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Hearing of Subcommittee on Courts, the Internet, & Intellectual Property of the House Judiciary Committee - International Piracy:Intellectual Property


Location: Washington, DC

Hearing of Subcommittee on Courts, the Internet, & Intellectual Property of the House Judiciary Committee - International Piracy:Intellectual Property

REP. BERMAN: (In progress) -- Mr. Smith and ranking member of this subcommittee, Mr. Coble.

The Organization for Economic Co-Operation and Development recently released a report on the economic impact of counterfeiting and piracy, together with suggestions to enact stronger criminal penalties and increase enforcement of national laws, strengthen cooperation between government and industry, and educate consumers.

These are the cornerstones of effective IP protection. Each of the participants, governments, industries, and consumer public must have the will to do it, the will to respect intellectual property rights.

Sometimes that will comes naturally as when the participants understand that IP enforcement is in their own interest. That occurred at least for a brief moment in China, when they saw counterfeit 2008 Olympic T-shirts appearing on street corners. But sometimes, outside inducement is helpful.

Some nations such as Russia, do not yet meet international standards in their IP laws. Others such as China may have good laws on the books, but often fail to enforce them.

How do we get Russia and China and other emerging market economies to, as Mark MacCarthy of Visa states, do the right thing? We have the tools of persuasion and trade benefits at our disposal, and of course international law and accession to the WTO.

Sometimes, it just takes a little nudge for a country to see the light. Industry, not only those who own the rights, but those who benefit from use of those rights, must also have the will to protect intellectual property.

Whether it be Internet service providers or financial services such as banks and credit companies, they often facilitate piracy through their servicing of the legal transactions. While there may be legal ambiguity as to whether their conduct meets the legal definition of contributory infringement, industry clearly has a responsibility.

Their refusal to use the technical tools at their disposal now to staunch piracy exacerbates the problem. They should understand that effective IP enforcement improves economies, and ultimately therefore their own bottom line.

Take, for instance, Baidu, the Chinese counterpart to Google. It is responsible for much of the Internet piracy in China. Their continued activities have dissuaded any legitimate download services from entering that market.

I'm more than a little surprised that a company that can be traded on the New York Stock Exchange can still maintain practices that are so destructive of the ability of the Chinese digital market to develop a more legitimate manner, and deprive intellectual property owners of compensation.

And I don't mean just to pick on Russia and China although they have garnered the lion's share of the headlines. Trading partners such as Chile, India, Turkey, Venezuela, and others have been cited for their inadequate commitments to IP protection.

Even, I'm sad to say, our neighbor to the north needs to improve. Today, they have still not updated their laws to comply with the 1996 -- the WIPO Copyright Treaty. On Tuesday night, the governor general of Canada presented the new government's agenda to parliament. Our government will improve the protection of cultural and intellectual property rights in Canada, including copyright reform. While former commitments are necessary, they are insufficient. They must be backed by results.

Now I will record -- recognize the ranking member of the subcommittee for his opening statement, Mr. Smith if he has one. And then Mr. Conyers is chairing actually another hearing at this time of this taskforce of the witnesses. Howard.

REP. HOWARD COBLE (R-NC): Thank you, Howard, Mr. Chairman. I want to join you in welcoming all to our hearing this morning, and I want to commend you, Mr. Chairman, and Ranking Member Smith. I believe you all convened at least three hearings on this very significant subject in 2005.

The investment in time, capital, and effort needed to obtain a valid patent trademark or copyright is enormous, as you all know. The reward for that investment is supposed to be the exclusive right for a limited time to manufacture, market, or license an invention, product, or work. But that reward is a little incentive on a value if individuals and governments are unable, or when the latter is just sometimes unwilling to provide meaningful protection and enforcement to the owners of intellectual property rights.

A number of developments in recent years have overwhelmed the methods that countries traditionally employ to prevent legitimate producers from being exposed to unfair competition, and to protect consumers from health and safety risks associated with unsafe goods.

The expansion of transnational trade, the development of the Internet as a commercial tool, and the ability of producers anywhere in the world to cheaply and rapidly produce, distribute, and transport goods to virtually any other part of the globe, have revolutionized not merely the relationships between producers and consumers, but also the relationship between and among nations and their citizens.

To protect the legitimate interest of nations and inventors with respect to promotion of intellectual property rights, Mr. Chairman, it seems the United States is party to numerous international, multilateral, and bilateral agreements.

Our ability to ensure that these agreements and understandings are properly carried out merely here at home -- not merely here at home, but also in the markets overseas that demand the creative products Americans are so skilled at producing, is fundamental to the continued vitality of our economy.

When you consider that our copyright industry typically receives about half of its revenue from outside the United States, industries that rely on IP protection account for over half of all U.S. exports, and these industries together represent about 40 percent of the U.S. economic growth, it is obvious why it is still important that we assure that foreign governments respect the rights of our producers.

One of the personable methods that our government uses to promote these interests is the Section 301 review process, which was established pursuant to the Trade Act of 1974.

Among other things, Section 301, as you know, requires the U.S. Trade Rep. to publish an annual report that details foreign government policies or practices that violate a bilateral or multilateral trade agreement, or are unreasonable and unjustifiable or discriminatory, and are unnecessary and burdensome to the United States commerce.

For many years, the Section 301 report had documented various violations for the governments of China and Russia as you just pointed out in your statement, Mr. Chairman, with respect to the protection and enforcement of U.S. intellectual property rights.

Indeed, the failure of China to -- in particular to reduce its levels of counterfeiting and piracy, which in many copyright sectors routinely approaches 90 percent, has led to the United States filing two IP-related complaints at the WTO.

Rather than stealing the thunder of our witnesses who can describe in great detail the status of our concerns with China and Russia and other countries of priority to U.S. IP owners, I want to first acknowledge the progress, the administration -- Congress and private industry have made in recent years in improving the exchange of information and developing strategies to improve the situation for IP owners.

There are no quick fixes in this area as complex as this. Real progress requires more sustained attention and a bipartisan commitment.

Mr. Chairman, I've spoken longer than I usually do, but I don't know of any subject that impacts our economy any more significantly than what we're discussing today.

