September 23, 1989 on the basis of the understanding that the Argentine Government had given reasonable assurances that it would address constructively the issue of patent protection for pharmaceutical products.

Two years later, in October 1991, President Menem sent a flawed bill to the Congress which the Congress failed to act on. The Menem Administration failed to put its weight behind the bill. After three and one half years since the original commitment to the USTR, in March 1993, the Industry Committee of the Chamber of Deputies voted 14 to 2 to postpone discussions about any improvement in patent protection until an agreement in the GATT (Uruguay Round) is reached and only then will they ostensibly start the discussion of the pharmaceutical patent issue.

With respect to Brazil, in 1987, following the filing of a 301 petition by PMA, USTR found that Brazil was infringing PMA companies' patent rights which led to the application of sanctions on Brazil on October 1988. When the Collor Administration assumed power in 1990, pursuant to negotiations between the U.S. and Brazil, Collor sent the pharmaceutical patent bill to Congress and the sanctions were lifted. After Congressional deliberations of more than two years, the proposed law being considered continues to be absolutely unacceptable in meeting world class standards.

So, in both cases, we have been negotiating and waiting at least since 1987 for improvements with no results. Therefore, our only alternative based on the facts explained above is to act decisively and propose immediate and meaningful sanctions.

With regard to India, there has been no country which has played a more insidious role in the undermining of global standards of effective intellectual property protection than India. While the Indian Government has shown a willingness to create incentives for investment in other economic sectors, it has chosen to ignore the potential contribution of the research-based pharmaceutical industry by refusing to accept any of the increasingly global standards for intellectual property protection for pharmaceutical products.

It thus also has condemned its citizens to low quality and at times dangerous medicines which are produced by Indian pharmaceutical patent pirates. Since these same pirates export these medicines to other countries, especially in the Asia-Pacific region, the Indian Government endangers the health and safety of many more hundreds of thousands of citizens beyond India's shores. If India were to enact effective patent protection, we estimate that the patented pharmaceutical market in India could be close to $ 300 million per annum, whereas today it is less than half that amount.

India also has led an effort within the GATT negotiations to delay the implementation of effective global norms of intellectual property protection by as much as 10 to 20 years, and to resist the acceptance of the principle of pipeline protection of qualifying pharmaceutical patents of any future GATT agreement.

Because India has refused to negotiate at all for improved patent protection for pharmaceuticals, we would urge the U.S. Government to take immediate action against India by reducing India's GSP benefits from the U.S., as it did one year ago.

Question: In 1989, Canada was placed on the "Watch List" under the "Special 301" provisions of the 1988 Trade Act, because of the compulsory licensing provisions for pharmaceuticals. In January 1992, Canada announced that it would end compulsory licensing of pharmaceuticals and extend patent protection to 20 years from the date of registration as part of a Uruguay Round agreement. Legislation to implement those changes was introduced at the end of 1992, and, as of January 1993, was close to becoming law. Can you tell me where this currently stands? And are you content with the resolution?

Response: In past years, PMA has suggested that Canada be placed on the

Special 301 Watch List. On February 3, the Canadian Parliament passed C-91, the Mulroney's government's patent bill. The passage of C-91 eliminates the discrimination against full patentability of pharmaceuticals not researched and discovered in Canada and the use of compulsory licenses as a sanction. Because of this achievement, PMA does not believe that Canada should be considered any longer in the context of Special 301.

While it may be too early to gauge the full impact of this change in Canada, PMA member companies certainly have been encouraged by this change and perceive a much brighter future for the industry in Canada, especially in terms of the opportunities for increased research and development for new drugs in that country.

Question: Since 1989, Japan has been on the "Special 301" "Watch List" from which the United States seeks stronger intellectual property protection. I would like to hear from each of you as to what you perceive is Japan's most flagrant violation and what, if any, action this Administration should be contemplating.

Response: In general, PMA member companies do not encounter significant problems in the patent application and grant process in Japan. The U.S. research-based pharmaceutical industry has encountered one particular problem with the Japanese patent term restoration law.

