SPECIAL 301 RECOMMENDATION

UNCLAS SECTION 01 OF 04 MADRID 000696

SIPDIS

DEPT FOR EB/IPC SWILSON/JURBAN DEPT PLEASE PASS TO USTR
BPECK, DOC ESCWHARZ, USPTO DLASHLEY-JOHNSON

E.O. 12958: N/A
TAGS: ETRD KIPR SP
SUBJECT: SPECIAL 301 RECOMMENDATION

REF: (A) STATE 23950 (B) MADRID 00007 (C) 2004 MADRID
04299


1. Summary: Piracy in Spain continues to be a major problem.
The new government is formulating, in concert with
stakeholders, an integrated plan against piracy (ref B).
Industry is skeptical but is working actively with the
government to fix some legislative loopholes and to encourage
more effective enforcement. The GOS is willing to work with
the USG on an IPR "roundtable". Spanish law enforcement
agencies are active in combatting IPR piracy, but, to date,
law enforcement actions have not had a discernible impact on
IPR piracy levels. Local industry association
representatives express greater frustration over piracy
levels and some advocate Spanish inclusion on the 301 list.
Our overall sense is that the Zapatero government is
committed to fighting piracy. Given the government's
formation of an integrated anti-piracy plan, work with
industry on legislative issues, willingness to work with the
USG on an IPR "roundtable", and the newness of the government
(the Zapatero government took office after the last Special
301 determination),our recommendation is that Spain stay off
the 301 watchlist this year. End Summary


CHARGE MEETING WITH VICE PRESIDENT TERESA FERNANDEZ DE LA VEGA



2. Charge emphasized the importance the U.S. attaches to
effective IPR enforcement in a 2/22/05 meeting (septel) with
Vice President Fernandez de la Vega who is, in effect, the
Deputy Prime Minister of Spain. De la Vega clearly
understood our message and was familiar with the issues. She
said she had received a local industry federation the day
before to talk about IPR matters and noted that it was a
difficult task to work on because there was little public
consciousness that IPR theft was wrong, let alone a crime.



OVERALL IP CLIMATE



3. MUSIC: The International Intellectual Property Alliance
(IIPA) estimates piracy losses to be about USD 90 million in

2004. The Spanish Music Producers Association (PROMUSICAE)
released a "White Book" on the music industry in Spain in
early 2005, although most of the latest statistics contained
in the white book are from 2003. The association estimates
that in 2003, 24% of the CDs sold in Spain were pirated.
There is no indication that this percentage changed
significantly in 2004, despite a greater volume of police
confiscations. Moreover, internet downloads probably
increased in 2004. Artists saw a reduction in royalties of
37% between 2000 and 2003, and during the same period music
producers cut employment by 20%. This is the background
prompting music industry executives to say that their
industry is in "crisis". PROMUSICAE says the future of the
industry depends on developing new business models,
technology and future legislation/enforcement. In October,
2004 iTunes opened for business in Spain, allowing consumers
to purchase legal music online. Cellphone companies have
developed technologies allowing for the downloading (legal)
of digital quality music. So, there were some positive
developments for the music industry in 2004. But the
combination of the EU's highest level of street piracy (which
probably affects music the most of all the IP industries) and
developed world levels of internet piracy has frustrated the
music industry. The government talks the talk. In fact,
Minister of Culture Carmen Calvo signed a prologue to the
white paper in which she says that the "public administration
must be the guarantor of Intellectual Property Rights". But
translating even fairly high levels of law enforcement
activity into meaningful piracy level reductions remains a
challenge.


4. VIDEOGAMES: Pirated games remain readily available even
though IIPA notes that "there were more police actions
against retail outlets selling counterfeit and pirated goods
in 2004".


5. AUDIOVISUAL SECTOR: The IIPA estimates losses at USD 40
million. Pirated DVDs are readily available on the street,
subway stations and in bars and restaurants. An industry
representative told EconOff that he has tried repeatedly to
arrive at a deal with the bar and restaurant association, but
the association will not return his calls. (Comment: Doing
something about rampant sales of pirated audivisual and music
products in bars and restaurants should be a priority. This
business is dominated by Chinese vendors who frequent even
upper middle class establishments to ply their wares.) The
Spanish Federation for the Protection of Intellectual
Property (FAP) is also particularly worried about internet
piracy as the average time for downloading a movie declines
to seven minutes with the latest ADSL connections.


