Notes from PIJIP Event: “Special 301 and the Enforcement Agenda: Competing Perspectives on U.S. Intellectual Property and Trade Policy.

On April 6, PIJIP hosted a a debate between two leading industry advocates with divergent visions of U.S. trade policy on intellectual property and technology matters. The panelists were Matt Schruers, Vice President for Law & Policy, Computer & Communications Industry Association (CCIA members include Google, Facebook, Oracle, eBay, NVIDIA, and AMD);  and  Steve Metalitz, Partner, Michell Silberberg & Knupp LLP  (MS&K clients include Sony, RIAA, MPAA, and ASCAP).  Sean Flynn, Associate Director of PIJIP, moderated.

The event was webcast and is available here: http://auw.cl/s301

In his opening statement, Metalitz described how U.S. industries came together in the early 1980s to seek greater IP protection through trade policy.  Around that time, it was becoming clear that the fastest growing parts of the U.S. economy relied on IP, and that they were having troubles in foreign markets where IP was not protected.  They faced other barriers too – there was a close link between piracy of IP goods and other barriers to market access for firms that rely on IP protection.  An example of other barriers that discriminate against foreign firms that rely on copyright is an Indonesian ban on foreign ownership of certain types of firms.  The statutory basis for the Special 301 Report addresses both IP and other market barriers for firms that rely on IP.

Special 301 has changed over years, and one major reason for this was the entry into force of the TRIPS Agreement.  Most of our trading partners (other than Russia) are WTO Members, and the WTO rules prevent unilaterally sanctions.  Special 301 was originally meant to provide a framework to designate certain countries as Priority Foreign Countries, and then for the US to impose trade sanctions or tariffs in order to retaliate against their market deficiencies.  Tariffs were imposed in some cases, and brinksmanship with the threat of trade sanctions occurred in others.   This is no longer in practice because as WTO Members we have an obligation not to discriminate. The U.S. has much less flexibility to unilaterally retaliate against trading partners, even if their markets are closed to U.S. goods – we are supposed to resolve disputes at the WTO.  So today, Special 301 is different than it was originally intended.  It helps to convey a sense of priorities, and shows what the U.S. will be focusing on in bilateral engagements in the year ahead.  It still serves a purpose, even if it is a different purpose than originally intended.

Matt Schruers began saying that he was speaking on his own behalf, not on behalf of his organization, the CCIA.  He said that the current discussion is the result of a general decision to make IP a trade issue. This merits some examination, but undoing that decision is not really viable approach.  Today, IP issues are permanently committed to the international trade framework, for better or worse.

Regarding trade policy, we come to the question of whether or not we should be “ramming our norms down other peoples’ throats,” and the answer is yes. We want others to adopt certain norms, including free expression, democracy, and intellectual property protection.  Special 301 has some positive attributes as a way to export our norms.  It is fast, and it’s a relatively democratic exercise including a transparent comment process and open hearings.  Special 301 is more transparent than other mechanisms like bilateral trade negotiations.

To other countries, Special 301 is sort of a “kangaroo court” where we name and shame countries, and it allows us to hold access to our markets hostage. In trade agreements, the U.S. does not get everything we want (for instance, we did not get everything we wanted in ACTA, and we won’t in the TPP.

Our trade policy is good at promoting the interests of firms that rely on IP protection, but it is slow to respond to other technology-industry trade barriers like censorship.  There are industrial interests that depend on limitations and exceptions to copyright, and those interests are not being represented in the norms we export.

There is a lack of insight into how the norms we export operate. In developing countries, you see a system that is underdeveloped, both in protection of IP and in limitations and exceptions. If you never bring any actions to enforce intellectual property, then the limitations and exceptions are kind of irrelevant. However, when you strengthen the protection (as the U.S. is promoting) but not the limitations and exceptions, you have problems.

Our trade policy seems to miss the distinction between substantive norms and enforcement of IP.  Special 301 tends to focus on the substantive issues of IP protection in  countries, but then call them ‘pirates’ and shame them as though they do not enforce IP because we disagree with the way in which their IP laws work.  This lacks credibility.  For instance, we list Canada as being one of the main offenders, when there are other countries that have more of a problem with IP enforcement.

Sean asked Steve Metalitz to respond to the points Matt Schruers raised regarding the export of norms on limitations and exceptions, and to discuss differences between the point of view of content-owning industries and other technology industries.

Metalitz said he would not characterize current trade policy as “ramming norms down others’ throats,” The WTO has established international norms that we want other countries to live up to.  The WIPO internet treaties have established other international norms that 80 or 90 countries adhere to.  This makes a difference, and asking countries to uphold their agreements seems moderate.  In some non-IP areas, like free speech, there are weak or no equivalent international norms.

