June 16, 1999

GSP Subcommittee

Trade Policy Staff Committee

Office of the U.S. Trade Representative

600 17th Street NW, Room 518

Washington, DC 20508

Re: Request for Review of the Intellectual Property Rights Practices of Peru in the 1999 Annual GSP Country Eligibility Practices Review, 64 Fed. Reg. 20046 (April 23, 1999)

To the Subcommittee:

            On April 23, 1999, the Trade Policy Staff Committee (TPSC) of the Office of the United States Trade Representative (USTR) published in the Federal Register a notice announcing the 1999 Annual Generalized System of Preferences (GSP) Product and Country Eligibility Practices Review. USTR indicated that interested parties "may submit petitions to have the GSP status of any eligible beneficiary developing country reviewed with respect to any of the designation criteria listed in subsections 502(b) or 502(c) of the 1974 Act (19 U.S.C. 2462(b) and (c))." See 64 Fed. Reg. 20047.

            The International Intellectual Property Alliance (IIPA) hereby submits its request that the eligibility of Peru as a GSP beneficiary developing country be reviewed, and that its GSP benefits be suspended or withdrawn, in whole or in part, if requisite improvements are not made by Peru to remedy the deficiencies (outlined below) which adversely affect U.S. copyright owners. In 1998, Peru exported goods valued at $125.0 million to the U.S. which received preferential duty-free treatment under the GSP Program. This represents approximately 12.6% of total exports to the U.S., according to U.S. government statistics. Last year, Congress reauthorized the GSP program through June 30, 1999. Currently there are several bills pending before Congress which would extend the GSP program.

            In addition, IIPA requests that a simultaneous review of the eligibility of Peru as a beneficiary developing country under the Andean Trade Preferences Act (ATPA) be conducted, and that Peru’s ATPA benefits be suspended or withdrawn, in whole or in part, if improvements are not made by Peru to remedy the deficiencies (outlined below) which adversely affect U.S. copyright owners. In 1998, Peru exported goods valued at $632.6 million to the U.S. which received preferential duty-free treatment under ATPA; this represented about 63.8% of its total exports to the U.S. last year.

 

 

Petitioner and its Interest: The International Intellectual Property Alliance

            IIPA is a coalition of seven trade associations that collectively represent the U.S. copyright-based industries -- the motion picture, music and recording, business and entertainment software, and book publishing industries. IIPA’s member associations are the Association of American Publishers (AAP), AFMA (formerly the American Film Marketing Association), the Business Software Alliance (BSA), the Interactive Digital Software Association (IDSA), the Motion Picture Association of America (MPAA), the National Music Publishers’ Association (NMPA) and the Recording Industry Association of America (RIAA).

            These member associations represent over 1,350 U.S. companies producing and distributing works protected by copyright laws throughout the world -- all types of computer software including business software and entertainment software (such as videogame CDs and cartridges, personal computer CDs and multimedia products); motion pictures, television programs, home videocassettes and DVDs; music, records, CDs and audiocassettes; and textbooks, tradebooks, reference and professional publications and journals (in both electronic and print media).

           

These U.S. copyright-based industries represent the leading edge of the world's high technology, entertainment and publishing industries. According to the most recent edition of the report, Copyright Industries in the U.S. Economy: The 1998 Report, prepared for IIPA by Economists, Inc., these core copyright industries accounted for $278.4 billion in value added to the U.S. economy, or approximately 3.65% of the Gross Domestic Product (GDP) in 1996 (the last year for which complete data is available). The total copyright industries accounted in 1996 for $433.9 billion in value added, or approximately 5.68% of GDP. The core copyright industries’ share of the GDP grew more than twice as fast as the remainder of the U.S. economy between 1977 and 1996 (5.5% vs. 2.6%). Employment in the core copyright industries grew at close to three times the employment growth in the economy as a whole between 1977 and 1996 (4.0% vs. 1.6%). More than 6.5 million workers were employed by the total copyright industries, about 5.15% of the total U.S. work force, in 1996. The core copyright industries accounted for an estimated $60.15 billion in foreign sales and exports in 1996, a 13% gain over the $53.25 billion generated in 1995. This report has been made widely available to officials working on country and IPR issues at USTR, and throughout other agencies, including the State Department, the Commerce Department, the U.S. Patent and Trademark Office, and the U.S. Copyright Office. IIPA’s press release on the issuance of this report is available on IIPA’s website, at http://www.iipa.com/html/pr_05071998.html.

            The U.S. creative industries represent one of the few sectors of the U.S. economy that regularly contributes to a positive balance of trade. It is essential to the continued growth and future competitiveness of these industries that our trading partners provide free and open markets and high levels of protection to the copyrights on which this trade depends. Inexpensive and accessible reproduction technologies make it possible for U.S. copyrighted works to be pirated -- stolen -- in other countries, and including specifically for the purposes of this petition, Peru. However, the copyright industries represented in IIPA lose an estimated $20-22 billion annually due to piracy outside the United States. These staggering losses, if not halted, could reverse this path of growth in these sectors, threaten the high wage employment that these industries bring to the U.S. economy, and damage U.S. competitiveness. In addition to the worldwide problem of piracy, several foreign countries have erected market access barriers to U.S. copyright products. To combat these dual problems in developing countries, the U.S. copyright-based industries joined with the Administration and Congress to fashion new legislation and negotiating tools. IIPA and its members have supported various trade tools with IPR provisions over the years, including the GSP Program, Special 301, Section 301, the Caribbean Basin Economic Recovery Act, and the Andean Trade Preferences Act.

 

Action Requested by Petitioner

            Pursuant to the Trade Act of 1974, as amended (19 U.S.C. 2461 et seq.), IIPA, on behalf of its seven trade association members, hereby petitions the President to review the eligibility of Peru as a GSP and an ATPA beneficiary developing country, and if requisite improvements are not made by Peru, then IIPA requests the President to suspend or withdraw GSP and/or ATPA benefits of Peru, in whole or in part, for its failure to provide adequate and effective copyright protection for U.S. copyright owners.

