareness of piracy and is being more cooperative. This 
is progress; no question. But have the Chinese authorities 
commenced a barrage of criminal cases against pirates? No.
    Have they sought to provide greater market access? China is 
the most closed market in the world to copyright-based 
industries. The answer again is, no. In fact, the U.S. 
Government in the last JCCT round was told flat-out, no, there 
would be no market liberalization in these sectors.
    In my written testimony, and Ms. Espinel's as well, we 
detail what happened at the July 2005 JCCT meeting. There was 
some progress made, but, in our view, most were in the nature 
of future commitments; not what we really seek, a report on 
specific actions being taken to ``significantly reduce IPR 
infringements.''
    We are continually frustrated by the lack of transparency 
in the Chinese enforcement system. One of the reasons that USTR 
went to the article 63 process at the TRIPS Council was to, 
hopefully, get a real understanding of how the Chinese system 
works by getting meaningful facts about all the vast numbers of 
cases they cite to us.
    At the recent IPR Working Group meeting in November in 
Beijing, it was reported to us that the Ministry of Public 
Security provided statistics on some of its enforcement 
actions. They sound impressive, but there was no report on how 
many copyright cases were brought, how many persons were 
convicted for piracy of U.S. copyrighted works, or what 
penalties were meted out.
    We have no alternative but to conclude that the number of 
cases brought was very close to zero. And to the best of our 
knowledge, there have only been two convictions for piracy of 
U.S. copyrighted works under article 217 of the criminal law 
since China joined the WTO, and none that we are aware of in 
the last 6 months.
    Our view is that China's failure to bring criminal cases 
against copyright piracy on a commercial scale--the TRIPS 
standard--puts it in violation of its obligations under the WTO 
TRIPS Agreement. We also believe that China's criminal law, on 
its face, is in violation of TRIPS.
    Not being able to do business in the Chinese market is 
deeply frustrating to our companies. It is inexcusable that 
China continues to permit the wholesale theft of U.S. 
intellectual property, the key export of our country, while 
continuing to enjoy the benefits of our open market for Chinese 
goods--so open that China enjoyed a $162 billion surplus with 
us in 2004. As we noted earlier, this is an issue of political 
will, and we have not seen it yet.
    Turning to Russia, a market which has deteriorated for us 
in the last 6 months, some salient facts:
    In the last 6 months, Russia has added at least eight--and 
by some accounts, more--optical disc plants to the 34 we 
reported last May. Nine of these plants--and maybe up to 18--
are located on the facilities of the Russian government, as was 
described. Pirate optical discs forensically sourced from 
Russia have been found in 27 countries.
    We have asked the Russian government to inspect these 
factories, seize pirate products, seize the equipment used in 
these infringements, and prosecute the plant owners; while 
imposing deterrent penalties that would place every Russian 
plant owner and their associates in real jeopardy. This has 
just not happened.
    In recent weeks, the Russian authorities reported taking 
nine raids against OD plants. This is positive, but the results 
are telling. Much of the seized material ended up back on the 
streets. No equipment was seized. We believe that most of these 
plants continue to operate. This has been the typical situation 
in 2004, and so far in 2005.
    We know that over the years a few people employed by these 
plants were prosecuted and convicted. But virtually all have 
received suspended sentences. There is simply no deterrence in 
the Russian system, and until there is the political will to 
change that, we cannot expect much change.
    Fortunately, we have ample tools to help Russia, hopefully, 
find that political will to enforce the law. In passing House 
Congressional Resolution 230 by a near unanimous bipartisan 
vote in the House of Representatives on November 9--thanks to 
Mr. Issa and all of you--the Administration has been delivered 
a clear message: Until Russia takes effective enforcement 
action to reduce this piracy, it should not be admitted to the 
WTO and receive the trade benefits accorded WTO members. We 
cannot make the same mistake that was made with China: 
permitting Russia to enter the WTO without undertaking 
meaningful and WTO/TRIPS compatible enforcement.
    It has also sent a clear message that Russia should not be 
eligible for over $600 million--that's January to September 
2005--in GSP benefits. IIPA's GSP petition is 5 years old. It 
has not been acted on, and piracy has gotten worse in Russia. 
IIPA just testified at another GSP hearing looking into 
Russia's eligibility. We asked again for benefits to be 
withdrawn. It's now time to act, and for the Administration to 
remove these benefits.
    The U.S. Government also has huge leverage under Special 
301. IIPA has recommended that Russia be designed a Priority 
Foreign Country, after the ongoing Out-of-Cycle Review. If no 
actions are taken, Special 301 permits the levying of 
retaliatory sanctions against such named country.
    We cannot allow Russia to continue to feel invulnerable, at 
the same time as they do nothing to halt massive theft of our 
intellectual property.
    Thank you again, Mr. Chairman, for showing such a great and 
abiding interest in nurturing the creative and innovative 
individuals and industries that have become so important to our 
culture, our technological future, our economic growth, and to 
job creation. I'd be pleased to answer any questions. Thank 
you.
    [The prepared statement of Mr. Smith follows:]

                  Prepared Statement of Eric H. Smith




                               ATTACHMENT



    Mr. Smith of Texas. Thank you, Mr. Smith. I have to observe 
that I noticed, Mr. Smith and Ms. Borsten, that you both went 
to Berkeley. And it's just nice to see two graduates of 
Berkeley in favor of any kind of property rights; particularly 
intellectual property rights. [Laughter.]
    And that's not really a slight, but goes more to the 
reputation perhaps of one of the best institutions in the 
country.
    Ms. Borsten.

   TESTIMONY OF JOAN BORSTEN, PRESIDENT, FILMS BY JOVE, INC.

    Ms. Borsten. Chairman Smith, Congressman Berman, and other 
distinguished Members of the Subcommittee, I want to thank you 
for the invitation to appear before you again.
    Despite three U.S. Federal Court decisions in our favor, my 
company, Films by Jove, continues to be threatened with the 
loss of our investment by the Russian government. In May 1992, 
Films by Jove acquired rights to distribute internationally an 
award-winning library of more than 1,200 Soviet animated films. 
Most of these films were little known outside the former 
Eastern Bloc. Our contract required that we restore and 
reformat the films for the international market, and that we 
pay our Russian partners significant acquisition fees and 
profits.
    Our success drew the attention of the Russian Federation 
officials, who wanted to bring the lucrative business that we 
developed under their own control. In 1999, the Russian 
government deliberately formed a new state-owned animation 
studio with the same name as the studio from which we had 
licensed the rights back in 1992.
    In 2000, this state-owned studio, backed by the ministry of 
culture, joined forces against us as a third party in a lawsuit 
we had initiated in the New York Federal Court to end illegal 
video duplication by a major Russian-American video pirate, a 
convicted felon. The new studio told Judge David Trager that it 
was the sole legitimate copyright holder of the animated films, 
and that we were the pirates.
    In August 2001, Judge Trager concluded that we had signed 
our 1992 contract with the only possible copyright holder of 
the animated films. The following year, the Russian studio 
requested that Judge Trager reconsider his ruling, on the basis 
of a new decision by Russia's highest commercial court. That 
ruling cancelled, without explanation, certain lower court 
decisions on which Judge Trager had relied.
    To counter this step, we presented the court with a 
confidential document which provided details of a secret 
meeting at the Kremlin about securing the animation rights for 
the new studio. The secret meeting was attended by a 
representative of the office of the chief justice. It was also 
attended by the Minister of Culture, his two deputies and their 
lawyer, representatives of the State Property Ministry, the 
State Prosecutor's Office, the Russian Patent Bureau, the 
presidential administration, and the director of the new state-
owned studio. At the meeting, the Deputy Prime Minister 
assigned the chief justice the task of making sure the courts 
ruled in favor of the state.
    The last time I testified, we were still waiting for Judge 
Trager's decision. In April 2003, he denied their request for 
consideration, writing, ``It is apparent that the High 
Arbitrazh Court's decision was strongly influenced, if not 
coerced, by the efforts of various Russian government officials 
seeking to promote state interests.'' Under these 
circumstances, the high court's decision is entitled to no 
deference.
    Nine months later, the Prime Minister of Russia signed a 
directive retroactively amending the 1999 directive that had 
created the new state-owned studio, now to include animation 
copyrights. According to both Soviet and post-Soviet laws, the 
state did not have those copyrights to give, either in 1999 or 
in 2003.
    The state-owned studio again petitioned Judge Trager for 
reconsideration. In their brief, attorneys for the state-owned 
studio warned Judge Trager that the Prime Minister's directive 
``strongly suggests that the Russian government is concerned 
about what has happened in this U.S. court.''
    In November 2004, Judge Trager again declined 
reconsideration, writing, ``It would contradict the very 
principles at the foundation of the separation of powers 
doctrine to allow a foreign state to engage in activities that 
the United States courts would not tolerate from the U.S. 
Legislature.''
    The pirates settled. The state studio did not appeal. But 
the Russian government continued its efforts against us. 
Indeed, their recent actions have been most contradictory. One 
moment, they propose settlement; and the next moment, they 
resume obstructionism and hostility.
    In October this year, we signed a memorandum of 
understanding, by which the new studio recognized our 1992 
contract and its amendments. One month later, the Russian side 
suddenly began to demand additional documents in what we fear 
might turn out to be a renewed challenge to our rights.
    We've recommended numerous times to the Russian government 
that if it is so important for the animation library to be 
controlled by a Russian state-owned organization, they should 
come to the negotiating table and buy us out of our contract.
    Despite the difficulties that I have outlined, since Judge 
Trager's decision there has been progress in building 
protection for intellectual property rights of U.S. investors 
in Russia. It is now quite possible that in the future U.S. 
companies harmed by Russian non-enforcement of their 
intellectual properties will be able to use U.S. courts to 
obtain redress of their grievances. Recently, both the Second 
Circuit and the Colorado Supreme Court reversed lower court 
decisions that had found the Russian courts to be adequate 
alternative forums for property disputes.
    I urge this Committee and Congress not to underestimate the 
ruthlessness and implacability of Russian efforts to undermine 
property rights, especially intellectual property rights.
    I want to thank the Subcommittee for giving me the 
opportunity to testify today. And I'll be happy to answer any 
of your questions.
    [The prepared statement of Ms. Borsten follows:]

