[Senate Hearing 114-664]
[From the U.S. Government Publishing Office]
S. Hrg. 114-664
CHALLENGES AND OPPORTUNITIES FOR U.S. BUSINESS IN THE DIGITAL AGE
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HEARING
before the
COMMITTEE ON FINANCE
UNITED STATES SENATE
ONE HUNDRED FOURTEENTH CONGRESS
SECOND SESSION
__________
JUNE 15, 2016
__________
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COMMITTEE ON FINANCE
ORRIN G. HATCH, Utah, Chairman
CHUCK GRASSLEY, Iowa RON WYDEN, Oregon
MIKE CRAPO, Idaho CHARLES E. SCHUMER, New York
PAT ROBERTS, Kansas DEBBIE STABENOW, Michigan
MICHAEL B. ENZI, Wyoming MARIA CANTWELL, Washington
JOHN CORNYN, Texas BILL NELSON, Florida
JOHN THUNE, South Dakota ROBERT MENENDEZ, New Jersey
RICHARD BURR, North Carolina THOMAS R. CARPER, Delaware
JOHNNY ISAKSON, Georgia BENJAMIN L. CARDIN, Maryland
ROB PORTMAN, Ohio SHERROD BROWN, Ohio
PATRICK J. TOOMEY, Pennsylvania MICHAEL F. BENNET, Colorado
DANIEL COATS, Indiana ROBERT P. CASEY, Jr., Pennsylvania
DEAN HELLER, Nevada MARK R. WARNER, Virginia
TIM SCOTT, South Carolina
Chris Campbell, Staff Director
Joshua Sheinkman, Democratic Staff Director
(ii)
C O N T E N T S
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OPENING STATEMENTS
Page
Hatch, Hon. Orrin G., a U.S. Senator from Utah, chairman,
Committee on Finance........................................... 1
Wyden, Hon. Ron, a U.S. Senator from Oregon...................... 2
WITNESSES
Foucart, Bruce, Assistant Director, National Intellectual
Property Rights Coordination Center, Immigration and Customs
Enforcement, Department of Homeland Security, Arlington, VA.... 5
Schenk, Norman T., vice president, global Customs policy and
public affairs, UPS, Washington, DC............................ 7
Triggs, Tom, chief legal officer and general counsel, Belkin
International, Inc., Playa Vista, CA........................... 8
ALPHABETICAL LISTING AND APPENDIX MATERIAL
Foucart, Bruce:
Testimony.................................................... 5
Prepared statement........................................... 21
Responses to questions from committee members................ 25
Hatch, Hon. Orrin G.:
Opening statement............................................ 1
Prepared statement........................................... 35
Schenk, Norman T.:
Testimony.................................................... 7
Prepared statement........................................... 36
Responses to questions from committee members................ 37
Triggs, Tom:
Testimony.................................................... 8
Prepared statement........................................... 40
Responses to questions from committee members................ 46
Wyden, Hon. Ron:
Opening statement............................................ 2
Prepared statement........................................... 47
Communications
The Center for Fiscal Equity..................................... 49
eBay Inc......................................................... 50
International AntiCounterfeiting Coalition (IACC)................ 53
The Internet Association......................................... 58
Venus Fashion, Inc............................................... 59
(iii)
CHALLENGES AND OPPORTUNITIES FOR U.S. BUSINESS IN THE DIGITAL AGE
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WEDNESDAY, JUNE 15, 2016
U.S. Senate,
Committee on Finance,
Washington, DC.
The hearing was convened, pursuant to notice, at 2:10 p.m.,
in room SD-215, Dirksen Senate Office Building, Hon. Orrin G.
Hatch (chairman of the committee) presiding.
Present: Senators Crapo, Burr, Scott, Wyden, Stabenow,
Cantwell, Menendez, Carper, Bennet, and Casey.
Also present: Republican Staff: Chris Armstrong, Deputy
Chief Oversight Counsel; Chris Campbell, Staff Director;
Everett Eissenstat, Chief International Trade Counsel; Kim
Frankena, Detailee; and Andrew Rollo, Detailee. Democratic
Staff: Elissa Alben, Senior Trade and Competitiveness Counsel;
Greta Peisch, International Trade Counsel; Joshua Sheinkman,
Staff Director; and Jayme White, Chief Advisor for
International Competitiveness and Innovation.
OPENING STATEMENT OF HON. ORRIN G. HATCH, A U.S. SENATOR FROM
UTAH, CHAIRMAN, COMMITTEE ON FINANCE
The Chairman. Welcome, everyone, to this afternoon's
hearing, which we have titled ``Challenges and Opportunities
for U.S. Business in the Digital Age.''
Over the last decade, the digital economy has dramatically
changed our way of life, from the way that we hail a cab,
search for a new home, or order take-out. It has a profound
effect on all of our lives.
This is also true for the ways in which companies conduct
their business. The digital economy provides U.S. businesses of
all sizes with great opportunities and challenges.
In today's marketplace, businesses no longer have to rely
on the hope that a passerby will notice something in their
storefront window and come in. Today, the business can set up
shop wherever it wants and sell all kinds of products over the
Internet to customers all over the world. This represents a
huge portion of worldwide commerce.
According to the Internet Association, about $8 trillion
changes hands in the digital marketplace each year.
In addition to having a digital storefront that can be seen
in every corner of the world, the Internet also provides new
tools for businesses to find and retain customers. For example,
it is now possible to tailor advertisements to specific market
segments and customers using social media.
However, as with all great technological and societal
developments, there are challenges that come part and parcel
with the opportunities. Although the United States has largely
embraced and supported the changes brought about by expanded
Internet commerce, there are many countries around the world
that do not fully embrace this potential.
Many countries want to regulate various facets of the
Internet, including the digital economy, operating under a
mindset from the last century.
Put simply, that is not a wise or sustainable approach to
dealing with the Internet. That is why the Finance Committee
worked to make digital trade a priority in our international
trade negotiations through the Trade Promotion Authority, or
TPA, statute that was signed into law last year.
The digital trade negotiating objective in the new TPA law
directs the administration to do a number of things in order to
protect the Internet as we know it, including ensuring that our
digital goods and services will be exported to other nations
without duties, that our electronic goods and services are
treated no less favorably than their physical counterparts, and
that the free flow of data across borders is not inhibited.
Another equally important challenge facing businesses and
consumers in the digital marketplace is the rise of
counterfeits. Just as the digital economy has made it easier
for businesses to find and engage with consumers, it has also
enabled counterfeiters to do the same.
Small businesses are the backbone of our economy, and for
these businesses, the Internet is a powerful tool.
Now, I have a call coming in from the President. So I am
going to have to put the rest of my remarks into the record and
turn to my colleague, my great colleague who works with me on
this committee, Ron Wyden, and then come back as soon as I can.
[The prepared statement of Chairman Hatch appears in the
appendix.]
The Chairman. Thank you, Ron. I appreciate it.
OPENING STATEMENT OF HON. RON WYDEN,
A U.S. SENATOR FROM OREGON
Senator Wyden [presiding]. Thank you very much, Mr.
Chairman. Thank you for scheduling this important hearing.
In my view, there are two issues at hand today, and in many
respects, they are two sides of the same coin. The first is
about how more small businesses are tapping foreign markets,
thanks to the digital economy and e-commerce platforms.
The bottom line is that the Internet is the shipping lane
of the 21st century, and every business in this country, in one
way or another, is digital.
Take the example of Bike Friday, an Oregon company that
makes folding bicycles. It may not always be bicycle season in
Oregon, but it is always summertime somewhere. The Internet is
an essential resource that enables Bike Friday to reach
customers and process orders 24/7, regardless of time
differences.
It is exactly the same story if you are talking about the
steel industry, if you are talking about the manufacturing
sector, if you are talking about clean energy, or if you are
talking about apparel.
Digital technology is a booster shot in the arm for exports
at a time when 95 percent of the world's customers live outside
the borders of the United States.
American businesses and their workers today are not relying
on listings in the yellow pages or waiting for new customers to
walk through the door. Many of their storefronts are online,
and they are always open.
That is one side of the coin.
The other is the challenge represented by counterfeit
goods. For the trade enforcers, it used to be a matter of
identifying a shipping container filled with fake computer
chips or tennis shoes.
Although those shipping containers still come in,
counterfeit goods are now also delivered in individual packages
that go straight to the doorsteps of the American consumer.
So the challenge of rooting out counterfeits is a lot more
difficult than it once was, and it poses a direct threat to
family-wage jobs in our country and our businesses.
There is a firsthand case for a lot of Oregon businesses in
various industries, from parts for autos and railcars to high-
tech semiconductors.
Take Leatherman Tools as an example. They are a proud
Oregon employer that makes high-quality outdoor gear that gets
a lot of use in our State's recreation economy. But if you
place an order for a Leatherman's tool pocketknife from an
unknown seller, there is a chance that you will be receiving a
cheap knockoff. The result is a disappointed consumer and an
Oregon manufacturer who has lost a sale.
That is why buyer reviews of sellers on platforms like
Amazon and eBay and liability laws that enable those reviews
are so valuable to those seeking authentic merchandise.
So our policies have to take both of these issues into
account, helping our workers and businesses to take advantage
of digital shipping lanes and staying ahead of the online rip-
off artists who want to sneak their counterfeit goods into our
market and rip off American jobs.
On a bipartisan basis, this committee took a major step
forward earlier this year in the fight against counterfeiters
by passing the toughest package of trade enforcement policies
in decades.
Thanks to that legislation, Customs and Border Protection
now has additional tools to sniff out illegal goods before they
make it into the home of the American consumer, including by
encouraging Customs and Border Patrol to work with U.S. rights-
holders on identifying potential counterfeits at the border.
As the digital economy continues to transform our lives and
reshape the way business is done, this committee will have more
work to do. It is our job to understand how technology and
policies empower America's innovators, producers, and sellers.
It is also our job to understand how the trade cheats are
ripping off Americans and to respond accordingly.
So we want to thank our witnesses for joining us today. In
effect, this digital hearing fits exactly into what I have said
throughout this debate. We have dealt with the rules for trade
agreements--that is called TPA--and we have dealt with
enforcement.
Obviously, there is a great deal of debate about trade
agreements. But at the end of the day, it comes down, in my
view, to trade done right. That is my vision of what America's
trade policy ought to be all about: trade done right.
That is why today's hearing is so important. As you heard,
the chairman is off talking to the President and should join us
shortly.
We are going to make his prepared remarks a part of the
record in their entirety, and he will rejoin us when he can.
[The prepared statement of Senator Wyden appears in the
appendix.]
Senator Wyden. Let me briefly introduce our witnesses.
We are going to hear from Mr. Bruce Foucart, the Director
for the U.S. National Intellectual Property Rights Coordination
Center within Customs. The Center heads a task force of over 20
agencies focused on preventing global intellectual property
theft.
He is also responsible for U.S. Immigration and Customs
Enforcement's trade fraud investigation program. Prior to his
current position, Mr. Foucart had served for 8 years as the
special agent in charge of ICE's homeland security
investigations in Boston, overseeing their investigations
across New England.
He has also had an extensive career in law enforcement.
We would like to thank you for your service and, Mr.
Foucart, I can tell you that Senator Brown and I very much
appreciate the meeting you had with us in following up the
effort to stop child and forced labor. Senator Brown has done
very good work on this. I have been happy to join him, and we
thank you for the good work you and Mr. Kerlikowske are
pursuing on this.
Next, we are going to hear from Mr. Norman Schenk, the vice
president of global Customs policy and public affairs at UPS.
Mr. Schenk has more than 30 years of experience working in
Customs. He is also currently serving on several advisory
committees and chairs the International Chamber of Commerce
Commission on Customs and Trade Facilitation.
There is nothing that I enjoy more, and I am sure it is
true for my colleagues, than going to a UPS center and standing
on the little foot stool that is given when you get a chance to
visit with your constituents.
So we thank you, Mr. Schenk, for joining us.
Then we are going to hear from Tom Triggs, general counsel
and chief legal officer of Belkin International. Before joining
Belkin, Mr. Triggs practiced law, focusing his expertise on
global and technology law.
We thank all of you for making time to join us. We will
hear from the witnesses in the order they were introduced. We
will make your prepared statements part of the record in their
entirety.
Mr. Foucart, why don't you begin?
STATEMENT OF BRUCE FOUCART, ASSISTANT DIRECTOR, NATIONAL
INTELLECTUAL PROPERTY RIGHTS COORDINATION CENTER, IMMIGRATION
AND CUSTOMS ENFORCEMENT, DEPARTMENT OF HOMELAND SECURITY,
ARLINGTON, VA
Mr. Foucart. Good afternoon, everyone. Thank you, Ranking
Member Wyden and distinguished members, and I appreciate that
meeting that we had yesterday as well. I also appreciate the
opportunity to testify before you today concerning ICE's
efforts to combat the illegal importation and sales of
counterfeit products and the threats to consumers, public
safety, national security, and the economy that counterfeit
products pose.
ICE is the lead agency in the investigation of intellectual
property violations involving the illegal importation of
counterfeit merchandise and pirated works, as well as
associated money laundering investigations and violations. In
combination with U.S. Customs and Border Protection, we target
and investigate counterfeit merchandise associated with these
investigations and seize illicit goods that infringe on
trademarks, trade names, and copyrights.
I recognize that no single U.S. law enforcement agency
alone can succeed in the fight against IP crime. Rather, it is
essential that all relevant agencies work together and with
industry partners to confront this challenge. Law enforcement,
public education, demand reduction, and global collaboration
are all critical to successfully address these crimes.
To focus on government efforts and to enhance efficiencies,
back in 1999, the former U.S. Customs Service's Office of
Investigation, now known as ICE's Homeland Security
Investigations, and the FBI formed the National Intellectual
Property Rights Coordination Center. The Trade Facilitation and
Trade Enforcement Act of 2015, which was recently signed into
law by President Obama, officially authorized the IPR center.
The IPR Center's mission is to address the theft of
innovation that threatens U.S. economic stability and national
security, undermines the competitiveness of U.S. industry and
world markets, and places the public's health and safety at
risk. The IPR Center supports field personnel, operates via a
task force model, and is comprised of 23 Federal and
international partners.
As you know, the illegal importation, distribution, and
sale of counterfeit products pose a significant and growing
threat to health and safety. Counterfeiters do not care if
their products contain the correct materials. Counterfeiters do
not care if their products are made in sanitary conditions or
unsanitary conditions. They do not care if their products
physically harm consumers. They do not care if their products
result in economic damage to legitimate companies.
Rather, they care about their products looking good enough
to be purchased. They care about their bottom line.
Through the course of its investigations, ICE has uncovered
counterfeit lithium batteries not properly vented; counterfeit
airbags that have too much propellant; counterfeit jewelry that
contains lead; counterfeit pharmaceuticals that contain
potentially toxic substances; counterfeit health and beauty
products that are made in unsanitary conditions; and goods
entering the Department of Defense and U.S. Government supply
chains.
Today, I would like to outline some of our efforts to
protect the public's health and safety from counterfeit
consumer products.
Operation Chain Reaction, for example, is an initiative
that combines the efforts of 16 IPR Center agencies to target
counterfeit items entering the Department of Defense and other
U.S. Government supply chains. Operation Chain Reaction partner
agencies coordinate their efforts to more productively protect
the U.S. Government supply chain from substandard counterfeit
parts that could impact the reliability of weapons systems,
delay DOD missions, imperil the safety of servicemen and women,
and waste taxpayer money.
Operation Engine Newity is another example that addresses
safety threats posed by counterfeit automotive, aerospace,
rail, and heavy industry components. These counterfeit parts
are not only an evident health and safety risk to Americans,
but they also impact the economy of the automotive industry.
Investigations and interdictions have uncovered counterfeit
airbags, steering, braking, and seatbelt components, bearings,
and diagnostic equipment. Operation Engine Newity resulted in
31 arrests, 32 indictments, 16 convictions, and the seizure of
goods worth approximately $18.4 million in fiscal years 2014
and 2015 combined.
Operations Apothecary and Plastic Beauty target
counterfeit, unapproved, or adulterated pharmaceuticals and
personal health care and beauty products.
In addition to the investigations carried out under these
operations, the IPR Center supports the efforts of the new
Verified Top-Level Domains Consortium, working to secure domain
names, including dot-pharmacy, dot-med, dot-bank, and dot-
insurance.
As you know, seals and logos can be faked online, but the
dot-pharmacy domain is secure. Only safe, legal pharmacies are
eligible for the dot-pharmacy domain. It is like baking the
seal of legitimacy into the domain name itself.
We in law enforcement know we cannot arrest or seize our
way out of this problem, so we welcome efforts by industry like
this to help us protect their customers and the economy.
To further complement our enforcement actions and to help
educate consumers on emerging dangers of counterfeit products
and facilitate productive partnerships with the public and
private sectors, the IPR Center launched Operation Joint
Venture. This effort is designed to increase consumer
awareness, communication, training, and international
cooperation for our ongoing IPR enforcement initiatives and our
critical public health and safety efforts.
IP cases demand attention from criminal investigators and
regulatory agencies. We take this responsibility to protect
American consumers and industry very seriously, and ICE's
priorities in IP crime enforcement remain to protect the
public's health and safety, the military supply chain, and the
American economy.
Thank you again for the opportunity to appear before you
today, and I look forward to working closely with the members
of this committee on this issue, as it directly threatens
consumers' health and safety, as well as the economy worldwide.
[The prepared statement of Mr. Foucart appears in the
appendix.]
Senator Wyden. Mr. Foucart, thank you.
Mr. Schenk, welcome.
STATEMENT OF NORMAN T. SCHENK, VICE PRESIDENT, GLOBAL CUSTOMS
POLICY AND PUBLIC AFFAIRS, UPS, WASHINGTON, DC
Mr. Schenk. Thank you, Senator Wyden.
At UPS, our processes are complex and our technology is
advanced, but our objective is simple--to ensure world-class
service for our customers while providing the necessary data to
law enforcement and other government agencies. This allows them
to target contraband and identify bad actors who seek to import
dangerous goods and counterfeit items into the U.S. in small
packages.
UPS works closely with U.S. Customs and Border Protection
at our own expense to comply with and even exceed existing
legal requirements to provide data to target high-risk inbound
shipments and screen them out. In addition to enabling better
screening for counterfeit contraband, this data can also be
used to screen for shipments from potential terrorists, for
illicit drugs, and for other potentially dangerous products.
To achieve these goals, UPS provides advance data to CBP on
our packages before they enter the United States, and, in
addition, we share shipment data through the Air Cargo Advance
Screening system.
The most important aspect of package screening is the use
of advance data. In May of 2000, I testified before the House
Government Oversight Committee on how UPS provides advance data
to help Federal agencies combat illegal drug trafficking. At
that time, there were about 21 million package shipments
entering the U.S. annually: about 10 million through the
private sector--which were accompanied by advance electronic
data--and 11 million through the international mail system,
which did not have any electronic data.
Even back then, it was clear that Customs and other Federal
agencies could not manually screen packages that were not
accompanied by advance data purely because of volume and that
the most effective way of interdicting bad shipments was
through the use of advance electronic data.
By 2016, the volume of packages entering the U.S. has
increased many times over. The Department of Homeland Security
reports that in 2014, CBP processed approximately 340 million
mail parcels arriving from foreign post operators, most without
electronic data. It also estimated that 35 million packages
entered the U.S. through private carriers like UPS, all with
electronic data.
If Customs could not effectively manually screen 11 million
packages without advance electronic data in 2000, imagine what
they are tasked with when screening 30 times that amount.
UPS and other private express carriers use advance
electronic data to manifest their shipments on a package-level
basis, present them to Customs, and provide critical screening
data to law enforcement to counteract illicit trade.
We have been using electronic data for years, even before
it was required by the Trade Act of 2002, to provide CBP with
item-level detail about each and every shipment entering the
country.
The data consists of seven data ports: who and where it is
coming from, who and where it is going to, a description of the
goods, piece count, and item weight. This not only helps us
reduce the potential of dangerous goods entering through our
system but also aids in manifest compliance, payment of duties
and fees, and clearance through Customs.
Perhaps more importantly, UPS is also working with CBP, the
Transportation Security Administration, and other Federal
agencies by sharing data through the ACAS system. ACAS,
currently a pilot program, builds on datasets from electronic
manifests required in the past and provides the necessary
information before shipments depart for the United States. It
allows authorities and watch groups to target potentially high-
risk shipments.
As the advance electronic submission allows for risk
assessment or data-level screening prior to the arrival in the
U.S., it reduces the need for physical inspections, which are
cumbersome and ineffective.
UPS is committed to help Federal authorities identify bad
packages in our system and believes that the best way to do so
is through the smart policy requiring electronic manifesting on
all shipments, public and private, so that Customs is well-
equipped to combat illegal trade.
With cross-border e-commerce growing at an unprecedented
rate and showing little signs of abating, the only way to
protect our borders, national security, American business and
consumers, and even our own supply chain, is to employ data-
driven solutions and share the intelligence with law
enforcement and other Federal agencies.
Thank you.
[The prepared statement of Mr. Schenk appears in the
appendix.]
Senator Wyden. Thank you very much.
Mr. Triggs?
STATEMENT OF TOM TRIGGS, CHIEF LEGAL OFFICER AND GENERAL
COUNSEL, BELKIN INTERNATIONAL, INC., PLAYA VISTA, CA
Mr. Triggs. Chairman Hatch, Ranking Member Wyden, and
members of the committee, thank you for the opportunity to
testify on the important subject of challenges and
opportunities facing U.S. businesses in the digital age.
My name is Tom Triggs. I am the chief legal officer and
general counsel with Belkin International, and it is truly an
honor and a pleasure to be here.
As the committee is aware, e-commerce presents tremendous
opportunities for businesses both here in the United States and
abroad. At Belkin, we celebrate the digital age. We also
advocate for the consumer in every aspect of our business.
Our grand purpose is this: that technology exists to make
people's lives better, easier, and more fulfilling.
Belkin is about peace of mind, and product quality is
essential to this. We have invested billions of dollars in
development of products, and that has been our mission since
1983 when our founder and still current CEO, Chet Pipkin,
created the company in his parents' garage.
Today, we have over 1,200 employees in 22 countries around
the world, more than 700 employed in the United States.
Now the Internet provides a virtual storefront to the rest
of the world. Today, anybody online, including criminals, can
sell anything anywhere. Third parties who have not invested the
resources that we have invested to develop and design products
are now able to manufacture inexpensively inferior counterfeit
copies and then sell them to unsuspecting customers around the
globe.
We have invested many millions of dollars in time and
energy to protect our company and our customers from
counterfeit goods. We have systematically focused for years on
this effort, and it requires around-the-clock vigilance on a
global basis and the application of consistent pressure to the
relevant law enforcement authorities around the world.
We have taken legal action in more than 30 countries
against those who violate our intellectual property rights,
and, unfortunately, we know that there are many more we will
not discover and that we will not be able to get out of the
market.
And I have a good story about this. In December of 2014,
after months of investigation and undercover surveillance,
Belkin worked with the local law enforcement agencies all
across southern China. We conducted raids of 11 manufacturers
and sellers, and we seized more than 1 million counterfeit
Belkin goods. Six people went to jail.
That is a good result. Those raids also revealed the
presence of Melkin branded products, which are identical in
packaging and identical in products, and I have them here. Here
is the Belkin, this is our product, and this is a Melkin
product.
It is almost funny. I mean, it is a little bit crazy. Under
Chinese law--I will put these up here. Under Chinese law, if
you change the first letter of a trademark, then it is not
trademark infringement against the rightful owner of that
trademark.
So we have struggled to obtain relief in China to stop this
company from infringing our company IP.
I think all of us would agree that under U.S. trademark
laws, this Melkin clearly infringes Belkin. It is a classic law
school example of infringement.
So what we have been forced to do is, we have chased Melkin
in more than 20 countries. In China, we have worked with
various agencies: the Administration for Industry and Commerce,
the Quality Technical Supervision Bureau, the trademark office
there, the courts there. And in Hong Kong, we filed an action,
a lawsuit, and we obtained an injunction against Melkin from
doing business in Hong Kong.