In terms of access to our market, we have no leverage in 301 proceedings.  There will probably never be actual retaliations imposed through Special 301.  In contrast, we do have interest in the negotiation of trade agreements, where the whole exercise is to determine under what conditions will we open our markets.

Schruers answered that he agrees with a lot of what Metalitz said, but he does not think U.S. policy only asks other countries to uphold their obligations in international agreements.  The US often ask for TRIPS-Plus intellectual property protection. TRIPS obligations used to be “gold standard,” but now we ask for stronger measures.  The U.S. also asks countries to do more than the WIPO treaties require.  One example is our efforts to export DMCA-style anticircumvention measures, which are much more detailed than what is found in the WIPO treaties.

Flynn asked the panelists if they believe that all countries should have the same IP framework (if “one size fits all”), or if there is room for differentiation between countries.

Schruers said if we seek to harmonize IP, we should think about what we are harmonizing.  For a long time, the US policy was that “rights” should be harmonized, but limitations and exceptions were “flexibilities” that countries should be free to adopt or not.  But many U.S. industries rely on legal protection under the limitations and exceptions in the same way that content owners rely on IP protection.  The lack of trade policy promotion of limitations and exceptions leads to situations where our firms are getting attacked in other countries for doing things that are legal in the US (examples including France and Belgium).

Metalitz agreed that Brazil should not have the same copyright law as the US, and that one size does not fit all, but he stressed that it is important countries abide by international norms.  Countries can implement the norms in different ways, but they need to meet the norms – and this applies to both the rights and the limitations and exceptions.

However, promotion limitations and exceptions is “ramming our norms down other people’s throats.” The fair use doctrine was a poison pill in the ACTA negotiation.  We should be careful about insisting countries exceed norms regarding limitations and exceptions.  Schruers noted that geographical indications were a stumbling block in the ACTA negotiations, but Metalitz replied that fair use was the “intractable copyright issue.”

Flynn asked Schruers to respond.  Is there a problem with promoting norm-plus exceptions as opposed to norm-plus rights?

Schruers said that there are international norms on limitations and exceptions, such as the news of the day rule. Mandatory minimums exist. However, the existing norms on exceptions are not the most relevant for industries with legal exposure.  He also said that if the Special 301 Report gets too technical with substantive rules in intellectual property, this takes away from the real exercise of naming and shaming those who do not enforce it. Therefore, the proper place for harmonizing limitations and exceptions is plurilateral and multinational agreements.  One example is the fair use reference in the Korea FTA.

Flynn asked the panelists if the greater transparency in the negotiation of trade agreements would be good or bad for their industries’ interests.

Schruers said neither the CCIA nor its members have complained about the process, and when they reached out to trade officials, they listened.  He acknowledged that this is more meaningful for trade associations with a DC presence than it is for other interests.  He doesn’t disagree that by doing everything in a nontransparent manner, (as opposed to more open, WIPO-like negotiations), USTR creates problems. If the public’s knowledge is based on information from leaks, not only does the U.S. not get the secrecy it wants, but is looks bad. We need to accept that the current intellectual property system has some credibility problems, and recognize that secret negotiations don’t help.

Metalitz noted that negotiators are faced with rising standards of transparency. In the past, trade negotiations have never been very transparent.  Texts come out along the line, but the actual meetings have been relatively closed.  U.S. negotiators are probably more prone to transparency than other country negotiators, but negotiators never expect to be working in a fishbowl. In the era of wikileaks, people expect a high level of transparency.  It may be harmful for arriving at good agreements, but it is what the public has come to expect – and lack of transparency encourages people’s fantasies.

Schruers agreed that it is hard to negotiate in a fishbowl, and that it causes negotiations to take longer.  However, the norms that come out of transparent negotiations have more credibility.  WIPO negotiations take a very long time but have a lot of credibility.  It is also important that all relevant parties have their interests represented.  In the U.S. Congress, there are backroom negotiations, but people understand that their Representatives are looking out for their interest, so they don’t get mad.  On the other hand, there is no sense that USTR is representing everyone in the U.S.  It is important that public interests are credibly engaged in the debates.  Otherwise, secrecy leads to overblown fears in the public, like hype about border guards seizing iPods, which was never actually intended in ACTA.

Flynn noted that one distinction between Congress and USTR is that legislation is never classified.  When you talk to people on Capitol Hill, you don’t have to talk in general terms.  My sense is that in the trade world, it happens if you are a cleared advisor who’s signed a nondisclosure agreement.  Is this a problem?