6. SOFTWARE: The Business Software Alliance (BSA) estimates
the 2004 piracy level to be 44%, down from 49% in 2003 but
nonetheless one of the highest levels in the EU. Small
companies, dealers and internet downloaders are the main
software piracy perpetrators.


7. TRADEMARK ISSUES: Embassy is not aware of outstanding
trademark issues affecting U.S. firms. Nike is still engaged
in court battles with its former partner, but the
specifically trademark-related aspect (i.e. who can use the
trademark) of the company's decade-plus litigation is over.


PHARMACEUTICAL PATENTS



8. Spain's pharmaceutical patent problem is a legacy of its
old process patent law which was in effect until October,

1992. From that point on, all pharmaceutical patents granted
have been product patents. Pharmaceutical companies complain
that non-innovative producers are able to easily obtain
permission to produce "legal copies" of their process
patented drugs if they make minor changes in the production
process. Like other countries that have a recent history of
process patents, this is a problem that only time will solve.
For the next seven years the legacy of the old patent system
will continue to irk pharmaceutical companies, but until all
process patents are expired, we do not anticipate a
significant change in the situation.


9. U.S. pharmaceutical companies operating in Spain recently
assumed leadership positions the Spanish pharmaceutical
association, Farmaindustria. American companies in Spain are
concerned about government tax and pricing policies affecting
the industry that might have an especially deleterios effect
on the R&D based industry. In fact, these policies are the
U.S. firms' principal concerns, rather than traditional
clearly IPR and/or TRIPs-related commitments undertaken by
the GOS.


POLICE ENFORCEMENT EFFORTS



10. In 2004, the National Police conducted 982 raids and
1,304 arrests, up from 488 raids and 733 arrests in 2003.
The Madrid Municipal Police confiscated 1.6 million items and
conducted 390 raids in 2003. The Municipal Police
confiscated roughly 1.2 million items in 2004 and conducted
256 raids in 2004, a downtick. We do not currently have
numbers for other law enforcement entitities. The important
thing to take away from these actually quite impressive
levels of law enforcement activity though is that they do not
have a signficant deterrent effect. This is probably because
there were very few convictions resulting in meaningful jail
sentences and/or fines. Most arrestees are released after a
few days and given a court hearing date months later. For
the pirates, police enforcement is really just a minor cost
of doing business. In theory, the tougher penal code
(effective since October 1, 2004) gives the police the tools
to go after pirates as they can do so ex oficio. And judges
have the option of stiffer sentencing. But in practice, the
courts lack of interest in IPR crimes complicate the effort
to mount a meaningful enforcement campaign.


EDUCATION EFFORTS



11. In January, 2005, Minister of Culture Carmen Calvo
participated in an event called "Days of Training for
Professional Experts in the Study of Phonographic and
Videographic material". This was a major event receiving
extensive press coverage and focussed on piracy. In May,
2004 Spain attended an Interpol and World Customs
Organization (WCO) conference on counterfeiting.


ANTI-PIRACY INITIATIVE



12. The Minister of Culture announced on 12/29/04 the GOS's
"Integrated Plan for the Reduction and Elimination of
Activities Violating Intellectual Property". The plan, which
is still being finalized in consultation with industry,
involves coordinating 11 different Ministries in an effort to
reduce piracy. Culture Ministry Under Secretary Antonio
Hidalgo told visiting Commerce Assistant Secretary William H.
Lash, III on 2/17/05 (septel) that the fact that the Culture
Ministry had managed to corral 11 ministries into
collaborating on fighting piracy showed that Zapatero himself
was interested in the issue - otherwise most of the
ministries would not be willing to participate. The plan
involves creating an Interadministrative Commission to
coordinate IPR protection; describe piracy problem in all its
aspects; conduct public education campaigns;
regulatory/legislative reform; and law enforcement/judicial
training. (Comment: Some of this work is probably redundant,
but nonetheless it is worthwhile noting that all the relevant
industry sectors are cooperating with the government on this
initiative.)


