[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]




 
 PROTECTING INTELLECTUAL PROPERTY RIGHTS IN A GLOBAL ECONOMY: CURRENT 
                      TRENDS AND FUTURE CHALLENGES

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

                                HEARING

                               before the

                 SUBCOMMITTEE ON GOVERNMENT MANAGEMENT,
                     ORGANIZATION, AND PROCUREMENT

                                 of the

                         COMMITTEE ON OVERSIGHT
                         AND GOVERNMENT REFORM

                        HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                               __________

                            DECEMBER 9, 2009

                               __________

                           Serial No. 111-65

                               __________

Printed for the use of the Committee on Oversight and Government Reform


  Available via the World Wide Web: http://www.gpoaccess.gov/congress/
                               index.html
                      http://www.house.gov/reform



                  U.S. GOVERNMENT PRINTING OFFICE
57-791                    WASHINGTON : 2010
-----------------------------------------------------------------------
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpo.gov  Phone: toll free (866) 512-1800; (202) 512ï¿½091800  
Fax: (202) 512ï¿½092104 Mail: Stop IDCC, Washington, DC 20402ï¿½090001

              COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM

                   EDOLPHUS TOWNS, New York, Chairman
PAUL E. KANJORSKI, Pennsylvania      DARRELL E. ISSA, California
CAROLYN B. MALONEY, New York         DAN BURTON, Indiana
ELIJAH E. CUMMINGS, Maryland         JOHN L. MICA, Florida
DENNIS J. KUCINICH, Ohio             MARK E. SOUDER, Indiana
JOHN F. TIERNEY, Massachusetts       JOHN J. DUNCAN, Jr., Tennessee
WM. LACY CLAY, Missouri              MICHAEL R. TURNER, Ohio
DIANE E. WATSON, California          LYNN A. WESTMORELAND, Georgia
STEPHEN F. LYNCH, Massachusetts      PATRICK T. McHENRY, North Carolina
JIM COOPER, Tennessee                BRIAN P. BILBRAY, California
GERALD E. CONNOLLY, Virginia         JIM JORDAN, Ohio
MIKE QUIGLEY, Illinois               JEFF FLAKE, Arizona
MARCY KAPTUR, Ohio                   JEFF FORTENBERRY, Nebraska
ELEANOR HOLMES NORTON, District of   JASON CHAFFETZ, Utah
    Columbia                         AARON SCHOCK, Illinois
PATRICK J. KENNEDY, Rhode Island     BLAINE LUETKEMEYER, Missouri
DANNY K. DAVIS, Illinois             ANH ``JOSEPH'' CAO, Louisiana
CHRIS VAN HOLLEN, Maryland
HENRY CUELLAR, Texas
PAUL W. HODES, New Hampshire
CHRISTOPHER S. MURPHY, Connecticut
PETER WELCH, Vermont
BILL FOSTER, Illinois
JACKIE SPEIER, California
STEVE DRIEHAUS, Ohio
JUDY CHU, California

                      Ron Stroman, Staff Director
                Michael McCarthy, Deputy Staff Director
                      Carla Hultberg, Chief Clerk
                  Larry Brady, Minority Staff Director

  Subcommittee on Government Management, Organization, and Procurement

                 DIANE E. WATSON, California, Chairman
PAUL E. KANJORSKI, Pennsylvania      BRIAN P. BILBRAY, California
JIM COOPER, Tennessee                AARON SCHOCK, Illinois
GERALD E. CONNOLLY, Virginia         JOHN J. DUNCAN, Jr., Tennessee
HENRY CUELLAR, Texas                 JEFF FLAKE, Arizona
JACKIE SPEIER, California            BLAINE LUETKEMEYER, Missouri
PAUL W. HODES, New Hampshire
CHRISTOPHER S. MURPHY, Connecticut
MIKE QUIGLEY, Illinois
                      Bert Hammond, Staff Director


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on December 9, 2009.................................     1
Statement of:
    Glickman, Dan, chairman and chief executive officer, Motion 
      Picture Association of America, Inc.; Robert W. Holleyman 
      II, president and chief executive officer, Business 
      Software Alliance; Brian Toohey, senior vice president for 
      international affairs, Pharmaceutical Research and 
      Manufacturers of America; and Frank Vargo, vice president, 
      international economic affairs, National Association of 
      Manufacturers..............................................    87
        Glickman, Dan............................................    87
        Holleyman, Robert W., II,................................    95
        Toohey, Brian............................................   103
        Vargo, Frank.............................................   125
    McCoy, Stanford K., Assistant U.S. Trade Representative for 
      Intellectual Property and Innovation, Office of the U.S. 
      Trade Representative; Robert L. Stoll, Commissioner for 
      Patents, U.S. Patent and Trademark Office; Jason Weinstein, 
      Deputy Assistant Attorney General, Criminal Division, U.S. 
      Department of Justice; William E. Craft, Acting Deputy 
      Assistant Secretary, Bureau of Economics, Energy, and 
      Business Affairs, U.S. Department of State; and Loren 
      Yager, Director, International Affairs and Trade, 
      Government Accountability Office...........................     8
        Craft, William E.........................................    40
        McCoy, Stanford K........................................     8
        Stoll, Robert L..........................................    17
        Yager, Loren.............................................    60
        Weinstein, Jason.........................................    28
Letters, statements, etc., submitted for the record by:
    Bilbray, Hon. Brian P., a Representative in Congress from the 
      State of California, prepared statement of.................     4
    Craft, William E., Acting Deputy Assistant Secretary, Bureau 
      of Economics, Energy, and Business Affairs, U.S. Department 
      of State, prepared statement of............................    42
    Glickman, Dan, chairman and chief executive officer, Motion 
      Picture Association of America, Inc., prepared statement of    90
    Holleyman, Robert W., II, president and chief executive 
      officer, Business Software Alliance, prepared statement of.    97
    McCoy, Stanford K., Assistant U.S. Trade Representative for 
      Intellectual Property and Innovation, Office of the U.S. 
      Trade Representative, prepared statement of................    10
    Murphy, Hon. Christopher S., a Representative in Congress 
      from the State of Connecticut, prepared statement of.......   146
    Stoll, Robert L., Commissioner for Patents, U.S. Patent and 
      Trademark Office, prepared statement of....................    19
    Toohey, Brian, senior vice president for international 
      affairs, Pharmaceutical Research and Manufacturers of 
      America, prepared statement of.............................   105
    Vargo, Frank, vice president, international economic affairs, 
      National Association of Manufacturers, prepared statement 
      of.........................................................   127
    Weinstein, Jason, Deputy Assistant Attorney General, Criminal 
      Division, U.S. Department of Justice, prepared statement of    30
    Yager, Loren, Director, International Affairs and Trade, 
      Government Accountability Office, prepared statement of....    62


 PROTECTING INTELLECTUAL PROPERTY RIGHTS IN A GLOBAL ECONOMY: CURRENT 
                      TRENDS AND FUTURE CHALLENGES

                              ----------                              


                      WEDNESDAY, DECEMBER 9, 2009

                  House of Representatives,
            Subcommittee on Government Management, 
                     Organization, and Procurement,
              Committee on Oversight and Government Reform,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 10 a.m. in 
room 2247, Rayburn House Office Building, Hon. Diane E. Watson 
(chairwoman of the subcommittee) presiding.
    Present: Representatives Watson, Connolly, Cuellar, Speier, 
Chu, Maloney, Bilbray, and Issa.
    Staff present: Bert Hammond, staff director; Valerie Van 
Buren, clerk; Adam Bordes and Deborah Mack, professional staff; 
Adam Fromm, minority chief clerk and Member liaison; John Ohly, 
minority professional staff member; and April Canter, minority 
staff member.
    Ms. Watson. Good morning. The Subcommittee on Government 
Management, Organization, and Procurement of the Committee on 
Oversight and Government Reform will now come to order.
    Today's hearing will focus on the Federal Government's role 
and responsibility in the global protection and enforcement of 
intellectual property rights. The subcommittee will also seek 
additional information from administrative witnesses on the 
strategic objectives of the Obama administration for improving 
coordination among the stakeholder agencies having IPR 
protection or enforcement responsibilities.
    Without objection, the Chair and ranking minority member 
will have 5 minutes to make opening statements, followed by 
opening statements not to exceed 3 minutes by any other Member 
who seeks recognition.
    Without objection, Members and witnesses may have 5 
legislative days to submit a written statement or extraneous 
materials for the record.
    I would like to welcome all of you to today's subcommittee 
hearing on Federal efforts to protect and enforce the 
intellectual property rights of our Nation's industrial base 
throughout the domestic and global marketplace.
    Before we begin, I would like to apologize for the 
subcommittee having to postpone our original hearing that was 
scheduled for November 4th, but our legislative calendar was 
rather full that week, as some of you probably will recall. So 
I welcome our distinguished witnesses, especially those who 
have had to rearrange their travel or business schedules in 
order to attend today's rescheduled hearing, and look forward 
to hearing your testimony.
    Intellectual property rights [IPR], is an issue that is 
near and dear to my heart and the livelihood of many of my 
constituents. My congressional district, the 33rd, which 
includes Los Angeles, Culver City, and Hollywood, CA, is home 
to a number of important entertainment companies, including 
Sony Studios, the Culver Studios, Capital Records, Raleigh 
Studies, and Television Studios, and, of course, the American 
Film Institute.
    According to figures compiled by Americans for the Arts, 
approximately 30,000 people are employed in entertainment-
related industries located in my congressional district. More 
than 18,000 people who work in the congressional district make 
a living from film, radio, and television, whose profits and 
future viability are dependent on strong IPR protection and 
enforcement.
    As a fellow member of the California congressional 
delegation, I know my Ranking Member Bilbray recognizes the 
vital economic importance of intellectual property to our 
State's economic health, as well as to the future growth and 
stability of our Nation and the global economy.
    Since the establishment of the World Trade Organization in 
1995, America's key IP-related industries have prospered 
through our domestic comparative advantage in innovation and 
research, but this advantage has been severely undermined by 
sharp escalation in IP infringement, such as piracy and 
counterfeiting, even among our closest and most vital trading 
partners and strategic allies. This causes great economic harm 
to innovations and innovators who invest significant capital in 
the products or creations that have improved our standard of 
living and increased our knowledge base. While the true amount 
is unclear, recent estimates of the losses or costs associated 
with IP infringement for the U.S. domestic industry ranges from 
$200 to $250 billion annually.
    The prevalence of such losses extends to all IP-related 
sectors, including information technology, life sciences, 
digital content, pharmaceuticals, the defense industry, and the 
entertainment industry. These losses threaten our Nation's 
economic growth and global leadership in innovation.
    Furthermore, IPR infringement poses significant risk to our 
national security, consumer welfare, and ability to rely upon 
an effective legal framework for our domestic industries 
working abroad. According to the Los Angeles County Economic 
Development Corp., the cost of global piracy and counterfeiting 
activities in Los Angeles County in the year 2005 was estimated 
at $5.2 billion. Those figures were proportionately shared 
across all sectors of the IP-driven economy, with motion 
pictures leading the way at $2.7 billion, followed by the 
recording industry, apparel makers, and software developers.
    Unless such trends are soon curtailed, the roughly 1 
million L.A. County IP-dependent jobs will be placed at a 
significant risk. The findings in this year's special 301 
Report issued by the Office of U.S. Trade Representatives tell 
us that a combination of technological advances and various 
market access barriers in key countries are preventing our 
companies from protecting their IP-based goods and services.
    With that in mind, I would like our witnesses to discuss 
what they believe are the major factors in the escalation of 
IPR infringement abroad. Specifically, I want our Government 
panelists to explain how they believe the newly established 
intellectual property enforcement coordination office will aid 
in their development of a stronger framework for managing our 
inter-agency IPR protection and enforcement responsibilities, 
both domestically and abroad. Specifically, what new 
authorities has this office been granted to police our 
patchwork of agencies charged with combating global IPR 
infringement.
    Furthermore, I would like you to discuss how our trade 
agreements with other nations, including those issues being 
negotiated as part of the proposed anti-counterfeiting trade 
agreement, are reducing the growing incidence of digital-based 
piracy or the illegal manufacturing of counterfeit drugs and 
consumer goods for importation.
    These activities pose significant threats to our economy, 
to public health, to national security, and must be countered 
in order to maintain our position in the global marketplace.
    Last, I would like to address an emerging IPR issue with 
the People's Republic of China and its efforts to restrict our 
domestic technology industries from participating in their 
governmentwide procurement programs. And under the Chinese 
government's newly issued rules, only products that contain 
Chinese proprietary intellectual property would be eligible for 
government procurement. This process will, in effect, result in 
excluding the products of international companies from the 
government procurement market in China. This is a troubling 
development that will have major economic consequences for our 
trade relations if we do not find an amicable resolution.
    I am hopeful that our witnesses can educate us on the 
latest developments with these matters and other 
recommendations on how we at the subcommittee can be helpful in 
facilitating a resolution for all parties involved.
    I will also ask my ranking member, Mr. Bilbray, for his 
consideration on how we may be able to work collaboratively on 
this topic of vital importance to our home State's economy.
    Once again, I want to thank our panelists for joining us 
today and look forward to your testimony.
    Are you taking his place, Mr. Issa?
    Our distinguished Member, Mr. Issa from San Diego, will 
take the place of our ranking member, Mr. Bilbray.
    Mr. Issa.
    Mr. Issa. Thank you, Madam Chair. I would ask unanimous 
consent that Mr. Bilbray's entire opening statement be placed 
in the record.
    Ms. Watson. Without objection.
    [The prepared statement of Hon. Brian P. Bilbray follows:]

