Statement of Stuart Eizenstat (State Dept.) to Senate Foreign Relations Committee.
Re: Software piracy.
Date: April 29, 1999.
Source: Senate Foreign Relations Committee. This document has been edited for HTML, but not for content.

Statement of
UNDER SECRETARY OF STATE
FOR ECONOMIC AFFAIRS
Before the
SUBCOMMITTEE ON INTERNATIONAL ECONOMIC POLICY,
EXPORT AND TRADE PROMOTION
COMMITTEE ON FOREIGN RELATIONS
UNITED STATES SENATE
April 29, 1999

Thank you for providing an opportunity to speak to you today about the actions this Administration is taking to counter the piracy of software developed by U.S. companies and sold worldwide.

Protecting our intellectual property rights internationally in this cutting edge technology and in other industries is critical to the United States' competitiveness in the twenty-first century, and, therefore, is one of the highest priorities of U.S. international economic policy. Indeed, the software and other core copyright-based industries (motion picture, publishing, sound recording sectors) have accounted for as much as 3.6% of the nation’s GDP in recent years, according to some industry studies. Job growth in this area has far outstripped the performance of the economy as a whole. Revenues earned abroad by the software sector alone may well reach $116.9 billion by 2001 and direct U.S. employment in the industry could climb to 1,030,500 jobs by 2005. Yet these economic benefits are eroded by intellectual property piracy, which cost our software sector an estimated $11 billion in lost revenues in 1997 alone.

This is why the Administration, and I personally, have been so vigorous in our efforts to bolster protection of intellectual property (IP) rights around the world and to eliminate the widespread piracy abroad of software and other IP-based products. I have been working directly on IP issues since 1993, first as our Ambassador to the European Union, then as Under Secretary of Commerce for International Trade, and now as the Under Secretary of State for Economic, Business, and Agricultural Affairs. Throughout my tenure in this Administration, intellectual property has remained one of the U.S. highest priorities in the economic sphere. While serving at the EU Mission, I was involved in issues concerning the EU broadcast directive and focused on focused on promoting the enforcement of IP rights in Europe. Virtually every day since I returned to Washington in April of 1996, I have pressed this vital U.S. interest with our foreign trading partners; there is rarely a meeting where these issues are not raised. Indeed, I have raised the issue forcefully with two of our most valued friends, Israel and Mexico, and done likewise with numerous other countries.

One point I repeatedly stress with our trading partners is that the protection of IP serves not just U.S. interests, but is vital to investment and growth in developing and transitional economies. Empirical evidence shows that IP protection is critical to a country’s ability to attract investment and technology – especially in the industrial sectors likely to be dominant in the 21st century. These nations can benefit from cutting edge innovations that arise out of the investments IP protection fosters. Thus, improvement in IP enforcement in software and other areas is a “win-win” proposition.”

With this background in mind, I would like to give you my perspective on the nature of the problem, the tools and policies we are using to address it, and the efforts we plan for the future. As I will discuss, we have made tangible progress in improving the protection of U.S. software abroad, but there is much work yet to be done.

U.S. Software and the Problem of Piracy

The United States is the world’s undisputed leader in software design and development. From operating systems and Internet communication command systems to business applications and entertainment software, the technical depth, creativity, and inventiveness of U.S. firms is demonstrated by the wide array of products that U.S. firms introduce to world markets.

The economic benefits for the United States in the form of exports and employment are clearly at risk due to software piracy. The problem is partly a function of the technology itself. The design and development of software requires an enormous investment in time and painstaking effort on the part of developers and software engineers. Once that investment is made, though, it is easily appropriated by those that would free ride on the efforts of the software creators. One piece of software may represent a multi-million dollar investment in design, testing, and development, but technology permits the software CD to be duplicated rapidly on a wide-scale for pennies a copy.

Related to the ease of copying is the problem that many end-users who otherwise consider themselves law-abiding citizens routinely copy software for a family member, friend or co-worker. In contrast, as the Business Software Alliance (BSA) has noted, total inventory "shrinkage" for U.S. retailers, which includes losses from theft, is only 2%, while losses to software producers from end-user piracy in the U.S. are more than ten times larger. The failure to recognize end-user piracy as akin to shoplifting ignores the burden that unauthorized copying imposes on the development of new software, and the profitability of American software firms generally.

In addition, governments that readily take on retail piracy by closing down street vendors and retail shops, nonetheless may be reluctant to take on large-scale commercial users at major banks and corporations. In many foreign countries there often is no will to prosecute end-user piracy, even when the end-users are large companies or governments. Sometimes, government's themselves are the single largest source of unauthorized software use. This has been a problem we confront daily in our commercial diplomacy, and we rely on both multilateral and bilateral tools to advance the cause of IP protection.

