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96–748 PDF 2004

INTELLECTUAL PROPERTY PIRACY: ARE WE

DOING ENOUGH TO PROTECT U.S. INNOVATION

ABROAD?

HEARING

BEFORE THE

COMMITTEE ON

GOVERNMENT REFORM

HOUSE OF REPRESENTATIVES

ONE HUNDRED EIGHTH CONGRESS

SECOND SESSION

SEPTEMBER 23, 2004

Serial No. 108–225

Printed for the use of the Committee on Government Reform

(

Available via the World Wide Web: http://www.gpo.gov/congress/house

http://www.house.gov/reform

(II)

COMMITTEE ON GOVERNMENT REFORM

TOM DAVIS, Virginia, Chairman

DAN BURTON, Indiana

CHRISTOPHER SHAYS, Connecticut

ILEANA ROS-LEHTINEN, Florida

JOHN M. MCHUGH, New York

JOHN L. MICA, Florida

MARK E. SOUDER, Indiana

STEVEN C. LATOURETTE, Ohio

DOUG OSE, California

RON LEWIS, Kentucky

TODD RUSSELL PLATTS, Pennsylvania

CHRIS CANNON, Utah

ADAM H. PUTNAM, Florida

EDWARD L. SCHROCK, Virginia

JOHN J. DUNCAN, JR., Tennessee

NATHAN DEAL, Georgia

CANDICE S. MILLER, Michigan

TIM MURPHY, Pennsylvania

MICHAEL R. TURNER, Ohio

JOHN R. CARTER, Texas

MARSHA BLACKBURN, Tennessee

PATRICK J. TIBERI, Ohio

KATHERINE HARRIS, Florida

MICHAEL C. BURGESS, Texas

HENRY A. WAXMAN, California

TOM LANTOS, California

MAJOR R. OWENS, New York

EDOLPHUS TOWNS, New York

PAUL E. KANJORSKI, Pennsylvania

CAROLYN B. MALONEY, New York

ELIJAH E. CUMMINGS, Maryland

DENNIS J. KUCINICH, Ohio

DANNY K. DAVIS, Illinois

JOHN F. TIERNEY, Massachusetts

WM. LACY CLAY, Missouri

DIANE E. WATSON, California

STEPHEN F. LYNCH, Massachusetts

CHRIS VAN HOLLEN, Maryland

LINDA T. SANCHEZ, California

C.A. ‘‘DUTCH’’ RUPPERSBERGER, Maryland

ELEANOR HOLMES NORTON, District of

Columbia

JIM COOPER, Tennessee

BETTY MCCOLLUM, Minnesota

———

BERNARD SANDERS, Vermont

(Independent)

MELISSA WOJCIAK, Staff Director

DAVID MARIN, Deputy Staff Director/Communications Director

ROB BORDEN, Parliamentarian

TERESA AUSTIN, Chief Clerk

PHIL BARNETT, Minority Chief of Staff/Chief Counsel

(III)

C O N T E N T S

Page

Hearing held on September 23, 2004 ..................................................................... 1

Statement of:

Papovich, Joseph, senior vice president-international, Recording Industry

Association of America; John G. Malcolm, senior vice president and

director for worldwide anti-piracy operations, Motion Picture Association of America; and Robert Cresanti, vice president, public policy,

Business Software Alliance .......................................................................... 54

Simmons, Hon. Rob, a Representative in Congress from the State of

Connecticut .................................................................................................... 12

Yager, Loren, Ph.D., Director, International Affairs and Trade, U.S. Government Accountability Office ..................................................................... 20

Letters, statements, etc., submitted for the record by:

Cresanti, Robert, vice president, public policy, Business Software Alliance, prepared statement of ......................................................................... 83

Cummings, Hon. Elijah E., a Representative in Congress from the State

of Maryland, prepared statement of ............................................................ 136

Davis, Chairman Tom, a Representative in Congress from the State of

Virginia:

Article dated September 23, 2004 ............................................................ 42

Prepared statement of ............................................................................... 5

Malcolm, John G., senior vice president and director for worldwide antipiracy operations, Motion Picture Association of America, prepared

statement of ................................................................................................... 69

Papovich, Joseph, senior vice president-international, Recording Industry

Association of America, prepared statement of .......................................... 57

Simmons, Hon. Rob, a Representative in Congress from the State of

Connecticut, prepared statement of ............................................................ 14

Waxman, Hon. Henry A., a Representative in Congress from the State

of California, prepared statement of ........................................................... 9

Yager, Loren, Ph.D., Director, International Affairs and Trade, U.S. Government Accountability Office, prepared statement of .............................. 24

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INTELLECTUAL PROPERTY PIRACY: ARE WE

DOING ENOUGH TO PROTECT U.S. INNOVATION ABROAD?

THURSDAY, SEPTEMBER 23, 2004

HOUSE OF REPRESENTATIVES,

COMMITTEE ON GOVERNMENT REFORM,

Washington, DC.

The Committee met, pursuant to notice, at 11 a.m., in room

2154, Rayburn House Office Building, Hon. Tom Davis (chairman

of the committee) presiding.

Present: Representatives Davis, Blackburn, Waxman, Maloney,

Cummings, Clay, Watson, Sanchez, Ruppersberger, Norton, and

Cooper.

Staff present: David Marin, deputy staff director/communications

director; Keith Ausbrook, chief counsel; Ellen Brown, legislative director and senior policy counsel; Jennifer Safavian, chief counsel

for oversight and investigations; Jack Callender, John Hunter, and

David Young, counsels; Rob White, press secretary; Drew Crockett,

deputy director of communications; John Cuaderes and Victoria

Proctor, senior professional staff members; Jaime Hjort, professional staff member; Sarah D’Orsie, deputy clerk; Allyson

Blandford, office manager; Corinne Zaccagnini, chief information

officer; Phil Barnett, minority staff director; Karen Lightfoot, minority communications director/senior policy advisor; Anna Laitin,

minority communications & policy assistant; Michelle Ash, minority senior legislative counsel; Nancy Scola, minority professional

staff member; Earley Green, minority chief clerk; Jean Gosa, minority assistant clerk; and Cecelia Morton, minority office manager.

Chairman TOM DAVIS. The committee will come to order. A

quorum being present, the Committee on Government Reform is

now in order.

I would like to welcome everybody to today’s hearing on intellectual property rights and the effectiveness of our efforts to protect

U.S. interests from privacy abroad. The committee will focus on

counterfeiting and piracy in foreign countries of software, movies,

music, and designs for consumer industrial products that are protected by U.S. intellectual property laws.

Everybody knows that the United States is the greatest source

of creativity in the world. Our products, whether they are movies,

music recordings, design of clothing, ship and airplane parts, fast

food, or computer software, can be found in every market in almost

every country in the world. If markets for U.S. goods derived from

intellectual property are to be sustained and expanded, our prodVerDate 11-MAY-2000 13:12 Dec 21, 2004 Jkt 000000 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 D:\DOCS\96748.TXT HGOVREF1 PsN: HGOVREF1
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ucts must be adequately protected in every market where they are

found; otherwise, jobs will be lost, not only the jobs of executives

or movie stars or recording artists, but also the technicians, the

carpenters, the factory workers, and the retailers.

Moreover, consumer safety will also be in jeopardy if we get

knock-off goods such as airplane, ship or auto parts, or consumer

products get into the mainstream of commerce and fail to perform

as expected. Incentives to stimulate and encourage innovation will

also be diminished, as capital necessary to foster this creativity will

be lost to illegitimate interests.

Counterfeiting and piracy of U.S. intellectual property in foreign

countries is rampant. Counterfeited editions of U.S. software, movies, music, and designs for consumer and industrial products can

be found in markets throughout the world. I know because I witnessed it along with Mrs. Blackburn in China just last month. Several of my staff also saw it in Russia and Poland recently.

On the table to my left you can see both real and counterfeit

movies, music, and consumer goods provided by the GAO. The real

and counterfeit goods appear indistinguishable. In addition, the

manufacture and sale of these items has become a significant global business. It is difficult to assess the exact economic losses, but

the Office of the U.S. Trade Representatives report that U.S. companies lost between $200 and $250 billion in 2003 because of piracy

and counterfeiting.

Our copyright, patent, and trademark laws protect intellectual

property domestically, but foreign intellectual property laws are

often totally lacking or woefully inadequate to protect legitimate

U.S. intellectual property interests. Those countries that do have

laws often don’t enforce them. Enforcement efforts by many foreign

governments have come under increased criticism as being ineffective.

Federal law charges a number of different U.S. Government

agencies with responsibility for securing more comprehensive and

effective protection of U.S. intellectual property rights abroad.

These functions really fall into three categories: first, policy initiatives, such as negotiating trade agreements with foreign governments in coordination with international organizations such as the

World Trade Organization and the World Intellectual Property Organization; second, Federal law enforcement actions, including

multi-country investigations, seizure of goods at U.S. ports of entry,

and patent and trademark infringements; and, third, training and

technical assistance for foreign governments.

The agencies that have responsibility for these activities include

the USTR, the Trade Rep., the Departments of State, Commerce,

Justice, Homeland Security, the U.S. Patent and Trademark Office,

U.S. International Trade Commission, the U.S. Agency for International Development, the Federal Bureau of Investigation, and

the Library of Congress’s Copyright Office.

The complexity of this issue requires coordination of specific

functions among the Federal agencies involved. Formal efforts include the National Intellectual Property Law Enforcement Coordination Council, which was created in 1999 by Congress to coordinate law enforcement efforts among the various responsible Federal agencies.

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The USTR also coordinates efforts to protect U.S. intellectual

property through the Special 301 review, which consists of annual

assessments on the effectiveness of foreign countries’ efforts to protect U.S. intellectual property. Less formal coordination is ongoing

at individual U.S. embassies in countries where intellectual property violations are severe.

Private industry has also taken action to enforce and protect its

intellectual property rights abroad. A number of industry associations engage in collaborative efforts to advance foreign governments’ protection of U.S. interests.

Because of the severity of the piracy problem and the vital importance of protecting U.S. innovation throughout the world, we

asked the Government Accountability Office [GAO], to review and

assess Federal agencies’ responsibilities and efforts to combat intellectual property piracy in foreign countries. GAO has complied with

its study and the report, which is entitled, ‘‘Intellectual PropertyU.S. Efforts Have Contributed to Strengthened Laws Overseas, But

Challenges Remain,’’ confirms the severity of the piracy and counterfeiting problem. The report finds that agencies are actively engaged in combating this problem and have made progress in persuading foreign governments to strengthen their intellectual property laws; however, the report concludes that enforcement of these

laws remains a major challenge. The report recommends that the

NIPLECC’s authority, structure, membership, and mission should

be strengthened.

The committee will first welcome Congressman Rob Simmons

from Connecticut, who will tell us about a manufacturer in Connecticut in his district that has experienced piracy and counterfeiting on its fuel gages.

We will then receive GAO’s assessment of the intellectual property piracy problem as it relates specifically to U.S. software, movies, music, and designs for consumer and industrial products, and

its recommendations for strengthening U.S. efforts to protect those

problems.

Although we invited Federal Government agencies responsible

for intellectual property protection to be here today to testify, they

were unable to do so. While I am disappointed by their absence, we

are going to continue to work with the administration to develop

coordinated and effective reforms that will enhance the protection

of U.S. intellectual property rights abroad.

Finally, the committee will hear from the private sector that is

victimized by intellectual property piracy and counterfeiting in the

world markets. We particularly want to receive their assessment of

not only the situation they face in international markets, but also

their own enforcement efforts in foreign countries.

This is an important issue that will receive increased attention

in government and industry circles. In particular, we need to focus

on enhancing foreign governments’ enforcement efforts. The fact

that the Senate CJS Appropriations bill for fiscal year 2005 includes $20 million for the NIPLECC and directs that entity to take

more specific action to enhance intellectual property law enforcement internationally is one vehicle to consider.

Over the next few weeks we will be in a better position to determine whether enhancing the NIPLECC is the best solution or

4

whether other measures should also be taken. In light of this urgency, I felt that it was essential to proceed with this hearing today

to hear GAO’s findings and the industry’s assessments.