 

Legal Authority for this Petition and Discussion of the IPR Criteria in the GSP and ATPA Statutes

            Provisions tying intellectual property protection to trade benefits were first added to the Trade and Tariff Act of 1984 [hereinafter "TTA 1984"]. Title V of the TTA 1984, known as the GSP Renewal Act of 1984, renewed the GSP Program which had been introduced in the Trade Act of 1974 [hereinafter "TA 1974"], and specifically required the President to consider intellectual property protection in determining whether to designate a developing country as eligible for GSP benefits. The GSP Program provides unilateral, non-reciprocal duty-free tariff treatment to over 4,400 articles imported from more than 140 countries and territories designated beneficiary countries and territories (these are less developing countries) to aid their economic development through preferential market access. An additional 1,700 articles are eligible for GSP treatment for specified least developing countries. While there has been a minor change in the statutory language between the GSP Renewal Act of 1984 and the GSP Renewal Act of 1996, the Act remains essentially the same as in 1984. The legislative history of the 1984 Renewal Act is particularly instructive on the important link between GSP benefits and strong IPR protection.

            The GSP Renewal Act of 1984

            In the GSP Renewal Act of 1984, Congress specified conditions that GSP beneficiary countries must meet in order to gain and maintain their preferential trading status. In particular, one of these express conditions (which Congress also delineated as one "purpose" of the GSP Program) was to encourage developing countries "to provide effective means under which foreign nationals may secure, exercise, and enforce exclusive intellectual property rights."

            The legislation required the President to apply mandatory and discretionary criteria with respect to IPR protection as a condition to a country achieving "beneficiary" status under the GSP Program. The mandatory criterion prohibited the designation of a country from becoming a "beneficiary developing country" if, for example, "such country has nationalized, expropriated, or otherwise seized ownership or control of property, including patents, trademarks, or copyrights, owned by a United States citizen or by a corporation, partnership, or association which is 50 percent or more beneficially owned by United States citizens." See Section 503(b)(4) of the GSP Renewal Act of 1984, now codified at 19 U.S.C. 2462(b)(2)(D).

            The GSP Renewal Act of 1984 added as a discretionary criterion, in determining whether to designate a developing country as eligible to receive GSP duty-free trade treatment, that

            the President shall take into account ... the extent to which [each] country is providing adequate and effective means under its laws for foreign nations to secure, to exercise, and to enforce exclusive rights in intellectual property, including patents, trademarks, and copyrights.

Section 503(c)(5) of the GSP Renewal Act of 1984, as codified at 19 U.S.C. 2462(c)(5) (1984). The Senate Finance Committee Report explained that:

            To determine whether a country provides "adequate and effective means," the President should consider the extent of statutory protection for intellectual property (including the scope and duration of such protection), the remedies available to aggrieved parties, the willingness and ability of the government to enforce intellectual property rights on behalf of foreign nationals, the ability of foreign nationals effectively to enforce their intellectual property rights on their own behalf and whether the country’s system of law imposes formalities or similar requirements that, in practice, are an obstacle to meaningful protection.

S. Rep. No.98-485, 98^th Cong., 2d Sess. At 11 (1984). The Senate Report also noted:

            In delegating this discretionary authority to the President, it is the intent of the Committee that the President will vigorously exercise the authority to withdraw, to suspend or to limit GSP eligibility for non-complying countries ....

            Where valid and reasonable complaints are raised by U.S. firms concerning a beneficiary country’s market access policy or protection of intellectual property rights, for example, it is expected that such interests will be given prominent attention by the President in deciding whether to modify duty-free treatment for that country.

Id. at 12-13 (emphasis added). The House Ways and Means Committee stated that "countries wishing to reap the benefits of preferential duty-free access to the U.S. market must fulfill international responsibilities" in the intellectual property area. House Rep. No. 98-1090, 98^th Cong., 2d Sess. at 12 (1984).

 

            The IPR criteria are a condition, not only for obtaining GSP benefits in the first place, but also for retaining them. The 1984 Act authorized the President to "withdraw, suspend, or limit the application of the duty-free treatment accorded under Section 501 of this title with respect to any article or any country" and requires the President, when taking any such action, to "consider the factors set forth in Sections 501 and 502(c)." TTA 1984 Section 505(a)(1); TA 1974 Section 504(a)(1), as amended; 19 U.S.C. 2464(a)(1) (emphasis added). The Act also created a system of "general reviews" to ensure that these statutory criteria are met. TTA 1984 Section 505(b); TA 1974 Section 504(c)(2)(A), as amended; 19 U.S.C. 2464(c)(2)(A); see also 15 C.F.R. 2007.3.

            This GSP Subcommittee is asked to follow the explicit intent of Congress, and advise the President to "vigorously exercise" his authority to withdraw, suspend or limit GSP eligibility of Peru for its non-compliance with the IPR statutory criteria of the GSP Program.

            Over the years, retaining GSP benefits has figured prominently in the decisions of a number of countries to improve their IPR protection. In the 1980s, such leverage was used to encourage Singapore, Indonesia and Malaysia to adopt new copyright legislation. IIPA has filed petitions against several countries for their failure to provide adequate and effective copyright protection. IIPA petitions which have been accepted by USTR over the past ten years (1989-1998) include: Indonesia, Thailand, Cyprus, Egypt, El Salvador, Turkey and Poland. IIPA has participated in GSP IPR reviews involving Malta, Guatemala, the Dominican Republic, Honduras, Panama, and Paraguay (all of which were initiated by other petitioners or by USTR). IIPA also filed petitions in 1995 against the Russian Federation, the Philippines, Bolivia and Peru which, we learned in October 1996, were not accepted by USTR for the 1995 GSP Annual Review. A GSP petition which IIPA filed against Turkey in June 1993 remains under current investigation.

            The GSP Renewal Act of 1996

            When the GSP Program was reauthorized in August 1996, the language of the IPR discretionary criterion for GSP eligibility in Section 502(c)(5) was simplified slightly and now requires the President to "take into account the extent to which such country is providing adequate and effective protection of intellectual property rights." To review, the expired law had specified that each beneficiary country provide "adequate and effective means under its laws for foreign nationals to secure, to exercise and to enforce exclusive rights in intellectual property, including patents, trademarks, and copyrights." Otherwise, the GSP Renewal Act contains identical IPR provisions, including "mandatory" criteria denying GSP status to countries that directly or indirectly expropriate U.S. property (including intellectual property), and authorizing the President to withdraw, suspend or limit GSP privileges based on failure to meet the IPR criteria.

