[House Hearing, 109 Congress]
[From the U.S. Government Publishing Office]
PRODUCT COUNTERFEITING: HOW FAKES ARE UNDERMINING U.S. JOBS,
INNOVATION, AND CONSUMER SAFETY
=======================================================================
HEARING
before the
SUBCOMMITTEE ON
COMMERCE, TRADE, AND CONSUMER PROTECTION
of the
COMMITTEE ON ENERGY AND COMMERCE
HOUSE OF REPRESENTATIVES
ONE HUNDRED NINTH CONGRESS
FIRST SESSION
__________
JUNE 25, 2005
__________
Serial No. 109-26
__________
Printed for the use of the Committee on Energy and Commerce
Available via the World Wide Web: http://www.access.gpo.gov/congress/
house
__________
U.S. GOVERNMENT PRINTING OFFICE
22-982 WASHINGTON : 2005
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------------------------------
COMMITTEE ON ENERGY AND COMMERCE
JOE BARTON, Texas, Chairman
RALPH M. HALL, Texas JOHN D. DINGELL, Michigan
MICHAEL BILIRAKIS, Florida Ranking Member
Vice Chairman HENRY A. WAXMAN, California
FRED UPTON, Michigan EDWARD J. MARKEY, Massachusetts
CLIFF STEARNS, Florida RICK BOUCHER, Virginia
PAUL E. GILLMOR, Ohio EDOLPHUS TOWNS, New York
NATHAN DEAL, Georgia FRANK PALLONE, Jr., New Jersey
ED WHITFIELD, Kentucky SHERROD BROWN, Ohio
CHARLIE NORWOOD, Georgia BART GORDON, Tennessee
BARBARA CUBIN, Wyoming BOBBY L. RUSH, Illinois
JOHN SHIMKUS, Illinois ANNA G. ESHOO, California
HEATHER WILSON, New Mexico BART STUPAK, Michigan
JOHN B. SHADEGG, Arizona ELIOT L. ENGEL, New York
CHARLES W. ``CHIP'' PICKERING, ALBERT R. WYNN, Maryland
Mississippi, Vice Chairman GENE GREEN, Texas
VITO FOSSELLA, New York TED STRICKLAND, Ohio
ROY BLUNT, Missouri DIANA DeGETTE, Colorado
STEVE BUYER, Indiana LOIS CAPPS, California
GEORGE RADANOVICH, California MIKE DOYLE, Pennsylvania
CHARLES F. BASS, New Hampshire TOM ALLEN, Maine
JOSEPH R. PITTS, Pennsylvania JIM DAVIS, Florida
MARY BONO, California JAN SCHAKOWSKY, Illinois
GREG WALDEN, Oregon HILDA L. SOLIS, California
LEE TERRY, Nebraska CHARLES A. GONZALEZ, Texas
MIKE FERGUSON, New Jersey JAY INSLEE, Washington
MIKE ROGERS, Michigan TAMMY BALDWIN, Wisconsin
C.L. ``BUTCH'' OTTER, Idaho MIKE ROSS, Arkansas
SUE MYRICK, North Carolina
JOHN SULLIVAN, Oklahoma
TIM MURPHY, Pennsylvania
MICHAEL C. BURGESS, Texas
MARSHA BLACKBURN, Tennessee
Bud Albright, Staff Director
David Cavicke, Deputy Staff Director and General Counsel
Reid P.F. Stuntz, Minority Staff Director and Chief Counsel
______
Subcommittee on Commerce, Trade, and Consumer Protection
CLIFF STEARNS, Florida, Chairman
FRED UPTON, Michigan JAN SCHAKOWSKY, Illinois
NATHAN DEAL, Georgia Ranking Member
BARBARA CUBIN, Wyoming MIKE ROSS, Arkansas
GEORGE RADANOVICH, California EDWARD J. MARKEY, Massachusetts
CHARLES F. BASS, New Hampshire EDOLPHUS TOWNS, New York
JOSEPH R. PITTS, Pennsylvania SHERROD BROWN, Ohio
MARY BONO, California BOBBY L. RUSH, Illinois
LEE TERRY, Nebraska GENE GREEN, Texas
MIKE FERGUSON, New Jersey TED STRICKLAND, Ohio
MIKE ROGERS, Michigan DIANA DeGETTE, Colorado
C.L. ``BUTCH'' OTTER, Idaho JIM DAVIS, Florida
SUE MYRICK, North Carolina CHARLES A. GONZALEZ, Texas
TIM MURPHY, Pennsylvania TAMMY BALDWIN, Wisconsin
MARSHA BLACKBURN, Tennessee JOHN D. DINGELL, Michigan,
JOE BARTON, Texas, (Ex Officio)
(Ex Officio)
(ii)
C O N T E N T S
__________
Page
Testimony of:
Arthur, Stephen C., Vice President, Government Affairs,
Grocery Manufacturers Association.......................... 15
Christian, James, Head of Corporate Security, Novartis
International AG........................................... 19
DelBianco, Steve, Vice President, Association of Competitive
Technology, Member, U.S. Chamber of Commerce, Coalition
Against Counterfeiting and Piracy.......................... 29
Emmer, Scott, Brand Protection Manager, Federal-Mogul
Corporation, on Behalf of the Motor and Equipment
Manufacturers Association.................................. 11
Pearl, David S., II, Executive Vice President, Uniweld
Products, Inc.............................................. 24
(iii)
PRODUCT COUNTERFEITING: HOW FAKES ARE UNDERMINING U.S. JOBS,
INNOVATION, AND CONSUMER SAFETY
----------
WEDNESDAY, JUNE 15, 2005
House of Representatives,
Committee on Energy and Commerce,
Subcommittee on Commerce, Trade,
and Consumer Protection,
Washington, DC.
The subcommittee met, pursuant to notice, at 2:59 p.m., in
room 2123 of the Rayburn House Office Building, Hon. Cliff
Stearns (chairman) presiding.
Members present: Representatives Stearns, Cubin,
Radanovich, Bass, Ferguson, Rogers, Murphy, Blackburn, Barton
(ex officio), and Schakowsky.
Staff present: Chris Leahy, policy coordinator; Brian
McCullough, professional staff; Will Carty, professional staff;
Lisa Miller, deputy communications director; Billy Harvard,
clerk; Michael Abraham, clerk; David Nelson, minority
investigator; Jessica McNiece, research assistant; and Jonathan
Cordone, minority counsel.
Mr. Stearns. The subcommittee will come to order. Good
afternoon, everybody.
Today, counterfeiters have become just another competitor
for legitimate U.S. businesses in the high stakes world of
global commerce and remain busy in every industry and in every
region of the world, developing new ways to exploit and steal
the hard work, creativity, and knowledge of others.
Unfortunately, in many areas of the world, the traditional
practice of branding goods and registering trademarks no longer
adequately protects the brand value and know how that is
associated with distinctive and innovative products from the
thieves and from the criminal organization.
My colleagues, as we hear from the distinguished panel
before us today, global counterfeiting is not just limited to
fake, high end watches, movie, DVDs, and designer apparel, it
is a multi-billion dollar criminal enterprise that has
infiltrated virtually every section of the United States
economy, targeting our industrial know how in cars, computers,
medicine, aircraft parts, and frankly just about everything.
What is even more disturbing is that counterfeiting thieves are
no longer content with just undercutting the inexpensive labor
intensive product with cheaper fakes; they are going after high
value products that represent a large part of the current U.S.
intellectual capital and know how.
According to the World Custom Organization in Interpol,
product counterfeiting and copyright privacy have increased
from $5.5 billion a year enterprise in 1982 to one that costs
almost $600 billion annually. In the United States, product
counterfeiting alone costs United States businesses between
$200 and $250 billion annually and that is a figure statistic
according to the FBI.
Now if these numbers don't alarm you, be aware that
counterfeiting is not a victimless crime. In terms of U.S.
jobs, those sterile economic statistics translate into layoffs,
plant closings at our home here in the United States. U.S.
Customs and border protection calculate that the resulting loss
in revenue from counterfeiting translate into the loss of more
than 750,000 United States jobs. Companies both large and small
are faced with sharply reduced revenue and of course lost
profits when counterfeiters strike. This, in turn, translates
into less capital to invest in expansion, research and
development, and innovation. In the auto sector alone, the
Federal Trade Commission estimated that by eliminating fakes,
the U.S. auto industry could create at least 200,000 more auto
related jobs all of the time when many of these jobs are being
lost.
My concern today is about how fakes are robbing our U.S.
companies of the hard earned intellectual property and
ingenuity that they own and need to compete globally. Consumer
safety is another area that greatly concerns our committee.
Counterfeiters have attempted to sell fake baby formula,
pharmaceuticals, phony aircraft parts just quickly to turn a
fast buck. Those are frightening revelations that should
concern all of us.
The World Health Organization figures that over 10 percent
of the world's medicines are simply counterfeit with
percentages reaching as high as 60 percent in the developing
world. There also have been product recalls including consumer
products like shampoo and lifestyle pharmaceuticals, increased
technology capability has made counterfeiters even more brazen
to push their way into lucrative intellectual property driven
industries like healthcare, goods, and of course,
pharmaceuticals. Deaths and injuries are inevitable if the
current rate of counterfeiting continues.
The auto industry is starting to see more critical safety
components like brake pads and windshields being counterfeited.
And there are even reports from the FAA that over 2 percent of
all aircraft replacement parts are counterfeited each year with
some linked to fatal crashes.
My colleagues, this is a massive and pervasive problem that
demands a massive and global response. I applaud the
administration for action like STOP, the Strategic Targeting
Organized Privacy Plan and for aggressively using the USGR
Special 301 Report to call our countries out that should be
doing better. According to the U.S. Custom Service, over 60
percent of sized counterfeit goods last year originated from
China. As we learned last week, the administration is taking
China to task for its lack of intellectual property rights
enforcement placing it on the USGR Special 301 Priority Watch
List.
But before we direct all the blame, we should also
understand that counterfeiting is clearly a global phenomena
and not just a Chinese one. Counterfeiting hotspots in Eastern
Europe, South America, even in the United States are just
capable of inflicting serious damage on U.S. economy as any
other region. Unfortunately, with today's advances in computer
technology, global supply chain management, and the Internet,
even the smallest counterfeiting operation based anywhere in
the world can be a major problem for our companies.
As I said in last week's hearing on the U.S./China Joint
Commission on Commerce and Trade, intellectual property rights
are critical to our economy and to the engine of innovation.
The fortress around our ingenuity, technological leadership,
and creativity is the rule of law. And as we will hear today,
it is time to insure that our laws are just as robust as they
can be, that they are aggressively enforced, and that all
relevant parties be required to live up to our international
agreements regarding IPR especially obligations under WTO and
the trade related aspects of intellectual property right
agreement.
Again, I would like to welcome our distinguished panel of
witnesses here today. I would especially like to welcome Dr.
David Pearl of Uniweld, Incorporated, a family owned
manufacturing company based in Fort Lauderdale, Florida for
joining us today. Your story gives a voice to all the U.S.
small companies that are also feeling the brunt of this global
problem.
I would also like to thank the U.S. General Accounting
Office for the samples of counterfeit products they provided to
us this afternoon. They are on the table there and we look
forward to the testimony from our witnesses. And I would say we
will be showing a video, a 5-minute video after the opening
statement on counterfeiting so I look forward to that.
With that, the ranking member, Ms. Schakowsky.
[The prepared statement of Hon. Cliff Stearns follows:]
Prepared Statement of Hon. Clifford Stearns, Chairman, Subcommittee on
Commerce, Trade, and Consumer Protection
Good afternoon. Today, counterfeiters have become just another
competitor for legitimate U.S. businesses in the high-stakes world of
global commerce, and remain busy in every industry and in every region
of the world developing new ways to exploit and steal the hard work,
creativity, and knowledge of others. Unfortunately, in many areas of
the world, the traditional practice of branding goods and registering
trademarks no longer adequately protects the brand value and know-how
associated with distinctive and innovative products from thieves and
criminal organizations. As we will hear from the distinguished panel
before us today, global counterfeiting is not just limited to fake
high-end watches, movie DVDs, and designer apparel, it is a multi-
billion dollar criminal enterprise that has infiltrated virtually every
sector of the U.S. economy--targeting our industrial know-how in cars,
computers, medicines, aircraft parts, or just about anything.
What's even more disturbing is that counterfeiting thieves are no
longer content with undercutting inexpensive, labor-intensive products
with cheaper fakes; they are going after high-value products that
represent a large part of current U.S. intellectual capital and know-
how. According to the World Customs Organization and Interpol, product
counterfeiting and copyright piracy have increased from a $5.5 billion
dollar a year enterprise in 1982 to a one that costs almost $600
billion annually. In the U.S., product counterfeiting alone costs U.S.
business $200-$250 billion annually, according to the FBI.
If the numbers don't alarm you, be aware that counterfeiting is not
a victimless crime. In terms of U.S. jobs, those sterile economic
statistics translate into layoffs and plant closings at home. U.S.
Customs and Border Protection calculate that the resulting loss in
revenue from counterfeiting translates into the loss of more than
750,000 U.S. jobs. Companies, both large and small, are faced with
sharply reduced revenue and lost profits when counterfeiters strike.
This, in turn, translates into less capital to invest in expansion,
research and development, and innovation. In the auto sector alone, the
Federal Trade Commission estimated that by eliminating fakes, the U.S.
auto industry could create at least 200,000 more auto-related jobs, all
at a time when many of these jobs are being lost. Our concern today is
about how fakes are robbing our U.S. companies of the hard-earned
intellectual property and ingenuity that they own and need to compete
globally.
Consumer safety is another area that greatly concerns the
Committee. Counterfeiters have attempted to sell fake baby formula,
counterfeit pharmaceuticals, and phony aircraft parts to turn a fast
buck. Those are frightening revelations that should alarm all of us.
The World Health Organization (WHO) figures that over ten percent of
the world's medicines are counterfeit, with percentages reaching as
high as 60% in the developing world. There also have been product
recalls involving consumer products like shampoo and life-style
pharmaceuticals. Increased technological capability has made
counterfeiters even more brazen to push their way into lucrative,
intellectual property-driven industries like healthcare goods and
pharmaceuticals. Deaths and injuries are inevitable if the current rate
of counterfeiting continues. The auto industry is starting to see more
critical safety components like brake pads and windshields being
counterfeited, and there are even reports from the Federal Aviation
Administration (FAA) that over 2% of all aircraft replacement parts are
counterfeited every year, with some linked to fatal crashes.
This is a massive and pervasive problem that demands a massive and
global response. I applaud the Administration for action like the STOP!
(Strategy Targeting Organized Piracy) Initiative and for aggressively
using the USTR Special 301 Report to call out countries that should be
doing better. According to the U.S. Customs Service, over 60% of seized
counterfeit goods last year originated from China. As we learned last
week, the Administration is taking China to task for its lack of
Intellectual Property Rights (IPR) enforcement, placing it on the USTR
Special 301 Priority Watch List. But before we direct all the blame, we
should also understand that counterfeiting is clearly a global
phenomenon not just a Chinese one. Counterfeiting hot spots in Eastern
Europe, South America, and even in the U.S. are just as capable of
inflicting serious damage on U.S. economy as any other region.
Unfortunately, with today's advances in computer technology, global
supply chain management, and the Internet, even the smallest
counterfeiting operation based anywhere in the world can be a major
problem for our companies.
As I said at last week's hearing on the U.S.-China Joint Commission
on Commerce and Trade (JCCT), Intellectual Property Rights (IPR) are
critical to the U.S. economy and its engine of innovation. The fortress
around our ingenuity, technological leadership, and creativity is the
rule of law. And as we will hear today, it is time to ensure that our
laws are as robust as they can be, they are aggressively enforced, and
that all relevant parties be required to live up to our international
agreements regarding IPR, especially obligations under the WTO and the
TRIPs (Trade-Related Aspects of Intellectual Property) agreement.
Again, I would like to welcome our distinguished panel of witnesses
here today. I would like to especially welcome Mr. David Pearl of
Uniweld Inc., a family-owned manufacturing company based in Fort
Lauderdale, Florida for joining us today. Your story gives a voice to
all the U.S. small businesses that are also feeling the brunt of this
global scourge. I also would like to thank the U.S. General Accounting
Office for the samples of counterfeit products they provided us for
this hearing. We look forward to the important testimony from all of
our witnesses. Thank you.
Ms. Schakowsky. Thank you, Mr. Chairman. I appreciate you
calling today's hearing.
Counterfeiting poses a threat not only to our present and
future economic wellbeing, but also to the health and safety of
all Americans. Many Americans think of counterfeits as limited
to poor copies of luxury products that are sold on city street
corners. However, we know that the problem is much bigger than
a fake Kate Spade bag and has serious consequences that we must
explore. I am pleased that we will be discussing counterfeit
auto parts and prescription drugs. Our witnesses' testimony,
which I look forward to hearing, should add urgency to the task
of dealing with foreign pirates that steal intellectual
property and undermine the healthy of the economy.
While stealing our movies is wrong, selling defective
medicines, auto brake parts, or helicopter rotor components to
Americans or people anywhere in the world is a heinous crime,
yet such crimes occur every day. The question we must ask is
what is this administration doing about it. Where is the
commitment to defend this country from those that would profit
from counterfeit goods regardless of the human consequences?
The Food and Drug Administration is charged along with customs
to protect us from counterfeit drugs.
I support re-importation and I believe that we could do it
safely while the administration continues to block
comprehensive re-importation legislation obstensively to
guarantee safety. It is not doing its job with drugs that are
coming into the country already. The oversight committee has
discovered that the real policy of this administration seems to
be to allow virtually any knockoff pharmaceutical into the
United States unimpeded. The FDA has tested counterfeits, found
them to be subponent and yet still allowed them to proceed into
the commerce of the United States.
