Intellectual Property
Risk and Enforcement Challenges Gao ID: GAO-08-177T October 18, 2007Intellectual property plays a significant role in the U.S. economy, and the United States is an acknowledged leader in its creation. Industries that relied on IP protection were estimated to account for over half of all U.S. exports and employed about 18 million Americans in 2006. However, legal protection of IP varies greatly around the world, and several countries are havens for the production of counterfeit and pirated goods. Counterfeit products raise serious public health and safety concerns, and the annual losses that companies face from IP violations are substantial. Eight federal agencies undertake a wide range of activities in support of protecting IP rights, and two mechanisms coordinate protection efforts: the National Intellectual Property Law Enforcement Coordination Council (NIPLECC) and the Strategy for Targeting Organized Piracy (STOP). GAO was asked to address: (1) the nature of the risks that U.S. corporations face in protecting IP, particularly in countries such as China, and (2) U.S. methods for implementing and coordinating domestic IP enforcement activities. This testimony is based on issued GAO reports that focused on IP protection and related trade matters.
U.S. intellectual property is increasingly at risk of theft as U.S. firms become more integrated into the world economy and the production of more sophisticated processes and investments move overseas. High profits and technological advances have also increased the risk of IP infringements by making counterfeiting and piracy more attractive and easy to conduct. At the same time, deterrents such as penalties and other measures have failed to keep pace. The seriousness of these risks has been exacerbated by weak enforcement in some countries, particularly China. While the U.S. faces significant obstacles when trying to ensure effective IP protection abroad, it also faces serious challenges in coordinating domestic efforts and ensuring that IP protection remains a priority. The large number of federal agencies involved, due to the cross-cutting nature of IP protection, makes coordination particularly important. However, GAO's recent report on coordinating mechanisms for federal IP protection, we found that the effectiveness and long-term viability of the coordinating structure is uncertain. In addition, each of the agencies involved in IP has multiple missions, and it is a challenge to ensure that IP enforcement is a sufficiently high priority. GAO's report on the efforts of the Customs and Border Patrol (CBP) to interdict counterfeit goods at the border found that the bulk of CBP's enforcement outcomes in recent years have been generated by pockets of activity within certain modes of transport and product types as well as among a limited number of port locations. While the number of seizure actions has increased, this growth can be attributed to a growing number of small-value seizures made from air-based modes. CBP lacks an approach to further improve border enforcement outcomes; it has been focused on efforts that have produced limited results, while not taking the initiative to understand and address the variations among ports.
GAO-08-177T, Intellectual Property: Risk and Enforcement Challenges
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United States Government Accountability Office:
GAO:
Testimony:
Before the House Judiciary Subcommittee on Courts, the Internet, and
Intellectual Property:
For Release on Delivery:
Expected at 10:00 a.m. EDT:
October 18, 2007:
Intellectual Property:
Risk and Enforcement Challenges:
Statement of Loren Yager:
Director:
International Affairs and Trade:
GAO-08-177T:
GAO Highlights:
Highlights of GAO-GAO-08-177T, a report to House Judiciary,
Subcommittee on Courts, the Internet, and Intellectual Property.
Why GAO Did This Study:
Intellectual property plays a significant role in the U.S. economy, and
the United States is an acknowledged leader in its creation. Industries
that relied on IP protection were estimated to account for over half of
all U.S. exports and employed about 18 million Americans in 2006.
However, legal protection of IP varies greatly around the world, and
several countries are havens for the production of counterfeit and
pirated goods. Counterfeit products raise serious public health and
safety concerns, and the annual losses that companies face from IP
violations are substantial. Eight federal agencies undertake a wide
range of activities in support of protecting IP rights, and two
mechanisms coordinate protection efforts: the National Intellectual
Property Law Enforcement Coordination Council (NIPLECC) and the
Strategy for Targeting Organized Piracy (STOP). GAO was asked to
address: (1) the nature of the risks that U.S. corporations face in
protecting IP, particularly in countries such as China, and (2) U.S.
methods for implementing and coordinating domestic IP enforcement
activities. This testimony is based on issued GAO reports that focused
on IP protection and related trade matters.
What GAO Found:
U.S. intellectual property is increasingly at risk of theft as U.S.
firms become more integrated into the world economy and the production
of more sophisticated processes and investments move overseas. High
profits and technological advances have also increased the risk of IP
infringements by making counterfeiting and piracy more attractive and
easy to conduct. At the same time, deterrents such as penalties and
other measures have failed to keep pace. The seriousness of these risks
has been exacerbated by weak enforcement in some countries,
particularly China.
