[House Hearing, 109 Congress]
[From the U.S. Government Publishing Office]
INTERNATIONAL IPR REPORT CARD--ASSESSING U.S. GOVERNMENT AND INDUSTRY
EFFORTS TO ENHANCE CHINESE AND RUSSIAN ENFORCEMENT OF INTELLECTUAL
PROPERTY RIGHTS
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON COURTS, THE INTERNET,
AND INTELLECTUAL PROPERTY
OF THE
COMMITTEE ON THE JUDICIARY
HOUSE OF REPRESENTATIVES
ONE HUNDRED NINTH CONGRESS
FIRST SESSION
__________
DECEMBER 7, 2005
__________
Serial No. 109-88
__________
Printed for the use of the Committee on the Judiciary
Available via the World Wide Web: http://judiciary.house.gov
______
U.S. GOVERNMENT PRINTING OFFICE
24-927 WASHINGTON : 2006
_____________________________________________________________________________
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COMMITTEE ON THE JUDICIARY
F. JAMES SENSENBRENNER, Jr., Wisconsin, Chairman
HENRY J. HYDE, Illinois JOHN CONYERS, Jr., Michigan
HOWARD COBLE, North Carolina HOWARD L. BERMAN, California
LAMAR SMITH, Texas RICK BOUCHER, Virginia
ELTON GALLEGLY, California JERROLD NADLER, New York
BOB GOODLATTE, Virginia ROBERT C. SCOTT, Virginia
STEVE CHABOT, Ohio MELVIN L. WATT, North Carolina
DANIEL E. LUNGREN, California ZOE LOFGREN, California
WILLIAM L. JENKINS, Tennessee SHEILA JACKSON LEE, Texas
CHRIS CANNON, Utah MAXINE WATERS, California
SPENCER BACHUS, Alabama MARTIN T. MEEHAN, Massachusetts
BOB INGLIS, South Carolina WILLIAM D. DELAHUNT, Massachusetts
JOHN N. HOSTETTLER, Indiana ROBERT WEXLER, Florida
MARK GREEN, Wisconsin ANTHONY D. WEINER, New York
RIC KELLER, Florida ADAM B. SCHIFF, California
DARRELL ISSA, California LINDA T. SANCHEZ, California
JEFF FLAKE, Arizona CHRIS VAN HOLLEN, Maryland
MIKE PENCE, Indiana DEBBIE WASSERMAN SCHULTZ, Florida
J. RANDY FORBES, Virginia
STEVE KING, Iowa
TOM FEENEY, Florida
TRENT FRANKS, Arizona
LOUIE GOHMERT, Texas
Philip G. Kiko, General Counsel-Chief of Staff
Perry H. Apelbaum, Minority Chief Counsel
------
Subcommittee on Courts, the Internet, and Intellectual Property
LAMAR SMITH, Texas, Chairman
HENRY J. HYDE, Illinois HOWARD L. BERMAN, California
ELTON GALLEGLY, California JOHN CONYERS, Jr., Michigan
BOB GOODLATTE, Virginia RICK BOUCHER, Virginia
WILLIAM L. JENKINS, Tennessee ZOE LOFGREN, California
SPENCER BACHUS, Alabama MAXINE WATERS, California
BOB INGLIS, South Carolina MARTIN T. MEEHAN, Massachusetts
RIC KELLER, Florida ROBERT WEXLER, Florida
DARRELL ISSA, California ANTHONY D. WEINER, New York
CHRIS CANNON, Utah ADAM B. SCHIFF, California
MIKE PENCE, Indiana LINDA T. SANCHEZ, California
J. RANDY FORBES, Virginia
Blaine Merritt, Chief Counsel
David Whitney, Counsel
Joe Keeley, Counsel
Ryan Visco, Counsel
Shanna Winters, Minority Counsel
C O N T E N T S
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DECEMBER 7, 2005
OPENING STATEMENT
Page
The Honorable Lamar Smith, a Representative in Congress from the
State of Texas, and Chairman, Subcommittee on Courts, the
Internet, and Intellectual Property............................ 1
The Honorable Howard L. Berman, a Representative in Congress from
the State of California, and Ranking Member, Subcommittee on
Courts, the Internet, and Intellectual Property................ 3
The Honorable Darrell Issa, a Representative in Congress from the
State of California, and Member, Subcommittee on Courts, the
Internet, and Intellectual Property............................ 4
WITNESSES
The Honorable Chris Israel, Coordinator for International
Intellectual Property Enforcement, U.S. Department of Commerce
Oral Testimony................................................. 7
Prepared Statement............................................. 8
The Honorable Victoria Espinel, [Acting] Assistant U.S. Trade
Representative for Intellectual Property, Office of U.S. Trade
Representative
Oral Testimony................................................. 13
Prepared Statement............................................. 16
Mr. Eric H. Smith, President, International Intellectual Property
Alliance
Oral Testimony................................................. 23
Prepared Statement............................................. 26
Ms. Joan Borsten, President, Films by Jove, Inc.
Oral Testimony................................................. 52
Prepared Statement............................................. 54
LETTERS, STATEMENTS, ETC. SUBMITTED FOR THE RECORD
Written response to question posed by Representative Issa from
the Honorable Chris Israel, Coordinator for International
Intellectual Property Enforcment, U.S. Department of Commerce.. 70
Written response to question posed by Representative Issa from
Mr. Eric Smith, President, International Intellectual Property
Alliance (IIPA)................................................ 72
Written response to question posed by Representative Issa from
Ms. Joan Borsten, President, Films by Jove, Inc................ 74
APPENDIX
Material Submitted for the Hearing Record
Statement of the Honorable Howard Berman, a Representative in
Congress from the State of California, and Ranking Member,
Subcommittee on Courts, the Internet, and Intellectual Property 79
Statement of the Honorable Bob Goodlatte, a Representative in
Congress from the State of Virginia............................ 80
News Article by the Honorable Lamar Smith, a Representative in
Congress from the State of Texas, and Chairman, Subcommittee on
Courts, the Internet, and Intellectual Property: ``Defense
Contrator Held in Spy Case,'' from the November 30, 2005
edition of The Washington Times................................ 82
News Article by the Honorable Lamar Smith, a Representative in
Congress from the State of Texas, and Chairman, Subcommittee on
Courts, the Internet, and Intellectual Property: ``Envoy:
Licensed DVDs Cost Too Much,'' from the December 1, 2005
edition of The Moscow Times.................................... 84
News Article by the Honorable Lamar Smith, a Representative in
Congress from the State of Texas, and Chairman, Subcommittee on
Courts, the Internet, and Intellectual Property: ``U.S. and EU
to Battle Chinese Counterfeiting,'' from the November 30, 2005
Dow Jones Newswires............................................ 85
Exhibit submitted by Joan Borsten: ``Corruption in the Russian
Arbitrazh Courts: Will There Be Significant Progress in the
Near Term?''................................................... 88
Exhibit submitted by Joan P. Borsten: ``The Circumstances
Surrounding the Arrest and Prosecution of Leading Yukos
Executives.''.................................................. 131
Statement and Exhibits from the Honorable Dan Glickman, Chairman
and Chief Executive Officer, Motion Picture Association of
America, Inc. (MPAA)........................................... 152
INTERNATIONAL IPR REPORT CARD--ASSESSING U.S. GOVERNMENT AND INDUSTRY
EFFORTS TO ENHANCE CHINESE AND RUSSIAN ENFORCEMENT OF INTELLECTUAL
PROPERTY RIGHTS
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WEDNESDAY, DECEMBER 7, 2005
House of Representatives,
Subcommittee on Courts, the Internet,
and Intellectual Property,
Committee on the Judiciary,
Washington, DC.
The Subcommittee met, pursuant to notice, at 10:17 a.m., in
Room 2141, Rayburn House Office Building, the Honorable Lamar
Smith (Chairman of the Subcommittee) presiding.
Mr. Smith of Texas. The Subcommittee on Courts, the
Internet, and Intellectual Property will come to order.
I'm going to recognize myself for an opening statement,
then the Ranking Member, Mr. Berman of California, for an
opening statement. Then I want to represent the gentleman from
California, Mr. Issa, for comments, as well, because he is the
author of a resolution that was approved on the House floor
recently to deal with the subject at hand.
I also want to compliment the gentleman from California,
Mr. Issa, because I believe, with the exception of the Chairman
and the Ranking Member, that he has the best attendance record
on this Subcommittee of anyone. And that is both appreciated
and will be remembered. I'll recognize myself for an opening
statement.
The evidence continues to show that the government of the
People's Republic of China is engaged in a long-term effort to
steal sensitive and proprietary technologies from U.S.
industry. Last week, Federal judges in Los Angeles ordered Chi
Mak, an electrical engineer who worked as a defense contractor,
and his brother Tai Mak, who also is in the Chinese military,
to be held without bond in a case prosecutors believe could be
among the most damaging cases of Chinese technology spying.
In court papers, Chi Mak has reportedly admitted passing
restricted data for 22 years--including sensitive information
on the DBX destroyer, the Aegis weapons system, and a U.S.
study that reveals the methods to be used by U.S. warship
personnel to continue operating after being attacked--to
Chinese military intelligence handlers.
This kind of technology spying and theft of intellectual
property pose serious threats to our country's long-term
economic and national security interests. No two governments
are more adept at exploiting U.S. weaknesses in protecting
technology than the governments of China and the Russian
Federation.
U.S. policy is motivated by a sincere desire to encourage
these governments to respect individual rights, including the
right to profit from the legitimate use and licensing of
intellectual property rights. Our hope is that the Chinese and
Russian governments will ultimately develop into reliable and
dependable allies in the fight to protect intellectual property
rights. Yet that hope must be grounded in reality, and not
motivated by wishful thinking.
Unfortunately, there is little in the present record to
indicate a sincere desire by the political leadership of these
nations to respect the rights of U.S. intellectual property
owners. In numerous international and bilateral agreements,
China and Russia assume the duty to provide adequate and
effective enforcement of intellectual property rights in return
for the United States and other nations lowering trade barriers
to their goods. The political leadership of each nation has
prospered by being permitted to reap the benefits of
international trade, without being held accountable for their
own commitments.
Their record stands in stark contrast to the countless
assurances, guarantees, and commitments to honor their
obligations that have been made to the most senior officials of
the United States Government.
One of the most offensive examples of intransigence was
reported in the December 1st edition of the Moscow Times. In an
article entitled, ``Envoy: Licensed DVDs Cost Too Much,''
Alexander Kotenkov, who is President Putin's representative in
the Russian Parliament's upper chamber, stated at a conference
``devoted to the fight against piracy'' that he often purchased
illegally-made discs for plane trips, paying the equivalent of
$3.12 for a DVD that contains five or six films.
President Putin's representative went on to blame copyright
owners for piracy, by stating that Russian citizens are not at
fault for being unable to buy licensed discs, because the costs
of legitimate discs are too high.
I am confident, in connection with any future consideration
of Russian accession to the WTO, the United States Congress
will consider the extension of permanent normal trade relations
with Russia. In the absence of a real, sustained, and
verifiable commitment by the highest levels of the Russian
government to protect the legitimate rights of intellectual
property owners, I will continue to oppose U.S. support for the
extension of PNTR and for Russia's admission to the WTO.
I have no intention of watching while Russia becomes the
next China; a result that I am concerned could ultimately lead
to an erosion of U.S. public support for the WTO and the rules-
based trading system that it was intended to implement.
Our witnesses today will bring the Subcommittee up to date
on the developments that have transpired since May 17, when
this Subcommittee held back-to-back hearings on Chinese and
Russian IP theft.
That concludes my opening statement, and the gentleman from
California, Mr. Berman, is recognized for his.
Mr. Berman. Thank you very much, Mr. Chairman, for
scheduling this hearing on international intellectual property
piracy. I actually hope the Subcommittee can institutionalize
the practice of having at least one hearing a year that focuses
on international trade and products protected by intellectual
property rights.
I particularly want to thank you for inviting Joan Borsten
to testify. She is a long, longstanding good friend, a
constituent, and has a very compelling story. She brings a
valuable perspective to the hearing: that of an individual
American entrepreneur whose business has been dramatically
impacted by a foreign government's sustained campaign to steal
her rights to intellectual property.
Because of the massive copyright piracy that occurs daily
in China and Russia, the sales of black market goods cause an
annual loss of revenue to American creators that is truly
staggering. According to the International Intellectual
Property Alliance, piracy rates in the copyright industries
range from a low of 70 percent to a high of 95 percent. And
American industries annually lose over $2\1/2\ billion in
China, and almost $2 billion in Russia.
But it is not only the copyright industries, entertainment,
software, book publishing, etcetera, that suffer. We could
probably have an entire hearing only on counterfeiting of
motorcycle parts, purses, and pharmaceuticals. No industry is
immune from the endemic intellectual property violations
occurring in these two countries.
The problem in both China and Russia is similar. While the
laws may be on the books, actual enforcement of those laws is
sorely lacking. Few criminal prosecutions have taken place, and
even fewer sentences have been meted out. There's currently no
true deterrent for the pirates. In fact, piracy has become the
foundation for new businesses that export these black market
goods.
The one effective tool the current Administration has to
incentivize the Chinese government to address its piracy
problem is pursuing a WTO case. At the last hearing on this
issue, the USTR testified that they were, ``committed to ensure
that China is compliant with its obligations. And we will take
WTO action if, in consultation with you and with our industry,
we determine that this is the most effective way to fix the
problem that we are resolved to fix.''
When I asked whether 6 months would be a reasonable time
frame to reach a conclusion, the answer was that it could be.
So here we are, 6 months later, and I'm looking forward to an
update from that office.
Furthermore, have additional avenues for mitigating the
effect of piracy in China been explored by the current
Administration? Currently, the Chinese government engages in
vast restrictions on market access for American copyrighted
goods. They restrict the number of American films that can be
shown, and severely curtail the right of our companies to do
business in their country. These barriers make the impact of
piracy that much greater, and virtually impossible for our
companies to counteract piracy.
With Russia, there is still some leverage, because they
have not joined WTO yet. I took note of the Chairman's comments
in his opening statement on this subject.
A number of months ago, I, along with a number of other
Democrats, wrote Ambassador Portman advising him. And these
were Democrats who were inclined--on a number of occasions
have been willing to support free trade agreements. We
wrote a letter to Ambassador Portman, advising him that in
order to obtain our support for any future trade agreement, we
would have to be assured that the lesson taught from allowing
China to join the WTO without provision for adequate
enforcement against intellectual property violations has been
learned.
