[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]







                     INTERNATIONAL IP ENFORCEMENT:
                      OPENING MARKETS ABROAD AND 
                         PROTECTING INNOVATION

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

                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
                         INTELLECTUAL PROPERTY,
                     COMPETITION, AND THE INTERNET

                                 OF THE

                       COMMITTEE ON THE JUDICIARY
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             SECOND SESSION

                               __________

                           SEPTEMBER 20, 2012

                               __________

                           Serial No. 112-149

                               __________

         Printed for the use of the Committee on the Judiciary




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

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                       COMMITTEE ON THE JUDICIARY

                      LAMAR SMITH, Texas, Chairman
F. JAMES SENSENBRENNER, Jr.,         JOHN CONYERS, Jr., Michigan
    Wisconsin                        HOWARD L. BERMAN, California
HOWARD COBLE, North Carolina         JERROLD NADLER, New York
ELTON GALLEGLY, California           ROBERT C. ``BOBBY'' SCOTT, 
BOB GOODLATTE, Virginia                  Virginia
DANIEL E. LUNGREN, California        MELVIN L. WATT, North Carolina
STEVE CHABOT, Ohio                   ZOE LOFGREN, California
DARRELL E. ISSA, California          SHEILA JACKSON LEE, Texas
MIKE PENCE, Indiana                  MAXINE WATERS, California
J. RANDY FORBES, Virginia            STEVE COHEN, Tennessee
STEVE KING, Iowa                     HENRY C. ``HANK'' JOHNSON, Jr.,
TRENT FRANKS, Arizona                  Georgia
LOUIE GOHMERT, Texas                 PEDRO R. PIERLUISI, Puerto Rico
JIM JORDAN, Ohio                     MIKE QUIGLEY, Illinois
TED POE, Texas                       JUDY CHU, California
JASON CHAFFETZ, Utah                 TED DEUTCH, Florida
TIM GRIFFIN, Arkansas                LINDA T. SANCHEZ, California
TOM MARINO, Pennsylvania             JARED POLIS, Colorado
TREY GOWDY, South Carolina
DENNIS ROSS, Florida
SANDY ADAMS, Florida
BEN QUAYLE, Arizona
MARK AMODEI, Nevada

           Richard Hertling, Staff Director and Chief Counsel
       Perry Apelbaum, Minority Staff Director and Chief Counsel
                                 ------                                

  Subcommittee on Intellectual Property, Competition, and the Internet

                   BOB GOODLATTE, Virginia, Chairman

                   BEN QUAYLE, Arizona, Vice-Chairman

F. JAMES SENSENBRENNER, Jr.,         MELVIN L. WATT, North Carolina
Wisconsin                            JOHN CONYERS, Jr., Michigan
HOWARD COBLE, North Carolina         HOWARD L. BERMAN, California
STEVE CHABOT, Ohio                   JUDY CHU, California
DARRELL E. ISSA, California          TED DEUTCH, Florida
MIKE PENCE, Indiana                  LINDA T. SANCHEZ, California
JIM JORDAN, Ohio                     JERROLD NADLER, New York
TED POE, Texas                       ZOE LOFGREN, California
JASON CHAFFETZ, Utah                 SHEILA JACKSON LEE, Texas
TIM GRIFFIN, Arkansas                MAXINE WATERS, California
TOM MARINO, Pennsylvania             HENRY C. ``HANK'' JOHNSON, Jr.,
SANDY ADAMS, Florida                   Georgia
MARK AMODEI, Nevada

                     Blaine Merritt, Chief Counsel

                   Stephanie Moore, Minority Counsel


















                            C O N T E N T S

                              ----------                              

                           SEPTEMBER 20, 2012

                                                                   Page

                           OPENING STATEMENTS

The Honorable Bob Goodlatte, a Representative in Congress from 
  the State of Virginia, and Chairman, Subcommittee on 
  Intellectual Property, Competition, and the Internet...........     1
The Honorable Melvin L. Watt, a Representative in Congress from 
  the State of North Carolina, and Ranking Member, Subcommittee 
  on Intellectual Property, Competition, and the Internet........     3

                                WITNESS

Victoria A. Espinel, U.S. Intellectual Property Enforcement 
  Coordinator, Office of Management and Budget, Executive Office 
  of the President
  Oral Testimony.................................................     5
  Prepared Statement.............................................     7
  Response to Questions for the Record...........................    32

 
  INTERNATIONAL IP ENFORCEMENT: OPENING MARKETS ABROAD AND PROTECTING 
                               INNOVATION

                              ----------                              


                      THURSDAY, SEPTEMBER 20, 2012

              House of Representatives,    
         Subcommittee on Intellectual Property,    
                     Competition, and the Internet,
                                Committee on the Judiciary,
                                                    Washington, DC.

