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Part II
INTELLECTUAL PROPERTY THEFT IN RUSSIA
TUESDAY, MAY 17, 2005
House of Representatives,
Subcommittee on Courts, the Internet,
and Intellectual Property,
Committee on the Judiciary,
Washington, DC.
The Subcommittee met, pursuant to notice, at 12:26 p.m., in Room 2141, Rayburn House Office Building, the Honorable Lamar Smith (Chair of the Subcommittee) presiding.
Mr. SMITH. The Subcommittee on Courts, the Internet, and Intellectual Property will come to order. I will recognize myself and the Ranking Member for opening statements, and then we will get to the witness testimony.
This, the second of our two back-to-back oversight hearings on the subject of international intellectual property theft, will focus on the state of IP enforcement in the Russian Federation. In our first hearing, the Subcommittee received testimony that China, the single largest source of counterfeit and pirated products worldwide, has accelerated their theft of intellectual property and failed to adopt enforcement procedures that are designed to deter such actions.
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The Russian Federation now seeks to become a member of the World Trade Organization, and is counting on the support of the United States Government and the American people for that privilege. Recently, Secretary of State Condoleezza Rice acknowledged the reality that Russia lacks ''the legal framework to prosecute those who engage in piracy,'' and stated that this ''really must be taken care of before WTO accession.''
However, the adoption of a legal framework alone, which is not accompanied by a demonstrated and sustained commitment to criminal enforcement of large-scale commercial piracy and counterfeiting, is not enough to gain U.S. support for Russian accession. This commitment must be made at the highest levels, and it must be made before the American people endorse Russian accession to the WTO.
Russian President Putin stated last month ''Our bureaucracy is still to a large extent isolated, and is undermined by corruption, irresponsibility, and incompetence.'' Anyone familiar with the Russian Federation track record for protecting and enforcing intellectual property would concur with President Putin's statement.
Last Thursday's Wall Street Journal contained a report entitled, ''In Russia, Politicians Protect Movie and Music Pirates.'' It describes how certain Russian elected officials thwart police investigations of IP crimes, and in fact profit by doing so.
As our witnesses today will testify, the grim reality is that lawlessness, physical danger, and corruption are part of the daily challenges faced by businesses and individuals who seek to conduct business or protect their IP rights in Russia. They will provide compelling evidence that the situation has actually worsened, rather than improved, in recent years.
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The Members of this Subcommittee will receive evidence that the Russian government is the landlord for as many as 18 optical disc plants that annually produce tens of millions of illicit copyrighted works for export to mature markets, and that the government has failed to even inspect the vast majority of these facilities, let alone investigate or prosecute any of the criminals. On the rare occasion when someone is investigated for IP theft in Russia, the most likely outcome is that no prosecution will occur and that any conviction will result in a suspended sentence.
If Russia is permitted to join the WTO without first demonstrating a sustained and serious commitment to the enforcement of IP rights, then the real winners will be the criminal syndicates. We owe it to the Russian people and to the American people to consider this record before the U.S. advocates that the Russian government be rewarded with accession to the WTO.
That concludes my statement, and the gentleman from California is recognized for his.
Mr. BERMAN. Thank you, Mr. Chairman. Russia is considered by the copyright industries as second only to China as an intellectual property pirate. In fact, that Wall Street Journal article that you sent around, Mr. Chairman, its paragraph says, ''While China may be the world's top producer of illegal computer software, CDs, and DVDs, at least authorities there are getting serious about cracking down.'' Well, I'm not sure that's established. But then it points out, ''In Russia, the Kremlin has been promising to deal with the problem for years, but industry officials say under President Vladimir Putin it's gotten worse, not better.''
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Almost 2 years ago, a number of Members of Congress sent a letter to President Bush to focus his attention on the escalating problem in Russia. Yet Russian plants are still producing tens of millions of pirated optical discs for export. U.S. copyright industries continue to lose billions of dollars, and the piracy rates are estimated at 70 percent for every copyright sector.
In February, the International Intellectual Property Alliance released its 2005 Special 301 Recommendations, a document that Mr. Schwartz will address in his testimony. The options laid out are time-sensitive. We must consider one or all of the following actions: Recommending the designation of Russia as a priority foreign country; or conditioning Russia's entry into WTO on meaningful copyright enforcement; or denying Russia its GSP benefits.
We must move quickly, because each day that goes by without a firm stance by the Administration on these possibilities lessens the importance of this issue in Russia's eyes.
When we had a hearing on international copyright piracy 2 years ago, a constituent of mine testified to her own personal experience of intellectual property theft by the Russian government. Before us today are representatives of the movie and music industry who will testify to the effect Russian piracy has had on that segment of the American economy.
Whether one pirates from an individual or from a corporation, the act of piracy must be stopped. The same holds true whether the piracy is sponsored by the government itself, or funded by individual citizens. While the concept of private ownership of property is relatively new in many of the formerly communist countries, the value has not been lost on them.
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Any government that wants the benefits of trade with America and who is currently benefitting from trade preferences, like Russia, has a responsibility to respect American innovation. Any citizen of a state must recognize basic rules of law, such as a prohibition on theft.
The Russian government has pointed to the high price of legitimate products coming from the U.S. as a justification for piracy. This is tantamount to blaming the victim for the crime. It is clear that price is not the cause of piracy. The pirated goods contain language tracks that include languages that are not Russian. The goal, therefore, is not simply to help Russians afford DVDs of movies; piracy is providing a business opportunity to services—to service those that live outside of Russia.
We have an opportunity now, in trying to address the piracy situations in Russia, to learn from our failures with intellectual property enforcement in China. This came up at the last hearing. Before permitting Russia's accession to the WTO, we must require stricter enforcement of intellectual property rights.
I look forward to hearing the witnesses describe the extent of piracy in Russia, and any suggestions they have to curtail the problem. And I look forward to working with you, Mr. Chairman, to address the importance of achieving significant reform of Russian intellectual property enforcement before admitting Russia into the WTO. Thank you, Mr. Chairman.
Mr. SMITH. Thank you, Mr. Berman. And may I ask the witnesses to stand and be sworn in, if you will.
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[Witnesses sworn.]
Mr. SMITH. Thank you. Please be seated.
Our first witness is Victoria Espinel, who is the Acting Assistant U.S. Trade Representative for Intellectual Property in the Office of the United States Trade Representative. In that capacity, Ms. Espinel serves as the principal U.S. trade negotiator on IP. Ms. Espinel's office chairs the interagency committee that conducts the annual Special 301 Review of international protection of intellectual property rights. The latest report was published on April 29, 2005.
She holds an LLM from the London School of Economics, a JD from Georgetown University, and a BS in foreign service from Georgetown University School of Foreign Service. After serving as the government witness in our China hearing earlier this morning—or this morning—Ms. Espinel is now a veteran who is seasoned in delivering testimony to Congress. We look forward to her return testimony, as well.
Our second witness is Eric Schwartz, Vice President and Special Counsel to the International Intellectual Property Alliance, IIPA, a private-sector coalition of six U.S. trade associations which represents over 1,300 companies that produce, and distribute materials protected by copyright laws throughout the world.
Mr. Schwartz is a partner at Smith and Metalitz, where he specializes in copyright, entertainment, and information law. Mr. Schwartz was the principal negotiator of the copyright provisions in the U.S.-USSR trade agreement of 1990, and he is the subject matter expert for IIPA on copyright matters that involve the Russian Federation and Eastern and Central Europe. A graduate of Johns Hopkins University, Mr. Schwartz obtained a JD from the American University's Washington College of Law.
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Our next witness is Mrs. Bonnie Richardson, who serves as the Senior Vice President for International Policy at the Motion Picture Association of America, where she is responsible for international policies affecting the production and distribution of filmed entertainment in worldwide markets.
Before joining MPAA, she served as the director for services negotiations for USTR, and as a foreign service officer at the Department of State. Mrs. Richardson earned her master's degree at Johns Hopkins School of Advanced International Studies, and her undergraduate degree from the University of Delaware.
Our final witness is Matthew T. Gerson, the Vice President for Public Policy and Government Relations at the world's largest music company, the Universal Music Company. Mr. Gerson has been with Universal for 10 years. Prior to that, he worked at the MPAA. He is a graduate of Georgetown University Law Center, and Tufts University.
We welcome you all, and look forward to your very expert testimony. And as before, Ms. Espinel, we'll begin with you.
TESTIMONY OF VICTORIA ESPINEL, ACTING ASSISTANT U.S. TRADE REPRESENTATIVE FOR INTELLECTUAL PROPERTY, OFFICE OF U.S. TRADE REPRESENTATIVE
Ms. ESPINEL. Thank you. Chairman Smith and Members of the Committee, thank you for the opportunity to address your concerns over inadequate protection and enforcement of intellectual property rights in Russia.
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Protection and enforcement of America's IP rights in Russia is an issue that is of the utmost concern to USTR and to the Administration, and is one that we take very seriously. Due to the importance of this issue and the prevalence of piracy in Russia, Presidents Bush and Putin have discussed improving protection of intellectual property in Russia at several recent summits, including most recently at their meeting earlier this month in Moscow. Successfully combatting the rampant piracy and counterfeiting that currently exists in Russia is a top priority.
The level of copyright piracy in Russia has increased dramatically, and the adverse effects on American owners of copyrights are compounded by the fact that Russia has become a major exporter of pirated materials. In addition to sales in Russia of illegal music, movies, and computer software, Russia's pirates are exporting large volumes of illegal products to other markets. As a result, Russia is on the 2005 Special 301 Priority Watch List announced on April 29.
In addition, due to the severity of the problem in Russia, USTR announced that the Administration will conduct an out-of-cycle review this year to monitor progress by Russia on a number of IP issues. We are also continuing interagency review of a petition filed by the U.S. copyright industries to withdraw some or all of Russia's benefits under the U.S. Generalized System of Preferences program.
USTR and other agencies have been, and will continue to be, very engaged with the Russian government at all levels to develop an effective IP regime and strengthen enforcement in Russia. We have an ongoing bilateral working group with the Russian Federal Service for Intellectual Property, Patents, and Trademarks, Rospatent, the agency responsible for most IP matters in Russia, which has convened several times this spring to discuss a wide range of IP issues. Recent discussions have focused on Russia's enforcement regime; legislative deficiencies, including the need for a comprehensive regulatory regime on optical media production; and Internet piracy.
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Through these and other ongoing efforts, we have seen an improvement in cooperation at the working level on IP issues, especially from Rospatent and the Ministry of the Interior. Based upon case information provided by our industry, embassy officials meet regularly with senior representatives of the Ministry of Interior, the prosecutors, Rospatent, and the Supreme Court, to track and press for enforcement in major criminal cases involving optical disc manufacturing facilities and Internet piracy.
We are also working on IP issues in the context of Russia's WTO accession negotiations. We have continuing concerns that Russia's current IP regime does not meet WTO requirements related to protection of undisclosed information, geographic indications, and IP enforcement. We are raising these and other concerns in the accession negotiations, and have made it clear to the Russian government that progress on IP will be necessary to complete the accession progress.
Supplementing these efforts directly with Russia, the Administration is taking comprehensive action to block trade around the world in counterfeit and pirated goods through the Strategy Targeting Organized Piracy, or STOP, initiative. STOP is a U.S. government-wide initiative begun in October 2004 to empower U.S. businesses to secure and enforce their rights overseas, to stop fakes at our borders, to expose international counterfeiters and pirates, to keep global supply chains free of infringing goods, to dismantle criminal enterprises that steal U.S. intellectual property, and to reach out to like-minded U.S. trading partners that are facing similar problems in order to build an international coalition to stop counterfeiting and piracy worldwide. Addressing Russia's growing exports of pirate and counterfeit products is part of this initiative.
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Our work has brought about some improvements, particularly with respect to the content of Russia's laws; but much more will need to be done in order to reduce the level of piracy and counterfeiting. As part of its effort to bring Russia's IP regime into compliance with the TRIPS Agreement, Russia amended its copyright law in 2004 to provide protection for preexisting works and for sound recordings. Russia has amended a number of other laws as well, including its law on patents and protection of computer software and databases. Although these amendments demonstrate some commitment to strengthening its intellectual property laws, further improvements in Russia's laws are necessary.
On the enforcement side, we have seen far less progress. While Russian law enforcement agencies have taken some actions, including an increased number of raids by police, these actions have not resulted in the kind of robust prosecution and meaningful penalties that would deter the significant increase in piracy that our industry has observed in Russia.
Enforcement efforts in Russia must increase dramatically in order to combat the rising piracy and counterfeiting levels. We need to see improvements in enforcement of Russia's criminal law against piracy; improved enforcement at the border; and better administrative and civil procedures, such as providing for ex parte procedures in civil cases.
We are very concerned with the amount of excess optical media capacity in Russia and with Russia's lack of a comprehensive regulatory regime to control illegal optical media operations. Although Russian authorities have recently taken some positive steps to strengthen optical disc licensing procedures, Russia must establish an effective system for inspecting the optical media plants, to ensure that only authorized product is being made.
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On the criminal enforcement side, we see frequent delays in prosecutions and then imposition of minimal penalties, including many suspended sentences. Frequently, pirated goods that have been seized are not destroyed, but are returned to the market. We have raised these issues with Russia, and are seeking decisive actions to address these growing problems, such as inspecting optical media plants, permanently shutting down illegal production, and taking down Internet sites that are spreading pirated material.
We share in our industries' frustration—and your frustration, I would imagine—over the lack of significant progress on the part of Russia's authorities. USTR is committed to utilizing effectively the tools currently available to us to press Russia to implement immediate concrete measures to combat piracy and counterfeiting and reduce the losses to our industry.
Despite our close engagement and continued work with the Russian government, Russia has made little progress in permanently closing down illegal production plants and bringing offenders to justice. Political will at the highest levels will be needed in order to see a reduction in piracy levels in the near term.
USTR will continue to monitor Russia's progress in bringing its IP regime in line with international standards through the Special 301 out-of-cycle review that we have just announced, the ongoing GSP review, and the WTO accession discussions.
Progress will be critical for our bilateral relationship with Russia, and will have implications for Russia's accession to the WTO. Ultimately, success will depend on the political will of Russia's leaders to tackle the underlying problems of corruption and organized crime. The STOP initiative will also be employed to address the significant intellectual property problem.
