THE THEFT OF AMERICAN INTELLECTUAL PROPERTY:
REASSESSMENTS OF THE CHALLENGE
AND UNITED STATES POLICY
update
to the
ip commission
report
2017
to the
ip commission
report
THE THEFT OF AMERICAN INTELLECTUAL PROPERTY:
REASSESSMENTS OF THE CHALLENGE
AND UNITED STATES POLICY
update
This report was published on behalf of
The Commission on the Theft of American Intellectual Property
by The National Bureau of Asian Research.
The Report of the Commission on the e of American Intellectual Property (also known as the
IP Commission Report) was published in May 2013. This update was published in February 2017.
© 2017 by e National Bureau of Asian Research.
TABLE OF CONTENTS
v
Acknowledgments
Dennis C. Blair and Jon M. Huntsman, Jr.
1
Executive Summary
4
Introduction
4
New Developments to Counter IP e
7
State of the Problem: Damage Report
13
e Intellectual Property Rights Climate Abroad
16
Conclusion
17
Appendix: Examination of Recommendations
Adopted Recommendations
Recommendations Pending Action
20
About the Commissioners
24
List of Common Abbreviations
to the
ip commission
report
update
v
ACKNOWLEDGMENTS
Over three years ago we co-chaired a report by the Commission on the e of American
Intellectual Property. e report outlined the enormous magnitude of the problem and presented a
series of recommended actions to stem the loss of the lifeblood of American entrepreneurship. e
original report received, and continues to receive, widespread public attention. Congress adopted
several Commission recommendations to provide the executive branch and private industry with
unprecedented, powerful tools with which to ght intellectual property (IP) the. e executive
branch took a limited number of actions, while American businesses have continued to conne
their actions to defensive measures. e Commission still believes that IP the is one of the most
pressing issues of economic and national security facing our country. It is our unanimous opinion
that the issue has not received the sustained presidential focus and strong policy attention that
it requires.
is Commission remains composed of its original, extraordinary members. We are indebted
to our fellow Commissioners for their seless bipartisanship, insights, and help in explaining the
original report to the American people, policymakers, and members of the press for over three years.
e Commission’s sta has continued to be terrically eective. It includes several who have
remained in their positions, including Commission Director Richard Ellings and Deputy Director
Roy Kamphausen. Other stalwarts working on the Commission since the beginning are John
Graham, Amanda Keverkamp, and Joshua Ziemkowski. New commission sta who contributed
to the update to the original report include Dan Aum, Jessica Keough, Mariana Parks, Craig
Scanlan, and Sandra Ward. Special thanks are due to Mike Dyer, who shouldered more than his
fair share of this latest round of research, and to outside specialists for their guidance and reviews.
e Commission is grateful to e National Bureau of Asian Research (NBR) and its Slade Gorton
International Policy Center, which have provided the unrestricted support that has underwritten
the Commission’s work and complete independence.
e importance of ensuring the viability and success of the U.S.-China relationship in part gave
rise to this Commission and our participation in it. We oer this update so that the United States
can better understand, prioritize, and solve a critical challenge.
Dennis C. Blair Jon M. Huntsman, Jr.
Co-chair Co-chair
1
UPDATE TO THE IP COMMISSION REPORT
EXECUTIVE SUMMARY
e Commission on the e of American Intellectual Property is an independent and bipartisan
initiative of leading Americans from the private sector, public service in national security and foreign
aairs, academia, and politics. e members are listed in the section About the Commissioners.
e three purposes of the Commission are as follows:
1.
Document and assess the causes, scale, and other major dimensions of international intellectual
property (IP) the as they aect the United States.
2. Document and assess the role of China and other infringers in international IP the.
3. Propose appropriate U.S. policy responses that would mitigate ongoing and future damage and
obtain greater enforcement of IP rights (IPR) by China and other infringers.
IP the pervades international trade in goods and services due to lack of legal enforcement and
national industrial policies that encourage IP the by public, quasi-private, and private entities.
While some indicators show that the problem may have improved marginally, the the of IP remains
a grave threat to the United States. Since 2013, at the release of the IP Commission Report, U.S.
policy mechanisms have been markedly enhanced but gone largely unused. We estimate that the
annual cost to the U.S. economy continues to exceed $225 billion in counterfeit goods, pirated
soware, and the of trade secrets and could be as high as $600 billion.
1
It is important to note
that both the low- and high-end gures do not incorporate the full cost of patent infringement—an
area sorely in need of greater research. We have found no evidence that casts doubt on the estimate
provided by the Oce of the Director of National Intelligence in November 2015 that economic
espionage through hacking costs $400 billion per year.
2
At this rate, the United States has suered
over $1.2 trillion in economic damage since the publication of the original IP Commission Report
more than three years ago.
Scale and Cost of IP Theft
In three categories of IP the, new evidence and studies make it possible to provide more accurate
assessments of the damage done to the U.S. economy today than was the case in 2013.
3
ese
categories are counterfeit and pirated tangible goods, pirated soware, and trade secret the.
With regard to the rst category, the most reliable data available now suggests that in 2015 the
United States imported counterfeit and pirated tangible goods valued between $58 billion and
$118 billion, while counterfeit and pirated tangible U.S. goods worth approximately $85 billion
were sold that year worldwide.
4
e estimate by the Organisation for Economic Co-operation and
1
On November 18, 2015, William Evanina, national counterintelligence executive of the Oce of the Director of National Intelligence,
estimated that economic espionage through hacking costs the U.S. economy $400 billion a year, which falls within the range of the ndings
of the IP Commission. Evanina also stated, “We haven’t seen any indication in the private sector that anything has changed [in terms of
Chinese government involvement in hacking].” To date, the IP Commission has not found any evidence to the contrary. Chris Strohm,
“No Sign China Has Stopped Hacking U.S. Companies, Ocial Says,” Bloomberg, November 18, 2015, https://www.bloomberg.com/news/
articles/2015-11-18/no-sign-china-has-stopped-hacking-u-s-companies-ocial-says. e full report from the Oce of the Director of
National Intelligence is available from the IP Commission website at http://www.ipcommission.org/report/Evolving_Cyber_Tactics_in_
Stealing_US_Economic_Secrets_ODNI_Report.jpg.
2
Strohm, “No Sign China Has Stopped Hacking U.S. Companies, Ocial Says.”
3
e Report of the Commission on the e of American Intellectual Property (Seattle: National Bureau of Asian Research on behalf of e
Commission on the e of American Intellectual Property, 2013), http://www.ipcommission.org/report/ip_commission_report_052213.pdf.
4
ese values were found using statistics from the Organisation for Economic Co-operation and Development (OECD) and European Union
Intellectual Property Oce (EUIPO), Trade in Counterfeit and Pirated Goods: Mapping the Economic Impact (Paris: OECD Publishing,
2016), http://dx.doi.org/10.1787/9789264252653-en.
2
2017
Development (OECD) and the European Union Intellectual Property Oce (EUIPO) for the total value
of counterfeit and pirated tangible goods imported into the United States or counterfeit and pirated
tangible U.S. goods sold abroad on the conservative low end was $143 billion in 2015. e Commission
believes that these goods did not displace the sale of legitimate goods on a dollar-for-dollar basis and
estimates that at least 20% of the total amount of counterfeit and pirated tangible goods actually
displaced legitimate sales. us, the cost to the American economy, on the low end of the estimate,
is $29 billion.
5
e same OECD/EUIPO study found that while 95% of counterfeit goods seized by customs
ocials were protected by trademarks, only 2% were counterfeits of patent-protected goods.
6
is
means that although there is some overlap between our estimates of the value of counterfeit goods and
patent infringement, the vast majority of patent infringement is unaccounted for in this report. We
are disappointed that there is a paucity of reliable data on the economic costs of patent infringement,
but from anecdotal evidence we are led to believe the costs are substantial.
e proliferation of pirated soware is believed to be a much larger problem in scope than
statistics suggest because of the ease of downloading soware, ubiquitous use of soware across
industries and countries, and inadequate surveys. e value of soware pirated in 2015 alone
exceeded $52 billion worldwide. American companies were most likely the leading victims, with
estimated losses of at least 0.1% of the $18 trillion U.S. GDP, or approximately $18 billion.
7
e cost of trade secret the is still dicult to assess because companies may not even be aware
that their IP has been stolen, nor are rms incentivized to report their losses once discovered. As IP
the remains hard for rms to detect, much less obtain legal redress for, their incentives are to rely
more on their own eorts to conceal trade secrets and less on patents that entail public disclosure.
8
New estimates suggest that trade secret the is between 1% and 3% of GDP, meaning that the cost
to the $18 trillion U.S. economy is between $180 billion and $540 billion.
