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75–775 2012

S. HRG. 112–533 

OVERSIGHT OF THE OFFICE OF THE INTELLECTUAL PROPERTY ENFORCEMENT COORDINATOR 

HEARING 

BEFORE THE

COMMITTEE ON THE JUDICIARY 

UNITED STATES SENATE 

ONE HUNDRED TWELFTH CONGRESS 

SECOND SESSION 

MAY 9, 2012 

Serial No. J–112–75 

Printed for the use of the Committee on the Judiciary 

( 

(II) 

COMMITTEE ON THE JUDICIARY 

PATRICK J. LEAHY, Vermont, Chairman 

HERB KOHL, Wisconsin 

DIANNE FEINSTEIN, California 

CHUCK SCHUMER, New York 

DICK DURBIN, Illinois 

SHELDON WHITEHOUSE, Rhode Island 

AMY KLOBUCHAR, Minnesota 

AL FRANKEN, Minnesota 

CHRISTOPHER A. COONS, Delaware 

RICHARD BLUMENTHAL, Connecticut 

CHUCK GRASSLEY, Iowa 

ORRIN G. HATCH, Utah 

JON KYL, Arizona 

JEFF SESSIONS, Alabama 

LINDSEY GRAHAM, South Carolina 

JOHN CORNYN, Texas 

MICHAEL S. LEE, Utah 

TOM COBURN, Oklahoma 

BRUCE A. COHEN, Chief Counsel and Staff Director 

KOLAN DAVIS, Republican Chief Counsel and Staff Director 

(III) 

C O N T E N T S 

STATEMENTS OF COMMITTEE MEMBERS 

Page 

Grassley, Hon. Chuck, a U.S. Senator from the State of Iowa ............................ 2 

prepared statement .......................................................................................... 75 

Leahy, Hon. Patrick J., a U.S. Senator from the State of Vermont .................... 1 

prepared statement .......................................................................................... 81 

WITNESSES 

Espinel, Victoria A., U.S. Intellectual Property Enforcement Coordinator, Office of Management and Budget ......................................................................... 3 

QUESTIONS AND ANSWERS 

Responses of Victoria A. Espinel to questions submitted by Senators Grassley, 

Coburn, Klobuchar, Franken, Lee and Cornyn ................................................. 20 

SUBMISSIONS FOR THE RECORD 

Espinel, Victoria A., U.S. Intellectual Property Enforcement Coordinator, Office of Management and Budget, statement ...................................................... 60 

(1) 

OVERSIGHT OF THE OFFICE OF THE INTELLECTUAL PROPERTY ENFORCEMENT COORDINATOR 

WEDNESDAY, MAY 9, 2012 

U.S. SENATE, 

COMMITTEE ON THE JUDICIARY, 

Washington, DC. 

The Committee met, pursuant to notice, at 10:13 a.m., in room 

SD–226, Dirksen Senate Office Building, Hon. Patrick J. Leahy, 

Chairman of the Committee, presiding. 

Present: Senators Leahy, Kohl, Whitehouse, Franken, Coons, 

Grassley, and Coburn. 

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

SENATOR FROM THE STATE OF VERMONT 

Chairman LEAHY. I apologize for being late. I try not to be to one 

of these hearings—unfortunately, I got into an unavoidable situation—especially when we have our Intellectual Property Enforcement Coordinator Victoria Espinel back here in the Committee. 

Thank you for being here. It is good to see you. 

As we move into the 21st century, intellectual property becomes 

one of America’s most important assets. In fact, we had a report 

released by the Department of Commerce that shows that IP-intensive industries directly accounted for over 27 million jobs in 2010. 

That is one in five jobs across the country. They indirectly support 

another 12.9 million jobs. So if you want to protect American industry, that is not a Republican or Democratic idea or issue. It is 

a priority that benefits all of us. 

This is the third oversight hearing this Committee has held to 

discuss intellectual property enforcement since the establishment 

of the Intellectual Property Enforcement Coordinator. She knows 

that one of the primary roles of this position is to coordinate the 

work being done across Government agencies to combat intellectual 

property theft. So I am pleased to have Ms. Espinel here not only 

to talk about the efforts being made by her office, but by the numerous departments and agencies with which she works on a daily 

basis: the Department of Justice, the FBI, the Department of 

Homeland Security, and the U.S. Trade Representative. 

In fact, the IP Enforcement Coordinator, in collaboration with 

those agencies and others, gave us a set of legislative recommendations designed to strengthen our intellectual property laws. We 

have taken action on several of these. Last December, Senator 

Whitehouse and other members of this Committee worked to pass 

2 

important legislation that will protect our military supply chain by 

increasing the penalties for those who sell counterfeit goods for use 

by the military or in connection with national security. 

Congress has passed legislation, originally part of the PROTECT 

IP Act, that will make it easier for Customs and Border Protection 

to determine whether products stopped at the border are counterfeits. This has been a particularly serious concern as the counterfeiting of microprocessors has become extremely sophisticated, and 

I will be glad to hear more about the administration’s enforcement. 

I am glad that Congress acted on that. 

In March, the Senate passed the Counterfeit Drug Penalty Enhancement Act. That is a bill that I introduced along with Senator 

Grassley to strengthen the penalties for trafficking in counterfeit 

drugs. We passed it here, and I hope the House will soon vote on 

that bill so that it can become law. 

Now, these are practical measures which remind us that effective 

intellectual property enforcement benefits all in this country. Law 

enforcement has seized shipments of counterfeit smoke detectors 

and electronics. There is an example of something that the counterfeit products can endanger the lives of Americans. It is just one example. We have a lot more we can talk about. 

We are all committed to an open Internet, but that does not 

mean giving a free pass to rogue foreign websites, many from organized crime, that serve no purpose but to steal the hard work of 

American writers, musicians, and creators. 

So I appreciate the work that Ms. Espinel is doing. I will put my 

full statement in the record. 

[The prepared statement of Chairman Leahy appears as a submission for the record.] 

Chairman LEAHY. In view of the time, I will yield to Senator 

Grassley. 

STATEMENT OF HON. CHUCK GRASSLEY, A U.S. SENATOR 

FROM THE STATE OF IOWA 

Senator GRASSLEY. And I will put my full statement in the 

record, too, and thank you for holding the hearing, and I thank Ms. 

Espinel for coming. 

