[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]
INTERNATIONAL PIRACY: THE CHALLENGES OF PROTECTING INTELLECTUAL
PROPERTY IN THE 21ST CENTURY
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON COURTS, THE INTERNET,
AND INTELLECTUAL PROPERTY
OF THE
COMMITTEE ON THE JUDICIARY
HOUSE OF REPRESENTATIVES
ONE HUNDRED TENTH CONGRESS
FIRST SESSION
__________
OCTOBER 18, 2007
__________
Serial No. 110-67
__________
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
JOHN CONYERS, Jr., Michigan, Chairman
HOWARD L. BERMAN, California LAMAR SMITH, Texas
RICK BOUCHER, Virginia F. JAMES SENSENBRENNER, Jr.,
JERROLD NADLER, New York Wisconsin
ROBERT C. ``BOBBY'' SCOTT, Virginia HOWARD COBLE, North Carolina
MELVIN L. WATT, North Carolina ELTON GALLEGLY, California
ZOE LOFGREN, California BOB GOODLATTE, Virginia
SHEILA JACKSON LEE, Texas STEVE CHABOT, Ohio
MAXINE WATERS, California DANIEL E. LUNGREN, California
WILLIAM D. DELAHUNT, Massachusetts CHRIS CANNON, Utah
ROBERT WEXLER, Florida RIC KELLER, Florida
LINDA T. SANCHEZ, California DARRELL ISSA, California
STEVE COHEN, Tennessee MIKE PENCE, Indiana
HANK JOHNSON, Georgia J. RANDY FORBES, Virginia
BETTY SUTTON, Ohio STEVE KING, Iowa
LUIS V. GUTIERREZ, Illinois TOM FEENEY, Florida
BRAD SHERMAN, California TRENT FRANKS, Arizona
TAMMY BALDWIN, Wisconsin LOUIE GOHMERT, Texas
ANTHONY D. WEINER, New York JIM JORDAN, Ohio
ADAM B. SCHIFF, California
ARTUR DAVIS, Alabama
DEBBIE WASSERMAN SCHULTZ, Florida
KEITH ELLISON, Minnesota
Perry Apelbaum, Staff Director and Chief Counsel
Joseph Gibson, Minority Chief Counsel
------
Subcommittee on Courts, the Internet, and Intellectual Property
HOWARD L. BERMAN, California, Chairman
JOHN CONYERS, Jr., Michigan HOWARD COBLE, North Carolina
RICK BOUCHER, Virginia TOM FEENEY, Florida
ROBERT WEXLER, Florida LAMAR SMITH, Texas
MELVIN L. WATT, North Carolina F. JAMES SENSENBRENNER, Jr.,
SHEILA JACKSON LEE, Texas Wisconsin
STEVE COHEN, Tennessee ELTON GALLEGLY, California
HANK JOHNSON, Georgia BOB GOODLATTE, Virginia
BRAD SHERMAN, California STEVE CHABOT, Ohio
ANTHONY D. WEINER, New York CHRIS CANNON, Utah
ADAM B. SCHIFF, California RIC KELLER, Florida
ZOE LOFGREN, California DARRELL ISSA, California
BETTY SUTTON, Ohio MIKE PENCE, Indiana
Shanna Winters, Chief Counsel
Blaine Merritt, Minority Counsel
C O N T E N T S
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OCTOBER 18, 2007
Page
OPENING STATEMENTS
The Honorable Howard L. Berman, a Representative in Congress from
the State of California, and Chairman, Subcommittee on Courts,
the Internet, and Intellectual Property........................ 1
The Honorable Howard Coble, a Representative in Congress from the
State of North Carolina, and Ranking Member, Subcommittee on
Courts, the Internet, and Intellectual Property................ 3
The Honorable Lamar Smith, a Representative in Congress from the
State of Texas, and Member, Subcommittee on Courts, the
Internet, and Intellectual Property............................ 11
WITNESSES
Ms. Victoria A. Espinel, Assistant U.S. Representative for
Intellectual Property and Innovation, Office of the U.S. Trade
Representative, Washington, DC
Oral Testimony................................................. 24
Prepared Statement............................................. 26
Mr. Eric H. Smith, President, International Intellectual Property
Alliance (IIPA), Washington, DC
Oral Testimony................................................. 31
Prepared Statement............................................. 34
Mr. Loren Yager, Director of International Affairs and Trade,
U.S. General Accountability Office (GAO), Washington, DC
Oral Testimony................................................. 50
Prepared Statement............................................. 52
Mr. Mark MacCarthy, Senior Vice President for Global Public
Policy, Visa Incorporated, Washington, DC
Oral Testimony................................................. 71
Prepared Statement............................................. 73
LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING
Prepared Statement of the Honorable Howard Coble, a
Representative in Congress from the State of North Carolina,
and Ranking Member, Subcommittee on Courts, the Internet, and
Intellectual Property.......................................... 5
Prepared Statement of the Honorable Lamar Smith, a Representative
in Congress from the State of Texas, and Member, Subcommittee
on Courts, the Internet, and Intellectual Property............. 13
Prepared Statement of the Honorable John Conyers, Jr., a
Representative in Congress from the State of Michigan,
Chairman, Committee on the Judiciary, and Member, Subcommittee
on Courts, the Internet, and Intellectual Property............. 20
APPENDIX
Material Submitted for the Hearing Record........................ 112
INTERNATIONAL PIRACY: THE CHALLENGES OF PROTECTING INTELLECTUAL
PROPERTY IN THE 21ST CENTURY
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THURSDAY, OCTOBER 18, 2007
House of Representatives,
Subcommittee on Courts, the Internet,
and Intellectual Property,
Committee on the Judiciary,
Washington, DC.
The Subcommittee met, pursuant to notice, at 10:04 a.m., in
Room 2237, Rayburn House Office Building, the Honorable Howard
Berman (Chairman of the Subcommittee) presiding.
Present: Representatives Berman, Watt, Jackson Lee,
Sherman, Schiff, Lofgren, Sutton, Coble, Sensenbrenner, Smith,
and Goodlatte.
Mr. Berman. The hearing of the Subcommittee on Courts, the
Internet, and Intellectual Property will come to order.
I would like to begin by welcoming everyone to this
hearing, International Piracy: The Challenges of Protecting
Intellectual Property in the 21st Century.
I will recognize myself for an opening statement.
Almost a year ago, in connection with bilateral
negotiations on the Russian Federation's accession to the World
Trade Organization, the Russian government and the U.S. reached
an agreement regarding actions to improve the protection and
enforcement of intellectual property rights in Russia.
Just last week, the U.S. requested the WTO establish a
dispute settlement panel to challenge China's restrictions on
the importation and distribution of products of copyright-
intensive industries such as theatrical films, DVDs, music,
books, and journals.
This hearing will update us on the status of our efforts in
these two specific countries, which many have identified as the
primary culprits in allowing piracy and counterfeiting to
flourish.
We also will look at the piracy problem in other countries
and the challenges America faces when trying to alter the legal
landscape and enforcement mechanisms available.
This is an effort to ensure that other countries do not
thrive on the backs of American creativity.
Today's witnesses will speak to the importance of IP to the
global economy. I would like to use my time to move beyond that
particular aspect of the issue to identify causes for the lack
of adequate protection for IP in some places, and to talk about
solutions and incentives to address the problem.
Hopefully these will dovetail with the IP enforcement bill
that I hope to be introducing shortly with the Chairman of the
full Committee, Mr. Conyers, as the lead author, along with the
Ranking Member of the full Judiciary Committee, Mr. Smith, and
Ranking Member of this Subcommittee, Mr. Coble.
The Organization for Economic Cooperation and Development
recently released their report on the Economic Impact of
Counterfeiting and Piracy together with suggestions to enact
stronger criminal penalties and increase enforcement of
national laws, strengthen cooperation between government and
industry, and educate consumers.
These are the cornerstones of effective IP protection. Each
of the participants--governments, industries and the consuming
public--must have the will to do it, the will to respect
intellectual property rights.
Sometimes that will comes naturally, as when the
participants understand that IP enforcement is in their own
interest. That occurred, at least for a brief moment in China
when they saw counterfeit 2008 Olympic T-shirts appearing on
street corners.
But sometimes outside inducement is helpful. Some nations,
such as Russia, do not yet meet international standards in
their IP laws. Others, such as China, may have good laws on the
books but often fail to enforce them.
How do we get Russia, China and other emerging market
economies to, as Mark MacCarthy of Visa states, ``do the right
thing?''
We have the tools of persuasion and trade benefits at our
disposal and, of course, international law in accession to the
WTO. Sometimes it takes a little nudge for a country to see the
light.
Industry, not only those who own the rights, but those who
benefit from use of those rights, must also have the will to
protect intellectual property.
Whether it be Internet service providers, or financial
services such as banks and credit card companies, such
intermediaries often facilitate piracy through their servicing
of illegal transactions.
While there may be legal ambiguity as to whether their
conduct meets the legal definition of contributory
infringement, industry clearly has a responsibility. Their
refusal to use the technical tools at their disposal now to
stop piracy exacerbates the problem.
They should understand that effective IP enforcement
improves economies and ultimately, therefore, their own bottom
line.
Take, for instance, Baidu, the Chinese counterpart to
Google. It is responsible for much of the Internet piracy in
China. Their continued activities have dissuaded any legitimate
down-stream services from entering that market.
I am more than a little surprised that a company can be
traded on the New York Stock Exchange and still maintain
practices that are so destructive of the ability of the Chinese
digital market to develop in a legitimate manner.
And I don't mean just to pick on Russia and China. Although
they have garnered the lion's share of the headlines, trading
partners such as Chile, India, Turkey, Venezuela and others
have been cited for their inadequate commitments to IP
protection.
Even, I am sad to say, our neighbor to the north needs to
improve. To date, they have still not updated their laws to
comply with the 1996 WIPO Copyright Treaty.
On Tuesday night, the Governor General of Canada presented
the new government's agenda to Parliament: Our government will
improve the protection of cultural and intellectual property
rights in Canada, including copyright reform.
While formal commitments are necessary, they aren't
sufficient. They must be backed by results.
Now, I recognize the Ranking Member of the Subcommittee for
his opening statement, Mr. Smith, if he has one, and then Mr.
Conyers, chairing, actually, another hearing at this time of
this task force----
Howard?
Mr. Coble. Thank you, Mr. Chairman. I want to join you in
welcoming all to our hearing this morning.
I want to commend you, Mr. Chairman, and Ranking Member
Smith. I believe you all convened at least three hearings on
this very significant subject in 2005.
The investment in time, capital and effort needed to obtain
a valid patent, trademark, or copyright is enormous, as you all
know.
The reward for that investment is supposed to be the
exclusive right for a limited time to manufacture, market or
license an invention, product or work.
But that reward is of little incentive or value if
individuals and governments are unable or, in the latter
instance, sometimes unwilling to provide meaningful protection
and enforcement to the owners of intellectual property rights.
A number of developments in recent years have overwhelmed
the methods that countries traditionally employ to prevent
legitimate producers from being exposed to unfair competition
and to protect consumers from health and safety risks
associated with unsafe goods.
The expansion of transnational trade and the development of
the Internet as a commercial tool and the ability of producers
anywhere in the world to cheaply and rapidly produce,
distribute and transport goods to virtually any other point of
the globe have revolutionized not merely the relationships
between producers and consumers but also the relationships
between and among nations and their citizens.
To protect the legitimate interest of nations and inventors
with respect to promotion of intellectual property rights, Mr.
Chairman, it seems the United States is party to numerous
international multilateral and bilateral agreements.
Our ability to ensure these agreements and understandings
are properly carried out, not merely here at home, but also in
the markets overseas that demand the creative products
Americans are so skilled at producing, is fundamental to the
continued vitality of our economy.
When you consider that our copyright industry typically
receives about half of its revenue from outside the United
States, industries that rely on IP protection account for over
half of all U.S. exports, and these industries together
represent about 40 percent of the U.S. economic growth, it is
obvious why it is so important that we ensure that foreign
governments respect the rights of our producers.
One of the principal methods that our government uses to
promote these interests is the Section 301 review process,
which was established pursuant to the Trade Act of 1974.
Among other things, Section 301, as you know, requires the
U.S. trade rep to publish an annual report that details foreign
government policies or practices that violate a bilateral or
multilateral trade agreement or are unreasonable,
unjustifiable, are discriminatory and are unnecessarily
burdensome to the United States commerce.
For many years, the Section 301 Report has documented
various violations by the governments of China and Russia, as
you just pointed out in your statement, Mr. Chairman, with
respect to the protection and enforcement of U.S. intellectual
property rights.
Indeed, the failure of China in particular to reduce its
levels of counterfeiting and piracy, which in many copyright
sectors routinely approaches 90 percent, has led to the United
States filing two IP-related complaints at the WTO.
Rather than stealing the thunder of our witnesses, who can
describe in great detail the status of our concern with China
and Russia and other countries of priority to U.S. IP owners, I
want to first acknowledge the progress the Administration,
Congress and private industry have made in recent years in
improving the exchange of information and developing strategies
to improve the situation for IP owners.
There are no quick fixes in this area as complex as this.
Real progress require most sustained attention and a bipartisan
commitment.
Mr. Chairman, I spoke a little longer than I usually do,
but I don't know of any subject that impacts our economy any
more significant than what we are discussing today.
President Reagan once summed up the U.S. policy of
negotiating arms control agreements as ``trust, but verify.''
In my view, meaningful progress in the promotion of
intellectual property rights requires a similar transparency.
In other words, we need a little less trust and a lot more
verification.
I thank you, Mr. Chairman, and I yield back my time.
[The prepared statement of Mr. Coble follows:]
Prepared Statement of the Honorable Howard Coble, a Representative in
Congress from the State of North Carolina, and Ranking Member,
Subcommittee on Courts, the Internet, and Intellectual Property
Mr. Berman. Well, thank you very much, Mr. Coble, and your
comments reminded me that, in fact, we have had a number of
hearings on this subject building up to this point.
Our colleague from Texas, Mr. Smith, as Chairman of the
Subcommittee over the last few years, and now as Ranking Member
of the full Committee--I recognize him for his opening
statement.
Mr. Smith of Texas. Thank you, Mr. Chairman. You mentioned
Mr. Conyers a while ago.
Like Mr. Conyers, I am a Member of the Antitrust Task
Force, which also happens to be meeting right now, so I suspect
that he and I will be shuttling back and forth and maybe even
substituting for each other as the morning goes on.
But I do want to thank you, Mr. Chairman and Ranking Member
Coble, for convening this very important oversight hearing.
As has already been mentioned, we have had three
Subcommittee hearings on this subject already, which is clearly
an indication of how important this Subcommittee thinks this
subject is, and it is nice to have this as a bipartisan subject
of interest as well.
At the outset of the first hearing, I noted one of our
purposes is to begin an examination of the role of intellectual
property rights in promoting international respect for the rule
of law. In whatever form it takes, the theft of intellectual
property inflicts substantial economic harm on our country, our
entrepreneurs, our innovators and ultimately on American
consumers.
I don't quote myself very often, but I thought that was a
particularly good statement from a couple of years ago.
[Laughter.]