9
ese gures, while startling, do not take into account the second-order eects on the economy
from IP the. First, there is the practical matter of IP protection costs, which have skyrocketed,
especially in response to cyber-enabled IP the. More importantly, when trade secrets and other IP
are stolen by competitors, U.S. rms are discouraged from investing the substantial capital required
to innovate or eort required to work to be the rst movers to market. e immediate and long-term
loss of these advantages makes American rms less competitive globally.
China
China, whose industrial output now exceeds that of the United States, remains the world’s
principal IP infringer. China is deeply committed to industrial policies that include maximizing the
5
For purposes of aggregating the direct costs of IP the in the three listed categories—counterfeit and pirated tangible goods, soware
piracy, and trade secret the—the Commission estimates that no less than 20% of counterfeit sales would displace legitimate sales.
However, the precise amount is unknowable, because the purchase of counterfeit goods does not displace the sale of legitimate goods
on a dollar-for-dollar basis. For more discussion on the complex relationship between counterfeit and legitimate sales, see OECD, “e
Economic Impact of Counterfeiting,” 1998, 26–29, https://www.oecd.org/sti/ind/2090589.pdf.
6
OECD and EUIPO, Trade in Counterfeit and Pirated Goods.
7
Business Soware Alliance (BSA), “Seizing Opportunity through License Compliance,” BSA Global Soware Survey, May 2016,
http://globalstudy.bsa.org/2016/downloads/studies/BSA_GSS_US.pdf.
8
R. Mark Halligan, “Trade Secrets v. Patents: e New Calculus,” Landslide, July/August 2010, http://www.americanbar.org/content/dam/aba/
migrated/intelprop/magazine/LandslideJuly2010_halligan.authcheckdam.pdf.
9
Center for Responsible Enterprise and Trade (CREATe.org) and PricewaterhouseCoopers, “Economic Impact of Trade Secret e: A
Framework for Companies to Safeguard Trade Secrets and Mitigate Potential reats,” 2014, https://create.org/resource/economic-impact-of-
trade-secret-the.
3
UPDATE TO THE IP COMMISSION REPORT
acquisition of foreign technology and information, policies that have contributed to greater IP the.
IP the by thousands of Chinese actors continues to be rampant, and the United States constantly
buys its own and other states’ inventions from Chinese infringers. China (including Hong Kong)
accounts for 87% of counterfeit goods seized coming into the United States.
10
China continues to obtain American IP from U.S. companies operating inside China, from
entities elsewhere in the world, and of course from the United States directly through conventional
as well as cyber means. ese include coercive activities by the state designed to force outright IP
transfer or give Chinese entities a better position from which to acquire or steal American IP.
U.S. Policy Response
Aer the release of the IP Commission Report in May 2013, the Obama administration and
Congress made important procedural changes to how the United States defends itself from IP the
and related cyberattacks, but they have been applied unevenly.
First, there are several positive developments. Chief among them is that cyberattacks may have
declined in volume since about 2014, although whether this is a result of a crackdown in China
on responsible units in the People’s Liberation Army (PLA) or other factors is not entirely clear.
In any case, the cyber units of the PLA may have responded by shiing their tactics from blatant
mass hacking of U.S. entities to a more targeted and discreet approach.
11
Second, the gravity and complexity of IP the are better understood today than in 2013. Our
report and other studies raised public awareness through extensive media coverage and government
attention. e IP Commission Report continues to be cited by the world’s press and commentators.
e report was downloaded over 20,000 times in the rst week of its release and over 200,000 times
since then. It has come to be viewed as the foundational study in the eld.
Implementation is the major challenge today. e Obama administration and Congress adopted
some of the report’s key recommendations that set in place the legal basis for combatting IP the
successfully. e report’s major impact is Section 1637 of the 2015 National Defense Authorization
Act (NDAA). e law requires the president to issue a report on economic cyberespionage and on
actions taken by the executive branch against those who are stealing American IP through cyber
means. More importantly, the language gives the president the power to sanction foreign entities,
from persons to companies to countries. e deadline for issuance of the report was June 17, 2015.
Unfortunately, however, the report was not published until November 2016, and it gives no indication
that President Obama used Section 1637 to sanction foreign IP infringers.
In addition, last year Congress passed, and President Obama signed, the Defend Trade Secrets
Act of 2016, which, among other things, creates a private right of action for U.S. entities under the
Economic Espionage Act. is was another IP Commission recommendation. e president took into
account some of our recommendations for cybersecurity when he implemented the administration’s
Cybersecurity National Action Plan and signed Executive Order 13691 to mitigate vulnerabilities
in cyberspace and increase cooperation between the private and public sectors on this issue. e
National Cybersecurity and Communications Integration Center has proved eective, as far as we
can ascertain.
10
U.S. Customs and Border Patrol, “Intellectual Property Rights Seizure Statistics Fiscal Year 2015,” 2016, https://www.cbp.gov/sites/default/
les/assets/documents/2016-Apr/FY%202015%20IPR%20Stats%20Presentation.pdf.
11
FireEye iSight Intelligence, “Red Line Drawn: China Recalculates Its Use of Cyber Espionage,” Special Report, June 2016,
https://www.reeye.com/content/dam/reeye-www/current-threats/pdfs/rpt-china-espionage.pdf.
4
2017
Introduction
As the authors of the original Report of the Commission on the e of American Intellectual
Property (also known as the IP Commission Report), we were encouraged by the widespread interest
in the report and its impact on new legislation. In addition to the high volume of downloads, the
report was regularly cited, quoted, or referred to in the national and international media, including
the New York Times, Wall Street Journal, Washington Post, and Economist.
We are pleased that Congress and the Obama administration took the lead from our report
and implemented several of our top recommendations. Congress gave the president the power to
sanction foreign entities that engage in cyberespionage of IP and gave U.S. entities private right of
action in federal courts against thieves of their trade secrets. For its part, the Obama administration
set up a mechanism to sanction foreign persons engaged in “signicant malicious activities.”
12
Despite the success of the report and resulting legislation, there is still much work that needs to be
done. We estimate that at the low end the annual cost to the U.S. economy of several categories of IP
the exceeds $225 billion, with the unknown cost of other types of IP the almost certainly exceeding
that amount and possibly being as high as $600 billion annually.
13
Further, while cyberespionage may
have decreased from some actors, several sources report that the worst and most capable actors still
persist in hacking for economic gain. IP thieves continue to use traditional means to attack targets.
What follows is an update to our original report. is update begins with an overview of the
legislative and executive actions that the U.S. government has taken since 2013. It moves on to assess
the economic cost of IP the and discuss the challenges to IP protections abroad that persist despite
attempts to deal with the problem. In the conclusion, we argue that Section 1637 of the 2015 NDAA
needs to be implemented and that many of our original recommendations remain relevant and ripe
for adoption. Our recommendations are outlined in detail in the appendix.
New Developments to Counter IP Theft
Aer the release of the IP Commission Report in May 2013, the Obama administration and
Congress took several actions to reduce the the of American IP. Some of the policies enacted have
borrowed from the recommendations that the Commission made in 2013, while others have fallen
short and le the Commission wanting more. Outlined below are the statutory and executive actions
that the U.S. government has implemented over the past three-plus years:
Indictment of ve PLA ocers. One year aer the release of the IP Commission Report, the
Department of Justice indicted ve members of PLA unit 61398 in Shanghai on economic espionage
charges. e indictment alleges the PLA ocers hacked into the networks of several U.S. companies
and maintained access over several years to steal trade secrets and other sensitive information.
e indictment of the ve ocers signied a break with the Obama administration’s strategy of
12
“Blocking the Property of Certain Persons Engaging in Signicant Malicious Cyber-Enabled Activities,” Executive Order 13694, April 1,
2015, Code of Federal Regulations, title 3 (2015), 297–99, https://www.gpo.gov/fdsys/pkg/CFR-2016-title3-vol1/pdf/CFR-2016-title3-vol1-
eo13694.pdf.
13
As noted in the Executive Summary, in November 2015 William Evanina, national counterintelligence executive of the Oce of the Director
of National Intelligence, estimated that economic espionage through hacking costs the U.S. economy $400 billion a year, which is within the
range of the IP Commission’s ndings. See Strohm, “No Sign China Has Stopped Hacking U.S. Companies, Ocial Says.” e full report
from the Oce of the Director of National Intelligence is available from the IP Commission website at http://www.ipcommission.org/
report/Evolving_Cyber_Tactics_in_Stealing_US_Economic_Secrets_ODNI_Report.jpg.
5
UPDATE TO THE IP COMMISSION REPORT
quietly pressuring the Chinese government to establish mutually acceptable norms in cyberspace.
14
However, the indictment is largely symbolic; the PLA ocers will likely never be tried in a U.S.
court as they are unlikely to travel to the United States. e action seemed intended to shame the
People’s Republic of China (PRC) as publicly as possible, but in reality it probably served to disperse
the hackers away from the PLA unit and the associated unit headquarters, without achieving real
punishment for cyberattacks.