                   Prepared Statement of Joan Borsten



    Mr. Smith of Texas. Thank you, Ms. Borsten.
    Mr. Israel, let me direct my first comment to you. And that 
is, I think it is worthy of emphasizing a couple of figures 
that you used in your prepared testimony. And in fact, I've 
used similar figures when I've made speeches on this subject, 
as well.
    The first is that the United States intellectual property 
industries account for over half of all U.S. exports, and 
represent 40 percent of our economic growth. The figure I've 
been using is actually 30 percent, and I just wondered what 
your source was for the 40, which I like better.
    Mr. Israel. Thank you, Mr. Chairman. I'd be happy to 
provide you the specific footnote to that. I believe that's a 
study that was done by the U.S. Federal Reserve that looked at 
economic growth, I think in the latter half of the 1990's. But 
on the 40-percent number, I'd be happy to follow up to you and 
the Committee on that.
    Mr. Smith of Texas. Okay. Great, if you would. And would 
you do the same in regard to the estimated IP theft cost to 
United States businesses of approximately $250 billion 
annually? And of course, the result in hundreds of thousands of 
lost American jobs, I'm familiar with that. But the $250 
billion figure I think is, again, eye-catching, and if you 
could give us the source on that, as well.
    Mr. Israel. I will certainly do it.
    Mr. Smith of Texas. Ms. Espinel, let me direct most of my 
questions to you today, just because of your position. You say 
in your testimony that we are working on IPR issues in the 
context of Russia's WTO accession negotiations. We have 
continuing concerns that Russia's current IPR regime does not 
meet WTO requirements.
    I assume today you would oppose the entry of Russia into 
the World Trade Organization, based upon its current record; 
would you not?
    Ms. Espinel. I would certainly say that Russia needs to 
make considerable progress----
    Mr. Smith of Texas. Okay, but they're not----
    Ms. Espinel [continuing]. As we, including Ambassador 
Portman, have made clear.
    Mr. Smith of Texas. You would not consider them in 
sufficient compliance today to recommend their entry into WTO?
    Ms. Espinel. We believe more progress needs to be made.
    Mr. Smith of Texas. I'm sorry?
    Ms. Espinel. We believe more progress needs to be made.
    Mr. Smith of Texas. Okay. Do you have any ideas when that 
progress would be sufficient to justify their consideration?
    Ms. Espinel. I suppose a lot of that depends on Russia. I 
mean, we're working very hard on the accession negotiation, 
obviously, but we've made it very clear to them that we need a 
good agreement, in order to be able to complete the process.
    Mr. Smith of Texas. Mr. Smith in his testimony raised, or 
made three recommendations, and let me follow up on two of 
them. They overlap what I was going to ask you about. He says 
that IIPA believes that after 9 years on the Priority Watch 
List, it is time for the United States Government to take a 
different approach to Russia's inability or unwillingness to 
act. In this case, recommendation, designate Russia as a 
Priority Foreign Country, after the ongoing Out-of-Cycle Review 
by USTR. Why would you not so designate Russia?
    Ms. Espinel. Well, we would consider using all of the 
options that we have against Russia. I think we would consider 
not so designating Russia if we believed that progress is being 
made, or if we believed that designating Russia as a PFC would 
not be the most effective way to achieve what we want to 
achieve, which is progress in Russia.
    Mr. Smith of Texas. The other recommendation was to deny 
Russia's eligibility to Generalized System of Preference duty 
free trade benefits. When will that decision be made?
    Ms. Espinel. There is an ongoing review of GSP, which the 
USTR is taking very seriously. There was a hearing actually----
    Mr. Smith of Texas. Is there a deadline for when that 
review will be complete?
    Ms. Espinel. The general GSP deadline, the regular GSP 
deadline is June 30th for decisions. That doesn't necessarily, 
though, have to be Russia's deadline. There could be a decision 
made earlier than that.
    Mr. Smith of Texas. That's good news. June 30th, or perhaps 
before.
    Ms. Espinel. We would certainly anticipate that a decision 
would be made by June, at the latest.
    Mr. Smith of Texas. June 30th at the latest? Okay. Good. 
And a question on China. If we are not using existing WTO trade 
dispute mechanisms against China, which is widely perceived as 
among the worst global IPR offenders, then of what value are 
the WTO mechanisms?
    Ms. Espinel. Well, I would say I think even the threat of 
WTO dispute settlement, of which China is well aware, is an 
effective tool.
    Mr. Smith of Texas. Well, the threats, both to China and 
Russia, just don't seem to be manifested in much of a change in 
their conduct. And so I think it's going to require tougher 
actions on your part, on the part of our Government, if we are 
going to get the results that we want.
    Ms. Espinel. I think we would certainly agree that there is 
an enormous amount of work that remains to be done. We have 
seen some recent indications of progress with China and with 
Russia. Although with Russia I would like to emphasize that 
those signs of progress are truly very, very recent; so 
obviously, it's going to be critical to see if Russia has the 
ability to not just sustain that, but actually increase it 
significantly.
    With respect to WTO settlement, their dispute settlement 
specifically with China, as you know, it is something that we 
are working quite closely with our industry to develop our WTO 
options. And as I said before, if we, in consultation with our 
industry and in consultation with you and the rest of Congress, 
believe that's the most effective way to address the problem, 
we will move forward.
    Mr. Smith of Texas. Okay. I would guess you would get 
widespread support by Congress to take some strong actions. 
Thank you, Ms. Espinel.
    The gentleman from California, Mr. Berman, is recognized 
for his questions.
    Mr. Berman. Well, thank you very much, Mr. Chairman. First, 
Mr. Israel and Ms. Espinel, you've heard Ms. Borsten, the story 
of her saga in dealing with the Russians and their sale of 
these copyrights and then their refusal to acknowledge it, 
their creation of an entity to continue to produce them.
    I'm wondering if, following this hearing, you or your 
offices--I think Commerce only because commercial attaches in 
our embassy in Moscow; the Trade Representative, because of 
your ongoing dialogue--in addition to the broader issues, help 
the Russians understand the importance of this specific issue 
in terms of at least a good example of how they respect 
copyrights and contracts. Would you be willing to have your 
offices follow up in pursuing that?
    Mr. Israel. Certainly, Congressman. And my understanding is 
that Films by Jove has worked with the U.S. Embassy in Russia.
    Mr. Berman. Yes.
    Mr. Israel. Previously, I know Ambassador Vershbow was 
personally engaged, and commercial offices in Russia have been 
engaged, as well. We're certainly happy to take onboard recent 
activity and any developing needs that the company may have for 
U.S. engagement, and do any follow-up we can.
    Mr. Berman. Great.
    Ms. Espinel. As would USTR.
    Mr. Berman. Good. This issue about progress is being made, 
on China, they made a number of commitments: increased criminal 
prosecutions for IPR violations, relative to the total number 
of IPR administrative enforcement cases. They agreed to do 
that. Have they?
    Ms. Espinel. In order to do that--Well, one of the steps 
that they need in order to do that is to have regulations in 
place that will transfer cases that are put into the 
administrative system, about which we have serious concerns 
that it's not sufficiently deterrent----
    Mr. Berman. Are those regulations in place?
    Ms. Espinel. Those regulations are in process. They have 
drafted them. We are reviewing them. They are moving forward on 
them.
    Mr. Berman. Reduce exports of infringing goods by issuing 
regulations to ensure the timely transfer of cases. That's what 
you're referring to for criminal investigation?
    Ms. Espinel. There are several regulations that China is in 
the process of drafting as a result of the commitments in the 
JCCT, including with respect to transfer of administrative 
cases to the criminal process, export regulations, and Internet 
regulations in order to come into compliance with the WIPO 
Internet treaties.
    Mr. Berman. And at this particular point, none of these 
regulations are in place?
    Ms. Espinel. None of these regulations are yet in place.
    Mr. Berman. Improve national police coordination by 
establishing a leading group in the ministry of public security 
responsible for overall research, planning, and coordination of 
all IPR criminal enforcement, to ensure a nationwide 
enforcement effort. Have they created such a group in the 
ministry of public security?
    Ms. Espinel. I believe that has been concluded.
    Mr. Berman. Four, enhance cooperation on law enforcement 
matters with U.S. by establishing a bilateral IPR law 
enforcement working group focusing on the reduction of cross-
border infringement activities. Has that been done?
    Ms. Espinel. Yes.
    Mr. Berman. Expand an ongoing initiative to aggressively 
counter piracy of movies and audiovisual products.
    Ms. Espinel. Yes.
    Mr. Berman. It's been----
    Ms. Espinel. It has. I should note, I suppose, that they 
have been some mixed results from that. There's been some very 
good results. The results of the campaign in Beijing were not 
as strong as we would have liked to have seen. The results in 
Shanghai and, I believe, Shenjin [ph] were actually quite 
positive.
    But again, I would like to emphasize China--whatever signs 
of progress there we consider to be, obviously, good, but 
nascent. I mean, what is critical is that they sustain them.
    Mr. Berman. Do you have benchmarks in mind for determining 
whether the progress is real and meaningful and substantial? I 
sound like we're talking about Iraq, but I'm not. We're talking 
about in terms of dealing with the problem of piracy.
    In a percentage context, a reduction, or in an absolute 
number context, do you have some kind of benchmarks in mind for 
deciding whether or not there is enough progress to justify 
continuing not to bring a WTO case?
    Ms. Espinel. Well, I guess, in my view, there are two 
categories of benchmarks. One is the specific commitments that 
China has made to us, and whether or not they follow through on 
those in terms of, for example, improving their legislation, or 
putting certain processes in place. And the second would be----
    Mr. Berman. What about----
    Ms. Espinel [continuing]. Results in terms of actually 
seeing piracy and counterfeiting reduce; whether that's 
measured by increased sales of our products, or measured by 
industry's assessment of the piracy rates falling. But I would 
say both of those, I think, are important components to measure 
progress.
    Mr. Berman. And on the latter, what have you seen so far, 
on the quantified benchmarks, the reduction in piracy, the 
increase in acquisition of legal goods?
    Ms. Espinel. I'm not aware that industry has done an 
overall survey since the last time I was before this testimony 
[sic], so I don't have any new figures or statistics to cite.
    Mr. Berman. Well, Mr. Smith, if you apply that quantifiable 
standard, what would you say about China at this point?
    Mr. Smith. Well, for 2004, at least, the piracy rate went 
down a small notch in the recording industry, but stayed pretty 
constant for everything else. And we don't expect much of a 
change in 2005, simply because we haven't seen in our area the 
kind of criminal enforcement that the Chinese have been 
promising for a long time now. We just haven't seen it.
    Mr. Berman. Well, I think my time has expired, Mr. 
Chairman.
    Mr. Smith of Texas. The gentleman's time has in fact 
expired. And the gentleman from California, Mr. Schiff, is 
recognized for his questions.
    Mr. Schiff. Thank you, Mr. Chairman. And really, the 
question I had is the question that Howard concluded with.
    But I'd like to see if I can get a few more specifics on 
it, because I think, both with respect to China and Russia and 
for our own purposes, unless there are clear expectations 
expressed to China and Russia about what we would like to see 
happen--in Russia's case vis-a-vis WTO and GSP; in China's 
case, whether there is an actual case filed in the WTO--my 
guess is, from my limited meetings with Chinese officials both 
there and here, they'll continue to tread water as long as they 
feel they can tread water. It won't injure the trading 
relationship.
    And I think the same is true of Russia. Unless they have 
clear benchmarks of what we expect, I don't think things are 
going to change appreciably. But I do think that if we set out 
clear benchmarks of what we expect, that we might get a change.
    And I know that you've asked the industry to go about doing 
the documentation to prepare for a WTO case. And I'm sure that 
will be useful; although the facts seem to be pretty 
overwhelming. If you can't make a WTO case in China, you can't 
make a WTO case anywhere.
    And it seems to me that this is really designed by time, to 
tread water a little bit. But again, I think unless we have a 
