December 12, 2017

Thoughts on the Report of the Commission on the Theft of American Intellectual Property

A just released Report of the Commission on the Theft of American Intellectual Property basically confirmed what most of us who practice in this area already know; that the theft of intellectual property from U.S. companies is costing the U.S. a lot of money and, by far, the largest culprit is China. The Report estimates that China’s responsibility for the thefts may be as high as 70%. While many of the findings and the recommendations are not new, the august background of the members of the Commission, who included, Dennis Blair (co-chair, former Director of National Intelligence and Commander in Chief of the U.S. Pacific Command), Jon Huntsman, Jr. (co-chair, presidential candidate and former Ambassador to China) Craig Barrett (former Chairman and CEO of Intel Corporation) and Slade Gorton (former U.S. Washington State Senator), coupled with recent news events about widespread computer intrusions may finally lead to real reforms in this area and the increased protection of intellectual property.

The Report first explored the nature and scope of the problem and reached the following conclusions. First, while the exact figure is “knowable” and private and government studies tend to understate the impacts due to inadequacies in data or scope, the Report claimed that annual losses are likely to be “comparable to the current annual level of U.S. exports to Asia—over $300 billion.” The Report expressly agreed with the widely reported quote of General Keith Alexander Commander of the United States Cyber Command and Director of the National Security Agency, that the ongoing theft of IP is “the greatest transfer of wealth in history.” The Report further found that if IP were to receive the same protection overseas that it does here, The U.S. economy would add millions of jobs, that better protection of IP would encourage significantly more R&D investment and economic growth and that the threat of IP theft diminishes the incentive to invest in technology that improves the quality of life.

Second, the Report found that stolen IP represents a subsidy to foreign suppliers that do not have to bear the costs of developing or licensing it. The Report noted that, especially in China, “where many overseas supply chains extend, even ethical multinational companies frequently procure counterfeit items or items whose manufacture benefits from stolen IP, including proprietary business processes, counterfeited machine tools, pirated software, etc.”

Third, the Report concluded that China is the root of most evil, at least when it comes to IP thefts. It stated that China is “[b]etween 50% and 80% of the problem. The major studies range in their estimates of China’s share of international IP theft; many are roughly 70% but in specific industries we see a broader range.” The Report stated that a core component of China’s successful growth strategy is acquiring science and technology, and while China does acquire does acquire such technology by legal means “[n]ational industrial policy goals in China encourage IP theft, and an extraordinary number of Chinese in business and government entities are engaged in this practice.”

Finally, the Report found that existing remedies are not keeping up. In particular, the Report that because of short product life cycles, the slow pace of legal remedies for IP infringement does not meet the needs of companies whose products have rapid product life and profit cycles. Further, in developing countries, particularly, in China there is inadequate meaningful protection for U.S. IP and that international trade agreements do not adequately address this issue. Perhaps, most importantly, the steps undertaken by Congress and the administration are inadequate.

Based on these findings, the Report recommended the adoption of a number of short and long term steps to stem the growth of IP theft. The short term steps included: (1) designate the national security advisor as the principal policy coordinator for all actions on the protection of U.S. IP; (2) provide statutory responsibility and authority to the secretary of commerce to serve as the principal official to manage all aspects of IP protection; (3) strengthen the International Trade Commission’s 337 process to sequester good containing stolen IP; (4) empower the secretary of the treasury, on the recommendation of the secretary of commerce, to deny the use of the American banking system to foreign companies that repeatedly use or benefit from the theft of U.S. IP; (5) increase Department of Justice and FBI resources to investigate and prosecute cases of trade secret theft, especially those accomplished by computer hacking; (6) consider the degree of protection afforded to U.S. companies’ IP a criterion for approving major foreign investments in the U.S. under the Committee on Foreign Investment in the U.S. (CIFUS) process; (7) enforce strict supply-accountability for the U.S. government; (8) require the SEC to judge whether companies’ use of stolen IP is a material condition that should be publicly reported; and (8) greatly expand the number of green cards available to foreign students who earn science, technology, engineering and mathematics degrees in U.S. universities and who have a job offer in their field upon graduation.

