2008 SPECIAL 301 REVIEW: REMOVE POLAND FROM WATCH

UNCLAS SECTION 01 OF 06 WARSAW 000237 SIPDIS SENSITIVE SIPDIS STATE PASS TO USTR USTR FOR WMOORE AND JCHOE GROVES COMMERCE FOR 4232/ITA/MAC/EUR/OECA/MROGERS AND ITA/MAC/OIPR/CPETERS STATE FOR EUR/NCE AND EEB/TPP/IPE/JBOGER E.O. 12958: N/A TAGS: ETRD ECON KIPR PL SUBJECT: 2008 SPECIAL 301 REVIEW: REMOVE POLAND FROM WATCH LIST REF: A. STATE 09475 ¶B. 07 WARSAW 735 ¶C. 07 WARSAW 2149 ¶D. 07 WARSAW 0918 ¶E. WARSAW 165 ¶F. PARIS 156 ¶G. 07 WARSAW 2212 ¶H. WARSAW 99 ¶I. 07 WARSAW 2231 WARSAW 00000237 001.2 OF 006 ¶1. (SBU) Summary: Poland made notable progress in protecting intellectual property rights (IPR) in 2007. The Warsaw Stadium closed. Poland implemented the EU's Enforcement Directive, closed a major legal loophole, called for IPR education for all university students, and began working to create specialized IPR courts. A more professional customs service and Border Guard emerged as Poland entered the Schengen Zone. Rights holders reported excellent cooperation with local police. Government and industry continued to struggle with internet piracy. The innovative pharmaceuticals industry's market access problem eased, as 33 new active substances were approved for reimbursement by the National Health Service and new legislation promising greater transparency was adopted. Although problems remain, overall the IPR picture for 2007 was extremely positive. These advances justify removing Poland from the Watch List (ref A). End summary. -------------- Changing Background Conditions -------------- ¶2. (U) Poland's economy is growing rapidly. In 2007, gross domestic product grew by 6.5 percent. Unemployment fell from 14.9 percent in December 2006 to 11.3 percent in December 2007, and average wages increased, year-on-year, by 8.9 percent. In the same period, the zloty appreciated 11 percent against the dollar, and 3 percent against the Euro. In other words, more Poles are working, they are earning more money, and that money is worth more. ¶3. (U) An increasing number of Poles are "wired." Sixty-one percent of Polish households have a computer. Of those, 3/4 have internet access. Close to three million users have access to broadband (ref B). However, growth of legitimate internet commerce is checked by the fact that online stores usually require a credit card to make purchases. Young Poles -- the main consumers of films and music -- often do not have credit cards, which blocks them from being able to pay to download MP3s legally. ¶4. (U) As an EU member, Poland has adopted EU legislation and is subject to the discipline of infringement proceedings commenced by Brussels. On December 21, 2007, Poland joined the Schengen zone. As a result, Poland lifted controls on its western border with Germany and the Czech Republic, but beefed up controls on its eastern border, with Ukraine, Belarus and Russia. -------------- Notorious Markets: Warsaw Stadium Closed -------------- ¶5. (SBU) Poland's most "notorious market" -- the "crown" of the Warsaw Stadium -- closed on October 1, 2007 (ref C). Contacts in the film, music, software, liquor and tobacco industries, the police, and the Border Guard, all identified this as the most significant IPR development in Poland in ¶2007. While some of the Stadium's trade dispersed around the city, this needs to be kept in perspective. EmbOffs have noticed a vendor's table pop up here and there offering pirated DVDs. These sightings of small-scale trading have been haphazard; a buyer cannot be certain of being able to find a given seller at a given location, or of the contents of the seller's stock. This contrasts sharply with the huge wholesale turnover that used to exist at the Stadium, where hundreds of traders offered seemingly endless quantities of pirated shoes, clothing, cigarettes, liquor, music and software, and where virtually any bootleg film could be "ordered" if it weren't already in a trader's stock (ref D). Closure of the Stadium was a major advance. According to Arkadiusz Olejnik, of the Polish Border Guards, in contrast WARSAW 00000237 002.2 OF 006 to two years ago, Warsaw is no longer a distribution center for pirated goods. -------------- -------------- Notorious Markets: Uncertain Effect of Schengen Entry on Border Bazaars -------------- -------------- ¶6. (SBU) Poland continues to struggle with open-air bazaars along the border with Germany. It is unclear what effect Poland's entry into the Schengen zone will have on these markets; conceivably the lifting of controls along the western border eliminated their raison d'etre, since sellers can now take pirated goods directly to the consumer in Germany. Nevertheless, the Border Guards' Olejnik expects the bazaars to continue to operate on the same