[Senate Hearing 109-989] [From the U.S. Government Publishing Office] S. Hrg. 109-989 PIRACY OF INTELLECTUAL PROPERTY ======================================================================= HEARING before the SUBCOMMITTEE ON INTELLECTUAL PROPERTY of the COMMITTEE ON THE JUDICIARY UNITED STATES SENATE ONE HUNDRED NINTH CONGRESS FIRST SESSION __________ MAY 25, 2005 __________ Serial No. J-109-22 __________ Printed for the use of the Committee on the Judiciary U.S. GOVERNMENT PRINTING OFFICE 38-864 PDF WASHINGTON DC: 2007 --------------------------------------------------------------------- For sale by the Superintendent of Documents, U.S. Government Printing Office Internet: bookstore.gpo.gov Phone: toll free (866)512-1800 DC area (202)512-1800 Fax: (202) 512-2250 Mail Stop SSOP, Washington, DC 20402-0001 COMMITTEE ON THE JUDICIARY ARLEN SPECTER, Pennsylvania, Chairman ORRIN G. HATCH, Utah PATRICK J. LEAHY, Vermont CHARLES E. GRASSLEY, Iowa EDWARD M. KENNEDY, Massachusetts JON KYL, Arizona JOSEPH R. BIDEN, Jr., Delaware MIKE DeWINE, Ohio HERBERT KOHL, Wisconsin JEFF SESSIONS, Alabama DIANNE FEINSTEIN, California LINDSEY O. GRAHAM, South Carolina RUSSELL D. FEINGOLD, Wisconsin JOHN CORNYN, Texas CHARLES E. SCHUMER, New York SAM BROWNBACK, Kansas RICHARD J. DURBIN, Illinois TOM COBURN, Oklahoma David Brog, Staff Director Michael O'Neill, Chief Counsel Bruce A. Cohen, Democratic Chief Counsel and Staff Director ------ Subcommittee on Intellectual Property ORRIN G. HATCH, Utah, Chairman JON KYL, Arizona PATRICK J. LEAHY, Vermont MIKE DeWINE, Ohio EDWARD M. KENNEDY, Massachusetts LINDSEY O. GRAHAM, South Carolina JOSEPH R. BIDEN, Jr., Delaware JOHN CORNYN, Texas DIANNE FEINSTEIN, California SAM BROWNBACK, Kansas HERBERT KOHL, Wisconsin TOM COBURN, Oklahoma RICHARD J. DURBIN, Illinois Bruce Artim, Majority Chief Counsel Bruce A. Cohen, Democratic Chief Counsel C O N T E N T S ---------- STATEMENTS OF COMMITTEE MEMBERS Page Biden, Hon. Joseph R., Jr., a U.S. Senator from the State of Delaware, prepared statement................................... 33 Cornyn, Hon. John, a U.S. Senator from the State of Texas, prepared statement............................................. 35 Hatch, Hon. Orrin G., a U.S. Senator from the State of Utah...... 1 prepared statement........................................... 46 Leahy, Hon. Patrick J. Leahy, a U.S. Senator from the State of Vermont........................................................ 15 prepared statement........................................... 56 WITNESSES Hackford, Taylor, Board Member, Directors Guild of America, Los Angeles, California............................................ 22 Holleyman, Robert, President and Chief Executive Officer, Business Software Alliance, Washington, D.C.................... 27 Mendenhall, James, Acting General Counsel, Office of the U.S. Trade Representative, Washington, D.C.......................... 8 Peters, Marybeth, Register of Copyrights and Associate Librarian for Copyright Services, Copyright Office, Washington, D.C...... 3 Pinkos, Stephen M., Deputy Under Secretary of Commerce for Intellectual Property and Deputy Director, U.S. Patent and Trademark Office, Alexandria, Virginia......................... 6 Smith, Eric H., President, International Intellectual Property Alliance, Washington, D.C...................................... 19 SUBMISSIONS FOR THE RECORD Hackford, Taylor, Board Member, Directors Guild of America, Los Angeles, California, prepared statement........................ 37 Holleyman, Robert, President and Chief Executive Officer, Business Software Alliance, Washington, D.C., prepared statement...................................................... 48 Mendenhall, James, Acting General Counsel, Office of the U.S. Trade Representative, Washington, D.C., prepared statement..... 58 NBC Universal Pictures, charts................................... 70 Peters, Marybeth, Register of Copyrights and Associate Librarian for Copyright Services, Copyright Office, Washington, D.C., prepared statement............................................. 74 Pinkos, Stephen M., Deputy Under Secretary of Commerce for Intellectual Property and Deputy Director, U.S. Patent and Trademark Office, Alexandria, Virginia, prepared statement..... 87 Smith, Eric H., President, International Intellectual Property Alliance, Washington, D.C., prepared statement and attachment.. 102 Trainer, Timothy P., President, Global Intellectual Property Strategy Center, P.C., Washington, D.C., prepared statement.... 145 PIRACY OF INTELLECTUAL PROPERTY ---------- WEDNESDAY, MAY 25, 2005 United States Senate, Subcommittee on Intellectual Property, Committee on the Judiciary, Washington, D.C. The Subcommittee met, pursuant to notice, at 2:34 p.m., in room SD-226, Dirksen Senate Office Building, Hon. Orrin G. Hatch, Chairman of the Subcommittee, presiding. Present: Senators Hatch and Leahy. OPENING STATEMENT OF HON. ORRIN G. HATCH, A U.S. SENATOR FROM THE STATE OF UTAH Chairman Hatch. All right, we have had enough frivolity here. We have got to go to work, so welcome to today's hearing before the Intellectual Property Subcommittee. Today, we will be examining a variety of problems and challenges involving international piracy, and that is international piracy of U.S.-owned intellectual property. This hearing will focus on copyright piracy, but I hope the Subcommittee will be mindful of the serious issues in the trademark counterfeiting and patent infringement realms as well. Piracy and counterfeiting inflict significant and widespread harms on the American economy. Theft of intellectual property abroad is disastrous and very much disadvantages this country's entrepreneurs, innovators and, of course, the creative community. Ultimately, it also harms consumers, shareholders and American workers and their families. The timing of this hearing was intended to coincide roughly with a number of recent developments and events relevant to our consideration of piracy issues. On April 29, 2005, the Office of the United States Trade Representative issued its decision resulting from the out-of-cycle review of China's enforcement practices, and completed the special 301 process. Much of the focus in that process and in USTR's conclusions remains on the inadequate enforcement of intellectual property rights in Russia and China. Russia remains on the Priority Watch List this year due to continuing problems with its legal regime, which is described as having weak intellectual property enforcement and a lack of data protection. It appears that Russia's current intellectual property regime is inconsistent with its bilateral trade obligations and likely does not conform to the obligations which Russia needs to fulfill in order to join the WTO. Other recent events that have prompted some additional interest and scrutiny on both sides of the Hill include a number of studies and reports on piracy and counterfeiting which indicate that we are not making much headway in many areas. And I might add that some of these suggest some very disturbing trends in other areas as well. For example, various analyses indicate that piracy level in many sectors are close to or exceed 90 percent in China. In Russia, the overall losses to copyright-related industries have continued to increase and are, at least in my opinion, at unacceptable levels. Today, we will hear a description of the big-picture issues in the fight to protect U.S. interests and to ensure that American export products reliant on intellectual property rights receive appropriate attention and protection. We will also hear specific experiences and instances that illustrate how rapidly and widely pirated works reach countries around the globe. For example, it was recently reported that unauthorized disks of the new ``Star Wars'' movie were on sale on the streets of Beijing just days after the film's premiere. My understanding is that Mr. Hackford, who directed the movie ``Ray,'' has had a very similar experience with his film. We also will discuss the importance to the U.S. economy of the industries that rely most heavily on intellectual property rights. For example, according to the International Intellectual Property Alliance and other sources, the core U.S. copyright industries account for about 6 percent of our total United States gross domestic product. Employment in these industries has recently been estimated at 5.5 million workers, or 4 percent of total U.S. employment. Between 1996 and 2002, the information technology sector grew by 26 percent. This is a growth sector for the United States economy and in my own home State of Utah and one of the few areas in which we really have a positive balance of trade. I also want to point out that piracy of entertainment products is not the sole concern in the copyright realm. Although movies and music receive a lot of attention today, we are going to hear this day from Mr. Holleyman of the Business Software Alliance about a recently released report indicating that software piracy just in the Asia-Pacific region alone cost manufacturers in this country an estimated $8 billion in 2004. Losses due to software piracy worldwide are estimated at more than $32 billion, with predicted piracy rates of 90 percent in some countries. In preparing for this hearing, we asked witnesses to provide both a general description of the global state of affairs on intellectual property rights, as well as a discussion of specific areas of concern to them respectively. From the testimony, it appears that most of the witnesses have serious concerns about Russia and China. This is consistent with the feedback that I have received from a wide variety of sources. I note, however, that recent reports have also highlighted longstanding and serious problems particularly in the area of optical media piracy in places such as Pakistan, Malaysia and the Philippines. And although there has been progress in some areas, it does not appear at least to me that consistent headway is being made in many countries. Finally, I note that today's hearing is particularly timely because the Chinese delegation to the Intellectual Property Working Group of the Joint Commission on Commerce and Trade is scheduled to meet here in Washington to discuss some of these issues with Government officials. Now, I am hopeful that some progress will be made, and I stand ready to provide whatever assistance is necessary to move forward on these very important issues. Let me close by observing that during the Cold War it was said that the Soviet Union's style of negotiation could be summed up as follows: what is mine is mine and what is yours is negotiable. If Russia, China or any other government attempts to adopt this view with respect to their responsibilities to protect intellectual property under international trade law and agreements, I can assure you that public support for U.S. trade agreements will be undermined and there will be a strong resistance from, and appropriate action taken by, members of Congress. To put a fine point on it, before the Congress votes in favor of Russia joining the WTO, many of us will have to be convinced that the Russian government is serious about cracking down on theft of U.S. intellectual property. As the ranking Republican on the Finance Committee and the Chairman of this Subcommittee, I have a particular interest in the intellectual property problems that will be outlined today, and I intend to work with members of both sides of the aisle and in both committees to ensure that these issues receive the attention and resolution they merit. I know that Senator Leahy and many others, such as Senators and Cornyn and Feinstein, are concerned about these problems as well. So I look forward to hearing from the witnesses and I want to thank all of you for coming and for testifying here today and I believe this hearing should be a very good hearing. [The prepared statement of Senator Hatch appears as a submission for the record.] We will begin the hearing by turning to our stalwart, Marybeth Peters, who is Register of Copyrights and Associate Librarian for Copyright Services of the United States Copyright Office right here in Washington, D.C. After Marybeth, we will turn to Stephen M. Pinkos, the Deputy Under Secretary of Commerce for Intellectual Property and Deputy Director of the United States Patent and Trademark Office, in Alexandria, Virginia. Then we will turn to James E. Mendenhall, the Acting General Counsel of the Office of the United States Trade Representative. We welcome all three of you here today and we look forward to taking your testimony at this time. STATEMENT OF MARYBETH PETERS, REGISTER OF COPYRIGHTS AND ASSOCIATE LIBRARIAN FOR COPYRIGHT SERVICES, U.S. COPYRIGHT OFFICE, WASHINGTON, D.C. Ms. Peters. Thank you, Mr. Chairman. Thank you very much for the opportunity to speak to you today about one of the most pressing issues in copyright--international piracy. It is always a pleasure to appear before you, and I am pleased to see the reestablishment of the Subcommittee and I congratulate you on your chairmanship. Mr. Chairman, in