President Reagan once summed up the U.S. policy of negotiating arms control agreements as "Trust, but verify." In my view, meaningful progress in the promotion of intellectual property rights requires a similar transparency. In other words, we need a little less trust and a lot more verification.

I thank you, Mr. Chairman. I yield my time.

REP. BERMAN: Well, thank you very much, Mr. Coble. And your comments reminded me that in fact we had a number of hearings on this subject to -- in building up to this point -- our witness from the -- Mr. Smith as chairman of the subcommittee over the last few years. And now as ranking member of the full committee, I recognize him for his opening statement.

REP. LAMAR SEELIGSON SMITH (R-TX): Thank you, Mr. Chairman. You mentioned Mr. Conyers a while ago. Like Mr. Conyers, I'm a member of the Antitrust Task Force which also happens to be meeting right now. So I suspect that he and I will be shuffling back and forth or maybe even substituting through each other as the morning goes on.

But I do want to thank you, Mr. Chairman, and Ranking Member Coble for convening this very important oversight hearing. As has already been mentioned, we've had three subcommittee hearings on the subject already, which is clearly an indication of how important this subcommittee thinks the subject is, and it's nice to have this as a bipartisan subject of interest as well.

At the outset of the first hearing, I noted whenever our purposes is to begin an examination of the role of intellectual property rights and promoting international respect for the rule of law, in whatever form it takes, the theft of intellectual property inflicts substantial economic harm on our country, our entrepreneurs, our innovators, and ultimately on American consumers.

I don't quote myself very often, but I thought that was a particularly good statement from a couple of years ago.


REP. SMITH: The potential harm to consumers that results from the rampant production and distribution of illegal goods is of course not limited to purely economic harm. Recently, Chinese manufactured toothpaste was recalled because it contained a chemical used in antifreeze.

And Connor O'Keeffe, a 7-year-old British boy, tragically died after reportedly being electrocuted by a counterfeit Nintendo Game Boy charger. These cases illustrate the danger posed by the failure to stop the manufacture and distribution of unsafe and counterfeit goods.

The enormous scope of today's counterfeiting activity and the unprecedented ability of pirates to distribute their illegal wares quickly and on a global scale, pose new challenges to policymakers around the world. And government officials and countries who profit from illegal commerce actually facilitate it; these challenges are tougher.

When U.S. Trade Representative released the annual Special 301 report earlier this year, China and Russia were once again included on the priority watch list. They came as no surprise. That designation reflects the judgment that these countries fail to provide an adequate level of intellectual property rights protection or appropriate market access to intellectual property owners.

China is poised to become the second largest trading nation in the world, and Russia is seeking to join the World Trade Organization. The U.S. and other countries that support the international rules- based trading regime must take steps to ensure that these and other countries which enjoy the benefits of free trade, also exercise responsibilities that that free trade requires.

Since our hearings in 2005, the U.S. government has stepped up its dialogue with Congress and industry stakeholders, and has sought to monitor and improve international respect for IPR. Our today's hearing topic is broader in the subject of Chinese and Russian IP theft.

I do hope our witnesses will address several specific topics. These include offering their views on Russia's implementation of the bilateral IPR agreement which was signed with the U.S. on November 19, 2006, and the current situation with respect to the two complaints the U.S. filed against China at the World Trade Organization for IP violations.

Before concluding, Mr. Chairman, I'd like to take a moment to recognize the service of Victoria Espinel, to our left, the assistant U.S. Trade Representative for intellectual property and innovation, who is one of our four witnesses. I understand that she would be leaving government service soon.

In May 2005, she served as the only common witness at our two back-to-back hearings on IP theft. She has brought in unparalleled dedication and commitment to her duties at USTR, and in doing so she has brought credit and credibility to our international efforts to improve respect for intellectual property rights. And we thank you for your efforts and appreciate your being here perhaps to testify for the last time.

Mr. Chairman, with that I yield back.

REP. BERMAN: Thank you, Mr. Smith. And in the interest of proceeding to our witnesses -- now I have a vote on, so I'd ask other members to submit their statements for the record. I would ask the members submit in the opening statements by the close of business, say, Wednesday. And without objection, all opening statements will be placed in the record. Without objection, the chair will be authorized to declare a recess of the hearing at any point.

I think maybe we could have -- start the -- these -- panel to testify. So let me quickly introduce our witnesses and join with you, Mr. Smith, in acknowledging the fine work of our first witness that will be Victoria Espinel. She is the assistant USTR for intellectual property and innovation.

She is the chief policy advisor to United States Trade Representative, and the administration on intellectual property innovation and trade issues, and the chief U.S. trade negotiator for intellectual property issues. She seems like the right person to have here for this subject.

She was -- she oversees enforcement of the intellectual property protection required under international trade rules, authors the annual Special 301 review of international protection of intellectual property rights, and was involved in creating the president's multi- agency initiative to combat global counterfeiting and piracy, otherwise known as the "STOP! Initiative."

Welcome, and I'll have you perhaps give your testimony, and then I'll introduce the rest of the panel afterwards, but still hope you could stick around, it is your last shot -- and for questions afterwards. Thank you.

MS. ESPINEL: Thank you for inviting me to speak today about some of the work the U.S. government is doing to strengthen protection and enforcement of intellectual property rights around the world including in China and Russia.

It is a great privilege that I've had the opportunity to work with the leadership displayed in this committee in protecting one of America's greatest comparative advantages, our creative class. I would also like to commend your skilled and dedicated staff members for all of their efforts as well.

As Mr. Smith mentioned, this was in fact the first subcommittee that I testified in front of on this issue, and it will likely be the last at least in my capacity as assistant USTR. And I want to say what a true pleasure it has been to work with the members of the subcommittee, and to work with your excellent staffs.

There are a number of challenges that we face in protecting American lives overseas including weak laws, a lack of political will by some of our trading partners, and the increase in scope and sophistication of counterfeiters and pirates -- (audio break) -- and devote considerable resources to addressing these problems.

The free trade agreements that we negotiate, contain comprehensive chapters on intellectual property outlining our model for protecting intellectual property, a model that is the world's gold standard. Our FTAs get results. We have consistently seen stronger laws and better enforcement of those laws from the FTA that we conclude.