The potential harm to consumers that results from the
rampant production and distribution of illegal goods is, of
course, not limited to purely economic harm.
Recently, Chinese-manufactured toothpaste was recalled
because it contained a chemical used in antifreeze. And Connor
O'Keefe, a 7-year-old British boy, tragically died after
reportedly being electrocuted by a counterfeit Nintendo Gameboy
charger.
These cases illustrate the danger posed by the failure to
stop the manufacture and distribution of unsafe and counterfeit
goods.
The enormous scope of today's counterfeiting activity and
the unprecedented ability of pirates to distribute their
illegal wares quickly and on a global scale pose new challenges
to policy makers around the world.
When government officials and countries who profit from
illegal commerce actually facilitate it, these challenges are
tougher.
When the U.S. trade representative released her annual
Special 301 Report earlier this year, China and Russia were
once again included on the priority watch list. It came as no
surprise.
That designation reflects a judgment that these countries
fail to provide an adequate level of intellectual property
rights protection or appropriate market access to intellectual
property owners.
China is posed to become the second-largest trading nation
in the world, and Russia is seeking to join the World Trade
Organization.
The U.S. and other countries that support the international
rules-based trading regime must take steps to ensure that these
and other countries which enjoy the benefits of free trade also
exercise the responsibilities that that free trade requires.
Since our hearings in 2005, the U.S. government has stepped
up its dialogue with Congress and industry stakeholders and has
sought to monitor and improve international respect for IPR.
While today's hearing topic is broader than the subject of
Chinese and Russian IP theft, I do hope our witnesses will
address several specific topics.
These include offering their views on Russia's
implementation of their bilateral IPR agreement which was
signed with the U.S. on November 19th, 2006, and the current
situation with respect to the two complaints the U.S. filed
against China at the World Trade Organization for IP
violations.
Before concluding, Mr. Chairman, I would like to take a
moment to recognize the service of Victoria Espinel, to our
left, the assistant U.S. trade representative for intellectual
property and innovation, who is one of our four witnesses.
I understand that she will be leaving government service
soon. In May 2005, she served as the only common witness at our
two back-to-back hearings on IP theft.
She has brought an unparalleled dedication and commitment
to her duties at USTR, and in doing so she has brought credit
and credibility to our international efforts to improve respect
for intellectual property rights.
And we thank you for your efforts and appreciate your being
here, perhaps to testify for the last time.
Mr. Chairman, with that, I will yield back.
[The prepared statement of Mr. Smith follows:]
Prepared Statement of the Honorable Lamar Smith, a Representative in
Congress from the State of Texas, and Member, Subcommittee on Courts,
the Internet, and Intellectual Property
Mr. Berman. Thank you, Mr. Smith. And in the interest of
proceeding to our witnesses and--you know, we have a vote on,
so I would ask other Members to submit their statements for the
record.
I would ask the Members to submit any opening statements by
the close of business Wednesday. And without objection, all
opening statements will be placed into the record.
[The prepared statement of Mr. Conyers follows:]
Prepared Statement of the Honorable John Conyers, Jr., a Representative
in Congress from the State of Michigan, Chairman, Committee on the
Judiciary, and Member, Subcommittee on Courts, the Internet, and
Intellectual Property
Mr. Berman. Without objection, the Chair will be authorized
to declare a recess of the hearing at any point. And maybe we
could have Ms. Espinel testify.
So let me quickly introduce our witnesses and join with
you, Mr. Smith, in acknowledging the fine work of our first
witness. That will be Victoria Espinel. She is the Assistant
USTR for Intellectual Property and Innovation.
She is the Chief Policy Advisor to the United States Trade
Representative and the administration on Intellectual Property
and Innovation, and trade issues and the chief U.S. trade
negotiator for intellectual property issues.
She seems like the right person to have here for this
subject. She oversees enforcement of the intellectual property
protection required under International Trade rules, authors
the annual Special 301 Report of international Protection of
Intellectual Property Rights, and was involved in creating the
President's multi-agency initiative to combat global
counterfeiting and piracy, otherwise known as the STOP
initiative.
Welcome, and I will have you perhaps give your testimony,
and then I will introduce the rest of the panel afterwards but
still hope you could stick around. It is your last shot--and
for questions after this. Thank you.
TESTIMONY OF VICTORIA A. ESPINEL, ASSISTANT U.S. REPRESENTATIVE
FOR INTELLECTUAL PROPERTY AND INNOVATION, OFFICE OF THE U.S.
TRADE REPRESENTATIVE, WASHINGTON, DC
Ms. Espinel. Thank you for inviting me to speak today about
some of the work the U.S. government is doing to strengthen
protections and enforcement of intellectual property rights
around the world, including in China and Russia.
It is a great privilege that I have had the opportunity to
work with the leadership displayed in this Committee in
protecting one of America's greatest comparative advantages,
our creative class.
I would also like to commend your skilled and dedicated
staff members for all of their efforts as well. As Mr. Smith
mentioned, this was, in fact, the first Subcommittee that I
testified in front of on this issue, and it will likely be the
last, at least in my capacity as assistant USTR.
So, I want to say what a true pleasure it has been to work
with the Members of this Subcommittee and to work with your
excellent staff.
There are a number of challenges that we face in protecting
American rights overseas, including weak laws, a lack of
political will by some of our trading partners, and the
increasing scope and sophistication of counterfeiters and
pirates.
We use and devote considerable resources to addressing
these problems. The free trade agreements that we negotiate
contain comprehensive chapters on intellectual property
outlining our model for protecting intellectual property, a
model that is the world's gold standard.
Our FTAs get results. We have consistently seen stronger
laws and better enforcement of those laws from the FTAs that we
conclude.
Another tool is Special 301, which has been mentioned by
the Chairman, the Ranking Member and Mr. Smith. This report has
been successful in encouraging countries to institute reforms
or to increase enforcement in order to avoid elevation on the
list or to improve their standing on the list.
Another serious challenge that we face comes from advancing
technology and from the increasing scope and sophistication of
counterfeiters, including dissemination over the Internet and
highly organized distribution networks, some with links to
organized crime.
USTR is keenly aware that counterfeiting and piracy is a
threat to the health and safety of our consumers and to our
economy. In order to address this, we need to ensure that our
own system is as strong as possible.
We need a new international consensus on stronger rules for
civil, criminal and border enforcement. And we need to increase
global cooperation with our trading partners.
With that broad overview of USTR's approach to IP issues as
a background, I would like to comment briefly on recent
activities in China and in Russia.
China is a top intellectual property enforcement concern
for us. There is no question that China must do more to protect
intellectual property rights. China is making some genuine
efforts, but IP infringement remains at unacceptable levels.
This year's Special 301 Report described the United States'
plan to maintain China on the priority watch list and to
continue Section 306 monitoring.
In addition, we conducted an unprecedented special
provincial review of IP enforcement in several key provinces
and independent municipalities of China.
Many of these provinces and municipalities are huge
economies in their own right, and they attract significant U.S.
investment. They are also on the front lines of the IP problems
of many of our right holders.
We reported the results of that review in this year's 301
report, spotlighting weaknesses at the local level but also
highlighting some positive efforts.
In past years, we have used the Joint Commission on
Commerce and Trade to make progress on IP issues such as China
joining the WIPO Internet Treaties, which are critical to
ensuring IP protection in the digital age, and new rules
requiring that all computers be pre-installed with legal
operating system software.
Finally, in appropriate cases where bilateral dialogue has
not resolved our concerns, we have taken the further step of
filing cases at the WTO, using the WTO's dispute settlement
procedure.
So far we have initiated two cases that relate to our
intellectual property concerns. The first case involves
deficiencies in China's system for protecting and enforcing
intellectual property.
The second case challenges China's rules which make it
difficult for movies, publications and music, products of our
copyright industry, to be imported and distributed inside of
China.
It is clear from these examples that we do not hesitate to
file WTO cases when circumstances warrant that action. That
said, we believe these cases are evidence of need for more
bilateral cooperation with China, not less.
The United States believes that continued dialogue and
cooperation with China is essential to making further progress
on intellectual property issues.
With respect to Russia, the Administration has made it
clear to Russia's officials at the very highest levels that
protection of intellectual property is a singular U.S.
priority.
In November 2006 we negotiated a bilateral intellectual
property agreement between the United States and Russia, which
includes important and specific commitments to strengthen IP
protection and enforcement in Russia.
This agreement sets the stage for further progress on IP
issues in the ongoing multilateral negotiations at the WTO
concerning Russia's bid to enter the WTO.
We are also conducting an out-of-cycle review of Russia
under the Special 301. Russia has made progress in some areas--
for example, taking steps to remove pirate optical disc plants
off of government and military sites and cracking down on
unlicensed optical disc plants.
These were all specific commitments in our bilateral
agreement with Russia. However, more remains to be done under
our bilateral agreement. We will continue to press Russia to
shut down and prosecute the operators of illegal Web sites
operating in Russia, including the successors to the infamous
AllOfMP3.com.
Russia needs to pass legislation now pending in the Duma to
strengthen customs authority. Russia needs to complete
implementation of the WIPO Internet Treaties. And Russia needs
to amend Part 4 of the civil code to bring it into compliance
with the TRIPS agreement and other IP agreements.
In closing, Mr. Chairman, I want to assure you in the
strongest possible terms that the Administration shares the
view, frequently and well-articulated by the Members of this
Committee, that protection of U.S. intellectual property
overseas is critical to America's economic future.
With that in mind, we look forward to continuing to work
with you and your colleagues to improve protection and
enforcement of intellectual property around the world.
[The prepared statement of Ms. Espinel follows:]
Prepared Statement of Victoria A. Espinel
Mr. Chairman, my name is Victoria A. Espinel, and I am the
Assistant U.S. Trade Representative for Intellectual Property and
Innovation. It is my pleasure to have this opportunity to speak to you
today about some of the U.S. Government's work to strengthen protection
and enforcement of intellectual property rights (IPR) around the world,
including in China and Russia.
In order to better use our trade policy tools, the Office of the
U.S. Trade Representative (USTR) created a new Intellectual Property
and Innovation office in 2006. I head that office. The office also
includes a new Chief Negotiator for Intellectual Property Enforcement,
Stanford McCoy, and five other IPR specialists. My office is tasked
with using the full range of trade policy tools around the world to
better protect American industry from piracy and counterfeiting around
the world, and to ensure that protection remains effective as
technology continues to develop and intellectual property (IP)
infringers become more sophisticated.
USTR uses a variety of tools to protect US intellectual property
overseas, working in cooperation with other U.S. Government agencies,
with our foreign trading partners, and with U.S. right holders. These
tools include our free trade agreements, negotiations of Trade and
Investment Framework Agreements (TIFAs), WTO accession negotiations,
bilateral discussions of IP issues, the Special 301 process, U.S.
preference programs, and dispute settlement.
There are a variety of reasons that U.S. IP rights are violated
overseas, including that: some governments have weak laws--that is,
laws that are inadequate to deter piracy and counterfeiting, and some
governments do not place a high priority on protection of IP. In
addition, the scale and scope of piracy and counterfeiting has changed
in the last decade, as we have seen the use of new means to produce and
distribute infringing goods, such as the Internet, and the increasing
sophistication and organization of pirates and counterfeiters on a
global scale.
WEAK LAWS
Many countries' laws are inadequate to deter counterfeiting and
piracy. The WTO Agreement on Trade-Related Aspects of Intellectual
Property Rights (TRIPS) sets out certain minimum standards. However,
even those countries that have implemented TRIPS may not make
consistent use of those laws to deter IP theft.
USTR devotes considerable resources to working with countries to
strengthen their laws. One way we do this is through negotiations of
free trade agreements (FTAs). Each of the FTAs we negotiate contains a
comprehensive chapter on intellectual property. Our IP chapters provide
the international standard for rules to protect copyright, trademarks
and patents and other forms of intellectual property, in line with U.S.
law. Our IP chapters also contain high standards for enforcement,
including civil enforcement, criminal enforcement and border
enforcement. After we negotiate an FTA, USTR works closely with our
trading partners to ensure that the agreement is faithfully
implemented.
For example, as a result of the United States-Australia FTA,
Australia has strengthened its laws to combat internet piracy and
signal piracy. As a result of the United States-Singapore FTA,
Singapore passed a law to criminalize end user piracy of software and
then used that law to criminally prosecute software pirates for the
first time. If the United-States Korea FTA is approved and goes into
effect, Korea will be obligated to change its laws to provide greater
authority to its police and customs authorities, to outlaw movie
camcording, and to increase its focus on fighting book piracy.
We also work with countries on IP issues through our Trade and
Investment Framework Agreement (TIFA) discussions. While a TIFA does
not have as detailed IPR provisions as an FTA, we have found the TIFA
discussions to be a productive forum to discuss intellectual property
issues. For instance, our TIFA dialogue helped persuade Taiwan to pass
legislation to make peer-to-peer file sharing services illegal. Through
our TIFA dialogue, we also encouraged Taiwan to clamp down on
counterfeit pharmaceuticals, leading to police shutting down 40 drug
counterfeiting operations; pass legislation to create specialized IP
courts; and create a task force to combat copyright infringement on
university campuses.
WTO accession negotiations are another tool we have to strengthen
laws. One outcome of the negotiations on Vietnam's accession to the WTO
is that Vietnam will provide protections against criminal copyright and
trademark violations where no such protections previously existed.
Furthermore, the government has committed to address the problem of
government use of illegal software and to increase enforcement against
signal piracy. We have also used WTO accession negotiations to address
IP concerns in Russia, which I will discuss in more detail later.
LACK OF PRIORITY
Another challenge that we face is that some governments do not
place a high enough priority on protecting intellectual property. To
address this problem, we use the Special 301 process to encourage
specific trading partners to place a higher priority on addressing
identified IP problems. Each April, USTR issues a Special 301 Report
cataloguing specific IPR problems in dozens of countries worldwide. A
trading partner's ranking in the report sends a message to the world,
including potential investors, about its commitment to IPR protection.
Special 301 also affords an opportunity to give credit where it is due,
as in our decision to improve countries' standing when there are
significant improvements in IPR protection and enforcement.
The Special 301 Report has been successful in encouraging countries
to institute reforms or increase enforcement to avoid elevation on the
list or to improve standing on the list. For example, Indonesia had
been listed as a Priority Watch List country for a number of years and
was interested in improving its standing. Our concerns about illegal OD
factories in Indonesia helped persuade Indonesia to significantly
increase enforcement actions, in particular against manufacturers and
retailers of illegal optical discs. These continued and sustained
actions, which demonstrated there was political will to do more on
protecting IPR, caused Indonesia's standing to be improved to Watch
List. We are continuing to work with Indonesia to further improve IP
protection on the basis of an Action Plan developed when we improved
its standing on the Watch List.