We filed an action at the ITC here in the United States,
and we filed in the ITC because we could not otherwise get
jurisdiction over Melkin in the Federal courts.
But our efforts are not as effective in China. Simply put,
IPR and IPR enforcement are less developed, less predictable in
China than they are at home.
So let us be clear. The business of counterfeiting is big
business in these other countries, and because of that economic
benefit there, those countries make it hard to shut down those
businesses.
But I do want to be very clear on this one point. We at
Belkin, we celebrate the global marketplace, the online
platforms. We believe in the value of global e-commerce and its
importance to Belkin and American job growth.
Like our peer companies, we simply want to advocate for the
level playing field and believe that with fair competition, we
and other American companies will succeed in that competition
by working harder and being more innovative than our foreign
competitors.
So Belkin will continue to enjoy the opportunities that
every U.S. business will enjoy in the digital age and we will
continue to work and enjoy working with this committee in that
effort.
Thank you.
[The prepared statement of Mr. Triggs appears in the
appendix.]
The Chairman. Thank you. I apologize for having to leave,
but that was a conversation with the President, and he seemed
to think it was important. [Laughter.]
I did too.
Let me start with you, Mr. Foucart. Shutting down
counterfeit websites is almost like playing a game of whack-a-
mole. Are there any better ways to stop counterfeiters? Are
there ways to cut off their payment stream?
Mr. Foucart. Yes, there are, Senator. Yes, you are right.
It is like playing whack-a-mole, and we have pushed a lot of
that responsibility civilly onto industry for them to protect
their goods, and we have created almost a procedure for the
different marketplaces that they can go to--such as eBay, for
example, Amazon--the procedures that would be required for
industry to shut these websites down, either civilly or with
cease-and-desist orders. So we have assisted in that way.
Secondly, we have joined up with specific coalitions and
consortiums within--actually, within the Washington, DC area.
One I mentioned in my remarks is called the Verified Top-Level
Domains Consortium. And how it works is, it is a verification
process for someone who wants to sell their goods. And when I
say sell their goods, I mean to sell them legitimately.
They go through this background or vetting process in which
the people who are vetting them ensure that what they are going
to be selling is licensed and it is proper and they have a
secure supply chain.
Then, working with the registries, they will provide a
specific dot-pharmacy or dot-bank in the banking industry
domain. And so that is the first part of this action, working
with industry doing that.
The second part of that action will be getting that word
out to the consumer, educating the consumer that when they go
online, if they want to buy product from XYZ Corporation that
sells pharmaceuticals, look for it to be www.xyz.pharmacy. That
way we know that they have been vetted and they are wearing
this badge of approval, so to speak.
Secondly, along those lines, we have worked with a
coalition called the Trustworthy Accountability Group that
deals with advertisement fraud as well as malware, and they
have a verification program as well very similar to wearing the
Good Housekeeping seal.
To be part of this, to be an advertiser, you undergo a
background check for legitimacy, and then you will get this
seal that you will be able to wear or put on your website. It
shows that you have been vetted, you have no criminal activity,
and, again, you have a secure supply chain as well.
So with that, this TAG payment ID system, there are records
kept in which all ad impressions that advertisers are paid for,
they will keep a record of this. So a legitimate seller of a
product would be able to go to this Trustworthy Accountability
Group and ask to see if they are part of this.
So those are just three ways in which we have worked with
online companies to further these efforts.
The Chairman. Thank you.
Mr. Schenk, UPS has a long tradition of working with CBP to
stop fakes from entering into the stream of commerce in the
United States.
As you know, the Customs bill recently passed by Congress
contains a number of provisions both to facilitate trade and
ensure effective protection of U.S. intellectual property
rights.
What additional steps do you think Congress can or should
take to help stop fakes from reaching the U.S. consumer?
Mr. Schenk. Thank you, Mr. Chairman.
I think, clearly, the one thing that Congress could do to
help that is to mandate through legislation that advance
electronic data be required for all packages coming into the
U.S.
A package is a package, and in order for CBP to do risk
assessment, and the other government agencies, they need the
advance data to do that.
The Chairman. Thank you.
Mr. Triggs, you testified that your company has significant
experience working with China to stop counterfeiting at its
source.
Can you please describe your experience working with U.S.
Government officials overseas, including our IP attaches, and
tell us what more Congress can do to support these efforts?
Mr. Triggs. Thank you, Mr. Chairman.
Well, we have been working with the U.S. Embassy in China
for a few years now. I have made at least two trips to Beijing.
In fact, about 1 month ago, 2 months ago, I enjoyed a lovely
dinner with the former chairman of this committee, Ambassador
Max Baucus, and I can tell you directly here that he and his US
PTO team and the State Department teams are working hard to
open those markets for us and all U.S. businesses.
They are working with the platforms that are out there. I
have made two trips to Alibaba's headquarters in Hangzhou,
China and met with their IPR teams. And we have worked together
with the U.S. Embassy and the attache group there. And I really
appreciate personally, as well as our company and on behalf of
the U.S. interest, we really do appreciate the work that the
U.S. Embassy is doing in China.
The Chairman. My time is up.
Did you want to add something?
Mr. Triggs. What you could do to help--if I could add
something really quickly, I will just jump into it.
Senator Wyden yesterday, in yesterday's hearing, asked a
great question about the cost of uncertainty in the tax code.
At today's hearing, we are looking at that same problem:
the cost of uncertainty. And the cost of uncertainty is not, as
yesterday, an investment decision; today we are talking about
purchase decisions by every consumer, every business, when they
ask, ``Am I getting what I paid for; is it worth the risk to
upgrade my technology because of all these counterfeits?''
It is not only consumer confusion that is at stake here. It
is also the hidden effect of the consumer who chooses not to
buy something, not to buy technology, not to buy a product, and
the demand that that would create for jobs and the economy, not
only for us, but for all consumers.
So there is a microeconomic effect here to this. There is
also a macroeconomic effect as a result of that, the cost of
uncertainty.
So we would ask this committee and the U.S. Government to
reduce that cost of uncertainty to give us predictability,
enhanced IPR standards, and enforcement across the globe,
especially in the Asia-Pacific region.
Thank you.
The Chairman. Thank you.
Senator Wyden?
Senator Wyden. Thank you, Mr. Chairman. I am very glad you
are here. This is a particularly important hearing, because it
really reflects what this committee is all about and how the
challenge has changed over the years.
The Finance Committee--if you look at the history of what
has been done, the chairman and I have tried to emphasize that
there is a very long bipartisan history, and we have been the
committee that has financed so many modes of transportation and
opportunities for American industry and American commerce.
We finance roads, we finance ports, we finance the way
farmers get their cattle to market. A number of colleagues on
this committee are from the Midwest, and so we have, in effect,
financed the ways in which American cars get into global
markets, creating jobs for Americans and transportation
opportunities for global consumers.
What I have said is, we are now in the midst of looking at
avenues for these kinds of economic opportunities, and I really
describe it, the Internet, as the shipping lane of the 21st
century, and every business one way or another is digital.
Mr. Triggs, your company has grown out of the digital
revolution, including innovations and products that support the
architecture of the Internet and the innovative services that
are going to mean that before too long, more Americans are
going to be able to access smart cars and perhaps live in smart
houses.
So you demonstrate how our country leads in critical
sectors for future growth. Your testimony mentions the value of
global e-
commerce, and I think it would be very important if you could
lay out--since this is really something of a groundbreaking
hearing, I think it would be very helpful if you could lay out
the benefits of e-commerce platforms from your company, since
you are one of the ones that has been on the cusp of this
revolution.
Mr. Triggs. Thank you, Senator. Certainly, I would be happy
to. Like I mentioned, at Belkin, we celebrate this digital
marketplace, and you said it best, that it really is the
shipping lane of the 21st century, and trade done right across
that shipping lane is the way we want to be thinking about it.
We view the online platforms as an opportunity to
dramatically expand our business, as well as our partners'
businesses. In doing that, we open new markets to us and to
others who might not have had access to those. So it not only
helps Belkin, but it helps all U.S. businesses and countless
numbers of small businesses that have access now to potentially
billions of customers globally.
The second point I would make is that distribution is a
really hard thing for a hardware company to do. So for us in
consumer electronics, it is tough to get a peg on a shelf
locally, no less globally.
The online platform levels that playing field for the small
business, for the large business. We like that.
The third thing--and it is interesting. I spoke about the
risks that come with the online platform and counterfeits. At
Belkin, we view the online platform also, almost paradoxically,
as a tool to combat counterfeit activities as well.
Technology provides transparency, and technology allows us
to deeply educate potential customers. We have web pages that
educate on how to spot infringing or counterfeit products. We
talk about safety and security on the web page as well.
So we believe it is an effective tool to help the problem.
I would just say one last thing, that the online platforms
globally, they are here to stay. We want trade done right, I
think is what you said, and we appreciate your work in that
effort.
Senator Wyden. Thank you very much.
Assistant Director Foucart, all types of products are now
being targeted by counterfeits. We are looking at clothing,
jewelry, shoes, pharmaceuticals, smart phones, the list just
goes on and on.
Not only do these counterfeits pose a threat to our
businesses, but many also threaten the health and safety of the
American consumer. Fake drugs impede the treatment of patients.
Fake electronics catch fire. Fake auto parts can make an
automobile malfunction.
How do you all prioritize your enforcement agenda against
counterfeit goods based on the potential harm to the health and
safety of the U.S. consumer?
I assume, for purposes of this question, you all are
working all the time with the FDA, the Food and Drug
Administration, and the Product Safety Commission and the like.
But I think it would be helpful to get a sense of how you
prioritize your enforcement agenda given the fact that I think
we know that there is really an avalanche of counterfeit
materials coming into our country.
Mr. Foucart. Certainly, health and safety are probably, if
not the most important, in the top three as far as our
priorities go, and many of the operations I mentioned earlier
involve health and safety issues, like Operation Engine Newity.
And yes, the FDA is part of the IPR Center, and we work hand-
in-hand with them with counterfeit pharmaceuticals and
adulterated medicines.
If there is an imminent or an immediate health and safety
issue, obviously, that rises to the top.
Probably the end of last summer, early fall of this last
year and, to an extent, during the Christmas season, we saw the
lithium batteries that were counterfeit in the hover boards,
and we took immediate action. We took immediate action, with
CBP making seizures. We worked with the Department of
Transportation and the Consumer Product Safety Commission to
get those hover boards off the streets and off of airplanes and
transportation modes, et cetera.
That is a great example of how an imminent health and
safety risk rose immediately to the top.
Additionally, we are, obviously, guided, as far as our
prosecutions go, by the Department of Justice, and I know for a
fact, working with the Department of Justice, both in DC as
well as in the field, that health and safety issues are
absolutely their number one priority as well.
Senator Wyden. Thank you, Mr. Chairman.
The Chairman. Senator Menendez, we will turn to you.
Senator Menendez. Thank you, Mr. Chairman.
Mr. Chairman, I appreciate you having this hearing with the
ranking member.
I have repeatedly raised how counterfeit imports are
increasingly threatening the viability of U.S. businesses, and
I sought to draw Customs and Border Protection's attention to
this growing issue, adding report language to the recent
Customs enforcement bill, calling on the agency to better
screen, for example, small packages sent from international
businesses to U.S. consumers, often illegally marked as gifts
to evade Customs duties.
But I also recognize that we need to be looking at what can
be done to prevent the proliferation of counterfeit goods in
the first place.
Companies from around the country have been contacting me,
explaining how their copyrighted imaging is increasingly being
pirated and used by counterfeiters in advertisements on online
search engines like Google, social media networks, and other
websites.
This deceptive practice tricks consumers into thinking that
they are purchasing an authentic branded product at a discount,
and what they are really getting is a cheap imitation.
On the easel here, on the left, I have an example of an
image that was stolen from a U.S. company and used in an online
advertisement by a Chinese counterfeiter. Images like these are
often displayed to unsuspecting U.S. consumers in online ads
and counterfeiter websites.
On the right is a picture posted by the woman who bought
the dress. As you can see, the final product is a cheap
imitation of what was promised.
I have seen this in the wedding dress industry, which is an
incredibly important industry, one of the few domestic
industries we have left in this regard. It is killing them,
and, at the same time, shattering one of the most important
days in a person's life.
I believe that these online search engines, like Google and
other websites, that aid and abet these counterfeiters by
failing to police the use of copyrighted product imaging in
online ads, bear some responsibility.
Clearly, companies that sell online advertising have some
capacity to pre-screen advertisements. In fact, it has been
brought to my attention that some search engines will remove
counterfeit websites from their organic search results but
continue to display those same companies' advertisements.
In other words, some sellers of online ads may be
continuing to receive advertising fees from companies that they
know to be breaking the law, because they, in essence, took
their counterfeited websites off their organic search results
but still are taking their other sites and taking their fees.
If search engines, social networks, and other sellers of
online ads are unwilling to filter these types of illegal
advertisements, I hope the committee will work with me to
explore policy options to address a growing threat to American
business.
So let me, having that as the premise of what I am focused
on here, turn to Mr. Foucart and ask you this.
Director, I have written to the IPR Center raising this and
other issues related to counterfeit imports. I have always
believed that this problem requires more than one isolated
agency, and I am looking into ways to encourage both business
and other parts of the Federal Government to tackle the problem
head-on.
But as I said earlier, I am interested to hear what CBP can
do to stop counterfeits from entering the country, but also, I
want to address how we prevent the proliferation of counterfeit
goods in the first place.
How is your office addressing the misappropriation of
copyrighted imaging for online advertisements, which is the
initial theft of the U.S. intellectual property to deceive
American consumers into buying what they think is a legitimate
product? And how is your office implementing the report
language that I offered with Chairman Hatch to raise the
enforcement priority for counterfeit products, specifically
those marked as gifts to evade Customs duties and detection?
Mr. Foucart. Let me start off by saying we did have the
wedding dress and wedding gown industry at a meeting at the IPR
Center, probably within the last month. Prior to that, we had
them in, as far as creating dialogue with them, 2 years prior
to that. So we have engaged them with communication, and we are
aware of their problems.
One of our responsibilities at the IPR Center is to educate
the consumer. It is education, education, education. And I
mentioned that we cannot arrest, indict, and seize our way out
of this problem. It is just too much.
A $500-billion-a-year problem annually internationally is
just too big. There have been estimates that over 6 percent of
all goods out there are counterfeit. That is staggering.
So we try, in addition to enforcement, to include
education, and what we look at are really consumers--a consumer
who is going to go out on the Internet and look for that cheap
wedding dress at a very cut-rate cost, and we try to educate
them that there are links to criminality behind this. There are
criminal organizations that are selling this. This is a gateway
crime to other crimes, such as drug trafficking, identity
theft, human trafficking.
So we try to effectively educate those folks by that link
to criminality.
Then it is the consumer who goes out there and just gets
duped, and that is an additional group of people whom we have
to reach on a regular basis.
So that is going to take effort. It is going to take a very
challenging effort with industry to continually get that word
out.
Until those policies are changed through legislation or
otherwise, we will have to continue to work the way we have
been working and then effectively, if that legislation is
changed, create a different route to affect that.
Senator Menendez. If I may, Mr. Chairman, with the chair's
indulgence. I appreciate the education part, and that is very
important. But if we had a $500-billion problem in any other
context, we would not just accept education as the only vehicle
for dealing with it.
For example, I have the Port of Elizabeth in Newark, the
mega-port of the east coast, in my State, and I have dealt with
those issues for years.
CBP uses algorithms, for example, since we do not screen
every piece of cargo that comes into the United States. Very
different context. They do those algorithms for the purposes of
trying to spot a cargo that might have some potential explosive
or some other security threat or, for that matter, drugs and
narcotics.
Is there not a way to have a similar algorithm system when
we know, for example, that the Chinese consistently send
products back to the United States through the mail, maybe
through private handlers, and it is a small package and it is a
gift all the time, and we know the companies and we have a
universe of companies that consistently do this, and we know
their geographical location?
It just seems to me that there is more that we could do,
because while education, I think, is critically important--and
I certainly applaud that effort--at the same time, when you go
after a few people and the message is sent that there is a real
consequence to this, then behavior at least begins to change.
There are those who are always willing to break the law. We
will have to deal with those people. But I just get a sense
that right now, they feel they can do so with impunity. And in
that respect, what are the consequences?
Mr. Foucart. It is extremely difficult for what we like to
call the onesies, twosies, directly to the consumer. We are not
seeing those 40-foot containers come in as much anymore. Like
you indicated, it is through the mail.
CBP has started an abandonment pilot program, a process
that UPS has been part of, in which if it is under a certain
value, that item--a letter will be sent out to the consumer who
imported it, who had it mailed to them, asking them to explain
if these are counterfeit or, if they are not, what their
position is as far as the product goes.
Many times during the course of this pilot program, the
consumer is not going to reply, and in those instances, the
items get destroyed.
But as far as enforcement action goes, it is extremely
difficult to prosecute that single consumer. So we have to look
at it at more of a macro level, such as drop-shipment points
maybe within the United States. We have seen them with
counterfeit pharmaceuticals, where they may be going to one
mail drop and then are disseminated out to a group of people in
a certain area.
But in those instances, we are looking at organized crime
more than that one individual, where we will get a little bit
more bang for our buck with either a local prosecution or, as
well, a Federal prosecution.
Senator Menendez. I will close, because the chairman has
been gracious with the time. But I will just say I am not
looking necessarily to prosecute the consumer, because in many
cases, I believe the consumer was duped.
What I am looking to is to prosecute the entities that are
violating intellectual property rights and counterfeiting. If
we prosecuted some of those entities--if they are foreign in
nature, there are ways to do that. There are also ways to deny
them access to the U.S. banking system; there are ways to deny
them visas. There are real consequential efforts in which a
$500-billion challenge can begin to have a more aggressive
tool--so I would love to meet with you at some point to talk
about this.
Mr. Foucart. Absolutely. One of our initiatives at the IPR
Center is to work with the credit card companies and the
payment providers to obtain that information for overseas
banking. Certainly, hitting them there would hurt them.
And we do have our enforcement tools, and we work with
overseas law enforcement partners to obtain that information.
Sometimes we get cooperation in certain countries,
sometimes we do not. My agency, specifically, we have 67
offices in 48 countries, which span the globe.
So we are out there, we are diligent, we are working with
foreign law enforcement for the same effort, and that is to
effectuate prosecutions here in the United States.
Senator Menendez. We look forward to following up with you.
Thank you, Mr. Chairman, for your courtesy.
The Chairman. Thank you.
Let me just ask you a question, Mr. Foucart. One of the
purposes of this hearing is to help us think proactively about
the steps that we might be able to take today to meet the
challenges of tomorrow.
In that vein, what trends do you see in counterfeiting
practice that Congress needs to take into account when devising
solutions to this, what really is a growing problem?
Mr. Foucart. I think I mentioned them before, some of the
ways that we are effectively working with online industry. But
it would have to be changes in policy, similar to Senator
Menendez's comments about changes with search engines, et
cetera, and holding their feet to the fire.
Additionally, the registrars and registries that knowingly
are allowing domains for rogue websites or rogue companies or
criminal organizations, holding their feet to the fire as well.
And if you can provide us with those enforcement tools, that
would be something that we would appreciate.
The Chairman. Thank you.
Mr. Schenk, you spoke about how UPS and other private
carriers work with CBP to provide advance electronic data to
CBP to help fight counterfeits and terrorism, but the United
States Postal Service does not.
I know that you do not work for the USPS, but as someone in
the industry, are you able to discuss how difficult it would be
for USPS to provide advance electronic data to CBP?
Mr. Schenk. Thank you, Mr. Chairman. I will give you an
example of what we did, and I cannot speak for USPS. But back
when the Yemen incident took place, where there was the printer
cartridge that was caught over in the UK, it was identified
that it had a potential threat to the U.S. on that one.
We received a call from CBP and subsequently TSA that said,
``We need you to do more to get advance data to us so we can do
this type of thing.'' Within 45 days, working together with CBP
and TSA, we developed a system, and we are up and running and
transmitting all that data.
So, from a private-sector perspective, we were able to do
it within 45 days. Is that practical for the Post Office? I
cannot speak for them. But certainly, I think, going back to
your point that you made, Customs now has more tools to use to
help with enforcement, but unless they have the advance data to
the risk assessment, it is like finding a needle in a haystack.
So everything--and I know we are talking about counterfeits
here, but this also has to do with potential shipments from
terrorists. It could be fake airbags, it could be drugs.
Unfortunately, since back in 2000 when I testified on a similar
subject, there has not been much change in terms of getting
everybody playing by the same rules with the advance data.
Two things have changed. The volumes are much higher, and
the risk is much higher. I participated in another Senate
hearing, a roundtable a little while back, that fentanyl--it
used to be amphetamines, and now it is fentanyl. So the
situation is much more serious than it was, and the only way
for CBP to use those tools that you referred to is by having
the risk assessment from advance data.
The Chairman. Senator Wyden?
Senator Wyden. Thank you.
A question for you, Mr. Foucart. With the volume of
shipments coming in, it is important that ICE and CBP make sure
targeting methodologies keep up with technology and the
resulting changing patterns in trade.
Now, we are in a high-tech age, and we have high-tech
digital criminals. How are you all in enforcement leveraging
the technologies that we need to target and detect counterfeit
imports and bring charges against criminals?
Mr. Foucart. We are leveraging our cooperation and our
partnerships with private industry. We are targeting
information. CBP and--to a certain extent ICE--sits at the
National Targeting Center, which is out in McLean, VA.
It is a real state-of-the-art facility. But we rely on
industry to provide us with that targeting data so we can put
it through our system, through our automated systems, computer
systems worldwide, as well as CBP-specific systems.
So we are aware that potential shipments can be or may be
coming into the United States. So a lot of that intelligence,
again, has to be guarded by industry itself, and I am happy to
say we do have those relationships with private industry,
because we are protecting their brands.
Senator Wyden. I do not have any other questions, Mr.
Chairman. I want to make one comment though, because we have
had a little bit of discussion with respect to websites and
search engines. I think as we all know, U.S. websites take down
copyrighted photos when you have an owner of the photo
notifying the website that the use of the photo is not
authorized.
The big challenge, the area we have to zero in on--and we
learned about this during the whole debate about PIPA and SOPA
and a variety of issues--is the foreign websites.
Our trade agreements get at this issue by requiring that we
make a special priority to have foreign countries adopt the
kind of take-down process used by the United States.
So we are going to be spending time on these kinds of
issues, but I just want it understood that there is a
difference between American websites, U.S. websites, and the
foreign websites as we go forward with this kind of discussion.
I appreciated the effort that you and I were able to work
together on, Mr. Chairman, to deal with these foreign websites,
because I think that is a serious problem.
I thank all of you. I think it has been a terrific hearing.
I am sure the chairman has additional remarks, but I want to
thank him for scheduling this, and I look forward to working
with him.
The Chairman. Thank you, Senator Wyden.
I am going to keep the record open so that members can
submit questions to you, because this is extremely interesting
to me, and there are so many other questions we could ask. But
I think you have been an excellent panel, and I am just very
appreciative of you taking time to come and be with us here
today.
With that, we will thank you all for coming today and for
your thoughtful comments and participation. These are really
important issues, and I hope that we can continue working
together to find bipartisan solutions.
I would ask that any questions for the record be submitted
by Friday, June 24th of this year.
With that, we will adjourn this meeting. Thanks so much.
[Whereupon, at 3:10 p.m., the hearing was concluded.]
A P P E N D I X
Additional Material Submitted for the Record
----------
Prepared Statement of Bruce Foucart, Assistant Director, National
Intellectual Property Rights Coordination Center, Immigration and
Customs Enforcement, Department of Homeland Security
introduction
Chairman Hatch, Ranking Member Wyden, and distinguished members of
the Committee:
On behalf of the Department of Homeland Security (DHS), thank you
for the opportunity to testify before you today to discuss the efforts
of U.S. Immigration and Customs Enforcement (ICE) to combat the illegal
importation and sale of counterfeit products, and the threats to public
safety and national security that counterfeit products may pose.
