Intellectual Property: U.S. Efforts have Contributed to 	 
Strengthened Laws Overseas, but Significant Enforcement 	 
Challenges Remain (14-JUN-05, GAO-05-788T).			 
                                                                 
Although the U.S. government provides broad protection for	 
intellectual property domestically, intellectual property	 
protection in parts of the world is inadequate. As a result, U.S.
goods are subject to piracy and counterfeiting in many countries.
A number of U.S. agencies are engaged in efforts to improve	 
protection of U.S. intellectual property abroad. This testimony, 
based on a prior GAO report as well as recent work, describes	 
U.S. agencies' efforts, the mechanisms used to coordinate these  
efforts, and the impact of these efforts and the challenges they 
face.								 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-05-788T					        
    ACCNO:   A26577						        
  TITLE:     Intellectual Property: U.S. Efforts have Contributed to  
Strengthened Laws Overseas, but Significant Enforcement 	 
Challenges Remain						 
     DATE:   06/14/2005 
  SUBJECT:   Copyrights 					 
	     Federal agencies					 
	     Foreign trade policies				 
	     Intellectual property				 
	     Interagency relations				 
	     International law					 
	     International relations				 
	     International trade				 
	     International trade regulation			 
	     Law enforcement					 
	     Patents						 
	     Trademarks 					 
	     Foreign governments				 
	     Property rights					 
	     Forgery						 
	     Counterfeiting					 

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GAO-05-788T

United States Government Accountability Office

GAO Testimony

Before the Committee on Homeland Security and Government Affairs,
Subcommittee on Oversight of Government Management, the Federal Workforce,
and the District of Columbia, United States Senate

For Release on Delivery

Expected at 10:00 a.m. EDT INTELLECTUAL

Tuesday, June 14, 2005

PROPERTY

  U.S. Efforts have Contributed to Strengthened Laws Overseas, but Significant
                         Enforcement Challenges Remain

Statement of Loren Yager, Director International Affairs and Trade

GAO-05-788T

[IMG]

June 14, 2005

INTELLECTUAL PROPERTY

U.S. Efforts Have Contributed to Strengthened Laws Overseas, but Significant
Enforcement Challenges Remain

                                 What GAO Found

U.S. agencies undertake policy initiatives, training and assistance
activities, and law enforcement actions in an effort to improve protection
of U.S. intellectual property abroad. Policy initiatives include
identifying countries with the most significant problems-an annual
interagency process known as the "Special 301" review. In addition, many
agencies engage in assistance activities, such as providing training for
foreign officials. Finally, a small number of agencies carry out law
enforcement actions, such as criminal investigations and seizures of
counterfeit merchandise.

Agencies use several mechanisms to coordinate their efforts, although the
mechanisms' usefulness varies. The National Intellectual Property Law
Enforcement Coordination Council, established in 1999 to coordinate
domestic and international intellectual property law enforcement, has
struggled to find a clear mission, has undertaken few activities, and is
generally viewed as having little impact despite recent congressional
action to strengthen the council. The Congress's action included
establishing the role of Coordinator, but the position has not yet been
filled (although the selection process is underway). The Administration's
October 2004 Strategy Targeting Organized Piracy (STOP!) is intended to
strengthen U.S. efforts to combat piracy and counterfeiting. Thus far, the
initiative has resulted in some new actions and emphasized other ongoing
efforts.

U.S. efforts have contributed to strengthened intellectual property
legislation overseas, but enforcement in many countries remains weak, and
further U.S. efforts face significant challenges. For example, competing
U.S. policy objectives such as national security interests take precedence
over protecting intellectual property in certain regions. Further, other
countries' domestic policy objectives can affect their "political will" to
address U.S. concerns. Finally, many economic factors, as well as the
involvement of organized crime, hinder U.S. and foreign governments'
efforts to protect U.S. intellectual property abroad.

                  Pirated DVDs from Brazil, China, and Ukraine

Source: GAO.

                 United States Government Accountability Office

Mr. Chairman and Members of the Subcommittee:

Thank you for the opportunity to discuss our work on U.S. efforts to
protect U.S. intellectual property rights (IPR) overseas. As you know, the
United States dominates the creation and export of intellectual property-
creations of the mind. The U.S. government provides broad protection for
intellectual property through means such as copyrights, patents, and
trademarks. However, protection of intellectual property in many parts of
the world is inadequate. As a result, U.S. goods are subject to
substantial counterfeiting and piracy in many countries.

The U.S. government, through numerous agencies, is seeking better
intellectual property protection overseas. To understand more fully how
U.S. agencies have performed in this regard, we have examined several
issues. This testimony addresses (1) the specific efforts of U.S. agencies
to improve intellectual property protection in other nations, (2) the
means used to coordinate these efforts, and (3) challenges facing
enforcement efforts abroad. In addition, this testimony, based on our
September 2004 report addressing these topics,1 provides an update on key
IPR-related events since that time-an administration initiative referred
to as the Strategy Targeting Organized Piracy, or STOP!; a report prepared
by a Department of Justice intellectual property task force,2 and
congressional action concerning an interagency intellectual property law
enforcement council.

