Intellectual Property: Risk and Enforcement Challenges		 
(18-OCT-07, GAO-08-177T).					 
                                                                 
Intellectual property plays a significant role in the U.S.	 
economy, and the United States is an acknowledged leader in its  
creation. Industries that relied on IP protection were estimated 
to account for over half of all U.S. exports and employed about  
18 million Americans in 2006. However, legal protection of IP	 
varies greatly around the world, and several countries are havens
for the production of counterfeit and pirated goods. Counterfeit 
products raise serious public health and safety concerns, and the
annual losses that companies face from IP violations are	 
substantial. Eight federal agencies undertake a wide range of	 
activities in support of protecting IP rights, and two mechanisms
coordinate protection efforts: the National Intellectual Property
Law Enforcement Coordination Council (NIPLECC) and the Strategy  
for Targeting Organized Piracy (STOP). GAO was asked to address: 
(1) the nature of the risks that U.S. corporations face in	 
protecting IP, particularly in countries such as China, and (2)  
U.S. methods for implementing and coordinating domestic IP	 
enforcement activities. This testimony is based on issued GAO	 
reports that focused on IP protection and related trade matters. 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-08-177T					        
    ACCNO:   A77430						        
  TITLE:     Intellectual Property: Risk and Enforcement Challenges   
     DATE:   10/18/2007 
  SUBJECT:   Copyrights 					 
	     Federal agencies					 
	     Foreign governments				 
	     Foreign trade policies				 
	     Intellectual property				 
	     International cooperation				 
	     International organizations			 
	     International trade				 
	     Law enforcement					 
	     Patents						 
	     Program evaluation 				 
	     Risk assessment					 
	     Risk management					 
	     Trademarks 					 
	     Counterfeiting					 
	     Program coordination				 
	     Strategy Targeting Organized Piracy		 

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GAO-08-177T

   

     * [1]Summary
     * [2]Background
     * [3]U.S. Intellectual Property Increasingly at Risk As Firms Ope

          * [4]Global Operations Increase the Risk of IP Theft
          * [5]Economic Incentives and Technological Advances Also Raise th
          * [6]Weak Enforcement Exacerbates the Risk of IP Theft, Particula

     * [7]U.S. Efforts to Coordinate IP Activities and Enforce Laws at

          * [8]Lack of Leadership and Permanence Hampers Effectiveness and
          * [9]U.S. Border IP Efforts Demonstrate the Need for Improvements

     * [10]Concluding Observations
     * [11]Contacts and Acknowledgements

          * [12]Order by Mail or Phone

Testimony

Before the House Judiciary Subcommittee on Courts, the Internet, and
Intellectual Property

United States Government Accountability Office

GAO

For Release on Delivery
Expected at 10:00 a.m. EDT
October 18, 2007

INTELLECTUAL PROPERTY

Risk and Enforcement Challenges

Statement of Loren Yager, Director
International Affairs and Trade

GAO-08-177T

Mr. Chairman and Members of the Subcommittee:

I am pleased to be here today to report on our work on intellectual
property (IP) protection before the subcommittee of the U.S. Congress that
has identified this topic as one of its primary areas of focus. I
appreciate the opportunity to provide some insights from GAO's wide range
of work on this issue. As you know, intellectual property is an important
component of the U.S. economy. Prior hearings of this subcommittee have
focused on the patent reform act, trying to create the right formula for
stimulating creative and inventive activity in the United States.
Ultimately, however, patents will only be meaningful if there is real
protection of IP in the United States as well as other countries. Today, I
will discuss the increasing risk and enforcement challenges to IP
protection as advances in technology and changes in global manufacturing
make counterfeiting and piracy a greater threat.

This hearing is particularly timely, as during the last year a number of
news stories have raised severe doubts among the American people about the
quality and safety of products imported from China and the ability of the
Chinese government to regulate its manufacturers. While some of the goods
that posed risks in recent months were legitimate goods associated with
U.S. firms (Mattel), it is well known that counterfeit goods from China
pose risks to U.S. consumers, and unlike the situation with legitimate
goods, there is little recourse to go back to the importer or manufacturer
and demand that the risks be eliminated.

I know that many of these issues are familiar to members of this
subcommittee, particularly as this panel held back-to-back hearings on
China and Russia IP theft in May 2005. As requested, today I will
summarize the work that GAO has performed in two areas: (1) the nature of
the risks that U.S. corporations face in protecting IP, particulary in
countries such as China, and (2) U.S. methods for implementing and
coordinating U.S. IP enforcement activities.

