Intellectual Property: U.S. Efforts Have Contributed to Strengthened Laws Overseas, but Challenges Remain
Published: 2004-09-23T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Although the U.S. government provides broad protection for intellectual property, 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 recent GAO report, 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 assessing global intellectual property challenges and identifying countries with the most significant problems--an annual interagency process known as the "Special 301" review--and negotiating agreements that address intellectual property. In addition, many agencies engage in training and assistance activities, such as providing training for foreign officials. Finally, a small number of agencies carry out law enforcement actions, such as criminal investigations involving foreign parties and seizures of counterfeit merchandise. Agencies use several mechanisms to coordinate their efforts, although the mechanisms' usefulness varies. Formal interagency meetings--part of the U.S. government's annual Special 301 review--allow agencies to discuss intellectual property policy concerns and are seen by government and industry sources as rigorous and effective. However, the National Intellectual Property Law Enforcement Coordination Council, established 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. 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 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 and our recent  report on this topic. 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, you asked us to identify and  review their activities. 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  the enforcement efforts abroad.
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 our work from June 2003  through July 2004, 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 2004, 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.
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 was  conducted by numerous agencies over the last year 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 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. For example, the Department of Justice has an  office that directly addresses international IPR problems. 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 recently 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.”
Although investigations can result in international actions such as those  cited above, FBI officials told us that they cannot determine the number of  past or present IPR cases with an international component because they  do not track or categorize cases according to this factor. Department of  Homeland Security (DHS) officials emphasized that their investigations  include an international component when counterfeit goods are brought  into the United States. However, DHS does not track cases by a specific  foreign connection. The overall number of IPR-oriented investigations that  have been pursued by foreign authorities as a result of DHS efforts is  unknown.
DHS does track seizures of goods that violate IPR and reports seizures that  totaled more than $90 million in fiscal year 2003. Seizures of IPR-infringing  goods have involved imports primarily from Asia. In fiscal year 2003,  goods from China accounted for about two-thirds of the value of all IPR  seizures, many of which were shipments of cigarettes. Other seized goods  from Asia that year originated in Hong Kong and Korea. 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.
section_title: Several Mechanisms Coordinate IPR Efforts, but Their Usefulness Varies
paragraphs: Several interagency mechanisms exist to coordinate overseas intellectual  property policy initiatives, development and assistance activities, and law  enforcement efforts, although these mechanisms’ level of activity and  usefulness varies.
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
paragraphs: The National Intellectual Property Law Enforcement Coordination Council  (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 independent  staff or budget. In the council’s nearly 4 years of existence, its primary  output has been three annual reports to the Congress, which are required  by statute.
According to interviews with industry officials and officials from its  member agencies, and as evidenced by its own legislation and reports,  NIPLECC continues to struggle 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 an official from USPTO, NIPLECC is hampered primarily by  its lack of independent staff and funding. 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.
Despite its difficulties thus far, we heard some positive comments  regarding NIPLECC. For example, an official from USPTO noted that the  IPR training database Web site resulted from NIPLECC efforts. Further, an  official from the State Department commented that NIPLECC has had  some “trickle-down” effects, such as helping to prioritize the funding and  development of the intellectual property database at the State Department.  Although the agency officials that constitute NIPLECC’s membership meet  infrequently and NIPLECC has undertaken few concrete activities, this  official noted that NIPLECC provides the only forum for bringing  enforcement, policy, and foreign affairs agencies together at a high level to  discuss intellectual property issues. A USPTO official stated that NIPLECC  has potential but needs to be “energized.”
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 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. An FBI official  associated with the IPR Center estimated that about 10 percent of all FBI  industry referrals come through the center rather than going directly to  FBI field offices. DHS officials noted that “industry is not knocking the  door down” and that the IPR Center is perceived as underutilized.
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 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. USTR’s most recent  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.
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.
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. Conversely, the mechanism for  coordinating intellectual property law enforcement, NIPLECC, has  accomplished little that is concrete. Currently, there is a lack of  compelling information to demonstrate a unique role for this group,  bringing into question its effectiveness. In addition, it 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.
The effects of U.S. actions are most evident in strengthened foreign IPR  legislation. U.S. efforts are now focused on enforcement, since effective  enforcement is often the weak link in intellectual property protection  overseas and the situation may be deteriorating for some industries. As  agencies continue to pursue IPR improvements overseas, they will face  daunting challenges. These challenges include the need to create political  will overseas, recent technological advancements that facilitate the  production and distribution of counterfeit and pirated goods, and powerful  economic incentives for both producers and consumers, particularly in  developing countries. Further, as the U.S. government focuses increasingly  on enforcement, it will face different and complex factors, such as  organized crime, that may prove quite difficult to address.
With a broad mandate under its authorizing legislation, NIPLECC has  struggled to establish its purpose and unique role. 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. Such considerations could  help NIPLECC identify appropriate activities and operate more effectively  to coordinate intellectual property law enforcement issues.
Mr. Chairman, this concludes my prepared statement. I would be pleased  to respond to any questions that you or other members of the committee  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 or Emil Friberg at friberge@gao.gov. We can also  be reached at (202) 512-4128 and (202) 512-8990, respectively. Other major  contributors to this testimony were Leslie Holen, Ming Chen, and Sharla  Draemel.
This is a work of the U.S. government and is not subject to copyright protection in the  United States. It may be reproduced and distributed in its entirety without further  permission from GAO. However, because this work may contain copyrighted images or  other material, permission from the copyright holder may be necessary if you wish to  reproduce this material separately.