COPYCENSE

[Editor’s Note: This is the second of a three-part series on the intersection of trade agreements, foreign affairs, and U.S. copyright law. Part 1 was published on May 28; Part 3 will be published on Tuesday, June 9. Portions of this work are included in a continuing study about the framing of “piracy” and its influence on U.S. copyright law. For ease of reading and formatting, this excludes scholarly references, but replaces them with hyperlinks to source material where such links are available.]

This article summarizes the Special 301 process, including its history, its procedures, and the 2009 Special 301 report.

Background of Section 301

Section 301 of the Trade Act of 1974 (19 U.S.C. sec. 2411), as amended, is the principal statutory authority under which the United States may impose trade sanctions against foreign countries that violate, deny benefits under, or unreasonably discriminate against the U.S. government, or otherwise restrict U.S. commerce, pursuant to a trade agreement. Section 301(a) may be understood as a self-help strategy for discouraging breach of agreement by trading partners.

(a) The Patent Lobby

The seeds for the contemporary Section 301 process were sown in the mid-seventies. Partly as a reaction to the Watergate scandal, Congress adopted several reforms that sought decentralization of government and allowed private companies to influence trade policy. IBM and Pfizer were two of the first companies that recognized the need for a global approach to intellectual property protection. In the late 1970s, the CEOs of these two companies “devised a strategy to improve intellectual property protection internationally until American standards became the international norm, especially in developing countries.”

Pfizer sought “significant reform” of the Paris Convention, while IBM sought patent treaty reform and full copyright implementation under the Berne Convention (especially reforming Berne to recognize the copyrightability of software). Together, the two companies sought multilateral diplomacy through the General Agreement on Trade & Tariffs’ Advisory Committee on Trade Policy and Negotiation (“ACTPN”). Pfizer chief executive officer Edmund Pratt and IBM chief executive officer John Opel held high level positions on ACTPN.

By 1985, ACTPN was playing a major role in U.S. trade policy. Around the same time, the U.S. economy was struggling from the effects of large trade deficits with several foreign countries. Industry associations identified and blamed a foreign, monolithic enemy: “pirates.” U.S. corporate executives convinced members of Congress that America’s economy and the nation’s long term economic and innovation competitiveness would improve only if the country passed trade laws that levied stiff punishments for continuing trade violations, especially those that involved “piracy” of intellectual property.

This led to a number of changes to trade policy. For example, ACTPN recommended that the U.S. Office of the Trade Representative (“USTR”) create a post of assistant trade representative for investment; USTR did so in 1981. In 1985, ACTPN established an intellectual property task force in 1985, with Pratt, Opel, and Fritz Attaway serving. (Attaway is executive vice president and Washington general counsel for the Motion Picture Association of America, where he has worked since 1976.)

From this core, ACTPN worked to educate people in Congress and in the executive branch (especially USTR) about the importance of protecting intellectual property rights as a way of facilitating investment in developing countries. Part of the education included targeting Washington policy makers with conferences and books, both of which emphasized that American competitiveness in innovation industries was being hurt by developing countries’ failure to pass or enforce laws that protected American intellectual property. As a result, USTR spent much more time and diplomatic effort in putting intellectual property issues on the GATT Uruguay Round agenda in 1986, ultimately consulting ACTPN on a “GATT strategy.”

(The GATT Uruguay Round strategy was a “carrot and stick” approach to trade and intellectual property negotiations with developing countries. On one hand, the U.S. offered tariff concessions on agricultural and textile products and technical training on intellectual property issues. In exchange, the U.S. wanted higher levels of intellectual property protection to combat “piracy” and counterfeiting. A foreign country’s failure to comply would result in cutting the country’s aid through America’s General System of Preferences, and possible trade sanctions pursuant to Section 301 actions. Said more simply, where bilateral and multilateral trade concessions GATT Uruguay Round are the carrot, Section 301 actions are the stick, a form of unilateral sanctions.)

The Intellectual Property Committee (“IPC”) was another important trade group that started work during this period. IPC’s purpose was to be a spokesman for intellectual property-based companies and lobby their interests in Washington and Geneva. Charter members were Pfizer, IBM, Merck, General Electric, DuPont, Warner Communications, Hewlett-Packard, Bristol-Meyers, FMC Corporation, General Motors, Johnson & Johnson, Monsanto, and Rockwell International.

