U.S. GOVERNMENT PRINTING OFFICE

63–466 CC WASHINGTON : 2000

‘‘VIOLATIONS OF INTELLECTUAL PROPERTY

RIGHT: HOW DO WE PROTECT AMERICAN

INGENUITY?’’

HEARING

BEFORE THE

COMMITTEE ON

INTERNATIONAL RELATIONS

HOUSE OF REPRESENTATIVES

ONE HUNDRED SIXTH CONGRESS

FIRST SESSION

OCTOBER 13, 1999

Serial No. 106–79

Printed for the use of the Committee on International Relations

(

(II)

COMMITTEE ON INTERNATIONAL RELATIONS

BENJAMIN A. GILMAN, New York, Chairman

WILLIAM F. GOODLING, Pennsylvania

JAMES A. LEACH, Iowa

HENRY J. HYDE, Illinois

DOUG BEREUTER, Nebraska

CHRISTOPHER H. SMITH, New Jersey

DAN BURTON, Indiana

ELTON GALLEGLY, California

ILEANA ROS-LEHTINEN, Florida

CASS BALLENGER, North Carolina

DANA ROHRABACHER, California

DONALD A. MANZULLO, Illinois

EDWARD R. ROYCE, California

PETER T. KING, New York

STEVE CHABOT, Ohio

MARSHALL ‘‘MARK’’ SANFORD, South

Carolina

MATT SALMON, Arizona

AMO HOUGHTON, New York

TOM CAMPBELL, California

JOHN M. MCHUGH, New York

KEVIN BRADY, Texas

RICHARD BURR, North Carolina

PAUL E. GILLMOR, Ohio

GEORGE RADANOVICH, California

JOHN COOKSEY, Louisiana

THOMAS G. TANCREDO, Colorado

SAM GEJDENSON, Connecticut

TOM LANTOS, California

HOWARD L. BERMAN, California

GARY L. ACKERMAN, New York

ENI F.H. FALEOMAVAEGA, American

Samoa

MATTHEW G. MARTINEZ, California

DONALD M. PAYNE, New Jersey

ROBERT MENENDEZ, New Jersey

SHERROD BROWN, Ohio

CYNTHIA A. MCKINNEY, Georgia

ALCEE L. HASTINGS, Florida

PAT DANNER, Missouri

EARL F. HILLIARD, Alabama

BRAD SHERMAN, California

ROBERT WEXLER, Florida

STEVEN R. ROTHMAN, New Jersey

JIM DAVIS, Florida

EARL POMEROY, North Dakota

WILLIAM D. DELAHUNT, Massachusetts

GREGORY W. MEEKS, New York

BARBARA LEE, California

JOSEPH CROWLEY, New York

JOSEPH M. HOEFFEL, Pennsylvania

RICHARD J. GARON, Chief of Staff

KATHLEEN BERTELSEN MOAZED, Democratic Chief of Staff

SUBCOMMITTEE ON INTERNATIONAL ECONOMIC POLICY AND TRADE

ILEANA ROS-LEHTINEN, Florida, Chairman

DONALD A. MANZULLO, Illinois

STEVEN J. CHABOT, Ohio

KEVIN BRADY, Texas

GEORGE RADANOVICH, California

JOHN COOKSEY, Louisiana

DOUG BEREUTER, Nebraska

DANA ROHRABACHER, California

TOM CAMPBELL, California

RICHARD BURR, North Carolina

ROBERT MENENDEZ, New Jersey

PAT DANNER, Missouri

EARL F. HILLIARD, Alabama

BRAD SHERMAN, California

STEVEN R. ROTHMAN, New Jersey

WILLIAM D. DELAHUNT, Massachusetts

JOSEPH CROWLEY, New York

JOSEPH M. HOEFFEL, Pennsylvania

MAUVICIO TAMAVGO, Subcommittee Staff Director

JODI CHRISTIANSEN, Democratic Professional Staff Member

YLEEM POBLETE, Deputy Staff Director

VICTOR MALDONADO, Staff Associate

(III)

C O N T E N T S

WITNESSES

Page

Hon. Raymond Kelly, Commissioner, U.S. Customs Service, Department

of the Treasury .............................................................................................. 3

Mr. Del Richburg, Special Agent, U.S. Customs Service .............................. 5

Hon. Richard Fisher, Deputy U.S. Trade Representative ............................. 8

Mr. Q. Todd Dickinson, Acting Assistant Secretary of Commerce, Acting

Commissioner of Patents and Trademarks ................................................. 11

Mr. Jeremy Salesin, Senior Vice President and General Counsel, Lucas

Arts Entertainment ...................................................................................... 18

Mr. Charles Caruso, International Patent Counsel, Merck & Company,

Incorporated .................................................................................................. 20

Mr. Salvatore Monte, President, Kenrich Petrochemicals, Incorporated ..... 22

Lt General Gordon Sumner ............................................................................. 24

APPENDIX

Prepared statement:

Chairmwoman Ros-Lehtinen ........................................................................... 34

Mr. Raymon Kelly ............................................................................................ 36

Mr. Richard W. Fisher ..................................................................................... 40

Mr. Q. Todd Dickinson ..................................................................................... 50

Mr. Jeremy Salesin .......................................................................................... 60

Mr. Charles M. Caruso, Esq. ........................................................................... 70

Mr. Salvatore J. Monte .................................................................................... 77

(1)

‘‘VIOLATIONS OF INTELLECTUAL PROPERTY

RIGHT: HOW DO WE PROTECT AMERICAN

INGENUITY?’’

WEDNESDAY, OCTOBER 13, 1999

HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE ON INTERNATIONAL

ECONOMIC POLICY AND TRADE,

COMMITTEE ON INTERNATIONAL RELATIONS,

Washington, D.C.

The Subcommittee met, pursuant to call, at 1:30 p.m., in room

2172, Rayburn House Office Building, Hon. Ileana Ros-Lehtinen

[Chairwoman of the Subcommittee] presiding.

Ms. ROS-LEHTINEN. [presiding] The Subcommittee will come to

order. Thank you so much for your patience, both the witnesses

and the visitors today.

In much the same way that the Eli Whitney’s cotton gin is credited with igniting the Industrial Revolution, intellectual property

industries are propelling us into a new age of discovery and

growth. According to the report, ‘‘Copyright Industries in the U.S.

economy,’’ the core copyright industries accounted for $278 billion

in value added to the U.S. economy, or almost 4 percent of the

GDP. For all copyright industries, the report cites that the total

value added amounted to close to $434 billion, or almost 6 percent

of GDP.

The core industries grew at nearly twice the annual growth rate

of the U.S. economy as a whole between 1987 and 1996. Employment in these industries grew at close to 3 times the level in the

overall economy. Further, they accounted for an estimated $60 billion in foreign sales and exports in 1996—a 13 percent gain over

the previous year.

The American formula for excellence and success in the area of

intellectual property is one many would like to emulate. Unfortunately, some across the world are seeking to repeat the U.S. experience through stealing, pirating, counterfeiting, and other unauthorized uses of American products.

The impact of piracy on the U.S. economy is widespread. As industry leaders have stated: ‘‘Piracy puts breaks on the development

of the national producers, generates tax evasion, reduces the creation of employment on the part of American companies, and provokes serious losses for the national economy.’’

The pervasiveness of this infringement, despite the growth of the

copyright industries, is resulting in significant losses worldwide.

The International Intellectual Property Alliance estimated that, in

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1998, losses were about $5 billion for business applications; over $3

billion for entertainment software; almost $2 billion for the motion

picture industry; and close to $2 billion for the record and music

industries. Focusing on just two countries, the Pharmaceutical Research and Manufacturers of America reports that its members

companies lose over $1 billion annually.

Intellectual property rights issues continue to be at the heart of

U.S. relations with industrialized countries such as Japan and the

European Union members; allies such as Russia, and Israel; as

well as developing countries in Latin America, Asia, and the Middle East. Violations of intellectual property rights are a direct infringement on free trade, as it creates distortions in the market

and creates parallel black market systems, which, in the end, will

hurt, not just the United States but the global economy as a whole.

In turn, as a Finnish copyright specialist has argued, the global

phenomena of intellectual property industries ‘‘can only be dealt

with by a global approach and, where necessary, by global rules.’’

One agreement considered by experts to be a good first step was

the Uruguay Round (WTO) Agreements on Trade Related Aspects

of Intellectual Property Rights (TRIP’s) which took effect in January 1996. It established international obligations for the protection

and enforcement of intellectual property rights, and established enforcement and dispute settlement mechanisms. However, there

were still issues relating to protection of intellectual content in

cyberspace, loopholes regarding duplication of sound recordings,

and other challenges posed by global networks that needed to be

addressed.

In December 1996, the World Intellectual Property Organization

Diplomatic Conference concluded negotiations on two multilateral

treaties-one, to protect copyrighted material in the new digital environment and another, to provide stronger international protection

to performers and producers of phonograms. The implementing legislation was passed last year.

Nevertheless, the differences in deadlines for implementation of

international requirements and the failure of our trading partners

to effectively address the issue, translate into an escalation of violations and the creation of an environment where piracy is becoming rampant. Our enforcement, monitoring, and investigative agencies—some of which are represented here today—are doing an outstanding job within the limitations imposed by the pervasiveness

and magnitude of the problem.

The Intellectual Property Law Enforcement Coordination Council, established by a Fiscal Year 2000 treasury/postal appropriations Bill will certainly help as enforcement of intellectual property

is coordinated domestically and internationally among the U.S.

Federal agencies, as well as foreign entities.

But more needs to be done on the preventive side of the equation. I look forward to the recommendations of our witnesses today

as we search for a cure to this growing epidemic.

[The statement of Ms. Ros-Lehtinen appears in the appendix.]

Ms. ROS-LEHTINEN. I am very proud to introduce our first witness, Mr. Raymond Kelly, who is the Commissioner of the U.S. customs service. I thank him for being here today and for the opportunity to participate earlier in the demolition of counterfeit CD’s.

3

As a Customs Commissioner, Mr. Kelly directs over 19,000 employees responsible for enforcing hundreds of laws and international agreements, which protect the American public. Prior to

this prestigious appointment, Commissioner Kelly served as the

Under Secretary for enforcement at the Treasury Department.

Commissioner Kelly brings to the position more than 30 years of

experience and commitment to the public service. A former marine

who served in combat in Vietnam, he was part of the team investigating the World Trade Center bombing in 1993, the year in

which he was recognized as New York State’s official of the year.

Because of the delay and the constraints on the Commissioner’s

schedule, we will be submitting questions in writing, Commissioner, to Customs upon the conclusion of the testimony. I will excuse you, because I know that you have other commitments, and

we thank you for being here today, Commissioner. Thank you. We

will enter you statement in full in the record.