While the U.S. faces significant obstacles when trying to ensure
effective IP protection abroad, it also faces serious challenges in
coordinating domestic efforts and ensuring that IP protection remains a
priority. The large number of federal agencies involved, due to the
cross-cutting nature of IP protection, makes coordination particularly
important. However, GAO‘s recent report on coordinating mechanisms for
federal IP protection, we found that the effectiveness and long-term
viability of the coordinating structure is uncertain. In addition, each
of the agencies involved in IP has multiple missions, and it is a
challenge to ensure that IP enforcement is a sufficiently high
priority. GAO‘s report on the efforts of the Customs and Border Patrol
(CBP) to interdict counterfeit goods at the border found that the bulk
of CBP‘s enforcement outcomes in recent years have been generated by
pockets of activity within certain modes of transport and product types
as well as among a limited number of port locations. While the number
of seizure actions has increased, this growth can be attributed to a
growing number of small-value seizures made from air-based modes. CBP
lacks an approach to further improve border enforcement outcomes; it
has been focused on efforts that have produced limited results, while
not taking the initiative to understand and address the variations
among ports.
What GAO Recommends:
In prior reports, GAO made a number of recommendations to various
agencies to strengthen their management of their IP enforcement
efforts.
To view the full product, including the scope and methodology, click on
[hyperlink, http://GAO-GAO-08-177T]. For more information, contact
Loren Yager at (202) 512-4128 or yagerl@gao.gov.
[End of section]
Mr. Chairman and Members of the Subcommittee:
I am pleased to be here today to report on our work on intellectual
property (IP) protection before the subcommittee of the U.S. Congress
that has identified this topic as one of its primary areas of focus. I
appreciate the opportunity to provide some insights from GAO's wide
range of work on this issue. As you know, intellectual property is an
important component of the U.S. economy. 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, however, patents will only be meaningful
if there is real protection of IP in the United States as well as other
countries. Today, I will discuss the increasing risk and enforcement
challenges to IP protection as advances in technology and changes in
global manufacturing make counterfeiting and piracy a greater threat.
This hearing is particularly timely, as during the last year a number
of news stories have raised severe doubts among the American people
about the quality and safety of products imported from China and the
ability of the Chinese government to regulate its manufacturers. While
some of the goods that posed risks in recent months were legitimate
goods associated with U.S. firms (Mattel), it is well known that
counterfeit goods from China pose risks to U.S. consumers, and unlike
the situation with legitimate goods, there is little recourse to go
back to the importer or manufacturer and demand that the risks be
eliminated.
I know that many of these issues are familiar to members of this
subcommittee, particularly as this panel held back-to-back hearings on
China and Russia IP theft in May 2005. As requested, today I will
summarize the work that GAO has performed in two areas: (1) the nature
of the risks that U.S. corporations face in protecting IP, particularly
in countries such as China, and (2) U.S. methods for implementing and
coordinating U.S. IP enforcement activities.
My remarks are based on a variety of assignments that GAO has conducted
on IP protection over the past 4 years. Some of this work was focused
on the challenges that U.S. firms face in securing IP protection
abroad, and some has focused on the extent to which U.S. firms rely on
nations like China and India as part of their production chain. We have
also done extensive work on the international and domestic efforts
undertaken by U.S. agencies to coordinate their efforts to address IP
theft and piracy issues. Finally, we have drawn from some of our
ongoing work for the Senate regarding federal efforts to enforce IP
rights at the border. We made several recommendations during the course
of this work, with which the recipient agencies generally agreed. Our
work was conducted in accordance with generally accepted government
auditing standards.
Summary:
U.S. intellectual property faces increasing risk of theft as U.S. firms
integrate into the world economy and the production of more
sophisticated processes and investments move overseas. For example, as
the technological and manufacturing capability in Asia increases, such
as in the semiconductor industry, more complex parts of the production
process are being carried out in countries like China. High profits and
technological advances have also raised the risk of IP infringements by
encouraging and facilitating counterfeiting and piracy, while the
deterrents, such as penalties and other measures, fall short. Economic
incentives for counterfeiting and piracy include low barriers to entry,
high profits, and limited or low legal sanctions if caught. At the same
time, technology has allowed accessible reproduction and distribution
in some industries. The severity of these risks has been intensified by
weak enforcement in some countries, particularly China, whose
enforcement challenges have persisted despite U.S. efforts.
