I am David Quam, General Counsel of the International AntiCounterfeiting Coalition ("IACC"). On behalf of the IACC and its members, I would like to thank the Commission for the privilege and opportunity to testify on the issue of intellectual property protection in the People’s Republic of China ("China"). This issue is of great importance to many IACC member companies.

The IACC is the largest organization dealing exclusively with issues involving intellectual property piracy and counterfeiting. The IACC has approximately 150 members, representing a cross-section of industries, including the apparel, automotive, electrical, entertainment, software, luxury goods, consumer goods, personal care and pharmaceutical sectors. The total annual revenues of IACC members exceed US$650 Billion. The objective that brings such diverse industries together is their need to protect and enforce their intellectual property rights and their customers from those who would steal such property.

First, because my co-panelists represent the copyright industries and have years of experience working on copyright matters related to China, I will not dwell on the same issues. In view of the fact that many IACC member companies from the copyright community also belong to the organizations represented by Ms. Richardson and Mr. Smith, it is not necessary to repeat those issues, except to say that given the intellectual property ("IP") enforcement issues in China, there is significant overlap regarding the problems affecting the copyright and trademark communities.

Second, the IACC acknowledges and commends China for the progress it has made in its IP legal regime in recent years. China has significantly upgraded and improved its IP laws as it transitions to a market driven economy. In the past year alone, several IP laws have been amended as part of China’s efforts resulting in its recent entry into the World Trade Organization ("WTO"). Many IACC member companies favored China’s entry into the WTO.

Specifically, the trademark law has been amended and includes provisions that contain stronger enforcement provisions. In addition, the Supreme People’s Court has issued new interpretations regarding the application of the law in criminal counterfeiting cases, although numerous issues remain to be clarified. China is also amending its customs regulations relating to IP protection at the border, which we believe is vital to stopping trade in counterfeit and pirate product.

Next, we recognize that China’s transition to a market driven economy is not a simple task, but a task that affects millions of Chinese citizens and has an impact on fundamental htmects of its economy. Thus, providing effective protection and enforcement of IP to both its domestic and foreign enterprises are a daunting challenge.

In general, the counterfeit and pirate production in China has a detrimental impact on companies in the Chinese domestic market and in markets around the world. Highlighting this for a moment, the U.S. Customs Service has seized over 1,000 shipments from China containing pirate and counterfeit goods between October 1, 1999, and March 31, 2001, having a value of over $29 million. IACC member companies have reported seizures of infringing goods produced in China by police and customs officers from around the world.

Regarding trademark counterfeiting in China, the trademark community did not focus on the magnitude of the problem or recognize the scale of the problem as early as the copyright community’s recognition of a massive piracy problem. This is perhaps most evident by looking to the 1995 U.S.-China bilateral IP agreement addressing IP enforcement. Only one page of that agreement explicitly addressed trademark protection and enforcement. Thus, reflecting the fact that the trademark community did not make the U.S. Government aware of the problem adequately enough to be addressed in the agreement.

However, since 1995, the problem of trademark counterfeiting has become worthy of significant media attention¹ as trademark owners see a market flooded with counterfeit products. China’s own Development and Research Center has issued a report indicating that counterfeiting in China is a $16 billion industry. While the copyright community has generally focused on pirate production of sound recordings, motion pictures, software and interactive games, the trademark community confronts a market filled with counterfeit goods that are not limited to a few product lines, but affecting every conceivable product.

The IACC’s 2001 Special 301 submission to the Office of the U.S. Trade Representative identified goods from auto parts and industrial lubricants to chewing gum and razor blades being counterfeited. Procter and Gamble has previously stated that it loses $150 million per year to counterfeiting in China. Regarding a company like Procter and Gamble and many other companies whose trademarks are counterfeited, these are not luxury products with high price tags, but well known brands of soaps, batteries, razor blades, lotions, household cleaning products and other every day products that people use. If one seriously considers what is being counterfeited and the quantity, it is staggering. To reach a loss threshold into the hundreds of millions of dollars for these everyday products, the quantity has to be voluminous because the price differentials between counterfeit soaps or batteries are not as great as between counterfeit luxury goods and genuine products.

The growth in product counterfeiting in China is due to a multitude of factors. Some of these are:

• Transitioning economy;
• Closing of state owned enterprises;
• Local protectionism/profit-making by officials from illegal operations;
• Entry of foreign enterprises;
• Promotion of brands;
• Opposition to closing illegal operations;
• Opposition to confiscating machinery used to make counterfeit goods;
• Reluctance to criminal prosecution;
• Inadequate funding of enforcement agencies;
• Failure to imprison repeat offenders; and
• Lack of imposition of fines that are more than the cost of doing business.

This is far from an exhaustive list, but some of the reasons for the proliferation of counterfeit goods.