So I want to thank all of our witnesses for appearing before the

committee.

[The prepared statement of Chairman Tom Davis follows:]

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Chairman TOM DAVIS. I will now yield to our ranking member,

Mr. Waxman.

Mr. WAXMAN. Thank you very much, Mr. Chairman, for this opportunity today to examine the serious challenge facing some of the

most dynamic industries in the United States.

America’s thriving intellectual property industry is a driving

force of economic growth in this country. Revenues from movies,

music, video games, computer software, digital and media technology constitute a significant percentage of our gross domestic

product, contributing billions of dollars annually to the U.S. economy.

Despite this success and the popularity of these U.S. products

worldwide, the industry’s growth is imperiled by losses to piracy

each year.

According to the Recording Industry Association of America, one

out of every three music CDs sold in the world is pirated. And in

July 2004, the Business Software Alliance released a report finding

that one-third of software installed on computers last year was pirated.

U.S. Government activism has garnered increased protection for

copyrighted works through the World Trade Organization’s Agreement on Trade-Related Aspects of Intellectual Property Rights, bilateral free trade agreements, and global standards for recognized

intellectual property rights. But these laws are only as useful as

their enforcement.

Many of the world’s worst offenders—who counterfeit and traffic

millions of illegally copied CDs, videos, and software—operate undetected and undeterred. In countries like China and Russia,

where property law is still in an early stage of development, corruption is also a tremendous obstacle.

Elsewhere, enforcement efforts suffer from a lack of training for

investigators and prosecutors, competing priorities for law enforcement resources, or an inability to catch criminals because technology makes it so easy for them to hide.

The U.S. Government has had some success in using trade sanctions or even the threat of trade sanctions to pressure countries to

crack down on IP theft. U.S. law enforcement has also been able

to take advantage of the tremendous amount of investigative work

originating from the IP industry itself. The Motion Picture Producers Association now has anti-piracy programs in over 60 countries

and is an active participant in inspections, raids, and seizures.

Unfortunately, as the findings of the GAO report that prompted

this hearing indicate, overseas enforcement efforts continue to suffer because of limitations on our own resources and lack of coordination between agencies. Interagency councils like the National Intellectual Property Law Enforcement Coordination Council and the

National IPR Coordination Center, which were put in place at the

end of the Clinton administration, have not been well organized or

used to their full potential. Offices at the USTR and the State Department that handle IPR issues may not have a high enough profile to give this issue the constant level of attention it needs.

I look forward to the testimony of our panelists today to help us

explore what is necessary for the United States to develop a comVerDate 11-MAY-2000 13:12 Dec 21, 2004 Jkt 000000 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 D:\DOCS\96748.TXT HGOVREF1 PsN: HGOVREF1
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prehensive and effective strategy to combat piracy and advance

international intellectual property protection.

Thank you, Mr. Chairman.

[The prepared statement of Hon. Henry A. Waxman follows:]

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Chairman TOM DAVIS. Thank you very much.

Mrs. Blackburn, you have been very active on this issue. Any

opening statement? All right. If not, we will proceed to our first

witness. We have the Honorable Rob Simmons from the Second

District of Connecticut.

Rob, welcome. It is good to have you here today. Please proceed.

STATEMENT OF HON. ROB SIMMONS, A REPRESENTATIVE IN

CONGRESS FROM THE STATE OF CONNECTICUT

Mr. SIMMONS. Thank you, Mr. Chairman. I thank the ranking

member and the members of the committee for convening today to

discuss this critically important issue. I have a prepared statement

that I would request be placed into the record as prepared, and I

would like to summarize my remarks, Mr. Chairman.

Chairman TOM DAVIS. Without objection.

Mr. SIMMONS. We hear a lot about counterfeiting and piracy in

the context of very large corporations, in the context of Hollywood

and other well-known institutions, but the problem I am going to

present to you today is that counterfeiting and piracy is hitting at

the heart of small business. And whereas you may not hear a lot

of publicity about it, it is having a crippling effect on the survival

of small business and small manufacturing in America today, and

it is the kind of thing that, quite frankly, angers me.

Earlier this year I met with David Blackburn, who lives in my

hometown and who runs a small manufacturing company called

Faria, which, for over 40 years, has produced gauges, initially for

the automotive industry, more recently for the maritime industry.

And, in fact, as this photo shows, they actually make gauges for

Humvees and other types of military equipment.

A few months ago Mr. Blackburn told me that his products were

being counterfeited by China and sold to some of his customers

overseas; and he has customers in 22 countries overseas. The counterfeit gauges that were being sold were virtually exact replicas of

his gauges, and I would ask my staff person to take these up to

the chairman and have him take a look and see if he can tell the

difference between the two gauges. And don’t be fooled by the lettering on one of them.

The only area where we found that the counterfeit model was not

exactly the same as the real thing was that the nuts did not go easily onto the bolts. But they even had an employee inspection sticker

that was exactly the same as the employee inspection stickers used

by the company. There is no question in my mind that the people

that produced these counterfeit gauges were doing it knowingly

and willingly, and this is a criminal act. These are criminals that

are doing this.

Furthermore, when an overseas supplier discovered that these

counterfeit gauges were flooding the market, the overseas supplier

indicated to Mr. Blackburn that he would try to obtain one of the

gauges, and then the person that sold the gauges to him threatened him and his family with violence if they ‘‘created any problems’’ and tried to stop the racket.

This is an outrageous situation that Mr. Blackburn and the Faria

company have found themselves in.

13

After I learned of this problem, I scheduled a visit to the factory

and was briefed by officials of Faria that they estimate they are

losing about $2 million annually because of these counterfeit

gauges that are flooding the markets around the world. And beyond the loss of sales, Faria has a lifetime guarantee for its gauges,

because it is a quality name in gauge production. They are getting

the phony gauges back, which are defective, to them, and then they

are having to replace it with a real gauge at no cost.

When I returned back to Washington, I scheduled a meeting with

the Department of Commerce, and I presented officials there in the

Patent and Trademark Office, as well as the Office of Market Access and Compliance, with the counterfeit product, with the real

product, and I asked them to initiate an investigation into the matter, which they did; and they actually sent an official over to China

to look into the matter.

Nonetheless, the problem remains. Counterfeit gauges from

Faria are flooding the market around the world. These gauges do

not meet our high standards. Many of them are defective. They

don’t even reflect the information that the gauge is supposed to reflect. So the personal safety of the people using these gauges, perhaps our troops in Iraq or Afghanistan driving their Humvees, perhaps somebody driving an inboard or an outboard motorboat,

where these gauges are telling them important information, perhaps these individuals are at risk because the information in the

phony gauges is not coming across to the operator of the equipment. And then what happens if there is an accident, if somebody

is hurt or somebody is killed? Who gets sued? Faria, of course.

Faria.

Counterfeiting is a global challenge. We all know that. It is costing businesses’ profits, worker’s jobs, government’s revenue; it is

costing consumers and customers their safety. I am told that up to

$200 to $250 billion annually is lost by U.S. companies because of

counterfeiting. But, Mr. Chairman, the message that I am trying

to convey to you today is this isn’t just hitting the big companies.

This isn’t just hitting the name recording stars. This is hitting

small and medium-sized manufacturing outfits all across this country.

Now, I love the Chinese people, I love their culture, I love their

food. I lived in China for 3 years. I just came back from a trip to

China a year or so ago. I spent 2 years of my life studying Chinese.

But it is clear that over 50 percent of the counterfeits identified in

America today are coming from China, and this has to stop. This

is not competing, this is cheating. And cheating has no place in

world trade, especially when it comes to the safety of our customers, especially when it comes to the security of the jobs of our

workers. There is no place for cheating.

Mr. Chairman, again I thank you for having this important hearing, and I would be happy to answer any questions you may have.

[The prepared statement of Hon. Rob Simmons follows:]

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Chairman TOM DAVIS. Representative Simmons, thank you very

much. You make the case factually and passionately. Of course,

these gauges also hurt Faria’s reputation, don’t they, in the marketplace?

Mr. SIMMONS. Absolutely. If you are a boat builder, if you are a

manufacturer that relies on panels of gauges for your product, and

you discover that the ‘‘Faria gauge’’ that you bought is defective,

that it isn’t working, that you are going to have to send it in for

a replacement, not knowing it is a counterfeit, after a while you are

going to say, well, you know, there is something wrong with the

quality of Faria; they are not as good as they used to be, they are

cutting corners, the bolts don’t fit; we are going to go to a Swiss

manufacturer, we are going to go to a German manufacturer, we

are going to go to somebody else, we are going to go another name

brand.

And what happens is this company, that was started in my district over 40 years ago, where the founder of the company had a

bunch of patents on gauges, where 300 people continue to make the

best gauges in the world, the name brand gauges, they are being

undercut, and eventually put out of business, by counterfeits and

cheating.

Chairman TOM DAVIS. Does the Chinese Government know the

source of these phony gauges?

Mr. SIMMONS. The investigation continues. Originally, the company that was suspected of being the source was taken off a Web

page that was managed by the government. Now there is some discussion as to whether the Faria Corp. should have had an agent

in China to somehow establish a legal relationship with the Chinese Government.

Let me ask you this, Mr. Chairman. How many of our small companies must place an agent in China to prevent China from cheating and counterfeiting? I don’t think that is a fair thing to say. So

the bottom line is——

Chairman TOM DAVIS. It doesn’t work, either.

Mr. SIMMONS. It doesn’t work. The bottom line is that the investigation continues. But I consider this matter so important and so

significant that I took those gauges right down to the Commerce

Department myself and presented it to them and asked them for

an investigation. To their credit, they have been to China on the

issue; they have been up into my district on the issue. But it has

not been resolved to my satisfaction at this point in time.

Chairman TOM DAVIS. Has the Chinese Government done anything about this that you are aware of?

Mr. SIMMONS. Not to my knowledge.

Chairman TOM DAVIS. Have they given you a letter at least?

Mr. SIMMONS. Not to me, no.

Chairman TOM DAVIS. We have, right down here in the front left,

some items that I am not going to single out any particular country, but—well, I will, a couple. If you want a pair of Nike shoes,

we have some from $3 that you can buy in Brazil, complete with

the label. You can get a math CD program from Russia for $3.33,

a Lord of the Rings for $6.67. I was tempted to take that one, but

it is in Russian; it wouldn’t do me any good. All kinds of shampoos

and detergent for cut rate costs. Christina Aguillera tape for $1.50;

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Britney Spears for $1.50, which, in my opinion, is overpriced even

at that. Don’t tell my teenage daughter.

But the fact is this is going on in some of the countries; it is not

just China, unfortunately, it is Russia, it is the Ukraine, it is

Brazil, it is all over the world.

We appreciate your bringing this to our attention, and I am sorry

that the USTR and some of our enforcement groups are not here

today to react to this before this committee, but we will get them

back here and we will try to help you as you stay on your case.

We appreciate your being here.

Mr. SIMMONS. Thank you, Mr. Chairman, and, yes, it is unfortunate because these people are charged with this responsibility, and

the confidence that we have, or the lack of confidence, goes to the

issue of how aggressively they are going to pursue these things.

Again, one can say that this is only a small company in a little

State up in New England, 300 workers; it doesn’t really matter in

the big scheme of things. But I guarantee you there are hundreds,

if not thousands, of the same small companies that are falling victim to this cheating and to this counterfeiting, and they slowly go

off the map one at a time; a little one here, a little one there, a

little one over there, and nobody is counting. Nobody is counting.

But if you add it all up, it is a huge hit to our country and to our

working men and women, and we need to fight back.

Chairman TOM DAVIS. Thank you very much.

Mrs. Blackburn, any questions?

Mrs. BLACKBURN. Thank you, Mr. Chairman.

Representative Simmons, I want to thank you for bringing the

issue forward and working so closely with your constituent. Where

I come from in Tennessee, with the music industry, we see a lot

of this. Our tool and dye manufacturers are also beginning to have

a problem with this, as they are suppliers for the auto industry for

many things that are manufactured there.