To address these issues, we analyzed key U.S. government reports and
documents from eight federal agencies and two offices. In addition to
meeting with federal officials, we met with officials from key
intellectual property industry groups and reviewed reports they had
prepared. We also conducted field work in four countries where serious
problems regarding the protection of intellectual property have been
reported (Brazil, China, Russia, and Ukraine) and met with U.S. embassy
and foreign government officials as well as representatives of U.S.
companies and industry groups operating in those countries. We conducted
this work from June 2003 through July 2004. We subsequently updated our
work in May and June of 2005 by meeting with key government officials and
industry groups

1GAO, Intellectual Property: U.S. Efforts Have Contributed to Strengthened
Laws Overseas, but Challenges Remain, GAO-04-912 (Washington, D.C.: Sept.
8, 2004).

2Report of the Department of Justice's Task Force on Intellectual
Property, Office of the Attorney General, U.S. Department of Justice,
October 2004.

  Summary

involved in recent U.S. government efforts. All work was conducted in
accordance with generally accepted government auditing standards.

U.S. agencies' efforts to improve protection of U.S. intellectual property
in foreign nations fall into three categories-policy initiatives, training
and assistance activities, and law enforcement actions. The Office of the
U.S. Trade Representative (USTR) leads U.S. policy initiatives with an
annual assessment known as the "Special 301" review, which results in an
annual report detailing global intellectual property challenges and
identifying countries with the most significant problems. This report
involves input from many U.S. agencies and industry. In addition to
conducting policy initiatives, most agencies involved in intellectual
property issues overseas also engage in training and assistance
activities. Further, although counterterrorism is the overriding U.S. law
enforcement concern, U.S. agencies such as the Departments of Justice and
Homeland Security conduct law enforcement activities regarding IPR. These
activities have included Justice's creation of an intellectual property
task force in March 2004, which in October 2004 published a report
containing recommendations for, among other things, improving the
department's criminal enforcement, fostering international cooperation,
and preventing intellectual property crime.

Several mechanisms exist to coordinate U.S. agencies' efforts to protect
U.S. intellectual property overseas, although the level of activity and
usefulness of these mechanisms vary. First, the Special 301 process
requires formal interagency meetings as part of the U.S. government's
annual review to identify countries with inadequate IPR protection;
government and industry sources view this effort as effective and
thorough. Second, the National Intellectual Property Law Enforcement
Coordination Council (NIPLECC)3 was established in 1999 to coordinate
domestic and international intellectual property law enforcement among
U.S. federal and foreign entities. However, NIPLECC has struggled to find
a clear mission, has undertaken few activities, and is perceived by
officials from the private sector and some U.S. agencies as having little
impact. In fiscal year 2005 appropriations legislation, Congress
established a Coordinator for International Intellectual Property
Enforcement to head NIPLECC, but the position remains unfilled (although a
selection process

3NIPLECC was mandated under Section 653 of the Treasury and General
Government Appropriations Act, 2000, Public Law 106-58 (15 U.S.C. 1128).

is underway). Third, the most recent interagency coordination effort-the
Strategy Targeting Organized Piracy, or STOP!, announced in October
2004-represents the administration's increased focus on IPR enforcement
and is intended to strengthen U.S. government and industry efforts to
combat piracy and counterfeiting. The initiative includes some new
actions, such as the establishment of a hotline that businesses can use to
report IPR problems to the U.S. government, and also emphasizes numerous
preexisting efforts. U.S. government officials told us that the STOP! has
strengthened interagency coordination in addressing IPR issues.

U.S. efforts have contributed to strengthened foreign IPR laws, but
enforcement overseas remains weak and U.S. efforts face numerous
challenges. Competing U.S. policy objectives may take priority over
protecting intellectual property in certain countries. In addition, the
impact of U.S. activities overseas is affected by countries' domestic
policy objectives, which may complement or conflict with U.S. objectives.
Further, economic factors, as well as the involvement of organized crime,
pose additional challenges to U.S. and foreign governments' enforcement
efforts, even in countries where the political will for protecting
intellectual property exists. These economic factors include low barriers
to producing counterfeit or pirated goods, potential high profits for
producers of such goods, and large price differentials between legitimate
and counterfeit products for consumers.

Intellectual property is an important component of the U.S. economy, and
the United States is an acknowledged global leader in the creation of
intellectual property. However, industries estimate that annual losses
stemming from violations of intellectual property rights overseas are
substantial. Further, counterfeiting of products such as pharmaceuticals
and food items fuels public health and safety concerns. USTR's Special 301
reports on the adequacy and effectiveness of intellectual property
protection around the world demonstrate that, from a U.S. perspective,
intellectual property protection is weak in developed as well as
developing countries and that the willingness of countries to address
intellectual property issues varies greatly.

Eight federal agencies, as well as the Federal Bureau of Investigation
(FBI) and the U.S. Patent and Trademark Office (USPTO), undertake the
primary U.S. government activities to protect and enforce U.S.
intellectual property rights overseas. The agencies are the Departments of
Commerce, State, Justice, and Homeland Security; USTR; the Copyright
Office; the

  Background

U.S. Agency for International Development (USAID); and the U.S.
International Trade Commission.4

The efforts of U.S. agencies to protect U.S. intellectual property
overseas fall into three general categories-policy initiatives, training
and technical assistance, and U.S. law enforcement actions.