Last year we started a new program called the Special 301
Initiative intended to make the Special 301 process even more
effective. Under the Special 301 Initiative we have focused attention
on a group of countries where we believe there is a good possibility of
progress through increased engagement. This has proved a success; we
have in fact seen concrete results over the past year in terms of
stronger legislation and better enforcement as result of the Special
301 Initiative.
TECHNOLOGICAL CHANGES AND SOPHISTICATION OF COUNTERFEITERS
Another of our challenges comes from advancing technology and from
the increasing scope and sophistication of the activities of pirates
and counterfeiters. Counterfeit and pirated products are manufactured
and then exported around the world using increasingly sophisticated and
highly organized distribution networks, some with links to organized
crime. The Internet, for example, is creating great economic
opportunities and facilitating wide dissemination of information, but
it is also a means to distribute vast quantities of pirated material
around the world quickly and at very low cost. To give another example,
product counterfeiting spans a remarkable array of products, not only
luxury goods and apparel, but also pharmaceuticals, electronics, baby
formula and auto parts, among many others.
USTR is keenly aware that counterfeiting and piracy is an
increasing threat to the health and safety of our consumers and to our
economy. We need a strong international regime for IP protection; we
need an international consensus of strong rules for civil, criminal and
border enforcement; and we need to continue to increase global
cooperation with our trading partners.
Along with challenges, we have some new opportunities. One such
opportunity is that other countries are increasingly aware of the harm
that counterfeiting is causing to their domestic economies and
consumers and are increasingly concerned that lack of IP protection
will inhibit their ability to innovate. As governments like Brazil,
China, and India pursue policies to become more innovative, they have a
greater stake in the international IP system. A second opportunity is
that other countries are becoming more interested in cooperating with
the United States on protecting IP. There is a growing international
realization that we need strong cooperation in order to stop the
manufacture and trade in counterfeit and pirate goods. USTR has worked
to capitalize on these opportunities to strengthen the international IP
regime and to increase cooperation with our trading partners.
With that broad overview of USTR's approach to IPR issues as
background, I would now like to comment briefly on recent activities in
China and Russia, two countries that have been the topics of hearings
before this subcommittee.
CHINA
China is a top IPR enforcement concern for us.
There is no question that China must do more to protect
intellectual property rights. China is making some genuine efforts, but
IPR infringements remain at unacceptable levels.
Let me start with some of the recent efforts China has taken to
improve IPR protection and enforcement. In July, as a result of the
ongoing work of experts in the U.S.-China Joint Liaison Group for Law
Enforcement, Chinese and FBI law enforcement successfully worked
together in their largest joint IP investigation to date, Operation
Summer Solstice. Among other things, this operation dismantled a major
international criminal network engaged in optical disc piracy; seized
half-a-billion dollars in pirated U.S. software and over $7 million in
assets; arrested 25 suspects in China; and dismantled 6 manufacturing
and retail facilities. China also agreed in May to cooperate with U.S.
Customs and Border Protection (CBP) to fight exports of counterfeit and
pirated goods.
That said, we see evidence of unacceptable levels of IPR
infringement most vividly in the numbers of infringing goods seized at
U.S. borders. CBP mid-year statistics for 2007 showed that China was
the source of 81 percent of infringing goods seized at U.S. borders.
China's high share of seized goods is not particular to the current
year.
USTR and the Administration as a whole continue to respond to this
critical concern by making innovative use of our full range of trade
policy tools. First, USTR has augmented our focus on the unique
challenges of China with the appointment last year of a Chief Counsel
for China Trade Enforcement, Claire Reade, who leads our China
Enforcement Task Force.
Second, this year's Special 301 Report described the United States'
plan to maintain China on the Priority Watch List and to continue
Section 306 monitoring. In addition, we conducted an unprecedented
special provincial review of progress on IPR issues in several key
provinces and independent municipalities of China. Many of these
provinces and municipalities are huge economies in their own right, and
they attract significant U.S. investment. They are also on the front
lines of IPR problems for some U.S. right holders. We reported the
results of that review at the end of the 2007 Special 301 report,
spotlighting weaknesses at local levels, but also highlighting positive
efforts, innovative initiatives for fighting Internet piracy in
Beijing, pilot programs on enforcement in Shanghai, and deeper
engagement with international right holders in Jiangsu province.
In past years, we have used the Joint Commission on Commerce and
Trade (JCCT), which Ambassador Schwab jointly chairs with Secretary
Gutierrez, to get results on IPR. For example, as a result of past JCCT
commitments:
China introduced rules that require computers to be
pre-installed with licensed operating system software;
China agreed to step up work to combat counterfeit
goods at trade fairs and consumer markets; and
China joined the WIPO Internet Treaties, which are
critical to ensuring IP protection in the digital age.
As I mentioned earlier, we have also used our Special 301 process--
USTR's annual report card on international IP protection--to highlight
China as a top IPR enforcement priority. Our analysis of China is the
most in-depth and detailed of any country covered in the Special 301
Report.
Finally, in appropriate cases, where bilateral dialogue has not
resolved our concerns, we have taken the further step of filing World
Trade Organization (WTO) dispute settlement cases. So far we have
initiated two cases that relate to our IPR concerns.
The first of these cases involves deficiencies in China's legal
regime for protecting and enforcing copyrights and trademarks on a wide
range of products. Specifically, our panel request focused on three
main issues: quantitative thresholds in China's law that must be met in
order to start criminal prosecutions of copyright piracy and trademark
counterfeiting and that appear to create a substantial safe harbor for
those who manufacture, distribute, or sell pirated and counterfeit
products in China; rules for disposal of IPR infringing goods seized by
China's customs authorities; and the apparent denial of copyright
protection to works poised to enter the Chinese market but awaiting
censorship approval from China's authorities. The WTO panel in this
case was formally established at a meeting of the WTO Dispute
Settlement Body on September 25.
Our second WTO case challenges China's barriers to trade in books,
music, videos and movies. Our panel request focuses on a legal
structure in China that denies foreign companies the right to import
publications, movies, music, and videos, as well as on China's rules
that severely impede the efficient and effective distribution of
publications and videos within China. In addition, this panel request
addresses market access barriers affecting the distribution of movies,
as well as the distribution of sound recordings over the internet and
the mobile phone network.
It is clear from these examples that we do not hesitate to file WTO
cases when circumstances warrant that action. At the same time, these
cases are evidence of the need for more, not less, bilateral engagement
with China. The United States believes that continued bilateral
dialogue and cooperation can lead to further progress in these and
other areas. The United States will continue to put serious efforts
into its joint work with China on innovation policy, intellectual
property protection strategies, and the range of other important
matters in our bilateral economic relationship through the U.S.--China
Strategic Economic Dialogue and the JCCT.
Moving ahead with that work will of course require a willingness to
cooperate on the Chinese side. We have seen that in some areas, such as
the recent law enforcement actions I mentioned earlier, and we hope to
see it in other areas as well.
RUSSIA
With respect to Russia, the Administration has made it clear to
Russia's officials at the highest levels that the protection of IPR in
Russia is a U.S. priority. As we have moved into the multilateral phase
of the negotiations on Russia's accession to the WTO, we have continued
to reinforce the importance that both the Administration and Congress
place on full implementation of all the commitments in our November
2006 Bilateral IPR Agreement.
The 2007 Special 301 Report describes the Bilateral IPR Agreement
between the United States and Russia, concluded in November 2006, which
includes important commitments to strengthen IPR protection and
enforcement in Russia. Under the terms of the agreement, Russia
committed to take action to address piracy and counterfeiting and
further improve its laws on IPR protection and enforcement. The
agreement sets the stage for further progress on IPR issues in ongoing
multilateral negotiations concerning Russia's bid to enter the WTO.
This year's Special 301 Report continued heightened scrutiny of Russia
by maintaining Russia on the Priority Watch List and announcing plans
for an Out-of-Cycle Review.
In August, we received comments from the public, including from
U.S. industry and the Russian Federation, as part of the Out-of-Cycle
Review of Russia's protection of intellectual property. A major purpose
of that review is to scrutinize Russia's implementation of the
Bilateral IPR Agreement. That review is ongoing.
In the meantime, we continue to work intensively with our Russian
counterparts to achieve progress on the outstanding bilateral and
multilateral issues related to Russia's WTO accession, including
implementation of TRIPS.
Russia has made clear progress in some areas. For example, they are
taking steps to move optical disc plants off of restricted military-
industrial sites, cracking down on unlicensed optical disc
manufacturers, passing laws to curb abuses by rogue copyright
collecting societies, and issuing helpful new guidance for the
prosecution of criminal IPR cases. These were all specific commitments
in our bilateral agreement.
However, more remains to be done pursuant to our bilateral
agreement. For example, we will continue to press Russia to shut down
and prosecute the operators of illegal websites operating in Russia,
including the successors to the infamous allofmp3.com. Russia needs to
strengthen its supervision of licensed optical disc plants, including
better laws and regulations and more enforcement. Russia still needs to
make legislative changes to implement its TRIPS requirements to protect
pharmaceutical test data. It must pass legislation now pending in the
Duma to strengthen Customs' authority to take actions ex officio with
respect to suspected exports and imports of pirated or counterfeit
goods. Russia needs to complete implementation of the WIPO Internet
Treaties, and it must amend Part IV of its Civil Code to ensure full
compliance with TRIPS and other IPR agreements. Some of these actions
are overdue--a concern that we raised with our Russian colleagues at
our bilateral Intellectual Property working Group in Moscow on
September 24 and 25 and during other recent meetings with the Russian
Federation in Geneva and Washington. We have been assured that the
process of compliance is moving ahead.
______
In closing, Mr. Chairman, I want to assure you in the strongest
possible terms that the Administration shares the view, so frequently
and well articulated by the distinguished members of this subcommittee,
that protection of U.S. intellectual property overseas is critical to
America's economic future. With that in mind, we look forward to
continuing to work with you and your colleagues to improve protection
and enforcement of IPR around the world.
Mr. Berman. Well, thank you very much, Ms. Espinel.
And I think at this point I will recess the hearing. I
believe it is one vote, so we will be right back and introduce
the rest of the witnesses, hear their testimony and then
questions.
Thank you.
[Recess.]
Mr. Berman. Let me introduce the rest of the panel and
reconvene the meeting. The next witness will be Eric Smith, who
represents the International Intellectual Property Alliance.
The IIPA is a private-sector coalition of seven copyright-
based trade associations which represent over 1,900 companies
in the movie, music, business software, and video game
publishing industries.
Since co-founding the IIPA in 1984, Mr. Smith has
represented the IIPA before U.S. and foreign governments with
the primary objective of opening foreign markets to U.S.
copyrighted products and reducing piracy levels through
improved legal protection and effective enforcement.
He was the principal representative of the copyright
industries in the WTO's TRIPS and NAFTA intellectual property
negotiations, and served on the U.S. delegation at the
diplomatic conference leading to the adoption of the WIPO
Copyright Treaty and Performances and Phonograms Treaty in
1996.
I would just add that I had the pleasure of spending a
couple of days with him at a conference on these subjects this
past summer, and both enjoyed it and found him incredibly
knowledgeable on this whole subject.
Dr. Loren Yager is Director of International Affairs and
Trade of the U.S. Government Accountability Office.
Dr. Yager has managed GAO efforts to document U.S. efforts
to enforce intellectual property rights at home and abroad, the
Federal approach and strategy for improving intellectual
property rights enforcement, and small business efforts to
obtain patent protection.
Additionally, Dr. Yager has completed reports and provided
congressional testimony on a wide range of topics, including
China import remedies, customs and border protection's in-bond
system, off-shoring of U.S. services, terrorist financing,
global corporate responsibility, illegal textile transshipment
and the World Trade Organization, China's WTO compliance, the
maquiladora industry, container security, and a variety of
other subjects.
Lastly, Mark MacCarthy is Senior Vice President of Global
Public Policy at Visa. He represents Visa before international
public policy makers around the world and in the United States
before the Congress, the Administration, the Federal Trade
Commission, the banking regulators and other regulatory
agencies.
Mr. MacCarthy is responsible for Visa's global public
policy initiatives and strategies in the area of data security
and privacy, electronic commerce issues such as Internet
gambling and Internet pharmacies, and product innovation such
as Visa's contactless payment platform and prepaid cards.
If I recall correctly, he also worked in this place for a
good period of time.
Gentlemen, all your written statements will be part of the
record in its entirety. I would ask you to summarize your
testimony in 5 minutes or less.
There is a timing light at your table that supposedly works
now, and when 1 minute remains, the light will switch from
green to yellow, and then to red when the 5 minutes are up.
I am tempted to let Mr. Coble add his admonition about what
that light means, but I'm not doing that. Mr. Smith, why don't
you begin?
TESTIMONY OF ERIC H. SMITH, PRESIDENT, INTERNATIONAL
INTELLECTUAL PROPERTY ALLIANCE (IIPA), WASHINGTON, DC
Mr. Smith. Chairman Berman, Ranking Member Coble, Members
of the Subcommittee, it is an honor and pleasure to appear
before the Subcommittee for the third time on this topic, twice
in 2005, to again provide an update on global copyright piracy.
Piracy continues to rage around the world and is a threat
to U.S. growth and U.S. jobs. While the situation is slowly
improving each year on the physical piracy front, with some
individual country exceptions, Internet piracy is now truly a
global problem with U.S. content fueling that piracy in most
countries.
Increasingly, we all must focus on online piracy as a
threat to e-commerce and to U.S. leadership in producing and
globally distributing high-value content.
The U.S. maintains a huge comparative advantage, as was
said by Mr. Coble, in the production and distribution of
creative works, filmed entertainment, music and recordings,
business and entertainment software, and books and journals
that make up the IIPA family.
And for most of these industries, 50 percent of their
revenues derive from outside the U.S.
This comparative advantage has meant that these creative
industries now account for an ever-increasing portion of the
GDP, about $819 billion in 2005, or close to 7 percent of the
U.S. GDP; over five million jobs, which is about 4 percent of
total employment; and $110 billion in foreign trade revenues,
making it one of the largest contributors to trade in our
economy.
Perhaps most important is that these industries accounted
for over 13 percent of the growth in the economy in 2006.
Global piracy threatens that growth path. We have been
wiretapping what Internet piracy has done to our recording
industry and threatens to do to others as well.
A study came out this month that for the first time was
able to quantify the impact of global piracy on the U.S.
economy, $58 billion in losses, lost jobs, lost tax revenues,
lost waves.
The study concluded that all these numbers were
conservative. In my written statement, I detailed IIPA members'
initiatives and challenges in dealing with this problem, and I
won't repeat them here.
But Mr. Coble was quite right. On the enforcement side
there just aren't any quick fixes.
Suffice it to say that the copyright industries depend
critically on good laws and enforcement and that governments
are central to making that happen.
Our government has led the way and without the help of USTR
and other agencies and from Congress for providing the trade
tools to assist in awakening our trading partners to the need
to protect our intellectual property, including for the benefit
of their own citizens and creators, we would be in truly dire
straits.
We have witnesses many successes in the last 20 years,
driven in part by good work from our government.
I do want to report on the two countries that have provided
the greatest challenges for us, China and Russia. The situation
in China since we last reported to you at the end of 2005 is
mixed.
IIPA members, with the exception of the business software
industry, have not seen much progress at all, mostly at the
margins. Losses continue at very high levels, hovering between
80 percent and 90 percent of the market, making it almost
impossible to do business there.
