SPEAKERS CONTENTS INSERTS
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24–927 PDF
2006
INTERNATIONAL IPR REPORT CARD—ASSESSING U.S. GOVERNMENT AND INDUSTRY EFFORTS TO ENHANCE CHINESE AND RUSSIAN ENFORCEMENT OF INTELLECTUAL PROPERTY RIGHTS
HEARING
BEFORE THE
SUBCOMMITTEE ON COURTS, THE INTERNET,
AND INTELLECTUAL PROPERTY
OF THE
COMMITTEE ON THE JUDICIARY
HOUSE OF REPRESENTATIVES
ONE HUNDRED NINTH CONGRESS
FIRST SESSION
DECEMBER 7, 2005
Serial No. 109–88
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Printed for the use of the Committee on the Judiciary
Available via the World Wide Web: http://judiciary.house.gov
COMMITTEE ON THE JUDICIARY
F. JAMES SENSENBRENNER, Jr., Wisconsin, Chairman
HENRY J. HYDE, Illinois
HOWARD COBLE, North Carolina
LAMAR SMITH, Texas
ELTON GALLEGLY, California
BOB GOODLATTE, Virginia
STEVE CHABOT, Ohio
DANIEL E. LUNGREN, California
WILLIAM L. JENKINS, Tennessee
CHRIS CANNON, Utah
SPENCER BACHUS, Alabama
BOB INGLIS, South Carolina
JOHN N. HOSTETTLER, Indiana
MARK GREEN, Wisconsin
RIC KELLER, Florida
DARRELL ISSA, California
JEFF FLAKE, Arizona
MIKE PENCE, Indiana
J. RANDY FORBES, Virginia
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STEVE KING, Iowa
TOM FEENEY, Florida
TRENT FRANKS, Arizona
LOUIE GOHMERT, Texas
JOHN CONYERS, Jr., Michigan
HOWARD L. BERMAN, California
RICK BOUCHER, Virginia
JERROLD NADLER, New York
ROBERT C. SCOTT, Virginia
MELVIN L. WATT, North Carolina
ZOE LOFGREN, California
SHEILA JACKSON LEE, Texas
MAXINE WATERS, California
MARTIN T. MEEHAN, Massachusetts
WILLIAM D. DELAHUNT, Massachusetts
ROBERT WEXLER, Florida
ANTHONY D. WEINER, New York
ADAM B. SCHIFF, California
LINDA T. SÁNCHEZ, California
CHRIS VAN HOLLEN, Maryland
DEBBIE WASSERMAN SCHULTZ, Florida
PHILIP G. KIKO, General Counsel-Chief of Staff
PERRY H. APELBAUM, Minority Chief Counsel
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Subcommittee on Courts, the Internet, and Intellectual Property
LAMAR SMITH, Texas, Chairman
HENRY J. HYDE, Illinois
ELTON GALLEGLY, California
BOB GOODLATTE, Virginia
WILLIAM L. JENKINS, Tennessee
SPENCER BACHUS, Alabama
BOB INGLIS, South Carolina
RIC KELLER, Florida
DARRELL ISSA, California
CHRIS CANNON, Utah
MIKE PENCE, Indiana
J. RANDY FORBES, Virginia
HOWARD L. BERMAN, California
JOHN CONYERS, Jr., Michigan
RICK BOUCHER, Virginia
ZOE LOFGREN, California
MAXINE WATERS, California
MARTIN T. MEEHAN, Massachusetts
ROBERT WEXLER, Florida
ANTHONY D. WEINER, New York
ADAM B. SCHIFF, California
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LINDA T. SÁNCHEZ, California
BLAINE MERRITT, Chief Counsel
DAVID WHITNEY, Counsel
JOE KEELEY, Counsel
RYAN VISCO, Counsel
SHANNA WINTERS, Minority Counsel
C O N T E N T S
DECEMBER 7, 2005
OPENING STATEMENT
The Honorable Lamar Smith, a Representative in Congress from the State of Texas, and Chairman, Subcommittee on Courts, the Internet, and Intellectual Property
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
The Honorable Darrell Issa, a Representative in Congress from the State of California, and Member, Subcommittee on Courts, the Internet, and Intellectual Property
WITNESSES
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The Honorable Chris Israel, Coordinator for International Intellectual Property Enforcement, U.S. Department of Commerce
Oral Testimony
Prepared Statement
The Honorable Victoria Espinel, [Acting] Assistant U.S. Trade Representative for Intellectual Property, Office of U.S. Trade Representative
Oral Testimony
Prepared Statement
Mr. Eric H. Smith, President, International Intellectual Property Alliance
Oral Testimony
Prepared Statement
Ms. Joan Borsten, President, Films by Jove, Inc.
Oral Testimony
Prepared Statement
LETTERS, STATEMENTS, ETC. SUBMITTED FOR THE RECORD
Written response to question posed by Representative Issa from the Honorable Chris Israel, Coordinator for International Intellectual Property Enforcment, U.S. Department of Commerce
Written response to question posed by Representative Issa from Mr. Eric Smith, President, International Intellectual Property Alliance (IIPA)
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Written response to question posed by Representative Issa from Ms. Joan Borsten, President, Films by Jove, Inc.
APPENDIX
Material Submitted for the Hearing Record
Statement of the Honorable Howard Berman, a Representative in Congress from the State of California, and Ranking Member, Subcommittee on Courts, the Internet, and Intellectual Property
Statement of the Honorable Bob Goodlatte, a Representative in Congress from the State of Virginia
News Article by the Honorable Lamar Smith, a Representative in Congress from the State of Texas, and Chairman, Subcommittee on Courts, the Internet, and Intellectual Property: ''Defense Contrator Held in Spy Case,'' from the November 30, 2005 edition of The Washington Times
News Article by the Honorable Lamar Smith, a Representative in Congress from the State of Texas, and Chairman, Subcommittee on Courts, the Internet, and Intellectual Property: ''Envoy: Licensed DVDs Cost Too Much,'' from the December 1, 2005 edition of The Moscow Times
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News Article by the Honorable Lamar Smith, a Representative in Congress from the State of Texas, and Chairman, Subcommittee on Courts, the Internet, and Intellectual Property: ''U.S. and EU to Battle Chinese Counterfeiting,'' from the November 30, 2005 Dow Jones Newswires
Exhibit submitted by Joan Borsten: ''Corruption in the Russian Arbitrazh Courts: Will There Be Significant Progress in the Near Term?''
Exhibit submitted by Joan P. Borsten: ''The Circumstances Surrounding the Arrest and Prosecution of Leading Yukos Executives.''
Statement and Exhibits from the Honorable Dan Glickman, Chairman and Chief Executive Officer, Motion Picture Association of America, Inc. (MPAA)
INTERNATIONAL IPR REPORT CARD—ASSESSING U.S. GOVERNMENT AND INDUSTRY EFFORTS TO ENHANCE CHINESE AND RUSSIAN ENFORCEMENT OF INTELLECTUAL PROPERTY RIGHTS
WEDNESDAY, DECEMBER 7, 2005
House of Representatives,
Subcommittee on Courts, the Internet,
and Intellectual Property,
Committee on the Judiciary,
Washington, DC.
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The Subcommittee met, pursuant to notice, at 10:17 a.m., in Room 2141, Rayburn House Office Building, the Honorable Lamar Smith (Chairman of the Subcommittee) presiding.
Mr. SMITH OF TEXAS. The Subcommittee on Courts, the Internet, and Intellectual Property will come to order.
I'm going to recognize myself for an opening statement, then the Ranking Member, Mr. Berman of California, for an opening statement. Then I want to represent the gentleman from California, Mr. Issa, for comments, as well, because he is the author of a resolution that was approved on the House floor recently to deal with the subject at hand.
I also want to compliment the gentleman from California, Mr. Issa, because I believe, with the exception of the Chairman and the Ranking Member, that he has the best attendance record on this Subcommittee of anyone. And that is both appreciated and will be remembered. I'll recognize myself for an opening statement.
The evidence continues to show that the government of the People's Republic of China is engaged in a long-term effort to steal sensitive and proprietary technologies from U.S. industry. Last week, Federal judges in Los Angeles ordered Chi Mak, an electrical engineer who worked as a defense contractor, and his brother Tai Mak, who also is in the Chinese military, to be held without bond in a case prosecutors believe could be among the most damaging cases of Chinese technology spying.
In court papers, Chi Mak has reportedly admitted passing restricted data for 22 years—including sensitive information on the DBX destroyer, the Aegis weapons system, and a U.S. study that reveals the methods to be used by U.S. warship personnel to continue operating after being attacked—to Chinese military intelligence handlers.
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This kind of technology spying and theft of intellectual property pose serious threats to our country's long-term economic and national security interests. No two governments are more adept at exploiting U.S. weaknesses in protecting technology than the governments of China and the Russian Federation.
U.S. policy is motivated by a sincere desire to encourage these governments to respect individual rights, including the right to profit from the legitimate use and licensing of intellectual property rights. Our hope is that the Chinese and Russian governments will ultimately develop into reliable and dependable allies in the fight to protect intellectual property rights. Yet that hope must be grounded in reality, and not motivated by wishful thinking.
Unfortunately, there is little in the present record to indicate a sincere desire by the political leadership of these nations to respect the rights of U.S. intellectual property owners. In numerous international and bilateral agreements, China and Russia assume the duty to provide adequate and effective enforcement of intellectual property rights in return for the United States and other nations lowering trade barriers to their goods. The political leadership of each nation has prospered by being permitted to reap the benefits of international trade, without being held accountable for their own commitments.
Their record stands in stark contrast to the countless assurances, guarantees, and commitments to honor their obligations that have been made to the most senior officials of the United States Government.
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One of the most offensive examples of intransigence was reported in the December 1st edition of the Moscow Times. In an article entitled, ''Envoy: Licensed DVDs Cost Too Much,'' Alexander Kotenkov, who is President Putin's representative in the Russian Parliament's upper chamber, stated at a conference ''devoted to the fight against piracy'' that he often purchased illegally-made discs for plane trips, paying the equivalent of $3.12 for a DVD that contains five or six films.
President Putin's representative went on to blame copyright owners for piracy, by stating that Russian citizens are not at fault for being unable to buy licensed discs, because the costs of legitimate discs are too high.
I am confident, in connection with any future consideration of Russian accession to the WTO, the United States Congress will consider the extension of permanent normal trade relations with Russia. In the absence of a real, sustained, and verifiable commitment by the highest levels of the Russian government to protect the legitimate rights of intellectual property owners, I will continue to oppose U.S. support for the extension of PNTR and for Russia's admission to the WTO.
I have no intention of watching while Russia becomes the next China; a result that I am concerned could ultimately lead to an erosion of U.S. public support for the WTO and the rules-based trading system that it was intended to implement.
Our witnesses today will bring the Subcommittee up to date on the developments that have transpired since May 17, when this Subcommittee held back-to-back hearings on Chinese and Russian IP theft.
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That concludes my opening statement, and the gentleman from California, Mr. Berman, is recognized for his.
Mr. BERMAN. Thank you very much, Mr. Chairman, for scheduling this hearing on international intellectual property piracy. I actually hope the Subcommittee can institutionalize the practice of having at least one hearing a year that focuses on international trade and products protected by intellectual property rights.
I particularly want to thank you for inviting Joan Borsten to testify. She is a long, longstanding good friend, a constituent, and has a very compelling story. She brings a valuable perspective to the hearing: that of an individual American entrepreneur whose business has been dramatically impacted by a foreign government's sustained campaign to steal her rights to intellectual property.
Because of the massive copyright piracy that occurs daily in China and Russia, the sales of black market goods cause an annual loss of revenue to American creators that is truly staggering. According to the International Intellectual Property Alliance, piracy rates in the copyright industries range from a low of 70 percent to a high of 95 percent. And American industries annually lose over $2 1/2 billion in China, and almost $2 billion in Russia.
But it is not only the copyright industries, entertainment, software, book publishing, etcetera, that suffer. We could probably have an entire hearing only on counterfeiting of motorcycle parts, purses, and pharmaceuticals. No industry is immune from the endemic intellectual property violations occurring in these two countries.
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The problem in both China and Russia is similar. While the laws may be on the books, actual enforcement of those laws is sorely lacking. Few criminal prosecutions have taken place, and even fewer sentences have been meted out. There's currently no true deterrent for the pirates. In fact, piracy has become the foundation for new businesses that export these black market goods.
The one effective tool the current Administration has to incentivize the Chinese government to address its piracy problem is pursuing a WTO case. At the last hearing on this issue, the USTR testified that they were, ''committed to ensure that China is compliant with its obligations. And we will take WTO action if, in consultation with you and with our industry, we determine that this is the most effective way to fix the problem that we are resolved to fix.''
When I asked whether 6 months would be a reasonable time frame to reach a conclusion, the answer was that it could be. So here we are, 6 months later, and I'm looking forward to an update from that office.
Furthermore, have additional avenues for mitigating the effect of piracy in China been explored by the current Administration? Currently, the Chinese government engages in vast restrictions on market access for American copyrighted goods. They restrict the number of American films that can be shown, and severely curtail the right of our companies to do business in their country. These barriers make the impact of piracy that much greater, and virtually impossible for our companies to counteract piracy.
With Russia, there is still some leverage, because they have not joined WTO yet. I took note of the Chairman's comments in his opening statement on this subject.
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A number of months ago, I, along with a number of other Democrats, wrote Ambassador Portman advising him. And these were Democrats who were inclined—on a number of occasions
have been willing to support free trade agreements. We wrote a letter to Ambassador Portman, advising him that in order to obtain our support for any future trade agreement, we would have to be assured that the lesson taught from allowing China to join the WTO without provision for adequate enforcement against intellectual property violations has been learned.
