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Baldwin-Hawley Act Would Fix Overvalued U.S. Currency Problem

Tuesday, September 3rd, 2019

The Baldwin-Hawley Senate Bill, S.2357, titled the “Competitive Dollar for Jobs and Prosperity Act” was introduced by Sen. Tammy Baldwin (D-WI) and Josh Hawley (R-MO) on July, 31, 2019. The purpose of the Bill is “To establish a national goal and mechanism to achieve a trade-balancing exchange rate for the United States dollar, to impose a market access charge on certain purchases of United States assets, and for other purposes.”

This Bill is the legislative vehicle for the Market Access Charge (MAC) first proposed in a paper titled, “The Threat of U.S. Dollar Overvaluation: How to Calculate True Exchange Rate Misalignment & How to Fix It” released on July 11, 2017 by the Coalition for a Prosperous America and written by Michael Stumo (CEO), Jeff Ferry (Research Director) and Dr. John R. Hansen, a former Economic Advisor for the World Bank, CPA Advisory Board member, and founding  Editor of Americans Backing a Competitive Dollar (ABCD).

The paper explained the problem of the dollar overvaluation, showed how to accurately calculate the dollar’s misalignment against trading partner currencies, and proposed a solution to this serious threat to America’s future by means of a Market Access Charge (MAC). Dr. Hansen’s proposal was “to initiate the MAC with a 0.5% charge “on any purchase of U.S. dollar financial assets by a foreign entity or individual…As a one-time charge, the MAC will discourage would-be short-term investors, many of whom hold dollars or dollar-denominated securities overnight or even for minutes for the sake of a tiny profit.

The MAC rate would operate on a sliding scale, geared to the value of the trade deficit as a percentage of GDP. The MAC tax would rise if the trade deficit rose, and fall as the trade deficit falls… Most importantly, the MAC would have a substantial impact on the dollar’s value, moving it gradually and safely to a trade-balancing exchange rate and keeping it there, regardless of what other countries do. If the trade deficit goes to zero, so would the MAC.”

In an email to supporters on August 13, 2019, Dr. Hansen wrote, “A major milestone has just been reached in the battle to kill the U.S. trade deficit, stop the offshoring of U.S. industry, and put millions of Americans to work at well-paying jobs…The bill’s presentation to the Senate is indeed a major milestone – but only one of many that lie between where we are today and the bill’s ultimate passage. You support and advice would be most welcome as the process moves forward.”

The Bill’s summary cites the following ”Findings” by Congress:

 “(1) The strength, vitality, and stability of the United States economy and, more broadly, the effectiveness of the global trading system are critically dependent on an international monetary regime of exchange rates that respond appropriately to eliminate persistent trade surpluses or deficits by adjusting to changes in global trade and capital flows.

(2) In recent decades, the United States dollar has become persistently overvalued, in relation to its equilibrium price, because of excessive foreign capital inflows from both public and private sources.

(3) Countries with persistent trade surpluses maintain or benefit from undervalued currencies over a long period of time. As a result, those countries overproduce, underconsume, and excessively rely on consumers in countries with persistent trade deficits for growth. Those countries also export their unemployment and underemployment to countries with persistent trade deficits.

(4) Countries with persistent trade deficits, including the United States, absorb the overproduction of countries with persistent trade surpluses, thereby reducing domestic wages, manufacturing output and employment, economic growth, and innovation.

(5) The United States possesses fiscal and monetary tools to pursue national economic goals for employment, production, investment, income, price stability, and productivity. However, exchange rates that do not adjust to balance international trade can frustrate the achievement of those goals. The United States does not have a tool to manage exchange rates in the national interest.”

The Bill defines a “United States asset” as “(i) a security, stock, bond, note, swap, loan, or other financial instrument—

(I) the face value of which is denominated in United States dollars;

(II) that is registered or located in the United States; or

(III) that is an obligation of a United States person;

(ii) real property located in the United States;

(iii) any ownership interest in an entity that is a United States person;

(iv) intellectual property owned by a United States person; and

(v) any other asset class or transaction identified by the Board of Governors of the Federal Reserve as trading in sufficient volume to cause a risk of upward pressure on the exchange rate of the United States dollar.

It excludes:  “(i) a good being exported from the United States; or (ii) currency or noninterest bearing deposits.”

In the above mentioned paper, Dr. Hansen proposed that the MAC to be “a 0.5% charge on any purchase of U.S. dollar financial assets by a foreign entity or individual…As a one-time charge, the MAC will discourage would-be short-term investors, many of whom hold dollars or dollar-denominated securities overnight or even for minutes for the sake of a tiny profit. The MAC rate would operate on a sliding scale, geared to the value of the trade deficit as a percentage of GDP. The MAC tax would rise if the trade deficit rose, and fall as the trade deficit falls…”

The Balwin-Hawyley Bill stipulates that “On and after the date that is 180 days after the date of the enactment of this Act, there shall be imposed a market access charge on each covered buyer in a covered transaction…The Board of Governors of the Federal Reserve System shall establish and adjust the rate of the market access charge at a rate that— (A) achieves a current account balance not later than 5 years after the date of the enactment of this Act; and (B) maintains a current account balance thereafter.”

However, under the “ALTERNATE INITIAL MARKET ACCESS CHARGE” clause, “If, on the date that is 180 days after the date of the enactment of this Act, the Board of Governors has not established the initial rate for the market access charge, the initial market access charge shall be established at the rate of 50 basis points of the value of a covered transaction.”

The bill concludes with a description of how the Market Access Charge should be charged, collected, and reported to the U.S. Treasury.

At the time of the CPA paper cited above, the “The U.S. dollar was calculated at 25.5% overvalued compared to itsFundamental Equilibrium Exchange Rate (FEER). However, in an article titled “Why We Need Baldwin-Hawley Currency Reform Now,” by Jeff Ferry, CPA Chief Economist, published on August 21, 2019, he writes that the Coalition for a Prosperous America estimates “the dollar is overvalued today by 27 percent.” He points out that” that an overvalued currency makes it harder for a nation’s exports to compete in world markets and easier for foreign imports to take share in its domestic market.”

Mr. Ferry explains that “…overvaluation undermines our industrial base, makes our agricultural goods less competitive and tilts the income distribution in favor of the top 10 percent. Instead of an economy built on production and employment, we get growth built on consumption and debt. In fact, the only sector that favors overvaluation is the financial sector, because it helps Wall Street bankers sell stocks and bonds around the world. On Wall Street they like to call overvaluation the ‘strong dollar.’”

He concludes by saying that “Voltaire said the world is like a giant watch: it runs automatically according to an internal mechanism. If one of the settings is wrong, the watch won’t run properly. Our economy is a huge $21 trillion watch. If an exchange rate is set too high, a national economy runs down. If an economy doesn’t invest enough in its own industry, it becomes less competitive…On the international side, the US economy has been underproducing and overconsuming for some 40 years and adjustments are needed. Right now, Baldwin-Hawley is the most crucial adjustment Congress could enact.”

As a sales representative for American manufacturers, I can testify that America’s manufacturing industry is hurt by the overvalued dollar.  It hurts the ability for American companies to export products that are competitive in the world marketplace. It even hurts the ability for American manufacturers to compete against the low prices of Chinese imports in the domestic market.  I firmly endorse the passage of this critically needed bill by Congress in this session to reduce the U.S. dollar’s overvaluation, discourage unwanted investment in the dollar, and significantly reduce America’s trade deficit.

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Posted in Currency Misalignment/Munipulation, Legislation, Trade Policy | No Comments »

Brookings Recommends New Focus for SBA’s Small Business Investment Corp Program

Tuesday, July 9th, 2019

can better support America’s advanced industries.

On June 26, 2019, Mark Muro, Senior Fellow, Brookings Institution Metropolitan Policy Program submitted testimony to the U.S. Senate Committee on Small Business & Entrepreneurship regarding the “Reauthorization of SBA’s Small Business Investment Company Program,” and particularly on how the Small Business Investment Company (SBIC) program.

Mr. Muro’s expertise is in America’s advanced industry sector, which are the high-productivity, high-pay innovation industries that anchor American competitiveness and are critical to America’s prosperity.

In his testimony, Mr. Muro wrote that advanced industries are identified using two criteria and must meet both criteria to be considered advanced.:

  • “industry’s R&D spending per worker must fall in the 80th percentile of industries or higher, exceeding $450 per worker
  • The share of workers in an industry whose occupations require a high degree of STEM knowledge must also be above the national average, or 21 percent of all workers”

He explained, “Based on this definition, the U.S. advanced industries sector encompasses 50 diverse industries, including 3 energy, 35 manufacturing, and 12 service industries. These prime industries include manufacturing industries such as automaking, aerospace, pharmaceuticals, and semiconductors; energy industries such as oil and gas extraction and renewables; and critical service activities such as R&D services, software design, and telecommunications.”

He wrote, Advance industries matter because they “are in many respects the nation’s core sources of prosperity and economic preeminence.” Specifically, the advanced industries sector:

  • Encompasses many of the nation’s most crucial industries
  • Represents a key site of innovative activity
  • Trains and employs much of the nation’s STEM workforce

In addition, “its sizable advanced manufacturing sub-sector—delivers critical, specific, under recognized value to the nation and its people and places:”

  • Employment – “In 2018, the 50 advanced industries in the United States employed 14 million U.S. workers, or nearly 10%of total employment. Of that, the 35 advanced manufacturing industries contributed 5.7million jobs and 4% of U.S. employment.”
  • GDP – “U.S. advanced industries generate $3.7 trillion worth of output annually, or 18.5% of U.S. GDP in 2018…advanced manufacturing was a particularly sizable contributor of $1.4trillion worth of U.S. output.”
  • Productivity – “Each worker generated approximately $260,000 worth of output compared with $120,000 for the average worker outside advanced industries.3For the advanced manufacturing sub-sector the figure is $250,000.”
  • Pay – “In 2018, the average advanced industries worker earned $103,000 in total compensation, double the $51,000 earned by the average worker in other sectors. And real absolute earnings in advanced industries grew by 63 percent between 1975 and 2013, compared with just 17 percent for other workers…”
  • Multipliers – “Every new advanced industry job creates 2.2 jobs domestically—0.8 jobs locally and 1.4 jobs outside of the region…On average in other industries, new jobs create only one additional domestic job—0.4 jobs locally and 0.6 jobs outside the region.”
  • Innovation – “Advanced industries perform 90%of all private-sector R&D and develop approximately 82%of all U.S. patents.”