my nearly 40 years in the Copyright Office, piracy, and especially global piracy, has been an enduring problem. We can and should strive to reduce piracy to the lowest levels possible, levels that will not deny authors and copyright owners of the incentives to create and distribute the works that have made America's creative industries the envy of the world. The Copyright Office has had a long history in working toward this goal both on its own initiative and in cooperation with other agencies of the Federal Government. In the ten years since the adoption of the TRIPs Agreement, there have been tremendous improvements worldwide in countries' legal frameworks for copyright protection. By incorporating the substantive copyright obligations of the Berne Convention and supplementing them the civil, criminal and border enforcement obligations, TRIPs established a minimum standard against which all countries' copyright regimes could be judged. The Office's contribution to this success includes participation in the negotiation of the TRIPs agreement and other copyright treaties and agreements, as well as training of foreign officials. Our main program for training foreign copyright officials is our International Copyright Institute. This program exposes foreign officials from developing and countries in transition to a wealth of copyright knowledge and information presented by the U.S. Government and foreign and domestic industry experts. The Copyright Office works hand in hand with USTR on bilateral and regional trade agreements, including negotiations implementing the free trade agreements. We also support USTR free trade agreements by providing technical assistance to our negotiating partners. The Office is a major contributor to the strengthening of copyright protection through international organizations, notably the World Intellectual Property Organization. It played a key role in the negotiation of the WIPO Internet treaties which are substantially improving the legal framework for the protection of copyright in numerous countries around the world, including our own copyright law. I believe United States copyright law does the best job of providing appropriate protections to authors and copyright owners, while still allowing for fair and reasonable use of copyrighted material. But our law is not perfect and when we go to other countries seeking improved copyright protection, they are quick to point out the deficiencies and gaps in our law. For example, the United States has not amended its law to delete a provision of Section 110(5) added to our law in 1998 which significantly broadened the exemption for performance of musical works in public places like bars and restaurants. A WTO dispute resolution panel has determined that this expansion is inconsistent with our TRIPs obligations. Also, because our law has extremely narrow performance rights for sound recordings, many countries limit protection for U.S. rights-holders to only the protection that we provide, despite the popularity and widespread of U.S. recordings overseas. No matter how good a country's law is on the books, enforcement of that law is essential to effective copyright protection, which is why the TRIPs Agreement contains specific provisions requiring adequate and effective enforcement measures. Our FTAs have built upon the TRIPs enforcement text by adding specificity to what is found in TRIPs and other obligations not found in TRIPs. The FTAs also provide us with the flexibility to address enforcement problems that are particularly problematic in a given region or country. The fact remains, however, that copyright enforcement in too many countries around the world is extremely lax. China is a good example of why enforcement is absolutely essential to the protection of copyright. As China joined the WTO in 2001, the Office worked with the USTR-led interagency team to provide technical advice and to urge the Chinese government to amend its law to be TRIPs-compliant. While its revision feel short in several important respects, the law is more than sufficient to provide some meaningful protection if it is enforced. Unfortunately, it is not. Last year, China made a number of commitments to improve various aspects of its intellectual property regime, most notably with regard to enforcement. Shortly before meetings in which those commitments were made, the Office hosted a delegation of Chinese officials, led by the National Copyright Administration. We have enjoyed a 25-year relationship with them which has helped promoted greater understanding between our governments. But NCAC does not have the final say on copyright policy and enforcement in China and China's implementation of last year's commitments has been incomplete. Russia has been on the Priority Watch List since 1997. According to IIPA, piracy rates in China in 2004 for most sectors are about 80 percent and losses are beyond $1.7 billion. Obviously, there is a serious problem in Russia. The Copyright Office is committed to be a member of interagency efforts to combat intellectual property violations in Russia. Certainly, statements by President Putin and other high-ranking government officials indicate a comprehension of the serious nature of the problem, but piracy remains and we haven't gotten the desired results. There are two causes of inadequate enforcement: one, lack of competent police, prosecutors and/or judges, and, two, lack of political will to enforce copyright. We and others do our best through training programs to address the first problem. The second, lack of political will, is much more difficult. Let me say something about the nature of piracy that we see in other countries. Much of it is done by for-profit criminal syndicates. Factories through China, Southeast Asia, Russia and elsewhere are churning out millions of copies of copyrighted works, sometimes before their authorized release. These operations most certainly involve other criminal activities, and although the information is sketchy at best, there have been a series of rumored ties between pirating operations and terrorist organizations. What is problematic is that some American commentators who are prone to hyperbole are providing arguments and rationalizations that foreign governments are using to defend their failure to address this type of organized crime. The confusion wrought by the imprecision and lack of clarity in these commentators' statements is not helpful to achieving the goal for which there is no credible opposition--dramatic reduction in organized piracy of U.S.-copyrighted works abroad. International piracy poses a tremendous threat to the prosperity of our creative industries and it deserves our utmost attention. This attention must be consistent and long- term if it is to be successful, but we must be realistic in our goals, lest we become discouraged. While it is not realistic to expect to eliminate all piracy, we can assist in improving the global situation to the benefit of authors and rights-holders here in the United States and throughout the world. Thank you. [The prepared statement of Ms. Peters appears as a submission for the record.] Chairman Hatch. Thank you, Ms. Peters. We really appreciate that. Mr. Pinkos, we will turn to you. STATEMENT OF STEPHEN M. PINKOS, DEPUTY UNDER SECRETARY OF COMMERCE FOR INTELLECTUAL PROPERTY AND DEPUTY DIRECTOR, UNITED STATES PATENT AND TRADEMARK OFFICE, ALEXANDRIA, VIRGINIA Mr. Pinkos. Thank you, Mr. Chairman, and I appreciate the opportunity to join with you today in a discussion about international piracy issues. I have a deep respect for the role that the Judiciary Committee plays, or the leading role that it plays in crafting our Nation's intellectual property laws and oversight of the agencies that implement them, and I think much of them is spawned from the fact that I spent six years as a staff member of the Judiciary Committee over on the other side of the Capitol. In fact, I think my last memory of this room is being in here a couple of years ago as we negotiated the PROTECT Act while we tried to catch glimpses of the NCAA Championship game in the other room right there. Luckily, the result of the legislative effort was strong and the game depended on whether you were--I think it was Kansas or Syracuse that year. I wanted to emphasize that the Bush administration is keenly aware and fully understands that intellectual property protection is critical to the competitiveness of our economy, and that U.S. businesses face enormous challenges in protecting their IP overseas. Secretary of Commerce Gutierrez, who has just been on the job for five months or so, is also very aware of the significance of intellectual property for America and he has made combatting piracy one of his top priorities. The U.S. Patent and Trademark Office is dedicated to carrying out his vision of marshaling all U.S. Government efforts and agencies to reduce IP theft. As you noted, Mr. Chairman, increasingly both the United States and our trading partners rely on IP to drive economic growth. The statistics you cited show that IP-based businesses such as software and entertainment now represent the largest single sector of our U.S. economy. Unfortunately, the economic benefits of intellectual property have also captured the attention of thieves and organized crime and, as Marybeth mentioned, even terrorists. Because of that, the threats to U.S. economic safety and security, the administration is working hard to curb IP crime and to strengthen enforcement around the world. I am certain that many of you and your colleagues have heard about the STOP initiative, which is the Strategy Targeting Organized Piracy. It is a White House-coordinated effort of all U.S. Government agencies that are involved in protecting IP and it is the most comprehensive U.S. Government- wide initiative yet. It is designed to simply eliminate trade in pirated and counterfeited goods worldwide, and the greatest benefit thus far has been bringing a lot of agencies together to discuss the different efforts that they have underway to stop trade in counterfeit and pirated goods. We are seeing some results: a report on behalf of some of my other colleagues in the administration that the Department of Homeland Security is increasing seizures. They are applying new technologies and accounting methods to try to stop bogus goods coming over our borders. DOJ, as you are well aware in your oversight of that agency, is stepping up their prosecutions and increasing the amount of special units they have for IP crimes. Over at the Department of Commerce, we are trying to inform U.S. businesses how to best protect their rights with a new hotline and a website and some training programs around the world. And specifically in the United States, Mr. Chairman, we started this week a series of seminars for small and medium- size enterprises. This applies more for the patent and trademark world, but we were out in Utah Monday and Tuesday of this week and we had over 200 businesses represented in our seminar out there. Jon Dudas represented the agency there and from all accounts, it was quite a success. We are expanding that around the country and we are having a couple that are China-specific as well. We did one in Baltimore and we are going to Detroit soon. As I mentioned, USPTO is engaged in enforcement and training efforts around the globe and here. We have offered training and technical assistance to 55 different countries and we have trained hundreds, if not thousands, of officials-- judges, prosecutors, legislators--in how to have a strong IP system and then how to enforce, as well. We have had particular focus on China and one of the things we are trying to do in China is, as has been stated, they have some good laws on the books, but they need to implement them and they need to enforce them. They have one of the fastest growing patent and trademark offices in the world and we are trying to give them the technical assistance so that when U.S. businesses go to protect their property there, the offices actually function as they should. As was mentioned by you, the Joint Commission on Commerce and Trade is meeting this week here in Washington, and the Working Group on IP, which is chaired by Mr. Mendenhall's colleague, Deputy Ambassador Josette Shiner, along with Jon Dudas, are meeting with the Chinese and we are pressing them to implement an IPR action plan that will address some specific IPR problems. The PTO remains active at WIPO, which is always a unique institution to deal with. It is represented by developed and developing countries, but we work with them to set these international standards for IP protection and enforcement, and work to harmonize IP laws to the greatest extent possible. And we are trying to break some ground with a broadcasters treaty there, after the success of the Internet treaties. USPTO is also working closely with the USTR to provide the support they need with free trade agreements, and we have been fortunate, I think, with some of the recent trade agreements with Singapore and Chile and Morocco to have