U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

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

21–217 PDF 2005

INTELLECTUAL PROPERTY THEFT

IN CHINA AND RUSSIA

HEARING

BEFORE THE

SUBCOMMITTEE ON COURTS, THE INTERNET, 

AND INTELLECTUAL PROPERTY

OF THE

COMMITTEE ON THE JUDICIARY 

HOUSE OF REPRESENTATIVES

ONE HUNDRED NINTH CONGRESS

FIRST SESSION

MAY 17, 2005

Serial No. 109–34

Printed for the use of the Committee on the Judiciary

(

Available via the World Wide Web: http://judiciary.house.gov 

(II)

COMMITTEE ON THE JUDICIARY 

F. JAMES SENSENBRENNER, JR., Wisconsin, Chairman 

HENRY J. HYDE, Illinois 

HOWARD COBLE, North Carolina 

LAMAR SMITH, Texas 

ELTON GALLEGLY, California 

BOB GOODLATTE, Virginia 

STEVE CHABOT, Ohio 

DANIEL E. LUNGREN, California 

WILLIAM L. JENKINS, Tennessee 

CHRIS CANNON, Utah 

SPENCER BACHUS, Alabama 

BOB INGLIS, South Carolina 

JOHN N. HOSTETTLER, Indiana 

MARK GREEN, Wisconsin 

RIC KELLER, Florida 

DARRELL ISSA, California 

JEFF FLAKE, Arizona 

MIKE PENCE, Indiana 

J. RANDY FORBES, Virginia 

STEVE KING, Iowa 

TOM FEENEY, Florida 

TRENT FRANKS, Arizona 

LOUIE GOHMERT, Texas 

JOHN CONYERS, JR., Michigan 

HOWARD L. BERMAN, California 

RICK BOUCHER, Virginia 

JERROLD NADLER, New York 

ROBERT C. SCOTT, Virginia 

MELVIN L. WATT, North Carolina 

ZOE LOFGREN, California 

SHEILA JACKSON LEE, Texas 

MAXINE WATERS, California 

MARTIN T. MEEHAN, Massachusetts 

WILLIAM D. DELAHUNT, Massachusetts 

ROBERT WEXLER, Florida 

ANTHONY D. WEINER, New York 

ADAM B. SCHIFF, California 

LINDA T. SA ́ NCHEZ, California 

ADAM SMITH, Washington 

CHRIS VAN HOLLEN, Maryland

PHILIP G. KIKO, Chief of Staff-General Counsel 

PERRY H. APELBAUM, Minority Chief Counsel 

SUBCOMMITTEE ON COURTS, THE INTERNET, AND INTELLECTUAL PROPERTY

LAMAR SMITH, Texas, Chairman

HENRY J. HYDE, Illinois 

ELTON GALLEGLY, California 

BOB GOODLATTE, Virginia 

WILLIAM L. JENKINS, Tennessee 

SPENCER BACHUS, Alabama 

BOB INGLIS, South Carolina 

RIC KELLER, Florida 

DARRELL ISSA, California 

CHRIS CANNON, Utah 

MIKE PENCE, Indiana 

J. RANDY FORBES, Virginia 

HOWARD L. BERMAN, California 

JOHN CONYERS, JR., Michigan 

RICK BOUCHER, Virginia 

ZOE LOFGREN, California 

MAXINE WATERS, California 

MARTIN T. MEEHAN, Massachusetts 

ROBERT WEXLER, Florida 

ANTHONY D. WEINER, New York 

ADAM B. SCHIFF, California 

LINDA T. SA ́ NCHEZ, California

BLAINE MERRITT, Chief Counsel 

DAVID WHITNEY, Counsel 

JOE KEELEY, Counsel 

RYAN VISCO, Counsel 

SHANNA WINTERS, Minority Counsel 

(III)

C O N T E N T S 

HEARINGS 

Page 

Part I 

INTELLECTUAL PROPERTY THEFT IN CHINA ......................................................... 1

Part II 

INTELLECTUAL PROPERTY THEFT IN RUSSIA ....................................................... 105

OPENING STATEMENT 

PART I (CHINA) 

The Honorable Lamar Smith, a Representative in Congress from the State 

of Texas, and Chairman, Subcommittee on Courts, the Internet, and Intellectual Property .................................................................................................... 1

The Honorable Howard L. Berman, a Representative in Congress from the 

State of California, and Ranking Member, Subcommittee on Courts, the 

Internet, and Intellectual Property .................................................................... 2

PART II (RUSSIA) 

The Honorable Lamar Smith, a Representative in Congress from the State 

of Texas, and Chairman, Subcommittee on Courts, the Internet, and Intellectual Property .................................................................................................... 105

The Honorable Howard L. Berman, a Representative in Congress from the 

State of California, and Ranking Member, Subcommittee on Courts, the 

Internet, and Intellectual Property .................................................................... 106

WITNESSES 

PART I (CHINA) 

Ms. Victoria Espinel, Acting Assistant U.S. Trade Representative for Intellectual Property, Office of U.S. Trade Representative 

Oral Testimony ..................................................................................................... 4

Prepared Statement ............................................................................................. 7

Mr. Ted C. Fishman, Author and Journalist, China, Inc. 

Oral Testimony ..................................................................................................... 8

Prepared Statement ............................................................................................. 10

Mr. Myron Brilliant, Vice President, East Asia, U.S. Chamber of Commerce 

Oral Testimony ..................................................................................................... 13

Prepared Statement ............................................................................................. 15

Mr. Eric H. Smith, President, International Intellectual Property Alliance 

(IIPA) 

Oral Testimony ..................................................................................................... 22

Prepared Statement ............................................................................................. 24

PART II (RUSSIA) 

Ms. Victoria Espinel, Acting Assistant U.S. Trade Representative for Intellectual Property, Office of U.S. Trade Representative 

Oral Testimony ..................................................................................................... 108

Prepared Statement ............................................................................................. 111

Page

IV

Mr. Eric J. Schwartz, Vice President and Special Counsel, International Intellectual Property Alliance (IIPA) 

Oral Testimony ..................................................................................................... 113

Prepared Statement ............................................................................................. 115

Ms. Bonnie J.K. Richardson, Senior Vice President, International Policy, Motion Picture Association of America 

Oral Testimony ..................................................................................................... 139

Prepared Statement ............................................................................................. 140

Mr. Matthew T. Gerson, Senior Vice President, Public Policy and Government 

Relations, Universal Music Group 

Oral Testimony ..................................................................................................... 148

Prepared Statement ............................................................................................. 150

APPENDIX 

MATERIAL SUBMITTED FOR THE HEARING RECORD

PART I (CHINA) 

Prepared Statement of the Honorable Howard L. Berman, a Representative 

in Congress from the State of California, and Ranking Member, Subcommittee on Courts, the Internet, and Intellectual Property ......................... 163

Prepared Statement of the Honorable Bob Goodlatte, a Representative in 

Congress from the State of Virginia ................................................................... 164

Prepared Statement of the Honorable Elton Gallegly, a Representative in 

Congress from the State of California ................................................................ 165

Prepared Statement of the American Chamber of Commerce People’s Republic 

of China ................................................................................................................. 166

Article from the New York Times entitled ‘‘The Pirate Kingdom’’ by Pat 

Choate ................................................................................................................... 176

PART II (RUSSIA) 

Dear Colleague and Article entitled ‘‘In Russia, Politicians Protect Movie 

and Music Pirates’’ from the Honorable Lamar Smith, a Representative 

in Congress from the State of Texas, and Chairman, Subcommittee on 

Courts, the Internet, and Intellectual Property ................................................ 178

Prepared Statement of the Honorable Howard L. Berman, a Representative 

in Congress from the State of California, and Ranking Member, Subcommittee on Courts, the Internet, and Intellectual Property ......................... 182

Prepared Statement of Tom Thomson, Vice President, Coalition for Intellectual Property Rights (CIPR) ................................................................................ 183

Letter from the Recording Industry Association of America (RIAA) to President George W. Bush ........................................................................................... 188

(1)

Part I

INTELLECTUAL PROPERTY THEFT IN CHINA 

TUESDAY, MAY 17, 2005

HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON COURTS, THE INTERNET,

AND INTELLECTUAL PROPERTY, 

COMMITTEE ON THE JUDICIARY, 

Washington, DC.

The Subcommittee met, pursuant to notice, at 10:08 a.m., in 

Room 2141, Rayburn House Office Building, the Honorable Lamar 

Smith (Chair of the Subcommittee) presiding. 

Mr. SMITH. The Subcommittee on Courts, the Internet, and Intellectual Property will come to order. 

I am going to recognize myself and the Ranking Member for 

opening statements, and then we will proceed quickly to hear from 

the witnesses. And we very much look forward to their testimony. 

Today, in what may be a first for the Judiciary Committee, this 

Subcommittee will conduct two back-to-back oversight hearings on 

the subject of international intellectual property theft. The first 

will examine the massive piracy and counterfeiting that persists in 

China. The second will focus on the Russian Federation which, according to one of our witnesses today, ‘‘is the largest unregulated 

and unenforced producer of private optical discs in the world.’’ One of the purposes of these hearings is to begin an examination 

of the role of intellectual property rights in promoting international 

respect for the rule of law. In whatever form it takes, the theft of 

intellectual property inflicts substantial economic harm on our 

country, our entrepreneurs, our innovators and, ultimately, on the 

American consumers. 

The losses incurred are not limited to those sustained by the traditional ‘‘core’’ copyright industries, but extend to virtually all manufacturers and industries throughout our economy. 

The circumstances in China and Russia are unique, and clearly 

present separate challenges for U.S. policymakers. However, it is 

possible that the persistent failures of these two governments to 

adequately protect and enforce IP rights may be systemic and deliberate, rather than mere ‘‘growing pains’’ associated with the development of market economies. 

We need to determine for ourselves whether it is credible to believe the Chinese government is serious about enforcing the legitimate IP rights of U.S. companies, when copyright piracy levels continue to average 90 percent, and the government refuses to even 

police their own computers by removing unlicensed software. 

2

We need to assess whether the Chinese government has determined that they can continue to simply take without compensation 

the fruits of the investment, innovations, and industriousness of 

our most creative citizens. 

We must begin to consider the true cost of IP theft; not by merely 

calculating the effects of lost revenues, but by assessing the competitive advantage that Chinese companies wrongfully acquire by 

paying pennies for the exact same tools and software that cost U.S. 

and other manufacturers thousands, and sometimes millions, of 

dollars. 

Finally, we must ask whether we have done everything in our 

power to impress upon the Chinese government the seriousness we 

attach to respect for the rule of law and the protection of our most 

valuable commercial property. 

Our witnesses today will present overwhelming evidence that the 

theft of intellectual property in China has increased exponentially. 

This is in spite of the fact that successive U.S. governments have 

sought to engage China in the international rules-based trading 

system, and despite our active support for their accession to the 

WTO. In return, China committed to adequately and effectively 

protect the rights of intellectual property owners, something that 

to date the Chinese government has failed or chosen not to do. 

At the conclusion of these two hearings, I hope we will not simply be asking, ‘‘What is happening in China and Russia?’’, but will 

have begun to focus on the more difficult question of, ‘‘How do we 

solve this problem?’’ That concludes my comments. And the gentleman from California, Mr. Berman, is recognized for his. 

Mr. BERMAN. I thank you very much, Mr. Chairman, for scheduling these back-to-back hearings on this scourge of intellectual 

property piracy, with a focus on China and Russia. The problem we 

confront with both countries is the same: how to prevent billions 

of dollars in losses to the American economy as a result of an unfettered ability to pirate. 

From almost the beginning of recorded history, China has served 

as a provider of desired goods. Marco Polo traveled the world to 

bring back goods made in the Orient. Today, China’s economy has 

grown to include the manufacture of many different products, including clothing, purses, software, computers, and movies. 

While just as desired as the goods of Marco Polo’s day, these 

modern goods often are not the legitimate product of the original 

source. Instead, these are goods that are copied, reverse engineered 

and, with limited investment and no payment to the creator, sold 

for a negligible price for China’s 1.3 billion citizens, and exported 

in massive quantities to other countries, including America. 

The impact of counterfeiting and piracy on American innovators 

and the general public is impossible to quantify with precision, but 

it is enormous. The Chinese government, and some Chinese companies, appear to have an interesting philosophy about piracy. They 

point to their robust laws on intellectual property, show you attempts at enforcement with a televised raid of a market stall, and 

describe their involvement in the issue by lending you educational 

materials for high schools on the importance of respecting intellectual property. 

3

Piracy, they claim, is not to be tolerated. Yet the reality is that 

not only is piracy tolerated, but the government typically turns a 

blind eye to allow the benefits of piracy to accrue to Chinese consumers. 

These cheaper products, it is argued, provide the Chinese population with the luxury items they desire but may not be able to afford. I have heard some in the Chinese government assert that the 

pirates are merely providing cheaper products for those who cannot 

afford to buy bread, in essence, functioning as ‘‘Robin Hoods’’ for 

these goods. Yet this argument holds little credence when those 

goods are openly exported around the world, disrupting existing 

markets for legitimate products. 

As noted by the Chamber of Commerce, in the year ending October 31, 2004, the value of Chinese counterfeits coming into U.S. 

markets seized by the U.S. increased 47 percent. This Saturday, 

the Washington Post reported that—well, no. 

If the government in China sincerely wanted to stop piracy, it 

could; because they have. Clearly, when piracy hurts Chinese interests, the government has been motivated to step in. When teeshirt 

knockouts of the Beijing 2008 summer games were being sold, the 

government was quick to close down the shops and find the counterfeiters. In 2001, the government tore down 690 billboards that 

illegally associated products with the event, and ripped fake Olympic emblems off 67,000 taxis. When they want to, they can. 

This Saturday, the Washington Post reported that the Administration will likely cap imports of clothing as a result of the glut of 

Chinese products entering the American market. There is a far 

more compelling case for the Administration to be forceful with 

China about its willingness to tolerate intellectual property violations. 

A precondition to China entering the World Trade Organization 

was that it implement intellectual property protections. They have 

been given time to address this concern, and have failed. It is time 

for the Administration to bring a WTO case and confront China in 

a meaningful way. If we provide the will for them to put a stop to 

piracy, they’ll find a way. 

I look forward to hearing from our witnesses, Mr. Chairman, and 

especially from the U.S. Trade Representative’s Office on what 

steps they are taking to protect America’s most valuable treasure, 

our ideas and creations. 

Mr. SMITH. Thank you, Mr. Berman. Without objection, other 

Members’ opening statements will be made a part of the record. 

And before I introduce the witnesses, I would like to ask you all 

to stand and be sworn in. 

[Witnesses sworn.] 

Mr. SMITH. Thank you. Please be seated. 

Our first witness is Victoria Espinel, who is the Acting Assistant 

U.S. Trade Representative for Intellectual Property in the Office of 

the United States Trade Representative. In that capacity, Ms. 

Espinel serves as the principal U.S. trade negotiator on IP. Ms. 

Espinel’s office chairs the intra-agency committee that conducts the 

annual Special 301 review of the international protection of intellectual property rights. The latest report was published on April 

29, 2005. Ms. Espinel holds an LLM from the London School of EcVerDate 0ct 09 2002 14:31 Aug 11, 2005 Jkt 000000 PO 00000 Frm 00007 Fmt 6633 Sfmt 6601 G:\WORK\COURTS\051705A\21217.000 HJUD1 PsN: 21217
4

onomics, a JD from Georgetown University, and a BS in foreign 

service from Georgetown University School of Foreign Service. 

I am told that this is Ms. Espinel’s first time testifying before 

Congress. She’ll be doing double-duty today, since she will also be 

testifying at our Russia hearing, as well. Now, we look forward to 

hearing her testimony, and welcome her to the Committee today. 

Our second witness is Ted Fishman, the author of the best-selling book, ‘‘China, Inc.: How the Rise of the Next Superpower Challenges America and the World.’’ Provocative, timely, and insightful, 

Mr. Fishman’s book has been favorably reviewed by numerous 

business and general interest publications. In addition to his book, 

Mr. Fishman has written for The New York Times, the Times of 

London, Harper’s, and USA Today. Mr. Fishman is a graduate of 

Princeton University. 

Our next witness is Myron Brilliant. Mr. Brilliant serves as the 

Vice President for East Asia at the United States Chamber of Commerce. In that capacity, he is responsible for overseeing the U.S. 

Chamber’s programs and policy in that region. His focus has been 

on strengthening and promoting the U.S.-China relationship. Towards that end, he formed the U.S. Chamber’s China WTO Implementation Working Group in 2001; led efforts to secure congressional support for PNTR for China—we may ask you if you still are 

happy you did that—and currently heads the U.S. Chamber’s international IPR initiative. Mr. Brilliant received his JD from American University’s Washington College of Law; his BA in government and politics from the University of Maryland. 

Our final witness is Eric Smith, who serves as the President of 

the International Intellectual Property Alliance, IIPA, which is 

based in Washington, D.C. IIPA is a private-sector coalition of six 

U.S. trade associations which represents over 1,300 companies that 

produce and distribute materials protected by copyright laws 

throughout the world. A co-founder of IIPA, Mr. Smith frequently 

serves as the principal representative of the copyright industries in 

WTO, TRIPS, and free trade agreement negotiations. Mr. Smith 

has a JD from the University of California at Berkeley, a BA from 

Stanford, and an MA from the School of Advanced International 

Studies at Johns Hopkins. 

We welcome you all. Without objection, your entire statements 

will be made a part of the record. As you know, please try to limit 

your testimony to 5 minutes, both because that’s the rules and because we’re expecting votes in about 35 minutes. 

Again, we appreciate you all being here. And Ms. Espinel, we’ll 

begin with you. 

TESTIMONY OF VICTORIA ESPINEL, ACTING ASSISTANT U.S. 

TRADE REPRESENTATIVE FOR INTELLECTUAL PROPERTY, 

OFFICE OF U.S. TRADE REPRESENTATIVE 

Ms. ESPINEL. Thank you very much. Chairman and Members of 

the Committee, thank you for the opportunity to address your concerns over ineffective protection of intellectual property in the People’s Republic of China. 

As Ambassador Portman stated in his confirmation hearing testimony, we face major challenges in China. Our trade deficit, as you 

well know, with China last year alone was $162 billion, and part 

5

of that deficit is because the Chinese do not always play by the 

rules. 

Estimates on copyright piracy, for example, from the copyright 

software and music industries are illustrative of the scope of the 

problem, with reports that 90 percent of all software installed on 

computers and over 90 percent of the market for sound recordings 

in China was pirated in 2003. These disconcerting statistics are 

emblematic of the problems that can be found in other industries. 

After being sworn in just a couple of weeks ago, Ambassador 

Portman immediately reiterated his commitment to enforcing our 

trade agreements and the international obligations of our trading 

partners. He has ordered a top-to-bottom review of all trade issues 

with China, and plans to shift resources and people as appropriate 

to address these pressing concerns. 

I am here today because Ambassador Portman and this Administration place the highest priority on stemming the tide of IPR infringement in China. Counterfeiting and piracy in China are at 

record levels, and are affecting a wide range of U.S. business interests. 

Our companies report billions of dollars in lost revenue, irreparable harm to their brands and future sales, all of which ultimately affects U.S. workers who design and produce legitimate 

products forced to compete against Chinese fakes. We want and 

look forward to working closely with you and your staff in combatting the theft of American intellectual property in China. 

On April 29, USTR reported the results of its Special 301 outof-cycle review on China. In this report, we concluded that while 

China has undertaken a number of serious efforts at the national 

level to address its IPR theft epidemic, particularly by amending 

laws and increasing raids against those selling pirate and counterfeit goods and by operating illegal production facilities, China is 

still not deterring rampant piracy and counterfeiting. 

Piracy and counterfeiting rates in fact continue to grow, a situation that is hitting our small- and medium-size business the hardest. As a consequence, in our April 29 report we outlined a series 

of actions to ratchet up the pressure on China. 

These include working with U.S. industry and other stakeholders, with an eye toward utilizing WTO procedures to bring 

China into compliance with its WTO TRIPS obligations, including 

the possibility of WTO litigation; 

Invoking the transparency provisions of the WTO TRIPS Agreement, which will require China to produce detailed documentation 

on certain aspects of IPR enforcement that affect U.S. rights under 

the TRIPS Agreement; 

Elevating China onto the Priority Watch List, on the basis of serious concerns about China’s compliance with its TRIPS obligations 

and commitments that China has made at the JCCT; 

Continuing to monitor China’s commitments made under our 

1992 and 1995 bilateral agreements; 

And intensifying the JCCT process, including the Intellectual 

Property Working Group which is scheduled to meet next week to 

significantly improve IP protection and enforcement in China. 

China must expend the political capital necessary to deliver on 

its promise to substantially reduce IP infringement. China’s Vice 

6

Premier Wu Yi recommitted to this at the April 2004 JCCT. We 

will work with our counterparts on the Chinese side, beginning 

with the upcoming meeting of the IPR Working Group, to impress 

upon China that patience within the Administration and on Capitol 

Hill has run and now is the time for results. We will also share 

our technical expertise with China, where possible, to overcome the 

many challenges that lie ahead. 

Supplementing these bilateral IP efforts, we will continue outreach activities to U.S. stakeholders and our trading partners being 

harmed by the growth in counterfeit and pirate goods. One avenue 

through which we are seeking cooperation on this shared problem 

is the Administration’s Strategy Targeting Organized Piracy, otherwise known as the STOP Initiative. 

Since the announcement of STOP in October 2004, we have been 

working with the Departments of Commerce, including the U.S. 

Patent and Trademark Office, Homeland Security, including Customs and Immigration and Customs Enforcement, Justice, and 

State, to build international cooperation for a series of proposals 

that will stop the trade in fakes. 

Last month, a delegation representing these seven Federal agencies visited Singapore, Hong Kong, Japan, and Korea, generating 

much interest and fruitful discussions. In the coming months, we 

will continue our outreach so as to determine the activities that 

provide opportunities for cooperation to demonstrate tangible results. We would very much like China to participate in STOP, if 

it is prepared to do so and its participation would be useful. 

On the domestic front, we will continue to work with U.S. industry to identify problems and address trade complaints related to 

China, as we did during the out-of-cycle review. This includes cooperating with industry on China’s WTO TRIPS implementation 

and on the use of WTO procedures to address our serious concerns 

about China’s compliance. 

Industry’s daily operations throughout the country provide us insight into China’s IP regime at the local and provincial levels. We 

hope Congress will join us in encouraging industry’s robust participation on this front, including those companies and associations 

representing the recording industry, motion pictures, software, 

chemicals, pharmaceuticals, and information technology. Their engagement and support on IP issues this year is key to our efforts 

to improve IP protection in China. 

Lastly, we appreciate and will continue to work closely with Congress on these matters. We will press forward with the bilateral 

and multilateral strategy laid out before you, with the goal of improving the situation for American owners of intellectual property 

in China and worldwide. 

We will continue to reach out to our trading partners to develop 

mechanisms to comprehensively combat IPR theft through multilateral fora such as APEC, the OECD, and the WTO. And we will 

continue to conclude agreements such as our free trade agreements 

that reflect the level of protection and enforcement of intellectual 

property in the United States. 

Mr. Chairman and Members of the Committee, thank you for 

providing me with the opportunity to testify. I look forward to your 

questions. 

7

[The prepared statement of Ms. Espinel follows:]

PREPARED STATEMENT OF VICTORIA ESPINEL

Chairman Smith and members of the Committee, thank you for the opportunity 

to address your concerns over ineffective protection of intellectual property rights 

(IPR) in the People’s Republic of China. 

As Ambassador Portman stated in his confirmation hearing testimony, we face 

major challenges with China. Our trade deficit, as you well know, with China last 

year alone was $162 billion. And part of that deficit is because the Chinese do not 

always play by the rules. Estimates on copyright piracy, for example, from the computer software and music industries are illustrative of the scope of the problem, 

with reports that 90 percent of all software installed on computers and over 90 percent of the market for sound recordings in China was pirated in 2003. These disconcerting statistics are emblematic of the problems that can be found in other industries. 

After being sworn in just a couple of weeks ago, Ambassador Portman immediately reiterated his commitment to enforcing our trade agreements and the international obligations of our trading partners. He has ordered a top-to-bottom review 

of all of our trade issues with China, and plans to shift resources and people as appropriate to address these pressing concerns. 

I am here today because Ambassador Portman and this Administration place the 

highest priority on stemming the tide of IPR infringement in China. Counterfeiting 

and piracy in China are at record levels and are affecting a wide range of U.S. business interests. Our companies report billions of dollars in lost revenue, irreparable 

harm to their brands and future sales, all of which ultimately affects U.S. workers 

who design and produce legitimate products forced to compete against Chinese 

fakes. We want and look forward to working closely with you and your staff in combating the theft of American IP in China. 

On April 29, USTR reported the results of its Special 301 Out-of-Cycle Review on 

the IPR situation in China. In this report, we concluded that while China has undertaken a number of serious efforts at the national level to address its IPR theft 

epidemic, particularly by amending laws and increasing raids against those selling 

pirated and counterfeit goods and operating illegal production facilities, China is 

still not deterring rampant piracy and counterfeiting. Piracy and counterfeiting 

rates continue to grow, a situation that is hitting our small and medium size businesses the hardest. As a consequence, we outlined a series of actions to address our 

concerns:

1) Working with U.S. industry and other stakeholders with an eye toward utilizing WTO procedures to bring China into compliance with its WTO TRIPS 

obligations.

2) Invoking the transparency provisions of the WTO TRIPS Agreement, which 

will require China to produce detailed documentation on certain aspects of 

IPR enforcement that affects U.S. rights under the TRIPS Agreement.

3) Elevating China onto the Priority Watch List on the basis of serious concerns 

about China’s compliance with its WTO TRIPS obligations and commitments 

China made at the April 2004 U.S.-China Joint Commission on Commerce 

and Trade (JCCT) to achieve a significant reduction in IPR infringement 

throughout China, and make progress in other areas.

4) Continuing to monitor China’s commitments under our 1992 and 1995 bilateral agreements (including additional commitments made in 1996).

5) Using the JCCT, including its IPR Working Group, to secure new, specific 

commitments to significantly improve IPR protection and the enforcement 

environment in China.

China must expend the political capital necessary to deliver on its promise to 

‘‘substantially reduce IPR infringement.’’ China’s Vice Premier Wu Yi committed to 

this at the April 2004 JCCT and in our 1995 bilateral Memorandum of Understanding on IPR. We will work with our counterparts on the Chinese side, beginning 

with the upcoming meeting of the JCCT IPR Working Group scheduled for the week 

of May 22nd, to impress upon China that patience within the Administration and 

on Capital Hill has run and that now is the time for results. We will also share 

our technical expertise with China where possible to overcome the many challenges 

that lie ahead. 

Recently, the Chinese Government has increased its efforts to promote better IPR 

protection in China. We expect China to demonstrate these efforts will yield tangible 

8

results on IPR. In our OCR Report, we identified for China six specific results that 

in our view would be evidence that these efforts are succeeding, and have provided 

suggestions on how to achieve them. China must now take ownership of the problem 

and exercise the political leadership needed to show improvements in these areas, 

particularly at enhancing criminal enforcement, providing for a deterrent administrative enforcement system, allowing for fair market access for legitimate products, 

securing China’s borders against exports of pirated and counterfeit products, protecting copyrights in the context of the Internet, and increasing the transparency 

of its legal system. 

Supplementing these bilateral IPR efforts, we will continue outreach activities to 

U.S. stakeholders and our trade partners being harmed by the growth in trade of 

counterfeit and pirated goods originating from countries such as China. One avenue 

through which we are seeking cooperation on this shared problem is the Administration’s Strategy Targeting Organized Piracy, or STOP!. 

Since the announcement of STOP! in October 2004, we have been working with 

the Departments of Commerce,(including the U.S. Patent and Trademark Office), 

Homeland Security (including both Customs and Border Protection, and Immigration and Customs Enforcement), Justice, and State to build international cooperation for a series of proposals to that will stop the trade in fakes. Last month, a delegation representing these seven federal agencies visited Singapore, Hong Kong, 

Japan and Korea generating much interest and fruitful discussions. In the coming 

months, we will continue our outreach so as to determine the activities that provide 

opportunities for cooperation to demonstrate tangible results. We would very much 

like China to participate in STOP! if it is prepared to do so and its participation 

would be useful. 

On the domestic front, we will continue working with U.S. industry to identify 

problems and address trade complaints related to China, as we did during the Outof-Cycle Review. This includes cooperating with industry on China’s WTO TRIPS 

implementation and on the use of WTO procedures to address our serious concerns 

about China’s compliance. Industry’s daily operations throughout that country provide us insight into China’s IPR regime at the local and provincial levels. We hope 

Congress will join us in encouraging industry’s robust participation on this front, 

particularly those companies and associations representing the recording industry, 

motion pictures, software, chemicals, pharmaceuticals and information technology. 

Their engagement and support on IPR issues this year is key to our efforts to improve IPR protection in China. 

Lastly, we appreciate and will continue to work closely with Congress on these 

matters. We will press forward with the bilateral and multilateral strategy laid out 

before you with the goal of improving the situation for American owners of IPRs 

in China and world-wide. We will continue to reach out to our trade partners to develop mechanisms to comprehensively combat IPR theft through multilateral fora 

such as the APEC, OECD, and the WTO and will continue to conclude agreements 

such as our free trade agreements that reflect the level of protection and enforcement of IPRs in the United States. 

Mr. Chairman and members of the Committee, thank you for providing me with 

the opportunity to testify. I look forward to your questions.

Mr. SMITH. Thank you, Ms. Espinel. 

Mr. Fishman. 

TESTIMONY OF TED C. FISHMAN, AUTHOR AND JOURNALIST, 

CHINA, INC. 

Mr. FISHMAN. Thank you so much. I’m honored to be here. My 

written statement, and my book, China, Inc., and the attached New 

York Times articles that I provided offer a comprehensive view of 

why I think the Chinese intellectual property regime is so difficult 

to tackle. 

In my spoken remarks, I’m going to focus on why I think the 

problem is going to grow, and just what kind of force I think this 

Committee will need to encourage the United States to exert in 

order to overcome it. And the underlying issue there is China’s 

growth. 

The more China grows, the richer its people get, the more global 

its industries grow, the more difficult it is going to be to enforce 

9

intellectual property; because there’ll be more people willing to pay 

for pirated goods, more businesses in demand of pirated goods. This 

is part of China’s low-cost manufacturing machine and part of its 

industrial growth. 

Over the last 20 years, there has been no enforcement of intellectual property rights in China, virtually none. And yet, China has 

still attracted about a trillion dollars in foreign direct investment. 

It has not been a disincentive for foreign investment to date. In 

fact, if anything, it’s been an incentive; because when the world’s 

manufacturers move to China, they also take advantage of factories 

that work on machines that are created on pirated platforms, on 

computer-aided design work stations that run on pirated platforms, 

on virtually everything inside a factory that is protected by some 

intellectual property somewhere else. Those move to China at no 

cost, and are an essential part to how China produces goods for the 

world at low prices. 

If you want to assert an intellectual property protection regime 

in China, you’re going to have to drive a wedge in between the interest in keeping China the world’s low-cost manufacturing center, 

and the interest in keeping the United States a vital knowledge 

economy in which innovation is primary. 

Look at China’s growth. It is impressive by any measure. It is 

urbanizing and industrializing at a pace faster than any country in 

the history of the world. Within a generation, 300 million people 

will move off the farm, in which there is no technology virtually 

and it is the most basic of economies, into a rapid urban industrializing future. Every aspect of that urban industrialized future relies in some essential way on pirated technology—every aspect of 

it. 

And, you know, we shouldn’t overlook how China’s industrialization is also benefitting America’s consumers. The China price, 

which is the lowest price available for goods in the world, has 

saved American consumers, on average, about $600 each a year 

over the last year and a half. Those numbers come from economist 

Gary Hufbauer at the Institute for International Economics. 

And when you assert an intellectual property regime in China, 

you’re going to see prices go up, and it’s going to be the consumer 

that pays the price. But you’re also going to have a conflict of interest among those who buy those goods in the United States. Any 

time you walk into a big-box store, say a large discounter, what you 

are seeing is seven out of ten of the goods on those shelves coming 

from China. Often, those goods are made on entire production lines 

that are created with pirated intellectual property. It is simply a 

fact. It is a component of the Chinese economy. 

And China has very strong interests in not strengthening its IP. 

Do a thought experiment. If you were the leader of 1.3 to 1.6 billion 

people who were mostly desperately poor, in need of the world’s 

best educational resources, in need of the world’s best technology, 

and you could grant them this technology virtually for free, without 

consequence, and borrow the jewels from the rest of the world’s 

economies and deliver them to your people, and put them on an 

equal plane with the world’s most advanced industrial economies, 

would you make that choice? 

10

That is the choice that the Chinese regime has made. And reversing that choice, or stopping that choice, requires an extreme 

willingness on the part of the United States to form a consensus 

on China, to drive a wedge between those strong interests which 

deliver wealth to the Chinese people, in the area of pharmaceuticals it delivers better health to the Chinese people, and in the 

area of education it delivers the most advanced technological products available in the world. That is a strong interest to overcome. 

And yet, right now we are at a juncture. In order to save our 

economy and the innovative nature of our economy, we have to 

make that choice. Thank you. 

[The prepared statement of Mr. Fishman follows:]

PREPARED STATEMENT OF TED C. FISHMAN

Let me start with two bold statements. Intellectual property is now the most important issue in the economic relations between the United and China. Convincing 

the Chinese to consistently enforce laws that protect intellectual property, especially 

intellectual property held by foreigners, will impossible without a powerful assertion 

of American interests. My hopes for my testimony are to explain why China’s current, exceedingly loose intellectual property regime is one of the engines of the country’s amazing economic growth and thoroughly in that nation’s interest. I will offer 

what I think are the essential choices we Americans must make in addressing China’s intellectual property regime, choices that often pit one strong interest—such as 

our interests as consumers in search of low prices—against others—such as our 

need to protect America’s knowledge economy. 