The biggest problem, again, as before, is China's stubborn
reliance on a flawed administrative enforcement system that
simply lacks any incentive for pirates to leave this lucrative
business, and China's almost total failure, really, to employ
criminal remedies, which has been the only way we have been
able to reduce piracy levels in the rest of the world.
The business software industry, through China's meeting
some key JCCT commitments with respect to legalizing software
use in the industry's biggest customer, the Chinese government,
has seen a 10 percent decrease in piracy rates and a resulting
88 percent increase in sales since our last report to you in
2005.
And I can guarantee you the rest of my members would love
to see that kind of progress, too.
Internet piracy is our most urgent concern. The biggest ISP
search service in China, Baidu, which was mentioned, is
reportedly responsible for 50 percent of illegal downloads.
We think the Chinese government is also very concerned
about Internet piracy, has passed good regulations dealing with
the protection of content online, but, again, enforcement is
weak and criminal enforcement is spotty at best.
Overall, we have only counted six concluded criminal cases
involving U.S. works since 2001, when China joined the WTO, a
record that must change if China is ever to reduce its high
piracy levels and make a real market for copyrighted material.
And China is a closed market in terms of market access for
our cultural industries, another problem that prevents them
from selling in the Chinese market.
The pirates, of course, enjoy complete market access for
our products, and through this theft enjoy the economic
benefits that should come to our own citizens.
Russia remains a continuing frustration. The November 2006
IPR agreement, Russia's pathway to WTO accession, we hope and
continue to hope will be complied with. And if so, we will see
a much better market there.
Russia has made some progress, as Victoria has outlined,
but even here we await the true fruits of that progress. For
example, while Russia promised to cancel leases for the pirate
O.D. factories housed on protected government reservations,
that process is still in process.
No direct results yet. No plant owner has been convicted,
and very few criminal cases with deterrent penalties can be
counted.
We await real progress, and meanwhile IIPA's year 2000 GSP
petition remains in limbo with Russia still receiving over $500
million in unilateral benefits in 2006, with our industries, in
turn, suffering close to $2 billion in losses.
Mr. Chairman, it is there in our testimony, in our written
testimony, it is there for all to evaluate how serious Russia
is in working to solve its massive piracy problems.
If I might, Mr. Chairman, one word about Canada.
Mr. Berman. One sentence.
Mr. Smith. The situation there is not good. The law is
antiquated and unequipped to deal with online piracy, which is
growing. Enforcement is not a high priority there. We
definitely need improvements in Canada. Thank you.
[The prepared statement of Mr. Smith follows:]
Prepared Statement of Eric H. Smith
Mr. Berman. Thank you very much.
Dr. Yager?
TESTIMONY OF LOREN YAGER, DIRECTOR OF INTERNATIONAL AFFAIRS AND
TRADE, U.S. GENERAL ACCOUNTABILITY OFFICE (GAO), WASHINGTON, DC
Mr. Yager. Good morning, Mr. Chairman, Members of the
Subcommittee. I am pleased to be here today to report on our
work on intellectual property protection before the
Subcommittee of the U.S. Congress that has identified this
topic as one of its primary areas of focus.
Prior hearings of this Subcommittee have focused on the
patent reform act, trying to create the right formula for
stimulating creative and inventive activity in the United
States.
Ultimately, once the patents or other protections have been
granted, it will only be meaningful if there is protection of
IP in the United States as well as in other countries.
Today I will discuss the increasing challenges to IP
protection as advances in technology and changes in global
manufacturing make counterfeiting and piracy an ever greater
threat.
As requested, I will summarize the work the GAO has
performed on two subjects, first the nature of the risk that
U.S. corporations face in protecting IP, and second, U.S.
methods for implementing and coordinating United States'
intellectual property enforcement activities.
My remarks are based on a variety of assignments the GAO
has conducted for the Congress related to IP protection over
the past 5 years.
The first major subject I would like to cover in this
statement is that the risk to IP is increasing for U.S. firms,
for a number of reasons.
For example, as the technological and manufacturing
capability in Asia increases in industries such as the
semiconductor industry, more complex parts of the production
process are being carried out in countries like China, which
puts more U.S. technology at risk.
A second reason is that high profits and technological
advances have also raised the risk of IP infringements by
encouraging and facilitating counterfeiting and piracy.
Economic incentives for counterfeiting and piracy include
low barriers to entry and high profits, given that there is no
repayment of the research and development or other reward for
the inventive activity.
In addition, technology has allowed high-quality,
inexpensive and accessible reproduction and distribution,
particularly in the digital industries.
At the same time, the level of deterrence has not kept pace
with the level of profitability. For example, there has been
weak enforcement in some countries, and China is a country
where the combination of production capability as well as
export capacity is unique.
However, there are many other countries where enforcement
challenges have persisted despite U.S. efforts.
The second subject I want to cover is the U.S. domestic
efforts to protect intellectual property can also be improved.
The United States faces significant obstacles to
coordinating domestic efforts and ensuring that strong
intellectual property protection remains a priority.
One of the biggest obstacles is the crosscutting nature of
the issue and the necessity for coordination between the large
number of agencies involved in IP protection.
In my written statement, I have included a figure showing
the different agencies and sub-agencies involved in IP
protection, and the figure includes policy agencies such as
USTR, enforcement agencies such as the FBI, as well as
technical offices such as the copyright office.
We took a close look at the IP coordination structure in
the United States and found that it lacks permanence as well as
some other features that are central to the success of this
type of effort.
We also reported on the efforts of customs and border
protection to interdict counterfeit goods at the U.S. border
and found that the bulk of customs enforcement outcomes in
recent years have been accomplished within certain modes of
transport, product types, and have been restricted to a very
limited number of ports.
For example, only 10 of the 300-plus ports are responsible
for three-fourths of the seizure value, but yet these were not
necessarily the largest ports in terms of import volume.
We made a series of recommendations to customs that we
believe will help them better focus their IP inspection
activities.
In conclusion, Mr. Chairman, having the right formulas for
creating intellectual property is of limited value unless there
is sufficient protection for the works that are created, and
this hearing directly addresses that issue.
There is little disagreement, at least domestically, with
the need to strengthen protection, but the difficulty is in how
to best achieve that goal in the face of the strong economic
incentives for counterfeiting and the limited resources
available to protect it.
While there are many elements of a successful national
strategy, continuity is central to success, whether that is in
the efforts to encourage trading partners such as China, the
domestic efforts of U.S. agencies, or in the oversight by
Congress.
We appreciate the opportunity to discuss some of our
findings before this Subcommittee and would be happy to help
consult further to help achieve the long-term goals.
Thank you, Mr. Chairman. I would be happy to answer any
questions.
[The prepared statement of Mr. Yager follows:]
Prepared Statement of Loren Yager
Mr. Berman. Thank you, Dr. Yager.
And, Mr. MacCarthy?
TESTIMONY OF MARK MacCARTHY, SENIOR VICE PRESIDENT FOR GLOBAL
PUBLIC POLICY, VISA INCORPORATED, WASHINGTON, DC
Mr. MacCarthy. Thank you, Mr. Chairman, and Ranking Member
Coble and Members of the Subcommittee. Thank you for the
opportunity to testify before you today. Visa operates a global
electronic payments network in more than 170 countries around
the world.
We do not issues Visa cards and we do not arrange for
acceptance of Visa cards by merchants. These relationships are
handled by our network of 16,000 financial institutions
throughout the world.
To protect the Visa brand, to promote electronic commerce
and because it is the right thing to do--and thank you, Mr.
Chairman, for that quotation there--Visa goes beyond any legal
requirements to prevent the use of our payment system for
illegal electronic commerce transactions.
Our policy is clear and unambiguous. Our systems should not
be used for illegal transactions.
We work cooperatively with law enforcement around the
world, and we take special steps in cases of criminal activity
and activity that threatens health and safety.
For example, we search the Internet for merchants selling
child pornography or illegally distributing controlled
substances, and we expel them from our system as soon as they
are discovered.
The subject of today's hearing is different. It relates to
complaints by third-party business entities that Internet
merchants are violating their intellectual property rights.
Now, Visa can't be the law enforcement agency for
violations of intellectual property rights on the Internet.
Still, we have policies and procedures in place to handle these
third-party complaints.
Our global policy is this: If a transaction would be
illegal in either the jurisdiction of the merchant or the
jurisdiction of the cardholder, we don't want that transaction.
The AllOfMP3.com and allTunes.com case illustrates how this
policy works. In that case, Visa officials received a
documented complaint from IFPI, which represents copyright
owners internationally.
They asserted that AllOfMP3.com, a music download site
located in Russia, was infringing on the copyrights of their
members. We conducted a legal assessment, including a review by
outside counsel, and concluded that under Russian law and under
the law of the vast majority of the customers of AllOfMP3.com,
the merchant's transactions were illegal.
After appropriate notice, the Russian bank working with the
site stopped processing its Visa transactions. This was in
September of 2006. At the end of September 2006, the bank also
stopped processing transactions from an affiliated download
music site called allTunes.
And then the owner of allTunes sued the bank in a Russian
court. Visa was a party to that litigation on the side of the
bank. And in June 2007, the owner won a judgment that the bank
had violated its contract with the merchant, and the bank would
be required to provide processing services.
In response to the bank's claim that the merchant was
acting illegally, the court determined that there were no
rulings in Russia establishing that allTunes was making illegal
use of exclusive rights belonging to some rights holder.
Later on, in August of 2007, in a different case, a Russian
court issued a ruling relating to a criminal copyright
infringement case initiated by IFPI against the owner of
AllOfMP3.com. This ruling stated that there and not been
sufficient confirmation of any illegal activity by the site's
owner.
The court implied that this and similar sites would be in
compliance with Russian law to the extent that they paid for
rights from a Russian collective rights society.
These court cases created a challenge for us. To preserve
our cross-border policy, we decided to allow the local bank to
provide only domestic service to the site involved in the court
case, but transactions from customers in other countries would
not be allowed.
Now, what lessons can we learn from this case? First, Visa
has policies and procedures in place to handle these kind of
issues. Second, private-sector enforcement in this area is
limited. Visa can only make decisions where the underlying law
is reasonably clear.
In this circumstance, the local law appeared reasonably
clear to us, to our local bank and to the record companies. But
a local court thought otherwise.
As a result, Visa's client bank was exposed to legal
liability for withdrawing service to a merchant that was found
to be operating legally under local law.
We are simply not in a position to clarify local law, to
override it, or to resolve conflicts between different legal
systems.
There are clearly system limitations on our ability to
block illegal transactions when the laws of many countries
conflict. Potentially we would have to deal with conflicting
regimes in the 170 countries around the world where we operate.
And this leads to my third and final point. When local laws
are not clear, governments and aggrieved businesses cannot put
private-sector intermediaries like Visa in the position of
resolving the issues.
Ultimately, this will require government-to-government
discussions that harmonize local legal structures.
Thank you again for the opportunity to testify today, and I
am happy to answer any questions you might have.
[The prepared statement of Mr. MacCarthy follows:]
Prepared Statement of Mark MacCarthy
Mr. Berman. Well, thank you all.
And I am going to wait till the end of Member questioning
to ask my questions and will recognize now, for 5 minutes, the
Ranking Member of the Subcommittee, Mr. Coble.
Mr. Coble. Mr. Chairman, I thank you for that.
For the information of the witnesses, some weeks ago in my
district a church had a fundraiser, and the high bidders, Mr.
Chairman, were assured that they would be my guests for lunch.
So if I don't appear in the Members' room on or about
11:30, they are not going to be happy with me. I have got to
pick up the tab. Thank you, Mr. Chairman.
Ms. Espinel, given that China is the fourth-largest economy
in the world, and----
Mr. Berman. Is this an online program?
Mr. Coble. No. No. [Laughter.]
He always disarms me, but with a smile on his face.
Given that China is the fourth-largest economy in the world
and poised to become the second-largest training nation in the
world, why should it be considered a developing nation?
And let me ask you this, Ms. Espinel. Are there any
economic or trade benefits that extend to China based on this
designation?
Ms. Espinel. Well, certainly, with respect to the area that
I cover, intellectual property, we do not believe that China's
status as a developing country--and I am not conceding that
China is a developing country or has any particular status.
But if China asserts that it is, we don't believe that that
should serve as any excuse for China not to strengthen its
intellectual property system and adequately protect American
interests consistent with the obligations and commitments that
it has under the WTO.
Mr. Coble. And I wanted to ask Mr. Smith a question, but I
want to put one more question to Ms. Espinel.
Your statement referred generally to some of the
commitments contained in the bilateral IPR agreement, but it
did not make clear which, if any, of the specific actions that
the Russian government was obligated to complete by June 1st of
this year have been satisfactorily performed.
If you will, Ms. Espinel, can you identify which
commitments were required to be performed by 1 June and the
USTR's current assessment of Russia's performance on each?
Ms. Espinel. I would be happy to. There are two categories
of commitments. Some were required to be in place by June 1st.
Some, particularly as related to enforcement, are
commitments that Russia signed up to start acting on
immediately and commitments that we think should continue after
their WTO membership is complete, should we come to that point.
Two that I want to highlight in particular--one of the
commitments that Russia made in the bilateral agreement was to
shut down or to terminate the leases of illegal optical disc
plants that are operating on government sites, what are
referred to as restricted access sites.
And Russia has made progress in this are. I believe there
are 17 such plants. Russia has terminated the leases--or by the
end of this year, Russia should have terminated the leases on
16 of those 17 plants.
And I can assure you we won't forget about the one that is
remaining. But that is significant progress on an issue that
has been a point of contention between the U.S. and Russia for
some time.
Russia has also stepped up enforcement against illegal,
unlicensed optical disc plants. They have conducted seven raids
of unlicensed plants this year. They have conducted 17 raids of
warehouses where illegal product is stashed. So that is
progress.
However, there are a number of areas where Russia still
needs to make considerable progress, and we will continue to
push them on that.
And a few of those areas are--for example, there is customs
legislation that they committed to pass that has not yet gone
into force. It is now pending in the Duma.
But Russia needs to pass that customs legislation to give
their customs authorities more authority to take action at the
border.
Russia needs to take action against illegal pirate Web
sites--the successors to the AllOfMP3, which have been
mentioned by some of my fellow panelists.
Russia needs to make amendments to its civil code to bring
it into compliance with the TRIPS agreement. Russia needs to
complete its accession to the WIPO Internet Treaties to protect
copyright in the digital age.
So again, while Russia has made some progress in some
areas, there are still a number of areas where Russia needs to
make further progress in order to be in compliance with the
agreement that we have negotiated.
Mr. Coble. I thank you.
Mr. Smith, for some time the IIPA members call upon the
United States government to utilize the WTO dispute settlement
mechanism to press our concerns regarding China.
Now that we have done so, what do you consider to be the
next most important steps that the USG can take to improve
conditions for IP owners in China?
Mr. Smith. Well, I think that case has to proceed apace. It
is an important case, and I think Ms. Espinel can probably give
you the details. IIPA is not directly involved in that case. It
is a subgroup of our group called the China Copyright Alliance.
But I think that case has to proceed, and I think the
people who are involved in that case feel very certain that
that case will go well.
And I think the key is going to be, if that is true, the
implementation phase of that case when it is completed to try
to leverage additional improvements beyond those--the actual
panel decision on the narrow facts of the particular claims
that are being brought.