scale in 2008 as in 2007. Both officials and the private sector took measures in 2007 to reduce piracy in these bazaars. Most notably, the police closed down an internet site that allowed customers to download German subtitles for pirated DVDs. Also, ProMarka, an association of trademark owners, conducted information campaigns in the bazaars, aimed at raising consumer awareness of counterfeit goods. ¶7. (SBU) Some contacts expressed concern that similar open-air markets could spring up on Poland's eastern border. However, Olejnik stated there is no evidence of that so far, and he doubted it would happen, as inhabitants of the relatively poor eastern border region still lack the purchasing power to make such markets profitable. -------------- Enforcement: Legislation Improved -------------- ¶8. (SBU) In 2007, Poland enacted two important changes to IPR legislation: -- Poland amended Articles 305 and 306 of the Industrial Property Law to overturn a May 2005 Supreme Court decision holding that the law's criminal penalties could only be applied to the first importer/producer of a counterfeit good (ref E). Closing this loophole clears the way to increased infringement prosecutions. -- Poland implemented the EU's Directive on the Enforcement of Intellectual Property Rights (the Enforcement Directive). Under prior Polish legislation, in some circumstances rights holders could recover double (or, for intentional infringement, triple) damages for copyright infringement. When Poland implemented the Enforcement Directive, it kept this provision. However, patent and trademarks are addressed in a separate statute. Under that statute, only actual damages can be recovered for trademark and patent infringement. Some rights holders groups assert that the level of damages should be the same (i.e., triple) for all classes of intellectual property. However, double or triple damages are not required by the EU. In other words, Polish legislation implementing the Enforcement Directive gives all the protection due under EU law to trademarks and patents, and continues to give more protection than is required by the EU to copyrights. The Polish Minister of Culture, whose agency has the lead on IPR issues within the Polish government, asked government agencies and stakeholders in the private sector to identify additional needed legislative changes. He plans to make passing a new IPR bill a priority in the second half of 2008. -------------- -------------- Enforcement: Courts Still Backlogged, But Reform Effort Underway -------------- -------------- ¶9. (SBU) Polish courts remain congested. Contacts estimate that the number of pending IPR cases has remained the same, or increased slightly, since last year. The severity of the backlog varies from place to place, and is worst in large cities. In Warsaw, it may take three or four years to reach a final judgment in a case. Cases may be prolonged, and ultimately dismissed, because the rights holder deems the value of the infringing goods too small to bother with, and WARSAW 00000237 003.2 OF 006 declines to provide needed expert testimony. Despite slow-moving courts, effective relief may still be available to a rights holder. Counsel to the Business Software Alliance (BSA) told EconOff the BSA rarely pursues civil cases, because of the associated costs and delays. Instead, the BSA relies on criminal proceedings, in which there is little delay between filing a complaint and the police closing down the target. He said such cases are most frequently resolved by a settlement. While this precludes imposition of "deterrent sentences," the fact that the offender's business is shut down also has deterrent value. ¶10. (U) The Polish government hopes to address the problems of congested courts, and often ill-prepared prosecutors and judges, by establishing specialized IPR courts. The Ministry of Justice has already begun drafting the needed legislation. Currently, there is a dispute within the government regarding how broad the jurisdiction of the specialized courts should be, but a basic consensus in favor of establishing such courts appears to have emerged (ref E). -------------- Enforcement: Mixed Picture With Police -------------- ¶11. (SBU) Contacts distinguished between the performance of local police and the national police headquarters. The director of the unit responsible for IPR matters at the national police headquarters told EconOff that the police treat intellectual property violations "just like any other economic crime," and that when the police receive a complaint, they will investigate it. When asked about internet piracy, he stated anyone can monitor the internet, and -- if one finds a problem -- can file a complaint. The same official later asserted