Muro explained that these advanced industries need government financial support because “there is now abundant evidence that the primacy of America’s advanced industries, and especially its advanced manufacturing sector, is being aggressively contested—and eroding.”

The challenge is succeeding because China and other competitor nations “are accelerating their investments in the key inputs to advanced-sector competitiveness—basic and applied research and development (R&D), STEM worker development, regional supply chain deepening—just as the U.S. commitment has weakened.”

He asserted, “As a result, the future competitiveness of the U.S. advanced industries sector has become uncertain because the United States is losing ground on important measures of advanced industry competitiveness.” In fact, “the U.S. has since 2000 run negative trade balances with both China and the world on advanced technology products, with the deficit continuing to grow.”

“On innovation, for example, the U.S. share of global patenting and R&D is falling much faster than its share of global GDP and population. While the U.S. lost 1.6 percentage points in its share of world populationbetween1981and 2016, its shares of global patenting and R&D spending both fell by over 15 percentage points.”

He pointed out that “when the ‘Made in China 2025’ industrial policy implies direct support to thousands of firms through state funding, low-interest loans, tax breaks, and other subsidies to the tune of hundreds of billions of dollars according to third-party estimates, U.S. advanced manufacturing firms—especially smaller ones—struggle to access affordable capital.”  

He added that “while the United States has the most developed venture capital (VC) system in the world, that system remains difficult to access for manufacturing firms…the natural biases of VC and other capital sources skew the existing small-firm finance system far away from capital-intensive manufacturing enterprises and are leaving them to face a debilitating lack of access to critical finance in the United States.”

Because “innovative firms engaged in complex, advanced manufacturing production require greater capital and more time to make a profit than non-production firms…most existing small-firm finance sources (especially venture capital) default to the low-risk, high-reward nature of digital start-ups and stay away from the longer profit horizons of manufacturing.”

He explained that “Tech” companies, after all, can produce fast-turnaround, consumer-facing products with little-to-no physical infrastructure. Advanced manufacturing firms, by contrast, require much more time, risk, and capital to develop products, bring them to market, and achieve scale, ensuring they get fewer VC opportunities.”

He concluded that “acute capital shortfalls are likely hobbling the ability of smaller advanced manufacturing concerns to grow their operations, contribute to local supply-chain deepening, and enhance U.S. competitiveness, community by community.”

Next, his testimony focused on how the SBIC could offer the ideal tool for assisting advanced manufacturing concerns in the coming years.  However, the current SBIC program has “several limitations that prevent it from investing as helpfully in growth as it might.” He stated that “the lack of sectoral specificity in SBIC loan-making means that public funds are not always channeled toward the highest public benefit—most notably that of advanced industries…[and}

its repayment structure, which begins immediately and is comprised of an SBA annual charge plus interest due semiannually, is not conducive to the nature of the longer-term product development timelines that advanced manufacturing firms require. In general, the SBIC’s offerings are not “patient” enough to optimally support advanced manufacturing business models.”

In order for the SBIC to help fill the void and maximize the program’s benefit to U.S. competitiveness through the support of U.S. advanced industries, he recommended that policymakers should:

  • “Explicitly prioritize advanced manufacturing growth in the SBIC’s equity capital toolbox.”
  • “Encourage robust and patient capital in SBIC funding.”

He explained that these actions are needed because “advanced-sector production enterprises are not specifically mentioned in program policies and criteria. They should be, because as of now they are losing out.” And “currently the program favors low-risk, high-reward, relatively short-term enterprises, which discriminates against advanced manufacturing concerns.

Accordingly, the committee should amend the Small Business Act to create within the existing SBIC a program that will offer preferred financing terms to VC firms that invest in advanced manufacturing firms. To determine eligibility for participation in this funding activity. manufacturers’ ‘advanced’ status could be confirmed by their location in designated NAICS codes, employing the same definitional methodology and industry list as employed in this testimony…Funding, therefore, should be growth-oriented, as much as possible—not time-bound. Changes can include tying repayments to a percentage royalty from sales, as well as denoting full repayment as a multiple of the original loan amount, rather using the current fixed payment-plus-interest model.”

In conclusion, he stated, “American’s medium-and long-term competitiveness and economic prosperity will be determined by success in a few select, but significant, industrial sectors: namely, the nation’s advanced manufacturing, energy, and digital industries. Success or failure there, meanwhile, will be determined by our choices, both what we choose to do and choose not to do, in world of state competition for valuable industries. Fortunately, one tool for which we can make good choices is the SBA’s SBIC program. Given its important role in enterprise finance, it is well worth the time and effort to make sure it is optimized to serve as a tool for national competitiveness. If rigorously targeted to investment in America’s advanced manufacturing sector, it will absolutely help us reassert national competitiveness, support vibrant communities, and promote dignified work.”

I’ve worked in the advanced manufacturing sector my whole career and was part of the team of a startup technology-based manufacturing company in the past. I’ve been a volunteer mentor for startup entrepreneurs for the San Diego Inventors Forum for the past ten years and was also a mentor for entrepreneurs in the CONNECT Springboard program simultaneously for three years. I know how hard it is for entrepreneurs to raise seed capital, but the crowd funding programs such as Kickstarter and IndieGoGo are greatly helping.  I’ve seen entrepreneurs raise all the money they needed to get their product into the marketplace, but it’s raising the funds to scale up to full production that is the problem.  Investors are looking for quick profits or the kind of company that will be able to do an IPO rapidly.  I believe that the Brookings recommendations for expanding the scope of the SBA SBIC program will be beneficial in helping to rebuild America’s advanced manufacturing sector.

Posted in Legislation, Manufacturing | No Comments »

Congress Must Strengthen Buy America Act

Tuesday, June 4th, 2019

The Buy American Act was passed by Congress in 1933. It required the U.S. government to give preferential treatment to American producers in awarding of federal contracts. The Act restricted the purchase of supplies that are not domestic products. For manufactured products, the Buy American Act used a two-part test:  first, the article must be manufactured in the U.S., and second, the cost of domestic components must exceed 50 percent of the cost of all its components.

After the end of the Cold War and the end of the subsequent Gulf War in 1991, the provisions of the “Buy America Act” were eased to allow purchasing off the shelf commercial parts (COTS) from foreign countries by the Defense Department and other government agencies if they met the same fit and function of parts made to strict military specifications. Previously, parts, assemblies, and systems were required to be substantially made in the United States or in a NATO country, such as Great Britain, France, or Germany.

In the early 1990s, most commercial parts were still being made in the United States, with some outsourcing to the Philippines, Hong Kong, and Singapore, so this change was pretty safe. However, permitting commercial parts to replace Military Specification parts probably drove out of business the small companies that catered exclusively to the military and provided Traceability of Origin per Military Specifications for parts supplied to government agencies, military contractors, and subcontractors. This was all done in the name of cost savings.

Gradually over the last 26 years, the manufacturing of most commercial electronic components and microchips was transferred offshore, so that now they are fabricated in China, Vietnam, or South Korea. 

This is the root cause of counterfeit Chinese parts becoming part of the military/defense industrial supply chain.

The President has authority to waive the Act in response to the provision of reciprocal treatment to U.S. producers. Under the 1979 GATT Agreement on Government Procurement, the U.S.-Israel Free Trade Agreement, the U.S.-Canada Free Trade Agreement, the North American Free Trade Agreement, the Central American Free Trade Agreement, and the Korea Free Trade Agreement, access to government procurement is granted by certain U.S. agencies for goods from the partner countries to these agreements.

It was reported by Reuters in January 2014 that “The Pentagon repeatedly waived laws banning Chinese-built components on U.S. weapons in order to keep the $392 billion Lockheed Martin Corp F-35 fighter program on track in 2012 and 2013, even as U.S. officials were voicing concern about China’s espionage and military buildup.”

To address weaknesses in the defense supply chain and to promote the adoption of aggressive counterfeit avoidance practices by the Department of Defense and the defense industry, an amendment to the National Defense Authorization Act for Fiscal Year 2012  was adopted in the Senate and signed by President Obama.

Instead of implementing the requirements of the Act, it appears that DOD “entered a new phase… characterized by globalization of supply chains” according to Richard McCormack, publisher and producer of the Manufacturing & Technology News, May 20, 2015 edition.

McCormack reported on comments made by Bill Lynn, CEO of Finmeccanica North America and former Deputy Secretary of Defense from 2009 until 2011, at the April 29, 2015 meeting of the Center for Strategic and International Studies in Washington, D.C.

The defense sector and the U.S. military have “moved from being a net exporter of technology to a net importer,” Lynn stated, adding “When their R&D budgets are combined to total a scant $3 billion (or only 1.6 percent of revenue), the five biggest defense contractors — Boeing, Lockheed, Raytheon, L3 and Northrop — would not even make the list of the top 20 global companies that invest in R&D.”

Lynn told the meeting, “Those are things where the commercial industrial base is stronger than the defense industrial base and in many ways the key to maintaining our future [defense] technology edge is to be able to import those technologies into our defense industrial base… Since many of the underlying technologies now reside outside of the United States, DOD has to figure out how to deal with foreign corporations and state-owned enterprises that hold the keys to its success.”

McCormack noted, “The Department of Defense and its major contractors are now dependent on foreign manufacturers for many of the military’s most advanced weapons systems…The defense industry is a shadow of its former self, representing less than 3.5 percent of the U.S. economy, a position that continues to decline as defense budgets reach new lows with no chance of them growing faster than the economy.”

Lynn commented that “DOD is slowly catching up to the structural change caused by globalization of technology and supply chains. It is wrestling with the regulatory and procurement systems it has in place to monitor and conduct business with foreign suppliers, but it has little time to waste.”