I do have just one quick question I would like for you to address

because, as the chairman mentioned, we were in China recently, or

through Southeast Asia, working on this and had a couple of conversations with some folks as we looked at this issue and thought,

well, maybe there is a role for some NGO’s in this process, as far

as helping with education and with kind of rooting out the causes

of this. You know, you mentioned in your testimony that whomever

makes these is knowingly, willingly doing this and putting Faria

and their employees at great risk, as well as the consumers of the

Faria gauge.

Now, has Faria been able, at their own expense, which, of course,

all of this, for small business, this always lands on their back; they

have to pay for finding out who is doing wrong to them. Have they

been able to go back and trace what a link may have been or why

a counterfeiter would have picked up? Did they have association at

one point in time with someone in Southeast Asia, or was this just

like a bad thing that happened to come their way?

Mr. SIMMONS. First of all, I think you have put your finger right

on the heart of the subject, which is this is not happening because

it is an accident; this is happening on purpose. Faria is a name

brand, just like Britney Spears, like it or not, it is a name brand.

So they are imitating name brands. Point two: they are a small

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business. The only reason they found out about the gauges that are

in that magazine is because a customer in a foreign country was

offered a batch of ‘‘Faria gauges’’ at a discount. They were counterfeit. And that customer had the courage to report that back to the

headquarters in Connecticut and was subsequently threatened by

the Chinese vendor with physical violence if they ratted out the

racket.

So, you see, it was a series of fortuitous circumstances that actually brought this to the attention. They knew they were losing market share in these countries; they weren’t quite sure how. But how

does a company of 300 employees, locally based in a small State,

how do they have the resources to track down what really is an

international conspiracy of criminal activities that is condoned with

a wink and a nod by a major nation? How can they do that? They

can’t.

Mrs. BLACKBURN. So Faria still does not know the location of the

plant or the individual funding, putting the money into the plant

making the counterfeit goods.

Mr. SIMMONS. Absolutely correct. And if there is to be any followup, my feeling is if you can find that company and those people,

you not only shut them down, but you confiscate the equipment.

I lived in Taiwan for 3 years a number of years ago. The issue

of counterfeits and fakes is well known; it has plagued American

industry for 30, 40 years. We are all familiar with that. These

things don’t happen by accident. You don’t have a bunch of free enterprising entrepreneurs somewhere over there just doing this on

their own. It doesn’t happen by accident. The government condones

it with a wink and a nod.

If you expose a case, as we are trying to do here, there will be

many apologies: very sorry; big mistake; we didn’t know about it.

That is just a bunch of nonsense. Over 66 percent of the counterfeits coming into America today are coming in from China. That is

not a mistake. And it is incumbent upon us, the Congress, the executive branch of the United States of America, to address and confront the problem, because these little guys just can’t do it on their

own; they just don’t have the resources.

And I give Mr. Blackburn and his employees high marks for having the courage to bring this to our attention and publicize it because, again, one of his customers in a foreign country was physically threatened with violence if they disclosed the situation.

Chairman TOM DAVIS. Ms. Sanchez, do you have any questions?

Ms. SANCHEZ. Yes, thank you.

I read with interest about the new developments and how technologically potentially can help hinder piracy, but going back to the

issue of piracy, who would you say are the United States’ best allies in trying to combat international piracy?

Mr. SIMMONS. I think our best allies in that are other countries

like us who invest a lot of money into research and development,

who bring new products online at great cost, who have an educated

and a creative work force who have free enterprise systems where

creativity is rewarded and we try to protect it through patents and

other sorts of protections for intellectual property.

I think it is the western democracies and what I call the free

world. We must do this together. We must work to enforce this toVerDate 11-MAY-2000 13:12 Dec 21, 2004 Jkt 000000 PO 00000 Frm 00022 Fmt 6633 Sfmt 6633 D:\DOCS\96748.TXT HGOVREF1 PsN: HGOVREF1
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gether. And I think that we have to work on a global basis. And

I also think, and I have not seen to my satisfaction, that we have

to punish those nations who willfully engage in these activities

with a wink and a nod. We must have a system in place to punish

them for that; punishment, not just saying, you know, you

shouldn’t do that, please don’t do it again.

Ms. SANCHEZ. I read with interest about international trade

agreements, and some of the procedural protections that they try

to build in to help encourage countries that are interested in doing

trade with the United States, serious enforcement of piracy and intellectual property rights. And I missed part of your testimony, so

I apologize, but how would you say China is doing in their serious

investigation and prosecution of piracy?

Mr. SIMMONS. I have no evidence of that. And in my discussions

with the Commerce Department, I have asked to see how we are

doing in enforcement. You know, you can pass all the laws in the

world, but if there is no enforcement, it doesn’t work. You can sign

all the treaties in the world and have a nice glass of champagne,

that we have just signed this wonderful treaty; isn’t it great; it is

going to be fair trade, free trade, whatever it is.

But if there is no enforcement of labor regulations, if there is no

enforcement of environmental codes, if there is no enforcement

against piracy and counterfeiting, if there is no enforcement and if

there is no punishment for doing that, it is a worthless piece of

paper.

Ms. SANCHEZ. So would it be your testimony that you don’t think

that trade agreements, in and of themselves, can be a type of leverage used to help thwart piracy that is going on internationally?

Mr. SIMMONS. I think they can, but they must be enforced. My

concerns about counterfeiting and pirating go back several years,

in fact, but I never could find a concrete example of it in my own

experience, in my own district. So all I could do was talk about it.

But when this issue came up of counterfeit gauges pressuring a

company in my district, my neighbors, a man who lives in my home

town, who runs this company, that they are at risk, over the long

term, of being put out of business by counterfeiting, that is why I

took these gauges down to the Commerce Department. That is why

I put them on the table. I said, here is an example. Show me what

you are going to do about it.

You know, I am from Connecticut, but let us say I am from Missouri, the Show Me State. Show me. Show me what you are going

to do about it. This is a little case; not complicated, not big, it is

a little case. Show me what you can do with a little case. And,

quite frankly, if you can’t be successful with a little case, you are

not going to be successful with a big case. And that tells you the

nature of the problem.

Ms. SANCHEZ. And I would venture to guess, and correct me if

I am wrong, that it would be more difficult for U.S. agencies to enforce these laws than for foreign governments to enforce them in

their own home jurisdictions.

Mr. SIMMONS. If the home governments aren’t willing to cooperate with enforcement, it is simply not going to work. I think we

know that. And that is why I say governments may condone the

20

activity with a wink and a nod, but when confronted, maybe they

will accommodate you.

But that is not good enough; they have to be 100 percent with

the program. And the time will come. My guess is the time will

come when China and other countries that are engaged in counterfeiting may begin to create things on their own, and then suddenly

they will have an interest in protecting those creations. But they

ain’t there yet.

Ms. SANCHEZ. Thank you. I have no more questions.

Chairman TOM DAVIS. Thank you very much, Rob. We appreciate

your calling this to our attention, and we will continue to work

with you on this. Good luck.

Mr. SIMMONS. Thank you, Mr. Chairman, and thank you and the

members of your committee for addressing this important issue.

Chairman TOM DAVIS. Thank you.

We have our second panel up. We have GAO up now.

We will take a 1-minute break.

[Recess.]

Chairman TOM DAVIS. We will now call Loren Yager, who is the

Director of International Affairs and Trade at the Government Accountability Office.

Dr. Yager, it is our policy we swear you in. If you would just

raise your right hand.

[Witness sworn.]

Chairman TOM DAVIS. Thank you very much for being here. You

have done a good study on this thing that I had occasion to read

last night. The entire report is in the record, so if you could proceed

to sum it up, then we can move right to questions. Thank you very

much for your work on this.

STATEMENT OF LOREN YAGER, PH.D., DIRECTOR, INTERNATIONAL AFFAIRS AND TRADE, U.S. GOVERNMENT ACCOUNTABILITY OFFICE

Mr. YAGER. Thank you, Mr. Chairman, members of the committee. Thank you for the opportunity to discuss our work on U.S. efforts to protect U.S. intellectual property rights overseas. The

statement that I will give today is drawn from the GAO report that

was just released by the committee today, and copies are available

on the table by the door. I will summarize a few of the key points

in my oral statement, and I also ask that the written statement be

entered into the record.

To understand more fully how U.S. agencies have performed in

protecting IP abroad, you asked us to identify and review U.S.

agency activities. This testimony addresses three things: the specific efforts of U.S. agencies to improve IP protection in other nations, the means that they use to coordinate these efforts abroad,

and, finally, the challenges facing enforcement efforts abroad.

To address these issues, we met with key government officials

from agencies, including USTR, Commerce, Justice, FBI, State Department, and Homeland Security, among others. In addition, we

met with officials from key intellectual property industry groups,

including those represented here today at the hearing.

We also conducted research in four countries where serious problems regarding the protection of intellectual property have been reVerDate 11-MAY-2000 13:12 Dec 21, 2004 Jkt 000000 PO 00000 Frm 00024 Fmt 6633 Sfmt 6633 D:\DOCS\96748.TXT HGOVREF1 PsN: HGOVREF1
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ported: Brazil, China, Russia, and the Ukraine. And as you mentioned, Mr. Chairman, we brought a few items back which demonstrate some of the problems associated with piracy.

As to the first types of efforts, U.S. agencies’ efforts to improve

protection of intellectual property in foreign nations fall into three

categories: policy initiatives, training and assistance activities, and

law enforcement actions. USTR leads policy initiatives with an annual assessment known as the Special 301 review, which results in

an annual report detailing global IP challenges and identifying

countries with the most significant problems. This report involves

input from many U.S. agencies and industry.

In addition to conducting policy initiatives, most agencies involved in IP issues also engage in training and assistance. Further,

although counterterrorism is the overriding priority of U.S. law enforcement agencies, agencies such as the Departments of Justice

and Homeland Security conduct law enforcement activities regarding IPR. I understand that the committee has requested work from

GAO on the subject of seizures of counterfeit cigarettes and other

illegal goods, so you are aware of agency efforts in this area.

As to the second item on coordination mechanisms, let me talk

about two mechanisms that have very different results. For example, on the policy side, formal interagency meetings are conducted

each year as part of the U.S. Government’s annual Special 301 review.

Mr. Chairman, I am sorry that the agency witnesses are not

available for this hearing, as we can report quite positive findings

on the Special 301 process. Both the Government and industry

sources that we met with view this effort as effective and thorough.

This effort focuses the attention of a variety of private sector, U.S.

agency, and foreign officials on this subject each year, and this attention does lead to changes and improvements overseas.

Conversely, the National Intellectual Property Law Enforcement

Coordination Council [NIPLECC], has struggled to find a clear mission. NIPLECC was established to coordinate domestic and international IP law enforcement among U.S. Federal and foreign entities, but it has undertaken few activities and is perceived by officials from both the private sector and in some U.S. agencies as

having little impact. This mechanism needs the attention of the

Congress, as it is not working. To that end, we have a matter for

congressional consideration on the NIPLECC in our report.

On the final point, Mr. Chairman, both you and the ranking

member stated that enforcement is now the key issue. We certainly

agree with that. As we detail in the report, economic factors, as

well as the involvement of organized crime, pose significant challenges to United States and foreign governments’ enforcement efforts, even in countries where the political will exists for protecting

intellectual property.

In addition, economic factors, including low barriers to producing

counterfeit or pirated goods, potentially high profits for producers

of such goods, and large price differentials between legitimate and

counterfeit products for consumers, create huge incentives for piracy. In some industries the problem of IP theft is getting worse

despite these U.S. Government efforts.

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Mr. Chairman, this concludes my testimony. I would be happy to

answer any questions you or other members of the committee may

have. I also have some specific observations and insights from our

field work in those four countries that I would be able to summarize for the committee, if you are interested.

Chairman TOM DAVIS. Well, why don’t you take a second and

summarize that, because I think that is important for you to do

that?

Mr. YAGER. OK. Some of these relate directly to the examples

that Representative Simmons gave earlier, and also some of the

things in your statement.