As you know, ICE is the largest investigative component within DHS,
with an extensive portfolio of enforcement authorities. ICE Homeland
Security Investigations (HSI) is responsible for a wide range of
domestic and international criminal investigations arising from the
illegal movement of people and goods into, within, and out of the
United States, often in coordination with other federal agencies.
ICE has a legacy of enforcement against intellectual property (IP)
crime that spans from our past as U.S. Customs Service investigators to
our present role as Homeland Security investigators. ICE is the lead
agency in the investigation of IP violations involving the illegal
importation and exportation of counterfeit merchandise and pirated
works, as well as associated money laundering violations. In
coordination with U.S. Customs and Border Protection (CBP), we target
and investigate counterfeit merchandise and pirated works, and we seize
such illicit goods associated with these investigations, including
those that infringe on trademarks, trade names, and copyrights.
Investigating counterfeit products falls within ICE's broad IP mandate.
ICE recognizes that no single U.S. law enforcement agency alone can
succeed in the fight against IP crime. Rather, it is essential that all
relevant Federal agencies work together and with IP industry partners
to confront this challenge. Law enforcement, public education, demand
reduction, and global collaboration are all critical to successfully
combat these crimes. To focus government efforts and enhance
efficiency, the former U.S. Customs Service's Office of Investigations
(now known as ICE HSI) and the Federal Bureau of Investigation (FBI)
established in 1999 the multi-agency National Intellectual Property
Rights Coordination Center (IPR Center), which combats violations of
intellectual property rights with a focus on trademark and copyright
infringement. Recently, the IPR Center was expressly codified in
statute by section 305 of the Trade Facilitation and Trade Enforcement
Act of 2015 (TFTEA) (Pub. L. No. 114-125), which was signed into law by
President Obama on February 24, 2016. In section 305, Congress also
cemented the IPR Center's role as the lead office within the U.S.
Government for coordinating with other Federal agencies on IP
infringement investigations, law enforcement training, and private
sector and public outreach.
Pursuant to the Prioritizing Resources and Organization for
Intellectual Property Act of 2008 (PRO-IP Act) (Pub. L. No. 110-403),
ICE and CBP are members of the interagency intellectual property
enforcement advisory committee established by section 301 of the PRO-IP
Act (15 U.S.C. Sec. 8111). Chaired by the White House Office of the
U.S. Intellectual Property Enforcement Coordinator (IPEC), the
committee is responsible for developing the PRO-IP Act's 3-year ``Joint
Strategic Plan against counterfeiting and infringement'' (section 303;
15 U.S.C. Sec. 8113). In addition to its role in developing and
implementing the Joint Strategic Plan, the IPR Center collaborates
regularly with the IPEC and other Federal agencies on IP policy issues.
The IPR Center also shares the investigative outcomes and trend
information that we obtain with interagency partners and the IPEC to
further inform the administration's IP policy development process, the
U.S. Trade Representative's Special 301 Report, and the
administration's legislative recommendations.
The IPR Center's mission is to address the theft of innovation that
threatens U.S. economic stability and national security, undermines the
competitiveness of U.S. industry in world markets, and places the
public's health and safety at risk. The IPR Center brings together many
of the key domestic and foreign investigative agencies to efficiently
and effectively leverage resources, and promotes the skills and
authorities to provide a comprehensive response to IP crime.
The IPR Center operates on a task force model and is comprised of
23 relevant Federal and international partners. While ICE HSI holds the
director position, the IPR Center includes U.S. Government team members
from: ICE HSI, CBP, the Food and Drug Administration (FDA) Office of
Criminal Investigations (OCI), the FBI, the U.S. Postal Inspection
Service (USPIS), the U.S. Department of Commerce's International Trade
Administration and U.S. Patent and Trademark Office, the Defense
Criminal Investigative Service (DCIS), the U.S. Consumer Product Safety
Commission (CPSC), the National Aeronautics and Space Administration
(NASA), the Naval Criminal Investigative Service (NCIS), the Army
Criminal Investigative Command Major Procurement Fraud Unit, the U.S.
Air Force Office of Special Investigations, the Nuclear Regulatory
Commission, the U.S. Department of State's Office of International
Intellectual Property Enforcement, the Defense Logistics Agency (DLA),
the U.S. Postal Service Office of the Inspector General and the
Inspector General's Office from the General Services Administration,
and the Federal Maritime Commission. In addition, Department of Justice
(DOJ) trial attorneys from the Computer Crime and Intellectual Property
Section (CCIPS) regularly provide input for ongoing enforcement
operations and policy.
In 2010, the Government of Mexico and INTERPOL joined the IPR
Center as our first international partners. Since then, the Royal
Canadian Mounted Police and Europol have joined as well.
protecting national security, health, and safety
The illegal importation, distribution, and sale of counterfeit
products pose a significant and growing threat to public health and
safety. Counterfeiters do not care if their products contain the
correct materials. They do not care if their products are made in
sanitary conditions. They do not care if their products physically harm
consumers. They do not care if their products result in economic damage
to legitimate companies. Rather, they care about their product looking
good enough to be purchased. They care about their bottom line.
The IPR Center has a wealth of experience and subject matter
expertise to combat these counterfeiters and we support our field
agents in their significant efforts to enforce IP rights. Working
collaboratively with our law enforcement partners, the IPR Center has
developed numerous initiatives and interdiction efforts to combat the
infiltration of counterfeits that pose a risk to the health and safety
of the American public, or could potentially harm the economy of this
country. Specifically, the IPR Center focuses efforts on health and
beauty products, automotive, aerospace, and heavy industry products, as
well as goods entering the U.S. Department of Defense (DOD) and U.S.
Government supply chains. Today, I would like to discuss our efforts to
protect the public's health and safety from counterfeit consumer
products.
Using interdiction, enforcement, and outreach, the IPR Center
promotes a comprehensive layered approach that focuses on the
production, import, and distribution of counterfeit goods. Partnerships
are essential; the IPR Center works closely across agency boundaries
with law enforcement colleagues at the local, State, and Federal levels
and across international boundaries to form a united front against
criminal enterprises and international organizations that threaten
public safety and security.
Operation Chain Reaction
Operation Chain Reaction is an IPR Center initiative that combines
the efforts of 16 Federal law enforcement partner agencies to target
counterfeit items entering the DOD and other U.S. Government agencies
supply chains. Operation Chain Reaction (OCR) partner agencies
coordinate their efforts to more productively protect the U.S.
Government supply chain from substandard counterfeit parts that could
impact the reliability of weapons systems, delay DOD missions, imperil
the safety of servicemen and women, and waste taxpayer money.
For example, in a case investigated by ICE, DCIS, and NCIS, a
Massachusetts man pleaded guilty in 2014 to importing thousands of
counterfeit integrated circuits (ICs) from China to Hong Kong and then
reselling them to U.S. customers, including contractors supplying them
to the U.S. Navy for use in nuclear submarines. The subject told his
customers, many of whom specified in their orders that they would only
accept new ICs that were not from China that the ICs were brand new and
manufactured elsewhere, including in Europe. However, the subject
instead wired nearly $2 million to his suppliers' bank accounts in
China and Hong Kong to order ICs. Testing by the Navy and one of their
contractors revealed that many of the ICs had been resurfaced to change
the date code and to affix counterfeit marks to hide the fact that they
were actually older, used parts. On October 6, 2015, the defendant was
sentenced to 37 months imprisonment. This was the second conviction
ever under the new enhanced penalties for trafficking in counterfeit
military goods enacted in 2011.
In another case, the former Chief Executive Officer (CEO) of
Powerline, Inc., a battery distributor, was found guilty of five counts
of wire fraud and one count of conspiracy to defraud the United States
by selling more than $2.6 million in cheap, counterfeit batteries to
the DOD. In a joint case by ICE and DCIS, with assistance from DLA and
the Defense Contract Audit Agency, investigators discovered that
Powerline sold the DOD more than 80,000 batteries and battery
assemblies that the U.S. Navy used for emergency back-up power on
aircraft carriers, minesweepers, and ballistic submarines. Powerline,
Inc. affixed counterfeit labels falsely identifying the batteries as
originating from approved manufacturers and used chemicals to remove
``Made in China'' markings from the batteries. The CEO fled the United
States, but was arrested on December 6, 2013, after he spent more than
2 years near St. Martin. On October 15, 2014, he was sentenced to 87
months incarceration and ordered to pay $2,787,193 in restitution. In
fiscal years (FY) 2014 and 2015, OCR cases have resulted in 15 criminal
arrests, 28 indictments, 23 convictions, and seizures with a
Manufacturer's Suggested Retail Price (MSRP) of $13,768,355 in
counterfeit parts, currency, and vehicles.
Operation Plastic Beauty
Operation Plastic Beauty was initiated in FY 2014 by the IPR Center
to combat the illegal importation, sale, and distribution of
counterfeit healthcare and beauty products, such as shampoo,
toothpaste, makeup, and lip balm. Through Plastic Beauty, the IPR
Center combines the expertise of ICE, FDA-OCI, and CBP, and coordinates
with industry.
As a result of operations conducted by CBP, multiple shipments of
counterfeit name-brand cosmetics were discovered. ICE opened an
investigation and linked the cosmetics to a woman in Florida. A review
of seizure records uncovered that she had been trafficking in
counterfeit cosmetics for several years, and bank records related to
her business indicated that over $1 million had been deposited as
proceeds. ICE, with assistance from the Postal Inspection Service,
conducted an enforcement operation and seized approximately $16,905 and
over 1,500 counterfeit brand name cosmetic products that had an
estimated resale value of $31,715. The defendant pled guilty to
trafficking in counterfeit goods and, on July 20, 2015, was sentenced
to 18 months imprisonment and ordered to pay $961,744.75 in
restitution.
In FY 2015, Plastic Beauty resulted in 18 arrests, 19 indictments,
19 convictions, and the seizure of goods valued at over $7 million.
Operation Engine Newity
Operation Engine Newity addresses safety threats posed by
counterfeit automotive, aerospace, rail, and heavy industry components.
These counterfeit parts are not only an evident health and safety risk
to Americans, but they also impact the economic health of these
industries. Investigations and interdictions have uncovered counterfeit
airbags, steering, braking, and seatbelt components, bearings, and
diagnostic equipment.
To combat counterfeit automotive parts, Operation Engine Newity
member agencies work closely with the private sector, including the
Automotive Anti-Counterfeiting Council. This is a collaborative
voluntary industry group comprised of BMW, Fiat Chrysler Automobiles,
Ford, General Motors, Honda, Hyundai, Kia Motors, Mercedes-Benz,
Nissan, Subaru, Toyota, and Volkswagen. Automakers have shared lead
information with the IPR Center that is now being worked in the field,
and are actively cooperating with the agents investigating this
information. Additionally, they have shared knowledge regarding
upcoming trends in counterfeit automotive parts, which is being used to
target potential shipments and redirect government resources to top
priorities focusing on health and safety concerns.
In September 2014, an ICE Public Service Announcement (PSA) was
released to alert the public of the dangers of counterfeit automotive
parts. The PSA, which was coordinated through CBP, the FBI, and the
National Highway Traffic Safety Administration, is displayed by
automotive industry partners in dealership service departments. In one
ICE-led case, two brothers sold counterfeit airbags in an online
marketplace. The brothers, both Canadian citizens, were importing the
airbags from China into Canada. They would drive the counterfeit
airbags into the United States to mail them to customers from a U.S.
address. As part of its investigation, ICE identified the entities in
China providing the counterfeit airbags. Working through the United
States-China Joint Liaison Group (JLG) on Law Enforcement Cooperation,
ICE HSI Beijing provided information on the Chinese sources to the
Chinese Ministry of Public Security (MPS), which led to the arrests of
the individuals who made the airbags in China. In September and October
2014, the brothers were sentenced to 6 and 4 months incarceration,
respectively.
In FY 2014 and 2015, Operation Engine Newity resulted in 31
arrests, 32 indictments, 16 convictions, and the seizure of goods worth
approximately $18.4 million.
Operation Joint Venture
To help educate consumers on emerging dangers of counterfeit
products and facilitate productive partnerships with the public and
private sectors, the IPR Center launched Operation Joint Venture. This
effort is designed to increase support, communication, and cooperation
for our ongoing IPR enforcement initiatives and our critical public
health and safety efforts. Operation Joint Venture is the IPR Center's
method to provide industry with valuable information about our efforts
to combat the importation of hazardous and counterfeit products, and it
gives industry a point of contact they can use to provide us with leads
and tips regarding efforts to compromise intellectual property rights.
Also, we have developed a website (https://www.iprcenter.gov/) where
the public can obtain information on the efforts of all IPR Center
partner agencies to combat IP crime and we have placed a button on the
website where consumers and industry can report allegations of
counterfeit or pirated products.
Other Interagency Efforts
ICE shares its border security and trade mission responsibilities
with its sister agency, CBP. ICE and CBP work closely to target
counterfeit and other illicit goods crossing the borders, including
through the co-location of personnel at Trade Enforcement Coordination
Centers (TECC) in Los Angeles, New York/Newark, Detroit, New Orleans,
Houston, and Chicago Ports of Entry (POE). The TECCs enhance
communication and combine resources to identify and combat trade fraud
and IP crime. The TECCs proactively identify, interdict, and
investigate inbound cargo that may enter U.S. commerce in violation of
U.S. customs and trade laws. TECCs ensure joint CBP and ICE oversight
and prioritization of the enforcement and interdiction process in the
local area, and involve ICE early in the enforcement process. ICE and
CBP are establishing additional TECCs in El Paso, Texas; Buffalo, New
York; and San Juan, Puerto Rico.
The IPR Center also has agents who sit full-time at the National
Cyber-Forensics and Training Alliance (NCFTA) in Pittsburgh,
Pennsylvania. The NCFTA is a non-profit organization, which brings
together experienced personnel from academia, law enforcement, and
industry. By merging a wide range of expertise in one location, the
NCFTA provides a neutral forum for information sharing regarding
emerging and ongoing threats. In FY 2015, our NCFTA agents, working
with IPR Center analysts, processed 17,990 viable new leads.
trade facilitation and trade enforcement act of 2015
The TFTEA is the most comprehensive customs legislation in over two
decades. Many of its provisions directly impact ICE's trade fraud,
intellectual property, and the forced labor enforcement missions.
Specifically, the TFTEA enhances the ability of the Government to
combat IP violations. The IPR Center and ICE HSI are currently
implementing the Act's requirements, working closely with its partners
in the Federal Government, including CBP, DHS, and the IPEC. The IPR
Center welcomes this new focus and is rapidly ramping up its efforts to
enforce IP laws.
Key Provisions Impacting ICE's IP Enforcement Efforts
Sections 305 and 306 codify the establishment of the IPR Center
within ICE. TFTEA outlines the IPR Center's duties to include:
coordinating investigations of IP violations; conducting and
coordinating domestic and international law enforcement training on IP
investigations; coordinating with CBP activities to prevent the
importation or exportation of IP infringing merchandise; supporting
international interdiction of prohibitive IP merchandise destined for
the United States; collecting and integrating domestic and
international information on IP infringement; disseminating information
on IP infringement to other Federal agencies; developing and
implementing, in coordination with CBP, a risk-based alert system to
improve targeting; coordinating with U.S. Attorneys to develop
expertise in IP investigation and prosecution; and conducting private
sector outreach and information sharing.
Implementation
ICE and the IPR Center are proactively working to implement the
provisions of this law and have formed a team that will oversee the
implementation. Implementation will require close cooperation with CBP
and DHS Office of Policy, and initial steps have been made to
coordinate efforts among our offices. The IPR Center will continue to
co-host the 2-week advanced training, Intellectual Property and Trade
Enforcement Investigations Course, with CBP, which has been recently
revised and updated. This training is provided to ICE HSI and CBP
personnel to gain a better understanding of trade fraud and IP
investigations and current priorities. The training also includes
presentations from the DOJ and the private sector.
challenges ahead
Our biggest challenge is that criminals are willing to counterfeit
and market any product that will sell, regardless of whether it could
result in serious and significant injury to consumers or the public.
Through the course of its investigations, ICE has uncovered counterfeit
lithium batteries that are not properly vented, counterfeit airbags
that have too much propellant, counterfeit jewelry that contains lead,
counterfeit pharmaceuticals that contain potentially toxic substances,
and counterfeit health and beauty products that are made under
unsanitary conditions.
ICE anticipates that cyber-commerce and for-profit streaming will
continue to be challenges, along with the following upcoming
technologies: 3D printing; additive manufacturing; and the dark web and
virtual currency. ICE feels that IP criminals will continue to use
these technologies, and others we have not seen, in furtherance of
their criminal activity. One other challenge that lies ahead is the use
of e-commerce platforms with a business direct to consumer business
model that utilizes the express mail environment. There are numerous
weaknesses in this model that counterfeiters can exploit.
IP cases demand attention from criminal investigators and
regulatory agencies. We take our responsibility to protect American
consumers and industry very seriously, and ICE's priorities in IP crime
enforcement remain to protect the public's health and safety, the
military supply chain, and the American economy. The IPR Center
successfully brings together members of industry, State and local
partners, Federal Government and international counterparts to train,
exchange best practices and ultimately remove counterfeit and pirated
products from the marketplace and put the criminals behind them in
jail.
conclusion
Thank you again for the opportunity to appear before you today to
discuss the work of ICE and the IPR Center in protecting U.S. consumers
from the international illicit trade of dangerous counterfeit,
unapproved, and/or adulterated products. I look forward to working
closely with Congress on this issue of critical importance as it
directly threatens worldwide health and safety.
I would be pleased to answer any questions.
______
Questions Submitted for the Record to Bruce Foucart
Questions Submitted by Hon. Orrin G. Hatch
educating consumers
Question. I am concerned that far too many Americans don't fully
understand the dangers of purchasing potentially counterfeit goods.
They purchase a product at a significant discount, without fully
appreciating that it may be fake and the consequences that may follow.
Fake toys can contain lead and other toxic chemicals, fake
pharmaceuticals can contain life-threatening substances, and fake
electronic goods can create fire hazards as well as endangering the
user directly.
That is one reason why I insisted on including language in our
recently passed customs bill that directs Homeland Security to develop
and carry out an educational campaign to inform travelers about the
legal, economic, and public health dangers inherent in purchasing
potentially fake products overseas.
What do you think are the best ways for consumers to identify fake
products?
And, do you have any recommendations on educating consumers on the
harm of counterfeit products and training them to better identify fake
goods?
Answer. The National Intellectual Property Rights Coordination
Center (IPR Center) recommends that consumers minimize the risk of
purchasing counterfeit products by buying only from a reputable vendor
or retailer. They should beware of vendors or retailers selling items
significantly cheaper than most other retailers. The ``Golden Rule''
for identifying counterfeit products is: If the price is too good to be
true . . . it probably is.
Consumers should follow the 10 steps on the https://
www.stopfakes.gov/welcome page to protect themselves against
counterfeit goods. These steps include scrutinizing labels, packaging
and contents, seeking authorized retailers, insisting on secure
transactions, and trusting your instincts. Specifically, consumers of
pharmaceuticals who want to verify that their online prescription
purchases are legitimate may want to consult with their health care
provider to request a list of legitimate Internet pharmacies, if
available. Consumers should purchase pharmaceuticals from a state-
licensed pharmacy in the United States where the consumer can be
confident in the quality, safety, and efficacy of drugs. Consumers
should refer to the National Association of Boards of Pharmacy's (NABP)
Verified Internet Pharmacy Practice Sites (VIPPS) program, which
accredits online pharmacies that dispense prescription drugs. Consumers
have to be vigilant when doing business with Internet pharmacy sites
because the pharmacy may not be legitimately licensed, their location
can be almost anywhere in the world, and the product received may not
be an FDA-approved drug. The BeSafeRx program, of the Food and Drug
Administration (FDA) is a national campaign to raise awareness of the
dangers of buying prescription medicines from fake online pharmacies by
providing resources to help consumers know the risks and signs of fake
online pharmacies, and find safe online pharmacies.
The IPR Center recognizes the value of strong relationships with
industry, Federal, State and local officials, and nonprofit
organizations to educate the public about the effects of counterfeit
goods. The IPR Center conducts aggressive stakeholder outreach to
inform and educate companies and the consumers they serve about
intellectual property theft, trade fraud, and how to report
allegations. This campaign focuses attention on how counterfeit goods
pose health and safety hazards (for example counterfeit prescription
pain medicines made of fentanyl can cause deadly overdoses), threaten
the U.S. economy, and fund criminal organizations. Outreach efforts
have been especially effective in the automotive industry, where the
black-market sale of counterfeit airbags prompted major auto makers to
warn consumers about counterfeit airbags and provided online links to
the IPR Center for reporting allegations. The Motion Picture
Association of America, Motor and Equipment Manufacturer's Association,
National Crime Prevention Council, and the Pharmaceutical Security
Institute are other examples of enterprises featuring the IPR Center's
``To Report IP Theft'' link.
legal limitations
Question. Mr. Foucart, thank you for your testimony this afternoon.
You spoke about many of the positive things that the IPR Center is
doing today.
Do you know of any legal limitations that hinder your ability to do
your job?
Answer. As noted within the administration's White Paper on
Intellectual Property Enforcement Legislative Recommendations,\1\ there
are legal limitations that hinder the ability of U.S. Immigration and
Customs Enforcement to effectively combat intellectual property theft.
In particular, the list of offenses in 18 U.S.C. Sec. 2516(1) for which
the U.S. Government is authorized to seek wiretap authority from a
court to obtain interceptions of wire or oral communications as
evidence of those offenses does not currently include criminal
copyright (17 U.S.C. Sec. 506, 18 U.S.C. Sec. 2319) and criminal
trademark offenses (18 U.S.C. Sec. 2320). The enhancement of wiretap
authority would assist U.S. law enforcement agencies with the effective
investigation of copyright and trademark violations, including in
instances where counterfeit goods directly impact the health and safety
of consumers, particularly in organized crime.
---------------------------------------------------------------------------
\1\ https://www.whitehouse.gov/sites/default/files/
ip_white_paper.pdf
Additionally, because infringement by streaming remains a
misdemeanor, it is often difficult to justify the use of investigative
and prosecutorial resources for such violations. The availability of
more significant penalties, in appropriate circumstances, for
infringement by streaming or by means of other similar evolving
technology would assist U.S. law enforcement in effectively combating
infringement involving new technology.
capacity building
Question. Congress has made protection of intellectual property
rights a key component of our international trade strategy for many
years. Ensuring that our international trading partners agree to strong
enforcement provisions in our trade agreements is a vital element of
this strategy.
During our hearing, I touched on the importance of making sure that
our trading partners effectively implement their obligations before we
allow an agreement to enter into force, but I think that even more can
be done. Not only must we put strong rules into place, but we must work
with our trading partners to make sure that adequate capacity building
is available so that they can develop the technical expertise to stop
fakes before they even cross U.S. borders.
Can you comment on whether you believe capacity building is an
effective tool to stop fakes from entering our country and, if so, what
type of capacity building is most effective?
Answer. U.S. Immigration and Customs Enforcement (ICE) and the
National Intellectual Property Rights Coordination Center (IPR Center)
believe that capacity building is an effective tool to stop counterfeit
goods and pirated content from entering our country. Traditional
classroom training, coupled with real world practical enforcement
scenario exercises, have proven effective in providing police and
customs officials with intellectual property (IP) enforcement
detection, interdiction, and investigation fundamentals. For the past
few years, the IPR Center has provided this training, as part of the
International Law Enforcement Academy training program funded by the
U.S. Department of State's (DOS) Bureau of International Narcotics and
Law Enforcement Affairs (INL). The IPR Center also participates in
international capacity building programs sponsored by DOS, the U.S.
Patent and Trademark Office, U.S. Department of Justice, INTERPOL, and
the World Customs Organization as IP enforcement subject matter
experts.
In June 2015, the IPR Center led, in conjunction with ICE Attache
Hong Kong and utilizing funding from INL, an Advanced IPR Enforcement
Workshop that involved 35 U.S. law enforcement and 64 foreign law
enforcement, customs, and judicial officials. The workshop had
participation from the Governments of India, Bangladesh, China, Macau,
Hong Kong, Vietnam, Malaysia, Thailand, Cambodia, Korea, Philippines,
Indonesia, and Singapore. The training focused on public health and
safety violations, and U.S. and foreign law enforcement officials
exchanged techniques, best practices, and experiences for combating IP
theft.