Let me describe briefly the Chinese economic miracle that must be the backdrop 

for this discussion. Ever since the Chinese economic reforms began in earnest a little more than two decades ago, China has been growing faster than any large economy in the history of the world. China’s actual growth statistics are a source of considerable controversy, but even conservative estimates are impressive. As a nation, 

China has almost certainly enjoyed an average growth rate above 8 percent for two 

decades running. China has lifted 400 million people out of the lowest depths of poverty, and in twenty years has seen the incomes of the average household climb fourfold. In a country where recently private enterprise was strictly forbidden, and 

where the government owned every business, the land under every home, and even 

the pots, pans forks and knives in the kitchen, there are today 85 million private 

businesses. The United States, in contrast, has around 25 million private businesses. In other words, the Chinese Communist Party has overseen the one of the 

greatest capitalist flowerings the world has ever seen. It is hard for Americans to 

imagine leaders who proudly call themselves Communists allowing such rampant 

and successful commercialization, and harder still to see how communism has nevertheless informed China’s transformation. Yet, when looking at how China’s government will act in the future, it pays to see how the country’s communist leaders 

act for their country’s welfare, rather than to take to usual tact, which is to demonize the Communists and to see them at odds with the best interests of the Chinese 

people. Make no mistake: I have strong reservations about China’s government and 

sincere hope that China will look more like our democracy over time. Even so, in 

the context you are addressing today, we must acknowledge, and grudgingly admire 

how the Chinese have improved their lot and moved to the forefront of the world’s 

economic powers. 

China’s loose intellectual property regime allows the government to pass on to its 

citizens goods that make the Chinese people richer, smarter and healthier. They 

have solid reasons for doing business the way they do, and many of us would act 

in much the same way were we in the position the Chinese now find themselves 

in. Here’s a simple thought experiment. Imagine you were the leader of between 1.3 

and 1.6 billion people, most of them desperately poor and modestly educated. Suppose you could transfer to your people the jewels of the world’s advanced industrialized nations, paying nothing for much of it and pennies on the dollar for some 

more. Suppose, in other words, you could steal the best technology, copyrighted materials, brand names and top entertainment for your wanting people. And imagine 

further that you had little expectation of being held to account for that theft. To 

the contrary, you would be rewarded for it. In fact, that theft would make your 

country an ever-more desirable home for the very international fashion, technology 

and knowledge enterprises you were so liberally borrowing from. Anyone here would 

11

make that choice—the choice which the Chinese government and people made and 

still do make every day. One of the precepts of good leadership is to make one’s people prosperous and capable, and the Chinese practices have followed that hands 

down. The Chinese are indisputably richer today than ever before, the use of personal computers is widespread and expert and Chinese factories routinely run on 

the very same software that their competitors in America use. In all, China’s cre- ation of an extremely loose intellectual property regime has paid off handsomely. 

It is now time we exercise what means we have to enforce global rules that will 

also serve the American economy. 

All of Hollywood, Bollywood and even French, Italian and Russian cinema is 

available for a pittance in the streets of China. Everyone on this committee knows 

about DVD pirating, but how many have seen how the markets work in the streets 

of China. One soon sees why there are only a handful of movie theaters in China. 

Travel up a crowded escalator at the entrance to a Shanghai subway stop on a Friday evening after work, and there at the top is a woman with a medium-sized duffle 

bag. She steps to the side, opens the bag and with great speed lays out hundreds 

of DVDs of the latest American movie hits. Immediately, she is rushed by commuters who snap up the disks at $.70 a piece. There are few movie theaters in 

China because women with gym bags, and men with crates of DVDs on their bicycles and stores in alleys, and sometimes on busy business streets are, in essence, 

China’s movie theaters. The trade is so open that Chinese policeman can regularly 

be seen rifling through the bins of DVDs shops, not shutting them down, but shopping for a weekend’s entertainment. 

China’s lax policies on copyright protection offer the country the advantages of 

both bread and circuses. One expert I interviewed for my book, China, Inc. is Andrew Mertha, a political scientist at Washington University. Mertha, who has 

worked with Chinese and American officials on Chinese intellectual-property law, 

summarizes the circus side of things: ‘‘If you’re the Chinese leadership, do you want 

people idling around in the street, complaining about how unhappy they are, or do 

you want them home watching Hollywood movies?’’ In other words, the government 

is slow to crack down on the piracy of entertainment products because these serve 

its social agenda. But is there any doubt that if vendors suddenly found a brisk 

market for DVD’s promoting Tibetan independence or the virtues of Falun Gong, the 

outlawed religious sect, the DVD business would shrivel up overnight and all those 

anticounterfeiting laws on the books would find ready application? Indeed, when 

Sega’s new online fantasy sports game ‘‘Football Manager 2005’’ had the gall to suggest that imaginary soccer leagues in Hong Kong, Taiwan and Tibet could be governed locally, rather than by the central government, China’s Ministry of Culture 

banned the game on the grounds that it posed ‘‘harm to the country’s sovereignty 

and territorial integrity.’’ Fines reached $3,600. 

The two most cited examples of China’s disregard for intellectual property are 

movies sold on pirated DVDs and software copied and sold at low cost in Chinese 

shops. Nearly every movie, and every piece of software in China (except those used 

by multinational companies operating in China) is somehow stolen. It seems right 

to criticize these practices, but Americans must also acknowledge how we are 

complicit in them. Anyone who has shopped for a DVD player in an American store 

in the last two years knows that prices have dropped dramatically. During their 

first few years on the market, DVD players were manufactured by a handful of 

large global consumer electronics companies, and the technology that went into 

them was protected by patents held by a few of the companies. Any company that 

wanted to make a DVD player had to pay the consortium that held the patent rights 

a license fee. Then, about four years ago, Chinese manufacturers began to make 

players without paying the license fees. They simply copied the technology and assembled the machines. In fact, they added functions to the players that made them 

better then any others on the market. One of those function was the ability to read 

poor quality DVD disks, the kinds that sell out of gym bags. The original intent of 

the Chinese makers was to sell to Chinese consumers, who make up the largest 

group of consumers of recorded entertainment in the world. Soon, instead of 5 or 

6 foreign companies making and licensing DVD players, their were hundreds of Chinese manufacturers turning them out. Prices dropped from nearly $1,000 to around 

$50. Of course, the players did not stay in China. Today, there are $26 players for 

sale at America’s big box stores and chain pharmacies and grocers. That is roughly 

the price of two movies. The chipset and license fee for a DVD player costs about 

$11. When one sees a $26 Chinese-made player on the selves of a discount store 

or drugstore, it is worth wondering how it could get there unless there were winks 

and nudges from American retailers who insist on ever-lower prices from their Chinese suppliers, but do not always insist that the goods they buy have the proper 

IP bona fides. 

12

The motion picture industry and the American software industry suffer in China. 

I have noticed, however, that when I bring up the issue of counterfeiting and piracy 

in China it is almost impossible to get the average American to feel pity for Hollywood or for software giants like Microsoft. Or even for big pharmaceutical companies that face their own China challenges. There is group for whom there is lots 

of sympathy, however. It is American manufacturers who face intense competition 

from China’s low-cost manufacturing machine. And it is this group that may suffer 

the most from China’s lax intellectual property regime. 

American companies are not just creators of intellectual property, they are buyers 

of it. It can cost millions, or tens of millions or dollars to purchase and service the 

software to run an American company. Yet, Chinese competitors often pay nothing 

for the same technology, because it is simply stolen. Walk into the vast majority of 

Chinese firms that run computers and one will see one work station after another 

stuffed with $2 version of software that costs Western competitors hundreds of dollars to run. Or walk into any company that designs and manufactures highly engineered parts. A metal caster that has built a reputation for making precision 

parts—the kind that American companies excel at—typically designs its parts at engineering work stations manned by highly trained engineers who run proprietary 

software that can cost $50,000 to $60,000 a year to run. It is likely to have several 

such workstations, perhaps dozens or hundreds. Chinese competitors run the same 

software, but they are unlikely to have paid anything for it. It is easy to understand 

how low-cost labor contributes to China’s low-cost manufacturing. So far, the lowcost of technology has been entirely overlooked. I cannot offer numbers of the total 

cost of this mismatch, but it is an essential part of the dynamic that drives manufacturing to China. The cost would almost certainly dwarf the losses in sales suffered by Hollywood or the software industry. As China moves up the economic feeding chain, this level of piracy will play against American companies more and more. 

Our economic health demands that we address this. One place to look is toward 

American companies that bring in Chinese-made goods that are made on pirated 

platforms. That’s a daunting task, because nearly everything America buys from 

China achieves some of its cost competitiveness from China’s loose intellectual property regime. 

China’s loose intellectual property rules also transfer to Chinese industry valuable 

intellectual assets that can take American companies years and cost significant 

sums to develop. American automobile makers can spend half a billion dollars developing and building anew car, and take two years to do it. As soon as the car hits 

the market, Chinese manufacturers study it and look at how to copy it. Chery Motors, the company which will soon introduce Chinese built cars into the U.S. market 

has been accused by General Motors of pirating an entire GM car and beating GM 

to market with the Chery copy. It is not unusual for whole assembly lines to get 

duplicated in China, where the copiers need not worry about the cost of developing 

and designing the lines. Big business in the U.S. is vulnerable, but so are smaller 

firms where often one good idea, patented or kept proprietary in some other fashion, 

is the only truly valuable asset the firm has. 

China’s failure to police its intellectual property rules often looks less like ineffective government than a conscious policy to shift the highest value goods from other 

economies into the country. It is, in essence, the largest industrial subsidy in the 

world, and brilliantly, it costs the Chinese nothing. In 2005, China will most likely 

be the world’s third-largest trading nation, and counterfeiters give the country’s increasing number of globally competitive companies the means to compete against 

powerful foreign rivals that pay for their use of proprietary technologies. In a broader geopolitical context, China’s counterfeiters deny the world’s advanced economies, 

especially in the U.S. and Japan, the opportunity to sell to China the valuable designs, trademarked goods, advanced technology and popular entertainment that the 

Chinese urgently desire but cannot yet produce on their own. For the U.S., this mismatch is particularly punishing. Japan and Germany, which also suffer from China’s policies, do not have the huge trade deficits with China that the U.S. does. One 

reason is because our export economy is far more dependent on the sale highly valuable, intangible and easily copied goods. Japan and Germany make the machines 

China needs to run. America makes the software that runs those machines. It is 

far more difficult for us to paid by Chinese users for what we make, though most 

of the rest of the world pays handsomely for it. Until we can get paid for what we 

make and the Chinese use, our deficits will worsen, not improve. Say, for example, 

that the value of the dollar drops against the Chinese yuan. Economists predict our 

trade situation will level out, but do not take into account that no matter what our 

goods cost, the Chinese will most likely continue to pay nothing for some of the most 

useful goods we make. And, as a result, their factories will continue to be able to 

beat even the most efficient American factories on price. 

13

We now have a golden moment in which we can still use our power as China’s 

most important customer to enforce a change in its intellectual property regime. Action ought to be forceful and unequivocal. Our trade deficit with China alone—not 

counting the rest of our trade with the country—is more than ten percent of the 

entire Chinese economy. That is an astonishing figure, and in it we can find 

strength to exert rules over our trade with China. That may require a radical rethinking of past agreements, some brinksmanship with quotas and tariffs and other 

remedies. Without action, however, the U.S. is likely to find our entire economy copied in China and Americans paid little for the brainwork imported to make it run.

Mr. SMITH. Thank you, Mr. Fishman. 

Mr. Brilliant. 

TESTIMONY OF MYRON BRILLIANT, VICE PRESIDENT,

EAST ASIA, U.S. CHAMBER OF COMMERCE 

Mr. BRILLIANT. Mr. Chairman, Members of the House Judiciary 

Subcommittee, good morning. The U.S. Chamber appreciates your 

invitation today to appear at this important hearing on China’s intellectual property record. 

As the world’s largest business federation, representing more 

than three million businesses, the U.S. Chamber of Commerce is 

keenly aware of the global threat of counterfeiting and piracy to 

American firms and workers. Counterfeiting and piracy is not a 

victimless crime. Counterfeiting and piracy are costing the U.S. 

consumers and American companies billions of dollars every year, 

and those numbers are going up. 

It damages investment and innovation, has devastating economic 

consequences for small businesses, puts a severe strain on law enforcement agencies, nearly always escapes taxation, threatens public and health safety, diverts government resources from other priorities, and has links to terrorism and organized crime. 

IP theft will continue to be rampant without a concerted effort 

on the part of business and government. The U.S. Chamber has 

launched a three-part strategy aimed at mobilizing business and 

government to fight against counterfeiting and piracy. As part of 

our efforts, we have launched country-specific IPR initiatives in 

China, Brazil, Russia, India, and Korea, where the problems are 

particularly acute for American companies. 

Let me now turn to offer specific views on China, the subject of 

today’s hearing. The U.S. Chamber fully recognizes the importance 

of China’s successful integration into the world economy. U.S.-

China trade has boomed in recent years since China’s accession 

into the World Trade Organization. U.S. exports to China have 

grown by 114 percent since 2000, five times faster than exports to 

any other country. 

While the U.S.-China commercial relationship is of immense and 

growing importance to our membership, the U.S. Chamber feels 

strongly that China must do significantly more to comply fully and 

on time with its WTO, World Trade Organization, commitments; 

and in particular, in critical areas such as intellectual property 

rights. 

And we are communicating our views directly to the Chinese. 

This week, U.S. Chamber President and CEO, Tom Donohue is visiting Beijing with a business delegation for high-level delegation 

discussions with the Chinese government, including Premier Wen 

Jiabao and Minister Bo Xi Lai, and talking to the Chinese about 

14

the need for more tangible immediate steps to crack down on counterfeiting and piracy. 

Next week, we will play host to a senior Chinese IPR delegation 

led by Vice Minister Ma Xiuhong, and we will again use the opportunity to seek clarification and assurances about their enforcement 

efforts. 

Where do we stand? It is clear that the protection which China 

is actually providing fails to meet the standards of effectiveness 

and deterrence set out in the WTO TRIPS Agreement. IPR violations in China now severely affect all American industries, from 

consumer industrial goods, including medicine; to autos and auto 

parts, food and beverages and cosmetics; to copyright works, including entertainment and business software, movies, music, and 

books. 

China is the single largest source of counterfeit and pirated products worldwide, and we believe that the scope of counterfeiting and 

copyright piracy in China worsened for most of our member countries in 2004. Infringement levels are at 60 to 90 percent, or even 

higher, for virtually every form of intellectual property in China. In 

the copyright industry alone, for instance, USTR estimates U.S. 

losses are between 2.5 billion and 3.8 billion annually. 

The U.S. Chamber was heartened by the promises of Vice Premier Wu Yi at the April 20, 2004 Joint Commission on Commerce 

and Trade meetings, on the intention of the Chinese government 

to significantly reduce IPR violations. We acknowledge that the 

PRC government is taking important and constructive steps to improve coordination. 

In a further positive development, we acknowledge that they 

have issued a long awaited judicial interpretation that covers 

frankly criminal prosecutions—could cover—and could strengthen, 

deter, and impact China’s criminal enforcement efforts in the IP 

field. 

In 2004, China’s government modestly improved its regulatory 

environment for IPR protection, and carried out raids and other enforcement actions at the central, local, and provincial levels. 

Administrative penalties, however, mainly limited to fines and 

confiscation of fake products, remain too small to create deterrence. 

And despite some signs that new efforts are underway in 2005, 

China has not significantly reduced IPR infringement levels as Vice 

Premier Wu Yi promised at last year’s JCCT meeting. 

The U.S. Chamber remains concerned that the limited legal reforms and enforcement campaigns which commenced in China in 

2004 are insufficiently bold. If tangible progress is not made in the 

months ahead, we believe that USTR should conduct a second Special 301 out-of-cycle review of China later this year, to assess China’s implementation of the judicial interpretation and other enforcement efforts. 

We would encourage the U.S. Government to continue to work 

through the JCCT and through other appropriate forums in the 

months ahead to identify specific action items for China to undertake. Those are outlined in our written testimony, but in the interest of time, I would note that we will be looking in particular to 

see if the Chinese take steps to add police resources in critical regions; criminalize export-related cases; introduce new enforcement 

15

guidelines that will significantly boost fines and other penalties imposed by administrative enforcement agencies. We want to see significant increases in the number of criminal IPR investigations, 

prosecutions, convictions, and deterrent sentencing. 

Let me just briefly touch upon Russia, the subject of the second 

hearing, as I was asked to do by the Committee. Russia’s efforts 

to join the World Trade Organization in 2005 gives the U.S. Government a critical window of opportunity to seek from that country 

important commitments and progress on IPR enforcement. There is 

no question Russia’s IPR problems, like China, are growing, and 

this is of concern to our membership. 

We fully support USTR’s decision to keep Russia on the Priority 

Watch List and to conduct an out-of-cycle review to monitor Russia 

on IPR in 2005, but—but—the U.S. Chamber also encourages our 

government to make it a priority to engage Russia on how that 

country will improve its IPR enforcement efforts in the context of 

its WTO accession talks. We must not lose that opportunity. 

Thank you, Mr. Chairman, Members of the Committee. The U.S. 

Chamber and our members appreciate the opportunity to participate in today’s House Judiciary Subcommittee hearing on intellectual property rights. Given the importance of this matter to the 

American business community, we look forward to staying engaged 

with this Committee. Thank you. 

[The prepared statement of Mr. Brilliant follows:]

PREPARED STATEMENT OF MYRON BRILLIANT

Mr. Chairman, members of the House Judiciary Subcommittee, good morning. The 

U.S. Chamber appreciates your invitation to appear at this important hearing today 

on the importance of intellectual property rights to American companies. 

As the world’s largest business federation representing more than 3 million members, the U.S. Chamber of Commerce is keenly aware of the global threat of counterfeiting and piracy to American firms and workers. In the Information Age, intellectual property (IP) is the ‘‘gold standard.’’ It must be protected as it is the cornerstone for economic prosperity in this new era. Yet, IP is under attack here in the 

United States and globally. 

The problem goes by many names—counterfeiting, piracy, or knockoffs. The fact 

is the problem is getting worse worldwide. IP theft will not go away without a concerted effort on the part of business and government. 

BREADTH OF THE PROBLEM

Counterfeiting and piracy are costing the U.S. consumers and American companies billions of dollars every year. But the problem is more insidious than that. It 

damages investment and innovation; has potentially devastating economic consequences for small businesses; puts a severe strain on law enforcement agencies; 

nearly always escapes taxation; threatens public and health safety; diverts government resources from other priorities; and has links to terrorism and organized 

crime. 

Counterfeiting and piracy, once viewed, as ‘‘victimless’’ crimes mainly consisting 

of selling cheap products such as sunglasses and watches, have mushroomed in recent years to endanger every product. From dangerous substandard replacement 

parts for airplane engines, to ineffective pharmaceuticals, to illegally copied compact 

discs manufactured in clandestine factories around the world, sales of counterfeit 

and pirated products are skyrocketing. Profits from these illicit sales are being funneled worldwide into the pockets of everyone, from groups associated with known 

terrorists to organized crime elements. 

The problem of counterfeiting and piracy goes beyond the manufacture, distribution, and sale of cheap, unauthorized goods. It threatens our national security, 

lessens the value of legitimate brand names, and erodes the profits of nearly every 

business in America. 

Some statistics might be helpful to illustrate the magnitude of the problem we 

face today. Approximately 5% to 7% of world trade is in counterfeit goods, according 

16

to the FBI, Interpol, and the World Customs Organization. That’s the equivalent of 

as much as $512 billion in global sales. Of that amount, U.S. companies lose between $200 billion and $250 billion in global sales. U.S. Customs and Border Protection estimates that counterfeit merchandise is responsible for the loss of more than 

750,000 American jobs. Finally, we would note that the World Health Organization 

(WHO) has estimated that counterfeit drugs account for 10% of all pharmaceuticals. 

Incredibly, in some developing countries, WHO suggests that this number is as high 

as 60%. 

These statistics exemplify the U.S. Chamber’s concerns about the growing epidemic of IP theft globally. It is time to act, to take real measures to thwart the 

growing threat of counterfeiting and piracy. 

THE U.S. CHAMBER: MAKING A DIFFERENCE

The U.S. Chamber has launched a three-part strategy aimed at mobilizing business and governments to fight against counterfeiting and piracy. 

Part one is education. We are working in the United States to educate businesses, 

the media, and lawmakers about the growing threat of this issue. 

Part two is enforcement. The U.S. Chamber is committed to bringing these criminals to justice. We are working with manufacturers, retailers, and law enforcement 

to disrupt the ability of counterfeiting networks to use legitimate distribution channels. 

As part of our efforts, the U.S. Chamber established the Coalition Against Counterfeiting and Piracy (CACP) with the National Association of Manufacturers (NAM) 

to coordinate the efforts of the business community to stop counterfeiting and piracy. CACP is committed to increasing the understanding of the negative impact of 

counterfeiting and piracy by working with Congress and the administration to drive 

government-wide efforts to address this threat. 

Part three is international. The roots of counterfeiting and piracy extend far beyond U.S. borders. The U.S. Chamber therefore recognizes the importance of tackling this issue in foreign markets. We have launched country-specific initiatives in 

priority countries, where the problems are particularly acute for American companies. Our initial efforts have focused on China, Brazil, Russia, India and Korea. But 

we will also be working with our members in other countries where the problem is 

also prevalent. 

The remainder of my testimony will focus on our efforts in the international 

arena, in particular, on China and Russia which is the focus of today’s hearing. 

CHINA

The U.S. Chamber fully recognizes the importance of China’s successful integration into the world economy. It is perhaps the greatest foreign policy challenge facing our country today. 

China as an Opportunity and a Challenge 

As we noted previously during a recent Congressional hearing on U.S.-China economic relations, it is now trite to say that the U.S.-China commercial relationship 

is of immense and increasing importance to both the U.S. and Chinese business 

communities. U.S.-China trade has boomed in recent years. The United States 

ranked second among China’s global trading partners in 2004, and China was once 

again the 3rd largest trading partner for the United States. U.S. exports to China 

have grown by 114% since 2000—five times faster than exports to any other country. 

Year-on-year increases of U.S.-manufactured exports from 2003 to 2004 reveal 

positive trends: exports of U.S. power generation equipment increased by 34%; exports of electrical machinery and equipment increased by 27%; and exports of optics 

and medical equipment jumped by more than 30%. These statistics underscore the 

opportunities that China offers to U.S. exporters, to investors, and, more broadly, 

to U.S. economic development. 

Yet, we also recognize that concerns are rising in many quarters over the U.S. 

trade deficit with China, rising competition from Chinese imports, and concerns 

about China’s currency policy. The U.S. Chamber feels strongly that China must do 

significantly more to comply fully and on time with its World Trade Organization 

(WTO) commitments and, in particular, in critical areas such as intellectual property rights (IPR). 

In our view, China has failed to adequately enforce its own laws and regulations 

when it comes to piracy and counterfeiting violations. This is an endemic problem 

with immense consequences for the U.S. economy, our companies, particularly for 

small and medium-size businesses, and public safety. We are committed to construcVerDate 0ct 09 2002 14:31 Aug 11, 2005 Jkt 000000 PO 00000 Frm 00020 Fmt 6633 Sfmt 6621 G:\WORK\COURTS\051705A\21217.000 HJUD1 PsN: 21217
17

tive engagement with the Chinese government on this and other issues; however, 

we want to see China move beyond words to actions that crack down on IPR infringements. 

This week, U.S. Chamber President and CEO Thomas Donohue is visiting Beijing 

with a business delegation for high-level discussions with China’s government and 

business community. In particular, Mr. Donohue will be building upon recent discussions with Chinese officials in Washington, D.C. and China on the full range of 

issues in our commercial relationship, including the issue of IP protection and enforcement. 

China’s WTO Implementation Efforts 

Briefly, let us turn to China’s overall efforts to develop a market based on the 

rule of law and in accordance with WTO principles and disciplines. 

Now in year four of China’s WTO implementation, the U.S. Chamber believes that 

China’s WTO implementation process is fostering positive changes in its trade and 

investment regimes. 

We agree with the United States Trade Representative’s (USTR’s) December 2004 

report to Congress, which stated that China ‘‘deserves due recognition for the tremendous efforts made to reform its economy to comply with the requirements of the 

WTO.’’ Moreover, we continue to believe firmly that engaging China in the rulesbased trading system has resulted in important progress in key areas, particularly 

in tariff reduction, revising existing laws and drafting and passing new ones as well 

as educating its officials and companies about its WTO obligations. 

Positive steps by China to implement outstanding and new WTO commitments 

not only improve the Chinese business environment for the benefit of U.S. and Chinese companies alike, but also underscore China’s broader credibility in the global 

trading system. If China falters in meeting its commitments and its adherence to 

WTO disciplines, such as in the areas of intellectual property (IP) and transparency, 

there will be ramifications that will constrain the full potential of this relationship 

to the detriment of both countries as well as companies from both countries. 

Intellectual Property Rights 

Upon its accession to the WTO over three years ago, China agreed to fully comply 

with Trade Related Aspects of Intellectual Property Rights (TRIPS) Agreement obligations. Yet, it is clear that the protection which China is actually providing fails 

to meet the standards of ‘‘effectiveness’’ and ‘‘deterrence’’ set out in TRIPS. IPR violations now severely affect virtually all industries, from consumer and industrial 

goods—including medicines, autos and auto parts, food and beverages, and cosmetics—to copyright works, including entertainment and business software, movies, 

music, and books. The scope of counterfeiting and copyright piracy in China worsened for most of our member companies in 2004, and we believe that this problem 

has reached epidemic proportions. 

China is the single largest source of counterfeit and pirated products worldwide. 

Failure to control exports of these products is eroding our companies’ profit margins, 

diminishing brand value, and, in many cases, endangering public safety. U.S. Customs statistics showed an increase of 47% in the market value of counterfeit goods 

seized in the year ending October 31, 2004. Statistics compiled for 2004 by other 

governments are expected to reflect a similar trend. 

Increasingly, counterfeiting in China is harming small and medium-size U.S. enterprises. Many of these SME’s do not have operations on the Mainland and confront a flood of Chinese knockoffs in the U.S. market or in third-country markets 

where they export. Smaller companies clearly have fewer resources to deal with investigations and legal action against pirates in China and their middlemen in other 

countries. Thus the need for more convincing and proactive government intervention 

is becoming increasingly apparent. 

The U.S. Chamber was heartened by the promises of Vice Premier Wu Yi at the 

April 2004 Joint Commission on Commerce and Trade (JCCT) meetings on the intention of the Chinese government to significantly reduce IPR violations. We also 

acknowledge that the PRC government, at the central level and under the leadership of Vice Premier Wu Yi and the Market Order Rectification Office of the Ministry of Commerce, is taking important and constructive steps to improve coordination among relevant agencies responsible for IP protection and enforcement. 

The U.S. Chamber also notes some recent progress in the Chinese government’s 

willingness to engage directly with companies and industry associations in addressing problem cases and cooperating on capacity-building. 

In a further positive development, China’s Supreme People’s Court and Supreme 

People’s Procuratorate issued a long-awaited Judicial Interpretation on December 

21, 2004. This interpretation included a number of important changes that can 

18

strengthen the deterrent impact of China’s criminal enforcement efforts in the IP 

field. 

Regrettably, though, the Judicial Interpretation contains a number of problems 

that leave potentially gaping loopholes for infringers, and industry is closely monitoring their impact. Key examples include the following:

• Unclear methods for calculating case values, including the lack of standards 

for valuing semifinished products and raw materials.

• Lack of clarity whether trading companies caught dealing in fakes can be 

held criminally liable for counterfeiting and piracy.

• Lack of provisions to clarify the conditions under which vendors and accessories meet the requisite knowledge requirements to be held criminally liable.

• Lack of provisions to criminalize repeat offenses by smaller-scale infringers.

• Whether sound recordings are even covered by the Judicial Interpretation.

• Significantly higher monetary thresholds for enterprises than for individual 

persons.

As the U.S. Chamber stated in its fall 2004 report on China’s WTO implementation record, enforcement of IPR will not be effective until civil, administrative, and 

criminal penalties are routinely applied to IPR infringers. China’s government modestly improved its regulatory environment for IPR protection and carried out raids 

and other enforcement actions at the central, local, and provincial levels in 2004. 

Administrative penalties, however, mainly limited to fines and confiscation of fake 

products—remain too small to create deterrence. Despite some signs that new efforts are under way (and there is an increased level of arrests and raids), China 

has not ‘‘significantly reduced IPR infringement levels’’ as Vice Premier Wu Yi 

promised at last year’s JCCT meetings. 

The U.S. Chamber remains concerned that the limited legal reforms and enforcement campaigns, which commenced in China in 2004, are insufficiently bold. More 

focused action plans are needed at both the national and local levels in order to 

bring counterfeiting and copyright piracy under control. While it will take time to 

design and implement such plans, we do not yet see a commitment on the part of 

the Chinese to developing them. 

Based on inadequate levels of IPR protection and enforcement in China, causing 

adverse impact on U.S. economic interests, the U.S. Chamber recommended earlier 

this year that USTR request consultations with China through the WTO and place 

China on the Priority Watch List in its 2005 Special 301 Report. 

USTR elected a slightly different approach. As noted in its Special 301 Report released in April, USTR elevated China to the Priority Watch List for ‘‘failure to effectively protect IP rights and to meet its commitment to significantly reduce infringement levels.’’ While USTR did not act to immediately take China to the WTO for 

consultations, it did clearly note that it will work with American business to establish the basis for utilizing WTO procedures to bring China into compliance if infringement levels remain unacceptably high and if China fails to take robust enforcement actions. 

The U.S. Chamber welcomes working with USTR and other government agencies 

further on this important issue. We believe that USTR should conduct a second Special 301 Out-of-Cycle Review of China later this year to assess China’s implementation of the Judicial Interpretation and other enforcement efforts. Particular focus 

should be on reviewing the value of adding police resources in critical regions, criminalizing export-related cases, and introducing new enforcement guidelines that will 

significantly boost fines and other penalties imposed by administrative enforcement 

authorities. 

In reporting its findings, USTR noted that overall counterfeiting and piracy rates 

are not declining since China’s WTO accession. Some alarming statistics underscore 

our need to see more immediate robust actions in China. 

According to submissions made to USTR, infringement levels are at 90 percent 

or above for virtually every form of intellectual property in China. In the copyright 

industry alone, USTR estimates U.S. losses are between $2.5 billion and $3.8 billion 

annually. U.S. Chamber members in this area also note that internet piracy is 

quickly becoming an immense threat and serves to remind us that the lost sales 

could be even higher in years to come if the problem is not addressed. 

The problem is not unique to industries impacted by piracy. USTR observed that 

in 2004 the ‘‘value of Chinese counterfeits coming into U.S. markets seized by the 

United States increased 47 percent from US$94 million to US$134 million.’’ Seizures 

from China accounted for 67 percent of all U.S. Customs’ IPR seizures in 2004. 

Given the facts noted above, the U.S. Chamber and its members seek convincing 

evidence from Chinese authorities that the IPR climate is improving and creating 

19

a climate of deterrence. This should include data that confirms a much more substantial increase in proactive government investigations into cases, and substantial 

increases in prosecutions, convictions, and incarcerations of counterfeiters and copyright pirates. 

Aside from liaising with China in the WTO context, the U.S. Chamber strongly 

supports continuing efforts by the U.S. government to address China’s failure to 

comply with its IPR commitments through the JCCT, other bilateral forums, and 

multilateral policy mechanisms. The U.S. government should continue to work 

through the JCCT and through other appropriate forums in the months ahead to 

identify specific action items for China to undertake that: 

(a) Demonstrate a significant increase in the number of criminal IPR investigations, prosecutions, convictions and deterrent sentencing; 

(b) Implement administrative IPR enforcement actions that are deterrent; 

(c) Demonstrate specific steps to combat copyright and trade infringing activities, 

including internet piracy; 

(d) Make public available case rulings and IPR-related statistical data; 

(e) Demonstrate steps Chinese customs authorities are undertaking that are leading to significant declines of exports of infringing products; 

(f) Ensure that China removes administrative and other market access impediments that support illegal infringing activities and prevent the sales of legitimate 

foreign products; and 

(g) Resolve high profile cases involving infringements of foreign IP owners thus 

establishing the primacy of the rule of law. 

If China were to take such actions, tangible results could be achieved. 

U.S. Chamber Action Plan 

The U.S. Chamber is prepared to support the Chinese and U.S. governments in 

its efforts to extend greater protection to foreign and Chinese IP owners. We have 

embarked on a targeted program offering on the ground capacity—building efforts 

in the provinces, fostering public awareness of the importance of IPR protection 

among the Chinese public, and advising on policy changes to better strengthen the 

legal framework. 

The four main components of the U.S. Chamber action plan include:

(1) Spearheading high level dialogues with Chinese business and government 

leaders including here in Washington DC in late May with the Vice Minister 

of MOCOM and other ministries on IPR;

(2) Engaging local and provincial Chinese leaders on best practices, judicial and 

administrative training or related educational programs;

(3) Benchmarking progress with our American Chamber of Commerce in Beijing;

(4) Promoting public awareness in China by implementing a media strategy for 

re-branding IPR as not a ‘‘victimless crime.’’

To achieve these goals, the U.S. Chamber is also working closely with U.S. and 

Chinese governments, our corporate members, and counterpart associations, including with the AmCham network in China. 

As noted above, we want to benchmark China’s progress in implementing the new 

Judicial Interpretation through monitoring the number of judicial prosecutions, convictions, and jail sentences for IP crimes in 2005. In addition to monitoring the 

criminal enforcement, we want to collaborate with these partners to track enforcement by administrative authorities, including administrative fines, confiscations of 

production equipment, export enforcement, and the success of the government in 

transferring cases from administrative enforcers to the police for criminal prosecution. 

Looking Ahead 

In our view, the burden of ensuring a reduction in China’s piracy and counterfeiting levels in 2005 will ultimately hinge on the political will of local Chinese authorities as much as the national government. Police investigations into new cases 

need to be proactive and adequately resourced in order to send a proper message 

to criminal networks that are increasingly behind the problem. 

The sincerity of China’s pronouncements that it is serious about protecting and 

enforcing IP rights will further be tested by its willingness to eliminate loopholes 

for infringers in existing and new regulations and to resolve high-profile cases, such 

as the Pfizer patent case on Viagra and the General Motors auto case, that impact 

domestic and foreign IP owners. 