In fact, just last week, IIPA submitted comments for the Special 301 Out-of-Cycle review on Russia. It's not encouraging news: ''In short, Russia is not complying with its commitments to provide adequate and effective copyright protection and enforcement.''
Furthermore, the House in a bipartisan vote—I believe that was the gentleman from California, Mr. Issa's resolution—recognized Russia's failure to adequately protect intellectual property, and cautioned that without change they are at risk of losing GSP benefits and accession to the WTO.
The last time, we discussed the complexity of denying GSP benefits to a country, a process which requires consultation of most agencies within the Executive Branch. It's clear that in Congress we all agree that this situation is quite outrageous, and that a country that flagrantly violates American intellectual property rights should not receive GSP duty-free benefits. So I ask, since the last hearing, has there been any movement on the status of Russia's GSP benefits?
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If motivated, these countries can protect intellectual property rights. When piracy hurts the Chinese interests, the Chinese government has been motivated to step in. When knock-offs of the Beijing summer 2008 game logos on T-shirts were being sold, the markets were quickly cleared. In short, China can deal with this problem, if it has the political will, and when it has the political will.
In Russia, it seems incredible that the Russian government actually controls the facilities and land on which many of these pirate optical disc plants operate. How can it simply do nothing to shut down the plants operating on these government-run installations?
I'm looking forward to hearing from the witnesses to learn what benchmarks or time lines have been established to help guide a decision on a WTO case against China, the withdrawal of GSP duty-free benefits from Russia, and whether Russia is aware that they will be denied admission to the exclusive WTO club unless the piracy problem is addressed. I'm looking forward to hearing about other steps that are being taken to protect American creativity. Thank you, Mr. Chairman.
Mr. SMITH OF TEXAS. Thank you, Mr. Berman. The gentleman from California, Mr. Issa, is recognized for his comments.
Mr. ISSA. Thank you, Mr. Chairman and Ranking Member Berman. Thank you for your leadership in seeing that the resolution, which had to be pushed through the Ways and Means Committee, saw the floor, and certainly showed the Administration, in addition to the Russians, that we are determined not to make the same mistake we made with China.
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I, personally, voted in support of the Permanent Normalized Trade; and obviously, it led to WTO admission for China. That is a vote that I deeply regret. I'm a dyed-in-the-wool free-trader; but free trade is about fair trade.
Briefly, I wanted to echo some of the comments that the Ranking Member and the Chairman made, which are if you have countries which believe, support, and in fact participate in theft, it doesn't matter what their justification is. The truth is that Russia and China hide under the theory that they cannot afford—that they are poor countries; they cannot afford to pay that, as was said in the opening statements. The fact is, Russia has become the number-two, soon to be the number-one seller into Europe of counterfeit goods.
Obviously, Russia believes that Europe can also not afford—Luxembourg, with a per-capita GDP similar to the United States, cannot afford—to pay a fair price, unless of course Russia is making a profit on it.
There is no question that this behavior is part of a culture in the old Soviet Union and the still technically communist China, that intellectual property is not real property, and that in fact it is a right of the state. That attitude and the legislation and the enforcement have to be changed.
I believe that with the Chairman's leadership, that we can continue to echo the message to the Administration, Trade Representative here today, that we shall not, under any basis, allow for accession to the WTO—which I do have to disagree with the Ranking Member slightly. I'd like to say it was exclusive, but with over 140 members, the truth is Russia stands out by its absence as a country prohibited—rightfully so—prohibited from entering this no longer so exclusive club because of their action. Their action is reprehensible.
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And I'll close with this. Less than 6 months ago, I was in Russia; and I've been assured by a group that was there over the break, it's still the same. If you can drive the main streets of Moscow and see them offering MPEG-4, MP-3, formats for movies and for music that are not offered from the makers in their original form, on the main streets in large neon signs—and of course, offering an opportunity to buy ''Star Wars'' long before it was out on DVD—it is very clear that they are unapologetic for their theft of intellectual property.
And as Mr. Berman, I believe, noted, also, they don't have a problem at all stealing other property from us in the defense industry, and in fact in every area of manufacturing. And I thank the Chairman and the Ranking Member.
Mr. BERMAN. Would the gentleman yield?
Mr. ISSA. I'd be glad to yield.
Mr. BERMAN. On the issue of the exclusivity, it reminds me of the Groucho Marx line: ''Why would you want to get in any club that would take you?''
Mr. ISSA. ''That would have you as a Member.'' Absolutely. And with that, I yield back.
Mr. SMITH OF TEXAS. Thank you, Mr. Issa. It's nice of us to have a united front up here.
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Before we hear from the witnesses, I'd like to ask you to stand and be sworn in.
[Witnesses sworn.]
Mr. SMITH OF TEXAS. Please be seated. Our first witness is Chris Israel, who serves as the Coordinator for International Intellectual Property Enforcement. Mr. Israel was appointed to this newly created position, which is housed at the U.S. Department of Commerce, in July 2005, by President George W. Bush. In this capacity, Mr. Israel is tasked with coordinating and leveraging the resources of the Federal Government to improve the protection of U.S. intellectual property at home and abroad.
Before accepting his current position, Mr. Israel served in a variety of assignments at the Department of Commerce, many of which focused on advancing U.S. innovation and technology leadership.
I am told that today's testimony will mark the first time that Mr. Israel has testified before a Committee of Congress since accepting his new responsibilities.
His ability to ensure the development of a sustainable and comprehensive national and international enforcement policy for the protection of U.S.-based intellectual property rights is of vital and continuing interest to this Subcommittee.
Mr. Israel received his BA from the University of Kansas, and his MBA from the George Washington University.
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Our second 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 intellectual property.
Ms. Espinel's office chairs the intra-agency committee that conducts the annual Special 301 Review of international protection of intellectual property rights. The latest report was published on April 29, 2005. Subsequent to its publication, Ms. Espinel appeared before the Subcommittee to deliver testimony on the subjects of intellectual property theft in China and Russia. She will be providing this Subcommittee with an update on developments, as well as a status report on the substantial challenges that remain.
Ms. Espinel holds an LLM from the London School of Economics, a JD from Georgetown University, and a BS in foreign service from Georgetown University's School of Foreign Service.
Our third witness is Eric H. Smith, who serves as the President of the International Intellectual Property Alliance, a private-sector coalition of seven U.S. trade associations which is based in Washington, D.C. IIPA represents over 1,900 companies that produce and distribute materials protected by copyright laws throughout the world. A founder of IIPA, Mr. Smith frequently serves as the principal representative of the copyright industries in WTO, TRIPS, and Free Trade Agreement negotiations.
Mr. Smith has a JD from the University of California at Berkeley, a BA from Stanford, and an MA from the School of Advanced International Studies at Johns Hopkins.
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Our final witness is Joan Borsten, who is President of Films by Jove, Inc., a California-based production and distribution company that acquired worldwide rights to much of the animation library of Moscow's—is it Soyuzmultfilm?—Studio in 1992.
Ms. Borsten received her BA in comparative literature from the University of California at Berkeley, and her MS in bilingual education at USC.
Welcome to you all. We have witness statements from all of the witnesses on this panel. Without objection, their complete testimony will be made a part of the record.
As you all know, we trust that you will limit your testimony to 5 minutes; which we look forward to. And Mr. Israel, we will begin with you.
TESTIMONY OF CHRIS ISRAEL, COORDINATOR FOR INTERNATIONAL INTELLECTUAL PROPERTY ENFORCEMENT, U.S. DEPARTMENT OF COMMERCE
Mr. ISRAEL. Thank you, Mr. Chairman. Chairman Smith, Ranking Member Berman, and Members of the Committee, I'm pleased to be able to be here today to join you and my counterparts on this panel to discuss the challenge of international intellectual property rights enforcement.
I want to first thank the Committee for their continued support and leadership on issues concerning the protection of intellectual property. I look forward to the opportunity to work together to ensure that the heart of America's thriving innovation economy, its intellectual property, is effectively protected around the world.
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Combating piracy and counterfeiting is a top priority for the Bush Administration. President Bush has consistently raised IP enforcement with foreign leaders; placed it on the agenda of the G8; and made it a key part of the recent U.S./EU summit. He has also discussed our ongoing concerns with leaders of critical markets such as China and Russia. In addition, he has directed his Administration to address the issue actively, aggressively, and with a results-oriented approach.
The reasons IP enforcement is a priority for this Administration are very clear. Few issues are as important to the current and future economic strength of the United States as our ability to create and protect intellectual property.
Enforcement of intellectual property also carries great consequence for the health and safety of consumers around the world, because fake goods don't just hurt business; they hurt people.
Finally, the theft of American intellectual property strikes at the heart of one of our greatest comparative advantages: our innovative capacity.
The Office of International Intellectual Property Enforcement is located at the Department of Commerce, and I report to Secretary Gutierrez. We also work under the leadership of the White House, and we have been met with tremendous cooperation from all Federal agencies that contribute to our overall IP enforcement efforts.
A very critical element of our overall coordination is the Strategy Targeting Organized Piracy, the STOP Initiative, launched by the Bush Administration in October 2004. This initiative brings together USTR, Commerce, Justice, Homeland Security, and the State Department. STOP has yielded tangible results and received attention around the world.
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The STOP Initiative and our new Office of International Intellectual Property Enforcement allows us to deliver a clear message: The United States takes the issue of intellectual property enforcement very seriously; we are leveraging all of our resources to address it; and we have very high expectations of all of our global trading partners.
As this Committee clearly understands, the problem of global piracy and counterfeiting exists in many industries and countries, and demands continuous attention. With finite resources and seemingly infinite concerns, how we focus our efforts is critical.
The Bush Administration is focused on six key priorities. First, we are working to empower America's innovators. Through specific tools and broad education efforts, we are getting the word out to American businesses that they must be aggressive and proactive in protecting their rights.
Secondly, we are focused on preventing counterfeit and fake goods from penetrating our borders. This means casting a wider net, utilizing technology, and working with our trading partners to share information.
Third, we are working to prevent fake and counterfeit goods from corrupting legitimate supply chains. We have worked closely with the Coalition Against Counterfeiting and Piracy to develop voluntary guidelines companies can use to ensure their supply and distribution chains are free of counterfeits.
Fourth, U.S. law enforcement is leading efforts to dismantle criminal enterprises around the world that steal intellectual property. The Justice Department has pursued numerous operations targeting criminal organizations involved in online piracy and trafficking in counterfeit goods.
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Fifth, we are working with our trading partners to build international support for IP enforcement. Through the Joint Committee for Commerce and Trade, the JCCT, for example, we have worked extensively with China to address rampant IP concerns. And just last week, we reached an agreement to work much more closely with the European Union to combat global piracy.
Lastly, we are educating other governments about intellectual property rights and how important IPR is to the global economy. To date, over 100 IPR enforcement projects and 290 IPR technical assistance projects have been conducted around the world.
Mr. Chairman, the Bush Administration is committed to stopping intellectual property theft and providing businesses with the tools they need to flourish in a global economy. As I work to coordinate the U.S. Government's efforts, and with your continued support and the partnership of this Committee, we will be able to do even more on behalf of American innovators, researchers, entrepreneurs, artists, and workers.
We must take advantage of the opportunity to work together to better protect the knowledge industries of today, so that we may continue to see the innovations and growth of tomorrow. Thank you, Mr. Chairman.
[The prepared statement of Mr. Israel follows:]
PREPARED STATEMENT OF CHRIS ISRAEL
Chairman Smith, Ranking Member Berman and members of the Committee, I am pleased to join you today to discuss the challenge of international intellectual property rights enforcement.
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I want to thank the Committee for its continued support and leadership on issues concerning the protection of intellectual property. I look forward to the opportunity to work together to ensure that the heart of America's innovation economy, its intellectual property, is effectively protected around the world.
The Bush Administration is keenly aware of the significance of IP protection for American businesses, workers, entrepreneurs and innovators. It is estimated that IP theft costs U.S. businesses approximately $250 billion annually and results in the loss of hundreds of thousands of American jobs. Combating piracy and counterfeiting is a top priority for this Administration. This prioritization is evident in the leadership shown by President Bush. He has consistently raised IP enforcement with foreign leaders, placed the issue on the agenda of the G8 and made it a key part of the recent U.S./EU summit. He has also discussed our ongoing concerns with leaders of critical markets such as China and Russia. He has directed his Administration to address this issue actively, aggressively and with a results-oriented approach.
I appreciate the opportunity to discuss this leadership, to address our efforts to maximize the Federal government's role in protecting American intellectual property and to share our results-oriented strategy.
* * * * *
LEADERSHIP AND PRIORITIZATION
The reasons for the Administration's leadership on IP enforcement and for its prioritization are clear.
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First, few issues are as important to the current and future economic strength of the United States as our ability to create and protect intellectual property. U.S. IP industries account for over half of all U.S. exports. They represent 40% of our economic growth and employ 18 million Americans who earn 40% more than the average U.S. wage, and a recent study valued U.S. intellectual property at approximately $5 trillion—or about half of U.S. GDP. Quite simply, our ability to ensure a secure and reliable environment for intellectual property around the world is critical to the strength and continued expansion of the U.S. economy.
The enforcement of intellectual property rights also carries great consequence for the health and safety of consumers around the world. The World Health Organization estimates that 10% of all pharmaceuticals available worldwide are counterfeit. The U.S. Federal Aviation Administration estimates that 2% of airline parts installed each year are fake—or about 520,000 parts. And we have seen counterfeit circuit breakers that overheat and explode, brake linings made of wood chips and cardboard, and fake power cords. In the world of today's sophisticated criminal IP operations, if a product can be easily counterfeited, has an immediate demand and provides a good profit margin it will be copied. Consumer safety and product quality are concerns obviously not on the minds of global IP thieves.