state-of-the-art IP protections in those agreements--what we like to call TRIPs- plus, going above and beyond what TRIPs requires. Mr. Chairman, just to say in closing counterfeiting and piracy do appear to be on the rise, but the administration, I think, is making progress in attacking the problem. There is a lot of work that needs to be done, but I am personally increasingly hopeful that with the continued coordination among agencies and the administration, work with this Subcommittee and other committees in Congress, and with private industry as well--they are a big partner in this--we can continue to do more to help American businesses protect their important intellectual property. Thank you. [The prepared statement of Mr. Pinkos appears as a submission for the record.] Chairman Hatch. Well, thank you so much. Mr. Mendenhall, we will take your testimony at this time. STATEMENT OF JAMES MENDENHALL, ACTING GENERAL COUNSEL, OFFICE OF THE U.S. TRADE REPRESENTATIVE, WASHINGTON, D.C. Mr. Mendenhall. Thank you, Mr. Chairman, and thank you for inviting me here today and giving your attention to this critical issue to our economy. The protection of intellectual property and access for U.S. goods dependent upon IP protection is at the top of USTR's enforcement agenda. In the area of trade, IPR protection is one of the most important and certainly one of the most complex issues that we face today. Yet, we are pursuing this issue with single-minded resolve. We are making some progress. Clearly, a lot of work needs to be done. But to preserve our economic strength, we have to cultivate an atmosphere of creativity and innovation both in the United States and abroad. And if that atmosphere doesn't exist, we have to create it, and that means in part strengthening IP rules around the world. We had a good start with that with the TRIPs Agreement, the global rules on intellectual property. But without enforcement of those rules, those rules are meaningless. Now, two points about enforcement. Ensuring enforcement is actually often harder than negotiating the rules themselves. Enforcement requires political will from legislators, prosecutors, judges, police and administrators at all levels of government, and that is hard to litigate. If we go to dispute settlement, it is hard to craft a rule which compels political will, but political will is essential if we are going to be successful in this mission. Furthermore, ensuring enforcement is not solely about bringing dispute settlement cases against our trading partners. Dispute settlement is a valuable tool, but neither dispute settlement nor, in fact, any particular legal mechanism is the silver bullet here. When we talk about enforcement, we are talking about getting results. We need to think outside the box and it is not a one-size-fits-all solution. The solutions involve pushing multiple levers in the right sequence and with the right amount of pressure. Now, let me give you a couple of examples of what we have done over the past year where we have had some success. Every year, as you know, the U.S. Trade Representative's office issues a special 301 report cataloguing IPR problems around the world and putting countries in a hierarchy of wrongdoing, from Watch List, to Priority Watch List, to Priority Foreign Country. This year, we have done 50, 60 countries, perhaps more than that, in our special 301 report. One of them, for example, is Pakistan, which you mentioned in your opening statement. Pakistan is on the Priority Watch List this year, as they have been for a while, in large part because they have within their borders a series of well-known plants churning out pirated copies of optical disks, millions of them over the past several years. We have taken every opportunity to raise the issue with Pakistan. We have put on the Priority Watch List again this year. Five days later, Pakistan shut down six of those plants. We also use the carrot-and-stick approach that we have through using our preference programs, like the GAP program. Over the past six months or so, we have worked closely with Brazil, for example, where we have indicated to them that they would face the possibility of revocation of GAP benefits if they don't put their enforcement house in order. Recently, as a result of our efforts, Brazil has undertaken a very comprehensive action plan, including many elements, in fact, suggested by U.S. industry. Now, with both Pakistan and Brazil, we have a lot of work to do, so I don't mean to say our work is done there. But there are many levers that we can use and that we need to bring to bear on this project. Dispute settlement, of course, is a key tool that we need to use, and we have used it and we will use it again if that is the most effective way to achieve our objectives. We recently won a case, for example, against the E on the protection of geographical indications. We are willing to do that again if, as I said, that is the most effective tool available to us, which brings us to China. Now, it comes as no surprise to you or anyone in this room, I am sure, that China is perhaps our number one enforcement challenge when it comes to IPR. On China, when we have a problem, many folks have a knee-jerk reaction that we should go immediately to dispute settlement. We have gone to dispute settlement before with respect to China in other areas. In fact, the United States is the only country in the world that has ever challenged China in dispute settlement, which we did last year. We got a successful resolution of a case involving a tax matter. We have utilized WTO procedures even earlier this week, when we requested consultations with China on a direct sales regulation that they are proposing. It is not formal dispute settlement, but they are WTO procedures that we are making use of, and we will continue to do that. Now, WTO rules are clearly going to be helpful to us in IPR, which I will get to in a minute about how those two relate. But I want to give you a quick overview of what we have done on our China strategy over the past year. First, we have held China to its existing obligations. We have negotiated new commitments, when appropriate, to fill any gaps that may exist. Second, we have monitored progress on the ground in close coordination with our industry to ensure that those commitments are being implemented. And if not, we have ratcheted up pressure on China and will continue to do so to ensure that those commitments are fulfilled. Now, over the past year we have moved through all these phases with China. Last year at the JCCT meeting, we negotiated a set of new commitments on IPR, with the overall objective of significantly reducing piracy and counterfeiting. A month later, we dedicated a section of our special 301 report indicating that we take those obligations seriously, that we would monitor their implementation and we would seek to ensure that they are implemented, and that we would review the matter in an out-of-cycle review that, in fact, we started in December of last year. In the summer of last year, we took an unprecedented step of issuing an open letter to industry soliciting information on enforcement problems in China. We reiterated that request when we started the out-of-cycle review and again when we sent the questionnaire to every member of Congress asking that they work with us to inform their constituents of problems in China and help us build a database. At the end of that process, the out-of-cycle review results in April, we put China on the Priority Watch List. We have ratcheted up the pressure on them. China wasn't happy with it, but we thought the report card that we gave them was appropriate, given the lack of progress that we have seen. This week, as has been discussed, we are working with China through the IPR Working Group under the JCCT. In the coming weeks, we are going to be issuing a request through WTO rules seeking additional information from China on the status of enforcement in the country. And then we are going to be working with industry over the coming months to refine our arguments, collect additional information to fill any holes that we may have. We have seen some progress in China. We saw China issue new judicial interpretations in December of last year making it easier to bring criminal cases. We have seen other steps they have taken, including a nationwide campaign, but we haven't seen enough progress and we need to consider carefully what our next steps will be. Now, if we are going to go forward and we are going to utilize WTO procedures, we have to have our facts in order. We have to have a full and complete docier of information to prove our case. Everybody knows it is a problem. Everybody around the world knows it is a problem. The Chinese know it is a problem, but we have to have a full evidentiary basis to prove our case with them if we expect them to make serious progress. Now, we have worked with industry over the past couple of months to do that. We hope you and members of Congress will work with us to work with industry to gather that information as appropriate. Just a word on Russia. Here again, we have got a serious enforcement problem well-known to you and others, of course. We have taken a series of steps to try to increase pressure on Russia to improve their IPR regime. We have raised the issue at the presidential level. We have put them on the Priority Watch List again this year. We are having an out-of-cycle review on China later this year. We continue to review the petition the copyright industry has filed to withdraw GAP benefits, and we are continuing to raise the issue as a critical issue to be addressed in the WTO accession negotiations. Ultimately, again, any progress in this area is going to depend on the political will of Russia's leadership. We will continue to press Russia to undertake that commitment to crack down and deal with this problem straight on. Finally, just two closing remarks. As I indicated in the beginning of my statement, we have a good foundation with the TRIPs rules on enforcement. They need to be elaborated upon, they need to be fleshed out further. We have started that process with our FTAs, as my colleagues on the panel indicated. We have dedicated about half of our IP chapters and our FTAs to enforcement and we are working through the strategy targeting organized piracy to build a global consensus on the need for IP enforcement and build the machinery to ensure that we have the tools available to us, working with our trading partners, to cleanse international trading lanes of pirating counterfeit goods. Thank you. [The prepared statement of Mr. Mendenhall appears as a submission for the record.] Chairman Hatch. Well, thanks to all three of you. Let me just ask a couple of questions. The collective picture the administration witnesses paint of the problem of China is stark and unattractive to me. It is obviously disastrous for our software manufacturers that 90 percent of software installed on computers in China was as a result of pirating of intellectual property. I understand that the American film industry used to be able to say that they had a positive balance of trade in every country in which they do business, but I also understand that this is no longer the case with one country, and that is China. This is not because they are an international film-making powerhouse, and while I am sure the Chinese are making some good films, I am also told that the Chinese will not let the American film industry compete fairly in China. I also understand that whenever a new American film opens, illicit copies are available on the streets in Beijing almost the same day as they are shown, or within days after they are shown. And all of this is taking place when we have big trade deficits with China. You have all touched on this to a degree, but I would like you to just be more specific. What are you doing to fix the IP theft problem in China and what can Congress do to help you? What can we do, if anything, to help you in this area? Mr. Mendenhall. Clearly, the copyright problem--the movies, music, and so on--in China is an extremely serious issue that we take extremely seriously. We have worked very closely with our industries to get a sense for the real problems they face on the ground and figure out what the best steps forward would be. When we talk about movies, in particular, which is what your question focused on, we have got a couple of problems. One is that China puts a cap on the number of movies that come into the country every year to be shown in theaters and such. As a result of that cap, China effectively creates a market for pirate movies to come in; that is to say for the 20 or so movies that are allowed in, there may be 30 additional movies that our industries would like to show and that people would like to see. As a result, there is a black market that grows up with respect to those particular movies. So we have a market access problem that contributes to the creation of a black market. We also have the problems that we face in a lot of other sectors, including the fact that there