In fact, just last week, IIPA submitted comments for the
Special 301 Out-of-Cycle review on Russia. It's not encouraging
news: ``In short, Russia is not complying with its commitments
to provide adequate and effective copyright protection and
enforcement.''
Furthermore, the House in a bipartisan vote--I believe that
was the gentleman from California, Mr. Issa's resolution--
recognized Russia's failure to adequately protect intellectual
property, and cautioned that without change they are at risk of
losing GSP benefits and accession to the WTO.
The last time, we discussed the complexity of denying GSP
benefits to a country, a process which requires consultation of
most agencies within the Executive Branch. It's clear that in
Congress we all agree that this situation is quite outrageous,
and that a country that flagrantly violates American
intellectual property rights should not receive GSP duty-free
benefits. So I ask, since the last hearing, has there been any
movement on the status of Russia's GSP benefits?
If motivated, these countries can protect intellectual
property rights. When piracy hurts the Chinese interests, the
Chinese government has been motivated to step in. When knock-
offs of the Beijing summer 2008 game logos on T-shirts were
being sold, the markets were quickly cleared. In short, China
can deal with this problem, if it has the political will, and
when it has the political will.
In Russia, it seems incredible that the Russian government
actually controls the facilities and land on which many of
these pirate optical disc plants operate. How can it simply do
nothing to shut down the plants operating on these government-
run installations?
I'm looking forward to hearing from the witnesses to learn
what benchmarks or time lines have been established to help
guide a decision on a WTO case against China, the withdrawal of
GSP duty-free benefits from Russia, and whether Russia is aware
that they will be denied admission to the exclusive WTO club
unless the piracy problem is addressed. I'm looking forward to
hearing about other steps that are being taken to protect
American creativity. Thank you, Mr. Chairman.
Mr. Smith of Texas. Thank you, Mr. Berman. The gentleman
from California, Mr. Issa, is recognized for his comments.
Mr. Issa. Thank you, Mr. Chairman and Ranking Member
Berman. Thank you for your leadership in seeing that the
resolution, which had to be pushed through the Ways and Means
Committee, saw the floor, and certainly showed the
Administration, in addition to the Russians, that we are
determined not to make the same mistake we made with China.
I, personally, voted in support of the Permanent Normalized
Trade; and obviously, it led to WTO admission for China. That
is a vote that I deeply regret. I'm a dyed-in-the-wool free-
trader; but free trade is about fair trade.
Briefly, I wanted to echo some of the comments that the
Ranking Member and the Chairman made, which are if you have
countries which believe, support, and in fact participate in
theft, it doesn't matter what their justification is. The truth
is that Russia and China hide under the theory that they cannot
afford--that they are poor countries; they cannot afford to pay
that, as was said in the opening statements. The fact is,
Russia has become the number-two, soon to be the number-one
seller into Europe of counterfeit goods.
Obviously, Russia believes that Europe can also not
afford--Luxembourg, with a per-capita GDP similar to the United
States, cannot afford--to pay a fair price, unless of course
Russia is making a profit on it.
There is no question that this behavior is part of a
culture in the old Soviet Union and the still technically
communist China, that intellectual property is not real
property, and that in fact it is a right of the state. That
attitude and the legislation and the enforcement have to be
changed.
I believe that with the Chairman's leadership, that we can
continue to echo the message to the Administration, Trade
Representative here today, that we shall not, under any basis,
allow for accession to the WTO--which I do have to disagree
with the Ranking Member slightly. I'd like to say it was
exclusive, but with over 140 members, the truth is Russia
stands out by its absence as a country prohibited--rightfully
so--prohibited from entering this no longer so exclusive club
because of their action. Their action is reprehensible.
And I'll close with this. Less than 6 months ago, I was in
Russia; and I've been assured by a group that was there over
the break, it's still the same. If you can drive the main
streets of Moscow and see them offering MPEG-4, MP-3, formats
for movies and for music that are not offered from the makers
in their original form, on the main streets in large neon
signs--and of course, offering an opportunity to buy ``Star
Wars'' long before it was out on DVD--it is very clear that
they are unapologetic for their theft of intellectual property.
And as Mr. Berman, I believe, noted, also, they don't have
a problem at all stealing other property from us in the defense
industry, and in fact in every area of manufacturing. And I
thank the Chairman and the Ranking Member.
Mr. Berman. Would the gentleman yield?
Mr. Issa. I'd be glad to yield.
Mr. Berman. On the issue of the exclusivity, it reminds me
of the Groucho Marx line: ``Why would you want to get in any
club that would take you?''
Mr. Issa. ``That would have you as a Member.'' Absolutely.
And with that, I yield back.
Mr. Smith of Texas. Thank you, Mr. Issa. It's nice of us to
have a united front up here.
Before we hear from the witnesses, I'd like to ask you to
stand and be sworn in.
[Witnesses sworn.]
Mr. Smith of Texas. Please be seated. Our first witness is
Chris Israel, who serves as the Coordinator for International
Intellectual Property Enforcement. Mr. Israel was appointed to
this newly created position, which is housed at the U.S.
Department of Commerce, in July 2005, by President George W.
Bush. In this capacity, Mr. Israel is tasked with coordinating
and leveraging the resources of the Federal Government to
improve the protection of U.S. intellectual property at home
and abroad.
Before accepting his current position, Mr. Israel served in
a variety of assignments at the Department of Commerce, many of
which focused on advancing U.S. innovation and technology
leadership.
I am told that today's testimony will mark the first time
that Mr. Israel has testified before a Committee of Congress
since accepting his new responsibilities.
His ability to ensure the development of a sustainable and
comprehensive national and international enforcement policy for
the protection of U.S.-based intellectual property rights is of
vital and continuing interest to this Subcommittee.
Mr. Israel received his BA from the University of Kansas,
and his MBA from the George Washington University.
Our second witness is Victoria Espinel, who is the [Acting]
Assistant U.S. Trade Representative for Intellectual Property
in the Office of the United States Trade Representative. In
that capacity, Ms. Espinel serves as the principal U.S. trade
negotiator on intellectual property.
Ms. Espinel's office chairs the intra-agency committee that
conducts the annual Special 301 Review of international
protection of intellectual property rights. The latest report
was published on April 29, 2005. Subsequent to its publication,
Ms. Espinel appeared before the Subcommittee to deliver
testimony on the subjects of intellectual property theft in
China and Russia. She will be providing this Subcommittee with
an update on developments, as well as a status report on the
substantial challenges that remain.
Ms. Espinel holds an LLM from the London School of
Economics, a JD from Georgetown University, and a BS in foreign
service from Georgetown University's School of Foreign Service.
Our third witness is Eric H. Smith, who serves as the
President of the International Intellectual Property Alliance,
a private-sector coalition of seven U.S. trade associations
which is based in Washington, D.C. IIPA represents over 1,900
companies that produce and distribute materials protected by
copyright laws throughout the world. A founder of IIPA, Mr.
Smith frequently serves as the principal representative of the
copyright industries in WTO, TRIPS, and Free Trade Agreement
negotiations.
Mr. Smith has a JD from the University of California at
Berkeley, a BA from Stanford, and an MA from the School of
Advanced International Studies at Johns Hopkins.
Our final witness is Joan Borsten, who is President of
Films by Jove, Inc., a California-based production and
distribution company that acquired worldwide rights to much of
the animation library of Moscow's--is it Soyuzmultfilm?--Studio
in 1992.
Ms. Borsten received her BA in comparative literature from
the University of California at Berkeley, and her MS in
bilingual education at USC.
Welcome to you all. We have witness statements from all of
the witnesses on this panel. Without objection, their complete
testimony will be made a part of the record.
As you all know, we trust that you will limit your
testimony to 5 minutes; which we look forward to. And Mr.
Israel, we will begin with you.
TESTIMONY OF CHRIS ISRAEL, COORDINATOR FOR INTERNATIONAL
INTELLECTUAL PROPERTY ENFORCEMENT, U.S. DEPARTMENT OF COMMERCE
Mr. Israel. Thank you, Mr. Chairman. Chairman Smith,
Ranking Member Berman, and Members of the Committee, I'm
pleased to be able to be here today to join you and my
counterparts on this panel to discuss the challenge of
international intellectual property rights enforcement.
I want to first thank the Committee for their continued
support and leadership on issues concerning the protection of
intellectual property. I look forward to the opportunity to
work together to ensure that the heart of America's thriving
innovation economy, its intellectual property, is effectively
protected around the world.
Combating piracy and counterfeiting is a top priority for
the Bush Administration. President Bush has consistently raised
IP enforcement with foreign leaders; placed it on the agenda of
the G8; and made it a key part of the recent U.S./EU summit. He
has also discussed our ongoing concerns with leaders of
critical markets such as China and Russia. In addition, he has
directed his Administration to address the issue actively,
aggressively, and with a results-oriented approach.
The reasons IP enforcement is a priority for this
Administration are very clear. Few issues are as important to
the current and future economic strength of the United States
as our ability to create and protect intellectual property.
Enforcement of intellectual property also carries great
consequence for the health and safety of consumers around the
world, because fake goods don't just hurt business; they hurt
people.
Finally, the theft of American intellectual property
strikes at the heart of one of our greatest comparative
advantages: our innovative capacity.
The Office of International Intellectual Property
Enforcement is located at the Department of Commerce, and I
report to Secretary Gutierrez. We also work under the
leadership of the White House, and we have been met with
tremendous cooperation from all Federal agencies that
contribute to our overall IP enforcement efforts.
A very critical element of our overall coordination is the
Strategy Targeting Organized Piracy, the STOP Initiative,
launched by the Bush Administration in October 2004. This
initiative brings together USTR, Commerce, Justice, Homeland
Security, and the State Department. STOP has yielded tangible
results and received attention around the world.
The STOP Initiative and our new Office of International
Intellectual Property Enforcement allows us to deliver a clear
message: The United States takes the issue of intellectual
property enforcement very seriously; we are leveraging all of
our resources to address it; and we have very high expectations
of all of our global trading partners.
As this Committee clearly understands, the problem of
global piracy and counterfeiting exists in many industries and
countries, and demands continuous attention. With finite
resources and seemingly infinite concerns, how we focus our
efforts is critical.
The Bush Administration is focused on six key priorities.
First, we are working to empower America's innovators. Through
specific tools and broad education efforts, we are getting the
word out to American businesses that they must be aggressive
and proactive in protecting their rights.
Secondly, we are focused on preventing counterfeit and fake
goods from penetrating our borders. This means casting a wider
net, utilizing technology, and working with our trading
partners to share information.
Third, we are working to prevent fake and counterfeit goods
from corrupting legitimate supply chains. We have worked
closely with the Coalition Against Counterfeiting and Piracy to
develop voluntary guidelines companies can use to ensure their
supply and distribution chains are free of counterfeits.
Fourth, U.S. law enforcement is leading efforts to
dismantle criminal enterprises around the world that steal
intellectual property. The Justice Department has pursued
numerous operations targeting criminal organizations involved
in online piracy and trafficking in counterfeit goods.
Fifth, we are working with our trading partners to build
international support for IP enforcement. Through the Joint
Committee for Commerce and Trade, the JCCT, for example, we
have worked extensively with China to address rampant IP
concerns. And just last week, we reached an agreement to work
much more closely with the European Union to combat global
piracy.
Lastly, we are educating other governments about
intellectual property rights and how important IPR is to the
global economy. To date, over 100 IPR enforcement projects and
290 IPR technical assistance projects have been conducted
around the world.
Mr. Chairman, the Bush Administration is committed to
stopping intellectual property theft and providing businesses
with the tools they need to flourish in a global economy. As I
work to coordinate the U.S. Government's efforts, and with your
continued support and the partnership of this Committee, we
will be able to do even more on behalf of American innovators,
researchers, entrepreneurs, artists, and workers.
We must take advantage of the opportunity to work together
to better protect the knowledge industries of today, so that we
may continue to see the innovations and growth of tomorrow.
Thank you, Mr. Chairman.
[The prepared statement of Mr. Israel follows:]
Prepared Statement of Chris Israel
Chairman Smith, Ranking Member Berman and members of the Committee,
I am pleased to join you today to discuss the challenge of
international intellectual property rights enforcement.
I want to thank the Committee for its continued support and
leadership on issues concerning the protection of intellectual
property. I look forward to the opportunity to work together to ensure
that the heart of America's innovation economy, its intellectual
property, is effectively protected around the world.
The Bush Administration is keenly aware of the significance of IP
protection for American businesses, workers, entrepreneurs and
innovators. It is estimated that IP theft costs U.S. businesses
approximately $250 billion annually and results in the loss of hundreds
of thousands of American jobs. Combating piracy and counterfeiting is a
top priority for this Administration. This prioritization is evident in
the leadership shown by President Bush. He has consistently raised IP
enforcement with foreign leaders, placed the issue on the agenda of the
G8 and made it a key part of the recent U.S./EU summit. He has also
discussed our ongoing concerns with leaders of critical markets such as
China and Russia. He has directed his Administration to address this
issue actively, aggressively and with a results-oriented approach.
I appreciate the opportunity to discuss this leadership, to address
our efforts to maximize the Federal government's role in protecting
American intellectual property and to share our results-oriented
strategy.
* * * * *
LEADERSHIP AND PRIORITIZATION
The reasons for the Administration's leadership on IP enforcement
and for its prioritization are clear.
First, few issues are as important to the current and future
economic strength of the United States as our ability to create and
protect intellectual property. U.S. IP industries account for over half
of all U.S. exports. They represent 40% of our economic growth and
employ 18 million Americans who earn 40% more than the average U.S.
wage, and a recent study valued U.S. intellectual property at
approximately $5 trillion--or about half of U.S. GDP. Quite simply, our
ability to ensure a secure and reliable environment for intellectual
property around the world is critical to the strength and continued
expansion of the U.S. economy.
The enforcement of intellectual property rights also carries great
consequence for the health and safety of consumers around the world.
The World Health Organization estimates that 10% of all pharmaceuticals
available worldwide are counterfeit. The U.S. Federal Aviation
Administration estimates that 2% of airline parts installed each year
are fake--or about 520,000 parts. And we have seen counterfeit circuit
breakers that overheat and explode, brake linings made of wood chips
and cardboard, and fake power cords. In the world of today's
sophisticated criminal IP operations, if a product can be easily
counterfeited, has an immediate demand and provides a good profit
margin it will be copied. Consumer safety and product quality are
concerns obviously not on the minds of global IP thieves.
