```

[Senate Hearing 107-457]
[From the U.S. Government Publishing Office]

                                                        S. Hrg. 107-457
 
                    EXAMINING THE THEFT OF AMERICAN
                        INTELLECTUAL PROPERTY AT
                            HOME AND ABROAD
=======================================================================

                                HEARING

                               BEFORE THE

                     COMMITTEE ON FOREIGN RELATIONS
                          UNITED STATES SENATE

                      ONE HUNDRED SEVENTH CONGRESS

                             SECOND SESSION

                               __________

                           FEBRUARY 12, 2002

                               __________

       Printed for the use of the Committee on Foreign Relations

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

                           U.S. GOVERNMENT PRINTING OFFICE
78-178                          WASHINGTON : 2002
__________________________________________________________________________
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Fax: (202) 512-2250 Mail: Stop SSOP, Washington, DC 20402-0001

                     COMMITTEE ON FOREIGN RELATIONS

                JOSEPH R. BIDEN, Jr., Delaware, Chairman
PAUL S. SARBANES, Maryland           JESSE HELMS, North Carolina
CHRISTOPHER J. DODD, Connecticut     RICHARD G. LUGAR, Indiana
JOHN F. KERRY, Massachusetts         CHUCK HAGEL, Nebraska
RUSSELL D. FEINGOLD, Wisconsin       GORDON H. SMITH, Oregon
PAUL D. WELLSTONE, Minnesota         BILL FRIST, Tennessee
BARBARA BOXER, California            LINCOLN D. CHAFEE, Rhode Island
ROBERT G. TORRICELLI, New Jersey     GEORGE ALLEN, Virginia
BILL NELSON, Florida                 SAM BROWNBACK, Kansas
JOHN D. ROCKEFELLER IV, West         MICHAEL B. ENZI, Wyoming
    Virginia
                     Edwin K. Hall, Staff Director
            Patricia A. McNerney, Republican Staff Director

                                  (ii)

  

                            C O N T E N T S

                              ----------                              
                                                                   Page

Allgeier, Hon. Peter, Deputy U.S. Trade Representative...........     9
      Prepared statement.........................................    12
Gordon, John S., U.S. Attorney, Central District of California...    25
      Prepared statement.........................................    27
Holleyman, Robert, II, President and CEO, Business Software 
  Alliance--Statement Submitted for the Record...................     5
Larson, Hon. Alan P., Under Secretary for Economic, Business, and 
  Agricultural Affairs, Department of State......................    19
      Prepared statement.........................................    21
Lowenstein, Douglas, President, Interactive Digital Software 
  Association....................................................    62
      Prepared statement.........................................    64
Raikes, Jeffrey, Group Vice President, Productivity and Business 
  Services, Microsoft Corporation................................    41
      Prepared statement.........................................    43
Rosen, Hilary, President and CEO, Recording Industry Association 
  of America.....................................................    56
      Prepared statement.........................................    59
Valenti, Jack, President and CEO Recording Industry Association 
  of America.....................................................    48
      Prepared statement.........................................    53

                                Appendix

``Theft of American Intellectual Property: Fighting Crime Abroad 
  and At Home,'' a report from Senator Joseph R. Biden, Jr.......    93

                                 (iii)

  

                    EXAMINING THE THEFT OF AMERICAN

                         INTELLECTUAL PROPERTY

                           AT HOME AND ABROAD

                              ----------                              

                       Tuesday, February 12, 2002

                                       U.S. Senate,
                               Foreign Relations Committee,
                                                   Washington, D.C.
    The committee met, pursuant to notice, at 2:33 p.m. 
inBuilding SD-419, Hon. Joseph Biden (chairman) presiding.
    Present: Senators Biden, Boxer, Smith, and Allen.
    The Chairman.  The hearing will come to order, please. I 
welcome our witnesses and all our guests. I welcome you to 
today's hearing on the theft of American intellectual property, 
fighting crime at home and abroad.
    While this hearing is taking place here in the Foreign 
Relations Committee, I am also wearing my hat today as chairman 
of the Judiciary Committee, Subcommittee on Crime and Drugs, 
because we are discussing an issue that is not only a matter of 
international dimension, but it is also a crime, pure and 
simple.
    The New York Times recently reported that illegal copies of 
the ``Lord of the Rings,'' a film just recently released in 
movie theaters here in the United States, are already on sale 
in the streets of Jalalabad, Afghanistan. Windows XP was 
available for illegal use on the streets of Moscow two months 
before it was released in the U.S. by Microsoft. Every episode 
of ``Seinfeld'' is now available for download free to anyone 
with access to the Internet. In September of 2001 alone, 1.5 
million songs were downloaded by Web sites which enable users 
to steal music. Video games that would cost $50 each in the 
United states are sold for the equivalent of 75 cents on the 
streets in some of China's cities every day. Thieves steal 
millions of dollars of American intellectual property from its 
rightful owners, and hundreds of thousands of American jobs are 
lost as a result.
    American innovation and the protection of innovation by the 
government has been the critical component of America's 
economic growth throughout our history. The founding fathers 
were pretty smart, and they had the foresight to provide for 
protection of intellectual property, giving Congress the power, 
``to promote the progress of science and useful arts'' by 
providing copyrights and patents.
    The Federal Government's vigilance in shielding 
intellectual property rights remains essential. Innovation 
would slow, business would suffer, and jobs would dissolve if 
technological advances were left unprotected. The American arts 
and entertainment industry could not survive without the 
ability to protect and earn income from its ideas. Would U2 
continue to make records and go on tour if all the records, 
videos, and fan paraphernalia were given out for free? As much 
as they love music, they might, but it would not be fair.
    Copyrights and trademarks mean nothing if government 
authorities fail to enforce the protection they provide 
intellectual property owners. It has been estimated that 
software piracy alone cost the U.S. economy over 118,000 jobs 
and $5.7 billion in wage losses in the year 2000 alone. Even 
more, the International Planning and Research Corporation 
estimates that government loses more than a billion dollars 
worth of revenue as a result of piracy.
    To put this in perspective, with a billion dollars in 
additional revenue, the American Government could pay for 
childcare services of more than 100,000 children annually. 
Alternatively, one billion dollars could be used to fund a 
Senate proposal to assist schools nationally with emergency 
school renovation and repairs, and a thousand other things we 
could usefully use it for.
    This is a crime, a crime against which we have made some 
progress, but against which we can do more. The purpose of 
today's hearing is to focus on this crime, review what is being 
done to fight it, and discuss what more can or should be done 
in light of the continued growth of piracy and counterfeiting 
abroad and at home.
    Fighting crime is not merely in the interest of the United 
States. As software and entertainment companies begin to 
flourish in foreign countries, foreign governments are starting 
to realize that intellectual-property theft possesses a 
significant economic threat to them. The Indian film industry, 
as it matured, became increasingly aware that its product was 
being pirated. It successfully pushed the Indian government to 
institute adequate protections for intellectual property. One 
of the challenges we face is to help other countries follow in 
India's footsteps.
    When an American owns property, the government has the 
responsibility to protect that property from theft. When that 
property is an idea, it deserves our protection no less than if 
it were land or a personal object. Who among us would want to 
see expanded the efforts that have been made by the pirates 
against those who expend so much effort, the effort required to 
develop a new product, if the government were not prepared to 
punish those who would steal it?
    If we want to protect American innovation--and, by 
extension, American jobs--we need to maintain a vigilant stand 
against intellectual-property theft. American intellectual 
property is of immense value, perhaps our most valuable 
resource. Not to protect it is the equivalent of letting coal 
be stolen from our mines or water taken from our rivers. How 
will we protect the creative genius of America? How will we 
preserve the creativity and experimentation that are America's 
inexhaustible oil wells?
    I look forward to discussing these and other questions 
today. If nothing else, it is my hope that this hearing will 
educate all of us on the need to respect intellectual property 
rights in the cyber age and the particular challenge posed by 
high-tech pirates.
    A Federal judge, in a recent court opinion upholding the 
constitutionality of the Digital Millennium Copyright Act, 
captured perfectly, in my view, the challenge we face. He said, 
``We live in an age in which the excitement of ready-access to 
untold quantities of information has blurred, in some minds, 
the fact that taking what is not yours and not freely offered 
to you is stealing.''
    I would like to thank all of our witnesses for taking the 
time to join us today. I look forward to this hearing.
    At this time, I would like to recognize Senator Allen, who 
also has an opening statement, and then I will introduce the 
witnesses.
    Senator Allen.  Thank you, Mr. Chairman, and I want to 
thank you particularly for holding this hearing today. I think 
it is terrific to see the Foreign Relations Committee 
discussing the protection of intellectual property, both 
domestically and internationally.
    As we try to spread American ingenuity and innovation 
abroad and have that innovation benefit those in other 
countries, one of the impediments to our technologists and 
those who develop it is the concern that it will be stolen, it 
will be copied and they will not get a return. And then some of 
that copyrighted material or software will come back into this 
country, obviously at a lower price than what would be sold to 
consumers.
    So this is an issue, obviously, of concern to the Commerce 
Committee, to the Judiciary Committee, and, yes, also to the 
Foreign Relations Committee, because this very much deals with 
some of the intrigues and concerns that we have with certain 
countries around the world.
    As you know, Mr. Chairman, I am chairman of the Republican 
High-Tech Task Force, and one of the principles of our task 
force is to enhance the deterrents to Internet piracy and 
counterfeiting of intellectual property and also bolstering 
international cooperation against computer crimes. This hearing 
will be very helpful in advancing this goal, which I know is 
shared by many members of this committee.
    And, indeed, I agree with what you said, Mr. Chairman, on 
the issue of property rights when you talk about the rule of 
law and it is part of our Constitution that people's property 
is to be protected. And, indeed, in a draft statement report--I 
will quote from your report, Mr. Chairman:

          American innovation and the protection of that 
        innovation by government has been a critical component 
        of American economic growth throughout our history. The 
        founding fathers had the foresight to provide for 
        protection of intellectual property, giving Congress 
        the power to, quote, ``promote the progress of science 
        and useful arts by providing copyrights and patents.'' 
        And obviously our vigilance as a government in 
        protecting these copyrighted acts or this intellectual 
        property has an impact on the growth of innovation, it 
        has an impact on business and investment, and it also 
        clearly has an impact on jobs in this country.

    Now, the unauthorized use of intellectual property is a top 
concern for publishers and users. New technologies and 
distribution models are--made possible by the Internet--are 
wonderful, but they also have created opportunities for 
companies in the software and information industries to get 
jobs and new ideas. Unfortunately, the wrong side of it, it has 
become a fertile hunting ground for online pirates.
    First, let me mention some successes of the Bush 
administration. In an effort to combat piracy, the Department 
of Justice last month announced the formation of one of the 
largest cyber-crime units in the country. It is comprised of 
six assistant U.S. Attorneys who will specialize in computer 
and intellectual property crimes in San Francisco, Los Angeles, 
San Diego, Atlanta, Boston, New York, Dallas, and Seattle. And 
I am pleased we have today with us U.S. Attorney John Gordon 
who will give us some of the details, I suspect, as the battle 
goes on in the front lines in the Los Angeles area.
    Our U.S. Customs Office is engaged in Operation Buccaneer, 
the largest anti-piracy operation ever, which is bringing down 
a Trans-Atlantic ring of hackers believed to be the major 
providers of illegal software on the Internet. We are told that 
the hackers who are the target of this effort are responsible 
for 95 percent of all pirated software available online, 
causing at least $1 billion in lost revenues each year.
    But lost revenue to content producers and content providers 
is only one part of the problem. Piracy is not a private 
offense. It hurts everyone. Consumers have to pay more for 
their product. Producers may be less inclined to be as creative 
with their artistic endeavors. Software engineers will either 
have less compensation or possibly less incentive to be 
innovative and creative when they know their product cannot be 
protected. And all of this, obviously, adversely affects our 
families, good-paying jobs, and communities all across our 
country.
    I hope, Mr. Chairman, that the product of this hearing will 
be an answer to the question that many Americans may ask, 
``Well, how does the sale of a pirated video in China hurt 
me?'' I understand that Jack Valenti, in the second panel, will 
show us some pirated videos that were recently purchased in 
China, and I know our other witnesses will focus on the cost of 
piracy to people here and abroad.
    With these distinguished people on both panels, who are 
very knowledgeable, have good insight, I hope that they will 
relate how the harm from the piracy of intellectual property 
actually harms American people in a way that normal people 
that--in other words, non-lawyers--would understand.
    People, when you are talking about trademarks, intellectual 
property means a lot of things. It is trade names, trademarks. 
It is licenses, it is copyrights, it is patents. The 
infringements or the theft of any of those or the unauthorized 
use has an impact. And the better you can explain how that 
affects Americans and their jobs and our prosperity and our way 
of life, the better we will be to get the public support behind 
this important issue.
    I would like to add two final points, Mr. Chairman.
    I was pleased by yesterday's news report on today's hearing 
and by your call for stronger law enforcement. I spoke with 
Jeff Raikes--Jeff Raikes' colleagues in Microsoft in Redmond, 
Washington--last month, and they shared with me a proposed 
modification to Section 2318 of Title 18 of the U.S. Code, 
which will strengthen anti-tampering legislation to protect the 
authentication features of copyrighted works. I am eager to 
work with you and our colleagues to enact this proposal into 
law.
    Finally, I would like to submit, for the record, a 
thoughtful written statement by Robert Holleyman on behalf of 
the Business Software Alliance, which is a strong voice of the 
world's software and Internet industry and a leader in anti-
piracy efforts.
    [The prepared statement of Mr. Holleyman follows:]

Prepared Statement of Robert Holleyman II, President and CEO, Business 
                           Software Alliance

    Mr. Chairman and Members of the Committee,
    On behalf of the members of the Business Software Alliance (BSA) 
\1\, I submit this statement concerning a related threat to the 
American software industry, software piracy and counterfeiting. BSA 
members have been fighting the piracy of our products since our 
companies were founded. BSA pursues both criminal and civil cases on 
behalf of its members in over 65 countries around the world. Unlike 
most other forms of intellectual property, software has always been 
created in digital form, making it relatively easy to produce perfect 
duplicates. Since software is a high value good, it also represents the 
greatest share of pirated American intellectual property on a dollar 
basis.
---------------------------------------------------------------------------
    \1\ The Business Software Alliance (www.bsa.org) is the voice of 
the world's software and Internet industry before governments and with 
consumers in the international marketplace. Its members represent the 
fastest growing industry in the world. BSA educates computer users on 
software copyrights; advocates public policy that fosters innovation 
and expands trade opportunities; and fights software piracy. BSA 
members include Adobe, Apple Computer, Autodesk, Bentley Systems, 
Borland, CNC Software/Mastercam, Compaq, Dell, Entrust, IBM, Intel, 
Intuit, Macromedia, Microsoft, Network Associates, Novell, Sybase, 
Symantec, and UGS.
---------------------------------------------------------------------------
the contribution of the american software industry to america's economy
    U.S. software publishers earn more than half of their total revenue 
from overseas sales of software. BSA estimates that the U.S. software 
industry supplies 70 percent of the world's demand for legitimate 
packaged software. Since 1990, the industry's trade surplus has grown 
at an average rate of 17.9 percent annually. In contrast, the U.S. 
economy has posted increasingly large trade deficits throughout the 
past decade, as a growing number of major U.S. industries moved 
manufacturing facilities and jobs offshore.
    Software industry growth, fueled by the ever-increasing demand for 
software, has generated a significant number of U.S. jobs. According to 
a study by Nathan Associates, a Virginia-based consulting firm, the 
U.S. software industry employed more than 800,000 U.S. workers in 1998, 
with aggregate wages of $55.6 billion. By the year 2008, the software 
industry is expected to employ more than 1.3 million workers in the 
United States. No other industry is providing employment opportunities 
at such a rapidly increasing rate and at such high wages.
                        software piracy overview
    In 2001, we estimate that over $11 billion in software sales were 
lost due to software piracy. This loss is more than just a loss to our 
member companies' bottom lines. It is also a huge tax revenue and 
employment loss to the U.S. and foreign treasuries. I am sad to report 
that in some countries, such as China and Vietnam, over 90 percent of 
software in use has been pirated. While the piracy rate is lower in 
other countries, in far too many places in Asia, Latin America and 
Eastern Europe, the rate still exceeds 50 percent.
    Over the past decade, the most significant change that our industry 
has seen in software piracy has been in the means by which it occurs. 
Until recently, software piracy was most often a local or regional 
issue. Software piracy in Latin America had little to do with software 
piracy in Asia. This is no longer the case. With the widespread reach 
and use of the Internet, pirates now operate on a global basis. A 
software pirate can advertise his stolen American-developed software 
from Asia while offering downloads from a South American server and 
accepting payment on a European based payment service. All of the 
activity has occurred outside of the United States even though the 
company, and in fact the country, most directly harmed by the activity 
is here.
                          international issues
    The success of the U.S. software industry is due in large part to 
this country's historical commitment to strong copyright protection. As 
noted above, piracy severely limits--and in some countries virtually 
blocks--development of a strong local copyright industry.
    The ability of countries to reap high economic benefits from e-
commerce is highly dependent on their ability to promote protection and 
enforcement of intellectual property rights. Multi-lateral and 
bilateral trade alliances must be fully backed by governments' firm 
commitment to respect and enforce intellectual property rights within 
the public and private sectors; to treat the manufacture and sale of 
counterfeit software as a crime warranting tough enforcement and 
penalties; and to ensure that its laws and enforcement regimes 
adequately address Internet piracy. Worldwide governments can help 
promote this commitment to intellectual property protection and fight 
Internet piracy by:

   ensuring that they fulfill their obligations under the WTO 
        TRIPs Agreement by adopting and implementing laws that provide 
        for effective enforcement against piracy;

   encouraging ratification of the WIPO Copyright Treaty and 
        strong criminal enforcement;

   advocating government legalization policies and other 
        reforms that will fundamentally reduce piracy rates; and

   Dedicating resources to the investigation and prosecution of 
        Internet piracy, training, technical assistance and mutual 
        cooperation.
            the critical importance of trips implementation
    Given the emergence of organized criminal counterfeiting 
operations, it is imperative that all governments fulfill their 
obligation under WTO TRIPs to enact and enforce strong criminal 
remedies against piracy, including tough, effective penalties. 
Moreover, to combat rampant piracy among end users, these criminal laws 
must be supplemented by civil remedies that allow software publishers 
to obtain civil ex parte search orders along with adequate damages, 
without significant judicial delays or overly burdensome bond 
requirements.
    The TRIPs Agreement is the first major international treaty to 
recognize that intellectual property rights are meaningful only if 
accompanied by adequate enforcement procedures and remedies. In 
addition, TRIPs requires that intellectual property right enforcement 
regimes meet specific ``results-oriented'' performance standards. 
Specifically, each member's enforcement regime must ``permit effective 
action against infringement'' and ``constitute a deterrent to further 
infringements.'' Moreover, enforcement procedures cannot be 
``unnecessarily complicated or costly,'' or ``entail unreasonable time 
limits or unwarranted delays.'' Thus, in assessing TRIPs compliance, it 
is critical to review and monitor all aspects of a country's 
enforcement regime, including the adequacy of procedural remedies and 
penalties, as well as their effectiveness in deterring piracy.
                implementation of wipo copyright treaty
    In order to promote a safe, legal environment for e-commerce, it is 
critical that governments implement laws that guard against piracy on 
the Internet. In direct response to the growing threat of Internet 
piracy, the international community in 1996 adopted the WIPO Copyright 
Treaty to ensure protection of copyrighted works in the digital age. 
Among other things, the WIPO Treaty (i) makes clear that a copyrighted 
work can be placed on an interactive network only with the consent of 
the relevant rightsholder; (ii) makes clear that the Berne Convention's 
reproduction right applies to electronic uses of works; (iii) protects 
all forms of expression of computer programs; and (iv) prohibits 
``hacking'' of technical protections that have been applied to works.
    The United States was one of the first countries to implement the 
WIPO Copyright Treaty by enacting the Digital Millennium Copyright Act. 
In addition, Congress has enacted legislation that criminalizes online 
distribution of pirated software and increases penalties for Internet 
piracy. To ensure that these laws have real impact, U.S. law 
enforcement agencies have elevated the priority given Internet piracy 
and other copyright offenses, resulting in important prosecutions 
against criminal pirates and counterfeiters. Similar measures are 
urgently needed on a global basis.
                     government software management
    Government agencies and public institutions are typically among the 
largest users of computer software. As such, government leaders have an 
obligation to establish legalization policies and procedures that both 
prevent software piracy within the public sector and set an example for 
the private sector to follow. At a minimum, a government legalization 
policy should require government agencies and recipients of government 
funds to (i) comply with software copyright and licensing requirements; 
(ii) establish systems and controls to manage software use; (iii) 
ensure that adequate funds are budgeted for software procurement; and 
(iv) require all recipients of government funds to comply with software 
copyright and licensing requirements in connection with government-
funded projects and government grants.
    On September 30, 1998, President Clinton signed an Executive Order 
on Computer Software Piracy, which for the first time clearly 
articulates legal software use and procurement requirements for Federal 
agencies and recipients of Federal funds. Several American governors 
have issued similar executive orders for their states.
    Foreign governments are now beginning to consider the adoption of 
decrees modeled after the U.S. Executive Order (the most notable 
example being China's ``Red-Top Decree''). BSA urges other governments 
to follow suit and adopt policies that mandate legal software use by 
government agencies and public institutions. Moreover, to ensure that 
these policies have more than symbolic value, each government should 
designate a system for oversight and explicitly require agencies to 
implement a software asset management program. To assist in these 
efforts, BSA has published an international ``Government Guide for 
Software Management,'' which is designed to help foreign governments 
adopt and implement software asset management programs.
    Electronic commerce promises a new revolution in the development, 
distribution and use of products and services protected by intellectual 
property. It also poses monumental new risks. The WIPO Treaties, full 
implementation of the WTO TRIPs agreement, strong government management 
software policies and commitment of resources to investigation and 
prosecution of Internet piracy will provide a healthy environment for 
the development of e-commerce.
    On a similar note, passage of Trade Promotion Authority is 
supported by my industry as another vehicle for boosting the protection 
of intellectual property around the world. I encourage this Committee 
to be a leader in the Senate in support for Trade Promotion Authority.
    Finally, as part of the State Department's outreach on 
international development issues around the world, I would point out 
that the creation of intellectual property depends only upon individual 
creativity that every country has. Intellectual property does not 
require huge startup or investment costs. Nor does it shift 
environmental burdens to third world countries. In sum, intellectual 
property is an opportunity for every country around the world to 
prosper from. America's economic strength is often viewed as a role 
model for developing countries. I encourage the State Department 
through its Foreign Service Officers and employees in conjunction with 
the international development programs that it oversees to highlight 
the economic development potential of intellectual property.
                               conclusion
    Mr. Chairman and Members of this Committee, thank you again for the 
opportunity to submit a statement on software piracy for the record. 
Our industry depends upon the U.S. government to make the case for 
protecting America's intellectual property assets worldwide.
                                 ______
                                 

                The Need for Anti-Tampering Legislation

    Microsoft and other software publishers face a substantial 
challenge from the worldwide distribution of high quality counterfeit 
software. The software industry annually loses an estimated $12 billion 
in revenues because of counterfeiting activities. Such intellectual 
property crimes drain the U.S. economy of thousands of jobs, millions 
in lost tax revenues and billions in lost wages.
    Among the practices of counterfeiters and pirate resellers is 
tampering with authentication features of software and other 
copyrighted works. These components, such as holograms, certificates of 
authenticity (COAs), and other security features, are affixed to or 
embedded in the copyrighted work to allow the rightholder to 
distinguish genuine works from counterfeits. Highly sophisticated 
counterfeiters engage in tampering activities both to make counterfeit 
software appear genuine and to increase the selling price of genuine 
software and licenses. Examples of such tampering activities in the 
software industry include:

   Genuine certificates of authenticity and other 
        authentication features are stolen from replicators or removed 
        from genuine packaging and affixed to counterfeit packaging and 
        CD-ROMs.

   Genuine academic and original equipment manufacturer (OEM) 
        products are altered and mislabeled to resemble retail product.

   End user licenses are altered and mislabeled to specify a 
        higher license quantity.

    Cunently, Federal law does not provide adequate civil and criminal 
remedies to combat such tampering activities. For example, Federal law 
fails to criminalize the distribution or sale of genuine authentication 
features to software counterfeiters. This gap in Federal law makes it 
increasingly difficult for copyright holders to combat counterfeiting 
activities.
    In order to strengthen Federal intellectual property enforcement 
efforts to combat counterfeiting activities, legislation should be 
enacted that protects the authentication features of copyrighted works. 
Section 2318 of title 18 should be amended to (i) prohibit trafficking 
in authentication features that have been altered or removed from the 
genuine product, affixed to counterfeit products, or distributed or 
imported without the authorization of the copyright owner; and (ii) 
require forfeiture of equipment, devices or materials used to 
manufacture counterfeit labels or illicit authentication features. 
Authentication features would include holograms, certificates of 
authenticity, and similar physical components used by rightholders to 
distinguish genuine copyrighted works from counterfeits.

    Senator Allen.  So, again, I thank our witnesses. And I 
thank you, Mr. Chairman, especially, for your leadership in 
bringing this issue to the attention of all Americans. Thank 
you. I look forward to the testimony.
    The Chairman.  Thank you, Senator.
    The reference made by Senator Allen to a report that we are 
filing today and making available is this report. And I think 
there are probably copies out there. If they are not, it is 
``Theft of American Intellectual Property, Fighting Crime 
Abroad and at Home,'' and it lays out the status of the 
problem, at least as we see it, and some of the attempted ways 
to deal with the problem.
    [The report to which the Chairman referred, ``Theft of 
American Intellectual Property, Fighting Crime Abroad and at 
Home,'' appears in the Appendix on page 93.]
    Now, our first witness--and I will introduce each witness 
individually--well, I will introduce all three of you now, and 
I would ask you to testify in the order that I introduce you, 
if you would.
    First of all, the Ambassador Peter Allgeier, is Deputy U.S. 
Trade Representative. He's held a variety of positions in the 
office of the United States Trade Representatives since joining 
in 1980, focusing both in Asia and European trade issues until 
U.S. Trade Rep. Mickey Kanter appointed him Associate U.S. 
Trade Representative for the Western Hemisphere in '95. 
President Bush appointed him Deputy Trade Representative last 
year. And in his current position, he supervises trade 
negotiation in Europe, the Middle East, and most of the Western 
Hemisphere. He also supervises negotiations in the World Trade 
Organization. We look forward to his testimony.
    Our next witness, Ambassador Alan P. Larson, assumed his 
duties as the United States Secretary of State for Economic 
Business for Agricultural Affairs November 24th of 1999, and he 
continues to serve in that position. The Undersecretary serves 
as the senior economic official at the Department of State. He 
advises the Secretary of the international economic policy and 
leads the work of the department on issues ranging from trade 
and aviation to bilateral relations of American's economic 
partners. Welcome back to the committee, Mr. Ambassador.
    The next witness, John Gordon, currently serves as the 
United States Attorney for the Central District of California. 
Having been a Federal Prosecutor in Los Angeles for 17 years, 
he now serves as the chief Federal law enforcement officer in 
the Nation's most populous Federal District, with over 16 
million residents. Previous to his current appoint, he served 
as Chief of the Narcotics Division and Chief of the Criminal 
Division in the same office. I welcome him.
    So if you will proceed in the order of--you, Mr. Allgeier, 
then Mr. Larson, and then Mr. Gordon.

      STATEMENT OF HON. PETER ALLGEIER, DEPUTY U.S. TRADE 
                         REPRESENTATIVE

    Ambassador Allgeier.  Thank you very much, Mr. Chairman. I 
would ask that I could summarize my remarks and have the full 
testimony submitted for the record.
    The Chairman.  Without objection, your entire statement 
will be placed in the record.
    Ambassador Allgeier.  Thank you. More importantly, thank 
you very much for offering the opportunity to testify before 
you and with Senator Allen on this very important issue, which 
is so crucial to American prosperity and international 
competitiveness.
    Creating an environment for innovation is perhaps our 
strongest comparative advantage internationally. We certainly 
appreciate very much the support and the work together with the 
Congress over many years in fighting piracy internationally.
    We share with you an appreciation of the immense economic 
importance to the United States of protecting intellectual 
property. The copyright industries alone, it is estimated, 
contributes something like $457 billion a year to our gross 
domestic product. That's roughly five percent of our gross 
domestic product. And so we also see theft of ideas as serious 
a crime as theft of physical assets or financial assets.
    And just to give some dimension to that, just 
internationally alone, our copyright industry is estimated to 
lose between $20 and $20 billion to piracy.
    The Chairman.  Can you imagine if $20 billion had been 
taken out of the international banking system by theft, what 
interest that might generate here?
    Ambassador Allgeier.  That's right. Our job as USTR, and we 
are just part of the overall interagency approach to dealing 
with international piracy, is to negotiate strong intellectual 
property protection in our trade agreements and our investment 
agreements and then to ensure that those provisions of those 
agreements are enforced vigorously. What I would like to do is 
to just briefly go over the types of negotiating tools we have 
in carrying out this mission.
    Of course, the premier trade negotiation affecting 
intellectual property was the TRIPs agreement in the World 
Trade Organization. But I want to assure you that we are not 
just sitting on our laurels because of that agreement. As we 
continue to negotiate free-trade agreements such as the 
bilateral agreement we are negotiating with Singapore and Chile 
and the regional free trade agreement of the Americas, we are 
insisting that strong intellectual-property protections, even 
beyond what is already in the TRIPs, be included in those 
agreements and be subject to dispute settlement.
    This, of course, I think underlines how important it is for 
us to obtain the trade promotion authority that will strengthen 
our hand in negotiations. And we are very mindful of the fact 
that the pending bills on trade promotion authority contain 
strong mandates for negotiating objectives on intellectual 
property, including an emphasis on protections for the--against 
intellectual property piracy of--aimed at the new forms of 
intellectual property, the high-tech forms of intellectual 
property that are so important to our economy.
    Now, we do not just negotiate agreements. We also intercede 
in situations where piracy is especially prevalent in foreign 
countries. Two ways in which we do that, I will discuss in a 
minute, the Special 301 process that we have, which was 
provided by Congress in the Trade Act of 1988. But we also use 
the preference programs, the trade preference programs of GSP, 
the Carribean Basin Initiative, the ANDEAN Trade Preference 
Act, and the African Growth Opportunities Act, because they all 
have provisions for adherence to intellectual property 
protection. So we use the--frankly, the leverage of those 
programs to promote stronger intellectual property protection 
in the countries that benefit from those programs.
    I mentioned the Special 301. The Special 301 provision of 
U.S. law is the framework in which we pursue our international 
intellectual-property objectives. This past year, in April, we 
reviewed the practices of 80 countries. I think that is more 
countries than we have ever reviewed before. And as a result of 
that review, we obtained stronger protection and stronger 
enforcement.
    In the review, the current review of 2001, we are focusing 
on three areas. One is ensuring proper and timely 
implementation of the TRIPs agreement. The second is 
controlling piracy of optical media products such as music and 
video CDs, software, CD-ROMS and so forth. And third is 
ensuring that governments worldwide observe intellectual 
property protection in their own offices, that they are using 
only legitimate software. So these are our three major----
    The Chairman.  You mean in their government offices?
    Ambassador Allgeier [continuing]. ----Yes. So, just to go 
over those priorities--with respect to the implementation of 
the TRIPs agreement, this is an important focus of our efforts. 
Many of the developing countries had until January of 2000 to 
implement the obligations. So since that time, an important 
focus of our effort has been to bring developing countries into 
compliance with their obligations. Part of that is working 
cooperatively with them on training programs and basically 
raising the level of political awareness of the importance of 
intellectual property. Part of it, however, is moving more 
aggressively, as I said, removing trade preferences or pursuing 
dispute settlement in the WTO. And we use whatever tools we 
feel will be most effective.
    A very important focus, as I said, are the new forms of 
intellectual property and the pirates--as you pointed out, Mr. 
Chairman--the pirates are barely a step behind the innovation 
of new forms of intellectual property, whether it is in 
software or in these optical media that we are talking about.
    We have seen progress there. For example, Hong Kong has 
taken additional legislative and enforcement actions in this 
area to combat optical media piracy, but we have much work to 
do with other countries.
    In the case of Ukraine, just recently we removed their 
benefits under the GSP. I think that was worth something like 
$40 million in trade. And we also imposed additional trade 
sanctions on Ukraine for failure to eliminate piracy on sound 
recordings and optical media piracy. And we also--these trade 
sanctions we imposed, in addition to the GSP removal, covered 
about $75 million of trade. But we are pressing other 
countries, as well--Russia, Thailand, Indonesia, and the 
Philippines--to address this important area.
    Another tool that we have is the recent copyright treaties 
that were negotiated in the World Intellectual Property 
Organization. There are two treaties. The WIPO Copyright Treaty 
and the WIPO Performances and Phonograms Treaty. And important 
emphasis of our work has been to get, first of all, countries 
to ratify those agreements, and then to enforce them.
    One of the ways we do that is--in these new free-trade 
agreements that I mentioned, such as with Chile and Singapore 
and in the FTAA, we insist that part of those agreements be the 
obligations that are contained in the WIPO treaties.
    Now, you might say, well, why do you do that if they 
already have ratified the WIPO treaties? The principal reason 
is the WIPO treaties do not have dispute settlement, whereas 
our trade agreements do. And so that is--that is an important 
element in the new trade agreements that we are negotiating.
    Similarly, we seek to have the strongest possible 
intellectual property commitments in the commitments that 
countries make as they are negotiating their accession to the 
World Trade Organization. We have a number of those 
negotiations going on now, one of the most important of which, 
of course, is Russia. And their intellectual property 
protection is a very important component.
    This past year, at the Doha Ministerial, we saw China and 
Taiwan join the WTO. They now have obligations within the WTO 
that are enforceable under dispute settlement. And in the case 
of China, for example, we will be reviewing their enforcement 
each year until the 10th anniversary of their entry of the WTO.
    I mentioned the government says ``use of software'' here. 
It is really ``misuse of software'' that we are seeking to 
eliminate. And in the last few years, we have worked with a 
number of countries, and some 19 countries have adopted decrees 
or regulations making it against their rules to use software 
illegally within government offices.
    These, Mr. Chairman, are the primary vehicles that we use 
in the Office of the U.S. Trade Representatives to promote 
protection for United States intellectual property overseas.
    One thing I would like to emphasize is, we are not just 
doing this alone. All of these efforts, whether they are 
negotiating in the WTO, working bilaterally with other 
countries, are done on an interagency context where we have the 
experts from the Patent Office and the Copyright Office. We 
have the diplomatic support from the State Department. We have 
the enforcement support from the Justice Department and 
Customs. And so it is very much a coordinated effort among the 
different agencies.
    So, in closing, I would simply like to thank you once again 
for the opportunity to discuss this important subject. I do 
want to highlight how the Congress, over the years, has 
provided strong tools for us to do our job. I mentioned the 
1988 Trade Act, the passage of the Special 301. There is, of 
course, the ratification of the WIPO treaties and the passage 
of the Digital Millennium Copyright Act. The strong 
intellectual property mandates in Trade Promotion Authority 
that we look forward to and hearings like this which raise the 
level of consciousness, not just of the American people, but of 
our trading partners as to the importance that we attach to 
this important subject. Thank you.
    [The prepared statement of Ambassador Allgeier follows:]

            Prepared Statement of Ambassador Peter Allgeier,
                    Deputy U.S. Trade Representative

    Good morning, Mr. Chairman and Members of the committee. Thank you 
for the opportunity to speak to you today about the role played by the 
Office of the United States Trade Representative (USTR) in protecting 
intellectual property.
    Mr. Chairman, as our Constitution recognizes, intellectual property 
rights are at the heart of scientific and technological progress and 
artistic creation. As part of the U.S. Government's overall dedication 
to ensuring respect for intellectual property, the USTR is committed to 
ensuring market access and fighting piracy overseas. We appreciate the 
support and interest we have received from Congress over the years, and 
today I would like to review with you our policy.
               importance of intellectual property rights
    Ensuring respect for intellectual property rights is an immensely 
important American economic interest. According to industry estimates, 
the core American copyright industries--software, films, music, books 
and other works accounted for $457.2 billion in value added to the U.S. 
economy, or approximately 4.94% of the Gross Domestic Product. 
Virtually all of our manufacturing industries, as well as 
pharmaceutical firms and others, rely upon patent protection to 
encourage innovation. Trademark protection is equally important for 
firms and for protecting consumers.
    The value of intellectual property rights, however, goes well 
beyond these issues. A system of strong intellectual property 
protection promotes future innovation by ensuring that artists, 
inventors, and scientists are rewarded for their work. Strong copyright 
protection for business and entertainment software, for example, is 
essential for a simple reason: software programs are technical marvels 
that require large investments to create, but can be copied at 
virtually no cost. Likewise, patent laws that protect inventions in 
pharmaceuticals and other fields encourage discovery and invention by 
providing exclusive rights, for a limited period, to those who disclose 
the results of their work. Disclosure, in turn, enables others to 
understand the advances made and to extend those advances both in the 
original field of technology and in other fields.
    The results of our policy are clear in practice. Computer programs 
developed in the past two decades have vastly changed American life: 
they have improved productivity, created jobs and improved safety in 
our factories; created new products in countless fields; improved 
health treatments; made tax filing easier; developed new forms of art 
and entertainment; strengthened our military and much more. Innovations 
in drug therapies developed by our pharmaceutical industry have saved 
millions of lives both at home and abroad.
                          the threat of piracy
    Almost all types of intellectual property, however, are highly 
vulnerable to piracy. The American copyright industry reported losses 
through piracy overseas at between $20-22 billion last year. Our 
patent-dependent pharmaceutical industry estimates that it loses a 
billion dollars annually in India and Argentina alone. Other U.S. 
industries dependent on patents, trademarks, trade secrets, industrial 
designs and other forms of intellectual property suffer similar 
unquantified losses.
    Toleration of piracy in America can swiftly remove incentives to 
create. The result would be erosion of America's comparative advantage 
in high technology; and ultimately loss of the benefits of new advances 
in health, public safety, education, defense and freedom of information 
for the entire world. In a sense, the intellectual property of the 
American economy is like a warehouse of ideas. For people to walk in 
and steal them is no more tolerable than theft of goods. That is why we 
at USTR place such an emphasis on ensuring that our trading partners 
enact, enforce and continue to enforce laws that ensure respect for our 
rights.
    Toleration of piracy by our trading partners, in addition to the 
harm it causes American interests, can also swiftly remove incentives 
for their citizens to innovate. Equally important is the role 
intellectual property plays in developed and developing country 
economies by providing the foundation for promoting investment, 
technology transfer, and economic growth in the long run.
    In this work, we consult closely with Congress on our priorities 
and strategies; we use domestic trade law; regional initiatives in 
Europe, Asia, Latin America and Africa; existing institutions, notably 
the World Intellectual Property Organization; and the World Trade 
Organization (WTO). Our goal is to control piracy through strong laws 
and effective enforcement worldwide, and to ensure that protection 
remains effective as technology develops in the future. It is complex 
work: effective protection of inventions in the pharmaceutical area, 
protection of copyrighted works like software, music, and movies, and 
protection of the trademark reputation of our firms requires a 
coordinated effort involving not only trade officials but entire 
governments. Effective protection of intellectual property rights 
involves customs, courts, prosecutors and police, commitment by senior 
political officials; and a general recognition that to copy is to steal 
and to deprive finance ministries of revenue. But although it is 
complex and the work is never done, the effort, over the years, has 
been quite successful.
    Let me now review our major initiatives and policy tools.
                 bilateral initiatives and special 301
    The United States is committed to a policy of promoting 
intellectual property protection, in this regard we are making 
significant progress advancing the protection of these rights through 
the negotiation of free trade agreements. As part of the negotiations 
with Jordan, Chile and Singapore, as well as in the hemispheric Free 
Trade Area of the Americas, we are seeking higher levels of 
intellectual property protection in areas covered by the TRIPs 
Agreement, as well as in new areas not covered by TRIPs. This gives us 
the opportunity to ensure that the intellectual property provisions of 
these new agreements reflect the technological changes that have 
occurred since the TRIPs Agreement was negotiated in the late 1980s and 
early 1990s.
    We also intercede directly in countries where piracy is especially 
prevalent or governments are exceptionally tolerant of piracy. Among 
our most effective tools in this effort is the annual ``Special 301'' 
review mandated by Congress in the 1988 Trade Act.
    This tool has vastly improved intellectual property standards 
around the world, including for software. Publication of the Special 
301 list warns a country of our concerns. And it warns potential 
investors in that country that the intellectual property rights in 
their investment may not be satisfactorily protected.
    The listing process has often helped win improvements in 
enforcement. One fascinating aspect of the Special 301 process occurs 
just before we make our annual determinations, when there is often a 
flurry of activity in those countries desiring not to be listed or to 
be moved to a lower list. Intellectual property laws are suddenly 
passed or amended, and enforcement activities increase significantly.
    In many cases, these actions lead to permanent improvement in the 
situation. Bulgaria is a notable example. Several years ago it was one 
of Europe's largest sources of pirate CDs, and a major cause of concern 
for us. Since then, we have worked to raise awareness and concern about 
the problem, and Bulgaria has at this point almost totally eliminated 
pirate production.
    Similarly, progress has occurred in Hong Kong, Macau and Malaysia, 
as discussed later in my testimony.
    At times, however, we must use the sanction authority granted to us 
for worst case offenders.
    China is a prime example. In 1995 and 1996, persistent tolerance of 
piracy--in particular growth of pirate production for both the domestic 
market and export--led us to threaten $1 billion in trade sanctions. 
These helped us to win a bilateral IP agreement in 1995 and further 
action in 1996. Our follow-up work since has been to ensure that all 
relevant Chinese agencies including trade, customs, judiciary, police 
and senior political officials are involved.
    Today, China has an improved system that protects U.S. copyrights 
more effectively than before. Enforcement of intellectual property 
rights has become part of China's nationwide anti-crime campaign, 
involving the Chinese police and court system in fighting piracy. 
Production (but unfortunately not the availability) of pirated 
copyrighted works has dropped significantly.
    Lack of enforcement of intellectual property rights remains a 
significant problem in China, particularly for trademarked products and 
copyrighted works. China's leaders recognize the need for more 
effective action to address this continuing problem. Ambassador 
Zoellick welcomed the initial progress they have made through such 
actions as the new anti-counterfeiting ``campaigns'' initiated in late 
2000 and continued through today. In recent consultations, Chinese 
officials reported that they had seized 119 million CDs and DVDs, and 
shut down 15 illegal CD production lines during 2001, bringing to well 
over 100 the number of such lines closed since 1996.
    Nevertheless, piracy and counterfeiting remain rampant in China. 
The United States continues to actively engage China to address these 
problems through bilateral consultations to ensure that the laws as 
enacted are consistent with China's WTO obligations and that China 
applies its laws in a manner that provides more effective protection of 
intellectual property rights. In fact, AUSTR Joseph Papovich and a full 
interagency team just returned from week long consultations in China. 
We will also be undertaking a review of China's implementation of its 
WTO TRIPs obligations in Geneva this year, and annually thereafter over 
the next 10 years.
    Specifically, in this most recent visit to China, we discussed the 
steps China is taking to implement its commitments in the WTO on the 
protection of intellectual property rights. This is a normal process 
among WTO members. One of China's WTO commitments is to share 
information and consult upon request with other WTO members about such 
implementation efforts. In our consultations we have been stressing 
issues of particular importance to us.
2001 Special 301 Review
    In the 2001 Special 301 review, we analyzed approximately 80 
countries, the largest number of countries ever reviewed, with 49 
countries recommended for specific identification and two subject to 
Section 306 monitoring. In this review we are focusing on three major 
issues:

   Ensuring proper and timely implementation of the TRIPs 
        Agreement.

   Second, controlling piracy of optical media products (music 
        and video CDs, and software CD-ROMs).

   Third, ensuring that government ministries worldwide ensure 
        enforcement of the use of legitimate software.

    While piracy and counterfeiting problems persist in many countries, 
progress has occurred in other countries. Significant positive 
developments are highlighted below:

   In February 2001, Turkey enacted long-awaited amendments to 
        its Copyright Law, with the goal of bringing Turkey into 
        compliance with the TRIPs Agreement.

   In February 2001, President Kim of Korea issued public 
        orders to the Ministries of Information and Communications and 
        the Ministry of Justice designed to strengthen their copyright 
        enforcement efforts.

   On March 20, 2001, the Danish Parliament approved 
        legislation making civil ex parte searches available. This is a 
        particularly important enforcement tool for the U.S. software 
        industry in fighting against unauthorized use of computer 
        software programs by commercial entities. The legislation was 
        signed into law on March 28, 2001.

   Hong Kong's amendments to its Copyright Ordinance, 
        clarifying end-user software piracy as a criminal offense, 
        became effective on April 1, 2001.

