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Cablegate: Update On Czech Response to Ipr Violations At

DE RUEHPG #0619/01 2631433
O 191433Z SEP 08




E.O. 12958: N/A

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

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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

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

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

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

-- 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

-- 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.

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

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

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