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INTERNATIONAL PIRACY: THE CHALLENGES OF

PROTECTING INTELLECTUAL PROPERTY IN THE

21ST CENTURY

HEARING

BEFORE THE

SUBCOMMITTEE ON COURTS, THE INTERNET, 

AND INTELLECTUAL PROPERTY

OF THE

COMMITTEE ON THE JUDICIARY 

HOUSE OF REPRESENTATIVES

ONE HUNDRED TENTH CONGRESS

FIRST SESSION

OCTOBER 18, 2007

Serial No. 110–67

Printed for the use of the Committee on the Judiciary

(

Available via the World Wide Web: http://judiciary.house.gov 

(II)

COMMITTEE ON THE JUDICIARY 

JOHN CONYERS, JR., Michigan, Chairman 

HOWARD L. BERMAN, California 

RICK BOUCHER, Virginia 

JERROLD NADLER, New York 

ROBERT C. ‘‘BOBBY’’ SCOTT, Virginia 

MELVIN L. WATT, North Carolina 

ZOE LOFGREN, California 

SHEILA JACKSON LEE, Texas 

MAXINE WATERS, California 

WILLIAM D. DELAHUNT, Massachusetts 

ROBERT WEXLER, Florida 

LINDA T. SA ́ NCHEZ, California 

STEVE COHEN, Tennessee 

HANK JOHNSON, Georgia 

BETTY SUTTON, Ohio 

LUIS V. GUTIERREZ, Illinois 

BRAD SHERMAN, California 

TAMMY BALDWIN, Wisconsin 

ANTHONY D. WEINER, New York 

ADAM B. SCHIFF, California 

ARTUR DAVIS, Alabama 

DEBBIE WASSERMAN SCHULTZ, Florida 

KEITH ELLISON, Minnesota 

LAMAR SMITH, Texas 

F. JAMES SENSENBRENNER, JR., 

Wisconsin 

HOWARD COBLE, North Carolina 

ELTON GALLEGLY, California 

BOB GOODLATTE, Virginia 

STEVE CHABOT, Ohio 

DANIEL E. LUNGREN, California 

CHRIS CANNON, Utah 

RIC KELLER, Florida 

DARRELL ISSA, California 

MIKE PENCE, Indiana 

J. RANDY FORBES, Virginia 

STEVE KING, Iowa 

TOM FEENEY, Florida 

TRENT FRANKS, Arizona 

LOUIE GOHMERT, Texas 

JIM JORDAN, Ohio

PERRY APELBAUM, Staff Director and Chief Counsel 

JOSEPH GIBSON, Minority Chief Counsel 

SUBCOMMITTEE ON COURTS, THE INTERNET, AND INTELLECTUAL PROPERTY

HOWARD L. BERMAN, California, Chairman 

JOHN CONYERS, JR., Michigan 

RICK BOUCHER, Virginia 

ROBERT WEXLER, Florida 

MELVIN L. WATT, North Carolina 

SHEILA JACKSON LEE, Texas 

STEVE COHEN, Tennessee 

HANK JOHNSON, Georgia 

BRAD SHERMAN, California 

ANTHONY D. WEINER, New York 

ADAM B. SCHIFF, California 

ZOE LOFGREN, California 

BETTY SUTTON, Ohio 

HOWARD COBLE, North Carolina 

TOM FEENEY, Florida 

LAMAR SMITH, Texas 

F. JAMES SENSENBRENNER, JR., 

Wisconsin 

ELTON GALLEGLY, California 

BOB GOODLATTE, Virginia 

STEVE CHABOT, Ohio 

CHRIS CANNON, Utah 

RIC KELLER, Florida 

DARRELL ISSA, California 

MIKE PENCE, Indiana 

SHANNA WINTERS, Chief Counsel 

BLAINE MERRITT, Minority Counsel 

(III)

C O N T E N T S 

OCTOBER 18, 2007

Page 

OPENING STATEMENTS 

The Honorable Howard L. Berman, a Representative in Congress from the 

State of California, and Chairman, Subcommittee on Courts, the Internet, 

and Intellectual Property .................................................................................... 1

The Honorable Howard Coble, a Representative in Congress from the State 

of North Carolina, and Ranking Member, Subcommittee on Courts, the 

Internet, and Intellectual Property .................................................................... 3

The Honorable Lamar Smith, a Representative in Congress from the State 

of Texas, and Member, Subcommittee on Courts, the Internet, and Intellectual Property ........................................................................................................ 11

WITNESSES 

Ms. Victoria A. Espinel, Assistant U.S. Representative for Intellectual Property and Innovation, Office of the U.S. Trade Representative, Washington, 

DC 

Oral Testimony ..................................................................................................... 24

Prepared Statement ............................................................................................. 26

Mr. Eric H. Smith, President, International Intellectual Property Alliance 

(IIPA), Washington, DC 

Oral Testimony ..................................................................................................... 31

Prepared Statement ............................................................................................. 34

Mr. Loren Yager, Director of International Affairs and Trade, U.S. General 

Accountability Office (GAO), Washington, DC 

Oral Testimony ..................................................................................................... 50

Prepared Statement ............................................................................................. 52

Mr. Mark MacCarthy, Senior Vice President for Global Public Policy, Visa 

Incorporated, Washington, DC 

Oral Testimony ..................................................................................................... 71

Prepared Statement ............................................................................................. 73

LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING 

Prepared Statement of the Honorable Howard Coble, a Representative in 

Congress from the State of North Carolina, and Ranking Member, Subcommittee on Courts, the Internet, and Intellectual Property ......................... 5

Prepared Statement of the Honorable Lamar Smith, a Representative in 

Congress from the State of Texas, and Member, Subcommittee on Courts, 

the Internet, and Intellectual Property .............................................................. 13

Prepared Statement of the Honorable John Conyers, Jr., a Representative 

in Congress from the State of Michigan, Chairman, Committee on the 

Judiciary, and Member, Subcommittee on Courts, the Internet, and Intellectual Property .................................................................................................... 20

APPENDIX 

Material Submitted for the Hearing Record .......................................................... 112

(1)

INTERNATIONAL PIRACY: THE CHALLENGES 

OF PROTECTING INTELLECTUAL PROPERTY 

IN THE 21ST CENTURY 

THURSDAY, OCTOBER 18, 2007

HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE ON COURTS, THE INTERNET, 

AND INTELLECTUAL PROPERTY, 

COMMITTEE ON THE JUDICIARY, 

Washington, DC.

The Subcommittee met, pursuant to notice, at 10:04 a.m., in 

Room 2237, Rayburn House Office Building, the Honorable Howard 

Berman (Chairman of the Subcommittee) presiding. 

Present: Representatives Berman, Watt, Jackson Lee, Sherman, 

Schiff, Lofgren, Sutton, Coble, Sensenbrenner, Smith, and Goodlatte. 

Mr. BERMAN. The hearing of the Subcommittee on Courts, the 

Internet, and Intellectual Property will come to order. 

I would like to begin by welcoming everyone to this hearing, 

International Piracy: The Challenges of Protecting Intellectual 

Property in the 21st Century. 

I will recognize myself for an opening statement. 

Almost a year ago, in connection with bilateral negotiations on 

the Russian Federation’s accession to the World Trade Organization, the Russian government and the U.S. reached an agreement 

regarding actions to improve the protection and enforcement of intellectual property rights in Russia. 

Just last week, the U.S. requested the WTO establish a dispute 

settlement panel to challenge China’s restrictions on the importation and distribution of products of copyright-intensive industries 

such as theatrical films, DVDs, music, books, and journals. 

This hearing will update us on the status of our efforts in these 

two specific countries, which many have identified as the primary 

culprits in allowing piracy and counterfeiting to flourish. 

We also will look at the piracy problem in other countries and 

the challenges America faces when trying to alter the legal landscape and enforcement mechanisms available. 

This is an effort to ensure that other countries do not thrive on 

the backs of American creativity. 

Today’s witnesses will speak to the importance of IP to the global 

economy. I would like to use my time to move beyond that particular aspect of the issue to identify causes for the lack of adequate protection for IP in some places, and to talk about solutions 

and incentives to address the problem. 

2

Hopefully these will dovetail with the IP enforcement bill that I 

hope to be introducing shortly with the Chairman of the full Committee, Mr. Conyers, as the lead author, along with the Ranking 

Member of the full Judiciary Committee, Mr. Smith, and Ranking 

Member of this Subcommittee, Mr. Coble. 

The Organization for Economic Cooperation and Development recently released their report on the Economic Impact of Counterfeiting and Piracy together with suggestions to enact stronger 

criminal penalties and increase enforcement of national laws, 

strengthen cooperation between government and industry, and educate consumers. 

These are the cornerstones of effective IP protection. Each of the 

participants—governments, industries and the consuming public—

must have the will to do it, the will to respect intellectual property 

rights. 

Sometimes that will comes naturally, as when the participants 

understand that IP enforcement is in their own interest. That occurred, at least for a brief moment in China when they saw counterfeit 2008 Olympic T-shirts appearing on street corners. 

But sometimes outside inducement is helpful. Some nations, such 

as Russia, do not yet meet international standards in their IP laws. 

Others, such as China, may have good laws on the books but often 

fail to enforce them. 

How do we get Russia, China and other emerging market economies to, as Mark MacCarthy of Visa states, ‘‘do the right thing?’’

We have the tools of persuasion and trade benefits at our disposal and, of course, international law in accession to the WTO. 

Sometimes it takes a little nudge for a country to see the light. 

Industry, not only those who own the rights, but those who benefit from use of those rights, must also have the will to protect intellectual property. 

Whether it be Internet service providers, or financial services 

such as banks and credit card companies, such intermediaries often 

facilitate piracy through their servicing of illegal transactions. 

While there may be legal ambiguity as to whether their conduct 

meets the legal definition of contributory infringement, industry 

clearly has a responsibility. Their refusal to use the technical tools 

at their disposal now to stop piracy exacerbates the problem. 

They should understand that effective IP enforcement improves 

economies and ultimately, therefore, their own bottom line. 

Take, for instance, Baidu, the Chinese counterpart to Google. It 

is responsible for much of the Internet piracy in China. Their continued activities have dissuaded any legitimate down-stream services from entering that market. 

I am more than a little surprised that a company can be traded 

on the New York Stock Exchange and still maintain practices that 

are so destructive of the ability of the Chinese digital market to develop in a legitimate manner. 

And I don’t mean just to pick on Russia and China. Although 

they have garnered the lion’s share of the headlines, trading partners such as Chile, India, Turkey, Venezuela and others have been 

cited for their inadequate commitments to IP protection. 

3

Even, I am sad to say, our neighbor to the north needs to improve. To date, they have still not updated their laws to comply 

with the 1996 WIPO Copyright Treaty. 

On Tuesday night, the Governor General of Canada presented 

the new government’s agenda to Parliament: Our government will 

improve the protection of cultural and intellectual property rights 

in Canada, including copyright reform. 

While formal commitments are necessary, they aren’t sufficient. 

They must be backed by results. 

Now, I recognize the Ranking Member of the Subcommittee for 

his opening statement, Mr. Smith, if he has one, and then Mr. Conyers, chairing, actually, another hearing at this time of this task 

force——

Howard? 

Mr. COBLE. Thank you, Mr. Chairman. I want to join you in welcoming all to our hearing this morning. 

I want to commend you, Mr. Chairman, and Ranking Member 

Smith. I believe you all convened at least three hearings on this 

very significant subject in 2005. 

The investment in time, capital and effort needed to obtain a 

valid patent, trademark, or copyright is enormous, as you all know. 

The reward for that investment is supposed to be the exclusive 

right for a limited time to manufacture, market or license an invention, product or work. 

But that reward is of little incentive or value if individuals and 

governments are unable or, in the latter instance, sometimes unwilling to provide meaningful protection and enforcement to the 

owners of intellectual property rights. 

A number of developments in recent years have overwhelmed the 

methods that countries traditionally employ to prevent legitimate 

producers from being exposed to unfair competition and to protect 

consumers from health and safety risks associated with unsafe 

goods. 

The expansion of transnational trade and the development of the 

Internet as a commercial tool and the ability of producers anywhere in the world to cheaply and rapidly produce, distribute and 

transport goods to virtually any other point of the globe have revolutionized not merely the relationships between producers and consumers but also the relationships between and among nations and 

their citizens. 

To protect the legitimate interest of nations and inventors with 

respect to promotion of intellectual property rights, Mr. Chairman, 

it seems the United States is party to numerous international multilateral and bilateral agreements. 

Our ability to ensure these agreements and understandings are 

properly carried out, not merely here at home, but also in the markets overseas that demand the creative products Americans are so 

skilled at producing, is fundamental to the continued vitality of our 

economy. 

When you consider that our copyright industry typically receives 

about half of its revenue from outside the United States, industries 

that rely on IP protection account for over half of all U.S. exports, 

and these industries together represent about 40 percent of the 

U.S. economic growth, it is obvious why it is so important that we 

4

ensure that foreign governments respect the rights of our producers. 

One of the principal methods that our government uses to promote these interests is the Section 301 review process, which was 

established pursuant to the Trade Act of 1974. 

Among other things, Section 301, as you know, requires the U.S. 

trade rep to publish an annual report that details foreign government policies or practices that violate a bilateral or multilateral 

trade agreement or are unreasonable, unjustifiable, are discriminatory and are unnecessarily burdensome to the United States commerce. 

For many years, the Section 301 Report has documented various 

violations by the governments of China and Russia, as you just 

pointed out in your statement, Mr. Chairman, with respect to the 

protection and enforcement of U.S. intellectual property rights. 

Indeed, the failure of China in particular to reduce its levels of 

counterfeiting and piracy, which in many copyright sectors routinely approaches 90 percent, has led to the United States filing 

two IP-related complaints at the WTO. 

Rather than stealing the thunder of our witnesses, who can describe in great detail the status of our concern with China and Russia and other countries of priority to U.S. IP owners, I want to first 

acknowledge the progress the Administration, Congress and private industry have made in recent years in improving the exchange 

of information and developing strategies to improve the situation 

for IP owners. 

There are no quick fixes in this area as complex as this. Real 

progress require most sustained attention and a bipartisan commitment. 

Mr. Chairman, I spoke a little longer than I usually do, but I 

don’t know of any subject that impacts our economy any more significant than what we are discussing today. 

President Reagan once summed up the U.S. policy of negotiating 

arms control agreements as ‘‘trust, but verify.’’ In my view, meaningful progress in the promotion of intellectual property rights requires a similar transparency. In other words, we need a little less 

trust and a lot more verification. 

I thank you, Mr. Chairman, and I yield back my time. 

[The prepared statement of Mr. Coble follows:]

5

PREPARED STATEMENT OF THE HONORABLE HOWARD COBLE, A REPRESENTATIVE IN

CONGRESS FROM THE STATE OF NORTH CAROLINA, AND RANKING MEMBER, SUBCOMMITTEE ON COURTS, THE INTERNET, AND INTELLECTUAL PROPERTY


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Mr. BERMAN. Well, thank you very much, Mr. Coble, and your 

comments reminded me that, in fact, we have had a number of 

hearings on this subject building up to this point. 

Our colleague from Texas, Mr. Smith, as Chairman of the Subcommittee over the last few years, and now as Ranking Member of 

the full Committee—I recognize him for his opening statement. 

Mr. SMITH OF TEXAS. Thank you, Mr. Chairman. You mentioned 

Mr. Conyers a while ago. 

Like Mr. Conyers, I am a Member of the Antitrust Task Force, 

which also happens to be meeting right now, so I suspect that he 

and I will be shuttling back and forth and maybe even substituting 

for each other as the morning goes on. 

But I do want to thank you, Mr. Chairman and Ranking Member 

Coble, for convening this very important oversight hearing. 

As has already been mentioned, we have had three Subcommittee hearings on this subject already, which is clearly an indication of how important this Subcommittee thinks this subject is, 

and it is nice to have this as a bipartisan subject of interest as 

well. 