Finally, the theft of American intellectual property strikes at the
heart of one of our greatest comparative advantages--our innovative
capacity. Through the applied talents of American inventors,
researchers, entrepreneurs, artists and workers we have developed the
most dynamic and sophisticated economy the world has ever seen.
And I truly believe the world is a much better place due to these
efforts. We have delivered life-saving drugs and products that make
people more productive. We have developed entirely new industries and
set loose the imaginative power of entrepreneurs everywhere. And, we
set trends and market best-of-class products to nearly every country in
the world.
We value our heritage of innovation and exploration--it is not only
part of our history; it is the key to our future.
And this future--a future of innovation, exploration and growth
that benefits the entire world--rests on a basic, inherent respect for
intellectual property rights and a system that protects them.
The Bush Administration's effort to provide a secure and
predictable global environment for intellectual property is driven by a
commitment to foster U.S. economic growth, to secure the safety and
health of consumers everywhere, and an abiding respect for the great
American innovative spirit that has driven our nation since its
founding and will determine our future.
* * * * *
ORGANIZATION AND EFFECTIVE ENGAGEMENT
This is my first opportunity to testify as the Coordinator for
International Intellectual Property Enforcement, and I appreciate the
chance to discuss how the Administration is working to focus and
leverage our vast capabilities and resources.
The Office of International Intellectual Property Coordination is
located at the Department of Commerce, and I report to Commerce
Secretary Carlos Gutierrez. We also work under the leadership of the
White House, and our efforts thus far have met with tremendous
cooperation from the all federal agencies that contribute to our IP
enforcement efforts.
Reinforcing the commitment and collaboration that exists within
this interagency process is the fact that a senior Justice Department
official is currently serving as the Deputy Coordinator for
International Intellectual Property Coordination and Customs and Border
Protection and the Patent and Trademark Office have both provided
detailees to support our efforts.
A critical element in our overall coordination is the Strategy
Targeting Organized Piracy (STOP) Initiative launched by the Bush
Administration in October 2004. STOP has built an expansive interagency
process that provides the foundation and focus for all of our efforts.
This initiative is led by the White House and brings together USTR, the
Department of Commerce, the Department of Justice, the Department of
Homeland Security and the State Department. STOP is an attempt to play
offense in the global fight against piracy and counterfeiting. The
agencies involved have identified ways to empower U.S. businesses to
better protect their IP, increase efforts to seize counterfeit goods at
our borders, pursue criminal enterprises involved in piracy and
counterfeiting, found innovative ways to work with U.S. industry, and
aggressively engaged our trading partners to join our efforts.
STOP has yielded tangible results (Fact Sheet is submitted for the
record), maintained the commitment of senior Administration officials,
institutionalized an unprecedented level of coordination within the
federal government and received attention around the world. The message
that the STOP Initiative, and indeed our new Office of International
Intellectual Property Enforcement, allows us to deliver is--the United
States takes the issue of IP enforcement very seriously, we are
leveraging all of our resources to address it and we have high
expectations of all of our global trading partners.
In addition to the infrastructure put in place by the STOP
Initiative and reinforced by the Office of International Intellectual
Property Enforcement, the Administration will seek a reinvigorated role
for the National Intellectual Property Law Enforcement Coordination
Council (NIPLECC). NIPLECC is tasked with coordinating domestic and
international intellectual property law enforcement in order to ensure
the effective and efficient enforcement of intellectual property in the
United States and worldwide. NIPLECC has made a number of valuable
contributions since its creation in 1999 including the development of a
comprehensive database that includes all recent IP law enforcement
training provided by the U.S. government to developing and least
developed nations as well as delivering legislative suggestions to
improve domestic IP laws related to enforcement. However, there is
unmet potential and in my role as Director of NIPLECC I look forward to
working with this Committee to ensure that we are maximizing the
capabilities of NIPLECC. To begin this effort, I can report that we
will conduct a meeting of all NIPLECC members in January. This will be
the most comprehensive NIPLECC meeting since its inception in 1999.
NIPLECC can play a vital role in our effort by bringing together
the leaders of the key operational entities within the federal
government that are responsible for IP enforcement. By establishing
priorities and objectives at a senior level we will reinforce our day-
to-day activities and ensure that all of the agencies critical to the
federal government's IP enforcement efforts are closely coordinated and
committed to a common results-oriented agenda. In addition to the
existing NIPLECC structure--which is comprised of the Department of
Justice (Assistant Attorney General of the Criminal Division), the
Commerce Department (Under Secretary for Intellectual Property and
Director of the Patent and Trademark Office and Under Secretary for
International Trade), the Office of the U.S. Trade Representative
(Deputy USTR), the Department of Homeland Security (Commissioner of
Customs and Border Protection) and the State Department (Under
Secretary for Economics, Business and Agricultural Affairs).
* * * * *
STRATEGY AND FOCUS
As this Committee clearly understands, the problem of global piracy
and counterfeiting confronts many industries, exists in many countries
and demands continuous attention. With finite resources and seemingly
infinite concerns, how we focus our efforts is crucial. I appreciate
this opportunity to share with you the key areas which make up the
Administration's overall Strategy for Targeting Organized Piracy.
First, we are working to empower America's innovators to secure and
enforce their rights at home and abroad. Our efforts to provide new
federal services and assistance include:
A hotline (1-866-999-HALT) to counsel businesses on
how to protect their IP.
A website (www.stopfakes.gov) and brochure, to
provide information and guidance to right holders on how to
register and protect their IP in markets around the world.
``IP toolkits'' to guide businesses through securing
and enforcing their rights in key markets around the world.
Available at the www.stopfakes.gov website, toolkits for China,
Russia, Mexico, Korea and Taiwan are downloadable.
Extensive education campaigns across the country to
teach small and medium sized enterprises how to secure and
protect their rights and where to turn for federal resources
and assistance. These seminars have occurred in 20 states and
more are planned in 2006.
An online recordation tool for rights holders to
record their trademarks and copyrights with Customs and Border
Protection.
We have launched a China Intellectual Property Rights
(IPR) Advisory Program in conjunction with the American Bar
Association, the National Association of Manufacturers and the
American Chamber of Commerce in China to provide legal counsel
for SMEs to protect and enforce their IPR in China.
Training for U.S. embassy personnel to be effective
first responders to IPR issues in order to identify problems
abroad and assist rights holders before fakes enter the market
and/or supply chain.
Next, we need to increase our efforts to stop fake and counterfeit
goods at America's borders. This means:
Casting a wider, tighter net on counterfeit and
pirated goods by implementing new risk assessment models and
technologies to stop counterfeit goods at our borders.
Working with trading partners to share information
and improve our capabilities to assess and anticipate risks. We
have seen results of this effort with the European Union. At
the U.S./EU Economic Ministerial last week, leaders of both
governments committed to expand information sharing of customs
data. Follow-up work on this commitment has already begun.
We need to build international support and rules to stem the flow
of fake and counterfeit goods and keep them out of global supply
chains. Our efforts here include:
Commissioning a study by the Organization for
Economic Cooperation and Development on the impact of global
counterfeiting and piracy.
Conducting outreach to Canada, the European
Commission, France, Germany, Hong Kong, Japan, Korea, Mexico,
Singapore and the United Kingdom laying the basis for
increasing cooperation on IP enforcement. Outreach to other
like-minded countries is underway.
Facilitating the transfer of IP criminals to justice
in America by revising and modernizing mutual legal assistance
treaties and extradition treaties with Finland, Sweden,
Belgium, Spain, the UK and Luxembourg. Additional treaties are
under negotiation.
Conducting post-entry audits to identify companies
vulnerable to IP violations and working with them to correct
their faulty business practices.
Working closely with U.S. industry--namely, the
Coalition Against Counterfeiting and Piracy, a U.S. Chamber of
Commerce and National Association of Manufacturers led
association--on the ``No Trade in Fakes'' program to develop
voluntary guidelines companies can use to ensure their supply
and distribution chains are free of counterfeits.
Law enforcement must play a leading role in dismantling criminal
enterprises that steal intellectual property. We have:
Pursued numerous operations targeting criminal
organizations involved in online piracy and trafficking in
counterfeit goods. We have indicted the four leaders of one of
the largest counterfeit goods operations ever uncovered in New
England--broke up a scheme to sell more than 30,000 luxury
goods--including handbags, wallets, sunglasses, coats, shoes,
and necklaces, and found the materials to manufacture at least
20,000 more counterfeit items.
Led Operation Site Down, an international online
piracy investigation involving more than 90 searches in twelve
countries. Such cases have led to numerous arrests and
convictions around the globe, seizure of millions of dollars
worth of pirated products and the dismantling of criminal
operations.
Led Operation Ocean Crossing, a joint U.S. and
Chinese law enforcement action that disrupted an organization
trafficking in counterfeit pharmaceuticals. The action resulted
in arrests in China and the United States and the capture of
hundreds of thousands of fake pharmaceuticals.
Executed measures to maximize law enforcement's
ability to pursue perpetrators of IPR crimes. For example, we
increased from 5 to 18 the total number of Computer Hacking and
Intellectual Property Units in U.S. Attorneys' Offices across
the country. This increased to 229 (one in each federal
district) the number of specially trained prosecutors available
to focus on IP and high-tech crimes.
Proposed the Intellectual Property Protection Act of
2005 to strengthen criminal intellectual property protection,
toughen penalties for repeat copyright criminals, and add
critical investigative tools for both criminal and civil
enforcement authorities.
We must reach out to our trading partners and build international
support. U.S. leadership is critical and we are active on a number of
fronts:
We have obtained endorsement of increased protection
for IP in multilateral forums such as the G-8 and Asia-Pacific
Economic Cooperation forum, and bilateral venues with the
European Union and China.
The past year has resulted in particularly strong
commitments from China in a variety of fora. Within the Joint
Committee on Commerce and Trade (JCCT) the Chinese have
committed to, among other things, address the proliferation of
illegal software within government and state-owned enterprises,
increase criminal prosecutions for IP violations, enhance
cooperation with U.S. law enforcement and join the WIPO
Internet Treaties. We have already seen movement on a number of
these commitments. Notably, Attorney General Gonzales laid the
groundwork for expanded law enforcement cooperation on IP cases
during a recent trip to China and China recently sent a
delegation to the United States to discuss the steps necessary
to accede to the WIPO Internet Treaties. In addition, USTR has
recently invoked a procedure under the WTO Agreement on Trade-
Related Aspects of Intellectual Property Rights to make a
formal request for China to provide detailed information
regarding their IP enforcement regime. The Japanese and Swiss
governments also delivered similar requests to China for
enforcement data under the same WTO provision.
Noting the interest this Committee showed in
increased cooperation with the European Union and Japan at its
hearing in May, I would like to point to two significant
developments. Just last week, Secretary Gutierrez reached an
agreement with European leaders to significantly expand the
cooperation between the United States and EU to address global
piracy through stepped-up commitment to enforcement and
information sharing.
We are increasing the number of U.S. IP attaches
abroad in our embassies located in China, India, Brazil and
Russia, who will assist U.S. businesses, advocate U.S.
intellectual property policy and conduct IPR training.
Finally, we must educate other governments about intellectual
property rights:
The United States has conducted numerous training and
capacity building programs working with foreign judges and law
enforcement officials from around the world to improve criminal
and civil IPR protection. So far, we have conducted over 100
IPR enforcement projects and 290 IPR technical-assistance
projects around the world, producing real results in IP
protection and enforcement.
We have established a Global Intellectual Property
Academy to consolidate and expand intellectual property
training programs for foreign judges, enforcement officials,
and relevant administrators.
* * * * *
Mr. Chairman, the Bush Administration is committed to stopping
intellectual property theft and providing businesses the tools they
need to flourish in the global economy. As I work to coordinate the
U.S. government's intellectual property enforcement efforts, and with
your continued support and the partnership of this Committee, we will
be able to do even more to provide American businesses and innovators
with the protection they need. America's intellectual property is
important not just for her national security, but it is also a
necessary component in ensuring continued U.S. economic growth and
technological leadership. We must take advantage of the opportunity to
work together to better protect the knowledge industries of today so
that we may continue to see the innovations of tomorrow. Thank you very
much.
Mr. Smith of Texas. Thank you, Mr. Israel.
Ms. Espinel.
TESTIMONY OF VICTORIA ESPINEL, [ACTING] ASSISTANT U.S. TRADE
REPRESENTATIVE FOR INTELLECTUAL PROPERTY, OFFICE OF U.S. TRADE
REPRESENTATIVE
Ms. Espinel. Thank you. Chairman Smith, Ranking Member
Berman, and Members of the Committee, thank you for the
opportunity to address the important issue of the international
protection and enforcement of intellectual property.
Stopping counterfeiting and piracy and protecting our
right-holders is a top priority of this Administration and of
USTR. My remarks will focus on China and Russia but, time
permitting, I would also like to provide you with a brief
overview of our other activities to fight counterfeiting and
piracy.
Turning to China, the protection and enforcement of IP
remains a top issue in our bilateral trade relationship with
China. It is an issue that has been raised at the highest
levels of government with the Chinese by both Ambassador
Portman and by President Bush.
As you know, each year USTR issues a Special 301 Report
that catalogues the IP problems of the world's worst offenders.
In 2004, because of our level of concern at China's continued
lack of progress, USTR initiated a more intensive review of
China's IP regime, known as an Out-of-Cycle Review.
On April 29th, USTR reported the results of that review. I
described the results of the review and the actions we
announced that we would take in my earlier testimony. Today, I
would like to update you on the progress that has been made
since then on the actions that we set out in the 301 Report.
First, we committed to investigate potential WTO dispute
settlement cases. In the 301 Report, we announced that we would
be working closely with our industry, with a view toward WTO
dispute settlement. Cases at the WTO require extensive research
and data collection.
We have been working closely with our industry to develop
the information, and have, for example, sent a USTR legal team
to China to meet with industry enforcement experts on the
ground. We anticipate that those industries that have been
working closely with us will continue to do so.
We appreciate greatly the Chairman's support of this
partnership. Our time table for determining whether or not a
WTO case against China is the most effective approach is
dependent on the effectiveness of these efforts.
Second, we elevated China to the Priority Watch List, as an
indication of our significant level of concern.
Third, we pledged to intensify work to the JCCT IPR Working
Group. Since April, we have had three meetings of the JCCT, and
have seen progress at these meetings.
