Special 301 Recommendation for Hong Kong

UNCLAS SECTION 01 OF 04 HONG KONG 000715

SIPDIS

SENSITIVE
SIPDIS

STATE FOR EB/IPE CLACROSSE, EB/TPP EFELSING, AND EAP/CM
KBENNETT
STATE PLS PASS TO USTR JCHOE-GROVES
COMMERCE FOR JBOGER
COMMERCE PLS PASS TO USPTO JURBAN AND LOC STEPP

E.O. 12958: N/A
TAGS: KIPR ETRD EIND HK
SUBJECT: Special 301 Recommendation for Hong Kong

Refs: A) 05 Hong Kong 3574, B) 05 Hong Kong 4657, C) 05 Hong

Kong 4894

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Summary and Recommendation for Hong Kong
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1. (SBU) Post recommends that, based on its overall
performance, Hong Kong not be placed on any Special 301 lists
or be referred to as a country of special concern ("Special
Mention") at this time. We note that if the legislature enacts
revisions that significantly weaken Hong Kong's Copyright
Ordinance, Special Mention status may well become appropriate.


2. (SBU) Summary: In 2005, the Hong Kong Government (HKG)
continued to maintain an effective IPR protection regime but
showed signs of complacency in several ongoing areas of
concern. The Commerce, Industry and Technology Bureau's (CITB)
current attempt to liberalize the Copyright Amendment may lead
to a weakening of the overall IPR protection environment in
Hong Kong. The Copyright Amendment draft contains many issues
of primary concern to U.S. firms, especially clauses dealing
with software end-user piracy, fair use and "safe harbor"
provisions for end use of copyrighted works, and the reduction
of the criminal liability period for parallel imports. Hong
Kong's judicial system supports enforcement efforts by
sentencing those convicted of copyright and trademark
violations to jail time but still does not hand down tough
sentences to convicted vendors of counterfeit medicines. The
Hong Kong Customs and Excise Department (CE) is dedicated and
effective in its enforcement fforts and has achieved notable
successes this yar in combating online piracy (Ref C).
Counterfeit pharmaceuticals have become an issue of priority
concern to U.S. firms along with the continued maketing of
patent-infringing pharmaceuticals. Crss-border shipments of
infringing products from ainland China remained a significant
issue despite notable CED efforts at greater cross-border
surveillance. End Summary.

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Strong Education and Enforcement Efforts
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3. (SBU) The HKG's Intellectual Property Department (IPD)
conducted a range of public education efforts to encourage
respect for intellectual property rights in 2005 and has also
pledged significant resources for outreach in 2006. In 2005
the IPD continued its "I Pledge" campaign (in which consumers
promise not to buy infringing products and are given
preferential access to "I Pledge" concerts and shows) and its
"No Fakes" campaign (in which local retailers pledge to not
sell counterfeit or pirated wares and in return are featured in
promotional material issued by tourist and business chambers).
In addition, the IPD started an IP Tutor program for schools,
in which certain teachers are given intensive IPR training and
then hold special IPR awareness classes for intermediate
students throughout Hong Kong. One particularly innovative
outreach being planned by CED for 2006 is the Anti-Internet
Piracy Youth Alliance, a program that will organize 200,000
youths to search for IPR violating content online and report
violations to a special CED website. IPD conducts an annual
survey of IPR awareness in Hong Kong. Awareness levels of Hong
Kong's IPR laws have risen from 55.2 percent in 1999 to 84.7
percent in 2005. In addition to IPD, CED, which is responsible
for IPR enforcement, regularly publicizes news of enforcement
actions against infringers.


4. (SBU) CED has continued aggressive raids at the retail
level. In 2005, there were 953 arrests for piracy related to
optical disks. Between January and October, there were 53
counterfeit-related arrests. During the same period, the
judiciary handed down 1,292 copyright and trademark
convictions, the majority of which led to prison sentences of
six to twelve months. CED intelligence operations and raids on
underground production facilities have closed most large-scale
pirate manufacturing operations, prompting many optical disk
pirates to switch to computers or CD burners to produce illicit
copies and forcing retailers to rely increasingly on smuggled
products. In July 2005, CED scored its biggest single haul of
counterfeit items to date, seizing 157,000 pieces of
counterfeit clothing and leather goods valued at USD 8 million
(Ref A). Despite the crackdown on large-scale illicit
manufacturing, there is still concern about Hong Kong's 817
licensed optical disk production lines, which give the
territory a huge overcapacity that must be carefully monitored.