Lynn stated “that changing perceptions about foreign involvement in the defense industry are similar to what happened in the U. S. auto sector…Americans and their representatives in Congress were skeptical about foreign nameplates. But as foreign auto companies started building technologies in the United States and hiring American workers, the tide turned… “

It is incomprehensible to me to compare what happened to the U. S. auto industry to what is happening to the U. S. defense industry. The whole purpose of the defense industry is to protect our national sovereignty and national security. How can anyone in their right mind want to make our defense supply chain vulnerable to the foreign country, namely China, that has a written plan to replace the U.S. as the world’s super power? The Chinese have stolen our technology to build up their own military power as evidenced by the uncanny similarity of China’s stealth fighter, the J-31and the Chengdu J-20 fighter jet to the F-35 Lightning II advanced fighter jet. 

Does anyone believe that we will get the parts and assemblies needed by our defense industry when China has decided we are so weak that we cannot stop their aggression in Asia? We are not even safe to have parts sourced in Taiwan, South Korea, the Philippines, Malaysia, Indonesia, or Vietnam. These countries would all be targets for takeover by China once the Chinese lose their fear and respect for U. S. naval and air power.

Four of the last five sessions of Congress attempted to address this problem, but the following bills to strengthen the Buy American Act introduced in Congress failed to be enacted: 

H.R. 4553 (111th), introduced February 2, 2010

S. 2391 (113th), introduced May 22, 2014

S. 2167 (114th), introduced October 8, 2015.

At least, President Trump issued an Executive Order on Buy American and Hire American onApril 18, 2017, which set forth a policy to “maximize …use of goods, products and materials produced in the United States” through federal procurements.

This was followed by the introduction of the 21st Century Buy American Act (S.2196) on Dec. 6, 2017 by Sen. Chris Murphy, D-CN, and a similar bill, H.R. 4812 introduced in the House by Representative David Cicilline. D-RI.  Both bills aimed to strengthen existing Buy American standards, but after considerable support, both failed to be enacted. The legislation focused on five change areas.

  1. The cost of components test for non-commercial-off-the-shelf items would be modified to require that an item’s U.S. component costs exceed 60% of the item’s total costs for the item to be deemed “domestic.” From the current 50%
  2. The so-called “overseas exemption” regarding items procured for use outside the United States would be limited significantly.
  3. Agencies would not be permitted to apply a public interest exception unless it considers the short-term and long-term effects of applying such exception on employment within the U.S.
  4. A program to make or guarantee loans would be created for contractors seeking to manufacture certain items that are not currently manufactured in the U.S.
  5. Actions would be taken to increase transparency related to the use of exceptions

On May 2, 2019, Congressmen Dan Lipinski (IL-3) and Mike Bost (IL-12) “reintroduced the BuyAmerican.gov Act, which helps ensure that federal agencies adhere to Buy American laws and prioritize the purchase of American-made goods. The legislation, H.R. 2472, directs the General Services Administration to establish a website, BuyAmerican.gov, to collect and display information about each request by a federal agency to bypass ‘Buy American’ laws and purchase foreign-made products.  Once the law is approved, manufacturers and others will be able to use the site to identify contract opportunities and challenge pending ‘Buy American’ waivers sought by federal agencies.”

The press release stated, “In the last five years, federal agencies have spent $34 billion on goods manufactured by foreign firms.  The Department of Defense, the largest purchaser of manufactured goods in the world, has spent almost $200 billion on manufactured goods made by foreign companies since 2007.…This bill applies “Buy American” requirements to federal spending programs that are not covered under current law and closes loopholes in “Buy American” programs.

Under current law, federal agencies are exempt from following Buy American laws if American-made goods are unavailable or cost-prohibitive. Unfortunately, federal agencies are too often abusing this waiver authority and there’s no way to hold them accountable,” Lipinski said.”

Senators Rob Portman (R-OH), Chris Murphy (D-CT), Lindsey Graham (R-SC), and Sherrod Brown (D-OH) introduced companion legislation the same day in the Senate.

This bill increases transparency related to waivers and exemptions to the Buy American Act, but it doesn’t address the other four issues that previous bills addressed.

Congress must act to strengthen the Buy American Act, not weaken it, eliminate the incentives for offshoring, and provide incentives for bringing manufacturing back to America. We must protect the supply chain for defense and military products and systems, so that the Defense Department can fulfill its primary mission of defending our country.

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Congress Must Protect Inventor Rights

Tuesday, April 2nd, 2019

Ever since the Leahy-Smith America Invents Act was passed by the 112th Congress in 2011, inventors have been discouraged to innovate by failing to secure the exclusive rights to their inventions through a patent.

It was bad enough that the Act changed patent law from a “first to invent” to “a first to file” for patents. It also created new and easier ways to invalidate an existing patent. Prior to this, to invalidate a patent required going to a judicial court with a jury and its various protections offered to the holder of a property right. The Act created procedures for an administrative court, the PTAB (Patent Trial and Appeals Board), that does not have the same protections.  PTAB has become a nightmare for inventors because it allows infringers to challenge the validity of patents in the PTAB. Some inventors have faced hundreds of thousands of dollars in legal expense and annihilation of their patent rights in unlimited third-party patent validity challenges. Serial petitions are common with valuable patents suffering a dozen or more attacks with costs typically being in excess of $350,000 for each PTAB defense.

Some inventors have endured up to a decade and spent tens of millions of dollars in legal expense to obtain a final judgment in court against infringers of their patent.  Even then, inventors have not been not compensated fairly or sufficiently to prevent infringement of their patent rights.

For example, in the Amazon documentary, Invalidated: The Shredding of the U.S. Patent System,  Josh Malone, the inventor of Bunch O Balloons, stated that his court case against Telebrands has cost over $20M.  It also documented how Dan Phillips, inventor of the Bionic Wrench, has been fighting Sears in court since 2012. A judge recently tossed out the jury verdict that held Sears liable because of their bankruptcy. I understand his appeal process will take several more years. (Note:  The full version is available now on Amazon and iTunes)

It’s not just China that is stealing our technology; it is U.S.-based corporations stealing technology from inventors right and left. Google, Apple, Amazon, Telebrands and other big corporations are getting away with profiting from pirated product. Why should large corporations be allowed to steal inventions and block access to the legal system for private inventors and small businesses? How can a small business survive if it takes a decade and millions of dollars in legal expense to protect intellectual property rights? 

According to Randy Landreneau, President of US Inventor, Inc., “Current policies and case law focus instead on patents as monetary assets held by corporations, injecting extremely high cost and risk to enforcing any single patent and making patent enforcement a ‘game of kings.’ Big corporations play the game by hiring dozens of lawyers, hoarding hundreds of patents, and pouring millions of dollars into litigation. Inventors cannot play that game and need a viable path to enforce their patent rights because PTAB rulings have canceled claims in 85% of issued patents. This is disheartening and discouraging to inventors and startups in our community.”

He added, “In the rare instance that the PTAB permits an inventor to keep his patent, there is no monetary recovery. This means the inventor has nothing to offer a law firm to take the case on a contingency basis. Pro bono defense is not available either. Inventors with valuable inventions have virtually no chance of keeping their patents in the PTAB.”

Last year three bills were introduced to Congress to protect inventors rights, but these bills never got out of committee for a vote on the House floor:

H.R.6557, Inventor Protection Act – “To amend title 35, United States Code, to restore patent rights to inventors, and for other purposes.” It was designed to restore patent protection for inventors by reversing a generation of laws and regulations. 

S.1390, Stronger Patents Act of 2017 – A bill to strengthen the position of the United States as the world’s leading innovator by amending title 35, United States Code, to protect the property rights of the inventors that grow the country’s economy.

H.R.6264 – Restoring America’s Leadership in Innovation Act of 2018 – A bill “to promote the leadership of the United States in global innovation by establishing a robust patent system that restores and protects the right of inventors to own and enforce private property rights in inventions and discoveries, and for other purposes.”


In order to foster the development of American manufacturing, Article I, Section 8, Clause 8 of the Constitution states that the Congress shall have the power “To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries.”

This enabled America to become the world leader in innovation, driven largely by this simple yet profound promise to inventors of the exclusive right to their discoveries. Without secure patent rights, inventors are starved of time and capital required to explore and develop new technologies. Today, the United States faces an escalating innovation crisis as we are forced to rely on outdated or imported technologies. Congress must act quickly to restore reliable patent rights for inventors.

As a mentor for San Diego’s CONNECT Springboard accelerator program for a few years and a director on the board of the San Diego Inventors Forum, I work with inventors designing new products or break-through technologies. Local inventors have the opportunity to compete in the San Diego Inventors Forum annual invention contest for best new consumer product or best new technology. All contestants must have applied for at least a provisional patent before they can participate. The future success of their product or technology is contingent upon their having a patent they can protect from infringement. Their ability to raise the financial investment they need to bring their product to the marketplace depends upon their being able to protect their patent.

Why is this important? Because most new technologies, especially break-through or disruptive technologies, come from individual inventors who either start a company or license their technology to companies that are more able to take them to the market. It is critical for inventors to be able to have some assurance that the rights to their patents will be reviewed in a consistent manner so that they will be able to secure investors and get their product into the marketplace.

Inventors must be equipped and motivated to apply their knowledge and creativity to solving problems.  In order to encourage inventors to share their discovery in exchange for a time-limited exclusive right, patents owned by the original inventor must be protected from the policies that target assets held and traded by non-inventors.

The United States must retake the lead in the next wave of technological innovation in areas like quantum computing, artificial intelligence, and medical diagnostics. Protection for discoveries is these fields is the absolute best way to promote progress in science and useful arts in our modern day.

US Inventors started off The Inventor’s Project in February by co-hosting an open house on Capitol Hill with the Congressional Inventions Caucus. A bipartisan group of Congressional members and staff attended. As a result, the Inventions Caucus will continue to grow and support the mission of educating Congress on the importance of innovation and small inventors and promote the Inventor Rights Resolution.

