Posts Tagged ‘Intellectual Property’

Threat to the American Patent System and Inventors’ Rights

Tuesday, October 10th, 2017

On August 11, 2017, a group of inventors went to the United States Patent Office to make a statement and give testimony against new patent laws that promote the theft of our intellectual property instead of protecting it. Afterward, the inventors demonstrated in front of the Patent Office, and several burned their patents.  Michael Caputo, Managing Director of Zeppelin Communications, stated, “Patents have become worthless.”  The C-Span video of the protest can be viewed here.

Why is the American patent system and inventors’ rights being threatened?  In September 2011, Congress passed and the president signed the Leahy-Smith America Invents Act (AIA) that changed the U.S. patent system to the party “first to file” instead of the “first to invent to bring the U.S. in line with other countries who adopted first to file patent systems years ago, supposedly to simplify the patent process for companies that file applications in multiple countries. Its central provisions went into effect on September 16, 2012 and on March 16, 2013.

At the time, supporters said it would improve patent quality by creating a new process for reviewing patents after they have been issued and allow third parties to provide information on other parties’ applications.

Opponents argued that there was no reason to change the U.S. system, and inventors and small businesses complained that switching to a “first to file” system would give large companies an advantage and hurt individual inventors.

To find out what has happened to the American Patent System and Inventors’ Rights since 2011, I requested information from Randy Landreneau, Founder Independent Inventors of America, Paul Morinville, Founder US Inventor, and Adrian Pelkus, President of San Diego Inventors Forum.

Randy Landreneau: “America has been the most innovative country on earth from the start. A key reason for this is the revolutionary patent system created by our Founders that provided intellectual property rights to any man or woman, rich or poor. The rest of the world had systems that were for the aristocracy and those favored by the powerful…America maintained a superior system in protecting the intellectual property rights of inventors until …the passage of The America Invents Act in 2011…While it is hard to quantify the effect of changing to First-to-File, this change does place a disadvantage on the independent inventor relative to the large corporation. But another change has had very measurable negative effects.

The America Invents Act created new and easier ways to invalidate an existing patent. Prior to this, to invalidate a patent required going to a judicial court with its various protections offered to the holder of a property right. The America Invents Act created procedures for an administrative court, the PTAB (Patent Trial and Appeals Board), that does not have the same protections. Approximately 70% of the patents that companies try to invalidate using the PTAB get invalidated.

There are efforts underway to get the PTAB procedures ruled unconstitutional or at least reigned in and similar to the procedures of a Judicial court. Certainly, the PTAB procedures are doing great harm to American innovation.”

A more recent bill was even worse – The Innovation Act (H.R. 9), which passed the House in December of 2013. But, the Senate version (PATENT Act, S.1137) was fought effectively and did not pass the Senate.  However, these bills were reintroduced in subsequent sessions of Congress until the summer of 2016, when it became clear these bills were not moving forward.

Hundreds of millions of dollars have been spent pushing a false narrative that nefarious entities called “patent trolls” are using frivolous litigation to make companies pay them unfairly. More often, in actuality, an inventor has a patent that is being infringed by large corporation that he cannot afford to fight in court. So, he sells his patent to a company that does have the wherewithal to fight in court (a non-practicing entity or NPE), and the infringer loses because he is guilty.

One element of the Innovation Act was ‘Loser Pays.’ If an inventor sues a corporation for patent infringement and does not win, he could be liable for the infringer’s legal costs. This could be more than $5,000,000. This liability would also be a personal liability to an investor with an interest in the patent (piercing the corporate veil and placing personal assets at risk).

There are still efforts underway by multinational corporations to get a similar bill passed in the future. Currently, there is the threat that something similar to the Innovation Act will come back.

But, the more current threat is how the courts have been moving toward not considering a patent as the property right that it has been for 200 years. A three-judge panel actually ruled that a patent is a public right. If the courts start to widely regard patents as not being property rights, as some feel they are already doing, this will greatly harm American innovation. If a court does not respect the rights of an inventor, court procedures end up being applied in ways that work against him. Recently, there have been numerous cases where judges ruled that a patent was too abstract, and the inventor was not given the normal due process of providing witnesses, testimony, or otherwise fighting to retain his intellectual property.