IPR Center workshops such as these promote stronger relationships
and information sharing between the United States and the participating
governments. In addition, IPR Center IP enforcement workshops increase
subject matter knowledge and investigative capacity for the
participants and inform participants about recent or anticipated trends
in IP-related crimes and enforcement.
One of the best examples of developing effective capacity building
for IP enforcement abroad can be seen when ICE or IPR Center partner
agency Special Agents work in close collaboration with foreign law
enforcement and customs administrations to enhance cooperation on IP
enforcement. In November 2014 and July 2015, ICE sent two Special
Agents to Thailand as technical advisors to provide subject matter
expertise and assist in overseeing the startup of the Thailand National
Intellectual Property Rights Centre for Enforcement. While on temporary
assignment, these Special Agents also assisted the Thai Department of
Special Investigations in the planning and implementation of IP
enforcement actions. During the two temporary assignments in 2014 and
2015, ICE Special Agents advised on 20 IP enforcement operations, which
resulted in 82 seizures and 16 criminal arrests by the Thai government.
The seizures totaled over $18 million (manufacturer suggested retail
price, had the goods been genuine). Much more important than the
resultant seizures and arrests was the repeated operational experience
and subject matter expertise gained by the Thai police officers taking
part in 20 enforcement operations.
taobao
Question. Mr. Foucart, Chinese government agencies have estimated
that two-thirds of what is sold on Taobao is counterfeit.
How does the IPR Center coordinate with CBP to use the information
that you have to better target these shipments so that CBP interdicts
counterfeits sold on Taobao?
Answer. The Intellectual Property Rights (IPR) Center notes that
there are many factors considered by U.S. Immigration and Customs
Enforcement (ICE) and other IPR Center partners when determining
whether to pursue a criminal investigation into the production,
transportation, sale, and/or distribution of counterfeit merchandise.
These factors may include, but are not limited to, the number and value
of counterfeit goods at issue, whether the sale of counterfeit
merchandise is part of a larger criminal enterprise, and the extent of
available actionable information.
The IPR Center deconflicts all actionable leads with the 23 IPR
Center partners, including U.S. Customs and Border Protection (CBP),
and the rights holder whose rights are being infringed. IPR Center
analysts conduct searches of open source and law enforcement databases
to compile a lead package, which is sent to the appropriate agency and
field office including ICE field offices. In cases where there is not
enough actionable intelligence for a criminal case, the IPR Center may
refer those leads back to industry for civil actions. Additionally, the
information gathered in these lead packages can be used by CBP to
improve targeting of future shipments.
The IPR Center recognizes the challenges that rapidly expanding e-
commerce places on legitimate commercial marketplaces. To facilitate
legitimate commerce while protecting consumers against the sale of
counterfeit goods, the IPR Center is creating a guide for industry on
the different processes third-party marketplaces have in place to
report counterfeit and pirated merchandise and content on their sites.
The guide will provide industry with reference information on how to
report counterfeit and pirated merchandise and content.
The IPR Center has initiated a process of ongoing dialogue with
online marketplaces. Where possible, the IPR Center will work with them
to recommend detection methods and law enforcement lead referral
mechanisms. Liaising with the marketplaces can be effective as long as
the dialogue is conducted on a regular basis, preferably in person, to
account for changes in personnel and/or policy within the marketplace.
As part of these outreach efforts, the IPR Center has met with
representatives from Alibaba twice to suggest ways to better combat
counterfeits on their various sites.
______
Questions Submitted by Hon. Ron Wyden
counterfeits at the source
Question. Because international trade involves a larger volume of
small packages shipped to individuals, we need new strategies to have a
meaningful impact on preventing counterfeit imports. It seems that one
strategy is to go after the source, to work with countries where the
counterfeits are coming from and prevent shipments and shutdown
manufacturing operations before individual counterfeit products are
sent off in hundreds or thousands of separate packages.
Can you discuss what ICE is doing to address counterfeits at the
source? Most counterfeits come to the United States from China and Hong
Kong--what in particular are you doing in those countries to prevent
exports of counterfeits to the United States?
Answer. U.S. Immigration and Customs Enforcement (ICE) Homeland
Security Investigations (HSI), through its attache offices and the
National Intellectual Property Rights Coordination Center (IPR Center),
has taken a proactive approach to increasing international cooperation
on law enforcement efforts to combat intellectual property (IP)
violations and trade fraud. Only by working together with our
international counterparts are we able to address counterfeits at their
source.
As you indicated, most counterfeits come to the United States from
China and Hong Kong. ICE attache office personnel engage regularly with
Chinese law enforcement and customs officials to increase law
enforcement cooperation on IP investigations. ICE HSI participates in
the U.S.-China Joint Liaison Group on the Law Enforcement Cooperation
Intellectual Property Criminal Enforcement Working Group (IPCEWG). The
IPCEWG meets yearly and has resulted in an open dialogue on IP
enforcement, the sharing of information on selected investigations, and
several successful joint IP operations.
The Assistant Director of the IPR Center, Bruce Foucart, and the
U.S. Customs and Border Protection (CBP) Director of IPR Policy and
Programs, Michael Walsh, traveled to Beijing and Guangzhou, China, for
a series of meetings with Embassy, industry, and Government of China
officials. Meetings were held with the American Chamber of Commerce,
U.S. industry representatives in China, the Ministry of Public
Security, and the General Administration of Customs to discuss ICE and
CBP's mission in combatting IP violations.
In an effort to combat counterfeits from China that are being
transshipped through Singapore, CBP and ICE HSI held a joint IP
enforcement operation focused on counterfeit pharmaceuticals with
Singapore Customs at Changi Airport, as well as at the Miami
International Mail Facility and the Cincinnati DHL Hub. The operation
was notable as this is the first time Singapore Customs has
participated in joint enforcement efforts on goods re-packaged and
transiting their Free Trade Zone bound for the United States. In an
effort to disguise the counterfeits, they were re-packaged as if they
originated in Singapore, using Singapore's reputation for clean
operations and health controls. Singapore Customs located packages of
possible interest at the Changi Airport mail and DHL hub through
cooperation with ICE HSI and marked them for CBP officers to find when
they arrived in the United States.
Training and outreach is also a key component to our international
efforts. In fiscal year 2015, ICE HSI conducted 125 international
outreach and training events on IP and customs fraud investigations for
more than 3,400 people. For example, ICE HSI Hong Kong partners with
Hong Kong Customs on capacity building, and recently co-hosted a
Department of State-funded regional IP workshop for representatives of
13 Asian governments.
These examples demonstrate the close cooperation that occurs
between ICE HSI and our international law enforcement counterparts to
combat counterfeit goods before they enter the United States.
new tools
Question. With the high volume of shipments coming in, it is
important that ICE and CBP make sure their strategies keep up with
technology and the resulting changing patterns in trade. We are in a
high-tech digital age, with high-tech digital criminals. What new tools
are U.S. enforcement agencies using to fight counterfeit imports and
bring charges against criminals?
Answer. U.S. Immigration and Customs Enforcement (ICE) is
constantly exploring and testing new tools and technologies that can
advance our investigative efforts across the spectrum of our
authorities. Many of these tools are cross-cutting, with applicability
across multiple investigative areas, including trade fraud and
intellectual property (IP) enforcement.
Partnering with the private sector and academia is also one way
that ICE stays ahead of the technological curve. The National
Intellectual Property Rights Coordination Center (IPR Center) serves a
crucial role in bringing together law enforcement and the private
sector to discuss new trends, strategies, and best practices in IP
enforcement. In fiscal year 2015, IPR Center staff met with 4,893
private industry representatives not only to collaborate on enforcement
initiatives and share information, but also to ensure that IPR Center
Special Agents, analysts, and program managers are up to date on
various cutting edge technologies and detection tools available in the
private sector.
ICE has assigned two full-time personnel to the National Cyber
Forensics Training Alliance (NCFTA) in Pittsburgh, Pennsylvania. The
NCFTA is a non-profit organization that brings together experienced
agents and analysts, government experts, and leaders in the business
world to form an integral partnership. By merging a wide range of
expertise in one location, the NCFTA provides a neutral forum for
information sharing regarding emerging and ongoing threats. Having
personnel at the NCFTA enables ICE to benefit from the cyber expertise
located there by vetting, adding value to, and de-conflicting lead and
case information.
Additionally, ICE runs the Cyber Crimes Center (C3), which
maintains expertise in the latest computer forensics and cybercrimes
trends. Special Agents who are investigating IP crimes can leverage
their local computer forensic agents or contact C3 for support on
cyber-related issues that may arise during the course of a criminal
investigation.
As part of a more comprehensive approach to combatting digital
crimes, ICE has altered its strategy to focus on developing long-term
investigations that identify targets, assets, and financial schemes
used in operating infringing websites. Through this revised strategy,
ICE seeks to arrest, prosecute, seize assets, and criminally seize
domain names. In support of this strategy, ICE Special Agents
participate in the Intellectual Property and Trade Enforcement
Investigations Course at the Federal Law Enforcement Training Center,
where they learn about IP enforcement intelligence tools, online trends
and structures, and digital media case studies.
counterfeit importation report
Question. This committee has placed enormous emphasis on trade
enforcement. When people ask me what I think about a new trade
agreement, the first question I ask is how past trade agreements are
being enforced. How the trade remedy laws on the books are being
enforced. Trade policy starts with trade law and trade agreement
enforcement. In section 310 of the Trade Facilitation and Trade
Enforcement Act (the ``Trade Enforcement Act'') that was signed into
law a few months ago, we directed the Director of ICE and the CBP
commissioner to deliver a report to us by the end of September that
describes the efforts that ICE is undertaking to address counterfeit
imports, particularly those facilitated by online commerce. As you
know, in the Trade Enforcement Act Congress also gave ICE and CBP new
tools to help identify counterfeit imports, by specifically authorizing
more cooperation and information sharing with rights holders. This
committee intends to be a partner in implementation of the Trade
Enforcement Act, so we need to know how its implementation is helping
address the problems to which the bill intends to respond. We don't
just send bills to the President and move on. Implementation of
legislation is as important as getting legislation to the President's
desk.
Will the report described in section 310 be delivered to Congress
on time, and does ICE intend to include in the report an assessment of
how the new tools Congress has provided are successfully being
utilized?
Answer. U.S. Immigration and Customs Enforcement is working closely
with U.S. Customs and Border Protection and the Department of Homeland
Security to complete all reports mandated by the Trade Facilitation and
Trade Enforcement Act by the timelines defined in the legislation,
including the report required by section 310. Because the report is due
on September 30, 2016, before the fiscal year statistics have been
finalized, the report will address enforcement efforts from fiscal year
2015. Therefore, this year's report will serve as a baseline that can
be used to better identify enforcement successes resulting from
implementation of the legislation. Included in the September 30, 2017
report on section 310 will be an assessment of how the new tools
provided by Congress were successfully utilized.
enforcement priority for counterfeit products i
Question. All types of products are being targeted by
counterfeiters, from clothing, jewelry, and shoes, to pharmaceuticals,
smart phones, and high-tech components for airplanes. Not only do the
counterfeits pose a threat to U.S. businesses, but many threaten the
health and safety of the U.S. consumer. Fake drugs impede the treatment
of patients, fake electronics can catch fire, and fake auto parts can
make a car malfunction.
Does ICE prioritize enforcement against counterfeit goods based on
the potential harm to the health and safety of the U.S. consumer? How
do you work with FDA, the Consumer Product Safety Commission and other
agencies to protect U.S. consumers?
Answer. The National Intellectual Property Rights Coordination
Center (IPR Center) brings together 23 partners, consisting of 19 key
Federal agencies, INTERPOL, Europol, and the Governments of Canada and
Mexico in a task force setting. This structure enables the IPR Center
to effectively leverage the resources, skills, and authorities of each
of the partners and provide a comprehensive response. The Food and Drug
Administration (FDA) Office of Criminal Investigation (OCI) is one of
the 23 partners, and ICE regularly partners with FDA OCI on criminal
investigations that involve counterfeit, unapproved, or adulterated
pharmaceuticals. The Consumer Product Safety Commission (CPSC) is also
a partner of the IPR Center. ICE collaborates with the CPSC on issues
that would fall under their area of expertise.
Through its leadership of the IPR Center, U.S. Immigration and
Customs Enforcement (ICE) prioritizes enforcement against counterfeit
goods that pose a health and safety risk to the U.S. consumer. The IPR
Center's mission is to address the theft of innovation that threatens
U.S. economic stability and national security, undermines the
competitiveness of U.S. industry in world markets, and places the
public's health and safety at risk. In furtherance of this mission to
protect the health and safety of the public, the IPR Center has
developed the following initiatives:
(1) Operation Chain Reaction targets counterfeit goods entering
the supply chains of the U.S. Department of Defense (DOD) and other
U.S. Government agencies. These counterfeits pose a health and safety
risk because they can potentially delay DOD missions, affect the
reliability of weapon systems, imperil the safety of service members,
and endanger the integrity of sensitive data and secure networks.
(2) Operation Apothecary targets the smuggling, illegal
importation, and sale of unapproved, counterfeit, or adulterated
pharmaceuticals in the United States. People with substance use
disorders seeking pharmaceutical grade medicines they believe to be
relatively safe such as Oxycontin are now encountering lab-made
fentanyl that is pressed into counterfeit pills that are branded to
look like prescription medicines. When consumers take these, they often
rapidly overdose because the counterfeit contains extremely potent
illegally made product.
(3) Operation Plastic Beauty addresses the illegal production,
importation, and sale of counterfeit personal healthcare and beauty
products, such as cosmetics or perfumes.
(4) Operation Engine Newity counters the threat of counterfeit
automotive, aerospace, rail, and heavy industry related components,
such as airbags and bearings.
(5) Operation Guardian is an umbrella investigation that covers
all counterfeit products that pose a health and safety risk to
consumers, whether or not the products specifically fall under one of
the other initiatives. Examples of products that are covered by
Operation Guardian include toys, electronics, and batteries.
______
Question Submitted by Hon. Robert Menendez
enforcement priority for counterfeit products ii
Question. Assistant Director Foucart, in follow up to the question
I asked you at the hearing, how is your office implementing the report
language to the Trade Facilitation and Trade Enforcement Act of 2015
that I authored with Senator Hatch to raise the enforcement priority
for counterfeit products, specifically those marked as ``gifts'' to
evade customs duties and detection? What new resources have been
brought to bear? What share of our agents' time is focused on this? I
would appreciate a written answer on the IPR Center's compliance plan
and actions.
Answer. The Department of Homeland Security's (DHS) role to
facilitate legitimate trade and travel, while identifying and
preventing counterfeit products from entering into commerce, presents a
significant challenge for law enforcement officials. Intellectual
property rights (IPR) related seizures by DHS have risen 444 percent,
from 6,500 in fiscal year (FY) 2003 to 28,865 in FY 2015. In FY 2015,
express consignment and international mail shipments were the top areas
for IPR seizures, combined making up 90 percent of all IPR seizures.
This is a 3 percent increase over FY 2014, and the volume of small
packages entering through express consignment and international mail
shipments are expected to increase as direct-to-consumer sales and e-
commerce industries surge.
High-volume, low-value shipments create a tremendous resource
challenge for U.S. Immigration and Customs Enforcement (ICE) and U.S.
Customs and Border Protection (CBP). Although express consignment and
international mail shipments generally contain a smaller piece count
and can be minimal in declared value, they nonetheless are subject to
the same seizure and forfeiture procedures as larger cargo shipments.
To combat this challenging issue, CBP and ICE work closely
together. CBP analyzes all seizures, including those described as
gifts. The analyzed seizure data is used to identify recidivists,
target their shipments, and refer violators as leads to ICE for
investigation.
The official establishment of the National Intellectual Property
Rights Coordination Center (IPR Center) by the Trade Facilitation and
Trade Enforcement Act of 2015 (TFTEA) is a welcome recognition of this
great resource and the work it continues to do to advance U.S.
Government efforts and resources to attack counterfeit products,
including those marked as gifts to evade customs duties and detection.
The IPR Center's priorities include coordinating investigations of IPR
violations, conducting and coordinating domestic and international law
enforcement training on intellectual property (IP) investigations,
coordinating with CBP on U.S. activities to prevent the importation or
exportation of IP infringing merchandise, supporting international
interdiction of IPR merchandise destined for the United States,
collecting and integrating domestic and international information on
IPR infringement, disseminating information on IPR infringement to
other Federal agencies, and conducting private sector outreach and
information sharing.
The IPR Center has begun to implement many of the new TFTEA
requirements already, and is working on identifying the resources and
funding necessary to fulfill all facets of this new law, including
developing a risk-based alert system to improve the targeting of
persons that repeatedly infringe on intellectual property rights. In
furtherance of its TFTEA implementation responsibilities, the IPR
Center has asked each ICE Special Agent in Charge office to develop a
strategic plan to enhance their commercial fraud and intellectual
property enforcement efforts. These plans address training for the
agents; enforcement best practices and challenges; interagency
cooperation, including enhancing relationships with CBP and the
Department of Justice; and private sector outreach. Based on this
assessment, the IPR Center is working with ICE to identify where
additional resources can be best placed as they become available.
______
Questions Submitted by Hon. Robert P. Casey, Jr.
operation chain reaction
Question. Mr. Foucart, counterfeits and theft of Intellectual
Property not only threaten U.S. economic competitiveness, they can be a
threat to consumer health and safety and to national security.
The Pennsylvania defense industrial base helps ensure that our
warfighters have the most innovative, most effective equipment and
technology to ensure that they are never in a fair fight, as General
Odierno used to say. I am concerned about the impact that
counterfeiting has on the defense supply chain.
In your testimony, you referenced Operation Chain Reaction, which
addressed counterfeit circuits made in China. What are the main
countries behind this counterfeit activity, and how does ICE work with
the Department of Defense to identify vulnerabilities in our supply
chain?
Answer. Operation Chain Reaction (OCR) is a comprehensive
initiative that targets counterfeit goods entering the supply chains of
the U.S. Department of Defense (DOD) and other U.S. Government
agencies. These counterfeit parts come primarily from China.
OCR combines the expertise of the following agencies: U.S.
Immigration and Customs Enforcement (ICE); Air Force Office of Special
Investigations (AFOSI); Naval Criminal Investigative Service (NCIS);
Defense Criminal Investigative Service (DCIS); U.S. Army Criminal
Investigation Command; Defense Logistics Agency, Office of the
Inspector General (OIG); Department of Justice (DOJ), Computer Crimes
and Intellectual Property Section (CCIPS); U.S. Customs and Border
Protection; Federal Bureau of Investigation; General Services
Administration, OIG; INTERPOL; National Aeronautics and Space
Administration (NASA), OIG; Department of Energy; National
Reconnaissance Office, OIG; Nuclear Regulatory Commission; and Coast
Guard Investigative Service.
Under the auspices of OCR, ICE works closely with its DOD
counterparts to identify and investigate incidents of counterfeit goods
in the supply chain. This cooperation involves a combination of
training, outreach, supply chain assessments, and enforcement
activities. In addition:
ICE conducts presentations at the Defense Counter-
Proliferation Training Program (DCTP), which is a joint effort by
AFOSI, NCIS, and DCIS at the Federal Law Enforcement Training Center in
Glynco, Georgia. DCTP is an introductory course that promotes awareness
of the threats facing DOD technologies and endorses partnerships within
the DOD to counter foreign intelligence entity initiatives, protect
critical U.S. information, and ensure a continued technical and
military advantage for the U.S. military. This course discusses the
processes required to successfully investigate and prosecute the
illegal transfer of technology, the roles and responsibilities of the
intelligence community, and how investigators can effectively work
together to combat threats to technology.
ICE works with the Defense Logistics Agency (DLA) to test the
reliability of their procurement process. The project aides DLA with
obtaining product authentication from the original equipment
manufacturers.
ICE works with the Naval Sea Systems Command (NAVSEA) and
AFOSI for commodity expertise, testing of suspected counterfeit
integrated circuits, and real-time identification of suspect parts
during ICE enforcement operations. NAVSEA provided ICE with a list of
typically obsolete military grade integrated circuits that would likely
be counterfeited by suspect companies, leading to successful
investigations. AFOSI supply chain risk management continues to support
the analysis of companies suspected of counterfeiting military grade
integrated circuits. Both NAVSEA and AFOSI request seized counterfeit
circuits for testing in order to increase their knowledge base.
ICE co-hosts the biannual Microelectronics Working Groups, led
by DOJ CCIPS. The focus of the meetings is enhancing communication
between law enforcement and industry. Attendees include defense
industry representatives, law enforcement (both civilian and DOD), and
Assistant United States Attorneys.
OCR also conducted 7 webinars that reached 114 special agents
and intelligence analysts. The webinars consisted of an OCR 101, case
overviews from agents who are subject matter experts on OCR
investigations, and presentation by DOJ CCIPS. In addition to the
webinars, OCR traveled to Los Angeles, California, and Tampa, Florida,
to provide on-site training for ICE, DCIS, NCIS, and NASA OIG. The goal
of the training was to increase the investigative capacity of the
agents with regard to investigating counterfeits entering the DOD
supply chain.
international partner trends
Question. Mr. Foucart, I note that China accounts for the lion's
share of counterfeits seizures--with 52 percent by value coming from
the Chinese mainland and 35 percent by value from Hong Kong.
On average, do our international partners see the same trends in
counterfeit imports as we do in the United States, particularly with
respect to the share of counterfeits coming from China, and trends in
counterfeit pharmaceuticals?
Answer. U.S. Immigration and Customs Enforcement (ICE) does not
officially monitor the influx of Chinese goods into other countries;
however, based on information shared with the ICE Attache in China and
discussions with American corporations operating in the region, China
continues to be a major source of counterfeit goods coming into the
United States, as well as into Brazil, Spain, Russia, and the United
Kingdom. Even though Hong Kong accounts for 35 percent of the value,
the counterfeit goods are likely sourced from mainland China and
transported to Hong Kong for shipment.
With regard to the movement in counterfeit pharmaceuticals, the
current trend leans toward India as a significant source. Much like
China, India has a robust legal chemical industry that provides
criminal organizations with a ready source of chemicals that are used
in the production of counterfeit pharmaceuticals. ICE Homeland Security
Investigations has seen an increase in the number of seizures of
counterfeit pharmaceuticals originating from India.
coordination with treasury and irs
Question. Mr. Foucart, in addition to IPR violations, I presume
many of the cases you discuss in your testimony may also have a revenue
component. Can you describe your coordination with Treasury and IRS,
and to the extent you are able in this setting, discuss instances where
your investigations have led to cases involving trade based money
laundering?
Answer. Trade-based money laundering (TBML) is one of the most
complex and dynamic forms of illicit money movement to investigate.
TBML undermines legitimate business and commerce. Transnational
criminal organizations will often dump imported goods at a discount to
expedite the process of receiving ``clean'' proceeds. TBML can also
destabilize sovereign governments through the loss of tax revenue on
discounted goods and duty collection on undervalued imports and
fraudulently manifested goods.
U.S. Immigration and Customs Enforcement (ICE) special agents have
jurisdiction and authority to investigate money laundering violations
of titles 18 and 19 of the U.S. Code. Criminal enterprises often engage
in a variety of criminal schemes designed to make illicit profits.
Examples of these activities result in unlawful activities include,
trade-based fraud, intellectual property rights violations, and customs
violations such as false statements or smuggling. Applying money
laundering and asset forfeiture laws is a powerful means of attacking
the threat of trade fraud and intellectual property theft. Enhanced
penalties for violating money laundering statutes are significant and
include fines up to $500,000 and/or imprisonment up to 20 years.
ICE is very active in the financial investigation arena and employs
its existing relationships with other Federal agencies to detect,
investigate, and prosecute those involved in money laundering or
illicit proceeds of crime schemes. ICE has created various units and
initiatives that serve the sole purpose of targeting organizations that
seek to exploit trade and the U.S. financial system for their illegal
gain.
