[House Hearing, 115 Congress]
[From the U.S. Government Publishing Office]
INNOVATION NATION: HOW SMALL BUSINESSES IN THE DIGITAL TECHNOLOGY
INDUSTRY USE INTELLECTUAL PROPERTY
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HEARING
BEFORE THE
COMMITTEE ON SMALL BUSINESS
UNITED STATES
HOUSE OF REPRESENTATIVES
ONE HUNDRED FIFTEENTH CONGRESS
SECOND SESSION
__________
HEARING HELD
JULY 11, 2018
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[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
Small Business Committee Document Number 115-083
Available via the GPO Website: www.govinfo.gov
__________
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HOUSE COMMITTEE ON SMALL BUSINESS
STEVE CHABOT, Ohio, Chairman
STEVE KING, Iowa
BLAINE LUETKEMEYER, Missouri
DAVE BRAT, Virginia
AUMUA AMATA COLEMAN RADEWAGEN, American Samoa
STEVE KNIGHT, California
TRENT KELLY, Mississippi
ROD BLUM, Iowa
JAMES COMER, Kentucky
JENNIFFER GONZALEZ-COLON, Puerto Rico
BRIAN FITZPATRICK, Pennsylvania
ROGER MARSHALL, Kansas
RALPH NORMAN, South Carolina
JOHN CURTIS, Utah
NYDIA VELAZQUEZ, New York, Ranking Member
DWIGHT EVANS, Pennsylvania
STEPHANIE MURPHY, Florida
AL LAWSON, JR., Florida
YVETTE CLARKE, New York
JUDY CHU, California
ALMA ADAMS, North Carolina
ADRIANO ESPAILLAT, New York
BRAD SCHNEIDER, Illinois
VACANT
Kevin Fitzpatrick, Majority Staff Director
Jan Oliver, Majority Deputy Staff Director and Chief Counsel
Adam Minehardt, Staff Director
C O N T E N T S
OPENING STATEMENTS
Page
Hon. Steve Chabot................................................ 1
Hon. Dwight Evans................................................ 2
WITNESSES
Mr. Frank Cullen, Vice President of U.S. Policy, The Global
Innovation Policy Center, U.S. Chamber of Commerce, Washington,
DC............................................................. 4
Mr. Morgan Reed, President, ACT/The App Association, Washington,
DC............................................................. 6
Mr. Christopher Mohr, Vice President for Intellectual Property
and General Counsel, Software & Information Industry
Association, Washington, DC.................................... 8
Mr. Chris Israel, Executive Director, Alliance of U.S. Startups &
Inventors for Jobs, Washington, DC............................. 9
APPENDIX
Prepared Statements:
Mr. Frank Cullen, Vice President of U.S. Policy, The Global
Innovation Policy Center, U.S. Chamber of Commerce,
Washington, DC............................................. 23
Mr. Morgan Reed, President, ACT/The App Association,
Washington, DC............................................. 33
Mr. Christopher Mohr, Vice President for Intellectual
Property and General Counsel, Software & Information
Industry Association, Washington, DC....................... 40
Mr. Chris Israel, Executive Director, Alliance of U.S.
Startups & Inventors for Jobs, Washington, DC.............. 57
Questions for the Record:
Questions from Representative Radewagen to Mr. Frank Cullen
and Answers from Mr. Frank Cullen.......................... 61
Questions from Representative Radewagen to Mr. Chris Israel
and Answers from Mr. Chris Israel.......................... 63
Additional Material for the Record:
Institute for Women's Policy Research........................ 66
Innovation Alliance.......................................... 69
Letter from Joshua Landau, Patent Counsel, Computer &
Communications Industry Association........................ 71
INNOVATION NATION: HOW SMALL
BUSINESSES IN THE DIGITAL TECHNOLOGY INDUSTRY USE INTELLECTUAL PROPERTY
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WEDNESDAY, JULY 11, 2018
House of Representatives,
Committee on Small Business,
Washington, DC.
The Committee met, pursuant to call, at 11:06 a.m., in Room
2360, Rayburn House Office Building. Hon. Steve Chabot
[chairman of the Committee] presiding.
Present: Representatives Chabot, King, Luetkemeyer, Brat,
Kelly, Fitzpatrick, Marshall, Evans, Clarke, Adams, and
Schneider.
