Intellectual Property: U.S. Efforts have Contributed to Strengthened Laws Overseas, but Significant Enforcement Challenges Remain
Published: 2005-06-14T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Although the U.S. government provides broad protection for intellectual property domestically, intellectual property protection in parts of the world is inadequate. As a result, U.S. goods are subject to piracy and counterfeiting in many countries. A number of U.S. agencies are engaged in efforts to improve protection of U.S. intellectual property abroad. This testimony, based on a prior GAO report as well as recent work, describes U.S. agencies' efforts, the mechanisms used to coordinate these efforts, and the impact of these efforts and the challenges they face.
section_title: What GAO Found
paragraphs: U.S. agencies undertake policy initiatives, training and assistance activities, and law enforcement actions in an effort to improve protection of U.S. intellectual property abroad. Policy initiatives include identifying countries with the most significant problems--an annual interagency process known as the "Special 301" review. In addition, many agencies engage in assistance activities, such as providing training for foreign officials. Finally, a small number of agencies carry out law enforcement actions, such as criminal investigations and seizures of counterfeit merchandise. Agencies use several mechanisms to coordinate their efforts, although the mechanisms' usefulness varies. The National Intellectual Property Law Enforcement Coordination Council, established in 1999 to coordinate domestic and international intellectual property law enforcement, has struggled to find a clear mission, has undertaken few activities, and is generally viewed as having little impact despite recent congressional action to strengthen the council. The Congress's action included establishing the role of Coordinator, but the position has not yet been filled (although the selection process is underway). The Administration's October 2004 Strategy Targeting Organized Piracy (STOP!) is intended to strengthen U.S. efforts to combat piracy and counterfeiting. Thus far, the initiative has resulted in some new actions and emphasized other ongoing efforts. U.S. efforts have contributed to strengthened intellectual property legislation overseas, but enforcement in many countries remains weak, and further U.S. efforts face significant challenges. For example, competing U.S. policy objectives such as national security interests take precedence over protecting intellectual property in certain regions. Further, other countries' domestic policy objectives can affect their "political will" to address U.S. concerns. Finally, many economic factors, as well as the involvement of organized crime, hinder U.S. and foreign governments' efforts to protect U.S. intellectual property abroad.

section_title: Letter
paragraphs: Thank you for the opportunity to discuss our work on U.S. efforts to  protect U.S. intellectual property rights (IPR) overseas. As you know, the  United States dominates the creation and export of intellectual property— creations of the mind. The U.S. government provides broad protection for  intellectual property through means such as copyrights, patents, and  trademarks. However, protection of intellectual property in many parts of  the world is inadequate. As a result, U.S. goods are subject to substantial  counterfeiting and piracy in many countries.
The U.S. government, through numerous agencies, is seeking better  intellectual property protection overseas. To understand more fully how  U.S. agencies have performed in this regard, we have examined several  issues. This testimony addresses (1) the specific efforts of U.S. agencies to  improve intellectual property protection in other nations, (2) the means  used to coordinate these efforts, and (3) challenges facing enforcement  efforts abroad. In addition, this testimony, based on our September 2004  report addressing these topics, provides an update on key IPR-related  events since that time—an administration initiative referred to as the  Strategy Targeting Organized Piracy, or STOP!; a report prepared by a  Department of Justice intellectual property task force, and congressional  action concerning an interagency intellectual property law enforcement  council.
To address these issues, we analyzed key U.S. government reports and  documents from eight federal agencies and two offices. In addition to  meeting with federal officials, we met with officials from key intellectual  property industry groups and reviewed reports they had prepared. We also  conducted field work in four countries where serious problems regarding  the protection of intellectual property have been reported (Brazil, China,  Russia, and Ukraine) and met with U.S. embassy and foreign government  officials as well as representatives of U.S. companies and industry groups  operating in those countries. We conducted this work from June 2003  through July 2004. We subsequently updated our work in May and June of  2005 by meeting with key government officials and industry groups  involved in recent U.S. government efforts.  All work was conducted in  accordance with generally accepted government auditing standards.
subsections: section_title: Background
paragraphs: Intellectual property is an important component of the U.S. economy, and  the United States is an acknowledged global leader in the creation of  intellectual property. However, industries estimate that annual losses  stemming from violations of intellectual property rights overseas are  substantial. Further, counterfeiting of products such as pharmaceuticals  and food items fuels public health and safety concerns. USTR’s Special 301  reports on the adequacy and effectiveness of intellectual property  protection around the world demonstrate that, from a U.S. perspective,  intellectual property protection is weak in developed as well as developing  countries and that the willingness of countries to address intellectual  property issues varies greatly.