When confronted with hard facts regarding this problem by a
committee, the administration chose to solve the problem by
directing that no more packages containing prescription drugs
shipped to individuals be opened at the international mail
facility in Miami. I guess they figure that if they don't see
it, they cannot be blamed. Even when we try to stop
counterfeits, we are facing an uphill battle. Customs has been
overwhelmed by years with too many containers and too few
inspectors. And that was before 9/11. Now with those scarce
resources shifted to the detection of possible chemical,
biological, or nuclear weapons, we are increasingly vulnerable
to the threats posed by fake auto and aircraft parts and other
counterfeit products with the potential to do serious harm.
The Internet has made shopping for substandard goods very
easy. Visa and MasterCard have made their entry into the
commerce of the United States simple and virtually without
consequence. What can we do about it? Should the transporters
and financiers of these often dangerous products take some
responsibility for their involvement in illegal commerce?
The entry and sale of counterfeit goods in the United
States is already a crime. Nonetheless, it may be that the laws
do need to be tightened. We know that more resources must be
devoted to this fight; however, the problem with counterfeit
goods appears to be more likely a case of tragically misplaced
priorities by the executive branch. That this administration
chooses not to devote the necessary enforcement resources is
what has enabled the swelling wave of privacy--piracy, excuse
me, piracy.
Last week, we had a hearing on trade with China. The
Department of Commerce witness sent here with little or no
preparation or ability to answer many of our questions on most
subjects did tell us that despite paper promises,
counterfeiting in China continues unabated. Why hasn't the
administration taken concrete action to stop this?
Mr. Chairman, I would like to see the officials from HHS,
Homeland Security, and the Commerce Department that are
responsible for the lax enforcement of existing laws and the
appeasement trade policy come before us to tell us why they are
failing to protect our workers, companies, and the public as a
whole from counterfeit products. I hope that we will be able to
hear from them as we continue our work on trade.
Mr. Chairman, I thank you for today's hearing. I believe
this committee should get to the root cause of the rip offs
that are rapidly displacing jobs and threatening the safety of
all Americans. And I believe that the administration must be
called to account.
Mr. Stearns. I thank the gentlelady.
Mr. Rogers?
Mr. Rogers. Thank you, Mr. Chairman.
I want to thank the panelists for being here today and I
hope this does not become a partisan argument about what
policies do and do not work. Every product that we see up on
that table cost an American a job. It costs financial
reinvestment in that particular business or growth.
This is a serious problem that really has exploded over the
last few years exponentially. And together, I think we can come
up with a very good common sense solution to target these folks
who are costing American jobs. And the climate has changed.
It used to be in America we did not have to worry about
folks who were doing knockoffs and other things because we were
going to be more innovative and more competitive. Well the
world has caught up and we have to do a couple of things. We
need to stand up for the world and every country that
participates in commerce saying hey, look, you need to live by
the rule of law. We need to abide by the sanctity of contracts,
and we need to protect intellectual property rights. If we do
those things, we will have commerce for generations that
benefit not only every American, but certainly our trading
partners as well.
So again, I appreciate your being here. I don't believe
that there is a single person at fault in this process. I
commend the chairman for having this hearing and setting us on
a course to take some pretty tough and aggressive action in
protecting these American jobs and your products and your
ability to protect your intellectual property.
So Mr. Chairman, I thank you again, and I yield back the
remainder of my time.
Mr. Stearns. I thank the gentleman.
The gentlelady from Tennessee, Ms. Blackburn.
Ms. Blackburn. Thank you, Mr. Chairman. And I want to thank
you for holding this hearing today and for your attention to
the importance of intellectual property. I will tell you among
my constituents in Tennessee, you are building a pretty good
fan base but we are not ready to let Florida Gators take on UT.
We are going to reserve that one.
Mr. Stearns. Okay.
Ms. Blackburn. But they do appreciate the attention that
the subcommittee is putting to protecting those whose
production of their product and practicing their trade depends
on being able to apply a value to their intellectual property.
And Mr. Chairman, this weekend, I held a listening session
in Nashville on intellectual property theft and on our trade
with China. And in the room we had songwriters, we had record
labels, we had recording engineers, we had film producers,
music publishers, book publishers, and artists. And they all
came together and shared their thoughts on how this theft and
how counterfeiting impacts them and their ability to earn a
living practicing their craft. And it is important for us to
point out that this does not just impact big business. In my
district and in my state, it impacts small business and
independent contractors.
Mr. Chairman, I look forward to hearing the testimony of
our witnesses. I thank our panel for being with us today and I
look forward to working with you and the administration as we
address the issues that we are going to discuss here today.
Thank you. I yield back.
Mr. Stearns. Thank you.
Mr. Ferguson, New Jersey.
Mr. Ferguson. Thank you, Mr. Chairman for holding this
hearing on an issue that is really of immense importance to
many of the industry sectors in our country and many of them
are represented today.
The all out theft of intellectual property and copyrights
and the blatant copying of products innovated in our country
presents grave threats both to our economy and to the health
and safety of our citizens. Whether it is the widespread
copying of American movies and songs in places like China, to
the counterfeiting of pharmaceuticals practically everywhere
throughout the world, stealing these patent processes is a
tremendous threat.
The committee has held hearings over the past few years
looking into the harm that comes from counterfeiting and patent
and copyright infringement. The legal and dangerous fake
pharmaceuticals account for hundreds of deaths and many other
health complications around the world. These killer drugs find
their way to our shores today even with the stringent controls
that we have on pharmaceutical imports.
This issue further underscores the threat that is present
and that our vigilance--continued vigilance is really
necessary. We have to know for certain where our
pharmaceuticals actually are coming from and not let this
supposed specter of savings from imported drugs from other
countries allow us to forget the dangers that are present with
drugs coming into our country from other countries.
And I have to respectfully suggest to my friends in this
Congress who say they support the re-importation of drugs into
our country yet are very concerned about the issue of
counterfeits. Wake up and smell the coffee. Let us get a clue,
folks. If you like counterfeit drugs, you will love re-
importation.
When you--we are going to hear today from some of our
witnesses about the poorest borders of the EU. We are going to
hear about counterfeit drugs being made in Russia and how they
make their way into the EU and eventually of course will make
their way into the United States. We have folks who say well
importation from Canada is no problem. Well where is Canada
getting their drugs? We are seeing huge increases of imports
from places all around the world into Canada. Canada cannot
possibly supply their drugs needs and ours. So where is Canada
getting the drugs?
If you like counterfeit drugs, you will love drug re-
importation. And we have to deal with that. We have to wake up
and smell the coffee on that because saying that we are going
to simply start importing our drugs from other countries and
that somehow is going to solve the counterfeit problem. We are
having a tough enough time dealing with the counterfeit
problem, even with the tough laws and stringent standards that
we have in this country today. We are kidding ourselves if we
think we are going to help solve the counterfeit problem. We
are going to make it exponentially worse.
Today I also want to make sure I welcome Mr. Jim Christian,
who is here from Novartis. I am looking forward to his insights
based on the counterfeiting issue. His insights are, of course,
based on over 30 years of fighting counterfeiting.
Welcome to all of our panelists today, we look forward to
hearing all of your insights.
Thank you, Mr. Chairman, I yield back.
Mr. Stearns. Thank you, gentleman.
The gentleman from New Hampshire, Mr. Bass.
Mr. Bass. Mr. Chairman, I think this is an interesting
hearing and I am eager to hear the witnesses, so I will waive.
Mr. Stearns. All right. The gentleman waives.
And with that, we welcome--I think we are going to play the
video first, so with that, we will shut the lights off so we
can see the video.
[Video.]
Mr. Stearns. Well that was a pretty good introduction here.
The chairman of the full committee, Mr. Barton is recognized.
Chairman Barton. Mr. Chairman, I am not going to be here
very long. I appreciate the hearing and I have scanned the
testimony. This is a serious issue, and I appreciate you doing
it.
[The prepared statement of Hon. Joe Barton follows:]
Prepared Statement of Hon. Joe Barton, Chairman, Committee on Energy
and Commerce
Thank You, Chairman Stearns, for holding this important hearing
today. This subcommittee had a hearing last week on U.S.-China trade
issues, and particularly intellectual property issues. This hearing on
how counterfeiting hurts the American economy and American consumers is
a natural extension of that discussion.
Intellectual property (IP) is one of our country's biggest exports.
From movies and music to pharmaceuticals and manufactured goods, our
innovation, creativity, and entrepreneurship are some of our most
important cultural and economic strengths. Given our growing trade
deficit--not to mention other concerns such as currency manipulation--
it is increasingly important that we protect the economic rights of our
inventors, engineers, and designers. In that spirit, I would like to
commend the Administration for its interagency ``STOP! Initiative,''
and specifically, the United States Trade Representative for recently
placing China on the Special 301 Priority Watch List because of the
rampant rate of counterfeiting and piracy in that country. Last year,
more than 66% of counterfeit goods seized by U.S. Customs were traced
to China. I trust that the administration will continue to keep a
vigilant eye on this issue in China and elsewhere.
The growth of the global market for illegal goods has grown
exponentially in the last 20 years, estimated now to be more than $600
billion dollars a year. More than one third of that amount is in fake
American goods, which is estimated to cost the U.S. economy over \3/4\
of a million jobs. We all enjoy cheaper goods, but nobody wants to lose
U.S. jobs. We expect our trade partners to enforce international law
with regard to copyrights, patents and trademarks in order to prevent
these losses. Importantly, the members of the World Trade Organization
and signatories to the Trade-Related Aspects of Intellectual Property
Agreement (``TRIPs Agreement'')--including the U.S., China, and India--
agree to abide by minimum standards for IP protection, including
requiring enforcement procedures for any IP infringement. These
agreements need to be adhered to and enforced.
Regardless of whether counterfeit products come from China, Russia,
Ukraine, Brazil, India, or elsewhere, there is significant economic
impact to American companies. However, there is sometimes less
discussion of an equally important concern regarding the safety of some
of these products for consumers. When fake automobile brake pads or
counterfeited airline parts are thought to be genuine, they are
installed and presumed safe. When this happens, all of us are at risk.
Furthermore, counterfeit pharmaceuticals--which may account for as much
as 60% of the market in some countries--frequently do not have the
proper ingredients or the proper amounts of those ingredients,
rendering them at the very least ineffective, and at worst potentially
lethal. Our country has an economic, regulatory, and legal system that
ensures a high degree of safety and accountability. When products come
into this country that do not abide by the same rules, the entire
system is undermined. This must not be allowed to continue as it does.
Simply put, Mr. Chairman, this is a serious concern for our
country. Our economy relies heavily on our ability to innovate and
improve American products for sale here and around the world. If the
economic incentives to ``build a better mousetrap'' are eroded, it
could have devastating effects on our economy. Additionally, the
American people expect their government to protect them against unsafe
products whatever they may be. We have a responsibility to keep
dangerous counterfeits out of the market.
I want to thank the Chairman for putting this panel together to
help us understand the extent of these problems and the implications
for American industries and consumers. I look forward to their
testimony.
I yield back the balance of my time.
Mr. Stearns. I thank the distinguished chairman. Ms. Cubin
is recognized.
Ms. Cubin. Thank you, Mr. Chairman. I will pass at this
time so that I will have more time in questions.
[The prepared statement of Hon. Barbara Cubin follows:]
Prepared Statement of Hon. Barbara Cubin, a Representative in Congress
from the State of Wyoming
Thank you, Mr. Chairman.
In their wisdom, the founders of our Nation gave Congress the
constitutional power to protect the Intellectual Property of ``Authors
and Inventors'' in order to ``promote the Progress of Science and the
useful Arts.'' Among the many political and legal innovations of the
Constitution, the addition of this enumerated power to Article I was
agreed to unanimously. The spirit of ownership contained in this clause
as well as throughout our country's founding document lives on today as
a cornerstone of our economy.
Patents encourage groundbreaking innovation and development by
protecting the IP that is even more valuable than material components.
Copyrights serve the cause of the arts by rewarding creativity.
Trademarks protect consumers from confusion and deceptive marketing
practices by allowing them to identify and distinguish unique goods and
services.
But we still have much work to be done in protecting IP to keep up
with technological innovations and meet the challenges presented by the
global marketplace, in which some of our fellow World Trade
Organization members and trading partners, like China, fail to comply
with their IP protection obligations. The astonishing rates of
counterfeiting and piracy in countries like China, to go along with a
lack of effective deterrents, casts a long dark shadow on our efforts
to promote fair and open global trade. From software and artistic
content to auto parts and pharmaceuticals, the lack of IP protection
abroad harms U.S. industries and small business owners and in many
instances poses a danger to consumer safety.
I look forward to our panel's insight into the efficacy to date of
IP protections in international trade agreements. I hope their
expertise will help us identify how to better enforce these obligations
abroad, as well as provide guidance as to how we can best protect IP in
future trade agreements.
Mr. Chairman, I yield back the balance of my time.
Mr. Stearns. Okay. All right. With that, we welcome Mr.
Scott Emmer, Brand-Protection Manager of the Federal-Mogul
Corporation; and Mr. Stephen Arthur, Grocery Manufacturers
Association; and Mr. James Christian, Head of Corporate
Security at Novartis International; and Mr. David S. Pearl,
Executive Vice President, Uniweld Products; and Mr. Steve
DelBianco, Vice President, Association of Competitive
Technology, Member of U.S. Chamber. And before you start your
testimony, I think the ranking member has a request.
Ms. Schakowsky. Thank you, Mr. Chairman.
I just ask for unanimous consent to submit the testimony of
the ranking member, John Dingell into the record.
Mr. Stearns. By unanimous consent, so ordered.
[The prepared statement of Hon. John Dingell follows:]
Prepared Statement of Hon. John D. Dingell, a Representative in
Congress from the State of Michigan
Mr. Chairman, thank you for calling this hearing today. During my
tenure as Chairman, the Subcommittee on Oversight and Investigations
held 35 days of hearings on unfair foreign trade practices over some
six Congresses. Those hearings detailed many of the same problems we
are examining today--counterfeiting, customs fraud, market entry
barriers, and other unfair and illegal practices undertaken by foreign
pirates aided and abetted by their governments. These scoundrels have
continued to steal our jobs, our technology, our very economic future,
and endanger the safety and health of American consumers.
Those hearings in the 1980s did see a modicum of change in the
approach to this piracy. We passed a stringent law to prevent the entry
of counterfeit drugs that unfortunately goes unenforced by this
Administration.
We conditioned certain trade preferences upon respect for American
patents, copyrights, and trademarks. This was targeted at the emerging
economic powers of Southeast Asia. Today, our intellectual property
problems in Taiwan, Korea, Singapore, and even Hong Kong are apparently
greatly diminished.
In a single Appropriations bill, we managed to add and fund 1,500
new U.S. Customs officials to fight fraudulent entry of contraband
goods at our borders. They were used to good effect.
But the last decade or so has seen a growing deterioration in the
concern for the well-being of American jobs and health and safety. Free
trade agreements have become purposes unto themselves with little or no
care for the consequences paid by American workers and their employers
in this country.
Yes, we have negotiated intellectual property protection in these
agreements as well as in the multinational setting of the WTO. But the
paper acquiescence of certain of our trading partners, notably China,
has not diminished their appetite for stealing American ideas or
American jobs. And we still have those U.S. Customs agents, but they
are now trying to prevent the infiltration of weapons of mass
destruction rather then policing our borders for commercial contraband.
This Administration has reached new heights of inaction. Last week
we held a hearing on China trade and the Commerce Department could not
even be bothered to send knowledgeable witnesses. The Director of the
Patent Office did testify and confirmed that counterfeiting continues
unabated in China despite repeated promises of reform. He told this
Committee that if he were the owner of a business that was dependent
upon intellectual property protection, he would not open an office in
China. Yet he could not tell us if the U.S. could or would file a WTO
case against that country that not only protects but actually
encourages pirates.
The most recent estimate is that 15 percent of the total
manufactured goods produced in China are counterfeit, totaling some 8
percent of that country's GNP. Counterfeiters are not targets of the
Chinese Government; they apparently are valued partners.
Yet we stand by hoping that somehow the Chinese will mend their
ways as their economic power and our debt to them grows. Meanwhile, our
trade agreements with Mexico and other developing countries and the
proposed Central American Free Trade Agreement just open back doors for
Chinese goods, counterfeit or not, and often produced with stolen
American ideas, to enter our commerce virtually unimpeded.
Among the victims of this epidemic of piracy are the workers,
manufacturers, and consumers of auto parts. It is estimated that
counterfeit auto parts is a $12 billion business worldwide with $3
billion of lost sales within the United States, and possibly as many as
200,000 jobs have been lost. But consider the unknown dimensions of
this tragedy. There are no National Transportation Safety Board
investigations of auto accidents. How many deaths and crippling
injuries are caused by defective parts? We do not know but we do know
that no one has ever made money selling counterfeits that were superior
in quality to the original.
Mr. Chairman, I am pleased that we will have the Commerce Secretary
before us soon. I hope we will also have the Food and Drug
Administration, the U.S. Trade Representative, and the U.S. Customs and
Border Protection before us in the near future, as I have some
questions for those Agencies. Our constituents are demanding that their
Government protect them from illegal trade practices and we should hold
the Administration accountable to them.
Mr. Stearns. So with that, Mr. Emmer, we will start with
you.
STATEMENTS OF SCOTT EMMER, BRAND PROTECTION MANAGER, FEDERAL-
MOGUL CORPORATION, ON BEHALF OF THE MOTOR AND EQUIPMENT
MANUFACTURERS ASSOCIATION; STEPHEN C. ARTHUR, VICE PRESIDENT,
GOVERNMENT AFFAIRS, GROCERY MANUFACTURERS ASSOCIATION; JAMES
CHRISTIAN, HEAD OF CORPORATE SECURITY, NOVARTIS INTERNATIONAL
AG; DAVID S. PEARL II, EXECUTIVE VICE PRESIDENT, UNIWELD
PRODUCTS, INC.; AND STEVE DELBIANCO, VICE PRESIDENT,
ASSOCIATION OF COMPETITIVE TECHNOLOGY, MEMBER, U.S. CHAMBER OF
COMMERCE, COALITION AGAINST COUNTERFEITING AND PIRACY
Mr. Emmer. Thank you, Mr. Chairman and members of the----
Mr. Stearns. I would just have you pull the mike a little
closer to you. Is that better? I think it is, great.