There is an effort underway to get the U. S. Supreme Court to take up this issue and rule in the favor of patents being property rights. If this effort succeeds, we will have, at least temporarily, stopped the erosion of inventor rights that are so important to this great nation. I and others are involved in fighting to maintain the rights of inventors, and to expand them where they have been reduced in recent years.”

Paul Morinville wrote his opinion in a paper titled, “We’ve Been Googled,” when H.R. 9 looked like it would pass in which he stated that “H.R.9 creates a Patent System without Inventors. Over the last decade, Google and others have spent hundreds of millions of dollars to lobby Congress and produce an ingenious ‘patent troll’ narrative, which distorts the reality of invention in America. In this decade long war on inventors, H.R.9 is the Google lobby’s latest accomplishment. Not surprisingly, H.R.9 is not directed to fixing the fictional problem of ‘patent trolls.’ Instead, H.R.9 mounts its considerable damage on the patent system in general, specifically harming inventors and small patent-based businesses.”

Morinville explained, “If this bill becomes law, inventors will not be able to enforce their patent rights against moneyed corporations like Google. However, moneyed corporations like Google will still be able to enforce their patents against small businesses with even more devastating consequences to those small businesses. Patent litigation is about risk and cost versus reward. If risk or cost is too high in relation to reward, a patent cannot be enforced.”

Adrian Pelkus: “I’m an inventor named on 14 issued patents and have made my life as a serial entrepreneur doing new product development for over 30 years. Along the way I have created many startups and raised millions of dollars on the back of IP. I have coached inventors and startups every Thursday since 1985 and have run one of the larger inventor clubs in the U. S. since 2005, the San Diego Inventors Forum (www.sdinventors.org.)

He said, “What is most absurd about the America Invents Act to American inventors is the fact that with PTABs we can lose our ISSUED PATENTS… A company challenging a patent wins 90% of the time. The cost to defend is so expensive that inventors give up and are unable to afford achieving their dreams.”

Now, issued patents guaranteed as a Property Right in the constitution are being challenged. A business that infringes would just pay a royalty to the inventor if found guilty hence ‘efficient infringement.’ The biggest incentives to create new ideas and businesses are weakened because the guarantee that an issued patent will protect your IP interests and investments is gone. Patents can now become liabilities. The proposed bills to penalize an inventor with loser pays and threatens to make their investors pay was beyond absurd; it would be economic and intellectual suicide. The end of our rights and hopes as inventors is in plain sight.”

Adrian became connected to Randy Landreneau and Paul Morinville when they reached out to other inventor groups, and he was invited to join the fly-in to Washington, D.C. to fight H.R.9 in April 2015. After that fly-in to Washington, D.C. he became focused on fighting against bills that would destroy our patent system and joined the board of US Inventor in August 2016. He was already on the board of the United Inventors Association and had been working to unite the inventor clubs and groups nationwide.

In January, 2017, the Policy Panel of US Inventors authored a USI Policy Section 101 paper and in February, it was determined that they had to “get as many inventors as possible calling Congress and writing about the threat of a new bill.” 

Adrian said, “I sent out my first call to action to all the clubs and sent a second one the next week and every week since. I discussed the plan to unite the groups and clubs with Stephen Key of Invent Right and Louis Foreman of Edison Nation, who asked how they could help. With their help, we have united 24 inventor groups nationwide to fight the threat to our American patent system and protect inventors’ rights.

I established a bimonthly phone conference with the heads of the biggest organizations in the inventor community, inventor clubs, and individual inventors in an effort to create a coalition that would support a petition that reflects our concerns about and suggestions to change the America Invents Act. This coalition is a historic cooperation that will unite the inventor community and bring a voice to Washington, D.C. they need to hear!