A Broad-based U.S. Policy for the Protection of Intellectual Property

Our efforts to address the problem of copyright piracy have been broad and aggressive. They include the following key elements:

• active pursuit of a multilateral framework for the protection of intellectual property;
• aggressive bilateral diplomacy for the protection of U.S. rights, including the Administration's World-Wide Anti-piracy Campaign;
• support for capacity building in developing and transitional economies.

Throughout all of our efforts, we cooperate closely with the business community, including the Business Software Alliance. Let me be specific.

The cornerstone of our approach to piracy of U.S. software and other intellectual property infringement is our effort to engage countries multilaterally to strengthen international IP standards.

Software, like information-based technology and products generally, is easily reproduced and transferred across national boundaries. Hence, the only truly effective intellectual property regime is one that transcends national boundaries as well. This is the reason why the Administration has been so vigorous in its commitment to the World Intellectual Property Organization (WIPO) and the World Trade Organization (WTO) and the important conventions and treaties that are under the auspices of these organizations; the key agreements include the Berne Convention for the Protection of Literary and Artistic Works, the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS), and the new WIPO Copyright Treaty and Performances and Phonograms Treaty.

The Berne Convention sets forth internationally-accepted standards of protection that countries must incorporate into their domestic copyright regimes. These standards are largely identical to those principles of copyright that the United States has adhered to since our founding days. TRIPS incorporates the substantive standards of Berne and makes each explicit member country’s obligation not just to adopt adequate legal standards but, just as importantly, to provide efficient and effective mechanisms for enforcing those standards. TRIPS also makes explicit that computer programs shall be protected as literary works. Under Uruguay Round commitments, developed country members have been obliged to adhere to these TRIPS standards since January 1996.

The focus now shifts to developing country members, which must comply with TRIPS as of January 1, 2000. For some time now, we have been actively engaging our trading partners in the developing world at both the multilateral and bilateral level on the need for them to be fully compliant with TRIPS standards by this deadline. Frankly, developing countries are finding this a difficult task, especially in the enforcement area. As I will explain, we are taking steps to facilitate their compliance efforts. However, and I would like to stress this point, if we find after January 1, 2000 that our trading partners are not in compliance, we will hold them accountable under the WTO dispute resolution mechanism. Where our important commercial interests are threatened, we will not hesitate to use WTO dispute resolution mechanisms to hold others to the same commitments that we have had to meet.

The WIPO Copyright Treaty and the WIPO Performances and Phonograms Treaty were concluded in Geneva in December 1996. The treaties are essential to extend copyright protection to the Internet and digital technology. Emerging digital technology is a two-edged sword for copyright holders. The Internet and other new communications technologies are opening new avenues for rapid and cost-efficient dissemination of creative works. The same digital technology, however, provides intellectual property pirates with new tools for copying and distributing works, including software products, without the creators’/owners’ authorization. The primary goal of the WIPO treaties is to fill in the gaps created by digital technology in copyright protection.

The Congress, working closely with the Administration, last year passed the Digital Millennium Copyright Act of 1998 containing the necessary implementing provisions, and the President signed the Act into law on October 28. With the implementing legislation passed, U.S. looks forward to depositing in Geneva its instrument of ratification. The treaties require ratification by at least 30 signatories to come into force. Seven countries already have ratified the WIPO Copyright Treaty and five have ratified the WIPO Performances and Phonograms Treaty. The Administration is now engaged in a concerted campaign to promote ratification of the treaty by all of our trading partners as quickly as possible.

My colleague Richard Fisher will discuss our trade policies and practices in detail. However, let me highlight that we have made clear to our trading partners that we view the WIPO and TRIPS standards as the minimum standards for intellectual property protection. We will not be reticent when we see unique country-specific problems. When the nature and magnitude of a country’s violation of our intellectual property rights warrant our doing so, we will employ Special 301 to its fullest extent in order to secure fair and effective remedies for U.S. industries and intellectual property rights holders. Trade should be mutually beneficial. The U.S. benefits by having markets that are open to foreign firms. At the same time, though, we expect our trading partners to provide fair and equal protection for U.S. firms and their legitimate property rights. TRIPS is in effect the price of admission for those countries that want to enjoy the benefits of a world trading system; all countries must bear the corresponding responsibilities equitably.