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We remain committed to working with Congress, and this Committee in particular, in pressing Russia to effectively combat and reduce the unacceptable levels of piracy and counterfeiting which plague our industry.
Mr. Chairman and Members of the Committee, thank you for providing me with the opportunity to testify. And I look forward to your questions.
[The prepared statement of Ms. Espinel follows:]
PREPARED STATEMENT OF VICTORIA ESPINEL
Chairman Smith and members of the Committee, thank you for the opportunity to address your concerns over ineffective protection and enforcement of intellectual property rights in Russia.
Protection and enforcement of American's intellectual property rights (IPRs) in Russia is an issue that is of utmost concern to USTR and the Administration and is one that we take very seriously. Due to the importance of this issue and the prevalence of piracy in Russia, Presidents Bush and Putin have discussed improving protection of IPRs in Russia at several recent summits, including at their meeting earlier this month in Moscow. Successfully combating the rampant piracy and counterfeiting that currently exists in Russia is a top priority.
As you have heard from other witnesses here today, U.S. copyright, trademark, and patent-based industries are experiencing huge losses resulting from ineffective or, in some cases, non-existent enforcement—losses that, in some cases, are continuing to increase over the past year.
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The level of copyright piracy in Russia has increased dramatically and the adverse effects on American owners of copyrights are compounded by the fact that Russia has become a major exporter of pirated materials. In addition to sales in Russia of illegal music, movies and computer software, Russia's pirates are exporting large volumes of illegal products to other markets. As a result, Russia is on the 2005 Special 301 Priority Watch List announced on April 29. In addition, due to the severity of the problem in Russia, USTR announced that the Administration will conduct an out-of-cycle review this year to monitor progress by Russia on numerous IPR issues. We are also continuing interagency review of a petition filed by the U.S. copyright industries to withdraw some or all of Russia's benefits under the U.S. Generalized System of Preferences (GSP) program.
USTR and other agencies have been and will continue to be very engaged with the Russian Government at all levels to develop an effective IPR regime and strengthen enforcement in Russia. We have an ongoing bilateral working group with the Russian Federal Service for Intellectual Property, Patents, and Trademarks (Rospatent), the agency responsible for most IPR matters in Russia, which has convened several times this spring to discuss a wide range of IPR issues. Recent discussions have focused on Russia's enforcement regime, legislative deficiencies—including the need for a comprehensive regulatory regime on optical media production, and Internet piracy.
We are working with other U.S. Government agencies and our Embassy in Moscow to more actively engage senior Russian officials and law enforcement representatives. Our Embassy has increased efforts on the ground, such as conducting a series of regional workshops on IPR enforcement. We will have held a workshop in every Russian region by the end of 2005. These conferences are designed to more actively engage Russian officials from the Ministry of the Interior's economics crimes unit, Russian customs, local prosecutors' offices and the judiciary at the regional level. Through these and our other ongoing efforts, we have seen an improvement in cooperation at the working-level on IPR issues, especially from Rospatent and the Ministry of Interior. Based upon case information provided by U.S. industry, Embassy officials meet regularly with senior representatives of the Ministry of Interior, the Procuracy (prosecutors), Rospatent, and the Supreme Court to track and press for enforcement in major criminal cases involving optical disk manufacturing facilities, as well as in Internet piracy cases.
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We are also working on IPR issues in the context of Russia's WTO accession negotiations. We have continuing concerns that Russia's current IPR regime does not meet WTO requirements related to protection of undisclosed information, geographic indications and enforcement. We are raising these and other concerns in the accession negotiations and have made it clear to the Russian Government that progress on IPR will be necessary to complete the accession process.
Supplementing these efforts directly with Russia, the Administration is taking comprehensive action to block trade around the world in counterfeit and pirated goods through the Strategy Targeting Organized Piracy (STOP!). STOP! is a U.S. government-wide initiative begun in October 2004 to empower U.S. businesses to secure and enforce their intellectual property rights in overseas markets, to stop fakes at U.S. borders, to expose international counterfeiters and pirates, to keep global supply chains free of infringing goods, to dismantle criminal enterprises that steal U.S. intellectual property and to reach out to like-minded U.S. trading partners in order to build an international coalition to stop counterfeiting and piracy worldwide. Addressing Russia's growing exports of pirated and counterfeit products is part of this initiative, and Russian officials have repeatedly express interest in cooperating with us on the initiative.
Our work has brought about some improvements, particularly with respect to the content of Russia's laws, but much more will need to be done in order to reduce the level of piracy and counterfeiting. As part of its effort to bring Russia's IPR regime into compliance with the obligations of the TRIPS Agreement, Russia amended its Copyright Law in 2004 to provide protection for pre-existing works and sound recordings. Russia has amended a number of other laws as well, including its laws on patents and protection of computer software and databases. Although these amendments demonstrate Russia's commitment to strengthening its IPR laws, further improvements in Russia's laws are necessary.
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On the enforcement side, we have seen far less progress. While Russian law enforcement agencies have taken some actions, including an increased number of raids by police, these actions have not resulted in the kind of robust prosecution and meaningful penalties that would deter the significant increase in piracy that our industry has observed in Russia. Enforcement efforts in Russia must increase dramatically in order to combat rising piracy and counterfeiting levels. We need to see improvements in enforcement of Russia's criminal laws against piracy and counterfeiting, improved enforcement at the border to prevent exports of pirated and counterfeit products and better administrative and civil procedures for IPR enforcement, such as providing for ex parte procedures in civil cases.
We are very concerned with the amount of excess optical media capacity in Russia and with Russia's lack of a comprehensive regulatory regime to control illegal optical media operations. Our industry estimates that the capacity of known plants in Russia is 371.6 million discs while legitimate domestic demand is around only 30 million discs. Illegal optical media from Russia has been found in markets around the world. Russia lacks an effective system for inspection of optical media production plants to ensure that only authorized product is being made. However, Russian authorities recently have taken some positive steps to strengthen optical disc licensing procedures.
On the criminal enforcement side, we see frequent delays in prosecutions and then imposition of minimal penalties, including many suspended sentences. Frequently, pirated goods that have been seized in a case are not destroyed, but are returned to the market. The U.S. copyright industry estimates that 70 percent of seized pirated products go back into the stream of commerce. We are also seeing an increase in piracy on the Internet. Several major illegal websites are operating out of Russia, one of which our industry reports is now the largest portal for pirated product in the world. We have raised these issues with Russia and are seeking decisive actions to address these growing problems such as inspecting optical media plants, permanently shutting down illegal production, and taking down Internet sites that are spreading pirated material.
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We share in our industries' frustration over the lack of significant progress on the part of Russia's authorities. USTR is committed to utilizing effectively the tools currently available to us to press Russia to implement immediately concrete measures to combat piracy and counterfeiting operations and reduce the losses to U.S. industries. Despite our close engagement and continued work with the Russian Government, Russia has made little progress in permanently closing down illegal production plants and bringing offenders to justice. Political will at the highest levels will be needed in order to see a reduction in piracy levels in the near term.
USTR will continue to monitor Russia's progress in bringing its IPR regime in line with international standards through the Special 301 out-of-cycle review, the ongoing GSP review, and WTO accession discussions. Progress will be critical for our bilateral relationship with Russia and will have implications for Russia's accession to the WTO. Ultimately, success will depend on the political will of Russia's leaders to tackle the underlying problems of corruption and organized crime. The STOP! initiative will also be employed to address this significant IPR problem. We remain committed to working with the Congress and this committee in particular in pressing Russia to effectively combat and reduce the unacceptable levels of piracy and counterfeiting which plague our industry.
Mr. Chairman and members of the Committee, thank you for providing me with the opportunity to testify. I look forward to your questions.
Mr. SMITH. Thank you, Ms. Espinel.
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Mr. Schwartz.
TESTIMONY OF ERIC SCHWARTZ, VICE PRESIDENT AND SPECIAL COUNSEL, INTERNATIONAL INTELLECTUAL PROPERTY ALLIANCE (IIPA)
Mr. SCHWARTZ. Thank you, Chairman Smith, Mr. Berman, and Members of the Subcommittee, for giving IIPA the opportunity to testify on the copyright problems we're confronting in Russia.
I've provided a detailed report on some of the problems, and will use my time to just give you a brief overview across all the copyright sectors of the problems our industries are facing in Russia, as well as some suggestions that we think the U.S. Government could take to improve the situation there.
We've provided a lot of statistics, and the statistics only tell a part of the story. What they do not show is the poor reaction over the past 10 years of the Russian government to the piracy problem. The optical disc production and distribution problem, which is our most serious problem—that is, the making of CDs and DVDs at the 34 plants—did not spring up overnight. And this problem is not unique to Russia. It has been successfully addressed in other countries. So we know that it can be fixed.
IIPA first raised this problem with the Russian government in 1996, when there were two plants. The reason the problem has been allowed to escalate to the 34 current plants—that is, 34 known plants—eight of which are dedicated to making DVDs, and with a total plant capacity over 400 million discs a year, has been because the Russian government has failed to properly act. In short, what we have is a legacy of failed commitments.
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On a personal note, I can tell you the piracy situation in Russia is the worst it has been in the 16 years I've been working on Russian and, before that, Soviet copyright issues. Let me show you a few of the statistics that we're confronting.
First, we estimate that the copyright industries lost over $1.7 billion last year alone to copyright piracy in Russia; over $6 billion in the last 5 years. At the same time that we're losing $1.7 billion last year, Russia enjoyed over $515 million in GSP benefits, $430 million in 2003. In short, Russia has not earned the right to enjoy these benefits. They are neither in compliance with the GSP requirements for enjoyment of the benefits, and they are not taking the necessary actions to reduce piracy.
Our rate, as noted in the opening statements, hover around 70 percent at the low end, and 87 percent on the high end. We know from forensic evidence that at least 24 of the 34 plants are known to be producing some pirate product. We don't know how much, because there is not proper plant inspections ongoing. We also know that Russian-produced optical discs have been positively identified in 27—at least 27—countries.
Let me give you an example of some of the actions that were undertaken last year, and the results. In 2004, the Russian government and our industry agreed that there were eight actions taken against the Russian plants. But they were unsuccessful, for three reasons: One, most of the seized material ends back in the marketplace—by some industry experts, as much as 70 percent. Two, every single plant that was raided remained in operation throughout the year; they have never closed a plant. And third, there were few, if any, criminal prosecutions; almost all end in suspended sentences. I was looking back at my notes, and I believe it may be the case that in the last 10 years there have only ever been two criminal convictions that ended in served sentences.
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We've suggested six steps to the Russian government on how to improve the optical disc problem. Step number one is easy. All they have to do is conduct surprise raids at 34 plants. This could be done in a matter of weeks.
As for new legislation, which Ms. Espinel has mentioned, we can't wait for new legislation. Yes, there are deficiencies in their optical disc regulatory scheme, but it took them 12 years to fix the deficiencies in their copyright law, and all the while the U.S. Government was pressing them, as well as the IIPA, on these shortages.
The legacy of failed commitments, though, is very serious. At all levels of the Russian government—as you've heard, even at the presidential level—these issues have been discussed without success. Beginning in 1999, when the Russian government first acknowledged that it had an optical disc problem—and remember, we raised it with them in 1996, so three years before—they acknowledged a problem; they acknowledged they would take care of the problem.
In 2002, they agreed in negotiation with the U.S. Government to create an action plan, something comprehensive to fix the optical disc problem. They never provided the action plan, and we never heard about the plan ever again after those rounds of negotiations. Instead, they created an inter-ministerial commission, which meets quarterly and issues reports on the ''progress'' that they're making on optical disc piracy problems.
As one example of the shortcomings of the government. This last October, we spent a considerable amount of time in discussions with them. And the Russian government officials told us that they would convene a meeting in December with the 18 plants known to be on leased or limited-access government property.
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The meeting never took place. And the reason the meeting never took place: The government later acknowledged they couldn't identify who the owners of the plants are. Because they have no effective plant licensing system, they don't even know how to identify who they should be meeting with to stop these actions.
So we've suggested three things to the U.S. Government. For the past 9 years, Russia has been on the priority watch list, and it's time to take some different course of action. The first is to condition Russia's entry into the World Trade Organization on meaningful copyright enforcement.
The second is, when the out-of-cycle review is over, to designate Russia as a priority foreign country, and to get to the business of forcing them with deadlines, to either fix the problem or to face trade sanctions.
And the third, and probably simplest for the U.S. Government, would be to suspend or deny their eligibility for GSP benefits; which could be done immediately. We filed the petition in 2000 with the U.S. Government. It was accepted in 2001. I've testified twice on the issue, and regularly file updates on the shortcomings of the Russian government. And we think they could just suspend the GSP benefits.
In short, we think that the time for the Russian government is up. And looking at the clock, my time is up, as well. So I will thank you, and be happy to answer any questions.
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[The prepared statement of Mr. Schwartz follows:]
PREPARED STATEMENT OF ERIC J. SCHWARTZ
Mr. Chairman, Ranking Member, and Members of the Subcommittee, the International Intellectual Property Alliance (IIPA) and our members thank you for the opportunity to testify today on the piracy problems we are confronting in Russia.
The IIPA is a private sector coalition representing the U.S. copyright-based industries in bilateral and multilateral efforts to improve protection and enforcement of copyrighted materials worldwide. The IIPA is comprised of six trade associations representing over 1,300 U.S. companies who produce and distribute materials throughout the world. The copyright industries contributed over $625 billion to the U.S. GDP, or 6% of the U.S. economy, and almost 5.5 million jobs or 4% of U.S. employment, in 2002.
The copyright businesses and the individual creators that work with them are critically dependent on having strong copyright laws in place in foreign countries and having those laws effectively enforced. In fact, most of the copyright sectors generate over 50% of their revenue from outside the U.S. This is why we are so concerned with the problems of weak legal regimes and poor enforcement in China, Russia, and the many other countries detailed in our annual Special 301 Report to the U.S. government.