Mr. Coble. I thank you for that.
Mr. Chairman, I know my red light is on, but if I may make
one more statement, Mr. Chairman.
The international trading system, lady and gentlemen, is
rules-based. And respect for those rules demands that there be
serious consequences for countries which have voluntarily
agreed to abide by the rules of the road but yet choose to
consistently and continually fail to honor their commitments.
And I think that is one of the impediments, Mr. Chairman,
that we must encounter successfully.
Thank you.
And thank you, Mr. Chairman.
Mr. Berman. Thank you, Mr. Coble. I couldn't agree with you
more. Of course, one of the questions I plan to ask later to
Ms. Espinel is what about the situation where we don't comply
with this rules-based system, but we will save that for later.
The gentleman from North Carolina, Mr. Watt, is recognized
for 5 minutes.
Mr. Watt. Thank you, Mr. Chairman.
I want to first applaud the Chair for convening this
important hearing. I am new to this Subcommittee.
There probably hadn't been a more consistent theme for a
set of involvements that I have had in international travel
since I have been in Congress than this one issue.
I don't think I have ever been to a foreign country on a
congressional delegation trip, on an informal trip, on
anybody's dime where there hadn't been an aggressive discussion
of how we attack the piracy and theft of intellectual property
and its products.
And I guess if I had made an opening statement, it would
have paralleled Ms. Espinel's that we started off thinking that
in most countries it was primarily a question of weak laws or
no laws.
We progressed beyond that to a recognition that having a
set of laws on the books, without some effective enforcement
mechanism and policing and sanctioning process, wasn't very
helpful.
And the third point she made was that despite all of those
efforts, after 15 years in Congress, the explosion of
international trade and the opportunities for people to engage
in piracy and intellectual property theft have gotten bigger,
and bigger, and bigger and bigger.
So one walks away from a hearing of this kind with a sense
of frustration, a much, much better understanding of a
description of the problem, which all of the witnesses were
very well equipped to describe.
What seems always lacking at the end of these kinds of
hearings is not a lack of understanding about what the problem
is but what can we do more aggressively to try to solve the
problem.
And so let me start with Mr. Yager and Mr. MacCarthy. First
of all, maybe I will start with Mr. MacCarthy, just to see
whether other facilitators of the economic transactions--credit
card issuers, banks that facilitate the transfer of money and
facilitate commerce in the regular course of events--aside from
the off market itself.
I am not much on using the term black market for reasons
that some people might understand better than others.
But what is the general attitude of facilitators of
financial transactions? Are they consistent with the ones that
you have expressed here? Are they being aggressively engaged?
And what more can they do to help us with this problem?
Mr. MacCarthy. I can't speak in detail for all of the
financial service providers in this area, but in general they
have policies and procedures that are similar to the ones that
I described, which is they have in place a process for
evaluating complaints that come to them, investigating them and
then taking appropriate action.
Even if the systems--the traditional systems that are
involved in electronic commerce could stamp out these kind of
transactions within their systems--and for reasons I mentioned
in my testimony, it seems unlikely that they will be successful
in doing that completely.
But even if they could, there are alternative payment
mechanisms out there that are ready to move into the gap and to
provide payment services when the traditional payment providers
are successful in driving the illegal activity out of their
circumstance.
We have seen that already in the context of child
pornography, where there is a coalition against child
pornography that the financial institutions have organized, and
we are working cooperatively together with the National Center
for Missing and Exploited Children.
And what we found is that the success that we have had in
driving those kind of transactions out of our system has been
mirrored by the use of alternative payment mechanisms for those
transactions. Various kinds of e-cash or digital cash are
stepping in to be the transaction processor of choice.
Similar things are happening in Internet gambling. As we
are using our coding and blocking mechanism to reduce the use
of regular payment cards for Internet gambling transactions,
those merchants are turning to the automated clearinghouse and
using that as the mechanism for completing the transactions.
And that mechanism is not, you know, a kind of underground
operation. That is the same mechanism that many people use to
get their payment from employment. It is the same mechanism
that people use for many recurrent payments, for their
mortgages or utilities or their rental payments.
But it is a harder system to control. There is less ability
to know exactly who is doing what on that system. And it is the
kind of system that can be used as an alternative mechanism
when the traditional payment mechanisms have done what they can
to drive the illegal transactions out of them.
Mr. Watt. You may be depressing everybody in the room if I
allow you to go further.
My time has expired.
Mr. Yager, and you don't have to answer this now, if the
GAO has done some specific set of recommendations about how we
may approach solutions--I mean, I understand the problem. There
is a great description of the problem that you have outlined in
your testimony.
But if there are a set of solutions that you all--came up
in the process of doing the GAO study, I would welcome----
Mr. Yager. Let me just answer that very briefly. We have
done a lot of work. Obviously, Ms. Espinel has covered what
happens abroad.
Some of the work that we have done has to do with what can
be done in the United States to raise the level of deterrent,
because that is really what we are talking about, trying to
create a bigger deterrent for the operations.
So a couple of the very specific studies we did had to do
with the customs and border protection that operates at our
borders when the goods are coming across.
One of the keys there is that there has to be a greater
extent and a greater level of seizure activity, because we
found in looking at their seizure efforts that they were highly
concentrated in certain specific ports, and some of the major
ports are not getting much seizure activity.
And there isn't awareness by the management of this problem
to try to learn how it is that some ports are doing so much
better than others. What can they learn internally to make sure
that that kind of skill exists at all ports?
The second recommendation and the second issue that we
brought up in our report is that in some cases there are
penalties assessed against seized goods, but one of the things
that we found is less than 1 percent of those penalties are
currently being collected.
Penalties without payment are not an effective deterrent,
so there has to be greater attention to not just levying the
fines but collecting the fines from those that are abusing the
laws.
So I think that also means at some point a greater threat
of prosecution in the United States. So I think that the
deterrent level needs to be raised.
Certainly, a lot can be done abroad, but there are also
things that can be done domestically, and we have some very
specific suggestions as to how that could be done.
Mr. Watt. And I know my time is over, but it seems to me
that there is a parallel effort going on here to intercept the
prospect of terrorism before it gets to the borders that you
are talking about.
Mr. Yager. That is right.
Mr. Watt. Is anybody looking at the--I mean, we tend to
look at this stuff in silos.
I would like the benefit, at some point--not right now--of
knowing whether anybody is even talking to each other across
those silos to try to figure out some common steps that we
could be making on the intellectual property front while we are
making steps on the terrorism, counterterrorism front.
Mr. Chairman, I am way over my time, and I will yield back.
Mr. Berman. Perhaps a hearing on whether we should take the
military option off the table--well, never--no. [Laughter.]
Just based on order of appearance, I am going to recognize
our newest Member of the Subcommittee, from Ohio, Ms. Sutton.
Ms. Sutton. Thank you, Mr. Chairman. And Mr. Coble is gone,
but I want to thank you both for not only, of course, Mr.
Chairman, for holding the hearing but also for the remarks and
the questions that Mr. Coble asked while he was present.
This is an extraordinarily important issue, and I see it
as--in reflecting upon Mr. Coble's words, as part of a bigger
problem that our international trading system is broken. And I
have a number of questions, but I would just like to sort of
draw some things together.
And I was struck, Ms. Espinel, when you were talking about
the privilege to protect our creative class.
And I absolutely concur that this is an enormous issue, and
I am sympathetic and looking forward to finding ways to make
this work so that our businesses and our workers are not left
at a disadvantage in this country.
But I was struck by the use of the words that you chose,
protect and protect and protect against sort of these illegal
tactics being employed by others.
When I use that language to talk about other sectors of our
economy, like the traditional manufacturing sector, just
talking about stopping unfair trading practices that are being
employed and sometimes subsidized by other countries, I am
called a protectionist.
Do you ever get--are you ever called a protectionist, or do
you fashion yourself one?
Ms. Espinel. No. In the sense that that word is used,
protectionist in terms of--obviously, my office, USTR as a
whole, are strong proponents of free trade.
We see our free trade agreements--we see our free trade
agenda--as being a way not just to increase market access for
U.S. products but also for a way to build the world economy and
a way to help other countries build their own economy.
In terms of intellectual property protection, yes, the
mission of my office is to protect American industry, but we
also strongly believe that other countries have a role, a true
stake, in the international IP system.
We have talked a lot today about challenges. One of the
opportunities we have is that there are many countries around
the world that want to become innovators, that I think see
their future as being part of the knowledge economy.
And I think as that continues, they will then see that they
have a greater stake in the international IP system. Amd I
think there is also a growing realization among our trading
partners that while the U.S. does a tremendous amount to
protect the right holders, we cannot do it alone.
This problem that we are discussing of global trade and
counterfeit and pirate goods is an area where we need increased
cooperation with our trading partners.
I think more and more of some of the trading partners that
share the U.S. concerns are aware of that. And USTR has been
working very actively to try to capitalize on that and to try
to come up with some new and creative ideas to increase that
cooperation with our trading partners, because without that
cooperation, it is difficult for us to truly be effective.
Ms. Sutton. I appreciate your response, and I concur with
the promise of trade as a tool that can lift up people
worldwide and can benefit beyond our borders and that it should
be that kind of a tool, and I am a proponent of making it that
kind of tool.
I again go back to my belief--and I think it is, frankly,
also supported by the testimony that we have heard here today--
that there are problems, however, with the gap between the
promise of trade and what is actually playing out out there.
And we are trying to find ways not only with intellectual
property, obviously, but with other veins. It is a multifaceted
problem. And it has to be approached in a multifaceted way.
But I was just curious--and I understand--and I don't
believe that that is protectionistic, what you said.
But I think it is an interesting dichotomy, where we hear
the protection against illegal subsidies by foreign countries
in one vein being called--if somebody who rails against that
says that with respect to illegal dumping of steel, for
example, they are a protectionist, if you want to do something
to fix that.
And I also just simply--I am not going to have a lot of
time here, but I also just simply reject the idea that there
aren't things internally that we need to be focusing our
attention on also.
We heard testimony by others on the panel about the actions
that the United States can and should properly take to deal
with this issue.
And of course, again, I believe there are actions that we
can take in the rest of the facets of this huge, huge issue of
international trade.
I guess my time is up. I just wanted to know, to the
extent--you know, we see these illegal subsidies from other
countries.
Are countries in any way complicit in the pirating of
intellectual property, to your know, other than the United
States, outside of the United States?
Ms. Espinel. That is an excellent question, and a
complicated one. And I know we are short on time here, so I am
going to speak concisely but then would be happy to follow up
in more detail.
Going back to your first point on protectionism, that term
is generally used for countries that are trying to protect
their local industry from competition. And we talking about
protecting intellectual property--it is exactly the opposite.
We are not trying to protect our right holders----
Ms. Sutton. With all due respect, I understand the theory
of what protectionism is. That is not how that word is often
used.
It is also used to try to shut down people who want to
fight against unfair similar, in a different vein, kinds of
illegal subsidies, to just remove the unfair advantage, to have
rules enforced.
Sometimes it is used for that purpose of shutting down that
debate because, unfortunately, there are some who are
benefitting from those unfair tactics. I understand the
difference between--there is a gap here between what the word
really means and how it is used. That is my point, and I
appreciate that.
Ms. Espinel. Exactly.
Ms. Sutton. Thank you.
Ms. Espinel. And in protecting intellectual property, we
are trying to increase market access. We are trying to make
sure that there is a market for our legitimate products
overseas so that we can compete on a level playing field.
Ms. Sutton. Exactly, exactly. And I support that
proposition, and I also support it in other venues.
Ms. Espinel. With respect to your second question,
governments' complicity--and again, we would be happy to follow
up in more detail--there are some instances where we feel that
governments themselves not only are not enforcing their laws
but may be complicit.
And one of the things that we have talked about are the
illegal optical discs that have been operating on Russian
military sites. That has been an enormous focus and enormous
concern.
And that is one of the key commitments in the bilateral
agreement with Russia, to stop that. So again, happy to follow
up with you in more detail. There are some instances of that,
and it is something that we obviously go after quite
aggressively.
Ms. Sutton. I appreciate the time.
Mr. Berman. I mean, it is a very interesting question. And
for example, one example is good--I think--I don't know if we
can do it right at this second, but a more comprehensive sense
of countries that are not merely enforcing their laws, but that
are actually actively facilitating the theft--is one that the
Subcommittee generally would be very interested in getting some
more specifics on.
Ms. Espinel. Well, we would be happy to follow up.
Ms. Sutton. Thank you, Mr. Chairman.
Mr. Berman. Yes. Just one more diversion based on Ms.
Sutton's question. We did in the late 1990's, as a response to
Chinese activities in counterfeiting, propose a series of
countervailing tariffs that by virtue of their impact--by the
way, their impact was on some U.S. importers as well as on
Chinese companies and the Chinese government.
But as a result of those countervailing tactics, they
actually took some steps they had not been willing to take to
avoid those countervailing duties from actually coming into
place.
Ms. Espinel. Right.
Mr. Berman. I think that is a little bit where Ms. Sutton
is focusing, a thing that on its own might be protectionist in
that situation was simply a tool to deal with the blocking of
violations of trading rules.
Ms. Lofgren? I am sorry.
Ms. Lofgren. Thank you, Mr. Chairman.
I do appreciate this hearing, and I think that we perhaps
have the potential of accomplishing something, and I give you
credit for that.
Often times, those of us who follow these issues tend to
focus on actually the relatively small area where there is
disagreement, in the DMCA where we are arguing about the
technology mandate and freedom and First Amendment issue,
instead of focusing on the issue where there is no
disagreement, where you have vast piracy and we should have an
effective enforcement regime.
And so I was actually wanting to follow up, Dr. Yager, on
your report on the 1 percent penalty collection, because, you
know, we are not doing a very good job, actually, of
inspecting. That is something that most people don't realize.
And the gentleman from North Carolina is correct. I mean,
it not only has IP issues. There are national security issues
involved with that.
But even for the small amount we inspect, to assess the
penalties and then not collect them, I mean, is really
counterproductive.
What recommendations do you have? I mean, this is not a new
thing. I mean, your prior reports identified a similar issue.
Mr. Yager. Well, I think one of the things that we noticed,
and this also gets back to Mr. Watt's question, is that the
Department of Homeland Security--its primary mission,
obviously, is protecting the homeland and trying to ensure that
no weapons of mass destruction get through the U.S. ports.
But one of the things that we have observed is that they
have some very important--what are now called legacy functions,
and that is collecting trade revenue, for example, where these
are tariffs or countervailing duties.
It is protecting against drugs entering the United States,
protecting against intellectual property that comes into the
United States.
In the series of reports that we have done, whether it is
on IP or whether it is on customs revenue or another one called
an in-bond system, we are finding that DHS has not found a good
balance between their new function and their existing legacy
functions.
Some of those functions are not getting the kind of
attention that is necessary, and not only these weaknesses and
problems in the IP area, but also--in fact, it also has a
relationship to even performing the security function, because
we found that one program allows goods to come into the United
States and not officially enter until they get to a domestic
port somewhere in the interior.