These units include the Trade Transparency Units (TTU) to develop
partnerships with domestic and international trade, customs, and
financial representatives to detect trade discrepancies and investigate
criminal violations focusing on TBML. TTUs allow for the exchange of
trade data with foreign partners. The values reported on U.S. import/
export declarations are compared against the corresponding values
reported on foreign counterpart import/export declarations. This
exchange of information adds a level of transparency to the
international trade system. The TTU works with its international
partners to identify abnormal trade transactions that may indicate
TBML, customs duty evasion, and other related financial crimes.
The success of ICE collaboration was recently illustrated when ICE
Homeland Security Investigations (HSI) Buffalo conducted an illicit
trade/TBML investigation into imported Chinese magnesium powder
disguised, mislabeled, and undervalued to circumvent a 305.56 percent
antidumping duty, resulting in a loss to the U.S. Government of $14.6
million in customs duties. The investigation proved that a conspiracy
was orchestrated to defraud the Department of Defense (DOD) by using
substandard Chinese magnesium powder to manufacture countermeasure
flares used in the defense of U.S. military aircraft. The defendants
were able to sell the DOD 1.8 million fraudulent, untested substandard
countermeasure flares at a cost of $42 million. On January 13, 2015,
ICE HSI Buffalo reported this investigation resulted in three guilty
pleas to charges of Smuggling; Money Laundering; and Aiding and
Abetting Illegal Importation by Presenting/Transmitting Forged,
Altered, or False Documents to U.S. Customs and Border Protection. This
case ultimately resulted in 10 indictments, 7 arrests, 5 convictions,
27 search and seizure warrants, $950,000 seized, $330,467 forfeited,
and a DOD penalty of $30 million.
ICE has partnered with the Treasury Executive Office for Asset
Forfeiture (TEOAF) to identify and target Third Party Money Launders
who often launder illicit proceeds through a broad range of schemes.
These schemes may include creating shell corporations, opening offshore
bank accounts in the shell corporation's name, and creating or using
front businesses for their illegal activity and money laundering, to
name a few. Complicit businesses, accountants, lawyers, brokers, and
financial institutions may be enlisted to launder money. Human
smugglers, human traffickers, arms traffickers, drug traffickers,
terrorists, and other criminals depend on money laundering networks and
financial systems to move, store, and conceal illicit proceeds. They
also depend on fraudulently created or fraudulently obtained documents,
such as passports and visas, to move themselves or their clients into
the United States to reside or conduct business within our borders.
In September 2014, ICE conducted large-scale enforcement actions in
the Los Angeles Fashion district targeting trade-based money launders
and third party money launders. The results of those actions were the
seizure of more than $90 million in cash and initiated forfeiture
proceedings on several real properties. ICE worked collaboratively with
CBP, Internal Revenue Service, and State and local agencies during this
operation.
ICE will continue to leverage all its tools to coordinate and unite
domestic and international law enforcement efforts to combat illicit
trade crimes.
______
Prepared Statement of Hon. Orrin G. Hatch,
a U.S. Senator from Utah
WASHINGTON--Senate Finance Committee Chairman Orrin Hatch (R-Utah)
today delivered the following opening statement at a hearing to examine
trade opportunities and challenges for American businesses in the
digital age:
Welcome, everyone, to this afternoon's hearing, which we've titled
``Challenges and Opportunities for U.S. Business in the Digital Age.''
Over the last decade, the digital economy has dramatically changed
our way of life--from the way we hail a cab, search for a new home, or
order take-out, it has a profound effect on our lives.
This is also true for the ways in which companies conduct their
business.
The digital economy provides U.S. businesses of all sizes with
great opportunities and challenges. In today's marketplace, businesses
no longer have to rely on the hope that a passerby will notice
something in their storefront window and come in. Today, a business can
set up shop wherever it wants and sell all kinds of products over the
Internet to customers all over the world.
This represents a huge portion of worldwide commerce. According to
the Internet Association, about $8 trillion changes hands in the
digital marketplace each year.
In addition to having a digital storefront that can be seen in
every corner of the world, the Internet also provides new tools for
businesses to find and retain customers. For example, it is now
possible to tailor advertisements to specific market segments and
interact in meaningful ways with customers using social media.
However, as with all great technological and societal developments,
there are challenges that come part and parcel with the opportunities.
Although the United States has largely embraced and supported the
changes brought about by expanded Internet commerce, there are many
countries around the world that do not fully embrace this potential.
Many countries want to regulate various facets of the Internet,
including the digital economy, operating under a mindset from the last
century.
Put simply, that's not a wise or sustainable approach to dealing
with the Internet. That is why the Finance Committee worked to make
digital trade a priority in our international trade negotiations
through the Trade Promotion Authority, or TPA, statute that was signed
into law last year.
The digital trade negotiating objective in the new TPA law directs
the administration to do a number of things in order to protect the
Internet as we know it, including ensuring that our digital goods and
services can be exported to other nations without duties, that our
electronic goods and services are treated no less favorably than their
physical counterparts, and that the free flow of data across borders is
not inhibited.
Another equally important challenge facing businesses and consumers
in the digital marketplace is the rise of counterfeits. Just as the
digital economy has made it easier for businesses to find and engage
with consumers, it has also enabled counterfeiters to do the same.
Small businesses are the backbone of our economy and, for these
businesses, the Internet is a powerful tool.
I don't think I'm the only who remembers a time in which the first
steps to launching a successful business were finding the right spot to
physically locate the business and advertising in the local newspaper.
Clearly, times have changed, and, today, small businesses start by
launching a website and creating a Facebook page.
Unfortunately, the relative simplicity and efficiency of this
process can sometimes be a double-edged sword.
We hear all the time from businesses that have established a robust
web presence to grow their business only to find that, as their
products became more popular, counterfeiters started to sell fake
versions of their products. Some of these counterfeiters are so brazen
that they steal photos from legitimate websites and use them to
advertise their fake products on search and social media platforms.
Equally as unnerving, the consumer often doesn't know that they are
purchasing a counterfeit good.
Sadly, the threat of counterfeit goods is only growing.
The Organisation for Economic Co-operation and Development (OECD)
recently released a study that shows that counterfeit products
accounted for up to 2.5 percent of world trade, or $461 billion, in
2013. This is a dramatic increase from a 2008 estimate that showed that
fake products accounted for less than half that amount.
Counterfeits are a worldwide problem, but the OECD estimates that
the United States is the hardest hit, followed by Italy and France. Of
the estimated $461 billion in counterfeit trade in 2013, goods with
registered intellectual property rights in the U.S. represented 20
percent, or $92 billion, of the OECD estimate.
U.S. trade data also shows a growing trend in counterfeits. U.S.
Customs and Border Protection, along with Immigration and Customs
Enforcement, tracks, on an annual basis, the number of seizures
conducted at the border to stop products that violate U.S. intellectual
property rights from entering the United States. Over the last decade,
these seizures have nearly doubled from approximately 15,000 in 2006 to
over 28,000 in 2015. The 2015 seizures represent approximately $1.4
billion of goods.
As we all know, this is a multifaceted problem with no simple
solutions.
Congress has taken a number of steps to address these challenges.
In addition to establishing a TPA negotiating objective on digital
trade, we addressed counterfeits in our Customs bill, which was signed
into law earlier this year. This new law established a Chief Innovation
and Intellectual Property Negotiator in the office of the United States
Trade Representative, strengthened the ``Special 301'' report, required
CBP to publish information concerning the seizure of unlawful
circumvention devices, and codified the National Intellectual Property
Rights Coordination Center.
These are all important developments. However, as we learned at our
FTA Implementation hearing earlier this year, we also must ensure that
our trading partners fully implement their commitments in our trade
agreements. All too often, we have seen the executive branch allow
agreements to enter into force without first ensuring that our trading
partners have fully met their obligations. This is especially true when
it comes to provisions relating to protecting intellectual property,
particularly under the current administration.
Going forward, if the Obama administration wants Congress's support
for trade agreements like the Trans-Pacific Partnership, they must not
only address outstanding congressional concerns, but also demonstrate
that they have achieved a common understanding through detailed plans
with our trading partners on how they intend to implement these and
other commitments.
As the digital economy continues to evolve, Congress must be
vigilant in finding new and better solutions. That is one reason why we
are holding this hearing today, to hear firsthand what steps we can
take to ensure a safe and secure digital environment for the future.
We have some very accomplished witnesses with us this afternoon. I
am very much looking forward to their testimonies and to what I hope
will be a robust discussion of how we can more effectively ensure that
our workers, consumers, and job creators receive the full benefits of
the digital marketplace while also preventing the growing threat of
counterfeits going forward.
______
Prepared Statement of Norman T. Schenk, Vice President,
Global Customs Policy and Public Affairs, UPS
Thank you, Chairman Hatch, Ranking Member Wyden, and distinguished
members of the committee. I appreciate the opportunity to appear before
you today.
At UPS, our processes are complex and our technology is advanced,
but our objective is simple: to ensure world-class service for our
customers while providing the necessary data to law enforcement and
other government agencies so they can target contraband and identify
bad actors that seek to import dangerous goods and counterfeit items
into the United States in small packages.
UPS works closely with U.S. Customs and Border Protection (CBP), at
our own expense, to comply with, and even exceed, existing legal
requirements to provide data to target high-risk inbound shipments and
screen them out. In addition to enabling better screening for
counterfeit contraband, this data can also be used to screen for
shipments from potential terrorists, for illicit drugs, and for other
potentially dangerous products.
To achieve these goals, UPS provides advance data to CBP on our
packages before they enter the United States; and, in addition, we
share shipment data through the Air Cargo Advance Screening (ACAS)
system.
The most important aspect of package screening is the use of
advance data. In May of 2000, I testified before the House Government
Oversight Committee on how UPS provides advance data to help Federal
agencies combat illegal drug trafficking. At that time, there were
about 21 million package shipments entering the United States annually:
about 10 million through the private sector--which were accompanied by
advance electronic data--and 11 million through the international mail
system, which did not have any electronic data. Even back then, it was
clear that Customs and other Federal agencies could not manually screen
packages that were not accompanied by advance data--purely because of
volume--and that the most effective way of interdicting bad shipments
was through the use of advance electronic data.
By 2016, the volume of packages entering the United States has
increased many times over: the Department of Homeland Security reports
that in 2014, CBP processed approximately 340 million mail parcels
arriving from foreign postal operators, most without electronic data.
It is also estimated that 35 million packages enter the United States
through private carriers like UPS, all with electronic data. If Customs
couldn't effectively manually screen 11 million packages without
advance electronic data in 2000, imagine what they are tasked with when
screening 30 times that amount.
UPS and other private express carriers use advance electronic data
to manifest their shipments on a package-level basis, presents them to
customs, and provides critical screening data to law enforcement to
counteract illicit trade.
We have been using electronic data for years, even before it was
required by the Trade Act of 2002, to provide CBP with item-level
detail about each and every shipment entering the country. This data
consists of seven data points: who and where it is coming from; to whom
and where it is going; what's in the shipment (item description); piece
count; and item weight. This not only helps us reduce the potential of
dangerous goods entering through our system, but also aids in
manifesting compliance, payment of duties and fees, and clearance
through customs.
Perhaps more importantly, UPS is also working with CBP, the
Transportation Security Administration, and other Federal agencies, by
sharing data through the ACAS (Air Cargo Advance Screening) system.
ACAS, currently a pilot program, builds on data sets from
electronic manifests required in the past, and provides the necessary
information before shipments depart for the United States. It allows
authorities and watch-groups to target potentially high-risk shipments.
As the advance electronic submission allows for risk assessment or
data level screening prior to arrival in the United States, it takes
away the need for physical inspections, which is cumbersome and
ineffective.
UPS is committed to help Federal authorities identify bad packages
in our system, and believes that the best way to do so is through smart
policy requiring electronic manifesting on all shipments--public and
private--so that Customs is well-equipped to combat illegal trade. With
cross-border e-commerce growing at an unprecedented rate and showing
little signs of abating, the only way to protect our borders, national
security, American businesses and consumers, and even our own supply
chain, is to employ data-driven solutions and share this intelligence
with law enforcement and other Federal agencies.
______
Questions Submitted for the Record to Norman T. Schenk
Questions Submitted by Hon. Orrin G. Hatch
Question. You talked about the power of advance manifest data to
stop fakes from entering our country and suggested that such data could
be a useful tool for the U.S. Postal Service as well. There is another
angle to the postal issue that I would like to raise. Just 6 months
ago, USTR issued its Notorious Market Report. In that report, USTR
raised significant concerns with Alibaba platforms, saying that:
``Brand owners continue to report that Alibaba platforms, particularly
Taobao, are used to sell large quantities of counterfeit goods. USTR is
increasingly concerned by rights holders' reports that Alibaba Group's
enforcement program is too slow, difficult to use, and lacks
transparency. Stronger and more efficient systems for addressing right
holders' concerns should be undertaken without delay.''
Given these concerns, I was surprised to learn that the U.S. Postal
Service recently entered into a Memorandum of Understanding with
Alibaba that will help speed delivery of merchandise sold through
AliExpress to consumers in the United States. Given USTR's concern
about Alibaba as a platform for fakes, does this new arrangement raise
any red flags for you?
Answer. At the outset, I would note that UPS as a matter of policy
does not comment on arrangements between other companies. This is
especially true for any agreement between the Postal Service and
AliExpress, as there is little public information available regarding
the agreement.
However, more generally, any arrangement involving volume destined
for the United States--postal or otherwise--that is not required to
provide advance electronic manifesting and screening data raises red
flags. As I testified before the committee, perhaps the most important
aspect of package screening is the use of advance electronic data to
enable Customs and Border Protection and other law enforcement to
identify and interdict dangerous and illegal shipments. The use of
screening data not only allows for advance detection and diversion of
items coming from known bad actors, it also greatly reduces the need
for physical inspections, which are costly and less effective.
Again, while UPS declines to comment on the Postal Service,
AliExpress, or either of their respective capabilities for data
sharing, we maintain the position that any volume that is allowed to
enter the United States without advance electronic information being
shared presents significant challenges to combating illegal cross-
border trade, including trafficking in counterfeit goods.
Question. Congress has made protection of intellectual property
rights a key component of our international trade strategy for many
years. Ensuring that our international trading partners agree to strong
enforcement provisions in our trade agreements is a vital element of
this strategy.
During our hearing, I touched on the importance of making sure that
our trading partners effectively implement their obligations before we
allow an agreement to enter into force, but I think that even more can
be done. Not only must we put strong rules into place, but we must work
with our trading partners to make sure that adequate capacity building
is available so that they can develop the technical expertise to stop
fakes before they even cross U.S. borders.
Can you comment on whether you believe capacity building is an
effective tool to stop fakes from entering our country and, if so, what
type of capacity building is most effective?
Answer. UPS agrees that enhanced capacity coupled with smart,
strong border rules is integral to combatting illegal trade, including
preventing the entry of counterfeit and/or dangerous goods into the
United States. However, exponential growth in cross-border e-commerce
volume presents unique challenges that affect the way the United States
and our trading partners need to focus our capacity building efforts.
Namely, large flows of e-commerce packages into the United States
necessarily require that we implement data-driven solutions instead of
attempting to approach illegal trade interdiction through manual
inspection. For example, the volume of packages from China to the
United States through the international postal system has grown a
reported 70 to 90 percent annually, according to China Post, and shows
little sign of slowing. It is virtually impossible to develop an
effective interdiction system if U.S. Customs and Border Protection is
required to manually screen these items without electronic data on a
package-level basis.
Of course, the onus for investment in customs and security
capabilities does not fall on the United States alone. Our trading
partners, to the extent that they want to be able to participate in
American markets, must be brought up to speed through requiring
increased investment in information sharing capabilities. This is, to a
certain extent, limited by the United States' participation in the
Universal Postal Union (UPU) Convention, a congressional-executive
agreement between the United States and 191 other member countries to
deliver each other's mail, including small packages.
Regulations promulgated under the UPU Convention do not require the
sharing of advance electronic data, and instead allow for
``simplified'' customs procedures for shipments from postal operators
like China Post or India Post. The United States, led by the State
Department in its delegation to the UPU, has proposed measures that
would require non-discriminatory treatment of all packages--through
private carriers as well as postal carriers--but those proposals face
strong political headwinds, especially from China, who has actively
fought any proposal to mandate data sharing for packages.
Unfortunately, the United States cannot, by itself, alter the UPU
Convention or the regulations promulgated thereunder. However, this
should not deter the United States from exploring all options to
enforce border security laws for all shipments through posts and
private carriers alike. With cross-border e-commerce growing at an
unprecedented rate and showing little signs of abating, the only way to
protect our borders, national security, American businesses and
consumers is to mandate advance data sharing capabilities for all
shipments entering the United States.
______
Questions Submitted by Hon. Ron Wyden
Question. As you noted in your testimony, the volume of small
packages has increased substantially in recent years. In large part,
this is due to the changing landscape of trade resulting from digital
technologies. For example, we know that small and medium-sized U.S.
businesses are now participating in the global economy--accounting for
about 50 percent of U.S. exports--which used to be reserved for only
large multinational companies.
Could you speak to changes you have seen in your customer base and
how trade patterns reflect this dynamic? The United States is pretty
open for business, and we have low barriers for imports. What are the
challenges that our smaller exporters face in shipping to foreign
markets?
Answer. Over the years, UPS has seen a number of trends emerge that
are shaping global trade. Of course there is the e-commerce boom, where
digital trade has served as an equalizer allowing companies who offer
the best products to thrive regardless of location and size. We have
also seen the growing need of companies to compete internationally and
the internationalization of supply chains where nearly 60% of trade is
in intermediate goods, including the inputs and components that cross
borders dozens of times in the production of a good.
These trends have increased the pressure on international trade
infrastructure both in terms of the volume of goods being traded and
the time pressures many of our customers face. Burdensome customs
procedures, which involve excessive paperwork and sometimes extremely
lengthy hold-ups at borders, have a huge impact on businesses of all
sizes, but especially for our smaller exporting customers. These border
barriers can lead to missed shipment deadlines and damaging financial
losses, and over time can make or break a business' relationship with a
client. For time- and temperature-sensitive shipments such as
pharmaceuticals and healthcare products, the time window may be even
more critical.
Big companies have the resources and expertise to tackle these
challenges, but much of the increase in small parcel package volume
crossing borders comes from small to medium size companies who lack the
expertise to understand the laws and regulations of international
trade. While service providers like UPS have developed software tools
to support our customers, it doesn't negate the challenges the
challenges facing companies that don't understand the complex
processes. Simplifying clearance processes to reduce administration
burdens would help to improve the flow of goods across borders and
enhance both security and compliance.
UPS is a strong advocate of trade agreements like TPP given the
role they play in breaking down customs and regulatory and other
barriers our customers face. As you note, U.S. barriers are already
quite low so these agreements disproportionately tear down other
countries' trade barriers. As one piece of evidence of this positive
effect on U.S. exporters, UPS on average has seen our export volume
grow about 20% to countries with which the U.S. has recently
implemented a trade agreement. While eliminating market barriers is of
benefit to our customers of all sizes, our smaller customers
particularly benefit as they don't have the experience and resources to
navigate barriers as effectively.
Question. Many companies in Oregon, from large multinationals to
small businesses, sell an increasing share of their products through
the Internet, rather than brick and mortar retail stores. For customers
around the globe, they take orders, process payments, search inventory,
and arrange for the delivery of products, including via UPS. These
transactions are highly data intensive, requiring safe and secure
transfers of data across borders for processing in major regional
technology hubs.
In recent years, several countries have considered or even imposed
measures that would restrict cross-border data flows and require
companies to store and process data on servers located in the
jurisdiction where the data is collected. I am particularly concerned
that U.S. companies face uncertainty regarding their ability to
transfer data between the United States and the European Union.
Mr. Schenk, can you comment on how restrictions on cross-border
data flows would affect UPS and the business customers it serves?
Answer. UPS shares the concern you raise about measures that would
restrict cross-border data flows and/or require companies to store and
process data on local servers. In today's economy, global data flows
are essential for businesses across all sectors--manufacturers, service
providers, and agricultural firms. E-commerce, in particular, has
allowed small and medium-sized businesses to go global from day 1,
creating a new engine of innovation and jobs.
UPS relies on the continuous, seamless movement of data, often
across borders. Data transfer restrictions that limit how companies
process information on a global basis impede UPS's operations and harm
both our individual and business customers. At UPS, data flows ahead of
our packages and behind our packages. We send customs and security data
ahead to government authorities and our customers track and trace to
follow their packages on the back end. Last year we averaged 58.2
million daily tracking requests.
We are pleased that TPP's e-Commerce chapter includes a number of
important provisions to prohibit government restrictions on cross-
border data flows and data localization, which should help fuel the
digital economy.
______
Prepared Statement of Tom Triggs, Chief Legal Officer and
General Counsel, Belkin International, Inc.
i. introduction
Chairman Hatch, Ranking Member Wyden, and distinguished members of
the Senate Finance Committee, thank you for the opportunity to testify
on the important subject of challenges and opportunities facing U.S.
businesses in the digital age.
My name is Tom Triggs, and I am the Chief Legal Officer and General
Counsel of Belkin International, Inc. I lead an international team of
attorneys that assists the company in growing, developing, and
protecting all aspects of Belkin's business.
As the esteemed members are well aware, ecommerce presents
tremendous opportunities for businesses both here in the United States
and abroad. That much is obvious. We at Belkin celebrate the digital
age. This is reflected by the praise we have received from a variety of
publications for our innovative spirit, including recognition from Fast
Company as one of the top 10 most innovative ``Internet of Things''
(IoT) companies in the world.
The digital economy has contributed to Belkin's growth from its
humble beginnings in a southern California garage in 1983, while also
creating significant challenges for the operation of our businesses. I
would like to speak to you today about certain of those challenges, in
particular, the increasing complexity of international brand
management, the proliferation abroad of counterfeit products, and the
ease with which such products are purchased and sold online.
ii. about belkin
i. Belkin's Businesses
At Belkin, we create products that help people realize the power of
technology and make their lives better, easier, and more fulfilling.
This has been Belkin's mission since 1983 when our Founder and CEO,
Chet Pipkin, created the company in his parents' garage in Hawthorne,
California. Even back then, Chet's passion was driven by a desire to
satisfy customers' needs. He manufactured computer cable assemblies in
the evenings and on weekends, and sold them to local computer
manufacturers and dealers in response to the burgeoning personal
computer market in the 1980s.
We remain true to our southern California origins, and today we are
based in Playa Vista, in the heart of Silicon Beach, the Los Angeles
tech center. We have grown significantly since our roots in Chet's
parents' garage. We currently employ over 1,200 employees in 22
countries throughout the world, over 700 of whom are based here in the
United States. While we are at our core an American company, we are
global in reach and outlook.
Belkin owns three core brands: Belkin, Linksys and WeMo, each a
premium consumer electronics brand. Belkin delivers mobile and computer
accessories, known for their quality, reliability, simplicity and ease
of use. Linksys delivers consumer networking products, and helped make
wireless connectivity mainstream around the globe, delivering top-
ranked consumer Wi-Fi routers and connectivity devices. Our newest
brand, WeMo, is taking on the Internet of Things, delivering market-
leading customizable smart home experiences that empower people to
monitor, measure and manage their electronics, appliances and lighting
at home and on-the-go.
Belkin has recently embarked on an ambitious joint venture called
``Phyn'' with our new Finnish partner Uponor, a leading supplier
worldwide of plumbing for residential and commercial spaces. Phyn's
mission is to utilize Belkin's technology-
leading intellectual property to provide an intelligent water solution
that protects families and their homes from leak damage, enables
mindful conservation of water within the home, and enhances household
water usage with automated and anticipatory controls.
ii. Belkin's Product and Brand Development
At Belkin, we believe we enjoy success because we are an advocate
for the consumer in every facet of our business. Our brand purpose is
built on the belief that the sole reason technology exists in the world
is to make people's lives better, easier and more fulfilling. We
realize this purpose by making it our mission to understand what people
wish technology would do, what drives them crazy about technology, and
what they never even dreamed technology could do. We simplify,
streamline, enhance, and beautify to make technology work effectively,
effortlessly, harmoniously, and efficiently.