    The Subcommittee met, pursuant to call, at 2:26 p.m., in 
room 2141, Rayburn Office Building, the Honorable Bob Goodlatte 
(Chairman of the Subcommittee) presiding.
    Present: Representatives Goodlatte, Coble, Griffin, Marino, 
Watt, and Chu.
    Staff present: (Majority) Vishal Amin, Counsel; Olivia Lee, 
Clerk; and (Minority) Stephanie Moore, Subcommittee Chief 
Counsel.
    Mr. Goodlatte. Good afternoon. The hearing of the 
Subcommittee on Intellectual Property, Competition, and the 
Internet will come to order. And I will recognize myself for an 
opening statement.
    Today we are holding an oversight hearing on the Obama 
administration's international IP enforcement efforts, focusing 
specifically on international patent, trade secret, and market 
access issues to shine the spotlight on the problems that 
American companies face when seeking enforcement and using 
patents overseas.
    This Subcommittee held hearings in April with industry 
stakeholders and in June with the Deputy Director of the USPTO 
to look at the patent systems in foreign countries and whether 
they meet global trading standards. The fundamental question we 
sought to answer was whether we have a level or an unlevel 
playing field abroad for American investors. What we learned is 
that much work needs to be done to level the playing field for 
American innovators.
    When American businesses seek to sell their goods abroad, 
they must be able to compete fairly. Our trading partners must 
live up to their international obligations and not discriminate 
against U.S. companies or fields of technology when it comes to 
patentability and market access.
    World Trade Organization members are required to make 
patents available for inventions in all fields of technology. 
However, many countries discriminate based on the place of 
invention, field of technology, or whether products are 
imported or locally produced. For example, countries like 
Brazil and India limit the scope of patent eligible subject 
matter in a way that makes it difficult, if not impossible, for 
a U.S. innovator to get patent protection. Just as problematic 
is the flip side where a country grants many low quality or 
junk patents to local companies so that they can sue American 
companies and get rich quick. Many of these are utility model 
patents that go through minimal review and lack real 
inventiveness.
    Recently we heard about the Goophone I5, a supposed iPhone 
5 clone being manufactured by a Chinese company. This same 
company also sells a clone of the Samsung Galaxy smartphone. 
The issue here is that this company has filed for Chinese 
patents on innovations that were made by others, and this type 
of patent trolling can be used to threaten American companies 
and force monetary settlements.
    For example, Bloomberg reported that in China, of the 
530,000 patents granted during the first half of this year, 
only 107,000 were invention patents. The rest were for design 
or utility model patents, neither of which requires a rigorous 
examination process before being approved.
    We have also seen a series of rulings in Canada that 
dramatically heightens utility requirements as to the 
usefulness of an invention, which will result in certain 
pharmaceutical patents being valid in the U.S., but not in 
Canada. This directly disadvantages American drug companies and 
could open the door to other countries that seek to further 
weaken protections for pharmaceutical patents.
    Another field where foreign competitors have engaged in 
protectionist practices is trade secrets. Certain foreign 
governments have begun adopting policies that undermine trade 
secrets and disadvantage American companies. These policies 
include, one, requiring companies to provide trade secret 
information to a local partner or government agency as a 
condition of investment or market access, and two, testing or 
certification programs that require companies to disclose 
confidential information in order to sell their product in the 
foreign market.
    When U.S. companies are forced to give their confidential 
business information to a government authority, there is 
usually a lack of adequate safeguards to protect it. U.S. 
companies should not have to choose between treating trade 
secret theft as simply a cost of doing business and avoiding 
certain markets in Asia all together. The issue of trade secret 
theft is not simply a business-to-business concern. Foreign 
governments must take these cases seriously and ensure that 
they have adequate remedies and laws in place.
    Some countries, like South Korea, China, and India, are 
looking at using compulsory licensing in the trade secret 
space. The regulators in these countries can potentially compel 
new licensing of a trade secret by a third party. This is done 
to help a local competitor that claims that it needs access to 
the trade secret in order to compete. What makes this more 
troubling is that some of these third parties are State-owned 
enterprises.
    All of these practices point to the fact that the U.S. 
needs to be more vigilant in ensuring an international market 
that is fair to U.S. companies looking to compete.
    Today we will examine what the U.S. has and has not been 
doing to ensure this is indeed the case. Some have argued that 
the Obama administration has taken a narrow approach when it 
comes to concerns of American innovative companies in the 
patents, trade secrets, and market access space. They point to 
the Administration's lack of focus on international patent and 
trade secret issues generally, as well as the lack of a strong 
public response when in March the Indian government took the 
unprecedented step of issuing a compulsory license on a 
pharmaceutical patent.
    Trade agreements, like the Trans Pacific Partnership Act, 
or TPP, provide platforms for the U.S. to exert pressure on 
other countries to level the playing field when it comes to 
these issues. It has come to our attention that some provisions 
being discussed in the TPP, like requirements for plain 
packaging of tobacco products and pharmaceutical test data 
protection issues, could weaken rather than strengthen global 
commitments to intellectual property rights.
    I look forward to continuing to work to ensure that these 
negotiations result in stronger, not weaker, commitments by 
other countries to enhance their IP laws. Today I hope to hear 