clear set of benchmarks of what we expect--And it might be 
measured in terms of reduction of piracy. I don't know that it 
can be measured in the sense of increased sales of our 
products. That, although a desirable metric, doesn't seem like 
a legitimate metric, in terms of their piracy problems.
    But what more specific and quantifiable things either have 
you asked for, or can you ask for, where China can be given the 
very clear alternatives of ``Meet these expectations, or we'll 
support a WTO case,'' or in Russia's case, their accession? 
What are the clear metrics that either you have offered or that 
we can now offer?
    Ms. Espinel. Well, first, I would say that I absolutely 
agree with you, that I think having clear benchmarks or a clear 
path forward is critical for China, Russia and, frankly, for 
all the countries where we're facing this challenge, so they 
have a clear understanding of what we think is necessary in 
order for them to address that.
    With China and Russia, we have done that, I think, both at 
what I would describe as the macro level and a micro level. I 
mean, we've made clear to China and Russia that we need to see 
improvements and that improvements will be measured by seeing 
the piracy rates come down.
    We have, in addition to that, given them very detailed 
lists of either improvements in legislation, administrative 
processes, other very detailed improvements they need to make 
to their overall system in order to make their system more 
effective. And we will be measuring progress both by decrease 
in piracy rates and by their ability to move forward on the 
very specific action items that we've given both of them.
    Mr. Schiff. Can you share with us--the Chairman asked what 
the deadline was for determination on the GSP issue. It's June 
30th; it has to be decided by June 30th. Is that----
    Ms. Espinel. That is the general deadline for the GSP 
review processes that are outstanding. That's not specific to 
ISP, just specific to the GSP review process as a whole.
    Mr. Schiff. So on or before that point, you'll have to make 
a decision about whether to try to revoke GSP status. Can you 
let us know what criteria you've enumerated with the Russians, 
so that we can hold you accountable and that we can together 
hold the Russians accountable?
    Because as we get closer to June 30th, there may be a 
decision made to wait till the next June 30th; which is a 
decision of sorts that we've made, I guess, over several years, 
because we haven't taken action in this area. But it would be 
useful, I think, for us and for the Russians to know precisely 
what we expect of them.
    My impression, again, with respect to China--and it's 
probably similar to Russia--is that if we merely talk about 
improvement, they will give us a very good presentation about 
all the ways they've improved; and yet, at the bottom line, the 
piracy won't have changed very much.
    So either today or in written form, I'd really like to see 
what specifically we expect to take place before June 30th with 
respect to Russia, what specifically we expect China to 
accomplish in terms of number of criminal prosecutions or 
whatever standard is the right standard to use, so that we can 
encourage, foster, push a WTO case or any other kind of 
enforcement action, so that we can get concrete results. I 
invite any of you to respond to that.
    Mr. Israel. Congressman, I would add one insight based on 
something you brought up in the initial part of your question 
to Victoria; which is the sales of U.S. goods and services into 
these markets, I think, is a very critical piece of evidence we 
need to review and we need to look at. And it's something that 
working with industry is the key vehicle that's going to 
present those types of results.
    When we talk to the Chinese about bringing their government 
infrastructure into an environment where they use legitimate 
and legal software, I think the most effective determinant of 
their progress on that, or one of the most effective 
determinants, is: are leading American software companies who 
are actively looking to get into that market having better 
results?
    The fact that the Chinese market is the second leading 
market, the second largest market for PCs in the world, but the 
25th largest market for software in the world, obviously tells 
us that in between two and 25 there's a lot of piracy going on.
    So I do think it's important. And one thing we're trying to 
focus on doing is work with U.S. industry to get some 
indicators from them.
    Mr. Schiff. And I don't disagree with that. What I mean is 
that I don't know that we can tell China that, unless we sell 
``X'' amount of products, we're going to bring a WTO case for 
infringement. I don't know we can show that causal effect. But 
I do think we ought to maximize our pressure to open the 
markets in China, for exactly the reason you mentioned.
    Ms. Espinel. If I could just add to the specifics, 
particularly with respect to Russia, in terms of benchmarks 
that we're looking for, one thing that we've made very clear to 
Russia is that they have a massive optical disc piracy problem, 
and that we need to see the plants shut. But in addition to 
that, we need to see the equipment seized and destroyed, so the 
plants can't reopen. There are raids and prosecutions, but we 
need to see people actually be put in jail.
    There does seem to be--again, this is recent--greater 
cooperation on the law enforcement side. It may be that the 
prosecutors are the weakest link in this system at this point 
in time. But I think both on the OD plants--on the optical disc 
plants--and on tackling the Internet piracy problem that Russia 
has, those are two key items that we have made quite clear to 
Russia we see as priority issues that they have to get 
addressed.
    Mr. Schiff. Thank you.
    Mr. Smith of Texas. Thank you, Mr. Schiff.
    The gentleman from California, Mr. Issa, is recognized for 
his questions.
    Mr. Issa. Thank you, Mr. Chairman. I sit on the 
International Relations Committee, in addition to the Judiciary 
Committee and, oddly enough, the Government Reform Committee. 
And all three of our Committees are looking at and trying to 
deal with: What do we do with two nations, both former classic 
Stalinist dictatorships, that seem to have absolutely no real 
intent, beyond passing laws, but intent to enforce those laws 
when it comes to intellectual property, when it comes, to be 
honest, with not spying on us and not taking not just 
intellectual property in the sense of DVDs and CDs, but 
technology to do just about anything to improve their economy?
    And I always want to be careful when I suggest this, but I 
want to liken back to the Cold War. During the Cold War, we 
held these two--China as it is today obviously, and the old 
Soviet Union, but substantially the Moscow government--we held 
them to be totalitarian dictatorships. And because we held them 
to be totalitarian dictatorships, we held them responsible for 
any and all actions that occurred within their government 
structure and within anything that might be called a private 
sector. Any person granted the ability to leave their country, 
their ships, including their maritime commercial ships, we held 
them all responsible.
    Isn't it true that, particularly with Putin's step away 
from a free market, that Russia now is looking much more like a 
government that central control is certainly possible, if not 
always executed; and in the case of China, there's 
substantially no difference in the organization that we dealt 
with in the Cold War, a strong central government with strong 
regional governments, but all of which reported back, in the 
case of China, to the political structure of the Communist 
Party?
    If that's true, and I believe it is, shouldn't we view the 
Cold War tactic of simply saying to their governments, ``We 
hold you responsible, and any failure will be considered to be 
a willful act,'' and a failure to make these changes, or 
substantial progress on these changes, in a timely fashion, 
should result in an appropriate raising on an economic basis of 
the curtain that we so long were viewing in front of us and 
between us? Mr. Israel, I guess we'll start with you.
    Mr. Israel. Thank you, Congressman. I think, you know, the 
historical contexts that come into play with these two 
countries in particular certainly have to be considered. And I 
know the entire Federal Government--the Administration, as well 
as Congress--consider these components when you think about how 
to address the issues going forward.
    I do think, in addition to some of the things you laid out, 
one key factor to consider is the significant current presence 
and potential presence and desired presence of U.S. business 
and industry working in these markets. These are, as you're 
well aware, sir, of course, very large and lucrative markets, 
particularly in the case of China, with very large U.S. 
investments there.
    So I do think the posture that the United States takes 
toward these two countries has, obviously, evolved and changed 
a good deal over the most recent years, as the trading 
relationship has become extremely intertwined and complex 
between the countries.
    And I do think we are looking. And I believe that in the 
coordination model that we're trying to develop we are looking 
to make sure that across the entire U.S. Federal Government the 
relationships that we have with these two countries, when given 
an opportunity to stress the significance of intellectual 
property rights, what it means, not in terms of how these two 
countries view it, but how in terms the United States views it 
and, indeed, most of the industrialized, sophisticated 
economies of the world view intellectual property.
    One thing that I think is a bit of a piece of leverage with 
both Russia and China is they desire to be viewed on the world 
stage as sophisticated global economies.
    Mr. Issa. Market economies.
    Mr. Israel. Market economies, to use the common term that 
we hear quite a bit from both. And their leaders desire that. 
And we have stressed that there is a certain pattern of 
behavior; there's rules of law; there's ways you engage in a 
global economy that fit the norms of the modern economy. And I 
do think that's something we need to continue to stress with 
both these countries.
    And I do think it's an evolving set of relationships, 
clearly. And there are new rules and new processes we're 
engaging in and trying to use every opportunity we have across 
all the relationship venues with these two countries to stress 
the priorities that we have; IPR being nearly first on every 
one of those lists.
    Mr. Issa. So in order to focus the answers, because I don't 
want to monopolize the time, the question really, though, is 
the government-to-government relationship; not as a market 
economy to market economy where we say, ``Make your best 
efforts, but we understand you have an independent judiciary, 
an independent legislature, an independent business climate,'' 
all of which really doesn't exist in China. And I've traveled 
and done business in China extensively for over 20 years, and 
now traveled to Russia and looked at the changing Russia. These 
are not market economies.
    Business-to-business, I understand. Government-to-
government, should we hold these governments responsible? And 
if so, should that message become the obvious message, which 
is, ``We don't want to hear about best efforts; we expect your 
government to perform the same as when, during the Cold War, we 
said if your submarine drifts outside its zone, we will 
consider it a provocative action, not an accident, because we 
expect you to keep your government activities and your fishing 
boats that used to prowl the West Coast--we expect you to make 
sure that they obey international law.'' So the question really 
is government-to-government. Ms. Espinel?
    Ms. Espinel. Well, I guess, to me, the question you ask is: 
Isn't this really a matter of political will, high-level 
political will?
    Mr. Issa. Exactly.
    Ms. Espinel. And I would agree with you. And I think we 
understand that with both Russia and China it is critical that 
this come from the highest level of their political structure 
in order to be effective. We have, therefore, raised it at our 
own highest levels of political structure, including by 
President Bush.
    I'd like to note, in case you aren't aware, that the 
meetings, I think, with the top levels of all the Federal 
agencies and President Bush have produced a statement from 
President Hu of China, saying that he understands the need to 
protect the legitimate rights and interests of our right-
holders, and that this is something China intends to do.
    I'd also like to note that our understanding is in August 
of this year, for what I believe is the first time, President 
Putin actually intervened on this issue and sent a very strong 
message to his inter-ministerial that this is something that 
needed to be addressed. And I think that is a primary reason 
why we have in fact seen some recent progress in the last few 
weeks, because that message is coming from the very top of 
their political structure now. So I would agree with you that 
it's critical that it be addressed at that level.
    Mr. Issa. Thank you, Mr. Chairman. I'd ask unanimous 
consent for the others to respond in writing.
    Mr. Smith of Texas. Without objection, would you complete 
the response in writing, then?
    [The statements follow:]