One thing that I could start out by mentioning is the wide range

of quality in pirated and counterfeit goods that is immediately evident from the various items that we have on display here. It reflects the fact that many of these goods copies might either be produced in a large, sophisticated factory or they might be produced

in someone’s apartment on a DVD or a CD burner. You can see

some of that range of quality on display with some of the CDs and

videos in very rudimentary packaging, while others could easily be

mistaken for an original.

This presents significant problems for enforcement. Let me mention too. Authorities cannot focus on one particular site or source

of pirated goods, since they can be produced cheaply in a variety

of locations. As a result, shutting off the supply is enormously difficult, particularly for digital products, where reasonable copies can

be produced on very inexpensive equipment.

Another problem is that in some cases authorities may have difficulty in distinguishing the real goods from the fake goods, making

the process much more time-consuming and requiring significant

expertise. For example, I visited with Hong Kong Customs authorities when they were inspecting goods coming across the border

from China, and they indicated that the high quality of some goods

makes it impossible for them to determine the authenticity of those

goods. In fact, they indicated that even the product representatives

of the firms that were shipping those goods often had to consult

their order and shipping information in order to determine whether

the goods coming across the border were legitimate or whether they

were pirated goods.

A second issue is the enormous volume of pirated and counterfeit

goods. When countries do undertake a vigorous effort to seize and

prosecute these crimes, they quickly run into problems associated

with storage and management of all the items. Single raids of

small-time shops or markets can yield hundreds of CDs and DVDs,

handbags, cigarettes, or other goods; and raids on factories or distribution centers can create many times that much merchandise.

In a number of the police stations and other locations that we

visited, this rapidly overwhelms their storage capacity and, depending upon the evidentiary requirements of their legal systems, it

may be necessary for eventual prosecution. Given the slow pace of

many of the judicial systems in many nations, you can see how this

creates some fairly daunting practical problems.

The third and final issue I want to raise is that not all countries

are equal in their self interest to actively combat intellectual property crimes. While most governments would see this as one more

23

way to reduce opportunities for corruption and crime, they might

differ greatly on what priority to assign to these activities, and to

what extent the interest groups in these countries would support

this effort.

For example, in a country where the domestic industry is also

losing sales and royalties, they can be effective in campaigns to

educate the public on the cost of privacy. Brazil is a very good example of this, as a large share of their domestic music sales are

from Brazilian artists, and they have been outspoken in their own

anti-piracy campaign. Brazilian musicians are obviously held in

very high esteem in that country, and we understand that this public relations campaign with those artists has been effective.

On the other hand, in nations where there is no confluence of interest between foreign and domestic firms, the situation is much

different. If the only earnings are from the export of pirated items,

it is much more difficult to convince the nations that it is in their

interest to make IP enforcement a priority and tools such as the

Special 301 must be used.

Mr. Chairman, those are the insights we had from our field

work. I would be happy to answer any further questions.

[The prepared statement of Mr. Yager follows:]

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Chairman TOM DAVIS. Thank you. Let me ask you. The internal

pressures from these countries as they start to develop more and

gain more IP within their countries, they are going to really be conflicted, the governments, at that point, aren’t they?

Mr. YAGER. That is right. I think one of the things that we recognized much more when we went abroad is that there are often situations where the United States can gain the support of certain

groups within those countries and help them make their own

points and be effective within their internal systems. The United

States obviously needs those kinds of domestic allies in those foreign nations in order to be effective. The Brazilian example of

music is one, but also with many of the manufactured goods such

as cigarettes, their domestic manufacturers are losing because

those goods are being produced outside of the country and brought

in, and obviously the jobs and the wages and all the other benefits

that go with that production is lost.

Chairman TOM DAVIS. My impression is that the economics over

the long-term takes care of this as these countries get to a higher

level of industrialization and into the IP markets, but we can hasten that with good protection, writing good rules, and pressures on

the government. And in the meantime, of course, innocent companies like this one in Connecticut that was cited by Representative

Simmons, go by the wayside, and it is not fair. So I think we need

to take a look at the long-term, but in the short-term we need to

just keep the pressure on.

Your report praises the Special 301 review process. Are there any

interagency lessons that can be learned from the success of the

Special 301 process?

Mr. YAGER. Well, that is really a good question. I think that one

of the things that we observed that is good about the Special 301

process is, one, it is credible. They have used the strongest form

of protection on a number of occasions, and they have found countries like the Ukraine and, earlier, Paraguay and China, at the

highest level and put them on the list, which put the United States

in a position of being able to use sanctions. So the process has

credibility because they have shown that they are willing to use it.

A second thing about it is that it really does get the attention

of U.S. agency officials, foreign officials, and the industry one time

a year to try to revisit this issue. So it brings together the right

people; they take a look at the evidence, they revisit the kinds of

issues and the changes from the last year. So that is another characteristic of this particular effort that we think makes it successful.

And, finally, the right people are involved. You have all the

major trade agencies, as well as some of the domestic technology

agencies, the patent office and things like that. These groups are

all involved.

So you have the right people, the mechanism seems to be working, and I think even the threat of sanctions with the Special 301

seems to be having a good effect in capturing people’s attention

both in the United States, as well as abroad, and getting some effective changes.

Chairman TOM DAVIS. I just got a notice off the wires. This is

an Associated Press story that says, ‘‘Bootleg wares account for between 50 percent to 90 percent of the products on Russian shelves,

41

depending on the category of goods,’’ Leonid Vetenoff, the Deputy

Chief of the Interior Ministry’s Public Order Department told TAS,

‘‘billions, tens of billions of dollars of fake goods are in circulation.’’

He says, ‘‘Russia has taken some measures,’’ he said, ‘‘but piracy

is still rife.’’ I am going to ask unanimous consent to put this story

in the record. But he notes that ‘‘While Russia has its own booming

counterfeit industry, fakes are mostly imported from Southeast

Asia, Bulgaria, and the Ukraine, with some smuggled in from Poland.’’

So, as you note, everybody is having problems, without some

kind of world order on this.

[The information referred to follows:]

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Mr. YAGER. That is right.

Chairman TOM DAVIS. Your report offered criticism of the

NIPLECC and says that the group lacks impact. What can we do

to make it work? As we noted, the Senate has put money into the

budget to strengthen it, but if you don’t change the organization,

sometimes money alone doesn’t solve the problem. What can we do

to make this work, given that the Special 301 process seems to

work well in bringing agencies together?

Mr. YAGER. Well, I think your first question also had to do with

what are the characteristics that make the Special 301 so successful, and think about how those could be applied to the NIPLECC,

because obviously it has not been successful. So a couple of things

we raised in our report as potential areas to focus on.

One is a change in membership, because as we note in the report, despite the FBI’s importance in law enforcement efforts, both

domestically as well as abroad, the FBI is not included in

NIPLECC. So that is obviously an oversight and that needs to be

considered.

A second thing is that at this point the NIPLECC has no authority or staffing, so one of the issues that you mention is the fact that

now, at least in the Senate bill, there is a chance to give them

some funding to have an organization. That certainly could be a

way to provide them with additional impetus and get more done.

Third, there was an issue about their mission. It doesn’t seem

clear from a lot of the materials that they have put out, both their

annual reports as well as their call for public comment on their

mission, that they have really established what it is that they

should be doing within this process. As we mentioned, the USTRled Special 301 process gets a lot of the key players involved to talk

about the policy issues, but if this is supposed to be an operational

group rather than a policy group, then I think that mission has to

be clarified.

I think the final thing that I would mention is that we have to

consider the nature of those agencies and any cultural or legal constraints that prevent them from effectively sharing information

within a forum like the NIPLECC. And we have some recommendations that we put in prior reports, particularly to the FBI,

because we found in other reports that the FBI does not necessarily

collect and analyze and share information the way that you would

like them to do in a group like the NIPLECC.

So this is quite similar to an issue that we brought up in a report

that was published 1 year ago, where we have made a recommendation to the FBI that they do a better job of systematically

analyzing the information and making it available to others in

order to try to prevent this kind of activity.

Chairman TOM DAVIS. And, last, what role does litigation play in

enforcing intellectual property rights? I am talking about suing

abroad, not just suing here. Could industry use civil litigation

abroad as an effective tool to fight the intellectual property piracy,

or are the courts just as corruptible and out of touch on this as the

governments seem to be enforcing it sometimes?

Mr. YAGER. I think certainly many of the representatives of the

private sector would have some direct experience on that, but my

comment on that is that it would depend greatly on the country

44

that you are dealing with, as to whether the legal protections are

there and whether using the judicial system would be the most effective way to go about trying to curb these kinds of efforts. Obviously, that could be a very costly route, it could be a very time-consuming route, so before those kinds of efforts are made and those

kinds of expenditures are made, you would have to see whether

that in fact is the best way to combat that crime.

Chairman TOM DAVIS. Thank you very much.

Ms. Norton, any questions?

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

Thank you, Dr. Yager, for your testimony. I must say that I despair of our ability to get a hold of this kind of piracy either

through law enforcement efforts or diplomatic efforts. There does

seem to be open season on the intellectual property of those who

have invested so much and taken the leadership in our own country. The extent to which technology seems to make giant leaps forward, while we do what we can to catch up with it is at the major

reason that I wonder at our ability to get a hold of this kind of piracy.

In light of that, I guess I have two questions. One relates to your

last comment about whether law enforcement efforts usually, of

course, are seen not as systemic efforts in the first place, are

worthwhile, because the GAO has called for the increased use of

FBI agents trained in IPR in embassies abroad, and I wonder

whether or not we are looking at a deterrent effect if there was law

enforcement. And I think your notion of whether or not this is the

best place to put whatever resources we have is an important question, so I would like to know why train the FBI agents. How could

they be used in a way to leverage or galvanize that use?

But then I would like to ask you, in light of how technology

moves ahead far faster than we can catch up to what it allows in

piracy, I turn to what a university here in this city has done, I

think a number of universities have begun to do across the country,

and to realize that fighting to catch up with the pirates will leave

you not a step behind, but miles behind.

So, I don’t know, G.W. makes available some of the CDs to

youngsters. The industry has tried prosecuting some, high-profile

prosecutions, so people know you are home-free just because you

are a student. But then some of the universities are saying let us

try an approach that gives some access to try to ward off some of

the piracy which we think is going to go on in any case.

Now, I can’t come out of my head with analogies in the intellectual area. I guess it is the basic concept I am asking about. So first

I want to know how FBI agents, since you recommend their training and use, are likely to be used; and, second, whether there is

any analogy that you can think of to what some of the universities

have been doing, because they have just been given up, essentially,

on high-profile prosecutions, warnings, you are going to be expelled; no, no, no, that is not ethical. All of that seems not to have

worked enough, so they have found this way. I don’t know if it is

working, but I would like to know your thoughts on that and what

potential it may or may not have in the international sphere.

Mr. YAGER. Let me answer your first question by saying that one

of the things that we have noticed is that there is the potential for

45

not just criminals and other profitmaking entities to use counterfeiting and other types of alternative financing mechanisms, but

there is also the possibility that terrorists might be using these

same kinds of ways to either earn assets, for example, outside of

the United States and then shift them to other parts of the world.

So one of the things that we did in a report that came out about

a year ago, and we are actually further pursuing this particular

issue, is the extent to which terrorists might be using these kinds

of methods to fund their own activities. And for that reason we

think that some of the training and some of the activities that are

the highest priority for these law enforcement agencies, such as

Homeland Security and the FBI, are already putting them in a position where they may have information and they may be collecting

information which could be very useful to this particular effort.

And as I mentioned before, we have a report that came out, and

one of the things that we recommended to the Federal Bureau of

Investigation was that they do a better job of analysis. In particular, we said, they should establish a basis for an informed strategy

to focus resources on the most significant mechanisms that terrorists use to finance their activities. Certainly, counterfeit goods are

one potential way that they can earn money for those types of activities.