Another tool is Special 301 which has been mentioned by the chairman, the ranking member, and Mr. Smith. This report has been successful in encouraging countries to institute reforms or to increase enforcement in order to avoid elevation on the list or to improve their standing on the list.

Another serious challenge that we face comes from advancing technology, and from the increasing scope and sophistication of counterfeiters including dissemination over the Internet, and highly organized distribution networks, some with links to organized crime.

USTR is keenly aware that counterfeiting and piracy is a threat to the health and safety of our consumers and to our economy. In order to address this, we need to ensure that our own system is as strong as possible, we need a new international consensus on stronger rules for civil, criminal, and border enforcement, and we need to increase global cooperation with our trading partners.

With that broad overview of USTR's approach to IP issues as a background, I would like to comment briefly on recent activities in China and in Russia.

China is a top intellectual property enforcement concern for us. There is no question that China must do more to protect intellectual property rights. China is making some genuine efforts, but IP infringement remains at unacceptable levels.

This year's Special 301 report describes the United States plan to maintain China on the priority watch list, and to continue Section 306 monitoring. In addition, we conducted an unprecedented special provincial review of IP enforcement in several key provinces and independent municipalities of China.

Many of these provinces and municipalities are huge economies in their own right, and they attract significant U.S. investment. They are also on the front lines of the IP problems for many of our right holders. We reported the results of that review in this year's 301 report, spotlighting weaknesses at the local levels, but also highlighting some positive efforts.

In past years, we have used the Joint Commission on Commerce and Trade to make progress on IP issues such as China joining the WIPO Internet Treaties which are critical to ensuring IP protection in the digital age, and new rules requiring that all computers be pre- installed with legal operating system software.

Finally, in appropriate cases, where bilateral dialogue has not resolved our concerns, we have taken the further step of filing cases at the WTO using the WTO's dispute settlement procedure. So far, we have initiated two cases that relate to our intellectual property concerns.

The first case involves deficiencies in China's system for protecting and enforcing intellectual property. The second case challenges Chinese rules for -- which make it difficult for movies, publications, and music, products of our copyright industry, to be imported and distributed inside of China.

It is clear from these examples that we do not hesitate to file WTO cases when circumstances warrant that action. That said, these cases are the evidence -- we believe these cases are evidence of need for more bilateral cooperation with China, not less. The United States believes that continued dialogue and cooperation with China is essentially to making further progress on intellectual property issues.

With respect to Russia, the administration has made it clear to Russia's officials at the very highest levels, that protection of intellectual property is a singular U.S. priority.

In November 2006, we negotiated a bilateral intellectual property agreement between the United States and Russia, which includes important and specific commitments to strengthen IP protection and enforcement in Russia.

This agreement sets the stage for further progress on IP issues in the ongoing multilateral negotiations at the WTO concerning Russia's bid to enter the WTO. We are also conducting an out-of-cycle review of Russia under the Special 301.

Russia has made progress in some areas; for example, taking steps to remove pirate optical disc plants off of government military sites, and cracking down on unlicensed optical disc plants. These were all specific commitments in our bilateral agreement with Russia.

However, more remains to be done under our bilateral agreement. We will continue to press Russia to shut down and prosecute the operators of illegal websites operating in Russia, including the successors to the infamous

Russia needs to pass legislation now pending in the Duma to strengthen customs' authority. Russia needs to complete implementation of the WIPO Internet Treaties, and Russia needs to amend Part IV of the Civil Code to bring it into compliance with the TRIPS agreement and other IP agreements.

In closing, Mr. Chairman, I want to assure you in the strongest possible terms, that the administration shares the view, so frequently and well-articulated by the members of this committee, that protection of U.S. intellectual property overseas is critical to America's economic future.

With that in mind, we look forward to continuing to work with you and your colleagues to improve protection and enforcement of intellectual property around the world.

REP. BERMAN: Well, thank you very much, Ms. Espinel. And I think at this point I will recess the hearing. I believe it's one vote -- (inaudible). So we'll be right back and introduce the rest of the witnesses, hear their testimony, and then hear some questions. Thank you.

(Vote recess.)

REP. BERMAN: Let me introduce the rest of the panel and reconvene the meeting.

And the next witness would be Eric Smith who represents the intellectual -- International Intellectual Property Alliance. The IIPA is a private sector coalition of seven copyright-based trade associations, which represent over 1900 companies in the movie, music, business software, videogame, publishing industries.

Since co-founding the IIPA in 1984, Mr. Smith has represented the IIPA before U.S. and foreign governments with the primary objective of opening foreign markets to U.S. copyrighted products and reducing piracy levels through improved legal protection and effective enforcement.

He was the principal representative of the copyright industries in the WTO TRIPS and NAFTA intellectual property negotiations and served on the U.S. delegation at the diplomatic conference leading to the adoption of the WIPO Copyright Treaty and the WIPO Performances and Phonograms Treaty in 1996.

I'd just add that it was a pleasure spending a couple of days with him in the conference on these subjects this past summer. And both enjoyed it. I found him incredibly knowledgeable on this whole subject.

Dr. Loren Yager is director of International Affairs and Trade -- (coughing) -- of the U.S. Government Accountability Office.

Dr. Yager has managed GAO efforts to document U.S. efforts to enforce intellectual property rights at home and abroad, the federal approach and strategy for improving intellectual property rights enforcement, and small business efforts to obtain patent protection.

Additionally, Dr. Yager has completed reports and congressional testimonies on a wide range of topics including China import remedies, customs and broader protections inbound system, offshoring of U.S. services, terrorist financing, global corporate responsibility, illegal textile transshipment and the World Trade Organization, China's WTO compliance, the Maquiladora industry, container security, and a variety of other subjects.

Lastly, Mark MacCarthy is the senior vice president of Global Public Policy at Visa. He represents Visa before international public policymakers around the world and in the United States, before the Congress, the administration, the Federal Trade Commission, the banking regulators, and other regulatory agencies.

Mr. MacCarthy is responsible for Visa's global public policy initiatives and strategies in the area of data security and privacy, electronic commerce issues such as Internet gambling and Internet pharmacies and product innovation such as Visa's contactless payment platform and prepaid cards. If I recall correctly, he also worked in this place for a good period of time.

