U.S. Trade Representative Issues 2013 Special 301 Report

by McDonnell Boehnen Hulbert & Berghoff LLP

U.S. Trade RepresentativeOn May 1st, Acting U.S. Trade Representative (USTR) Demetrius Marantis issued the 2013 Special 301 Report.  According to the USTR website, the Report "demonstrates U.S. resolve to take strong action to support critical jobs and exports in IP-intensive industries."  "The actions reflected in this year's report send a message to all trading partners on the Priority Watch List and the Watch List that the United States is prepared to use the Special 301 process to its full effect, both to recognize positive action and, where necessary and appropriate, to identify deterioration of the IPR protection and enforcement systems that play such a vital role in international trade," according to USTR Marantis.  The USTR Report "demonstrates U.S. resolve to take strong action to support critical jobs and exports in IP-intensive industries," according to the website announcement, and "regrets" the inclusion of Ukraine, which "earned the first new Priority Foreign Country designation in 11 years" as the result of its "severely deteriorating climate for IPR protection and market access," and "call[s] upon that government to reverse recent backsliding and swiftly resolve the problems identified" in the Report.  This action follows last year's inclusion of Ukraine on the Priority Watch List "in light of serious and growing concerns relating to counterfeiting and rampant piracy."  On the other hand, the Report hails Canada for making "long-awaited progress on concerns identified in past reports."

The Report is promulgated pursuant to Section 182 of the Trade Act of 1974, as amended by the Omnibus Trade and Competitiveness Act of 1988 and the Uruguay Round Agreements Act (enacted in 1994).  The Trade Representative is required under the Act to "identify those countries that deny adequate and effective protection for IPR or deny fair and equitable market access for persons that rely on intellectual property protection."  The Trade Representative has implemented these provisions by creating a "Priority Watch List" and "Watch List."  Placing a country on the Priority Watch List or Watch List is used to indicate that the country exhibits "particular problems . . . with respect to IPR protection, enforcement, or market access for persons relying on intellectual property."  These watch lists are reserved for countries having "the most onerous or egregious acts, policies, or practices and whose acts, policies, or practices have the greatest adverse impact (actual or potential) on the relevant U.S. products."

CoverThis Report, on the state of intellectual property rights worldwide, identifies ten countries on a "Priority Watch List" and another 30 countries on the "Watch List," all relating to deficiencies in intellectual property protection in these countries.  The Priority Watch List in the Report lists Algeria, Argentina, Chile, Chine, India, Indonesia, Pakistan, Russia, Thailand, and Venezuela, with Canada and Israel exiting the list compared with last year's Report.  Countries on this list "do not provide an adequate level of IPR protection or enforcement, or market access to persons relying on intellectual property protection."  On the Watch List this year are Barbados, Belarus, Bolivia, Brazil, Bulgaria, Canada, Columbia, Costa Rica, Dominican Republic, Ecuador, Egypt, Finland, Greece, Guatemala, Israel, Italy, Jamaica, Kuwait, Lebanon, Mexico, Paraguay, Peru, Philippines, Romania, Tajikstan, Trinidad and Tobago, Turkey, Turkmenistan, Uzbekistan, and Vietnam; compared to last year, Brunei and Norway have been removed from the list and Canada is on the list this year, with Ukraine having been moved to the Priority Watch List.  The Report lists a "wide range of concerns, including the continued deterioration in IPR protection, enforcement, and market access for persons relying on IPR in Ukraine; the growing problem of misappropriation of trade secrets in China and elsewhere; troubling 'indigenous innovation' policies that may unfairly disadvantage U.S. rights holders in China; the continuing challenges of copyright piracy over the Internet in countries such as Brazil, Italy, and Russia; and other ongoing, systemic IPR enforcement issues presented in many trading partners around the world."  Despite these concerns, the Report evinces a desire to "work[] closely with the governments of [U.S.] trading partners [identified in the Report] to address both emerging and continuing concerns, and to build on the positive results many of these governments have achieved."

The Report notes that public response to a Federal Register Notice used to prepare the Report continued the "enhanced approach to public engagement" instituted last year, with the USTR receiving 41 comments (access to these comments is provided at www.regulations.gov, docket number USTR-2012-0022).  In addition, 13 witnesses provided testimony at a public hearing on February 20, 2013; these witnesses included "representatives of foreign governments, industry, and non-governmental organizations" (available on the USTR website).