SUMMARY OF THE RESOLUTION

Our patent system is in crisis. Recent changes to patent laws and Supreme Court decisions have adversely affected inventors such that the requirement in Article I, Section 8 of the Constitution of “securing for limited times to inventors the exclusive right to their discoveries” is no longer achieved. It is nearly impossible to stop an infringer from using an invention without permission, or to make them to pay for the damage caused when they do. The undersigned inventors call on Congress to pass legislation to address these critical issues.

PTAB

The USPTO Must Stop Taking Back Patents from Inventors

INJUNCTIONS

Courts must prohibit the use of a patented invention without permission

PROFITS

Infringers must not profit by using an invention without permission

We must stop the America Invents Act from gradually destroying the American Patent System. We need to encourage our own Congressional Representative to co-sponsor or support an Inventor Rights Act to restore our rights as inventors in this Congress and reinvigorate the famous American innovation system.  Join us by signing the Inventor Rights Resolution

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Tax Cuts Act Hurts Small Corporations

Wednesday, January 30th, 2019

When we attended the Christmas party for one of the small fabrication companies we represent in December 2018, the owner announced that employee bonuses would be less this year because his corporate tax rate went up from 15% to 21%. As manufacturers sales representatives, we wondered if other small corporations were being similarly hurt.

When President Trump signed the Tax Cuts and Jobs Act on December 22, 2017, business and economic experts lauded the reduction in corporate tax rates as one way to help American companies be more competitive in the global marketplace. The National Association of Manufacturers and the U. S. Chamber of Commerce had long complained that the U. S. had the highest corporate tax rate in the world at 39.1 percent, which the Tax Foundation explained was “a combination of our 35 percent federal rate and the average rate levied by U.S. states.”

Doing research, I found an article titled “Trump’s Tax Plan and How It Affects You” on The Balance website.  I learned that the Act permanently cut the corporate tax rate from a progressive rate of 15 percent to as high as 35 percent down to a flat tax rate of 21 percent beginning in 2018, the lowest since 1939. Besides C corporations, the corporate tax rate also applies to LLC’s who have elected to be taxed as corporations. This rate does not apply to S corporations, partnerships or sole proprietorships, which are taxed at the personal tax rate, ranging from 10% to the new limit of 37%.

Most people didn’t realize that while the previous tax rate for corporations started at only 15%, and went up to 35 percent, the average “effective rate was 18.6 percent,” according to a 2017 report by the Congressional Budget Office.

At the Small Business & Entrepreneurship Council’s website, it states that “according to the Census Bureau’s Statistics of U.S. Businesses for employer C corporations in 2015, 99.0 percent of all business are small businesses” with fewer than 500 employees as defined by the Small business Administration; “96.4 percent of firms had fewer than 100” and “84.9 percent of firms had fewer than 20 employees.”

This means that the majority of C corporations paid tax rates well below the maximum tax rate of 35%. Therefore, the flat tax of 21 percent replacing is hurting low-earning corporations that were paying a lower rate and benefiting high-earning wealthy corporations.

The Balance website also states: “The Act allows companies to repatriate the $2.6 trillion they hold in foreign cash stockpiles. They pay a one-time tax rate of 15.5 percent on cash and 8 percent on equipment.”

The reason corporate monies need to be repatriated is that according to Wikipedia, “tax deferral is one of the main features of the worldwide tax system that allows U.S. multinational companies to delay paying taxes on foreign profits. Under U.S. tax law, companies are not required to pay U.S. tax on their foreign subsidiaries’ profits for many years, even indefinitely until the earnings are returned to U.S.”

Thus, repatriation benefited wealthy corporations because they are the ones that shifted manufacturing to subsidiary plants outside of the United States in the past 20 years. It is unlikely that any small business has a plant outside of the U.S., and thus wouldn’t have any profits stockpiled offshore to repatriate.

In the last two years, I wrote two articles about corporate tax reform at the federal level based on the Sales Factor Apportionment Framework proposed by one of the members of the Coalition for a Prosperous America, Bill Parks. Mr. Parks is a retired finance professor and founder of NRS Inc., an Idaho-based paddle sports accessory maker. He asserted that “Tax reform proposals won’t fix our broken corporate system… [because] they fail to fix the unfairness of domestic companies paying more tax than multinational enterprises in identical circumstances.”

He explained that multinational enterprises (MNEs) use cost accounting practices to transfer costs and profits. “Currently MNEs manipulate loopholes in our tax system to avoid paying U. S. taxes… MNEs can legitimately choose a cost that reduces or increases the profits of its subsidiaries in different countries. Because the United States is a relatively high-tax country, MNEs will choose the costs that minimize profits in the United States and maximize them in what are usually lower-tax countries.”

The way his plan would work is that the amount of corporate taxes that a multinational company would pay “would be determined solely on the percent of that company’s world-wide sales made to U. S. customers. Foreign MNEs would also be taxed the same way on their U. S. income leveling the playing field between domestic firms and foreign and domestic MNEs.”

On January 24, 2019. the Coalition for a Prosperous America (CPA) released a Press Release stating that  a letter was sent to both the Senate Finance and House Ways & Means Committees asking “for consideration of both a destination-based Sales Factor Apportionment tax system (SFA) and a Strategic Goods and Services Tax (GST).”

A Goods and Services Tax (GST) is a strategic consumption tax, which would improve America’s trade competitiveness. The Release states: “Currently, foreign governments charge US exporters value-added (VAT) taxes—averaging 17 percent globally—at their borders. Most of these countries have reduced tariffs over the last 45 years—but replaced them with value added taxes. They use this new revenue to reduce other taxes and costs, and to fund national pension systems and health care. The US is virtually alone in not collecting value added taxes on imports.”

CEO Michael Stumo said, “Congress should fix this foreign trade advantage through an innovative and strategic consumption tax called a Goods and Services Tax…a 13 percent GST could raise $1.4 trillion in revenue and fund a full credit against payroll taxes, reduce personal income taxes, and provide a credit for healthcare costs. US companies would benefit from the cost reduction and receive a 13 percent GST rebate when exporting. Foreign companies would pay a 13 percent GST tax when bringing goods into the US.”

Stumo continued, “Tax reform can reduce our trade deficit, drastically reduce complexity and put even more Americans to work in good paying jobs. Congress should tax the profits and sales of all companies selling here and eliminate taxes on exports. The combination of an SFA and a strategic GST is the most pro-American tax system Congress could devise.”

It’s time that small American domestic corporations stop bearing the brunt of corporate taxes that benefit the large multinational enterprises.  Bi-partisan tax reform that benefits all Americans should be made a priority by our newly elected Congressional Representatives and Senators.

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Innovative Products Featured at San Diego Inventors Forum Invention Contest

Tuesday, November 6th, 2018

This year’s invention contest held on October 11, 2018 by the San Diego Inventors Forum was incredible. I’ve been attending the contests for nine years, and this year, there were so many unique, useful inventions that it was very difficult to vote for my favorite invention.

The mission of the San Diego Inventors Forum is to help inventors to become entrepreneurs to create new companies and jobs here in San Diego. Monthly meetings have been held on the 2nd Thursday of each month. Meetings are held at AMN Healthcare, 12400 High Bluff Drive, San Diego, CA 92130.The next meeting will be this Thursday, November 8, 2018.  Networking starts at 6:30 pm, and the meeting starts at 7:00 pm.

At the monthly meetings, inventors meet other successful, local inventors in many different fields and learn how they developed their marketable products. The give inventors the opportunity to network with fellow creative people and get guidance and encouragement to take their first or next steps necessary to turn their ideas into a reality.

At the beginning of each meeting, new attendees are able to introduce themselves and ask financing, business, licensing, marketing, legal and engineering questions.  They can present their ideas to private individuals or for focus group review.  They also get to ask for particular resources they are looking for so their needs can be matched.  During the “Who Needs Who?” portion of the meeting, service providers can personally introduce their services.

Inventors can pay $100 for a one-year membership or pay $10 for each meeting they attend. During the course of the year, program topics cover everything subject you need to know from capturing the concept to getting investors to marketing your product.

The 2018 contestants were:

  • Andrew Bataller,  iPad Case  
  • Gerry Klassen, New Painting Tool
  • Phillip Perez for his Impact Tool shovel
  • Eric Robinson for his Green Launch orbital launch service
  • Michael Rodgers, The One-Handed Hamper
  • Dave Schmoyer, Pill or Parts Pal
  • Scott Swaaley, MAKESafe Power Tool Brake
  • Greg Wawrzyniak, Super Dooper Cord Looper
  • Chris Wzysoczanski, T-Shots – Disposable Reactive Target
  • Ruth Young-Loaeza for her hybrid sheet collection

  The First Prize of $1000 was won by Phillip Perez for his Impact Tool shovel. Second place was Ruth Young-Loaeza for her hybrid sheet collection, and third place was Eric Robinson for his Green Launch orbital launch service.

At the end of the meeting, SDIF Chairman Adrian Pelkus said “good-bye” to attendees after 13 years of leading the group.  He said, “I’ve been privileged to meet hundreds of my fellow inventors over the years and mentored so many here in San Diego.  I’ve been delighted to see many of your ideas get to market and honored to have assisted some of you along the way.  I am indeed sad to leave the local community. My plans are to accomplish a lot more for mankind and the environment by working on my large backlog of such projects.

I am especially proud to have play a part in bringing together over 40 inventor clubs around the county into the newly formed organization of inventor club leaders and to have been part of our first meeting with Andrei Iancu, the new director of the USPTO, and participate in meetings with Congressional Representatives in Washington, D. C. to educate them about how the America Invents Act and PTABs are hurting inventors.”

He added, “Thanks to my dear friends that helped me keep SDIF going all these years. Especial thanks to long-time supporters and fellow board members:  Leslie Wagner, David Waller, Sidney Wildesmith, Ben Gage, Judith Balian, Jennifer Joe, and Michele Nash-Hoff.”

Several of the above, including me, gave heartfelt testimonials to Adrian for his brilliant leadership of the group for these many years and wished him continued success with his own inventions.