   In November 2001, Taiwan's legislature passed an optical 
        media management law, in response to the U.S. Special 301 
        process. Under the bill, fines were increased and the 
        government has the authority to seize machinery and products. 
        Due to the six-month transition period, it will be some time 
        before the effectiveness of Taiwan's enforcement effort will be 
        seen.
TRIPs Implementation
    Among our top priorities this year has been to ensure full 
implementation of World Trade Organization commitments on intellectual 
property. The WTO requires all members to enact and enforce copyright 
and other intellectual property protection. Obligations for developing 
countries became effective on January 1, 2000, while least-developed 
Members have until 2006 to implement most of the Agreements provisions 
and until 2016 for certain others.
    Progress continues to be made by developing countries toward full 
implementation of their TRIPs obligations. Nevertheless, a number of 
countries are still in the process of finalizing implementing 
legislation and establishing adequate enforcement mechanisms. The 
United States will continue to work with such countries and expects 
further progress in the very near future to complete the TRIPs 
implementation process. However, in those instances where additional 
progress is not achieved in the near term the United States will pursue 
our rights through WTO dispute settlement proceedings.
    Not only is compliance a legal matter under the WTO TRIPs 
Agreement, but it is an essential element in creating a favorable 
climate for investment, especially in Latin American countries facing 
economic slowdown.
Pirate Optical Media Production
    At the same time, however, our work must keep up with the very 
rapid advance of technology: as new software products and services 
develop, pirates quickly take advantage of them. Thus, we are focusing 
on the control of piracy in optical media--for example, music and video 
CDs, and software CD-ROMs.
    We have had some significant successes on this issue in recent 
years. Hong Kong is one case in point. Our expressions of concern were 
joined by a number of Hong Kong artists and copyright industry figures. 
In part because of this, Hong Kong has taken additional legislative and 
enforcement actions to combat optical media piracy, having already 
implemented model controls on optical media production.
    Malaysia, Macau and Taiwan are other examples. Having identified 
them as a growing source of pirate optical media production, we 
dispatched teams to Kuala Lumpur and Taipei to press them on the 
problem. As a result, Malaysia and Taiwan have enacted legislation and 
are completing the process of implementing controls on optical media 
production. Macau has also enacted such legislation and has taken 
important steps to reduce the magnitude of the problem.
    However, in certain cases persuasion and diplomatic pressure are 
not sufficient to ensure our trading partners implement controls on 
optical media production. Last month, after several years of 
negotiations, we imposed $75 million in sanctions on Ukrainian exports 
to the United States for Ukraine's failure to crack down on sound 
recording and optical media piracy, particularly its failure to pass an 
optical disc licensing law.
    We are also pressing the governments of Russia, Thailand, 
Indonesia, and the Philippines to implement such laws.
Internet Piracy
    As serious as the problem of optical media piracy is, the Internet 
is potentially even more problematic in that it has provided an 
efficient global distribution network for pirate products. Several 
approaches must be taken by governments to address this problem, 
including full implementation of the TRIPs Agreement's enforcement 
obligations to provide effective action and adequate deterrence against 
commercial piracy whether it occurs in the on-line environment or in 
the physical world.
WIPO Copyright Treaties
    We are actively consulting with U.S. industry to develop the best 
strategy to address Internet piracy. An important first step was 
achieved at the World Intellectual Property Organization, when it 
concluded two copyright treaties in 1996; the WIPO Copyright Treaty 
(WCT) and the WIPO Performances and Phonograms Treaty (WPPT). These 
Treaties help raise the minimum standards of intellectual property 
protection around the world, particularly with respect to Internet-
based delivery of copyrighted works.
    These Treaties represent the consensus view of the world community 
that the vital framework of protection under existing treaties, 
including the TRIPs Agreement, should be supplemented to eliminate any 
remaining gaps in copyright protection on the Internet that could 
impede the development of electronic commerce.
    Throughout the world, countries have recognized the importance of 
the Internet as a vehicle for economic expansion. In order to realize 
the enormous potential of the Internet a growing number of these 
countries are implementing the WIPO Treaties and are thus creating a 
legal environment conducive to investment and growth in Internet-
related businesses and technologies. In the competition for foreign 
direct investment in these industries, these countries now hold a 
decided advantage. Therefore, governments should ratify and implement 
the two WIPO ``Internet'' treaties, which clarify exclusive rights in 
the on-line environment and specifically prohibit the circumvention of 
technological protection measures for copyrighted works.
    Of the 159 members of WIPO, 28 have ratified the WPPT and 31 
countries have ratified the WCT. The United States deposited its 
instrument of ratification on September 14, 1999. As you know Mr. 
Chairman, the Senate Foreign Relations Committee was instrumental in 
this effort. This committee passed the resolution of ratification on 
October 21, 1998. Each of the Treaties requires that 30 countries 
ratify the treaty before it becomes effective. The WCT will come into 
force in March of this year. Ambassador Zoellick is committed to 
working internationally to promote ratification of these Treaties by 
our trading partners in close coordination with the Department of 
Commerce, the Patent and Trademark Office, the Copyright Office, and 
the Department of State.
    We are pursuing this goal in several ways. We are seeking to 
incorporate the highest standards of protection for intellectual 
property into every bilateral and regional trade agreement. We have 
already had our first success in this effort by incorporating the 
standards of the WIPO Treaties as substantive obligations in our FTA 
with Jordan. The Jordan FTA has laid the foundation for pursuing this 
goal in the free trade agreements we currently have under negotiation 
with Chile and Singapore as well as the Free Trade Area of the Americas 
(FTAA), and other FTAs yet to be launched. Moreover, our proposals in 
these negotiations will further update copyright and enforcement 
obligations to reflect the technological challenges we know today as 
well as those that may exist at the time negotiations are concluded 
several years from now.
    One additional way in which USTR is pursuing this objective is 
through negotiations with governments seeking to join the World Trade 
Organization. In accession negotiations with Albania and Croatia, for 
example, USTR obtained formal commitments from these governments to 
ratify the WIPO Copyright Treaties as a part of their protocol of 
accession.
    Finally, one of our longer term objectives is to bring the 
substantive obligations of the WIPO copyright treaties into the WTO as 
obligations for all WTO Members under the TRIPs Agreement. At that 
time, we would also intend to further update the TRIPs Agreement to 
ensure that it provides adequate and effective protection for 
intellectual property in the light of technological challenges that may 
occur in coming years.
Other Initiatives Regarding Internet Piracy
    As the next step in our effort to keep pace with the very rapid 
advance of technology, we are focusing our Special 301 reviews on 
Internet piracy. This is a major focus of the 2002 Special 301 Annual 
Review that we launch in March. Ambassador Zoellick will announce the 
results of this review at the end of April.
    In part because of USG efforts to raise awareness of the need for 
countries to enforce against all forms of piracy, several countries are 
moving beyond their fight against traditional forms of piracy to 
address the serious and growing problem of Internet piracy.
    As part of our intensive on-going interaction with China on piracy 
issues, in 2000 USTR wrote to Chinese Vice Premier Li Lanqing urging 
that China include in its current reform of its copyright law 
amendments to address Internet piracy, including implementation of the 
WIPO Copyright Treaties. China's new copyright law addresses certain of 
these Internet-related issues. We look forward to China's issuance of 
detailed implementing regulations and rules in the near future. We have 
identified some additional provisions which we believe will further 
enhance protections in the internet environment and clarify the new 
copyright law.
    Beyond this, the Chinese Ministry of Culture has issued a circular 
regarding on-line business activities of audio-video (A/V) products. 
The circular stipulates that the A/V products sold on-line must be 
legal AV products and that sales of smuggled, pirated, and other 
illegal AV products are prohibited.
    The Supreme People's Court and certain Chinese courts have issued 
interpretations and rendered decisions involving copyright and piracy 
in the internet environment which have reinforced the rights of owners 
in the online environment is an act of infringement under their 
copyright law.
Government Use of Software
    The third component of this year's Special 301 initiative is 
government use of software. Our goal is to control ``end-user'' 
piracy--that is, the unauthorized copying of large numbers of legally 
obtained programs by government agencies.
    In October 1998, the President of the United States issued a new 
Executive Order directing U.S. Government agencies to maintain 
appropriate, effective procedures to ensure legitimate use of software. 
The President directed USTR to undertake an initiative to work with 
other governments, particularly those in need of modernizing their 
software management systems or about which concerns have been 
expressed, regarding inappropriate government use of illegal software.
    The United States has achieved considerable progress under this 
initiative since October of 1998. Countries that have issued decrees 
mandating the use of only authorized software by government ministries 
include China, Colombia, France, Greece, Ireland, Israel, Jordan, 
Hungary, Hong Kong, Lebanon, Macau, Paraguay, the Philippines, Spain, 
Taiwan, Thailand and the UK.
Preference Programs
    Another bilateral tool is preferential tariff treatment, such as 
the Generalized System of Preferences, the Caribbean Basin Initiative, 
the Andean Trade Preferences Act, and the Africa Growth and Opportunity 
Act. These programs provide duty-free treatment to certain products of 
beneficiary countries, subject to certain conditions, including 
adequate and effective protection of intellectual property rights. The 
threat of loss of GSP and ATPA benefits has proven to be an effective 
point of leverage with some of our trading partners.
    For example, we took action against Honduras because of the 
unauthorized broadcasting of U.S. satellite-carried television 
programing in response to a petition filed by the Motion Picture 
Association. After we withdrew $5 million dollars in GSP and CBI trade 
benefits Honduras agreed to address our concerns.
    More recently, on August 7, 2001, we suspended all of Ukraine's GSP 
benefits in response to Ukraine's failure to crack down on rampant 
sound recording and optical media piracy. 2001. We are currently 
reviewing a petition filed by the International Intellectual Property 
Alliance to revoke Brazil's GSP status as a result of it's inadequate 
protection of intellectual property rights.
Problem Countries
    We continue, however, to face serious problems in a number of 
countries in each part of the world.
    In Eastern Europe, our concerns include the Ukraine and Russia. In 
January, we sanctioned Ukraine for failure to shut down pirate CD 
manufacturing plants.
    In Latin America, we are focused on Brazil, Mexico, and Paraguay, 
where enforcement is dangerously weak and causes billions of dollars in 
losses for U.S. right holders annually. In Brazil, U.S. industry 
reports that in 2001 its trade losses from copyright piracy were over 
$900 million--the largest losses due to piracy in the hemisphere. 
Mexico has acted in previous years to improve its laws by enacting new 
legislation and has taken steps to increase its enforcement efforts. 
Regrettably, these efforts have not had a significant impact on 
reducing rampant piracy in Mexico and we will soon be reinitiating a 
bilateral working group with the Government of Mexico to press for more 
effective action.
    Paraguay was identified as a Priority Foreign Country in January 
1998. The subsequent Section 301 investigation terminated with the 
signing of a comprehensive Memorandum of Understanding (MOU) on the 
protection of intellectual property. Unfortunately, the implementation 
of the MOU has been inadequate and Paraguay continues to be a regional 
center for piracy and counterfeiting. The United States is concerned 
with these lapses in the implementation of the MOU and will seek 
consultations. If no progress is made on these issues in the coming 
year, then we may have no choice but to reactivate the Section 301 
investigation.
    We also remain focused on several economies in Asia, notably China, 
as I mentioned, but also Taiwan, Thailand, the Philippines, Indonesia, 
and Malaysia.
                     multilateral trade initiatives
    Bilateral negotiations are and will remain central to our efforts 
to improve intellectual property standards worldwide. However, as time 
has passed, our trading partners have begun to see the effect of 
stronger standards at home--that is, that strong intellectual property 
standards allow nations to develop their own high-tech and artistic 
industries.
    This allowed us to make a fundamental advance with the TRIPs 
agreement at the creation of the World Trade Organization in 1995. This 
was an historic achievement: it has required all WTO members to pass 
and enforce copyright, patent and trademark laws, and given us a strong 
dispute settlement mechanism to protect our rights. Thus we created a 
set of standards enforceable between governments and subject not only 
to our own trade laws but to multilateral rules.
Meeting Obligations
    The TRIPs Agreement granted developing countries until January 1, 
2000 to implement most provisions of the Agreement, and granted least 
developed countries until 2006. In past years, we have pressed 
countries wherever possible to accelerate implementation of these 
obligations. Now we are working to ensure that developing countries at 
a minimum are taking steps to finalize implementation of their 
obligations. We are also working with least-developed countries through 
bilateral and multilateral technical assistance to assist them in their 
effort to implement the agreement in a timely fashion.
Use of Dispute Settlements
    In the interim, we have been aggressive and successful in using WTO 
dispute settlement procedures to assert our rights in developed 
countries of American works, beginning with our initiation of the first 
TRIPs-related dispute settlement ease against Japan in 1996. We have 
since initiated an additional twelve cases, including:

   With Portugal for failing to apply TRIPs-levels of 
        protection to existing patents,

   Against Pakistan and India for it failure to provide a 
        ``mailbox'' and exclusive marketing rights for pharmaceutical 
        products,

   With Denmark and Sweden over the lack of ex parte civil 
        search procedures,

   With Ireland for failure to pass a TRIPs-consistent 
        copyright law,

   With Greece over rampant broadcast piracy,

   With Argentina over exclusive marketing rights and data 
        protection,

   With Canada for failing to provide a 20-year patent term in 
        all cases, and
   With the EU regarding regulations governing geographical 
        indications.

    We have brought complaints to address the failure of countries to 
implement TRIPs obligations of particular importance to the 
pharmaceutical, copyright, and trademark industry.
    For example, a significant success for us is the ease we brought 
against Ireland for failure to pass a TRIPs-consistent copyright law. 
As a result of our dispute settlement consultations, Ireland adopted 
the needed amendments to its copyright law and the U.S. and Ireland 
announced resolution of the WTO ease brought by the United States. The 
new law became effective on January 1, 2001.
    On March 20, 2001, the Danish Parliament approved legislation 
making civil ex parte searches available. The legislation was signed 
into law on March 28, 2001. In addition, the WTO Appellate Body decided 
in favor of the United States in a dispute with Canada regarding the 
term of protection for patents applied for prior to October 1, 1989, 
and recommended that Canada implement the recommendations of the 
dispute settlement panel within a reasonable time. Effective July 12, 
2001, Canada announced that it had enacted an amendment to its Patent 
Act to bring it into conformity with its obligations under the TRIPs 
Agreement.
    On March 22, 2001, the United States and Greece formally notified 
the WTO of the resolution of the dispute settlement case regarding 
television piracy. This was possible due to the sharp decline in the 
level of television piracy in Greece, passage of new legislation 
providing for the immediate closure of infringing stations, closure of 
several stations that had pirated U.S. films, and the issuance of the 
first criminal convictions for television piracy in Greece.
New Dispute Settlement Cases
    In the year ahead, we expect to be equally active at the WTO. We 
are aware of U.S. industry's concerns regarding compliance problems in 
a number of specific countries.
    We are hopeful that many of these situations can be resolved 
through consultations. If not, we are prepared to address the problems 
through dispute settlement proceedings, where necessary.
Accessions to the WTO
    The year 2001 saw the completion of over fifteen years of 
negotiations for the WTO Membership of the People's Republic of China. 
Three other long-term accession applicants, Lithuania, Moldova, and 
Taiwan also completed the accession process in 2001, bringing total WTO 
Membership to 144 as of January 1, 2002.
    Our negotiations on the accession of these economies and twenty-
eight other applicants seeking WTO membership offer us a major 
opportunity to improve intellectual property standards worldwide. These 
include a number of the countries in which our intellectual property 
industries have experienced significant piracy problems over the years 
such as Russia. With Russia, and all other applicants, we consider 
acceptance of the WTO requirement for enactment and enforcement of 
modern intellectual property laws as set out in the TRIPs Agreement a 
fundamental condition of entry.
Achieving Further Progress in the WTO TRIPs
    Finally, let me offer a few thoughts on the Doha Development 
Agenda.
    The next year presents us with an opportunity to make fundamentally 
important advances in intellectual property protection worldwide, 
including through further implementation of existing WTO obligations in 
many developing countries and through the accession negotiations. 
Furthermore, under the WTO's ``built-in agenda,'' we will complete a 
thorough review in TRIPs Council of developing-country implementation 
of TRIPs obligations. And, as I mentioned, begin a multi-year review of 
China's implementation of the TRIPs Agreement.
    In close coordination with U.S. industry, we chose not to seek new 
TRIPs negotiations as a priority in Doha. At a time when we are urging 
WTO Members to complete their efforts to fully implement the TRIPs 
Agreement, we felt it was premature to launch new negotiations. That 
being said, like other Members, we foresee the possibility of 
improvements to the TRIPs Agreement, in due course. Among other things, 
we believe that it will be important to examine and ensure that 
standards and principles concerning the availability, scope, use and 
enforcement of intellectual property rights are adequate, effective, 
and are keeping pace with rapidly changing technology, including 
further development of the Internet and digital technologies. But 
first, we will seek to establish these standards bilaterally and 
regionally through our FTA negotiations.
    We also expect that, once Members have the benefit of the 
experience gained through full implementation of the TRIPs Agreement, 
we will want to examine and ensure that Members have fully attained the 
commercial benefits which were intended to be conferred by the TRIPs 
Agreement. In any event, ``no consideration will be given to the 
lowering of standards in any future negotiation below those set forth 
in the TRIPs Agreement.''
                               conclusion
    Mr. Chairman, intellectual property protection is one of our most 
important and challenging tasks. We protect U.S. intellectual property 
rights to protect the research, investments and ideas of some of 
America's artists, authors, and private-sector and academic 
researchers. Protecting intellectual property rights also enhances 
America's comparative advantage in the highest-skill, highest-wage 
fields; and helps ensure that the extraordinary scientific and 
technical progress of the past decades continues and accelerates in the 
years ahead to the benefit of all mankind.
    In the past century, the commitment we have shown to enforce 
respect for intellectual property rights at home has helped to create 
the world's most technologically advanced economy; a flowering of new 
artistic forms from films to sound recordings and computer graphic art; 
and inventions in fields from medicine to aerospace that have improved 
lives and opened new worlds of experience.
    The implications of our international intellectual property 
policies--for prosperity, creative innovation and improved lives 
throughout the world--are no less. Congress, through passage of the 
Special 301 law in 1988, passage of the Digital Millennium Copyright 
Act in 2000 implementing the WIPO Internet Treaties, by providing 
strong intellectual property mandates in Trade Promotion Authority 
legislation, and in hearings such as this, deserves great credit for 
bringing public focus to these issues. We look forward continuing the 
effort together in the years ahead.
    Thank you, Mr. Chairman and Members of the Committee.

    The Chairman.  Mr. Larson.

STATEMENT OF HON. ALAN P. LARSON, UNDER SECRETARY FOR ECONOMIC, 
    BUSINESS, AND AGRICULTURAL AFFAIRS, DEPARTMENT OF STATE

    Mr. Larson.  Mr. Chairman, I also have a written statement 
which, with your permission, I would submit for the record.
    The Chairman.  It will be placed in the record.
    Mr. Larson.  Thank you. Mr. Chairman, we very strongly 
agree with what you and Senator Allen said at the outset, that 
the United States, as a knowledge-based and innovation-driven 
economy, has a profound interest in the protection of 
intellectual property rights. I would like to focus on how the 
State Department is part of the team that Ambassador Allgeier 
described by outlining some of the things we are doing in 
Washington, but also in the field, to support this effort.
    It begins the first day a foreign service officer walks 
into the State Department. We have training on IPR as an 
integral part of the training program. We also are training our 
mid- and senior-level people in IPR issues. And I am speaking 
with every outgoing ambassador about commercial advocacy and 
IPR issues. We used our awards program to draw attention to 
some of the success stories of both our younger officers as 
well as our ambassadors in pressing the case for IPR protection 
abroad.
    We support the Special 301 process that Ambassador Allgeier 
described by using our embassies to monitor other countries' 
activities, to report to the interagency process, but we also 
try to use the Special 301 not just as a report card but also 
as leverage to get improved performance out of our trading 
partners.
    The State Department is chairing an interagency group that 
is devoted to training for foreigners. This is an effort 
designed to prioritize and coordinate the various agencies that 
can contribute to training foreign government officials in IPR 
protection.
    The Chairman.  Training the foreign government officials?
    Mr. Larson.  Correct.
    The Chairman.  Teaching them how to----
    Mr. Larson.  Working with customs officials, working with 
regulatory officials. Some of it is just helping judges 
understand these issues. In Jordan, for example, we had a very 
effective training session that focused on judges.
    The Chairman.  Is it a hard sell?
    Mr. Larson.  Well.
    The Chairman.  I am not being facetious when I ask that.
    Mr. Larson.  No. I mean, I think part of what----
    The Chairman.  I am sorry to interrupt you.
    Mr. Larson [continuing]. ----my testimony is about is that 
we need a combination of pressure, but also persuasion. We 
profoundly believe that, for these countries, if they want to 
have an investment climate that works, if they want to attract 
foreign capital, if they also want to be an innovation economy, 
that they have to protect intellectual property. So we are 
involved in--as part of our effort--in a process of persuasion.
    I received a letter--two letters, in fact--late last year--
one from Jack Valenti and the other from Hilary Rosen, who you 
will hear more from later--about an initiative taken by our 
Public Affairs section in San Paolo, Brazil, which was designed 
to have a public-private partnership that brought in large 
segments of Brazilian society to discuss the benefits to Brazil 
of having stronger IPR protection. And it was a very successful 
effort, because it was really pitched from the standpoint of 
what was in their interests.
    Another initiative we have in this vein is to launch a Web 
site about IPR protection. It has been in the works for awhile. 
By coincidence, we got it up today. But it is--I think it is 
very good, and it is something that obviously we can build on 
as we go forward.
    It is important to just underscore quickly one of the 
points that Ambassador Allgeier raised about the international 
legal structure. I had the honor of testifying before this 
committee in 1998 on behalf of the two WIPO Internet treaties. 
And we do think those are very important initiatives. We were 
grateful that the Senate moved promptly to give advice and 
consent. And the copyright--the WIPO copyright treaty, has now 
been ratified by enough governments that it will enter into 
force next month.
    Without going into too much detail, Mr. Chairman, because 
it is outlined in my testimony, I do want to highlight that we 
have had a number of success stories. Ambassador Allgeier 
mentioned the persistent efforts that have resulted in Hong 
Kong in the passage of a good optical disk law and the shutting 
down of pirating production lines. In Greece we had an 
ambassador that pressed this issue strongly and was able to 
convince to the government to pass tougher enforcement laws. 
Similarly, in the United Arab Emirates, one of our ambassadors 
got very, very active on these issues and persuaded the 
government to launch raids on stores that were selling pirated 
computer software. In Paraguay, we had a young officer who just 
very, very actively pushed the government to accede to the WIPO 
Copyright Treaty as well as the WIPO Performances and 
Phonograms treaty. And there are many other examples, as well, 
where we are using our embassies abroad to support the 
government-wide effort to persuade other countries to respect 
intellectual property rights. We really do think we have made 
some progress, but we would be the first to acknowledge that we 
have an awful lot that we need to do in the future.
    [The prepared statement of Mr. Larson follows:]

    Prepared Statement of Alan Larson, Under Secretary of State for 
              Economic, Business and Agricultural Affairs

    Thank you for the opportunity to meet with you today to discuss 
intellectual property policy and enforcement. The United States is a 
knowledge-based, innovation-driven economy. The protection of 
intellectual property rights is critically important to our prosperity 
and economic leadership.
    The Department of State is fully committed to the Administration's 
goal of advancing the protection of intellectual property worldwide. At 
all levels of the Department, we are actively engaged in a cooperative 
effort that involves other Washington agencies, the private sector, and 
foreign governments.
    What I would like to do today is to touch on some recent trends in 
intellectual property protection, and then describe briefly the role of 
the Department of State.
           recent trends in intellectual property protection
    In assessing the state of intellectual property protection 
overseas, we see two complementary and positive trends in recent years. 
First, we observe a significant, if not readily quantifiable, increased 
appreciation of the benefits inherent in effective protection of 
intellectual property. More and more of our trading partners are coming 
to understand that their future growth and development depends in large 
part on their becoming active players in the knowledge-based economy. 
They also are coming to appreciate that strong intellectual property 
protection is necessary to create an attractive investment climate. In 
short, economic self-interest is becoming a very important factor in 
enhancing intellectual property protection overseas.
    Recent statistics about our own economy are illustrative. The 
copyright industries now account for about five percent of our GDP, and 
this sector has grown at twice the rate of the rest of the U.S. 
economy. The positive impact of intellectual property protection can 
also be seen in India's emergence as a dynamic competitor in the 
world's computer software sector after that country adopted higher 
levels of copyright protection. However, Indian scientists do not yet 
enjoy similar levels of patent protection for pharmaceutical products. 
As a result, domestic innovation and growth in that sector remain 
stymied.
    Although much more remains to be done, we believe we have made 
tangible progress in improving the level of intellectual property 
protection around the world. Many developing country WTO Members have 
passed domestic legislation and begun to implement enforcement measures 
to comply with their obligations under the TRIPs Agreement.
    Several years ago, I testified in support of the World Intellectual 
Property Organization (WIPO) ``Internet'' Treaties. The Senate did 
promptly give its advise and consent to these treaties. As a result, 
they are expanding the protection afforded by the TRIPs Agreement to 
the new technological environment and are providing a legal framework 
to facilitate the further development of e-commerce.
    I thank the members of the Committee for promptly ratifying these 
treaties. I am pleased to note the WIPO Copyright Treaty has been 
ratified by enough governments for it to enter into force in March. We 
continue to urge other governments to ratify as well the companion WIPO 
Performances and Phonograms Treaty.
    Although the trends for effective intellectual property protection 
are positive, significant challenges remain. The focus of this year's 
Special 301 review will be the growing problem of piracy of optical 
media (music CDs, video CDs, CD-ROMs, and DVDs).
    This pernicious form of piracy spreads quickly, infecting whole 
regions unless strong and effective measures are taken to prevent 
illicit operators from setting up shop. But piracy of optical media can 
be stopped if governments are willing to act--as did the Government of 
Bulgaria several years ago.
    When the pirates moved into new fields of opportunity in Ukraine, 
the Department and our Embassy in Kiev began working intensively with 
USTR, other government agencies and the private sector to press the 
Government of Ukraine to close down pirating facilities. For a time, 
our efforts were somewhat successful, but the commitment of the 
Government of Ukraine unfortunately did not last. Last year's 
designation of Ukraine as a Priority Foreign Country and the recent 
imposition of sanctions sends a strong signal that we will not tolerate 
wanton piracy of our intellectual property.
    Another priority will be implementing initiatives to proactively 
combat computer software piracy. The Department of State is working 
closely with USTR and the private sector to get our trading partners to 
require government ministries and offices to use only authorized 
software.
    In addition, we are working closely with USTR and other Washington 
agencies to help ensure that WTO Members comply fully with their 
legislative and enforcement obligations under the TRIPs Agreement. 
These obligations came due for developing countries on January 1, 2000.
    The success we achieve through these and other intellectual 
property initiatives depends on the close and constructive relationship 
we enjoy with the private sector. The progress we have made to date has 
been and will continue to be a joint enterprise.
              the state department's role in intellectual
                    property policy and enforcement
    The Department of State has as its primary mission using U.S. 
foreign policy tools to protect Americans' security and prosperity. The 
protection of intellectual property abroad figures prominently among 
our international economic objectives. Our Ambassadors and embassy 
country teams around the world are devoted to promoting the protection 
of intellectual property, by mobilizing government agencies in the 
field, host government officials and the private sector.
Internal Preparation
    New Foreign Service officers learn about the Department's policy in 
this area as they enter on duty. Members of each orientation class are 
briefed on the importance of intellectual property protection, and the 
key place it occupies in our international economic policy agenda.
    We also provide intellectual property training as part of our mid 
and senior level professional courses. Specialized training for 
economic officers includes instructional modules on intellectual 
property. We also provide a stand-alone course on intellectual property 
that is geared specifically to economic officers being assigned to 
positions in countries where intellectual property issues are 
particularly challenging.
    Chiefs of Mission and Deputy Chiefs of Mission are briefed on 
intellectual property issues before assuming their duties. They and 
Economic officers headed to overseas posts receive briefings from other 
agencies and the private sector. A number of representatives from the 
intellectual property organizations we receive briefings from are 
testifying before the Committee today.
    Finally, I have made it a practice to meet with outgoing Chiefs of 
Mission. The importance of intellectual property protection is high on 
my agenda in all these sessions.
Cooperative Activities
    The Department of State plays a strong role in the annual Special 
301 review of country intellectual property practices. Participating 
agencies rely heavily on the accurate, up-to-date information we 
receive from our posts abroad. The objective of the review is not 
simply to give our trading partners an intellectual property report 
card. Rather, we seek to employ Special 301 to leverage real progress 
with host governments. In this regard, our Ambassadors and embassy 
officers overseas play a critical role. They are well positioned to 
effectively convey our views and they have the on-the-ground contacts 
needed to work the issues with host governments and the private sector.
    Our participation in the Special 301 process is a year-long 
commitment to bilateral engagement with countries worldwide. Our posts 
are continuously looking for ways to bring together all parties of the 
intellectual property community, and to help them work together more 
effectively.
    With growing evidence of links between intellectual property crime, 
organized crime and funding for terrorist activities, embassy country 
teams are seeking to foster closer ties between U.S. Government 
agencies and the foreign counterparts who work these enforcement 
issues.
    Another focus of the Department of State's work is our active 
participation in international negotiations. At the WTO Ministerial in 
Doha, I worked closely with my USTR colleagues and the private sector 
to reach agreement on a Declaration on TRIPs and Public Health. The 
Declaration fended off efforts to weaken TRIPs by reaffirming the 
commitment of WTO Members to the TRIPs Agreement and by drawing 
attention to the flexibilities the Agreement already affords WTO 
Members in pursuing their public health objectives.
    The Department of State has joined with other U.S. Government 
agencies in working closely with the World Intellectual Property 
Organization (WIPO). WIPO saves our inventors and innovators countless 
dollars as well as time in registering patents overseas. WIPO also 
provides a valuable service in training developing countries to improve 
their intellectual property regulatory regimes.
Training, Technical Assistance and Public Diplomacy
    As developing countries strive to improve their intellectual 
property regimes, the U.S. Government and the private sector are 
receiving an increasing number of requests for intellectual property 
training and technical assistance.
    The U.S. Agency for International Development (USAID) estimates it 
provided $7.1 million in assistance over the period 1999-2001 to 
developing and transition countries to support their implementation of 
the TRIPs Agreement. The Department of State's Bureau of International 
Narcotics and Law Enforcement allocated about $377,000 for IPR training 
in FY 2001. Our Bureau of Educational and Cultural Affairs brings to 
the United States officials, academics, journalists and business people 
from developing countries to show them the benefits of protecting 
intellectual property rights--thereby creating advocates for stronger 
intellectual property protection.
    The U.S. Customs Service, U.S. Patent and Trademark Office, the 
Federal Bureau of Investigation, the Department of Justice, the 
Department of Commerce, the Copyright Office of the Library of 
Congress, and the Office of the U.S. Trade Representative participate 
in these training and assistance activities by providing experts for 
programs funded by USAID, the Department of State, and by their own 
budgets. U.S. industry also funds and provides significant amounts of 
training to developing countries.
    The Department of State chairs an Intellectual Property Rights 
Training Coordination Group that is working with other U.S. agencies 
and the private sector to prioritize program proposals and to ensure we 
get the most out of our training and assistance investments. It 
responds to training and assistance recommendations from both our 
embassies overseas and industry. To enable government and the private 
sector to more effectively pool their efforts, the Group is working to 
improve a database of training programs. Examples of some of these 
programs include;

   Seminars sponsored by USAID for the Jordanian public and 
        private sector on benefits of intellectual property protection 
        and training for Jordanian judges on intellectual property 
        laws.

   International Law Enforcement Academies' IPR enforcement 
        programs, where State provides the facility and program funding 
        and USG enforcement agencies provide the substantive expertise.

   Conferences sponsored by the Department of Commerce under 
        its Commercial Law Development Program (CLDP), which bring in 
        officials from foreign governments. A recent conference in 
        Croatia brought together officials from Albania, Bosnia and 
        Herzegovina, Bulgaria, Croatia, FYR Macedonia, and Romania.

    Our embassies and consulates also have hosted assistance programs 
sponsored by the private sector. For example, in Bulgaria, the Motion 
Picture Association of America (MPAA) sponsored a program to train 
border control police and customs officers on identification of pirated 
product. In Croatia, the Business Software Alliance (BSA) provided 
training on software piracy for Croatian trade inspectors.
    Some of the most effective training programs are educational 
efforts organized or sponsored by the Department of State's public 
diplomacy corps. A recent example of this was a conference organized by 
the Public Affairs Section of our Consulate General in Sao Paulo. The 
purpose of the conference was to explore ways to combat piracy in the 
Brazilian market, including better training and public/private 
collaboration.
    The conference was itself a shining example of the partnering that 
is possible with the private sector. The Consulate General staff worked 
with the Brazilian government and industry representatives to organize 
the conference, drawing in law enforcement officials, representatives 
of anti-piracy groups, and leaders from the entertainment and software 
industries. The value of this conference--and this type of initiative--
was confirmed by positive post-conference comments from both the Motion 
Picture Association of America (MPAA) and the Recording Industry 
Association of America (RIAA).
    Other examples of public diplomacy efforts include:

   Sponsoring officials from developing countries to travel to 
        the United States as part of the State Department's 
        International Visitors Program to study intellectual property 
        protection in the United States.

   Sending intellectual property experts abroad as speakers to 
        various developing countries.

   Hosting our widely appreciated WorldNet interactive 
        videoconferences, which enable intellectual property experts to 
        reach audiences in several countries at the same time.

   Creating an intellectual property web site for foreign 
        audiences which will include key reports, international 
        agreements, links to relevant U.S. Government web sites, fact 
        sheets, and original articles on current intellectual property 
        issues. This web page will be launched today.
Success Stories
    The educational work of our embassies and consulates, their 
reporting and their interventions with foreign government officials 
have helped the U.S. Government in many other instances to advance 
intellectual property protection. Following are several examples:
    In Hong Kong, persistent efforts on the part of consulate officers 
paid off when authorities passed a good optical disk law, shut down 
pirating production lines and drove pirating distributors out of 
business.
    In Singapore, embassy interventions convinced the local authorities 
to shut down ``night markets'' which sold pirated merchandise.
    In Greece, ambassadorial pressure in a sustained campaign played a 
key role in convincing the government to pass tougher enforcement laws. 
As a result, audio/visual piracy--specifically TV stations showing 
movies without paying royalties--have declined from $100 million to 
near zero.
    In the UAE, repeated representations by the Ambassador resulted in 
successful raids on stores selling pirated computer software. Also, the 
Ambassador was given the Department's Charles E. Cobb Award for helping 
PhRMA and the UAE reach agreement ending UAE piracy of U.S. 
pharmaceutical products.
    In Slovenia, embassy interventions, using Special 301 as leverage, 
convinced the government to pass legislation protecting test data 
submitted to obtain marketing approval for pharmaceuticals.
    In Paraguay, embassy efforts helped convince the government to 
accede to both the WIPO Copyright Treaty and the WIPO Performances and 
Phonograms Treaty. The officer who led this effort was given the 
Department's Charles E. Cobb, Jr. Award for Initiative and Success in 
Trade Development.11In South Africa, embassy initiatives led to the 
founding of a group representing all intellectual property industries 
and companies in the country. The group then developed ways for customs 
agents at remote borders to better identify counterfeit goods.
    In Argentina, the Deputy Chief of Mission was honored by PhRMA for 
his outstanding support as a determined advocate for adequate and 
effective intellectual property protection for pharmaceutical products 
in that country.
                               conclusion
    The State Department's contribution to intellectual property 
protection rests in large part on our ability and commitment to work 
with all relevant parties, public and private, both here and abroad. We 
welcome this broad responsibility and opportunity. The challenge for 
the United States and for other countries throughout the world to 
strengthen their ``innovation economies'' relies not only on protection 
of intellectual property, but also on the free flow of information and 
ideas that is characteristic of democracy.

    The Chairman.  Thank you very much. Mr. Gordon, welcome. 
Thanks for--did you come in today? Or yesterday?
    Mr. Gordon.  Yesterday.
    The Chairman.  Thank you for making the trip. It's a long 
haul. We appreciate it.
    Mr. Gordon.  Mr. Chairman----
    The Chairman.  Before you begin, I have one question. Is 
this job you are doing out there now easier than when you were 
running the drug unit?
    Mr. Gordon.  More political. [Laughter.]
    The Chairman.  Probably more interesting.
    Mr. Gordon.  Everyone in our side gets on the side of drug 
enforcement. It's harder to balance the other things when you 
are the U.S. Attorney.
    The Chairman.  Thank you.
    Mr. Gordon.  Thank you very much for having me.

STATEMENT OF JOHN S. GORDON, U.S. ATTORNEY, CENTRAL DISTRICT OF 
                           CALIFORNIA

    Mr. Gordon.  Mr. Chairman and Senator Allen, I am pleased 
to testify today on the efforts of the Department of the 
Justice and the U.S. Attorney's office in Los Angeles to combat 
the high-tech piracy of intellectual property.
    Our country leads the world in the creation and export of 
intellectual property, or IP. The IP sector of our economy 
faces grave threats from high-tech pirates who counterfeit or 
copy computer chips and computer software programs, motion-
picture video tapes and DVDs, and music CDs. IP criminals also 
manufacture and sell unauthorized access devices which allow 
people to receive satellite TV programs without paying for 
them. In each case, criminals steal the profits that rightfully 
belong to the creators or makers of the IP being infringed or 
stolen.
    High-tech IP pirates operate throughout the U.S. and around 
the world. Based on our experience in Los Angeles, the largest-
scale IP pirates operate out of Asia, and Asian organized crime 
is believed to bankroll and reap the lion's share of profits of 
many IP infringement schemes that we have uncovered in the 
central district.
    In large part due to the funding and the personnel 
allocations provided by Congress to fight computer and IP 
crime, the Department has set up ten units around the country 
referred to earlier by Senator Allen, dubbed ``Computer Hacking 
and Intellectual Property,'' or CHIPS units, composed of 
prosecutors specially trained to combat computer and IP crime. 
Such units have been established in San Jose, Los Angeles, San 
Diego, Seattle, Dallas, Atlanta, Boston, Brooklyn, Manhattan, 
and Alexandria, Virginia.
    In Los Angeles, we formally established our CHIPS unit last 
year. Over the last two years our office has prosecuted more 
than 50 defendants for a variety of high-tech IP offenses. 
Those have included the trafficking of high-quality counterfeit 
versions of the latest Microsoft software programs, the 
smuggling from Far East countries of counterfeit Microsoft 
software and accompanying packaging and licensing paperwork, 
illegally copying software and high-security computer chips for 
arcade-style video games and illegally modifying Intel computer 
chips to run at higher speeds, then re-marking the chips to 
reflect the higher speeds without informing the consumer, 
thereby allowing the seller to command a higher price while the 
consumer and Intel are both defrauded, and finally 
manufacturing and selling counterfeit DirecTV access cards 
which allow people to steal satellite programming without 
paying for it.
    In the Central District of California, we recently 
convicted the first two defendants in an international anti-
piracy investigation that has been directed and is being 
directed by DOJ's Computer Crimes and Intellectual Property 
Section, or CCIPS. Operation Buccaneer targeted a high-level 
Warez organization, an international underground network that 
obtains software, rips it--that is, removes the security 
devices that are designed to prevent unauthorized duplication--
and then posts it on the Internet for use by other members of 
the group, sometimes before the software is commercially 
released--again, referring to what the Chairman talked about in 
his opening statement.
    These organizations are believed to be responsible for the 
vast majority of pirated software, games, and movies available 
on the Internet today. In Operation Buccaneer, CCIPS is working 
with my office in Los Angeles, as well as several other U.S. 
Attorney's offices, the Customs Service, and various foreign 
law-enforcement agencies to mount a coordinated international 
attack on major Warez leaders and members. Approximately 20 
foreign searches have been conducted in the U.K., Australia, 
Finland, Norway, and Sweden. We're working to form and solidify 
international relationships and interagency cooperation that 
are required to successfully conduct such investigations.
    We're also working with industry victims such as the Motion 
Picture Association of America to identify and apprehend 
individuals using the Internet to illegally distribute 
copyrighted motion pictures and other creative works. We're 
working with DirecTV and other satellite TV companies to 
identify and apprehend computer hackers who circumvent the 
security features that allow people to steal satellite 
programming. We're infiltrating software piracy and trafficking 
rings that use the Internet to carry out crimes.
    The Customs Service continues to aggressively target and 
intercept organized rings which smuggle goods into our country 
through Los Angeles and Long Beach Harbors and LAX. And in the 
Central District, we also intend to continue to conduct 
industry outreach and facilitate interagency cooperation and 
conduct IP crime training for our agents and prosecutors.
    CCIPS at DOJ intends to continue to conduct specialized IP 
training for prosecutors and investigators from all over the 
world who both come here and are trained elsewhere. That 
training is designed to help solidify the effective 
international alliances that are necessary to combat IP piracy.
    I thank you for the opportunity to address the committee on 
these important issues, and I would be happy to answer any 
question you might have.
    [The prepared statement of Mr. Gordon follows:]

 Prepared Statement of John S. Gordon, United States Attorney, Central 
                         District of California

        computers, cyberspace, and the global reach of ip crime
    Mr. Chairman and Members of the Committee, my name is John Gordon. 
I am the United States Attorney for the Central District of California 
(CDCA), the nation's most populous Federal judicial district with over 
fifteen million residents. It is my privilege to appear before you 
today to discuss the national and international efforts of the 
Department of Justice (DOJ) as a whole and the U.S. Attorney's Office 
(USAO) in Los Angeles in particular to combat the infringement of 
intellectual property. This is an extremely important topic, and I 
commend the Committee for holding this hearing.
    Intellectual property, often referred to as ``IP,'' is a vital part 
of our economy. As we continue to shift from an industrial economy to 
one that is more dependent on information technology, the assets of 
this country, including software, music, and other digital products, 
are increasingly IP-based. Additionally, the health of the U.S. economy 
depends on consumers trusting that the products they buy are legitimate 
and safe, which in turn requires the vigorous protection of registered 
trademarks. Furthermore, the incentive of American businesses to 
produce innovative products and designs depends in part upon protection 
of their trade secrets from theft by other domestic and foreign 
businesses. The protection of copyright, trademark, and trade secrets 
is the protection of IP.
    The United States leads the world in the creation and export of IP 
and IP-related products. Not surprisingly, the infringement of IP 
rights is particularly harmful to our economy. High-tech thieves 
counterfeit computer chips and computer software programs and 
accompanying packaging and pass the products off as authentic. Software 
pirates obtain computer source code or strip the encryption features of 
software, movie, or music CDs or DVDs, and unlawfully duplicate and 
distribute virtually identical copies of such copyrighted goods. 
Crooked computer programmers obtain the code used in satellite TV 
access device cards and manufacture and sell unauthorized access cards 
to people who don't want to pay monthly fees for satellite programming. 
In each case, criminals are stealing the profits that rightfully belong 
to the creators or makers of the copyrighted, trademarked, or otherwise 
protected property.
    High-tech counterfeiters, software pirates, and those who engage in 
economic espionage are as different as the intellectual property they 
counterfeit or steal. They can be computer administrators or computer 
hackers, or members of organized criminal groups that have moved into 
the IP field. Many copyright and trademark pirates operate out of 
countries, often located in Asia or Eastern Europe, where counterfeit 
and imitation products can be made inexpensively by using underpaid 
laborers.
    DOJ is charged with investigating and prosecuting Federal IP 
violations. Primary investigative and prosecutorial responsibility 
within DOJ rests with the USAOs and the Federal Bureau of Investigation 
(FBI), with the support and coordination of DOJ Criminal Division's 
Computer Crime and Intellectual Property Section (``CCIPS''). CCIPS is 
DOJ's highly specialized team of over two dozen attorneys who focus on 
computer and high-tech crime. CCIPS works cooperatively with the 93 
USAOs across the country through the Computer and Telecommunications 
Coordinators (CTCs) who work in each USAO. CTCs are Assistant U.S. 
Attorneys who have been specially trained in investigating and 
prosecuting computer crime cases and IP matters. In addition to the 
nationwide CTC network, in July 2001, DOJ announced the formation of 
ten highly specialized prosecutorial units dedicated to fighting 
cybercrime in districts with a targeted need. These units have been 
dubbed Computer Hacking and Intellectual Property (or ``CHIPs'') units. 
CDCA is one of the districts that has formed a CHIPs unit to mount a 
focused and specialized attack on cybcrcrime.
    The USAO in Los Angeles is on the front line of IP rights 
enforcement. Los Angeles and Long Beach are major international ports 
serving as the gateway for billions of dollars of imports from Asia. A 
significant proportion of counterfeit goods entering the country 
travels through those ports. Accordingly, we work closely with the U.S. 