The Report notes some "positive developments" in the past year, including copyright amendments in the Bahamas that benefited U.S. copyright holders, and the removal of Brunei from the Watch List due to its "significantly increased its focus on IPR protection and enforcement in recent years, through substantial and meaningful enforcement efforts, including both civil and -- for the first time -- criminal actions."  Also, "Canada enacted the long-awaited Copyright Modernization Act in 2012, which, among other things, is designed to implement Canada's obligations under the WIPO Internet Treaties and address the challenges of copyright piracy in the digital age" which garnered U.S. approval, and Israel "enacted a law improving its procedures for the publication of patent applications."  China was lauded in the Report for the decision by the Supreme People's Court "on the liability of Internet intermediaries ('Rules of Supreme Court on Several Issues Concerning the Application of Law in Adjudication of Civil Disputes Related to Infringement of Right of Communication over Information Networks')."  The Report also extolled Russia for developing an "IPR Action Plan" with the U.S. directed towards "the areas of greatest mutual concern in IPR protection and enforcement," which include enactment of laws for a specialized IPR court and amendments to the Russian criminal code "to revise criminal thresholds for copyright piracy."  Panama, the Philippines, Taiwan and Turkey were also noted for positive measures adopted by their governments in 2012.

Several initiatives were also mentioned.  As in the 2012 Report, these included the Trans-Pacific Partnership Agreement, between the U.S. and Australia, Brunei Darussalam, Chile, Malaysia, New Zealand, Peru, Singapore, and Vietnam, and in addition, Canada, Mexico, and Japan; the Transatlantic Trade and Investment Partnership between the U.S. and the EU; actions by the World Trade Organization in support of IP rights; the Anti-Counterfeiting Trade Agreement (ACTA) between the U.S. and Australia, Canada, Japan, South Korea, Mexico, Morocco, New Zealand, Singapore, with Japan becoming the first signatory to deposit its instrument of acceptance; bilateral and regional initiatives, including free trade agreements and Trade and Investment Framework Agreements; and the USTR Trade Preference Program Reviews such as the Generalized System of Preferences (GSP) program relating to Russia, Lebanon, and Uzbekistan, and regional programs including the Caribbean Basin Economic Recovery Act (CBERA).  Finally, the Representative "looks forward to continuing engagement with trading partners in bilateral, regional, and multilateral fora to improve the global IPR environment"; including the U.S.-EU Summit, and in the Asia Pacific Economic Cooperation (APEC) forum, and the Organization for Economic Cooperation and Development (OECD).

The Report contains a section on "best practices" among U.S. trading partners, including "encourage[ing] trading partners to work with the United States to develop mutually agreed-upon action plans to advance the protection and enforcement of IPR," specifically noting the "action plan" with Russia.  Cooperation between governments is also mentioned, as well as "innovative mechanisms that enable government and private sector rights holders to voluntarily donate or license IPR on mutually-agreed terms and conditions."  These include the use of existing IPR to advance policy goals and innovation, specific examples of which are the Medicines Patent Pool under the auspices of the World Health Organization and the WIPO Re:Search Consortium among the U.S., Brazil and South Africa.

There is a section of the Report again this year regarding "capacity building efforts" that relate to "opportunities for the U.S. Government to work closely with trading partners to address [IPR] concerns."  These efforts are described in the Report as being directed to "building stronger, more streamlined, and more effective systems for the protection and enforcement of IPR," which seems to include an effort to encourage U.S. trading partners to enact criminal penalties for IPR infringement.  The Report documents the efforts of the USPTO's Global Intellectual Property Academy (GIPA) to provide training ("9,217 foreign IP officials from 130 countries through 140 separate programs") as well as programs administered by other U.S. government agencies (including the USPTO's Office of Policy and External Affairs; the International Trade Administration; the Bureau of Customs and Border Protection; the Commercial Law Development Program and programs in law enforcement administered by the Departments of Justice and Homeland Security).