Specifically, the problem is that products which receive a marketing authorization prior to patent grant are not eligible for patent term restoration. This issue is of particular concern to our industry, because of the long eight to twelve year delay in Japan between patent filing and patent grant. The long delay between filing and grant is due to the long prosecution period which averages three to five years, and the fact that the opposition period is only allowed within the pre-grant stage of a patent application. If an opposition is filed, patent grant could be postponed for five to seven years in the case of a simple opposition.

While expedited prosecution is provided for in certain situations, these opportunities are of little or no use to the pharmaceutical industry in addressing the patent term restoration problem. Due to delays in the granting of a patent in Japan, in a number of cases, especially those involving innovative drugs, products receive a marketing authorization prior to patent grant and thus are not eligible for patent terms restoration. The problem does not occur in the United States, where the period between patent filing and grant is only two to three years, or in Europe, where the same period lasts about five years.

The other problem in the patent are in Japan really applies to the biotechnology companies which are research affiliates of PMA. This generally involves the narrow protection given in Japan to the original inventor of a biotechnology invention. This applies, for example, to "second generation products," or new polypeptides produced by the DNA sequence. The invention typically involves only a particular portion of the DNA sequence, i.e., the portion that codes for the new polypeptide. The rest of the DNA sequence is relatively unimportant.

In Japan, patent examiners apparently are hesitant to grant a patent claim to only a portion of the DNA sequence. There is a huge backlog of applications that worsens this problem, with the Japanese Patent Office apparently avoiding a decision. The result of such a claims structure essentially is to allow others to use the DNA sequence coding the new polypeptide simply by changing the unimportant part of the remainder of the sequence. Thus the protection given to the original inventor is very narrow.

Another problem is that access to Japanese courts is extremely limited. The discovery procedures for investigating infringement are much more limited than in the U.S. Courts delays are notorious in Japan, and judges there push litigants toward settlement. Under the patent statute, patent claims are interpreted literally, that is, as they are written. The doctrine of equivalents, which is used in the U.S. to expand the interpretation of a claim beyond its literal wording, is virtually non-existent in Japan.

None of these problems is necessarily biased against foreign inventors utilizing the Japanese system. Japanese inventors indeed are subject to the same law. Nonetheless, U.S. innovators, including some PMA research affiliates, would be more affected to the degree that they are more likely to arrive at a seminal invention that can receive broad protection in the U.S., but only narrow protection in Japan. In contrast, a pioneering Japanese company would receive broad protection in the U.S. Thus, there is an apparent problem of reciprocity.

Question: I would like to ask a question as it relates to the NAFTA. As we all know, Mexico has made strides in resolving many of its intellectual property concerns and the NAFTA will resolve additional U.S. concerns if implemented. I would like each of you to tell me your position on the NAFTA generally and specifically how you envision the NAFTA strengthening the intellectual property rights issue?

Response: PMA believes that the NAFTA is a monumental agreement in that it strengthens pharmaceutical patent protection and provides other benefits to increase the competitiveness of the U.S. research-based pharmaceutical industry.

The NAFTA reinforces the gains achieved in a recently-implemented Mexican patent law which went into effect on June 28, 1991. The law contains many of the provisions developed in the NAFTA such as a twenty-year patent term, product and process patent protection for pharmaceuticals, limited compulsory licenses, immediate implementation and pipeline protection. Mexico's law represents a major advancement in the protection of intellectual property protection and is a benchmark for other countries to follow.

Further, NAFTA also will build on the recently-passed Canadian Patent Law, C-91. C-91 promises to eliminate flaws in the previous law in Canada, particularly, discrimination against pharmaceuticals not researched and discovered in Canada and openended compulsory licensing language. For its part, the NAFTA will reinforce and internationalize positive elements of C-91.

Thus, we strongly support speedy Congressional implementation of the NAFTA agreement.

