104TH CONGRESS REPORT 2d Session HOUSE OF REPRESENTATIVES 104±556 "! ANTICOUNTERFEITING CONSUMER PROTECTION ACT OF 1995 MAY 6, 1996.ÐCommitted to the Committee of the Whole House on the State of the Union and ordered to be printed Mr. MOORHEAD, from the Committee on the Judiciary, submitted the following REPORT [To accompany H.R. 2511] [Including cost estimate of the Congressional Budget Office] The Committee on the Judiciary, to whom was referred the bill (H.R. 2511) to control and prevent commercial counterfeiting, and for other purposes, having considered the same, report favorably thereon without amendment and recommend that the bill do pass. CONTENTS Page Purpose and Summary ............................................................................................ 1 Background and Need for Legislation .................................................................... 2 Hearings ................................................................................................................... 4 Committee Consideration ........................................................................................ 4 Committee Oversight Findings ............................................................................... 4 Committee on Government Reform and Oversight Findings ............................... 5 New Budget Authority and Tax Expenditures ...................................................... 5 Congressional Budget Office Estimate ................................................................... 5 Inflationary Impact Statement ............................................................................... 6 Section-by-Section Analysis and Discussion .......................................................... 6 Agency Views ........................................................................................................... 8 Changes in Existing Law ........................................................................................ 8 PURPOSE AND SUMMARY Because of the high profit potential and low risk of meaningful prosecution, criminal counterfeiting has grown tremendously over the past several years and has been increasingly tied to organized crime. The purpose of H.R. 2511 is to prevent counterfeiting of copyrighted and trademarked goods and services and to ensure that counterfeit goods produced elsewhere cannot enter the United 29±006 2 States. The bill addresses this problem by amending both criminal and civil laws. H.R. 2511 includes trafficking in counterfeit goods or services as predicate offenses subject to the Racketeer Influenced and Corrupt Organizations (RICO) provisions of the criminal code. It also amends civil laws to ensure that imported counterfeits are seized and destroyed and allows trademark owners to opt for judi- cially determined statutory damages, rather than actual damages. BACKGROUND AND NEED FOR THE LEGISLATION Congress recognized that the problem of copyright and trade- mark counterfeiting was much broader than individual street cor- ner vendors selling watches and handbags when it enacted the Trademark Counterfeiting Act of 1984. While that legislation was a step in the right direction, it has proven to be an inadequate remedy for the explosive growth of criminal commercial counterfeit- ing. It is estimated that businesses in the United States lose more than $200 billion a year today because of illegal counterfeiting com- pared to $5.5 billion of losses in 1982. Today, between five to eight percent of all goods and services sold worldwide are counterfeit. The problem is especially severe for American computer software developers. The industry estimates that sales of counterfeit soft- ware exceed 40% of the industry's total revenuesÐthat is, for every five programs legitimately sold, two illegally pirated copies are also sold Ms. Catherine Simmons-Gill, President of the International Trademark Association pointed out in her testimony that counter- feiting of copyrighted and trademarked goods and services costs American industries more than just displaced direct sales. In some cases, it can cost a company its reputation. Counterfeit products are generally made of substandard materials and are rarely of the same quality as the genuine article. They are not subject to any of the stringent quality control standards that a company requires be- fore putting its stamp of approval, its trademark, on the product. An unsuspecting customer who unwittingly buys a counterfeit product is rightfully upset when the shoddy product fails to per- form to expectations. Although the customer's anger and dis- appointment is justified, it is mistakenly directed at the legitimate manufacturer instead of the counterfeiter. In addition to losing the actual sale to the counterfeiter, the company loses any subsequent sales that the disappointed customer might otherwise have made. Consumer awareness of criminal counterfeiting also damages a company's reputation and reduces sales. Customers are reluctant to buy a particular brand that is known to be counterfeited for fear that they may mistakenly purchase a substandard copy rather than the genuine article. It is simply easier to buy another brand than run that risk. This problem was evident when the Subcommit- tee sought witnesses to testify at the December 13 hearing on H.R. 2511. Some companies that had experienced significant counterfeit- ing problems were reluctant to testify because their testimony might have generated publicity, and past acknowledgement of counterfeiting had historically led to significant sales losses. In those cases where the consumer actually intends to buy a cheap counterfeit, the trademark owner suffers significant losses because 3 of the dilution of its trademark. This is especially true when luxury items, like expensive watches, are counterfeited. Even more grievous than the enormous economic losses suffered by American companies are the serious health and safety hazards caused by criminal counterfeiting. In one case, more than one mil- lion bogus birth control pills had been distributed bearing the false mark of a large pharmaceutical company. The company did not dis- cover the counterfeits until several women complained of pain and unusual bleeding. There have been numerous other cases where name-brand pharmaceuticals, both over-the-counter and prescrip- tion, have been counterfeited and distributed. Last year, sub- standard counterfeited infant formula, bearing the false label of a well known brand, was widely distributed in California and Ken- tucky. The Food and Drug Administration intervened and issued warnings to consumers in fifteen additional states before the prob- lem was resolved. Ms. Angela Small, Vice President of Legal Af- fairs at Saban Entertainment testified that toy manufacturers are concerned that cheap knock-offs present choking hazards and may contain toxic paint. Counterfeit machine parts and brake pads have been linked to fatal automobile, aviation and helicopter crashes. Mr. John Bliss, President of the International Anticounterfeiting Association, testi- fied that federal investigators discovered that more than 600 heli- copters that had been sold to NATO and private entities contained counterfeit parts. He also reported instances where counterfeit parts had been discovered in jet engines, bridge joints and fasten- ers in areas of nuclear facilities responsible for preventing melt- downs. The enormous profit potential and low risk of prosecution for criminal counterfeiting has made it an increasingly attractive en- terprise for organized crime syndicates. In 1993, law enforcement agents raided a warehouse in New York City and discovered a large shipment of designer handbag knockoffs. There were traces of heroin in the lining of the handbags. Apparently, this ring of drug smugglers would smuggle drugs inside the bags, remove and sell the drugs, and then sell the counterfeit handbags. Another ex- ample of the connection between organized crime and counterfeit- ing is the case of David Thai. Mr. Thai, a convicted murderer and former leader of the violent gang Born to Kill claims to have used his gang to operate a counterfeit watch ring that netted nearly $13 million a year. Mr. Leonard S. Walton, the Deputy Assistant Commissioner of Investigations for the United States Customs Service, compared the pattern of criminal activity and organizational structure associ- ated with counterfeiting to that of drug trafficking. For three years, Mr. Walton's agents investigated an expansive Korean crime syn- dicate that operated an enormous counterfeiting operation through- out America. In September 1995, that investigation culminated in coordinated raids in New York City and Los Angeles that netted $27 million in counterfeit merchandise and resulted in the indict- ments of 43 members of the crime syndicate. Mr. Walton explained that Section 2 of the bill, which applies RICO provisions in the criminal counterfeiting context, is essential to allow law enforce- 4 ment agents to take down the entire criminal organization rather than merely react to each crime the organization commits. Organized crime is not the only source of criminal commercial counterfeiting. In some cases, the source is an otherwise legitimate manufacturer of goods. This category of counterfeiters purchases ``seconds'' or ``rejects'' from a manufacturer, applies counterfeit la- bels, and sells the products as first quality. Another example is where the counterfeiter is a legitimate manufacturer of a low-grade or generic product, but mislabels