STATEMENT OF RAYMOND KELLY, COMMISSIONER, U.S.

CUSTOMS SERVICE, DEPARTMENT OF THE TREASURY

Mr. KELLY. Thank you very much, Madam Chairwoman. Thank

you for the opportunity to testify.

Throughout its long history, the United States Customs Service

has protected the Nation from the harmful effects of unfair and

predatory trade practices. In recent years, we have taken on the

rising threat against intellectual property rights.

IPR theft hurts not only our national economy but the world

economy as well. This crime is already costing industry approximately $200 billion a year in lost revenue and nearly 750,000 jobs.

In Fiscal Year 1998, the Customs Service seized almost $76 million worth of counterfeit and pirated merchandise and conducted

484 criminal IPR investigations. China and Taiwan were the

source countries for nearly half of all the merchandise seized.

In just the first half of Fiscal Year 1999, we seized over $73 million of pirated merchandise and conducted 505 criminal IPR investigations. Again, China and Taiwan accounted for 56 percent of this

seized merchandise. Motion pictures, computer software, and music

were the products that were illegally copied the most.

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.

Customs continues to raise awareness of the importance of protecting our intellectual property rights. This past summer, our

Fraud Investigations Division sponsored two conferences on methods to recognize and investigate IPR violations. Our agency teamed

up with private industry and trade associations to provide advanced training for approximately 200 Customs special agents and

inspectors. Twenty special agents from the Federal Bureau of Investigation were also included in this training.

4

Our Federal law enforcement agencies are stepping up to the

challenge, but we can’t do it alone. We need international cooperation. We need the help of our foreign partners.

Accordingly, we have conducted training for customs and Federal

police officers in nine different countries. We also provided training

to six additional foreign law enforcement agencies under the auspices of the International Law Enforcement Academy in Bangkok,

Thailand.

U.S. customs has also forged a close working relationship with

those industries most affected by IPR violations. We are working

with these corporations to train personnel at airports, seaports,

mail facilities, land borders, and other locations where foreign imports are received on ways to spot counterfeit merchandise.

Our partners in this effort have included the Interactive Digital

Software Association, the Motion Picture Association of America,

the Recording Industry Association of America, the Software Publishers Association, Lucas Arts, Microsoft, Novell, Nintendo, Sega,

and Sony Entertainment.

In recent months, we have contacted major pharmaceutical manufacturers to learn about their IPR concerns. As a result, we have

developed training for our Customs officers to help them identify

shipments of imported pharmaceuticals that violate manufacturers’

IPR rights as well as Food and Drug Administration regulations.

Customs mandate now extends to the borderless world of cyberspace as well. The Internet has opened up vast new opportunities

for legitimate business and criminal smugglers alike. In this new

environment, our traditional enforcement remedies simply won’t

suffice.

U.S. industries, particularly those involved in computer software,

motion pictures, and sound recordings, are at great risk from Internet piracy. Cyber criminals are difficult to track with a few simple

keystrokes from a computer anywhere in the world, they can ship

stolen trademarks, traffic pirated music, or download copyrighted

software.

U.S. customs is tackling this new breed of criminal on a variety

of fronts. Our main weapon in this fight is the Customs

Cybersmuggling Center, or C–3, located in Fairfax, Virginia. The

center is devoted to combating Internet crime, including IPR violations.

Currently, this center is conducting about 100 investigations involving the sale of counterfeit goods through the Internet. With the

help of Congress, we have expanded the center, and we will continue to devote our resources to its important work.

President Clinton included the protection of intellectual property

rights in his 1998 international crime control strategy. Customs,

along with the FBI, Co-Chair a working group charged with implementing the IPR strategy and strengthening the enforcement of

IPR laws.

Members of this group include the Departments of Treasury, Justice, and State, the Patent and Trade Office, the Copyright Office,

the U.S. trade Representative, the Central Intelligence Agency, and

the National Security Council.

I would also like to take this opportunity to announce the opening of the National Intellectual Property Rights Coordination CenVerDate 11-SEP-98 10:59 Jun 15, 2000 Jkt 000000 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 63466.TXT HINTREL1 PsN: HINTREL1
5

ter. The center, based at Customs headquarters here in Washington, will synchronize the joint efforts of our Federal agencies in

IPR investigations. Investigative personnel from Customs and the

FBI will provide the core staffing for the center. Other interested

agencies have been invited to participate.

The main objective of the center will be to eliminate duplication

of investigative efforts between agencies and to coordinate multinational investigations. The center will provide one-stop service for

industry to raise potential violations of IPR law. It will centralize

intelligence gathering, including data and information collected by

foreign government agencies and disseminate intelligence where

needed.

We will also utilize the 44 Customs mutual assistance agreements we have signed with our international partners to help in

our IPR efforts. These agreements provide for the free exchange of

information and assistance in areas of mutual concern. The IPR

Coordination Center will tap our attache offices worldwide to gain

intelligence under the mutual assistance agreements for IPR investigations.

This center will begin limited operations within 30 days. Additional funding has been requested in our Fiscal Year 2001 budget

to provide adequate staffing and resources.

Madame Chairwoman, with the continued support of the Congress, U.S. customs will remain a force in the battle against IPR

piracy. Every day we gain in fighting those who subvert legitimate

commerce and destroy livelihoods by stealing the creative works of

others. Ever day we build new partnerships to help us in this battle.

But as much as we have done, we need to do more. IPR crime

is an increasing global threat. We need to educate consumers on

the dangers of counterfeit and pirated goods. U.S. customs look forward to working with the Congress to raise public awareness of the

IPR threat and to enhance the defense of our cultural and commercial interests. The fact is, IPR crime affects more than those whose

copyrighted works are stolen. In some way, it affects us all.

With your consent, I would like now to offer a brief demonstration of our work on this important front. This demonstration is

being conducted U.S. customs special agent Del Richburg. Special

Agent Richburg is currently assigned to the Customs Cyber Crime

Center in Newington, Virginia, and he specializes in IPR investigations.

[The prepared statement of Mr. Kelly appears in the appendix.]

STATEMENT OF DEL RICHBURG, SPECIAL AGENT

Mr. RICHBURG. Thank you, Commissioner Kelly.

Madam Chairwoman, I would like to show several Internet

which demonstrate IPR violations. The web sites were captured

earlier in the week, but we will be viewing the sites as if they are

live.

This first site is called the Software Depot. It is located in Russia

and offers pirated business software for sale. As you can see in the

questions and answers area, they even let you know up-front they

are located in Moscow, Russia.

6

One of the issues—one of the problems with this web site is that

it looks very professional. It gives the appearance of a legitimate

software site, so the average consumer may not realize they are

purchasing pirated software from this site.

How would an investigator or the public know that the products

offered on this site are pirated? One of the first clues is this word

here ‘‘warez.’’ It is here again, and located several other areas on

this web site. The word ‘‘wares’’ is an accepted word on the Internet for pirated software.

This area of the web page, serials, it is an area where you can

download en mass serial numbers for software. Serial numbers for

software are normally not offered until you purchase software.

They are not available for mass download.

If we actually look at the type of products that the Software

Depot offers, you will note they have an extensive list of software—

Adobe Complete, the super bundle they are offering for $99. That

is a ridiculously low price. Some of the software that they offer easily runs into the thousands of dollars.

They offer mixed compilations, meaning the software that they

offer is software from competing companies. You may see a Microsoft product with a competing software, for example, and that is

just not going to happen on a legitimate software site.

Another example of Internet piracy involves music piracy in the

popular in MP3 format. MP3 pirated music can be located on many

areas of the Internet. One of the areas we are going to look at is

the World Wide Web. This is a popular common search engine

called scour.net. It is a multimedia search engine, and it allows you

to locate MP3 music. You would simply type in either the name of

the song or the name of the musical group you are interested in

and click search, and it will locate all of the occurrences on the

World Wide Web of that particular song or group.

In this particular case I searched for the Dire Strait song Sultans

of Swing. As you can see here, there is 441 pages where this particular song occurs. There is about 10 songs per page. That is well

over 4,000 songs.

Then if we continue, you would simply click on the song you

want to download, and the song is now downloading. This is called

the URL. This is an interesting piece on the software. What it is,

is it is an address. It is the address where this site is located at.

One of the first steps an investigator would take if we were to look

into this site would be to run a common search, a trace program.

We are running the program, this trace software, and it is telling

us that this particular site is located in Chicago. It is on a university server. What has happened in this particular case, more than

likely, is a student has probably placed his content on the university server without the university’s consent.

If we continue on, we will see that the download is in progress—

it is at 6 or 7 percent. In less than a minute, we would have

downloaded the song. Now, if we wanted to hear that recording in

MP3 format, you would hear a near-CD quality version of that Dire

Strait song. We will go ahead and play that song and get an idea

of the quality.

We will fast forward a little bit. You see it is a near-CD quality

sound of that song.

7

Obviously, there is literally thousands of these types of sites on

the Internet, thousands. In the interest of time, I only showed a

few today.

Thank you for your interest.

Ms. ROS-LEHTINEN. Thank you so much, Commissioner. Thank

you for that presentation, and we apologize again to all of our witnesses for the delay. The Export Promotion Act is on the floor

today, which is of extreme interest to our Trade Subcommittee, and

that is where most of our Members are. If you see C–Span, you will

see them all on the floor talking. I got in early and left so I could

Chair this meeting, but that is where we are, and we apologize to

all of you today.

We will submit our questions in writing to you, Commissioner.

We thank you so much——

Mr. KELLY. Thank you, Madam Chairwoman.

Ms. ROS-LEHTINEN [continuing]. For being with us and for the

presentation that you made.

Mr. KELLY. Thank you. We have some items on the table over

there that have been confiscated by Customs Service. They are all

manifest IPR violations.

Ms. ROS-LEHTINEN. Thank you so much. We will take a look at

those.

Mr. KELLY. Thank you very much.

Ms. ROS-LEHTINEN. Thank you.

We are very proud to now present our second panel, headed by

Ambassador Richard Fisher, the Deputy United States Trade Representative with primary responsibility for Asia, Latin America,

and Canada. Ambassador Fisher also serves as vice Chairman of

the Board of Directors of the Overseas Private Investment Corporation, and we were just discussing your bill a few minutes ago.

Ambassador FISHER. Thank you.

Ms. ROS-LEHTINEN. Before joining the USTR, Ambassador Fisher

was managing partner of Fisher Ewing Partners and Fisher Capital Management. He was Executive Assistant to the Secretary of

the Treasury during the Carter Administration and was founding

Chairman of the Dallas Committee on Foreign Relations, among

many other distinguished groups, and we thank Ambassador Fisher for being with us today.

