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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, GAOs 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. GAOs report on the efforts of the Customs and Border Patrol 
(CBP) to interdict counterfeit goods at the border found that the bulk 
of CBPs 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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