Protecting Intellectual Property and the Nation’s Economic Security

Vol. 6 No. 5

By

Colonel Reggie Ash is a U.S.  Air Force Cyber Officer and a 2013 graduate of the Eisenhower School at National Defense University. He currently serves as the Senior Military Advisor in the European and Eurasian Affairs Bureau at the State Department. This summer he is projected to take command of the 21 Mission Support Group at Peterson AFB, Colorado.

Intellectual property is a driving force behind the U.S. economy. Intellectual property refers to the inventions, ideas, designs, and creations that are protected by U.S. law. Even the country’s founding fathers recognized the importance of intellectual property and provided for its protection in the Constitution. Article I of the U.S. Constitution grants Congress the power to “promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries.”1 In the Federalist papers, James Madison explained that maintaining the rights of individuals to their writings and inventions was a “public good.”2 The public good from intellectual property is increasingly threatened at great cost to the U.S. economy. The United States must stem the loss of intellectual property before the lost value to the economy leads to irreparable harm to national security.

Value of Intellectual Property

The United States protects IP rights primarily through patents, trademarks, and copyrights. Patents, protected by the Patent Act of 1952, refer to “inventions of processes, machines, manufactures, and compositions of matter that are useful, new, and nonobvious.”3 Trademarks, protected by the Trademark Act of 1946 (also known as the Lanham Act), refer to the “words, names, symbols, sounds, or colors that distinguish goods and services from those manufactured or sold by others.”4 Copyrights, protected by the Patent Act of 1952, refer to “original artistic and literary works of authorship.”5

The United States also protects a fourth kind of intellectual property called “trade secrets.” Trade secrets are defined as “all forms and types of financial, business, scientific, technical, economic, or engineering information . . . whether tangible or intangible,” provided the owner takes reasonable measures to protect the information and the information provides economic value if not known publicly.6 Examples of trade secrets include software source code and the ingredients of unique recipes like Coca-Cola. In the United States, trade secrets are primarily protected by state laws, although there is some federal protection via the Economic Espionage Act of 1996,7 and the Theft of Trade Secrets Clarification Act of 2012.8 Trade secrets are not registered federally, because such registration would make them public.

Because the laws mentioned above only protect IP rights in the United States, IP owners must file for protections in every country where protection is desired. The U.S. government has joined a number of free trade agreements that protect IP rights among signatories. Additionally, there are some large, multilateral agreements that create temporary protections or ease the process of filing for patents and copyrights in multiple countries. These treaties include the Patent Cooperation Treaty, the Madrid Protocol,9 and the World Trade Organization (WTO) Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS).10

As James Madison described in Federalist No. 43, the U.S. public benefits when intellectual property is protected. Without protected IP rights, artists and authors fear their work can be easily copied and are less likely to create works of art that make life more beautiful and interesting. In the business world, protected IP rights spawn innovation—ideas and devices to improve our lives. Without IP rights protection, others can profit from the sunk costs of others, putting the innovator at a disadvantage.

Innovation generates jobs and revenue, which drive many industries and provide a source of strength to the U.S. economy. According to the U.S. Department of Commerce (DOC), the country’s most IP-intensive industries provide 40 million, or 27.7 percent, of all U.S. jobs.11 In the words of U.S. Intellectual Property Enforcement Coordinator Victoria Espinel, “Infringement of intellectual property can hurt our economy and can undermine U.S. jobs. Infringement also reduces our markets overseas and hurts our ability to export our products. Counterfeit products can pose a significant threat to the health and safety of us all.”12

Intellectual property is especially valuable within the information and communications technology (ICT) industry. Nationwide, the four industries with the highest level of patent intensity are submarkets of the ICT industry (e.g., computer and peripheral equipment; communications equipment; semiconductor and other electronic components; and other computer and electronic products). These four submarkets accounted for 851,400 jobs in fiscal year 2008.13

Threats to Intellectual Property

While intellectual property is critical to the U.S. economy, it is subject to a tremendous level of theft. The DOC estimates the domestic value of stolen intellectual property to be between $200 billion and $250 billion annually.14 Protection of IP rights is especially important to the ICT industry because of losses to the industry, and the fact that the Internet makes IP theft easier.