just simply is a lack of enforcement in China. There are plants turning out millions of optical disks that aren't being shut down. If they are shut down, they may open the next day; the vendors, the same thing. They may be shut down and they open the next day. Now, the steps that we have to take are complicated, as I indicated in my remarks. We have tried to work with the Chinese cooperatively. We have set for them overall objectives of significantly reducing piracy and counterfeiting, as well as specific objectives. The work plan that Mr. Pinkos referred to that we are talking to the Chinese about this year is quite detailed, asking them to take specific steps to build up their enforcement machinery at all levels, and we have worked very closely with the Chinese on that. Now, the Chinese may balk at that. As I said, they think they are doing a lot. We haven't seen the results yet, so I can't tell you what the results of those discussions are going to be. If we don't see results, though, we do need to think about next steps we need to take in this area, and that may include working perhaps within the WTO procedures, as we indicated in our out-of-cycle review results. So we're working the diplomatic angle and the negotiation angle as much as we can. If there is nothing more to be gained about that, we do need to think about next steps and that may be for the utilization of WTO procedures. Chairman Hatch. Is there anything we can do that we are not doing that would better help you there? Mr. Mendenhall. Well, as I indicated, I think what would be most helpful is if we all worked together cooperatively; the administration, Congress and the industry work together to, one, give a united and consistent message to the Chinese that this is a serious problem that has to be grappled with. Two, we need to impress upon--well, we need to work together to ensure that both the private sector and the Government bring the proper amount of resources to bear upon this issue, which includes not only resources for data collection purposes, but also legal resources appropriate for us to build and refine our arguments, build our database so that we can go to the Chinese and present a very solid case, backed up by evidence, that something needs to be done here. Chairman Hatch. I guess I am asking you are there aspects of U.S. law that, in your opinion, need to be changed to assist you in your efforts to combat international piracy. Mr. Pinkos. I don't know if there are laws that will help us deal specifically with China. I think the administration is working on a legislative package to submit to the Congress that will help rights-holders enforce their rights here in the United States a little more aggressively. The Department of Justice is working on that, and the Patent and Trademark Office and Customs. So we would like to work with you on that as we bring some items forward. Mr. Chairman, if I could suggest something that I think is helpful that I think many of you know intuitively, but when you all travel abroad to take a strong message, but not just to China, but really, as Mr. Mendenhall alluded to, this is going to require an effort in China specifically, among multiple nations. Chairman Hatch. Well, I have the same basic question with regard to Russia. It is a big problem, too, and the question is what can we do now to stop the widespread and growing piracy of U.S.-owned and U.S.-developed intellectual property in Russia. It is a big, big problem over there, as well. Mr. Pinkos. That is exactly right, and we are raising it at the highest levels, as Mr. Mendenhall said, with the President, and likewise analyzing their progress in terms of their WTO ascension, as you mentioned in your statement as well. Chairman Hatch. Well, to be honest with you, I am not going to ask you what Congress can do to help with the situation in Russia because I hear a growing number of my colleagues are complaining and very upset and grumbling about their concern that if we go along with ascension to the WTO, Russia is going to become the new China, and they will do it blatantly when it comes to attempting to gain the benefits of free trade for its citizens at the same time it acts to hurt the interests of U.S. copyright-holders and U.S. workers and investors and their families by avoiding the responsibilities under the international trade agreements and in areas where both Russia and China almost blatantly flaunt their theft of U.S.-owned intellectual property materials. Before I ask you to specifically comment on the situation in Russia, particularly on the role of organized crime in intellectual property theft over there, I want to make a few comments on the state of affairs between the Senate and the administration on trade issues. Everyone knows that the situation with CAFTA is fraught with difficulties and that the administration is going to need every supporter that it can both on the Hill and in the public as well. Everyone on the Judiciary Committee members only too well the misadventures we had when USTR negotiators included immigration language in several trade agreements last Congress that caused enough furor on the Judiciary Committee to actually unite us on a bipartisan basis, and that was not easy to do on this Committee, I have to admit. One of the messages we conveyed, and the House Judiciary Committee as well conveyed to the administration is that we want to be consulted and taken seriously on these types of issues. Many of us in the Senate have felt from time to time that either those in the administration who have been working directly are not taking back our concerns, or if they are, these concerns are not being effectively conveyed or listened to or considered. I have been a strong supporter of free trade and everybody knows that, and I hate to see the increasing erosion of support among the public and within Congress for trade agreements especially with people like me. But one way to help reverse this growing tide against trade agreements is to be able to assure the public and the Congress that the U.S. Government is standing up for our rights in areas where we lead the world, such as the intellectual property-dependent sectors of software, entertainment, information technology and biotechnology. There is a growing weariness that while we may have all the right words on the paper, at the end of the day there is no teeth in the words. And when it comes down to enforcing the laws against the outright, flagrant theft of U.S. intellectual property, there is no strength behind that. So with that, I would just ask all of you to comment on the situation in Russia and whether the Russian government is effectively combatting IP theft by organized crime in Russia, and if you could comment very quickly because we will turn to Senator Leahy as soon as you are through. Ms. Peters. Clearly, the answer is no, they are really not doing enough. They actually do have an Internet piracy problem. Many of us realize that in the United States we also have a problem that you and Senator Leahy tried to address last year and time ran out, and we are waiting to see what happens in the Grokster case. But if it comes out, quote, ``the wrong way''-- Chairman Hatch. We are all waiting for that, aren't we? Ms. Peters. If it comes out the wrong way, you may have to take the effort back up again because people will look to the kind of law that we have and how we protect our works in an Internet environment before we go there and tell them that they have their Internet problem and they are not solving it. Chairman Hatch. Mr. Mendenhall, go ahead, or Mr. Pinkos. We will go right across. Mr. Mendenhall. Just a couple of points in response to what you said. Your question, I know, was directed at Russia, but you also mentioned in the course of your comment our free trade agreements, CAFTA and others, and I want to pick up on that because one of the problems that we have when we talk about the enforcement obligations in the WTO and elsewhere is that the rules that we have in TRIPs, for example, are fairly blunt instruments. So what we have tried to do in CAFTA, as with our other trade agreements, is refine the enforcement rules. We have roughly 25 pages of our IP chapters dedicated solely to enforcement, much of it dedicated specifically at copyright enforcement to update the rules applicable in these countries, whether it be on the Internet, dealing with the specific issues related to the Internet, or even broader than that on other matters. So when it comes to our free trade agreements, we are refining and honing the rules and we have seen significant progress. Now, in Russia specifically, I certainly share the frustration that you expressed with Russia's failure to adequately enforce IP rights. I think we all recognize that. That is why we put them on the Priority Watch List this year. That is why we are going to continue to monitor it closely through the out-of-cycle review toward the end of the year. And I can assure you that it is an issue that has taken a very high profile, very prominent, in our discussions in the accession process and our IPR bilateral dialogue with them. We will continue to do what we can to impress upon them to make progress, but it is a serious problem. We recognize that. Chairman Hatch. Let me just ask one other question before turning to Senator Leahy. It is my understanding that the TRIPs provisions are a floor, not a ceiling, and I hope you agree with that statement. Does anybody disagree with that? [No response.] Chairman Hatch. Okay. Can you comment on whether it is the policy of our Government to attempt to negotiate in a TRIPs- plus fashion, when appropriate, such as in the fast-changing IP areas? I will just mention one, e-commerce. These areas were not fully developed when the TRIPs provisions were adopted in the mid-1990s. Do you care to comment about that? Mr. Mendenhall. Sure. I can start, but my colleagues may want to jump in. Yes, TRIPs is a floor. Yes, it is ten years out of date, in a sense. Since then, there have been new rules that have emerged, internationally but not universally accepted in WIPO, for example, to deal with the Internet issue. Our FTAs, as I said, have a very intense focus on enforcement, including on e-commerce and the Internet. They do need to be updated--not the FTAs; the global rules do need to be updated in some sense. We are pressing in all of our bilateral dialogues, including with China, for example, the adoption of rules to bring their enforcement regimes up to snuff. Mr. Pinkos, I think, indicated that we are urging China to fully implement and adopt the WIPO Internet treaties. They have indicated to us that they would seek to do that this year, that the draft regulations in train, and we hold them to do that commitment. It is something that we have discussed at the JCCT, and we will continue to do that. But we are pressing our trading partners through our FTAs and outside of our FTAs and in any other context we can raise it, including through the special 301 process, adoption of rules that modernize the enforcement regimes and go above TRIPs standards. Chairman Hatch. Thank you. Mr. Pinkos. Mr. Pinkos. I think we have seen success with our FTAs in implementing TRIPs-plus, but it is increasing tough sledding in these multi-national settings like WIPO or at the WTO because there is really a very active anti-IP developing world sentiment. In these bodies that require consensus or near consensus to agree on things, it makes it particularly difficult to get further protections. As we saw with the GI case, the geographical indications case, we even have some differences with our European trading partners on the height or strength of IP protection. So it is tough sledding, but I think we are working really hard in these international organizations to try to push through some things. Chairman Hatch. Thank you. Senator Leahy. STATEMENT OF HON. PATRICK J. LEAHY, A U.S. SENATOR FROM THE STATE OF VERMONT Senator Leahy. Thank you, Mr. Chairman, and I am sorry that I was late. I want to commend you for having this hearing. I also wanted to submit for the record a statement by Senator Biden, who is on the floor, as you know, with a nomination. Chairman Hatch. Without objection. Senator Leahy. We Americans think globally as we enjoy the fruits of a lot of creativity of other Americans. I was just getting some messages here on a Blackberry, but that is just one example. Unfortunately, a lot of other people think globally and enjoy the fruits of people's creativity and innovation and they do it because they steal it. I pay for those things I get, as does the Chairman, but a lot of the advances of the digital age have eliminated a lot of the barriers between buyers and sellers. Software, music, photographs--any of those things can be sent around the globe. We saw the opening of the latest ``Star Wars'' movie. It had the biggest opening, I guess, of any movie in history, and within the first day they were downloading pirated copies and selling pirated copies overseas and some here in the United States. So it is a global