Testimony to
the Subcommittee on Courts, The Internet and Intellectual Property
President,
Films By Jove, Inc.
“Intellectual Property Rights
Violations in U.S.-Russian Trade”
Chairman
Smith, Congressman Berman and other distinguished members of the subcommittee,
I want to thank you for the invitation to appear before the Subcommittee
today. I come to you as president of a
small business that invested in Russia and is in danger of having its
investment expropriated without compensation.
I also come to you as the representative of a group of small businesses
who have suffered a similar fate in Russia.
As
a victim of Russia’s weak enforcement of intellectual property rights, I come
to you with a warning that Russia’s disrespect for IP rights is on the increase
due to the difference between stated policy and what certain government
officials unofficially condone in practice.
Even as Russia moves toward membership in the WTO, systematic copyright
violations and collusion between government officials and pirates both continue
unabated.
Finally,
I come to you as a victim of a breakdown of separation of powers between
Russia’s executive and judicial branches: from the highest federal courts to
the smallest regional courts, judges make ill-founded rulings when government
officials often with private agendas exert pressure on courts in the name
of “protection of state interests.”
So
as you can see, I have a number of issues to discuss, but here at the outset
let me make clear that my comments do not purport to make any linkage between
piracy and organized crime and terrorism.
Others more qualified may speak directly to those precise issues, but
the purpose of my testimony today is to outline my experience with intellectual
property rights violations in Russia. To
demonstrate why this matters to the U.S. Congress, I would like to highlight
the following points and the impact they have on our bilateral commercial
relationship:
I.
IPR violations in Russia hurt U.S. investors
II.
The use of “state interests” and illegal ex-parte meetings hinder
legitimate judicial reform efforts in Russia
III.
Russia disregards U.S. and international arbitration court decisions
IV.
The U.S. government must play an important role in addressing Russian IPR
violations in the United States
In
my conclusion, I will present several recommendations to Congress on steps that
can be taken to address these issues.
I. IPR
violations in Russia hurt U.S. investors
The International Intellectual Property Alliance (IIPA) 2003 report on Russia cites losses to U.S. copyright holders of $1 billion a year, making Russia one of the worst violators of U.S. intellectual property rights. The majority of my testimony will be dedicated to IPR violations in the entertainment industry (e.g., films, CDs, videocassettes, DVDs, electronic games, etc.). But there is another, equally important area impacted by IPR violations — technology transfer. I would like to share an example with you. My colleague, Gary Johnson, is President of Sawyer Research Products. (Gary is in the audience today, has submitted separate testimony for the record, and is happy to answer any questions.) Sawyer is a global leader in the business and technology of single crystal piezoelectric materials, especially quartz, which is second only to the production of silicon in the ranking of crystal materials used in electronics. In 1994, Sawyer became a shareholder of Quartz Glass Plant in the Vladimir region of Russia. The plant’s success, in large measure the result of utilizing Sawyer’s world-class technology in a neglected facility in the heart of Russia, caught the eye of the local governor who waved the “protection of state interests” flag. Shortly following a court decision favorable to their ends, private parties closely linked to the local administration deployed a private security force to block Sawyer from its own plant, despite the fact that Sawyer had not exhausted the appeals process and litigation continued. Sawyer technology now is available to a nearby plant still under state ownership, as well as to the private parties continuing to occupy the object of Sawyer’s investment.
The Sawyer example highlights the devastating impact IPR violations have on U.S. small businesses investing in Russia. I would like to emphasize this point, because, unlike our larger counterparts, SMEs do not have the financial or human resources necessary to devote to the extensive legal proceedings resulting from IPR violations in Russia.
Films By Jove
case
Now
I would like to provide my personal experience with IPR/copyright violations in
Russia.
I
have been an executive in the U.S. motion picture industry for over 15 years,
and am currently president and co-owner of the Los Angeles-based film
production and distribution company, Films By Jove. Eleven years ago, in May 1992, we signed a
contract with Russia's leading animation studio to restore and market a large
body of Soviet-era animated films. For
your background, during the Soviet era, this type of animation had been sold
for peanuts, by the kilo, or just given as a bonus to companies buying a large
package of Soviet feature films.