Simply put, Russia's current copyright piracy problem is enormous. I have worked on U.S.—Russian copyright matters for over 16 years trying to improve the legal regime in Russia—including adoption of better copyright and related enforcement laws, as well as working to improve on-the-ground enforcement. The present piracy problem in Russia is the worst it has been in my 16 years experience. Piracy of all copyright materials—motion pictures, records and music, business and entertainment software, and books—is at levels ranging from a low of about 66% to a high of 87%—totally unacceptable for a country and economy the size and sophistication of Russia.
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Let me begin by describing the scope and nature of the problem in Russia from our vantage point.
SCOPE AND NATURE OF THE PIRACY PROBLEM IN RUSSIA
Russia has one of the worst piracy problems of any country in the world, second only to China. The IIPA estimates that the copyright industry lost over $1.7 billion due to piracy last year, and over $6 billion in the last five years in Russia. As noted, the piracy rates hover around 70% of the market or higher for every copyright sector. In short, Russia's criminal enforcement system has failed to stem persistent commercial piracy.
The number of optical disc (i.e., CD and/or DVD) plants in Russia has more than doubled in just the last three years to number at present, at least 34 plants, including eight dedicated DVD plants. There are a total of 80 known operational production lines. Production capacity has nearly tripled as criminal operations have encountered little hindrance in expanding their activities. Even more troubling, IIPA is aware of nine production plants located on the facilities of the Russian government, so-called restricted access regime enterprises (although the Russian government has publicly acknowledged that there may be as many as 18 such plants). Russia's annual manufacturing capacity now stands conservatively at over 370 million CDs and additionally over 30 million DVDs, despite the fact that the demand for legitimate discs is unlikely to exceed 80 million in all formats.
Forensic evidence indicates that at least 24 of the 34 plants are known to be producing pirate product. Of course, without proper surprise inspection procedures in place, there is no way of knowing for certain the size and scope of what all the plants are producing. Russian-produced optical discs (CDs) have been positively identified in at least 27 countries. So, the harm illegal Russian plants are doing far exceeds the Russian marketplace.
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In 2004, there were eight actions taken by the Russian government against the optical disc (''OD'') CD/DVD plants, including raids and seizures of illegal materials according to our industry, and Russian government, reports. The raids are obviously a positive step. But, the outcome of the raids is telling:
First, much of the seized material ends up back in the marketplace either through lax enforcement (or corruption), laws permitting charitable sales of such property, or the conclusion without prosecution of criminal investigations. As an example, over half of the one million illegal CD and DVD copies seized in a raid last year ''disappeared'' before the case went to trial.
Second, all of the optical disc plants that were raided in 2004 remained in operation after those raids. In some cases, truckloads of illegal material were seized from the same plants by Russian government enforcement officials—and still these same plants remain in operation.
Third, the plant owners remain unscathed by the criminal justice system. A few people employed by the plants were convicted—after extensive delays in criminal investigations—but virtually all received suspended sentences. So, there is no deterrence to continuing to conduct commercial piracy in Russia at present.
In fact, the record industry (International Federation of Phonogram Producers, IFPI) reports that in the past two years, of the 24 cases IFPI is cooperating on, 21 of those 24 cases remain without a resolution—that is, no prosecutions of the operators of illegal CD plants, as investigations have dragged on. In the other three cases, the pirate CDs were destroyed, but no deterrent sentences were handed down. The only exception to this pattern (which has been true for years) was in June 2002 when the Disc Press MSK plant (raided in September 1999) was finally closed and a Zelenograd court handed down 4-year prison sentences to two operators of the plant. In February 2004, there was a one-year conditional sentence given to a manager of the Zelenograd plant which was raided in December 2002, resulting in the seizure of 234,493 pirate CDs (over 59,000 were music CDs). The more typical case is that of the Synograph plant, raided in October 2000. There was a four year criminal investigation aimed at the director of the plant; a court hearing is scheduled for 2005, and the plant is still in operation.
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The optical disc problem that IIPA confronts in Russia is one that has been regulated in virtually all other countries where we have found these levels of massive production of pirate product—countries like Taiwan, China, Hong Kong, Macau, Bulgaria and Malaysia. Russia's regulation of the plants is virtually non-existent, and based on a weak 2002 licensing law. Quite simply, Russia is the largest un-regulated and un-enforced producer of pirate optical disc product in the world.
To solve this problem, Russia must undertake vigorous criminal enforcement backed by the highest political officials in the government, since much of the piracy is undertaken by organized criminal syndicates. For example, according to the Entertainment Software Association (ESA), Russian crime syndicate pirates of videogame material are so well-entrenched that they ''label'' their product. The Motion Picture Association of America (MPAA) reports that producers of motion picture DVDs produce export-only copies of DVDs because they are in seven or eight foreign languages, not including Russian.
Most of our testimony today is limited to problems pertaining to hard-copy piracy, but there are growing problems related to digital piracy as well. In fact, the world's largest server-based pirate music website—allofmp3.com—remains in operation after a criminal prosecutor in early 2005 reviewed the case and determined (wrongly) that current Russian copyright law could not prosecute or prevent this type of activity. In fact, this interpretation of the Russian law is contrary to all the assurances the Russian government gave the U.S. government and private sector during the years-long adoption of amendments to the 1993 Copyright Law; those amendments were finally adopted in July 2004.
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The business software industry (Business Software Alliance, BSA) is confronting its own unique digital piracy problem relating to copyright enforcement. In short, the Russian government has failed to take effective action against the broad distribution of counterfeit software over the Internet, primarily through unsolicited e-mails (spam) originating from groups operating in Russia. Separately, the BSA has had success with Russian law enforcement agencies taking action against channel piracy (i.e., illegal software preloaded on computers sold in the marketplace), not only in the Moscow area, but also in other Russian regions, and has made some progress in software legalization in the public sector.
The book industry, the Association of American Publishers (AAP) reports widespread piracy of an array of reference works and textbooks, increasingly a large market in Russia as the penetration of English-language materials in the market grows. Lax enforcement, including poor border enforcement—endemic to all copyright sectors—results in the import (and export) of illegal materials. In the book industry this includes unlicensed imports of pirated reprints from neighboring countries, and pirated reference books and medical texts; there is also widespread illegal commercial photocopying, especially in the academic sector.
We have indicated the devastating consequences to the U.S. copyright owners and authors. The harm to the Russian economy is enormous as well. The motion picture industry alone estimates lost tax revenues on DVDs and videos in Russia was $130 million last year. In another study undertaken by the software industry, it was estimated that if levels of piracy could be reduced to regional norms (that is, realistic levels), ten of thousands of jobs and several hundred million dollars in tax revenues would be realized from that sector alone in Russia.
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THE RUSSIAN GOVERNMENT'S LEGACY OF FAILED COMMITMENTS
The performance of the Russian government over the past decade can be summed up as representing a legacy of failed commitments on obligations to the United States and the broader international community. A short list of these failed commitments is as follows:
Optical Disc Enforcement Commitments: The most egregious problem is that illegal production has devastated the domestic Russian market, and exports of Russian-produced pirated optical media (CDs, DVDs, etc.) are causing serious damage to legitimate market worldwide, as witnessed by the huge amount of pirated material originating in Russia that is found abroad.
In 1996, the IIPA first identified optical disc plant production as a problem and suggested the need for an enforcement ''action plan'' to address this problem, including legislative reforms. Two optical disc (''OD'') plants were identified in the IIPA's February 1996 Special 301 Report. As noted, there are now 34 CD plants, with a total capacity of 370 million discs per year.
At all levels of the Russian government there have been promises to address this problem (starting in 1999) including a pledge, never met, in 2002 to issue an ''action plan''—but to date, there has been virtually no action taken against the plants, no comprehensive plan of action issued by the Russian government, and no legislative reforms on this point have even been introduced. Now ten years after IIPA (and the U.S. government) raised the issue, there is no excuse for why the Russian government has been unable to properly license and inspect all the known (now 34) plants, and to close and repeal the licenses of those engaged in illegal production and distribution, as well as to criminally prosecute the plant owners and operators.
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As one example of the failure to regulate the plants: late in 2004, in bilateral talks with the U.S. government and IIPA, the Russian government promised it would ''meet with the 18 plants'' (their figure) on restricted access (i.e., military) property to ascertain the legal or illegal status of their production, and to report back to the U.S. government. The meeting, scheduled for December, was cancelled and has not been rescheduled. The reason: the Russian government confessed it was unable to determine all the owners of the plants from its records (because of its inadequate licensing law) and therefore could not identify with whom the government needed to meet.
Promised Legal Reforms: The Russian government has for 13 years, obligated itself in bilateral and multilateral negotiations to adopt necessary legal reforms. A short list of the failed commitments relating to legal reforms includes:
In 1995, the Russian government agreed to provide ex parte search provisions—critical enforcement tools, especially in the software industry. These were adopted in part in the Arbitration Procedures Code in 2002, however the proper provisions were never implemented and are absent from the Civil Procedure Code (enacted in 2003).
In 1995, the Russian government agreed to provide the police and prosecutors with proper authority to confiscate illegal material and ex officio authority to commence criminal investigations. The 1996 Criminal Procedure Code reversed that authority, and required rightholders to formally press charges to commence investigations in some instances, thus thwarting effective enforcement.
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In 1995, Russia acceded to the Berne Convention but failed to comply with Article 18 to provide protection for pre-existing works. That same year, Russia acceded to the Geneva Phonograms Convention but provided no protection for pre-existing foreign sound recordings prior to the accession date of March 13, 1995. These were commitments Russia made to the U.S. government in the 1992 Bilateral NTR Trade Agreement—Russia agreed to have these commitments in place by the end of 1992. Finally, in July 2004, Russia adopted provisions to its law to provide protection for foreign pre-existing works and sound recordings—however, the 12 year delay in adopting these provisions has resulted in flooding the marketplace with illegal product that will take years to enforce, even if Russian enforcement were effective (which it is not).
In the 1992 Bilateral NTR Trade Agreement, the Russian government committed to provide effective criminal penalties and enforcement. In 1996, Criminal Code amendments were adopted (after a 1995 veto) but a deficient provision (a ''grave harm'' threshold) prevented effective enforcement. In 2003 an amendment to ''fix'' the grave harm provision was finally adopted, but implementation of these criminal provisions remains a matter of concern, and there is no initiative to use these tools, if they even work properly, as part of effective enforcement.
In short, the Russian government has made promise after promise to the U.S. (and other foreign) governments to develop an effective legal regime, including strong copyright and enforcement laws, and strong on-the-ground enforcement. It has failed to meet its commitments while it has enjoyed trade benefits and preferences with the U.S. that are the quid pro quo for these benefits and preferences.
STEPS THE RUSSIAN GOVERNMENT CAN TAKE TO PROPERLY ENFORCE IPR CRIMES—FOCUSING ON OPTICAL DISC PIRACY
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There are six critical steps that the Russian government could take immediately to effectively confront its optical disc piracy problem:
1. Inspect, on a regular, unannounced and continuous basis, each of the 34 known OD plants, and immediate close and seize the machinery of any found to be used to produce pirate product (some of these steps require additional legislative or regulatory measures);
2. Announce, from the office of the President, that fighting copyright piracy is a priority for the country and law enforcement authorities, and instruct the Inter-Ministerial Commission, headed by the Prime Minister, to deliver reports every three months to the President on what steps have been taken to address the problem;
3. Adopt in the Supreme Court a decree setting forth sentencing guidelines for judges—advising the courts to impose deterrent penal sanctions as provided under the penal code as amended (Article 146);
4. Immediately take down websites offering infringing copyright materials, such as allofmp3.com, and criminally prosecute those responsible;
5. Initiate investigations into and criminal prosecutions of organized criminal syndicates that control piracy operations in Russia (including operations that export pirate material to markets outside Russia); and
6. Introduce either via executive order or legislation, the necessary modifications of the optical disc licensing regime so that it clearly provides more effective control over the operations of the plants, including the granting of licenses to legal plants and withdrawing and sanctioning of illegal plants; stricter controls on the importation of polycarbonate and machinery; mandatory seizure and destruction of machinery used to produce pirate materials; and the introduction of criminal penalties for the owners of such plants.
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There are, obviously, may other steps the Russian government could take to combat commercial piracy in Russia, including, but not only related to, optical disc piracy. These steps, including other enforcement and legal reforms necessary in Russia, are detailed in our Special 301 Report of February 2005 (attached).
We also want to address one issue that has been raised by certain senior members of the Russian Government in our meetings, which raises serious questions about its commitment to fighting piracy. We have seen a number of reports in which Russian officials have suggested that the prices for legitimate goods and the lack of local manufacturing of legitimate products are to blame for the piracy problem. This comment reflects both an ignorance of what is happening in the marketplace, and a misunderstanding of the nature of the problem that we confront in Russia. The organized criminal enterprises manufacturing and distributing pirate product are largely servicing foreign markets (local manufacturing capacity is at least a multiple of six or seven times that of local demand), making the Russian price for legitimate materials wholly irrelevant to their motivation or profitability. As noted earlier, Russian manufactured product has been found in over 27 countries over the past two years.
In addition, existing efforts by certain industries to offer low cost Russian editions have not had the effect of reducing local piracy rates. The record industry, for example, is already manufacturing locally, and sells legitimate copies for an average price of $6.00 to $8.00 U.S. dollars—a price that is extremely low not just in relation to prices for music elsewhere, but also with respect to other consumer goods sold in Russia. It is not the price of legitimate product that is creating opportunities for piracy—it is the opportunity for easy profits that has brought criminal enterprises into this business, and Russia should stop offering such excuses for its continuing inaction.
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Another matter that the Russian government continues to raise is the need for the U.S. copyright industries to use civil remedies for effective enforcement. The copyright industries (especially the record industry) have recently attempted to bring civil cases against illegal plant operators—although procedural hurdles are significant.
However, in no country of the world, including Russia, can copyright owners be left to civil remedies in lieu of criminal remedies to effectively address large-scale organized crime commercial piracy. The government of Russia needs to play a major role in an effective criminal enforcement regime. The copyright industries generally report good police cooperation with raids and seizures, mostly of smaller quantities (with some exceptions) of material, but prosecutorial and other procedural delays and non-deterrent sentencing by judges remains a major hindrance to effective enforcement.
WHAT CAN THE U.S. GOVERNMENT DO?