Chairman CHABOT. Good morning. The Committee will come to
order.
Today, the Small Business Committee will examine how small
business owners in the digital technology industry use
intellectual property protections to help their businesses and
the issues they face when navigating the intellectual property
process.
Digital technology allows small businesses to sell their
products and services all over the world. In fact, 84 percent
of small businesses use at least one major digital platform to
provide information to customers. Digital technology also plays
a vital role in the American economy, and the United States is
the largest technology market in the world.
The tech industry accounts for approximately $1.6 trillion
in direct economic value in the United States, and net tech
employment accounted for over 7 percent of the overall
workforce in 2017.
As we learned from our hearing on intellectual property in
May, intellectual property plays a vital role in protecting
creative and innovative products and ideas, both here in the
United States and abroad. America's intellectual property is
worth $6.6 trillion, and intellectual property-intensive
industries employ over 45 million Americans. Our nation's small
business owners are essential to producing new, creative, and
groundbreaking products and ideas that strengthen our nation's
economy. In fact, entrepreneurs and small business owners have
generated about 70 percent of new jobs over the last 2 decades,
and small businesses represent about 96 percent of employer
firms in manufacturing industries with a high number of
patents. Intellectual property also accounts for 52 percent of
all merchandise exports in the United States.
However, the process for obtaining intellectual property
protections can be daunting, even for the most experienced
small business owner. It can also be very expensive to hire
professionals to traverse the intellectual property process.
Because of their limited financial abilities, small
business owners are vulnerable to their innovations being
stolen, both here in the U.S. and internationally, which can be
financially devastating.
The FBI has found that intellectual property theft costs
billions of dollars every year to America's businesses, and
thieves are targeting small business owners and startups
because of their limited abilities to fight back.
To combat this problem, this Committee unanimously passed
H.R. 2655, the Small Business Innovation Protection Act of 2017
this past March, and I am pleased to report that it passed the
full House yesterday.
This bipartisan legislation, which was sponsored by Mr.
Evans and co-sponsored by Mr. Fitzpatrick on our Committee,
would leverage existing resources at the SBA and the U.S.
Patent and Trademark Office to better assist small business
owners and expand the agencies outreach efforts to provide
small businesses with the resources they need to address
intellectual property issues.
Today, we will hear from experts on intellectual property
and the digital technology industry on the role that
intellectual property plays for this vital and growing
industry. I look forward to hearing how intellectual property
helps small digital technology businesses and what we can do to
foster America's creative small businesses moving forward.
And I would now like to yield to the Acting Ranking Member,
Mr. Evans, for the purpose of making an opening statement.
Mr. EVANS. Thank you, Mr. Chairman. Good morning.
Digital technology has become a vital part of nearly every
industry. Over the past 3 decades, the tech sec has created 23
percent new businesses than the private sector as a whole.
Technology innovation bolsters our economy making IP protection
a vital part of the process.
Protecting the intellectual property rights for technology
innovation can support long-term job growth, increase exports,
and drive development. New business ventures rely on a system
in which the ideas are protected.
Intellectual property is a $6.6 trillion industry that
accounts for over 1/3 of total U.S. gross domestic product, and
small firms make up the vast majority of firms and intellectual
property intensity industries. In fact, startups in high-tech
hubs account for more than 40 percent of new jobs each year.
These businesses have an enormous stake in ensuring the
continued growth of intellectual property.
Patent protection helps innovators recoup the costs of
research and development, capitalizing on their inventions,
create jobs and grow the economy. It is also essential to
ensure the availability of businesses to ensure their rights to
both at home and abroad. Doing so is critical to protect the
American economy's interests.
In 2016, Customs and Border Patrol received $1.3 billion of
intellectual property rights infringement goods across our
borders. This theft can have a deep impact on small businesses
that may have limited time and resources. This is especially
true among women, minorities, and other underserved business
owners who already face obstacles obtaining IP protection and
funding.
More than 80 percent of patents do not include women. This
gap is likely because of the unrepresentation in the science,
technology, engineering, and math fields. GDP per capita could
rise up to 3.3 percent with the inclusion of more women and
African-Americans in the initial stage of the process of
innovation. Congress must address the inclusion of
unrepresented groups to allow for additional small business
growth.