Eight federal agencies, as well as the Federal Bureau of Investigation (FBI)  and the U.S. Patent and Trademark Office (USPTO), undertake the  primary U.S. government activities to protect and enforce U.S. intellectual  property rights overseas. The agencies are the Departments of Commerce,  State, Justice, and Homeland Security; USTR; the Copyright Office; the  U.S. Agency for International Development (USAID); and the U.S.  International Trade Commission.
section_title: U.S. Agencies Undertake Three Types of IPR Efforts
paragraphs: The efforts of U.S. agencies to protect U.S. intellectual property overseas  fall into three general categories—policy initiatives, training and technical  assistance, and U.S. law enforcement actions.
subsections: section_title: Policy Initiatives
paragraphs: U.S. policy initiatives to increase intellectual property protection around  the world are primarily led by USTR, in coordination with the  Departments of State and Commerce, USPTO, and the Copyright Office,  among other agencies. A centerpiece of policy activities is the annual  Special 301 process. “Special 301” refers to certain provisions of the Trade  Act of 1974, as amended, that require USTR to annually identify foreign  countries that deny adequate and effective protection of intellectual  property rights or fair and equitable market access for U.S. persons who  rely on intellectual property protection. USTR identifies these countries  with substantial assistance from industry and U.S. agencies and publishes  the results of its reviews in an annual report. Once a pool of such  countries has been determined, the USTR, in coordination with other  agencies, is required to decide which, if any, of these countries should be  designated as a Priority Foreign Country (PFC). If a trading partner is  identified as a PFC, USTR must decide within 30 days whether to initiate  an investigation of those acts, policies, and practices that were the basis  for identifying the country as a PFC. Such an investigation can lead to  actions such as negotiating separate intellectual property understandings  or agreements between the United States and the PFC or implementing  trade sanctions against the PFC if no satisfactory outcome is reached.
Between 1994 and 2005, the U.S. government designated three countries as  PFCs—China, Paraguay, and Ukraine—as a result of intellectual property  reviews. The U.S. government negotiated separate bilateral intellectual  property agreements with China and Paraguay to address IPR problems.  These agreements are subject to annual monitoring, with progress cited in  each year’s Special 301 report. Ukraine, where optical media piracy was  prevalent, was designated a PFC in 2001. The United States and Ukraine  found no mutual solution to the IPR problems, and in January 2002, the  U.S. government imposed trade sanctions in the form of prohibitive tariffs  (100 percent) aimed at stopping $75 million worth of certain imports from  Ukraine over time.
In conjunction with the release of its 2005 Special 301 report, USTR  announced the results of a detailed review examining China’s intellectual  property regime. This review concluded that infringement levels remain  unacceptably high throughout China, despite the country’s efforts to  reduce them. The U.S. government identified several actions it intends to  take, including working with U.S. industry with an eye toward utilizing  World Trade Organization (WTO) procedures to bring China into  compliance with its WTO intellectual property obligations (particularly  those relating to transparency and criminal enforcement) and securing  new, specific commitments concerning actions China will take to improve  IPR protection and enforcement.
By virtue of membership in the WTO, the United States and other  countries commit themselves not to take WTO-inconsistent unilateral  action against possible trade violations involving IPR protections covered  by the WTO but to instead seek recourse under the WTO’s dispute  settlement system and its rules and procedures. This may impact any U.S.  government decision regarding whether to retaliate against WTO members  unilaterally with sanctions under the Special 301 process when those  countries’ IPR problems are viewed as serious. The United States has  brought a total of 12 IPR cases to the WTO for resolution, but has not  brought any since 2000 (although the United States initiated a WTO  dispute panel for one of these cases in 2003).  A senior USTR official  emphasized that this is due to the effectiveness of tools such as the Special  301 process in encouraging WTO members to bring their laws into  compliance with WTO intellectual property rules.