And I will not repeat some of the statistics that you gave about 

the importance of intellectual property on our economy, but that 

data demonstrates the importance of intellectual property to our 

economy and why intellectual property should be protected. So it 

is really unfortunate that intellectual property theft has increased 

dramatically, adversely impacting American businesses that innovate and generate new products and jobs for Americans. 

In addition to the loss of jobs and adverse impact on our economy, intellectual property theft is a serious consumer protection 

issue. I cannot imagine that anyone intentionally sets out to buy 

unsafe or defective counterfeit goods, especially counterfeit pharmaceuticals. Yet unsuspecting consumers are scammed all the time 

into purchasing these dangerous and potentially life-threatening 

products. Even the Federal Government, including our military, is 

duped into buying harmful and sub-par counterfeit products, putting people at risk, and that is not acceptable. If you do not rememVerDate Nov 24 2008 09:19 Sep 18, 2012 Jkt 075919 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 S:\GPO\HEARINGS\75775.TXT CMORC
3 

ber anything else in my remarks, I hope you will remember these 

last few statements. 

So it is very important for our Judiciary Committee to examine 

how industry and the Federal Government are addressing intellectual property crimes, what is being done to enforce intellectual 

property rights, and how the word is getting out that intellectual 

property theft hurts the U.S. economy, threatens our jobs, and puts 

people at risk. It is also important for us to ensure that efforts to 

combat counterfeiting and piracy do not limit freedom of expression, inhibit innovation, impair privacy and security, and undermine the Internet. 

In those statements, you have the extreme of people who think 

nothing should be done about theft because it might interfere with 

some rights of people to use certain methods of communication, and 

yet we all ought to agree, at least the Chairman and I agree, that 

we cannot tolerate theft. And we have had a bipartisan approach 

to that, and if we understand that theft is wrong, we ought to be 

able to find a way of accomplishing our goals to prevent that theft 

because nobody benefits when the rule of law is not respected and 

when theft is allowed and not tolerated—and tolerated, I should 

say. Thank you very much. 

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

Chairman LEAHY. Thank you, Senator Grassley. 

Victoria Espinel is the Nation’s first Intellectual Property Enforcement Coordinator. That is a position she has held since she 

was confirmed by the Senate in 2009, and I would note confirmed 

unanimously. She is well qualified for this position. She previously 

served as Assistant U.S. Trade Representative for Intellectual 

Property Innovation. She is the Chief Trade Negotiator for the U.S. 

on intellectual property issues. She was a professor at George 

Mason University School of Law, an adviser to several committees 

of Congress, including this one. She received her undergraduate 

and law degrees from Georgetown—always delighted to see somebody else who has a law degree from Georgetown—and a Master 

of Law degree from the London School of Economics. 

Ms. Espinel, please go ahead, and then we will take turns asking 

questions. 

STATEMENT OF THE HONORABLE VICTORIA A. ESPINEL, U.S. 

INTELLECTUAL PROPERTY ENFORCEMENT COORDINATOR, 

OFFICE OF MANAGEMENT AND BUDGET 

Ms. ESPINEL. Chairman Leahy, Ranking Member Grassley, members of the Committee, thank you for your continued leadership on 

this important issue. 

In June 2010, I issued the administration’s first strategy for intellectual property enforcement, the Joint Strategic Plan, and just 

over a month ago, on March 30th, I sent to you and to the President the 2011 annual report. The good news is that we are making 

some progress, but I know that we still have an enormous challenge on our hands. 

As President Obama said in this year’s State of the Union, ‘‘It 

is not right when another country lets our movies, music, and software be pirated’’ He knows that protecting our innovative techVerDate Nov 24 2008 09:19 Sep 18, 2012 Jkt 075919 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 S:\GPO\HEARINGS\75775.TXT CMORC
4 

nology is critical to our future, and we know that our workers are 

the most productive on Earth and that, if the playing field is level, 

American will always win. A level field means protecting the value 

of American intellectual property around the world. 

Last year, I told you that we were working with the Department 

of Commerce on an economic report to identify the sectors of the 

U.S. economy that produce intellectual property and the number of 

jobs and exports from those sectors. And last month, I was joined 

by Commerce Secretary John Bryson, U.S. Chamber of Commerce 

President Thomas Donohue, and President of the AFL–CIO Richard Trumka to announce the issuance of that report. 

As Chairman Leahy and Senator Grassley noted, the report 

makes clear that intellectual property is a key driver of our economy, and in 2010 alone, the IP-intensive industries accounted for 

$5 trillion in value-added, or nearly 35 percent of our GDP. 

U.S. law enforcement continues to aggressively fight those who 

seek to steal American creativity and innovation. There have been 

dramatic increases in law enforcement in key areas, including FBI 

investigations of trade secret cases, up 29 percent; seizures of counterfeit safety and critical technology goods are up 44 percent; FBI 

investigations of health and safety cases are up almost 90 percent; 

and DHS seizures of counterfeit drugs are up almost 200 percent. 

The number of cases prosecuted by the Department of Justice in 

which defendants received a prison sentence of more than 5 years 

has doubled. 

My office continues to be focused on making sure that we are 

using taxpayer dollars as efficiently as we can, and to that end, 

last year Federal law enforcement took a very modest 5-percent increase in spending and turned that into a 33-percent increase in 

law enforcement operations. DOJ has awarded nearly $11 million in grants to State and local law enforcement agencies. That $11 million yielded seizures of infringing goods that were valued in excess of $200 million, so a 

roughly 18 times return on investment of the original grants. 

As you know, in March of last year, I submitted to you a white 

paper with 20 legislative recommendations. Since then, several 

bills have been introduced that incorporated recommendations from 

our white paper, and two of those recommendations have become 

law. A bill introduced by Senator Whitehouse and cosponsored by 

Senators Coons, Graham, McCain, Blumenthal, Klobuchar, Hatch, 

Kyl, Schumer, and Chairman Leahy enhanced penalties for selling 

counterfeit goods to our military and became the basis for an 

amendment to the NDAA. Also included in the NDAA was an 

amendment that I know is of concern to many on this Committee, 

including Chairman Leahy, giving Customs the authority to share 

information with right holders. Moving forward, I will continue to 

work with Congress on the remaining recommendations that we 

made. 

As we said in the Joint Strategic Plan, we will vigorously investigate and prosecute criminal activity. However, we know that we 

cannot do it alone. We need to have the private sector working cooperatively with us. 