  Written response to question posed by Representative Issa from the 
  Honorable Chris Israel, Coordinator for International Intellectual 
            Property Enforcment, U.S. Department of Commerce



                               __________

Written response to question posed by Representative Issa from Mr. Eric 
 Smith, President, International Intellectual Property Alliance (IIPA)



                               __________
Written response to question posed by Representative Issa from Ms. Joan 
                Borsten, President, Films by Jove, Inc.



                               __________
    Mr. Smith of Texas. Thank you, Mr. Issa.
    The gentlewoman from California, Ms. Waters, is recognized 
for her questions.
    Ms. Waters. Thank you very much, Mr. Chairman, and Members. 
I'm beginning to recognize that this problem of piracy and 
counterfeit items, etcetera, is much larger than I even thought 
it was.
    First, let me just say that, whether you are on Fifth 
Avenue in New York in front of Sak's Fifth Avenue or Cartier's, 
where the knockoff goods are being sold out of bags by 
immigrants around the clock, or you are in most of the 
communities--and particularly low-income communities--across 
the country, knockoffs have replaced, basically, the retail 
industry in many of these communities.
    And not only do you have people selling on the streets; you 
have these huge swap meets that are bringing in the knockoffs 
from Korea and China and other places, I guess. So when you go 
to festivals around the country, whether it's in Florida, New 
York, etcetera, they're selling thousands of Louis Vuitton 
purses and all the other items that most of us know about.
    Now, I can simply speculate that we have been very lenient 
with China and some of our other trading partners. And I do not 
think they take us seriously.
    I'm pleased to hear about this new, strong relationship we 
have with Russia, and the fact that they are supposedly 
shutting down plants and breaking up these operations. But I 
guess I'd like to ask whomever would like to answer, what 
evidence do you have that Russia or China is willing to shut 
down plants, have criminal penalties, and to destroy equipment, 
etcetera; whether we're talking about in the simple retail 
industry, or with computer software, or any of the other areas 
of concern that we have about intellectual properties?
    Mr. Smith. If I might take a crack at that, just to respond 
to the first part of your statement, in this country, clearly, 
we have piracy, and you described it. But it's a very small 
percentage of our overall market. It exists. There's no way 
you're going to get rid of it.
    But if you go to China and Russia, we're not talking about 
3 and 4 percent piracy rates, we're talking about 90 percent 
piracy rates. And we're talking huge criminal syndicates that 
produce this product. It's a problem of a totally different 
order.
    With respect to Russia and the closing of the plants, in 
fact, just recently they raided nine plants. And in my 
testimony, I noted that that's progress. They raided them. But 
the problem is----
    Ms. Waters. And what happened?
    Mr. Smith. The problem is that product went out the door. 
They didn't seize the equipment. Historically, there have been 
virtually no prosecutions of plant owners. There's been one 
conviction of a plant owner in the last 5 years. This latest 
set of raids doesn't give us great comfort that there's been 
significant change.
    And Ms. Espinel is absolutely right, President Putin did 
make that statement. And perhaps we will see something. But 
President Putin and the Russian government have made a lot of 
statements over the last years, and we haven't seen the action. 
And we're, frankly, quite frustrated. And it's a lot of 
promises and no convictions, no real action that is going to 
have a significant, on-the-ground market impact for our 
industries.
    Ms. Waters. May I quickly ask, how has this discussion 
taken form or shape in the WTO?
    Ms. Espinel. I'll speak to that. I just want to emphasize, 
or underscore, the remarks made by Mr. Smith. We do see the 
recent raids of the OD plants as progress, but we have made 
quite clear to Russia that we need follow-up; we need the 
equipment to be seized and destroyed; we need the plants to be 
shut down permanently; we need to see people put in jail.
    In terms of the WTO process, right now we and other 
countries are negotiating with Russia the terms of their WTO 
accession, and there is an office at USTR that handles those 
negotiations. We are in the process of doing our bilateral 
market access negotiations with Russia. When those are 
completed, there will then be a multilateral process to 
negotiate the rules of the WTO accession.
    Ms. Waters. Thank you, Mr. Chairman.
    Mr. Smith of Texas. Thank you, Ms. Waters; appreciate those 
questions.
    Thank you all for your testimony today. It's been very 
helpful. Obviously, this is an issue we're going to continue to 
monitor closely. But we appreciate your responses today.
    And Mr. Israel, you more than survived your first 
appearance before Congress as a witness.
    I thank you all again. We stand adjourned.
    [Whereupon, at 11:33 a.m., the Subcommittee was adjourned.]