The United States faces significant obstacles to both providing
effective IP protection abroad while coordinating domestic efforts and
ensuring that strong intellectual property protection remains a
priority. The cross-cutting nature of the issue and the necessity for
coordination is evident given the large number of agencies involved in
IP protection. However, we recently reported on the law enforcement
coordinating council and found that the effectiveness and the long-term
viability of the current IP enforcement coordinating structure is
uncertain and made particularly challenging by agencies' multiple
missions. Our report on the efforts of the Customs and Border Patrol
(CBP) to interdict counterfeit goods at the border found that the bulk
of CBP's enforcement outcomes in recent years have been accomplished
within certain modes of transport and product types and have been
restricted to a limited number of ports. For example, 10 ports are
responsible for three fourths of the value of the goods seized. Despite
recent increases in seizure outcomes, CBP lacks an approach to make
further improvements in its level of seizures. We found that CBP has
focused on efforts that have had limited results and has not taken the
initiative to understand and address the variations in seizure outcomes
among ports. For instance, CBP lacks data with which to analyze IP
enforcement trends across transport modes and has not tried to
determine whether certain ports have been relatively more successful in
capturing IP-infringing goods.
Background:
Intellectual property, for which the U.S. government provides broad
protection through means such as copyrights, patents, and trademarks,
plays a significant role in the U.S. economy, and the United States is
an acknowledged leader in its creation. According to the U.S.
Intellectual Property Rights Coordinator, industries that relied on IP
protection were estimated to account for over half of all U.S. exports,
represented 40 percent of U.S. economic growth, and employed about 18
million Americans in 2006. However, the economic benefits that
copyrights, trademarks, and patents bring are threatened by the fact
that legal protection of IP varies greatly around the world, and
several countries are havens for the production of counterfeit and
pirated goods. The global illicit market competes with genuine products
and it is difficult to detect and take actions against violations.
Although the public is often not aware of the issues and consequences
surrounding IP theft, counterfeit products raise serious public health
and safety concerns, and the annual losses that companies face from IP
violations are substantial. The Organization for Economic Cooperation
and Development recently estimated that international trade in
counterfeit and pirated products in 2005 could have been up to $200
billion.
Eight federal agencies as well as entities within them undertake a wide
range of activities in support of protecting IP rights, as shown in
figure 1. These are the Departments of Commerce, State, Justice, Health
and Human Services, and Homeland Security; the U.S. Trade
Representative (USTR); the Copyright Office; the U.S. International
Trade Commission; within Justice, the Federal Bureau of Investigation
(FBI); and within Commerce, the U.S. Patent and Trademark Office
(USPTO). In addition, two entities coordinate IP protection efforts:
the National Intellectual Property Law Enforcement Coordination Council
(NIPLECC), created by Congress in 1999, and the Strategy for Targeting
Organized Piracy (STOP), initiated by the White House in 2004. (These
are discussed later in this testimony.)
Figure 1: Primary U.S. Agencies and Entities Supporting U.S. IP Rights:
[See PDF for image]
This figure is an organizational chart depicting the relationship of
Primary U.S. Agencies and Entities Supporting U.S. IP Rights:
* Copyright Office [a];
* Department of Homeland Security [b];
- Custom and Border Protection (CBP) [a];
- Immigration and Custom Enforcement (ICE) [a];
* Department of Commerce [b];
- International Trade Administration ITA) [a];
- U.S. Patent and Trademark Office (USPTO) [a];
* Department of Health and Human Services;
- Food and Drug Administration [b];
* Department of Justice [b];
- Criminal Division [a];
- Federal Bureau of Investigation (FBI);
- United States Attorney's Office;
* U.S. International Trade Commission;
* Department of State [b];
- Bureau of International Narcotics Law Enforcement (INL);
- Bureau of Economics and Business Affairs (EB) [a];
* Office of the U.S. Trade Representative (USTR) [a,b].
[a] Entities that house National Intellectual Property Law Enforcement
Coordination Council (NIPLECC) principals.
[b] Strategy Targeting Organized Piracy (STOP) agency.
Source: GAO.
Note: NIPLECC is required to consult with the Register of Copyrights on
copyright law enforcement matters. Immigration and Customs Enforcement,
while not an original member, was reported as a member of NIPLECC in
the council's fifth annual report issued in September 2006.
[End of figure]
U.S. agencies use policy initiatives and enforcement activities to
improve IP protection in the United States and abroad. Policy
initiatives include reviewing IP protection undertaken by foreign
governments and negotiating agreements that address intellectual
property. Trade policy initiatives to increase IP protection and
enforcement are primarily led by USTR, in coordination with the
Departments of State, Commerce, USPTO, and the Copyright Office, among
other agencies. Enforcement activity in the United States includes
detecting and seizing IP-infringing goods at the U.S. border and
investigating and prosecuting those who engage in IP-infringing
activities. The Department of Justice, including the FBI, and the
Department of Homeland Security's Customs and Border Protection (CBP)
and Immigration and Customs Enforcement take actions such as engaging
in multicountry investigations involving intellectual property
violations and seizing goods that violate IP rights at U.S. ports of
entry. The Food and Drug Administration (FDA) also investigates
intellectual property violations for FDA-regulated products as part of
its mission to assure consumer safety.