Belkin is about peace of mind. Product quality is essential to
this. Our products are thoughtfully designed to be highly desirable,
delightful to use, and a pleasure to live with. We seek to lead the
standard for design quality in the consumer electronics industry.
For over 30 years, Belkin has invested billions of dollars in
developing and manufacturing products that provide the highest quality
experience for our consumers. Our cross-functional teams work together
to ensure that our products work seamlessly, are safe and reliable, and
look good. This commitment to quality is the reason our products are
found at major retail stores that U.S. customers know and trust, such
as Best Buy, Walmart, Target, and Apple stores.
Our products are recognized both by industry experts and consumers
for their excellence, and the substantial investment we make in
delivering the best experience possible to our consumers is reflected
in the numerous awards we have won, particularly for our innovative
product designs.
In addition to the resources that we devote to product development,
Belkin also spends tens of millions of dollars each year developing our
brands. These brands communicate who we are, and our values, to
consumers. When consumers see a Belkin product, or a Linksys product,
or a WeMo product, they know that it is a product they can trust, and
one that carries a rich heritage of commitment to quality and
excellence.
iii. brand management in an international digital market
i. The Digital Revolution
When Belkin was formed in 1983, the Internet and the transformative
role that it would play in global commerce was unknown and unknowable.
Our products were originally sold, like all other consumer products at
the time, in brick and mortar retail stores, and developing brand
awareness was dependent upon gaining shelf space in those retail
stores.
Today, according to a UPS report released last week, online orders
now surpass in-store purchases, with 51% of shoppers' purchases,
excluding groceries, made online within the 3-month period prior to the
report's publication. Also, those consumers who are not buying online
are likely to be researching products online before making a purchase,
whether to locate product specifications, read product reviews or
simply find the best prices.
As the ecommerce market emerged and grew, so did our business, and
the way we interacted with our consumers evolved in sync with these
developments. We launched an online store in the United States, http://
www.belkin.com/us/, in 2000, and we currently operate online stores in
the Americas, Europe, Asia, and Australia. Today virtually all of our
retail store customers operate their own websites in addition to their
physical stores. In fact, some of our largest customers are now
exclusively online sellers, such as Amazon and Newegg. Our websites are
an important tool for not only selling products to customers, but also
for educating them about who we are, what products we offer and how to
communicate with us.
ii. New Challenges Presented by the Digital Age
While the Internet has opened new markets and provided Belkin with
global growth momentum, it has also brought challenges, one of the most
significant being the unprecedented access to markets that online
commerce has afforded counterfeiters.
The Internet has provided us all with a virtual storefront to the
rest of the world. While Belkin built the foundations of its business
by developing strong retail relationships, today anybody online,
including criminals, can sell anything, anywhere. There are very low
barriers to entry. Third parties who have not invested the money, time,
and resources that Belkin has in developing, designing, testing, and
manufacturing products and building strong, dependable brands, are now
able to inexpensively manufacture inferior counterfeit copies of our
products and sell them to unsuspecting consumers on the global market.
The sale of counterfeit products has now become a big business
worldwide; as estimated by the International Chamber of Commerce
(``ICC'') in a 2012 report, the annual value of counterfeit goods sold
globally would exceed U.S.$1.7 trillion by 2015, representing over 2%
of the world's total economic output in 2012.\1\
---------------------------------------------------------------------------
\1\ See: http://www.iccwbo.org/Advocacy-Codes-and-Rules/BASCAP/
BASCAP-Research/Economic-impact/Global-Impacts-Study/.
The United States is the country that is hardest hit by the trade
in fake goods. According to an April 2016 report by the Organisation
for Economic Co-operation and Development (``OECD'') and the European
Union's Intellectual Property Office, almost 20% (by total value) of
the fake goods seized globally infringe intellectual property rights
registered in the United States.\2\ In 2015, U.S. Customs and Border
Protection and Immigration and Customs Enforcement seized over 28,000
shipments of counterfeit goods valued at U.S.$1.35 billion, of which
18% (by value) were consumer electronics products.\3\ We ourselves have
been notified of more than 100 seizures since 2013 of counterfeit
Belkin products that third parties attempted to import into the United
States; these are just the shipments that were identified to us, and we
know that many more such shipments made it through despite the
diligence of our customs enforcement agents.
---------------------------------------------------------------------------
\2\ See: http://www.oecd.org/governance/risk/trade-in-counterfeit-
and-pirated-goods-978926425
2653-en.htm.
\3\ See: https://www.cbp.gov/sites/default/files/assets/documents/
2016-Apr/FY%202015%20
IPR%20Stats%20Presentation.pdf.
There is a real and substantial cost associated with the sale of
these fake products; the ICC has estimated the annual cost of lost tax
revenue and additional welfare spending due to counterfeit goods at
U.S.$125 billion in the G20 countries alone.\4\
---------------------------------------------------------------------------
\4\ See: http://www.iccwbo.org/Advocacy-Codes-and-Rules/BASCAP/
BASCAP-Research/Economic-impact/Global-Impacts-Study/.
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iii. Belkin's Anti-Counterfeiting and Brand Management Program
At Belkin, we are committed to protecting our consumers from these
counterfeiters, thieves who profit from the creativity, good will, and
investment of others.
We have already invested many millions of dollars in legal and
other fees, as well as valuable time and resources, in our unstinting
efforts to protect our company and our consumers from counterfeit
goods.
We have been systematically focused for years on the goal of
eliminating counterfeits of our products, in order to maintain both the
strong Belkin brand recognition and the trust of consumers, as well as
to provide a safe and quality product experience to the end user.
Counterfeiting is a problem that does not go away if ignored. It is not
curbed with a single legal notice. Rather, it requires around the clock
monitoring on a global basis and the application of consistent pressure
to the relevant law enforcement authorities around the world. It is
because we have this focus that we are a leader in the worldwide effort
to rid the consumer electronics space of counterfeit products. Our
extensive anti-counterfeiting and brand management program leverages
the strong relationships that we have established with customs
officials in the U.S. and around the world by proactively informing
them of instances of counterfeiting and other illegal brand-dilutive
activities that we track through our private resources.
Counterfeiting and other illegal brand-dilutive activities present
in a myriad of different forms, and, as a result, require experts drawn
from a variety of disciplines to combat effectively. To ensure that we
protect our brand, we have established an internal business unit
network to detect potential violations of our intellectual property
rights (``IPR''), and to investigate, identify, report, and enforce our
rights with respect to actual violations. This business unit network is
comprised of subject matter experts in a broad range of fields,
including legal, NetNames, testing (to determine whether a product is
counterfeit), reporting (of the suspected items to the appropriate
authorities), and customs. Our coverage is global in nature and
collected (using SharePoint software) in a single in-house repository
of information.
We constantly monitor the Internet, no small task indeed, for
potential instances of counterfeiting or other illegal brand-dilution
activities. We compile a monthly report listing instances of detected
infringement, ranging from brazen counterfeiting to brand abuse.
Oftentimes, in the case of U.S.-based online marketplaces operating
both in the U.S. and abroad, when we identify a counterfeit product
online, we are able to have that product removed relatively quickly
from the subject marketplace. Counterfeit sellers, unfortunately, know
how to manipulate the safety measures that many of the marketplaces
have established. They do this in a variety of different ways. They may
occasionally feature neither quantity nor pricing information, instead
advising the buyer to contact the seller directly to discuss options.
In some instances, where listings have been successfully closed, the
seller may simply re-list the auction and attempt to sell the
infringing item again, necessitating multiple actions to close the case
successfully.
You might be wondering how we are able to identify a potentially
infringing product. The answer is through a multifactor process. During
the initial stage, we look for the following indicia of counterfeit
packaging, among others:
(1) Shipments of Belkin-branded products sent directly from Asia
are almost always counterfeit, as Belkin does not ship from resellers
in Asia to any other market;
(2) The existence of spelling mistakes on the rear of a package;
(3) The security sticker being clear;
(4) Location of advertising, e.g., in the case of an iPhone
model, on the front of the product;
(5) The language and scope of warranties; and/or
(6) The product being sold purportedly under the Belkin brand is
simply one that we do not make (internally, we refer to these as
``ghost'' products).
In an effort to educate the public and minimize consumer confusion,
we have included a page on our website with information to help
consumers identify fake products and report potential incidents.
Overall, we are an efficient and effective team. This year alone,
we have already taken down 5,738 online listings of counterfeit Belkin
products in Europe and the United States.
When we have evidence of extensive counterfeiting activity by a
seller abroad, we go in country, engage in private investigations, and
then reach out to the relevant law enforcement authorities.
As a result of our constant vigilance, Belkin has filed complaints
and injunctions in more than 22 countries against entities that violate
its intellectual property rights, all in an effort to thwart the sale
of unlawful and potentially dangerous products. Counterfeit electronics
affect much more than our bottom line. These cheap, knock-off products
also harm the business of legitimate retailers and can even pose a
safety risk to end consumers. Our ultimate goal is to rid the market
entirely of these counterfeit items so that only authentic Belkin-
branded products that provide a quality and safe experience for our
consumers are available under our name.
Working with U.S. Customs and Border Protection and foreign
agencies, we have seen some success in removing counterfeit products
from the market. Below are a couple of salient examples of our work to
detect and remove these products. Unfortunately, we know that there are
many more we won't discover or won't be able to get off the market.
In December 2014, after months of investigation, undercover
surveillance, planning, and coordinated effort, Belkin's Supply Chain
Team in Hong Kong and Shenzhen, SinoFaith (an IPR group that
specializes in this type of operation) and the law enforcement agencies
in Shenzhen, Dongguan, and Guangzhou conducted concurrent raids on 11
counterfeit manufacturing or selling sites in southern China. Belkin
and the China State Administration for Industry and Commerce seized
more than 1 million counterfeit Belkin goods in this effort, leading to
jail time for six individuals. The company would not have been able to
see this operation through without the cooperation of both the U.S. and
Chinese governments.
Our most recent success story occurred earlier this year when, in
coordination with the Department of Economic Development (DED) of
Dubai, we oversaw a series of raids across Dubai. In this sting,
authorities raided 22 separate stores located in four main Dubai
marketplaces and confiscated more than 1,400 counterfeit Belkin-branded
products. The counterfeit Belkin products confiscated during the raids
included smartphone accessories such as cases, cables, and chargers for
both car and home. In Dubai, these resellers, including Dragon Mart and
E-City Shop, caught with counterfeit goods are subject to confiscation
of merchandise and a fine of 15,000 AED.
While we are able to point to a few success stories today, the
reality is that we meet with far more obstacles than success stories
when it comes to fighting those who seek to profit from the strength of
our brand and its association with consumer safety. Our global fight
against the counterfeit brand ``Melkin'' is one such example of the
continued frustrations that we face. We currently have suits pending in
China, Hong Kong, and the United States, as well as over 20 trademark
oppositions around the world, relating to these infringing products
manufactured by a China-based company.
These products are branded with the express purpose of confusing
consumers into thinking that in purchasing these products they are
purchasing Belkin products. This company, and the individuals and
entities behind it, are benefiting unfairly from the Belkin name and
reputation while causing significant harm to our business. The
infringing products are sold to the same customers through the same
channels of trade at a price slightly lower than that of the genuine
Belkin products.
In June 2015, we were granted an injunction from the courts in Hong
Kong to block Melkin-branded products from entering Hong Kong, which
included an order to remove such products from the Global Sources trade
fair in Hong Kong.
On November 13, 2015, Belkin filed a complaint under section 337 of
the Tariff Act of 1930 with the U.S. International Trade Commission
(``USITC'') against Dongguan Pinte Electronic Co., Ltd. and Dongguan
Shiije Fresh Electronic Products Factory (the entities behind Melkin).
The complaint details the infringement of Belkin's federally registered
trademarks resulting from these companies' unlawful importation into
the United States, sale for importation into the United States and/or
sale within the United States after importation, of certain computer
cables, chargers, adapters, peripheral devices, and packaging under the
brand name ``Melkin.'' We are seeking in this action an Exclusion Order
that would bar from entry into the United States such infringing
products, and also a cease and desist order to bar sales of such
infringing products that have already been imported into the United
States. In December 2015, the USITC agreed to open the complaint for an
official review, which is now underway. We expect to prevail in this
action, but at a cost of several hundreds of thousands of dollars.
iv. belkin's experience as a microcosm of the problems facing u.s.
businesses in the international digital marketplace
Of course, Belkin's experiences with the explosion in counterfeit
goods in the international digital marketplace are not unique. As
government and industry witnesses have previously observed before both
this and other congressional committees, the availability of cheap
manufacturing around the globe makes it easy for counterfeiters to
produce packaging that is almost identical to that of the brand owners.
However, in our case, and that of many other quality American
manufacturers and distributors, the product inside is nothing close to
the quality product that we deliver to our consumers. It has not passed
through the rigorous safety certifications, testing, or protocols that
we are required to satisfy to market our products. Consumers simply
cannot know this from looking at the package or the product, for
counterfeiters even have the audacity to include counterfeit safety
certification marks on the packaging. The result is consumer
frustration, Belkin brand damage, and, occasionally, harm to consumers.
This story is the same regardless of whether you are talking about
consumer electronics, clothing, medicine or a wide range of other
industries impacted by this worldwide problem.
Ecommerce presents tremendous opportunities and risks for consumer
electronics firms like Belkin. On the one hand, a powerful platform for
reaching vast numbers (billions, in fact) of new customers, both at
home and abroad, has been created. But this same platform also presents
a new, almost universally accessible, channel for counterfeiters to
sell fake products through, hurting brand owners like us and in some
cases endangering consumer safety.
No place illustrates both the relevant opportunities and risks on
the same scale as China. China reportedly has over 700 million Internet
users, and last year recorded U.S.$672 billion in ecommerce sales from
approximately 380 million Chinese consumers shopping online.\5\ And by
2020, China's ecommerce market is expected to reach U.S.$1.1 trillion.
But that market is also plagued by rampant sales of online fakes. The
above-referenced OECD study from April 2016 also found that nearly all
of the counterfeit goods captured by customs offices around the world
came from China.
---------------------------------------------------------------------------
\5\ See: http://beijing.usembassy-china.org.cn/2016ir2/ambassador-
baucuss-remarks-on-iacc-conference.html.
China has in place a recently revised Trademark Law that provides
some new enforcement tools, and we have recently seen improvement in
effective enforcement from Chinese agencies like AIC that we work with.
We also spend significant time with large Chinese ecommerce companies,
and I personally have traveled twice to Alibaba's campus in Hangzhou,
China, to identify and take down criminals using Alibaba's platforms to
sell counterfeit Belkin products in huge volumes. Alibaba has told me
repeatedly that they want their ecommerce sites and brands to meet the
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highest standards of integrity and support for U.S. businesses.
But our efforts are not as effective in China as they are, say,
here at home. China's comparatively weak rule of law in general, and an
IPR protection regime that still has a long way to go, both on paper
and in practice, before it even approaches international best
practices, pose big barriers for U.S. companies seeking effective
solutions to these problems. Simply put, IPR enforcement is less
developed, and less predictable, in China than it is in the West.
On that front, I want to point out that the former chairman of this
Committee, Ambassador Max Baucus, is doing a great job to help U.S.
companies in this fight. I have met with him, and his team of State and
USPTO officers, numerous times, and I can tell you directly that our
Mission in China is working vigorously with the Chinese government to
strengthen its IPR regime, and is also calling on Chinese ecommerce
platforms to live up to their ``no tolerance'' rhetoric.
There is no cut and dried answer to what Congress or any other
legislative or regulatory body across the globe can do to eliminate or
substantially reduce the online sale of counterfeit goods. Hearings
like these are an important step, and certainly helpful in highlighting
the nature and scope of the problem so that our legislators have the
``facts on the ground'' needed to craft the appropriate remedial
legislation. However, beyond that, it becomes much more murky, as one
approaches the intergovernmental/diplomatic side of the equation.
Belkin appreciates the efforts of the U.S. Government to work within
the current system. We also appreciate its efforts to raise the IPR bar
internationally and especially in the Asia-Pacific region. The high IPR
standards embodied in the Trans-Pacific-Partnership (TPP) would be
particularly conducive to our efforts in the Asia-Pacific region,
clearly with TPP members, but also, we would hope, with non-members
like China.
v. conclusion
Chairman Hatch, Ranking Member Wyden, and distinguished members of
the committee, I want to thank you again for the opportunity to testify
before you today. If I were to leave you with one last thought, it
would be that the business of counterfeiting is big business in other
countries, and one which many such countries make (both on paper and in
practice) hard to shut down, if not actively encourage. The branded
intellectual properties of American businesses are not only critical to
the success of those businesses but to the success of our American
economy as a whole, and, I would posit here, of the still expanding
global digital economy in which we all participate. We must ensure that
our representatives abroad actively monitor any activity in foreign
jurisdictions that may unfairly dilute the value of our American
brands. We love the digital marketplace, as we support all channels of
commerce, and appreciate that we, like other businesses, must evolve
with the evolution of such marketplaces. We believe in the value of
global ecommerce and its importance to Belkin and American job growth.
Like all of our peer-group companies, we are simply advocating for
level playing fields across all of those marketplaces, and believe
that, with fair competition, we and other American companies will
succeed in that competition by working harder and with more innovation
than our competitors abroad. We therefore need enhanced and predictable
IPR standards and laws, and corresponding enforcement mentality, across
the globe, especially in the Asia-Pacific region.
Belkin will continue to enjoy the opportunities and challenges that
U.S. businesses face in the digital age. And we will continue to work
with appropriate authorities around the globe to enforce our
intellectual property rights to shut down the sellers of counterfeit
Belkin products. We as a company are firmly committed to fighting those
who seek to damage our brand, undermine our valued customer
relationships and flood the market with inferior and potentially
dangerous products. We hope this information will be contributory to,
and helpful in, the decision-making ahead of you that will impact all
of us.
______
Questions Submitted for the Record to Tom Triggs
Questions Submitted by Hon. Orrin G. Hatch
Question. Do you believe that section 337 of the Tariff Act of 1930
is an important and necessary tool to help stop fakes from entering the
United States?
Answer. Section 337 of the Tariff Act of 1930 is an important and
necessary tool to help stop fakes from entering the United States. The
in rem jurisdiction of the ITC is an invaluable tool for domestic
businesses who cannot easily obtain jurisdiction over foreign
counterfeit manufacturers. The exclusion orders that the ITC can grant
in respect of counterfeit goods are a powerful remedy, particularly
where general exclusion orders can be granted.
Belkin has in fact filed a section 337 action with the ITC; in
2015, we filed a complaint against counterfeit manufacturers exporting
''Melkin''-branded copycat products to the United States, and we expect
an exclusion order to be granted shortly. Accordingly, while there may
have been some recent abuses of exclusion orders by patent trolls, we
(as an operator) appreciate the utility of this enforcement action as a
compliment to recourse to the courts.
Question. Congress has made protection of intellectual property
rights a key component of our international trade strategy for many
years. Ensuring that our international trading partners agree to strong
enforcement provisions in our trade agreements is a vital element of
this strategy.
During our hearing, I touched on the importance of making sure that
our trading partners effectively implement their obligations before we
allow an agreement to enter into force, but I think that even more can
be done. Not only must we put strong rules into place, but we must work
with our trading partners to make sure that adequate capacity building
is available so that they can develop the technical expertise to stop
fakes before they even cross U.S. borders.
Can you comment on whether you believe capacity building is an
effective tool to stop fakes from entering our country and, if so, what
type of capacity building is most effective?
Answer. Belkin actively works with partners around the globe to
educate them about our products, our supply chain, and how to identify
potentially counterfeit products. A combination of our local counsel
and customs team members provide training to the CBP and their
international equivalents. We attempt to target those ports where we
have found, or believe may be, significant sources for the export or
import of fakes. We also train our retail and distribution partners to
identify fakes.
Belkin has recently made the decision to pilot a new packaging
program which enables customs officials and warehouse staff to scan a
product with a smartphone app to identify whether it is fake or
genuine. We hope that this will make it even easier for our customs
partners, and for customers, to be able to locate fake products.
Empowering customs officials to identify products also has the
advantage of providing access to information about exporters and
importers that will aid our supply chain investigations, and ultimately
play a role in us finding, and shutting down, counterfeit manufacturers
and sellers.
______
Questions Submitted by Hon. Ron Wyden
Question. Belkin has grown out of the digital revolution, including
innovations in products that support the Internet architecture, and
innovative services that will mean we'll all be driving smart cars and
living in smart houses before long. Belkin demonstrates how the United
States is leading in these critical sectors for future growth. In
addition, your testimony mentions the value of global e-commerce and
its importance to Belkin and American job growth.
Can you talk about the benefits of e-commerce platforms from
Belkin's perspective?
Answer. Online marketplaces have expanded Belkin's and our
partners' opportunities to dramatically grow our market and open new
markets for U.S. businesses, and reach billions of potential customers.
These platforms have enabled countless small businesses to do the same.
According to a recent UPS report, online orders now surpass in-
store purchases, with 51% of shoppers' purchases, excluding groceries,
made online within the 3-month period prior to the report's
publication. Consumers who are not buying online are likely to be
researching products online before making a purchase, whether to locate
product specifications, read product reviews or simply find the best
prices.
In addition, distribution is really hard for hardware (hard goods)
businesses; and, to that end, it is really hard to get shelf space for
products in retail stores. Online platforms take the pain out of
distribution and level the playing field for U.S. businesses, both
large and small.
Virtually all of our retail store customers operate their own
websites in addition to their physical stores. In fact, some of our
largest customers are now exclusively online sellers, such as Amazon
and Newegg. Our own http://www.belkin.com/us/ websites are an important
tool for not only selling products to customers, but also for educating
them about who we are, what products we offer and how to communicate
with us.
While online platforms allow for the risk of counterfeit
proliferation by criminals worldwide, these online platforms,
paradoxically, can provide Belkin with a powerful tool to combat
counterfeit goods because technology increases transparency to identify
fakes and facilitate take-downs--and helps us to deeply educate our
customers about differences between genuine and fake products.
Question. In your testimony, you outline the many challenges that
Belkin faces in combating counterfeit products. As you point out,
counterfeits are not only poor quality, but can also pose a real safety
hazard. You also mentioned the need to work with CBP and other parts of
the government to ensure enforcement is as robust as possible. In the
Trade Facilitation and Trade Enforcement Act that came out of this
committee last year, and that was signed into law a few months ago, we
gave CBP new tools to collaborate with the private sector, including
the ability to share information about potentially infringing products
with the rights holder.
Can you speak to the role that tools like this play in the effort
to combat counterfeit products?
Answer. It is no secret that information is a valuable resource. We
state, again and again, that all we desire is a ''level playing field''
on which to compete. Participants is the big business of counterfeit
products prevent a level playing field. The new CBP tools enable us to
identify relevant participants in the counterfeit supply chain, and use
our private resources to pursue them. Belkin welcomes any tool that
provides us with access to more information, and more transparency--
getting Belkin and other U.S. businesses to a place where healthy
competition creates the best outcomes for consumers.
______
Prepared Statement of Hon. Ron Wyden,
a U.S. Senator From Oregon
In my view, there are two issues at hand today, and in many ways
they're two sides of the same coin. The first is about how more small
businesses are tapping foreign markets thanks to the digital economy
and e-commerce platforms. The bottom line is that the Internet is the
shipping lane of the 21st century, and every business in this country,
in one way or another, is digital.
Take the example of Bike Friday, an Oregon company that makes
folding bicycles. It might not always be bicycling season in Oregon,
but it's always summertime somewhere. The Internet is an essential
resource that enables Bike Friday to reach customers and process orders
24/7, regardless of time differences. It's the same story if you're in
steel, in manufactured goods, in clean energy, or in apparel. Digital
technology is a booster shot in the arm for exports at a time when 95
percent of the world's customers live outside our borders. American
businesses and their workers today aren't relying on listings in the
yellow pages or waiting for new customers to walk through the door.
Many of their storefronts are online, and they're always open.
