UPDATE ON CZECH RESPONSE TO IPR VIOLATIONS AT

UNCLAS SECTION 01 OF 04 PRAGUE 000619 SENSITIVE SIPDIS STATE FOR EUR/CE AND EEB/IPE - JURBAN STATE PASS USTR FOR JCHOE-GROVES AND WMOORE COMMERCE FOR 4232/ITA/MAC/MROGERS COMMERCE PASS USPTO E.O. 12958: N/A TAGS: KIPR ETRD ECON PGOV EZ SUBJECT: UPDATE ON CZECH RESPONSE TO IPR VIOLATIONS AT BORDER MARKETS REF: STATE 45119 (U) This cable is sensitive but unclassified. Please protect accordingly. ¶1. (SBU) Summary: Czech authorities have made significant progress in disrupting the sale of pirated materials at the roughly 50 outdoor markets that dot the German and Austrian borders. From January to July of this year, Czech authorities seized and destroyed pirated goods worth over USD 100 million, including more than 240,000 DVDs and CDs. Our visit to two of the more notorious marketplaces confirmed that most pirated goods, while still available, are now hidden out of view and only offered to select customers. Czech authorities appear to have made far less progress on our other recommendations such as stripping repeat offenders of business licenses or the introduction of secondary liability for landlords. Czech authorities have transferred some competencies away from Customs to other less active agencies. Penalties for IPR violations also remain light: only two individuals are known to have ever received any jail time. This cable summarizes the current IPR situation at the Czech border markets in advance of the September 23 DVC between USTR and the Czech IPR interagency task force. End summary. The Ugly: The Extent of the Problem -------------- ¶2. (SBU) The U.S. placed the Czech Republic on the Special 301 Watch List on January 22, 2008, because of widespread and persistent IPR violations at the roughly 50 market places that dot the Czech Republic's borders with Germany and Austria. Of the 50 markets, roughly 15 are especially large, with each containing several hundred vendors. The market stalls are almost universally run by members of the Czech Vietnamese community, and over 90 percent of the customers are German or Austrian. The International Federation of the Phonograph Industry (IFPI) estimated in the past that these markets sold approximately 10 to 20 million pirated CDs annually (among other counterfeit goods) representing losses to the recording industry alone of 20 to 40 million Euros per year. ¶3. (SBU) The majority of the marketplaces are at least partially on land owned by local governments, who have a vested interest in their survival, both as a source of revenue and a way to draw more tourists to the region. German and Austrian tour companies organize regular bus excursions, bringing tens of thousands of customers to the markets each year. The Good: Progress on Enforcement -------------- ¶4. (SBU) The USG made four main recommendations to the GOCR when placing the Czech Republic on the Watch List: a) increased enforcement; b) firm dates for the Czech action plan; c) revocation of business licenses for repeat offenders; and d) introduction of landlord liability (reftel) Of the four, the Czechs have made the most progress on enforcement. ¶5. (SBU) During the first seven months of 2008, Czech Customs has systematically targeted the largest markets for repeated raids. Contrary to past practice, when Customs symbolically raided only a few select stalls and then left the area, Customs is now inspecting the entire market place, leaving written information on piracy and, most importantly, leaving its people in place at the markets for several weeks. The new strategy is producing results. Most pirated goods are no longer in plain sight, but have to be specially ordered/requested. Vendors are also, in our experience, visibly nervous and only offer goods to select customers (or those who speak German and know to ask). ¶6. (SBU) According to Customs, during the first half of 2008, it seized at the market places (and subsequently destroyed) 222,787 CDs and DVDs, 549,729 clothing or textile items, 69,344 pairs of shoes, 1,322,332 tobacco products, and 90,965 pieces of jewelry, cosmetics and watches. The total value of all confiscated goods was CZK 1,598,682,312 (or roughly USD 96 million). Inspectors from the Czech Trade Inspection Office also confiscated counterfeit goods, primarily at the border markets, worth an additional CZK 128,831,125 (USD 7.6 million),including 22,088 CDs and DVDs and 58,000 pieces of clothing or textiles. PRAGUE 00000619 002 OF 004 ¶7. (SBU) Our August visits to two notorious markets in Svaty Kriz and Cheb (recommended to us by IFPI) largely confirmed the significant progress Customs has made. We did see some obviously counterfeit Coach handbags, K-Swiss shoes and clothing, as well as significant amounts of unlicensed soccer jerseys and rock T-shirts (and possibly pirated cigarettes). We also were offered some first run DVDs hidden in a back room and witnessed a vendor taking orders for fake Adidas shoes. (Note: According to Customs, vendors are increasingly hiding pirated material in homes near the markets, because they know it is much harder for Customs to get warrants to search domiciles than to search stalls or warehouses. When a client places an order, one of the vendors will leave the market place to visit a nearby house and return five to ten minutes later with the item hidden in a back pack. End note.) ¶8. (SBU) However, no CDs or DVDs were on display and several signs offering CDs for sale had been removed. Instead cheap generic Asian-origin clothing dominated the two markets, and trade in pirated goods appeared to have been driven underground. This is a far cry from past years when vendors openly sold and displayed pirated goods. The Bad: Limited Progress on Other Issues -------------- ¶9. (SBU) Stripping the business licenses of repeat offenders: We have not seen significant progress on other key recommendations. Our reading of the business registration law suggests that it may be possible for Czech authorities to suspend a business license should the license holder be convicted of a business-related crime, or if the enterprise is operating in a manner inconsistent with its license. We are unaware, however, that this tool has ever been used to suspend the licenses of border market pirates. ¶10. (SBU) Introducing landlord liability: According to local IFPI Representative Petra Zikovska, a vague, untested secondary liability clause does exist in the current Czech civil code. IFPI has commissioned a private legal opinion