2015 National Defense Authorization Act, Section 1637, Actions to Address Economic or Industrial
Espionage in Cyberspace. e language of the section is remarkably similar to the Deter Cyber e
Act, which was introduced in its original sanction-less form in May 2013 by Senator Carl Levin,
then chairman of the Senate Armed Services Committee. (e bill cosponsors included Senator
John McCain, current chairman of the committee.) In May 2014 the Deter Cyber e Act was
reintroduced with the sanctions provision and was referred to the Senate Banking, Housing, and
Urban Aairs Committee, where no action was taken. In December 2014, Section 1637 was included
in the 2015 NDAA.
Section 1637 has two major components. First, it directs the president to submit a report to
Congress that contains a list of countries that engage in “economic and industrial espionage in
cyberspace” and a list of technologies or services that are being targeted by foreign actors. e
list of countries is similar to that of the Special 301 Report published by the United States Trade
Representative (USTR). Both require “priority” categories for the most egregious oending countries.
e report also must identify the actions taken by the president to “decrease the prevalence of
economic or industrial espionage in cyberspace.”
15
e National Counterintelligence and Security
Center released the report in November 2016—some seventeen months late. e report outlines
how state intelligence services have improved their cyberespionage techniques over the past several
years while U.S. companies have become more vulnerable targets due to increased use of the cloud
and other factors. e report concludes that the cost from cyber the to U.S. businesses appears
to be increasing.
16
Second, and more importantly, the bill authorizes the president “to prohibit all transactions in
property” of any person who the president determines “knowingly engages in economic or industrial
espionage in cyberspace.”
17
is authority is an expansion of the long-standing International
Emergency Economic Powers Act (IEEPA). ere are two points worth considering on what counts
as a “person.” First, the bill is limited to foreign persons. erefore, people within the United States
still must be prosecuted under the Economic Espionage Act. Second, IEEPA has been used for many
years, and it has targeted organizations as well as people.
14
Michael S. Schmidt and David E. Sanger, “5 in China Army Face U.S. Charges of Cyberattacks,” New York Times, May 19, 2014, http://www.
nytimes.com/2014/05/20/us/us-to-charge-chinese-workers-with-cyberspying.html.
15
U.S. Congress, Carl Levin and Howard P. “Buck” McKeon National Defense Authorization Act for Fiscal Year 2015, 113th Cong., Public Law
113-291 (Washington, D.C., December 19, 2014).
16
Oce of the Director of National Intelligence, National Counterintelligence and Security Center, “Evolving Cyber Tactics in Stealing U.S.
Economic Secrets: Report to Congress on Foreign Economic Collection and Industrial Espionage in Cyberspace 2015,” 2016, available
at http://www.ipcommission.org/report/Evolving_Cyber_Tactics_in_Stealing_US_Economic_Secrets_ODNI_Report.jpg. Much of the
data in the report only goes through 2015. For a report dated November 2016, we had hoped that more current data would be available.
e report also lacks the priority country list and the description of actions taken by the executive to decrease economic espionage in
cyberspace, as mandated by Section 1637. As noted above, the report concludes that the problem is growing worse due to several factors.
ese ndings would seem to contradict President Obama’s assertion that cyber the would get better in light of the agreement he struck
with President Xi Jinping.
17
For the purposes of Section 1637, cyberspace is dened as “the interdependent network of information technology infrastructures” and
includes “the internet, telecommunications networks, computer systems, and embedded processors and controllers.” See U.S. Congress,
Carl Levin and Howard P. “Buck” McKeon National Defense Authorization Act for Fiscal Year 2015.
6
2017
Five months aer this legislation was signed into law, President Obama signed Executive Order
13694 invoking the IEEPA emergency powers as urged by Congress, but unfortunately he apparently
never applied them to address the problem of IP the. See the section below on Executive Order
13694 for more information.
National Cybersecurity Protection Act of 2014. is law amends the Homeland Security Act of
2002 and codies the Department of Homeland Security’s cybersecurity operations center (the
National Cybersecurity and Communications Integration Center, or NCCIC). It grants authority
for the Department of Homeland Security to work with private and public entities to encourage
information sharing, including with international partners. It further instructs the NCCIC to report
to Congress on several issues, including the secretary’s recommendations for how to “expedite the
implementation of information-sharing agreements” between the public and private sectors and the
NCCIC’s progress in creating the center and implementing the law. e act also introduces a federal
agency “data breach notication” law, requiring federal agencies to notify Congress and individuals
aected by a data breach as quickly as possible. (ere are already 47 states with similar data statutes
requiring agencies to alert applicable persons.)
Federal Information Security Modernization Act (FISMA) of 2014. is law amends the Federal
Information Security Management Act of 2002 and instructs agencies to update their monitoring
systems for identifying data security compliance. Currently these processes require a lot of
redundant paperwork. FISMA outlines responsibilities for agencies and forces them to develop
better information security practices.
Cybersecurity Workforce Assessment Act of 2014. is act mandates that the Department of
Homeland Security review, update, and bolster its cybersecurity workforce. It also requires the
secretary of homeland security to develop a strategy to enhance “the readiness, capacity, training,
recruitment, and retention of the cybersecurity workforce of the Department.”
Cybersecurity Enhancement Act of 2014. With the aim to enhance the security of federal networks
and to “support the development of a voluntary, consensus-based, industry-led set of standards,”
the Cybersecurity Enhancement Act of 2014 authorizes the National Institute of Standards
and Technology to coordinate and consult with government agencies and the private sector to
develop best practices, including establishing research centers and scholarships for cultivating
cybersecurity professionals.
Executive Order 13691 of February 13, 2015, promoting private-sector cybersecurity information
sharing. Executive Order 13691 establishes “information-sharing and analysis organizations” to
strengthen the security cooperation among private industries, nongovernmental organizations, and
the federal government. e administration hopes these organizations will help U.S. rms in the
asymmetrical ght against state-sponsored cyberespionage.
Executive Order 13694 of April 1, 2015, blocking the property of certain persons engaging in
signicant malicious cyber-enabled activities. As urged by Congress in Section 1637 of the 2015
NDAA, President Obama signed Executive Order 13694 blocking the transfer, payment, or export
of property of individuals who have engaged in cyberespionage directed against the “national
security, foreign policy, economic health, or nancial stability of the United States.” e executive
order specically states that it will apply to individuals engaged in misappropriating trade secrets
for commercial or competitive advantage as well as to the commercial entities in receipt of such
information. President Obama declared that the national emergency would continue for another
7
UPDATE TO THE IP COMMISSION REPORT
year on March 29, 2016, as required by law. As of December 2016, Executive Order 13694 had yet to
be used against any individual in response to IP the.
18
Executive Order 13718 of February 9, 2016, establishing the Commission on Enhancing National
Cybersecurity. President Obama established the bipartisan Commission on Enhancing National
Cybersecurity to make “detailed recommendations to strengthen cybersecurity in both the public
and private sectors” through raising awareness, studying risk management strategies, and developing
methods to improve the adoption of best practices throughout the government. e commission’s
goal was to seek input from both cybersecurity experts and the victims of signicant cybersecurity
incidents to identify barriers to improved cybersecurity. e commission submitted its nal report
in early December 2016.
Defend Trade Secrets Act of 2016. Signed into law on May 11, 2016, the bipartisan Defend Trade
Secrets Act establishes private right of action in federal court for U.S. entities that have had their
trade secrets stolen and oers them protections in the course of a trial to prevent their trade secrets
from becoming public. is was a key recommendation of the IP Commission in 2013. Prior to the
passage of the act, a victim of trade secret the could only seek a remedy with a civil suit in a state
court unless the Department of Justice led a criminal suit, which was rare.
19
e act also requires
the Department of Justice to submit a report to Congress on the size and scope of trade secret the
outside the United States no later than one year aer the date of enactment of the law and to oer
recommendations for combating such the. At the time of writing, the report, if submitted, is not
publicly available
IPEC Joint Strategic Plan on Intellectual Property Enforcement FY2017–2019. Published by the Oce
of the Intellectual Property Enforcement Coordinator (IPEC), this report was mandated by the
Prioritizing Resources and Organization for Intellectual Property Act and presents an account of
the economic cost of IP the and the various methods employed to commit IP-related crime. It
then oers several recommendations for securing cross-border trade and promoting frameworks to
enhance IPR enforcement.
20
e report was released in the nal month of the Obama administration,
and the eect on the Trump administration is yet to be determined.
State of the Problem: Damage Report
Despite executive and legislative action to stem the damage from IP infringement, the incentives
to steal IP persist, due in part to weak enforcement and penalties and in part to foreign industrial
policies and practices. e annual cost to the U.S. economy from IP the remains in the hundreds of
billions of dollars. is update to the IP Commission Report provides a conservative, low-end estimate
of the cost of IP the in three categories—counterfeit and pirated tangible goods, soware piracy,
and trade secret the—to be in excess of $225 billion, and the cost is possibly as high as $600 billion.