There are three things the U.S. government can do to mandate Russia compliance with international norms and obligations to provide ''adequate and effective protection and enforcement'' for U.S. copyright material:
1. Condition Russia's entry into the World Trade Organization (WTO) on meaningful copyright law enforcement;
2. Designate Russia as a Priority Foreign Country (PFC) after the on-going out of cycle review by U.S.T.R.; and
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3. Deny Russia's eligibility for the Generalized System of Preferences (GSP) duty-free trade benefits.
1. Condition Russia's Entry into the World Trade Organization (WTO) on Meaningful Progress in Enforcing its Copyright Laws
The Russian IPR regime is not in compliance with the WTO TRIPs obligations, especially pertaining to enforcement. As a consequence, the U.S. government should not assent to Russia's accession into the World Trade Organization until its copyright regime, both legislative and enforcement, is brought into compliance with the WTO TRIPS obligations.
Russia is not providing adequate and effective enforcement as required for entry into the WTO, certainly not the enforcement standards required as ''effective'' (Articles 41 through 61 of TRIPs).
The U.S. can and should condition Russia's entry into the WTO on Russia making positive and meaningful enforcement progress—for example, by licensing and inspecting all the known 34 optical disc plants, closing those engaged in illegal activities, and criminally prosecuting those involved in this commercial illegal activity, and ensuring imposition of deterrent (not suspended) sentences.
2. Designate Russia as a Priority Foreign Country (PFC) When the Current Out-of-Cycle Review is Complete
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The U.S. Trade Representative's announcement on April 29, 2005 that Russia would be left on the Priority Watch List (for the ninth straight year) noted ''[w]e will continue to monitor Russia's progress in bringing its IPR regime in line with international standards through out-of-cycle review, the ongoing GSP review that was initiated by USTR in 2001, and WTO accession discussions.''
The situation has gotten significantly worse, not better, in the past few years. IIPA recommended in February, and continues to recommend as part of the out-of-cycle review, that it is time to designate Russia a Priority Foreign Country to force Russia to properly enforce its laws or face the trade sanction consequences.
3. Remove Russia's Eligibility for Generalized System of Preferences (GSP) Benefits
In August of 2000, IIPA filed a petition asking the U.S. government to open an investigation into Russia's practices and outlining a variety of ways in which Russia failed (and continues to fail) to meet the GSP criterion of providing adequate and effective protection for intellectual property. That petition was accepted by the U.S. government on January 10, 2001. IIPA has since testified twice before the U.S. government GSP interagency committee (March 2001; September 2003) and submitted a number of materials and briefs in this matter since then.
IIPA believes it is time to revoke Russia's eligibility from the GSP program. Russia is not providing the U.S. GSP mandated ''adequate and effective protection'' as required by Sections 502(b) and 502(c) of the 1974 Trade Act (the intellectual property provisions in the GSP statute are at 19 U.S.C. §2462(b) and (c)).
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It has been almost five years since the IIPA petition was filed, and over four years since the U.S. government accepted the petition, which at least as a threshold matter, acknowledged the potential of Russia's shortcomings under the GSP program. The Russian government has had years to move to fix these problems and they have not done so adequately.
CONCLUSIONS
Unfortunately, the Russian piracy problem has been allowed to grow significantly worse in the past ten years, and the IIPA members' losses have continued to increase. Most obviously, the past five years have witnessed an explosion of optical disc manufacturing capacity without the concomitant controls to ensure that this capacity was used only for legitimate purposes.
Russia's anti-piracy efforts remain severely hampered by flawed legislation, ineffective enforcement by the Russian authorities and insufficient deterrent penalties in the courts. The Russian government needs to address legal reforms in the copyright law (even after the adoption of the 2004 amendments), the criminal code, the criminal procedure code, and the administrative code, but more importantly, it needs to provide stronger and more effective enforcement compatible with international norms, and WTO TRIPs (and the WIPO digital treaties). The Russian government has taken some steps towards addressing copyright piracy, such as adopting improvements in its copyright law in 2004, and including by taking some actions against pirate optical disc plants, adopting a ban on the sale of certain products at kiosks and other street locations. This is a start, but it is only that. IIPA suggests that the U.S. government should adopt positions, and a timetable, to ensure that Russia is significantly moving towards achieving meaningful and lasting progress to meet its international obligations—especially IPR enforcement.
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In sum, Russia's commercial piracy problem must be addressed immediately by the Russian authorities. IIPA recommends that the U.S. government take the necessary trade steps to deny Russia trade benefits (such as GSP) and entry into the World Trade Organization until Russia takes clear and effective steps to bring this illegal activity under control. This country can no longer afford inaction.
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Mr. SMITH. Thank you, Mr. Schwartz.
Mrs. Richardson.
TESTIMONY OF BONNIE J.K. RICHARDSON, SENIOR VICE PRESIDENT, INTERNATIONAL POLICY, MOTION PICTURE ASSOCIATION OF AMERICA
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Ms. RICHARDSON. Mr. Chairman, Mr. Berman, Members of the Subcommittee, thank you for inviting me to testify today, and for holding these back-to-back hearings on China and Russia.
As the witnesses outlined this morning, the problems in China are very serious. But the challenges we face in Russia—lawlessness, physical danger, and corruption—are even more daunting. Until Russia reforms its ways, the U.S. Government should stop considering, and start removing, the special breaks we give to Russian exports into the United States under the Generalized System of Preferences.
And I agree with you, Mr. Chairman. Before the United States supports Russia's accession to the WTO, Russia needs to reduce theft at home and stem exports of pirated goods. As Members of Congress, you are key players in Russia's bid to join the WTO. Please, let Russia know and let the Administration know that your vote on permanent normal trade relations will be in question unless Russia makes meaningful progress in protecting intellectual property.
I'm going to say some tough things about Russia today. But before I do, I want to acknowledge that there are also honest officials in Russia who put their lives on the line in trying to protect against intellectual property. They must be as frustrated as we are with the high levels of corruption.
Last October, police raided a warehouse and found it full of pirated video games. According to the Wall Street Journal, which you cited in your letter, the pirate got help from a corrupt Russian legislator, who then charged the police with running an illegal raid. For the next 3 months, the police had to defend themselves, instead of fighting piracy. And the pirate? Probably remains in business today.
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Let me give you a few examples of how organized and dangerous piracy is in Russia. Polish customs officials working on the border with Russia have uncovered false-bottomed compartments in both trains and cars, full of pirated copies of our films destined for markets all over Europe. This isn't ''mom and pop'' investment. This is organized crime.
At least nine of the 34 factories that replicate CDs and DVDs, and possibly considerably more, are located on government-owned property in Russia, the so-called ''restricted access regime enterprises.'' Given the location of these plants, civilian authorities have serious difficulties in gaining prompt access. Any delay in access during a raid allows the pirates time to destroy the evidence of infringing activity.
Nor are the pirates afraid to use violence. Two years ago, a thug shot at the car that was driven by our anti-piracy investigator. The incident occurred just after a major raid against a pirate facility. It was a clear effort to intimidate our anti-piracy team. Fortunately, our employee was not hurt. The assailant now resides in a psychiatric hospital. And the person who funded the attack? No doubt, he's still making money from our films.
Corruption has become endemic at every level of the enforcement system in Russia. As Eric Schwartz mentioned, 70 percent or more of the pirated goods that are seized during raids find their way back into the marketplace. And what's worse, often the pirated goods are sold by the trade houses that are associated with the justice ministry or by their veterans' funds.
Prosecutors often shelve cases resulting from major optical disc plant raids. Even the rare cases that end up in sentencing have no deterrent value. Of the eight raids conducted last year against pirated factories, all of the plants remain in operation today, and continue to pirate. In half of the cases that were prosecuted—and only four were prosecuted—lower-level employees were targeted; not the owners. All of the cases—all three of the cases—that reached judgment, resulted in suspended sentences. There is no deterrence in the system.
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My written testimony provides a summary of several anti-piracy actions last year. Any one of these cases could have been an innocent mistake or could have another honest explanation. But taken as a whole, they create a disturbing fact pattern that can only be understood as corruption or massive indifference.
In one case, local prosecutors closed the criminal case. The regional prosecutor ordered it reopened. The local prosecutor again closed the case; ordered the seized stampers returned to the plant operator. And the plant remains in operation today.
In another case, two and a half million pirated discs were seized from two related warehouses on one of these restricted access facilities. Within days of the raid, over a million of the discs had mysteriously disappeared from the sealed warehouses. The owner got a 2-year sentence—suspended, of course.
We will see no progress in enforcing against intellectual property crime in Russia unless President Putin himself demands accountability from his senior officials. Until then, corrupt officials will continue to afford protection to the pirates.
Mr. Chairman, on behalf of the Motion Picture Association of America, and the thousands of law-abiding Americans who work in the movie industry and whose livelihoods are threatened by piracy, I want to thank you for inviting me to testify and for your support to this industry over the years.
[The prepared statement of Ms. Richardson follows:]
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PREPARED STATEMENT OF BONNIE J.K. RICHARDSON
Mr. Chairman, Ranking Member, Members of the Committee:
I would like to thank you for inviting me to testify before you today on the important topic of international intellectual property theft in Russia. I commend you for holding back-to-back hearings this morning to illuminate the problems of IP theft in China and Russia. As serious as problems are in China, and they are serious indeed, the challenges we face in protecting our intellectual property in Russia are even more daunting. Lawlessness, physical danger, and corruption are part of the daily challenges we face in trying to protect our rights in Russia.
Russia is one of the largest producers and exporters of pirated DVDs and other copyrighted products in the world. Russia needs to lower the incidence of copyright theft at home and stem the export of pirated goods before the United States supports Russia's accession to the WTO. Our Government also needs to use all the tools in its bilateral arsenal to send this message, including suspending Russia's eligibility for preferential trade benefits under the Generalized System of Preferences.
If the United States Government acts now, it won't have to choose between American economic interests and our geopolitical goals. If the US Administration tells the Russians, clearly and unambiguously, that the United States will not accept Russia as a WTO partner until they have taken effective actions to control the rampant optical disc piracy, then the choice will not be ours—it will be Russia's. Russia will have to choose between coddling criminals and tolerating corruption on the one hand and joining the world trade community on the other. Congress can help ensure that both Russia and the Administration know that a grant of Permanent Normal Trade Relations to Russia, which is a prerequisite to WTO relations, will be endangered without meaningful progress on protecting intellectual property.
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THE ''GOOD GUYS'' IN RUSSIA
In my remarks today I will focus on what is wrong in the fight against piracy in Russia today. But, I want first to acknowledge the dedicated and courageous officials in Russia who have fought hard to secure adoption of good copyright laws, and who put their own safety on the line in trying to enforce those laws against the organized criminals who run the piracy business in Russia. These honest men and women must be as frustrated as we when their laws aren't implemented, when their raids aren't prosecuted, or when their prosecutions result in paltry sentences.
Chairman Smith cited a May 12 article from the Wall Street Journal from May 12 in his ''Dear Colleague'' letter of the same date. I would like to append this article to my testimony, because it vividly illustrates the price that honest officials in Russia can pay for trying to do their jobs. After a raid last October on a warehouse full of pirated videogames, the pirate enlisted the help of a Russian legislator, who complained to prosecutors, city officials, and police's own internal affairs office. The police, who were trying to enforce Russian copyright law, ended up spending the next three months defending themselves. And the pirate remains in business.
Certainly the Russian film industry, who have basked in the light of such local and international successes as last year's superhit ''Night Watch'' or this year's all time box office record holder ''Turkish Gambit,'' have to be angered that the revenues from the successful home video sales of their fine films go to the pirates instead of to the Russian creators.
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THE AMERICAN ECONOMIC INTEREST
The US filmed entertainment industry has a surplus trade balance with almost every country in the world. No other American industry can make that claim. Ensuring the continued economic health of the film industry, and of other U.S. intellectual property rightsholders, is in our national interest and in the interest of the ordinary Americans who enjoy those films, as well as the costumers, the carpenters, the set painters, the sound technicians, the fire safety workers, whose jobs rely on the creation of filmed entertainment and other forms of copyrighted works. Piracy, massive thievery really, threatens the continuing viability of this important economic engine.
AN ORGANIZED CRIME
In Russia, the people procuring, producing, and distributing pirated copies of our movies are affiliated with large and dangerous international criminal syndicates and gangs. Organized crime figures own the modern factories that cost well in excess of a million dollars, and operate 24 hours a day, seven days a week, cranking out millions of pirated discs. They ensure protection for the distributors and retailers who sell eight pirated copies to every two legal copies my members manage to sell in Russia.
No small-scale, independent operator could afford the false-bottomed compartments in trains and cars which Russian organized crime uses to export pirated copies of our films to other organized criminal syndicates all across Europe. Pirated movie discs from Russia are readily available throughout Europe and the Middle East. The odds are high that every dollar or euro spent on these pirated goods is put into the pockets of bad people who will spend it in a way that is not consonant with our safety and security.
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Another example of the failures of the Russian enforcement regime comes from IIPA's annual Special 301 report and relates to the control that criminal syndicates have over entertainment software piracy in Russia. There are four principal criminal syndicates that control the production and distribution of pirated entertainment software in Russia. The syndicates attach ''logos'' or ''brand'' names to their illegal product and localize the illegal copies they produce—before the legitimate product is released into the market. These same groups control illegal distribution networks in Russia, as well as in the surrounding countries. It is widely believed that the Russian groups control piracy operations in much of Eastern Europe including the markets in Poland and Latvia, and that they also have ties with syndicates operating in Ukraine. One ESA company reports that in 2004, one of these piracy syndicates attempted to register one of the company's trademarks for a videogame product that was being pirated by the syndicate.
A LARGE, GROWING, AND VERY DANGEROUS PROBLEM
In 1996 there were two known optical disc plants in Russia. The subsequent years of inaction by the government of Russia allowed the number of factories to mushroom to today's 34 known plants, resulting in a serious problem—production capacity that far exceeds legal demand in Russia. The excess capacity is, of course, devoted to illegal production for the local market and for export. Unfortunately, Russia has yet to put in place an effective optical disc regulatory regime to fight illegal production at its source.
According to our data, at least nine of these factories are located on property owned by the Russian military, or ''restricted access regime enterprises.'' The location of these plants creates serious difficulties for ensuring prompt access to these plants for the civilian authorities. Any delay in access allows the pirates time to destroy evidence of infringing activity.