U.S. Intellectual Property Increasingly at Risk As Firms Operate
Globally and Economic Incentives and Technology Facilitate IP Theft,
Which is Exacerbated by Weak Enforcement:
U.S. intellectual property is increasingly at risk of theft as U.S.
firms become more integrated into the world economy and the production
of more sophisticated processes and investments move overseas. High
profits and technological advances have also increased the risk of IP
infringements by making counterfeiting and piracy progressively
attractive and easy, while the deterrents, such as penalties and other
measures, fail to keep pace. The seriousness of these risks has been
exacerbated by weak enforcement in some countries, particularly China,
whose enforcement problems has persisted despite U.S. efforts.
Global Operations Increase the Risk of IP Theft:
The risk of IP theft increases as U.S. companies operate more globally
and locate their production facilities in other countries. Our report
on the U.S. semiconductor industry illustrates this movement of
production to other countries and increasing concerns about IP
theft.[Footnote 1] Initially, U.S. firms invested in overseas
manufacturing facilities such as India and China, to perform the labor-
intensive assembly of semiconductors for export to the United States.
However, as the technological and manufacturing capability in Asia
increased, more sophisticated parts of the process have been sourced in
India and China. This shift where more advanced technology is being
used abroad creates a greater risk for those firms involved by making
advanced technologies protected by IP laws more readily available to
those who might want to copy them illegally.
The shift of operations to overseas facilities is also evident in the
U.S. investment statistics. For example, we reported in December 2005
that U.S. investment in China has been growing, and the value of U.S.
affiliate sales in China began to exceed the value of U.S. exports to
China in 2002. [Footnote 2] U.S. companies have generally concentrated
their investments in China in the manufacturing sector, in industries
such as transportation equipment, chemicals, and computers and
electronic products. U.S. investment in China funds the creation of
U.S. affiliates, who then sell in China and to other countries,
including the United States. U.S. affiliate sales of goods and services
have become an important avenue for accessing the Chinese market.
Factors such as the growing Chinese market, lower labor costs, and
China's accession to the World Trade Organization (WTO) have drawn U.S.
companies to increase their investment and sales in China.
Economic Incentives and Technological Advances Also Raise the Risk of
IP Violations:
Economic incentives to commit counterfeiting and piracy activities
contributed to the growth in IP rights violations in recent years.
Economic incentives include low barriers to entering the counterfeiting
and piracy business, potentially high profits, and limited or low legal
sanctions, including penalties, if caught. For example, one industry
pointed out that it is much more profitable to buy and resell software
than to traffic in cocaine. In addition, the low prices of fake
products are attractive to consumers. The economic incentives can be
especially acute in countries where people have limited income.
Economic incentives have also attracted organized crime in the
production and distribution of pirated products. Federal and foreign
law enforcement officials have linked intellectual property crime to
national and transnational organized criminal operations. The
involvement of organized crime increases the sophistication of
counterfeiting operations, as well as the challenges and threats to law
enforcement officials confronting the violations.[Footnote 3]
Technological advances have lowered the barriers to counterfeiting and
piracy by allowing for high-quality, inexpensive, and accessible
reproduction and distribution in some industries. The mobility of the
equipment makes it easy to transport it from one location to another,
further complicating enforcement efforts. Industry and government
officials described this as the "whack-a-mole" problem --when progress
is made in one location, piracy operations often simply move. Likewise,
the Internet provides a means to transmit and sell illegal software or
music on a global scale and provides a sales venue for counterfeit
goods. According to an industry representative, the ability of Internet
pirates to hide their identities or operate from remote jurisdictions
often makes it difficult for IP rights holders to find them and hold
them accountable.
How economic incentives and technological advances can contribute to IP
piracy can be seen in the optical media industry (CD's, DVD's). The
cost of reproduction technology and copying digital media is low,
making piracy an attractive employment opportunity, especially in a
country where formal employment is hard to obtain. According to the
Business Software Alliance, a CD recorder is relatively inexpensive.
The sometimes large price differentials between pirated and legitimate
CDs also create incentives for consumers to purchase pirated CDs - even
those who might have been willing to pay a limited amount extra to
purchase the legitimate product. Low-cost, high-quality reproduction
and distribution in some industries are creating increasingly strong
incentives for piracy. Private sector representatives have identified
Russia as a prominent source of pirated software and optical media,
which include music, movies, and games. For instance, USTR reports that
the U.S. copyright industries estimate that they lost in excess of $2.1
billion in 2006 due to copyright piracy in Russia. The U.S. copyright
industries also reported that in 2006 Russia's optical disc production
capacity continued to be far in excess of domestic demand, with pirated
products apparently intended for export as well as domestic
consumption.