that police headquarters has a special internet unit to deal with online pedophiles as well as IPR violations. However, he subsequently acknowledged, the unit has no dedicated personnel. A single official in the national headquarters works full time on IPR issues. Nothing appears to have been done in the past year to increase the national headquarters' technical ability to deal with internet piracy. At a Polish inter-agency meeting on January 30, 2008, other Polish government agencies interested in IPR issues criticized the national police headquarters' inaction. Industry contacts repeatedly described national police headquarters as "doing absolutely nothing." ¶12. (SBU) Lack of IPR fervor in the national police headquarters is disappointing, but in reality may be of little consequence, as rights holders can -- and do -- work directly with local police. Representatives of the liquor, tobacco, film, music and software industries all reported that they enjoy excellent working-level cooperation from local police. They stated that, thanks to training offered by rights holders groups, local police forces increasingly include officers with IPR expertise. In addition, several local police commands have established specialized "economic crimes" units. Moreover, in Wroclaw, an IPR group has been established that brings together the police, customs officials and Border Guards. This model may be replicated in other Polish cities. ¶13. (SBU) On another positive note, contacts report that the customs service and Border Guards made significant strides in the past year. The government of Jaroslaw Kaczynski tried to root out corruption even at low levels, leading to a large number of officials being dismissed. With Poland's entry into the Schengen zone, the overall competence and professionalism of the Border Guards has increased. According to the Border Guards' Olejnik, at each stage of their training, border guards receive instruction regarding IPR. A handbook has been distributed in the training schools and to each unit. He said that every local division of the Border Guards has a person assigned to deal with IPR issues. -------------- Optical Disks and Software -------------- ¶14. (SBU) In prior years, statistics on the number of seized goods were used as a proxy to assess the scope of trade in pirated goods. This approach has always had some problems. WARSAW 00000237 004.2 OF 006 When a case is transferred from, say, customs officials to the police, they may both record it, resulting in double-counting. In cases where the rights holder declines to press charges, a seizure may not be recorded, resulting in under-counting. Furthermore, figures on number of investigations can be distorted by a particularly large case. The Border Guards' Olejnik noted that two years ago there was a major seizure of goods on the border with Lithuania. Thanks to that seizure, in that year that region appeared to be a leader in IPR enforcement, but there has been little activity there since. In 2007, Torun officials seized an internet pirate's hard drive. Using data from the hard drive, the Torun prosecutor commenced 2,000 cases against end-users, causing a spike in statistics for the region. On January 23, 2008, Polish Border Guards along Poland's western border seized 66,000 CDs, DVDs, CD-Rs and DVD-Rs, as well as 108,000 inlay cards. The haul was 10 times larger than the total for all seizures for that area in the prior year. The case was an important one that took time to prepare. Nevertheless, due to this one seizure, a simple year-on-year comparison of the number of seized goods in 2008 with 2007 would lead to faulty conclusions regarding the degree of enforcement activity. ¶15. (SBU) Changes in technology further reduce the probative value of statistics on the number of seized goods. As broadband internet access increased, illegal downloading of music, films and software grew apace. There has been a corresponding decline in trade in physical goods, like pirated CDs and DVDs. A market shift toward MP3s and away from CDs further reduced demand for CDs. As in prior years, forensic studies indicate that 85 percent of seized "pressed" discs were made in Russia. However, the number of "pressed" disks in circulation has declined, as CD and DVD burners have become commonplace. In 2006, the ratio of pressed to burned disks was roughly 50-50. In 2007, burned disks predominated by a ratio of 3-to-1. Also, according to FOTA, an association of film producers, increases in disk capacity mean losses per DVD have increased. A few years ago a seized DVD contained one film; now a majority of those seized contain three or four films. ¶16. (SBU) Statistics gathered by the recording industry association, ZPAV, indicate that