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51–834 CC








MAY 21, 1998

Printed for the use of the Committee on International Relations

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BENJAMIN A. GILMAN, New York, Chairman
HENRY J. HYDE, Illinois
CASS BALLENGER, North Carolina
EDWARD R. ROYCE, California
JAY KIM, California
TOM CAMPBELL, California
JON FOX, Pennsylvania
LINDSEY GRAHAM, South Carolina
ROY BLUNT, Missouri
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RICHARD BURR, North Carolina
SAM GEJDENSON, Connecticut
TOM LANTOS, California
PAT DANNER, Missouri
BRAD SHERMAN, California
BOB CLEMENT, Tennessee
BILL LUTHER, Minnesota
JIM DAVIS, Florida
LOIS CAPPS, California
RICHARD J. GARON, Chief of Staff
MICHAEL H. VAN DUSEN, Democratic Chief of Staff
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Subcommittee on International Economic Policy and Trade
ILEANA ROS-LEHTINEN, Florida, Chairperson
TOM CAMPBELL, California
LINDSEY O. GRAHAM, South Carolina
ROY BLUNT, Missouri
SAM GEJDENSON, Connecticut
PAT DANNER, Missouri
BRAD SHERMAN, California
BOB CLEMENT, Tennessee
TOM LANTOS, California
BILL LUTHER, Minnesota
YLEEM D.S. POBLETE, Professional Staff Member
AMOS HOCHSTEIN, Democratic Professional Staff Member
CAMILA RUIZ, Staff Associate

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    Hon. Bruce Lehman, Assistant Secretary and Commissioner of Patents and Trademarks, U.S. Department of Commerce
    Ms. Bonnie Richardson, Vice President for Trade and Federal Affairs, Motion Picture Association of America
    Mr. Jason Berman, Chairman, Recording Industry Association of America
    Mr. Steven Metalitz, Vice President and General Counsel, International Intellectual Property Alliance
Prepared statements:
Hon. Ileana Ros-Lehtinen
Hon. Bruce Lehman
Ms. Bonnie Richardson
Mr. Jason Berman
Mr. Steven Metalitz
Additional material submitted for the record:
Statement of the International Intellectual Property Alliance
Copyright Industries in the U.S. Economy: The 1998 Report—Executive Summary

THURSDAY, MAY 21, 1998
House of Representatives,
Subcommittee on International Economic Policy and Trade,
Committee on International Relations,
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Washington, DC.
    The Subcommittee met, pursuant to notice, at 1:20 p.m., in room 2172, Rayburn House Office Building, Hon. Ileana Ros-Lehtinen (chairman of the Subcommittee) presiding.
    Ms. ROS-LEHTINEN. [presiding] The Subcommittee will come to order. Thank you so much for waiting for us. We have a vote going on right now that is momentarily going to end; and as soon as it does, the Members will come in, I'm sure, although we have a series of votes coming up in just a little bit.
    Thank you for attending this hearing on such a timely and important topic. American ingenuity, creativity, and talent, throughout the centuries, has spiraled the United States into a position of global leadership. It has enabled us to adapt and build upon technological economic, political, and social changes to usher in a new era of growth and opportunity.
    This is the reality of the world we live in today—a world where brainpower industries have redefined the economic landscape, both here in the United States as well as internationally. Intellectual property is a source of comparative advantage for the United States and a wellspring of export opportunities by many of America's most creative and innovative companies.
    Recent figures reveal that the copyright sector is growing at twice the rate of the rest of the U.S. economy; that intellectual property is now our economy's largest exporter and source of revenue. A study conducted by the firm Economists Inc. found that core copyright industries accounted for over 3.6 percent of the Nation's GDP. This figure translates into approximately $278.4 billion in revenue for our U.S. economy. When combined with related industries, the figure increased by yet again 2 percent. The Motion Picture Association, represented today by Ms. Bonnie Richardson, calculated a 12 to 14 percent rise in revenues between 1996 and 1997, just for the film and television industry alone.
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    The potential is limitless, for a human being's imagination knows no boundaries. In much the same way that Whitney's cotton gin is credited with igniting the industrial revolution, intellectual property industries are propelling us into a new age of discovery and growth.
    The American formula for excellence and success in the area of intellectual property is one many would like to emulate. Unfortunately, many across the world are seeking to repeat the U.S. experience through stealing, pirating, counterfeiting, and other unauthorized use of American products. They are seeking to capitalize on the hard work and commitment of authors, songwriters, producers, publishers, and so many in these industries, by systematically violating intellectual property rights.
    The impact of piracy on the U.S. economy is widespread. As industry leaders have stated: ''Piracy puts brakes on the development of the national producers, generates tax evasion, reduces the creation of employment on the part of American companies, and it provokes serious losses for the national economy.''
    The pervasiveness of this infringement is resulting in billions of dollars in losses worldwide for our U.S. industries. The International Intellectual Property Alliance reported in 1996 that 29 countries cause more than $6 billion in trade losses. It is estimated that piracy in the People's Republic of China has cost U.S. copyright owners about $2 billion.
    Intellectual property right issues continue to be at the heart of U.S.-Japan discussions in a number of areas. It is an integral part of the negotiating agenda for the Free Trade Area of the Americas and a serious concern impacting U.S. relations with individual countries in the hemisphere.
    For example, improper enforcement of copyright and trademark laws threaten a broad range of U.S. exports to Mexico. It has been widely reported that 65 percent of all videos rented or sold in Mexico are pirated, posing a significant loss of royalties and property rights. Piracy levels in Mexico exceed 50 percent in all relevant categories, including software, motion pictures, sound recordings, and books.
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    The estimated losses last year were $425 million, up from $414 million in 1996, and there have been almost 2,000 raids conducted by U.S. motion picture, software, and recorded music industries in Mexico.
    Piracy and other violations of intellectual property is also a contentious matter with the European Union countries, such as Greece and other states that fail to take action against, for example, television stations that routinely broadcast U.S. movies and other programming without permits. Viewing this as a violation of obligations under the WTO, the United States has filed a complaint against Greece and the EU at the Dispute Settlement Body.
    Nevertheless, the issue of intellectual property rights is not just a matter of criminal violations of international and domestic laws. It is a direct infringement on free trade, as it creates distortion in the market and creates parallel black market systems which, in the end, will hurt, not just the United States but the global economy as a whole.
    For this reason, we must focus on protection and enforcement. We must look at the recent agreements reached, which are aimed at creating a framework to provide maximum security and recourse for victims of pirating.
    In essence, intellectual property rights are national in scope. The rights granted by a U.S. patent or copyright do not extend into foreign countries and the United States does not enforce intellectual property rights granted solely under foreign laws. Thus, in order to provide some degree of protection in foreign markets, national laws have been woven together by international conventions and treaties which traditionally establish limited standards of protection.
    The Convention for the Protection of Literary and Artistic Works has been the primary legal structure offering protection for production in the literary, scientific and artistic domain. Revised several times, it began to fall short of the demands for protection created by technological developments. It failed to fully address the new piracy threats.
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    It became evident that the global phenomena of intellectual property industries, a Finnish copyright specialist has said, ''can only be dealt with by a global approach and, where necessary, by global rules.''
    From the U.S. perspective, however, it should be a global approach that raises standards and does not infringe upon U.S. domestic laws or protection.
    One agreement considered by experts to be a good first step was the Uruguay Round and the WTO Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS), which took effect in January 1996. It established international obligations for the protection and enforcement of intellectual property rights, and established enforcement and dispute settlement mechanisms.
    However, there were still issues relating to protection of intellectual content in cyberspace, loopholes regarding duplication of sound recordings, and other challenges posed by global networks that needed to be addressed.
    In December 1996, the World Intellectual Property Organization Diplomatic Conference concluded negotiations on two multilateral treaties, one to protect copyrighted material in the new digital environment, and another to provide stronger international protection to performers and producers of phonograms. Experts underscore the latter's importance, as it would provide guarantees abroad of the same strong protection for American records, tapes, and compact discs abroad that is provided here domestically.
    There were a few policy issues that raised concern from different parties to the negotiations. Of particular interest for U.S. industries was the discussion over the liability of online service providers and other communication entities that provide access to the internet. In the end, this and other items were resolved by two separate agreed statements of the participating countries.
    Currently, there is implementing legislation in the House for both the Copyright Treaty and the Performances and Phonograms Treaty.
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    Thus, one of the purposes of today's hearing is to better inform Members on the issue of piracy and the protection of intellectual property, prior to the vote on the new international agreements. The music and film industry provide one of the most dramatic and relevant examples of the costs of infringement and the widespread nature of the problem. Through their experiences, we will all be able to gain a better understanding relating to intellectual property rights and free trade. As our witnesses will state today, this is a global issue, a national issue, and a local problem.
    I'm pleased to recognize Mr. Clement for opening statements that he might make.
    Thanks, Bob.
    Mr. CLEMENT. Madam Chairman, it's good to be here with you today. I guess you know I represent Nashville, Tennessee, Music City USA; and these issues are critically important not only to Nashville but to the world about fairness. And I'm looking forward to hearing what the various witnesses have to say today.
    Thank you.
    Ms. ROS-LEHTINEN. Thank you so much, Mr. Clement. We're pleased to introduce our first witness today. It's Bruce Lehman, Assistant Secretary of Commerce and Commissioner of Patents and Trademarks.
    Commissioner Lehman served as the head of the U.S. delegation to the World Intellectual Property Organization's Diplomatic Conference; and also chairs the working group on IPR of the National Information Infrastructure Task Force.
    Before assuming his current position, he was a partner in the Washington, DC law firm of Swidler and Berlin as counsel to the House Committee on Judiciary and as an attorney with the U.S. Department of Justice.
    We thank the commissioner for being here with us and providing us with insight on this very important issue.
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    Thank you so much, Mr. Lehman.
    Mr. LEHMAN. Thank you very much, Madam Chair. I'm not sure that I need to provide you with much insight because you had a very comprehensive statement which indicates that you already have a very, very good understanding of the problem.
    I want to thank you and welcome this opportunity to hold a hearing like this that helps educate Congress at large and the public on this very important issue.
    My prepared testimony cites some of the same statistics that you had in your opening statement so I'm not going to review those but——
    Ms. ROS-LEHTINEN. And we will put your opening statement, without objection, as part of the record.
    Mr. LEHMAN. Thank you very much, Madam Chair. I would observe, if one looks simply at the membership of this Committee, and Mr. Clement has already testified to this fact, and even in your own district, Madam Chair, you can see the reality of these statistics that you describe. It used to be that the entertainment industry, the copyright-based industries, were the New York, Los Angeles axis. That's just simply not the case anymore. It certainly is one of the biggest growth industries in Florida. It's a very important industry, as you know, in your own district. It's certainly a very important industry in Tennessee.
    With the rise of the computer software industry, which increasingly is becoming both, not just a highly technologically based industry, but also a cultural-based industry as well, we see intellectual property industries growing virtually everywhere in every State in the entire United States. So this is becoming an economic issue of great importance to all Members of Congress.