    [GRAPHIC] [TIFF OMITTED] T7791.001
    
    [GRAPHIC] [TIFF OMITTED] T7791.002
    
    Mr. Issa. Thank you, Madam Chair.
    Intellectual property contributes $5.5 trillion--I repeat, 
$5.5 trillion--a year to our economy. In fact, we have become 
the intellectual property giant around the world. We have 
traded many, many jobs, entry-level jobs in manufacturing of 
garments and other products, for our development of these high-
skill, high-paying jobs, and we have off-loaded many of them to 
China. So I find it today particularly confusing that China 
would look at this bargain that has been so favorable to them 
and begin the process of far exceeding any moratorium or 
prohibition allowed under the WTO.
    We in the U.S. Congress, under the chairwoman and my watch, 
participated in China ascending to the WTO. They did so not 
having met all the requirements but with the promise to meet 
them and to continue in this direction. Intellectual property 
was, in fact, at the core of the items which China had not 
lived up to their responsibility but promised to. Over the 
years, countries such as Russia have been prohibited and 
stopped from getting into that for good reason. We have seen 
that China has not gained any respect for intellectual 
property. In fact, they continue to be the largest customer in 
Asia for Microsoft products. They simply don't buy them.
    Madam Chair, it is very clear that we have to say that 
China has a right to have such special property as is necessary 
for its own defense. We, too, maintain a policy that certain 
technology must be domestic for our national security. 
Certainly neither one of us would want the ability to put a 
space-based defense system into space not to be domestically 
controllable and known. But China very clearly is trying to 
force partnering with U.S. companies' transfer of technology 
for purposes of getting a jump start on that next generation of 
products and services.
    So, Madam Chair, I appreciate your viewing something which 
this committee has a longstanding belief that we not only 
control the procurement process governmentwide, but we have, by 
necessity, a requirement to look beyond our borders for free 
and fair trade and access for our products.
    So I look forward to our witnesses and, again, Madam Chair, 
thank you for holding this important hearing.
    I yield back.
    Ms. Watson. Thank you.
    Without objection, Members and witnesses may have 5 
legislative days to submit a written statement or extraneous 
materials for the record.
    I now yield to Congressman Cuellar for an opening 
statement.
    Mr. Cuellar. Thank you, Madam Chair. I appreciate this 
hearing.
    I am a big believer in trade agreements, but one of the 
things that I think, along with my other colleagues, we have to 
make sure that we protect our intellectual properties. I am 
interested, as we go through the testimony, to see what we are 
looking at as we look at the countries of Colombia, of Panama, 
and, of course, of Korea also. If you all could highlight that 
also during your testimony, if one of you all could do that. 
Otherwise, Madam chair, I am ready to listen to the testimony 
and ask some questions afterwards.
    Thank you very much for having this hearing today.
    Ms. Watson. If there are no further opening statements, the 
subcommittee will now receive testimony from the witnesses 
before us today.
    We will now turn to our first panel. There will be two this 
morning. It is the policy of the Committee on Oversight and 
Government Reform to swear in all witnesses before they 
testify. I would like to ask all of you to please stand and 
raise your right hands.
    [Witnesses sworn.]
    Ms. Watson. Let the record reflect that the witnesses 
answered in the affirmative.
    I will now introduce the panelists. We will first start 
with Mr. Stanford K. McCoy, who is the Assistant U.S. Trade 
Representative for the Intellectual Property and Innovation at 
the Office of U.S. Trade Representative. He serves as the chief 
policy advisor to the U.S. Trade Representative on the 
intellectual property and trade issues and serves as the lead 
U.S. trade negotiator on intellectual property and innovation 
to the WTO and Trips Council, and as part of the U.S. Free 
Trade Agreement negotiations.
    Next to him is Mr. Robert Stoll, who is the Commissioner of 
Patents at the U.S. Patent and Trademark Office, where he 
oversees the administration of all U.S. PTO patent programs. 
Prior to his current appointment, Mr. Stroll served as Director 
of Enforcement for U.S. PTO, as well as Dean of Education and 
Training Programs for external agency stakeholders involved 
with intellectual property issues.
    Mr. Jason Weinstein is the Deputy Assistant Attorney 
General of the Criminal Division at the U.S. Department of 
Justice. Before joining the Criminal Division, Mr. Weinstein 
served as chief of the Violent Crime Section in the U.S. 
Attorney's Office for the District of Maryland, and as 
assistant U.S. attorney for the Southern District of New York. 
Before becoming a Federal prosecutor, Mr. Weinstein served as 
Special Investigative Counsel in the Justice Department's 
Office of the Inspector General.
    Mr. William Craft is the Acting Deputy Assistant Secretary 
of the Bureau of Economics, Energy, and Business Affairs at the 
U.S. Department of State. Prior to this, he was Director of the 
Office of Multilateral Trade and Agricultural Affairs. He is 
the lead officer in the State Department for all issues related 
to the World Trade Organization [WTO], including negotiations 
including the DOHA Development Round and WTO Accession issues.
    Mr. Loren Yager is the Director of International Affairs 
and Trade at the Government Accountability Office, where he 
oversees issues associated with intellectual property rights 
and international trade negotiations.
    I ask that each of the witnesses now give a brief summary 
of their testimony, and to keep this summary under 5 minutes in 
duration. Your complete written statement will be included in 
the hearing record.
    Before we proceed, I am going to ask Ms. Chu if she would 
like to make an opening statement.
    Ms. Chu. I am just happy to take part in these proceedings 
and I look forward to hearing what the witnesses have to say.
    Ms. Watson. We are happy to have you.
    Mr. McCoy, would you please proceed.

     STATEMENTS OF STANFORD K. MCCOY, ASSISTANT U.S. TRADE 
REPRESENTATIVE FOR INTELLECTUAL PROPERTY AND INNOVATION, OFFICE 
OF THE U.S. TRADE REPRESENTATIVE; ROBERT L. STOLL, COMMISSIONER 
FOR PATENTS, U.S. PATENT AND TRADEMARK OFFICE; JASON WEINSTEIN, 
  DEPUTY ASSISTANT ATTORNEY GENERAL, CRIMINAL DIVISION, U.S. 
    DEPARTMENT OF JUSTICE; WILLIAM E. CRAFT, ACTING DEPUTY 
ASSISTANT SECRETARY, BUREAU OF ECONOMICS, ENERGY, AND BUSINESS 
 AFFAIRS, U.S. DEPARTMENT OF STATE; AND LOREN YAGER, DIRECTOR, 
  INTERNATIONAL AFFAIRS AND TRADE, GOVERNMENT ACCOUNTABILITY 
                             OFFICE

                 STATEMENT OF STANFORD K. MCCOY

    Mr. McCoy. Thank you, Madam Chairwoman. Thank you to the 
ranking member, Mr. Bilbray, and all the members of this 
subcommittee for the opportunity to join you today and talk a 
little bit about the mission of the Office of the U.S. Trade 
Representative in respect to the protection and enforcement or 
intellectual property rights.
    As you said in your opening statement, Madam Chairwoman, 
one of the factors that makes American exporters and investors 
competitive across so many sectors of the global economy is the 
value we add to our products and services through innovation 
and creativity.
    Intellectual property rights and their protection and 
enforcement are critical to securing that comparative aviation 
in global trade, and thus to securing the jobs of workers in 
America's many innovative and creative industries. Providing 
leadership in the creation and maintenance of the global 
infrastructure of trade rules to support American exports and 
investments is a critical part of the work of the Office of the 
U.S. Trade Representative. It is a job that we carry out in 
coordination with the other agencies represented here at the 
table, and in coordination in coming days with the new 
Intellectual Property Enforcement Coordinator, who has recently 
been confirmed by the Senate.
    We carry out that mission in many ways. One of the best 
tools we have is one that was handed to us by the U.S. Congress 
of consistently monitoring our partners' trade practices 
through the special 301 report. If they know that we are 
holding a magnifying glass up to their actions, they will be 
less likely to break the rules, and special 301 is one of our 
biggest and strongest magnifying glasses. We use it to scour 
the globe for copycats and counterfeiters and call out 
countries that provide safe havens for the theft of American 
intellectual property.
    Madam Chairwoman, this year marks the 20th anniversary of 
the first special 301 report, which was mandated by the U.S. 
Congress in 1988 and first issued in 1989. The past two decades 
have brought enormous new challenges in the scope and 
sophistication of international piracy and counterfeiting. The 
special 301 process has expanded in scope and breadth to match 
that challenge. For our most recent report, USTR examined IPR 
protection and enforcement in 77 countries and listed 46 of 
them in the report.
    Special 301 works because the reports' rankings shine a 
light on IP protection and enforcement, and also afford an 
opportunity to give credit where it is due.
    The Republic of Korea is a good example of both of those. 
It was removed from the watch list in 2009, marking the latest 
in a series of improvements in the Asia Pacific region and 
around the world that have been encouraged and recognized 
through the special 301 process created by Congress.
    We hope to see that trend continue and spread. It is vital 
that trading partners such as China, Russia, and other 
countries on the priority watch list and watch list follow 
suit. It is also critical that valued trading partners like 
Canada and Spain step up and confront emerging challenges like 
Internet piracy.
    China still presents significant challenges to the 
protection and enforcement of intellectual property rights, 
including the indigenous innovation challenge that was 
mentioned by you, Madam Chairwoman, and by Mr. Issa in your 
opening statements. With China we are making use of every 
available trade tool to achieve progress on IP issues.
    Madam Chairwoman, let me say it as plainly as Ambassador 
Kirk has said it: China must do more to protect U.S. 
intellectual property rights.
    In addition to reporting and engaging bilaterally, USTR is 
also providing essential leadership through trade agreements to 
strengthen norms for the enforcement of intellectual property 
rights. A key USTR initiative in this area is the Anti-
Counterfeiting Trade Agreement [ACTA]. In that effort, we are 
partnering with a group of key trading partners representing 
about 50 percent of global merchandise trade. When it is 
finalized, the ACTA will help governments around the world to 
more effectively combat the proliferation of pirated and 
counterfeit goods.
    With that, Madam Chairwoman, I will close my summary of my 
remarks and thank you and the members of the committee again 
for the opportunity to be here today.
    [The prepared statement of Mr. McCoy follows:]

    [GRAPHIC] [TIFF OMITTED] T7791.003
    
    [GRAPHIC] [TIFF OMITTED] T7791.004
    
    [GRAPHIC] [TIFF OMITTED] T7791.005
    
    [GRAPHIC] [TIFF OMITTED] T7791.006
    
    [GRAPHIC] [TIFF OMITTED] T7791.007
    
    [GRAPHIC] [TIFF OMITTED] T7791.008
    
    [GRAPHIC] [TIFF OMITTED] T7791.009
    
    Ms. Watson. I thank you, Mr. McCoy.
    Mr. Stoll, you may proceed.

                  STATEMENT OF ROBERT L. STOLL

    Mr. Stoll. Thank you, Madam Chairwoman Watson and members 
of the subcommittee. I am pleased to be here to discuss the 
efforts of the Department of Commerce and the U.S. PTO in 
promoting the protection of intellectual property rights in a 
global economy.
    Innovation and creativity are essential ingredients of our 
Nation's prosperity. Appropriate protection of that innovation 
and creativity domestically and internationally is necessary to 
stimulate job growth and promote our economic well-being. That 
is why safeguarding these important assets is a top priority 
for all of us at this table and throughout the Obama 
administration. It is truly a team effort among our agencies to 
help fight piracy and counterfeiting within and outside our 
borders.
    The Department of Commerce plays an important role in 
encouraging innovation and strengthening the Nation's ability 
to compete in the global marketplace. The U.S. PTO's statute 
directs us to advise the President through the Secretary of 
Commerce in intellectual property issues and to advise other 
Federal departments and agencies on matters of intellectual 
property policy in the United States and in intellectual 
property protection in other countries.
    To this end, we are actively involved with the development 
of overall U.S. Government IP policy. We work to develop 
unified standards for international IP, provide policy guidance 
on domestic IP issues, and work with other agencies to procure 
strong IP provisions in free trade and other international 
agreements. We also provide training, education, and capacity 
building programs designed to foster respect for IP and 
encourage the development of strong IP enforcement regimes by 
U.S. trading partners.
    Madam Chair, my written statement contains more details of 
a wide range of our efforts. In my limited time here, I would 
like to highlight some of our programs and initiatives.
    The U.S. PTO coordinates, organizes, and participates in 
intellectual property rights training, trade capacity building, 
and technical assistance. We are especially proud of our Global 
Intellectual Property Academy [GIPA]. Since its creation in 
2005, the U.S. PTO has provided in its 20,000 square foot 
training facility in Alexandria, VA, high-level capacity 
building programs and technical assistance training to foreign 
judges, prosecutors, Customs officials, IP enforcement 
personnel, as well as officials from copyright, trademark, and 
patent offices from around the world. Those individuals come to 
the United States to learn, discuss, and strategize about 
global intellectual property rights protection and enforcement.
    Our program goals include fostering a better understanding 
of international intellectual property obligations and norms, 
exposing participants to the U.S. model of protecting and 
enforcing intellectual property rights, and promoting 
discussion of intellectual property issues in a friendly and 
supportive environment.
    The Academy provides both multi-lateral programs and 
country-specific programs as needed. We further envision 
programs dedicated to specific legal issues or technologies as 
the Academy continues to develop. The U.S. PTO's programs 
reached an average of 4,000 individuals in over 100 countries 
annually.
    In partnership with the Department of Commerce's United 
States and Foreign Commercial Service and the Department of 
State, U.S. PTO intellectual property experts are sent out to 
strengthen global intellectual property protection and 
enforcement overseas in selected high-profile countries where 
U.S. IP challenges are greatest.
    The IP experts support, as part of the overseas 
intellectual property rights attache program, U.S. embassies 
and consulates on IPR issues, including devising strategies to 
stop counterfeiting and piracy and supporting U.S. Government 
efforts to improve the protection and enforcement of IPR. They 
also advocate U.S. intellectual property policies, coordinate 
training on IPR matters, and assist U.S. businesses that rely 
on IPR protection abroad.
    The U.S. PTO has offered free programs and materials to 
help small- and medium-sized businesses improve their 
understanding of intellectual property, increase the value of 
intellectual property in their businesses to protect against 
counterfeits and piracies and of their intellectual property 
through our public awareness campaign.
    An important effort is the intellectual property awareness 
campaign [IPAC], IP basics program, offered nationwide by U.S. 
PTO since 2005 to over 1,000 small- and medium-sized 
businesses. These programs include presentations by our 
attorney advisors that cover the entire range of intellectual 
property.
    With that, Madam Chairman, I would like to conclude my 
remarks. Thank you.
    [The prepared statement of Mr. Stoll follows:]

    [GRAPHIC] [TIFF OMITTED] T7791.010
    
    [GRAPHIC] [TIFF OMITTED] T7791.011
    
    [GRAPHIC] [TIFF OMITTED] T7791.012
    
    [GRAPHIC] [TIFF OMITTED] T7791.013
    
    [GRAPHIC] [TIFF OMITTED] T7791.014
    
    [GRAPHIC] [TIFF OMITTED] T7791.015
    
    [GRAPHIC] [TIFF OMITTED] T7791.016
    
    [GRAPHIC] [TIFF OMITTED] T7791.017
    
    [GRAPHIC] [TIFF OMITTED] T7791.018
    
    Ms. Watson. Thank you, Mr. Stoll.
    Mr. Weinstein, you may proceed.