Finally, the theft of American intellectual property strikes at the heart of one of our greatest comparative advantages—our innovative capacity. Through the applied talents of American inventors, researchers, entrepreneurs, artists and workers we have developed the most dynamic and sophisticated economy the world has ever seen.
And I truly believe the world is a much better place due to these efforts. We have delivered life-saving drugs and products that make people more productive. We have developed entirely new industries and set loose the imaginative power of entrepreneurs everywhere. And, we set trends and market best-of-class products to nearly every country in the world.
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We value our heritage of innovation and exploration—it is not only part of our history; it is the key to our future.
And this future—a future of innovation, exploration and growth that benefits the entire world—rests on a basic, inherent respect for intellectual property rights and a system that protects them.
The Bush Administration's effort to provide a secure and predictable global environment for intellectual property is driven by a commitment to foster U.S. economic growth, to secure the safety and health of consumers everywhere, and an abiding respect for the great American innovative spirit that has driven our nation since its founding and will determine our future.
* * * * *
ORGANIZATION AND EFFECTIVE ENGAGEMENT
This is my first opportunity to testify as the Coordinator for International Intellectual Property Enforcement, and I appreciate the chance to discuss how the Administration is working to focus and leverage our vast capabilities and resources.
The Office of International Intellectual Property Coordination is located at the Department of Commerce, and I report to Commerce Secretary Carlos Gutierrez. We also work under the leadership of the White House, and our efforts thus far have met with tremendous cooperation from the all federal agencies that contribute to our IP enforcement efforts.
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Reinforcing the commitment and collaboration that exists within this interagency process is the fact that a senior Justice Department official is currently serving as the Deputy Coordinator for International Intellectual Property Coordination and Customs and Border Protection and the Patent and Trademark Office have both provided detailees to support our efforts.
A critical element in our overall coordination is the Strategy Targeting Organized Piracy (STOP) Initiative launched by the Bush Administration in October 2004. STOP has built an expansive interagency process that provides the foundation and focus for all of our efforts. This initiative is led by the White House and brings together USTR, the Department of Commerce, the Department of Justice, the Department of Homeland Security and the State Department. STOP is an attempt to play offense in the global fight against piracy and counterfeiting. The agencies involved have identified ways to empower U.S. businesses to better protect their IP, increase efforts to seize counterfeit goods at our borders, pursue criminal enterprises involved in piracy and counterfeiting, found innovative ways to work with U.S. industry, and aggressively engaged our trading partners to join our efforts.
STOP has yielded tangible results (Fact Sheet is submitted for the record), maintained the commitment of senior Administration officials, institutionalized an unprecedented level of coordination within the federal government and received attention around the world. The message that the STOP Initiative, and indeed our new Office of International Intellectual Property Enforcement, allows us to deliver is—the United States takes the issue of IP enforcement very seriously, we are leveraging all of our resources to address it and we have high expectations of all of our global trading partners.
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In addition to the infrastructure put in place by the STOP Initiative and reinforced by the Office of International Intellectual Property Enforcement, the Administration will seek a reinvigorated role for the National Intellectual Property Law Enforcement Coordination Council (NIPLECC). NIPLECC is tasked with coordinating domestic and international intellectual property law enforcement in order to ensure the effective and efficient enforcement of intellectual property in the United States and worldwide. NIPLECC has made a number of valuable contributions since its creation in 1999 including the development of a comprehensive database that includes all recent IP law enforcement training provided by the U.S. government to developing and least developed nations as well as delivering legislative suggestions to improve domestic IP laws related to enforcement. However, there is unmet potential and in my role as Director of NIPLECC I look forward to working with this Committee to ensure that we are maximizing the capabilities of NIPLECC. To begin this effort, I can report that we will conduct a meeting of all NIPLECC members in January. This will be the most comprehensive NIPLECC meeting since its inception in 1999.
NIPLECC can play a vital role in our effort by bringing together the leaders of the key operational entities within the federal government that are responsible for IP enforcement. By establishing priorities and objectives at a senior level we will reinforce our day-to-day activities and ensure that all of the agencies critical to the federal government's IP enforcement efforts are closely coordinated and committed to a common results-oriented agenda. In addition to the existing NIPLECC structure—which is comprised of the Department of Justice (Assistant Attorney General of the Criminal Division), the Commerce Department (Under Secretary for Intellectual Property and Director of the Patent and Trademark Office and Under Secretary for International Trade), the Office of the U.S. Trade Representative (Deputy USTR), the Department of Homeland Security (Commissioner of Customs and Border Protection) and the State Department (Under Secretary for Economics, Business and Agricultural Affairs).
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* * * * *
STRATEGY AND FOCUS
As this Committee clearly understands, the problem of global piracy and counterfeiting confronts many industries, exists in many countries and demands continuous attention. With finite resources and seemingly infinite concerns, how we focus our efforts is crucial. I appreciate this opportunity to share with you the key areas which make up the Administration's overall Strategy for Targeting Organized Piracy.
First, we are working to empower America's innovators to secure and enforce their rights at home and abroad. Our efforts to provide new federal services and assistance include:
A hotline (1–866–999–HALT) to counsel businesses on how to protect their IP.
A website (www.stopfakes.gov) and brochure, to provide information and guidance to right holders on how to register and protect their IP in markets around the world.
''IP toolkits'' to guide businesses through securing and enforcing their rights in key markets around the world. Available at the www.stopfakes.gov website, toolkits for China, Russia, Mexico, Korea and Taiwan are downloadable.
Extensive education campaigns across the country to teach small and medium sized enterprises how to secure and protect their rights and where to turn for federal resources and assistance. These seminars have occurred in 20 states and more are planned in 2006.
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An online recordation tool for rights holders to record their trademarks and copyrights with Customs and Border Protection.
We have launched a China Intellectual Property Rights (IPR) Advisory Program in conjunction with the American Bar Association, the National Association of Manufacturers and the American Chamber of Commerce in China to provide legal counsel for SMEs to protect and enforce their IPR in China.
Training for U.S. embassy personnel to be effective first responders to IPR issues in order to identify problems abroad and assist rights holders before fakes enter the market and/or supply chain.
Next, we need to increase our efforts to stop fake and counterfeit goods at America's borders. This means:
Casting a wider, tighter net on counterfeit and pirated goods by implementing new risk assessment models and technologies to stop counterfeit goods at our borders.
Working with trading partners to share information and improve our capabilities to assess and anticipate risks. We have seen results of this effort with the European Union. At the U.S./EU Economic Ministerial last week, leaders of both governments committed to expand information sharing of customs data. Follow-up work on this commitment has already begun.
We need to build international support and rules to stem the flow of fake and counterfeit goods and keep them out of global supply chains. Our efforts here include:
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Commissioning a study by the Organization for Economic Cooperation and Development on the impact of global counterfeiting and piracy.
Conducting outreach to Canada, the European Commission, France, Germany, Hong Kong, Japan, Korea, Mexico, Singapore and the United Kingdom laying the basis for increasing cooperation on IP enforcement. Outreach to other like-minded countries is underway.
Facilitating the transfer of IP criminals to justice in America by revising and modernizing mutual legal assistance treaties and extradition treaties with Finland, Sweden, Belgium, Spain, the UK and Luxembourg. Additional treaties are under negotiation.
Conducting post-entry audits to identify companies vulnerable to IP violations and working with them to correct their faulty business practices.
Working closely with U.S. industry—namely, the Coalition Against Counterfeiting and Piracy, a U.S. Chamber of Commerce and National Association of Manufacturers led association—on the ''No Trade in Fakes'' program to develop voluntary guidelines companies can use to ensure their supply and distribution chains are free of counterfeits.
Law enforcement must play a leading role in dismantling criminal enterprises that steal intellectual property. We have:
Pursued numerous operations targeting criminal organizations involved in online piracy and trafficking in counterfeit goods. We have indicted the four leaders of one of the largest counterfeit goods operations ever uncovered in New England—broke up a scheme to sell more than 30,000 luxury goods—including handbags, wallets, sunglasses, coats, shoes, and necklaces, and found the materials to manufacture at least 20,000 more counterfeit items.
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Led Operation Site Down, an international online piracy investigation involving more than 90 searches in twelve countries. Such cases have led to numerous arrests and convictions around the globe, seizure of millions of dollars worth of pirated products and the dismantling of criminal operations.
Led Operation Ocean Crossing, a joint U.S. and Chinese law enforcement action that disrupted an organization trafficking in counterfeit pharmaceuticals. The action resulted in arrests in China and the United States and the capture of hundreds of thousands of fake pharmaceuticals.
Executed measures to maximize law enforcement's ability to pursue perpetrators of IPR crimes. For example, we increased from 5 to 18 the total number of Computer Hacking and Intellectual Property Units in U.S. Attorneys' Offices across the country. This increased to 229 (one in each federal district) the number of specially trained prosecutors available to focus on IP and high-tech crimes.
Proposed the Intellectual Property Protection Act of 2005 to strengthen criminal intellectual property protection, toughen penalties for repeat copyright criminals, and add critical investigative tools for both criminal and civil enforcement authorities.
We must reach out to our trading partners and build international support. U.S. leadership is critical and we are active on a number of fronts:
We have obtained endorsement of increased protection for IP in multilateral forums such as the G–8 and Asia-Pacific Economic Cooperation forum, and bilateral venues with the European Union and China.
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The past year has resulted in particularly strong commitments from China in a variety of fora. Within the Joint Committee on Commerce and Trade (JCCT) the Chinese have committed to, among other things, address the proliferation of illegal software within government and state-owned enterprises, increase criminal prosecutions for IP violations, enhance cooperation with U.S. law enforcement and join the WIPO Internet Treaties. We have already seen movement on a number of these commitments. Notably, Attorney General Gonzales laid the groundwork for expanded law enforcement cooperation on IP cases during a recent trip to China and China recently sent a delegation to the United States to discuss the steps necessary to accede to the WIPO Internet Treaties. In addition, USTR has recently invoked a procedure under the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights to make a formal request for China to provide detailed information regarding their IP enforcement regime. The Japanese and Swiss governments also delivered similar requests to China for enforcement data under the same WTO provision.
Noting the interest this Committee showed in increased cooperation with the European Union and Japan at its hearing in May, I would like to point to two significant developments. Just last week, Secretary Gutierrez reached an agreement with European leaders to significantly expand the cooperation between the United States and EU to address global piracy through stepped-up commitment to enforcement and information sharing.
We are increasing the number of U.S. IP attaches abroad in our embassies located in China, India, Brazil and Russia, who will assist U.S. businesses, advocate U.S. intellectual property policy and conduct IPR training.
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Finally, we must educate other governments about intellectual property rights:
The United States has conducted numerous training and capacity building programs working with foreign judges and law enforcement officials from around the world to improve criminal and civil IPR protection. So far, we have conducted over 100 IPR enforcement projects and 290 IPR technical-assistance projects around the world, producing real results in IP protection and enforcement.
We have established a Global Intellectual Property Academy to consolidate and expand intellectual property training programs for foreign judges, enforcement officials, and relevant administrators.
* * * * *
Mr. Chairman, the Bush Administration is committed to stopping intellectual property theft and providing businesses the tools they need to flourish in the global economy. As I work to coordinate the U.S. government's intellectual property enforcement efforts, and with your continued support and the partnership of this Committee, we will be able to do even more to provide American businesses and innovators with the protection they need. America's intellectual property is important not just for her national security, but it is also a necessary component in ensuring continued U.S. economic growth and technological leadership. We must take advantage of the opportunity to work together to better protect the knowledge industries of today so that we may continue to see the innovations of tomorrow. Thank you very much.
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Mr. SMITH OF TEXAS. Thank you, Mr. Israel.
Ms. Espinel.
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, Ranking Member Berman, and Members of the Committee, thank you for the opportunity to address the important issue of the international protection and enforcement of intellectual property.
Stopping counterfeiting and piracy and protecting our right-holders is a top priority of this Administration and of USTR. My remarks will focus on China and Russia but, time permitting, I would also like to provide you with a brief overview of our other activities to fight counterfeiting and piracy.
Turning to China, the protection and enforcement of IP remains a top issue in our bilateral trade relationship with China. It is an issue that has been raised at the highest levels of government with the Chinese by both Ambassador Portman and by President Bush.
As you know, each year USTR issues a Special 301 Report that catalogues the IP problems of the world's worst offenders. In 2004, because of our level of concern at China's continued lack of progress, USTR initiated a more intensive review of China's IP regime, known as an Out-of-Cycle Review.
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On April 29th, USTR reported the results of that review. I described the results of the review and the actions we announced that we would take in my earlier testimony. Today, I would like to update you on the progress that has been made since then on the actions that we set out in the 301 Report.
First, we committed to investigate potential WTO dispute settlement cases. In the 301 Report, we announced that we would be working closely with our industry, with a view toward WTO dispute settlement. Cases at the WTO require extensive research and data collection.
We have been working closely with our industry to develop the information, and have, for example, sent a USTR legal team to China to meet with industry enforcement experts on the ground. We anticipate that those industries that have been working closely with us will continue to do so.
We appreciate greatly the Chairman's support of this partnership. Our time table for determining whether or not a WTO case against China is the most effective approach is dependent on the effectiveness of these efforts.
Second, we elevated China to the Priority Watch List, as an indication of our significant level of concern.
Third, we pledged to intensify work to the JCCT IPR Working Group. Since April, we have had three meetings of the JCCT, and have seen progress at these meetings.