We found that that program actually makes it more difficult
for CBP to screen even for weapons of mass destruction. So I
think Mr. Watt's point and your question are on target in that
DHS needs to find the ability to not just perform their primary
function but to also spend the time and make sure they are
performing these legacy functions, because the legacy functions
are quite important.
Ms. Lofgren. Well, I wouldn't refer to them as legacy
functions, because I actually voted against the creation of the
Department of Homeland Security, a vote that looks better and
better in that respect.
But the department was passed with not just a security
measure, but taking over the entire function of the customs
bureau and the like.
Now, wouldn't it be true that with this level of
performance by the Department of Homeland Security our ability
even to adequate impose countervailing tariffs would be in
doubt?
Mr. Yager. We are currently performing work on the issue of
their ability to collect countervailing duties. One of the
problems that we have is that the duties are finally assessed
sometimes years after the goods have entered.
In some cases, the deposits that have been made are not
sufficient, and therefore you can't collect the full amount of
the duties.
So there certainly are a number of issues at Customs and
Border Protection where they can be doing a better job of
enforcing U.S. trade laws.
Again, finding that balance between their primary mission
and these other missions is something that we have commented on
in a number of reports, and we think they can do better on
these issues.
Ms. Lofgren. Have you done a look at the impact that this
failure has had on the value of patents in the United States?
Mr. Yager. We haven't looked at that specifically.
One thing I think where we do have industry-specific
information--we look at the kinds of seizures that they have
made over the past 5 years or so, and I think there has been a
lot in the area of the garment, and footwear and clothing
industries. I mean, the dominant category are those kinds of
products.
Ms. Lofgren. So it is trademark infringement?
Mr. Yager. Yes. In many cases, though, where you would
expect to see a much higher level of seizures--for example,
with pharmaceutical products and things of that nature, where
there are really health and safety issues, the percent of
overall seizures in those areas is quite low, about 1 percent
or 2 percent.
So I think there certainly are opportunities to take a hard
look, as we have recommended for CBP. They have made that a
priority area, but ultimately we haven't seen the results of
demonstrating or indicating that that priority actually affects
what people do at the border.
Ms. Lofgren. Mr. Chairman, I think that this is--I hope
that we can follow up on this aspect. I serve on the Homeland
Security Committee and unfortunately have the opportunity on a
regular basis to find dysfunction in virtually every element of
the department.
But this is one that, you know, actually is within our
jurisdiction here, and maybe we could--you know, the customs
inspectors, I think, and the whole customs function has really
been treated shabbily in the whole department.
And I think the morale among the employees is low as a
consequence. And it is perhaps something that we could pursue
further. And I think it is an area where we would have broad
agreement here on the Committee, if we could get some changes.
Mr. Yager. If I could just make one quick answer, we
certainly found a lot of people in customs--when we visited
ports, we visited ports all over the United States. There are
many people who are very dedicated to this mission.
It is a very tough mission, because the movement on ports
is relentless. The amount of goods coming by train, truck, and
ship is staggering. They have a very hard job. They do need
support, and some of them don't feel like they are getting that
support.
Ms. Lofgren. Well, I am glad you mentioned that, because I
certainly would not want my criticisms to be directed at the
people who are trying, under trying circumstances--but the
problem has been in the department a lack of leadership, a lack
of organization and structure that dedicated people can
actually successfully implement. And this is still another
example of that.
My time is up, I know, Mr. Chairman. I thank you for this
hearing and this opportunity.
Mr. Berman. I thank the gentlelady.
And I recognize the gentleman from California, Mr. Schiff.
Mr. Schiff. Well, thank you, Mr. Chairman, and also thank
you, Mr. Chairman, for letting me go out of order. I have to
run in 5 minutes, so I know I won't take more than that amount
of time.
But I did have one question, Ms. Espinel. Two years ago, we
had a hearing before this Subcommittee focused on IPR issues
and Russia and China. At the time, your office was continuing
its review of Russia's IPR regime as part of the WTO extension
negotiations.
Back in 2005, I asked you to identify clear metrics or the
specific criteria you presented to Russia so that they would
know precisely what we expected of them and so that we could
hold your office accountable, and together we could hold the
Russians accountable if those metrics were not reached.
You responded at the time that in terms of benchmarks there
were two key items the U.S. had made quite clear that Russia
needed to address.
First you noted that Russia had a massive optical disc
piracy problem, and you indicated they must close the optical
disc plants and also show us the equipment seized and destroy
the plants so they are unable to reopen.
Now, in your 2007 report, and I will quote from it, you
provide that the U.S. copyright industries estimates they lose
in excess of $2.1 billion in 2006 due to copyright piracy in
Russia.
The U.S. copyright industries also reported in 2006
Russia's optical disc production capacity continued to be far
in excess of domestic demand, with pirated products apparently
intended not only for domestic consumption but also for export.
Second, you indicated at that hearing a couple years ago
that tackling the Internet piracy problem in Russia must be
addressed and indicated that there are raids and prosecutions,
but that we needed to see people actually put in jail.
But again, reading from your 2007 report, you state poor
enforcement of IPR in Russia is a pervasive problem. The U.S.
notes that prosecution and adjudication of IP cases remains
sporadic and inadequate in Russia. There is a lack of
transparency and a failure to impose deterrent penalties.
We all know about AllOfMP3.com, et cetera. Long and short
of it, it has been nearly 2 years. You shared benchmarks with
us. I don't see any progress.
Why did we conclude bilateral negotiations when none of
these benchmarks were satisfied? Isn't it clear that Russia's
IPR regime is nowhere near ready for admission to the WTO?
Ms. Espinel. Since the hearing in 2005, we have actually
expanded the benchmarks that we have given to Russia, and we
have done that in a very concrete way.
In November of 2006, we negotiated in the context of
Russia's bilateral accession agreement with the United States.
We negotiated a very specific agreement with Russia that
lays out a blueprint of very specific commitments and actions
that they need to take in order to come into the WTO on
intellectual property protection and enforcement.
And that agreement between us, I think, serves as an
excellent series of benchmarks that Russia will need to
complete if they are, in fact, going to enter the WTO.
That agreement includes some of the issues that we
discussed at that time, including taking action against optical
disc plants and taking action against illegal pirate Web sites.
It, in fact, actually added a series of other commitments
that Russia also needs to comply with--for example,
strengthening customs authority, amending the civil code so
that it is in compliance with the TRIPS agreement and other IP
agreements.
Russia has made some progress on some of those commitments,
but they are certainly not in compliance with the agreement
that we negotiated with them.
And until they are in compliance with that agreement, we
have made very clear to Russia that compliance with that
agreement is essential to Russia being able to enter the WTO.
Mr. Schiff. Well, I mean, you know, right away, it sounds
like the Russian benchmarks aren't being met any more than the
Iraqi benchmarks.
And you know, we--I asked the question for a reason 2 years
ago, because we wanted something to measure progress by,
because, you know, the rhetoric we hear usually is the same,
``They are making progress. You know, this is--we are turning
the corner. They are really going to be serious now.''
And so we ask, you know, what can we measure this by so
that when we meet 2 years from now--and I am concerned that we
meet 2 years from today, and either we will have new benchmarks
because the old ones weren't met, or we will have Russia that
is part of the WTO that is doing what China has done as part of
the WTO, which is very little, as far as I can see, in terms of
enforcement.
Ms. Espinel. Well, then, to be more specific in terms of
the benchmark that we have laid out in this agreement and the
commitments, one of them, as you mentioned, was optical disc
plants.
Russia has 16 optical disc plants that have been operating
on military sites. That has been an enormous concern for the
United States. One of the commitments in this agreement was
that they had to terminate the leases on those optical disc
plants.
That is an area where Russia has made progress that we can
measure, and they have terminated 15 of those 16 leases, and
those plants should be removed by the end of the year. That is
one very concrete measure we can look at in terms of Russia
making progress.
But I completely agree with you, there are many areas where
Russia has not yet met the benchmarks that we have set for
them, and until Russia does that, the United States will not
allow them into the WTO.
And I think that accession negotiation that we have with
the WTO is one of the most powerful tools that we have to push
Russia to make progress on these issues, and we will continue
to use it to the full.
Mr. Berman. Mr. Sherman?
Mr. Sherman. Thank you.
Mr. Berman. Recognized for 5 minutes.
Mr. Sherman. Mr. Yager, what percentage of the incoming
cargo do we inspect? And who pays for the inspections?
Mr. Yager. At the present time, Mr. Sherman, 100 percent of
the cargo is inspected at least in terms of the paperwork. It
is not, obviously, opened. So the first thing is for security
purposes----
Mr. Sherman. Okay. Let me ask the question this way. What
percentage of the cargo do we actually open up the container,
look what is inside, and make sure we don't have counterfeit
disks inside?
Mr. Yager. In terms of intellectual property protection, it
is much less than 1 percent.
Mr. Sherman. Much less than one--now who pays for the
inspection?
Mr. Yager. In general, the inspections are performed by CBP
officers either at the port or in warehouse locations near the
port. But the costs and the delay are borne by the shippers and
ultimately the----
Mr. Sherman. The costs--so if my container is opened and
looked at, I pay for that as an extra fee?
Mr. Yager. There is not an extra fee. There is a delay. And
obviously, any time that cargo----
Mr. Sherman. Okay. I am talking not about the delay. I am
talking about--you know, there is a guy. He is looking.
Mr. Yager. Right.
Mr. Sherman. So he is getting a salary. Who is paying for
that?
Mr. Yager. This is the U.S. Customs Service. The U.S.
Customs Officials are the ones who are----
Mr. Sherman. And so that is out of general tax revenue?
Mr. Yager. Correct.
Mr. Sherman. Okay.
I am going to mispronounce your last name, Ms. Espinel.
Would it be a violation of WTO for us to say that the owner of
the container--that we impose a fee on each container coming
in, we use those fees exclusively to look inside every
container?
Ms. Espinel. That is an excellent question, and I would
want to make sure that my answer is as accurate as possible, so
if I may, I would like to get back to you on that so we can
give you a precise and accurate answer.
It is not obvious to me that there is any WTO issue----
Mr. Sherman. Okay, so----
Ms. Espinel [continuing]. That would arise from that, but I
wouldn't want----
Mr. Sherman [continuing]. We have a situation, then, where
the importers of this country and ultimately all of those who
consume imported products, which means all of us, are imposing
a host of risks and costs on America--the risks of weapons of
mass destruction, the risk of pirated products, toys with lead
in them.
And we are not doing anything to open the boxes. We just
bring them in. We look at less than 1 percent. And there we may
just, you know, pass a Geiger counter over it to make sure that
if there is a nuclear weapon inside at least they have been
smart enough to shield it with lead.
So if we wanted to prevent people from importing pirated
disks and fraudulent brake pads and all the other illegal
products, not to mention drugs, coming into this country, we
would actually have to open the packages--open the containers.
That would cost money, and that cost would be borne by our
importers, which, I might add, would help us on the balance of
payments situation, where right now all of the costs, societal
costs, of piracy, et cetera, are not borne by the importers
but, rather, borne by the society at large.
Have we ever threatened China with loss of access to U.S.
markets if they do not--I don't care what agreements they sign,
because that is absolutely meaningless.
But if they actually don't create a circumstance where
everybody I talk to visits Beijing and says, as they are
walking around, they are tripping over stands selling pirated
movies, pirated music, et cetera, what does China have to lose?
And why are they laughing at us so hard when we fail to do
anything?
Ms. Espinel. I think China is one of the most important
trading relationships that we have, and----
Mr. Sherman. Well, excuse me, aren't our exports to China
about the size of our exports to Belgium?
Ms. Espinel. Yes, but the Chinese economy--the Chinese
imports--not just our export economy----
Mr. Sherman. Okay. If you think that you get rich by
importing, then the Chinese trade relationship is critically
important. If you think you get rich by--society gets rich by
high corporate profits, then China is important.
But if you think in terms of U.S. jobs, better focus on
Belgium. That is to say, exports are what creates jobs. So in
any case, it is an important trading relationship, at least in
one direction.
What have we threatened the Chinese with?
Ms. Espinel. And I understand the frustration that you are
expressing. I think before taking action to shut down Chinese
market access to the United States, we have to look very
carefully at the consequences that would have on U.S.
consumers, on the U.S. public as a whole.
But your comment that China----
Mr. Sherman. Yes, somebody might actually get a job in the
textile industry. It could happen.
Ms. Espinel. Your comment that China is laughing at us I
would respectfully disagree with. I would agree that China----
Mr. Sherman. Have you had your----
Ms. Espinel [continuing]. Needs to do more.
Mr. Sherman [continuing]. Hearing checked?
Ms. Espinel. But China has made progress. China is not in
the same situation--and I think that is in part because of U.S.
pressure, but I think that is also because the Chinese
government has recognized that its reputation as a
manufacturing source around the world, the primary
manufacturing source, of counterfeit and pirated goods, is not
a benefit to it.
That is not at all----
Mr. Sherman. Are you saying that any American diplomat just
walking around the streets of Beijing will not, without even
looking for it, run into pirated goods for sale?
Ms. Espinel. I am not disagreeing at all that there is a
massive problem in China and that you will find counterfeit and
pirated goods quite easily in China.
The Chinese authorities have taken some actions against
those, but clearly they have not done enough and----
Mr. Sherman. These actions they have taken that you have
bought off on, for the most part, and apologize for here, are
so ineffective that it is easier to buy pirated goods in China
than it is to buy chewing gum here in the United States.
Ms. Espinel. I also want to take this opportunity to point
out that we have been encouraging the Chinese to do a better
job here, one of the most effective tools that we have at
USTR--and of course--is WTO dispute settlement.
And we have recently filed cases against China at the WTO.
That is something the Chinese government is obviously quite
displeased with our doing so.
Mr. Sherman. They are quite displeased because they tell
you--they put on an act in front of you, and you buy it.
They are quite displeased because they can walk into a
room, point to the most recent highly ineffectual action you
have taken, pound the table, cry--if they are really good
actors--and convince you that way that your ineffectual actions
are somehow having some effect, and then leave and then laugh,
but only behind your back.
Ms. Espinel. Well, I would say that it is certainly our
hope that the cases we have brought at the WTO will not be as
ineffectual as you seem to think that they will be.
We have rights at the WTO. We chose to exercise those
rights when it became clear that we were not going to be able
to resolve some of our differences with China.
And it is my personal belief that these cases, while
certainly not addressing the entire IP issue in China, will be
effective at increasing enforcement in China.
Mr. Sherman. I yield back. My time has expired.
Mr. Berman. If extra time would bring a consensus----
[Laughter.]
Mr. Sherman. If I could have just 30 seconds, I would like
to commend to the Chair the bill that has been introduced in
the Senate, and three of us introduced it in the House, and
that is the Intellectual Property Rights Enforcement Act.
And I hope that we either pass that separately or, better
yet, include it in the larger package. And I think that we will
have strong support in the Senate for that approach.
Mr. Berman. And just on that subject, I mentioned it in my
opening statement, but some of the issues here that have been
raised in the reports and by all of you in one way or another,
are going to be addressed in a larger enforcement bill that
Chairman Conyers and I will be introducing 3 weeks ago--I mean,
no, coming up soon. [Laughter.]