Customs Service to stem the flow of such contraband. Many high-tech 
industries are also located in the CDCA. Los Angeles is the 
entertainment capital of the world. It is home to the motion picture 
and recording industries, as well as numerous high-tech developers, 
manufacturers, and distributors, big and small. While large businesses 
are often victimized by IP crime, small businesses, which comprise a 
sizeable portion of the Southern California economy, can be devastated 
by organized commercial-scale piracy. Unfortunately, technology has 
made such large-scale piracy more common in the U.S. and around the 
globe.
    The burgeoning use of the Internet and digital media has spurred 
the international growth of IP. Software, music, and movies have all 
benefitted from technological advancements related to computers and the 
Internet. However, these technological advances have also produced new 
means of illegally reproducing and distributing copyright and trademark 
protected material. Congress has responded to this mounting problem by 
enacting new criminal laws and amendments to the criminal copyright 
statute that prohibit such misappropriation. The 1997 amendments made 
by the No Electronic Theft (NET) Act extended Federal criminal 
copyright law to large-scale, not-for-profit, unlawful reproduction and 
distribution of copyrighted works. However, IP infringers are evolving 
with the pace of technology.
    For example, there is a new brand of organized high-tech IP piracy, 
discussed in detail below, that operates internationally and engages in 
the large-scale infringement of digital media using the Internet. The 
Internet's emerging role in IP infringement virtually guarantees that 
we will witness a growth in such conduct, requiring many more such 
investigations. Furthermore, because the Internet has no borders, these 
cases will necessarily require a greater focus on international 
investigations. Fortunately, we are already experiencing success in 
tackling these new challenges.
             the evolution of doj's ip enforcement program
    The enforcement of IP rights has been a DOJ priority since July 
1999, when the Attorney General's Intellectual Property Rights 
Enforcement Initiative was announced. Since then, the USAOs, working 
cooperatively with DOJ, CCIPS, the FBI and Customs, have been making 
criminal IP enforcement a priority by increasing the number and quality 
of criminal IP investigations and prosecutions. Today's IP enforcement 
effort is a multi-pronged, multidisciplinary effort.
    As I mentioned earlier, the formation of the CHIPs units represents 
DOJ's evolving effort to fight crime in the digital age. New CHIPs 
units have been established in Los Angeles, San Diego, Atlanta, Boston, 
New York (Brooklyn and Manhattan), Dallas, Seattle and Alexandria, 
Virginia. The units are based upon a model pioneered by the USAO in the 
Northern District of California, where the concept has proven effective 
in prosecuting cybercrime and IP crimes. Districts such as the CDCA 
were chosen for the CHIPs program because of a significant 
concentration or explosive growth of high-tech industry, or the 
presence of other likely targets for IP or computer crimes. In the 
CDCA, we have six prosecutors in Los Angeles and two in our Orange 
County branch office dedicated to prosecuting complex computer crimes, 
including high-tech IP offenses. The expertise of the prosecutors in 
these units, as well as in CCIPS, will allow us to continue the success 
we have had to date and to ensure that in the future, DOJ will continue 
to battle effectively against IP crime.
    In the meantime, CCIPS has coordinated prosecutions with the USAOs, 
focused on creating specialized IP training courses for investigators 
and prosecutors, streamlined the victim-industry referral process, 
developed relationships with affected industries, and worked with 
Congress and the Sentencing Commission to improve the sentencing 
guidelines for IP crimes. CCIPS has also been tackling the 
international IP issues that are becoming increasingly important to 
American IP rights enforcement.
    Realizing the significant international aspects of IP enforcement, 
the Department has concentrated its international efforts on boosting 
the visibility and attention given to IP enforcement in four important 
areas: coordinating international training efforts to address specific 
enforcement-related issues; identifying bilateral and multilateral 
forums to promote investigative cooperation; coordinating efforts with 
other agencies charged with promoting effective IP enforcement regimes; 
and integrating the latest empirical data and trends involving 
transborder IP crime into DOJ's enforcement operations. Where 
appropriate, the U.S. government has encouraged our foreign 
counterparts to create specialized units devoted to investigating and 
prosecuting IP crime. DOJ has also participated in numerous training 
courses sponsored by the U.S. Government and industry, both within the 
U.S. and overseas, especially in targeted countries where IP crime is 
prevalent.
    These multi-pronged efforts together encompass DOJ's IP program. 
Together they are advancing our campaign to prevent and, where 
necessary, prosecute IP crime in the U.S. and abroad.
                   the cdca's ip enforcement efforts
    Over the past two years, under the IP initiative, the USAO in Los 
Angeles has prosecuted a wide variety of IP crime. We have prosecuted 
more than 50 defendants for an array of high-tech IP offenses. 
Summarized below are examples of cases that we have successfully 
prosecuted:
Software Piracy
   September 2000--a defendant from Plano, Texas was convicted 
        of running a trafficking ring that purchased and distributed 
        counterfeit Microsoft software through a company in Cincinnati, 
        Ohio. The black-market value of the software was over $600,000. 
        Defendant was sentenced to one year in prison and ordered to 
        pay more than $650,000 in restitution to Microsoft.

   February 2001--a man who sold approximately $30,000 in 
        counterfeit software from his home was convicted of selling 
        counterfeit Microsoft software. The defendant previously 
        entered into a pre-trial diversion agreement with the 
        government to avoid the filing of charges against him if he no 
        longer engaged in selling counterfeit software. Within weeks of 
        signing the agreement, however, defendant once again was 
        advertising, manufacturing and selling counterfeit software.

   June 2001--a woman was arrested by U.S. Customs agents for 
        selling cutting-edge pirated software including Windows 
        Millennium Edition. Search warrants were executed, resulting in 
        the seizure of over $7 million in counterfeit software. The 
        woman has pled guilty and is pending sentencing.

   August 2001--FBI agents raided several locations after a 
        year-long operation to infiltrate a Microsoft software piracy 
        ring. Agents found over 10,000 units of counterfeit Windows 
        operating systems as well as counterfeit certificates of 
        authenticity. Through the use of a confidential informant, 
        investigators were able to learn of the ring's operation to 
        import counterfeit products from Asia and sell them in the 
        United States. Four defendants were indicted, have pled guilty 
        to IP offenses, and are awaiting sentencing.
Counterfeit Computer Chips
   June 2000--Two defendants were arrested and later were 
        convicted of copying software and high-security computer chips 
        for arcade-style video games. Defendants developed a method of 
        circumventing the security technology in the original chips 
        which enabled the defendants to copy the software and chips.

   1999-2000--defendants obtained low-speed Pentium II computer 
        chips and modified the chips to enable the chips to run at a 
        higher speed. The chips were then repackaged into counterfeit 
        Pentium II cases and retail boxes which reflected the new 
        higher speed and were sold to small computer retailers in Los 
        Angeles, San Jose, Boston, and North Carolina. The counterfeit 
        chip casings were obtained from suppliers in Taiwan. The chips 
        were destined for or sold in the domestic retail chip market 
        through small computer retailers. The re-markers typically set 
        up front companies in nominee names to sell to these retailers. 
        While the retailers often knew they were buying re-marked chips 
        because they purchased the illegal chips at prices 
        substantially below the normal market price, consumers 
        purchased the chips at the full retail price and believed they 
        were purchasing an authentic Intel product along with Intel's 
        customer support. Intel received numerous calls from consumers 
        who believed that they purchased an authentic Intel product. 
        Not only did consumers get defrauded, but in some instances, 
        the counterfeit chips may have caused computer fires because 
        the chips were running faster than they were designed to run. 
        In a related case, chips were stamped with a red lobster, which 
        is the mark of a specific Taiwanese organized crime group 
        (reminiscent of kilos of cocaine being stamped with a specific 
        mark or word to designate the particular Colombian organization 
        that manufactured the cocaine). Intel has seen similar marks in 
        other cases.
Satellite Signal Theft--DirecTV
   August 2000--14 defendants in a nation-wide sweep were 
        arrested for stealing satellite signals in connection with 
        selling unauthorized and counterfeit DirecTV access cards. All 
        of the defendants were convicted and received sentences ranging 
        from probation to 15 months imprisonment.
    Our newly formed CHIPs Unit has a number of other cases currently 
under investigation that will continue our aggressive pursuit of IP 
crime.
  recent national success in ip enforcement: internet software piracy
    The intersection of IP infringement and the burgeoning use of the 
Internet has produced a new high-tech means of committing large-scale 
copyright infringement. International underground networks with 
thousands of members from countries spanning the globe have organized 
themselves into competitive gangs that obtain software, ``up'' it (that 
is, remove various security features designed to prevent unauthorized 
duplication of the software) and post it on the Internet for use by 
other members of the group--sometimes before the software has been 
commercially released. These high-level ``Warez'' (as in soft-warez) 
organizations are believed to be responsible for the vast majority of 
the pirated software, games and movies available on the Internet today. 
The top-level groups are highly structured, security-conscious 
organizations. Frequently, the members of these groups never meet and 
know each other only through their screen names. The top Warcz groups 
use the latest technology to expand their reach and avoid detection by 
law enforcement.
    To provide some idea of the volume of illegal material available on 
these sites, many archive sites contain 2,000 gigabytes or more of 
pirated software. 2,000 gigabytes of software is equivalent to 1.5 
million, 3 1/4-inch diskettes full of copyrighted material. The 
estimated retail value of the material expected to be seized from a 
major archive site is in the millions of dollars.
    In December 2001, DOJ and the Treasury Department dealt a major 
blow to Warez organizations. DOJ, in conjunction with the U.S. Customs 
Service, the FBI, and various foreign law enforcement agencies, 
simultaneously executed over 100 search warrants in three operations in 
what is to date, the most significant Federal law enforcement action 
ever taken against copyright piracy on the Internet. These operations, 
dubbed ``Buccaneer,'' ``Bandwidth,'' and ``Digital Piratez,'' struck at 
all aspects of the Warez illegal software, game and movie trade. The 
CDCA, which participated in Operation Buccaneer, recently took the 
first guilty pleas in the case from two defendants who used UCLA's 
computer systems to support the group's software piracy. As part of 
their pleas, the defendants agreed that their activities caused $5 
million in loss to industry.
    An important and unprecedented aspect of the December 2001 
operations is that the investigation did not stop at this nation's 
borders. U.S. law enforcement worked closely with law enforcement from 
six foreign countries to identify, target and execute searches against 
major Warez leaders and membership conducting their illegal activity 
from overseas. Our foreign counterparts should be commended for their 
efforts in what has been a truly significant cooperative effort to 
combat global piracy. In Operation Buccaneer, over 20 foreign searches 
were conducted in the United Kingdom, Australia, Finland, Norway and 
Sweden against major players in these international syndicates. We 
anticipate future success in the investigation of these sorts of 
transborder IP crimes and are working to form and solidify the 
international relationships and inter-agency cooperation that are 
required to successfully conduct such investigations. We cannot 
effectively combat software piracy unless it is confronted on an 
international scale.
                             the road ahead
    The CDCA's goal is to increase the quantity and quality of high-
tech IP investigations and prosecutions. We are working with industry-
victims such as the Motion Picture Association of America to identify 
and apprehend individuals using the Internet to illegally distribute 
copyrighted motion pictures and other creative works. We are working 
with DirecTV and other companies to identify and apprehend computer 
hackers who are circumventing security features to steal satellite 
programming and other satellite signals. We are infiltrating software 
piracy and trafficking rings that use the Internet to carry out their 
crimes. The Customs Service continues to aggressively target and 
intercept organized rings that smuggle goods into this country through 
our major ports and through our major airport--LAX. We will also 
continue to conduct industry outreach and facilitate inter-agency 
cooperation in IP enforcement, and will continue to conduct IP crime 
training in our district for agents and prosecutors.
    The funding that Congress recently provided for additional 
Assistant U.S. Attorneys is greatly appreciated by the CDCA and by DOJ. 
It will help us more effectively pursue our law enforcement 
initiatives. In addition, the USA Patriot Act has provided prosecutors 
valuable tools to streamline the collection of essential electronic 
evidence and identify high-tech IP pirates. We greatly appreciate your 
support for our work as it continues to produce results.
    Thank you for the opportunity to address this Committee on these 
important issues. I would be pleased to answer any questions you might 
have.

    The Chairman.  Thank you very much. With the permission of 
my colleagues, we will do--what time is the first vote? We 
could do ten-minute rounds. We'll do ten-minute rounds.
    Senator, I do not know why you are so far down. You are 
welcome up here.
    Senator Boxer.  That's okay. I have got my little props, 
and I am ready to go.
    The Chairman.  You just wanted to be next to Jack in his 
orange shirt. [Laughter.]
    Well, let me begin with you, Mr. Gordon. What can you tell 
us in an open session about the criminal organizations that are 
involved in large-scale piracy and counterfeiting? Are they the 
only types of activities these organizations are involved in, 
or do they also get involved in other criminal enterprises? Are 
they specialized, or are they part of broader operations? Are 
there any links you are aware of?
    Mr. Gordon.  I think it is both. I just met with the FBI 
and Customs people in Los Angeles who are most familiar with 
our current investigations and trends that they are seeing, and 
they tell me that in Los Angeles, on the West Coast, Asian 
organized crime is the number-one perpetrator. And Asian 
organization crime, as you are probably aware, does not limit 
itself to any particular type of crime. They go where the money 
is, and they oftentimes try to engage in a calculus of what 
makes the most money at the least risk, both of getting caught 
and, if you do get caught, how much time you are going to get.
    And while drug trafficking is extremely heavily penalized 
in this country, IP piracy, while it is improving, is still not 
at that level. So it is a fairly low-cost way of making a whole 
lot of money.
    The Chairman.  Quite frankly, that was my next question, 
and I would invite either of our other witnesses to respond. 
And that is that we have, for a long time--and this is not a 
criticism of anyone in the Senate, in the administration, or 
past administrations--but for the longest time, we have seemed 
to look at this, I think--having been Chairman of the Judiciary 
Committee for so many years prior to this and Chairman of the 
Criminal Law Subcommittee for two decades, I am part of the 
problem, what I am about to say--we have viewed, in terms--
there is an old expression. If you want to know what a society 
values most, take a look at what it punishes the harshest if 
that value is, in fact, infringed upon. And there is very 
little correlation between the punishment that flows from 
piracy of intellectual property and a similar punishment that 
would flow for doing something that affected the property value 
or had the same amount of money that was attendant to it if it 
were done in another form.
    For example, you know, you go to law school--as the U.S. 
Attorney will tell you, and my friend from Virginia--and, you 
know, we learn about petty theft and grand theft that relates 
to the amount of the value of the thing stolen. And yet if, in 
fact, you were to pirate, you know, a half a million dollars 
worth of intellectual property, notwithstanding the fact you 
may not have made a half million dollars from that piracy, you 
get one penalty. If you were to literally go out and rob a bank 
or rob--if you were to burglarize someone's home and steal a 
half million dollars in property, the penalty is much more 
severe.
    Do any of you have any view on whether or not the severity 
of the penalty and the treatment of this as a crime more than 
as an economic or trade issue would have any impact on the 
dimension of the problem?
    Mr. Gordon.  I did want to say that a big change in the IP 
piracy fight came when the penalties under the sentencing 
guidelines changed from just looking at the value of the knock-
off good, for example, rather than the value of the good that 
is being infringed. When that change was made and you start 
looking at how much the actual Microsoft product is worth, how 
much the actual movie that is being infringed, is worth, rather 
than the value of the knock-off, that increased penalties 
considerably, and I think predictably will have some greater 
deterrent value than just punishing someone for the value of 
the knock-off.
    The Chairman.  Gentlemen?
    Ambassador Allgeier.  Yes. I would say if you are 
concerned, Mr. Chairman, about the disparity in levels of 
punishment for intellectual property crimes in the United 
States, versus other crimes, that disparity is a multiple of 
that, internationally. And frankly, that is, I think, it is the 
biggest obstacle that we face in dealing with--especially in 
developing countries--the appreciation that this is really a 
crime.
    And you see that very clearly--countries that adhere to the 
TRIPs, they have the laws in place, but the penalties --you 
probably could get a worse penalty by parking illegally out 
here in the District of Columbia.
    Mr. Larson.  Yeah, I agree with that. I think it is both--
the issue of the penalty and then the predictability that the 
penalty will be imposed, that both are a problem in many of 
these countries.
    The Chairman.  One of the things that I find when you talk 
to people about this issue, otherwise very decent, honorable 
people, people who if you dropped your wallet in the line to 
pay your groceries and money fell out, they would pick it up 
and give you your money back, those same people do not think 
much of whether or not they are going to tie illegally into a 
satellite reception for their television or whether they are 
going to do a lot--and there seems to be a sort of moral 
equivalency that is applied here, and that is the notion that, 
well, the amount of money these artists get is so obscene that 
we are really not doing really anything much at all here, that 
denying the artist or the company, you know, the ability to 
sell these additional billion dollars worth of CDs, or whatever 
it may be, abroad--that is not a big deal because they make so 
much money anyway.
    When you are sitting down as a trade rep--when you are 
sitting down as the chief economic officer in the Department of 
State meeting with your counterparts, give me--and this is 
going to sound like a silly question, but I have been doing 
this job a long time--tell me what it is? What's the 
conversation like? You're sitting with your counterpart, 
whether it is in Asia or Latin America or Europe, and saying, 
``Look, you have got to change this. You have got to stiffen 
this. You have got to''--what response do you get?
    Mr. Larson.  I will give you one example. You mentioned in 
your opening remarks, Mr. Chairman, India. Part of what I try 
to do is appeal to their sense of self-interest. And you 
mentioned that they have a movie industry. And due to pressures 
within their own country, they began to see this in a different 
light and began to strengthen some of these protections and the 
enforcement of them. But they have other knowledge-based 
industries--software, but also potentially pharmaceuticals.
    And what we have tried to stress throughout is, yes, there 
is a--first of all, it is the law. You know, there are 
international regimes that you belong to. But in addition to 
that, you have a self-interest. And the argument that your 
country is poor and people can't afford to pay full price is 
not really a compelling argument.
    The Chairman.  Is that the argument that is made sometimes, 
too?
    Mr. Larson.  Yes.
    The Chairman.  Go ahead. I didn't mean to interrupt you.
    Mr. Larson.  No, but that is the argument that is made 
sometimes, and, you know, I think the industries involved do 
make an effort to recognize income levels when they go in and 
try to market their products, but they expect that their 
copyrights and patents will be respected. And I think what we 
are beginning to see, in fits and starts, is that more and more 
countries are recognizing that they have intellectual property, 
too, and they could develop even more intellectual property if 
they had the regime that protected it.
    The Chairman.  Mr. Ambassador?
    Ambassador Allgeier.  Yes. We can use the leverage of trade 
agreements and dispute settlement and preferential tariffs and 
so forth to leverage countries to a certain extent. But until 
they realize that it is in their own interest, they will only 
take that so far.
    I would mention two things. One, Ambassador Larson spoke 
about the--convincing them that this is part of the environment 
for them to attract investment, especially in the high-tech 
area. The other thing is, it is part of having a rule of law in 
the society. And, you know, countries will say, ``Well, we want 
to have the rule of law.'' Well, the rule of law is not 
divisible. You can't say we are going to have the rule of law 
in this area, and we are going to have rampant illegality in 
that area.
    There are resource problems in these countries. A lot of 
them have judicial systems that do not operate well, even 
under, you know, capital crimes such as murders. That said, the 
solution is to improve the judicial system and to work with 
them on it and to convince them that--well, as the U.S. 
Attorney was saying, just as in the west coast, criminals who 
are operating in narcotics in South America, their operations 
in piracy are helping to fuel their narcotics operations, as 
well. And so it is all part of an assault on the rule of law.
    The Chairman.  Well, is there one area of the world--well, 
I will withhold my question in the interest of time. I yield to 
my friend from Virginia and then Senator Boxer. And there is a 
vote at--I guess in about 20 minutes or 15 minutes, at which 
time we will break, and then we will all go vote and come right 
back.
    Senator Allen.  Thank you, Mr. Chairman. This question is 
mostly addressed to Mr. Larson and Mr. Allgeier. I was looking 
at an analysis. I want to hear your analysis. The Business 
Software Alliance had a--in 1999, there as a review of various 
states of our union, as far as piracy rights. I was happy to 
see Virginia had the lowest piracy rate, which was only--it was 
16.2 percent. Delaware, the Chairman's state, was also one of 
the better states and had a 19.9 percent--or 19.8 piracy rate. 
The total in the U.S. was 25.1 percent. All of this represents 
a lot of dollars lost, thousands of jobs--4,290 in Virginia--in 
California, 13,859 jobs in Senator Boxer's state. So this had 
that impact in those states.
    Now, also the Business Software Alliance had an 
international study, and they went through all sorts of 
countries, and they did it by region, but it had everyone, from 
Austria and Poland, Brazil, Chile, African countries, 
Australia, and so forth.
    Which countries--I would ask these two gentlemen--which 
countries, in your view, are the biggest threat to American's 
copyright interests worldwide? And what are you all doing, or 
your agencies doing, to respond to these international pirates? 
I assume you have seen this Business Software Alliance report.
    Ambassador Allgeier.  I am generally aware of it, but what 
I --
    Senator Allen.  Well, what--in your view, from your--which 
country--say, the top three major concerns for those who are 
pirating our intellectual property, our copyrighted materials?
    Ambassador Allgeier.  First of all, let me say that I think 
that the types of countries in which this is the biggest 
problem are the more advanced developing countries, because 
what you have there is you have a combination of rising 
affluence, people who are interested, you know, in buying 
either the products of the entertainment industry or the 
computer industry. But the systems of enforcement and so forth 
have not kept pace, and so they are generally weaker.
    Also a number of these countries--if you think of countries 
like China and Brazil, Mexico, and so forth--they are large 
countries, so the markets there are quite large, and there is 
quite a penetration of, frankly, U.S. cultural interest, and so 
there is this huge market for it. And I would say that those 
are the types of countries where we have the biggest challenge 
right now.
    Senator Allen.  Well, what are you all doing--would you 
agree with that, Mr. Larson?
    Mr. Larson.  Broadly, yes.
    Senator Allen.  Alright. Now, what are you all specifically 
doing--whether it is China, whether it is Brazil, whether it is 
Mexico, or any others that fit that large category--I 
understand the trepidations and reluctance to name countries, 
but some of them pay no attention, maybe, to these matters of 
enforcing the law. What are you doing to make sure that they do 
enforce the law?
    Ambassador Allgeier.  Well, we pursue them through their 
obligations within the WTO. We pursue it through programs--if 
they are beneficiaries of our tariff preference programs. In 
the case of where we have a bilateral agreement, such as the 
NAFTA, we have the provisions there. And basically we work with 
these countries mostly to enhance the enforcement.
    It's less a question of new legislation, although there is 
certainly improvements that can be made in legislation. And it 
is a long-term effort, because it is convincing them to devote 
the resources. It's also training people, as Ambassador Larson 
mentioned. Those could be judges, they can police officials, 
they can be customs officials. And it is trying to convey to 
them their own interest in protecting their own intellectual 
property.
    Senator Allen.  Well, in all crime matters, in combating 
crime--and certainly our U.S. Attorney, Mr. Gordon, understand 
this--and you hit on it indirectly--is in trying to deter 
criminal behavior, you need to have tough penalties, clearly, 
and there needs to be also a certainty of punishment. You can 
have tougher penalties, but if it is not --they are not 
enforced or they are not caught, and if when the people are 
caught, they are not getting the full sentence, that doesn't 
help. So you need tougher penalties and certainty of 
punishment.
    It sounds to me, though, from your testimony, that this is 
simply not happening. Not only are you trying to trying to 
train judges, but so often it seems like when they--when 
somebody may be caught, you are talking about--the guy should 
get a worse penalty for illegal parking or whatever sort of 
traffic infraction you gave as an example.
    And I think that, clearly, you'd like them to enforce those 
laws. If not, there is going to have to be some way of those 
countries seeing the importance that we place on it in trade 
agreements, and some of them are going to have to get 
sanctioned, one way or the other--again, they are different 
treaties, whether they are multi-country treaties or bilateral 
agreements.
    Yes, Mr. Larson?
    Mr. Larson.  Just to comment very briefly, Senator, on that 
last point, I stressed in my remarks the importance of 
training, the importance of persuasion, but I also agree with 
you that there are times when we have to act. We worked very 
hard, for example, on Ukraine. I pushed them several times, 
talked with their trade ministers, their finance ministers, and 
we thought for a time that we had begun to turn around this 
problem of piracy. But they didn't persist and turn it around, 
and so we were quick to support the policy that Ambassador 
Allgeier discussed, which was really taking back a significant 
amount of trade benefits from them.
    At the same time, I did want to underscore the importance 
of the WTO as a tool to move this process forward. This is an 
effort that we are going to have to make over a decade. And in 
the case of two very big countries--China, we have the fact 
that they have just joined the WTO, and so they have 
obligations which they have accepted, and now it is going to be 
very important for the WTO and, I think, the business 
community, as well, to work with the various provinces and 
localities that have the responsibility to enforce these 
obligations and, frankly, at this stage, may not fully 
understand what these obligations are. This is going to take 
persistence and effort.
    In the case of Russia, we have a WTO accession negotiation 
underway where we will be pushing for them to accept fully the 
international obligation of the TRIPs agreement. And this gives 
us an opportunity to get the sort of standards written into 
their laws that we would like to see all over the world.
    Senator Allen.  Thank you. And you will have this Senator's 
and I think many other Senators' support in those efforts. 
That's one of the values of bringing some of these countries 
into the World Trade Organization is it actually a method of 
enforcing their obligations and responsibilities. And I am 
confident that both of you two have that prioritization. Just 
understand you will get reinforcements here.
    Well, I would like to ask Mr. Gordon a question or two, 
depending on the amount of time left. Do you see in other U.S. 
Attorneys' Offices the same sort of prioritization of 
intellectual-property violations? I went through the 
international, but I also went through the states. It's not 
just a problem overseas. It's a problem here in our own 
country. Do you see U.S. Attorneys' offices making this a 
priority, or not?
    Mr. Gordon.  The Attorney General has made clear that it is 
one of his priorities. And generally when the Attorney General 
says it is a priority, it is a priority. I will say I know that 
in the ten CHIPS cities, it unquestionably is a demonstrated 
priority. They've created--and we have created--specialized 
units with numerous AUSAs trained and dedicated to doing that 
type of work.
    Even a part from that, though, I think, given the Attorney 
General's stated preference for prioritizing the matter, that 
other districts, as well, even if they are not in the middle of 
a high-tech or high-IP industry center, are making it more of a 
priority.
    Senator Allen.  Let me ask you this questions, then. Thank 
you. I am glad they are all listening and making it a priority. 
In fighting drugs, obviously you drill the drug dealers, you 
try to get as much--high up the chain as you can and make sure 
they get a penalty, but you also get after their assets, the 
illegal drugs, or any of the profits therefrom--art objects, 
yachts, cars, whatever.
    In this fight against pirated intellectual property, would 
there be changes in the law that may make it easier for you to 
at least--regardless of the proving guilt beyond a reasonable 
doubt, if you know the property is stolen or illegal property, 
the destruction of that on the spot, would that help in 
thwarting--or would they just--it is just so much of it being 
made, it just--it doesn't matter?
    In other words, if you see the videotapes, if you see 
what--maybe the software, but regardless of what it is, if you 
could separate that, the property, the illegal property from 
the criminal and the destruction of that, how would that deter 
or reduce the volume or frequency of this pirated intellectual 
property?
    Mr. Gordon.  Well, I do not think destruction right now is 
a problem. When we get it, I think it is fairly easy to destroy 
it. I think there are a couple of problems. Number one, in the 
era of digital reproductions, you can destroy 5,000 copies. But 
when it is digital, and they've got it electronically 
formatted, it can be reproduced like that all around the world, 
in bulk. So that is a much different world than drugs, where 
you can burn 10,000 kilos and really put a dent in a drug 
lord's inventory.
    Second, we are definitely trying to get up to speed and 
trying to get ahead of the curve on tracing assets of the 
people who are running the large-scale rings. I think we are 
much further ahead. We've got a lot more experience doing it in 
the drug arena. We've learned really a lot about MOs of where 
they put the money, how they move the money. We do a better 
job, so far, of moving our way up the chain by flipping people 
at the lower ends--the money launderers, et cetera.
    It's definitely proving to be a challenge for us, I think, 
to find the money side of the large-scale organized crime 
ring's IP profits. But that, of course, is part and parcel of 
our effort, and that is what we want to, I think, try and 
improve on.
    And I mentioned the international cooperation that we got 
in a number of countries and our efforts to improve training 
and coordination. With all that training and coordination, we 
are hopeful that we will improve our efforts on the money side 
of IP piracy.
    Senator Allen.  Well, I hope you will do that, because I do 
think that the forfeiture of drug-dealer assets has worked in 
drug dealing, to some extent, but at least you take the profit 
motive out of it. And obviously it is a business--it is an 
illegal business, and they way to hit them is in the 
pocketbook, and that is one way to at least to export our 
judicial reach, so to speak, or our jurisdiction, to those that 
may be offshore in countries that may not handle it. But if you 
can seize those assets, then maybe here--or somehow get 
jurisdiction of it, at least you will get that much in denting 
it.
    Well, my time's up. I am co-chairman of this committee, and 
I would like to recognize Senator Boxer, from California.
    Senator Boxer.  Thank you so much, Senator. I want to thank 
this panel very much, not only for your testimony, but for the 
work you do. From reports I hear, you are working hard on this, 
and I want to--as one Senator on this committee and one of the 
two from California--encourage you to continue your efforts. 
This is noble work and important work.
    I also--I wanted to thank Chairman Biden. I thought--I read 
his opening statement, and I just think it is eloquent, and I 
was going to quote, just to underscore, a couple of sentences. 
``If we want to protect American innovation and, by extension, 
American jobs, we need to maintain a vigilant stand against 
intellectual-property theft. American intellectual property is 
an immensely valuable, perhaps our most valuable, resource. Not 
to protect it is equivalent to letting coal be stolen from our 
mines and water taken from our rivers.''
    And I just want associate myself with that, because, as has 
been stated, if you go out and ask an average person on the 
street, ``What's intellectual property,'' they won't know the 
answer. It is up to all of us to talk about it and make the 
case that Senator Biden made, which is that it is property, 
just the same as if there was a bicycle here and somebody 
walked out with it.
    And you know that, and you are working on it. I am 
particularly proud of our U.S. Attorney for the work that you 
are doing.
    Let me say that on our next panel, we are going to hear 
from people who see, you know, the adverse impact of 
intellectual property theft. They've been working for years, 
and they've been trying to sound this clarion call for help for 
a long time. So it is good that they are here.
    Intellectual property rights form the foundation of two of 
California's most exciting industries--the entertainment 
industry and the high-tech industry. And sometimes those two 
clash. But on this one, you know, they are together. These twin 
engines of commerce are far too vulnerable to theft, and their 
loss means lost jobs and lost tax revenues. It also means 
illegitimate profits for international criminal organizations.
    In some cities in Asia, you can walk down main street and 
buy DVDs or optical disks for a couple of dollars or less. You 
can buy DVDs of Black ``Hawk Down,'' ``Harry Potter,'' ``Ali,'' 
in China for the equivalent of $1.21 per copy. The software 
industry loses an estimated $12 billion each year--$12 
billion--because of counterfeiting activities alone, and we 
know that since people usually pay income taxes, that means we 
do not have funding for some of the things we are tying to do 
here, like protect this country against terrorism, and all the 
other important things we have to do.
    It's wrong that a pirated copy of a film like ``Monsters, 
Inc.'' can be bought on a street in Malaysia for $3.00 before 
it is even available legitimately on the market in the U.S. So 
I have this pirated copy here from Malaysia--before it was even 
available, here it was.
    And you also have the Microsoft Office 2000 here. I mean, 
you can't tell the difference between these two. This one is 
the counterfeit. This one is real. It's thievery.
    And people, by the way, can also be caught in the situation 
where they are buying a counterfeited copy, and they do not 
think it is a counterfeited copy.
    We have a lot of work to do here. I have been on this for 
awhile, even before I was on this committee, and this gives us 
a chance here to do something about it with our friends and 
people who are allies with us in so many areas. They have to 
help us. They have to help us on this. And it seems to me, as 
they develop, they are going to want protection for their 
intellectual properties. So they've got to start working with 
us.
    Ambassador--and you may have said this before I came in, so 
forgive me if you answered this--but what do you think are the 
main reasons for the poor enforcement in these countries?
    Ambassador Allgeier.  I think there are two reasons. The 
first one is still a lack of appreciation of the seriousness of 
the crime of piracy. And the second is resources in developing 
countries, an overall shortage of resources, but not applying 
sufficient resources to this part of law enforcement and the 
judicial activity.
    Senator Boxer.  It is just not a priority. Do you have 
something to add to that, Mr. Larson?
    Mr. Larson.  I agree with what Ambassador Allgeier said. I 
do think that some of the new technologies, as we have 
discussed, have made this a tougher problem for governments, 
even where they would feel it is a priority. It's easier to 
make these knock-off products. It's harder to police. That 
means you need more vigilance. And that is really the purpose 
that the programs that the government has been pursuing, to try 
to raise the profile of this issue for foreign governments, 
help them understand why it is in their interest to devote the 
resources that are needed to police and stop these sorts of 
activities.
    Senator Boxer.  Now, I do not know if this was asked. If it 
was, please tell me. But what is the status of free-trade 
negotiations with Chile and Singapore? And how will we protect 
intellectual property in those agreements?
    Ambassador Allgeier.  We are negotiating a chapter--
intellectual property chapters in both of those agreements. And 
we use those agreements to seek protection even beyond the 
level of obligations that these countries already have in the 
WTO. The specific example I will give of that is these 
obligations under the new WIPO copyright treaties. We are 
insisting on incorporating those obligations into our trade 
agreements with Singapore and with Chile and in the free-trade 
agreement of the Americas. And the advantage to that is there 
will be a dispute settlement mechanism in those trade 
agreements, where there is not in the WIPO treaties themselves.
    Senator Boxer.  Mr. Gordon, do you have anything you'd like 
to add? Is this an issue that--do you feel that--where are we 
on the graph of this situation? I mean, has it topped out? Is 
it getting worse? Where do you see the problem?
    Mr. Gordon.  I think, from talking to the people who run 
the computer crime section of our office and the FBI and 
Customs people who are running the investigations in the 
Central District, they expect the problem to get worse, far 
worse, before it gets better, and largely because of the 
digital nature of reproduction. It's just so much easier to do. 
You do not have to have massive amounts of inventory kept at 
once. You can reproduce it from a master very easily, and it is 
a virtually identical copy that can be sold for just about the 
same amount.
    Senator Boxer.  So this is a $12 billion problem that could 
be even worse for us.
    Mr. Gordon.  According to our people--they think it is 
going to get worse.
    Senator Boxer.  Okay. Those are all my questions, Mr. 
Chairman.
    Senator Allen.  Thank you, Senator Boxer. I have no further 
questions of this panel and would thank you, all three of you, 
for your insight, for your dedication to this effort.
    I think what you are doing, Mr. Gordon, is an example for 
U.S. Attorneys elsewhere. Granted you are in some of the 
largest cities and probably where the problem is most 
prevalent. Hopefully, you will drill those folks. And if you 
find there is any law on the books in our country that harms 
you, come back, whether to this committee or to Commerce or 
Judiciary, because I think you will find good bipartisan 
support to have you drill them internationally.
    Gentlemen, keep working for this. Some of these countries 
are so poor and just starting off, they do not make it a 
priority. They're worrying about other things. But to the 
extent that we can somehow either get jurisdiction, entice them 
to do what's right. It's absolutely essential.
    Sometimes there will need to be sanctions. And that is not 
just for criminals, that is also for governments so that they 
understand the importance that we apply to protecting the 
intellectual property of the technologists, the innovators, and 
the creators in this country. So I thank you all so very much.
    Now, what we were--what I was going to say to the second 
panel--we were expecting to have a vote on the Farm Bill. 
Gentlemen, you can be at ease. You're dismissed. You'd better 
get out before the Chairman gets back. [Laughter.]
    If everyone would just stand down for a moment. We're 
trying to determine when this next vote is. It may not have 
been at 3:35. It may be at 4:30. So I am going to just have 
everyone stay at ease here. If the second panel--if you'd just 
be kind of wandering around the starting gate and ready to go 
when the Chairman gets back. Fortunately, you all do not run 
your businesses the way the Senate does, as far as its timing. 
So everyone just be at ease for awhile and we will probably 
proceed shortly.
    [Brief recess.]
    Senator Allen. I tried to filibuster til you got back here.
    The Chairman.  I apologize. I thanked the first panel on 
the way out. I really did think we were going to vote at 3:45.
    We have a very distinguished private panel of--beginning 
with--and I would like to welcome them all--with Mr. Jeffrey 
Raikes. He's vice president of productivity and business 
services for Microsoft Corporation. Obviously, you have been 
very productive. He joined Microsoft in 1981 when he was 3 
years old as a product manager, and has risen in the ranks. In 
his current position, he is responsible for knowledge, worker 
productivity, and business process applications and services. 
He's a member of Microsoft's senior leadership and the business 
leadership teams which developed Microsoft's core direction in 
broad, strategic and business planning respectively. I would 
like to welcome Mr. Raikes.
    And in full disclosure, I would like to welcome a guy I 
consider a personal friend, I have known him for a long time, 
Jack Valenti. He's president and CEO of the Motion Picture 
Association of America, a decorated veteran of the Second World 
War. He served as a special assistant to President Lyndon 
Johnson before taking his current position, which he has held 
since 1966. He also was a very young man when he took that job. 
His efforts through the years have played a significant role in 
allowing the film industry to grow as it has, and we look 
forward to his testimony.
    Hilary Rosen has been president and CEO of the Recording 
Industry Association of America since 1998. Prior to joining 
that organization, she was a private consultant and a lobbyist. 
She has worked with former New Jersey Governor Brendan Byrne, 
and served on the transition teams of two of my colleagues here 
in the Senate, Bill Bradley and Dianne Feinstein. She has 
worked for years to nurture partnerships between the music and 
technology companies. We thank her very much for joining us.
    Douglas Lowenstein became president of Interactive Digital 
Software Association in 1994 and has been instrumental in 
developing a world-wide anti-piracy program for the computer- 
and video-game software industry. Previously, he had been a 
journalist, legislative director for my esteemed colleague, 
Howard Metzenbaum, and a private strategic communications and 
public policy consultant. Mr. Lowenstein, I thank you, as well, 
for being here.
    It's great to have you all. And should we just begin with 
the panel? Let's begin in the order that I introduced you. 
Jeff, please.

STATEMENT OF JEFFREY RAIKES, GROUP VICE PRESIDENT, PRODUCTIVITY 
          AND BUSINESS SERVICES, MICROSOFT CORPORATION

    Mr. Raikes. Thank you, Mr. Chairman and members of the 
committee. My name is Jeff Raikes, and I am group vice 
president of productivity and business services at Microsoft 
Corporation. And I really want to thank you and the committee 
for holding these hearings. Microsoft commends you for 
recognizing that intellectual property crime is a problem of 
global dimension that really undermines economic growth and 
legitimate international trade. At Microsoft, we work closely 
with other members of the IP industry, including the panelists 
here as well as the Business Software Alliance, and we all work 
to fight theft.
    And I want to thank you, Senator Allen, for asking that we 
include the BSA's written testimony today. And, Mr. Chairman, I 
hope that you will accept my written testimony, as well.
    The Chairman.  Without objection, we will.
    Mr. Raikes. For more than a decade, the software industry 
has battled against software theft, recognizing that widespread 
piracy really threatens the existence of our industry. Now, 
despite these efforts, software piracy is rampant, accounting 
for almost 40 percent of the software that is used around the 
world. And in some parts of the world, piracy exceeds 80 
percent in those countries.
    And as a whole--and as Senator Boxer mentioned--the 
software industry loses almost $12 billion each year from 
counterfeiting and other forms of software piracy. And these 
revenue losses directly translate into lost jobs and, of 
course, opportunities for the U.S. economy.
    We believe that by the end of this decade, piracy-related 
losses will rob the U.S. economy and its workers of 175,000 
jobs and, very important to you and your goals, $1.6 billion 
annually in tax revenue.
    Now, today I am going to focus my testimony on the 
proliferation of counterfeit software. Unlike Internet piracy, 
software counterfeiting involves the physical manufacture of 
fake CD-ROMs and other components that may accompany legitimate 
Microsoft software. Software counterfeiters go to great lengths 
to make products look genuine, the goal being to deceive the 
consumer, to avoid detection by law enforcement, and to 
maximize their illicit profits.
    As Senator Boxer demonstrated with the two copies of retail 
versions of Microsoft Office 2000 Pro, one genuine, one 
counterfeit, even the most sophisticated consumer would have 
great difficulty in distinguishing the counterfeit package from 
the genuine item.
    Now, there is no question that sophisticated counterfeits 
defraud consumers and displace legitimate sales of Microsoft 
products. And I just want to hold up this box of Microsoft 
Office '97 to point your attention to the fact that we estimate 
that our company lost more than $1.3 billion in sales on this 
one product alone.
    Now, software counterfeiters use state-of-the-art 
technology to create counterfeit CD-ROMs and packaging that 
bear all of the hallmarks of the genuine product. For many 
years, Microsoft has worked to outpace counterfeiting 
technology by developing authentication features that help 
consumers and law enforcement distinguish legitimate software 
from sophisticated counterfeits. The certificate of 
authenticity on the side of the package incorporates security 
features--for example, special inks, micro-text--to 
authenticate genuine software. And another example of some of 
the work that we are doing to try and keep ahead of these 
criminals is shown here with the edge-to-edge hologram that you 
see on the CDs that we use for Windows and Microsoft Office.
    But increasingly, the most sophisticated counterfeits 
combine fake CD-ROMs and packaging with some of the genuine 
authentication features. In the past year, nearly 100,000 
genuine Microsoft certificates of authenticity were stolen from 
authorized replicators in Southern California. Now, these 
certificates are then sold to counterfeiters, and they are 
affixed to the counterfeit software package, thus deceiving the 
consumers and increasing the selling price or the illicit 
profits for these criminals.
    Currently, Federal law does not provide adequate civil and 
criminal remedies to combat trafficking in these software-
authentication features or the combination of the stolen 
features with counterfeit CD-ROMs and packaging. So to close 
this gap, Microsoft urges Congress to enact legislation that 
would prohibit trafficking in the genuine authentication 
features.
    With potential profits in the billions, it is hardly 
surprising that organized crime is deeply involved in the 
software counterfeiting trade. Software counterfeiting 
operations are organized in many similar respects to the global 
narcotics trade. Financiers will base their operations in 
countries with generally weak IP, or intellectual property, 
laws, and then they assemble a global network of low-level 
distributors that market the counterfeit software. What's more, 
these counterfeiters commit a host of other violent crimes to 
protect their operations.
    Now, although Asia continues to be the major source of 
sophisticated counterfeit software, manufacturing facilities 
exist throughout the world, even here in the United States. 
Global counterfeiting flourishes because counterfeiters face 
little risk of prosecution or meaningful punishment.
    Now, at Microsoft, we invest millions of dollars each year 
to investigate global counterfeiting activity and to assist law 
enforcement in criminal prosecutions. To win the war against 
counterfeiting, it is critical that law-enforcement agencies in 
the United States and throughout the world treat software 
counterfeiting as a major crime priority. That requires 
multilateral cooperation, a sustained commitment of resources, 
and a continued and deeper partnership between government and 
industry.
    I would be happy to answer any questions, and I thank you 
very much for this opportunity.
    [The prepared statement of Mr. Raikes follows:]

      Prepared Statement of Jeffrey Raikes, Group Vice President,
                         Microsoft Corporation

                            i. introduction
    Mr. Chairman, members of the Committee, my name is Jeff Raikes, and 
I am Group Vice President of Productivity and Business Services at 
Microsoft Corporation. I am responsible for Microsoft Office, 
the Business Tools Division, Business Solutions and eMerging 
Technologies. Let me begin by thanking you and the Committee for 
holding this hearing. Microsoft commends you for focusing congressional 
attention on the serious threat posed by global intellectual property 
crimes. We appreciate the opportunity to discuss with you one aspect of 
intellectual property theft of particular concern to Microsoft--
software counterfeiting.
    Software counterfeiting and other forms of piracy cost our industry 
several billions of dollars each year, and yet enforcement and 
penalties are uniformly weak throughout the world. The highly effective 
Intellectual Property Rights Center cannot address the piracy problems 
alone. Globally, the failure to treat software theft as a serious crime 
is largely due to the misperception that intellectual property crime is 
a ``victimless'' crime. In fact intellectual property crime has many 
victims, not just the software industry or the other industries 
represented here today:

          Lost Jobs and Tax Revenues: When you consider that one-
        quarter of the software used in this country is illegal, it is 
        hardly surprising that software counterfeiting and other forms 
        of piracy are a significant drain on our economy. ln the 
        1990's, software theft robbed our economy of more than 100,000 
        jobs and a billion dollars in tax revenues each year. These 
        annual losses are expected to double this decade.