Many companies in the ICT industry are heavily dependent on their intellectual property; therefore, those companies are at great risk to theft. Sometimes the theft is from consumers, and sometimes from competitors. For years software manufacturers, such as Microsoft, have sought to prevent consumers from using a single license on multiple computers. ICT companies also must protect their intellectual property from competitors. For example, Apple is currently alleging in court that Samsung copied patented ideas and technology used in smartphones. Ironically, the founder of Apple, Steve Jobs, once said, “[W]e have always been shameless about stealing great ideas . . . .”15

The entertainment industry has been hit hard by theft of intellectual property via the Internet. In the 1990s, the music industry lobbied Congress to pass IP protection laws that eventually forced the Internet file-sharing company Napster out of business. Even so, the entertainment industry, as well as the software industry and others, continue to lose $58 billion annually due to online copyright piracy.16

The Internet also serves as a medium for organized crime, competitors, activist groups, and state-sponsored actors to steal intellectual property. While these criminals frequently hack into networks to access intellectual property, they often gain the assistance of unaware insiders via phishing or social engineering.17 A 2013 study by Symantec reveals that insiders are a serious threat to intellectual property. This study identified that over half of corporate employees use risky data practices by mailing business documents from their work to their personal e-mail accounts, and using online file-sharing applications without their employer’s permission. These activities make the external criminals’ job much easier. Equally as concerning, more than half of employees take proprietary information with them when they leave a company.18

There is also a foreign policy aspect to IP theft. Annually, the U.S. Trade Representative (USTR) publishes a Special 301 Report on global enforcement of IP rights. The 2012 report listed 27 countries on the “watch list” and 13 countries on the “priority watch list” for IP rights violations. The U.S. government takes bilateral actions with countries on these lists to improve foreign protection of U.S. intellectual property.19

China is the most prominent nation listed on the 2012 Special 301 Report, which notes China’s “high levels of trademark counterfeiting and copyright piracy, including over the Internet, [and] the persistence of notorious physical and online markets selling [IP rights] infringing goods.”20 Furthermore, the New York Times notes that China is the second largest purchaser of computer hardware in the world, yet it is only the eighth largest software purchaser. Government agencies in China are known to download software updates without ever purchasing the original software.21 Furthermore, while China provides cheap labor for manufacturing, many U.S. companies are afraid their intellectual property will be stolen during the manufacturing process. According to the U.S. International Trade Commission (USITC), Chinese theft of U.S. intellectual property costs nearly $48 billion in economic losses, leading to a loss of nearly one million U.S. jobs.22

Domestically, a new U.S. business model threatens the value of intellectual property in the ICT industry. In this business model, companies purchase patents from nonpracticing entities, such as universities, with no intent to use the patent in manufacturing. These patent assertion entities (PAEs), known pejoratively as “patent trolls,” create revenue by suing innovators and manufacturers for patent infringement. While these PAEs provide much-needed revenue to research centers, such as universities, many of their lawsuits are frivolous and cost the ICT industry billions of dollars. For example, PAEs cost the ICT industry $29 billion in 2009 alone. Due to exorbitant court costs in defending a patent infringement suit, most cases settle early in the process. When cases do proceed to a judgment, 92 percent of the time the PAE loses. In 2012, 61 percent of all infringement cases were filed by PAEs, and the rate is growing fast, increasing by 38 percent since 2007. These cases have an especially damaging effect on startup companies in the ICT industry that do not have the resources to defend themselves.23

Countering Intellectual Property Threats

In a 2010 speech at the Export-Import Bank Annual Conference, President Obama said the following:

[W]e’re going to aggressively protect our intellectual property. Our single greatest asset is the innovation and the ingenuity and creativity of the American people. It is essential to our prosperity and it will only become more so in this century. But it’s only a competitive advantage if our companies know that someone else can’t just steal that idea and duplicate it with cheaper inputs and labor. There’s nothing wrong with other people using our technologies, we welcome it—we just want to make sure that it’s licensed, and that American businesses are getting paid appropriately.24

In line with the president’s comments, U.S. companies and the U.S. government pursue multiple avenues to protect IP rights.