Mr. Emmer. Thank you, Mr. Chairman and members of the
committee for this opportunity to testify today.
My name is Scott Emmer and I am Brand Protection Manager at
Federal-Mogul Corporation. We are a global manufacturer of
automotive products such as brake, ignition, and chassis
products for original equipment manufacturers and the
aftermarket which are sold under our well-known brand names to
include Champion, MOOG, FERODO, and Wagner. Federal-Mogul is
headquartered in Southfield, Michigan and is a global
corporation with 55 manufacturing facilities in the United
States and a total of 196 facilities worldwide employing 45,000
workers. I appreciate this opportunity to testify today on the
problem of product counterfeiting.
First, I just wanted to give a mention of my background
which consists of a master's degree in criminal justice, as
well as 4 years with the Central Intelligence Agency. Now as
Brand Protection Manager for Federal-Mogul, I have a
responsibility for all anti-counterfeiting initiatives to
include pursuing enforcement against violators of Federal-
Mogul's intellectual property both in the U.S. and abroad. Also
for raising public awareness within Federal-Mogul and the
general public regarding the negative impact caused by
counterfeit automotive products, as well as developing a
proactive brand protection solution encompassing a product
marketing technology for authentication, tracking and tracing.
Federal-Mogul Corporation and its workers are proud to
provide high quality products to our customers in the United
States and abroad. We are proud to be part of a network of
thousands of automotive suppliers in the United States
providing the technologies and products that go into making and
servicing the safest and most technologically advanced motor
vehicles available anywhere in the world. Today our company and
our industry are helping to keep drivers safe and enjoying
better technologies and products for their motor vehicles year
after year. Due to the assault on intellectual property by
Chinese counterfeiters, continuing that record of safety and
value to American consumers is going to require the diligent
attention and involvement of the U.S. Government. We believe in
the integrity of the U.S. market and we aim to do our part to
keep it that way. But we need the U.S. Government's help to
stop Chinese counterfeiters, as well as counterfeiters from
other countries from exporting fake product to America.
Our company and many other automotive suppliers like us are
equipped to compete in the global market. Now in China, as well
as other markets, we are forced to compete not just against
other legitimate manufacturers but against a strong determined
criminal element that makes money by stealing our brand names
and making off in inferior and defective copies of our
products.
Companies work for years building a brand reputation and
brand loyalty. Inferior counterfeit products can ruin years of
hardworking investment. Destruction of a producer's brand name
and good reputation in the market from counterfeit products can
be even more serious to a supplier over the long term than the
direct loss of sales. Furthermore, legitimate American
manufacturers cannot get a foothold in the Chinese market or in
other markets where counterfeiters get deep market coverage and
often exist out in the open.
As a global corporation, we need to be able to offer
products and technologies appropriate to each market. However,
introduction of a new product or technology to China to buildup
our business in that market creates a huge risk that the
product or technology will be copied and counterfeited on a
massive scale.
Keeping counterfeit products out of the American market is
a first and foremost concern to our company. We believe it will
not be enough just to play defense protecting the U.S. market
from counterfeiters; we believe the U.S. Government with the
support of industry must also go on the offensive and track the
counterfeit products back to their source in China. We
appreciate all of the efforts the Government has made up to
this point, but we believe continued diligence and more action
will be required.
I would like to show you some of the products that Federal-
Mogul has found and discuss each one briefly. One of our
biggest problems involves counterfeit Champion spark plugs,
which are mainly produced in China. I have a couple on display
on the front table and on the table----
Mr. Stearns. If you don't mind, why don't we have the staff
just pick them up and then the members could see them. Is that
possible?
Mr. Emmer. These counterfeit products or spark plugs rather
are exported from China worldwide to include the Middle East,
Africa, and North America. Those are the two spark plugs. If
they are passed around--Federal-Mogul in this particular case,
Federal-Mogul was actually contacted by a counterfeit
distributor in Canada who offered to sell us our own Champion
spark plugs at a cost far below what we actually--or at a price
far below our actual costs. We have since initiated enforcement
against this distributor but this example shows a blatant
disregard for intellectual property rights to genuine brand
owners.
Mr. Stearns. Are both of these counterfeits?
Mr. Emmer. I believe the one in your left hand is
counterfeit. On the package, it should have a tag that says
genuine, as well as counterfeit.
Mr. Stearns. Okay.
Mr. Emmer. The shinier of the two is the counterfeit spark
plug.
Mr. Stearns. I see, I can tell. This one is a counterfeit,
okay.
Mr. Emmer. The quality of those are suspect and often fell
after 50, 100, upwards of 1,000 miles, also posing severe
safety risks to render a vehicle inoperative, as well as
potentially projecting out of the engine like a bullet would,
so there are some clear safety issues involved with these. You
will note from looking at those the similarities in it and it
is often extremely different to tell the two apart.
The second example I have, and there is simply some digital
pictures on the table as well, but these are the infringing
MOOG chassis products which are found or are being sold
rampantly in the Middle East, as well as on the East Coast of
the United States. Those parts are actually chassis and
suspension products that aid the vehicles steering and
suspension and when they fell, a vehicle can easily get
involved in an accident. Those particular parts that we found
are--post a very significant safety threat to the general
public since those parts are found on taxi cabs, commercial
vans, as well as school buses, so our kids are also at risk.
Federal-Mogul and other automotive suppliers have taken
steps to protect our intellectual property. For example, we
have pursued joint enforcement action against counterfeiters to
seize products. In addition, we worked with U.S. Customs to
seize infringing products and we also worked with foreign
Customs to include China to seize counterfeit products intended
for export. We are also taking steps to include product
marketing technologies for easier packaging authentication.
Unfortunately, the profit motive for criminals dealing in
counterfeit goods is huge and they are working every day to
thwart our efforts.
The House of Representatives recently passed by unanimous
consent H.R. 32, the Stop Counterfeiting in Manufactured Goods
Act. Federal-Mogul and the automotive supplier industry
strongly supported that legislation and were heartened by your
action. Our industry is presently seeking similar action in the
Senate.
Measuring the impact of this criminal activity is very
difficult and beyond the ability of any one company or
industry. We would, therefore, urge you to support efforts by
the OECD to study global counterfeiting.
Federal-Mogul appreciates your attention to this important
industry problem and urges you to combat product counterfeiting
with diligent enforcement and constructive but firm discussion
with the Chinese Government for the good of our company, our
industry, our customers, and the general public.
I appreciate this opportunity to testify today and I will
be happy to answer any questions that you may have.
[The prepared statement of Scott Emmer follows:]
Prepared Statement of Scott Emmer, Federal-Mogul Corporation
Thank you Mr. Chairman and members of the committee for this
opportunity to testify today. My name is Scott Emmer. I am the Brand
Protection Manager for Federal-Mogul Corporation. We are a global
manufacturer of automotive products, such as brake, ignition and
chassis products for Original Equipment Manufacturers and the
Aftermarket, which are sold under our well-known brand names to include
Champion, MOOG, Wagner and FERODO. Federal-Mogul, headquartered in
Southfield, MI is a global corporation with 55 manufacturing facilities
in the United States and a total of 196 facilities worldwide, employing
45,000 workers. I appreciate this opportunity to testify today on the
problem of product counterfeiting.
As brand protection manager for Federal-Mogul, I have
responsibility for all anti-counterfeiting initiatives including:
pursuing enforcement against violators of Federal-Mogul's intellectual
property both in the US and abroad; raising public awareness within
Federal-Mogul and the general public regarding the negative impact
caused by counterfeit automotive products; and developing a proactive
brand protection solution encompassing product marking technologies for
authentication, tracking and tracing.
Federal-Mogul Corporation and its workers are proud to provide high
quality products to our customers in the United States and abroad. We
are proud to be part of a network of thousands of automotive suppliers
in the United States providing the technologies and products that go
into making and servicing the safest and most technologically advanced
motor vehicles available anywhere in the world. Today, our company and
our industry are helping to keep drivers safe and enjoying better
technologies and products for their motor vehicles year after year. Due
to the assault on intellectual property by Chinese counterfeiters,
continuing that record of safety and value to American consumers is
going to require the diligent attention and involvement of the U.S.
Government. We believe in the integrity of the U.S. market and we aim
to do our part to keep it that way. But we need the US Government's
help to stop Chinese counterfeiters, as well as counterfeiters from
other countries, from exporting fake product to America.
Our company, and many other automotive suppliers like us are
equipped to compete in the global market. Now, in China, as well as
other markets, we are forced to compete not just against other
legitimate manufacturers, but also against a strong, determined
criminal element that makes money by stealing our brand name and making
often inferior and defective copies of our products.
Companies work for years building a brand reputation and brand
loyalty. Inferior counterfeit products can ruin years of hard work and
investment. Destruction of a producer's brand name and good reputation
in the market from counterfeit products can be even more serious to a
supplier over the long term than the direct loss of sales. Furthermore,
legitimate American manufacturers cannot get a foothold in the Chinese
market, or in other markets, where counterfeiters get deep market
coverage and exist out in the open.
As a global corporation, we need to be able to offer products and
technologies appropriate to each market. However, introduction of a new
product or technology to China, to build our business in that market,
creates a huge risk that the product or technology will be copied and
counterfeited on a massive scale.
Keeping counterfeit products out of the American market is of first
and foremost concern to our company. We believe it will not be enough
just to play defense, protecting the U.S. market from counterfeiters.
We believe the U.S. government, with the support of industry must also
go on the offensive, and track the counterfeit products back to their
source in China. We appreciate all the efforts the government has made
up to this point, but we believe continued diligence and more action
will be required.
I would like to show you some of the counterfeit products Federal-
Mogul has found and discuss each one briefly. One of our biggest
problems involves counterfeit Champion spark plugs, which are mainly
produced in China. These plugs are then exported worldwide to include
the Middle East, Africa and North America. Federal-Mogul was actually
contacted by a counterfeit distributor in Canada who offered to sell
Champion spark plugs at a price below our actual costs. We've since
initiated criminal enforcement against this distributor, but this
example shows the blatant disregard for intellectual property rights of
genuine brand owners.
I've brought a couple of sample counterfeit products for your
review. First, please find two genuine and two counterfeit Champion
spark plugs that were imported into Latin America from China. Please
note that the counterfeit packaging and plugs are nearly identical to
the genuine product. Second, please find pictures of genuine and
infringing MOOG Chassis Products found not only in the Middle East, but
also on the East Coast of the United States. These infringing MOOG
parts pose a significant safety threat to the general public,
especially in this case since these counterfeit parts are used to
repair taxicabs, commercial vans and school buses.
Federal-Mogul and other automotive suppliers have taken steps to
protect our intellectual property. For example, we pursue joint
enforcement action against counterfeiters to seize products. In
addition, we work with US Customs to seize infringing products and we
work with foreign Customs including China to seize counterfeit products
intended for export. Further, we are taking steps to incorporate
product-marking technologies into our packaging for easier
authentication.
But the profit motive for criminals dealing in counterfeit goods is
huge and they are working everyday to thwart our efforts.
The House of Representatives recently passed by unanimous consent
HR 32, ``The Stop Counterfeiting in Manufactured Goods Act.'' Federal-
Mogul and the automotive supplier industry strongly supported that
legislation and were heartened by your action. Our industry is
presently seeking similar action in the Senate.
Measuring the impact of this criminal activity is very difficult,
and beyond the ability of any one company or industry. We would,
therefore, urge you to support efforts by the OECD to study global
counterfeiting.
Federal-Mogul appreciates your attention to this important industry
problem and urges you to combat product counterfeiting with diligent
enforcement and constructive, but firm discussion with the Chinese
government for the good of our company, our industry, our customers and
the general public.
Thank you for this opportunity to testify. I will be glad to answer
your questions.
Mr. Stearns. Thank you.
Mr. Arthur?
STATEMENT OF STEPHEN C. ARTHUR
Mr. Arthur. Thank you.
I am Steve Arthur. I am Vice President of Government
Affairs for GMA, the Grocery Manufacturers Association. And I
am pleased here to be today to talk about this issue of great
concern to our member companies and we very much appreciate the
chairman's interest and the interest of the committee in this
issue.
Just a little background. GMA is the world's largest
association of food, beverage, and consumer product companies.
With U.S. sales of more than $500 billion, GMA members employ
more than 2.5 million employees in all 50 States.
Unfortunately, they are also victims of many counterfeiting
operations that have the potential to do serious harm to their
reputations and to their bottom lines. I have submitted formal
comments for the record so what I wanted to do is simply
highlight the main issues surrounding the counterfeiting issues
that I raised in that testimony.
We see three key problems associated with counterfeiting.
The first is the increasing scope and danger of counterfeiting.
And I think the video and a number of the opening statements
highlighted those some of the legal barriers to punishing
offenders here in the United States and the lack of adequate
enforcement abroad.
As the chairman mentioned, more than $200 billion of
counterfeiting activity--or $200 billion of economic activity
costs through counterfeiting each year and I think it was also
mentioned by another of the members that 750,000 jobs are
believed to have been lost because of counterfeiting.
Just recently, just to give you an example of some of the
members from our member companies just in the last 3 months
things that have been found: milk drinks, wine, and rum, soy
sauce, detergents, insecticides, perfumes, and cosmetics and
that is just in the last few months. And there is--it is
costing our member companies millions of dollars every year.
And our member companies who make those products, they have
rigorous quality control procedures in place to ensure that
their products are safe for proper human use and consumption.
And I can almost guarantee that the counterfeit products don't
live up to those same quality standards as I think Mr. Fox on
the video referenced or also the Better Business Bureau person.
And if the product does not taste good or perform as well as
expected, our companies could end up losing that customer for
life. And I think Mr. Emmer mentioned in his testimony the
types of things that can happen when the brand reputation can
suffer as a result of counterfeiting.
And also as you have heard, the counterfeiting criminals
are also part of organized retail theft. They can mix
counterfeit goods with stolen goods and get them more easily
back into the supply chain. And as the--I believe it was the
video mentioned, a lot of that money ends up going to fund
organized crime and even terrorist groups.
One of the first things that can be done to help improve
the fight of counterfeiting worldwide is to improve enforcement
at home. And again, Mr. Emmer beat me to the punch by praising
the House by passing H.R. 32 to make sure that we close that
loophole that allows counterfeit goods to be--and the labels to
be brought in separately without fear of any serious
punishment. It also allows the stricter remedies to be enforced
on those caught counterfeiting. And GMA also strongly supported
its passage in the house and will be working to move it through
the Senate as well. GMA also supports the administration's
inner agency STOP Initiative that was mentioned by the
chairman. And we are working with other key associations on one
element of the STOP Initiative to develop purchasing guidelines
for manufacturers and retailers to insure that the global
supply chains are free of illicit goods.
In addition to protecting the supply chain, it is
absolutely essential that we do more to stop the production of
counterfeit products in the first place. Again, the chairman
mentioned there is a big problem worldwide in China especially.
And we do urge the United States to continue to work with the
Chinese Government to try to create an effective program to
stop the trafficking of counterfeit goods both in their country
and at the point of export.
One of the things that GMA has long advocated for is more
engagement with the OECD to address the counterfeit issue. And
we are pleased that with the support recently of the U.S.
Government, the organization recently announced that it will
conduct a new study to determine the scope of the problem and
the damage product counterfeiting does on a global basis. The
project will also develop a set of best practices to guide
future efforts in the fight against counterfeiting. And we
believe this is really going to be very helpful in pushing
countries to improve their anti-counterfeiting initiatives as
they look to join the OECD. And I would point to the example of
China and Russia trying to get in the OECD that with those best
practices there, there may be a real opportunity to really push
the real anti-counterfeiting initiatives there.
To conclude, this is not a problem that we can solve
overnight and it is not a problem that we can solve alone. We
need global cooperation between industry and Governments around
the world. And with the adoption of H.R. 32, we will be able to
more credibly push our trading partners to tighten their end by
counterfeiting laws. And with the OECD now engaged in the
issue, there will be better information and increased pressure
on countries to crack down on counterfeiting.
And I also thank you for your time and welcome your
questions.
[The prepared statement of Stephen C. Arthur follows:]
Prepared Statement of Steve Arthur, Vice President, Government Affairs,
Grocery Manufacturers Association
I am Steve Arthur, Vice President of Government Affairs for GMA,
the Grocery Manufacturers Association, and I am very pleased to be here
today to talk about an issue of intense concern to our member companies
and manufacturers across the country.
GMA is the world's largest association of food, beverage and
consumer product companies. Led by a board of 42 Chief Executive
Officers, GMA applies legal, scientific and political expertise from
its more than 120 member companies to vital public policy issues
affecting its membership. The association also leads efforts to
increase productivity, efficiency and growth in the food, beverage and
consumer products industry. With U.S. sales of more than $500 billion,
GMA members employ more than 2.5 million workers in all 50 states.
GMA has been fighting counterfeiting for a long time and is a
member of the Coalition Against Counterfeiting and Piracy, an industry
group created by a joint initiative between the U.S. Chamber of
Commerce and the National Association of Manufacturers to act as the
interface between business and the U.S. Government's Strategy Targeting
Organized Piracy (STOP!) program.
Today I would like to focus my comments on three problems: the
increasing scope and danger of counterfeiting, the legal barriers to
punishing offenders here in the United States, and the lack of adequate
enforcement abroad.