My remarks are based on a variety of assignments that GAO has conducted on
IP protection over the past 4 years. Some of this work was focused on the
challenges that U.S. firms face in securing IP protection abroad, and some
has focused on the extent to which U.S. firms rely on nations like China
and India as part of their production chain. We have also done extensive
work on the international and domestic efforts undertaken by U.S. agencies
to coordinate their efforts to address IP theft and piracy issues.
Finally, we have drawn from some of our ongoing work for the Senate
regarding federal efforts to enforce IP rights at the border. We made
several recommendations during the course of this work, with which the
recipient agencies generally agreed. Our work was conducted in accordance
with generally accepted government auditing standards.

Summary

U.S. intellectual property faces increasing risk of theft as U.S. firms
integrate into the world economy and the production of more sophisticated
processes and investments move overseas. For example, as the technological
and manufacturing capability in Asia increases, such as in the
semiconductor industry, more complex parts of the production process are
being carried out in countries like China. High profits and technological
advances have also raised the risk of IP infringements by encouraging and
facilitating counterfeiting and piracy, while the deterrents, such as
penalties and other measures, fall short. Economic incentives for
counterfeiting and piracy include low barriers to entry, high profits, and
limited or low legal sanctions if caught. At the same time, technology has
allowed accessible reproduction and distribution in some industries. The
severity of these risks has been intensified by weak enforcement in some
countries, particularly China, whose enforcement challenges have persisted
despite U.S. efforts.

The United States faces significant obstacles to both providing effective
IP protection abroad while coordinating domestic efforts and ensuring that
strong intellectual property protection remains a priority. The
cross-cutting nature of the issue and the necessity for coordination is
evident given the large number of agencies involved in IP protection.
However, we recently reported on the law enforcement coordinating council
and found that the effectiveness and the long-term viability of the
current IP enforcement coordinating structure is uncertain and made
particularly challenging by agencies' multiple missions. Our report on the
efforts of the Customs and Border Patrol (CBP) to interdict counterfeit
goods at the border found that the bulk of CBP's enforcement outcomes in
recent years have been accomplished within certain modes of transport and
product types and have been restricted to a limited number of ports. For
example, 10 ports are responsible for three fourths of the value of the
goods seized. Despite recent increases in seizure outcomes, CBP lacks an
approach to make further improvements in its level of seizures. We found
that CBP has focused on efforts that have had limited results and has not
taken the initiative to understand and address the variations in seizure
outcomes among ports. For instance, CBP lacks data with which to analyze
IP enforcement trends across transport modes and has not tried to
determine whether certain ports have been relatively more successful in
capturing IP-infringing goods.

Background

Intellectual property, for which the U.S. government provides broad
protection through means such as copyrights, patents, and trademarks,
plays a significant role in the U.S. economy, and the United States is an
acknowledged leader in its creation. According to the U.S. Intellectual
Property Rights Coordinator, industries that relied on IP protection were
estimated to account for over half of all U.S. exports, represented 40
percent of U.S. economic growth, and employed about 18 million Americans
in 2006. However, the economic benefits that copyrights, trademarks, and
patents bring are threatened by the fact that legal protection of IP
varies greatly around the world, and several countries are havens for the
production of counterfeit and pirated goods. The global illicit market
competes with genuine products and it is difficult to detect and take
actions against violations. Although the public is often not aware of the
issues and consequences surrounding IP theft, counterfeit products raise
serious public health and safety concerns, and the annual losses that
companies face from IP violations are substantial. The Organization for
Economic Cooperation and Development recently estimated that international
trade in counterfeit and pirated products in 2005 could have been up to
$200 billion.

Eight federal agencies as well as entities within them undertake a wide
range of activities in support of protecting IP rights, as shown in figure
1. These are the Departments of Commerce, State, Justice, Health and Human
Services, and Homeland Security; the U.S. Trade Representative (USTR); the
Copyright Office; the U.S. International Trade Commission; within Justice,
the Federal Bureau of Investigation (FBI); and within Commerce, the U.S.
Patent and Trademark Office (USPTO). In addition, two entities coordinate
IP protection efforts: the National Intellectual Property Law Enforcement
Coordination Council (NIPLECC), created by Congress in 1999, and the
Strategy for Targeting Organized Piracy (STOP), initiated by the White
House in 2004. (These are discussed later in this testimony.)

Figure 1: Primary U.S. Agencies and Entities Supporting U.S. IP Rights

Note: NIPLECC is required to consult with the Register of Copyrights on
copyright law enforcement matters. Immigration and Customs Enforcement,
while not an original member, was reported as a member of NIPLECC in the
council's fifth annual report issued in September 2006.