Since this strategy was issued, I have engaged with Internet 

service providers, credit card companies, domain name registrars, 

5 

online advertisers, and others on a voluntary, non-regulatory approach to reduce infringement. We need to quarantine the bad actors and make the business of infringement as difficult as possible. 

We believe that legitimate companies do not want to support illegal 

activity. It is critical that any voluntary agreements or best practices be practical, that they be effective, that they be consistent 

with protecting legitimate uses of the Internet, and with our commitment to the principles of due process, competition, free speech, 

fair use, and privacy. 

Dialogue with stakeholders has led to several sets of voluntary 

best practices. As I reported to you last year, in December 2010 

several prominent payment processors and Internet intermediaries 

announced that they would form a nonprofit group to combat fake 

online pharmacies. In June 2011, American Express, Discover, 

MasterCard, PayPal, and Visa developed voluntary best practices 

to withdraw payment services from sites that are selling counterfeit and pirated goods. And in July 2011, a voluntary agreement 

was finalized among several Internet service providers and music 

labels and movie studios to reduce online piracy. 

I told you last year that we were working with advertisers to develop a voluntary pledge that ads not support infringing sites. Last 

week, the Association of National Advertisers and the American 

Association of Advertising Agencies issued a statement of best 

practices to address online infringement. I appreciate the efforts of 

those groups and the efforts of Senators Whitehouse and Hatch 

who sent letters to these groups requesting that they cut off advertising revenue from rogue websites. 

I believe that, together with law enforcement efforts, private sector voluntary actions can reduce online infringement and change 

the enforcement paradigm. However, we know that there is no single approach that will solve the problem, so we will continue to simultaneously pursue a variety of tactics, including increased law 

enforcement, supporting the development of voluntary best practices by other industry sectors, encouraging other countries to increase their enforcement, educating the public on the dangers of infringement, and supporting the development of authentic alternatives for consumers. 

Last year’s accomplishments were the collective effort of people 

working across the Government, including the leadership of Attorney General Holder, Secretary Napolitano, FBI Director Robert 

Mueller, and ICE Director John Morton. As the world’s leader for 

innovation, we must set an example for citizens and for the international community and make clear that the U.S. Government will 

be vigorous in protecting intellectual property and will do so in a 

manner that respects due process, privacy, fair use, and transparency. The future of America’s economic condition rests squarely 

on the shoulders of our ability to protect the American worker, creator, and innovator. 

I look forward to working closely with this Committee on improving our protection of American intellectual property, and I would 

be happy to take any questions that you have. 

Thank you. 

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

for the record.] 

6 

Chairman LEAHY. Thank you very much. 

I would also welcome a member of your family here to this hearing. I recall him being here for your confirmation hearing, too. 

Last year, the Justice Department secured the conviction of a 

Chinese national, a man who had sold counterfeit versions of the 

weight loss drug Alli through a website based in the United States. 

Now, it is one thing selling these, but in this case, this counterfeit 

version caused at least one victim to have a stroke. Because the 

website was based in the United States, we could do something 

about it. Law enforcement could move in. The defendant was sentenced to 7 years in prison, and the website was shut down. Now, 

that is a good result, but I think you and I are both concerned 

about those people who evade the law because their domain names 

are registered overseas. In fact, somebody could look for that same 

weight loss drug, go on a website, find one that looks very accurate, 

takes credit cards from here, but it is operating outside the U.S. 

so it falls into a loophole. And the danger to the health of Americans is still the same. 

Will you continue not only to work with Congress but with a lot 

of the parties involved to try to address this problem? And it is not 

just weight loss things. It is heart medications. It is somebody on 

a fixed income looking for a way to save money and finding what 

looks like a legitimate website, and they buy the medication, and 

then they end up either very ill or even dying as a result of it. 

Ms. ESPINEL. Absolutely. Clearly, for sites that are based overseas, our law enforcement jurisdiction is limited. There are a few 

things that we can do and that we are doing. One of those is to 

press foreign law enforcement to do more, and we are doing that 

in a variety of ways, including trying to ensure that we have more 

U.S. personnel on the ground to build relationships with law enforcement overseas and using very high level diplomatic pressure 

to encourage countries to do more. But we know realistically that 

there are certain countries where it is going to be very difficult to 

have robust law enforcement cooperation for many, many years. So 

we will continue to press on that, but we are aware of the limitations of that as well. 

We believe that the private sector can do a lot to help us here. 

When U.S. companies are interacting with sites that are based 

overseas, they will work cooperatively with us to try to—to not be 

engaging with those sites and not lending their legitimate services 

to their sites. We think that can go a long way in helping address 

the problem. But it is a very, very serious problem, and we would, 

of course, want to work very closely with you, Mr. Chairman, and 

with this Committee as a whole on how to address it. 

Chairman LEAHY. Let me go into an area, some would call it the 

area of ‘‘patent trolls’’ When we passed the Leahy-Smith America 

Invents Act last year, we wanted to greatly improve—and I believe 

we did—patent quality in the coming years. But there are many 

patents still in the system, and people who own them greatly exaggerate how broadly the patent applies, and this is stifling innovation, whether it is in Delaware or Minnesota or Wisconsin, 

Vermont, or anywhere else. 

Have you considered whether the assertion of a monopoly right 

that is broader than the patent right is anticompetitive? 

7 

Ms. ESPINEL. Well, we have certainly been hearing concerns. 

First, I should say I think the America Invents Act was a great 

step forward in terms of reforming our patent system. That said, 

we are continuing to hear concerns about patents and about the 

ways that patents are being used in certain circumstances. 

Clearly, the point of the patent system is to support innovation, 

to reward innovation, and to motivate innovation, so that is key to 

the system, and we need to make sure that we have a system that 

does that well, and we would work closely with you on looking to 

see if there are ways that our system needs to be adjusted to try 

to address it. 

Chairman LEAHY. Let us work on that because I am afraid just 

because somebody wants to make some money on something that 

really does not apply, they end up stifling innovation. In fact, another area on the escalating tech patent wars where patents are 

issued essential to technology that might make different kinds of 

products interoperable, Senator Kohl and I wrote to the Justice Department about this issue. Senator Kohl and I noted that when 

patent holders agree to license standard essential patents on reasonable terms to any interested party, it may be anticompetitive for 

them to then use the International Trade Commission to enjoin 

competitors from using that standardized technology. 