While a number of factors increase the risk of IP theft, the deterrent
effect of IP enforcement efforts has not kept pace. A number of
industry officials believe that the chance of getting caught for
counterfeiting and piracy, along with the penalties, when caught, are
too low. CBP only inspects a small percentage of containers entering
the country each day even for counterfeit goods seized at the border.
CBP officials said that the enforcement penalties are not an effective
deterrent. In reviewing CBP penalty data for fiscal years 2001 through
2006, we found that less than 1 percent of the penalty amounts were
collected. Federal officials we interviewed remarked that the penalties
or even the loss of goods through seizures are viewed by counterfeiters
as the cost of doing business. In work we did several years ago on
small business efforts to patent abroad, we reported that patent
attorney experts viewed the potential for unauthorized production as
well as the level of IP infringement and enforcement in other countries
as highly important factors that needed to be considered in developing
a foreign patent strategy.[Footnote 4] They also advised that firms
need to understand the practical--or enforcement--value of the patent,
and China and Russia were both mentioned as countries where the patents
were of limited value but the situation was improving.
Weak Enforcement Exacerbates the Risk of IP Theft, Particularly in
China:
China's track record for enforcing IP laws has been historically weak.
We reported in October 2002 that when China joined the WTO in 2001,
some WTO members noted concerns about enforcement of IP regulations in
China, and the majority of China's commitments in its WTO accession
agreement were intended to address these concerns.[Footnote 5] For
example, members raised concerns about filing civil judicial actions
relating to IP violations in China, and they noted that the way in
which damages resulting from IP violations were calculated often
resulted in inadequate compensation. We identified 32 IP rights related
commitments made by China in its WTO accession agreement, about half of
which were related specifically to IP enforcement.
Based on our 2002 survey, U.S. companies with a presence in China
considered China's commitments in the area of IP rights to be the most
important of those made in its WTO accession agreement However, they
also recognized that they were going to be among the most difficult for
China to implement, particularly those related to rule of law and
reforming state owned enterprises. Indeed, in our 2003 follow-up
interviews, respondents reported that China had implemented its IP
rights commitments only to some extent or to a little extent.[Footnote
6] Our ongoing work on federal IP law enforcement actions reiterates
this concern about IP infringement in China. Sixteen of the thirty
companies and industry associations we interviewed cited China as the
primary country producing and distributing IP-infringing goods. They
went on to note that these are often substandard products that are sold
in grey markets[Footnote 7] or through the Internet.
USTR put China on its Special 301 Priority Watch List[Footnote 8] in
2005 on the basis of serious concerns about China's compliance with its
WTO Agreement on Trade-Related Aspects of Intellectual Property Rights
(TRIPS)[Footnote 9] obligations as well as with commitments it made in
a subsequent bilateral forum in 2004. In addition, China remains
subject to Section 306 monitoring.[Footnote 10] USTR also identified IP
rights protection in its February 2006 Top-to-Bottom review[Footnote
11] of U.S.-China trade relations as one of China's greatest
shortcomings and greatly enhancing China's IP rights protection became
a priority goal for the United States. The review outlined a number of
action items for the United States to undertake to achieve this goal,
which included increasing U.S. enforcement staff levels, enhancing
cooperation with the private sector, and promoting technical exchanges
between U.S. and Chinese agency officials.
The United States has undertaken other actions with regard to IP
violations in China. The United States requested WTO dispute settlement
consultations with China on a number of IP rights protection and
enforcement issues and conducted a special provincial review over the
past year to examine the adequacy and effectiveness of IP rights
protection and enforcement at the provincial level. In October 2004, we
recommended that the USTR and Secretaries of Commerce, State, and
Agriculture (USDA) take steps to improve their performance management
of their agencies' China-WTO compliance efforts. For example, we
recommended that USTR set annual measurable predetermined targets
related to its China compliance performance measures and assess the
results in its annual performance reports, and that the Secretary of
Commerce should take further steps to improve the accuracy of the data
used to measure results for the agency's trade compliance related
goals. We made similar recommendations to the other agencies. Not all
of the recommendations have been implemented to date, but some agencies
have reported looking into modifying both their performance plans and
unit level plans. This month, we are sending a team to Beijing to
follow up on U.S. agency activities, including their response to these
recommendations.