This hearing will allow Committee members to hear from
entrepreneurs on opportunities for growth in the digital
technology industry and to understand what additional measures
are needed to ensure their long-term success.
I thank our witnesses for being here, and I yield back the
balance of my time. And I thank the Chairman.
Chairman CHABOT. Thank you very much. The gentleman yields
back.
And I will now announce that if Committee members have
opening statements prepared, that they be submitted for the
record.
Without objection, so ordered.
And I would like to take just a moment to explain our
lighting and timing rules. Basically, pretty simple. We operate
under the 5-minute rule. You all get 5 minutes. We all get 5
minutes to ask questions, and there are some lights to assist
you. The green light will be on for 4 minutes and then the
yellow light will come on to let you know you have a minute to
wrap up. And then the red light means stop. So you do not have
to stop midsentence, but if you would stay within those
parameters to some degree we would greatly appreciate it.
And I would now like to introduce our distinguished panel
this morning. Our first witness will be Frank Cullen, who is
the Vice President of U.S. Policy at the U.S. Chamber of
Commerce's Global Innovation Policy Center. Mr. Cullen direct
the center's domestic programs in promoting and protecting
intellectual property rights in both the online and physical
markets. He has extensive experience speaking on intellectual
property issues, and we welcome you here today.
Our next witness will be Morgan Reed, who is the President
of ACT, the App Association, a trade association representing
over 5,000 app makers and tech companies. Mr. Reed specializes
in intellectual property, security, privacy, connected health,
digital trade, and business development. He also has experience
as a coder and business owner and has testified before Congress
in the past. And we welcome you here, Mr. Reed.
And our third witness will be Christopher Mohr, who is the
Vice President for Intellectual Property and General Counsel at
the Software and Information Industry Association, or SIIA.
SIIA represents over 800 companies in the software and
information industries. Mr. Mohr acts as SIIA's chief legal
officer and principal spokesperson on intellectual property
issues and has appeared before legislative, judicial, and
administrative bodies on intellectual property issues,
including the Supreme Court of the United States. So we welcome
you here, Mr. Mohr.
And I would now yield to the acting Ranking Member for the
purpose of introducing our fourth and final witness.
Mr. EVANS. Thank you again, Mr. Chairman.
It is my pleasure to introduce Mr. Christopher Israel,
executive director of the Alliance for U.S. Startups and
Inventors for Jobs, a coalition of inventors, startups, and
research businesses that depend on patents. Prior to his role,
Mr. Israel served as the U.S. coordinator for international IP
enforcement and also served at the Commerce Department. He
received his B.A. from the University of Kansas and his M.A.
from George Washington University. I welcome Mr. Israel.
Thank you, Mr. Chair.
Chairman CHABOT. Thank you very much.
And Mr. Cullen, you are recognized for 5 minutes.
STATEMENTS OF FRANK CULLEN, VICE PRESIDENT OF U.S. POLICY, THE
GLOBAL INNOVATION POLICY CENTER, U.S. CHAMBER OF COMMERCE;
MORGAN REED, PRESIDENT, ACT, THE APP ASSOCIATION; CHRISTOPHER
MOHR, VICE PRESIDENT FOR INTELLECTUAL PROPERTY AND GENERAL
COUNSEL, SOFTWARE & INFORMATION INDUSTRY ASSOCIATION; CHRIS
ISRAEL, EXECUTIVE DIRECTOR, ALLIANCE FOR U.S. STARTUPS &
INVENTORS FOR JOBS
STATEMENT OF FRANK CULLEN
Mr. CULLEN. Thank you, Mr. Chairman. And also, I want to
thank the Ranking Member Velazquez for the opportunity to
testify at this important hearing.
The U.S. Chamber of Commerce's Global Innovation Policy
Center is working around the world to champion intellectual
property rights that are vital to creating jobs, saving lives,
advancing global economic growth, and generating breakthrough
solutions to global challenges.
The U.S. Chamber of Commerce is the world's largest
business federation, and more than 96 percent of our member
companies are small businesses with fewer than 100 employees.
As members of this Committee know well, small businesses
employ more than half of all Americans, and the Chamber is
proud to represent millions of these businesses.