My complete testimony sets out a number of commitments made
by China at the July JCCT following the experts' meeting in
May, and our elevation of China to the Priority Watch List. I
will highlight a few of them.
China agreed, among other things:
To increase criminal prosecutions;
To reduce exports of infringing goods;
To establish an IPR ombudsman in the Chinese Embassy to
assist small- and medium-sized companies in particular;
To join the WIPO Internet treaties in 2006; and
To clarify some deficiencies in the judicial
interpretations.
Since July, in order to move these commitments forward,
China has done several things, including: Making a proposal for
customs cooperation;
They have explained to us their process to ensure legal use
of software by the government;
They have sent us Internet regulations in order to come
into compliance with the WIPO Internet treaties, and have
committed to work with us on them;
They have told us that the IPR specialist to help small-
and medium-sized businesses will be in Washington by the end of
this year; and
They have been working on regulations that transfer
administrative cases over to the criminal process, as part of
the effort to increase criminal prosecutions.
We have also seen some increased enforcement, particularly
against counterfeiting; for example, in this year's Mountain
Eagle campaign. But we have made clear to China that we need
sustained enforcement and that annual enforcement campaigns
will not be sufficient.
Fourth, I would like to highlight the TRIPS Transparency
Provision commitment that we made. We announced that we would
be filing a formal request under article 63 of the TRIPS
Agreement, and we did so on October 26. This request seeks
additional information on China's IP enforcement efforts.
In an example of our work to enhance international
cooperation, we were joined by Japan and Switzerland, who
submitted simultaneous similar requests. These requests seek
detailed information from China on its reported IPR enforcement
efforts.
China's response to these requests, anticipated in early
2006, will be a test of whether it is serious about resolving
the rampant IP infringement throughout its country.
Turning to Russia, enforcement in both the copyright and
trademark sectors continues to be a significant problem in
Russia. As a result, Russia is designated as a Priority Watch
List country in the Special 301 Report, and an Out-of-Cycle
Review is being conducted this year to monitor progress. We are
also continuing inter-agency review of a petition filed by the
U.S. copyright industries to withdraw some or all of Russia's
GSP benefits.
USTR and other agencies have been, and will continue to be,
very engaged with the Russian government at all levels to
develop an effective intellectual property regime and
strengthen enforcement in Russia. Intellectual property has
been raised as a priority issue by Ambassador Portman and by
President Bush.
We are working on IP issues in Russia and on a number of
fronts, including in the context of Russia's WTO accession
negotiations. We have made it clear to the Russian government
that progress on intellectual property will be necessary in
order to complete the accession process.
Our work has brought about some improvements; particularly
with respect to the content of Russia's laws. But enforcement
of these laws is critical. We have seen some recent indications
of progress, and we are monitoring to see whether or not Russia
sustains and increases these efforts. We will continue to push,
and have made clear to Russia that we need concrete results.
USTR has a number of other tools at our disposal. I would
like to give a very brief overview of these. As you know----
Mr. Smith of Texas. Ms. Espinel, I'm afraid your time has
expired.
Ms. Espinel. All right.
Mr. Smith of Texas. Now, we'll look forward to hearing the
rest of your testimony when we ask you questions, if that's all
right.
Ms. Espinel. Thank you.
[The prepared statement of Ms. Espinel follows:]
Prepared Statement of Victoria Espinel
Mr. Smith of Texas. Thank you.
Mr. Smith.
TESTIMONY OF ERIC H. SMITH, PRESIDENT, INTERNATIONAL
INTELLECTUAL PROPERTY ALLIANCE
Mr. Smith. Mr. Chairman, Mr. Berman, Members of the
Subcommittee, the IIPA is a coalition of seven trade
associations representing now over 1,900 U.S. copyright-based
companies. Thank you once again for the opportunity to appear
here to review the record of China and Russia on enforcing
their copyright laws to reduce among the highest piracy rates
in the world.
I'm afraid anything I add here won't even approach the
eloquence with which the Chairman and the Ranking Member and
Mr. Issa described the endemic piracy problems that we face in
these two countries. We reported to you last May that our
situation in both these countries was dire, at best. Our
industries were losing at least $2\1/2\ billion a year in
China, $1.7 billion in Russia; piracy rates were 90 percent in
China, and between 70 and 90 percent in Russia, depending on
the sector involved.
You've asked us to give you a report card on progress over
the last 6 months. We regret to report that there has been
negligible progress in China, and the situation in Russia has
actually gotten worse. Neither country has yet found the
political will to act.
Let me turn first to China. In my written statement, we
outline what has happened--or more accurately, not happened--in
the last 6 months. Some report that the government is showing
greater awareness of piracy and is being more cooperative. This
is progress; no question. But have the Chinese authorities
commenced a barrage of criminal cases against pirates? No.
Have they sought to provide greater market access? China is
the most closed market in the world to copyright-based
industries. The answer again is, no. In fact, the U.S.
Government in the last JCCT round was told flat-out, no, there
would be no market liberalization in these sectors.
In my written testimony, and Ms. Espinel's as well, we
detail what happened at the July 2005 JCCT meeting. There was
some progress made, but, in our view, most were in the nature
of future commitments; not what we really seek, a report on
specific actions being taken to ``significantly reduce IPR
infringements.''
We are continually frustrated by the lack of transparency
in the Chinese enforcement system. One of the reasons that USTR
went to the article 63 process at the TRIPS Council was to,
hopefully, get a real understanding of how the Chinese system
works by getting meaningful facts about all the vast numbers of
cases they cite to us.
At the recent IPR Working Group meeting in November in
Beijing, it was reported to us that the Ministry of Public
Security provided statistics on some of its enforcement
actions. They sound impressive, but there was no report on how
many copyright cases were brought, how many persons were
convicted for piracy of U.S. copyrighted works, or what
penalties were meted out.
We have no alternative but to conclude that the number of
cases brought was very close to zero. And to the best of our
knowledge, there have only been two convictions for piracy of
U.S. copyrighted works under article 217 of the criminal law
since China joined the WTO, and none that we are aware of in
the last 6 months.
Our view is that China's failure to bring criminal cases
against copyright piracy on a commercial scale--the TRIPS
standard--puts it in violation of its obligations under the WTO
TRIPS Agreement. We also believe that China's criminal law, on
its face, is in violation of TRIPS.
Not being able to do business in the Chinese market is
deeply frustrating to our companies. It is inexcusable that
China continues to permit the wholesale theft of U.S.
intellectual property, the key export of our country, while
continuing to enjoy the benefits of our open market for Chinese
goods--so open that China enjoyed a $162 billion surplus with
us in 2004. As we noted earlier, this is an issue of political
will, and we have not seen it yet.
Turning to Russia, a market which has deteriorated for us
in the last 6 months, some salient facts:
In the last 6 months, Russia has added at least eight--and
by some accounts, more--optical disc plants to the 34 we
reported last May. Nine of these plants--and maybe up to 18--
are located on the facilities of the Russian government, as was
described. Pirate optical discs forensically sourced from
Russia have been found in 27 countries.
We have asked the Russian government to inspect these
factories, seize pirate products, seize the equipment used in
these infringements, and prosecute the plant owners; while
imposing deterrent penalties that would place every Russian
plant owner and their associates in real jeopardy. This has
just not happened.
In recent weeks, the Russian authorities reported taking
nine raids against OD plants. This is positive, but the results
are telling. Much of the seized material ended up back on the
streets. No equipment was seized. We believe that most of these
plants continue to operate. This has been the typical situation
in 2004, and so far in 2005.
We know that over the years a few people employed by these
plants were prosecuted and convicted. But virtually all have
received suspended sentences. There is simply no deterrence in
the Russian system, and until there is the political will to
change that, we cannot expect much change.
Fortunately, we have ample tools to help Russia, hopefully,
find that political will to enforce the law. In passing House
Congressional Resolution 230 by a near unanimous bipartisan
vote in the House of Representatives on November 9--thanks to
Mr. Issa and all of you--the Administration has been delivered
a clear message: Until Russia takes effective enforcement
action to reduce this piracy, it should not be admitted to the
WTO and receive the trade benefits accorded WTO members. We
cannot make the same mistake that was made with China:
permitting Russia to enter the WTO without undertaking
meaningful and WTO/TRIPS compatible enforcement.
It has also sent a clear message that Russia should not be
eligible for over $600 million--that's January to September
2005--in GSP benefits. IIPA's GSP petition is 5 years old. It
has not been acted on, and piracy has gotten worse in Russia.
IIPA just testified at another GSP hearing looking into
Russia's eligibility. We asked again for benefits to be
withdrawn. It's now time to act, and for the Administration to
remove these benefits.
The U.S. Government also has huge leverage under Special
301. IIPA has recommended that Russia be designed a Priority
Foreign Country, after the ongoing Out-of-Cycle Review. If no
actions are taken, Special 301 permits the levying of
retaliatory sanctions against such named country.
We cannot allow Russia to continue to feel invulnerable, at
the same time as they do nothing to halt massive theft of our
intellectual property.
Thank you again, Mr. Chairman, for showing such a great and
abiding interest in nurturing the creative and innovative
individuals and industries that have become so important to our
culture, our technological future, our economic growth, and to
job creation. I'd be pleased to answer any questions. Thank
you.
[The prepared statement of Mr. Smith follows:]
Prepared Statement of Eric H. Smith
ATTACHMENT
Mr. Smith of Texas. Thank you, Mr. Smith. I have to observe
that I noticed, Mr. Smith and Ms. Borsten, that you both went
to Berkeley. And it's just nice to see two graduates of
Berkeley in favor of any kind of property rights; particularly
intellectual property rights. [Laughter.]
And that's not really a slight, but goes more to the
reputation perhaps of one of the best institutions in the
country.
Ms. Borsten.
TESTIMONY OF JOAN BORSTEN, PRESIDENT, FILMS BY JOVE, INC.
Ms. Borsten. Chairman Smith, Congressman Berman, and other
distinguished Members of the Subcommittee, I want to thank you
for the invitation to appear before you again.
Despite three U.S. Federal Court decisions in our favor, my
company, Films by Jove, continues to be threatened with the
loss of our investment by the Russian government. In May 1992,
Films by Jove acquired rights to distribute internationally an
award-winning library of more than 1,200 Soviet animated films.
Most of these films were little known outside the former
Eastern Bloc. Our contract required that we restore and
reformat the films for the international market, and that we
pay our Russian partners significant acquisition fees and
profits.
Our success drew the attention of the Russian Federation
officials, who wanted to bring the lucrative business that we
developed under their own control. In 1999, the Russian
government deliberately formed a new state-owned animation
studio with the same name as the studio from which we had
licensed the rights back in 1992.
In 2000, this state-owned studio, backed by the ministry of
culture, joined forces against us as a third party in a lawsuit
we had initiated in the New York Federal Court to end illegal
video duplication by a major Russian-American video pirate, a
convicted felon. The new studio told Judge David Trager that it
was the sole legitimate copyright holder of the animated films,
and that we were the pirates.
In August 2001, Judge Trager concluded that we had signed
our 1992 contract with the only possible copyright holder of
the animated films. The following year, the Russian studio
requested that Judge Trager reconsider his ruling, on the basis
of a new decision by Russia's highest commercial court. That
ruling cancelled, without explanation, certain lower court
decisions on which Judge Trager had relied.
To counter this step, we presented the court with a
confidential document which provided details of a secret
meeting at the Kremlin about securing the animation rights for
the new studio. The secret meeting was attended by a
representative of the office of the chief justice. It was also
attended by the Minister of Culture, his two deputies and their
lawyer, representatives of the State Property Ministry, the
State Prosecutor's Office, the Russian Patent Bureau, the
presidential administration, and the director of the new state-
owned studio. At the meeting, the Deputy Prime Minister
assigned the chief justice the task of making sure the courts
ruled in favor of the state.
The last time I testified, we were still waiting for Judge
Trager's decision. In April 2003, he denied their request for
consideration, writing, ``It is apparent that the High
Arbitrazh Court's decision was strongly influenced, if not
coerced, by the efforts of various Russian government officials
seeking to promote state interests.'' Under these
circumstances, the high court's decision is entitled to no
deference.
Nine months later, the Prime Minister of Russia signed a
directive retroactively amending the 1999 directive that had
created the new state-owned studio, now to include animation
copyrights. According to both Soviet and post-Soviet laws, the
state did not have those copyrights to give, either in 1999 or
in 2003.
The state-owned studio again petitioned Judge Trager for
reconsideration. In their brief, attorneys for the state-owned
studio warned Judge Trager that the Prime Minister's directive
``strongly suggests that the Russian government is concerned
about what has happened in this U.S. court.''
In November 2004, Judge Trager again declined
reconsideration, writing, ``It would contradict the very
principles at the foundation of the separation of powers
doctrine to allow a foreign state to engage in activities that
the United States courts would not tolerate from the U.S.
Legislature.''
The pirates settled. The state studio did not appeal. But
the Russian government continued its efforts against us.
Indeed, their recent actions have been most contradictory. One
moment, they propose settlement; and the next moment, they
resume obstructionism and hostility.
In October this year, we signed a memorandum of
understanding, by which the new studio recognized our 1992
contract and its amendments. One month later, the Russian side
suddenly began to demand additional documents in what we fear
might turn out to be a renewed challenge to our rights.
We've recommended numerous times to the Russian government
that if it is so important for the animation library to be
controlled by a Russian state-owned organization, they should
come to the negotiating table and buy us out of our contract.
Despite the difficulties that I have outlined, since Judge
Trager's decision there has been progress in building
protection for intellectual property rights of U.S. investors
in Russia. It is now quite possible that in the future U.S.
companies harmed by Russian non-enforcement of their
intellectual properties will be able to use U.S. courts to
obtain redress of their grievances. Recently, both the Second
Circuit and the Colorado Supreme Court reversed lower court
decisions that had found the Russian courts to be adequate
alternative forums for property disputes.
I urge this Committee and Congress not to underestimate the
ruthlessness and implacability of Russian efforts to undermine
property rights, especially intellectual property rights.
I want to thank the Subcommittee for giving me the
opportunity to testify today. And I'll be happy to answer any
of your questions.
[The prepared statement of Ms. Borsten follows:]
Prepared Statement of Joan Borsten
Mr. Smith of Texas. Thank you, Ms. Borsten.
