USTR Releases 2005 Special 301 Report

April 29, 2005. The Office of the U.S. Trade Representative (USTR) released its 2005 Special 301 Report [65 pages in PDF]. See also, Executive Summary [13 pages in PDF]. This report, among other things, elevates the People's Republic of China to the Priority Watch List. It has long been on the USTR's Priority Foreign Country List.

Peter Allgeier, the acting USTR, stated in a release that "This year, we are elevating China to the Priority Watch List for failure to effectively protect intellectual property rights and to meet its commitment to significantly reduce infringement levels, despite efforts by China's senior leadership to do so".

Allgeier (at right) continued that "China must take action to address rampant piracy and counterfeiting, including increasing the number of criminal IPR cases and further opening its market to legitimate copyright and other goods. We will work closely with U.S. industry and other stakeholders, with an eye toward utilizing WTO procedures to bring China into compliance with its trade obligations."

Section 301 is the statutory means by which the U.S. asserts its international trade rights, including its rights under World Trade Organization (WTO) agreements. In particular, under the "Special 301" provisions of the Trade Act of 1974, the USTR identifies trading partners that deny adequate and effective protection of intellectual property or deny fair and equitable market access to U.S. artists and industries that rely upon intellectual property protection. The Special 301 provisions are codified at 19 U.S.C. § 2411 et seq.

China. The USTR conducted an out of cycle review (OCR) in early 2005 to evaluate the PR China. It has now elevated it to the Priority Watch List. See, report at pages 15-23.

The report states that "China's inadequate IPR enforcement is resulting in infringement levels at 90 percent or above for virtually every form of intellectual property, according to the OCR submissions that USTR received."

"Overall piracy rates in China have not declined significantly since WTO accession, and in some sectors have increased from already extremely high levels. OCR submissions report estimated U.S. losses due to piracy of copyrighted materials alone ranging between $2.5 billion and $3.8 billion annually. Internet piracy is quickly becoming the number one threat to the copyright industry according to OCR submissions. End-user piracy of business software and other copyright materials, such as books and journals, remains a key concern." Moreover, the report states that "OCR submissions also confirm that China has not yet achieved a significant reduction in trademark counterfeiting."

The report also details that lack of criminal and administrative enforcement in China.

The report also addresses the lack of government transparency. It states that "Transparency in rulemaking is also a continuing problem. Government entities responsible for drafting rules often refuse to make drafts widely available for public comment, and instead limit their "consultations" to pre-selected industry and trade associations. A prime example is China’s drafting of the criminal judicial interpretation. During the 2003 Transitional Review of China’s WTO/TRIPS compliance, China pledged to increase transparency by making draft judicial interpretations on IPR matters available for public comment. Despite this pledge made in Geneva and numerous requests from the United States and rights holders, China refused to release a draft of its December 2004 judicial interpretation for public comment. In addition, guidelines for the examination of patents and trademarks are not publicly available, and numerous local rules, such as those governing trade secrets, are inconsistent with national law, regulations or rules, resulting in uncertainty and confusion for rights holders."

The report also states that "Copyright infringement on the Internet is a growing phenomenon in China because of loopholes in existing regulations and implementing rules", and because "China still has not acceded to the WIPO Internet Treaties."

The report states that "the Administration will use WTO instruments whenever appropriate to address our concerns regarding the unacceptable levels of counterfeiting and piracy in China." The U.S. will, for example, "invoke the transparency provisions of the WTO TRIPS Agreement to request that China provide detailed documentation on certain aspects of IPR enforcement that affect U.S. rights under the TRIPS Agreement."

Russia. The report also addresses Russia, which remains on the Priority Watch List. It states that "Despite some legislative improvements and increased engagement between the United States and Russia on IPR issues, certain aspects of Russia's IPR regime, including enforcement and data protection, appear to be inconsistent with Russia’s obligations under the 1992 U.S.-Russian Federation Trade Agreement and thus would not conform to obligations which Russia needs to fulfill in order to join the WTO. For these reasons, Russia remains on the Priority Watch List in 2005."

The report adds that "Enforcement in Russia remains weak and caused substantial losses for the U.S. copyright, trademark, and patent industries in the last year. Piracy in all copyright sectors continues unabated, and the U.S. copyright industry estimated losses of $1.7 billion in 2004."

It also states that "Internet piracy is increasing (industry reports that a Russian website is now the largest portal for pirate product in the world) ..." (Parentheses in original.)

European Union. The EU is lowered from the Priority Watch List to the Watch List. Its Priority Watch List status stemmed from its protection of geographical indications (GIs) for agricultural products and foodstuffs. The U.S. complained to the WTO, and prevailed.

Korea. Korea has also been lowered from the Priority Watch List to the Watch List. The report lists several favorable developments, including "introducing legislation that will create protection for sound recordings transmitted over the Internet (using both peer-to-peer and web casting services); implementing regulations that restore the ability of the Korea Media Rating Board to take necessary steps to stop film piracy; and increasing enforcement activities by the Standing Inspection Team against institutions using illegal software." (Parentheses in original.)

Canada. Canada remains on the Watch List. It has not ratified the WIPO Internet Treaties. The report also states that "The Canadian court decision finding that making files available for copying on a peer-to-peer file sharing service cannot give rise to liability for infringement under existing Canadian copyright law underscores the need for Canada to join nearly all other developed countries in implementing the WIPO Internet Treaties."

IP Industry Reaction. Robert Holleyman, P/CEO of Business Software Alliance (BSA), stated in a release that "In the case of China, one of the countries where the software industry now faces the most serious piracy problems, it is clear that USTR recognizes the severity and urgency of the problem. Their decisions today reflect the Bush Administration’s ongoing commitment to find ways to produce concrete and measurable progress in reducing piracy rates".

Eric Smith, President of the International Intellectual Property Alliance (IIPA) wanted the USTR and the Bush administration to do more. He stated in a release [PDF] that "IIPA is deeply concerned that USTR chose not to make an immediate announcement to suspend Russia’s eligibility for GSP benefits under the ongoing GSP IPR investigation nor to identify Russia as a Special 301 Priority Foreign Country this year. While IIPA greatly appreciates the work that USTR and other agencies have devoted to trying to address the many problems in Russia, we are concerned that today’s announcement maintaining Russia on the Priority Watch List fails to convey a clear warning that unless the situation dramatically changes, we are on a collision course with respect to Russia’s hoped-for WTO accession."

Smith also stated that "months. If, by November 1, 2005 criminal copyright enforcement by China has not significantly lowered piracy rates, the copyright industries expect that the U.S. Government will then immediately commence WTO consultations. IIPA believes that China is out of compliance with its WTO TRIPS obligations, with respect to both substantive law and enforcement, particularly by its failure to deter further infringements by applying criminal remedies."

Pat Schroeder, P/CEO of the American Publishers Association, stated in a release that ""Book piracy in China is hurting those publishing in virtually all sectors-trade books, academic and ELT materials, professional and scholarly books and journals and a host of online materials. We sincerely hope that USTR's announcement will encourage further meaningful engagement on these issues and will result in the significant reductions in all types of piracy that the Chinese government has promised. The publishing community stands ready to assist both the Chinese and U.S. governments in finding solutions to this growing problem."