Intellectual property, or IP as I think you all well know,
is an umbrella term covering copyright, patent, trademark, and
trade secrets. It is often the secret sauce that gives a new
up-and-coming company its competitive edge. The loss of that
edge through theft or other appropriation invites unfair
competition that can devastate even the largest company, much
less a small one.
The critical importance of IP was recognized in the
Constitution where Article I, Section 8, Clause 8 provided that
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.''
Now, this set forth the fundamental policy approach that
has undergirded America's rise to the largest economy in the
world. This formula is straightforward: allow authors and
inventors to own the intellectual property rights over their
creations and inventions and they will have an incentive to
create, invent, and distribute to the benefit of all.
This formula is as true today as it has ever been. Yet, any
commercial project carries the risk it will fail or not become
commercially successful. And of course, there is the added risk
that even if successful, copycats may attempt to free ride on
the work of others and offer fake products at an artificially
low price. This is precisely the form of unfair competition
that IP protections are designed to prevent.
As Steve Jobs said, from the earliest days of Apple, ``I
realized that we thrived when we created intellectual property.
If it were not protected, there would be on incentive for us to
make new software or product designs.''
And it is worth noting that Apple, like so many other small
businesses, started with an idea and the creative genius of two
young inventors working in their garage.
By allowing innovators and creators the opportunity to run
a business on their talent and ingenuity, IP rights drive U.S.
competitiveness and economic growth. The Chairman noted the
impressive economic numbers. The Department of Commerce
estimates that more than half of our exports, $842 billion, and
almost 40 percent of all U.S. GDP can be directly tied to IP-
intensive industries.
And for the past 6 years, GIPC has published an annual
International IP Index. As we look over the course of our
report, we see one clear pattern: strong IP environments tend
to enjoy greater levels of research and innovation output. And
as a top-scorer in its overall IP system, the United States has
a competitive advantage over other countries.
Now, every market requires equitable rules, but an
environment of overbearing regulation can strangle business
growth, especially for small businesses with lightly and
tightly limited resources. A marketplace that has no rules
invites abuse and theft to the detriment of businesses and
consumers alike.
As former Fed chair Alan Greenspan said, ``Market economies
require rules of law.'' A system of intellectual property
protections is one of the reasonable rules that creates an
environment of fairness and promotes innovation and job growth.
Free trade agreements can also provide protections of IP
rights for small business owners, creators, and inventors.
Now, in the digital environment and the technology that
accompanies it, we have seen a great enhancement of the ability
of businesses to connect with their customers far beyond the
reach previously thought possible. They have provided new media
for creative expression and new tools for innovators. However,
this technology can be a double-edged sword.
While thousands of small businesses now have the
opportunity to compete in the global marketplace, they are at
risk of having their products ripped off by unscrupulous
criminals.
So one of the problems we have as the Chairman alluded to
is that most small businesses when they start out do not factor
IP protection or an IP strategy into their business plan. They
need to have education about these fundamental forums of IP
protections and how copyright, patents, trademarks, trade
secrets can really benefit them.
Obviously, we understand that we are doing business in the
online environment and there are threats from counterfeiters.
It not only affects a small businessman but it also potentially
affects consumers. So it is important that the brand that has
been established in a new up-and-coming company is not
undermined by either the theft or by subpar products being put
into the marketplace by criminal elements. Because when that
brand is really reduced in terms of its value, it hurts both
the company and ultimately the consumer's access to new
products.
Obviously, I have additional information in my written
testimony, and I welcome the Committee's questions. Thanks
again for this opportunity to testify.
Chairman CHABOT. Thank you very much.
Mr. Reed, you are recognized for 5 minutes.
STATEMENT OF MORGAN REED
Mr. REED. Chairman Chabot, Ranking Member Evans, and
distinguished members of the Committee, my name is Morgan Reed,
and I am the president of The App Association, a trade
association representing more than 5,000 app makers and
connected device companies in a $950 billion industry.
The app economy employs 4.7 million Americans and is
outpacing nearly every other sector of the economy. In fact, we
have over 500,000 open jobs waiting to be filled.
As our 2018 state of the app economy report, which you all
have, shows, smartphones are the single most rapidly adopted
technology in world history. Device ownership grew from 0 to
3.4 billion people in just a decade.
The broad reach of cloud plus mobile structure creates the
conditions for rapid adoption and gives our member companies in
all 435 congressional districts, including yours, access to
markets around the world.