section_title: Training and Technical Assistance
paragraphs: In addition, most of the agencies involved in efforts to promote or protect  IPR overseas engage in some training or technical assistance activities.  Key activities to develop and promote enhanced IPR protection in foreign  countries are undertaken by the Departments of Commerce, Homeland  Security, Justice, and State; the FBI; USPTO; the Copyright Office; and  USAID. Training events sponsored by U.S. agencies to promote the  enforcement of intellectual property rights have included enforcement  programs for foreign police and customs officials, workshops on legal  reform, and joint government-industry events. According to a State  Department official, U.S. government agencies have conducted intellectual  property training for a number of countries concerning bilateral and  multilateral intellectual property commitments, including enforcement,  during the past few years. For example, intellectual property training has  been conducted by numerous agencies in Poland, China, Morocco, Italy,  Jordan, Turkey, and Mexico.
section_title: U.S. Law Enforcement Efforts
paragraphs: A small number of agencies are involved in enforcing U.S. intellectual  property laws, and the nature of these activities differs from other U.S.  government actions related to intellectual property protection. Working in  an environment where counterterrorism is the central priority, the FBI and  the Departments of Justice and Homeland Security take a variety of  actions that include engaging in multicountry investigations involving  intellectual property violations and seizing goods that violate intellectual  property rights at U.S. ports of entry.
The Department of Justice has an office that directly addresses  international IPR problems. Further, Justice has been involved with  international investigation and prosecution efforts and, according to a  Justice official, has become more aggressive in recent years. For instance,  Justice and the FBI coordinated an undercover IPR investigation, with the  involvement of several foreign law enforcement agencies. The  investigation focused on individuals and organizations, known as “warez”  release groups, which specialize in the Internet distribution of pirated  materials. In April 2004, these investigations resulted in 120 simultaneous  searches worldwide (80 in the United States) by law enforcement entities  from 10 foreign countries and the United States in an effort known as  “Operation Fastlink.”
In addition, in March 2004, the Department of Justice created an  intellectual property task force to examine all of Justice’s intellectual  property enforcement efforts and explore methods for the department to  strengthen its protection of IPR. A report issued by the task force in  October 2004 provided recommendations for improvements in criminal  enforcement, international cooperation, civil and antitrust enforcement,  legislation, and prevention of intellectual property crime. Some of these  recommendations have been implemented, while others have not. For  example, Justice has implemented a recommendation to create five  additional Computer Hacking and Intellectual Property (CHIP) units to  prosecute IPR crimes. Additionally, Justice has designated a CHIP  coordinator in every U.S. Attorney’s office in the country, thereby  implementing a report recommendation that such action be taken.  However, an FBI official told us the FBI has not been able to implement  recommendations such as posting additional personnel to the U.S.  consulate in Hong Kong and the U.S. embassy in Budapest, Hungary for  budgetary reasons; Justice has not yet implemented a similar  recommendation to deploy federal prosecutors to these same regions and  designate them as Intellectual Property Law Enforcement Coordinators.
Fully implementing some of the report’s recommendations will require a  sustained, long-term effort by Justice. For example, to address a  recommendation to develop a national education program to prevent  intellectual property crime, Justice held two day-long events in  Washington, D.C. and Los Angeles with high school students listening to  creative artists, victim representatives, the Attorney General, and a  convicted intellectual property offender, among others, about the harm  caused by intellectual property piracy. The events were filmed by Court  TV and produced into a 30 minute show aired on cable television.  Further,  to enhance intellectual property training programs for foreign prosecutors  and law enforcement officials, as recommended in the report, Justice  worked with the Mexican government to provide a three-day seminar for  intellectual property prosecutors and customs officials in December 2004.  Such actions are initial efforts to address recommendations that can be  further implemented over time.
The Department of Homeland Security (DHS) tracks seizures of goods that  violate IPR and reports seizures that totaled almost $140 million resulting  from over 7,200 seizures in fiscal year 2004. In fiscal year 2004, goods from  China (including Hong Kong) accounted for almost 70 percent of the value  of all IPR seizures, many of which were shipments of cigarettes and  apparel. Other seized goods were shipped from, among other places,  Russia and South Africa. A DHS official pointed out that providing  protection against IPR-infringing imported goods for some U.S.  companies—particularly entertainment companies—can be difficult,  because companies often fail to record their trademarks and copyrights  with DHS. DHS and Commerce officials told us that they believe this  situation could be ameliorated if, contrary to current practice, companies  could simultaneously have their trademarks and copyrights recorded with  DHS when they are provided their intellectual property right by USPTO or  the Copyright Office.