That's one side of the coin. The other is the challenge represented
by counterfeit goods. For the trade enforcers, it used to be a matter
of identifying a shipping container filled with fake computer chips or
tennis shoes. Although those shipping containers are still coming in,
counterfeit goods are now also delivered in individual packages that go
straight to the doorsteps of American consumers. So the challenge of
rooting out counterfeits is a lot more difficult than it once was, and
it poses a direct threat to American jobs and businesses.
This is a firsthand issue for a lot of Oregon businesses in various
industries, from parts for autos and rail cars to high-tech semi-
conductors. Take Leatherman Tools as an example. They are a proud
Oregon employer that makes high-quality outdoor gear that gets a lot of
use in my State's recreation economy. But if you place an order for a
Leatherman Tools pocket knife from an unknown seller, there is a chance
that you'll receive a cheap knockoff. The result is a disappointed
consumer, and an Oregon manufacturer that has lost a sale. That's why
buyer reviews of sellers on platforms like Amazon and eBay--and
liability laws that enable those reviews--are so valuable to those
seeking authentic merchandise.
So our policies have to take both of these issues into account:
helping our workers and business to take advantage of digital shipping
lanes and staying ahead of the online schemers who want sneak their
counterfeit goods into our market and rip off jobs.
On a bipartisan basis, this committee took a major step forward
earlier this year in the fight against counterfeiters by passing the
toughest package of trade enforcement policies in decades. Thanks to
that legislation, Customs and Border Protection now has more tools to
sniff out illegal goods before they make it into the homes of American
consumers, including by encouraging CBP to work with U.S. rights-
holders on identifying potential counterfeits at the border.
And as the digital economy continues to transform our lives and
reshape the way business is done, this committee will have more work to
do. It's our job to understand how technology and policies empower
America's innovators, producers, and sellers. It's also our job to
understand how the trade cheats rip off Americans, and to respond
accordingly. I want to thank our witnesses for joining the committee
today, and I look forward to discussing how our digital economy fits
into what I call ``trade done right.''
______
Communications
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The Center for Fiscal Equity
14448 Parkvale Road
Rockville, MD 20853
Comments for the Record by Michael Bindner
Chairman Hatch and Ranking Member Wyden, thank you for the opportunity
to submit our comments on this topic. As usual, our comments are based
on our four-part tax reform plan, which is as follows:
A Value Added Tax (VAT) to fund domestic military spending and
domestic discretionary spending with a rate between 10% and 13%, which
makes sure every American pays something.
Personal income surtaxes on joint and widowed filers with net
annual incomes of $100,000 and single filers earning $50,000 per year
to fund net interest payments, debt retirement and overseas and
strategic military spending and other international spending, with
graduated rates between 5% and 25% in either 5% or 10% increments.
Heirs would also pay taxes on distributions from estates, but not the
assets themselves, with distributions from sales to a qualified
ESOPcontinuing to be exempt.
Employee contributions to Old-Age and Survivors Insurance (OASI)
with a lower income cap, which allows for lower payment levels to
wealthier retirees without making bend points more progressive.
A VAT-like Net Business Receipts Tax (NBRT), essentially a
subtraction VAT with additional tax expenditures for family support,
health care and the private delivery of governmental services, to fund
entitlement spending and replace income tax filing for most people
(including people who file without paying), the corporate income tax,
business tax filing through individual income taxes and the employer
contribution to OASI, all payroll taxes for hospital insurance,
disability insurance, unemployment insurance and survivors under age
60.
U.S. firms of all ownership types face many challenges doe to the
digital age. The most immediate of them is how sales taxes are
collected across state lines. Technology is also the answer to that.
Whatever the law is, it can be included in a simple digital application
based on state of sale and/or state of origin. Of course, if a Value
Added Tax is adopted federally with state participation, taxation will
occur where the work occurs rather than at the sales destination,
mooting the entire question. This would be true for our first bullet, a
Value Added Tax and our fourth, the Net Business Receipts/Subtraction
VAT.
There is a far more difficult question that business faces, one which
tax policy can help. In the current information economy, there is
pressure to hire the latest graduates who have the most recent
programming training--even when older, more expensive, staff might be
more productive overall, with better soft skills.
Older workers expect to be paid for their longevity and need to be paid
for their larger families. The latter is harder to do, because firms
that hire younger, childless workers can pay less money but offer a
higher standard of living--at least in the short term. The free market
in this instance is a failed market, because although larger families
benefit society--both in terms of demand and for retirement savings,
the incentives don't match up. In such cases, it is appropriate for the
government to offer a Child Tax Credit that is even larger than the
current credit. In our model, this would be paid as a wage as a credit
against the NERT/Subtraction VAT. This shows that such a credit is not
only for the poor, but could be a major part of middle class
compensation.
The NERT/Subtraction VAT would fund the employer contribution to Social
Security Old-Age and Survivors Insurance. We propose that the
progressivity now found in the benefits calculation portion of the
program be moved to the accumulation phase, with each worker receiving
the same credit from the federal government, regardless of wage level.
Further, a portion of that credit could be used to buy employer voting
stock, or for cooperative firms, one share of voting stock and the
remainder of preferred stock, preserving warm body voting. In either
case, longevity compensation would be shifted to continued stock
accumulation and dividend reinvestment or distribution, or a mix of the
two. Suddenly, it makes no sense to fire workers who are still valuable
because their direct expense is lower. Indeed, in a corporate model,
the more experienced workers would be an asset and would vote their
stock based on their experience level.
The employer contribution to Social Security OASI would remain a
function of income, mostly because society would not tolerate rolling
the entire program into the employer contribution, although that is
also an option.
On the income tax front, one of the remaining deductions to the income
and inheritance surtax would be sales of stock to a qualified ESOP.
This could accelerate the movement to employee-ownership, with the
longevity compensation scheme described above.
These solutions work in any firm, but they do the most good where the
need for a new approach is most needed: the digital sector.
What is not needed are attempts to cut taxes on business or income to
make capital more available. There is plenty of capital available now.
It is not being used because demand is anemic. The last time we tried
cutting capital gains tax rates to spur growth we got the tech bubble.
People got capital for all sorts of projects for which there was no
demand. Let us not repeat that mistake.
In the tech industry there exists the Computer-Aided Manufacturing--
International Multi-Attribute Decision (MAD) Model. The first element
of the model is the market. Not the stock market, but the product
market. Questions of the cost of capital are buried in Return on
Investment figures and are of little importance.
If a committee staffer joined a tech firm and tried to push investments
because of low tax rates, he would be fired as an ideologue and sent
packing back to the committee. If, however, he could promise more
spending in the tech industry by the government--or even more money for
social programs, then he would go far in industry. Of course, if he
could get a $15 minimum wage enacted (along with the measures suggested
above), which would spur pent up demand by the working class, they
might make him CEO.
Let's not make the same mistakes as the late 90s. Instead, give
families what they need and business will succeed beyond our wildest
dreams.
Thank you for this opportunity to share these ideas with the committee.
As always, we are available to meet with members and staff or to
provide direct testimony on any topic you wish.
______
eBay Inc.
1250 Eye Street, NW, Suite 1200
Washington, DC 20005
STATEMENT FOR THE RECORD OF BRIAN BIERON
Executive Director, Global Public Policy Lab
Chairman Hatch, Ranking Member Wyden, and members of the committee, I
would like to thank you for giving eBay Inc. the opportunity to submit
a statement for the record on this important topic.
eBay Inc. is a global commerce leader including the Marketplace,
StubHub and Classifieds platforms. Collectively, we connect buyers and
sellers around the world, empowering people and creating opportunity
through Connected Commerce. Founded in 1995 in San Jose, CA, eBay is
one of the world's largest and most vibrant marketplaces for
discovering great value and unique selection.
In 2015, eBay enabled $82 billion of gross merchandise volume and
today, 57% of our Marketplaces business is international. Our platforms
enable hundreds of thousands of U.S. entrepreneurs, small businesses,
as well as mid-size and large businesses, to reach customers around the
world. We empower over 162 million buyers globally on our marketplaces
with users in 190 countries. Our platform facilitates a new kind of a
global trade that is truly beneficial for Main Street businesses across
America.
eBay Inc. is an Internet and mobile technology-based business, but in
the 21st century global economy, every business that operates
internationally in any significant scale depends on access to, and
transmission of, digital goods and services, including logistics,
online services, distribution networks, finance and professional
services. The Internet accounts for 21% of GDP growth in advanced
economies and facilitates $8 trillion each year in e-commerce. The
United States is the unquestioned world leader in Internet-enabled
business, innovation and entrepreneurship. But data moving across
borders is not just an Internet industry phenomenon; it impacts every
business, including manufacturers, agricultural businesses, and
financial services providers. McKinsey reports that 75% of the impact
of the Internet is being realized by traditional industry.\1\ The U.S.
International Trade Commission estimates that digital trade has already
boosted U.S. gross domestic product by 3.4% to 4.8% through enhanced
productivity and reduced international trade costs, and the effect on
U.S. total employment ranged from no change to an increase of 2.4
million full-time equivalents.\2\
---------------------------------------------------------------------------
\1\ McKinsey Global Institute, ``Internet Matters: The Net's
Sweeping Impact on Growth, Jobs, and Prosperity'' (May 2011), available
at: http://www.mckinsey.com/insights/high_tech_
telecoms_internet/internet_matters.
\2\ U.S. International Trade Commission, ``Digital Trade in the
U.S. and Global Economies, Part 2,'' available at: http://
www.usitc.gov/publications/332/pub4485.pdf.
My team at eBay Inc. has spent the last 4 years conducting research on
the growth of global trade by technology-enabled small businesses.\3\
In April 2016, we released the United States Small Online Business
Growth Report \4\ which provides an in-depth look at trade and growth
figures for eBay-enabled small businesses and entrepreneurs (annual
sales of $10K or more) in all 50 states as well as the District of
Columbia. The report also provides a state-by-state snapshot of the
counties with the most eBay-enabled small business activity per capita.
---------------------------------------------------------------------------
\3\ The full range of research can be found here: http://
www.ebaymainstreet.com/lab.
\4\ Available at: http://www.ebaymainstreet.com/policy-papers/us-
small-online-business-growth-report.
The report findings reveal that nearly every eBay-enabled small
business in each state is an exporter, and that eBay-enabled small
businesses as a whole have been experiencing sales growth rates that
exceed their state economy averages. The research also shows that
active eBay-enabled small businesses emerge from communities
nationwide, rural and urban alike. These findings further bolster the
argument that the technology-enabled platform commerce model, which
significantly reduces the cost of doing business over distances, is a
highly inclusive model of trade. For example, our research revealed
that 97% of eBay-enabled small businesses in the United States export.
This figure dwarfs the export activity of traditional U.S. businesses,
which stands at approximately 1% nationwide. Additionally, nationwide,
eBay-enabled small businesses that export reach an average of 18
---------------------------------------------------------------------------
foreign markets.
Alongside these impressive statistics, there are many excellent
examples of small business success stories including:
Mac Griffiths from South Jordan, UT, specializes in the sale of
computer/
networking equipment and software. Mac left his full-time job in 2002
to open an eBay store and today has an office and warehouse to run the
business sand store inventory. His company employs five people and
exports 25% of its sales.
Kyle Resnick lives in Portland, OR, and sells lamination
equipment and supplies. His father, Russ, started Oregon Laminations
Company in 1984 and Kyle helped expand the business online following
the 2008 recession. His eBay store has allowed the business to grow and
reach international markets and Kyle now exports 10% of his products.
This trade activity represents a new model of SME exporting that has
emerged in parallel to the SME ``Global Value Chain'' model where small
enterprises engage in trade as a component of a giant commercial
enterprise. We have coined the term ``Global Empowerment Network'' to
describe this new model by which small businesses are able to create a
storefront presence online and compete directly in global markets
through e-commerce platforms with vibrant customer bases. The Global
Empowerment Network combines a set of services and conditions enabling
SMEs to transcend borders, reach customers on a global scale, and
facilitate business transactions.
There are four key building blocks that fuel the Global Empowerment
Network: (1) Connectivity to the global Internet at lost cost and
without gatekeepers; (2) Global platform-based marketing, marketplace,
and payment services; (3) Efficient, modern, and ``connected'' package-
level logistics and delivery services; and (4) Legal, regulatory, and
public policy framework supporting direct SME-to-consumer global
commerce.
The report also provides key recommendations for policy makers to drive
even greater economic growth among small American businesses that use
the Internet to export. These include:
Increase low-value customs de minimis thresholds across the
globe;
Support the Trans-Pacific Partnership Agreement (TPP) and other
efforts to modernize trade policy;
Modernize postal systems to support small business digital
trade;
Promote the U.S. standard of intellectual property law in trade
agreements;
Ensure a free and open Internet;
Explore flexible international regulatory cooperation solutions;
and
Provide coordinated export promotion assistance to Internet-
enabled SMEs.
The kind of cross-border trade being done by these, and hundreds of
thousands of other ``micro-multinationals'' spread across America, is
growing rapidly. Research from Progressive Economy finds that low-value
or ``micro'' U.S. exports increased by 103% between 2005 and 2010, more
than twice the increase for all exports.\5\ Moreover, the 2013 World
Economic Forum (WEF) Enabling Trade report found that the use of
technology platforms can reduce the burdens small businesses face when
selling overseas, increasing cross-border small business sales by 60-
80%.\6\
---------------------------------------------------------------------------
\5\ Gresser, Edward, ``Lines of Light: Data Flows as a Trade Policy
Concept'' (2012).
\6\ World Economic Forum, ``Enabling Trade'' (2013).
Of course, these unprecedented new Internet-enabled small business
trade trends have created challenges for existing trade policy and
enforcement mechanisms. As aptly identified by the committee, one
---------------------------------------------------------------------------
challenge is the issue of counterfeit goods.
To be clear, counterfeits are not welcome on eBay. eBay's success as a
business depends on a climate of confidence and trust. Counterfeit
products can have a negative impact on brand owners, retailers and
eBay's community of legitimate sellers who trade authentic goods on
eBay every day. They also negatively impact the confidence and trust of
many buyers. That is why we have spent close to 20 years building
teams, policies and processes to protect buyers, sellers and third-
party brand owners. Those efforts include:
The Verified Rights Owner Program (VeRO) is used by more than
40,000 rights owners to quickly and easily report alleged intellectual
property infringement, including counterfeits or copyright
infringements.
eBay's Money Back Guarantee applies in the rare case the buyer
believes that they have purchased a counterfeit item.
eBay has dedicated teams focused on ensuring we have the right
technology and policies in place to tackle problematic goods, which
includes tools and solutions that help detect patterns of fraudulent
activity.
eBay's Global Asset Protection team trains law enforcement and
retail loss prevention officials about our services and how to partner
with us to carry out investigations.
We are fully committed to identifying and eliminating counterfeit
listings and continue to devote substantial human and technological
resources, keeping sellers of counterfeit goods off our platform.
Finally, it is key to realize that when examining the challenges and
opportunities for U.S. business in the digital age, our discussion is
not merely about business or policy; it is about people. Globalization
and trade are fundamental realities of the world in which we live.
Unfortunately, a significant number of people have not yet been able to
directly take part in the global marketplace because they own or work
in businesses that have, traditionally, been too small or too remote.
But now the Internet, and the global data-based businesses and
platforms that underpin 21st-century commerce, are enabling small
business and consumers, for the first time, to truly enjoy the benefits
of direct participation in the global market.
We sit at the dawn of a new era of globalization that is far more
inclusive than the one that preceded it--a future where millions of
small businesses from across the United States can participate in their
local economy and also increase revenue through access to customers
around the world. This is good economics because it means more growth
and wealth, and it is good for society because it means a more
inclusive future. We need to make the right policy choices to achieve
this future.
Chairman Hatch, Ranking Member Wyden, and members of the committee, we
respectfully submit this statement for the record and pledge to work
with you to ensure that U.S. small businesses and consumers can realize
the true benefits from the Internet.
______
International AntiCounterfeiting Coalition (IACC)
1730 M Street NW, Suite 1020
Washington, DC 20036
(202) 223-6667
[email protected]
http://www.iacc.org/
Chairman Hatch, Ranking Member Wyden, and members of the committee:
The International AntiCounterfeiting Coalition (``IACC'') is pleased to
offer this written statement for the record on the issue of,
``Challenges and Opportunities for U.S. Business in the Digital Age,''
and we thank you for examining this important topic during your recent
hearing. We are available at your convenience to discuss any questions
you might have regarding these comments, or to otherwise provide
clarification of our submission.
With a membership composed of approximately 250 corporations, trade
associations, and professional firms, and founded over 35 years ago,
the International AntiCounterfeiting Coalition is one of the world's
oldest and largest organizations representing exclusively the interests
of companies concerned with trademark counterfeiting and the related
theft of intellectual property. The members of the IACC represent a
broad cross-section of industries, and include many of the world's
best-known companies in the apparel and luxury goods, automotive,
software, tobacco, electronics, consumer goods, entertainment,
pharmaceutical, and other product sectors. The IACC is committed to
working with government and industry partners in the United States and
abroad to strengthen IP protection and enforcement, and to raise
awareness regarding the range of harms caused by counterfeiting and
piracy.
The comments provided herein focus on challenges faced by intellectual
property owners with regard to three main areas of concern, each
relevant to the committee's jurisdiction. The first of these is the
evolution of sales and distribution models of counterfeit goods in the
digital age, including the transition from a traditional multi-level
distribution model associated with overseas production and ``brick-and-
mortar'' retail sales to the increasingly prevalent direct-to-consumer
e-commerce model. Next, we examine continuing challenges facing rights-
holders in their efforts to work in a collaborative fashion with their
public sector partners in enforcement, specifically with regard to the
exchange of information regarding shipments of suspected counterfeits
presented for entry at U.S. borders. Finally, we would like to draw
attention to an ongoing program operated by CBP which, although well-
intentioned, is viewed by the IACC as detrimental to rights-holders'
overall investigative and enforcement efforts.
Evolving Distribution Models
Historically, the distribution chains for counterfeit goods have
largely mirrored those seen for legitimate commerce. Illicit imports
have, until relatively recently, arrived to the U.S. market in large-
scale shipments via container vessels. It should not be surprising
then, that a pronounced shift away from this traditional distribution
model has been seen in recent years, correlating with the explosive
growth of online commerce. The proliferation of websites and online
marketplaces offering counterfeit goods directly to consumers has
drastically altered the landscape, presenting significant challenges,
not only to rights-holders, but to law enforcement and Customs
officials, legitimate service providers whose services are exploited to
facilitate the illegal activity, and to consumers. With this
submission, we wish to highlight some of these challenges, and the
efforts to address them being brought to bear by both the private and
public sectors.
As rights-holders and others have begun to analyze the online
trafficking of counterfeit goods, a great deal of attention has been
placed on the so-called ``choke points'' in the online ecosystem. How
do consumers find counterfeit goods online, and how do counterfeiters
offer their illicit wares to consumers? How are the goods purchased and
sold? What sort of infrastructure is essential to get the goods from
the seller to the buyer? Each step in the distribution chain presents
an opportunity for rights-holders and enforcement personnel to disrupt
the counterfeiters' illegal businesses.
There are two primary ways in which consumers discover counterfeit
goods online: search and advertising. Whether the consumers are
actively seeking out counterfeit products, or as is often the case,
simply seeking a deal on authentic goods, finding a site offering
counterfeit products online is often as simple as going to one's
preferred search engine and typing in the words, ``cheap [insert brand
name].'' Counterfeiters often employ sophisticated search engine
optimization strategies to ensure that their sites appear at, or near,
the top of organic search results, and frequently invest in paid
advertising that appears alongside organic results. Search providers,
meanwhile, have typically been reluctant to engage in the wholesale
removal or de-indexing of websites for a variety of reasons. And
although direct links to infringing items or specific pages on a site
may be removed, neutral search providers enjoy broad immunity from
liability based on their inclusion in search results of sites dealing
in illicit products. These reasons, coupled with the staggering number
of sites online that offer counterfeit goods for sale, have greatly
diminished the effectiveness (and rights-holders' reliance upon) notice
and takedown procedures that have been a mainstay of online enforcement
regimes for years.
Online sellers of counterfeits, just like legitimate online businesses,
also rely on a variety of infrastructure providers, from domain
registrars, Internet service providers, web hosting services,
marketplace platforms, and others to maintain their presence online.
Add into that mix the payment service providers, including credit card
companies, and delivery services--whether express consignment or
traditional mail providers--and there are a wide array of potential
options available to rights-holders and enforcement agencies to bring
pressure to bear on the counterfeiters. For several years now, the IACC
has sought to actively engage with partners in these various sectors to
develop effective and efficient ways to deter illicit online sales. Our
RogueBlock \1\ and IACC MarketSafe \2\ programs offer examples of the
positive impact that such collaboration can have.
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\1\ http://www.iacc.org/online-initiatives/rogueblock.
\2\ http://www.iacc.org/online-initiatives/marketsafe.
The IACC launched its RogueBlock program in January 2012, as a means
to providing a streamlined, simplified procedure by which rights-
holders could report online sellers of counterfeit or pirated goods
directly to participating credit card and payment processing network
partners. This effectively facilitated action against the merchant
accounts associated with those sites, and diminished the ability of
individuals to profit from their illicit sales. The program has seen
great success, and significant expansion over the past 3 years, and has
been viewed as a ``win-win'' for all of the parties involved. Rights-
holders are able to provide timely, relevant intelligence, and in the
process aid financial service providers in policing bad actors who seek
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to misuse legitimate commercial tools for illegitimate purposes.
Our goals upon commencing the RogueBlock program were: (1) to increase
the cost of doing business for, and decrease profits to, the
counterfeiters; (2) to shrink the universe of third-party acquiring
banks willing to do business with rogue merchants; (3) to facilitate an
efficient use of resources by both IP owners and our partners by
sharing relevant data and avoiding the duplication of efforts; and (4)
to disrupt and dismantle counterfeit networks. By any measure, we are
achieving those goals. Equally important, the strong partnerships we've
developed in the financial sector are enabling us to continue
enhancing, expanding, and evolving to face new challenges in the online
space. To date, our collaborative efforts with the payment sector have
resulted in the termination of over 5,000 merchant accounts in
connection with the illegal sale of counterfeit goods online. By
conservative estimates, upwards of 200,000 websites have been deprived
of the means to accept payment for their illegal products.
In a similar vein, the IACC has worked closely with the Alibaba Group
to address the trafficking of counterfeit goods on two of the world's
largest online marketplaces--Taobao and Tmall. Since that program began
operating in 2014, we have succeeded in removing over 200,000 listings
for counterfeit goods from those marketplaces, and more than 5,500
sellers of illicit goods have been permanently banned from the
platforms. We recently announced the forthcoming expansion of the
program, through which our system will be made available to rights-
holders at no cost.
These existing programs target two of the previously mentioned choke
points in the modern distribution chain--the online ``storefront''
where items are displayed to potential buyers, and the point of sale.
We will continue to work with those partners, and with other industry
sectors, to further impact this illicit trade. During the past year, we
have had some positive discussions with the express shipping industry,
which we believe can play a vital role in addressing these problems,
and we're hopeful that we will find similar success to that seen in our
other partnerships.
Information Disclosure and Exchange
Historically, the owners of intellectual property rights have provided
invaluable assistance to those CBP personnel tasked with the
enforcement of IPR at our nation's borders. This assistance has been
necessitated by a number of factors, including the overall volume of
imports passing through U.S. ports, the variety of goods presented to
CBP for inspection, and more recently, the increasing ability of
counterfeiters to manufacture near-perfect copies of products and
packaging. These, and other factors, have contributed to the difficulty
faced by CBP in determining whether those goods before them were
genuine or counterfeit. Customs officials cannot, and should not, be
expected to maintain, across countless brands and products, the
expertise required to make such determinations with the level of
efficiency and accuracy necessary to achieve the agency's twin goals of
trade facilitation and IPR enforcement. The recognition of that fact is
what drove CBP's and rights-holders' traditional collaboration.
On April 7, 2000, U.S. Customs published Customs Directive 2310-008A
\3\ (hereafter, ``the Directive''), advising personnel that the
disclosure to rights-holders of certain information regarding
shipments, prior to seizure of those goods, was impermissible, even
when a disclosure was made for the limited purpose of obtaining
assistance to determine whether the goods were genuine or counterfeit.