Gentlemen, all your witness statements will be part of the record in its entirety. I'd ask you to summarize your testimony in five minutes or less. There's timing light at your table that supposedly works now. And when one minute remains, the light will switch from green to yellow, and then red when the five minutes are up.

I am tempted to let Mr. Coble have his admonition about what that light means, but without doing that I just -- Mr. Smith, why don't you begin?

MR. SMITH: Chairman Berman, Ranking Member Coble, and Members of the subcommittee, it's an honor and pleasure to appear before this subcommittee for the third time on this topic, twice in 2005, to again provide an update on global copyright piracy.

Piracy continues to rage around the world and is a threat to U.S. growth and U.S. jobs. While the situation is slowly improving each year on the physical piracy front, with some individual country exceptions, Internet piracy is now truly a global problem with U.S. content fuelling that piracy in most countries.

Increasingly, we almost focus on online piracy as a threat to e- commerce and to U.S. leadership in producing and globally distributing high-value content.

U.S. maintains a huge comparative advantage, as was said by Mr. Coble, in the production and distribution of creative works, film, entertainment, music and recordings, business and entertainment software and books and journals that make up the IIPA family.

And for most of these industries, 50 percent of their revenue is derived from outside the U.S. This comparative advantage has meant that these creative industries now account for an ever-increasing portion of the GDP, about (dollars) 819 billion in 2005 or close to seven percent of the U.S. GDP.

Five -- over five million jobs, which is about four percent of total employment, and a $110 billion in foreign trade revenues making it one of the largest contributors to trade in our economy. Perhaps most important is that these industries accounted for over 13 percent of the growth in the economy in 2006.

Global piracy threatens that growth pattern. We've been witnessing what Internet piracy has done to our recording industry and threatens to do to others as well.

A study came out this month that for the first time was able to quantify the impact of global piracy on the U.S. economy, $58 billion in losses, lost jobs, lost tax revenues, lost wages. The study concluded that all these numbers were conservative.

In my written statement, I detailed IIPA members' initiatives and challenges in dealing with this problem, and I wonÂÂ't repeat them here, but Mr. Coble was quite right, on the enforcement side, there just aren't any quick fixes.

Suffice it to say that the copyright industries depend critically on good laws and enforcement, and that governments are central to making that happen.

Our government has led the way, and without the help of USTR and other agencies and from Congress for providing the trade tools for assist in awakening our trading partners to the need to protect our intellectual property, including for the benefit of their own citizens and creators, we would be in truly dire straits.

We have witnessed many successes in the last 20 years, driven in part by good work from our government. I do want to report on the two countries that have provided the greatest challenges for us, China and Russia.

The situation is China, since we last reported to you in the end of 2005, is mixed. IIPA members with the exception of the business software industry have not seen much progress at all mostly at the margins. Losses continue at very high levels hovering between 80 and 90 percent of the market making it almost impossible to do business there.

The biggest problem, again as before, is China's stubborn reliance on a flawed administrative enforcement system that simply lacks any incentive for pirates to leave this lucrative business and China's almost total failure really to employ criminal remedies, which has been the only way we have been able to reduce piracy levels in the rest of the world.

The business software industry, through China's meeting some key JCCT commitments with respect to legalizing software use in the industry's biggest customer, the Chinese government, has seen 10 percent increase -- decrease in piracy rates and a resulting 88 percent increase in sales since our last report to you in 2005. And I can guarantee you the rest of my members would love to see that kind of progress too.

Internet piracy is our most urgent concern.

The biggest ISP search service in China, Baidu, which was mentioned as reportedly responsible for 50 percent of illegal downloads. We think the Chinese government is also very concerned about Internet piracy, has passed good regulations dealing with protection of content online, but, again, enforcement is weak and criminal enforcement is spotty at best.

Overall, we have only counted six concluded criminal cases involving U.S. works since 2001, when China joined the WTO. The record then must change if China is ever to reduce its high piracy levels and make a real market for copyrighted material. And China is a closed market in terms of market access for our cultural industries, another problem that prevents them from selling in the Chinese market.

The pirates, of course, enjoy complete market access for our products, and through this theft, enjoy the economic benefits that should come to our own citizens.

Russia remains a continuing frustration. The November 2006 IPR agreement, Russia's pathway to WTO accession, we hoped and continue to hope, will be complied with, and if so, we will see a much better market there.

Russia has made some progress, as Victoria has outlined, but even here we await the true fruits of that progress. For example, while Russia promised to cancel leases for the pirate OD factories housed on protected government reservations, that process is still in process; no direct results yet.

No plant owner has been convicted and very few criminal cases with deterrent penalties can be counted. We await real progress, and meanwhile IIPA's Year 2000 GSP petition remains in limbo with Russia still receiving over (dollars) 500 million in unilateral benefits in 2006 with our industries in turn suffering close to $2 billion in losses.

Mr. Chairman, it's there for -- in our testimony, in our written testimony, it's there for all to evaluate how serious Russia is in working to solve its massive piracy problems.

If I might, Mr. Chairman, can I say one word about Canada?

REP. BERMAN: (Off mike) -- one sentence.

MR. SMITH: The situation there is not good. The law is antiquated and unequipped to deal with online piracy, which is growing. Enforcement is not a high priority there, definitely need improvement in Canada. Thank you.

REP. BERMAN: Thank you very much. Dr. Yager?

MR. LOREN YAGER: Good morning, Mr. Chairman, and Members of the subcommittee. I am pleased to be here today to report on our work on intellectual property protection before the subcommittee of the U.S. Congress that has identified this topic as one of its primary areas of focus.

Prior hearings of this subcommittee have focused on the patent reform act, trying to create the right formula for stimulating creative and inventive activity in the United States.

Ultimately, once patents and other protections have been granted, it will only be meaningful if there is protection of IP in United States as well as in other countries.

Today, I will discuss the increasing challenges to IP protection as advances in technology and changes in global manufacturing make counterfeiting and piracy an ever greater threat.

As requested, I will summarize the work that GAO has performed on two subjects: first, the nature of the risks that U.S. corporations face in protecting IP, and second, U.S. methods for implementing and coordinating the United States intellectual property enforcement activities.

Our remarks are based on a variety of assignments that GAO has conducted for the Congress related to IP protection over the past 5 years.