At the outset of the first hearing, I noted one of our purposes is 

to begin an examination of the role of intellectual property rights 

in promoting international respect for the rule of law. In whatever 

form it takes, the theft of intellectual property inflicts substantial 

economic harm on our country, our entrepreneurs, our innovators 

and ultimately on American consumers. 

I don’t quote myself very often, but I thought that was a particularly good statement from a couple of years ago. [Laughter.] 

The potential harm to consumers that results from the rampant 

production and distribution of illegal goods is, of course, not limited 

to purely economic harm. 

Recently, Chinese-manufactured toothpaste was recalled because 

it contained a chemical used in antifreeze. And Connor O’Keefe, a 

7-year-old British boy, tragically died after reportedly being electrocuted by a counterfeit Nintendo Gameboy charger. 

These cases illustrate the danger posed by the failure to stop the 

manufacture and distribution of unsafe and counterfeit goods. 

The enormous scope of today’s counterfeiting activity and the unprecedented ability of pirates to distribute their illegal wares quickly and on a global scale pose new challenges to policy makers 

around the world. 

When government officials and countries who profit from illegal 

commerce actually facilitate it, these challenges are tougher. 

When the U.S. trade representative released her annual Special 

301 Report earlier this year, China and Russia were once again included on the priority watch list. It came as no surprise. 

That designation reflects a judgment that these countries fail to 

provide an adequate level of intellectual property rights protection 

or appropriate market access to intellectual property owners. 

China is posed to become the second-largest trading nation in the 

world, and Russia is seeking to join the World Trade Organization. 

The U.S. and other countries that support the international 

rules-based trading regime must take steps to ensure that these 

and other countries which enjoy the benefits of free trade also exercise the responsibilities that that free trade requires. 

12

Since our hearings in 2005, the U.S. government has stepped up 

its dialogue with Congress and industry stakeholders and has 

sought to monitor and improve international respect for IPR. 

While today’s hearing topic is broader than the subject of Chinese and Russian IP theft, I do hope our witnesses will address 

several specific topics. 

These include offering their views on Russia’s implementation of 

their bilateral IPR agreement which was signed with the U.S. on 

November 19th, 2006, and the current situation with respect to the 

two complaints the U.S. filed against China at the World Trade Organization for IP violations. 

Before concluding, Mr. Chairman, I would like to take a moment 

to recognize the service of Victoria Espinel, to our left, the assistant U.S. trade representative for intellectual property and innovation, who is one of our four witnesses. 

I understand that she will be leaving government service soon. 

In May 2005, she served as the only common witness at our two 

back-to-back hearings on IP theft. 

She has brought an unparalleled dedication and commitment to 

her duties at USTR, and in doing so she has brought credit and 

credibility to our international efforts to improve respect for intellectual property rights. 

And we thank you for your efforts and appreciate your being 

here, perhaps to testify for the last time. 

Mr. Chairman, with that, I will yield back. 

[The prepared statement of Mr. Smith follows:]

13

PREPARED STATEMENT OF THE HONORABLE LAMAR SMITH, A REPRESENTATIVE IN

CONGRESS FROM THE STATE OF TEXAS, AND MEMBER, SUBCOMMITTEE ON COURTS, 

THE INTERNET, AND INTELLECTUAL PROPERTY


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Mr. BERMAN. Thank you, Mr. Smith. And in the interest of proceeding to our witnesses and—you know, we have a vote on, so I 

would ask other Members to submit their statements for the 

record. 

I would ask the Members to submit any opening statements by 

the close of business Wednesday. And without objection, all opening 

statements will be placed into the record. 

[The prepared statement of Mr. Conyers follows:]

20

PREPARED STATEMENT OF THE HONORABLE JOHN CONYERS, JR., A REPRESENTATIVE

IN CONGRESS FROM THE STATE OF MICHIGAN, CHAIRMAN, COMMITTEE ON THE JUDICIARY, AND MEMBER, SUBCOMMITTEE ON COURTS, THE INTERNET, AND INTELLECTUAL PROPERTY


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Mr. BERMAN. Without objection, the Chair will be authorized to 

declare a recess of the hearing at any point. And maybe we could 

have Ms. Espinel testify. 

So let me quickly introduce our witnesses and join with you, Mr. 

Smith, in acknowledging the fine work of our first witness. That 

will be Victoria Espinel. She is the Assistant USTR for Intellectual 

Property and Innovation. 

She is the Chief Policy Advisor to the United States Trade Representative and the administration on Intellectual Property and Innovation, and trade issues and the chief U.S. trade negotiator for 

intellectual property issues. 

She seems like the right person to have here for this subject. She 

oversees enforcement of the intellectual property protection required under International Trade rules, authors the annual Special 

301 Report of international Protection of Intellectual Property 

Rights, and was involved in creating the President’s multi-agency 

initiative to combat global counterfeiting and piracy, otherwise 

known as the STOP initiative. 

Welcome, and I will have you perhaps give your testimony, and 

then I will introduce the rest of the panel afterwards but still hope 

you could stick around. It is your last shot—and for questions after 

this. Thank you. 

TESTIMONY OF VICTORIA A. ESPINEL, ASSISTANT U.S. REPRESENTATIVE FOR INTELLECTUAL PROPERTY AND INNOVATION, OFFICE OF THE U.S. TRADE REPRESENTATIVE, WASHINGTON, DC 

Ms. ESPINEL. Thank you for inviting me to speak today about 

some of the work the U.S. government is doing to strengthen protections and enforcement of intellectual property rights around the 

world, including in China and Russia. 

It is a great privilege that I have had the opportunity to work 

with the leadership displayed in this Committee in protecting one 

of America’s greatest comparative advantages, our creative class. 

I would also like to commend your skilled and dedicated staff 

members for all of their efforts as well. As Mr. Smith mentioned, 

this was, in fact, the first Subcommittee that I testified in front of 

on this issue, and it will likely be the last, at least in my capacity 

as assistant USTR. 

So, I want to say what a true pleasure it has been to work with 

the Members of this Subcommittee and to work with your excellent 

staff. 

There are a number of challenges that we face in protecting 

American rights overseas, including weak laws, a lack of political 

will by some of our trading partners, and the increasing scope and 

sophistication of counterfeiters and pirates. 

We use and devote considerable resources to addressing these 

problems. The free trade agreements that we negotiate contain 

comprehensive chapters on intellectual property outlining our 

model for protecting intellectual property, a model that is the 

world’s gold standard. 

Our FTAs get results. We have consistently seen stronger laws 

and better enforcement of those laws from the FTAs that we conclude. 

25

Another tool is Special 301, which has been mentioned by the 

Chairman, the Ranking Member and Mr. Smith. This report has 

been successful in encouraging countries to institute reforms or to 

increase enforcement in order to avoid elevation on the list or to 

improve their standing on the list. 

Another serious challenge that we face comes from advancing 

technology and from the increasing scope and sophistication of 

counterfeiters, including dissemination over the Internet and highly organized distribution networks, some with links to organized 

crime. 

USTR is keenly aware that counterfeiting and piracy is a threat 

to the health and safety of our consumers and to our economy. In 

order to address this, we need to ensure that our own system is as 

strong as possible. 

We need a new international consensus on stronger rules for 

civil, criminal and border enforcement. And we need to increase 

global cooperation with our trading partners. 

With that broad overview of USTR’s approach to IP issues as a 

background, I would like to comment briefly on recent activities in 

China and in Russia. 

China is a top intellectual property enforcement concern for us. 

There is no question that China must do more to protect intellectual property rights. China is making some genuine efforts, but IP 

infringement remains at unacceptable levels. 

This year’s Special 301 Report described the United States’ plan 

to maintain China on the priority watch list and to continue Section 306 monitoring. 

In addition, we conducted an unprecedented special provincial review of IP enforcement in several key provinces and independent 

municipalities of China. 

Many of these provinces and municipalities are huge economies 

in their own right, and they attract significant U.S. investment. 

They are also on the front lines of the IP problems of many of our 

right holders. 

We reported the results of that review in this year’s 301 report, 

spotlighting weaknesses at the local level but also highlighting 

some positive efforts. 

In past years, we have used the Joint Commission on Commerce 

and Trade to make progress on IP issues such as China joining the 

WIPO Internet Treaties, which are critical to ensuring IP protection in the digital age, and new rules requiring that all computers 

be pre-installed with legal operating system software. 

Finally, in appropriate cases where bilateral dialogue has not resolved our concerns, we have taken the further step of filing cases 

at the WTO, using the WTO’s dispute settlement procedure. 

So far we have initiated two cases that relate to our intellectual 

property concerns. The first case involves deficiencies in China’s 

system for protecting and enforcing intellectual property. 

The second case challenges China’s rules which make it difficult 

for movies, publications and music, products of our copyright industry, to be imported and distributed inside of China. 

It is clear from these examples that we do not hesitate to file 

WTO cases when circumstances warrant that action. That said, we 

26

believe these cases are evidence of need for more bilateral cooperation with China, not less. 

The United States believes that continued dialogue and cooperation with China is essential to making further progress on intellectual property issues. 

With respect to Russia, the Administration has made it clear to 

Russia’s officials at the very highest levels that protection of intellectual property is a singular U.S. priority. 

In November 2006 we negotiated a bilateral intellectual property 

agreement between the United States and Russia, which includes 

important and specific commitments to strengthen IP protection 

and enforcement in Russia. 

This agreement sets the stage for further progress on IP issues 

in the ongoing multilateral negotiations at the WTO concerning 

Russia’s bid to enter the WTO. 

We are also conducting an out-of-cycle review of Russia under 

the Special 301. Russia has made progress in some areas—for example, taking steps to remove pirate optical disc plants off of government and military sites and cracking down on unlicensed optical disc plants. 

These were all specific commitments in our bilateral agreement 

with Russia. However, more remains to be done under our bilateral 

agreement. We will continue to press Russia to shut down and 

prosecute the operators of illegal Web sites operating in Russia, including the successors to the infamous AllOfMP3.com. 

Russia needs to pass legislation now pending in the Duma to 

strengthen customs authority. Russia needs to complete implementation of the WIPO Internet Treaties. And Russia needs to amend 

Part 4 of the civil code to bring it into compliance with the TRIPS 

agreement and other IP agreements. 

In closing, Mr. Chairman, I want to assure you in the strongest 

possible terms that the Administration shares the view, frequently 

and well-articulated by the Members of this Committee, that protection of U.S. intellectual property overseas is critical to America’s 

economic future. 

With that in mind, we look forward to continuing to work with 

you and your colleagues to improve protection and enforcement of 

intellectual property around the world. 

[The prepared statement of Ms. Espinel follows:]

PREPARED STATEMENT OF VICTORIA A. ESPINEL

Mr. Chairman, my name is Victoria A. Espinel, and I am the Assistant U.S. Trade 

Representative for Intellectual Property and Innovation. It is my pleasure to have 

this opportunity to speak to you today about some of the U.S. Government’s work 

to strengthen protection and enforcement of intellectual property rights (IPR) 

around the world, including in China and Russia. 

In order to better use our trade policy tools, the Office of the U.S. Trade Representative (USTR) created a new Intellectual Property and Innovation office in 

2006. I head that office. The office also includes a new Chief Negotiator for Intellectual Property Enforcement, Stanford McCoy, and five other IPR specialists. My office is tasked with using the full range of trade policy tools around the world to better protect American industry from piracy and counterfeiting around the world, and 

to ensure that protection remains effective as technology continues to develop and 

intellectual property (IP) infringers become more sophisticated. 

USTR uses a variety of tools to protect US intellectual property overseas, working 

in cooperation with other U.S. Government agencies, with our foreign trading partners, and with U.S. right holders. These tools include our free trade agreements, 

27

negotiations of Trade and Investment Framework Agreements (TIFAs), WTO accession negotiations, bilateral discussions of IP issues, the Special 301 process, U.S. 

preference programs, and dispute settlement. 

There are a variety of reasons that U.S. IP rights are violated overseas, including 

that: some governments have weak laws—that is, laws that are inadequate to deter 

piracy and counterfeiting, and some governments do not place a high priority on 

protection of IP. In addition, the scale and scope of piracy and counterfeiting has 

changed in the last decade, as we have seen the use of new means to produce and 

distribute infringing goods, such as the Internet, and the increasing sophistication 

and organization of pirates and counterfeiters on a global scale. 

WEAK LAWS

Many countries’ laws are inadequate to deter counterfeiting and piracy. The WTO 

Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) sets 

out certain minimum standards. However, even those countries that have implemented TRIPS may not make consistent use of those laws to deter IP theft. 

USTR devotes considerable resources to working with countries to strengthen 

their laws. One way we do this is through negotiations of free trade agreements 

(FTAs). Each of the FTAs we negotiate contains a comprehensive chapter on intellectual property. Our IP chapters provide the international standard for rules to 

protect copyright, trademarks and patents and other forms of intellectual property, 

in line with U.S. law. Our IP chapters also contain high standards for enforcement, 

including civil enforcement, criminal enforcement and border enforcement. After we 

negotiate an FTA, USTR works closely with our trading partners to ensure that the 

agreement is faithfully implemented. 

For example, as a result of the United States-Australia FTA, Australia has 

strengthened its laws to combat internet piracy and signal piracy. As a result of the 

United States-Singapore FTA, Singapore passed a law to criminalize end user piracy 

of software and then used that law to criminally prosecute software pirates for the 

first time. If the United-States Korea FTA is approved and goes into effect, Korea 

will be obligated to change its laws to provide greater authority to its police and 

customs authorities, to outlaw movie camcording, and to increase its focus on fighting book piracy. 

We also work with countries on IP issues through our Trade and Investment 

Framework Agreement (TIFA) discussions. While a TIFA does not have as detailed 

IPR provisions as an FTA, we have found the TIFA discussions to be a productive 

forum to discuss intellectual property issues. For instance, our TIFA dialogue helped 

persuade Taiwan to pass legislation to make peer-to-peer file sharing services illegal. Through our TIFA dialogue, we also encouraged Taiwan to clamp down on 

counterfeit pharmaceuticals, leading to police shutting down 40 drug counterfeiting 

operations; pass legislation to create specialized IP courts; and create a task force 

to combat copyright infringement on university campuses. 

WTO accession negotiations are another tool we have to strengthen laws. One outcome of the negotiations on Vietnam’s accession to the WTO is that Vietnam will 

provide protections against criminal copyright and trademark violations where no 

such protections previously existed. Furthermore, the government has committed to 

address the problem of government use of illegal software and to increase enforcement against signal piracy. We have also used WTO accession negotiations to address IP concerns in Russia, which I will discuss in more detail later. 

LACK OF PRIORITY

Another challenge that we face is that some governments do not place a high 

enough priority on protecting intellectual property. To address this problem, we use 

the Special 301 process to encourage specific trading partners to place a higher priority on addressing identified IP problems. Each April, USTR issues a Special 301 

Report cataloguing specific IPR problems in dozens of countries worldwide. A trading partner’s ranking in the report sends a message to the world, including potential 

investors, about its commitment to IPR protection. Special 301 also affords an opportunity to give credit where it is due, as in our decision to improve countries’ 

standing when there are significant improvements in IPR protection and enforcement. 

The Special 301 Report has been successful in encouraging countries to institute 

reforms or increase enforcement to avoid elevation on the list or to improve standing 

on the list. For example, Indonesia had been listed as a Priority Watch List country 

for a number of years and was interested in improving its standing. Our concerns 

about illegal OD factories in Indonesia helped persuade Indonesia to significantly 

increase enforcement actions, in particular against manufacturers and retailers of 

28

illegal optical discs. These continued and sustained actions, which demonstrated 

there was political will to do more on protecting IPR, caused Indonesia’s standing 

to be improved to Watch List. We are continuing to work with Indonesia to further 

improve IP protection on the basis of an Action Plan developed when we improved 

its standing on the Watch List. 