                  STATEMENT OF JASON WEINSTEIN

    Mr. Weinstein. Good morning. I want to thank you, 
Chairwoman Watson, and the ranking member and members of the 
subcommittee for the opportunity to appear before you today.
    Attorney General Holder has made intellectual property 
protection a top priority, and the Department of Justice is 
fully committed to aggressive, effective criminal enforcement 
efforts to protect our Nation's IP stakeholders and the 
American public. The Department has worked with our law 
enforcement partners to develop a strong enforcement program 
that combines aggressive investigation and prosecution of IP 
crimes with law enforcement training and victim outreach. 
However, because we understand that in the global economy a 
successful criminal enforcement program requires a strong 
international component, we also work in partnership with our 
foreign law enforcement counterparts whenever possible, which 
has resulted in great successes.
    For example, in January of this year Kevin Xu was sentenced 
to 78 months in prison for conspiring with others in China to 
traffic in counterfeit cancer drugs and other pharmaceuticals. 
Many of these counterfeits were lacking active ingredients or 
contained unidentified impurities, and drugs with lot numbers 
identical to the counterfeits were detected in the legitimate 
supply chain in London, which promoted a massive recall in the 
U.K.
    Just this past September the department obtained its 64th 
felony conviction arising from Operation Fastlink, which 
targeted multi-national organized criminal networks. In the 
underlying investigation, which was one of the largest 
international law enforcement actions ever taken against online 
piracy, the FBI worked with foreign law enforcement to conduct 
over 120 simultaneous search warrants in 27 States and a dozen 
foreign countries.
    These are just two examples of the many, many successful 
international enforcement efforts that we have participated in, 
and we are proud of all of them, and they all demonstrate the 
value of strong relationships with international and foreign 
law enforcement.
    The cornerstone of the Department's international efforts 
is the Intellectual Property Law Enforcement Coordinator 
[IPLEC], program. With the help of the State Department, we 
have deployed two experienced Federal prosecutors to serve as 
IPLECs, one in southeast Asia and one in eastern Europe, to 
provide training and operational assistance in those regions.
    Working with the IPLEC for Asia, the Department also 
spearheaded the formation of the Intellectual Property Crimes 
Enforcement Network [IPCEM], which has helped to strengthen 
communication channels and promote the informal exchange of 
evidence among member nations in Asia.
    In addition, the Department through the Criminal Division 
co-chairs the Intellectual Property Criminal Enforcement 
Working Group, which is part of the U.S.-China joint liaison 
group for law enforcement cooperation. The working group has 
fostered an open dialog on criminal IP enforcement, has 
increased information and evidence sharing, and has resulted in 
a number of successful joint operations between the United 
States and China, including Operation Summer Solstice, which 
targeted a criminal organization believed to be responsible for 
the distribution of over $2 billion worth of pirated and 
counterfeit software. Summer Solstice was the largest ever 
joint criminal enforcement operation between the FBI and law 
enforcement in China.
    More generally, the Department has placed great emphasis on 
efforts to strengthen enforcement capacity overseas, from 
Europe to Asia to Africa to South America to Mexico. In fact, 
over the past 5 years, working on partnership with some of the 
agencies represented here on this panel with me, DOJ attorneys 
have provided training and education on IP enforcement to over 
10,000 prosecutors, investigators, and judicial officers from 
over 100 countries.
    Because IP crime has increasingly become the province of 
international organized crime, we are working to identify and 
to address links between organized crime and intellectual 
property. The Department has already taken a number of 
significant steps to incorporate IP into its existing organized 
crime strategy, as directed by the PRO-IP Act.
    To succeed in the missions that I have outlined, we work 
closely with all of our partner law enforcement agencies, 
including through the National Intellectual Property Rights 
Coordination Center. Our ability to increase the number and 
scope of our IP investigations has also been bolstered more 
recently by the addition of 31 dedicated FBI special agents to 
investigating IP crime, and we appreciate Congress' decision to 
fund those positions.
    Finally, the Department works extensively on IP issues with 
other agencies in the Federal Government, including those 
represented here today, and with the industries most affected 
by IP crime, and we also look forward to working very closely 
with Victoria Espinel, who was confirmed just last week as the 
new IP Enforcement Coordinator, and with our partner agencies 
on the newly formed or to-be-formed IPEC Advisory Committee.
    Again I thank you for the opportunity to share with you the 
high priority that the Attorney General places on criminal 
enforcement of IP rights and the work that we do every day at 
the Department of Justice to combat intellectual property crime 
both here and abroad.
    I would be happy to take your questions.
    [The prepared statement of Mr. Weinstein follows:]

    [GRAPHIC] [TIFF OMITTED] T7791.019
    
    [GRAPHIC] [TIFF OMITTED] T7791.020
    
    [GRAPHIC] [TIFF OMITTED] T7791.021
    
    [GRAPHIC] [TIFF OMITTED] T7791.022
    
    [GRAPHIC] [TIFF OMITTED] T7791.023
    
    [GRAPHIC] [TIFF OMITTED] T7791.024
    
    [GRAPHIC] [TIFF OMITTED] T7791.025
    
    [GRAPHIC] [TIFF OMITTED] T7791.026
    
    [GRAPHIC] [TIFF OMITTED] T7791.027
    
    [GRAPHIC] [TIFF OMITTED] T7791.028
    
    Ms. Watson. Thank you, Mr. Weinstein.
    Now you may proceed, Mr. Craft.

                 STATEMENT OF WILLIAM E. CRAFT

    Mr. Craft. Thank you, chairwoman and committee members. It 
is a pleasure to be here today to testify on the State 
Department's role in protecting intellectual property rights in 
today's global economy.
    We welcome the committee's interest in this issue and look 
forward to continuing to work with you to achieve our mutual 
goal of ensuring that U.S. intellectual property rights are 
fully respected everywhere in the world. As President Obama has 
said, innovation is the key to good new jobs for the 21st 
century.
    Since intellectual property rights encourage and reward 
innovation, protecting American intellectual property abroad is 
one of the State Department's top economic policy priorities. 
We work closely with other U.S. Government agencies, the 
private sector, and foreign governments to achieve that goal.
    Within the State Department, our efforts are led by the 
Office of Intellectual Property Enforcement, part of the Trade 
Policy and Programs Deputate that I head. That office now has a 
staff of 12 people. As you are aware, Congress created this 
office in 2005 to strengthen State Department efforts to combat 
counterfeiting and piracy.
    IPE promotes enforcement of U.S. IP rights overseas, 
represents the State Department in inter-agency IPR policy 
discussions, and participates actively in bilateral and 
multilateral negotiations to improve enforcement of IP rights.
    State implements IPR enforcement training and technical 
assistance programs for which the Congress has given us $4 
million in 2009. In calendar year 2009, we used that money to 
train over 1,500 customs, police, and judicial officials from 
more than 20 countries, including the Ukraine, Mexico, Russia, 
Vietnam, and Nigeria.
    State also conducts public outreach to foreign audiences on 
the importance of IP to host country economies, innovators, and 
creators, and trains our embassy officers overseas around the 
world on IP enforcement.
    Intellectual property enforcement is integrated into the 
work of other State Department bureaus and offices. For 
example, we work closely with our Bureau of International 
Organizations and with other agencies to strengthen the World 
Intellectual Property Organization and to ensure that other 
U.N. agencies support good IP policy. Our regional bureaus, 
U.S. embassies, and consulates are on the front lines of 
protecting U.S. IP rights in particular countries, responding 
to complaints raised by U.S. companies and vigorously pressing 
foreign governments to combat piracy and counterfeiting.
    There is a Foreign Service officer assigned to work on 
intellectual property protection in every U.S. embassy 
overseas.
    Madam Chairwoman, as you have noted, piracy and 
counterfeiting are still enormous problems, but we are making 
some headway. There are more examples in my written testimony, 
but let me just cite two examples of areas where we think we 
have made a positive impact.
    On the enforcement side, the U.S. Government and the 
private sector have been working actively with Mexico to 
encourage them to increase enforcement of their laws, and 
working on information provided by the U.S. industry, the 
Mexican Attorney General's office recently arrested a number of 
individuals for camcording in movie theaters, thereby 
dismantling one of Mexico's major camcording rings.
    In terms of the winning hearts and minds side on public 
outreach, an excellent example is the way that our embassy in 
Bosnia helped to develop an IPR school campaign with a 
curriculum and comic books printed in the three local 
languages, supported by appearances by the U.S. Ambassador and 
several Bosnian movie and music stars.
    Let me just note, Madam Chairwoman, that the State 
Department concurs with the recent GAO report's recommendations 
on improving coordination between our embassies and our 
intellectual property attaches overseas, and we have sent a 
cable to relevant posts instructing them to implement the 
recommendations of the GAO. We are getting responses from the 
posts and we are reviewing those now.
    As Mr. Stoll and the others have noted, we know very well 
and very favorably Ms. Espinel and we look forward to working 
with her as she tries to raise the image and profile of 
protecting intellectual property as she takes on her new role. 
We look forward to working very closely with her.
    Finally, let me thank you and the committee for your 
interest in this very important issue and to assure you that we 
look forward to working with you to strengthen our efforts to 
protect intellectual property.
    Thank you very much.
    [The prepared statement of Mr. Craft follows:]

    [GRAPHIC] [TIFF OMITTED] T7791.029
    
    [GRAPHIC] [TIFF OMITTED] T7791.030
    
    [GRAPHIC] [TIFF OMITTED] T7791.031
    
    [GRAPHIC] [TIFF OMITTED] T7791.032
    
    [GRAPHIC] [TIFF OMITTED] T7791.033
    
    [GRAPHIC] [TIFF OMITTED] T7791.034
    
    [GRAPHIC] [TIFF OMITTED] T7791.035
    
    [GRAPHIC] [TIFF OMITTED] T7791.036
    
    [GRAPHIC] [TIFF OMITTED] T7791.037
    
    [GRAPHIC] [TIFF OMITTED] T7791.038
    
    [GRAPHIC] [TIFF OMITTED] T7791.039
    
    [GRAPHIC] [TIFF OMITTED] T7791.040
    
    [GRAPHIC] [TIFF OMITTED] T7791.041
    
    [GRAPHIC] [TIFF OMITTED] T7791.042
    
    [GRAPHIC] [TIFF OMITTED] T7791.043
    
    [GRAPHIC] [TIFF OMITTED] T7791.044
    
    [GRAPHIC] [TIFF OMITTED] T7791.045
    
    [GRAPHIC] [TIFF OMITTED] T7791.046
    
    Ms. Watson. Thank you, Mr. Craft.
    Now you may proceed, Mr. Yager.

                    STATEMENT OF LOREN YAGER

    Mr. Yager. Thank you. Good morning, Madam Chairwoman, 
Ranking Member Bilbray, and members of the subcommittee. Thank 
you for the opportunity to appear before the subcommittee to 
discuss our work on U.S. efforts to protect intellectual 
property rights. We appreciate the opportunity to continue our 
contributions to the record that this committee has established 
on IP protection.
    This hearing is timely, as Congress recently overhauled the 
U.S. structure for IP protection. The PRO-IP Act created a new 
structure, and the Senate recently confirmed the coordinator to 
chair the Advisory Committee.
    In my statement today I will address two topics on IP 
protection and enforcement that are relevant to that structure. 
First let me talk about the lessons learned from past efforts 
to coordinate IP protection and enforcement, and second I will 
make a few observations on the efforts of the Patent and 
Trademark Office intellectual property attaches in key 
countries around the world.
    Let me start with a few observations from our prior work. 
The PRO-IP Act of 2008 enacted several changes that addressed 
weaknesses we found in the prior IP coordinating structure. 
That structure was initiated under two different authorities 
and lacked clear leadership and permanence, hampering the 
effectiveness and long-term viability of such coordination.
    In a GAO report undertaken for this committee in 2004, we 
reported that this council had not undertaken any independent 
activities since it was created. Congress subsequently made 
enhancements in 2004 to strengthen its role but we reported 
that it continued to have leadership challenges.
    In contrast, the Presidential initiative called STOP had a 
positive image among the agencies and the private sector, and 
from its beginning was characterized by a high level of 
coordination and visibility. However, as a Presidential 
initiative it lacked permanence, since its influence was tied 
to a single administration.
    While its impact will depend upon its implementation, the 
PRO-IP Act of 2008 enacted several changes that addressed 
weaknesses in that prior structure. For example, the act places 
leadership in the Executive Office of the President, a status 
similar to STOP. In addition, the PRO-IP Act specifically 
requires the new agency to prepare a strategic plan that builds 
in mechanisms for accountability and for oversight. The PRO-IP 
Act requires the council to submit the strategic plan to 
committees of the Congress to improve accountability.
    Let me now turn to another important issue, and that is the 
placement of the PTO IP attaches abroad. An additional theme of 
the PRO-IP act is the emphasis on strengthening the capacity of 
U.S. agencies abroad to protect and enforce IP rights. In a 
report we released in September of this year, we found that the 
IP attaches could be an asset to U.S. firms and to other U.S. 
agencies who needed assistance in matters related to IP 
enforcement. These IP attaches provided this assistance by 
adopting a number of practices.
    First, the attaches served as effective focal points. Prior 
to the creation of the IP attache position, State economic 
officers had primary responsibility for IP, but IP attaches are 
full time in the issue, and they also impart their subject 
matter expertise, which enhances their effectiveness as focal 
points.
    Second, they established IP working groups. Several agency 
officials at the posts we visited in China, Thailand, and India 
said that the working groups provided several benefits, such as 
increasing coordination on training and on other activities.
    Third, the attaches leverage resources through joint 
activities. For example, the IP attaches helped the Foreign and 
Commercial Service efforts to assist firms by providing advice 
on how to avoid IP problems and answering IP-related questions.
    While our observations on PTO's attaches abroad are largely 
positive. Our prior work has also demonstrated that the long-
term success of overseas operations requires careful attention 
to human capital planning. In particular, we have observed that 
other agencies attempting to establish a presence abroad had to 
make specific efforts to ensure that they could recruit and 
retain sufficient personnel with both the technical as well as 
the cultural expertise that is essential in those posts. These 
considerations may be important as the Congress and the PTO 
make decisions about the scale and the performance of this 
program.
    Madam Chairwoman, Ranking Member Bilbray, thank you for the 
opportunity to appear before this subcommittee to summarize our 
work. I will be happy to answer any questions that you or other 
Members have.
    [The prepared statement of Mr. Yager follows:]