Counterfeiting is a Devastating Global Problem
Counterfeiting is not a victimless crime. On the contrary, it
causes devastating financial and physical harm to United States
companies, employees, investors, consumers, patients, and citizens.
Many industries are affected, including consumer products, automotive,
pharmaceutical, electronics, textiles and others.
When the average American thinks about counterfeit goods, he or she
may think of phony Rolex watches, fake high-fashion handbags, or cheap
knock-offs of designer T-shirts. The purchasers of these items usually
know the products are not originals, so they may readily conclude that
buying a fake is no big deal. However, counterfeiting is far more
pervasive and dangerous than street vendors selling fake luxury items.
In fact, only a minute portion of counterfeit goods are luxury items.
For example, in December, 2003, Australian customs officials
stopped 52,000 containers of counterfeit shampoo at port. Last week,
officials in India seized a large quantity of bottled water with
spurious marks as well as many counterfeit personal care consumer
products. Canadian based Gieschen Consultancy, which tracks counterfeit
product enforcement incidents, reports that in the first quarter of
2005, there were 279 incidents of intellectual property theft world
wide, valued at a loss of $396 million dollars. Of particular interest
to GMA member companies, this total included counterfeit milk drinks,
wine, rum and soy sauce, as well as industrial goods and supplies such
as insecticides and detergents and counterfeit perfumes and cosmetics.
Our member companies who make food, beverage and consumer products
have rigorous quality controls to ensure their products are safe for
proper human use and consumption. Counterfeit products are not subject
to those same quality standards. As long as the packaging looks
similar, it might enter the supply chain without any quality controls
at all.
To put the enormity of the problem in financial terms, the U.S.
Customs Service estimates that counterfeiting activity costs the U.S.
more than $200 billion annually and has resulted in the loss of 750,000
American jobs. If you compare that to the earlier number I referenced
regarding enforcement actions, its clear that only a small percentage
of counterfeit products are caught and the counterfeiters prosecuted.
Recently, the FTC stated that eradicating counterfeit auto parts could
create 200,000 new jobs in the U.S. auto industry alone. The
International Chamber of Commerce estimates that counterfeiting drains
more than $350 billion each year from the world's economy--this is 7 to
9 percent of total world trade. And each dollar lost by law-abiding,
hard-working Americans and companies winds up lining the pockets of
criminals.
Counterfeiting frequently is part of a larger criminal enterprise
involving the theft of legitimate goods. Criminals responsible for
distributing counterfeit goods are also often the ringleaders of
organized retail theft. They have become expert in mixing counterfeit
goods with stolen goods to ``sanitize'' the stolen property and move
them back into the supply chain. These criminals feed on those buyers
or distributors who are willing to turn a blind eye in return for a
good deal. In other cases, the buyer is truly unaware that the goods he
or she is purchasing are stolen or counterfeit. In addition, the same
networks used to distribute counterfeit products also ease the
transport of illegal drugs into U.S. markets.
The danger of counterfeiting goes beyond mere financial harm and
theft. Organized crime and terrorist groups use the sale of counterfeit
goods to raise money for illegal activities and violence. Paramilitary
groups in Northern Ireland have funded terrorist activities through the
sale of pirated products. Protection rackets in Italy no longer demand
just money from retailers; instead, they want shelf space to sell
counterfeit goods. In testimony before the Senate Homeland Security
Committee, the Los Angeles Sheriff's Department testified that many
arrested for counterfeit product crimes in Los Angeles are Hamas and
Hezbollah sympathizers and supporters. Most alarming is that those who
aim to terrorize United States citizens look to counterfeiting to help
them achieve their deadly goal: Seized Al Qaeda training manuals
recommend the sale of fake goods as a financing source for its
terrorism.
It is clearly not just the food, beverage and consumer products
industry that is targeted. This committee is also hearing about
counterfeit pharmaceutical and automotive products. These counterfeits
can and have caused serious injury and even death.
Domestic Efforts
The first step in combating counterfeiting worldwide is to improve
enforcement at home. We need to close some of the legal loopholes that
allow counterfeiters to escape prosecution, and we need laws that give
enforcement agencies better tools to fight counterfeiting.
GMA is pleased that the House has taken this first step by
approving HR 32, the Stop Counterfeiting in Manufactured Goods Act, by
Congressman Knollenberg. As this committee knows, this bill will close
a loophole in the federal criminal code that allows phony products to
be shipped to the United States without brand markings, so they can
pass through customs without any apparent violation. Counterfeit labels
are then added and the products are sold through a variety of channels.
HR 32 will allow authorities to prosecute the people who do the
labeling and packaging here. It will also allow for the forfeiture and
destruction of any confiscated counterfeit labels or products that
would bear those labels.
In addition, the bill gives law enforcement officials the ability
to seize and confiscate the equipment and assets--such as machine tools
and computers--used to produce counterfeit products, labels, and
packaging. Without this ability, law enforcement officers are forced to
chase the same counterfeiters over and over again. The counterfeiters
can simply continue to use their infrastructure to replace seized
inventory and resume their trade. GMA strongly supported the passage of
HR 32 and will now work just as vigorously for its passage in the
Senate.
GMA also supports the Administration's Strategy Targeting Organized
Piracy (STOP!) initiative, which was launched in 2004 and brings
together the U.S. Trade Representative, the Departments of Commerce,
Justice, and Homeland Security to stop the distribution of counterfeit
goods. The effort is broad in scope and brings a new approach, new
tools and new pressure to bear through a coordinated effort from the
federal government, the private sector and America's international
trading partners.
A key element of the STOP! initiative is the development of
purchasing guidelines for manufacturers and retailers to ensure that
global supply chains are free of illicit goods. As a coordinator for
the Coalition Against Counterfeit Products task force, GMA is working
with other associations that represent food, beverage and consumer
product manufacturers and retailers to accomplish this objective. The
task force is developing voluntary guidelines to prevent illicit goods
from entering the supply chain and prevent criminals from exploiting
alternate sourcing strategies. The final document is expected to be
completed by September, 2005. These guidelines will then be available
for use by other industries.
Change Domestically Provides Leverage Globally
Passage of HR 32 is essential to our ability to improve anti-
counterfeiting efforts abroad. The Office of the U.S. Trade
Representative has made clear that it is not prepared to negotiate for
mandatory confiscation and destruction abroad when U.S. law does not
contain these provisions. Not surprisingly, our trade negotiators are
loath to negotiate with other countries an agreement with which the
United States could not comply under existing laws. We need to have
domestic mandatory seizure and destruction so our trade negotiators
have a foundation to press for this minimum necessary enforcement
around the world.
In 2004, the Office of the U.S. Trade Representative, in a
``Special 301'' annual review, reported that more than 66% of
counterfeit goods seized by the U.S. Customs Service at ports of entry
into this country were traced to China. In addition to combating
counterfeiting within its borders, the Chinese government also must
stop the export of counterfeit products. The United States should
continue to work with the Chinese government to create an effective
program to stop the trafficking of counterfeit goods at the point of
export.
GMA is encouraged that the U.S. Government is taking the issue of
intellectual property theft and counterfeit products seriously. In
April 2005, as part of the Administration's Strategy Targeting
Organized Piracy (STOP!), the United States traveled to Singapore, Hong
Kong, Tokyo and Seoul to explore avenues for increased cooperation,
improved coordination, and expanded information exchanges as an initial
step in garnering international support to work together to stem the
trade in fakes. A series of 17 U.S. proposals were shared with
government officials from these countries generating fruitful
discussions, interest and commitments to continue working together on
this shared concern. And just last week, officials representing seven
United States Government agencies traveled to Europe to meet with
German, United Kingdom, French and European Commission officials to
discuss cooperation to crack down on global piracy and counterfeiting.
In addition to having appropriate prosecutorial powers in the U.S.
and other countries, it is important to understand the scope of product
counterfeiting globally in terms of damage to rights holders and
countries that harbor counterfeiting. GMA has long advocated engagement
with the Organization for the Economic Cooperation (OECD) to address
this issue. With the support of the U.S. government, the Organization
for Economic Cooperation and Development announced in April 2005 that
it will conduct a study to determine the scope of the problem and the
damage product counterfeiting does on a global basis. The project will
also analyze existing public and private anti-counterfeiting efforts to
develop a set of best practices to guide future efforts in the fight
against counterfeiting.
The project will include a three-phase study on the adverse impacts
of counterfeiting and piracy; a series of four regional workshops,
envisioned to take place in Russia, Brazil, India and China in 2006;
and two Global Forums, focusing on various aspects of the problem, one
planned for 2006 and the second in 2007.
OECD is scheduled to co-host a two-day meeting with the World
Intellectual Property Organization in October, 2005 in Geneva to
develop metrics and examine statistical issues, and also plans to
circulate an outline for the Phase one study to governments, asking
them to circulate more widely for feedback. A final report is expected
in May, 2006.
Now, around the globe, brand owners, industry coalitions, and
governments are joining the fight against counterfeiting. This is not a
problem we can solve overnight, and it is not a problem we can solve
alone. We need global cooperation. To get it, however, we first need to
close the loopholes in current federal criminal laws to criminalize
trafficking in fake labels and packaging for all goods. We also need to
provide our law enforcement agencies with authority to seize the
machinery of counterfeiting. And we need to devote the resources to
study this problem comprehensively, so that we can arm ourselves with
more information about this problem in ways that will allow us more
effectively to fight it.
Mr. Stearns. Thank you.
Mr. Christian?
STATEMENT OF JAMES CHRISTIAN
Mr. Christian. Mr. Chairman and members of the committee,
my name is James Christian and I am Vice President and Head of
Global Security for Novartis International. Novartis is a world
leader in pharmaceuticals and consumer health. The Novartis
Group invested over $4 billion in research and development in
2004.
Prior to joining Novartis, I spent 20 years with the United
States Secret Service, the last five as a Special Agent in
Charge. While in Government service, one of my duties was to
suppress the international counterfeiting of U.S. currency. At
Novartis for the last 16 years, one of my responsibilities has
been to oversee the companies worldwide anti-counterfeiting
operations.
In the past several years, Novartis has participated with
law enforcement and health authorities in over 200
counterfeiting investigations in 33 countries involving
hundreds of drug products. I have witnessed firsthand the great
ingenuity and resourcefulness that unlawful enterprises utilize
to manufacture and distribute ineffective and often unsafe
counterfeit products. I have also witnessed the hardship and
misery counterfeit medicines bring to patients and their
families. There can be no doubt that drug counterfeiters
present a severe and growing threat to the health and safety of
U.S. citizens.
Counterfeit drugs are fake medicines, produced and packaged
to look like the genuine article. They include products
including correct ingredients although they may be adulterated
on in the wrong dosage strength, incorrect ingredients, no
active ingredient, and usually have phony packaging and
labeling. Counterfeit drugs may be made in garages, basements,
warehouses, often under horrific conditions.
Counterfeiters are able to produce labels that are
basically indistinguishable from the authentic materials. They
can also make stamp tablets with company logos and put them in
special packaging such as blister packs.
We have scores of examples of counterfeit, expired, and
adulterated medicines. In one case, our anti-counterfeiting
efforts interjected millions of yellow tablets of a popular
pain reliever that were virtually indistinguishable from a
genuine product including the company logo. These tablets were
made of boric acid, floor wax, and lead-based yellow paint. You
now the see mixture that was used to make the tablets. The
yellow based paint was used for road markings. Sacks of these
raw materials were stacked throughout the counterfeiter's
ramshackle warehouse in Bogota, Columbia.
Production of counterfeit medicines is pervasive outside
the United States and is growing in an alarming rate. Before I
review some international examples of counterfeiting, let us
take a look at the difference between a Novartis manufacturing
plant and a counterfeit manufacturing lab. There you see a
sterile facility typical of an ethical pharmaceutical company.
There you see a lab blister pack with some of the chemicals
used in the counterfeiting in the background. And there we have
their counterfeit shipping and distribution area.
Russia is a drug counterfeiter's paradise. Politically
connected organized crime elements in that country face little
resistance from the Government and the laws and penalties for
counterfeiting pharmaceuticals are weak or non-existent. With
its recent expansion, the European Union's border in the east
is no longer the well-controlled German border, but instead is
a more porous Polish border. Russian counterfeit drugs which
cross into Poland have virtually unobstructed access to the
markets in the rest of EU. These counterfeit drugs could easily
find their way to pharmacy shelves in the U.S. Indeed, some
counterfeit Russian pharmaceuticals have already been
discovered in this country.
Counterfeiting is also a burgeoning problem in China where
seizures have secured large quantities of fake drugs. What is
unique about counterfeiting in China is that many of the
counterfeiting operations are publicly traded and often health,
regulatory, and law enforcement officials are shareholders.
More recently, Novartis has become aware of a Hangzhov-based
website called Alibaba where major players in an underground
counterfeiting network surface to buy and sell counterfeit
products including prescription drugs.
In Latin America, the counterfeit problem is staggering.
Last November, four children died from counterfeit drugs in the
Dominican Republic. In Venezuela, six children died from
counterfeit drugs, including counterfeit anesthesia, in 2004.
Six months ago in Argentina, Veronica Diaz suffered acute liver
failure and died after being injected with a counterfeit iron
supplement while hospitalized. A review of the hospital records
disclosed that two other women had died after being injected
with the same product.
Two months ago, police in Lima, Peru seized four tons of
adulterated and counterfeit pharmaceuticals, including ampoules
for injection which contained feces and dangerous bacteria. In
Columbia, the length and breath of the counterfeiting problem
is mind boggling. Novartis alone is responsible for the seizure
of a counterfeit lab every month. The problem is often referred
to as ``El Otro trafico de drogas,'' or ``The other drug
trafficking.'' Many hospital administrators have no faith in
their drugs in the hospital pharmacy and efforts to switch
suppliers are often met with threats of violence.
Pharmaceutical companies and non-U.S. law enforcement
authorities have an extremely difficult time suppressing
international counterfeiting operations. Many counterfeit
pharmaceuticals are manufactured so cleverly that it is
virtually impossible for consumers, Government officials, and
law enforcement agencies to identify them as counterfeit
without elaborate testing. Detection is made more difficult by
the criminal practice of mingling counterfeit, adulterated,
expired, stolen, and genuine product. When this occurs, random
or sample testing is totally ineffective.
Here you see a transplant drug in the oral which present--
which prevents organ rejection after a transplant and as you
can see, these packages look legitimate from the outside.
Internally, they contain Chinese beans.
The United States relies on foreign countries to protect
American citizens from counterfeit medicines. This reliance is
misplaced. Many governments lack the interest, resources, and
technological sophistication to address the problem.
While certain covert and overt technologies may improve the
distribution system and the supply chain management, no one has
yet demonstrated the ability of such technology to protect
against counterfeiting. New anti-counterfeiting technologies
have numerous shortcomings, including the following. In almost
every case, the technology, be it a hologram, tamper proof
labels, embossing, thermo-reactive ink, RFID tags, DNA markets
enable companies to track cardboard. That is the packaging not
the product. It is not unusual to find genuine product in
counterfeit packaging and counterfeit product in genuine
packaging.
Additionally, in the United States and in the European
Union, the two largest pharmaceutical markets in the world
repackaging is legal; thus without violation of any law,
packaging of all types of expensive state-of-the-art secure
devices can end up in the trash, or worse in the hands of a
counterfeiter, while genuine product is legally distributed in
packaging with no security features.
RFID technology which was featured in an FDA task report is
more of an inventory management tool than an anti-category
device.
Well where do we go from here? Now is the time to do a
realistic assessment of the problem. In my view, there is no
quick fix. There is no solution around the corner. If we place
our trust in the hope that a solution will be available soon,
we may well neglect to take the incremental steps necessary to
make progress against the terrible plague of counterfeit
medicines.
I cannot say strongly enough that drug counterfeiters,
blackmarketeers, and other organized criminal elements are
ready, willing--drug counterfeiting severely imperils public
health and safety across the globe and in the United States.
Now is the time to strengthen our commitment to keeping our
medicines the best and safest in the world.
Thank you.
[The prepared statement of James Christian follows:]
Prepared Statement of James Christian, Vice President and Head of
Global Corporate Security, Novartis International AG
Mr. Chairman and members of the Committee, my name is James
Christian and I am Vice President and Head of Global Corporate Security
for Novartis International AG (``Novartis''). Prior to joining
Novartis, I spent 20 years with the United States Secret Service, the
last five as a Special Agent in Charge. While in Government service,
one of my duties was to suppress the international counterfeiting of
U.S. currency. At Novartis, for the last 16 years, one of my
responsibilities is to oversee the company's worldwide anti-
counterfeiting operations.
In the past several years, Novartis has participated with law
enforcement and health authorities in over 200 counterfeiting
investigations in 33 countries and involving hundreds of drug products.
I have witnessed firsthand the virtually limitless ingenuity and
resourcefulness that unlawful enterprises utilize to manufacture and
distribute ineffective and often unsafe counterfeit products. I have
also witnessed the hardship and misery counterfeit medicines bring to
patients and their families. There can be no doubt that drug
counterfeiters present a severe and growing threat to the health and
safety of U.S. citizens.
Novartis has a compelling interest in protecting the medicines that
it currently markets as well as those now under development. This year
alone, Novartis will spend more than $4.2 billion on drug research and
development. More importantly, patients using Novartis products must
have every confidence that the drugs are safe and effective.
Counterfeit drugs are ``fake'' medicines, produced and packaged to
look like the genuine article. They include products containing correct
ingredients, although they may be adulterated or in the wrong dosage
strength; incorrect ingredients; no active ingredient; or an
insufficient quantity of active ingredient; and usually have phony
packaging and labeling. Counterfeit drugs may be made in garages,
basements, or warehouses, often under horrific conditions.
Counterfeiters are able to produce labels that are virtually
indistinguishable from the authentic materials. They can also make and
stamp tablets with company logos and put them in special packaging such
as blister packs.