Mr. Israel, let me direct my first comment to you. And that
is, I think it is worthy of emphasizing a couple of figures
that you used in your prepared testimony. And in fact, I've
used similar figures when I've made speeches on this subject,
as well.
The first is that the United States intellectual property
industries account for over half of all U.S. exports, and
represent 40 percent of our economic growth. The figure I've
been using is actually 30 percent, and I just wondered what
your source was for the 40, which I like better.
Mr. Israel. Thank you, Mr. Chairman. I'd be happy to
provide you the specific footnote to that. I believe that's a
study that was done by the U.S. Federal Reserve that looked at
economic growth, I think in the latter half of the 1990's. But
on the 40-percent number, I'd be happy to follow up to you and
the Committee on that.
Mr. Smith of Texas. Okay. Great, if you would. And would
you do the same in regard to the estimated IP theft cost to
United States businesses of approximately $250 billion
annually? And of course, the result in hundreds of thousands of
lost American jobs, I'm familiar with that. But the $250
billion figure I think is, again, eye-catching, and if you
could give us the source on that, as well.
Mr. Israel. I will certainly do it.
Mr. Smith of Texas. Ms. Espinel, let me direct most of my
questions to you today, just because of your position. You say
in your testimony that we are working on IPR issues in the
context of Russia's WTO accession negotiations. We have
continuing concerns that Russia's current IPR regime does not
meet WTO requirements.
I assume today you would oppose the entry of Russia into
the World Trade Organization, based upon its current record;
would you not?
Ms. Espinel. I would certainly say that Russia needs to
make considerable progress----
Mr. Smith of Texas. Okay, but they're not----
Ms. Espinel [continuing]. As we, including Ambassador
Portman, have made clear.
Mr. Smith of Texas. You would not consider them in
sufficient compliance today to recommend their entry into WTO?
Ms. Espinel. We believe more progress needs to be made.
Mr. Smith of Texas. I'm sorry?
Ms. Espinel. We believe more progress needs to be made.
Mr. Smith of Texas. Okay. Do you have any ideas when that
progress would be sufficient to justify their consideration?
Ms. Espinel. I suppose a lot of that depends on Russia. I
mean, we're working very hard on the accession negotiation,
obviously, but we've made it very clear to them that we need a
good agreement, in order to be able to complete the process.
Mr. Smith of Texas. Mr. Smith in his testimony raised, or
made three recommendations, and let me follow up on two of
them. They overlap what I was going to ask you about. He says
that IIPA believes that after 9 years on the Priority Watch
List, it is time for the United States Government to take a
different approach to Russia's inability or unwillingness to
act. In this case, recommendation, designate Russia as a
Priority Foreign Country, after the ongoing Out-of-Cycle Review
by USTR. Why would you not so designate Russia?
Ms. Espinel. Well, we would consider using all of the
options that we have against Russia. I think we would consider
not so designating Russia if we believed that progress is being
made, or if we believed that designating Russia as a PFC would
not be the most effective way to achieve what we want to
achieve, which is progress in Russia.
Mr. Smith of Texas. The other recommendation was to deny
Russia's eligibility to Generalized System of Preference duty
free trade benefits. When will that decision be made?
Ms. Espinel. There is an ongoing review of GSP, which the
USTR is taking very seriously. There was a hearing actually----
Mr. Smith of Texas. Is there a deadline for when that
review will be complete?
Ms. Espinel. The general GSP deadline, the regular GSP
deadline is June 30th for decisions. That doesn't necessarily,
though, have to be Russia's deadline. There could be a decision
made earlier than that.
Mr. Smith of Texas. That's good news. June 30th, or perhaps
before.
Ms. Espinel. We would certainly anticipate that a decision
would be made by June, at the latest.
Mr. Smith of Texas. June 30th at the latest? Okay. Good.
And a question on China. If we are not using existing WTO trade
dispute mechanisms against China, which is widely perceived as
among the worst global IPR offenders, then of what value are
the WTO mechanisms?
Ms. Espinel. Well, I would say I think even the threat of
WTO dispute settlement, of which China is well aware, is an
effective tool.
Mr. Smith of Texas. Well, the threats, both to China and
Russia, just don't seem to be manifested in much of a change in
their conduct. And so I think it's going to require tougher
actions on your part, on the part of our Government, if we are
going to get the results that we want.
Ms. Espinel. I think we would certainly agree that there is
an enormous amount of work that remains to be done. We have
seen some recent indications of progress with China and with
Russia. Although with Russia I would like to emphasize that
those signs of progress are truly very, very recent; so
obviously, it's going to be critical to see if Russia has the
ability to not just sustain that, but actually increase it
significantly.
With respect to WTO settlement, their dispute settlement
specifically with China, as you know, it is something that we
are working quite closely with our industry to develop our WTO
options. And as I said before, if we, in consultation with our
industry and in consultation with you and the rest of Congress,
believe that's the most effective way to address the problem,
we will move forward.
Mr. Smith of Texas. Okay. I would guess you would get
widespread support by Congress to take some strong actions.
Thank you, Ms. Espinel.
The gentleman from California, Mr. Berman, is recognized
for his questions.
Mr. Berman. Well, thank you very much, Mr. Chairman. First,
Mr. Israel and Ms. Espinel, you've heard Ms. Borsten, the story
of her saga in dealing with the Russians and their sale of
these copyrights and then their refusal to acknowledge it,
their creation of an entity to continue to produce them.
I'm wondering if, following this hearing, you or your
offices--I think Commerce only because commercial attaches in
our embassy in Moscow; the Trade Representative, because of
your ongoing dialogue--in addition to the broader issues, help
the Russians understand the importance of this specific issue
in terms of at least a good example of how they respect
copyrights and contracts. Would you be willing to have your
offices follow up in pursuing that?
Mr. Israel. Certainly, Congressman. And my understanding is
that Films by Jove has worked with the U.S. Embassy in Russia.
Mr. Berman. Yes.
Mr. Israel. Previously, I know Ambassador Vershbow was
personally engaged, and commercial offices in Russia have been
engaged, as well. We're certainly happy to take onboard recent
activity and any developing needs that the company may have for
U.S. engagement, and do any follow-up we can.
Mr. Berman. Great.
Ms. Espinel. As would USTR.
Mr. Berman. Good. This issue about progress is being made,
on China, they made a number of commitments: increased criminal
prosecutions for IPR violations, relative to the total number
of IPR administrative enforcement cases. They agreed to do
that. Have they?
Ms. Espinel. In order to do that--Well, one of the steps
that they need in order to do that is to have regulations in
place that will transfer cases that are put into the
administrative system, about which we have serious concerns
that it's not sufficiently deterrent----
Mr. Berman. Are those regulations in place?
Ms. Espinel. Those regulations are in process. They have
drafted them. We are reviewing them. They are moving forward on
them.
Mr. Berman. Reduce exports of infringing goods by issuing
regulations to ensure the timely transfer of cases. That's what
you're referring to for criminal investigation?
Ms. Espinel. There are several regulations that China is in
the process of drafting as a result of the commitments in the
JCCT, including with respect to transfer of administrative
cases to the criminal process, export regulations, and Internet
regulations in order to come into compliance with the WIPO
Internet treaties.
Mr. Berman. And at this particular point, none of these
regulations are in place?
Ms. Espinel. None of these regulations are yet in place.
Mr. Berman. Improve national police coordination by
establishing a leading group in the ministry of public security
responsible for overall research, planning, and coordination of
all IPR criminal enforcement, to ensure a nationwide
enforcement effort. Have they created such a group in the
ministry of public security?
Ms. Espinel. I believe that has been concluded.
Mr. Berman. Four, enhance cooperation on law enforcement
matters with U.S. by establishing a bilateral IPR law
enforcement working group focusing on the reduction of cross-
border infringement activities. Has that been done?
Ms. Espinel. Yes.
Mr. Berman. Expand an ongoing initiative to aggressively
counter piracy of movies and audiovisual products.
Ms. Espinel. Yes.
Mr. Berman. It's been----
Ms. Espinel. It has. I should note, I suppose, that they
have been some mixed results from that. There's been some very
good results. The results of the campaign in Beijing were not
as strong as we would have liked to have seen. The results in
Shanghai and, I believe, Shenjin [ph] were actually quite
positive.
But again, I would like to emphasize China--whatever signs
of progress there we consider to be, obviously, good, but
nascent. I mean, what is critical is that they sustain them.
Mr. Berman. Do you have benchmarks in mind for determining
whether the progress is real and meaningful and substantial? I
sound like we're talking about Iraq, but I'm not. We're talking
about in terms of dealing with the problem of piracy.
In a percentage context, a reduction, or in an absolute
number context, do you have some kind of benchmarks in mind for
deciding whether or not there is enough progress to justify
continuing not to bring a WTO case?
Ms. Espinel. Well, I guess, in my view, there are two
categories of benchmarks. One is the specific commitments that
China has made to us, and whether or not they follow through on
those in terms of, for example, improving their legislation, or
putting certain processes in place. And the second would be----
Mr. Berman. What about----
Ms. Espinel [continuing]. Results in terms of actually
seeing piracy and counterfeiting reduce; whether that's
measured by increased sales of our products, or measured by
industry's assessment of the piracy rates falling. But I would
say both of those, I think, are important components to measure
progress.
Mr. Berman. And on the latter, what have you seen so far,
on the quantified benchmarks, the reduction in piracy, the
increase in acquisition of legal goods?
Ms. Espinel. I'm not aware that industry has done an
overall survey since the last time I was before this testimony
[sic], so I don't have any new figures or statistics to cite.
Mr. Berman. Well, Mr. Smith, if you apply that quantifiable
standard, what would you say about China at this point?
Mr. Smith. Well, for 2004, at least, the piracy rate went
down a small notch in the recording industry, but stayed pretty
constant for everything else. And we don't expect much of a
change in 2005, simply because we haven't seen in our area the
kind of criminal enforcement that the Chinese have been
promising for a long time now. We just haven't seen it.
Mr. Berman. Well, I think my time has expired, Mr.
Chairman.
Mr. Smith of Texas. The gentleman's time has in fact
expired. And the gentleman from California, Mr. Schiff, is
recognized for his questions.
Mr. Schiff. Thank you, Mr. Chairman. And really, the
question I had is the question that Howard concluded with.
But I'd like to see if I can get a few more specifics on
it, because I think, both with respect to China and Russia and
for our own purposes, unless there are clear expectations
expressed to China and Russia about what we would like to see
happen--in Russia's case vis-a-vis WTO and GSP; in China's
case, whether there is an actual case filed in the WTO--my
guess is, from my limited meetings with Chinese officials both
there and here, they'll continue to tread water as long as they
feel they can tread water. It won't injure the trading
relationship.
And I think the same is true of Russia. Unless they have
clear benchmarks of what we expect, I don't think things are
going to change appreciably. But I do think that if we set out
clear benchmarks of what we expect, that we might get a change.
And I know that you've asked the industry to go about doing
the documentation to prepare for a WTO case. And I'm sure that
will be useful; although the facts seem to be pretty
overwhelming. If you can't make a WTO case in China, you can't
make a WTO case anywhere.
And it seems to me that this is really designed by time, to
tread water a little bit. But again, I think unless we have a
clear set of benchmarks of what we expect--And it might be
measured in terms of reduction of piracy. I don't know that it
can be measured in the sense of increased sales of our
products. That, although a desirable metric, doesn't seem like
a legitimate metric, in terms of their piracy problems.
But what more specific and quantifiable things either have
you asked for, or can you ask for, where China can be given the
very clear alternatives of ``Meet these expectations, or we'll
support a WTO case,'' or in Russia's case, their accession?
What are the clear metrics that either you have offered or that
we can now offer?
Ms. Espinel. Well, first, I would say that I absolutely
agree with you, that I think having clear benchmarks or a clear
path forward is critical for China, Russia and, frankly, for
all the countries where we're facing this challenge, so they
have a clear understanding of what we think is necessary in
order for them to address that.
With China and Russia, we have done that, I think, both at
what I would describe as the macro level and a micro level. I
mean, we've made clear to China and Russia that we need to see
improvements and that improvements will be measured by seeing
the piracy rates come down.
We have, in addition to that, given them very detailed
lists of either improvements in legislation, administrative
processes, other very detailed improvements they need to make
to their overall system in order to make their system more
effective. And we will be measuring progress both by decrease
in piracy rates and by their ability to move forward on the
very specific action items that we've given both of them.
Mr. Schiff. Can you share with us--the Chairman asked what
the deadline was for determination on the GSP issue. It's June
30th; it has to be decided by June 30th. Is that----
Ms. Espinel. That is the general deadline for the GSP
review processes that are outstanding. That's not specific to
ISP, just specific to the GSP review process as a whole.
Mr. Schiff. So on or before that point, you'll have to make
a decision about whether to try to revoke GSP status. Can you
let us know what criteria you've enumerated with the Russians,
so that we can hold you accountable and that we can together
hold the Russians accountable?
Because as we get closer to June 30th, there may be a
decision made to wait till the next June 30th; which is a
decision of sorts that we've made, I guess, over several years,
because we haven't taken action in this area. But it would be
useful, I think, for us and for the Russians to know precisely
what we expect of them.
My impression, again, with respect to China--and it's
probably similar to Russia--is that if we merely talk about
improvement, they will give us a very good presentation about
all the ways they've improved; and yet, at the bottom line, the
piracy won't have changed very much.
So either today or in written form, I'd really like to see
what specifically we expect to take place before June 30th with
respect to Russia, what specifically we expect China to
accomplish in terms of number of criminal prosecutions or
whatever standard is the right standard to use, so that we can
encourage, foster, push a WTO case or any other kind of
enforcement action, so that we can get concrete results. I
invite any of you to respond to that.
Mr. Israel. Congressman, I would add one insight based on
something you brought up in the initial part of your question
to Victoria; which is the sales of U.S. goods and services into
these markets, I think, is a very critical piece of evidence we
need to review and we need to look at. And it's something that
working with industry is the key vehicle that's going to
present those types of results.
When we talk to the Chinese about bringing their government
infrastructure into an environment where they use legitimate
and legal software, I think the most effective determinant of
their progress on that, or one of the most effective
determinants, is: are leading American software companies who
are actively looking to get into that market having better
results?
The fact that the Chinese market is the second leading
market, the second largest market for PCs in the world, but the
25th largest market for software in the world, obviously tells
us that in between two and 25 there's a lot of piracy going on.
So I do think it's important. And one thing we're trying to
focus on doing is work with U.S. industry to get some
indicators from them.