USTR reports that China has made progress in some areas, such as
completion of its accession to the World Intellectual Property
Organization (WIPO)[Footnote 12] Internet Treaties, and its ongoing
implementation of new rules that require computers to be pre-installed
with licensed operating system software. However, in other areas, the
USTR reports that little progress has been made. Despite anti-piracy
campaigns in China and an increasing number of IP rights cases in
Chinese courts, overall piracy and counterfeiting levels in China
remained unacceptably high in 2006. USTR reports further that the U.S.
copyright industries estimate that 85 percent to 93 percent of all
copyrighted material sold in China was pirated, indicating little or no
improvement over 2005. Trade in pirated optical media continues to
thrive, supplied by both licensed and unlicensed factories and by
smugglers. Small retail shops continue to be the major commercial
outlets for pirated movies and music and a wide variety of counterfeit
goods, and roaming vendors offering cheap pirated discs continue to be
visible in major cities across China. According to USTR, piracy of
books and journals and end user piracy of business software also remain
key concerns. In addition, Internet piracy is increasing, as is piracy
over closed networks such as those of universities.
Finally, the United States has dealt with China's poor IP enforcement
through efforts at the U.S. border. China accounts for by far the
largest share of IP-infringing goods seized by CBP. For instance, China
accounted for 81 percent of the value of goods seized in fiscal 2006,
increasing from 69 percent in fiscal 2005 and nearly half in fiscal
2002. Chinese counterfeits include many products, such as
pharmaceuticals, electronics, batteries, industrial equipment, toys,
and many other products, some of which pose a direct threat to the
health and safety of consumers.
U.S. Efforts to Coordinate IP Activities and Enforce Laws at the Border
Need Improvement:
While the U.S. faces significant obstacles when trying to ensure
effective IP protection abroad, it also faces some significant
challenges in coordinating domestic efforts and ensuring that this
issue remains a priority. The large number of agencies involved in IP
protection issues (see figure 1) demonstrates the cross-cutting nature
of the issue and the importance of coordination. However, in our recent
report on the law enforcement coordinating council, we found that the
effectiveness and the long-term viability of the coordinating structure
is uncertain. Another challenge is that each of these agencies have
multiple missions, and within the agencies it may be a challenge to
ensure that IP enforcement gets sufficient priority. Our report on the
efforts of CBP to interdict counterfeit goods at the border found that
the bulk of CBP's enforcement outcomes in recent years have been
generated by pockets of activity within certain modes of transport and
product types as well as among a limited number of port locations.
Despite recent increases in seizure outcomes, CBP lacks an approach to
further improve border enforcement outcomes, and has been focused on
efforts that have produced limited results, while not taking the
initiative to understand and address the variations among ports.
Lack of Leadership and Permanence Hampers Effectiveness and Long-Term
Viability of IP Enforcement Coordinating Structure:
We reported in November 2006 that the current coordinating structure
for U.S. protection and enforcement of intellectual property rights
lacks clear leadership and permanence, hampering its effectiveness and
long-term viability. [Footnote 13] Created in 1999 to coordinate
domestic and international IP law enforcement among U.S, federal and
foreign entities, the National Intellectual Property Law Enforcement
Coordination Council (NIPLECC)[Footnote 14] has struggled to define its
purpose, retains an image of inactivity within the private sector, and
continues to have leadership problems despite the addition of a
Coordinator for International Intellectual Property Enforcement as the
head of NIPPLEC, made by Congress in December 2004. In addition, in
July 2006, Senate appropriators expressed concern about the lack of
information provided by NIPLECC on its progress.
In contrast, the presidential initiative called the Strategy for
Targeting Organized Piracy (STOP), which is led by the National
Security Council, has a positive image compared to NIPLECC, but lacks
permanence since its authority and influence could disappear after the
current administration leaves office. Many agency officials said that
STOP has increased attention to IP issues within their agencies and the
private sector, as well as abroad, and attribute that to the fact that
STOP came out of the White House, thereby lending it more authority and
influence.[Footnote 15] While NIPLECC adopted STOP as its strategy for
protecting IP overseas, its commitment to implementing STOP as a
successful strategy remains unclear, creating challenges for
accountability and long-term viability. For instance, although
NIPLECC's most recent annual report describes many STOP activities, it
does not explain how the NIPLECC principals plan to carry out their
oversight responsibilities mandated by Congress to help ensure
successful implementation of the strategy.