We now have a petition that we believe will help make America great again by making it a great place for American Inventors again. This petition represents concerned citizens, inventors, entrepreneurs, and businesses from coast to coast. I’m proud to contribute my efforts to help America by restoring its patent system. 

I agree with Landreneau, Morinville, and Pelkus that the America Invents Act is gradually destroying the American Patent System. If a bill similar to H. R. 9 passes Congress, it would the final nail in its coffin.

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.

As a mentor for San Diego’s CONNECT Springboard accelerator program and fellow director on the board of the San Diego Inventors Forum with Adrian Pelkus, 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. No investor will take the risk of investing in a product or technology that cannot be protected.

Please join the American inventors coalition formed by Adrian Pelkus, Randy Landreneau, Paul Morinville, and others to save American inventors by signing the petition at http://www.usinventor.org/petition.

 

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.

What Could be done about China’s Theft of Intellectual Property

Sunday, March 13th, 2016

Hardly a week goes by without a report of Chinese “hacking” or Intellectual Property Theft, so it was no surprise that a published analysis by CrowdStrike, a California-based cyber security company, revealed that China violated its cyber agreement with the United States the very next day after CNBC reported that President Obama and China’s President Xi Jinping agreed to not conduct cyber theft of intellectual property on Friday, September 25, 2015. President Obama said. “The United States government does not engage in cyber economic espionage for commercial gain, and today I can announce that our two countries have reached a common understanding on a way forward.” However, the U.S.-China agreement “does not prohibit cyber spying for national security purposes.”

It is interesting to note that the day before the announcement, September 24, 2015, Chet Nagle, a former CIA agent and current Vice President of M-CAM, penned an article in the Daily Caller, stating, “At FBI headquarters in July, the head of FBI counterintelligence, Randall Coleman, said there has been a 53 percent increase in the theft of American trade secrets, thefts that have cost hundreds of billions of dollars in the past year. In an FBI survey of 165 private companies, half of them said they were victims of economic espionage or theft of trade secrets — 95 percent of those cases involved individuals associated with the Chinese government.”

He blamed the corruption of Chinese government officials for the problem and stated that “President Xi Jinping has instituted a strict anti-corruption campaign. Regrettably, the campaign has focused on “tigers” — senior government officials — at the expense of eliminating the rampant corruption by the “flies” — officials at the provincial and local level. In any event, putting a dollar value on direct corruption does not address the totality of the costs. Business confidence and foreign direct investment in China are already falling because of the absence of the rule of law.”

He concluded, “China’s disregard of the rule of law should be the underlying driver for all discussions of commercial topics during the coming visit of China’s president. Lack of the rule of law is the most difficult challenge American enterprises face in China.”

In researching this topic, I found out that three years earlier, May 22, 2013, the bipartisan Commission on the Theft of American Intellectual Property of the U.S. International Trade Commission released a report. Dennis C. Blair, former Director of National Intelligence and Commander in Chief of the U.S. Pacific Command, and Jon M. Huntsman, Jr., former Ambassador to China, Governor of the state of Utah, and Deputy U.S. Trade Representative, were the Co-chairs of the Commission.

The day after the release, Forbes published an article about the report, stating that “China accounts for at least half – and maybe as much as 80 percent – of U.S. intellectual property theft.” The article briefly discussed the problem of China’s Intellectual Property theft and included quotes from the co-chairs, but did not go into any detail about the recommendations of the Commission.

The article did provide the link to the 100-page report, which I have since read. In view of the continuing problem, it is time to reconsider the key findings of the report, titled, “The Impact of International IP Theft on the American Economy”:

  • ”Hundreds of billions of dollars per year. The annual losses are likely to be comparable to the current annual level of U.S. exports to Asia—over $300 billion…”
  • Millions of jobs. If IP were to receive the same protection overseas that it does here, the American economy would add millions of jobs.
  • A drag on U.S. GDP growth. Better protection of IP would encourage significantly more R&D investment and economic growth.
  • The incentive to innovate drives productivity growth and the advancements that improve the quality of life. The threat of IP theft diminishes that incentive.