  U.S. Agencies Undertake Three Types of IPR Efforts

                               Policy Initiatives

U.S. policy initiatives to increase intellectual property protection
around the world are primarily led by USTR, in coordination with the
Departments of State and Commerce, USPTO, and the Copyright Office, among
other agencies. A centerpiece of policy activities is the annual Special
301 process.5 "Special 301" refers to certain provisions of the Trade Act
of 1974, as amended, that require USTR to annually identify foreign
countries that deny adequate and effective protection of intellectual
property rights or fair and equitable market access for U.S. persons who
rely on intellectual property protection. USTR identifies these countries
with substantial assistance from industry and U.S. agencies and publishes
the results of its reviews in an annual report. Once a pool of such
countries has been determined, the USTR, in coordination with other
agencies, is required to decide which, if any, of these countries should
be designated as a Priority Foreign Country (PFC).6 If a trading partner
is identified as a PFC, USTR must decide within 30 days whether to
initiate an investigation of those acts, policies, and practices that were
the basis for identifying the country as a PFC. Such an investigation can
lead to actions such as negotiating separate intellectual property
understandings or agreements between the United States and the PFC or
implementing trade sanctions against the PFC if no satisfactory outcome is
reached.

4Although the FBI is part of the Department of Justice and the USPTO is
part of the Department of Commerce, their roles will be discussed
separately because of their distinct responsibilities.

5Other policy actions include: use of trade preference programs for
developing countries that require IPR protection, such as the Generalized
System of Preferences; negotiation of agreements that address intellectual
property; participation in international organizations that address IPR
issues; and, diplomatic efforts with foreign governments.

6PFCs are those countries that (1) have the most onerous and egregious
acts, policies, and practices with the greatest adverse impact (actual or
potential) on the relevant U.S. products and (2) are not engaged in
good-faith negotiations or making significant progress in negotiations to
address these problems.

Between 1994 and 2005, the U.S. government designated three countries as
PFCs-China, Paraguay, and Ukraine-as a result of intellectual property
reviews. The U.S. government negotiated separate bilateral intellectual
property agreements with China and Paraguay to address IPR problems. These
agreements are subject to annual monitoring, with progress cited in each
year's Special 301 report. Ukraine, where optical media piracy was
prevalent, was designated a PFC in 2001. The United States and Ukraine
found no mutual solution to the IPR problems, and in January 2002, the
U.S. government imposed trade sanctions in the form of prohibitive tariffs
(100 percent) aimed at stopping $75 million worth of certain imports from
Ukraine over time.

In conjunction with the release of its 2005 Special 301 report, USTR
announced the results of a detailed review examining China's intellectual
property regime. This review concluded that infringement levels remain
unacceptably high throughout China, despite the country's efforts to
reduce them. The U.S. government identified several actions it intends to
take, including working with U.S. industry with an eye toward utilizing
World Trade Organization (WTO) procedures to bring China into compliance
with its WTO intellectual property obligations (particularly those
relating to transparency and criminal enforcement) and securing new,
specific commitments concerning actions China will take to improve IPR
protection and enforcement.

By virtue of membership in the WTO, the United States and other countries
commit themselves not to take WTO-inconsistent unilateral action against
possible trade violations involving IPR protections covered by the WTO but
to instead seek recourse under the WTO's dispute settlement system and its
rules and procedures. This may impact any U.S. government decision
regarding whether to retaliate against WTO members unilaterally with
sanctions under the Special 301 process when those countries' IPR problems
are viewed as serious. The United States has brought a total of 12 IPR
cases to the WTO for resolution, but has not brought any since 2000
(although the United States initiated a WTO

dispute panel for one of these cases in 2003).7 A senior USTR official
emphasized that this is due to the effectiveness of tools such as the
Special 301 process in encouraging WTO members to bring their laws into
compliance with WTO intellectual property rules.

Training and Technical Assistance

In addition, most of the agencies involved in efforts to promote or
protect IPR overseas engage in some training or technical assistance
activities. Key activities to develop and promote enhanced IPR protection
in foreign countries are undertaken by the Departments of Commerce,
Homeland Security, Justice, and State; the FBI; USPTO; the Copyright
Office; and USAID. Training events sponsored by U.S. agencies to promote
the enforcement of intellectual property rights have included enforcement
programs for foreign police and customs officials, workshops on legal
reform, and joint government-industry events. According to a State
Department official, U.S. government agencies have conducted intellectual
property training for a number of countries concerning bilateral and
multilateral intellectual property commitments, including enforcement,
during the past few years. For example, intellectual property training has
been conducted by numerous agencies in Poland, China, Morocco, Italy,
Jordan, Turkey, and Mexico.

U.S. Law Enforcement Efforts

A small number of agencies are involved in enforcing U.S. intellectual
property laws, and the nature of these activities differs from other U.S.
government actions related to intellectual property protection. Working in
an environment where counterterrorism is the central priority, the FBI and
the Departments of Justice and Homeland Security take a variety of actions
that include engaging in multicountry investigations involving
intellectual property violations and seizing goods that violate
intellectual property rights at U.S. ports of entry.