So I think that some of the agencies are in fact pursuing very

similar kinds of issues. They may be doing it for terrorist reasons,

but while they are doing that they could be collecting information

which could be quite useful to other U.S. agencies or, in some

cases, to foreign entities to pursue. So we may actually have the

information in the agencies, but at this point it is not being effectively analyzed and it has not been distributed or communicated

with other groups. So we think there are some opportunities there.

We are still working with the FBI as to whether they will fully implement this particular recommendation, but I think it goes to

some of the points that you raised.

With regard to the changing economics and the changing technology and the effect that this might have on the strategies that

are either led by the U.S. Government or also by the industry associations, it is certainly clear that the technology is creating new

challenges, particularly in some of the digital areas. And I am sure

that some of the industry representatives can talk further about

this, but our view was that the main problem at this point in the

four countries that we visited was still the production of manufactured goods such as CDs and DVDs, which certainly has been made

easier through digitalization of all these products.

They haven’t even gotten to the point where downloading is a

problem because most of the people in those countries do not have

access to high speed equipment that would make that kind of an

option available. But that certainly would not be far off for some

of these countries, and there is just no question that the industry

and the government have to adapt their enforcement priorities to

try to adjust and to counter the new types of techniques that now

are available to them, and other techniques that will be available

in the near future.

Chairman TOM DAVIS. Thank you.

The gentlelady’s time has expired.

46

Mrs. Blackburn.

Mrs. BLACKBURN. Thank you, Mr. Chairman. I do have just a

couple of little questions I wanted to get to.

In your report, page 41, the footnote, you reference the Trade Secrets Act as a potential hindrance to IPR enforcement, and I would

like for you just to touch on that and talk about why you would

see that as a barrier. At the same time, let us go on and talk about

what other components of the legal process could be either a help

or a hindrance.

Mr. YAGER. OK, with regard to the Trade Secrets Act, there really are two issues that could prevent this kind of complete sharing

of information between not just U.S. agencies, but U.S. agencies

and foreign counterparts, and a couple of those have to do either

with the Trade Secrets Act or also the fact that many of these investigations are ongoing.

And there may actually be quite a bit of activity that is related

in one way or another to IP allegations or problems, but those are

not in the public domain because those could be involved with ongoing investigations, and obviously much of that information cannot be released, particularly in a public forum. So there could be

quite a bit of activity and some of that legitimately cannot be

shared during the investigations.

But we think that there are additional opportunities to provide

that information, even within these law enforcement agencies.

They could be looking at their own information internally to look

for patterns to see whether there are opportunities to see that all

of a sudden you are seeing more activity, for example, in a particular type of counterfeiting, or that kind of money all of a sudden

seems to be shifting its locus of production from one country to another.

Because one of the things that we noticed in doing the work in

the Ukraine and observing the effects of the pressure on the

Ukraine to reduce its copyrighting and pirating problems, that

many of those factories appeared to have moved to Russia as a result and are now operating out of Russia. So having agencies that

have a bigger picture view of where this activity is is certainly important in trying to reduce their activity.

Mrs. BLACKBURN. Let us go back to the example of Mr. Simmons’

constituent, Mr. Blackburn, who I will say for the record is no relation to me at all, or to my husband. But finding the source, being

able to pinpoint the specific factory in the specific province that is

replicating your product, is there a barrier there that would prohibit them from being able to find that information in a timely

manner and have an avenue of recourse?

Mr. YAGER. I think that would depend on a number of issues on

the specific case. For example, if it is a large manufacturing outfit

and if, for example, the products are fairly sophsticated products,

then I think there would be a much greater chance to be able to

go and trace and find that particular manufacturing outlet, because

it is not easy to move those things around. So there might be opportunities, for example, in large-scale manufacturing, whether it

is of gauges or even of cigarettes, where the scale of operation

would be so large that you would have time to go back, find that

factory and try to take action against it.

47

Unfortunately, that is not the only type of activity that we are

talking about here. Some are just a matter of people having some

DVD or CD burners in an apartment and doing this on a very

small scale. And in situations like that, going to the source and trying to shut that down would be enormously difficult.

Mrs. BLACKBURN. Well, I appreciate that, and I think the Golden

Sciences Technologies case out of Hong Kong was something we

were glad to see come to completion, and then of course the sentencing there.

I want to just touch on one other thing. What are we not doing

that we ought to be doing to be certain that agents can spot the

counterfeit goods, because they are rampant and it is a matter of

learning what you are looking for? And when the chairman and I

were on the CODEL, which we have referenced, and I spent some

time in Hong Kong and went to a market area, within 45 minutes

someone from the embassy and I listed over 50 items that I knew

were knock-off, fraudulent, counterfeit items.

Mr. YAGER. There are some challenges in identifying some of

these products. The better the fake, obviously the more expertise

that you might need to try to identify it. In some cases you can

walk up to the shop and look at the items and realize immediately

that they are knock-offs, but that is obviously not true in all cases.

We think that there are some opportunities to improve the training and technical assistance that U.S. agencies provide to their

counterparts, including being able to spot those things and then

how to pursue leads to find the actual producers and the suppliers.

The United States has been actively pursuing those kinds of training and assistance activities but we did feel that there could be

some improvements there.

For example, it doesn’t appear that they are checking back to see

whether the people that have taken these training courses or benefited from U.S. assistance are actually using those systematically

to improve their domestic jurisdictions. In addition, we feel that

important agencies, such as USAID, are not working closely with

the other agencies to ensure that they are hitting the most highpriority items. So we think that among their training and technical

assistance activities there are some opportunities for making better

use of those dollars.

Chairman TOM DAVIS. OK. Thank you very much.

Yes, ma’am, Ms. Watson.

Ms. WATSON. I want to thank you, Chairman Davis, for convening this particular panel.

As Chair of the Congressional Entertainment Caucus and a

member representing a number of entertainment studios in Los

Angeles, the protection of our U.S. intellectual property rights

abroad is extremely important to me and many of my constituents

that are working in the industry. Indeed, the health and vitality

of the entertainment sector is critical to the overall health of our

economy, since it contributes an estimated $535.1 billion to the

U.S. economy, and that happened in the year 2001; and it remains

one of our Nation’s biggest export sectors.

Since I have been here, I have tried to champion greater protection of U.S. IP products, both domestically and abroad, and earlier

this year I introduced H.R. 576, a bill urging the Chinese GovernVerDate 11-MAY-2000 13:12 Dec 21, 2004 Jkt 000000 PO 00000 Frm 00051 Fmt 6633 Sfmt 6633 D:\DOCS\96748.TXT HGOVREF1 PsN: HGOVREF1
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ment to take further and immediate steps to improve the IPR

mechanism, especially in the enforcement of such rights, by changing and updating its criminal law and enforcement procedures.

China, a country featured in the GAO report, has one of the worst

records in the world on intellectual property rights violations. It is

now subject to an out-of-cycle review by the USTR in the year

2005. And I am delighted that our chamber has recognized the importance of global IPR enforcement by passing my resolution on

China in July, but we must do more.

So the release of the GAO cannot be more timely. The existing

mechanisms among the U.S. agencies to coordinate efforts by global

IPR protection have been instrumental in advancing foreign laws

and enhancing international obligations. Yet the losses from piracy

and counterfeiting of U.S. IP products, from film, recorded music,

published products and software, pharmaceuticals, electronic equipment, industrial products, research results, to auto parts and even

cars themselves, continue to undermine American creativity and

threaten our economy. IPR theft has reached epidemic levels in

many countries around the world, and our Government must step

up efforts to protect U.S. intellectual property with greater resources and a prioritized focus on enforcement.

I look forward, Director Yager, to what you are doing regarding

how the National Intellectual Property Law Enforcement Coordination Council, as created by this Congress, can play a greater role.

And I am sorry to have come in late, and I am sure that the first

part of your testimony addressed a lot of what I am asking for, particularly the first panel.

But equally important are the initiatives by private industries to

enforce and protect their own intellectual property products abroad.

So the testimony from the trade associations today on the response

to the GAO report and its recommendations, and how Congress can

further implement their initiative with new legislative efforts, I am

really interested in hearing about. I think progress is being made.

I want to thank you for what has been done to this point, and I

just have a couple of questions that you might want to address in

light of my statement.

The first one is what is the level of coordination between Federal

agencies and organizations, such as the World Intellectual Property

Organization [WIPO], in updating and implementing strong IP

laws in developing in underdeveloped countries? That is No. 1.

And why hasn’t the National IPR Coordination Center, consisting

of the FBI and the DHS officials, focused on the collection of intelligence involving IP infringement, and why has this not been utilized by the IP industry? And how can Congress encourage greater

public-private partnership, especially through formal coordination

in which Federal moneys have already been invested in the staffing

of the resources?

So if you would address those two concerns, it will satisfy my inquiry.

Mr. YAGER. Yes, Representative Watson. On three things, actually, let me respond. We have actually also done a lot of work

which relates specifically to China’s compliance with its entry into

the WTO. And certainly when we did the work, both at the initial

time at compliance, we identified about 55 paragraphs in its docuVerDate 11-MAY-2000 13:12 Dec 21, 2004 Jkt 000000 PO 00000 Frm 00052 Fmt 6633 Sfmt 6633 D:\DOCS\96748.TXT HGOVREF1 PsN: HGOVREF1
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ment which had reference to intellectual property. Certainly this

was something that was of primary importance to those who negotiated this for the United States.

In addition to that, when we went to China and talked to businesses about what their biggest issues are, IPR is always at the top

of that list. So we have reported that in some of the reports that

we have done on China’s commitments, and we will certainly continue to do that. We have an additional report coming out on China

relatively shortly.

With regard to your two questions, let me talk briefly about the

IPR Center. We did talk to a number of the agencies, as well as

to some of the industry officials, about the effectiveness of the IPR

Center. We got very mixed views on that. There were some who

told us that it had an important role to play, but that one of the

things that happened was that information was provided to the

IPR Center, but nothing ever came out of it.

So it was difficult for them to tell whether there was action being

taken on this kind of information or just what was happening after

they made the effort to inform them. So I think it would probably

be a very good question to ask of the industry to find out what do

they think about a center that does seem to be interested in their

information, but ultimately they get very little back from it. So I

think that is one of the issues that could be brought up.

As to the use of some of these international organizations such

as WIPO, it was certainly our indication that the United States is

by far the most aggressive pursuer of intellectual property rights

and changes abroad, and I think that is one of the reasons why,

in addition to participating in groups like the WIPO, that the

United States is also working very hard with its Special 301 process and with some bilateral agreements to try to enforce and better

improve intellectual property protection abroad. I don’t know that

those kinds of efforts really move quickly enough for the USTR or,

in fact, for the Congress, to be putting all of your efforts into those

areas, and that is why there is so much emphasis on the Special

301 process.

Ms. WATSON. Do I still have some more time, Mr. Chairman?

Chairman TOM DAVIS. No, your time has expired.

Ms. WATSON. Can I just raise one issue?

Chairman TOM DAVIS. Without objection.

Ms. WATSON. OK, thank you.

We were in Athens for the Olympics this summer, and I was in

a neighborhood where they had a swap meet, and one of the Greek

citizens said, oh, I will take you down there. Well, I was amazed.

I could get every CD that is available in my local store for 2 and

3-year-olds. And I pointed it out to my friends, I said, look at this

piracy. I mean, they had every latest hit. This was over in Athens,

and I understand all you needed to do was go to Turkey to get anything in the world that was copied.

So we have a real serious problem, and I have been working with

WIPO, which is a subsidiary of the United Nations, on these issues,

and whatever we can do legislatively, we are here, and I am particularly interested through my caucus. I just wanted to mention

that.

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Mr. YAGER. Yes. It certainly is not hard to find these things, and

I think the whole emphasis of the hearing is that enforcement is

really now the key: to try to get others to understand the importance of this, gain their support from domestic interest groups, and

try to move forward that way.

Chairman TOM DAVIS. Thank you very much.

Mr. Ruppersberger.

Mr. RUPPERSBERGER. Thank you, Mr. Chairman. This is a very

important issue, as we know.

Marsha Blackburn, I know this is very important to you, and I

have learned a lot from being with you on the issue that is happening in Tennessee, with all of your companies.