    [GRAPHIC] [TIFF OMITTED] T7791.047
    
    [GRAPHIC] [TIFF OMITTED] T7791.048
    
    [GRAPHIC] [TIFF OMITTED] T7791.049
    
    [GRAPHIC] [TIFF OMITTED] T7791.050
    
    [GRAPHIC] [TIFF OMITTED] T7791.051
    
    [GRAPHIC] [TIFF OMITTED] T7791.052
    
    [GRAPHIC] [TIFF OMITTED] T7791.053
    
    [GRAPHIC] [TIFF OMITTED] T7791.054
    
    [GRAPHIC] [TIFF OMITTED] T7791.055
    
    [GRAPHIC] [TIFF OMITTED] T7791.056
    
    Ms. Watson. Thank you so much, Mr. Yager.
    We will now move to our question period and proceed under 
the 5-minute rule. Before that, I would like to welcome 
Congresswoman Carolyn Maloney to our committee. Thank you for 
coming and sitting in with us today.
    I want to delve a little deeper into what is happening, Mr. 
McCoy, and particularly this week, in China. We know that the 
government is developing regulations regarding what are being 
called, as you mentioned, national indigenous innovation 
products. My understanding is that these regulations would, in 
essence, create preferences for Chinese vendors and eliminate 
U.S. information technology and intercommunication industries 
from China's government procurement and acquisition markets. 
This proposal obviously raises multiple issues surrounding 
compliance with international trade laws, as well as our 
bilateral agreements with the Chinese government.
    Can you address how the Obama administration, including the 
USTR, has been proactive with this issue? It is very troubling 
to us, so let us know.
    Mr. McCoy. Madam Chairwoman, this is indeed a serious 
concern that you have identified, this indigenous innovation 
preference issue. Certainly it is in the interest of both the 
U.S. Government and the Chinese government to promote 
innovation. There are appropriate ways to do that, and there 
are inappropriate ways to do that. Let's be clear: innovation 
is no excuse for discrimination. We are very alert to these 
industry concerns about China's indigenous innovation policies 
in a wide range of areas, including the recent announcements 
out of China on a procurement preference list.
    We are in the process of expressing our serious concerns. 
The inter-agency team in the U.S. Government has sprung into 
action. Ambassador Huntsman has received instructions and he 
and his team are in the process of raising our questions with 
all of the appropriate counterparts in the Chinese government. 
I can assure you we will stay fully engaged and continue to 
follow this closely.
    Ms. Watson. There has been mention that we have attaches 
and we have FBI and so on in our overseas embassies, and so I 
am really pleased to hear that you are working through the 
Ambassadors. I have been there, and we really need to have 
close scrutiny and interchange back with our administration as 
to how we are progressing.
    The 2009 special 301 report that was mentioned highlighted 
the increased incidence of Internet piracy among U.S. trading 
partners. Some countries such as France and Britain have 
pursued legislation that would cutoff Internet access for users 
who repeatedly are caught engaging in integral peer-to-peer 
file sharing. Any of you that would like to address this 
particular question, please feel free to do so. Do you believe 
that this is a potential legislative remedy to our own 
significant peer-to-peer file sharing problem? We will start 
with you, Mr. Stoll.
    Mr. Stoll. Thank you, Madam Chairman.
    I am not sure that type of activity would be something that 
the United States would want to follow. I think that there is 
an intent to try to take care of the issues related to piracy 
in many manners, but I am not sure that removing access--I 
think in France it is a three strikes you are out program. I am 
not sure that would be palatable here in the United States.
    I think that taking many other actions to be able to reduce 
piracy in the United States is an important interest in all of 
the agencies represented here, but I am not sure that is the 
right direction to go in.
    Ms. Watson. Mr. Weinstein.
    Mr. Weinstein. I would agree with that, Madam Chairwoman. 
As a general matter, it is my view that the technology is not 
the problem, it is the way in which the technology is being 
used that creates the problem, and I think this is no 
exception.
    In terms of criminal enforcement, we are increasingly 
concerned--we have been for some time and we continue to be 
concerned it--online piracy. It is perhaps the greatest 
emphasis of our computer crime and IP section. In pursuing 
online piracy, we work closely with industry, with the Motion 
Picture Association of America, with the Business Software 
Alliance, with the Entertainment Software Association to help 
identify emerging trends and to identify and prosecute the most 
serious online copyright thieves.
    We have had great successes over the last few years and are 
continuing to prosecuting wares groups--that is, online 
organized groups that are engaging in piracy of software and 
music--focusing on the first suppliers, on the primary 
distributors of those materials online.
    We have more recently engaged in fairly aggressive 
investigative operations against peer-to-peer networks, 
particularly those using BitTorrent software. We had an 
operation that we called the Elite, which resulted in eight 
convictions, including the first ever conviction at trial of a 
high-ranking administrator of a P2P Web site that was 
distributing massive amounts of infringing copyrighted works--
software, video games, music, movies, the whole works--and who 
got a substantial sentence.
    We are also trying to get the problem at the source. 
Oftentimes the multi-million dollar online piracy scheme begins 
with a camcorder, someone who is taping a movie, for example, 
in a movie theater, and so we have aggressively worked in 
partnership with the MPA and other interested partners to 
identify appropriate targets for camcording cases and recently 
convicted, late last year, convicted a gentleman named Michael 
Logan here in D.C. who was viewed as perhaps the most prolific 
camcorder on the east coast.
    So we are trying to get to the problem at all ends, both 
once they are on an infringing site and even at the origin at 
the camcording level.
    I would also say that since this problem is increasingly an 
international one, our international work engagement with 
foreign partners is increasingly important in this area, 
perhaps more than any other, and the IPLEC program that I 
mentioned is a key component of that strategy.
    The fact that these sites are often posted on servers that 
are located overseas presents some investigative challenges, 
but they are challenges that we are working very closely with 
our foreign partners to overcome. The fact that a person 
commits this kind of crime from what he thinks is the privacy 
of an apartment or an office somewhere in eastern Europe, for 
example, or Asia is not the safe haven that it used to be. We 
are working very hard with our foreign partners, not only to 
aggressively enforce criminal laws and to take down the 
organizations and individuals engaging in this conduct, but we 
are also working to increase their capacity so that we can 
reduce the number of safe haven countries throughout the world 
for people who engage in this kind of behavior.
    Criminals, particularly criminal organizations, that engage 
in this type of online piracy, particularly from overseas or 
using overseas servers and other assets, should make no mistake 
about our resolve to find them and locate them and our 
increasing capacity to do that.
    Ms. Watson. Thank you. My time is up, so I would like to go 
to our most distinguished ranking member, Mr. Bilbray, for 5 
minutes.
    Mr. Bilbray. Thank you, Madam Chair. I apologize for my 
tardiness, gentlemen.
    Mr. Stoll, you said that the American people, you didn't 
think the American system had the stomach to do the three 
strikes like the British and the French. First of all, it kind 
of gets me nervous when we figure we don't have the intestinal 
fortitude of the French, but that's a different issue.
    You want to elaborate on why we don't have the stomach for 
it?
    Mr. Stoll. I am not sure I didn't--maybe I shouldn't have 
said don't have the stomach. I don't think that would be the 
direction we would go, because their access for informational 
purposes would be removed completely, as well. So we have a 
balancing act of interests here. I think there are many 
mechanisms where we are able to take care of the problem 
related to piracy, but I am not sure that it would probably be 
in the interests of our society to block access for other 
purposes of information exchange, education, of Internet 
access. So I think that's what I am trying to say.
    I think that there are mechanisms that are in place. We 
work with MPAA, with RIAA. There are many different things to 
do. I am not sure just about blocking access would be something 
that we would want to do.
    Mr. Bilbray. I apologize. I am not as well versed as 
obviously I should be. When you say blocking access, are they 
talking about a national ban?
    Mr. Stoll. Yes.
    Mr. Bilbray. The British are talking about a national ban?
    Mr. Stoll. That's what my understanding is. I believe that 
is correct.
    Mr. Bilbray. OK. Gentlemen, let me be a little blunt. I 
think the perception out there--and I would ask you to either 
verify it or refute it--is that when it comes to intellectual 
piracy, China is the Somalia of the intellectual world. Is that 
fair to say?
    Mr. Yager. If I could just make a couple of comments on 
that, Ranking Member Bilbray, certainly China has some unique 
features that make it a special problem. One, it is an enormous 
exporter. It has the capability to export a wide range of goods 
and services, many of which have some level of intellectual 
property.
    Second, China is also a major market. It has become an 
increasingly large market, not just for U.S. goods, but for 
goods from other places around the world.
    So this is one of the few places around the world where you 
have both this enormous export capacity as well as a large 
internal market, so U.S. firms are understandably interested in 
serving that market, as well as gaining protection from the 
kinds of exports that China does produce, both shipping here as 
well as to third countries.
    Mr. Bilbray. So what you are telling me is China is at that 
critical location right along the major shipping lanes of 
intellectual property, which indicates that sounds a lot like 
Somalia to me.
    Mr. Yager. They certainly have a unique position. Whether 
it is in the south, the manufacturing center of the world, 
where they are able to produce in mass quantities and at 
relatively high quality, and using intellectual property in 
some cases that is not owned by those firms. It does have a 
unique position.
    Mr. Bilbray. Are you a diplomat? You sure sound like it.
    Go ahead, sir.
    Mr. Weinstein. I am not a diplomat, either, but I have 
never been accused of being a diplomat, but I do think it is 
worth pointing out, Congressman, that sometimes some of the 
countries that present the greatest challenges for IP crimes 
generally also are the most engaged in terms of trying to 
address their weaknesses, so it is certainly no--there really 
is no secret and there can't be any dispute that China is a 
source of a very large quantity of infringing goods, both hard 
goods and electronic goods.
    But we have enjoyed a very productive and increasingly so 
working relationship with Chinese law enforcement, and I think 
the FBI and ICE and Chinese law enforcement officials, working 
with our prosecutors, have made great strides over the last few 
years. So at least from a law enforcement perspective I think 
China is working hard to try to address the challenges that 
even it identifies within its borders.
    One of the areas in which I think we have been effective in 
other parts of Asia, particularly in southeast Asia and in 
eastern Europe through the IPLEC program that I mentioned, we 
have a prosecutor who works on a day-to-day basis not only to 
do joint operations with law enforcement in those countries or 
those regions where we have IP problems, but also to build 
their capacity to investigate and prosecute their own cases. 
That is a program that we very much would like to see expanded, 
and it is our long-term goal to expand, and China would be 
probably first on the list of places on the globe where we 
think more engagement, at least at the law enforcement level, 
would be productive for everyone.
    Mr. Bilbray. Well, China probably has the best capabilities 
of doing enforcement of anybody in the world. I mean, they 
probably have one of the tightest-knit enforcement capabilities 
that anybody has ever seen on the face of the earth, so their 
argument for not being able to crack down really is not germane 
to this issue.
    The question that I have, though, is with at least the huge 
reputation of being the pirating capital, doesn't that give 
indications to other countries that, look, if you are big 
enough, if you are rich enough, if you intimidate the rest of 
the world you can get away with a lot of this, or maybe it is 
the other way that, Look what's going on in China. Why don't we 
try it in Monterrey, Mexico, or why don't we try it in 
Singapore. Well, Singapore is kind of a tight, little 
community, so you might have that problem, too. But questions 
about how that gives a potential for other parts of the world 
to expand into the pirating aspect.
    Mr. McCoy. I could speak to that, Mr. Ranking Member, if I 
could. I think it is important to bear in mind that China, in 
addition to being the world's leading exporter of knock-off 
products, is also really suffering in terms of its domestic 
market the consequences of really decimating markets for 
software, music, films, and other IP-intensive products because 
of inadequate respect for IPR, so there is a lesson there to 
other trading partners, as well, not to go down this path, and 
we have seen in the Asia Pacific region and around the world 
other trading partners such as the Republic of Korea, such as 
Hong Kong, Taiwan, Singapore, take a different path and really 
look toward growing respect for IP rights as an important part 
of their economic growth story, and we would hope that other 
trading partners around the world follow that example.
    Mr. Bilbray. Thank you, Madam Chair. I would be very 
interested to know how they handle Windows 7, which was really 
a blatant piracy action that was going on in China.
    Ms. Watson. Thank you.
    We will now proceed with questioning. Mr. Cuellar of Texas.
    Mr. Cuellar. Thank you very much, Madam Chair.
    Mr. Weinstein, let me ask you, what are we doing to--let me 
start off with the Republic of Mexico, a big NAFTA country 
along with Canada. What are we doing to work with them 
internationally, because I saw your report where you talk about 
domestically and the coordination that we have here, but what 
are we doing to work with, let's say, the Republic of Mexico, 
because now, as in our drug cartels are now involved, the ones 
in Mexico are involved in--they are going into legitimate areas 
now, what we call legitimate businesses. I just want to see 
what we are doing to work with the Mexican government.
    Mr. Weinstein. Congressman, one of the things that we have 
been doing recently with Mexico is working with their officials 
at the border. One of the things that we do generally when we 
engage internationally--bilaterally, that is--is try to 
identify what the particular weakness is in the enforcement 
regime of particular countries, and it does vary by region and 
it certainly varies by country. Sometimes the problem is a lack 
of political will. Sometimes the problem is the political will 
is there but there is corruption. And sometimes it is a lack of 
coordination among agencies that would be responsible for 
various aspects of IP enforcement. Sometimes it is a 
combination of the three.
    In Mexico, at least on the ports, in the ports, what we 
identified as a significant weakness was a lack of coordination 
among agencies that would be responsible for port security, and 
so one of the things that we did was work aggressively at three 
of the largest ports in Mexico, including Monterrey and Vera 
Cruz, to improve the level of coordination to teach the 
inspectors and the other people responsible for the security of 
the port how to do targeted inspections, how to identify 
potentially infringing goods.
    In at least two of the ports, if I recall correctly, there 
had never been--or at least one of them, if not two--there had 
never been a seizure of infringing goods prior to our training 
and our engagement with them, and in the period following that, 
the technical assistance we provided, there were seizures 
through the roof at those ports and those ports became much 
more effective at trying to identify infringing goods as they 
are moving across the border.
    That is one area in which we have engaged in Mexico. It is 
not the only one, but it is one of the most prominent recently.
    Mr. Cuellar. When working with our domestic partners, and 
different law enforcement, I know that I have heard from the 
U.S. Chamber and other folks saying that we have so many 
threats to our country that when it comes to counterfeiting and 
this type of piracy that our resources are not put there. Is 
there anything else we can do to help our businesses, to 
protect them from this economic loss? Whoever else wants to add 
to that.
    Mr. Weinstein. I will jump in. I will lead off briefly and 
then turn it over to my colleagues.
    One of the things that we have done with our partners at 
FBI and ICE to try to improve the level of coordination and to 
improve our ability to be responsive to IP stakeholders is to 
invest a lot of time and resources in the IP Rights 
Coordination Center, which is located in Crystal City. It is 
operated principally by ICE, but it has partnership from a 
number of different agencies, FBI and other law enforcement 
agencies that have some interest in IP enforcement.
    It is intended to do a number of things. No. 1, it provides 
for a pooling of intelligence from all these different agencies 
so that they can share intelligence and share information and 
make their investigations more coordinated and more effective. 
It is also a deconfliction center, and it is also meant to be 
one-stop shopping for an industry. We had an industry meeting 
there on Monday, a lunch with representatives of 29 different 
IP stakeholder companies or organizations, and one of the 
things we emphasized to them is that not only can they make 
referrals directly to the Justice Department, but they can make 
referrals to the IP Rights Coordination Center. It is meant to 
be a place where they can share information themselves, they 
can make referrals, and they can get law enforcement to respond 
as quickly as possible.
    Mr. Cuellar. I appreciate that. I think that one-stop 
center so they know who to call instead of being bounced from 
one place to the other place, so I appreciate that. I 
appreciate the work that you all do.
    Mr. Yager.
    Mr. Yager. Yes. One point I'd like to make. I think your 
question raises a very important issue, and that is in some 
cases what we find is these are criminal networks that 
operating, for example, on the border, so they may not just be 
involved in intellectual property crimes. There could also be 
money laundering, there could be illegal arms sales, there 
could be illegal drugs that are being traded by the same 
criminal networks. So I think it is important to focus not just 
on China but also look, for example, at the southern border to 
determine whether products are being brought in by those same 
criminal networks that are also taking advantage of the border 
to make other transactions, either guns moving south or illegal 
drugs moving north.
    Mr. Cuellar. Right. Again, from what we hear--I live in 
Laredo, a border town, and we hear that those criminal 
organizations are starting to look at different ways of making 
money, so we appreciate it, so whatever you all can do to 
protection it.
    Last question for Mr. McCoy.
    Mr. McCoy, our Ambassador Ron Kirk--I will close up with 
this--are we doing everything possible? I am a big supporter, 
was a big supporter of CAFTA, big supporter of Colombia, big 
supporter of Panama, South Korea, and hopefully we will have 
those agreements this coming year, but are we doing everything 
possible under those negotiations to make sure that we protect 
the intellectual property rights of our stakeholders?
    Mr. McCoy. I believe we are, Congressman. Ambassador Kirk 
has said repeatedly that ensuring strong IP protection is one 
of the top priorities for the President's trade agenda. It is 
something that we are working to move forward, both through the 
implementation of free trade agreements that are already out 
there, close monitoring and enforcement to make sure that those 
agreements are properly implemented, our trading partners 
deliver on their promises, going forward as we look toward new 
trade agreements, as we look to getting the trade agreements 
that are out there into force. We will continue that emphasis 
on proper implementation of IP provisions, and with efforts 
like the Anti-Counterfeiting Trade Agreement and the special 
301 report we can continue to drive home that point.
    Mr. Cuellar. Thank you all. Thank you, Madam Chair.
    Ms. Watson. Thank you very much. You are welcome.
    Ms. Chu of California.
    Ms. Chu. Thank you, Madam Chair.
    Well, this is for any of the panelists. The GAO has 
identified continued weakness in Global intellectual property 
protections and enforcement mechanisms, and specifically cites 
one challenge being the ineffective coordination of agency 
stakeholders charged with protection and enforcement 
responsibilities. From what I understand, there are eight 
agencies with overlapping protection and enforcement 
responsibilities, and from what I can tell there is not one 
single agency that leads the charge.
    I know that there was legislation that created the 
Intellectual Property Enforcement Coordinator, and this is one 
step forward, but that person has not yet been put into place 
as of now.
    What specific steps would you like to see the coordinator 
take in tackling these issues?
    Mr. Yager. Ms. Chu, I think there are three points that we 
would make.
    We think that the legislation does address some of the 
prior weaknesses. I think a couple things that we would 
recommend is that the new group follows the guidance regarding 
the key elements of the national strategy so that the IP 
coordinator can create that strategy and ensure that all parts 
are working together. That would include not just the law 
enforcement but also the policy level working together.
    The balance would also include working both at the firm 
level as well as at the industry and at the country level.
    Finally, I think a point that was made earlier, to the 
extent possible utilize alliances with IP owners abroad, 
because in many cases the leverage that the United States has 
can be limited, but when you also team up with some of the IP 
owners abroad there could be greater success. So I think there 
are a couple of general points that we make in our prior 
statements about how this person or this new group could be 
effective.
    Mr. McCoy. Let me add from the perspective of USTR, 
Congresswoman, that I know that as of yesterday Victoria 
Espinel, the IP Enforcement Coordinator, has just started work. 
I know she was burning the midnight oil last night on her first 
day at work, because she talked with me a little bit about how 
we can work together, so at USTR we are looking very much 
forward to teaming with her.
    We already work intensely with the other agencies here 
through inter-agency coordination of trade policy under the 
rubric of the trade policy staff committee mechanism that has 
been set out by Congress as a vehicle to coordinate, including 
on intellectual property trade policy.
    So we work very closely with the other agencies of the U.S. 
Government, and we are looking forward to further enhancing 
that cooperative relationship under the guidance of the IP 
Enforcement Coordinator.
    Ms. Chu. Very good. Then, Mr. Weinstein, the World Health 
Organization estimates that 50 percent of drugs worldwide are 