Last year we started a new program called the Special 301 Initiative intended to 

make the Special 301 process even more effective. Under the Special 301 Initiative 

we have focused attention on a group of countries where we believe there is a good 

possibility of progress through increased engagement. This has proved a success; we 

have in fact seen concrete results over the past year in terms of stronger legislation 

and better enforcement as result of the Special 301 Initiative. 

TECHNOLOGICAL CHANGES AND SOPHISTICATION OF COUNTERFEITERS

Another of our challenges comes from advancing technology and from the increasing scope and sophistication of the activities of pirates and counterfeiters. Counterfeit and pirated products are manufactured and then exported around the world 

using increasingly sophisticated and highly organized distribution networks, some 

with links to organized crime. The Internet, for example, is creating great economic 

opportunities and facilitating wide dissemination of information, but it is also a 

means to distribute vast quantities of pirated material around the world quickly and 

at very low cost. To give another example, product counterfeiting spans a remarkable array of products, not only luxury goods and apparel, but also pharmaceuticals, 

electronics, baby formula and auto parts, among many others. 

USTR is keenly aware that counterfeiting and piracy is an increasing threat to 

the health and safety of our consumers and to our economy. We need a strong international regime for IP protection; we need an international consensus of strong 

rules for civil, criminal and border enforcement; and we need to continue to increase 

global cooperation with our trading partners. 

Along with challenges, we have some new opportunities. One such opportunity is 

that other countries are increasingly aware of the harm that counterfeiting is causing to their domestic economies and consumers and are increasingly concerned that 

lack of IP protection will inhibit their ability to innovate. As governments like 

Brazil, China, and India pursue policies to become more innovative, they have a 

greater stake in the international IP system. A second opportunity is that other 

countries are becoming more interested in cooperating with the United States on 

protecting IP. There is a growing international realization that we need strong cooperation in order to stop the manufacture and trade in counterfeit and pirate 

goods. USTR has worked to capitalize on these opportunities to strengthen the 

international IP regime and to increase cooperation with our trading partners. 

With that broad overview of USTR’s approach to IPR issues as background, I 

would now like to comment briefly on recent activities in China and Russia, two 

countries that have been the topics of hearings before this subcommittee. 

CHINA

China is a top IPR enforcement concern for us. 

There is no question that China must do more to protect intellectual property 

rights. China is making some genuine efforts, but IPR infringements remain at unacceptable levels. 

Let me start with some of the recent efforts China has taken to improve IPR protection and enforcement. In July, as a result of the ongoing work of experts in the 

U.S.-China Joint Liaison Group for Law Enforcement, Chinese and FBI law enforcement successfully worked together in their largest joint IP investigation to date, Operation Summer Solstice. Among other things, this operation dismantled a major 

international criminal network engaged in optical disc piracy; seized half-a-billion 

dollars in pirated U.S. software and over $7 million in assets; arrested 25 suspects 

in China; and dismantled 6 manufacturing and retail facilities. China also agreed 

in May to cooperate with U.S. Customs and Border Protection (CBP) to fight exports 

of counterfeit and pirated goods. 

That said, we see evidence of unacceptable levels of IPR infringement most vividly 

in the numbers of infringing goods seized at U.S. borders. CBP mid-year statistics 

for 2007 showed that China was the source of 81 percent of infringing goods seized 

at U.S. borders. China’s high share of seized goods is not particular to the current 

year. 

USTR and the Administration as a whole continue to respond to this critical concern by making innovative use of our full range of trade policy tools. First, USTR 

has augmented our focus on the unique challenges of China with the appointment 

29

last year of a Chief Counsel for China Trade Enforcement, Claire Reade, who leads 

our China Enforcement Task Force. 

Second, this year’s Special 301 Report described the United States’ plan to maintain China on the Priority Watch List and to continue Section 306 monitoring. In 

addition, we conducted an unprecedented special provincial review of progress on 

IPR issues in several key provinces and independent municipalities of China. Many 

of these provinces and municipalities are huge economies in their own right, and 

they attract significant U.S. investment. They are also on the front lines of IPR 

problems for some U.S. right holders. We reported the results of that review at the 

end of the 2007 Special 301 report, spotlighting weaknesses at local levels, but also 

highlighting positive efforts, innovative initiatives for fighting Internet piracy in 

Beijing, pilot programs on enforcement in Shanghai, and deeper engagement with 

international right holders in Jiangsu province. 

In past years, we have used the Joint Commission on Commerce and Trade 

(JCCT), which Ambassador Schwab jointly chairs with Secretary Gutierrez, to get 

results on IPR. For example, as a result of past JCCT commitments:

• China introduced rules that require computers to be pre-installed with licensed operating system software;

• China agreed to step up work to combat counterfeit goods at trade fairs and 

consumer markets; and

• China joined the WIPO Internet Treaties, which are critical to ensuring IP 

protection in the digital age.

As I mentioned earlier, we have also used our Special 301 process—USTR’s annual report card on international IP protection—to highlight China as a top IPR enforcement priority. Our analysis of China is the most in-depth and detailed of any 

country covered in the Special 301 Report. 

Finally, in appropriate cases, where bilateral dialogue has not resolved our concerns, we have taken the further step of filing World Trade Organization (WTO) dispute settlement cases. So far we have initiated two cases that relate to our IPR concerns. 

The first of these cases involves deficiencies in China’s legal regime for protecting 

and enforcing copyrights and trademarks on a wide range of products. Specifically, 

our panel request focused on three main issues: quantitative thresholds in China’s 

law that must be met in order to start criminal prosecutions of copyright piracy and 

trademark counterfeiting and that appear to create a substantial safe harbor for 

those who manufacture, distribute, or sell pirated and counterfeit products in China; 

rules for disposal of IPR infringing goods seized by China’s customs authorities; and 

the apparent denial of copyright protection to works poised to enter the Chinese 

market but awaiting censorship approval from China’s authorities. The WTO panel 

in this case was formally established at a meeting of the WTO Dispute Settlement 

Body on September 25. 

Our second WTO case challenges China’s barriers to trade in books, music, videos 

and movies. Our panel request focuses on a legal structure in China that denies foreign companies the right to import publications, movies, music, and videos, as well 

as on China’s rules that severely impede the efficient and effective distribution of 

publications and videos within China. In addition, this panel request addresses market access barriers affecting the distribution of movies, as well as the distribution 

of sound recordings over the internet and the mobile phone network. 

It is clear from these examples that we do not hesitate to file WTO cases when 

circumstances warrant that action. At the same time, these cases are evidence of 

the need for more, not less, bilateral engagement with China. The United States believes that continued bilateral dialogue and cooperation can lead to further progress 

in these and other areas. The United States will continue to put serious efforts into 

its joint work with China on innovation policy, intellectual property protection strategies, and the range of other important matters in our bilateral economic relationship through the U.S.—China Strategic Economic Dialogue and the JCCT. 

Moving ahead with that work will of course require a willingness to cooperate on 

the Chinese side. We have seen that in some areas, such as the recent law enforcement actions I mentioned earlier, and we hope to see it in other areas as well. 

RUSSIA

With respect to Russia, the Administration has made it clear to Russia’s officials 

at the highest levels that the protection of IPR in Russia is a U.S. priority. As we 

have moved into the multilateral phase of the negotiations on Russia’s accession to 

the WTO, we have continued to reinforce the importance that both the AdministraVerDate 0ct 09 2002 15:02 Apr 10, 2008 Jkt 000000 PO 00000 Frm 00033 Fmt 6633 Sfmt 6621 H:\WORK\COURTS\101807\38337.000 HJUD1 PsN: 38337
30

tion and Congress place on full implementation of all the commitments in our November 2006 Bilateral IPR Agreement. 

The 2007 Special 301 Report describes the Bilateral IPR Agreement between the 

United States and Russia, concluded in November 2006, which includes important 

commitments to strengthen IPR protection and enforcement in Russia. Under the 

terms of the agreement, Russia committed to take action to address piracy and 

counterfeiting and further improve its laws on IPR protection and enforcement. The 

agreement sets the stage for further progress on IPR issues in ongoing multilateral 

negotiations concerning Russia’s bid to enter the WTO. This year’s Special 301 Report continued heightened scrutiny of Russia by maintaining Russia on the Priority 

Watch List and announcing plans for an Out-of-Cycle Review. 

In August, we received comments from the public, including from U.S. industry 

and the Russian Federation, as part of the Out-of-Cycle Review of Russia’s protection of intellectual property. A major purpose of that review is to scrutinize Russia’s 

implementation of the Bilateral IPR Agreement. That review is ongoing. 

In the meantime, we continue to work intensively with our Russian counterparts 

to achieve progress on the outstanding bilateral and multilateral issues related to 

Russia’s WTO accession, including implementation of TRIPS. 

Russia has made clear progress in some areas. For example, they are taking steps 

to move optical disc plants off of restricted military-industrial sites, cracking down 

on unlicensed optical disc manufacturers, passing laws to curb abuses by rogue 

copyright collecting societies, and issuing helpful new guidance for the prosecution 

of criminal IPR cases. These were all specific commitments in our bilateral agreement. 

However, more remains to be done pursuant to our bilateral agreement. For example, we will continue to press Russia to shut down and prosecute the operators 

of illegal websites operating in Russia, including the successors to the infamous 

allofmp3.com. Russia needs to strengthen its supervision of licensed optical disc 

plants, including better laws and regulations and more enforcement. Russia still 

needs to make legislative changes to implement its TRIPS requirements to protect 

pharmaceutical test data. It must pass legislation now pending in the Duma to 

strengthen Customs’ authority to take actions ex officio with respect to suspected 

exports and imports of pirated or counterfeit goods. Russia needs to complete implementation of the WIPO Internet Treaties, and it must amend Part IV of its Civil 

Code to ensure full compliance with TRIPS and other IPR agreements. Some of 

these actions are overdue—a concern that we raised with our Russian colleagues at 

our bilateral Intellectual Property working Group in Moscow on September 24 and 

25 and during other recent meetings with the Russian Federation in Geneva and 

Washington. We have been assured that the process of compliance is moving ahead. 

In closing, Mr. Chairman, I want to assure you in the strongest possible terms 

that the Administration shares the view, so frequently and well articulated by the 

distinguished members of this subcommittee, that protection of U.S. intellectual 

property overseas is critical to America’s economic future. With that in mind, we 

look forward to continuing to work with you and your colleagues to improve protection and enforcement of IPR around the world.

Mr. BERMAN. Well, thank you very much, Ms. Espinel. 

And I think at this point I will recess the hearing. I believe it 

is one vote, so we will be right back and introduce the rest of the 

witnesses, hear their testimony and then questions. 

Thank you. 

[Recess.] 

Mr. BERMAN. Let me introduce the rest of the panel and reconvene the meeting. The next witness will be Eric Smith, who represents the International Intellectual Property Alliance. 

The IIPA is a private-sector coalition of seven copyright-based 

trade associations which represent over 1,900 companies in the 

movie, music, business software, and video game publishing industries. 

Since co-founding the IIPA in 1984, Mr. Smith has represented 

the IIPA before U.S. and foreign governments with the primary objective of opening foreign markets to U.S. copyrighted products and 

31

reducing piracy levels through improved legal protection and effective enforcement. 

He was the principal representative of the copyright industries 

in the WTO’s TRIPS and NAFTA intellectual property negotiations, 

and served on the U.S. delegation at the diplomatic conference 

leading to the adoption of the WIPO Copyright Treaty and Performances and Phonograms Treaty in 1996. 

I would just add that I had the pleasure of spending a couple of 

days with him at a conference on these subjects this past summer, 

and both enjoyed it and found him incredibly knowledgeable on 

this whole subject. 

Dr. Loren Yager is Director of International Affairs and Trade of 

the U.S. Government Accountability Office. 

Dr. Yager has managed GAO efforts to document U.S. efforts to 

enforce intellectual property rights at home and abroad, the Federal approach and strategy for improving intellectual property 

rights enforcement, and small business efforts to obtain patent protection. 

Additionally, Dr. Yager has completed reports and provided congressional testimony on a wide range of topics, including China import remedies, customs and border protection’s in-bond system, offshoring of U.S. services, terrorist financing, global corporate responsibility, illegal textile transshipment and the World Trade Organization, China’s WTO compliance, the maquiladora industry, 

container security, and a variety of other subjects. 

Lastly, Mark MacCarthy is Senior Vice President of Global Public Policy at Visa. He represents Visa before international public 

policy makers around the world and in the United States before the 

Congress, the Administration, the Federal Trade Commission, the 

banking regulators and other regulatory agencies. 

Mr. MacCarthy is responsible for Visa’s global public policy initiatives and strategies in the area of data security and privacy, 

electronic commerce issues such as Internet gambling and Internet 

pharmacies, and product innovation such as Visa’s contactless payment platform and prepaid cards. 

If I recall correctly, he also worked in this place for a good period 

of time. 

Gentlemen, all your written statements will be part of the record 

in its entirety. I would ask you to summarize your testimony in 5 

minutes or less. 

There is a timing light at your table that supposedly works now, 

and when 1 minute remains, the light will switch from green to 

yellow, and then to red when the 5 minutes are up. 

I am tempted to let Mr. Coble add his admonition about what 

that light means, but I’m not doing that. Mr. Smith, why don’t you 

begin? 

TESTIMONY OF ERIC H. SMITH, PRESIDENT, INTERNATIONAL 

INTELLECTUAL PROPERTY ALLIANCE (IIPA), WASHINGTON, 

DC 

Mr. SMITH. Chairman Berman, Ranking Member Coble, Members of the Subcommittee, it is an honor and pleasure to appear before the Subcommittee for the third time on this topic, twice in 

2005, to again provide an update on global copyright piracy. 

32

Piracy continues to rage around the world and is a threat to U.S. 

growth and U.S. jobs. While the situation is slowly improving each 

year on the physical piracy front, with some individual country exceptions, Internet piracy is now truly a global problem with U.S. 

content fueling that piracy in most countries. 

Increasingly, we all must focus on online piracy as a threat to 

e-commerce and to U.S. leadership in producing and globally distributing high-value content. 

The U.S. maintains a huge comparative advantage, as was said 

by Mr. Coble, in the production and distribution of creative works, 

filmed entertainment, music and recordings, business and entertainment software, and books and journals that make up the IIPA 

family. 

And for most of these industries, 50 percent of their revenues derive from outside the U.S. 

This comparative advantage has meant that these creative industries now account for an ever-increasing portion of the GDP, about 

$819 billion in 2005, or close to 7 percent of the U.S. GDP; over 

five million jobs, which is about 4 percent of total employment; and 

$110 billion in foreign trade revenues, making it one of the largest 

contributors to trade in our economy. 

Perhaps most important is that these industries accounted for 

over 13 percent of the growth in the economy in 2006. Global piracy threatens that growth path. We have been wiretapping what 

Internet piracy has done to our recording industry and threatens 

to do to others as well. 

A study came out this month that for the first time was able to 

quantify the impact of global piracy on the U.S. economy, $58 billion in losses, lost jobs, lost tax revenues, lost waves. 

The study concluded that all these numbers were conservative. 

In my written statement, I detailed IIPA members’ initiatives and 

challenges in dealing with this problem, and I won’t repeat them 

here. 

But Mr. Coble was quite right. On the enforcement side there 

just aren’t any quick fixes. 

Suffice it to say that the copyright industries depend critically on 

good laws and enforcement and that governments are central to 

making that happen. 

Our government has led the way and without the help of USTR 

and other agencies and from Congress for providing the trade tools 

to assist in awakening our trading partners to the need to protect 

our intellectual property, including for the benefit of their own citizens and creators, we would be in truly dire straits. 

We have witnesses many successes in the last 20 years, driven 

in part by good work from our government. 

I do want to report on the two countries that have provided the 

greatest challenges for us, China and Russia. The situation in 

China since we last reported to you at the end of 2005 is mixed. 

IIPA members, with the exception of the business software industry, have not seen much progress at all, mostly at the margins. 

Losses continue at very high levels, hovering between 80 percent 

and 90 percent of the market, making it almost impossible to do 

business there. 