We have talked about all the stories. We have talked about

China here today. Recently, one of my staff persons was in China,

and it was amazing to him the amount of bootleg DVDs that were

on the street. I believe Spiderman 2, that just came out in August,

was on the street in China and looked like professional packaging.

So we talk about China or other countries passing laws, but what

about the enforcement issue? And I think right now the figure—

and you might correct me—is close to $25 billion that we are losing

throughout the world as far as piracy, that U.S. business are losing. And if that is the case, we really have a tough issue.

Now, what is the root of piracy? If you look at it, it is a cultural

issue, I am sure. The black market allows any entrepreneurial person to come in and provide a service, and the products and demand. So let us ask ourselves if we are doing enough to educate

consumers about not purchasing illegal products.

Are we educating the international governments, not only China,

but there is a long list of governments? And until we start setting

a strategy to deal with the cultural issue, because as long as there

is a demand, people are going to buy something cheaper; that is

just the way it is going to be throughout the world. So do we need

to focus more on enforcement? That is an issue that we have to

deal with.

Let me ask you this. Do our trade imbalances force out U.S.

goods because of excessive tariffs?

Mr. YAGER. OK, let me make a couple comments on what you

have said. I think what is interesting is that you said that many

of these movies are available very soon after their release. In fact,

in some cases they are available even before the release in Hollywood, which shows that somehow these products are getting out

there, and it is really quite startling how fast they are put into distribution through these counterfeit methods.

In terms of the dollar value of losses associated with piracy, we

actually looked into the numbers that had been printed and provided by USTR of $200 to $250 billion as potential losses, as well

as some of the other numbers. It is enormously difficult to come up

with a good estimate of just what the losses are. We certainly know

that they are enormous; they are obviously of policy significance;

they do mean jobs and production in the United States.

But it is very difficult to try to estimate how many goods would

be sold at legal prices in those countries. So for that reason I think

all the estimates need to be taken with a certain grain of salt and

certain amount of caution, because it is enormously difficult to

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come up with a particular dollar value. We tried to find the source

of some of the numbers, the $250 billion number, but we actually

were not able to do that, and we spent some time trying to track

that down. But, in any case, we obviously know that the number

is a very large one and the losses are very large and they are obviously of policy significance, so we didn’t do anything in terms of

trying to estimate that number.

In terms of the cultural issues, one of the items that I mentioned

earlier in my statement was that trying to gain the support of

many of the local groups and the local companies within these

other countries is obviously very important, because there could be

these interests that the United States shares with producers in

these other countries. So by allowing them to also voice their concerns and the problems associated with piracy, whether it is a loss

of tax revenues for the governments, whether it is a loss of production in jobs for the companies, I think it is very important for the

United States to look to allies in those countries to try to gain their

support in order to have a more effective campaign to really convince people in those countries that it is in their interest to not buy

counterfeit goods.

Mr. RUPPERSBERGER. OK, two other things, because my light is

coming on. I want to know whether you feel that the trade imbalances force out U.S. goods because of excessive tariffs, and do we

need to look at that. And the other thing, before my red light comes

on, we have talked about countries that we are having problems

with throughout the world. Is there any example of a country that

is working with us where we have been able to turn around the

culture and where we could look to as a model to try to develop

a program that works? So if you could answer those two questions.

Mr. YAGER. In terms of the excessive tariffs, I do not believe that

is really the issue in this industry. I think the fact is that many

of these goods are relatively high priced. When you look at the median income for many of the people around the world that are currently purchasing some of these illegal goods, the prices that are

being charged in countries like Brazil and Russia and the Ukraine,

the legal prices are relatively high. So one of the issues there is

that some of these goods are possibly priced out of the range of the

typical consumer in some of these countries.

And the other question was? I am sorry.

Mr. RUPPERSBERGER. Is there a country out there. We talk about

all the problems. Even though China has passed laws, it really

hasn’t done a lot; there hasn’t been a lot of enforcement. Is there

a country we could look to that we have worked with where we feel

that we are doing a good job as it relates to this issue?

Mr. YAGER. I think that by looking at that Special 301, even

some of the efforts that have gone on within the Ukraine have been

positive. They have become much more aggressive at trying to shut

down some of those big producing firms. Many of these countries

have in fact passed laws. I think there is also a directive by 22 nations, although it doesn’t seem like a lot of countries, that all government agencies are required to use legitimate goods.

Mr. RUPPERSBERGER. But why does it work there and not in

other places?

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Mr. YAGER. Well, that is a good question. I think again it has to

do with gaining support of those domestic industries in order to be

effective.

Mr. RUPPERSBERGER. So more of a domestic industry than it is

government-to-government.

Mr. YAGER. I think both have to be involved. In order to be effective in enforcement, there has to be that domestic support for this

kind of activity, because if these kinds of groups don’t feel it is in

their own interest to pursue it, then it is not going to be very effectively pursued.

Mr. RUPPERSBERGER. OK, thank you.

Chairman TOM DAVIS. Mr. Cooper, any questions?

Mr. COOPER. Yes, please.

Let us cut to the chase. Companies in Nashville, TN and companies across America are being robbed blind by many of the nations

across the world, some of whom call themselves our allies. The

GAO has come up with a report that, in my opinion, largely

whitewashes the issue. We have contributed to some strengthened

laws in other nations, but when you say challenges remain, we are

still being robbed blind, whether it is music, movies, pharmaceuticals, you name it. Intellectual property is the greatest store of

wealth on the plant, and we as a Nation have not figured out how

to protect that adequately.

You say, in the summary of your report, ‘‘Competing U.S. policy

objectives take precedence over protecting intellectual property in

certain regions.’’ In other words, we chicken out in protecting U.S.

property rights in certain nations for other reasons. And, granted,

property rights are not the only interest that we have, but this has

lasted for so long and it has been so systematic, and our efforts

even to document the problem pale in comparison to the problem.

So I am worried that GAO—and you are a fine person and it is a

fine agency—we are going to study this thing to death; meanwhile,

American jobs are being shipped overseas, the American economy

is being seriously damaged, and no real effective action is taking

place.

I would love to see the Secretary of State here, top administration officials really doing something about the problem, not just

talking about it again, as we have done for so many years, because

this has to stop. And I don’t see any real hope that you are offering

here today; we will study it some more, we will look at it, we will

try to do incrementally, here and there, some things. But in the

end this administration has largely allowed other policy considerations to take precedence. Previous administrations have allowed

other policy considerations to take precedence. Meanwhile, we are

still being robbed blind.

So why can’t we do more about this? Why can’t this Government

take more action, firmer action, more successful actions to stop

theft of property wholesale, widespread, systematic theft of property? That is what this hearing is really about. What are we going

to do about it? What is this administration going to do about it?

Mr. YAGER. We certainly agree that enforcement is the challenge.

I think that is the key point that you are making. I did outline

some comments in the beginning of the hearing where we talked

about the kinds of changes that could be made to this coordinating

53

group, the NIPLECC, that has the responsibility for trying to

achieve greater levels of cooperation within the U.S. law enforcement community as well as between the U.S. law enforcement community and their counterparts abroad. We certainly mentioned in

our report that group is not working well; it is not functioning effectively and it has very little to show for its first 3 or 4 years of

operation.

So we think that by pointing out the kinds of systems that have

been effective, which is the Special 301, and contrasting it to a

group that has clearly not been effective, despite the fact that the

enforcement is the area that is of greatest importance right now,

we feel that that is a step forward in trying to focus the government’s attention and activities on a mechanism that is not working.

Mr. COOPER. Most Americans have never heard of the agency you

describe. You say it has not been especially effective. That is

bureaucratese for saying it has been an abject utter failure after

three or 4 years. Why can’t we do better? Where is the FBI? Where

is the CIA? I don’t know, call in other agencies so that it can get

the attention it deserves, because American companies and the

American people should no longer be robbed blind by nations

around the world, some of whom call themselves our allies.

Mr. YAGER. We agree that there needs to be attention on this

NIPLECC. We have a matter for congressional consideration in

which we basically are saying to the Congress that this particular

group has not been effective, it has failed, and it needs to have attention by the Congress, because ultimately some of the things that

should be required are outside the bounds of what the agencies can

do alone.

For example, the membership. Congress would have to authorize

or instruct the FBI to become a member of this group. Those are

the kind of things that we have directed and we have pointed out

in the report which we feel would make some forward progress and

make this group more effective in the area of enforcement, where

it is obviously needed.

Mr. COOPER. Isn’t there a warning label on every U.S. videotape,

FBI warning, copying this tape or whatever brings sanctions? Why

is that only on U.S. videotapes only used against American efforts

to copy these tapes? What is the deal?

Mr. YAGER. Well, we have some examples over on the table

which show just how close the copies are, and in some cases I believe they do include the same kind of warning labels that exist domestically. But I think the issue is whether people pay attention

to those warning labels; and the answer right now is that in many

countries they do not.

Chairman TOM DAVIS. Thank you.

The gentleman’s time has expired.

Mr. COOPER. Thank you, Mr. Chairman.

Chairman TOM DAVIS. One of the problems is the labels on there,

but people think they are legitimate.

Mr. YAGER. Right.

Chairman TOM DAVIS. You don’t know for sure, when you are

buying it out there in the marketplace.

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Mr. YAGER. In some cases that is true. In some cases it is pretty

clear, when you are buying something in a little cellophane bag,

that it is a pirated copy.

Chairman TOM DAVIS. In China we could buy a whole bag of just

the alligators for Izod, and then you could sew them on the shirts,

or you could buy the shirts with the Izod on them. I don’t think

they know anything about it.

Well, thank you very much. I appreciate your being here. Your

report has been very, very useful to us.

We will take a 2-minute recess as we move to our third panel.

Oh, I am sorry. Mr. Cummings, did you have any questions?

Mr. CUMMINGS. No, thank you, Mr. Chairman.

Chairman TOM DAVIS. OK, we will move to our third panel at

this point. We will take a 2-minute recess.

[Recess.]

Chairman TOM DAVIS. We are now going to move to our third

panel and hear from the industry members. We have Joe Papovich

here, the senior vice president of the International Recording Industry Association of America; John Malcolm, the senior vice president of Worldwide Anti-Piracy from the Motion Picture Association

of America; and Robert Cresanti, who is the vice president for public policy for the Business Software Alliance.

It is our policy to swear you in. If you would just rise and raise

your right hands.

[Witnesses sworn.]

Chairman TOM DAVIS. Thank you very much for your patience.

You have heard the previous testimony, being here with us today.

Your entire statements are going to be part of the record; they are

already in the record. So questions will be based on this, but we

will give you about 5 minutes to kind of sum up what is important,

and then we will move to questions.

Mr. Papovich, we will start with you, then we will move on down

the line. Thank you for being with us.

STATEMENTS OF JOSEPH PAPOVICH, SENIOR VICE PRESIDENT-INTERNATIONAL, RECORDING INDUSTRY ASSOCIATION OF AMERICA; JOHN G. MALCOLM, SENIOR VICE PRESIDENT AND DIRECTOR FOR WORLDWIDE ANTI-PIRACY OPERATIONS, MOTION PICTURE ASSOCIATION OF AMERICA; AND

ROBERT CRESANTI, VICE PRESIDENT, PUBLIC POLICY, BUSINESS SOFTWARE ALLIANCE

Mr. PAPOVICH. Thank you, Mr. Chairman and members of the

committee. Thank you very much for focusing Congress’s attention

on the devastating impact of piracy and the actions our Government should take to address this enormous problem. As you pointed out, I am the senior vice president for International at RIAA.

I also worked for 21 years at the Office of the U.S. Trade Representative, the last 9 of which I handled these issues there. So I

have been on both sides of the issues, as has Mr. Malcolm.

RIAA’s members create, manufacture, and distribute 90 percent

of all the legitimate sound recordings produced and sold in the

United States. The United States is the world’s biggest producer of

intellectual property products and services. It is our Nation’s comparative advantage. It is something we do better than any other

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nation. Copyright industry exports and foreign sales approach $90

billion a year. That is even despite the piracy.

