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38–864 PDF 2007

S. HRG. 109–989

PIRACY OF INTELLECTUAL PROPERTY

HEARING

BEFORE THE

SUBCOMMITTEE ON INTELLECTUAL PROPERTY

OF THE

COMMITTEE ON THE JUDICIARY 

UNITED STATES SENATE

ONE HUNDRED NINTH CONGRESS

FIRST SESSION

MAY 25, 2005

Serial No. J–109–22

Printed for the use of the Committee on the Judiciary

(

(II)

COMMITTEE ON THE JUDICIARY 

ARLEN SPECTER, Pennsylvania, Chairman 

ORRIN G. HATCH, Utah 

CHARLES E. GRASSLEY, Iowa 

JON KYL, Arizona 

MIKE DEWINE, Ohio 

JEFF SESSIONS, Alabama 

LINDSEY O. GRAHAM, South Carolina 

JOHN CORNYN, Texas 

SAM BROWNBACK, Kansas 

TOM COBURN, Oklahoma 

PATRICK J. LEAHY, Vermont 

EDWARD M. KENNEDY, Massachusetts 

JOSEPH R. BIDEN, JR., Delaware 

HERBERT KOHL, Wisconsin 

DIANNE FEINSTEIN, California 

RUSSELL D. FEINGOLD, Wisconsin 

CHARLES E. SCHUMER, New York 

RICHARD J. DURBIN, Illinois 

DAVID BROG, Staff Director 

MICHAEL O’NEILL, Chief Counsel 

BRUCE A. COHEN, Democratic Chief Counsel and Staff Director 

SUBCOMMITTEE ON INTELLECTUAL PROPERTY

ORRIN G. HATCH, Utah, Chairman 

JON KYL, Arizona 

MIKE DEWINE, Ohio 

LINDSEY O. GRAHAM, South Carolina 

JOHN CORNYN, Texas 

SAM BROWNBACK, Kansas 

TOM COBURN, Oklahoma 

PATRICK J. LEAHY, Vermont 

EDWARD M. KENNEDY, Massachusetts 

JOSEPH R. BIDEN, JR., Delaware 

DIANNE FEINSTEIN, California 

HERBERT KOHL, Wisconsin 

RICHARD J. DURBIN, Illinois 

BRUCE ARTIM, Majority Chief Counsel 

BRUCE A. COHEN, Democratic Chief Counsel 

(III)

C O N T E N T S 

STATEMENTS OF COMMITTEE MEMBERS

Page

Biden, Hon. Joseph R., Jr., a U.S. Senator from the State of Delaware, 

prepared statement .............................................................................................. 33

Cornyn, Hon. John, a U.S. Senator from the State of Texas, prepared statement ...................................................................................................................... 35

Hatch, Hon. Orrin G., a U.S. Senator from the State of Utah ............................ 1

prepared statement .......................................................................................... 46

Leahy, Hon. Patrick J. Leahy, a U.S. Senator from the State of Vermont ......... 15

prepared statement .......................................................................................... 56

WITNESSES 

Hackford, Taylor, Board Member, Directors Guild of America, Los Angeles, 

California .............................................................................................................. 22

Holleyman, Robert, President and Chief Executive Officer, Business Software 

Alliance, Washington, D.C. .................................................................................. 27

Mendenhall, James, Acting General Counsel, Office of the U.S. Trade Representative, Washington, D.C. ............................................................................ 8

Peters, Marybeth, Register of Copyrights and Associate Librarian for Copyright Services, Copyright Office, Washington, D.C. .......................................... 3

Pinkos, Stephen M., Deputy Under Secretary of Commerce for Intellectual 

Property and Deputy Director, U.S. Patent and Trademark Office, Alexandria, Virginia ........................................................................................................ 6

Smith, Eric H., President, International Intellectual Property Alliance, Washington, D.C. ........................................................................................................... 19

SUBMISSIONS FOR THE RECORD 

Hackford, Taylor, Board Member, Directors Guild of America, Los Angeles, 

California, prepared statement ........................................................................... 37

Holleyman, Robert, President and Chief Executive Officer, Business Software 

Alliance, Washington, D.C., prepared statement .............................................. 48

Mendenhall, James, Acting General Counsel, Office of the U.S. Trade Representative, Washington, D.C., prepared statement ......................................... 58

NBC Universal Pictures, charts ............................................................................. 70

Peters, Marybeth, Register of Copyrights and Associate Librarian for Copyright Services, Copyright Office, Washington, D.C., prepared statement ....... 74

Pinkos, Stephen M., Deputy Under Secretary of Commerce for Intellectual 

Property and Deputy Director, U.S. Patent and Trademark Office, Alexandria, Virginia, prepared statement ..................................................................... 87

Smith, Eric H., President, International Intellectual Property Alliance, Washington, D.C., prepared statement and attachment ............................................ 102

Trainer, Timothy P., President, Global Intellectual Property Strategy Center, 

P.C., Washington, D.C., prepared statement ..................................................... 145

(1)

PIRACY OF INTELLECTUAL PROPERTY 

WEDNESDAY, MAY 25, 2005

UNITED STATES SENATE, SUBCOMMITTEE ON INTELLECTUAL PROPERTY, COMMITTEE ON THE JUDICIARY, Washington, D.C. 

The Subcommittee met, pursuant to notice, at 2:34 p.m., in room 

SD–226, Dirksen Senate Office Building, Hon. Orrin G. Hatch, 

Chairman of the Subcommittee, presiding. 

Present: Senators Hatch and Leahy. 

OPENING STATEMENT OF HON. ORRIN G. HATCH, A U.S. 

SENATOR FROM THE STATE OF UTAH 

Chairman HATCH. All right, we have had enough frivolity here. 

We have got to go to work, so welcome to today’s hearing before 

the Intellectual Property Subcommittee. 

Today, we will be examining a variety of problems and challenges involving international piracy, and that is international piracy of U.S.-owned intellectual property. This hearing will focus on 

copyright piracy, but I hope the Subcommittee will be mindful of 

the serious issues in the trademark counterfeiting and patent infringement realms as well. 

Piracy and counterfeiting inflict significant and widespread 

harms on the American economy. Theft of intellectual property 

abroad is disastrous and very much disadvantages this country’s 

entrepreneurs, innovators and, of course, the creative community. 

Ultimately, it also harms consumers, shareholders and American 

workers and their families. 

The timing of this hearing was intended to coincide roughly with 

a number of recent developments and events relevant to our consideration of piracy issues. On April 29, 2005, the Office of the 

United States Trade Representative issued its decision resulting 

from the out-of-cycle review of China’s enforcement practices, and 

completed the special 301 process. Much of the focus in that process and in USTR’s conclusions remains on the inadequate enforcement of intellectual property rights in Russia and China. 

Russia remains on the Priority Watch List this year due to continuing problems with its legal regime, which is described as having weak intellectual property enforcement and a lack of data protection. It appears that Russia’s current intellectual property regime is inconsistent with its bilateral trade obligations and likely 

does not conform to the obligations which Russia needs to fulfill in 

order to join the WTO. 

2

Other recent events that have prompted some additional interest 

and scrutiny on both sides of the Hill include a number of studies 

and reports on piracy and counterfeiting which indicate that we are 

not making much headway in many areas. And I might add that 

some of these suggest some very disturbing trends in other areas 

as well. For example, various analyses indicate that piracy level in 

many sectors are close to or exceed 90 percent in China. In Russia, 

the overall losses to copyright-related industries have continued to 

increase and are, at least in my opinion, at unacceptable levels. 

Today, we will hear a description of the big-picture issues in the 

fight to protect U.S. interests and to ensure that American export 

products reliant on intellectual property rights receive appropriate 

attention and protection. We will also hear specific experiences and 

instances that illustrate how rapidly and widely pirated works 

reach countries around the globe. For example, it was recently reported that unauthorized disks of the new ‘‘Star Wars’’ movie were 

on sale on the streets of Beijing just days after the film’s premiere. 

My understanding is that Mr. Hackford, who directed the movie 

‘‘Ray,’’ has had a very similar experience with his film. 

We also will discuss the importance to the U.S. economy of the 

industries that rely most heavily on intellectual property rights. 

For example, according to the International Intellectual Property 

Alliance and other sources, the core U.S. copyright industries account for about 6 percent of our total United States gross domestic 

product. Employment in these industries has recently been estimated at 5.5 million workers, or 4 percent of total U.S. employment. Between 1996 and 2002, the information technology sector 

grew by 26 percent. This is a growth sector for the United States 

economy and in my own home State of Utah and one of the few 

areas in which we really have a positive balance of trade. 

I also want to point out that piracy of entertainment products is 

not the sole concern in the copyright realm. Although movies and 

music receive a lot of attention today, we are going to hear this day 

from Mr. Holleyman of the Business Software Alliance about a recently released report indicating that software piracy just in the 

Asia-Pacific region alone cost manufacturers in this country an estimated $8 billion in 2004. Losses due to software piracy worldwide 

are estimated at more than $32 billion, with predicted piracy rates 

of 90 percent in some countries. 

In preparing for this hearing, we asked witnesses to provide both 

a general description of the global state of affairs on intellectual 

property rights, as well as a discussion of specific areas of concern 

to them respectively. From the testimony, it appears that most of 

the witnesses have serious concerns about Russia and China. This 

is consistent with the feedback that I have received from a wide 

variety of sources. 

I note, however, that recent reports have also highlighted longstanding and serious problems particularly in the area of optical 

media piracy in places such as Pakistan, Malaysia and the Philippines. And although there has been progress in some areas, it 

does not appear at least to me that consistent headway is being 

made in many countries. 

Finally, I note that today’s hearing is particularly timely because 

the Chinese delegation to the Intellectual Property Working Group 

3

of the Joint Commission on Commerce and Trade is scheduled to 

meet here in Washington to discuss some of these issues with Government officials. Now, I am hopeful that some progress will be 

made, and I stand ready to provide whatever assistance is necessary to move forward on these very important issues. 

Let me close by observing that during the Cold War it was said 

that the Soviet Union’s style of negotiation could be summed up as 

follows: what is mine is mine and what is yours is negotiable. If 

Russia, China or any other government attempts to adopt this view 

with respect to their responsibilities to protect intellectual property 

under international trade law and agreements, I can assure you 

that public support for U.S. trade agreements will be undermined 

and there will be a strong resistance from, and appropriate action 

taken by, members of Congress. 

To put a fine point on it, before the Congress votes in favor of 

Russia joining the WTO, many of us will have to be convinced that 

the Russian government is serious about cracking down on theft of 

U.S. intellectual property. As the ranking Republican on the Finance Committee and the Chairman of this Subcommittee, I have 

a particular interest in the intellectual property problems that will 

be outlined today, and I intend to work with members of both sides 

of the aisle and in both committees to ensure that these issues receive the attention and resolution they merit. 

I know that Senator Leahy and many others, such as Senators 

and Cornyn and Feinstein, are concerned about these problems as 

well. So I look forward to hearing from the witnesses and I want 

to thank all of you for coming and for testifying here today and I 

believe this hearing should be a very good hearing. 