We will then also hear from Mr. Todd Dickinson, the Acting Assistant Secretary of Commerce and Acting Commissioner of Patents

and Trademarks. Prior to these distinguished assignments, he

served as counsel with a Philadelphia-based law firm and as chief

counsel for Intellectual Property and Technology at Sun Company.

Commissioner Dickinson is responsible for managing the agency’s

growth and ensuring quality products and services.

Among the initiatives implemented during his tenure as head of

the agency was the launching of the Quality Council to provide

guidance in aligning PTO with established quality criteria. Commissioner Dickinson also established the Office of Independent Inventor Programs aimed toward inventors working for themselves or

for small businesses.

We thank Mr. Dickinson as well as Ambassador Fisher, and we

thank you mostly for your patience today. Thank you. We will be

glad to enter your statements in full in the record. Thank you.

8

You are recognized now.???

???[The prepared statement of Mr. Richburg, Kelly appears in

the appendix.]

STATEMENT OF HON. RICHARD FISHER, DEPUTY U.S. TRADE

REPRESENTATIVE

Ambassador FISHER. Madame Chair, you eloquently summarized

the economics of piracy in your opening statement. The value of intellectual property rights, however, goes well beyond its present

economic value. A system of strong intellectual protection is referred to by the Commissioner in his presentation just now is fundamental to ensure that artists and inventors and scientists and

even the group Dire Straits are rewarded for their work and thus

incentivized to push the envelope of artistic creativity and scientific

advancement in the future.

To paraphrase Thomas Edison, ‘‘The greatest machine ever invented is the human mind.’’ Our commitment is to intellectual

property rights, that is to products of the American mind, at home

and abroad as a foundation of our ability to create the manufacturing successes, the distribution systems, the computer programs,

the medicines, the defense systems, and the films and recordings

of music of the future.

In a sense, the intellectual property of the American economy is

like a warehouse of ideas. For people to walk into that warehouse

and be able to steal from it is no more tolerable than the theft of

goods, and this is why we at the U.S. Trade Representative’s Office

place such an emphasis on ensuring that our trading partners pass,

enforce, and continue to enforce laws that ensure respect for our

property rights, our intellectual property rights.

Among our most effective bilateral tools, Madam Chair, in combating piracy is the annual Special 301 review mandated by Congress in the 1988 Trade Act. Publication of the Special 301 list

warns the country of our concerns, and, importantly, it warns potential investors in that country that their intellectual property

rights are not likely to be satisfactorily protected.

In many cases, these actions lead to permanent improvement in

the situation. Bulgaria, for example, was once one of Europe’s largest sources of pirated CD’s. We worked through the 301 process to

raise awareness of the problem in Sophia, and Bulgaria has, at this

point, almost totally eliminated pirate production.

China is another example where we used both the listing and actual retaliation to win bilateral intellectual property agreements in

1995 and 1996. As a result, China has a relatively functioning system which protects copyrights much more effectively than ever before, and, importantly and recently, in March, the China State

Council followed our example here in the United States in issuing

a directive to all government ministries mandating that only legitimate software be used in government and quasi-government agencies.

That said, we do of course have continuing concerns in China. Pirate production is down, but imports from other pirate havens are

increasing in that country, and restrictions on market access have

hindered our ability to replace pirate products with legitimate

9

goods in many cases. As in all our IPR work, continuous follow-up

and review is essential for success as it is elsewhere.

In 1999, Madam Chair, we reviewed—or we have reviewed 72

countries in our Special 301 review, with 54 countries recommended for specific identification and 2 subject to sector 306

monitoring. In this review, we focused on 3 major issues: First, we

are working to ensure full implementation of the World Trade Organization commitments on intellectual property, a subject I will

expand upon in just a moment; second, we are addressing new

issues raised by the rapid advance of technology, in particular, the

control of piracy and newly developed optical media, for example,

music and video CD’s and software CD–Roms, and we have made

some significant success on this issue over the past year with Hong

Kong and Malaysia being cases in point; and, third, we have

mounted a major effort to control end user software piracy; that is,

the unauthorized copying of large numbers of one or two illegally

obtained, or perhaps legally obtained, programs in particular by

government agencies around the world.

We have used the example set by Vice President Gore’s announcement of a U.S. Executive Order mandating the use of only

authorized software by U.S. Government agencies to win similar

commitments from Colombia, Paraguay, the Philippines, Korea,

Thailand, Taiwan, and Jordan, in addition to China, which I referred to earlier. Spain and Israel are actively considering such decrees.

The bilateral negotiations are and will remain central to our efforts to improve copyright standards worldwide. However, as time

has passed, our trading partners have begun the positive effect of

stronger standards in their own home countries, and this allowed

us to make a fundamental advance with the TRIP’s agreement,

which you referred to in your introduction to today’s hearing.

This required that all WTO members pass and enforce copyright

patent and trademark laws and give us a strong dispute settlement

mechanism to protect our rights. This agreement will soon be fully

in force. The Uruguay Round, which you referred to, Madam Chair,

granted developing countries until January 1 of the year 2000 to

implement most provisions, including copyright protection for computer software. as we approach 2000, we are working to ensure

that developing countries are taking steps to ensure that they will

meet their obligations.

In the interim, we have been aggressive and successful in using

WTO dispute settlement procedures to assert our rights in 13 specific cases stemming from the very first TRIP’s-related dispute settlement case against Japan in 1996. The more recent cases include

one with Portugal for failing to apply TRIP’s levels of protection to

existing patents; another against Pakistan and India for their failure to provide a so-called mailbox and exclusive marketing rights

for pharmaceutical products; a third case with Denmark and another with Sweden over the lack of ex parte civil search procedures;

one with Ireland for their failure to pass a TRIP’s-consistent copyright law; one with Greece dealing with their rampant broadcast

piracy; with Argentina over exclusive marketing rights data protection for agricultural chemicals; with Canada for failing to provide

a 20 year patent term in all rather than certain specific cases, and

10

with the EU regarding regulations governing geographical indicators.

These cases, Madam Chair, illustrate the range of issues that are

involved in using WTO settlement procedures and processes to protect American property rights.

In the year ahead, we expect to be equally active. As part of our

annual Special 301 report, we announced that USTR would conduct

a Special 301 out-of-cycle review of developing countries toward full

TRIP’s compliance this December, and we are hopeful that many

instances of less than full implementation can now be resolved

through consultations. If not, we are prepared to address the problems through dispute settlement proceedings beginning in January

where necessary.

In fact just last week, I met in Buenos Aires with the economic

advisers to the three leading Presidential candidates. I told them

that unless the Argentine Congress provides the wherewithal to address our concerns regarding pharmaceutical piracy and patent piracy between now and year-end, their government, to be elected

next month, may well be subject to a TRIP’s suit early next year.

At the same time, Madam Chair, our negotiations on the accession of 32 economies to the WTO offer us a major opportunity to

improve intellectual property standards worldwide. The economies

applying to enter the WTO include a number of countries in which

our intellectual property industries have experience very significant piracy problems over the years, as you may seen in this morning’s paper. For example, Jordan is keen on stressing progress on

this front as part of their WTO accession effort in order to attract

investment to the kingdom. In each case, we consider acceptance

of the WTO requirement for passage and enforcement of modern

intellectual property laws a fundamental condition of entry and accession to the WTO.

Our overriding objective at the moment is to secure full and

timely implementation of the TRIP’s agreement by all WTO members and to broaden this to new members. WTO’s so-called builtin agenda includes a review of the TRIP’s agreement scheduled to

begin after implementation, and this will help us build consensus

for the next steps at the WTO. We foresee the possibility of improvements to the TRIP’s agreement in due course. Among other

things, we believe that it will important to examine and ensure

that standards and principles concerning the availability, scope,

the use, and enforcement of intellectual property rights are adequate and effective, and are keeping pace with the rapid changing

technology, which we just saw illustrated, including further development of the Internet and digital technologies.

We also expect that once members have the benefit of experience

gained through full implementation of the agreement, we will want

to examine and ensure that members have fully attained the commercial benefits which were intended to be conferred by the TRIP’s

agreement and the protection it affords. In any event, no consideration will be given or should be given to the lowering of standards

in any future negotiations.

Looking forward, Madam Chair, we are giving careful consideration to our options for protecting intellectual property associated

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formation society. For example, we are consulting with United

States industry to develop the best strategy to address problems

such as Internet piracy. We began an effort to address this issue

through the multilateral negotiations under the auspices of the

World Intellectual Property Organization, or WIPO, which you referred to in your opening statement. This resulted in the signature

of two 1996 WIPO copyright treaties, which will help raise the minimum standards of copyright protection around the world particularly with respect to Internet-based delivery of copyrighted works.

With the recent approval by the U.S. Senate of these treaties, the

Administration is committed to work with industry to encourage

ratification of these treaties by other signatories as soon as possible.

Madam Chairwoman, intellectual property protection is one of

our most important and challenging tasks. To protect U.S. intellectual property rights is to protect the product of the American mind.

It protects America’s comparative advantage in the highest-skill,

highest-wage fields. It helps to ensure that the extraordinary scientific and technical progress of the past decades continues and accelerates in the years ahead and all of woman and mankind prospers from it.

Congress, through the passage of the Special 301 law, through

the passage of the Digital Millennium Copyright Act implementing

the WIPO treaties, and through hearings such as this deserves

great credit for bringing public focus to these issues, and we thank

you for it. USTR has worked very closely with the responsible Committees over the years, and we look forward to continuing that effort together in the years ahead.

Thank you, Madam Chair and Members of the Committee. Be

happy to answer any questions you have and happy to turn this

over to my friend, the Commissioner.

[The prepared statement of Ambassador Fisher appears in the

appendix.]

Ms. ROS-LEHTINEN. Thank you so much, Mr. Ambassador.

Mr. Commissioner, we will also include your full statement into

the record.

STATEMENT OF Q. TODD DICKINSON, ACTING ASSISTANT SECRETARY OF COMMERCE AND ACTING COMMISSIONER OF

PATENTS AND TRADEMARKS

Mr. DICKINSON. Thank you very much, Madam Chairman and

Members of the Committee.

Let me start by commending you for holding this hearing on the

protection of intellectual property. Echoing what my colleague, Ambassador Fisher, and Commissioner Kelly said, I firmly believe that

no issue is more important in shaping the future growth and development of our economy and the global economy than to the development and the maintenance of an effective intellectual property

protection system.

Within our national intellectual property system, the Patent and

Trademark Office is basically responsible for examining and granting patents and registering trademarks. We also serve an important policymaking role. Specifically, the PTO is the primary adviser

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national IP matters, including the international agreements. To

that end, we work closely with our colleagues here at USTR and

Customs and the U.S. copyright office, the Departments of State

and Justice and other Federal agencies to secure and expand protection of U.S. intellectual property throughout the world.