from 2006 to 2007: (i) the number of seized cassettes fell by 98 percent, which ZPAV attributed to the fact that cassette tapes are essentially a dead technology; (ii) the number of seized foreign CDs fell by 17 percent (from 52,413 to 43,750),and the number of seized Polish CDs decreased 12 percent (from 13,455 to 11,786); (iii) the number of seized DVDs decreased 44 percent (from 12,659 to 7,156); (iv) the number of seized CD-RWs decreased 66 percent (from 129 to 44); and (v) the number of seized CD-Rs increased 8 percent (from 119,874 to 129,883). The overall value of seizures dropped by 23 percent. Contacts in the film and recording industries assert the decline in seized goods is a result of police conducting fewer raids. However, the changes in technology and the market discussed above undoubtedly were also major factors. ¶17. (SBU) Post knows of no reliable means to assess the relative contribution of each factor to the overall decline in seizures. It seems safe to say, however, that internet piracy is on the rise and is the primary concern of media rights holders. Unfortunately, as one contact privately admitted, "no one really has a good idea about how to control the problem." Some contacts point to the recommendations of the French Olivennes Commission Report on digital piracy as indicating the way forward (see ref F),but others worry efforts to adopt the Olivennes proposals in Poland would open the door to legislation substantially restricting rights holders' ability to incorporate digital rights management technologies into their products. Discussion of how to adapt to the proliferation of peer-to-peer technologies is at an early stage, and rights holders seem to be floundering as they search for an effective response. The Minister of Culture's plan to push for new IPR legislation in the second half of 2008 could provide a vehicle for new measures to limit internet piracy. The Ministry is soliciting proposals from rights holders groups. ¶18. (SBU) In prior years, the music and film industry was concerned by excess production capacity in optical WARSAW 00000237 005.2 OF 006 disk-pressing facilities in Poland. This is no longer an issue. Contacts report the excess capacity has been fully absorbed by the new Europe-wide trend of distributing CDs and DVDs as free inserts in newspapers. -------------- -------------- Pharmaceuticals: Major Progress on Market Access Issues -------------- -------------- ¶19. (SBU) Contacts in the research pharmaceuticals industry uniformly identify access to the list of drugs eligible for reimbursement from the National Health Service as their top priority. In 2007 there was a major breakthrough: 33 new active substances were added to the list (ref G). As a result, those companies whose products were added to the list expect substantial increases to their revenues in 2008 and 2009 (ref H). A Ministry-industry dialogue, commenced under USG auspices, contributed to the breakthrough. ¶20. (SBU) In addition, on September 29 new legislation went into effect revising the process for adding drugs to the reimbursement list. The legislation set a 180-day limit for making a decision on whether to add a drug, required the Ministry of Health to provide a reasoned basis for decisions, and allowed decisions not to include a drug on the reimbursement list to be appealed to an administrative court (ref G). If implemented properly, the law should lead to a significant improvement in the timeliness and transparency of the process for adding drugs to the reimbursement list. Some contacts in the industry note that deadlines existed in Polish law in the past, and were frequently ignored. They doubt the Polish government will abide by the terms of the new law. Such worries are understandable in light of the industry's troubled history here, but at this time post has no concrete information indicating the Polish government will fail to comply with the terms of the legislation. Poland is under pressure to modify its methods because of an EU case challenging Poland's past lack of criteria for making reimbursement decisions, failure to respect deadlines, failure to justify decisions and failure to provide appeal rights. That case is at the stage of a "reasoned opinion." ¶21. (SBU) While major progress was made on the industry's top issue, several other matters of lesser commercial importance require comment. First, Polish legislation still only provides six years of data protection for products registered in Poland. However, Poland does extend the European "8 2 1" term of protection to all products registered at the EU level. Since, as a practical matter, all new products are in fact registered at the EU level, the lesser degree of protection for Polish-registered