The Commission on the Theft of Intellectual Property issues Report

The theft of intellectual property (IP) has been, to say the least, a top-of-mind issue for U.S. companies and public policy makers for quite some time. The intensity of this interest led to the formation of the independent and bipartisan Commission on the Theft of American Intellectual Property (IP Commission), headed by co-chairs Dennis C. Blair, former director of National Intelligence and commander in chief of the U.S. Pacific Command, and Jon M. Huntsman, Jr., former ambassador to China, governor of the state of Utah and deputy U.S. Trade Representative. After almost a year of investigation, the group is out with its report, and despite its length (roughly 90 pages), it is a must-read.

Findings and Recommendations      

The reason this report is critical reading is because of its findings, recommendations and the urgency for action it contains.

Below are important highlights excerpted from the report.

Findings

The Impact of International IP Theft on the American Economy:

• Annual losses from IP theft are likely to be comparable to the current annual level of U.S. exports to Asia—over $300 billion. The commander of the United States Cyber Command and director of the National Security Agency (News - Alert), General Keith Alexander, noted that the ongoing theft of IP is “the greatest transfer of wealth in history.”
• If IP were to receive the same protection overseas that it does here, the American economy would add millions of jobs.
• Better protection of IP would encourage significantly more R&D investment and economic growth.
• The incentive to innovate drives productivity growth and the advancements that improve the quality of life. The threat of IP theft diminishes that incentive.

Long Supply Chains Pose a Major Challenge

Stolen IP represents a subsidy to foreign suppliers that do not have to bear the costs of developing or licensing it. In China, where many overseas supply chains extend, even ethical multinational companies frequently procure counterfeit items or items whose manufacture benefit from stolen IP, including proprietary business processes, counterfeited machine tools, pirated software, etc. In fact, as will be seen in other parts of the report, the concerns about China run far and deep. Although, as the authors point out, this in not just a Chinese issue.

The Role of China

China represents between 50 percent and 80 percent of the problem. The investigation found that while technology is a “core component of China’s successful growth strategy,” and the country is acquiring science and technology in part by legal means—imports, foreign domestic investment, licensing and joint ventures—they also do so illegally.

In harsh terms, the report states: “National industrial policy goals in China encourage IP theft, and an extraordinary number of Chinese in business and government entities are engaged in this practice. There are also weaknesses and biases in the legal and patent systems that lessen the protection of foreign IP. In addition, other policies weaken IPR, from mandating technology standards that favor domestic suppliers to leveraging access to the Chinese market for foreign companies’ technologies.”

Existing Remedies are Not Keeping Up

The section about the lack of existing policy and enforcement mechanisms to mitigate the impacts of continued and growing IP theft are the most sobering. The report notes that:

• 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.
• Particularly in developing countries, there is inadequate institutional capacity to handle IP-infringement cases—for example, a shortage of trained judges.
• China’s approach to IPR is evolving too slowly, and has not produced meaningful protection for American IP, nor is there evidence that substantial improvement is imminent. In fact, it is noted that cyberattacks from China are increasing.
• There are significant limitations in trade agreements, including activities the U.S. is pursuing through the World Trade Organization (WTO), and bilateral and regional free trade agreements have not shown much promise.

A pullout that makes for scary reading is the statement: “Steps undertaken by Congress and the administration are inadequate. Actions have been taken recently both to elevate the problem as a policy priority and to tighten U.S. economic espionage law. These are positive steps. A bill in Congress that would allow greater information-sharing between government and private business needs to be enacted and amended if needed. All of these efforts, however, will not change the underlying incentive structure for IP thieves and will therefore have limited effect.”

Recommendations

The IP Commission has a series of short, medium and longer-term recommendations. The extensive list and justifications behind each recommendation are another reason to read the entire report. They include: restructuring and better funding of government agencies; better public and private sector cooperation on rooting out illegal activities; stricter penalties (via new legislation), including the confiscation of stolen IP and making respect for the law a condition for getting a listing on U.S. stock exchanges; and encouraging the industry to use such tactics as “water marking” or “beaconing” to render stolen IP inoperable. The goal is simple – to send the message that if you break the law, there will be serious consequences.

Since the report found that much of the IP theft is done in the U.S., the hope is that really punitive actions along with improved vigilance will send the bad actors, including those emboldened by the lack of their own government’s indifference or collaboration, to think twice about their actions. It did stop short of recommending what panel member Craig Barrett, former chairman and chief executive of Intel (News - Alert) Corporation, calls "the nuclear option"—authorizing counter attacks against hackers. This was because, while revenge might seem like a great deterrent, legal questions and fear of an escalation of retaliation and possible collateral damage were seen as too risky at this time to formalize as a policy.

U.S. House of Representatives Permanent Select Committee on Intelligence Chairman Mike Rogers (News - Alert) (R. Mich.) is in full support of the commission’s work and the need for fast action. He stated, “It is already clear to me that this report is going to make a very important contribution to the discussion about the grave danger that IP theft poses to our economic well-being. In particular, all should carefully read what the report has to say about Chinese economic espionage. I heartily agree that Congress and the Administration need to act quickly to help American companies defend the hard work and innovation that is the life-blood of our economy. That must begin with getting cyber information sharing legislation signed into law.”

Rogers was referring to the need for quick passage of the controversial Cyber Information Sharing and Protection Act (CISPA), which is working its way through Congress but has drawn fire from civil liberty groups and may itself be a victim of collateral damage because of the current wiretapping scandal that has Washington, D.C. transfixed on “big brother” issues.

CISPA passed in the House of Representatives but failed to make it to the Senate. It will be interesting to see if the IP Commission gets the legislative process revved up, or whether it ends up gathering dust, like so many well-intentioned commissions over the last several decades – Simpson-Bowles comes to mind as an example, whether you agree with its recommendations or not. Let’s hope the latter is not the case with this report.