Now, if there is infringement, of course, you pay royalties, but if 

you are doing it to prevent even the use of the technology, well, 

that can harm consumers and can stifle innovation and so on. 

So are you working with antitrust authorities to ensure that patents on these technologies where owners agree to license any willing company are not being misused for anticompetitive purposes? 

Ms. ESPINEL. I would be happy to reach out to the Department 

of Justice on that and would look forward to working with you 

closely on that as well. 

Chairman LEAHY. Thank you. 

Senator Kohl. 

Senator KOHL. Thank you. 

Ms. Espinel, many of us were troubled, as I am sure you were, 

too, when the Second Circuit Court of Appeals overturned the conviction of a former Goldman Sachs programmer who stole valuable 

computer code worth many millions of dollars from the company. 

The court ruled that he did not violate the Economic Espionage Act 

because the stolen computer code was not a product intended for 

sale, as required by the statute. 

Is this ruling a major setback for prosecutors’ ability to go after 

the theft of trade secrets under the Economic Espionage Act? Does 

it give a free pass to anyone out there who wants to steal a company’s proprietary and highly valuable computer codes? How urgent is it for the Congress to try to fix this problematic decision? 

Ms. ESPINEL. So, first, I would say yes, we are concerned about 

the decision and the implications of that decision. DOJ, the Department of Justice, is right now actively considering that decision and 

what our next steps are from here. And if we determine that a legislative fix is what would be most helpful there, we would very 

much want to work with you on that. 

Senator KOHL. As you know, we are looking into ways to address 

this problem, and we would appreciate your continued cooperation. 

8 

Ms. Espinel, nearly 2 years ago, we raised concerns about the 

small number of prosecutions and investigations conducted in the 

15 years since the Economic Espionage Act was passed. Now, to its 

credit, the Justice Department has increased outreach to the community, resulting in a 29-percent increase in investigations, and 

has pursued many more prosecutions. When you appeared before 

the Committee last year, you assured us that DOJ had sufficient 

resources to increase enforcement of the Economic Espionage Act. 

Given the influx of investigations and the ever-growing threat to 

American businesses, jobs, and the economy, of course, we need to 

be sure that there is a cop on the beat in every case. Do you still 

have the needed resources to continue to increase investigations 

and prosecutions? I think you addressed this to some extent in 

your statement. 

Ms. ESPINEL. Well, I can certainly tell you that the Department 

of Justice and the FBI have made this a top priority, so they have 

been putting resources and that is reflected in the fact that you are 

seeing increases in investigations and increases in prosecutions. 

As to whether or not they feel they have additional resources, I 

know one of the things the Department of Justice is interested in— 

and it has been in the President’s budget—is to try to have more 

Department of Justice personnel stationed overseas to try to increase foreign law enforcement cooperation. 

As you know, one of the big problems we have with trade secret 

theft is trade secrets that are being taken from U.S. companies and 

then are being transferred overseas. So having law enforcement 

personnel overseas that can work with foreign law enforcement to 

help try to increase the prosecutions and investigations of those 

cases I think would be very valuable. 

Senator KOHL. As you know, many of us on the Committee share 

a concern about enforcement of the Act, and we will be paying close 

attention to the progress that you will be making. 

Finally, recently, high-level U.S. and Chinese officials met to discuss economic issues important to both countries, including protection of intellectual property. China agreed to increase enforcement 

against criminals who steal trade secrets from foreign countries, including the U.S. This is a step in the right direction, but as we all 

know, the problem continues to grow. Intellectual property theft by 

China poses a serious threat to our economy and to the global competitiveness of American businesses. 

What specific commitments are you hoping to receive from 

China? 

Ms. ESPINEL. So, first, I want to note that last week at the Strategic and Economic Dialogue in Beijing, China did make the commitments that you referred to to increase enforcement of trade secret theft. That is the first time that they have made that commitment that forcefully, so I think that is a significant positive step. 

However, as we all know, commitments are commitments. Commitments need to be followed through if they are going to be effective. So I think it is—I am very pleased that China has now publicly committed to increase enforcement of trade secret theft, has 

now publicly acknowledged that this is a problem that we are facing, but we will be working vigilantly—with great dedication and 

commitment to ensure that China follows through. And I can also 

9 

tell you that this issue of trade secret theft has been raised with 

the Chinese Government by President Obama himself repeatedly, 

by Vice President Biden, by Secretary Clinton, by Attorney General 

Holder, by the most senior levels of our administration, and we will 

continue to press on that. 

If I may, I would like to mention one other commitment that 

came out of last week’s Strategic and Economic Dialogue which I 

think is of interest, which is that China committed to create an environment to increase the sales of legitimate IP-intensive products 

in line with its status as a global player in the world economy. 

That is, again, the first time they have ever agreed to a commitment along those lines, and we will be working to make sure that 

we follow through on that. 

Senator KOHL. Thank you very much. 

Thank you, Mr. Chairman. 

Chairman LEAHY. Thank you, Senator Kohl. 

Senator Coons. 

Senator COONS. Thank you. I had expected Senator Franken next 

in order. Forgive me. 

If I might, Ms. Espinel, first, just thank you for your very strong 

leadership and the compelling report and what I think is a renewed and needed focus on coordination of IP enforcement across 

so many different activities in our Federal Government. 

Let me followup first, if I could, on the Commerce report you referenced in your opening statement, which I think is an important 

way to sort of frame and focus our conversations on it. It did not 

use trade secrets as one of the elements to appraise the total value 

of IP-intensive products in the United States. How might it have 

been a different report and what conclusions might it have reached 

differently if it had included trade secrets as a vital part of our IP 

ecosystem? 

Ms. ESPINEL. That is a great question. The report was an ambitious report. It was the first time we have ever even attempted to 

do this type of analysis. It is the first time I am aware of that anyone has attempted to analyze the importance of trademarks to our 

economy, and the report demonstrates that the brands and trademarks are incredibly important to the U.S. economy. But it is true 

that we did not attempt to measure trade secrets. 

I can tell you, as I hope the report and the discussion so far has 

made clear, trade secret theft is an enormous priority for us, and 

I think it is clear that the contribution that trade secrets make 

and, perhaps said another way, the negative economic implications 

for our ability to compete globally when we lose trade secrets, either through trade secret theft, through forced tech transfer, for 

economic espionage, when our trade secrets of our innovative companies walk out the door, the consequences of that for our economy 

and for our future are very significant. 