18
Executive Order 13694 was amended on December 29, 2016, and applied to sanction nine individuals and entities “in response to the
Russian government’s aggressive harassment of U.S. ocials and cyber operations aimed at the U.S. election.” “Executive Order—Taking
Additional Steps to Address the National Emergency with Respect to Signicant Malicious Cyber-Enabled Activities,” White House, Press
Release, December 29, 2016, https://www.whitehouse.gov/the-press-oce/2016/12/29/executive-order-taking-additional-steps-address-
national-emergency.
19
“Congress Authorizes Federal Cause of Action for Trade Secret Misappropriation,” Lexology, 2006, http://www.lexology.com/library/detail.
aspx?g=9c07d09d-67b7-4937-af54-c7a313bcb85e.
20
Intellectual Property Enforcement Coordinator, U.S. Joint Strategic Plan on Intellectual Property Enforcement FY2017–2019: Supporting
Innovation, Creativity & Enterprise (Washington, D.C., December 2016), https://www.whitehouse.gov/sites/default/les/omb/IPEC/
2016jointstrategicplan.pdf.
8
2017
The Continuing Signicance of the Problem
e threat to American IP-intensive industries stems from the diculty of enforcing protections
against advanced and persistent foreign threats. Law enforcement lacks the capacity to patrol and
protect the vast U.S. business community. When foreign actors are implicated in stealing American
IP, it is highly unlikely that they will ever be brought to justice in a U.S. court, as evidenced by
the indictment of the ve PLA ocers implicated in the the of IP from six U.S. companies.
21
e problem is made worse by foreign industrial policies and practices that rely on securing new
technologies cheaply to catch up with developed economies.
e threat of IP the is in turn signicant because of IP’s contribution to the U.S. economy.
IP protection is important to every business, as trade secrets and trademarks pervade the private
sector. According to the Global Intellectual Property Center of the U.S. Chamber of Commerce,
sales from IP-intensive rms totaled $6.9 trillion in 2013. IP-intensive industries are also responsible
for 56 million jobs in the United States—roughly 35% of the U.S. labor force. Moreover, a job with
an IP-intensive company pays on average 26% more than a job with a non-IP-intensive company.
22
The Diculty in Measuring the Damage
Measuring the economic impact of IP infringement and counterfeit goods is extraordinarily
dicult because of the illicit nature of piracy and trading in counterfeit goods, the ease of using
pirated soware, and the disincentives associated with reporting trade secret the. Victims of trade
secret the—to the extent that they are aware of the crime—are oen reluctant to share information
on the resulting nancial loss (when such the necessitates disclosure) out of fear of declining
investment opportunities or diminished market valuation.
Most statistics of trade in counterfeit tangible goods are based on seizure data reports from the
Customs and Border Patrol (CBP), with the understanding that customs ocials only capture a small
portion of counterfeit goods entering U.S. territory at the border and the statistics do not account for
counterfeit goods exchanged within the United States. ey also do not capture data for counterfeit
U.S. goods sold in foreign markets, nor do they take into account the vast amount of pirated goods,
which is even more dicult to measure. Moreover, even if the total amount of pirated and counterfeit
goods entering the United States could be quantied, this gure would only represent the value of
these goods and not necessarily the value of lost revenues. Finally, it is dicult to measure how
many buyers know that what they are purchasing is counterfeit and would not otherwise be in the
market for legitimate goods at an authorized price.
Despite these diculties, the damage to the U.S. economy can still be estimated by using existing
data and proxies. e following discussion provides a range for the cost to the U.S. economy of
counterfeit and pirated tangible goods, soware piracy, and trade secret the.
Estimate of the Cost of IP Theft
Counterfeit and pirated tangible goods. In 2016, the OECD and EUIPO used worldwide seizure
statistics from 2013 to calculate that up to 2.5%, or $461 billion, of world trade was in counterfeit
21
“U.S. Charges Five Chinese Military Hackers for Cyber Espionage against U.S. Corporations and a Labor Organization for Commercial
Advantage,” U.S. Department of Justice, May 19, 2014, https://www.justice.gov/opa/pr/us-charges-ve-chinese-military-hackers-cyber-
espionage-against-us-corporations-and-labor.
22
U.S. Chamber of Commerce Global Intellectual Property Center, “Employing Innovation across America,” 2016, http://image.uschamber.
com/lib/fee913797d6303/m/1/GIPC_Employing_Innovation_Report_2016.pdf.
9
UPDATE TO THE IP COMMISSION REPORT
or pirated products.
23
By applying this percentage to U.S. trade, we estimate that in 2015 the value
of these goods entering the U.S. market was at least $58 billion.
e United States, however, is a much larger market for imports than the average market. It is
nearly equivalent in size to the European Union, where the OECD/EUIPO study determined that
approximately 5% of imports are counterfeit or pirated tangible goods.
24
By using 5% as a proxy
for the proportion of counterfeit and pirated tangible goods in U.S. imports ($2.273 trillion),
25
we
estimate that the United States may have imported up to $118 billion of these goods in 2015. us,
anywhere from $58 billion to $118 billion of counterfeit and pirated tangible goods may have entered
the United States in 2015. is represents the approximate value of counterfeit and pirated tangible
goods (not services) entering the country.
With respect to counterfeit and pirated tangible U.S. goods sold in foreign markets, the
OECD/EUIPO study found that they accounted for nearly 20% of the value of reported worldwide
seizures.
26
In 2015, estimated worldwide seizures of counterfeit goods totaled $425 billion, meaning
that as much as $85 billion of counterfeit U.S. goods (20% of worldwide seizures) entered the world
market (including the U.S. market).
27
Certainly, in the absence of counterfeit goods some sales would never take place, and thus the
value of illegal sales is not the same as the sales lost to U.S. rms. e true cost to law-abiding U.S.
rms in sales displaced due to counterfeiting and pirating of tangible goods is unknowable, but it is
almost certain to be a signicant proportion of total counterfeit sales. For purposes of aggregating
the total cost to the U.S. economy of IP the, we have estimated that 20% of counterfeits might
have displaced actual sales of goods. When applied to the low-end estimate ($143 billion) of the total
value of counterfeit and pirated tangible goods imported into the United States and counterfeit and
pirated tangible U.S. goods sold abroad, the conservative estimate of the cost to the U.S. economy
is $29 billion. When applied to the high-end estimate ($203 billion), the cost to the U.S. economy is
estimated at $41 billion.
How much of that total is intercepted by customs ocials, where does it come from, and how does
it get to the United States? CBP releases the Intellectual Property Rights Seizure Statistics each year.
From the nearly 29,000 seizures in 2015, CBP seized $1.35 billion in counterfeit goods at the U.S.
border, or 1.2%–2.3% of the estimated total value of counterfeit goods entering the United States,
according to the approximation from the OECD/EUIPO model.
28
Worldwide, counterfeit goods
travel mostly by postal service (62%) and quite oen in small shipments of ten items or fewer (43%).
29
is makes seizing them extraordinarily dicult.
CBP also tracks from where the counterfeit goods are imported. Slightly more than half (52%) of
all counterfeit goods entering the United States come from mainland China.
30
is is signicantly
23
OECD and EUIPO, Trade in Counterfeit and Pirated Goods. Because the dynamics of trade have changed since 2013, and because the
United States is a larger market for imports than the average country, the 2.5% gure is not directly applicable to the United States, but it can
provide a rough approximation in the absence of updated data.
24
Ibid.
25
U.S. Bureau of Economic Analysis, “U.S. International Transaction Tables,” December 2016, https://www.bea.gov/scb/pdf/2017/01%20
January/0117_international_transactions_tables.pdf. It should be noted that there are signicant dierences between the two economies,
including apparently more porous borders in the European Union. As a result, the EU economy is not a perfect proxy for the U.S. economy.
26
OECD and EUIPO, Trade in Counterfeit and Pirated Goods.
27
Ibid.
28
U.S. Customs and Border Patrol, “Intellectual Property Rights Seizure Statistics Fiscal Year 2015.”
29
OECD and EUIPO, Trade in Counterfeit and Pirated Goods.
30
Ibid.
f i g u r e 1 Source economies of counterfeit goods
2010 2011 2012 2013 2014 2015
0
10
20
30
40
50
60
70
80
90
100
Source of counterfeit goods (% share)
Year
China Hong Kong
China + Hong Kong
India Other economies
10
2017
lower than in 2013, which saw 68% of counterfeit goods coming from mainland China. However,
these improvements are oset by the increase in counterfeit goods imported from Hong Kong, which,
although a separate customs territory and economic entity, is under PRC sovereignty, allowing for a
more uid border with regard to the transport of goods in some cases. e PRC as a whole (including
Hong Kong) accounts for 87% of all counterfeit goods seized. is is only slightly lower than in 2013
and is slightly higher than the ve-year average. All other economies combined represent around
13% of imported counterfeit goods (see Figure 1). It is not just the United States that is receiving
counterfeits from China; 80% of the counterfeits seized in Canada are China-sourced as well.