Adrian announced that he was also dropping off the board of directors for U. S. Inventors and the United Inventors of America, but he urged everyone to continue to support patent reform.  He reminded everyone that we need strong intellectual property laws to defend their innovations.  He said, “The patent laws have become so weak that the independent inventor can no longer count on an issued patent to protect his right to profit from the labors of their mind. This strikes at the heart of what our founding fathers knew was the way to make the country great and made a foundation Article in the US constitution. We American Independent Inventors must stand and demand our rights be restored. Our nation needs us to create the new ideas and subsequent new jobs to continue to grow and thrive. The present patent laws must be revised to bring back the confidence a patent brings to both the inventor and investor.”

He encouraged everyone to see the movie Invalidated: The Shredding of the US Patent System, if they didn’t attend the SDIF viewing in August. The movie raises public awareness of the problems inventors are having with the patent system. (Note: You can also see the documentary on Amazon, free with Amazon Prime subscription, or $2 otherwise.)

In this session of Congress, there have been bills introduced to the House of Representatives and Senate to protect inventors’ patent rights, such as the STRONGER Patents Act 2017 (S. 1390), introduced by Senator Christopher A Coons  (D-DE), and the Inventor Protection Act  (H. R. 6557), sponsored by Rep. Dana Rohrabacher (R-CA). The most comprehensive BILL is the Restoring American Leadership in Innovation Act of 2018 (H.R. 6264)introduced by Congressman Thomas Massie (R-KY), an award-winning inventor and successful entrepreneur himself. It is co-sponsored by Congresswoman Marcy Kaptur (D-OH) and Congressman Dana Rohrabacher (R-CA). Its goal is to roll back some of the “worst parts” of the America Invents Act of 2011 and reverts patents back to first to invent, not the first inventor to file. All three bills are stuck in the Judiciary Committee.

I encourage you to contact your Congressional Representative to urge them to become a co-sponsor of one or all of the bills mentioned above. These bills must not languish in committee for the rest of this session.  We must pass legislation to restore our once great American patent system that was the envy of the world. Right now, inventors in China have more protection for their patents than inventors in the U.S.  We cannot let China become the innovation leader of the world.

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CPA’s Fair Trade Message Finds Favor in Capitol Hill Meetings

Thursday, May 31st, 2018

The week of March 12th, I was one of over 60 members of the Coalition for a Prosperous America (CPA) who attended our annual conference/fly-in.  In a two-day blitz, members visited more than 120 House and Senate offices in Washington, D. C. to sound the alarm: “America’s massive, growing trade deficit is killing jobs, harming communities, and stifling economic growth.”

Our conference began Monday afternoon with remarks by CPA Chairman Dan DiMicco touting Present Trump’s announcement of imposing Section 232 tariffs on steel and aluminum as a long-overdue measure to safeguard our domestic steel and aluminum mills.  He emphasized that CPA also supports all allowable trade enforcement remedies, such as the Section 201 Tariffs on imported solar panels and clothes washers and the Section 301 Investigation into Chinese intellectual property theft.

CEO Michel Stumo highlighted the new flyers covering issues that we were to discuss with Congressional Representatives and their staff.  Research Director Jeff Ferry introduced the new Job Quality Index he has created, which will differentiate high-paying jobs from low-paying jobs in the monthly job data.

We urged Representatives to support legislation that would eliminate the nation’s trade deficit, address an overvalued dollar, provide stronger trade enforcement, and tackle troubling trade issues with China.

In our meetings, we provided Representatives and their staffs with legislative solutions aimed at eliminating America’s trade deficit, which grew to $566 billion last year. A fact sheet produced by CPA highlighted that no other country has run 42 years of consecutive trade deficits, which has been an average 2.99% drag on our Gross Domestic Product. The flyer offered key reasons why “free” and “fair” trade can result in balanced trade—instead of the job loss that has plagued America’s productive sectors for the past 15 years.

Another fact sheet, showed that ten countries account for 97% of our trade deficit, namely China, Mexico, Japan, Germany, Ireland, Vietnam, Italy, India, South Korea, and Malaysia. Our deficit with China alone jumped from a $337 billion deficit or 38% in 2016 to a $375 billion deficit or 47% in 2017.

We discussed how the he Tax Cuts for Jobs Act narrowed, but did not eliminate, the tax benefit for moving operations overseas, and presented information on how the tax system could be improved with Sales Factor Apportionment, based, which is “a destination of sales system used by many states that would tax corporate income in proportion to a companies’ sales in the U.S. regardless of either domicile or location of operations.”  For example, a multinational corporation that still does 40% of its business in the U.S. would be taxed on the profits of that 40% of its worldwide sales.

The North American Free Trade Agreement (NAFTA) was also another topic of discussion during our visits. CPA supports “mending it or ending it” as CPA has long argued that NAFTA has hurt U.S. manufacturing, cost jobs, and incentivized investment in Mexico rather than the U.S. We explained the provisions that must be included in a renegotiated NAFTA to help America’s manufacturers, such as reinstating country of original labeling for beef and pork, tightening country of origin rules to require higher North American content, requiring periodic reviews, and a mechanism for countries to withdraw, if necessary.

During our Hill meetings, we emphasized the importance to our national security of a vibrant domestic steel and aluminum industry. I mentioned that we outproduced Germany and Japan in World War II, but we would not be able to do so in future wars if we let our domestic steel and aluminum industries be further decimated. We expressed our support for President Trump’s tariffs on steel and aluminum import, especially since CPA has many members in the steel industry.

In addition, we discussed the problem of the overvalued U. S. dollar. And presented the flyer that showed as of May 2017, the U. S. dollar was overvalued by 25.5%, whereas the currencies of Japan and Germany were undervalued by nearly as much, with South Korea not far behind at about 15% of undervaluation.  I told them that CPA has a new Advisory Board member, Dr. John R. Hansen, who is a 30-year veteran of the World Bank. He has proposed a solution to address this problem that “pushes American wages down, increases the trade deficit, disrupts capital markets, and hooks consumers on debt.” He proposed that “Congress should provide the Federal Reserve the responsibility to maintain the dollar at a current account balancing equilibrium price. New legislation should provide the Fed with a new tool to moderate the dollar exchange rate called a market access charge (MAC).” He projects that the MAC would balance trade in five years and that balance would be maintained in the future.

In addition to our congressional visits, CPA hosted a bipartisan group of Representatives to meet with our members, including Rep. Tom Reed (R-NY-23), Rep. Dan Lipinski (D-IL-23), Rep. Mo Brooks (R-AL-05), and Rep. Robert Pittinger (R-NC-09). Last fall, Representatives Brooks and Lipinski introduced House Congressional Resolution 37 for Congress to set a national goal to eliminate the trade deficit.  It is only one sentence long: “Expressing the sense of Congress that Congress and the President should prioritize the reduction and elimination, over a reasonable period of time, of the overall trade deficit of the United States.”

Rep. Pittinger is co-sponsor of HR 4311, the Foreign Investment Risk Review Modernization Act of 2017, which would expand and update the review by the Committee on Foreign Investment in the U.S. (CFIUS) to meet new national security risks. As we distributed this flyer to Congressional Members, we expressed our support for the order President Trump signed to prohibit the acquisition of Qualcomm by Broadcom.  When I met with Congressman Duncan Hunter, he said he had sent a letter to President Trump urging him to stop the takeover of Qualcomm by Broadcom.

As the publisher of my newest book, Rebuild Manufacturing – the Key to American Prosperity, CPA provided books for me to present at my 15 appointments with Congressional Members and/or staff, and I also had the pleasure of presenting a copy of my book to Rep. Mo Brooks and Rep. Robert Pittinger.

On March 16, CPA released a press release about the success of the annual conference fly-in. highlighting the following:

“The 2018 CPA fly-in was our best yet,” said Dan DiMicco, CPA Chairman. “The presentations and panels were very well received and by far the most informative yet, with great speakers and panelists. Without a doubt we made a strong impact on those we visited on the Hill. Our congressional speakers clearly showed us that our messaging is having an impact.”

Michael Stumo, CEO of the CPA said, “We came to Capitol Hill with a united message from our members that Main Street America urgently needs action on trade. We were encouraged to find that our elected officials are becoming more receptive to calls for greater trade enforcement. Our next step is to remind them that voters are watching, and that the time for action is now.”

CPA chair Dan DiMicco said, “In 2016, voters spoke very clearly at the ballot box. They are frustrated and tired with the business-as-usual approach in Washington. We came to Capitol Hill this week to remind our elected officials that the American people are waiting for action, and that reducing our mammoth trade deficit must be a top priority.”

“The Coalition for a Prosperous America trade conference was very useful and successful in educating our members and legislators about the dangers of continuing our country’s obsession with free trade,” said Roger Simmermaker, author of How to Buy American and a CPA member. “Several times, it was evident that many members of Congress and their staff experienced what I would call “light bulb moments” as we laid out our ideas and strategies for a better and fairer trade policy that will benefit our national economy.”

“When real workers, manufacturers, and agriculturalists converge on Washington, theory is tested against reality, and good things begin happening in America,” said Bill Bullard, CEO of R-CALF and a CPA board member. “There is no question that CPA had a positive impact on U.S. trade policy this week.”

The steel and aluminum tariff discussions proved particularly wide-ranging. And as Greg Owens, CEO of Sherill Manufacturing and a CPA member, noted, “Trade and our decades-long deficits are a critical and complex issue. While I applaud the recent move to levy tariffs on steel and aluminum, the comprehensive answer must go beyond that. The overvalued dollar and tax policies are major contributors to the problem that must be addressed. CPA has detailed concrete solutions to these and other issues that I fully support. It was a privilege and an honor to help CPA introduce and develop these solutions on Capitol Hill this week.”

I am proud to be one of the 4.1 million members in the manufacturing, labor, and agricultural sectors who are “united in their view that a continuing trade deficit hampers jobs and productivity nationwide. CPA will continue to urge action on America’s troubling trade deficit, and we look forward to expanding its relationship with Members of Congress who have pledged to fight for America’s manufacturers, farmers, and their workers.”

Chairman Dan DiMicco and CEO Michael Stumo will be in southern California April 18 – 20th speaking to members of Metal Service Center and NTMA, as well as speaking at the San Marcos Manufacturing Summit to be held at the San Marcos Community Center on Friday, April 20th.  As Chair of CPA’s California chapter, I invite you to register to attend.