counterfeit, which translates into approximately $38 billion in 
loss of legitimate U.S. corporate sales each year due to the 
sale of these counterfeit drugs. This statistic raises great 
concerns for me, because these are life-threatening type of 
issues, and there are huge ramifications to consumers who 
unknowingly purchase these counterfeit drugs and put themselves 
at risk.
    What methods are the Department of Justice implementing to 
address this problem?
    Mr. Weinstein. Congresswoman, it is of great concern to us, 
as well, and one of the ways in which we have tried to use our 
limited resources, prosecutory resources, is to focus on 
intellectual property violations that are a threat to the 
public health and safety, and I can't think of one more serious 
than the one you just mentioned.
    We have prosecuted a number of cases, going back several 
years now and continuing through the present, involving people 
who have produced counterfeit drugs of all types. Cancer drugs 
is the one case I mentioned in my oral statement. There are a 
number of others involving Viagra and other types of 
medications that are mentioned in my written testimony.
    What is striking about these cases is that they are 
international in scope, just as the online piracy cases are. In 
fact, in November of last year a citizen of the Republic of the 
Philippines was charged here and was convicted and sentenced 
for participating in a conspiracy to import Viagra and Cialis, 
and I believe other types of medication, as well, and was the 
first person--he was extradited from Thailand. He was the first 
person ever extradited to the United States on a counterfeit 
pharmaceutical charge. We hope he will not be the last.
    So in that area as well as the online piracy area we were 
talking about earlier we are not stopping at the borders and we 
are trying to find people who engage in this conduct, wherever 
they are, whether they are in China or here.
    Speaking of China, one of the biggest cases involving 
counterfeit products--it is not a pharmaceutical, but it is a 
counterfeit product that affects health and safety--involved a 
national Guinea and a U.S. citizen in the Bronx who were 
conspiring to import counterfeit tubes of toothpaste from China 
that not only didn't contain fluoride, but also contained 
microorganisms and in some cases contained diethylene glycol, 
which is an ingredient in hydraulic and brake fluid. The co-
conspirators brought in almost 83,000 tubes of this toothpaste, 
which had a retail value of just under $117,000. And we managed 
to get the importers here in the United States, and they got 
significant sentences.
    So this is an area that continues to be of concern to us. I 
would say, other than online piracy and counterfeiting that 
involves online auctionsites and direct sales sites, the public 
health and safety continues to be the area where we try to put 
our greatest emphasis.
    Ms. Chu. Thank you. I see my time is up.
    Ms. Watson. Thank you.
    We will now proceed to Mr. Connolly of Virginia.
    Mr. Connolly. Thank you, Madam Chairwoman.
    Let me pick up, if I may, where Ms. Chu left off, Mr. 
Weinstein. We acknowledge that not only human pharmacological 
agents but veterinarian pharmacological agents are a problem, 
as well, coming into the United States. I know the Department 
of Justice was involved for many years in trying to prosecute 
folks who were wilfully violating our laws and introducing 
pirated antibiotics and other substances to Forest Grove into 
our livestock and feed chain here in the United States.
    There are just lots of examples, intellectual property 
examples involving software, involving music and movies and all 
the technologies associated with them over the years. It wasn't 
that long ago you could go to Etawon and Seoul or you could go 
to neighborhoods in Taipei or Hong Kong and blatantly get 
knock-offs or infringed items at a discount.
    If enforcement is everything it should be and the estimate 
is accurate that we are losing about a quarter of a billion 
dollars a year because of intellectual property infringements 
of one sort or another, the best estimate I have seen, in terms 
of border agent seizures of pirated materials, the value is 
something south of $300 million. In other words, about 1 
percent of the estimated cost of the total infringements.
    Doesn't that suggest that, while you are not expecting 
everything to come through our borders, but 1 percent sounds 
pretty low in terms of our success rate at interdicting these 
materials or agents coming into our country?
    Mr. Weinstein. Congressman, I wasn't smart enough to check 
your math and I don't have figures myself on the amount of 
infringing goods, hard goods, that is, that are seized at the 
border, but I will tell you as a general matter, whether you 
are talking about goods coming in across borders or you are 
talking about goods that are coming here electronically, the 
problem is far greater than the resources that law enforcement 
has available, either investigative or prosecutive resources, 
and I think the problem grows as more and more piracy is 
committed through online means.
    I am an optimist by nature, but I am also particularly 
optimistic because I think the people who we have conducting 
these investigations, leading these prosecutions, are the best 
trained in the world and work very hard to keep pace with and, 
indeed, to be one step ahead of the people that we are 
investigating. And so I think that we have terrific people 
doing it; we just don't have enough of them. And the problem is 
of a magnitude that is far greater than our resources allow.
    Having said that, I think that one of the things that 
demonstrates is the need for us to be able to turn ourselves 
into force multipliers, and that is to expand capacity overseas 
so that our overseas partners can engage in aggressive 
enforcement actions within their own borders.
    I will give you just one example that I think is fairly 
illustrative. The IPLEC that I mentioned in eastern Europe--you 
are going to begin I am getting paid by every time I mention 
IPLEC--but our IPLEC in eastern Europe worked with law 
enforcement of the Ukraine, which was trying to take down a 
major piracy site that was operating in the Ukraine and they 
didn't know how to conduct an investigation of that type, and 
the IPLEC worked with them.
    Their technology was quite outdated. They had an outdated 
personal computer and they had a dial-up Internet connection. 
And using an outdated personal computer with a dial-up Internet 
connection, following the guidance given to them by the one 
prosecutor we have over there, an investigator in the Ukraine 
took down the entire site.
    So by engaging in trainings like that and in teaching 
people overseas how to make these cases, themselves, not only 
do we have bigger, splashier, more high-impact law enforcement 
operations here, but we can multiply the number of people who 
are able to be prosecuted in the countries in which they are 
operating.
    Mr. Connolly. Right. Thank you. That's helpful.
    With respect to enforcement there are sort of two broad 
aspects to this. One has to do with capability on the ground, 
ours and our counterparts; the other has to do, though, with 
political will. I would like the panel to address that.
    Candidly, we know that in some cases, including trading 
partners and allies of the United States, are not seized with 
this mission. How severe are we prepared to be, and 
historically how severe have we ever been in impressing upon an 
ally or a trading partner, or even somebody who is neither of 
those categories, that we mean business and we are prepared to 
exact a price if they don't, in fact, change their behavior 
from the top?
    Mr. McCoy. I can speak to that, Congressman. I think that 
we need to have a strategy that proceeds on two fronts. One is 
to be very frank and, when appropriate, very critical of our 
trading partners who don't step up to the challenge. And the 
other front is to work in tandem with our trading partners 
through leadership and partnership to really get at this 
problem better, because on the one hand we have to be honest 
enough to call it out when the problem is bad; on the other 
hand, we cannot solve this global problem alone. We have to 
have international leadership and partnership and be working 
with our trading partners.
    Sometimes we have to be capable of walking and chewing gum, 
of doing both of those things at the same time with the same 
trading partners.
    There have certainly been occasions in the past when we 
have gone all the way to the extent of trade sanctions with 
trading partners who refuse to protect U.S. intellectual 
property. The most recent occasion was Ukraine. All of the 
tools of the trade arsenal are available to make progress where 
it is appropriate, and we are continuing to use all the tools 
at our disposal.
    Mr. Connolly. Madam Chairwoman, my time is up. By the way, 
I would ask for unanimous consent that my opening statement be 
entered into the record.
    Ms. Watson. Without objection.
    Mr. Connolly. I just want to observe before you call on Mr. 
Murphy that I thank Mr. McCoy for his answer.
    Inferentially, one could conclude from your answer some 
criticism of past performance on our part in terms of our 
consistency in strict enforcement and so conveying to other 
countries in the international community.
    Thank you.
    Ms. Watson. Thank you.
    Mr. Murphy from Connecticut.
    Mr. Murphy. Thank you, Madam Chair.
    I want to continue to pursue the line of questioning from 
Mr. Connolly and other members of the committee regarding our 
current approach to, I guess, supply side enforcement when it 
comes to pirated content on the Internet.
    I was a little discouraged to hear your critique of demand 
side's restrictions, because I wonder about the efficacy of a 
strategy that effectively tries to play whack-a-mole around the 
world. We are talking about one guy with a computer that can 
move his computer, can move his location, can move the site of 
his hosting entity from city to city, from country to country. 
I guess I don't doubt your resolve, but as we look at the trend 
line over the last several years the amount of pirated content 
and the number of sites that are selling them are going in only 
one direction.
    So I guess I will ask this: what tools do you need that you 
don't have now to try to pursue this supply side enforcement 
policy, and how worried should I or any of us be about the 
ability of the people who are perpetuating these sites to just 
simply move to a different place or to take up residence under 
a different business entity, given the fact that it is so easy 
to just put up a new site and take one down the minute that 
they sniff that law enforcement is on to them?
    Mr. Weinstein. First, Congressman, I am not suggesting that 
enforcement should only be supply side or demand side. I think 
that, given limited Federal resources, we can have the greatest 
impact by pursuing the supply side, by getting the people who 
doing exactly what you just described, who are actually the 
first providers of the online content that is then downloaded 
by people throughout the world.
    You can get the person who is downloading it and making a 
few infringing copies, but you haven't actually made an impact 
unless you take down the person who is obtaining it, putting it 
online, and making it available.
    To your question what do we need, I would say that the 
greatest investment of resources that we have made is in this 
IPLEC program, because with the cost of putting one prosecutor 
in a foreign region or foreign country, that person can have an 
impact on enforcement operations, both trans-national 
enforcement operations and enforcement operations in the 
countries and regions in which he is operating that go far 
beyond what that one prosecutor could do working on even a very 
full caseload here in the United States.
    So it is not an inexpensive program by any means. The cost 
of putting a person and his family overseas for an extended 
period of time is not small, but we view it as a sound 
investment in our ability to have a greater impact on the 
enforcement side not only here but throughout the world.
    In terms of how concerned you should be that someone has 
the capacity to basically pick up and move their operations, I 
would say there is reason to be concerned about it, but by no 
means are those methods of evading detection or evading capture 
foolproof; in fact, quite the contrary.
    As we have improved our relationships with our foreign 
partners, as we have increased our ability to share evidence 
and to share intelligence and to share information more quickly 
than we ever have before, the person who picks up a server and 
moves it overseas or moves it from one country to another 
country overseas is much more vulnerable than he ever has been 
before. That is why Attorney General Holder--I said that this 
was a high priority for him. Attorney General Holder actually 
initiated the Department's first major IP initiative when he 
was the Deputy Attorney General back in 1999, and one of the 
principles of that initiative that we continue to build on 
today is the need to engage with our foreign partners so that 
we can not only have effective law enforcement against people 
who are operating in their countries, but so that they can be 
more effective in their own countries.
    So I think that our determination to get people wherever 
they are and to find their servers and to find their assets, 
wherever they are in the world, has never been greater, and our 
capacity to do it has never been greater.
    Mr. Murphy. So let me ask this: how do I square that with 
data showing that the amount of pirated content is greater than 
ever? So how do I square your enforcement capacity being 
greater than ever with the amount of pirated content continuing 
to grow?
    Mr. Weinstein. Unfortunately, I don't think that they are 
inconsistent at all. I think, as I mentioned to Congressman 
Connolly, I think the problem is of a magnitude that is far 
greater than the resources that are currently available to 
address it. So we try to address it as intelligently and 
strategically as we can, both in terms of identifying what 
targets we should pursue in our own enforcement operations, 
and, as I said, in terms of trying to improve the ability of 
our international partners. But it is largely a resource 
problem.
    I think the strategies we have are effective. I think the 
people we have doing it are outstanding. But there are not 
enough of them. So I think it is a resource issue.
    Mr. Murphy. Thank you, Madam Chair.
    Ms. Watson. Thank you so much.
    Now we will call on our distinguished Member from 
California, Ms. Jackie Speier.
    Ms. Speier. Thank you, Madam Chairman.
    I guess this is a question for Mr. Weinstein. There is an 
alarming number of reported instances where information 
technology goods are counterfeited abroad to sell here in 
America. Can you speak in general terms of those nations that 
pose the greatest threat to our information technology vendor 
supply chain for counterfeiting and national security matters?
    Mr. Weinstein. Congresswoman, I don't think I can speak, 
even in the most general terms, to the countries that pose the 
greatest threat from a national security point of view, but I 
would be happy to discuss that with the folks in our national 
security division and get back to you with a more detailed 
answer after the hearing.
    What I can say is that the regions that are the greatest 
concern to us right now I think are China, obviously, as we 
discussed earlier, South America, and parts of Africa. And we 
have tried to devote resources in terms of training and 
technical assistance to law enforcement in South Africa, for 
example, in Brazil, in India, and in other parts of southeast 
Asia, and again in China, to try to address that as practically 
as we can. But I think that the regions that we are the most 
concerned about in terms of not just online piracy but all 
types of policy would be South America and Africa and China.
    And, as I mentioned earlier, I think those areas that 
present the greatest challenge often also present the greatest 
opportunity, and some of the law enforcement officials in those 
countries tend to be the ones who are the most fully engaged 
with us and are just as aware as we are of the extent to which 
the problem flows through or arises from the region that they 
are operating in. So the fact that there is a great deal of 
piracy that involves those countries is not in any way an 
indictment of the law enforcement officials in those countries' 
commitment to address it; in fact, oftentimes, as I said, those 
tend to be our most committed partners.
    Ms. Speier. All right.
    Mr. Yager, thank you for your work on the GAO reports, and 
I guess the ones that predated it that created the genesis of 
the new legislation. The one area that you keep coming back to 
is the area of just human capital and not necessarily 
committing enough human capital planning. I guess you are 
speaking of the operations abroad. Could you elaborate on that 
some more and tell us, if you haven't already, what more we 
need to do.
    Mr. Yager. GAO has done a number of reports, as you know, 
on human capital planning. We have done some for the State 
Department. More generally, we have done some for USAID. But in 
this context I think one of the things that we learned when we 
traveled last summer to visit some of the key locations where 
intellectual property crimes are rampant is that having someone 
in that post who is full-time on that job, full-time on IP, 
someone who understood some of the technical issues related to 
intellectual property protection, even understanding some of 
the laws in those host countries, and having the ability to 
understand the culture, we thought that those three particular 
assets were extremely important.
    And where you have that combination, we found, in our 
discussions with the private sector, that the private sector 
felt very well served, and they felt that the U.S. officials 
could be helpful to them in making contact, solving problems, 
in some cases before they became a serious problem, and in some 
cases solving problems after it got to the point where they 
needed to address it with the host government.
    So we certainly found great support for some of the kinds 
of people that were put abroad recently by the Patent and 
Trademark Office, but I think one of the other points that we 
make--and I make this in my written statement--is that you need 
the ability to continue to send that set of people with those 
skills over there, and agencies that haven't long had a foreign 
presence may not be that deep in terms of having people with 
the cultural expertise as well as the technical expertise. So 
that's one of the cautions that we made in the report that we 
recently released.
    Ms. Speier. So you looked at four different countries?
    Mr. Yager. That's right. We went to three countries, four 
posts. China, because of the importance of the Guangzhou area, 
has an IP attache in that consulate because it is such a larger 
producer of goods for the world.
    Ms. Speier. So where else do we need to have individuals 
outposted that we don't presently?
    Mr. Yager. Of course, it depends on the size of the 
program. We know that some places in central Europe are a 
significant problem. We know that South America has some, I 
think what USTR calls notorious trading areas. There are 
certainly other places in southeast Asia where you could 
probably benefit from having additional personnel. But, again, 
if the personnel don't have that unusual combination of 
expertise, they will not be as effective as the people who were 
first put in those posts.
    Ms. Speier. But it would seem to me--I see my time has 
expired--that should be a high priority for us if we are really 
going to address this issue long-term, so it might behoove us 
to identify those other countries and make sure that there are 
individuals with those skills outposted, if you could provide 
that to us and the committee.
    Thank you, Madam Chair.
    Ms. Watson. Thank you so much.
    I would like to thank this panel for your testimony. Now 
you will be excused so we can bring up the second panel. Thank 
you so very, very much.
    We are now going to proceed to the second and final panel. 
We will try to get you out of here by noon, and so we have to 
watch our own timing, the committee, but now that we have 
narrowed down to just three of us, I think we can do that.
    It is the policy of the Committee on Oversight and 
Government Reform to swear in all witnesses before they 
testify. I would like to ask all of you to please stand and 
raise your right hands.
    [Witnesses sworn.]
    Ms. Watson. Let the record reflect that the witnesses 
answered in the affirmative.
    I will now take a moment to introduce our prestigious and 
distinguished panelists.
    I would first like to start with Mr. Dan Glickman, who 
serves as the chairman and CEO of the Motion Picture 
Association of America. Prior to becoming the leading voice for 
the motion picture industry, and some of my congressional 
district's most prominent employers, Mr. Glickman proudly 
served as a Member of Congress from the 4th congressional 
district of Kansas for 18 years, as well as the Secretary of 
Agriculture in the Clinton administration.
    In addition to his current position with MPAA, he serves on 
the boards of the American Film Institute, the Chicago 
Mercantile Exchange, communities and schools, and the Center 
for U.S. Global Engagement. He is also a member of the Genocide 
Prevention Task Force, which is chaired by Secretaries 
Madeleine Albright and Bill Cohen, and a member of the Council 
on Foreign Relations, and a member of the Academy of Motion 
Pictures, Arts, and Sciences.
    Mr. Robert W. Holleyman is the president and chief 
executive officer of the Business Software Alliance. He is 
widely known for his work on policy related issues affecting 
the technology industry, including intellectual property laws, 
cyber security, international trade, and electronic commerce. 
Before joining BSA, he spent 8 years serving as counsel in the 
U.S. Senate, and was an attorney with a leading law firm in 
Houston, TX.
    Mr. Brian Toohey is the senior vice president for 
international affairs at the Pharmaceutical Research and 
Manufacturers of America [PHARMA]. And prior to joining PHARMA, 
Mr. Toohey served in multiple Government affairs roles in the 
medical device and telecommunications industry. Before entering 
the private sector, he served as both a desk officer and Deputy 
Director in the Equipment Officers of the U.S. Department of 
Commerce.
    Finally, Mr. Frank Vargo is the vice president for 
international affairs at the National Association of 
Manufacturers. He serves as its lead lobbyist and spokesman on 
issues of trade, currency, and other issues related to global 
markets and access. And prior to joining them, Mr. Vargo had a 
three decade trade policy career at the U.S. Department of 
Commerce.
    Without objection, before proceeding to testimony from our 
panelists, I would like to submit a statement for the record on 
behalf of the Coalition of Music Ministries representatives 
that include performing artists, publishers, song writers, 
composers, and record labels. What is telling to me from their 
testimony is how critical IPR protection and enforcement is to 
industry stakeholders across the entertainment spectrum, 
including independent artists and major recording studios, 
alike. I am proud to have the music industry as a major 
constituent in our California's 33rd Congressional District and 
welcome the many cultural and economic contributions they 
provide to our Nation.
    As I travel abroad and introduce myself as representing Los 
Angeles, CA, and Culver City, and I get nice nods, but when I 
say Hollywood, big smiles. So our industry reaches every corner 
of the globe and pretty much represents who we are. At least we 
try to put forth the movies that represent the true beliefs of 
America.
    So I ask that each of the witnesses now give a brief 
summary of their testimony, and to keep this summary under 5 
minutes in duration if possible. Your complete written 
statements will be included in the hearing record.
    Mr. Glickman, I would like to start with you. Welcome.