To identify shipments of IPR-infringing merchandise and prevent their  entry into the United States, DHS is developing an IPR risk-assessment  computer model. The model uses weighted criteria to assign risk scores to  individual imports. The methodology is based on both historical risk-based  trade data and qualitative rankings. The historical data are comprised of  seizure information and cargo examination results, while qualitative  rankings are based on information such as whether a shipment is arriving  from a high-risk country identified by USTR’s annual Special 301 report.  According to DHS officials, the model has been piloted, and several issues  have been identified which must be addressed before it is fully  implemented.
DHS officials also told us that problems in identifying and seizing IPR- infringing goods frequently arise where the department’s in-bond system is  involved. The in-bond system allows cargo to be transported from the  original U.S. port of arrival (such as Los Angeles) to another U.S. port  (such as Cleveland) for formal entry into U.S. commerce or for export to a  foreign country. We previously reported that weak internal controls in this  system enable cargo to be illegally diverted from the supposed  destination. The tracking of in-bond cargo is hindered by a lack of  automation for tracking in-bond cargo, inconsistencies in targeting and  examining cargo, in-bond practices that allow shipments’ destinations to  be changed without notifying DHS and extensive time intervals to reach  their final destination, and inadequate verification of exports to Mexico.  DHS inspectors we spoke with during the course of our previous work  cited in-bond cargo as a high-risk category of shipment because it is the  least inspected and in-bond shipments have been increasing. We made  recommendations to DHS regarding ways to improve monitoring of in- bond cargo. USTR’s 2005 Special 301 report identifies customs operations  as a growing problem in combating IPR problems in foreign countries such  as Ukraine, Canada, Belize, and Thailand.
section_title: Several Mechanisms Coordinate IPR Efforts, but Their Usefulness Varies
paragraphs: Several interagency mechanisms exist to coordinate overseas law  enforcement efforts, intellectual property policy initiatives, and  development and assistance activities, although these mechanisms’ level  of activity and usefulness vary.
subsections: section_title: Formal Interagency Coordination on Trade Policy
paragraphs: According to government and industry officials, an interagency trade  policy mechanism established by the Congress in 1962 to assist USTR has  operated effectively in reviewing IPR issues. The mechanism, which  consists of tiers of committees as well as numerous subcommittees,  constitutes the principle means for developing and coordinating U.S.  government positions on international trade, including IPR. A specialized  subcommittee is central to conducting the Special 301 review and  determining the results of the review.
This interagency process is rigorous and effective, according to U.S.  government and industry officials. A Commerce official told us that the  Special 301 review is one of the best tools for interagency coordination in  the government, while a Copyright Office official noted that coordination  during the review is frequent and effective. A representative for copyright  industries also told us that the process works well and is a solid  interagency effort.
section_title: National Intellectual Property Law Enforcement Coordination Council (NIPLECC)
paragraphs: NIPLECC, created by the Congress in 1999 to coordinate domestic and  international intellectual property law enforcement among U.S. federal  and foreign entities, seems to have had little impact. NIPLECC consists of  (1) the Under Secretary of Commerce for Intellectual Property and  Director of the United States Patent and Trademark Office; (2) the  Assistant Attorney General, Criminal Division; (3) the Under Secretary of  State for Economic and Agricultural Affairs; (4) the Deputy United States  Trade Representative; (5) the Commissioner of Customs; and (6) the  Under Secretary of Commerce for International Trade. NIPLECC’s  authorizing legislation did not include the FBI as a member of NIPLECC,  despite its pivotal role in law enforcement. However, according to  representatives of the FBI, USPTO, and Justice, the FBI should be a  member. USPTO and Justice cochair NIPLECC, which has no staff of its  own. In the council’s several years of existence, its primary output has  been three annual reports to the Congress, which are required by statute.  (NIPLECC’s 2004 report has been drafted but is not yet available.)
According to interviews with industry officials and officials from its  member agencies, and as evidenced by its own reports, NIPLECC has  struggled to define its purpose and has had little discernable impact.