33

The biggest problem, again, as before, is China’s stubborn reliance on a flawed administrative enforcement system that simply 

lacks any incentive for pirates to leave this lucrative business, and 

China’s almost total failure, really, to employ criminal remedies, 

which has been the only way we have been able to reduce piracy 

levels in the rest of the world. 

The business software industry, through China’s meeting some 

key JCCT commitments with respect to legalizing software use in 

the industry’s biggest customer, the Chinese government, has seen 

a 10 percent decrease in piracy rates and a resulting 88 percent increase in sales since our last report to you in 2005. 

And I can guarantee you the rest of my members would love to 

see that kind of progress, too. 

Internet piracy is our most urgent concern. The biggest ISP 

search service in China, Baidu, which was mentioned, is reportedly 

responsible for 50 percent of illegal downloads. 

We think the Chinese government is also very concerned about 

Internet piracy, has passed good regulations dealing with the protection of content online, but, again, enforcement is weak and 

criminal enforcement is spotty at best. 

Overall, we have only counted six concluded criminal cases involving U.S. works since 2001, when China joined the WTO, a 

record that must change if China is ever to reduce its high piracy 

levels and make a real market for copyrighted material. 

And China is a closed market in terms of market access for our 

cultural industries, another problem that prevents them from selling in the Chinese market. 

The pirates, of course, enjoy complete market access for our products, and through this theft enjoy the economic benefits that should 

come to our own citizens. 

Russia remains a continuing frustration. The November 2006 

IPR agreement, Russia’s pathway to WTO accession, we hope and 

continue to hope will be complied with. And if so, we will see a 

much better market there. 

Russia has made some progress, as Victoria has outlined, but 

even here we await the true fruits of that progress. For example, 

while Russia promised to cancel leases for the pirate O.D. factories 

housed on protected government reservations, that process is still 

in process. 

No direct results yet. No plant owner has been convicted, and 

very few criminal cases with deterrent penalties can be counted. 

We await real progress, and meanwhile IIPA’s year 2000 GSP 

petition remains in limbo with Russia still receiving over $500 million in unilateral benefits in 2006, with our industries, in turn, suffering close to $2 billion in losses. 

Mr. Chairman, it is there in our testimony, in our written testimony, it is there for all to evaluate how serious Russia is in working to solve its massive piracy problems. 

If I might, Mr. Chairman, one word about Canada. 

Mr. BERMAN. One sentence. 

Mr. SMITH. The situation there is not good. The law is antiquated 

and unequipped to deal with online piracy, which is growing. Enforcement is not a high priority there. We definitely need improvements in Canada. Thank you. 

34

[The prepared statement of Mr. Smith follows:]

PREPARED STATEMENT OF ERIC H. SMITH


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Mr. BERMAN. Thank you very much. 

Dr. Yager? 

TESTIMONY OF LOREN YAGER, DIRECTOR OF INTERNATIONAL AFFAIRS AND TRADE, U.S. GENERAL ACCOUNTABILITY OFFICE (GAO), WASHINGTON, DC 

Mr. YAGER. Good morning, Mr. Chairman, Members of the Subcommittee. I am pleased to be here today to report on our work on 

intellectual property protection before the Subcommittee of the 

U.S. Congress that has identified this topic as one of its primary 

areas of focus. 

Prior hearings of this Subcommittee have focused on the patent 

reform act, trying to create the right formula for stimulating creative and inventive activity in the United States. 

Ultimately, once the patents or other protections have been 

granted, it will only be meaningful if there is protection of IP in 

the United States as well as in other countries. 

Today I will discuss the increasing challenges to IP protection as 

advances in technology and changes in global manufacturing make 

counterfeiting and piracy an ever greater threat. 

As requested, I will summarize the work the GAO has performed 

on two subjects, first the nature of the risk that U.S. corporations 

face in protecting IP, and second, U.S. methods for implementing 

and coordinating United States’ intellectual property enforcement 

activities. 

My remarks are based on a variety of assignments the GAO has 

conducted for the Congress related to IP protection over the past 

5 years. 

The first major subject I would like to cover in this statement is 

that the risk to IP is increasing for U.S. firms, for a number of reasons. 

For example, as the technological and manufacturing capability 

in Asia increases in industries such as the semiconductor industry, 

more complex parts of the production process are being carried out 

in countries like China, which puts more U.S. technology at risk. 

A second reason is that high profits and technological advances 

have also raised the risk of IP infringements by encouraging and 

facilitating counterfeiting and piracy. 

Economic incentives for counterfeiting and piracy include low 

barriers to entry and high profits, given that there is no repayment 

of the research and development or other reward for the inventive 

activity. 

In addition, technology has allowed high-quality, inexpensive and 

accessible reproduction and distribution, particularly in the digital 

industries. 

At the same time, the level of deterrence has not kept pace with 

the level of profitability. For example, there has been weak enforcement in some countries, and China is a country where the combination of production capability as well as export capacity is 

unique. 

However, there are many other countries where enforcement 

challenges have persisted despite U.S. efforts. 

The second subject I want to cover is the U.S. domestic efforts 

to protect intellectual property can also be improved. 

51

The United States faces significant obstacles to coordinating domestic efforts and ensuring that strong intellectual property protection remains a priority. 

One of the biggest obstacles is the crosscutting nature of the 

issue and the necessity for coordination between the large number 

of agencies involved in IP protection. 

In my written statement, I have included a figure showing the 

different agencies and sub-agencies involved in IP protection, and 

the figure includes policy agencies such as USTR, enforcement 

agencies such as the FBI, as well as technical offices such as the 

copyright office. 

We took a close look at the IP coordination structure in the 

United States and found that it lacks permanence as well as some 

other features that are central to the success of this type of effort. 

We also reported on the efforts of customs and border protection 

to interdict counterfeit goods at the U.S. border and found that the 

bulk of customs enforcement outcomes in recent years have been 

accomplished within certain modes of transport, product types, and 

have been restricted to a very limited number of ports. 

For example, only 10 of the 300-plus ports are responsible for 

three-fourths of the seizure value, but yet these were not necessarily the largest ports in terms of import volume. 

We made a series of recommendations to customs that we believe 

will help them better focus their IP inspection activities. 

In conclusion, Mr. Chairman, having the right formulas for creating intellectual property is of limited value unless there is sufficient protection for the works that are created, and this hearing directly addresses that issue. 

There is little disagreement, at least domestically, with the need 

to strengthen protection, but the difficulty is in how to best achieve 

that goal in the face of the strong economic incentives for counterfeiting and the limited resources available to protect it. 

While there are many elements of a successful national strategy, 

continuity is central to success, whether that is in the efforts to encourage trading partners such as China, the domestic efforts of 

U.S. agencies, or in the oversight by Congress. 

We appreciate the opportunity to discuss some of our findings before this Subcommittee and would be happy to help consult further 

to help achieve the long-term goals. 

Thank you, Mr. Chairman. I would be happy to answer any questions. 

[The prepared statement of Mr. Yager follows:]

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PREPARED STATEMENT OF LOREN YAGER


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Mr. BERMAN. Thank you, Dr. Yager. 

And, Mr. MacCarthy? 

TESTIMONY OF MARK MacCARTHY, SENIOR VICE PRESIDENT 

FOR GLOBAL PUBLIC POLICY, VISA INCORPORATED, WASHINGTON, DC 

Mr. MACCARTHY. Thank you, Mr. Chairman, and Ranking Member Coble and Members of the Subcommittee. Thank you for the 

opportunity to testify before you today. Visa operates a global electronic payments network in more than 170 countries around the 

world. 

We do not issues Visa cards and we do not arrange for acceptance of Visa cards by merchants. These relationships are handled 

by our network of 16,000 financial institutions throughout the 

world. 

To protect the Visa brand, to promote electronic commerce and 

because it is the right thing to do—and thank you, Mr. Chairman, 

for that quotation there—Visa goes beyond any legal requirements 

to prevent the use of our payment system for illegal electronic commerce transactions. 

Our policy is clear and unambiguous. Our systems should not be 

used for illegal transactions. 

We work cooperatively with law enforcement around the world, 

and we take special steps in cases of criminal activity and activity 

that threatens health and safety. 

For example, we search the Internet for merchants selling child 

pornography or illegally distributing controlled substances, and we 

expel them from our system as soon as they are discovered. 

The subject of today’s hearing is different. It relates to complaints by third-party business entities that Internet merchants are 

violating their intellectual property rights. 

Now, Visa can’t be the law enforcement agency for violations of 

intellectual property rights on the Internet. Still, we have policies 

and procedures in place to handle these third-party complaints. 

Our global policy is this: If a transaction would be illegal in either the jurisdiction of the merchant or the jurisdiction of the cardholder, we don’t want that transaction. 

The AllOfMP3.com and allTunes.com case illustrates how this 

policy works. In that case, Visa officials received a documented 

complaint from IFPI, which represents copyright owners internationally. 

They asserted that AllOfMP3.com, a music download site located 

in Russia, was infringing on the copyrights of their members. We 

conducted a legal assessment, including a review by outside counsel, and concluded that under Russian law and under the law of 

the vast majority of the customers of AllOfMP3.com, the merchant’s transactions were illegal. 

After appropriate notice, the Russian bank working with the site 

stopped processing its Visa transactions. This was in September of 

2006. At the end of September 2006, the bank also stopped processing transactions from an affiliated download music site called 

allTunes. 

And then the owner of allTunes sued the bank in a Russian 

court. Visa was a party to that litigation on the side of the bank. 

72

And in June 2007, the owner won a judgment that the bank had 

violated its contract with the merchant, and the bank would be required to provide processing services. 

In response to the bank’s claim that the merchant was acting illegally, the court determined that there were no rulings in Russia 

establishing that allTunes was making illegal use of exclusive 

rights belonging to some rights holder. 

Later on, in August of 2007, in a different case, a Russian court 

issued a ruling relating to a criminal copyright infringement case 

initiated by IFPI against the owner of AllOfMP3.com. This ruling 

stated that there and not been sufficient confirmation of any illegal 

activity by the site’s owner. 

The court implied that this and similar sites would be in compliance with Russian law to the extent that they paid for rights from 

a Russian collective rights society. 

These court cases created a challenge for us. To preserve our 

cross-border policy, we decided to allow the local bank to provide 

only domestic service to the site involved in the court case, but 

transactions from customers in other countries would not be allowed. 

Now, what lessons can we learn from this case? First, Visa has 

policies and procedures in place to handle these kind of issues. Second, private-sector enforcement in this area is limited. Visa can 

only make decisions where the underlying law is reasonably clear. 

In this circumstance, the local law appeared reasonably clear to 

us, to our local bank and to the record companies. But a local court 

thought otherwise. 

As a result, Visa’s client bank was exposed to legal liability for 

withdrawing service to a merchant that was found to be operating 

legally under local law. 

We are simply not in a position to clarify local law, to override 

it, or to resolve conflicts between different legal systems. 

There are clearly system limitations on our ability to block illegal 

transactions when the laws of many countries conflict. Potentially 

we would have to deal with conflicting regimes in the 170 countries 

around the world where we operate. 

And this leads to my third and final point. When local laws are 

not clear, governments and aggrieved businesses cannot put private-sector intermediaries like Visa in the position of resolving the 

issues. 

Ultimately, this will require government-to-government discussions that harmonize local legal structures. 

Thank you again for the opportunity to testify today, and I am 

happy to answer any questions you might have. 

[The prepared statement of Mr. MacCarthy follows:]

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PREPARED STATEMENT OF MARK MACCARTHY


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Mr. BERMAN. Well, thank you all. 

And I am going to wait till the end of Member questioning to ask 

my questions and will recognize now, for 5 minutes, the Ranking 

Member of the Subcommittee, Mr. Coble. 

Mr. COBLE. Mr. Chairman, I thank you for that. 

For the information of the witnesses, some weeks ago in my district a church had a fundraiser, and the high bidders, Mr. Chairman, were assured that they would be my guests for lunch. 

So if I don’t appear in the Members’ room on or about 11:30, they 

are not going to be happy with me. I have got to pick up the tab. 

Thank you, Mr. Chairman. 

Ms. Espinel, given that China is the fourth-largest economy in 

the world, and——

Mr. BERMAN. Is this an online program? 

Mr. COBLE. No. No. [Laughter.] 

He always disarms me, but with a smile on his face. 

Given that China is the fourth-largest economy in the world and 

poised to become the second-largest training nation in the world, 

why should it be considered a developing nation? 

And let me ask you this, Ms. Espinel. Are there any economic or 

trade benefits that extend to China based on this designation? 

Ms. ESPINEL. Well, certainly, with respect to the area that I 

cover, intellectual property, we do not believe that China’s status 

as a developing country—and I am not conceding that China is a 

developing country or has any particular status. 

But if China asserts that it is, we don’t believe that that should 

serve as any excuse for China not to strengthen its intellectual 

property system and adequately protect American interests consistent with the obligations and commitments that it has under the 

WTO. 

Mr. COBLE. And I wanted to ask Mr. Smith a question, but I 

want to put one more question to Ms. Espinel. 

Your statement referred generally to some of the commitments 

contained in the bilateral IPR agreement, but it did not make clear 

which, if any, of the specific actions that the Russian government 

was obligated to complete by June 1st of this year have been satisfactorily performed. 

If you will, Ms. Espinel, can you identify which commitments 

were required to be performed by 1 June and the USTR’s current 

assessment of Russia’s performance on each? 

Ms. ESPINEL. I would be happy to. There are two categories of 

commitments. Some were required to be in place by June 1st. 

Some, particularly as related to enforcement, are commitments 

that Russia signed up to start acting on immediately and commitments that we think should continue after their WTO membership 

is complete, should we come to that point. 

Two that I want to highlight in particular—one of the commitments that Russia made in the bilateral agreement was to shut 

down or to terminate the leases of illegal optical disc plants that 

are operating on government sites, what are referred to as restricted access sites. 

And Russia has made progress in this are. I believe there are 17 

such plants. Russia has terminated the leases—or by the end of 

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this year, Russia should have terminated the leases on 16 of those 

17 plants. 

And I can assure you we won’t forget about the one that is remaining. But that is significant progress on an issue that has been 

a point of contention between the U.S. and Russia for some time. 

Russia has also stepped up enforcement against illegal, unlicensed optical disc plants. They have conducted seven raids of unlicensed plants this year. They have conducted 17 raids of warehouses where illegal product is stashed. So that is progress. 

However, there are a number of areas where Russia still needs 

to make considerable progress, and we will continue to push them 

on that. 

And a few of those areas are—for example, there is customs legislation that they committed to pass that has not yet gone into 

force. It is now pending in the Duma. 

But Russia needs to pass that customs legislation to give their 

customs authorities more authority to take action at the border. 

Russia needs to take action against illegal pirate Web sites—the 

successors to the AllOfMP3, which have been mentioned by some 

of my fellow panelists. 

Russia needs to make amendments to its civil code to bring it 

into compliance with the TRIPS agreement. Russia needs to complete its accession to the WIPO Internet Treaties to protect copyright in the digital age. 

So again, while Russia has made some progress in some areas, 

there are still a number of areas where Russia needs to make further progress in order to be in compliance with the agreement that 

we have negotiated. 

Mr. COBLE. I thank you. 

Mr. Smith, for some time the IIPA members call upon the United 

States government to utilize the WTO dispute settlement mechanism to press our concerns regarding China. 

Now that we have done so, what do you consider to be the next 

most important steps that the USG can take to improve conditions 

for IP owners in China? 

Mr. SMITH. Well, I think that case has to proceed apace. It is an 

important case, and I think Ms. Espinel can probably give you the 

details. IIPA is not directly involved in that case. It is a subgroup 

of our group called the China Copyright Alliance. 

But I think that case has to proceed, and I think the people who 

are involved in that case feel very certain that that case will go 

well. 

And I think the key is going to be, if that is true, the implementation phase of that case when it is completed to try to leverage 

additional improvements beyond those—the actual panel decision 

on the narrow facts of the particular claims that are being brought. 