            ATPA

            The Andean Trade Preference Act contains provisions for the protection of intellectual property rights similar to those in the GSP program. The ATPA contains two mandatory criteria in Section 3202(c)(5) which state that the President shall not designate a country as an ATPA beneficiary country

if a government-owned entity in such country engages in the broadcast of copyrighted material, including films or television material, belonging to the United States copyright owners without their express consent or such country fails to work toward the provision of adequate and effective protection of intellectual property rights.

19 U.S.C. § 3202(c)(5). In addition, in determining whether to designate a country as a beneficiary country, the President shall take into account the following discretionary criteria:

the extent to which such country provides under its law adequate and effective means for foreign national to secure, exercise, and enforce exclusive rights in intellectual property, including patent, trademark and copyright rights;

the extent to which such country prohibits its nationals from engaging in the broadcast of copyrighted material, including films or television materials, belonging to United States copyright owners without their express consent;...

19 U.S.C. §§ 3202(d)(9) and 3202(d)(10). This latter section reflects the same language of the previous GSP provision, before its amendment in 1996. Under the ATPA, the President has the authority to withdraw or suspend the designation of any country as a beneficiary country, or withdraw, suspend, or limit the application of duty-free treatment to any article of any country, if, after such designation, the President determines that as a result of changed circumstances such a country should be barred from designation as a beneficiary country. 19 U.S.C. §3202(e).. To date, such ATPA leverage has not been used in the realm of intellectual property rights. IIPA requests that the GSP Subcommittee include the ATPA criteria along with the GSP review.

Peru Fails to Provide "Adequate and Effective Protection" of U.S. Copyrights

            To the best of petitioner’s knowledge, much of the information describing the piracy situation in Peru and the deficiencies in Peru’s copyright enforcement regime has been presented previously to members of various U.S. governmental interagency groups, including the Special 301 interagency group, several members of the GSP Subcommittee, as well as the Trade Policy Staff Committee, in the context of USTR’s Annual Special 301 Review. On February 16, 1999, IIPA presented its annual Special 301 submission to Assistant USTR for Services, Investment and Intellectual Property Joseph Papovich; this submission was widely distributed among the interagency for its internal consideration in the 1999 Special 301 Annual Review. IIPA’s entire report is available on our website.

           

 

 

 

 

1. Enforcement Efforts Against Piracy in Peru Are Inadequate and Ineffective

A.     An overview of TRIPS Agreement enforcement obligations is useful in the evaluation of the Peruvian Government’s efforts on enforcement

            Critical to our discussion of Peru is its performance toward complying with the GSP (and ATPA) statutory standard of "providing adequate and effective protection" of intellectual property rights. For the purpose of this GSP review, IIPA suggests that the GSP Subcommittee should look to the enforcement provisions found in Part III of the TRIPS Agreement to evaluate the effectiveness of Peru’s copyright enforcement efforts. Because the GSP statute itself does not define this standard, IIPA asserts that any standard of "adequate and effective" in the enforcement realm should, at the very least, meet the obligations outlined in the TRIPS Agreement. And because IIPA’s analysis of Peru’s performance of its copyright enforcement efforts shows that Peru falls short under this TRIPS measure, we conclude that Peru fails to meet its statutory obligations under the GSP Program to provide "adequate and effective protection." The U.S. Government should not be subsidizing, through its award of unilateral preferential trade benefits, the theft of U.S. copyrighted materials in Peru, which fails to meet its already existing obligations under GSP and ATPA to protect intellectual property, including copyrights.

            The purpose of the discussion in this section is to provide the GSP Subcommittee with tangible guidance on the key elements of an effective copyright enforcement regime under TRIPS. As the minimum standard of copyright protection in a multilateral world, TRIPS copyright obligations enter fully into force for developing countries (LDCs) on January 1, 2000 (See TRIPS Articles 65). These LDCs must bring their statutory laws and, most importantly, their enforcement systems into compliance with these standards.

The TRIPS enforcement obligations were developed in recognition of the critical importance of enforcement to any effective IP regime. In the area of copyright enforcement, there are three articles in the TRIPS enforcement text that are the most relevant. These are Articles 41 (general obligations), 50 (provisional measures in civil cases) and 61 (criminal remedies), and are attached hereto as Appendix 1. In virtually every country in the world, most of the copyright industries deal with piracy through criminal enforcement. Years of experience have led these industries and virtually every country to conclude that civil remedies are simply not sufficient to deter commercial piracy. The one exception, viable in some countries with mature civil remedies, involves enforcement against corporate and other commercial end-users of business software. With this type of software piracy, the infringers are otherwise legitimate businesses who cannot afford to have their reputations sullied by allegations of illegal conduct.

Article 41 sets out the general obligations of each WTO member, including Peru. These obligations apply to all areas of enforcement --- civil, administrative, criminal and enforcement at the border. First, the requirement that enforcement procedures permit "effective action" speaks to all possible remedies, including civil, administrative and criminal procedures, as well as border measures, customs, tax and communications procedures. Further, and most importantly, procedures that meet the test of effective action can only be tested in actual practice. They must result in the reduction of the level of piracy in that country. If not, they are not "effective." Second, "available" remedies does not mean that remedies only appear in the statutory law. Even if a country’s copyright law is amended to include criminal remedies for copyright infringement, for example, those amendments will not make the criminal remedy "available" unless they are actually used in practice. Third, remedies that are "available" must be "expeditious". The ex parte civil search order required under Article 50 of TRIPS (discussed below) must also be available without overly burdensome documentary or evidentiary requirements, and must be available at a reasonable cost (see TRIPS Article 41.2). The same applies to search warrants and seizure orders issued by a criminal court. For example, criminal cases that take three to four years to reach judgement simply do not meet the test of "expeditious." Finally, and perhaps most importantly, these remedies must constitute a "deterrent to further infringements." This phrase is key to the TRIPS enforcement text. To determine whether a country has satisfied this requirement, the results of the enforcement system must be objectively analyzed. There are several indicia that may provide needed evidence to determine whether a remedy is "deterrent." One of the most clear-cut tests is the change over time of the piracy level.

Under Article 61 of TRIPS, effective criminal enforcement has two major elements: (a) effective searches and seizures of pirate product by the police without notice to the infringer (raids), and (b) the existence in statutory law of deterrent criminal penalties and, in combination with Article 41, their imposition by judges in practice.