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My complete testimony sets out a number of commitments made by China at the July JCCT following the experts' meeting in May, and our elevation of China to the Priority Watch List. I will highlight a few of them.
China agreed, among other things:
To increase criminal prosecutions;
To reduce exports of infringing goods;
To establish an IPR ombudsman in the Chinese Embassy to assist small- and medium-sized companies in particular;
To join the WIPO Internet treaties in 2006; and
To clarify some deficiencies in the judicial interpretations.
Since July, in order to move these commitments forward, China has done several things, including: Making a proposal for customs cooperation;
They have explained to us their process to ensure legal use of software by the government;
They have sent us Internet regulations in order to come into compliance with the WIPO Internet treaties, and have committed to work with us on them;
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They have told us that the IPR specialist to help small- and medium-sized businesses will be in Washington by the end of this year; and
They have been working on regulations that transfer administrative cases over to the criminal process, as part of the effort to increase criminal prosecutions.
We have also seen some increased enforcement, particularly against counterfeiting; for example, in this year's Mountain Eagle campaign. But we have made clear to China that we need sustained enforcement and that annual enforcement campaigns will not be sufficient.
Fourth, I would like to highlight the TRIPS Transparency Provision commitment that we made. We announced that we would be filing a formal request under article 63 of the TRIPS Agreement, and we did so on October 26. This request seeks additional information on China's IP enforcement efforts.
In an example of our work to enhance international cooperation, we were joined by Japan and Switzerland, who submitted simultaneous similar requests. These requests seek detailed information from China on its reported IPR enforcement efforts.
China's response to these requests, anticipated in early 2006, will be a test of whether it is serious about resolving the rampant IP infringement throughout its country.
Turning to Russia, enforcement in both the copyright and trademark sectors continues to be a significant problem in Russia. As a result, Russia is designated as a Priority Watch List country in the Special 301 Report, and an Out-of-Cycle Review is being conducted this year to monitor progress. We are also continuing inter-agency review of a petition filed by the U.S. copyright industries to withdraw some or all of Russia's GSP benefits.
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USTR and other agencies have been, and will continue to be, very engaged with the Russian government at all levels to develop an effective intellectual property regime and strengthen enforcement in Russia. Intellectual property has been raised as a priority issue by Ambassador Portman and by President Bush.
We are working on IP issues in Russia and on a number of fronts, including in the context of Russia's WTO accession negotiations. We have made it clear to the Russian government that progress on intellectual property will be necessary in order to complete the accession process.
Our work has brought about some improvements; particularly with respect to the content of Russia's laws. But enforcement of these laws is critical. We have seen some recent indications of progress, and we are monitoring to see whether or not Russia sustains and increases these efforts. We will continue to push, and have made clear to Russia that we need concrete results.
USTR has a number of other tools at our disposal. I would like to give a very brief overview of these. As you know——
Mr. SMITH OF TEXAS. Ms. Espinel, I'm afraid your time has expired.
Ms. ESPINEL. All right.
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Mr. SMITH OF TEXAS. Now, we'll look forward to hearing the rest of your testimony when we ask you questions, if that's all right.
Ms. ESPINEL. Thank you.
[The prepared statement of Ms. Espinel follows:]
PREPARED STATEMENT OF VICTORIA ESPINEL
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Mr. SMITH OF TEXAS. Thank you.
Mr. Smith.
TESTIMONY OF ERIC H. SMITH, PRESIDENT, INTERNATIONAL INTELLECTUAL PROPERTY ALLIANCE
Mr. SMITH. Mr. Chairman, Mr. Berman, Members of the Subcommittee, the IIPA is a coalition of seven trade associations representing now over 1,900 U.S. copyright-based companies. Thank you once again for the opportunity to appear here to review the record of China and Russia on enforcing their copyright laws to reduce among the highest piracy rates in the world.
I'm afraid anything I add here won't even approach the eloquence with which the Chairman and the Ranking Member and Mr. Issa described the endemic piracy problems that we face in these two countries. We reported to you last May that our situation in both these countries was dire, at best. Our industries were losing at least $2 1/2 billion a year in China, $1.7 billion in Russia; piracy rates were 90 percent in China, and between 70 and 90 percent in Russia, depending on the sector involved.
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You've asked us to give you a report card on progress over the last 6 months. We regret to report that there has been negligible progress in China, and the situation in Russia has actually gotten worse. Neither country has yet found the political will to act.
Let me turn first to China. In my written statement, we outline what has happened—or more accurately, not happened—in the last 6 months. Some report that the government is showing greater awareness of piracy and is being more cooperative. This is progress; no question. But have the Chinese authorities commenced a barrage of criminal cases against pirates? No.
Have they sought to provide greater market access? China is the most closed market in the world to copyright-based industries. The answer again is, no. In fact, the U.S. Government in the last JCCT round was told flat-out, no, there would be no market liberalization in these sectors.
In my written testimony, and Ms. Espinel's as well, we detail what happened at the July 2005 JCCT meeting. There was some progress made, but, in our view, most were in the nature of future commitments; not what we really seek, a report on specific actions being taken to ''significantly reduce IPR infringements.''
We are continually frustrated by the lack of transparency in the Chinese enforcement system. One of the reasons that USTR went to the article 63 process at the TRIPS Council was to, hopefully, get a real understanding of how the Chinese system works by getting meaningful facts about all the vast numbers of cases they cite to us.
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At the recent IPR Working Group meeting in November in Beijing, it was reported to us that the Ministry of Public Security provided statistics on some of its enforcement actions. They sound impressive, but there was no report on how many copyright cases were brought, how many persons were convicted for piracy of U.S. copyrighted works, or what penalties were meted out.
We have no alternative but to conclude that the number of cases brought was very close to zero. And to the best of our knowledge, there have only been two convictions for piracy of U.S. copyrighted works under article 217 of the criminal law since China joined the WTO, and none that we are aware of in the last 6 months.
Our view is that China's failure to bring criminal cases against copyright piracy on a commercial scale—the TRIPS standard—puts it in violation of its obligations under the WTO TRIPS Agreement. We also believe that China's criminal law, on its face, is in violation of TRIPS.
Not being able to do business in the Chinese market is deeply frustrating to our companies. It is inexcusable that China continues to permit the wholesale theft of U.S. intellectual property, the key export of our country, while continuing to enjoy the benefits of our open market for Chinese goods—so open that China enjoyed a $162 billion surplus with us in 2004. As we noted earlier, this is an issue of political will, and we have not seen it yet.
Turning to Russia, a market which has deteriorated for us in the last 6 months, some salient facts:
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In the last 6 months, Russia has added at least eight—and by some accounts, more—optical disc plants to the 34 we reported last May. Nine of these plants—and maybe up to 18—are located on the facilities of the Russian government, as was described. Pirate optical discs forensically sourced from Russia have been found in 27 countries.
We have asked the Russian government to inspect these factories, seize pirate products, seize the equipment used in these infringements, and prosecute the plant owners; while imposing deterrent penalties that would place every Russian plant owner and their associates in real jeopardy. This has just not happened.
In recent weeks, the Russian authorities reported taking nine raids against OD plants. This is positive, but the results are telling. Much of the seized material ended up back on the streets. No equipment was seized. We believe that most of these plants continue to operate. This has been the typical situation in 2004, and so far in 2005.
We know that over the years a few people employed by these plants were prosecuted and convicted. But virtually all have received suspended sentences. There is simply no deterrence in the Russian system, and until there is the political will to change that, we cannot expect much change.
Fortunately, we have ample tools to help Russia, hopefully, find that political will to enforce the law. In passing House Congressional Resolution 230 by a near unanimous bipartisan vote in the House of Representatives on November 9—thanks to Mr. Issa and all of you—the Administration has been delivered a clear message: Until Russia takes effective enforcement action to reduce this piracy, it should not be admitted to the WTO and receive the trade benefits accorded WTO members. We cannot make the same mistake that was made with China: permitting Russia to enter the WTO without undertaking meaningful and WTO/TRIPS compatible enforcement.
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It has also sent a clear message that Russia should not be eligible for over $600 million—that's January to September 2005—in GSP benefits. IIPA's GSP petition is 5 years old. It has not been acted on, and piracy has gotten worse in Russia. IIPA just testified at another GSP hearing looking into Russia's eligibility. We asked again for benefits to be withdrawn. It's now time to act, and for the Administration to remove these benefits.
The U.S. Government also has huge leverage under Special 301. IIPA has recommended that Russia be designed a Priority Foreign Country, after the ongoing Out-of-Cycle Review. If no actions are taken, Special 301 permits the levying of retaliatory sanctions against such named country.
We cannot allow Russia to continue to feel invulnerable, at the same time as they do nothing to halt massive theft of our intellectual property.
Thank you again, Mr. Chairman, for showing such a great and abiding interest in nurturing the creative and innovative individuals and industries that have become so important to our culture, our technological future, our economic growth, and to job creation. I'd be pleased to answer any questions. Thank you.
[The prepared statement of Mr. Smith follows:]
PREPARED STATEMENT OF ERIC H. SMITH
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Mr. SMITH OF TEXAS. Thank you, Mr. Smith. I have to observe that I noticed, Mr. Smith and Ms. Borsten, that you both went to Berkeley. And it's just nice to see two graduates of Berkeley in favor of any kind of property rights; particularly intellectual property rights. [Laughter.]
And that's not really a slight, but goes more to the reputation perhaps of one of the best institutions in the country.
Ms. Borsten.
TESTIMONY OF JOAN BORSTEN, PRESIDENT, FILMS BY JOVE, INC.
Ms. BORSTEN. Chairman Smith, Congressman Berman, and other distinguished Members of the Subcommittee, I want to thank you for the invitation to appear before you again.
Despite three U.S. Federal Court decisions in our favor, my company, Films by Jove, continues to be threatened with the loss of our investment by the Russian government. In May 1992, Films by Jove acquired rights to distribute internationally an award-winning library of more than 1,200 Soviet animated films. Most of these films were little known outside the former Eastern Bloc. Our contract required that we restore and reformat the films for the international market, and that we pay our Russian partners significant acquisition fees and profits.
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Our success drew the attention of the Russian Federation officials, who wanted to bring the lucrative business that we developed under their own control. In 1999, the Russian government deliberately formed a new state-owned animation studio with the same name as the studio from which we had licensed the rights back in 1992.
In 2000, this state-owned studio, backed by the ministry of culture, joined forces against us as a third party in a lawsuit we had initiated in the New York Federal Court to end illegal video duplication by a major Russian-American video pirate, a convicted felon. The new studio told Judge David Trager that it was the sole legitimate copyright holder of the animated films, and that we were the pirates.
In August 2001, Judge Trager concluded that we had signed our 1992 contract with the only possible copyright holder of the animated films. The following year, the Russian studio requested that Judge Trager reconsider his ruling, on the basis of a new decision by Russia's highest commercial court. That ruling cancelled, without explanation, certain lower court decisions on which Judge Trager had relied.
To counter this step, we presented the court with a confidential document which provided details of a secret meeting at the Kremlin about securing the animation rights for the new studio. The secret meeting was attended by a representative of the office of the chief justice. It was also attended by the Minister of Culture, his two deputies and their lawyer, representatives of the State Property Ministry, the State Prosecutor's Office, the Russian Patent Bureau, the presidential administration, and the director of the new state-owned studio. At the meeting, the Deputy Prime Minister assigned the chief justice the task of making sure the courts ruled in favor of the state.
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The last time I testified, we were still waiting for Judge Trager's decision. In April 2003, he denied their request for consideration, writing, ''It is apparent that the High Arbitrazh Court's decision was strongly influenced, if not coerced, by the efforts of various Russian government officials seeking to promote state interests.'' Under these circumstances, the high court's decision is entitled to no deference.
Nine months later, the Prime Minister of Russia signed a directive retroactively amending the 1999 directive that had created the new state-owned studio, now to include animation copyrights. According to both Soviet and post-Soviet laws, the state did not have those copyrights to give, either in 1999 or in 2003.
The state-owned studio again petitioned Judge Trager for reconsideration. In their brief, attorneys for the state-owned studio warned Judge Trager that the Prime Minister's directive ''strongly suggests that the Russian government is concerned about what has happened in this U.S. court.''
In November 2004, Judge Trager again declined reconsideration, writing, ''It would contradict the very principles at the foundation of the separation of powers doctrine to allow a foreign state to engage in activities that the United States courts would not tolerate from the U.S. Legislature.''
The pirates settled. The state studio did not appeal. But the Russian government continued its efforts against us. Indeed, their recent actions have been most contradictory. One moment, they propose settlement; and the next moment, they resume obstructionism and hostility.
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In October this year, we signed a memorandum of understanding, by which the new studio recognized our 1992 contract and its amendments. One month later, the Russian side suddenly began to demand additional documents in what we fear might turn out to be a renewed challenge to our rights.
We've recommended numerous times to the Russian government that if it is so important for the animation library to be controlled by a Russian state-owned organization, they should come to the negotiating table and buy us out of our contract.
Despite the difficulties that I have outlined, since Judge Trager's decision there has been progress in building protection for intellectual property rights of U.S. investors in Russia. It is now quite possible that in the future U.S. companies harmed by Russian non-enforcement of their intellectual properties will be able to use U.S. courts to obtain redress of their grievances. Recently, both the Second Circuit and the Colorado Supreme Court reversed lower court decisions that had found the Russian courts to be adequate alternative forums for property disputes.
I urge this Committee and Congress not to underestimate the ruthlessness and implacability of Russian efforts to undermine property rights, especially intellectual property rights.
I want to thank the Subcommittee for giving me the opportunity to testify today. And I'll be happy to answer any of your questions.