Mr. COBLE. I thank you for that. 

Mr. Chairman, I know my red light is on, but if I may make one 

more statement, Mr. Chairman. 

The international trading system, lady and gentlemen, is rulesbased. And respect for those rules demands that there be serious 

consequences for countries which have voluntarily agreed to abide 

by the rules of the road but yet choose to consistently and continually fail to honor their commitments. 

85

And I think that is one of the impediments, Mr. Chairman, that 

we must encounter successfully. 

Thank you. 

And thank you, Mr. Chairman. 

Mr. BERMAN. Thank you, Mr. Coble. I couldn’t agree with you 

more. Of course, one of the questions I plan to ask later to Ms. 

Espinel is what about the situation where we don’t comply with 

this rules-based system, but we will save that for later. 

The gentleman from North Carolina, Mr. Watt, is recognized for 

5 minutes. 

Mr. WATT. Thank you, Mr. Chairman. 

I want to first applaud the Chair for convening this important 

hearing. I am new to this Subcommittee. 

There probably hadn’t been a more consistent theme for a set of 

involvements that I have had in international travel since I have 

been in Congress than this one issue. 

I don’t think I have ever been to a foreign country on a congressional delegation trip, on an informal trip, on anybody’s dime 

where there hadn’t been an aggressive discussion of how we attack 

the piracy and theft of intellectual property and its products. 

And I guess if I had made an opening statement, it would have 

paralleled Ms. Espinel’s that we started off thinking that in most 

countries it was primarily a question of weak laws or no laws. 

We progressed beyond that to a recognition that having a set of 

laws on the books, without some effective enforcement mechanism 

and policing and sanctioning process, wasn’t very helpful. 

And the third point she made was that despite all of those efforts, after 15 years in Congress, the explosion of international 

trade and the opportunities for people to engage in piracy and intellectual property theft have gotten bigger, and bigger, and bigger 

and bigger. 

So one walks away from a hearing of this kind with a sense of 

frustration, a much, much better understanding of a description of 

the problem, which all of the witnesses were very well equipped to 

describe. 

What seems always lacking at the end of these kinds of hearings 

is not a lack of understanding about what the problem is but what 

can we do more aggressively to try to solve the problem. 

And so let me start with Mr. Yager and Mr. MacCarthy. First of 

all, maybe I will start with Mr. MacCarthy, just to see whether 

other facilitators of the economic transactions—credit card issuers, 

banks that facilitate the transfer of money and facilitate commerce 

in the regular course of events—aside from the off market itself. 

I am not much on using the term black market for reasons that 

some people might understand better than others. 

But what is the general attitude of facilitators of financial transactions? Are they consistent with the ones that you have expressed 

here? Are they being aggressively engaged? And what more can 

they do to help us with this problem? 

Mr. MACCARTHY. I can’t speak in detail for all of the financial 

service providers in this area, but in general they have policies and 

procedures that are similar to the ones that I described, which is 

they have in place a process for evaluating complaints that come 

to them, investigating them and then taking appropriate action. 

86

Even if the systems—the traditional systems that are involved in 

electronic commerce could stamp out these kind of transactions 

within their systems—and for reasons I mentioned in my testimony, it seems unlikely that they will be successful in doing that 

completely. 

But even if they could, there are alternative payment mechanisms out there that are ready to move into the gap and to provide 

payment services when the traditional payment providers are successful in driving the illegal activity out of their circumstance. 

We have seen that already in the context of child pornography, 

where there is a coalition against child pornography that the financial institutions have organized, and we are working cooperatively 

together with the National Center for Missing and Exploited Children. 

And what we found is that the success that we have had in driving those kind of transactions out of our system has been mirrored 

by the use of alternative payment mechanisms for those transactions. Various kinds of e-cash or digital cash are stepping in to 

be the transaction processor of choice. 

Similar things are happening in Internet gambling. As we are 

using our coding and blocking mechanism to reduce the use of regular payment cards for Internet gambling transactions, those merchants are turning to the automated clearinghouse and using that 

as the mechanism for completing the transactions. 

And that mechanism is not, you know, a kind of underground operation. That is the same mechanism that many people use to get 

their payment from employment. It is the same mechanism that 

people use for many recurrent payments, for their mortgages or 

utilities or their rental payments. 

But it is a harder system to control. There is less ability to know 

exactly who is doing what on that system. And it is the kind of system that can be used as an alternative mechanism when the traditional payment mechanisms have done what they can to drive the 

illegal transactions out of them. 

Mr. WATT. You may be depressing everybody in the room if I 

allow you to go further. 

My time has expired. 

Mr. Yager, and you don’t have to answer this now, if the GAO 

has done some specific set of recommendations about how we may 

approach solutions—I mean, I understand the problem. There is a 

great description of the problem that you have outlined in your testimony. 

But if there are a set of solutions that you all—came up in the 

process of doing the GAO study, I would welcome——

Mr. YAGER. Let me just answer that very briefly. We have done 

a lot of work. Obviously, Ms. Espinel has covered what happens 

abroad. 

Some of the work that we have done has to do with what can 

be done in the United States to raise the level of deterrent, because 

that is really what we are talking about, trying to create a bigger 

deterrent for the operations. 

So a couple of the very specific studies we did had to do with the 

customs and border protection that operates at our borders when 

the goods are coming across. 

87

One of the keys there is that there has to be a greater extent and 

a greater level of seizure activity, because we found in looking at 

their seizure efforts that they were highly concentrated in certain 

specific ports, and some of the major ports are not getting much 

seizure activity. 

And there isn’t awareness by the management of this problem to 

try to learn how it is that some ports are doing so much better 

than others. What can they learn internally to make sure that that 

kind of skill exists at all ports? 

The second recommendation and the second issue that we 

brought up in our report is that in some cases there are penalties 

assessed against seized goods, but one of the things that we found 

is less than 1 percent of those penalties are currently being collected. 

Penalties without payment are not an effective deterrent, so 

there has to be greater attention to not just levying the fines but 

collecting the fines from those that are abusing the laws. 

So I think that also means at some point a greater threat of prosecution in the United States. So I think that the deterrent level 

needs to be raised. 

Certainly, a lot can be done abroad, but there are also things 

that can be done domestically, and we have some very specific suggestions as to how that could be done. 

Mr. WATT. And I know my time is over, but it seems to me that 

there is a parallel effort going on here to intercept the prospect of 

terrorism before it gets to the borders that you are talking about. 

Mr. YAGER. That is right. 

Mr. WATT. Is anybody looking at the—I mean, we tend to look 

at this stuff in silos. 

I would like the benefit, at some point—not right now—of knowing whether anybody is even talking to each other across those 

silos to try to figure out some common steps that we could be making on the intellectual property front while we are making steps on 

the terrorism, counterterrorism front. 

Mr. Chairman, I am way over my time, and I will yield back. 

Mr. BERMAN. Perhaps a hearing on whether we should take the 

military option off the table—well, never—no. [Laughter.] 

Just based on order of appearance, I am going to recognize our 

newest Member of the Subcommittee, from Ohio, Ms. Sutton. 

Ms. SUTTON. Thank you, Mr. Chairman. And Mr. Coble is gone, 

but I want to thank you both for not only, of course, Mr. Chairman, 

for holding the hearing but also for the remarks and the questions 

that Mr. Coble asked while he was present. 

This is an extraordinarily important issue, and I see it as—in reflecting upon Mr. Coble’s words, as part of a bigger problem that 

our international trading system is broken. And I have a number 

of questions, but I would just like to sort of draw some things together. 

And I was struck, Ms. Espinel, when you were talking about the 

privilege to protect our creative class. 

And I absolutely concur that this is an enormous issue, and I am 

sympathetic and looking forward to finding ways to make this work 

so that our businesses and our workers are not left at a disadvantage in this country. 

88

But I was struck by the use of the words that you chose, protect 

and protect and protect against sort of these illegal tactics being 

employed by others. 

When I use that language to talk about other sectors of our economy, like the traditional manufacturing sector, just talking about 

stopping unfair trading practices that are being employed and 

sometimes subsidized by other countries, I am called a protectionist. 

Do you ever get—are you ever called a protectionist, or do you 

fashion yourself one? 

Ms. ESPINEL. No. In the sense that that word is used, protectionist in terms of—obviously, my office, USTR as a whole, are 

strong proponents of free trade. 

We see our free trade agreements—we see our free trade agenda—as being a way not just to increase market access for U.S. 

products but also for a way to build the world economy and a way 

to help other countries build their own economy. 

In terms of intellectual property protection, yes, the mission of 

my office is to protect American industry, but we also strongly believe that other countries have a role, a true stake, in the international IP system. 

We have talked a lot today about challenges. One of the opportunities we have is that there are many countries around the world 

that want to become innovators, that I think see their future as 

being part of the knowledge economy. 

And I think as that continues, they will then see that they have 

a greater stake in the international IP system. Amd I think there 

is also a growing realization among our trading partners that while 

the U.S. does a tremendous amount to protect the right holders, we 

cannot do it alone. 

This problem that we are discussing of global trade and counterfeit and pirate goods is an area where we need increased cooperation with our trading partners. 

I think more and more of some of the trading partners that share 

the U.S. concerns are aware of that. And USTR has been working 

very actively to try to capitalize on that and to try to come up with 

some new and creative ideas to increase that cooperation with our 

trading partners, because without that cooperation, it is difficult 

for us to truly be effective. 

Ms. SUTTON. I appreciate your response, and I concur with the 

promise of trade as a tool that can lift up people worldwide and can 

benefit beyond our borders and that it should be that kind of a tool, 

and I am a proponent of making it that kind of tool. 

I again go back to my belief—and I think it is, frankly, also supported by the testimony that we have heard here today—that there 

are problems, however, with the gap between the promise of trade 

and what is actually playing out out there. 

And we are trying to find ways not only with intellectual property, obviously, but with other veins. It is a multifaceted problem. 

And it has to be approached in a multifaceted way. 

But I was just curious—and I understand—and I don’t believe 

that that is protectionistic, what you said. 

But I think it is an interesting dichotomy, where we hear the 

protection against illegal subsidies by foreign countries in one vein 

89

being called—if somebody who rails against that says that with respect to illegal dumping of steel, for example, they are a protectionist, if you want to do something to fix that. 

And I also just simply—I am not going to have a lot of time here, 

but I also just simply reject the idea that there aren’t things internally that we need to be focusing our attention on also. 

We heard testimony by others on the panel about the actions 

that the United States can and should properly take to deal with 

this issue. 

And of course, again, I believe there are actions that we can take 

in the rest of the facets of this huge, huge issue of international 

trade. 

I guess my time is up. I just wanted to know, to the extent—you 

know, we see these illegal subsidies from other countries. 

Are countries in any way complicit in the pirating of intellectual 

property, to your know, other than the United States, outside of 

the United States? 

Ms. ESPINEL. That is an excellent question, and a complicated 

one. And I know we are short on time here, so I am going to speak 

concisely but then would be happy to follow up in more detail. 

Going back to your first point on protectionism, that term is generally used for countries that are trying to protect their local industry from competition. And we talking about protecting intellectual 

property—it is exactly the opposite. 

We are not trying to protect our right holders——

Ms. SUTTON. With all due respect, I understand the theory of 

what protectionism is. That is not how that word is often used. 

It is also used to try to shut down people who want to fight 

against unfair similar, in a different vein, kinds of illegal subsidies, 

to just remove the unfair advantage, to have rules enforced. 

Sometimes it is used for that purpose of shutting down that debate because, unfortunately, there are some who are benefitting 

from those unfair tactics. I understand the difference between—

there is a gap here between what the word really means and how 

it is used. That is my point, and I appreciate that. 

Ms. ESPINEL. Exactly. 

Ms. SUTTON. Thank you. 

Ms. ESPINEL. And in protecting intellectual property, we are trying to increase market access. We are trying to make sure that 

there is a market for our legitimate products overseas so that we 

can compete on a level playing field. 

Ms. SUTTON. Exactly, exactly. And I support that proposition, 

and I also support it in other venues. 

Ms. ESPINEL. With respect to your second question, governments’ 

complicity—and again, we would be happy to follow up in more detail—there are some instances where we feel that governments 

themselves not only are not enforcing their laws but may be 

complicit. 

And one of the things that we have talked about are the illegal 

optical discs that have been operating on Russian military sites. 

That has been an enormous focus and enormous concern. 

And that is one of the key commitments in the bilateral agreement with Russia, to stop that. So again, happy to follow up with 

90

you in more detail. There are some instances of that, and it is 

something that we obviously go after quite aggressively. 

Ms. SUTTON. I appreciate the time. 

Mr. BERMAN. I mean, it is a very interesting question. And for 

example, one example is good—I think—I don’t know if we can do 

it right at this second, but a more comprehensive sense of countries 

that are not merely enforcing their laws, but that are actually actively facilitating the theft—is one that the Subcommittee generally 

would be very interested in getting some more specifics on. 

Ms. ESPINEL. Well, we would be happy to follow up. 

Ms. SUTTON. Thank you, Mr. Chairman. 

Mr. BERMAN. Yes. Just one more diversion based on Ms. Sutton’s 

question. We did in the late 1990’s, as a response to Chinese activities in counterfeiting, propose a series of countervailing tariffs that 

by virtue of their impact—by the way, their impact was on some 

U.S. importers as well as on Chinese companies and the Chinese 

government. 

But as a result of those countervailing tactics, they actually took 

some steps they had not been willing to take to avoid those countervailing duties from actually coming into place. 

Ms. ESPINEL. Right. 

Mr. BERMAN. I think that is a little bit where Ms. Sutton is focusing, a thing that on its own might be protectionist in that situation was simply a tool to deal with the blocking of violations of 

trading rules. 

Ms. Lofgren? I am sorry. 

Ms. LOFGREN. Thank you, Mr. Chairman. 

I do appreciate this hearing, and I think that we perhaps have 

the potential of accomplishing something, and I give you credit for 

that. 

Often times, those of us who follow these issues tend to focus on 

actually the relatively small area where there is disagreement, in 

the DMCA where we are arguing about the technology mandate 

and freedom and First Amendment issue, instead of focusing on the 

issue where there is no disagreement, where you have vast piracy 

and we should have an effective enforcement regime. 

And so I was actually wanting to follow up, Dr. Yager, on your 

report on the 1 percent penalty collection, because, you know, we 

are not doing a very good job, actually, of inspecting. That is something that most people don’t realize. 

And the gentleman from North Carolina is correct. I mean, it not 

only has IP issues. There are national security issues involved with 

that. 

But even for the small amount we inspect, to assess the penalties 

and then not collect them, I mean, is really counterproductive. 

What recommendations do you have? I mean, this is not a new 

thing. I mean, your prior reports identified a similar issue. 

Mr. YAGER. Well, I think one of the things that we noticed, and 

this also gets back to Mr. Watt’s question, is that the Department 

of Homeland Security—its primary mission, obviously, is protecting 

the homeland and trying to ensure that no weapons of mass destruction get through the U.S. ports. 

But one of the things that we have observed is that they have 

some very important—what are now called legacy functions, and 

91

that is collecting trade revenue, for example, where these are tariffs or countervailing duties. 

It is protecting against drugs entering the United States, protecting against intellectual property that comes into the United 

States. 

In the series of reports that we have done, whether it is on IP 

or whether it is on customs revenue or another one called an inbond system, we are finding that DHS has not found a good balance between their new function and their existing legacy functions. 

Some of those functions are not getting the kind of attention that 

is necessary, and not only these weaknesses and problems in the 

IP area, but also—in fact, it also has a relationship to even performing the security function, because we found that one program 

allows goods to come into the United States and not officially enter 

until they get to a domestic port somewhere in the interior. 

We found that that program actually makes it more difficult for 

CBP to screen even for weapons of mass destruction. So I think Mr. 