(b) The Copyright Lobby

While ACTPN and IPC handled multilateral GATT diplomacy strategy, the corporate owners of large copyright portfolios became concerned that the ACTPN was too focused on patent issues. Those companies began seeking their own bilateral strategy to strengthen international copyright laws, resulting in the formation of the International Intellectual Property Alliance (“IIPA”). IIPA charter members included the American Association of Publishers; the Motion Picture Association of America; and the Recording Industry Association of America. The Business Software Association and Interactive Digital Software Association since have joined IIPA.

Created in 1984, IIPA also was established to advocate an agenda for the USTR’s Section 301 report, which Congress codified in the U.S. Trade and Tariff Act of 1984. Among other things, the 1984 Trade Act clarified the Section 301 review process, for which copyright creators had lobbied. In 1985, IIPA submitted to USTR a report entitled Piracy of U.S. Copyrighted Works in Ten Selected Countries that presented data from IIPA members that estimated $1.3 billion in lost film, music, computer software, and books sales due to “piracy.”

USTR responded by initiating a Section 301 investigation against Korea. Based in part upon this initial report, IIPA lobbied Congress to institutionalize the measurement of copyright problems in foreign countries, leading to an amended Section 301.

Section 301 Process Overview

The Section 301 process works in the following way:

1. Initiation: Any interested party – usually a private sector interest group – files a petition with USTR to request that the government agency investigate a possible trade violation. (USTR also may initiate an investigation on its own.)
2. Publication: USTR publishes its determination to initiate an investigation (or reasons for not initiating in the case of a petition) in the Federal Register.
3. Hearing: A public hearing is required if USTR initiates a Section 301 investigation.
4. Consultations: Once an investigation begins, USTR must request consultations with the foreign government.
5. Settlement: Where an investigation involves an alleged violation of a trade agreement (such as a World Trade Organization (WTO) agreement or the North American Free Trade Agreement (NAFTA)), USTR must follow the dispute settlement provisions set out in that agreement.
6. Conclusion: USTR must conclude its investigation and make a determination of whether the foreign practice is actionable under Section 301 within 18 months after initiation of an investigation involving a trade agreement that includes a dispute settlement mechanism, or 30 days after conclusion of dispute settlement procedures, which ever comes first.

The Trade Representative’s use of Section 301 as a procedural stick in intellectual property protection is recent. In 1984, USTR held little institutional knowledge about intellectual property matters. At the urging of IIPA members, the Office hired a new deputy trade officer, intellectual property lawyer on staff whose primary job was to advise USTR staff on issues of bilateral and multilateral diplomacy. Armed with new expertise and IIPA data, USTR started a Section 301 action in fall 1985 against South Korea.

IIPA complained South Korean businesses were extensively “pirating” books, music, film and software, and the organization claimed annual sales losses in Korea totaling $150 million. This may seem an insignificant amount now, but given the time frame – mid-1980s; high inflation; large trade deficits, particularly to Asian countries – this estimate was significant enough to warrant the attention of U.S. government officials. Korean negotiators insisted that the country’s level of development was insufficient to revise its intellectual property laws. The U.S. countered by threatening to strip Korea of its benefits under the Generalized System of Preferences.

In July 1986, Korea and the U.S. reached an agreement whereby Korea would revise its copyright laws, become a signatory to a number of international copyright treaties, and pledge to strengthen penalties against copyright infringement. Korea also pledged more aggressive patent enforcement. This was USTR’s first successful implementation of the Section 301 process against foreign country based upon “piracy.”

It is common for a private sector group to initiate a Section 301 petition against a foreign country because of alleged “piracy” issues. Initiating petitions, however, puts U.S. companies at risk of having foreign governments retaliate against their overseas subsidiaries. The retaliation can take the form of selective regulatory enforcement or questionable contract awards.

To guard against this possibility, Congress in August 1988 passed Special 301 as part of the U.S. Omnibus Trade and Competitiveness Act. Sponsored by former Illinois Congressman Dan Rostenkowski and referred to in some quarters as a “velvet fist in an iron glove,” Special 301 requires USTR to identify nations that fail to protect the intellectual property rights of U.S. companies by April 30 annually.