problem. Because we are the world leader in intellectual property, we at least should be acutely aware of the impact on U.S. industry and our own citizens' creativity. Intellectual property is vital to our health. According to the International Intellectual Property Alliance, in 2002 the various copyright industries accounted for 12 percent of the U.S. gross domestic product. That is $1.25 trillion, and 11.5 million people employed, but they still lose hundreds of billions of dollars to piracy every year. The Business Software Alliance estimates its loss at $30 billion in software sales annually. The MPAA estimates it loses $3 billion a year to piracy. The International Intellectual Property Alliance reports that the U.S. lost more than $13 billion in trade due to copyright piracy in 2003. The FBI says that we lose $200 to $250 billion annually to counterfeiting alone. You have people who work very hard to develop, to create something. This is their livelihood, this is what they are proud of, and it is just stolen. We all understand if you break into somebody's house or warehouse and steal what is there, but these people are broken into maybe from 10,000 miles away. We focus today on China and Russia, and for good reason. The Chairman asked the pertinent question is Russia doing enough. Well, we all know the answer to that. China, in the year 2000, entered the World Trade Organization and I expressed concern about China's record on human rights and labor rights, a record which is terrible. When ultimately I voted in favor of establishing permanent and normal trade relations, I did note that isolationist policies do not work. For several years now, we have been engaging China in attempts to improve its record on piracy. Instead of progress, the United States Trade Representative's 2005 special 301 report placed China on its Priority Watch List. The report notes that while China has expended efforts, we have not seen any meaningful reduction in infringement that China promised to attain. I sometimes wonder when you see raids for television, whether you raid the front end of the pirate business in China while work goes on at the back end. It has resulted in an estimated loss of $2.5 billion to $3.8 billion annually in pirated copyrighted works. Russia, as the Chairman has mentioned, is on USTR's Priority Watch List. We know that while Russia has passed numerous laws designed to improve intellectual property protection, enhanced enforcement has not followed. It is sort of like you pass a law and say we will have a law against burglary, but you can't put locks on your doors and the police won't ever bother to come around and check the place at night. Well, the law looks good on the books and nothing happens. The piracy rate for the recording industry is 66 percent; for the movie industry, 80 percent. Among the many problems in Russia is that the pirated goods that are confiscated by law enforcement--think about this--the goods they do confiscate so they can show us how hard they are working, 70 percent of it is returned to the market. It is sort of like, hey, everybody, look at this, we are getting tough here in Russia, we are grabbing this stuff. Okay, the camera is gone, give 70 percent back. You have got to have more than a revolving door. The copyright industry's estimated loss in Russia is $1.7 billion. Last week, Senator Cornyn and I introduced S. 1095, the Protecting American Goods and Services Act of 2005, to criminalize possession of counterfeit goods with intent to traffic, to close off the loopholes. In 1996, Senator Hatch and I worked together to pass the Anti-Counterfeiting Consumer Protection Act, which amended several sections of our criminal and tariff codes. We know it is more than a problem for just a few of us. We have to ask if the United States Trade Representative has adequate tools to address this issue. Do we need to strengthen our domestic laws through legislation like the legislation Senator Cornyn and I recently introduced? Do we have to engage more vigorously with China, Russia and other countries that don't enforce IP enforcement? I think the answer to all those questions is yes. I am probably preaching to a lot of the converted in this room, but, Mr. Chairman, we are hurting on this. The other thing is now we know it is not just some of these countries that are allowing this. We have organized crime syndicates turning to piracy. It is a lot easier than going out to rob banks. When they asked Willie Sutton why he robbed banks, he said, well, that is where the money is. Organized crime has always looked where the money is, whether it was selling liquor during Prohibition times, or drugs, or whatever. Piracy is a very easy way to go. I read Eric Smith's written testimony and it was very much like Marybeth Peters', who is a person who has enormous credibility before this Committee on both sides of the aisle. They mention the very disturbing possibility that this piracy may be funding terrorist groups. That is something that worries me. If terrorist groups are looking for money, why not go to piracy? Ms. Peters, did you want to add to that at all? Ms. Peters. Not really. I agree with you a hundred percent that the organized crime element that we see in the international arena should be of tremendous concern to everybody and not just the United States, but other countries. Senator Leahy. Well, you know, we put China as a member of the WTO on the idea that maybe this will help us get them to stop all the counterfeiting, but they keep right on doing it. Is there any reason to think that Russia will do any better if we put them in WTO, Ms. Peters, based on our experience so far? Ms. Peters. Well, I think that the possibility to bring about any kind of changes is during the entrance process, our ability to negotiate with them and what they need to do in order to become a WTO member, and make sure that they live up to those agreements. We hope that if the United States Government believes that that is where they should go that we will have managed to elicit more than promises, but effective actions. Senator Leahy. But have we seen much in what they have been doing so far to make us think that they are going to? Ms. Peters. No. Senator Leahy. Mr. Pinkos? Mr. Pinkos. From what I understand--and Mr. Mendenhall may want to take a shot at this--it has been pretty tough sledding, pretty tough negotiations, but we have been pretty strongly insistent that they make the IP commitments before we are going to acquiesce to their ascension to the WTO. Senator Leahy. Mr. Mendenhall? Mr. Mendenhall. It is a difficult issue, obviously. It is a complex issue. We have been in negotiations with Russia for a long time. Through that time, we have seen incremental progress, for example, in having Russia get its laws in shape. As with China and as with a lot of these other countries, the laws on the books don't matter a whole lot if they aren't enforcing them. But we have seen some progress in getting the laws in shape. We have emphasized to them that that is not enough, that they actually need to enforce those laws. They need to go forward and reduce the piracy and counterfeiting levels. We have made that a critical part of the accession package, the accession negotiations, as I indicated earlier. We have raised it at the highest levels and we will continue to do so to impress upon them the need to make progress on this issue as we go forward in the process. Senator Leahy. But what is going to make them do it? I mean, we can raise it to the highest level, but in the past nothing seemed to worry them. I bet you anything that if you go to downtown Beijing within hours of the time just about any movie comes out that is going to be kind of a blockbuster, or downtown Moscow, you can buy pirated copies. I have seen them there. What is enough of either a carrot or a stick to make them change, especially when it seems to be governmental policy to allow this? Mr. Mendenhall. Well, of course, that is the $64,000 question. I mean, what is going to do it? As I indicated in my opening remarks, we have a series of tools that we have used-- you mentioned China, in particular--to gradually escalate the issue--actually, not so gradually. We have escalated the issue over the past year with China, starting with diplomatic initiative through the JCCT, working through an out-of-cycle review, stepping up from there to make a finding of Priority Watch List which, as I indicated, China has taken seriously. I can tell you that because they are here this week talking to us about it. They have expressed their concern about that listing as a Priority Watch List country. We are working with them further on developing an IPR action plan over the next couple of weeks and we are going to be resorting to WTO procedures, as I said, on the transparency side in the coming weeks. And if we still haven't seen progress, we need to think seriously about next steps that we need to take in the WTO or otherwise. So what we are doing is what I think we need to do with China, as we need to do with Russia. We need to speak with a unified and strong voice. We need to impress upon them the importance with which we take it, and I think it is almost important, frankly, to get them to change the mindset so they see it in their own interest. And we have started to do that through various training programs that the various agencies represented here have undertaken, as well as others have. We will get there, but it is going to be a slow process because as I said in my remarks, this is not your typical trade case. This is not a case where you need to change a number in a tariff schedule. You need to change the mindset. You need to get political will at all levels of the government to take it seriously. And if you want to change the mindset, that takes time. It is not a matter of simply changing a number in a tariff schedule, but we are using all the procedures and all the levers we have at our disposal to do it. Senator Leahy. Thank you. Thank you, Mr. Chairman. I have a number of other questions, but I will submit them for record. Chairman Hatch. Thank you so much, Senator Leahy. We appreciate all three of you coming. You have been helpful to us here today and we are going to have to work on this together. I think the next panel will have a number of suggestions on what might be done and I hope you will pay strict attention to what they have to say, as well. Maybe there are some ideas there that might augment some of the ideas you already have. We have got to put a stop to it. We have got to go after these people and we have got to go after these countries and get them to start being responsible to protect intellectual property. But we appreciate the work all of you do. Thanks for being here. Mr. Mendenhall. Thank you, Mr. Chairman. Chairman Hatch. Thanks. Our next three witnesses will be Eric Smith, President of the International Intellectual Property Alliance here in Washington, D.C., then Taylor Hackford, board member of the Directors Guild of America, from Los Angeles, California, and Robert W. Holleyman, President and Chief Executive Officer of the Business Software Alliance here in Washington, D.C. So we will start with you, Mr. Smith, and then we will go across to Mr. Hackford and then to Mr. Holleyman. Mr. Smith, you are first. STATEMENT OF ERIC H. SMITH, PRESIDENT, INTERNATIONAL INTELLECTUAL PROPERTY ALLIANCE, WASHINGTON, D.C. Mr. Smith. Thank you, Mr. Chairman and Senator Leahy, for again giving IIPA an opportunity to testify on the piracy problems the copyright industries are confronting globally. I am going to speak very generally on the topic and my colleagues here will speak to their particular industries in some more detail. This oversight hearing is extremely timely, as you have mentioned, because at this very moment a delegation from China called the IPR Working Group is meeting with the U.S. Government as we speak. In addition, USTR has just announced its special 301 decisions. This is the congressionally-created mechanism by which our Government seeks to improve IPR protection and enforcement globally, and to nurture those creative and innovative industries and individuals who contribute so greatly to our Nation's economic growth. Finally, there are currently ongoing talks between Russia and the U.S. looking toward Russia becoming a WTO member and to secure permanent normal trade relations. I want to briefly discuss our global problems and challenges, and then turn to the dire problems we face in Russia and China. As you know, Mr. Chairman, we represent the U.S. copyright industries. We have six member trade associations, 1,300 companies, accounting for millions of U.S. jobs. You have mentioned those numbers. I won't repeat them. These companies and the individual creators that work with them are critically dependent on having strong copyright laws in place and having those effectively enforced. On average, the copyright industries generate over 50 percent of their revenue from outside the United States, and in 2002 contributed over $89 billion in exports and foreign