Watt’s point and your question are on target in that DHS needs to 

find the ability to not just perform their primary function but to 

also spend the time and make sure they are performing these legacy functions, because the legacy functions are quite important. 

Ms. LOFGREN. Well, I wouldn’t refer to them as legacy functions, 

because I actually voted against the creation of the Department of 

Homeland Security, a vote that looks better and better in that respect. 

But the department was passed with not just a security measure, 

but taking over the entire function of the customs bureau and the 

like. 

Now, wouldn’t it be true that with this level of performance by 

the Department of Homeland Security our ability even to adequate 

impose countervailing tariffs would be in doubt? 

Mr. YAGER. We are currently performing work on the issue of 

their ability to collect countervailing duties. One of the problems 

that we have is that the duties are finally assessed sometimes 

years after the goods have entered. 

In some cases, the deposits that have been made are not sufficient, and therefore you can’t collect the full amount of the duties. 

So there certainly are a number of issues at Customs and Border 

Protection where they can be doing a better job of enforcing U.S. 

trade laws. 

Again, finding that balance between their primary mission and 

these other missions is something that we have commented on in 

a number of reports, and we think they can do better on these 

issues. 

Ms. LOFGREN. Have you done a look at the impact that this failure has had on the value of patents in the United States? 

Mr. YAGER. We haven’t looked at that specifically. 

One thing I think where we do have industry-specific information—we look at the kinds of seizures that they have made over the 

past 5 years or so, and I think there has been a lot in the area of 

the garment, and footwear and clothing industries. I mean, the 

dominant category are those kinds of products. 

Ms. LOFGREN. So it is trademark infringement? 

92

Mr. YAGER. Yes. In many cases, though, where you would expect 

to see a much higher level of seizures—for example, with pharmaceutical products and things of that nature, where there are really 

health and safety issues, the percent of overall seizures in those 

areas is quite low, about 1 percent or 2 percent. 

So I think there certainly are opportunities to take a hard look, 

as we have recommended for CBP. They have made that a priority 

area, but ultimately we haven’t seen the results of demonstrating 

or indicating that that priority actually affects what people do at 

the border. 

Ms. LOFGREN. Mr. Chairman, I think that this is—I hope that we 

can follow up on this aspect. I serve on the Homeland Security 

Committee and unfortunately have the opportunity on a regular 

basis to find dysfunction in virtually every element of the department. 

But this is one that, you know, actually is within our jurisdiction 

here, and maybe we could—you know, the customs inspectors, I 

think, and the whole customs function has really been treated 

shabbily in the whole department. 

And I think the morale among the employees is low as a consequence. And it is perhaps something that we could pursue further. And I think it is an area where we would have broad agreement here on the Committee, if we could get some changes. 

Mr. YAGER. If I could just make one quick answer, we certainly 

found a lot of people in customs—when we visited ports, we visited 

ports all over the United States. There are many people who are 

very dedicated to this mission. 

It is a very tough mission, because the movement on ports is relentless. The amount of goods coming by train, truck, and ship is 

staggering. They have a very hard job. They do need support, and 

some of them don’t feel like they are getting that support. 

Ms. LOFGREN. Well, I am glad you mentioned that, because I certainly would not want my criticisms to be directed at the people 

who are trying, under trying circumstances—but the problem has 

been in the department a lack of leadership, a lack of organization 

and structure that dedicated people can actually successfully implement. And this is still another example of that. 

My time is up, I know, Mr. Chairman. I thank you for this hearing and this opportunity. 

Mr. BERMAN. I thank the gentlelady. 

And I recognize the gentleman from California, Mr. Schiff. 

Mr. SCHIFF. Well, thank you, Mr. Chairman, and also thank you, 

Mr. Chairman, for letting me go out of order. I have to run in 5 

minutes, so I know I won’t take more than that amount of time. 

But I did have one question, Ms. Espinel. Two years ago, we had 

a hearing before this Subcommittee focused on IPR issues and Russia and China. At the time, your office was continuing its review 

of Russia’s IPR regime as part of the WTO extension negotiations. 

Back in 2005, I asked you to identify clear metrics or the specific 

criteria you presented to Russia so that they would know precisely 

what we expected of them and so that we could hold your office accountable, and together we could hold the Russians accountable if 

those metrics were not reached. 

93

You responded at the time that in terms of benchmarks there 

were two key items the U.S. had made quite clear that Russia 

needed to address. 

First you noted that Russia had a massive optical disc piracy 

problem, and you indicated they must close the optical disc plants 

and also show us the equipment seized and destroy the plants so 

they are unable to reopen. 

Now, in your 2007 report, and I will quote from it, you provide 

that the U.S. copyright industries estimates they lose in excess of 

$2.1 billion in 2006 due to copyright piracy in Russia. 

The U.S. copyright industries also reported in 2006 Russia’s optical disc production capacity continued to be far in excess of domestic demand, with pirated products apparently intended not only for 

domestic consumption but also for export. 

Second, you indicated at that hearing a couple years ago that 

tackling the Internet piracy problem in Russia must be addressed 

and indicated that there are raids and prosecutions, but that we 

needed to see people actually put in jail. 

But again, reading from your 2007 report, you state poor enforcement of IPR in Russia is a pervasive problem. The U.S. notes that 

prosecution and adjudication of IP cases remains sporadic and inadequate in Russia. There is a lack of transparency and a failure 

to impose deterrent penalties. 

We all know about AllOfMP3.com, et cetera. Long and short of 

it, it has been nearly 2 years. You shared benchmarks with us. I 

don’t see any progress. 

Why did we conclude bilateral negotiations when none of these 

benchmarks were satisfied? Isn’t it clear that Russia’s IPR regime 

is nowhere near ready for admission to the WTO? 

Ms. ESPINEL. Since the hearing in 2005, we have actually expanded the benchmarks that we have given to Russia, and we have 

done that in a very concrete way. 

In November of 2006, we negotiated in the context of Russia’s bilateral accession agreement with the United States. 

We negotiated a very specific agreement with Russia that lays 

out a blueprint of very specific commitments and actions that they 

need to take in order to come into the WTO on intellectual property 

protection and enforcement. 

And that agreement between us, I think, serves as an excellent 

series of benchmarks that Russia will need to complete if they are, 

in fact, going to enter the WTO. 

That agreement includes some of the issues that we discussed at 

that time, including taking action against optical disc plants and 

taking action against illegal pirate Web sites. 

It, in fact, actually added a series of other commitments that 

Russia also needs to comply with—for example, strengthening customs authority, amending the civil code so that it is in compliance 

with the TRIPS agreement and other IP agreements. 

Russia has made some progress on some of those commitments, 

but they are certainly not in compliance with the agreement that 

we negotiated with them. 

And until they are in compliance with that agreement, we have 

made very clear to Russia that compliance with that agreement is 

essential to Russia being able to enter the WTO. 

94

Mr. SCHIFF. Well, I mean, you know, right away, it sounds like 

the Russian benchmarks aren’t being met any more than the Iraqi 

benchmarks. 

And you know, we—I asked the question for a reason 2 years 

ago, because we wanted something to measure progress by, because, you know, the rhetoric we hear usually is the same, ‘‘They 

are making progress. You know, this is—we are turning the corner. 

They are really going to be serious now.’’

And so we ask, you know, what can we measure this by so that 

when we meet 2 years from now—and I am concerned that we 

meet 2 years from today, and either we will have new benchmarks 

because the old ones weren’t met, or we will have Russia that is 

part of the WTO that is doing what China has done as part of the 

WTO, which is very little, as far as I can see, in terms of enforcement. 

Ms. ESPINEL. Well, then, to be more specific in terms of the 

benchmark that we have laid out in this agreement and the commitments, one of them, as you mentioned, was optical disc plants. 

Russia has 16 optical disc plants that have been operating on 

military sites. That has been an enormous concern for the United 

States. One of the commitments in this agreement was that they 

had to terminate the leases on those optical disc plants. 

That is an area where Russia has made progress that we can 

measure, and they have terminated 15 of those 16 leases, and 

those plants should be removed by the end of the year. That is one 

very concrete measure we can look at in terms of Russia making 

progress. 

But I completely agree with you, there are many areas where 

Russia has not yet met the benchmarks that we have set for them, 

and until Russia does that, the United States will not allow them 

into the WTO. 

And I think that accession negotiation that we have with the 

WTO is one of the most powerful tools that we have to push Russia 

to make progress on these issues, and we will continue to use it 

to the full. 

Mr. BERMAN. Mr. Sherman? 

Mr. SHERMAN. Thank you. 

Mr. BERMAN. Recognized for 5 minutes. 

Mr. SHERMAN. Mr. Yager, what percentage of the incoming cargo 

do we inspect? And who pays for the inspections? 

Mr. YAGER. At the present time, Mr. Sherman, 100 percent of the 

cargo is inspected at least in terms of the paperwork. It is not, obviously, opened. So the first thing is for security purposes——

Mr. SHERMAN. Okay. Let me ask the question this way. What 

percentage of the cargo do we actually open up the container, look 

what is inside, and make sure we don’t have counterfeit disks inside? 

Mr. YAGER. In terms of intellectual property protection, it is 

much less than 1 percent. 

Mr. SHERMAN. Much less than one—now who pays for the inspection? 

Mr. YAGER. In general, the inspections are performed by CBP officers either at the port or in warehouse locations near the port. 

95

But the costs and the delay are borne by the shippers and ultimately the——

Mr. SHERMAN. The costs—so if my container is opened and 

looked at, I pay for that as an extra fee? 

Mr. YAGER. There is not an extra fee. There is a delay. And obviously, any time that cargo——

Mr. SHERMAN. Okay. I am talking not about the delay. I am talking about—you know, there is a guy. He is looking. 

Mr. YAGER. Right. 

Mr. SHERMAN. So he is getting a salary. Who is paying for that? 

Mr. YAGER. This is the U.S. Customs Service. The U.S. Customs 

Officials are the ones who are——

Mr. SHERMAN. And so that is out of general tax revenue? 

Mr. YAGER. Correct. 

Mr. SHERMAN. Okay. 

I am going to mispronounce your last name, Ms. Espinel. Would 

it be a violation of WTO for us to say that the owner of the container—that we impose a fee on each container coming in, we use 

those fees exclusively to look inside every container? 

Ms. ESPINEL. That is an excellent question, and I would want to 

make sure that my answer is as accurate as possible, so if I may, 

I would like to get back to you on that so we can give you a precise 

and accurate answer. 

It is not obvious to me that there is any WTO issue——

Mr. SHERMAN. Okay, so——

Ms. ESPINEL [continuing]. That would arise from that, but I 

wouldn’t want——

Mr. SHERMAN [continuing]. We have a situation, then, where the 

importers of this country and ultimately all of those who consume 

imported products, which means all of us, are imposing a host of 

risks and costs on America—the risks of weapons of mass destruction, the risk of pirated products, toys with lead in them. 

And we are not doing anything to open the boxes. We just bring 

them in. We look at less than 1 percent. And there we may just, 

you know, pass a Geiger counter over it to make sure that if there 

is a nuclear weapon inside at least they have been smart enough 

to shield it with lead. 

So if we wanted to prevent people from importing pirated disks 

and fraudulent brake pads and all the other illegal products, not 

to mention drugs, coming into this country, we would actually have 

to open the packages—open the containers. 

That would cost money, and that cost would be borne by our importers, which, I might add, would help us on the balance of payments situation, where right now all of the costs, societal costs, of 

piracy, et cetera, are not borne by the importers but, rather, borne 

by the society at large. 

Have we ever threatened China with loss of access to U.S. markets if they do not—I don’t care what agreements they sign, because that is absolutely meaningless. 

But if they actually don’t create a circumstance where everybody 

I talk to visits Beijing and says, as they are walking around, they 

are tripping over stands selling pirated movies, pirated music, et 

cetera, what does China have to lose? 

96

And why are they laughing at us so hard when we fail to do anything? 

Ms. ESPINEL. I think China is one of the most important trading 

relationships that we have, and——

Mr. SHERMAN. Well, excuse me, aren’t our exports to China about 

the size of our exports to Belgium? 

Ms. ESPINEL. Yes, but the Chinese economy—the Chinese imports—not just our export economy——

Mr. SHERMAN. Okay. If you think that you get rich by importing, 

then the Chinese trade relationship is critically important. If you 

think you get rich by—society gets rich by high corporate profits, 

then China is important. 

But if you think in terms of U.S. jobs, better focus on Belgium. 

That is to say, exports are what creates jobs. So in any case, it is 

an important trading relationship, at least in one direction. 

What have we threatened the Chinese with? 

Ms. ESPINEL. And I understand the frustration that you are expressing. I think before taking action to shut down Chinese market 

access to the United States, we have to look very carefully at the 

consequences that would have on U.S. consumers, on the U.S. public as a whole. 

But your comment that China——

Mr. SHERMAN. Yes, somebody might actually get a job in the textile industry. It could happen. 

Ms. ESPINEL. Your comment that China is laughing at us I would 

respectfully disagree with. I would agree that China——

Mr. SHERMAN. Have you had your——

Ms. ESPINEL [continuing]. Needs to do more. 

Mr. SHERMAN [continuing]. Hearing checked? 

Ms. ESPINEL. But China has made progress. China is not in the 

same situation—and I think that is in part because of U.S. pressure, but I think that is also because the Chinese government has 

recognized that its reputation as a manufacturing source around 

the world, the primary manufacturing source, of counterfeit and pirated goods, is not a benefit to it. 

That is not at all——

Mr. SHERMAN. Are you saying that any American diplomat just 

walking around the streets of Beijing will not, without even looking 

for it, run into pirated goods for sale? 

Ms. ESPINEL. I am not disagreeing at all that there is a massive 

problem in China and that you will find counterfeit and pirated 

goods quite easily in China. 

The Chinese authorities have taken some actions against those, 

but clearly they have not done enough and——

Mr. SHERMAN. These actions they have taken that you have 

bought off on, for the most part, and apologize for here, are so ineffective that it is easier to buy pirated goods in China than it is to 

buy chewing gum here in the United States. 

Ms. ESPINEL. I also want to take this opportunity to point out 

that we have been encouraging the Chinese to do a better job here, 

one of the most effective tools that we have at USTR—and of 

course—is WTO dispute settlement. 

97

And we have recently filed cases against China at the WTO. 

That is something the Chinese government is obviously quite displeased with our doing so. 

Mr. SHERMAN. They are quite displeased because they tell you—

they put on an act in front of you, and you buy it. 

They are quite displeased because they can walk into a room, 

point to the most recent highly ineffectual action you have taken, 

pound the table, cry—if they are really good actors—and convince 

you that way that your ineffectual actions are somehow having 

some effect, and then leave and then laugh, but only behind your 

back. 

Ms. ESPINEL. Well, I would say that it is certainly our hope that 

the cases we have brought at the WTO will not be as ineffectual 

as you seem to think that they will be. 

We have rights at the WTO. We chose to exercise those rights 

when it became clear that we were not going to be able to resolve 

some of our differences with China. 

And it is my personal belief that these cases, while certainly not 

addressing the entire IP issue in China, will be effective at increasing enforcement in China. 

Mr. SHERMAN. I yield back. My time has expired. 

Mr. BERMAN. If extra time would bring a consensus—— [Laughter.] 

Mr. SHERMAN. If I could have just 30 seconds, I would like to 

commend to the Chair the bill that has been introduced in the Senate, and three of us introduced it in the House, and that is the Intellectual Property Rights Enforcement Act. 

And I hope that we either pass that separately or, better yet, include it in the larger package. And I think that we will have strong 

support in the Senate for that approach. 

Mr. BERMAN. And just on that subject, I mentioned it in my 

opening statement, but some of the issues here that have been 

raised in the reports and by all of you in one way or another, are 

going to be addressed in a larger enforcement bill that Chairman 

Conyers and I will be introducing 3 weeks ago—I mean, no, coming 

up soon. [Laughter.] 

I recognize myself now. 