more about the Administration's plans to do more to expand the 
U.S. government's efforts to find real solutions to these 
unfair trade practices which distort the free market and trade, 
and hinder American job creation.
    And before we turn to our distinguished witness today, I 
would be pleased to recognize the Ranking Member of the 
Subcommittee, the gentleman from North Carolina, Mr. Watt.
    Mr. Watt. Thank you, Chairman Goodlatte. And let me start 
by thanking you also for accommodating today's witness and me 
at our previous hearing on this topic in June. As we as Members 
all recognize, there are simply those occasions where you 
cannot be in two places at one time. And both our witness and I 
had that problem, as I recall, when the hearing was previously 
scheduled.
    Be that as it may, I am happy that the Intellectual 
Property Enforcement Coordinator, Victor Espinel, is with us 
here today. Based upon her written submission, it is clear that 
she has been very busy working to fulfill the requirements of 
the position conceived by then Chairman Conyers and current 
Chairman Smith in the PRO-IP Act of 2008.
    The Intellectual Property Enforcement Coordinator handles 
nationwide and international coordination of intellectual 
property enforcement efforts. The position has provided an 
institutional IP enforcement structure to help to ensure that 
the United States and our IP intensive industries have a solid 
economic base in the increasingly competitive global 
marketplace.
    In April of this year, the Obama administration issued a 
report entitled ``Intellectual Property and the U.S. Economy: 
Industries in Focus.'' The report makes plain the value of IP 
industries to the American economy. These industries produce 
27.1 million jobs for our citizens.
    But as we have seen over the course of this Congress, the 
foreign threat to American-generated intellectual property is 
real and ongoing, and in some cases is intensifying. Other 
countries and their citizens continue to profit from an immense 
world trade of illicit goods, digital theft, and anti-
competitive practices that violate the IP rights of U.S. rights 
holders.
    Just this morning, the Congressional International Anti-
Piracy Caucus, co-chaired by Chairman Goodlatte, released a 
report adding Switzerland and Italy to the list of countries 
that engage in piracy of American copyrights. So while today we 
focus on innovation and patent intensive industries, it is 
clear that foreign thieves do not discriminate with respect to 
the type of intellectual property they steal or misappropriate.
    An emerging threat that I hope we will hear more about in 
this hearing is the theft of trade secrets of American 
businesses. In the 2011 annual report to Congress, the IPAC 
reported that, ``The pace of foreign economic collection of 
information and industrial espionage activities against major 
U.S. corporations is accelerating. Foreign competitors of U.S. 
corporations with ties to companies owned by foreign 
governments have increased their efforts to steal trade secret 
information and intellectual property.''
    The theft trade secrets poses a substantial risk unlike 
that experienced in the production of low quality, substandard 
counterfeits. Trade secrets may enable foreign operatives to 
duplicate American products and undermine market access.
    Earlier this year, I was happy to co-sponsor with Chairman 
Smith Foreign and Economic Espionage Penalty Enhancement Act of 
2012, which I believe will send a clear message that those who 
dare to steal American trade secrets will pay a heavy price 
when caught. The bill passed the House in July and awaits 
action in the Senate.
    Another area of interest is the impact on the U.S. 
pharmaceutical industry of the successful enforcement efforts 
noted in Ms. Espinel's written testimony. While our witness 
rightly emphasizes the public health and safety aspects of 
these efforts, it would be helpful to hear the impact both from 
an economic and reputational perspective on the companies whose 
drugs were copied.
    Finally, Director Kappos, the Director of the Patent and 
Trademark Office, earlier this year testified in essence that 
litigation within and across American IP industries was a 
necessary and generally healthy aspect of IP enforcement. I am 
interested in the witness' perspective in her capacity as 
basically the one who herds the cats in how the U.S. IP 
industries cooperate or do not cooperate in the protection of 
each other's intellectual property abroad. Specifically, does 
IP litigation among U.S. companies have an adverse impact on 
whether they collaborate with government efforts to confront 
the global threat against intellectual property theft?
    With that, Mr. Chairman, I will close. I thank you for 
holding this hearing again, and welcome our witness, and look 
forward to her testimony.
    I yield back.
    Mr. Goodlatte. I thank the gentleman.
    And without objection, and I do not believe there will be 
any objection, other Members' opening statements will be made a 
part of the record.
    We have a very distinguished witness here today, and in 
light of the fact that we have just one witness here today, we 
will be more generous than the 5 minutes we ordinarily allow. 
But we will turn the light on just so you know how the timing 
is going on that. And when it turns to red, that signals 5 
minutes have expired, but we want to hear your report, Ms. 
Espinel.
    And as I the custom of this Committee, we swear in our 
witnesses. So if you would like to stand and be sworn.
    [Witness sworn.]
    Mr. Goodlatte. Thank you very much. And please join me in 
welcoming today the Honorable Victoria Espinel, the 
Intellectual Property Enforcement Coordinator at the Office of 
Management and Budget in the Executive Office of the President.
    Ms. Espinel joined OMB in December 2009. Her 
responsibilities include developing the Obama administration's 
overall strategy for IP enforcement both at home and abroad. 
Earlier Ms. Espinel served in the Office of the U.S. Trade 
Representative as the Assistant U.S. Trade Representative for 
Intellectual Property and Innovation.
    Ms. Espinel received her undergraduate degree from the 
Georgetown University School of Foreign Service, her law degree 
from Georgetown University Law School, and a master of law 
degree from the London School of Economics.
    Welcome, and we are pleased to have your testimony.