   STATEMENTS OF DAN GLICKMAN, CHAIRMAN AND CHIEF EXECUTIVE 
OFFICER, MOTION PICTURE ASSOCIATION OF AMERICA, INC.; ROBERT W. 
 HOLLEYMAN II, PRESIDENT AND CHIEF EXECUTIVE OFFICER, BUSINESS 
  SOFTWARE ALLIANCE; BRIAN TOOHEY, SENIOR VICE PRESIDENT FOR 
      INTERNATIONAL AFFAIRS, PHARMACEUTICAL RESEARCH AND 
  MANUFACTURERS OF AMERICA; AND FRANK VARGO, VICE PRESIDENT, 
    INTERNATIONAL ECONOMIC AFFAIRS, NATIONAL ASSOCIATION OF 
                         MANUFACTURERS

                   STATEMENT OF DAN GLICKMAN

    Mr. Glickman. Thank you, Madam Chairwoman. Thank you very 
much for your leadership on film and entertainment issues. It 
is a great honor for me, after spending 18 years in the House 
of Representatives, to come back here and to be in the greatest 
deliberative----
    Ms. Watson. Does it feel like home?
    Mr. Glickman. It feels like home, and also it makes me 
yearn to come back, although I have no intention of going down 
that road. But I would say that you all have the greatest jobs 
in the world, and you realize it more when you are out, in 
terms of the impact that you have on people's lives.
    Ms. Watson. Well, I understand you will be leaving soon. 
What are you going to pursue, if I can get into your private 
business?
    Mr. Glickman. We will talk privately about that afterward.
    Ms. Watson. All right.
    Mr. Glickman. And not for a while, so I will still be 
around.
    First of all, let me say that the intellectual property 
industries represented by those of us here are so critically 
important to the country. In the case of motion pictures, 
directly and indirectly we employ about 2.5 million people in 
this country. We are one of the few industries that has a 
positive balance of payment surplus with every single country 
in the world we do business with.
    The movies and television shows are produced in all 50 
States now, employment in all 50 States. And if you talk about 
a symbol of America, entertainment is probably as profound and 
powerful symbol of everything to do with our great country. So 
this is a really important industry and important issue for us, 
as well. These jobs are good jobs, high-paying jobs, and 
important to the country, as well.
    By the way, over half of our revenues are derived from 
outside the United States. So what happens in the rest of the 
world, these trade issues are life or death for us, because 
people do love our product.
    So what are the things? I was listening to the work of the 
Government officials--and, by the way, they have done a very 
good job. USTR, Justice, the other agencies here, I must say 
both in the Bush administration and in the Obama administration 
have picked up these issues and the importance of intellectual 
property right protection. They can always do more. We talk 
about that. I am going to talk about some additional 
suggestions.
    The first thing is we now have a coordinator--and we talked 
about that--under the PRO-IP bill. We have an IP coordinator. 
This is very important. There is somebody that is accountable, 
that we can focus on, that we can go to, and can help lead and 
marshall resources and enforcement policy throughout the U.S. 
Government. The question now is to make sure that she and her 
organization realize the full potential of this position by 
funding its remaining elements in the PRO-IP bill, the agents, 
the enforcement authorities that are provided in that bill.
    It is also important that the nomination for Deputy U.S. 
Trade Representative for IP be confirmed. Her name is Miriam 
Sapiro. She is a critical senior level official in the U.S. 
Inter-Agency Team. That position has not been confirmed yet. 
That's very important to get that done.
    We have talked about the special 301 process. This is a 
critical tool which identifies deficiencies in foreign markets 
and served as the administration's overall road map. Just to 
give you some idea, I was over in Spain recently. Spain has 
very serious problems involving Internet piracy. President 
Obama met with the president of Spain, Mr. Zapatero, raised the 
issue of Internet piracy. Spain is on the special 301 list and 
is hot because of that government-to-government coordination 
and impact. It has highlighted their hopeful desire to fix some 
of the problems that we have here.
    We have something called the general system of preferences 
[GSP], program, which is intended to offer trade benefits to 
developing countries, while at the same time protecting U.S. 
interests. However, too frequently there is a disconnect 
between special 301, which are the countries on our watch list, 
and trade preference programs, with some of the most egregious 
offenders of U.S. intellectual property rights receiving 
preferential access to the U.S. market, despite their 
longstanding failure to effectively protect U.S. creativity.
    So in my view our foreign policy needs to be more 
coordinated and cohesive in this particular resolve. Linking 
special 301 and trade preference program eligibility would 
provide the United States a powerful enforcement tool.
    We have a variety of trade agreements, free trade 
agreements. There are three pending right now: Columbia, Korea, 
and Panama. We want to work with you and your colleagues to see 
the three pending FTAs implemented so that we can benefit from 
the negotiated IPR obligations of our trading partners. They 
all involve IPR. In the case of Korea, there are very 
significant improvements in their enforcement of intellectual 
property as a result of these trade agreements, and it is 
something that we think is important to us.
    While not a free trade agreement, the U.S. motion picture 
industry has a keen interest in the anti-counterfeiting trade 
agreement [ACTA], which is in particular dealing with issues of 
Internet piracy. And I would echo the comments that have been 
made about having more IPR attaches overseas in our industries.
    Above all, I guess my point in all of this is that this is 
a big, dynamic, important industry for America. It is very much 
a face of the soft power of America, our entertainment world. 
Having you all engaged in this, having an enforcement team and 
a trade team in our U.S. Government engaged in this, we can 
make real progress in dealing with what Mr. Bilbray calls the 
problems of China, which just keep going and going and going, 
although there is some hope for some improvement there. But the 
fact of the matter is we have made progress in other places in 
the world, and we appreciate your interest in this issue.
    [The prepared statement of Mr. Glickman follows:]

    [GRAPHIC] [TIFF OMITTED] T7791.057
    
    [GRAPHIC] [TIFF OMITTED] T7791.058
    
    [GRAPHIC] [TIFF OMITTED] T7791.059
    
    [GRAPHIC] [TIFF OMITTED] T7791.060
    
    [GRAPHIC] [TIFF OMITTED] T7791.061
    
    Ms. Watson. Thank you so much. I was just talking to staff. 
We are going to plan another hearing where we want you to 
describe just what plans have been laid out by this 
administration and the enforcement. That is so important. We 
were just talking about how we would line up the countries. I 
think China, No. 1. I mean, they are expert at stealing our 
intellectual property. Maybe Russia No. 2. And Nigeria, No. 3 
in terms of technology.
    So anyway, what we are going to do is hold a hearing, 
probably after the first of the year. I just want to let you 
know what our plans are.
    Mr. Holleyman, you may proceed, please.

              STATEMENT OF ROBERT W. HOLLEYMAN II

    Mr. Holleyman. Madam Chairwoman, Mr. Bilbray, I thank you 
so much for holding this hearing today. The hearing is about 
protecting intellectual property rights in the global economy, 
but this hearing is also about jobs, it is about health care, 
it is about education, it is about the environment, and 
national economic security.
    The software industry is helping to provide specific 
solutions to each of these national needs. The greatest value 
of what software is is what software does. I would like to 
offer for the record examples of several BSA member companies 
and the type of software that they are providing and developing 
here in the United States to help us meet these national needs.
    Ms. Watson. Without objection.
    Mr. Holleyman. But we also face a challenge of our own. 
Theft of intellectual property, both in the United States and 
overseas, is robbing us of resources that we could invest in 
more innovative solutions. Let me give you a few facts about 
this industry.
    It is a $300 billion software and services industry, the 
largest copyright industry in the United States and globally. 
Sixty cents of every dollar spent on software worldwide inures 
to U.S.-based companies, and it is a source of American pride, 
with over 2 million direct workers and a $36 billion trade 
surplus.
    But all of these benefits are endangered by software theft. 
The compelling statistic for today is that software theft 
reached $53 billion last year. Most software theft occurs when 
an otherwise legitimate business makes illegitimate copies of 
software for its use. When repeated millions of times by 
businesses and consumers throughout the world, this has a 
staggering cumulative effect.
    Harms of software theft include lost jobs, industry, and 
tax revenues, but what has been missing from this equation is 
the way this distorts competition. A company that steals 
business software has an unfair competitive advantage over an 
enterprise that pays for it. Both get roughly equal 
productivity benefits from the software, but only one is 
bearing the legitimate cost.
    Software piracy is a problem around the world. It is 
particularly acute in many of the fastest growing developing 
markets that have disproportionately high rates of piracy.
    Let me talk about China. Wherever I travel in the United 
States and around the world, the place I am asked about most 
frequently is China. In China, only 20 percent of software is 
paid for. In comparison, in the United States 80 percent is 
paid for. That means that there are a whole host of Chinese 
enterprises that are enjoying an unfair advantage over their 
U.S. counterparts. This unfair advantage is exacerbated by the 
new industrial policies that threaten to shut out U.S. 
companies.
    Madam Chairwoman, I want to thank you for your comments in 
your opening statement, for your questions to the Government 
witnesses today. Steps by the U.S. Government to ensure that 
providers of software and other innovative technologies can 
continue to have access to China as the fastest-growing market 
in the world are critical.
    Companies in six critical sectors, from software, 
telecommunications, and high energy efficiency products were 
given a December 10th deadline to apply to get on a list of 
preferred products the Chinese government will buy. We believe 
that few, if any, U.S. companies will qualify unless they turn 
over their IP to a Chinese entity. This could amount to a 
potentially massive transfer of IP, jobs, and economic power.
    Madam Chairwoman, that is a step that is not in our 
national interest or in the interest of U.S. companies.
    China made this announcement just a few weeks ago. It 
violates a series of commitments. The administration is 
actively pushing back from this policy, and I urge you and the 
ranking member to strengthen their hand by expressing your own 
opposition to China's Ambassador here in Washington. This issue 
is important not just to the IT industry, but to a wide range 
of business and governmental interests in the United States and 
abroad. And, indeed, I could add that it is not even in China's 
own interest to exclude their ability to obtain the best 
products from the United States or elsewhere.
    In closing, I would ask all of us to begin thinking about 
intellectual property theft in a different way. The problem is 
more pervasive, it is more complex, and it is more pernicious 
than it was just a few years ago.
    Quite frankly, I think we need to think of another term 
other than the word piracy for this to talk about the breadth 
and scope of the problem. It has national implications, 
national economic implications.
    Thank you for holding this very timely hearing.
    [The prepared statement of Mr. Holleyman follows:]

    [GRAPHIC] [TIFF OMITTED] T7791.062
    
    [GRAPHIC] [TIFF OMITTED] T7791.063
    
    [GRAPHIC] [TIFF OMITTED] T7791.064
    
    [GRAPHIC] [TIFF OMITTED] T7791.065
    
    [GRAPHIC] [TIFF OMITTED] T7791.066
    
    [GRAPHIC] [TIFF OMITTED] T7791.067
    
    Ms. Watson. Thank you, Mr. Holleyman.
    Mr. Toohey, you can proceed.