Based on recent “off-the-record” interviews in Silicon Valley, U.S. companies take several approaches to protecting their intellectual property. First, companies tightly control their research departments, with some limiting research to their headquarters where communication and controls can be monitored. For those that manufacture their products offshore, some U.S. companies insist on having U.S. overseers in the plant at all times. Other companies only produce a “dumb box” outside the United States, and don’t add the proprietary components until the product is in a tightly controlled U.S. facility.

U.S. companies have also banded together via the trade associations to help minimize IP piracy. The Software & Information Industry Association (SIIA) works with the education industry to provide classroom materials to teach students the dangers and costs of IP piracy. Additionally, the SIIA promotes among its members the best practices for piracy prevention. Furthermore, the SIIA offers an opportunity for confidential reporting of piracy, then investigates and seeks restitution on behalf of its members.25

Off-the-record interviews in Washington, D.C., and in Silicon Valley revealed a couple different approaches to the problem of frivolous lawsuits from PAEs. One firm in Silicon Valley noted that patent trolls were the biggest threat to its intellectual property, and that it aggressively sought its own patents to counter this threat. A trade association explained that it also viewed PAEs as a serious threat to intellectual property, and that it lobbied for legal changes regarding the payment of costs during the discovery phase of IP rights cases.

Companies that value their intellectual property must also minimize the threat from insiders. Employees should be educated regularly about phishing and social engineering efforts of criminals. Education plans should include company policies on using off-site e-mail and data-sharing applications. Furthermore, companies should conduct exit interviews to remind departing employees of laws regarding the ownership and sharing of corporate data.26

As for the federal effort, many U.S. government agencies and departments are involved in the protection of IP rights. An increased level of focus began at the federal level with implementation of the Prioritizing Resources and Organization for Intellectual Property (PRO IP) Act of 2008. This law increased civil and criminal penalties in IP theft cases, increased Department of Justice (DOJ) funding for IP programs, and created an IP Enforcement Coordinator (IPEC) within the Executive Office of the President. The IPEC’s role is to coordinate the federal response to combating violations of IP rights.27 By presidential executive order, the IPEC accomplishes this task by leading the Intellectual Property Enforcement Advisory Committees (both the “seniors committee” of department heads and the lower-level committee of presidential appointees). A major task of these committees, as required by PRO IP Act, is publishing a “joint strategic plan” for IP enforcement.28

The 2010 Joint Strategic Plan on Intellectual Property Enforcement identified six focus areas for the federal effort, including leading by example, transparency of efforts, improving coordination among law enforcement agencies, working with trade partners and international organizations, securing supply chains, and improving information collection efforts.29 As a result of increased attention on those areas, the federal government significantly increased IP rights enforcement. For example, U.S. Immigration and Customs Enforcement (ICE) increased IP-related arrests by 116 percent from fiscal years 2009–2011. Furthermore, the federal government began the first ever fully coordinated, long-term law enforcement effort, “Operation in Our Sites,” targeting websites that sell stolen intellectual property. This operation has resulted in the seizure of more than 1,700 domain names.30 One of the reasons for the increasing success of enforcement efforts is the National Intellectual Property Rights Coordination Center (IPR Center), which ICE established to increase communication and cooperation across 21 federal and international agencies.31

Impacts on National Security

In 2010, then-Chairman of the Joint Chiefs of Staff Admiral Mike Mullen famously said, “Our national debt is our biggest national security threat.”32 Admiral Mullen understood that economic strength underlies all aspects of U.S. power. The hard power of the U.S. military cannot be produced and supported without funding from a strong economy. U.S. diplomatic influence loses power if the economy is weak, especially when it is weak compared to other economies.

To maintain its status as the sole world superpower, the United States must maintain a strong economy. Yet since 2008, the U.S. economy has been underperforming with high unemployment and a gross domestic product (GDP) less than its potential. This situation is known as an “output gap,” due to the gap between actual and potential GDP. Closing this gap and returning the U.S. economy to full strength requires higher productivity and lower unemployment.

If the United States could eliminate this loss of private revenue, it would take a very large step toward improving economic security. As noted previously, the DOC estimates that IP theft sucks $200 billion to $250 billion out of the U.S. economy each year. Extrapolating from previously mentioned USITC data on IP theft in China provides a rough estimate of 3.8 million to 4.8 million U.S. jobs lost to global IP theft. As there are currently 155 million people in the U.S. workforce,33 adding jobs lost from IP theft would easily return the U.S. unemployment rate to historical averages, close the economic output gap, and create stability again in the U.S. economy.