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[The prepared statement of Ms. Borsten follows:]
PREPARED STATEMENT OF JOAN BORSTEN
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Mr. SMITH OF TEXAS. Thank you, Ms. Borsten.
Mr. Israel, let me direct my first comment to you. And that is, I think it is worthy of emphasizing a couple of figures that you used in your prepared testimony. And in fact, I've used similar figures when I've made speeches on this subject, as well.
The first is that the United States intellectual property industries account for over half of all U.S. exports, and represent 40 percent of our economic growth. The figure I've been using is actually 30 percent, and I just wondered what your source was for the 40, which I like better.
Mr. ISRAEL. Thank you, Mr. Chairman. I'd be happy to provide you the specific footnote to that. I believe that's a study that was done by the U.S. Federal Reserve that looked at economic growth, I think in the latter half of the 1990's. But on the 40-percent number, I'd be happy to follow up to you and the Committee on that.
Mr. SMITH OF TEXAS. Okay. Great, if you would. And would you do the same in regard to the estimated IP theft cost to United States businesses of approximately $250 billion annually? And of course, the result in hundreds of thousands of lost American jobs, I'm familiar with that. But the $250 billion figure I think is, again, eye-catching, and if you could give us the source on that, as well.
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Mr. ISRAEL. I will certainly do it.
Mr. SMITH OF TEXAS. Ms. Espinel, let me direct most of my questions to you today, just because of your position. You say in your testimony that we are 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.
I assume today you would oppose the entry of Russia into the World Trade Organization, based upon its current record; would you not?
Ms. ESPINEL. I would certainly say that Russia needs to make considerable progress——
Mr. SMITH OF TEXAS. Okay, but they're not——
Ms. ESPINEL [continuing]. As we, including Ambassador Portman, have made clear.
Mr. SMITH OF TEXAS. You would not consider them in sufficient compliance today to recommend their entry into WTO?
Ms. ESPINEL. We believe more progress needs to be made.
Mr. SMITH OF TEXAS. I'm sorry?
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Ms. ESPINEL. We believe more progress needs to be made.
Mr. SMITH OF TEXAS. Okay. Do you have any ideas when that progress would be sufficient to justify their consideration?
Ms. ESPINEL. I suppose a lot of that depends on Russia. I mean, we're working very hard on the accession negotiation, obviously, but we've made it very clear to them that we need a good agreement, in order to be able to complete the process.
Mr. SMITH OF TEXAS. Mr. Smith in his testimony raised, or made three recommendations, and let me follow up on two of them. They overlap what I was going to ask you about. He says that IIPA believes that after 9 years on the Priority Watch List, it is time for the United States Government to take a different approach to Russia's inability or unwillingness to act. In this case, recommendation, designate Russia as a Priority Foreign Country, after the ongoing Out-of-Cycle Review by USTR. Why would you not so designate Russia?
Ms. ESPINEL. Well, we would consider using all of the options that we have against Russia. I think we would consider not so designating Russia if we believed that progress is being made, or if we believed that designating Russia as a PFC would not be the most effective way to achieve what we want to achieve, which is progress in Russia.
Mr. SMITH OF TEXAS. The other recommendation was to deny Russia's eligibility to Generalized System of Preference duty free trade benefits. When will that decision be made?
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Ms. ESPINEL. There is an ongoing review of GSP, which the USTR is taking very seriously. There was a hearing actually——
Mr. SMITH OF TEXAS. Is there a deadline for when that review will be complete?
Ms. ESPINEL. The general GSP deadline, the regular GSP deadline is June 30th for decisions. That doesn't necessarily, though, have to be Russia's deadline. There could be a decision made earlier than that.
Mr. SMITH OF TEXAS. That's good news. June 30th, or perhaps before.
Ms. ESPINEL. We would certainly anticipate that a decision would be made by June, at the latest.
Mr. SMITH OF TEXAS. June 30th at the latest? Okay. Good. And a question on China. If we are not using existing WTO trade dispute mechanisms against China, which is widely perceived as among the worst global IPR offenders, then of what value are the WTO mechanisms?
Ms. ESPINEL. Well, I would say I think even the threat of WTO dispute settlement, of which China is well aware, is an effective tool.
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Mr. SMITH OF TEXAS. Well, the threats, both to China and Russia, just don't seem to be manifested in much of a change in their conduct. And so I think it's going to require tougher actions on your part, on the part of our Government, if we are going to get the results that we want.
Ms. ESPINEL. I think we would certainly agree that there is an enormous amount of work that remains to be done. We have seen some recent indications of progress with China and with Russia. Although with Russia I would like to emphasize that those signs of progress are truly very, very recent; so obviously, it's going to be critical to see if Russia has the ability to not just sustain that, but actually increase it significantly.
With respect to WTO settlement, their dispute settlement specifically with China, as you know, it is something that we are working quite closely with our industry to develop our WTO options. And as I said before, if we, in consultation with our industry and in consultation with you and the rest of Congress, believe that's the most effective way to address the problem, we will move forward.
Mr. SMITH OF TEXAS. Okay. I would guess you would get widespread support by Congress to take some strong actions. Thank you, Ms. Espinel.
The gentleman from California, Mr. Berman, is recognized for his questions.
Mr. BERMAN. Well, thank you very much, Mr. Chairman. First, Mr. Israel and Ms. Espinel, you've heard Ms. Borsten, the story of her saga in dealing with the Russians and their sale of these copyrights and then their refusal to acknowledge it, their creation of an entity to continue to produce them.
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I'm wondering if, following this hearing, you or your offices—I think Commerce only because commercial attaches in our embassy in Moscow; the Trade Representative, because of your ongoing dialogue—in addition to the broader issues, help the Russians understand the importance of this specific issue in terms of at least a good example of how they respect copyrights and contracts. Would you be willing to have your offices follow up in pursuing that?
Mr. ISRAEL. Certainly, Congressman. And my understanding is that Films by Jove has worked with the U.S. Embassy in Russia.
Mr. BERMAN. Yes.
Mr. ISRAEL. Previously, I know Ambassador Vershbow was personally engaged, and commercial offices in Russia have been engaged, as well. We're certainly happy to take onboard recent activity and any developing needs that the company may have for U.S. engagement, and do any follow-up we can.
Mr. BERMAN. Great.
Ms. ESPINEL. As would USTR.
Mr. BERMAN. Good. This issue about progress is being made, on China, they made a number of commitments: increased criminal prosecutions for IPR violations, relative to the total number of IPR administrative enforcement cases. They agreed to do that. Have they?
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Ms. ESPINEL. In order to do that—Well, one of the steps that they need in order to do that is to have regulations in place that will transfer cases that are put into the administrative system, about which we have serious concerns that it's not sufficiently deterrent——
Mr. BERMAN. Are those regulations in place?
Ms. ESPINEL. Those regulations are in process. They have drafted them. We are reviewing them. They are moving forward on them.
Mr. BERMAN. Reduce exports of infringing goods by issuing regulations to ensure the timely transfer of cases. That's what you're referring to for criminal investigation?
Ms. ESPINEL. There are several regulations that China is in the process of drafting as a result of the commitments in the JCCT, including with respect to transfer of administrative cases to the criminal process, export regulations, and Internet regulations in order to come into compliance with the WIPO Internet treaties.
Mr. BERMAN. And at this particular point, none of these regulations are in place?
Ms. ESPINEL. None of these regulations are yet in place.
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Mr. BERMAN. Improve national police coordination by establishing a leading group in the ministry of public security responsible for overall research, planning, and coordination of all IPR criminal enforcement, to ensure a nationwide enforcement effort. Have they created such a group in the ministry of public security?
Ms. ESPINEL. I believe that has been concluded.
Mr. BERMAN. Four, enhance cooperation on law enforcement matters with U.S. by establishing a bilateral IPR law enforcement working group focusing on the reduction of cross-border infringement activities. Has that been done?
Ms. ESPINEL. Yes.
Mr. BERMAN. Expand an ongoing initiative to aggressively counter piracy of movies and audiovisual products.
Ms. ESPINEL. Yes.
Mr. BERMAN. It's been——
Ms. ESPINEL. It has. I should note, I suppose, that they have been some mixed results from that. There's been some very good results. The results of the campaign in Beijing were not as strong as we would have liked to have seen. The results in Shanghai and, I believe, Shenjin [ph] were actually quite positive.
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But again, I would like to emphasize China—whatever signs of progress there we consider to be, obviously, good, but nascent. I mean, what is critical is that they sustain them.
Mr. BERMAN. Do you have benchmarks in mind for determining whether the progress is real and meaningful and substantial? I sound like we're talking about Iraq, but I'm not. We're talking about in terms of dealing with the problem of piracy.
In a percentage context, a reduction, or in an absolute number context, do you have some kind of benchmarks in mind for deciding whether or not there is enough progress to justify continuing not to bring a WTO case?
Ms. ESPINEL. Well, I guess, in my view, there are two categories of benchmarks. One is the specific commitments that China has made to us, and whether or not they follow through on those in terms of, for example, improving their legislation, or putting certain processes in place. And the second would be——
Mr. BERMAN. What about——
Ms. ESPINEL [continuing]. Results in terms of actually seeing piracy and counterfeiting reduce; whether that's measured by increased sales of our products, or measured by industry's assessment of the piracy rates falling. But I would say both of those, I think, are important components to measure progress.
Mr. BERMAN. And on the latter, what have you seen so far, on the quantified benchmarks, the reduction in piracy, the increase in acquisition of legal goods?
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Ms. ESPINEL. I'm not aware that industry has done an overall survey since the last time I was before this testimony [sic], so I don't have any new figures or statistics to cite.
Mr. BERMAN. Well, Mr. Smith, if you apply that quantifiable standard, what would you say about China at this point?
Mr. SMITH. Well, for 2004, at least, the piracy rate went down a small notch in the recording industry, but stayed pretty constant for everything else. And we don't expect much of a change in 2005, simply because we haven't seen in our area the kind of criminal enforcement that the Chinese have been promising for a long time now. We just haven't seen it.
Mr. BERMAN. Well, I think my time has expired, Mr. Chairman.
Mr. SMITH OF TEXAS. The gentleman's time has in fact expired. And the gentleman from California, Mr. Schiff, is recognized for his questions.
Mr. SCHIFF. Thank you, Mr. Chairman. And really, the question I had is the question that Howard concluded with.
But I'd like to see if I can get a few more specifics on it, because I think, both with respect to China and Russia and for our own purposes, unless there are clear expectations expressed to China and Russia about what we would like to see happen—in Russia's case vis-á-vis WTO and GSP; in China's case, whether there is an actual case filed in the WTO—my guess is, from my limited meetings with Chinese officials both there and here, they'll continue to tread water as long as they feel they can tread water. It won't injure the trading relationship.
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And I think the same is true of Russia. Unless they have clear benchmarks of what we expect, I don't think things are going to change appreciably. But I do think that if we set out clear benchmarks of what we expect, that we might get a change.
And I know that you've asked the industry to go about doing the documentation to prepare for a WTO case. And I'm sure that will be useful; although the facts seem to be pretty overwhelming. If you can't make a WTO case in China, you can't make a WTO case anywhere.
And it seems to me that this is really designed by time, to tread water a little bit. But again, I think unless we have a clear set of benchmarks of what we expect—And it might be measured in terms of reduction of piracy. I don't know that it can be measured in the sense of increased sales of our products. That, although a desirable metric, doesn't seem like a legitimate metric, in terms of their piracy problems.
But what more specific and quantifiable things either have you asked for, or can you ask for, where China can be given the very clear alternatives of ''Meet these expectations, or we'll support a WTO case,'' or in Russia's case, their accession? What are the clear metrics that either you have offered or that we can now offer?
Ms. ESPINEL. Well, first, I would say that I absolutely agree with you, that I think having clear benchmarks or a clear path forward is critical for China, Russia and, frankly, for all the countries where we're facing this challenge, so they have a clear understanding of what we think is necessary in order for them to address that.
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With China and Russia, we have done that, I think, both at what I would describe as the macro level and a micro level. I mean, we've made clear to China and Russia that we need to see improvements and that improvements will be measured by seeing the piracy rates come down.
We have, in addition to that, given them very detailed lists of either improvements in legislation, administrative processes, other very detailed improvements they need to make to their overall system in order to make their system more effective. And we will be measuring progress both by decrease in piracy rates and by their ability to move forward on the very specific action items that we've given both of them.
Mr. SCHIFF. Can you share with us—the Chairman asked what the deadline was for determination on the GSP issue. It's June 30th; it has to be decided by June 30th. Is that——
Ms. ESPINEL. That is the general deadline for the GSP review processes that are outstanding. That's not specific to ISP, just specific to the GSP review process as a whole.
Mr. SCHIFF. So on or before that point, you'll have to make a decision about whether to try to revoke GSP status. Can you let us know what criteria you've enumerated with the Russians, so that we can hold you accountable and that we can together hold the Russians accountable?
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Because as we get closer to June 30th, there may be a decision made to wait till the next June 30th; which is a decision of sorts that we've made, I guess, over several years, because we haven't taken action in this area. But it would be useful, I think, for us and for the Russians to know precisely what we expect of them.
My impression, again, with respect to China—and it's probably similar to Russia—is that if we merely talk about improvement, they will give us a very good presentation about all the ways they've improved; and yet, at the bottom line, the piracy won't have changed very much.
So either today or in written form, I'd really like to see what specifically we expect to take place before June 30th with respect to Russia, what specifically we expect China to accomplish in terms of number of criminal prosecutions or whatever standard is the right standard to use, so that we can encourage, foster, push a WTO case or any other kind of enforcement action, so that we can get concrete results. I invite any of you to respond to that.