 TESTIMONY OF VICTORIA A. ESPINEL, U.S. INTELLECTUAL PROPERTY 
   ENFORCEMENT COORDINATOR, OFFICE OF MANAGEMENT AND BUDGET, 
               EXECUTIVE OFFICE OF THE PRESIDENT

    Ms. Espinel. Thank you. Chairman Goodlatte, Ranking Member 
Watt, Members of the Subcommittee, thank you for your 
leadership on intellectual property enforcement and for the 
support that this Subcommittee has provided to the 
Administration's overall intellectual property enforcement 
efforts.
    There are three areas that I will focus on in my remarks 
today: first, patent enforcement, second, counterfeit 
pharmaceuticals, and third, trade secret theft.
    With respect to patents, last year in response to growing 
concerns over China's administrative and judicial systems of 
patent enforcement, we launched a new initiative to focus on 
patent enforcement in China. My office and the USPTO have 
conducted roundtables in Washington, Beijing, Shanghai, and 
Guangzhou to learn from U.S. companies directly about the 
specific challenges they face when trying to enforce their 
patents in China. The goal is to address the deficiencies in 
China's systems, including the lack of effective discovery, low 
damage awards, unexamined utility model patents, and the 
enforceability of judicial orders.
    With respect to counterfeit pharmaceuticals, because of the 
very serious risk to health and safety that they pose, 
combatting counterfeit drugs is a critical priority for us. In 
March of last year, we sent to Congress a strategy that was 
specifically focused on how we will combat counterfeit drugs.
    A few examples of our approach include a Customs and Border 
Protection pilot program that is focused on forming closer 
partnerships with the pharmaceutical companies to better 
understand their industry practices, and then to leverage that 
information into more effective and more efficient targeting 
and enforcement. The effects of CBP's overall prioritization of 
health and safety is clear as seizures of counterfeit 
pharmaceuticals have increased in the last 2 years by nearly 
600 percent.
    There have been several notable law enforcement operations 
over the last year. In my written testimony, I highlight 
several instances of recent joint operations, many of them 
cross border operations, that resulted in the arrest of 
individuals that were selling counterfeit drugs and significant 
seizures.
    In addition, we have worked with a number of companies from 
diverse sectors to form a non-profit group to combat illegal 
fake online pharmacies, criminals that are masquerading as 
legitimate pharmacies. The Center for Safe Internet Pharmacies 
was launched in July of 2012 and is now fully operational. And 
we hope and expect that CSIP will be particularly effective in 
reducing the prevalence of counterfeit and illegal 
pharmaceuticals.
    On trade secret theft, we have very serious concerns 
related to the threat that is posed to U.S. innovation from 
economic espionage and trade secret theft. President Obama and 
senior Administration officials have expressly raised our 
concerns with China on trade secret theft, and we will continue 
to raise this as a priority issue and a grave concern.
    In May at the most recent Strategic and Economic Dialogue, 
China agreed for the first time to include protection of trade 
secrets and agreed to intensify enforcement against trade 
secret theft. This past year, the Department of Justice and the 
FBI increased investigations of economic espionage and trade 
secret theft by 29 percent.
    I want to thank Chairman Goodlatte, Chairman Smith, Ranking 
Member Watt, and many Members of the Subcommittee for the work 
that they did in sponsoring the Foreign and Economic Espionage 
Penalty Enhancement Act of 2012, which recently passed the 
House. Increasing penalties for economic espionage was one of 
the recommendations that we made to Congress to strengthen our 
ability to enforce against this crime, and I thank you for 
acting on this issue.
    We are currently in the process of developing a strategy to 
officially coordinate the government's effort to mitigate the 
theft of trade secrets and economic espionage. We need to act 
aggressively to combat the theft of trade secrets, and I look 
forward to working with Members of this Committee as we develop 
the strategy.
    Mr. Chairman, intellectual property is used throughout the 
U.S. economy, and intellectual property rights support 
innovation and creativity in virtually every sector and every 
U.S. industry. I look forward to working closely with this 
Subcommittee on improving protection of American intellectual 
property.
    Now I am happy to take your questions.
    [The prepared statement of Ms. Espinel follows:]