7Of these 12 cases, 8 were fully resolved, and one was substantially
resolved before going through the entire dispute settlement process by
mutually agreed solutions between the parties-the preferred outcome,
according to a USTR official. Another 3 cases resulted in the issuance of
a final WTO decision, or panel report, and all of these cases concluded
with favorable rulings for the United States, according to USTR. (One of
these 3 cases--involving a dispute with the European Community regarding
geographical indications--began with a request for consultations in 1999,
for which a new expanded request was filed in 2003 and the case was
brought before a WTO panel the same year.) In the substantially resolved
dispute, involving Argentina, consultations continue with respect to
certain issues.

o  The Department of Justice has an office that directly addresses

international IPR problems.8 Further, Justice has been involved with
international investigation and prosecution efforts and, according to a
Justice official, has become more aggressive in recent years. For
instance, Justice and the FBI coordinated an undercover IPR investigation,
with the involvement of several foreign law enforcement agencies. The
investigation focused on individuals and organizations, known as "warez"
release groups, which specialize in the Internet distribution of pirated
materials. In April 2004, these investigations resulted in 120
simultaneous searches worldwide (80 in the United States) by law
enforcement entities from 10 foreign countries9 and the United States in
an effort known as

"Operation Fastlink."

o  	In addition, in March 2004, the Department of Justice created an
intellectual property task force to examine all of Justice's intellectual
property enforcement efforts and explore methods for the department to
strengthen its protection of IPR. A report issued by the task force in
October 2004 provided recommendations for improvements in criminal
enforcement, international cooperation, civil and antitrust enforcement,
legislation, and prevention of intellectual property crime. Some of these
recommendations have been implemented, while others have not. For example,
Justice has implemented a recommendation to create five additional
Computer Hacking and Intellectual Property (CHIP) units to prosecute IPR
crimes.10 Additionally, Justice has designated a CHIP coordinator in every
U.S. Attorney's office in the country, thereby implementing a report
recommendation that such action be taken. However, an FBI official told us
the FBI has not been able to implement recommendations such as posting
additional personnel to the U.S. consulate in Hong Kong and the U.S.
embassy in Budapest, Hungary for budgetary reasons; Justice has not yet
implemented a similar recommendation to deploy federal prosecutors to
these same regions and designate them as Intellectual Property Law
Enforcement Coordinators.

8The Computer Crime and Intellectual Property Section (CCIPS) addresses
intellectual property issues (copyright, trademark, and trade secrets)
within the Department of Justice's Criminal Division. In April 2004, CCIPS
appointed an International Coordinator for Intellectual Property.

9These foreign countries were Belgium, Denmark, France, Germany, Hungary,
Israel, the Netherlands, Singapore, Sweden, and Great Britain and Northern
Ireland. According to a Justice official, law enforcement officials in
Spain subsequently took action against related targets in that country.

10These CHIP units have been added in the District of Columbia;
Sacramento, CA; Pittsburgh, PA; Nashville, TN; and Orlando, FL.

Fully implementing some of the report's recommendations will require a
sustained, long-term effort by Justice. For example, to address a
recommendation to develop a national education program to prevent
intellectual property crime, Justice held two day-long events in
Washington, D.C. and Los Angeles with high school students listening to
creative artists, victim representatives, the Attorney General, and a
convicted intellectual property offender, among others, about the harm
caused by intellectual property piracy. The events were filmed by Court TV
and produced into a 30 minute show aired on cable television. Further, to
enhance intellectual property training programs for foreign prosecutors
and law enforcement officials, as recommended in the report, Justice
worked with the Mexican government to provide a three-day seminar for
intellectual property prosecutors and customs officials in December 2004.
Such actions are initial efforts to address recommendations that can be
further implemented over time.

o  	The Department of Homeland Security (DHS) tracks seizures of goods
that violate IPR and reports seizures that totaled almost $140 million
resulting from over 7,200 seizures in fiscal year 2004. In fiscal year
2004, goods from China (including Hong Kong) accounted for almost 70
percent of the value of all IPR seizures, many of which were shipments of
cigarettes and apparel.11 Other seized goods were shipped from, among
other places, Russia and South Africa.12 A DHS official pointed out that
providing

protection against IPR-infringing imported goods for some U.S.
companies-particularly entertainment companies-can be difficult, because
companies often fail to record their trademarks and copyrights with DHS.
DHS and Commerce officials told us that they believe this situation could
be ameliorated if, contrary to current practice, companies could
simultaneously have their trademarks and copyrights recorded with DHS when
they are provided their intellectual property right by USPTO or the
Copyright Office.

11For information on cigarette smuggling, see GAO, Cigarette Smuggling:
Federal Law Enforcement Efforts and Seizures Increasing, GAO-04-641
(Washington, D.C.: May 28, 2004).

12One additional area of note regarding counterfeit seizures involves
pharmaceutical

products. DHS, in cooperation with the Department of Health and Human
Services' Food

and Drug Administration, conducts "blitz" exams in an effort to target,
identify, and stop

counterfeit and potentially unsafe prescription drugs from entering the
United States from

foreign countries via mail and common carriers. Such efforts have been
undertaken in the

past in locations such as Florida, New York, and California and have
identified, in some

instances, drugs that appeared to be counterfeit. For more information on
federal efforts

regarding prescription drugs imports, see GAO, Prescription Drugs:
Preliminary

Observations on Efforts to Enforce the Prohibitions on Personal
Importation,

GAO-04-839T (Washington, D.C.: July 22, 2004).

o  	To identify shipments of IPR-infringing merchandise and prevent their
entry into the United States, DHS is developing an IPR risk-assessment
computer model. The model uses weighted criteria to assign risk scores to
individual imports. The methodology is based on both historical risk-based
trade data and qualitative rankings. The historical data are comprised of
seizure information and cargo examination results, while qualitative
rankings are based on information such as whether a shipment is arriving
from a high-risk country identified by USTR's annual Special 301 report.
According to DHS officials, the model has been piloted, and several issues
have been identified which must be addressed before it is fully
implemented.