As part of that international effort, we and our colleagues within

the Administration engage in policy consultations and educational

programs with our foreign counterparts. The goal is not only to

convey the advantages of effective intellectually property enforcement systems, including full compliance with the TRIP’s agreement, but also to promote understanding of the critical role that intellectual property protection plays in building strong and vital

economies.

Our educational programs and discussions regularly take place

here in Washington and abroad; in fact, just last week the PTO

and the World Intellectual Property Organization’s Asia bureau Cosponsored a study program of the enforcement of IP rights for customs officers from 12 Asian countries. Next month, we will hold another enforcement program with intellectual property officials from

over 15 other nations.

The PTO traditionally consults with other Federal agencies on

intellectual property related enforcement activities. I am very

pleased that Congress has recently gone further and formally initiated a new interagency coordination effort. The law, which creates

the National Intellectual Property Law Enforcement Coordination

Council, signals a strong commitment on behalf of the United

States to improve the coordination of domestic and international

intellectual property law enforcement among Federal and foreign

entities.

The Council, which is Co-Chaired by us at the PTO and the Assistant Attorney General for the Criminal Division, also includes

the USTR, State Department, the Department of Commerce, and

the Customs Service. It is directed to consult with the register of

copyrights on copyright-related issues and reports annually no its

activities to the President and the House and Senate Committees

on Appropriations and the Judiciary. We look forward to working

with our colleagues on this new, important effort.

Securing effective patent protection as expeditiously as possible

is critical to all U.S. industries but particularly the pharmaceutical,

computer, and other high-technology sectors. On that point, Madam

Chair, I can report that the U.S. patent business is booming. Patent applications are up 25 percent in just the last 2 years; almost

50 percent since the start of the Clinton Administration. In the fiscal year that just ended, we received nearly 270,000 patent applications.

To handle the rapid growth in patent applications and to address

our customers’ concerns, we have hired in the last 2 years more

than 1,600 new patent examiners. At the same time, we are expanding staff training and aggressively automating our operations

to improve the efficiency and the quality of our service.

Our international efforts on patent protection include ongoing

consultations with our international partners through the Patent

Cooperation Treaty and the Patent Law Treaty as well as with our

trilateral partners, the European and the Japanese patent offices.

13

The culmination of these efforts will streamline the procedures for

and—for filing for and maintaining patent protection throughout

the world. We also look forward to the day when there is a complete international regime for patent protection, the so-called global

patent.

With respect to our trademark operations, we are also experiencing significant growth. Trademark are up nearly 25 percent in

this year alone. Our efforts in this area include hiring more trademark examiners, promoting electronic filing, and improving our

searchable data base.

On the international front, we expect that the implementation of

the Trademark Law Treaty this November will substantially aid

U.S. trademark owners by simplifying and harmonizing requirements for acquiring and maintaining a trademark registration in

member countries.

While our publishing, computer software, information, and entertainment industries continue to face serious challenges in terms of

piracy and infringement in foreign markets, progress is being made

to promote international cooperation in the protection of intellectual property in the global economy. For example, the Digital Millennium Copyright Act, passed by the Congress and signed into the

law by the President last October, implements the WIPO copyright

treaties mentioned by Ambassador Fisher.

They were recently negotiated by my predecessor, Commissioner

Lehman, and it was my pleasure to join Secretary Daley in depositing our instruments of ratification for these new treaties last

month in Geneva. These treaties will help ensure that other nations provide copyright protection for electronic commerce at a level

equivalent to the protection provided under U.S. law. We are working to encourage other nations to ratify and implement them.

As we prepare to enter the next millennium, the PTO will continue its efforts to secure and expand protection of U.S. intellectual

property throughout the world. With some hard work and good

will, we are confident that we can buildup on existing systems so

that they can reflect the realities of a new marketplace, one that

is increasingly electronic and global. This task is not without its

challenges, Madam Chairman, but we believe our Nation’s everevolving IP systems will continue to serve our citizens well during

the next century and beyond. Thank you.

[The prepared statement of Mr. Dickinson appears in the appendix.]

Ms. ROS-LEHTINEN. We thank you so much for joining us as well.

Commissioner Dickinson, your office will be Co-Chairing the new

Enforcement Council. Can you tell us what progress has been made

in the establishment of that Council? What recommendations has

the industry provided, and what are some of the specific goals that

you wish to achieve through this Council?

Mr. DICKINSON. Thank you, Madam Chairman. The legislation

which established this Council just passed and was recently signed

by the President, so we are in the very early stages. I did speak

actually just this morning with my Co-Chair, Assistant Attorney

General Robinson, and we will shortly issue an invitation to our

colleagues on the Council to come to the very first meeting, and we

are looking very much forward to that. We have our staffs turning

14

their attention to the various matters that the Council would take

up——

Ms. ROS-LEHTINEN. What are your expectations to come with

this?

Mr. DICKINSON. Are expectations, frankly, are fairly high. We believe that one of the key benefits from this is to have the kind of

coordination activities which have not heretofore formally existed,

and I am hopeful that the kind of—perhaps some of the

redundancies and overlap that may have existed before will be

streamlined and that we will have the opportunity to work together

to come up with new creative ways of dealing with these issues, because, as Commissioner Kelly indicated and Ambassador Fisher indicated and others certainly do, this is an extraordinarily growing

problem and one we need to take a coordinated approach to.

Ms. ROS-LEHTINEN. Ambassador Fisher, if you could address that

as well.

Ambassador FISHER. Just a comment on this idea and the importance of having a unified view and eliminating overlap. One of the

most difficult problems we have with enforcement overseas is that

intellectual property protection cuts across several cabinet portfolios or ministries in any one country. For example, if we look at

CD piracy in Brazil, a lot of these CD’s are stamped out in Macao;

their shipped across the Pacific Ocean; they actually enter into

Brazil from a small country that borders it to the north on donkey

back. A recording artist like Susha, for example—one of my favorites; one of my wife’s least favorites, by the way—is denied her

hard earned earnings in Brazil. Then you find out, of course, that

tax authorities are bringing on finance revenue. It is a border and

customs issue; it is a law enforcement issue, and so on, which the

Commissioner well knows.

We have had tremendous difficulty in getting countries to understand that trade ministers cannot in and of themselves effect the

kind of enforcements necessary to implement the laws that they

are beholden to, internationally or bilaterally or the agreements

that they have made. I want to also just add that it is important

that we get other countries and use our own example for other

countries as we have with the Vice President’s issuance of orders

on software for legitimate software to be used; set an example for

others, and then expect to hold their feet to the fire.

Mr. DICKINSON. Madam Chairman, if I could elaborate just a little bit, I concur with what Ambassador Fisher said. We consult bilaterally regularly, and very recently was in Europe, in Geneva,

with the WIPO governing bodies. Many of the European countries

approached us about this—the establishment of this Council, because they would like to emulate it. This is an issue which they

would like to bring back to their own countries. We are at the forefront, and we are to be congratulated for doing that.

Ms. ROS-LEHTINEN. That is great. Commissioner, how will the

$50 million reduction in the CJS appropriations bill affect PTO’s

processing capabilities?

Mr. DICKINSON. Thank you, Madame Chairman, for that question. The budget process is a difficult one, as I think we all understand, particularly this year, and I know Congress is taking—has

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passed version would take $51 million our of our request and place

it into what is called a carryover.

One of the issues which concerns our customers and our constituents the most is that the fees which they pay—and we are the only

fully fee-funded agency in the Federal Government; we don’t receive any taxpayer dollars whatsoever, just the fees that are paid

to do the work that we do—those constituents, as you can imagine,

when they pay those fees, small inventors in particular, are concerned that those fees get taken away for other governmental purposes. The impact of that $51 million can be very significant. We are

studying that question now, but it looks like we may have to slow

down or possibly stop the hiring of new examiners, hiring new

judges on our boards, the backlogs and pendancies that we have

may increase significantly, and when we are in a regime now

where your term for a patent runs from the day you file it as opposed to the day it issues, each day longer we take to examine an

application is 1 day less that somebody gets on their term. It would

be a shame, I think, if this led to a significant or any reduction in

the amount of a term that a patent owner is entitled to.

Ms. ROS-LEHTINEN. Thank you. Ambassador Fisher, in some

cases, violation of intellectual property rights are accompanied by

market access issues whereby a lengthy regulatory approval process not only discriminates against our American products but if affords the opportunity for stealing of research data. How can this

problem be addressed?

Ambassador FISHER. You point to a very important part of this

exercise, which is the systems that are set up, for example, I referred to the mailbox system before when we are applying for a

patent to be applied in a country to make sure that while it is in

the system, first, it will progress through the system; second, while

it is in the system, we will be granted exclusive marketing rights,

and, again, the perfection of TRIP’s and of WIPO will assist us tremendously in this process.

We know when we are being robbed. Our industry is diligent; our

industry reports whether it is in the visual or optical media or the

pharmaceutical industry to us, and we use every tool we can as I

refer to in my testimony and at greater length in my written testimony, Congresswoman, to make certain that we can use the full effect of our own laws, and, for example, under the 301 sections that

I mentioned earlier.

Again, this is not a seamless process. It is not easy to put your

finger in every single leak in the dike, but we use every effort we

can to make sure that while we are awaiting approval or once

something is approved that, indeed, our intellectual property is protected, our rights are upheld, and we seek to perfect this as we go

through time.

Ms. ROS-LEHTINEN. USTR has authority under the generalized

system of preferences to deny GSP benefits to nations that aren’t

providing adequate and effective protection of intellectual property

rights. Does USTR plan to aggressively use this authority?

Ambassador FISHER. We do, and we have.

Ms. ROS-LEHTINEN. You had mentioned that you had already discussed some of these items with other ministers in Argentina, you

16

had mentioned. What progress have we made in other countries,

and do they believe us when we say that we are going to exercise

the authority?

Ambassador FISHER. I think they definitely believe us, without a

doubt. Let me give you an interesting case that I raised last week

in Latin America, because it shows you again the breadth of this

problem. It deals with Ecuador. The intellectual property protection

is provided for varieties for flowers. We have heard reports from

Ecuador that a judge has arbitrarily canceled all the varietal flower

registrations and patents of United States and foreign flower

breeders in Ecuador. Many of these varieties are not indigenous to

Ecuador, but the growing climate is quite attractive. So science has

been brought to bear and patents have been provided and protection had been in place for these various varieties and the registration of those varieties. It is being threatened by a court ruling. This

is a perfect example of a country where we have significant leverage. We will see how this court case works its way through the system. We have raised our protests. Whether it is through GSP or

other means, tools that we have are meaningful to these countries

in providing access to our market, and if need be—and we have not

been shy, Congresswoman, as you know—we are perfectly willing

to use those tools in order to enhance our leverage in cases such

as these.