Indeed, officials from more than half of the member agencies offered  criticisms of NIPLECC, remarking that it is unfocused, ineffective, and  “unwieldy.” In official comments to the council’s 2003 annual report, major  IPR industry associations expressed a sense that NIPLECC is not  undertaking any independent activities or effecting any impact. One  industry association representative stated that law enforcement needs to  be made more central to U.S. IPR efforts and said that although he  believes the council was created to deal with this issue, it has “totally  failed.” The lack of communication regarding enforcement results in part  from complications such as concerns regarding the sharing of sensitive  law enforcement information and from the different missions of the  various agencies involved in intellectual property actions overseas.  According to a USTR official, NIPLECC needs to define a clear role in  coordinating government policy. A Justice official stressed that, when  considering coordination, it is important to avoid creating an additional  layer of bureaucracy that may detract from efforts devoted to each  agency’s primary mission.
According to an official from USPTO, NIPLECC has been hampered  primarily by its lack of its own staff and funding. In our September 2004  report, we noted that “If the Congress wishes to maintain NIPLECC and  take action to increase its effectiveness, the Congress may wish to  consider reviewing the council’s authority, operating structure,  membership, and mission.” In the Consolidated Appropriations Act, 2005,  the Congress provided $2 million for NIPLECC expenses, to remain  available through fiscal year 2006. The act addressed international  elements of the council and created the position of the Coordinator for  International Intellectual Property Enforcement, appointed by the  President, to head NIPLECC. This official may not serve in any other  position in the federal government, and the NIPLECC co-chairs,  representatives from USPTO and Justice, are to report to the Coordinator.  The law also provides additional direction regarding NIPLECC’s  international mission, providing that NIPLECC shall (1) establish policies,  objectives, and priorities concerning international intellectual property  protection and intellectual property law enforcement; (2) promulgate a  strategy for protecting American intellectual property overseas; and (3)  coordinate and oversee implementation of items (1) and (2) by agencies  with responsibilities for intellectual property protection and intellectual  property law enforcement. The Coordinator, with the advice of NIPLECC  members, is to develop a budget proposal for each fiscal year to  implement the strategy for protecting American intellectual property  overseas and for NIPLECC operations and may select, appoint, employ,  and fix compensation of such officers and employees as may be necessary  to carry out NIPLECC functions. Personnel from other departments or  agencies may be temporarily reassigned to work for NIPLECC. Agency  officials told us that, as of June 2005, no Coordinator had been named  (although a selection process was underway), the $2 million in NIPLECC  funding has not been spent, and NIPLECC continued to accomplish little.
section_title: Strategy Targeting Organized Piracy (STOP!)
paragraphs: In October 2004, USTR and the Departments of Commerce, Justice, and  Homeland Security announced STOP! to fight trade in pirated and  counterfeit goods. Other STOP! participants are the Department of State  and the Department of Health and Human Service’s Food and Drug  Administration. STOP!, which is targeted at cross-border trade in tangible  goods and was initiated to strengthen U.S. government and industry  enforcement actions. STOP! has five general objectives:  1.  Stop pirated and counterfeit goods at the U.S. border. Such  efforts are to be achieved through, for example, the implementation of  the DHS IPR risk model, mentioned above, to better identify and seize  infringing goods at U.S. borders.  2.  Dismantle criminal enterprises that steal intellectual property.
Justice and DHS are taking measures to maximize their ability to  pursue perpetrators of intellectual property crimes through, for  example, the addition of the 5 new Justice CHIP units mentioned  above. Justice and DHS are also committed under STOP! to work with  the Congress to update IPR legislation.  3.  Keep counterfeit and pirated goods out of global supply chains.
Commerce is working with industry to develop voluntary guidelines  companies can use to ensure that supply and distribution chains are  free of counterfeits.  4.  Empower U.S. businesses to secure and enforce their rights at  home and abroad. For example, Commerce is meeting with small and  medium enterprises to inform companies on how to secure and protect  their rights in the global marketplace.  5.  Reach out to U.S. trading partners to build an international  coalition to block trade in pirated and counterfeit goods. USTR  and State are engaging in multilateral forums, such as the Organization  for Economic Cooperation and Development (OECD) and the Asia- Pacific Economic Cooperation (APEC), through the introduction of  new initiatives to improve the global intellectual property  environment.