                            A P P E N D I X

                              ----------                              


               Material Submitted for the Hearing Record

Statement of the Honorable Howard Berman, a Representative in Congress 
   from the State of California, and Ranking Member, Subcommittee on 
            Courts, the Internet, and Intellectual Property
    Mr. Chairman,
    Thank you for scheduling this hearing on international intellectual 
property piracy. I hope this subcommittee can institutionalize the 
practice of having at least one hearing a year that focuses on 
international trade in products protected by intellectual property 
rights. By consistently bringing attention to the rampant piracy 
problem occurring abroad, we can begin to help the millions of creative 
people in this country who earn their living from intellectual 
property.
    I particularly want to thank you for inviting Joan Borsten to 
testify. She's a good friend, a constituent and has a very compelling 
story. She brings a valuable perspective to the hearing--that of an 
individual American entrepreneur whose business has been dramatically 
impacted by a foreign government's sustained campaign to steal her 
rights to intellectual property.
    Because of the massive copyright piracy that occurs daily in China 
and Russia, the sales of black-market goods cause an annual loss of 
revenue to American creators that is truly staggering. According to the 
International Intellectual Property Alliance, piracy rates in the 
copyright industries range from a low of 70 percent to a high of 95 
percent and American industries annually lose over 2.5 billion dollars 
in China and almost two billion dollars in Russia. But it is not only 
the copyright industries - entertainment, software, book publishing 
that suffer. We could probably have an entire hearing only on 
counterfeiting of motorcycle parts, purses and pharmaceuticals. No 
industry is immune from the endemic intellectual property violations 
occurring in these countries.
    The problem in both China and Russia is similar - while the laws 
may be on the books, actual enforcement of those laws is sorely 
lacking. Few criminal prosecutions have taken place and even fewer 
sentences have been meted out. There is currently no true deterrent for 
the pirates. In fact, piracy has become the foundation for new 
businesses that export these black market goods.
    The one effective tool the current administration has to 
incentivize the Chinese government to address its piracy problem is 
pursuing a WTO case. At the last hearing on this issue, the USTR 
testified that they were ``committed to ensure that China is compliant 
with its obligations. And we will take WTO action if, in consultation 
with you and with our industry, we determine that this is the most 
effective way to fix the problem that we are resolved to fix.'' When I 
asked whether 6 months would be a reasonable time frame to reach a 
conclusion, the answer was that it could be. So here we are 6 months 
later - I am looking forward to an update.
    Furthermore, have additional avenues for mitigating the effect of 
piracy in China been explored by the current administration? Currently, 
the Chinese government engages in vast restrictions on market access 
for American copyrighted goods. They restrict the number of American 
films that can be shown and severely curtails the right of our 
companies to do business in their country. These barriers make the 
impact of piracy that much greater and virtually impossible for our 
companies to counteract piracy.
    With Russia there is still some leverage because they have not 
joined WTO yet. A number of months ago I, along with a number of New 
Democrats, wrote Ambassador Portman advising him that in order to 
obtain our support for any future trade agreement we would have to be 
assured that the lesson taught from allowing China to join the WTO 
without provision for adequate enforcement against intellectual 
property violations, has been learned. In fact, just last week IIPA 
submitted comments for the Special 301 out of cycle review on Russia. 
It is not encouraging news. ``In short, Russia is not complying with 
its commitments to provide adequate and effective copyright protection 
and enforcement.'' Furthermore, the House, in a bipartisan vote (H. 
Con. Res. 230) recognized Russia's failure to adequately protect 
intellectual property and cautioned that without change they are at 
risk of losing GSP benefits and accession to the WTO.
    Last time, we discussed the complexity of denying GSP benefits to a 
country - a process which requires consultation of most agencies within 
the Executive branch. It is clear that in Congress, we all agree that 
this situation is quite outrageous and that a country that flagrantly 
violates American intellectual property rights should not receive GSP 
duty-free benefits. So, I ask--since the last hearing has there been 
any movement on the status of Russia's GSP benefits?
    If motivated, these countries can protect intellectual property 
rights. When piracy hurts the Chinese interests, the Chinese government 
has been motivated to step in. When knockoffs of the Beijing Summer 
2008 games logos on T-shirts were being sold, the markets were quickly 
cleared. In short China can deal with this problem if it has the 
political will. In Russia, it seems incredible that the Russian 
government actually controls the facilities and land on which many of 
these pirate optical disk plants operate. How can it simply do nothing 
to shut down the plants operating on these government- run 
installations?
    I am looking forward to hearing from the witnesses to learn what 
benchmarks or timelines have been established to help guide a decision 
on a WTO case against China, the withdrawal of GSP duty free benefits 
from Russia, and whether Russia is aware that they will be denied 
admission to the exclusive WTO club unless the piracy problem is 
addressed. I am looking forward to hearing about other steps that are 
being taken to protect American creativity.

                              ----------                              

Statement of the Honorable Bob Goodlatte, a Representative in Congress 
                       from the State of Virginia

    Mr. Chairman, thank you for holding this important oversight 
hearing on intellectual property theft in China and Russia.
    In China, an estimated 95% of motion pictures and 90% of business 
software are pirated. In Russia, 80% of all motion pictures and 87% of 
business software are pirated. Considering that the core copyright 
industries account for 6% of U.S. GDP and the total copyright 
industries account for approximately 12% of U.S. GDP, it is clear that 
America's businesses are facing a serious problem. In fact, the FBI 
estimates that U.S. businesses lose between $200-250 billion a year to 
counterfeit goods.
    Recently, China and Russia have received attention for intellectual 
property rights violations within their borders. For example, in April, 
the Office of the United States Trade Representative released its 
``Special 301'' report, and elevated China to the ``priority watch 
list'' due to its failure to protect intellectual property rights.
    We must make sure that each nation recognizes that piracy is a 
global problem. The growth of piracy among organized crime rings is 
illustrative of its global scope. The combination of enormous profits 
and practically nonexistent punishments by many foreign governments 
makes copyright piracy an attractive cash cow for organized crime 
syndicates. Often specializing in optical disc and business software 
piracy, these crime rings are capable of coordinating multi-million 
dollar efforts across multiple national borders. We must meet this type 
of highly organized piracy with highly organized coordination and 
enforcement efforts.
    Another disturbing trend is the growing willingness of many foreign 
governments to condone the use of, and even use, pirated materials. At 
its best, government sets the standards for the protection of rights. 
At its worst, government encourages and even participates in the breach 
of those rights.
    A recent article in The Moscow Times reported that the co-chairman 
of the public advisory board for the Russia Against Counterfeiting 
movement has said that until DVD's and CD's become more affordable, he 
and the majority of Russians would opt for pirated music and movies. 
This type of behavior from those responsible for reducing piracy is 
unacceptable. Now is the time for each country in the international 
community to choose which path it will take with regard to intellectual 
property rights.
    We all must realize that copyright piracy and counterfeiting are 
serious problems that do not merely affect private companies' bottom 
lines in the short term. They also discourage investment and innovation 
in the long term, which will eventually lead to fewer consumer choices 
- a repercussion that affects entire societies and economies. 
Governments must work together to reward creators and punish thieves.
    Recent treaties, such as the TRIPS agreement, provide the legal 
framework for member countries to aggressively enforce their copyright 
laws. Article 61 of the TRIPS agreement specifically requires member 
countries to establish criminal procedures and penalties to be applied 
in cases of copyright piracy. The WTO provides trade dispute mechanisms 
and these tools can be used to pressure countries into compliance with 
existing agreements. In addition, countries like Russia wishing to 
enter the WTO should establish that they are committed to enforcing 
intellectual property rights.
    We already have many tools to combat international piracy. Now we 
must put these tools to work. The United States must lead by example 
and rigorously enforce our copyright piracy statutes. However, we must 
also work with the international community to encourage other countries 
to do the same. Only when we coordinate our efforts to combat piracy 
will we see substantial results.
    I look forward to hearing the testimony of our expert witnesses 
about how best the United States can help enforce intellectual property 
rights in countries that have not yet proven their commitment to 
enforcing intellectual property violations.