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Let me be clear, the people heading these organizations have no qualms about resorting to violence or bribery to conduct their operations. Two years ago, shortly after a major raid against a pirate facility, in what clearly was designed as an intimidation effort, a thug shot at the car in which one of our anti-piracy investigators in Russia was driving from work. Fortunately our employee was not harmed. The assailant now resides in a psychiatric hospital, while the funder of the attack likely grows ever more wealthy from the lucrative—and in Russia—extremely low risk, piracy game.
THE EXPORT PROBLEM
Russia is now one of the world's largest exporters of illegally copied optical discs. Exported Russian pirated discs have been found in over 27 international markets. The exported DVDs generally contain multiple language tracks. Frequently the exported discs do not include a Russian language track—a clear indication that the pirated discs were produced solely for the export market. The result is a serious erosion of legitimate sales in Europe that threatens the lucrative Western European markets.
WIDESPREAD CORRUPTION
Corruption has become endemic at every level of the enforcement system in Russia. The lure of a bribe has long been common among poorly paid police. By now, many prosecutors have succumbed to corruption. There is even reason to suspect that some judges may have been influenced by the pirates.
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One indication of prosecutorial corruption is the number of requests prosecutors make of rightsholder organizations to return seized material to prosecutors because they ''need to show the evidence to the judges.'' In fact, the goods confiscated during raids on factories and warehouses are returned to commercial channels to which the prosecutors are connected.
The Wall Street Journal article cited above estimates that 70% of confiscated merchandise winds up back on the market. MPAA has estimated that up to three quarters of the pirate product seized in raids finds its way back onto the market via Veterans' Funds and the Trade Houses of the Justice Ministry.
The number of times prosecutors have tried successfully to shelve cases resulting from major OD plant raids or ducked prosecution of the public and notorious pirate website ''Allofmp3.com'' also points to rampant corruption.
In 2004, there were eight raids against optical disc plants, including raids and seizure of illegal materials. In all cases, the factories remain in operation to this day with evidence of continued piracy. When prosecutions took place, the prosecutors tended to target lower-level employees, instead of the owner. Three of the cases that reached judgment resulted in suspended sentences and the fourth still awaits a final decision.
In fact, the only time MPA has been able to get an unsuspended prison sentence for a pirate in Russia, the defendant was a video shop owner, not a large-scale factory owner. The video shop owner was sentenced to three years and two months in prison. The defendant was a repeat offender, having received a two year suspended sentence in his first conviction.
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Below is a brief summary of several of the factory cases that together create a disturbing fact pattern that can only be understood as a reflection of corruption or massive indifference.
A DISTURBING PATTERN OF SENTENCING AND FAILURE TO CLOSE PLANTS
The UVK Stimul plant in Zelenograd was raided June 21, 2004, the second raid against this plant in ten months.
37,000 pirate CDs and DVDs and 8 stampers were seized.
The plant continues to operate, reportedly working 24 hours a day.
On January 14, 2005, a Moscow court imposed a one-year suspended prison sentence on the plant's chief technician, after he confessed to ordering the plant's personnel to replicate pirate DVDs. The prosecution claimed the accused acted alone, without reporting to the management of the company. The defendant pleaded guilty and the court ruled under simplified procedures without full consideration of the case.
Data Media plant in Koroliov, raided on April 30, 2004.
The plant operator pleaded guilty in December 2004 to replicating pirate discs. Sentenced on February 28 to a suspended two year prison term.
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Despite an alleged closure of the plant by police, trucks full of illegal DVDs intercepted leaving the plant in July 2004, were found with 22, 771 pirated CDs and DVDs.
Two further criminal cases are pending against the same accused arising from these subsequent seizures.
Plant remains in operation, continues to work illegally.
ZZMT plant in Zelenograd, raided December 2002
234,493 counterfeit CDs seized.
The defendant, the human resources officer not believed to be an owner or major organizer, was sentenced February 2004, to one year suspended sentence.
Defendant ordered to pay $180,000 damages to rightsholder.
Plant continues to operate. A disc matched by forensics to this plan was found in Kiev in March 2005.
EXAMPLES OF CASES NOT PROSECUTED
T3The Okapi plant, Puskino, raided February 2004,
25,000 pirate DVDs and computer games discs, and 800 stampers seized.
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Situated on a government owned, restricted access facility.
Closed in early 2004—after equipment was returned by court order to its alleged owners and moved it to an unknown site to continue manufacturing.
Samara plant, found to be a pirate DVD plant during a routine tax inspection at a cement factory in April 2004;
7,000 pirate DVDs and 30 stampers uncovered.
Plant director was questioned, a criminal prosecution prepared.
Local prosecutor closed the criminal case.
Regional prosecutor ordered the case re-opened.
Local prosecutor again closed the case, ordered the seized stampers returned to the plant operator.
The plant, an unlicensed plant, remains in operation.
Warehouse in Odintzovo near Moscow raided August 2004, over 1 million pirate discs seized. A nearby second warehouse contained an additional 1.5 million pirate discs.
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Located on a military camp.
Within days of the raid, over a million of the discs mysteriously disappeared from the ''sealed'' warehouses.
Industry anti-piracy group nevertheless managed to get legal guardianship of over 100,000 of the seized, pirated DVDs.
On March 15, 2005, a court in Odintzovo imposed a suspended two year prison term on the owner.
The one bit of good news—remaining DVDs still in legal custody were ordered to be destroyed August 2004.
Given the extent of corruption, seeking enforcement from within the bureaucracy is largely a waste of time. We will not see progress in enforcement against intellectual property crimes in Russia unless President Putin directs all relevant agencies to make the fight against copyright piracy a priority. Until the President himself demands accountability from his senior officials, corrupt officials will continue to afford protection to the pirates.
CONCLUSION
Mr. Chairman, on behalf of the Motion Picture Association of America, as well as the thousands of law-abiding people who work in the movie industry and whose livelihoods are threatened by piracy, I want to thank you again for inviting me to testify today and for your support to this industry over the years. As I have attempted to describe today, piracy in Russia is a large, growing and dangerous problem. Russian enforcement institutions have not demonstrated any intention to deal with this problem seriously. We need your help to ensure that Russia does not continue to benefit from US trade preferences, while continuing to coddle the pirates who rob us blind. We also need your help to ensure that Russia addresses its piracy problems before it is permitted to join the WTO.
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ATTACHMENT
Mr. SMITH. Thank you, Ms. Richardson.
Mr. Gerson.
TESTIMONY OF MATTHEW T. GERSON, SENIOR VICE PRESIDENT, PUBLIC POLICY AND GOVERNMENT RELATIONS, UNIVERSAL MUSIC GROUP
Mr. GERSON. Mr. Chairman, Congressman Berman, thank you very much for inviting me to testify today on behalf of the Universal Music Group and the Recording Industry Association of America, and for taking the time to dedicate today's hearings to two very important problems that we face: piracy in China and piracy in Russia.
In my years knocking around this Committee, I've learned a few things; and among the most important is to recognize that the people sitting behind me are starting to get hungry. So I'm going to be brief, and I'm going to try not to repeat some of the things that have already been said.
We envision Russia as a terrific market for both local and international businesses, and have made significant investments in the arts, and have made investments in the many businesses that it takes to bring CDs to market. We've signed and distributed local bands; we've promoted them outside of Russia. We manufacture our product locally in Russia through Russian-owned businesses. We've developed special budget lines to bring legitimate product within the buying power of the average Russian citizen.
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We've also tried to raise awareness within Russia of the social, cultural, and economic costs of piracy. Through IFPI, the federation of music trade associations from around the world, the industry invests millions in a wide variety of anti-piracy, pro-music activities. But we're frustrated.
And as you observed, Mr. Chairman, all our efforts are stymied when law enforcement fails to prosecute the crimes that they can identify and easily find. Our best intentions and best efforts are undermined when the few convictions lead to slaps on the wrist or penalties that are insignificant and really just a cost of doing business.
Despite our work with the Administration, despite interactions between the United States and Russia at the highest levels, as cited by Ms. Espinel, piracy is growing. The Russian government sees our bill of particulars. They can read our Special 301 submissions. They can read what we say about GSP. They know exactly what we know, and they're failing to act.
Now, Bonnie and Eric gave you a sense of what's happening with physical piracy. We're starting to see the same disregard when it comes to Internet piracy. Through online servers based in Russia, a site called ''allofmp3.com'' sells music to anyone in the world willing to pay about 10 cents a song. The problem is that ''allofmp3.com'' has not secured the rights to do so, and doesn't bother to pay the people who wrote the songs or recorded the songs or own the copyrights.
There's no question about the law. At the very least, ''allofmp3.com'' is violating the reproduction rights afforded by Russian copyright law and the criminal code, and the laws of country where those songs are downloaded.
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Now, industry observers—industry investigators looked at the website; worked closely with the Moscow city high-tech crime unit; and submitted a substantial body of evidence to the Moscow prosecutor. In February, the prosecutor dismissed the case. And in doing so, he conveyed a damaging message to the public and, frankly, a damaging message to those of us trying to establish legitimate businesses there.
We need to do some messaging of our own. And by that I mean the copyright industries and U.S. policymakers need to make it clear that failure to control piracy has clear ramifications for the Russian government. First, as has been said, USTR should really reexamine Russia's eligibility for GSP. It's wrong that U.S. taxpayers should, in effect, be helping to finance Russian exports to the United States, while the rights of U.S. intellectual property owners are being systematically neglected.
Second, we really do have to learn from the China experience. By every measure, by every expert and every witness, the China WTO has failed. The commitments that were made, the efforts that were made before China entered WTO haven't done what's necessary for America's patent, copyright, and trademark industries. And we just have to learn what went wrong, and correct it when it comes time for Russia to be admitted, or to be considered for admission, into WTO.
Third, I believe Congress should delay consideration of PNTR for Russia. As with admission to WTO, Russia should not be rewarded with Permanent Normal Trade Relations until it has demonstrated sufficient and sustainable reform. The word ''sustainable'' is one that you used, Mr. Chairman. That's really what's at stake here.
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Let me make a few final observations. WTO accession is not a political prize. It represents a commitment to abide by international rules. WTO as an institution and global confidence in free and fair trade are quickly undermined when agreements and commitments go unenforced.
In addition, we have to face facts. Today, the Administration and the Congress has a certain amount of leverage because Russia wants PNTR and Russia wants WTO. And once they attain those goals, the leverage that we have is going to diminish significantly.
I've got a few seconds left so, you know, Congressman Issa mentioned the problem he's having with patents over amplifiers. It is not so long ago that in this room we talked only about music and movies and software being pirated. But today, we can talk about Congressman Issa's amplifiers, or somebody who manufactures altimeters in Mr. Goodlatte's district. Or I loved the example in the L.A. Times a couple of weeks ago about hot sauce. It's a favored brand in L.A., and is being imported illegally from China, as well. It is touching every aspect of the American economy, and we really need to take aggressive steps.
And finally, just to follow up on a point that Myron Brilliant made, it's not just U.S. industries getting hurt. There are industries in China and businesses in Japan and businesses in Europe that are being hurt by the piracy that takes place in China and in Russia. And maybe there are things that we can do on a multilateral basis with our trading partners, with other businesses who are trying to succeed in the global marketplace.
Thank you. And I really want to thank you, Mr. Chairman, Congressman Berman, and your staffs, for doing so much over so many years to help the U.S. creative industries.
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[The prepared statement of Mr. Gerson follows:]
PREPARED STATEMENT OF MATTHEW GERSON
Mr. Chairman and Members of the Committee, my name is Matthew Gerson and I am Senior Vice President for Public Policy and Government Relations at the Universal Music Group. I appreciate the opportunity to appear before you today on behalf of my company and the Recording Industry Association of America to discuss the problems that we confront as we attempt to establish and build businesses in the Russian Federation.
Universal Music Group [UMG] is the world's leading music company with wholly owned record operations or licensees in 77 countries. Its businesses also include Universal Music Publishing Group, one of the world's largest music publishing operations.
Universal Music Group consists of record labels Decca Record Company, Deutsche Grammophon, DreamWorks Records, Interscope Geffen A&M Records, Island Def Jam Music Group, Lost Highway Records, MCA Nashville, Mercury Nashville, Mercury Records, Philips, Polydor, Universal Music Latino, Universal Motown Records Group, and Verve Music Group as well as a multitude of record labels owned or distributed by its record company subsidiaries around the world. The Universal Music Group owns the most extensive catalog of music in the industry, which is marketed through two distinct divisions, Universal Music Enterprises (in the U.S.) and Universal Strategic Marketing (outside the U.S.). Universal Music Group also includes eLabs, a new media and technologies division.
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The Recording Industry Association of America (RIAA) is the trade group that represents the U.S. recording industry. Its mission is to foster a business and legal climate that supports and promotes its members' creative and financial vitality. Its members are the record companies that comprise the most vibrant national music industry in the world. RIAA members create, manufacture and/or distribute approximately 90% of all legitimate sound recordings produced and sold in the United States. In support of this mission, the RIAA, among other things, works to protect intellectual property rights worldwide.
International markets are vital to RIAA's companies and our creative talent. Foreign sales account for over fifty percent of industry revenues. This strong export base sustains and creates American jobs and is a key reason that the core copyright industries—including music, movies, software and videogames—account for some 6 percent of U.S. GDP.
However, as this subcommittee well knows, America's creative industries are under attack. Piracy has grown in recent years with the advance of digital technology that facilitates both physical and online piracy. Indeed, high levels of piracy and trade barriers that complicate our efforts to enter or operate in foreign markets plague all of America's copyright owners and creators.
Despite the enormous challenges that the copyright industries face, I want to highlight one great benefit that we enjoy—the consistent and committed work of this subcommittee. Your work over the years is in no small measure responsible for the extraordinary success of America's creators. Your focus has enabled us to entertain, educate and inspire people all over the globe. I would also like to recognize the State Department, the U.S. embassies around the world, the United States Trade Representative, the Department of Commerce, the Patent and Trademark Office and other agencies staffed with dedicated and talented officials committed to the continued vitality of this uniquely successful sector of the U.S. economy.