[The prepared statement of Senator Hatch appears as a submission for the record.] 

We will begin the hearing by turning to our stalwart, Marybeth 

Peters, who is Register of Copyrights and Associate Librarian for 

Copyright Services of the United States Copyright Office right here 

in Washington, D.C. After Marybeth, we will turn to Stephen M. 

Pinkos, the Deputy Under Secretary of Commerce for Intellectual 

Property and Deputy Director of the United States Patent and 

Trademark Office, in Alexandria, Virginia. Then we will turn to 

James E. Mendenhall, the Acting General Counsel of the Office of 

the United States Trade Representative. 

We welcome all three of you here today and we look forward to 

taking your testimony at this time. 

STATEMENT OF MARYBETH PETERS, REGISTER OF COPYRIGHTS AND ASSOCIATE LIBRARIAN FOR COPYRIGHT SERVICES, U.S. COPYRIGHT OFFICE, WASHINGTON, D.C. 

Ms. PETERS. Thank you, Mr. Chairman. Thank you very much 

for the opportunity to speak to you today about one of the most 

pressing issues in copyright—international piracy. It is always a 

pleasure to appear before you, and I am pleased to see the reestablishment of the Subcommittee and I congratulate you on your 

chairmanship. 

Mr. Chairman, in my nearly 40 years in the Copyright Office, piracy, and especially global piracy, has been an enduring problem. 

We can and should strive to reduce piracy to the lowest levels posVerDate 0ct 09 2002 12:45 Nov 26, 2007 Jkt 038864 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 S:\GPO\HEARINGS\38864.TXT SJUD1 PsN: CMORC
4

sible, levels that will not deny authors and copyright owners of the 

incentives to create and distribute the works that have made 

America’s creative industries the envy of the world. 

The Copyright Office has had a long history in working toward 

this goal both on its own initiative and in cooperation with other 

agencies of the Federal Government. In the ten years since the 

adoption of the TRIPs Agreement, there have been tremendous improvements worldwide in countries’ legal frameworks for copyright 

protection. By incorporating the substantive copyright obligations 

of the Berne Convention and supplementing them the civil, criminal and border enforcement obligations, TRIPs established a minimum standard against which all countries’ copyright regimes 

could be judged. 

The Office’s contribution to this success includes participation in 

the negotiation of the TRIPs agreement and other copyright treaties and agreements, as well as training of foreign officials. Our 

main program for training foreign copyright officials is our International Copyright Institute. This program exposes foreign officials 

from developing and countries in transition to a wealth of copyright 

knowledge and information presented by the U.S. Government and 

foreign and domestic industry experts. 

The Copyright Office works hand in hand with USTR on bilateral 

and regional trade agreements, including negotiations implementing the free trade agreements. We also support USTR free 

trade agreements by providing technical assistance to our negotiating partners. 

The Office is a major contributor to the strengthening of copyright protection through international organizations, notably the 

World Intellectual Property Organization. It played a key role in 

the negotiation of the WIPO Internet treaties which are substantially improving the legal framework for the protection of copyright 

in numerous countries around the world, including our own copyright law. 

I believe United States copyright law does the best job of providing appropriate protections to authors and copyright owners, 

while still allowing for fair and reasonable use of copyrighted material. But our law is not perfect and when we go to other countries 

seeking improved copyright protection, they are quick to point out 

the deficiencies and gaps in our law. 

For example, the United States has not amended its law to delete a provision of Section 110(5) added to our law in 1998 which 

significantly broadened the exemption for performance of musical 

works in public places like bars and restaurants. A WTO dispute 

resolution panel has determined that this expansion is inconsistent 

with our TRIPs obligations. Also, because our law has extremely 

narrow performance rights for sound recordings, many countries 

limit protection for U.S. rights-holders to only the protection that 

we provide, despite the popularity and widespread of U.S. recordings overseas. 

No matter how good a country’s law is on the books, enforcement 

of that law is essential to effective copyright protection, which is 

why the TRIPs Agreement contains specific provisions requiring 

adequate and effective enforcement measures. 

5

Our FTAs have built upon the TRIPs enforcement text by adding 

specificity to what is found in TRIPs and other obligations not 

found in TRIPs. The FTAs also provide us with the flexibility to address enforcement problems that are particularly problematic in a 

given region or country. 

The fact remains, however, that copyright enforcement in too 

many countries around the world is extremely lax. China is a good 

example of why enforcement is absolutely essential to the protection of copyright. As China joined the WTO in 2001, the Office 

worked with the USTR-led interagency team to provide technical 

advice and to urge the Chinese government to amend its law to be 

TRIPs-compliant. While its revision feel short in several important 

respects, the law is more than sufficient to provide some meaningful protection if it is enforced. Unfortunately, it is not. 

Last year, China made a number of commitments to improve 

various aspects of its intellectual property regime, most notably 

with regard to enforcement. Shortly before meetings in which those 

commitments were made, the Office hosted a delegation of Chinese 

officials, led by the National Copyright Administration. We have 

enjoyed a 25-year relationship with them which has helped promoted greater understanding between our governments. But NCAC 

does not have the final say on copyright policy and enforcement in 

China and China’s implementation of last year’s commitments has 

been incomplete. 

Russia has been on the Priority Watch List since 1997. According 

to IIPA, piracy rates in China in 2004 for most sectors are about 

80 percent and losses are beyond $1.7 billion. Obviously, there is 

a serious problem in Russia. The Copyright Office is committed to 

be a member of interagency efforts to combat intellectual property 

violations in Russia. Certainly, statements by President Putin and 

other high-ranking government officials indicate a comprehension 

of the serious nature of the problem, but piracy remains and we 

haven’t gotten the desired results. 

There are two causes of inadequate enforcement: one, lack of 

competent police, prosecutors and/or judges, and, two, lack of political will to enforce copyright. We and others do our best through 

training programs to address the first problem. The second, lack of 

political will, is much more difficult. 

Let me say something about the nature of piracy that we see in 

other countries. Much of it is done by for-profit criminal syndicates. 

Factories through China, Southeast Asia, Russia and elsewhere are 

churning out millions of copies of copyrighted works, sometimes before their authorized release. These operations most certainly involve other criminal activities, and although the information is 

sketchy at best, there have been a series of rumored ties between 

pirating operations and terrorist organizations. 

What is problematic is that some American commentators who 

are prone to hyperbole are providing arguments and rationalizations that foreign governments are using to defend their failure to 

address this type of organized crime. The confusion wrought by the 

imprecision and lack of clarity in these commentators’ statements 

is not helpful to achieving the goal for which there is no credible 

opposition—dramatic reduction in organized piracy of U.S.-copyrighted works abroad. 

6

International piracy poses a tremendous threat to the prosperity 

of our creative industries and it deserves our utmost attention. 

This attention must be consistent and long-term if it is to be successful, but we must be realistic in our goals, lest we become discouraged. While it is not realistic to expect to eliminate all piracy, 

we can assist in improving the global situation to the benefit of authors and rights-holders here in the United States and throughout 

the world. 

Thank you. 

[The prepared statement of Ms. Peters appears as a submission 

for the record.] 

Chairman HATCH. Thank you, Ms. Peters. We really appreciate 

that. 

Mr. Pinkos, we will turn to you. 

STATEMENT OF STEPHEN M. PINKOS, DEPUTY UNDER SECRETARY OF COMMERCE FOR INTELLECTUAL PROPERTY 

AND DEPUTY DIRECTOR, UNITED STATES PATENT AND 

TRADEMARK OFFICE, ALEXANDRIA, VIRGINIA 

Mr. PINKOS. Thank you, Mr. Chairman, and I appreciate the opportunity to join with you today in a discussion about international 

piracy issues. I have a deep respect for the role that the Judiciary 

Committee plays, or the leading role that it plays in crafting our 

Nation’s intellectual property laws and oversight of the agencies 

that implement them, and I think much of them is spawned from 

the fact that I spent six years as a staff member of the Judiciary 

Committee over on the other side of the Capitol. 

In fact, I think my last memory of this room is being in here a 

couple of years ago as we negotiated the PROTECT Act while we 

tried to catch glimpses of the NCAA Championship game in the 

other room right there. Luckily, the result of the legislative effort 

was strong and the game depended on whether you were—I think 

it was Kansas or Syracuse that year. 

I wanted to emphasize that the Bush administration is keenly 

aware and fully understands that intellectual property protection is 

critical to the competitiveness of our economy, and that U.S. businesses face enormous challenges in protecting their IP overseas. 

Secretary of Commerce Gutierrez, who has just been on the job 

for five months or so, is also very aware of the significance of intellectual property for America and he has made combatting piracy 

one of his top priorities. The U.S. Patent and Trademark Office is 

dedicated to carrying out his vision of marshaling all U.S. Government efforts and agencies to reduce IP theft. 

As you noted, Mr. Chairman, increasingly both the United States 

and our trading partners rely on IP to drive economic growth. The 

statistics you cited show that IP-based businesses such as software 

and entertainment now represent the largest single sector of our 

U.S. economy. 

Unfortunately, the economic benefits of intellectual property 

have also captured the attention of thieves and organized crime 

and, as Marybeth mentioned, even terrorists. Because of that, the 

threats to U.S. economic safety and security, the administration is 

working hard to curb IP crime and to strengthen enforcement 

around the world. 

7

I am certain that many of you and your colleagues have heard 

about the STOP initiative, which is the Strategy Targeting Organized Piracy. It is a White House-coordinated effort of all U.S. Government agencies that are involved in protecting IP and it is the 

most comprehensive U.S. Government-wide initiative yet. It is designed to simply eliminate trade in pirated and counterfeited goods 

worldwide, and the greatest benefit thus far has been bringing a 

lot of agencies together to discuss the different efforts that they 

have underway to stop trade in counterfeit and pirated goods. 

We are seeing some results: a report on behalf of some of my 

other colleagues in the administration that the Department of 

Homeland Security is increasing seizures. They are applying new 

technologies and accounting methods to try to stop bogus goods 

coming over our borders. DOJ, as you are well aware in your oversight of that agency, is stepping up their prosecutions and increasing the amount of special units they have for IP crimes. 

Over at the Department of Commerce, we are trying to inform 

U.S. businesses how to best protect their rights with a new hotline 

and a website and some training programs around the world. And 

specifically in the United States, Mr. Chairman, we started this 

week a series of seminars for small and medium-size enterprises. 

This applies more for the patent and trademark world, but we were 

out in Utah Monday and Tuesday of this week and we had over 

200 businesses represented in our seminar out there. Jon Dudas 

represented the agency there and from all accounts, it was quite 

a success. We are expanding that around the country and we are 

having a couple that are China-specific as well. We did one in Baltimore and we are going to Detroit soon. 

As I mentioned, USPTO is engaged in enforcement and training 

efforts around the globe and here. We have offered training and 

technical assistance to 55 different countries and we have trained 

hundreds, if not thousands, of officials—judges, prosecutors, legislators—in how to have a strong IP system and then how to enforce, 

as well. 