First major subject that I would like to cover in the statement is that the risk to IP is increasing for U.S. firms for a number of reasons. For example, as the technological and manufacturing capability in Asia increases, in industries such as the semiconductor industry, more complex parts of the production process are being carried out in countries like China, which puts more U.S. technology at risk.

The second reason is that high profits and technological advances have also raised the risk of IP infringements by encouraging and facilitating counterfeiting and piracy. Economic incentives to counterfeiting and piracy include low barriers to entry and high profits given that there is no repayment of the research and development or other reward for the inventive activity.

In addition, technology has allowed high quality, inexpensive and accessible reproduction, and distribution, particularly, in the digital industries. The same time, the level of deterrence has not kept pace with the level of profitability. For example, there has been weak enforcement in some countries. And China is country with a combination of production capability, as well as the export capacity is unique. However, there are many other countries where enforcement challenges have persisted despite U.S. efforts.

Second subject I want to cover is the U.S. domestic efforts to protect intellectual property can also be improved.

The United States faces significant obstacles to coordinating domestic efforts and ensuring that strong intellectual property protection remains a priority. One of the biggest obstacles is the cross cutting nature of the issues and the necessity for coordination between the large number of agencies involved in IP protection. In my written statement I've included a figure showing the different agencies and sub-agencies involved in IP protection. And the figure includes policy agencies such as USTR, enforcement agencies such as the FBI as well as technical offices such as the copyright office.

We took a close look at the IP coordination structure in the United States and found that it lacks prominence as well as some other features that are central to the success of this type of efforts.

We also reported on the efforts of customs and border protection to interdict counterfeit goods at the U.S. border, found that the bulk of customs enforcement outcomes in recent years have been accomplished within certain modes of transport and product types and have been restricted to a very limited number of ports.

For example, only 10 of the 300-plus ports are responsible for three-fourths of the seizure value. But yet these were not necessarily the largest ports in terms of import volume.

We made a series of recommendations to customs that we believe will help them better focus their IP inspection activities.

In conclusion, Mr. Chairman, having the right formulas for creating intellectual property is at limited value unless there's sufficient protection for the works that are created, and this hearing directly addresses that issue.

There is little disagreement, at least domestically, with the need to strengthen protection, but the difficulty is in and how to best achieve that goal in the face of the strong economic incentives for counterfeiting and the limited resources available to protect it.

While there are many elements for a successful national strategy, continuity is central to success, whether that's in the efforts to encourage trading partners such as China, the domestic efforts of U.S. agencies or in the oversight of Congress.

We appreciate the opportunity to discuss some of our findings before the subcommittee. We'd be happy to help consult further to help achieve the long-term goals. Thank you, Mr. Chairman, I am happy to answer any questions.

REP. BERMAN: Thank you, Dr. Yager.

And Mr. MacCarthy?

MR. MARK MacCARTHY: Thank you, Mr. Chairman and Ranking Member Coble, and Members of the subcommittee, thank you for the opportunity to testify before you today.

Visa operates a global electronic payments network in more than a 170 countries around the world. We do not issue Visa cards and we do not arrange for acceptance of Visa cards by merchants. These relationships are handled by our network of 16,000 financial institutions throughout the world.

To protect the Visa brand, to promote electronic commerce, and because it's the right thing to do, and thank you, Mr. Chairman, for that quotation there, visa goes beyond any legal requirements to prevent the use of our payment system for illegal electronic commerce and transactions.

Our policy is clear and unambiguous; our system should not be used for illegal transactions. We work cooperatively with law enforcement around the world and we take special steps in cases of criminal activity and activity that threatens health and safety. For example, we searched the Internet for merchants selling child pornography or illegally distributing controlled substances, and we expelled them from our system as soon as they are discovered.

The subject of today's hearing is different. It relates to complaints by third party business entities that Internet merchants are violating their intellectual property rights.

Now, Visa canÂÂ't be the law enforcement agency for violations of intellectual property rights on the Internet. Still, we have policies and procedures in place to handle these third party complaints. Our global policy is this: if the transaction would be illegal in either the jurisdiction of the merchant or the jurisdiction of the card holder, we don't want that transaction.

The and case illustrates how this policy works. In that case, Visa officials received a documented complaint from IFPI, which represents copyright owners internationally. They asserted that, a music download site located in Russia, was infringing on the copyrights of their members.

We conducted a legal assessment including a review by outside council and concluded that under the Russian law and under the law of the vast majority of the customers of, the merchant's transactions were illegal. After appropriate notice, the Russian bank working with this site stopped processing its Visa transactions. This was in September of 2006. At the end of September 2006, the bank also stopped processing transactions from an affiliated download music site called Alltunes.

And then the owner of the Alltunes sued the bank in a Russian court. Visa was a party to that litigation on the side of the bank. And in June 2007, the owner won a judgment that the bank had violated its contract with the merchant and the bank would be required to provide processing services.

In response to the bank's claim that the merchant was acting illegally, the court determined that there were no rulings in Russia establishing that Alltunes was making illegal use of exclusive rights belonging to some rights holder. Later on in August of 2007, in a different case, a Russian court issued a ruling relating to a criminal copyright infringement case initiated by IFPI against the owner of

This ruling stated that there had not been sufficient confirmation of any illegal activity by the sites owner. The court implied that this and similar sites would be in compliance with Russian law to the extent that they paid for rights from a Russian collective rights society. These court cases created a challenge for us. To preserve our cross-border policy, we decided to allow the local bank to provide only domestic service to the site involved in the court case. But transactions from customers in other countries would not be allowed.

Now, what lessons can be learned from this case? First, Visa has policies and procedures in place to handle these kind of issues, second, private sector enforcement in this area is limited. Visa can only make decisions where the underlying law is reasonably clear. In this circumstance, the local law appeared reasonably clear to us, to our local bank and to the record companies, but a local court thought otherwise.

As a result, Visa's client bank was exposed to legal liability for withdrawing service to a merchant that was found to be operating legally under local law. We are simply not in a position to clarify local law, to override it, or to resolve conflicts between different legal systems.

Very clearly, system limitations on our ability to block illegal transactions when the laws of many countries conflict. Potentially we would have to deal with conflicting regimes in the 170 countries around the world where we operate.