Mr. ISRAEL. Congressman, I would add one insight based on something you brought up in the initial part of your question to Victoria; which is the sales of U.S. goods and services into these markets, I think, is a very critical piece of evidence we need to review and we need to look at. And it's something that working with industry is the key vehicle that's going to present those types of results.
When we talk to the Chinese about bringing their government infrastructure into an environment where they use legitimate and legal software, I think the most effective determinant of their progress on that, or one of the most effective determinants, is: are leading American software companies who are actively looking to get into that market having better results?
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The fact that the Chinese market is the second leading market, the second largest market for PCs in the world, but the 25th largest market for software in the world, obviously tells us that in between two and 25 there's a lot of piracy going on.
So I do think it's important. And one thing we're trying to focus on doing is work with U.S. industry to get some indicators from them.
Mr. SCHIFF. And I don't disagree with that. What I mean is that I don't know that we can tell China that, unless we sell ''X'' amount of products, we're going to bring a WTO case for infringement. I don't know we can show that causal effect. But I do think we ought to maximize our pressure to open the markets in China, for exactly the reason you mentioned.
Ms. ESPINEL. If I could just add to the specifics, particularly with respect to Russia, in terms of benchmarks that we're looking for, one thing that we've made very clear to Russia is that they have a massive optical disc piracy problem, and that we need to see the plants shut. But in addition to that, we need to see the equipment seized and destroyed, so the plants can't reopen. There are raids and prosecutions, but we need to see people actually be put in jail.
There does seem to be—again, this is recent—greater cooperation on the law enforcement side. It may be that the prosecutors are the weakest link in this system at this point in time. But I think both on the OD plants—on the optical disc plants—and on tackling the Internet piracy problem that Russia has, those are two key items that we have made quite clear to Russia we see as priority issues that they have to get addressed.
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Mr. SCHIFF. Thank you.
Mr. SMITH OF TEXAS. Thank you, Mr. Schiff.
The gentleman from California, Mr. Issa, is recognized for his questions.
Mr. ISSA. Thank you, Mr. Chairman. I sit on the International Relations Committee, in addition to the Judiciary Committee and, oddly enough, the Government Reform Committee. And all three of our Committees are looking at and trying to deal with: What do we do with two nations, both former classic Stalinist dictatorships, that seem to have absolutely no real intent, beyond passing laws, but intent to enforce those laws when it comes to intellectual property, when it comes, to be honest, with not spying on us and not taking not just intellectual property in the sense of DVDs and CDs, but technology to do just about anything to improve their economy?
And I always want to be careful when I suggest this, but I want to liken back to the Cold War. During the Cold War, we held these two—China as it is today obviously, and the old Soviet Union, but substantially the Moscow government—we held them to be totalitarian dictatorships. And because we held them to be totalitarian dictatorships, we held them responsible for any and all actions that occurred within their government structure and within anything that might be called a private sector. Any person granted the ability to leave their country, their ships, including their maritime commercial ships, we held them all responsible.
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Isn't it true that, particularly with Putin's step away from a free market, that Russia now is looking much more like a government that central control is certainly possible, if not always executed; and in the case of China, there's substantially no difference in the organization that we dealt with in the Cold War, a strong central government with strong regional governments, but all of which reported back, in the case of China, to the political structure of the Communist Party?
If that's true, and I believe it is, shouldn't we view the Cold War tactic of simply saying to their governments, ''We hold you responsible, and any failure will be considered to be a willful act,'' and a failure to make these changes, or substantial progress on these changes, in a timely fashion, should result in an appropriate raising on an economic basis of the curtain that we so long were viewing in front of us and between us? Mr. Israel, I guess we'll start with you.
Mr. ISRAEL. Thank you, Congressman. I think, you know, the historical contexts that come into play with these two countries in particular certainly have to be considered. And I know the entire Federal Government—the Administration, as well as Congress—consider these components when you think about how to address the issues going forward.
I do think, in addition to some of the things you laid out, one key factor to consider is the significant current presence and potential presence and desired presence of U.S. business and industry working in these markets. These are, as you're well aware, sir, of course, very large and lucrative markets, particularly in the case of China, with very large U.S. investments there.
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So I do think the posture that the United States takes toward these two countries has, obviously, evolved and changed a good deal over the most recent years, as the trading relationship has become extremely intertwined and complex between the countries.
And I do think we are looking. And I believe that in the coordination model that we're trying to develop we are looking to make sure that across the entire U.S. Federal Government the relationships that we have with these two countries, when given an opportunity to stress the significance of intellectual property rights, what it means, not in terms of how these two countries view it, but how in terms the United States views it and, indeed, most of the industrialized, sophisticated economies of the world view intellectual property.
One thing that I think is a bit of a piece of leverage with both Russia and China is they desire to be viewed on the world stage as sophisticated global economies.
Mr. ISSA. Market economies.
Mr. ISRAEL. Market economies, to use the common term that we hear quite a bit from both. And their leaders desire that. And we have stressed that there is a certain pattern of behavior; there's rules of law; there's ways you engage in a global economy that fit the norms of the modern economy. And I do think that's something we need to continue to stress with both these countries.
And I do think it's an evolving set of relationships, clearly. And there are new rules and new processes we're engaging in and trying to use every opportunity we have across all the relationship venues with these two countries to stress the priorities that we have; IPR being nearly first on every one of those lists.
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Mr. ISSA. So in order to focus the answers, because I don't want to monopolize the time, the question really, though, is the government-to-government relationship; not as a market economy to market economy where we say, ''Make your best efforts, but we understand you have an independent judiciary, an independent legislature, an independent business climate,'' all of which really doesn't exist in China. And I've traveled and done business in China extensively for over 20 years, and now traveled to Russia and looked at the changing Russia. These are not market economies.
Business-to-business, I understand. Government-to-government, should we hold these governments responsible? And if so, should that message become the obvious message, which is, ''We don't want to hear about best efforts; we expect your government to perform the same as when, during the Cold War, we said if your submarine drifts outside its zone, we will consider it a provocative action, not an accident, because we expect you to keep your government activities and your fishing boats that used to prowl the West Coast—we expect you to make sure that they obey international law.'' So the question really is government-to-government. Ms. Espinel?
Ms. ESPINEL. Well, I guess, to me, the question you ask is: Isn't this really a matter of political will, high-level political will?
Mr. ISSA. Exactly.
Ms. ESPINEL. And I would agree with you. And I think we understand that with both Russia and China it is critical that this come from the highest level of their political structure in order to be effective. We have, therefore, raised it at our own highest levels of political structure, including by President Bush.
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I'd like to note, in case you aren't aware, that the meetings, I think, with the top levels of all the Federal agencies and President Bush have produced a statement from President Hu of China, saying that he understands the need to protect the legitimate rights and interests of our right-holders, and that this is something China intends to do.
I'd also like to note that our understanding is in August of this year, for what I believe is the first time, President Putin actually intervened on this issue and sent a very strong message to his inter-ministerial that this is something that needed to be addressed. And I think that is a primary reason why we have in fact seen some recent progress in the last few weeks, because that message is coming from the very top of their political structure now. So I would agree with you that it's critical that it be addressed at that level.
Mr. ISSA. Thank you, Mr. Chairman. I'd ask unanimous consent for the others to respond in writing.
Mr. SMITH OF TEXAS. Without objection, would you complete the response in writing, then?
[The statements follow:]
WRITTEN RESPONSE TO QUESTION POSED BY REPRESENTATIVE ISSA FROM THE HONORABLE CHRIS ISRAEL, COORDINATOR FOR INTERNATIONAL INTELLECTUAL PROPERTY ENFORCMENT, U.S. DEPARTMENT OF COMMERCE
[Note: Image(s) not available in this format. See PDF version of this file.]
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WRITTEN RESPONSE TO QUESTION POSED BY REPRESENTATIVE ISSA FROM MR. ERIC SMITH, PRESIDENT, INTERNATIONAL INTELLECTUAL PROPERTY ALLIANCE (IIPA)
[Note: Image(s) not available in this format. See PDF version of this file.]
WRITTEN RESPONSE TO QUESTION POSED BY REPRESENTATIVE ISSA FROM MS. JOAN BORSTEN, PRESIDENT, FILMS BY JOVE, INC.
[Note: Image(s) not available in this format. See PDF version of this file.]
Mr. SMITH OF TEXAS. Thank you, Mr. Issa.
The gentlewoman from California, Ms. Waters, is recognized for her questions.
Ms. WATERS. Thank you very much, Mr. Chairman, and Members. I'm beginning to recognize that this problem of piracy and counterfeit items, etcetera, is much larger than I even thought it was.
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First, let me just say that, whether you are on Fifth Avenue in New York in front of Sak's Fifth Avenue or Cartier's, where the knockoff goods are being sold out of bags by immigrants around the clock, or you are in most of the communities—and particularly low-income communities—across the country, knockoffs have replaced, basically, the retail industry in many of these communities.
And not only do you have people selling on the streets; you have these huge swap meets that are bringing in the knockoffs from Korea and China and other places, I guess. So when you go to festivals around the country, whether it's in Florida, New York, etcetera, they're selling thousands of Louis Vuitton purses and all the other items that most of us know about.
Now, I can simply speculate that we have been very lenient with China and some of our other trading partners. And I do not think they take us seriously.
I'm pleased to hear about this new, strong relationship we have with Russia, and the fact that they are supposedly shutting down plants and breaking up these operations. But I guess I'd like to ask whomever would like to answer, what evidence do you have that Russia or China is willing to shut down plants, have criminal penalties, and to destroy equipment, etcetera; whether we're talking about in the simple retail industry, or with computer software, or any of the other areas of concern that we have about intellectual properties?
Mr. SMITH. If I might take a crack at that, just to respond to the first part of your statement, in this country, clearly, we have piracy, and you described it. But it's a very small percentage of our overall market. It exists. There's no way you're going to get rid of it.
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But if you go to China and Russia, we're not talking about 3 and 4 percent piracy rates, we're talking about 90 percent piracy rates. And we're talking huge criminal syndicates that produce this product. It's a problem of a totally different order.
With respect to Russia and the closing of the plants, in fact, just recently they raided nine plants. And in my testimony, I noted that that's progress. They raided them. But the problem is——
Ms. WATERS. And what happened?
Mr. SMITH. The problem is that product went out the door. They didn't seize the equipment. Historically, there have been virtually no prosecutions of plant owners. There's been one conviction of a plant owner in the last 5 years. This latest set of raids doesn't give us great comfort that there's been significant change.
And Ms. Espinel is absolutely right, President Putin did make that statement. And perhaps we will see something. But President Putin and the Russian government have made a lot of statements over the last years, and we haven't seen the action. And we're, frankly, quite frustrated. And it's a lot of promises and no convictions, no real action that is going to have a significant, on-the-ground market impact for our industries.
Ms. WATERS. May I quickly ask, how has this discussion taken form or shape in the WTO?
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Ms. ESPINEL. I'll speak to that. I just want to emphasize, or underscore, the remarks made by Mr. Smith. We do see the recent raids of the OD plants as progress, but we have made quite clear to Russia that we need follow-up; we need the equipment to be seized and destroyed; we need the plants to be shut down permanently; we need to see people put in jail.
In terms of the WTO process, right now we and other countries are negotiating with Russia the terms of their WTO accession, and there is an office at USTR that handles those negotiations. We are in the process of doing our bilateral market access negotiations with Russia. When those are completed, there will then be a multilateral process to negotiate the rules of the WTO accession.
Ms. WATERS. Thank you, Mr. Chairman.
Mr. SMITH OF TEXAS. Thank you, Ms. Waters; appreciate those questions.
Thank you all for your testimony today. It's been very helpful. Obviously, this is an issue we're going to continue to monitor closely. But we appreciate your responses today.
And Mr. Israel, you more than survived your first appearance before Congress as a witness.
I thank you all again. We stand adjourned.
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[Whereupon, at 11:33 a.m., the Subcommittee was adjourned.]
A P P E N D I X
Material Submitted for the Hearing Record
STATEMENT OF THE HONORABLE HOWARD 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 this hearing on international intellectual property piracy. I hope this subcommittee can institutionalize the practice of having at least one hearing a year that focuses on international trade in products protected by intellectual property rights. By consistently bringing attention to the rampant piracy problem occurring abroad, we can begin to help the millions of creative people in this country who earn their living from intellectual property.
I particularly want to thank you for inviting Joan Borsten to testify. She's a good friend, a constituent and has a very compelling story. She brings a valuable perspective to the hearing—that of an individual American entrepreneur whose business has been dramatically impacted by a foreign government's sustained campaign to steal her rights to intellectual property.
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Because of the massive copyright piracy that occurs daily in China and Russia, the sales of black-market goods cause an annual loss of revenue to American creators that is truly staggering. According to the International Intellectual Property Alliance, piracy rates in the copyright industries range from a low of 70 percent to a high of 95 percent and American industries annually lose over 2.5 billion dollars in China and almost two billion dollars in Russia. But it is not only the copyright industries - entertainment, software, book publishing that suffer. We could probably have an entire hearing only on counterfeiting of motorcycle parts, purses and pharmaceuticals. No industry is immune from the endemic intellectual property violations occurring in these countries.
The problem in both China and Russia is similar - while the laws may be on the books, actual enforcement of those laws is sorely lacking. Few criminal prosecutions have taken place and even fewer sentences have been meted out. There is currently no true deterrent for the pirates. In fact, piracy has become the foundation for new businesses that export these black market goods.
The one effective tool the current administration has to incentivize the Chinese government to address its piracy problem is pursuing a WTO case. At the last hearing on this issue, the USTR testified that they were ''committed to ensure that China is compliant with its obligations. And we will take WTO action if, in consultation with you and with our industry, we determine that this is the most effective way to fix the problem that we are resolved to fix.'' When I asked whether 6 months would be a reasonable time frame to reach a conclusion, the answer was that it could be. So here we are 6 months later - I am looking forward to an update.