Full protection under PRC law and enforcement of IPR in China as set forth in 

China’s TRIPS obligations are critical to the interests of foreign and PRC companies 

20

in China, as well as to China’s public health and safety, the integrity and 

attractiveness of China’s investment regime, and its broader economic development 

goals. We hope that the PRC government will accelerate IP enforcement in 2005 by 

further enhancing national leadership and dedicating additional capital and resources. Only through aggressive measures will China’s IPR protection enforcement 

regime be effective and respected. 

China’s accession to the WTO afforded it an opportunity to sell increasing quantities of products where it has a comparative advantage to the United States. But 

by tolerating massive counterfeiting and piracy, China is denying U.S. companies 

the chance to do the same in China. Moreover, by tolerating the export of such counterfeits, China strips our companies of the opportunity to use their comparative advantage—and thus WTO benefits—in third countries as well. 

Ultimately, it is essential that China purchase the foreign IP-based products it 

is illegally using. That would translate into billions of dollars in sales and exports 

by U.S. and other foreign companies and more accurately reflect the balance of 

trade between the U.S. and China. 

RUSSIA

In addition to China, the U.S. Chamber has great interest in seeing significant 

progress in Russia’s intellectual property enforcement efforts. This is made all the 

more pressing as Russia proceeds toward entry into the World Trade Organization 

(WTO) in 2005. This process gives the U.S. government a critical window of opportunity to require that, as part of its WTO accession, Russia make considerable efforts on its IPR-related commitments and their implementation. 

Unfortunately, the sense of urgency that we all feel here today does not appear 

to fully register in the upper echelons of the Russian government. The Russian government has acknowledged that there is an intellectual property problem in Russia, 

and it has created government commissions and introduced meaningful legislation. 

However, new laws are not enough. The governmental commissions have so far 

achieved little and there is no consistent political will to address the real fundamental issues such as:

1) Better enforcement at all levels (e.g., customs, police, etc.);

2) Educating the public; and

3) Making IPR a priority public policy issue that needs to be addressed immediately.

In short, the IP problem in Russia is not the law, except for geographical indications and a few other issues, it is enforcement. 

The U.S. Chamber believes that Russia is at a critical crossroads, where it can 

turn from the significant source of IPR violations it is today, to becoming a key partner in the ongoing global efforts to safeguard IPR as the foundation of innovation. 

At the eve of its accession to the WTO, Russia faces a critical choice, where it can 

choose to invest in research and development and expand its intellectual assets, or 

go the other direction. The U.S. Chamber is committed to a constructive engagement 

with the Russian Federation to help it make the right choice and reform before it 

is too late. 

The U.S. Chamber is therefore actively supporting and engaging with companies, 

government agencies, officials, business associations, especially the American Chamber of Commerce in Russia, and other groups dedicated to IPR protection and enforcement in Russia, especially the Coalition for Intellectual Property Rights (CIPR). 

The goal is to encourage the Russian government to take steps that will achieve 

tangible results in the fight against this economic plague. 

Dimensions of the IP problem in Russia: 

Although there is much need for better and more comprehensive statistical information on IP issues in Russia, the following trends should be highlighted. 

Clearly, there is a sense in the American business community that the Russian 

government has recognized that it has an IP problem. However, we feel that there 

is no consistent will to address the real fundamental issues such as better enforcement, educating the public, and making IPR a priority policy issue that needs to 

be addressed immediately. 

As part of its 2004 reorganization, the Russian government restructured the regulatory structure for IP regulation and enforcement. Many Russian government officials who were IP experts and dealt with IP issues were removed from their positions. In their place appeared new officials with less knowledge and experience on 

major issues affecting industrial property and copyright protection. Other administrative changes resulted in decreased enforcement. There is also a latent lack of coVerDate 0ct 09 2002 14:31 Aug 11, 2005 Jkt 000000 PO 00000 Frm 00024 Fmt 6633 Sfmt 6621 G:\WORK\COURTS\051705A\21217.000 HJUD1 PsN: 21217
21

ordination between government agencies, which further worsens the problem. In addition, there is no strong political will to address IP issues from the top down in 

the Russian government. 

IP rights-holders and consumers take very little action to defend their rights and 

resolve their problems. The Russian government clearly needs to focus on educating 

the public, and the business community needs to motivate its customers and its 

companies to become more involved in this issue. 

The U.S. Chamber believes that IP violations are truly a global crime issue, and 

that no country can solve the problem alone, especially due to widespread border 

control issues. Russian IP problems are having a direct impact on other former Soviet republics, notably in Ukraine, in Eastern and Western Europe (countries now 

part of the European Union), and in the Middle East. Fake goods are produced in 

Russia, but Russia is also a transit point for fake goods made in Asia, notably 

China. 

Russia’s exports of counterfeited and pirated product to the United States and 

other markets have a significant effect on the U.S and our businesses. 

Statistics on IP in Russia: 

USTR noted in its 2005 301 Report that: 

‘‘Certain aspects of Russia’s IPR regime, including enforcement and data protection, appear to be inconsistent with Russia’s obligations under the 1992 U.S.-Russian Federation Trade Agreement and thus would not conform to obligations which 

Russia needs to fulfill in order to join the WTO.’’

USTR 301 Report points to staggering figures concerning piracy, which corroborate the urgency of the actions mentioned above. ‘‘Piracy in all copyright sectors continues unabated, and the U.S. copyright industry estimated losses of $1.7 billion in 

2004.’’ ‘‘The U.S. copyright industry reports the following levels of piracy: 66% in 

the recording industry, 80% in the motion picture industry, 87% for business software, and 73% for entertainment software.’’

USTR 301 Report does not emphasize trademarks as an IP problem in Russia; 

however, industry associations, like the Moscow-based Coalition for Intellectual 

Property Rights (CIPR), have reported that trademarks violations (particularly 

counterfeits) are today no less important. 

Russian government officials acknowledge that there is an IP problem, while also 

acknowledging that they have no good data to detail the scope of the problem. According to the Russian Agency for Patents and Trademarks (Rospatent) official 2004 

data, the turnover of counterfeit goods on the Russian market is 80 to 100 billion 

rubles (US$2.89 to $3.61 billion), and the government’s budget loses up to 30 billion 

rubles (US$1.08 billion) in tax revenue. Russian Federation Deputy Head of the 

Federal Service for Consumer Rights Protection, Nadyezhda Nazina, spoke at an IP 

related Parliamentary hearing to the Russian Federation State Duma in November 

2004. She stated that counterfeit and false products on the market are likely between 30% and 40%. Some Russian experts have speculated that counterfeit and pirated products make up at least 60% of the retail ‘‘grey’’ market in Russia. 

We believe that Russian officials do not yet really have a full picture of the scope 

of the problem in their market. This is supported by statements made in March 

2005 by Russian Federation Deputy of Culture and Mass Media, Leonid Nadirov, 

to the press when summarizing the results of a meeting of the governmental commission to fight IP violations. He stated ‘‘we ourselves can’t imagine how much 

counterfeit products are produced in Russia, in what geographic regions the production is occurring in, how much money is being stolen and how much taxes have not 

been paid.’’ However, Mr. Nadirov said that by October 2005, the government 

‘‘should receive a real picture of the market situation, so that we can, in an understandable language, communicate with partners both inside the country and internationally.’’

The U.S. Chamber encourages our government to make it a priority to engage 

Russia on how that country will improve its IPR enforcement efforts and data protection. We also fully support USTR’s decision to keep Russia on the Priority Watch 

List and to conduct an ‘‘out-of-cycle’’ review to monitor Russia on IPR in 2005. 

CONCLUSION

The U.S. Chamber and our members appreciate the opportunity to participate in 

today’s House Judiciary Subcommittee hearing on intellectual property rights. 

As noted at the outset, IP theft is a global problem. Business and governments 

need to continue to work together to address the growing proliferation of intellectual 

property theft in the United States and globally. Once seen as a threat mainly to 

a few select industries, today, the theft of intellectual property is now so widespread 

22

that it touches nearly every industry and every country, including China and Russia. 

It is not a victimless crime. It hurts legitimate established businesses, innovators, 

consumers, and governments that lose tax revenues. 

With particular regard to China, we note that while China is now the fastestgrowing trading partner of the United States, it also the single largest source of 

counterfeit and pirated products worldwide. Rapidly expanding bilateral economic 

and commercial ties underscore the market opportunities that China potentially offers to U.S. exporters and investors, which support the creation of high value-added 

jobs at home. Yet, the failure of Chinese authorities to date to crack down effectively 

on the manufacture, distribution and export of counterfeited and pirated products 

is eroding legitimate Chinese and foreign companies’ profit margins, diminishing 

brand value, and, in many cases, endangering public safety. 

China can and must do more to stop IP theft. The U.S. business community and 

others that vigorously advocated China’s WTO membership premised their support 

on expectations that China is evolving into a more open and transparent market 

based on the rule of law. China’s unsuccessful efforts to consistently enforce its IPR 

laws and to vigorously deter IP theft represent the most visible examples of these 

expectations remaining unfulfilled. 

Similarly, we believe that Russia should take aggressive steps to stem its counterfeiting and piracy problem. Our government should require Russia to show demonstrable evidence of efforts to crackdown on counterfeiting and piracy before it formally supports that country’s accession into the WTO. This is an important opportunity to encourage more tangible actions on the part of Russia. 

The U.S. Chamber, the world’s largest business organization, will remain fully engaged on doing our part in waging a campaign against counterfeiting and piracy on 

behalf of American business. We will continue to lend our strong voice to ensure 

that China, Russia, and other countries take even more robust measures in this critical area. 

Thank you, Mr. Chairman and members of the committee, for the opportunity to 

express the views of the U.S. Chamber and our members on this important topic. 

Be assured the protection of IP is a top priority of our organization and we look 

forward to working with the members of this Committee and Congress in finding 

constructive solutions.

Mr. JENKINS. [Presiding.] Thank you, Mr. Brilliant. 

We’ll now hear from Mr. Eric Smith. 

TESTIMONY OF ERIC H. SMITH, PRESIDENT, INTERNATIONAL 

INTELLECTUAL PROPERTY ALLIANCE 

Mr. SMITH. Chairman Smith, Ranking Member Berman, Members of the Subcommittee, it’s an honor to appear before you at this 

very timely moment, shortly after USTR elevated China to the Priority Watch List, and just a few days before the Chinese IPR working group arrives in Washington to continue a dialogue with the 

U.S. Government on China’s enforcement of IP rights and its failure to accord broader market access to U.S. copyright industries. 

We know that they will be listening to what this Subcommittee 

says about the current situation in China. 

Mr. Chairman, the copyright industries—business and entertainment software, filmed entertainment, recordings, and books and 

journals—are in dire straits in China. Piracy rates have hovered at 

over 90 percent in the more than 15 years that IIPA has been engaged with the U.S. and the Chinese governments. 

Indeed, with new digital copying technologies and the Internet, 

the situation has even worsened. Every year, industries have lost 

conservatively between one and a half and two and a half billion 

dollars; in 2004, it was over two and a half billion dollars. These 

losses will grow unless this unacceptable situation is quickly reversed. 

23

Before I elaborate on the difficult situation our industries face in 

China, let me note again what we have said before. The copyright 

industries now represent over 6 percent of U.S. GDP, and that 

number increases every year. We employ 4 percent of the U.S. 

workforce, and generated in 2002 over $89 billion in revenue in export—from exports and foreign sales. 

This growth is fueled by the huge global demand for U.S. creative and high-tech products, with 50 percent of our revenue generated coming from international trade. It is the ability to enter 

and prosper in foreign markets that will allow us to continue this 

growth and employ new highly-paid workers at a rate that is double the economy as a whole. 

In trade jargon, the U.S. has a huge comparative advantage in 

trade and copyrighted products. But as we know, in China, potentially the largest market in the world, that advantage 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 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 are 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 to effective market 

entry. In short, these two problems are indelibly interlocked. 

About a year ago, Vice Premier Wu Yi was here with the U.S. 

in the JCCT process. The government committed at that time to 

‘‘significantly reduce IPR infringements,’’ by taking a number of 

tough enforcement and regulatory measures. The bottom line is 

that 1 year later, even though more raids were run and products 

seized and the criminal thresholds, as was mentioned, reduced 

somewhat, there has been little effect on the market, and piracy 

rates have not come down. 

Why? The answer is not new. There is still no deterrence in the 

Chinese enforcement system, no disincentive to continue to engage 

in piracy. Even exports of pirate product which slowed to a trickle 

after the 1996 section 301 action against China, have resumed, and 

are growing again. 

China relies on an ineffective and uncoordinated administrative 

enforcement system which has not succeeded in all these years in 

reducing the rate of piracy. The system is characterized by woefully 

low fines. A study done by one of our members in raids they were 

involved in revealed that the average fine per unit of product 

seized exceeded only marginally the cost of a blank CD. To expect 

such a system to deter one of the most lucrative economic crimes 

is a flight of fancy. But China has to date simply refused to do 

what all other countries in the world do; namely, bring criminal actions with deterrent fines and jail terms. 

24

While it is difficult to be certain on these matters, our industries 

know of only a handful of cases involving criminal piracy prosecutions involving U.S. works in the last 10 years. Countries like 

South Korea, Singapore, and even Taiwan, have been able in the 

late ’90’s to reduce audio and video piracy, for example, from over 

90 percent to less than 20 percent of the market, with aggressive 

and deterrent criminal enforcement. The Chinese can do the same. 

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, which is the TRIPS standard, also violates that agreement. 

Because of the failure, despite repeated bilateral engagements, of 

the Chinese government to show the political will to lower these 

staggering piracy rates, IIPA urged USTR to engage in a new multilateral dialogue with China. Following USTR’s announcements of 

the results of their out-of-cycle review, we are working closely now 

to develop the elements of a possible WTO case against China; unless China takes immediate action, making such a course unnecessary. 

In my written testimony, Mr. Chairman, we have tried to give 

this Subcommittee a flavor of how hard it is to do business under 

these circumstances. Copyright theft in China is hurting America, 

and hurting China. Since I do not have time to detail these specific 

problems, I hope our written statement will cover those issues. 

We ask two things: first, that China immediately commence 

criminal actions against pirates, with 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, Mr. Chairman, and I look forward to a lively and 

productive dialogue. 

[The prepared statement of Mr. Smith follows:]

PREPARED STATEMENT OF ERIC H. SMITH

Mr. Chairman, Ranking Member Berman and other distinguished Committee 

members, IIPA and its members thank you for the opportunity to appear today to 

review China’s record on enforcement of its copyright law against widespread piracy 

including China’s compliance with its WTO-TRIPS obligations. This oversight hearing is extremely timely. Madam Ma, head of China’s delegation to the IPR Working 

Group of the Joint Commission on Commerce and Trade (JCCT), will be in Washington next week, discussing these issues with the United States Government. Your 

interest in China’s record is certain to illuminate those talks. 

IIPA represents the U.S. copyright industries. Its six member trade associations 

consist of over 1,300 U.S. companies, accounting for millions of U.S. jobs. The copyright industries, in 2002, contributed over $625 billion to the GDP, or 6% of the U.S. 

economy and almost 5.5 million jobs or 4% of U.S. employment. These companies 

and the individual creators that work with them are critically dependent on having 

strong copyright laws in place around the world and having those laws effectively 

enforced. On average, the copyright industries generate over 50% of their revenue 

from outside the U.S., contributing 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, including China, that continue to allow piracy to flourish in their own 

economies were to significantly reduce piracy rates by enforcing their copyright law 

vigorously. 

25

IIPA’S SPECIAL 301 REPORT ON PIRACY IN CHINA

I have appended to our written testimony a copy of IIPA’s comprehensive February 2005 Special 301 submission on China to the U.S. Trade Representative. In 

that submission we called for entering into a new, multilateral dialogue in the WTO 

with the Chinese government as a way to persuade it to take aggressive action— as promised in the Joint Commission on Commerce and Trade (JCCT) meetings over 

one year ago—to significantly reduce the rate of piracy in all IPR sectors including 

the copyright sector. We then provided a summary review of what had happened 

in China over the last year to redeem that commitment. Our conclusion: China has 

failed to comply with its commitment made over one year ago in the JCCT to significantly reduce piracy rates. While some modest reductions have occurred in some 

sectors, by no measure have piracy rates been significantly reduced. In fact little 

has changed in the marketplace for our members and their companies, despite reports of increased raiding activity and seizures of many pirate products. In my testimony today, I would like, for the record, to update that report and in the process 

to summarize it where appropriate. Our report tells the sad, frustrating story of the 

failure of an enforcement system to deter rampant piracy in the potentially largest 

market in the world. 

RECENT ACTIONS BY THE U.S. GOVERNMENT ON CHINA

On April 29, 2005, USTR issued its decision resulting from the out-of-cycle review 

of China’s enforcement practices announced on May 3, 2004. USTR reflected in this 

decision its deep concern over China’s lack of progress in the enforcement area by 

elevating China to the Priority Watch List. It also announced a number of other initiatives, one of which was to work closely with our industries with an eye on utilizing WTO procedures to bring China into compliance with its WTO obligations. 

Since that time we have met with USTR to begin this process and will work intensively with USTR toward the mutual goal of bringing China into compliance with 

its WTO TRIPS obligations, its bilateral obligations to the U.S. in the 1995 and 

1996 IPR agreement and action plan, and its commitments made to our government 

in the JCCT process. 

This process has now commenced in earnest. USTR will also be seeking information from the Chinese government under the transparency provisions of the TRIPS 

agreement, and is committed to using the JCCT process to encourage the Chinese 

government to implement key reforms on both the enforcement and the all-important market access front. 

THE CHINESE MARKETPLACE FOR COPYRIGHT PRODUCTS: A RECORD OF FRUSTRATION

AND FAILURE

Mr. Chairman, our industries are deeply frustrated by the lack of real progress 

by China in taking effective action to deter piracy and to open up its market to legitimate cultural and high technology copyright products. China remains one of the 

most closed markets in the world for the U.S. copyright industries. Onerous market 

access restrictions affect all our industries. Notwithstanding Premier Wen’s pledge 

to address the $162 billion trade imbalance between the U.S. and China by increasing China’s imports from the U.S., China is retaining—and, in some sectors, augmenting—market access restrictions for creative and high-tech products that represent America’s comparative advantage. 

Copyright piracy represents perhaps the largest barrier to effective market access 

in China. An average (and truly staggering) 90% piracy rate has persisted for years 

despite repeated ‘‘strike hard’’ enforcement campaigns, steamroller campaigns, and 

public statements from many high level government officials supporting stronger enforcement. While our Special 301 submission highlights the current situation in 

China, I wanted to give you a brief flavor of what copyright companies confront in 

trying to do business in China in face of these trade barriers and these inexcusably 

high piracy levels. 

THE PLIGHT OF THE COPYRIGHT INDUSTRIES DUE TO PIRACY IN CHINA

The Business Software Industry 

Taking the business software industry first—one of our nation’s most productive 

and important creative sectors: The software industry faces piracy rates in China 

of 90%, one of the highest in the world for that industry. China leads the world in 

the production and export of counterfeit software—software packages that are purposely designed to replicate the original legitimate product. Losses to U.S. software 

publishers were estimated by IIPA member, the Business Software Alliance (BSA), 

at $1.47 billion in 2004. China was the 6th largest market in the world for personal 

26

computers and ranked 26th in legitimate software sales. This increasing disparity 

not only damages the U.S. industry but hurts Chinese software developers as well. 

China has failed to criminalize the most damaging type of piracy to the business 

software industry—the unauthorized use of software within businesses and government institutions. This is a violation of the TRIPS Agreement. Combined with the 

total absence of a criminal remedy is the absence of all but a few administrative 

actions against this type of piracy with woefully low and non-deterrent fines. As a 

consequence, piracy rates continue to remain at staggering levels. 

To make matters worse, China is on the verge of shutting down access for U.S. 

and other foreign companies to the largest purchaser of software in China: the Chinese government. It would accomplish this by adopting draft government procurement regulations that would expressly favor Chinese software only. In short, the situation for this critical copyright sector is truly dire in China with no significant improvement in sight. 

The Motion Picture Industry 

The U.S. motion picture industry is facing a 95% piracy rate in China (the highest 

in the Asia Pacific region, and among the highest in the world) which represents 

a worsening of the situation from the previous year. Losses to just the motion picture industry, from 1998 through 2004, are estimated at over $1 billion (not including losses from Internet piracy, which are growing alarmingly). While raids and seizures have increased somewhat following Vice Premier Wu Yi’s 2004 enforcement 

campaign, administrative fines remain far too low to deter pirate activity and, as 

I will describe later, criminal cases have been extremely rare despite Chinese promises to use this TRIPS-required remedy. According to a recent newspaper report, the 

legitimate home video market in China represents about 5% of the estimated total 

market of $1.3 billion (which is itself a very conservative estimate). Of the 83 optical 

disc factories licensed by the government (and an unknown number of ‘‘underground’’ unlicensed plants), many continue to churn out pirate DVDs. The export 

of pirated home video product, which had slowed to a trickle after the U.S. Section 

301 action (and threatened retaliation) in 1995–96, has resumed and is growing. 

The total optical disk plant production capacity, a significant amount of which is 

devoted to producing pirate product, is now close to 2.7 billion units annually. Optical disks sourced in China and containing pirated films have been seized in over 

25 countries around the world. The massive quantity of pirated movie product available in China is evidenced by the fact that pirate prices start around $0.60 per unit, 

the lowest price in Asia. As with the other copyright industries, any enforcement 

that occurs is conducted by administrative agencies, with overlapping jurisdiction 

and often little coordination, and fines imposed are a mere ‘‘cost of doing business.’’

A recent anecdotal study, conducted by IIPA member, the Motion Picture Association (MPA) revealed that the average fine imposed per pirate home video product 

(DVD, VCD) seized in raids resulting from MPA complaints is only slightly higher 

than the cost of purchasing a blank disk—clearly of no deterrent value. The lack 

of deterrent administrative penalties is a key reason, in addition to the almost complete lack of criminal enforcement that piracy rates persist at 90% of the market 

and above. 

Accompanying and reinforcing this piracy situation are onerous market access restrictions, including a Government-owned, monopoly importer, very limited competition in distribution, and a quota of 20 theatrical films allowed into China annually 

on commercial terms. The pirates capture 100% of the market for films not permitted legally in China. Even those films permitted theatrical release suffer piracy 

rates of 70–75%, because of the long delays before most American films are given 

screen time. Another consequence of the lack of competition in importation and distribution is the non-competitive pricing in the Chinese market. Cumbersome licensing requirements burdens the retail sale of legal home entertainment product, holding down revenue potential and helping keep the market in the hands of the pirates. 

These barriers and those to all our industries must be removed in the JCCT process. 

The Entertainment Software Industry 

The entertainment software industry, one of the fastest growing copyright-based 

industries, faces similar high piracy rates and estimates the value of pirated 

videogames in the market at $510 million in 2004. Demand for entertainment software products is growing rapidly but is being soaked up primarily by the pirates. 

This demand is exemplified by the exploding popularity of ‘‘massively multiplayer 

online role-playing games’’ (MMORPGs) where literally thousands of players can 

compete against one another simultaneously. Demand for MMORPGs in China grew 

at 40–45% over expectations in 2004. This increasing demand has fueled, in part, 

the growth of Internet cafe ́s in China. (It is estimated that there are close to 

27

200,000 Internet cafe ́s in the country, with a seating capacity of between 100–300 

seats, of which 60% are involved in game play.) While U.S. game publishers, represented by IIPA member, the Entertainment Software Association (ESA), have engaged in some licensing of the cafe ́s, the vast majority of the product used is pirated, 

either available at the cafe ́ or downloadable from the Internet. This dire situation 

has been all the more exasperating since the Chinese government extensively regulates the activities of these Internet cafe ́s and often and vigorously revokes licenses 

for actions the government deems inappropriate. However, as far as we know, the 

government has never sought to include in this extensive regulatory scheme prohibitions against the widespread and blatant piracy at these cafe ́s in its business licenses (which are otherwise very thorough). Moreover, no copyright enforcement of 

any kind has occurred. The legal infrastructure governing the Internet still is not 

helpful to copyright enforcement. Takedown of pirate sites is negligible; penalties 

non-existent. 

Cartridge-based handheld games are also hard hit by the pirates with manufacturing and assembly operations throughout China with exports throughout Asia, 

Latin America, the Middle East and Europe. Enforcement attempts have been relatively successful in terms of raids and seizures but, like with other industries, administrative fines are non-deterrent and criminal enforcement action very rarely undertaken, even against factories generating millions of dollars in illicit profits. Entertainment software products are also subject to a protracted content review process, by two separate agencies contributing to market entry delays. Given the immediate nature of the demand and lifecycle of best selling games, this leaves the pirates virtually uncontested in the market prior to the official release of a new title. 

There are also Internet and investment restrictions that must be significantly eased 

or abolished. 

The Book Publishing Industry 

The U.S. book publishing industry, represented by IIPA member, the Association 

of American Publishers (AAP), faces both significant offset printing of pirated books, 

primarily in translated editions, and massive commercial photocopying of textbooks 

and reference books on and near University campuses. There are 580 licensed stateowned publishers in China, 50 of which are considered major. There are only a few 

privately owned publishers but they must buy publishing rights from the stateowned publishers. U.S. publishers issued 4500 translation licenses in 2004, a significant number but far below China’s potential. All the best selling books are then virtually immediately pirated by outlaw ‘‘printers’’ and made available through independent bookstores, stalls and street vendors. To give an example, the famous selfhelp bestseller ‘‘Who Moved My Cheese’’ sold over 3 million copies in China. It is 

estimated, however, that the pirates sold another 6 million copies. The Harry Potter 

books, and other best sellers like Hilary and Bill Clinton’s books ‘‘Living History’’

and ‘‘My Life,’’ John Grisham’s books and others all face a similar fate from the pirates. Former General Electric President, Jack Welch’s biography, ‘‘Winning,’’ has 

sold over 800,000 copies but with an equal number of pirate copies available in the 

market. English language textbooks are also heavily photocopied in their entirety 

and there are six known websites which make available entire copies of textbooks 

that are downloaded and then photocopied. Enforcement against this vast piracy is 

spotty and all done administratively through the local and national copyright bureaus. Any resulting administrative fines are non-deterrent. We know of no criminal 

enforcement. The book publishing industry also faces market access barriers—U.S. 

publishers are not permitted to publish, sign authors, or print their books in China. 

The Recording Industry 

The recording industry, represented by IIPA member, the Recording Industry Association of America (RIAA) did experience a minor reduction in the piracy rate for 

sound recordings, from 90% in 2003 to 85% in 2004 in ‘‘hard goods’’ piracy, but with 

significant increases in Internet piracy. Losses remain in excess of $200 million per 

year from continued optical disk manufacture and distribution within the Chinese 

market and significant levels of audiocassette piracy (still an important format in 

China). The recording industry faces many of the same problems with optical disk 

piracy confronting the motion picture industry. Millions of pirated music CDs are 

readily available throughout China. Some of these pirate products have found their 

way into the export market. China continues to rely on its failed administrative enforcement system, which relies on numerous inspections, product seizures and, when 

the pirate doesn’t flee, the imposition of small, non-deterrent fines. 

Internet piracy in China, as in other countries in the world, has become a huge 

problem for the recording industry. Thousands of active websites such as 

www.9sky.com and www.chinaMP3.com are giving away, or offering links to, thouVerDate 0ct 09 2002 14:31 Aug 11, 2005 Jkt 000000 PO 00000 Frm 00031 Fmt 6633 Sfmt 6621 G:\WORK\COURTS\051705A\21217.000 HJUD1 PsN: 21217
28

1 In the area of trademark enforcement undertaken by one ESA member company and involving handheld and cartridge based games, the new Judicial Interpretations are unclear on whether the authorities are able to seize components and parts that make up the counterfeit products. 

This is essential and must be clarified.

sands of pirated songs. (These not-for-profit acts of piracy are not criminalized in 

China, as they are, for example, in the U.S.). International criminal syndicates are 

apparently using Chinese servers to hide their illicit activity (www.boxup.com) and 

many Asian pirate sites are doing a thriving business in China, such as 

www.kuro.com from Taiwan. 

Market access restrictions are severe, contributing to piracy and market losses. 

U.S. record companies cannot ‘‘publish’’ or release a recording without permission 

of a state owned company and cannot manufacture, distribute or engage in retailing 

of its products, which artificially segments the market and makes it extraordinarily 

difficult for this world class industry to participate in the Chinese market. Its products are subject to censorship while domestic (as well as pirate) recordings are not— a national treatment violation. 

All in all, the copyright industries estimate their total losses in excess of $2.5 billion in 2004 due to piracy in China. The simple fact remains that these losses and 

the 90% piracy rates will NOT be significantly reduced without subjecting major piracy to criminal enforcement accompanied by deterrent penalties and substantially 

increasing the administrative fines specified in the copyright law and imposing 

them in practice. To date, even after the JCCT commitments, this has NOT happened and there is a real question whether the Chinese government as a whole 

(Vice Premier Wu Yi has been a staunch defender of better enforcement) can muster 

the political will to take these absolutely necessary actions—actions that have been 

key to significant reductions in piracy levels in other countries in which our companies operate. China cannot exempt itself from the rules—that enforcement against 

piracy requires deterrence and criminal remedies. The global community recognized 

this when it fashioned the Article 61 criminal obligation in TRIPS and it has proven 

to be the case in practice. 

ACTIONS TO BE TAKEN BY THE CHINESE GOVERNMENT

If piracy rates are to be significantly reduced as committed by Vice Premier Wu 

Yi in the JCCT and if China is to come into compliance with its TRIPS obligations, 

it must take the following actions.

• China should significantly liberalize and implement its market access and investment rules, including and in addition to those already made in the WTO, 

and improve the overall business climate in China to permit effective operations by all copyright industries. This should be a major objective in the 

JCCT.

• Immediately commence criminal prosecutions using both the monetary and 

new copy thresholds and carry these forward promptly to impose deterrent 

penalties. The Economic Crime Division of the Public Security Bureau should 

be made responsible for all criminal copyright enforcement and be provided 

sufficient resources and training to very substantially increase criminal enforcement under the new Judicial Interpretations. Further amendments 

should be made to those Interpretations, particularly to include sound recordings.

• Under the leadership of Vice Premier Wu Yi, constitute a single interagency 

authority at the national and provincial/local levels to undertake administrative enforcement against piracy of all works. This authority would have the 

would have the full authority to administer fines and to refer cases to the 

Ministry of Public Security and the Supreme People’s Procuratorate for criminal prosecution, under referral guidelines that are equal to or better than the 

Judicial Interpretations. Such authority must have the full backing of the 

Party Central Committee and the State Council. Far greater resources must 

be provided to this enforcement authority. All administrative enforcement, 

and enforcement by Customs at the border, must be significantly strengthened.1

• Adopt, in a transparent manner with the opportunity of public comment, a 

full and comprehensive set of regulations governing protection and enforcement on the Internet, including the liability of Internet Service Providers, 

which follow the recommendations made in IIPA’s Special 301 submission, inVerDate 0ct 09 2002 14:31 Aug 11, 2005 Jkt 000000 PO 00000 Frm 00032 Fmt 6633 Sfmt 6621 G:\WORK\COURTS\051705A\21217.000 HJUD1 PsN: 21217
29

cluding effective ‘‘notice and takedown’’ mechanisms and without unreasonable administrative evidentiary burdens. Establish within this single interagency authority described above special units (at the national, provincial and 

local levels), whose purpose is to enforce the law and these new regulations 

against piracy on the Internet.

• Amend the Criminal Law to comply with the TRIPS Article 61 requirement 

to make criminal all acts of ‘‘copyright piracy on a commercial scale.’’ These 

must include infringing acts not currently covered, such as end user software 

piracy and Internet offenses conducted without a profit motive. Also amend 

the Criminal Code provisions requiring proof of a sale, to require instead 

proof of commercial intent, such as possession with the intent to distribute.

• Significantly increase administrative penalties/remedies, including shop closures, and monetary fines and impose them at deterrent levels.

• Permit private companies and trade associations to undertake anti-piracy investigations on the same basis as local companies and trade associations.

• Through amended copyright legislation or regulations, correct the deficiencies 

in China’s implementation of the WCT and WPPT, and ratify the two treaties.

• Significantly ease evidentiary burdens in civil cases, including establishing a 

presumption with respect to subsistence and ownership of copyright and, 

ideally, permitting use of a U.S. copyright certificate, and ensure that evidentiary requirements are consistently applied by judges and are available in 

a transparent manner to litigants.

The copyright industries will be working closely with USTR to prepare the necessary elements of a WTO case should the TRIPS obligations of China described 

above and in our submission not be fully implemented. This work is now ongoing. 

We are grateful for the support of the Chairman and members of this Subcommittee 

in working with us to monitor China’s progress and to ensure that it takes these 

actions and avoids further confrontation with its trading partners on the issue of 

copyright piracy. 

Thank you.

30

ATTACHMENT


EHS0001.eps
31


EHS0002.eps
32


EHS0003.eps
33


EHS0004.eps
34


EHS0005.eps
35


EHS0006.eps
36


EHS0007.eps
37


EHS0008.eps
38


EHS0009.eps
39


EHS0010.eps
40


EHS0011.eps
41


EHS0012.eps
42


EHS0013.eps
43


EHS0014.eps
44


EHS0015.eps
45


EHS0016.eps
46


EHS0017.eps
47


EHS0018.eps
48


EHS0019.eps
49


EHS0020.eps
50


EHS0021.eps
51


EHS0022.eps
52


EHS0023.eps
53


EHS0024.eps
54


EHS0025.eps
55


EHS0026.eps
56


EHS0027.eps
57


EHS0028.eps
58


EHS0029.eps
59


EHS0030.eps
60


EHS0031.eps
61


EHS0032.eps
62

Mr. JENKINS. Thank you, Mr. Smith. 

Since I have ascended to the Chair this morning, I’ll recognize 

myself for the first questions. 

Ms. Espinel, shortly after I started a law practice down in Tennessee, a really nice lady came into my office. A national company, 

a storage and moving company, had lost her Oriental rug. She had 

moved from Washington, D.C., to Rogersville, Tennessee. And previously, she had been represented in this loss by a big, 50-member 

law firm. 

She came into my office, and I inquired about—but the negotiations had gone on for months and months and months, and nothing 

had happened. So I inquired about whether anybody had talked to 

her about filing a lawsuit. She said ‘‘No.’’ And that very day, I filed 

a lawsuit. And within a very short period of time, there was a recovery. 