                              ----------                              

News Article by the Honorable Lamar Smith, a Representative in Congress 
  from the State of Texas, and Chairman, Subcommittee on Courts, the 
 Internet, and Intellectual Property: ``Defense Contrator Held in Spy 
   Case,'' from the November 30, 2005 edition of The Washington Times



                              ----------                              

News Article by the Honorable Lamar Smith, a Representative in Congress 
  from the State of Texas, and Chairman, Subcommittee on Courts, the 
 Internet, and Intellectual Property: ``Envoy: Licensed DVDs Cost Too 
     Much,'' from the December 1, 2005 edition of The Moscow Times


                              ----------                              

News Article by the Honorable Lamar Smith, a Representative in Congress 
  from the State of Texas, and Chairman, Subcommittee on Courts, the 
 Internet, and Intellectual Property: ``U.S. and EU to Battle Chinese 
    Counterfeiting,'' from the November 30, 2005 Dow Jones Newswires



                              ----------                              

    Exhibit submitted by Joan Borsten: ``Corruption in the Russian 
   Arbitrazh Courts: Will There Be Significant Progress in the Near 
                                Term?''




                              ----------                              

Exhibit submitted by Joan Borsten: ``The Circumstances Surrounding the 
         Arrest and Prosecution of Leading Yukos Executives.''




                              ----------                              

 Statement and Exhibits from the Honorable Dan Glickman, Chairman and 
 Chief Executive Officer, Motion Picture Association of America, Inc. 
                                 (MPAA)
      Prepared Statement of Statement Prepared For the Record From
                              DAN GLICKMAN
                  Chairman and Chief Executive Officer
             Motion Picture Association of America, Inc.\1\
---------------------------------------------------------------------------
    \1\ The Motion Picture Association of America (MPAA) represents the 
major producers and distributors of motion picture and television 
programs in the United States; its members are Metro-Goldwyn-Mayer 
Studios; NBC Universal City Studios, Paramount Pictures Corporation, 
Sony Pictures Entertainment, The Walt Disney Company, Twentieth Century 
Fox Film Corporation, and Warner Brothers Entertainment.
---------------------------------------------------------------------------
    CHAIRMAN SMITH AND MEMBERS OF THE SUBCOMMITTEE: When, six months 
ago, you last examined the problems we are facing protecting our 
intellectual property rights (IPR) in China and Russia, we painted a 
bleak picture: We estimated then that piracy in both markets exceeds 
ninety-five percent, costing our members in excess of half a billion 
dollars every year. Additionally, we told the Subcommittee that not 
only was piracy corrupting the two internal markets, pirates in Russia 
and in China have been the source of stolen material exported to 
markets all over the world.
    I wish today we could report that this scenario had brightened, 
that piracy rates had fallen, losses dropped, and that the two 
countries were no longer sources of pirated product far from their 
borders. I cannot. With little amendment, we could submit for your 
consideration virtually the same testimony as we did then in describing 
the scope of the problem. With respect to the steps we are taking in 
both markets, I can report progress, and will report steps we are 
taking on our own, with the US government, and, yes, with the host 
governments.
    Before doing so, I want to thank you and the Subcommittee for your 
enduring support of our work and, in particular, the fact that you are 
keeping these problems high on your agenda. As I will elaborate, that 
you are doing so is, in our view, one of the critical elements to a 
successful strategy of combating the theft of our product, and 
essential to motivating both governments to take action.
    Adequate laws and resources, effective enforcement, and private 
sector initiatives and cooperation with the US government as well as 
the Chinese and Russian governments are all important tools in this 
fight. However, unless these governments exercise the political will to 
address the rampant theft of US IPR, those tools are meaningless. This 
hearing keeps IPR high on both the US-China and US-Russian agendas, 
demonstrating, yet again in a yet another forum, to the Chinese and 
Russian authorities the priority you and your colleagues attach to 
seeing satisfactory results.
    On behalf of the member studios and the hundreds of thousands of 
Americans who earn their livelihoods in this industry, thank you for 
your interest and the opportunity to provide these comments to the 
Subcommittee.

                                 RUSSIA

    Russia ranks, along with China, as one of the two largest producers 
and exporters of pirated DVDs and other copyrighted materials in the 
world. As serious as the problems are in China, and they are indeed 
quite serious, the challenges we face in Russia - lawlessness, physical 
danger, and corruption - are even more daunting. I cannot underscore 
enough the scope and depth of the problem we face in Russia - and it is 
getting worse, not better.
    Last year alone MPAA member companies lost $275 million to piracy 
in Russia. All copyright industries lost $1.7 billion due to piracy 
last year, and over $6 billion in the last five years in Russia. These 
figures are staggering.
    The Government of Russia has allowed the problem to grow 
significantly worse in recent years. The number of plants manufacturing 
optical discs increased twenty-seven percent, from thirty-six to forty-
six in the past year alone. Sixteen of these plants are located on 
property owned by the Russian government. Moreover, the number of DVD 
lines has increased fifty percent in the past year.
    A matter of immediate and utmost importance is that Russia, right 
now, is actively pressing to accede to the World Trade Organization 
(WTO). MPAA cannot support Russia's accession to the WTO, an 
organization founded on rules, until these problems are addressed 
satisfactorily.
    The Agreement on Trade-Related Aspects Intellectual Property Rights 
(TRIPS) agreement, establishes minimum levels of protection that WTO 
members must give to fellow WTO members' intellectual property. It is 
an integral component of the international trade regime. Taking 
effective criminal action against piracy is a key TRIPS requirement.
    For the record, I am attaching to my statement a fuller description 
of the problems we face. Every year, we compile a submission of the 
trade barriers we face for the Office of the United States Trade 
Representative's (USTR) annual National Trade Estimate Report on 
Foreign Trade Barriers; the comments we filed with USTR last month on 
the Russian market detail those problems. Here is a sketch of what we 
are confronting on a daily basis in Russia.

          Russia's domestic market is literally saturated with 
        pirate DVDs. The level of piracy is estimated to be over ninety 
        percent.
          Seventy percent or more of the seized pirated 
        material ends up back in the marketplace.
          Russian DVD plants are, it is estimated, 
        manufacturing between 50 and 80 million DVDs a year for export.
          Pirate discs manufactured in Russia have been found 
        in twenty-seven countries, negatively affecting our legitimate 
        business in countries such as Bulgaria, Finland, Germany, 
        Hungary, Israel, Poland, Turkey, and the United Kingdom.
          All of the optical disk plants that were raided in 
        2004 remained in operation after those raids.
          The plant owners remain unscathed by the criminal 
        justice system.

    We have presented this evidence to Russia over and over again. The 
Government of Russia has acknowledged that these plants exist and while 
the number of raids has recently increased, recall that seventy percent 
of the seized product finds its way back into the marketplace and that 
not one plant has been closed.
    Much of the piracy in Russia is orchestrated by organized crime 
syndicates and gangs. No small-scale, independent operator could afford 
the false-bottomed compartments in trains and cars that these 
syndicates use to export pirate copies of our films to other organized 
criminal syndicates across Europe. Two years ago, shortly after a major 
raid against a pirate facility, in what clearly was designed as an 
intimidation effort, a thug shot at the car in which one of our anti-
piracy investigators in Russia was driving from work. Fortunately, our 
employee was unharmed. While the assailant ended up in a psychiatric 
hospital, those who contracted the assailant remain unscathed and grow 
ever wealthier.
    This rampant organized crime flows from and thrives because of 
endemic corruption. The entrenched corruption of Russia's judicial 
system has caused our complaints to be routinely dismissed. An 
indication of prosecutorial corruption is the number of requests 
prosecutors make of rights holders organizations to return seized 
material to prosecutors because they ``need to show the evidence to the 
judges''. In fact, the goods confiscated during raids on factories and 
warehouses are frequently returned to commercial channels connected to 
the prosecutors. Russian authorities openly acknowledge that only eight 
non-suspended prison sentences have been imposed on intellectual 
property infringers in 2005.
    Circling back to the TRIPS agreement, criminalizing all acts of 
copyright piracy on a commercial scale and taking effective criminal 
action against such acts are key WTO TRIPS requirements. There is no 
argument that can be made that Russia complies with the WTO TRIPS 
obligations. We do not believe that our problems can be effectively 
addressed upon Russia's accession to the WTO. We tried this with China 
and we learned an expensive and difficult lesson. The U.S. government 
and U.S. industry cannot afford to make the same mistake twice.
    Russia has repeatedly promised both the US government and the US 
copyright industry that it would take the steps necessary to meet these 
WTO obligations. However, Russia has to date failed - and this failure 
can only be attributed to lack of political will - to step up and 
address these concerns. We are reminded of Russia's lack of commitment 
to combating piracy every time Government of Russia officials assert 
that piracy is the acceptable result of legitimate product pricing. 
Most recently, on November 30, President Putin's representative to the 
Duma's upper chamber said that widespread piracy would continue to 
flourish if legitimate product did not become cheaper.
    Russia's accession cannot be paved with empty promises. Russia must 
only be permitted to accede upon demonstration that it has the 
political will to inspect all known plants, and to close and repeal the 
licenses of those engaged in production and distribution, as well as to 
criminally prosecute the plant owners and operators. We will not see 
progress in the enforcement against intellectual property crimes in 
Russia unless President Putin directs all relevant agencies to make the 
fight against piracy a priority. Until the President himself demands 
accountability from his senior officials, corruption will continue to 
shelter the pirates.
    Mr. Chairman, members of the Subcommittee, we need your help in 
ensuring that Russia addresses its piracy problems before it is 
permitted to join the WTO. We greatly appreciate the fact that you and 
your colleagues voted overwhelmingly in favor of H. Con. Res. 230. That 
sends a clear signal to the Russian authorities that they must address 
these matters before it joins the rules-based WTO, and ensures that 
both Russia and the Administration know that a grant of Permanent 
Normal Trade Relations to Russia, a prerequisite to WTO relations, will 
be endangered without meaningful progress on protecting intellectual 
property rights.