Question: Russia is the largest and wealthiest republic of the former Soviet Union. While there are no significant legal barriers to trade with Russia, there are a number of factors that discourage trade. The Russian government has shown considerable interest in formulating laws to bring the country up to world standards in the area of intellectual property. One of the weak point's with Russia is its inability to enforce existing and contemplated IPR Laws. What if anything should the United States be doing to hep them resolve this problem or should we be even contemplating trading with the Russian?

Response: I believe we should support the Russian Federation's efforts to formulate laws to bring it to world standards in order to facilitate and expand trade. In the area of intellectual property protection, Russia has enacted legislation which significantly improves upon the protection previously afforded. Enforcement of this and other laws, however, is crucial to their success and meaningfulness.

To help Russia overcome obstacles to the implementation and enforcement of the legislation, the U.S. and other developed western countries, in conjunction with interested industries should consider affording the Russian authorities technical expertise in the area of patents. For example, the U.S. Patent office conducts training programs for foreign patent officials. The U.S. pharmaceutical industry in conjunction with our government, also has facilitated the training of Mexican patent lawyers at law schools in this country, in anticipation of the implementation of Mexico's new patent law.

As in all aspects of commercial activity, the dramatic transition to a market economy requires that Russia be afforded sound technical advice and expertise by all interested parties both in the public and private sectors.

PREPARED STATEMENT OF SENATOR MAX BAUCUS

On April 30th, under the Special 301 trade law, the USTR will release the annual list of Priority Foreign Countries for negotiations on strengthening protection of intellectual property, along with the accompanying "Priority Watch List" and "Watch List."

This process is America's strongest weapon against piracy weak legal protection and barriers to access for American intellectual property works abroad. Like the Super 301 law, it sets deadlines and forces action.

That's why it works. We need to renew Super 301 this year if we hope to make the same sort of progress in other sectors that Special 301 brings about in intellectual property.

Today, with the Special 301 lists due in eleven days, we will give the USTR office and representatives of private industry a chance to share their views on the effectiveness of the law in general and on their priorities for this year in particular.

Intellectual property products are broadly divided into three types: copyrights, patents and trademarks.

Copyrighted works include books and magazines, musical scores, films and videos, sound recordings and computer software.

Patented products include pharmaceuticals, agrichemicals, and innovative machines tools and processes.

Trademarked goods include a vast array of products from food to apparel to machines and more recognizable by the name or symbol of their producers.

Together, these industries rank with agriculture and aerospace as one of America's three most successful export sectors.

American film and TV programs generate a $3.5 billion trade surplus each year. American pharmaceuticals generate a $1 billion surplus. American computer software leads all competitors. And American trademarks get instant recognition worldwide.

PROBLEM OF PIRACY

Creative works like these are difficult and often expensive to make. But they are often easy to copy. A software program, for example, takes years, technoloaical wizardry, and millions of dollars in R&D to write and publish. Pirating the same program takes seconds, minimal skill, and an eighty-cent floppy disk.

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This problem is world wide, and is extraordinarily damaging to our economy. eral years ago, after an exhaustive survey, the International Trade Commission estimated that they cost America somewhere between $43 and $6! billion dollars in lost exports even year. It is likely that the figure is even higher today.

The financial injury is at times even accompanied by physical injury. One of my constituents from Bozeman, Montana, permanently injured her knee a few years ago when a pair of Korean-produced counterfeit Reebok sneakers came apart while she was playing tennis.

SPECIAL 301

This problem requires a strong American response. In 1988, Congress provided it by passing the Special 301 law. It directs the USTR to identify the countries in which intellectual property receives the weakest legal protection and meets the strongest barriers to entry. USTR must then begin trade negotiations with these "Priority Foreign Countries." If this fails to get results, the U.S. can impose trade sanctions against the country in question.

This is our strongest weapon against piracy of intellectual property overseas. Two developments are proof enough-first, the record number of filings by American industries this year; and second, the troops of foreign officials which have come to Washington to negotiate last-minute deals to avoid listing.

THIS YEAR'S LISTINGS

This year, India, Taiwan and Thailand are among the highest priorities. They have all been named before as Priority Foreign Countries, but have not changed their ways. We should not hesitate to retaliate against them unless they adopt dramatic changes in the next ten days. The credibility of Special 301 depends on willingness to USA retaliation as a last resort; and I believe we have reached that last resort in these cases.