          Consumer Fraud: Unlike the cheap fakes sold on street 
        corners, counterfeit software is manufactured to look like the 
        genuine product and marketed to unsuspecting consumers, who 
        would never knowingly purchase illegal software. In fact, many 
        victims of fraudulent software sales are legitimate businesses 
        and government agencies.

          Organized Crime: Software counterfeiting operations are 
        controlled at the highest levels by sophisticated criminals 
        that rely upon an organized, global network of manufacturers 
        and distributors to produce and market massive volumes of 
        counterfeit software CD-ROMs. These criminal networks commit a 
        host of other crimes to protect their operations--money 
        laundering, corruption, and violence--which exact a heavy cost 
        on society.

    Until the United States and its global trading partners treat 
intellectual property crime as a major law enforcement priority, 
counterfeiters will continue to threaten our economic prosperity, our 
consumers and society as a whole.
      ii. background on software industry and counterfeit problem
A. Economic Contributions of U.S. Software Industry
    Over the past 25 years, computer software has fundamentally 
reshaped every facet of our lives and helped secure this country's 
economic leadership. By the late 1990s, the software industry employed 
more than 800,000 U.S. workers with aggregate wages of $55.6 billion. 
By the year 2008, the software industry is expected to employ more than 
1.3 million workers in the United States alone. No other high-tech 
industry is providing employment opportunities at such a rapidly 
increasing rate.
    The economic contribution of the U.S. software industry can also be 
measured in terms of Federal and state tax dollars benefiting a host of 
national and community programs. Annually, the software industry 
contributes more than $28 billion in tax revenues to Federal and state 
governments. This tax contribution is expected to reach $50 billion by 
the year 2008. Of equal significance is the industry's contribution to 
the U.S. balance of payments. While the U.S. trade deficit reached new 
record highs, the U.S. software industry generated a trade surplus of 
more than $20 billion in the year 2000. The software industry's growing 
trade surplus means more jobs and more tax revenues for the U.S. 
economy.
    The success of the U.S. software industry is due in large part to 
this country's historical commitment to strong intellectual property 
protection. Indeed, it is no coincidence that the United States--the 
world's leading advocate for intellectual property rights--is also home 
to the world's largest software industry. The software industry's 
continued growth and its continued economic contributions are directly 
dependent on our ability as an industry and a notion to eliminate theft 
of computer software.
B. Software Counterfeiting Activity Worldwide
            (i) Extent of Problem
    The forces that drive growth in the software industry--technology 
advances, high market demand, and the emergence of E-commerce--also 
create new opportunities for software pirates to manufacture and sell 
massive quantities of counterfeit software to unsuspecting consumers. 
The software industry estimates that 40 percent of the software used 
throughout the world has been illegally copied; and in many regions, 
the average piracy rate exceeds 60 percent. Even in the United States, 
which boasts a high level of intellectual property protection, the 
software industry confronts a 25 percent piracy rate, meaning that one 
out of every four copies of software is illegal.
    In addition to the software industry, all industries are 
vulnerable, including the music, pharmaceuticals and automobile 
industries. The proliferation of organized criminal counterfeiting 
operations has reached such alarming proportions that the estimate of 
lost revenues to such industries has reached $328 billion annually.
            (ii) Economic Impact
    The software industry loses an estimated $12 billion in revenues 
because of counterfeiting activities. In one recent twelve-month 
period, almost 5 million units of counterfeit Microsoft software and 
hardware were seized worldwide, with an estimated retail value of over 
$1.7 billion. Each year, such intellectual property crimes drain the 
U.S. economy of thousands of skilled high paying jobs and billions of 
dollars in tax revenues. According to a study conducted by the 
International Planning & Research Corp. annual software theft costs the 
U.S. economy 118,000 jobs, $5.6 billion in wages, and over $1.5 billion 
in tax revenues. If the U.S. were to eliminate software piracy by the 
year 2008, the U.S. economy would gain more than 170,000 new jobs, $7.3 
billion in wages, and $1.6 billion in tax revenues.
            (iii) Trends in Growth in Software Counterfeiting 
                    Operations
    At least three converging phenomena have contributed to the 
explosive growth in software counterfeiting operations:

   Technological developments that make it possible to 
        replicate cheaply and profitably large volumes of counterfeit 
        CDs;

   Growth in global manufacturing and distribution networks; 
        and

   The emergence of organized criminal counterfeiting 
        enterprises, often with multinational operations and ties to 
        criminal gangs.

                a. Technological Advances
    The manufacture and distribution of counterfeit software involves 
the production of fake or ``look-a-like'' products. Typically, the 
packaging or labeling of the original software product is forged as 
well. Computer software is uniquely susceptible to counterfeiting 
because with new CD-ROM technologies, near-perfect copies can be 
manufactured for a few dollars per copy, but resold for many times that 
amount.
    It is particularly profitable for the counterfeiter who bears none 
of our research and development marketing or support costs that 
primarily determine the retail price of legitimate software. 
Accordingly, the counterfeiter is able to sell counterfeit CDs at a 
price that is significantly lower than it costs to produce the legal 
products, but far higher than the per-unit cost of replication. The 
accessibility of CD replicating technology, as well as the 
profitability of pirate sales, has made the production of counterfeit 
CDs attractive to large organized crime syndicates and petty criminals 
alike. Victims of counterfeit fraud run the gamut from small businesses 
to large, sophisticated government agencies, which unwittingly purchase 
counterfeit software believing they are getting a good deal on genuine, 
discounted product.
                b. Global Network of Counterfeit Manufacturers and 
                    Distributors
    Although manufacturing plants for high quality counterfeit software 
are located throughout the world, the major manufacturing centers 
appear to be in Asia, most notably China, Singapore, Malaysia, Thailand 
and Indonesia. Large counterfeiting facilities, however, also exist in 
the former Soviet Republic (the Ukraine, Russia and Bulgaria); Latin 
America (Paraguay, Colombia and Mexico); and even the United States 
(California). Plants in these areas produce hundreds of thousands of 
high quality counterfeit CDs, which are then distributed throughout the 
developed markets worldwide.
    Over the past several years, Microsoft has worked closely with law 
enforcement agencies to initiate raids against major counterfeiting 
operations in southern California. In the mid-to-late 1990's, 
California-based criminal enterprises were a major source of the high 
quality counterfeit Microsoft CD-ROMs and packaging distributed 
throughout North America and exported to Europe, Australia, and other 
developed markets. Due to the success of these enforcement efforts, 
many of the major California-based plants were put out of business, 
forcing counterfeit production to move to Asia and other markets. 
Nevertheless. California remains a major entry and assembly point for 
counterfeit software CD-ROMs and other components imported from Asia.
    Similarly, as law enforcement pressure has been brought to bear 
against operations in Hong Kong, Singapore, and in parts of China, new 
manufacturing centers have sprung up in other parts of Asia to meet the 
demand for high quality counterfeit software. We recently learned of 
major counterfeiting operations in Indonesia, Macau, Malaysia, and 
Thailand, all of which are producing high quality product for export to 
developed markets. There is also evidence that counterfeit 
manufacturing is moving into Vietnam, the Philippines, Mynamar, and 
Brunei.
                c. Emergence of Organized Crime
    The very nature of the business of producing and distributing high 
quality counterfeit software requires a high level of planning, funding 
and organization; and access to replicating equipment, raw materials, 
packaging, shipping facilities, and money laundering avenues.
    Because of the enormous opportunities for profits and the low risk 
of prosecution or significant punishment strong evidence suggests that 
software counterfeiting has become part of an intricate web of 
organized crime, with links to Asian gangs and drug cartels.
    The Federal Government explicitly acknowledged the growing 
involvement of organized crime when it created a new ``Intellectual 
Property Rights Initiative'' to strengthen enforcement against 
intellectual property crime. At a congressional hearing, former Customs 
Commissioner Ray Kelly stated that--

          Our investigations have shown that organized criminal groups 
        are heavily involved in trademark counterfeiting and copyright 
        piracy. They often use the proceeds obtained from these illicit 
        activities to finance other, more violent crimes. These groups 
        have operated with relative impunity. They have little fear of 
        being caught--for good reason. If apprehended, they face 
        minimal punishment. We must make them pay a heavier price.

    There are several examples of these threatening links:

   Over the past several years, Microsoft has worked closely 
        with law enforcement agencies to initiate raids against major 
        counterfeiting operations in southern California. Just last 
        November, the Los Angeles Sheriff's office and police 
        department, U.S. Customs Service and the U.S. Secret Service 
        executed the most significant raid and seizure of Microsoft 
        software and components in U.S. history. A preliminary 
        inventory of the seized products puts the estimated retail 
        value at $60 million. The raid has interrupted a major 
        counterfeit software distribution pipeline that moves 
        containers of counterfeit software and other illegal components 
        from Taiwan.

   California police raided a suspected ``stash pad'' for Asian 
        gang members. Instead of finding narcotics, the police found 
        counterfeit Office 97 media and packaging with an estimated 
        value of $8.5 million. Police arrested 4 alleged members of the 
        Wah Ching.

   A Los Angeles raid netted $10.5 million in counterfeit 
        software, holograms, shotguns, handguns, TNT and plastic 
        explosives. Three Asian organized crime groups, including the 
        Wah Ching, were believed to be involved.

    As these cases demonstrate, counterfeit seizures often reveal an 
organized network of distributors and manufacturers, requiring an 
ongoing investigation into each arm of the distribution network and 
coordination between Federal and state law enforcement agencies 
throughout the country. Given this level of sophistication within 
criminal counterfeiting operations, it is imperative that the Federal 
Government assume a leadership role in anti-counterfeiting enforcement 
efforts.
        iii. microsoft's commitment to combating counterfeiting
    Microsoft invests literally millions of dollars each year to 
support law enforcement efforts and protect its products and the 
consumer from counterfeiting activities. Microsoft investigators and 
counterfeiting experts work closely with state and Federal law 
enforcement agencies to investigate and prosecute counterfeit 
manufacturers and resellers. In addition, Microsoft each year brings 
hundreds of civil actions against counterfeit resellers throughout the 
United States. In addition, Microsaft works with a number of industry 
organizatians to address the counterfeiting challenge and software 
piracy generally. For example, the Business Software Alliance, an 
organization representing the leading U.S. software publishers, pursues 
both criminal and civil cases on behalf of its members in over 65 
countries around the world. With the Committee's permission, I would 
like to submit a statement by BSA's President Robert Holleyman for the 
record. Consumer education is a critical component of Microsoft's anti-
counterfeiting efforts, particularly given the increasing 
sophistication of counterfeiters and the great difficulty most 
consumers experience in distinguishing between counterfeit and 
legitimate software. Many organizations and individuals--as well as 
Federal, state and local governments--are unaware that counterfeit 
software is so pervasive in the marketplace an that its use can expose 
the user to various business risks, such as viruses and manufacturing 
defects. To increase public awareness, Microsoft sponsors worldwide 
campaigns that teach consumers to recognize the warning signs 
associated with counterfeit software, disreputable resellers and 
fraudulent software offers.
    Microsoft and other software publishers are also experimenting with 
a number of copyright technologies designed to prevent the unauthorized 
reproduction and distribution by software products. As with our law 
enforcement investigations. Microsoft spends millions of dollars on 
research and development of highly sophisticated security features, 
including certificates of authenticity (COAs), and inner mirror band 
and edge-to-edge holograms on CD-ROMs. In order to prevent 
counterfeiting, Microsoft relies upon a variety of these security 
features that are affixed to, or embedded in, the software, user 
manuals and packaging. With each new version of our software, Microsoft 
incorporates state-of-the-art technologies that are extremely difficult 
and expensive to replicate. For a brief period, at least counterfeiters 
are unable to duplicate new products in a credible way.
    We also are taking steps to protect against a form of piracy known 
as ``casual copying'' or ``softlifting.'' Casual copying is the sharing 
of software between people in a way that infringes on the software's 
end user license agreement (EULA). This form of piracy is prevalent and 
has been estimated by industry trade groups to account for a staggering 
50 percent of the economic losses due to piracy. To combat this 
problem, we have incorporated Product Activation technology in 
Microsoft Office XP, Visio 2002 and 
Windows XP operating system in an effort to reduce software 
piracy as well as ensuring that Microsoft's customers are receiving the 
product quality that they expect.
    Only software acquired as packaged product will require activation. 
Customers required to activate their software must complete a simple 
and anonymous activation process that takes less than one minute when 
completed over the Internet. Activatian can also be completed by 
telephoning Microsoft and speaking with a customer service 
representative. To make activation convenient, the products do not 
require activation immediately after installation. Office XP and its 
components will allow up to 50 launches before requiring activatian. 
Visio 2002 will allow up to 10 launches before requiring activation. 
Windows XP will allow 30 days from first boot before requiring 
activation.
    As a result of Microsoft's investment in security features, 
however, the demand for genuine components has increased resulting in 
an increase in robberies, thefts and fraudulent schemes. Recently, for 
example, there has been a rash of thefts of COAs in Europe and the 
United States. These genuine COAs are then sold to counterfeiters who 
affix them to counterfeit products to make them appear genuine. In 
addition to these thefts, Microsoft now faces the pervasive practice 
among counterfeiters of tampering with components of our software 
product. Counterfeiters engage in such tampering both to make 
counterfeit software appear genuine and to increase the selling price 
of genuine software and licenses.
                    iv. law enforcement is critical
    Given the presence of organized crime and the international scope 
of counterfeiting operations, there is a critical need to treat 
counterfeiting as a global law enforcement priority. Existing levels of 
commitment by law enforcement agencies are not sufficient to meet the 
growing challenge of global counterfeiting operations. And existing 
levels of civil damages and criminal penalties do not pose a serious 
deterrent especially to the organizers and financiers of counterfeiting 
operations.
    There have been a few recent initiatives, however, which Microsoft 
appreciates and supports. Microsoft applauds the efforts at the 
Intellectual Property Rights Center (``IPR Center'') which serves as a 
critical resource in coordinating multi-agency, multi-jurisdictional 
investigations of software counterfeiting manufacturers and 
distributors.
    By coordinating the investigative efforts by U.S. and foreign law 
enforcement agencies and acting as a clearinghouse for relevant 
intelligence, the IPR Center strives to provide the kind of 
sophisticated law enforcement response necessary to combat 
international software counterfeiting operations.
    We strongly urge Congress to maintain funding for the IPR Center 
and to encourage its investigators to target their efforts on organized 
counterfeiting operations worldwide. We appreciate Congress providing 
the recent increase of $5 million in funding for the U.S. Customs 
Service and the IPR Center that was included in the FY 2002 Treasury 
appropriations legislation. We look forward to learning of Custams' 
plans for expending the new funds. We encourage the IPR Center to use a 
portion of the funds to establish a clearinghouse for all intellectual 
property rights information gathered from other Federal, as well as 
state and local law enforcement agencies.
    Microsoft also appreciates the increase in FY 2002 funding for 
additional attorney positions at the Department of Justice to augment 
the investigation and prosecution of intellectual property crimes. We 
look forward to working with the new dedicated Federal agents and 
prosecutors assigned to this task.
                           v. recommendations
A. Strengthen Federal Anti-Counterfeiting Laws
    Microsoft strongly encourages Congress to amend existing Federal 
anti-counterfeiting laws to prohibit trafficking in, or tampering with, 
the authentication features used by software publishers and other 
copyright owners to distinguish genuine software. Currently, Federal 
law does not provide adequate civil and criminal remedies to guard 
against these types of tampering activities, which directly facilitate 
counterfeiting activity. Federal law also fails to criminalize the 
distribution or sale of genuine authentication features to software 
counterfeiters and distributors. In order to strengthen Federal 
intellectual property enforcement efforts, Microsoft recommends that 
legislation be enacted that protects authentication features of 
copyright works by providing adequate civil and criminal remedies for 
trafficking in components affixed to or embedded in software or other 
copyright works.
B. Strengthen U.S. and Global Anti-Counterfeiting Enforcement
    In addition, in order to achieve greater enforcement of 
intellectual property laws, Microsoft urges Congress to:

   Direct our Federal law enforcement agencies, including the 
        U.S. Customs Service and the Department of Justice, to treat 
        software counterfeiting and other intellectual property crime 
        as a law enforcement priority; and continue to provide these 
        agencies with the resources needed to crack down on 
        sophisticated criminal counterfeiting operations.

   Promote international enforcement of intellectual property 
        crimes through training programs (e.g., the International Law 
        Enforcement Academies) and technical assistance. These types of 
        international initiatives are critical, particularly with 
        respect to counterfeiting and Internet piracy, which often 
        involve multiple jurisdictions. Training programs are 
        particularly critical in software counterfeiting centers, 
        including parts of Asia, Bulgaria and Paraguay, as well as 
        counterfeit transshipment points, such as Panama, Singapore and 
        Amsterdam.

   Promote greater mutual cooperation among national 
        authorities: Counterfeiting networks may link financiers in 
        Asia, manufacturers in the United States, and distributors 
        throughout the world. Unless prosecutors and law enforcement 
        agencies in each relevant jurisdiction have the authority and 
        obligation to cooperate and share information without the red 
        tape and formalities that so often hinder multi-jurisdictional 
        investigations, there is little hope of identifying and 
        prosecuting each of the links that farm criminal networks of 
        counterfeiters. Microsoft urges the Federal Government to 
        explore avenues to facilitate mutual cooperation among national 
        law enforcement agencies and prosecutors, whether through 
        existing multi-lateral or bilateral treaties an other 
        cooperative agreements. Whatever the appropriate mechanism, it 
        must allow field agents and prosecutors to operate effectively 
        in a global environment.

   Partner with the software industry to identify and prosecute 
        counterfeiters: Microsoft fully recognizes that the 
        proliferation and increasing sophistication of counterfeit 
        manufacturers and distributors calls for an even closer 
        partnership between industry and government. To that end, 
        Microsoft pledges to assist Federal law enforcement in 
        identifying and investigating counterfeiters and to provide 
        technical support and training.

    Mr. Chairman, thank you again for the opportunity to appear before 
the Committee this afternoon. Microsoft looks forward to working with 
you and others on the Committee in addressing this important issue.

    The Chairman.  Thank you very much. Why don't we proceed in 
the way you were introduced. Jack.

STATEMENT OF JACK VALENTI, PRESIDENT AND CEO RECORDING INDUSTRY 
                     ASSOCIATION OF AMERICA

    Mr. Valenti. Mr. Chairman, first, I want to really thank 
this committee, Mr. Chairman, Senator Boxer, Senator Allen, 
Senator Smith, because you are illuminating an extraordinary 
and grotesque threat to the future life of America's greatest 
trade export prize, the copyright industries, which are movies, 
television programs, home video, music, books, and computer 
software is an incredible machine of growth.
    We are responsible for almost five percent of the gross 
domestic product, I think, as Senator Allen, that you pointed 
out, almost $500 billion. We gather in more international 
revenues than aircraft, than automobiles and auto parts, and 
more than agriculture. We are creating new jobs at three times 
the rate of the rest of the economy. And the movie industry 
alone has a surplus balance of trade with every single country 
in the world. No other American enterprise can make that 
statement, except in the copyright industries. And to have this 
huge engine of growth to be squandered by piracy, it would be 
more than a crime; it would be a blunder.
    Now, what I want to tell you today is that we estimate that 
our piracy loss around the world is about three to three and a 
half billion dollars annually. And that, to us, is very serious 
money. The fact is that much of this piracy occurs in Asia. And 
where a new threat has reared its illegal head, it is called 
optical-disc piracy--optical discs where you are using very, 
very inexpensive technology to make the discs in the machine, 
although the quality of the viewing is inferior to DVD. But it 
has spread throughout China and Asia with the rapidity of 
rabbits in a warren.
    Now, China, I must say, in response to our entreaties, has 
really tried to crack down on pirates, and they've sent most of 
them fleeing offshore. Pirates never die; they just change 
locations. Our big problem in China now is street-vendor 
piracy. And before I do anything else, I want to show you 
something. This is ``Black Hawk Down.'' This was bought ten 
days ago in Southern China and, as Senator Boxer said, a ``buck 
twenty-five.'' Here is ``Ali''--same thing, on the streets. You 
can buy them by the long ton, and here is ``Harry Potter.''
    Now, I want to show you something that is happening in this 
country. You have got to see this to believe it. I want to show 
you a Web site, just for about 20 seconds, called Morpheus. It 
is illegal, and I am proud to say that the recording industry 
of America and the MPAA are taking it court. And I want you to 
see this, because this was taken down by our anti-piracy 
forces. It is----
    [Video was shown]
    Mr. Valenti [continuing]. ----This is ``Black Hawk Down'' 
and it is imminently watchable. It makes you want to cry out in 
frustration. Thank you very much, Troy.
    As a result, though----
    The Chairman.  Was that downloaded?
    Mr. Valenti [continuing]. ----Downloaded by--one of our 
people in Encino, California, took it down I think, about three 
or four days ago, and its this Web site called Morpheus, and it 
is chock full of first-class movies. I might also add it is 
also brimming over with pornographic material, as well. And 
this is owned by a company in the Netherlands, and they have 
licensed American companies and people all over the world, and 
we are going after them in the courts of the United States.
    The Chairman.  Jack, how does it work? Is there a fee or 
can your staff tell us--is there a fee to download it?
    Mr. Valenti. No. You just go up there and download it.
    Ms. Rosen. We actually have a demonstration, Mr. Chairman, 
that starts from the download, if you wanted to----
    The Chairman.  I would like--I think we'd like to see it.
    Senator Allen.  If I may, whatever this Web site is--I hate 
to mention the name.
    Mr. Valenti. Well, every student in America knows about it.
    Senator Allen.  Well, some non-students, of course, aren't 
watching this hearing. Regardless, they did not--those who have 
this did not get it off the Internet. Did they get it from 
somebody who was filming the film?
    Mr. Valenti. It's called file sharing, and this is the 
unruly son of Napster that did it on music.
    Senator Allen.  But did you put this, or did whomever, did 
they put this on the Internet?
    Mr. Valenti. Absolutely.
    Senator Allen.  How did they get the copy?
    Mr. Valenti. Oh, I see. The copy can come from going into a 
theater and camcording the theater or bribing somebody in a 
theater and taking it overnight and reproducing it. It could be 
taken from many different places. The ease with which this is 
done, it scares you.
    Senator Allen.  But they did not get it over the Internet. 
They got it----
    Mr. Valenti. But it is on the Internet right now.
    Senator Allen.  I was talking to folks from Warner Brothers 
who were telling me how they were going to the premier in New 
York City of ``Harry Potter,'' and there was someone selling 
the videos on a blanket on the sidewalks in New York City as he 
is walking to see the premier of it.
    Mr. Valenti. He probably got it from a screener or could 
have got it from a premier in a theater. These people are quite 
ingenious and quite indefatigable when they do it.
    The Chairman.  Jack, you know this place well, and I 
apologize for this interruption. One of the purposes of this 
hearing is to explain to our colleagues in simple terms exactly 
how easy this is. So please do not be hesitant about being 
elementary in explaining in detail how this physically happens. 
Most of our colleagues are so busy doing every other thing, 
they do not even watch television, let alone get around how to 
figuring out how to play with a computer, other than Pat Leahy, 
to download anything. [Laughter.]
    He lives in his computer, and he does well on it. But all 
kidding aside, it is really important that you tell us and you 
communicate to anybody who's listening here exactly just how 
simple this is to get a sense of--my mother, for example, would 
have no notion how simple this is. She would think you had to 
have pretty sophisticated equipment, you'd have to be awful 
smart to figure out how to do this--and so as elementary as you 
can be, and this is the last time I will interrupt--would be 
useful. Don't worry about taking the committee's time.
    Mr. Valenti. Well, Mr. Chairman, I am by nature, 
inclination, and heritage, elementary. So it is very simple. 
There are lots of ways you can do it. Let me just--let me count 
the ways.
    For example, there is a thing called ``file sharing 
protocols,'' and that is like a Napster or a Morpheus, where 
young kids can go on here and get on top of the Web site and 
then open up their hard drive to all the movies they have, and 
they share them with other people. And it is millions and 
millions of these. File sharing goes on every day.
    As a matter of fact, Viant, which is a Boston-based 
consulting firm, estimates that 350,000 movies are downloaded 
every day, and all of them illegal, and that is just an 
estimate. My judgment is it is a half a million to a million, 
because it goes on all over the country.
    I will give you a good example. I am not going to name the 
university, because it is one of the most prestigious and 
important universities in this country. Now, all these 
universities have state-of-the-art, large-type computer 
systems, the best you can find. All of these universities do. 
So many students were going on that university computer system 
and using Gnutella, which is also like Morpheus, file sharing--
you can get movies, music, everything--that the university, in 
order to relive the burden on its computer system, if you can 
believe this, set up a separate server for Gnutella. It is kind 
of Enron going off the balance sheet to set up subsidiaries to 
relieve the pressure on their debt. And that is what the 
university did.
    I found out about it by reading an editorial in the daily 
newspaper of the campus on the Internet, and I went ballistic. 
And I wrote a letter to the President saying, ``This action of 
yours is a piece of disreputable plausibility which collides 
with the moral compact that governs this society. Is this why 
people go to your university, to learn this kind of ethics? 
Parents pay $150,000 so their children can learn to steal? What 
kind of a university do you have?'' Well, to their credit, they 
took it down, but that is a good example. That is happening all 
over America and universities right now.
    A second place is that you can get in a camcorder, you can 
go into a theater and camcord it, and people throw it up on the 
Internet just for fun, and then they share that with everybody 
else. And all of a sudden, it is like a viral contagion that 
moves around this country.
    The criminals--the organized criminals will go bribe some 
fellow in the laboratory, get the negative overnight, reproduce 
it, give it back the next morning, do it with a corrupt 
projectionist in some theater or--sometimes you'd go in and 
take a Blockbuster you go in and rent legitimately and copy 
that, but that is not very good. You do not get that great a 
watchable quality on it.
    But the ways are myriad, and they go up to this Internet. 
Now, get this. Think of--with a click of the mouse, anybody can 
send a two-hour movie hurtling around the globe to every nook 
and cranny of this weary planet, and do it at the speed of 
light--386,000 miles per second. Now, if that is not scary, I 
do not know what is.
    Now, that is what we are enduring right now, and it is 
going on every day, and multiplying. Now, get this. If you have 
a regular 56K modem in your computer, which most of us have--
that is what you get--isn't that right, Mr. Raikes? That's what 
most computers have. Mr. Raikes is the expert on this. I am 
going to him.
    The Chairman. Well, until they change their software, and 
it may change.
    Mr. Valenti. If I want to bring down a move with a 56K 
modem, I probably would--if I went to bed at 10:00 o'clock, I 
would set my computer whirring, and about 12 to 24 hours later, 
I would have a movie. If you have got broadband access, a DSL 
line or a cable modem, you can bring down a two-hour movie, 
depending on the speed of that line or that modem, in about 45 
minutes.
    But the next generation of Internet that is rapidly upon 
us, you will be able to bring down a two-hour movie in 45 
seconds. That's the kind of grotesquery we are looking at in 
the future. And it is very, very frightening. Now, are there 
any questions about this?
    The Chairman.  No. [Laughter.]
    Got it.
    Mr. Valenti. I want to point out that Malaysia and Taiwan, 
because this is in your territory, Mr. Chairman, and members of 
this committee, are really the breeding grounds for DVD piracy, 
which is digital piracy--and it is high resolution, and its 
marvelous fidelity to sight, sound, and color. And that was the 
breeding ground. However, I must say those two countries have 
now revised and reinforced their copyright laws. However, now 
we have to find out if they can demonstrate the political will 
and the resolve to enforce those laws. They claim that they are 
going to try to do it, and for the time being, I am going to 
take them at their word and feel confident that they will do 
that.
    But it is digital piracy, though--digital piracy that gives 
movie producers these multiple-Maalox moments, I can tell you 
that, because, as I said earlier, with a click of a mouse, you 
are all over the world. Now, that is something that causes us 
great despair.
    Right now--Senator Boxer would probably know this--in 
California, the average cost, average total cost, of the 
average movie put out by the major studios--that is to make it 
and to market it--is a mind bending $84 million. Now, who on 
earth is going to continue to invest these huge sums of 
private-investment capital, Senator Allen? Who is going to do 
that if they know that movie is going to be intercepted and 
stolen early in its journey from domestic theatrical exhibition 
to cable to satellite to television stations and to 
international, because that is what we have to do in order to 
retrieve this huge investment in these various market segments. 
And if you can't do that, if it is stolen early in that 
journey, how do you get your money back? This is causing great 
despair, great concern, and sleepless nights on a lot of people 
who are in this business.
    Now, we are operating on three fronts. First is in the 
courts. We have to go into the court to resolutely defend the 
copyright laws of this country. And Hilary Rosen and Doug and 
all of us are trying to do this to make sure these copyright 
laws are not loosened or shrunk or diminished, because if they 
are, we are gone.
    No. 2, we are using a highly sophisticated search engine 
named Ranger Online. This is like a bloodhound that ferrets out 
and sniffs out illegitimate movies on the Internet. And we do 
that because you program this sophisticated search engine with 
the names--all kind of names of, say, the hundred movies that 
are being mostly pirated, and they are the popular movies. And 
we give that to this bloodhound of an Internet searcher, and it 
roams the Internet. And whenever it finds one of these movies, 
it tells us, ``Uh-uh, we got one.'' It's like these dogs 
sniffing out drugs when you have got them at an airport. And 
then we send out cease and desist letters.
    I am not a lawyer, but I always love to say lawyer-talk. It 
gives me a kind of sense of surreal confidence here--cease and 
desist letters.
    Senator Boxer.  Jack, you do not need any more confidence. 
You are the most confident person I have ever met. [Laughter.]
    Mr. Valenti. Now, we sent out last year 54,000-plus of 
these cease and desist letters, to 1,680 Internet service 
providers, ISPs. And our anti-piracy people tell me we have 
about 80 percent compliance with this. The ISPs have been very 
good and take them down.
    But there is a wonderful game that kids play. And all of 
you who have small kids know about Whack-a-Mole where a little 
peg comes up and the kid hits the peg and then it pops up over 
here. That is what happens in piracy. You banish them in this 
little distance, and they pop over there. So that is why every 
day we have to be vigilant, because, like virtue, we are every 
day besieged, and it is really tough. [Laughter.]
    Now, the third front, though, because none of the above is 
going to do this job, and now, I am getting to the really core 
of this, Mr. Chairman, and this is where I am really appealing 
to you and your colleagues. None of this is going to work until 
we get a really seamless protective clothing that we can put on 
our movies so they won't be stolen. The only way we can do that 
is two ways.
    One is--I have been trying to get the IT community, the 
computer manufacturers, the chip designers, the video-device 
recording people--I flew to Menlo Park, California, on 
September 20--Silicon Valley--nine days after 9-11--with all 
these people assembled in a room, and I said, ``Please, let us 
sit down and talk this thing through, see if we can't together 
find some common ground to form some standards that we can put 
in every machine around the world, in this country 
particularly, and then that machine will give us the kind of 
sturdy protection we need.
    And when we do that, the Internet is going to grow faster, 
because movies now, legitimate movies, will be on the Internet. 
That is the great, glaring omission today. There are no 
legitimate movies up there. As I have said to the people of 
Sysco--and it goes to Microsoft--they will sell more software 
because more people will be using the Internet to bring down 
legitimate movies.
    Now, so far, in Menlo Park, I thought I was going to get it 
moving, but no follow-up meetings. I haven't been able to put a 
follow-up meeting together. I am still trying. I am urging--I 
am entreating these people. Let's sit down together and then if 
we can find a concord, then we go to the Congress and let it be 
mandated by law.
    Now, I am still trying, Mr. Chairman, but I am saying this, 
that all my Texas charm has been to no avail, because I haven't 
been able to put those meetings together. Now, if we can't put 
the meetings together, if we can't find this, what's the 
answer?
    I remember when I was working for Lyndon Johnson, you'd go, 
and you'd say, ``Let's do this, that,'' and somebody would say, 
``We can't do that.'' Then you would say, ``Well, if not this, 
what?'' The only alternative left is to go to the Congress and 
say, ``We've tried, but you have got to do this. You have to 
make sure we protect this huge economic asset to this 
country.``
    Mr. Valenti. My final comment is this. There is nothing 
more that movie producers and distributors want more than to 
have another new delivery system to send movies to consumers so 
they have another choice as to how they want to watch a movie 
at a fair and reasonable price, which would be defined by the 
consumer, not by us. And then we would dispatch these movies to 
the customers in their home. And if they wanted to see it 
there, if they wanted to go to a theater, or they wanted to see 
it some other way--but it is the new delivery system.
    To turn away from this delivery system would be fiscal 
lunacy. And while I think you can say a lot of things about the 
movie industry, they are not fiscal lunatics, I can tell you 
that. That's what we are about, Mr. Chairman, and that is why 
Hilary and Doug and Mr. Raikes are here today; it is to plead 
with you. We've got to find a way to save this unique, 
uncommon, and almost un-duplicatable asset. I am done.
    The Chairman.  You done good.
    [The prepared statement of Mr. Valenti follows:]

   Prepared Statement of Jack Valenti, Chairman and Chief Executive 
                Officer, The Motion Picture Association

    a present and future danger--the potential undoing of america's 
                      greatest export trade prize
An accounting of movie thievery in the analog and digital format, in 
the U.S. and around the world

    This text of my testimony is titled ``A Present and Future Danger--
The Potential Undoing of America's Greatest Export Trade Prize.'' And 
for good reason. Which is why it is entirely suitable and necessary 
that the Senate Committee on Foreign Relations illuminate and seriously 
examine the impact of any erosion of the worth of the Copyright 
Industries (consisting of movies, TV programs, home videos, books, 
music and computer software) on the economy of this country.
The Economic Worth of the Copyright Industries
    The facts are these: The Copyright Industries are responsible for 
some five percent of the GDP of the nation. They gather in more 
international revenues than automobiles and auto parts, more than 
aircraft, more than agriculture. They are creating NEW jobs at three 
times the rate of the rest of the economy. The movie industry alone has 
a Surplus balance of trade with every single country in the world. No 
other American enterprise can make that statement. And all this at a 
time when the U.S. is bleeding from some $400 billion in deficit 
balance of trade.
The Peril Now and in the Future
    Brooding over the global reach of the American movie and its 
persistent success in attracting consumers of every creed, culture and 
country is thievery, the theft of our movies in both the analog and 
digital formats.
    Let me explain. Videocassettes, the kind we all use and enjoy, are 
in the analog format. Worldwide, the U.S. movie industry suffers 
revenue losses of more than $3 billion annually through the theft of 
videocassettes. That is a most conservative estimate. We are everyday 
vigilant in combating this analog thievery because, like virtue, we are 
everyday besieged. We are trying to restrain this pilfering so that its 
growth does not continue to rise to intolerable levels.
    But it is digital piracy that gives movie producers multiple Maalox 
moments. It is digital thievery, which can disfigure and shred the 
future of American films. What we must understand is that digital is to 
analog as lightning is to the lightning bug. In analog, the pirate must 
be provisioned with equipment, dozens, even hundreds of slave-video 
recorders, because after repeated copying in analog on one machine, the 
finished product becomes increasingly un-watchable. Not so in digital 
format. The 1,000th digital copy is as pure and pristine as the 
original. The copy never wears out. It is that durability which 
provides the DVD (Digital Versatile Disc) with its grandest asset and 
at the same time provokes such anxiety within the movie industry 
because copying retains its high resolution.
    Then there is the mysterious magic of being able, with a simple 
click of a mouse, to send a full-length movie hurtling with the speed 
of light (386,000 miles per second) to any part of this wracked and 
weary old planet. It is that uncomprehending fact of digital life that 
disturbs the sleep of the entire U.S. film industry.
    Movies have, until recently, been sheltered from the incessant 
pilfering visited on the music industry. Music on the Net has no 
graphics and can be brought down with normal computer modems since most 
songs are no more than three or four minutes. Not so with movies chock 
full of graphics. With a normal 56K computer modem, it could take 
between 12 to 24 hours to bring down a two-hour movie. Or to put it 
another way, one movie takes up the same space on a hard drive as do 
600 songs. The moat that has slowed a wide-spreading assault on movies 
in digital form is the languor with which American computer-homes have 
valued broadband access. With broadband access, a two-hour movie can be 
taken down, depending on the speed of the DSL line or cable modem, in 
20 to 40 minutes. (But the next generation Internet will be able to 
download a two-hour movie in some 45 seconds!) Only some 9.5 million 
American computer homes have current high-speed, large pipe connections 
to the Internet. But that moat will gradually be drained as broadband 
grows, both in its speed-power and in the deployment of broadband to 
homes. Once that happens, the moat will flatten, and all barriers to 
highspeed takedowns of movies will collapse. The avalanche will have 
begun. It is the certainty of that scenario which concerns every movie 
maker and distributor in the land.
    A new threat has entered the arena, called Optical Disc Piracy. 
This new thievery design first reared its fraudulent head in China with 
VCD (Video Compact Disc), a cousin to DVD though its quality is 
inferior to DVD but cheaper to reproduce on machines that are far less 
costly than those that play DVD only. China, in response to our 
entreaties, has cracked down on pirates, forcing them off-shore. The 
huge problem in China at this writing is the street vendor malady. We 
are working with the Chinese government to shrink this problem. 
Meanwhile, mostly in Asia organized thieves are busily involved in 
stealing DVD movies, reproducing them and distributing them everywhere. 
In 2001, the MPA's Anti-Piracy forces conducted 74 raids against 
facilities in China, Hong Kong, Indonesia, Malaysia, the Philippines, 
Taiwan and Thailand, happily engaged in manufacturing illegal copies of 
both VCD and DVD. Happily, that is, until our Anti-Piracy people, along 
with local law enforcement officers, moved in for the raid. In some 
cases arrests were made and in some cases equipment confiscated. But 
not in all, because of porous attention by authorities in some 
countries to really crack down hard on these pirates. It is an ongoing 
problem for us.
    More ominously, just recently, with the sturdy aid of the FBI, a 
factory was raided in New Jersey which was illegally reproducing DVDs. 
This was the first time we have located a U.S. site dealing in 
illegitimate DVDs. But it won't be the last.
    I report quite joyously that we are receiving first class 
assistance from the FBI, the U.S. Secret Service, the Department of 
Justice, U.S. Customs Service as well as local U.S. Attorneys' offices.
Comes Now the Internet, Future New Delivery System, but Now a Piracy 
        Haven
    It is the Internet, that all-embracing technological marvel, which 
is putting to hazard our attempts to protect precious creative 
property. Viant, a Boston-based consulting firm, has estimated that 
some 350,000+ movies are being downloaded from the Internet every day--
all of them illegal.
    We are deploying our defenses on three fronts.
    First, we have taken on the task of protecting copyright in the 
courts. We have to insist that copyright laws cannot be casually 
regarded, for if those laws are shrunk or loosened, the entire fabric 
of costly creative works is in deep trouble. We have moved swiftly and 
decisively against all those Web sites which harbor and inspire theft 
of movies. We took on Scour, iCrave, RecordTV, all of which were either 
promoting the takedown of illegal movies or, as iCrave did, sucking up 
Canadian and U.S. television signals illegitimately, transporting them 
to the iCrave Web site, and then selling advertisements. iCrave was 
promptly shut down by the courts, but its clones will not go away. 
Scour, and RecordTV are no longer functioning. Whenever a new site 
appears whose prime allurement is the availability of movies, 
illegitimately file-shared or readied for download, it is our intention 
to move with celerity to bring them to the courtroom.
    Second, we are using Ranger, a sophisticated search engine, to 
track down movies illegitimately on the Web. Once Ranger sniffs out an 
illegal site, we send ``cease and desist'' letters to the Internet 
Service Provider or the site itself. In 2001, we dispatched 54,000 such 
letters to 1,680 ISPs around the world.
    What is even more perfidious is the ascending growth of on-campus 
illegitimate downloads of brand-new movies. Students operating off 
their university's broadband, high-speed, state-of-the-art computer 
systems have a merry old time bringing down movies, none of which are 
up there legally. We're not talking about old, classic films. These are 
new films, many of which are still in theaters: ``Ali,'' ``Harry 
Potter,'' ``Lord of the Rings,'' ``Monsters, Inc.,'' ``Ocean's 
Eleven,'' ``Vanilla Sky,'' ``Brotherhood of the Wolf,'' ``Mothman 
Prophecies,'' ``Snow Dogs,'' and the list goes drearily on. The result 
is immensely attractive to students, downloading and viewing new movies 
without paying for them, with fine fidelity to sight, sound and color.
    Just two months ago we learned that one of America's most 
prestigious and preeminent universities, vexed by the burden of heavy 
persistent student use of its computer system, actually set up a 
special Web site for Gnutella, a well known mightily used site for 
filesharing (a discreet description of taking films which don't belong 
to you). This astonishing action was taken by this University to 
relieve the swollen student use of its computer system. I swiftly 
dispatched an unambiguous letter to the President of that University 
chiding him for ``a disreputable plausibility'' which collided with the 
moral compact that informs a stable, free, democratic society. The 
University, to its credit, immediately cancelled the Web site.
    Just a few weeks ago, in Taiwan a new Web site came on stream. It 
is steadily streaming brand new movies, mostly American, all without 
permission of their owners. That site is charging $1 per movie, and 
steadfastly claiming they are protected by Taiwan copyright laws. I do 
not choose to give its name, else it would be over-run by the newly-
minted ethics in too many young people which says that if films are 
available on the Net, they ought to be downloaded, no matter the 
illegality. We are now in the process of urging the Taiwan government 
to shut down the site, so plainly and clearly operating outside the 
copyright laws of Taiwan.
How to Transform the Net Into a Thriving New Delivery System, With More 
        Choices for Consumers, and Full Protection for Movies
    Keep in mind that movie producers and distributors are filled with 
optimism over the prospect of the Internet as another new delivery 
system to dispatch their movies to consumers, at a fair and reasonable 
price (the defining of ``fair and reasonable'' to done by the 
consumer). To resist or to turn away from that new Internet delivery 
system would be fiscal lunacy. Why? Because the movie-making cost has 
risen to nerve-shattering heights. In 2000, the total cost to the major 
studios of making and marketing their films was, on the average, some 
$84 million per film! Only two in ten movies ever retrieve its total 
investment from domestic U.S. theatrical exhibition. Each film must 
journey through various marketplace sequences--airlines, home video, 
satellite delivery, premium and basic cable, over the air TV stations 
and internationally--in order to break even or make a profit.
    How, then, can America's most valued creative works find it 
possible to make those works available to consumers on the Net, giving 
consumers another choice for the way they want to view movies?
    This brings us to the third front: To sit down in good faith 
negotiations with the Information Technology (IT) community, makers of 
computers and video recording devices, to search--TOGETHER--for an 
agreement on standards which would be part of every computer and 
device. Those standards would be similar to standards in so many 
industries and appliances in our country--all railroads have the same 
width, all electrical outlets accept all electrical devices, etc. These 
standards would allow for the protective garments of content 
encryption, watermarking and other necessities for guarding the life of 
movies. All this to the ultimate benefit of American consumers, 99.9 
percent of whom are not hackers, who have moral standards which inhabit 
their daily conduct. Consumers would readily rent or buy movies on the 
Net--at fair prices. They would have an additional choice, how they 
want to watch movies, when they want to watch them.
    I have tried, personally, to enlist others into the beginning of 
these talks. On September 20, 2001, I flew to Silicon Valley, in Menlo 
Park, California to meet with the IT community, computer makers, chip 
designers, etc. Disappointingly, no further meetings emerged from that 
first gathering. I continue to try. I have suggested that no one on 
either side of the table will agree to anything that is not in each 
other's best interests, so no one can lose by talking. If all groups 
could find common ground on which an agreement would sit firmly, 
perhaps we could then come to the Congress to mandate that concord.
    Alas, so far there is no meeting in progress which is considering 
the all-embracing solution to what everyone knows to be a totally 
unacceptable morass, which offends both ethical precepts and rational 
business judgments.
    I close this document with Mr. Churchill's exhortation: ``Truth is 
incontrovertible; panic may ignore it, malice may distort it, ignorance 
may deride it, but there it is.''
    A singular truth exists in the movie industry: ``If you can't 
protect what you own, you don't own anything.''

    The Chairman.  Ms. Rosen.

    STATEMENT OF HILARY ROSEN, PRESIDENT AND CEO, RECORDING 
                INDUSTRY ASSOCIATION OF AMERICA

    Ms. Rosen. I just hate that I've been following this guy, 
my entire career.
    I associate myself with everything my friend, Mr. Valenti, 
just said. I wanted to talk about two things. And while I can't 
match Jack's flash, perhaps I can add a little educational 
flesh around the Internet part of it. So, Mark, why don't you 
set up while I make a couple of points.
    I want to follow up on something that Ambassador Allgeier 
and Al Larson said, in terms of international piracy. We have 
some problem countries, and it is important for this committee 
to know what those priority countries are and what our 
recommendations are for making some progress there.