31
Patent infringement. Unfortunately, our investigation has revealed no reliable quantitative data
on the economic cost of patent infringement to the U.S. economy, and therefore this is not included
in our total gures. However, through testimony to the Commission and anecdotal evidence in the
press, we can conclude that the cost to U.S. businesses from patent infringement abroad is at least in
the billions of dollars, although the full scale cannot be estimated.
32
China presents a mixed case. Of
particular note, China has become the top source of new patents, accounting for around one-third
31
“RFA: China Has Become the Largest Fake Product Source for Canada’s Online Market,” Chinascope, December 13, 2016, http://chinascope.
org/archives/10777.
32
As noted in our 2013 report, the U.S. International Trade Commission (USITC) estimated that U.S. companies suered $0.2 billion to $2.8
billion in losses from Chinese patent infringement in 2009 alone. USITC, China: Eects of Intellectual Property Infringement and Indigenous
Innovation Policies on the U.S. Economy (Washington, D.C., May 2011), 3–37, http://www.usitc.gov/publications/332/pub4226.pdf.
11
UPDATE TO THE IP COMMISSION REPORT
of all new patents led in 2015.
33
However, many of these are “petty” or “utility” patents, which
grant protections to rights holders without questioning how innovative the subject matter might
be.
34
ese patent holders are then able to sue foreign companies bringing their IP into the Chinese
market. For more background on patent infringement, please see our original report.
Pirated software. e Business Soware Alliance (BSA) and International Data Corporation
track the rates and value of illicit soware in use throughout the world.
35
According to their
2015 data, the “shadow market” for globally pirated soware shrunk approximately 17% from
$62.7 billion in 2013 to $52.2 billion in 2015.
36
e low-end estimate for the cost to U.S. rms is
$18 billion, using 0.1% of U.S. GDP as a proxy—a percentage in line with BSA’s historical estimates
of global soware piracy.
37
Globally the proportion of illicit soware was 39% in 2015, down from 43% in 2013. e
Asia-Pacic region remains the worst oender, with 61% of all soware in use being illicit—which
amounts to 36% of the world’s illicit soware value (see Figure 2).
38
Lost sales from pirated goods
are dicult to quantify.
e BSA study nds a strong correlation (0.78 coecient) between illicit soware and harmful
malware. In a separate study based on data from its wide network of users, Symantec discovered
“more than 430 million new unique pieces of malware, up 36 percent from the year before.”
39
Malware and ransomware are oen components of cyberattacks.
Theft of trade secrets. Of all the forms of IP the, trade secret the—in an increasing number
of cases enabled by cyberespionage—might do the greatest damage to the U.S. economy. In a
2014 study, “Economic Impact of Trade Secret e: A Framework for Companies to Safeguard
Trade Secrets and Mitigate Potential reats,” PricewaterhouseCoopers and the Center for
Responsible Enterprise and Trade, using several proxy measures, found that trade secret the
could be estimated to be between 1% and 3% of GDP.
40
Given this calculation, the economic
impact of trade secret the on the U.S. economy in 2015 is estimated to be between $180 billion
and $540 billion. Using the lower end of the range, we estimate that trade secret the costs the U.S.
economy at least $180 billion per year.
Cyber theft is a cheap way to avoid costly and time-intensive R&D that may simply be beyond
the thieves’ capacity. Foreign firms benefiting from the cyber theft of American IP are thus
able to sell goods and services developed using stolen IP at a much cheaper price than firms
investing in R&D organically.
33
“Global Patent Applications Rose to 2.9 Million in 2015 on Strong Growth from China; Demand Also Increased for Other Intellectual
Property Rights,” World Intellectual Property Organization, Press Release, November 23, 2016, http://www.wipo.int/pressroom/en/
articles/2016/article_0017.html.
34
USITC, China: Eects of Intellectual Property Infringement and Indigenous Innovation Policies on the U.S. Economy.
35
We consider pirated soware as one category of pirated digital goods (other categories include all forms of digital media) that is separate
from pirated tangible goods. ere is much reliable data on counterfeit and pirated tangible goods based on seizure statistics from
customs and border patrol agencies, but much less data is available on pirated digital goods as a result of the ease of downloading and
sharing pirated digital content.
36
BSA, “Seizing Opportunity through License Compliance.”
37
CREATe.org and PricewaterhouseCoopers, “Economic Impact of Trade Secret e.”
38
BSA, “Seizing Opportunity through License Compliance.”
39
Symantec, “Internet Security reat Report,” vol. 21, April 2016, https://www.symantec.com/content/dam/symantec/docs/reports/istr-
21-2016-en.pdf.
40
CREATe.org and PricewaterhouseCoopers, “Economic Impact of Trade Secret e.”
f i g u r e 2 Global proportion of illicit software use by region
2009 2011 2013 2015
0
5
10
15
20
25
30
35
40
Illicit software use by region (% share)
Year
Asia-Pacic
Central and Eastern Europe
Latin America
Middle East and Africa
North America
Western Europe
12
2017
Totaling It All Up
In summary, we estimate that the total low-end value of the annual cost of IP the in three major
categories exceeds $225 billion, or 1.25% of the U.S. economy, and may be as high as $600 billion,
based on the following components:
• e estimated low-end value of counterfeit and pirated tangible goods imported and exported,
based on a conservative estimate that 20% of the cost of these goods detracts from legitimate
sales, is $29 billion. e high-end estimate for counterfeit and pirated tangible goods imported
and exported is $41 billion.
• e estimated value of pirated U.S. soware is $18 billion.
•
e estimated low-end cost of trade secret the to U.S. rms is $180 billion, or 1% of U.S. GDP.
e high-end estimate is $540 billion, amounting to 3% of GDP.
We have thus found no evidence that the Oce of the Director of National Intelligence’s
estimate of $400 billion is incorrect.
41
Again, these are only the direct costs of IP the that can
41
Strohm, “No Sign China Has Stopped Hacking U.S. Companies, Ocial Says.”
13
UPDATE TO THE IP COMMISSION REPORT
be roughly estimated. e indirect costs to the U.S. economy, such as the loss of competitiveness
and devaluation of trademarks, are more dicult to measure, but we conclude that they are no
less substantial. It is also important to note that these gures do not account for the economic
cost of patent infringement.
Innovation is the United States’ greatest competitive advantage.
42
e massive the of American
IP undermines that advantage, making the United States less competitive over the long term. Further,
IP-intensive jobs have a greater multiplier eect on employment than do other types of jobs. For every
high-tech job created in the United States, ve jobs are also created indirectly in a local economy.
43
China does not just steal the most American IP of any country; it targets the sectors at the forefront
of innovation that could create the best jobs for Americans in the 21st century. Firms in nascent
industries such as biotechnology and next-generation IT that have the greatest potential to drive
future growth in the U.S. economy are unfortunately under the greatest threat.
The Intellectual Property Rights Climate Abroad
Every year, the USTR reviews the development in IPR protection abroad and establishes watch
lists. In 2016 the USTR reviewed 73 trading partners for its Special 301 Report and listed 34 countries
on its Priority Watch List or Watch List. Only Ecuador and Pakistan moved o the Priority Watch
List.
44
ese watch lists are important for the U.S. government to identify the most salient issues
of IPR protection among U.S. trade partners. e Special 301 Report is not all negative; it also
identies best IPR practices by trading partners and other positive developments abroad. e 2016
report recognized China specically for overhauling its IPR laws and regulations and for signing
an expanded memorandum of understanding with the National Intellectual Property Rights
Coordination Center of the Department of Homeland Security.
45
In addition to the watch lists, the USTR announced that it would conduct four out-of-cycle reviews
in 2016 to encourage foreign nations to make continued progress on IPR issues. Specically, the
reviews would examine and make recommendations for Colombia, Pakistan, Spain, and Tajikistan.
e out-of-cycle reviews were not available from the USTR website at the time of writing.
The Special Case of China
As previously mentioned, China (including Hong Kong) is the source of 87% of counterfeit
physical goods entering the United States. It is not surprising, then, that in the “2016 China Business
Climate Survey Report” the American Chamber of Commerce in the People’s Republic of China lists
IP infringement as a concern regarding doing business in China, with 23% of respondents listing
it as a top challenge.
46
is evidence is corroborated by the U.S.-China Business Council, which
found that IPR enforcement was the eighth-highest concern of U.S. companies it surveyed—an
improvement over the previous year. Of note, the top concerns for U.S. companies in the Business
42
Derek Scissors, “Fixing U.S.-China Trade and Investment,” American Enterprise Institute, April 13, 2016, https://www.aei.org/publication/
xing-us-china-trade-and-investment.
43
Enrico Moretti, e New Geography of Jobs (Boston: First Mariner Books, 2013).
44
USTR, “2016 Special 301 Report,” April 2016, https://ustr.gov/sites/default/les/USTR-2016-Special-301-Report.pdf.