                                 CHINA

    The source of the problems we face in China is twofold: First, 
China imposes strict limits on the number of foreign films that can be 
exhibited in its theaters on a revenue-sharing basis, and applies 
burdensome regulations and confiscatory taxes on foreign home video and 
television content. This creates a marketplace vacuum that pirates are 
only too happy to fill. Second, China has not asserted the political 
will necessary to reduce the level of piracy. Yes, it has conducted 
some raids and even put a few pirates in jail, but it has not 
materially reduced the level of piracy and the ready availability of 
pirated products in the shops and in the streets.
    As I will elaborate, fighting piracy, especially in a restricted 
market such as China, means more than simply enforcing laws and going 
after the counterfeiters - the traditional anti-piracy tools. Getting 
better access to the Chinese market is a critically important tool in 
the fight against piracy. The controls the Chinese government imposes 
upon legitimate film producers and distributors have no effect 
whatsoever on the pirates. Until we have the same unrestricted access 
to that market, we will not be able to compete effectively and stop the 
theft of our content.
    Regrettably, to coin a phrase, if you did not see a counterfeit 
DVD, you were not in China. Unfortunately, I fear our collective 
perception of China has become so ingrained with the notion that China 
is overflowing with pirate DVDs we frequently fail to appreciate the 
magnitude of the problem.
    The problem is ubiquitous - on virtually every street corner, 
packed on to the shelves of audio-visual shops in every neighborhood. 
We estimate that the piracy rate exceeds ninety percent - more than 
nine of every ten DVDs in the Chinese market is a fake, stolen product. 
Counterfeit, stolen motion pictures cost our members nearly $300 
million annually, in China alone.
    Too many, especially some around the world who should be allies in 
the fight against piracy in China, view this as an American problem. 
While we certainly bear the disproportionate share of the burden of 
this problem, movie piracy in China affects film makers all around the 
world. Our research indicates that almost half the pirated product is 
actually Chinese product. We also find stolen copies of Japanese, 
Korean, French, and Indian movies in China.
    A few weeks ago, a young Chinese film producer visited my office. 
When asked to define his number one problem, he did not mention 
financing, distribution, or any of the other obstacles film producers 
must overcome: He said piracy is his biggest problem - the theft of his 
movies, in his home country.
    It is clearly more than an American problem, it is a problem 
afflicting film makers no matter where they live and make movies, in 
more than one way. Not only are the pirates sapping legitimate movie 
makers in the China market, they are encroaching on legitimate markets 
all around the world. Our analysis of pirated DVDs seized from around 
the world traced their production back to over fifty plants in China.
    As we dig deeper into this problem, particularly the global spread 
of China-sourced pirated product, we are coming to a disturbing 
conclusion: There is a growing link between piracy of motion pictures 
and organized crime. Our Asia-Pacific Regional Office just completed a 
new study on these connections. With your permission, Mr. Chairman, I 
have included a copy of that study with my statement and would like to 
have it included in the record. Let me cite a few of its findings:

        Criminal theft of IPR dwarfs criminal revenues from narcotics 
        trade: US government and international law enforcement records 
        peg the illegal narcotics trade at $322 billion last year; 
        criminal revenues from all IPR theft were significantly higher, 
        $512 billion.

        Part of the allure for organized crime to move into DVD piracy 
        is the incredible profit margins, exponentially higher than for 
        drugs: The mark-up on pirated DVDs made in Asia and sold in 
        Europe, for example, averages an astounding 1,150%, three times 
        the mark-up of heroin sourced in Asia and sold on the same 
        street corners, and the criminal risk is far lower.

        The report cites two recent cases linked back to China, with 
        tentacles around the world, including into the US. In September 
        2005, a federal grand jury in New York indicted thirty-nine 
        individuals tied to the Yi Ging Syndicate, based in New York 
        but which funneled much of its one million dollars plus a year 
        earnings back to China. Next January, an American, Randolph 
        Guthrie, will stand trial in the US for his role in leading a 
        criminal syndicate, based in Shanghai, that made and 
        distributed hundreds of thousands of pirate DVDs around the 
        world; when he was arrested last summer, Chinese authorities 
        seized more than 210,000 counterfeit DVDs.

    I think it goes without saying that many of these revenues finance 
other illegal activities in which these criminal organizations are 
involved, making the reach of piracy even more pernicious: This is not 
just an American problem, and it is not just a motion picture industry 
problem, it is now underwriting activities that threaten all of us, in 
all walks of life.
    Of course, it affects some of us more directly than others. As I 
said at the outset, our members employ nearly one million American men 
and women, at all job levels. We employ thousands of laborers, 
electricians, technicians, truck drivers, as well as professionals in 
finance, legal positions, and specialized support services.
    There seems to be a view - a myth - that buying a stolen DVD only 
means a movie star earns a few dollars less on that movie. Let me be 
clear: That notion is just that, a myth. Every dollar the pirates earn 
is one less dollar going to an American worker, a worker employed in an 
industry that is one of the few in this country bringing more money 
back to the US in export earnings than it sends overseas.
    Chinese piracy of US motion pictures also hits some of us very 
personally. I was in China the last time in May. I strolled the 
neighborhood near my hotel, and looked into one of the audio-visual 
stores I came across. I admit I was not surprised to see shelves of 
pirated DVDs, disappointed, but not surprised. I was, however, taken 
aback when one title caught my eye: ``The Hitchhikers Guide to the 
Galaxy.'' At the time, the movie was not available on DVD in the US, so 
I knew it was a fake, taking the money out of a US film maker's pocket. 
That film maker: my son. He is a producer and that was his most recent 
film. I relayed the story to him, and he replied: ``And what Dad, Mr. 
Chairman of the MPAA, are you going to do about this?''
    MPAA invests millions every year in fighting piracy in China and 
around the world. We go after the pirates, we work with governments to 
enact and then enforce adequate laws, we work to educate the public 
about the consequences of piracy, and the legal alternatives to piracy, 
and we are constantly seeking new ways to prevent the problem through 
technology, education, and changing business practices.
    As I have indicated previously, piracy in China is indeed a China 
problem, but it is also a problem with global reach. A pirated disc 
made in China can, in a day or two, be in the street markets of Los 
Angeles. Someone can illegally camcord a movie in Moscow, send the file 
by way of the internet to someone in Guangzhou who then dubs and 
subtitles the Russian dialogue, and then illegal presses thousands of 
DVDs.
    We approach the problem fully cognizant of its global reach, with a 
seamless strategy of going after the producers, distributors, and 
sellers of DVDs and the machinery they use to make the fakes. We have 
aggressively pursued a strategy to stop the illegal camcording of 
movies, which is still the largest source of pirated product. We are 
very appreciative of the action Congress took to make illegal 
camcording a federal crime and that the President signed the bill 
earlier this year.
    We seek to track the production of optical discs, to make sure the 
plants that make them are legal, registered, and their product produced 
with internationally recognized identifying codes. Increasingly, we are 
beefing up our Internet strategy to go after the thieves who think they 
can anonymously download and send stolen movies over the Internet.
    We are also on the ground in China. Our representatives survey the 
market for information about the incidence of piracy and pass on this 
information to the Chinese authorities. In many cases, this information 
helps Chinese authorities formulate cases for raids on sellers and 
distributors, and often, those authorities invite our representatives 
to accompany them on such raids.
    We operate and participate in training sessions for Chinese 
authorities and jurists on IPR laws and enforcement, in the US and in 
China. We also work closely with US officials in elevating the 
importance of IPR enforcement; for example, our representatives 
participated in the IPR Roundtable our Embassy conducted in Beijing at 
the first of this month.
    One of the most significant initiatives we have been able to launch 
with the Chinese government was the joint anti-piracy memorandum of 
understanding (MOU) we executed with three entities of the Chinese 
government: Ministry of Culture (MOC), State Administration of Radio, 
Film and Television (SARFT), and National Copyright Administration 
(NCA).
    This MOU was signed last July 13, in connection with the most 
recent discussions held under the auspices of the Joint Committee on 
Commerce and Trade (JCCT). Under its terms, every three months MPAA 
will submit to the MOC and SARFT a list of motion pictures scheduled to 
be screened in China by its member companies. All home video products 
that are available in the marketplace prior to the legitimate home 
video release date in China will be deemed illegal audio and visual 
products and forfeited, and when a criminal copyright infringement 
offense has been committed, the case will be prosecuted.
    On October 25, we met with the Chinese side to review the results 
of the MOU. For our part, we surveyed a small selection of shops in 
four key cities: Beijing, Shanghai, Guangzhou, and Shenzhen. The 
surveys were by no means intended to provide a comprehensive assessment 
of anti-piracy enforcement progress across China; merely an indication 
as to whether the needle had moved at all.