sales to the U.S. economy. Given the overwhelming global demand for the products of America's creative industries, all these numbers would be significantly higher if our trading partners, particularly those like Russia and China that continue to allow piracy to flourish in their own economies, were to significantly reduce piracy rates by actually enforcing their copyright laws vigorously. First, I want to highlight the global problem. In our 600- plus-page report which we submitted to USTR, we highlighted problems in 67 countries and their impact on the U.S. economy and U.S. jobs. Rampant piracy in most of those countries highlighted in this report constitutes the copyright industry's greatest barrier to trade, costing U.S. jobs and contributions to the U.S. economy. In our report, we identified six priorities or challenges we face in fighting piracy in partnership with our own Government. These challenges are amply illustrated by the two countries I want to especially highlight today--Russia and China. These challenges are, very briefly, Internet piracy and its impact on the growth of electronic commerce; optical disk piracy and the need to regulate it at the production level; the role of organized criminal syndicates in the piracy business; the problem of losses caused by unauthorized use of business software in governments and small businesses, and Mr. Holleyman will speak about that; book and journal piracy, both traditional and online; and the cross-cutting challenge of securing compliance with the WTO TRIPs Agreement, and particularly its enforcement provisions, and how the new free trade agreements are helping to achieve better protection. Our industries face all these challenges in Russia and China, two countries that are highest priorities and where we suffer huge and growing losses. First, Russia, and the problems in what it and the U.S. Government needs to do. Mr. Chairman, Russia is about to become the new China, as you have mentioned, as far as piracy is concerned. Let's look at a few statistics. You have mentioned that we lose over $1.7 billion due to piracy in Russia. That was in 2004, and $6 billion over the last five years. At the same time, the U.S. has unilaterally granted Russia over $515 million in GAP benefits in 2004. With its record, Russia should not be considered eligible to receive those benefits. As you have mentioned, piracy rates hover around 70 percent of the market, or higher, for every copyright sector. It has been recently estimated that Russia's annual manufacturing capacity for OD product now stands at 480 million disks. Demand for legitimate disks is unlikely to exceed 80 million in all formats. You can imagine what happens with the rest. The government of Russia has said that there are 18 plants on restricted access property, military bases, where simple entry is denied law enforcement. Forensic evidence indicates that at least 24 of the 34 plants are known to be producing pirate product. Russian-produced optical disks have been positively identified in at least 27 countries, seized in 27 countries. However, the statistics only tell a part of the story. What they do not show is the poor reaction over the past ten years of the Russian government to their piracy problems. IIPA first raised the OD problems with the Russian government in 1996 when there were just two plants. The reason the problem has been allowed to escalate to 34 plants has been the Russian government's continued and deliberate failure to act, despite repeated promises to our government and to our industries. In short, what we face in Russia is a legacy of failed commitments. Let's look at the enforcement record. In 2004, there were eight actions taken by the Russian government against the optical disk plants, including raids and seizures of illegal materials. As Senator Leahy has said, 70 percent of the products seized went out the back door--unbelievable. All of the optical disk plants that were raided remained in operation after those raids. There are few, if any, criminal prosecutions. All that were prosecuted ended in suspended sentences. In ten years, there have been only two convictions with actual sentences. We and the U.S. Government have recommended six straightforward steps to deal with the optical disk piracy problem. They are detailed in my written testimony. The conclusion: none of them have been done. So what needs to happen? First, 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 actions. The actions we detail must be a pre-condition to such entry. These are not commitments we are looking for. This is action. We got commitments from China and now it is almost four years later. Second, if Russia fails to act, it should be designated a priority foreign country after the ongoing out-of-cycle review by USTR--something that we recommended and was not done in this last round. Third, we should deny Russia's eligibility for the generalized system of preference duty-free trade benefits. It has been five years since we filed that petition and it has been four years since USTR granted that petition. Russia has been on the Priority Watch List now for nine years. Mr. Chairman, it is time to act. Let me now turn to China. Mr. Chairman, we are in dire straits in China. Piracy rates have hovered at and over 90 percent, as we have discussed here, in the more than 15 years that IIPA has been engaged with the U.S. and the Chinese government. Indeed, with the new digital copying technologies and the Internet, the situation has even worsened. Every year, industries have lost conservatively between $1.5 and $2.5 billion. In 2004, it was over $2.5 billion. China is potentially the largest market in the world and is growing at a faster pace than virtually every country in the world. We have an important, in trade jargon, comparative advantage in the area of copyright, an advantage that hasn't even begun to be realized, while, as we know, China is continually taking advantage of their comparative advantage in so many areas, with a trade surplus with the United States of $162 billion. Of all the industry sectors represented in the U.S. economy, the copyright industries face a market more closed to them than to any other. Not only is nine-tenths of the Chinese market closed through piracy, but our industries suffer under onerous and sometimes discriminatory market access barriers. China's denial of effective market access prevents us from getting to know the market and establishing a presence that would enhance our ability to fight piracy. Even if we were to reduce piracy by half in China, under the present circumstances most of our industries could not satisfy the huge local demand because of these barriers. In short, these two problems are indelibly interlocked. Chairman Hatch. Mr. Smith, would you try to wrap it up? Mr. Smith. Yes. Chairman Hatch. We allot five minutes. You are almost ten minutes. Mr. Smith. We believe that the failure to use the criminal law to fight piracy is a violation of China's TRIPs obligations. We believe that the Chinese criminal law, because it does not encompass all acts of copyright piracy on a commercial scale, also violates the TRIPs Agreement. Because of all this, IIPA has urged USTR to engage in a new multilateral dialogue with China. Following USTR's announcement of the results of their out-of-cycle review, we are closely to develop the elements of a possible WTO case. We ask two things: first, that China immediately commence a significant number of criminal actions against pirates of our products and impose deterrent penalties; and, second, that China now eliminate the onerous and destructive market access barriers that prevent U.S. copyright-based companies from doing real business in China. Thank you very much. [The prepared statement of Mr. Smith appears as a submission for the record.] Chairman Hatch. Thank you, Mr. Smith. Mr. Hackford, we will turn to you. STATEMENT OF TAYLOR HACKFORD, BOARD MEMBER, DIRECTORS GUILD OF AMERICA, LOS ANGELES, CALIFORNIA Mr. Hackford. Senator Hatch, Senator Leahy, thank you for inviting me here. I am here today on behalf of the Directors Guild of America, which represents 13,000 directors and members of the directorial team, which accounts for assistant directors, production managers, et cetera. Those teams work in feature films, television, commercials, documentaries and news. Our mission is to protect the economic and creative rights of directors and their teams. I think most people tend to think of the movie industry as the glitz and glamour of Hollywood, movie stars, et cetera, but the reality is that most jobs are behind the camera and they are located all over this country. We are talking about those names that scroll up the screen at the end of a film, hundreds of names for every film, tens of thousands of people who work in this industry. Now, those employees are just the ones that work in the film industry. There are a lot of other people, small businesses, that have their livelihood, their bread and butter, in the film industry also--cleaners that clean costumes, rental cars, trucking, many, many things. As you well know, the entertainment industry and the information industry in this country account as the second largest export that we have. All of these jobs and that industry are currently at stake, are at great risk, which you have heard about today. Now, it is an incorrect assumption in the piracy debate, usually made by people who are interested in open access, that once a film is out and gone into the theaters, it is over and it just comes back then perhaps as profit to the studios. Nothing could be further from the truth. There is a process in the entertainment industry called residuals. This is a crucial element in our business and let me explain why. We are not on a weekly salary, or a monthly or a yearly. We work freelance. Every single film we make, depending on its success, could be our last. Therefore, you work on a project, you put your lifeblood into it, and you hope in the long run that it is going to do well. The residuals from our productions that come back from free and pay television, through DVDs, through video cassettes--that money that comes in feeds our health and pension plan and is really the bread and butter that keeps us alive. What we are facing today is a market where over 55 percent of the money that comes back from films comes from outside the United States. The whole issue of piracy, both within and especially from outside the United States, is seriously threatening our livelihoods, our bread and butter income. So when pirates steal a movie--and that is exactly what it is; it is robbing--they are not just robbing revenues from the studios; they are taking our money that we need to live on and hopefully exist in the future. Moreover, it is not just the films that we make. It is about the films that have not yet been made, and let me explain. When you go out to make a film as a film maker--and I am film director and producer--you don't just make it like this. I want to give you a case in point. I just made a film this past year called ``Ray.'' It was a film about the life of Ray Charles. It took me 15 years to make this film. Senator Leahy. Incidentally, one of the best movies I have seen in years. Mr. Hackford. Thank you very much, Senator. Senator Leahy. I am not trying to give plugs on it, but I went to that and I have urged all my kids to go to it. I have urged all my friends to go to it. It was a tough movie. Mr. Hackford. It was. Senator Leahy. But it was a good movie, really good. Mr. Hackford. Thank you very much. I thought today one of the things that I could do was try to put a personal face on this issue and talk about a project like ``Ray'' that I was personally involved in, and you can see the process of what has happened with that particular film. As I said, it took 15 years and it was not easy, for some reason. You have seen the film and you liked the film, but it was very hard in Hollywood to find anybody who would finance it. I had a passion for this film. I believed in it. I had made the commitment to Ray Charles himself and worked with him for 15 years, and in the process I finally came to the point where I did find somebody to make the film. In this industry, it is a huge risk. People are putting up a lot of money, and with smaller films like ``Ray'' this is a much bigger problem than a film like ``Star Wars'' that everyone knows is going to go out and play in the theater and millions and millions and millions of people are going to see it. The smaller films, the riskier films, are the ones that are most affected like this, like ``Ray'' was. Now, luckily for me, I convinced an individual to actually finance the movie. He was advised by everyone not to do it. Luckily for him, the film was done very, very film. Luckily, we had a distributor, Universal, that picked the film up and did a very, very good job. So, in reality, everybody made out, but you should realize that only four out of every ten films made makes it money back from theatrical receipts. Less than that number--I think it is something