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The other witnesses on this panel will elaborate on the current state of piracy in Russia. To avoid repetition, I will describe some of the efforts that Universal has taken to build a business in Russia, and the industry's efforts to bring our piracy problems to the attention of U.S. policymakers as well as officials in Russia.
But the position of the music industry and many in the content community is easy to summarize—the piracy situation in Russia is untenable, as made clear in the Thursday, May 12 Wall Street Journal article circulated by Chairman Smith.
To protect the American businesses that invest in creativity, and the artists and others who earn their livelihoods in the production and distribution of intellectual property, the U.S. Government should take a hard look at the economic and political mechanisms at its disposal. Until we can be certain that there is a demonstrated and sustainable commitment to enforcing intellectual property laws, the Congress and Administration should—
reexamine the GSP benefits currently afforded Russia;
delay its consideration of PNTR—and the benefits that come with Permanent Normal Trade Relations;
withhold support for Russian membership within the World Trade Organization (WTO).
DOING BUSINESS IN RUSSIA
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Russia is a very exciting music market that is ripe with opportunities for both local and international business. But these opportunities are stymied by the second largest pirate music market in the world—estimated at $330 million U.S. dollars—where two-thirds of all recordings are illegal copies.
Universal Music is the biggest record company in Russia and we have made very significant investments in the arts in Russia as well as the many disciplines involved in bringing a CD to market. We have signed and distributed local bands, and have promoted them outside of Russia. We manufacture our product locally through Russian-owned third parties. We have developed special budget lines to bring legitimate product within the buying power of the average Russian citizen. And we have tried to raise awareness within Russia of the social, cultural and economic costs associated with their failure to create more favorable conditions for investing in creativity.
The cultural impact of American music and the role of a U.S. record company is exemplified by a Russian act called Bering Strait. I saw them a couple of years ago at Wolf Trap where they were opening for another Universal band. The band plays country music—that's right, country music—and was on their first American tour. The tour was a real success as they were embraced by audiences—most of which never thought they would see Russian musicians putting their own spin on familiar bluegrass melodies.
Because we are so committed to the Russian market, we have joined with industry allies to do everything in our power to address music theft. Through IFPI—the International Federation of the Phonographic Industry, a federation of music trade associations from around the world—the industry invests millions in anti-piracy activities. However, those efforts are stymied when law enforcement fails to prosecute the crimes and criminal enterprises that are identified. We have agonized over the few judicial sentences that have been granted, which each time result in a relatively small fine easily assumed as a cost of doing business. We have struggled as the Russian Government refuses to act against fraudulent collecting societies that grant ''licenses'' to pirate internet sites.
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AN ONGOING TREND
Russian piracy is not a new problem for the recording industry, and our interaction with the U.S. Government on this point is long standing. For the past several years, the International Intellectual Property Alliance [IIPA] has, through its Special 301 and GSP submissions, documented the extensive copyright violations going on in Russia. This year the U.S. copyright industries urged the U.S. government to suspend Russia's eligibility for any duty-free trade benefits accorded through GSP, and were disappointed when the Government decided not to do so. It was equally dismaying when the U.S. Government did not identify Russia as a ''priority foreign country'' under Special 301, and instead choose to keep them on the priority watch list.
Nearly two years ago, on September 16, 2003, RIAA CEO Mitch Bainwol joined the CEO's of America's major record companies in writing to President Bush. A complete copy of that letter is attached to this testimony, but the main points were:
To ask President Bush to raise piracy during an upcoming Summit with Russian President Vladimir Putin and urge him to ''take immediate steps to curtail his country's illegal production and export of pirate products—an activity that has been on the rise for the past three years and which severely harms American and Russian creators alike.''
To emphasize that, ''the success or failure of initiatives to strengthen copyright protection on the global stage has a profound bearing on U.S. economic competitiveness. It will dictate whether the global economic and legal environment will sustain America's artistic and intellectual heritage. No less is at stake than the genius and individuality that lie at the core of our national soul, and the dangers posed are great and immediate.''
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To set out the facts. At that time—just two years ago—Russia was ''home to 28 known optical disc plants (''optical discs'' refers to CDs, DVDs, CD-ROMs, and other disc based products) with a production capacity of over 330 million discs a year. Demand for legitimate discs in Russia, on the other hand, is unlikely to exceed 30 million discs per year. This excess capacity is used to produce and then export pirate materials, and investigations have led to the seizure of Russian manufactured pirate discs in over 25 countries. The U.S. copyright industries have been losing more than $1 billion a year to piracy in Russia, and we have been sustaining this level of loss for 5 years.''
To clarify why more action was necessary. ''President Putin has taken certain steps over the course of the past year, but they have not been adequate to address this intolerable situation. The thrust of our request to the Russian Government—oft repeated by the excellent and dedicated Ambassador of the United States to Russia, Ambassador Vershbow—has been to introduce and implement effective controls over the operations of the CD plants . . . Ambassador Vershbow delivered a document to the Government of Russia more than one year ago that listed the names and addresses of the [pirate] facilities [but they continue in operation today].''
I urge you to read the entire text of that letter from industry CEO's because an understanding of what we have tried is critical if we are to properly respond today. President Bush did indeed raise his concerns about copyright piracy with President Putin on several occasions, and President Putin in turn pledged to address it. To date, the response has been inadequate.
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In fact, the statistics demonstrate a dramatic increase in music theft, certainly not a crackdown. According to RIAA:
The 28 replication plants in 2003 have grown to 34 plants in 2005. Five plants would be sufficient to meet the needs of the legitimate Russian market. As a result of that excess capacity, Russia is the world's largest exporter of pirated music.
Production capacity which stood at an alarming 330 million a year in 2003 now stands at 488 million units.
At least 9 of these production plants are located on so-called ''Russian State Restricted Access Regime Enterprises'' in which the Russian Government itself is the owner of the premises.
Russia is now home to some of the world's only Internet-based pirate pay download services—such as allofmp3.com.
The case of allofmp3.com helps illustrate the music industry's frustration. Through online services based in Russia, it sells music to anyone in the world willing to pay ten cents a song. The problem is that allofmp3.com has not secured the rights to do so—and doesn't bother to pay the people who wrote and own the songs being sold. There is no question about the law—at the very least allofmp3.com is violating the reproduction rights afforded by Russian Copyright Law and Criminal Code, and the laws of the countries where the songs are being downloaded.
Once again, IFPI investigated and in 2004 began working in close collaboration with the Moscow City High-Tech Crime Unit. Both IFPI and the High-Tech Unit submitted formal complaints—including supporting documentation—to the Moscow City Prosecutor's office.
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In February 2005, without much explanation, IFPI received notice that a regional Moscow City Prosecutor declined to accept the matter for further investigation. Clearly the Prosecutor failed to appreciate the seriousness of the matter and misapplied the law. In doing so, he conveyed two incorrect and damaging messages to the public—that the service is legal and that it is legal to download from the service wherever you may be. Similarly, the Prosecutor sent yet another clear signal to those trying to establish legitimate businesses.
WHAT SHOULD BE DONE?
We need to change the political calculus so that failure to control piracy has clear ramifications for the Russian Government—ramifications that outweigh the costs associated with stopping piracy. Specifically:
(1) USTR should reexamine Russia's eligibility to participate in the Generalized System of Preferences until it has satisfactorily protected intellectual property from theft. It is wrong that U.S. taxpayers should, in effect, be helping to finance Russian exports to the U.S. while the interests of U.S. intellectual property owners are being systematically undermined. The United States needs to point out how failure to address copyright piracy will impede Russia's goals, whether such goals relate to attracting foreign investment, joining the WTO, or other matters.
(2) We must learn from the China experience. Congress should insist upon demonstrated and sustainable reform before supporting Russia's accession to the WTO. By every measure, the steps taken before China was admitted to WTO have failed America's patent, trademark and copyright industries. The U.S. should ensure that relevant legal and enforcement measures are in place and implemented before we accept Russia into the WTO. WTO accession is not a political prize—it represents a commitment to abide by international rules. The WTO institution and global confidence in world trade rules is quickly undermined when WTO parties openly mock trade discipline.
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Let's face it—today Congress has some bilateral leverage because Russia wants to enter WTO. Once they are in, the leverage diminishes significantly. Secretary of State Rice alluded to that reality in an April 20, 2005 interview in Moscow in response to a question about WTO—
''We are very supportive of Russia's effort to join the WTO. We think this would be good for world trade, good for Russia. There are certain performance criteria in the WTO that have to be met. And we need to resolve the issue of intellectual property rights. At this point, the legal framework in Russia to prosecute those who engage in piracy is not very strong, and that really must be taken care of before WTO accession . . .
It has to be understood, and I hope the Russian people will understand that when the United States supports WTO accession, this also has to be accepted by the American Congress. And so we have to have performance on these outstanding issues so that when we go to the American Congress, the WTO accession can go through without difficulty.''
(3) Delay consideration of PNTR for Russia. As with admission to the WTO, Russia should not be rewarded with Permanent Normal Trade Relations until it has demonstrated sufficient, meaningful and sustainable reform.
CONCLUSION
Mr. Chairman, I will do the safest thing on earth—I will conclude by quoting you. When you circulated the May 12 Wall Street Journal article you observed that the article, ''underscored the importance of achieving significant reform of the Russian intellectual property rights enforcement system before admitting Russia into the WTO.''
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We agree completely, and appreciate the seriousness with which this Committee will approach WTO accession if it is presented to the Congress.
Thank you for inviting me to participate in this hearing. I would be glad to answer any questions you may have.
Mr. SMITH. Thank you, Mr. Gerson.
My first question I'd like to address to Ms. Espinel. You mentioned in your testimony that we are continuing interagency review of a petition filed by the U.S. copyright industries to withdraw some or all of Russia's benefits under the U.S. Generalized System of Preferences, the GSP program.
It so happens that that particular issue was raised by every one of the other witnesses. That's one of two common denominators that I've seen. But the question really is this. Reviews can only go on so long. When do you think you will actually decide something in that regard?
Ms. ESPINEL. Well, as you may know, the review of this GSP petition has been a longstanding process. And we are reconvening an interagency group to review the GSP petition with Russia and with some other countries in the coming months.
I appreciate the frustration that has been expressed with the length of time that the GSP review has been outstanding. I appreciate hearing the concerns that have been expressed by industry. And we will consider all of the suggestions made with them with respect to GSP, but also with respect to some of the other suggestions they've made.
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I just want to note that this is obviously a deep-rooted problem in Russia. This is not just related to intellectual property. This will require widespread systemic reform by Russia.
Mr. SMITH. Right. But when do you think you will actually make a decision whether or not to deny Russia some of the benefits? You mentioned the frustration. You certainly felt it a minute ago when Mr. Schwartz testified given his experience. Do you know of any kind of timetable within your office, USTR, that might be of interest to us?
Ms. ESPINEL. I'm not aware of any timetable. There is no deadline that I can offer you today. But I will just note that with Ambassador Portman newly onboard, we are examining our strategy with Russia. I think it's very helpful to get this input from industry.
Mr. SMITH. Okay.
Ms. ESPINEL. And we will consider that.
Mr. SMITH. And you can be assured that we will monitor what you all do or don't do in the coming weeks, as well. The second common denominator was interesting to me, because all witnesses mentioned it, as well. And that was the problem with the optical disc plants in Russia which are producing something like three or four times the actual number of discs that are used or purchased by those who live within the Russian Federation themselves. That is clearly a flaunting of U.S. interests. What is going to be done about that?
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Ms. ESPINEL. The problem of optical disc manufacturing in Russia is that the scale of the problem is deeply disturbing. We have made IP enforcement—but, in particular, this issue of optical disc protection—a top priority in our bilateral discussions with Russia, and in particular in our accession negotiations. Again, we share the concern, we share the frustration. One other——
Mr. SMITH. Okay. We're going to give you the benefit of the doubt today. You've been sharing our frustrations and sharing our concerns. And normally, we'd come back at you for a lack of commitment; but you do have a new boss, you do have a new ambassador. And I have great faith in him and his willingness to address some of these issues. So let's just assume that good faith on your part.
Ms. ESPINEL. One thing I would like to note that the Administration has been doing, which is a new action. It isn't directed solely at Russia. In fact, to some extent, it is directed at many of our trading partners, including China and Russia. But this is the STOP initiative which I alluded to briefly.
I think it's particularly relevant with respect to this problem of optical disc manufacture in Russia. Because the major purpose of STOP is to try to stop the illegal trade in counterfeit pirated goods, to stop exactly the kind of problem that we're seeing in Russia, this massive export of illegal optical discs.
So we have been working domestically to tighten our own borders. But we have also been reaching out to trading partners around the world that are also—that share a perspective on this problem and are also facing this, to have them tighten their borders, to try to eradicate the market by cleaning up the supply chains of legitimate retailers, or retailers that would like to be legitimate retailers, and to try to stop these goods after they leave Russia and as they move around the world.
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Mr. SMITH. Okay. Thank you, Ms. Espinel. I'm going to do on this panel what I asked the previous panel, and that is to ask the other three witnesses what your top priority would be, as far as what the United States should be doing, what the United States Trade Representative should be doing to change our policies.
And Mr. Gerson, we'll begin with you. You'll need to go fairly quickly, since my time is almost up.
Mr. GERSON. I will be quick about it. We have to make it clear that failure to control piracy has clear ramifications for the Russian government. There are three items out there that we've mentioned: GSP, WTO, and PNTR. There are opportunities to make the point, and we should move forward using those tools that are at our disposal.
Mr. SMITH. Very good. My thought, real quickly, Russia has already been on the Priority Watch List for 9 years. When does it finally get to be on the Priority Country Watch List?
Ms. ESPINEL. Well, USTR announced this year a special out-of-cycle review of Russia because of the level of concern that we have. So at the conclusion of that out-of-cycle review, we will determine whether or not Russia will be moved up to PFC.
Mr. SMITH. Good. That's progress. Thank you. Mrs. Richardson?
Ms. RICHARDSON. I agree with what Mr. Gerson said, so I'll go from the general to the specific.
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Mr. SMITH. Okay. Good.