Agency officials told us that STOP! has both furthered ongoing agency  activities and facilitated new initiatives. For example, Commerce officials  told us that while they had been working on having the OECD conduct a  study of the extent and impact of counterfeiting and piracy, STOP!  provided additional momentum to succeed in their efforts. They said that  the OECD has now agreed to conduct a comprehensive study on the  extent and effect of international counterfeiting and piracy in tangible  goods, with a study addressing the digital arena to follow. In addition, in  March 2005, Justice announced the continuation of work by its intellectual  property task force, which had been rolled into STOP!. Regarding new  initiatives, USPTO has established a hotline for companies to obtain  information on intellectual property rights enforcement and report  problems in other countries. According to USPTO, this hotline has  received 387 calls since it was activated in October 2004. Commerce has  also developed a website to provide information and guidance to IPR  holders for registering and protecting their intellectual property rights in  other countries. The most visible new effort undertaken as a part of STOP!  is a coordinated U.S. government outreach to foreign governments. In  April 2005 officials from seven federal agencies traveled to Hong Kong,  Japan, Korea, and Singapore and in June, they traveled to Belgium, France,  Germany, and the United Kingdom. According to USTR officials, the goals  of these trips are to describe U.S. initiatives related to IPR enforcement  and to learn from the activities of “like-minded” trading partners with IPR  concerns and enforcement capacities similar to the United States. DHS  officials reported that their Asian counterparts were interested in the U.S.  development of the IPR risk model to target high-risk imports for  inspection, while a USTR official emphasized that U.S. participants were  impressed by a public awareness campaign implemented in Hong Kong.
Officials involved in STOP! told us that one key goal of the initiative is to  improve interagency coordination. Agency officials told us that to achieve  this goal, staff-level meetings have been held monthly and senior officials  have met about every 6 weeks. Agency officials also told us that as an  Administration initiative with high-level political support, STOP! has  energized agencies’ enforcement efforts and strengthened interagency  efforts. A USPTO official explained that STOP! has laid the groundwork  for future progress and continued interagency collaboration. Agency  officials noted that STOP! goals and membership overlap with those of  NIPLECC, and remarked that STOP! could possibly be integrated into  NIPLECC at some future date. In May 2005, a NIPLECC meeting was held  to address coordination between STOP! and NIPLECC. According to a  Justice official, once an International Intellectual Property Enforcement  Coordinator is appointed, there may be an opportunity to continue the  momentum that STOP! has provided in the context of NIPLECC activities.
One private sector representative we met with said that although U.S.  industry has worked closely with agencies to achieve the goals of STOP!,  he is frustrated with the lack of clear progress in many areas. For instance,  he said that the administration has neither supported any pending  legislation to improve intellectual property rights protection, nor proposed  such legislation. He added that agencies need to do more to integrate their  systems, noting the situation where companies must currently receive a  trademark or copyright from USPTO or the Copyright Office, and then  separately record that right with DHS. Another industry representative  noted that STOP! has been announced with great fanfare, but that progress  has been sparse.  However, he noted that industry supports this  administration effort and is working collaboratively with the federal  agencies to improve IPR protection.  Another industry official cited issues  of concern such as insufficient enforcement resources “on the ground”  (particularly at DHS).
section_title: Other Coordination Mechanisms
paragraphs: Other coordination mechanisms include the National International  Property Rights Coordination Center (IPR Center) and informal  coordination. The IPR Center in Washington, D.C., a joint effort between  DHS and the FBI, began limited operations in 2000. According to a DHS  official, the potential for coordination between DHS, the FBI, and industry  and trade associations makes the IPR Center unique. The IPR Center is  intended to serve as a focal point for the collection of intelligence  involving copyright and trademark infringement, signal theft, and theft of  trade secrets. However, the center is not widely used by industry. For  example, an FBI official told us that from January 2004 through May 2005,  the FBI has received only 10 referrals to its field offices from the IPR  Center. Further, the number of FBI and DHS staff on board at the center  has decreased recently and currently stands at 10 employees (down from  20 in July 2004), with no FBI agents currently working there and fewer  DHS agents than authorized. However, IPR Center officials emphasized  one recent, important case that was initiated by the center. DHS, in  conjunction with the Chinese government and with the assistance of the  intellectual property industry, conducted the first ever joint U.S.-Chinese  enforcement action on the Chinese mainland, disrupting a network that  distributed counterfeit motion pictures worldwide. More than 210,000  counterfeit motion picture DVDs were seized, and in 2005, four individuals  (two Chinese and two Americans) were convicted in China.