HONG KONG 00000715 002 OF 004


The volume of openly marketed pirated disks found in retail
shopping arcades has decreased significantly but more dispersed
sales of infringing products remain a problem.

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Internet Piracy
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5. (SBU) Hong Kong achieved some significant advances in its
efforts to combat online piracy. A Hong Kong magistrate in
November of 2005 sentenced a man to three months in jail for
distributing three Hollywood films using the popular BitTorrent
peer-to-peer (P2P) file-sharing software, the first conviction
of its kind anywhere. Although the convicted man immediately
appealed the decision, HKG officials said that the case still
had a large deterrent effect upon online piracy in Hong Kong as
the volume of copyrighted materials shared on BitTorrent in
Hong Kong dropped 80% in the period immediately following the
conviction (Ref C).


6. (SBU) In January 2006, a Hong Kong court ordered four
Internet Service Providers to release the names, addresses, and
identity card numbers of 22 people who had uploaded music onto
the now defunct P2P file-sharing service WinMX. Industry
representatives said that downloads of infringing music files
had dropped in the period after the decision but noted that
this round of legal action had cost the Hong Kong recording
industry HKD 1.5 million. Nevertheless, industry
representatives were hopeful that the case was precedent
setting and would make future P2P cases easier to pursue. The
Hong Kong music industry blames illegal online file-sharing for
pushing down sales of music CDs in Hong Kong by 32 percent
between 2000 and 2004. We will continue to support the HKG's
enforcement actions against on-line pirates and urge the HKG to
ensure that its laws do not leave loopholes that can be
exploited in the digital environment.

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Copyright Amendment Concerns
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7. (SBU) The Copyright Ordinance is up for renewal by June

2006. CITB is currently drafting proposals for revision aimed
in part at liberalizing and otherwise weakening legislative
measures governing the enforcement of copyright regulations.
Post is particularly concerned about revisions regarding
business software end-use piracy, the introduction of fair use
and safe harbor provisions for copyrighted works, and the
reduction of parallel import periods. Post is closely
monitoring the amendment process and continues to urge the HKG
to ensure effective eterrence against end-use piracy.


8. (SBU) Busiess Software End-Use Piracy: In 2005, Hong Kongcontinued to have
one o the highest rates of busiess software
end-use piracy in the region with a 2% piracy rate resulting
in economic losses of HD 650 million (according to a 2004
study commissoned by the Business Software Alliance). Despite
this high piracy rate and the HKG's continued inability to win
any contested convictions for software end-use piracy, CITBproposes to further
protect ompany employees who are forced to
knowingly use infringing software or who are unaware that they
are using infringing software. Post feels that this express
employee protection is unnecessary given the existing
difficulty of prosecuting these cases and the fact that the
Copyright Ordinance already allows for individuals to defend
themselves by claiming ignorance of infringement. Although the
current draft text of the Copyright Amendment also includes a
clause stating that directors or partners of businesses found
using unlicensed software are criminally liable for the
infringement, industry sources indicate that strong Legco
opposition, particularly from the Liberal Party, will force the
CITB to drop the directors/partners liability clause from the
draft text. Industry representatives also point out that
unclear evidentiary standards on how to determine the
legitimacy of installed software present another hurdle against
successful prosecutions of business software end-use piracy.