I would be happy to go back and talk to the economists at the 

Department of Commerce and at USTR and the President’s Council 

of Economic Advisers and the other agencies that we worked with 

to see whether or not it is possible to gather some data on trade 

secret theft. But I can tell you sitting here today that we know how 

important trade secrets are, and that is reflected—that is why you 

10 

have seen us putting such a big priority on this issue over the past 

year. 

Senator COONS. And I look forward to working with Senator Kohl 

and with your office on strengthening our trade secret protections, 

the Economic Espionage Act issues that he referred to and you discussed, whether there is a legislative fix there or in other areas, 

and would welcome a more sort of robust assessment of its total 

contribution. 

Cyber crime is something that has been a real topic of discussion 

on this Committee and other committees in the House and the Senate, and I am just wondering if you think we have the right cops 

on the beat, the right structure in terms of protection and enforcement, and if you have got any advice or input for us as we stand 

at the edge of potentially legislating on cyber protection. How big 

a threat do you see in terms of the loss of IP through cyber threat? 

And how seriously do you take the Chinese commitment to be actively engaged, not just in public acknowledgment but in action to 

reduce the extent of trade secret and other theft of IP? 

Ms. ESPINEL. So I think the threat of cyber crime is a very real 

one and one that our company should take very, very seriously. I 

think if you look at where we are losing trade secrets and where 

we are losing data, cyber, cyber hacking, is only part of that at this 

point. So a lot of trade secret theft is lost—or a lot of trade secrets 

are being lost or compromised either through human assets or 

through forced technology transfer coming from China. That said, 

the threat from cyber crime I think is an enormous one and is likely to grow. 

In terms of ways that we can address it, again, I would say I 

think having additional law enforcement personnel on the ground 

overseas, in particular in China, I think will be helpful in doing 

that. But, you know, what you said about the commitments that 

the Chinese Government has made, I think what is really key here 

and what I can assure you will happen is that the Chinese Government is made keenly aware of how important this issue is to the 

United States and how much importance we attach to them following through on greater enforcement of trade secret theft. 

Senator COONS. Good. That is something I look forward to working with the Chairman and with you on. 

Two of the things you mentioned that have already moved forward out of the report and previous testimony was allowing CBP 

to communicate explicitly with rights holders, but the rule, if I understand it right, does not address copyright and circumvention devices, and I wondered if that was an area you thought that rule 

might be strengthened or expanded to include copyright infringement. 

Ms. ESPINEL. So our original recommendation has applied it to 

all intellectual property rights, including copyright and circumvention devices. I think the rule that is in place now is an interim 

rule, as you may or may not be aware. So there will be a process 

during which, if anyone, any stakeholder that is interested in this, 

feels like there is a problem with how it is being implemented or 

the actual practice on the ground or the scope of the rule, there will 

be a process through which they can make recommendations for 

how it should be changed. 

11 

Senator COONS. The last question. You opened by referencing the 

President’s comments in the State of the Union about the importance of protecting IP, and he cited pirated movies, music, and software, which are a very large part of our IP-intensive exports. But 

I am also, just to echo the Chairman’s first question, concerned 

about pharmaceuticals. You have had great success working in voluntary collaboration with a lot of private sector partners in shutting down websites and in strengthening our protections against 

counterfeit drugs. I think it is important for the average American 

to realize that that is a vital part of what we are talking about 

here, is keeping our pharmaceutical supply safe and free of the 

very widespread counterfeiting that is occurring in other parts of 

the world where it can be as much as 20 or 30 percent of the drug 

supply, particularly in the developing world. 

What next steps do you expect, what more resources might your 

office need to be more successful in this ongoing fight against counterfeiting in drugs in particular? 

Ms. ESPINEL. Well, with respect to our overall efforts, the President also said in the State of the Union that there would be more 

inspections at our border to keep out counterfeit and unsafe products, and counterfeit drugs will be a big focus of that. 

There are other things that we are doing as well. Part of that 

is working foreign law enforcement. Counterfeit pharmaceuticals is 

actually an area where we have had pretty good cooperation with 

foreign law enforcement, and there was recently an enormous sort 

of global coordinated sweep focused on counterfeit drugs, which 81 

countries participated in. So there has been good movement, I 

think, in terms of foreign law enforcement cooperation on counterfeit drugs. This is not to say we do not still have a problem, but 

that is an area where there has been more receptivity. 

I think the voluntary efforts that you referred to are absolutely 

critical. I think there is a big education gap here. I think consumers are unaware of some of the dangers that they are facing 

when they are buying from sites that are not pharmacies in a 

sense, that are criminal enterprises that are masquerading as 

pharmacies. So I think that there is more that we can do and will 

be doing in terms of consumer education. And in terms of capacity 

building, the State Department is now putting a third of all of its 

training funds toward counterfeit drugs, which is a demonstration 

of the importance they place on it. And I should say that in this 

regard Under Secretary Robert Hormats has been a tremendous 

ally here. Counterfeit drugs is something he is very concerned 

about, and he has been putting his energy and the resources of the 

State Department behind that. 

Senator COONS. Thank you. 

Chairman LEAHY. Unfortunately, organized crime used to think 

they could just do small scams or protection rackets. Now it is a 

lot easier to do much, much bigger ones through these. 

Senator Franken, I want to thank you for your courtesy in letting 

Senator Coons go ahead of you, and I would call on you now. I 

know this is an issue that you have expressed a great deal of concern in these hearings. Go ahead. 

Senator FRANKEN. Well, thank you. 

12 

Chairman LEAHY. And, Senator Coons, thank you. When I think 

of all the corporations that are registered in your State of Delaware 

that are being hit by some of these things, there is a lot of attention here, Ms. Espinel, from—it goes way beyond parochialism on 

this Committee. 

Senator Franken. 

Senator FRANKEN. Thank you, Mr. Chairman. 

Ms. Espinel, before I begin, I want to thank you for all your work 

over the last 3 years to bring greater attention to the problem of 

intellectual property, or IP, theft in this country. 

When people think of intellectual property or copyright, they 

rarely think of what IP issues mean to jobs, but they should. Minnesota is one of those States with the highest patent-intensive employment in the country, and that is why I have been encouraging 

the U.S. Patent and Trademark Office to open a satellite office in 

the Twin Cities. 