like only six films out of ten ever make their money back at all. So it is a hugely risky thing. I want to give you the case of ``Ray.'' When Universal released the film, it was the end of October. The same week it opened, I walked down Canal Street in New York City and the video cassette was on sale, complete with the art work. These people had done all the work ahead of time, and when they got the disk they put it out. Now, we happen to know from research that Universal has done that it was videotaped at the Raceway 10 Westbury Theater, the Loews Raceway 10 in New York and the Loews Jersey Garden Theater in Elizabeth, New Jersey. Now, they immediately took that videotape and they put it on the Web. They sent it to Russia and China, and immediately started that process, the things that you were talking about of generating it. So the fact is that it was on sale a week after its release, or the week of its release--pardon me--because I saw it the day after it was released here in New York, California, Florida, Georgia, Texas and worldwide. Chairman Hatch. When you talk about release, you are saying in the theaters. Mr. Hackford. I mean the DVD was for sale. Chairman Hatch. Yes, because the DVD you came out with later was like three months later. Mr. Hackford. Three months later. This is an important thing. The DVD was on sale in Europe before--we didn't release the film in Europe for another two months. Chairman Hatch. What you are saying is you had the film in the U.S. theaters. You hadn't yet hit Europe. You hadn't yet done your own DVD of it. Mr. Hackford. We hadn't done our DVD. Chairman Hatch. And a day after the film was released, you had DVDs on the street at a very discounted price. Mr. Hackford. Absolutely. You had DVDs on the street. Chairman Hatch. Without any payment of any copyright royalties at all. Mr. Hackford. Nothing coming back. Now, what then happened is three months later, at the beginning of February, we released the DVD. Immediately, that high quality--first of all, the camcorder version was not very good quality, but still that didn't stop millions of people from buying it. Then on February 1, we went out with a DVD, and immediately that went on the Web for downloads. Now, just to give you an idea, last week, one day, May 19, on the peer-to-peer networks there were more than 476,000 requests for ``Ray.'' Since the film was released and first pirated in October, there have been 42 million requests to download ``Ray.'' Chairman Hatch. That is without any payment of royalty or any copyright-- Mr. Hackford. Nothing, nothing. I think that kind of tells you what we are facing. If I had that much trouble raising the money to make the film--luckily, the film worked critically and commercially, and the people are going to make their money back. But those people didn't know that. They were told this was going to be a risk and they might not get it back. Now, if you tell them that you can go out and you can make the film and before they can see anything back, millions and millions of copies--in fact, the other thing that is important to say is last year was the first time in history that DVD revenue exceeded box office. The future is clear. The DVD is going to be the profit leader in this industry. So when I am going to an investor and trying to raise money for a film and that person already knows it is a big risk and now knows that before the film even plays in a theater, it can be on the street, it is going to be devastating to our business. And that means devastating loss of jobs and obviously, as I said before, to this country. If it is the second largest balance of trade export, it is going to be devastating to our economy, and obviously something things to be done. Chairman Hatch. Plus, a loss of creativity, loss of star power, loss of people's opportunities to excel in the arts, et cetera. Mr. Hackford. I think the important thing about the movie business--and again I don't want to put it all in commercial terms. I am an artist. I think when you put something together in a film--let's take Ray Charles. Ray Charles is to me the epitome of the American experience, and let's not talk about race. This is a blind man who in this country was able to make himself a legend, who was able to, through his own talent and fortitude, go out there. That is a message that you send to the world about America. If this industry and the things that we are communicating about this country and the industry that we are creating that will bring revenue back to this country is destroyed--and it will be unless we do something--I think that, yes, I am speaking personally. Myself, my colleagues, the people I work with--and again they are not just the movie stars, but all those people that go into--I don't work alone. I am not a painter at an easel or a novelist at my typewriter working alone. It is a collaborative effort. All those people go into making my film as good as it is, and those people are going to be out of work. So I am here today to express this personal plea to you, and I want to also thank both of you and your Committee for all the work that you have done. Your interest in this has been pioneering. The laws that you have helped enact have really helped us. People are just now starting to wake up even in my industry. But we appreciate that and the Directors Guild is here to help you in any way we possibly can in the future because we share your concern and understand the vital nature of this problem. Chairman Hatch. Thank you. [The prepared statement of Mr. Hackford appears as a submission for the record.] Senator Leahy. Mr. Hackford, I think I can probably speak for both of us in saying that if you worked hard to create something, you ought to have the satisfaction of knowing it is your creation. Now, if you do a bad job and it doesn't sell, fine. That is a risk you take, whether somebody paints a picture, writes a song, writes a book or anything else, or does computer software. But if you have done something good, you ought to get rewarded for it. It ought to be yours, in the same way that if you have got something in your own home, you shouldn't have somebody steal it. You shouldn't have something that is your creation be stolen. Senator Hatch and I have wrestled with this and I think we have demonstrated to the country that it has not been a partisan issue. We are very concerned about this. I want people to be able to compete in the marketplace. If their product sells, they benefit by it. If it doesn't sell, well, that is the risk they take, as anybody does who goes into the marketplace. But it shouldn't be stolen any more than if you own a furniture store and you create nice furniture; somebody shouldn't break in and steal your furniture. Mr. Chairman, I am going to have to leave at this point. I apologize. Mr. Holleyman, of course, has been so extraordinarily valuable to this Committee over the years, to all of us here. I have read the testimony and I will leave some questions for the record. It is unfortunate. I know you have had a million things going on today and I have got a conflict, but I thank you for holding the hearing. I can't tell you how much I want to close the door. I am a former prosecutor and I would like to just be able to go out and prosecute everybody who is doing this. You probably would, too, but I wish there was some way we could close the door. We are never going to get it completely closed, but we can do a lot better job than we are. Thank you. Chairman Hatch. I just want to thank Senator Leahy because he takes a tremendous interest in these things, and we get together on these matters. We get together on a lot of things, but we particularly get together here. I don't think there is even a division between us in almost any area that affects you. I just feel it is a great privilege to work with him, as well, because he takes a great interest in these issues. Let me just say that you are raising issues here that should affect everybody in America. This Committee is going to do everything it can, but we need more help from the intellectual property community as to how we might domestically pass some laws that might be of aid to you. We have been trying to do that, but they haven't exactly worked as well as would like them to work. They are working in some ways, but not as well as we would like. So we need your help. We need the best thinkers in all of the aspects of the intellectual property community and the high-tech community to assist us. As you know, there is a real divide between some in the high-tech world and some in the intellectual property world, or should I say the copyright world. So we have got to bridge those gaps and try to be fair to everybody. Let me just also say that I am also first ranking on the Senate Finance Committee and will take over as Chairman if I am fortunate enough to be reelected. We handle the trade issues and I can guarantee you I am not going to be very open to China and Russia if they are not going to clamp down and do something about it. I might as well warn the administration right now that unless they are willing to start demanding that they abide by international norms, they are going to lose a very advocate for free trade in me. I don't think it is a question of free trade as much as it is a question of thievery. Mr. Hackford. Well, there is a free trade issue, too, Mr. Chairman. Chairman Hatch. Well, there is. Mr. Hackford. When they put a cap on and when they say that only 20 films from outside China can be distributed, what is also happening is the studios are thinking about going to China to make films to get around that, which means that takes jobs out of America to do that. Chairman Hatch. That is one of their ideas to get you to go there. Mr. Hackford. Yes. Chairman Hatch. But I am very concerned about this, and it isn't just the movie industry. It is the publishing industry, it is the music industry. We have seen tremendous dislocations there. We will turn to Mr. Holleyman, who will put a wrap-up on this. STATEMENT OF ROBERT HOLLEYMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER, BUSINESS SOFTWARE ALLIANCE, WASHINGTON, D.C. Mr. Holleyman. Mr. Chairman, I want to thank you and Senator Leahy for inviting the Business Software Alliance to testify at today's hearing and for your very persistent attention to the problem of piracy over the years. As I think this panel has shown, piracy is an issue that affects individual creators. It affects collaborators, it affects shareholders, it affects national economies, and it affects future creators as well. Last week, the BSA and the IDC, which is the leading information technology market research firm, released a report showing that in 2004 the value of pirated software worldwide actually increased, despite a modest one-percentage-point decline in piracy rates. In 2004, the world spent more than $59 billion for commercial packaged software. Yet, software worth over $90 billion was actually installed. So for every two dollars' worth of software purchased legitimately, one dollar's worth was obtained illegally. The BSA has also worked with IDC in looking at the impact of reducing piracy on jobs and tax revenues. We have shown globally that a 10-point reduction in piracy can yield 1.5 million new jobs, $64 billion in taxes, and $400 billion in economic growth. And in North America alone, a 10-point reduction in software piracy would yield 145,000 new jobs, $150 billion in additional economic growth, and more than $24 billion in tax revenues. While there are many countries that I could talk about, today I would like to focus on two--Russia and China. Both of these markets should be tremendous opportunities for our industry. The potential as software markets, and indeed as software suppliers one day, is significant, but it is today largely unfulfilled. Russian software piracy last year--87 percent of the total market was pirated software. It has been stuck in the high 80s for several years. Russia has adopted a number of legal reforms over the past several years, and while they give us some hope that there may be improvements in the marketplace, we have yet to see that realized. Indeed, the piracy situation on the ground in Russia is mixed. Our companies, on the one hand, are seeing some progress in addressing their channel enforcement issues by working with Russian law enforcement authorities. Yet, very little is being done to address end user organizational piracy, which is the largest single problem that the software industry faces in Russia, and indeed in every country around the world. Internet piracy is also a growing challenge in Russia and an area where we have had little success. Pirated software from Russia is being promoted and sold all over the world using spam e-mail and delivery by e-mail. Mr. Chairman, I have examples that I have printed out of some of the spams that are being originated in Russia that are being sent to unsuspecting consumers in the United States and around the world that then link you to slick websites that advertise software for a fraction of the normal retail