PROPOSED U.S.-SPAIN IPR ROUNDTABLE



13. Commerce Department Assistant Secretary Lash and Deputy
Assistant Secretary Eric Stewart conducted meetings with
industry representatives, the Industry, Tourism and Trade
Ministry, the Culture Ministry, and the National Policy on
February 17. Lash proposed the organization of a U.S. -
Spain IPR Roundtable in Spain sometime in 2005. All GOS
interlocutors accepted in principle. The Culture Ministry
will probably take the lead for the GOS on this event.


REGULATORY/LEGISLATIVE FIXES NEEDED



14. Internet Service Providers (ISPs) are only obliged to
take action against pirates if they have "effective
knowledge" of piracy. Spain's e-commerce law defines two
ways for ISPs to have "effective knowledge". A court order
can provide such knowledge, but it is time consuming to get
an order. The Spanish e-commerce law also provides for the
possibility of using an administrative mechanism, but content
providers are not clear on how to avail themselves of this
mechanism. Culture Ministry officials told A/S Lash that
they would work on clarifying the administrative route
towards providing "effective knowledge" to internet
providers. They said this can be done through regulation,
rather than legislatively. This is of enormous practical
interest to, for instance, the music industry. In Spain, the
most important ISP is Telefonica. Industry complains that
the current legal environment does not provide sufficient
incentive for the telecoms giant to clamp down on pirates.
Given that the current "killer application" (i.e. most sold)
in the internet world is a program allowing for music
downloads, industry frustration on this issue is mounting.

15 The law transposing the EU Copyright Directive contains
two serious weaknesses according to industry representatives.
First, it defines copying too narrowly. The current draft
says copying is fixing a work so that it can be communicated
and copied. Industry wants an and/or definition of copying.
Industry also wants permitted copying for private use to be
limited and for the copiers not to overcome
anti-circumvention devices.


ONGOING AREAS OF REVIEW



16. OPTICAL MEDIA PIRACY REGULATIONS: Article 25 of Spain's
IP legislation establishes a tax on optical manufacturing
equipment; operators are required to apply for licenses.
There is no legislation requiring that Source Identification
Codes (SID) be used on locally manufactured CDs. Despite
this, however, 12 out of 13 Spanish compact disc
manufacturers have signed SID accords with Philips and IFPI.



17. USE/PROCUREMENT OF GOVERNMENT SOFTWARE: As previously
reported, in 2000 the GOS published guidelines entitled "The
Intellectual Property of Software Programs." These
guidelines are for government ministries and outline measure,
recommendations and good practices for acquiring and using
software. The guidelines have been explained in workships
and are widely available to Spanish government officials,
including on the internet.

18 TRIPS COMPLIANCE: The GOS counts itself in complete
compliance with TRIPS since 1997.


19. ENFORCEMENT: See para. 9 above.

COMMENT



20. The Spanish IPR piracy picture is an amalgam of Third
World and First World. Readily available pirated products on
the street, in subway stations, bars, and restaurants
resemble the Third World. Internet levels of piracy approach
the most advanced countries in the world. Clearly, this
government takes this issue seriously, but it will take
sustained education, law enforcement, legislative and
regulatory efforts to bring piracy levels down appreciably.
On balance, we think this government should have another year
off the watchlist to work on IPR piracy. But no matter
happens with respect to Spanish inclusion or non-inclusion,
Embassy Madrid will urge the GOS to focus on the following
actions.


A. Appropriate-level participation in a U.S.-Spain IPR
Roundtable.


B. Creation of an effective administrative mechanism to
compel ISPs to shut down pirates.


C. Legislative fixes to the proposed law transposing the EU
Copyright Directive.


D. Work with bar/restaurant associations to keep pirates out
of such establishments.
Work with subway authorities as well.

Given many entertainment industry stars' open preference for
the Socialist government (it is signficant, for instance,
that Zapatero attended the Spanish equivalent of the Oscars),
it is possible that this government will be especially
sensitive to doing something for this sector. We will need a
year or so to see if this sensitivity translates into
results.





MANZANARES