45
Ibid.
46
American Chamber of Commerce in the People’s Republic of China, “2016 China Business Climate Survey Report,” 2016, http://www.
amchamchina.org/policy-advocacy/business-climate-survey.
14
2017
Climate Survey are issues relevant to this report—inconsistent interpretation of regulations and
unclear laws—which is a sign that China’s regulatory regime is developing in uneven ways.
47
e Chinese government recognizes that it must reform its regulatory environment to support the
development of an IP-intensive economy that produces its own high-value products and to become
not just a “large IP country” but also a “strong IP country.”
48
e Chinese government has made
strengthening its IPR regime a goal since it enacted a series of laws in the 1970s. It signed on to the
Agreement on Trade-Related Aspects of Intellectual Property Rights in the 1990s and ultimately
joined the World Trade Organization (WTO) in 2001.
49
Yet China has only had IP courts since 2014
and is still reforming its laws and regulations.
To realize those reforms, China’s State Council issued a new action plan in 2016. Building on
a 2015 policy document outlining goals to develop a stricter IPR regime, the action plan, titled
“Opinion of the State Council on Accelerating the Construction of Intellectual Property Powers for
China as an Intellectual Property Strong Country under the New Situation—Division of Tasks,”
duplicates standing policy but also lists several priorities for reform of the IPR regime.
50
According to
analysis by Mark Cohen, a long-standing expert on China’s IP environment, the document suggests
that China is making a greater eort to raise the damages a victim can sue for in Chinese courts.
51
e action plan also stresses international cooperation and the placement of more IP ocials overseas
to protect Chinese companies. It goes on to encourage the study of China’s IP-intensive industries and
the use of scal policy to promote their development.
52
Taken as a whole, the plan appears to be more
geared toward fostering stronger IP-intensive industries at home than developing the rule of law.
In both its Report to Congress on China’s WTO Compliance and the Special 301 Report, the
USTR identies problems with trade secret the, soware piracy, and counterfeit physical goods.
53
e “2016 Special 301 Report” outlines several deciencies in China’s IPR regime that go uncorrected
in the most recent action plan:
Progress toward eective protection and enforcement of IPR in China is
undermined by unchecked trade secret the, market access obstacles to ICT
[information and communications technology] products raised in the name of
security, measures favoring domestically owned intellectual property in the name
of promoting innovation in China, rampant piracy and counterfeiting in China’s
massive online and physical markets, extensive use of unlicensed soware, and
the supply of counterfeit goods to foreign markets. Additional challenges arise
in the form of obstacles that restrict foreign rms’ ability to fully participate
in standards setting, the unnecessary introduction of inapposite competition
concepts into intellectual property laws, and acute challenges in protecting and
incentivizing the creation of pharmaceutical inventions and test data. As a result,
surveys continue to show that the uncertain intellectual property environment
47
U.S.-China Business Council, “USCBC 2016 Membership Survey: e Business Environment in China—Key Findings,” 2016, https://www.
uschina.org/sites/default/les/USCBC%202016%20Annual%20Member%20Survey%20%28ENG%29_1.pdf.
48
“New State Council Decision on Intellectual Property Strategy for China as a Strong IP Country,” China IPR, July 24, 2016, https://chinaipr.
com/2016/07/24/new-state-council-decision-on-intellectual-property-strategy-for-china-as-a-strong-ip-country.
49
Mingde Li, “Current IP Issues in China and the Multilateral Trading System,” Chinese Academy of Social Sciences, February 26, 2015,
https://www.wto.org/english/tratop_e/trips_e/Li_Mengde.pdf.
50
“New State Council Decision on Intellectual Property Strategy for China as a Strong IP Country.”
51
Ibid.
52
Ibid.
53
USTR, “2015 Report to Congress on China WTO Compliance,” December 2015, https://ustr.gov/sites/default/les/2015-Report-to-
Congress-China-WTO-Compliance.pdf.
15
UPDATE TO THE IP COMMISSION REPORT
is a leading concern for businesses operating in China, as intellectual property
infringements are dicult to prevent and remediate.
54
China also singles out high-tech sectors for special support in its ve-year plans. In testimony
to the U.S.-China Economic and Security Commission, Jen Weedon, formerly of the cybersecurity
rm FireEye, asserted that while all sectors are potential targets of Chinese cyberespionage, rms
in strategic industries identied in the 12th Five-Year Plan are targeted by a greater number of
advanced hackers sponsored by the Chinese government.
55
One such targeted high-tech sector is the
semiconductor industry. e Chinese government hopes that China can attain “world-class status”
in semiconductor production by 2030.
56
It aims to do so through subsidizing domestic rms, and
by what the President’s Council of Advisors on Science and Technology calls “zero-sum tactics”
that hurt the overall industry and global economy but help Chinese rms. ese tactics include
the overt and covert the of IP, among others.
57
Numerous examples help demonstrate the scope of the Chinese industrial policy of gaining access
to foreign expertise in key sectors. For example, in the United Kingdom, the sensitive nuclear project
at Hinkley Point proposed for co-development with China General Nuclear Power Company was
delayed. It came to light that the Chinese rm was indicted (along with one of its senior employees,
Allen Ho) for “conspiracy to unlawfully engage and participate in the production and development
of special nuclear material outside the United States, without the required authorization from the
U.S. Department of Energy.”
58
Perhaps the most recent case is China’s development of the Micius satellite, considered the world’s
rst quantum communications satellite, which China launched into orbit in 2016. Scientists at
national laboratories and academic institutions around the world have been working on developing
technology based on quantum mechanics to create a communications system that is considered to
be completely secure from penetration. China is eager to develop this technology to protect its own
communications from potential adversaries like the United States. However, perhaps ironically,
China was able to develop quantum communications technology ahead of its rivals by incorporating
their research ndings. In an interview with the Wall Street Journal, Pan Jianwei, the physicist leading
the project, was quoted saying, “We’ve taken all the good technology from labs around the world,
absorbed it and brought it back.”
59
is may be just an innocent quip about how scientists share
their basic research ndings with one another across borders. However, it has been demonstrated
54
USTR, “2016 Special 301 Report.”
55
Jen Weedon, testimony before the U.S.-China Economic and Security Review Commission, Hearing on Commercial Cyber Espionage and
Barriers to Digital Trade in China, Washington, D.C., June 15, 2015, http://www.uscc.gov/sites/default/les/Weedon%20Testimony.pdf.
56
“China’s Global Semiconductor Raid,” Wall Street Journal, January 12, 2017, http://www.wsj.com/articles/chinas-global-semiconductor-
raid-1484266212.
57
President’s Council of Advisors on Science and Technology, Report to the President: Ensuring Long-Term U.S. Leadership in Semiconductors
(Washington, D.C., January 2017), https://www.whitehouse.gov/sites/default/les/microsites/ostp/PCAST/pcast_ensuring_long-term_us_
leadership_in_semiconductors.pdf. e other zero-sum tactics include forcing customers to buy domestic and forcing foreign companies
to transfer technology for market access. A fourth zero-sum tactic, not mentioned in the report from the President’s Council of Advisors
on Science and Technology, is barring foreign rms from providing certain services in the Chinese market. For example, value-added
telecommunications services cannot be provided by a foreign-owned entity. e best a foreign company can do is own 49% of an entity
providing such services because the necessary license can only be granted to a majority-Chinese-owned entity. is means that online stores
and cloud storage, among other services, have to be provided by the latter, forcing the foreign company to share the technology and prots
with a Chinese partner.
58
“U.S. Nuclear Engineer, China General Nuclear Power Company and Energy Technology International Indicted in Nuclear Power
Conspiracy against the United States,” U.S. Department of Justice, April 14, 2016, https://www.justice.gov/opa/pr/us-nuclear-engineer-
china-general-nuclear-power-company-and-energy-technology-international.
59
Josh Chin, “China’s Latest Leap Forward Isn’t Just Great—It’s Quantum,” Wall Street Journal, August 20, 2016, http://www.wsj.com/articles/
chinas-latest-leap-forward-isnt-just-greatits-quantum-1471269555.
16
2017
that the Chinese government systematically collects information and secrets from abroad to further
its technology development goals, as illustrated by the cases discussed above.
Beyond security issues is the concern that Chinese rms are able to underbid competitors
because of unfair business practices, such as a rm enjoying preferential funding arrangements as
a state-owned enterprise or engaging in the the of IP and resources, as the U.S. Department of
Justice nds.
60
Not only do these business practices allow Chinese rms to outbid potential rivals;
they help Chinese researchers in the state sector develop competitive technology faster than some
of their international rivals.