The report stated, “A core component of China’s successful growth strategy is acquiring science and technology. It does this in part by legal means—imports, foreign domestic investment, licensing, and joint ventures—but also by means that are illegal. National industrial policy goals in China encourage IP theft, and an extraordinary number of Chinese in business and government entities are engaged in this practice.”

The report stated that existing remedies are not keeping up with the problem because of:

  • Short product life cycles – “the slow pace of legal remedies for IP infringement does not meet the needs of companies whose products have rapid product life and profit cycles.”
  • Inadequate institutional capacity ? a shortage of trained judges in developing countries
  • China’s approach to IPR is evolving too slowly – “improvements over the years have not produced meaningful protection for American IP.”
  • Limitations in trade agreements? there are also significant problems in the WTO process that have made it impossible to obtain effective resolutions. “Bilateral and regional free trade agreements are not a panacea either.”
  • Steps undertaken by Congress and the administration are inadequate.

The Commission recommended short-term, medium-term, and long-term remedies. The short-term measures are immediate actions that are largely regulatory or made effective via executive order and include the following:

  • Designate the national security advisor as the principal policy coordinator for all actions on the protection of American IP.
  • Provide statutory responsibility and authority to the secretary of commerce to serve as the principal official to manage all aspects of IP protection.
  • Strengthen the International Trade Commission’s 337 process to sequester goods containing stolen IP.
  • Empower the secretary of the treasury, on the recommendation of the secretary of commerce, to deny the use of the American banking system to foreign companies that repeatedly use or benefit from the theft of American IP.
  • Increase Department of Justice and Federal Bureau of Investigation resources to investigate and prosecute cases of trade-secret theft, especially those enabled by cyber means.
  • Consider the degree of protection afforded to American companies’ IP a criterion for approving major foreign investments in the United States under the Committee on Foreign Investment in the U.S. (CFIUS) process.
  • Enforce strict supply-chain accountability for the U.S. government.
  • Require the Securities and Exchange Commission to judge whether companies’ use of stolen IP is a material condition that ought to be publicly reported.
  • Enforce strict supply-chain accountability for acquisitions by U.S. government departments and agencies by June 1, 2014, and work to enhance corporate accountability for the IP integrity of the supply chain.

The Commission made the following medium term recommendations to build a more sustainable legal framework to protect American IP that Congress and the administration should take:

  • Amend the Economic Espionage Act (EEA) to provide a federal private right of action for trade-secret theft. If companies or individuals can sue for damages due to the theft of IP, especially trade secrets, this will both punish bad behavior and deter future theft.
  • Make the Court of Appeals for the Federal Circuit (CAFC) the appellate court for all actions under the EEA. The CAFC is the appellate court for all International Trade Commission cases and has accumulated the most expertise of any appellate court on IP issues. It is thus in the best position to serve as the appellate court for all matters under the EEA.
  • Instruct the Federal Trade Commission (FTC) to obtain meaningful sanctions against foreign companies using stolen IP. Having demonstrated that foreign companies have stolen IP, the FTC can take sanctions against those companies.
  • Strengthen American diplomatic priorities in the protection of American IP. American ambassadors ought to be assessed on protecting intellectual property, as they are now assessed on promoting trade and exports. Raising the rank of IP attachés in countries in which theft is the most serious enhances their ability to protect American IP.

The more idealistic long-term recommendations are:

  • Build institutions in priority countries that contribute toward a “rule of law” environment in ways that protect IP.
  • Develop a program that encourages technological innovation to improve the ability to detect counterfeit goods.
  • Ensure that top U.S. officials from all agencies push to move China, in particular, beyond a policy of indigenous innovation toward becoming a self-innovating economy.
  • Develop IP “centers of excellence” on a regional basis within China and other priority countries.
  • Establish in the private, nonprofit sector an assessment or rating system of levels of IP legal protection, beginning in China but extending to other countries as well.