And this leads to my third and final point. When local laws are not clear, governments and aggrieved businesses cannot put private sector intermediaries like Visa in the position of resolving the issues. Ultimately, this will require government to government discussions that harmonize local legal structures.

Thank you again for the opportunity to testify today, and I am happy to answer any questions you might have.

REP. BERMAN: Well, thank you all, and I am going to wait to the end of member question to ask my questions. And we'll recognize now for five minutes, the ranking member of the subcommittee, Mr. Coble.

REP. COBLE: Mr. Chairman, I thank you for that. For the information of the witnesses, some weeks ago in my district a church had a fund raiser, and the high bidders, Mr. Chairman, were assured that they would be my guest for lunch.

So if I don't appear in the member's room on or about 11:30, they're not going to be happy with me. I've got to pick up the time. Thank you, Mr. Chairman.

Ms. Espinel, given that China is the fourth largest economy in the world --

REP. BERMAN: Is this an online program?



REP. COBLE: He always disrupts me, but with a smile on his face.


REP. COBLE: Given that China is the fourth largest economy in the world and poised to become the second largest trading nation in the world, why should it be considered a developing nation?

And let me ask you this, Ms. Espinel, are there any economic or trade benefits that extend to China based on this designation?

MS. ESPINEL: Well, certainly, with respect to the area that I cover, intellectual -- and I'm not conceding that China is a developing country or has any particular status, but if China asserts that it is, we don't believe that would serve as an excuse for China not to strengthen its intellectual property system and adequately protect American interests consistent with the obligations and commitments that it has under the WTO.

REP. COBLE: And I wanted to ask Mr. Smith a question, but I want to put one more question to Ms. Espinel. Your statement referred generally to some of the commitments contained in the Bilateral IPR Agreement, but it did not make clear which if any of the specific actions that the Russian government was obligated to complete by June 1st of this year had been satisfactorily performed.

If you will, Ms. Espinel, can you identify which commitments were required to be performed by 1 June, and the User's current assessment of Russia's performance on each?

MS. ESPINEL: I'd be happy to. There are two categories of commitments. Some are -- were required to be in place by June 1st, some, particularly those related to enforcement, are commitments that Russia signed up to start acting on immediately and commitments that we think should continue after the WTO membership is complete, should we come to that point?

Two, that I want to highlight in particular, one of the commitments that Russia made in the bilateral agreement was to shutdown or to terminate the leases of the illegal optical disc plants that are operating on government sites that are referred to as restricted access sites.

And Russia has made progress in this area. I believe there are 17 such plants. Russia has terminated the leases -- or by the end of this year, Russia should have terminated the leases of 16 of those 17 plants.

And I can assure you, we wonÂÂ't forget about the one that is remaining. But this significant progress on an issue that has been quite a contention between the U.S. and Russia for some time.

Russia has also stepped up enforcement against illegal unlicensed optical disc plants, and they've conducted seven raids of unlicensed plants here. They conducted 17 raids of warehouses where illegal products are stashed.

So that is progress. However, there are a number of areas where Russia still needs to make considerable progress, and we will continue to push them on that. And few of those areas are, for example, there's customs legislation that they committed to pass, that they have not yet -- has not yet going to enforce.

It's now pending in the Duma, that they -- Russia needs to pass that customs legislation to give their customs authorities more -- to give their customs more authority to take action at the border.

Russia needs to take action against illegal pirate websites, the successors of the Allofmp3, which has been mentioned by -- some of my fellow panelist. Russia needs to make amendments to its civil code to bring it into compliance with the TRIPS Agreement.

Russia needs to complete its accession to the WIPO Internet Treaties to protect copyright in the digital age. So again, while Russia has made some progress in some areas, there are still a number of areas where Russia needs to make further progress in order to be in compliance with the agreement that we've negotiated.

REP. COBLE: I thank you. Mr. Smith, for some time the IIPA members called upon the United States Government to utilize the WTO dispute settlement mechanism to press our concerns regarding China.

Now that we've done so, what do you consider to be the next most important steps that USG can take to improve conditions for IP owners in China?

MR. SMITH: Well, I think that case has to proceed apace. It's an important case, and I think Ms. Espinel can probably give you the details.

IIPA is not directly involved in that case. It's a subgroup of our group called the China Copyright Alliance. But I think that case has to proceed, and I think the people who are involved in that case feel very certain that that case will go well.

And it is -- I think, the key is going to be, if that is true, the implementation phase of that case, when it is completed, to try to leverage additional improvements beyond those -- the actual panel decision on the narrow facts of the particular claims that are being brought.

REP. COBLE: I thank you for that. Mr. Chairman, I know about the red lights, but if I may make one more statement, Mr. Chairman.

The international trading system, ladies and gentlemen, is rules based, and respect for those rules demands that there be serious consequences for countries which have voluntarily agreed to abide by the rules of the road, but yet choose to consistently and continually -- (audio break) -- impediments, Mr. Chairman, that we must encounter successfully.

Thank you. And thank you, Mr. Chairman.

REP. BERMAN: Thank you, Mr. Coble, I couldn't agree with you more. Of course, one of the questions I had planned to ask later to Ms. Espinel was what about the situations where we don't comply with this rules-based system, but I'd save that for --

The gentleman from North Carolina, Mr. Watt, is recognized for five minutes.


REP. SUTTON: I appreciate your response, and I concur with the promise of trade as a tool than can lift up people worldwide, and can benefit beyond our borders, and that it should be that kind of a tool, and I am a proponent of making it that kind of a tool.

I, again, go back to the -- to my belief, and I think it's frankly also supported by the testimony that we have heard here today, that there are problems however with the gap between the promise of trade and what is actually playing out, out there.

And we are trying to find ways, not only with intellectual property, obviously both within other -- with other veins. It's a multifaceted problem, and it has to be approached in a multifaceted way.

But I was just curious, and I understand, and I don't believe that that is protectionist, what you said. But I think it's an interesting dichotomy where we hear the protection against illegal subsidies by foreign countries and one vein being called -- it's somebody who rails against that says it -- with respect to a legal dumping of steel, for example, there are protectionists if you want to do something to fix that. And I also just simply -- I'm not going to have a lot of time here. But I also just simply reject the idea that there aren't things internally that we need to be focusing our attention on also.

