Cablegate: Embassy's Special 301 Recommendation for Mexico

DE RUEHME #0837/01 0512026
P 202026Z FEB 07





E.O. 12958: N/A

B. B. MEXICO 7001
C. C. 06 MEXICO 969

1. Summary: Embassy recommends that Mexico remain on the
Special 301 Watch List for 2007. Mexico's federal government
has made greater efforts to combat piracy and counterfeiting
over the past year, but serious obstacles to effective
enforcement remain. The new Calderon administration has
declared its top priorities to be strengthening Mexico's rule
of law and economic competitiveness. If the president and
his team are serious about these (Post believes they are),
then taking action to improve protection of IPR provides the
GOM an excellent opportunity to make progress on both fronts.
Post will monitor such progress, or the lack thereof,
closely. Cooperation with the U.S. and Canada via the
Security and Prosperity Partnership and ongoing capacity
building for GOM officials should help generate positive
momentum. End summary.

Overall Assessment of IP Climate

2. As Post reported in reftel B, Mexico continues to suffer
from rampant and largely undeterred commercial IPR
infringement that causes huge losses to Mexican, U.S., and
third-country IP rights-owners. Dedicated federal IPR
agencies have upgraded their efforts to enforce the law, and
seizures of infringing goods continue to rise. At the end of
the day, however, it is still very hard to send someone to
jail for piracy or counterfeiting, making effective
deterrence difficult. Obstacles include legislative
loopholes, a cumbersome judiciary process, lack of effort by
many state and municipal governments, and broad cultural
acceptance of illegal commerce. These systemic factors are
temporarily exacerbated by three other factors: 1) the new
Calderon government, which took office December 1, 2006, has
not finished staffing the top positions responsible for IPR
in various federal agencies; 2) the initiative to re-organize
the federal law enforcement agencies has not yet been
completed; and 3) the recent counter-narcotics campaigns that
the GOM launched in various regions of the country have
required huge surges of federal law enforcement personnel and
resources, to some degree diverting the same from IPR
enforcement. Despite the slow start in staffing key
positions, activity on the part of the GOM's dedicated IPR
offices and agencies continues apace. On the other hand,
large-scale enforcement operations that require the support
of federal police will be affected by the surge in
counter-narcotics operations until the GOM feels it has
achieved a certain comfort level in containing
narco-violence. That said, Post feels the new government is
sending the right signals that IPR enforcement will get the
attention and resources needed. We will need to monitor GOM
performance closely and follow up on both opportunities and
ongoing problem areas.

3. Taking action on the following fronts (all of which are
possible this year) would help counteract the more systemic
problems identified above: passing a pending amendment to
give law enforcement officials ex oficio authority to go
after infringers; continuing the training of judges to
improve their understanding of the importance of IPR and the
application of relevant Mexican laws; tapping into existing
law enforcement resources and authorities that target
organized crime; enlisting more cooperation from state and
municipal authorities (the state of Mexico, the country's
largest, is expected to sign an anti-piracy agreement with
interested industry groups in spring 2007, mirroring the
national agreement that was signed in 2006 with the federal
government); fully implementing the GOM's commitments to
protect and purchase legitimate medicines; ramping up public
awareness of the value of strong IPR protection; and
improving international coordination to stop cross-border
flows of infringing products. More broadly, Mexico is
pursuing judiciary reforms that, if eventually enacted, would
streamline and rationalize the legal process for all types of
cases, IPR included.

4. In addition to Mexico's domestic efforts to move ahead on
these fronts, the GOM is working closely with the U.S. and
Canadian governments in the IPR working group organized under
the trilateral Security and Prosperity Partnership. The
working group is focused on cooperation in three key areas:

MEXICO 00000837 002 OF 003

detecting and deterring trade in pirated and counterfeit
goods; public awareness and outreach to our business
communities; and measuring piracy and counterfeiting. IPR
officials from the three countries have finalized an action
strategy that will be presented to ministers for their
approval in late February 2007. Bilaterally, the Embassy
continues to take full advantage of capacity building
opportunities like the U.S. Patent and Trademark Office's
Global Intellectual Property Academy Training Program to
expose Mexican IPR officials and judges to best international
practices for protecting IPR.

Specific Areas of Concern

5. This section adopts the format for specific areas of
concern that was used in reftel A.

A. Notorious Markets: Informal markets throughout Mexico
feature vendors blatantly selling pirated audio-visual
materials and counterfeit name-brand goods. In Mexico City,
Tepito remains the main warehousing and distribution center
for infringing products, and hosts scores of retail stalls to
boot. Other markets of particularly ill repute include the
Plaza Meave, the Eje Central, Lomas Verdes, and the Pericoapa
Bazaar in Mexico City, San Juan de Dios in Guadalajara,
Simitrio-La Cuchilla, San Martin Texmelucan, Emiliano Zapata,
and Independence in Puebla, and Pulgas Mitras and La Ranita
in Monterrey. Though authorities do conduct raids in these
markets, they frequently do so at night to avoid the violent
confrontations that daylight raids can provoke. The Mexico
City legislature passed a bill in 2005 that would have given
city officials the power to close down any business
establishment engaged in the fake goods trade, but the
then-mayor (who received substantial political support from
the capital's numerous informal street vendors) vetoed the
bill in 2006. Business groups intend to press for its
re-introduction this year. On a more positive note, on
February 14, 2007, Mexico City police expropriated a number
of buildings in Tepito that had been used for selling illegal
drugs and pirated merchandise, vowing to convert them into a
public school. There could be legal challenges to this
unique tactic.