U.S. agencies use policy initiatives and enforcement activities to improve
IP protection in the United States and abroad. Policy initiatives include
reviewing IP protection undertaken by foreign governments and negotiating
agreements that address intellectual property. Trade policy initiatives to
increase IP protection and enforcement are primarily led by USTR, in
coordination with the Departments of State, Commerce, USPTO, and the
Copyright Office, among other agencies. Enforcement activity in the United
States includes detecting and seizing IP-infringing goods at the U.S.
border and investigating and prosecuting those who engage in IP-infringing
activities. The Department of Justice, including the FBI, and the
Department of Homeland Security's Customs and Border Protection (CBP) and
Immigration and Customs Enforcement take actions such as engaging in
multicountry investigations involving intellectual property violations and
seizing goods that violate IP rights at U.S. ports of entry. The Food and
Drug Administration (FDA) also investigates intellectual property
violations for FDA-regulated products as part of its mission to assure
consumer safety.

U.S. Intellectual Property Increasingly at Risk As Firms Operate Globally and
Economic Incentives and Technology Facilitate IP Theft, Which is Exacerbated by
Weak Enforcement

U.S. intellectual property is increasingly at risk of theft as U.S. firms
become more integrated into the world economy and the production of more
sophisticated processes and investments move overseas. High profits and
technological advances have also increased the risk of IP infringements by
making counterfeiting and piracy progressively attractive and easy, while
the deterrents, such as penalties and other measures, fail to keep pace.
The seriousness of these risks has been exacerbated by weak enforcement in
some countries, particularly China, whose enforcement problems has
persisted despite U.S. efforts.

Global Operations Increase the Risk of IP Theft

The risk of IP theft increases as U.S. companies operate more globally and
locate their production facilities in other countries. Our report on the
U.S. semiconductor industry illustrates this movement of production to
other countries and increasing concerns about IP theft.1 Initially, U.S.
firms invested in overseas manufacturing facilities such as India and
China, to perform the labor-intensive assembly of semiconductors for
export to the United States. However, as the technological and
manufacturing capability in Asia increased, more sophisticated parts of
the process have been sourced in India and China. This shift where more
advanced technology is being used abroad creates a greater risk for those
firms involved by making advanced technologies protected by IP laws more
readily available to those who might want to copy them illegally.

The shift of operations to overseas facilities is also evident in the U.S.
investment statistics. For example, we reported in December 2005 that U.S.
investment in China has been growing, and the value of U.S. affiliate
sales in China began to exceed the value of U.S. exports to China in 2002.
2 U.S. companies have generally concentrated their investments in China in
the manufacturing sector, in industries such as transportation equipment,
chemicals, and computers and electronic products. U.S. investment in China
funds the creation of U.S. affiliates, who then sell in China and to other
countries, including the United States. U.S. affiliate sales of goods and
services have become an important avenue for accessing the Chinese market.
Factors such as the growing Chinese market, lower labor costs, and China's
accession to the World Trade Organization (WTO) have drawn U.S. companies
to increase their investment and sales in China.

1See GAO, Offshoring: U.S. Semiconductor and Software Industries
Increasingly Produce in China and India, [13]GAO-06-423 ; Sept. 7, 2006.

2See GAO, China Trade: U.S. Exports, Investment, Affiliate Sales Rising,
but Export Share Falling', [14]GAO-06-162 , Dec.12, 2005.

Economic Incentives and Technological Advances Also Raise the Risk of IP
Violations

Economic incentives to commit counterfeiting and piracy activities
contributed to the growth in IP rights violations in recent years.
Economic incentives include low barriers to entering the counterfeiting
and piracy business, potentially high profits, and limited or low legal
sanctions, including penalties, if caught. For example, one industry
pointed out that it is much more profitable to buy and resell software
than to traffic in cocaine. In addition, the low prices of fake products
are attractive to consumers. The economic incentives can be especially
acute in countries where people have limited income. Economic incentives
have also attracted organized crime in the production and distribution of
pirated products. Federal and foreign law enforcement officials have
linked intellectual property crime to national and transnational organized
criminal operations. The involvement of organized crime increases the
sophistication of counterfeiting operations, as well as the challenges and
threats to law enforcement officials confronting the violations.3

Technological advances have lowered the barriers to counterfeiting and
piracy by allowing for high-quality, inexpensive, and accessible
reproduction and distribution in some industries. The mobility of the
equipment makes it easy to transport it from one location to another,
further complicating enforcement efforts. Industry and government
officials described this as the "whack-a-mole" problem -- when progress is
made in one location, piracy operations often simply move. Likewise, the
Internet provides a means to transmit and sell illegal software or music
on a global scale and provides a sales venue for counterfeit goods.
According to an industry representative, the ability of Internet pirates
to hide their identities or operate from remote jurisdictions often makes
it difficult for IP rights holders to find them and hold them accountable.