The 1980’s and 1990’s were terrific decades for music sales, and

then things went south for our industry. There are three reasons.

The first was the increased involvement of organized criminal syndicates in the production and global distribution of pirate CDs and

other optical disc products. These syndicates quickly shift their activities to the most accommodating country and they use the complexity of multi-jurisdictional law enforcement to their advantage.

The second was the widespread proliferation of what is called CD

burners, that made it so very easy to reproduce high-quality sound

recordings and for criminal syndicates to further diversify the manner in which pirate materials are replicated and distributed. The

third was and is the wave of illegal file sharing on the Internet,

caused by a surge of decentralized peer-to-peer networks. In rough

terms, the combination of growing global physical piracy, illegal CD

burning, and Internet piracy generated a 20 percent sales decline

in our industry since 1999.

The impact of the revenue crash has been even more profound

in human and creative terms. There has been successive rounds of

job losses at our member companies: 1,000 jobs were lost at Warner

Music in March, another 1,500 at EMI, last year Sony cut 1,000

jobs, 1,500 jobs were lost at Universal in less than 2 years. The creative cost is even more troubling. Artist rosters are being slashed

dramatically as companies no longer can afford to carry as many

dreams as they did in the past.

My testimony sets out the many efforts we make to combat piracy in other countries. In the world of physical piracy, our enemy

is the organized criminal syndicates who mass-produce our recordings and governmental indifference or corruption in other countries

that enables these syndicates to thrive. We cannot combat this double whammy on our own; we need Government’s help to protect our

Nation’s comparative advantage.

We get as much help as current government resources permit,

and I mean current U.S. Government resources permit. The problem is not indifference by our Government, the problem is that piracy and counterfeiting abroad are so pervasive and the resources

that our Government makes available are so small.

In addition, as was pointed out by Congressman Cooper, our

issues sometimes do become casual to use abroad or foreign policy

concerns. We recommend that Congress elevate the status of international intellectual property protection in the executive branch

and expand the human and financial resources made available to

combat this nasty problem. We offer these suggestions.

First, do two things at USTR: one, elevate the status of traderelated intellectual property at USTR and create a special standalone intellectual property office; second, provide sufficient IP staffing at USTR in order to obtain better and more up-to-date commitments from our trading partners and to ensure that such commitments are enforced.

Second, ensure that Commerce, the Patent and Trademark Office, and State have adequate resources to assist USTR and to

carry out their own functions in this area.

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Third, consider elevating the State Department’s Intellectual

Property Division to an office level status so that it has the necessary resources to ensure that intellectual property is adequately

considered in our Nation’s foreign policymaking.

Fourth, provide additional and new financial resources to the

State Department’s INL Bureau for intellectual property capacitybuilding in other countries.

Fifth, direct FBI agents in relevant U.S. embassies to become

more involved in copyright piracy matters.

And sixth, expand the ability of U.S. Customs to intercept imports of piratical product.

On behalf of the music community, we appreciate your focus on

the piracy problem and welcome the opportunity to work with you

on this. Thank you very much.

[The prepared statement of Mr. Papovich follows:]

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Chairman TOM DAVIS. Well, thank you very much.

Mr. Malcolm.

Mr. MALCOLM. Mr. Chairman, members of the committee, I

would like to thank you for inviting me to testify before you today

on this important topic of international intellectual property theft.

As a former Deputy Assistant Attorney General at the Department

of Justice who oversaw the Computer Crime and Intellectual Property Section, and as the current director of the Motion Picture Association of America’s Worldwide Anti-Piracy Program, I have perhaps a unique vantagepoint that I would like to share with you

with respect to this problem.

The copyright industries employ 3.5 percent of the American

work force and earn more money abroad than automobiles, planes,

and agriculture. The movie industry has a surplus trade balance

with every single country in the world, and no other American industry can make that claim. Ensuring the continued economic

health of the film industry and of other U.S. intellectual property

rightsholders is in our national interest and in the interest of ordinary Americans, the costumers, the carpenters, the set painters,

sound technicians, fire safety workers, whose jobs rely on the creation of filmed entertainment and other forms of copyrighted

works.

I understand, Mr. Chairman, that you have in fact a brief videotape that shows this, and I would ask that you consider playing

that at this time.

Chairman TOM DAVIS. All right.

[Videotape played.]

Mr. MALCOLM. Thank you for playing that, Mr. Chairman.

Chairman TOM DAVIS. Thank you. They show that at the movies,

don’t they? I think I have seen that at the theaters.

Mr. MALCOLM. Yes, they do.

Piracy, massive thievery, really, threatens the continuing viability of this important economic engine. Last year, our investigators

participated in nearly 32,000 raids and seized over 52 million pirated optical discs. I fully expect the number of raids and seizures to

go up significantly this year. Despite improvements in some markets and the often heroic efforts of our investigators, the worldwide

piracy situation isn’t getting better; it is getting worse.

With rare exceptions, the people procuring, producing, and distributing this pirated material are affiliated with large and dangerous international criminal syndicates and gangs. Camcorded

copies of movies are reproduced on expensive replicators, costing

well in excess of $1 million, that operate 24 hours a day, 7 days

a week, cranking out thousands and thousands and thousands of

pirated discs. These discs are then distributed by ‘‘mules’’ and

through courier services to pirate stores and street vendors.

This is not being done by mom and pop operations; it is being

done by business-minded thugs who fund this activity through

money raised from other illicit activity such as drug dealing, gun

running, and human trafficking, utilizing, by the way, the same

distribution networks, and who, in turn, fund these other activities

through the money they raise from piracy.

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Drying up the funds and stopping the illegal activities of international criminal syndicates, gangs, and terrorist organizations are

also obviously in our national interest.

There is also the exploding problem of movie piracy occurring on

the Internet. Sophisticated international encoding groups, often referred to as warez groups, take a perverse pride in being the first

to steal copyrighted material, stripping it of its protection, and then

distributing it to their members, where it quickly finds its way onto

peer-to-peer networks, often within 24 hours.

At any given moment there are 8.3 million people trading copyrighted material over the Internet, taking what does not belong to

them and depriving artists and those who invest in them of the opportunity to make a reasonable return on their creative endeavors.

Earlier this month, scientists were able to send 859 gigabytes of information halfway around the world in less than 17 minutes. At

that speed, somebody can download a full-length feature film in 4

seconds.

Still, despite the grim realities that we face, I choose to see the

glass as half full, rather than half empty. We are grateful to the

Department of Justice and to the Attorney General for expanding

the CHIP, which stands for Computer Hacking and Intellectual

Property, program, and for establishing an Intellectual Property

Task Force. We are also grateful for increased law enforcement efforts such as Operational Digital Gridlock, Operation Fastlink, and

Operation Buccaneer, which help combat piracy and which shine a

spotlight on this scourge, and which establish new contacts and

strengthen old ones with law enforcement counterparts and other

government officials overseas.

We commend the Department of Homeland Security’s Bureau of

Immigration and Customs Enforcement for its role in a recent unprecedented and successful joint operation labeled Operation

Spring with the Chinese Ministry of Public Security that resulted

in the arrest of six individuals, including a U.S. citizen, and the

seizure and destruction of hundreds of thousands of pirated discs

and the warehouses in which they were stored. We applaud all

these efforts and pledge to do anything we can, anywhere, and at

any time to support these and future investigative endeavors.

We have to continue to use every arrow in our quiver to combat

this international crime problem, which threatens to cripple a vital

part of our economy and which imperils our national security.

I have several specific recommendations which are contained in

my written statement, which I realize is part of the record, that I

would urge you to consider.

Mr. Chairman, I want to thank you again for inviting me to testify today and for your support over the years. I would be happy

to answer any questions you may have.

[The prepared statement of Mr. Malcolm follows:]

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Chairman TOM DAVIS. Thank you very much.

Mr. Cresanti.

Mr. CRESANTI. Thank you, Mr. Chairman. And thank you, members, for staying through this hearing.

Good afternoon. The theft of intellectual property, commonly

known as piracy, is a matter of great concern to the business software industry. Piracy costs the industry billions of dollars in lost

revenues each year; it reduces investment in creativity and it

harms national economies, including our own.

The software industry is a remarkable engine of growth. I have

submitted for the record two reports which we have produced over

the last year detailing relevant economic statistics, one on the economic impact of software piracy and one that details the scope of

the software piracy problem worldwide. Together, these studies

dramatically illustrate how software piracy harms our economy.

The Business Software Alliance and its individual members devote significant resources to preventing piracy worldwide. First, we

engage in extensive educational efforts designed to increase public

understanding of the value of intellectual property, and improve

the awareness of copyright laws on a global basis. We operate in

almost 60 countries.

Second, we work closely with governments to encourage adoption

of laws that strengthen copyright protection and promote an environment in which the software industry can continue to innovate.

Finally, where appropriate BSA takes enforcement actions against

those individuals who are engaged in the unlawful use, distribution, and sale of our member companies’ software.

Clearly, industry cannot solve this issue alone; the Government

has an essential role to play, both domestically and internationally.

Investigation and prosecution of copyright piracy is an essential

part of the solution to the piracy problem. BSA commends the Department of Justice for its increased emphasis on IPR and

cybercrime enforcement.

This year, DOJ has carried out a number of major operations

against Internet piracy. Operations Fastlink and Digital Gridlock

particularly illustrate the importance of cooperation between domestic and foreign law enforcement bodies. Given the global nature

of the problem, these are the steps that we think work. Adequate

resources to investigate and prosecute IPR theft are essential in

order to continue these successes.

As in the years past, BSA supports a congressional designation

of DOJ funds directed at combating cybercrime and intellectual piracy. In addition, we support increased resources for FBI investigations of these crimes. There are other areas that could benefit from

increased resources as well, and as you have noted, Mr. Chairman,

Senator Gregg has taken a step in that direction. In the international arena, the U.S. Government has had great success in

using a variety of tools, including those that link continued and expanded trade benefits with IP protection.

These efforts have been led by small, but dedicated professional

staff at USTR. USTR has been ably supported in this work by

State, Commerce, Justice Departments, while the U.S. PTO and

the Copyright Office have often provided essential subject matter

expertise.

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These efforts should be enhanced by providing USTR with additional resources for negotiating and enforcing strong norms and obligations for the protection of intellectual property rights. BSA supports the creation of a new and separate intellectual property office

within USTR, with an increased staff to enable USTR to continue

to place the high priority on IPR negotiation and enforcement that

it has in the past.

Similarly, BSA believes that a separate intellectual property office should be created within the Department of State. This would

assist the State Department in continuing to place a high priority

on ensuring foreign market access for U.S. intellectual property

products and services, and compliance with international agreements protecting intellectual property rights.

Thank you for the opportunity to testify before you today, and I

look forward to answering your questions.

[The prepared statement of Mr. Cresanti follows:]

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Chairman TOM DAVIS. Thank you.

Let me ask a question. Aside from all the intellectual and economic arguments, how good are some of these pirated things that

come through, the software?

Mr. CRESANTI. It is perfect. It is 100 percent perfect. The only

thing that has been stripped out are the protections that we have

put in place to prevent duplication of.

Chairman TOM DAVIS. So they have gotten very good now duplicating the stuff. I mean, at one point there was a time when you

could take some of the software, and it had bugs in it and the like.

Same with the movies?

Mr. MALCOLM. It varies in quality, depending on how it was pirated, but well over 90 percent of the pirated movies begin with a

camcorder, and the trend is for the pirates to use more sophisticated camcorders and more sophisticated means of getting

camcorder product that is leading to increased quality.

Chairman TOM DAVIS. How do they get this stuff before it is even

released in the theaters?

Mr. MALCOLM. There can be a variety of ways, Mr. Chairman.

Probably the most common way has to do with before a movie

comes out in a theater—sometimes, by the way, movies open in

other countries before they open here. But before a movie will come

out, a studio, despite the extraordinary lengths to which they are

going to protect their product, will do promotional screening,

screening for critics, screening with test audiences. Sometimes

films will be in post-production houses that will be preparing publicity or working on editing and pirates will pay bribes and pay a

lot of money to send in camcorders to those screenings or to pay

off projectionists or pay off insiders to get that product.