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How could we stop Chinese Investors from Buying U. S. Companies?

Wednesday, April 11th, 2018

After my article, “Should We Allow the Chinese to Buy Any U.S. Company They Want?” was published January 9th, I was made aware that AXIOS published an article by Steve LeVine on January 10th that provided data from MacroPolo showing that the amount of Chinese investment in the U.S is far greater and more dangerous that I thought.

He wrote, “Chinese investors and firms own a majority of almost 2,400 American companies employing 114,000 people, about the same number as the combined U.S. staffs of Google, Facebook and Tesla…”

On their website, MacroPolo is described as “an initiative of the in-house think tank of the Paulson Institute at the University of Chicago,” which “has a dedicated team of experienced observers and seasoned analysts” whose “aim is to decode China’s economic arrival …across multiple dimensions.”

The article featured MacroPolo’s interactive map, which shows the economic impact of Chinese investment in each state by economic contribution, number of firms owned, and total employment of these firms. The map “appears to be the first open-source, county-by-county study of every majority-owned Chinese company in the U.S. — $56 billion worth.”

In 2017, the top three states were:

  • California: $12.3 billion – economic contribution, 19,300 employed, 598 firms
  • Michigan: $7.6 billion economic contribution 15,200 employed, 111 firms
  • New York: $3.1 billion economic contribution, 6,300 employed, 198 firms

Kentucky was the top state in 2016 with the $5.4 billion buyout of GE Appliances in Louisville by Haier.  I was horrified when this happened because I had used GE’s reshoring of a water heater as the headline case study in my reshoring presentations, and I had visited the GE new product design center in Louisville in the fall of 2015. I had been delighted to see one appliance after another being reshored.

The most immediate way that we could reduce Chinese investment in the U. S. would be to pass the legislation I mentioned in my previous article:  The Foreign Investment Risk Review Modernization Act (FIRRMA), introduced on November 8, 2017 by Congressman Pittenger (H.R.4311) and Senator Cornyn (S. 2098).  The key features of these bills are:

  • “Expands CFIUS jurisdiction to include joint ventures, minority position investments, and real estate transactions near military bases and other sensitive national security facilities.
  • Updates CFIUS definition of “critical technologies” to include emerging technologies that could be essential for maintaining the U.S. technological advantage over countries that pose threats.
  • Adds new national security factors to the review process.
  • Strengthens the government’s ability to protect American “critical infrastructure” from foreign government disruption.”
  • Representatives Devin Nunes (CA-22), Chris Smith (NJ-04), Denny Heck (WA-10), Dave Loebsack (IA-02), Sam Johnson (TX-03), and John Culberson (TX-07) are co-sponsors of H.R. 4311.

In his press release, Senator Cornyn said, “By exploiting gaps in the existing CFIUS review process, potential adversaries, such as China, have been effectively degrading our country’s military technological edge by acquiring, and otherwise investing in, U.S. companies…This undermines our national security and highlights the imperative of modernizing the CFIUS review process to address 21st century threats. This bill takes a measured approach by providing long overdue reforms to better protect our country, while also working to ensure that beneficial foreign investment is not chilled.”

Senators Burr (R-VA), Feinstein (D-CA), Marco Rubio (R-FL), Amy Klobuchar (D-MN), John Barrasso (R-WY), Gary Peters (D-MI), James Lankford (R-OK), Joe Manchin (D-WV), and Tim Scott (R-SC) are also co-sponsors of S. 2098.

The introduction of FIRRMA may be the outcome of the recommendations of the draft annual report of the U.S.-China Economic and Security Review Commission  “calling for a ban of the commission’s annual Chinese state-owned enterprises’ purchases of U.S. companies…The Commission recommends Congress amend the statute authorizing the Committee on Foreign Investment in the United States to bar Chinese state-owned enterprises from acquiring or otherwise gaining effective control of U.S. companies…” as reported by Ali Meyer on October 27, 2016 in the Washington Free Beacon.

The first independent review of these 79-page bills was published December 21, 2017 in the Latham & Watkins Client Alert White Paper titled, “CFIUS Reconstructed: The Foreign Investment Risk Review Modernization Act of 2017.” The White Paper states, in part:

“The proposed Foreign Investment Risk Review Modernization Act would bring substantial changes to CFIUS review. Key Points are:

  • FIRRMA could speed review of certain transactions
  • It would provide for increased scrutiny of transactions from countries of concern.
  • It would expand the scope of activities subject to CFIUS review

FIRRMA would also lengthen the CFIUS review process, extending the initial review period from 30 to 45 days, and allowing CFIUS to extend a national security investigation for 30 days beyond the existing 45-day period where “extraordinary circumstances” require. Thus, the post-notice CFIUS clock would expand from 75 days currently to either 90 or 120 days from the time of filing to the end of the national security investigation.

…But FIRRMA would also increase the resources CFIUS would have to undertake its expanded responsibilities.… In a number of important ways FIRRMA would clarify, alter, or expand current CFIUS practices. And yet, the 79-page bill leaves open certain questions, and raises still others.”

The White paper also stated that “an alternative bill was introduced into the Senate, the “United States Foreign Investment Review Act of 2017 (S.1983),” also with bipartisan sponsorship (Sens. Sherrod Brown (D-Ohio) and Charles Grassley(R-Iowa). That said, FIRRMA’s bicameral introduction and bipartisan support, which includes Senator Diane Feinstein (D-California), as well as reports that some of FIRRMA’s sponsors worked with the Administration on the bill before it was introduced, all provide some reason to expect a version of FIRRMA to move during upcoming months.”

On December 11, 2017, Alexandra Kilroy wrote a guest blog for Adam Segal on the Council on Foreign Relations website. Alexandra is an intern in the Digital and Cyberspace Policy program at the Council on Foreign Relations. She wrote, “As Chinese firms pour funds into promising Silicon Valley start-ups, many national security experts are concerned that China may soon surpass the United States as a technological power, in part though investing in U.S. firms and acquiring cutting-edge technology.”

She commented that “the Foreign Investment Risk Review Modernization Act (FIRMMA), … appears to be motivated in part by an unreleased Pentagon report of the military applications of Chinese investments in the United States. Under the new legislation, CFIUS oversight would be expanded to include foreign investments near military facilities, minor-share investments in critical technology and infrastructure sectors, and transfers of dual-use technology to foreign entities. Acquisitions of critical technologies by “countries of special concern” would also be subject to CFIUS oversight.”

She commented that “Chinese state-led capitalism makes it difficult to distinguish between private and state-owned businesses, and many private firms have strong ties to the Chinese government. In addition, China has been historically disinclined to allow private foreign investment in many critical parts of the economy…it has traditionally maintained strict limits on foreign investment in its energy, transportation, and technology industries. Chinese firms, many with connections to the state, can invest billions in U.S. technology, but U.S. companies are often barred from doing the same.”

As a director on the board of the San Diego Inventors Forum, it greatly concerns me that Chinese investors are buying startup companies whose new technologies may be critical to the future of American technological advances.  Under the current law, Chinese investors could be buying small emerging companies that have advanced technologies that are down at the Tier 3 and 4 levels in the supply chain and never get brought up for a CIFIUS review of the acquisition.

In this regard, there are two possible scenarios that frighten me: (1) Chinese investors buying an advanced technology company and shutting it down to keep the U. S. from benefitting from the technology, and (2) having Chinese engineers insert “backdoor” technology into the product to make it not work properly or quit working when triggered remotely. The latter is already a problem with counterfeit Chinese parts in the defense and military supply chain.

On January 22, 2018, Daniel DiMicco, Chairman, and Michael Stumo, CEO, of the Coalition for a Prosperous America sent letters to Congressman Robert Pittenger and Senator John Cornyn, which said, in part:

“The Coalition for a Prosperous America (CPA) board of directors has voted to support the Foreign Investment Risk Review Modernization Act of 2017 (FIRRMA) which you introduced on November 8, 2017 with bipartisan support.

We appreciate your recognition that foreign investment should be more tightly monitored to address new security threats posed by an evolving global landscape. Your bill appropriately expands CFIUS’s authority to review certain transactions that pose national security concerns, expands the list of factors to be considered by CFIUS and mandates disclosures by state-owned enterprises.

We agree with your reasons, and those of your cosponsors, for advancing this bill. We would additionally point out that trade is part of China’s multidisciplinary strategy to surpass the US on the global stage. China engineers persistent trade surpluses. Our corresponding deficits require us to be a net importer of capital. We sell our assets to balance the books as they sell more goods than they buy. Thus, the greater the US trade deficit, the more we sell our assets and the more we must monitor and restrict which assets are sold.

CPA believes your bill could be improved by adding economic security as a basis for rejecting investment. As an example, Canadian laws restricting investment go beyond national to economic security, i.e. net gain to the domestic economy, when buyers are state-influenced companies.”

The expansion of CIFIUS by FIRRMA may not be enough to stop the dangerous level of Chinese investment in the U.S.  Another solution would be to require reciprocity between China and the U.S. with regard to investment.  Currently, U. S. companies are not allowed to buy 100% of any Chinese company.

On January 17, 2018, CPA’s Trade Blog included an excerpt from Jenny Leonard’s article on Inside US Trade, which stated, “The White House is considering the creation of a reciprocal investment regime with China following a Section 301 [Trade act of 1974] investigation into Chinese technology and intellectual property policies…The sources said the administration, if it went that route, would apply the 1977 International Emergency Economic Powers Act, which gives the president broad authority to regulate commerce “to deal with an unusual and extraordinary threat with respect to which a national emergency has been declared for purposes of this chapter and may not be exercised for any other purpose.”

The article describes how it could be done: “Trump, they said, would sign an executive order declaring a national emergency and, as required under the statute, “immediately” transmit a report to Congress specifying the rationale behind the emergency and actions, and naming “any foreign countries with respect to which such actions are to be taken and why such actions are to be taken with respect to those countries.”