Today
the Russian animation we distribute can be seen in theaters and on television
all over the world, and is available on videocassettes and DVD in thousands of
retail outlets in North America, South America, Europe, and Asia. Together with our partner Mikhail
Baryshnikov, we gave the old animation new cachet by revoicing it in English
with actors such as Jessica Lange, Martin Sheen and Charlton Heston. We revoiced in French with actors like
Catherine Deneuve, and in Spanish with Julio Iglesias. Together with the prestigious art book
publisher Harry N. Abrams, we published the only book of Russian fairy tales
currently in print in the United States, handsomely illustrated with cells from
the animation.
We
are proud to have contributed to the safeguarding and promotion of Russia’s
rich artistic heritage. We accomplished
this by investing millions of dollars to acquire, repair, restore, and
distribute these films, making them accessible for the first time to the
general public outside the former USSR.
The Soviets had freely “borrowed” Western literature and music to make some
of the best animated films — a bad habit that did not end after the USSR signed
its first intellectual property convention in 1973. So we also had to plead and cajole
representatives of these writers and musicians to license us the rights
necessary to keep these films alive.
In
1999, seven years after we licensed the animation library, when the investment
in restoring the animated films first showed a profit for the Russian animation
studio and for my company, the Russian State Film Committee (later absorbed
into the Ministry of Culture) commenced a legal and political campaign to
retroactively void our contract. This
effort began when the State Film Committee set up in Moscow a shell corporation
with the same name as the Russian studio from which we had licensed the
animation rights. Ministry of Culture
officials claimed that this new company, established in 1999, was the true
copyright holder back in 1992, instead of the entity with whom we had
contracted. Hence, they claimed, our
contract was void retroactively.
Thus
began a protracted series of suits and countersuits, decisions and appeals in
Russian courts between the animation studio that had licensed the rights to us
and the Ministry of Culture. During this
period, Films By Jove suffered financial losses because the Ministry of Culture
prohibited the Russian State Film Archives from supplying us with films for
which we had the rights. Such
interference with our normal business operations became
part
of an organized campaign to deny our property rights.
Throughout
this time, Ministry of Culture officials significantly damaged my company’s
interests by sending letters via Russian embassies to broadcasters with whom we
were negotiating — informing them, falsely, that only licenses issued by the
dummy corporation were legitimate and implying that Films By Jove could not
therefore contract out the rights. These
misleading statements have deceived our trade partners, interfered with our
commercial activities, and caused us serious financial losses due to damage to
our reputation and lost sales.
Furthermore, the letters from the Ministry blatantly misrepresent the
fact that Films By Jove has successfully defended its copyright in the U.S.
courts. The studio with which Films by
Jove contracted in 1992 was also successful in the Russian court system, only
to have the decisions overturned in the name of “state interests.”
The
unrelenting and organized efforts by Russian government officials to annul the
contractual rights of Films By Jove, and to destroy our investment, have
already come to the attention of the U.S. Congress. In 2002, two letters concerning our case were
sent to Russian government officials jointly signed by Congressman Berman,
Congressman Waxman and Congressman Weldon, including the following points:
1. Officials of the Russian
government “appear to have inappropriately influenced the decisions of the
Russian courts in violation of the constitutional separation of powers between
the two branches of government”;
2. Such efforts directly harm
the long-term investment of Films By Jove; and
3. The Ministry of Culture
does not appear to be committed to safeguarding the rights of American
investors, contrary to President Putin’s repeated statements pledging that
investors will be guaranteed a level playing field, adherence to the rule of
law, an independent judiciary, and no government interference in private
commercial contracts.
In
response, Congressmen Berman, Waxman and Weldon received a letter from the
Russian Ambassador to the U.S. questioning the reference to Films By Jove as an
investor. Apparently the Russians
destroyed evidence of our wire transfers and payments to the studio (assuming
U.S. banks do not keep records) because, according to the Russian Ambassador,
the Russian company received no payments from the U.S. party to the
contract.
In
addition to the assistance we received from the U.S. Congress regarding our
case, U.S. Ambassador to Russia Alexander Vershbow and the staff at the U.S.
Embassy have also raised our case repeatedly with the Minister of Economic
Development and Trade. Ambassador
Vershbow met personally with the Minister of Culture last November and
explained that we are ready to conduct negotiations aimed at reaching an amicable
and transparent solution based on the rule of law.
In
spite of repeated assurances that our concerns would be addressed, a new
full-scale campaign was mounted at an international television sales expo in
France last fall to advise all buyers that we were “pirates” and “thieves,”
that all new contracts had to be signed with them, and that any contracts
previously signed with our company were null and void. The state-studio’s brochures specifically
advertised the titles we legally acquired, paid for, and into which we invested
significant amounts of money for restoration and revoicing in order to make
them sellable to international broadcasters.