A significant part of the Report focuses on "trends" in counterfeiting and copyright piracy, as it has in other years.  This area "continue[s] on a global scale," according to the Report, "involving the mass production and far-reaching sales of a vast array of fake goods, including counterfeit semiconductors, medicines, health care products, food and beverages, automobile parts, such as air bags, aircraft parts, apparel and footwear, toothpaste, shampoos, razors, electronics, batteries, chemicals, sporting goods, motion pictures, and music."  The Report recites a "[s]ustained growth in piracy of copyrighted products in virtually all formats," which "offer enormous profits and little risk."  Online sales of counterfeit goods "will soon surpass the volume of such goods sold" in physical markets, which raise "difficulties" for IPR enforcement.  Also noted is an increase in legitimate businesses, such as courier services, enlisted to deliver infringing goods, as well as the practice of producing the goods and the counterfeit labels separately, specifically citing Canada and Vietnam for such practices.  There is also the emergence of "Media Box piracy," defined as a situation "whereby 'boxes,' often with capability to play high definition content, are loaded with large quantities of pirated works.  These boxes may be sold with preloaded content, but can later have new content uploaded for a relatively low fee.  Boxes may be purchased online, with the user's chosen content, and delivered via postal service, or may have online capabilities allowing consumers to download infringing content from the Internet or through downloadable apps.  This problem has been reported in China, Indonesia, Malaysia, Taiwan, Thailand, and Vietnam."

The Report calls for "[s]tronger and more effective criminal and border enforcement" to reverse these trends.  Another "growing" problem is counterfeit pharmaceuticals, either final drug product or active pharmaceutical ingredients (API); Brazil, China, India, Indonesia, Lebanon, Peru, and Russia are cited as countries where the former type of counterfeiting is a problem and China is cited as being a "major source" of counterfeit APIs.

Another section of the Report is concerned with digital piracy, particularly over the Internet, which is "a significant concern in many U.S. trading partners."  The "increased availability of broadband Internet connections around the world . . . has [] made the Internet an extremely efficient vehicle for disseminating copyright-infringing products, replacing legitimate markets for rights holders," according to the Report.  Piracy is a "significant" concern, with "[u]nauthorized retransmission of live sports telecasts over the Internet" being singled out as "a growing problem."  New technologies, including media boxes as discussed above, are also recognized to be a problem, with "U.S. copyright industries also report[ing] growing problems with piracy using mobile telephones, tablets, flash drives, and other mobile technologies."  Further mentioned are the "emergence of private servers, which permit "cloud-based entertainment software" to have access to such unauthorized servers "to play copyrighted video games that are made available through hacked software and/or circumvention of the rights holders' technological protection measures."  In this regard, the Report specifically calls out SlySoft, "a company headquartered and operating in Antigua, which developed and sells a program called 'Any DVD HD' enabling the user to defeat the encryption technology embedded in Blu-ray Discs that prevents unauthorized reproduction and distribution," operating despite an Antiguan law prohibiting "manufacture or import for sale or rental any such circumvention device."  Despite cooperation between the Antiguan government and a "consortium of electronic manufacturers, software companies, and motion picture studios that developed these technological protection measures," progress on changing Antiguan law is deemed "slow" in the Report.

The Report asserts that the U.S. "will work with its trading partners to combat these growing problems," and urges U.S. trading partners to "adequately implement the WIPO Internet Treaties."  The Report specifically recites a list of trading partners that includes Argentina, Belarus, Brazil, Chile, China, Colombia, India, Indonesia, Italy, Mexico, Philippines, Romania, Russia, Spain, Switzerland, Taiwan, Thailand, Turkey, Ukraine, Venezuela, and Vietnam in this regard, and Switzerland is "strongly encourage[d] . . . to combat online piracy vigorously."

Trade secrets and forced technology transfer are identified as problems in "a wide variety of industry sectors" that include "information and communication technologies, services, biopharmaceuticals, manufacturing, and environmental technologies."  The threat of trade secret misappropriation is "increasing," particular with regard to electronic espionage.  Particularly noted in the Report in this regard is China, with trade secret theft involving "departing employees, failed joint ventures, cyber intrusion and hacking, and misuse of information submitted to government entities for purposes of complying with regulatory obligations," with remedies in China being "difficult to obtain."  "Chinese actors are the world's most active and persistent perpetrators of economic espionage," according to the U.S. National Counterintelligence Executive, with recent evidence indicating that "actors affiliated with the Chinese military and Chinese Government have systematically infiltrated the computer systems of over one hundred U.S. companies and stolen hundreds of terabytes of data, including all forms of trade secrets, such as proprietary technology, manufacturing processes, and confidential business information."

The Report cited a publication by the U.S. Intellectual Property Enforcement Coordinator on February 20, 2013 of "Administration Strategy on Mitigating the Theft of U.S. Trade Secrets," which "highlights U.S. efforts to combat the theft of trade secrets that could be used by foreign governments or companies to gain an unfair economic advantage by harming U.S. innovation and creativity."  These include:

• "Focusing diplomatic efforts to protect trade secrets overseas;
• Promoting voluntary best practices by private industry to protect trade secrets, including information security, physical security, and human resources policies;
• Enhancing domestic law enforcement operations, especially through the activities of the Department of Justice, Federal Bureau of Investigations, Department of Defense, and the National IPR Coordination Center;
• Improving domestic legislation to protect against trade secret theft, [and]
• Conducting public awareness campaigns and stakeholder outreach to encourage all stakeholders to be aware of the dangers of trade secret theft."