Specifically, Article 61 obliges countries to "provide for" criminal procedures and penalties "at least in cases of willful trademark counterfeiting or copyright piracy." Imprisonment and fines must be "sufficient to provide a deterrent." Article 41 combined with Article 61 (which should be understood as subsumed within the requirements of Article 41), requires countries to "provide for" or make "available" remedies not just in the law, but in practice as well. This obligation cannot be satisfied if no significant fines or imprisonment have been meted out against commercial pirates, or if sentences are regularly suspended or are commuted to low fines.

Article 61 also provides that seizure, forfeiture and destruction of the infringing goods and any "materials and implements the predominant use of which has been in the commission of the offense" must be available. This means all three actions (seizure, forfeiture and destruction of goods); simply seizing goods and leaving them to gather dust in a warehouse will not suffice (particularly if the pirate walks away unpunished and continues to remain in business). It cannot be underestimated how important the seizure, forfeiture and destruction of "materials and implements the predominant use of which has been in the commission of the offense" is in fighting piracy. Even where VCRs, computers and other machines have been seized, returning them to the pirates is extremely damaging and only encourages pirates to continue piratical activities. If fines are too low, or equipment and pirate goods are not seized, forfeited and destroyed, enforcement will not meet the test of "deterrence"; it will constitute simply a cost of doing business for the pirate.

Article 50 of TRIPS provides for provisional (or injunctive) relief in cases where the alleged infringer is present in court to defend against the rightholders request to stop the infringing conduct or to preserve evidence. But Article 50 also applies to cases where it is imperative that the rightholder search the defendant’s premises and seize infringing product and other evidence without notice to the alleged infringer. This is an essential remedy in civil cases since it is so easy to destroy the evidence of infringement in many cases, such as where a company has made unauthorized copies of software by loading them on the hard disks of all computers in a business network. Again, it is not sufficient that this remedy be merely in the law. Article 50 (and Article 41) provide that these procedure be "expeditious." This requirement cannot be judged by mere reference to the law; it compliance must be judged by its "effective" use in practice.

B. Summary of enforcement problems in Peru

Difficulties in obtaining effective enforcement remain the copyright industries primary concern in Peru. Initial efforts by the administrative authority charged with enforcing the copyright law, the Copyright Office of National Institute for the Defense of Competition and the Protection of Intellectual Property (INDECOPI), were promising, and for some of the copyright industries, did actually improve with respect to running raids. However, troubles continue with the INDECOPI Appellate Tribunal which is slow in issuing decisions, and when it does issue decisions, it has reduced the administrative fines previously issued, thus severely reducing the effectiveness of any possible deterrence. Between the low fines of INDECOPI and the likely suspension of criminal sentences, copyright pirates in Peru know that, if caught, the penalties will be quite low. There is a concern that INDECOPI’s educational approach toward piracy appears to have come at the cost of supporting, and conducting, effective enforcement.

Three years ago, Peru passed a new copyright law, Legislative Decree No. 822, which entered into force on May 24, 1996. This comprehensive legislation raised the level of protection toward the TRIPS standards. The law contains a broad scope of economic rights, as well as some of the highest levels of criminal penalties in Latin America. It allows both criminal and administrative actions can be filed at the same time.

            A special police unit was created in May 1997 to fight piracy and other economic crimes. This unit was trained in IPR enforcement issues. Although criminal procedures remain slow, several of the copyright industries, primarily the recording and music industries and the motion picture industry, prefer to use criminal procedures through the Public Ministry for enforcement. For some industries, the raids carried by the police and the Public Ministry can be relatively effective. The piracy situation is so pervasive that thousands of pirated audiocassettes are sold in the neighborhood of Mesa Redonda, located one block away from the police and the Public Ministy’s headquarters. It is very rare for a case to reach the verdict stage. For those few cases which do reach judgement, the sentences are suspended, and the defendants walk free.

            Other industries, such as the software industry, prefer INDECOPI enforcement, because their proceedings at the level of the Copyright Office (the administrative court of first instance) continue to be faster than criminal proceedings, which seldom reach indictment and trial. After the Copyright Law passed in 1996, INDECOPI’s enforcement efforts worked well, particularly for the software industry. Raids were run, infringing product seized, and administrative fines issued. In 1998, the software industry tripled the number of raids conducted over the previous year. And more recently INDECOPI’s efforts in the fight against video piracy have improved, although the industry continues to bring a majority of its cases through the criminal process. Last year, the levels of business software piracy and video piracy even dropped slightly. In contrast, the levels of piracy affecting the recording and music industry remain unchanged.

 

 

 

1.      The Criminal Enforcement System in Peru Fails to Provide Any Deterrence to Commercial Copyright Piracy

No copyright pirate has received deterrent sentences for criminal copyright infringements in Peru. Article 217 of the 1996 Copyright Law provides for a penalty of not less than two year nor more than six years in jail, and a fine of 30 to 90 times the average daily income for most infringements. Other articles provide even higher penalties. For acts involving commercial purposes, Article 218(d) specifies that the sanction is not fewer than two years or more than eight years in jail and fine of 60 to 100 average daily income wages.

While these on-the-books provisions are strict, they are not actually imposed as a matter of practice by Peruvian judges. In a few cases involving video piracy, defendants have been issued sentences ranging from one to two years in jail. Under Article 57 of the Peruvian Criminal Procedures Code, sentences of four years or less are suspendable. The results in these cases have been that the courts suspend the defendant’s sentence. The only deterrent factor is that the defendant is prohibited from leaving the country and from committing the same crime again (and even this deterrent is suspected if the defendant files and appeal). As discussed in the prior section, TRIPS requires that criminal remedies be imposed, and at deterrent levels. This is not the case in Peru.

Another problem exists at the prosecutorial level. After the police conduct the raids, the system breaks down. Very few cases are pursued by the prosecutors through judgment. Moreover, there is only one IPR prosecutor for the entire country (of 22 million people), and this prosecutor is limited in his jurisdiction to the city of Lima. The Motion Picture Association has been unsuccessful in its efforts to seek the appointment of a second prosecutor and two specialized IPR judges. This failure of the criminal system to prosecute fully criminal copyright infringement cases exemplifies the low priority given for this serious economic crime. And when those few officials do take specific actions to stop piracy, they are not recognized for their efforts by their superiors.