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


                               __________

    Mr. Goodlatte. And in less than 5 minutes, too. My 
goodness.
    Well, thank you very much for that report, and we do have a 
number of questions. And Mr. Watt and I may go back and forth 
here in terms of the opportunity to ask lots of questions 
without going too far. And I hope we are joined by some of our 
other Members of the Committee because this is a very important 
issue.
    The Administration is currently negotiating a Trans-Pacific 
Partnership Trade Agreement that includes provisions dealing 
directly with the issue of regulatory test data protection and 
how it should be protected. I understand that although trade 
promotion authority has expired, the Administration continues 
to negotiate agreements in line with TPA standards, which 
require the U.S. when in negotiations for a trade agreement to 
advocate for standards that are in line with existing U.S. law, 
which would mean a 12-year term of protection for biologic test 
data as provided for in the Affordable Care Act.
    But it appears that when it comes to regulatory test data 
protection, the Administration has instead been working off of 
a suggestion from the President's budget that calls for a 7-
year term. I also understand that as part of the United States-
China Joint Commission on Commerce and Trade Meetings, the 
issue of a 12-year data protection term was planned on being 
raised, but then taken out and watered down during interagency 
review to simply push for a generic ``new protections'' for 
biologics.
    There seems to be a real disconnect here. Regulatory test 
data is valuable IP, and when countries provide limited or no 
protection, it would make sense for our negotiators to at least 
start their negotiations with U.S. law rather than a suggestion 
made in the President's budget proposal.
    Can you explain to the Committee the importance of data 
protection, the markets that lack adequate protection, and how 
you believe it should be protected as a part of the TPP?
    Ms. Espinel. So with respect to data protection, this 
Administration, like prior Administrations, has made that a 
priority issue in our trade negotiations.
    With respect to the specific issue you raise and the term 
of years, I know that Ambassador Kirk has spoken on that in 
previous hearings, and I will just repeat that he, the USTR, 
and the Administration as a whole, we stand by U.S. existing 
law. We also stand by the President's budget.
    My understanding on this specific issue of the difference 
of term is that that USTR has not, in fact, tabled text on that 
particular issue yet, and is in the process now of talking to a 
range of stakeholders about the right path there.
    So I am happy to take that back to them, but that is my 
current understanding of the status of that.
    Mr. Goodlatte. Let me interrupt there. If you stand by both 
U.S. law and the proposal in the President's budget, there 
seems to be a conflict between the two. Is there a way to 
reconcile that?
    Ms. Espinel. So as I said, my understanding is that the 
USTR has not tabled text on that because I believe them to be 
in discussion with the various stakeholders right now about 
that very issue.
    On the JCCT and the agenda in the JCCT, that I am not aware 
of, but I can certainly look into that and take that back to 
them.
    Mr. Goodlatte. Thank you. It is crystal clear that many 
countries have de facto TRIPS violations. And although the 
President announced a subsidies case while in Ohio on Monday, 
the Administration has failed to bring a single IP case at the 
WTO in 4 years. The Bush administration filed 24 WTO cases 
overall, including 2 IP cases, and 7 cases against China, 
despite having a limited amount of time to file since China 
joined the WTO in 2001 and China's WTO commitment did not 
become fully operative until 2006.
    One incredibly powerful tool to help address serious 
challenges to the economic value of U.S. companies' IPR would 
be to make use of non-violation nullification and impairment 
disputes at the WTO. NVNI disputes relate to measures that may 
not on their face clearly violate any specific TRIPS or other 
WTO rule, but that nonetheless prevent a member from enjoying 
the benefits that should accrue to it under the relevant 
agreement.
    NVNI measures that harm the economic interests of creative 
and innovative U.S. companies are prevalent, especially in the 
area of IP, and they result in significant economic harm to 
U.S. companies and exporters. And yet there is currently a 
moratorium on the use of NVNI disputes, and the Administration 
recently agreed to an extension of this moratorium, essentially 
giving a free pass to China, Indian, and Brazil on measures 
that impair U.S. IP interests.
    Examples of subsidies that could be targeted include 
preferential or IP free procurement or subsidy programs that 
programs such as China have in place, and technical standards 
that discriminate in favor of a locally owned IPR, as well as a 
range of other preferences accorded to indigenous IPR owners 
and assets. They could also be used to deal with inadequate 
enforcement regimes that may implement TRIPS in a manner that 
impairs the economic interests of right holders.
    Why has this been allowed to continue, and why has the 
United States not been more aggressive in investigating and in 
bringing IP cases at the WTO and making use of all of our 
international trade tools?
    Ms. Espinel. So I was at USTR as the Assistant USTR for 
Intellectual Property and Innovation during the Bush 
administration when the two intellectual property cases were 
brought against China. So I am personally aware of how much of 
a priority intellectual property was for the former 
Administration, and I hope it is evident from the work that we 
have been doing that it is very much a priority for this 
Administration as well.
    There are a variety of trade tools that we use, and I am 
happy to speak to those. But since you really focused on WTO 
dispute resolution in your remarks, I will focus on that. And 
one thing that I want to make sure that you are aware of, in 
case you are not, is that the President announced in his State 
of the Union, and it is now up and running, to form something 
called the ITEC, the Interagency Trade and Enforcement 
Committee. And the ITEC is charged with aggressively 
investigating potential trade barriers and looking for ways to 
resolve them using a variety of trade tools, as you said, to 
bring all of our trade tools to bear. And that includes using 
our domestic trade law and using WTO dispute resolution.
    We are very interested in looking for more aggressive ways 
to resolve the trade barriers that remain. You mentioned, at 
least in general terms, what might be some specific suggestions 
for cases that could be brought. I think we would be very 
interested in that. And if there is a way for us to have a 
follow-up conversation--probably best not in an open hearing--
about specific suggestions, we would really welcome that.
    Mr. Goodlatte. Thank you. And can you shed any light on the 
Administration's apparent recent agreement for an extension of 
the moratorium on NVNI disputes?
    Ms. Espinel. That is not an issue that I have been close 
to. I am familiar with nullification and impairment cases as a 
concept for the USTR, but I was not aware of the moratorium or 
the recent extension on that. But that is certainly something 
that I can look into further.
    Mr. Goodlatte. Yes, if you would and report back to the 
Committee your thoughts on that and where that is headed, that 
would be helpful.
    Next, I would like to ask about two significant problems 
that American companies face abroad that center on trade secret 
theft and patent quality, including weak utility model patents, 
particularly in foreign markets in Asia, I mentioned in my 
opening statement.
    The trade secret theft issue becomes even more troubling 
when the companies involved may be State-owned enterprises or 