price. These prices, however, are high enough to convince some consumers that the offer is legitimate. There are a whole host of other problems I can outline, but we are hopeful that the WTO accession mechanism will be the way that we can finally begin to see some improvements in Russia. Switching to China, last year the piracy rate was 90 percent in China, down two percentage points from the year before, but still far too high. Much more needs to be done. Consider this: China is now the second largest market for personal computers in the world, but it is only the 25th largest market for software. The gap between hardware and software sales is huge and it is growing. I would like to recommend for specific improvements for China and its IP regime. First, they must extend criminal liability to enterprise end user piracy. It is absolutely critical that there be criminal penalties for organizational end user piracy. Two, they have to reduce and clarify criminal thresholds. Three, they have to increase the administrative penalties for infringement. Fourth, they need to ensure that the government itself is using only legitimate software. The goal of all of this is to increase the legitimate market for software in China, and that will benefit all software suppliers, whether they are U.S. or Chinese origin. Let me say, Mr. Chairman, before I conclude that we have looked at a lot of measures in the past of how China addresses enforcement--the number of actions they are bringing, the publicity for those actions. We think those are important, but experience has now shown that that is insufficient. We have to look creatively at new benchmarks that we can put on the table that will not only show the number of cases, but that will also show demonstrable market growth. We are working with USTR and the Commerce Department now in looking at some options to put on the table in the context of JCCT that will expand the type of benchmarks that can be used. Let me conclude, Mr. Chairman, by saying that we make the point here and with our allies around the world that reducing piracy benefits all creators. It benefits the entire channel for the distribution of legitimate product. It benefits U.S. companies, but it benefits domestic producers. In each of these countries, I go hand in hand with local developers to make this case, but it has been through the persistent efforts of this Committee and the U.S. Government that we have been armed with the tools that we need. We look to you for continued help and you have our pledge of support. [The prepared statement of Mr. Holleyman appears as a submission for the record.] Chairman Hatch. Well, thank you. A lot of people don't know in this country that we are way behind some of these other countries, including China, with regard to some of the aspects of the high-tech world. A lot of those Ph.D.s and a lot of those highly educated engineers were educated right here in America, which is good, but then they go home and they know how to suck the lifeblood out of our economy. Mr. Hackford, just a rough estimate. How many people totally were involved, from writing, to production, to post- production, to marketing, to DVDs in the film ``Ray?'' Let's just use that one film. Mr. Hackford. Well, during the production I would say there were 150 people that were directly--we shot the film in Louisiana, in New Orleans, and we had a crew there. But in the post-production process and in the marketing, you could probably add another 150. I mean, that is for one film. Chairman Hatch. But that doesn't count all the people in the movie houses and everybody else. It is hundreds of thousands of people. Mr. Hackford. No, no. Then, in fact, as the film goes out and plays around the country, it is an interesting question. Chairman Hatch. You are talking about hundreds of thousands of job for one film. Mr. Hackford. In the movie industry, without question, without question. But the reality is that there is what we call a multiplier effect that I love. When we go into a community, people think it is just the crew that goes there, but when you go in, you have all the small businesses that literally make their--as I said before, make their livelihood based on films. One of the things that is interesting that is happening right now in this country is it is spreading out from Hollywood. I mean, I happened to make ``Ray'' in Louisiana. They put up incentive, and thanks to you and other people we were able to get a Federal bill passed to bring jobs back to the United States. But you can see what happens when an economy is infused. Louisiana went from $12 million a year in film production to in the last two years $500 million. People want to work in this country, and what is important is that jobs are being created in different States. The film community is not just in Hollywood, but this is a profession and the problem that I have is we create, we have the best talent in the world--and I am not talking about talent in front of the camera, I am not talking about actors. We have the best people and we have created an industry here. Of course, we did create it from the outset, but it is still there. I would like to see that continue to flourish because it helps this country lead in the area of intellectual property. Chairman Hatch. Well, I will go back to engineering and I will go back to experts in your field. If we don't do something to encourage kids to get into math and science, we are not going to have the engineers and we are not going to have the people who can even keep a film industry going the way it needs to go. And we are going to be out-competed all over the world, and it is inexcusable when we are the number one nation in the world in all of these aspects. The same thing in music. You know, I know a number of writers who are just excellent and barely get by. You know actors that really are very, very good, but barely get by. There are some who hit it very big and that is great. You are one of the directors who has become very successful and wealthy in the process, but the fact of the matter is not many are able to do that. And to find investors to go into these areas is very, very difficult because there is hardly anything more dangerous for investment than getting into the entertainment world. Unless you really know what you are doing and you really have top people, you are going to lose your shirt. It is just that simple, as a general rule, whether it is in movies, whether it is in books, whether it is in CDs, music, you name it, and it is totally unfair. For instance, you are happy because ``Ray'' made some money and it made money for your investor. Mr. Hackford. It could have made a lot more, as you can tell. Chairman Hatch. Yes, and you could have become even more wealthy. But, see, that is the short-sightedness on this. What it meant is that the investor and you, if you had had the extra money, would be much more likely to take more risks and give other people an opportunity to greater films, do greater music. A lot of these films take music, a lot of these films take special actors, a lot of these films take all kinds of sets and a lot of these films take geographic locations. There is an awful lot that goes into it. People just think it conjures out of the air. It is like our young people--you know, I told the whole recording industry they ought to capture Napster that was getting 80 million hits a day and then educate our young people that what they are doing is thievery and use Napster to do it. Well, gradually, we have come a long way that way, but I still see a tremendous dislocation, except maybe in country music, in the music industry, because our young people are not downloading as much in the country area as they are in others. So the country area has been pretty good. I can't tell you the really outstanding music writers that I know who have to take other jobs because they just simply can't make it on the current royalty system and the current stealing of their copyrighted works under current conditions. So, naturally, I am very concerned about this and I am very concerned about our movie industry. There are successes, of course. Like you say, six out of ten aren't so successful. Mr. Hackford. Right. As a songwriter, you know how the music industry has been savaged because there is less information and it is easier to go. But the fact is that technology marches ahead. Right now, at Cal Tech in California they have developed a technology that will allow individuals to download a high-quality digital copy of any film in three seconds. Right now, the only thing that has held it back is that it takes a long time. But as this technology starts to become part of our system, it will just be rampant. Again, there has got to be a technological solution, in addition to an educational solution. These are all things we have to work on. Chairman Hatch. I agree with that. There has got to be some way. And, of course, you have people in the high-tech world who don't believe in copyright, even though they couldn't exist without copyright, but they take a short-sighted viewpoint. That is why we are all watching Grokster right now. We can't wait until that Supreme Court decision comes down, and at least from my perspective hopefully they won't treat it the same as betamax because there is only one reason for Grokster's existence as far as I can see and that is to enable the pilfering of copyrighted materials, illegal downloading of copyrights materials. And when that is so, I mean you might be able to find some peripheral use of that, but that is the primary reason for that. And our young people are being led down a primrose path, too. I hope the Supreme Court thinks about that, that if they don't come up with the right decision in Grokster, they are aiding our young people to think that everything on the Internet is free, even though it is not and even though our copyright laws teach otherwise. I have heard young people who say, who cares? It is my computer and I can do whatever I want to do. Once you have that attitude on one thing, it permeates a lot of other things and it deteriorates society far below what our society should be. So I personally appreciate all three of you being here today. You have laid out some pretty important problems and you have made some suggestions, but there are no simple solutions. We are a long way from having the trade agreements work perfectly and we are a long way from having China and Russia, two of the biggest thievery countries who just won't get this under control--and they have the capacity to do it. I know that, because they don't have nearly the stringent laws that we do and if they wanted to take care of this, they could take care of it. We know about the 30-plus facilities in Russia and if they want to take care of it, they can. As far as I am concerned, they don't belong in the WTO until they do. I would be very strong supporters of theirs if they would straighten this out. And I have got to say if people like Orrin Hatch don't support them, they are not going to make it. It isn't that I am so great. It is just that I am in a position where I can do some things that some people can't. I just want freedom and fairness and decency and honor in our country, as well as their countries, and I am just hoping that some of them will be watching these hearings to realize that we mean business on this. We are sick and tired of it. We want them to have a great film industry and we want them to have a great music industry, a great publishing industry, a great television industry, a great software industry, whatever you want to call intellectual property, ad infinitum. And we are willing to compete with them, but we want to do it on a fair basis. Well, this has been a really wonderful hearing as far as I am concerned. It is highly technical maybe for some, but anybody watching it has got to say we have got to do something about these problems. And you guys are at the forefront of trying to do something about it and I just want to commend you for it, but take our request here and let's come up with some ways that will help us to pass the right laws so that we can help you more, because there are some things that we can do. And then we have to get to our young people and get them to realize there are right ways of doing things and wrong ways of doing things, and that they should be doing the right ways, not the wrong ways. Well, with that, thank you all for your time. I am sorry to keep you so long, but it is an interesting area for, I think, so many of us, but especially for Senator Leahy and me, and we are grateful that you would come and testify today. Thanks so much. With that, we will leave the record open for one week for additional submissions, anybody who would like to make those submissions. And if anybody has a good argument on the other side, I am interested in that, too. So we will leave the record open and recess until further notice. [Whereupon, at 4:19 p.m., the Subcommittee was adjourned.] [Submissions for the record follow.] [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]