    Brazil--we have had a problem in the record industry in 
Brazil for years. It is the sixth largest music market. It is 
being killed by piracy. Brazilian music is loved all around the 
world. There's just no excuse for the lack of the Brazilian 
government's attention to this. And so hopefully GSP is going 
to be renewed quickly, but I urge this committee to continue to 
bolster our government's efforts with respect to Brazil, and 
that Brazil should be denied GSPs in--when it is renewed.
    Mexico--again, another place where the laws are fine. Their 
problem is enforcement. We have made some progress with the 
Attorney General's office. We've had some raids. We can't get 
judges to impose any sentences. It has become sort of an 
unpunishable crime in Mexico, and it is a significantly 
important market for American products, for American Latino 
artists who are quite popular in Mexico, who would normally be 
selling significantly, just at this point do not even want to 
release their music there.
    China--keep the pressure on. We've made some progress, 
because the government finally recognizes there is a problem. 
This is no longer a problem of export in China, which is 
different than several years ago. It is a problem of not being 
able to take advantage of how exciting and huge this domestic 
sales market is, because the marketplace is so piratical, so 
China is quite important.
    And finally, I would just say something about Russia. 
Russia wants to be in the WTO, another place where the 
marketplace simply precludes American investment in any 
significant form because there is just too much piracy and 
corruption there. Russia shouldn't be allowed into the WTO 
until they address this problem. And this committee's support 
for those priorities with our administration and with 
government leaders as you meet with them, as I know you do on a 
regular basis, would be very much appreciated. This committee 
has always had a leadership role in intellectual property 
through ratification of trade treaties and copyright treaties 
as well as things that each of you do in other contexts in the 
Senate.
    I want to address Senator Allen's point early on, which is 
why should most Americans who do not work in the entertainment 
industry care about piracy. And I think the answer is very 
simple. And Jack said it eloquently from a movie business side.
    Ours is a risk-based business. Our companies spend millions 
of dollars taking a chance on artists that they think have the 
opportunity to be successful. Ninety percent of those are going 
to fail to make back their costs. Ten percent of those are 
going to pay for all the failures. And what to the pirates want 
to copy? The successes. So they are essentially creaming the 
successes, which deny opportunity to new artists.
    If you love listening to a great album by a new artist you 
have never heard before as much as I do, then you know how 
important it is to be able to continue to generate the revenue 
to invest in new artists. In the new technology area, 
businesses are clearly being stifled by the Internet piracy 
area, whether it is legitimate subscription services, whether 
it is digital rights management companies, technology-
protection companies, even Internet service provider 
alternatives--nobody can compete with the amount of money that 
is being lost in opportunity to Internet piracy.
    And these are hundreds of jobs in the high-tech sector. 
Internet music is a perfect example. Investment in Internet 
music has stalled. Several years ago, it was one of the biggest 
generators of investment and new jobs and new opportunities. It 
has stalled because it is virtually impossible to compete with 
the pirates, and all of our companies have begun their 
legitimate offerings. But it is still extremely difficult to 
get a foothold in the marketplace.
    Let me try and illuminate a little bit where Jack 
summarized on the Internet side. I will give you an example. 
This company called Fast Track that Jack referred to, it is 
based in the Netherlands. And what they did was, they created a 
piece of software that they own and they then--it is a system 
called KaZaA.
    And it is more than software, actually. It's a system that 
essentially maintains and profits from this web of piracy. 
They've licensed this system to a company in Tennessee called 
Music City and to a company in the West Indies called Grokster. 
And how it works is individuals will download onto your PC at 
home what's called a client software. And we downloaded it onto 
our system. And what that means is that now we are connected to 
the centralized search engine of KaZaA. So you can see up in 
the left, it says KaZaA. It's sort of hard to read. And, Troy 
or Mark, can you read there and tell me how many people were 
connected at the same time when this was turned on?
    Voice. 509,000.
    Ms. Rosen. So yesterday, when we went to get our sample, 
over 500,000 people were also online connected to this software 
and to this search engine, because once you download the client 
software, it connects everybody together, all looking for 
files. And how many files are available for download from those 
people?
    Voice. About 79 million.
    Ms. Rosen. Seventy-nine million files at one point last 
night. This system is generating 3.6 billion downloads a month. 
So now why don't we show you how it works. Once you have the 
system on your place, we go in and add in to the ``Search 
For.'' And you can search for audio files, you can search for 
software, you can search for movies.
    We're searching for audio files, because that is what we 
do. We're searching for Billy Joel. So you key in Billy Joel. 
You push ``Search.'' All of those are Billy Joel's songs, that 
instantly come up, that are available for download.
    The Chairman.  Is there any cost for this?
    Ms. Rosen. No. In fact, on the bottom, you can see there is 
advertising. KaZaA is selling advertising space on their site, 
so they are making money by attracting people to the site. But 
they are offering the downloads for free.
    If you looked closer at this, you could see that virtually 
Billy Joel's entire catalog is available here online. And so we 
picked something--I forgot what we picked. We are keying onto 
``Moving Out.'' That's the one we want to download. So you move 
your mouse to the ``Moving Out.'' You click on it, and this is 
what comes up. And you can actually watch it being downloaded 
as it is happening. See, that line is--in the middle that is 
moving across to the right shows the download as it occurs. 
That is how simple it is. That's how fast it is. Unlike a 
motion picture, music takes two minutes to download a song.
    The Chairman.  How long would it take to download a full-
length feature movie off of this?
    Ms. Rosen. It depends on your bandwidth size.
    The Chairman.  On the computer most kids have at home.
    Mr. Valenti. I mentioned earlier, Mr. Chairman, if I may, 
that if you have a 56K modem, it would take you 12 to 24 hours 
for a two-hour movie. If you have a DSL line or a cable modem 
that is pretty fast, you can bring it down to about 45 minutes. 
But within weeks and months, you have got the next generation 
coming where you can bring it down in 45 seconds.
    The Chairman.  Thank you.
    Senator Allen.  Mr. Chairman, just for the record, I 
visited with Napster. And I know Mr. Valenti brought them up, 
and I know that is a great fear of the motion picture industry 
is that happening, that what happened originally with Napster. 
As I understand, Napster's business model now, it is actually 
people paying for it. At least that is the way I understood 
what they are trying to do now.
    Ms. Rosen. I am sick of picking on Napster. Napster 
actually has begun to secure licenses for music. They have 
switched over to a legitimate business model. Ultimately, when 
people are in this long enough, they want to make money. These 
guys want to make money. They just haven't figured out--you 
know, they are selling advertising.
    And when ultimately the force of law gets brought down on 
them, hopefully they will seek to make money in a legitimate 
way. But Napster has done that, and they are currently in 
negotiations. They have gotten licenses from several companies. 
They're in negotiations with several others.
    Once you have this on your system, you can see that what it 
turns into is essentially a file list very much like your other 
software programs on your computer. You just click on it, and 
you can play the song.
    [Playing song.]
    Ms. Rosen. Even on these speakers it sounds fine. Thanks, 
Mark.
    Let me just tell you one more thing about this system in 
particular, this KaZaA system, which is owned by a company 
called Fast Track in the Netherlands. I said it had a World 
Wide Web because of the licensees in various parts of the 
world. Several weeks ago, a Dutch court enjoined them to shut 
them down in the Netherlands to prevent their system from being 
used. They immediately sold the company to an Australian entity 
and closed down their company in the Netherlands to avoid the 
jurisdiction of the Dutch court.
    So we are going to end up chasing these guys all around the 
world and doing what we can, but the pirates clearly take too 
much comfort in their ability to search for the lowest common 
denominator around the world in terms of legal protection.
    That is why, unlike physical piracy, where you really are 
subject to the laws of the jurisdiction you are in, in Internet 
piracy, with a global information link, you are vulnerability 
is the weakest point anywhere in the world. And that is why I 
think the U.S. Attorney, Mr. Gordon, made the point that the 
digital world of piracy is a significantly different game. 
Thank you.
    [The prepared statement of Ms. Rosen follows:]

   Prepared Statement of Hilary Rosen, President and CEO, Recording 
                 Industry Association of America [RIAA]

    Thank you, Chairman Biden and Senator Helms, for holding this 
hearing and asking me to appear before you today to discuss the issue 
of piracy, a problem that has threatened the vitality of American 
creative works for a very long time. The Recording Industry Association 
of America is comprised of hundreds of labels that produce, manufacture 
and distribute over 90% of the sound recordings in the United States 
and are affiliated with companies that produce 70% of the world market. 
Let me also express our sincere thanks to this Committee for its long 
history of protecting the intellectual property sector of our economy 
through the ratification of important trade and copyright treaties.
    Stifling piracy levels in many parts of the globe undermine the 
stability and growth of U.S. entertainment industries, affecting not 
only U.S. creators and jobs, but also robbing other countries of much 
needed foreign investment and cultural and economic development. Our 
international affiliate, IFPI, currently estimates that the sale of 
pirate sound recordings exceeds $4.5 billion, a number that I view as 
conservative in light of the growing CD-R piracy that we confront in 
multiple markets around the world. Let me also point out that this 
number does not include losses dues to Internet piracy--a subject that 
I will return to later on. In any event, it should be clear that 
addressing this large and growing problem has fundamental importance to 
the U.S. economy and to our overall competitiveness. There is no 
country that can compete with us in the production of creative 
materials. We cannot permit our trading partners to openly steal this 
country's greatest assets.
    Piracy is not a private offense. It hurts everyone by diminishing 
the incentive to invest in the creation of music. It should not 
therefore be viewed as a crime only against songwriters, performers, 
musicians, record companies, distributors, wholesalers and retailers, 
but against each of us. It deprives each of us access to diverse 
musical entertainment at the same time that it deprives governments of 
tax revenues. Pirates do not invest in recorded music and pirates do 
not pay taxes. And our member companies invest everywhere in the world 
in local artists. So, while American music represents 30% of the world 
market, piracy of music does not just affect American interests, it 
really is a global problem. And, as is often the case, where problems 
are global, American leadership is essential.
    I would like to highlight today two distinct but equally important 
forms of piracy--the piracy of physical recordings, and Internet 
piracy.
    For physical recordings, there are unfortunately many places around 
the world where the market for recorded music is overwhelmingly 
pirate--indeed piracy claims in excess of 90% of the market in all too 
many locations. In Russia, China and Brazil alone--the world's three 
leading pirate marketplaces, the music industry loses more than $1 
billion per year--for our community that is a staggering sum. In each 
of these countries, the story is pretty familiar--sufficient, if not 
perfect, laws, exists, but the respective governments have simply not 
paid enough attention to their enforcement.
    There is cause for some optimism in China, as officials are no 
longer denying the existence of the problem--a critical first step in 
the possible resolution of this long-standing concern. We have seen 
China ebb and flow over the years as international pressure is great, 
and then subsides. Russia too has begun to address its copyright 
enforcement deficiencies, but it will require significant prodding from 
its future World Trade Organization (WTO) partners to ensure progress. 
I would ask that this Committee work together with the Administration 
to communicate to the Russian Government that WTO admission will take 
place only after our copyright protection issues have been addressed. I 
also urge you to work with the Administration in conveying to our 
trading partners, including Russia, China, Brazil, Taiwan and others, 
that compliance with the Trade Related Aspects of Intellectual Property 
(TRIPs) Agreement is non-negotiable.
    In Brazil, the Government has demonstrated remarkably, and 
inexplicably, little resolve to deal with a piracy problem that is 
destroying its own copyright industries. Brazil is a frustrating 
example of years of efforts that have produced no results. Brazilian 
music is loved around the world, yet in Brazil, our members have given 
up selling cassettes to the pirates and the CD market is slowly being 
strangled. Brazil's neglect, unlike China and Russia whose markets are 
just getting started in some ways, is killing a thriving industry--
formerly the sixth largest in the world.
    The U.S. copyright industries have filed a petition with USTR 
asking for withdrawal of Brazil's benefits under the General System of 
Preferences (GSP). If and when the GSP program is renewed, and I 
certainly hope that it is, I would ask that this Committee and the 
Administration jointly convey a message that Brazil will not be 
permitted to enjoy unilaterally extended trade benefits from the U.S. 
if it stands idle and allows the open and notorious theft of U.S. 
intellectual property.
    There are many other countries whose enforcement practices leave a 
great deal to be desired. Ukraine, Taiwan, Pakistan, Philippines, 
Paraguay and Thailand all harbor organized criminal syndicates that are 
involved in the manufacture and global distribution of pirate CDs. You 
may have noted that Ambassador Zoellick recently imposed sanctions on 
Ukraine in connection with their involvement in this illicit trade, and 
I want to thank USTR for the aggressive use of the tools that the 
Congress provided to the Administration in the 1988 Trade Act. Ukraine 
has been a manufacturing point for CD's that traveled throughout 
Western and Eastern Europe and even fed the pirate markets in Latin 
America. I would also like to publicly thank U.S. Ambassador to Ukraine 
Carlos Pascual for his superhuman efforts to persuade the Government of 
Ukraine to assert control over the production and export of pirate CDs. 
Ukraine's failure to adopt the necessary practices to control illegal 
CD production and exports was certainly not the consequence of a lack 
of effort on the part of the Ambassador and his staff, and they deserve 
recognition for their work.
    I should point out that we, through an umbrella group of the 
copyright industries known as the International Intellectual Property 
Alliance (IIPA) (including the RIAA, the MPAA, the Business Software 
Alliance, the Interactive Digital Software Association, and the 
Association of American Publishers), will be filing a report with USTR 
this Friday detailing the lack of effective enforcement in key foreign 
markets and urging various forms of U.S. sanctions under Section 301 of 
the U.S. Trade Act. I will ensure that a copy of this report gets to 
the Committee. But you can be sure the countries mentioned will be the 
focus of our efforts.
    While much remains to be accomplished in the fight against the 
piracy of music in physical forms (such as CD-R burning), a great deal 
must also be done to combat Internet piracy.
    Internet piracy poses a global and borderless threat to the future 
success of American creators. The unauthorized digital transmission of 
a sound recording on the Internet is no less prejudicial to the 
financial incentives in creating music, and thus no less damaging in 
drying up creativity. As a consequence, today's unauthorized digital 
broadcast, or unauthorized Internet transmission is no less piratical 
than their physical counterparts. And with Internet piracy, the lack of 
real protection is actually stifling the development of a new 
marketplace. It is extremely difficult to support the investment in new 
on-line systems that require payment by the consumer for music when so 
many existing sites are providing free services without licenses or 
compensation to the creators of that music. There is no substitute for 
serving our consumers on-line and that is what we have been trying to 
do. But these businesses are facing classically unfair competition from 
the pirates. While the music industry has struggled with this question 
for several years and in several high profile legal cases, the 
situation continues to remain critical. We must be vigilant in ensuring 
that standards of protection are not outdated by technology, and that 
financial rewards remain a realizable goal for American creators of 
copyrighted materials.
    These rewards are put at risk by commercial enterprises that 
develop and maintain systems that allow for the unauthorized use of 
recorded music. One such commercial enterprise that seeks to profit by 
giving away music in which others invest is a company called FastTrack. 
FastTrack is based in the Netherlands, but recently, after an 
injunction was issued by a Dutch court prohibiting its continued 
operation, it was suddenly sold to an entity based in Australia. 
FastTrack developed, maintains and profits from a computer system that 
encourages the free copying of music, movies, images, software, and 
videogames. FastTrack's proprietary service is known to many users 
around the world as KaZaA. FastTrack also licensed the system to Music 
City, a company based in Nashville, Tennessee. That system is known as 
Morpheus. Finally, FastTrack licensed the system to a company in Nevis, 
West Indies, which operates under the name Grokster. Together, these 
systems are distributing 3.63 billion songs or files a month around the 
world. In order to protect our rights, we joined with the Motion 
Picture Association of America and the National Music Publishers 
Association in a suit against FastTrack, Music City and Grokster to 
prevent further theft of our recordings.
    This Committee helped take a major step in combating Internet 
piracy when it ratified the World Intellectual Property Organization 
Copyright Treaty and the Phonograms Treaty.
    These treaties contain four critical provisions:

          (1) sound recording copyright holders must have the ability 
        to authorize or prohibit the transmission of their works 
        through interactive media;

          (2) states must ensure that technological systems used by 
        copyright holders to guard against unauthorized uses may not be 
        circumvented;

          (3) states must prohibit interference with rights management 
        information used by copyright holders to identify their works; 
        and

          (4) states must, and this is especially important so I am 
        going to quote the language of the treaty itself, provide 
        ``expeditious remedies to prevent infringements and remedies 
        which constitute a deterrent to further infringements.'' This 
        means there must be adequate penalties for those that enable 
        and profit form the pirate activity.

    Promoting international legal order through the adoption and 
implementation of the WIPO Treaties is a critical step in creating the 
conditions under which U.S. copyright owners can prevent piracy in the 
online environment, and I urge you to use every opportunity to convince 
other countries to ratify and properly implement these treaties. This 
Committee should pay particular attention to issues of enforcement. You 
can play an important role in requiring governments to understand the 
need to ensure that Internet Service Providers and other entities must 
be held to reasonable standards of liability, like they are in the 
U.S., ensuring that they cannot turn a blind eye to what is taking 
place through their systems. Partnerships and the adoption of 
reasonable business practices by all sectors will be critical in 
ensuring the vitality of America's creative sector.
    If we are able to construct a new global marketplace dominated by 
legitimate businesses rather than pirates, we will be able to reach new 
markets with unprecedented efficacy. More than ever before, the music 
industry will become a global enterprise based on local creativity. 
This hinges, however, on maintaining an environment in which copyright 
protection is effective, and continues to fuel investment in the 
creation and distribution of creative materials.
    Global sales of recorded music last year exceeded $40 billion. But 
we sold less music than we did the year before despite the fact that 
consumer interest in music has, according to reliable surveys, never 
been higher. They are getting it around the world supplied by a pirate 
network of services and manufacturers. Preserving markets and creating 
opportunities for expansion is now a primary imperative to sustain one 
of the worlds most vital, diverse and competitive industries. Our 
future is wholly dependent upon achieving adequate and effective 
protection for our recordings in global markets. While this task has 
traditionally been fraught with difficulty--witness the well-known 
piracy problems in China or Mexico--it becomes increasingly more 
complex with developments in technology that permit the instantaneous 
and global distribution of materials with the touch of a button.
    In a global information network, protection of the creative 
materials that are such a critical part of this globe's economic 
backbone is only as strong as the weakest link in the information 
communication chain. Thus, there is an absolute necessity to eliminate 
existing gaps in the international legal structure that undermine the 
protection enjoyed by copyright holders in national and international 
channels of commerce.
    I urge you to stay involved in the fight against piracy. The 
Congress, together with the Administration, should communicate directly 
with world leaders about the importance that the United States 
government attaches to effective copyright protection--both on and off 
line. Thank you very much.

    The Chairman.  Thank you. Mr. Lowenstein.

STATEMENT OF DOUGLAS LOWENSTEIN, PRESIDENT, INTERACTIVE DIGITAL 
                      SOFTWARE ASSOCIATION

    Mr. Lowenstein. Mr. Chairman, Senator Allen, Senator Boxer, 
Senator Smith. I think I first wanted to commend you, Mr. 
Chairman, for the remarkable insightful report you referred to 
earlier. I thought it was an extraordinary and exceptional 
piece of work. And if I had any sense, after listening to Jack 
and Hilary and reading your report, I would just say I 
associate myself with everything in your report and everything 
they said, and I would just shut up and let everybody go home. 
But I am going to plunge forward nonetheless.
    I want to start very briefly with a word about our industry 
which may not be as well known as the film industry, the 
business software industry, and the record industry, to members 
of this committee.
    It is now estimated by Wall Street analysts that video game 
sales in the United States could top $16 billion within the 
next four years. That is in the United States alone. World-
wide, Bear Sterns estimates that the games software industry 
will generate $112 billion in sales over the next four years. 
Equity markets, as everybody knows, were depressed in 2001, but 
the entertainment software industry index was up 40 percent 
last year, which I think is another measure of how dynamic and 
fast-growing this industry is.
    Now, the remarkable thing about the growth of this industry 
is that it has really occurred in essentially four areas of the 
world, and that is it--North America, Australia, New Zealand, 
Western Europe, and Japan. There are over a hundred countries 
around the world where our industry essentially makes no effort 
to market its product. It is impossible to imagine how fast 
this industry could grow and how much we can grow if we had 
access to legitimate markets around the globe.
    The piracy and counterfeiting activities we face fall into 
the categories we have heard here today. One is hard-goods 
piracy--optical disc piracy, the illegal manufacturing of 
optical disks around the world and their distribution--and 
Internet piracy. And we have all the same problems that you 
have been hearing about.
    I want to focus just for a second on the optical disk 
piracy problem because sometimes the sexiness of the Internet 
makes us lose track of this, but this still is a huge area of 
concern, I think, for all of our industries. And as has been 
alluded to here today, the optical disk piracy networks are 
controlled by international crime syndicates who have the money 
and the political muscle to build and locate pirate replication 
factories around the world.
    They have the distribution networks required to move those 
goods to all corners of the globe, where they sell, as we have 
heard this morning, for as little as one or two dollars. We 
can't--our members can't compete, which is why we are not 
making an effort in so many countries to do so. And I want to 
call out some countries here today.
    Senator Allen asked about it. Hilary has mentioned some. 
But countries like Malaysia, Thailand, Taiwan, Indonesia, the 
Philippines, the Ukraine, and Russia are among the winking and 
nodding host countries for these pirate syndicates. And I do 
not think we should mince any words about that.
    I thought one way to dramatize exactly what goes on in this 
area is to perhaps walk you through 24 hours in the life of a 
pirated game. I do not have any visual displays here, so try to 
use your imagination. It starts with a member of a cracker gang 
who will purchase a game at 9:00 a.m. on the day of its 
release, if they haven't already gotten a pre-release beta 
copy, perhaps from an internal leak from a company, perhaps a 
reviewed copy that went to a magazine.
    But as soon as the game buyer is back home, he runs a 
program that produces a mirror copy of the CD, perhaps a ten- 
or fifteen-minute process. Then his work is done, and the pros 
take over. The mirror copy is transmitted, usually through a 
broadband connection, to the next level of the illegal scheme, 
a game cracker. It is now, say, about 11:00 a.m., two hours 
after release, and the cracker is working on breaking the copy 
protection. This is not easy, but it is not uncommon, depending 
on the skill level of the cracker, for the copy protection to 
be broken in 12 hours or less.
    So now, run the clock ahead, we are 12, 14 hours into our 
day. The cracked game is now ready for distribution and use 
without the original disk. It is now, say, midnight, and IRC 
and news groups are advertising its availability on the 
Internet for purchase and download, and the cat is out of the 
bag.
    Now, we are not done yet, because, assuming the game is a 
hot title, it will be sold by the crackers to replicators for 
anywhere from a few thousand dollars, because many of these 
crackers are kind of, they are really not in it for the money, 
but they will sell it for a few thousand dollars or, in some 
cases, considerably more, to the replication facilities that I 
have been talking about, the organized crime syndicates.
    So now, as early as 9:00 o'clock on day two, 24 hours after 
the game was released, organized crime's network of pirate 
replicating factories in Asia and elsewhere have got the game 
and they are stamping out tens of thousands of copies for 
shipment throughout the world, and the game is off to Europe 
and Africa and the Middle East and even North America and 
Canada.
    So that is kind of a quick run through of this. My 
testimony has some suggestions of things that I think we can do 
about the problem. I do not want to take too much of your time 
to address those. I do want to touch very quickly on two things 
that have come up here this afternoon.
    Like Hilary, I wanted to comment on Senator Allen's point 
about impact and essentially echo what she said. You know, it 
takes two to three years now to make a video game. It takes 
typically not the same as a motion picture, but we are now 
pushing $10 million to make a typical video game. You have 
teams of animators, programmers, software engineers, and so 
forth working on this process. Many of them are in small to 
mid-sized development studios around the country.
    Yeah, the industry is dominated by large software 
publishers, but we have hundreds of small developers who feed 
those software publishers. And so essentially when you--and the 
other point that is certainly important to realize about this 
industry is that most games make their money in the first 
couple of months. If they are not selling one or two months 
after release, they are off the shelf. Just like the record 
industry, most games do not make money. It's a hits-driven 
business.
    So when you pull all that together, what piracy is doing is 
it is sucking money out of the industry. It is depriving the 
industry of the R&D dollars required to make that next game 
that is going to cost $10 or $15 million. And with 145 million 
Americans who are playing computer games and video games, not 
just a bunch of adolescent boys these days, that means millions 
of Americans are being deprived, potentially, of entertainment 
options. And, of course, the economic impact that results from 
developers and the publishers not being able to maximize their 
revenue.
    And with that and the lateness of the hour, I will wrap up 
my remarks and welcome any questions.
    [The prepared statement of Mr. Lowenstein follows:]

   Prepared Statement of Douglas Lowenstein, President, Interactive 
                      Digital Software Association

                              introduction
    The Interactive Digital Software Association (IDSA) is the U.S. 
trade association representing the business and public affairs 
interests of the world's leading publishers of interactive games for 
video game consoles, handheld devices, personal computers, and the 
Internet. IDSA members collectively accounted for nearly 90 percent of 
the $6.35 billion in entertainment software sales in the United States 
in 2001, and billions more in export sales of American-made 
entertainment software. Our industry has just entered a new era of 
dynamic growth. After doubling in size between 1994 and 2000, Wall 
Street analysts now estimate that industry sales in the U.S. will 
double again to at least $12 billion by 2005, with some estimating that 
retail sales will reach a staggering $16 billion that year. Worldwide, 
Bear Stearns forecasts that the game software industry will generate 
$112 billion in revenue over the next four years. A recent survey by 
Peter Hart & Associates found that 145 million Americans now play 
interactive games on their PCs, their game consoles, and/or their cell 
phones on a regular basis.
    The industry's growth has been a boon to the U.S. economy, and to 
our exports. Industry sales have grown at an annual rate of 15% a year 
over the last several years, double the rate of growth of the U.S. 
economy as a whole, and far outpacing the growth in other entertainment 
and technology industries. A recent report in ``Red Herring'' Magazine 
identified video games as one of the two or three most impressive 
performing sectors in U.S. equity markets in 2001, with the index of 
video game stocks up more than 40% for the year. All of this led 
journalist Ted Fishman, writing in ``Worth'' Magazine to conclude, 
``For investors, for businesses, and even for national economies, video 
games aren't child's play. They are becoming a dominant medium.''
    In today's modern era of video games, it typically costs more than 
$5 million to make a top game, with a development process that spans 
two years from start to finish. Teams of 20-30 animators, software 
engineers, writers, sound engineers, and other crafts come together to 
create an artistic achievement that is the most technologically 
advanced form of entertainment available, where players are the authors 
and directors, and where passivity, the hallmark of 20th century 
entertainment, is replaced by interactivity. Once the game is 
completed, IDSA members pour millions of marketing dollars into 
supporting the new title, knowing that in this hits-driven business, 
most games have but a month of shelf life to capture consumer mind 
share and take off, or else join the vast majority of titles that do 
not return a profit to the publishers.
    The worldwide growth and expansion of the U.S. game software 
industry is impressive on any terms. But it's even more remarkable when 
you consider that this growth has largely occurred in only four 
markets: North America, Western Europe, Australia/New Zealand, and 
Japan. There are at least 100 other countries around the globe where 
there is virtually no legitimate market for our products due to rampant 
piracy. It is no exaggeration to say that the growth of the U.S. video 
game business is limitless if we can reduce piracy in these untapped 
markets to incidental levels. The potential was vividly illustrated in 
a ``New York Times'' photograph of newly liberated Kabul in October. 
Here in one of the world's most repressed and isolated cities, a 
picture taken just a few days after the expulsion of the Taliban, 
showed a group of kids gathering excitedly around several Game Boy 
handheld video game consoles. If the kids in Kabul can't wait to get 
their hands on video games, it's safe to say the same is true in 
country after country in Asia, the Middle East, Eastern Europe, and 
South and Central America.
               piracy and counterfeiting: a global primer
    Interactive game software is created and distributed in digital 
format, making it susceptible to electronic theft, unauthorized 
reproduction, mass duplication and Internet transmission. To prevent 
such abuses, almost all game publishers seek to protect their product 
by incorporating into the game software one or more different 
technologies aimed at restricting unauthorized access to, and copying 
of, the digital content of these products. However, despite the 
millions of dollars that have been invested in such access and copy 
protection technologies, intrepid pirates have been able to penetrate 
these defenses and access the digital game content for their illicit 
purposes. Once these defenses have been compromised, the digital game 
content is then subjected to active global channels of piracy and 
counterfeiting that result in the almost instantaneous availability of 
illegal copies of this game product in all four corners of the world. 
This instant piracy is especially devastating because in our industry, 
given the hundreds of releases per year, limited retail shelf space, 
and the competition for consumer mindshare, a title's fate is 
determined within a month or two of launch. Massive piracy at launch 
thus can have a material impact on the financial success of a given 
game.
    The piracy and counterfeiting activities plaguing the game industry 
fall into two general categories: (1) the illegal manufacture and 
global distribution of optical disc copies of games; and (2) the 
posting and worldwide transmission of illegal copies of games as 
digital files via the Internet.
Optical Disc Piracy
    Optical discs known as CD-ROMs have for some time been the 
predominant format for games played on personal computers. Starting 
with the PlayStation in 1994, there has also been a deliberate trend 
towards putting console games on optical discs, as this format offers 
greater storage capacity on which to hold the large quantities of 
digital information required for the newer more powerful game 
platforms. The latest console technologies, such as the Xbox, 
PlayStation 2, and GameCube, use optical discs as the carriers for 
their game software. This trend for game software paralleled the rapid 
expansion in the use of optical discs for other entertainment media, 
including music CDs and motion pictures on DVD.
    This universal medium has proven to be an irresistible opportunity 
for international crime syndicates, for which the economics of optical 
disc replication and global distribution has tied in comfortably with 
existing strengths within their organizations. These criminal 
enterprises have easy access to the necessary capital to acquire 
multiple optical replication lines and the required connections in 
certain countries to establish replication facilities, often in 
clandestine settings, where they are being allowed to operate with 
little interference or interruption from any government or law 
enforcement authorities.
    Many of these criminal organizations have selected countries in 
Southeast Asia as the home base for these replication facilities. 
Optical disc facilities engaged in illegal replication activities have 
been found at one time or another in every country in this region. 
While progress in certain countries has been made in controlling 
illegal optical disc replication, such as in Singapore and Hong Kong, 
other countries continue to be active hosts of such facilities, in 
particular, Malaysia, Thailand, Taiwan, Indonesia and the Philippines. 
Pirate optical disc replication facilities are also frequently found in 
Eastern Europe, Russia and some of the former CIS countries, Ukraine in 
particular.
    As our colleagues in the film and music industries have estimated, 
the average annual production capacity of a replication line is over 3 
million discs per year, a capacity that typically far outstrips any 
demand for legitimate product. Given the massive mismatch between 
demand and capacity, it's fair to conclude that the concentrated 
presence of replication lines in many of these countries is indicative 
of the fact that their illegal output is intended for export to other 
markets. Of course, the criminal organizations base their manufacturing 
facilities in these countries because they know that they will have 
considerable freedom in replicating and exporting the pirate optical 
discs to their export markets. The host countries frequently turn a 
blind eye to such activity, either because of the political and 
economic influence of the criminal enterprises that own the facilities 
or because the problem is so large and pervasive that they are 
reluctant to enact the measures and commit the resources to deal with 
the problem.
    The international distribution channels of these pirate and 
counterfeiting operations are widespread. Pirate game product 
manufactured in Southeast Asia has been found in Europe, Africa, the 
Middle East and throughout the western hemisphere, from Argentina north 
through Canada. U.S. Customs seizure statistics for 2001 reveal that 
there were over 1,300 different seizures involving optical media 
product, many of these from Southeast Asian countries. And these are 
U.S. seizures--representing only a fraction of shipments made directly 
from Asia into other markets.
    The criminal organizations running these operations have clearly 
been able to take advantage of the inadequacy of the customs operations 
and border controls in many countries around the world. Not only are 
the criminal organizations involved in the optical disc trade effective 
at securing the export of their pirate products from their country of 
manufacture, but they have also carefully arranged for multi-step 
shipments for such product in mapping its global distribution. On 
several occasions, we have found game product that had been 
manufactured in Asia shipped through Europe and then on to countries in 
South America. Frequently, such ``trans-shipment'' schemes are done to 
avoid scrutiny and detection as shipments from certain countries are 
more likely than others to arouse suspicion and possible inspection. In 
addition, the pirate exporters have also taken to reducing the number 
of units in each shipment as the smaller quantities are more likely to 
elude detection and, even if found and seized, would represent a 
smaller loss to the pirate trader.
    The global counterfeiting operations have had a devastating effect 
on the distribution of legitimate game product to international 
markets. As these pirate ``entrepreneurs'' sustain neither development 
costs, nor royalty expenses, nor marketing costs, they enjoy untold 
advantages over the publishers and sellers of legitimate game product. 
Adding this to the fact that pirates never pay applicable taxes and 
import duties, it is not difficult to understand how in almost every 
international market a pirate copy of a game is offered at a fraction 
of the price that the legitimate version of the same game would command 
and usually reaches that market well in advance of the legitimate 
version. This has resulted in pirate product overwhelming legitimate 
sales in certain markets and even preempting legitimate market entry in 
others. Many IDSA members remain skeptical of their ability to compete 
against pirates in countries such as Thailand, Malaysia, the 
Philippines or Indonesia because of the huge predominance of pirate 
product in the marketplace. The same holds true for many countries in 
Eastern Europe, where IDSA members would like to establish a foothold 
but are reluctant to assume the risk given the current piracy climate. 
Even in other countries where many IDSA members are working to sell 
legitimate versions of their games, it is common to find piracy rates 
of over 90%, such as in Mexico and Argentina.
    While the United States ranks as the world's largest market in the 
consumption of interactive game software, most IDSA members now 
generate 40-50% of total revenue from foreign markets. It is very clear 
that the international pirate and counterfeiting trade in interactive 
game product, if left to grow unabated, will have a profoundly harmful 
effect in dampening the growth of the interactive game industry.
Poland Stadium: Organized Crime Piracy Up Close and Personal
    Let me take this from the abstract to the real world. An excellent 
example of the scope and scale of optical media piracy and its 
ascendance in certain countries is the ongoing presence and visibility 
of the 10th Anniversary Stadium in Warsaw, Poland. This stadium, a 
former football stadium, centrally located in Warsaw, has served as an 
open marketplace for the sale of a huge volume and variety of illegal 
goods and pirated products, whether game software, pirate movies, 
illegal music CDs, as well as applications software.
    Sellers from Poland, Russia, Estonia and Eastern European countries 
come to the stadium to rent out selling space within or around the 
stadium and sell illegal merchandise, much of which is likely 
manufactured in optical disc facilities in their home countries. Each 
of these ethnic groups is reportedly tied in with organized crime 
groups who are active in the pirate trade and who use the stadium as a 
high volume outlet for their optical disc product. The volume of 
illegal transactions is huge and has been estimated at over $3 billion 
per year (not all of this represents sales of pirate product), helping 
to make the stadium, by some estimates, the second highest income 
producing enterprise in the country.
    The most telling aspects of this story are the following facts: (1) 
the Stadium has been operating in this fashion for a number of years; 
(2) the Stadium and the European Fair operating in the Stadium are 
managed by an international board of foreign representatives under a 
contract that they have entered with the Stadium authority as well as 
the board of the local Warsaw police district; (3) the illegal 
activities at the Stadium are the subject of monitoring and 
surveillance by Polish law enforcement authorities for some time; (4) 
these authorities claim that, despite undertaking occasional actions 
against Stadium businesses, they are unable to meaningful enforcement 
efforts against the illegal businesses operating in the Stadium due to 
the control maintained by the Stadium security and police force, as 
well as the protection afforded the Stadium businesses by a local 
organized crime group; (5) the Stadium and its pirate sales of millions 
of dollars in infringing products has been the subject of the copyright 
industries' annual filings to the U.S. Trade Representative for a 
number of years; (6) despite the attention that the U.S. government has 
focused on the Stadium in response to these filings, it continues to 
operate freely, with local Embassy reports confirming the Polish 
government's refusal to close down the Stadium because of the benefits 
it provides to the local economy.
    One last point about these organized crime syndicates. We are 
concerned about reports, admittedly anecdotal, that suggest that the 
organizations involved in the piracy and counterfeiting trade are also 
involved in other forms of criminal endeavors. For example, on October 
13 the ``Washington Post'' reported that Paraguayan commandos raided a 
video game store linked to international terrorists in Ciudad del Este, 
a hotbed for video game piracy. I cannot say for sure that there is a 
clear link between terrorism and piracy--in contrast to the 
unimpeachable certainty about the link between organized crime and 
piracy. Unfortunately, there are limits to the resources that private 
industry can put to this problem and therefore concrete information in 
this area is hard for us to come by. In this case, only the U.S. 
Government has the resources and the ability to pursue this potential 
link between those who would endanger America's national security by 
undermining its economic security. I hope this Committee will encourage 
the U.S. Government to actively investigate this as part of its broader 
attack on terrorism.
Internet Piracy of Game Product
    While the video game industry has been a pioneer in distributing 
entertainment content for free and for pay over the Internet, this 
medium has unfortunately proven to be a terribly effective outlet for 
the worldwide dissemination of pirate version of games. Here's one 
example of how the system works:
    A member of a ``cracker'' gang--a gang of people who ``hack'' or 
``crack'' the access and copy protection controls in games--will 
purchase a game the first day of its release, first thing in the 
morning--if they haven't already obtained a pre-release beta version. 
As soon as they're back home, they run a program that produces a mirror 
copy of the CD, perhaps a 10-15 minute process. The hacker will then 
transmit this mirror copy, usually through a broadband line, to a game 
cracker in the gang. So within an hour or two of release, the cracker 
is hard at work breaking the copy protection. It is not uncommon, 
depending on his or her skill, for the cracker to remove copy 
protections in 12 hours or less. The cracked game is now ready for 
distribution and use without an original disk. By late evening of the 
release day, IRC and newsgroups are advertising the cracked game's 
availability and, depending on demand, the cracked game may also be 
sold to replicators for anywhere from a few thousand dollars to 
considerably more. Thus, within 24 hours of release, the pirate 
replication factories I described earlier may be stamping out tens of 
thousands of illegal copies for shipment throughout the world, 
resulting in untold lost sales for the publisher and artists involved 
in making the game.
    Unfortunately, law enforcement has found it difficult to 
investigate and penetrate these hacker rings, even more so because many 
of these groups' members reside and operate from overseas. However, 
three separate operations by U.S. Customs, the Department of Justice, 
the Federal Bureau of lnvestigation and the Office of the Inspector 
General of the Environmental Protection Agency in December 2001 
targeted raids and search warrants against individual members of some 
of these rings. Of particular note to this Committee, and particular 
encouragement to us, is the fact that in two of these operations, the 
Federal agencies involved were able to coordinate their investigative 
efforts with foreign law enforcement agencies in five countries (United 
Kingdom, Sweden, Finland, Australia, Canada), some of whom executed 
search warrants against local residents. These investigations are still 
ongoing, but I submit to you that this is the kind of international 
cooperation this Committee should encourage and stimulate if we are to 
have a coordinated worldwide attack on pirates of all stripes.
    It is fortunate that U.S. law offers IDSA members, as well as other 
copyright holders, the legal means to address Internet sites that 
feature illegal copies of their product through the remedies offered by 
the Digital Millennium Copyright Act (DMCA). Such remedies help 
facilitate a fairly rapid takedown of infringing product from Internet 
sites, which is quite important given the difficulty and protracted 
effort required to investigate and prosecute the hacker rings described 
above. Unfortunately, the vast majority of foreign countries do not 
offer a similar system for the removal of infringing product. These 
countries' adoption of similar ``notice-and-takedown'' systems as part 
of their legal codes would go a long way to help the game industry and 
copyright holders in general pursue their own efforts to rid the 
Internet of infringing product.
                         policy recommendations
1. Renewal of the GSP trade benefit program
    Although there are many important considerations underlying the 
renewal of the Generalized System of Preferences (GSP) program, the 
IDSA believes that the availability of GSP trade benefits has been an 
effective incentive for countries to improve their efforts to protect 
and enforce U.S. intellectual property rights. Every year, the U.S. 
Trade Representative (USTR) reviews petitions submitted by the 
copyright industries with respect to trading partners who enjoy GSP 
trade benefits but who fail to provide adequate and effective 
enforcement of American intellectual property rights, one of the 
qualifying criteria for GSP eligibility. Because one of the possible 
sanctions available to USTR and its review of these countries' IP 
protection efforts is the suspension of GSP benefits, this review of 
GSP beneficiaries' IP performance is an effective way to pressure these 
countries to improve their enforcement efforts against local piracy and 
counterfeiting operations. The current inactive status of the GSP 
program has therefore removed one of the more effective mechanisms for 
obtaining significant improvements in countries' efforts to address 
local optical disc and Internet piracy. Accordingly, we would urge this 
Committee to play a leadership role in securing GSP renewal.
2. Assisting law enforcement overseas/Mutual Legal Assistance Treaties 
        (MLATs)
    As many of the significant players in the optical disc and Internet 
piracy trades are resident and operating overseas, Congress should 
consider approaches that would allow U.S. law enforcement officials to 
aid in the pursuit of foreign nationals for commission of U.S. IP 
crimes. Particularly in the optical disc piracy trade, most of the 
players are operating in countries where they are unlikely to fear 
local prosecution or efforts to curtail their pirate activities.11In 
this regard, there are a number of foreign law enforcement agencies who 
are quite active and effective in pursuing investigations against 
optical disc operations and, to a lesser extent, Internet pirates. Many 
foreign police forces have also indicated a strong interest in becoming 
more active in these areas. Federal law enforcement officials should 
develop a better level of communication and coordination with such 
officials as such relationships will inevitably become necessary in 
pursuing investigations into optical disc enterprises as well as 
Internet piracy rings, both of which have extensive trans-national 
connections and links.
    These cooperative investigations are based on mutual legal 
assistance treaties (MLAT's) that specify the conditions under which 
U.S. law enforcement agencies cooperate with non-U.S. law enforcement 
agencies, and which require Senate ratification. We encourage this 
Committee to play a major role in reviewing these MLATs and, where 
necessary, strengthening them to ensure cooperation is forthcoming in 
internet-related investigations and those involving ``hard-goods'' 
piracy, particularly in those counties in Asia and Eastern Europe where 
factory-style production of pirate optical media product remains our 
greatest concern.
    Still another effective way to build foundations for these 
relationships is through increased technical training of foreign law 
enforcement officials and agents. Such training should focus on the 
technical and forensic aspects of optical disc and Internet piracy. The 
IDSA is committed to participate and/or provide whatever technical 
support would be required to develop a technical curriculum for such 
training programs. In addition to such training, a greater effort needs 
to be made to reach out and share intelligence and information with 
foreign law enforcement bodies, particularly when the information 
implicates a local resident or national.
3. Foreign countries' adoption of notice and takedown provisions to 
        address Internet piracy
    As noted previously, the absence of statutory provisions on ISP 
liability and notice and takedown in foreign countries similar to those 
found in the DMCA severely limits IDSA members' abilities to address 
foreign Internet sites which are hosting infringing activity or 
offering pirate versions of their game product. Statutory recognition 
of the liability of an ISP for infringing product being made available 
through its systems has been a crucial factor underlying the effective 
system of notice and takedown that has enabled U.S. copyright holders 
to obtain ISPs' removal of pirate product from their systems. Congress 
should take an active role in promoting the adoption of such measures 
by U.S. trading partners as this would give U.S. copyright holders a 
better chance to try and address instances of Internet piracy which 
arise overseas.
4. More effective deployment of Federal law enforcement resources
    We have been gratified by recent stepped up efforts within the U.S. 
Government to focus more resources on large scale optical media and 
Internet piracy. Since mid-1999, we have seen an increased focus on IP-
related crimes through greater allocations of dedicated manpower and 
resources within a number of Federal agencies, including the Department 
of Justice, the Federal Bureau of Investigation, the U.S. Customs 
Service and a number of U.S. Attorneys' Offices across the country. 
Attorney General Ashcroft's announcement last year of the Computer 
Hacking and Intellectual Property (CHIP) units within key U.S. 
Attorney's Offices was another helpful step towards ensuring the 
dedication of an appropriate amount of resources to cover this growing 
and complex area of economic crime.
    As I said, we are certainly gratified by this increased Federal 
commitment. But we would like to suggest that adding manpower and other 
resources is not by itself sufficient to the task at hand, and 
therefore offer the following recommendations to enhance the efficacy 
of the national government's drive to defeat the worldwide pirate 
enterprises.