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    You referred, Madam Chair, to the problems of international enforcement and I'd just like to give you a little anecdote, when the international nature of this really dawned on me in a very, very big way. You indicated I was head of the Working Group for the Information Infrastructure Task Force Working Group on Intellectual Property Law for the Administration. Well, that committee was appointed soon after President Clinton took office, which was probably about 4 years ago now, at least 4 years ago. We had a lot of different committees and subcommittees. We had people working on telecommunications issues, people working on intellectual property issues, people working on privacy and security issues. And all over the city of Washington there were various government agencies focusing on this problem. And each of us were working, of course, on our own issue but about 2 weeks after we started working, I think it sort of dawned on every one of us, almost like mental telepathy, around town that we had really probably mis-named our effort. It should not have been the National Information Infrastructure Task Force because you really couldn't be talking about these issues and talking only about the United States; that we were, automatically, in a global context. With the rise of the internet, with the rise of the global information economy, it really was impossible to make policy without considering the global context.
    And, in fact, we did move to change a lot of our initiatives to the ''GII,'' the Global Information Infrastructure. So that's why it's very appropriate that this Subcommittee of the House International Relations Committee educate itself about this very important issue because it is an international issue and a global issue.
    Now, we've had piracy problems for quite some period of time. In the old days we really didn't have too many piracy problems because it was very hard to pirate a work. Back in the 1930's or 1940's when you produced a movie if you wanted to pirate it, you had to get a 35-millimeter celluloid film producing machine and transfer it from one film to another. And the sound recordings, you had to have a factory, virtually, in order to pirate something in the old days of the vinyl disks. But as technology began to change and recording technologies began to be a lot simpler and a lot easier to use, piracy began to be a problem. We saw that in the era of tape recorders, when tape recordings came in, because you didn't have to have a factory anymore, you could just rig up half a dozen or a dozen tape recorders and start to make analog copies of audio works, or, once video technology came into play, of audio visual works.
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    Congress recognized that, by the way, when in 1972 they brought the record industry, which heretofore had not been covered under Federal copyright law, under the copyright law. And that was very much a product of the introduction of those taping technologies. And most piracy that took place in the 1970's and 1980's was piracy of analog product and whereas it became more and more sophisticated it still had a competitive disadvantage with the real thing. Because when you make a tape recording of a videotape, or when you make a tape recording of an audit tape, the subsequent copies inevitably have lower quality. So at least you have some kind of advantage. But even in the face of that, we've seen enormous piracy problems.
    We're now moving very rapidly and have moved into a completely new era and that's because of the digitalization of the copyright world. Products are now being offered to the public in digital format. And a digital product can be copied an infinite number of times without any degradation in quality at all. The copy is every bit as good as the original. And so that puts a lot of pressure on the copyright enforcement system.
    It also illustrates why copyright law is very important because these creations are property; but they no longer can be defined by the physical package that they come in. In fact, increasingly, we don't even have the physicality of a compact disc, or a sound recording, a piece of vinyl, or anything like that. Products now can be distributed on the internet where they are nothing more than a series of digital bits, zeros and one's, that are transmitted through electronic impulses and carried by satellite and on through fiber optic cable and so on and so forth. And so the property virtually doesn't exist unless there's a legal regime to recognize it. And all of these industries that we are talking about and all the economic possibilities don't exist unless you have that fundamental property right underlying them.
    Madam Chair, I don't know how we can have trade and commerce if we don't have property rights. It's the very essence of a system of commerce and trade, and intellectual property consists of the property rights in these kinds of products.
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    Now, recognizing that the digital economy is producing a new paradigm for the production of works, we, in the Administration, move rather aggressively to try to review our own policies, our own domestic law, and the international law to put in place a series of new principles which would carry time-honored principles of copyright in the old forms of intellectual property into the digital age. And that's what the two treaties that you referred to, Madam Chair, are all about.
    In December 1996, the specialized U.N. agency that is responsible for making international norms and administering the world's patent and trademark and copyright treaties, sponsored a very large diplomatic conference. There were about 160 countries present, and they all agreed on two new treaties: the World Intellectual Property Organization (WIPO), Copyright Treaty, and the WIPO Phonograms and Performance Treaty, which, for the first time, will bring traditional copyrighted works into full protection in the digital age. And those treaties are very important. For the most part, they simply recognize that when works are used in a digital environment and an internet environment, that they enjoy the same level of protection that they did traditionally when they were sold in the form of a printed page, or a sound recording, or a compact disc, or a floppy disk, or a hard disk.
    But there are some unique new features to the treaties which are very essential. One, I would point out, is the fact that the treaty requires countries to recognize that intellectual property owners are not just going to have to rely on the law alone, they're going to have to use technology to protect themselves. And they will do that by using various kinds of copy protection mechanisms, encryption, and similar mechanisms, to prevent their work from being illegally copied. And the treaty requires all of the countries in the world that sign on to it to make certain that copyright owners can protect themselves against people who want to try to circumvent those technological protections. And that is a very, very important part of these treaties. And I know that some people have objected to that in the United States, but I want to make it very clear, Madam Chair, that those are extremely important provisions of the treaties; and I'm happy to report that they were overwhelmingly approved by a vote 99 to nothing when the Senate approved the implementing legislation to those treaties last week.
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    Compromises were made in the Senate. The legislation looks a little bit different than it did when we submitted it and different from the House of Representatives' version. But, I don't know of any bill, in my 25 years of being a Washington lawyer, that has ever come up to Congress from an Administration, or anybody else, that hasn't been changed some time during the process.     I think the Senate did a very fine job in balancing the interests, and I really look forward to the House taking up that matter as well.
    Traditionally, of course, these matters have been within the jurisdiction of the House Judiciary Committee, which has been responsible since 1790 for making patent, trademark, and copyright laws in the United States. But because of the international implications, the large commercial implications, it's only natural that other committees, like your own, Madam Chair, should be looking into this and I very, very much welcome this opportunity to work with you to try to obtain a broader understanding of these issues in the Congress.
    And I want to thank you very much personally for your leadership in this area.
    Thank you.
    [The prepared statement of Mr. Lehman appears in the appendix.]
    Ms. ROS-LEHTINEN. Thank you so much. Thank you for being with us. We're also joined by Congressman Salmon, who's not a Member of our Subcommittee, but is very interested in this issue; Congressman Chabot and Congressman Rohrabacher as well.
    Thank you. I would like to yield time now for Congressman Rohrabacher for questions that he might have.
    Mr. ROHRABACHER. Thank you very much. Mr. Lehman and I know each other very well as having been adversaries on a couple of issues; and friends on a couple of issues.
    Mr. Lehman, today you are presenting to us a picture of foreign predators who are willing to steal America's creative products, something that you are presenting to us in a fashion that suggests that this is something you are very concerned about, and are trying to offer us some alternatives that would take care of that.
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    That China and other countries might be able to steal our songs and our writings is a major challenge. Yet, Mr. Lehman, and you realize what question is coming now, yet, Mr. Lehman, the protection of our artists and writers is something that you are very concerned about because there are these foreign predators; while, at the same time, you are advocating changing our patent laws that make available to these very same predators more information than they have today. And by disclosing that information before patents are issued, makes it more likely that those technological creative products will be stolen. It seems to me to be a major contradiction from wanting to protect writers and songwriters but willing to take people who are developing technologies that will make us safe or keep us more competitive with these foreign predators by letting all of that information out. So, could you explain to us what seems to be an apparent contradiction?
    Mr. LEHMAN. I'd be happy to respond to that, Congressman. First of all, let me say that the good news is that apparently we agree on the subject matter of this hearing. And I think the good news is that we agree, generally, on the objective, even in the patent system, it's just that we have different points of view about how to get there. That's a problem, apparently, we don't have on this subject.
    Obviously, we have two kinds of intellectual property. We have the intellectual property in the information industries, which is protected by copyright; and then we have the intellectual property in the hard tech industries, which is protected by patent. And these are America's greatest competitive assets, and it is absolutely critical that they be protected as much as possible on a global basis so that we can trade in them. And the fundamental principle behind the Administration's policies in international patent law is to achieve that objective.
    There's a big difference between how copyright works are treated under international law and patented works. Because for over 100 years we've had a series of multi-national treaties. We had the Berne Convention, which historically protected copyrighted works, and now we have these two new treaties that I referred to. We have long had a harmonized system of protecting copyrighted works around the world. And, in fact, the moment you lift pen from paper, or your finger from a keyboard on a computer when you're creating an information product, under the existing international treaties, you automatically have rights that vest in virtually every country in the world. Now enforcing them is a little bit different matter. And that's one reason we have to be very vigilant, both in the trade side and on the normative side in the subject matter of this hearing. But you automatically have those rights.
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    With hard technologies, that's not the case, though. You do not have a patent until the government gives you one. And that's even true in the United States and there's an important reason for that. And that is because a patent has to meet a very high standard in order to be issued. And the standard is that it has to be novel and non-obvious and useful. That means that no one else in the history of the world has created this particular product. And that's important because if you issued a patent on something that wasn't novel, then you would be issuing a property right on something that somebody else already had out there. And that would be inappropriate.
    Mr. ROHRABACHER. But there are predators, but there are predators overseas——
    Mr. LEHMAN. Yes, it's very important that we have a patent examination procedure to issue patents. That means that in every country there has to be some mechanism for grant of a national patent right. When we give you a patent in the United States, it's only good within the borders of the United States. And so the Administration's policy has been to create a worldwide patent system that will encourage people to file patent applications within this country and then to make it easy for them to file patent applications in every other country in the world, have harmonized rules in every country in the world, so that we will have the basis for fighting piracy anywhere where it may occur, whether or not it's inside or outside the boundaries of the United States.
    Mr. ROHRABACHER. You wouldn't be advocating for writers and artists to let their creative product out, even from what you just said, to let it out on the market, or let other people see it without copyright protection, but yet your policies toward patents are even before the patent is issued, you believe it should be published so that those people—those predators we're worried about stealing our songs and our books—so they will have the detailed plans of our technology even before the patent is issued.
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    Mr. LEHMAN. Well, that's not my position, Mr. Rohrabacher, and, you know, we simply disagree on how to get there. I would just say that our policy——
    Mr. ROHRABACHER. Well, I thought that was the basis——
    Mr. LEHMAN. —was developed after holding extensive public hearings and virtually every major business and industrial organization in the United States that relies on the patent system, from the American Manufacturers' Association to the Software Publishers' Association to the Pharmaceutical Research Manufacturers' Association, the Biotechnology Industries' Association, the Electronics Industries' Association, and on and on and on support the provisions that I'm talking about.
    Mr. ROHRABACHER. So I take it that you say now that you are withdrawing your support for the 18-month disclosure?
    Mr. LEHMAN. No, I'm saying that they favor 18-month disclosure.