The Report also notes that "threat of trade secret theft is not the only way that foreign actors may seek to undermine U.S. commercial advantages," and urges U.S. trading partners to "eject trade-distortive policies," which include:

• Requiring the transfer of technology as a condition for allowing access to a market, or for allowing a company to continue to do business in the market;
• Directing state-owned enterprises in innovative sectors to seek non-commercial terms from their foreign business partners, including with respect to the acquisition and licensing of IPR;
• Failing to effectively enforce IPR, including patents, trademarks, trade secrets, and copyrights, thereby allowing firms to gain competitive advantages from their misappropriation or infringement of another's IPR;
• Failing to take meaningful measures to prevent or deter cyber intrusions;
• Requiring use of, or providing preferences to, products or services in which IPR is either developed or owned locally, including with respect to government procurement;
• Manipulating the standards development process to create unfair advantages for domestic firms, including with respect to the terms on which IPR is licensed;
• Requiring unnecessary disclosure of confidential business information for regulatory approval, or failing to protect such information.

As it has for the past few years, the Report contains a section on "Intellectual Property and Health Policy," again specifically mentioning the 2001 Doha Declaration on the TRIPS Agreement.  The Report states that the Declaration "recognized the gravity of the public health problems afflicting many developing and least-developed countries, especially those resulting from HIV/AIDS, tuberculosis, malaria, and other epidemics," and that the U.S. "respects a trading partner's right to protect public health and, in particular, to promote access to medicines for all, and supports the vital role of the patent system in promoting the development and creation of new and innovative lifesaving medicines."  Accordingly, the Report states that the U.S. "respects our trading partners' rights to grant compulsory licenses in a manner consistent with the provisions of the TRIPS Agreement, and encourages its trading partners to consider ways to address their public health challenges while maintaining intellectual property systems that promote investment, research, and innovation."  The U.S. "strongly supports" the WTO General Council Decision on the Implementation of Paragraph 6 of the Doha Declaration on the TRIPS Agreement and Public Health.  The Report, in a section relating to "pharmaceutical and medical device innovation" cites "the policies of several developed trading partners, including Finland, Germany, Greece, Hungary, Italy, Korea, New Zealand, Poland, Portugal, Romania, Spain, Turkey, and Taiwan, on issues related to innovation in the pharmaceutical sector and other aspects of health care goods and services."  The U.S. is "seeking to establish or continue dialogues with relevant trading partners to address these and other sectoral concerns, and encourage a common understanding on questions related to innovation in the pharmaceutical and medical device sectors," specifically regarding China in this regard.

The Report contains in a final section a review of U.S. activities in the WTO to resolve disputes with countries such as China and the EU over trade issues.

Section II of Report is a detailed, country-by-country discussion for each country on the Priority Watch List and the Watch List, relating to the activities (or lack thereof) of each country that results in placement of that country on these lists.

As it has for the past several years (and across otherwise very different Administrations), the U.S. Trade Representative Report provides insights into both the concerns of U.S. IP rights holders and the Administration's intentions to work with, cajole, coerce, or threaten other countries to increase protection for IP rights of U.S. IP rights holders.  The Report seems to revert to earlier attempts, generally no more than partially successful, by the U.S. and other Western governments to implement international trade treaties designed to increase IP rights protection.  It remains to be seen if that approach is continued in next year's Report, or if U.S. trade policy will continue to swing through the pendulum of the carrot or the stick regarding international intellectual property rights enforcement.

For additional information regarding this and other related topics, please see:

• "U.S. Trade Representative Issues 2012 Special 301 Report," May 1, 2012
• "U.S. Trade Representative Releases Special 301 Report on Global IPR," May 4, 2011
• "U.S. Trade Representative Releases Special 301 Report on Global IPR," May 19, 2010
• "New Administration, Same Result: U.S. Trade Representative's Section 301 Report," May 6, 2009
• "Congressmen Criticize U.S. Trade Representative over Special 301 Report," July 1, 2008
• "U.S. Continues Efforts to Protect Patent Rights Abroad," April 29, 2008


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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