Now, to bring that to this situation, I liked Mr. Berman’s suggestion. I liked his question in his opening remarks. You know, why 

are we not in the WTO court? That’s the only jurisdiction that’s 

available to us; isn’t it? 

Ms. ESPINEL. Thank you. As outlined in my testimony, we have 

made clear in the OCR report that was issued about 2 weeks ago 

that we are prepared to fight aggressively to protect our intellectual property in China. We have—our overall goal, I think the goal 

that we all share, is to significantly reduce the rampant piracy and 

counterfeiting in China. That may be through an intensified JCCT 

process; that may be through WTO litigation. There may be other 

means. There will probably, likely, I think, be a combination of 

means. And we are actively considering all of those options. 

But beyond mere consideration of those options, we are also actively engaged with our industry now, including the recording industry, the motion picture, IIPA; including specifically some of the 

people testifying for you here this morning. They have been working very hard with us to develop our options, including the option 

of WTO litigation. And we look forward to their continued cooperation and hard work with us. 

We are—this is a top priority for the Administration. This is a 

top priority for Ambassador Portman, as he has made clear in his 

confirmation hearings and also to his staff. He is in the process of 

reassessing our strategy, to see if there are ways in which it can 

be improved. But I can assure you that we are looking for the most 

effective mechanism that we can use to address this very significant concern. 

Mr. JENKINS. Well, I, personally, don’t have as much confidence 

in the WTO as I have in the courts in east Tennessee. But I don’t 

think this matter of inaction will lead us anywhere, and I think it’s 

time that we took some action somewhere, based upon everything 

that we heard this morning. 

And I would ask Mr. Fishman, Mr. Brilliant, Mr. Smith, if they 

would agree with that. Or what do you think the best strategy is? 

Mr. Fishman? 

Mr. FISHMAN. Well, certainly, you shouldn’t give up your WTO 

options. But there are other options. You know, one of the groups 

that’s very complicit in China’s intellectual property regime, loose 

63

as it is, is our American buyers of Chinese products, big buyers of 

Chinese products. 

If you look at a DVD player, before the Chinese entered the market, a DVD player made with a licensed chipset and licensed software cost about a thousand dollars. The Chinese decided to enter 

that market. In very short order, there are about 300 companies in 

China producing DVD players without any licensed technology 

below it. The price went down to about $30. 

Those players are now in American stores. And if you don’t think 

that there’s a wink and a nudge on the part of American buyers 

of those DVD players, the big-box stores that line their shelves 

with them, for the Chinese manufacturers to drive prices down by 

not paying the intellectual property license fees that they owe 

them, then you have something else coming. 

Maybe one course to consider is: How do you address the problem by looking at American companies, who feed our $170 billion trade 

deficit with China by bringing in goods that are made in virtually 

every Chinese factory which uses pirated technology? 

Mr. JENKINS. Thank you, Mr. Fishman. Mr. Brilliant? 

Mr. BRILLIANT. I’d make a couple of observations. First of all, I 

think the U.S. Government is prodding China along, and is continuing to put pressure on the Chinese government to act in this 

area—with mixed results to date, no question. But I think the Chinese government understands this is a top priority of the U.S. government. 

I think the American business community has also over the last 

year and a half, 2 years, amplified its voices on this issue. I mentioned already in my oral remarks that our president/CEO, Tom 

Donohue, was in discussions this week with Premier Wen Jiabao 

and Minister Bo Xi Lai. 

More importantly, though, I think there is a broad array of industry associations and companies that are engaged in this issue 

today, that perhaps were not engaged a couple of years ago. The 

issue is that important to CEOs of big and small companies. 

In terms of next steps, we actually did encourage USTR to seek 

WTO consultations. In our submission to the USTR as part of the 

out-of-cycle review, we encouraged WTO consultations because we 

do believe that China is falling short of its obligations under the 

WTO, and that we do believe that they need to do more, specifically 

in the area of enforcement and police investigations. And so we did 

encourage China—sorry, USTR to take that next step, and proceed 

with WTO consultations. We continue to believe that may be a necessary step. And we would urge USTR to exhaust all options, including perhaps a second out-of-cycle review later in the year. 

I think the JCCT is an important process, and I think we are 

looking to that as well, to see what assurances and what actions 

China is taking to really deal with this issue. But as others have 

testified, and as I have already indicated, what we need to see is 

Chinese political action. And we need to see it at the local as well 

as the provincial level. 

What we need to see is prosecutions. And what we need to see 

is not just the street vendors put away but, frankly, the owners of 

these illegal operations. And until we see real evidence of that, 

then we don’t have the deterrence in the marketplace that we need. 

64

And then, finally, I would just say that we should test the market ourselves. U.S. companies should press in China for enforcement actions. If we press for enforcement actions in China, and 

China fails to follow through on those actions, that would be more 

evidence that their enforcement mechanisms are not working. 

Mr. JENKINS. Thank you, Mr. Brilliant. 

My time has expired. The Chair will now recognize the Ranking 

Member from California, Mr. Berman. 

Mr. BERMAN. Thank you very much, Mr. Chairman. I have several questions. I’d appreciate it if the witnesses could respond rather quickly. 

But the first one that just comes to mind, Mr. Brilliant, in your 

very forceful answer to the previous question, and your testimony, 

you seem to blithely ignore the suggestion of Mr. Fishman that one 

strategy for dealing with what’s going on is to—is essentially to go 

after American companies selling products not because—cheaper 

not because of labor costs or other kinds of comparative advantage, 

but because they are built on pirated and counterfeited intellectual 

property; and holding the stores and the retailers and the distributors of those products in this country accountable, apart from what 

else we might do with China. What do you think of that suggestion? 

Mr. BRILLIANT. Well, I mean, I think we looked at all options. 

Mr. BERMAN. Well, what about that one? 

Mr. BRILLIANT. I think the short answer would be that we have 

had discussions with our own industries about steps that they can 

undertake to ensure that we are not selling counterfeit and pirated 

products. That’s not a simple process, but I think that is an important step that we can undertake here in the United States. And 

certainly, we welcome—— Mr. BERMAN. Well, if a Chinese DVD is using counterfeited chips 

in its product, and it’s being sold in U.S. stores, should the companies that own those stores have any accountability for that? 

Mr. BRILLIANT. Well, I think those stores that perhaps are selling 

those products should, first of all, be made aware of that. And second, they should take steps to make sure that those products are 

not being sold in their stores. That’s accountability to begin with. 

In terms of legal liability, I’m not in a position comment; except 

that I will say that U.S. companies need to clean their own house, 

as well. 

Mr. BERMAN. Okay. Ms. Espinel, in a column a couple of days 

ago in the New York Times, Pat Choate, who I don’t generally 

agree with on trade issues, writes a compelling couple of paragraphs, which I’d like to read to you. First of all, on the issue of 

the WTO and bringing actions, he points out that the Clinton Administration brought 17—13 intellectual property cases at the 

WTO against other nations. All of them were resolved to the U.S.’s 

satisfaction. We’ve seen not one in the past 4 years. 

And essentially, he concludes that China hasn’t met its intellectual property obligations, which you seem to agree with, and that 

the U.S. has failed to leverage the WTO mechanisms that might 

bring China into compliance. 

Although China has passed laws that accord with WTO requirements, the Trade Representative has reported—and as you said 

65

here—that enforcement of those laws was inconsistent, ineffective, 

and discriminatory against foreigners. It found intellectual property infringement in China to be rampant, with violations worsening. This is your agency. 

China has created a Potemkin Village of intellectual property 

protections. The WTO provides a way to confront that problem. If 

the U.S. can prove to a three-judge WTO panel that China is out 

of compliance and is harming intellectual property owners, it can 

seek damages. If WTO grants such a judgment, the U.S. can impose tariffs on Chinese goods. 

Understanding that there’s more dialogue and more meetings 

and more rounds and more watch lists, in the end, aren’t all of 

those avenues more effective if China thinks that such a decision 

is imminent? And to the extent that those things haven’t produced 

success, isn’t that the way to go? And what could we expect, in 

terms of that kind of action by the Administration? 

Ms. ESPINEL. Thank you. I’d be happy to respond. And with your 

permission, I’d also like to respond briefly to the question that you 

put to Mr. Brilliant, or at least give you another aspect of it. 

With respect, though, to the question that you just asked, I think 

it’s important to remember that a WTO case against China would 

be a new area for WTO litigation, in the sense that this would be 

a case not necessarily just against deficiencies in the Chinese statutes, but also against their enforcement. And that is one of the reasons why——

Mr. BERMAN. We have never brought a case against a country 

with good statutes and no enforcement? 

Ms. ESPINEL. The intellectual property cases that we have 

brought have hinged on facial deficiencies in statutes. And this is 

one of the reasons why our very close cooperation with industry is 

key to this. However, I can tell you that we are committed to ensure that China is compliant with its obligations. And we will take 

WTO action if, in consultation with you and with our industry, we 

determine that this is the most effective way to fix the problem 

that we are resolved to fix. 

Mr. BERMAN. And what would—on the horizon, when would such 

a conclusion be reached? 

Ms. ESPINEL. Well, we are actually at the moment involved in 

very intense discussions with certain sections of our industry; in 

particular, the copyright industry. They have been—as I noted, 

they have been working very hard with us to develop our WTO options, so——

Mr. BERMAN. Is 6 months a reasonable time frame? 

Ms. ESPINEL. I think it might be. I think to some extent it will 

be—the time line will be guided by our consultations with our industry. But given the focus and the hard work that is going into 

this, both on the part of USTR and with our industry, I think that 

that could be a reasonable time line. 

Mr. BERMAN. Thank you. 

Mr. SMITH. [Presiding.] Thank you, Mr. Berman. Let me recognize myself for questions, and say I’m sorry for my brief absence, 

but I had to go to another Committee to vote on a markup of a 

piece of legislation. As a result, my questions may overlap some of 

66

the questions that you’ve already been asked, and let me know if 

that’s the case. 

Ms. Espinel, let me begin with you. And it sounds like I’m following up on a couple of things that had been raised. I was going 

to page 2 of your written testimony, where you list a series of five 

actions that you think need to be taken to address our concerns; 

the concerns being, as you pointed out and as other witnesses have 

pointed out, that basically counterfeiting and piracy in China are 

at record levels. And I assume that that means unacceptable to everybody involved. 

What I’m interested in, you list these as a series of actions. I’d 

like to know specifically what actions you intend to take, and when 

you intend to take them. And let me pick out four of these five. The 

first is utilizing WTO procedures to bring China into compliance 

with WTO TRIPS obligations. What—you say you have an eye toward using those procedures. I’m really more interested in not 

looking, but in acting. And what specific actions might you take? 

Ms. ESPINEL. I think we are resolved to go to WTO litigation if 

we determine that that’s the most effective strategy to accomplish 

what our overall goal is, which is reducing piracy and counterfeiting. And that goes to the answer to the question—— Mr. SMITH. Right. 

Ms. ESPINEL.—I gave to Congressman Berman. We are working 

with our industry to develop these options, right now. 

Mr. SMITH. When Mr. Berman asked you if 6 months was a reasonable time frame, you didn’t really answer that question specifically. I hate to be too hard on you your first time to testify before 

Congress, but could you be explicit in the time frame? 

Ms. ESPINEL. Well, I hate to make promises that I can’t keep. 

Mr. SMITH. You’re learning fast. All right. [Laughter.] 

Ms. ESPINEL. Because I think a lot of that will depend on our 

consultations with industry. But I certainly think that could be a 

reasonable time line. 

Mr. SMITH. Okay. Let me go to a couple of other items here. You 

say you want to require China to produce detailed documentation 

on certain aspects of IPR enforcement. When will those requests 

and documentation be made? 

Ms. ESPINEL. Very soon. There is no time line under the WTO 

procedures for us to make that request, but this is something that 

we have announced that we are going to do. We are in the process 

of preparing the request, and we are planning to file it very soon. 

Mr. SMITH. Right. And also, of course, with the recent appointment of Rob Portman, you’re, I’m sure, reviewing a lot of the policies and taking additional initiatives that you might not otherwise 

take as a result of Mr. Portman’s personal interest. And I’m sure 

that’s the case, too. 

What about elevating China onto the Priority Watch List. You 

put China sort of in the middle position, but chose not to put China 

in a priority foreign country category. Why was that, when its violations are so egregious and it’s so obvious? 

Ms. ESPINEL. Well, as you probably know, China hasn’t been on 

the watch list in any category for the last decade or so. And we 

thought, frankly, given the level of disappointment, and seriousness of the concerns that we had with China, it was important that 

67

they be returned to the Priority Watch List. And we felt that that 

was a strong signal, frankly, of the level of unhappiness. 

Mr. SMITH. Perhaps that’s the first step. And maybe you’ll get to 

the next-higher step, given the response by China, perhaps? 

Ms. ESPINEL. Yes. 

Mr. SMITH. Okay. Good. Thank you. Let me ask you a question 

that—or to respond to a recommendation made by Mr. Brilliant in 

his testimony. He said USTR should conduct a second Special 301 

out-of-cycle review of China later this year, to assess China’s implementation of the judicial interpretation and other enforcement efforts. You’ve talked about that a little bit, but what about that suggestion? 

Ms. ESPINEL. Frankly, all options are on the table at this point. 

I think we’re willing to consider any approach that we think would 

effectively address that, in consultation with our industry. So we 

will take, as we always do, any suggestions made by our industry 

quite seriously. 

Mr. SMITH. I can’t fault you for saying all options are on the 

table; since that’s the phrase President Bush used with regard to 

Social Security reform. But can you tell us when you might take 

some of those options? 

Ms. ESPINEL. Well, with respect—as I said, with respect to the 

request for additional information, the transparency procedures 

under the WTO, that’s a request that we’re planning to make very 

soon. 

In terms of whether or not we decide to initiate a second out-ofcycle review, or decide to go to WTO litigation, I think the time 

lines that we’ve discussed earlier are probably reasonable ones—— Mr. SMITH. Realistic? Okay. 

Ms. ESPINEL.—based on where we are with industry at this 

point. 

Mr. SMITH. Okay. Very good. Thank you, Ms. Espinel. 

Mr. Fishman, I wish we had more time to talk about your book. 

You’ve no doubt read Thomas Fishman’s—Thomas Friedman’s 

book, The World is Flat. And you saw the cover article—I think it 

was Newsweek—a couple of weeks ago on China, as well. We underestimate China at our peril, I think, in many, many ways. 

In my time remaining—I don’t know what happened to my 30-

second warning yellow light, but we’ll work on that. And if the 

Members will indulge me, what I’m going to ask the remaining 

three witnesses to do, very quickly—Mr. Smith, Mr. Brilliant, and 

Mr. Fishman, if you had one suggestion for what the U.S. should 

do to try to engage China in enforcing and respecting our intellectual property rights, what would be that suggestion for our Administration? 

Mr. Smith, we’ll start with you, and work down real quickly. And 

then, Ms. Espinel, we’re not going to have time for you to respond, 

but perhaps you can in writing, to their three suggestions. And I 

also have two other questions to submit to you in writing, as well. 

Mr. SMITH. I think we have to make clear to the Chinese government that they’re in jeopardy. We can do that both bilaterally, and 

we need a credible—we need to take—the U.S. Government needs 

to take a credible position with respect to moving toward a WTO 

case in the next few months, as Ms. Espinel said. 

68

I think that China needs to feel a lot of pressure, before they’re 

going to move on this issue. There are a lot of domestic forces that 

are against it. And the more pressure we can bring to bear, and 

the more that this Congress can do to help in that effort, the closer 

we will come to that objective. 

Mr. SMITH. Okay. Thank you, Mr. Smith. 

Mr. Brilliant, go beyond, if you will, your four suggestions in 

your testimony. You talk about spearheading, engaging, 

benchmarking, and promoting. Specifically, what would you want 

the Administration to do? 

Mr. BRILLIANT. Well, our testimony does cover both our actions 

as well as what we suggest that the USTR does. But what I would 

just say is follow up on previous comments, and just say we need 

to continue the pressure and we need the Administration to build 

toward a WTO case, if the facts warrant it. That means industry 

supporting it, but it also means that USTR needs to let the Chinese understand that these are challenging times, that we need 

tangible evidence of progress. 

And that’s the second point I’d make; which is we need to get out 

of the JCCT some sort of contract from the Chinese saying exactly 

what they’re going to do in terms of dealing with the prosecution 

issue, dealing with police investigations, dealing with custom enforcements. We need some sort of litany—or really, a line-by-line 

contract from the Chinese to show that they’re really serious about 

taking action. 

Mr. SMITH. Thank you, Mr. Brilliant. And finally, Mr. Fishman. 

Mr. FISHMAN. My one suggestion is a two-step process. The first 

is to form a domestic consensus on China. And part of that has to 

do with the future of our economy; stressing that the future of our 

economy is both industrial and innovative, and that needs to be 

protected. And that means asking consumers to make a sacrifice in 

order to maintain our standard of living. 

And the second is to rethink all of the mechanisms that you’ve 

talked about today. There’s a lot of dickering that can go on in the 

context of WTO, but the stakes are enormously huge. And there’s 

billions and billions of dollars coming into this country based on 

counterfeit platforms. You might have to put a tax on all of that 

stuff, in order to force a change. 

We have a small window when this can happen. The window is 

now. Our trade deficit with China right now—our deficit alone, not 

our total trade—is 14 percent of their economy. If we put a tax on 

that 14 percent of the economy, you will see rules change very, 

very quickly. 

Mr. SMITH. Okay. Thank you, Mr. Fishman. I appreciate all your 

responses. 

The gentleman from Virginia, Mr. Goodlatte, is recognized for his 

questions. 

Mr. GOODLATTE. Mr. Chairman, thank you very much for holding 

this very important hearing. I have an opening statement that I 

didn’t have an opportunity to give, and I’d ask that that be made 

a part of the record. 

And I’d like to just point out a couple of figures that I have. It’s 

estimated that in China 95 percent of motion pictures and 90 perVerDate 0ct 09 2002 14:31 Aug 11, 2005 Jkt 000000 PO 00000 Frm 00072 Fmt 6633 Sfmt 6601 G:\WORK\COURTS\051705A\21217.000 HJUD1 PsN: 21217
69

cent of business software are pirated. And in Russia, 80 percent of 

all motion pictures and 87 percent of business software are pirated. 

Considering that the core copyright industries account for 6 percent of the U.S. gross domestic product, and the total copyright industries account for approximately 12 percent of U.S. GDP, it’s 

clear that America’s businesses are facing a very serious problem. 

Mr. Smith, what evidence have you found that piracy and counterfeiting are being used to fund organized crime in Russia and 

China? And why are piracy and counterfeiting such attractive funding mechanisms in those countries? 

Mr. SMITH. Piracy has become one of the most lucrative businesses in Asia; indeed, throughout the world. By our best information, organized criminal syndicates, organized principally out of 

Taiwan, Hong Kong, and into the mainland, and in other countries 

in East Asia, have a solid lock on this business. And their lock is 

so solid that it is very difficult for governments to unlock it. And 

it’s going to require major political will of those governments to 

break these syndicates. 

Now, that process has started in many of the countries in Asia. 

I don’t believe it’s started in China. And we need to get about that 

business immediately. I know the STOP Initiative that the U.S. 

Government has initiated is an effort at least to get at international organized crime through international cooperation of justice departments in those regions. 

But there is no question that organized crime and terrorism and 

gun running and money laundering are all part of a piece, and it’s 

growing. And until we—this becomes an urgent matter and a zerotolerance issue, it’s going to continue to grow, because there’s just 

too much money in this business. 

Mr. GOODLATTE. Thank you. Mr. Brilliant, are you aware of instances where counterfeit goods have actually caused serious bodily 

injury or death? 

Mr. BRILLIANT. I know in the case of China that has happened. 

There was the instance involving baby formula, but there are other 

examples. There have been examples regarding auto parts—— Mr. GOODLATTE. Brakes. 

Mr. BRILLIANT. Brakes. 

Mr. GOODLATTE. And airplane parts, too. 

Mr. BRILLIANT. Right. So there are examples where faulty equipment has been cited as a cause for bodily harm. I think there is 

a real public health and safety component to this issue. We’ve all 

highlighted that. And certainly it’s true, not just in the pharmaceutical area, but across a wide range of industries. 

And that just adds to our concern that this be not just a priority 

of the U.S. private sector, but also the U.S. Government; which it 

is, I think, today. 

Mr. GOODLATTE. Thank you. Ms. Espinel, we heard Mr. 

Fishman’s very forceful arguments about some of the things that 

we could do. I wonder if you could tell us what remedies are available to better ensure that China and Russia live up to their domestic and international obligations to protect intellectual property 

rights. And what more can the U.S. do in this regard? 

Ms. ESPINEL. Well, with China there are a number of steps that 

we outlined a couple of weeks ago in the OCR report that we reVerDate 0ct 09 2002 14:31 Aug 11, 2005 Jkt 000000 PO 00000 Frm 00073 Fmt 6633 Sfmt 6601 G:\WORK\COURTS\051705A\21217.000 HJUD1 PsN: 21217
70

leased. And those include our elevation of China to the Priority 

Watch List; intensifying the JCCT process, in particular with respect to the Intellectual Property Working Group meeting that is 

going to be meeting next week; working with our industry in order 

to develop our WTO options; invoking the transparency procedures 

of the TRIPS Agreement, in order to require China to give us detailed information about its enforcement actions. I think we’ll also 

require it to take a serious look at the deficiencies in its system. 

These are a number of actions that we have already announced 

that we are going to take, but of course, we are also—and as Ambassador Portman has made clear, this is a top priority for him. 

And he made that clear at his confirmation hearing. He’s made 

that quite clear to his staff. So we are also in the process, in consultation with our industry, of discussing what other options they 

might be. And of course, we would also be looking to this Committee for leadership and guidance in that process. 

Mr. GOODLATTE. How close do you think we are to imposing tariff 

sanctions on China, along the lines of what Mr. Fishman suggested? 

Ms. ESPINEL. With respect to intellectual property? 

Mr. GOODLATTE. Yes. 

Ms. ESPINEL. I think the range of options that we’re looking at 

right now include the ones that I’ve just outlined. Of course, at the 

conclusion—— Mr. GOODLATTE. How long would it take? If we were to start that 

process today, how long would it take before we would see actual 

sanctions imposed on China? 

Ms. ESPINEL. Well, WTO litigation generally takes somewhere 

between—I mean, it’s a little hard to say, as in all litigation—but 

somewhere, I’d say, between a year and two. And partly, that depends on whether or not the trial court decision, so to speak, is appealed by China. 

Of course, there may be progress made by China. And we will absolutely be pressing them to continue to make progress, if we go 

down the WTO road; that we not wait till the conclusion of a case 

and the imposition of sanctions to see progress from China. 

Mr. GOODLATTE. Well, thank you. I know Mr. Portman is brand 

new to the job, but I hope the ambassador will take a close look 

at making some of those decisions very quickly in this regard. 

Ms. ESPINEL. He absolutely will. 

Mr. GOODLATTE. Thank you very much, Mr. Chairman. 

Mr. SMITH. Thank you, Mr. Goodlatte. 

The gentleman from California, Mr. Schiff, is recognized for his 

questions. 

Mr. SCHIFF. I thank the Chairman. And I just had the opportunity—one of the reasons I’m late this morning, I just had the opportunity to meet with the Chinese ambassador today, and to raise 

this issue personally. 

I want to get your thoughts—and I apologize if we’re covering 

ground we’ve covered already—but what is—what steps do you believe that China could effectively take to curtail this problem? My 

impression is that China is very capable of cracking down on dissenting viewpoints. They have the capability, certainly, of cracking 

down on illegal products. 

71

What should China be doing that they’re not doing? What evidence do we have that this is a conscious economic decision on China’s part? And what are the constructive steps that we can take 

here in Congress to change China’s behavior vis-a-vis pirated 

goods? 

Mr. FISHMAN. I’d like to tackle that. I regard China’s loose intellectual property regime as the largest industrial subsidy in the 

world. It transfers to China all of the gems of the world’s advanced 

economies at no cost to the Chinese government. So it’s a large 

subsidy that costs them nothing, and costs us everything. 

If you want to know what the Chinese can do more of, it’s virtually everything. But there’s no will there to do it. And the will 

has to come from somewhere else. It has to come in the form of a 

cost. Because right now, their intellectual property regime enriches 

its people and benefits its people greatly. And we ought to have 

some grudging admiration for how they’ve run this so far, because 

it’s gotten them to where they are and it’s also created a country 

which we would love to do business with now because it’s increasingly wealthy. 

But right now, we’re at an inflection point, where we have to act 

in order to preserve what we have. And you could get any action 

that you want. If pirated DVDs included something about Falun 

Gong or Tibetan independence, you would see enforcement happen 

on day two. 

Mr. SCHIFF. Right. 

Mr. FISHMAN. But it’s a little bit more mysterious when you go 

into a manufacturing plant that’s making ‘‘widgets,’’ but they have 

20 or 30 or 100 engineering stations, each of which in the United 

States would cost 50 or 60 thousand dollars a year to run, a proprietary piece of software; but they run for zero cost in China. Those 

factories are the kinds of factories that churn out goods to us. And 

unless you look to the world’s customers of those goods, those Chinese factories have no incentive to spend extra millions on intellectual property license fees. 

Mr. SCHIFF. And what’s the most effective pressure point that 

the U.S. can bring to bear to get China convinced that it’s in their 

economic interest? 

Mr. FISHMAN. Well, there’s been a lot of talk on this among the 

witnesses, about what individual companies can do to bring pressure. But individual companies have very few options, because 

there are so many ways to pressure them in China to transfer technology there. 

You really need a public solution, and a widespread solution from 

the United States. And that has to be some kind of extreme 

brinksmanship or actual action that taxes everything in China 

that’s made on a pirated platform that comes into the United 

States. And until you get that kind of broad-scale action, you will 

get no turn of sentiment in China on intellectual property. 

Mr. SCHIFF. Can you address, any of you on the panel—I know 

this is a little bit off-topic—but the issue of Chinese restrictions, for 

example, on the type of software that their government agents—

vendors purchase, that essentially excludes American exports in 

that area? 

72

Mr. SMITH. Let me see if I can answer that. Right now, there’s 

a pending regulation before the Chinese government to—for the 

Chinese ministries to procure only Chinese software. And there 

was a hearing last Friday before the Government Reform Committee, I believe, that dealt exactly with this problem, discrimination against American software publishers. 

I mean, this is the kind of thing—following up on what Mr. 

Fishman said—that is exactly the wrong strategy. Maybe right, 

from a very narrow point of view; but it is our view that China’s 

ultimate economic welfare does not lie in continuing to build a 

copying nation. 

They are never going to go up the value chain, if they continue 

to do what they are now doing. They will continue to have trade 

friction with the rest of the world. We’re trying to elicit the Japanese and the Europeans now to work with us to try to fight this 

problem. 

And the mechanics of fighting it aren’t that difficult. Other countries have done it. Other countries have reduced piracy rates. 

China can do it. I think Mr. Fishman is right: What are the incentives? 

Part of those incentives are disincentives; and that includes the 

possibility of retaliation through a WTO case, and things like that. 

I believe—— Mr. SCHIFF. Is the WTO the most effective leverage that we have 

in dealing with—or are there interconnections between issues of 

the valuation of the Chinese currency or other economic issues that 

are a more powerful lever for us to use? 

Mr. SMITH. I mean, I think there’s a lot of pressure that can be 

brought to bear that’s outside the IP area. I mean, everybody is 

now talking about the Chinese currency and all and—you know, 

and there’s defense issues. There are a number of intersections. 

And the importance of China—or the interrelationship of China 

and the United States and that trade relationship is extremely important. 

And China cannot continue to just thumb their nose at the 

United States on these issues, when our most productive industries 

can’t even get into the market or, as Mr. Fishman said—and this 

is not so much true in the copyright area—product is coming out 

of—just flowing out of China that’s counterfeit. There are remedies 

to that at the border of the United States. And I’m not speaking 

to what recommendations Mr. Fishman has made. 

But there is no question that China must—it’s not a question of 

whether; it’s a question of when. They have to deal with this problem. We hope that the U.S. Government, and all of us, and the U.S. 

Congress, are in a position to convince the Chinese that it should 

be now, before this gets to the brink of disaster. 

Mr. BRILLIANT. If I could just briefly comment, industrial policy 

is at the heart of some of this. I mean, government procurement 

issues, standards, intellectual property, that folds into an industrial targeting policy of the Chinese government. We have to not 

only deal with this issue bilaterally; we have to deal with it multilaterally. 

The WTO is a multilateral system for dealing with it. But another component, we need to bring in the Europeans and Japanese 

73

and others to increase the pressure on the Chinese to act. Because 

if we act just bilaterally—unilaterally—in our actions, that won’t—

the Chinese will go elsewhere. They’ll deal with other markets. 

And that would cost American businesses, as well. 

So we need to bring in the multilateral community into our fold. 

And I think the U.S. Government needs to do more on that front. 

I know there’s actions underway, but that’s an area where we need 

to progress further, is bringing in the Europeans and the Japanese 

and others who share our concerns about the policies in China. 

Mr. SCHIFF. Thank you. 

Mr. SMITH. Mr. Schiff, the gentleman’s time has expired. Thank 

you for your questions. 

Mr. Forbes and Mr. Issa, would you all be able to come back in 

15 minutes, if we take a quick recess for these two votes? And then 

we’ll finish up at that point. That’ll be great. I hope the witnesses 

can stay, as well. 

We’ll recess for about 15 minutes, and then reconvene about 25 

or 20 of 12:00, and finish up the questions then. Thank you. 

[Recess.] 

Mr. SMITH. The Subcommittee on Courts, the Internet, and Intellectual Property will reconvene, and we will resume our questions. 

And we will go to the gentleman from Virginia, Mr. Forbes, for his. 

Mr. FORBES. Thank you, Mr. Chairman. And thank all of you for 

being here today. This is an important topic. Mr. Smith said earlier 

that he hoped we could have a lively and productive dialogue, and 

in the time periods we’ve got, it’s very difficult to do that. But I 

just want to throw out a couple of things to you. And I’m going to 

ask you two questions at the end of that. 

But I remember years ago going to a high school baseball game. 

And I got there a little bit late, and it was the fourth inning. And 

when I sat down on the bleachers, the team that was supposed to 

win, that was going to the State championship supposedly, was 

down eight-to-nothing, and it was the fourth inning. And this old 

man sitting beside me looked at me, and he said, ‘‘Don’t worry. 

Don’t worry. They’re taking this very seriously.’’ He said, ‘‘They’re 

going to do everything it takes to win.’’

In the seventh inning, they were down 12-to-nothing. And he 

looked at me and said, ‘‘Don’t worry. Don’t worry. They’re taking 

this very seriously. They’re going to do everything it takes to win.’’

At the bottom of the ninth inning, it was 15-to-nothing. And he 

looked at me and he said, ‘‘They should have taken this more seriously.’’ He said, ‘‘They didn’t do what it took to win.’’ And I don’t 

want us to be in the ninth inning of this ball game, and be saying 

the same thing. 

And some of the concepts are simple, and some are very complex. 

The simple ones are these. You know, we have ideas and creative 

talent that springs from the investment we put in a free society. 

China has cheap labor. You can steal ideas and creative thoughts. 

You cannot steal cheap labor. 

My big concern is, when you look at this $162 billion trade deficit, it’s more now than just dollars and cents in the economy. Just 

5 years or so ago, when the Chinese went to the Soviets to buy 

weapons, they were using IOUs. Today, they’re using our cash to 

74

modernize their military. And their weapons are pointed at us. 

They don’t have anybody else to point them to. 

And my question is that the word games just don’t seem to be 

working. I led a delegation to China in January. We’d just started 

a China Caucus. And you all know what happens is, when you 

meet with them to have a little chat, if you’ve got an hour, for the 

first 50 minutes, they talk; and then they give you 10 minutes, and 

you know they’re not paying attention to anything you say in those 

10 minutes. 

Mr. Brilliant, you know, you raised some good ideas here. And 

you indicate if we enforce intellectual property rights, consumers 

will pay more. But that would be true here, too. If we didn’t enforce 

intellectual property rights here, consumers wouldn’t pay as much. 

And when we talk about it being difficult to form a consensus because consumers would pay more, I have never had a consumer call 

me and say, ‘‘I want you to vote for a particular issue, because I’m 

going to get a DVD player $30 cheaper.’’ It’s the businesses that 

are selling the DVD players that are calling us and pushing some 

of these policies. So, you know, I feel that it’s time for us to stop 

‘‘going to be doing everything that’s necessary to do this and win 

this.’’ But it’s important for us to actually take some steps to do 

something. 

And my two questions to you are these. I measure a whole lot 

about what we’re going to do in the future by what we’ve done in 

the past. When I was in China, I asked the embassy people, I 

asked everybody I met with, ‘‘What have we done right, and where 

are we winning?’’ And I didn’t get many good answers. 

And so the question that I would ask for you is—again, not putting a whole lot of stock in ‘‘going to study this,’’ and ‘‘going to do 

something down the road’’—when we’re dealing with China, what 

have we specifically done right in this matter? And where are we 

winning? 

And if each of you would give me—Mr. Brilliant, if you could give 

me—since you’ve got such a great name, we’ll just—you have a 

brilliant name. 

Mr. BRILLIANT. A brilliant name. First of all, what we’ve done 

right is getting China into the multilateral trading system. By getting them in the WTO, we do have opportunities to bring cases 

and——

Mr. FORBES. But help me with that, because when I talk to the 

average citizen—and you know, I supported—I mean, you know, so 

I’m not arguing—but I’ll look at people, and they just laugh at me 

now and they say, ‘‘See, we told you. You were going to be able to 

get them in there and get them to enforcement.’’ We haven’t been 

able—we’re not winning on that argument. 

Mr. BRILLIANT. Well, I think, first of all, it’s a lot better to have 

them in the camp than to have them out of the camp. Prior to 

2000, we had less options in our arsenal than we do today. So I’m 

not arguing that we haven’t—we need steps further to deal with 

this issue of intellectual property rights; but we have made 

progress by having them in the WTO. First of all, it binds them 

to rules that are internationally recognized. 

Mr. FORBES. But that they’re not abiding by. 