There are many candidates for Priority Foreign Country status this year. Poland continues to be a notorious center for piracy of software, sound recordings, and book, and has taken little action to resolve the problem. Copyright industries add Italy, South Korea, and Turkey as targets for PFC status. Saudi Arabia, one of the richest

countries in the worlds continues to allow blatant piracy of films, sound recordings and CDs, and in fact does not guarantee protection of foreign works at all. It is a disgrace.

Despite years of promises, Argentina and Brazil have not yet upgraded their patent regimes for pharmaceuticals. Other patent offenders include Colombia, Hungary, South Korea, Turkey, and Venezuela. Trademark industries cite China's inadequate trademark law as a major problem, to go with other serious problems in Taiwan, Thailand, Brazil, and South Korea.

With this year's deadline approaching, we have already reached an important agreement with the government of the Philippines to protect American copyrights, patents and trademarks. Last-minute efforts to upgrade pharmaceutical patent protection are going on in Argentina.

We have seen energetic raids on sellers of pirated shoes in South Korea, and a factory making pirate audio cassette in Thailand. There is activity in the Taiwanese Legislative Yuan and the Russian Parliament. All are a result of the Special 301 law.

TODAY'S WITNESSES

Today we will hear about these events from representatives of U.S. government charged with determining this year's listings, and from private industry representatives who have participated in filing petitions with the USTR this year. It promises to be an enlightening morning, and with no further delays let's begin.

PREPARED STATEMENT OF JASON S. BERMAN

I want to thank you, Mr. Chairman, for holding this important hearing and for asking me to discuss existing market conditions and the ability to address these under special 301. Without your leadership it is fair to say that we would not be here talking about how important Special 301 really is to U.S. copyright industries. It is our trade lifeline.

We are indebted to you and to the subcommittee, for the firm resolve that you have demonstrated in ensuring that the trade remedy that you helped to fashion in the omnibus trade and competitiveness act of 1988 has been-and continues to be effectively used by executive branch officials to accomplish its objective of securing fair market access and the adequate and effective protection of our intellectual property. And the USTR has done just that. Special 301 has been the instrument for resolving major piracy and market access problems for the recording industry. We firmly believe it continues to be an essential ingredient of an effective U.S. trade policy designed to open markets and protect American intellectual property abroad. Special 301 serves to protect what America does best to create, to entertain, to educate. America's recording industry does more than just return billions of dollars back into our economy. It captures and exports American cultural and democratic values, promoting individual creativity, diversity and independent thinking. It is interesting to note the importance that most observers have placed on the influence of American recordings and films in the dramatic democratic upheavals in Russia and its former republics, as well as elsewhere around the globe. American music has played a major role in shaping the way people around the world view the importance of free speech and robust debate, and will undoubtedly continue to make life difficult for totalitarian regimes whenever they may exist. Yes, rock and roll actually does that.

Unfortunately, for U.S. record companies market conditions in many places around the world can only be described in one word: Hostile. Whether through the failure to adopt adequate legislation or the unwillingness to effectively enforce laws, many countries have implicitly condoned piratical activities that deprive U.S. record companies, performers, composers, songwriters, and music publishers of billions of dollars every year. We have identified the most serious violators in our submission to USTR under Special 301. I will briefly discuss the status of copyright protection in a number of territories, particularly with a view to those bilateral consultations that have produced results and to those that have remained on our special 301 list as offenders for far too long.

Let me begin with the most dramatic developments. A little more than a year ago, I sent a letter to USTR apprising them of a piracy problem of huge dimensions in Paraguay-yes, little Paraguay was the source of a big problem. A handful of large and powerful tape pirates not only controlled nearly 100% of that country's market, but exported nearly $200 million annually into the surrounding markets of Argentina, Brazil and Uruguay. Just to put this in perspective: The pirate business was more than the combined legitimate markets of Argentina, Bolivia, Chile, Colombia,