We have had particular focus on China and one of the things we 

are trying to do in China is, as has been stated, they have some 

good laws on the books, but they need to implement them and they 

need to enforce them. They have one of the fastest growing patent 

and trademark offices in the world and we are trying to give them 

the technical assistance so that when U.S. businesses go to protect 

their property there, the offices actually function as they should. 

As was mentioned by you, the Joint Commission on Commerce 

and Trade is meeting this week here in Washington, and the Working Group on IP, which is chaired by Mr. Mendenhall’s colleague, 

Deputy Ambassador Josette Shiner, along with Jon Dudas, are 

meeting with the Chinese and we are pressing them to implement 

an IPR action plan that will address some specific IPR problems. 

The PTO remains active at WIPO, which is always a unique institution to deal with. It is represented by developed and developing countries, but we work with them to set these international 

standards for IP protection and enforcement, and work to harmonize IP laws to the greatest extent possible. And we are trying 

to break some ground with a broadcasters treaty there, after the 

success of the Internet treaties. 

8

USPTO is also working closely with the USTR to provide the 

support they need with free trade agreements, and we have been 

fortunate, I think, with some of the recent trade agreements with 

Singapore and Chile and Morocco to have state-of-the-art IP protections in those agreements—what we like to call TRIPs-plus, going 

above and beyond what TRIPs requires. 

Mr. Chairman, just to say in closing counterfeiting and piracy do 

appear to be on the rise, but the administration, I think, is making 

progress in attacking the problem. There is a lot of work that needs 

to be done, but I am personally increasingly hopeful that with the 

continued coordination among agencies and the administration, 

work with this Subcommittee and other committees in Congress, 

and with private industry as well—they are a big partner in this—

we can continue to do more to help American businesses protect 

their important intellectual property. 

Thank you. 

[The prepared statement of Mr. Pinkos appears as a submission 

for the record.] 

Chairman HATCH. Well, thank you so much. 

Mr. Mendenhall, we will take your testimony at this time. 

STATEMENT OF JAMES MENDENHALL, ACTING GENERAL 

COUNSEL, OFFICE OF THE U.S. TRADE REPRESENTATIVE, 

WASHINGTON, D.C. 

Mr. MENDENHALL. Thank you, Mr. Chairman, and thank you for 

inviting me here today and giving your attention to this critical 

issue to our economy. 

The protection of intellectual property and access for U.S. goods 

dependent upon IP protection is at the top of USTR’s enforcement 

agenda. In the area of trade, IPR protection is one of the most important and certainly one of the most complex issues that we face 

today. Yet, we are pursuing this issue with single-minded resolve. 

We are making some progress. Clearly, a lot of work needs to be 

done. 

But to preserve our economic strength, we have to cultivate an 

atmosphere of creativity and innovation both in the United States 

and abroad. And if that atmosphere doesn’t exist, we have to create 

it, and that means in part strengthening IP rules around the 

world. We had a good start with that with the TRIPs Agreement, 

the global rules on intellectual property. But without enforcement 

of those rules, those rules are meaningless. 

Now, two points about enforcement. Ensuring enforcement is actually often harder than negotiating the rules themselves. Enforcement requires political will from legislators, prosecutors, judges, 

police and administrators at all levels of government, and that is 

hard to litigate. If we go to dispute settlement, it is hard to craft 

a rule which compels political will, but political will is essential if 

we are going to be successful in this mission. 

Furthermore, ensuring enforcement is not solely about bringing 

dispute settlement cases against our trading partners. Dispute settlement is a valuable tool, but neither dispute settlement nor, in 

fact, any particular legal mechanism is the silver bullet here. When 

we talk about enforcement, we are talking about getting results. 

We need to think outside the box and it is not a one-size-fits-all soVerDate 0ct 09 2002 12:45 Nov 26, 2007 Jkt 038864 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 S:\GPO\HEARINGS\38864.TXT SJUD1 PsN: CMORC
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lution. The solutions involve pushing multiple levers in the right 

sequence and with the right amount of pressure. 

Now, let me give you a couple of examples of what we have done 

over the past year where we have had some success. Every year, 

as you know, the U.S. Trade Representative’s office issues a special 

301 report cataloguing IPR problems around the world and putting 

countries in a hierarchy of wrongdoing, from Watch List, to Priority 

Watch List, to Priority Foreign Country. This year, we have done 

50, 60 countries, perhaps more than that, in our special 301 report. 

One of them, for example, is Pakistan, which you mentioned in 

your opening statement. Pakistan is on the Priority Watch List this 

year, as they have been for a while, in large part because they have 

within their borders a series of well-known plants churning out pirated copies of optical disks, millions of them over the past several 

years. We have taken every opportunity to raise the issue with 

Pakistan. We have put on the Priority Watch List again this year. 

Five days later, Pakistan shut down six of those plants. 

We also use the carrot-and-stick approach that we have through 

using our preference programs, like the GAP program. Over the 

past six months or so, we have worked closely with Brazil, for example, where we have indicated to them that they would face the 

possibility of revocation of GAP benefits if they don’t put their enforcement house in order. Recently, as a result of our efforts, Brazil 

has undertaken a very comprehensive action plan, including many 

elements, in fact, suggested by U.S. industry. 

Now, with both Pakistan and Brazil, we have a lot of work to do, 

so I don’t mean to say our work is done there. But there are many 

levers that we can use and that we need to bring to bear on this 

project. Dispute settlement, of course, is a key tool that we need 

to use, and we have used it and we will use it again if that is the 

most effective way to achieve our objectives. We recently won a 

case, for example, against the E on the protection of geographical 

indications. We are willing to do that again if, as I said, that is the 

most effective tool available to us, which brings us to China. 

Now, it comes as no surprise to you or anyone in this room, I am 

sure, that China is perhaps our number one enforcement challenge 

when it comes to IPR. On China, when we have a problem, many 

folks have a knee-jerk reaction that we should go immediately to 

dispute settlement. We have gone to dispute settlement before with 

respect to China in other areas. In fact, the United States is the 

only country in the world that has ever challenged China in dispute settlement, which we did last year. We got a successful resolution of a case involving a tax matter. 

We have utilized WTO procedures even earlier this week, when 

we requested consultations with China on a direct sales regulation 

that they are proposing. It is not formal dispute settlement, but 

they are WTO procedures that we are making use of, and we will 

continue to do that. 

Now, WTO rules are clearly going to be helpful to us in IPR, 

which I will get to in a minute about how those two relate. But I 

want to give you a quick overview of what we have done on our 

China strategy over the past year. 

First, we have held China to its existing obligations. We have negotiated new commitments, when appropriate, to fill any gaps that 

10

may exist. Second, we have monitored progress on the ground in 

close coordination with our industry to ensure that those commitments are being implemented. And if not, we have ratcheted up 

pressure on China and will continue to do so to ensure that those 

commitments are fulfilled. 

Now, over the past year we have moved through all these phases 

with China. Last year at the JCCT meeting, we negotiated a set 

of new commitments on IPR, with the overall objective of significantly reducing piracy and counterfeiting. A month later, we dedicated a section of our special 301 report indicating that we take 

those obligations seriously, that we would monitor their implementation and we would seek to ensure that they are implemented, 

and that we would review the matter in an out-of-cycle review that, 

in fact, we started in December of last year. 

In the summer of last year, we took an unprecedented step of 

issuing an open letter to industry soliciting information on enforcement problems in China. We reiterated that request when we started the out-of-cycle review and again when we sent the questionnaire to every member of Congress asking that they work with us 

to inform their constituents of problems in China and help us build 

a database. 

At the end of that process, the out-of-cycle review results in 

April, we put China on the Priority Watch List. We have ratcheted 

up the pressure on them. China wasn’t happy with it, but we 

thought the report card that we gave them was appropriate, given 

the lack of progress that we have seen. 

This week, as has been discussed, we are working with China 

through the IPR Working Group under the JCCT. In the coming 

weeks, we are going to be issuing a request through WTO rules 

seeking additional information from China on the status of enforcement in the country. And then we are going to be working with industry over the coming months to refine our arguments, collect additional information to fill any holes that we may have. 

We have seen some progress in China. We saw China issue new 

judicial interpretations in December of last year making it easier 

to bring criminal cases. We have seen other steps they have taken, 

including a nationwide campaign, but we haven’t seen enough 

progress and we need to consider carefully what our next steps will 

be. 

Now, if we are going to go forward and we are going to utilize 

WTO procedures, we have to have our facts in order. We have to 

have a full and complete docier of information to prove our case. 

Everybody knows it is a problem. Everybody around the world 

knows it is a problem. The Chinese know it is a problem, but we 

have to have a full evidentiary basis to prove our case with them 

if we expect them to make serious progress. Now, we have worked 

with industry over the past couple of months to do that. We hope 

you and members of Congress will work with us to work with industry to gather that information as appropriate. 

Just a word on Russia. Here again, we have got a serious enforcement problem well-known to you and others, of course. We 

have taken a series of steps to try to increase pressure on Russia 

to improve their IPR regime. We have raised the issue at the presidential level. We have put them on the Priority Watch List again 

11

this year. We are having an out-of-cycle review on China later this 

year. 

We continue to review the petition the copyright industry has 

filed to withdraw GAP benefits, and we are continuing to raise the 

issue as a critical issue to be addressed in the WTO accession negotiations. Ultimately, again, any progress in this area is going to depend on the political will of Russia’s leadership. We will continue 

to press Russia to undertake that commitment to crack down and 

deal with this problem straight on. 

Finally, just two closing remarks. As I indicated in the beginning 

of my statement, we have a good foundation with the TRIPs rules 

on enforcement. They need to be elaborated upon, they need to be 

fleshed out further. We have started that process with our FTAs, 

as my colleagues on the panel indicated. We have dedicated about 

half of our IP chapters and our FTAs to enforcement and we are 

working through the strategy targeting organized piracy to build a 

global consensus on the need for IP enforcement and build the machinery to ensure that we have the tools available to us, working 

with our trading partners, to cleanse international trading lanes of 

pirating counterfeit goods. 

Thank you. 

[The prepared statement of Mr. Mendenhall appears as a submission for the record.] 

Chairman HATCH. Well, thanks to all three of you. Let me just 

ask a couple of questions. 

The collective picture the administration witnesses paint of the 

problem of China is stark and unattractive to me. It is obviously 

disastrous for our software manufacturers that 90 percent of software installed on computers in China was as a result of pirating 

of intellectual property. 

I understand that the American film industry used to be able to 

say that they had a positive balance of trade in every country in 

which they do business, but I also understand that this is no longer 

the case with one country, and that is China. This is not because 

they are an international film-making powerhouse, and while I am 

sure the Chinese are making some good films, I am also told that 

the Chinese will not let the American film industry compete fairly 

in China. I also understand that whenever a new American film 

opens, illicit copies are available on the streets in Beijing almost 

the same day as they are shown, or within days after they are 

shown. And all of this is taking place when we have big trade deficits with China. 

You have all touched on this to a degree, but I would like you 

to just be more specific. What are you doing to fix the IP theft 

problem in China and what can Congress do to help you? What can 

we do, if anything, to help you in this area? 

Mr. MENDENHALL. Clearly, the copyright problem—the movies, 

music, and so on—in China is an extremely serious issue that we 

take extremely seriously. We have worked very closely with our industries to get a sense for the real problems they face on the 

ground and figure out what the best steps forward would be. 