STOP is a first step toward an integrated national strategy to protect
and enforce U.S. intellectual property rights, and it has energized
agency efforts. However, we previously reported that STOP's potential
as a national strategy is limited because it does not fully address
important characteristics of an effective national strategy. For
example, its performance measures lack baselines and targets to assess
how well the activities are being implemented. In addition, the
strategy lacks a risk management framework and a discussion of current
or future costs - important elements to effectively balance the threats
from counterfeit products with the resources available. Although STOP
identifies organizational roles and responsibilities with respect to
individual agencies' STOP activities, it does not specify who will
provide oversight and accountability among the agencies carrying out
the strategy. While individual agency documents include some key
elements of an effective national strategy, they have not been
incorporated into the STOP documents. This lack of integration
underscores the strategy's limited usefulness as a management tool for
effective oversight and accountability by Congress as well as the
private sector and consumers who STOP aims to protect.
In our November 2006 report, we made two recommendations to clarify
NIPLECC's oversight role with regard to STOP and improve STOP's
effectiveness as a planning tool and its usefulness to Congress: First,
we recommended that the head of NIPLECC, called the IP Coordinator, in
consultation with the National Security Council and the six STOP
agencies, clarify in the STOP strategy how NIPLECC will carry out its
oversight and accountability responsibilities in implementing STOP as
its strategy. Second, we recommended that the IP Coordinator, in
consultation with the National Security Council and the six STOP
agencies, take steps to ensure that STOP fully addresses the
characteristics of an effective national strategy. In our April 2007
testimony, we reported that the IP Coordinator said that NIPLECC had
taken some steps to address our recommendations, including working with
OMB to understand agencies' priorities and resources related to IP
enforcement.
U.S. Border IP Efforts Demonstrate the Need for Improvements:
In our April 2007 report, we found that the volume of goods entering
the
United States every year is substantial, and creates a challenge for
CBP in terms of ensuring that these shipments do not carry weapons of
mass destruction or illegal drugs and that appropriate duties are
collected on imports.[Footnote 16] CBP also has the responsibility to
ensure that counterfeit goods do not enter through the 300 plus U.S.
ports, but detecting and seizing IP-infringing products from among this
large volume of traffic is difficult. CBP efforts in this regard
include (1) targeting suspicious shipments, (2) examining goods to
determine their authenticity, and (3) enforcing IP laws through seizure
and penalty actions.
CBP faces challenges in targeting shipments, in part, because its
primary computer-based targeting method is not equally effective in all
modes of transport (that is, sea, air, truck, and rail). For example,
CBP officials believe counterfeiters are increasingly using express
consignment services to move commercial quantities of goods into the
United States, but their computer-based targeting method is less
effective in this environment. Determining during an examination
whether IP infringement has occurred can be challenging because of high
counterfeit quality and the complexity of U.S. IP laws. Interaction
among port staff, CBP's legal and product experts, and rights holders
is required to make these determinations. When violations are found,
CBP is authorized to seize the goods and, if warranted, assess
penalties against the violator.
Although CBP has reported increases in the number and value of IP
seizures, our analysis found that the bulk of these seizures have been
generated by a limited number of ports and that recent increases in
seizure actions can be attributed to a growing number of small-value
seizures made from air-based modes. For example, 10 ports are
responsible for three fourths of the value of goods seized. In
addition, nearly two-thirds of seizure value since 2001 has been
concentrated in certain product types - -footwear, wearing apparel,
handbags, and cigarettes. However, seizures of goods related to public
health and safety have been small. Although penalties assessed for IP
violations have grown steadily since 2001, CBP has collected less than
1 percent of assessed amounts. For example, CPB collected approximately
600,000 dollars of the 136.6 million dollars assessed in 2006.[Footnote
17]
CBP has undertaken steps to improve its border enforcement efforts, but
it lacks data with which to analyze IP enforcement trends across
transport modes, and it has not analyzed ports' IP enforcement outcomes
to determine whether certain ports have been relatively more successful
in capturing IP-infringing goods. In addition, a lack of integration
between the ports and CBP's trade policy office hinders it from making
further improvements.
Given the challenging environment in which CBP must process the vast
influx of goods into the United States every day, it is particularly
important that the agency utilize data to effectively focus its limited
enforcement resources to those areas where they can be most effective.
As a result, we have made a number of recommendations to the
Commissioner of CBP. These include improvements in enforcement data as
well as increased use of enforcement data to understand enforcement
activities and outcomes.
Concluding Observations:
This committee made a significant investment in the current legislative
session in moving IP legislation to try to find the right formula for
protecting and stimulating creative and inventive activity in the
United States in the area of patent reform, and encountered a number of
differing views on how to establish that formula. However, having the
incentives for creating intellectual property is of limited value
unless there is 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 how to best achieve that goal in
the face of the strong economic incentives for counterfeiting and the
limited resources to prevent it. GAO has performed a large body of work
for the Congress of aspects of these issues, and has put forward some
specific recommendations regarding the importance of coordination as
well as methods to be effective in the context of competing priorities.