I mention this only because it is a rather bizarre and interesting

case. It shows you the breadth and reach of intellectual property.

But, again, here is a case where we will see how it goes. It is now

being reviewed by a higher court. We will see if our interests are

being upheld, and in this case and in other cases, we can use the

tools that you mentioned, and this is a very powerful tool particularly with regard to countries that want access to our markets that

are in lesser stages of development but where the principle still

needs to be applied.

Ms. ROS-LEHTINEN. Let us hope so. Thank you so much.

Mr. Chabot?

Mr. CHABOT. Thank you. I will be brief with my questions. I just

noticed some of the knock-off goods over here, the counterfeit

items, and my son, my 10 year old, is thoroughly caught up in this

Pokemon craze, and if he saw that peekachoo sitting down there,

even though it is fake, I am sure he would want me to take it home

with me. For the parents, those that have kids, they are familiar

with peekachoo and all the rest of these things. If you don’t have

kids that age, you don’t have a clue as to what I am talking about.

I just have one question and that is that do the penalties imposed under international agreements offer sufficient cost to violators to deter the piracy, and are penalties and remedies sufficient

to compensate the rightholder or are there changes that should be

made?

Ambassador FISHER. Congressman, we expect that they are.

Again, as I mentioned in my prepared statement, also my spoken

statement, one of the things we will be evaluating with regard to

TRIP’s, for example, is to make sure that the implementation of

TRIP’s, and particularly as it kicks in for all countries on 1–1–

2000—the developing nations are then enveloped by this discipline—is to have a review to make sure that we indeed are seeing

17

the commercial interest or the interests of our intellectual property

producers are indeed being protected and that the system holds

water, so to speak.

I am sure there will always be critics that we are not being adequately compensated. We have labored mightily to make sure that

we are. I can tell you that the reaction to using tools like GSP but

also the direct penalties that we can bring to bear using our laws

and implementing these international rules and regulations have

been effective, and I think we just need to continue to monitor the

situation and make sure that they stay effective.

Mr. CHABOT. Thank you. I yield back the balance.

Ms. ROS-LEHTINEN. Thank you.

Mr. Hoeffel? Thank you.

Thank you so much, gentlemen. We appreciate your patience. We

will be voting on the OPIC bill in about an hour, so let us see how

we do.

Thank you so much.

Mr. DICKINSON. Thank you.

Ms. ROS-LEHTINEN. Our third panel leads off with Mr. Jeremy

Salesin who is the director of Business Affairs and general counsel

for Lucas Arts Entertainment Company. Mr. Salesin advises company management on a full range of business, corporate, and legal

issues. In addition to handling Lucas Arts patent, copyright, trademark, and other intellectual property related issues, he negotiates

and documents business arrangements and strategic alliances in

the areas of development, distribution, manufacturing, marketing,

and licensing. Prior to joining Lucas Arts in November 1996, Mr.

Salesin was vice president, Business Affairs, general counsel, and

secretary of Sanctuary for Woods Multimedia Corporation.

He will be followed by Mr. Charles Caruso and Mr. Salvatore

Monte who are the guest of the Ranking Member, Mr. Menendez,

and Mr. Hoeffel of Pennsylvania is going to be introducing them for

us, because Mr. Menendez is on the floor handling our bill.

Thank you so much.

Mr. HOEFFEL. Thank you, Madam Chairman, and it is a pleasure

to stand in for Mr. Menendez today to introduce Mr. Charles Caruso from Merck & Company, the international patent council. Mr.

Caruso represents Merck in various United States and international organizations and conferences for the protection of intellectual property rights. He also reviews and monitors those issues

around the world and counsels members of Merck’s law department

regarding those developments.

Merck employs 5,000 scientists and has spent nearly $2 billion

since 1998 for research and development covering nearly every

major field of therapeutic research, representing about 10 percent

of all U.S.-based pharmaceutical companies in that area, and,

Madam Chairman, employed 10,000 people in my district and are

a very good corporate neighbor as well.

Mr. Caruso holds a juris doctor degree in law from Rutgers; has

been a patent attorney and a member of the bar since 1976.

Mr. Salvatore Monte, President and owner of Kenrich Petrochemicals, of Bayonne, New Jersey; I gather, a personal friend of

Mr. Menendez’, and he would be here except he is leading the debate on the floor of the House at the moment. Mr. Monte has

18

championed the need for our Government to challenge the Japanese Government to adhere to international treaty obligations for

the protection of intellectual property rights by ending the notorious practice of patent flooding.

As an inventor, Mr. Monte has patented and developed several

globally used chemicals, including chemical titanites—I hope I said

that right—in the early 1970’s. In an attempt to expand in 1980,

Mr. Monte contacted a Japanese firm to manufacture and distribute his invention and was required to share his formula with

the Japanese. Now, 20 years and millions of dollars in losses later,

at least 40 Japanese patents have been based upon Mr. Monte’s licensed technology. I understand in 1990, Congresswoman Helen

Bentley first spoke about the problems faced by Kenrich Petrochemicals. At that point, Kenrich represented—or, rather, had 90

employees, and now is down to 30, if this information is correct.

Mr. Monte, obviously fighting hard against the negative impact on

his company by the patent flooding that has occurred to him.

Thank you for the opportunity, Madam Chairman, to introduce

our—a few of our constituents.

Ms. ROS-LEHTINEN. Thank you so much. That is an incredible

story. We look forward to that testimony.

Mr. Salesin? All of your statements will be entered in full in the

record. Thank you.

STATEMENT OF JEREMY SALESIN, SENIOR VICE PRESIDENT

AND GENERAL COUNSEL, LUCAS ARTS ENTERTAINMENT,

ALSO REPRESENTING THE INTERACTIVE DIGITAL SOFTWARE ASSOCIATION

Mr. SALESIN. Thank you, Madam Chairwoman and distinguished

Committee Member. I want to thank you for the opportunity to testify——

Ms. ROS-LEHTINEN. If you could perhaps move the mic just a little bit closer.

Mr. SALESIN. I want to—is that on? There we go.

As you said, my name is Jeremy Salesin. I am the general counsel of Lucas Arts Entertainment Company. You may know Lucas

Arts as the producer of dozens of best-selling entertainment software games with titles such as Rogue Squadron and most recently

the games based on Star Wars Episode I, the Phantom Menace.

I am testifying today on behalf of the Interactive Digital Software Association, which is the trade association that represents the

publishers of entertainment software for video consoles, computers,

and the Internet.

In 1998, U.S. entertainment software publishers had $5.5 billion

in U.S. sales. Furthermore, the U.S. entertainment software industry and other core copyright industries are collectively responsible

for over $60 billion in foreign sales and exports, more than any

other industry sector. That is the good news. The bad news is that

intellectual property piracy threatens the continued health of my

industry.

Piracy has cost us over $3 billion in losses in 1998 alone. That

is right. An industry with $5.5 billion in U.S. sales has lost over

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land, the piracy rate is in excess of 90 percent, meaning that virtually all entertainment software sold is pirated. I might add, these

piracy numbers are conservative. They don’t actually include losses

due to Internet piracy, which are very hard to measure.

Some anecdotes about piracy of Lucas Arts titles can demonstrate this reality. We have not released a single game this year

that was not available in a pirate version on the Internet within

a week of arriving on store shelves. In some cases, the products are

even available on the Internet before they reach stores. In addition,

with each new release of one of our games, it is common to find

that individuals have burned on their home CD burners 20 or 30

copies and put them up for a dutch auction on auctionsites such as

eBay or Yahoo.

Lucas Arts also released two games to coincide with the May release of the Phantom Menace film, and, within days, in Hong Kong,

you could get a three-pack—two games and the film—on VCD for

a mere $15.

Some of the level of piracy has actually led my industry to

change its method of producing games where, before, we would release a U.S. version, and then we would release foreign versions.

Now, we will actually develop and localize the title completely for

all the languages in countries that we feel are major markets, and

then release it simultaneously in order to avoid pirating in many

of the foreign markets. Even that doesn’t help a great deal.

The vast majority of entertainment software piracy occurs outside the United States and is increasingly dominated by organized

crime rings. The crime syndicates have become so big that they

market their own brands. For instance, the Players Ring, operating

out of Southeast Asia, stamps its CD’s with its own logo, which

often replaces the trademarks of the true game publishers. These

international crime rings mass produce and assemble pirated entertainment software in countries such as China, Bulgaria, Macao,

and Taiwan, and ship through nations such as Paraguay and Panama that have spotty customs enforcement, and, finally, sell, in addition to these countries, in places like Russia, Brazil, Argentina,

and Indonesia, among others.

This pervasive illegal trade in U.S. entertainment software effectively bars my industry from entering many markets. We simply

cannot compete with pirates who sell entertainment software at a

mere fraction of our break even price.

With this breadth and depth of entertainment software piracy,

the question remains, what can be done? I believe there are a number of things Congress and the U.S. Government can do to help us

control this piracy. First, as we discussed a little bit earlier with

the U.S. Trade Representative, nations that are a source of major

piracy and in particular those identified in the annual Special 301

report as providing inadequate and ineffective protection of intellectual property, should not be given preferential trade benefits

under the Generalized System of Preferences Program. Currently,

the GSP Program provides USTR discretionary authority to withhold GSP benefits from nations that fail to provide adequate and

effective protection of intellectual property. But unlike the Special

301 statute, the GSP Program does not define this phrase. If Congress harmonizes the definitions, it may provide the USTR with

20

much clearer guidance that Congress intends countries listed under

Special 301 to be denied the GSP benefits.

A second thing which Congress can do is to continue to support

the criminal prosecution of intellectual property theft. This is vital,

because many pirates are effectively judgment proof, and because

intellectual property theft is widely perceived to be a minor and

victim less crime. In a move that my industry welcomed and applauded, the Department of Justice, the U.S. customs, and other

Federal agencies recently announced a Federal initiative to prosecute intellectual property crimes, and we have talked about that

some today. Through the exercise of its oversight and appropriations role, Congress should ensure that the executive branch remains committed to this IPR initiative and has the resources to

pursue it.

Finally, Congress should support and encourage the continued efforts to make meaningful international agreements protecting intellectual property rights. Congress should encourage the executive

branch to aggressively press developing nations, which have already had a 5 year transition period to meet their obligations, to

fully implement the WTO agreement on trade related aspects of intellectual property rights by January 1, 2000. There should not be

any additional grace period.

Likewise, Congress should encourage the Administration to continue to aggressively press other signatories to ratify and implement the World Intellectual Property Organization copyright treaty.