The adoption and full implementation of WTO and WIPO standards by all our trading partners is the best means for dealing with the problem of software piracy abroad. The treaties embrace all the important aspects of copyright protection from adequate criminal enforcement to self-help civil mechanisms needed for copyright owners to enforce their rights through civil litigation. In cases of flagrant criminal activities involving software piracy, copyright owners need a strong, effective law-enforcement response. In other instances, copyright owners themselves can be the best-suited and most vigilant agents for securing relief against infringement. But in order to do so, copyright owners need access to courts and administrative bodies. They need, for example, an effective ex parte search procedure as a means to prevent the destruction of evidence needed for maintaining a civil action for alleged copyright infringement. They need courts to issue judgments that effectively deter future acts of piracy or infringement, and to do so in a timely manner. The framework that we have been building through WTO/TRIPS and the WIPO treaties would require U.S. trading partners to provide these mechanisms.

USG Initiatives

Within this multilateral framework, the United States has undertaken significant efforts to reduce software piracy. The Worldwide Anti-piracy Campaign is a key element of our approach. As you are likely aware, in 1998 the Vice President announced an Executive Order requiring all USG agencies to use only legal software in accordance with licensing requirements. Frequently, a foreign government constitutes the largest single software market in a given country. Therefore, U.S. Embassies worldwide are working with host governments to ensure adoption of similar regulations. To date we have received assurances from a number of governments including China, Israel, Kuwait, Turkey, Thailand, Paraguay, and Colombia, just to name a few -- that all government offices will purchase legal software and use it in accordance with licensing requirements. At our urging, Israel has even agreed to place language in public tender announcements requiring the use of legal software for any bidder on public projects. We are developing a similar provision for our domestic procurement; given the difference in magnitude of procurement between Israel and the U.S., however, I suspect that our implementation may be a little more complicated.

The Department of State has also made the protection of software and other forms of intellectual property a cornerstone of U.S. commercial diplomacy and has integrated these issues into our dialogue with foreign governments at all levels. In the joint economic commissions I chair, I always raise these issues directly and forcefully. The Secretary and I often raise intellectual property issues during our meetings with foreign officials. For example, I raised these issues in detail with all the countries I visited on my last trip to the Middle East – Israel, Egypt and Jordan, as well as with the Palestinian Authority. Our diplomats are engaged abroad at the ground level in monitoring the problem of software piracy. Many make routine visits to marketplaces where street vendors are suspected of selling unauthorized copies of software products. There have been instances in Bulgaria, in Kuwait, in China, and in many other foreign countries where we have gained invaluable insights into the nature and magnitude of local software piracy through such man-on-the-street monitoring.

Our diplomats also work closely with local and U.S.-based industry representatives to identify and gage the problem of software piracy, both at the retail level and among large institutional end-users. Diplomatic reporting provides the background against which Washington agencies can determine just how well our trading partners are doing in protecting intellectual property rights. It is a critical component to the current, on-going Special 301 review being conducted in the interagency process to determine which countries are failing to provide adequate protection for U.S. intellectual property. Based on their direct observations and input from U.S. industry, our diplomats engage host governments whenever and wherever there are urgent problems relating to the intellectual property protection of software. They conduct the day-to-day efforts aimed at improving intellectual property protection among our trading partners.

We also support and encourage the efforts of our trading partners to build the capacity to address software piracy. The problem of software piracy is a strategic one that requires foreign governments themselves to appreciate the seriousness of the problem and to develop the laws and institutions necessary for dealing with it on a long-term basis. These are not easy tasks for many of our trading partners, but they are vital to our long term interests and their own economic growth. It requires establishing appropriate administrative processes and enforcement mechanisms, including the ability to seek relief in courts or other fora – concepts not yet well established in some developing countries.

This is why we are actively engaged in cooperative efforts on law enforcement, training, and assistance. The Department of State funds and coordinates law enforcement technical cooperation in the IP area, focussed in part on software piracy. We are expanding law enforcement training opportunities for trading partners where the legal environment and level of political will indicate that technical assistance will lead to a substantial reduction in piracy. Within State, we now have a million-dollar budget dedicated to IP law enforcement training efforts, which we hope to expand in future years. USAID, USIA, and the Department of Commerce's Commercial Law Development Program also provide technical assistance aimed at building the necessary policy, legal and regulatory environment for better IP protection in Egypt, Ukraine, Russia, and elsewhere. In Egypt, the government has greatly improved its record on use of legal software, thanks in large part to a USAID program entitled Strengthening Intellectual Property Rights in Egypt, or SIPRE.

In countries in Europe and the Middle East we have helped U.S.-based organizations like the Software Business Alliance and the International Intellectual Property Alliance conduct training seminars for law enforcement officers, judges, and other officials with intellectual property-related responsibilities. As an active member of the World Intellectual Property Organization, we support that organization’s efforts to provide expert advice to countries with developing economies or in the transition to a market-based economy and in the process of bolstering or establishing for the first time a domestic intellectual property regime.