share significant links with their home government. Trade 
secret theft is not simply a business-to-business concern, but 
one that requires real governmental action and legal reform.
    American companies operating overseas should not have to 
view this kind of theft as simply a cost of doing business. As 
part of the Strategic and Economic Dialogue, and the U.S.-China 
Joint Commission on Commerce and Trade, what are the types of 
commitments that the Administration is pushing for to address 
these pressing problems?
    Ms. Espinel. So first let me say, I absolutely agree with 
you that this should not be a cost of doing business. It should 
absolutely not be occurring. And I think we need to move very 
aggressively to try to stop it as I referred to in my opening 
remarks.
    With respect to trade secrets, I think there are a number 
of things that we can do. You mentioned the Strategic and 
Economic Dialogue. I will talk about that specifically, but I 
think there are a few other things that we can do as well.
    First, this is a critical issue for us. I think the theft 
of trade secrets, economic espionage, and the potential impact 
that it could have on our economy, on our ability to stay 
competitive globally, is a critical one. So it is very much a 
front and center issue for us.
    The President and a range of other very senior 
Administration officials have been raising this with China very 
directly and very forcefully. And coming out of the most recent 
Strategic and Economic Dialogue, which was held in May, China 
for the first time made a commitment to include trade secret 
theft and to increase enforcement against trade secret theft. 
So obviously now our job is to make sure, having had China make 
that commitment--agree to make that commitment for the first 
time--to have them actually follow through on that commitment.
    There are other things that we can do here at home. One of 
those is to increase our own domestic law enforcement 
investigation of trade secret theft to try to stop it before it 
happens, and then prosecution of trade secret theft after it 
has happened.
    In that regard, I want to note again the Foreign Economic 
Espionage Penalty Enhancement Act. We think that will be very 
valuable to us in terms of enforcing, so I thank you and other 
Members of this Subcommittee that worked on that piece of 
legislation.
    And then the last thing that I want to note is that we are 
right now working internally on developing a strategy focused 
on trade secret theft and economic espionage specifically to 
try to make sure that we are as coordinated as possible and 
that we are acting as aggressively as we can. And I would very 
much look forward to working with this Committee as we develop 
that strategy.
    Mr. Goodlatte. Thank you. And one final question. Tying 
patent rights to domestic manufacturing, or actual use in 
country appears to be the new trick that countries are 
employing to nullify legally-granted patent rights. Brazil and 
India are countries that require a patentee to ``make use of'' 
a patent in the country, basically forcing a domestic 
manufacturing requirement on foreign companies.
    The Chinese patent office has a made in China requirement 
requiring inventions that have a tangential link to China be 
filed in China first or risk losing patent protection.
    What is the next threat or legal trick that you are just 
starting to see come up on the horizon, and what can we do 
about these?
    Ms. Espinel. So as you know, there have been a number of 
things that other countries, including China, have done to try 
to undermine our innovation in ways that go beyond simply 
infringement of intellectual property, and you mentioned a few 
of them. Indigenous innovation was something that we were very 
concerned about, I believe Members of this Committee were very 
concerned about. And China did take steps back from that when 
it was raised as an issue of serious concern by the 
Administration.
    But it is, I think, inevitable that other countries will 
try to gain an unfair advantage in gaming their system in 
various ways. And for us, anything that means that our 
companies have a less stable and predictable environment 
overseas is an issue of real concern. So whether it is tying 
things to local manufacture, whether it is, as you said, other 
tricks that countries are using to try to undermine our 
innovation in different ways, whatever those issues are, we 
will continue to try to combat them.
    Let me take this opportunity, though, to mention one other 
new commitment that came out of the S&ED, which I think is very 
relevant to this conversation. In the most recent S&ED, China 
made a commitment to increase sales of legitimate IP intensive 
products in accordance with its status as a global leader and 
the economy. And I think that is worth spending a little bit 
time on it because of the significance of having China agree to 
a commitment in those terms.
    One of the reasons, one of the primary reasons that we are 
concerned about piracy and counterfeiting, that we are 
concerned about infringement, that we are concerned about other 
countries gaming their system to undermine innovation is 
because we truly believe--we collectively truly believe--that 
if our companies have a level and fair playing field, if they 
have the ability to compete on fair terms, that they will do 
very well. And so having China make a commitment that will 
focus and that will lead to increased exports of U.S. product, 
that will lead to increased sales of legitimate products.
    So having China agree to a commitment that is focused on 
that for a practical outcome of what we are trying to achieve I 
think is very significant, and I wanted to highlight it. That 
is basically a different way, in addition to the all the other 
things we were doing, to try to combat unfair practices that 
China and other countries raise. It is another way of us going 
at this issue and trying to make sure that our companies have 
the ability to compete on fair terms.
    Mr. Goodlatte. Well, given the substantial trade deficit 
that the United States has with China, if we were to impose a 
make use of or made in China requirement on the protection of 
property manufactured in China, and essentially force a 
domestic manufacture in the United States, it would have an 
enormous impact on the Chinese economy, would it not?
    Ms. Espinel. I believe it would. I think there are----
    Mr. Goodlatte. I am not necessarily advocating that. I 
would rather see the Chinese back away. But sometimes when you 
get overwhelmed, the pressure builds on people like Members of 
Congress who if you cannot beat them, join them.
    Ms. Espinel. Really what we are all looking for are ways to 
get China's attention and make sure that they are taking this 
seriously. And they have made progress in some areas, but I do 
not want to overstate that because there is still an enormous 
problem.
    What we are looking at doing is looking basically at every 
point of leverage that we have and trade policy tool that we 
have and seeing how we can use it most effectively against 
China. But then also as I mentioned, in the most recent S&ED, 
looking to see if there are other ways to address this rather 
than just going trade barrier by trade barrier by China and 
having them step back and make improvements in one area, but 
then raise new trade barriers in other areas. Get at the core 
of the problem, which is trying to make sure that our companies 
have the ability to compete fairly and that we are seeing 
exports and sales of legitimate goods go up in those markets. 
And that is really one of our primary goals . That is really at 
the core of what we are trying to get at.
    Mr. Goodlatte. Thank you. We will now turn to the gentleman 
from North Carolina, Mr. Watt, and he will enjoy the same 
latitude that he afforded me.
    Mr. Watt. Mr. Chairman, I am going to exercise my latitude 
to let Ms. Chu go before me, if it is all right.
    Mr. Goodlatte. The gentlewoman from California is 
recognized for 5 minutes.
    Ms. Chu. Thank you. I actually wanted to follow up on a 