Recommendations

While eliminating all IP theft is not realistic, it’s clear to see the impact this theft has on the U.S. economy. Strengthening protection of IP rights not only improves unemployment rates, but it also adds billions in tax revenue and motivates companies to innovate. For these reasons, the United States must continue to improve our IP rights protection efforts.

Congressional attention in the IP rights arena is welcome. Just as the PRO IP Act created significant benefits, so will laws to eliminate online piracy. Feuding lobbies have stalled congressional action to this point. The Online Protection and Enforcement of Digital Trade (OPEN) Act has a better chance of becoming law than previous efforts partly because it relies on the USITC rather than the DOJ to stop infringing websites. The OPEN Act has the support of online companies that are opposed to other proposals which attempt to sensor the Internet; however, copyright groups, including the entertainment industry, are opposed to the OPEN Act because they favor more intrusive legislation.34

Congress should also act to reduce frivolous lawsuits from PAEs. As the SIIA recommends, adjusting the payment of discovery fees is a smart way ahead. Such a law would reduce frivolous lawsuits, while maintaining a legal remedy for those whose IP was legitimately stolen.

In the private sector, trade associations should increase their educational efforts to help stop the insider threat to intellectual property. Trade associations could share best practices for defeating social engineering and phishing efforts. Additionally, they can provide educational materials to help companies teach their employees to control intellectual property as well as ownership of intellectual property.

Conclusion

Protection of intellectual property rights has been recognized for centuries as critical to innovation and a growing economy. Yet threats to IP rights are expanding, and the Internet makes IP theft easier. Private industry and the federal government are putting increased focus on protecting IP rights, and they’re beginning to make a difference with increased arrests. The USTR is gaining increased cooperation from foreign governments working to remove their countries from the Special 301 Report. As the U.S. economy remains weak and underperforming, IP theft is sapping jobs out of the economy, keeping the U.S. unemployment rate abnormally high. As the weak economy is draining money from the defense budget and weakening U.S. diplomatic power, U.S. national security will begin to erode. Strengthening protection of IP rights will contribute to an improved U.S. economy and improved U.S. national security.

Endnotes

1. U.S. Const. art. I, § 8, cl. 8.

2. Alexander Hamilton et al., The Federalist Papers 268 (Clinton Rossiter ed., 2003).

3. Brian T. Yeh, Cong. Research Serv., RL 34109, Intellectual Property Rights Violations: Federal Civil Remedies and Criminal Penalties Related to Copyrights, Trademarks, and Patents 1 (2012).

4. STOP! FAQ, U.S. Patent & Trademark Office, http://www.uspto.gov/main/faq/stopfaq.htm (last modified Nov. 2, 2005).

5. Yeh, supra note 3, at 1.

6. 18 U.S.C. § 1839(3).

7. Pub. L. No. 104-294, 110 Stat. 3488 (codified in scattered sections of 18 U.S.C.); see Yeh, supra note 3, at 2.

8. Pub. L. No. 112-236, 126 Stat. 1627 (codified at 18 U.S.C. § 1832); see Victoria A. Espinel, Combating Trade Secret Theft, Intell. Prop. Spotlight (Office of the U.S. Intellectual Prop. Enforcement Coordinator), Nov./Dec. 2012, at 2.

9. See STOP! FAQ, supra note 4.

10. See Office of Policy and External Affairs: Patent Trade Secrets, U.S. Patent & Trademark Office, http://www.uspto.gov/ip/global/patents/ir_pat_tradesecret.jsp (last modified Feb. 20, 2013).

11. Econ. & Statistics Admin. & U.S. Patent & Trademark Office, Intellectual Property and the U.S. Economy: Industries in Focus, at vii (2012) [hereinafter Industries in Focus].

12. Victoria Espinel, Intellectual Property and Risks to the Public, White House Blog (Feb. 23, 2010), http://www.whitehouse.gov/blog/2010/02/23/intellectual-property-and-risks-public.