products is of little commercial significance. Post has seen no new evidence of specific IPR violations related to data exclusivity with American firms, and no U.S. pharmaceutical firm reported a new case of patent infringement to post during the past year. ¶22. (SBU) In 2007, the Ministry of Health began to rely on Health Technology Assessments (HTAs) for innovative products. Some companies are concerned that the assessment process could be used as a pretext to keep innovative products out of the reimbursement system. However, contacts also report that the HTA process is used in other EU countries, including France and the UK, and that the agency conducting the HTAs is staffed by competent professionals using recognized methodologies. While abuse of the process is possible, post is aware of no concrete cases where the HTA process was in fact abused to erect a barrier to market access for innovative drugs in Poland. ¶23. (SBU) On July 1, 2006, the Polish government instituted a 13 percent across-the-board price cut on all imported pharmaceutical products. The Polish government contended that it cut prices in response to exchange rate changes, as allowed under Polish regulations. In response to allegations that the price cut violated national treatment obligations, in November 2007 the Polish government reduced the price it pays domestic producers for drugs manufactured using imported inputs. The European Commission is investigating the price reduction, and contacts are confident that Poland will eventually be found to have violated EU rules. In the meantime, contacts advise, the costs associated with the WARSAW 00000237 006.2 OF 006 price reduction long since have been absorbed or written off. ¶24. (SBU) Another pending EU case concerns the accelerated registration on the eve of EU accession in 2004 of the so-called "ghost list" of generic products with incomplete dossiers. The pharmaceuticals industry has expressed concern that a similar approach could be used by the Ministry of Health in 2008 to issue conditional re-registrations for older generics when the transitional period allowed for upgrading of old dossiers comes to an end. Contacts at the Ministry of Health informed EconOff they are unaware of any such plans. -------------- Education -------------- ¶25. (SBU) The Polish Ministry of Science and Higher Education issued a higher education guideline calling for all Polish university students to receive instruction in IPR, effective October 1, 2007 (ref I). To our knowledge, this is the first time such a step has been taken anywhere in the world. The President of the Polish Patent Office personally championed the measure. Although the guideline is not binding, Polish universities report they are moving to implement it. The private sector is also working to increase IPR awareness. For example, Michal Siciarek, chairman of the AmCham's Intellectual Property Committee, told EconOff that AmCham members plan to teach an IPR course at Warsaw University. Working with the Ministry of Culture, the AmCham also sponsored an IPR-related poster contest. Similarly, ProMarka, an association of trademark owners, commissioned a survey of public attitudes towards counterfeits, and launched a public awareness campaign. ¶26. (SBU) Training for government officials is also increasingly available and used. Rights groups, such as ZPAV, participate regularly in police training and law enforcement conferences. ZPAV and FOTA collaborated on a handbook for handling IPR cases (including a protocol for dealing with internet piracy) that was distributed to all police commands and prosecutors offices. Under a "twinning" program supported by the EU's "Transition Facility 2004," 14 training sessions, in which 248 Border Guards participated, were organized by the Polish border guards, Ministry of Finance, and Ministry of Culture. In 2008, officials from the Polish Ministry of Culture will take part in courses offered by the U.S. Patent and Trademark Office. -------------- Comment -------------- ¶27. (SBU) In 2007, Poland improved its IPR legislation, closed the most notorious market for counterfeits in eastern Europe, improved control of its eastern border, and called for IPR education for all university students. Poland broke the logjam on adding innovative pharmaceuticals to the reimbursement list, and adopted legislation promising a more transparent process. A bill is being drafted to create specialized IPR courts, and the government is open to industry proposals to address internet piracy. Weak spots remain, but overall these developments indicate a government with a broad and deepening commitment to IPR. In light of the excellent progress made in 2007, Poland should be removed from the Watch List. CURTIN