During the past year, the Chinese Government has announced special anti-counterfeiting enforcement initiatives. These types of initiatives are welcome. However, the problem continues to be the lack of penalties that demonstrate the seriousness of counterfeiting and the injury caused to trademark owners.

One IACC member has informed us that because of the ability to get authorities to conduct raids, these enforcement actions have made enforcement more difficult. Why? Because individuals are not adequately punished and machinery is not confiscated, the operations go underground so that raids are more difficult because the location of the illegal operation cannot be detected.

In another case involving the auto industry, the same illegal production facility has been raided three times during a two and a half year period. Unfortunately, despite the raids, the operation has not been shut down because individuals remain free to work and the equipment remains in use. Though fines were imposed, the level of fines was not sufficient to deter those involved from returning to this illegal production.

As of today, I can say that we hope that the new laws will afford better protection, enforcement and tougher penalties. However, hope for better protection at some indefinite time in the future means that trademark owners will continue to suffer from severe counterfeiting.

The trademark community, while suffering from severe counterfeiting, has been actively involved in a dialogue with the Chinese Government both regarding law and training/education. Trademark owners have worked to make concrete recommendations about legal changes that would improve China’s IP enforcement regime. It is also involved in providing training to enforcement officials in order to improve their knowledge of IP. Moreover, trademark owners have helped to fund trips to China by U.S. experts, e.g., judges, prosecutors, FBI agents, private industry representatives and others. Thus, trademark owners have not only suffered economic losses from counterfeiting, but expended funds to help educate and train Chinese officials.

The training and education efforts of Chinese enforcement officials by both the IP community and the U.S. Government have been substantial. In addition to the workshops and seminars by trademark owners, the U.S. Government has funded many IP enforcement-training programs dating back several years. As a result of the 1995 bilateral IP agreement, which included detailed IP enforcement obligations, the U.S. Government funded numerous IP enforcement-training programs.² There is no doubt that the U.S. Government and industry have made a substantial investment toward assisting China in understanding what the enforcement requirements are and how these enforcement obligations might be implemented.

Supplementing these efforts are the efforts of intergovernmental organizations. Chinese officials have often participated in IP enforcement seminars funded by intergovernmental organizations having U.S. Government and/or industry participation.³

Looking ahead, IP enforcement training for China’s enforcement agencies will continue. In fact, the IACC, IIPA and other industry associations have been meeting with the U.S. Patent and Trademark Office about a planned program later this year. Moreover, other agencies of the U.S. Government and other associations are working on additional IP programs.

An indication of the importance of effective IP protection in China comes from other Governments as well. The U.S. IP industries are not alone in suffering from massive piracy and counterfeiting. Opportunities to impress upon the Chinese that more must be done to enforce IP rights may exist in concert with European and Japanese officials and their industries.

European IP officials have also recognized the IP issue in China and have established an office in China. This presents an opportunity to explore the possibility of joint U.S.-European actions that may prompt China to improve its IP enforcement. From an industry perspective, U.S. and European companies are already working together in China on the trademark counterfeiting issue. Therefore, to the extent that the U.S. and European governmental agencies can engage Chinese officials on matters of mutual interest, this should be encouraged.

Recently, the Japanese Patent Office has voiced its concern about China’s counterfeiting of Japan’s trademark industries. Indeed, given the fame of Japan’s products, the U.S. Government and industry should encourage Japan’s active involvement in the anti-counterfeiting effort. For our part, the IACC has met with Japanese officials on several occasions in recent months to explain the importance of Japan’s more active role in combating counterfeiting in China, whether through its companies that are the victims or through the Government’s effort to engage the appropriate Chinese Government entities.

Conclusion

Despite the progress in legal amendments in China, it is difficult to be very optimistic about enforcement in China. The enforcement system is complex because of the numerous administrative agencies as well as the tensions between the various levels of entities, e.g., national, provincial, local/municipal. In addition, because fines help to finance the operations of the entity that collects the fine, there is no motivation to coordinate enforcement efforts, a fundamental obstacle to effective enforcement.

Moreover, despite the progress in IP laws and special anti-counterfeiting initiatives of limited duration, trademark owners continue to suffer sever counterfeiting. It raises the question: what can the U.S. Government do on behalf of the affected industries if counterfeiting remains at these levels? This may be an issue worthy of further study and one that requires increased industry-government dialogue.

On behalf of the IACC, I thank the Commission for this opportunity and am happy to answer any questions you may have.


______

ENDNOTES

1. See "China’s Piracy Plague", BusinessWeek (June 5, 2000); "China – A Powerful Faux China’s Drowning in Pool of Counterfeits", China Online (July 14, 2000); "Beijing’s Phony War on Fakes", Fortune (October 30, 2000).

2. Although China has just entered the World Trade Organization, TRIPS-related training was being provided in 1995 to prepare China for its need to provide TRIPS compliant enforcement.

3. The IACC has participated in a number of IP enforcement seminars funded by the World Intellectual Property Organization that have included Chinese participants.