Recommended longer-term projects included the following: (1) build institutions in priority countries that contribute toward a “rule of law” environment in ways that protect IP; (2) develop a program that encourages technological innovation to improve the ability to detect counterfeit goods; (3) ensure that top U.S. officials from all agencies push to move China, in particular, beyond a policy of indigenous innovation toward becoming a self-innovating economy; (4) develop IP centers of excellence on a regional basis within China and other priority countries; and (5) establish in the private, nonprofit sector an assessment or rating system of levels of IP legal protection, beginning in China but extending  to other countries as well.

With regard to legislative and legal reforms, the Report recommended to amend the Economic Espionage Act to provide a federal right of action for trade secret theft, to make the Court of Appeals for the Federal Circuit the exclusive appellate court for all actions under the EEA, and to give private companies the right to engage in a broader scope of self-help measures “to penalize illegal intruders” into their networks.

As readers of this blog know, I have been recommending that Congress amend the EEA to include a private right of action for a number of years. We can only hope that Congress will listen more to the recommendations contained in this Report than to me and other trade secret practitioners.

I don’t agree, however, with the recommendation that the CAFC should have exclusive jurisdiction for all actions under the EEA. since it unlikely ever to happen and could detract from the proposal to amend the EEA to include a civil cause of action. While on the surface this seems like a sensible and attractive recommendation, since the CAFC has a great deal of familiarity with intellectual property and technology issues, it is extremely unlikely to ever become more than that. In recent years, CAFC judges have rightly complained of their onerous caseload and it is impossible to imagine that they will agree to taking on more cases with Congress substantially increasing the number of judges on the court. Even though the CAFC is not a particularly politicized circuit, any proposal to increase the number of judges is not likely to go anywhere in Congress so long as the House and President remain so deeply divided. Further, it is true that CAFC, as the exclusive appellate arbiter of patent disputes, does possess a deep understanding of technology, however, it has no history of dealing with criminal law issues. Because the EEA, as proposed, would become a civil and criminal statute, the CAFC would be involved in appeals from criminal cases involving issues about which it knows nothing or very little. While the CAFC’s appellate jurisdiction could be limited to civil EEA cases, I’m not sure that distinguishing civil from criminal cases makes sense since the underlying law is the same. In addition, the CAFC does not hear exclusive jurisdiction over cases involving trademark and copyright law, so there is also a precedent for the CAFC to not have exclusive jurisdiction for IP case appeals. On balance, this proposal does not make a great deal of sense and is likely to go nowhere.

The last legislative proposal, i.e, that victims of cyberattacks be permitted to engage in self-help measures, however, should be given serious consideration by Congress. The issue of self-help or “hackbacks” has recently become a major topic within the cybersecurity community. Proponents have noted that the government has limited resources to combat computer crime and ultimately the private sector has the ultimate responsibility to take steps to protect themselves. Accordingly, the Computer Fraud and Abuse Act should be amended to permit companies to take steps to protect themselves, such by attacking those who are responsible originally for the attacks or by exfiltrating the trade secrets that have been misappropriated. Critics have pointed out that such actions could cause an escalating series of attacks and counter cyberattacks with dangerous collateral damage. Although making hackbacks legal does necessarily carry a degree of risk, Congress should seriously consider whether, on balance, it would lead to great cyber security.

Most of the Report’s recommendations are well thought out and should, at the very least, be seriously considered for implementation. The adoption of even a limited number of the recommendations likely would lead to the increased protection of intellectual property. Unfortunately, however, given that many of these very same recommendations have been made by various commissions in the past without going anywhere, it seems unlikely that they will go anywhere this time. I hope I am wrong, but history suggests otherwise.

 

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  1. […] different focuses. The ABA IP Section and AIPLA, as well some legal commentators (e.g. John Marsh, Peter Toren, Ken Vanko and Seyfarth’s Robert Milligan), have come out in support of creating a civil […]

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