    Mr. ROHRABACHER. No, no, you just said that wasn't your position. You're trying to say that you now don't believe that after 18 months that if a patent hasn't been issued that that will be made public?
    Mr. LEHMAN. Well, you know——
    Mr. ROHRABACHER. That was the center point of your whole reform package.
    Mr. LEHMAN. —this is a hearing about copyright, Mr. Rohrabacher, and I was attempting to explain why we have taken the position that we do. And it is because overwhelmingly U.S. industry has asked us to do so precisely because they feel that it is the best mechanism for protecting their rights.
    Mr. ROHRABACHER. I generally don't have people ignore the substance of the question and go on with a list of people who are endorsing certain plans, but that's all right.
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    Madam Chairman, thank you very much. I think people understand the contradiction here.
    Ms. ROS-LEHTINEN. Thank you so much, Mr. Rohrabacher. Mr. Clement.
    Mr. CLEMENT. Yes, Commissioner Lehman, I know you and several others involved daily with the trade aspects of intellectual property have previously communicated your concerns, but could you explain for this Committee whether the music licensing legislation attached to the copyright term extension bill passed earlier this year, would put the United States in violation of any of our international copyright and trade agreements?
    Mr. LEHMAN. Yes, Mr. Clement, that legislation would be catastrophic for everything that we're trying to accomplish. The Administration is very strongly opposed to it. It is a legislation that virtually goes against everything that we've been talking about here. It gives a very large number of users of copyrighted works the right to use them for absolutely free. And, in that case, I believe various kinds of establishments that serve food and drink, we wouldn't permit them to obtain the glassware or the beverages or the food stuffs that are used in their establishments for free and yet there seems to be a desire on the part of some people to take away that fundamental property right for these intangible intellectual property products.
    It's going to be very difficult for us to go to other countries which are resisting effective copyright enforcement and getting them to comply if we lead the way by carving out a major sector of use of intellectual property from protection in the United States. And, in fact, I don't think there's any question about it that it could expose us to a violation of our obligations under the WTO agreement, and that would have implications that would go beyond the area of intellectual property because if a country is found to be in violation of their agreement, then other sectors of the economy can be forced to pay the price for that, the agricultural sector, or other sectors. So, even if a particular Member of Congress may not have an IP-based industry in his or her district, they may well have agriculture or other interests which would pay the price for U.S. failure to meet its obligations under these international treaties.
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    Mr. CLEMENT. I know my colleague awhile ago commented about predators, but I tell you what, from what I know, a lot of people feel like that they've truly been shafted, been treated rather shabbily, and surely hadn't been heard in Washington, DC concerning this legislation, which compromises the intellectual property rights of our songwriters and assaults their ability to make a living. In effect, passage of this legislation sent out a signal to both the American creative community and to the world at large that intellectual property no longer holds any value in the United States.
    And I'm not surprised by the latest figures which reveal that intellectual property is now the economy's largest exporter and source of revenue. Because of this, I feel strongly that we must work to ensure that the property rights of any individual should not be considered secondary to the rights of others. Do you agree with this?
    Mr. LEHMAN. Yes, I do, Congressman, and I can assure you that the Administration does as well and we will take every action that we can to abide by that.
    Mr. CLEMENT. Now, tell me one more time how adversely this affects our creators? What are the negative aspects, go through them one, two, three, four, five, and what this does to us?
    Mr. LEHMAN. Well, to put it another way, Mr. Clement, you have a lot of automobile factories in Tennessee, how do you think an automobile worker would feel if he put in a good 8-hour-day putting together an automobile and then somebody could just go out on the factory's parking lot and take it away for free without paying any money for it. I mean, it's as simple as that. You wouldn't have an automobile business very long, and you wouldn't have any jobs in those factories. And exactly the same thing is true with the music business in Nashville.
    Mr. CLEMENT. Let me ask you about the piracy issue, and I know you commented in your testimony, are we making any progress in mainland China, concerning the piracy issue?
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    Mr. LEHMAN. Yes, I think we are making some progress, Congressman. It's slow going sometimes. It's one of these problems where you stamp out the problem in one place and then it shows up in another place, a thousand miles away, 2 weeks later. And that's what has happened in China. The Chinese Government has indeed engaged in efforts, in some cases, to crack down on piracy, and we made some progress but then we see the activity shifting to Hong Kong, we see it shifting to Macao, which are outside the direct jurisdiction of the national government there so it's a little bit of a shell game and that's why it's very important that we constantly keep putting pressure on every place that piracy can occur at every time.
    And I have to say we saw an example of that just Monday. I was in Geneva with the President at the 50th anniversary of the world trading system and he delivered a major speech to all of the assembled heads of states and ministers; and he specifically indicated that the protection of intellectual property has to be one of the principal objectives of the world trading system, in every country, not just the developed countries. And we are, every single day that goes by, we are working on that. And it's something that the USPTO is involved with.
    In fact, as we're sitting here, people from my office are in several countries in the world, oftentimes along with representatives from the U.S. Trade Representative's office, or people from the State Department, from our Bureau of Economic Affairs, making it very clear to foreign governments that there will be a price to pay if they do not respect our intellectual property rights.
    So it's a process, and it's something that we have to be engaged in constantly. And it has yielded some success. I don't think we'll ever be in a situation to figure out how to completely stop theft. I think that people have been trying to stop theft ever since the nomads came off the steppes and put a little fence around the fields and planted crops. Somebody was ready to come in there and break down the fence and steal their crops; and our prisons are still full of people that want to steal tangible goods. So, it is something that is going to have to take diligence, year in and year out, day in and day out, as far as the eye can see.
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    But we are making some progress and we'll make more progress if people understand that the U.S. Government stands united behind our efforts, and that's why it's a good thing to see this Committee involved because you are very much involved with our activities across the board on an international basis.
    Mr. CLEMENT. Thank you, Commissioner.
    Ms. ROS-LEHTINEN. Thank you so much, Mr. Clement. Mr. Chabot.
    Mr. CHABOT. I thank the Chairman. Mr. Lehman, in your opinion, what are the most important protections that the international copyright treaties will extend to those who are victimized by electronic international piracy, particularly of sound recordings?
    Mr. LEHMAN. Well, first and foremost, up until these two treaties, or particularly, the Phonograms Treaty, since that was your question, we really didn't have an international treaty to which the United States was a party that really effectively protected this at all because sound recordings are not covered under the Berne Convention, which is the principal copyright treaty that has governed the relationships among countries for over 100 years. In our country, we protect sound recordings under the copyright law. But in most other countries in the world, they're not protected under copyright, they're considered to be something different that they call ''neighboring rights.''
    And so we didn't have any treaty which really pulled together the U.S. system and the system of these other countries. And so now in the Phonograms Treaty we will have that. And that's very critical because that, along with the TRIPS agreement, which is a part of the WTO agreement, Trade Related Aspects of Intellectual Property, will now give us the legal foundation in every country in the world that adheres to both agreements to really go after, in a very strong way, intellectual property piracy in sound recordings.
    Of course, the other important feature of both the sound recordings treaty and the copyright treaty is that it also brings the principle of copyright enforcement, or intellectual property law enforcement, squarely into the digital age so nobody can use the excuse that the old laws, the old treaties, didn't cover digitized works as a reason to justify piracy. And that's particularly important in the internet environment. And, you know, this isn't just something that's going to help copyright owners too, it's going to help consumers as well because the internet is a wonderful medium for distributing product. But I don't know any rational business person who is going to put a product into an environment where it's automatically going to be stolen. So, putting into place a system of enforceable intellectual property rights in the internet environment is absolutely a predicate to permitting consumers to receive product through that medium, including audio product.
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    Mr. CHABOT. Just one specific followup question, and specifically with respect to China, it's my understanding that in China that pirated music and movies sell for as little as one-tenth of the retail price and that makes it virtually impossible for legitimate products to compete. Could you specifically relate what's going on relative to——
    Mr. LEHMAN. Well, I think you hit it right on the head, anywhere piracy takes place, whether it's China or any other place, obviously the product is a lot cheaper. And that's true of intellectual property in general whether it's a drug, or whether it's a movie. It takes a very large investment to create these products, and if you don't have to make that investment and you can just rip off somebody else's investment, you can obviously undercut them. That completely distorts the entire market mechanism that supports the creation of these products.
    It obviously hurts us as producers of these products. But, interestingly, it hurts even more the nascent creators in the countries where the piracy is most rampant. China, for example, is a very large country, has a language and a culture quite different from ours, and I would assume that there's probably a great potential for the development of products in China for the Chinese consumer that an American company could never produce very well; and yet that possibility is precluded when the Chinese creator has to compete against a product that has been ripped off in the United States. And the same thing can be said all over the world in other countries. And part of what we are trying to do in government today and in the international organizations is to educate policymakers in other countries about the fact that this isn't just a question of paying out money to the United States, this is a question making it possible for your own industries to take off and grow.
    One of the reasons the United States is the prosperous country and powerful country that it is today is because in 1789, our Constitution provided for the protection of intellectual property as a Constitutional right in Article 1, Section 8. And one of the very first laws passed in 1790 by the U.S. Congress were the patent and copyright laws; and they have produced in 200 years the most vibrant industry in the world. Countries that have not done that aren't as prosperous as the United States and they're even going to be less prosperous because this is where the jobs of the future, the economic activity of the future, is going to be in.
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    So, we need to work with other countries to make that understood. And I think we're making some progress. You know, when you look at many countries around the world, 20 years ago, people were adopting the Marxist-Leninist model. They didn't believe in property rights at all. All around the world now you've seen that change. You've seen people sell off State industries; you've seen people deregulate economies, put in place free market mechanisms. And I think leaders around the world are beginning to appreciate that one of the mechanisms that they have to put in place to go to the next level of developing their own economies is a functioning intellectual property system. But it takes a lot of work, of effort, of discussion, of education to get us to that point. So it's not an entirely bad picture, but this is one of those things where every percentage point that we can reduce in piracy is just more wealth that belongs rightfully to us and that's going to be flowing back into the United States. So it's just something we're all in government—and in the private sector—going to have to work on for a long time.
    Mr. CHABOT. Thank you. I yield back.
    Ms. ROS-LEHTINEN. Thank you so much, Mr. Chairman. Mr. Berman was here with us. I don't know if he would like to come back and ask some questions, but thank you so much for being with us.
    If you could address the issue of piracy, what are the profits for those who are engaging in this illegal practice, and are there penalties that are imposed under the international agreements that we've already entered into sufficient to deter piracy? Or is it unfortunate, like the drug trade, that the profits are of such high magnitude and the penalties nonsufficient?
    Mr. LEHMAN. Well, the treaties, the two treaties, that we're talking about—and, indeed, the Berne Convention and the TRIPS agreement, which is part of the WTO treaty—they don't spell out exactly what the prison sentences have to be or what the level of civil damages has to be, but they require that the remedies be effective remedies.