Let's take a moment to dig into that because it is easy for
everyone to sit on the panel and say, well, we represent a lot
of people, but let's give it some specificity.
So Chairman Chabot, in your district, we have Canned
Spinach Designs. My friend, Andrew Savitz, built a company
there that is a design and development firm, but they have also
built a cool mobile app that allows large companies to offer
discounts and benefits to their employees that they can pass on
to their family.
Congressman Evans, in your district we have NEAT. NEAT
extracts key information from your receipts and documents and
integrates it with popular accounting and business software.
Congressman Luetkemeyer, in your district we have got CSPI.
They do online banking services and they tie in the ability to
take that picture of your check and they tie it back to your
mobile app. That is the company that helps make that all
possible.
Congresswoman Adams, in your district we have my friend,
Douglas McDowell, who runs a company called Century One. They
allow Microsoft data professionals to monitor, diagnose, and
optimize the products in the environment and in the cloud for
mobile.
Congressman Schneider, in your district, we have got
Pathfinder. They are a health company, one of my favorite
technologies that incorporates mobile tech, and they are doing
it for both small and large companies.
Congressman Kelly, Next Gear Solutions, great product. They
have built a mobile app that helps people who go in and solve--
if you have a house that has had a fire or a flood, they are
building the mobile app that allows the onsite professional to
take pictures, instantaneously take notes, figure out how to
resolve the problem, fix your house, get your family back in as
quickly as possible.
Congressman Marshall, we have got Media Dime Solutions that
builds a ton of mobile apps. They are in the Kansas First. They
do website and graphics as well.
I have folks for everybody here, but as I am looking at my
clock, I figure I would shorten it up a little bit and say that
is the reality of the world we are living in. We are here to
talk IP. That IP is not just in Silicon Valley. It is in every
single one of your districts.
And a big part of that comes from the IP protections that
are available. Our member companies not only rely just on
copyright but also patents, trademarks, and trade secrets. And
I would like to thank all of your for your support of the trade
secret acts that passed last year.
One of the things to understand is how does it matter?
Software is especially dependent on copyright. I know members
of the Committee here are well aware of music and movie piracy,
and that anti-copyright voices claim the problem is with the
business model of copyright holders.
For my members they have heard, if you provide the app for
free, nobody can steal it. I am here tell you today that free
is not cheap enough. No matter what business or pricing model
our members choose, piracy still occurs.
You might be thinking, how is that even possible? How do
you steal a free app? Well, I will tell you.
One of our members had--one of their apps was downloaded
160,000 times for their free app. And yet, none of the revenue
came to him. Well, free apps are usually monetized through
advertising. In this case, a pirate took his app, moved it to a
different ad network that fed the money back to the thief, not
our member. To make matters worse, our member's app featured
video components, so every time it was viewed through the
pirated version of the app, our member was charged by his
hosting service. Essentially, he was paying for the privilege
to be robbed.
Beyond copyright, I want to talk for a moment about the
importance of patents to our companies and their beneficiaries.
We have members who have patents but all of our members depend
on patented technologies.
I know many of my panelists will be talking about the
USPTO, but I want to take a moment to talk about standards.
Over the past 20 years, the United States has led the way in
protecting IP and preserving fair, reasonable, and
nondiscriminatory licensing terms for standards that allow
companies to make innovations. Standards create the foundation
for technology advancements and interoperability competing
products while still maintaining fair, reasonable, and
nondiscriminatory paths to compensation. We need to preserve a
strong, voluntary standard system to ensure that entrepreneurs
can create the next great innovation on top of those great
standards.
Small businesses benefit the most from an effective
standard system because it enables them to specialize and go
head-to-head with big companies.
We urge members of the Committee to support the current
voluntary standard system and the balance it strikes for IP
rights holders.
I thank you for the hearing and look forward to your
questions.
Chairman CHABOT. Thank you very much.
Mr. Mohr, you are recognized for 5 minutes.
STATEMENT OF CHRISTOPHER MOHR
Mr. MOHR. Thank you, Mr. Chairman.
Mr. Chairman, Ranking Members of the Committee, on behalf
of SIIA, thank you for the opportunity to appear today.
SIIA is the principal trade association of the software and
information industries. We represent over 700 companies that
develop and market software and digital content for business,
education, and consumers.