The Minnesota companies that create and build medical devices, 

electric circuits, industrial coatings and films, and advanced microprocessors all provide thousands of great jobs to Minnesotans, but 

those companies are only able to hire more people to help them innovate if we are successful at protecting the products that they develop. 

According to an FBI agent in Minnesota, trade secret theft costs 

Minnesota businesses hundreds of millions of dollars. We need to 

be doing everything we can to stop this, and I am pleased at your 

efforts to increase prosecution of these crimes. 

I have been impressed with your ability to push companies to 

voluntarily adopt policies to reduce online theft of intellectual property. I remain convinced that this is a serious problem and think 

we need to be doing as much as possible to encourage companies 

to be aggressive about monitoring their systems to stop this type 

of theft. 

Now that Internet service providers, the advertising community, 

and payment processors have all stepped up, what other industries 

do you think need to step up and adopt voluntary best practices? 

Ms. ESPINEL. Well, let me mention three areas where I think it 

would be helpful, and there are more than this, but I will just highlight a few. 

First, as I mentioned, the advertisers—the ANA, so the online 

advertisers and the ad agencies, issued a statement of best practices last week, and we very much welcome that. We would like us 

to continue working with the ad brokers, the technology companies 

that actually place the ads online, to develop a set of voluntary best 

practices there that are as effective as they possibly can be. Those 

companies know how their systems work. If they are committed to 

working with us, I think we can make some real headway there. 

I would also note, you know, the domain name registrars with 

whom we have had some very good cooperation, I think there is 

much that they can do. Cyber lockers, in fact, and in the wake of 

the Megaupload case, we have seen cyber lockers voluntarily taking 

steps to try to address infringement that was going on in their 

sites. So I think that is another area. 

But beyond specific industry sectors, two other things that I 

would like to mention are the following: 

13 

First, we think this is a very good model for other countries, so 

we would really like to see other governments start talking to their 

companies to try to encourage similar things, and we have been already talking to the U.K., to France, and to the European Commission about how they could—in fact, some of those governments 

have come to us expressing interest and asking what our advice 

would be on how they could move this forward. And I think this 

is a global problem, I think it goes without saying. So it would be 

much more effective if it was not just U.S. companies that were involved in this but also companies that are based overseas. So that 

will be a focus for this year, and I really hope we see some progress 

there. 

The second thing or the last thing I would mention is we think 

voluntary best practices could be very helpful in the physical supply chain as well, so most of our efforts have been focused—or up 

to this point, they have been focused on the online world. I think 

in the physical world, there is a lot of progress that could be made 

here, too. I think with respect to the issue of trade secret theft, I 

think working with companies on voluntary best practices to try to 

tighten their supply chains to keep counterfeit and pirated goods 

from getting into their supply chains, to keep trade secrets from 

leaking out of their supply chains, I think there is a lot of progress 

that could be made there. 

There are groups like Create.org that are starting to work on 

this, but, again, we really need to be working very closely with the 

companies. They know how their distribution chain works. They 

know how their supplier contracts work. They, I think, if they are 

committed to working with us, can do a lot to try to ensure that 

the supply chains stay as clean as possible. 

Senator FRANKEN. Thank you for that answer. 

As you may know, I am concerned that ICANN, or the Internet 

Corporation for Assigned Names and Numbers, plans to expand 

top-level domains, and those plans may make it even harder for 

law enforcement to halt online piracy and cyber squatting. 

Is this an issue that you are monitoring? And what do you think 

we should be doing to make sure that these new top-level domains 

do not become a breeding ground for rogue sites? 

Ms. ESPINEL. So we have also heard those concerns. My office 

has heard those concerns directly and has been talking to right 

holders about them. Larry Strickling, who is the head of the NTIA, 

the National Telecommunications Information Administration, has 

also been talking to right holders about those concerns. So those 

concerns are being heard. 

You know, I think this is an area where domain name registrars 

could do a lot. That was actually what was in my mind when I 

mentioned them a few moments ago. But I think it is critical that 

it be not just domain name registrars in the United States, but domain name registrars around the world. I think there are things 

that they could do to try to reduce infringement and try to alleviate 

some of the concerns that are being raised by this. 

The last thing I would note is that when the application process 

is closed, NTIA will run a process of review of the new top-level 

domain names that have been applied for, and so there will be an 

opportunity during that review to raise objections to certain names 

14 

if they exist. But moving beyond, you know, or speaking beyond 

just sort of the particular application process that is going on now, 

I do think it is very important to have the domain name registrar 

community actively engaged on and thinking cooperatively with us 

on what they can do on a voluntary basis to try to reduce infringement. 

Senator FRANKEN. Well, I hope they. 

Mr. Chairman, my time is up. Thank you. 

Chairman LEAHY. I thank you and Senator Coons and Senator 

Kohl and Senator Whitehouse for the attention you have given to 

this. 

Senator Whitehouse, before you came in, I mentioned your legislation to go after counterfeit equipment sold to our military. Thank 

you for that. I am going to have to step out for a minute, but I will 

yield to Senator Whitehouse. 

Senator WHITEHOUSE. Thank you, Mr. Chairman, and thank you 

for your attention to this important effort. And thank you, Ms. 

Espinel, for being here and for your hard work on this. 

We obviously had a significant legislative failure recently trying 

to help protect the intellectual property on which so many American businesses rely. It is frustrating for many of us that this is 

a crime that is being conducted in plain view. Anybody can go to 

the websites and see the criminals in action selling American products without paying the American creators of the product. 

It is frustrating to see American-owned search engines taking 

people to the criminal websites. It is frustrating to see American 

credit card companies having their facilities used to pay for the 

criminal websites. And it is frustrating, as Senator Franken noted, 

to see American corporations advertising on criminal websites. So 

I think it is really important that we continue to push back. Our 

economy really cannot withstand this kind of persistent criminal 

degradation. 

When you go beyond the question of what is being done in plain 

view, there is also massive intellectual property theft out of our 

tech, pharmaceutical, manufacturing, and other industries, usually 

by or on behalf of Chinese interests. And it has been described not 

just by me but by General Alexander and by private sector security 

experts like the folks at McAfee as the largest transfer of wealth 

in the history of humankind through theft and piracy, and we are 

on the losing end of it. 