The result “would be to restrict Chinese foreign investment in the U.S. to the extent that Beijing restricts U.S. foreign investment in its market, which could effectively lead to sectoral investment bans. Chinese investors under the new regime would have to demonstrate that China allows U.S. investment in a specific sector. For example, one source said, if Chinese investors wanted to buy a U.S. bank, they would be able to acquire no more than a 49 percent stake — in line with Chinese rules on foreign ownership of banks in China.”

Personally, I like this latter solution the best as there is still too much possibility that a Chinese acquisition may escape the expanded CIFIUS “radar screen” for a review. It’s not just our national security that is being threatened, it’s our economic security as well.

 

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Should We Allow the Chinese to Buy Any U.S. Company They Want?

Wednesday, April 11th, 2018

We Americans blithely ignore the long-term effects of allowing foreign corporations to purchase the assets of our country in the form of companies, land, and resources. We are selling off our ability to produce wealth by allowing many American corporations to be purchased by foreign corporations. It is not just foreign companies buying our assets that is the problem ? it is the state-owned and massively subsidized companies of China that are the dangerous because China uses its state-owned enterprises as a strategic tool of the state. By pretending they are private companies abiding by free-market rules makes us the biggest chumps on the planet.

How many Americans paid attention to the news that the world’s largest pork producer, American company Smithfield Foods, was acquired by a Chinese corporation in 2013? Shareholders approved the sale of the company to Shuanghui International Holdings Limited, the biggest meat processor in China.

Very few paid any attention to one of the earliest acquisitions by a Chinese corporation — when the Hoover brand was sold to Hong Kong, China-based firm Techtronic Industries in 2006 after Maytag that owned Hoover was acquired by Whirlpool.

In January 2014, Motorola Mobility was sold by Google to Chinese computer corporation, Lenovo, which means that the nation that invented smart phones is just about entirely out of the business of producing smart phones in America. This acquisition will give one of China’s most prominent technology companies a broader foothold in the U. S. Lenovo is the same company that bought IBM’s line of personal computers in 2004.

Through strategic purchases, China is positioning itself to be our energy supplier as well. Since 2009, Chinese companies have invested billions of dollars acquiring significant percentages of shares of energy companies, such as The AES Corporation, Chesapeake Energy, and Oil & Gas Assets. In 2010, China Communications Construction Company bought 100% of Friede Goldman United, and in 2012, A-Tech Wind Power (Jiangxi) bought 100% of Cirrus Wind Energy.

In a Fortune article titled  “The Biggest American Companies Now Owned by the Chinese” Stephen Gandel provides the following list of American companies acquired by Chinese investors in 2016:

  • Starwood Hotels acquired by Anbang Insurance, a Chinese insurance company that is rapidly buying up U.S. hotels…It is the latest hotel acquisition by the Chinese insurer, which last year bought the company that owns New York’s Waldorf-Astoria. “Starwood would add 1,300 hotels around the world to Anbang’s portfolio.”
  • Ingram Micro, which is No. 62 on the Fortune 500, was bought by Tianjin Tianhai Investement Development Co., “a Chinese firm that specializes in aviation and logistics.”
  • General Electric Appliance Business was bought by Qingdao Haier Co.
  • Terex Corporation, an 83-year-old Connecticut-based company that “makes machinery for construction, agricultural, and industrial purposes,” was bought by Zoomlion Heavy Industry Science.
  • Legendary Entertainment Group, which has co-financed a number of major movies like Jurassic Park, Godzilla, and Pacific Rim, was bought by Dalian Wanda
  • Dalian Wanda also bought AMC Entertainment Holdings, the U.S.’s second largest movie chain at the time of purchase, but now #1.

The acquisition of American companies by foreign corporations isn’t something new. Many prominent companies founded in America were bought by corporations from the United Kingdom, France, Germany, Italy, and other European countries in the latter half of the 20th Century. Most Americans don’t realize that such iconic American companies as BF Goodrich and RCA are now owned by French corporations, and that Carnation and Gerber are now owned by Swiss corporations.

Many foreign countries don’t allow 100% foreign ownership of their businesses, but sadly, the United States does not exercise the same prudence. We allow sales of U. S. companies to foreign companies unless there are national security issues, and they almost never sell theirs to us. The Chinese government limits foreign ownership to very few selected industry sectors, that can change annually, and requires joint ventures with Chinese corporations for most industry sectors.

What is enabling Chinese companies to go on a buying spree of American assets? Trade deficits – our ever-increasing trade deficit with China over the past 20 years is transferring America’s wealth to China and making millionaires out of many Chinese. In 1994, our trade deficit with China was $29.5 billion, and it grew to $83.8 by 2001 when China was granted “Most Favored Nation” status and admitted to the World Trade Organization. By 2004, it had doubled to $162.3 billion. After a slight dip in 2009 during the depths of the Great Recession, the trade deficit grew to $347 billion in 2016. If you add the annual trade deficits with China alone for the past 20 years, it totals $4.22 trillion. China now has over one billion serious savers and more than a million millionaires whose assets when combined provide billions to spend to buy our assets.

In theory, we have the means to protect ourselves from this. CFIUS, the Committee on Foreign Investment in the United States, has the power to regulate, approve and deny these purchases. Unfortunately, it has been rare for CFIUS to block deals that don’t directly pose a threat to our national security.

The last time CFIUS reviews were expanded was July 26, 2007 when the President signed H.R. 556, Foreign Investment and National Security Act of 2007 (FINSA) “after the Dubai Ports World transaction passed through CFIUS without a formal investigation, leaving a surprised and angry Congress determined to avoid a repetition of that scenario.”

However, this new Act didn’t stop recommendations for expanding the scope of CFIUS reviews. Diane Francis, author of “Merger of the Century: Why Canada and America Should Become One Country, wrote  expressed her opinion of why CFIUS reviews should be expanded in an article in the December 15, 2013, New York Post: “Currently, American authorities only evaluate foreign takeovers on the basis of national-security issues or shareholder rights and securities laws. But these criteria are inadequate. A fairer test in the case of Smithfield, and future buyout attempts by China, should also require reciprocity: Only corporations from countries that allow Americans to buy large companies should be allowed to buy large American companies. That is why Washington must impose new foreign ownership restrictions based on the principle of reciprocity. The rule must be that foreigners can only buy companies if Americans can make similar buyouts in their countries.”

The dangers of these foreign acquisitions were also mentioned in the 2013 Annual Report to Congress by the U.S.-China Economic and Security Review Commission, which states, “China presents new challenges for CFIUS, because investment by SOEs can blur the line between national security and economic security. The possibility of government intent or coordinated strategy behind Chinese investments raises national security concerns. For example, Chinese companies’ attempts to acquire technology track closely the government’s plan to move up the value-added chain. There is also an inherent tension among state and federal agencies in the United States regarding FDI from China. The federal government tends to be concerned with maintaining national security and protecting a rules-based, nondiscriminatory investment regime. The state governments are more concerned with local economic benefits, such as an expanded tax base and increased local employment, rather than a national strategic issue, especially as job growth has stagnated.”

This report, continues, “China has amassed the world’s largest trove of dollar-denominated assets. Although the true composition of China’s foreign exchange reserves, valued at $3.66 trillion, is a state secret, outside observers estimate that about 70 percent is in dollars. In recent years, China has become less risk averse and more willing to invest directly in U.S. land, factories, and businesses.”

On January 26, 2017, Robert D. Atkinson, President of the Information Technology and Innovation Foundation, testified at a hearing on “Chinese Investment in the United States: Impacts and Issues for Policymakers” before the U.S.-China Economic and Security Review Commission.  He testified: “For many years, China has recycled the earnings from its large and sustained trade deficit with the United States into U.S. Treasury bills. But the last few years have seen a marked increase in the amount of inward foreign direct investment (FDI) from China to the United States, across a range of industries. While the underlying motivation for some of this investment is commercial, at least one-third is from Chinese state-owned enterprises, and it is likely that considerably more is guided and supported by the Chinese government, specifically targeting sectors that are strategically important for U.S. national security or economic leadership.“

After ten years, there is finally action on expanding the scope of CFIUS reviews. On November 8, 2017, Congressman Robert Pittenger (R-NC) and Senate Majority Whip John Cornyn (R-TX) “introduced bipartisan, bicameral legislation to modernize the national security review of potential foreign investments in the United States, Foreign Investment Risk Review Modernization Act (“FIRRMA).”

The Press Release stated, “Chinese investment in the United States increased more than 900 percent between 2010 and 2016.  Much of this investment was part of a strategic, coordinated, Chinese government effort to target critical American infrastructure…China is buying American companies at a breathtaking pace.  While some are legitimate business investments, many others are part of a backdoor effort to compromise U.S. national security,” said Congressman Pittenger.  “For example, China recently attempted to purchase a U.S. missile defense supplier using a shell company to evade detection.  The global economy presents new security risks, and so our bipartisan legislation provides Washington the necessary tools to better track and evaluate Chinese investment…”

In a letter to Senator Cornyn, Attorney General Jeff Sessions wrote, “I am particularly supportive of the goals of several aspects of your proposed legislation, including but not limited to (1) the expansion of CFIUS’s authority to review certain transactions that may pose national security concerns; (2) an expanded list of national security factors that CFIUS should consider; and (3) mandatory disclosures of certain investments by state-owned enterprises.”

Earlier this year, the Coalition for a Prosperous America (CPA) published an issue flyer titled “America Must Modernize its Foreign Investment Rules.” It states:

“A wave of strategic foreign acquisitions of U.S. companies threatens our security and future prosperity. The U.S. liberalized rules on incoming foreign investment believing others would follow our lead. That belief was wrong. freely invest here while severely restricting U.S. investment there. America’s trade deficits result in a tsunami of incoming foreign investment, a change from when the US was the world’s sole superpower. The Committee on Foreign Investment in the U.S. (CFIUS) can block incoming investment based upon national security concerns, but not for economic strategy reasons as other countries do.”