Of particular interest is the mention in the report that an annual survey in late 2012 of member companies of the American Chamber of Commerce in the People’s Republic of China “over 40% of respondents reported that the risk of data breach to their operations in China is increasing, and those who indicated that IP infringement has resulted in “material damage” to China operations or global operations increased from 18% in 2010 to 48% in 2012,” and that “The longer the supply line, the more vulnerable it is to IP theft.”

The risk of Intellectual Property is one of the major reasons many companies are returning manufacturing to America through reshoring. This is also why I urge the inventors that are part of the San Diego Inventors Forum to avoid going to China if at all possible, and if they have to go to China to meet their target Bill of Material cost, they should never source all of the parts of their product with one vendor. Otherwise, they are at risk of being victimized by their Chinese vendor stealing their IP and getting a counterfeit version of their product on the market first.

In conclusion, “The Commission considered three additional ideas for protecting the intellectual property of American companies that it does not recommend at this time.” The following one of the three is particularly interesting to me because of the enormous trade deficits we have with China:

“Recommend that Congress and the administration impose a tariff on all Chinese-origin imports, designed to raise 150% of all U.S. losses from Chinese IP theft in the previous year, as estimated by the secretary of commerce. This tariff would be subject to modification by the president on national security grounds.”

“The Commission is not prepared to make such a recommendation now because of the difficulty of estimating the value of stolen IP, the difficulty of identifying the appropriate imports, and the many legal questions raised by such an action under the United States’ WTO obligations. If major IP theft continues or increases, however, the proposal should be further refined and considered.”

What is outrageous to me is that it is obvious to me that none of the short-term, medium-term or long-term recommendations have been implemented or we would not still have the serious problem of cyber espionage and Intellectual Property Theft three years later.

Supporters of developments in China “essentially argue that when China begins producing its own intellectual property in significant quantities, the country’s own entrepreneurs and inventors will put pressure on political and Communist Party leaders to change the laws and improve IP protections.” Since China has the stated goal of becoming the superpower of the 21st Century and is Intellectual Property Theft is one of their tools to achieve this goal, I do not feel that this will ever happen.

To me, the most important conclusion of the report is “If the United States continues on its current path, with the incentives eroding, innovation will decline and our economy will stagnate. In this fundamental sense, IP theft is now a national security issue.” It will be interesting to see if the next president and the next Congress we elect will have the courage to play hardball with China by implementing some of the recommendations of the Commission.

Could California Manufacturing Thrive Again?

Wednesday, February 20th, 2013

On February 14, about 135 business, civic, academic, and labor leaders met at the conference facilities of AMN Healthcare for the “Manufacturing in California – Making California Thrive” economic summit. Comments to welcome attendees were made in turn by San Diego City Councilman Mark Kersey, Assembly member Marie Waldron, Dale Bankhead from Assembly member Toni Atkins office, and Senator Mark Wyland.

Then, Michael Stumo, president of the Coalition for a Prosperous America, provided an overview of the schedule for the day that included an overview of manufacturing in California, a panel of local manufacturers, a panel of national presenters, and breakout sessions after lunch.

I provided the overview of California manufacturing in which I briefly discussed the history of manufacturing in California that I wrote about in a previous blog and pointed out that even though California is perceived as bad for manufacturing, it is the 8th largest market in world and ranks first in manufacturing for both jobs and output. Manufacturing in California accounts for 11.7% of Gross State Product and 9% of workforce. California leads the nation in monies spent on R&D, and California companies received over 50% of all Venture Capital dollars invested in the U. S. in 2011. California high-tech exports also ranked first nationwide, totaling $48 billion in 2011.

The major manufacturing industries are shown by the following chart:

Besides the great weather, California also has world-famous research institutions and research universities, a skilled, educated workforce, a large pool of inventors/entrepreneurs, and strong networks of “angel” investors and venture capitalists. California inventors and entrepreneurs are supported by more than 20 business incubators throughout the state, including two incubator facilities in San Diego – EvoNexus and the San Diego Technology Incubator, as well as the incubator-without-walls, CONNECT’s Springboard program.