o  	DHS officials also told us that problems in identifying and seizing
IPRinfringing goods frequently arise where the department's in-bond system
is involved. The in-bond system allows cargo to be transported from the
original U.S. port of arrival (such as Los Angeles) to another U.S. port
(such as Cleveland) for formal entry into U.S. commerce or for export to a
foreign country. We previously reported that weak internal controls in
this system enable cargo to be illegally diverted from the supposed
destination.13 The tracking of in-bond cargo is hindered by a lack of

automation for tracking in-bond cargo, inconsistencies in targeting and
examining cargo, in-bond practices that allow shipments' destinations to
be changed without notifying DHS and extensive time intervals to reach
their final destination, and inadequate verification of exports to Mexico.
DHS inspectors we spoke with during the course of our previous work cited
in-bond cargo as a high-risk category of shipment because it is the least
inspected and in-bond shipments have been increasing. We made
recommendations to DHS regarding ways to improve monitoring of inbond
cargo. USTR's 2005 Special 301 report identifies customs operations as a
growing problem in combating IPR problems in foreign countries such as
Ukraine, Canada, Belize, and Thailand.

  Several Mechanisms Coordinate IPR Efforts, but Their Usefulness Varies

Several interagency mechanisms exist to coordinate overseas law
enforcement efforts, intellectual property policy initiatives, and
development and assistance activities, although these mechanisms' level of
activity and usefulness vary.

13 GAO, International Trade: U.S. Customs and Border Protection Faces
Challenges in Addressing Illegal Textile Transshipment, GAO-04-345
(Washington, D.C.: Jan. 23, 2004).

Formal Interagency Coordination on Trade Policy

According to government and industry officials, an interagency trade
policy mechanism established by the Congress in 1962 to assist USTR has
operated effectively in reviewing IPR issues. The mechanism, which
consists of tiers of committees as well as numerous subcommittees,
constitutes the principle means for developing and coordinating U.S.
government positions on international trade, including IPR. A specialized
subcommittee is central to conducting the Special 301 review and
determining the results of the review.

This interagency process is rigorous and effective, according to U.S.
government and industry officials. A Commerce official told us that the
Special 301 review is one of the best tools for interagency coordination
in the government, while a Copyright Office official noted that
coordination during the review is frequent and effective. A representative
for copyright industries also told us that the process works well and is a
solid interagency effort.

National Intellectual Property Law Enforcement Coordination Council
(NIPLECC)

NIPLECC, created by the Congress in 1999 to coordinate domestic and
international intellectual property law enforcement among U.S. federal and
foreign entities, seems to have had little impact. NIPLECC consists of (1)
the Under Secretary of Commerce for Intellectual Property and Director of
the United States Patent and Trademark Office; (2) the Assistant Attorney
General, Criminal Division; (3) the Under Secretary of State for Economic
and Agricultural Affairs; (4) the Deputy United States Trade
Representative; (5) the Commissioner of Customs; and (6) the Under
Secretary of Commerce for International Trade.14 NIPLECC's authorizing
legislation did not include the FBI as a member of NIPLECC, despite its
pivotal role in law enforcement. However, according to representatives of
the FBI, USPTO, and Justice, the FBI should be a member. USPTO and Justice
cochair NIPLECC, which has no staff of its own. In the council's several
years of existence, its primary output has been three annual reports to
the Congress, which are required by statute. (NIPLECC's 2004 report has
been drafted but is not yet available.)

According to interviews with industry officials and officials from its
member agencies, and as evidenced by its own reports, NIPLECC has
struggled to define its purpose and has had little discernable impact.

14NIPLECC is also required to consult with the Register of Copyrights on
law enforcement matters relating to copyright and related rights and
matters.

Indeed, officials from more than half of the member agencies offered
criticisms of NIPLECC, remarking that it is unfocused, ineffective, and
"unwieldy." In official comments to the council's 2003 annual report,
major IPR industry associations expressed a sense that NIPLECC is not
undertaking any independent activities or effecting any impact. One
industry association representative stated that law enforcement needs to
be made more central to U.S. IPR efforts and said that although he
believes the council was created to deal with this issue, it has "totally
failed." The lack of communication regarding enforcement results in part
from complications such as concerns regarding the sharing of sensitive law
enforcement information and from the different missions of the various
agencies involved in intellectual property actions overseas. According to
a USTR official, NIPLECC needs to define a clear role in coordinating
government policy. A Justice official stressed that, when considering
coordination, it is important to avoid creating an additional layer of
bureaucracy that may detract from efforts devoted to each agency's primary
mission.

According to an official from USPTO, NIPLECC has been hampered primarily
by its lack of its own staff and funding. In our September 2004 report, we
noted that "If the Congress wishes to maintain NIPLECC and take action to
increase its effectiveness, the Congress may wish to consider reviewing
the council's authority, operating structure, membership, and mission." In
the Consolidated Appropriations Act, 2005, the Congress provided $2
million for NIPLECC expenses, to remain available through fiscal year
2006.15 The act addressed international elements of the council and
created the position of the Coordinator for International Intellectual
Property Enforcement, appointed by the President, to head NIPLECC. This
official may not serve in any other position in the federal government,
and the NIPLECC co-chairs, representatives from USPTO and Justice, are to
report to the Coordinator. The law also provides additional direction
regarding NIPLECC's international mission, providing that NIPLECC shall
(1) establish policies, objectives, and priorities concerning
international intellectual property protection and intellectual property
law enforcement; (2) promulgate a strategy for protecting American
intellectual property overseas; and (3) coordinate and oversee
implementation of items (1) and (2) by agencies with responsibilities for
intellectual property protection and intellectual