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    By the way, that's why it's extremely important that the United States move expeditiously to ratify and implement these two new copyright treaties, because our legislation does provide effective criminal penalties, in the case of criminal piracy, and effective civil remedies, in the case of piracy that can be addressed that way. When that legislation is in effect, then we will have a template that we can use, that the Trade Representative can use, that we in the Commerce Department can use, the State Department can use, when we are in negotiations with other governments to advise them as to what they need to do to implement their responsibilities in these treaties to provide effective remedies.
    An effective remedy is a remedy that stamps out piracy. It is not a remedy that is a slap on the hand. But this is one of the principal problems. We're beginning to get countries all over the world now that are putting in place laws that they didn't have. They're having copyright laws and trademark laws. Beginning to develop the enforcement mechanisms is really, really the tough part.
    For example, China is going to be having, I think within the next month or two, largely as a result of U.S. pressure, what they call a special enforcement period, where they're bringing all of the law enforcement agencies of the Chinese Government together in a concerted effort to crack down on piracy.
    In many countries we have seen where they don't have very highly developed court systems, we've seen them develop, usually under U.S. pressure, specialized courts that are set up simply to handle piracy cases. Oftentimes criminal laws are used in countries where the civil laws are not adequate. But it's a mixed bag and the moment we pull up on the pressure, usually, there's a sliding back. I hope that answers your question.
    Ms. ROS-LEHTINEN. Specifically relating to some of the treaties that we've entered into, it is our understanding that in the WIPO treaties that substantive and technical changes will have to be made of our U.S. laws, our domestic laws in order to comply and be in agreement with these treaties, for us to be in compliance with them. If you could elaborate on this and how does this affect the protection of U.S. laws to American products? As you know, one of the difficulties that we have with these international treaties is that then we lower our standards and lower our protection for American products. If you could please elaborate on changes that we will have to make to be in compliance with these treaties?
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    Mr. LEHMAN. Yes, I'll be happy to do that. First of all, I should say that for the most part these treaties will cause other countries to bring their laws up to U.S. standards even, for example, in countries that have fairly extensive protections, such as European countries. They have concepts in their law that make it easier in a digital environment to make unauthorized use of a copyrighted work. For example, in some countries where there is a distribution to the public of a copyrighted work, the copyright owner doesn't have the exclusive right to control use of that work. He or she only has the right to receive a payment, to receive money and oftentimes that payment can be basically determined by a regulatory procedure, sort of a quasi-governmental regulatory procedure, and collected through a collecting society and that isn't a free market mechanism that results in fairness to the copyright owner.
    Under these treaties, countries will have to provide to works that are distributed in a digital environment the same rights that we already provide in the United States because we have for a long time had in our copyright law the principle that a distribution of a work, not just copying it or publicly performing it, but a distribution of a work, is an exclusive right of the copyright owner. So we don't have to make any changes in our law in that regard, we'll be asking other countries to make changes in theirs.
    But there are some things in the treaty that will require changes in U.S. law. And the most significant feature is the one that I referred to earlier in my oral statement, and that has to do with the new problems that we have in the digital environment where there is absolutely no tangibility whatsoever, you have no physical product involved when you distribute a copyrighted work, and that means that a copyright owner is going to have to make use of encrypting technologies, of copyright management technologies, of the very computer technologies, and software technologies that are used to support the internet. They're going to have to use those technologies to put an electronic envelope around their work; and the right to use that electronic envelope, the sanctity of that electronic envelope, and the fact that it is every bit as much of a violation of law to rip open that envelope in an unauthorized way as it is to go down and take somebody's mail out of their mailbox and rip open that paper envelope, that is now recognized in these treaties. That is not a part of U.S. law currently and that is one of the major changes that is made by the legislation.
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    And one reason it is so important that we lead the way in doing this, and also in setting up what the penalties will be for violations, is because then we'll be in a strong position to go to other countries and say, ''Look, we're leading the way as the world's greatest producer, greatest user of intellectual property works, and you should follow this example.''
    Ms. ROS-LEHTINEN. And following up on that, Commissioner, we had known that there were about 30 countries that need to adhere to these treaties, they need to make some changes, and you have talked about some of the changes that they need to make, some examples, what kind of leverage do we have to make sure that these countries comply? Which countries are we focusing in on? What has been their response? How slow or how quick are they making those changes to comply with these treaties? And does this process of adherence affect our U.S. industries during this process?
    Mr. LEHMAN. Well, first, Madam Chair, when you refer to 30 countries, there will be a lot more, hopefully, a lot more than 30 countries, that will ratify this treaty, hopefully every country in the world will, certainly, every country that is a member of the WTO will. But the 30 number is the number of countries that have to ratify the treaties and implement them in order for them to go into effect. And, first of all, I think that will happen fairly soon, hopefully, by the end of this year because between the developed countries in the world and the United States and the European countries, Japan, and so on, who clearly have every intention of implementing the treaties expeditiously, we'll achieve that magic number of 30.
    But in these countries that are moving to ratify the treaties and implement them, there are differences of opinion about exactly what the rules and regulations ought to be, the fine points of law, even between us and the Europeans. And that's why it's particularly encouraging that the Senate acted last week because now the U.S. model will be the principal model.
    And I have to say that even though a lot of copyright industries are based in Europe, we don't always have the best relationships with European countries because, as you know, one of the areas that is not a part of the World Trade Organization treaty is the so-called ''audio visual sector,'' the cultural-based industries. And the United States has just an overpowering presence in that field that oftentimes some of our trading partners, even in the adult world, are more than willing to make it a little hard for us to enforce our rights there. So it's very important that the United States lead the way and then we will use whatever other leverage we have, the State Department and the U.S. Trade Representative's office, and the Commerce Department, to encourage those countries to come up to our standards.
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    And I think when they do that, then you'll see the developing countries fall into line as well. Now those developing countries really don't have the sophistication, in many cases, to do a lot of mischief when they make laws in this area. And so they really look to a country like the United States as the model to copy. And, again, that's why it's important that we give them a model expeditiously to copy.
    Now, the problem in the developing countries isn't going to be so much, I think, with the developing what the law is going to be, it's going to be once the laws are on the books there, developing effective mechanisms for them to enforce them and we've already talked about that, the problems in China and so on and so forth.
    So, we really need to create that model for other countries. And I think, hopefully, we're moving quickly here. If the House can move on this bill quickly, by the time that the summer is over, or maybe even before July 4th recess, that would be awfully nice if we could get this done, the President can sign this, we can have the treaties ratified, and then we can go about the job of going country by country. And I can tell you, it's an arduous job, you know, sending some of the very fine lawyers that we have in our office and in the USTR, and the State Department, to country after country, capital after capital, and saying, ''This is the model. This is what you need to do.''
    Ms. ROS-LEHTINEN. Thank you so much. We're very pleased to have with us one of the most active Members of our Subcommittee, Mr. Sherman, who I would like to recognize for questions at this time. Brad.
    Mr. SHERMAN. Thank you, Madam Chair. I would have been here at the beginning of this hearing but there is—and it's just concluded—a Memorial Service for Walter Capps, who was a Member of our Committee and we planted a tree for him on the East Lawn.
    I want to thank Mr. Lehman for being here to focus his attention on piracy of our intellectual property, particularly in China. You may have covered this in your opening statement, but I'm told that there are 31 identified pirate operations producing both music and reproducing video entertainment in China. How much of a decline, or increase, have we seen in the level of Chinese piracy of our intellectual property in the various areas of music and video entertainment over the last several years?
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    Mr. LEHMAN. Well, Congressman, our analysis of the level of piracy in a country is based to some degree on estimates because we don't have the capacity to go into China and knock on every door and find out what they're doing.
    Mr. SHERMAN. So a few of these pirate firms answer those questionnaires from the Department of the Census?
    Mr. LEHMAN. That's right. We're long beyond having debate over sampling or actual knocking on the doors there. I wish that was the level of the debate that we were having. We have made progress in China, there's no question about it. But it's an enormous huge market in an enormous huge country and it seems like for every—sometimes, I'm not sure whether we take two steps forward and one step back, or sometimes one step forward and two steps back.
    In the last year, the problem in China has been when we crack down on people in China, they then move to Hong Kong and to Macao. If every person in Macao and every person in Hong Kong bought every pirated work that was made, their house wouldn't be able to hold them all. So, these are obviously products that are either re-exported back into China or to other places in Asia.
    Mr. SHERMAN. Mr. Lehman, you're saying the Chinese Government asserts sovereignty and ownership of Hong Kong and Macao but then when there's piracy there, they say, ''Well, that isn't China?'' I thought Hong Kong became part of China, was reunited with China last year.
    Mr. LEHMAN. Well, this is really a question that the International Relations Committee is more aware of than I am but I would have to say Hong Kong and Macao obviously have separate administrations and separate legal systems and that was a part of their agreement when the United Kingdom and Portugal ceded back those territories to China. And so the Chinese enforcement authorities do not have direct control over them.
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    In a sense, though, this is an example of a problem that I think that we've had in China in general. You can make an agreement with the people in Beijing but what the people in Hueng-Chao or out in Xian or Shanghai do is another matter. It's a big complex society and it isn't as rigid and as carefully controlled as it was in the past, and I wouldn't attribute that entirely to a lack of good faith in Beijing. I think there's obviously some lack of good faith on the part of some people but a lot of it is a question of developing more comprehensive national legal systems and enforcement systems in China. And we're working with them on that. But you have that particular problem in Hong Kong and Macao where obviously they're even less, it's sort of a Federal system like we have here, and they're are less under the thumb of Beijing than the Chinese provinces and cities are.
    Mr. SHERMAN. Well, I would hope that if they are a Federal system whose Federal Government can't control the individual provinces, that they would at least consent to us passing a law that each of our 50 States could exclude Chinese textiles, shoes, or toys without the Federal Government getting involved. And certainly as long as China finds it in its interest to pirate our intellectual property on the one hand, it has no absolutely no retribution from the United States on the other except letters of complaint, that we will continue to see this level of piracy.
    Has the Administration made it clear to the Chinese that not a revoking of Most Favored Nation status, but some diminution of that status, MFN-minus, might be the appropriate Administration-recommended response? We don't have to grant MFN. We could say MFN, except for toys; or MFN, except for toys made in those cities identified by your department as being the location—provinces not just cities—we don't want to get involved in looking at municipal boundaries—those provinces that contain a pirating operation identified by your department. Have we threatened the Chinese with anything worse than an angry letter?
    Mr. LEHMAN. Well, the short answer to that is yes, Congressman. Intellectual property issues have always been at the forefront of the U.S.-Chinese relationship for many, many years, certainly, under this Administration. And I think it was probably about 2 years ago we came very close to $3 billion worth of trade sanctions on China when they did not meet previously negotiated agreements. And it was only after ships were heading across the Pacific Ocean and might not be able to be unloaded in Los Angeles, and Seattle, and what not, that the Chinese reversed their position and began being more cooperative with us.