Any country whose acts, policies, or practices are “the most onerous or egregious” and have not entered into (or are significantly progressing toward) negotiations to provide adequate and effective intellectual property regulation the USTR must designate as a “priority foreign countries.” Countries that USTR does not designate as “priority foreign countries” may appear on “priority watch” or “watch” lists if the U.S. government is concerned about their intellectual property laws or enforcement practices.

As before the 1988 amendment, industry organizations play a vital role in filing petitions (requiring USTR follow up) and providing evidence of economic losses due to “piracy.” For example, in a response to USTR’s required Federal Register posting requesting public comment on country identification for the Special 301 report, IIPA earlier this year submitted “[its] discussion of the types, levels, and costs of piracy, an evaluation of enforcement practices to reduce those levels, and the status of copyright law reform in 60 separate country reports.” Referencing its Jan. 30, 2007, report entitled “Copyright Industries in the U.S. Economy,” (.pdf) IIPA claimed in a 22-page cover letter (.pdf) that

“core” U.S. copyright industries accounted for an estimated $819.06 billion or 6.56% of the U.S. gross domestic product (GDP) in 2005. These “core” industries were responsible for 12.96% of the growth achieved in 2005 for the U.S. economy as a whole (this means that the growth contributed by these core industries (12.96%) was almost double their current dollar share of GDP (6.56%)). In addition, the “core” copyright industries employed 5.38 million workers in 2005 (4.03% of U.S. workers) in 2005.

It is essential to the continued growth and future competitiveness of these industries that our trading partners provide not only free and open markets, but also high levels of protection to the copyrights on which this trade depends. This protection upon which so much U.S. economic performance rests is under constantly evolving threats, and it is critical to sustain U.S. economic competitiveness that our country’s response remains flexible, innovative and committed. There are certain sectors of the U.S. copyright community, notably the music sector, that has already witnessed significant declines in foreign sales and royalty remittances as a consequence of increased levels and new forms of piracy, and it is essential that we address these problems on an urgent basis.

The IIPA mentioned the term “piracy” 93 times in the cover letter. None of those mentions is consistent with the term’s primary definition in Black’s Law Dictionary, the United Nations Convention on the Law of the Sea, Oxford English Dictionary, or the United States Code.

The 2009 Special 301 Report

The 2009 Special 301 report, which the USTR released on April 30, examined more than 40 countries, placing a dozen (China, Russia, Algeria, Argentina, Canada, Chile, India, Indonesia, Pakistan, Thailand and Venezuela) on the “priority watch” list (PWL). The number of countries on the report’s “priority watch list” has remained relatively stable over the years. (In 2007, there were 12 countries on the “priority watch list.” In 2008, nine countries made the list. China, Russia, Argentina, India, and Thailand have made the PWL each of the last three years.)

USTR placed more than 30 additional countries on its 2009 “watch list.”

Canada was perhaps this year’s most surprising inclusion on the 2009 PWL. Over the past three years, Canada has experienced considerable citizen interest in (and resistance against) government proposals to increase the country’s level of copyright protection, most notably through a Facebook group organized by University of Ottawa law professor Michael Geist. The citizenry’s effectiveness in halting government proposals to spread stronger protections, however, has led to disapproval from the U.S., its southern neighbor:

[T]he Government of Canada has not delivered on … commitments [to improve IPR protection and enforcement] by promptly and effectively implementing key copyright reforms. The United States continues to have serious concerns with Canada’s failure to accede to and implement the WIPO Internet Treaties, which Canada signed in 1997. We urge Canada to enact legislation in the near term to strengthen its copyright laws and implement these treaties. The United States also continues to urge Canada to improve its IPR enforcement system to enable authorities to take effective action against the trade in counterfeit and pirated products within Canada, as well as curb the volume of infringing products transshipped and transiting through Canada. Canada’s weak border measures continue to be a serious concern for IP owners.

Part of the reform the U.S. wants Canada to pass is C-61, legislation that mirrors the U.S. Digital Millennium Copyright Act. Since the Canadian government has had difficulty in passing this and similar legislation, the U.S. has placed it alongside perennial PWL countries like Russia and China.

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