In addition, California has 40 Enterprise Zones throughout the state, two of which are in San Diego’s south county. Enterprise Zone companies are eligible for substantial tax credits:

  • Hiring Credits – Firms can earn $37,440 or more in state tax credits for each qualified employee hired
  • Up to 100% Net Operating Loss (NOL) carry-forward for up to 15 years under most circumstances.
  • Sales tax credits on purchases of up to $20 million per year of qualified machinery and machinery parts;
  • Up-front expensing of certain depreciable property
  • Unused tax credits can be applied to future tax years
  • Enterprise Zone companies can earn preference points on state contracts.

There are also 17 Foreign Trade Zones (FTZs) in California that are sites in or near a U.S. Customs port of entry where foreign and domestic goods are considered to be in international trade. Goods can be brought into zone without formal Customs entry or without incurring Customs duties/excise taxes until they are imported into the U. S. FTZs are intended to promote U.S. participation in trade and commerce by eliminating or reducing the unintended costs associated with U.S. trade laws

Of course, no overview would be complete without mentioning the disadvantages of manufacturing in California. In the Small Business Entrepreneur Council Survival Index of 2011, California ranks 46th for its business climate because of the following:

  • Highest personal income & capital gains taxes
  • Highest corporate income & capital gains taxes
  • Highest gas and diesel taxes
  • High state minimum wage
  • High electric utility costs
  • High workers’ compensation costs
  • More stringent Cal OSHA & Cal EPA regulations
  • Stringent Air Quality Monitoring District rules
  • Large number of health insurance mandates

As a result, California has lost over 500,000 manufacturing jobs since the year 2001 as shown by the chart below.

No state, county, or city agency keeps track of the number of manufacturing companies leaving California, but there are frequent anecdotal stories in the news. Of course, everyone had seen or heard one of the ads by Texas Governor Rick Perry to woo California companies to relocate to Texas, as well as the fact that he was in California that very week to meet with some California companies.

I then moderated a panel of the following local manufacturers, who gave their viewpoints of the challenges of doing business in California:

  • Karl Friedrich Haarburger – VP, Solar Energy Industrial Operations, SOITEC
  • Neal Nordstrom – COO, PureForge
  • Rick Urban – COO, Quality Controlled Manufacturing, Inc.
  • Paul Brown – CFO, The Wheat Group
  • Craig Anderson – EHS Director, Solar Turbines, Inc.

Their comments provided examples of most of the above-cited disadvantages of doing business in California with particular emphasis on the problems of raising taxes retroactively in the last election by the passage of Proposition 30. Neal Nordstrom said, “It isn’t just the increase in income taxes and sales taxes, it’s the cumulative effect of all of the taxes and the uncertainty of what is happening next.” Businesses need to be able to have some certainty in their planning, so passing retroactive taxes makes planning for the future difficult and hurts their profitability greatly.

Mr. Anderson commented that there biggest problem was caused by the passage of AB 32. He stated, “The technology to comply with AB 32 does not currently exist, so there is great uncertainty as to whether Solar Turbines will be able to comply with the law by the deadline for compliance.”

Greg Autry, School of Business and Economics, Chapman University, led off the national panel with the topic of Trade Policy. The U. S. had a trade deficit $559.8 billion in 2011, of which over half ($295.4 billion) was with China. Every trade agreement signed in the past 20 years has resulted in an increase trade deficit with our trading partners. The U. S. already has an increased trade deficit with Korea and Columbia from the recently signed trade agreements. He said, “States need to stop trying to “poach” companies from other states and work together against our common adversary, China. States cannot compete against another country where the government is subsidizing manufacturing companies to take control of markets.” Mr. Autry showed a video he had taped during a visit to China in which an employee of Foxconn stated that the Chinese government had provided the land and built the facility where the iPads and iPhone are being manufactured without cost to Foxconn, as well as covering all of the expenses for running the facility for three years. He also showed a video interview with an executive of CODA Automotive Inc. that has opened its HQ in Los Angeles and claims to be making their electric car in the U. S. when, in fact, they are importing the “glider” (a car without the drive train) from China. Miles Automotive partnered with China-based Hafei Saibao Electric Motor Car and Qingyuan Electric Vehicle Co. to establish Coda Automotive as an affiliate company. Mr. Autry opined that federal tax rebates should not be going to purchase an electric car for essentially a Chinese import to the detriment of American car manufacturers like General Motors.