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    As you know, the United States does not support a major objective of the Chinese Government, that is, their admission to the World Trade Organization. As a developing country, we want them to abide by the same rules and regulations that developed countries have to abide by and one of the most important of those areas, rules and regulations, is intellectual property. And we've made that very, very clear to them. So that is a major objective which they are attempting to achieve. And we've made it clear that intellectual property enforcement protection is an important part of that.
    So, I think it is not fair to say that it has just been sending a letter or two. But I would make the observation that I don't hear in the Foreign Relations Committee that to that extent that other issues complicate the U.S.-China relationship, it sometimes makes it more difficult to focus them and to focus our relationship on these very important economic issues. And so it is something that we have to keep in mind.
    China is a sovereign country. I don't believe we're about to go to armed conflict over intellectual property protection. And so we have to use a combination of diplomatic tools in order to achieve our objectives. And those involve carrots and sticks and it's a very complicated situation involving a very complicated relationship. But I can just tell you this that the Clinton Administration is very, very serious about obtaining more effective intellectual property protection in China.
    Mr. SHERMAN. I commend the Administration for that one brief instance when there was the possibility of some sanctions. I'd point out that perhaps that achieved some purpose for a while. But can you assert today that the total value of all the piracy in China is lower today than it was when that incident occurred several years ago? Or is the problem even worse than when we were willing——
    Mr. LEHMAN. My impression is that the piracy problem in China itself is not as bad as it was——
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    Mr. SHERMAN. When you say, ''China itself,'' though you're excluding Hong Kong and Macao?
    Mr. LEHMAN. Yes.
    Mr. SHERMAN. Which sounds rather foreign to Members of this Committee since in every other respect the Chinese Government insists that we treat Hong Kong and Macao as indivisible parts of——
    Mr. LEHMAN. That's not actually true, Congressman, because Hong Kong, we have a quite separate trading relationship with Hong Kong.
    Mr. SHERMAN. Yes, I know. When it benefits the Chinese——
    Mr. LEHMAN. —well, that's something that Hong Kong wanted, not just China, so——
    Mr. SHERMAN. —to have different—What?
    Mr. LEHMAN. That's not something that is simply a Beijing-driven thing. I mean, I think that it's very clear that the people and the Government of Hong Kong also wish to have separate treatment. And I should say, by the way, I think we're making progress in Hong Kong. I think Macao is a more serious problem. Hong Kong has the British legal tradition, they have mechanisms for enforcement that exceed that of Macao.
    Mr. SHERMAN. I would just comment, Mr. Secretary, that you're saying that it benefits both the Chinese in one part of China and the Chinese in another part of China to simultaneously assert that Chinese sovereignty exists throughout the country, and the military of China and the PLA is stationed in every part of that country, that their sovereignty is not to be degraded in any way, and yet they should be regarded as separate for trade purposes, especially when piracy is involved. The fact that that approach is embraced both in Beijing and in Hong Kong doesn't mean it should be embraced in Washington. And finally, I'll point to the fact that, to add insult to injury—and correct me if I'm wrong—the Chinese Government imposes quotas on the importation of sound recording so it becomes illegal to import into China the legitimate sound recording and on a practical basis, very easy to sell the pirated recordings. Is there, indeed a quota on the importation of sound recordings from the United States into China?
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    Mr. LEHMAN. I can't answer that question, Congressman.
    Mr. SHERMAN. Perhaps, the next panel.
    Mr. LEHMAN. Well, let me say, I don't want to give the impression that there's any kind of, certainly on my part or the Administration's part, adversarial context between our position and yours. I think we have the same objective. We're on the same side. It's simply a question of how to achieve that and to the extent our U.S. legal system and our trading system and time-honored agreements and treaties that we've entered into in the past create some difficulties for us, that's perhaps something that you and the International Relations Committee may wish to consider.
    Ms. ROS-LEHTINEN. And, Mr. Chairman, if the other panelists do not answer that question, our Subcommittee will be glad to do the research and get that for you next week.
    Mr. SHERMAN. Thank you very much.
    Ms. ROS-LEHTINEN. Very good question. Thank you so much, Commissioner, for being with us. Thank you for your expertise and we look forward to working with you as that legislation moves forward.
    We have a vote but I would like to introduce our second panel and then just recess for a few minutes while we go vote.
    Thanks, again, Bruce, for being with us.
    Mr. LEHMAN. Thank you very much.
    Ms. ROS-LEHTINEN. Our second panel will be led by Ms. Bonnie Richardson, vice president for trade and Federal affairs with the Motion Picture Association of America. Before joining the Association in 1994, Ms. Richardson served as director for service negotiations at the Office of the U.S. Trade Representative. She entered the Foreign Service in 1978, serving in numerous capacities at the State Department and abroad.
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    She will be followed by Mr. Jason Berman, who serves as chairman of the Recording Industry Association of America. Mr. Berman is a member of the board of directors of the International Federation of Phonographic Industries—I want to make sure I say that one right—member of the Commission of the U.S.-Pacific Trade and Investment Policy; and member of the U.S. Trade Representative's Service's Policy Advisory Committee. Recently, he was on a 4-month leave of absence from the Association to serve as special counselor to the President.
    And rounding off our panel will be Mr. Steven Metalitz, vice president and general counsel of the International Intellectual Property Alliance; and counsel to the Creative Incentive Coalition. Previously, he was vice president and general counsel of the Information Industry Association, has served in several capacities at the Senate Judiciary Committee, and as a legislative director to Senator Charles Matthias.
    We welcome all of you here today. We look forward to hearing your testimony. We will just recess for a few minutes, vote, and come back.
    Thank you. The Subcommittee is in recess.
    Ms. ROS-LEHTINEN. The Subcommittee is once again in order. We thank you so much for your patience, and, Ms. Richardson, if Mr. Berman, and Mr. Metalitz, if we are ready, we will begin. Ms. Richardson.
    Ms. RICHARDSON. Madam Chairman, I'm honored to have the opportunity to speak with you today. The issue of protection of intellectual property rights in world markets is critical to the motion picture industry.
    With your permission, I'll summarize my written testimony in my oral remarks.
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    Ms. ROS-LEHTINEN. And we will put all of your remarks as part of the written record. Thank you.
    Ms. RICHARDSON. I'd really like to highlight four areas today: First, the role of the motion picture industry in the greater U.S. trade balance; then, the record of the World Trade Organization in addressing intellectual property issues; an overview of the countries where we have our biggest piracy problems; and, finally, a couple of areas where we would appreciate your help.
    I will start with our role in international trade and I was going to use the most quoted statistic in today's hearing, that is the copyright industries are the No. 1 export but you already told us that.
    Ms. ROS-LEHTINEN. I don't want to be accused of pirating.
    Ms. RICHARDSON. There are 3.5 million Americans who are employed in these industries and they will only keep their jobs and only be able to help lower the trade deficit if their creativity is protected by good copyright laws. It costs our studies on average $70 million to produce a major studio film; and we can only recoup that investment if we use and have good access to overseas markets. Almost half of the revenues from theatrical exhibition of motion pictures comes from outside the United States. Unfortunately, each year our companies lose $2.5 billion because governments fail to protect our intellectual property. Most of our losses are caused by illegal copying of video cassettes. In Asia, we also face an explosion in the unauthorized reproduction of movies on video compact discs.
    I'd like to move now to the role of the World Trade Organization. The WTO has a new set of rules which have really helped the filmed entertainment industry. The rules on protection of intellectual property have been enforced aggressively by this Administration. In fact, they brought 10 intellectual property cases in the first 2 years of operation of this agreement. There have been important precedents set with countries like Ireland and Japan. There's a new case just starting, as you mentioned, in Greece; and we believe that the WTO has pretty much established its credibility and has been very useful to us. But that doesn't mean that our bilateral trade instruments aren't important. In fact, Special 301 remains extremely important, our key weapon in fighting piracy.
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    Each year the Administration gives Congress its ''to-do'' list of the countries that they want to focus on in improving intellectual property abroad. Among those countries, one of the priorities for the motion picture industry includes Italy. For more than 3 years, the Italian Government has been promising the President, the U.S. Trade Representative, and a series of Ambassadors, that they were going to pass an anti-piracy bill to increase criminal penalties for copyright infringement. Only yesterday, the governing party in Italy introduced an amendment to that bill that would lower the penalties back down to their current inadequate levels.
    We already lose $220 million in Italy each year. That's almost twice what we lose in China. The vote on this provision in the Italian Senate is scheduled for next Wednesday. There is no single issue that is more important to the motion picture industry than the need for Italy to redeem its promises to pass this anti-piracy bill and increase criminal penalties.
    There's an issue I didn't raise in my written testimony because it's a brand new issue, and that's a recent action by New Zealand. The government introduced a law and passed it within 48 hours. They did not consult with the U.S. Government, one of their key and close trade allies. They did not consult with their own industry. Instead, they simply stripped all of the copyright industries of parallel import protections. That's when you have a legal copy that's authorized for distribution in one market but not authorized in a different market. When you remove parallel import protection, piracy increases because the same people who import the parallel imported products also import the piratical discs. It also makes it extremely difficult for us in the motion picture industry to keep our various products apart. Theater owners are hurt if videos come into the market as parallel imports while the movie is still supposed to be playing in the cinema. So, this is a big problem for us and we're really discouraged by the process and the failure to consult by the New Zealand Government.
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    Two other priorities were mentioned in your opening remarks, Madam Chairman, the problems in Greece and the problems in Mexico. In Mexico; I'd only add that the NAFTA does include some pretty good rules for protection of intellectual property, and we in the motion picture industry are beginning to look at those rules to see whether maybe a dispute settlement case there is the solution to our problems.
    There's been a fair amount of discussion on China. At least for the motion picture association, our major problems, which were the domestic production of optical media works in China and their export all over Asia, have been pretty much brought under control. It is true that when the problem was brought under control in the Mainland, the pirates fled elsewhere to Malaysia, to Hong Kong, to Macao. Although the Hong Kong Government was slow in addressing the problem, we do believe we now have their attention. They've passed some innovative laws that may help us get this one under control.
    Russia is another case. In fact, our biggest losses in the world are in Russia. We're cautiously optimistic that we may be seeing some improvement there.
    Finally, with regard to future action, there are two areas where we need your help. One of the most important pieces of legislation which Congress can enact this session to help ensure the continued vitality of the American copyright industries is implementation of the WIPO treaties. The WIPO implementing bill would generally make it illegal to circumvent technologies put in place by copyright owners to restrict access to and use of our works.
    These bills would also protect copyright holders from online piracy while granting the online and internet service providers limited copyright infringement liability exemptions. This implementing legislation does not alter fair use principles nor does it inhibit research or interfere in any way with consumer devices like VCR's.
    The second bill where we hope your cooperation can help us assure our continued competitiveness in global markets is the Copyright Term Extension bill. We believe the United States should keep up with and, in fact, we think we should be the leader in creating international standards of copyright protections. But in this one area of the length of copyright protection we're, in fact, significantly lagging behind. There are approximately 30 countries that already have a term of protection of 70 years or more, whereas we in the United States are lagging behind.