                   STATEMENT OF BRIAN TOOHEY

    Mr. Toohey. Thank you, Madam Chairwoman, thank you, Mr. 
Bilbray, for the opportunity to be here this morning.
    First let me just say I absolutely agree with Secretary 
Glickman's and Mr. Holleyman's statements about the importance 
of IP intensive industries. According to the Commerce 
Department, currently driving over 50 percent of our exports 
and 40 percent of our growth here in the United States. Very 
important economic industries.
    PHARMA's member companies are innovators devoted to 
developing medicines that allow patients to live longer, 
healthier, and more productive lives. PHARMA's membership 
ranges in size from small startup research firms to 
corporations that employ tens of thousands of Americans and 
encompass both pharmaceutical and biotechnology companies.
    The research-based pharmaceutical sector is one of the most 
knowledge-intensive enterprises of the U.S. economy. In 2008, 
our sector invested over $65 billion in research and 
development, and of that amount about 70 percent was invested 
here in the United States. The pharmaceutical industry supports 
more than 3 million jobs and directly employs nearly 700,000 
Americans.
    To foster continued economic growth and deliver 
breakthroughs, our sector relies on policies that promote and 
protect pharmaceutical innovation, especially complementary 
protections of patents and data protections.
    Our companies face significant challenges to the discovery, 
development, and commercialization of new medicines. Adequate 
protection of intellectual property, both within and outside 
the United States, is essential for continued advances against 
challenging and costly diseases. In addition, access to 
international markets is critical to ensuring that these 
products reach as many patients as possible.
    In that regard, PHARMA members especially appreciate the 
continuing strong efforts of USTR, State, Commerce, and PTO to 
promote compliance with international obligations by our 
trading partners.
    PHARMA member companies also undertake significant 
research, both privately and through public/private 
partnerships, to develop medicines that disproportionately 
affect poor countries.
    In addition to research in this area, in recent years our 
industry has donated more than $9 billion to access the 
medicines programs, more than the entire foreign aid budget of 
countries like Canada or the Netherlands, and provided enough 
health interventions to help 1.7 billion people in the 
developing world.
    Currently, nearly 3,000 medicines are under development, 
including 300 medicines for rare diseases, 750 for cancers, and 
109 to fight HIV/AIDS. A recent Tufts study estimated that the 
cost of developing a new medicine at over $1.2 billion a year, 
and for every approximately 10,000 compounds that enter the R&D 
pipeline, eventually only one comes to market, and can take as 
long as 15 years.
    Two complementary legal mechanisms, in particular, provide 
periods of exclusive marketing for new therapies. These 
mechanisms are essential to attract investment needed to fund 
the R&D process. First, patents protect inventions made in the 
course of research and development by giving the innovator the 
right to prevent the unauthorized use of inventions for a 
defined period of time. Second, data protection has proven 
essential. Clinical data represents the investment in 
conducting the rigorous, lengthy pre-clinical and clinical 
studies that the FDA requires.
    One of our concessions made by the United States in the 
TRIPS agreement was to provide developing countries with a 
number of extended transition periods to implement new 
standards. As of 2005, all but the least-developed countries 
were required to comply with provisions of TRIPS. Many of these 
trading partners have benefited tremendously from the openness 
of our market and the industries that aggressively compete with 
our own. Yet even now many of these countries have not fully 
met their TRIPS obligations to provide effective IP protection.
    Another important area of concern which was discussed 
earlier is counterfeit drugs. Weak regulatory and IP 
enforcement regimes in some countries contribute to this 
problem, which increase health risks to patients.
    In addition to the failure to meet IP obligations, many 
countries erect barriers to reduce the access of our products. 
Clearly, these restrictions adversely affect the health of 
patients in their countries, while they also have potential 
negative effects on the United States and consumers worldwide.
    We believe it is critical for the U.S. Government to take 
action against measures that prevent fair and equitable market 
access for our products. PHARMA members believe the special 301 
process is a particularly useful trade tools through which 
these barriers and priority markets can be removed. In addition 
to special 301, the administration should use all available 
trade tools, including bilateral and multilateral trade 
negotiations, to pursue a positive agenda on pharmaceutical 
trade.
    For example, the U.S.-Korea Free Trade Agreement or 
negotiations included provisions on pharmaceuticals and 
specific steps to improve the transparency and accountability 
of the pricing and reimbursement listing process. We urge the 
administration to build on this success and include similar 
provisions and agreements with future trading partners.
    Thank you again for the opportunity to speak with you 
today. PHARMA and its member companies believe it is crucial 
for this subcommittee and the Government, as a whole, to foster 
incentives for innovation both United States and abroad.
    Thank you very much.
    [The prepared statement of Mr. Toohey follows:]

    [GRAPHIC] [TIFF OMITTED] T7791.068
    
    [GRAPHIC] [TIFF OMITTED] T7791.069
    
    [GRAPHIC] [TIFF OMITTED] T7791.070
    
    [GRAPHIC] [TIFF OMITTED] T7791.071
    
    [GRAPHIC] [TIFF OMITTED] T7791.072
    
    [GRAPHIC] [TIFF OMITTED] T7791.073
    
    [GRAPHIC] [TIFF OMITTED] T7791.074
    
    [GRAPHIC] [TIFF OMITTED] T7791.075
    
    [GRAPHIC] [TIFF OMITTED] T7791.076
    
    [GRAPHIC] [TIFF OMITTED] T7791.077
    
    [GRAPHIC] [TIFF OMITTED] T7791.078
    
    [GRAPHIC] [TIFF OMITTED] T7791.079
    
    [GRAPHIC] [TIFF OMITTED] T7791.080
    
    [GRAPHIC] [TIFF OMITTED] T7791.081
    
    [GRAPHIC] [TIFF OMITTED] T7791.082
    
    [GRAPHIC] [TIFF OMITTED] T7791.083
    
    [GRAPHIC] [TIFF OMITTED] T7791.084
    
    [GRAPHIC] [TIFF OMITTED] T7791.085
    
    [GRAPHIC] [TIFF OMITTED] T7791.086
    
    [GRAPHIC] [TIFF OMITTED] T7791.087
    
    Ms. Watson. Thank you, Mr. Toohey.
    Mr. Vargo.

                    STATEMENT OF FRANK VARGO

    Mr. Vargo. Thank you, Madam Chairwoman and Mr. Bilbray.
    The NAM is all about manufacturing in America. We are still 
the world's largest manufacturer. We make, believe it or not, 
one out of every $5 of everything made and manufactured in the 
whole world.
    But we are under a lot of challenges and a lot of threats, 
and the most serious truly is the threat to the protection of 
intellectual property. The United States is never going to be 
the world's low-cost producer, nor would we want to be. We want 
to be the high-tech producer, the high-value-added producer, 
but we have to have protection of patents, trademarks, 
copyrights, and those are under real, real threat right now 
through what I call the three Cs: counterfeiting, compulsory 
licensing, and China. Let me just say a few words about each.
    The administration has and the previous administration have 
done a good job in increasing enforcement and trying to 
intercept counterfeited goods. More resources are going on. 
Having Victoria Espinel, who everybody in the trade community 
knows and thinks is just a fantastic choice, is very, very 
helpful. But there has been a major step backward that nobody 
has mentioned as yet, and I do want to focus on, because it may 
require legislation. When I first heard of this I couldn't 
believe it.
    What Customs officials do when they suspect a counterfeit 
shipment is, logically, contact the trademark holder or the 
patent holder and send photographs or descriptions and say is 
this your product. Well, the Customs and Border Protection 
legal office recently sent a notification to Customs agents 
saying you can't do that any more. You cannot custom the rights 
owners with photos or descriptions of suspected counterfeit 
products because this could allow facing of liability under the 
Trade Secrets Act.
    Now, to me this is ridiculous, and if there is, indeed, 
some legal conflict here I hope this subcommittee will look 
into it, and if we need legislation let's do it. This can undo 
all the good. You know, if a Customs official if prohibited 
from contacting, say, the Square D Co., which makes excellent 
circuit breakers, because they suspect that there is a shipment 
of counterfeit circuit breakers--are these real, did you bring 
these in--but if they are prohibited from doing that, believe 
me, the interception of counterfeit goods in the United States 
is going to come way down. I think this is an extremely serious 
problem.
    Compulsory licensing: the country of Ecuador, for example, 
is saying now we need U.S. agricultural chemicals, so we are 
going to just force, we will steal the technology. There are 
countries talking about global climate change are saying well, 
you know, if you want us to participate in improving the 
environment, you have to give us the technology. This 
technology costs billions and billions to develop, and the even 
better technologies of the future are going to require more 
billions. Where does this come from? It comes from the flow of 
funds by having U.S. companies marketing around the world.
    What these countries need to do is not say we want to steal 
your technology, but what they need to do first is to join in 
the idea the United States has promoted, that look, there 
should be an environmental goods and services agreement 
globally. What sense does it make for countries to put 20 or 40 
or 60 percent import duties on clean climate technologies. You 
know, let's get rid of government interference there and let 
them take it from there.
    Then China. Based on Customs data, we can estimate that 80 
percent of the counterfeit goods in the world are made in 
China. China joined the WTO in 2001 and promised that they 
would provide an effective deterrent against counterfeiting. An 
effective deterrent. That means they were going to stop it.
    Now 8 years later they haven't done it. They still don't 
have the laws necessary to criminalize counterfeiting. It is an 
administrative procedure, you get a slap on the hand, you move 
across the street, and you are back in business. They have not 
cracked down on the corruption in the provinces, where 
frequently you have local leaders in cahoots with the 
counterfeiters. Enough is enough. This has to be accelerated. 
China Customs has to start intercepting the export of 
counterfeit goods.
    And then China comes along with the indigenous innovation 
product accreditation system, saying, you know, we are tired of 
using American technologies and British technologies and 
Japanese and others. We want Chinese. And the best way to do 
that is to take our enormous government procurement market and 
close it off. So only indigenous Chinese technologies, those 
developed in China and owned by Chinese, and that were 
originally registered in China, will be able to participate in 
the Chinese government market. Well, you know, that is blatant 
protectionism. That is what the whole world trading system is 
designed to stop.
    Now, on top of that, it was only a couple of months ago 
that China solemnly promised in the Joint Commission of 
Commerce and Trade statement, that China will require that 
products produced in China by foreign enterprises will be 
treated equally with domestic products. Well, you know, I guess 
that promise was good only for 3 months.
    Anyway, this is a very, very serious challenge. This could 
be the most serious challenge to U.S. manufacturing ever faced. 
So I commend you for this hearing. Please stay on top with the 
NAM will. The best way to solve this, of course, is in a 
collegial way with the Chinese government, and we certainly 
hope that works, but one way or another this is unacceptable.
    Thank you.
    [The prepared statement of Mr. Vargo follows:]