So I think we really need to be very energetic about this, and one 

area in which I think we are doing good work but where we are, 

I think, way underresourced for a threat of this magnitude is in 

law enforcement. And I think we need to be thinking about how 

our law enforcement resources should be structured to deal with 

this threat, how we should be resourced in law enforcement to deal 

with this threat. I know that there was a very considerable role by 

American law enforcement in the takedown of the Rustock and the 

Coreflood botnets. 

But when you look at the amount of botnet activity that is out 

there and the extent to which computers across this country and 

across the world have been slave to different botnets, frankly two 

is not very many. We could be doing two a month. So, again, it took 

15 

a lot of talent and initiative to get those two things done, but we 

should be resourced to be able to do a lot of that. 

My information is that the U.S. Government, its law enforcement 

authorities have yet to make a single case, criminal case, based on 

intellectual property theft through cyber. We have made intellectual property theft cases, but they have always involved the traditional human taking a disk or there has been a human link. But 

the pure hack, starting in China, going through a company’s cyber 

guards into their precious intellectual property, extracting and expropriating that intellectual property, not one case has yet been 

made. And yet here we have other elements of the Government 

saying it is the biggest transfer of wealth in history and we are on 

the losing end. 

So I would urge you—and I am trying to work with OMB and 

with the Department of Justice to sort out how we do this. In the 

draft legislation, there are provisions we are working on for putting 

together a group to sort of brainstorm this and figure out where 

should we be. I think that if there is an analogy for this, it is when 

airplanes started flying and the American military had to figure 

out what to do about airplanes, and the senior military commanders who had never been on an airplane, were probably born 

in 1880 at that point, did not really think of this as a significant 

thing. But now we have a U.S. Air Force, and it is a pretty important part of our defense establishment. And it took some thinking 

to get us to where we needed to be structurally. 

I do not think we are there in law enforcement. I would like to 

have your reaction. I have used all my time on this, but I would 

like to have your reaction, and I would like to work with you to 

try to make sure we do this right. The business community I think 

would be much advantaged by being able to call up and say, ‘‘We 

think we have a problem here’’ and have law enforcement come in 

and take over. And right now their experience is that they cannot 

do that. The law enforcement folks who they talk to are good. 

There are just far too few of them to get their attention, considering the amount of crime, pilferage, and intellectual property theft 

that is going on. 

Ms. ESPINEL. So if I may, I want to start by responding to something that you said at the beginning of your remarks with respect 

to what companies in the private sector are doing, and I did want 

to make sure you are aware that the credit card companies that 

you mentioned, at least the five U.S. major payment processors, 

have stepped up and have developed a set of voluntary best practices that have been in operation for almost a year now. And my 

understanding, both from talking to them and from talking to the 

right holders, is that that process is going very well. 

I think the right holder community—and I would sort of call out 

in particular the IACC, the International Anti- Counterfeiting Coalition—has been working on their end to try to create portals and 

other mechanisms to make sure that things are going into the credit card companies in ways that are as efficient and streamlined as 

possible. So I think there has been some good collaboration there 

and some real progress there, and I commend those companies for 

that. 

16 

On the advertiser side, in fact, just last week the online advertisers, the companies that advertise online and their ad agents, 

issued a statement of voluntary best practices saying that they 

would not be supporting rogue websites. There is still a piece of the 

advertising world, which is the ad brokers that place those ads, 

that we are continuing to work with on the voluntary best practices, and we would like to see something come out of that. But I 

think there has been some real progress on both the credit card 

and the ad side. 

To your comments on cyber crime and the—— 

Senator WHITEHOUSE. Although on that, I would have no trouble 

finding a website right now that sold pirated goods and had both 

advertisements and credit cards operating on that website, correct? 

It is a process that has begun, but it is certainly still a problem 

out there. 

Ms. ESPINEL. It is absolutely still a problem. I will say that my 

understanding is to the extent there are sites that are using U.S. 

payment processors and the U.S. payment processors are being 

made aware of those sites, they are working expeditiously and effectively to try to cut that off. I think those companies have told 

me—and I believe them—that they truly do not want to be engaged 

with this type of activity, and they do not want these types of sites 

using their services. And at least in the U.S., I think they have 

stepped up. 

As I said before, I think we need to get other countries to adopt 

the same thing. I would say in particular—and this may be overly 

ambitious—if we could get Russian payment processors to step up 

and cut off services to those sites, that would be, I think, a step 

of tremendous progress. That is, I think, a long-term goal, but we 

really need it to be a global effort if it is going to be effective. 

In terms of your comments on cyber crime and the significance 

of that problem, I would just say that I agree with you fully. In 

terms of the resources and how they are structured, I can also tell 

you that the Department of Justice and the FBI, as they have 

made this a priority, have been looking to use the resources that 

they do have as effectively and as efficiently as they can. But I will 

also commit to you that I will go back to my colleagues at OMB 

and the Department of Justice and discuss this with them. 

Senator WHITEHOUSE. Yes, I think, Mr. Chairman, this is an 

issue that we should be sort of talking through, and I think right 

now the deadlock is that nobody in the Department of Justice 

wants to talk about anything that creates a demand for new resources because that violates their budget rules with OMB, and 

this is not a big priority for OMB. And so you really have to get 

OMB and the Department and somebody from the White House in 

the room and say, all right, let’s have a process here for how we 

sort through what our law enforcement posture should look like. 

What should a private company that is being hacked be able to expect when it picks up the phone and calls the FBI? What do we 

want to do here? And I do not see that discussion taking place, and 

I would very much like to be a part of it and have this Committee 

be a part of it. 

17 

Chairman LEAHY. And I think Ms. Espinel has been very open 

to requests from this Committee for information, and we will continue that. 

I agree with what Senator Whitehouse says. We are in a sometimes rapidly changing world, but the incentives for criminals are 

always out there. And, unfortunately, it is in an area that can hurt 

Americans greatly, can hurt our national security, can hurt individuals, and can have a crushing effect on job creation in this country. 

So we have to keep working on this. It is not as exciting as some 

of these bumper sticker kinds of things we see that some in Congress want to talk about, usually have very little effect on anything. This is a more serious area. It has a great deal of effect on 

our country and on our safety. One, I am glad you are there. But, 

second, I think that we do have to work very closely with the various parts of our Government, some of which are having a little bit 

of a difficult time adjusting to the modern world. If we have to find 

more resources, we will. There are a lot of resources spent on 

crimes that probably should—that do not really do much for us. We 

should be spending resources on those crimes that do. 