             

2.      The INDECOPI Appellate Tribunal Fails to Issue Timely Decisions and Undermines Deterrence by Reducing Fines Issued by the Lower Court of First Instance

A significant problem has been the long delays of the INDECOPI Appellate Tribunal ("La Sala de Propiedad Intelectual") in deciding cases. BSA estimates that it takes approximately two years from the appeal to the time of the Tribunal’s decision in its software cases. A two-year review, in an administrative matter no less, certainly does not reflect an expeditious proceeding. We have heard informal reports that the Tribunal does process trademark appeals more swiftly than the copyright cases cited here. Such a discrepancy between these two kinds of cases suggests that it is possible for the Tribunal to speed up its review processes in copyright cases.

Once the Tribunal does decide a copyright case, it has reduced the levels of administrative fines issued by the Copyright Office, which are usually relatively level to begin with. Such reductions totally undermine any effective enforcement, including any deterrence. Specifically with respect to business software piracy cases, the Tribunal significantly reduced damages in six cases brought by the Business Software Alliance (BSA) back in 1997. It has been difficult to determine whether this disturbing pattern of fine reductions would continue in 1998 because the Tribunal only issued one decision in a BSA case in all of last year, despite a significant increase in the number of BSA software piracy cases filed at INDECOPI during 1998.

INDECOPI reports that it processed approximately 1,120 copyright matters in 1998, with 98.7% resolved without reaching the appeals stage. IIPA cannot comment on all those 1,110-odd cases. We do know that basically all – 100% (not including the case BSA withdrew) -- of the BSA cases pending before the Tribunal were not acted on during 1998. Neither the motion picture nor the recording industries filed appeals last year.

 

3.      The Institutional Attitude by INDECOPI is Counterproductive to Efforts by Industry to Strengthen Copyright Protection in Peru and Does Not Promote Adequate and Effective Protection of Copyrights

Actions and announcements made by INDECOPI officials over the past year, in particular, as well as over the last few years, have shown an antagonistic attitude toward copyright enforcement in general, and several copyright industries in particular. Examples of several specific instances are cited below. This allegation is not an indictment against any specific individuals, but rather is a harsh yet realistic commentary about a major Peruvian institution charged with promoting investment and enforcing the copyright law. The mixed messages circulated by INDECOPI about copyright protection do not serve to promote a positive educational or cultural message which that agency often touts. IIPA member associations and companies in Peru do look forward to continuing their work to improve relationships with INDECOPI officials. However, it is clear that reform in INDECOPI’s public message, as well as its administrative enforcement actions, is needed.

 

A.     Industry-specific experiences with piracy and enforcement in Peru show that "adequate and effective" copyright protection is not being achieved by the Peruvian Government

The section below discusses, in detail, the experience of the U.S. copyright industries, often in cooperation with their local counterparts, in working with both the criminal and administrative authorities in Peru responsible for copyright enforcement.

Sound Recordings and Musical Compositions

            Piracy of sound recordings and music in Peru worsened over the past year. Estimated losses due to audio piracy increased to $50 million in 1998, with the estimated piracy level rising to 85% of the market. These losses are astounding, considering that the legal market for recordings in Peru was only $17.3 million in 1998 (retail value). Actual 1999 figures to date show that this discrepancy between the pirate and the legitimate market is worsening. In the first three months of 1999, 55,000 legal audiocassettes were sold, compared to 97,500 for the same period in 1998. With respect to music compact discs, the industry sold 111,000 units this year, compared to 187,000 in 1998. There are fears among some recording industry representatives that Peru may soon be "the next Paraguay," because of the rising levels of piracy and lack of effective government action, both internally and at the borders.

            Up until recently, Peru had not been the source of pirate duplication of compact discs on an industrial scale. However, in early 1999, a huge CD plant commenced operations in Lima. After investigations were conducted by the recording industry, a judge agreed to issue a search warrant to raid this CD plant, suspected of manufacturing pirated CD product of major artists for export to Brazil, Paraguay, Bolivia, Ecuador, and the U.S. At the time of the raid, 125,000 pirate CDs had already left the plant. The success of this raid was the result of industry’s patience in waiting for the right time to work this case with a judge, prosecutor and select police officers who were willing to enforce the copyright law. Successful efforts were made to keep this case confidential and out of the hands of other enforcement officials in order to protect the integrity of the case. The CD plant had admitted its problems and has committed to implement strict methods to protect copyright.

           

Piracy involving CD-R (CD-Recordable) machines is also on the rise. Interestingly, as the CD problem worsens, so do problems with audiocassette piracy. The industry estimates that there are 18 illegal tapes per single legal audiocassette. This means that while the legitimate industry sold 500,000 cassettes annually, the pirates sold more than 9 million. Estimates show that Peru has the potential, based on its installed duplication equipment, to produce 18 million cassettes per year. This growth in the pirate market has been astounding, overshadowing by far any growth experienced by the legitimate market.

CD and cassette piracy has been on the rise for the past two years due to several factors. First, Peru does not have a national copyright enforcement program. There is but a single IPR prosecutor in the entire country. Second, Peru continues to have inadequate border controls. Large amounts of pirate CDs, blank tapes and duplication equipment enter Peru from other nations, including Chile, Paraguay, Bolivia, Ecuador, Mexico, Venezuela, Colombia, Panama, and the Far East. Industry investigations shows that thousands of blank tapes make their way every week into the mainstream Peruvian market through Iacna in Chile (Iquique-Arica) and then distributed for illegal duplication. No efforts are made by the Customs Office or the tax enforcement entity (SENAT) to stop this flow. Once in Peruvian territory, blank tapes are duplicated illegally and further distributed, without any kind of government control. Improved customs controls are particularly important for reducing the rising levels of audio piracy.

            Third, the recording industry reports that police corruption limits the possibility of effective industry action. Disturbingly, leaks regarding ongoing investigations and demands for bribes are common. The special police have not provided much assistance to the recording industry. The Peruvian police continue to protect the pirates of Mesa Redonda (an area similar in its level of lawlessness to the Mexican district of Tepito and the Paraguayan city of Ciudad del Este). For example, the Peruvian television program Dialogo aired a story about sound recording piracy in March 1999. There is footage showing two forms of police corruption: first, the passive tolerance of widespread piracy in Lima’s downtown district in broad daylight, and second, police protection of the pirates when raids took place.