75

Mr. BRILLIANT. Well, I think, first of all, they have made some 

important cuts in the area of tariffs. They’ve improved transparency. There are things they are doing. It’s not a perfect situation. By no means are they complete in their WTO accession process. But there are things they are doing. They are making tariff 

cuts; they are improving transparency; they are implementing trading rights; they’re dealing with distribution issues. But by no 

means does that mean we have complete market access. But it 

would have been a lot worse if they had stayed out of the world 

trade system. 

The other thing is that China benefits, itself, from being part of 

a multilateral community. And that, I think, helps move them, and 

modernizes their economy. They see the benefit, as well. They’re 

bringing cases, as well. And that means something. That means 

that they understand the value of playing by the same game. 

Now, they’re not abiding by all the rules that we want them to 

abide by. And certainly, in the topic of this hearing, they have fallen well short of our understanding and expectations in the area of 

intellectual property rights. But I think they have—I think it is to 

our benefit to have them in the trading system. 

Mr. SMITH. In a few minutes, you’re going to have a hearing on 

Russia, and Russia is not yet in the WTO. Hindsight is easy; but 

if we go back and look at what the situation was when China 

joined the WTO, for the IP industries we would probably want to 

do a lot more in that protocol than we did do. 

And we hope to God that we do it in the Russia protocol, and we 

don’t allow Russia to join with a totally ineffective enforcement system, and then drag this thing out. That’s probably what we should 

have done back then. 

I would only add that before China joined the WTO, we had the 

one example where I think there was a success with China. And 

China, faced with $2 billion worth of retaliation in 1995 and ’96, 

closed their CD factories and stopped the export of pirate product. 

And that lasted five or 6 years. So that was a success. 

And hopefully, we can not only convince the Chinese that it is 

in their interest to do this—and Mr. Fishman’s rather bleak view 

is quite disturbing. We think we can convince them. We think it’s 

the right answer. A lot of countries have also agreed that it’s the 

right answer to protect intellectual property for the long-term 

growth of their country. But if we can’t convince them, then we 

have the WTO. 

Mr. FISHMAN. I think one thing we ought to look at is the trade 

deficit number. The trade deficit number is impressive for a lot of 

reasons; just impressive because it says how much more we spend 

on Chinese goods than they spend on us. But it’s also the most direct measure we have of how much American companies are profiting in China. 

It’s American companies that bring in that $162 billion worth of 

extra goods. This year, the statistics might rise far beyond that. 

I’ve seen numbers running as high as $240 billion as a trade deficit 

with China in the next year. 

That is the barrier that we face. There’s a lot of profit being 

made by doing business with China. And they are growing richer 

from it, and American companies are growing richer from it. And 

76

if we need to move in to protect American industry, we have to look 

at which industries you’re going to protect. 

Right now, it is the large companies in the United States which 

are moving as fast as they can to China, to change their supply 

chains and move them to China as fast as they can, and cut the 

rugs out from under medium- and small-sized businesses in this 

country. 

Well, for most medium- and small-sized manufacturers in this 

country and many service businesses, the only valuable piece of 

property that they own is some core piece of intellectual property 

that they’ve developed in-house. And they are extremely vulnerable 

to that moving to China and feeding the large companies which are 

trying to move all their production over there. 

Ms. ESPINEL. One of the things the Administration has done in 

the last year is intensify the JCCT process. And we have seen some 

real successes coming out of that. For example, the new judicial interpretations that were issued by the Chinese at the end of last 

year. 

However, I would say that we agree with you that we need to 

do more, and that we need to engage with China in a new way. 

I think it is fair to say that we are entering into a new phase of 

our relationship with China. 

Ambassador Portman is well aware of the concern that you have, 

the criticalness of this issue to our economy, to our industry, to 

Congress. And we have—as I’ve mentioned before, we announced 

a couple of weeks ago a series of actions that we are taking to intensify the pressure on China. 

But at the same time, Ambassador Portman is reexamining our 

strategy and our options, to find the most effective way we can to 

address this problem. 

Mr. SMITH. Thank you, Mr. Forbes. 

The gentleman from California is recognized. And I might say, 

to my knowledge, he’s the only Member of the Judiciary Committee 

that actually holds patents, himself. And we look forward to his 

questions. 

Mr. ISSA. Thank you, Mr. Chairman. And I got those patents by 

founding an electronics company 25 years ago. And I no longer own 

the company. I divested when I came to Congress. And I’m glad I 

did, because in preparation for this hearing I received from the 

general counsel of the company I founded, but do not own, something that’s—and I would ask that this material be allowed to be 

inserted in the record. 

Mr. SMITH. Without objection. 

Mr. ISSA. Thank you. So ordered. 

[The information referred to follows:]

77

INFORMATED PROVIED BY KC BEAN, VICE PRESIDENT & GENERAL COUNSEL, 

DIRECTED ELECTRONICS, INC.


Bean1.eps
78


Bean2.eps
79


Bean3.eps
80


Bean4.eps
81


Bean5.eps
82


Bean6.eps
83


Bean7.eps
84


Bean8.eps
85


Bean9.eps
86


Bean10.eps
87


Bean11.eps
88


Bean12.eps
89


Bean13.eps
90


Bean14.eps
91


Bean15.eps
92


Bean16.eps
93


Bean17.eps
94


Bean18.eps
95


Bean19.eps
96


Bean20.eps
97


Bean21.eps
98


Bean22.eps
99


Bean23.eps
100


Bean24.eps
101

Mr. ISSA. And what they did, which I think is noteworthy here, 

to show you just how bad—and particularly, for our Trade Representative—things are, after I left the company, Directed Electronics bought a company called ADS—famous speaker manufacturer, speaker and amplifier, very high-end. And they were already 

manufacturing some of their products—and had been for decades—

in China; actually, for more than a decade, almost two decades. 

And so I have a picture of the authentic ADS product, and I’ll send 

it down. This is going to be included in the record. And I have a 

picture of the counterfeit. 

Now, the amazing thing is, it’s less than 20 miles from the real 

factory to the fake factory. And when the company, according to the 

general counsel that sent me this, began the process of making 

them aware that a product that is trademarked all over the world 

was being counterfeited in China, sent into China, and that as a 

result the trademark, which had been acquired by the fake company, was invalid and fraudulently applied for, in every sense, they 

got a resounding ‘‘No Answer’’ from China. And that continues till 

today. 

And there actually was—I only brought this part, but if you’d 

like, I do have that many inches that they’ve gone so far. And this 

was because I mentioned in a conversation that we were going to 

hold a hearing. China is not, in my opinion, going to do anything, 

unless we pull the trigger on some of those sanction capabilities. 

And I would—I think I would be remiss if I didn’t mention that 

the DVD example, from my standpoint, makes no sense. Those are 

patents, U.S. patents. You can get an injunction against Circuit 

City, Best Buy, or the person supplying them, in a matter of hours. 

Phillips and others could do that. 

So I would hope that that not go in the record as the best example. Because I think that most of China’s violations have more to 

do with when there is no patent, when the intellectual property is 

not easily seen. And certainly, when it comes to their domestic 

market—and much of this product is being sold to the domestic 

market—what they’ve decided to do is not let us into the domestic 

market at all; but rather, supply it themselves. And ignoring intellectual property gives them that ability. 

And that market, as chairman Bill Gates and others have noted, 

is going to be huge. And that’s why so many companies are putting 

an emphasis on getting access. And that, perhaps, is the story not 

told today. 

I would have a specific question for Ms. Espinel. Isn’t there a 

tendency—and if there absolutely isn’t, please say it in those 

terms. Isn’t there a tendency for our ongoing problems with North 

Korea to cause us to soft-pedal the trade portion, the valuation portion? 

When I was there with Chairman Hyde in China, now over 2 

years ago, that 1-hour discussion was 50 minutes on North Korea. 

And some note-taker, you know, put a check mark when we started 

talking about intellectual property. 

Isn’t that one of our challenges with China? That if this were the 

country of my grandparents, Lebanon, we’d demand that they 

change their rights and they enforce them and they do it, or we 

102

sanction them. With China, isn’t their size and their strength and 

their geopolitical influence part of our problem? 

Ms. ESPINEL. I think the situation in China is very complex, for 

all of the reasons that you just mentioned. And I would add another one to that. I think, given the size of China, I think it is a 

difficult market even for the Chinese government to control the 

problem that they’re facing. 

That said, I agree with what other people have said here today, 

that this is a time for the Chinese government to demonstrate the 

political will that I think they can demonstrate to get a handle on 

the problem before it goes any further, and to correct the problem 

and reverse the situation that they’ve created. 

In terms of USTR’s relationship with China, Ambassador 

Portman has made quite clear, I think feels quite strongly, that IP 

protection is one of the top priorities that we have with China. And 

I think he is quite willing to press that issue with China as far as 

we need to, in order to effectively address this problem. 

Mr. ISSA. And just one follow-up question. This problem—I know 

that just in one area, you cited 2.5 billion; but this problem represents a substantial portion of the trade deficit. How do we get 

whole, when we’re talking about tens of billions of dollars of losses 

to our economy? And that’s not to our economy in the abstract; 

that’s to particular individuals, to particular companies, to particular workers, that are going on every day. 

It has been more than—I mean, to be honest, Rob Portman’s 

predecessor came in with exactly the same statements that you’re 

giving us today about why this was important. And how many—

how many hundreds of thousands of U.S. jobs and how much was 

lost as a result of saying we were going to act; but inaction? 

Why is it that this Committee should believe that, until you actually show us action, that you’re going to show us action? What’s different now than it was 2 years ago? 

Ms. ESPINEL. Well, one thing that I think is different, actually 

in the last couple of weeks, is the out-of-cycle review determination 

that we’ve made. As I’ve mentioned before, we have intensified 

pressure in the JCCT in the last twelve months. 

We also conducted this extraordinary out-of-cycle review against 

China, and announced the results of that and the aggressive actions that we would take as a result of that, a couple of weeks ago. 

And those include things like elevating China to the Priority Watch 

List, which I think has sent a very clear signal to China; one that, 

I might add, they are quite unhappy about. 

We have publicly announced that we are working with our industry to develop our WTO options, and we are actively engaged in 

that process. We have publicly announced that we will be invoking 

the WTO TRIPS Agreement procedures for transparency, in order 

to acquire information from China. So I think we have already outlined a fairly aggressive series of actions that we will be taking. 

And in addition to that, I mean, we are looking very actively to 

see what our other options are. I think it seems to me that it’s 

clear, given the scope of the problem in China, there is not going 

to be one single effective approach; but rather, a combination of approaches that we have already either started in train, or maybe, in 

103

consultation with you and with our industry, able to develop over 

the next few months. 

Mr. ISSA. Thank you, Mr. Chairman. This could go on, if only we 

had time. 

Mr. SMITH. Thank you, Mr. Issa. That was a very good question, 

and a good response, as well. 

Mr. Berman has one more quick question to ask, and as I do. 

And then we’ll adjourn. 

Mr. BERMAN. I think I’m not asking you to respond here, but if 

you could respond in writing, Mr. Smith in his testimony—he 

didn’t really touch on it much in his testimony, but in his written 

testimony, talks about at least two different limitations on market 

access for films and music—one quotas; the other one, requirement 

of permission to retail music—and raises issues of discrimination, 

tests put on here that aren’t put on Chinese produced music. 

I’d like to know, number one, to your mind, do those violate China’s international commitments? And secondly, what efforts are 

being made specifically on those market access limitations by the 

Trade Representative’s Office? And if you would be willing to put 

that in writing, I’d be very grateful. 

And I’d only say that, Mr. Issa, notwithstanding the problems, at 

least China is being very helpful with respect to North Korea. 

Mr. SMITH. Thank you. 

Mr. ISSA. You know, funny he should note that——

Mr. SMITH. Thank you, Mr. Issa. No response is necessary right 

now. 

I do have a quick question to ask, myself, Ms. Espinel, and that 

is this. What can American industry do to help you make the case 

that you need to make in order to get the enforcement we need 

from China? 

Ms. ESPINEL. As I mentioned, we have been working closely with 

some segments of the industry. And I would encourage them to 

continue to cooperate with us, as they have been doing, to continue 

the hard work that they have been doing, to help us build the factual record that we need in order to bring the best case possible. 

Mr. SMITH. Okay. You need specific examples, specific figures, 

documentation, and so forth? 

Ms. ESPINEL. Yes. Exactly. 

Mr. SMITH. Okay. Thank you, Espinel [sic]. 

Ms. ESPINEL. Thank you. 

Mr. SMITH. All right. Thank you all for being here. We appreciate 

your testimony. It’s been very, very helpful. And I might add, I 

think this is the first such hearing that this Subcommittee has had 

on this important subject in probably many, many years. But we 

intend to go forward and work with—work with Ms. Espinel and 

our new ambassador to try to effectuate change of the kind that we 

want. 

We are going to adjourn this hearing now, and then in about 5 

minutes we will resume our hearing schedule and start the next 

hearing. 

[Whereupon, at 12:15 p.m., the Subcommittee was adjourned.] 

(105)

Part II

INTELLECTUAL PROPERTY THEFT IN RUSSIA 

TUESDAY, MAY 17, 2005

HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON COURTS, THE INTERNET,

AND INTELLECTUAL PROPERTY, 

COMMITTEE ON THE JUDICIARY, 

Washington, DC.

The Subcommittee met, pursuant to notice, at 12:26 p.m., in 

Room 2141, Rayburn House Office Building, the Honorable Lamar 

Smith (Chair of the Subcommittee) presiding. 

Mr. SMITH. The Subcommittee on Courts, the Internet, and Intellectual Property will come to order. I will recognize myself and the 

Ranking Member for opening statements, and then we will get to 

the witness testimony. 

This, the second of our two back-to-back oversight hearings on 

the subject of international intellectual property theft, will focus on 

the state of IP enforcement in the Russian Federation. In our first 

hearing, the Subcommittee received testimony that China, the single largest source of counterfeit and pirated products worldwide, 

has accelerated their theft of intellectual property and failed to 

adopt enforcement procedures that are designed to deter such actions. 

The Russian Federation now seeks to become a member of the 

World Trade Organization, and is counting on the support of the 

United States Government and the American people for that privilege. Recently, Secretary of State Condoleezza Rice acknowledged 

the reality that Russia lacks ‘‘the legal framework to prosecute 

those who engage in piracy,’’ and stated that this ‘‘really must be 

taken care of before WTO accession.’’ However, the adoption of a legal framework alone, which is not 

accompanied by a demonstrated and sustained commitment to 

criminal enforcement of large-scale commercial piracy and counterfeiting, is not enough to gain U.S. support for Russian accession. 

This commitment must be made at the highest levels, and it must 

be made before the American people endorse Russian accession to 

the WTO. 

Russian President Putin stated last month ‘‘Our bureaucracy is 

still to a large extent isolated, and is undermined by corruption, irresponsibility, and incompetence.’’ Anyone familiar with the Russian Federation track record for protecting and enforcing intellectual property would concur with President Putin’s statement. 

106

Last Thursday’s Wall Street Journal contained a report entitled, 

‘‘In Russia, Politicians Protect Movie and Music Pirates.’’ It describes how certain Russian elected officials thwart police investigations of IP crimes, and in fact profit by doing so. 

As our witnesses today will testify, the grim reality is that lawlessness, physical danger, and corruption are part of the daily challenges faced by businesses and individuals who seek to conduct 

business or protect their IP rights in Russia. They will provide 

compelling evidence that the situation has actually worsened, rather than improved, in recent years. 

The Members of this Subcommittee will receive evidence that the 

Russian government is the landlord for as many as 18 optical disc 

plants that annually produce tens of millions of illicit copyrighted 

works for export to mature markets, and that the government has 

failed to even inspect the vast majority of these facilities, let alone 

investigate or prosecute any of the criminals. On the rare occasion 

when someone is investigated for IP theft in Russia, the most likely 

outcome is that no prosecution will occur and that any conviction 

will result in a suspended sentence. 

If Russia is permitted to join the WTO without first demonstrating a sustained and serious commitment to the enforcement 

of IP rights, then the real winners will be the criminal syndicates. 

We owe it to the Russian people and to the American people to consider this record before the U.S. advocates that the Russian government be rewarded with accession to the WTO. 

That concludes my statement, and the gentleman from California 

is recognized for his. 

Mr. BERMAN. Thank you, Mr. Chairman. Russia is considered by 

the copyright industries as second only to China as an intellectual 

property pirate. In fact, that Wall Street Journal article that you 

sent around, Mr. Chairman, its paragraph says, ‘‘While China may 

be the world’s top producer of illegal computer software, CDs, and 

DVDs, at least authorities there are getting serious about cracking 

down.’’ Well, I’m not sure that’s established. But then it points out, 

‘‘In Russia, the Kremlin has been promising to deal with the problem for years, but industry officials say under President Vladimir 

Putin it’s gotten worse, not better.’’

Almost 2 years ago, a number of Members of Congress sent a letter to President Bush to focus his attention on the escalating problem in Russia. Yet Russian plants are still producing tens of millions of pirated optical discs for export. U.S. copyright industries 

continue to lose billions of dollars, and the piracy rates are estimated at 70 percent for every copyright sector. 

In February, the International Intellectual Property Alliance released its 2005 Special 301 Recommendations, a document that Mr. 

Schwartz will address in his testimony. The options laid out are 

time-sensitive. We must consider one or all of the following actions: 

Recommending the designation of Russia as a priority foreign country; or conditioning Russia’s entry into WTO on meaningful copyright enforcement; or denying Russia its GSP benefits. 

We must move quickly, because each day that goes by without 

a firm stance by the Administration on these possibilities lessens 

the importance of this issue in Russia’s eyes. 

107

When we had a hearing on international copyright piracy 2 years 

ago, a constituent of mine testified to her own personal experience 

of intellectual property theft by the Russian government. Before us 

today are representatives of the movie and music industry who will 

testify to the effect Russian piracy has had on that segment of the 

American economy. 

Whether one pirates from an individual or from a corporation, 

the act of piracy must be stopped. The same holds true whether the 

piracy is sponsored by the government itself, or funded by individual citizens. While the concept of private ownership of property 

is relatively new in many of the formerly communist countries, the 

value has not been lost on them. 

Any government that wants the benefits of trade with America 

and who is currently benefitting from trade preferences, like Russia, has a responsibility to respect American innovation. Any citizen of a state must recognize basic rules of law, such as a prohibition on theft. 

The Russian government has pointed to the high price of legitimate products coming from the U.S. as a justification for piracy. 

This is tantamount to blaming the victim for the crime. It is clear 

that price is not the cause of piracy. The pirated goods contain language tracks that include languages that are not Russian. The 

goal, therefore, is not simply to help Russians afford DVDs of movies; piracy is providing a business opportunity to services—to service those that live outside of Russia. 

We have an opportunity now, in trying to address the piracy situations in Russia, to learn from our failures with intellectual property enforcement in China. This came up at the last hearing. Before permitting Russia’s accession to the WTO, we must require 

stricter enforcement of intellectual property rights. 

I look forward to hearing the witnesses describe the extent of piracy in Russia, and any suggestions they have to curtail the problem. And I look forward to working with you, Mr. Chairman, to address the importance of achieving significant reform of Russian intellectual property enforcement before admitting Russia into the 

WTO. Thank you, Mr. Chairman. 

Mr. SMITH. Thank you, Mr. Berman. And may I ask the witnesses to stand and be sworn in, if you will. 

[Witnesses sworn.] 

Mr. SMITH. Thank you. Please be seated. 

Our first witness is Victoria Espinel, who is the Acting Assistant 

U.S. Trade Representative for Intellectual Property in the Office of 

the United States Trade Representative. In that capacity, Ms. 

Espinel serves as the principal U.S. trade negotiator on IP. Ms. 

Espinel’s office chairs the interagency committee that conducts the 

annual Special 301 Review of international protection of intellectual property rights. The latest report was published on April 29, 

2005. 

She holds an LLM from the London School of Economics, a JD 

from Georgetown University, and a BS in foreign service from 

Georgetown University School of Foreign Service. After serving as 

the government witness in our China hearing earlier this morning—or this morning—Ms. Espinel is now a veteran who is seaVerDate 0ct 09 2002 14:31 Aug 11, 2005 Jkt 000000 PO 00000 Frm 00111 Fmt 6601 Sfmt 6601 G:\WORK\COURTS\051705A\21217.001 HJUD1 PsN: 21217
108

soned in delivering testimony to Congress. We look forward to her 

return testimony, as well. 

Our second witness is Eric Schwartz, Vice President and Special 

Counsel to the International Intellectual Property Alliance, IIPA, a 

private-sector coalition of six U.S. trade associations which represents over 1,300 companies that produce, and distribute materials protected by copyright laws throughout the world. 

Mr. Schwartz is a partner at Smith and Metalitz, where he specializes in copyright, entertainment, and information law. Mr. 

Schwartz was the principal negotiator of the copyright provisions 

in the U.S.-USSR trade agreement of 1990, and he is the subject 

matter expert for IIPA on copyright matters that involve the Russian Federation and Eastern and Central Europe. A graduate of 

Johns Hopkins University, Mr. Schwartz obtained a JD from the 

American University’s Washington College of Law. 

Our next witness is Mrs. Bonnie Richardson, who serves as the 

Senior Vice President for International Policy at the Motion Picture 

Association of America, where she is responsible for international 

policies affecting the production and distribution of filmed entertainment in worldwide markets. 

Before joining MPAA, she served as the director for services negotiations for USTR, and as a foreign service officer at the Department of State. Mrs. Richardson earned her master’s degree at 

Johns Hopkins School of Advanced International Studies, and her 

undergraduate degree from the University of Delaware. 

Our final witness is Matthew T. Gerson, the Vice President for 

Public Policy and Government Relations at the world’s largest 

music company, the Universal Music Company. Mr. Gerson has 

been with Universal for 10 years. Prior to that, he worked at the 

MPAA. He is a graduate of Georgetown University Law Center, 

and Tufts University. 

We welcome you all, and look forward to your very expert testimony. And as before, Ms. Espinel, we’ll begin with you. 

TESTIMONY OF VICTORIA ESPINEL, ACTING ASSISTANT U.S. 

TRADE REPRESENTATIVE FOR INTELLECTUAL PROPERTY, 

OFFICE OF U.S. TRADE REPRESENTATIVE 

Ms. ESPINEL. Thank you. Chairman Smith and Members of the 

Committee, thank you for the opportunity to address your concerns 

over inadequate protection and enforcement of intellectual property 

rights in Russia. 

Protection and enforcement of America’s IP rights in Russia is an 

issue that is of the utmost concern to USTR and to the Administration, and is one that we take very seriously. Due to the importance 

of this issue and the prevalence of piracy in Russia, Presidents 

Bush and Putin have discussed improving protection of intellectual 

property in Russia at several recent summits, including most recently at their meeting earlier this month in Moscow. Successfully 

combatting the rampant piracy and counterfeiting that currently 

exists in Russia is a top priority. 

The level of copyright piracy in Russia has increased dramatically, and the adverse effects on American owners of copyrights are 

compounded by the fact that Russia has become a major exporter 

of pirated materials. In addition to sales in Russia of illegal music, 

109

movies, and computer software, Russia’s pirates are exporting large 

volumes of illegal products to other markets. As a result, Russia is 

on the 2005 Special 301 Priority Watch List announced on April 29. 

In addition, due to the severity of the problem in Russia, USTR 

announced that the Administration will conduct an out-of-cycle review this year to monitor progress by Russia on a number of IP 

issues. We are also continuing interagency review of a petition filed 

by the U.S. copyright industries to withdraw some or all of Russia’s 

benefits under the U.S. Generalized System of Preferences program. 

USTR and other agencies have been, and will continue to be, 

very engaged with the Russian government at all levels to develop 

an effective IP regime and strengthen enforcement in Russia. We 

have an ongoing bilateral working group with the Russian Federal 

Service for Intellectual Property, Patents, and Trademarks, 

Rospatent, the agency responsible for most IP matters in Russia, 

which has convened several times this spring to discuss a wide 

range of IP issues. Recent discussions have focused on Russia’s enforcement regime; legislative deficiencies, including the need for a 

comprehensive regulatory regime on optical media production; and 

Internet piracy. 

Through these and other ongoing efforts, we have seen an improvement in cooperation at the working level on IP issues, especially from Rospatent and the Ministry of the Interior. Based upon 

case information provided by our industry, embassy officials meet 

regularly with senior representatives of the Ministry of Interior, 

the prosecutors, Rospatent, and the Supreme Court, to track and 

press for enforcement in major criminal cases involving optical disc 

manufacturing facilities and Internet piracy. 

We are also working on IP issues in the context of Russia’s WTO 

accession negotiations. We have continuing concerns that Russia’s 

current IP regime does not meet WTO requirements related to protection of undisclosed information, geographic indications, and IP 

enforcement. We are raising these and other concerns in the accession negotiations, and have made it clear to the Russian government that progress on IP will be necessary to complete the accession progress. 

Supplementing these efforts directly with Russia, the Administration is taking comprehensive action to block trade around the 

world in counterfeit and pirated goods through the Strategy Targeting Organized Piracy, or STOP, initiative. STOP is a U.S. government-wide initiative begun in October 2004 to empower U.S. 

businesses to secure and enforce their rights overseas, to stop fakes 

at our borders, to expose international counterfeiters and pirates, 

to keep global supply chains free of infringing goods, to dismantle 

criminal enterprises that steal U.S. intellectual property, and to 

reach out to like-minded U.S. trading partners that are facing similar problems in order to build an international coalition to stop 

counterfeiting and piracy worldwide. Addressing Russia’s growing 

exports of pirate and counterfeit products is part of this initiative. 

Our work has brought about some improvements, particularly 

with respect to the content of Russia’s laws; but much more will 

need to be done in order to reduce the level of piracy and counterfeiting. As part of its effort to bring Russia’s IP regime into compliVerDate 0ct 09 2002 14:31 Aug 11, 2005 Jkt 000000 PO 00000 Frm 00113 Fmt 6601 Sfmt 6601 G:\WORK\COURTS\051705A\21217.001 HJUD1 PsN: 21217
110

ance with the TRIPS Agreement, Russia amended its copyright law 

in 2004 to provide protection for preexisting works and for sound 

recordings. Russia has amended a number of other laws as well, including its law on patents and protection of computer software and 

databases. Although these amendments demonstrate some commitment to strengthening its intellectual property laws, further improvements in Russia’s laws are necessary. 

On the enforcement side, we have seen far less progress. While 

Russian law enforcement agencies have taken some actions, including an increased number of raids by police, these actions have not 

resulted in the kind of robust prosecution and meaningful penalties 

that would deter the significant increase in piracy that our industry has observed in Russia. 

Enforcement efforts in Russia must increase dramatically in 

order to combat the rising piracy and counterfeiting levels. We 

need to see improvements in enforcement of Russia’s criminal law 

against piracy; improved enforcement at the border; and better administrative and civil procedures, such as providing for ex parte 

procedures in civil cases. 

We are very concerned with the amount of excess optical media 

capacity in Russia and with Russia’s lack of a comprehensive regulatory regime to control illegal optical media operations. Although 

Russian authorities have recently taken some positive steps to 

strengthen optical disc licensing procedures, Russia must establish 

an effective system for inspecting the optical media plants, to ensure that only authorized product is being made. 

On the criminal enforcement side, we see frequent delays in prosecutions and then imposition of minimal penalties, including many 

suspended sentences. Frequently, pirated goods that have been 

seized are not destroyed, but are returned to the market. We have 

raised these issues with Russia, and are seeking decisive actions to 

address these growing problems, such as inspecting optical media 

plants, permanently shutting down illegal production, and taking 

down Internet sites that are spreading pirated material. 

We share in our industries’ frustration—and your frustration, I 

would imagine—over the lack of significant progress on the part of 

Russia’s authorities. USTR is committed to utilizing effectively the 

tools currently available to us to press Russia to implement immediate concrete measures to combat piracy and counterfeiting and 

reduce the losses to our industry. 

Despite our close engagement and continued work with the Russian government, Russia has made little progress in permanently 

closing down illegal production plants and bringing offenders to 

justice. Political will at the highest levels will be needed in order 

to see a reduction in piracy levels in the near term. 

USTR will continue to monitor Russia’s progress in bringing its 

IP regime in line with international standards through the Special 

301 out-of-cycle review that we have just announced, the ongoing 

GSP review, and the WTO accession discussions. 

Progress will be critical for our bilateral relationship with Russia, and will have implications for Russia’s accession to the WTO. 

Ultimately, success will depend on the political will of Russia’s 

leaders to tackle the underlying problems of corruption and orgaVerDate 0ct 09 2002 14:31 Aug 11, 2005 Jkt 000000 PO 00000 Frm 00114 Fmt 6601 Sfmt 6601 G:\WORK\COURTS\051705A\21217.001 HJUD1 PsN: 21217
111

nized crime. The STOP initiative will also be employed to address 

the significant intellectual property problem. 

We remain committed to working with Congress, and this Committee in particular, in pressing Russia to effectively combat and 

reduce the unacceptable levels of piracy and counterfeiting which 

plague our industry. 

Mr. Chairman and Members of the Committee, thank you for 

providing me with the opportunity to testify. And I look forward to 

your questions. 

[The prepared statement of Ms. Espinel follows:]

PREPARED STATEMENT OF VICTORIA ESPINEL

Chairman Smith and members of the Committee, thank you for the opportunity 

to address your concerns over ineffective protection and enforcement of intellectual 

property rights in Russia. 

Protection and enforcement of American’s intellectual property rights (IPRs) in 

Russia is an issue that is of utmost concern to USTR and the Administration and 

is one that we take very seriously. Due to the importance of this issue and the prevalence of piracy in Russia, Presidents Bush and Putin have discussed improving 

protection of IPRs in Russia at several recent summits, including at their meeting 

earlier this month in Moscow. Successfully combating the rampant piracy and counterfeiting that currently exists in Russia is a top priority. 

As you have heard from other witnesses here today, U.S. copyright, trademark, 

and patent-based industries are experiencing huge losses resulting from ineffective 

or, in some cases, non-existent enforcement—losses that, in some cases, are continuing to increase over the past year. 

The level of copyright piracy in Russia has increased dramatically and the adverse 

effects on American owners of copyrights are compounded by the fact that Russia 

has become a major exporter of pirated materials. In addition to sales in Russia of 

illegal music, movies and computer software, Russia’s pirates are exporting large 

volumes of illegal products to other markets. As a result, Russia is on the 2005 Special 301 Priority Watch List announced on April 29. In addition, due to the severity 

of the problem in Russia, USTR announced that the Administration will conduct an 

out-of-cycle review this year to monitor progress by Russia on numerous IPR issues. 

We are also continuing interagency review of a petition filed by the U.S. copyright 

industries to withdraw some or all of Russia’s benefits under the U.S. Generalized 

System of Preferences (GSP) program. 

USTR and other agencies have been and will continue to be very engaged with 

the Russian Government at all levels to develop an effective IPR regime and 

strengthen enforcement in Russia. We have an ongoing bilateral working group with 

the Russian Federal Service for Intellectual Property, Patents, and Trademarks 

(Rospatent), the agency responsible for most IPR matters in Russia, which has convened several times this spring to discuss a wide range of IPR issues. Recent discussions have focused on Russia’s enforcement regime, legislative deficiencies—including the need for a comprehensive regulatory regime on optical media production, 

and Internet piracy. 

We are working with other U.S. Government agencies and our Embassy in Moscow to more actively engage senior Russian officials and law enforcement representatives. Our Embassy has increased efforts on the ground, such as conducting a series of regional workshops on IPR enforcement. We will have held a workshop in 

every Russian region by the end of 2005. These conferences are designed to more 

actively engage Russian officials from the Ministry of the Interior’s economics 

crimes unit, Russian customs, local prosecutors’ offices and the judiciary at the regional level. Through these and our other ongoing efforts, we have seen an improvement in cooperation at the working-level on IPR issues, especially from Rospatent 

and the Ministry of Interior. Based upon case information provided by U.S. industry, Embassy officials meet regularly with senior representatives of the Ministry of 

Interior, the Procuracy (prosecutors), Rospatent, and the Supreme Court to track 

and press for enforcement in major criminal cases involving optical disk manufacturing facilities, as well as in Internet piracy cases. 

We are also working on IPR issues in the context of Russia’s WTO accession negotiations. We have continuing concerns that Russia’s current IPR regime does not 

meet WTO requirements related to protection of undisclosed information, geographic 

indications and enforcement. We are raising these and other concerns in the accesVerDate 0ct 09 2002 14:31 Aug 11, 2005 Jkt 000000 PO 00000 Frm 00115 Fmt 6601 Sfmt 6621 G:\WORK\COURTS\051705A\21217.001 HJUD1 PsN: 21217
112

sion negotiations and have made it clear to the Russian Government that progress 

on IPR will be necessary to complete the accession process. 

Supplementing these efforts directly with Russia, the Administration is taking 

comprehensive action to block trade around the world in counterfeit and pirated 

goods through the Strategy Targeting Organized Piracy (STOP!). STOP! is a U.S. 

government-wide initiative begun in October 2004 to empower U.S. businesses to secure and enforce their intellectual property rights in overseas markets, to stop fakes 

at U.S. borders, to expose international counterfeiters and pirates, to keep global 

supply chains free of infringing goods, to dismantle criminal enterprises that steal 

U.S. intellectual property and to reach out to like-minded U.S. trading partners in 

order to build an international coalition to stop counterfeiting and piracy worldwide. 

Addressing Russia’s growing exports of pirated and counterfeit products is part of 

this initiative, and Russian officials have repeatedly express interest in cooperating 

with us on the initiative. 

Our work has brought about some improvements, particularly with respect to the 

content of Russia’s laws, but much more will need to be done in order to reduce the 

level of piracy and counterfeiting. As part of its effort to bring Russia’s IPR regime 

into compliance with the obligations of the TRIPS Agreement, Russia amended its 

Copyright Law in 2004 to provide protection for pre-existing works and sound recordings. Russia has amended a number of other laws as well, including its laws 

on patents and protection of computer software and databases. Although these 

amendments demonstrate Russia’s commitment to strengthening its IPR laws, further improvements in Russia’s laws are necessary. 