When we talk about movies, in particular, which is what your 

question focused on, we have got a couple of problems. One is that 

China puts a cap on the number of movies that come into the counVerDate 0ct 09 2002 12:45 Nov 26, 2007 Jkt 038864 PO 00000 Frm 00015 Fmt 6633 Sfmt 6633 S:\GPO\HEARINGS\38864.TXT SJUD1 PsN: CMORC
12

try every year to be shown in theaters and such. As a result of that 

cap, China effectively creates a market for pirate movies to come 

in; that is to say for the 20 or so movies that are allowed in, there 

may be 30 additional movies that our industries would like to show 

and that people would like to see. As a result, there is a black market that grows up with respect to those particular movies. So we 

have a market access problem that contributes to the creation of 

a black market. 

We also have the problems that we face in a lot of other sectors, 

including the fact that there just simply is a lack of enforcement 

in China. There are plants turning out millions of optical disks that 

aren’t being shut down. If they are shut down, they may open the 

next day; the vendors, the same thing. They may be shut down and 

they open the next day. 

Now, the steps that we have to take are complicated, as I indicated in my remarks. We have tried to work with the Chinese cooperatively. We have set for them overall objectives of significantly 

reducing piracy and counterfeiting, as well as specific objectives. 

The work plan that Mr. Pinkos referred to that we are talking to 

the Chinese about this year is quite detailed, asking them to take 

specific steps to build up their enforcement machinery at all levels, 

and we have worked very closely with the Chinese on that. 

Now, the Chinese may balk at that. As I said, they think they 

are doing a lot. We haven’t seen the results yet, so I can’t tell you 

what the results of those discussions are going to be. If we don’t 

see results, though, we do need to think about next steps we need 

to take in this area, and that may include working perhaps within 

the WTO procedures, as we indicated in our out-of-cycle review results. So we’re working the diplomatic angle and the negotiation 

angle as much as we can. If there is nothing more to be gained 

about that, we do need to think about next steps and that may be 

for the utilization of WTO procedures. 

Chairman HATCH. Is there anything we can do that we are not 

doing that would better help you there? 

Mr. MENDENHALL. Well, as I indicated, I think what would be 

most helpful is if we all worked together cooperatively; the administration, Congress and the industry work together to, one, give a 

united and consistent message to the Chinese that this is a serious 

problem that has to be grappled with. Two, we need to impress 

upon—well, we need to work together to ensure that both the private sector and the Government bring the proper amount of resources to bear upon this issue, which includes not only resources 

for data collection purposes, but also legal resources appropriate for 

us to build and refine our arguments, build our database so that 

we can go to the Chinese and present a very solid case, backed up 

by evidence, that something needs to be done here. 

Chairman HATCH. I guess I am asking you are there aspects of 

U.S. law that, in your opinion, need to be changed to assist you in 

your efforts to combat international piracy. 

Mr. PINKOS. I don’t know if there are laws that will help us deal 

specifically with China. I think the administration is working on a 

legislative package to submit to the Congress that will help rightsholders enforce their rights here in the United States a little more 

aggressively. The Department of Justice is working on that, and 

13

the Patent and Trademark Office and Customs. So we would like 

to work with you on that as we bring some items forward. 

Mr. Chairman, if I could suggest something that I think is helpful that I think many of you know intuitively, but when you all 

travel abroad to take a strong message, but not just to China, but 

really, as Mr. Mendenhall alluded to, this is going to require an effort in China specifically, among multiple nations. 

Chairman HATCH. Well, I have the same basic question with regard to Russia. It is a big problem, too, and the question is what 

can we do now to stop the widespread and growing piracy of U.S.-

owned and U.S.-developed intellectual property in Russia. It is a 

big, big problem over there, as well. 

Mr. PINKOS. That is exactly right, and we are raising it at the 

highest levels, as Mr. Mendenhall said, with the President, and 

likewise analyzing their progress in terms of their WTO ascension, 

as you mentioned in your statement as well. 

Chairman HATCH. Well, to be honest with you, I am not going 

to ask you what Congress can do to help with the situation in Russia because I hear a growing number of my colleagues are complaining and very upset and grumbling about their concern that if 

we go along with ascension to the WTO, Russia is going to become 

the new China, and they will do it blatantly when it comes to attempting to gain the benefits of free trade for its citizens at the 

same time it acts to hurt the interests of U.S. copyright-holders 

and U.S. workers and investors and their families by avoiding the 

responsibilities under the international trade agreements and in 

areas where both Russia and China almost blatantly flaunt their 

theft of U.S.-owned intellectual property materials. 

Before I ask you to specifically comment on the situation in Russia, particularly on the role of organized crime in intellectual property theft over there, I want to make a few comments on the state 

of affairs between the Senate and the administration on trade 

issues. 

Everyone knows that the situation with CAFTA is fraught with 

difficulties and that the administration is going to need every supporter that it can both on the Hill and in the public as well. Everyone on the Judiciary Committee members only too well the misadventures we had when USTR negotiators included immigration 

language in several trade agreements last Congress that caused 

enough furor on the Judiciary Committee to actually unite us on 

a bipartisan basis, and that was not easy to do on this Committee, 

I have to admit. 

One of the messages we conveyed, and the House Judiciary Committee as well conveyed to the administration is that we want to 

be consulted and taken seriously on these types of issues. Many of 

us in the Senate have felt from time to time that either those in 

the administration who have been working directly are not taking 

back our concerns, or if they are, these concerns are not being effectively conveyed or listened to or considered. 

I have been a strong supporter of free trade and everybody 

knows that, and I hate to see the increasing erosion of support 

among the public and within Congress for trade agreements especially with people like me. But one way to help reverse this growing tide against trade agreements is to be able to assure the public 

14

and the Congress that the U.S. Government is standing up for our 

rights in areas where we lead the world, such as the intellectual 

property-dependent sectors of software, entertainment, information 

technology and biotechnology. There is a growing weariness that 

while we may have all the right words on the paper, at the end 

of the day there is no teeth in the words. And when it comes down 

to enforcing the laws against the outright, flagrant theft of U.S. intellectual property, there is no strength behind that. 

So with that, I would just ask all of you to comment on the situation in Russia and whether the Russian government is effectively 

combatting IP theft by organized crime in Russia, and if you could 

comment very quickly because we will turn to Senator Leahy as 

soon as you are through. 

Ms. PETERS. Clearly, the answer is no, they are really not doing 

enough. They actually do have an Internet piracy problem. Many 

of us realize that in the United States we also have a problem that 

you and Senator Leahy tried to address last year and time ran out, 

and we are waiting to see what happens in the Grokster case. But 

if it comes out, quote, ‘‘the wrong way’’—

Chairman HATCH. We are all waiting for that, aren’t we? 

Ms. PETERS. If it comes out the wrong way, you may have to take 

the effort back up again because people will look to the kind of law 

that we have and how we protect our works in an Internet environment before we go there and tell them that they have their Internet problem and they are not solving it. 

Chairman HATCH. Mr. Mendenhall, go ahead, or Mr. Pinkos. We 

will go right across. 

Mr. MENDENHALL. Just a couple of points in response to what 

you said. Your question, I know, was directed at Russia, but you 

also mentioned in the course of your comment our free trade agreements, CAFTA and others, and I want to pick up on that because 

one of the problems that we have when we talk about the enforcement obligations in the WTO and elsewhere is that the rules that 

we have in TRIPs, for example, are fairly blunt instruments. 

So what we have tried to do in CAFTA, as with our other trade 

agreements, is refine the enforcement rules. We have roughly 25 

pages of our IP chapters dedicated solely to enforcement, much of 

it dedicated specifically at copyright enforcement to update the 

rules applicable in these countries, whether it be on the Internet, 

dealing with the specific issues related to the Internet, or even 

broader than that on other matters. So when it comes to our free 

trade agreements, we are refining and honing the rules and we 

have seen significant progress. 

Now, in Russia specifically, I certainly share the frustration that 

you expressed with Russia’s failure to adequately enforce IP rights. 

I think we all recognize that. That is why we put them on the Priority Watch List this year. That is why we are going to continue 

to monitor it closely through the out-of-cycle review toward the end 

of the year. And I can assure you that it is an issue that has taken 

a very high profile, very prominent, in our discussions in the accession process and our IPR bilateral dialogue with them. We will continue to do what we can to impress upon them to make progress, 

but it is a serious problem. We recognize that. 

15

Chairman HATCH. Let me just ask one other question before 

turning to Senator Leahy. It is my understanding that the TRIPs 

provisions are a floor, not a ceiling, and I hope you agree with that 

statement. 

Does anybody disagree with that? 

[No response.] 

Chairman HATCH. Okay. Can you comment on whether it is the 

policy of our Government to attempt to negotiate in a TRIPs-plus 

fashion, when appropriate, such as in the fast-changing IP areas? 

I will just mention one, e-commerce. These areas were not fully developed when the TRIPs provisions were adopted in the mid-1990s. 

Do you care to comment about that? 

Mr. MENDENHALL. Sure. I can start, but my colleagues may want 

to jump in. Yes, TRIPs is a floor. Yes, it is ten years out of date, 

in a sense. Since then, there have been new rules that have 

emerged, internationally but not universally accepted in WIPO, for 

example, to deal with the Internet issue. Our FTAs, as I said, have 

a very intense focus on enforcement, including on e-commerce and 

the Internet. They do need to be updated—not the FTAs; the global 

rules do need to be updated in some sense. 

We are pressing in all of our bilateral dialogues, including with 

China, for example, the adoption of rules to bring their enforcement regimes up to snuff. Mr. Pinkos, I think, indicated that we 

are urging China to fully implement and adopt the WIPO Internet 

treaties. They have indicated to us that they would seek to do that 

this year, that the draft regulations in train, and we hold them to 

do that commitment. It is something that we have discussed at the 

JCCT, and we will continue to do that. 

But we are pressing our trading partners through our FTAs and 

outside of our FTAs and in any other context we can raise it, including through the special 301 process, adoption of rules that 

modernize the enforcement regimes and go above TRIPs standards. 

Chairman HATCH. Thank you. 

Mr. PINKOS.

Mr. PINKOS. I think we have seen success with our FTAs in implementing TRIPs-plus, but it is increasing tough sledding in these 

multi-national settings like WIPO or at the WTO because there is 

really a very active anti-IP developing world sentiment. In these 

bodies that require consensus or near consensus to agree on things, 

it makes it particularly difficult to get further protections. 

As we saw with the GI case, the geographical indications case, 

we even have some differences with our European trading partners 

on the height or strength of IP protection. So it is tough sledding, 

but I think we are working really hard in these international organizations to try to push through some things. 

Chairman HATCH. Thank you. 

Senator Leahy.

STATEMENT OF HON. PATRICK J. LEAHY, A U.S. SENATOR 

FROM THE STATE OF VERMONT 

Senator LEAHY. Thank you, Mr. Chairman, and I am sorry that 

I was late. I want to commend you for having this hearing. I also 

wanted to submit for the record a statement by Senator Biden, who 

is on the floor, as you know, with a nomination. 