Policy agency officials noted the importance of informal but regular  communication among staff at the various agencies involved in the  promotion or protection of intellectual property overseas. Several officials  at various policy-oriented agencies, such as USTR and the Department of  Commerce, noted that the intellectual property community was small and  that all involved were very familiar with the relevant policy officials at  other agencies in Washington, D.C. Further, State Department officials at  U.S. embassies regularly communicate with agencies in Washington, D.C.,  regarding IPR matters and U.S. government actions. Agency officials noted  that this type of coordination is central to pursuing U.S. intellectual  property goals overseas.
Although communication between policy and law enforcement agencies  can occur through forums such as the NIPLECC, these agencies do not  systematically share specific information about law enforcement activities.  According to an FBI official, once a criminal investigation begins, case  information stays within the law enforcement agencies and is not shared.   A Justice official emphasized that criminal law enforcement is  fundamentally different from the activities of policy agencies and that  restrictions exist on Justice’s ability to share investigative information,  even with other U.S. agencies.
section_title: Enforcement Overseas Remains Weak and Challenges Remain
paragraphs: U.S. efforts such as the annual Special 301 review have contributed to  strengthened foreign IPR laws, but enforcement overseas remains weak.  The impact of U.S. activities is challenged by numerous factors. Industry  representatives report that the situation may be worsening overall for  some intellectual property sectors.
subsections: section_title: Weak Enforcement Overseas
paragraphs: The efforts of U.S. agencies have contributed to the establishment of  strengthened intellectual property legislation in many foreign countries,  however, the enforcement of intellectual property rights remains weak in  many countries, and U.S. government and industry sources note that  improving enforcement overseas is now a key priority. A recent USTR  Special 301 report states that “although several countries have taken  positive steps to improve their IPR regimes, the lack of IPR protection and  enforcement continues to be a global problem.” For example, although the  Chinese government has improved its statutory IPR regime, USTR remains  concerned about enforcement in that country. According to USTR,  counterfeiting and piracy remain rampant in China and increasing  amounts of counterfeit and pirated products are being exported from  China. In addition, although Ukraine has shut down offending domestic  optical media production facilities, pirated products continue to pervade  Ukraine, and, according to USTR’s 2004 Special 301 Report, Ukraine is  also a major trans-shipment point and storage location for illegal optical  media produced in Russia and elsewhere as a result of weak border  enforcement efforts.
Although U.S. law enforcement does undertake international cooperative  activities to enforce intellectual property rights overseas, executing these  efforts can prove difficult. For example, according to DHS and Justice  officials, U.S. efforts to investigate IPR violations overseas are  complicated by a lack of jurisdiction as well as by the fact that U.S.  officials must convince foreign officials to take action. Further, a DHS  official noted that in some cases, activities defined as criminal in the  United States are not viewed as an infringement by other countries and  that U.S. law enforcement agencies can therefore do nothing.
section_title: Challenges to U.S. Efforts
paragraphs: In addition, U.S. efforts confront numerous challenges. Because  intellectual property protection is one of many U.S. government objectives  pursued overseas, it is viewed internally in the context of broader U.S.  foreign policy objectives that may receive higher priority at certain times  in certain countries. Industry officials with whom we met noted, for  example, their belief that policy priorities related to national security were  limiting the extent to which the United States undertook activities or  applied diplomatic pressure related to IPR issues in some countries.  Further, the impact of U.S. activities is affected by a country’s own  domestic policy objectives and economic interests, which may  complement or conflict with U.S. objectives. U.S. efforts are more likely to  be effective in encouraging government action or achieving impact in a  foreign country where support for intellectual property protection exists.  It is difficult for the U.S. government to achieve impact in locations where  foreign governments lack the “political will” to enact IPR protections.