On the enforcement side, we have seen far less progress. While Russian law enforcement agencies have taken some actions, including an increased number of raids 

by police, these actions have not resulted in the kind of robust prosecution and 

meaningful penalties that would deter the significant increase in piracy that our industry has observed in Russia. Enforcement efforts in Russia must increase dramatically in order to combat rising piracy and counterfeiting levels. We need to see 

improvements in enforcement of Russia’s criminal laws against piracy and counterfeiting, improved enforcement at the border to prevent exports of pirated and counterfeit products and better administrative and civil procedures for IPR enforcement, 

such as providing for ex parte procedures in civil cases. 

We are very concerned with the amount of excess optical media capacity in Russia 

and with Russia’s lack of a comprehensive regulatory regime to control illegal optical media operations. Our industry estimates that the capacity of known plants in 

Russia is 371.6 million discs while legitimate domestic demand is around only 30 

million discs. Illegal optical media from Russia has been found in markets around 

the world. Russia lacks an effective system for inspection of optical media production plants to ensure that only authorized product is being made. However, Russian 

authorities recently have taken some positive steps to strengthen optical disc licensing procedures. 

On the criminal enforcement side, we see frequent delays in prosecutions and 

then imposition of minimal penalties, including many suspended sentences. Frequently, pirated goods that have been seized in a case are not destroyed, but are 

returned to the market. The U.S. copyright industry estimates that 70 percent of 

seized pirated products go back into the stream of commerce. We are also seeing 

an increase in piracy on the Internet. Several major illegal websites are operating 

out of Russia, one of which our industry reports is now the largest portal for pirated 

product in the world. We have raised these issues with Russia and are seeking decisive actions to address these growing problems such as inspecting optical media 

plants, permanently shutting down illegal production, and taking down Internet 

sites that are spreading pirated material. 

We share in our industries’ frustration over the lack of significant progress on the 

part of Russia’s authorities. USTR is committed to utilizing effectively the tools currently available to us to press Russia to implement immediately concrete measures 

to combat piracy and counterfeiting operations and reduce the losses to U.S. industries. Despite our close engagement and continued work with the Russian Government, Russia has made little progress in permanently closing down illegal production plants and bringing offenders to justice. Political will at the highest levels will 

be needed in order to see a reduction in piracy levels in the near term. 

USTR will continue to monitor Russia’s progress in bringing its IPR regime in line 

with international standards through the Special 301 out-of-cycle review, the ongoing GSP review, and WTO accession discussions. Progress will be critical for our bilateral relationship with Russia and will have implications for Russia’s accession to 

the WTO. Ultimately, success will depend on the political will of Russia’s leaders 

to tackle the underlying problems of corruption and organized crime. The STOP! initiative will also be employed to address this significant IPR problem. We remain 

113

committed to working with the Congress and this committee in particular in pressing Russia to effectively combat and reduce the unacceptable levels of piracy and 

counterfeiting which plague our industry. 

Mr. Chairman and members of the Committee, thank you for providing me with 

the opportunity to testify. I look forward to your questions.

Mr. SMITH. Thank you, Ms. Espinel. 

Mr. Schwartz. 

TESTIMONY OF ERIC SCHWARTZ, VICE PRESIDENT AND SPECIAL COUNSEL, INTERNATIONAL INTELLECTUAL PROPERTY 

ALLIANCE (IIPA) 

Mr. SCHWARTZ. Thank you, Chairman Smith, Mr. Berman, and 

Members of the Subcommittee, for giving IIPA the opportunity to 

testify on the copyright problems we’re confronting in Russia. 

I’ve provided a detailed report on some of the problems, and will 

use my time to just give you a brief overview across all the copyright sectors of the problems our industries are facing in Russia, 

as well as some suggestions that we think the U.S. Government 

could take to improve the situation there. 

We’ve provided a lot of statistics, and the statistics only tell a 

part of the story. What they do not show is the poor reaction over 

the past 10 years of the Russian government to the piracy problem. 

The optical disc production and distribution problem, which is our 

most serious problem—that is, the making of CDs and DVDs at the 

34 plants—did not spring up overnight. And this problem is not 

unique to Russia. It has been successfully addressed in other countries. So we know that it can be fixed. 

IIPA first raised this problem with the Russian government in 

1996, when there were two plants. The reason the problem has 

been allowed to escalate to the 34 current plants—that is, 34 

known plants—eight of which are dedicated to making DVDs, and 

with a total plant capacity over 400 million discs a year, has been 

because the Russian government has failed to properly act. In 

short, what we have is a legacy of failed commitments. 

On a personal note, I can tell you the piracy situation in Russia 

is the worst it has been in the 16 years I’ve been working on Russian and, before that, Soviet copyright issues. Let me show you a 

few of the statistics that we’re confronting. First, we estimate that the copyright industries lost over $1.7 bil- lion last year alone to copyright piracy in Russia; over $6 billion 

in the last 5 years. At the same time that we’re losing $1.7 billion last year, Russia enjoyed over $515 million in GSP benefits, $430 

million in 2003. In short, Russia has not earned the right to enjoy 

these benefits. They are neither in compliance with the GSP requirements for enjoyment of the benefits, and they are not taking 

the necessary actions to reduce piracy. 

Our rate, as noted in the opening statements, hover around 70 

percent at the low end, and 87 percent on the high end. We know 

from forensic evidence that at least 24 of the 34 plants are known 

to be producing some pirate product. We don’t know how much, because there is not proper plant inspections ongoing. We also know 

that Russian-produced optical discs have been positively identified 

in 27—at least 27—countries. 

Let me give you an example of some of the actions that were undertaken last year, and the results. In 2004, the Russian governVerDate 0ct 09 2002 14:31 Aug 11, 2005 Jkt 000000 PO 00000 Frm 00117 Fmt 6601 Sfmt 6601 G:\WORK\COURTS\051705A\21217.001 HJUD1 PsN: 21217
114

ment and our industry agreed that there were eight actions taken 

against the Russian plants. But they were unsuccessful, for three 

reasons: One, most of the seized material ends back in the marketplace—by some industry experts, as much as 70 percent. Two, 

every single plant that was raided remained in operation throughout the year; they have never closed a plant. And third, there were 

few, if any, criminal prosecutions; almost all end in suspended sentences. I was looking back at my notes, and I believe it may be the 

case that in the last 10 years there have only ever been two criminal convictions that ended in served sentences. 

We’ve suggested six steps to the Russian government on how to 

improve the optical disc problem. Step number one is easy. All they 

have to do is conduct surprise raids at 34 plants. This could be 

done in a matter of weeks. 

As for new legislation, which Ms. Espinel has mentioned, we 

can’t wait for new legislation. Yes, there are deficiencies in their 

optical disc regulatory scheme, but it took them 12 years to fix the 

deficiencies in their copyright law, and all the while the U.S. Government was pressing them, as well as the IIPA, on these shortages. 

The legacy of failed commitments, though, is very serious. At all 

levels of the Russian government—as you’ve heard, even at the 

presidential level—these issues have been discussed without success. Beginning in 1999, when the Russian government first acknowledged that it had an optical disc problem—and remember, we 

raised it with them in 1996, so three years before—they acknowledged a problem; they acknowledged they would take care of the 

problem. 

In 2002, they agreed in negotiation with the U.S. Government to 

create an action plan, something comprehensive to fix the optical 

disc problem. They never provided the action plan, and we never 

heard about the plan ever again after those rounds of negotiations. 

Instead, they created an inter-ministerial commission, which meets 

quarterly and issues reports on the ‘‘progress’’ that they’re making 

on optical disc piracy problems. 

As one example of the shortcomings of the government. This last 

October, we spent a considerable amount of time in discussions 

with them. And the Russian government officials told us that they 

would convene a meeting in December with the 18 plants known 

to be on leased or limited-access government property. 

The meeting never took place. And the reason the meeting never 

took place: The government later acknowledged they couldn’t identify who the owners of the plants are. Because they have no effective plant licensing system, they don’t even know how to identify 

who they should be meeting with to stop these actions. 

So we’ve suggested three things to the U.S. Government. For the 

past 9 years, Russia has been on the priority watch list, and it’s 

time to take some different course of action. The first is to condition Russia’s entry into the World Trade Organization on meaningful copyright enforcement. 

The second is, when the out-of-cycle review is over, to designate 

Russia as a priority foreign country, and to get to the business of 

forcing them with deadlines, to either fix the problem or to face 

trade sanctions. 

115

And the third, and probably simplest for the U.S. Government, 

would be to suspend or deny their eligibility for GSP benefits; 

which could be done immediately. We filed the petition in 2000 

with the U.S. Government. It was accepted in 2001. I’ve testified 

twice on the issue, and regularly file updates on the shortcomings 

of the Russian government. And we think they could just suspend 

the GSP benefits. 

In short, we think that the time for the Russian government is 

up. And looking at the clock, my time is up, as well. So I will thank 

you, and be happy to answer any questions. 

[The prepared statement of Mr. Schwartz follows:]

PREPARED STATEMENT OF ERIC J. SCHWARTZ

Mr. Chairman, Ranking Member, and Members of the Subcommittee, the International Intellectual Property Alliance (IIPA) and our members thank you for the 

opportunity to testify today on the piracy problems we are confronting in Russia. 

The IIPA is a private sector coalition representing the U.S. copyright-based industries in bilateral and multilateral efforts to improve protection and enforcement of 

copyrighted materials worldwide. The IIPA is comprised of six trade associations 

representing over 1,300 U.S. companies who produce and distribute materials 

throughout the world. The copyright industries contributed over $625 billion to the 

U.S. GDP, or 6% of the U.S. economy, and almost 5.5 million jobs or 4% of U.S. 

employment, in 2002. 

The copyright businesses and the individual creators that work with them are 

critically dependent on having strong copyright laws in place in foreign countries 

and having those laws effectively enforced. In fact, most of the copyright sectors 

generate over 50% of their revenue from outside the U.S. This is why we are so concerned with the problems of weak legal regimes and poor enforcement in China, 

Russia, and the many other countries detailed in our annual Special 301 Report to 

the U.S. government. 

Simply put, Russia’s current copyright piracy problem is enormous. I have worked 

on U.S.—Russian copyright matters for over 16 years trying to improve the legal 

regime in Russia—including adoption of better copyright and related enforcement 

laws, as well as working to improve on-the-ground enforcement. The present piracy 

problem in Russia is the worst it has been in my 16 years experience. Piracy of all 

copyright materials—motion pictures, records and music, business and entertainment software, and books—is at levels ranging from a low of about 66% to a high 

of 87%—totally unacceptable for a country and economy the size and sophistication 

of Russia. 

Let me begin by describing the scope and nature of the problem in Russia from 

our vantage point. 

SCOPE AND NATURE OF THE PIRACY PROBLEM IN RUSSIA

Russia has one of the worst piracy problems of any country in the world, second 

only to China. The IIPA estimates that the copyright industry lost over $1.7 billion 

due to piracy last year, and over $6 billion in the last five years in Russia. As noted, 

the piracy rates hover around 70% of the market or higher for every copyright sector. In short, Russia’s criminal enforcement system has failed to stem persistent 

commercial piracy. 

The number of optical disc (i.e., CD and/or DVD) plants in Russia has more than 

doubled in just the last three years to number at present, at least 34 plants, including eight dedicated DVD plants. There are a total of 80 known operational production lines. Production capacity has nearly tripled as criminal operations have encountered little hindrance in expanding their activities. Even more troubling, IIPA 

is aware of nine production plants located on the facilities of the Russian government, so-called restricted access regime enterprises (although the Russian government has publicly acknowledged that there may be as many as 18 such plants). Russia’s annual manufacturing capacity now stands conservatively at over 370 million 

CDs and additionally over 30 million DVDs, despite the fact that the demand for 

legitimate discs is unlikely to exceed 80 million in all formats. 

Forensic evidence indicates that at least 24 of the 34 plants are known to be producing pirate product. Of course, without proper surprise inspection procedures in 

place, there is no way of knowing for certain the size and scope of what all the 

plants are producing. Russian-produced optical discs (CDs) have been positively 

116

identified in at least 27 countries. So, the harm illegal Russian plants are doing far 

exceeds the Russian marketplace. 

In 2004, there were eight actions taken by the Russian government against the 

optical disc (‘‘OD’’) CD/DVD plants, including raids and seizures of illegal materials 

according to our industry, and Russian government, reports. The raids are obviously 

a positive step. But, the outcome of the raids is telling: 

First, much of the seized material ends up back in the marketplace either through 

lax enforcement (or corruption), laws permitting charitable sales of such property, 

or the conclusion without prosecution of criminal investigations. As an example, 

over half of the one million illegal CD and DVD copies seized in a raid last year 

‘‘disappeared’’ before the case went to trial. 

Second, all of the optical disc plants that were raided in 2004 remained in operation after those raids. In some cases, truckloads of illegal material were seized 

from the same plants by Russian government enforcement officials—and still these 

same plants remain in operation. 

Third, the plant owners remain unscathed by the criminal justice system. A few 

people employed by the plants were convicted—after extensive delays in criminal investigations—but virtually all received suspended sentences. So, there is no deterrence to continuing to conduct commercial piracy in Russia at present. 

In fact, the record industry (International Federation of Phonogram Producers, 

IFPI) reports that in the past two years, of the 24 cases IFPI is cooperating on, 21 

of those 24 cases remain without a resolution—that is, no prosecutions of the operators of illegal CD plants, as investigations have dragged on. In the other three cases, 

the pirate CDs were destroyed, but no deterrent sentences were handed down. The 

only exception to this pattern (which has been true for years) was in June 2002 

when the Disc Press MSK plant (raided in September 1999) was finally closed and 

a Zelenograd court handed down 4-year prison sentences to two operators of the 

plant. In February 2004, there was a one-year conditional sentence given to a manager of the Zelenograd plant which was raided in December 2002, resulting in the 

seizure of 234,493 pirate CDs (over 59,000 were music CDs). The more typical case 

is that of the Synograph plant, raided in October 2000. There was a four year criminal investigation aimed at the director of the plant; a court hearing is scheduled 

for 2005, and the plant is still in operation. 

The optical disc problem that IIPA confronts in Russia is one that has been regulated in virtually all other countries where we have found these levels of massive 

production of pirate product—countries like Taiwan, China, Hong Kong, Macau, 

Bulgaria and Malaysia. Russia’s regulation of the plants is virtually non-existent, 

and based on a weak 2002 licensing law. Quite simply, Russia is the largest unregulated and un-enforced producer of pirate optical disc product in the world. 

To solve this problem, Russia must undertake vigorous criminal enforcement 

backed by the highest political officials in the government, since much of the piracy 

is undertaken by organized criminal syndicates. For example, according to the Entertainment Software Association (ESA), Russian crime syndicate pirates of 

videogame material are so well-entrenched that they ‘‘label’’ their product. The Motion Picture Association of America (MPAA) reports that producers of motion picture 

DVDs produce export-only copies of DVDs because they are in seven or eight foreign 

languages, not including Russian. 

Most of our testimony today is limited to problems pertaining to hard-copy piracy, 

but there are growing problems related to digital piracy as well. In fact, the world’s 

largest server-based pirate music website—allofmp3.com—remains in operation 

after a criminal prosecutor in early 2005 reviewed the case and determined (wrongly) that current Russian copyright law could not prosecute or prevent this type of 

activity. In fact, this interpretation of the Russian law is contrary to all the assurances the Russian government gave the U.S. government and private sector during 

the years-long adoption of amendments to the 1993 Copyright Law; those amendments were finally adopted in July 2004. 

The business software industry (Business Software Alliance, BSA) is confronting 

its own unique digital piracy problem relating to copyright enforcement. In short, 

the Russian government has failed to take effective action against the broad distribution of counterfeit software over the Internet, primarily through unsolicited emails (spam) originating from groups operating in Russia. Separately, the BSA has 

had success with Russian law enforcement agencies taking action against channel 

piracy (i.e., illegal software preloaded on computers sold in the marketplace), not 

only in the Moscow area, but also in other Russian regions, and has made some 

progress in software legalization in the public sector. 

The book industry, the Association of American Publishers (AAP) reports widespread piracy of an array of reference works and textbooks, increasingly a large 

market in Russia as the penetration of English-language materials in the market 

117

grows. Lax enforcement, including poor border enforcement—endemic to all copyright sectors—results in the import (and export) of illegal materials. In the book industry this includes unlicensed imports of pirated reprints from neighboring countries, and pirated reference books and medical texts; there is also widespread illegal 

commercial photocopying, especially in the academic sector. 

We have indicated the devastating consequences to the U.S. copyright owners and 

authors. The harm to the Russian economy is enormous as well. The motion picture 

industry alone estimates lost tax revenues on DVDs and videos in Russia was $130 

million last year. In another study undertaken by the software industry, it was estimated that if levels of piracy could be reduced to regional norms (that is, realistic 

levels), ten of thousands of jobs and several hundred million dollars in tax revenues 

would be realized from that sector alone in Russia. 

THE RUSSIAN GOVERNMENT’S LEGACY OF FAILED COMMITMENTS

The performance of the Russian government over the past decade can be summed 

up as representing a legacy of failed commitments on obligations to the United 

States and the broader international community. A short list of these failed commitments is as follows: 

Optical Disc Enforcement Commitments: The most egregious problem is that illegal production has devastated the domestic Russian market, and exports of Russianproduced pirated optical media (CDs, DVDs, etc.) are causing serious damage to legitimate market worldwide, as witnessed by the huge amount of pirated material 

originating in Russia that is found abroad. 

In 1996, the IIPA first identified optical disc plant production as a problem and 

suggested the need for an enforcement ‘‘action plan’’ to address this problem, including legislative reforms. Two optical disc (‘‘OD’’) plants were identified in the IIPA’s 

February 1996 Special 301 Report. As noted, there are now 34 CD plants, with a 

total capacity of 370 million discs per year. 

At all levels of the Russian government there have been promises to address this 

problem (starting in 1999) including a pledge, never met, in 2002 to issue an ‘‘action 

plan’’—but to date, there has been virtually no action taken against the plants, no 

comprehensive plan of action issued by the Russian government, and no legislative 

reforms on this point have even been introduced. Now ten years after IIPA (and the 

U.S. government) raised the issue, there is no excuse for why the Russian government has been unable to properly license and inspect all the known (now 34) plants, 

and to close and repeal the licenses of those engaged in illegal production and distribution, as well as to criminally prosecute the plant owners and operators. 

As one example of the failure to regulate the plants: late in 2004, in bilateral 

talks with the U.S. government and IIPA, the Russian government promised it 

would ‘‘meet with the 18 plants’’ (their figure) on restricted access (i.e., military) 

property to ascertain the legal or illegal status of their production, and to report 

back to the U.S. government. The meeting, scheduled for December, was cancelled 

and has not been rescheduled. The reason: the Russian government confessed it was 

unable to determine all the owners of the plants from its records (because of its inadequate licensing law) and therefore could not identify with whom the government 

needed to meet. 

Promised Legal Reforms: The Russian government has for 13 years, obligated 

itself in bilateral and multilateral negotiations to adopt necessary legal reforms. A 

short list of the failed commitments relating to legal reforms includes: 

In 1995, the Russian government agreed to provide ex parte search provisions—

critical enforcement tools, especially in the software industry. These were adopted 

in part in the Arbitration Procedures Code in 2002, however the proper provisions 

were never implemented and are absent from the Civil Procedure Code (enacted in 

2003). 

In 1995, the Russian government agreed to provide the police and prosecutors 

with proper authority to confiscate illegal material and ex officio authority to commence criminal investigations. The 1996 Criminal Procedure Code reversed that authority, and required rightholders to formally press charges to commence investigations in some instances, thus thwarting effective enforcement. 

In 1995, Russia acceded to the Berne Convention but failed to comply with Article 

18 to provide protection for pre-existing works. That same year, Russia acceded to 

the Geneva Phonograms Convention but provided no protection for pre-existing foreign sound recordings prior to the accession date of March 13, 1995. These were 

commitments Russia made to the U.S. government in the 1992 Bilateral NTR Trade 

Agreement—Russia agreed to have these commitments in place by the end of 1992. 

Finally, in July 2004, Russia adopted provisions to its law to provide protection for 

foreign pre-existing works and sound recordings—however, the 12 year delay in 

118

adopting these provisions has resulted in flooding the marketplace with illegal product that will take years to enforce, even if Russian enforcement were effective 

(which it is not). 

In the 1992 Bilateral NTR Trade Agreement, the Russian government committed 

to provide effective criminal penalties and enforcement. In 1996, Criminal Code 

amendments were adopted (after a 1995 veto) but a deficient provision (a ‘‘grave 

harm’’ threshold) prevented effective enforcement. In 2003 an amendment to ‘‘fix’’ the grave harm provision was finally adopted, but implementation of these criminal 

provisions remains a matter of concern, and there is no initiative to use these tools, 

if they even work properly, as part of effective enforcement. 

In short, the Russian government has made promise after promise to the U.S. 

(and other foreign) governments to develop an effective legal regime, including 

strong copyright and enforcement laws, and strong on-the-ground enforcement. It 

has failed to meet its commitments while it has enjoyed trade benefits and preferences with the U.S. that are the quid pro quo for these benefits and preferences. 

STEPS THE RUSSIAN GOVERNMENT CAN TAKE TO PROPERLY ENFORCE IPR CRIMES—

FOCUSING ON OPTICAL DISC PIRACY

There are six critical steps that the Russian government could take immediately 

to effectively confront its optical disc piracy problem:

1. Inspect, on a regular, unannounced and continuous basis, each of the 34 

known OD plants, and immediate close and seize the machinery of any found 

to be used to produce pirate product (some of these steps require additional 

legislative or regulatory measures);

2. Announce, from the office of the President, that fighting copyright piracy is 

a priority for the country and law enforcement authorities, and instruct the 

Inter-Ministerial Commission, headed by the Prime Minister, to deliver reports every three months to the President on what steps have been taken 

to address the problem;

3. Adopt in the Supreme Court a decree setting forth sentencing guidelines for 

judges—advising the courts to impose deterrent penal sanctions as provided 

under the penal code as amended (Article 146);

4. Immediately take down websites offering infringing copyright materials, such 

as allofmp3.com, and criminally prosecute those responsible;

5. Initiate investigations into and criminal prosecutions of organized criminal 

syndicates that control piracy operations in Russia (including operations that 

export pirate material to markets outside Russia); and

6. Introduce either via executive order or legislation, the necessary modifications of the optical disc licensing regime so that it clearly provides more effective control over the operations of the plants, including the granting of licenses to legal plants and withdrawing and sanctioning of illegal plants; 

stricter controls on the importation of polycarbonate and machinery; mandatory seizure and destruction of machinery used to produce pirate materials; 

and the introduction of criminal penalties for the owners of such plants.

There are, obviously, may other steps the Russian government could take to combat commercial piracy in Russia, including, but not only related to, optical disc piracy. These steps, including other enforcement and legal reforms necessary in Russia, are detailed in our Special 301 Report of February 2005 (attached). 

We also want to address one issue that has been raised by certain senior members 

of the Russian Government in our meetings, which raises serious questions about 

its commitment to fighting piracy. We have seen a number of reports in which Russian officials have suggested that the prices for legitimate goods and the lack of 

local manufacturing of legitimate products are to blame for the piracy problem. This 

comment reflects both an ignorance of what is happening in the marketplace, and 

a misunderstanding of the nature of the problem that we confront in Russia. The 

organized criminal enterprises manufacturing and distributing pirate product are 

largely servicing foreign markets (local manufacturing capacity is at least a multiple 

of six or seven times that of local demand), making the Russian price for legitimate 

materials wholly irrelevant to their motivation or profitability. As noted earlier, 

Russian manufactured product has been found in over 27 countries over the past 

two years. 

In addition, existing efforts by certain industries to offer low cost Russian editions 

have not had the effect of reducing local piracy rates. The record industry, for example, is already manufacturing locally, and sells legitimate copies for an average price 

of $6.00 to $8.00 U.S. dollars—a price that is extremely low not just in relation to 

119

prices for music elsewhere, but also with respect to other consumer goods sold in 

Russia. It is not the price of legitimate product that is creating opportunities for piracy—it is the opportunity for easy profits that has brought criminal enterprises 

into this business, and Russia should stop offering such excuses for its continuing 

inaction. 

Another matter that the Russian government continues to raise is the need for 

the U.S. copyright industries to use civil remedies for effective enforcement. The 

copyright industries (especially the record industry) have recently attempted to 

bring civil cases against illegal plant operators—although procedural hurdles are 

significant. 

However, in no country of the world, including Russia, can copyright owners be 

left to civil remedies in lieu of criminal remedies to effectively address large-scale 

organized crime commercial piracy. The government of Russia needs to play a major 

role in an effective criminal enforcement regime. The copyright industries generally 

report good police cooperation with raids and seizures, mostly of smaller quantities 

(with some exceptions) of material, but prosecutorial and other procedural delays 

and non-deterrent sentencing by judges remains a major hindrance to effective enforcement. 

WHAT CAN THE U.S. GOVERNMENT DO?

There are three things the U.S. government can do to mandate Russia compliance 

with international norms and obligations to provide ‘‘adequate and effective protection and enforcement’’ for U.S. copyright material:

1. Condition Russia’s entry into the World Trade Organization (WTO) on meaningful copyright law enforcement;

2. Designate Russia as a Priority Foreign Country (PFC) after the on-going out 

of cycle review by U.S.T.R.; and

3. Deny Russia’s eligibility for the Generalized System of Preferences (GSP) 

duty-free trade benefits. 

1. Condition Russia’s Entry into the World Trade Organization (WTO) on Meaningful Progress in Enforcing its Copyright Laws 

The Russian IPR regime is not in compliance with the WTO TRIPs obligations, 

especially pertaining to enforcement. As a consequence, the U.S. government should 

not assent to Russia’s accession into the World Trade Organization until its copyright regime, both legislative and enforcement, is brought into compliance with the 

WTO TRIPS obligations. 

Russia is not providing adequate and effective enforcement as required for entry 

into the WTO, certainly not the enforcement standards required as ‘‘effective’’ (Articles 41 through 61 of TRIPs). 

The U.S. can and should condition Russia’s entry into the WTO on Russia making 

positive and meaningful enforcement progress—for example, by licensing and inspecting all the known 34 optical disc plants, closing those engaged in illegal activities, and criminally prosecuting those involved in this commercial illegal activity, 

and ensuring imposition of deterrent (not suspended) sentences. 

2. Designate Russia as a Priority Foreign Country (PFC) When the Current Out-ofCycle Review is Complete 

The U.S. Trade Representative’s announcement on April 29, 2005 that Russia 

would be left on the Priority Watch List (for the ninth straight year) noted ‘‘[w]e 

will continue to monitor Russia’s progress in bringing its IPR regime in line with 

international standards through out-of-cycle review, the ongoing GSP review that 

was initiated by USTR in 2001, and WTO accession discussions.’’

The situation has gotten significantly worse, not better, in the past few years. 

IIPA recommended in February, and continues to recommend as part of the out-ofcycle review, that it is time to designate Russia a Priority Foreign Country to force 

Russia to properly enforce its laws or face the trade sanction consequences. 

3. Remove Russia’s Eligibility for Generalized System of Preferences (GSP) Benefits 

In August of 2000, IIPA filed a petition asking the U.S. government to open an 

investigation into Russia’s practices and outlining a variety of ways in which Russia 

failed (and continues to fail) to meet the GSP criterion of providing adequate and 

effective protection for intellectual property. That petition was accepted by the U.S. 

government on January 10, 2001. IIPA has since testified twice before the U.S. government GSP interagency committee (March 2001; September 2003) and submitted 

a number of materials and briefs in this matter since then. 

120

IIPA believes it is time to revoke Russia’s eligibility from the GSP program. Russia is not providing the U.S. GSP mandated ‘‘adequate and effective protection’’ as 

required by Sections 502(b) and 502(c) of the 1974 Trade Act (the intellectual property provisions in the GSP statute are at 19 U.S.C. §§ 2462(b) and (c)). 

It has been almost five years since the IIPA petition was filed, and over four years 

since the U.S. government accepted the petition, which at least as a threshold matter, acknowledged the potential of Russia’s shortcomings under the GSP program. 

The Russian government has had years to move to fix these problems and they have 

not done so adequately. 

CONCLUSIONS

Unfortunately, the Russian piracy problem has been allowed to grow significantly 

worse in the past ten years, and the IIPA members’ losses have continued to increase. Most obviously, the past five years have witnessed an explosion of optical 

disc manufacturing capacity without the concomitant controls to ensure that this capacity was used only for legitimate purposes. 

Russia’s anti-piracy efforts remain severely hampered by flawed legislation, ineffective enforcement by the Russian authorities and insufficient deterrent penalties 

in the courts. The Russian government needs to address legal reforms in the copyright law (even after the adoption of the 2004 amendments), the criminal code, the 

criminal procedure code, and the administrative code, but more importantly, it 

needs to provide stronger and more effective enforcement compatible with international norms, and WTO TRIPs (and the WIPO digital treaties). The Russian government has taken some steps towards addressing copyright piracy, such as adopting improvements in its copyright law in 2004, and including by taking some actions 

against pirate optical disc plants, adopting a ban on the sale of certain products at 

kiosks and other street locations. This is a start, but it is only that. IIPA suggests 

that the U.S. government should adopt positions, and a timetable, to ensure that 

Russia is significantly moving towards achieving meaningful and lasting progress to 

meet its international obligations—especially IPR enforcement. 

In sum, Russia’s commercial piracy problem must be addressed immediately by 

the Russian authorities. IIPA recommends that the U.S. government take the necessary trade steps to deny Russia trade benefits (such as GSP) and entry into the 

World Trade Organization until Russia takes clear and effective steps to bring this 

illegal activity under control. This country can no longer afford inaction.

121

ATTACHMENT


EJS0001.eps
122


EJS0002.eps
123


EJS0003.eps
124


EJS0004.eps
125


EJS0005.eps
126


EJS0006.eps
127


EJS0007.eps
128


EJS0008.eps
129


EJS0009.eps
130


EJS0010.eps
131


EJS0011.eps
132


EJS0012.eps
133


EJS0013.eps
134


EJS0014.eps
135


EJS0015.eps
136


EJS0016.eps
137


EJS0017.eps
138


EJS0018.eps
139

Mr. SMITH. Thank you, Mr. Schwartz. 

Mrs. Richardson. 

TESTIMONY OF BONNIE J.K. RICHARDSON, SENIOR VICE 

PRESIDENT, INTERNATIONAL POLICY, MOTION PICTURE ASSOCIATION OF AMERICA 

Ms. RICHARDSON. Mr. Chairman, Mr. Berman, Members of the 

Subcommittee, thank you for inviting me to testify today, and for 

holding these back-to-back hearings on China and Russia. 

As the witnesses outlined this morning, the problems in China 

are very serious. But the challenges we face in Russia—lawlessness, physical danger, and corruption—are even more daunting. 

Until Russia reforms its ways, the U.S. Government should stop 

considering, and start removing, the special breaks we give to Russian exports into the United States under the Generalized System 

of Preferences. 

And I agree with you, Mr. Chairman. Before the United States 

supports Russia’s accession to the WTO, Russia needs to reduce 

theft at home and stem exports of pirated goods. As Members of 

Congress, you are key players in Russia’s bid to join the WTO. 

Please, let Russia know and let the Administration know that your 

vote on permanent normal trade relations will be in question unless Russia makes meaningful progress in protecting intellectual 

property. 

I’m going to say some tough things about Russia today. But before I do, I want to acknowledge that there are also honest officials 

in Russia who put their lives on the line in trying to protect 

against intellectual property. They must be as frustrated as we are 

with the high levels of corruption. 

Last October, police raided a warehouse and found it full of pirated video games. According to the Wall Street Journal, which you 

cited in your letter, the pirate got help from a corrupt Russian legislator, who then charged the police with running an illegal raid. 

For the next 3 months, the police had to defend themselves, instead 

of fighting piracy. And the pirate? Probably remains in business 

today. 

Let me give you a few examples of how organized and dangerous 

piracy is in Russia. Polish customs officials working on the border 

with Russia have uncovered false-bottomed compartments in both 

trains and cars, full of pirated copies of our films destined for markets all over Europe. This isn’t ‘‘mom and pop’’ investment. This is 

organized crime. 

At least nine of the 34 factories that replicate CDs and DVDs, 

and possibly considerably more, are located on government-owned 

property in Russia, the so-called ‘‘restricted access regime enterprises.’’ Given the location of these plants, civilian authorities have 

serious difficulties in gaining prompt access. Any delay in access 

during a raid allows the pirates time to destroy the evidence of infringing activity. 

Nor are the pirates afraid to use violence. Two years ago, a thug 

shot at the car that was driven by our anti-piracy investigator. The 

incident occurred just after a major raid against a pirate facility. 

It was a clear effort to intimidate our anti-piracy team. Fortunately, our employee was not hurt. The assailant now resides in a 

140

psychiatric hospital. And the person who funded the attack? No 

doubt, he’s still making money from our films. 

Corruption has become endemic at every level of the enforcement 

system in Russia. As Eric Schwartz mentioned, 70 percent or more 

of the pirated goods that are seized during raids find their way 

back into the marketplace. And what’s worse, often the pirated 

goods are sold by the trade houses that are associated with the justice ministry or by their veterans’ funds. 

Prosecutors often shelve cases resulting from major optical disc 

plant raids. Even the rare cases that end up in sentencing have no 

deterrent value. Of the eight raids conducted last year against pirated factories, all of the plants remain in operation today, and 

continue to pirate. In half of the cases that were prosecuted—and 

only four were prosecuted—lower-level employees were targeted; 

not the owners. All of the cases—all three of the cases—that 

reached judgment, resulted in suspended sentences. There is no deterrence in the system. 

My written testimony provides a summary of several anti-piracy 

actions last year. Any one of these cases could have been an innocent mistake or could have another honest explanation. But taken 

as a whole, they create a disturbing fact pattern that can only be 

understood as corruption or massive indifference. 

In one case, local prosecutors closed the criminal case. The regional prosecutor ordered it reopened. The local prosecutor again 

closed the case; ordered the seized stampers returned to the plant 

operator. And the plant remains in operation today. 

In another case, two and a half million pirated discs were seized 

from two related warehouses on one of these restricted access facilities. Within days of the raid, over a million of the discs had mysteriously disappeared from the sealed warehouses. The owner got 

a 2-year sentence—suspended, of course. 