15The Consolidated Appropriations Act, 2005, Public Law 108-447, Division
B (118 Stat. 2809 at 2872-2873).

property law enforcement. The Coordinator, with the advice of NIPLECC
members, is to develop a budget proposal for each fiscal year to implement
the strategy for protecting American intellectual property overseas and
for NIPLECC operations and may select, appoint, employ, and fix
compensation of such officers and employees as may be necessary to carry
out NIPLECC functions. Personnel from other departments or agencies may be
temporarily reassigned to work for NIPLECC. Agency officials told us that,
as of June 2005, no Coordinator had been named (although a selection
process was underway), the $2 million in NIPLECC funding has not been
spent, and NIPLECC continued to accomplish little.

Strategy Targeting Organized Piracy (STOP!)

In October 2004, USTR and the Departments of Commerce, Justice, and
Homeland Security announced STOP! to fight trade in pirated and
counterfeit goods. Other STOP! participants are the Department of State
and the Department of Health and Human Service's Food and Drug
Administration. STOP!, which is targeted at cross-border trade in tangible
goods and was initiated to strengthen U.S. government and industry
enforcement actions. STOP! has five general objectives:

1. 	Stop pirated and counterfeit goods at the U.S. border. Such efforts
are to be achieved through, for example, the implementation of the DHS IPR
risk model, mentioned above, to better identify and seize infringing goods
at U.S. borders.

2. 	Dismantle criminal enterprises that steal intellectual property.
Justice and DHS are taking measures to maximize their ability to pursue
perpetrators of intellectual property crimes through, for example, the
addition of the 5 new Justice CHIP units mentioned above. Justice and DHS
are also committed under STOP! to work with the Congress to update IPR
legislation.

3. 	Keep counterfeit and pirated goods out of global supply chains.
Commerce is working with industry to develop voluntary guidelines
companies can use to ensure that supply and distribution chains are free
of counterfeits.

4. 	Empower U.S. businesses to secure and enforce their rights at home and
abroad. For example, Commerce is meeting with small and medium enterprises
to inform companies on how to secure and protect their rights in the
global marketplace.

5. 	Reach out to U.S. trading partners to build an international coalition
to block trade in pirated and counterfeit goods. USTR

and State are engaging in multilateral forums, such as the Organization
for Economic Cooperation and Development (OECD) and the Asia-Pacific
Economic Cooperation (APEC), through the introduction of new initiatives
to improve the global intellectual property environment.

Agency officials told us that STOP! has both furthered ongoing agency
activities and facilitated new initiatives. For example, Commerce
officials told us that while they had been working on having the OECD
conduct a study of the extent and impact of counterfeiting and piracy,
STOP! provided additional momentum to succeed in their efforts. They said
that the OECD has now agreed to conduct a comprehensive study on the
extent and effect of international counterfeiting and piracy in tangible
goods, with a study addressing the digital arena to follow. In addition,
in March 2005, Justice announced the continuation of work by its
intellectual property task force, which had been rolled into STOP!.
Regarding new initiatives, USPTO has established a hotline16 for companies
to obtain information on intellectual property rights enforcement and
report problems in other countries. According to USPTO, this hotline has
received 387 calls since it was activated in October 2004. Commerce has
also developed a website17 to provide information and guidance to IPR
holders for registering and protecting their intellectual property rights
in other countries. The most visible new effort undertaken as a part of
STOP! is a coordinated U.S. government outreach to foreign governments. In
April 2005 officials from seven federal agencies traveled to Hong Kong,
Japan, Korea, and Singapore and in June, they traveled to Belgium, France,
Germany, and the United Kingdom. According to USTR officials, the goals of
these trips are to describe U.S. initiatives related to IPR enforcement
and to learn from the activities of "like-minded" trading partners with
IPR concerns and enforcement capacities similar to the United States. DHS
officials reported that their Asian counterparts were interested in the
U.S. development of the IPR risk model to target high-risk imports for
inspection, while a USTR official emphasized that U.S. participants were
impressed by a public awareness campaign implemented in Hong Kong.

Officials involved in STOP! told us that one key goal of the initiative is
to improve interagency coordination. Agency officials told us that to
achieve

161-866-999-HALT.

17

www.stopfakes.gov. According to Commerce, between November 2004 and May
2005, there were almost 70,000 visits to this website.

this goal, staff-level meetings have been held monthly and senior
officials have met about every 6 weeks. Agency officials also told us that
as an Administration initiative with high-level political support, STOP!
has energized agencies' enforcement efforts and strengthened interagency
efforts. A USPTO official explained that STOP! has laid the groundwork for
future progress and continued interagency collaboration. Agency officials
noted that STOP! goals and membership overlap with those of NIPLECC, and
remarked that STOP! could possibly be integrated into NIPLECC at some
future date. In May 2005, a NIPLECC meeting was held to address
coordination between STOP! and NIPLECC. According to a Justice official,
once an International Intellectual Property Enforcement Coordinator is
appointed, there may be an opportunity to continue the momentum that STOP!
has provided in the context of NIPLECC activities.