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    One of the troubles here is that until the United States has a law, the EU and the other countries that have the longer term of protection are under no legal obligation to extend that additional 20 years of protection to our works. This rule of the shorter term, or in trade parlance, ''reciprocity,'' is the prevailing principle when it comes to copyright term protection.
    The Copyright Term Extension bill has been passed by the House but, unfortunately, as was mentioned earlier today, it did contain a damaging amendment which allows bars, restaurants, and retail stores to play music without having to pay a fee for licensing the use of that music. The companion term extension bill has been introduced in the Senate but hasn't yet moved. We hope that Copyright Term Extension will be enacted by this Congress but without provisions that weaken copyright protection or place the United States in violation of international obligations on TRIPS and WIPO.
    Thank you.
    [The prepared statement of Ms. Richardson appears in the appendix.]
    Ms. ROS-LEHTINEN. Thank you. Mr. Berman.
    Mr. JASON BERMAN. Thank you, Madam Chairman. The piracy of U.S. copyrighted materials represents one of the greatest barriers to the ability of U.S. companies to sell their creative wares in foreign markets. Significantly reducing piracy represents America's greatest and most immediate mechanism for improving our overall balance of trade, which is, as you may have noticed, in a serious state of disrepair. Losses to the record industry alone, on a global basis, due to piracy are estimated to be $5 billion annually.
    Let me take a moment to describe what today's pirate operation looks like because many people are under the mistaken impression that pirates are poor struggling individual entrepreneurs working away in dark and dingy basements or garages turning out poor quality tapes on old equipment to be sold by street vendors or in flea markets, three for less than $10. Nothing could be further from the truth. While a variant of this type of pirate still exists in a few places in Latin America, piracy today is dominated by large, well-financed, multi-national criminal enterprises. The pirate music carrier of choice is the compact disc and the distribution network of pirate materials is global.
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    A CD pirate facility probably costs well in excess of $1 million just to build. And the manufacturing process itself is likely to be taking place in a number of different territories. A typical modern-day pirate operation might look something like this. The creation of the master for duplication in Taiwan or Singapore. The master is then shipped to Macao for mass reproduction. Thousands of copies are shipped on through Hong Kong and Panama to a port in Brazil where they are trucked and enter customs territory of Paraguay. The insert cards are printed in Paraguay where the final product is packaged and shrink-wrapped. Copies are then sold in Ciudad del Este in Paraguay, but at the border with Brazil and Argentina, destined for retail markets in Brazil, Uruguay, Bolivia, and Argentina.
    While the task of fighting piracy is indeed daunting, I wouldn't want to leave you with the wrong impression because recently significant gains have been made in dealing with pirate production in particular places. In certain cases, progress has been nothing short of spectacular. And this, I think, will address Congressman Sherman's question, but I'd be happy to answer it in greater length. Mainland China, just 2 years ago, was home to the world's greatest assemblage of compact disc plants, churning out pirate products for export.
    Since the U.S.-Sino Intellectual Property Agreement was reached in 1995, and that, incidentally, was the result, as Congressman Sherman noted, of the imposition of sanctions under Special 301, and under constant pressure from USTR, the manufacture of pirate CD's has been drastically reduced. In that timeframe, over 60 pirate disc lines have been closed in China. Unfortunately, pirate activity on an equally massive level has been relocated to Macao and Hong Kong.
    And I'll just indicate the level. This is an article from the South China Morning Post about a seizure which just took place in Hong Kong. Forty-one CD replication lines, one digital DVD line, seven mastering machines, seven printers, 7 million optical discs, 3,000 stampers. Thirty-three of these lines were pressing U.S. movies and recordings. In addition to this, 11 people were actually arrested in this raid, including a very high ranking customs official in Hong Kong; and as a result of that, another 1 million discs were seized in a related operation. The capacity of this operation is 1.2 million discs a day. It's a staggering concept. And that's the good news. The bad news is if we discovered these discs, what is really happening in Hong Kong that we haven't discovered?
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    Similarly, within the last 2 years, Bulgaria, of all places, has emerged as a major producer and exporter of pirate CD's. But a clear indication from the United States that Bulgaria will face trade sanctions if it doesn't resolve this situation appears to have triggered a dramatic turnaround in this situation.
    Our hope is that this is something more than a temporary response to temporary U.S. pressure. Now, Congress has played a very significant role in facilitating and furthering the progress that has been made recently. First, by the creation in 1988 of Special 301, and by demonstrating your continued interest in protecting the interests of U.S. intellectual property owners through oversight hearings just like this.
    And one of the most important things that Congress can do now to ensure the protection of U.S. copyrighted works in global commerce is to pass, without delay, legislation that implements our obligations under the treaties recently concluded at the World Intellectual Property Organization, the Copyright Treaty and the Performances and Phonograms Treaty. By doing so, the United States will be taking a major step forward in establishing an international legal structure that will help to prevent piracy on the internet and through other global communications mediums.
    As a practical matter, the unauthorized digital transmission of a sound recording by cable, audio, or internet service is no less piratical than cassette or CD piracy. We need to ensure that standards of protection are not outdated by technology.
    And I'll just conclude by saying the adoption of these treaties by the United States is the first and most critical step in getting other nations to do so. We are the world's leading exporter of intellectual property materials. If we don't set the standard, there is no incentive for anyone else to do so. The task ahead will be difficult not only because we focus our attention on the enforcement of adequate standards but because such standards need to be adopted in so many countries where they are lacking and because new technologies are making the protection of intellectual property rights more difficult. Technologies that permit unauthorized access, collection and storage, are expanding more rapidly than the ability of copyright owners to protect their property and quickly outdistancing legal protection.
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    So, again, I would call on the Congress at the earliest possible moment and, in particular, before Congress adjourns this session to enact legislation necessary to permit the United States to ratify these treaties.
    Thank you, Madam Chairman.
    [The prepared statement of Mr. Jason Berman appears in the appendix.]
    Ms. ROS-LEHTINEN. Thank you so much, Mr. Berman. Mr. Metalitz.
    Mr. METALITZ. Thank you very much, Madam Chairman. I'm suffering the fate of the last witness at every hearing and that is that many of the important points have already been made.
    Ms. ROS-LEHTINEN. They haven't been made by you.
    Mr. METALITZ. Well, it's particularly true in my case because I'm joined here at the table by leaders of two of the seven trade associations that make up the International Intellectual Property Alliance. So, of course, they have already covered many of these points.
    Our coalition represents the range of U.S. copyright industries from books, recordings, and music, to film, videos, and TV programming, to computer software for business and for entertainment. The Alliance has been together since 1984 working to strengthen copyright law and enforcement in more than 100 countries around the world. We also commission the economic studies that have been cited. The most recent one, the 1998 report, which was just released a couple of weeks ago, and which has been cited by many of the witnesses, shows, once again, that these industries are among our Nation's largest and fastest growing economic assets and now, for the first time, are No. 1 in the category of foreign sales and exports, outstripping automotive products, agriculture, aerospace, and every other sector in the U.S. economy. So we're very proud of that particularly because we know that a strong export sector is the key to global competitiveness.
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    The problem of piracy is a cloud in this picture, of course, and still a very serious one. It inflicts substantial damage on all the creative industries to the tune of about $18 to $20 billion each year by our estimate. We survey the situation yearly as part of the report that we make to the U.S. Trade Representative's office, and there are some success stories and some good news. Some countries are making progress but the problem remains very serious around the world in the countries that Bonnie Richardson has mentioned and those that Jay Berman has touched on. And really on almost every continent, this continues to be a serious problem.
    One thing that we're very concerned about is that technology is driving this problem to get worse. The digital revolution and proliferation of the internet and other networks give the copyright industries new ways of reaching new customers and new markets. But these very same technologies magnify the threat of piracy. And as you've just heard, these are global pirate networks that depend very heavily on digital technology. It's never been easier or cheaper or more profitable for pirates to steal the fruits of American creativity than it is today. In this environment, pirates can make limitless perfect copies, disseminate them around the world at the touch of a button, and carry out their activities with less fear of detection and capture than ever before. So this is a very serious challenge that we face to keep this problem from getting out of control.
    We do offer four suggestions about how to approach this on the global level, At the top of our list, as you've heard from the other witnesses this afternoon, is stronger international legal standards and, particularly, bringing into force the two new treaties that were adopted in 1996 by the World Intellectual Property Organization.
    The United States led the way in the negotiation of those treaties and we hope it can lead the way in ratifying and implementing them. The tools to do that are at hand; H.R. 2281 is the bill in the House which has been ordered reported by the Judiciary Committee. I understand the report will be filed this week. It makes the limited changes that are needed to bring our laws into full compliance with the obligations of these treaties, and, as Commissioner Lehman mentioned, our task is simple on the legal side. There aren't many changes that are needed for U.S. law. The challenge is much greater for other countries, but if we don't take that first step, they are extremely unlikely to follow.
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    We have been surveying the situation in many countries around the world with respect to ratification and implementation of these treaties. They have a number of different difficulties in bringing this about, but if I had to put my finger on one, it is the failure of the United States to take the first step. And once we do that, I think we're going to see a lot of momentum building to reach that number of 30 to put the treaties into effect. Hopefully, we can get every major country to ratify these treaties.
    The Senate has already approved the companion legislation by a vote of 99 to nothing. They've adopted some amendments that are aimed at foreclosing any unintended adverse consequences on libraries or on schools, on the consumer equipment manufacturers, or on individual internet users. So that would certainly be at the top of our list.
    Our second recommendation concerns implementation of the TRIPS agreement, the World Trade Organization agreement on intellectual property rights. A key deadline is coming up: January 1, 2000. By that date all the developing countries are supposed to bring their laws into full compliance with this treaty. Most of the countries in the WTO are developing countries. A lot of these countries have put good new laws on the books and they are in compliance or are close to being in compliance with the substantive obligations. The problem is with enforcement. TRIPS requires that these rights be enforced and it requires that commercial copyright piracy be met by deterrent penalties, not a slap on the wrist but serious penalties.
    We're dealing with an organized piracy business here, and the only way to stop that is to make it extremely unprofitable and unpleasant to be in that business. That means serious fines and, in many cases, for the serious commercial pirates, jail terms.
    Many countries, even countries that have good laws on the books, haven't followed through with enforcement. There's a lot the United States can do to encourage these countries over the next 19 months to bring their laws, and their enforcement systems, into full compliance with the TRIPS agreement. We think that should be a major focus over the next year and a half.
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    The third area which has been mentioned is the problem of excess capacity in the production of optical media—compact disks; CD-ROM; video CD, which is a format we're not familiar with here but is very important in Asia; and the new format, DVD, or digital versatile disk.
    Macao has been mentioned and it really epitomizes this problem. It is a protectorate with a few hundred thousand people that has a capacity to turn out a quarter of a billion optical disks each year. Obviously, that's not feeding the local market; it's basically being devoted to piracy.