We will see no progress in enforcing against intellectual property 

crime in Russia unless President Putin himself demands accountability from his senior officials. Until then, corrupt officials will 

continue to afford protection to the pirates. 

Mr. Chairman, on behalf of the Motion Picture Association of 

America, and the thousands of law-abiding Americans who work in 

the movie industry and whose livelihoods are threatened by piracy, 

I want to thank you for inviting me to testify and for your support 

to this industry over the years. 

[The prepared statement of Ms. Richardson follows:]

PREPARED STATEMENT OF BONNIE J.K. RICHARDSON

Mr. Chairman, Ranking Member, Members of the Committee: 

I would like to thank you for inviting me to testify before you today on the important topic of international intellectual property theft in Russia. I commend you for 

holding back-to-back hearings this morning to illuminate the problems of IP theft 

in China and Russia. As serious as problems are in China, and they are serious indeed, the challenges we face in protecting our intellectual property in Russia are 

even more daunting. Lawlessness, physical danger, and corruption are part of the 

daily challenges we face in trying to protect our rights in Russia. 

Russia is one of the largest producers and exporters of pirated DVDs and other 

copyrighted products in the world. Russia needs to lower the incidence of copyright 

theft at home and stem the export of pirated goods before the United States supports Russia’s accession to the WTO. Our Government also needs to use all the tools 

in its bilateral arsenal to send this message, including suspending Russia’s eligibility for preferential trade benefits under the Generalized System of Preferences. 

141

If the United States Government acts now, it won’t have to choose between American economic interests and our geopolitical goals. If the US Administration tells the 

Russians, clearly and unambiguously, that the United States will not accept Russia 

as a WTO partner until they have taken effective actions to control the rampant 

optical disc piracy, then the choice will not be ours—it will be Russia’s. Russia will 

have to choose between coddling criminals and tolerating corruption on the one 

hand and joining the world trade community on the other. Congress can help ensure 

that both Russia and the Administration know that a grant of Permanent Normal 

Trade Relations to Russia, which is a prerequisite to WTO relations, will be endangered without meaningful progress on protecting intellectual property. 

THE ‘‘GOOD GUYS’’ IN RUSSIA

In my remarks today I will focus on what is wrong in the fight against piracy 

in Russia today. But, I want first to acknowledge the dedicated and courageous officials in Russia who have fought hard to secure adoption of good copyright laws, and 

who put their own safety on the line in trying to enforce those laws against the organized criminals who run the piracy business in Russia. These honest men and 

women must be as frustrated as we when their laws aren’t implemented, when their 

raids aren’t prosecuted, or when their prosecutions result in paltry sentences. 

Chairman Smith cited a May 12 article from the Wall Street Journal from May 

12 in his ‘‘Dear Colleague’’ letter of the same date. I would like to append this article to my testimony, because it vividly illustrates the price that honest officials in 

Russia can pay for trying to do their jobs. After a raid last October on a warehouse 

full of pirated videogames, the pirate enlisted the help of a Russian legislator, who 

complained to prosecutors, city officials, and police’s own internal affairs office. The 

police, who were trying to enforce Russian copyright law, ended up spending the 

next three months defending themselves. And the pirate remains in business. 

Certainly the Russian film industry, who have basked in the light of such local 

and international successes as last year’s superhit ‘‘Night Watch’’ or this year’s all 

time box office record holder ‘‘Turkish Gambit,’’ have to be angered that the revenues from the successful home video sales of their fine films go to the pirates instead of to the Russian creators. 

THE AMERICAN ECONOMIC INTEREST

The US filmed entertainment industry has a surplus trade balance with almost 

every country in the world. No other American industry can make that claim. Ensuring the continued economic health of the film industry, and of other U.S. intellectual property rightsholders, is in our national interest and in the interest of the ordinary Americans who enjoy those films, as well as the costumers, the carpenters, 

the set painters, the sound technicians, the fire safety workers, whose jobs rely on 

the creation of filmed entertainment and other forms of copyrighted works. Piracy, 

massive thievery really, threatens the continuing viability of this important economic engine. 

AN ORGANIZED CRIME

In Russia, the people procuring, producing, and distributing pirated copies of our 

movies are affiliated with large and dangerous international criminal syndicates 

and gangs. Organized crime figures own the modern factories that cost well in excess of a million dollars, and operate 24 hours a day, seven days a week, cranking 

out millions of pirated discs. They ensure protection for the distributors and retailers who sell eight pirated copies to every two legal copies my members manage to 

sell in Russia. 

No small-scale, independent operator could afford the false-bottomed compartments in trains and cars which Russian organized crime uses to export pirated copies of our films to other organized criminal syndicates all across Europe. Pirated 

movie discs from Russia are readily available throughout Europe and the Middle 

East. The odds are high that every dollar or euro spent on these pirated goods is 

put into the pockets of bad people who will spend it in a way that is not consonant 

with our safety and security. 

Another example of the failures of the Russian enforcement regime comes from 

IIPA’s annual Special 301 report and relates to the control that criminal syndicates 

have over entertainment software piracy in Russia. There are four principal criminal syndicates that control the production and distribution of pirated entertainment 

software in Russia. The syndicates attach ‘‘logos’’ or ‘‘brand’’ names to their illegal 

product and localize the illegal copies they produce—before the legitimate product 

is released into the market. These same groups control illegal distribution networks 

in Russia, as well as in the surrounding countries. It is widely believed that the 

142

Russian groups control piracy operations in much of Eastern Europe including the 

markets in Poland and Latvia, and that they also have ties with syndicates operating in Ukraine. One ESA company reports that in 2004, one of these piracy syndicates attempted to register one of the company’s trademarks for a videogame product that was being pirated by the syndicate. 

A LARGE, GROWING, AND VERY DANGEROUS PROBLEM

In 1996 there were two known optical disc plants in Russia. The subsequent years 

of inaction by the government of Russia allowed the number of factories to mushroom to today’s 34 known plants, resulting in a serious problem—production capacity that far exceeds legal demand in Russia. The excess capacity is, of course, devoted to illegal production for the local market and for export. Unfortunately, Russia 

has yet to put in place an effective optical disc regulatory regime to fight illegal production at its source. 

According to our data, at least nine of these factories are located on property 

owned by the Russian military, or ‘‘restricted access regime enterprises.’’ The location of these plants creates serious difficulties for ensuring prompt access to these 

plants for the civilian authorities. Any delay in access allows the pirates time to destroy evidence of infringing activity. 

Let me be clear, the people heading these organizations have no qualms about resorting to violence or bribery to conduct their operations. Two years ago, shortly 

after a major raid against a pirate facility, in what clearly was designed as an intimidation effort, a thug shot at the car in which one of our anti-piracy investigators 

in Russia was driving from work. Fortunately our employee was not harmed. The 

assailant now resides in a psychiatric hospital, while the funder of the attack likely 

grows ever more wealthy from the lucrative—and in Russia—extremely low risk, piracy game. 

THE EXPORT PROBLEM

Russia is now one of the world’s largest exporters of illegally copied optical discs. 

Exported Russian pirated discs have been found in over 27 international markets. 

The exported DVDs generally contain multiple language tracks. Frequently the exported discs do not include a Russian language track—a clear indication that the 

pirated discs were produced solely for the export market. The result is a serious erosion of legitimate sales in Europe that threatens the lucrative Western European 

markets. 

WIDESPREAD CORRUPTION

Corruption has become endemic at every level of the enforcement system in Russia. The lure of a bribe has long been common among poorly paid police. By now, 

many prosecutors have succumbed to corruption. There is even reason to suspect 

that some judges may have been influenced by the pirates. 

One indication of prosecutorial corruption is the number of requests prosecutors 

make of rightsholder organizations to return seized material to prosecutors because 

they ‘‘need to show the evidence to the judges.’’ In fact, the goods confiscated during 

raids on factories and warehouses are returned to commercial channels to which the 

prosecutors are connected. 

The Wall Street Journal article cited above estimates that 70% of confiscated merchandise winds up back on the market. MPAA has estimated that up to three quarters of the pirate product seized in raids finds its way back onto the market via Veterans’ Funds and the Trade Houses of the Justice Ministry. 

The number of times prosecutors have tried successfully to shelve cases resulting 

from major OD plant raids or ducked prosecution of the public and notorious pirate 

website ‘‘Allofmp3.com’’ also points to rampant corruption. 

In 2004, there were eight raids against optical disc plants, including raids and seizure of illegal materials. In all cases, the factories remain in operation to this day 

with evidence of continued piracy. When prosecutions took place, the prosecutors 

tended to target lower-level employees, instead of the owner. Three of the cases that 

reached judgment resulted in suspended sentences and the fourth still awaits a final 

decision. 

In fact, the only time MPA has been able to get an unsuspended prison sentence 

for a pirate in Russia, the defendant was a video shop owner, not a large-scale factory owner. The video shop owner was sentenced to three years and two months in 

prison. The defendant was a repeat offender, having received a two year suspended 

sentence in his first conviction. 

143

Below is a brief summary of several of the factory cases that together create a 

disturbing fact pattern that can only be understood as a reflection of corruption or 

massive indifference. 

A DISTURBING PATTERN OF SENTENCING AND FAILURE TO CLOSE PLANTS

• The UVK Stimul plant in Zelenograd was raided June 21, 2004, the second 

raid against this plant in ten months.

• 37,000 pirate CDs and DVDs and 8 stampers were seized.

• The plant continues to operate, reportedly working 24 hours a day.

• On January 14, 2005, a Moscow court imposed a one-year suspended prison 

sentence on the plant’s chief technician, after he confessed to ordering the 

plant’s personnel to replicate pirate DVDs. The prosecution claimed the accused acted alone, without reporting to the management of the company. 

The defendant pleaded guilty and the court ruled under simplified procedures without full consideration of the case.

• Data Media plant in Koroliov, raided on April 30, 2004.

• The plant operator pleaded guilty in December 2004 to replicating pirate 

discs. Sentenced on February 28 to a suspended two year prison term.

• Despite an alleged closure of the plant by police, trucks full of illegal DVDs 

intercepted leaving the plant in July 2004, were found with 22, 771 pirated 

CDs and DVDs.

• Two further criminal cases are pending against the same accused arising 

from these subsequent seizures.

• Plant remains in operation, continues to work illegally.

• ZZMT plant in Zelenograd, raided December 2002

• 234,493 counterfeit CDs seized.

• The defendant, the human resources officer not believed to be an owner or 

major organizer, was sentenced February 2004, to one year suspended sentence.

• Defendant ordered to pay $180,000 damages to rightsholder.

• Plant continues to operate. A disc matched by forensics to this plan was 

found in Kiev in March 2005. 

EXAMPLES OF CASES NOT PROSECUTED

• T3The Okapi plant, Puskino, raided February 2004,

• 25,000 pirate DVDs and computer games discs, and 800 stampers seized.

• Situated on a government owned, restricted access facility.

• Closed in early 2004—after equipment was returned by court order to its 

alleged owners and moved it to an unknown site to continue manufacturing.

• Samara plant, found to be a pirate DVD plant during a routine tax inspection 

at a cement factory in April 2004;

• 7,000 pirate DVDs and 30 stampers uncovered.

• Plant director was questioned, a criminal prosecution prepared.

• Local prosecutor closed the criminal case.

• Regional prosecutor ordered the case re-opened.

• Local prosecutor again closed the case, ordered the seized stampers returned to the plant operator.

• The plant, an unlicensed plant, remains in operation.

• Warehouse in Odintzovo near Moscow raided August 2004, over 1 million pirate discs seized. A nearby second warehouse contained an additional 1.5 million pirate discs.

• Located on a military camp.

• Within days of the raid, over a million of the discs mysteriously disappeared from the ‘‘sealed’’ warehouses.

• Industry anti-piracy group nevertheless managed to get legal guardianship 

of over 100,000 of the seized, pirated DVDs.

• On March 15, 2005, a court in Odintzovo imposed a suspended two year 

prison term on the owner.

144

• The one bit of good news—remaining DVDs still in legal custody were ordered to be destroyed August 2004.

Given the extent of corruption, seeking enforcement from within the bureaucracy 

is largely a waste of time. We will not see progress in enforcement against intellectual property crimes in Russia unless President Putin directs all relevant agencies 

to make the fight against copyright piracy a priority. Until the President himself 

demands accountability from his senior officials, corrupt officials will continue to afford protection to the pirates. 

CONCLUSION

Mr. Chairman, on behalf of the Motion Picture Association of America, as well as 

the thousands of law-abiding people who work in the movie industry and whose livelihoods are threatened by piracy, I want to thank you again for inviting me to testify today and for your support to this industry over the years. As I have attempted 

to describe today, piracy in Russia is a large, growing and dangerous problem. Russian enforcement institutions have not demonstrated any intention to deal with this 

problem seriously. We need your help to ensure that Russia does not continue to 

benefit from US trade preferences, while continuing to coddle the pirates who rob 

us blind. We also need your help to ensure that Russia addresses its piracy problems before it is permitted to join the WTO.

145

ATTACHMENT


BJKR1.eps
146


BJKR2.eps
147


BJKR3.eps
148

Mr. SMITH. Thank you, Ms. Richardson. 

Mr. Gerson. 

TESTIMONY OF MATTHEW T. GERSON, SENIOR VICE PRESIDENT, PUBLIC POLICY AND GOVERNMENT RELATIONS, UNIVERSAL MUSIC GROUP 

Mr. GERSON. Mr. Chairman, Congressman Berman, thank you 

very much for inviting me to testify today on behalf of the Universal Music Group and the Recording Industry Association of 

America, and for taking the time to dedicate today’s hearings to 

two very important problems that we face: piracy in China and piracy in Russia. 

In my years knocking around this Committee, I’ve learned a few 

things; and among the most important is to recognize that the people sitting behind me are starting to get hungry. So I’m going to 

be brief, and I’m going to try not to repeat some of the things that 

have already been said. 

We envision Russia as a terrific market for both local and international businesses, and have made significant investments in the 

arts, and have made investments in the many businesses that it 

takes to bring CDs to market. We’ve signed and distributed local 

bands; we’ve promoted them outside of Russia. We manufacture 

our product locally in Russia through Russian-owned businesses. 

We’ve developed special budget lines to bring legitimate product 

within the buying power of the average Russian citizen. 

We’ve also tried to raise awareness within Russia of the social, 

cultural, and economic costs of piracy. Through IFPI, the federation 

of music trade associations from around the world, the industry invests millions in a wide variety of anti-piracy, pro-music activities. 

But we’re frustrated. 

And as you observed, Mr. Chairman, all our efforts are stymied 

when law enforcement fails to prosecute the crimes that they can 

identify and easily find. Our best intentions and best efforts are 

undermined when the few convictions lead to slaps on the wrist or 

penalties that are insignificant and really just a cost of doing business. 

Despite our work with the Administration, despite interactions 

between the United States and Russia at the highest levels, as 

cited by Ms. Espinel, piracy is growing. The Russian government 

sees our bill of particulars. They can read our Special 301 submissions. They can read what we say about GSP. They know exactly 

what we know, and they’re failing to act. 

Now, Bonnie and Eric gave you a sense of what’s happening with 

physical piracy. We’re starting to see the same disregard when it 

comes to Internet piracy. Through online servers based in Russia, 

a site called ‘‘allofmp3.com’’ sells music to anyone in the world willing to pay about 10 cents a song. The problem is that 

‘‘allofmp3.com’’ has not secured the rights to do so, and doesn’t 

bother to pay the people who wrote the songs or recorded the songs 

or own the copyrights. 

There’s no question about the law. At the very least, 

‘‘allofmp3.com’’ is violating the reproduction rights afforded by Russian copyright law and the criminal code, and the laws of country 

where those songs are downloaded. 

149

Now, industry observers—industry investigators looked at the 

website; worked closely with the Moscow city high-tech crime unit; 

and submitted a substantial body of evidence to the Moscow prosecutor. In February, the prosecutor dismissed the case. And in 

doing so, he conveyed a damaging message to the public and, 

frankly, a damaging message to those of us trying to establish legitimate businesses there. 

We need to do some messaging of our own. And by that I mean 

the copyright industries and U.S. policymakers need to make it 

clear that failure to control piracy has clear ramifications for the 

Russian government. First, as has been said, USTR should really 

reexamine Russia’s eligibility for GSP. It’s wrong that U.S. taxpayers should, in effect, be helping to finance Russian exports to 

the United States, while the rights of U.S. intellectual property 

owners are being systematically neglected. 

Second, we really do have to learn from the China experience. By 

every measure, by every expert and every witness, the China WTO 

has failed. The commitments that were made, the efforts that were 

made before China entered WTO haven’t done what’s necessary for 

America’s patent, copyright, and trademark industries. And we just 

have to learn what went wrong, and correct it when it comes time 

for Russia to be admitted, or to be considered for admission, into 

WTO. 

Third, I believe Congress should delay consideration of PNTR for 

Russia. As with admission to WTO, Russia should not be rewarded 

with Permanent Normal Trade Relations until it has demonstrated 

sufficient and sustainable reform. The word ‘‘sustainable’’ is one 

that you used, Mr. Chairman. That’s really what’s at stake here. 

Let me make a few final observations. WTO accession is not a 

political prize. It represents a commitment to abide by international rules. WTO as an institution and global confidence in free 

and fair trade are quickly undermined when agreements and commitments go unenforced. 

In addition, we have to face facts. Today, the Administration and 

the Congress has a certain amount of leverage because Russia 

wants PNTR and Russia wants WTO. And once they attain those 

goals, the leverage that we have is going to diminish significantly. 

I’ve got a few seconds left so, you know, Congressman Issa mentioned the problem he’s having with patents over amplifiers. It is 

not so long ago that in this room we talked only about music and 

movies and software being pirated. But today, we can talk about 

Congressman Issa’s amplifiers, or somebody who manufactures altimeters in Mr. Goodlatte’s district. Or I loved the example in the 

L.A. Times a couple of weeks ago about hot sauce. It’s a favored 

brand in L.A., and is being imported illegally from China, as well. 

It is touching every aspect of the American economy, and we really 

need to take aggressive steps. 

And finally, just to follow up on a point that Myron Brilliant 

made, it’s not just U.S. industries getting hurt. There are industries in China and businesses in Japan and businesses in Europe 

that are being hurt by the piracy that takes place in China and in 

Russia. And maybe there are things that we can do on a multilateral basis with our trading partners, with other businesses who are 

trying to succeed in the global marketplace. 

150

Thank you. And I really want to thank you, Mr. Chairman, Congressman Berman, and your staffs, for doing so much over so many 

years to help the U.S. creative industries. 

[The prepared statement of Mr. Gerson follows:]

PREPARED STATEMENT OF MATTHEW GERSON

Mr. Chairman and Members of the Committee, my name is Matthew Gerson and 

I am Senior Vice President for Public Policy and Government Relations at the Universal Music Group. I appreciate the opportunity to appear before you today on behalf of my company and the Recording Industry Association of America to discuss 

the problems that we confront as we attempt to establish and build businesses in 

the Russian Federation. 

Universal Music Group [UMG] is the world’s leading music company with wholly 

owned record operations or licensees in 77 countries. Its businesses also include 

Universal Music Publishing Group, one of the world’s largest music publishing operations. 

Universal Music Group consists of record labels Decca Record Company, Deutsche 

Grammophon, DreamWorks Records, Interscope Geffen A&M Records, Island Def 

Jam Music Group, Lost Highway Records, MCA Nashville, Mercury Nashville, Mercury Records, Philips, Polydor, Universal Music Latino, Universal Motown Records 

Group, and Verve Music Group as well as a multitude of record labels owned or distributed by its record company subsidiaries around the world. The Universal Music 

Group owns the most extensive catalog of music in the industry, which is marketed 

through two distinct divisions, Universal Music Enterprises (in the U.S.) and Universal Strategic Marketing (outside the U.S.). Universal Music Group also includes 

eLabs, a new media and technologies division. 

The Recording Industry Association of America (RIAA) is the trade group that 

represents the U.S. recording industry. Its mission is to foster a business and legal 

climate that supports and promotes its members’ creative and financial vitality. Its 

members are the record companies that comprise the most vibrant national music 

industry in the world. RIAA members create, manufacture and/or distribute approximately 90% of all legitimate sound recordings produced and sold in the United 

States. In support of this mission, the RIAA, among other things, works to protect 

intellectual property rights worldwide. 

International markets are vital to RIAA’s companies and our creative talent. Foreign sales account for over fifty percent of industry revenues. This strong export 

base sustains and creates American jobs and is a key reason that the core copyright 

industries—including music, movies, software and videogames—account for some 6 

percent of U.S. GDP. 

However, as this subcommittee well knows, America’s creative industries are 

under attack. Piracy has grown in recent years with the advance of digital technology that facilitates both physical and online piracy. Indeed, high levels of piracy 

and trade barriers that complicate our efforts to enter or operate in foreign markets 

plague all of America’s copyright owners and creators. 

Despite the enormous challenges that the copyright industries face, I want to 

highlight one great benefit that we enjoy—the consistent and committed work of 

this subcommittee. Your work over the years is in no small measure responsible for 

the extraordinary success of America’s creators. Your focus has enabled us to entertain, educate and inspire people all over the globe. I would also like to recognize 

the State Department, the U.S. embassies around the world, the United States 

Trade Representative, the Department of Commerce, the Patent and Trademark Office and other agencies staffed with dedicated and talented officials committed to the 

continued vitality of this uniquely successful sector of the U.S. economy. 

The other witnesses on this panel will elaborate on the current state of piracy in 

Russia. To avoid repetition, I will describe some of the efforts that Universal has 

taken to build a business in Russia, and the industry’s efforts to bring our piracy 

problems to the attention of U.S. policymakers as well as officials in Russia. 

But the position of the music industry and many in the content community is easy 

to summarize—the piracy situation in Russia is untenable, as made clear in the 

Thursday, May 12 Wall Street Journal article circulated by Chairman Smith. 

To protect the American businesses that invest in creativity, and the artists and 

others who earn their livelihoods in the production and distribution of intellectual 

property, the U.S. Government should take a hard look at the economic and political 

mechanisms at its disposal. Until we can be certain that there is a demonstrated 

and sustainable commitment to enforcing intellectual property laws, the Congress 

and Administration should—

151

• reexamine the GSP benefits currently afforded Russia;

• delay its consideration of PNTR—and the benefits that come with Permanent 

Normal Trade Relations;

• withhold support for Russian membership within the World Trade Organization (WTO). 

DOING BUSINESS IN RUSSIA

Russia is a very exciting music market that is ripe with opportunities for both 

local and international business. But these opportunities are stymied by the second 

largest pirate music market in the world—estimated at $330 million U.S. dollars— where two-thirds of all recordings are illegal copies. 

Universal Music is the biggest record company in Russia and we have made very 

significant investments in the arts in Russia as well as the many disciplines involved in bringing a CD to market. We have signed and distributed local bands, and 

have promoted them outside of Russia. We manufacture our product locally through 

Russian-owned third parties. We have developed special budget lines to bring legitimate product within the buying power of the average Russian citizen. And we have 

tried to raise awareness within Russia of the social, cultural and economic costs associated with their failure to create more favorable conditions for investing in creativity. 

The cultural impact of American music and the role of a U.S. record company is 

exemplified by a Russian act called Bering Strait. I saw them a couple of years ago 

at Wolf Trap where they were opening for another Universal band. The band plays 

country music—that’s right, country music—and was on their first American tour. 

The tour was a real success as they were embraced by audiences—most of which 

never thought they would see Russian musicians putting their own spin on familiar 

bluegrass melodies. 

Because we are so committed to the Russian market, we have joined with industry allies to do everything in our power to address music theft. Through IFPI—the 

International Federation of the Phonographic Industry, a federation of music trade 

associations from around the world—the industry invests millions in anti-piracy activities. However, those efforts are stymied when law enforcement fails to prosecute 

the crimes and criminal enterprises that are identified. We have agonized over the 

few judicial sentences that have been granted, which each time result in a relatively 

small fine easily assumed as a cost of doing business. We have struggled as the Russian Government refuses to act against fraudulent collecting societies that grant ‘‘li- censes’’ to pirate internet sites. 

AN ONGOING TREND

Russian piracy is not a new problem for the recording industry, and our interaction with the U.S. Government on this point is long standing. For the past several 

years, the International Intellectual Property Alliance [IIPA] has, through its Special 301 and GSP submissions, documented the extensive copyright violations going 

on in Russia. This year the U.S. copyright industries urged the U.S. government to 

suspend Russia’s eligibility for any duty-free trade benefits accorded through GSP, 

and were disappointed when the Government decided not to do so. It was equally 

dismaying when the U.S. Government did not identify Russia as a ‘‘priority foreign 

country’’ under Special 301, and instead choose to keep them on the priority watch 

list. 

Nearly two years ago, on September 16, 2003, RIAA CEO Mitch Bainwol joined 

the CEO’s of America’s major record companies in writing to President Bush. A complete copy of that letter is attached to this testimony, but the main points were:

• To ask President Bush to raise piracy during an upcoming Summit with Russian President Vladimir Putin and urge him to ‘‘take immediate steps to curtail his country’s illegal production and export of pirate products—an activity 

that has been on the rise for the past three years and which severely harms 

American and Russian creators alike.’’

• To emphasize that, ‘‘the success or failure of initiatives to strengthen copyright protection on the global stage has a profound bearing on U.S. economic 

competitiveness. It will dictate whether the global economic and legal environment will sustain America’s artistic and intellectual heritage. No less is 

at stake than the genius and individuality that lie at the core of our national 

soul, and the dangers posed are great and immediate.’’

• To set out the facts. At that time—just two years ago—Russia was ‘‘home to 

28 known optical disc plants (‘‘optical discs’’ refers to CDs, DVDs, CD-ROMs, 

and other disc based products) with a production capacity of over 330 million 

152

discs a year. Demand for legitimate discs in Russia, on the other hand, is unlikely to exceed 30 million discs per year. This excess capacity is used to 

produce and then export pirate materials, and investigations have led to the 

seizure of Russian manufactured pirate discs in over 25 countries. The U.S. 

copyright industries have been losing more than $1 billion a year to piracy 

in Russia, and we have been sustaining this level of loss for 5 years.’’

• To clarify why more action was necessary. ‘‘President Putin has taken certain 

steps over the course of the past year, but they have not been adequate to 

address this intolerable situation. The thrust of our request to the Russian 

Government—oft repeated by the excellent and dedicated Ambassador of the 

United States to Russia, Ambassador Vershbow—has been to introduce and 

implement effective controls over the operations of the CD plants . . . Ambassador Vershbow delivered a document to the Government of Russia more than 

one year ago that listed the names and addresses of the [pirate] facilities [but 

they continue in operation today].’’

I urge you to read the entire text of that letter from industry CEO’s because an 

understanding of what we have tried is critical if we are to properly respond today. 

President Bush did indeed raise his concerns about copyright piracy with President 

Putin on several occasions, and President Putin in turn pledged to address it. To 

date, the response has been inadequate. 

In fact, the statistics demonstrate a dramatic increase in music theft, certainly 

not a crackdown. According to RIAA:

• The 28 replication plants in 2003 have grown to 34 plants in 2005. Five 

plants would be sufficient to meet the needs of the legitimate Russian market. As a result of that excess capacity, Russia is the world’s largest exporter 

of pirated music.

• Production capacity which stood at an alarming 330 million a year in 2003 

now stands at 488 million units.

• At least 9 of these production plants are located on so-called ‘‘Russian State 

Restricted Access Regime Enterprises’’ in which the Russian Government 

itself is the owner of the premises.

• Russia is now home to some of the world’s only Internet-based pirate pay 

download services—such as allofmp3.com.

The case of allofmp3.com helps illustrate the music industry’s frustration. 

Through online services based in Russia, it sells music to anyone in the world willing to pay ten cents a song. The problem is that allofmp3.com has not secured the 

rights to do so—and doesn’t bother to pay the people who wrote and own the songs 

being sold. There is no question about the law—at the very least allofmp3.com is 

violating the reproduction rights afforded by Russian Copyright Law and Criminal 

Code, and the laws of the countries where the songs are being downloaded. 

Once again, IFPI investigated and in 2004 began working in close collaboration 

with the Moscow City High-Tech Crime Unit. Both IFPI and the High-Tech Unit 

submitted formal complaints—including supporting documentation—to the Moscow 

City Prosecutor’s office. 

In February 2005, without much explanation, IFPI received notice that a regional 

Moscow City Prosecutor declined to accept the matter for further investigation. 

Clearly the Prosecutor failed to appreciate the seriousness of the matter and misapplied the law. In doing so, he conveyed two incorrect and damaging messages to 

the public—that the service is legal and that it is legal to download from the service 

wherever you may be. Similarly, the Prosecutor sent yet another clear signal to 

those trying to establish legitimate businesses. 

WHAT SHOULD BE DONE?

We need to change the political calculus so that failure to control piracy has clear 

ramifications for the Russian Government—ramifications that outweigh the costs 

associated with stopping piracy. Specifically: 

(1) USTR should reexamine Russia’s eligibility to participate in the Generalized System of Preferences until it has satisfactorily protected intellectual property from theft. It is wrong that U.S. taxpayers should, in effect, be 

helping to finance Russian exports to the U.S. while the interests of U.S. intellectual 

property owners are being systematically undermined. The United States needs to 

point out how failure to address copyright piracy will impede Russia’s goals, whether such goals relate to attracting foreign investment, joining the WTO, or other matters. 

153

(2) We must learn from the China experience. Congress should insist 

upon demonstrated and sustainable reform before supporting Russia’s accession to the WTO. By every measure, the steps taken before China was admitted to WTO have failed America’s patent, trademark and copyright industries. The 

U.S. should ensure that relevant legal and enforcement measures are in place and 

implemented before we accept Russia into the WTO. WTO accession is not a political prize—it represents a commitment to abide by international rules. The WTO 

institution and global confidence in world trade rules is quickly undermined when 

WTO parties openly mock trade discipline. 

Let’s face it—today Congress has some bilateral leverage because Russia wants 

to enter WTO. Once they are in, the leverage diminishes significantly. Secretary of 

State Rice alluded to that reality in an April 20, 2005 interview in Moscow in response to a question about WTO—

‘‘We are very supportive of Russia’s effort to join the WTO. We think this would 

be good for world trade, good for Russia. There are certain performance criteria 

in the WTO that have to be met. And we need to resolve the issue of intellectual 

property rights. At this point, the legal framework in Russia to prosecute those 

who engage in piracy is not very strong, and that really must be taken care of 

before WTO accession...

It has to be understood, and I hope the Russian people will understand that 

when the United States supports WTO accession, this also has to be accepted 

by the American Congress. And so we have to have performance on these outstanding issues so that when we go to the American Congress, the WTO accession can go through without difficulty.’’

(3) Delay consideration of PNTR for Russia. As with admission to the WTO, 

Russia should not be rewarded with Permanent Normal Trade Relations until it has 

demonstrated sufficient, meaningful and sustainable reform. 

CONCLUSION

Mr. Chairman, I will do the safest thing on earth—I will conclude by quoting you. 

When you circulated the May 12 Wall Street Journal article you observed that the 

article, ‘‘underscored the importance of achieving significant reform of the Russian 

intellectual property rights enforcement system before admitting Russia into the 

WTO.’’

We agree completely, and appreciate the seriousness with which this Committee 

will approach WTO accession if it is presented to the Congress. 

Thank you for inviting me to participate in this hearing. I would be glad to answer any questions you may have.

Mr. SMITH. Thank you, Mr. Gerson. 

My first question I’d like to address to Ms. Espinel. You mentioned in your testimony that we are continuing interagency review 

of a petition filed by the U.S. copyright industries to withdraw 

some or all of Russia’s benefits under the U.S. Generalized System 

of Preferences, the GSP program. 

It so happens that that particular issue was raised by every one 

of the other witnesses. That’s one of two common denominators 

that I’ve seen. But the question really is this. Reviews can only go 

on so long. When do you think you will actually decide something 

in that regard? 

Ms. ESPINEL. Well, as you may know, the review of this GSP petition has been a longstanding process. And we are reconvening an 

interagency group to review the GSP petition with Russia and with 

some other countries in the coming months. 

I appreciate the frustration that has been expressed with the 

length of time that the GSP review has been outstanding. I appreciate hearing the concerns that have been expressed by industry. 

And we will consider all of the suggestions made with them with 

respect to GSP, but also with respect to some of the other suggestions they’ve made. 

154

I just want to note that this is obviously a deep-rooted problem 

in Russia. This is not just related to intellectual property. This will 

require widespread systemic reform by Russia. 

Mr. SMITH. Right. But when do you think you will actually make 

a decision whether or not to deny Russia some of the benefits? You 

mentioned the frustration. You certainly felt it a minute ago when 

Mr. Schwartz testified given his experience. Do you know of any 

kind of timetable within your office, USTR, that might be of interest to us? 

Ms. ESPINEL. I’m not aware of any timetable. There is no deadline that I can offer you today. But I will just note that with Ambassador Portman newly onboard, we are examining our strategy 

with Russia. I think it’s very helpful to get this input from industry. 

Mr. SMITH. Okay. 

Ms. ESPINEL. And we will consider that. 

Mr. SMITH. And you can be assured that we will monitor what 

you all do or don’t do in the coming weeks, as well. The second 

common denominator was interesting to me, because all witnesses 

mentioned it, as well. And that was the problem with the optical 

disc plants in Russia which are producing something like three or 

four times the actual number of discs that are used or purchased 

by those who live within the Russian Federation themselves. That 

is clearly a flaunting of U.S. interests. What is going to be done 

about that? 

Ms. ESPINEL. The problem of optical disc manufacturing in Russia is that the scale of the problem is deeply disturbing. We have 

made IP enforcement—but, in particular, this issue of optical disc 

protection—a top priority in our bilateral discussions with Russia, 

and in particular in our accession negotiations. Again, we share the 

concern, we share the frustration. One other——

Mr. SMITH. Okay. We’re going to give you the benefit of the doubt 

today. You’ve been sharing our frustrations and sharing our concerns. And normally, we’d come back at you for a lack of commitment; but you do have a new boss, you do have a new ambassador. 

And I have great faith in him and his willingness to address some 

of these issues. So let’s just assume that good faith on your part. 

Ms. ESPINEL. One thing I would like to note that the Administration has been doing, which is a new action. It isn’t directed solely 

at Russia. In fact, to some extent, it is directed at many of our 

trading partners, including China and Russia. But this is the STOP 

initiative which I alluded to briefly. 