We have scores of examples of counterfeit, expired, and adulterated
medicines. In one case, our anti-counterfeiting efforts interdicted
millions of yellow tablets of a popular pain killer that were virtually
indistinguishable from the genuine product--including the company logo.
These tablets were made of boric acid, floor wax, and lead-based yellow
paint used for road markings. Sacks of these ``raw materials'' were
stacked throughout the counterfeiters' ramshackle warehouse in Bogota,
Columbia.
Production of counterfeit medicines is pervasive outside the United
States and is growing at an alarming rate. We can provide the Committee
with detailed information on the extent of counterfeiting activity in
Latin and Central America, Asia, Russia, China, and India. First, let's
look at a Novartis manufacturing facility, and then a counterfeit
manufacturing plant.
Russia is a drug counterfeiter's paradise. Politically connected
organized crime elements in that country face little resistance from
the government, and the laws and penalties for counterfeiting
pharmaceuticals are weak or non-existent. With its recent expansion,
the European Union's border in the East is no longer the well-
controlled German border but instead is the more porous Polish border.
Once counterfeit drugs have crossed into Poland, they have virtually
unobstructed access to the markets in France, Germany, Spain, and the
rest of the European Union countries. These counterfeit drugs, which
have passed through nations in the European Union, could easily find
their way to pharmacy shelves in the United States. Indeed, some
counterfeit Russian pharmaceuticals have already been discovered in
this country.
Europe has also developed an internet sales problem, with hundreds
of web sites selling counterfeit medicines, often from China.
Counterfeiting is also a burgeoning problem in China where seizures
have secured large quantities of fake drugs. Novartis and other
pharmaceutical companies participated in a raid with authorities in
Shantou that resulted in the seizure of over 1800 cartons of
counterfeit pharmaceutical products from 14 multinational companies.
What is unique about counterfeiting in China is that many of the
counterfeiting operations are publicly traded, and often have health,
regulatory, and law enforcement officials as shareholders. More
recently, Novartis has become aware of a Hangzhov-based website called
Alibaba (w) where major players in an underground counterfeiting
network surface to buy and sell counterfeit products including
prescription drugs.
In Latin America, the counterfeiting problem is staggering. Last
November, it was determined that four children died from counterfeit
drugs at the Jose Maria Cabral y Baez Hospital in the Dominican
Republic. In Venezula, six children are known to have died from
counterfeit drugs, including counterfeit anesthesia in 2004. Six months
ago, in Argentina, Veronica Diaz, suffered acute liver failure and died
after being injected with a counterfeit iron supplement while
hospitalized. A review of the hospital records disclosed that two other
women had died after being injected with the same product.
Two months ago police in Lima, Peru seized four tons of adulterated
and counterfeit pharmaceuticals, including ampoules for injection which
contained feces and dangerous bacteria. These seizures took place after
numerous epileptic and diabetic patients were hospitalized after taking
counterfeit medicines.
In Colombia, the length and breadth of the counterfeiting problem
is mind boggling. Novartis alone is responsible for the seizure of a
counterfeit lab every month. The problem is referred to as ``El Otro
trafico de drogas'', or ``The other drug trafficking''. Many hospital
administrators have no faith in the drugs in the hospital pharmacy, and
efforts to switch suppliers are often met with threats of violence.
Pharmaceutical companies and non-U.S. law enforcement authorities
have an extremely difficult time suppressing international
counterfeiting operations. Many counterfeit pharmaceuticals are
manufactured so cleverly that it is virtually impossible for consumers,
government officials, and law enforcement agencies to identify them as
counterfeit without elaborate testing. Detection is made more difficult
by the criminal practice of mingling counterfeit, adulterated, expired,
stolen, and genuine product. When this occurs, random or sample testing
is totally ineffective. Counterfeiters do not care about the quality
and safety of the product. Their goal is to sell a fake drug to an
unsuspecting patient.
The United States relies on foreign countries to protect American
citizens from counterfeit medicines. This reliance is misplaced. Many
governments lack the interest, resources and technological
sophistication needed to address the problem.
While certain overt and covert technologies may improve the
distribution system and increase a manufacturer's ability to manage the
supply chain and to track and trace products, no one has yet
demonstrated the ability of such technology to protect against
counterfeiting.
New anti-counterfeiting technologies have numerous shortcomings
including the following:
In almost every case, the technology, be it a hologram, tamper proof
labels, embossing, thermo-reactive ink, RFID tags, DNA markers,
and the like, enable companies to track cardboard, not product.
It is not unusual to find genuine product in counterfeit
packaging and counterfeit product in genuine packaging.
In the United States and in the European Union, the two largest
pharmaceutical markets in the world, repackaging is legal;
thus, without violation of any law, packaging, with all types
of expensive, state of the art secure devices, can end up in
the trash or worse, in the hands of a counterfeiter, while
genuine product is legally distributed in packaging with no
security features.
RFID technology which was featured in a FDA task force report is more
of an inventory management tool than an anti-counterfeiting
device.
A counterfeiter or diverter could purchase RFID tags and attempt
to mimic manufacturers' RFID codes.
Industries which have and are using RFID products have noted that
when their products enter the ``grey market'', their RFID
tags are often ``zapped'' rendering them unreadable.
Counterfeiters generally deal, not only with counterfeit product,
but with diverted, expired, and stolen product as well.
Envision the scenario where a counterfeiter steals product,
removes genuine product from the ``secure packages'', and
then puts the counterfeit product in these packages, and
then reinserts the counterfeit product back into the
system. The counterfeit product would pass through all the
readers successfully. What then happens to the genuine
product? The irony is that the genuine product would most
likely be repackaged in counterfeit packaging with
unreadable tags and entered into the distribution system.
If the RFID system works correctly, the genuine product
would be kicked out of then system, but later determined to
be genuine, undermining any confidence in the system.
Where do we go from here? Now is the time to do a realistic
assessment of the problem. In my view there is no quick fix. There is
no ``solution'' on the horizon. If we place our trust in the hope that
a ``solution'' will be available in the near future, we may well
neglect to take the incremental steps necessary to make progress
against the terrible plague of counterfeit medicines.
I cannot say strongly enough that drug counterfeiters,
blackmarketeers, and other organized criminal elements are ready,
willing, and able to exploit any perceived weakness in the U.S.
pharmaceutical system. Make no mistake, drug counterfeiting severely
imperils public health and safety across the globe, including the
United States. Now is the time to strengthen our commitment to keeping
our medicines the best and safest in the world.
Thank you.
Mr. Stearns. Thank you.
Mr. Pearl?
STATEMENT OF DAVID S. PEARL II
Mr. Pearl. Mr. Chairman and members of the subcommittee, my
name is David Pearl II. I am Executive Vice President of
Uniweld, a small family owned manufacturing company located in
Fort Lauderdale, Florida. I am pleased to appear before the
subcommittee today and to testify on behalf of the National
Association of Manufacturers.
Uniweld was founded by my father in 1949. Currently we
employ over 260 people who are producing many industrial
products including refrigeration testing and charging
manifolds. That is testing instruments used by refrigeration
technicians to determine the condition of an air conditioning
or refrigeration system. The National Association of
Manufacturers, the NAM on whose behalf I am testifying today,
is the Nation's largest industrial trade association
representing small and large manufacturers in every industrial
sector in all 50 States.
Exports are important to Uniweld. In 1976, I went to the
Middle East to establish Uniweld's products in that
marketplace. Our good American reputation made selling this
market possible and profitable. Persistence and diligence in
selling our testing and charging manifolds resulted in the
gradual buildup of our business and we found ourselves a market
leader for this product in the Middle East. We have exported to
about 80 countries around the world and today the number has
dwindled to 30. The net result of counterfeiting has already
cost our company a significant number of jobs. Continued
worldwide counterfeiting could even put small companies like
mine out of business.
Currently, however, Uniweld Products has lost over $1
million a year in sales in the Middle East due to Chinese
counterfeits in the Saudi Arabian market. The cheap imitation
manifolds look like ours. The instruction sheets we provide
with our product are copied with our name, address, and
telephone numbers and the package even carries the American
flag that we put on our own box. The product and the packaging
are copied to a ``T'' and I have brought two pairs of samples
with me of genuine and fake products and they are right at the
table in front me that you can see. And if you did not know
what you were looking at, there is no way you could tell.
Mr. Stearns. Do you have any objection if we just pass them
around?
Mr. Pearl. Absolutely, please take a look.
Mr. Stearns. Okay. Just make sure we know which one is the
counterfeit.
Mr. Pearl. Okay. The one in your left hand is the
counterfeit, the one in the right hand is original. You can see
that they actually just photographed the boxes, they didn't go
through the process to make it a true multi-colored separation.
We have registered our trademark in six countries in the
Middle East and 17 other countries elsewhere around the world.
Not only has this not worked, but the counterfeiting has
recently expanded into the United Arab Emirates, the UAE.
We are losing business and the quality of our counterfeit--
of the counterfeit product is so poor that our hard earned
reputation for producing a quality product is being destroyed
in one of the most promising marketplaces in the world.
When the United States negotiates treaties such as the
CAFTA, it is critical that strong anti-counterfeiting
provisions be built into the treaty. Trademark counterfeiting
must be considered a criminal offense.
It is virtually impossible for a small company like mine to
address problems like these halfway around the world. The U.S.
Government needs to intervene and assist small businesses
trying to protect themselves from piracy and counterfeiting.
I want to note that the Commerce Department and the Office
of the U.S. Trade Representative have been working with my
company and have been providing advice we have been following
and we appreciate that. But companies like mine need more.
Removing the restrictions and allowing them to do more would
save thousands of American jobs.
A fresh look has to be taken at what the U.S. Government
can do. Perhaps by initiating public defender programs or by
finding ways that diplomatic means could be utilized to a
greater degree. The NAM wants to sit down with Government
officials and explore possibilities. Embassies should have an
IPR advocate who should do more than assisting the small
business in getting a local lawyer and going through the
foreign countries legal system, but should also have the
responsibility for assisting that small business in defending
its good name, its market share and its employment base.
We have a choice. We can either stick our heads in the sand
and hope that counterfeiters in China or elsewhere go away, or
we can be intelligent and use our national resources and
influence to stop the counterfeiting. If American industry is
to be preserved and Americans employed, we need your help and
we need it now. Here are immediate action steps that as a
representative of a small business I believe we should take.
First, customs authorities need to look for phony ``Made in
the U.S.A.'' attributions on imported products that do not come
from the United States. It is a tip off for which goods are
counterfeit. Counterfeiters are getting better and better at
mimicking genuine packaging and ``Made in the U.S.A.'' is a key
part of the mimickery. Such vigilance needs to be a part of
accepted best practices by custom services around the world.
U.S. Customs and border protection should urge greater
vigilance through the World Customs Organization.
Second, trade agreements being negotiated should pick up on
this point as well. It is very pertinent that the Office of the
U.S. Trade Representative is negotiating a free trade agreement
right now with the UAE and this is where we can make a big
impact. If customs officials in the UAE, or elsewhere for that
matter, do not have the authority or guidance to seize goods
solely on the basis of fraudulent ``Made in the U.S.A.''
printing, then we should ensure that they do as that agreement
is negotiated. We need to help them get the tools that they
need to do their jobs, too.
Third, the U.S. Government as a whole, the U.S. embassies
in particular must find a way to be more helpful to small and
midsize companies that encounter flagrant counterfeiting and
other IPR violations. We appreciate the establishment of a
point of contact for small and mid-size companies in the patent
and trademark office, but we also need more on the ground
support overseas.
Fourth, the U.S. Government needs to keep the pressure on
foreign Governments, especially the Chinese Government to
enforce their IRP laws and stop the flagrant counterfeiting of
U.S. products by their companies. It would be helpful to have a
link for each country on the annual Special 301 List put out by
the USTR so that we could better track IPR problems. Getting
like minded trading partners like Europe and Japan to cooperate
and send the same message to these Governments would also help.
I and other NAM members certainly appreciate the
Government's new initiatives, such as the STOP Program, which
is a good start to developing a global strategy on
counterfeiting. The NAM though wants to sit down with the U.S.
Government agencies to move things further and to put more of a
focus on doing things that will really help small businesses
that are faced with the scourge of counterfeiting.
Every time a counterfeit of an American product is sold
somewhere in the world, it costs American prestige, reputation,
worsens our balance of trade, and costs American jobs. By
reducing worldwide counterfeiting, we can reduce our trade
imbalance.
Thank you, Mr. Chairman.
[The prepared statement of David S. Pearl II follows:]
Prepared Statement of David S. Pearl II, Executive Vice President,
Uniweld, Inc., on Behalf of the National Association of Manufacturers
Mr. Chairman, Members of the Subcommittee: My name is David Pearl
II. I am the Executive Vice President of Uniweld Products, Inc., a
small family-owned manufacturing company located in Ft. Lauderdale,
Florida. I am pleased to appear before the subcommittee today, and to
be testifying on behalf of the National Association of Manufacturers.
Uniweld was founded by my father, David S. Pearl Sr. in 1949. Starting
with 20 employees he expanded the business to as many as 375.
Currently, we employ over 260 people who are producing many industrial
products, including refrigeration testing and charging manifolds, that
is, testing instruments used by refrigeration technicians to determine
the condition of an air conditioning or refrigeration system.
The National Association of Manufacturers (the NAM), on whose
behalf I am testifying today, is the nation's largest industrial trade
association, representing small and large manufacturers in every
industrial sector and in all 50 states. The NAM also represents over
350 vertical industry associations and state manufacturing associations
and their members. The NAM's mission is to enhance the competitiveness
of manufacturers by shaping a legislative and regulatory environment
conducive to U.S. economic growth and to increase understanding among
policymakers, the media and the general public about the vital role of
manufacturing to America's economic future and living standards.
In 1976, I went to the Middle East to establish Uniweld's products
in the market place. Our good American reputation made selling this
market possible and profitable. Persistence and diligence in selling
our testing and charging manifolds resulted in the gradual build up of
our business and we found ourselves a market leader for this product in
the Middle East.
Currently, however, Uniweld Products, Inc. has lost over $1 million
a year in testing and charging manifold sales in the Middle East due to
the Chinese counterfeits in the Saudi Arabian market. The cheap
imitation manifolds look like ours. The instructions sheets we provide
with our product are copied with our name, address and telephone
numbers, and the packaging even carries the American flag that we put
on our own box. The product and the packaging are copied to a ``T.'' I
have brought two pairs of samples with me of genuine and fake products.
We have registered our trademark in six countries in the Middle
East and 17 other countries elsewhere around the world. Having a
product's trademark being registered is supposed to offer some
protection from infringement. Not only has this not worked, but the
counterfeiting was discovered to have expanded to the United Arab
Emirates (UAE) by our sales manager during a trip in November 2004. Two
appendices to my statement provide further particulars.
Not only are we losing business, but also the quality of the
counterfeit product is so poor that our hard-earned reputation for
producing a quality product is being destroyed in one of the most
promising market places in the world.
Traders hold the ultimate responsibility as they find the
manufacturers to make the product and travel the world to sell without
scruples. Traders collect commissions on what is sold and are extremely
hard to track down. The actual Chinese manufacturers may not even know
anything about our company as they appear to be manufacturing to the
traders' specifications.
Something must be done to stop China from counterfeiting
trademarked American goods. Customs authorities in all countries must
be alert to any goods that fraudulently state ``Made in U.S.A.'' yet
have other countries of origin, such as China. When these goods are
found the importer should be sanctioned and arrested if possible and
the goods confiscated and destroyed. The real manufacturer along with
the trader involved should be located and the entire counterfeit ring
could then be eliminated. Counterfeiting should be treated as a serious
crime everywhere.
It's impossible for a small company like mine address problems like
these halfway around the world. The U.S. Government needs to intervene
and assist small businesses trying to protect themselves from piracy
and counterfeiting. Intellectual property rights (IPR) must be
protected. Small businesses do not have the financial resources or the
wherewithal to fight global counterfeiting. Our government, through its
embassies, can make a real difference in how the governments of other
countries view these issues. Embassies should have an IPR advocate who
does not just tell the small business to get a local lawyer and go
through the foreign countries legal system, but he should have
responsibility of assisting that small business in defending its good
name, its market share and its employment base.We have a choice. We can
stick our heads in the sand and hope that counterfeiters in China or
elsewhere go away, or we can intelligently use our national resources
to stop the counterfeiting. If American industry is to be preserved and
Americans employed, we need your help and we need it now. Here are
immediate action steps that as a representative of a small business I
believe we should take:
First, customs authorities need to look for phony ``Made in the
U.S.A.'' attributions on imported products that do not come from the
United States. This is a tip-off for which goods are counterfeit.
Counterfeiters are getting better and better at mimicking genuine
packaging, and ``Made in the U.S.A.'' is a key part of this mimicry.
Such vigilance needs to be a part of accepted best practices by customs
services around the world. U.S. Customs and Border Protection should
urge greater vigilance through the World Customs Organization.
Second, trade agreements being negotiated should pick up on this
point as well. It's very pertinent that the Office of the U.S. Trade
Representative is negotiating a free trade area agreement with the UAE
right now. If customs officials in the UAE--or elsewhere, for that
matter--do not have the authority or guidance to seize goods solely on
the basis of fraudulent ``Made in the U.S.A.'' printing, then we should
ensure that they do.
Third, the U.S. Government as a whole, and U.S. embassies in
particular, must find a way to be more helpful to small and mid-size
companies that encounter flagrant counterfeiting and IPR violations. We
appreciate the establishment of a point of contact for small and mid-
size companies in the Patent and Trademark Office but we also need more
on-the-ground support overseas.
Fourth, the U.S. Government needs to keep the pressure on foreign
governments, like the Chinese government, to enforce their IPR laws and
stop the flagrant counterfeiting of U.S. products by their companies.