16

Chairman HATCH. Without objection. 

Senator LEAHY. We Americans think globally as we enjoy the 

fruits of a lot of creativity of other Americans. I was just getting 

some messages here on a Blackberry, but that is just one example. 

Unfortunately, a lot of other people think globally and enjoy the 

fruits of people’s creativity and innovation and they do it because 

they steal it. I pay for those things I get, as does the Chairman, 

but a lot of the advances of the digital age have eliminated a lot 

of the barriers between buyers and sellers. 

Software, music, photographs—any of those things can be sent 

around the globe. We saw the opening of the latest ‘‘Star Wars’’ 

movie. It had the biggest opening, I guess, of any movie in history, 

and within the first day they were downloading pirated copies and 

selling pirated copies overseas and some here in the United States. 

So it is a global problem. 

Because we are the world leader in intellectual property, we at 

least should be acutely aware of the impact on U.S. industry and 

our own citizens’ creativity. Intellectual property is vital to our 

health. According to the International Intellectual Property Alliance, in 2002 the various copyright industries accounted for 12 percent of the U.S. gross domestic product. That is $1.25 trillion, and 

11.5 million people employed, but they still lose hundreds of billions of dollars to piracy every year. The Business Software Alliance estimates its loss at $30 billion 

in software sales annually. The MPAA estimates it loses $3 billion 

a year to piracy. The International Intellectual Property Alliance 

reports that the U.S. lost more than $13 billion in trade due to 

copyright piracy in 2003. The FBI says that we lose $200 to $250 

billion annually to counterfeiting alone. 

You have people who work very hard to develop, to create something. This is their livelihood, this is what they are proud of, and 

it is just stolen. We all understand if you break into somebody’s 

house or warehouse and steal what is there, but these people are 

broken into maybe from 10,000 miles away. 

We focus today on China and Russia, and for good reason. The 

Chairman asked the pertinent question is Russia doing enough. 

Well, we all know the answer to that. China, in the year 2000, entered the World Trade Organization and I expressed concern about 

China’s record on human rights and labor rights, a record which 

is terrible. When ultimately I voted in favor of establishing permanent and normal trade relations, I did note that isolationist policies 

do not work. 

For several years now, we have been engaging China in attempts 

to improve its record on piracy. Instead of progress, the United 

States Trade Representative’s 2005 special 301 report placed China 

on its Priority Watch List. The report notes that while China has 

expended efforts, we have not seen any meaningful reduction in infringement that China promised to attain. I sometimes wonder 

when you see raids for television, whether you raid the front end 

of the pirate business in China while work goes on at the back end. 

It has resulted in an estimated loss of $2.5 billion to $3.8 billion 

annually in pirated copyrighted works. 

Russia, as the Chairman has mentioned, is on USTR’s Priority 

Watch List. We know that while Russia has passed numerous laws 

17

designed to improve intellectual property protection, enhanced enforcement has not followed. It is sort of like you pass a law and 

say we will have a law against burglary, but you can’t put locks 

on your doors and the police won’t ever bother to come around and 

check the place at night. Well, the law looks good on the books and 

nothing happens. 

The piracy rate for the recording industry is 66 percent; for the 

movie industry, 80 percent. Among the many problems in Russia 

is that the pirated goods that are confiscated by law enforcement—

think about this—the goods they do confiscate so they can show us 

how hard they are working, 70 percent of it is returned to the market. It is sort of like, hey, everybody, look at this, we are getting 

tough here in Russia, we are grabbing this stuff. Okay, the camera 

is gone, give 70 percent back. You have got to have more than a 

revolving door. The copyright industry’s estimated loss in Russia is 

$1.7 billion. 

Last week, Senator Cornyn and I introduced S. 1095, the Protecting American Goods and Services Act of 2005, to criminalize 

possession of counterfeit goods with intent to traffic, to close off the 

loopholes. In 1996, Senator Hatch and I worked together to pass 

the Anti-Counterfeiting Consumer Protection Act, which amended 

several sections of our criminal and tariff codes. 

We know it is more than a problem for just a few of us. We have 

to ask if the United States Trade Representative has adequate 

tools to address this issue. Do we need to strengthen our domestic 

laws through legislation like the legislation Senator Cornyn and I 

recently introduced? Do we have to engage more vigorously with 

China, Russia and other countries that don’t enforce IP enforcement? I think the answer to all those questions is yes. 

I am probably preaching to a lot of the converted in this room, 

but, Mr. Chairman, we are hurting on this. The other thing is now 

we know it is not just some of these countries that are allowing 

this. We have organized crime syndicates turning to piracy. It is a 

lot easier than going out to rob banks. When they asked Willie Sutton why he robbed banks, he said, well, that is where the money 

is. Organized crime has always looked where the money is, whether it was selling liquor during Prohibition times, or drugs, or whatever. Piracy is a very easy way to go. 

I read Eric Smith’s written testimony and it was very much like 

Marybeth Peters’, who is a person who has enormous credibility before this Committee on both sides of the aisle. They mention the 

very disturbing possibility that this piracy may be funding terrorist 

groups. That is something that worries me. If terrorist groups are 

looking for money, why not go to piracy? 

Ms. Peters, did you want to add to that at all? 

Ms. PETERS. Not really. I agree with you a hundred percent that 

the organized crime element that we see in the international arena 

should be of tremendous concern to everybody and not just the 

United States, but other countries. 

Senator LEAHY. Well, you know, we put China as a member of 

the WTO on the idea that maybe this will help us get them to stop 

all the counterfeiting, but they keep right on doing it. Is there any 

reason to think that Russia will do any better if we put them in 

WTO, Ms. Peters, based on our experience so far? 

18

Ms. PETERS. Well, I think that the possibility to bring about any 

kind of changes is during the entrance process, our ability to negotiate with them and what they need to do in order to become a 

WTO member, and make sure that they live up to those agreements. We hope that if the United States Government believes that 

that is where they should go that we will have managed to elicit 

more than promises, but effective actions. 

Senator LEAHY. But have we seen much in what they have been 

doing so far to make us think that they are going to? 

Ms. PETERS. No. 

Senator LEAHY. Mr. Pinkos? 

Mr. PINKOS. From what I understand—and Mr. Mendenhall may 

want to take a shot at this—it has been pretty tough sledding, 

pretty tough negotiations, but we have been pretty strongly insistent that they make the IP commitments before we are going to acquiesce to their ascension to the WTO. 

Senator LEAHY. Mr. Mendenhall? 

Mr. MENDENHALL. It is a difficult issue, obviously. It is a complex 

issue. We have been in negotiations with Russia for a long time. 

Through that time, we have seen incremental progress, for example, in having Russia get its laws in shape. As with China and as 

with a lot of these other countries, the laws on the books don’t matter a whole lot if they aren’t enforcing them. 

But we have seen some progress in getting the laws in shape. We 

have emphasized to them that that is not enough, that they actually need to enforce those laws. They need to go forward and reduce 

the piracy and counterfeiting levels. We have made that a critical 

part of the accession package, the accession negotiations, as I indicated earlier. We have raised it at the highest levels and we will 

continue to do so to impress upon them the need to make progress 

on this issue as we go forward in the process. 

Senator LEAHY. But what is going to make them do it? I mean, 

we can raise it to the highest level, but in the past nothing seemed 

to worry them. I bet you anything that if you go to downtown Beijing within hours of the time just about any movie comes out that 

is going to be kind of a blockbuster, or downtown Moscow, you can 

buy pirated copies. I have seen them there. 

What is enough of either a carrot or a stick to make them 

change, especially when it seems to be governmental policy to allow 

this? 

Mr. MENDENHALL. Well, of course, that is the $64,000 question. 

I mean, what is going to do it? As I indicated in my opening remarks, we have a series of tools that we have used—you mentioned 

China, in particular—to gradually escalate the issue—actually, not 

so gradually. We have escalated the issue over the past year with 

China, starting with diplomatic initiative through the JCCT, working through an out-of-cycle review, stepping up from there to make 

a finding of Priority Watch List which, as I indicated, China has 

taken seriously. 

I can tell you that because they are here this week talking to us 

about it. They have expressed their concern about that listing as 

a Priority Watch List country. We are working with them further 

on developing an IPR action plan over the next couple of weeks and 

we are going to be resorting to WTO procedures, as I said, on the 

19

transparency side in the coming weeks. And if we still haven’t seen 

progress, we need to think seriously about next steps that we need 

to take in the WTO or otherwise. 

So what we are doing is what I think we need to do with China, 

as we need to do with Russia. We need to speak with a unified and 

strong voice. We need to impress upon them the importance with 

which we take it, and I think it is almost important, frankly, to get 

them to change the mindset so they see it in their own interest. 

And we have started to do that through various training programs 

that the various agencies represented here have undertaken, as 

well as others have. 

We will get there, but it is going to be a slow process because 

as I said in my remarks, this is not your typical trade case. This 

is not a case where you need to change a number in a tariff schedule. You need to change the mindset. You need to get political will 

at all levels of the government to take it seriously. And if you want 

to change the mindset, that takes time. It is not a matter of simply 

changing a number in a tariff schedule, but we are using all the 

procedures and all the levers we have at our disposal to do it. 

Senator LEAHY. Thank you. Thank you, Mr. Chairman. I have a 

number of other questions, but I will submit them for record. 

Chairman HATCH. Thank you so much, Senator Leahy. 

We appreciate all three of you coming. You have been helpful to 

us here today and we are going to have to work on this together. 

I think the next panel will have a number of suggestions on what 

might be done and I hope you will pay strict attention to what they 

have to say, as well. Maybe there are some ideas there that might 

augment some of the ideas you already have. 

We have got to put a stop to it. We have got to go after these 

people and we have got to go after these countries and get them 

to start being responsible to protect intellectual property. But we 

appreciate the work all of you do. Thanks for being here. 

Mr. MENDENHALL. Thank you, Mr. Chairman. 

Chairman HATCH. Thanks. 

Our next three witnesses will be Eric Smith, President of the 

International Intellectual Property Alliance here in Washington, 

D.C., then Taylor Hackford, board member of the Directors Guild 

of America, from Los Angeles, California, and Robert W. 

Holleyman, President and Chief Executive Officer of the Business 

Software Alliance here in Washington, D.C. 

So we will start with you, Mr. Smith, and then we will go across 

to Mr. Hackford and then to Mr. Holleyman. Mr. Smith, you are 

first. 

STATEMENT OF ERIC H. SMITH, PRESIDENT, INTERNATIONAL 

INTELLECTUAL PROPERTY ALLIANCE, WASHINGTON, D.C. 

Mr. SMITH. Thank you, Mr. Chairman and Senator Leahy, for 

again giving IIPA an opportunity to testify on the piracy problems 

the copyright industries are confronting globally. I am going to 

speak very generally on the topic and my colleagues here will 

speak to their particular industries in some more detail. 