The recording industry has been working over the past year to reorganize and strengthen its local industry group, known as COPERF, to focus activities more on anti-piracy actions. In 1998, the recording industry seized a total of 217,000 pirate audiocassettes in Peru. Peru’s special IPR prosecutor reported that his office seized a total of 42,000 in 1998. From January to June 1998 alone, COPERF conducted several actions which resulted in the seizure of approximately 50,000 tapes and 6 small telex duplication machines. The industry continues to use alternate means and other police officers to conduct seizures of pirated product. This five-fold gap between industry actions and the central government’s awareness of the scope of the problem suggests that there is much room for improvement. The disturbing fact is that the 217,000 seized is still a small dent in a market which supports more than 9 million pirate audiotapes.

            Fourth, the "educational attitude" approach taken by INDECOPI — instead of a stricter enforcement approach -- has not worked in the sound recording area. It is true that INDECOPI has been somewhat effective in those cases where the industry provides all the targets (as long as those targets are not social groups like street vendors or unions, or entities in the sensitive, protected zones like Mesa Redonda). Because the street vendors greatly damage the legitimate music and recording industries in Peru, INDECOPI’s lack of action on this most flagrant form of piracy is disturbing and does not contribute to provide effective action against piracy.

           

            The recording industry has increased its efforts on the criminal side, but the industry has met with almost complete failure in working with INDECOPI. Admittedly, the recording industry historically has not shared much information identifying local pirates with INDECOPI. Nor is it required to by law. When the industry does get information about piratical activities, it chooses to take criminal actions because INDECOPI does not take an enforcement approach. Nevertheless, in 1997, the industry made its best efforts to bring legal actions and/or raids to INDECOPI, but none were conducted. In June 1997, the industry made a formal visit to INDECOPI and suggested a specific petition of action, including ways in which INDECOPI could take actions against record piracy. Nothing happened; the industry never received any specific actions from INDECOPI.

            In April 1998, recording industry representatives again met with Ms. Boza of INDECOPI. While Ms. Boza indicated her organization’s willingness to assist the recording industry in obtaining police and customs cooperation, she explicitly said that INDECOPI would not take any actions against street vendors selling pirate audio products. As a result of this meeting, the industry invested significant money and time to investigate and identify the major ports of entry of blank tapes which feed the pirate market in Peru. These products come from Chile’s free trade zone of Iquique via Tacna.

            Clearly, cooperation between both the recording industry and the administrative authorities would be an ideal way to proceed. However, as discussed herein, INDECOPI support for recording industry enforcement action has been low. INDECOPI should not escape from its ex oficio obligations to enforce the copyright law simply because the recording industry chooses to pursue criminal actions as well. Major efforts from all public and private resources will be needed to begin to address the problem of Mesa Redonda, and INDECOPI has already stated its refusal to act there.

            The recording industry also has found specific cases of anti-recording industry messages made by INDECOPI officials earlier this year. Dr. Ruben Ugarteche, the long-time director of copyright in INDECOPI, gave a radio interview on January 1, 1999 in a program called "Controversia." There Dr. Ugarteche said that the INDECOPI was not created to defend the interests of multinational companies that have sufficient funds to bring their own actions to court. He specifically clarified that he was not referring to songwriters, but to big multinational recording companies that have been provided with sufficient tools by the Government. Also in this interview Mr. Ugarteche clearly stated that INDECOPI was an educational entity, and he declared that repression was not the way to end with piracy. In a second interview on March 1,, 1999, the Official Newspaper El Peruano, printed an article written by INDECOPI’s Ugarteche entitled, "Music Piracy, A Daily Reality." There, he wrote:

Music piracy is a market problem produced due to the huge price difference between legal product and pirate copies. The Music Industry is oriented to classes A and B while piracy product is consumed by C and D classes. He also justifies the existence of pirate goods due to the fact that people need them.

Mr. Ugarteche implicitly blamed the legal industry’s price strategy. He gave examples of cheaper product. He did not identify the difference between catalog product and new releases, between special goods and de luxe product, or between legitimate goods and parallel imports introduced to Peru with a lesser declared value. He did not mention, however, the INDECOPI is charged with enforcing the copyright law, too.

Computer Programs: Business Applications

            The BSA prefers INDECOPI enforcement over criminal enforcement. Requests for administrative inspections have generally been approved in a timely manner by the Copyright Office, and BSA has successfully coordinated the timetable of these inspections with INDECOPI officials. Furthermore, administrative proceedings generally commence with little delay following an administrative inspection. In criminal cases, search and seizure actions take place without too much difficulty. However, the legal proceedings following a search and seizure action intended to establish the defendant’s copyright culpability have been slow, and BSA’s requests to expedite such proceedings have had little effect.

            In 1998, 75 search and seizure actions were conducted at BSA’s request against end- users and resellers suspected of software piracy. Fifty-five of these actions were filed through INDECOPI, and twenty were criminal cases filed with the Public Prosecutor. At the enforcement level, INDECOPI has performed very well, as inspections and administrative proceedings following inspects have been carried out in an efficient and professional manner. Moreover, the Administrative Court of First Instance (Oficina de Derecho de Autor) has issued a number of favorable software decisions.

            However, BSA continues to have significant problems with INDECOPI’s Appellate Tribunal. In 1998, the Tribunal issued only one decision in a software piracy case. BSA had nine appeals pending, and five of those were pending for more than one year. This single decided case involved a situation in which the BSA signed a settlement agreement with the defendant so that the case was withdrawn. It is BSA’s experience that it takes approximately two years from the appeal to the time of the Tribunal’s decision. This contrasts sharply with the Tribunal’s assertion that it renders decisions in an average of eight months.

More problems with the Tribunal abound in the area of reduced fines. Under the 1996 Copyright Law, 100% of these fines go to INDECOPI; additional compensation (known as derechos devengados) can be awarded to the copyright owners. In 1996 and 1997, the Appellate Tribunal affirmed the Copyright Office’s determination of copyright infringement in five cases, but then severely reduce the fines imposed; in some cases, fines were reduced to only one-tenth of the original amount. Contrary to INDECOPI’s assertions that (a) the evidence supported the reductions, or (b) the parties did not provide enough economic evidence in the first place, BSA did provide ample evidence to prove the cases. Pressure from the U.S. industries and the U.S. government over the years has brought attention to the Tribunal's practices. However, these efforts have not yet had a positive effect on the Tribunal, which has chosen to delay the resolution of software piracy cases.