CHIP Mandate
    First, the CHIP units' resources must be devoted to both ``hard 
goods'' or packaged goods piracy, not exclusively on online offenses as 
some statements have suggested may be the case. Such a narrow focus on 
the Internet will give an unfortunate free pass to the organized 
criminal piracy rings operating with impunity today. As optical media 
piracy currently poses an even greater danger to the interactive game 
industry, we would urge that priority also be assigned to pursuing 
investigations into the sources of pirate optical discs in this 
country, many of which will likely begin with the information derived 
from Customs seizures of optical disc shipments. Application of law 
enforcement resources to such cases could prove useful in deriving 
additional information on both foreign and U.S.-based sources of such 
optical disc product, providing a basis for additional investigations 
aimed at the pirate manufacturers.
Inter-Agency Coordination
    While it is helpful to have increased Federal resources available 
to address the multiplicity of leads and intelligence on the growing 
optical disc and Internet piracy problems, there is a continuing need 
for the resources addressing these problems to be carefully 
coordinated, particularly establishing the business connections between 
different illegal operations can be more easily achieved if 
investigative efforts by different offices and different agencies are 
tracked so that shared intelligence can help facilitate building the 
case against individual targets. This past December's raids against 
Internet piracy rings were a good example of how effective such 
coordination can be as three separate investigations involving 
different Federal agencies benefited from a coordinated approach on 
execution of search warrants and sharing of investigative intelligence. 
We would like to see such coordination expanded, centralized and 
implemented on a more systematic basis so that we can maximize the 
effectiveness of the investigative and enforcement resources applied to 
Internet and optical disc piracy.
Training
    While increasing the number of investigative and prosecutorial 
staff to focus specifically on IP-related offenses is valuable, it is 
crucial that such individuals receive the proper training and 
orientation in the areas of optical disc and Internet piracy, 
particularly in the technological facets of the problem and in computer 
forensics. As the offenses in these areas as well as the evidentiary 
aspects of the cases are heavily influenced by technological factors 
and considerations, it is extremely important that the agents and 
prosecutors assigned to work in these areas have a full understanding 
of the technological components of the software and the related 
hardware systems. IDSA and its members are prepared to provide whatever 
training resources are required to help provide such background and 
know-how to Federal law enforcement officials.
Technology
    It is critical that law enforcement officials working in these 
areas be furnished with computers, devices, machines and other 
equipment that will enable them to conduct effective investigations 
into the activities of those engaged in Internet and optical disc 
piracy. Those who are active in these pirate trades are generally 
technologically sophisticated and frequently well-equipped with the 
latest and best in computers and Internet access. It is crucial that 
the law enforcement agents who we task with tracking these people down 
and gathering evidence on their illegal activities are provided a 
roughly equal footing on a technological level.
                               conclusion
    Mr. Chairman, it's clear from my testimony that global piracy is 
both a drag on the growth of U.S. businesses, and the U.S. economy, and 
that it is a legitimate American foreign policy concern. In this 
testimony, I have tried to share with you some concrete sense of our 
industry, the nature of the global piracy problem, and some easily 
achieved ways to make an even greater dent in the pirate networks.
    At the same time, it must be said that pirates tend to flourish 
most in countries where any potential respect for IP is overwhelmed by 
harsh economic realities. In this sense, the single greatest action we 
can take as a government is to pursue a foreign policy that seeks to 
raise the standard of living and build viable, sustainable, free 
market, national economies. I believe that if countries stamp out IP 
theft, they create a climate where IP-based industries can thrive; a 
growing IP-based economy, in turn, perfectly aligns with greater 
economic growth and opportunity. So while we must continue to wage the 
enforcement fight, we must also acknowledge that only when the 
underlying economic conditions around the world improve will we create 
an environment where incentives for piracy truly diminish. That may 
take decades, but it is a case where our industry's interests coincide 
with our national and economic security interests as well.

    The Chairman.  At what point does the Internet and 
increased access to broadband begin to pinch on the 
counterfeiters? In other words, at what point does it get that 
you can't make money setting up these counterfeiting operations 
that stamp out ten thousand, or fifty or hundred or two-hundred 
thousand of these games, movies, or CDs, records, or any other 
software, that because you can just pull it right out of the 
ether, you know? Yes, Jeff?
    Mr. Raikes. Well, Mr. Chairman, it is like Jack said, it is 
Whack-a-Mole. These are criminal organizations which are quite 
versatile, and they continue to evolve themselves. So what they 
do is, they prey on consumers, and so their step will be to set 
up what appears to the consumer to be a legitimate site to 
distribute software or distribute other types of technologies, 
yet, in fact, they will be illegal businesses, just like you 
are seeing today. So it would be my expectation that the 
criminal element will continue. It is just that they will have 
to change their business model.
    The Chairman.  The arrival and the growth of broadband 
strikes me as a double-sided development for all your 
industries. I mean, in one sense, it gives you, Jack, what the 
industry and all the industries have been looking for: direct 
access to the consumer with high-quality capability and the 
market will determine, absent piracy, be able to allow you to 
market directly to consumers. But how without--I mean it gives 
the pirates the same--and the counterfeiters the same access.
    Mr. Valenti. Mr. Chairman, let me speak to that, because 
you put your finger on something that is quite elusive, and it 
is a good-news-bad-news kind of thing. For every gain, there is 
a loss; for every loss, there is a gain, the Amazonian doctrine 
goes. The window of opportunity we have to protect ourselves is 
the languishing of broadband in this country. That is the moat 
that has been protecting us for some time.
    Yet in order for us to really make use of the Internet, we 
must have more broadband. Today, there are nine and a half 
million broadband users in this country--66 million computer 
homes, only nine and half million have broadband. That is DSL 
line or cable modem. We do know that the use of the Internet 
has begun to flatten. It's not growing with the exponential 
speed it once had. And I keep saying--I do not know how the 
rest of the world feels about this--but I am saying that the 
great omission on the Internet today is the lack of movies. 
That is what people want, and that is the thing that drives it. 
It is not there.
    The only way we are going to do this, Mr. Chairman, and we 
know what is required to protect our movies. You've got to have 
a broadcast flag that protects over-the-air television from 
being re-transmitted on the Internet. You have to have content 
encryption. You have to have watermarking, which allows you to 
plug what is called the analog hole.
    We know the ingredients that are required to protect us. 
And until you get those ingredients all put together in an all-
embracing solution, we are going to suffer in a lamentable way 
the slow undoing of one of America's great economic assets, 
whether they be video games or music or Microsoft software or 
whatever. It's going down the drain sooner or later unless we 
can stop it.
    I am saying to you if we can't get all the IT communities 
and chip makers and the home recording device people together 
in a room and let us work it out privately then bring it to the 
Congress, if we can't do that, then the Congress has to do it.
    Mr. Lowenstein. Senator, if I may just add a couple of very 
quick comments. Our industry, I think, is perhaps farther ahead 
in its use of the Internet as a distribution tool than some of 
our colleagues here. We've been using the Internet to 
distribute game content for years, at least five years. And in 
the lifetime of the Internet, that is a lifetime.
    Games are made available for free. Games are made available 
for monthly fees. They're made available for hourly charges. 
There are games where literally ten and twenty thousand people 
are playing simultaneously--several of those enormously 
successful commercially. There are 50 million Americans who say 
they play games online, anything from card games like Hearts 
all the way up to very intensive games. Even with a fairly 
proactive effort to embrace the Internet technology, our 
industry is obviously still facing tremendous piracy problems, 
nonetheless. It's not simply a question of making the content 
available through legitimate channels. Broadband, you have 
absolutely right, will compound the problem.
    It is, as you say, absolutely a double-edged sword. But it 
is inevitable. And so as we march toward that, we are going to 
have to find ways, both through the legal systems and through 
technology. Our industry, again, if I can just say for one 
second--we have proprietary platforms. Again, we are a little 
different from our colleagues.
    Microsoft has the X-Box. Sony has the Play Station. 
Nintendo has the Game Cube. Each one of those has hundreds of 
millions of dollars in R&D invested in encryption to prevent 
the playing of illegal games. And unfortunately, 
notwithstanding the investment of some of the most talented 
people in R&D in the world in these companies, these copy 
protections are routinely cracked. So I am not even as sanguine 
as Jack, that even if you can come up with a standard it is 
going to ultimately solve this problem.
    That is a rather pessimistic note, but I wanted to share it 
with you.
    Mr. Raikes. I think we absolutely share Jack's goals, and I 
agree with Mr. Lowenstein that--we are a content provider, too. 
So, you know, we may not be really in the movie business, but 
we care a lot about trying to protect content. And so, 
therefore, we take a very proactive position on this. We're 
spending more than $50 million annually on digital rights 
management technology, the kind of technology that will help to 
secure content. But again, we are dealing with people who also 
are going to try and continue to advance their skill, their 
criminal skill.
    And so I think one of the important things is to have the 
technical community working together and also the business 
community. And, in fact, Jack's efforts have energized a group, 
the Content Protection Technology Working Group are getting 
together and having these discussions.
    The important thing to remember is that whatever sort of 
standards are put in place, the mechanism has to be flexible 
enough to encourage the innovation. You have to strike a 
balance that encourages people to innovate on digital rights 
management technology, because, again, you have to understand 
the criminal elements are going to be trying to crack the copy 
protection, the digital rights management technology, on an 
ongoing basis. And so we have got to keep moving, moving, 
moving in order to make sure that we deliver on this.
    So, there is no lack of energy or enthusiasm for what Jack 
said, certainly from our perspective and I think many of our 
colleagues in the industry. The key issue is how can we make 
sure that we come together as an industry and get the right 
technologies in place and keep one step ahead of the bad guys.
    The Chairman.  Senator Allen.
    Senator Allen.  Thank you, Mr. Chairman. No. 1, I fully 
understood, having visited some of the studios and others, 
especially the motion-picture business, whether that is Disney 
or Warner Brothers or others, the tens of millions of dollars 
that are invested in these wonderful creations and the 
thousands of jobs they provide. And when they are shooting in 
other places other than, say, Burbank, and so forth, what the 
impact is on communities. And just like any other business, 
when one takes a risk, whether it is in the recording industry 
or motion picture industry or the game--my children--my son, in 
particular, is the one that keeps you all in business. 
[Laughter.]
    All of that, you have to get a return on your investment. 
And if you are not going to get a return, if there is thievery, 
so to speak, you have to increase the price. But in the long 
run, you kill off that creativity, because they are simply not 
going to make those investments which are risky to begin with. 
And the ones that are profitable, and if you have made, like, a 
pharmaceutical, once you finally get something that has a 
market, that gets stolen, it is hardly going to be conducive to 
more creativity and risk taking and making a better product, 
whether it is music or whether it is television or whether that 
is also--of course, in motion pictures.
    I think that this panel here is very representative, and 
the comments, particularly of Mr. Valenti as you were going 
forward, and that of Mr. Raikes and Lowenstein and Ms. Rosen, 
as well, on the issue of broadband. In looking at broadband, it 
is interesting that all of us, at least many of us are trying 
to get broadband to more areas, especially to rural areas, 
sometimes inner-city areas. It's looked as an economic 
development, modern day rural electrification matter. 
Interestingly, I have read--and I can't remember the source--
but about half the country has access to broadband, more than 
half. But the actual utilization and desirability is around ten 
percent.
    And why is that? People like to get the Internet, but I 
think what makes the difference is, and why they do not want to 
pay more for broadband, whether it is cable modem or DSL, 
regardless, the reason they do not want to pay more is they do 
not see anything compelling to make a difference. Sure, you can 
download a newspaper a little bit quicker to read, whatever 
your newspaper is or maybe you get the sports scores a little 
bit quicker. Maybe get a better broadcast of the Raiders game 
or something like that. But that is still not enough to make 
you pay more.
    The difference is the content, and that is what will make 
the difference, being and visiting with Microsoft and seeing 
their flat screen projecting Disney's ``Dinosaurs,'' I believe 
it was, the movie, seeing the digital TV, the great creativity, 
the preciseness, the clarity, and so forth of that film and how 
you would enjoy it on one of those large, flat-screen digital 
screens. It seems to me everyone--everyone, whether you are a 
computer maker, whether you are a consumer of electronics, 
whether you are a software programmer, so to speak, software 
manufacturer, obviously the music industry, the recording 
industry, the motion-picture industry, everyone--and the 
Internet companies, for that matter, and those who are 
investing tons and tons of money into broadband--and there is a 
lot of dirt to dig up to put in the fiber optics if you are 
using fiber as opposed to wireless or satellite, there is a lot 
of money into that, and they've got to get a rate of return.
    And so it is in every single party's interest to come to a 
solution. And it may not be just one solution. It may be 
several solutions. The folks at Warner Brothers, the folks at 
Disney, the folks at MGM, regardless, all have to be 
comfortable with it to put that risk of that production of that 
property on the Internet. And so I would hope that all the 
parties would get together as quickly as possible. My solution 
generally is not one of saying, ``Let's get the Congress to 
come up with it.'' And I understand the frustration. Sometimes 
you need to have a kind of an axe over someone's head to get 
them to pay attention and come together. But it is really in 
everyone's interest for the return on the investment on 
broadband and also to get people utilizing broadband, not just 
for entertainment, but entertainment is what will drive it, but 
it also will be beneficial for education. It will be beneficial 
for economics and jobs in areas. So there is a reason for the 
Internet Service Providers, or the broadband whether it is 
again, the fiber optics to be laid, because they will say, 
``Hey, look. If we put this out here, folks are going to want 
it.'' And the digital rights and the innovation on it, I think 
is absolutely essential.
    But these standards, whether it is content or whatever you 
want to call it--content encryption, watermarking, the point is 
it is protecting copyright laws, so to speak, or copyrighted 
property--is vitally important for this whole country.
    Yes, it is great for business, but it is also very 
important for the development of our country. And these 
communities that are very concerned about getting broadband, 
and there is others, such as Senator Rockefeller in West 
Virginia and myself, have been working on various incentives. 
But you can have all the incentives you want, you can have 
these companies digging the dirt to get the fiber all over, but 
if the consumers aren't going to want it, why should anyone do 
it? Just to get a tax break? No. They need to get a return on 
their investment.
    I would encourage each and every one of you all to listen 
to Mr. Valenti. I may not be exactly wanting to use that 
quickly the axe on it to get the government in it, but you all 
do need to get together as quickly as possible. To me, that 
will really spur on the technology sector of our economy while 
also providing consumers what they would want. And I think it 
would also help roll out the digital TV, the digital products 
in the consumer electronics area where they were all thrilled 
last year when they said, ``Gosh, we sold our one-millionth 
digital TV, high-definition HDTV.'' And I said, ``Well, that is 
great. How many TVs are out there in this country?'' You know, 
it is hundreds and hundreds of millions.
    We need to keep moving in technological advancements. And 
so to the extent the recording industry and the motion-picture 
industry is going to help, we all need to get together, and do 
it as quickly possible, because if you all do not get agreement 
on it, I think there will a great impetus to get the government 
developing that standard. And it is best that the innovators in 
the private sector are the ones whose creativity needs to solve 
this problem.
    That's all I have to say. And I want to thank each of you 
all for your testimony and what you are doing to help our 
country along--entertain us or educate us, but mostly allow us 
to have a good quality of life. And I want to thank you, Mr. 
Chairman, for these series of hearings you have had. I have 
never had a chance to listen to Mr. Valenti at a hearing. What 
a pleasure. You could charge admission for that, as well.
    The Chairman. He sort of does, but we will talk about that 
later. [Laughter.]
    Senator Allen.  But again, Mr. Raikes, Mr. Lowenstein, Ms. 
Rosen, Mr. Valenti, thank you so much, and I encourage you all 
to work together as quickly as possible to get that watermark 
or digital protection done as quickly as possible.
    The Chairman.  Senator Boxer.
    Senator Boxer.  Thanks, Mr. Chairman. I will be very brief. 
As I sit here looking at this again, because I have done so 
individually with you, but just to hear you all present it and 
read over my Chairman's statement which, when you were out of 
the room, I said was right to the point, I think it is not an 
overstatement to say that our economy is being threatened by 
this thievery of intellectual property. Now, we have been able 
to quantify it, and I am going to ask you again, our Microsoft 
person, to repeat, because I am not sure the Chairman was 
there--looking out into the future, what is the loss that you 
see to the American economy if this continues?
    Mr. Raikes. Well, at the current rate--I mean, today we are 
seeing annual losses of $12 billion and 100,000 jobs and $1.6 
billion in tax revenue. And we would expect that to increase to 
175,000 jobs and right in that range of $1.5 billion to $2 
billion in tax revenues towards the end of this decade. And 
keep in mind a lot of----
    Senator Boxer.  What is the loss to the industry?
    Mr. Raikes. Well, to the industry today----
    Senator Boxer. Today you said $12 billion. What did you say 
it would be in the future?
    Mr. Raikes. I am not sure. We're hoping that we can tread 
water as fast as we can.
    Senator Boxer.  You said something in your opening 
statement----
    Mr. Raikes. Today it is $12 billion. What I did estimate in 
the future was the amount of jobs and the annual tax revenues. 
And I would say that on that basis you are looking at something 
like potentially $20 billion just in the software industry. And 
we have colleagues here--we all feel a part of the community, 
which is the IP industry or industries--and you put us 
together, you are looking at $20 to $22 billion today. So I 
suppose you could be looking at $40-$50 billion. I do not have 
a precise estimate at this time for the revenue before the end 
of this decade.
    Senator Boxer. Bit it is possible if we do nothing--and by 
that, Senator Allen, I am not saying government, I am saying 
we, Americans do not do something about protecting this 
property, we could be looking at annual losses to business in 
the range maybe of $40-60 billion--that is not an exaggeration, 
altogether. And you said 175,000 jobs. Was that just in 
software?
    Mr. Raikes. Just in the software industry.
    Senator Boxer.  So if you add on others, you are looking at 
a hefty loss of jobs. If we were threatened in some other way, 
we would move on this. This is huge. This is a lot of families 
that are going to not realize their potential. The jobs won't 
be available, or they will loss the job. So I think we are 
talking about jobs in this century.
    We're talking about wealth creation. And we are frankly 
talking about revenues to this government to keep paying for 
the programs, the things that we all believe in, whether it is 
education or others. So we need to address this. And one of the 
great things about Senator Biden is he sits as the chair here, 
and he is the senior member on Judiciary, and so this is a 
wonderful, I think, opportunity to see us match our domestic 
laws and our foreign policy.
    I just hope that we are going to do something, because 
thievery is thievery, and there are laws against thievery. I 
mean, I know, Senator, you support those laws and penalties. 
Now, we have to look to you to set the standard. That I agree 
with. I do not have a problem with that. But we are going to 
have to have to be tough and strong and come behind that, it 
seems to me, just as we would if somebody was stealing a 
bicycle or a car or anything else.
    Let me just close by saying that every time I am subjected 
to this presentation, which I do voluntarily, it makes me get 
more and more upset, because we are really not doing anything 
about it, Mr. Chairman. And it is going to be like other things 
we have happen in this country where we are told about 
something and we do not act.
    We are coming to the point where we have to do something. I 
would like to be kept informed, as a member of this committee, 
on how these negotiations are going. I would offer my offices, 
and I am sure other colleagues would. If we can help bring the 
parties together in any fashion, I am happy to do so. I know 
that colleagues on both sides would be willing to do that 
because I think Senator Allen is right. You need to have all 
the stakeholders in the room. You have to cut to the chase. And 
a lot of us are pretty good at doing that because we have to 
be, because we write legislation, and it is hard to get it 
enacted. We know how to make it happen.
    But I just want to say, again, thank you for this. I think 
this is a wake-up call and I thank you, Mr. Chairman and 
Senator Allen, for this. With all the problem we have in this 
problems we have in this country today--God knows, we have so 
many--and we have had to divert attention to those issues, and 
we will have to for a long time. We can't forget this, because 
if you really strip it all away, these industries are what is 
putting us--keeping us in economic leadership in the world.
    How tragic it would be if, through foolishness, and because 
maybe we are just too occupied, that we just let this slip by, 
and then suddenly we do not have the great music and the 
movies--we know they are not all perfect, but many of them are 
great. We want to see them happen. We want to see the 
leadership in software--we want to retain our leadership.
    And so I just say, Mr. Chairman, I want to work with you. 
If you consider legislation, I would like to be part of that. 
If you want to work and help get these groups together, I want 
to be part of that. My state--this is key to my state. You've 
come to my state a lot. So have all of you.
    You know how crucial it is to my state. So I stand ready, 
willing, and able to help. But we just can't have this and say, 
``Well, we did our thing.'' We must follow through. And I 
pledge I will do that, working with my Chairman.
    Mr. Lowenstein. Senator, may I make a modest suggestion, 
just a very modest one and very brief.
    The Chairman.  Modesty is not required in this chamber. 
[Laughter.]
    Mr. Lowenstein. We have a very serious culture of 
disrespect in this country for intellectual property, and it is 
getting worse. The Napster situation really fed it. It is also 
in existence overseas. We probably have lost the generation of 
kids between over 16 years old, in terms of using services like 
that. They know it is wrong. They do not care. We do need to do 
something, from an educational standpoint, in this country, and 
maybe it is something that everybody can rally around.
    Perhaps there is a role for the Department of Education. 
Jack has talked about this over the years. Hilary has. We need 
to do something to get at young kids today and create a culture 
of respect for intellectual property, because otherwise we are 
going to have another whole generation grow who do not care 
that it is stealing. Just as you were saying earlier, Mr. 
Chairman, millions of Americans would not think of stealing a 
toothbrush who routinely steal works of art. And I think that 
may be something to work cooperatively on. I just wanted to 
share that with you.
    The Chairman.  Thank you. Senator Smith?
    Senator Smith.  Thank you, Mr. Chairman. I often take the 
subway. And this city has the Red Line out to Bethesda where I 
live. And as you go down Union Station there is always a guy 
down there playing a trumpet. And he is actually very good. And 
occasionally, if I have got some change I will throw it in his 
case there. And I think, if what I am hearing what Senator 
Boxer is describing--is if we do not figure this out, all the 
artists are going to be like that guy blowing the trumpet.
    That's what you are telling us, isn't it? I think kids 
actually would understand that, that they are not going to have 
anything if we do not figure out how to reinforce what came off 
Mount Sinai, that thou shalt not steal. Somehow, apparently, we 
have lost that ethic. But how do artists get paid, how do 
Microsoft employees get paid, if everything that you produce is 
quickly stolen?
    Ms. Rosen. I think that is, particularly in music, a very 
interesting point, because clearly artists are not going to 
stop making music. If an artist is compelled to create, they 
are going to create. I think the issue is, will we all lose the 
opportunity to maybe hear that artist? Because record companies 
certainly do not create artists. What we do is give them a 
chance to have their music developed, to produce their albums, 
to distribute their albums, to help them develop long-term 
careers so maybe they can be making music full-time and not 
doing something else.
    Senator Smith.  They will have to go to Union Station to 
hear it.
    Ms. Rosen. I think nobody should mistake the need for 
addressing the issue by saying that art will stop. Art won't 
stop. It's our access to art that will be limited.
    Senator Smith.  Is there something we could do in terms 
of--see, I like the fact that, Jack, you are having these 
meetings. But sometimes work expands to the time allotted for 
its completion. If there is no deadline, maybe there is no 
pressure on the competing industries. Would it be helpful if we 
set a deadline?
    Ms. Rosen. Yes.
    Mr. Valenti. The answer is absolutely. I am always 
reminded--I think in movie parables--I am always reminded of 
the scene in ``The Godfather'' where Al Pacino is telling his 
girlfriend about a certain fellow named Lucco Brazzi and how he 
got to be a friend of his father. He said that his father went 
to a fellow, and he wanted to get one of his proteges out of a 
contract, and so he had Lucco Brazzi put a .357 magnum to the 
guy's head and made him an offer he couldn't refuse.
    In a strange way, I think, Senator Allen that might have 
said, you need some push. I think it would be very helpful if a 
group of important Senators, like yourself, would make it very 
clear to everybody that you need to sit down and work this out 
in private negotiations. And it may take a few months. It is 
not going to take a year or two, because if you do not have a 
deadline, you will have the tendency to dawdle and delay and 
relentlessly keep speaking without ever coming to a conclusion. 
I think there ought to be a deadline, I really do. Congress is 
the absolute last resort, as Senator Allen said. He's 
absolutely correct. You do not want the Congress, with all due 
respect, messing around in something that they have only a 
cursory knowledge of, although some of these young people 
sitting against the wall may have a hell of a lot more than a 
cursory knowledge.
    But I think it needs to be done with the Microsofts of the 
world, with the Dells and the Compaqs and the Hewlett-Packards 
and with the Intels and with the hardware manufacturers. And if 
we could just do that in an orderly way--now, Jeff Raikes says 
the CPWG, and I hate these acronyms, I never can remember what 
the hell they mean.
    But there is this working group, it is going on now, but 
they are discussing one thing. As you know, Jeff, they are 
discussing the broadcast flag. What does that mean? Over-the-
air television and televison programmers worry that television 
programs will be redistributed on the Internet and vitiate the 
worth of the television program. So they are trying to avoid 
redistribution on the Internet. And that is called a broadcast 
flag, and it is inserted in the computer. It's inserted in the 
program. And it says to the computer, you can't redistribute 
this. That is all it says.
    Now, there is, and I can understand this, there is some 
reluctance on the part of computer makers. They do not want to 
have anybody telling them what to put in their computer. I 
understand that. But when you are nearing the precipice and you 
are about to fall off, you hope somebody might throw you a 
lifeline every now and then. And this is what we need.
    Senator Smith.  Mr. Raikes, is there something that 
Microsoft has that is imminent, and if you were already asked 
that question, you do not need to reanswer it, but when I was 
at your campus six or so months ago, I was very impressed with 
what I was hearing that persuaded me that government shouldn't 
get involved, that the marketplace would solve this. And that 
is my strong preference.
    But I am saying perhaps a date only in the sense that we 
are facilitating the private sector to solve this, because we 
will do it much less efficiently than you will.
    Mr. Raikes. Yeah, it is a very good question, Senator 
Smith. And again, we share the enthusiasm that Jack and others 
have, but there is, if I may just offer a little bit of a ray 
of sunshine. Today there are legitimate movies online that are 
being protected by our digital rights management technology. So 
there are examples today of digital rights management work that 
is working and it is effective. But again, we have to keep 
going.
    The Chairman.  Excuse me. Give me an example of a movie 
that, where that is the case. And if that is the case, why 
don't all movie manufacturers go to you to get that done?
    Mr. Raikes. Well, there is a site--I am actually not sure 
of it; in fact, maybe some of other people can help with me 
some of the movies--but it is called Intertainer, with an I, I-
n-t-e-r-t-a-i-n-e-r, dot com, which is a site that exists 
today.
    Now, I haven't had the opportunity to hear what the movie 
industry might think of that particular use of the digital 
rights management technology, and I can understand their desire 
to have even higher levels of security, because we do know that 
there are risks here. And so some people would suggest, for 
example, that you need to add things, like unique identifiers 
in the hardware in order to try to improve the security 
schemes. Those are the kinds of good discussions that our 
industry has underway and needs to continue to have the 
dialogue on.
    While not everybody--not every party in the industry would 
agree on what is the right strategy for balancing, sort of, 
consumer obtrusiveness with the desire to protect the content, 
or standards with the desire to encourage innovation--not 
everybody is going to agree. But the good news is there is some 
promise that has already been shown by some of the technologies 
that are in place. We've used this same technology in our e-
book area, where today we are able to secure content of 
authors. And to my knowledge, that system has not had a system-
wide crack where people are able to take a book and then just 
freely distribute it after cracking that digital rights 
management. So there are those indicators of progress. I think 
the movie industry, appropriately, is setting a very high bar. 
And that is why I think that having the dialogue is good. I 
think that the challenge with, say, setting a date is--the 
question becomes a date for what?
    Because, again, we are going to have to continue to push 
the progress forward. And so, you know, what we will have to do 
is we will have to decide what kind of progress, additional 
progress needs to occur by what given time? But in no situation 
should any one of us, or any of you, view that we hit that 
date, we deliver on some technology, and our work is done. 
That'll never be the case.
    Senator Smith.  Well, I want to say, I am loathe to set a 
date. I am anxious to be helpful, and I think that is what we 
are all saying, because we are even more loathe to lose all the 
economy that is represented in this hearing today. If your 
industries go in the tank because everything is stolen and none 
of your employees can be paid, I think that is the real thing 
that we loathe.
    I know, Jeff, you go after a bunch of people stealing your 
stuff. When you get settlements, what happens to the money 
there? What do you do with it?
    Mr. Raikes. You know, that is a very important point, and I 
am glad you bring it up because in part because it brings us 
back to some of the immediate things that we can also be doing. 
Your support for funding U.S. Customs, the Intellectual 
Property Rights Coordination Center, has been extremely 
important. It led to, in November, an arrest by a cooperation 
of U.S. Customs, U.S. Secret Service, and the L.A. Sheriff's 
office made a $60 million bust in Los Angeles--counterfeit 
software, certificates of authenticity. And that was an 18-
month investigation.
    So just to kind of give you a sense of some of the 
immediate things that we can be doing today and that you are 
supporting. And we hope, as I mentioned, with the anti-
tampering action, we hope for continued support. There is 
progress. What we do is, we look at whatever recoveries we get 
from either, well, in particular from a civil actions that can 
occur from busting software pirates. We look at that as an 
opportunity to reinvest.
    We are going to invest approximately $25 million back into 
these communities to close the digital divide. We look at this 
as an opportunity, these recoveries as a way to give back to 
the communities. We also reinvest in our support for the 
actions of government and law enforcement agencies here in the 
United States and around the world because a big part of this 
is to be able to take the leads, identify the possible criminal 
activities that are underway and then work cooperatively in 
partnership with government in order to do that. So our 
approach, in terms of the recoveries, is to do both of those 
elements--give back to the communities, help close the digital 
divide, and to reinvest in the work that does help to keep this 
part of our economy vibrant.
    Senator Smith.  Mr. Chairman, I know my time is up. I would 
suggest including in the record an editorial that was in the 
Washington Post by woman named Roslyn Maser about--and it is 
entitled ``From T-shirts to Terrorism,'' and she makes an 
incredible case that piracy of these trademarks is one of the 
sources of revenue for Mr. Bin Laden. So it is even beyond just 
stealing for money; it is stealing for terrorism.
    [The editorial referred to follows:]

               [From the Washington Post, Sept. 30, 2001]

  From T-Shirts to Terrorism; That Fake Nike Swoosh May Be Helping to 
                        Fund Bin Laden's Network

                          (By Roslyn A. Mazer)

    It was sickening to learn that one of the World Trade Center 
hijackers had booked his deadly flight as an airline frequent flyer, 
turning a benevolent perk of our free, mobile society to such 
malevolent use. But we could be in for more appalling news of the ways 
in which terrorists turn the fruits of our economic powerhouses against 
us: It's highly likely that some of the funds used to finance terrorist 
networks are being derived from the sale of products ripping off iconic 
American companies, such as Microsoft or Nike.
    President Bush took the first important steps last week to freeze 
the assets of organizations known to be financial supporters of Osama 
bin Laden and the al Qaeda network. But even more concerted action will 
be necessary to seal off the financial pipelines that nourish 
terrorists' activities. Recent developments suggest that many of the 
governments suspected of supporting al Qaeda are also promoting, being 
corrupted by, or at the very least ignoring highly lucrative 
trafficking in counterfeit and pirated products capable of generating 
huge money flows to terrorists and other organized criminal groups.
    While serving in the Criminal Division at the Department of Justice 
from 1998 to 2001, I helped catalogue disturbing trends in this area. 
With cooperation from our copyright and trademark industries--the 
producers of software, music, film, books, apparel, pharmaceuticals and 
other highly sought-after American products--we documented the links 
between intellectual property (IP) crimes and the even more nefarious 
crimes they pay for. We found that the post-Cold War landscape of open 
borders has combined with the anonymity and speed of the Internet, as 
well as modern telecommunications and the lure of huge, risk-free 
profits, to give rise to some startling developments:
    According to 1995 testimony before the Senate Judiciary Committee, 
New York's Joint Terrorist Task Force had reason to believe that high-
level players who controlled a counterfeit T-shirt ring were using the 
proceeds to support terrorist groups such as the one that bombed the 
World Trade Center in 1993.
    Last year, in the notorious piracy haven of Ciudad del Este, 
Paraguay, Ali Khalil Mehri, a naturalized Paraguayan citizen born in 
Lebanon, was charged with selling millions of dollars of counterfeit 
software, the proceeds from which he allegedly funneled to the militant 
Islamic group Hezbollah in Lebanon. He fled to Paris. FBI agents and 
their counterparts from several countries are now pursuing rumored 
links between groups within the city's 12,000-member Arab community and 
the Sept. 11 attacks.
    Last December, several news organizations reported that trademark 
pirates based in Pakistan were filling orders from Afghanistan to 
produce T-shirts bearing counterfeit Nike logos and glorifying bin 
Laden as ``The great mujahid (holy warrior) of Islam.''
    In April, Microsoft officials based in London alleged that 
counterfeiters were using the Internet to sell pirated software, and 
that some of the same criminals were using the proceeds to fund 
terrorism and drug running.
    In 1999, an International Chamber of Commerce official cited 
``compelling evidence of the involvement of organized crime and terror 
groups'' in commercial-scale piracy and counterfeiting, including 
accounts that the Irish Republican Army was financing its activities 
with pirated videos such as ``The Lion King.''
    Losses at the hands of the far-flung criminal organizations that 
produce high-quality fakes cost U.S.-based copyright industries $20 
billion to $22 billion in 2000, and cost the country in lost jobs, 
sales taxes and customs duties. Rivers of fakes are flooding Asia, the 
Middle East, China, Russia and India, as well as Pakistan, Egypt, 
Kazakhstan and Uzbekistan--countries believed to be harboring cells 
supporting al Qaeda and other terrorist groups. Eight of 10 countries 
identified by a trade group as having the highest business software 
piracy rates in the world--Pakistan, China, Indonesia, Ukraine, Russia, 
Lebanon, Qatar and Bahrain--have links to at Qaeda.
    Eyeing the lucrative music market in Latin America, the music 
industry reports that organized syndicates are moving pirated optical-
media products (CDs, DVDs, CD-ROMs) from Thailand, Malaysia and the 
Philippines to Brazil through Paraguay. The industry, which estimates 
that piracy cost it $4.2 billion worldwide last year, has documented 
links between commercial-scale piracy and organized criminal activity.
    The Internet, itself a key communications tool for terrorists, also 
facilitates high-volume piracy, with up to $11 billion in pirated 
software products sluicing through computer networks worldwide last 
year. McAfee, the Internet security services provider, warns parents on 
its kids Web site that organized crime ``is very involved in Internet 
piracy.''
    In the wake of the latest terrorist attacks, policy-makers are 
understandably focusing on the catastrophic losses to the nation's 
airline industry, which directly or indirectly contributed about 10 
percent of the nation's gross domestic product in 2000. But consider 
this: The Commerce Department reports that the copyright industries 
generated more foreign sales and exports than the aircraft and aircraft 
parts industry; indeed, they generated more foreign sales than the 
automobile, automobile parts and agriculture sectors combined.
    With the stakes so high, the 20th-century paradigm of thugs using 
the rackets to finance drugs and other contraband has shifted in the 
21st century to include our prized exports: the cultural products noted 
above as well as shoddy knockoff products that endanger public health 
and safety, such as airplane parts and brake pads, drugs and baby 
formula.
    As the ingenuity and productivity of our knowledge-based industries 
soared throughout the 1980s and 1990s, reports of large-scale 
counterfeiting and piracy generated growing concern on the part of 
industry. At first, law enforcement officials were dismissive, if not 
hostile to the challenge, arguing that software giants like Microsoft 
could use their private armies to shut down the counterfeiters, or that 
counterfeiting is a ``victimless crime'' that permits low-end consumers 
to purchase cheap, but adequate, goods.
    Criminals were poised to exploit this period of neglect. The 
result: ``[A] fully fledged criminal activity . . . not peripheral to 
other criminal activities but at the very heart of them,'' according to 
Interpol's former secretary general, R.E. Kendall.
    U.S. law enforcement is only now trying to overcome the historic 
bias against IP crime and is playing catch-up. Since July 1999, 
investigators at the FBI and Customs Service have joined with Federal 
prosecutors in elevating IP crimes to a higher priority in regions with 
a high incidence of such crimes (including New York and New Jersey, 
Silicone Valley, Boston and other metropolitan areas) and the resources 
to combat them.
    In February 2000, the FBI and Customs Service launched the National 
Intellectual Property Rights Coordination Center, designed to be a 
central repository for collecting and disseminating information about 
serious IP crimes. And the United States is carrying the message abroad 
as well. As a champion of the World Trade Organization's Trade-Related 
Aspects of Intellectual Property (TRIPs) Agreement, the U.S. trade 
representative presses our trading partners, with the threat of 
sanctions, to have the basic laws on the books, to provide necessary 
law enforcement training and resources, and to encourage prosecutors 
willing to seek--and judges willing to impose--deterrent sentences on 
criminals who are caught and convicted. Last year, under the auspices 
of the G-8 nations, the United States hosted the first meeting of law 
enforcement experts to explore ways of sharing investigative 
information and cataloguing trends.
    The convergence of our economic security and our national security 
became starkly apparent on Sept. 11. The staggering economic losses to 
America's copyright and trademark industries--alarming unto 
themselves--now are compounded by the opportunistic trafficking in IP 
products to finance terrorism and other organized criminal endeavors.
    We can only dismantle the links between terrorists and their 
financing through robust intergovernmental cooperation in the U.S., 
pan-industry alliances, and coordinated investigative and intelligence-
sharing networks with our allies. Like the military and civil defense, 
for which new strategies are already in the works, law enforcement and 
industry alliances must be upgraded, too, if one of the feeder lines of 
terrorism is to be cut off and the engines of our economic prosperity 
are to flourish.

    Mr. Raikes. Yeah. If I may add to Senator Smith's remarks, 
in her article she pointed out that a counterfeiter, exactly 
the kind of criminal enterprise that I was describing earlier, 
was shut down in Paraguay and the local authorities there 
believed that that was funding Hezbollah. She also indicated 
that the--in 1995, the New York Terrorist Division indicated 
that the people who attempted to bomb the World Trade Center in 
1993 were funded by copyright violations and T-shirts, and that 
is where it came from, T-shirts to terrorism.
    If you look at the highest software piracy rates in the 
world--the highest business software piracy rates in the 
world--eight of those ten countries are connected to Al Qaeda.
    With all due respect to the comments about focusing in on 
digital rights management--very important initiative--but I 
would also want us to not lose sight of the fact that in 
addition to loss of jobs, in addition to loss of tax revenues, 
in addition to defrauding consumers, in effect here you have a 
double whammy. You have a situation where not only do we have 
all of those negative impacts, but we also then have the 
support for criminal enterprises in all of the types of 
activities they would undertake.
    The vigilance for anti-tampering, for supporting U.S. 
Customs, those are all extremely important initiatives, as well 
as the cooperative efforts of the industry. And that is why we 
personally at Microsoft put such a huge investment in all of 
these areas, because it is all about protecting intellectual 
property and the vibrant economy that that is going to help to 
build.
    Senator Smith.  Thank you.
    The Chairman.  Let me conclude by saying that--and asking 
one question of each of you, the same question. But speaking of 
the movies, Jack, there was the movie ``Cool Hand Luke'' where 
it was said, ``what we have got here is a failure to 
communicate.'' One of the problems here is that when you talk 
about the loss of jobs, it doesn't compute to most people, 
because your industries are all growing.
    So what you are doing is lost opportunity. And that never 
works to convince people that there is a problem. To say that--
I will give you an example. Years ago, there was a Senator who 
headed up what was then called the Public Works Committee, 
Jennings Randolph. And Senator Randolph, from West Virginia, a 
wonderful old fellow, put me on the committee and gave me a 
subcommittee chairmanship because I had said I wanted to make 
it the environmental committee. And he did not like that idea 
at all.
    So he put me on a committee, and he gave me a subcommittee 
on technology so I could hold hearings but couldn't write 
legislation, but I could make a recommendation. He assigned me 
the first topic, and he said he wanted me to write a report on 
whether or not we should phase out lead in gasoline. And a 
little company called the DuPont Company--that at that time to 
Delaware was what Microsoft is to Redmond, not the whole 
state--had invested tens of millions of dollars on a copyright 
for a lead trap that would trap the lead, retrofit it to every 
automobile in the world, with projected revenues of several 
billion dollars. And I got to write the report. I wrote the 
report truly thinking I was about to enter the second edition 
of ``Profiles in Courage''--not with great glee, because I 
wrote a report after six months of hearings saying we should 
phase out lead in gasoline. Had DuPont already been selling 
that retrofitted item, they would have lost several billion 
dollars, and I would have lost the election. But because it was 
projected revenues that they were losing, the management of the 
company disliked me for a long time, but the average DuPont 
employee who didn't lose a job didn't feel compelled to go 
campaign against Joe Biden.
    I cite that as a practical problem. It does not compute to 
people when we say we have lost 175,000 jobs. It doesn't 
compute to people when all these folks show up at the Emmys and 
the Oscars with gowns that cost more than what people make in a 
year--I am not criticizing it--to say these poor artists are 
losing their income.
    It does not compute when Microsoft's profits continue to 
increase, which they should, at significant numbers, and people 
say, ``Oy veh! Microsoft, poor Microsoft.'' And we have a 
problem, a communications problem.
    That is, as Hilary, you point out. If you didn't pay a 
single artist on the come, if you asked them to pay you their 
entire life savings to be able to appear at a Hollywood Bowl, 
they would give it to you. They'd give you all they had just to 
get up on the stage before two, five, ten, twenty, or fifty 
thousand people.
    We are at a real disadvantage here. We're at a real 
disadvantage, in terms of being able to generate the kind of 
enthusiasm to deal with what is a gigantic problem. The reason 
I am holding these hearings is to try to get attention on this 
item for people to understand, not what is at stake, but what 
opportunity costs there are out there. The opportunity costs 
are astounding. Astounding.
    And I do not know quite how to get my hands around this, 
because one of the reasons why we have such situational ethics 
today is people are able to rationalize. They're able to 
rationalize, ``I am not doing much. All I am doing is''--I do 
not believe any of this; I am just telling you what they say, 
``All I am doing is keeping Gates from having fifty zillion 
dollars. He'll only have forty zillion dollars. All I am doing 
is keeping some''--with a relatively conservative person--
``some rap music punk from making $60 billion instead of $40 
billion. This comes from people who wear suits like we do, and 
dress like we do, and would not steal so much as a toothbrush.
    I am really at a loss here trying to figure out what to do. 
I do not suggest that this committee has the primary 
jurisdiction. I am not trying to grab the jurisdiction from 
Commerce or from Judiciary or whatever. I am not interested in 
that at all. What I want to do, and I would like you to think 
about, is if we can turn this into--this is an awful thing to 
say, but I am going to be completely honest with you--if we can 
turn this into America versus the world, we may get a very 
different focus on it.
    Excuse me for being a Johnsonian politician here, but the 
truth of the matter is if it is America versus what Americans 
are doing to your industries, nobody's shedding a tear. Nobody. 
Zero. None. They could care less. But if it is in the context 
of the rest of the world is doing something that damages the 
United States of America, we may be able to get some traction 
on this issue.
    I am not looking for whipping boys; what I am trying to do 
is, to the extent that we internationalize this and make it and 
put it in stark relief as it relates to the foreign policy 
consequences of what we are doing, including Al Qaeda and 
anything else, it is a useful thing. You all are creative 
people.
    Separate and apart from the issue of timetables, we need a 
fairly creative solution here, because what is gaining some 
currency are the apologists for why this is not bad--why this, 
in fact, generates creativity. You know the arguments, the 
arguments they actually have on those college campuses, among 
the brightest of the bright young women and men. There is some 
cachet out there for Lawrence Lessing.
    There's some cachet out there. You know, it is sort of like 
your point, Jeff. You indicated that--or maybe it was you--I do 
not know. One of you said the hackers do this not for the 
money. They do it like Willy Sutton, ``Why do you rob banks?'' 
``That's where the money is.'' Why do they do this? ``It's an 
intellectual challenge, man, and I am going to show you how to 
do it.''
    I do not know the answer. I do not want to claim--I am 
proud of the report my staff put together. But if you look at 
Page 39--and I mean this sincerely--about the best we could 
come up with, if we do everything that is suggested, I have to 
tell you honestly, as the guy who has literally been the author 
of every major crime bill since 1979, every single one, one 
thing I never did do on the crime stuff, Jack, is over-
promise--never over-promised what it was going to do.
    If we do everything that exists on Page 39, which is a 
compilation of most of the generally accepted notions of 
positive things we can do, we still have ourselves a 
communications problem, because someone else can be taking our 
communications, your communications, and making a lot of money 
off of it. And so I do not know whether it ultimately rests in 
what you all are wrestling with within the jurisdiction of the 
Commerce Committee about the manufacturers of the hardware and 
the producers of the artistic content--I do not know, but it 
seems to me that is where a lot of this lies in terms of its 
ultimate resolution.