Do either of you gentlemen have any further questions? 

Senator Franken. 

Senator FRANKEN. Thank you, Mr. Chairman. 

Ms. Espinel, when you were last here before the Committee, I 

spent a considerable amount of time talking about IP infringement 

in China. I am still convinced that we are not doing enough to stop 

this enormous problem and that U.S. companies are losing billions 

of dollars as a result of this theft. 

According to the U.S. Trade Representative, 99 percent of all 

music downloads in China are illegal. We certainly have not totally, entirely solved our music piracy problem here in the U.S. But 

in 2010, the music industry only collected a mere $64.3 million 

from China. This is when their population is four times the size of 

the United States’ and revenues in the United States were more 

than $4 billion last year. 

I understand that China’s lead search engine, Baidu—I think 

that is the name of it—signed a leasing agreement with Universal, 

Warner Music, and Sony BMG to ensure its online music platform 

does not sell pirated music. While this deal marks a step in the 

right direction, there is clearly still a large gap to fill in this regard. 

What are you doing to address this problem both online and with 

physical sales of DVDs and CDs? 

Ms. ESPINEL. So as we discussed earlier, when there is infringement taking place overseas, that is obviously a particular set of 

challenges for us because our law enforcement jurisdiction is limited there. But there are a number of things that we are doing. I 

do not mean to say that—in fact, I would say that we still have 

an enormous challenge on our hands, and we are aware of that. 

But I will mention a few of the things that we are doing and then 

would welcome having more discussion on this and more collaboration with this Committee on other things that we could do. 

One thing, which you alluded to, is last year for the first time 

USTR issued what we call the Notorious Markets List, basically 

issued a stand-alone report that was just highlighting Internet 

18 

sites and physical marketplaces that were havens for counterfeiting 

and piracy. This is the first time they have done it. Baidu was one 

of the sites that was on the list. I think it got a lot of attention 

in a positive way as it sort of shone a spotlight on some of the problems that we are having. And after being placed on the list—and 

I would like to think at least in part because of being placed on 

the list—Baidu did sign the licensing agreement that you mentioned with our music industry. 

USTR has now issued the second Notorious Markets List, and 

there are still many, many sites on that list, including Taobao, 

which is another large Chinese site. 

So we will continue to use tools like the special 301 process, 

which is where the Notorious Markets List comes from and where 

its authority comes from, to try to both encourage other governments to do more, but also put pressure on some of the companies 

that we feel—international companies that we feel are not stepping 

up. 

In addition to that, I think, as I have said before, we need to 

have foreign law enforcement doing more. There is only so much 

U.S. law enforcement can do, particularly when we are overseas. So 

there are things that we can do to press foreign law enforcement 

to do more, including trying to have more personnel, more U.S. personnel overseas working with them. But I think key to that will be 

having other governments—and the Chinese Government is the 

focus of our concern here—understand how great a priority this is 

for the U.S. Government at this point. And I think, you know, in 

the past year the Chinese have heard this directly from President 

Obama on several occasions. They have heard this repeatedly and 

forcefully from Vice President Biden. They have heard from Secretary Clinton, from Attorney General Holder, from Secretary 

Geithner, from FBI Director Mueller, from ICE Director John Morton. They have heard from the most senior levels of our administration in a very coordinated and very clear way, and I think that 

is—we are starting to see some progress. I talked earlier about 

some of the progress that we are seeing, but we know that we need 

to continue to press, and press very, very hard, because this is an 

area that is so important to our country and where even where 

there may have been small steps of progress, there is so much more 

that needs to be done. 

Senator FRANKEN. I have one more question, and this is about 

China as well. I am alarmed about cases of American companies 

have to disclose trade secrets in order to do business in China. For 

example, it was recently reported that Ford is considering giving 

China the intellectual property that supports its electric vehicle 

technology. And in 2007, Westinghouse Electric shared thousands 

of pages of technology secrets with China in exchange for the opportunity to build nuclear power plants there. 

What is especially alarming is that these technologies were developed with U.S. Government support through the Department of 

Energy. 

Are you aware of this problem? And is your office working with 

the Departments of Energy, Commerce, and other Federal agencies 

to limit when and how trade secrets are turned over to China, particularly where the technology was developed by U.S. taxpayers? 

19 

Ms. ESPINEL. I am aware of the problem, and we are very concerned about it. We are concerned about it for all technology, frankly, and then where technology has been developed with U.S. taxpayer dollars, I think we have a particular interest. But this issue 

of forced technology transfer in various ways is one that we are 

concerned about for a number of our sectors. And I have spoken to 

and have been working with the Department of Energy and others 

inside the Federal Government on what we can do to try to address 

this. It can be a difficult issue in some ways because we do not 

want to hinder our companies’ ability to compete in the global marketplace. On the other hand, we have a responsibility to the U.S. 

citizens as a whole and to our economy as a whole to try to do everything that we can to make sure that we are not losing technology, we are not losing innovation, we are not losing trade secrets. 

So it is something that we are engaged in a very active discussion on right now, in fact, and I would be happy to followup with 

you and have discussions about both our concern about this issue 

and some of the possibilities that we might be able to engage in 

in the future to try to address it. But I can tell you it is something 

that we are very aware of and very concerned about. 

Senator FRANKEN. I would like to do that because this is a problem that I know Senator Webb has been taking a lead on, and if 

you could get back to me with information, maybe in writing, along 

with recommendations on what we could do to stop this from happening, I would really appreciate it. Thank you very much. 

Thank you, Mr. Chairman. 

Chairman LEAHY. Thank you, Senator Franken. 

Senator Whitehouse. 

Senator WHITEHOUSE. Let me just ask, I do not know, Ms. 

Espinel, if you are in a position to comment on the cybersecurity 

legislation that we are looking at, if that is an issue that you are 

prepared to take any questions on. If so, I will proceed. If not, 

then—— 

Ms. ESPINEL. I would be happy to put you in touch with my colleague, Howard Schmidt, or others who could answer your questions on that. 

Senator WHITEHOUSE. OK. I will take that advice. 

Chairman LEAHY. With that, we thank you very, very much and 

will stand in recess. 

[Whereupon, at 11:15 a.m., the Committee was adjourned.] 

[Questions and answers and a submission for the record follows.] 

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