3See GAO, Intellectual Property: U.S. Efforts Have Contributed to
Strengthened Laws Overseas but Challenges Remain, [15]GAO-04-912
(Washington D.C.; September 8, 2004).

How economic incentives and technological advances can contribute to IP
piracy can be seen in the optical media industry (CD's, DVD's). 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. According to the Business Software Alliance,
a CD recorder is relatively inexpensive. The sometimes large price
differentials between pirated and legitimate CDs also create incentives
for consumers to purchase pirated CDs - even those who might have been
willing to pay a limited amount extra to purchase the legitimate product.
Low-cost, high-quality reproduction and distribution in some industries
are creating increasingly strong incentives for piracy. Private sector
representatives have identified Russia as a prominent source of pirated
software and optical media, which include music, movies, and games. For
instance, USTR reports that the U.S. copyright industries estimate that
they lost in excess of $2.1 billion in 2006 due to copyright piracy in
Russia. The U.S. copyright industries also reported that in 2006 Russia's
optical disc production capacity continued to be far in excess of domestic
demand, with pirated products apparently intended for export as well as
domestic consumption.

While a number of factors increase the risk of IP theft, the deterrent
effect of IP enforcement efforts has not kept pace. A number of industry
officials believe that the chance of getting caught for counterfeiting and
piracy, along with the penalties, when caught, are too low. CBP only
inspects a small percentage of containers entering the country each day
even for counterfeit goods seized at the border. CBP officials said that
the enforcement penalties are not an effective deterrent. In reviewing CBP
penalty data for fiscal years 2001 through 2006, we found that less than 1
percent of the penalty amounts were collected. Federal officials we
interviewed remarked that the penalties or even the loss of goods through
seizures are viewed by counterfeiters as the cost of doing business. In
work we did several years ago on small business efforts to patent abroad,
we reported that patent attorney experts viewed the potential for
unauthorized production as well as the level of IP infringement and
enforcement in other countries as highly important factors that needed to
be considered in developing a foreign patent strategy. 4 They also advised
that firms need to understand the practical--or enforcement--value of the
patent, and China and Russia were both mentioned as countries where the
patents were of limited value but the situation was improving.

4See GAO, International Trade: Experts' Advice for Small Businesses
Seeking Foreign Patents, [16]GAO-03-910 , (Washington D.C.: June 26,
2003).

Weak Enforcement Exacerbates the Risk of IP Theft, Particularly in China

China's track record for enforcing IP laws has been historically weak. We
reported in October 2002 that when China joined the WTO in 2001, some WTO
members noted concerns about enforcement of IP regulations in China, and
the majority of China's commitments in its WTO accession agreement were
intended to address these concerns.5 For example, members raised concerns
about filing civil judicial actions relating to IP violations in China,
and they noted that the way in which damages resulting from IP violations
were calculated often resulted in inadequate compensation. We identified
32 IP rights related commitments made by China in its WTO accession
agreement, about half of which were related specifically to IP
enforcement.

Based on our 2002 survey, U.S. companies with a presence in China
considered China's commitments in the area of IP rights to be the most
important of those made in its WTO accession agreement However, they also
recognized that they were going to be among the most difficult for China
to implement, particularly those related to rule of law and reforming
state owned enterprises. Indeed, in our 2003 follow-up interviews,
respondents reported that China had implemented its IP rights commitments
only to some extent or to a little extent.6 Our ongoing work on federal IP
law enforcement actions reiterates this concern about IP infringement in
China. Sixteen of the thirty companies and industry associations we
interviewed cited China as the primary country producing and distributing
IP-infringing goods. They went on to note that these are often substandard
products that are sold in grey markets7 or through the Internet.

5See GAO, World Trade Organization: Analysis of China's Commitments to
Other Members, [17]GAO-03-4 , (Washington D.C.; October 3, 2002).

6See GAO, World Trade Organization: Selected U.S. Company Views about
China's Membership' [18]GAO-02-1056 which was released on September 23,
2002; World Trade Organization: U.S. Companies' Views on China's
Implementation of Its Commitments' [19]GAO-04-508 March 24, 2004.