Chairman TOM DAVIS. The GAO report points out that one of the

challenges in the optical media sector is the huge price difference

between legitimate and the pirated products. This is not something

the Government can change. Any suggestions how we meet that

challenge?

Mr. MALCOLM. Well, I would start out by saying that, for instance, with respect to the Lord of the Rings that you said you pay

the equivalent of $6.50, that you dramatically overpaid. The price

differential between a legitimate product, assuming legitimate

product has been distributed for home distribution, and a pirated

product is very, very great. You are already seeing that the movie

industry has been quite robust in terms of narrowing windows for

release. There are online organizations where you can have legitimate video on demand. The prices of both CDs and DVDs have

come down.

However, when you are a pirate organization that is paying slave

labor, not paying any taxes, you don’t care about health benefits,

you pay no tariffs whatsoever, where your biggest cost is probably

the bribes that you pay, you can cost your product very low.

Chairman TOM DAVIS. In many of the countries where counterfeited sales are the highest, consumers see no ethical problems in

purchasing these pirated goods. They also can’t afford sometimes

the higher prices of the authentic goods. To what extent are foreign

governments using public awareness campaigns? I have seen it

here when I have gone to the theaters. I remarked earlier. Are the

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other countries doing the same; are they showing it? Should they

do more? And can industry help or directly be involved in those efforts?

Mr. MALCOLM. Well, we are directly involved in those efforts. I

will let Mr. Papovich speak for the RIAA. We are directly involved

in those efforts. Some countries, for which we are very grateful, are

doing a lot. France, for instance, at the Cannes Film Festival,

talked about piracy extensively, and they are really taking the lead

in terms of trying to highlight this issue in terms of harming

French products, French culture, but also intellectual property

rights in general. There are other countries that are, as you know,

woefully deficient in their efforts. You have to really sort of break

it down country by country, but obviously most countries could do

a lot more.

Chairman TOM DAVIS. Mr. Papovich, before you reply, also, are

there countervailing pressures in some of these countries as they

develop their own movie industry and their own recording industry,

that start saying we need some protections here to help our legitimate artists and creators as well?

Mr. MALCOLM. The economies that thrive do so because they recognize the value of property, both tangible and intellectual property. And as we frequently argue, sometimes with success, that

those people who don’t take a strong stand on IPR crime are ultimately killing themselves, because they are causing investment to

dry up and express no interest in those countries. No one will invest in developing property in a country if they don’t think anybody

is going to do anything to protect that property. Eventually, some

countries that have developed goods and services and intellectual

property that is worthy of protection, they get it and they beef up

their efforts.

Chairman TOM DAVIS. Mr. Papovich.

Mr. PAPOVICH. As I said in my oral statement, a huge problem

has been either indifference or corruption in government ministries

in other countries, and this has manifested itself in us seeing indigenous cultural industries dry up. Brazil is a good example. I would

differ a little bit with what Mr. Yager said previously. I don’t think

there has been that much progress in Brazil. Brazil and Mexico are

two countries which once had really thriving sound recording industries, industries who produced lots of musical entertainment,

that have seen tremendous reductions in that because of government indifference or corruption.

And I don’t know if the theory holds that as other countries develop their own intellectual property industries, it necessarily will

mean improvements. I think in some instances it will, but in other

instances—it just baffles the mind. I don’t understand why in

Brazil and Mexico, the governments see so little importance in protecting their own and foreign intellectual property.

Chairman TOM DAVIS. What retaliation could we do on this?

Mr. PAPOVICH. Well, there are two answers, I suppose. One is we

do already, the U.S. Government has done some. Frankly, the problem is, as has been said already, our Government has other foreign

policy considerations with respect to these countries, and quite

often the trigger doesn’t get pulled because while our Government

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cares about these things, there are other important issues at stake

that would be disrupted by pulling the trigger.

We also have limitations with respect to the World Trade Organization; we can’t just raise tariffs or impose quotas on goods coming

from another country, except in certain prescribed processes set out

by the WTO.

Mr. MALCOLM. Mr. Chairman, may I just elaborate very briefly

on that?

Chairman TOM DAVIS. Yes.

Mr. MALCOLM. I was going to say in some countries, as well, this

pirate market is a huge underground economy, and we have actually seen instances in which the people who are engaging in piracy

will have their own PR effort to say why are you harming the citizens of your country who are trying to eek out a living, just to protect American industries? So sometimes governments are caught

between a rock and a hard place, but I don’t disagree with anything Mr. Papovich said.

Chairman TOM DAVIS. Ms. Watson, any questions?

Ms. WATSON. No.

Chairman TOM DAVIS. Mr. Cooper.

Mr. COOPER. Thank you, Mr. Chairman.

Mr. Papovich just mentioned the indifference and corruption of

other nations. That is a pretty strong statement, but I think you

hit the nail on the head. What I am worried about is the indifference of our Government in facing these other nations. You have

worked with the USTR. I am a big fan of Bob Zellick; I think he

is great. But I have never been party to these long negotiations.

Can you tell us what really happens behind closed doors, when

they have a dozen issues to discuss? Because these intellectual

property issues seem to be, at best, back burner. Most of you gentlemen have asked that we fund an office within USTR to give IP

issues more prominence, perhaps an office within the State Department so they can have more prominence there. All this spells back

burner, as does this hearing, when we can’t even fill the room with

folks who are concerned about this massive systematic theft of U.S.

property. So what happens behind closed doors with the U.S. Trade

Representative and these various negotiators?

Mr. PAPOVICH. Actually, in the negotiations I would say it is different than that. In fact, intellectual property takes a very prominent position in the negotiations, and other governments complain

all the time about how much attention is paid by the U.S. Government when it comes to trade agreements.

It is in the enforcement that the problems arise. The other country takes on lots of very good commitments and then fails to adequately implement, and it will break down when our representatives operating in those countries use the provisions that those

agreements require by going into court in those countries and asking for criminal prosecution or asking for big civil damages, and

the judges won’t do it or the prosecutors won’t even take the case.

So it is more complex than just what is in the agreements; it is getting these other countries to actually live up to what they commit

to.

Mr. COOPER. But when we see a systematic lack of enforcement,

what actions do we take in response?

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Mr. PAPOVICH. That is when we go back to our Government asking for help.

Mr. COOPER. So our own Government isn’t helping our own industries enough to solve this problem?

Mr. PAPOVICH. I would say enough, not helping our industries

enough. I don’t want to say, and I won’t say, that our Government

is not trying to help. The people who are employed to do this try

very hard to help; there is just not nearly enough of them. I will

leave it at that; there is just not nearly enough of them. And they

also don’t have the clout, if it comes to a major conflict, to impress

upon the other government that this has to be changed.

Mr. COOPER. In one of your statements you said you were coming

to Congress to get us to encourage the executive branch to do more

in this area. Well, they are a separate branch of Government. We

can encourage them, we can pass budgets that give them more

funding, but if they don’t have the will to protect American industry from this rampant theft, American voters need to know about

that, because I think most voters are interested in protecting

American property and making this a higher priority.

Mr. MALCOLM. If I may respond briefly. Obviously, both Mr.

Papovich and I recently were with the administration, but I would

say that I don’t think that it is a question of a lack of will on our

Government’s part. The fact that there are requests for additional

funding doesn’t have anything to do with anything being on the

back burner; I think it bespeaks to the magnitude of the problem.

Mr. COOPER. Where is the administration request for funding for

a separate USTR office on IP or a State office on IP, or these other

things that you are requesting us to fund? Where is it in the administration’s budget?

Mr. MALCOLM. I no longer speak for the administration, so I

won’t even purport to do so.

Mr. COOPER. Well, they haven’t requested it, right? You are having to come to us to ask for it. That is an indication of a lack of

will.

Mr. MALCOLM. Mr. Papovich having been at USTR and me being

at DOJ, I can tell you that it was on every bilateral or multilateral

law enforcement convocation or trade convocation. IPR enforcement

was high on the agenda. This is a pervasive international problem

that needs a lot of resources, but I do not think that it is a lack

of good will or somehow a back burner issue on behalf of the administration. I can tell you that not only having been in the administration, but having dealt with administration officials in my current capacity.

Mr. COOPER. Well, I am sure there are a few good-hearted people

who are trying to do the right thing, but overall it looks as if the

administration has used this issue for window-dressing. They do

enough so that it looks like we are making an effort, but I don’t

know any other area of U.S. foreign policy where we have been so

systematically ineffective.

Mr. MALCOLM. I would respectfully disagree.

Chairman TOM DAVIS. The gentleman’s time has expired.

Let me just, first of all, thank you. We did ask the administration to appear today, and they chose not to do that, but we are

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working with them on some things and we will hold further hearings on this as we move forward.

Mr. COOPER. Mr. Chairman, would you yield for questions?

Chairman TOM DAVIS. I would be happy to.

Mr. COOPER. I am glad that you asked the administration to

come, but I would think that their failure to show up is another

sign of their lack of priority, lack of interest in this issue.

Chairman TOM DAVIS. Well, we are working with them on a lot

of legislative procedures. I would have preferred to have them show

up today too. This is a massive problem that is not just a problem

for the United States; it is a problem worldwide, as has been noted

before. And this hearing, I think, has brought out some of the

failings we have had at the governmental level and some of the

successes we have had at the governmental level, and some of the

work we still have to do.

But I guess I would just ask where do we go when suing in other

countries? There are legal systems in other countries. We get the

agreements intact that our trade leaders negotiate. What happens

when you sue in other countries and fine people?

Mr. PAPOVICH. China is the best example there is: a huge problem; fair amount of indifference by the government. The Chinese

have, in their criminal code, the standards for initiating a criminal

investigation and prosecution of intellectual property pirates. They

have written it in such a way, they have established a threshold

over which one must climb in order to have a prosecution initiated

that is nearly impossible to meet.

One of the things that has been a central demand of us on our

executive branch and, to their credit, has been the central demand

of our executive branch on the Chinese, is that this threshold has

to be either eliminated or substantially reduced so the criminal

prosecutions can be initiated in China. The Chinese are supposedly, right now, as we speak, rewriting the interpretation that

establishes this threshold. We are waiting with baited breath to see

what comes out of their process.

I think the gentleman from the GAO said the USTR says they

are going to conduct a Special 301 out-of-cycle review later this

year, and it will be for the purpose of evaluating this. So if the Chinese change the standard, lower the threshold, we have a shot—

there is still a question of will, but we have a shot of getting significantly more criminal prosecutions of pirates in China. Right

now there are almost none. Almost none, despite all of the piracy

that happens in China. You can get administrative fines imposed,

modest financial penalties, but that is. You can’t get anyone put in

jail, or it is very difficult to get anyone put in jail for copyright piracy.

Mr. MALCOLM. Mr. Chairman, if I may. There are really four pillars to this: you need effective laws, you need effective investigations, effective prosecutions, and deterrent sentencing. That is with

respect to criminal enforcement. Many countries now are compliant, they have the first, but the other three are lacking, and there

are problems at each step along that cycle.

With respect to civil lawsuits, there are organizations, our organization, the RIAA, that engage in civil lawsuits to protect their

property rights. People such as Congressman Simmons’ constituent

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in Connecticut, it is tough for them. The answer to the question is

in some countries the civil litigation process works fairly well and

in others the court system is positively byzantine.

Chairman TOM DAVIS. Well, thank you very much. I think you

have given a clarity to the work that has been accomplished and

the work that needs to be done, the massiveness of this problem,

and I hope it has been helpful not just to our members, but to people watching as well. We look forward to continue to work with you

on this. Thank you very much.

The hearing is adjourned.

[Whereupon, at 1:05 p.m., the committee was adjourned.]

[NOTE.—The GAO report entitled, ‘‘Intellectual Property, U.S. Efforts Have Contributed to Strengthened Laws Overseas, But Challenges Remain,’’ is on file with the committee.]

[The prepared statement of Hon. Elijah E. Cummings follows:]

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