Conclusion
e scourge of IP the and cyberespionage likely continues to cost the U.S. economy hundreds of
billions of dollars a year despite improved laws and regulations. e the of American IP is not just the
“greatest transfer of wealth in human history,” as General Keith Alexander once put it; IP the undercuts
the primary competitive advantage of American business—the capacity for innovation. IP-intensive
companies generate more jobs both directly and indirectly than rms in other sectors. e growth
of the U.S. economy and the strength of the U.S. labor market depend on the ability of Americans to
innovate and increase productivity. e scale and persistence of IP the, oen committed by advanced
state-backed groups, erode the competitiveness of U.S. rms and threaten the U.S. economy.
Apart from the economic costs of IP the are the political costs. Allowing persistent state-backed
IP the to continue represents the erosion of the norms between countries that buttress the
international order. e United States has chosen to uphold these norms for generations and
continues to uphold them when they are threatened in other domains. It should not give up on
leading toward a code of conduct in the cyber domain or on addressing the issue of IP the. Such
leadership requires that the United States enforce its own laws.
e commissioners were discouraged by the Obama administration’s inaction on IP the and
cyberespionage. Congress has implemented several of the recommendations from our 2013 report,
namely Section 1637 of the 2015 NDAA and the Defense Trade Secrets Act of 2016. Although the
president took steps to bring his emergency economic powers to bear on cyber-enabled IP the, the
Obama administration failed to bring any cases against the perpetrators of cybercrime or IP the.
e U.S. government has the capability and resources to address this problem. President Donald
Trump should make IP the a core issue in the early months of his administration. It is perhaps the
single best way to correct the problems in the Sino-U.S. relationship that he highlighted during his
campaign. To that end, several of this Commission’s recommendations (outlined in the appendix)
remain ripe for implementation, and we hope that the new Congress and administration will
examine them early in 2017. If the makeup of this Commission is any suggestion, there exists
broad bipartisan support for addressing IP the and safeguarding the competitive advantages of
U.S. rms, entrepreneurs, and workers.
60
“U.S. Nuclear Engineer, China General Nuclear Power Company and Energy Technology International Indicted in Nuclear Power
Conspiracy against the United States.”
17
UPDATE TO THE IP COMMISSION REPORT
APPENDIX: EXAMINATION OF RECOMMENDATIONS
Adopted Recommendations
Short-term Solutions
• Enforce strict supply-chain accountability for the U.S. government.
o According to the Government Accountability Office, the Department of Defense has
made some improvements in its supply-chain management, although much work remains
to be done.
Medium-term Solutions
• Amend the Economic Espionage Act to provide a federal private right of action for trade
secret the.
o The Defend Trade Secrets Act of 2016 created private right of action for victims of trade
secret theft in U.S. courts. The act also created protections for plaintiffs to conceal the
nature of their trade secrets.
• Strengthen U.S. diplomatic priorities in the protection of American IP.
o Additional IP attachés are posted abroad, including a dedicated IP attaché in Beijing.
Long-term Solutions
• Build institutions in priority countries that contribute toward a rule-of-law environment in
ways that protect IP.
o This long-term solution is arguably in progress. A key component of the Obama
administration’s Joint Strategic Plan on Intellectual Property Enforcement was building
capacity internationally to contribute to a rule-of-law environment.
Recommendations for Cybersecurity
• Implement prudent vulnerability-mitigation measures.
o This recommendation is being implemented through the Cybersecurity National
Action Plan and through Executive Order 13691 establishing information-sharing
and analysis organizations.
Recommendations Pending Action
Short-term Solutions
• Designate the national security adviser as the principal policy coordinator on the protection
of American IP to reect the president’s priority and to ensure interagency coordination on
this issue.
o Not implemented. The U.S. intellectual property enforcement coordinator, within the
Office of Management and Budget, is still the principal policy coordinator.
18
2017
• Provide statutory responsibility and authority to the secretary of commerce to serve as
the principal ocial responsible for eectively administering the president’s policies on
IP protection.
o Not implemented.
• Strengthen the International Trade Commission’s 337 process to sequester goods containing
stolen IP.
o Not implemented. However, Section 1637 of the 2015 NDAA allows the president to
sanction individuals and organizations found to be involved in economic espionage.
• Empower the secretary of the Treasury, on the recommendation of the secretary of commerce,
to deny the use of the U.S. banking system to foreign companies that repeatedly use or benet
from the the of American IP.
o Authority established but not exercised. The IEEPA allows the president to sanction
individuals and organizations and to “prohibit any transaction in foreign exchange.”
• Increase Department of Justice and FBI resources to investigate and prosecute cases of trade
secret the, especially those enabled by cyber means.
o
Partially implemented. Ad hoc evidence suggests that more resources have been dedicated,
but progress on this recommendation is difficult to quantify.
• Consider the degree of protection aorded to U.S. companies’ IP a criterion for approving
major foreign investments in the United States under the Committee on Foreign Investment
in the U.S. (CFIUS) process.
o Not Implemented. No relevant new legislation has passed and no new executive orders
have been implemented since 2008 that affect CFIUS.
• Require the Securities and Exchange Commission to judge whether companies’ use of stolen
IP is a material condition that ought to be publicly reported.
o Not implemented.
• Greatly expand the number of green cards available to foreign students who earn science,
technology, engineering, and mathematics degrees in American universities and who have a
job oer in their eld upon graduation.
o Not implemented.
Medium-term Solutions
• Make the Court of Appeals for the Federal Circuit the appellate court for all actions under
the Economic Espionage Act.
o Not implemented.
• Instruct the Federal Trade Commission to obtain meaningful sanctions against foreign
companies using stolen IP.
o Not implemented.
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UPDATE TO THE IP COMMISSION REPORT
Long-term Solutions
• Develop a program that encourages technological innovation to improve the ability to detect
counterfeit goods.
o Not implemented.
• Ensure that top U.S. ocials from all agencies push to move China beyond a policy of
indigenous innovation toward becoming a self-innovating economy.
o Not implemented.
• Develop IP “centers of excellence” on a regional basis within China and other priority countries.
o Not implemented.
• Establish in the private nonprot sector an assessment or rating system of levels of legal
protection for IP, beginning in China but extending to other countries as well.
o Not implemented.
Recommendations for Cybersecurity
• Support U.S. companies and technology that can both identify and recover IP stolen through
cyber means.
o Not implemented.
• On an ongoing basis, reconcile necessary changes in the law with a changing technical
environment.
o Partially implemented on an ad hoc basis.
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2017
ABOUT THE COMMISSIONERS
Dennis C. Blair is the Chairman of the Sasakawa Peace Foundation USA and the Co-Chair of
the Commission on the e of American Intellectual Property. He is the former commander
in chief of the U.S. Pacic Command and the former U.S. director of national intelligence.
Prior to rejoining the government in 2009, Admiral Blair held the John M. Shalikashvili Chair
in National Security Studies with the National Bureau of Asian Research and served as deputy
director of the Project for National Security Reform. From 2003 to 2006, Admiral Blair was
president and chief executive ocer of the Institute for Defense Analyses, a federally funded
research and development center based in Alexandria, Virginia, that supports the Department
of Defense, the Department of Homeland Security, and the intelligence community. He also
has been a director of two public companies, EDO and Tyco International. During his 34-year
career with the U.S. Navy, he served on guided-missile destroyers in both the Atlantic and Pacic
eets and commanded the Kitty Hawk Battle Group. Ashore, Admiral Blair served as director
of the Joint Sta and held budget and policy positions on the National Security Council and
several major navy stas. A graduate of the U.S. Naval Academy, Admiral Blair earned a master’s
degree in history and languages from Oxford University as a Rhodes Scholar and was a White
House Fellow at the Department of Housing and Urban Development. He has been awarded four
Defense Distinguished Service medals and three National Intelligence Distinguished Service
medals and has received decorations from the governments of Japan, ailand, South Korea,
Australia, the Philippines, and Taiwan.
Jon M. Huntsman, Jr., is the former U.S. ambassador to China (2009–11), the former governor
of Utah (2005–9), and the Co-Chair of the Commission on the e of American Intellectual
Property. He is currently the Chairman of the Atlantic Council and Co-Chairman of No Labels.
Governor Huntsman was appointed U.S. ambassador to China by President Barack Obama and
conrmed by the Senate on August 7, 2009. As ambassador, he worked closely with U.S. business
owners to facilitate commerce in the growing Asian market and advocated for the release of U.S.
citizens wrongfully imprisoned. As governor of Utah, he cut waste and made government more
ecient. As a result, the state held its AAA bond rating and earned national accolades for debt
management. Utah also ranked number one in the United States in job creation and was named
the best-managed state by the Pew Research Center. Prior to serving as governor, he was named
U.S. ambassador to Singapore, becoming the youngest head of a U.S. diplomatic mission in a
century. Governor Huntsman also served as U.S. trade ambassador under President George W.
Bush, during which time he helped negotiate dozens of free trade agreements with Asian and
African nations. Governor Huntsman holds a BA in international politics from the University
of Pennsylvania.