Just initially, Ms. Espinel—and by the way, I am sorry you have 

to spend your birthday testifying here. But by and large, there 

could be worse places to testify than here. And happy birthday. 

Mr. SHERMAN. Happy birthday. [Laughter.] 

Mr. BERMAN. We will skip the karaoke singing. 

But just on the issue of Russia accession, what is the trade representative—the Administration—thinking about in the context of 

timing? The U.S.-Russia bilateral agreement that was a precondition, is that complete and signed off on? 

You have talked about the intellectual property part of that 

agreement, but is the overall agreement done? 

Ms. ESPINEL. We have concluded the bilateral phase. We are now 

in the process of conducting what we call the multilateral phase of 

the negotiations. So that is the part of the process where all of the 

WTO trading partners together negotiate the terms of Russia’s 

final accession into the WTO. 

98

Mr. BERMAN. Does that mean that all the bilaterals Russia has 

entered into are concluded or are there other countries that are 

still negotiating their bilateral agreements with Russia? 

Ms. ESPINEL. The last I knew, there were two that were open, 

but those may have concluded recently, so I should double 

check——

Mr. BERMAN. So we are in the multilateral——

Ms. ESPINEL. It is a very small number. 

Mr. BERMAN. We are in the multilateral phase now. 

Ms. ESPINEL. Yes. 

Mr. BERMAN. And it is not until it is concluded that you will 

come to Congress with an effort to repeal the Jackson-Vanik provisions which are a precondition to——

Ms. ESPINEL. The multilateral phase has to be completed before 

Russia can come into the WTO. And obviously, part of that, as well, 

will involve the Jackson-Vanik——

Mr. BERMAN. And my guess is this is not a 2007 issue for Congress. I mean, you would like it to have been a 2005 issue, but the 

other things you are doing means that at this point Jackson-Vanik 

isn’t the main thing that stands in the way of Russian accession 

and——

Ms. ESPINEL. At this point what stands between Russia and its 

desire to join the WTO is making progress on a number of areas, 

but including making progress on IP, to come into compliance with 

the bilateral agreement that we negotiated with them. 

The pace and process of the multilateral process will depend on 

Russia. There is very intense engagement going on with the Russian Federation in Geneva. 

But there are a number of areas where Russia needs to make 

progress, not just intellectual property. And again, ultimately, the 

pace of that negotiation will depend on how quickly Russia is able 

to make progress sufficient for the United States to be comfortable 

for it to come into the WTO. 

Mr. BERMAN. At one point you testified about a gold standard. 

The U.S., on intellectual property enforcement, is the gold standard. But we are not quite pure as driven snow yet. 

What are our obligations in terms of compliance with international trade rules? Where do we fall short? 

Ms. ESPINEL. Well, overall, the United States system—the 

United States laws are very strong. 

Mr. BERMAN. I am talking in the intellectual property area; I am 

not getting off into a discussion about agriculture subsidies or anything else. 

Ms. ESPINEL. Thank you. 

In the intellectual property area, we have a very strong system. 

I think our system is and should be a model for the world. But 

there are two aspects of our system that have been challenged at 

the WTO and have been found to be inconsistent with the WTO. 

And those two aspects—one of them is with respect to our copyright law, certain exceptions under our copyright law, and one of 

those is with respect to certain aspects of trademark enforcement. 

I don’t want to suggest that our inconsistency with the WTO is 

anything comparable to the scale of the problem that we have, for 

example, in China or in Russia. 

99

Mr. BERMAN. Nor would I. 

Ms. ESPINEL. But it is a blemish on our record, and it is a problem for us bilaterally and at the WTO. 

As the U.S. pushes very hard for other countries to fully implement their WTO commitments, these cases do have the effect of 

hurting our credibility. And we believe it would be a benefit to us 

if these issues were resolved. 

Mr. WATT. Will the gentleman yield? 

What was the second issue? One was copyright and the second 

one was——

Ms. ESPINEL. And the second one is with respect to certain aspects of trademark enforcement related to assets that have been 

seized by the Cuban government. 

Mr. BERMAN. This is an issue that revolves around Section 211 

that was stuck into an Omnibus Appropriations bill, I believe in 

the dark of night, in the days when that was still done. 

Mr. WATT. You mean last year. [Laughter.] 

Mr. BERMAN. Well, not in the last days that it was still done, 

about 5 years, 6 years, 7 years ago, dealing with a trademark held 

by a French company, and that was challenged at the WTO, and 

the WTO found that our action violated our obligations under 

TRIPS. 

Is that a fair summary? 

Ms. ESPINEL. That is correct. 

Mr. BERMAN. And just on that subject, to close that subject, 

would USTR support an effort to repeal one or both of those provisions? 

Ms. ESPINEL. Yes. USTR would support an effort to amend our 

laws on both of those provisions, and we feel like that would be a 

benefit to us in trying to push other countries to come into full 

compliance with their WTO obligations. 

Mr. BERMAN. Mark MacCarthy told an interesting story of Visa’s 

efforts to do the right thing in the context of the AllOfMP3.com site 

and this other site, allTunes, and what happened in Russian 

courts. 

Is the trade representative’s office trying to create clarity of what 

Russian laws are? To do what I think he logically said their company cannot do, which is to get an understanding about what the 

law is, and what constitutes illegal actions in Russia in terms of 

intellectual property protection? 

Ms. ESPINEL. Yes. Mr. MacCarthy made the point that it is difficult for Visa to try to clarify local laws, but that is one of the 

things the USTR can try to do. 

My understanding of the case is that Media Services, the company that operated allTunes, was able to successfully argue in Russian court that it was not acting illegally because it was paying 

royalties to collecting societies, collecting societies that were not 

authorized by the rights holders. 

That is one of the issues, one of the very specific issues, that we 

addressed in the bilateral agreement that we negotiated with Russia. 

One of the commitments that they have made is to change their 

law so that it is clear that collecting societies can only, in the Internet context, can only collect on behalf of right holders that have auVerDate 0ct 09 2002 15:02 Apr 10, 2008 Jkt 000000 PO 00000 Frm 00103 Fmt 6633 Sfmt 6601 H:\WORK\COURTS\101807\38337.000 HJUD1 PsN: 38337
100

thorized them to do so, and that should resolve this particular 

issue. 

That change is one that has actually already been made in Russia’s civil code, and it should go into effect in January of 2008. And 

it should resolve or clarify that particular problem in the Russian 

legal system. 

Mr. BERMAN. Do you disagree with that? Is that news to you, or 

is that——

Mr. MACCARTHY. No, that is roughly our understanding of the 

legal situation in the Russian Federation right now. 

I should mention that the complication of local Russian law 

means only, from our point of view, that for the time being, at 

least, these sites that we have received complaints about have to 

be permitted to operate within the Russian Federation itself. 

Insofar as international transactions are concerned, our policy is 

to make sure that they are not processed using Visa cards. 

So for example, someone sitting here in the United States or in 

London who wants to go to one of these sites to use their card to 

make a purchase would not be able to do it under our cross border 

policy. 

Mr. BERMAN. I just have to say that I think this is a case where 

the company you represent has shown real leadership, and it has 

done the right thing, and I hope other financial service providers 

that facilitate online transactions will follow the example that you 

have showed here. 

Mr. Watt? I mean, I have got more, but I could go for 20 minutes. 

Mr. WATT. Let me just follow up on what Mr. McCarthy said. It 

is, I assume, true that somebody could still sit in Russia, under 

what Ms. Espinel has said—internal to Russia, the law would still 

be——

Mr. MACCARTHY. Our interpretation of Russian law right now is 

that we don’t have the legal standing to say to the Russian banks 

that operate within Russia, ‘‘You have to stop processing transactions for domestic transactions.’’

Mr. WATT. So what do you say about that, Ms. Espinel? 

Ms. ESPINEL. The change that Russia has made to the civil code, 

which is one of the commitments that they agreed to do in their 

bilateral agreement with the United States—this change that they 

have enacted should fix that problem in the context of sites like 

AllOfMP3 on the Internet, and that change should go into effect in 

Russia in January of 2008. 

Mr. BERMAN. Because they use the royalty collection society, 

which was sort of a phony deal—it never was authorized by the 

people to whom the royalties were owed—they claim that is what 

made what they were doing legal. 

They were making payments to this society and now——

Mr. MACCARTHY. Exactly, and that they prevailed in court. And 

if that changes in January of 2008, we would then be able to move 

forward in the context of addressing the local distribution of this 

music. 

By the way, just in terms of the successor sites to AllOfMP3 and 

allTunes, our understanding is that allTunes is in business these 

days, but they are not taking Visa cards at all. And another site 

101

called MP3Sparks is also in business, but they are not taking Visa 

cards at all. 

Mr. WATT. Mr. Smith seems not quite as satisfied with what you 

all are saying. 

Mr. SMITH. No, I think everything that was said here is completely accurate. 

We in industry and, I think, lawyers that are familiar with the 

Russian law when it was passed in the early 1990’s have always 

concluded that this case, this particular case, was decided wrongly, 

that, in fact, existing Russian law made these acts, including collecting societies representing—purporting to represent record companies that they don’t represent, was a violation of Russian law. 

And it is true that the 2008 amendments will fix that specifically. But I think every lawyer who has looked at this, including, 

I think, Visa’s lawyers—we all scratched our heads and said, ‘‘Wait 

a minute. This is already a violation of Russian law, and this 

should have been solved years ago.’’

Mr. WATT. I have no further questions. 

Mr. BERMAN. The gentleman from Virginia, Mr. Goodlatte? 

Mr. GOODLATTE. Thank you, Mr. Chairman. 

And I want to thank all the panelists. I am sorry I have not been 

able to be present earlier, but two other hearings, one in this Committee and one in the Agriculture Committee, have kept me elsewhere. 

But I am very pleased that you have taken up this subject, Mr. 

Chairman. It is one that is very important to me. I serve as one 

of the co-chairs of the International Antipiracy Caucus and welcome the exposure that you have afforded this issue. 

One of the things that I raise with other countries when I have 

the opportunity to do so, whether representatives come here, 

whether I am meeting with them in other places, is to point out 

that it is in their interest to support intellectual property law and 

the build-out of the infrastructure necessary to both have the law 

and enforce it. 

Because if they hope to transition into an innovation-based economy—many countries that are developing have many creative scientists and researchers and people involved in the technology community and other areas where the advancement of intellectual 

property is worth protecting—entertainment, artists, and so on. 

And that we are not asking them to enforce those laws just out 

of our interest in protecting what we export to those countries, but 

that it is in their interest to do that for the development and 

growth of their own intellectual property community. 

We have been hearing reports that China is beginning efforts to 

transition from a manufacturing-based economy to an innovationbased economy. And it seems like this could present a unique opportunity to make headway with the Chinese on the importance of 

intellectual property. 

So I would direct this to Ms. Espinel and to Mr. Smith. But in 

light of this apparent desire on the part of the Chinese, are there 

additional opportunities we should be pursuing to leverage this 

critical time to encourage China to take its own intellectual property laws more seriously as well as its obligations to honor the intellectual property of other nations’ inventors and authors? 

102

Ms. ESPINEL. I would say that I agree with you. I think China’s 

desire to become a leader in innovation does present an opportunity. 

I think there are actually several other countries as well, major 

trading partners, that see themselves as wanting to enter into the 

future and build a knowledge economy. And I think all of those do 

present a real opportunity for us. 

We have a number of tools that we use to push China and other 

countries to further strengthen intellectual property. But I think 

what you have just raised is—in terms of what we can do more—

I think that is an opportunity for the United States to try to cooperate further on China. 

So USTR is best known, in many ways, for the stick approach, 

for the Special 301 Report, for WTO dispute settlement, and we 

will continue to use all of those tools as aggressively as we feel is 

warranted in order to make progress. 

But I think countries—where there is an opportunity for a country to recognize that it is in their own domestic interest to be protecting intellectual property, I think the United States, USTR and 

the other government agencies can build on that desire through cooperation, through using, for example, our system as a model, and 

having dialogues with China, for example, on how to build a system that is closer to the U.S. system and is modeled on the U.S. 

system in some of the ways that we have encouraged innovation, 

so for example——

Mr. GOODLATTE. I know that in some countries—Russia, for example—at least a few years ago we were making pretty serious efforts to help translate U.S. intellectual property law, decisions and 

documents related to it, into Russian, that we were trying to help 

them with the court system and how they would handle disputes 

in this area and so on. 

Do we have any initiative like that with the Chinese? Have they 

shown any interest in working with us in terms of looking at laws 

that respect property rights? 

Ms. ESPINEL. I think the Chinese do pay close attention to the 

laws. One specific example I could cite that pertains to China and, 

actually, India as well is our Bayh-Dole legislation. 

Bayh-Dole in the United States is extremely effective in terms of 

increasing research of industry and building partnerships between 

universities and industry, thereby increasing the number of products that were brought to market. 

China is looking at our Bayh-Dole system—India is looking at 

our Bayh-Dole system—because it has proved to be successful. 

And while Bayh-Dole is not an intellectual property rule per se, 

having China and India and other countries become innovators, 

begin to build their system or base their system on aspects of the 

U.S. system that have been successful, I think will, long term, be 

very effective in helping us improve IP enforcement as they see 

that they have a greater stake themselves domestically in protecting intellectual property and as they see themselves having a 

greater stake in the international system for protecting intellectual 

property. 

Mr. GOODLATTE. Thank you. 

103

If I might, Mr. Chairman—I notice my light has already gone on, 

but I had a lot of competition——

Mr. BERMAN. Well, you would be the only person to have actually 

observed it. [Laughter.] 

Mr. GOODLATTE. Well, if you would give me that preference, I 

would like to ask one more question. 

Mr. BERMAN. It wouldn’t be preference. It would be nondiscrimination. 

Mr. GOODLATTE. I thank the Chairman for his indulgence. 

And I will ask this to all the panel members. But it follows along 

with what we have just been talking about. The Internet provides 

the means for massive copyright infringement in a single instant. 

While the U.S. has strong laws against online piracy, it seems 

that most of the discussion about international IP theft centers 

around the production of pirated products in physical form. 

How bad is online piracy in Russia and China? And do these 

countries’ IP laws address online piracy sufficiently? And do you 

see any evidence that these countries are inclined to make any decent attempt to combat it? 

Start with Mr. MacCarthy. 

Ms. ESPINEL. Start with Mr. Smith. 

Mr. SMITH. I think the one area——

Mr. GOODLATTE. You are welcome to address my first question, 

too, Mr. MacCarthy. 

Mr. SMITH. I will. Actually, I think China is very interested in 

pursuing the digital environment in an aggressive way, and I think 

we see it with the software industry in China that has seen more 

gains than any of our other industries. 

So I think there is a place there where we can intervene and 

gain some things. Unfortunately, that interest does not extend to 

the cultural industries where China is immensely protectionist. 

But with respect to the Internet—and I think you see it in the 

Internet environment—in 2006 they passed Internet regulations 

with respect to protecting content, and it was a very transparent 

process, quite surprisingly for China. 

We made three sets of comments. The regulations came out actually quite good and not that far from U.S. law. And I think China 

is interested in protecting on the Internet. 

What they haven’t done yet, and hopefully they will do, is they 

haven’t taken those regulations and then enforced them. What we 

are facing in the Internet environment is just simply what we are 

facing in the physical environment—bad enforcement, no criminal 

enforcement and very weak administrative enforcement. 

And lots of confusion in the ISP community has been recently 

generated by some nonbinding regulations the government has put 

out which have caused more burdensome notice requirements, if 

you are familiar with those. 

It is just a situation that hopefully China will, as distinct from 

maybe some other areas, find to be really in their interest. 

And of course, they want to control the Internet. We all know 

that. So the content issues sort of play into that political necessity 

that they have. 

Mr. GOODLATTE. Thank you. 

Mr. MacCarthy, do you want to add anything to that? 

104

Mr. MACCARTHY. I could just repeat some of the main points that 

I made in my testimony, which is when we were involved with two 

of the Web sites in Russia, we got caught up in complications from 

local Russian law. 