Specifically, the Directive required CBP officers to ``remove or
obliterate any information indicating the name and/or address of the
manufacturer, exporter, and/or importer, including all bar codes or
other identifying marks,'' prior to the release of any sample to a
trademark holder. Though issued in 2000, by most reports, the
Directive, and the procedures prescribed thereby, were not fully
implemented until 2007-2008. The IACC, in fact, heard relatively few
reports from rights-holders of any change in practice until 2006-2007.
Once implemented however, the Directive posed a severe impediment to
the public private cooperation that, previously, had been the norm.
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\3\ U.S. Customs and Border Protection--Customs Directive 2310-
008A, http://www.cbp.gov/sites/default/files/documents/2310-008a.pdf.
The basis for CBP's change in policy appears to be tied to an overly-
formalistic reading of the relevant regulatory code sections related to
the sharing of information regarding, and samples of, suspect
shipments, and a similar, overly literal interpretation of the Trade
Secrets Act (18 U.S.C. 1905 (``the Trade Secrets Act'')). The apparent
conflict, as seen by CBP, was between CBP officers' authority to seek
assistance by providing a physical sample, or a digital image of those
goods, to a trademark owner from the date the goods were presented for
inspection, and the timing authorized for the disclosure of other
information related to the shipment.\4\ While rights-holders typically
incorporate a variety of technologies to assist in the authentication
of their legitimate goods, CBP believed that, if those technologies or
other information evident on the goods or their packaging revealed to
the trademark owner any information that would otherwise only be made
available post-seizure, then any such markings must be removed or
redacted before providing the samples to the rights-holder. Likewise,
if the provision of a sample, or photographic images of the goods in
question, might reveal confidential or proprietary information
purportedly belonging to the importer, then such a disclosure would
violate the Trade Secrets Acts,\5\ and in turn expose CBP officers to
criminal prosecution.\6\
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\4\ At that time, the relevant code section, 19 CFR 133.25(b),
permitted the disclosure of: the date of importation, the port of
entry, a description of the merchandise, the quantity involved, and the
country of origin of the merchandise, from the time the goods were
presented to Customs for inspection. However, 19 CFR 133.21(c),
authorized the disclosure of the identity of the manufacturer,
exporter, and importer, only after a seizure had been made.
\5\ 18 U.S.C. 1905.
\6\ The Trade Secrets Act prohibits any disclosure, not authorized
by law, of a broad range of information a government employee obtains
or has access to in his or her official capacity.
The IACC expects that the committee is intimately familiar with these
issues, as they've been addressed by Congress twice during the past 5
years. It was first addressed by language included in Section 818(g)(1)
of the National Defense Authorization Act of Fiscal Year 2012
(``NDAA'').\7\ Despite that explicit authorization, CBP published an
Interim Rule in April of 2012, creating what rights-holders viewed as
an arduous and inefficient process requiring CBP personnel who were
seeking assistance in determining whether or not goods were
counterfeit, to first seek that assistance from the importer. As
drafted, the Interim Rule included a procedure ``intended to achieve
the policy goals of the NDAA in a manner consistent with maintaining
the flow of information to the government, fostering competition,
keeping prices low, and maintaining consumer choice.'' The rule
required CBP to provide the importer of goods suspected of being
counterfeit with an opportunity to demonstrate, within 7 days
(exclusive of weekends and holidays) of the issuance of a notice of
detention, that the goods in question did not bear a counterfeit mark.
``Only absent such a demonstration by the importer will information,
images, or samples be shared with the right-holder.'' The IACC outlined
its numerous concerns with the adoption of the Interim Rule in its
submission to CBP and the Treasury Department, dated June 25, 2012.\8\
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\7\ National Defense Authorization Act for Fiscal Year 2012,
Section 818(g)(1), stating, ``IN GENERAL.--If United States Customs and
Border Protection suspects a product of being imported in violation of
section 42 of the Lanham Act, and subject to any applicable bonding
requirements, the Secretary of the Treasury may share information
appearing on, and unredacted samples of, products and their packaging
and labels, or photographs of such products, packaging, and labels,
with the right holders of the trademarks suspected of being copied or
simulated for purposes of determining whether the products are
prohibited from importation pursuant to such section.''
\8\ http://www.iacc.org/downloads/key-issues/
Submitted_Comments_re_Disclosure_of_Informat
ion_for_Certain_IPR_at_the_Border.pdf.
In September of 2015, over 3 years after the publication of the Interim
Rule, CBP published a Federal Register Notice,\9\ amending and
finalizing the Interim Rule regarding the ``Disclosure of Information
for Certain Intellectual Property Rights Enforced at the Border.''
Among the most relevant changes embodied in the Final Rule, as adopted,
were:
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\9\ Disclosure of Information for Certain Intellectual Property
Rights Enforced at the Border, 80 Fed. Reg. 56370 (September 18, 2015).
The elimination of the optional 30-day extension period for
detention of goods (19 CFR 133.21(b)(1));
Acknowledgement of CBP's authority to seek assistance from the
owner of a mark at any time after the presentation of goods for
examination (19 CFR 133.21(b)(2)(i)(A);
Concurrent provision of limited importation information (19 CFR
133.21(b)(2)(i)(B)); and
Disclosure/Provision of Redacted and Unredacted Photos or
Samples (19 CFR 133.21(b)(3) and (b)(5)).
The Final Rule, as amended, though a significant improvement over the
Interim Rule, remained substantially unchanged with regard to CBP's
position on the disclosure of unredacted images or samples to rights-
holders. Under the adopted rule, such disclosure would only take place
in the event that the importer either failed to respond in a timely
manner, or provided CBP with insufficient proof that the goods in
question are authentic. CBP maintained its authority to provide
redacted samples or images of the merchandise and its packaging, at any
time after it has been presented for examination.
CBP further maintained that its disclosure of unredacted photos or
samples and the information provided to a mark owner under the
regulation may be subject to the Trade Secrets Act, and that the
information was provided only for the purpose of assisting CBP in
determining whether the merchandise had a counterfeit mark. The IACC
strenuously objected to CBP's and Treasury's interpretation of the
Trade Secrets Act, and its purported prohibition on the agency's
sharing of information with rights-holders. While such disclosure might
reasonably be said to be prohibited in the absence of statutory
authorization, the NDAA expressly provided that authority.
The issue was revisited by Congress with the recent enactment of the
Trade Facilitation and Trade Enforcement Act. Section 302 of that
legislation superseded the provisions of the NDAA (which were subject
to a sunset clause triggered by the Trade Facilitation bill's
enactment), and further clarified CBP's authority to share information
with affected trademark and copyright owners, again providing explicit
statutory authority overriding the Trade Secrets Act's general
prohibition. It is also worth noting that the Trade Facilitation and
Trade Enforcement Act provides no similar grant of authority or
direction to share information with any other party, including the
importer of the goods. We are currently awaiting further rulemaking
actions by the Department of Homeland Security and the Department of
Treasury to implement these provisions, and would encourage close
oversight by the committee to ensure that the will of Congress is
properly expressed in that implementation.
CBP Pilot Program--Abandonment of Infringing Goods
In the summer of 2015, the IACC became aware of a pilot program being
operated by U.S. Customs and Border Protection in collaboration with
the express shipping industry (the ``Abandonment Program'' or ``Pilot
Program''). The genesis of the Abandonment Program was a recommendation
of CBP's Commercial Operations Advisory Committee (COAC) Trade
Enforcement and Revenue Collection Subcommittee.\10\ Specifically, the
COAC recommended that CBP collaborate ``with its express consignment
stakeholders to develop a simplified and mutually beneficial IPR
enforcement process in the express consignment environment through
which CBP would offer the importer and the U.S. consignee an
abandonment option on detention notices for shipments detained by CBP
on suspicion of trademark or copyright violations.'' At the May 22,
2014 public meeting of the COAC, a status report was presented by the
Office of Trade Relations Trade Enforcement and Revenue Collection
Subcommittee, referencing the ``Simplified Seizure Process'' on May 15,
2014. That report highlighted provisions of the express carriers' terms
of agreement which permit the abandonment of suspect goods, and
suggesting the voluntary process as a means of increasing CBP's
efficiency in handling small consignments, while ``providing all
parties of interest with their legal due process.'' \11\ Regrettably,
as discussed herein, the development of this initiative took place with
minimal input from rights-holders, and the program, as implemented,
fails to take into account the interests and legal rights of
intellectual property owners specifically provided for in the relevant
statutory and regulatory provisions.
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\10\ FY 2013-FY 2015 COAC RECOMMENDATIONS, Term 13, Recommendation
Number 13047, May 22, 2014. Available at: http://www.cbp.gov/sites/
default/files/documents/COAC%20Recommendations%2013th%20Term.pdf.
\11\ Office of Trade Relations Trade Enforcement and Revenue
Collection Subcommittee Status Report, May 22, 2014. Available at:
http://www.cbp.gov/sites/default/files/documents/Trade%
20Enforcement%2oand%20Revenue%20Collection%20Subcommittee%20Status%20Rep
ort.pdf.
Under the Abandonment Program, CBP personnel working in express
shipping facilities around the United States target shipments for
suspected IP violations. If, upon inspection, the goods are believed to
violate an IP right,\12\ CBP provides notice of the suspected violation
to the express shipping company (as the importer of record). The
shipping company then forwards that notice to the ultimate consignee
(i.e., the individual to whom the package was to be delivered), and the
ultimate consignee is given the option of abandoning the goods, or
contesting that the importation of the goods violates an IP right. If
CBP's determination is contested, then Customs' personnel follow the
standard detention, seizure, and forfeiture process. If the consignee
abandons the goods, or fails to respond to the notice, the goods are
destroyed under Customs' supervision, at the expense of the
participating express shipping company. CBP has lauded the results of
the Pilot Program, citing the cost and time savings involved in
comparison with the formal detention and seizure process set forth in
Customs' regulations. And while rights-holders support the underlying
goal of increasing CBP's capacity to remove these harmful products from
the supply chain, the IACC has expressed serious concerns with the way
in which CBP is achieving this increased efficiency. Namely, the
Abandonment Program foregoes the reporting requirements mandated under
existing regulations, depriving affected rights-holders of valuable
information that would traditionally be supplied via detention and
seizure notices. Such information is vital to rights-holders (and in
turn, to law enforcement) in developing the intelligence necessary to
build criminal and civil cases. However, CBP has indicated that,
pursuant to the Pilot Program, they've included no process whatsoever
to retain the relevant information about the abandoned shipments--date
of importation, port of entry, the registered marks involved, the
quantity or value of the goods involved, etc.--or to report such data
to the affected rights-holders. CBP's determination that it is not
required to provide notice to rights holders under the Pilot Program,
as it is mandated to under the traditional model, is also greatly
troubling--particularly in light of the above-discussed issues related
to pre- and post-seizure disclosure of information. While the
Abandonment Program creates efficiencies by easing CBP's administrative
burden, it does so by cutting off a key enforcement tool.
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\12\ CBP has also established threshold requirements which a
shipment must meet to qualify for the Abandonment Program. Among these
are that the declared value of the goods must not exceed $2500, the
trademarks at issue must be recorded with CBP, and the goods must not
fall into a restricted category (e.g., the goods in question should not
present a health and safety risk or a national security concern).
A final concern of the IACC is the way in which this program was
initiated, and continues to operate. Outside of the COAC forum, we are
aware of no public announcement of the program prior to its initiation,
and no Federal Register notice or opportunity for public comment.
Though it has consistently been characterized as a ``pilot program,''
the Abandonment Program has continued uninterrupted for more than a
year, and to our knowledge, CBP has no plans for concluding the
program, or even suspending it, in order to conduct a formal analysis
of its effectiveness. Accordingly, we would again ask the committee to
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monitor this issue, and provide oversight as appropriate.
On behalf of the IACC, I thank you for your consideration of these
comments, and I would welcome the opportunity to discuss these matters
further with the committee.
Respectfully submitted,
Travis D. Johnson
Vice President--Legislative Affairs, Senior Counsel
______
The Internet Association
1333 H Street, NW, 12th Floor, West
Washington, DC 20005
https://internetassociation.org/
Statement for the Record of Michael Beckerman, President and CEO
Chairman Hatch, Ranking Member Wyden, and members of the Senate Finance
Committee, thank you for the opportunity to provide a statement for the
record on the ``Challenges and Opportunities for U.S. Business in the
Digital Age.''
The Internet Association represents nearly 40 of the world's leading
Internet companies.\1\ Our mission is to foster innovation, promote
economic growth, and empower people through the free and open Internet.
As the voice of the world's leading Internet companies, our job is to
ensure that all stakeholders understand the benefits the Internet
brings to our economy. Internet platforms are a global driver of the
innovation economy, with the Internet sector representing an estimated
6 percent of U.S. GDP in 2014, accounting for nearly 3 million American
jobs. In addition to the economic contribution of the Internet
industry, the Internet Association's member companies are transforming
the way we do business at home and abroad by providing unprecedented
growth opportunities for U.S. businesses and entrepreneurs.
---------------------------------------------------------------------------
\1\ The Internet Association's members include Airbnb, Amazon,
Coinbase, DoorDash, Dropbox, eBay, Etsy, Expedia, Facebook, FanDuel,
Google, Groupon, Handy, IAC, Intuit, LinkedIn, Lyft, Monster Worldwide,
Netflix, Pandora, PayPal, Pinterest, Practice Fusion, Rackspace,
reddit, Salesforce.com, Snapchat, Spotify, SurveyMonkey, Ten-X,
TransferWise, TripAdvisor, Turo, Twitter, Uber Technologies, Inc.,
Yahoo!, Yelp, Zenefits, and Zynga.
Cross-border trade is no longer defined by shipping containers and
freight lines. Buyers and sellers from around the globe are now
connected instantaneously. Small businesses and entrepreneurs are
harnessing the power of the Internet to reach new markets, connect with
new customers, and increase their productivity. The Internet is also
having a dramatic impact outside the Internet industry. A recent study
found that more than 75 percent of the economic value created by the
Internet is captured by companies in traditional industries, many of
them small businesses.\2\ Internet platforms are introducing
international audiences to American musicians, writers, and directors
through services like Spotify and Netflix, promoting small hospitality
providers through TripAdvisor and Yelp, and are revolutionizing how
entrepreneurs source materials and supply their customers through
Amazon. Frictions in international marketing are also alleviated by
platforms like eBay that make sellers' products fully searchable, and
mediums like Facebook Live that give entrepreneurs the ability to
showcase their products to a global audience in real time.
---------------------------------------------------------------------------
\2\ McKinsey Global Institute, ``Internet matters: The Net's
sweeping impact on growth, jobs, and prosperity,'' May 2011 (http://
www.mckinsey.com/industries/high-tech/our-insights/internet-matters).
Internet platforms are vectors for growth for the rest of our economy.
Businesses of all sizes are embracing Internet platforms to effectively
and efficiently sell their goods and services. As Internet Association
member companies continue to drive innovation, our industry is
creating, promoting, and disseminating platforms that encourage lawful
access to information and content. While cooperation, enforcement, and
education are helping minimize illegal activities, our members are
taking the lead in proactively addressing intellectual property theft
---------------------------------------------------------------------------
and the sale of counterfeit items through their platforms.
For example, more than 40,000 rights owners are able to quickly and
easily report instances of alleged intellectual property infringement
through eBay's Verified Rights Owner (VeRO) program. Reports of alleged
intellectual property theft are promptly investigated and any unlawful
activity can be reported to the eBay customer support team via links.
Etsy is also making intellectual property infringement a priority.
User-friendly tools allow rights holders to submit notices of
intellectual property infringement and, upon receipt of the notice,
Etsy's legal team personally reviews each case and directs sellers to
educational resources available on their platform. Under Amazon's Anti-
Counterfeiting Policy, sellers' accounts are suspended or terminated
immediately for engaging in the sale of counterfeit goods. Amazon has
the ability to destroy counterfeit inventory in fulfillment centers
without reimbursement and can withhold any remittances or payments owed
to the seller. Additionally, search engines like Google and Yahoo!
continuously remove content from their services when rights holders or
reporting organizations submit requests that infringing activities are
occurring.
We welcome comments made by Bruce Foucart, Assistant Director, United
States National Intellectual Property Rights Coordination Center, in
his testimony that highlighted some of the ``ways [they] are
effectively working with online industry'' to help minimize infringing
activities and educate consumers on the risks of purchasing
counterfeits. Our industry looks forward to continuing this meaningful
partnership, but respectfully disagrees with Mr. Foucart's assessment
that policy changes are needed to ``hold [the Internet industry's] feet
to the fire'' in combating intellectual property theft. In the United
States, rights holders and consumers already rely on a balanced and
well-functioning system of intellectual property protections. The
Internet Association believes efforts to combat theft are best directed
toward ensuring U.S. trading partners are adopting policies that
reflect our domestic approach.
As the Committee on Finance continues to evaluate opportunities and
challenges for U.S. businesses, the Internet Association urges Congress
and the executive branch to continue promoting innovation-friendly,
balanced intellectual property protections through trade agreements.
The United States Trade Representative has incorporated elements of the
Digital Millennium Copyright Act into trade agreements since 2004 and,
for the first time, the Trans-Pacific Partnership acknowledged the full
balance of U.S. copyright law--requiring countries to adopt innovation-
critical limitations and exceptions, as well as safe harbors, in order
to protect the basic functionality of the Internet, social media, and
online platforms. Encouraging U.S. trading partners to adopt and
implement these critical protections in trade agreements will help
provide important safeguards for rights holders, Internet platforms,
and consumers alike.
Thank you again for the opportunity to provide comments on behalf of
our member companies. The Internet Association looks forward to
continuing to engage with you on these matters in the future.
______
Venus Fashion, Inc.
11711 Marco Beach Drive
Jacksonville, FL 32224-7615
Submitted Testimony for the Record of Jim Brewster, CEO
Chairman Hatch, Ranking Member Wyden, and members of the committee,
thank you for allowing me to share my experience with some of the
challenges facing companies like Venus in the global marketplace during
this ever increasing digital age.
My name is Jim Brewster, and I am the Chief Executive Officer of Venus
Fashion, Inc. Venus is a true American success story that was started
in the college dorm room of company founder, Daryle Scott. What began
as a company manufacturing competition suits for body builders has
grown into a highly successful company based in Jacksonville, FL that
designs and manufactures swimwear and fashion clothing for women. Every
order for the business flows into Jacksonville and every customer's
order is shipped out of our Jacksonville warehouse and distribution
center. In addition, Venus's marketing, swim design, call center and
administrative offices are located in Florida and we handle swim
manufacturing via an affiliated company at the same location.
Venus is a catalog and Internet based company. The digital age has
created outstanding opportunities for companies like ours as we are
able to reach a much larger number of customers online. As proof of the
opportunities created, over the past 7 years, the number of employees
at Venus has grown from less than 200 to over 700 today to support the
elevenfold increase in sales. As customers' purchasing habits continue
to evolve to more reliance on shopping online, companies like ours are
well-positioned to take advantage of this evolution.
However, our ability to fully realize these opportunities is threatened
by a number of serious challenges facing Venus in the new digital age.
In fact, these challenges are so severe they don't just threaten our
ability to grow, they actually threaten the competitiveness and
sustainability of Venus and likely all American clothing companies. If
we do not address these issues, it will become increasingly difficult
for companies like ours to have any presence in the United States.
Starting in 2014, Venus began to find our copyrighted photographs and
copies of our products on Chinese websites and other digital
advertising outlets. These Chinese companies steal the copyrighted
photographs of some of our best selling products and advertise the
``same'' item at a deep discount to unsuspecting American consumers. In
some cases the photographs are identical to those on the Venus website
and in other cases these Chinese companies might take the extra step to
crop-off the head of the model, photo-shop the product to a different
color or simply mirror the photo. Online shoppers see the identical
photograph for the similar product sold on the Venus website advertised
for a fraction of the cost on Chinese websites like Twinkledeals and
Rosegal, as well as in their social media feeds and search engines.
Since the pictures are the same, customers often believe they are
purchasing the same product sold by Venus at a discount directly from a
Chinese retailer. We regularly see posts on the Venus social media
websites where customers comment about how you can buy the same swim
suit or dress on one of these Chinese websites for significantly less
than the price of the item on our Venus site. Along the same lines, a
number of customers also express frustration after placing an order
about seeing the ``exact same product'' being sold for a fraction of
the cost on a different website.
The reality of the situation is that the only thing that is the same
about the product is the picture the customer sees online. When the
customer receives the item from the Chinese retailer, they are nothing
like the pictures they saw in the online advertisement. The clothing
items are usually made of inferior materials, cheaply stitched and
often arrive in sizes so small they would barely fit a child. Customer
service is non-existent and the American buyer has no option for
returning the product or getting a refund. These false and misleading
advertisements using our stolen images result in consumers receiving
merchandise far below the quality they are expecting, pulling sales
away from Venus and greatly damaging Venus's brand. Although these
disappointed customers are unlikely to order from these Chinese
companies again, many customers also vow never to buy from Venus again
because they were misled to believe that Venus sells the same poor
quality products. As a result of the stolen photos and deceptive
advertising, our company misses out on both the initial transaction and
any future transaction from an individual who was clearly interested in
purchasing our products.
Venus has engaged in the long and drawn out process of protecting our
intellectual property, but with very limited success. In February of
2014, Venus filed a complaint against the website dressvenus.com, who
was infringing on both our trademarked name and our copyrighted photos.
Twenty months after filing the complaint, a liable company was finally
tracked down in China and Venus prevailed. The liable company, Tidebuy,
was prohibited from using Venus marks in any avenue of commerce or
social media. The dressvenus.com domain name and social media listings
were transferred to Venus. It was a long, frustrating process, but we
were pleased with the outcome. That is, until 6 months later when the
website changed to dressve.com and Venus photos appeared all over the
new site. Once again, Venus has to retain counsel and send a cease and
desist letter. The site is presently down, but we continue to see
``Dress Venus'' on FaceBook and Pinterest feeds.
The experience has been similar when Venus has been successful in
getting a stolen image removed from a website. Although the copyrighted
image may be removed from a specific website, online shoppers continue
to see a constant stream of the photo in deceptive advertisements on
their social media feeds and search engines. For every image we are
successful in getting taken down, countless new stolen images of our
products appear in its place. It feels as though we are engaged in an
endless game of ``whack-a-mole'' that we cannot win. In just the last
few months, Venus has identified at least 25 different websites that
used our copyrighted photography to sell poorly manufactured copies of
Venus products.
Recent changes that increased the value of merchandise that can be
shipped to the United States tax and duty free from $200 to $800 gives
another advantage to Chinese sellers over companies like Venus. While
the Trade Facilitation and Trade Enforcement Act approved by Congress
and signed into law earlier this year provides tools to U.S. Customs
and Border Protection to strengthen trade enforcement at the border,
the new limits make it easier for online companies in China to ship
their cheap clothing rip-offs directly to American homes. The same
companies who steal our intellectual property are able to avoid paying
taxes or duties on larger quantities of the goods they ship directly to
American consumers.
To give you an idea of the type of advantage this creates, Venus
imports many finished clothing items in bulk. At least 10 percent of
the price of these clothing products can be directly attributed to the
amount of duties and taxes we pay associated with these shipments. Our
shipments are subject to taxes and duties and undergo rigorous
screening at the border while our Chinese online competitors ship
single packages to customers and avoid scrutiny and duties entirely. My
Board of Directors regularly asks me why we choose to remain in Florida
rather than relocate our distribution center to Mexico and ship
directly to Venus customers from there. I remind them that Venus is a
proud Florida company with immense loyalty to our company's roots in
the local Jacksonville community. However, as the playing field
continues to slant against us, our competitiveness and sustainability
is at stake and one day we could be forced to reevaluate our large
presence in the United States.
I would like to thank the Committee for holding a hearing on this
important subject and for giving me the opportunity to bring attention
to the challenges facing companies like Venus in the digital age. I
welcome the chance to work with you and other policy leaders to find
solutions that will protect American consumers and allow American
companies to compete on a level playing field.
[all]