Ms. RICHARDSON. The U.S. Government needs to tell Russia to put a comprehensive optical disc regulatory scheme in place right away. They need to tell the President of Russia that he needs to take ownership of this issue and stop the corruption. Only he can do it. And they need guidance from the supreme court to get tougher sentences.
Mr. SMITH. Great. Thanks. Mr. Schwartz?
Mr. SCHWARTZ. This is an agreeable panel. I agree that—I think what they need are deadlines. That has worked in the past. A year ago, when the U.S. Government suggested to the Russian government that June 30, 2004 was going to be a trigger date for the removal of some or all GSP benefits—and it was just done at an informal level—we saw a lot of activity on the Russian side. Probably, it helped produce the Russian copyright law amendments of last July. So I think they need a deadline.
And failing that, I mean, within that deadline, they need to go and inspect all 34 plants. This is not that difficult to do. And if they don't by that deadline, then they need to understand there are consequences. And these deadlines just can't keep extending out and extending out.
Mr. SMITH. Okay. Thank you, Mr. Schwartz. I happen to agree with you. I don't think anything gets done unless there is a deadline. And that's part of the problem.
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Now, that brings us to the end. But Ms. Espinel, you haven't given us too many deadlines, but you've mentioned 6 months several times. So I'm going to take that as a deadline for a lot of the actions by the office. And obviously, you can expect an oversight hearing in 6 months. We'll hope for a lot of progress. Thank you all.
The gentleman from California, Mr. Berman.
Mr. BERMAN. Thank you, Mr. Chairman. In defense of the Trade Representative's Office, when a decision to deny GSP preferences, or elevate from the Priority Watch List to the Country Watch List—I take it, that's important because some sanctions flow from being elevated to that list? Automatically?
Ms. ESPINEL. Not quite automatically. But it causes the—We have to initiate an investigation, and at the end of that investigation we could then impose sanctions. So it does sort of start a chain of action.
Mr. BERMAN. In other words, it has more meaning than a Priority Watch List?
Ms. ESPINEL. Yes.
Mr. BERMAN. All right. So before a decision to take away GSP, or elevate to a list, or to say we're not interested in beginning accession talks in terms of the WTO, is this a decision made by the Trade Representative? Or does he have to clear it with some other agencies first?
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Ms. ESPINEL. We make decisions on all three of those things by interagency consensus. So this is not—this is not the sole decision of the United States Trade Representative. This would be a decision made by the U.S. Government, in consultation with our full interagency group.
Mr. BERMAN. And who is on that interagency group?
Ms. ESPINEL. A range of agencies. But the agencies that tend to be most deeply involved in intellectual property issues, I would say, are the Department of State, the Department of Commerce, with the sort of sister agency of the Patent and Trademark Office, the Department of Justice to some extent, I think particularly frankly with respect to the enforcement issues——
Mr. BERMAN. Is it done in the context of intellectual property issues, or is it done in the context of U.S.-Russia relations?
Ms. ESPINEL. There would actually be overlap between both groups. But primarily, it's done through a TPSC process—a TPSC group, that focuses on intellectual property issues.
Mr. BERMAN. And when they've cleared something as appropriate from an intellectual property point—I mean, it sounds to me like we've got—one would need to do a lot more reviews to have a compelling case of both inadequate laws and a massive lack of enforcement and a totally inadequate sanctions system within Russia. When the interagency intellectual property group thinks something has to be done, then what happens?
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Ms. ESPINEL. If the interagency intellectual property group decides, at not just the TPSC level, but at the higher political level—if we have a consensus from the U.S. Government, then the USTR will move forward to implement the decisions that the interagency group takes. But I think, following up on what you said, the problems that we face with Russia are complicated. And there are a lot of competing interests that are being weighed in Russia.
And this is not in any way to undermine or detract in any way from the seriousness of the problem that we are facing in Russia, but I think that is a partial explanation for why the interagency process in this case has been a long one.
Mr. BERMAN. But like in the case of the GSP petition, how many years now? Five years? Four years. But I guess my point is, if we think—which I do—that this situation is quite outrageous, that we wouldn't tolerate this in another sector of the economy, this kind of action, throwing all our ammunition at you may not produce the result.
We may want to—we may want to get—put pressure on the Administration to give greater weight to this issue than they are now doing, in order to allow you to move ahead with some of the options that have been suggested and that you have indicated receptivity towards, but not endorsement of. In other words, shall we at least add others to our target list here?
Ms. ESPINEL. Well, I think I'm here today because Ambassador Portman is very concerned about intellectual property in Russia and very interested in hearing the views of this Committee specifically. So I would, you know, welcome—we welcome input from this Committee.
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But in addition, it is a joint U.S. Government decision that will have to be made. So I can't speak for other agencies, but I am sure every agency in the U.S. Government would be interested in hearing the views of this Committee.
Mr. BERMAN. I'm not so sure about that. If performance is—if the past is prologue.
One last question, then, on the digital piracy issue, can we get a sort of a Grokster kind of decision in—does Russia have a copyright framework for indirect and contributory infringers that we could legitimately ask them to pursue at this point?
Mr. SCHWARTZ. I'll answer that. The answer is, yes, they do. What they did in their 2004 amendments was to adopt provisions in their law for eventual implementation of the digital treaties. One of the things that they did do, unfortunately, was to delay implementation of the making available right for sound recordings until September of 2006, because of some internal opposition to it. But the answer is, yes.
But the type of piracy that Mr. Gerson was talking about, this is a hosted server, the MP3. This is not a difficult copyright case.
Mr. BERMAN. This is——
Mr. SCHWARTZ. This is protected under the 1961——
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Mr. BERMAN. This is not the P-to-P problem?
Mr. SCHWARTZ. Not at all. It's hosted on a server site. So that's why the reproduction right, which has been in the Russian law since 1993, would clearly outlaw this type of activity.
Mr. BERMAN. Was that Russian guy who broke the DVD encryption, was he an agent of the government at the time? No, never mind.
Mr. GOODLATTE. [Presiding.] I thank the gentleman. Ms. Espinel, what lessons would you say the U.S. Trade Representative has learned from China's accession to the WTO and our subsequent inability to persuade the Chinese to meaningfully enforce intellectual property rights, that you've applied to the pending Russian application for WTO membership?
Ms. ESPINEL. Well, I think China and Russia are actually countries that are in very different positions. I think there are—I think the governments there have different attitudes. So I don't think necessarily what applies to one would apply to the other.
Mr. GOODLATTE. What difference in the Russian attitude would you perceive that would make them better than the experience we've had with China?
Ms. ESPINEL. Well, what I was going to—I think in the earlier China hearing some of the panel had expressed the view that having China in the WTO was helpful, to some extent; that it was better to have China in the club, it was better to have the obligations of the TRIPS agreement as Chinese commitments than it would be to have China without.
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Mr. GOODLATTE. But all that was done without China having the—not just the legal framework, but really the mindset, the kind of judicial structure, the kind of police structure and so on, that would be willing to go out and enforce these laws. They're now in the WTO and, yes, we can bring a WTO case against them, but we're really struggling from very far behind. Isn't the same thing true in Russia?
Ms. ESPINEL. Well, that's sort of what I was going to. I think right now we're at a critical point in accession negotiations with Russia. I think we have—you used the word ''leverage''—but we have an opportunity to impose meaningful deadlines on Russia in the accession negotiations. And I think we would take very seriously the concerns that we have heard from industry about not letting the——
Mr. GOODLATTE. Would we require to see some of this activity before we admit them to WTO, or simply get a timetable that they would commit to after they join the WTO? Because that's the problem we have with China.
Ms. ESPINEL. Well, as I was saying, I think we will take very seriously, and Ambassador Portman will take very seriously, the concerns that were raised from industry to not let Russia into the WTO until they have made meaningful commitments to us on intellectual property.
It has, obviously, been a huge priority in the accession negotiations, and it's something that we have been pressing Russia very hard on. But I will admit there is still a lot of progress—we have not seen nearly the progress that we feel Russia needs to make. So we will continue to press. And I think we see, and will continue to see, the accession negotiations as an appropriate forum for us to press Russia to make meaningful changes.
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Mr. GOODLATTE. And then, on the very specific subject that we've been talking about here, the optical disc plants, what does the USTR intend to do to ensure that the Russian government and Russian officials immediately inspect these optical disc plants that are operating on property owned by the Russian military, the so-called ''restricted access regime enterprises''?
Ms. ESPINEL. The optical disc plant is at the top of our priority list of IP concerns with Russia. This has—there is actually an action plan that we have given to Russia recently in dealing with their optical disc products—their optical disc problem—including through some of the measures that have been discussed here. Like unnotified searches and seizures of the production plants has been a key element of that. So it is something that we are definitely pressing very hard. It is at the very top of the list of issues that we have with Russia.
Mr. GOODLATTE. Thank you. Mr. Gerson, as the world's largest music company, you are, I'm sure, aware of the extent to which European and Japanese companies are experiencing similar difficulties protecting their IP in Russia. I wonder if you might indicate whether you think the U.S. alone can persuade the Russian government to achieve adequate and effective enforcement of IP rights; or do you believe that we need to have some multilateral action here?
Mr. GERSON. No, I agree with the statement made in the earlier panel by Myron Brilliant. I think there is an important opportunity to work with the Japanese and European businesses and parliamentarians, other government officials, to together try to come up with a plan to address what's going on in China and in Russia.
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And, you know, to answer a question that you asked Ms. Espinel, there has to be something to learn from the China experience. There has to be another provision, another paragraph, another tool to put in there to guarantee enforcement of trade agreements.
WTO as an institution and global confidence in free and fair trade are undermined when agreements and commitments aren't enforced. And if they can't be enforced, we need to do something so that there is the power to enforce them.
Mr. GOODLATTE. I agree with that. What signs do you see of European and Japanese governments coming together to cooperate with us in such a thing? Do you think they're so anxious to get Russia into the WTO that they're going to let this slide? Or do you think they really will be willing to hold back and do what's necessary to, in a multilateral way, press the Russians to do what we've been pressing them to do?
Mr. GERSON. In some respects, I think that you and Congressman Berman might be in a better position to answer that. You interact with your counterparts in other governments from time to time, and over the years have built up relationships with those who are committed to doing something in this area.
We work with other music industry—our music industry colleagues in other countries. We hear their frustrations. In many cases, they look to the United States as a leader in this area.
But I think it would be terrific to try to identify government officials, parliamentarians, others who want to work with us to find the right tools to use to deal with piracy that's not only affecting America's music and movie industry any more; it's affecting everyone, including, you know, the manufacturer in your district of an altimeter. Who would have thunk it? But that's where this piracy trend is going. It's affecting every sector of the economy.
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Mr. GOODLATTE. Well, let me ask that question of Ms. Espinel, then. What is the U.S. doing to reach out to the Europeans and Japanese and others that have a strong interest in protecting intellectual property rights, to pull together that kind of multinational, multilateral coalition that could put this pressure on Russia?
And as a follow-on to that, do you believe that folks in these other countries in a position to join us in that effort will see the need to confront Russia now, before they join the WTO?
Ms. ESPINEL. One of the major things that the Administration has been doing, particularly in the last few months, is reaching out to trading partners like Japan and Hong Kong and Singapore, to try to come up with a collective plan to address the problems, the type of problems that we're seeing in Russia. We are also going to be reaching out to the Europeans in early June, both to the commission and to some of the European countries that are facing the same problems that we have and share similar concerns that we have.
I will tell you preliminarily that I have been encouraged by discussions that we've had. I think there is actually a lot of interest in cooperating. I think there is a growing recognition that the United States and certainly no other single country can do this alone; that in order for countries that care about protecting intellectual property to combat this effectively, we are going to have to cooperate together.
But—so I am hopeful that the STOP initiative is going to bear some—in the short term, some very real, concrete results with our trading partners in Asia and with Europe.
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Mr. SCHWARTZ. If I could just——
Mr. GOODLATTE. Yes, let me go ahead, and I'll give Mrs. Richardson a chance, too. I didn't mean to neglect both of you. But go ahead.
Mr. SCHWARTZ. From my experience, I think that, yes, the cooperation makes a lot of sense. But I think in a more sophisticated negotiation, the European Union, for one, has always understood that these issues are at the forefront of importance for the U.S. And therefore, at the end of the day, they allow the U.S. to negotiate this issue, in exchange for concessions, while the European Union is negotiating for other things—for whatever else that they need.
And so the cooperation idea is a good one. But, in defense of Ms. Espinel and the U.S. Government, who do as good a job as possible, in trying to get that cooperation, when the negotiations are ongoing, that is the bilateral negotiations between the EU and Russia on WTO accession, I really think that the rest of the world looks to the United States on this issue; not only as a leader, but as the one that has to make the tough decisions.
Mr. GOODLATTE. Ms. Richardson?
Ms. RICHARDSON. I just wanted to point out that to the best of my knowledge, the Europeans have already closed out their WTO negotiations with Russia. They may be willing to lend us moral support, but I think their negotiating leverage is gone.
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Mr. GOODLATTE. Good point.
Yes, the gentleman from California.
Mr. BERMAN. Just I am reminded, from Mr. Schwartz's comments, there have been times—forget the problems with the Europeans prioritizing things, hoping that the U.S. will carry the day on intellectual property protection. I remember the days when the U.S. was twisted between something for the farmers, and abandoning the people involved in intellectual property protection, so——
Mr. GOODLATTE. Don't put me in a world of hurt, here. [Laughter.]
Mr. BERMAN. In other words, these pressures come in many different places. I mean, it will be interesting to see if we can get the Europeans just to uphold the arms embargo they agreed to on China; let alone this. So it's—I mean, I wonder to what extent we really can get the—particularly in some of these intellectual property areas, where we're doing so—we're so far ahead of them in terms of product and revenues, whether we can get them to step up to the plate.
And then, when Ms. Richardson points out they've already come to terms, that's sort of like saying—maybe our raising the issue with the Europeans will at least keep them from yelling at us about not moving fast enough on Russia. But I'm skeptical about our effectiveness in getting that kind of a wide coalition on this particular issue. I think we're going to have to make some tough—I hate to say it—sort of unilateral decisions here.
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Mr. SCHWARTZ. And that is why, you know, the bilateral tools that we have, like providing GSP benefits, I think could be successful; because here Russia is gaining $500 million in trade preferences from the U.S. as a bilateral matter, and obviously, the U.S. has a strong interest in seeing this problem fixed. And it would seem to be a quid pro quo here.