This oversight hearing is extremely timely, as you have mentioned, because at this very moment a delegation from China called 

the IPR Working Group is meeting with the U.S. Government as 

20

we speak. In addition, USTR has just announced its special 301 decisions. This is the congressionally-created mechanism by which 

our Government seeks to improve IPR protection and enforcement 

globally, and to nurture those creative and innovative industries 

and individuals who contribute so greatly to our Nation’s economic 

growth. Finally, there are currently ongoing talks between Russia 

and the U.S. looking toward Russia becoming a WTO member and 

to secure permanent normal trade relations. I want to briefly discuss our global problems and challenges, and then turn to the dire 

problems we face in Russia and China. 

As you know, Mr. Chairman, we represent the U.S. copyright industries. We have six member trade associations, 1,300 companies, 

accounting for millions of U.S. jobs. You have mentioned those 

numbers. I won’t repeat them. These companies and the individual 

creators that work with them are critically dependent on having 

strong copyright laws in place and having those effectively enforced. 

On average, the copyright industries generate over 50 percent of 

their revenue from outside the United States, and in 2002 contributed over $89 billion in exports and foreign sales to the U.S. economy. Given the overwhelming global demand for the products of 

America’s creative industries, all these numbers would be significantly higher if our trading partners, particularly those like Russia 

and China that continue to allow piracy to flourish in their own 

economies, were to significantly reduce piracy rates by actually enforcing their copyright laws vigorously. 

First, I want to highlight the global problem. In our 600-pluspage report which we submitted to USTR, we highlighted problems 

in 67 countries and their impact on the U.S. economy and U.S. 

jobs. Rampant piracy in most of those countries highlighted in this 

report constitutes the copyright industry’s greatest barrier to trade, 

costing U.S. jobs and contributions to the U.S. economy. 

In our report, we identified six priorities or challenges we face 

in fighting piracy in partnership with our own Government. These 

challenges are amply illustrated by the two countries I want to especially highlight today—Russia and China. 

These challenges are, very briefly, Internet piracy and its impact 

on the growth of electronic commerce; optical disk piracy and the 

need to regulate it at the production level; the role of organized 

criminal syndicates in the piracy business; the problem of losses 

caused by unauthorized use of business software in governments 

and small businesses, and Mr. Holleyman will speak about that; 

book and journal piracy, both traditional and online; and the crosscutting challenge of securing compliance with the WTO TRIPs 

Agreement, and particularly its enforcement provisions, and how 

the new free trade agreements are helping to achieve better protection. Our industries face all these challenges in Russia and China, 

two countries that are highest priorities and where we suffer huge 

and growing losses. 

First, Russia, and the problems in what it and the U.S. Government needs to do. Mr. Chairman, Russia is about to become the 

new China, as you have mentioned, as far as piracy is concerned. 

Let’s look at a few statistics. 

21

You have mentioned that we lose over $1.7 billion due to piracy in Russia. That was in 2004, and $6 billion over the last five years. 

At the same time, the U.S. has unilaterally granted Russia over 

$515 million in GAP benefits in 2004. With its record, Russia 

should not be considered eligible to receive those benefits. 

As you have mentioned, piracy rates hover around 70 percent of 

the market, or higher, for every copyright sector. It has been recently estimated that Russia’s annual manufacturing capacity for 

OD product now stands at 480 million disks. Demand for legitimate 

disks is unlikely to exceed 80 million in all formats. You can imagine what happens with the rest. 

The government of Russia has said that there are 18 plants on 

restricted access property, military bases, where simple entry is denied law enforcement. Forensic evidence indicates that at least 24 

of the 34 plants are known to be producing pirate product. Russianproduced optical disks have been positively identified in at least 27 

countries, seized in 27 countries. 

However, the statistics only tell a part of the story. What they 

do not show is the poor reaction over the past ten years of the Russian government to their piracy problems. IIPA first raised the OD 

problems with the Russian government in 1996 when there were 

just two plants. The reason the problem has been allowed to escalate to 34 plants has been the Russian government’s continued and 

deliberate failure to act, despite repeated promises to our government and to our industries. In short, what we face in Russia is a 

legacy of failed commitments. 

Let’s look at the enforcement record. In 2004, there were eight 

actions taken by the Russian government against the optical disk 

plants, including raids and seizures of illegal materials. As Senator 

Leahy has said, 70 percent of the products seized went out the 

back door—unbelievable. All of the optical disk plants that were 

raided remained in operation after those raids. There are few, if 

any, criminal prosecutions. All that were prosecuted ended in suspended sentences. In ten years, there have been only two convictions with actual sentences. 

We and the U.S. Government have recommended six straightforward steps to deal with the optical disk piracy problem. They 

are detailed in my written testimony. The conclusion: none of them 

have been done. So what needs to happen? 

First, we cannot make the same mistake that was made with 

China, permitting Russia to enter the WTO without undertaking 

meaningful and WTO TRIPs-compatible enforcement actions. The 

actions we detail must be a pre-condition to such entry. These are 

not commitments we are looking for. This is action. We got commitments from China and now it is almost four years later. 

Second, if Russia fails to act, it should be designated a priority 

foreign country after the ongoing out-of-cycle review by USTR—

something that we recommended and was not done in this last 

round. 

Third, we should deny Russia’s eligibility for the generalized system of preference duty-free trade benefits. It has been five years 

since we filed that petition and it has been four years since USTR 

granted that petition. Russia has been on the Priority Watch List 

now for nine years. Mr. Chairman, it is time to act. 

22

Let me now turn to China. Mr. Chairman, we are in dire straits 

in China. Piracy rates have hovered at and over 90 percent, as we 

have discussed here, in the more than 15 years that IIPA has been 

engaged with the U.S. and the Chinese government. Indeed, with 

the new digital copying technologies and the Internet, the situation 

has even worsened. Every year, industries have lost conservatively 

between $1.5 and $2.5 billion. In 2004, it was over $2.5 billion. 

China is potentially the largest market in the world and is growing at a faster pace than virtually every country in the world. We 

have an important, in trade jargon, comparative advantage in the 

area of copyright, an advantage that hasn’t even begun to be realized, while, as we know, China is continually taking advantage of 

their comparative advantage in so many areas, with a trade surplus with the United States of $162 billion. 

Of all the industry sectors represented in the U.S. economy, the 

copyright industries face a market more closed to them than to any 

other. Not only is nine-tenths of the Chinese market closed through 

piracy, but our industries suffer under onerous and sometimes discriminatory market access barriers. China’s denial of effective market access prevents us from getting to know the market and establishing a presence that would enhance our ability to fight piracy. 

Even if we were to reduce piracy by half in China, under the 

present circumstances most of our industries could not satisfy the 

huge local demand because of these barriers. In short, these two 

problems are indelibly interlocked. 

Chairman HATCH. Mr. Smith, would you try to wrap it up? 

Mr. SMITH. Yes. 

Chairman HATCH. We allot five minutes. You are almost ten 

minutes. 

Mr. SMITH. We believe that the failure to use the criminal law 

to fight piracy is a violation of China’s TRIPs obligations. We believe that the Chinese criminal law, because it does not encompass 

all acts of copyright piracy on a commercial scale, also violates the 

TRIPs Agreement. Because of all this, IIPA has urged USTR to engage in a new multilateral dialogue with China. Following USTR’s 

announcement of the results of their out-of-cycle review, we are 

closely to develop the elements of a possible WTO case. 

We ask two things: first, that China immediately commence a 

significant number of criminal actions against pirates of our products and impose deterrent penalties; and, second, that China now 

eliminate the onerous and destructive market access barriers that 

prevent U.S. copyright-based companies from doing real business 

in China. 

Thank you very much. 

[The prepared statement of Mr. Smith appears as a submission 

for the record.] 

Chairman HATCH. Thank you, Mr. Smith. 

Mr. Hackford, we will turn to you. 

STATEMENT OF TAYLOR HACKFORD, BOARD MEMBER, 

DIRECTORS GUILD OF AMERICA, LOS ANGELES, CALIFORNIA 

Mr. HACKFORD. Senator Hatch, Senator Leahy, thank you for inviting me here. I am here today on behalf of the Directors Guild 

of America, which represents 13,000 directors and members of the 

23

directorial team, which accounts for assistant directors, production 

managers, et cetera. Those teams work in feature films, television, 

commercials, documentaries and news. Our mission is to protect 

the economic and creative rights of directors and their teams. 

I think most people tend to think of the movie industry as the 

glitz and glamour of Hollywood, movie stars, et cetera, but the reality is that most jobs are behind the camera and they are located 

all over this country. We are talking about those names that scroll 

up the screen at the end of a film, hundreds of names for every 

film, tens of thousands of people who work in this industry. 

Now, those employees are just the ones that work in the film industry. There are a lot of other people, small businesses, that have 

their livelihood, their bread and butter, in the film industry also—

cleaners that clean costumes, rental cars, trucking, many, many 

things. As you well know, the entertainment industry and the information industry in this country account as the second largest export that we have. All of these jobs and that industry are currently 

at stake, are at great risk, which you have heard about today. 

Now, it is an incorrect assumption in the piracy debate, usually 

made by people who are interested in open access, that once a film 

is out and gone into the theaters, it is over and it just comes back 

then perhaps as profit to the studios. Nothing could be further from 

the truth. There is a process in the entertainment industry called 

residuals. This is a crucial element in our business and let me explain why. 

We are not on a weekly salary, or a monthly or a yearly. We 

work freelance. Every single film we make, depending on its success, could be our last. Therefore, you work on a project, you put 

your lifeblood into it, and you hope in the long run that it is going 

to do well. The residuals from our productions that come back from 

free and pay television, through DVDs, through video cassettes—

that money that comes in feeds our health and pension plan and 

is really the bread and butter that keeps us alive. 

What we are facing today is a market where over 55 percent of 

the money that comes back from films comes from outside the 

United States. The whole issue of piracy, both within and especially from outside the United States, is seriously threatening our 

livelihoods, our bread and butter income. 

So when pirates steal a movie—and that is exactly what it is; it 

is robbing—they are not just robbing revenues from the studios; 

they are taking our money that we need to live on and hopefully 

exist in the future. Moreover, it is not just the films that we make. 

It is about the films that have not yet been made, and let me explain. 

When you go out to make a film as a film maker—and I am film 

director and producer—you don’t just make it like this. I want to 

give you a case in point. I just made a film this past year called 

‘‘Ray.’’ It was a film about the life of Ray Charles. It took me 15 

years to make this film. 

Senator LEAHY. Incidentally, one of the best movies I have seen 

in years. 

Mr. HACKFORD. Thank you very much, Senator. 

24

Senator LEAHY. I am not trying to give plugs on it, but I went 

to that and I have urged all my kids to go to it. I have urged all 

my friends to go to it. It was a tough movie. 

Mr. HACKFORD. It was. 

Senator LEAHY. But it was a good movie, really good. 

Mr. HACKFORD. Thank you very much. 

I thought today one of the things that I could do was try to put 

a personal face on this issue and talk about a project like ‘‘Ray’’ 

that I was personally involved in, and you can see the process of 

what has happened with that particular film. 

As I said, it took 15 years and it was not easy, for some reason. 

You have seen the film and you liked the film, but it was very hard 

in Hollywood to find anybody who would finance it. I had a passion 

for this film. I believed in it. I had made the commitment to Ray 

Charles himself and worked with him for 15 years, and in the process I finally came to the point where I did find somebody to make 

the film. 