Furthermore, the Appellate Tribunal has applied the law erroneously. IN a non-BSA software case, Esass Thunderbyte Int’l B.V., the Tribunal determined that the copyright owner should be entitled to a payments resulting from the infringement of approximately 20% of the software package value. This amount represented the "author’s share" of the infringed rights (derechos devengados), because there was a finding that this was the proper figure for books, which are the classic "literary work," in the copyright sense. The Tribunal cited a respected Venezuelan copyright expert for this result; the expert, Dr. Ricardo Antequera Parilli has since presented two expert reports to the Tribunal explaining that the Tribunal’s criterion was incorrect. At the very least, the value of these rights to the software publisher should be at least the value of the license itself, not some lesser percentage. BSA fears that this case could be used as a dangerous precedent in cases BSA had brought. There are some reports that the Tribunal may be planning to change the way its calculates certain damages (derechos devengados) to create more consistency in awards. The Tribunal has not yet manifested any change in its errant ways in the copyright field.

            The problem is that by reducing damage awards in the cases it does rule on, and by delaying resolution of most cases, the Tribunal simply is not enforcing the Copyright Law. Senior INDECOPI officials have emphasized the importance of creating a "culture" which respects intellectual property rights while simultaneously avoiding punishing infringers. The result is that INDECOPI is shirking its obligations to enforce the Copyright Law. Instead of upholding the law, the Tribunal's excessive and unwarranted leniency sends a signal to pirates to appeal all cases since penalties will be reduced, if the case is ever resolved. In addition, there are strong and persistent rumors that INDECOPI wishes to end all software enforcement cases against end-users, which if true, would be contrary to the role of any agency charged with protecting intellectual property rights.

            Although the educational and legal campaigns of the BSA have resulted in a very slight reduction in the piracy rate in Peru from 66% in 1997 to 64% in 1998, overall growth in the market has led to an increase in losses due to piracy from $25.0 million in 1997 to $30.5 million in 1998.

            BSA’s local program also supports educational awareness. They regularly notify businesses about the importance of maintaining and using legal software.

            On March 31, 1998, BSA commenced a "Truce Campaign" announcing a two-month period during which they would take no action against end-users companies in Peru; this effort was coupled with massive publicity about the need to immediately legalize software. During April and May 1998, mailings were sent to thousands of companies. The mailings asked companies to give the BSA audit results of computer software. The response was extraordinary. Peruvian resellers reported record sales; with little inventory remaining and high demand, some apparently raised prices, causing anger in the market. Other resellers began stating that software purchased outside of Peru was illegal, and would not protect a company from legal action. The number of calls to the BSA hotline multiplied exponentially. The third-party hotline answering service, in some isolated incidents, provided incorrect information to callers. INDECOPI officials expressed concern and anger, stating that: "misinformation" was being given out "by the BSA" on the hotline; resellers were charging higher prices; BSA’s letters were too "aggressive"; and, erroneous information on the ability to purchase foreign software was circulating. INDECOPI took out a large advertisement in El Comercio, the leading newspaper in Peru, on June 15, stating that INDECOPI was not a participant in or supporter of the BSA campaign, and that only the employees of INDECOPI, the Prosecutor or the National Police, with the appropriate warrant, could verify infringements of copyright, and finally, that companies need not respond to BSA's requests for information.

            Since BSA had never before been publicly attacked by any Latin American government authority, BSA representatives flew down to meet with top INDECOPI officials, and agreed to resolve their differences through a joint communique. During this firestorm, BSA participated at an INDECOPI Seminar held on June 25, 1998; the topic was changed by INDECOPI at the last minute from "The Information Superhighway" to "The Problem of Software in Peru." The Seminar (organized, sponsored, and held at INDECOPI) was standing room only. INDECOPI conveniently invited various BSA enforcement targets to participate on the panel, and INDECOPI humiliated a Peruvian software industry representative who criticized INDECOPI's weak enforcement. Dr. Boza stated that, "Education without enforcement may not be effective, but enforcement without education is cruel." On a positive note, INDECOPI made clear at the seminar, and in the subsequent joint communique, that they would continue to enforce BSA cases.

            BSA and INDECOPI collaborated on a subsequent press release issued in November 1998, designed to educate end-users on how to recognize pirate software. This effort, though well received in Peru, has not resulted in any significant progress with respect to the Tribunal's handling of software piracy cases. The Tribunal has shown no willingness to review and decide pending cases in a timely manner or in accordance with the Copyright Law.

            As part of the fallout from BSA’s successful Truce Campaign (which BSA believes the Peruvian Government should have supported), INDECOPI issued Resolution No. 0121-1998/ODA-INDECOPI, entitled "Guidelines for the Legal Use of Computer Programs (Software)." This Resolution reaches fundamentally erroneous conclusions, out of line with freedom of contract principles, and international copyright interpretations (as well as arguably violating Peruvian copyright law), on the rights of copyright owners. Despite silence on the issue in Peru’s copyright law, INDECOPI concluded that the rightholder cannot put territorial limits on the right to use a computer program. Therefore, any user can purchase any program outside of Peru and bring it to Peru, despite license language to the contrary. In support of this conclusion, the Resolution states that fundamental use by a user cannot be interfered with, i.e., that a copyright holder really has limited rights regarding license terms. The Resolution further states that the rightholder cannot fundamentally interfere with the user’s rights to use a software program. For example, an evaluation copy may be free or purchased for a reduced price, and it may only permit a certain number of uses, or use of certain features of the program. The Resolution fails to comprehend the rightholder’s freedom to impose the contract terms found in the license; if the purchaser does not like the limitations, the purchaser need not purchase the program. The Resolution attempts to sidestep this issue by claiming that software shrink-wrap licenses are contracts of adhesion, unsigned by the user, and therefore abusive. However, their validity should be left to the courts, not undercut in an administrative resolution. The Resolution fails to understand that the copyright distribution right gives the rightholder the right to limit territorial distribution; there may be good reasons for doing so, such as preventing violations of U.S. export control laws, or the inability to provide support locally in certain countries.

            Even though serious difficulties remain with INDECOPI’s Appellate Tribunal, in terms of issuing both timely and legally correct decisions, BSA and its local colleagues continue to work with INDECOPI officials to ensure progress is made on addressing and resolving these many problems.

Motion Pictures

            The video piracy levels in Peru have decreased over the years, from 95% in 1995 to 50% in the third quarter of 1998, due in substantial part to the Motion Picture Association’s (MPA) active anti-piracy efforts and the threat of higher penalties in the Copyright Law. This achievement appears to be the result of MPA’s focus on bringing criminal, not administrative, actions (both of which are part of MPA’s anti-piracy program in Peru).