We heard testimony by others on the panel about the actions that the United States can and should properly take to deal with this issue and, of course, again, I believe there are actions that we can take in the rest of the facets of this huge issue of international trade.

Just -- I guess my time is up. I just wanted to know, to the extent, you know, we see these illegal subsidies from other countries. Is there -- are other -- are countries in any way complicit in the pirating of intellectual property to your knowledge other that the United States, out side of the United States?

MS. ESPINEL: That's an excellent question and a complicated one. I know we are short on time here so I'm going to speak concisely but then would be happy to follow up in more detail.

Going back to your first point on protectionism, that term is generally used for countries that are trying to protect their local industry from competition. And when we're talking about protecting intellectual property, it's exactly the opposite. We are not trying to protect our right-holders.

REP. SUTTON: With all due respect, I understand the theory of what protectionism is. That is now how that word is often used. It's also used to try to shutdown people who want to fight against unfair similar in a different vein kinds of illegal subsidies to just remove the unfair advantage to -- and have rules enforced.

Sometimes, it's used for that purpose of shutting down that debate because unfortunately there are some who are benefiting from those unfair tactics. I understand the difference between -- there is a gap here between what the word really means and how it's used. That's all my point, and I appreciate that. Thank you.

MS. ESPINEL: Exactly. And then to protect the intellectual property we are just trying -- we're trying to increase market access. We are trying to make sure that there is a market for our legitimate products overseas so that we can compete on a level playing field.

REP. SUTTON: Exactly. And I support that proposition, and I also support it in other venues.

MS. ESPINEL: With respect to your second question, government's complicity, and again, we'll be happy to follow up in more detail. There are some instances where we feel that governments themselves not only are not enforcing their laws but maybe complicit.

And one of the things that we've talked about are the illegal optical disks that have been operating on Russian military sites. That has been a enormous focus, an enormous concern. And that is one of the key commitments in the bilateral agreement with Russia to stop that.

So, again, happy that's -- happy to follow up with you in more detail. There are some instances of that. And it's something that we obviously go out at quite aggressively.

REP. SUTTON: I appreciate -- (cross talk.)

REP. BERMAN: Just -- I mean -- it's a very interesting question. And for example of one -- it is good. I think -- I don't know if we can do it right at this second. But a more comprehensive sense of countries, not that are merely not enforcing their laws, but that are actually actively facilitating the theft is one that I -- the subcommittee generally would be very interested in getting some more specifics on.

MS. ESPINEL: Well, we'll be happy to follow up.

REP. SUTTON: Thank you, Mr. Chairman.

REP. BERMAN: Just one more diversion based on Ms. Sutton's question. We did, in the late 1990s, as a response to Chinese activities in counterfeiting, propose a series of countervailing tariffs that by virtue of their impact -- by the way their impact was on some U.S. importers as well as on Chinese companies and Chinese government.

But as a rest of those countervailing tactics they actually took some steps they had not been willing to take to avoid those countervailing duties from actually coming into place.

I think that's where Sutton is focusing, a thing that on its own might be protectionist in that situation with simply a tool to deal with blocking of violations of trading laws.


REP. BERMAN: And just on that subject, I mentioned it in my opening statement, but some of the issues here have been raised in the reports, and all of you in a different way, one way or another, are going to be interested in the larger enforcement bill that Chairman Conyers and I and Mark (ph) will be introducing about three weeks ago -- no, coming up soon.


REP. BERMAN: I recognize myself now. Just initially, Ms. Espinel, and by the way, I'm sorry you have to spend your birthday testifying here. And -- but by and large, there could be worst places to testify than here. And happy birthday.

MR. : Happy birthday.


REP. BERMAN: And we will skip the karaoke singing of any song. But just on the issue of Russia accession, what is the trade representative of the administration thinking about in the context of timing?

The bilateral agreement that was a precondition to U.S.-Russia, is that complete and signed off on? You've talked about the intellectual property part of that agreement. But is the overall agreement done?

MS. ESPINEL: We've concluded our -- the bilateral phase. We are now in the process of conducting, what we call, the multilateral phase of the negotiations. So that's the part of the process where all of the WTO training partners together negotiate the terms of Russia's final accession into the WTO.

REP. BERMAN: Does that mean that Russia -- all the bilaterals have been entered into or are there other countries that are still negotiating their bilateral agreements with Russia?

MS. ESPINEL: The last I knew, there were two that were open, but those may have concluded recently. So I just double check to make sure. It's -- (cross talk) --

REP. BERMAN: So we're in the multilateral phase now.


REP. BERMAN: And it is not until that is concluded that you will come to Congress with an effort to repeal the Jackson-Vanik provisions, which are a precondition to --

MS. ESPINEL: The multilateral phase has to be completed before Russia can come into the WTO. And obviously, part of that as well will involve the Jackson-Vanik.

REP. BERMAN: And do you -- my guess is, this is not a 2007 issue for Congress.

MS. ESPINEL: Well --

REP. BERMAN: I mean you'd like it to have been a 2005 issue, but --

MS. ESPINEL: I think, ultimately --

REP. BERMAN: Things -- the other things you're doing mean that at this point that isn't the thing that stands between Russian accession and --

MS. ESPINEL: At this point what stands between Russia and its desire to join the WTO is making progress on a number of areas, but including making process on IP, to come into compliance with the bilateral agreement that we negotiated with them.

The pace and progress with the multilateral process will depend on Russia. There is very intense engagement going on with the Russian federation in Geneva. But there are a number of areas where Russia needs to make progress, not just intellectual property.

And again, ultimately, the pace of that negotiation will depend on how quickly Russia is able to make progress sufficient for the United States to be comfortable for it to come into the WTO.

REP. BERMAN: At one point you testified about a gold standard, the U.S. on intellectual property enforcement is the gold standard. But we're not as quite pure as driven snow yet. What are our obligations in terms of compliance with international trade rules? Where do we fall short?

MS. ESPINEL: Well, overall the United States' system -- the United States -- (cross talk) --

REP. BERMAN: I'm talking in the intellectual -- I'm not getting off into discussion about agricultural --

MS. ESPINEL: (Laughs).