One private sector representative we met with said that although U.S.
industry has worked closely with agencies to achieve the goals of STOP!,
he is frustrated with the lack of clear progress in many areas. For
instance, he said that the administration has neither supported any
pending legislation to improve intellectual property rights protection,
nor proposed such legislation. He added that agencies need to do more to
integrate their systems, noting the situation where companies must
currently receive a trademark or copyright from USPTO or the Copyright
Office, and then separately record that right with DHS. Another industry
representative noted that STOP! has been announced with great fanfare, but
that progress has been sparse. However, he noted that industry supports
this administration effort and is working collaboratively with the federal
agencies to improve IPR protection. Another industry official cited issues
of concern such as insufficient enforcement resources "on the ground"
(particularly at DHS).

Other Coordination Mechanisms

Other coordination mechanisms include the National International Property
Rights Coordination Center (IPR Center) and informal coordination.18 The
IPR Center in Washington, D.C., a joint effort between DHS and the FBI,
began limited operations in 2000. According to a DHS official, the
potential for coordination between DHS, the FBI, and industry and trade
associations makes the IPR Center unique. The IPR Center is

18Another coordination mechanism is the IPR Training Coordination Group,
led by the State Department. This voluntary, working-level group comprises
representatives of U.S. agencies and industry associations involved in IPR
programs and training and technical assistance efforts overseas or for
foreign officials.

intended to serve as a focal point for the collection of intelligence
involving copyright and trademark infringement, signal theft, and theft of
trade secrets. However, the center is not widely used by industry. For
example, an FBI official told us that from January 2004 through May 2005,
the FBI has received only 10 referrals to its field offices from the IPR
Center. Further, the number of FBI and DHS staff on board at the center
has decreased recently and currently stands at 10 employees (down from 20
in July 2004), with no FBI agents currently working there and fewer DHS
agents than authorized. However, IPR Center officials emphasized one
recent, important case that was initiated by the center. DHS, in
conjunction with the Chinese government and with the assistance of the
intellectual property industry, conducted the first ever joint
U.S.-Chinese enforcement action on the Chinese mainland, disrupting a
network that distributed counterfeit motion pictures worldwide. More than
210,000 counterfeit motion picture DVDs were seized, and in 2005, four
individuals (two Chinese and two Americans) were convicted in China.

Policy agency officials noted the importance of informal but regular
communication among staff at the various agencies involved in the
promotion or protection of intellectual property overseas. Several
officials at various policy-oriented agencies, such as USTR and the
Department of Commerce, noted that the intellectual property community was
small and that all involved were very familiar with the relevant policy
officials at other agencies in Washington, D.C. Further, State Department
officials at U.S. embassies regularly communicate with agencies in
Washington, D.C., regarding IPR matters and U.S. government actions.
Agency officials noted that this type of coordination is central to
pursuing U.S. intellectual property goals overseas.

Although communication between policy and law enforcement agencies can
occur through forums such as the NIPLECC, these agencies do not
systematically share specific information about law enforcement
activities. According to an FBI official, once a criminal investigation
begins, case information stays within the law enforcement agencies and is
not shared. 19 A Justice official emphasized that criminal law enforcement
is fundamentally different from the activities of policy agencies and that

19Further, a DHS official noted that the Trade Secrets Act (18 USC 1905)
precludes sharing information about specific imports, even where there is
criminal activity. The Trade Secrets Act makes it a criminal offense for
an employee of the United States, or one of its agencies, to disclose
trade secrets and certain other forms of confidential commercial and
financial information except where such disclosure is "authorized by law."

  Enforcement Overseas Remains Weak and Challenges Remain

restrictions exist on Justice's ability to share investigative
information, even with other U.S. agencies.

U.S. efforts such as the annual Special 301 review have contributed to
strengthened foreign IPR laws, but enforcement overseas remains weak. The
impact of U.S. activities is challenged by numerous factors. Industry
representatives report that the situation may be worsening overall for
some intellectual property sectors.

Weak Enforcement Overseas

The efforts of U.S. agencies have contributed to the establishment of
strengthened intellectual property legislation in many foreign countries,
however, the enforcement of intellectual property rights remains weak in
many countries, and U.S. government and industry sources note that
improving enforcement overseas is now a key priority. A recent USTR
Special 301 report states that "although several countries have taken
positive steps to improve their IPR regimes, the lack of IPR protection
and enforcement continues to be a global problem." For example, although
the Chinese government has improved its statutory IPR regime, USTR remains
concerned about enforcement in that country. According to USTR,
counterfeiting and piracy remain rampant in China and increasing amounts
of counterfeit and pirated products are being exported from China. In
addition, although Ukraine has shut down offending domestic optical media
production facilities, pirated products continue to pervade Ukraine, and,
according to USTR's 2004 Special 301 Report, Ukraine is also a major
trans-shipment point and storage location for illegal optical media
produced in Russia and elsewhere as a result of weak border enforcement
efforts.

Although U.S. law enforcement does undertake international cooperative
activities to enforce intellectual property rights overseas, executing
these efforts can prove difficult. For example, according to DHS and
Justice officials, U.S. efforts to investigate IPR violations overseas are
complicated by a lack of jurisdiction as well as by the fact that U.S.
officials must convince foreign officials to take action. Further, a DHS
official noted that in some cases, activities defined as criminal in the
United States are not viewed as an infringement by other countries and
that U.S. law enforcement agencies can therefore do nothing.