Our training is closely integrated with work of BSA and other IP Industry groups. For Russia, where I have personally participated in technical assistance to the Judiciary that State provided this past year, our bilateral IP program was initiated at the request of the copyright industry. I was impressed by the intensity of interest among the Russian judges I met last September who actually "briefed-up" on several actual IP cases, heard oral arguments at the Federal Court of Appeals, and discussed the cases with law clerks and American judges.

I am pleased to report that the broad and vigorous program I have outlined is now producing tangible results. Software piracy rates, while still unacceptably high, have fallen in every region of the world. In Bulgaria, for example, as a direct result of the Special 301 process, the government instituted a crackdown against illicit production and wholesale export of CDs that contained not only unauthorized copies of sound recordings but highly specialized software products. These changes came about as a result sustained effort on the part of the Department and our colleagues at USTR and Commerce here and in Sofia to impress upon the government of Bulgaria the deep need for reform.

Malaysia is another example where our efforts have generated success against software piracy. As governments take action to battle piracy, the producers of pirated material often pack up and move elsewhere. Some reports indicated that the location of choice was Malaysia. The Malaysian government recognized that in order to develop a knowledge-based workforce and to attract high tech investment, it had to protect intellectual property. The government recently created an interagency task force to attack the problem and has, in a relatively short period of time, demonstrated a commitment to address the most serious weaknesses in its IPR regime. The government has stepped up its raids and has begun drafting new regulations to control the importation and sale of the machinery used to manufacture optical disks.

Nonetheless, the problem is still pervasive and much more work needs to be done. In the Middle East we see intolerably high rates of software piracy. Kuwait is the only current WTO member completely lacking any formal copyright legislation. Due largely to the extensive efforts of our embassy, the Government of Kuwait recently put forward comprehensive copyright legislation. Nonetheless, the lack of effective copyright legislation has led to a piracy rate for business software applications of 86 percent. Moreover, the problem is not confined to those countries still developing strong intellectual property regimes to meet the standards of admission into the World Trade Organization. Rates are also excessive in many developed countries with which we have long-standing trade ties. Despite our and industry’s efforts, the rate of piracy of business software applications in Spain has hovered near 60 percent for two years. This is intolerably high for a developed country and a member of the EU.

To counter the increasing threat of software piracy and other IP infringement, Washington agencies are working together to develop mechanisms for better coordination of enforcement and related technical assistance policies. Our goals in this effort are to improve domestic and international laws and enforcement efforts, coordination and delivery of training, and IP crime intelligence-gathering and information sharing. This excellent initiative promises to further the effectiveness of domestic and international IP enforcement policies.

CONCLUSION: Looking Forward

In closing, through our efforts and those of others, I am hopeful that there is a growing international acceptance of the importance of protecting the legitimate interests of software creators. In an increasingly globalized economy, our trading partners are coming to realize that enforcing intellectual property rights in this sector not only is necessary to meet the standards of the emerging world trading system but to strengthen the rule of law and their own prospects for increased investment and growth. We will continue at every opportunity to press our trading partners and those countries seeking to join the world trading community that they must do all they can to address this important problem.

Let me also highlight some of the issues on which we will increasingly focus in the future, especially as we prepare for the next round of multilateral negotiations that will begin later this year in Seattle. First, there is an urgent need to press for adoption of the WIPO treaties to ensure that U.S. rights are protected and that the growth of digital technology will serve the interests of the public and copyright owners to mutual maximum advantage. Second, we have and will continue to press for complete and full adherence to the substantive and enforcement standards of TRIPS among developed and developing countries. As I mentioned, developed countries are already obligated to meet these standards, and the January 1, 2000, date for developing countries is rapidly approaching. In conjunction with our efforts aimed at ensuring full compliance with the WTO/TRIPS and WIPO treaties provisions, during the upcoming round of WTO trade negotiations, we will also push to address piracy issues related to newly developed optical media technologies—CDs, CD-ROMs, digital video discs and related products or devices—as well as software end-user piracy.

Looking even farther ahead, we need to be prepared to broaden and extend the minimum standards of protection set out in the current multilateral framework. This is especially true given the effect that the accelerating pace of technological development is bound to have on software and copyright generally. The WIPO treaties were an important step in this direction, but other challenges remain. We need to be prepared to adopt and extend this line of protection within the WTO/TRIPS context. In this regard, I would note that the Berne Convention was concluded in 1886, but that as technology changed and as new trading conditions emerged, it was necessary to continually revise and amend the convention. I am sure that this continual need to adapt to changing technology will continue well into the future. We need to be prepared to meet the challenge of change if we are to ensure the continued development of new software and other technologies. This is important for U.S. jobs, U.S. exports, and for the benefit of consumers around the world.