Pat Choate – Economist; Author, Saving Capitalism: Keeping America Strong, covered the importance of the protection of Intellectual Property to the future of American manufacturing. He said that the U. S. is the most innovative country in the world and issues more patents than any other country. However, the recent passage of the America Invents Act converting the U. S. from a “first-to-invent” to “first-to-file” is hurting our innovation. Most growth comes from “disruptive” technology developed by inventors/entrepreneurs of small companies, and the “first-to-file favors large companies that can file a challenge against these small companies in the hopes of bankrupting them to avoid disruptive technology from harming their business. The length of time for the Patent Office to issue a patent has increased from an average of 18 months to 36 months, which is hurting startup companies. The share of patents granted to U. S. residents and small entities has dropped several percentage points since 2007.1988.  He concluded by saying that the constitutionality of the America Invents Act is being challenged, and he hopes that it will be deemed unconstitutional.

Michael Stumo – CEO, Coalition for a Prosperous America, described the math about how a consumption tax could reduce the domestic tax burden, include imports in our tax base, and narrow the trade deficit, increase U.S. production, and fund reductions in the income tax while maintaining progressivity. He explained that our national Gross Domestic Product (GDP) equals of Consumption plus Investment plus Government Procurement plus Net Exports (Total exports minus Total Imports). Every one of our trading partners (150 countries) has a form of consumption tax, including value added taxes (VATs), with an average 17% level. These countries rebate these taxes on their exports, while the U. S. does not add a tax on its imports. The taxes are “border adjustable” because they act as a tariff on our goods sent to them and charged the VAT. This has created our more than $500 billion trade deficit with our trading partners, $298 billion with China alone. CPA advocates changes in U. S. trade policy to address this unfairness which tremendously distorts trade flows.

Thea Lee – Deputy Chief of Staff, President’s Office at AFL-CIO spoke passionately on the need to have a national manufacturing strategy that will create good paying jobs for American workers. Key points that she made were: We need to have a longer-term goal of what kind of country we want to be and how to achieve it. It will require some strategic investment in infrastructure. We need to figure out what kind of trade we want and what other countries are doing. Having an ideological position that free trade is good when other countries are pursuing mercantilism is harmful. We need to be responsive to what other countries are doing. We need to have a competitive trade policy. The ultimate goal is not to have more free trade but more prosperity at home. We need to get back into a job creation policy. We haven’t done trade policy very well, and we need to rethink our trade policies. We don’t need more dopey free trade agreements (taken from notes but not verbatim quotes.)

After lunch, the attendees were split into three groups for the breakout session, in which five issues were discussed and voted against each other, one pair at a time, to determine the top two issues. The five issues were:

  • Trade Reform
  • Tax Reform
  • Intellectual Property
  • Regulatory Reform
  • Manufacturing Strategy

After voting, the groups reconvened to share the outcome of their voting. The top two issues voted as most critical to be addressed were:  Regulatory Reform and Manufacturing Strategy. Regulatory Reform was chosen as the top issue by all three groups because they felt manufacturers needed to have their immediate “pain” alleviated before other issues could be considered. A manufacturing strategy was deemed the second most important issue because if you have a strategy that supports manufacturing, it will encompass intellectual property protection and trade reform. Attendees were invited to sign up to participate in a Task Force to be formed. I will be chairing the Task Force, so please contact me at michele@savingusmanufacturing.com if you would like to participate.

If our elected representatives will work with business, civic, academic, and labor leaders, I believe we can make manufacturing in California thrive again and once more be the “Golden State” of opportunity.