Challenges to U.S. Efforts

In addition, U.S. efforts confront numerous challenges. Because
intellectual property protection is one of many U.S. government objectives
pursued overseas, it is viewed internally in the context of broader U.S.
foreign policy objectives that may receive higher priority at certain
times in certain countries. Industry officials with whom we met noted, for
example, their belief that policy priorities related to national security
were limiting the extent to which the United States undertook activities
or applied diplomatic pressure related to IPR issues in some countries.
Further, the impact of U.S. activities is affected by a country's own
domestic policy objectives and economic interests, which may complement or
conflict with U.S. objectives. U.S. efforts are more likely to be
effective in encouraging government action or achieving impact in a
foreign country where support for intellectual property protection exists.
It is difficult for the U.S. government to achieve impact in locations
where foreign governments lack the "political will" to enact IPR
protections.

Many economic factors complicate and challenge U.S. and foreign
governments' efforts, even in countries with the political will to protect
intellectual property. These factors include low barriers to entering the
counterfeiting and piracy business and potentially high profits for
producers. In addition, the low prices of counterfeit products are
attractive to consumers. The economic incentives can be especially acute
in countries where people have limited income. Technological advances
allowing for high-quality inexpensive and accessible reproduction and
distribution in some industries have exacerbated the problem. Moreover,
many government and industry officials believe that the chances of getting
caught for counterfeiting and piracy, as well as the penalties when
caught, are too low. The increasing involvement of organized crime in the
production and distribution of pirated products further complicates
enforcement efforts. Federal and foreign law enforcement officials have
linked intellectual property crime to national and transnational organized
criminal operations. Further, like other criminals, terrorists can trade
any commodity in an illegal fashion, as evidenced by their reported
involvement in trading a variety of counterfeit and other goods.20

Many of these challenges are evident in the optical media industry, which
includes music, movies, software, and games. Even in countries where
interests exist to protect domestic industries, such as the domestic music

20See GAO, Terrorist Financing: U.S. Agencies Should Systematically Assess
Terrorists' Use of Alternative Financing Mechanisms, GAO-04-163
(Washington, D.C.: Nov. 14, 2003).

industry in Brazil or the domestic movie industry in China, economic and
law enforcement challenges can be difficult to overcome. For example, the
cost of reproduction technology and copying digital media is low, making
piracy an attractive employment opportunity, especially in a country where
formal employment is hard to obtain. The huge price differentials between
pirated CDs and legitimate copies also create incentives on the consumer
side. For example, when we visited a market in Brazil, we observed that
the price for a legitimate DVD was approximately ten times the price for a
pirated DVD. Even if consumers are willing to pay extra to purchase the
legitimate product, they may not do so if the price differences are too
great for similar products. Further, the potentially high profit makes
optical media piracy an attractive venture for organized criminal groups.
Industry and government officials have noted criminal involvement in
optical media piracy and the resulting law enforcement challenges. Recent
technological advances have also exacerbated optical media piracy. The
mobility of the equipment makes it easy to transport it to another
location, further complicating enforcement efforts. Likewise, the Internet
provides a means to transmit and sell illegal software or music on a
global scale. According to an industry representative, the ability of
Internet pirates to hide their identities or operate from remote
jurisdictions often makes it difficult for IPR holders to find them and
hold them accountable.

                               Industry Concerns

Despite improvements such as strengthened foreign IPR legislation,
international IPR protection may be worsening overall for some
intellectual property sectors. For example, according to copyright
industry estimates, losses due to piracy grew markedly in recent years.
The entertainment and business software sectors, for example, which are
very supportive of USTR and other agencies, face an environment in which
their optical media products are increasingly easy to reproduce, and
digitized products can be distributed around the world quickly and easily
via the Internet. According to an intellectual property association
representative, counterfeiting trademarks has also become more pervasive
in recent years. Counterfeiting affects more than just luxury goods; it
also affects various industrial goods. An industry representative noted
that U.S. manufacturers of all sizes are now being adversely affected by
counterfeit imports.

An industry representative also added that there is a need for additional
enforcement activity by the U.S. government at the border. However, he
recognized that limited resources and other significant priorities for DHS

Conclusions

Contacts and Acknowledgments

(320358)

heighten the need to use existing resources more effectively to interdict
more counterfeit and pirated goods.

The U.S. government has demonstrated a commitment to addressing IPR issues
in foreign countries using multiple agencies. However, law enforcement
actions are more restricted than other U.S. activities, owing to factors
such as a lack of jurisdiction overseas to enforce U.S. law. Several IPR
coordination mechanisms exist, with the interagency coordination that
occurs during the Special 301 process standing out as the most significant
and active. Efforts under STOP! appear to have strengthened the U.S.
government's focus on addressing IPR enforcement problems in a more
coordinated manner. Conversely, NIPLECC, the mechanism for coordinating
intellectual property law enforcement, has accomplished little that is
concrete and its ineffectiveness continues despite recent congressional
action to provide funding, staffing, and clearer guidance regarding its
international objectives. In addition, NIPLECC does not include the FBI, a
primary law enforcement agency. Members, including NIPLECC leadership,
have repeatedly acknowledged that the group continues to struggle to find
an appropriate mission.

Mr. Chairman, this concludes my prepared statement. I would be pleased to
respond to any questions that you or other members of the subcommittee may
have at this time.

Should you have any questions about this testimony, please contact me by
e-mail at [email protected]. I can also be reached at (202) 512-4128. Other
major contributors to this testimony were Emil Friberg, Leslie Holen,
Jason Bair, Ming Chen, Sharla Draemel, and Reid Lowe.

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