Furthermore, have additional avenues for mitigating the effect of piracy in China been explored by the current administration? Currently, the Chinese government engages in vast restrictions on market access for American copyrighted goods. They restrict the number of American films that can be shown and severely curtails the right of our companies to do business in their country. These barriers make the impact of piracy that much greater and virtually impossible for our companies to counteract piracy.
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With Russia there is still some leverage because they have not joined WTO yet. A number of months ago I, along with a number of New Democrats, wrote Ambassador Portman advising him that in order to obtain our support for any future trade agreement we would have to be assured that the lesson taught from allowing China to join the WTO without provision for adequate enforcement against intellectual property violations, has been learned. In fact, just last week IIPA submitted comments for the Special 301 out of cycle review on Russia. It is not encouraging news. ''In short, Russia is not complying with its commitments to provide adequate and effective copyright protection and enforcement.'' Furthermore, the House, in a bipartisan vote (H. Con. Res. 230) recognized Russia's failure to adequately protect intellectual property and cautioned that without change they are at risk of losing GSP benefits and accession to the WTO.
Last time, we discussed the complexity of denying GSP benefits to a country - a process which requires consultation of most agencies within the Executive branch. It is clear that in Congress, we all agree that this situation is quite outrageous and that a country that flagrantly violates American intellectual property rights should not receive GSP duty-free benefits. So, I ask—since the last hearing has there been any movement on the status of Russia's GSP benefits?
If motivated, these countries can protect intellectual property rights. When piracy hurts the Chinese interests, the Chinese government has been motivated to step in. When knockoffs of the Beijing Summer 2008 games logos on T-shirts were being sold, the markets were quickly cleared. In short China can deal with this problem if it has the political will. In Russia, it seems incredible that the Russian government actually controls the facilities and land on which many of these pirate optical disk plants operate. How can it simply do nothing to shut down the plants operating on these government- run installations?
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I am looking forward to hearing from the witnesses to learn what benchmarks or timelines have been established to help guide a decision on a WTO case against China, the withdrawal of GSP duty free benefits from Russia, and whether Russia is aware that they will be denied admission to the exclusive WTO club unless the piracy problem is addressed. I am looking forward to hearing about other steps that are being taken to protect American creativity.
STATEMENT OF THE HONORABLE BOB GOODLATTE, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF VIRGINIA
Mr. Chairman, thank you for holding this important oversight hearing 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.
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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. We must meet this type of highly organized piracy with highly organized coordination and enforcement efforts.
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.
A recent article in The Moscow Times reported that the co-chairman of the public advisory board for the Russia Against Counterfeiting movement has said that until DVD's and CD's become more affordable, he and the majority of Russians would opt for pirated music and movies. This type of behavior from those responsible for reducing piracy is unacceptable. 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.
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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. The WTO provides trade dispute mechanisms and these tools can be used to pressure countries into compliance with existing agreements. In addition, countries like Russia wishing to enter the WTO should establish that they are committed to enforcing intellectual property rights.
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.
I look forward to hearing the testimony of our expert witnesses about how best the United States can help enforce intellectual property rights in countries that have not yet proven their commitment to enforcing intellectual property violations.
NEWS ARTICLE BY THE HONORABLE LAMAR SMITH, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF TEXAS, AND CHAIRMAN, SUBCOMMITTEE ON COURTS, THE INTERNET, AND INTELLECTUAL PROPERTY: ''DEFENSE CONTRATOR HELD IN SPY CASE,'' FROM THE NOVEMBER 30, 2005 EDITION OF THE WASHINGTON TIMES
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NEWS ARTICLE BY THE HONORABLE LAMAR SMITH, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF TEXAS, AND CHAIRMAN, SUBCOMMITTEE ON COURTS, THE INTERNET, AND INTELLECTUAL PROPERTY: ''ENVOY: LICENSED DVDS COST TOO MUCH,'' FROM THE DECEMBER 1, 2005 EDITION OF THE MOSCOW TIMES
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NEWS ARTICLE BY THE HONORABLE LAMAR SMITH, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF TEXAS, AND CHAIRMAN, SUBCOMMITTEE ON COURTS, THE INTERNET, AND INTELLECTUAL PROPERTY: ''U.S. AND EU TO BATTLE CHINESE COUNTERFEITING,'' FROM THE NOVEMBER 30, 2005 DOW JONES NEWSWIRES
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EXHIBIT SUBMITTED BY JOAN BORSTEN: ''CORRUPTION IN THE RUSSIAN ARBITRAZH Courts: Will There Be Significant Progress in the Near Term?''
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EXHIBIT SUBMITTED BY JOAN BORSTEN: ''THE CIRCUMSTANCES SURROUNDING THE ARREST AND PROSECUTION OF LEADING YUKOS EXECUTIVES.''
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STATEMENT AND EXHIBITS FROM THE HONORABLE DAN GLICKMAN, CHAIRMAN AND CHIEF EXECUTIVE OFFICER, MOTION PICTURE ASSOCIATION OF AMERICA, INC. (MPAA)
Prepared Statement of Statement Prepared For the Record From
DAN GLICKMAN
Chairman and Chief Executive Officer
Motion Picture Association of America, Inc.(see footnote 1)
CHAIRMAN SMITH AND MEMBERS OF THE SUBCOMMITTEE: When, six months ago, you last examined the problems we are facing protecting our intellectual property rights (IPR) in China and Russia, we painted a bleak picture: We estimated then that piracy in both markets exceeds ninety-five percent, costing our members in excess of half a billion dollars every year. Additionally, we told the Subcommittee that not only was piracy corrupting the two internal markets, pirates in Russia and in China have been the source of stolen material exported to markets all over the world.
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I wish today we could report that this scenario had brightened, that piracy rates had fallen, losses dropped, and that the two countries were no longer sources of pirated product far from their borders. I cannot. With little amendment, we could submit for your consideration virtually the same testimony as we did then in describing the scope of the problem. With respect to the steps we are taking in both markets, I can report progress, and will report steps we are taking on our own, with the US government, and, yes, with the host governments.
Before doing so, I want to thank you and the Subcommittee for your enduring support of our work and, in particular, the fact that you are keeping these problems high on your agenda. As I will elaborate, that you are doing so is, in our view, one of the critical elements to a successful strategy of combating the theft of our product, and essential to motivating both governments to take action.
Adequate laws and resources, effective enforcement, and private sector initiatives and cooperation with the US government as well as the Chinese and Russian governments are all important tools in this fight. However, unless these governments exercise the political will to address the rampant theft of US IPR, those tools are meaningless. This hearing keeps IPR high on both the US-China and US-Russian agendas, demonstrating, yet again in a yet another forum, to the Chinese and Russian authorities the priority you and your colleagues attach to seeing satisfactory results.
On behalf of the member studios and the hundreds of thousands of Americans who earn their livelihoods in this industry, thank you for your interest and the opportunity to provide these comments to the Subcommittee.
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RUSSIA
Russia ranks, along with China, as one of the two largest producers and exporters of pirated DVDs and other copyrighted materials in the world. As serious as the problems are in China, and they are indeed quite serious, the challenges we face in Russia - lawlessness, physical danger, and corruption - are even more daunting. I cannot underscore enough the scope and depth of the problem we face in Russia - and it is getting worse, not better.
Last year alone MPAA member companies lost $275 million to piracy in Russia. All copyright industries lost $1.7 billion due to piracy last year, and over $6 billion in the last five years in Russia. These figures are staggering.
The Government of Russia has allowed the problem to grow significantly worse in recent years. The number of plants manufacturing optical discs increased twenty-seven percent, from thirty-six to forty-six in the past year alone. Sixteen of these plants are located on property owned by the Russian government. Moreover, the number of DVD lines has increased fifty percent in the past year.
A matter of immediate and utmost importance is that Russia, right now, is actively pressing to accede to the World Trade Organization (WTO). MPAA cannot support Russia's accession to the WTO, an organization founded on rules, until these problems are addressed satisfactorily.
The Agreement on Trade-Related Aspects Intellectual Property Rights (TRIPS) agreement, establishes minimum levels of protection that WTO members must give to fellow WTO members' intellectual property. It is an integral component of the international trade regime. Taking effective criminal action against piracy is a key TRIPS requirement.
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For the record, I am attaching to my statement a fuller description of the problems we face. Every year, we compile a submission of the trade barriers we face for the Office of the United States Trade Representative's (USTR) annual National Trade Estimate Report on Foreign Trade Barriers; the comments we filed with USTR last month on the Russian market detail those problems. Here is a sketch of what we are confronting on a daily basis in Russia.
Russia's domestic market is literally saturated with pirate DVDs. The level of piracy is estimated to be over ninety percent.
Seventy percent or more of the seized pirated material ends up back in the marketplace.
Russian DVD plants are, it is estimated, manufacturing between 50 and 80 million DVDs a year for export.
Pirate discs manufactured in Russia have been found in twenty-seven countries, negatively affecting our legitimate business in countries such as Bulgaria, Finland, Germany, Hungary, Israel, Poland, Turkey, and the United Kingdom.
All of the optical disk plants that were raided in 2004 remained in operation after those raids.
The plant owners remain unscathed by the criminal justice system.
We have presented this evidence to Russia over and over again. The Government of Russia has acknowledged that these plants exist and while the number of raids has recently increased, recall that seventy percent of the seized product finds its way back into the marketplace and that not one plant has been closed.
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Much of the piracy in Russia is orchestrated by organized crime syndicates and gangs. No small-scale, independent operator could afford the false-bottomed compartments in trains and cars that these syndicates use to export pirate copies of our films to other organized criminal syndicates across Europe. 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 unharmed. While the assailant ended up in a psychiatric hospital, those who contracted the assailant remain unscathed and grow ever wealthier.
This rampant organized crime flows from and thrives because of endemic corruption. The entrenched corruption of Russia's judicial system has caused our complaints to be routinely dismissed. An indication of prosecutorial corruption is the number of requests prosecutors make of rights holders 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 frequently returned to commercial channels connected to the prosecutors. Russian authorities openly acknowledge that only eight non-suspended prison sentences have been imposed on intellectual property infringers in 2005.
Circling back to the TRIPS agreement, criminalizing all acts of copyright piracy on a commercial scale and taking effective criminal action against such acts are key WTO TRIPS requirements. There is no argument that can be made that Russia complies with the WTO TRIPS obligations. We do not believe that our problems can be effectively addressed upon Russia's accession to the WTO. We tried this with China and we learned an expensive and difficult lesson. The U.S. government and U.S. industry cannot afford to make the same mistake twice.
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Russia has repeatedly promised both the US government and the US copyright industry that it would take the steps necessary to meet these WTO obligations. However, Russia has to date failed - and this failure can only be attributed to lack of political will - to step up and address these concerns. We are reminded of Russia's lack of commitment to combating piracy every time Government of Russia officials assert that piracy is the acceptable result of legitimate product pricing. Most recently, on November 30, President Putin's representative to the Duma's upper chamber said that widespread piracy would continue to flourish if legitimate product did not become cheaper.
Russia's accession cannot be paved with empty promises. Russia must only be permitted to accede upon demonstration that it has the political will to inspect all known plants, and to close and repeal the licenses of those engaged in production and distribution, as well as to criminally prosecute the plant owners and operators. We will not see progress in the enforcement against intellectual property crimes in Russia unless President Putin directs all relevant agencies to make the fight against piracy a priority. Until the President himself demands accountability from his senior officials, corruption will continue to shelter the pirates.
Mr. Chairman, members of the Subcommittee, we need your help in ensuring that Russia addresses its piracy problems before it is permitted to join the WTO. We greatly appreciate the fact that you and your colleagues voted overwhelmingly in favor of H. Con. Res. 230. That sends a clear signal to the Russian authorities that they must address these matters before it joins the rules-based WTO, and ensures that both Russia and the Administration know that a grant of Permanent Normal Trade Relations to Russia, a prerequisite to WTO relations, will be endangered without meaningful progress on protecting intellectual property rights.
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CHINA
The source of the problems we face in China is twofold: First, China imposes strict limits on the number of foreign films that can be exhibited in its theaters on a revenue-sharing basis, and applies burdensome regulations and confiscatory taxes on foreign home video and television content. This creates a marketplace vacuum that pirates are only too happy to fill. Second, China has not asserted the political will necessary to reduce the level of piracy. Yes, it has conducted some raids and even put a few pirates in jail, but it has not materially reduced the level of piracy and the ready availability of pirated products in the shops and in the streets.
As I will elaborate, fighting piracy, especially in a restricted market such as China, means more than simply enforcing laws and going after the counterfeiters - the traditional anti-piracy tools. Getting better access to the Chinese market is a critically important tool in the fight against piracy. The controls the Chinese government imposes upon legitimate film producers and distributors have no effect whatsoever on the pirates. Until we have the same unrestricted access to that market, we will not be able to compete effectively and stop the theft of our content.
Regrettably, to coin a phrase, if you did not see a counterfeit DVD, you were not in China. Unfortunately, I fear our collective perception of China has become so ingrained with the notion that China is overflowing with pirate DVDs we frequently fail to appreciate the magnitude of the problem.
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The problem is ubiquitous - on virtually every street corner, packed on to the shelves of audio-visual shops in every neighborhood. We estimate that the piracy rate exceeds ninety percent - more than nine of every ten DVDs in the Chinese market is a fake, stolen product. Counterfeit, stolen motion pictures cost our members nearly $300 million annually, in China alone.