IP is at the core of SIIA's mission, and the association
was founded on advocating for and enforcing its members'
intellectual property rights. That priority has remained even
as we have grown to represent 800-plus members, including
software and cloud companies, financial information and
database providers, educational technology companies, and
online publishers.
Some of our member companies were born digital. They
created and designed their business model for the internet.
Others either have or are transitioning from an analog
existence to an online one. Some members fund innovation by
selling subscriptions. Others fund it by advertising. Others
fund it by selling copies.
For all of our members, intellectual property and the
integrity of that property has always been at the core of what
they do, and it is growing in importance for all of our member
businesses, especially the small ones.
The pace of innovation is accelerating. Patents continue to
be granted in record numbers. It took over 200 years for the
United States to issue 9 million patents. It took 3 years to
get to 10 million. That growth trend is reflected all over the
country.
For example, according to PTO statistics, in your home
state of Ohio, there were approximately 108,000 utility patents
granted in the years between 1963 and 2002. Between 2003 and
2015, about half that time, there have been 150,000 utility
patents granted.
According to statistics compiled by the Copyright Alliance,
Ohio's residents have registered about 76,000 copyrights. There
seems to be an IP deluge, not a drought.
And that flood of innovation has been good for software and
technology businesses of all stripes.
In your home state, Mr. Chairman, again, these are
according to Copyright Alliance stats, the software industry
supported nearly 80,000 jobs and contributed $13 billion to the
Nation's GDP.
And that has bled through to R&D. Since the Supreme Court's
software patent decision in 2014, R&D spending for software
grew at a 27 percent rate, faster than the growth of all other
industries, at least between 2014 and 2015.
For software and services, there are estimates that the R&D
spending will grow to be about 24 percent of all R&D by 2020.
And since 2014, the number of jobs created by software
developers has increased 14 percent.
That is a very convoluted and probably over-statistical way
of saying that Congress should be taking a bit of a victory
lap.
The IP laws created by Congress are the engine that drives
innovation, and from the standpoint of SIIA members, whether
you are talking about copyrights, trademarks, patents, or trade
secrets, that engine is purring. These laws are working to
incentivize invention in the creation of expressive works while
preventing acts of unfair competition against businesses small
and large.
From a patent standpoint, the AIA, combined with the
Supreme Court's decision in Alice, has helped to mitigate the
still existing problem of patent litigation abuse. Bills like
the one that you passed yesterday and your BIG Data for IP Act
also help.
SIIA opposes rolling back either of these improvements,
especially given the deluge of patents and growth in the
software industry that is occurring under existing law.
With respected to copyrights, the substance of the law is
working well, but administrative improvements would improve
small business access, specifically by modernizing the
Copyright Office.
On the whole, it is our view that current law is working
very well.
Thank you again for the opportunity to appear before you
today, and I look forward to the Committee's questions.
Chairman CHABOT. Thank you very much.
Mr. Israel, you are recognized for 5 minutes.
STATEMENT OF CHRISTOPHER ISRAEL
Mr. ISRAEL. Thank you, Mr. Chairman.
I would like to thank you and Ranking Member Velazquez, Mr.
Evans, members of the Committee, for this opportunity to be
here today.
I tis an honor to participate in this important hearing
focused on the role of intellectual property in supporting
small business development and growth.
I am here on behalf of the Alliance for U.S. Startups and
Inventors for Jobs (USIJ). USIJ is a coalition of over 30
startup companies and their affiliated executives, inventors,
investors that depend on reliable patent protection as a
foundation for their business.
It is difficult and perilous to start a new company from
scratch. For companies built around a new inventory or
committed to solving a complex problem, it also requires
investors with a very strong appetite for risk.
The U.S. patient system is designed to incentivize and
reward this risk.
Unfortunately, over the past 15 years, we have seen the
foundations of the U.S. patent system eroded by court decisions
and changes in U.S. law. This has resulted in the U.S. falling
form number one to number 12 in terms of IP strength according
to the U.S. Chamber.
We believe there is a very strong correlation between the
patent system and the willingness of entrepreneurs and
investors to take risks on big breakthroughs and complex
problems. USIJ is releasing today the results of a study we
conducted on the trends in venture capital investment from 2004
to 2017, which I have included in my testimony.