REP. BERMAN: -- subsidies or anything else.

MS. ESPINEL: Thank you.

REP. BERMAN: Within the intellectual property area.


REP. BERMAN: Within the intellectual property area.

MS. ESPINEL: We do -- we have -- in the intellectual property area we have a very strong system. I think, our system is and should be a model for the world. But there are two aspects of our system that have been challenged at the WTO and have been found to be inconsistent with the WTO.

And those two aspects, one of them is with respect to our copyright law, certain exceptions under our copyright law, and one of those is with respect to certain aspects of trademark enforcement.

I don't want to suggest that our inconsistency with the WTO is anything comparable to the scale of the problem that we have, for example, in China or in Russia, but --

REP. BERMAN: Nor would I.

MS. ESPINEL: -- it is a blemish on our record, and it is a problem for us, bilaterally and at the WTO, as that U.S. pushes very hard for other countries to fully implement their WTO commitments, these cases do have the effect of hurting our credibility, and we believe it would be a benefit to us if these issues were resolved.

REP. BERMAN: And what was this -- would the gentleman yield? What was the second issue? One was copyright and the second one was --

MS. ESPINEL: And the second one is with respect to certain aspects of trademark enforcement --

REP. BERMAN: In fact, to just --

MS. ESPINEL: -- related to assets that have been seized by the Cuban government.

REP. BERMAN: This is an issue that -- Section 211 that was stuck into an Omnibus Appropriations Bill, I believe, dark of night and the days when that was still done.

MR. : You mean the last year?


REP. BERMAN: Well, not in the last days that it was still done, about five years, six years, seven years ago, dealing with a trademark held by a French company. And that was challenged at the WTO, and the WTO found that our action violated our -- the TRIPS. Is that a fair summary?

MS. ESPINEL: That's correct.

REP. BERMAN: Would -- then just on that subject, to close that subject, would USTR support an effort to repeal one or both of those provisions?

MS. ESPINEL: Yes, USTR was supporting the effort to amend our laws on both of those provisions. And we feel like that would be a benefit to us in trying to push other countries to come into full compliance with their WTO obligations.

REP. BERMAN: Just -- Mark MacCarthy told an interesting story of Visa's efforts to do the right thing in the context of the (ph) and this other site, Alltunes, and what happened in Russian courts.

Is the trade representative's office trying to create a -- do what -- I think he logically said their company cannot do, which is to get an understanding about what the law is and what constitutes illegal actions in Russia in terms of intellectual property protection?

MS. ESPINEL: Yes, Mr. MacCarthy made the point that it's difficult for Visa to try to clarify local laws, but that is one of the things that USTR can try to do.

My understanding of the case is that Media Services, the company that operated Alltunes, was able to successfully argue in Russian court that it was not acting illegally because it was paying royalties to collecting societies.

However, that collecting societies, they were not authorized by the right holders. That is one of the issues, one of the very specific issues that we addressed in the bilateral agreement that we negotiated with Russia.

One of the commitments that they have made is to change their law so that it is clear that collecting societies can only, in the Internet context, can only collect on behalf of right holders that have authorized them to do so.

And that should resolve this particular issue. That change is one that has actually already been made in Russian civil code and it should go into effect in January of '08, and will -- should resolve or clarify that particular problem in the Russian legal system.

REP. BERMAN: You disagree with that? Is that news to you or is that --

MR. MacCARTHY: No, that's roughly our understanding of the legal situation in the Russian federation right now. I should mention that the complication of local Russian law means, only from our point of view, that for the time being at least, these sites that we've received complaints about have to be permitted to operate within the Russian federation itself. Insofar as international transactions are concerned, our policy is to make sure that they are not processed using Visa cards.

So for example, someone sitting here in the United States or in London who wants to go to one of these sites to use their card to make a purchase would not be able to do it under our cross-border policy.

REP. BERMAN: I just have to say that I think this is a case where the company you represented is showing real leadership and it has done the right thing. And I hope other financial service providers that facilitate online transactions will follow your example that you showed here.

Mr. Watt? I mean, I got more but I -- I can go for 20 minutes.


REP. BERMAN: Thank you. I am going to ask one question to Mr. Smith, and then I recognize the gentle lady from Texas.

You may have touched on this, but do you think the Special 301 review is an effective tool, we do it -- countries year after year, is there something beyond that we should be doing or -- either in lieu of or instead of this Special 301 review?

MR. SMITH: I think Special 301 continues to be effective. I think there is debate about that, because most of our trading partners are now in the WTO, we can't use Special 301 as we did in the case you mentioned in '95 and '96 against China, where we were able to unilaterally retaliate.

REP. BERMAN: Say that one more time, because of what you are not able to --

MR. SMITH: Because the United States is, and all our trading partners are now in the WTO, unilateral retaliation, with an exception I mentioned in a minute -- is no longer possible. We -- like with China, our dispute has been taken through the WTO dispute settlement system, which would result, if we win that case, in the possibility of retaliation.

REP. BERMAN: What were the tariffs on steel dumping? That was after WTO.

MR. SMITH: Well, that's a different part -- I mean, you can unilaterally add tariffs —-

REP. BERMAN: Steel gets it, but IP doesn't?

MR. SMITH: I can't answer that question whether or not it would be WTO legal to do something in the IP area --

REP. BERMAN: Well, actually, I think WTO found it wasn't.

MR. SMITH: But what I am talking about is the ability to stop at our border, goods coming from China because of -- without going through the WTO dispute settlement process. We do have other tools though, we have all out unilateral trade preference tools, GSP, CBERA, where if countries don't -- and in Russia, which gets a half a billion dollars in GSP benefits, those benefits are removable, suspend-able for failure to effectively protect intellectual property.

So that's another tool and that's part of Special 301, but countries still don't want to be on those lists, and we feel that process continues to work to persuade and make countries aware of the need to improve their intellectual property protection.

So we are strongly supportive of the Special 301 process. Could it be improved? I think it can be improved. And I think there are things that USTR is doing for example, looking at enforcement agreements, there are things like that that can be done and a more aggressive use of the 301 process, I think is possible than is now being done. But basically I think our industries believe that process is been -- has been pretty successful.


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