9. (SBU) Fair Use/Safe Harbor Provisions: Industry
representatives are pleased that the CITB is now proposing to
extend criminal liability for the copying and distribution of
copyright infringing printed works. However, Post is concerned
about flaws in CITB's attempt to introduce thresholds under
which business end-user copying of printed works would not be
considered criminal. The proposed threshold for newspapers,
magazines, and periodicals is 1,000 copies within any 14-day

HONG KONG 00000715 003 OF 004


period. The proposed threshold for books is the production of
copies with a total retail value of under HKD 8,000 within a
180-day period. U.S. copyright laws have a threshold for
criminal liability of USD 1,000, but U.S. law additionally
states that any willful copyright infringement "for purpose of
commercial advantage or private financial gain" is subject to
criminal prosecution regardless of the value of the copyrighted
works - a distinction that the CITB does not acknowledge and
that may open the door to further infringements. An additional
concern is that the CITB plans to propose a blanket exclusion
on the fair use of copyrighted works by educational
institutions and public administration for all types of media,
printed and digital. This is a particular concern because
under Hong Kong law certain commercial enterprises can be
categorized as educational institutions. Post notes, however,
that CED continues to aggressively raid illegal copyshops that
produce infringing copies of copyrighted works. In February
2006, CED officers raided seven copyshops, seized seven
photocopiers, seven book-binding machines, and 1,200
photocopies of books worth about HKD 140,000, and arrested the
seven copyshop operators.


10. (SBU) Parallel Imports: Despite initial statements to the
contrary, the CITB is now proposing to reduce the period during
which parallel imports can attract criminal liability from 18
months to 9 months after initial public release of the
copyrighted work. Movie industry representatives in particular
point out that since the start of the parallel import
criminally liable period is determined by the date of the first
public release of a copyrighted work anywhere in the world,
this often means that movies are only in theaters for a short
time in Hong Kong before parallel import DVDs arrive in stores.
This problem is compounded by the growing trend of studios
choosing to release movies first in mainland China to fight
against widespread piracy in that territory. Movie industry
representatives say that if the parallel import period is
shortened any further, movie theater operators could find
themselves competing with legitimate and extremely inexpensive
DVDs parallel imported from mainland China.

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Pharmaceutical Counterfeits and Patent Linkage
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11. (SBU) The results of market observations and analysis
performed by industry as well as raids conducted by CED
suggests that counterfeit drugs may now be present in the
general Hong Kong pharmaceutical market. Although the legal
system provides for sufficiently serious penalties for drug
counterfeiting, the light penalties that are in reality levied
by judges -- who possess wide leeway in sentencing -- are an
insufficient deterrent. Pharmaceutical industry
representatives are quick to point out, however, their
excellent operational relationship with CED and are optimistic
that continued cooperative efforts can address the counterfeit
problem in the short term. A potentially longer-term problem
is the new issue of traditional Chinese medicine manufacturers
using the active pharmaceutical ingredients of western
pharmaceuticals in their products. Post will continue to
monitor both of these disturbing new trends.


12. (SBU) U.S. pharmaceutical companies are upset that the HKG
Department of Health continues to issue marketing authorization
for patent-infringing pharmaceuticals. The local industry
association (which represents a number of U.S. and other
international firms) submitted a proposal to the HKG in June
2004 that, if enacted, would give patent-owners an opportunity
to commence legal action against infringing generics before
their marketing authorization applications are processed by the
Department of Health. However, the Department of Health has
indicated it cannot adopt this proposal without amending the
pharmaceutical ordinance. As a result, patent-infringing
generics remain legally available on the market until patent-
owners can identify and successfully sue the infringers. The
HKG has yet to show any sign of taking meaningful steps to
address this problem. Meetings involving Post, industry
representatives, the CITB, and the Poisons and Pharmacy Board
(PPB) resulted in the PPB verbally agreeing to revise the
wording of their approval certificate, but some HKG officials
recently admitted that the Department of Health probably did
not see this issue as a high priority.

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Cross-border Shipments
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HONG KONG 00000715 004 OF 004




13. (SBU) A number of U.S. firms have identified as a growing
concern the growing flood of IPR-infringing products from
mainland China that either are sold in Hong Kong or pass
through on the way to other markets. At points of entry, CED
has in fact seized a number of shipments containing pirated or
counterfeit goods. In the first 10 months of 2005, CED seized
325,874 pirated optical disks, worth HKD 7.6 million, at its
various control points. During the same period, an additional
2.6 million miscellaneous counterfeit goods were seized.

SAKAUE