Metalitz said that the institutional expectation of trade negotiators is different. Their work is classified, and it always has been.  In some areas of Congress’ business, legislators work with classified texts.

Schruers noted that in the ACTA negotiations, there were individuals who signed nondisclosure agreements, including people at CCIA, and it provided a basis for substantive discussion.  Also with ACTA, people were able to have substantive discussions with leaked documents. USTR has made an effort to reach out to interest groups and to increase transparency. Much more could be done, but serious efforts have been made.  Metalitz pointed to the example of the Special 301 hearings, in which even foreign governments can wade in and object to what people say about them.

Flynn asked the panelists to comment on the Media Piracy in Emerging Economies report. It accepts the existence of large markets of infringing goods, which can include up to 90% of markets by volume. It says that piracy is driven by pricing, not by a lack of IP enforcement.  What can the legal framework do to address this issue, and have your industries looked into ways to approach it?

Metalitz said that the report’s findings are not novel.  IIPA is often told by officials in developing countries that their product are too expensive and that the countries would buy more if the products cost less. As a coalition of trade associations, IIPA can’t get involved with the prices set by individual companies.

It is not true that companies are uninterested in selling to the masses, preferring instead to sell at high prices to a sliver of the market and then attack the masses as with IP enforcement.  Businesses want to find a way to sell to these markets. In the area of business software, local companies will buy one copy and share it with everyone else at the firm because they think they can save money and improve their bottom line.  The problem is that the strength of rule of law is insufficient and the ability to enforce private contracts is limited.

Schruers agreed that the rule of law  is not respected in all markets.  In some places no one pays taxes because they know they won’t get caught and their payments might be misappropriated anyway.  This shows that we need rule of law and a credible intellectual property system that people will trust.  But when you attack local people as pirates it creates a perception problem.

Media Piracy in Emerging Economies probably has not gotten as much attention as it should because everyone knows the premise.  The report’s value is that it provides data to support this.  The pricing problem exists. In some situations, companies can only sell in local markets if they price so low they sell at a loss.  Sometimes, you need to price some stuff at a loss.  In those instances, some industries just don’t enter the market, and people have access to the products at all unless they buy IP infringing copies.

Metalitz agreed that there is a problem when legitimate products are simply unavailable, and that in very small, very poor markets, companies may not want to compete.  However, firms want to sell as much as they can in most markets, and market restrictions keep them out.  Whether or not a good is too expensive is a different question.  A business will probably pay for electricity, will buy furniture, may pay taxes, but it will see that it can get away with pirating software.  This is an economically rational decision, but adequate enforcement would make it not rational.

The floor was opened up for Q&A, and the first question was on DVD and music markets in middle income countries like India, where a legitimate good can cost far more relative to local purchasing power than in the U.S. (a DVD can be the equivalent of hundreds of dollars).  What steps are industries taking to be competitive?

Metalitz answered that the DVD market in India is not how most people watch movies in India.  Increasingly, mode of distribution is online, and hopefully it will lower costs.  Companies are trying to get their products into these Indian markets, but they face barriers.  One recent statistic on ease of doing business ranked India 184 out of 185 countries on the ability to enforce contracts.

The second questioner asked about Special 301. If companies rely on limitations and exceptions to copyright, shouldn’t USTR promote them as part of the 301 process to make sure companies like eBay and Google are not prosecuted overseas?

Metalitz answered that limitations and exceptions are very important to IIPA’s companies too, but that the statute for Special 301 is focused on intellectual property protection.  It also says that USTR should protect firms that rely on IP protection.

The next question concerned problems faced by Chinese companies seeking to buy products from U.S. firms – and US companies looking to sell products in China – but whose transactions are blocked by restrictions related to military use.  Metalitz answered that IIPA’s members wouldn’t have a position on the particular issue raised by the Chinese questioner, but they are generally in favor of greater access to cross border trade.

The final question concerned the recent WTO cotton dispute won by Brazil, which then threatened to invalidate US patents as a form of retaliation.  Would this action have been consistent with the WTO as it exists now?  If so, then should the WTO be changed?

Metalitz answered that everyone is glad the patents were not invalidated, but reason that the WTO is important is that it does involve cross-sectoral retaliation.  It is “part of the fabric of the WTO.”

Schruers said that the Brazilian threat to invalidate patents as a trade retaliation is a consequence of linking IP and trade.  We think of enforcement tools as something to use against others, without thinking that other countries could use them against us. Situations where countries seek to invalidate patents as a form of trade sanction could become more common.

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