on whether this could be used to hold border market landlords liable for the obvious criminal activity taking place on their property. The opinion's preliminary conclusion is that the clause may be too vague to stand up in court. Consequently, IFPI has decided not to try to test this, believing that a negative court decision would be inimical to its interests. IFPI, however, has sent suggested language on strengthening the secondary liability clause to the Czech authorities, who are currently preparing significant changes to the civil code. ¶11. (SBU) Creating specific timeline for the Czech IPR action plan: Czech authorities continue to argue that specific deadlines for items in the Czech government's IPR action plan are not necessary because all items are regarded as immediate goals. Some modest progress on the action plan has been made. -- The IPR interagency group, (headed by Lucie Sestakova, Director of the Ministry of Industry and Trade's Multilateral Trade Policy Department) has increased interagency IPR cooperation to some degree. Some participants have complained to us, however, that the group meets infrequently and is generally more of a talk shop than a coordinating body. Sestakova may have too many other responsibilities to dedicate as much time to IPR as needed. -- Czech authorities have cooperated with industry on public IPR education and have increased IPR training for government officials. -- The Government and parliament are also still working on the new criminal code which will, among other things, increase penalties for IPR violations. Czech authorities have responded to our (and industry's) concerns and removed from the draft ambiguous language that would have raised the threshold for criminal violation of trademark or copyright protections. Passage of the criminal code is behind schedule and thus the new code will not go into effect before July 1, 2009 (vice January 1, 2009). -- Penalties for convicted IPR violators continue to be light. So far in 2008, the Police have begun IPR-related prosecutions of 248 individuals. It is unclear how many of PRAGUE 00000619 003 OF 004 these are related to the border markets. Most prosecutions, however, result in suspended sentences. According to local industry, only two people have ever been sentenced to jail time for an IPR-related crime and only one was for a crime committed at a border market. -- We have no current information on the government's planned consultations with local government on IPR issues. Customs Losing Competencies -------------- ¶12. (SBU) According to existing regulations, landlords must keep detailed records of the individual/companies renting market stalls, and each market stall must be clearly labeled with the renter's company's name, contact information and tax identification number. Most stalls lacked any visible contact information when we visited the markets last month. Local industry, which often cooperates with the Czech authorities on their raids told us that both of these regulations are frequently not enforced. When the raids occur, the Vietnamese vendors simply run away and it is very difficult for the authorities to establish who is responsible for which stall. Customs told us that they had begun to more aggressively enforce the requirement to clearly mark stalls, but as of July 1, this competency, along with the ability to fine offenders, was transferred to another agency. Customs also complained that its ability to combat IPR could be compromised by a government draft proposal to merge it with the tax authorities and asked us to lobby in favor of Custom's continued independence. The View from Industry -------------- ¶13. (SBU) Local IFPI representative Petra Zikovska acknowledged to us the significant progress customs had made at the border markets but raised concerns that this may not be sustainable. She doubted whether Customs could continue to devote the current level of resources toward IPR enforcement, especially given persistent rumors that the government may seek to downsize Customs now that the Czech Republic has entered the Schengen Zone and closed all its border checkpoints. She also raised concerns about the lack of progress in other areas. ¶14. (SBU) The local MPAA representative noted that MPAA had cut all its funding for activities at the border markets and thus she concentrated mainly on internet piracy. They are pleased with cooperation from the police which had acted to close down and prosecute several internet operations offering pirated music and movies. MPAA had brought temporarily to the Czech Republic two sniffer dogs able to smell the plastic used in CDs and DVDs. The dogs participated in two highly publicized border market raids this spring. Comment -------------- ¶15. (SBU) During the September 23 DVC, the Czechs are likely to argue that they have made significant progress on disrupting illegal activities at the border markets and that they deserve to be removed from the Special 301 Watch List. They worry that industry will never be satisfied and that failure to acknowledge the significant efforts that Customs and others have made could undermine continued inter-agency support for IPR enforcement (i.e. why devote all these resources if nothing will ever be good enough). They understand industry's concerns that Custom's current level of activities may be unsustainable, but argue that the U.S. could always re-list the Czech Republic should enforcement wane. They do not appear to fully appreciate the reasoning behind our other recommendations and why they are critical to anti-piracy efforts. It is their goal to be removed from the Watch List before the January 1 start of their EU Presidency. They are unlikely to push for an Out of Cycle Review (OCR), however, unless they believe the likelihood of success is high. ¶16. (SBU) We continue to repeat industry's concerns and have repeatedly shared with the GoCR the list of industry's recommendations from 2007 and the USG priorities of increased enforcement, removal of business licenses for repeat offenders, deadlines for progress on the government's action plan, and introduction of landlord liability. We also continue to urge the GoCR to further reach out to industry. We believe it is critical to continue to provide the Czech Government with consistent and clear guidelines on what it PRAGUE 00000619 004 OF 004 needs to do obtain de-listing. We also believe it is important to find ways to acknowledge the progress made to date. Graber