The annual Special 301 list is one tool. It would be helpful to have a
link for each country on the annual Special 301 list put out by USTR so
that we could better track IPR problems. Today, you can find links to
only three of the almost 40 countries. Getting like-minded trading
partners, like Europe and Japan, to cooperate and send the same message
to these governments would also help.
You need to understand that small businesses like ours operate on
relatively small margins. It is a major financial commitment to develop
a market overseas. To lose a market because of counterfeiting is a
difficult loss to incur. We don't have the resources to challenge
counterfeiters in countries around the world.
The STOP initiative is a good start to developing a global strategy
on counterfeiting. But small businesses can't afford to wait long. We
needed to see practical progress soon.
We appreciate the Committee's interest in these concerns and ask
that Congress provide the resources and support needed for U.S.
agencies to carry out the STOP initiative and move ahead further in the
areas that I have noted.
This concludes my statement, Mr. Chairman, and I look forward to
your questions.
APPENDIX A
UNIWELD PRODUCTS, INC.--CHRONOLOGICAL HISTORY OF COUNTERFEITING
In the late 1990s, Uniweld noticed counterfeit refrigeration
testing and charging manifolds (with hoses) showing up in the market
place in Saudi Arabia. Our Mid-East Sales Manager scoured the shops and
was able to purchase counterfeit Uniweld manifolds. These manifolds
were packaged almost exactly like the original. This included Uniweld's
name, part number, address, and instruction sheets with Uniweld's name,
address and phone number and of course the American flag.
After several years of investigation, we were able to determine
that a former customer of Uniweld had taken our product to China for
counterfeit duplication. This very same customer owes us several
hundred thousand dollars and has been using every trick in the book to
delay his final day in court. The judge in the case has said, in open
court, that he does not like liars and the defendant will answer for
his crimes. We have been in litigation with our current lawyer for more
than 2 years. During the previous 2 years we had several other
attorneys that were ineffective. The wheels of justice in Saudi Arabia
move very, very slowly. The judge has indicated that there are two
issues:
1. Payment for the product acknowledged and received
2. Counterfeiting violations, including Trademark Infringement (Uniweld
has numerous trademarks registered in Saudi Arabia).
As of May 5, 2005, the legal case is moving forward. The Saudi
Chamber of Commerce, Ministry of Trade (Department of Counterfeiting
and Trademark Infringement) and the Saudi National Commercial Bank were
involved to establish a solid basis for this case. Our Middle East
Sales Manager has contacted officials at the United States Embassy in
Riyadh to inform the embassy of the situation. We asked for United
States Government assistance at the time; the only response we received
at the time was to get a lawyer, which we did. We had hoped, though,
that the United States Government could intervene through diplomatic
channels to assist us.
APPENDIX B
COUNTERFEITING IN THE UNITED ARAB EMIRATES
In November, 2004, Uniweld participated in The Big Five Show (an
annual five-country trade fair) in the United Arab Emirates in Dubai.
At this show, our Sales Manager noticed numerous Uniweld counterfeit
manifolds. Potential customers and our distributors approached him to
let him know that Uniweld products (manifolds) were being sold in shops
in large quantities at a cheaper rate (50% cheaper than prices sold to
distributors). He proceeded to investigate the claim by visiting the
local markets and discovered that what we were told was true.
Counterfeit Chinese manufactured manifolds with Uniweld's name,
packaging, design, trademarks and even the American flag were being
sold in large quantities in Dubai.
There were three major distributors selling counterfeit Uniweld
manifolds. Our sales manager immediately contacted Uniweld's Trademark
attorneys in Dubai, United Arab Emirates. We presented our lawyer with
counterfeit manifolds (with receipts) that were purchased in the three
shops. Our lawyer advised us to take action as per local procedures.
This we have done. Step one was to send the three offenders a cease and
desist letter. As of today, May 5, 2005, two have responded that they
did not import the counterfeit manifolds. They claim they are buying
them from our authorized Uniweld distributors in Dubai, which they are
not. Our attorney has advised us to wait a few weeks before we send
agents to determine if they are still carrying and selling counterfeit
Uniweld manifolds. One of the offenders has not yet responded to our
legal letter. We are waiting a little while longer for his response
before we send him an additional letter.
If any of the offenders are found selling counterfeit Uniweld
manifolds, a police raid, which includes confiscation of counterfeit
goods and closing of the shop, will be instituted immediately without
warning.
Our salesman is willing to meet with any U.S. Government official
willing and able to help. We hope someone in our government is willing
to stand up and put pressure on the U.A.E. Government to stop
counterfeiting. We will help all we can.
Mr. Stearns. Thank you.
Mr. DelBianco?
STATEMENT OF STEVE DELBIANCO
Mr. DelBianco. Mr. Chairman and members of the
subcommittee, my name is Steve DelBianco. I am Vice President
for Public Policy, the Association for Competitive Technology
or ACT. I want to thank the committee for holding this
important hearing and I am pleased to testify on the impact on
counterfeiting on small business.
ACT is an active member of the U.S. Chamber of Commerce
Coalition Against Counterfeiting and Piracy. And I am here
today as a coalition member.
ACT is an education and advocacy group for the tech
industry where we promote a healthy tech environment which
includes innovation, competition, and investment. We are a
3,000 IT and eCommerce firms and professionals, many like the
small software consulting firm that I started in Virginia in
the 1980's and unfortunately sold in the 1990's.
Today's other distinguished witnesses described the
devastating effects of counterfeiting on manufacturers of brand
name products, but we cannot forget the effect on the retailer
who makes a final sale to the customer. Here for instance is a
fake X-Box game and we are still a fake of an Apple iPOD
shuffle. The customer who buys and later learns that these are
counterfeits might never come back to that retailer again. If a
counterfeit product fails, the retailer often takes the blame.
He has got to deal with an angry customer who wants a
replacement or a refund. Does he send the fake back to the
manufacturer, the wholesaler, the distributor? And all this
assumes that the customer returns the counterfeit to talk to
the retailer. Often, they just get angry and the retailer is
passed by the next time his former customer goes shopping.
Small retailers depend on customer trust; that is no
surprise. But in the growing world of e-commerce, establishing
and maintaining that trust is even more of a challenge. It
really says something that so many of us will proffer a credit
card for an online purchase from a supplier that we simply
selected from an online search results list. Yet more consumers
do it every day and they are overwhelmingly satisfied with the
quality, convenience, and value of e-commerce. Online selling
is attractive for large businesses and small but it is also
attracting counterfeiters who want to exploit the reach and
anonymity of the Internet.
This fight has to be taken beyond the retail level,
however. It has got to be taken to the source of counterfeit
goods and the primary source as you have heard before was
China. Last week in preparation for this hearing, we hired a
consultant in Shin-Jen, a market between Hong Kong and China,
to scour the Shin-Jen market for what some know is the Holy
Grail of a consumer counterfeit item which was a bag of
Calloway golf clubs that retail for $2,500 here in the States.
Well, thanks to a crack customs agent in Memphis, Tennessee
this morning, that golf bag is still at Federal Express. I
assure members of the committee though that when the bag gets
here, we will host a long drive contest on the Capitol Mall to
see which is the real and which is the fake Calloway.
As Mr. Christian mentioned, Alibaba is a virtual
marketplace for the underground counterfeiting network. Alibaba
fails miserably to police its marketplace for counterfeit goods
and counterfeit sellers. Consequently, sellers in Alibaba
openly seek worldwide distributors for their counterfeit goods
including prescription drugs, golf clubs, apparel, and
software.
And when it comes to software, please take a moment to
appreciate the distinction between piracy and counterfeiting.
People download pirated copies of software every day from file
sharing services like Grokster. And they know without a
question that they are stealing that software. Now contrast, if
you would, that pure digital piracy with the counterfeit
software copies that come on a CD in a package that looks
authentic. On street corners and websites, you can buy a CD-ROM
with a copy of Microsoft or Symantec, Adobe, and other forms of
software and these counterfeits go further. They create huge
new security risks. One Eastern European counterfeit software
site contains this piece of fine print ``You will not be able
to register the software with the manufacturer and get their
support.'' Now that means the users of that counterfeit
software may not get critical security updates to prevent
identity theft, viruses, and it might even open a backdoor to
their PC.
Now the next generation of e-commerce will see even more
goods that are delivered in an entirely digital form with no
packaging whatsoever. Digital delivery of music, software,
books, art, and movies relies on a trust that is created and
maintained by technology. Sellers need to know that you are a
bona fide buyer and you as a buyer need to know that you are
getting a legal copy from a legitimate distributor or seller.
This future will turn the wisdom of President Reagan on its
ear. He said trust but verify, but I think the future of that
becomes verify in order to create trust.
Today e-commerce infrastructure players like VeriSign,
eBay, and Microsoft, they have tools to authenticate the
legitimate identify behind emails, websites, and products.
Looking further ahead, things will come full circle from
physical to digital, and back to the physical world again. A
technology called stereo lithography allows a digital design to
be downloaded to a fabrication shop that could be thousands of
miles away where they create an airline part or even a medical
implant. You can see there where authentication of the digital
file is absolutely essential.
To summarize, we see three critical points for
policymakers. One, counterfeiting is a huge drain on the
economy and it affects everyone from the manufacturer to the
retailer and it destroys the most valuable commodity we have,
customer trust.
No. 2, illegitimate exchanges like Alibaba move counterfeit
goods from the streets of China to markets worldwide, and our
Government must pressure trading partners to shut down this
activity.
And third, the next war in counterfeiting will not be wages
with physical packages but with digital seals and certificates.
Goods delivered electronically will depend on digital
certificates and physical goods bought from stores. It may even
use authentication to create and maintain their own customer
trust.
ACT joins the chorus at this table and our support of H.R.
32 and the administration's STOP Program and we look forward to
working with Congress and the administration to encourage
aggressive enforcement against counterfeiters and convince our
trading partners to do the same.
Thank you, Mr. Chairman. I look forward to your questions.
[The prepared statement of Steve DelBianco follows:]
Prepared Statement of Steve DelBianco, Vice President for Public
Policy, Association for Competitive Technology
Mr. Chairman, Members of the Subcommittee, My name is Steve
DelBianco, and I am Vice President for Public Policy for the
Association for Competitive Technology (ACT). I would like to thank the
Committee for holding this important hearing and I'm pleased to have
the opportunity to testify on the impact of counterfeiting on small
business.
ACT is an active part of the US Chamber of Commerce--Coalition
Against Counterfeiting and Piracy (CACP), and I am here today as a CACP
Member.
ACT is an international education and advocacy group for the
technology industry. Focusing on the interests of small and mid-size
entrepreneurial technology companies, ACT advocates for a ``Healthy
Tech Environment'' that promotes innovation, competition and
investment. ACT represents nearly 3000 IT and eCommerce businesses and
professionals.
Today's other distinguished witnesses will better describe the
devastating economic effects of counterfeiting on the industries that
manufacture or create the name brand products we all know and respect.
Without question, this half a trillion dollar drain on the global
economy is felt by big business. But we cannot forget the effect on the
retailer who makes the final sale to the customer, and the small
business for whom even 5% in lost sales will turn the lights out for
good.
For small retailers, whether online or on main street, counterfeiting
can be devastating.
Counterfeits can ruin the most important relationship we have--
customers who trust us. The small retailer depends on his wholesale
suppliers to provide legitimate products, and is caught unaware when
counterfeit goods make it onto his shelves.1
---------------------------------------------------------------------------
\1\ Tim Trainer, president of the International AntiCounterfeiting
Coalition, in http://www.pcworld.com/news/article/
0,aid,111319,pg,3,00.asp
---------------------------------------------------------------------------
If a counterfeit product fails, the retailer takes the blame. We
have to deal with an angry customer who wants a replacement, or worse,
a refund. If it's clearly counterfeit, our in-store managers have to
figure how and where to return the product. Do we send it back to the
wholesaler? Do we need to contact the manufacturer? Most often, we just
absorb the cost and work to regain the customer's trust.
All of this presupposes the customer decides to return the
counterfeit. More often than not, the customer gets angry but doesn't
bring the item in for replacement. Instead, the local store gets passed
by the next time our former customer goes shopping.
Small retailers depend heavily on customer trust and respect,
whether they're selling on main street or online, but in the growing
world of e-commerce, establishing and maintaining that trust is even
more challenging. Frankly, it says a lot about the growing consumer
confidence in ecommerce that so many Americans will proffer their
credit card for an online purchase from a supplier they've just
selected from a list of search results. Yet, more consumers do it
everyday, and they're overwhelmingly pleased with the quality,
convenience, and value of e-commerce.
Small business is relying more on online distribution
Small manufacturers and specialty retailers are turning to e-
commerce for their distribution and sales. According to Gartner
Research, 30% of businesses with fewer than 20 employees and a Web
presence now generate more than 25% of their sales online.2
---------------------------------------------------------------------------
\2\ Mika Krammer, research director of the small and mid-size
business group at Gartner.
---------------------------------------------------------------------------
E-commerce doesn't just benefit sellers of DVDs, software, iPods,
and other technology-related goods. The benefits of e-commerce extend
to industries that might not first come to mind. For example, a 2002
study confirmed that small farms value the Web as a business tool for
reaching new customers, buying supplies, and streamlining their
administrative processing.3
---------------------------------------------------------------------------
\3\ Ohmart, Jeri L.,``Using E-commerce to Add Value to Small
Farming Businesses in California,'' Study on Retail Farmers' Markets
and Rural Development, Cornell University & Iowa State University,
funded by the Fund for Rural America and the USDA, May 2002.
---------------------------------------------------------------------------
Small software companies can also take advantage of digital
delivery, without the need to create and ship costly packaging or hefty
paper manuals that go out of date with the next update. For any
manufacturer, the ability to send a product to a customer the instant
he wants it, with no warehousing or shipping costs, is the Holy Grail.
Online is the future, but online distribution attracts counterfeiters,
too.
Online selling is attractive for large and small businesses, but
it's also attractive to counterfeiters who want to exploit the instant
reach and relative anonymity of the Internet. Counterfeiters have a
long history of exploiting and undermining traditional distribution
channels, whether by infiltrating the supply chain or circumventing it
entirely through flea markets and street vendors. But now they're
learning that online selling offers some advantages over selling from
physical locations.
In the physical world, a store can't pretend to be something it
isn't. Unless you are attempting to pull-off `The Sting', one doesn't
construct an artificial storefront to lure people into purchasing
counterfeit goods. Online stores, on the other hand, are relatively
simple to create and operate. And the Internet lets a website in
Singapore be instantly visible to the entire world.
The fight against counterfeit goods has to be taken beyond the
retail level. Industry and law enforcement efforts have to focus on the
source--producers, wholesalers, and distributors of counterfeit goods.
And the primary source is, not surprisingly, China.
The Hangzhou-based Alibaba website (www.alibaba.com) is a virtual
market where major players in the underground counterfeiting network
connect and trade. While some authentic goods are traded on Alibaba,
counterfeiters are in evidence all over this website, in both English
and Chinese language renditions.
On Alibaba, many sellers are explicitly seeking worldwide
distributors for their counterfeit goods, including software,
prescription drugs, golf clubs, apparel, and even batteries. Below is
an actual Alibaba screen offering large lots of counterfeit Duracell
batteries, claiming they were produced using ``good materials'' and
promising ``value for money''.
Counterfeit exchanges like Alibaba will undoubtedly harm China's
consumers and impair the future of legitimate e-Commerce there. But
Alibaba can also drag other economies down with it, by injecting
wholesale quantities of counterfeit goods into the worldwide supply
chain.
While Alibaba has created a growing marketplace for counterfeit
physical goods, there is another side to counterfeiting that is
especially destructive to ACT's small software developers: digital
distribution sites that claim to be legitimate, but aren't.
Software piracy and counterfeiting: double jeopardy
It's important to note that there is a real distinction between
piracy and counterfeiting when it comes to software. We are all aware
that strictly-digital pirated copies of software are downloaded every
day from file-sharing services like Grokster and eDonkey. When a user
grabs a free digital download of Microsoft Word from these file-sharing
sites, he knows without question that he's stealing a pirated copy of
the software. There is not the least pretense of legitimacy from the
person giving the copy, from the file-sharing service, or in the mind
of the person downloading the copy.
Contrast that pure form of digital piracy with counterfeit software
copies that come in tangible form, complete with packaging. On street
corners and websites worldwide, you can buy CD-ROM copies of leading
software from Microsoft, RedHat, Symantec, Norton, Adobe, and Corel.
For example, SoftwareNow draws people to its website through emails
claiming ``Prices slashed to the bone on original U.S. PC software!''
SoftwareNow's slick website shows pictures of packaged software
available at a fraction of retail prices. On their site, here's how
SoftwareNow answers the wary consumer wondering how they can sell so
low:
How can you sell this software as OEM ? It seems too good to be true--
is there a catch?
There is no catch--the software versions that we sell are OEM
(Original Equipment Manufacturer) which means you will receive the
installation CDs only (they do not come in their original retail
packing and do not include the manual). We do guarantee that all
programs are the 100% full working retail versions--no demos or
academic versions! When you order, you will receive all materials
required for a complete installation--or your money back! Why pay
hundreds of dollars more when you can get exactly the same but OEM-CD?
You don't have to pay that much for the fancy box and manuals.
Although SoftwareNow claims they're selling OEM versions of
software from manufacturers like Microsoft, you cannot buy so-called
OEM software without buying the computer itself from the OEM. But not
many consumers are aware of that, so many are taken-in by the ruse.
Counterfeit Software is a security risk
Consumers who are unfortunately duped into buying counterfeit
software may never discover that they're running counterfeit code.
After all, digital copies are perfect copies, so the software looks and
performs like the real thing. But that only helps lure users into a
false sense of security when it comes to getting notifications and
updates to respond to new cybersecurity threats.
Returning to the SoftwareNow example, there's a dangerous
disclaimer buried on the website, warning buyers, ``Note, that you will
not be able to register the software with the manufacturer and get
their support, but we will do our best to support you any way
possible.''