question that Congressman Goodlatte asked, and ask about the 
issue of compulsory licenses because some countries have been 
able to use their ability to demand compulsory licenses in ways 
that I find alarming.
    For instance, on March 12, 2012, India gave a license to an 
Indian company to sell a generic version of a patented Bayer 
drug, even though Bayer had a valid and enforceable Indian 
patent for the drug. The Indian government justified the 
compulsory license by stating that the cost was too high and 
the drug was imported into India as opposed to being 
manufactured in the country.
    Some people have opined that compulsory licensing has 
weakened an intellectual property owner's use of the property. 
How do you respond to that statement, and what impact do you 
believe that compulsory licenses have on the effectiveness of 
international agreements?
    Ms. Espinel. So I am not familiar with the details of that 
particular case, so I cannot speak to that particular case. I 
can say as a general matter that I believe that countries can 
and should be able to address the public health situations that 
they face without taking measures that are going to undermine 
American intellectual property and American innovation. And 
that whatever steps they take they do working closely with U.S. 
industry. It sounds like U.S. industry was not necessarily 
involved in that case, but that they work with our 
stakeholders, they work with our companies in a cooperative 
way.
    Ms. Chu. Okay. Well, let me also ask about the Special 301 
report. This identifies foreign policies that may unfairly 
disadvantage U.S. rights holders in other countries. It lists 
those countries that are deemed to have inadequate intellectual 
property right protections. What is the significance of this 
report, and how can it be used to incentivize countries to 
harmonize their laws to conform to international agreements to 
which they are a party?
    Ms. Espinel. Many countries are unhappy with being listed 
on the Special 301 list, so it does serve as an incentive for 
countries to make changes to increase enforcement, or there are 
other reasons beyond enforcement that countries end up on the 
Special 301 list. And so it has been a useful tool.
    I believe in order for it to be effective, it needs to be 
clear to countries exactly what they need to do to get off of 
the Special 301 list, or exactly what will place on the Special 
301 list. So one of the things that we have been working with 
the USTR on, and the USTR could of course speak to this in more 
detail, is working with countries that are on the Special 301 
list to come up with action plans that make it very clear to 
them what steps they would need to take to come off of the 
Special 301 list.
    I fear that at least in the past, countries either felt 
that they did not know enough of why they were there, or they 
knew why they were there, but they were not sure exactly what 
steps they needed to take to get off. And so I think whether or 
not that was true or that was simply an excuse they made, I 
think steps that USTR has been taking to negotiate action plans 
with countries to make it very clear to them the kinds of 
improvement the United States would like to see will go far in 
making the Special 301 list even more effective than it has 
been. And I think there are a number of instances where it has 
been quite effective in getting countries to bring their 
practices more in line with protection of American intellectual 
property.
    Ms. Chu. In fact, in your testimony you mentioned that 
Spain was removed this year after years of placement on that 
list. What specifically did Spain do to get themselves off the 
list? What got them on the list, and then what steps did they 
take to get off?
    Ms. Espinel. So I believe Spain was put on the list after 
my tenure at USTR, so with your permission I would like to go 
back to them so I can get more details from them about Spain's 
placement on the list. And I would be happy to come back to you 
on that.
    Ms. Chu. Well, in general, how about the kind of trading 
best practices that might be able to ensure that people get off 
the list, that these countries get off the list?
    Ms. Espinel. Right, absolutely. So I think there are a 
number of things that we as government can do to try to help 
countries get off the list. Part of that is being clear about 
what our expectations are. Part of that, as you alluded to, is 
training and capacity building, and there is a lot that we do 
now to try to make sure that our training and capability 
building is as effective as it can be and is focused on the 
priorities that we have.
    I would be happy to talk more about sort of the specifics, 
and USTR can certainly speak to this as well, the specifics of 
how action plans are negotiated.
    I know this past year when they put the list out at the end 
of April, they made an open offer for the first time to any 
country that was on the list to negotiate an action plan with 
the United States to try to set up concrete deliverables so 
that country would see a path forward to getting off the list. 
Obviously our goal is not to have countries on the list. Our 
goal is to use the list as a way to encourage countries to make 
improvements in their system.
    Ms. Chu. Like are there any one or two or concrete examples 
that you have?
    Ms. Espinel. In terms of countries making improvements to 
come off the list?
    Ms. Chu. Yeah.
    Ms. Espinel. So I am going to reach back to my time at 
USTR. So just as one example that is relevant to the subject 
matter of this hearing, we worked with the government of 
Hungary because of concerns that we had with their data 
protection legislation. And they made changes to their data 
protection legislation, and I understand that the reason why 
they did that was because of their concern of being placed on 
the list.
    I know we have listed in the Special 301 report and the 
Notorious Markets list particular markets in China and Russia, 
and sort of highlighted the level of concern we have about 
counterfeit and pirated goods being sold in those markets. And 
that has also apparently motivated increased enforcement 
against those markets.
    So those are a couple of specific examples off the top of 
my head. And again, I would be happy to go back to the USTR and 
give you a more thorough debrief.
    Ms. Chu. Okay, thank you. I yield back.
    Mr. Coble [presiding]. I apologize to the Subcommittee for 
my delay. I had two other hearings to attend to simultaneously. 
Good to have you with us.
    What are the three key problems that American companies 
face in China and India regarding patent and trade secret 
protection? And are they in compliance with their international 
obligations under the TRIPS agreement?
    Ms. Espinel. What are the key problems, and are they in 
compliance with the TRIPS Agreement?
    Mr. Coble. Correct.
    Ms. Espinel. So let me speak to the key problems. I am not 
the right person to speak to compliance of the TRIPS Agreement, 
so I will put that aside, although I will, as I noted earlier, 
mention that USTR and the President's Interagency Trade 
Enforcement Committee is looking at investigating whether or 
not there are new ways that we can resolve trade barriers.
    But putting aside WTO consistency for the moment, certainly 
patent enforcement or the deficiencies in patent enforcement in 
China and trade secret theft are, I believe, a real issue of 
concern to our companies. And in the last year, on patent 
enforcement, as I mentioned, we actually mid-strategy launched 
a new initiative specifically focused on patent enforcement in 
China because of concerns that we were hearing from our 
industry that our companies had been having in trying to 
enforce their patents in China. They have met with a 
significant amount of difficulty.
    There are a range of reasons why they have. So one of the 
things that we did when we launched this initiative is have a 
series of sit-downs with a wide range of companies in various 