Craig R. Barrett is a leading advocate for improving education in the United States and around
the world. He is also a vocal spokesman for the value technology can provide in raising social and
economic standards globally. Dr. Barrett joined Intel Corporation in 1974 and held the positions
of vice president, senior vice president, and executive vice president from 1984 to 1990. In 1992, he
was elected to Intel Corporation’s Board of Directors and was promoted to chief operating ocer
in 1993. Dr. Barrett became Intel’s fourth president in 1997, chief executive ocer in 1998, and
21
UPDATE TO THE IP COMMISSION REPORT
chairman of the board in 2005, a post he held until May 2009. He has served on numerous other
boards as well as on policy and government panels. Until June 2009, he was chairman of the United
Nations Global Alliance for Information and Communication Technologies and Development,
which works to bring computers and other technology to developing parts of the world.
Dr. Barrett has also been an appointee of the president’s Advisory Committee for Trade Policy and
Negotiations and the American Health Information Community. He has co-chaired the Business
Coalition for Student Achievement and the National Innovation Initiative Leadership Council, and
has served as a member of the Board of Trustees for the U.S. Council for International Business
and the Clinton Global Initiative Education Advisory Board. Dr. Barrett has been a member of the
National Governors’ Association Task Force on Innovation America, the National Infrastructure
Advisory Council, and the Committee on Scientic Communication and National Security and
has served on the Board of Directors of the U.S. Semiconductor Industry Association, the National
Action Council for Minorities in Engineering, and TechNet. Dr. Barrett received BS, MS, and PhD
degrees in materials science from Stanford University. Aer graduation, he joined the faculty of
Stanford University in the Department of Materials Science and Engineering and remained there
through 1974. He was a Fulbright Fellow at Danish Technical University in Denmark in 1972 and
a NATO Postdoctoral Fellow at the National Physical Laboratory in England from 1964 to 1965.
Slade Gorton is a former U.S. senator (1981–87 and 1989–2001) and a member of the National
Commission on Terrorist Attacks Upon the United States. Senator Gorton is currently a Counselor
at the National Bureau of Asian Research. His years in the Senate saw him appointed to powerful
committee posts, including Appropriations; Budget; Commerce, Science, and Transportation;
and Energy and Natural Resources. He served as the chairman of the Interior Appropriations
Subcommittee (1995–2001), the Commerce Subcommittees on Consumer Aairs (1995–99), and
the Aviation Committee (1999–2000). He was also a member of the Republican leadership as
counsel to the majority leader (1996–2000). Senator Gorton began his political career in 1958 as a
Washington state representative, and he went on to serve as state House majority leader. In 1968,
he was elected attorney general of Washington State, in which capacity he argued fourteen cases
before the U.S. Supreme Court. In June 1980, Senator Gorton received the Wyman Award, the
highest honor accorded by the National Association of Attorneys General. Senator Gorton also
served on the president’s Consumer Advisory Council (1975–77) and on the Washington State
Criminal Justice Training Commission (1969–81). He was chairman of the Washington State
Law & Justice Commission (1969–76) and served as an instructor in constitutional law to public
administration graduate students at the University of Puget Sound. Senator Gorton received his
BA from Dartmouth College and his JD from Columbia Law School.
William J. Lynn III is the Chief Executive Ocer of both Leonardo North America and DRS
Technologies, Inc. Prior to joining DRS in January 2012, he served as the 30th U.S. deputy
secretary of defense (2009–11). As deputy secretary of defense, Mr. Lynn served under Secretaries
Robert Gates and Leon Panetta, managing three million personnel and overseeing an annual
budget of $700 billion. He also personally led the department’s eorts in cybersecurity, space
strategy, and energy policy. From 2002 to 2009, Mr. Lynn was senior vice president of government
operations and strategy at the Raytheon Company. Previously, he served as undersecretary
of defense (comptroller) from 1997 to 2001 and as director of program analysis and evaluation
22
2017
in the Oce of the Secretary of Defense from 1993 to 1997. Mr. Lynn also worked on the sta
of Senator Ted Kennedy as his counsel for the Senate Armed Services Committee. He has been
recognized for numerous professional and service contributions, including four Department of
Defense medals for distinguished public service, the Joint Distinguished Civilian Service Award
from the chairman of the Joint Chiefs of Sta, and awards from the U.S. Army, Navy, and Air
Force. Mr. Lynn holds a law degree from Cornell Law School and a master’s degree in public aairs
from the Woodrow Wilson School of Public and International Aairs at Princeton University. He
is also a graduate of Dartmouth College.
Deborah Wince-Smith is the President and CEO of the U.S. Council on Competitiveness.
Founded in 1986, this unique business-labor-academia coalition of CEOs, university presidents,
and labor union leaders puts forth actionable public policy solutions to make the United States
more competitive in the global marketplace. In 2004, Ms. Wince-Smith spearheaded the
groundbreaking National Innovation Initiative (NII). e NII shaped the bipartisan America
COMPETES Act, created state and regional innovation initiatives, and brought a global focus
to innovation. She has also led a bilateral dialogue between the United States and Brazil on
competitiveness and innovation strategy, including leading the 2007 and 2010 U.S.-Brazil
Innovation Summits. Ms. Wince-Smith serves as a director of several publicly and privately held
companies, national and international organizations, and U.S. government advisory committees.
She is also a Senate-conrmed member of the Oversight Board of the IRS. She chaired the
secretary of commerce’s Advisory Committee on Strengthening America’s Communities and
served on the secretary of state’s Advisory Committee on International Economic Policy. During
her seventeen-year tenure in the federal government, Ms. Wince-Smith held leading positions
in the areas of science, technology policy, and international economic aairs. Most notably, she
served as the nation’s rst Senate-conrmed assistant secretary of commerce for technology
policy in the administration of President George H.W. Bush. Ms. Wince-Smith received a BA
from Vassar College and was one of the rst female students to enter King’s College at the
University of Cambridge, where she read for a master’s degree in classical archaeology. In 2006,
she received an honorary doctorate in humanities from Michigan State University.
Michael K. Young is the President of Texas A&M University. Also a tenured Professor of Law,
he has a distinguished record as an academic leader with broad experience in public service
and diplomacy. He previously served as president of the University of Washington, where he led
the nation’s top public university (second among all universities) in attracting federal research
funding. Prior to his appointment at the University of Washington, he served as president and
distinguished professor of law at the University of Utah. Under President Young’s leadership,
Utah raised its stature nationally and internationally. Before assuming the presidency at Utah,
he was dean and Lobingier Professor of Comparative Law and Jurisprudence at the George
Washington University Law School. He was also a professor at Columbia University for more
than twenty years, and prior to joining the Columbia University faculty, he served as a law clerk
to justice William H. Rehnquist of the U.S. Supreme Court. President Young has held numerous
government positions, including deputy undersecretary for economic and agricultural aairs
and ambassador for trade and environmental aairs in the Department of State during the
presidency of George H.W. Bush. He also served as a member of the U.S. Commission on
23
UPDATE TO THE IP COMMISSION REPORT
International Religious Freedom from 1998 to 2005 and chaired the commission on two
occasions. He has published extensively on a wide range of topics, including the Japanese
legal system, dispute resolution, mergers and acquisitions, labor relations, the legal profession,
comparative law, industrial policy, international trade law, the North American Free Trade
Agreement, the General Agreement on Taris and Trade, international environmental law, and
international human rights and freedom of religion. He is a member of the Council on Foreign
Relations and a fellow of the American Bar Foundation. President Young received a BA from
Brigham Young University and a JD from Harvard Law School, where he served as a note editor
of the Harvard Law Review.
24
2017
LIST OF COMMON ABBREVIATIONS
CBP – U.S. Customs and Border Patrol
CFIUS – Committee on Foreign Investment in the U.S.
EUIPO – European Union Intellectual Property Oce
FISMA – Federal Information Security Modernization Act
IEEPA – International Emergency Economic Powers Act
IP – Intellectual Property
IPR – Intellectual Property Rights
NCCIC – National Cybersecurity and Communications Integrity Center
NDAA – National Defense Authorization Act
OECD – Organisation for Economic Co-operation and Development
PLA – People’s Liberation Army
PRC – People’s Republic of China
USTR – United States Trade Representative
WTO – World Trade Organization
Dennis C. Blair
Co-chair
Craig R. Barrett
Slade Gorton
Jon M. Huntsman, Jr.
Co-chair
William J. Lynn III
Deborah Wince-Smith
COMMISSIONERS
Michael K. Young
e Commission on the e of American Intellectual Property is an independent and bipartisan
initiative of leading Americans from the private sector, public service in national security and foreign
aairs, academe, and politics. e three purposes of the Commission are to:
1.
Document and assess the causes, scale, and other major dimensions of international intellectual
property the as they aect the United States.
2. Document and assess the role of China in international intellectual property the.
3.
Propose appropriate U.S. policy responses that would mitigate ongoing and future damage and obtain
greater enforcement of intellectual property rights by China and other infringers.
