[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]
INTERNATIONAL IP ENFORCEMENT:
OPENING MARKETS ABROAD AND
PROTECTING INNOVATION
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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
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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
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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
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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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