13. Industries in Focus, supra note 11, at 8.

14. Stolen Intellectual Property Harms American Businesses Says Acting Deputy Secretary Blank, Com. Blog (Nov. 29, 2011), http://www.commerce.gov/blog/2011/11/29/stolen-intellectual- property-harms-american-businesses-says-acting-deputy-secretary-.

15. Triumph of the Nerds: The Rise of Accidental Empires (PBS television broadcast June 1996), transcript available at http://www.pbs.org/nerds/part3.html.

16. Stephen E. Siwek, Inst. for Policy Innovation, Pol’y Rep. 189, The True Cost of Copyright Industry Piracy to the U.S. Economy, at i (2007).

17. Verizon RISK Team, DBIR Snapshot: Intellectual Property Theft 2–3 (2012).

18. Symantic, What’s Yours Is Mine: How Employees Are Putting Your Intellectual Property at Risk 1 (2013), https://www4.symantec.com/mktginfo/whitepaper/WP_WhatsYoursIsMine-HowEmployeesarePuttingYourIntellectualPropertyatRisk_dai211501_cta69167.pdf.

19. Press Release, Office of the U.S. Trade Representative, USTR Releases Annual Special 301 Report on Intellectual Property Rights (April 2012), http://www.ustr.gov/about-us/press-office/press-releases/2012/april/ustr-releases-annual-special-301-report-intellectual.

20. Ronald Kirk, Office of the U.S. Trade Representative, 2012 Special 301 Report 27 (2012).

21. David Leonhardt, The Real Problem with China, N.Y. Times, Jan. 11, 2011, http://www.nytimes.com/2011/01/12/business/economy/12leonhardt.html?_r=1&.

22. China: Effects of Intellectual Property Infringement and Indigenous Innovation Policies on the U.S. Economy, Inv. No. 332-519, USITC Pub. 4226, at 3-1 (May 2011).

23. Christopher E. Wilson, Some Light Shed on “Patent Trolls, TechAmerica Pol’y Blog (Dec. 11, 2012), http://www.techamerica.org/some-light-shed-on-patent-trolls/.

24. Press Release, Office of the Press Secretary, Remarks by the President at the Export-Import Bank’s Annual Conference (Mar. 11, 2010), http://www.whitehouse.gov/the-press-office/remarks-president-export-import-banks-annual-conference.

25. Software & Info. Industry Ass’n, http://www.siia.net/ (last visited Mar. 10, 2014).

26. Symantec, supra note 18, at 2.

27. Alison Arden Besunder, Righting the Wrong: Recovering Remedies for Trademark Infringement and Counterfeiting, IP Litigator, Sept./Oct. 2009, at 1–2 , available at http://www.besunderlaw.com/pdf/SeptOct2010-IP-Litigator-Righting-the-Wrong-Trademark-Infringement.pdf.

28. Exec. Order No. 13,565 (Feb. 8, 2011), available at http://www.whitehouse.gov/the-press-office/2011/02/08/executive-order-establishment-intellectual-property-enforcement-advisory.

29. Victoria A. Espinel, U.S. Intellectual Prop. Enforcement Coordinator, 2010 Joint Strategic Plan on Intellectual Property Enforcement 1–2 (2010).

30. Victoria A. Espinel, Intellectual Prop. Enforcement Coordinator, 2013 Joint Strategic Plan on Intellectual Property Enforcement 20 (2013).

31. Nat’l Intell. Prop. Rts. Coordination Center, http://www.iprcenter.gov/ (last visited Mar. 10, 2014).

32. Laura Bassett, Adm. Mike Mullen: “National Debt Is Our Biggest Security Threat, HuffPost Politics (June 24, 2010), http://www.huffingtonpost.com/2010/06/24/adm-mike-mullen-national_n_624096.html.

33. Press Release, Bureau of Labor Statistics, The Employment Situation tbl. A (2014), http://www.bls.gov/news.release/pdf/empsit.pdf.

34. Juliana Gruenwald, Critics of Online-Piracy Bills Release Their Own Draft Legislation, Nat’l J. (Dec. 8, 2011), http://www.nationaljournal.com/tech/critics-of-online-piracy-bills-release-their-own-draft-legislation-20111208.

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