Mr. Schiff. And I don't disagree with that. What I mean is
that I don't know that we can tell China that, unless we sell
``X'' amount of products, we're going to bring a WTO case for
infringement. I don't know we can show that causal effect. But
I do think we ought to maximize our pressure to open the
markets in China, for exactly the reason you mentioned.
Ms. Espinel. If I could just add to the specifics,
particularly with respect to Russia, in terms of benchmarks
that we're looking for, one thing that we've made very clear to
Russia is that they have a massive optical disc piracy problem,
and that we need to see the plants shut. But in addition to
that, we need to see the equipment seized and destroyed, so the
plants can't reopen. There are raids and prosecutions, but we
need to see people actually be put in jail.
There does seem to be--again, this is recent--greater
cooperation on the law enforcement side. It may be that the
prosecutors are the weakest link in this system at this point
in time. But I think both on the OD plants--on the optical disc
plants--and on tackling the Internet piracy problem that Russia
has, those are two key items that we have made quite clear to
Russia we see as priority issues that they have to get
addressed.
Mr. Schiff. Thank you.
Mr. Smith of Texas. Thank you, Mr. Schiff.
The gentleman from California, Mr. Issa, is recognized for
his questions.
Mr. Issa. Thank you, Mr. Chairman. I sit on the
International Relations Committee, in addition to the Judiciary
Committee and, oddly enough, the Government Reform Committee.
And all three of our Committees are looking at and trying to
deal with: What do we do with two nations, both former classic
Stalinist dictatorships, that seem to have absolutely no real
intent, beyond passing laws, but intent to enforce those laws
when it comes to intellectual property, when it comes, to be
honest, with not spying on us and not taking not just
intellectual property in the sense of DVDs and CDs, but
technology to do just about anything to improve their economy?
And I always want to be careful when I suggest this, but I
want to liken back to the Cold War. During the Cold War, we
held these two--China as it is today obviously, and the old
Soviet Union, but substantially the Moscow government--we held
them to be totalitarian dictatorships. And because we held them
to be totalitarian dictatorships, we held them responsible for
any and all actions that occurred within their government
structure and within anything that might be called a private
sector. Any person granted the ability to leave their country,
their ships, including their maritime commercial ships, we held
them all responsible.
Isn't it true that, particularly with Putin's step away
from a free market, that Russia now is looking much more like a
government that central control is certainly possible, if not
always executed; and in the case of China, there's
substantially no difference in the organization that we dealt
with in the Cold War, a strong central government with strong
regional governments, but all of which reported back, in the
case of China, to the political structure of the Communist
Party?
If that's true, and I believe it is, shouldn't we view the
Cold War tactic of simply saying to their governments, ``We
hold you responsible, and any failure will be considered to be
a willful act,'' and a failure to make these changes, or
substantial progress on these changes, in a timely fashion,
should result in an appropriate raising on an economic basis of
the curtain that we so long were viewing in front of us and
between us? Mr. Israel, I guess we'll start with you.
Mr. Israel. Thank you, Congressman. I think, you know, the
historical contexts that come into play with these two
countries in particular certainly have to be considered. And I
know the entire Federal Government--the Administration, as well
as Congress--consider these components when you think about how
to address the issues going forward.
I do think, in addition to some of the things you laid out,
one key factor to consider is the significant current presence
and potential presence and desired presence of U.S. business
and industry working in these markets. These are, as you're
well aware, sir, of course, very large and lucrative markets,
particularly in the case of China, with very large U.S.
investments there.
So I do think the posture that the United States takes
toward these two countries has, obviously, evolved and changed
a good deal over the most recent years, as the trading
relationship has become extremely intertwined and complex
between the countries.
And I do think we are looking. And I believe that in the
coordination model that we're trying to develop we are looking
to make sure that across the entire U.S. Federal Government the
relationships that we have with these two countries, when given
an opportunity to stress the significance of intellectual
property rights, what it means, not in terms of how these two
countries view it, but how in terms the United States views it
and, indeed, most of the industrialized, sophisticated
economies of the world view intellectual property.
One thing that I think is a bit of a piece of leverage with
both Russia and China is they desire to be viewed on the world
stage as sophisticated global economies.
Mr. Issa. Market economies.
Mr. Israel. Market economies, to use the common term that
we hear quite a bit from both. And their leaders desire that.
And we have stressed that there is a certain pattern of
behavior; there's rules of law; there's ways you engage in a
global economy that fit the norms of the modern economy. And I
do think that's something we need to continue to stress with
both these countries.
And I do think it's an evolving set of relationships,
clearly. And there are new rules and new processes we're
engaging in and trying to use every opportunity we have across
all the relationship venues with these two countries to stress
the priorities that we have; IPR being nearly first on every
one of those lists.
Mr. Issa. So in order to focus the answers, because I don't
want to monopolize the time, the question really, though, is
the government-to-government relationship; not as a market
economy to market economy where we say, ``Make your best
efforts, but we understand you have an independent judiciary,
an independent legislature, an independent business climate,''
all of which really doesn't exist in China. And I've traveled
and done business in China extensively for over 20 years, and
now traveled to Russia and looked at the changing Russia. These
are not market economies.
Business-to-business, I understand. Government-to-
government, should we hold these governments responsible? And
if so, should that message become the obvious message, which
is, ``We don't want to hear about best efforts; we expect your
government to perform the same as when, during the Cold War, we
said if your submarine drifts outside its zone, we will
consider it a provocative action, not an accident, because we
expect you to keep your government activities and your fishing
boats that used to prowl the West Coast--we expect you to make
sure that they obey international law.'' So the question really
is government-to-government. Ms. Espinel?
Ms. Espinel. Well, I guess, to me, the question you ask is:
Isn't this really a matter of political will, high-level
political will?
Mr. Issa. Exactly.
Ms. Espinel. And I would agree with you. And I think we
understand that with both Russia and China it is critical that
this come from the highest level of their political structure
in order to be effective. We have, therefore, raised it at our
own highest levels of political structure, including by
President Bush.
I'd like to note, in case you aren't aware, that the
meetings, I think, with the top levels of all the Federal
agencies and President Bush have produced a statement from
President Hu of China, saying that he understands the need to
protect the legitimate rights and interests of our right-
holders, and that this is something China intends to do.
I'd also like to note that our understanding is in August
of this year, for what I believe is the first time, President
Putin actually intervened on this issue and sent a very strong
message to his inter-ministerial that this is something that
needed to be addressed. And I think that is a primary reason
why we have in fact seen some recent progress in the last few
weeks, because that message is coming from the very top of
their political structure now. So I would agree with you that
it's critical that it be addressed at that level.
Mr. Issa. Thank you, Mr. Chairman. I'd ask unanimous
consent for the others to respond in writing.
Mr. Smith of Texas. Without objection, would you complete
the response in writing, then?
[The statements follow:]
Written response to question posed by Representative Issa from the
Honorable Chris Israel, Coordinator for International Intellectual
Property Enforcment, U.S. Department of Commerce
__________
Written response to question posed by Representative Issa from Mr. Eric
Smith, President, International Intellectual Property Alliance (IIPA)
__________
Written response to question posed by Representative Issa from Ms. Joan
Borsten, President, Films by Jove, Inc.
__________
Mr. Smith of Texas. Thank you, Mr. Issa.
The gentlewoman from California, Ms. Waters, is recognized
for her questions.
Ms. Waters. Thank you very much, Mr. Chairman, and Members.
I'm beginning to recognize that this problem of piracy and
counterfeit items, etcetera, is much larger than I even thought
it was.
First, let me just say that, whether you are on Fifth
Avenue in New York in front of Sak's Fifth Avenue or Cartier's,
where the knockoff goods are being sold out of bags by
immigrants around the clock, or you are in most of the
communities--and particularly low-income communities--across
the country, knockoffs have replaced, basically, the retail
industry in many of these communities.
And not only do you have people selling on the streets; you
have these huge swap meets that are bringing in the knockoffs
from Korea and China and other places, I guess. So when you go
to festivals around the country, whether it's in Florida, New
York, etcetera, they're selling thousands of Louis Vuitton
purses and all the other items that most of us know about.
Now, I can simply speculate that we have been very lenient
with China and some of our other trading partners. And I do not
think they take us seriously.
I'm pleased to hear about this new, strong relationship we
have with Russia, and the fact that they are supposedly
shutting down plants and breaking up these operations. But I
guess I'd like to ask whomever would like to answer, what
evidence do you have that Russia or China is willing to shut
down plants, have criminal penalties, and to destroy equipment,
etcetera; whether we're talking about in the simple retail
industry, or with computer software, or any of the other areas
of concern that we have about intellectual properties?
Mr. Smith. If I might take a crack at that, just to respond
to the first part of your statement, in this country, clearly,
we have piracy, and you described it. But it's a very small
percentage of our overall market. It exists. There's no way
you're going to get rid of it.
But if you go to China and Russia, we're not talking about
3 and 4 percent piracy rates, we're talking about 90 percent
piracy rates. And we're talking huge criminal syndicates that
produce this product. It's a problem of a totally different
order.
With respect to Russia and the closing of the plants, in
fact, just recently they raided nine plants. And in my
testimony, I noted that that's progress. They raided them. But
the problem is----
Ms. Waters. And what happened?
Mr. Smith. The problem is that product went out the door.
They didn't seize the equipment. Historically, there have been
virtually no prosecutions of plant owners. There's been one
conviction of a plant owner in the last 5 years. This latest
set of raids doesn't give us great comfort that there's been
significant change.
And Ms. Espinel is absolutely right, President Putin did
make that statement. And perhaps we will see something. But
President Putin and the Russian government have made a lot of
statements over the last years, and we haven't seen the action.
And we're, frankly, quite frustrated. And it's a lot of
promises and no convictions, no real action that is going to
have a significant, on-the-ground market impact for our
industries.
Ms. Waters. May I quickly ask, how has this discussion
taken form or shape in the WTO?
Ms. Espinel. I'll speak to that. I just want to emphasize,
or underscore, the remarks made by Mr. Smith. We do see the
recent raids of the OD plants as progress, but we have made
quite clear to Russia that we need follow-up; we need the
equipment to be seized and destroyed; we need the plants to be
shut down permanently; we need to see people put in jail.
In terms of the WTO process, right now we and other
countries are negotiating with Russia the terms of their WTO
accession, and there is an office at USTR that handles those
negotiations. We are in the process of doing our bilateral
market access negotiations with Russia. When those are
completed, there will then be a multilateral process to
negotiate the rules of the WTO accession.
Ms. Waters. Thank you, Mr. Chairman.
Mr. Smith of Texas. Thank you, Ms. Waters; appreciate those
questions.
Thank you all for your testimony today. It's been very
helpful. Obviously, this is an issue we're going to continue to
monitor closely. But we appreciate your responses today.
And Mr. Israel, you more than survived your first
appearance before Congress as a witness.
I thank you all again. We stand adjourned.
[Whereupon, at 11:33 a.m., the Subcommittee was adjourned.]
A P P E N D I X
----------
Material Submitted for the Hearing Record
Statement of the Honorable Howard Berman, a Representative in Congress
from the State of California, and Ranking Member, Subcommittee on
Courts, the Internet, and Intellectual Property
Mr. Chairman,
Thank you for scheduling this hearing on international intellectual
property piracy. I hope this subcommittee can institutionalize the
practice of having at least one hearing a year that focuses on
international trade in products protected by intellectual property
rights. By consistently bringing attention to the rampant piracy
problem occurring abroad, we can begin to help the millions of creative
people in this country who earn their living from intellectual
property.
I particularly want to thank you for inviting Joan Borsten to
testify. She's a good friend, a constituent and has a very compelling
story. She brings a valuable perspective to the hearing--that of an
individual American entrepreneur whose business has been dramatically
impacted by a foreign government's sustained campaign to steal her
rights to intellectual property.
Because of the massive copyright piracy that occurs daily in China
and Russia, the sales of black-market goods cause an annual loss of
revenue to American creators that is truly staggering. According to the
International Intellectual Property Alliance, piracy rates in the
copyright industries range from a low of 70 percent to a high of 95
percent and American industries annually lose over 2.5 billion dollars
in China and almost two billion dollars in Russia. But it is not only
the copyright industries - entertainment, software, book publishing
that suffer. We could probably have an entire hearing only on
counterfeiting of motorcycle parts, purses and pharmaceuticals. No
industry is immune from the endemic intellectual property violations
occurring in these countries.
The problem in both China and Russia is similar - while the laws
may be on the books, actual enforcement of those laws is sorely
lacking. Few criminal prosecutions have taken place and even fewer
sentences have been meted out. There is currently no true deterrent for
the pirates. In fact, piracy has become the foundation for new
businesses that export these black market goods.
The one effective tool the current administration has to
incentivize the Chinese government to address its piracy problem is
pursuing a WTO case. At the last hearing on this issue, the USTR
testified that they were ``committed to ensure that China is compliant
with its obligations. And we will take WTO action if, in consultation
with you and with our industry, we determine that this is the most
effective way to fix the problem that we are resolved to fix.'' When I
asked whether 6 months would be a reasonable time frame to reach a
conclusion, the answer was that it could be. So here we are 6 months
later - I am looking forward to an update.
Furthermore, have additional avenues for mitigating the effect of
piracy in China been explored by the current administration? Currently,
the Chinese government engages in vast restrictions on market access
for American copyrighted goods. They restrict the number of American
films that can be shown and severely curtails the right of our
companies to do business in their country. These barriers make the
impact of piracy that much greater and virtually impossible for our
companies to counteract piracy.
With Russia there is still some leverage because they have not
joined WTO yet. A number of months ago I, along with a number of New
Democrats, wrote Ambassador Portman advising him that in order to
obtain our support for any future trade agreement we would have to be
assured that the lesson taught from allowing China to join the WTO
without provision for adequate enforcement against intellectual
property violations, has been learned. In fact, just last week IIPA
submitted comments for the Special 301 out of cycle review on Russia.
It is not encouraging news. ``In short, Russia is not complying with
its commitments to provide adequate and effective copyright protection
and enforcement.'' Furthermore, the House, in a bipartisan vote (H.
Con. Res. 230) recognized Russia's failure to adequately protect
intellectual property and cautioned that without change they are at
risk of losing GSP benefits and accession to the WTO.