USTR put China on its Special 301 Priority Watch List8 in 2005 on the
basis of serious concerns about China's compliance with its WTO Agreement
on Trade-Related Aspects of Intellectual Property Rights (TRIPS)9
obligations as well as with commitments it made in a subsequent bilateral
forum in 2004. In addition, China remains subject to Section 306
monitoring.10 USTR also identified IP rights protection in its February
2006 Top-to-Bottom review11 of U.S.-China trade relations as one of
China's greatest shortcomings and greatly enhancing China's IP rights
protection became a priority goal for the United States. The review
outlined a number of action items for the United States to undertake to
achieve this goal, which included increasing U.S. enforcement staff
levels, enhancing cooperation with the private sector, and promoting
technical exchanges between U.S. and Chinese agency officials.

The United States has undertaken other actions with regard to IP
violations in China. The United States requested WTO dispute settlement
consultations with China on a number of IP rights protection and
enforcement issues and conducted a special provincial review over the past
year to examine the adequacy and effectiveness of IP rights protection and
enforcement at the provincial level. In October 2004, we recommended that
the USTR and Secretaries of Commerce, State, and Agriculture (USDA) take
steps to improve their performance management of their agencies' China-WTO
compliance efforts. For example, we recommended that USTR set annual
measurable predetermined targets related to its China compliance
performance measures and assess the results in its annual performance
reports, and that the Secretary of Commerce should take further steps to
improve the accuracy of the data used to measure results for the agency's
trade compliance related goals. We made similar recommendations to the
other agencies. Not all of the recommendations have been implemented to
date, but some agencies have reported looking into modifying both their
performance plans and unit level plans. This month, we are sending a team
to Beijing to follow up on U.S. agency activities, including their
response to these recommendations.

7The grey market usually refers to the flow of new goods through
distribution channels other than those authorized or intended by the
manufacturer or producer. Grey market goods are not generally counterfeit.
Instead, they are being sold outside of normal distribution channels by
companies which may have no relationship with the producer of the goods.

8The annual Special 301 process, which refers to certain provisions of the
Trade Act of 1974, as amended, requires USTR to annually identify foreign
countries that deny adequate and effective protection of IP rights or fair
and equitable market access for U.S. persons who rely on IP protection.
According to USTR, countries or economies on the Priority Watch List do
not provide an adequate level of IP rights protection or enforcement, or
market access for persons relying on intellectual property protection.

9The WTO Agreement on Trade-Related Aspects of Intellectual Property
Rights (TRIPS), which came into force in 1995, broadly governs the
multilateral protection of IP regulations. TRIPS established minimum
standards of protection in various areas of IP and provides for
enforcement measures for members.

10According to USTR, countries with serious IP-related problems are
subject to another part of the Special 301 statute, Section 306
monitoring, because of previous bilateral agreements reached with the
United States to address specific problems raised in earlier reports.

11USTR's Top-to-Bottom review assessed the benefits and challenges in
U.S-China trade following China's first four years of membership in the
World Trade Organization, as China neared the end of its transition period
as a new member. The review reflects the input of Congress, China experts,
industry, public testimony and other U.S. government agencies.

USTR reports that China has made progress in some areas, such as
completion of its accession to the World Intellectual Property
Organization (WIPO)12 Internet Treaties, and its ongoing implementation of
new rules that require computers to be pre-installed with licensed
operating system software. However, in other areas, the USTR reports that
little progress has been made. Despite anti-piracy campaigns in China and
an increasing number of IP rights cases in Chinese courts, overall piracy
and counterfeiting levels in China remained unacceptably high in 2006.
USTR reports further that the U.S. copyright industries estimate that 85
percent to 93 percent of all copyrighted material sold in China was
pirated, indicating little or no improvement over 2005. Trade in pirated
optical media continues to thrive, supplied by both licensed and
unlicensed factories and by smugglers. Small retail shops continue to be
the major commercial outlets for pirated movies and music and a wide
variety of counterfeit goods, and roaming vendors offering cheap pirated
discs continue to be visible in major cities across China. According to
USTR, piracy of books and journals and end user piracy of business
software also remain key concerns. In addition, Internet piracy is
increasing, as is piracy over closed networks such as those of
universities.

12The World Intellectual Property Organization (WIPO) is a specialized
agency of the United Nations. It is dedicated to developing a balanced and
accessible international [20]intellectual property (IP) system, which
rewards creativity, stimulates innovation and contributes to economic
development while safeguarding the public interest. WIPO was established
by the [21]WIPO Convention in 1967 with a mandate from its [22]Member
States to promote the protection of IP throughout the world through
cooperation among states and in collaboration with other international
organizations. Its headquarters are in Geneva, Switzerland.