B. Optical Media Piracy: Piracy of movies, music, games and
business software is rampant in Mexico. According to the
International Intellectual Property Alliance (IIPA), the
music, gaming and business software industries lost an
estimated USD 1 billion to piracy in 2006. The movie
industry, whose 2006 numbers are not yet available, reported
losses of another USD 483 billion in 2005, with more than six
times the number of pirated DVDs sold as legitimate ones.
Mexico imports around 800 million blank media units per year,
the vast majority of which are used to create pirated optical

C. Use/Procurement of Government Software: The government of
Mexico (GOM) generally purchases and uses legitimate

D. TRIPS Compliance, FTA Implementation, and Other IP-Related
Issues: As reported in Post's 2006 Special 301 recommendation
(reftel C), in 2005 Mexico published implementing regulations
to bring its 2003 copyright law amendment into force. GOM
claims that these regulations bring Mexico into compliance
with its TRIPS and NAFTA obligations appear well-founded.

E. Data and Patent Protection: Mexican law does not provide
any clear rules that either define or mandate data
protection. The pharmaceutical industry is working on draft
legislation to submit to the GOM, but this will likely be
delayed while the industry fights to defeat a recently
introduced bill to reduce patent protection from 20 to 10
years. The 2003 presidential decree mandating a product
patent link remains in effect, though enforcement by the
Mexican drug regulatory agency is patchy. The Mexican Social
Security Institute and the Social Security Institute for
Government Workers, two of the largest consumers of
pharmaceutical products in Mexico, have yet to fully
implement their 2003 pledge to purchase only legitimate
medicinal products.

F. Production, Import and Export of Counterfeit Goods:
Regarding production, as mentioned in para B above, a huge

MEXICO 00000837 003 OF 003

volume of blank optical discs enters Mexico each year, the
vast majority of which is used to burn pirate copies of
movies, music, and software. Industry groups have
recommended that the GOM create a new tariff line for these
items to facilitate tracking them after they are released
into the market. GOM authorities complain about their
growing triangulation problem. This refers to the export of
counterfeit goods from places like China to the U.S., where
the labels are switched to show U.S. origin. The goods then
enter Mexico under NAFTA's duty-free treatment, where they
end up being sold to consumers. IP-owners that want Mexican
Customs to hold shipments of infringing products have to
first obtain an order from PGR (the Office of the Prosecutor
General of the Republic, rough equivalent of the U.S.
Department of Justice) or IMPI (Mexican Institute of
Industrial Property, rough equivalent of the U.S. Patent and
Trademark Office) that directs customs officials to detain
the merchandise. Companies requesting such actions generally
report positive outcomes. However, U.S. industry has sought
increased cooperation and communication between PGR, IMPI,
and Mexican Customs to make the process more user-friendly.

G. Enforcement: As reported in reftels, the number of raids,
arrests, and seizures made by GOM law enforcement authorities
related to piracy and counterfeiting continue to rise,
demonstrating that efforts are being made at the federal
level to enforce IP rights. And as detailed below, there
have been successes in specific areas. However, officials
are quick to acknowledge that the legal limitations they work
under make it difficult to inflict real pain on criminals
(i.e., incarceration or serious monetary fines). According
to PGR, only four persons were criminally convicted in 2006
under Mexican IPR laws. Regarding administrative procedures,
IMPI has had success in fining or even shutting down
infringing businesses, but those willing to file for
injunctions can stave off penalties for months or even years.
Much of this is due to outdated, conflicting, or tortuous
legislation. As mentioned in para 3 above, broader judicial
reform would be helpful, but there are also specific bills
that could make a difference if passed. In addition to the
one granting the police ex oficio authority to go after
pirates and counterfeiters, there are other useful bills that
would, for example, criminalize video recording in movie
theaters and address the sale or use of anti-circumvention
devices. At the tactical level, industry groups continue to
urge the GOM to make better use of its intelligence gathering
assets to target the criminal bosses further up the food
chain from the easily replaced street vendors. On this
front, IMPI recently announced the establishment of a new
office with approximately 40 officers dedicated to
investigation and intelligence. Since 2004, PGR has had the
ability to prosecute copyright piracy under Mexico's much
stronger organized crime legislation. To date, there have
been no IPR-related organized crime convictions, though in
September 2006 PGR apprehended eight gang leaders involved in
commercial copyright infringement. It remains to be seen if
these arrests will result in prison sentences. PGR has also
been actively investigating cases of counterfeit drugs under
a 2006 presidential decree that made it a felony offense to
trade in tampered medicines.

H. Treaties: Mexico has ratified both of the WIPO "Internet
Treaties" -- the Copyright Treaty and the Performance and
Phonograms Treaty. Legislative amendments aimed at bringing
Mexico into compliance with various provisions of these two
treaties regarding technological protection measures and
rights management remain pending in the Congress.

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