Last time, we discussed the complexity of denying GSP benefits to a
country - a process which requires consultation of most agencies within
the Executive branch. It is clear that in Congress, we all agree that
this situation is quite outrageous and that a country that flagrantly
violates American intellectual property rights should not receive GSP
duty-free benefits. So, I ask--since the last hearing has there been
any movement on the status of Russia's GSP benefits?
If motivated, these countries can protect intellectual property
rights. When piracy hurts the Chinese interests, the Chinese government
has been motivated to step in. When knockoffs of the Beijing Summer
2008 games logos on T-shirts were being sold, the markets were quickly
cleared. In short China can deal with this problem if it has the
political will. In Russia, it seems incredible that the Russian
government actually controls the facilities and land on which many of
these pirate optical disk plants operate. How can it simply do nothing
to shut down the plants operating on these government- run
installations?
I am looking forward to hearing from the witnesses to learn what
benchmarks or timelines have been established to help guide a decision
on a WTO case against China, the withdrawal of GSP duty free benefits
from Russia, and whether Russia is aware that they will be denied
admission to the exclusive WTO club unless the piracy problem is
addressed. I am looking forward to hearing about other steps that are
being taken to protect American creativity.
----------
Statement of the Honorable Bob Goodlatte, a Representative in Congress
from the State of Virginia
Mr. Chairman, thank you for holding this important oversight
hearing on intellectual property theft in China and Russia.
In China, an estimated 95% of motion pictures and 90% of business
software are pirated. In Russia, 80% of all motion pictures and 87% of
business software are pirated. Considering that the core copyright
industries account for 6% of U.S. GDP and the total copyright
industries account for approximately 12% of U.S. GDP, it is clear that
America's businesses are facing a serious problem. In fact, the FBI
estimates that U.S. businesses lose between $200-250 billion a year to
counterfeit goods.
Recently, China and Russia have received attention for intellectual
property rights violations within their borders. For example, in April,
the Office of the United States Trade Representative released its
``Special 301'' report, and elevated China to the ``priority watch
list'' due to its failure to protect intellectual property rights.
We must make sure that each nation recognizes that piracy is a
global problem. The growth of piracy among organized crime rings is
illustrative of its global scope. The combination of enormous profits
and practically nonexistent punishments by many foreign governments
makes copyright piracy an attractive cash cow for organized crime
syndicates. Often specializing in optical disc and business software
piracy, these crime rings are capable of coordinating multi-million
dollar efforts across multiple national borders. We must meet this type
of highly organized piracy with highly organized coordination and
enforcement efforts.
Another disturbing trend is the growing willingness of many foreign
governments to condone the use of, and even use, pirated materials. At
its best, government sets the standards for the protection of rights.
At its worst, government encourages and even participates in the breach
of those rights.
A recent article in The Moscow Times reported that the co-chairman
of the public advisory board for the Russia Against Counterfeiting
movement has said that until DVD's and CD's become more affordable, he
and the majority of Russians would opt for pirated music and movies.
This type of behavior from those responsible for reducing piracy is
unacceptable. Now is the time for each country in the international
community to choose which path it will take with regard to intellectual
property rights.
We all must realize that copyright piracy and counterfeiting are
serious problems that do not merely affect private companies' bottom
lines in the short term. They also discourage investment and innovation
in the long term, which will eventually lead to fewer consumer choices
- a repercussion that affects entire societies and economies.
Governments must work together to reward creators and punish thieves.
Recent treaties, such as the TRIPS agreement, provide the legal
framework for member countries to aggressively enforce their copyright
laws. Article 61 of the TRIPS agreement specifically requires member
countries to establish criminal procedures and penalties to be applied
in cases of copyright piracy. The WTO provides trade dispute mechanisms
and these tools can be used to pressure countries into compliance with
existing agreements. In addition, countries like Russia wishing to
enter the WTO should establish that they are committed to enforcing
intellectual property rights.
We already have many tools to combat international piracy. Now we
must put these tools to work. The United States must lead by example
and rigorously enforce our copyright piracy statutes. However, we must
also work with the international community to encourage other countries
to do the same. Only when we coordinate our efforts to combat piracy
will we see substantial results.
I look forward to hearing the testimony of our expert witnesses
about how best the United States can help enforce intellectual property
rights in countries that have not yet proven their commitment to
enforcing intellectual property violations.
----------
News Article by the Honorable Lamar Smith, a Representative in Congress
from the State of Texas, and Chairman, Subcommittee on Courts, the
Internet, and Intellectual Property: ``Defense Contrator Held in Spy
Case,'' from the November 30, 2005 edition of The Washington Times
----------
News Article by the Honorable Lamar Smith, a Representative in Congress
from the State of Texas, and Chairman, Subcommittee on Courts, the
Internet, and Intellectual Property: ``Envoy: Licensed DVDs Cost Too
Much,'' from the December 1, 2005 edition of The Moscow Times
----------
News Article by the Honorable Lamar Smith, a Representative in Congress
from the State of Texas, and Chairman, Subcommittee on Courts, the
Internet, and Intellectual Property: ``U.S. and EU to Battle Chinese
Counterfeiting,'' from the November 30, 2005 Dow Jones Newswires
----------
Exhibit submitted by Joan Borsten: ``Corruption in the Russian
Arbitrazh Courts: Will There Be Significant Progress in the Near
Term?''
----------
Exhibit submitted by Joan Borsten: ``The Circumstances Surrounding the
Arrest and Prosecution of Leading Yukos Executives.''
----------
Statement and Exhibits from the Honorable Dan Glickman, Chairman and
Chief Executive Officer, Motion Picture Association of America, Inc.
(MPAA)
Prepared Statement of Statement Prepared For the Record From
DAN GLICKMAN
Chairman and Chief Executive Officer
Motion Picture Association of America, Inc.\1\
---------------------------------------------------------------------------
\1\ The Motion Picture Association of America (MPAA) represents the
major producers and distributors of motion picture and television
programs in the United States; its members are Metro-Goldwyn-Mayer
Studios; NBC Universal City Studios, Paramount Pictures Corporation,
Sony Pictures Entertainment, The Walt Disney Company, Twentieth Century
Fox Film Corporation, and Warner Brothers Entertainment.
---------------------------------------------------------------------------
CHAIRMAN SMITH AND MEMBERS OF THE SUBCOMMITTEE: When, six months
ago, you last examined the problems we are facing protecting our
intellectual property rights (IPR) in China and Russia, we painted a
bleak picture: We estimated then that piracy in both markets exceeds
ninety-five percent, costing our members in excess of half a billion
dollars every year. Additionally, we told the Subcommittee that not
only was piracy corrupting the two internal markets, pirates in Russia
and in China have been the source of stolen material exported to
markets all over the world.
I wish today we could report that this scenario had brightened,
that piracy rates had fallen, losses dropped, and that the two
countries were no longer sources of pirated product far from their
borders. I cannot. With little amendment, we could submit for your
consideration virtually the same testimony as we did then in describing
the scope of the problem. With respect to the steps we are taking in
both markets, I can report progress, and will report steps we are
taking on our own, with the US government, and, yes, with the host
governments.
Before doing so, I want to thank you and the Subcommittee for your
enduring support of our work and, in particular, the fact that you are
keeping these problems high on your agenda. As I will elaborate, that
you are doing so is, in our view, one of the critical elements to a
successful strategy of combating the theft of our product, and
essential to motivating both governments to take action.
Adequate laws and resources, effective enforcement, and private
sector initiatives and cooperation with the US government as well as
the Chinese and Russian governments are all important tools in this
fight. However, unless these governments exercise the political will to
address the rampant theft of US IPR, those tools are meaningless. This
hearing keeps IPR high on both the US-China and US-Russian agendas,
demonstrating, yet again in a yet another forum, to the Chinese and
Russian authorities the priority you and your colleagues attach to
seeing satisfactory results.
On behalf of the member studios and the hundreds of thousands of
Americans who earn their livelihoods in this industry, thank you for
your interest and the opportunity to provide these comments to the
Subcommittee.
RUSSIA
Russia ranks, along with China, as one of the two largest producers
and exporters of pirated DVDs and other copyrighted materials in the
world. As serious as the problems are in China, and they are indeed
quite serious, the challenges we face in Russia - lawlessness, physical
danger, and corruption - are even more daunting. I cannot underscore
enough the scope and depth of the problem we face in Russia - and it is
getting worse, not better.
Last year alone MPAA member companies lost $275 million to piracy
in Russia. All copyright industries lost $1.7 billion due to piracy
last year, and over $6 billion in the last five years in Russia. These
figures are staggering.
The Government of Russia has allowed the problem to grow
significantly worse in recent years. The number of plants manufacturing
optical discs increased twenty-seven percent, from thirty-six to forty-
six in the past year alone. Sixteen of these plants are located on
property owned by the Russian government. Moreover, the number of DVD
lines has increased fifty percent in the past year.
A matter of immediate and utmost importance is that Russia, right
now, is actively pressing to accede to the World Trade Organization
(WTO). MPAA cannot support Russia's accession to the WTO, an
organization founded on rules, until these problems are addressed
satisfactorily.
The Agreement on Trade-Related Aspects Intellectual Property Rights
(TRIPS) agreement, establishes minimum levels of protection that WTO
members must give to fellow WTO members' intellectual property. It is
an integral component of the international trade regime. Taking
effective criminal action against piracy is a key TRIPS requirement.
For the record, I am attaching to my statement a fuller description
of the problems we face. Every year, we compile a submission of the
trade barriers we face for the Office of the United States Trade
Representative's (USTR) annual National Trade Estimate Report on
Foreign Trade Barriers; the comments we filed with USTR last month on
the Russian market detail those problems. Here is a sketch of what we
are confronting on a daily basis in Russia.
Russia's domestic market is literally saturated with
pirate DVDs. The level of piracy is estimated to be over ninety
percent.
Seventy percent or more of the seized pirated
material ends up back in the marketplace.
Russian DVD plants are, it is estimated,
manufacturing between 50 and 80 million DVDs a year for export.
Pirate discs manufactured in Russia have been found
in twenty-seven countries, negatively affecting our legitimate
business in countries such as Bulgaria, Finland, Germany,
Hungary, Israel, Poland, Turkey, and the United Kingdom.
All of the optical disk plants that were raided in
2004 remained in operation after those raids.
The plant owners remain unscathed by the criminal
justice system.
We have presented this evidence to Russia over and over again. The
Government of Russia has acknowledged that these plants exist and while
the number of raids has recently increased, recall that seventy percent
of the seized product finds its way back into the marketplace and that
not one plant has been closed.
Much of the piracy in Russia is orchestrated by organized crime
syndicates and gangs. No small-scale, independent operator could afford
the false-bottomed compartments in trains and cars that these
syndicates use to export pirate copies of our films to other organized
criminal syndicates across Europe. Two years ago, shortly after a major
raid against a pirate facility, in what clearly was designed as an
intimidation effort, a thug shot at the car in which one of our anti-
piracy investigators in Russia was driving from work. Fortunately, our
employee was unharmed. While the assailant ended up in a psychiatric
hospital, those who contracted the assailant remain unscathed and grow
ever wealthier.
This rampant organized crime flows from and thrives because of
endemic corruption. The entrenched corruption of Russia's judicial
system has caused our complaints to be routinely dismissed. An
indication of prosecutorial corruption is the number of requests
prosecutors make of rights holders organizations to return seized
material to prosecutors because they ``need to show the evidence to the
judges''. In fact, the goods confiscated during raids on factories and
warehouses are frequently returned to commercial channels connected to
the prosecutors. Russian authorities openly acknowledge that only eight
non-suspended prison sentences have been imposed on intellectual
property infringers in 2005.
Circling back to the TRIPS agreement, criminalizing all acts of
copyright piracy on a commercial scale and taking effective criminal
action against such acts are key WTO TRIPS requirements. There is no
argument that can be made that Russia complies with the WTO TRIPS
obligations. We do not believe that our problems can be effectively
addressed upon Russia's accession to the WTO. We tried this with China
and we learned an expensive and difficult lesson. The U.S. government
and U.S. industry cannot afford to make the same mistake twice.
Russia has repeatedly promised both the US government and the US
copyright industry that it would take the steps necessary to meet these
WTO obligations. However, Russia has to date failed - and this failure
can only be attributed to lack of political will - to step up and
address these concerns. We are reminded of Russia's lack of commitment
to combating piracy every time Government of Russia officials assert
that piracy is the acceptable result of legitimate product pricing.
Most recently, on November 30, President Putin's representative to the
Duma's upper chamber said that widespread piracy would continue to
flourish if legitimate product did not become cheaper.
Russia's accession cannot be paved with empty promises. Russia must
only be permitted to accede upon demonstration that it has the
political will to inspect all known plants, and to close and repeal the
licenses of those engaged in production and distribution, as well as to
criminally prosecute the plant owners and operators. We will not see
progress in the enforcement against intellectual property crimes in
Russia unless President Putin directs all relevant agencies to make the
fight against piracy a priority. Until the President himself demands
accountability from his senior officials, corruption will continue to
shelter the pirates.
Mr. Chairman, members of the Subcommittee, we need your help in
ensuring that Russia addresses its piracy problems before it is
permitted to join the WTO. We greatly appreciate the fact that you and
your colleagues voted overwhelmingly in favor of H. Con. Res. 230. That
sends a clear signal to the Russian authorities that they must address
these matters before it joins the rules-based WTO, and ensures that
both Russia and the Administration know that a grant of Permanent
Normal Trade Relations to Russia, a prerequisite to WTO relations, will
be endangered without meaningful progress on protecting intellectual
property rights.
CHINA
The source of the problems we face in China is twofold: First,
China imposes strict limits on the number of foreign films that can be
exhibited in its theaters on a revenue-sharing basis, and applies
burdensome regulations and confiscatory taxes on foreign home video and
television content. This creates a marketplace vacuum that pirates are
only too happy to fill. Second, China has not asserted the political
will necessary to reduce the level of piracy. Yes, it has conducted
some raids and even put a few pirates in jail, but it has not
materially reduced the level of piracy and the ready availability of
pirated products in the shops and in the streets.
As I will elaborate, fighting piracy, especially in a restricted
market such as China, means more than simply enforcing laws and going
after the counterfeiters - the traditional anti-piracy tools. Getting
better access to the Chinese market is a critically important tool in
the fight against piracy. The controls the Chinese government imposes
upon legitimate film producers and distributors have no effect
whatsoever on the pirates. Until we have the same unrestricted access
to that market, we will not be able to compete effectively and stop the
theft of our content.