Finally, the United States has dealt with China's poor IP enforcement
through efforts at the U.S. border. China accounts for by far the largest
share of IP-infringing goods seized by CBP. For instance, China accounted
for 81 percent of the value of goods seized in fiscal 2006, increasing
from 69 percent in fiscal 2005 and nearly half in fiscal 2002. Chinese
counterfeits include many products, such as pharmaceuticals, electronics,
batteries, industrial equipment, toys, and many other products, some of
which pose a direct threat to the health and safety of consumers.

U.S. Efforts to Coordinate IP Activities and Enforce Laws at the Border Need
Improvement

While the U.S. faces significant obstacles when trying to ensure effective
IP protection abroad, it also faces some significant challenges in
coordinating domestic efforts and ensuring that this issue remains a
priority. The large number of agencies involved in IP protection issues
(see figure 1) demonstrates the cross-cutting nature of the issue and the
importance of coordination. However, in our recent report on the law
enforcement coordinating council, we found that the effectiveness and the
long-term viability of the coordinating structure is uncertain. Another
challenge is that each of these agencies have multiple missions, and
within the agencies it may be a challenge to ensure that IP enforcement
gets sufficient priority. Our report on the efforts of CBP to interdict
counterfeit goods at the border found that the bulk of CBP's enforcement
outcomes in recent years have been generated by pockets of activity within
certain modes of transport and product types as well as among a limited
number of port locations. Despite recent increases in seizure outcomes,
CBP lacks an approach to further improve border enforcement outcomes, and
has been focused on efforts that have produced limited results, while not
taking the initiative to understand and address the variations among
ports.

Lack of Leadership and Permanence Hampers Effectiveness and Long-Term Viability
of IP Enforcement Coordinating Structure

We reported in November 2006 that the current coordinating structure for
U.S. protection and enforcement of intellectual property rights lacks
clear leadership and permanence, hampering its effectiveness and long-term
viability. 13 Created in 1999 to coordinate domestic and international IP
law enforcement among U.S, federal and foreign entities, the National
Intellectual Property Law Enforcement Coordination Council (NIPLECC)14 has
struggled to define its purpose, retains an image of inactivity within the
private sector, and continues to have leadership problems despite the
addition of a Coordinator for International Intellectual Property
Enforcement as the head of NIPPLEC, made by Congress in December 2004. In
addition, in July 2006, Senate appropriators expressed concern about the
lack of information provided by NIPLECC on its progress.

In contrast, the presidential initiative called the Strategy for Targeting
Organized Piracy (STOP), which is led by the National Security Council,
has a positive image compared to NIPLECC, but lacks permanence since its
authority and influence could disappear after the current administration
leaves office. Many agency officials said that STOP has increased
attention to IP issues within their agencies and the private sector, as
well as abroad, and attribute that to the fact that STOP came out of the
White House, thereby lending it more authority and influence.15 While
NIPLECC adopted STOP as its strategy for protecting IP overseas, its
commitment to implementing STOP as a successful strategy remains unclear,
creating challenges for accountability and long-term viability. For
instance, although NIPLECC's most recent annual report describes many STOP
activities, it does not explain how the NIPLECC principals plan to carry
out their oversight responsibilities mandated by Congress to help ensure
successful implementation of the strategy.

STOP is a first step toward an integrated national strategy to protect and
enforce U.S. intellectual property rights, and it has energized agency
efforts. However, we previously reported that STOP's potential as a
national strategy is limited because it does not fully address important
characteristics of an effective national strategy. For example, its
performance measures lack baselines and targets to assess how well the
activities are being implemented. In addition, the strategy lacks a risk
management framework and a discussion of current or future costs -
important elements to effectively balance the threats from counterfeit
products with the resources available. Although STOP identifies
organizational roles and responsibilities with respect to individual
agencies' STOP activities, it does not specify who will provide oversight
and accountability among the agencies carrying out the strategy. While
individual agency documents include some key elements of an effective
national strategy, they have not been incorporated into the STOP
documents. This lack of integration underscores the strategy's limited
usefulness as a management tool for effective oversight and accountability
by Congress as well as the private sector and consumers who STOP aims to
protect.

13See GAO, Intellectual Property: Strategy Targeting Organized Piracy
(STOP) Requires Changes for Long-term Success, [23]GAO-07-74 (Washington
D.C.; November 8, 2006).

14NIPLECC was established under Section 653 of the Treasury and General
Government Appropriations Act, 2000 (Pub. L. No.106-58), 15 U.S.C. 1128.

15See figure 1 for NIPPLECC and STOP members.