    Macao has not yet been handed over to China and this is a problem that we urgently feel must be addressed before that handover happens.
    And, finally, the problem of end-user software piracy. If you look at the statistics of piracy in China, for example, the overall piracy losses have not gone down despite the progress that's been made in the audiovisual area and the area of sound recordings. The reason is the continuing high level of software piracy. In China, but also in many other countries around the world, it's standard operating practice for businesses to buy one copy of a software application that they need in their business and then make many unauthorized copies for use in their daily operations.
    Most alarmingly this is also a common practice in many government offices around the world. Until this problem is addressed, the software piracy rates that we've been seeing will not come down. Tolerating this piracy is really in no country's interest, but the U.S. Government has to take the lead here since the U.S. software industry is so dominant in the world.
    Once again, thank you very much for convening this hearing. I'd be glad to try to answer any questions.
    [The prepared statement of Mr. Metalitz appears in the appendix.]
    Ms. ROS-LEHTINEN. Thank you so much to the three excellent panelists. You had talked about some of the technological changes and they go so fast, are the laws that we've written and the treaties that we've signed into written in such a way that they keep up with the technological advances, or do you believe that so far they have not?
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    Mr. METALITZ. Well, I think that was the motivation behind the two new treaties that were negotiated. One of the motivations was to bring the minimum legal standards into line with the developments in technology and to make it clear that no matter how copyright owners disseminate their works including over digital networks, they have the ability under copyright to control that distribution. These treaties just set minimum standards. In many cases we're urging countries to go beyond those standards, but it is important for us to raise the floor by getting as many countries as possible to sign on to the minimum standards, and then move on from there.
    Ms. ROS-LEHTINEN. Thank you. How would you rate the effectiveness of the NAFTA IPR agreement? What is your position on initiating a complaint under NAFTA to enforce U.S. rights and do you believe that Mexico should be put on a priority watch list?
    Mr. JASON BERMAN. Well, from the point of view of the U.S. recording industry, I might point out that for every legitimate cassette we sell in Mexico, the pirates sell two. So, it's a very difficult place to do business. There's a discussion going on right now between USTR and the Mexican officials about the need to move forward expeditiously and effectively on an enforcement program. Quite frankly, if that fails to materialize, and I don't mean reaching an agreement because we've had many agreements with Mexico and the text of the NAFTA in regards to intellectual property is world-class, so that is not the issue.
     The issue in Mexico is political will to enforce. And we're going to see, my guess is over the course of the next few months, whether or not there is that will. In the absence of that, we would strongly vote for going forward with our sister organizations in trying to resolve this under the terms of NAFTA.
    We've been very, very patient with the Mexicans.
    Ms. ROS-LEHTINEN. How would the WIPO treaties help your industries, for example in the case of China, Argentina, Greece, or any country. How do you perceive the situation to change as a result of these treaties?
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    Mr. METALITZ. Well, there could be an immediate impact in the recording industry because one of the treaties raises protection for sound recordings to a level similar to those for other types of copyrighted works. I think for the copyright treaty, the answer to that depends on the type of piracy that is involved. Commissioner Lehman mentioned one example: these treaties require countries to recognize that the copyright owner has exclusive control over distribution of copies of works.
    We've had that right for many years in the United States. Many other countries don't have it. Many of the European systems don't have it, and other legal systems that are derived from the civil law, European model. So that would be an immediate help in many countries where you don't necessarily catch the guy who's making the copies, but you can catch the guy who is selling the copies. If you have a clear, exclusive distribution right, that's another important legal tool to combat piracy.
    Ms. RICHARDSON. I was about to say you specifically mentioned Greece. One of our frustrations with Greece is it does not require a change in law; it is not a new technological problem. This is a 10-year problem that you know exactly who the pirates are, you know exactly where they operate. Sometimes they even publish in the newspaper what they are going to pirate and when they are going to pirate it. This truly is a situation of political will. We haven't made the price of confronting their own pirates high enough until right now. Bringing the WTO case, we believe, provides a real incentive because if they don't correct their problems in the course of this case, then they will have to take a hit somewhere else.
    Mr. JASON BERMAN. As Steve pointed out, in the case of the U.S. recording industry it brings enormous benefits immediately and that is to say that in many nations of the world, and particularly in the European countries which have highly developed systems, nevertheless sound recordings are protected under something known as neighboring rights. Unfortunately, the neighborhood in which we're protected is not the same as the other neighborhood which is copyright and so this would equalize that.
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    Ms. ROS-LEHTINEN. Thank you. Which one do you believe is the more effective in protecting our U.S. intellectual property rights industries, the WTO system that has been set up or the Special 301 measures?
    Ms. RICHARDSON. We don't see it as an either/or situation. Special 301 first and foremost is a priority-setting exercise. It's our opportunity in an organized way to tell the government where we see the problems and we do so in a 500-page book each year, I think. Steve does a lot of the writing of that. And then it's the U.S. Government's turn to say given their resources what are they going to tackle for the next year. And some of those things that they identify they will address through bilateral negotiations under Special 301. Some of those issues they will shoot into the World Trade Organization's dispute settlement process. They actually fit together pretty nicely in our view and it's a good one-two shot.
    Mr. METALITZ. The whole WTO process, in a sense, was something of a gamble when we started on it. It was the first time that intellectual property standards have been included in one of these global trade agreements. Turning a lot of the enforcement over to a dispute settlement process was controversial but so far we're pretty pleased with the results.
    The USTR has been very effective in bringing some of these cases. What we found is that once they start the process of bringing the case to dispute settlement, the other side is usually ready to start talking about settlement pretty quickly. We hope that will be the case in Greece as well, but it's been the case in Japan, it's been the case in Ireland, and in other countries. We would say so far, so good.
    Ms. ROS-LEHTINEN. Thank you so much. Mr. Sherman.
    Mr. SHERMAN. Thank you, Madam Chairman. I know that we want to move forward with ratification of these treaties, there is some discussion that that ratification process should be combined with focus on OSP liability. Is that still a concern? That that red herring will be brought into this and what would be the harm of trying to deal with that issue while dealing with the ratification implementation?
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    Mr. JASON BERMAN. The herring is out of the jar, Congressman, and as in the case of the genie, it can't be put back in. This was something actually that developed in Geneva during the course of the discussion on the treaties and the telcos and the online service providers were devising quite an ingenious strategy. As a result of which, we've reach accommodation and I, quite frankly, don't think it would have been possible to move the treaties forward in the absence of this accommodation, given who the opponents were.
    We've reached an accommodation in both the Senate and the House Judiciary Committees and I believe it's the basis for going forward. While it's not a pure bill, it accommodates what became the reality.
    Mr. SHERMAN. Thank you. We passed Sensenbrenner out of this House, a deliberate act to weaken domestic copyright rights. What effect would this have on our efforts to deal in the international sphere, if it became the law of the land?
    Mr. JASON BERMAN. Well, I don't want to speak for the interests affected by the Sensenbrenner amendment, other than to say that the recording industry certainly didn't look upon it with favor. But I do think in any instance where the United States goes out into the world, asking other countries to raise the level of protection, to protect U.S. works, after all we are the largest exporter, and then turns around and in its own domestic law, reduces the level of protection, I think it makes the task much more difficult in general. So that even though this involves a specific instance involving songwriters and the music publishers, the fact is software, movies, recordings, books, that the United States is trying to get protected in other places will be exposed as a result of it.
    Mr. METALITZ. It opens up a gap in our law that just invites other countries to call us before the World Trade Organization and that's the last thing we need when we're trying to use that tool proactively to try to open markets, to try to increase the level of copyright protection around the world.
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    Mr. SHERMAN. Is it accepted in international law that the copyright owner, whether it be in Japan or France or any other country that is actually not only a signatory to but properly following these provisions, that bar owners, restaurant owners, et cetera, are supposed to pay the copyright owner, the song writer?
    Mr. METALITZ. Yes, what we have in our laws is the public performance right. It sometimes goes by different names in other systems. It is a well-established feature of the Berne Convention and, therefore, of the TRIPS agreement. The question is to what degree can there be exceptions to or limitations on that right. It is already very clear that if we adopted what's in the Sensenbrenner amendment, that we are going to be faced with a complaint at the World Trade Organization. It's extremely likely, anyway.
    Mr. SHERMAN. And let's say Sensenbrenner hadn't come up with that idea here, but someone in another signatory country had put forward the same amendment or legislation, would that be a violation of these treaties such as we would file something with WTO, not that we would be on very strong ground now with this becoming close to our law, but in the absence of a Sensenbrenner here, would it be a clear violation of these treaties for any other country to have adopted it?
    Mr. METALITZ. I feel sure that if the shoe were on that foot, we would be pressing very hard through USTR to have this dealt with.
    Mr. SHERMAN. OK. Focusing on Macao, and you're correct to point out that technically, legally, Macao will not be part of China for, I believe, it's another 14 or so months, China has exercised virtual total control over Macao. In fact, many goods are manufactured in China, labeled as coming from Macao and allowed into this country as Macao products so it would seem that the same Special 301 approach, that was used vis a vis China could be used vis a vis Macao.
    We could either continue this dance of viewing Macao separately or view it as part of China. What would be your response to using Special 301 and opting for the scenario of just using against Macao?
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    Mr. METALITZ. We did recommend, and the USTR followed our recommendation in this case, that Macao, which has never appeared on the Special 301 list before, be elevated to the Priority Watch List, which is the No. 2 category. We think that if there isn't progress very quickly, that we should move up to the next category of Priority Foreign Country so that sanctions could be imposed. We do have a trading relationship with Macao and it is vulnerable to trade sanctions. If they are unable to take the steps needed to try to bring this terrible problem under control, then we think Special 301 is the way to go.
    Mr. SHERMAN. The People's Liberation Army operates in Macao and will operate under its own flag later. I'm sure, that they have the physical capacity to control anything that is this large.
    Mr. METALITZ. There is an overall problem of the lack of the rule of law in Macao, and that complicates the situation. The last reports we've gotten is that Macao is starting to take some steps to put in place the kinds of controls, for example, that Hong Kong has recently put into place.
    Mr. SHERMAN. But when you're talking about tons of products moving out of a harbor, now China is arguably the second-most powerful nation on the planet. I assure you, that nothing goes into that harbor that the military and civilian government authorities of Macao and China don't want to go in, except in small smuggleable quantities. You seem to be talking about a quantity of material going out of Macao every day that far exceeds what any other potent government is unable to prevent coming into its territory. Perhaps you could describe, or perhaps Mr. Berman could describe how physically these goods go from Macao to Hong Kong, for example, or from Hong Kong to Brazil.
    Mr. JASON BERMAN. They chance it through Hong Kong. I mean there's no question. The irony in terms of Macao, as Steve pointed out, that a year ago it didn't appear on the list. That's because a year ago it wasn't that kind of a problem of this magnitude in Macao. As the plants closed on mainland China, they were simply, what we call ''whakemo''; they simply appeared someplace else.