We appreciate the opportunity to support this subcommittee and the
Congress as it continues to address these issues.
Mr. Chairman, this concludes my prepared remarks. I would be pleased to
respond to any questions you or other members of the subcommittee may
have at this time.
Contacts and Acknowledgements:
Should you have any questions about this testimony, please contact
Loren Yager at (202) 512-4347 or yagerl@gao.gov. Other major
contributors to this testimony were Christine Broderick, Nina Pfeiffer,
Jason Bair, Diana Blumenfeld, Shirley Brothwell, Adam Cowles, Karen
Deans, and Addie Spahr.
(320551):
[End of section]
Footnotes:
[1] See GAO, Offshoring: U.S. Semiconductor and Software Industries
Increasingly Produce in China and India, GAO-06-423; Sept. 7, 2006.
[2] See GAO, China Trade: U.S. Exports, Investment, Affiliate Sales
Rising, but Export Share Falling', GAO-06-162, Dec.12, 2005.
[3] See GAO, Intellectual Property: U.S. Efforts Have Contributed to
Strengthened Laws Overseas but Challenges Remain, GAO-04-912
(Washington D.C.; September 8, 2004).
[4] See GAO, International Trade: Experts' Advice for Small Businesses
Seeking Foreign Patents, GAO-03-910, (Washington D.C.: June 26, 2003).
[5] See GAO, World Trade Organization: Analysis of China's Commitments
to Other Members, GAO-03-4, (Washington D.C.; October 3, 2002).
[6] See GAO, World Trade Organization: Selected U.S. Company Views
about China's Membership' GAO-02-1056 which was released on September
23, 2002; World Trade Organization: U.S. Companies' Views on China's
Implementation of Its Commitments' GAO-04-508 March 24, 2004.
[7] The grey market usually refers to the flow of new goods through
distribution channels other than those authorized or intended by the
manufacturer or producer. Grey market goods are not generally
counterfeit. Instead, they are being sold outside of normal
distribution channels by companies which may have no relationship with
the producer of the goods.
[8] The annual Special 301 process, which refers to certain provisions
of the Trade Act of 1974, as amended, requires USTR to annually
identify foreign countries that deny adequate and effective protection
of IP rights or fair and equitable market access for U.S. persons who
rely on IP protection. According to USTR, countries or economies on the
Priority Watch List do not provide an adequate level of IP rights
protection or enforcement, or market access for persons relying on
intellectual property protection.
[9] The WTO Agreement on Trade-Related Aspects of Intellectual Property
Rights (TRIPS), which came into force in 1995, broadly governs the
multilateral protection of IP regulations. TRIPS established minimum
standards of protection in various areas of IP and provides for
enforcement measures for members.
[10] According to USTR, countries with serious IP-related problems are
subject to another part of the Special 301 statute, Section 306
monitoring, because of previous bilateral agreements reached with the
United States to address specific problems raised in earlier reports.
[11] USTR's Top-to-Bottom review assessed the benefits and challenges
in U.S-China trade following China's first four years of membership in
the World Trade Organization, as China neared the end of its transition
period as a new member. The review reflects the input of Congress,
China experts, industry, public testimony and other U.S. government
agencies.
[12] The World Intellectual Property Organization (WIPO) is a
specialized agency of the United Nations. It is dedicated to developing
a balanced and accessible international intellectual property (IP)
system, which rewards creativity, stimulates innovation and contributes
to economic development while safeguarding the public interest. WIPO
was established by the WIPO Convention in 1967 with a mandate from its
Member States to promote the protection of IP throughout the world
through cooperation among states and in collaboration with other
international organizations. Its headquarters are in Geneva,
Switzerland.
[13] See GAO, Intellectual Property: Strategy Targeting Organized
Piracy (STOP) Requires Changes for Long-term Success, GAO-07-74
(Washington D.C.; November 8, 2006).
[14] NIPLECC was established under Section 653 of the Treasury and
General Government Appropriations Act, 2000 (Pub. L. No.106-58), 15
U.S.C. 1128.
[15] See figure 1 for NIPPLECC and STOP members.
[16] Intellectual Property: Better Data Analysis and Integration Could
Help U.S. Customs and Border Protection Improve Border Enforcement
Efforts, GAO-07-735 (Washington D.C.; April 26, 2007).
[17] Fiscal year 2006 is reported based on data provided in January
2007. CBP officials said that the amount collected may change because
some penalty cases are still being processed, but they said that future
adjustments are unlikely to significantly change the disparity between
penalty amounts assessed and collected.
[End of section]
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