Many economic factors complicate and challenge U.S. and foreign  governments’ efforts, even in countries with the political will to protect  intellectual property. These factors include low barriers to entering the  counterfeiting and piracy business and potentially high profits for  producers. In addition, the low prices of counterfeit products are  attractive to consumers. The economic incentives can be especially acute  in countries where people have limited income. Technological advances  allowing for high-quality inexpensive and accessible reproduction and  distribution in some industries have exacerbated the problem. Moreover,  many government and industry officials believe that the chances of getting  caught for counterfeiting and piracy, as well as the penalties when caught,  are too low. The increasing involvement of organized crime in the  production and distribution of pirated products further complicates  enforcement efforts. Federal and foreign law enforcement officials have  linked intellectual property crime to national and transnational organized  criminal operations. Further, like other criminals, terrorists can trade any  commodity in an illegal fashion, as evidenced by their reported  involvement in trading a variety of counterfeit and other goods.
Many of these challenges are evident in the optical media industry, which  includes music, movies, software, and games. Even in countries where  interests exist to protect domestic industries, such as the domestic music  industry in Brazil or the domestic movie industry in China, economic and  law enforcement challenges can be difficult to overcome. For example, the  cost of reproduction technology and copying digital media is low, making  piracy an attractive employment opportunity, especially in a country  where formal employment is hard to obtain. The huge price differentials  between pirated CDs and legitimate copies also create incentives on the  consumer side. For example, when we visited a market in Brazil, we  observed that the price for a legitimate DVD was approximately ten times  the price for a pirated DVD. Even if consumers are willing to pay extra to  purchase the legitimate product, they may not do so if the price  differences are too great for similar products. Further, the potentially high  profit makes optical media piracy an attractive venture for organized  criminal groups. Industry and government officials have noted criminal  involvement in optical media piracy and the resulting law enforcement  challenges. Recent technological advances have also exacerbated optical  media piracy. The mobility of the equipment makes it easy to transport it  to another location, further complicating enforcement efforts. Likewise,  the Internet provides a means to transmit and sell illegal software or music  on a global scale. According to an industry representative, the ability of  Internet pirates to hide their identities or operate from remote  jurisdictions often makes it difficult for IPR holders to find them and hold  them accountable.
section_title: Industry Concerns
paragraphs: Despite improvements such as strengthened foreign IPR legislation,  international IPR protection may be worsening overall for some  intellectual property sectors. For example, according to copyright industry  estimates, losses due to piracy grew markedly in recent years. The  entertainment and business software sectors, for example, which are very  supportive of USTR and other agencies, face an environment in which  their optical media products are increasingly easy to reproduce, and  digitized products can be distributed around the world quickly and easily  via the Internet. According to an intellectual property association  representative, counterfeiting trademarks has also become more pervasive  in recent years. Counterfeiting affects more than just luxury goods; it also  affects various industrial goods.  An industry representative noted that  U.S. manufacturers of all sizes are now being adversely affected by  counterfeit imports.
An industry representative also added that there is a need for additional  enforcement activity by the U.S. government at the border. However, he  recognized that limited resources and other significant priorities for DHS  heighten the need to use existing resources more effectively to interdict  more counterfeit and pirated goods.
section_title: Conclusions
paragraphs: The U.S. government has demonstrated a commitment to addressing IPR  issues in foreign countries using multiple agencies. However, law  enforcement actions are more restricted than other U.S. activities, owing  to factors such as a lack of jurisdiction overseas to enforce U.S. law.  Several IPR coordination mechanisms exist, with the interagency  coordination that occurs during the Special 301 process standing out as  the most significant and active. Efforts under STOP! appear to have  strengthened the U.S. government’s focus on addressing IPR enforcement  problems in a more coordinated manner. Conversely, NIPLECC, the  mechanism for coordinating intellectual property law enforcement, has  accomplished little that is concrete and its ineffectiveness continues  despite recent congressional action to provide funding, staffing, and  clearer guidance regarding its international objectives. In addition,  NIPLECC does not include the FBI, a primary law enforcement agency.  Members, including NIPLECC leadership, have repeatedly acknowledged  that the group continues to struggle to find an appropriate mission.
Mr. Chairman, this concludes my prepared statement. I would be pleased  to respond to any questions that you or other members of the  subcommittee may have at this time.
section_title: Contacts and Acknowledgments
paragraphs: Should you have any questions about this testimony, please contact me by  e-mail at yagerl@gao.gov. I can also be reached at (202) 512-4128. Other  major contributors to this testimony were Emil Friberg, Leslie Holen,  Jason Bair, Ming Chen, Sharla Draemel, and Reid Lowe.
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