Not many consumers would be as alarmed as they should be by this
``disclaimer''. Those who purchase and install the counterfeit software
could go for months without knowing they are missing critical notices
and software updates to prevent security vulnerabilities. This
compromises their own security against viruses, spyware, and identity
theft.
Moreover, their unsecured PC can serve as a platform for other bad
actors to exploit for spam relays, virus proliferation, and denial of
service attacks. Counterfeit software can contain Trojan Horses or open
``back doors'' that let criminals into a user's computer.
Taken together, piracy and counterfeiting are costing the software
industry $30 billion each year, and IDC estimates that 1 in every 3 PCs
worldwide contains some pirated or counterfeit software. In 2002,
seizures of pirated Microsoft products alone exceeded $1.7
billion.4 And these costs don't include the wider costs to
businesses and consumers of vulnerable PC software that's not
registered with the manufacturer and not getting timely notices and
security updates.
---------------------------------------------------------------------------
\4\ Statement of Richard C. LaMagna (Microsoft Corporation) before
the House Subcommittee on Courts, the Internet, and Intellectual
Property, Oversight Hearing on International Copyright Piracy: Links to
Organized Crime and Terrorism, (March 13, 2003)
---------------------------------------------------------------------------
Government and Industry are fighting back
A Justice Department study in October 2004 describes several
examples of how industry and the U.S. Government are battling software
counterfeiters. In 2003, a Virginia man was sentenced to five years in
prison and ordered to pay $1.7 million in restitution for selling more
than $7 million in counterfeit software over the Internet. In a 2004
prosecution, a Ukrainian man was charged with illegally distributing
millions of dollars of unauthorized copies of software from Microsoft,
Adobe, Autodesk, Borland, and Macromedia. And in September 2004, DOJ's
``Operation Digital Marauder'' seized over $56 million in counterfeit
Microsoft software, and charged 11 people with manufacturing
counterfeit software and counterfeit packaging.
The next generation of e-commerce and of counterfeiting
The next generation of e-commerce will see more goods delivered in
entirely digital form--with no packaging at all. Digital delivery of
music, software, books, art, and movies will all depend on trust
relationships that are created and maintained by technology.
Digital content will be streamed via broadband, but the creators
will need a way to know that you are a bona fide buyer, and buyers will
need to assure they are acquiring a legal copy from a legitimate
vendor. This future world will turn President Regan's adage ``trust,
but verify.'' on its ear--the future of digital goods will ``verify, to
create trust''.
We all know what the breakthrough success of Apple's iTunes service
has done to legitimatize digital music downloads. But what you might
not realize is that iTunes relies on digital seals and certificates,
the electronic means of authenticating that you are who you say you
are.
To make this possible, e-commerce infrastructure leaders like
VeriSign, eBay, and Microsoft are developing certification technologies
and programs to authenticate the legitimate identity behind emails,
websites, and the products themselves. Automated authentications occur
quickly and without human intervention, so shoppers are notified only
when there's a question about certifications claimed on a store
website. If a consumer has to telephone the manufacturer or check lists
of authorized dealers, he loses some of the convenience that makes e-
commerce attractive in the first place.
Digital seals and certificate services are used by e-commerce sites
to prove identity and show they're using secure communications.
VeriSign's Secured Seal, for instance, shows that a website has been
approved by VeriSign to protect credit card and other confidential
information with SSL encryption. Similar technologies help to assure a
customer that his bank website really is his bank.
New technology behind RFID (Radio Frequency Identification) tags
and the Electronic Product Codes network will help stop fakes from
penetrating supply chains. Drug shipments, for instance, can be
automatically scanned and authenticated as they travel from
manufacturer to pharmacy. The pedigree and location of drug shipments
will be accessible to all parties, preventing copies from being
introduced into the supply chain.
However, these certification technologies could themselves be
subject to elaborate counterfeit schemes. Criminal email phishing
schemes are luring users to a website that has the marks and logos of
legitimate security providers, and some present a ``certificate'' that
the user can accept or refuse. Unfortunately, many users don't read the
certificate closely, and are duped into believing it's real. This gives
small software firms an abiding fear that a criminal could fake the
security certificates for a sales page, and sell digital downloads of
software to people who really are trying to buy a genuine product.
For the digital future to fulfill its promise, customers will need
to trust the person at the other end of the wire. And if you can't
shake their hand, you'll need digital certificates and authentication
methods to give you the same sense of trust. When--not if--criminals
begin to forge security keys, hash codes and security certificates,
industry will need to work even more closely with law enforcement to
investigate and aggressively prosecute counterfeiters.
Conclusion
To summarize, we see three critical points for policymakers to
consider when confronting the problems posed by counterfeit goods:
1. Counterfeiting is a huge drain on the economy--it affects everyone
from manufacturer to final retailer, destroying the most
valuable commodity we have: the trust of our customers.
2. Illegitimate exchanges like Alibaba are moving counterfeit goods
from the streets to websites. The U.S. Government needs to
exert pressure on foreign nations to shut this activity down.
3. The next war in counterfeiting will be waged not with physical boxes
but with digital seals and certificates. Goods that can be
delivered digitally will depend on digital signatures, physical
goods will be bought and sold from stores using authentication
to create and maintain trust relationships with customers.
The technology industry is constantly driven by market forces to
help its business partners solve problems quickly and cost-effectively.
We look forward to working with Congress and the Administration to
encourage aggressive enforcement against counterfeiters, and convincing
our trading partners to do the same.
CACP Membership List As of June 14, 2005
ASSOCIATIONS
Advanced Medical Technology Association (ADVAMED); AeA, Advancing the
Business of Technology (AeA); Aerospace Industries Association (AIA);
Alliance of Automobile Manufacturers (AAM); American Apparel & Footwear
Association (AAFA); American Association of Exporters and Importers
(AAEI); American Council of Independent Laboratories (ACIL); American
Intellectual Property Lawyers Association (AIPLA); American Society of
Association Executives (ASAE); Association for Competitive Technology
(ACT) ; Association of Equipment Manufacturers (AEM); Automotive
Aftermarket Industry Association (AAIA); Center for Health
Transformation (CHT); The Cosmetic, Toiletry and Fragrance Association
(CTFA); Consumer Electronics Association (CEA); Electronic Industries
Alliance (EIA); Entertainment Software Association (ESA); Food
Marketing Institute (FMI); Gas Appliance Manufacturers Association
(GAMA); Global Business Leaders Alliance Against Counterfeiting
(GBLAAC); Grocery Manufacturers of America (GMA); International Anti-
counterfeiting Coalition (IACC); International Federation of
Phonographic Industries (IFPI); Intellectual Property Owners
Association (IPO); International Communications Industries Association
(ICIA); International Trademark Association (INTA); Motion Picture
Association of American (MPAA); Motor & Equipment Manufacturers
Association (MEMA); Motorcycle Industry Council (MIC); National
Association of Manufacturers (NAM); National Electrical Manufacturers
Association (NEMA); National Marine Manufacturers Association (NMMA);
Outdoor Power Equipment Institute (OPEI); Pharmaceutical Research and
Manufacturers of America (PhRMA); Recording Industry Association of
America (RIAA); Specialty Equipment Market Association (SEMA); Toy
Industry Association (TIA); U.S. Chamber of Commerce (USCC); U.S.
Council for International Business (USCIB); and Vision Council of
America (VCA).
CORPORATIONS
Altria Corporate Services, Inc.; Altria Group, Inc.; American Standard
Inc.; Amgen Inc.; AOL Time-Warner; Aspen Systems Corporation; Baker &
McKenzie; BellSouth Corporation; British American Tobacco; C&M
International, LTD; Dayco Products, LLC; deKieffer & Horgan; DuPont
Security & Solution; Eastman Kodak Company; Gallup; Gillette; Intel
Corporation; Jones Day; Kent & O'Connor, Incorporated; National
Broadcasting Corporation (NBC); News Corporation; Oakley; Pernod Ricard
USA; Pfizer; Robert Branand International; Stanwich Group LLC.; The
Fairfax Group; Tiffany & Co.; Torys, LLP; Transpro, INC; Underwriters
Laboratories, Incorporated; USA For Innovation; Verizon; and Xerox
Corporation.
Mr. Stearns. I thank you.
I will start with the questions here. You know, listening
to you, it is a little overwhelming on what to do. And
listening to each of you talk about it, Mr. Christian, you had
sort of mentioned in your testimony sort of some steps. You
indicated there is no quick fix but we must take the
incremental steps to stop this problem.
I would like you to--and I think you did in your opening
statement but before you do that, I cannot comprehend, could
not eBay have a lot of counterfeit products being sold? I mean,
I think Mr. DelBianco you said eBay has worked out a system
where they authenticate every product that comes on or
something?
Mr. DelBianco. Mr. Chairman, e-Bay has worked tirelessly
for what they call the trust and security system. And it is a
system by which immediately upon notification that an item
might be counterfeit, they take aggressive measures to shut
down that particular sale. And even after an investigation to
block that seller from being on the site. I mentioned the
Calloway golf clubs. And Calloway in its statements have said
that they get cooperation from eBay the very instant they claim
that they suspect that a set of clubs could be a counterfeit--
--
Mr. Stearns. So it looks like to me--and Mr. Christian, you
can tell me if we could educate the public and we could
immediately have a data base in place where we could identify
these counterfeits and this data base was made publicly known
internationally, wouldn't that be a step to stop this?
Mr. Christian. Potentially a step, one of many steps. You
mentioned education certainly very important. What scares me at
times is the fact that certain people, certain organizations
seem prepared to declare victory and go home. This problem is
not about to be solved. In the U.S., we have got to become more
aggressive. This is an area where we are not a leader. We lead
the world in so many areas but in this area we are depending
upon foreign covernments----
Mr. Stearns. Yes.
Mr. Christian. [continuing] and authorities to do what
perhaps we should----
Mr. Stearns. And you say there is no technology, we cannot
have technology to prevent this. For example, Mr. Pearl, in
yours if you put an RFID, a radio frequency and you tell every
supplier that don't sell this unless it has this RFID, is not
there--I am asking any one of you, is not there some
technological solution here that we could have to help prevent
counterfeiting?
Mr. DelBianco. I can take a little of that. If they put an
RFID on our boxes, for example----
Mr. Stearns. Like your refrigerator manifold?
Mr. DelBianco. Yes, on one of our manifolds----
Mr. Stearns. Okay.
Mr. DelBianco. [continuing] or other products. The problem
is is that Chinese are very adaptive and they adapt very
quickly.
Mr. Stearns. You mean they will put an RFID in?
Mr. DelBianco. Immediately, the front box that you see was
our original packaging, the blue and red one and with less than
6 months after we put our new product on the market in the back
boxes which are nicer boxes, they had them copied as you can
see, fake being to your left and to my right, and the original
to my left and yours, your right. And it is very difficult to
stop them. They are----
Mr. Stearns. So no technological advancement will solve
this problem in your opinion? None that----
Mr. DelBianco. I don't believe technology will solve it. It
has to be solved at the source and we have to----
Mr. Stearns. You could not put a hologram or you could not
put something on there and----
Mr. DelBianco. Well in----
Mr. Stearns. When it comes to safety, I would think there
must be something, you know.
Mr. DelBianco. Technology is a tool in the toolbox but
somehow it got known as the solution. One of the things that
you mentioned and one of the things the FDA mentioned in their
task force report was holograms. Well Novartis and a number of
other pharmaceutical companies are considering putting
holograms on packaging. In the meantime, the counterfeiters
have already done so. So we have counterfeit product out there
with holograms and we don't put holograms. And it says in the
different languages for your safety on the hologram.
Mr. Stearns. So they got hubris here, they will put on
their package. Mr. Emmer and Mr. Arthur, is the problem with
counterfeiting outside the United States in one sector only or
are we talking across the board in your opinion?
Mr. Emmer. Yes, sir.
Mr. Stearns. Yes.
Mr. Emmer. Mr. Chairman, the vast majority of automotive
products that we found are manufactured in China and exported
worldwide. The key markets that we found are the Middle East.
Mr. Stearns. So I could go to an automotive shop in Florida
and probably find some counterfeit parts.
Mr. Emmer. Probably. We--Federal-Mogul, we are not naive to
think that we don't have a huge problem or a big problem in the
U.S. We have identified a couple of issues already. The MOOG
chassis parts on the East Coast of the U.S., we have identified
as being a problem and we are taking steps to address that. And
it is my opinion that you could go into any market in any
country and find counterfeit products.
Mr. Stearns. Mr. Arthur?
Mr. Arthur. I would say our member companies would see the
same that most of the problem is the counterfeit products are
being produced overseas and being distributed overseas and
being imported into the U.S. both on the food side and the
consumer product side.
Mr. Stearns. What do you mean the food?
Mr. Arthur. Well there is counterfeit as I had mentioned
soy sauce, I mean salsas.
Mr. Stearns. Okay.
Mr. Arthur. Just a lot of, you know, even specialty
products. There are companies that get a premium because they,
you know, make a good hot sauce or a good salsa and somebody
will make a cheap imitation of the label and sell it and that
can really do damage especially to those small regional----
Mr. Stearns. Well can I go into the local grocery store and
find a counterfeit salsa today?
Mr. Arthur. I would like to believe not but I think that
you probably could.
Mr. Stearns. So you are saying that we don't even have
protection of food safety in the United States in our grocery
stores because you could find counterfeit food?
Mr. Arthur. I am hesitant to say that you cannot because
that is a pretty much of an absolute statement.
Mr. Stearns. Yes.
Mr. Arthur. I think that we have very good food security
but I would be hesitant to say that you could not find it if
you went looking for it. And most of the--and I think that as
we work with the retailers and look at the supply chain, there
is a decent system but there are gaps occasionally in the
system that--and some of it can be in some of the discount
stores or when products are moved over their----
Mr. Stearns. Well how would I go about when I go into a
grocery store to determine whether it is a bad product? I could
not tell. I could not tell, right? Isn't it up to the grocery
store to actually come up with a list of suppliers that they
feel are credible?
Mr. Arthur. Yes.
Mr. Stearns. Shouldn't that be protection?
Mr. Arthur. Yes. In the end, I mean, I----
Mr. Stearns. I mean, they are going to be sued if myself or
my family get hurt from buying something in their store.
Mr. Arthur. I think it is not just the retail, I think it
is the whole supply chain from the manufacturer to the
consumer. We need to have a good system in place and that is
one of the things that we are working. The one part that I had
mentioned briefly in the STOP initiative is developing some
guidelines to protect that entire supply chain, and we are
hoping to have something developed before the end of the summer
that can then be distributed and then be used more broadly
beyond the grocery and consumer products industries.
Mr. Stearns. My time is expired. The ranking member.
Ms. Schakowsky. Thank you, to all the panelists. Mr. Emmer,
I had the pleasure of taking a tour of the Federal-Mogul
facility in my district in Skokie, Illinois not too long ago. I
wanted to begin with you and then ask the other panelists the
same question.
What has the Government done about your company or your
company's counterfeiting problems and if you have suggestion of
what more could be done. And I know when we get to you, Mr.
Christian, you said that we are relying on foreign countries to
do some of the things that we ought to do. So I am interested
in sort of what has worked, what has been done, and what more
could be done in just a couple of sentences during my time. Mr.
Emmer?
Mr. Emmer. The--some of the things that we have seen that
have worked are--or steps in the right direction are one the
proposals from H.R. 32, seeing an increase in criminal
penalties, the proposal to seize tooling patches, labels,
anything that can be used to affix to a generic product thereby
making it counterfeit. We would like to see it go a step
further and see an increased funding to not only Department of
Homeland Security, Department of Justice, increased resources
for further prosecution and further enforcement of these
crimes, specifically earmarked for counterfeiting crimes.
I would also like to see increase in cooperation between
U.S. Customs and foreign customs agencies since we are able to
track these counterfeit goods moving from one port to the next
from say the United Arab Emirates to the U.S. and have some
sort of interaction in place. I think that would facilitate a
lot of----
Ms. Schakowsky. Would you favor retaliation against Chinese
imports in some way? I mean, we have heard testimony from the
Commerce Department that it keeps going on.
Mr. Emmer. It does keep going on. I think the Chinese
Government, if they truly wanted to take action, they could
stamp out a lot of this problem. I think a lot of the companies
that we have found as being involved in the counterfeit
production are partly owned by the Chinese Government or
Chinese corporations. I think stronger measures on U.S.
Government could exert some pressure on China for some positive
results.
Ms. Schakowsky. Thank you. Mr. Arthur, do you have
suggestions or what has the Government done?
Mr. Arthur. Well as I mentioned and a couple of people
mentioned, getting H.R. 32 passed and in place will really help
on making our trade position more credible, that we are doing
what we can here to destroy counterfeit products that are found
plus the machinery that is used to make them when it is done in
the U.S. And then I think that stronger--working with the
international trade community to make sure that those countries
are doing what we are doing here to find those that are
counterfeiting and crack down on them. And so I would echo a
lot of what Mr. Emmer was saying as well.
Ms. Schakowsky. Okay.
Mr. Christian. As I mentioned, we need to take the lead. I
think this is an issue in a way similar to what we--what is
often heard about terrorism. That we can fight it across the
ocean in a far off land or we can fight it on Main Street,
U.S.A. And I think the counterfeiting of medicines falls into
that category as well.
If you look at the criminal jurisdictions from the criminal
code of the United States, most of the agencies, FBI, Secret
Service, DEA, Customs operate internationally. The purpose of
doing that is to protect American citizens before the crime
occurs in the United States. The criminal jurisdiction for
counterfeiting falls to the--for the FDA and they have a small
group of professional investigators but that is what it is: a
small group, they don't operate internationally.
So while DEA will try and keep a product from being
planted, they will try and keep it from being harvested, will
try and keep it from being shipped, and we will track it down
and investigate it when it is in the U.S., the FDA only has the
capability of tracking it down once it is in the U.S. So we are
not giving it as much attention. We are not leadership.