I recognize myself now.
Just initially, Ms. Espinel--and by the way, I am sorry you
have to spend your birthday testifying here. But by and large,
there could be worse places to testify than here. And happy
birthday.
Mr. Sherman. Happy birthday. [Laughter.]
Mr. Berman. We will skip the karaoke singing.
But just on the issue of Russia accession, what is the
trade representative--the Administration--thinking about in the
context of timing? The U.S.-Russia bilateral agreement that was
a precondition, is that complete and signed off on?
You have talked about the intellectual property part of
that agreement, but is the overall agreement done?
Ms. Espinel. We have concluded the bilateral phase. We are
now in the process of conducting what we call the multilateral
phase of the negotiations. So that is the part of the process
where all of the WTO trading partners together negotiate the
terms of Russia's final accession into the WTO.
Mr. Berman. Does that mean that all the bilaterals Russia
has entered into are concluded or are there other countries
that are still negotiating their bilateral agreements with
Russia?
Ms. Espinel. The last I knew, there were two that were
open, but those may have concluded recently, so I should double
check----
Mr. Berman. So we are in the multilateral----
Ms. Espinel. It is a very small number.
Mr. Berman. We are in the multilateral phase now.
Ms. Espinel. Yes.
Mr. Berman. And it is not until it is concluded that you
will come to Congress with an effort to repeal the Jackson-
Vanik provisions which are a precondition to----
Ms. Espinel. The multilateral phase has to be completed
before Russia can come into the WTO. And obviously, part of
that, as well, will involve the Jackson-Vanik----
Mr. Berman. And my guess is this is not a 2007 issue for
Congress. I mean, you would like it to have been a 2005 issue,
but the other things you are doing means that at this point
Jackson-Vanik isn't the main thing that stands in the way of
Russian accession and----
Ms. Espinel. At this point what stands between Russia and
its desire to join the WTO is making progress on a number of
areas, but including making progress on IP, to come into
compliance with the bilateral agreement that we negotiated with
them.
The pace and process of the multilateral process will
depend on Russia. There is very intense engagement going on
with the Russian Federation in Geneva.
But there are a number of areas where Russia needs to make
progress, not just intellectual property. And again,
ultimately, the pace of that negotiation will depend on how
quickly Russia is able to make progress sufficient for the
United States to be comfortable for it to come into the WTO.
Mr. Berman. At one point you testified about a gold
standard. The U.S., on intellectual property enforcement, is
the gold standard. But we are not quite pure as driven snow
yet.
What are our obligations in terms of compliance with
international trade rules? Where do we fall short?
Ms. Espinel. Well, overall, the United States system--the
United States laws are very strong.
Mr. Berman. I am talking in the intellectual property area;
I am not getting off into a discussion about agriculture
subsidies or anything else.
Ms. Espinel. Thank you.
In the intellectual property area, we have a very strong
system. I think our system is and should be a model for the
world. But there are two aspects of our system that have been
challenged at the WTO and have been found to be inconsistent
with the WTO.
And those two aspects--one of them is with respect to our
copyright law, certain exceptions under our copyright law, and
one of those is with respect to certain aspects of trademark
enforcement.
I don't want to suggest that our inconsistency with the WTO
is anything comparable to the scale of the problem that we
have, for example, in China or in Russia.
Mr. Berman. Nor would I.
Ms. Espinel. But it is a blemish on our record, and it is a
problem for us bilaterally and at the WTO.
As the U.S. pushes very hard for other countries to fully
implement their WTO commitments, these cases do have the effect
of hurting our credibility. And we believe it would be a
benefit to us if these issues were resolved.
Mr. Watt. Will the gentleman yield?
What was the second issue? One was copyright and the second
one was----
Ms. Espinel. And the second one is with respect to certain
aspects of trademark enforcement related to assets that have
been seized by the Cuban government.
Mr. Berman. This is an issue that revolves around Section
211 that was stuck into an Omnibus Appropriations bill, I
believe in the dark of night, in the days when that was still
done.
Mr. Watt. You mean last year. [Laughter.]
Mr. Berman. Well, not in the last days that it was still
done, about 5 years, 6 years, 7 years ago, dealing with a
trademark held by a French company, and that was challenged at
the WTO, and the WTO found that our action violated our
obligations under TRIPS.
Is that a fair summary?
Ms. Espinel. That is correct.
Mr. Berman. And just on that subject, to close that
subject, would USTR support an effort to repeal one or both of
those provisions?
Ms. Espinel. Yes. USTR would support an effort to amend our
laws on both of those provisions, and we feel like that would
be a benefit to us in trying to push other countries to come
into full compliance with their WTO obligations.
Mr. Berman. Mark MacCarthy told an interesting story of
Visa's efforts to do the right thing in the context of the
AllOfMP3.com site and this other site, allTunes, and what
happened in Russian courts.
Is the trade representative's office trying to create
clarity of what Russian laws are? To do what I think he
logically said their company cannot do, which is to get an
understanding about what the law is, and what constitutes
illegal actions in Russia in terms of intellectual property
protection?
Ms. Espinel. Yes. Mr. MacCarthy made the point that it is
difficult for Visa to try to clarify local laws, but that is
one of the things the USTR can try to do.
My understanding of the case is that Media Services, the
company that operated allTunes, was able to successfully argue
in Russian court that it was not acting illegally because it
was paying royalties to collecting societies, collecting
societies that were not authorized by the rights holders.
That is one of the issues, one of the very specific issues,
that we addressed in the bilateral agreement that we negotiated
with Russia.
One of the commitments that they have made is to change
their law so that it is clear that collecting societies can
only, in the Internet context, can only collect on behalf of
right holders that have authorized them to do so, and that
should resolve this particular issue.
That change is one that has actually already been made in
Russia's civil code, and it should go into effect in January of
2008. And it should resolve or clarify that particular problem
in the Russian legal system.
Mr. Berman. Do you disagree with that? Is that news to you,
or is that----
Mr. MacCarthy. No, that is roughly our understanding of the
legal situation in the Russian Federation right now.
I should mention that the complication of local Russian law
means only, from our point of view, that for the time being, at
least, these sites that we have received complaints about have
to be permitted to operate within the Russian Federation
itself.
Insofar as international transactions are concerned, our
policy is to make sure that they are not processed using Visa
cards.
So for example, someone sitting here in the United States
or in London who wants to go to one of these sites to use their
card to make a purchase would not be able to do it under our
cross border policy.
Mr. Berman. I just have to say that I think this is a case
where the company you represent has shown real leadership, and
it has done the right thing, and I hope other financial service
providers that facilitate online transactions will follow the
example that you have showed here.
Mr. Watt? I mean, I have got more, but I could go for 20
minutes.
Mr. Watt. Let me just follow up on what Mr. McCarthy said.
It is, I assume, true that somebody could still sit in Russia,
under what Ms. Espinel has said--internal to Russia, the law
would still be----
Mr. MacCarthy. Our interpretation of Russian law right now
is that we don't have the legal standing to say to the Russian
banks that operate within Russia, ``You have to stop processing
transactions for domestic transactions.''
Mr. Watt. So what do you say about that, Ms. Espinel?
Ms. Espinel. The change that Russia has made to the civil
code, which is one of the commitments that they agreed to do in
their bilateral agreement with the United States--this change
that they have enacted should fix that problem in the context
of sites like AllOfMP3 on the Internet, and that change should
go into effect in Russia in January of 2008.
Mr. Berman. Because they use the royalty collection
society, which was sort of a phony deal--it never was
authorized by the people to whom the royalties were owed--they
claim that is what made what they were doing legal.
They were making payments to this society and now----
Mr. MacCarthy. Exactly, and that they prevailed in court.
And if that changes in January of 2008, we would then be able
to move forward in the context of addressing the local
distribution of this music.
By the way, just in terms of the successor sites to
AllOfMP3 and allTunes, our understanding is that allTunes is in
business these days, but they are not taking Visa cards at all.
And another site called MP3Sparks is also in business, but they
are not taking Visa cards at all.
Mr. Watt. Mr. Smith seems not quite as satisfied with what
you all are saying.
Mr. Smith. No, I think everything that was said here is
completely accurate.
We in industry and, I think, lawyers that are familiar with
the Russian law when it was passed in the early 1990's have
always concluded that this case, this particular case, was
decided wrongly, that, in fact, existing Russian law made these
acts, including collecting societies representing--purporting
to represent record companies that they don't represent, was a
violation of Russian law.
And it is true that the 2008 amendments will fix that
specifically. But I think every lawyer who has looked at this,
including, I think, Visa's lawyers--we all scratched our heads
and said, ``Wait a minute. This is already a violation of
Russian law, and this should have been solved years ago.''
Mr. Watt. I have no further questions.
Mr. Berman. The gentleman from Virginia, Mr. Goodlatte?
Mr. Goodlatte. Thank you, Mr. Chairman.
And I want to thank all the panelists. I am sorry I have
not been able to be present earlier, but two other hearings,
one in this Committee and one in the Agriculture Committee,
have kept me elsewhere.
But I am very pleased that you have taken up this subject,
Mr. Chairman. It is one that is very important to me. I serve
as one of the co-chairs of the International Antipiracy Caucus
and welcome the exposure that you have afforded this issue.
One of the things that I raise with other countries when I
have the opportunity to do so, whether representatives come
here, whether I am meeting with them in other places, is to
point out that it is in their interest to support intellectual
property law and the build-out of the infrastructure necessary
to both have the law and enforce it.
Because if they hope to transition into an innovation-based
economy--many countries that are developing have many creative
scientists and researchers and people involved in the
technology community and other areas where the advancement of
intellectual property is worth protecting--entertainment,
artists, and so on.
And that we are not asking them to enforce those laws just
out of our interest in protecting what we export to those
countries, but that it is in their interest to do that for the
development and growth of their own intellectual property
community.
We have been hearing reports that China is beginning
efforts to transition from a manufacturing-based economy to an
innovation-based economy. And it seems like this could present
a unique opportunity to make headway with the Chinese on the
importance of intellectual property.
So I would direct this to Ms. Espinel and to Mr. Smith. But
in light of this apparent desire on the part of the Chinese,
are there additional opportunities we should be pursuing to
leverage this critical time to encourage China to take its own
intellectual property laws more seriously as well as its
obligations to honor the intellectual property of other
nations' inventors and authors?
Ms. Espinel. I would say that I agree with you. I think
China's desire to become a leader in innovation does present an
opportunity.
I think there are actually several other countries as well,
major trading partners, that see themselves as wanting to enter
into the future and build a knowledge economy. And I think all
of those do present a real opportunity for us.
We have a number of tools that we use to push China and
other countries to further strengthen intellectual property.
But I think what you have just raised is--in terms of what we
can do more--I think that is an opportunity for the United
States to try to cooperate further on China.
So USTR is best known, in many ways, for the stick
approach, for the Special 301 Report, for WTO dispute
settlement, and we will continue to use all of those tools as
aggressively as we feel is warranted in order to make progress.
But I think countries--where there is an opportunity for a
country to recognize that it is in their own domestic interest
to be protecting intellectual property, I think the United
States, USTR and the other government agencies can build on
that desire through cooperation, through using, for example,
our system as a model, and having dialogues with China, for
example, on how to build a system that is closer to the U.S.
system and is modeled on the U.S. system in some of the ways
that we have encouraged innovation, so for example----
Mr. Goodlatte. I know that in some countries--Russia, for
example--at least a few years ago we were making pretty serious
efforts to help translate U.S. intellectual property law,
decisions and documents related to it, into Russian, that we
were trying to help them with the court system and how they
would handle disputes in this area and so on.
Do we have any initiative like that with the Chinese? Have
they shown any interest in working with us in terms of looking
at laws that respect property rights?
Ms. Espinel. I think the Chinese do pay close attention to
the laws. One specific example I could cite that pertains to
China and, actually, India as well is our Bayh-Dole
legislation.
Bayh-Dole in the United States is extremely effective in
terms of increasing research of industry and building
partnerships between universities and industry, thereby
increasing the number of products that were brought to market.
China is looking at our Bayh-Dole system--India is looking
at our Bayh-Dole system--because it has proved to be
successful.
And while Bayh-Dole is not an intellectual property rule
per se, having China and India and other countries become
innovators, begin to build their system or base their system on
aspects of the U.S. system that have been successful, I think
will, long term, be very effective in helping us improve IP
enforcement as they see that they have a greater stake
themselves domestically in protecting intellectual property and
as they see themselves having a greater stake in the
international system for protecting intellectual property.
Mr. Goodlatte. Thank you.
If I might, Mr. Chairman--I notice my light has already
gone on, but I had a lot of competition----
Mr. Berman. Well, you would be the only person to have
actually observed it. [Laughter.]
Mr. Goodlatte. Well, if you would give me that preference,
I would like to ask one more question.
Mr. Berman. It wouldn't be preference. It would be
nondiscrimination.
Mr. Goodlatte. I thank the Chairman for his indulgence.
And I will ask this to all the panel members. But it
follows along with what we have just been talking about. The
Internet provides the means for massive copyright infringement
in a single instant.
While the U.S. has strong laws against online piracy, it
seems that most of the discussion about international IP theft
centers around the production of pirated products in physical
form.
How bad is online piracy in Russia and China? And do these
countries' IP laws address online piracy sufficiently? And do
you see any evidence that these countries are inclined to make
any decent attempt to combat it?
Start with Mr. MacCarthy.
Ms. Espinel. Start with Mr. Smith.
Mr. Smith. I think the one area----
Mr. Goodlatte. You are welcome to address my first
question, too, Mr. MacCarthy.
Mr. Smith. I will. Actually, I think China is very
interested in pursuing the digital environment in an aggressive
way, and I think we see it with the software industry in China
that has seen more gains than any of our other industries.
So I think there is a place there where we can intervene
and gain some things. Unfortunately, that interest does not
extend to the cultural industries where China is immensely
protectionist.
But with respect to the Internet--and I think you see it in
the Internet environment--in 2006 they passed Internet
regulations with respect to protecting content, and it was a
very transparent process, quite surprisingly for China.
We made three sets of comments. The regulations came out
actually quite good and not that far from U.S. law. And I think
China is interested in protecting on the Internet.
What they haven't done yet, and hopefully they will do, is
they haven't taken those regulations and then enforced them.
What we are facing in the Internet environment is just simply
what we are facing in the physical environment--bad
enforcement, no criminal enforcement and very weak
administrative enforcement.
And lots of confusion in the ISP community has been
recently generated by some nonbinding regulations the
government has put out which have caused more burdensome notice
requirements, if you are familiar with those.
It is just a situation that hopefully China will, as
distinct from maybe some other areas, find to be really in
their interest.
And of course, they want to control the Internet. We all
know that. So the content issues sort of play into that
political necessity that they have.
Mr. Goodlatte. Thank you.
Mr. MacCarthy, do you want to add anything to that?
Mr. MacCarthy. I could just repeat some of the main points
that I made in my testimony, which is when we were involved
with two of the Web sites in Russia, we got caught up in
complications from local Russian law.
One of the court cases ruled against our local bank, that
they had violated their contract by cutting off service to that
merchant, and seemed to want a ruling from a competent court
within Russia before they would allow us to withdraw service.
