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TO RUEHC/SECSTATE WASHDC IMMEDIATE 0701
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE IMMEDIATE
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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