        Specifically, during October, the surveys of target outlets in 
        Shanghai showed that of the films covered under the agreement, 
        no pirate versions were available at all.

        In Guangzhou, the availability in October of pirated versions 
        of the identified titles was down quite sharply from September, 
        when almost all titles were available.

        In Shenzhen, availability in October of pirated titles fell 
        fifty percent from September.

        In Beijing, in August, with the exception of one shop that 
        carried only fifty percent of the protected titles, pirate 
        versions of the six films ran from seventy to ninety percent. 
        In September, the original shops continued to offer pirated 
        versions of the protected titles. In October, the original ten 
        shops had cleaned up remarkably; however, an additional ten 
        shops surveyed showed piracy rates averaging around eighty 
        percent.

    The MOU only covers a handful of movies, and though it applies to 
the entire country, we have only been able to survey a limited number 
of cities and only a selection of retailers in each. We are 
disappointed with the results.
    In spite of their formal commitment to protect specific US movies, 
the Chinese authorities failed to demonstrate meaningful progress even 
within the limited review we conducted. Our next review of the MOU will 
occur in January and we would be pleased to keep the Subcommittee 
apprised of our progress.
    In addition to the work we are doing with the Chinese government 
and industry, and with other US copyright industries, most notably the 
sound recording industry, our key partner is the US government. I 
commend this Administration for the priority it has given this problem, 
and its willingness to work with us. Credit goes right to the top: 
President Bush made IPR a top agenda item during his summit with 
President Hu. Having our views and concerns addressed at this level is 
invaluable in elevating the priority of IPR on the bilateral agenda and 
we greatly appreciate the President's support as well as the support 
from USTR, the State Department, and the Commerce Department. Our work 
with the US government goes on virtually every day, and we are 
currently working very closely with the USTR on next steps to secure 
adequate protection of our product in China.
    Mr. Chairman, having surveyed the scope of these problems and the 
steps the US motion picture industry is taking, I want to bring my 
statement to conclusion by reiterating some points for you and your 
colleagues to consider for ways you can help protect American IPR in 
China. Many of these mirror the recommendations I outlined with respect 
to the Russian problems.
    First, help make sure our government has the resources it needs. I 
know fully well the difficulties with which the Congress has been 
dealing on controlling the deficit, I also know that it ought to be in 
our national interest to promote and protect winning industries, and 
this industry is a winner. As I have said, we employ nearly one million 
Americans, in good, well paying jobs, and we have a positive balance of 
trade in every market where our countries do business, except one: 
China.
    Why do we run a movie trade deficit with China? Piracy is certainly 
a key reason, though another is the onerous, burdensome restrictions we 
have on doing business in China, and even in getting into that market.
    Consider some facts about our access to the China market: The good 
news is that the money our movies made in China in 2004 doubled the 
amount they made in 2003. The sobering side is that that amount was 
only $10 million. As we saw in November with ``Walk The Line,'' ``Harry 
Potter and the Goblet of Fire,'' and ``Chicken Little'', and will see 
every weekend for the rest of the year, one American movie can make 
more on an opening weekend in the US alone.
    In recent years, in fact, two Chinese movies ``Kung Fu Hustle'' and 
``House of Flying Daggers'' both, individually, made more in the US 
than all US movies made in China for the years they were released, and, 
ironically, both were distributed in the US by one of our member 
companies.
    The primary barrier is the quota the Chinese impose on the number 
of foreign films they permit into their market under normal business 
terms, what we call revenue-sharing, whereby the US producer shares the 
box office with the Chinese distributor. The Chinese allow only twenty 
such films into China a year, from all countries, not just the US. That 
means film makers from France, Japan, the UK, Korea, and the US 
together can only hope to get a part of that twenty-film quota.
    Once into the market, the government controls the distribution of 
the movies. A state agency, through two divisions, distributes all the 
films in China, and dictates the terms of the revenue sharing with US 
film makers.
    There are many other restrictions, detailed in the attachment to my 
statement, but the net effect is critical. When fighting piracy and 
protecting IPR, most are familiar with what I call the traditional 
methods - effective laws, enforcement, raids, and the like. In China, 
getting better access is just as critical and intertwined closely with 
our strategy towards that market.
    My second recommendation is that we want the same access to the 
Chinese market as the pirates have. The barriers I outlined and that 
are enumerated in the attachment do not, at all, restrict the number of 
movies in China. Virtually any movie Chinese consumers might want is 
available, not necessarily through legitimate channels controlled by 
the restrictions applied to us, but from pirates who have no such 
restrictions and who operate largely without deterrent sanctions 
applied to offenders. Not only are our movies being stolen, but we also 
face an enormously unbalanced playing field at distinct competitive 
disadvantage.
    We are convinced access to the Chinese market on fair terms, the 
same terms as the pirates, is central to fighting piracy in China and 
protecting our rights there. We want to be able to compete, not bound 
by quotas, government restrictions on distribution rights, black-out 
periods when only Chinese movies are screened, nor onerous taxes, and 
we want transparent clearance procedures.
    Third, let me come back to where I started: political will. Just as 
the US government needs adequate resources and strong laws, so do the 
Chinese. However, for the most part, that is not the main problem. With 
a few notable exceptions, the Chinese IPR statutory regime is adequate 
and with changes, can easily be brought into compliance with WTO 
standards.
    The problem is political will, and keeping the pressure on is a key 
way to bolster that will. For example, we know the Chinese can stop 
pirates. When the Chinese open a film the government wants to promote 
and protect, pirated copies of it are non-existent; the word goes out 
that piracy will not be tolerated. Even when we surveyed results of the 
MOU, we saw some modest improvements in some places - evidence that the 
Chinese can crack down on the pirates if they want.
    The Chinese frequently recite this rationale for the IPR problems: 
The US, they say, has over 200 years experience with IPR; China has 
only twenty. China needs time to grow and develop. True. I acknowledge 
the problems with developing an adequate and effective IPR system, and 
culture. On the other hand, I have seen what China can accomplish when 
it makes something a priority. My first trip to China was about twenty 
years ago. The changes I saw between then and my last visit last May 
are breath taking. The lesson here is that when the Chinese have the 
will and desire to change and reform, they can.
    I saw another personal example of how the authorities can act when 
properly motivated. Last May, the day after I discovered the pirated 
copy of my son's movie, ``The Hitchhikers Guide to the Galaxy,'' I met 
with the mayor of Beijing and told him. The next day, the shop where I 
got the movie was raided and closed: political will in action. 
Unfortunately, it was short-lived; our China representative informed me 
the other day that the shop is back in business.
    A couple of weeks ago, The Wall Street Journal carried a telling 
story, about the paucity of counterfeit Olympics-logo goods in China. 
The production, distribution, and sale of those goods is tightly 
regulated and policed, and fakes are not tolerated. It is virtually 
impossible to find counterfeit Olympics goods in China. Why? As one of 
the Chinese officials said, it is because fakes dilute the value of the 
logo, the intellectual property upon which the Chinese have invested to 
finance the games.
    The lesson: When the Chinese want to stop piracy, they can be 
enormously effective. They do not need twenty more years experience 
with IPR, they have the resources, they have the basic statutes, and 
they can make the changes needed to improve them. They need the 
political will to protect our goods as effectively as they are 
protecting the Olympic logo.
    Please keep the pressure on; this hearing is one way to do so. Make 
sure you mention this when meeting with Chinese authorities. Above all 
else, unless the Chinese know this is a priority for all of us, we fear 
they will fail to exercise the political will to protect our IPR.
    Mr. Chairman, members of the Subcommittee, I appreciate again your 
attention to the acute problems we are facing in Russia and China and 
the chance to share with you the perspective of the US motion picture 
industry.
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