And the second case was a case not brought by us and not
involving us directly, IFPI, where the owner of one of these
sites was absolved of taking any illegal action whatsoever
under Russian law.
As I talked about before, this situation may be improved in
January of this year when a revision to their law on collective
rights society goes into effect.
In the meantime, what we have done is we have tried to take
account of the differences in local jurisdictions by making
sure that international transactions from the Russian sites are
not processed within the Visa system.
Mr. Goodlatte. Thank you.
Mr. Yager?
Mr. Yager. Yes, Mr. Goodlatte, just a couple of quick
answers. With regard to the issue of the trading on the
Internet in the near future, certainly, as the other countries'
bandwidth increases and a greater share of the populations
there are able to secure these songs, movies online, that will
become a greater issue.
I think there is a certain amount of time, depending on the
countries, before that happens on a wide-scale basis.
But if I could also address the other point that you made
about linking with like-minded countries, or at least
expressing their own interest, even in cases where the country
as a whole may not feel that it is in their interest to give
full protection. There may be industries within the country
that can be useful for education purposes or others.
And I give the example of Brazil. They have some very
important recording artists, and a significant share of the
music sold in Brazil is from domestic artists. And these folks
have been quite successful in putting out the message that it
is stealing, which is a long-term process in trying to get that
message across.
So I think even in countries where there have been larger
challenges, there are domestic industries that the United
States can link up with.
On the other side of that coin, there are also countries--
for example, in South America, again--Paraguay is not a country
that has a lot of content. An entire city exists in order to
just take advantage of the illegal trade across the border.
Ciudad de Este is a city that exists between the two giants
of Argentina and Brazil, and it seems like everything that
happens in that city is to take advantage of those trade
opportunities. And many of those, obviously, are illegal.
So I think that can work in places like China over the
longer term as well as other countries, but in some countries
that don't have a lot of content production, it is going to be
a tougher sell.
Mr. Goodlatte. Thanks.
Ms. Espinel?
Ms. Espinel. With respect to China, China has joined the
WIPO Internet Treaties to protect digital projects over the
Internet, which is progress.
And we have noticed, and we note in our Special 301
provincial review report this year, that there have been some
increased efforts, particularly in Beijing--have some
innovative programs for fighting Internet piracy.
With Russia, they have reported that they have opened 30
investigations this year against illegal Web sites. Now,
clearly, this is a significant problem in Russia still, but
that is a significant increase over last year.
My last point I wanted to make is one of the challenges I
think we face in fighting Internet piracy around the world is
that the--there is no clear international regime for fighting
Internet piracy the way there is for some other aspects of
intellectual property.
And one of the things that USTR would like to see is to see
a stronger--a consensus on stronger rules for enforcement,
including a consensus on new rules for fighting Internet
piracy.
Mr. Goodlatte. Thank you.
Thank you, Mr. Chairman.
Mr. Berman. Well, thank you.
I am going to ask one question to Mr. Smith, and then I
will recognize the gentlelady from Texas.
You may have touched on this, but do you think the Special
301 review is an effective tool? We list countries year after
year. Is there something beyond that we should be doing, either
in lieu of or instead of this Special 301 review?
Mr. Smith. I think Special 301 continues to be effective. I
think there is debate about that.
Because most of our trading partners are now in the WTO, we
can't use Special 301 as we did in the case you mentioned in
1995 and 1996 against China, where we were able to unilaterally
retaliate.
Mr. Berman. Say that one more time. What aren't we able to
do?
Mr. Smith. Because the United States is, and all our
trading partners are, now in the WTO, unilateral retaliation,
with an exception I will mention in a minute, is no longer
possible.
Like with China, our dispute has been taken through the WTO
dispute settlement system, which would result, if we win that
case, in the possibility of retaliation.
Mr. Berman. What were the tariffs on the steel dumping?
That was after WTO.
Mr. Smith. Oh. Well, that is a different part--I mean, you
can unilaterally add tariffs on----
Mr. Berman. Steel gets it but IP doesn't?
Mr. Smith. I can't answer that question whether or not it
would be WTO-legal to do something in the IP area.
Mr. Berman. Well, actually, I think WTO found there wasn't.
Mr. Smith. But what I am talking about is the ability to
stop at our border goods coming from China because of--without
going through the WTO dispute settlement process.
We do have other tools, though. We have all our unilateral
trade preference tools--GSP, CBERA--where if countries don't--
and in Russia, which gets $500 million in GSP benefits. Those
benefits are removable, suspendable, for failure to effectively
protect intellectual property.
So that is another tool, and that is part of Special 301.
But countries still don't want to be on those lists, and we
feel that that process continues to work to persuade and make
countries aware of the need to improve their intellectual
property protection.
So we are strongly supportive of the Special 301 process.
Could it be improved? I think it can be improved. And I think
there are things that USTR is doing--for example, looking at
enforcement agreements.
There are things like that that can be done, and a more
aggressive use of the 301 process I think is possible than is
now being done. But basically, I think our industries believe
that the process has been pretty successful.
Mr. Berman. All right. Well, I think our last questions
will come from the gentlelady from Texas, Ms. Jackson Lee.
Ms. Jackson Lee. Mr. Chairman, thank you very much for
holding this hearing.
And I apologize to the witnesses for being delayed in an
overlapping hearing. I will narrow my inquiry to a comment and
then a question. Frankly, I think that we are severely
disadvantaged.
And I thank the Chairman for continuing his oversight on
some of these many issues involving intellectual property--but
severely impacted and damaged by the fact that trade,
intellectual property, is all wrapped up in foreign policy.
And many times, we are more concerned about not offending
our perceived ally as opposed to protecting the intellectual
property of Americans and the ability for our economy to churn.
I frankly believe that the trade imbalance, for example, is
a stark example, particularly with China, of how skewed our
foreign policy and trade policy has gotten.
So with respect to the protection of intellectual property,
sometimes we yield, even with the 301 review, to not offending.
I would like to ask each of you to express your level of
anguish or anger at the present state of intellectual property
thievery.
And also, as I heard Ms. Espinel mention stronger piracy
laws, if each of you would--and if this has been asked and
answered, forgive me, but each of you give me again what kind
of legislative fix, the strongest legislative fix, we could get
to impact in particular both Russia and China, but others, in
terms of intellectual property--strengthening 301?
I have heard it mentioned that it is a fair process and you
are happy. But any other legislative fixes that would be
helpful in what is still an ongoing problem with the thievery
of our intellectual property.
And I will start with Mr. MacCarthy.
Mr. MacCarthy. In terms of the bigger picture, our access
to information about the problem comes largely from
intellectual property owners who come to us with complaints.
And in that regard, we have a process in place for dealing
with those kind of complaints. We think that process resolves
the responsibilities that we have in that area.
We think it is a balanced and legitimate use of our
complaint process to come to us when there are these kind of
difficulties. It is a business problem for many, many copyright
owners, and we are pleased to step forward to process the
complaints when they come to us in an appropriate fashion.
In terms of legislation, we don't have a general
recommendations.
Ms. Jackson Lee. What do you do? What is the relief that
you give to the Internet----
Mr. MacCarthy. If an aggrieved copyright owner comes to us
with a documented complaint, and if they identify the Internet
site that is involved in the alleged infringement, they give us
evidence that, indeed, this is illegal activity, and they
provide us documentation that Visa cards are used, we will
conduct an assessment of the legal situation.
And if we find that indeed these transactions are illegal
either under the laws of the country where the merchant is
located or where the cardholder is located, in either
jurisdiction, we will pass that information on to the banks
that work within our system directly with the merchant and ask
them to take corrective action.
Ms. Jackson Lee. Now, you do a civilian relief. You are
obviously processed to move that client's problem through and
try to resolve it in that way.
All right, let me ask, you were getting ready to say
legislatively you had a suggestion.
Mr. MacCarthy. We don't have an affirmative suggestion for
legislation on the broader issues. We don't have any expertise
or competence in there.
We do think it would be unnecessary to have legislation
that imposed liability on financial services intermediaries in
this area. We think we have stepped forward with the kind of
responsible private-sector enforcement action that should help
to resolve the problem.
We talked about the limits of private sector action in that
area. We can't help to resolve local laws or conflicts between
local laws.
And if there are many, many conflicts among the laws in
many different countries, the system I described won't work as
effectively as it did in the cases that we have applied it to
already.
So we don't think the legislation that would give us legal
responsibilities would improve the situation, and we are
already taking the steps we think are necessary to resolve the
problem through private-sector action.
Ms. Jackson Lee. Thank you.
Mr. Yager?
Mr. Yager. Yes. We have made one recommendation to the
Congress. It has to do with the coordinating group that is now
bringing together the U.S. agencies to combat IP--our
recommendation is to capture the energy that is currently
housed within the presidential initiative called STOP and try
to capture that to make that a more permanent structure.
Right now, STOP, as a presidential initiative, could go
away at the end of this Administration. Obviously, intellectual
property protection won't be solved by them. We think there
needs to be a permanent structure to maintain that, and we made
a recommendation in that direction.
We also made a number of recommendations to the U.S.
agencies in terms of their attention to intellectual property
and trying to find the right balance between this particular
function, which is often called a legacy function, for example,
in the Department of Homeland Security--trying to use the
existing resources better to focus their efforts on the kinds
of things that can generate intellectual property seizures.
Because even with the existing resources, we believe that
seizures and penalties and prosecution afterwards can be a more
effective deterrent to that crime than they are right now, and
we have a number of specific recommendations in those areas.
Ms. Jackson Lee. Is that in your statement?
Mr. Yager. Yes, and we also cite a number of reports that
we have done within the last year that have those
recommendations.
Ms. Jackson Lee. Seizures and penalties.
Mr. Yager. That is correct.
Ms. Jackson Lee. Thank you.
Mr. Smith. I think our position is that with respect to
foreign piracy, as opposed to customs and what happens here,
there are ways to more effectively use the existing trade
mechanisms that are in our current law.
And I wanted to mention that and then mention something
about legislation.
Ms. Jackson Lee. Do you want to just briefly instruct us
how to be more effective in using----
Mr. Smith. Yes. I mean, I think there are programs and
unilateral trade programs that can be removed from countries
that do not adequately protect our intellectual property.
That authority has tended in the last years not to be used
and I think lacks credibility now with our trading partners.
Ms. Jackson Lee. So we need to do due diligence and act
upon that.
Mr. Smith. Yes.
Ms. Jackson Lee. If you are violating those laws, they need
to suffer through what we already have in place, or partly what
we have in place, which is to stop the relationship.
Mr. Smith. That is right.
Ms. Jackson Lee. Stop the ability.
Mr. Smith. Also, in addition, there are trade agreements
with countries that aren't WTO members that could be used
effectively.
There are dispute settlement processes in the free trade
agreements which are available to be used as leverage to get
countries--now, we haven't needed to do that yet, but at some
point we will need to do that. Those are tools that we have
that will leverage improvements.
But I also think that there are things that can be done in
the legislative area that may increase the credibility of this
process and leverage improvements both--in the Special 301
area, I think, for example, we would like to see more and
stronger representation of the IP industries in the White
House.
We would like to see perhaps changes in Special 301 that
tighten up the timetables, tighten up the way USTR does that
business. We have some ideas there. But all of these things
ultimately end up with the--there are no quick fixes, which
Ranking Member Coble mentioned at the beginning of this
hearing.
There are no quick fixes. This is a long slog and a
continuing push to make countries aware that it is in their
interest to protect our intellectual property. All these tools
help get you to that place, and that is where you need to get.
Ms. Jackson Lee. And that is probably where we have not
acted, particularly in Russia and China.
But, Ms. Espinel, I will allow you to refute what I have
just said by, in addition to your answer that--I hope you will
repeat also this intellectual privacy strengthening that you
would like.
What is the record of the trade office and the White House
on denying access to the United States based on bad actors in
terms of intellectual property violations? What is your record?
What is the last five that you have denied that access?
Ms. Espinel. In terms of denying market access, one of the
things that we have been discussing today is that, for example,
using the Special 301 process to impose unilateral sanctions--
our ability to do that is now somewhat restricted by the fact
that most of our trading partners, including China, are members
of the WTO.
And so we are not in a position where we can, for example,
impose unilateral sanctions to block access consistent with our
WTO obligations.
Ms. Jackson Lee. Have you gone to the WTO? What is your
current status in the WTO in terms of challenging those who
have violated our agreements?
What are the countries?
Ms. Espinel. That said, we do have rights at the WTO. So
while the WTO membership may have restricted in some ways our
abilities under Special 301, membership in the WTO has also
given us certain rights against countries, including China.
And we have exercised those rights at the WTO. We have
recently filed two different cases against China at the WTO.
Ms. Jackson Lee. Are they broad cases, meaning something--
--
Ms. Espinel. Yes. They impact IP enforcement and
protection. That is the first case. And then there is a second
case which goes after certain market access restrictions that
China places on copyright products.
While that is not an intellectual property case per se, the
restrictions that China has do have the impact of restricting
our copyright industries' ability to access the Chinese market
and, as an ancillary effect to that, they create an enormous
vacuum for legitimate product and, therefore, an incentive to
pirate.
So we believe that China needs to get rid of those market
access restrictions both so that our products can enter the
Chinese market but also to remove an enormous incentive to
pirate, and we think that will be helpful in improving the
enforcement situation in China.
I also want to comment on Special 301. We do feel that it
is a very effective process. Countries do pay attention to
their standing on the list. It has been successful in getting
countries to institute reforms.
But we are always looking at ways that we can improve the
tools that we have. And in fact, last year USTR logged
something that we call the Special 301 Initiative, where we
were looking to see how we could better focus our resources.
And we selected a group of countries where we felt
increased engagement under Special 301 will lead to progress,
and that has, in fact, been successful. We have seen some
concrete results come out of that, and we are planning to
continue that initiative this year.
In terms of legislative fixes, I think we would look more
at the international side of things. And where we see a gap in
international rules to protect intellectual property is in
areas where we are facing new challenges that have arisen in
the last 10 years.
And two I would point to in particular are Internet piracy
and the fact that counterfeiting and pirating has become a much
more sophisticated, global criminal enterprise than it was 10
years ago.
Ms. Jackson Lee. The first one was Internet piracy, and
what----
Ms. Espinel. Internet piracy.
Ms. Jackson Lee [continuing]. Was the second?
Ms. Espinel. The sophistication of counterfeiters, the fact
that counterfeiters are not at this point just servicing a
domestic market but are manufacturing and then distributing
their products all across the world in very sophisticated ways.
We feel that we need a new set of international rules, a
new consensus on how to fight those rules, if we are going to
be able to effectively address that. USTR has some ideas in
that regard, and that is something that we are working on
actively with our trading partners.
Ms. Jackson Lee. Thank you, Mr. Chairman.
Mr. Berman. Okay.
Unless people object really strenuously, I think we will
adjourn this hearing. Thank all of you very much. You have
really provided, I think, very helpful testimony and useful
suggestions.
And happy birthday, Ms. Espinel.
[Whereupon, at 12:41 p.m., the Subcommittee was adjourned.]
A P P E N D I X
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Material Submitted for the Hearing Record