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 -------------- Summary and Recommendation for Hong Kong -------------- ¶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. -------------- Strong Education and Enforcement Efforts -------------- ¶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. -------------- Internet Piracy -------------- ¶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. -------------- Copyright Amendment Concerns -------------- ¶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. -------------- - Pharmaceutical Counterfeits and Patent Linkage -------------- - ¶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. -------------- Cross-border Shipments -------------- 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