I could recite the economic tax and consumer damage caused by

piracy, both in the United States and abroad, but I want to focus

on what I think is the most important issue for us, which is that

this activity hurts the creators of the intellectual property. The creative process is injured, and the founders of this Nation provided

specific protection for intellectual property in the U.S. Constitution,

because they recognized that the creative spirit provides great benefits to society but needs an environment in which it can flourish,

and piracy destroys the spirit and poisons the environment for

these creators. It is for this reason, above all others, that Congress

must vigilantly adhere to its constitutional directive to protect intellectual property.

Thank you.

[The prepared statement of Ms. Salesin appears in the appendix.]

Ms. ROS-LEHTINEN. Thank you so much.

Mr. Caruso?

STATEMENT OF CHARLES CARUSO, INTERNATIONAL PATENT

COUNSEL, MERCK & COMPANY, INCORPORATED

Mr. CARUSO. Good afternoon, Madam Chairwoman and Congressman, and thank you for the opportunity to speak with you today

about the very important issue of the need to protect American intellectual property rights abroad.

I am Charles Caruso, the international patent counsel for Merck.

We are a U.S. research-intensive pharmaceutical company with operations worldwide, focusing on the discovery, manufacturing, and

marketing of important medicines that treat, prevent, and cure disease. I would like to briefly summarize my written testimony.

21

Merck employs about 5,000 scientists, and, as the Congressman noted, will spend more than $2.1 billion on research and development in 1999. This investment has yielded impressive results.

Since January 1995, Merck has introduced 15 new medicines, an

unprecedented number. Merck’s commitment to research will also

bring new medicines and vaccines to patients in the future.

Some promising new treatments currently in Merck’s research

pipeline are for the treatment of cancer, depression, infection, osteoarthritis, and pain. As a major discoverer of vaccines, Merck is

currently researching vaccines for the prevention of HIV infection,

and human papilloma virus, a major cause of cervical cancer.

As Merck’s international patent counsel, I am keenly aware of

the link between our ability to invest in research and intellectual

property, especially patent protection. Strong patent protection is of

fundamental importance to the pharmaceutical industry, because

drug research is highly risky, time-consuming, and expensive. But

many pharmaceuticals can be pirated abroad for a fraction of the

research and development cost.

To encourage risk and innovation, a patent provides an exclusive

right to an invention for a limited time period. The evidence demonstrates the direct relationship between strong patent protection

and pharmaceutical innovation. Because of its strong patent laws,

the United States is the world leader in drug development.

In a 1988 World Bank study, it was estimated that about 65 percent of drug products would not have been introduced without adequate patent protection. Try to imagine modern health care without 65 percent of the medicines that are available today.

This hearing is particularly timely as the United States and

other members of the World Trade Organization are preparing for

the WTO Ministerial in Seattle later this year. Thanks to the leadership of Congress and the executive branch, especially the U.S.

Trade Representative, the United States has led the fight for

strong intellectual property protection around the world.

Two issues are of immediate concern to our industry: the implementation of existing intellectual property agreements, especially

TRIP’s, and, second, the possible attempts by some WTO members

to weaken the TRIP’s agreement, particularly as it relates to pharmaceuticals.

On the implementation issues, the pharmaceutical industry is

facing its own millennium bomb which might explode on January

1, 2000. We are concerned that a large number of developing countries will not meet their international obligations to enact TRIP’s

consistent intellectual property laws by January 1, 2000.

The second issue concerns the likely attempt by some countries

to define a WTO trade agenda designed to weaken TRIP’s and to

create broad exemptions targeted at pharmaceutical patents. As I

have described, there is a fundamental link between international

property protection and pharmaceutical innovation. If the intellectual property foundation of the pharmaceutical industry is threatened, the result will be fewer medicines and vaccines for patients

everywhere.

I urge this Subcommittee and the Congress to provide as much

support as possible to the U.S. Government negotiators in Seattle

to resist any and all attempts to reopen the TRIP’s agreement for

22

the purpose of diminishing its standards. By protecting innovation,

patents protect innovative medicines from foreign piracy and preserve incentives for research leading to tomorrow’s discoveries.

Thank you for the opportunity to testify and for holding this

hearing on this highly important topic.

[The prepared statement of Mr. Caruso appears in the appendix.]

Ms. ROS-LEHTINEN. Thank you, Mr. Caruso, and we would like

to now hear from Mr. Salvatore Monte, and he is accompanied by

Lieutenant General Sumner who is here as an expert witness if

needed, and the General is a friend of Congressman Dana Rohrabacher, so we welcome both of you today.

Thank you, Mr. Monte?

STATEMENT OF SALVATORE MONTE, PRESIDENT, KENRICH

PETROCHEMICALS, INCORPORATED

Mr. MONTE. Thank you, Madam Chair. Thank you, Congressman

Menendez, where ever you are, and, Mr. Hoeffel, for stepping in for

him.

General Sumner will finish off my remarks, but I would like to

thank you for this invitation to testify today on a subject that has

come to dominate my life and my wife’s, Erica’s, life for the last

quarter of a century.

Thanks to Congressman Menendez’ effort in having us here at

this hearing today, we have renewed hope that the Government

will see to it that Ajinomoto of Tokyo, Japan pays the price for

stealing intellectual property and that we can have our case tried

in the U.S. Federal court where it belongs and not in Tokyo where

our State Department believes will be treated fairly in a rigged judicial system that allows corrupt practices such as patent flooding.

Now, you have my prepared statement, which highlights how the

large $6 billion Japanese company, like Ajinomoto, goes about

stealing from an American inventor, an entrepreneur like me, by

violating intellectual property rights that are supposed to be protected by a contract written under the laws of the United States

of America, protected by a United States and worldwide patent

portfolio of 220 patents, and protected by registered trademarks,

even in Japan.

Ajinomoto stole my invention technology to provide 1,000 new

jobs to Japan while Kenrich was driven into chapter 11 and went

from 90 to 30 employees. I brought some show and tells, patents

and documents, that are in front of me here so that you can understand why this is a $250 million business for Ajinomoto and still

growing, a business that I developed through my inventions and

which they are gathering all the benefits of it.

Our titanium-based molecules form a chemical bridge between

the inorganic and organic world. We are the titanium in the Wilson

titanium golf ball. We are responsible for the continuous wear performance of Revlon and Cover Girl makeup. We are in everything

that is high-tech coming out of Japan—the magnetic recording

media, the Fuji audiotape. In the United States alone there are

three patents by Fuji, TDK, and Sony on covering magnetic recording media, and I got the word from Taiwan that they made a deal

that Fuji’s patent would dominate. Canon has our technology in

23

their patents, and they have 32 European patents alone, one in

Germany that runs 132 pages long.

I have here also a U.S. patent issued to Xerox on digital photocopier toner based on a gamma ferric oxide imported from Japan

from Toda Chemicals, and the gamma ferric oxide is treated with

a 0.5 percent of my invention technology called Ken-React, KR 38S.

Here is how it works. I was forced to license the product to

Ajinomoto in Japan. Ajinomoto then makes the KR 38S on the license, sells it Toda Chemicals in Japan. They treat the chemical

on the gamma ferric oxide. They give it to Xerox researchers in the

United States They come up with a new and improved, best-ever

digital computer. They file a U.S. patent. They buy the stuff from

Toda—they buy the chemical from Toda, the gamma ferric oxide.

Ajinomoto sells the KR 38S. Ajinomoto doesn’t report the sale to

Kenrich. We can’t get in and audit their books. We tried two and

a half years, spent $62,400 with Arthur Andersen, and the net result is we get zero royalties.

I also have here a U.S. patent issued at the time—filed at the

time we went chapter 11, and Gordon Sumner here—General Sumner is here to explain how we lost $10 million in lyco 12 sales because of the collusion with the Japanese and top-level Pentagon officials.

I would like to count some of the ways that Ajinomoto uses the

Japanese mercantile system to steal our intellectual property, and

they use patent flooding as one of their techniques. Japan is a

closed market; you really can’t sell into it. I didn’t want to contract

in Japan. I had to have a contract if I wanted to do business. I

could go on about how that occurred, but what they did is they

forced me into dumping down my 43 products that I was importing

through a trading company into 15 on the pretension that they

were going to register those 15, and that would cost a lot of money.

I found out after I spent $1,700 that we are not registered in

Japan, and only 2 of the 15 chemicals ever got registered. The

whole process was a sham. There is here a kereitsu report which

shows you all the interlocking of the Japanese kereitsus and how

because of they work together they can patent flood and use interlocking arrangements so that Nippon Soda, Tokyoma Soda, Mitsui

Mining and Smelting, Kuake, and Fine Chemicals, all in cooperation with Ajinomoto, can knock off my patents.

When you mentioned that there were 40 patents issued, those

were only the ones issued to Ajinomoto. There are literally 600

flooded patents on my title fossfatal titinates alone which are used

in the magnetic recording media and in videotapes. The USTR has

an annual report on foreign trade barriers. Japan has the largest

section. Everything that Ajinomoto did to us is mirrored in that report. We have been going on with this case for 9 years.

Publicly, when Congresswoman Bentley gave a speech on the

House floor on October 1, 1990 attacking Ajinomoto for what they

were doing to us, within 6 weeks, the Daitchi Kangi Bank, which

Ajinomoto’s kereitsu bank, bought my bank through CIT, and they

called my notes and put us into a credit squeeze that put us into

chapter 11. That is the hard ball they play. With Japan, business

is war, and CIT gained control of my accounts receivable financing,

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24

lion in 6 months; caused me to knock off 60 people, and reduce my

sales force from 9 people to 1 person.

We lost the lyco 12 business that I had spent from 1982 to 1990

developing with the U.S. Army through a defeat of our Public Law

85–804 bid in 1981. A phone excuse was given that capasi could

replace the lyco 12, and that has since been proven to be a lie. We

have a report into the Chairman of the Joint Chiefs of Staff and

the Inspector General of the Army, and General Sumner talked to

the Inspector General this morning.

I have other stuff I could tell you that just goes on and on about

trademark stealing, but you asked me today to comment on patent

flooding. The ludicrous part of this whole exercise is that we talk

about globalization of intellectual property laws and patent laws,

and we still have this dichotomy of the Japanese filing valid U.S.

patents according to the doctrine of equivalent, and then in their

own country they patent flood to beat the band, and the allow

themselves to play both sides of the street, and I don’t understand

how we can tolerate any kind of globalization or harmonization of

intellectual property laws as it relates to patents unless we address

primarily the issue of patent flooding, because that is the vehicle

by which they undermine every effort you have in order to gain effect of your intellectual property.

Specific to Kenrich, we have a bill in the Congress right now

which we would like to have that would right some of the wrongs

of a 1985 Supreme Court decision called Mitsubishi v. Soler that

will enable Kenrich to bring our Ajinomoto case away from where

it is now in the Japanese Arbitration Association in Tokyo—and

that is another story—back into U.S. Federal court where we can

establish case law on patent flooding and right some of the wrongs

that are going on.