Mr. GOODLATTE. And a nice chicken dinner with your trip to the movies is a winning combination. They don't have to be at odds with each other.
Mr. BERMAN. Chicken Kiev.
Mr. GOODLATTE. There you go. Absolutely. Absolutely. Our largest export to Russia, by the way, of any kind.
Well, folks, this has been an outstanding panel. We really appreciate your contribution. It's a major challenge. And whether the U.S. can pull together some help from Asian and other countries to leverage what we need to get from the Russians, or whether we have to hold out and do it on our own, I don't know; but I believe we should.
This is too important. It's too much at stake. There are hundreds of thousands, if not millions of American jobs involved here, with the amount of money that we lose in pirated intellectual property in China and in Russia. And we need to start fighting back a lot more aggressively than we have.
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So I hope that'll be the watchword of our new U.S. Trade Representative, and we look forward to working with him. And I thank you all for your participation today.
[Whereupon, at 1:30 p.m., the Subcommittee was adjourned.]
A P P E N D I X
Material Submitted for the Hearing Record
PREPARED STATEMENT OF THE HONORABLE HOWARD L. BERMAN, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF CALIFORNIA, AND RANKING MEMBER, SUBCOMMITTEE ON COURTS, THE INTERNET, AND INTELLECTUAL PROPERTY
Mr. Chairman,
Thank you for scheduling back-to-back hearings on the scourge of international intellectual property piracy with a focus on China and Russia, two of the countries that present the greatest challenges to intellectual property enforcement. Because there are unique enforcement issues with respect to each country, it is appropriate to address these areas separately. The problem we confront, however, is the same: how to prevent billions of dollars in losses to the American economy as a result of an unfettered ability to pirate.
From almost the beginning of recorded history, China has served as a provider of desired goods. Marco Polo traveled the world to bring back goods made in the Orient. Today, China's economy has grown to include the manufacture of many different products, including clothing, purses, software, computers, and movies. While just as desired as the goods of Marco Polo's day, these modern goods often are not the legitimate product of the original source; instead, these are goods that are copied, reverse engineered and—with limited investment and no payment to the creator—sold for a negligible price to China's 1.3 billion citizens and exported in massive quantities to other countries, including America.
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The impact of counterfeiting and piracy on American innovators and the general public is impossible to quantify with precision. Pharmaceutical researchers that invest in the development of drugs lose the ability to control the safety of their products. Studios that produce movies are unable to realize the full measure of profit from their creations. Car manufacturers cannot control the quality of their parts. But perhaps most egregious is that because of piracy, American jobs are lost and American creators lose the benefits of their contributions to the world of creativity.
The Chinese government and some Chinese companies appear to have an interesting philosophy about piracy. They point to their robust laws on intellectual property, show you attempts at enforcement with a televised raid of a market stall, and describe their involvement in the issue by lending you educational materials for high schools on the importance of respecting intellectual property. Piracy, they claim, is not to be tolerated.
Yet the reality is that not only is piracy tolerated, but the government typically turns a blind eye to allow the benefits of piracy to accrue to Chinese consumers. These cheaper products, it is argued, provide the Chinese population with the luxury items they desire, but may not be able to afford. I have heard some in the Chinese government assert that the pirates are merely providing cheaper products for those who cannot afford to buy bread, in essence functioning as ''Robin Hoods'' for these goods. Yet this argument holds little credence when those goods are openly exported around the world, disrupting existing markets for legitimate product. As noted by the Chamber of Commerce, in the year ending October 31, 2004 the value of Chinese counterfeits coming into U.S. markets seized by the U.S. increased 47 %.
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Rampant piracy has enabled the Chinese economy to move forward rapidly in the race of technology by building off the innovation of others without investing the initial time and capital in development of the product. Their goal of being a dominant market power is no longer in the distant future, but is becoming a reality now in part as a result of pilfering the fruit of many American ideas.
If the government in China sincerely wanted to stop piracy, it could. Clearly when piracy hurts Chinese interests, the government has been motivated to step in. When t-shirt knockoffs of the Beijing 2008 Summer Olympics were being sold, the government was quick to close down the shops and fine the counterfeiters. In 2001, the government tore down 690 billboards that illegally associated products with the event and ripped fake Olympic emblems off 67,000 taxis. It is a shame that these billboards likely sat on top of markets which sold counterfeit Gucci bags and that the taxis were dropping off customers to buy pirated DVDs.
This Saturday, the Washington Post reported that the administration will likely cap imports of clothing as a result of the glut of Chinese products entering the American market. There is a far more compelling case for the administration to be forceful with China about its willingness to tolerate intellectual property violations. A precondition to China entering the World Trade Organization was that it implement intellectual property protections. They have been given time to address this concern and have failed. It is time for the administration to bring a WTO case and confront China in a meaningful way. If we provide the will for them to put a stop to piracy, they will find a way.
I look forward to hearing from our witnesses. I am especially interested in hearing from USTR and what steps they are taking to protect America's most valuable treasure: our ideas and creations.
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PREPARED STATEMENT OF THE HONORABLE BOB GOODLATTE, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF VIRGINIA
Mr. Chairman, thank you for holding these important oversight hearings on intellectual property theft in China and Russia.
In China, an estimated 95% of motion pictures and 90% of business software are pirated. In Russia, 80% of all motion pictures and 87% of business software are pirated. Considering that the core copyright industries account for 6% of U.S. GDP and the total copyright industries account for approximately 12% of U.S. GDP, it is clear that America's businesses are facing a serious problem. In fact, the FBI estimates that U.S. businesses lose between $200–250 billion a year to counterfeit goods.
Recently, China and Russia have received attention for intellectual property rights violations within their borders. For example, in April, the Office of the United States Trade Representative released its ''Special 301'' report, and elevated China to the ''priority watch list'' due to its failure to protect intellectual property rights.
We must make sure that each nation recognizes that piracy is a global problem. The growth of piracy among organized crime rings is illustrative of its global scope.
The combination of enormous profits and practically nonexistent punishments by many foreign governments makes copyright piracy an attractive cash cow for organized crime syndicates. Often specializing in optical disc and business software piracy, these crime rings are capable of coordinating multi-million dollar efforts across multiple national borders. For example, on December 19, 2001, Mexican officials raided numerous locations in Mexico in an effort to bust an organized crime ring there. These officials uncovered 12.5 million blank CD-R's and arrested eleven members, some of whom were armed with high powered weapons. Subsequent investigations revealed that the blank CD's were made in Taiwan, shipped to a shell company established in the U.S., and then shipped to Mexico, where the actual illegal copying and distribution occurred. We must meet this type of highly organized piracy with highly organized coordination and enforcement efforts.
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Another disturbing trend is the growing willingness of many foreign governments to condone the use of, and even use, pirated materials. At its best, government sets the standards for the protection of rights. At its worst, government encourages and even participates in the breach of those rights. Now is the time for each country in the international community to choose which path it will take with regard to intellectual property rights.
We all must realize that copyright piracy and counterfeiting are serious problems that do not merely affect private companies' bottom lines in the short term. They also discourage investment and innovation in the long term, which will eventually lead to fewer consumer choices—a repercussion that affects entire societies and economies. Governments must work together to reward creators and punish thieves.
In addition, counterfeit goods can pose serious risks of bodily harm and even death. The U.S. Chamber of Commerce estimates that trade in counterfeit goods makes up between six and nine percent of all world trade. With products as essential as airplane parts and car brakes being faked, we must focus attention on this growing problem for the sake of our citizens.
Recent treaties, such as the TRIPS agreement, provide the legal framework for member countries to aggressively enforce their copyright laws. Article 61 of the TRIPS agreement specifically requires member countries to establish criminal procedures and penalties to be applied in cases of copyright piracy. We already have many tools to combat international piracy. Now we must put these tools to work. The United States must lead by example and rigorously enforce our copyright piracy statutes. However, we must also work with the international community to encourage other countries to do the same. Only when we coordinate our efforts to combat piracy will we see substantial results.
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I look forward to hearing the testimony of our expert witnesses about the scope of piracy and counterfeiting in China and Russia, and learning about the steps we can take to solve these growing problems.
PREPARED STATEMENT OF THE HONORABLE ELTON GALLEGLY, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF CALIFORNIA
Thank you for holding these two hearings today, Mr. Chairman.
Intellectual property is at the heart of the American success story. Over the last 200 years, the United States has emerged as the leader in innovation and development of new technologies and these innovations and developments are in turn the heart of the American economy. Intellectual property systems that encourage innovation made this possible.
Unfortunately, bad actors scorn the protection of innovation and development and favor systems that foster free riding on the backs of others. US trade partners must respect intellectual property. They not only must have laws on the books proscribing infringement, but also have enforcement mechanisms in place to make them stick. I am particularly concerned about recent revelations that pirating operations may be operating on land owned by the Russian government.
California industries have seen billions of dollars of losses. These losses do not only involve losses to the recording and movie industries, though I am very sympathetic to the particularly large losses in those sectors. American products from shaving razors to auto parts to pharmaceuticals are also being copied and sold in violation of international law. Former Attorney General Ashcroft reported late last year that intellectual property crimes cost the US economy $250 billion and 300,000 jobs in 2003. DVD piracy alone reportedly accounts for $3 billion a year in losses to the US economy.
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As the government, we have a duty to protect the rightful owners of property, intellectual and otherwise. The health of our economy depends on it.
I am interested in hearing the testimony of the witnesses and hearing about what we have learned from our dealings with China that can be applied to other countries where piracy is a problem.
Thank you, again, Mr. Chairman. I yield back my time.
PREPARED STATEMENT OF THE AMERICAN CHAMBER OF COMMERCE PEOPLE'S REPUBLIC OF CHINA
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ARTICLE FROM THE NEW YORK TIMES ENTITLED ''THE PIRATE KINGDOM'' BY PAT CHOATE
DEAR COLLEAGUE AND ARTICLE ENTITLED ''IN RUSSIA, POLITICIANS PROTECT MOVIE AND MUSIC PIRATES'' FROM THE HONORABLE LAMAR SMITH, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF TEXAS, AND CHAIRMAN, SUBCOMMITTEE ON COURTS, THE INTERNET, AND INTELLECTUAL PROPERTY
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PREPARED STATEMENT OF THE HONORABLE HOWARD L. BERMAN, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF CALIFORNIA, AND RANKING MEMBER, SUBCOMMITTEE ON COURTS, THE INTERNET, AND INTELLECTUAL PROPERTY
Mr. Chairman,
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Russia is considered by the copyright industries, as second only to China as an intellectual property pirate. Russia adopted a copyright law in 1993, and finally in 2004, remedied some key deficiencies. But it has neither enacted appropriate laws to deal with the problems of optical disc piracy, nor has it enforced the laws already on its books. Because of its poor enforcement, Russia is now one of—if not the largest—exporter of pirated music products in the world. Their pirated products have surfaced in over 27 countries, including the U.S.
Almost two years ago, a number of members of Congress sent a letter to President Bush to focus his attention on the escalating problem in Russia. Yet Russian plants are still producing tens of millions of pirated optical discs for export. U.S. copyright industries continue to lose billions of dollars and the piracy rates are estimated at 70% for every copyright sector.
In February, The International Intellectual Property Alliance released its 2005 Special 301 recommendations, a document that Mr. Schwartz will address in his testimony. Many of the suggestions provided in the IIPA report and today's testimony describe how the U.S. government can address the severity of the situation in Russia. These options are time-sensitive. We must consider one or all of the following actions: recommending the designation of Russia as a Priority Foreign Country, or conditioning Russia's entry into the WTO on meaningful copyright enforcement, or denying Russia its GSP benefits. We must move quickly because each day that goes by without a firm stance by the Administration on these possibilities lessens the importance of this issue in Russia's eyes.
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When we had a hearing on international copyright piracy two years ago, a constituent of mine testified to her own personal experience of intellectual property theft by the Russian government. Before us today are representatives from the movie and music industry who will testify to the effect Russian piracy has on that segment of the American economy. These industries represented 6% of U.S. economic output and almost 5.5 million jobs in 2004. However, whether you pirate from an individual or from a corporation, the act of piracy must be stopped.
The same holds true whether the piracy is sponsored by the government itself or funded by individual citizens. While the concept of private ownership of property is relatively new in many of the formerly communist countries, the value has not been lost on them. Any government that wants the benefits of trade with America, and who is currently benefiting from trade preferences, like Russia, has a responsibility to respect American innovation. Furthermore, any citizen of a state must recognize basic rules of law, such as the prohibition on theft. The Russian government has pointed to the high price of legitimate products coming from the United States as a justification for piracy. This is tantamount to blaming the victim for the crime. It is clear that price is not the cause of piracy. The pirated goods contain language tracks that include languages that are not Russian!! Therefore, the goal therefore is not to help Russians afford DVDs of movies—piracy is providing a business opportunity to service those that live outside of Russia.
The Wall Street Journal article ''In Russia, Politicians Protect Movie and Music Pirates,'' points to elected government officials who help protect the pirates. As I said two years ago, when a government does not exert its authority to stop the theft of intellectual property, it is entirely appropriate for the US not to grant special trade privileges such as WTO accession or GSP benefits on that foreign government. Furthermore, a government that itself is sponsoring intellectual property theft represents the essence of organized crime. In any nation, there is no bigger organization than its government, and there are few clearer prohibitions in any system of law than the prohibition on theft.
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We have an opportunity now when trying to address the piracy situation in Russia to learn from our failures with intellectual property enforcement in China. Before permitting Russia's accession to the WTO, we must require stricter enforcement of Intellectual Property rights.
I look forward to hearing the witnesses describe the extent of piracy in Russia and any suggestions they may have to curtail the problem. I hope to work with Chairman to address the importance of achieving significant reform of Russian intellectual property enforcement before admitting Russia into the WTO.
PREPARED STATEMENT OF THE COALITION FOR INTELLECTUAL PROPERTY RIGHTS (CIPR)
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LETTER FROM THE RECORDING INDUSTRY ASSOCIATION OF AMERICA (RIAA) TO PRESIDENT GEORGE W. BUSH
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