    I would like to ask you all one question, if you could be 
more brief than we have been, and that is if you had just one 
thing you could have us do--just one--you get to pick one--what 
one thing--and if it is a generic thing, do not bother taking 
the time, but if there is any one specific thing on a wish list 
that you could have, wave a wand, and it would happen as a 
consequence of a legislative initiative, you know, with the 
President signing onto it, what is it you think is the single-
most important thing we could do at this point other than try 
to generically educate the public as to the extent and depth of 
the problem? Anybody?
    Ms. Rosen. Well, I was going to say I think the points that 
you made before were eloquent and accurate, and that is why it 
is so important to distinguish the issue of physical piracy 
globally from this Internet piracy that so vexes the future 
opportunities. My industry, for one, happens to be losing 
money, not growing these days, and so we are particularly 
conscious of the distinction.
    So for American music's growth, historically, has been 
overseas, not in the U.S. market. U.S. market, we have been 
growing single digits for ten years. Internationally, we have 
been growing significantly more than that. So the most dramatic 
thing you could do as the Foreign Relations Committee for our 
industry is to condition all international loans of the IMF and 
the World Bank on piracy enforcement.
    The Chairman.  That's the kind of thing I am asking about. 
Is there a distinction made between when based on your 
discussions with counterparts and officials from other 
countries, is there a distinction made between those products 
that have a copyrighted proprietary interest that relate to the 
physical well-being of people in their country and those 
products that relate to the psychic remuneration they get from 
engaging in using them--i.e. the difference between patented 
medicine for AIDS versus, you know, a copyright on, you know, 
Billy Joel's music?
    Ms. Rosen. I think the answer is no, because the consumer 
doesn't care if they are listening to a digital pirated copy or 
a digital legitimate copy of a song. Globally the issue is U.S. 
economic pressure on our trading partners. That is clearly the 
number one thing that can make a difference for us on a 
physical piracy basis. The Internet piracy issue, I agree with 
everything you said. It's so consumer based, it is so connected 
with other emerging technology industries, it is a much more 
vexing problem.
    The Chairman.  Doug?
    Mr. Lowenstein. This is vague, but the notion would be to 
find a way either to bring our law enforcement resources 
together with international law enforcement resources to go 
after the international crime syndicates in a way that has to 
happen. And I do not know whether that requires a law. Maybe it 
does. But ultimately that is the source of most of the hard-
goods piracy we see, and they are implicated in the Internet 
piracy. And foreign governments lack the will and often the 
resources to attack the problem. And so I would suggest we find 
a way to facilitate that.
    The Chairman.  Jack?
    Mr. Valenti. Three quick things. One is, I think to 
encourage all the various parties in this intellectual property 
community to sit down and work this out privately, it can be 
done, with a set of standards on which Microsoft and others 
could build their own proprietary additions.
    No. 2 is to make sure particularly this committee will not 
entertain any kind of a treaty where that country is indulging 
in discriminatory actions toward the United States. I would 
bring up Korea, Mr. Chairman, I have talked to you about, where 
we have a screen quota there that is abysmal, and yet they are 
trying to get a bilateral treaty with the United States. That 
should not happen until these discriminatory obstacles are 
wiped out before we sign--before you entertain it.
    Third, I think Doug has a good point, and that is to make 
sure that we are dealing with--that the punishment fits the 
crime. Most of these countries in the world have a flimsy, 
slenderized Jenny Craig type national will to deal with piracy, 
nor the resolve to enforce the kind of punishment there ought 
to be.
    The Chairman.  Jeff?
    Mr. Raikes. The issue at hand is huge. You said it 
yourself. You drew the analogy to what would happen to the 
monetary system if $20 billion got sucked out of it? And so in 
terms of one thing, it is difficult to point to just one thing, 
but if there is one thing, it is resources.
    You have done things that have been incredibly helpful, 
incredibly effective. It's resources--resources for U.S. 
Customs, support for the Department of Justice in this area, 
support for people like John Gordon, the resources that do into 
negotiating these trade agreements to put pressure on our 
partners, the resources that go into helping educate our 
society, our culture, about respect for intellectual property 
law. I am sorry it is not maybe as tangible, but I can point to 
the tangible use of resources and actually applaud you, your 
colleagues, for the impact that it has had.
    I think it is very important to remember that with 
something you said, American intellectual property is immensely 
valuable, perhaps our most valuable resource. If it is that 
important to our country, then we have to make sure that we put 
in the resources in each of those areas to ensure success.
    The Chairman.  Quite frankly, not to in any way disparage 
the other recommendations, I think that is the single-most 
important thing. I had to struggle to get five million bucks 
put in to add the resource base for the U.S. Attorney's offices 
to train and to have people focus on this area, five million 
bucks.
    We should--if this were a problem that related to bank 
robberies, I would have no problem convincing the Congress for 
half a billion dollar increase in the FBI's budget or in the 
number of prosecutors. But that is just one piece.
    I truly appreciate the fact you have all given us your 
time. I must tell you, I do not know--I do not think there is a 
single answer. I do not know what it is. But I know one thing. 
We cannot stop trying to--notwithstanding the fact that mole is 
in the hole and we know he is going to pop up, we can't fail to 
continue to hit the sucker. So long. We're finished.
    [Whereupon, at 5:30 p.m., the committee was adjourned.]

   Responses to Additional Question Submitted for the Record by the 
    Committee to Peter F. Allgeier, Deputy U.S. Trade Representative

                  questions submitted by senator helms
    Question. Mr. Allgeier, I understand that U.S. proposals for Free 
Trade Agreements (FTAs) with Singapore and Chile include provisions 
that would substantially improve the standards of copyright protection 
in international trade agreements. I also understand that Chile, for 
example, is contemplating broad ``cultural'' carve-outs, which means 
that films, books, and music could be left unprotected. Can you give us 
a sense of what progress has been made to date on these issues in the 
FTAs to ensure that these agreements are beneficial ones?

    Answer. We met with Chile last month, and we indicated to Chile 
that any such ``cultural carve-out'' is unacceptable. We have also made 
very clear to our partners that we are seeking higher levels of 
protection for intellectual property rights, and that an FTA without 
these higher standards is not in our national interests.

    Question. Because Intellectual Property (IP) protection isn't worth 
much unless we have access to a market to sell our products, what 
progress are you making in countries like Korea, which has unacceptable 
high quotas on the number of American movies that can be shown in their 
cinemas?

    Answer. Removing or reducing Korea's film quotas is a major 
priority in our bilateral trade relationship. This issue was raised 
most recently in January, 2002 when Deputy USTR Huntsman met with his 
Korean counterpart. One clear point of leverage is in ongoing 
negotiations with Korea over a bilateral investment treaty, which has 
been a priority for Korea. In this negotiation we are insisting that 
Korea commit to reduce these quotas.

    Question. How successful has the effort been to reduce piracy 
within foreign governments? Have other governments agreed to use only 
legitimate copies of U.S. software products and restrict improper 
copying within their governments?

    Answer. As you know, in October 1998, the President of the United 
States issued a new Executive Order directing U.S. Government agencies 
to maintain appropriate, effective procedures to ensure legitimate use 
of software. In this decree, the President directed USTR to undertake 
an initiative to work with other governments, particularly those in 
need of modernizing their software managements systems or about which 
concerns have been expressed, regarding inappropriate government use of 
illegal software.
    The United States has achieved considerable progress under this 
initiative since October of 1998. Nineteen countries so far have issued 
decrees mandating the use of only authorized software by government 
ministries. These include: China, Chile, Colombia, France, Greece, 
Ireland, Israel, Jordan, Hungary, Hong Kong, Lebanon, Macau, Paraguay, 
the Philippines, Singapore, Spain, Taiwan, Thailand and the United 
Kingdom.

    Question. What efforts have been made to encourage more countries 
to ratify the WIPO copyright treaties? Why has it taken over three 
years for the WIPO Treaties to enter into force? Why have the European 
countries not yet ratified?

    Answer. USTR is pursuing this goal in several ways in the trade 
arena. One manner in which we are pursuing this goal is by seeking to 
incorporate the standards of the WIPO Treaties as substantive 
obligations of our FTAs. We achieved this result in the Jordan FTA. The 
success of incorporating these standards in the Jordan FTA has laid the 
foundation for pursuing this goal in the free trade agreements we 
currently have under negotiation with Chile and Singapore as well as 
the Free Trade Area of the Americas (FTAA), and other FTAs yet to be 
launched.
    We are also pursuing this objective through negotiations with 
governments seeking to join the World Trade Organization. In accession 
negotiations with Albania and Croatia, for example, USTR obtained 
formal commitments from these governments to ratify the WIPO Copyright 
Treaties as a part of their protocol of accession.
    As for why it has taken over three years for the Treaties to enter 
into force, there are two reasons. First, it requires 30 countries to 
ratify each treaty before they come into force. Second, these are 
complicated treaties dealing with high tech issues. I believe our own 
legislation, the Digital Millennium Copyright Act (DMCA) (Pub. L. No. 
105-304, 112 Stat. 2860), took substantial time to draft and enact.
    As for the EU, all 15 Members States must ratify, and that process 
is not yet complete.

    Question. Mr. Gordon, let me ask you a related question about 
``valuation'' in prosecuting IP crimes--especially in pre-release cases 
or cases where the infringed-upon work is not commercially available to 
the public at retail--like when the movie is still in the theater. In 
order to be a felony, copyright law requires the prosecutor both to 
find 10 or more copies of the illegally obtained film and to prove that 
the total retail value of those copies is more than $2500. I am told 
that in many U.S. Attorney's offices, they will not even consider 
bringing a case unless there is at least $40,000 in harm. Now, this 
sort of threshold is extremely difficult to meet particularly when you 
don't have possession of the criminal's computer to know how many 
downloads there have been of a particular film, or when the movie is 
still in the theaters so that the $19 average retail price of a DVD 
grossly underestimates the actual harm to the copyright owner. Do you 
have any thoughts about how we better solve the ``valuation'' issue for 
film piracy? And, if not, would you be willing to work with me and this 
Committee to help solve the problem?

    Answer. Valuation is a crucial determination in any intellectual 
property prosecution. It significantly affects not only the preliminary 
decision whether to open an investigation or the ultimate decision 
whether to bring a criminal prosecution, but also the sentence the 
defendant will receive after conviction. We realize that, particularly 
in intellectual property cases, it is impossible to determine an 
accurate loss figure at the outset of an investigation, and that the 
amount of loss alone may not adequately describe the severity of the 
crime. It is the policy of the U.S. Attorney's Office in the Central 
District of California to evaluate intellectual property cases on a 
case-by-case basis and to work diligently to bring appropriate cases 
for prosecution. The Computer Crime and Intellectual Property Section 
at the Department of Justice has encouraged United States Attorneys 
nationwide to adopt a similar approach in these cases.
    Determining a proper valuation for pre-release movies is a 
particularly complex issue. It has been, and will continue to be, the 
Department's goal to work closely with the motion picture industry and 
other copyright industries to understand the true amount of loss 
associated with piracy, recognizing, of course, that the amount of loss 
in a particular case is ultimately determined by the sentencing court. 
We look forward to working with you and other concerned Members of this 
Committee and the Congress on this important issue.

    Question. What other areas of inter-agency coordination need to be 
improved to better enforce intellectual property?

    Answer. The U.S. Attorney's Office in the Central District of 
California has prosecuted intellectual property offenses in cases 
investigated by the FBI and the U.S. Customs Service. Based on that 
experience, law enforcement does work effectively together in 
prosecuting criminal IP cases in Southern California. As mentioned in 
our written testimony, the Department is also working in a number of 
other areas, on an interagency basis, to improve the overall 
enforcement of intellectual property rights. We will continue to work 
with our colleagues in other agencies to improve the coordination of 
international training efforts, particularly in regard to specific 
criminal enforcement issues. It is essential that our training 
resources are used effectively. We will also continue to identify 
opportunities for the United States to work with foreign countries to 
enhance investigative cooperation, to promote the development of 
effective IP enforcement regimes, and to share information on trends in 
intellectual property crimes that will strengthen the ability of law 
enforcement worldwide to combat these crimes.

    Question. What channels are used for the importation of pirated or 
counterfeit articles into the United States?

    Answer. Although pirated and counterfeit articles are circulated in 
markets abroad in direct competition with the legitimate products of 
U.S. firms, counterfeiters and pirates continue to attempt to import 
such goods into the United States through all the channels available to 
otherwise legal commerce, such as airports, seaports, mail facilities, 
land borders and other locations where foreign imports are received. In 
addition, the Internet has opened up vast new opportunities for 
criminal enterprises which engage in counterfeiting and piracy. With a 
few simple keystrokes from a computer anywhere in the world, criminals 
can ship counterfeit trademarked goods, traffic pirated music, or 
download copyrighted software.

    Question. Is there any commonality with those channels used for the 
smuggling of drugs or currency?

    Answer. While there is a commonality between channels used for 
smuggling drugs or currency and those used for importing pirated and 
counterfeit articles, the Internet has become a medium particularly 
well suited for IPR crimes, especially copyright piracy. As 
globalization has enabled organized crime groups to diversify their 
criminal activities, these groups have become major players in all 
types of IPR crime.

                  questions submitted by senator dodd
    Question. The Office of the United States Representative has long 
been a champion for the protection of U.S. intellectual property rights 
abroad. Yet in United States Section 211 Omnibus Appropriations Act 
(WT/DS 176), your office expounded arguments that led a WTO panel to 
interpret the TRIPs Agreement and the Paris Convention for the 
Protection of Industrial Property in a restrictive manner that 
threatens to make it more difficult for U.S. nationals to protect and 
enforce their intellectual property rights abroad.
    Please explain how the USTR reconciles its policy of promoting 
effective intellectual property standards with its legal arguments in 
favor of limiting the scope of TRIPs and the Paris Convention.
    How does narrowing international obligations to protect 
intellectual property serve U.S. interests?

    Answer. USTR and other USG agencies have a firm and long-standing 
commitment to protecting U.S. intellectual property rights. We have 
been pressing our trading partners for years to implement the 
provisions of the TRIPs Agreement, which we negotiated to protect U.S. 
intellectual property rights abroad. This commitment continues. In its 
challenge to section 211, which the U.S. Congress passed in 1998, the 
EU contended that the United States was powerless under the TRIPs 
Agreement and the Paris Convention to question the ownership in the 
United States of trademarks registered--or sought to be registered--in 
the United States. This interpretation of the TRIPs Agreement would 
have rendered fundamental aspects of U.S. trademark law--and not just 
section 211--inconsistent with the TRIPs Agreement, because, under U.S. 
law, trademark registration is not conclusive of ownership, and not 
everyone seeking to register a trademark is its owner. Notably, in 
contrast to the EU ``registration-based'' system of trademark 
protection, trademark ownership in the United States is based on use of 
the trademark. For this reason, the United States argued, and the panel 
and Appellate Body agreed, that the TRIPs Agreement and the Paris 
Convention did not mandate that anyone who registers a trademark be 
considered the owner of that trademark, and indeed did not impose 
exhaustive mandatory trademark ownership criteria on WTO Members. We do 
not consider this to be a restrictive interpretation of the TRIPs 
Agreement or the Paris Convention, but the correct one--and the WTO 
panel, WTO Appellate Body, and World Intellectual Property Organization 
secretariat (which administers the Paris Convention) agreed. Nor is 
there any indication that the TRIPs Agreement, interpreted correctly in 
a manner that accommodates U.S. trademark law, threatens the ability of 
U.S. nationals to protect and enforce their rights abroad. Therefore, 
we do not see any inconsistency between this view of the TRIPs 
Agreement obligations and our long-standing and firmly held policy of 
promoting effective intellectual property rules. To the contrary, 
interpreting the TRIPs Agreement and the Paris Convention in a manner 
that accommodates U.S. trademark law, as was intended by U.S. 
negotiators, does serve U.S. interests.

    Question. The panel agreed with U.S. arguments at paragraphs 4.26, 
4.27, and 4.28 that WTO members are free to deny registration and 
protection of exclusive rights in trademarks on grounds other than 
those provided in the TRIPs Agreement and the Paris Convention. In 
doing so, the panel acknowledged that arbitrary treatment and abuse 
could arise from such measures.
    How does the USTR plan to curtail the arbitrary treatment or abuse 
that could occur from the use of this exception?
    How does it serve the interests of the United States to exploit 
loopholes in the TRIPs obligations to protect intellectual property?

    Answer. Both the TRIPs Agreement and the Paris Convention contain 
numerous provisions designed to prevent arbitrary treatment and abuse 
with respect to intellectual property rights, among them that nationals 
of other WTO Members cannot be treated worse than one's own nationals 
(``national treatment'') and that nationals of WTO Members cannot be 
treated worse than other nationals (``most favored nation treatment''). 
In addition, the TRIPs Agreement contains obligations with respect to 
fair and equitable procedures aimed at guarding against abuse and 
arbitrary treatment. USTR intends to ensure that its trading partners 
comply with these obligations to guard against any abuse or arbitrary 
treatment. Further, we do not believe that the provision of the TRIPs 
Agreement referenced in the question--Article 15--contains 
``exceptions'' or ``loopholes.'' This provision prohibits Members from 
denying trademark registrations based on certain enumerated grounds. It 
expressly does not limit the right of Members to deny trademark 
registrations on other grounds (unless those other grounds are 
prohibited elsewhere).

    Question. At the urging of the United States, the panel adopted a 
very narrow interpretation of the longstanding Paris Convention 
obligation to protect trademarks duly registered in the country of 
origin. According to the panel at paragraphs 4.44 through 4.48, the 
U.S. argued that this obligation is limited to instances in which a 
trademark registered in one WTO member might not otherwise be 
registrable in another member because of its form, e.g. because it is 
in a foreign language or comprises numbers or proper names. The U.S. 
also argued that nothing therein prevents a WTO member from applying 
other provisions of their domestic law to trademark applications.
    Because such a narrow obligation would only apply to a small number 
of trademarks, on what provision of TRIPs do U.S. nationals rely in 
registering the vast majority of their trademarks in other countries?
    Doesn't the panel ruling leave each WTO member complete freedom on 
determining who is entitled to trademark protection? What safeguards 
are there to prevent other countries from making trademark registration 
conditional upon criteria other than a U.S. trademark registration, 
such as use in the territory prior, to registration or approval by 
foreign regulators? How could national treatment be an adequate 
safeguard if these requirements also apply to the trading partner's own 
nationals? What would be the effect of such national criteria on 
registration abroad of trademarks owned by U.S. nationals?
    Answer. As discussed above, the TRIPs Agreement and the Paris 
Convention contain numerous provisions with respect to the protection 
of trademarks, which would apply to U.S. nationals registering 
trademarks abroad. For instance, Article 15.3 of the TRIPs Agreement 
provides that ``[m]embers may make registrability depend on use. 
However, actual use of a trademark shall not be a condition for filing 
an application for registration.'' Whether other requirements of 
foreign regulators are consistent with the TRIPs Agreement would depend 
on the requirements. In particular, as your question notes below, the 
principle of national treatment has operated for years to protect U.S. 
intellectual property right holders against discrimination, which is a 
bedrock principle of both the TRIPs Agreement and the Paris Convention 
and which offers substantial protections to U.S. intellectual property 
rights holders. Finally, we do not believe this is a narrow 
interpretation of the TRIPs Agreement obligations, but the correct one. 
As noted above, the interpretation adopted by the WTO panel and 
Appellate Body was also shared by the secretariat of the World 
Intellectual Property Organization, the body that administers the Paris 
Convention. This interpretation is based on a thorough analysis of the 
agreements, and accurately reflects that these agreements were intended 
by U.S. negotiators to accommodate fundamental elements of U.S. 
trademark law.

    Question. The panel predicated its decision on representations by 
the United States that Section 211 is subject to an abandonment 
defense. This understanding, however, contrasts with decisions by both 
a U.S. district court and a U.S. court of appeals that Section 211 is 
not subject to an abandonment defense.
    If it is the Administration's position that the question of whether 
a trademark was abandoned is relevant under Section 211, what steps is 
the Administration prepared to take to effectuate this interpretation? 
Does the court finding require a legislative change to Section 211 to 
correct its misinterpretation of the statute?

    Answer. There is no finding of the WTO panel or the Appellate Body 
suggesting the need for an amendment of section 211 relating to 
``abandonment.'' Both the panel and the Appellate Body were aware of 
the judicial decisions in the United States concerning section 211, and 
made no findings concerning these decisions or their interpretation of 
section 211.

    Question. Although a spokesman for the U.S. told reporters that the 
U.S. won the Section 211 case, it appears that the real losers in the 
long run will be U.S. intellectual property owners, whose ability to 
protect and enforce their rights will be constricted by the prevailing 
U.S. argument.
    What are you prepared to do to ensure that U.S. intellectual 
property rights are not undermined by the Section 211 decision? What 
steps will USTR take to ensure that established U.S. public policy does 
not again become a victim of zealous advocacy?

    Answer. As discussed above, both the TRIPs Agreement and the Paris 
Convention offer significant protections to U.S. intellectual property 
right holders, which are unaffected by the section 211 decision. USTR 
has for years been a champion of international intellectual property 
right protections, and U.S. positions in the section 211 dispute were 
aimed at both supporting these protections and defending the statute 
passed by Congress, based on correct readings of U.S. international 
obligations. As it has consistently in the past, USTR intends 
vigorously to enforce the rights of U.S. intellectual property right 
holders abroad under the TRIPs Agreement and to urge those Members not 
in compliance with the TRIPs Agreement to come into compliance.

    Question. The Appellate Body concluded that key provisions of 
Section 211 violate two fundamental principles of WTO rules--national 
treatment and most-favored-nation (MFN) treatment.
    For over 100 years, these principles have obligated our trading 
partners to protect U.S. trademark and trade name holders from 
discrimination abroad. The Appellate Body found, however, that Section 
211 violated these longstanding U.S. obligations by imposing obstacles 
on foreign intellectual property right holders that do not exist for 
U.S. and other nationals and recommended that the United States bring 
its laws into conformity with its obligations under TRIPs.
    Wouldn't the repeal of Section 211 in its entirety bring the U.S. 
back into compliance with its obligations under the TRIPs Agreement?

    Answer. As the question notes, certain aspects of section 211 were 
found to be inconsistent with the TRIPs Agreement, but other 
significant aspects were not. Repeal of section 211 would of course 
eliminate those aspects found inconsistent, but would also eliminate 
aspects not found inconsistent.

    Question. Section 211 calls into question the United States 
commitment to providing strong intellectual property protections and 
undermines efforts to encourage our trading partners to adopt similar 
protections for American intellectual property abroad. Given the 
potential damage to the foreign policy of the United States and the 
threat of possible retaliation against U.S. interests if the U.S. does 
not comply, wouldn't repeal of Section 211 in its entirety be 
preferable to any effort to merely revise Section 211?

    Answer. USTR and other interested agencies are currently 
considering options for implementing the recommendations and rulings of 
the WTO Dispute Settlement Body, and will consult with Congress as to 
the best manner of doing so.

                            A P P E N D I X

                              ----------                              

 Theft of American Intellectual Property: Fighting Crime Abroad and at 
                                  Home

               A Report From Senator Joseph R. Biden, Jr.

                                 ______
                                 

                           Executive Summary

    American innovation--and the protection of that innovation by the 
government--has been a critical component of American economic growth 
throughout our history. The Founding Fathers had the foresight to 
provide for protection of intellectual property, giving Congress the 
power to ``promote the progress of science and useful arts'' by 
providing copyrights and patents. According to at least one source, 
American intellectual property represents the largest single sector of 
the American economy, employing 4.3 million Americans. Yet, the theft 
of American intellectual property, through piracy and counterfeiting, 
has cost American jobs numbering in the hundreds of thousands and has 
cost the U.S. government tax revenues and U.S. corporations billions of 
dollars. Piracy rates (the percentage of copies of an item that are 
illicit) exceed 80% in a number of countries.
    Theft of intellectual property is increasing and accelerating as 
the medium through which companies transmit software, movies, books, 
music and other forms of intellectual property evolves. As the medium 
move from analog (audio and video cassettes) to digital (CDs, DVDs) to 
cybermedia (Internet downloading), the ease of piracy and 
counterfeiting, and the quality of the product offered, continually 
improves. With the advent of CDs and DVDs, a sound or video recording 
no longer deteriorates with each successive copy; the 100th copy is 
identical to the original. With the advent of the Internet, and 
particularly the arrival of broadband, an individual can download a 
full-length feature movie in less than 15 minutes, without ever 
stepping out the front door. As a result, it is becoming ever more 
difficult to fight this crime.
    It is important to bear in mind that lax enforcement of 
intellectual property rights in a particular country does not merely 
harm our interests. In the long run, it harms the interests of those 
developing countries, because it will preclude the development of their 
creative industries.
    Unfortunately, once a country enacts the requisite laws, summons 
the adequate will, and provides the necessary resources to combat 
piracy and counterfeiting, the criminals who profit from stealing 
intellectual property often simply change venue. Combating intellectual 
property theft is like squeezing a balloon: when you apply pressure in 
one area, the air inside simply adjusts and moves elsewhere. Thus, to 
crack down effectively, we cannot merely focus on a few egregious 
countries.
    Federal laws have long proscribed the intentional infringement of 
intellectual property, including criminal and civil statutes aimed at 
protecting copyrights and trademarks. Congress has responded to the 
particular challenges posed by new and emerging technologies by 
enacting legislation aimed at high tech piracy. These new statutes can 
be used to combat, for example, the illegal copying of software, music 
CDs, and movie DVDs, or the dissemination of decryption codes to 
``unlock'' protected works. Responsibility for overseeing federal law 
enforcement falls to the Justice Department, which uses specialized 
units to assist federal prosecutors around the country in bringing 
suits against high tech pirates.
    Much international law is just now coming into effect. The 
Agreement on Trade-Related Aspects of Intellectual Property, or 
``TRIPS,'' concluded during the 1990s, imposes upon World Trade 
Organization countries obligations to adequately enforce intellectual 
property rights. It also provides a mechanism for resolving disputes 
between countries. The World Intellectual Property Organization's 
Copyright Treaty and Performances and Phonograms Treaty will also add 
to the arsenal of international legal instruments. The former will come 
into force next month, while it is expected that the latter will take 
effect by the end of the year.
    Enforcement efforts have met with some success. The Justice 
Department has an entire section of its Criminal Division devoted to 
computer crimes and intellectual property. Other agencies are 
coordinating their diverse efforts at prosecuting criminals 
domestically, stopping the influx of illicit materials from overseas, 
and stopping the crime in foreign countries. This is being 
accomplished, among other things, through special prosecutorial units 
in United States Attorneys' Offices, trade negotiation tools such as 
Special 301, and training assistance to foreign countries.
    While substantial domestic and international laws exist, proposals 
abound to improve the working of our intellectual property system both 
at home and abroad. At home, we can dedicate more funding to the fight 
against intellectual property theft, and better coordinate among 
federal agencies involved in the effort, as well as between federal and 
state authorities. Moreover, we can do a better job of making it clear 
to all Americans that the theft of intellectual property is a crime, 
and that it hurts us all.
    Abroad, we can bring pressure to bear on countries that are 
recalcitrant in efforts to rein in piracy and counterfeiting; we can 
encourage the development of intellectual property laws and enforcement 
through targeted foreign aid for training and equipment; and we can 
prevail on all countries (including our own) to eliminate the use of 
illicit intellectual property within their own governments.
    Billions of dollars are being stolen, hundreds of thousands of jobs 
lost. It is worth the effort to do all we can to stem the tide.

                              Introduction

    The New York Times recently reported that illegal copies of ``The 
Lord of the Rings,'' a film just recently released to movie theaters 
here in the United States, are already on sale on the streets of 
Jalalabad, Afghanistan.\1\ Windows XP was available for illegal use on 
the streets of Moscow two months before it was released in the U.S. by 
Microsoft.\2\ Every episode of ``Seinfeld'' is now available for 
download free to anyone with access to the Internet.\3\ In September of 
2001 alone, 1.5 billion songs were downloaded from Grokster.com, an 
Internet website that enables users to steal music.\4\ Video games that 
would cost $50 each in the United States are sold for the equivalent of 
75 cents on the streets of some Chinese cities.\5\
---------------------------------------------------------------------------
    \1\ Chivers, C.J. ``Afghan City, Free of Taliban, Returns to Rule 
of the Thieves.'' New York Times. January 6, 2002.
    \2\ Judiciary Staff briefing with the Business Software Alliance, 
January 17, 2002.
    \3\ Judiciary Staff briefing with the Motion Picture Association of 
America, December 17, 2001.
    \4\ Judiciary Staff briefing with the Recording Industry 
Association of America, January 14, 2002.
    \5\ Lazarus, David. ``Lazarus at Large.'' The San Francisco 
Chronicle. October 19, 2001.
---------------------------------------------------------------------------
    Everyday, thieve steal millions of dollars of American intellectual 
property from its rightful owners, and hundreds of thousands of 
American jobs are lost as a result.
    American innovation--and the protection of that innovation by the 
government--has been a critical component of American economic growth 
throughout our history. The Founding Fathers had the foresight to 
provide for protection of intellectual property, giving Congress the 
power to ``promote the progress of science and useful arts'' by 
providing copyrights and patents.\6\ The federal government's vigilance 
in shielding intellectual property rights remains essential: innovation 
would slow, businesses would suffer, and jobs would dissolve if 
technological advances were left unprotected. The American arts and 
entertainment industry could not survive without the ability to protect 
and earn income from its ideas. Would U2 continue to make records and 
go on tour if all of their records, videos, and fan paraphernalia were 
given out for free? Would the tens of thousands of Americans who staff 
their concerts and produce their CDs keep their jobs?
---------------------------------------------------------------------------
    \6\ U.S. Constitution, Art. I, Sec. 8, cl. 8.
---------------------------------------------------------------------------
    Copyrights and trademarks mean nothing if government authorities 
fail to enforce the protections they provide intellectual property 
owners. It has been estimated that software piracy alone cost the U.S. 
economy over 118,000 jobs and $5.7 billion in wage losses in the year 
2000.\7\ Even more, it estimated that the government loses a billion 
dollars in revenue to piracy each year.\8\ To put that in perspective, 
with the $1 billion in lost revenue, the American government could pay 
for child care services for more than 100,000 children annually.\9\ 
Alternatively, $1 billion could be used to fund a Senate proposal to 
assist schools with emergency school renovation and repair 
projects.\10\
---------------------------------------------------------------------------
    \7\ Note that this does not include losses incurred in the 
entertainment industry.
    \8\ International Planning and Research Corporation study for the 
Business Software Alliance, ``U.S. Software State Piracy Study.'' 
November 2001.
    \9\ Full-day child care costs between $4,000 and $10,000 per year. 
At $10,000 per year, $1 billion would pay for 100,000 children. 
Children's Defense Fund website: [http://www.childrens defense.org/
cc__facts.htm], citing 13 K. Schulman (2000), Issue Brief: The High 
Cost of Child Care Puts Quality Care Out of Reach for Many Families. 
Washington, DC: Children's Defense Fund. 14 U.S. Census Bureau (2000), 
Money Income in the United States: 1999 (Current Population Reports, 
P60-209), Washington, DC: U.S. Government Printing Office.
    \10\ The proposal was included in the Senate's Labor-HHS-Education 
Appropriations bill. Senate Report 107-84 to accompany S.1536, p. 262. 
However, it was cut from the final Conference Agreement, presumably due 
to budgetary issues. House Report, 107-342, p.123./
---------------------------------------------------------------------------
    This report aims to (1) highlight some of the problems that have 
emerged in America's continuing struggle to protect innovators from 
those who would steal their products, and (2) list some potential 
solutions for combating piracy at home and abroad.
    If we intend to nurture growth and development, the government will 
have to take a long look at how best to approach the global 
technological marketplace, and address those who would take advantage 
of American innovation.

                            II. The Problem

    When an American owns property, the government has a responsibility 
to protect that property from theft. When that property is an idea, it 
deserves our protection no less than if it were land, or a personal 
object. Who among us would want to expend the effort required to 
develop a new product if the government were not prepared to punish 
those who would steal it? If we want to protect American innovation, 
and by extension American jobs, we need to maintain a vigilant stand 
against what is commonly known as ``intellectual property theft.''
    American intellectual property is an immensely valuable--perhaps 
our most valuable--resource. Not to protect it is equivalent to letting 
coal be stolen from our mines or water taken from our rivers. With that 
concern in mind, the American government has developed an 
infrastructure to protect Americans who rightfully own pieces of 
intellectual property.
    Copyrights protect the authors of ``original works of authorship,'' 
including literary, dramatic, musical, artistic, and certain other 
intellectual works.\11\ Trademarks provide businesses with exclusive 
use of ``any word, name, symbol, or device'' to indicate the source of 
the goods and to distinguish them from the goods of others.\12\
---------------------------------------------------------------------------
    \11\ 18 U.S.C. 102.
    \12\ Koppers Co. v. Krupp-Koppers, 517 F. Supp. 836, 840 (W.D. Pa. 
1981); see also 15 U.S.C. 1127.
---------------------------------------------------------------------------
    Unfortunately, the integration of the global economy and emergence 
of the Internet have eroded some of the walls which protect 
intellectual property rights from thieves: some of our efforts to 
protect intellectual property at home have become outmoded, and certain 
nations around the world are not doing enough to combat the problem. 
Advances in digital media have made it tremendously easy to steal and 
reproduce a variety of media.
    This report addresses two types of intellectual property theft: (1) 
``piracy'' is the unlawful theft of a protected product; \13\ and (2) 
counterfeiting, a type of piracy, is the unauthorized reproduction of a 
good, in an attempt to pass it off as the original.\14\ If criminals 
reproduced a copy of Microsoft Windows and sold it, they would be 
committing an act of piracy. If, before selling the reproduction, they 
also reproduced the software's packaging so as to give the purchaser 
the false impression that they were buying a legitimate copy of 
Windows, they would also be guilty of counterfeiting.\15\ Both types of 
crime represent an enormous threat to the software and entertainment 
industries. It is clearly the responsibility of governments around the 
world to protect intellectual property owners from those who would 
steal their goods.
---------------------------------------------------------------------------
    \13\ Most items generated by the software and entertainment 
industries are protected by copyrights. Piracy is the violation of that 
protection.
    \14\ In the case of most items generated by the software and 
entertainment industries, product names are protected by 
``trademarks.''
    \15\ Similarly, if a criminal copies a Madonna CD and sells it, 
without any attempt to make it appear like the original, he is 
violating Madonna's ``copyright'' protections, and committing an act of 
piracy. If a different criminal manufactures fake brake pads, places a 
``General Motors' insignia on them, and then sells the brakepads as if 
they were authentic, she would be violating General Motors'' 
``trademark protections,'' and committing an act of counterfeiting.
---------------------------------------------------------------------------
    Let me begin by illustrating the breadth and pervasiveness of 
intellectual property theft. The International Intellectual Property 
Alliance estimates that the world of intellectual property represents 
the largest single sector of the American economy, almost 5% of the 
nation's gross domestic product.\16\ By comparison, defense spending 
occupies approximately 3% of U.S. GDP.\17\ While I could provide an 
endless list of industries affected by piracy and counterfeiting around 
the world, this report will focus primarily on the following 
industries: computer software including business applications and 
entertainment software; motion pictures; television programs; DVDs and 
home videocassettes; music, records, CDs, and audiocassettes; and 
textbooks, tradebooks, reference and professional publications, and 
journals (in both electronic and print media).\18\ What makes these 
industries particularly vulnerable is the degree to which their 
products can be stolen, reproduced, and distributed with ease through 
emerging technologies like the Internet, CD-Rs, \19\ and DVDs.\20\
---------------------------------------------------------------------------
    \16\ Stephen E. Siwek, Copyright Industries in the U.S. Economy: 
The 2000 Report, prepared for the International Intellectual Property 
Alliance by of Economists, Incorporated, 2000.
    \17\ Department of Defense. Figures are for 1999. 
[www.defenselink.mil/pubs/allied__contrib 2000/chartIII-3.html.]
    \18\ These are the industries represented by the International 
Intellectual Property Alliance. Issues affecting these industries 
represent only a tip of the iceberg, and I certainly look forward to 
delving into the issues surrounding the protection of other 
intellectual property.
    \19\ Traditionally, consumers have been unable to record or copy 
music or data onto CDs, or compact discs. CD-Rs are compact discs, just 
now becoming widely available, onto which consumers can record or copy 
music.
    \20\ Digital Versatile Discs (DVDs) are high-capacity optical discs 
on which movies and television shows can be recorded. They are often 
viewed as the next generation of video cassette.
---------------------------------------------------------------------------
    The Business Software Alliance estimates that ``the market value of 
this stolen (or `pirated') software alone was $11.75 billion'' in 
2000.\21\ According to the International Intellectual Property 
Alliance, trade losses for five industries in 58 countries amount to 
almost $8 billion:
---------------------------------------------------------------------------
    \21\ Business Software Alliance, ``Software Theft--Stopping the 
Piracy of Intellectual Property,'' 2000. A note on numbers: Because the 
theft of intellectual property covers so many fields, takes place in so 
many places, and is an underground activity, numbers for losses of 
revenue, profits and jobs vary considerably. Although the figures in 
this report are consistent with their particular context, the most 
important point is the sense of scale they convey.

 Estimated Trade Losses Due to Copyright Piracy in 58 Selected Countries
                                in 2000 *
------------------------------------------------------------------------
                                                       Estimated Revenue
                      Industry                              Losses
------------------------------------------------------------------------
Motion Pictures.....................................      $1,242,500,000
Sound Recordings and Musical Compositions...........       1,835,600,000
Business Software Applications......................       2,490,900,000
Entertainment Software..............................       1,658,400,000
Books...............................................         675,100,000
                                                     ===================
  Total.............................................     $7,903,300,000
------------------------------------------------------------------------
* International Intellectual Property Alliance, 2001 Special 301 Report,
  February 16, 2001. Note that these figures do not represent piracy
  over the Internet. If such figures did exist, one can only assume that
  loss figures would be even more staggering. Also note that these
  figures represent only losses in the 58 nations being watched as part
  of the Special 301 process (discussed further below).

    But what is most important is not the sheer enormity of the 
intellectual property sector, but rather the number of people it 
employs here in the United States. 4.3 million Americans are employed 
by the intellectual property sector, representing 3.24% of total U.S. 
employment.\22\ To provide some perspective, intellectual property 
businesses export more American value to the world than the automobile, 
automobile parts, agricultural, and aircraft industries combined. In 
other words, theft of intellectual property does not just affect media 
moguls or software titans; it robs the American economy of valuable 
jobs.
---------------------------------------------------------------------------
    \22\ Copyright Industries in the U.S. Economy: The 2000 Report, by 
Stephen E. Siwek of Economists incorporated, prepared for the 
International Intellectual Property Alliance. 2000.
---------------------------------------------------------------------------

                              III. Piracy

    Piracy has had a particularly dramatic effect on American 
businesses and the entertainment software industry. Their products are 
stolen via at least three distinct avenues:

           Disks and CD-ROMS are copied illegally, and then re-
        sold.

           A program can be transferred from one business work-
        station to another without the purchase of another version of 
        the software, i.e., intra-business piracy. This latter form of 
        piracy does not receive the attention it deserves, though the 
        Business Software Alliance believes that it is the most 
        economically damaging, accounting for as much as half of the 
        industry's losses.\23\ Some foreign governments are 
        particularly hesitant to crack down on intra-business 
        violations because in doing so they will inevitably interfere 
        with firms that are doing legitimate business.\24\
---------------------------------------------------------------------------
    \23\ Business Software Alliance, ``Software Theft--Stopping the 
Piracy of Intellectual Property,'' available at [http://www.bsa.org/
usa/policy/copyright/software__theft.phtml].
    \24\ Judiciary Staff briefing with the United States Copyright 
Office, January 18, 2002.

           Software and entertainment can be sent illegally 
        from one user to another through the Internet.\25\ By accessing 
        so-called ``warez'' sites, pirates can transfer any sort of 
        digital media electronically.
---------------------------------------------------------------------------
    \25\ Copyright Industries in the U.S. Economy: The 2000 Report, by 
Stephen E. Siwek of Economists incorporated, prepared for the 
International Intellectual Property Alliance.

    Together, these three forms of piracy have taken a real bite out of 
intellectual property industry revenues. And to what degree does 
software affect the American economy? The Business Software Alliance 
estimates: ``In 1998, software piracy cost the U.S. economy 109,000 
jobs, $4.5 billion in wages and nearly $991 million in tax revenues. By 
2008, those numbers will rise to 175,000 lost jobs, $7.3 billion in 
lost wages and $1.6 billion in lost tax revenues.'' \26\ The 
Interactive Digital Software Association estimates that $3 billion in 
revenue was lost to the entertainment software industry in 2000, money 
which industry experts believe could have been used to develop 1,600 
new games.\27\
---------------------------------------------------------------------------
    \26\ Business Software Alliance, ``Software Theft--Stopping the 
Piracy of Intellectual Property.''
    \27\ Interactive Digital Software Association, ``The IDSA's Anti-
Piracy Program: Combating Piracy around the World and on the 
Internet,'' [http://www.idsa.com/piracy.html].
---------------------------------------------------------------------------
    The music industry has also been victimized by piracy. Modern 
technology has enabled thieves to employ inexpensive, portable, CD 
factories which take up no more space than a small room to manufacture 
illegal reproductions; such facilities, each of which can produce 
upwards of 100,000 CDs per year, have been built all over the world. 
Additionally, user-friendly, piracy-enabling websites like Grokster in 
the West Indies, Imesh in Israel, Morphius in Tennessee, and KaZaA in 
the Netherlands, allow users all over the world to download music 
illegally at no expense. In addition, the advent of decentralized 
``peer-to-peer'' technology, such as that used by the Gnutella network 
to permit maintenance of large databases of music without any central 
location, makes pursuit and prosecution of these criminal activities 
exceedingly difficult.\28\ To date, over 100 million copies have been 
made of commonly used peer-to-peer software for downloading music.\29\ 
The music industry estimates that piracy cost it $4.2 billion worldwide 
in 2000.\30\
---------------------------------------------------------------------------
    \28\ Judiciary Staff Briefing with the Recording Industry 
Association of America, January 14, 2002.
    \29\ Judiciary Staff Communication with the Recording Industry of 
America, February 8, 2002.
    \30\ Mazer, Roslyn A. ``From T-Shirts to Terrorism.'' Washington 
Post 30 Sept. 2001.
---------------------------------------------------------------------------
    Finally, the movie industry is yet another victim of the growing 
spate of piracy. The Motion Picture Association of America estimates 
that as many as one million movies are downloaded illegally from the 
Internet each day.\31\ DVD copies of ``Harry Potter and the Sorcerer's 
Stone'' were available in parts of China even before the film had hit 
theaters anywhere in the world, let alone been released for home 
viewing. Imagine the number of people who choose not to go to the movie 
theater or rent a film because they are able to retain a pirated copy; 
imagine the amount of money sapped from our economy; and imagine the 
number of jobs lost as a result.
---------------------------------------------------------------------------
    \31\ Valenti, Jack. ``Alert to the Senate Judiciary Committee to 
Protect Copyright Industries in the U.S. 1 April, 2001.
---------------------------------------------------------------------------

                           IV. Counterfeiting

    In their attempts to develop a customer base, companies often 
``trademark'' their product names or symbols. ``Coke,'' for instance, 
is the trademarked name of the popular American soft drink. Customers 
often purchase a product simply because they identify with the label; 
the name on the product ensures its quality. For that reason, 
trademarks are extremely valuable. Oftentimes, criminals attempt to 
fool consumers into believing that their pirated wares are legitimate 
by reproducing the original product's trademark. In such cases, the 
producer is guilty not only of having ``pirated'' copyrighted material, 
but also of ``counterfeiting'' a trademark.
    The same industries which have been victimized by piracy are 
getting hammered by counterfeiting. Counterfeiters flood markets with 
their underpriced products, and steal a great deal of revenue. 
Additionally, as the Anti-Gray Market Alliance explains, counterfeit 
goods often do not maintain the same standards of quality that an 
original might; for that reason, marketing is often undermined because 
consumers assume that the shoddy product they purchased is authentic.

                V. Piracy Around The World--A Snap Shot

    Piracy rates around the world are dispiritingly high. The 
International Planning and Research Corporation estimates that software 
piracy rates are as high as 94% in China, 81% in Bolivia, 97% in 
Vietnam, and 89% in the Ukraine. Brazil, Mexico, Paraguay, the 
Philippines, Poland, the Netherlands, the Bahamas, South Africa, Egypt 
and Indonesia are also known to be afflicted with widespread 
piracy.\32\ By comparison, piracy rates in the United States hover 
around 24%, a figure which needs to be reduced further, but is 
comparatively impressive.\33\
---------------------------------------------------------------------------
    \32\ International Planning and Research Corporation, Piracy Study 
Conducted for Business Software Alliance, 2001.
    \33\ Business Software Alliance, International Planning and 
Research Council, 2001 Piracy Study.