To
address this situation, we had recourse to a French court decision that we had
won in 1996 against Sovexportfilm, another state-owned Russian company that we
caught pirating in the early 1990s (it too enjoys Ministry of Culture
support). On the basis of that decision,
a French magistrate ordered his bailiff to shut down the Russian sales booth at
Cannes in order to gather evidence about the shell company’s commercial
activities that violated our intellectual property rights. The director of the shell company and his
deputy both told the French bailiff that they worked for the Russian Ministry
of Culture.
The
Russian Ministry of Culture is now in the process of liquidating the studio
with which we signed our agreement, showing no concern at all for the
livelihoods and pensions of the 300 shareholders, most long-term employees of
the animation studio.
IPR
violations and expropriation — to what end?
It
appears that part of the impetus for these copyright violations is the
Ministry’s goal to establish a Soviet-type structure to funnel profits directly
into the pockets of the film industry’s leadership. Currently, a state-owned entity, “Roskinoprokat,”
is seeking to control all phases of the Russian feature film industry, from
buying Kodak stock, to duplicating films for video and DVD, to producing
Russian films, dubbing others into Russian, and controlling all cinema houses
in Russia. All of the film studios have
had to become state companies. Most have
already had their libraries of films made during the USSR extracted from the
production arms.
This
desire to control all is what led the Ministry of Culture to destroy the
successor of the studio with which we signed our contract. The expropriation of our property rights
under this contract was another well-orchestrated step toward concentrating in
the same hands all of the animation rights.
You
will hear more about Roskinoprokat in the coming years because, as they openly
state in interview after interview in Russia, the biggest plum is rights to
distribute U.S. studio films, which generate the biggest profits in
Russia. More than 100 modern movie theatres
operate in Russia today, a number expected to triple in the next five years,
with revenues predicted to reach $100 million.
Post-Soviet Russian films constitute only about 3 percent of the screen
repertory and average $200,000 at the box office. By contrast, American movies have proven to
be very popular and very lucrative, grossing an average of $2.8 million at the
Russian box office.
The
Minister of Culture and his Deputy have made clear that their goal is to
consolidate everything into one big government-owned company. Roskinoprokat recently announced plans to
open offices in Los Angeles this summer and is already hiring staff. One of their associates told me earlier this
week that they believe it is only a “matter of time” before the major studios
“succumb.” The result will surely be a
nightmare even worse than Sovexportfilm’s monopoly on importing foreign films
into the Soviet Union.
II. The use of
“state interests” and illegal ex-parté meetings hinder legitimate judicial
reform efforts in Russia
The
importance of “state interests” in the application of law and administrative
process in Russia raises critical separation of powers issues. In the Soviet tradition, courts and
administrative powers, including enforcement agencies, pursue a mission related
to state interests. They do not follow
the Western norms of fair adjudication of law according to the facts and
transparent procedures to implement rulings and otherwise conduct
administrative process. In the Russian
environment, state prosecutors operating under control of the executive branch
define “state interests” in many judicial proceedings. Their very presence in a case frequently
creates outcomes consistent with their objectives, rather than with the law and
facts.
We
unfortunately have experienced the illegitimate use of ex-parté meetings in
court decisions. At the same time that
the Russian Ministry of Culture was challenging our copyright in U.S. court, it
was continuing in Russian courts to challenge the legitimacy of the animation
studio that had contracted with us.
After six rulings against the Ministry of Culture in the Russian courts,
Ministry officials invited the Chief Justice of the Supreme Arbitrazh (or
Commercial) Court to send a representative to a secret but well-documented
“consultation” at the offices of Deputy Prime Minister Matviyenko. The purpose of the meeting was to secure for
the new government-owned studio rights that belonged by law to the studio with
which we signed our contract. No one
from our side was invited of course, and such ex-parte meetings are against the
law.
The
Chief Justice did send a representative to the meeting which was attended on
behalf of the government by Minister of Culture Shvidkoy, two of his deputy
ministers, a Ministry of Culture lawyer, a representative of the State Property
Ministry, two representatives of the State Prosecutor’s Office, the director of
the Russian patent bureau Rospatent, representatives of the Presidential
Administration, director of the state-owned studio, and the chairman of new
state-owned company Roskinoprokat
(“Russian Film Distribution”).