In this industry, it is a huge risk. People are putting up a lot of 

money, and with smaller films like ‘‘Ray’’ this is a much bigger 

problem than a film like ‘‘Star Wars’’ that everyone knows is going 

to go out and play in the theater and millions and millions and millions of people are going to see it. The smaller films, the riskier 

films, are the ones that are most affected like this, like ‘‘Ray’’ was. 

Now, luckily for me, I convinced an individual to actually finance 

the movie. He was advised by everyone not to do it. Luckily for 

him, the film was done very, very film. Luckily, we had a distributor, Universal, that picked the film up and did a very, very 

good job. So, in reality, everybody made out, but you should realize 

that only four out of every ten films made makes it money back 

from theatrical receipts. Less than that number—I think it is something like only six films out of ten ever make their money back at 

all. So it is a hugely risky thing. 

I want to give you the case of ‘‘Ray.’’ When Universal released 

the film, it was the end of October. The same week it opened, I 

walked down Canal Street in New York City and the video cassette 

was on sale, complete with the art work. These people had done all 

the work ahead of time, and when they got the disk they put it out. 

Now, we happen to know from research that Universal has done 

that it was videotaped at the Raceway 10 Westbury Theater, the 

Loews Raceway 10 in New York and the Loews Jersey Garden Theater in Elizabeth, New Jersey. 

Now, they immediately took that videotape and they put it on 

the Web. They sent it to Russia and China, and immediately started that process, the things that you were talking about of generating it. So the fact is that it was on sale a week after its release, 

or the week of its release—pardon me—because I saw it the day 

after it was released here in New York, California, Florida, Georgia, Texas and worldwide. 

Chairman HATCH. When you talk about release, you are saying 

in the theaters. 

Mr. HACKFORD. I mean the DVD was for sale. 

Chairman HATCH. Yes, because the DVD you came out with later 

was like three months later. 

25

Mr. HACKFORD. Three months later. This is an important thing. 

The DVD was on sale in Europe before—we didn’t release the film 

in Europe for another two months. 

Chairman HATCH. What you are saying is you had the film in the 

U.S. theaters. You hadn’t yet hit Europe. You hadn’t yet done your 

own DVD of it. 

Mr. HACKFORD. We hadn’t done our DVD. 

Chairman HATCH. And a day after the film was released, you 

had DVDs on the street at a very discounted price. 

Mr. HACKFORD. Absolutely. You had DVDs on the street. 

Chairman HATCH. Without any payment of any copyright royalties at all. 

Mr. HACKFORD. Nothing coming back. 

Now, what then happened is three months later, at the beginning of February, we released the DVD. Immediately, that high 

quality—first of all, the camcorder version was not very good quality, but still that didn’t stop millions of people from buying it. Then 

on February 1, we went out with a DVD, and immediately that 

went on the Web for downloads. 

Now, just to give you an idea, last week, one day, May 19, on 

the peer-to-peer networks there were more than 476,000 requests 

for ‘‘Ray.’’ Since the film was released and first pirated in October, 

there have been 42 million requests to download ‘‘Ray.’’

Chairman HATCH. That is without any payment of royalty or any 

copyright—

Mr. HACKFORD. Nothing, nothing. I think that kind of tells you 

what we are facing. If I had that much trouble raising the money 

to make the film—luckily, the film worked critically and commercially, and the people are going to make their money back. But 

those people didn’t know that. They were told this was going to be 

a risk and they might not get it back. 

Now, if you tell them that you can go out and you can make the 

film and before they can see anything back, millions and millions 

of copies—in fact, the other thing that is important to say is last 

year was the first time in history that DVD revenue exceeded box 

office. The future is clear. The DVD is going to be the profit leader 

in this industry. 

So when I am going to an investor and trying to raise money for 

a film and that person already knows it is a big risk and now 

knows that before the film even plays in a theater, it can be on the 

street, it is going to be devastating to our business. And that 

means devastating loss of jobs and obviously, as I said before, to 

this country. If it is the second largest balance of trade export, it 

is going to be devastating to our economy, and obviously something 

things to be done. 

Chairman HATCH. Plus, a loss of creativity, loss of star power, 

loss of people’s opportunities to excel in the arts, et cetera. 

Mr. HACKFORD. I think the important thing about the movie 

business—and again I don’t want to put it all in commercial terms. 

I am an artist. I think when you put something together in a 

film—let’s take Ray Charles. Ray Charles is to me the epitome of 

the American experience, and let’s not talk about race. This is a 

blind man who in this country was able to make himself a legend, 

26

who was able to, through his own talent and fortitude, go out 

there. That is a message that you send to the world about America. 

If this industry and the things that we are communicating about 

this country and the industry that we are creating that will bring 

revenue back to this country is destroyed—and it will be unless we 

do something—I think that, yes, I am speaking personally. Myself, 

my colleagues, the people I work with—and again they are not just 

the movie stars, but all those people that go into—I don’t work 

alone. I am not a painter at an easel or a novelist at my typewriter 

working alone. It is a collaborative effort. All those people go into 

making my film as good as it is, and those people are going to be 

out of work. 

So I am here today to express this personal plea to you, and I 

want to also thank both of you and your Committee for all the 

work that you have done. Your interest in this has been pioneering. 

The laws that you have helped enact have really helped us. People 

are just now starting to wake up even in my industry. But we appreciate that and the Directors Guild is here to help you in any 

way we possibly can in the future because we share your concern 

and understand the vital nature of this problem. 

Chairman HATCH. Thank you. 

[The prepared statement of Mr. Hackford appears as a submission for the record.] 

Senator LEAHY. Mr. Hackford, I think I can probably speak for 

both of us in saying that if you worked hard to create something, 

you ought to have the satisfaction of knowing it is your creation. 

Now, if you do a bad job and it doesn’t sell, fine. That is a risk you 

take, whether somebody paints a picture, writes a song, writes a 

book or anything else, or does computer software. 

But if you have done something good, you ought to get rewarded 

for it. It ought to be yours, in the same way that if you have got 

something in your own home, you shouldn’t have somebody steal 

it. You shouldn’t have something that is your creation be stolen. 

Senator Hatch and I have wrestled with this and I think we have 

demonstrated to the country that it has not been a partisan issue. 

We are very concerned about this. I want people to be able to compete in the marketplace. If their product sells, they benefit by it. 

If it doesn’t sell, well, that is the risk they take, as anybody does 

who goes into the marketplace. But it shouldn’t be stolen any more 

than if you own a furniture store and you create nice furniture; 

somebody shouldn’t break in and steal your furniture. 

Mr. Chairman, I am going to have to leave at this point. I apologize. Mr. Holleyman, of course, has been so extraordinarily valuable to this Committee over the years, to all of us here. I have read 

the testimony and I will leave some questions for the record. It is 

unfortunate. I know you have had a million things going on today 

and I have got a conflict, but I thank you for holding the hearing. 

I can’t tell you how much I want to close the door. I am a former 

prosecutor and I would like to just be able to go out and prosecute 

everybody who is doing this. You probably would, too, but I wish 

there was some way we could close the door. We are never going 

to get it completely closed, but we can do a lot better job than we 

are. 

Thank you. 

27

Chairman HATCH. I just want to thank Senator Leahy because 

he takes a tremendous interest in these things, and we get together 

on these matters. We get together on a lot of things, but we particularly get together here. I don’t think there is even a division between us in almost any area that affects you. I just feel it is a great 

privilege to work with him, as well, because he takes a great interest in these issues. 

Let me just say that you are raising issues here that should affect everybody in America. This Committee is going to do everything it can, but we need more help from the intellectual property 

community as to how we might domestically pass some laws that 

might be of aid to you. We have been trying to do that, but they 

haven’t exactly worked as well as would like them to work. They 

are working in some ways, but not as well as we would like. 

So we need your help. We need the best thinkers in all of the 

aspects of the intellectual property community and the high-tech 

community to assist us. As you know, there is a real divide between some in the high-tech world and some in the intellectual 

property world, or should I say the copyright world. So we have got 

to bridge those gaps and try to be fair to everybody. 

Let me just also say that I am also first ranking on the Senate 

Finance Committee and will take over as Chairman if I am fortunate enough to be reelected. We handle the trade issues and I can 

guarantee you I am not going to be very open to China and Russia 

if they are not going to clamp down and do something about it. I 

might as well warn the administration right now that unless they 

are willing to start demanding that they abide by international 

norms, they are going to lose a very advocate for free trade in me. 

I don’t think it is a question of free trade as much as it is a question of thievery. 

Mr. HACKFORD. Well, there is a free trade issue, too, Mr. Chairman. 

Chairman HATCH. Well, there is. 

Mr. HACKFORD. When they put a cap on and when they say that 

only 20 films from outside China can be distributed, what is also 

happening is the studios are thinking about going to China to 

make films to get around that, which means that takes jobs out of 

America to do that. 

Chairman HATCH. That is one of their ideas to get you to go 

there. 

Mr. HACKFORD. Yes. 

Chairman HATCH. But I am very concerned about this, and it 

isn’t just the movie industry. It is the publishing industry, it is the 

music industry. We have seen tremendous dislocations there. 

We will turn to Mr. Holleyman, who will put a wrap-up on this. 

STATEMENT OF ROBERT HOLLEYMAN, PRESIDENT AND CHIEF 

EXECUTIVE OFFICER, BUSINESS SOFTWARE ALLIANCE, 

WASHINGTON, D.C. 

Mr. HOLLEYMAN. Mr. Chairman, I want to thank you and Senator Leahy for inviting the Business Software Alliance to testify at 

today’s hearing and for your very persistent attention to the problem of piracy over the years. 

28

As I think this panel has shown, piracy is an issue that affects 

individual creators. It affects collaborators, it affects shareholders, 

it affects national economies, and it affects future creators as well. 

Last week, the BSA and the IDC, which is the leading information 

technology market research firm, released a report showing that in 

2004 the value of pirated software worldwide actually increased, 

despite a modest one-percentage-point decline in piracy rates. In 2004, the world spent more than $59 billion for commercial packaged software. Yet, software worth over $90 billion was actually installed. So for every two dollars’ worth of software purchased 

legitimately, one dollar’s worth was obtained illegally. 

The BSA has also worked with IDC in looking at the impact of 

reducing piracy on jobs and tax revenues. We have shown globally 

that a 10-point reduction in piracy can yield 1.5 million new jobs, 

$64 billion in taxes, and $400 billion in economic growth. And in 

North America alone, a 10-point reduction in software piracy would 

yield 145,000 new jobs, $150 billion in additional economic growth, 

and more than $24 billion in tax revenues. 

While there are many countries that I could talk about, today I 

would like to focus on two—Russia and China. Both of these markets should be tremendous opportunities for our industry. The potential as software markets, and indeed as software suppliers one 

day, is significant, but it is today largely unfulfilled. 

Russian software piracy last year—87 percent of the total market 

was pirated software. It has been stuck in the high 80s for several 

years. Russia has adopted a number of legal reforms over the past 

several years, and while they give us some hope that there may be 

improvements in the marketplace, we have yet to see that realized. 