The Coalition proposed the follow remedies:

  • Expand consideration beyond national security to include economic security
  • Allow longer review periods, beyond 30 days, for CFIUS to review proposed investments
  • Include a “net benefit” test to encompass American economic interests where proposed
  • Acquisitions of companies important to future U.S. technology and employment, both civilian and defense related
  • Gauge systemic threats to U.S. interests in addition to individual cases
  • Require country by country reciprocity to allow foreign investment in U.S. companies and technology only to the extent they allow incoming US investment there
  • Prescribe heightened scrutiny of investments by state-influenced enterprises

CPA CEO Michael Stumo stated, “We must ensure that foreign greenfield investments in the US and acquisitions of existing US companies provide a clear ‘net benefit’ to the US with special scrutiny in cases of state influenced foreign entities.”

My question is:  Did we let the USSR buy our companies during the Cold War? No, we didn’t! We realized that we would be helping our enemy. This was pretty simple, common sense, but we don’t seem to have this same common sense when dealing with China.

It is time to wake up to the real dangers of our relationship with China. The Communist Chinese government is not our friend. China a geopolitical rival that has a written plan to become the Super Power of the 21st Century. Letting Chinese corporations acquire American companies, especially energy or technology-based companies is the biggest threat to rebuilding American manufacturing. With regard to China’s military buildup, the U.S.-China Commission report states, “PLA modernization is altering the security balance in the Asia Pacific, challenging decades of U.S. military preeminence in the region…The PLA is rapidly expanding and diversifying its ability to strike U.S. bases, ships, and aircraft throughout the Asia Pacific region, including those that it previously could not reach, such as U.S. military facilities on Guam.” We must not allow this policy to continue if we want to maintain our national sovereignty.

Posted in Legislation, Manufacturing, National security, Trade Policy | No Comments »

How the Trade Secrets Act will Benefit Manufacturers

Tuesday, October 11th, 2016

Many times, Congress passes important bills that are go unreported by the mainstream media. Such was the case with the Defend Trade Secrets Act of 2016 (DTSA – S. 1890), passed by the Senate and House of Representatives with near unanimous support in April and signed by President Obama on May 11, 2016. This beneficial bill was authored by U.S. Senators Chris Coons (D-DE) and Orrin Hatch (R-UT) and cosponsored by nearly two-thirds of the Senate.

The bill was supported by a broad industry coalition that included manufacturers and organizations, such as the Alliance of Automobile Manufacturers, the Association of Global Automakers, Inc., Biotechnology Industry Organization, The Boeing Company, Caterpillar Inc., Corning Incorporated, Eli Lilly and Company, General Electric, Honda, IBM, Intel, The Intellectual Property Owners Association  Johnson & Johnson, Medtronic, National Alliance for Jobs and Innovation , National Association of Manufacturers, The Procter & Gamble Company, Siemens Corporation, Software & Information Industry Association (SIIA), U.S. Chamber of Commerce, and United Technologies Corporation (click here for full list). This industry coalition sent a letter dated December 2, 2015 to Senators Hatch, Coons and Flake, saying in part:

“Trade secrets are an essential form of intellectual property. Trade secrets include information as broad-ranging as manufacturing processes, product development, industrial techniques, formulas, and customer lists. The protection of this form of intellectual property is critical to driving the innovation and creativity at the heart of the American economy. Companies in America, however, are increasingly the targets of sophisticated efforts to steal proprietary information, harming our global competitiveness.

Existing state trade secret laws are inadequate to address the interstate and international nature of trade secret theft today. Federal law protects trade secrets through the Economic Espionage Act of 1996 (“EEA”), which provides criminal sanctions for trade secret misappropriation. While the EEA is a critical tool for law enforcement to protect the clear theft of our intellectual property, U.S. trade secret owners also need access to a federal civil remedy and the full spectrum of legal options available to owners of other forms of intellectual property, such as patents, trademarks, and copyrights.

The Defend Trade Secrets Act will create a federal remedy that will provide a consistent, harmonized legal framework and help avoid the commercial injury and loss of employment that can occur when trade secrets are stolen. We are proud to support it.”

The intent of the DTSA is:

“IN GENERAL.—Section 1836 of title 18, United States Code, is amended by striking subsection (b) and inserting the following:

‘‘(b) PRIVATE CIVIL ACTIONS.—

‘‘(1) IN GENERAL.—An owner of a trade secret that is misappropriated may bring a civil action under this subsection if the trade secret is related to a product or service used in, or intended for use in, interstate or foreign commerce.”

‘‘(c) JURISDICTION.—The district courts of the United States shall have original jurisdiction of civil actions brought under this section.

However, the DTSA does not preempt state law. Therefore, the owner of a trade secret could potentially file a federal claim and a state law claim at the same time.

In a May 11, 2016 guest post on www.manufacturinglawblog.com by Ian Clarke-Fisher of Labor & Employment and Jim Nault of Robinson + Cole’s Intellectual Property Litigation Practice Team, they wrote, “…the DTSA provides the following important provisions, among others:

Federal Civil Action:  The DTSA creates a federal civil cause of action, giving original jurisdiction to United States District Courts. This will allow companies to decide whether to bring claims in federal or state courts, and may have the net effect of moving most trade secret litigation to federal courts…Importantly, similar to federal employment laws, the DTSA does not supersede state trade secret laws.”

“Seizure of Property:  The DTSA includes a provision that permits the Court to issue an order, upon ex parte application in ‘extraordinary circumstances,’ seizing property to protect against to improper dissemination of trade secrets…the DTSA permits such an order only if the moving party has not publicized the requested seizure…”.

“Damages and Attorney’s Fees:  In addition to the seizure of property and injunctive relief, the DTSA permits for the recovery of damages for actual losses and unjust enrichment, and allows for exemplary (double) damages trade secrets that are ‘willfully or maliciously misappropriated’… The DTSA also provides for the recovery of reasonable attorney’s fees in limited instances…”

In a blog article prior to the bill’s passage (April 8, 2016), Nuala Droney and James Nault, members of Robinson + Cole’s Intellectual Property Litigation Practice Team commented: “The law provides for the award of damages for trade secret theft as well as injunctive relief. It even includes a provision allowing a court to grant ex parte expedited relief to trade secret owners under extraordinary circumstances to preserve evidence or prevent dissemination of the trade secret…”

They explained that “Trade secrets are a form of intellectual property that are of increasing importance to many manufacturers for a variety of reasons. A trade secret can be any information that is (i) valuable to a company, (ii) not generally known, and (iii) not readily ascertainable through lawful means, as long as the trade secret holder has taken reasonable precautions to protect it. A classic example of a trade secret is the formula for Coca-Cola. A more recent example is DuPont’s innovative Kevlar product, which was the subject of a large scale trade secret theft in 2006. Trade secret theft is a huge problem; a recent Pricewaterhouse-Coopers study showed that trade secret theft costs American businesses $480 billion a year.”

Dennis Crouch, Law Professor at the University of Missouri School of Law and Co-director of the Center for Intellectual Property and Entrepreneurship, provides this commentary on his blog:

” The Defend Trade Secrets Act (DTSA) includes a new provision added to the Economic Espionage Act (EEA) that, depending upon how it is interpreted, may govern how district courts handle trade secret information in all cases. The new section will be codified as 18 U.S.C. 1835(b) and reads:

(b) Rights Of Trade Secret Owners—The court may not authorize or direct the disclosure of any information the owner asserts to be a trade secret unless the court allows the owner the opportunity to file a submission under seal that describes the interest of the owner in keeping the information confidential. . . .

Courts already liberally allow parties to file documents under seal – so that doesn’t provide the entire impact of the provision. Rather, the provision’s importance is that it extends beyond briefs being filed by parties and instead reaches disclosures at trial and court opinions. Thus, the statute presumably prevents a court from disclosing a trade-secret in its opinion without first providing the trade-secret owner with the opportunity to brief the issue of disclosure. In addition, it provides non-parties with a right to request (under seal) non-disclosure of their trade secret rights.”

However, the website of the Essex Richards law firm of Charlotte, NC has a warning that “businesses should know that the DTSA contains certain requirements that affect their employment and similar agreements with provisions protecting against disclosure or misappropriation of the company’s trade secrets or confidential information.” Here are a few provisions of the DTSA that they highlight as important for employers to understand:

  • “The DTSA provides immunity from trade secret misappropriation claims to whistleblowers who disclose their employer’s trade secrets or confidential information to government officials for the purpose of reporting or investigating a violation of the law.
  • The DTSA requires all employers to notify employees of the DTSA’s whistleblower protection provisions in any contract or agreement with an employee that governs the use of a trade secret or other confidential information. Otherwise, an employer will be deprived of exemplary damages and attorney’s fees under the DTSA. This notice requirement is satisfied if the agreement cross references a separate written policy that addresses reporting suspected violations of the law. Importantly, the DTSA broadly defines “employee” to include any individual “performing work as a contractor or consultant for an employer.” Therefore, independent contractors and consultants, in addition to “W-2 employees,” are covered under this definition. The notice requirement applies to agreements that are entered into or modified after May 11, 2016.
  • The DTSA provides a variety of remedies. If the court finds liability, it may: (1) issue an injunction so long as the order does not prevent an individual from entering an employment relationship and does not conflict with applicable state law prohibiting restraints on lawful employment; (2) order that a party take certain affirmative action to protect the trade secret; (3) award actual damages and damages for unjust enrichment; (4) condition future use of the trade secret on payment of a reasonable royalty, and (5) in a case of willful misappropriation, award exemplary damages not more than twice the original damages amount.  In addition, if the court determines that a party willfully and maliciously misappropriated a trade secret, or if it finds that a misappropriation claim or a motion to terminate an injunction has been brought in bad faith, it may award reasonable attorney’s fees to the prevailing party.
  • In the event a defending party is damaged due to a wrongful seizure, it may sue for and recover “relief as may be appropriate,” such as damages for lost profits, damages for loss of goodwill, reasonable attorney’s fees and punitive damages if the seizure was sought in bad faith.”

As a director on the board of the San Diego Inventors Forum, I am particularly interested in the fact that the DTSA is the first federal legislation that allows private citizens, without first having to obtain patent, trademark, or copyright registration, to sue in federal court to protect their trade secrets. This will be a great help for inventors and existing businesses that do not have “patentable” Intellectual Property and have to rely on trade secrets to protect their “secret” formulas or processes to produce their products.

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Posted in Inellectual Property, Legislation, Manufacturing | No Comments »

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