I have other ideas, but I really would like to turn the balance of

my time over to General Sumner so he can make some comments

for me. Thank you for having me here today, and I would be

pleased to answer questions in detail. There is a lot of stuff I have

here I could talk about.

[The prepared statement of Mr. Monte appears in the appendix.]

Ms. ROS-LEHTINEN. Thank you so much, and it is certainly a

tragic story. Thank you, Mr. Monte, for sharing that with us.

General Sumner?

STATEMENT OF LIEUTENANT GENERAL GORDON SUMNER

General SUMNER. If I can this on—can you hear me all right?

All right. Over the past 56 years, I have had the opportunity to

testify before the House, and I appreciate the opportunity, Madam

Chair, to do this, and other Members of the Committee.

I can’t think of a subject that is more important, not only to the

country but to the national security of the country than this subject

today. I have been involved in this particular case for some over

10 years now, and I would make the point that the wealth of this

Nation is not found in the smokestacks in the industrial base; it

is our intellectual property. That is the wealth of the Nation, and

if we don’t begin to understand this, then the young people sitting

here in this room are going to find that the country is going on to

the ash heap of history, because we are going to be overtaken by

25

people that are not necessarily our friends nor do they have the

same view or value system that we have.

As an old soldier, I became particularly outraged as I watched

what was happening, and we pick on the people oconus, overseas,

the other countries. We have the same pirates here in this country

doing the same thing. They found out that the Japanese could get

away with it—‘‘Why don’t we do here?’’ They have done it. They

have taken Sal’s patents and refiled them. They were under security restrictions. They took those security restrictions away, and I

have talked to the Inspector General of the Army about this at

length.

But we really have a major problem here, and one of the products that Mr. Monte has developed is used in the insensitive high

explosives. The insensitive high explosives are important not only

to the conventional forces but also very important to the nuclear

forces. Now, we have just gone through a whole bruha up in Los

Alamos, and, incidentally, my company, I have over 100 of what I

call the coneheads, and I think Sal would qualify. These are chemists, physicists, computational experts, et cetera. They have looked

at his products, and the Los Alamos National Laboratory looked at

it, and said, ‘‘This is important for the insensitive high explosive

we use in our nuclear weapons.’’

It is not only just the cosmetics, and it is not just the tapes and

the superficial things; it is the basic science that is being put at

risk here. When someone like Sal Monte figures out a way to bond

organic and inorganic materials, this is a worldwide application,

and it has very important national security implications.

I sit here and listen to the words of the Administration, and it

is not only this Administration, it is past Administrations. The

words are great, but when it gets down to the point where you

have a real case to go to court, our State Department steps in and

says, ‘‘Oh, no, we can’t hazard our relationships with an important

trading partner over some little company up in New Jersey.’’ Of

course, they don’t understand what it is all about in the first place.

But it leaves the little entrepreneur hanging out to dry. If you look

back at the history of the last 10 years—and this is not to take

anything away from Merck or any of the other major Fortune 500

companies—it has been the little entrepreneur with the bright idea

who is going to change the world, and the first thing you know is

his idea is stolen, and what does that tell the young people sitting

here in this room? Boy, you better be careful.

I don’t see the executive branch of this Government—and I said

back over several Administrations—doing anything about it. It is

up to the Congress to do something about this and let the judiciary

get their teeth in this, and let us bite somebody, and bite them

hard; make it happen.

I appreciate the opportunity, again——

Ms. ROS-LEHTINEN. Thank you.

General SUMNER [continuing]. To talk to this group——

Ms. ROS-LEHTINEN. I agree. We are here to bite.

Thank you so much, General; we appreciate it.

General SUMNER [continuing]. I hope we can make something

happen. Thank you.

Ms. ROS-LEHTINEN. Thank you so much.

26

Mr. MONTE. Thanks, General.

Ms. ROS-LEHTINEN. I would like to ask whoever would like to respond, in the worst violating countries, we have seen that there

could be parallel economies at work; that is, illegal, international

trade coinciding with its legitimate counterpart, and does illegal

trade tend to dominate in those cases? What has been your experience, and do you believe that this actually demonstrates that the

Government is actually complying being part of this problem in it

involvement, corruption, or at the very least neglect, and do you

agree or disagree that piracy could only be in place in these countries where there is no political will to end it?

Mr. SALESIN. Yes, I would like to take a—attempt to answer that

question. One of the issues facing the pharmaceutical industry is

this issue of parallel trade where goods that are sold in one country

are exported from that country and reimported in another country,

and that has basically been a serious problem. Intellectual property

is designed to give access to a single market, so the United States

patent protects the market of the United States; the Canadian patent protects the Canadian market. This concept of parallel trade

runs counter to that territorial theory of patent protection.

One of the problems that the pharmaceutical industry has faced

is that counterfeit goods ride on the back of parallel traded goods.

In fact, what we have seen through a investigative inquiry that we

have undertaken, something called a pharmaceutical initiative,

parallel trade is the door by which counterfeit goods enter into

trade, so there is an attempt to pass these counterfeit goods off as

legitimate goods.

The problem we face is basically one of parallel trade, and a concomitant problem is counterfeiting. That is something the United

States does not want to confront in any legislation in the United

States to allow parallel trade is something that is contrary to the

public health interests of the people of our country.

General SUMNER. Could I make a comment on that, Madam

Chair?

Ms. ROS-LEHTINEN. Yes, General.

General SUMNER. I think a perfect example of this is Panama

where you have the free trade zone at Colon and this parallel trade

he is talking about where it moves from one country into a free

trade zone, and because Panama is such a small country and because you can really focus on that, I think it is worth looking into.

The Panamanian Government—the past Panamanian Government,

not the new government, I think has been fully a partner in this

conspiracy.

Ms. ROS-LEHTINEN. Thank you. Mr. Monte?

Mr. MONTE. I have some problems that are like Merck’s, but

unique in their own way. You understand that if you go into market a chemical in today’s global economy, there is an environmental

awareness as to the toxicological effect of that chemical. You have

to disclose the chemical structure. Once you disclose the chemical

structure, you have told an intelligent scientist how to make it. Before you disclose the chemical structure, you have to file your patent position.

The way the patent laws are set up on a global basis, you file

in the United States, then you PTC it, and you follow within the

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year, filing it internationally, which today means a position of at

least 72 countries. The simplest idea, you are in for $75,000 just

on international patent filings. You speak about me being a small

guy, on my last invention, which was making clear plastic permanently anti-static, I spent over $110,000 just on the intellectual

property position, haven’t got a cent out of it yet.

The problem I have is that I have to—once I disclose the chemistry of the molecular structure of you achieve this anti-static effect, the Japanese copy it, they put it into their plastic. You go

prove that your stuff is in there when they patent flood around it.

You do a forensic analysis of it with atomic absorption, and you

chemically destroy the product in the analysis, so you come up with

the arid phosphato group, the arid sulphano group, but is it yours

or is it the 600 different patents flooded around it? That is the

issue. That is the problem. How in the hell do you defend that?

How do you go at that, and how do you stop them from exporting

to all of the other countries?

Everything—I mean, we code indium oxide and make indium

oxide functional. What the hell is indium oxide? It is what makes

flat panel screens possible, and this demonstration you saw from

the Department of Commerce is what indium oxide does. My stuff

is on the indium oxide. You don’t make flat panel screens in the

United States of America; you make them in Southeast Asia. They

come out of Japan or on the Japanese companies in other Southeast Asian countries. My stuff is in all that stuff. I don’t get anything out of that.

How do you police that? How do you control it when they are allowed to patent flood, they are allowed to have this sham of having

their intellectual property people in Japan take these small patent

and build around your patents, and then when they come over to

the United States the play the game by the United States rules,

and we allow this parallelism to go on? They can play the game

properly if they are forced to. They are not forced to, so why should

they change? They have got a mercantile system, a fortress Japan.

You can’t get at them in their own judicial system. You can’t win

in Japan. You can’t win in Japan.

What have you got left? You come here to the Congress and you

talk about it, and you talk about it, and you talk—I have been talking about it for 10 years. When am I going to get what is coming

to me? When are we going to change the law that we have asked—

Congressman Menendez has put together, Senator Torricelli has

Co-sponsored? All you got to do is pass the law and get on with it,

and we will get this thing straightened out in U.S. Federal court.

We have got everything ready to go. I have got 37 boxes of file data

like this that proves that I have been screwed, and I don’t get a

chance to talk about it. We just talk about principles, and the State

Department comes down and testifies against me. I don’t get it.

Ms. ROS-LEHTINEN. Do you believe that American interests in

international intellectual property rights are being sacrificed in

order to sustain or expand commercial relations with these violator

countries, whether it is Japan, China, Russia?

Mr. MONTE. And it started with Zenith and TV screens, and it

goes on. All of it coming out of South Korea have my stuff on it.

We don’t control the video technology of manufacturing. Even ZeVerDate 11-SEP-98 10:59 Jun 15, 2000 Jkt 000000 PO 00000 Frm 00030 Fmt 6633 Sfmt 6633 63466.TXT HINTREL1 PsN: HINTREL1
28

nith now makes their tubes in Mexico. We are funneling out all

that high-tech stuff offshore. In automotive it is following the path

of least cost of manufacturer. If you want to talk to Mattel, you

don’t go anywhere in the United States. You don’t go to Fisher

Price up in Buffalo; you go to Tiajuana. That is the way it works.

Ms. ROS-LEHTINEN. I would like to recognize former Congresswoman Helen Bentley in the audience. I know that Mr. Monte had

recognized——

Mr. MONTE. My champion.

Ms. ROS-LEHTINEN [continuing]. In his statement. Thank you so

much, Helen, for being with us.

Mr. Hoeffel?

Mr. HOEFFEL. Thank you, Madam Chairman. I didn’t recognize

Congresswoman Bentley. It is an honor to see you, and congratulations for taking up Mr. Monte’s case.

I want to thank all of the panel for being here to talk about intellectual property right problems.

Mr. Monte, I had a prepared question here to—that suggested

that you wanted to—that the State Department, at least, wanted

you to take more legal action in Japan——

Mr. MONTE. Yes.

Mr. HOEFFEL [continuing]. But from what you are saying, you

don’t want to do that. You want to come back to Federal U.S. district court.

Mr. MONTE. The problem with my issue is that you glaze over

with all the detail—they say the devil is in the details. We negotiated a 1980 contract. Darby & Darby was my attorney. Burt

Lewin, an excellent chemical engineer—the patent is filled with all

the boilerplate that any genius can put into it from American patent and intellectual property law.