This
ex-parté meeting resulted in one cassation court decision and one Supreme
Arbitrazh (Commercial) Court decision that together vacated all lower court
rulings that had previously been decided against the Ministry of Culture. The effect of these decisions was that the
properly registered successor of the company from which we gained our license
was de-registered. It should be noted
that in his declaration to the U.S. Federal Court, which I have submitted for
the record, the respected Russian jurist Sergei Pashin concluded that the
Supreme Arbitrazh Court decision was clearly inconsistent with both Soviet and
Russian law and prior decisions made by the same court about the same matter,
and that it had all of the markings of what is known in Russia as a “state
ordered decision.”
III. Russia disregards U.S. and international
arbitration court decisions
One
of our contractual obligations was to defend the Russian studio’s copyright
against pirates in our distribution territory, which included the United
States. In August 2000, while we were
engaged in a lawsuit against a convicted felon for copyright violation in the
U.S. Federal Court for the Eastern District of New York, the shell corporation
set up by the Russian Ministry of Culture joined the suit as a third party on
the side of the felon. Their objective
in joining the suit against us in U.S. court was to attempt to gain a ruling
that Films By Jove was not the legitimate copyright holder of the
animation. The Ministry was thus
tenacious in its organized campaign to undermine my company’s rights, and we
were unexpectedly burdened with enormous legal expenses in the effort to defend
ourselves.
As
it turned out, the Russian Ministry of Culture allied itself with the losing
party in the U.S. district court: Films By Jove won the case. The felon with whom the Ministry had allied
itself was arrested in December 2000 and subsequently pleaded guilty to pirating
the intellectual property of the Motion Picture Association of America and the
Recording Industry of America using master tapes and optical cassettes
illegally manufactured in Russia. The
Ministry’s support for this convicted felon has never wavered.
On
a related note, I also want to strongly urge the U.S. government and members of the international community to address
Russia’s failure to observe the United Nations Convention on the Recognition
and Enforcement of Foreign Arbitral Awards.
As
several of my small business colleagues will tell you, Russian bailiffs do not
enforce foreign arbitral decisions, even when ordered to do so by the Russian
Supreme Court. I would be happy to
provide examples of these cases if you so desire.
IV. The U.S.
government must play an important role in addressing Russian IPR violations in
the United States
Russian
IPR violations not only impact our business in Russia, they affect our business
in the U.S. and in other countries. The
losses I referenced earlier from the IIPA report on Russia do not include the
massive additional losses caused by the import into the U.S., Germany and
Israel — all countries with major populations of wealthy Russian immigrants —
of illegally manufactured videos CDs, DVDs and software.
In
the U.S., our government plays an important role in addressing IPR
violations. For example, in December
2000 when the FBI arrested a Brighton Beach video pirate for piracy of the MPAA
and RIA — the same one we sued in U.S. Federal Court — they confiscated
truckloads of master cassettes and CDs imported from Russia. Unfortunately the pirate’s arrest only
resulted in a momentary lull in the violations of Russian and U.S. intellectual
property by the Russian émigré community — and for that we have to look to our
own legal system.
The
pirate, Joseph Berov, opened his bootleg video business while on federal
probation for importing Russian women into the U.S. for the purpose of
indentured servitude. Yet two years
after his arrest by the FBI and one year after he pleaded guilty, Mr. Berov has
yet to be sentenced by the U.S. Federal Court for the Eastern District of New
York. In the interim, he has opened two
new superstores and resumed importing illegal video CDs from Russia. The message to his partners at the Ministry
of Culture and the local émigré community is that “crime pays.”
Other
examples of Russian IPR violations in the U.S. include the Ministry of
Culture’s attempt last week to present the American Film Institute (AFI) with
an animation program that violates both our license and the August 2001 U.S.
Federal Court decision that we won. The
same program included feature film rights that were legally licensed to
legitimate U.S. distributors by the very Russian studios the Ministry agrees
are the legal copyright holders. The AFI
was vigilant and thus averted a major scandal.
Two years ago, the American Cinematheque was less vigilant, and, with
the Ministry of Culture, organized a tour of films without the consent of the
legitimate producer (Mosfilm) of the films.
The copyright holder was not consulted, not paid, and not even
acknowledged.
Conclusion
I would like to close my testimony today by offering
the following recommendations to the U.S. government, in order to address IPR
violations in Russia:
I want to thank the Subcommittee for giving me the
opportunity to testify today, and I will be happy to answer any of your
questions.