industry sectors to find out exactly the problems that they 
were facing in China and which of those we could try to make 
progress on. That is an ongoing effort that we have, but it is 
coming directly because of our increasing concern about the 
ability to enforce our patents in China.
    We also have concerns about the quality of patents in 
China, which I alluded to earlier. And then with respect to 
trade secret theft, I would just reiterate my remarks from 
before, but, yes, we are very concerned about trade secret 
theft. We are very concerned about economic espionage. We are 
concerned about the impact that it will have on our companies 
and our economy as a whole.
    There is much that we are already doing to try to combat 
the theft of trade secrets, but because of the level of concern 
that we have on trade secret theft, we are at this moment 
engaged in a process of developing across agency administration 
strategy focused just on trade secret theft. And as we are in 
the process of developing it now, we would be very interested 
in working with Members of this Subcommittee as we come up with 
that strategy.
    Mr. Coble. Thank you. I appreciate your response. The 
distinguished gentleman from North Carolina, Mr. Watt.
    Mr. Watt. Thank you, Mr. Chairman. I am glad to see you.
    Let me deal with two questions that I kind of glossed over 
in my opening statement first, and then I will ask one final 
question. And then I will let you go, unless somebody else 
comes and demands your presence.
    Your testimony talked some about the pharmaceutical 
industry and the public health and safety aspects of the 
efforts that we are undertaking. I just wanted to give you an 
opportunity to talk a little bit about the economic and 
reputational aspects or implications of the pharmaceutical 
efforts that we are taking in addition to the health and safety 
aspects of it.
    Ms. Espinel. So perhaps I will open by saying when I took 
this job, and I tried not to have that many preconceived 
notions when I took it. But when I took this job, my assumption 
was going to be that there were almost no incidents of 
counterfeit or substandard drugs coming into the United States, 
and that the real problem--and it is an enormous problem--was 
in overseas markets, particularly in Africa, which are really 
plagued by an incredibly high prevalence of counterfeit drugs, 
and that our efforts would be focused on trying to get more aid 
to those countries. And that is something that has happened, 
and we have increased the amount of the State Department budget 
for aid on those issues.
    But what I also found out was that we recently have started 
seeing counterfeit and substandard drugs come into the United 
States--come to U.S. citizens--because of these fake 
pharmacies, which are pharmacies in no sense of the word. So we 
have worked very aggressively to try to combat those fake 
online pharmacies in a number of ways, which I am happy to talk 
about.
    But I think, you know, to your question on economic impact, 
I think at least in the United States, given the levels we have 
seen, this is not an issue that I think is having, at least in 
terms of the U.S. market, a major economic impact on the 
pharmaceutical industries. What I think is happening, though, 
is that you have counterfeit drugs going to U.S. citizens. And 
even one instance of that happening is too much because of the 
health and safety risks that they pose.
    In terms of reputational harm to the industry, that again 
is something that obviously we would like to avoid. But at 
bottom, our real concern, the real thing that is driving this, 
is the level of concern of having fake drugs coming into the 
United States, coming to our citizens, and the risk that that 
pose to people that are taking them unknowingly.
    Mr. Watt. I also alluded to in my opening statement this 
question about what impact all of this litigation is having. I 
take it that to really be effective internationally, we need 
all hands on board, including the private sector. And one of 
the concerns a number of people have expressed is that these 
internal disputes, legal disputes, may be undermining the 
willingness and aggressiveness of private sector participants 
in supporting aggressive efforts internationally to protect 
somebody else's patent and intellectual property.
    Can you give us some assurance that you are getting full 
cooperation from our private sector participants in protecting 
not only their own intellectual property, but protecting the 
intellectual property of other U.S. companies?
    Ms. Espinel. So I heard that in your statement, and I 
thought it was interesting. So I will say two different things. 
One is in terms of the domestic situation, I am probably not 
the person best suited to speak to the domestic litigation that 
is going on. But I will say that we heard a lot when we asked 
people for input for the next strategy. We heard a lot about 
escalating litigation costs in the United States, and of course 
we want to have a patent system here that is working as 
efficiently as possible. And Director Kappos and others are 
trying to make sure that happens through implementation of the 
American Invents Act.
    In terms of cooperation with other companies, I would say I 
think by and large we have had good cooperation with companies. 
We have tried to have an approach that is very inclusive and 
has as much input as possible from a whole range of companies.
    And so what I have seen over the last couple of years is a 
real increase in cooperation. Now is it--there are clearly 
areas where I feel like we could have more cooperation, we 
could have more effective cooperation. So I guess I would say I 
feel like there is a positive increasing trend, but we are by 
no means there.
    Mr. Watt. Finally, in a report to Congress in October, 
there was a suggestion that U.S. technologies and trade secrets 
face heightened vulnerability to theft in cyberspace. Do you 
have any recommendations on how we should confront those 
increasing risks, or do you recognize that that is an 
increasing risk as the report seems to suggest?
    Ms. Espinel. I think trade secret theft is definitely an 
increasing risk, whether it happens through cyber or not 
through cyber. And cyber itself I think is also an increasing 
risk, and our concern about increased risk is why, as I 
mentioned before, we are working on developing the strategy to 
try to make sure that we as a government are pulled together in 
as coordinated and as forceful as possible as we can be on that 
issue because, yes, we see it as an increasing concern.
    Mr. Watt. Okay, Mr. Chairman, I think I will yield back.
    Mr. Coble. I thank the gentleman. I am told the gentleman 
from Pennsylvania has no questions. Is that accurate?
    Mr. Marino. That is accurate. I just apologize. I am trying 
to get to several Committee hearings today.
    Mr. Coble. I, too, was late as well, so you will not be 
punished.
    Mr. Marino. And I apologize to Ms. Espinel. I am very sorry 
that I was not here earlier.
    Mr. Coble. Well, I want to thank the witness for her 
testimony today. Good to have you with us.
    Without objection, all Members will have 5 legislative days 
to submit to the Chair additional written questions for the 
witness, which we will forward and ask the witness to respond 
as promptly as she can so that their answers may be made a part 
of the record.
    Without objection, all Members will have 5 legislative days 
to submit any additional materials for inclusion in the record.
    With that, again I thank the witness. And this hearing is 
adjourned.
    [Whereupon, at 3:16 p.m., the Subcommittee was adjourned.]
                            A P P E N D I X

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               Material Submitted for the Hearing Record

  Response to Questions for the Record from Victoria A. Espinel, U.S. 
Intellectual Property Enforcement Coordinator, Office of Management and 
               Budget, Executive Office of the President


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