I think it’s particularly relevant with respect to this problem of 

optical disc manufacture in Russia. Because the major purpose of 

STOP is to try to stop the illegal trade in counterfeit pirated goods, 

to stop exactly the kind of problem that we’re seeing in Russia, this 

massive export of illegal optical discs. 

So we have been working domestically to tighten our own borders. But we have also been reaching out to trading partners 

around the world that are also—that share a perspective on this 

problem and are also facing this, to have them tighten their borders, to try to eradicate the market by cleaning up the supply 

chains of legitimate retailers, or retailers that would like to be leVerDate 0ct 09 2002 14:31 Aug 11, 2005 Jkt 000000 PO 00000 Frm 00158 Fmt 6601 Sfmt 6601 G:\WORK\COURTS\051705A\21217.001 HJUD1 PsN: 21217
155

gitimate retailers, and to try to stop these goods after they leave 

Russia and as they move around the world. 

Mr. SMITH. Okay. Thank you, Ms. Espinel. I’m going to do on 

this panel what I asked the previous panel, and that is to ask the 

other three witnesses what your top priority would be, as far as 

what the United States should be doing, what the United States 

Trade Representative should be doing to change our policies. 

And Mr. Gerson, we’ll begin with you. You’ll need to go fairly 

quickly, since my time is almost up. 

Mr. GERSON. I will be quick about it. We have to make it clear 

that failure to control piracy has clear ramifications for the Russian government. There are three items out there that we’ve mentioned: GSP, WTO, and PNTR. There are opportunities to make the 

point, and we should move forward using those tools that are at 

our disposal. 

Mr. SMITH. Very good. My thought, real quickly, Russia has already been on the Priority Watch List for 9 years. When does it finally get to be on the Priority Country Watch List? 

Ms. ESPINEL. Well, USTR announced this year a special out-ofcycle review of Russia because of the level of concern that we have. 

So at the conclusion of that out-of-cycle review, we will determine 

whether or not Russia will be moved up to PFC. 

Mr. SMITH. Good. That’s progress. Thank you. Mrs. Richardson? 

Ms. RICHARDSON. I agree with what Mr. Gerson said, so I’ll go 

from the general to the specific. 

Mr. SMITH. Okay. Good. 

Ms. RICHARDSON. The U.S. Government needs to tell Russia to 

put a comprehensive optical disc regulatory scheme in place right 

away. They need to tell the President of Russia that he needs to 

take ownership of this issue and stop the corruption. Only he can 

do it. And they need guidance from the supreme court to get tougher sentences. 

Mr. SMITH. Great. Thanks. Mr. Schwartz? 

Mr. SCHWARTZ. This is an agreeable panel. I agree that—I think 

what they need are deadlines. That has worked in the past. A year 

ago, when the U.S. Government suggested to the Russian government that June 30, 2004 was going to be a trigger date for the removal of some or all GSP benefits—and it was just done at an informal level—we saw a lot of activity on the Russian side. Probably, it helped produce the Russian copyright law amendments of 

last July. So I think they need a deadline. 

And failing that, I mean, within that deadline, they need to go 

and inspect all 34 plants. This is not that difficult to do. And if 

they don’t by that deadline, then they need to understand there are 

consequences. And these deadlines just can’t keep extending out 

and extending out. 

Mr. SMITH. Okay. Thank you, Mr. Schwartz. I happen to agree 

with you. I don’t think anything gets done unless there is a deadline. And that’s part of the problem. 

Now, that brings us to the end. But Ms. Espinel, you haven’t 

given us too many deadlines, but you’ve mentioned 6 months several times. So I’m going to take that as a deadline for a lot of the 

actions by the office. And obviously, you can expect an oversight 

156

hearing in 6 months. We’ll hope for a lot of progress. Thank you 

all. 

The gentleman from California, Mr. Berman. 

Mr. BERMAN. Thank you, Mr. Chairman. In defense of the Trade 

Representative’s Office, when a decision to deny GSP preferences, 

or elevate from the Priority Watch List to the Country Watch 

List—I take it, that’s important because some sanctions flow from 

being elevated to that list? Automatically? 

Ms. ESPINEL. Not quite automatically. But it causes the—We 

have to initiate an investigation, and at the end of that investigation we could then impose sanctions. So it does sort of start a chain 

of action. 

Mr. BERMAN. In other words, it has more meaning than a Priority Watch List? 

Ms. ESPINEL. Yes. 

Mr. BERMAN. All right. So before a decision to take away GSP, 

or elevate to a list, or to say we’re not interested in beginning accession talks in terms of the WTO, is this a decision made by the 

Trade Representative? Or does he have to clear it with some other 

agencies first? 

Ms. ESPINEL. We make decisions on all three of those things by 

interagency consensus. So this is not—this is not the sole decision 

of the United States Trade Representative. This would be a decision made by the U.S. Government, in consultation with our full 

interagency group. 

Mr. BERMAN. And who is on that interagency group? 

Ms. ESPINEL. A range of agencies. But the agencies that tend to 

be most deeply involved in intellectual property issues, I would say, 

are the Department of State, the Department of Commerce, with 

the sort of sister agency of the Patent and Trademark Office, the 

Department of Justice to some extent, I think particularly frankly 

with respect to the enforcement issues——

Mr. BERMAN. Is it done in the context of intellectual property 

issues, or is it done in the context of U.S.-Russia relations? 

Ms. ESPINEL. There would actually be overlap between both 

groups. But primarily, it’s done through a TPSC process—a TPSC 

group, that focuses on intellectual property issues. 

Mr. BERMAN. And when they’ve cleared something as appropriate 

from an intellectual property point—I mean, it sounds to me like 

we’ve got—one would need to do a lot more reviews to have a compelling case of both inadequate laws and a massive lack of enforcement and a totally inadequate sanctions system within Russia. 

When the interagency intellectual property group thinks something 

has to be done, then what happens? 

Ms. ESPINEL. If the interagency intellectual property group decides, at not just the TPSC level, but at the higher political level—

if we have a consensus from the U.S. Government, then the USTR 

will move forward to implement the decisions that the interagency 

group takes. But I think, following up on what you said, the problems that we face with Russia are complicated. And there are a lot 

of competing interests that are being weighed in Russia. 

And this is not in any way to undermine or detract in any way 

from the seriousness of the problem that we are facing in Russia, 

157

but I think that is a partial explanation for why the interagency 

process in this case has been a long one. 

Mr. BERMAN. But like in the case of the GSP petition, how many 

years now? Five years? Four years. But I guess my point is, if we 

think—which I do—that this situation is quite outrageous, that we 

wouldn’t tolerate this in another sector of the economy, this kind 

of action, throwing all our ammunition at you may not produce the 

result. 

We may want to—we may want to get—put pressure on the Administration to give greater weight to this issue than they are now 

doing, in order to allow you to move ahead with some of the options 

that have been suggested and that you have indicated receptivity 

towards, but not endorsement of. In other words, shall we at least 

add others to our target list here? 

Ms. ESPINEL. Well, I think I’m here today because Ambassador 

Portman is very concerned about intellectual property in Russia 

and very interested in hearing the views of this Committee specifically. So I would, you know, welcome—we welcome input from this 

Committee. 

But in addition, it is a joint U.S. Government decision that will 

have to be made. So I can’t speak for other agencies, but I am sure 

every agency in the U.S. Government would be interested in hearing the views of this Committee. 

Mr. BERMAN. I’m not so sure about that. If performance is—if the 

past is prologue. 

One last question, then, on the digital piracy issue, can we get 

a sort of a Grokster kind of decision in—does Russia have a copyright framework for indirect and contributory infringers that we 

could legitimately ask them to pursue at this point? 

Mr. SCHWARTZ. I’ll answer that. The answer is, yes, they do. 

What they did in their 2004 amendments was to adopt provisions 

in their law for eventual implementation of the digital treaties. 

One of the things that they did do, unfortunately, was to delay implementation of the making available right for sound recordings 

until September of 2006, because of some internal opposition to it. 

But the answer is, yes. 

But the type of piracy that Mr. Gerson was talking about, this 

is a hosted server, the MP3. This is not a difficult copyright case. 

Mr. BERMAN. This is——

Mr. SCHWARTZ. This is protected under the 1961——

Mr. BERMAN. This is not the P-to-P problem? 

Mr. SCHWARTZ. Not at all. It’s hosted on a server site. So that’s 

why the reproduction right, which has been in the Russian law 

since 1993, would clearly outlaw this type of activity. 

Mr. BERMAN. Was that Russian guy who broke the DVD 

encryption, was he an agent of the government at the time? No, 

never mind. 

Mr. GOODLATTE. [Presiding.] I thank the gentleman. Ms. Espinel, 

what lessons would you say the U.S. Trade Representative has 

learned from China’s accession to the WTO and our subsequent inability to persuade the Chinese to meaningfully enforce intellectual 

property rights, that you’ve applied to the pending Russian application for WTO membership? 

158

Ms. ESPINEL. Well, I think China and Russia are actually countries that are in very different positions. I think there are—I think 

the governments there have different attitudes. So I don’t think 

necessarily what applies to one would apply to the other. 

Mr. GOODLATTE. What difference in the Russian attitude would 

you perceive that would make them better than the experience 

we’ve had with China? 

Ms. ESPINEL. Well, what I was going to—I think in the earlier 

China hearing some of the panel had expressed the view that having China in the WTO was helpful, to some extent; that it was better to have China in the club, it was better to have the obligations 

of the TRIPS agreement as Chinese commitments than it would be 

to have China without. 

Mr. GOODLATTE. But all that was done without China having 

the—not just the legal framework, but really the mindset, the kind 

of judicial structure, the kind of police structure and so on, that 

would be willing to go out and enforce these laws. They’re now in 

the WTO and, yes, we can bring a WTO case against them, but 

we’re really struggling from very far behind. Isn’t the same thing 

true in Russia? 

Ms. ESPINEL. Well, that’s sort of what I was going to. I think 

right now we’re at a critical point in accession negotiations with 

Russia. I think we have—you used the word ‘‘leverage’’—but we 

have an opportunity to impose meaningful deadlines on Russia in 

the accession negotiations. And I think we would take very seriously the concerns that we have heard from industry about not letting the—— Mr. GOODLATTE. Would we require to see some of this activity before we admit them to WTO, or simply get a timetable that they 

would commit to after they join the WTO? Because that’s the problem we have with China. 

Ms. ESPINEL. Well, as I was saying, I think we will take very seriously, and Ambassador Portman will take very seriously, the concerns that were raised from industry to not let Russia into the 

WTO until they have made meaningful commitments to us on intellectual property. 

It has, obviously, been a huge priority in the accession negotiations, and it’s something that we have been pressing Russia very 

hard on. But I will admit there is still a lot of progress—we have 

not seen nearly the progress that we feel Russia needs to make. So 

we will continue to press. And I think we see, and will continue 

to see, the accession negotiations as an appropriate forum for us to 

press Russia to make meaningful changes. 

Mr. GOODLATTE. And then, on the very specific subject that we’ve 

been talking about here, the optical disc plants, what does the 

USTR intend to do to ensure that the Russian government and 

Russian officials immediately inspect these optical disc plants that 

are operating on property owned by the Russian military, the socalled ‘‘restricted access regime enterprises’’? 

Ms. ESPINEL. The optical disc plant is at the top of our priority 

list of IP concerns with Russia. This has—there is actually an action plan that we have given to Russia recently in dealing with 

their optical disc products—their optical disc problem—including 

through some of the measures that have been discussed here. Like 

159

unnotified searches and seizures of the production plants has been 

a key element of that. So it is something that we are definitely 

pressing very hard. It is at the very top of the list of issues that 

we have with Russia. 

Mr. GOODLATTE. Thank you. Mr. Gerson, as the world’s largest 

music company, you are, I’m sure, aware of the extent to which European and Japanese companies are experiencing similar difficulties protecting their IP in Russia. I wonder if you might indicate 

whether you think the U.S. alone can persuade the Russian government to achieve adequate and effective enforcement of IP rights; 

or do you believe that we need to have some multilateral action 

here? 

Mr. GERSON. No, I agree with the statement made in the earlier 

panel by Myron Brilliant. I think there is an important opportunity 

to work with the Japanese and European businesses and parliamentarians, other government officials, to together try to come up 

with a plan to address what’s going on in China and in Russia. 

And, you know, to answer a question that you asked Ms. Espinel, 

there has to be something to learn from the China experience. 

There has to be another provision, another paragraph, another tool 

to put in there to guarantee enforcement of trade agreements. 

WTO as an institution and global confidence in free and fair 

trade are undermined when agreements and commitments aren’t 

enforced. And if they can’t be enforced, we need to do something 

so that there is the power to enforce them. 

Mr. GOODLATTE. I agree with that. What signs do you see of European and Japanese governments coming together to cooperate 

with us in such a thing? Do you think they’re so anxious to get 

Russia into the WTO that they’re going to let this slide? Or do you 

think they really will be willing to hold back and do what’s necessary to, in a multilateral way, press the Russians to do what 

we’ve been pressing them to do? 

Mr. GERSON. In some respects, I think that you and Congressman Berman might be in a better position to answer that. You 

interact with your counterparts in other governments from time to 

time, and over the years have built up relationships with those who 

are committed to doing something in this area. 

We work with other music industry—our music industry colleagues in other countries. We hear their frustrations. In many 

cases, they look to the United States as a leader in this area. 

But I think it would be terrific to try to identify government officials, parliamentarians, others who want to work with us to find 

the right tools to use to deal with piracy that’s not only affecting 

America’s music and movie industry any more; it’s affecting everyone, including, you know, the manufacturer in your district of an 

altimeter. Who would have thunk it? But that’s where this piracy 

trend is going. It’s affecting every sector of the economy. 

Mr. GOODLATTE. Well, let me ask that question of Ms. Espinel, 

then. What is the U.S. doing to reach out to the Europeans and 

Japanese and others that have a strong interest in protecting intellectual property rights, to pull together that kind of multinational, 

multilateral coalition that could put this pressure on Russia? 

160

And as a follow-on to that, do you believe that folks in these 

other countries in a position to join us in that effort will see the 

need to confront Russia now, before they join the WTO? 

Ms. ESPINEL. One of the major things that the Administration 

has been doing, particularly in the last few months, is reaching out 

to trading partners like Japan and Hong Kong and Singapore, to 

try to come up with a collective plan to address the problems, the 

type of problems that we’re seeing in Russia. We are also going to 

be reaching out to the Europeans in early June, both to the commission and to some of the European countries that are facing the 

same problems that we have and share similar concerns that we 

have. 

I will tell you preliminarily that I have been encouraged by discussions that we’ve had. I think there is actually a lot of interest 

in cooperating. I think there is a growing recognition that the 

United States and certainly no other single country can do this 

alone; that in order for countries that care about protecting intellectual property to combat this effectively, we are going to have to 

cooperate together. 

But—so I am hopeful that the STOP initiative is going to bear 

some—in the short term, some very real, concrete results with our 

trading partners in Asia and with Europe. 

Mr. SCHWARTZ. If I could just——

Mr. GOODLATTE. Yes, let me go ahead, and I’ll give Mrs. Richardson a chance, too. I didn’t mean to neglect both of you. But go 

ahead. 

Mr. SCHWARTZ. From my experience, I think that, yes, the cooperation makes a lot of sense. But I think in a more sophisticated 

negotiation, the European Union, for one, has always understood 

that these issues are at the forefront of importance for the U.S. 

And therefore, at the end of the day, they allow the U.S. to negotiate this issue, in exchange for concessions, while the European 

Union is negotiating for other things—for whatever else that they 

need. 

And so the cooperation idea is a good one. But, in defense of Ms. 

Espinel and the U.S. Government, who do as good a job as possible, 

in trying to get that cooperation, when the negotiations are ongoing, that is the bilateral negotiations between the EU and Russia 

on WTO accession, I really think that the rest of the world looks 

to the United States on this issue; not only as a leader, but as the 

one that has to make the tough decisions. 

Mr. GOODLATTE. Ms. Richardson? 

Ms. RICHARDSON. I just wanted to point out that to the best of 

my knowledge, the Europeans have already closed out their WTO 

negotiations with Russia. They may be willing to lend us moral 

support, but I think their negotiating leverage is gone. 

Mr. GOODLATTE. Good point. 

Yes, the gentleman from California. 

Mr. BERMAN. Just I am reminded, from Mr. Schwartz’s comments, there have been times—forget the problems with the Europeans prioritizing things, hoping that the U.S. will carry the day 

on intellectual property protection. I remember the days when the 

U.S. was twisted between something for the farmers, and abanVerDate 0ct 09 2002 14:31 Aug 11, 2005 Jkt 000000 PO 00000 Frm 00164 Fmt 6601 Sfmt 6601 G:\WORK\COURTS\051705A\21217.001 HJUD1 PsN: 21217
161

doning the people involved in intellectual property protection, 

so——

Mr. GOODLATTE. Don’t put me in a world of hurt, here. [Laughter.] 

Mr. BERMAN. In other words, these pressures come in many different places. I mean, it will be interesting to see if we can get the 

Europeans just to uphold the arms embargo they agreed to on 

China; let alone this. So it’s—I mean, I wonder to what extent we 

really can get the—particularly in some of these intellectual property areas, where we’re doing so—we’re so far ahead of them in 

terms of product and revenues, whether we can get them to step 

up to the plate. 

And then, when Ms. Richardson points out they’ve already come 

to terms, that’s sort of like saying—maybe our raising the issue 

with the Europeans will at least keep them from yelling at us 

about not moving fast enough on Russia. But I’m skeptical about 

our effectiveness in getting that kind of a wide coalition on this 

particular issue. I think we’re going to have to make some tough— I hate to say it—sort of unilateral decisions here. 

Mr. SCHWARTZ. And that is why, you know, the bilateral tools 

that we have, like providing GSP benefits, I think could be successful; because here Russia is gaining $500 million in trade preferences from the U.S. as a bilateral matter, and obviously, the U.S. 

has a strong interest in seeing this problem fixed. And it would 

seem to be a quid pro quo here. 

Mr. GOODLATTE. And a nice chicken dinner with your trip to the 

movies is a winning combination. They don’t have to be at odds 

with each other. 

Mr. BERMAN. Chicken Kiev. 

Mr. GOODLATTE. There you go. Absolutely. Absolutely. Our largest export to Russia, by the way, of any kind. 

Well, folks, this has been an outstanding panel. We really appreciate your contribution. It’s a major challenge. And whether the 

U.S. can pull together some help from Asian and other countries 

to leverage what we need to get from the Russians, or whether we 

have to hold out and do it on our own, I don’t know; but I believe 

we should. 

This is too important. It’s too much at stake. There are hundreds 

of thousands, if not millions of American jobs involved here, with 

the amount of money that we lose in pirated intellectual property 

in China and in Russia. And we need to start fighting back a lot 

more aggressively than we have. 

So I hope that’ll be the watchword of our new U.S. Trade Representative, and we look forward to working with him. And I thank 

you all for your participation today. 

[Whereupon, at 1:30 p.m., the Subcommittee was adjourned.] 

(163)

A P P E N D I X 

MATERIAL SUBMITTED FOR THE HEARING RECORD

PREPARED STATEMENT OF THE HONORABLE HOWARD L. BERMAN, A REPRESENTATIVE

IN CONGRESS FROM THE STATE OF CALIFORNIA, AND RANKING MEMBER, SUB- COMMITTEE ON COURTS, THE INTERNET, AND INTELLECTUAL PROPERTY

Mr. Chairman, 

Thank you for scheduling back-to-back hearings on the scourge of international 

intellectual property piracy with a focus on China and Russia, two of the countries 

that present the greatest challenges to intellectual property enforcement. Because 

there are unique enforcement issues with respect to each country, it is appropriate 

to address these areas separately. The problem we confront, however, is the same: 

how to prevent billions of dollars in losses to the American economy as a result of 

an unfettered ability to pirate. 

From almost the beginning of recorded history, China has served as a provider 

of desired goods. Marco Polo traveled the world to bring back goods made in the 

Orient. Today, China’s economy has grown to include the manufacture of many different products, including clothing, purses, software, computers, and movies. While 

just as desired as the goods of Marco Polo’s day, these modern goods often are not 

the legitimate product of the original source; instead, these are goods that are copied, reverse engineered and—with limited investment and no payment to the creator—sold for a negligible price to China’s 1.3 billion citizens and exported in massive quantities to other countries, including America. 

The impact of counterfeiting and piracy on American innovators and the general 

public is impossible to quantify with precision. Pharmaceutical researchers that invest in the development of drugs lose the ability to control the safety of their products. Studios that produce movies are unable to realize the full measure of profit 

from their creations. Car manufacturers cannot control the quality of their parts. 

But perhaps most egregious is that because of piracy, American jobs are lost and 

American creators lose the benefits of their contributions to the world of creativity. 

The Chinese government and some Chinese companies appear to have an interesting philosophy about piracy. They point to their robust laws on intellectual property, show you attempts at enforcement with a televised raid of a market stall, and 

describe their involvement in the issue by lending you educational materials for 

high schools on the importance of respecting intellectual property. Piracy, they 

claim, is not to be tolerated. 

Yet the reality is that not only is piracy tolerated, but the government typically 

turns a blind eye to allow the benefits of piracy to accrue to Chinese consumers. 

These cheaper products, it is argued, provide the Chinese population with the luxury items they desire, but may not be able to afford. I have heard some in the Chinese government assert that the pirates are merely providing cheaper products for 

those who cannot afford to buy bread, in essence functioning as ‘‘Robin Hoods’’ for 

these goods. Yet this argument holds little credence when those goods are openly 

exported around the world, disrupting existing markets for legitimate product. As 

noted by the Chamber of Commerce, in the year ending October 31, 2004 the value 

of Chinese counterfeits coming into U.S. markets seized by the U.S. increased 47 

%. 

Rampant piracy has enabled the Chinese economy to move forward rapidly in the 

race of technology by building off the innovation of others without investing the initial time and capital in development of the product. Their goal of being a dominant 

market power is no longer in the distant future, but is becoming a reality now in 

part as a result of pilfering the fruit of many American ideas. 

If the government in China sincerely wanted to stop piracy, it could. Clearly when 

piracy hurts Chinese interests, the government has been motivated to step in. When 

t-shirt knockoffs of the Beijing 2008 Summer Olympics were being sold, the governVerDate 0ct 09 2002 14:31 Aug 11, 2005 Jkt 000000 PO 00000 Frm 00167 Fmt 6601 Sfmt 6621 G:\WORK\COURTS\051705A\21217.001 HJUD1 PsN: 21217
164

ment was quick to close down the shops and fine the counterfeiters. In 2001, the 

government tore down 690 billboards that illegally associated products with the 

event and ripped fake Olympic emblems off 67,000 taxis. It is a shame that these 

billboards likely sat on top of markets which sold counterfeit Gucci bags and that 

the taxis were dropping off customers to buy pirated DVDs. 

This Saturday, the Washington Post reported that the administration will likely 

cap imports of clothing as a result of the glut of Chinese products entering the 

American market. There is a far more compelling case for the administration to be 

forceful with China about its willingness to tolerate intellectual property violations. 

A precondition to China entering the World Trade Organization was that it implement intellectual property protections. They have been given time to address this 

concern and have failed. It is time for the administration to bring a WTO case and 

confront China in a meaningful way. If we provide the will for them to put a stop 

to piracy, they will find a way. 

I look forward to hearing from our witnesses. I am especially interested in hearing 

from USTR and what steps they are taking to protect America’s most valuable 

treasure: our ideas and creations. 

PREPARED STATEMENT OF THE HONORABLE BOB GOODLATTE, A REPRESENTATIVE IN

CONGRESS FROM THE STATE OF VIRGINIA

Mr. Chairman, thank you for holding these important oversight hearings on intellectual property theft in China and Russia. 

In China, an estimated 95% of motion pictures and 90% of business software are 

pirated. In Russia, 80% of all motion pictures and 87% of business software are pirated. Considering that the core copyright industries account for 6% of U.S. GDP 

and the total copyright industries account for approximately 12% of U.S. GDP, it 

is clear that America’s businesses are facing a serious problem. In fact, the FBI estimates that U.S. businesses lose between $200–250 billion a year to counterfeit 

goods. 

Recently, China and Russia have received attention for intellectual property 

rights violations within their borders. For example, in April, the Office of the United 

States Trade Representative released its ‘‘Special 301’’ report, and elevated China 

to the ‘‘priority watch list’’ due to its failure to protect intellectual property rights. 

We must make sure that each nation recognizes that piracy is a global problem. 

The growth of piracy among organized crime rings is illustrative of its global scope. 

The combination of enormous profits and practically nonexistent punishments by 

many foreign governments makes copyright piracy an attractive cash cow for organized crime syndicates. Often specializing in optical disc and business software piracy, these crime rings are capable of coordinating multi-million dollar efforts across 

multiple national borders. For example, on December 19, 2001, Mexican officials 

raided numerous locations in Mexico in an effort to bust an organized crime ring 

there. These officials uncovered 12.5 million blank CD-R’s and arrested eleven members, some of whom were armed with high powered weapons. Subsequent investigations revealed that the blank CD’s were made in Taiwan, shipped to a shell company established in the U.S., and then shipped to Mexico, where the actual illegal 

copying and distribution occurred. We must meet this type of highly organized piracy with highly organized coordination and enforcement efforts. 

Another disturbing trend is the growing willingness of many foreign governments 

to condone the use of, and even use, pirated materials. At its best, government sets 

the standards for the protection of rights. At its worst, government encourages and 

even participates in the breach of those rights. Now is the time for each country 

in the international community to choose which path it will take with regard to intellectual property rights. 

We all must realize that copyright piracy and counterfeiting are serious problems 

that do not merely affect private companies’ bottom lines in the short term. They 

also discourage investment and innovation in the long term, which will eventually 

lead to fewer consumer choices—a repercussion that affects entire societies and 

economies. Governments must work together to reward creators and punish thieves. 

In addition, counterfeit goods can pose serious risks of bodily harm and even 

death. The U.S. Chamber of Commerce estimates that trade in counterfeit goods 

makes up between six and nine percent of all world trade. With products as essential as airplane parts and car brakes being faked, we must focus attention on this 

growing problem for the sake of our citizens. 

Recent treaties, such as the TRIPS agreement, provide the legal framework for 

member countries to aggressively enforce their copyright laws. Article 61 of the 

TRIPS agreement specifically requires member countries to establish criminal proceVerDate 0ct 09 2002 14:31 Aug 11, 2005 Jkt 000000 PO 00000 Frm 00168 Fmt 6601 Sfmt 6621 G:\WORK\COURTS\051705A\21217.001 HJUD1 PsN: 21217
165

dures and penalties to be applied in cases of copyright piracy. We already have 

many tools to combat international piracy. Now we must put these tools to work. 

The United States must lead by example and rigorously enforce our copyright piracy 

statutes. However, we must also work with the international community to encourage other countries to do the same. Only when we coordinate our efforts to combat 

piracy will we see substantial results. 

I look forward to hearing the testimony of our expert witnesses about the scope 

of piracy and counterfeiting in China and Russia, and learning about the steps we 

can take to solve these growing problems. 

PREPARED STATEMENT OF THE HONORABLE ELTON GALLEGLY, A REPRESENTATIVE IN

CONGRESS FROM THE STATE OF CALIFORNIA

Thank you for holding these two hearings today, Mr. Chairman. 

Intellectual property is at the heart of the American success story. Over the last 

200 years, the United States has emerged as the leader in innovation and development of new technologies and these innovations and developments are in turn the 

heart of the American economy. Intellectual property systems that encourage innovation made this possible. 

Unfortunately, bad actors scorn the protection of innovation and development and 

favor systems that foster free riding on the backs of others. US trade partners must 

respect intellectual property. They not only must have laws on the books proscribing 

infringement, but also have enforcement mechanisms in place to make them stick. 

I am particularly concerned about recent revelations that pirating operations may 

be operating on land owned by the Russian government. 

California industries have seen billions of dollars of losses. These losses do not 

only involve losses to the recording and movie industries, though I am very sympathetic to the particularly large losses in those sectors. American products from shaving razors to auto parts to pharmaceuticals are also being copied and sold in violation of international law. Former Attorney General Ashcroft reported late last year 

that intellectual property crimes cost the US economy $250 billion and 300,000 jobs 

in 2003. DVD piracy alone reportedly accounts for $3 billion a year in losses to the 

US economy. 

As the government, we have a duty to protect the rightful owners of property, intellectual and otherwise. The health of our economy depends on it. 

I am interested in hearing the testimony of the witnesses and hearing about what 

we have learned from our dealings with China that can be applied to other countries 

where piracy is a problem. 

Thank you, again, Mr. Chairman. I yield back my time.

166

PREPARED STATEMENT OF THE AMERICAN CHAMBER OF COMMERCE

PEOPLE’S REPUBLIC OF CHINA


IPR0001.eps
167


IPR0002.eps
168


IPR0003.eps
169


IPR0004.eps
170


IPR0005.eps
171


IPR0006.eps
172


IPR0007.eps
173


IPRX0008.eps
174


IPR0009.eps
175


IPR0010.eps
176

ARTICLE FROM THE NEW YORK TIMES ENTITLED ‘‘THE PIRATE KINGDOM’’

BY PAT CHOATE


NYT1.eps
177


NYT2.eps
178

DEAR COLLEAGUE AND ARTICLE ENTITLED ‘‘IN RUSSIA, POLITICIANS PROTECT MOVIE

AND MUSIC PIRATES’’ FROM THE HONORABLE LAMAR SMITH, A REPRESENTATIVE IN

CONGRESS FROM THE STATE OF TEXAS, AND CHAIRMAN, SUBCOMMITTEE ON

COURTS, THE INTERNET, AND INTELLECTUAL PROPERTY


Smith1.eps
179


Smith2.eps
180


Smith3.eps
181


Smith4.eps
182

PREPARED STATEMENT OF THE HONORABLE HOWARD L. BERMAN, A REPRESENTATIVE

IN CONGRESS FROM THE STATE OF CALIFORNIA, AND RANKING MEMBER, SUBCOMMITTEE ON COURTS, THE INTERNET, AND INTELLECTUAL PROPERTY

Mr. Chairman, 

Russia is considered by the copyright industries, as second only to China as an 

intellectual property pirate. Russia adopted a copyright law in 1993, and finally in 

2004, remedied some key deficiencies. But it has neither enacted appropriate laws 

to deal with the problems of optical disc piracy, nor has it enforced the laws already 

on its books. Because of its poor enforcement, Russia is now one of—if not the largest—exporter of pirated music products in the world. Their pirated products have 

surfaced in over 27 countries, including the U.S. 

Almost two years ago, a number of members of Congress sent a letter to President 

Bush to focus his attention on the escalating problem in Russia. Yet Russian plants 

are still producing tens of millions of pirated optical discs for export. U.S. copyright 

industries continue to lose billions of dollars and the piracy rates are estimated at 

70% for every copyright sector. 

In February, The International Intellectual Property Alliance released its 2005 

Special 301 recommendations, a document that Mr. Schwartz will address in his testimony. Many of the suggestions provided in the IIPA report and today’s testimony 

describe how the U.S. government can address the severity of the situation in Russia. These options are time-sensitive. We must consider one or all of the following 

actions: recommending the designation of Russia as a Priority Foreign Country, or 

conditioning Russia’s entry into the WTO on meaningful copyright enforcement, or 

denying Russia its GSP benefits. We must move quickly because each day that goes 

by without a firm stance by the Administration on these possibilities lessens the importance of this issue in Russia’s eyes. 

When we had a hearing on international copyright piracy two years ago, a constituent of mine testified to her own personal experience of intellectual property 

theft by the Russian government. Before us today are representatives from the 

movie and music industry who will testify to the effect Russian piracy has on that 

segment of the American economy. These industries represented 6% of U.S. economic output and almost 5.5 million jobs in 2004. However, whether you pirate from 

an individual or from a corporation, the act of piracy must be stopped. 

The same holds true whether the piracy is sponsored by the government itself or 

funded by individual citizens. While the concept of private ownership of property is 

relatively new in many of the formerly communist countries, the value has not been 

lost on them. Any government that wants the benefits of trade with America, and 

who is currently benefiting from trade preferences, like Russia, has a responsibility 

to respect American innovation. Furthermore, any citizen of a state must recognize 

basic rules of law, such as the prohibition on theft. The Russian government has 

pointed to the high price of legitimate products coming from the United States as 

a justification for piracy. This is tantamount to blaming the victim for the crime. 

It is clear that price is not the cause of piracy. The pirated goods contain language 

tracks that include languages that are not Russian!! Therefore, the goal therefore 

is not to help Russians afford DVDs of movies—piracy is providing a business opportunity to service those that live outside of Russia. 

The Wall Street Journal article ‘‘In Russia, Politicians Protect Movie and Music 

Pirates,’’ points to elected government officials who help protect the pirates. As I 

said two years ago, when a government does not exert its authority to stop the theft 

of intellectual property, it is entirely appropriate for the US not to grant special 

trade privileges such as WTO accession or GSP benefits on that foreign government. 

Furthermore, a government that itself is sponsoring intellectual property theft represents the essence of organized crime. In any nation, there is no bigger organization than its government, and there are few clearer prohibitions in any system of 

law than the prohibition on theft. 

We have an opportunity now when trying to address the piracy situation in Russia to learn from our failures with intellectual property enforcement in China. Before permitting Russia’s accession to the WTO, we must require stricter enforcement 

of Intellectual Property rights. 

I look forward to hearing the witnesses describe the extent of piracy in Russia 

and any suggestions they may have to curtail the problem. I hope to work with 

Chairman to address the importance of achieving significant reform of Russian intellectual property enforcement before admitting Russia into the WTO.

183

PREPARED STATEMENT OF THE COALITION FOR

INTELLECTUAL PROPERTY RIGHTS (CIPR)


CIPR0001.eps
184


CIPR0002.eps
185


CIPR0003.eps
186


CIPR0004.eps
187


CIPR0005.eps
188

LETTER FROM THE RECORDING INDUSTRY ASSOCIATION OF AMERICA (RIAA) TO

PRESIDENT GEORGE W. BUSH


RIAA1.eps
189


RIAA2.eps
190


RIAA3.eps
191

Æ


RIAA4.eps