    [GRAPHIC] [TIFF OMITTED] T7791.088
    
    [GRAPHIC] [TIFF OMITTED] T7791.089
    
    [GRAPHIC] [TIFF OMITTED] T7791.090
    
    [GRAPHIC] [TIFF OMITTED] T7791.091
    
    [GRAPHIC] [TIFF OMITTED] T7791.092
    
    [GRAPHIC] [TIFF OMITTED] T7791.093
    
    [GRAPHIC] [TIFF OMITTED] T7791.094
    
    [GRAPHIC] [TIFF OMITTED] T7791.095
    
    [GRAPHIC] [TIFF OMITTED] T7791.096
    
    [GRAPHIC] [TIFF OMITTED] T7791.097
    
    [GRAPHIC] [TIFF OMITTED] T7791.098
    
    Ms. Watson. I would like to thank all the witnesses for 
your very informative testimony.
    I would like to raise some questions, first with Mr. 
Holleyman. I want to continue on this issue that we have been 
referring to, China's proposed regulation on what is being 
called the national indigenous innovation products.
    Is my understanding correct that these regulations will 
require your members to partner with or transfer their IPR to 
Chinese industry in order to qualify for government procurement 
programs?
    Mr. Holleyman. Madam Chairwoman, that's the perfect 
question, and this issue is moving so quickly. Fortunately, the 
U.S. Government team has mobilized very quickly to counter 
this. But yes, that certainly is the intent of those 
regulations, that something would have to be completely 
indigenous to China, which would require the transfer of IP. It 
is certainly not clear that any of my members could ever----
    Ms. Watson. What type of products?
    Mr. Holleyman. Well, there are six categories: computer 
applications and devices, communications products, modernized 
office equipment, software, new energy and equipment, and 
highly energy efficient products, and the understanding is this 
will be rolled out across a very broad sector of products, 
starting with these. And so it is not clear that any U.S. 
company could qualify or will make the type of concessions that 
the Chinese are seeking, so this will effectively exclude them 
from the market and certainly give hard preferences to whatever 
indigenous innovation occurs.
    Ms. Watson. Are there other proposals still under 
consideration?
    Mr. Holleyman. Still under consideration. As with all 
things in China, it is not completely explicit and clear until 
it is seen, and in this case it moves very quickly, but the 
business community not only here but in Europe, elsewhere in 
Asia and Latin America, and governments understand that this 
could be sweeping in scope, and what we need is this to be 
rolled back while there are further discussions with the United 
States, the E.U., and other major trading partners.
    Ms. Watson. Are we still partnering, discussing partnering 
in terms of the membership of China with the WTO?
    Mr. Holleyman. Well, they have made a commitment that they 
will join the government procurement agreement as part of the 
WTO. They did it when they entered the WTO. They have made it 
in JCC to commitments to the United States and we believe that 
this action is contrary to the spirit of those commitments. in 
addition, it will have a dramatic exclusionary effect for 
companies.
    Ms. Watson. Now, do you think it would be helpful for us 
here on this subcommittee to assist you in engaging our Federal 
agencies or China's diplomatic representatives here in 
Washington on these matters?
    Mr. Holleyman. Absolutely. I think that an outreach by this 
committee, you as the Chairwoman and Mr. Bilbray, directly to 
the Chinese Ambassador urging cooperation and trying to hold 
these off for pending further discussions will be useful.
    I know that the issue is now getting the highest level of 
attention within the U.S. Government. One of our CEOs raised it 
at the President's job summit last week because not only does 
this take away the potential for job growth for American 
companies and software and other industries in China, but it 
could cost the loss of jobs that we currently have today if 
that large market is shut out for further procurements.
    Ms. Watson. Our ranking member, Mr. Bilbray, has questions.
    Mr. Bilbray. Thank you.
    Congressman, thank you very much for broaching the issue 
that there needs to be a nexus between trade agreements and 
intellectual property. I think, looking at the lack of 
oversight in trade agreements in the past create a situation 
like what we have right now with Colombia, and especially 
Panama, where we have still got that trade agreement hanging 
out there. And I see why people are skeptical of trade 
agreements, because they look at the history of not maintaining 
some level playing field.
    And it really does hurt when you have a gray proposal, like 
we have with Panama, that they want to buy our bulldozers, Mr. 
Vargo. They want to build a canal with American equipment, and 
Washington's political structure is holding this up, when boy, 
I tell you, if there was any agreement that I saw that should 
be a matter of signing, that was one. But because of the lack 
of nexus, we are not doing enforcement.
    Now, the Korean situation to me is as close to a parallel, 
could become a parallel, as China as we see on the horizon. The 
question is: is it just because, as we would say, too big to 
fail, that China is too big to confront now, that we are 
confronted with an 80 percent of world pirating coming out of 
one political agency.
    And we can't say that they are not willing to do 
enforcement. We saw how effective they were with the milk 
tainting situation. Instead of giving them AIG pay raises, they 
take people out in the back yard. But you want to clarify 
exactly how we could be a little tougher on this?
    Mr. Glickman. First of all, that's a great question. I 
mentioned this before. We have this conflict because we have 
these countries on our special 301 list, and yet the same 
countries are on our general preference list.
    Mr. Bilbray. Right.
    Mr. Glickman. One, for example, is Russia. Eight years ago 
the U.S. industry submitted a petition to suspend GSP benefits 
for Russia, which has been on the priority watch list for the 
last 12 years, which has some of the highest piracy in the 
world; however, no action has been taken on the petition, and 
copyright piracy rages in Russia. Ironically, Russia is one of 
the fastest growing legal markets, as well, for U.S. products. 
So these are, as you can imagine, very complicated issues.
    China, my friend Robert talked a bit about China. We, of 
course, filed a WTO case against China for basically inadequate 
intellectual property enforcement. We largely won that case. 
The Chinese are going to be appealing that case. And I think 
one of the things that is helping us now more than what we 
faced in the past is the rest of the world is coming along with 
us now.
    If it were viewed just as the United States versus China, 
we will probably wait for another 250 years to get really 
anything done. But if it is the rest of the world involved in 
this case, if they join with us on the manufacturing sectors, 
the pharmaceutical sectors, the automobile sectors, the 
entertainment sectors, and at agriculture sectors, then I think 
that we can have some impact.
    They are in the WTO now, and one positive sign I see out of 
China for the first time is a great entrepreneurial class that 
is building that wants to protect their own intellectual 
property and see themselves victims of an arbitrary government 
action in this regard. But it is not easy and there is no 
simple solution except pressure at all levels, from the public 
sector and the private sector. It has had some impacts on other 
parts of the world; it has not yet had dramatic impact in 
China. There is no question about it.
    Mr. Bilbray. Is the European Union backing us up on this 
now?
    Mr. Glickman. They are beginning to back us up a lot more 
than they used to be. For example, you know, for a while they 
let us fight the battles for them, as they often----
    Mr. Bilbray. Europe has gotten into that habit.
    Mr. Glickman. But now, I mean, Europe and the United States 
share many of the same perspectives on manufacturing and 
intellectual property issues. In the film issue, for example, 
there is a quota. China will only import 20 foreign films a 
year under what you call normal revenue sharing agreements. The 
United States has maybe 13 or 14 of those, and the rest of the 
world has 6 or 7 of those. Of course, you can find any movie 
ever made in the history of the world on the streets of China, 
as well. But the Europeans are beginning to join us on those 
issues, as well.
    By the way, the Europeans are making their own positive 
movement in the area of piracy. You mentioned both France, 
U.K., that are moving ahead, particularly in the area of 
Internet piracy. That is a positive sign, not only for 
themselves but also how it relates to places like China that we 
have seen very little movement in the past.
    Mr. Bilbray. Now, let's get back to this, though, this 
nexus between if you want to be our first class trading partner 
you have to be responsible to the intellectual property issue. 
I see this as a major issue. I have scientists that have 
developed new, you know, genetically altered algaes that can 
produce diesel gasoline and jetco. This is going to be a big 
deal in the next 20 years. Have we made that nexus? Are we 
tying those together? Are we welding them together to where you 
can't play one game here and then expect to play the other game 
over here?
    Mr. Glickman. I think it requires, quite frankly, much 
greater attention to the inconsistencies that exist in the 
world trading situation, and for the U.S. Government to be a 
lot more consistent in its own approach.
    I realize there are a lot of political issues here that you 
have to deal with country-by-country, but the disconnect, just 
the Russia example I have given you, and there are a lot of 
others in there where we kind of turn a blind eye on some 
things for maybe political reasons and our trade agenda 
suffers. That is something that we really need to move away 
from.
    Mr. Bilbray. And I worry about it, Madam Chair, that the 
fact is the big guys get away with murder while the little guys 
like Panama are waiting in hand with everything we have ever 
asked from them, but because they are so little we don't want 
to bother with the negotiations, and I just think it sends a 
really wrong message. I think any parent would never accept the 
same thing in their family, and I don't think in the 
international community we should accept it, either.
    Thank you very much.
    Ms. Watson. Thank you.
    Ms. Chu.
    Ms. Chu. Mr. Toohey, California is home to many research 
institutions from well respected universities to biotech firms. 
In fact, the State is home to 2,042 biomed companies. In fact, 
the California biomed industry has grown from ideas first 
germinated in the State's first universities and has flourished 
through entrepreneurial commitment and investor financing to 
create a very strong industry that has led to breakthrough 
technologies and therapies that have helped patients around the 
world. These businesses create high-paying jobs and keep more 
than 270,000 Californians employed. All of this is dependent on 
patent protection that is strong.
    How do the needs of the pharmaceutical industry compare to 
that of the biotech and research universities? What are the 
areas where you agree with regard to patent requirement? Where 
do they diverge?
    Mr. Toohey. Well, first of all, Congresswoman, I absolutely 
agree with the importance to California and the leading role 
that California has played with respect to biomedical 
innovation and it is a growing engine for the industry and for 
the world and it needs to be protected.
    Patents and data protection and the whole suite of 
protections available for biomedical innovations are critical. 
They are critical to universities. They are critical to 
innovative companies. But we are finding in many cases that 
these patents are not really respected around the world. I 
believe we share very much with biomedical universities the 
same concerns about the protection of patents and the 
protection of test data protection.
    You know, I would appreciate the opportunity perhaps to 
discuss a little bit more with some colleagues and get a more 
complete answer back to you about some of the areas and ways we 
have worked with some of the California biomedical 
universities. But as I understand it, we very much share the 
concerns that countries around the world need to enforce 
patents, need to provide appropriate protection for our 
clinical data. And in many cases that is not happening. The 
United States really leads the world in its protection, and we 
are finding that countries, even developed countries, are not 
allowing the protection of IP and market access in order for 
all patients to be able to receive their medicines.
    Ms. Chu. Thank you.
    Mr. Glickman, many of my constituents work in the film 
industry, either in set design, editing, or even acting. I know 
how important a strong and robust film industry is to them, not 
to mention to the overall U.S. economy. I know the industry is 
working hard with international governments and the Federal 
Government here at home to ensure that intellectual property 
laws are adequately enforced.
    Just yesterday your organization was successful in helping 
to put an end to a notorious illegal Web site that was being 
operated in China after a 2-year-long Government investigation. 
This conviction of a Chinese couple is the most recent that you 
have successfully brought against copyright infringers on 
mainland China.
    What can we learn from other countries? I know we talked a 
lot about China and how badly they are protecting, but are 
there examples that are both good and bad of how we can improve 
our enforcement system here at home?
    Mr. Glickman. That's a very good question. First of all, I 
don't want to say it is 100 percent bad in China. After we 
filed the WTO case, the Chinese resisted, but there have been 
some improvements of training of IP judges. There has been some 
enforcement improvement. I would call it not material yet, but 
better than it was 5 years ago. But there is a lot of great 
stuff. So the pressure stays on and what we find is the more 
the Chinese develop an indigenous film industry of local 
producers, local actors, local directors, their stuff is 
getting pirated all over the place in China, just like our 
stuff is getting pirated. So the more we are all in this 
together, the better they, as well as us, see the need to 
protect intellectual property.
    You go into these stores, there is a store in Shanghai 
called the Oscar Club. It is about 95 percent pirated stuff. 
Most beautiful video store you have ever seen in your life. It 
is not just American stuff. It has as much Chinese stuff as 
almost anything else. It has French. It has south Asian. It has 
everything else. So the more we can get the Chinese creative 
community involved, the better we are.
    But other countries are also taking a very strong lead, 
particularly in Internet piracy. The French have adopted a 
system of graduated responses where they try to educate 
consumers, and then if they can't get them educated then they 
give the Internet service provider a mandate to take more 
forceful action. Other countries around the world are following 
that model.
    We in our country, we are working with the Internet service 
providers very diligently to get them to do the same kind of 
thing that is permitted under something called the Digital 
Millennium Copyright Act [DMCA] in which all of this is done. 
But this is a worldwide battle waged everywhere in the world, 
but there are two positive things that have happened that I 
must tell you. One is this used to be a music and movies issue. 
This is a comprehensive, worldwide manufacturing, software, 
pharmaceutical, automobile, and everything, and for the first 
time in the last 4 or 5 years we are all working on this thing 
as an American issue. It is a gigantic American issue.
    Then, in terms of the movie industry, we now have our 
unions, our guilds, the folks who actually work in the trenches 
all the time making these movies, as much involved with us--the 
Directors Guild, the Screen Actors Guild, and others, the 
Theater--well, all the organizations that are there. So we are 
finally beginning to get some political clout, both with 
respect to American industry generally as well as within our 
own industry.
    There is a lot of perception out there that our business is 
big movie stars and that's it. Of the people, 99.9 percent make 
less than $100,000 a year. They work very hard. They support 
their families. They are the people that Chairwoman Watson, I 
am sure, that occupies her District by and large.
    So with that you try and develop the political clout to be 
able to show that this is important to our Government as well 
as governments around the world.
    I don't want to make this all the voice of gloom and doom. 
I think there is a growing political clout to take this on as a 
very monumentally serious economic issue to this country. I 
hope we can get your help, which we have, and the help of our 
U.S. Government representatives to keep the fight going.
    Ms. Watson. I would like to conclude with throwing this 
question out to all of you, and then specifically being that we 
are in the kind of financial crisis as a Government that we are 
in, would your industries that are represented here at the 
table be willing to contribute financially to our efforts as 
the Government through a dedicated tax or users fee? So if you 
have recommendations that have not been mentioned, would you 
comment on those and let us know how we can pay, how you can 
help us to be able to bring these recommendations to fruition. 
Let's start with Mr. Holleyman.
    Mr. Holleyman. Madam Chairwoman, I think the question for 
us is how do we drive more American jobs through protecting IP 
here and abroad. I think that companies in BSA are spending 
tens of millions of dollars a year independently and through 
organizations like BSA to do this. I think that a tax to cover 
this could be misused in other markets as a subterfuge for 
diverting resources into funds that were not focused on IP 
enforcement.
    So I don't think the tax mechanism, certainly in the 
current climate, is the way to do it. I think it is a will. I 
think it is getting the new people in place who are now getting 
in place, and the support of this Congress to ensure that 
agencies understand this is an issue of American jobs and 
American innovation.
    Mr. Vargo. Madam Chairwoman, American manufacturing is 
already the most heavily taxed in the world. That's one of the 
major problems that we face, along with theft of intellectual 
property. So I would not see this as a way to go ahead. But 
there is so much more the Government can do, both through 
coordination and through the trade agreements.
    Mr. Bilbray mentioned Panama. He is exactly right. The NAM 
likes these trade agreements because we have a manufactured 
goods trade surplus. We think NAFTA, CAFTA, Australia, and the 
rest together, last year we sold $21 billion more in 
manufactured goods than we bought, so we need more of these. 
The Government can do more to advance these. Every day that the 
Colombia, Panama, and other agreements languish costs us jobs. 
It costs us revenues.
    Enforcement of trade agreements, this administration is 
doing a good job with accelerating that.
    Ms. Watson. Mr. Toohey.
    Mr. Toohey. Well, as has already been stated, innovation is 
critical to the future of this country, and protecting 
innovation ought to be a core function of what the U.S. 
Government does. I think in some cases countries around the 
world think differently about intellectual property. 
Intellectual property is the only right contained in the main 
body of the U.S. Constitution. Article I, Clause VIII, Section 
VIII, it is the only right. We have it so much in the soul of 
our country, which allows us to really lead in innovation, and 
many countries around the world simply don't share that view.
    We as the pharmaceutical industry have worked proactively 
and in many cases with partnerships with organizations like PTO 
and the State Department to train judges in Latin America, to 
train patent examiners in China, to build that capacity. I 
think it is a cooperation that we need to do more of, and it is 
the right type of capacity building that we are engaged in. But 
protecting innovation ought to be a core function of the U.S. 
Government.
    Ms. Watson. Mr. Bilbray.
    Mr. Bilbray. Yes. I appreciate your bringing that up, 
because I think that is one thing we don't teach our children 
or our Members of Congress enough, about the intellectual 
property issue, that everything that we looked at what happened 
after 1800 in this country and how we basically moved on and 
beyond our mother country, which was the industrial base, 
countries like Germany and Britain had a big head start.
    But intellectual property allowed us to evolve. That's 
where we did get the Carnegies. That's where we did get new 
processing for creating steel. That's where the railroad 
systems were totally renovated by the Americans. That's where 
the automobile was evolved. All of the prosperity that we see 
in capitalism we have to understand was based on the fact that 
intellectual property protection, that Government's place in 
this great economic boom was to protect those intellectual 
properties so that there was the return for the investment in 
developing these new concepts.
    I think we grossly underestimate that, and I am glad you 
brought up the fact that before there was the Bill of Rights, 
before we articulated the rights of individuals to do and speak 
and possess certain things, the right to possess and protection 
your intellectual property was in our Constitution before all 
those other rights were enumerated, and that is an essential 
thing that we don't articulate enough either in our classrooms 
or in the halls of Congress.
    Thank you very much.
    Ms. Watson. And Mr. Glickman, we are going to give you the 
final word. Since you represent an industry in my District, we 
will give you the final word.
    Mr. Glickman. I just concur with what my colleagues have 
said. This is a matter that affects the general economy of the 
country, so I think that if we go down the road of doing 
special assessments and special taxes for issues that affect--
--
    Ms. Watson. Or user fees.
    Mr. Glickman. Or even user fees for items that affect the 
country as a whole, then, you know, you could probably fund the 
Government just by nothing else but special assessments, 
special user fees. So I think the question here is resources, 
but it is also a question of will. It is also a question of 
commitment.
    What is so great about your hearing today is that the 
message that is being shouted out from you all is that we need 
to sustain this will to take this problem on, and I can tell 
you from an industry's perspective we are getting our act 
together, without question.
    Ms. Watson. I appreciate that.
    I just want all of you in the audience to know this is a 
very critical issue, and this won't be the last hearing, as I 
mentioned before. We are going to followup. We want to know 
what is being done in Government. We have a theory of pay-go, 
and we have a huge debt. China becomes the central focus, Mr. 
Vargo, as you mentioned among your three Cs, politically. We 
need their assistance in dealing with North Korea and so on, 
the largest nation in population on the globe, and so it 
presents some unique challenges to us.
    But we are on it. The political will is there. We are going 
to continue to pursue it until we get some resolutions that are 
workable.
    With that, thank you for your testimony panel two. Thank 
you for the audience being here. We will adjourn the meeting.
    [Whereupon, at 12:30 p.m., the subcommittee was adjourned.]
    [The prepared statement of Hon. Christopher S. Murphy 
follows:]

[GRAPHIC] [TIFF OMITTED] T7791.099

[GRAPHIC] [TIFF OMITTED] T7791.100

                                 