However, during the last quarter of 1998, video piracy got worse, and the level of piracy approached 60%, a disturbing trend. This is the result of the fiscal crisis in Peru, which has reduced consumers’ budgets for entertainment, and in turn affects the home video market, and to a lesser extent, the theatrical market.

            Widespread video piracy by video clubs and street vendors presents the most significant challenge to the motion picture industry. Ninety percent of the over 500 video clubs distribute infringing material. Pirate duplication labs are the source of most illegal videos in Peru. Four or five major pirates are believed to operate in Peru, and one is known to have extensive contacts with an infamous Central American supplier of pirate products. These illegal duplicators are difficult to track because they operate small laboratories that are well concealed and constantly moved to avoid raids. They distribute illegal product through public street markets to the video clubs. Enforcement there is hampered by threats of violence and by leaks of information about planned raids. In June 1998, MPA obtained the first court order granting an injunction to search a company making illegal videotapes, seizing approximately 2,000 pirate videos, including blockbusters like Titantic and Deep Impact (which had not yet been released in video format). In addition, video clubs also make small numbers of back-to-back copies using up to five VCRs at a time. MPA has also obtained several court orders to raid street markets, and has not experienced any problems in obtaining such orders.

            Cable television piracy continues to be a secondary problem in Peru, mainly due to the lack of government control over local cable systems. This problem is increasing as cable operators expand their systems outside Lima. The estimated level of cable and satellite piracy remains at 60%. Overall, losses to the U.S. motion picture industry due to audiovisual piracy in Peru during 1998 were estimated at $4 million, a drop from the $5 million in 1997.

            MPA focuses about 90% of its program on criminal actions. Private investigations into targets are conducted by MPA local counsel, who file these actions on behalf of MPA member companies against the alleged infringers with the specialized IPR prosecutor. MPA is pleased with the fact that it can obtain judicial, criminal orders to raid labs and markets, and to force open doors that are locked (in contrast, INDECOPI does not have this power).

 

            During 1998, MPA conducted 85 investigations and ran 84 raids. Last year, MPA obtained over 25 court decisions, with typical imprisonment sentences from one to two years and payments of damages (which ranged from $200 to $500). Fourteen of the 25 sentences have been appealed. The appellate court has confirmed nine of these, and the remainder are pending, at last report. These actions resulted in the seizures of 26,790 pirate videos, 14 VCRs and 30 albums. No criminal case filed in 1998 have yet reached the sentencing stage. In addition, no defendant was sanctioned with imprisonment from any of the cases from 1997.

Only 10% of the 85 actions mentioned above (eight cases) were filed with INDECOPI’s Copyright Office. Most of those cases involved illegal video rentals located outside of Lima; two are against television broadcasters. In total, 84 legal actions were filed. Six cases were concluded, and all of these were before INDECOPI. In five of these cases, illegal video rental outlets were punished by fines which ranged from US$250 to $850. MPA does not possess any evidence that INDECOPI ever collected these fines. The sixth case, against an TV broadcaster, was settled In 1998, the INDECOPI Appellate Tribunal did not review any of MPA’s cases.

Book Publishing

Commercial book piracy and photocopying remain at high levels in Peru, despite the availability of books supported by an RTAC (Regional Trade Aid Center, funded by the U.S. Agency for International Development) program. Trade books of U.S. origin now appear in pirated translations, and there continues to be pirated translations of college texts. The economic situation in Peru has deteriorated, causing the annual growth of RTAC’s distribution to slow. This has resulted in cheaper pirated editions creating a growing market. Estimated trade losses due to book piracy in Peru were $10 million for 1998.

Computer Programs: Entertainment Software

            There is piracy of entertainment software (including videogame CD-ROMs and cartridges, personal computer CD-ROMs and multimedia entertainment products) in Peru. However, estimated trade losses are not available for 1998.

            Nintendo has commenced several criminal and civil actions over the past two years, and has met with moderate success working with INDECOPI. Despite the seizure of thousands of counterfeit and pirate products, there have not been sufficient deterrent penalties imposed on any the defendants to cause them to stop their illegal activities. No one has gone to jail for commercial piracy or the counterfeiting of videogames. In only a few cases where any fines were imposed, they were minimal. Below is a summary of the 12 actions brought by Nintendo in Peru during 1998.

           

3. Because of Inadequate and Ineffective Copyright Protection and Enforcement in Peru, U.S. Copyright Owners Suffer Economic Harm

            Estimated losses due to the piracy of U.S. copyrighted products in Peru for 1998 were approximately $94.5 million.

 

 

 

 

 

 

 

 

 

 

ESTIMATED TRADE LOSSES DUE TO PIRACY

(in millions of U.S. dollars)

and LEVELS OF PIRACY : 1995 - 1998

INDUSTRY	1998		1997		1996		1995
	Loss	Level	Loss	Level	Loss	Level	Loss	Level
Motion Pictures	4.0	50%	5.0	60%	4.0	60%	4.0	95%
Sound Recordings/Musical Compositions	50.0	85%	40.0	80%	NA	NA	16.0	83%
Computer Programs: Business Applications	30.5	64%	25.0	66%	29.4	79%	30.0	84%
Computer Programs: Entertainment Software	NA	NA	5.2	NA	NA	NA	15.0	76%
Books	10.0	NA	10.0	NA	10.0	NA	9.0	NA
TOTALS	94.5		85.2		43.4		74.0

           

            Attached as Appendix 2 is the methodology used by IIPA members to calculate estimated losses due to copyright piracy. This methodology was also submitted to USTR in IIPA’s 1999 Special 301 submission.

                       

CONCLUSION

            For the reasons stated in this submission (including the Appendices), IIPA requests that the TPSC initiate a review the country eligibility of Peru as both a GSP and ATPA beneficiary for its failure to provide adequate and effective copyright protection to U.S. copyright owners. If improvements are not made in Peru to remedy these problems, then IIPA requests that the U.S. suspend the eligibility of, or withdraw GSP and/or ATPA benefits of Peru, in whole or in part.

           

                                                                        Respectfully submitted,

 

 

 

                                                                        Eric H. Smith

                                                                        President

                                                                        International Intellectual Property Alliance