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    I think its the great irony, quite frankly, Congressman, that the true hope for making serious inroads on the problem in Macao rests with China.
    Mr. SHERMAN. But I want to ask how these good physically, you're saying these goods being manufactured in Macao——
    Mr. JASON BERMAN. Yes.
    Mr. SHERMAN. —they're on some sort of container ship——
    Mr. JASON BERMAN. Right. Through Hong Kong.
     Mr. SHERMAN. Thus is the Government of China unable to spot a container ship going from Macao to Hong Kong. Then they're processed further in Hong Kong and they go to Brazil so they cross—I mean, to the extent we view Macao as a separate entity—they're crossing the Macao-China border, and then they are going out of China. So you get two international transactions—and we're not talking about, you know, little one-man subs with a pound or two of contraband.
    Mr. SHERMAN. In container ships.
    Mr. JASON BERMAN. Correct.
    Mr. SHERMAN. You probably know which ship, if the Chinese——
    Mr. JASON BERMAN. In some cases, we do. The problem in that regard is the level of Customs operations, and in most of the countries in that region, with the exception of Hong Kong, Customs is not operating at a level that we would consider adequate. And so we've been through this in particular with China, we've had a number of training seminars, our U.S. Customs has gone to China, and my hope is that we're going to see a result. If not, then Special 301 is the tool for resolving this; and in fact Macao probably does export to the United States some things that would be vulnerable.
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    Mr. SHERMAN. And many other things that at least come here with a Macao label.
    Mr. JASON BERMAN. That's another issue, yes.
    Mr. SHERMAN. And if they're going to take the position that they are made in Macao, and you're going to put a Macao label on it, then you have to suffer sanctions aimed at Macao.
    Finally, currency can be counterfeited but when an expert looks at it, an expert can determine it is counterfeit and counterfeit bills are immediately destroyed by any proper authority that gets their hands on them. When we're dealing with counterfeit CD's, it occurs to me that, ultimately, these are being sold in stores in Buenos Aires and Rio de Janeiro, et cetera. The description you gave was, I think quite illuminating. This is not just ''pfffft'' in the back of my truck; I've got a CD.
    Are these counterfeit CD's recognizable and provable to be counterfeit when your experts look at them?
    Mr. JASON BERMAN. The answer is in most cases, yes, and of course that would be even more so if in fact these jurisdictions were to adopt the same kind of system that is now in effect in Hong Kong, which is not only to license the production to production facility, but to require title verification. So I mean it is highly unlikely, for example, that a CD manufacturing plant in either Bulgaria, or Paraguay, or Macao, has the rights to Bruce Springsteen or Mariah Carey or Gloria Estefan, for that matter. So——
    Mr. SHERMAN. I'm looking not at the production end but the distribution end.
    Mr. JASON BERMAN. If you're distributing a piratical product in an environment in which you would otherwise be required to license the facility, to go through title verification, and then put an identification on the mold producing it, you can, in fact, establish for any police authority, any legal system, the fact that that is not an authorized duplication.
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    Mr. SHERMAN. OK. I mean the ultimate market for the billions of dollars of pirated music is not only streets in China itself, but, if I understood your explanation, know how hard you work for the record association and how hard you worked for the President, you need a vacation in Rio.
    Mr. JASON BERMAN. Thank you. No, it's actually a very unappealing place.
    It's on the State Department watch list.
    Mr. SHERMAN. The watch list for piracy?
    Mr. JASON BERMAN. No, the watch list for danger, for tourists.
    Mr. SHERMAN. Let's assume that you go to another beautiful location for rest and relaxation, in a very safe neighborhood in a city in Brazil. And you were to walk in and buy a Bruce Springsteen CD and recognize with your own expertise, or, I'm sure you might be traveling with someone else from your organization that has the expertise, look at that and it was demonstrably a counterfeit.
    Mr. JASON BERMAN. A pirate.
    Mr. SHERMAN. A pirate.
    Mr. JASON BERMAN. There's a technical between a counterfeit——
    Mr. SHERMAN. What's the difference in counterfeit and piracy?
    Mr. JASON BERMAN. Well, counterfeit will represent the fact that the total product was illegal, that is the graphics, the artwork, the trademark was infringed, and everything. A pirate version is simply the unauthorized reproduction of the sound recording.
    Mr. SHERMAN. Are the pirated versions designed to look identical to legitimate versions, or the consumer knows right up front, this is pirated?
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    Mr. JASON BERMAN. I would say in the case of optical disks, including the CD, the answer is it is designed to look exactly like the legitimate purchase.
    Mr. SHERMAN. So it's a pirated counterfeit?
    Mr. JASON BERMAN. In most cases, the answer could be yes. This is totally different than the traditional kind of cassette piracy we've been accustomed to, where the graphics automatically tell you this is not a legitimate thing because it's blurred, or the ink has run, or whatever.
    In the case of almost any digital reproduction, the quality of that reproduction and the way pirates go about doing it, is going to be difficult for someone other than an expert to identify.
    Mr. SHERMAN. OK. Well, let's say you're traveling with an expert. You went into a record store in the safest neighborhood in Rio de Janeiro, and——
    Mr. JASON BERMAN. There are some. No question.
    Mr. SHERMAN. —and you discover two products. One is the runny ink, not even really an attempt to make people think that they are buying an authorized product on the shelf and the other is something that you think is legitimate but your friend, the expert, says, ah, I can prove it's not legitimate. Is the Brazilian Government or the Argentinean Government going to send its law enforcement people to that store and regardless of whether or not the store owner is blameworthy or blameless, obviously he is blameworthy with regard to the noncounterfeit, mere pirated, going to do what you often see on the news here in the United States and that is take all the pirated and counterfeit stuff, put it in the middle of the street, and run a bulldozer over it?
    Mr. JASON BERMAN. In some cases, the answer is yes. For example, you know, the interesting thing about Mexico which was raised earlier. I've been in Mexico so many times watching bulldozers go over I don't know how many millions of pirate versions. Of course, the problem is not just having the product seized and having it destroyed because you are dealing with the end result of a process, and the whole idea of trying to make some headway against piracy is not at the end of the process, it's at the beginning of the process. It's at the manufacturing stage. We have witnessed in the last 2 years an enormous explosion in the ability of people to produce optical disks on which they could put the U.S. recording, U.S. motion picture, U.S. software, a book, or anything. So the source of the problem lies in the ability of people to get equipment and now we're facing an interesting situation where there has been a generational problem in equipment.
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    We have a whole new generation of equipment, so the earlier equipment is now going on the market and this is just creating an enormous problem and the problem has to be addressed at the source, and the source is the manufacturing capacity. And there the issue has to be the ability of the United States to negotiate with its trading partners, the imposition of licensing and verification procedures.
    Mr. SHERMAN. Let me ask the other panelists, do you tend to agree that we should focus almost exclusively on the production side of this, the countries where the pirated material is produced, or whether we would have much effect going after the material in the countries where it is consumed?
    Mr. METALITZ. I think Mexico is the best example of this. Mexico probably leads the world in the amount of a pirated product that has been seized and destroyed over the last several years. A lot of it is not digital product, but be that as it may, the bulldozers are running continuously. But if you take all of those 2,000 raids and see how many of them resulted even in indictments and of those indictments how many of them resulted in convictions, you are down to the number you can count on your fingers.
    Mr. JASON BERMAN. No, the number in Mexico of anyone who has actually served a jail sentence is zero.
    Mr. METALITZ. That's the punch line here, and it's not just a Mexico problem but Mexico exemplifies it.
    Mr. SHERMAN. So the profitability of this for those on the distribution and retailing end is so great that even if they have a 5 percent chance of losing 5 percent of their inventory, in 5 percent of the years of operation is the cost of doing business.
    Mr. JASON BERMAN. The cost of doing business.
    Mr. METALITZ. And that's why the TRIPS obligations which require the imposition of deterrent penalties are so important. The requirement is not just that you have something on the books that says if you're caught, you can go to jail, but the fact that pirates actually do go to jail. In countries like Mexico, countries like Thailand, and many other countries where no pirate has ever spent a night in jail for committing copyright piracy, they don't have systems that meet this world standard. That's the challenge that we really have to face.
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    Mr. SHERMAN. But, once again, focusing on this and after the frustration of watching these bulldozers, is it an effective strategy to also focus on the market countries, not only to try to see bulldozers, but also jail time for those engaged in the distribution in retailing?
    Mr. METALITZ. I think you do have to go to the source to really deal with this problem, but that doesn't mean that you ignore the retailers and the distributors. Part of the battle here is the battle for public opinion as well, and I think when retailers and distributors are raided and those cases go to court and they have penalties imposed on them, if that's done in a very public way, that helps get the message across to the general public that it is important for them to be supporting this type of thing.
    Mr. SHERMAN. The reason I bring this up is, there will always be some country in the world that defies the world trading system and that country may have the technological capacity—and when I say defies, I don't mean that they put up a big sign that says: ''We're in defiance.'' They'll at least have diplomats saying they are working very hard to control the problem. But there will always be at least one country in the world that does not seriously try to deal with piracy and we try to focus on as many of these countries as possible but assuming there is one place in which the illegal product is created, it is necessary to make sure that product doesn't get to, isn't distributed, and isn't sold in the country that provides the major markets.
    And I realize it's a much tougher job, but I would hope that—well, let me ask one final question. How dedicated is our State Department to working with you in the consumption countries to push governments toward effective prosecution and destruction of counterfeit material, or pirated material?
    Mr. METALITZ. We've had a very good relationship with many of the agencies of the Administration. This is an interagency process involving USTR, State, Commerce, and the Patent and Trademark Office; of course you heard from Commissioner Lehman before. So they are working on all of these countries. We do have to be concerned about the countries to which the pirate material is being exported as well.
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    If there's one change that's happened in the last 5 or 10 years in the world of piracy, it is that piracy is an export business. It used to be a local business and it happened within each country. Now it's an export business. The change in China over the last 2 years has been that export piracy of digital audio and digital video has declined dramatically. In those categories, China is probably now a net importer of pirate material from Macao, from Hong Kong, from Malaysia perhaps, and other places. But I think we're in a world now where piracy is an export business and it's going to stay that way for a long time.
    Ms. RICHARDSON. I do need to put a footnote on that. For us, except in Asia, videotape is still the major source of our piracy and the major formats in Latin America and Europe. And in the videotape world, production, distribution, and consumption generally happens all within one country, so it's still very important for us that we don't just look at the major sources of optical products which, of course, is an enormous and growing problem.
     Ms. ROS-LEHTINEN. Thank you so much for an excellent round of questions, and thank you to our panelists for your patience and for your expertise and sharing it with us.
    Mr. JASON BERMAN. Thank you.
    Ms. ROS-LEHTINEN. Thank you. This Subcommittee is now adjourned.
    [Whereupon, at 3:40 p.m., the Subcommittee adjourned subject to the call of the Chair.]


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