If you go out around the globe, whether it is Bogota or
Bangkok, if the authorities think the U.S. law enforcement
agencies are interested in a problem, they will work hard on
it. When nobody ever comes to them and talks about
counterfeiting, they back off a little bit. So I think we need
to lead. We need to get out front on this issue and take a
leadership role around the globe before we are reactive to a
serious problem here in the U.S.
Ms. Schakowsky. Thank you.
Mr. Pearl. In my instance, the USTR has been helpful in at
least helping me find attorneys in these countries where
counterfeiting is taking place. The--I think that for us to be
successful in reducing the amount of worldwide counterfeiting,
it will be important to get the Governments and the offending
countries to cooperate. It has to be done. If we have to twist
their arms, we have to twist their arms, but it has to be done.
We cannot do it as long as they are getting paid off in their
own countries. And if there is no reason for them to try and do
the right thing, we have to try and give them one. If we can do
that, then they will start stopping the counterfeits before
they get into their country. They will destroy them and they
will probably try and find out who is bringing them in. We have
to make it worth their while because right now it does not make
any difference to the person looking at containers, he could
care less. But if he comes--if--in our case, a whole container
load of product came in from China, the bill of lading said
China, the product said Made in the U.S.A.
Now if that does not tell you something and the guy said--I
mean if he--I would have gladly given him a bonus to stop that
container. It costs me a fortune when that gets into the market
and ruins our reputation. And we have to find a way to get the
other Governments to cooperate and see--make it in their
interest too. It has to be in their best interest and I think
it is.
Ms. Schakowsky. Thank you.
Mr. DelBianco. Representative Schakowsky, I believe your
question was what concrete steps has the administration taken
to combat counterfeits. I will just simply address sort of a
top down and a bottom up response to your answer.
From the top down, trade representatives and the
administration have been aggressive in negotiating strong
intellectual property protect rights in free trade agreements
and have been big supporters of pushing through the CAFTA,
Central America Free Trade Agreement. That, I believe is the
top down approach.
From the bottom up, this Justice Department--and to partly
catalog in a study they did last fall, this Justice Department
went a long way to document the cases that have been
prosecuted. In 2004, a prosecution of a Ukrainian man was
charged with illegally distributing millions of dollars of
unauthorized copies of software and was extradited to this
country. And then the Department of Justice conducted operation
digital marauder last fall and it seized almost $60 million of
counterfeit Microsoft software and have charged 11 people with
manufacturing counterfeit software and distributing it. And
that sort of pubic hanging or a public execution, I think will
focus the mind of some counterfeiters.
Ms. Schakowsky. Let me ask you a question though. You talk
about 11 individuals but if we have companies that are trading
on Chinese Stock Exchange that are actually making money from--
their business is counterfeiting, then this is kind of out in
the open and larger than 11 people. What can we do about that?
Mr. DelBianco. From the top down, we have to negotiate
heavily with China for intellectual property protection rights
that would help to shut down the Alibaba exchange. And from the
bottom up, those prosecutions, they are still going to have an
effect, Representative, on the distribution channels here in
the States. Because if someone is taking those Alibaba based
counterfeits and moving them to a U.S. based market, there are
going to be folks in that distribution chain. And I know we
cannot arrest them all, but let us not let the perfect be the
enemy of the good. I think we can make a difference.
Ms. Schakowsky. Thank you.
Mr. Ferguson. [Presiding] Ms. Blackburn for questions.
Ms. Blackburn. Thank you so much. And I want to thank each
of you for being here and for your comments on this issue.
Mr. Christian, I think it was you that mentioned the tools,
that technology was just one tool in the toolbox. I will remind
each of you and all of us collectively, I think it was Napoleon
who said tools belong to those who know how to use them. And I
think that it is high time we start figuring out how to use
some of these tools to help protect the creative community in
this country and I hope that we all will work collectively and
aggressively on this issue.
I have four questions and I am going to address them to
each of--to you all collectively and then you may either
respond now or respond in writing. I know we are a little close
on time. And Mr. DelBianco, you can respond for the association
that you work with.
And we talk in Tennessee where I am from and as we look at
this whether it is my entertainment industry, whether it is our
pharmaceutical development that takes place there, our
biopharmaceutical industry, our auto engineers that are
working, we talk about the impact of this. In entertainment
alone, we know that we have lost half of our songwriters in
this country over the past decade. Intellectual property theft
is an expensive business, very expensive business.
So what I would like to know from each of you with your
companies is this. No. 1, will you please give me an estimate
of the economic loss that you incur each year because of piracy
and intellectual property theft? What is it costing you in raw
dollars. No. 2, for your industry or your company jobs lost,
annual jobs lost. What do you estimate that to be? No. 3, would
you as a company support WTO action against China for their
infringement and lack of respect for intellectual property and
counterfeiting. And No. 4, in addition to China, what other
countries or regions of the world are producing counterfeit
product or infringements on the intellectual property that many
in our country own.
And Mr. Emmer, I will start with you. We will work down and
if each of you will just briefly respond or either let me know
that you are responding in writing.
Mr. Emmer. I will have to submit the response in writing to
you certainly on the economic loss, the annual job loss, as
well as the confirmation of the support against--action against
China. It certainly needs to be considered, as well as the--it
just needs to be considered. The other areas that we have seen
counterfeit products being produced, I can--I will include that
in writing as well but we have seen an increase in the India/
Pakistan Region or India/Pakistan specifically and those areas
are affecting our company as well.
Ms. Blackburn. Thank you.
Mr. Arthur. The job loss numbers and the economic loss
numbers I have seen as nationwide. I will have to get back to
see if we have those on an industry basis. And I will also have
to get back on the--your last two questions.
Ms. Blackburn. Thank you.
Mr. Christian. I will have to do as well. To us, this is
more of a public health issue than an economic issue, although
it is an economic problem. It does cost money. It does cost
jobs. There are other areas of concern. One of the areas I did
not mention today was India but India remains a concern and a
problem. Certainly in Latin America, Russia is a disaster as I
mentioned. But as far as the specifics, we will have to get
back to you because----
Ms. Blackburn. Excellent, thank you.
Mr. Christian. [continuing] we are in the public health.
Ms. Blackburn. Mr. Pearl?
Mr. Pearl. As far as an economic loss from my small company
it is at least a million dollars a year. Jobs lost, a few years
ago we had 375 employees, we now have 260. As far as the World
Trade Organization, I think that China wants to belong and I
think we should make them follow the rules. Absolutely force
them to take some action. And if we don't, we are all going to
suffer. They want what we have and they have a 20 or 30 year
plan to get it from us and we are just feeling it now and they
are not going to stop. If we don't slam them now and get their
respect, we will never have their respect. Something serious
has to be done now.
And you asked about other countries other than China. There
are many as have already been mentioned. But I believe if you
really want to slow down the Chinese counterfeit, you can do it
by making the traders responsible. Traders are people who go
out and scour the world, find products and customers, have them
made in China. They don't care about trademark law anywhere.
They have no scruples whatsoever and no morals and they will
copy anything that they think they can make a commission on.
Ms. Blackburn. Thank you.
Mr. Pearl. And if we can get China to make them
responsible, then I believe that we can slow down the Chinese
counterfeiting. Not stop it but we can certainly slow it down
and make it more difficult. If you--when I go to trade shows
around the world, I see the Chinese there. They are not
particularly selling but they are certainly getting all the
catalogs and talking to people about which one of their
products is well thought of so that they know which one to
copy. And before you know it, they have copied it and they are
in your market and they are producing inferior products.
Ms. Blackburn. Thank you. Mr. DelBianco?
Mr. DelBianco. Thank you for your question, Representative
Blackburn.
With respect to the first question, the economic losses due
to the information technology industry to the piracy and
counterfeiting is estimated by IDC at $30 billion a year. And
they estimate that one in three computers worldwide contains
some form of pirated or counterfeit software.
Representative, I would like to get back to you in writing
with the number of jobs and the specific WTO actions we would
recommend against China.
And with respect to your fourth question, I believe that
Brazil and at least three nations in Eastern Europe, Russia,
Poland, and Romania are a source of counterfeit software that
is plaguing software makers in this country and costing
American jobs as well and they deserve the same kind of
scrutiny we are applying to China here today. Thank you.
Ms. Blackburn. Thank you very much.
Thank you, Mr. Chairman.
Mr. Ferguson. The chair recognizes himself for questions.
A couple of questions for Mr. Christian. You say in your
testimony that EU's eastern border has become increasingly
poor. I referenced this in my opening statement allowing for
Russian counterfeit pharmaceutical cartels to being dangerous
counterfeit drugs into the EU pharmaceutical supply reaching
France and Germany. Can you talk a little bit more about that?
Can you elaborate in what you said in your statement?
Mr. Christian. Sure. Historically, Western Europe
particularly has enjoyed the same quality, the same safety that
the United States has in its medical distribution system.
Despite the fact it is a little more porous, a little more
dangerous because of the legal parallel trade that goes on
among the various northern and southern European countries
which is encouraged and, of course, the repackaging that I
mentioned.
So Europe is beginning to see some of the problems that we
are beginning to see. You know we have had a series of
counterfeit cases that have made the news in the United States.
Europe is beginning to see that. The border issue, Russia is
just exploding with counterfeiting and some cities it is up to
25 or 30 percent of the products in the pharmacies are
counterfeit. And these are coming out into the old Eastern
European areas. And now with the expansion of the EU, then once
you are into Eastern Europe, you are into the major markets.
Additionally in Europe, they are beginning to have the same
problem with the Internet sales that we have. There are many
hundreds of Internet sales selling counterfeit products from
Russia and also from China. So they are going through some of
the same pains and learning experiences that we are going
through. It is more dangerous for them at this point in time
because they are that much closer to a major existing
counterfeiter.
Mr. Ferguson. With the EU's development and formation, it
seems then that the safety of the drug supply, you seem to be
suggesting is getting less safe rather than more.
Mr. Christian. That is correct.
Mr. Ferguson. Any signal that that is not going to continue
to deteriorate?
Mr. Christian. No, but I think it is similar to the U.S. It
is similar to most of the world that the drug supply in general
is getting less safe. There is a new book out that just deals
with the issues of the United States called ``Dangerous Doses''
and that would be eye opening for members of the committee to
read because it just devotes itself to the problems in the
United States that often go unreported or under reported.
Mr. Ferguson. What about Canada?
Mr. Christian. Canada has a safe drug supply at this point
in time. As you may have seen today in the news, the latest
survey showed that 2 percent of the Canadian websites are
actually in Canada, and that to me is a precursor of what
potentially could happen if we have importation, re-
importation, or whatever you want to call it. Back in the
1980's, it was called American goods returned. And this very
committee determined that there were major problems with
counterfeit, adulterated, expired products coming back into the
United States and passed the Prescription Drug and Marketing
Act. And the same arguments that we used in the mid-1980's by
this committee exist today.
One of the major receipts of the American goods before they
returned were the Cayman Islands. Now the Cayman Islands had no
problem with counterfeit, or expired, or adulterated products
until the criminal organized crime elements decided to use it
as a launching point. So they would get millions of doses of
products shipped to the Cayman Islands where the population
might have been 15,000 people. And after sitting on the dock
and being messed with, if you will, replaced, or adulterated,
or liquid products being divided in two and water being added,
these products came back to the United States. And this
committee discovered and uncovered that scandal and the
Prescription Drug and Marketing Act took place.
Because Canada does not have a problem today, does not mean
if opportunity for criminal elements to take advantage of the
situation is created, then they will take advantage of it. If
the door is opened, then you are going to see what you see with
the Internet sales where 86 percent of all product entering via
the Internet is illegal in the United States.
Mr. Ferguson. The chair recognizes Mr. Bass. No other
questions.
Mr. Bass. Thank you very much, Mr. Chairman.
I regret having missed the chairman's questioning and
others. I have heard a lot of discussion here about the
problem. It is unclear to me as to exactly what the solutions
might be. In fact, it looks like a dam that is sort of being
broken here and as we get more technologically advanced, the
problems don't get easier to solve but harder.
I also think that we need to differentiate between the--
especially in the pharmaceutical field between the issue of re-
importation which is an economic issue and counterfeiting which
is quite different. Counterfeiting can occur anywhere in the
world, abroad or here or anywhere else. Manufacturing is
another story all together because the reason why you get knock
off products is because they are a lot cheaper to manufacture.
And as we well know, there are legitimate businesses in the
country that are subbing out manufacturing abroad but it has
their name on it so therefore it is okay.
Is there a nexus between the issue of counterfeiting and
the whole trade debate that we are having today? Is that--is
there any--do trade agreements help reduce the issue of
counterfeiting? Maybe, Mr. Pearl, you could answer. You are
representing NAM. Is NAM in favor or opposed to CAFTA. Do you
know?
Mr. Pearl. They are in favor of it. And I----
Mr. Bass. That is what your little button is?
Mr. Pearl. Absolutely. And the reason that I am in favor of
it also personally is that it will strengthen our IPR issues.
We can force them. When you are negotiating with someone, you
have an opportunity and I don't want our country to lose the
opportunities with every trade agreement. We need to drive home
IPR issues, counterfeiting issues, and other issues that are
very important to us.--went to the United Arab Emirates and
that to me personally is very important because we just in
November found them counterfeiting our parts there. And we--
temporarily we may have it stopped but it is something constant
diligence is required.
Mr. Bass. And Mr. Pearl, the reason your parts are
counterfeited is because I am going to assume labor is cheaper
elsewhere. Is that right?
Mr. Pearl. Correct.
Mr. Bass. Yes.
Mr. Pearl. Chinese labor is virtually free.
Mr. Bass. But you are not worried about counterfeiting
within the United States of your----
Mr. Pearl. We have not seen our products counterfeited in
the United States yet and I am hoping I never do.
Mr. Bass. All right.
Mr. Pearl. But in the Middle East definitely.
Mr. Bass. Did anybody mention any specific legislative
ideas for dealing with this counterfeiting issue?
Mr. DelBianco. Representative Bass?
Mr. Bass. Yes, sir, Mr. DelBianco.
Mr. DelBianco. Thank you. We, I think as a chorus, all of
us supported H.R. 32.
Mr. Bass. Okay.
Mr. DelBianco. And need to move that through on the
Senate's side.
Mr. Bass. But we have done that in the House, didn't we,
H.R. 32?
Mr. DelBianco. Yes.
Mr. Bass. So we have already passed that. Anything else?
Mr. DelBianco. The digital seals and certificates that I
spoke of in my testimony----
Mr. Bass. Okay.
Mr. DelBianco. [continuing] it is possible that those would
not be considered the same kind of labels that are named in
H.R. 32. So it is entirely possible we may need more targeted
legislation to identify that trafficking in digital seals and
certificates is every bit as bad as trafficking and physical
labels and certificates.
Mr. Bass. Mr. Christian, again, I do not want to talk about
re-importation so this is not the reason for this question. Is
there counterfeit-proof packaging technology available? Please
do not get into re-importation. Is it possible for
pharmaceutical companies to create, just like we have currency,
counterfeiting of currency which obviously we try to stay out
of. Is it possible to do it in your area?
Mr. Christian. Well if we just use the currency example,
sir, since 1986, the U.S. Currency has been changed, I think
seven times because it was being counterfeited. And in that
particular instance, you have to realize that the security
features are on the product. And so what we have is we are
putting security features when we talk about technology, we are
talking about putting them on the packaging. And at the end of
the day, we are tracking the cardboard, we are not tracking the
product and we constantly find counterfeit product in genuine
packaging and genuine product in counterfeit packaging.
The changes are being made. Legal repackaging as I
mentioned is--exists in the U.S. and the EU, the two biggest
markets. So a pharmaceutical company can put a great deal of
money into these new secure devices and packaging and they can
end up on the floor of the repackager as he puts it in his new
plain packages with no security features and if they just end
up in the trash that is a good thing. They sometimes end up in
the hands of the counterfeiter.
Mr. Bass. Is there as big--is there a significant issue of
counterfeit pharmaceuticals in American drug stores and if so,
what measures could be taken to reduce that problem?
Mr. Christian. Well, I think it can be said that we have
the safest distribution system in the world but it is very far
from perfect. And different States most recently and most
effectively Florida discovered a number of serious problems in
the distribution system and made a number of arrests and has
convictions and passed legislation tightening things up in
Florida and eliminating--in many States, you can become a
pharmaceutical distributor by filling out a one or two page
application and sending on a check for $100. And now you are a
distributor. And in Florida, they discovered these people
carrying temperature sensitive medicines around in the trunk of
a car in 90 degree heat.
Mr. Bass. How do pharmacists tell a counterfeit drug from a
non-counterfeit drug on--this is an American pharmacist on the
shelf? Can American pharmacists tell the difference between a
counterfeit and a non-counterfeit or genuine pharmaceutical
that arrives at their door from----
Mr. Christian. No, because what we are seeing and if you
recall the very well publicized cholesterol lowering case by
one of the major U.S. manufacturers about 1\1/2\ years ago,
they mixed in the counterfeit product with the genuine product.
So right down to the small container of 100 tablets you--one
day you might take a genuine product and the next day you might
take a counterfeit product. So we are not seeing what we did 7
or 8 years ago where the counterfeiters just had counterfeit
product. Today they have expired, they have adulterated, they
have stolen product and additionally, they have some genuine
and some counterfeit and they are mixing it together. And this
greatly complicates the reinforcement efforts.
Mr. Bass. Okay. Thank you very much, Mr. Chairman.
Mr. Ferguson. Seeing no other members who are prepared to
ask questions, I want to thank all of our panelists for your
testimony today. You made persuasive and an articulate case for
some of the challenges that we face and our hopes in addressing
those so thank you very much for being here today. We will
adjourn.
[Whereupon, at 4:34 p.m., the subcommittee was adjourned.]