---------------------------------------------------------------------------
    That discrepancy points to an important problem: while the American 
government is relatively vigilant in trying to stem intellectual 
property theft, other countries have not enacted the requisite laws to 
prosecute intellectual property thieves. Others willingly look the 
other way as property is pirated and stolen, and/or lack the resources 
needed to police the intellectual property market adequately.
    At first glance, one might assume that developing economies would 
benefit from loose intellectual property rights enforcement. Piracy 
would appear to enable firms to employ software at a diminished cost, 
and foreign governments often expect that any cost savings will advance 
economic development by increasing efficiencies and output.
    In the long run, however, weak intellectual property protections 
stifle local innovation. Music, software, and entertainment companies 
simply do not invest in nations that fail to honor or protect 
intellectual property rights. Ultimately, that lost investment costs 
nations much more than pirating and counterfeiting will ever provide. 
As important, local innovators are provided an enormous disincentive to 
create new products if they believe that thieves will steal whatever 
profit they might make. It is not uncommon for native-born innovators, 
such as software engineers, to leave their countries reluctantly, 
because their government will not protect their creations. Essentially, 
foreign countries that fail to enact and enforce anti-piracy laws end 
up doing themselves more harm than good.
    Unfortunately, once a country enacts the requisite laws, summons 
the adequate will, and provides the necessary resources to combat 
piracy and counterfeiting, the criminals who profit from stealing 
intellectual property often simply change venue. Combating intellectual 
property theft is like squeezing a balloon: when you apply pressure in 
one area, the air inside simply adjusts and moves elsewhere. For 
example, when Bulgaria, once rampant with illegal piracy operations, 
cracked down, much of its pirating industry moved to the Ukraine, which 
continues today to be an important haven for intellectual property 
thieves.\34\
---------------------------------------------------------------------------
    \34\ Judiciary Staff Briefing with the United States Copyright 
Office, January 18, 2002.
---------------------------------------------------------------------------
    When China began cracking down on some of the factories producing 
pirated compact discs, those production facilities (which, as noted 
earlier, are sometimes no more than a roomful of equipment) were 
largely moved to Hong Kong. When authorities in Hong Kong began to 
crack down, facilities sprouted in Macao and then Malaysia, where a 
civil case against a pirate can take six years to be heard in 
court.\35\ Hence, the balloon squeezing analogy: when one nation's 
government puts pressure on intellectual property thieves, they simply 
move to another part of the world.
---------------------------------------------------------------------------
    \35\ Judiciary Staff Briefing with the United States Copyright 
Office, January 18, 2002.
---------------------------------------------------------------------------
    Finally, international markets are debilitated by intellectual 
property theft on two dimensions. First, significant damage is done 
when a government fails to crack down on intellectual property theft 
and effectively corrupts its domestic market; this aspect of the 
problem is restricted to within a country's borders. Unfortunately, 
stolen material often floods across borders and into countries around 
the globe--even markets here in the United States--making pirated and 
counterfeit goods a problem even for countries doing an adequate job 
patrolling their own industries. As such, even when American 
authorities successfully prosecute copyright and trademark infringers 
here in the United States, our domestic market is affected by foreign 
production. Particularly as more theft moves onto the Internet, it will 
become difficult for a country to combat intellectual property theft 
initiated beyond its own borders. As such, it is tremendously important 
that every country participate in efforts to combat the problem.

                       VI. Advances in Technology

    What is it exactly that makes intellectual property so vulnerable 
to theft? First, the global economy has expanded tremendously during 
the last 20 years, buttressing demand worldwide for international 
products (entertainment and software goods in particular). Second, 
intellectual property is now most often transferred as digital data, 
which pirates can duplicate easily in identical form. Today, criminals 
can reproduce discs (CDs in the music business, CD-ROMS in the software 
industry, and DVDs in the world of entertainment) without degrading the 
quality of the recorded material. In the past, criminals who reproduced 
analog recordings (cassette tapes and VHS cassettes, for example) 
unavoidably faced a significant loss in sound quality: second 
generation copies were not as good as the original, and after a few 
generations they became virtually unusable. As a result, consumers were 
generally willing to pay more to ensure the highest quality sound. But 
the sound of a reproduced CD, even after 100 generations of 
reproduction, is identical to that of the original. Thus, improved 
technology has broken a barrier that previously limited the scope of 
pirated products. That breakthrough has translated into an explosion in 
supply: in the year 2001, DVD production increased by 9% and production 
capacity in Asia grew by 35%.\36\
---------------------------------------------------------------------------
    \36\ Motion Picture Association of America, ``2002 Trade Barriers 
Report.''
---------------------------------------------------------------------------
    Second, technology advances enable counterfeiters to produce 
packaging that fools even discriminating consumers into believing that 
they are buying the legitimate product. Often, a counterfeit CD's 
packaging will be nearly identical to that of the original. 
Sophisticated software and printing equipment enable counterfeiters to 
improve their illegal reproductions of trademarks themselves, copying 
even the markings (such as holograms) that trademark holders place on 
products to deter counterfeiting. Customs officials have even seen 
cases where the counterfeit packaging is of a higher quality than that 
of its legitimate counterpart.
    Third, digital products can not only be marketed on the Internet, 
they can actually be delivered on line. A copy of a popular song, for 
example, can itself be transferred immediately through the web. 
Certainly, the pervasiveness of Napster's successors, such as Grokster, 
Morphius, and Gnutella, indicates the extent to which the music 
industry has already been victimized by online piracy; indeed, illegal 
downloading of songs is now at its highest level ever, despite any 
chilling effect brought about by the industry's suit against Napster 
and, as noted earlier, is becoming more difficult to prosecute because 
of decentralization.\37\ Until recently, only small files, such as 
individual songs, could be downloaded efficiently over the Internet. 
But the emergence of ``broadband technologies,'' which dramatically 
increase the speed with which web-users can download large files, \38\ 
empowers consumers to download entire albums, television program, and 
even full-length feature movies much more easily and quickly. Thanks to 
broadband, a full-length motion picture can be downloaded in less than 
15 minutes, as compared to the four to five hours with conventional 
Internet access.\39\
---------------------------------------------------------------------------
    \38\ Judiciary Staff Briefing with the Recording Industry 
Association of America, January 14, 2002.
    \39\ Broadband refers to high-speed access to the Internet, such as 
DSL or cable modems. Broadband does to Internet access what a much 
larger pipe does to plumbing: it gives you much more information much 
quicker.
    \39\ Motion Picture Association of America, 2002 Trade Barrier 
Report.
---------------------------------------------------------------------------
    In turn, groups of pirates who upload products to the web have 
developed so-called ``warez'' sites at which one can download all sorts 
of stolen digital media at little or no cost to the consumer. As 
broadband becomes more pervasive in the U.S., the problem of online 
piracy will only grow.\40\ In other countries, such as South Korea and 
some northern European countries, where broadband is already more 
widely available, the problem has already grown. A simple Internet 
search for the word ``warez'' draws over 2 million hits.\41\
---------------------------------------------------------------------------
    \40\ According to the Federal Communications Commission, 7% of 
American households had broadband as of August 2001, a three-fold 
increase in 18 months. Federal Communications Commission. Third Report 
on the Availability of High Speed and Advanced Telecommunications 
Capability, February 6, 2002.
    \41\ Search conducted on Google.com. February 10, 2002.
---------------------------------------------------------------------------

                      VII. Current Legal Framework

    A variety of laws, both domestic and international, empower 
governments around the world to combat, investigate, and prosecute 
intellectual property thieves. But the web of protection they provide 
is incomplete. Officials at the U.S. Copyright Office have suggested 
that nations intending to uphold intellectual property rights must meet 
three criteria:

           First, they must develop an adequate legal framework 
        for prosecuting intellectual property theft.

           Second, they must have the political will to enforce 
        intellectual property laws. If prosecuting authorities, or 
        those involved in the enforcement process, are in league with 
        those who will profit from intellectual property theft, any 
        number of well-written laws will be ineffective.

           Third, they must devote sufficient resources to 
        enforcement of piracy laws. Even if adequate laws are on the 
        books, and the government retains the requisite political will, 
        prosecutors and judicial systems which do not receive the 
        resources they need to handle the sheer volume of crimes before 
        them will be unable to corral the problem.
             a. u.s. laws to protect intellectual property
1. In General
    Congress has passed several criminal statutes which protect 
intellectual property rights, including copyrights, trademarks, and 
patents. These statutes include:

           The No Electronic Theft (Net) Act, 17 U.S.C. 506 
        (see below).

           Digital Millennium Copyright Act, 17 U.S.C. 1201-
        1205 (see below).

           Criminal Infringement of a Copyright, 18 U.S.C. 
        2319. For willful infringement of a copyright for financial 
        gain, an individual is subject up to five (5) years in prison 
        and/or a fine of up to $250,000, for the reproduction or 
        distribution of at least ten (10) copies of a copyrighted work 
        with a retail value of more than $2,500. The penalty increases 
        to imprisonment of up to ten (10) years for second or 
        subsequent offenses. The penalty is imprisonment of up to one 
        (1) year and/or a fine of $250,000 for all other cases.

           Bootlegging Offenses, 18 U.S.C. 2319A. For knowing, 
        unauthorized recording and trafficking in sound recordings and 
        music videos of live musical performances, for financial gain, 
        an individual is subject up to five (5) years in prison and/or 
        a fine of up to $250,000; and up to ten (10) years in prison 
        for second or subsequent offenses.

           Trademark Offenses, 18 U.S.C. 2320. For knowing 
        trafficking in counterfeit goods or services, an individual is 
        subject up to ten (10) years in prison and/or a fine of up to 
        $2 million ($5 million in the case of a company); and up to 
        twenty (20) years in prison and/or a fine of up to $5 million 
        ($20 million in the case of a company) for second or subsequent 
        offenses.

           Trade Secret Offense, 18 U.S.C. 1832. For knowing 
        theft of a trade secret for financial gain, an individual is 
        subject up to ten (10) years in prison, and/or a fine of up to 
        $250,000.

           Offense Relating to Integrity of Intellectual 
        Property Systems:

                   Fraudulent Copyright Notice, 17 U.S.C. 506. 
                For knowing use and public dissemination of a 
                fraudulent copyright, or fraudulent removal of a 
                legitimate copyright, an individual is subject to a 
                fine of up to $2,500.

                   Counterfeit Patents, 18 U.S.C. 497. For 
                knowing forging of a letter of patent, or attempting to 
                pass a known forged letter of patent, an individual is 
                subject up to ten (10) years in prison and/or a fine of 
                up to $250,000.

                   False Marking, 35 U.S.C. 292. For knowing 
                use of a patent on a product, without permission, with 
                the intent of deceiving the public, an individual is 
                subject to a fine of up to $500.

           Offenses Relating to the Misuse of Dissemination 
        Systems:

                   Frauds and Swindles, 18 U.S.C. 1341. For 
                devising a scheme to distribute counterfeit goods 
                through the mails or interstate commerce, an individual 
                is subject up to five (5) years in prison and/or a fine 
                of up to $250,000 (up to thirty (30) years in prison 
                and/or a fine of up to $1 million if the violation 
                involves a financial institution.)

                   Fraud by Wire, Radio or Television, 18 
                U.S.C. 1343. For devising a scheme to obtain money/
                property by false or fraudulent pretenses, which 
                transmits through wire, radio, or television 
                communication any signals for executing the scheme, an 
                individual is subject up to five (5) years in prison 
                and/or a fine of up to $250,000 (up to thirty (30) 
                years in prison and/or a fine of up to $1 million if 
                the violation involves a financial institution.)

                   Electronic Communication Intercepting 
                Devices, 18 U.S.C. 2512. For intentional manufacture, 
                distribution, or advertising, through the mails or 
                interstate commerce, an electronic communication 
                intercepting device, an individual is subject up to 
                five (5) years imprisonment and/or a fine of up to 
                $250,000.

                   Unauthorized Reception of Cable Services, 47 
                U.S.C. 553. For unauthorized, willful interception of 
                cable services, an individual is subject up to six (6) 
                months and/or a fine of not more than $1,000. Any 
                person who commits such violation for the purpose of 
                private financial gain, is subject up to two (2) years 
                in prison and/or a fine of not more than $50,000. For 
                second or subsequent offenses, an individual is subject 
                up to five (5) years in prison and/or a fine of not 
                more than $100,000.

                   Unauthorized Use or Publication of 
                Communications, 47 U.S.C. 605. For knowing, willful 
                publication or use of wire or radio communications, in 
                certain instances, an individual is subject up to six 
                (6) months in prison and/or a fine of not more than 
                $2,000. Any person who commits such violation for the 
                purpose of private financial gain is subject up to two 
                (2) years in prison and/or a fine of not more than 
                $50,000. For second or subsequent offenses, an 
                individual is subject up to five (5) years in prison 
                and/or a fine of not more than $100,000. Also allows 
                the aggrieved party to bring a federal civil action 
                seeking injunctive relief.

2. Recent Criminal Statutes
    Congress passed new laws in 1997 and 1998 to specifically target 
the theft of intellectual property in cyberspace. These include:

           The No Electronic Theft Act (NET Act); and

           The Digital Millennium Copyright Act.

Because both Acts have been used by the Justice Department to combat 
intellectual property in cyberspace in particular, they are discussed 
in greater detail below.
            a. No Electronic Theft Act (NET Act)--17 U.S.C. 506
            (1) Provisions
    The No Electronic Theft Act (``NET Act''), signed into law in 1997, 
reflected Congress's determination to protect intellectual property 
rights which were being violated by a new phenomenon in cyberspace--
individuals who operated websites which allowed users to download 
pirated products for free. Such websites were created either for the 
amusement of the webmaster or, in some instances, as acts of self-
described ``cyber civil disobedience.''
    A loophole in IP protection statutes was exposed in the case of 
United States v. LaMacchia, 871 F. Supp. 535 (D. Mass. 1994). David 
LaMacchia, a college student, created an Internet web site where users 
could obtain pirated copies of commercial software products for free. 
LaMacchia's website reportedly disseminated over $1 million in free 
software. The Justice Department could not, accordingly, charge him 
with criminal copyright infringement because the statute required that 
LaMacchia infringe a protected holder's copyright for the purpose of 
financial gain--which he had not done since the items were dispensed 
for free. Accordingly, LaMacchia was indicted on wire fraud counts. The 
district court granted the defendant's motion to dismiss the 
indictment, finding that the defendant's actions did not satisfy the 
criminal copyright infringement statute or the wire fraud statute.
    Congress responded with the NET Act, which created a new category 
in the criminal copyright statute (17 U.S.C. 506(a)(2)) of criminal 
infringement that does not require a purpose of commercial advantage or 
financial gain. Rather, the willful reproduction or distribution, 
during any 180-day period, of copyrighted works with a retail value of 
more than $1,000 constitutes criminal infringement, regardless of 
whether the defendant enjoys financial gain from his enterprise. 
Criminal penalties include:

           Imprisonment of up to three (3) years and/or a fine 
        of up to $250,000, if the offense consists of reproduction or 
        distribution of ten (10) or more copies of a copyrighted work 
        which has a retail value of $2,500;

           Imprisonment of up to six (6) years and/or a fine of 
        up to $250,000, if the offense (described immediately above) is 
        a second or subsequent offense; or

           Imprisonment of up to one (1) year and/or a fine of 
        not more than $250,000, if the offense consists of reproduction 
        or distribution of one (1) or more copies of a copyrighted 
        work, which has a retail value of more than $1,000.

The NET Act also added a definition of ``financial gain'' (at 17 U.S.C. 
101) to includes the barter of copyrighted works. This new definition 
was targeted at Internet ``barter boards'' where pirated products are 
traded for other copies rather than for money.\42\
---------------------------------------------------------------------------
    \42\ U.S. Copyright Office Summary of No Electronic Theft Act (NET 
Act).
---------------------------------------------------------------------------
            (2) Recent Cases
    The Justice Department has aggressively pursued cases under the NET 
Act. Below is a summary of some recent cases as quoted from the 
Department of Justice's Computer Crime and Intellectual Property 
Section website (http://www.usdoj.gov/criminal/cybercrime/iplaws.htm):

           The first conviction under the No Electronic Theft 
        (NET) Act occurred on August 20, 1999 when Jeffrey Levy, a 22 
        year old University of Oregon senior, pled guilty to illegally 
        posting computer software programs, musical recordings, 
        entertainment software programs, and digitally-recorded movies 
        on his Internet web site; he then allowed the general public to 
        download these copyrighted products. On November 23, 1999, Levy 
        was sentenced to a two-year period of probation with 
        conditions.

           On May 4, 2000, seventeen defendants from across the 
        United States and Europe were indicted in federal court in 
        Illinois for conspiring to infringe the copyright of more than 
        5,000 computer software programs.

           On October 12, 2000, Brian Baltutat pled guilty in 
        federal court in Michigan to software copyright infringement. 
        He had offered approximately 142 software programs for free 
        downloading on a web site called ``Hacker Hurricane.'' Baltutat 
        was sentenced on January 30, 2001, to 3 years probation, 180 
        days home confinement, restitution to software manufacturers, 
        and 40 hours of community service.

           On December 15, 2000, Jason Spatafore pled guilty in 
        federal court in California to criminal copyright infringement. 
        The defendant willfully infringed a copyright by reproducing 
        and distributing by electronic means copies of parts of the 
        film Star Wars Episode I: The Phantom Menace. He did this by 
        posting copies of parts of the film on various web sites so 
        others could download copies of the film from the Internet. He 
        also encouraged others to download copies of the film from 
        those sites.

           Nine persons--who allegedly were associated with the 
        underground software piracy group known as ``Fastlane''--were 
        indicted on February 15, 2001, for pirating more than $1 
        million of copyrighted computer software, games, and movies 
        through non-public Internet sites. All nine defendants were 
        charged in federal court in Chicago in a nine-count indictment.

           On May 11, 2001, a federal jury in the Northern 
        District of Illinois found Christian Morley of Salem, 
        Massachusetts, guilty of conspiracy to infringe software 
        copyrights. Morley was indicted last year along with 16 other 
        defendants from across the United States and Europe for 
        conspiring to infringe the copyright of more than 5,000 
        computer software programs available through a hidden Internet 
        site located at a university in Quebec, Canada.
            b. Digital Millennium Copyright Act--17 U.S.C. 1201-1205
    The Digital Millennium Copyright Act (``DMCA'') was signed into law 
by President Clinton in 1998. Congress passed this statute both to 
implement U.S. intellectual property treaty obligations and to move the 
nation's copyright law into the digital age. Specifically, the DMCA 
implemented two 1996 World Intellectual Property Organization 
(``WIPO'') treaties into the U.S. code: the WIPO Copyright Treaty and 
the WIPO Performance and PhonographsTreaty. The DMCA also addressed a 
number of other significant copyright-related issues. The DMCA created 
two new prohibitions in chapter 12 of Title 17 of the U.S. Code:

           Circumventing the technological measures used by 
        copyright owners to protect their works; and

           Tampering with the integrity of copyright management 
        information.

Civil remedies and criminal penalties are established for violating 
these prohibitions.
            (1) Anti-Circumvention Measures
    Section 1201 of the DMCA focuses on providing adequate and 
effective protection against circumvention of technological measures 
designed to protect copyrighted works. The DMCA divides technological 
measures into two categories:

           Measures that prohibit unauthorized access to a 
        copyrighted work; and

           Measures that prohibit unauthorized copying of a 
        copyrighted work.

Making or selling devices or services that are used to circumvent 
either category is prohibited in certain instances. (Circumvention 
itself is prohibited only in the first category, not the second, 
reflecting the doctrine of ``fair use'' which allows copying in certain 
circumstances, e.g., a university professor lecturing on cinematography 
creates a CD-ROM for use in his class, featuring downloaded clips from 
several films.)
    An example: a film distribution company develops encryption 
software which prevents motion pictures on digital versatile disks 
(``DVDs'') from being copied. A hacker utilizing reverse engineering 
then discovers the encryption algorithm and keys, thus learning how to 
copy encrypted DVDs. The hacker then proposes to post his encryption-
breaking code on the web for others to purchase or use. The DMCA 
forbids the hacker from disseminating the encryption-breaking code 
which would be used by third parties to copy DVDs.
            (2) Integrity of Copyright Management Information
    In addition to the anti-circumvention provisions of section 1201, 
section 1202 of the DMCA also grants new protection for the integrity 
of ``copyright management information--i.e., data identifying works, 
their creators, copyright owners, and other key facts (including 
licensing information). Copyright management information can be linked 
to or travel with works in a networked environment to facilitate 
detection of unauthorized uses, promote the payment of royalties, and 
provide similar benefits to copyright owners.
    Section 1202 addresses both the dealing in false copyright 
management information and the removal or alteration of copyright 
management information.
    Specifically, the section prohibits:

           The falsification, alteration or removal of 
        copyright management information; or

           The trafficking in copies of works that are linked 
        with copyright management information that has been falsified, 
        altered or removed,

if the offending party knew or should have known that its actions would 
facilitate infringement.
            (3) Civil Remedies and Criminal Penalties
    Any person injured by a violation of section 1201 or section 1202 
of the DMCA may bring a civil action in federal court. The court may, 
pursuant to section 1203, grant a range of equitable and monetary 
remedies similar to those under the Copyright Act, including statutory 
damages.
    In addition, it is a criminal offense to violate section 1201 or 
1202 willfully and for purposes of commercial advantage or private 
financial gain. Under section 1204, penalties range up to a $500,000 
fine or up to five (5) years imprisonment for a first offense, and up 
to a $1,000,000 fine or up to ten (10) years imprisonment for second 
and subsequent offenses.
            (4) Recent Cases
    Three recent cases--one criminal and two civil--have been brought 
pursuant to the DMCA:

            Criminal

           The first indictment under the DMCA was returned in 
        federal court in California in August 2001 against Dmitry 
        Sklyarov and Elcom Ltd., both of Moscow.\43\ The defendants 
        allegedly conspired to develop and traffic a software program 
        which unlocked an on-line book encryption code; the code 
        protected the copyright holder's interest in an electronic book 
        by limiting access to reading--rather than copying and 
        distributing--an on-line book. The defendants posted the 
        decryption code on a Moscow website, thus enabling consumers 
        who purchased an encrypted book to ``unlock'' it, and make 
        copies. In December 2001, the federal government entered into 
        an agreement with Sklyarov in which the Justice Department 
        agreed to defer prosecution of the counts against him in return 
        for his cooperation and testimony against Elcom Ltd., the 
        Moscow website.
---------------------------------------------------------------------------
    \43\ See Department of Justice Website [http://www.usdoj.gov/
criminal/cybercrime/Sklyarovindictment.htm]; and [http://www.usdoj.gov/
criminal/cybercrime/sklyarovAgree.htm].

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            Civil

           Eight major motion picture studios brought suit in 
        2000, after computer hackers engineered decryption software to 
        copy the plaintiffs' motion pictures on digital versatile disks 
        (``DVDs'').\44\ After a website obtained and posted the 
        decryption software, the movie studio sought a court injunction 
        to enjoin the website from distributing the software on the 
        Internet. Universal Studios v. Reimerdes, 111 F. Supp. 2d 294 
        (S.D.N.Y. 2000), as amended, aff'd sub. nom. Universal Studios 
        v. Corley, 273 F.3d 429 (2d Cir. 2001).
---------------------------------------------------------------------------
    \44\ Jeweler, Robin and Jennings, Christopher Alan 
``Anticircumvention under the Digital Copyright Act: Universal Studios 
v. Corley.'' January 23, 2002.

                   The district court rejected the defendants' 
                argument that the DMCA's anti-circumvention provisions, 
                as applied to the posting and dissemination of the 
                decryption codes, violated the First Amendment. The 
                court held that the code-breaking software has a 
                functional, non-speech aspect--namely, that it 
                permitted consumers to ``unlock'' film DVDs, thereby 
                bypassing the copyright protections therein. 
                Accordingly, the district court granted a permanent 
---------------------------------------------------------------------------
                injunction against posting the decryption software.

                   The district judge expressed his hope that 
                the court's ruling would ``contribute to a climate of 
                appropriate respect for intellectual property rights in 
                an age in which the excitement of ready access to 
                untold quantities of information has blurred in some 
                minds the fact that taking what is not yours and not 
                freely offered to you is stealing!''

                   The Second Circuit Court of Appeals affirmed 
                the district court, upholding the constitutionality of 
                the DMCA.

           The recording industry issued a public challenge in 
        the spring of 2001 to decrypt copyright protection technology 
        designed to protect digital music.\45\ Edward Felten, a 
        Princeton professor, accepted the challenge, cracked the code, 
        then announced his intentions to present his findings at an 
        academic conference. The Recording Industry Association of 
        America (``RIAA'') threatened to sue Professor Felten, claiming 
        that publication of the decryption code would violate the DMCA. 
        Felten backed down and the RIAA dropped its law suit threat. 
        Felten then sued the RIAA, alleging that the DMCA had a 
        chilling effect which violated his First Amendment rights. 
        Felten sought a declaratory judgment that publication of his 
        findings would not violate the DMCA. The federal district court 
        dismissed his claim, but Felten--represented by the Electronic 
        Frontier Foundation--may appeal the dismissal.
---------------------------------------------------------------------------
    \45\ Jeweler, Robin and Jennings, Christopher Alan 
``Anticircumvention under the Digital Copyright Act: Universal Studios 
v. Corley.'' January 23, 2002.
---------------------------------------------------------------------------
       b. international treaties to protect intellectual property
    There is no such thing as ``international copyrights'' or 
``international trademarks.'' Rather, copyrights and trademarks are 
governed by national laws. That said, nations are obligated to protect 
copyrights and trademarks through a number of interrelated 
international treaties which impose minimum standards on countries 
party to the respective treaties. In this regard, there have been two 
important advancements for the international protection of copyrights 
and trademarks in the last decade. The first was the approval, during 
the Uruguay Round trade negotiations (concluded in 1994), of the 
Agreement on Trade-Related Aspects of Intellectual Property Rights, or 
``TRIPS.'' The second was the approval of the World Intellectual 
Property Organization (WIPO) Copyright Treaty and the WIPO Performances 
and Phonograms Treaty (concluded in 1996).
1. TRIPS Agreement
    Members of the World Trade Organization are required to comply with 
the TRIPS Agreement. Article 66 of the TRIPS Agreement, however, 
permits ``least developed countries'' a ten-year transition period for 
implementation of the Agreement; at present, 30 members of the WTO 
qualify for least developed country status.
    The TRIPS Agreement requires all members to comply with substantive 
provisions of two baseline treaties--one on copyrights (the Berne 
Convention for the Protection of Literary and Artistic Works) and one 
on trademarks (the Paris Convention for the Protection of Industrial 
Property).
    Equally important, the TRIPS Agreement imposes obligations on 
members to enforce adequately the intellectual property rights 
protected by it. The TRIPS Agreement also provides a means to secure 
enforcement, if diplomacy and persuasion prove inadequate: it 
incorporates by reference the dispute settlement procedures of the WTO. 
The Dispute Settlement Understanding provides a quasi-judicial means 
for a member to complain about WTO violations, a process which has 
often been successful for the United States in a range of trade areas. 
The United States has initiated several proceedings against foreign 
governments for TRIPS violations, including against Ireland for its 
deficient copyright laws, Greece for television piracy, and Denmark for 
its failure to make available ex parte search remedies in intellectual 
property enforcement actions. These cases have all been settled to the 
satisfaction of the United States.
2. WIPO Treaties
    Although the Senate gave its advice and consent to ratification of 
the WIPO treaties in October 1998, neither treaty has entered into 
force. The WIPO Copyright Treaty will enter into force, however, on 
March 6, 2002, and it is expected that the Performances and Phonograms 
Treaty will enter into force in 2002 (once the necessary 30 
ratifications have been achieved).

                           VIII. Enforcement

    Jurisdiction over piracy spans across not only a host of federal 
agencies, but also the community of nations. The Justice Department is 
the lead federal law enforcement agency while the State Department 
currently chairs a working group of U.S. Agencies that is involved in 
coordinating intellectual property rights.\46\
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    \46\ In addition, in the hopes of making each organization's 
contributions more accessible to those in and out of government, the 
State Department is currently working to create a website which will 
assist in an effort to better coordinate promotion of intellectual 
property rights abroad.
    In addition, a 1999 Appropriations Act established the National 
Intellectual Property Law Enforcement Coordination Council, with 
participation by the Departments of State, Justice and Commerce, as 
well as the Patent and Trademark Office, the Customs Service, and the 
Office of the U.S. Trade Representative. PL 106-58 653.
---------------------------------------------------------------------------
    In 1991, the Justice Department created what is now the Computer 
Crime and Intellectual Property Section (``CCIPS'') within the Criminal 
Division. According to the Department, CCIPS consists of ``two dozen 
lawyers who focus exclusively on the issues raised by computer and 
intellectual property crime. Section attorneys advise federal 
prosecutors and law enforcement agents; comment upon and proposed 
legislation; coordinate international efforts to combat computer crime; 
litigate cases; and train all law enforcement groups. Other areas of 
expertise possessed by CCIPS attorneys include encryption, electronic 
privacy laws, search and seizure of computers, e-commerce, hacker 
investigations, and intellectual property crimes.'' \47\ CCIPS 
attorneys work closely with U.S. Attorney's Office around the country 
in enforcing intellectual property laws as they relate to high tech 
piracy.\48\
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    \47\ See [http://www.usdoj.gov/criminal/cybercrime/ccips.html].
    \48\ The CCIPS webpage lists numerous federal criminal prosecutions 
brought in intellectual piracy cases. See [http://www.usdoj.gov/
criminal/cybercrime/ipcases.htm].
---------------------------------------------------------------------------
    Moreover, the Justice Department has raised the profile of 
cybercrime, including high tech piracy, by the recent creation of 
specialized prosecution units to focus on cybercrimes. In July 2001, 
Attorney General John Ashcroft announced that nine additional units are 
being added to a program called the Computer Hacking and Intellectual 
Property (``CHIPS'') Program that been premiered, to great success, in 
San Francisco. According to the Justice Department, ``[t]hat project 
demonstrated the benefits of a unit of prosecutors working closely with 
the FBI and other agencies to establish a relationship with the local 
high tech community and encourage them to refer cases to law 
enforcement. The new CHIPS units are the next phase in the Department's 
ongoing efforts to combat cybercrime and Intellectual Property theft.'' 
\49\ For now, the CHIPS units are limited to ten U.S. Attorney's 
Offices: San Francisco, Los Angeles, Dallas, San Diego, Seattle, 
Atlanta, Alexandria, Virginia, Boston, and New York (Brooklyn and 
Manhattan). Together, the 10 units will have a total of 77 positions, 
including 48 prosecutors.\50\
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    \49\ See [http://www.usdoj.gov/criminal/cybercrime/
enforcement.html#VIb].
    \50\ See [http://www.usdoj.gov/criminal/cybercrime/chipfact.htm].
---------------------------------------------------------------------------
    The Justice Department has worked with other federal and 
international law enforcement agencies in bringing criminal 
prosecutions against high tech pirates. For example, U.S. authorities 
spear-headed a 15-month investigation entitled ``Operation Buccaneer.'' 
Working in collaboration with officials in the U.K., Australia, Norway 
and Finland, the U.S. executed 58 warrants in 27 cities against 
``warez'' groups operators, seizing more than 140 computers. The 
operation struck at highly structured, security-conscious criminal 
groups specializing in ``obtaining the latest computer software, games, 
and movies; stripping (``cracking'') copyright protections; and 
releasing the final product to hundreds of Internet sites worldwide.'' 
\51\
---------------------------------------------------------------------------
    \51\ U.S. Department of Justice Press Release, ``Federal Law 
Enforcement Target International Internet Piracy Syndicates.'' 11 Dec 
2001. U.S. Customs Service, ``Operation Buccaneer Targets Software 
Piracy.'' January 2002. A useful resource for learning about the fight 
against intellectual property theft generally is the website of the 
Computer Crimes and Intellectual Property Section of the Justice 
Department. It can be accessed at [www.cybercrime.gov].
---------------------------------------------------------------------------
    In another ongoing investigation, entitled ``Operation Bandwidth,'' 
officials at the Defense Criminal Investigative Service, the Inspector 
General Office of the Environmental Protection Agency, the FBI, and the 
U.S. Attorney for the District of Nevada set up and maintained a warez 
site for 2 years as part of an undercover investigation targeting 
online pirates. The site was accessed to transfer over 100,000 files, 
including over 12,000 separate software programs, movies and games. 
Over 200 people attempted to obtain ``first-run movies, the latest 
computer games, and versions of notable software products even before 
they were publicly introduced.'' \52\
---------------------------------------------------------------------------
    \52\ U.S. Department of Justice Press Release, ``Federal Law 
Enforcement Targets International Internet Piracy Syndicates.'' 11 Dec 
2001.
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                        IX. Potential Solutions

    As discussed above, substantial laws, both international and 
domestic, already exist to help fight intellectual property theft. It 
is likely, therefore, that any successful proposals at this stage would 
not revolutionize the legal landscape so much as enhance our abilities 
to enforce the laws and treaties that exist. Based on my discussions to 
date with government and industry representatives, it does not appear 
that a major sea change is needed with respect to the substantive law. 
With that in mind, the following suggestions have been made by experts 
in the field.\53\
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    \53\ This section sets forth a variety of proposals that have been 
made to address the problems discussed above. The list is not meant to 
be comprehensive. Also, as I am still studying the issue, I have 
neither endorsed nor opposed any of them. My purpose in discussing 
these suggestions is merely to inform fully the reader.
---------------------------------------------------------------------------
                              a. domestic
    We cannot neglect the needs of those enforcing intellectual 
property protections at home and abroad, even as more time and energy 
is devoted to fighting international terrorism.\54\ American 
representatives around the world need to keep intellectual property 
protections high atop their list of priorities. Pirating and 
counterfeiting are sometimes subsumed by the variety of other 
challenges facing American diplomats and officials the world over. We 
need to remind them of the enormous cost incurred when we fail to 
protect the interests of America's businesses and workers.
---------------------------------------------------------------------------
    \54\ Another potential cause for concern is that some evidence is 
emerging that organized criminals, and perhaps even terrorist networks, 
may be financing themselves in part through theft of intellectual 
property. According to a Washington Post article in September 2001, 
``eight of the 10 countries identified by a trade group as having the 
highest business software piracy rates in the world--Pakistan, China, 
Indonesia, Ukraine, Russia, Lebanon, Qatar and Bahrain--have links to 
al Qaeda.'' Mazer, Roslyn A. ``From T-Shirts to Terrorism.'' Washington 
Post, September 30, 2001. In an article in The Industry Standard, 
former Attorney General Janet Reno wrote:

    ``Criminal organizations appear to be using the proceeds of 
intellectual property-infringing products to facilitate a variety of 
enterprises, including guns, drugs, pornography and even terrorism. 
Invariably, when there is intellectual property crime, there is tax 
evasion and money laundering.''

    So, while we ought to focus on the extent to which intellectual 
property theft affects the business sector, we ought not overlook the 
extent to which cracking down on criminal networks internationally may 
provide the added benefit of crippling those who would take up arms 
against the United States.
---------------------------------------------------------------------------
    Some specific proposals which others have offered to improve the 
fight against piracy and counterfeiting at home include:

           Dedicating more funding to the Justice Department's 
        effort to enforce intellectual property rights.

           Enacting statutes to prohibit individuals from 
        tampering with authentication features.

           Requiring that courts impose civil fines on those 
        known to be importing pirated material.

           Better supporting the intellectual property center 
        within the U.S. Customs Service.

           Working to enhance the communication between law 
        enforcement agencies and coordination between federal and state 
        authorities.

           Creating a fund dedicated to financing efforts to 
        expand intellectual property enforcement through training, 
        legislation, and technical assistance.

Some work is already progressing. For example, for fiscal year 2002, we 
in Congress have given the Customs Service's Intellectual Property 
Rights Center an additional $5 million, and we have funded more 
attorney positions at the Justice Department to prosecute these crimes. 
Undoubtedly, however, more can be done.
                            b. international
    On the international front, a key question is how can we in the 
United States convince foreign governments to join our effort to combat 
intellectual property theft. What will compel our counterparts around 
the world to institute and enforce proper intellectual property laws 
when many foreigners remain convinced that active enforcement will 
hobble their local economies?
    First, we could use the type of bilateral trade negotiations and 
threats available to us in trade disputes, namely the ``Special 301'' 
process, authorized in Section 182 of the Trade Act of 1974.\55\ That 
statute empowers the United States Trade Representative (USTR) to 
``identify and investigate'' priority foreign countries that fail to 
provide adequate and effective protection of American intellectual 
property rights. When foreign countries fail to provide proper relief, 
the USTR is empowered to impose trade sanctions.\56\ The U.S. Copyright 
Office notes that the process of investigation, in which foreign 
countries are placed on a so-called ``watch list,'' has been a 
tremendously successful tool.\57\ Foreign countries are often 
disinclined to invest in a ``priority country,'' so governments are 
often anxious to avoid that designation. Hong Kong and Malaysia were 
recently both compelled to do more to enforce intellectual property 
rights because the United States promised that failure to do so would 
impact their designation in the Special 301 process.\58\
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    \55\ Trade Act of 1974, P.L. No. 93-316, as amended by the Omnibus 
Trade and Competitiveness Act of 1988, P.L. No. 100-418. See 19 U.S.C. 
2242(a)(1)(A) (2001).
    \56\ Morrison, Wayne M. ``China-U.S. Trade Agreements: Compliance 
Issues.'' Congressional Research Service, December 7, 2000.
    \57\ Judiciary Staff Briefing with the United States Copyright 
Office, January 18, 2002.
    \58\ Judiciary Staff Briefing with the International Intellectual 
Property Association, January 10, 2002.
---------------------------------------------------------------------------
    Second, we could use the power we wield in negotiating free trade 
agreements to compel foreign governments to implement and enforce 
adequate intellectual property protections. Under the TRIPS agreement, 
World Trade Organization members are required only to institute laws 
which are ``sufficient to provide a deterrent'' to intellectual 
property theft.\59\ We in the United States know that authorities must 
do much more than that--most notably, they must prosecute those who 
violate the law. So, as we work to shape bilateral free trade 
agreements with nations like Peru, Brazil, Chile and Singapore, we 
should insist that the laws and policy instituted with our trading 
partners conform to the more stringent standards we apply domestically.
---------------------------------------------------------------------------
    \59\ TRIPS Agreement, Article 61.
---------------------------------------------------------------------------
    Third, we might provide an expanded arsenal of resources to foreign 
governments inclined to write and implement the type of intellectual 
property laws which will guarantee, with enforcement, that companies 
operating within their market have adequate protection. Many countries 
with pervasive problems simply do not have the resources or expertise 
necessary to prevent intellectual property theft, even when they 
understand that implementing the proper enforcement mechanisms will 
spur investment and economic growth. If American advisors, technology 
or financial resources are provided to well-meaning foreign 
governments, those countries will be better equipped to produce the 
sort of legal framework we enjoy here in the United States.\60\ The 
United States government provided at least $7.1 million worth of aid to 
developing countries in the pursuit of improving their intellectual 
property laws between 1999 and 2001.\61\ We should make sure that such 
programs are effective, and if they are, make them more available to 
countries throughout the globe.
---------------------------------------------------------------------------
    \60\ The State Department is already doing some work in this area. 
For example, in February 2002, the Department will host a three-week 
visit to the United States for intellectual property rights officials 
from numerous foreign governments.
    \61\ United States Agency for International Development, ``United 
States Government Initiatives to Build Trade Related Capacity in 
Developing and Transition Countries, Chapter Two: WTO Awareness, 
Accession, and Agreements,'' available on the USAID website, at 
[www.usaid.gov].
---------------------------------------------------------------------------
    Fourth, developing foreign countries often lack the resources 
required to fund and maintain the law enforcement agencies which 
prosecute intellectual property thieves. Enforcement agencies are often 
ill-equipped to fight high tech, fast-paced, well-financed criminal 
enterprises, and they rarely place intellectual property crime at the 
top of their enforcement agendas. In turn, piracy and trademark 
prosecutions are often given the short shift, despite the economic cost 
of failing to regulate the market.\62\ The United States could support 
foreign law enforcement, or at least foreign agencies, with some of the 
tools and training necessary to do an adequate job of prosecuting 
offending parties.
---------------------------------------------------------------------------
    \62\ Those producing pirated CDs, DVDs, and CD-ROMs are dependent 
on a special grade of polycarbonate which is mined in only a few 
locations around the world. If the countries that house polycarbonate 
production facilities were to place better export controls, or even 
look into developing a way to track the polycarbonate they produce, it 
would be much easier to stem the production of illegal copies. For 
example, governments could monitor whether the amount of polycarbonate 
given to a disc manufacturing plant represented the amount needed to 
produce the discs the plant purported to produce legitimately. If those 
numbers were to differ significantly, a government would have good 
reason to suspect that pirated material was coming from the facility.
---------------------------------------------------------------------------
    Fifth, we can encourage other countries that have already developed 
comparatively strong systems for protecting intellectual property to 
use their influence to persuade and cajole other governments to rise to 
their level. For example, the U.S. Government could press the European 
Union to do its utmost to raise the level of intellectual property 
protection in countries that seek to join its ranks.
    Finally, governments are typically some of the largest purchasers 
of computers and computer-related services. Both because they are 
market leaders and because prosecution is more difficult when the 
authorities are themselves the beneficiaries of pirated goods, it is 
terribly important that governments here and around the world police 
themselves. In 1998, President Clinton issued Executive Order 13103. It 
directs all federal agencies (and that third-party contractors doing 
business with the Government) to utilize legal software exclusively. 
The United States Trade Representative was tasked with convincing our 
trading partners to enact similar decrees.\63\ Despite that Order, 
evidence suggests that our government remains one of the largest 
violators of intellectual property rights.\64\ As we continue to work 
to address that problem--and we must--we can encourage foreign 
governments to enact the same sort of policy President Clinton 
instituted four years ago. If nothing else, the action a government 
takes to stem internal piracy sends a signal to private sector 
criminals.
---------------------------------------------------------------------------
    \63\ Executive Order 13103, September 30, 1998.
    \64\ Judiciary Staff Briefing with the Business Software Alliance, 
January 17, 2002.
---------------------------------------------------------------------------
    All of these proposals, of course, are for potential action by our 
government. As a Senator, that is logically my focus in reviewing this 
issue. Of course, any effort to fight the crime of intellectual 
property theft must involve substantial efforts on the part of the 
industries involved. For example, industries are currently working on 
technologies to protect their materials from illicit copying. Even as 
hackers and crooks become ever more sophisticated at cracking the 
codes, companies must continue to seek ways to thwart criminal efforts.

                             X. Conclusion

    Intellectual property theft has, through the years, stolen billions 
of dollars from American businesses and hundreds of thousands of jobs 
from American workers. The robust global economy and the Internet have 
enabled worldwide commerce to flourish. As businesses struggle to adapt 
to the new economic landscape, we need to ensure that government 
authorities throughout the world, and at home, are prepared to address 
the new challenges before them.
    As this report demonstrates, efforts to protect intellectual 
property are lacking, and represent an important hurdle for the 
development of economies around the globe. If those who invest in 
developing new and innovative ideas are consistently exploited, they 
may well give up efforts to improve technology and generate the type of 
art, music, literature, and entertainment that animates all our lives. 
More than that, if we fail to address this growing problem, millions of 
jobs will be lost, and we will have given into thieves and pirates.
    Our efforts will inevitably be buoyed by the development of 
intellectual property industries around the world. As software and 
entertainment companies begin to flourish in foreign countries, foreign 
governments will realize that intellectual property theft poses a 
significant economic threat. The Indian film industry, as it matured, 
became increasingly aware that its product was being pirated. It 
successfully pushed the Indian government to institute adequate 
protections. In the future, countries may come to the United States 
asking for assistance in developing the type of legal framework needed 
to combat intellectual property crime. We ought to be prepared to 
assist them in our mutual interest.
    Here at home, we should continue the strides made by federal law 
enforcement in waging an effective battle against high tech piracy. We 
must make sure that law enforcement has the legal tools and monetary 
resources to investigate fully and aggressively pursue high tech 
pirates--including both those who produce the pirated goods, as well as 
those that traffic them. We must ensure that federal laws are 
sufficient to prosecute all variations of high tech piracy, including 
appropriate civil and criminal provisions. We must maximize 
coordination among all the federal agencies with oversight for this 
crime. And we must make sure that all our citizens know that taking 
someone else's protected property through cyberspace is stealing, plain 
and simple.
    Only by being vigilant in investigating and prosecuting those who 
steal intellectual property will we be successful in continuing to 
nurture the development of the music, software, and entertainment 
industries which employ so many people both here and around the world. 
I look forward to assisting our government here at home in its battle 
against high tech pirates, as well as urging nations around the world 
join the United States in the fight against intellectual property 
theft, and I hope that I can continue to be helpful in that endeavor. 
Inevitably, the landscape will change, and I intend to reevaluate and 
readdress new problems in the coming years to ensure that creators and 
innovators are fully protected under the law.

                                   - 

```