Regrettably, to coin a phrase, if you did not see a counterfeit
DVD, you were not in China. Unfortunately, I fear our collective
perception of China has become so ingrained with the notion that China
is overflowing with pirate DVDs we frequently fail to appreciate the
magnitude of the problem.
The problem is ubiquitous - on virtually every street corner,
packed on to the shelves of audio-visual shops in every neighborhood.
We estimate that the piracy rate exceeds ninety percent - more than
nine of every ten DVDs in the Chinese market is a fake, stolen product.
Counterfeit, stolen motion pictures cost our members nearly $300
million annually, in China alone.
Too many, especially some around the world who should be allies in
the fight against piracy in China, view this as an American problem.
While we certainly bear the disproportionate share of the burden of
this problem, movie piracy in China affects film makers all around the
world. Our research indicates that almost half the pirated product is
actually Chinese product. We also find stolen copies of Japanese,
Korean, French, and Indian movies in China.
A few weeks ago, a young Chinese film producer visited my office.
When asked to define his number one problem, he did not mention
financing, distribution, or any of the other obstacles film producers
must overcome: He said piracy is his biggest problem - the theft of his
movies, in his home country.
It is clearly more than an American problem, it is a problem
afflicting film makers no matter where they live and make movies, in
more than one way. Not only are the pirates sapping legitimate movie
makers in the China market, they are encroaching on legitimate markets
all around the world. Our analysis of pirated DVDs seized from around
the world traced their production back to over fifty plants in China.
As we dig deeper into this problem, particularly the global spread
of China-sourced pirated product, we are coming to a disturbing
conclusion: There is a growing link between piracy of motion pictures
and organized crime. Our Asia-Pacific Regional Office just completed a
new study on these connections. With your permission, Mr. Chairman, I
have included a copy of that study with my statement and would like to
have it included in the record. Let me cite a few of its findings:
Criminal theft of IPR dwarfs criminal revenues from narcotics
trade: US government and international law enforcement records
peg the illegal narcotics trade at $322 billion last year;
criminal revenues from all IPR theft were significantly higher,
$512 billion.
Part of the allure for organized crime to move into DVD piracy
is the incredible profit margins, exponentially higher than for
drugs: The mark-up on pirated DVDs made in Asia and sold in
Europe, for example, averages an astounding 1,150%, three times
the mark-up of heroin sourced in Asia and sold on the same
street corners, and the criminal risk is far lower.
The report cites two recent cases linked back to China, with
tentacles around the world, including into the US. In September
2005, a federal grand jury in New York indicted thirty-nine
individuals tied to the Yi Ging Syndicate, based in New York
but which funneled much of its one million dollars plus a year
earnings back to China. Next January, an American, Randolph
Guthrie, will stand trial in the US for his role in leading a
criminal syndicate, based in Shanghai, that made and
distributed hundreds of thousands of pirate DVDs around the
world; when he was arrested last summer, Chinese authorities
seized more than 210,000 counterfeit DVDs.
I think it goes without saying that many of these revenues finance
other illegal activities in which these criminal organizations are
involved, making the reach of piracy even more pernicious: This is not
just an American problem, and it is not just a motion picture industry
problem, it is now underwriting activities that threaten all of us, in
all walks of life.
Of course, it affects some of us more directly than others. As I
said at the outset, our members employ nearly one million American men
and women, at all job levels. We employ thousands of laborers,
electricians, technicians, truck drivers, as well as professionals in
finance, legal positions, and specialized support services.
There seems to be a view - a myth - that buying a stolen DVD only
means a movie star earns a few dollars less on that movie. Let me be
clear: That notion is just that, a myth. Every dollar the pirates earn
is one less dollar going to an American worker, a worker employed in an
industry that is one of the few in this country bringing more money
back to the US in export earnings than it sends overseas.
Chinese piracy of US motion pictures also hits some of us very
personally. I was in China the last time in May. I strolled the
neighborhood near my hotel, and looked into one of the audio-visual
stores I came across. I admit I was not surprised to see shelves of
pirated DVDs, disappointed, but not surprised. I was, however, taken
aback when one title caught my eye: ``The Hitchhikers Guide to the
Galaxy.'' At the time, the movie was not available on DVD in the US, so
I knew it was a fake, taking the money out of a US film maker's pocket.
That film maker: my son. He is a producer and that was his most recent
film. I relayed the story to him, and he replied: ``And what Dad, Mr.
Chairman of the MPAA, are you going to do about this?''
MPAA invests millions every year in fighting piracy in China and
around the world. We go after the pirates, we work with governments to
enact and then enforce adequate laws, we work to educate the public
about the consequences of piracy, and the legal alternatives to piracy,
and we are constantly seeking new ways to prevent the problem through
technology, education, and changing business practices.
As I have indicated previously, piracy in China is indeed a China
problem, but it is also a problem with global reach. A pirated disc
made in China can, in a day or two, be in the street markets of Los
Angeles. Someone can illegally camcord a movie in Moscow, send the file
by way of the internet to someone in Guangzhou who then dubs and
subtitles the Russian dialogue, and then illegal presses thousands of
DVDs.
We approach the problem fully cognizant of its global reach, with a
seamless strategy of going after the producers, distributors, and
sellers of DVDs and the machinery they use to make the fakes. We have
aggressively pursued a strategy to stop the illegal camcording of
movies, which is still the largest source of pirated product. We are
very appreciative of the action Congress took to make illegal
camcording a federal crime and that the President signed the bill
earlier this year.
We seek to track the production of optical discs, to make sure the
plants that make them are legal, registered, and their product produced
with internationally recognized identifying codes. Increasingly, we are
beefing up our Internet strategy to go after the thieves who think they
can anonymously download and send stolen movies over the Internet.
We are also on the ground in China. Our representatives survey the
market for information about the incidence of piracy and pass on this
information to the Chinese authorities. In many cases, this information
helps Chinese authorities formulate cases for raids on sellers and
distributors, and often, those authorities invite our representatives
to accompany them on such raids.
We operate and participate in training sessions for Chinese
authorities and jurists on IPR laws and enforcement, in the US and in
China. We also work closely with US officials in elevating the
importance of IPR enforcement; for example, our representatives
participated in the IPR Roundtable our Embassy conducted in Beijing at
the first of this month.
One of the most significant initiatives we have been able to launch
with the Chinese government was the joint anti-piracy memorandum of
understanding (MOU) we executed with three entities of the Chinese
government: Ministry of Culture (MOC), State Administration of Radio,
Film and Television (SARFT), and National Copyright Administration
(NCA).
This MOU was signed last July 13, in connection with the most
recent discussions held under the auspices of the Joint Committee on
Commerce and Trade (JCCT). Under its terms, every three months MPAA
will submit to the MOC and SARFT a list of motion pictures scheduled to
be screened in China by its member companies. All home video products
that are available in the marketplace prior to the legitimate home
video release date in China will be deemed illegal audio and visual
products and forfeited, and when a criminal copyright infringement
offense has been committed, the case will be prosecuted.
On October 25, we met with the Chinese side to review the results
of the MOU. For our part, we surveyed a small selection of shops in
four key cities: Beijing, Shanghai, Guangzhou, and Shenzhen. The
surveys were by no means intended to provide a comprehensive assessment
of anti-piracy enforcement progress across China; merely an indication
as to whether the needle had moved at all.
Specifically, during October, the surveys of target outlets in
Shanghai showed that of the films covered under the agreement,
no pirate versions were available at all.
In Guangzhou, the availability in October of pirated versions
of the identified titles was down quite sharply from September,
when almost all titles were available.
In Shenzhen, availability in October of pirated titles fell
fifty percent from September.
In Beijing, in August, with the exception of one shop that
carried only fifty percent of the protected titles, pirate
versions of the six films ran from seventy to ninety percent.
In September, the original shops continued to offer pirated
versions of the protected titles. In October, the original ten
shops had cleaned up remarkably; however, an additional ten
shops surveyed showed piracy rates averaging around eighty
percent.
The MOU only covers a handful of movies, and though it applies to
the entire country, we have only been able to survey a limited number
of cities and only a selection of retailers in each. We are
disappointed with the results.
In spite of their formal commitment to protect specific US movies,
the Chinese authorities failed to demonstrate meaningful progress even
within the limited review we conducted. Our next review of the MOU will
occur in January and we would be pleased to keep the Subcommittee
apprised of our progress.
In addition to the work we are doing with the Chinese government
and industry, and with other US copyright industries, most notably the
sound recording industry, our key partner is the US government. I
commend this Administration for the priority it has given this problem,
and its willingness to work with us. Credit goes right to the top:
President Bush made IPR a top agenda item during his summit with
President Hu. Having our views and concerns addressed at this level is
invaluable in elevating the priority of IPR on the bilateral agenda and
we greatly appreciate the President's support as well as the support
from USTR, the State Department, and the Commerce Department. Our work
with the US government goes on virtually every day, and we are
currently working very closely with the USTR on next steps to secure
adequate protection of our product in China.
Mr. Chairman, having surveyed the scope of these problems and the
steps the US motion picture industry is taking, I want to bring my
statement to conclusion by reiterating some points for you and your
colleagues to consider for ways you can help protect American IPR in
China. Many of these mirror the recommendations I outlined with respect
to the Russian problems.
First, help make sure our government has the resources it needs. I
know fully well the difficulties with which the Congress has been
dealing on controlling the deficit, I also know that it ought to be in
our national interest to promote and protect winning industries, and
this industry is a winner. As I have said, we employ nearly one million
Americans, in good, well paying jobs, and we have a positive balance of
trade in every market where our countries do business, except one:
China.
Why do we run a movie trade deficit with China? Piracy is certainly
a key reason, though another is the onerous, burdensome restrictions we
have on doing business in China, and even in getting into that market.
Consider some facts about our access to the China market: The good
news is that the money our movies made in China in 2004 doubled the
amount they made in 2003. The sobering side is that that amount was
only $10 million. As we saw in November with ``Walk The Line,'' ``Harry
Potter and the Goblet of Fire,'' and ``Chicken Little'', and will see
every weekend for the rest of the year, one American movie can make
more on an opening weekend in the US alone.
In recent years, in fact, two Chinese movies ``Kung Fu Hustle'' and
``House of Flying Daggers'' both, individually, made more in the US
than all US movies made in China for the years they were released, and,
ironically, both were distributed in the US by one of our member
companies.
The primary barrier is the quota the Chinese impose on the number
of foreign films they permit into their market under normal business
terms, what we call revenue-sharing, whereby the US producer shares the
box office with the Chinese distributor. The Chinese allow only twenty
such films into China a year, from all countries, not just the US. That
means film makers from France, Japan, the UK, Korea, and the US
together can only hope to get a part of that twenty-film quota.
Once into the market, the government controls the distribution of
the movies. A state agency, through two divisions, distributes all the
films in China, and dictates the terms of the revenue sharing with US
film makers.
There are many other restrictions, detailed in the attachment to my
statement, but the net effect is critical. When fighting piracy and
protecting IPR, most are familiar with what I call the traditional
methods - effective laws, enforcement, raids, and the like. In China,
getting better access is just as critical and intertwined closely with
our strategy towards that market.
My second recommendation is that we want the same access to the
Chinese market as the pirates have. The barriers I outlined and that
are enumerated in the attachment do not, at all, restrict the number of
movies in China. Virtually any movie Chinese consumers might want is
available, not necessarily through legitimate channels controlled by
the restrictions applied to us, but from pirates who have no such
restrictions and who operate largely without deterrent sanctions
applied to offenders. Not only are our movies being stolen, but we also
face an enormously unbalanced playing field at distinct competitive
disadvantage.
We are convinced access to the Chinese market on fair terms, the
same terms as the pirates, is central to fighting piracy in China and
protecting our rights there. We want to be able to compete, not bound
by quotas, government restrictions on distribution rights, black-out
periods when only Chinese movies are screened, nor onerous taxes, and
we want transparent clearance procedures.
Third, let me come back to where I started: political will. Just as
the US government needs adequate resources and strong laws, so do the
Chinese. However, for the most part, that is not the main problem. With
a few notable exceptions, the Chinese IPR statutory regime is adequate
and with changes, can easily be brought into compliance with WTO
standards.
The problem is political will, and keeping the pressure on is a key
way to bolster that will. For example, we know the Chinese can stop
pirates. When the Chinese open a film the government wants to promote
and protect, pirated copies of it are non-existent; the word goes out
that piracy will not be tolerated. Even when we surveyed results of the
MOU, we saw some modest improvements in some places - evidence that the
Chinese can crack down on the pirates if they want.
The Chinese frequently recite this rationale for the IPR problems:
The US, they say, has over 200 years experience with IPR; China has
only twenty. China needs time to grow and develop. True. I acknowledge
the problems with developing an adequate and effective IPR system, and
culture. On the other hand, I have seen what China can accomplish when
it makes something a priority. My first trip to China was about twenty
years ago. The changes I saw between then and my last visit last May
are breath taking. The lesson here is that when the Chinese have the
will and desire to change and reform, they can.
I saw another personal example of how the authorities can act when
properly motivated. Last May, the day after I discovered the pirated
copy of my son's movie, ``The Hitchhikers Guide to the Galaxy,'' I met
with the mayor of Beijing and told him. The next day, the shop where I
got the movie was raided and closed: political will in action.
Unfortunately, it was short-lived; our China representative informed me
the other day that the shop is back in business.
A couple of weeks ago, The Wall Street Journal carried a telling
story, about the paucity of counterfeit Olympics-logo goods in China.
The production, distribution, and sale of those goods is tightly
regulated and policed, and fakes are not tolerated. It is virtually
impossible to find counterfeit Olympics goods in China. Why? As one of
the Chinese officials said, it is because fakes dilute the value of the
logo, the intellectual property upon which the Chinese have invested to
finance the games.
The lesson: When the Chinese want to stop piracy, they can be
enormously effective. They do not need twenty more years experience
with IPR, they have the resources, they have the basic statutes, and
they can make the changes needed to improve them. They need the
political will to protect our goods as effectively as they are
protecting the Olympic logo.
Please keep the pressure on; this hearing is one way to do so. Make
sure you mention this when meeting with Chinese authorities. Above all
else, unless the Chinese know this is a priority for all of us, we fear
they will fail to exercise the political will to protect our IPR.
Mr. Chairman, members of the Subcommittee, I appreciate again your
attention to the acute problems we are facing in Russia and China and
the chance to share with you the perspective of the US motion picture
industry.
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