Too many, especially some around the world who should be allies in the fight against piracy in China, view this as an American problem. While we certainly bear the disproportionate share of the burden of this problem, movie piracy in China affects film makers all around the world. Our research indicates that almost half the pirated product is actually Chinese product. We also find stolen copies of Japanese, Korean, French, and Indian movies in China.
A few weeks ago, a young Chinese film producer visited my office. When asked to define his number one problem, he did not mention financing, distribution, or any of the other obstacles film producers must overcome: He said piracy is his biggest problem - the theft of his movies, in his home country.
It is clearly more than an American problem, it is a problem afflicting film makers no matter where they live and make movies, in more than one way. Not only are the pirates sapping legitimate movie makers in the China market, they are encroaching on legitimate markets all around the world. Our analysis of pirated DVDs seized from around the world traced their production back to over fifty plants in China.
As we dig deeper into this problem, particularly the global spread of China-sourced pirated product, we are coming to a disturbing conclusion: There is a growing link between piracy of motion pictures and organized crime. Our Asia-Pacific Regional Office just completed a new study on these connections. With your permission, Mr. Chairman, I have included a copy of that study with my statement and would like to have it included in the record. Let me cite a few of its findings:
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Criminal theft of IPR dwarfs criminal revenues from narcotics trade: US government and international law enforcement records peg the illegal narcotics trade at $322 billion last year; criminal revenues from all IPR theft were significantly higher, $512 billion.
Part of the allure for organized crime to move into DVD piracy is the incredible profit margins, exponentially higher than for drugs: The mark-up on pirated DVDs made in Asia and sold in Europe, for example, averages an astounding 1,150%, three times the mark-up of heroin sourced in Asia and sold on the same street corners, and the criminal risk is far lower.
The report cites two recent cases linked back to China, with tentacles around the world, including into the US. In September 2005, a federal grand jury in New York indicted thirty-nine individuals tied to the Yi Ging Syndicate, based in New York but which funneled much of its one million dollars plus a year earnings back to China. Next January, an American, Randolph Guthrie, will stand trial in the US for his role in leading a criminal syndicate, based in Shanghai, that made and distributed hundreds of thousands of pirate DVDs around the world; when he was arrested last summer, Chinese authorities seized more than 210,000 counterfeit DVDs.
I think it goes without saying that many of these revenues finance other illegal activities in which these criminal organizations are involved, making the reach of piracy even more pernicious: This is not just an American problem, and it is not just a motion picture industry problem, it is now underwriting activities that threaten all of us, in all walks of life.
Of course, it affects some of us more directly than others. As I said at the outset, our members employ nearly one million American men and women, at all job levels. We employ thousands of laborers, electricians, technicians, truck drivers, as well as professionals in finance, legal positions, and specialized support services.
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There seems to be a view - a myth - that buying a stolen DVD only means a movie star earns a few dollars less on that movie. Let me be clear: That notion is just that, a myth. Every dollar the pirates earn is one less dollar going to an American worker, a worker employed in an industry that is one of the few in this country bringing more money back to the US in export earnings than it sends overseas.
Chinese piracy of US motion pictures also hits some of us very personally. I was in China the last time in May. I strolled the neighborhood near my hotel, and looked into one of the audio-visual stores I came across. I admit I was not surprised to see shelves of pirated DVDs, disappointed, but not surprised. I was, however, taken aback when one title caught my eye: ''The Hitchhikers Guide to the Galaxy.'' At the time, the movie was not available on DVD in the US, so I knew it was a fake, taking the money out of a US film maker's pocket. That film maker: my son. He is a producer and that was his most recent film. I relayed the story to him, and he replied: ''And what Dad, Mr. Chairman of the MPAA, are you going to do about this?''
MPAA invests millions every year in fighting piracy in China and around the world. We go after the pirates, we work with governments to enact and then enforce adequate laws, we work to educate the public about the consequences of piracy, and the legal alternatives to piracy, and we are constantly seeking new ways to prevent the problem through technology, education, and changing business practices.
As I have indicated previously, piracy in China is indeed a China problem, but it is also a problem with global reach. A pirated disc made in China can, in a day or two, be in the street markets of Los Angeles. Someone can illegally camcord a movie in Moscow, send the file by way of the internet to someone in Guangzhou who then dubs and subtitles the Russian dialogue, and then illegal presses thousands of DVDs.
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We approach the problem fully cognizant of its global reach, with a seamless strategy of going after the producers, distributors, and sellers of DVDs and the machinery they use to make the fakes. We have aggressively pursued a strategy to stop the illegal camcording of movies, which is still the largest source of pirated product. We are very appreciative of the action Congress took to make illegal camcording a federal crime and that the President signed the bill earlier this year.
We seek to track the production of optical discs, to make sure the plants that make them are legal, registered, and their product produced with internationally recognized identifying codes. Increasingly, we are beefing up our Internet strategy to go after the thieves who think they can anonymously download and send stolen movies over the Internet.
We are also on the ground in China. Our representatives survey the market for information about the incidence of piracy and pass on this information to the Chinese authorities. In many cases, this information helps Chinese authorities formulate cases for raids on sellers and distributors, and often, those authorities invite our representatives to accompany them on such raids.
We operate and participate in training sessions for Chinese authorities and jurists on IPR laws and enforcement, in the US and in China. We also work closely with US officials in elevating the importance of IPR enforcement; for example, our representatives participated in the IPR Roundtable our Embassy conducted in Beijing at the first of this month.
One of the most significant initiatives we have been able to launch with the Chinese government was the joint anti-piracy memorandum of understanding (MOU) we executed with three entities of the Chinese government: Ministry of Culture (MOC), State Administration of Radio, Film and Television (SARFT), and National Copyright Administration (NCA).
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This MOU was signed last July 13, in connection with the most recent discussions held under the auspices of the Joint Committee on Commerce and Trade (JCCT). Under its terms, every three months MPAA will submit to the MOC and SARFT a list of motion pictures scheduled to be screened in China by its member companies. All home video products that are available in the marketplace prior to the legitimate home video release date in China will be deemed illegal audio and visual products and forfeited, and when a criminal copyright infringement offense has been committed, the case will be prosecuted.
On October 25, we met with the Chinese side to review the results of the MOU. For our part, we surveyed a small selection of shops in four key cities: Beijing, Shanghai, Guangzhou, and Shenzhen. The surveys were by no means intended to provide a comprehensive assessment of anti-piracy enforcement progress across China; merely an indication as to whether the needle had moved at all.
Specifically, during October, the surveys of target outlets in Shanghai showed that of the films covered under the agreement, no pirate versions were available at all.
In Guangzhou, the availability in October of pirated versions of the identified titles was down quite sharply from September, when almost all titles were available.
In Shenzhen, availability in October of pirated titles fell fifty percent from September.
In Beijing, in August, with the exception of one shop that carried only fifty percent of the protected titles, pirate versions of the six films ran from seventy to ninety percent. In September, the original shops continued to offer pirated versions of the protected titles. In October, the original ten shops had cleaned up remarkably; however, an additional ten shops surveyed showed piracy rates averaging around eighty percent.
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The MOU only covers a handful of movies, and though it applies to the entire country, we have only been able to survey a limited number of cities and only a selection of retailers in each. We are disappointed with the results.
In spite of their formal commitment to protect specific US movies, the Chinese authorities failed to demonstrate meaningful progress even within the limited review we conducted. Our next review of the MOU will occur in January and we would be pleased to keep the Subcommittee apprised of our progress.
In addition to the work we are doing with the Chinese government and industry, and with other US copyright industries, most notably the sound recording industry, our key partner is the US government. I commend this Administration for the priority it has given this problem, and its willingness to work with us. Credit goes right to the top: President Bush made IPR a top agenda item during his summit with President Hu. Having our views and concerns addressed at this level is invaluable in elevating the priority of IPR on the bilateral agenda and we greatly appreciate the President's support as well as the support from USTR, the State Department, and the Commerce Department. Our work with the US government goes on virtually every day, and we are currently working very closely with the USTR on next steps to secure adequate protection of our product in China.
Mr. Chairman, having surveyed the scope of these problems and the steps the US motion picture industry is taking, I want to bring my statement to conclusion by reiterating some points for you and your colleagues to consider for ways you can help protect American IPR in China. Many of these mirror the recommendations I outlined with respect to the Russian problems.
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First, help make sure our government has the resources it needs. I know fully well the difficulties with which the Congress has been dealing on controlling the deficit, I also know that it ought to be in our national interest to promote and protect winning industries, and this industry is a winner. As I have said, we employ nearly one million Americans, in good, well paying jobs, and we have a positive balance of trade in every market where our countries do business, except one: China.
Why do we run a movie trade deficit with China? Piracy is certainly a key reason, though another is the onerous, burdensome restrictions we have on doing business in China, and even in getting into that market.
Consider some facts about our access to the China market: The good news is that the money our movies made in China in 2004 doubled the amount they made in 2003. The sobering side is that that amount was only $10 million. As we saw in November with ''Walk The Line,'' ''Harry Potter and the Goblet of Fire,'' and ''Chicken Little'', and will see every weekend for the rest of the year, one American movie can make more on an opening weekend in the US alone.
In recent years, in fact, two Chinese movies ''Kung Fu Hustle'' and ''House of Flying Daggers'' both, individually, made more in the US than all US movies made in China for the years they were released, and, ironically, both were distributed in the US by one of our member companies.
The primary barrier is the quota the Chinese impose on the number of foreign films they permit into their market under normal business terms, what we call revenue-sharing, whereby the US producer shares the box office with the Chinese distributor. The Chinese allow only twenty such films into China a year, from all countries, not just the US. That means film makers from France, Japan, the UK, Korea, and the US together can only hope to get a part of that twenty-film quota.
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Once into the market, the government controls the distribution of the movies. A state agency, through two divisions, distributes all the films in China, and dictates the terms of the revenue sharing with US film makers.
There are many other restrictions, detailed in the attachment to my statement, but the net effect is critical. When fighting piracy and protecting IPR, most are familiar with what I call the traditional methods - effective laws, enforcement, raids, and the like. In China, getting better access is just as critical and intertwined closely with our strategy towards that market.
My second recommendation is that we want the same access to the Chinese market as the pirates have. The barriers I outlined and that are enumerated in the attachment do not, at all, restrict the number of movies in China. Virtually any movie Chinese consumers might want is available, not necessarily through legitimate channels controlled by the restrictions applied to us, but from pirates who have no such restrictions and who operate largely without deterrent sanctions applied to offenders. Not only are our movies being stolen, but we also face an enormously unbalanced playing field at distinct competitive disadvantage.
We are convinced access to the Chinese market on fair terms, the same terms as the pirates, is central to fighting piracy in China and protecting our rights there. We want to be able to compete, not bound by quotas, government restrictions on distribution rights, black-out periods when only Chinese movies are screened, nor onerous taxes, and we want transparent clearance procedures.
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Third, let me come back to where I started: political will. Just as the US government needs adequate resources and strong laws, so do the Chinese. However, for the most part, that is not the main problem. With a few notable exceptions, the Chinese IPR statutory regime is adequate and with changes, can easily be brought into compliance with WTO standards.
The problem is political will, and keeping the pressure on is a key way to bolster that will. For example, we know the Chinese can stop pirates. When the Chinese open a film the government wants to promote and protect, pirated copies of it are non-existent; the word goes out that piracy will not be tolerated. Even when we surveyed results of the MOU, we saw some modest improvements in some places - evidence that the Chinese can crack down on the pirates if they want.
The Chinese frequently recite this rationale for the IPR problems: The US, they say, has over 200 years experience with IPR; China has only twenty. China needs time to grow and develop. True. I acknowledge the problems with developing an adequate and effective IPR system, and culture. On the other hand, I have seen what China can accomplish when it makes something a priority. My first trip to China was about twenty years ago. The changes I saw between then and my last visit last May are breath taking. The lesson here is that when the Chinese have the will and desire to change and reform, they can.
I saw another personal example of how the authorities can act when properly motivated. Last May, the day after I discovered the pirated copy of my son's movie, ''The Hitchhikers Guide to the Galaxy,'' I met with the mayor of Beijing and told him. The next day, the shop where I got the movie was raided and closed: political will in action. Unfortunately, it was short-lived; our China representative informed me the other day that the shop is back in business.
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A couple of weeks ago, The Wall Street Journal carried a telling story, about the paucity of counterfeit Olympics-logo goods in China. The production, distribution, and sale of those goods is tightly regulated and policed, and fakes are not tolerated. It is virtually impossible to find counterfeit Olympics goods in China. Why? As one of the Chinese officials said, it is because fakes dilute the value of the logo, the intellectual property upon which the Chinese have invested to finance the games.
The lesson: When the Chinese want to stop piracy, they can be enormously effective. They do not need twenty more years experience with IPR, they have the resources, they have the basic statutes, and they can make the changes needed to improve them. They need the political will to protect our goods as effectively as they are protecting the Olympic logo.
Please keep the pressure on; this hearing is one way to do so. Make sure you mention this when meeting with Chinese authorities. Above all else, unless the Chinese know this is a priority for all of us, we fear they will fail to exercise the political will to protect our IPR.
Mr. Chairman, members of the Subcommittee, I appreciate again your attention to the acute problems we are facing in Russia and China and the chance to share with you the perspective of the US motion picture industry.
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(Footnote 1 return)
The Motion Picture Association of America (MPAA) represents the major producers and distributors of motion picture and television programs in the United States; its members are Metro-Goldwyn-Mayer Studios; NBC Universal City Studios, Paramount Pictures Corporation, Sony Pictures Entertainment, The Walt Disney Company, Twentieth Century Fox Film Corporation, and Warner Brothers Entertainment.