In our November 2006 report, we made two recommendations to clarify
NIPLECC's oversight role with regard to STOP and improve STOP's
effectiveness as a planning tool and its usefulness to Congress: First, we
recommended that the head of NIPLECC, called the IP Coordinator, in
consultation with the National Security Council and the six STOP agencies,
clarify in the STOP strategy how NIPLECC will carry out its oversight and
accountability responsibilities in implementing STOP as its strategy.
Second, we recommended that the IP Coordinator, in consultation with the
National Security Council and the six STOP agencies, take steps to ensure
that STOP fully addresses the characteristics of an effective national
strategy. In our April 2007 testimony, we reported that the IP Coordinator
said that NIPLECC had taken some steps to address our recommendations,
including working with OMB to understand agencies' priorities and
resources related to IP enforcement.

U.S. Border IP Efforts Demonstrate the Need for Improvements

In our April 2007 report, we foundthat the volume of goods entering the
United States every year is substantial, and creates a challenge for CBP
in terms of ensuring that these shipments do not carry weapons of mass
destruction or illegal drugs and that appropriate duties are collected on
imports.16 CBP also has the responsibility to ensure that counterfeit
goods do not enter through the 300 plus U.S. ports, but detecting and
seizing IP-infringing products from among this large volume of traffic is
difficult. CBP efforts in this regard include (1) targeting suspicious
shipments, (2) examining goods to determine their authenticity, and (3)
enforcing IP laws through seizure and penalty actions.

16Intellectual Property: Better Data Analysis and Integration Could Help
U.S. Customs and Border Protection Improve Border Enforcement Efforts,
[24]GAO-07-735 (Washington D.C.; April 26, 2007).

CBP faces challenges in targeting shipments, in part, because its primary
computer-based targeting method is not equally effective in all modes of
transport (that is, sea, air, truck, and rail). For example, CBP officials
believe counterfeiters are increasingly using express consignment services
to move commercial quantities of goods into the United States, but their
computer- based targeting method is less effective in this environment.
Determining during an examination whether IP infringement has occurred can
be challenging because of high counterfeit quality and the complexity of
U.S. IP laws. Interaction among port staff, CBP's legal and product
experts, and rights holders is required to make these determinations. When
violations are found, CBP is authorized to seize the goods and, if
warranted, assess penalties against the violator.

Although CBP has reported increases in the number and value of IP
seizures, our analysis found that the bulk of these seizures have been
generated by a limited number of ports and that recent increases in
seizure actions can be attributed to a growing number of small-value
seizures made from air-based modes. For example, 10 ports are responsible
for three fourths of the value of goods seized. In addition, nearly
two-thirds of seizure value since 2001 has been concentrated in certain
product types - - footwear, wearing apparel, handbags, and cigarettes.
However, seizures of goods related to public health and safety have been
small. Although penalties assessed for IP violations have grown steadily
since 2001, CBP has collected less than 1 percent of assessed amounts. For
example, CPB collected approximately 600,000 dollars of the 136.6 million
dollars assessed in 2006.17

CBP has undertaken steps to improve its border enforcement efforts, but it
lacks data with which to analyze IP enforcement trends across transport
modes, and it has not analyzed ports' IP enforcement outcomes to determine
whether certain ports have been relatively more successful in capturing
IP-infringing goods. In addition, a lack of integration between the ports
and CBP's trade policy office hinders it from making further improvements.

17Fiscal year 2006 is reported based on data provided in January 2007. CBP
officials said that the amount collected may change because some penalty
cases are still being processed, but they said that future adjustments are
unlikely to significantly change the disparity between penalty amounts
assessed and collected.

Given the challenging environment in which CBP must process the vast
influx of goods into the United States every day, it is particularly
important that the agency utilize data to effectively focus its limited
enforcement resources to those areas where they can be most effective. As
a result, we have made a number of recommendations to the Commissioner of
CBP. These include improvements in enforcement data as well as increased
use of enforcement data to understand enforcement activities and outcomes.

Concluding Observations

This committee made a significant investment in the current legislative
session in moving IP legislation to try to find the right formula for
protecting and stimulating creative and inventive activity in the United
States in the area of patent reform, and encountered a number of differing
views on how to establish that formula. However, having the incentives for
creating intellectual property is of limited value unless there is
sufficient protection for the works that are created, and this hearing
directly addresses that issue. There is little disagreement -- at least
domestically -- with the need to strengthen protection, but the difficulty
is in how to best achieve that goal in the face of the strong economic
incentives for counterfeiting and the limited resources to prevent it. GAO
has performed a large body of work for the Congress of aspects of these
issues, and has put forward some specific recommendations regarding the
importance of coordination as well as methods to be effective in the
context of competing priorities. We appreciate the opportunity to support
this subcommittee and the Congress as it continues to address these
issues.