One of the court cases ruled against our local bank, that they 

had violated their contract by cutting off service to that merchant, 

and seemed to want a ruling from a competent court within Russia 

before they would allow us to withdraw service. 

And the second case was a case not brought by us and not involving us directly, IFPI, where the owner of one of these sites was absolved of taking any illegal action whatsoever under Russian law. 

As I talked about before, this situation may be improved in January of this year when a revision to their law on collective rights society goes into effect. 

In the meantime, what we have done is we have tried to take account of the differences in local jurisdictions by making sure that 

international transactions from the Russian sites are not processed 

within the Visa system. 

Mr. GOODLATTE. Thank you. 

Mr. Yager? 

Mr. YAGER. Yes, Mr. Goodlatte, just a couple of quick answers. 

With regard to the issue of the trading on the Internet in the near 

future, certainly, as the other countries’ bandwidth increases and 

a greater share of the populations there are able to secure these 

songs, movies online, that will become a greater issue. 

I think there is a certain amount of time, depending on the countries, before that happens on a wide-scale basis. 

But if I could also address the other point that you made about 

linking with like-minded countries, or at least expressing their own 

interest, even in cases where the country as a whole may not feel 

that it is in their interest to give full protection. There may be industries within the country that can be useful for education purposes or others. 

And I give the example of Brazil. They have some very important 

recording artists, and a significant share of the music sold in Brazil 

is from domestic artists. And these folks have been quite successful 

in putting out the message that it is stealing, which is a long-term 

process in trying to get that message across. 

So I think even in countries where there have been larger challenges, there are domestic industries that the United States can 

link up with. 

On the other side of that coin, there are also countries—for example, in South America, again—Paraguay is not a country that 

has a lot of content. An entire city exists in order to just take advantage of the illegal trade across the border. 

Ciudad de Este is a city that exists between the two giants of Argentina and Brazil, and it seems like everything that happens in 

that city is to take advantage of those trade opportunities. And 

many of those, obviously, are illegal. 

So I think that can work in places like China over the longer 

term as well as other countries, but in some countries that don’t 

have a lot of content production, it is going to be a tougher sell. 

Mr. GOODLATTE. Thanks. 

Ms. Espinel? 

105

Ms. ESPINEL. With respect to China, China has joined the WIPO 

Internet Treaties to protect digital projects over the Internet, which 

is progress. 

And we have noticed, and we note in our Special 301 provincial 

review report this year, that there have been some increased efforts, particularly in Beijing—have some innovative programs for 

fighting Internet piracy. 

With Russia, they have reported that they have opened 30 investigations this year against illegal Web sites. Now, clearly, this is 

a significant problem in Russia still, but that is a significant increase over last year. 

My last point I wanted to make is one of the challenges I think 

we face in fighting Internet piracy around the world is that the—

there is no clear international regime for fighting Internet piracy 

the way there is for some other aspects of intellectual property. 

And one of the things that USTR would like to see is to see a 

stronger—a consensus on stronger rules for enforcement, including 

a consensus on new rules for fighting Internet piracy. 

Mr. GOODLATTE. Thank you. 

Thank you, Mr. Chairman. 

Mr. BERMAN. Well, thank you. 

I am going to ask one question to Mr. Smith, and then I will recognize the gentlelady from Texas. 

You may have touched on this, but do you think the Special 301 

review is an effective tool? We list countries year after year. Is 

there something beyond that we should be doing, either in lieu of 

or instead of this Special 301 review? 

Mr. SMITH. I think Special 301 continues to be effective. I think 

there is debate about that. 

Because most of our trading partners are now in the WTO, we 

can’t use Special 301 as we did in the case you mentioned in 1995 

and 1996 against China, where we were able to unilaterally retaliate. 

Mr. BERMAN. Say that one more time. What aren’t we able to do? 

Mr. SMITH. Because the United States is, and all our trading 

partners are, now in the WTO, unilateral retaliation, with an exception I will mention in a minute, is no longer possible. 

Like with China, our dispute has been taken through the WTO 

dispute settlement system, which would result, if we win that case, 

in the possibility of retaliation. 

Mr. BERMAN. What were the tariffs on the steel dumping? That 

was after WTO. 

Mr. SMITH. Oh. Well, that is a different part—I mean, you can 

unilaterally add tariffs on——

Mr. BERMAN. Steel gets it but IP doesn’t? 

Mr. SMITH. I can’t answer that question whether or not it would 

be WTO-legal to do something in the IP area. 

Mr. BERMAN. Well, actually, I think WTO found there wasn’t. 

Mr. SMITH. But what I am talking about is the ability to stop at 

our border goods coming from China because of—without going 

through the WTO dispute settlement process. 

We do have other tools, though. We have all our unilateral trade 

preference tools—GSP, CBERA—where if countries don’t—and in 

Russia, which gets $500 million in GSP benefits. Those benefits are 

106

removable, suspendable, for failure to effectively protect intellectual property. 

So that is another tool, and that is part of Special 301. But countries still don’t want to be on those lists, and we feel that that process continues to work to persuade and make countries aware of the 

need to improve their intellectual property protection. 

So we are strongly supportive of the Special 301 process. Could 

it be improved? I think it can be improved. And I think there are 

things that USTR is doing—for example, looking at enforcement 

agreements. 

There are things like that that can be done, and a more aggressive use of the 301 process I think is possible than is now being 

done. But basically, I think our industries believe that the process 

has been pretty successful. 

Mr. BERMAN. All right. Well, I think our last questions will come 

from the gentlelady from Texas, Ms. Jackson Lee. 

Ms. JACKSON LEE. Mr. Chairman, thank you very much for holding this hearing. 

And I apologize to the witnesses for being delayed in an overlapping hearing. I will narrow my inquiry to a comment and then a 

question. Frankly, I think that we are severely disadvantaged. 

And I thank the Chairman for continuing his oversight on some 

of these many issues involving intellectual property—but severely 

impacted and damaged by the fact that trade, intellectual property, 

is all wrapped up in foreign policy. 

And many times, we are more concerned about not offending our 

perceived ally as opposed to protecting the intellectual property of 

Americans and the ability for our economy to churn. 

I frankly believe that the trade imbalance, for example, is a stark 

example, particularly with China, of how skewed our foreign policy 

and trade policy has gotten. 

So with respect to the protection of intellectual property, sometimes we yield, even with the 301 review, to not offending. 

I would like to ask each of you to express your level of anguish 

or anger at the present state of intellectual property thievery. 

And also, as I heard Ms. Espinel mention stronger piracy laws, 

if each of you would—and if this has been asked and answered, forgive me, but each of you give me again what kind of legislative fix, 

the strongest legislative fix, we could get to impact in particular 

both Russia and China, but others, in terms of intellectual property—strengthening 301? 

I have heard it mentioned that it is a fair process and you are 

happy. But any other legislative fixes that would be helpful in 

what is still an ongoing problem with the thievery of our intellectual property. 

And I will start with Mr. MacCarthy. 

Mr. MACCARTHY. In terms of the bigger picture, our access to information about the problem comes largely from intellectual property owners who come to us with complaints. 

And in that regard, we have a process in place for dealing with 

those kind of complaints. We think that process resolves the responsibilities that we have in that area. 

We think it is a balanced and legitimate use of our complaint 

process to come to us when there are these kind of difficulties. It 

107

is a business problem for many, many copyright owners, and we 

are pleased to step forward to process the complaints when they 

come to us in an appropriate fashion. 

In terms of legislation, we don’t have a general recommendations. 

Ms. JACKSON LEE. What do you do? What is the relief that you 

give to the Internet——

Mr. MACCARTHY. If an aggrieved copyright owner comes to us 

with a documented complaint, and if they identify the Internet site 

that is involved in the alleged infringement, they give us evidence 

that, indeed, this is illegal activity, and they provide us documentation that Visa cards are used, we will conduct an assessment of the 

legal situation. 

And if we find that indeed these transactions are illegal either 

under the laws of the country where the merchant is located or 

where the cardholder is located, in either jurisdiction, we will pass 

that information on to the banks that work within our system directly with the merchant and ask them to take corrective action. 

Ms. JACKSON LEE. Now, you do a civilian relief. You are obviously processed to move that client’s problem through and try to 

resolve it in that way. 

All right, let me ask, you were getting ready to say legislatively 

you had a suggestion. 

Mr. MACCARTHY. We don’t have an affirmative suggestion for 

legislation on the broader issues. We don’t have any expertise or 

competence in there. 

We do think it would be unnecessary to have legislation that imposed liability on financial services intermediaries in this area. We 

think we have stepped forward with the kind of responsible private-sector enforcement action that should help to resolve the problem. 

We talked about the limits of private sector action in that area. 

We can’t help to resolve local laws or conflicts between local laws. 

And if there are many, many conflicts among the laws in many 

different countries, the system I described won’t work as effectively 

as it did in the cases that we have applied it to already. 

So we don’t think the legislation that would give us legal responsibilities would improve the situation, and we are already taking 

the steps we think are necessary to resolve the problem through 

private-sector action. 

Ms. JACKSON LEE. Thank you. 

Mr. Yager? 

Mr. YAGER. Yes. We have made one recommendation to the Congress. It has to do with the coordinating group that is now bringing 

together the U.S. agencies to combat IP—our recommendation is to 

capture the energy that is currently housed within the presidential 

initiative called STOP and try to capture that to make that a more 

permanent structure. 

Right now, STOP, as a presidential initiative, could go away at 

the end of this Administration. Obviously, intellectual property protection won’t be solved by them. We think there needs to be a permanent structure to maintain that, and we made a recommendation in that direction. 

108

We also made a number of recommendations to the U.S. agencies 

in terms of their attention to intellectual property and trying to 

find the right balance between this particular function, which is 

often called a legacy function, for example, in the Department of 

Homeland Security—trying to use the existing resources better to 

focus their efforts on the kinds of things that can generate intellectual property seizures. 

Because even with the existing resources, we believe that seizures and penalties and prosecution afterwards can be a more effective deterrent to that crime than they are right now, and we 

have a number of specific recommendations in those areas. 

Ms. JACKSON LEE. Is that in your statement? 

Mr. YAGER. Yes, and we also cite a number of reports that we 

have done within the last year that have those recommendations. 

Ms. JACKSON LEE. Seizures and penalties. 

Mr. YAGER. That is correct. 

Ms. JACKSON LEE. Thank you. 

Mr. SMITH. I think our position is that with respect to foreign piracy, as opposed to customs and what happens here, there are 

ways to more effectively use the existing trade mechanisms that 

are in our current law. 

And I wanted to mention that and then mention something about 

legislation. 

Ms. JACKSON LEE. Do you want to just briefly instruct us how 

to be more effective in using——

Mr. SMITH. Yes. I mean, I think there are programs and unilateral trade programs that can be removed from countries that do 

not adequately protect our intellectual property. 

That authority has tended in the last years not to be used and 

I think lacks credibility now with our trading partners. 

Ms. JACKSON LEE. So we need to do due diligence and act upon 

that. 

Mr. SMITH. Yes. 

Ms. JACKSON LEE. If you are violating those laws, they need to 

suffer through what we already have in place, or partly what we 

have in place, which is to stop the relationship. 

Mr. SMITH. That is right. 

Ms. JACKSON LEE. Stop the ability. 

Mr. SMITH. Also, in addition, there are trade agreements with 

countries that aren’t WTO members that could be used effectively. 

There are dispute settlement processes in the free trade agreements which are available to be used as leverage to get countries—

now, we haven’t needed to do that yet, but at some point we will 

need to do that. Those are tools that we have that will leverage improvements. 

But I also think that there are things that can be done in the 

legislative area that may increase the credibility of this process and 

leverage improvements both—in the Special 301 area, I think, for 

example, we would like to see more and stronger representation of 

the IP industries in the White House. 

We would like to see perhaps changes in Special 301 that tighten 

up the timetables, tighten up the way USTR does that business. 

We have some ideas there. But all of these things ultimately end 

109

up with the—there are no quick fixes, which Ranking Member 

Coble mentioned at the beginning of this hearing. 

There are no quick fixes. This is a long slog and a continuing 

push to make countries aware that it is in their interest to protect 

our intellectual property. All these tools help get you to that place, 

and that is where you need to get. 

Ms. JACKSON LEE. And that is probably where we have not acted, 

particularly in Russia and China. 

But, Ms. Espinel, I will allow you to refute what I have just said 

by, in addition to your answer that—I hope you will repeat also 

this intellectual privacy strengthening that you would like. 

What is the record of the trade office and the White House on 

denying access to the United States based on bad actors in terms 

of intellectual property violations? What is your record? 

What is the last five that you have denied that access? 

Ms. ESPINEL. In terms of denying market access, one of the 

things that we have been discussing today is that, for example, 

using the Special 301 process to impose unilateral sanctions—our 

ability to do that is now somewhat restricted by the fact that most 

of our trading partners, including China, are members of the WTO. 

And so we are not in a position where we can, for example, impose unilateral sanctions to block access consistent with our WTO 

obligations. 

Ms. JACKSON LEE. Have you gone to the WTO? What is your current status in the WTO in terms of challenging those who have violated our agreements? 

What are the countries? 

Ms. ESPINEL. That said, we do have rights at the WTO. So while 

the WTO membership may have restricted in some ways our abilities under Special 301, membership in the WTO has also given us 

certain rights against countries, including China. 

And we have exercised those rights at the WTO. We have recently filed two different cases against China at the WTO. 

Ms. JACKSON LEE. Are they broad cases, meaning something——

Ms. ESPINEL. Yes. They impact IP enforcement and protection. 

That is the first case. And then there is a second case which goes 

after certain market access restrictions that China places on copyright products. 

While that is not an intellectual property case per se, the restrictions that China has do have the impact of restricting our copyright industries’ ability to access the Chinese market and, as an 

ancillary effect to that, they create an enormous vacuum for legitimate product and, therefore, an incentive to pirate. 

So we believe that China needs to get rid of those market access 

restrictions both so that our products can enter the Chinese market 

but also to remove an enormous incentive to pirate, and we think 

that will be helpful in improving the enforcement situation in 

China. 

I also want to comment on Special 301. We do feel that it is a 

very effective process. Countries do pay attention to their standing 

on the list. It has been successful in getting countries to institute 

reforms. 

But we are always looking at ways that we can improve the tools 

that we have. And in fact, last year USTR logged something that 

110

we call the Special 301 Initiative, where we were looking to see 

how we could better focus our resources. 

And we selected a group of countries where we felt increased engagement under Special 301 will lead to progress, and that has, in 

fact, been successful. We have seen some concrete results come out 

of that, and we are planning to continue that initiative this year. 

In terms of legislative fixes, I think we would look more at the 

international side of things. And where we see a gap in international rules to protect intellectual property is in areas where we 

are facing new challenges that have arisen in the last 10 years. 

And two I would point to in particular are Internet piracy and 

the fact that counterfeiting and pirating has become a much more 

sophisticated, global criminal enterprise than it was 10 years ago. 

Ms. JACKSON LEE. The first one was Internet piracy, and 

what——

Ms. ESPINEL. Internet piracy. 

Ms. JACKSON LEE [continuing]. Was the second? 

Ms. ESPINEL. The sophistication of counterfeiters, the fact that 

counterfeiters are not at this point just servicing a domestic market 

but are manufacturing and then distributing their products all 

across the world in very sophisticated ways. 

We feel that we need a new set of international rules, a new consensus on how to fight those rules, if we are going to be able to 

effectively address that. USTR has some ideas in that regard, and 

that is something that we are working on actively with our trading 

partners. 

Ms. JACKSON LEE. Thank you, Mr. Chairman. 

Mr. BERMAN. Okay. 

Unless people object really strenuously, I think we will adjourn 

this hearing. Thank all of you very much. You have really provided, 

I think, very helpful testimony and useful suggestions. 

And happy birthday, Ms. Espinel. 

[Whereupon, at 12:41 p.m., the Subcommittee was adjourned.] 

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