Indeed, the piracy situation on the ground in Russia is mixed. 

Our companies, on the one hand, are seeing some progress in addressing their channel enforcement issues by working with Russian 

law enforcement authorities. Yet, very little is being done to address end user organizational piracy, which is the largest single 

problem that the software industry faces in Russia, and indeed in 

every country around the world. 

Internet piracy is also a growing challenge in Russia and an area 

where we have had little success. Pirated software from Russia is 

being promoted and sold all over the world using spam e-mail and 

delivery by e-mail. Mr. Chairman, I have examples that I have 

printed out of some of the spams that are being originated in Russia that are being sent to unsuspecting consumers in the United 

States and around the world that then link you to slick websites 

that advertise software for a fraction of the normal retail price. 

These prices, however, are high enough to convince some consumers that the offer is legitimate. 

There are a whole host of other problems I can outline, but we 

are hopeful that the WTO accession mechanism will be the way 

that we can finally begin to see some improvements in Russia. 

Switching to China, last year the piracy rate was 90 percent in 

China, down two percentage points from the year before, but still 

far too high. Much more needs to be done. Consider this: China is 

now the second largest market for personal computers in the world, 

but it is only the 25th largest market for software. The gap between hardware and software sales is huge and it is growing. 

29

I would like to recommend for specific improvements for China 

and its IP regime. First, they must extend criminal liability to enterprise end user piracy. It is absolutely critical that there be 

criminal penalties for organizational end user piracy. 

Two, they have to reduce and clarify criminal thresholds. Three, 

they have to increase the administrative penalties for infringement. 

Fourth, they need to ensure that the government itself is using 

only legitimate software. The goal of all of this is to increase the 

legitimate market for software in China, and that will benefit all 

software suppliers, whether they are U.S. or Chinese origin. 

Let me say, Mr. Chairman, before I conclude that we have looked 

at a lot of measures in the past of how China addresses enforcement—the number of actions they are bringing, the publicity for 

those actions. We think those are important, but experience has 

now shown that that is insufficient. We have to look creatively at 

new benchmarks that we can put on the table that will not only 

show the number of cases, but that will also show demonstrable 

market growth. We are working with USTR and the Commerce Department now in looking at some options to put on the table in the 

context of JCCT that will expand the type of benchmarks that can 

be used. 

Let me conclude, Mr. Chairman, by saying that we make the 

point here and with our allies around the world that reducing piracy benefits all creators. It benefits the entire channel for the distribution of legitimate product. It benefits U.S. companies, but it 

benefits domestic producers. 

In each of these countries, I go hand in hand with local developers to make this case, but it has been through the persistent efforts of this Committee and the U.S. Government that we have 

been armed with the tools that we need. We look to you for continued help and you have our pledge of support. 

[The prepared statement of Mr. Holleyman appears as a submission for the record.] 

Chairman HATCH. Well, thank you. A lot of people don’t know in 

this country that we are way behind some of these other countries, 

including China, with regard to some of the aspects of the hightech world. A lot of those Ph.D.s and a lot of those highly educated 

engineers were educated right here in America, which is good, but 

then they go home and they know how to suck the lifeblood out of 

our economy. 

Mr. Hackford, just a rough estimate. How many people totally 

were involved, from writing, to production, to post-production, to 

marketing, to DVDs in the film ‘‘Ray?’’ Let’s just use that one film. 

Mr. HACKFORD. Well, during the production I would say there 

were 150 people that were directly—we shot the film in Louisiana, 

in New Orleans, and we had a crew there. But in the post-production process and in the marketing, you could probably add another 

150. I mean, that is for one film. 

Chairman HATCH. But that doesn’t count all the people in the 

movie houses and everybody else. It is hundreds of thousands of 

people. 

Mr. HACKFORD. No, no. Then, in fact, as the film goes out and 

plays around the country, it is an interesting question. 

30

Chairman HATCH. You are talking about hundreds of thousands 

of job for one film. 

Mr. HACKFORD. In the movie industry, without question, without 

question. But the reality is that there is what we call a multiplier 

effect that I love. When we go into a community, people think it 

is just the crew that goes there, but when you go in, you have all 

the small businesses that literally make their—as I said before, 

make their livelihood based on films. 

One of the things that is interesting that is happening right now 

in this country is it is spreading out from Hollywood. I mean, I 

happened to make ‘‘Ray’’ in Louisiana. They put up incentive, and 

thanks to you and other people we were able to get a Federal bill 

passed to bring jobs back to the United States. 

But you can see what happens when an economy is infused. Louisiana went from $12 million a year in film production to in the 

last two years $500 million. People want to work in this country, 

and what is important is that jobs are being created in different 

States. The film community is not just in Hollywood, but this is a 

profession and the problem that I have is we create, we have the 

best talent in the world—and I am not talking about talent in front 

of the camera, I am not talking about actors. We have the best people and we have created an industry here. 

Of course, we did create it from the outset, but it is still there. 

I would like to see that continue to flourish because it helps this 

country lead in the area of intellectual property. 

Chairman HATCH. Well, I will go back to engineering and I will 

go back to experts in your field. If we don’t do something to encourage kids to get into math and science, we are not going to have the 

engineers and we are not going to have the people who can even 

keep a film industry going the way it needs to go. And we are going 

to be out-competed all over the world, and it is inexcusable when 

we are the number one nation in the world in all of these aspects. 

The same thing in music. You know, I know a number of writers 

who are just excellent and barely get by. You know actors that 

really are very, very good, but barely get by. There are some who 

hit it very big and that is great. You are one of the directors who 

has become very successful and wealthy in the process, but the fact 

of the matter is not many are able to do that. 

And to find investors to go into these areas is very, very difficult 

because there is hardly anything more dangerous for investment 

than getting into the entertainment world. Unless you really know 

what you are doing and you really have top people, you are going 

to lose your shirt. It is just that simple, as a general rule, whether 

it is in movies, whether it is in books, whether it is in CDs, music, 

you name it, and it is totally unfair. 

For instance, you are happy because ‘‘Ray’’ made some money 

and it made money for your investor. 

Mr. HACKFORD. It could have made a lot more, as you can tell. 

Chairman HATCH. Yes, and you could have become even more 

wealthy. But, see, that is the short-sightedness on this. What it 

meant is that the investor and you, if you had had the extra 

money, would be much more likely to take more risks and give 

other people an opportunity to greater films, do greater music. 

31

A lot of these films take music, a lot of these films take special 

actors, a lot of these films take all kinds of sets and a lot of these 

films take geographic locations. There is an awful lot that goes into 

it. People just think it conjures out of the air. It is like our young 

people—you know, I told the whole recording industry they ought 

to capture Napster that was getting 80 million hits a day and then 

educate our young people that what they are doing is thievery and 

use Napster to do it. 

Well, gradually, we have come a long way that way, but I still 

see a tremendous dislocation, except maybe in country music, in 

the music industry, because our young people are not downloading 

as much in the country area as they are in others. So the country 

area has been pretty good. 

I can’t tell you the really outstanding music writers that I know 

who have to take other jobs because they just simply can’t make 

it on the current royalty system and the current stealing of their 

copyrighted works under current conditions. So, naturally, I am 

very concerned about this and I am very concerned about our 

movie industry. There are successes, of course. Like you say, six 

out of ten aren’t so successful. 

Mr. HACKFORD. Right. As a songwriter, you know how the music 

industry has been savaged because there is less information and it 

is easier to go. But the fact is that technology marches ahead. 

Right now, at Cal Tech in California they have developed a technology that will allow individuals to download a high-quality digital copy of any film in three seconds. 

Right now, the only thing that has held it back is that it takes 

a long time. But as this technology starts to become part of our system, it will just be rampant. Again, there has got to be a technological solution, in addition to an educational solution. These are 

all things we have to work on. 

Chairman HATCH. I agree with that. There has got to be some 

way. And, of course, you have people in the high-tech world who 

don’t believe in copyright, even though they couldn’t exist without 

copyright, but they take a short-sighted viewpoint. That is why we 

are all watching Grokster right now. We can’t wait until that Supreme Court decision comes down, and at least from my perspective hopefully they won’t treat it the same as betamax because 

there is only one reason for Grokster’s existence as far as I can see 

and that is to enable the pilfering of copyrighted materials, illegal 

downloading of copyrights materials. 

And when that is so, I mean you might be able to find some peripheral use of that, but that is the primary reason for that. And 

our young people are being led down a primrose path, too. I hope 

the Supreme Court thinks about that, that if they don’t come up 

with the right decision in Grokster, they are aiding our young people to think that everything on the Internet is free, even though 

it is not and even though our copyright laws teach otherwise. 

I have heard young people who say, who cares? It is my computer and I can do whatever I want to do. Once you have that attitude on one thing, it permeates a lot of other things and it deteriorates society far below what our society should be. 

So I personally appreciate all three of you being here today. You 

have laid out some pretty important problems and you have made 

32

some suggestions, but there are no simple solutions. We are a long 

way from having the trade agreements work perfectly and we are 

a long way from having China and Russia, two of the biggest thievery countries who just won’t get this under control—and they have 

the capacity to do it. I know that, because they don’t have nearly 

the stringent laws that we do and if they wanted to take care of 

this, they could take care of it. We know about the 30-plus facilities 

in Russia and if they want to take care of it, they can. 

As far as I am concerned, they don’t belong in the WTO until 

they do. I would be very strong supporters of theirs if they would 

straighten this out. And I have got to say if people like Orrin 

Hatch don’t support them, they are not going to make it. It isn’t 

that I am so great. It is just that I am in a position where I can 

do some things that some people can’t. I just want freedom and 

fairness and decency and honor in our country, as well as their 

countries, and I am just hoping that some of them will be watching 

these hearings to realize that we mean business on this. We are 

sick and tired of it. 

We want them to have a great film industry and we want them 

to have a great music industry, a great publishing industry, a great 

television industry, a great software industry, whatever you want 

to call intellectual property, ad infinitum. And we are willing to 

compete with them, but we want to do it on a fair basis. 

Well, this has been a really wonderful hearing as far as I am 

concerned. It is highly technical maybe for some, but anybody 

watching it has got to say we have got to do something about these 

problems. And you guys are at the forefront of trying to do something about it and I just want to commend you for it, but take our 

request here and let’s come up with some ways that will help us 

to pass the right laws so that we can help you more, because there 

are some things that we can do. And then we have to get to our 

young people and get them to realize there are right ways of doing 

things and wrong ways of doing things, and that they should be 

doing the right ways, not the wrong ways. 

Well, with that, thank you all for your time. I am sorry to keep 

you so long, but it is an interesting area for, I think, so many of 

us, but especially for Senator Leahy and me, and we are grateful 

that you would come and testify today. Thanks so much. 

With that, we will leave the record open for one week for additional submissions, anybody who would like to make those submissions. And if anybody has a good argument on the other side, I am 

interested in that, too. So we will leave the record open and recess 

until further notice. 

[Whereupon, at 4:19 p.m., the Subcommittee was adjourned.] 

[Submissions for the record follow.]

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