In the agreement, you have two levels. It is written under the

laws of the United States, you have two levels: the Federal court

jury trial, and you have arbitration. You put arbitration in as a

clause, because not every disagreement you anticipate is going to

be a Federal court jury trial level, and arbitration is cheaper so you

put it in. According to the Japanese, you put it in according to the

1952 United States–Japan bilateral trade agreement on arbitration. That is 1980.

1985, Mitsubishi and Chrysler have a fallout on an agreement.

It goes to arbitration. The American company, Chrysler, loses.

Chrysler says, ‘‘Screw it. It is an American contract, American

law.’’ They take it to the U.S. Federal court. They win the case.

The Japanese Mitsubishi says, ‘‘That is not fair. Every time we

have an arbitration and we lose with a U.S. Federal Government

contract, we lose because of double jeopardy before an American

jury. We think that is patently unfair. Arbitration clauses should

be binding.’’ In the Mitsubishi-Soler case the Supreme Court ruled

on a split decision that arbitration is now binding in all contracts.

So, ex-post fact, 5 years later, I am now bound by this Supreme

Court decision, so now I have to have my case before arbitration.

I am in chapter 11. I am telling everybody we can pay back everything we owe the creditors if we would just get our money from

Ajinomoto. They say, ‘‘How are you going to prove that?’’ We have

got to audit the books, right? The Federal bankruptcy judge orders

29

a budget of $40,000 to conduct an audit. We get Arthur Andersen

to agree that the could do it in Tokyo without conflict. Two and a half years later, $62,400, we don’t get a certified

statement. We have no clue as to what the books are of Ajinomoto.

They give us all kinds of garbage excuses that are really insults to

your intelligence like they don’t have computers that can handle it;

they didn’t split the contracted goods separate from their own reports, so they would be——

Mr. HOEFFEL. Let me ask you this: Where can you best defend

your rights?

Mr. MONTE. In U.S. Federal court. So, what happened was we—

Donald Diner from O’Connell & Hanna at the time decided, ‘‘OK,

let us go to arbitration. Let us just focus on the fact that we spent

$62,400. Let us do an audit. We have a right to an audit.’’ We conducted the audit; we spent the money; we didn’t get an audit; our

contract has been violated. It is pretty clear, right? We won the argument before the American Arbitration Association, but they said

because it concerned an audit—concerns the books of Ajinomoto,

they are a $6 billion company, we are going to move the venue to

the JAA in Japan and Tokyo, because you mutually respect each

other’s venue. By the way, we found out last year that the panel

was two Japanese in New York City out of three, and I lost 2 to

1 on the vote.

Now I am supposed to go to Tokyo, and I said, ‘‘Hell, I am not

going to Tokyo. This is my invention. It is a U.S. invention under

U.S. law, governed by U.S. law, and I am going to Tokyo to defend

myself?’’ I said I wasn’t going to go and Congressman Menendez

put together a bill that looked this oversight of Mitsubishi-Soler,

and said, ‘‘OK, let us get this oversight corrected and open up a 6

month sunset provision to allow me to into Federal court.’’

We had it all set up last year before the Intellectual Subcommittee—Judicial Committee on Intellectual Property to do that.

The State Department stepped in and said it would be terrible to

Japanese-U.S. trade relations to have this ad hoc bill passed, and

it would be disharmonious to our relationship, and I have been stymied ever since.

Mr. HOEFFEL. All right. I understand.

Mr. MONTE. You understand? I mean, that is the explanation.

Mr. HOEFFEL. Thank you for the explanation.

Let me ask Mr. Caruso, I assume Merck has the same kinds of

problems that Kenrich Company faces in Japan—you must have

them all over the world. How do you avoid them, if you do, and do

you have this—does Merck have advice for smaller American companies on how to deal with this?

Mr. CARUSO. We deal with these issues of enforcement of intellectual property rights on a worldwide basis, and it is, frankly, a very

difficult task. Part of it includes education of people in the country

to recognize the benefits of intellectual property protection. We

are—through this TRIP’s agreement, through the World Trade Organization, I think the United States is involved in a massive global education campaign to get people to recognize the benefits of intellectual property and how that drives that innovation.

That is very good for the long-term, but the question is what

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ploy local counsel to enforce your intellectual property rights and

to vigorously do the job to get the protection that your entitled to.

Merck—we have had some experiences that have turned out in a

positive way; we have had other experiences, particularly in some

of the European countries where we have had primarily process

patents, not product patents, covering the pharmaceutical product.

Because we were limited to methods of manufacturing, the local

companies say, ‘‘We don’t use your method of manufacturing. We

use an alternate one.’’ The question became, ‘‘What method do you

use? Have the court reveal to us what manufacturing method is

utilized.’’ We have been in litigation in Slovenia for 6 years, and

the court still has not forced the third party copier to reveal what

manufacturing process he uses.

We have enforcement problems. The answer is vigorously enforce

your rights; get local counsel; utilize the U.S. Government to help

assist you, and continue the education efforts.

Mr. HOEFFEL. Of course, the only drawback with that if you are

a very small company is it costs a lot of money.

Mr. MONTE. Oh, boy, does it.

Mr. HOEFFEL. Right. One quick question for Ms. Salesin—thank

you, Mr. Caruso. Mr. Caruso led into my question by talking about

education and letting people know. Does the entertainment industry have a particular ability to help here? I understand the problems you have with pirating, but of course you guys have a wonderful ability to educate and so forth. Can the entertainment industry

be of help to the Government in educating and trying to correct

this?

Mr. SALESIN. As an association, we certainly are trying to education people through our web site, through our programs in foreign countries, with the foreign licensees trying to make people understand that the piracy of our property is not a victim less crime,

that people really do need to get some return out of their efforts

or else jobs will be lost, as you see. We have, in a sense, the exact

same problem, but we are trying to educate. I don’t know. If you

are asking us whether we can help, I am sure we will be willing

to try to help.

Mr. HOEFFEL. Some television ads in American would go a long

way toward educating our constituents and us regarding the problem, and obviously that costs money, but you guys have the money,

and you have got the talent and the spokes people that could really

grab public attention.

Mr. SALESIN. I would say that our association is looking at an

education campaign. It is not a simple thing to do. A lot of people

don’t really understand that when they copy a piece of software, especially given the U.S. market if you are talking about educating

in the United States, that that is a crime, that people do get hurt,

and it is a very expensive undertaking to try to educate the entire

United States on that point.

Mr. HOEFFEL. Certainly the first obligation is ours as a Government, but I think the entertainment industry could certainly help.

Mr. SALESIN. I think one aspect of education that we are trying,

frankly, is to bring an enforcement case in the United States on the

civil side to try to educate people that there really are victims, and

we have done that as an association, but in attempting to do that,

31

we also would like the help of the Government in bringing criminal

actions, which are much more effective because they get much

more coverage; they have much better law enforcement opportunities to seize and to search people’s residences and things like that.

So, we do need the Government’s help. We also are trying to do it

on our own.

Mr. HOEFFEL. Very good.

Madam Chairman, thank you.

Ms. ROS-LEHTINEN. Thank you so much.

Mr. Sherman?

Mr. SHERMAN. Thank you, Madam Chairman. Thanks for having

these hearings. Obviously we need to reorient our foreign policy establishment. As Madam Chair has heard me say before, their attitude tends to be that we would like the honor of defending foreign

nations for free, and then in return for that honor, we would like

to make major trade concessions. If this was a wise policy during

the Cold War or not is not longer relevant to us, but it is certainly

not a wise policy today.

I am particularly interested in the bill that you referred to that

was carried by Mr. Menendez. If you could describe that bill for me

and how it gave you access to the U.S. courts?

Mr. MONTE. The bill has a 6 month sunset provision, I believe

it is, to simply address the specifics of the Mitsubishi-Soler case

law and say, in effect, that all bilateral trade agreements with

Japan prior to 1985, if affected by this binding and mandatory arbitration ruling, have an opportunity to file the case in the U.S.

Federal court. It is pretty simple; it is like two paragraphs, end of

story.

Mr. SHERMAN. I guess our risk was that Japan, which enjoys, what is it, a $60 billion trade surplus with the United States would

somehow think that our rules were unfair?

Mr. MONTE. Yes, right, and that we would be treating them unfairly. Even though the State Department came down and spoke

out against Kenrich, which I really was infuriated over, they

couldn’t produce a number as to how many companies would be involved if this law were passed. How many companies, in fact, have

a bilateral trade agreement with Japan prior to 1985 that have

been affected by this ruling of mandatory arbitration? Maybe two?

One? Me, for sure. I am raising my hand, ‘‘I need help, I need help

from my Government,’’ and my Government is standing up there

saying, ‘‘No,’’ and they have stalemated me, and Ajinomoto’s people

have told my attorneys we don’t have a prayer in hell of getting

that law passed. They are confident they are going to be able to

stalemate me and grind me into bankruptcy. They are going to win.

Mr. SHERMAN. Given the natural tendency of this Congress to

simply go along with what the State Department suggests, they

may be right. Others who have served in Congress longer who

might know what the chances of getting this bill passed, but apparently they weren’t good when it was raised last year with the Judiciary Committee.

I am particularly concerned with Canada’s attempt to take our

entertainment industry. They do so with a unique combination. On

the one hand, they won’t allow our product on their stations, because they want to defend their cultural sovereignty, or so they

32

say. But, at the same time, they are happy to make—to give tax

incentives for American content, movies, to be made there for the

American market, many of which have strictly U.S. themes. I think

one of them was the President’s wife; another one was the Texas

Rangers. It wasn’t the Prime Minister’s wife; it wasn’t the Calgary

Rangers; there were no Mounties in any of these films. Perhaps our

Mr. Salesin can comment on the efforts of Canada to restrict U.S.

product while at the same time entice American producers to make

them American content product in their country.

Mr. SALESIN. Your problem is a bigger one than what just my industry deals with here. You are talking about television; you are

talking about film.

Mr. SHERMAN. Yes, right.

Mr. SALESIN. I don’t——

Mr. SHERMAN. I realize I am talking about your cousins, not

about your——

Mr. SALESIN. Right, and I don’t fault the Canadians for trying to

create an impressive software industry if in fact they are trying to

do it, but I think what is important here is that we are a huge part

of the American economy, a huge part of the export economy, and

we need the support of the Government to try to protect that in the

foreign countries. I think you have hit a very good point. I just

don’t know the specifics of that tax issue.

Mr. SHERMAN. This is going to shock the Committee: I have run

out of questions.

Ms. ROS-LEHTINEN. Thank you so much for your expert testimony. We look forward to hearing more about the bill from Mr.

Menendez, and thank you so much for your patience today.

The Committee is now adjourned.

[Whereupon, at 3:42 p.m., the Subcommittee was adjourned.]

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A P P E N D I X

OCTOBER 13, 1999

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