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

Contacts and Acknowledgements

Should you have any questions about this testimony, please contact Loren
Yager at (202) 512-4347 or [25][email protected] . Other major contributors
to this testimony were Christine Broderick, Nina Pfeiffer, Jason Bair,
Diana Blumenfeld, Shirley Brothwell, Adam Cowles, Karen Deans, and Addie
Spahr.

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Highlights of GAO-08-177T , a report to House Judiciary, Subcommittee on
Courts, the Internet, and Intellectual Property.

October 18, 2007

INTELLECTUAL PROPERTY

Risk and Enforcement Challenges

Intellectual property plays a significant role in the U.S. economy, and
the United States is an acknowledged leader in its creation. Industries
that relied on IP protection were estimated to account for over half of
all U.S. exports and employed about 18 million Americans in 2006. However,
legal protection of IP varies greatly around the world, and several
countries are havens for the production of counterfeit and pirated goods.
Counterfeit products raise serious public health and safety concerns, and
the annual losses that companies face from IP violations are substantial.
Eight federal agencies undertake a wide range of activities in support of
protecting IP rights, and two mechanisms coordinate protection efforts:
the National Intellectual Property Law Enforcement Coordination Council
(NIPLECC) and the Strategy for Targeting Organized Piracy (STOP). GAO was
asked to address: (1) the nature of the risks that U.S. corporations face
in protecting IP, particularly in countries such as China, and (2) U.S.
methods for implementing and coordinating domestic IP enforcement
activities. This testimony is based on issued GAO reports that focused on
IP protection and related trade matters.

[32]What GAO Recommends

In prior reports, GAO made a number of recommendations to various agencies
to strengthen their management of their IP enforcement efforts.

U.S. intellectual property is increasingly at risk of theft as U.S. firms
become more integrated into the world economy and the production of more
sophisticated processes and investments move overseas. High profits and
technological advances have also increased the risk of IP infringements by
making counterfeiting and piracy more attractive and easy to conduct. At
the same time, deterrents such as penalties and other measures have failed
to keep pace. The seriousness of these risks has been exacerbated by weak
enforcement in some countries, particularly China.

While the U.S. faces significant obstacles when trying to ensure effective
IP protection abroad, it also faces serious challenges in coordinating
domestic efforts and ensuring that IP protection remains a priority. The
large number of federal agencies involved, due to the cross-cutting nature
of IP protection, makes coordination particularly important. However,
GAO's recent report on coordinating mechanisms for federal IP protection,
we found that the effectiveness and long-term viability of the
coordinating structure is uncertain. In addition, each of the agencies
involved in IP has multiple missions, and it is a challenge to ensure that
IP enforcement is a sufficiently high priority. GAO's report on the
efforts of the Customs and Border Patrol (CBP) to interdict counterfeit
goods at the border found that the bulk of CBP's enforcement outcomes in
recent years have been generated by pockets of activity within certain
modes of transport and product types as well as among a limited number of
port locations. While the number of seizure actions has increased, this
growth can be attributed to a growing number of small-value seizures made
from air-based modes. CBP lacks an approach to further improve border
enforcement outcomes; it has been focused on efforts that have produced
limited results, while not taking the initiative to understand and address
the variations among ports.

References

Visible links
  13. http://www.gao.gov/cgi-bin/getrpt?GAO-06-423
  14. http://www.gao.gov/cgi-bin/getrpt?GAO-06-162
  15. http://www.gao.gov/cgi-bin/getrpt?GAO-04-912
  16. http://www.gao.gov/cgi-bin/getrpt?GAO-03-910
  17. http://www.gao.gov/cgi-bin/getrpt?GAO-03-4
  18. http://www.gao.gov/cgi-bin/getrpt?GAO-02-1056
  19. http://www.gao.gov/cgi-bin/getrpt?GAO-04-508
  20. http://www.wipo.int/about-ip/en/
  21. http://www.wipo.int/treaties/en/convention/
  22. http://www.wipo.int/members/en/
  23. http://www.gao.gov/cgi-bin/getrpt?GAO-07-74
  24. http://www.gao.gov/cgi-bin/getrpt?GAO-07-735
  25. mailto:[email protected]
  26. http://www.gao.gov/
  27. http://www.gao.gov/
  28. http://www.gao.gov/fraudnet/fraudnet.htm
  29. mailto:[email protected]
  30. mailto:[email protected]
  31. mailto:[email protected]
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