I will touch on a few of the key conclusions and offer some
recommendations on how Congress can the administration PTO can
strengthen the U.S. patent system to better support startups in
key tech sectors.
To be clear, not all small businesses and startups depend
on patents for their success. Many do not, and some even find
patents a burden. But companies that invest heavily in R&D to
create breakthroughs in strategically critical technologies do
depend on patents to protect them from predatory behavior of
would-be competitors anxious to copy any new product or
technology once it is proven workable.
As the U.S. patent system has slipped from the strongest in
the world to number 12, we have seen the elimination of
injunctive relief for patent owners, significant limitations on
the ability of inventors to even obtain patents in key areas of
life sciences and software, and a procedure at the U.S. Patent
and Trademark Office that allows an open-ended opportunity for
anyone to challenge any valid U.S. patent multiple times and
often without any business reason for doing so.
So how is the market reacting to all of this? As you might
expect in some ways, even though total venture capital in the
United States has increased nearly fourfold over the last 15
years, the portion committed to small businesses and important
technology sectors has declined significantly.
In 2004, 21 percent of all venture capital funding in the
United States went to the following strategic patent-intensive
sectors: internet networking, wireless communications,
semiconductors, drug discovery, and medical devices. In 2017,
only 3.2 percent of venture capital funding in the U.S. went to
these sectors.
So who are the beneficiaries of this relative decline in
funding for strategically critical technology? In 2004, 11
percent of all venture capital in the United States went to the
following sectors: social network platforms, business-to-
consumer technologies, financial services, and software apps.
By 2017, 33 percent, 1/3 of all venture capital in the United
States went to these sectors.
While the latter group has certainly led to some
interesting products and services, created a lot of jobs, and
led to some very well-known and ubiquitous global companies,
these are not typically the sectors that are generally
investing heavily to push the outer boundaries of science and
technology to remain competitive in the global market.
These declines are fairly shocking unless one believes that
the U.S. can maintain its technological leadership with minimal
investment in startups that are working in the areas of new
drug discovery, networking equipment, cybersecurity, AI,
medical devices, biotech, semiconductors, computer hardware,
and a host of other core industrial sectors, while 1/3 of the
funding for new companies in the United States goes to apps,
social media, and online shopping and banking platforms.
The good news is that there are some specific things
Congress and the USPTO can do immediately to revitalize the
U.S. patent system for inventive small businesses. These
include passage of the Stronger Patents Act. I would like to
thank Ranking Member Velazquez and Mr. Norman for cosponsoring
that piece of legislation. Providing statutory clarity for
patentability for life sciences and software inventions under
section 101 of the Patent Act.
In addition, PTO can make some needed reforms to change its
post-grant review procedures. We strongly support the pending
rule change to discontinue use of the BRI standard for claim
construction. Patent owners should be allowed reasonable
opportunity to amend their claims during a post-grant review
proceeding. And USPTO should address serial attacks on patents
held by small companies by larger competitors working in
collaboration and with surrogates. This has become a major
problem for technology startups.
Mr. Chairman, I appreciate the opportunity to participate
in this hearing and look forward to all the questions.
Chairman CHABOT. Thank you very much.
And I will now recognize myself to begin the questioning. I
am recognized for 5 minutes.
And I will begin with you, Mr. Cullen. In your experience,
how much information on intellectual property do startups and
small business owners typically need when developing their
companies?
Mr. CULLEN. Well, at the very least, they need to
understand which type of IP is going to be most applicable to
their business. So education about what can benefit them in
terms of their business plan and their product is essential.
Obviously, there are costs associated with IP protections and
that has to be factored into their business plan as well. These
are widely divergent. For instance, at the Copyright Office,
for $55 you can get a copyright, but it is much more expensive
if you are going to see a patent. You are talking thousands of
dollars. So you have to really figure out what is the
appropriate IP for you, what the terms are in terms of how long
that IP protection will last, whether or not it is going to be
relative to your business domestically or abroad, and whether
you, of course, are going to do business in other markets. So
education about all the types of IP that are out there and what
is most applicable to your business model is probably the most
fundamental thing you need to do.
Chairman CHABOT. Thank you very much.
Mr. Reed, I will turn to you next if I can. What are the
best practices to combat online piracy and counterfeiting for
app developers? And also, how do you fix the problem that you
mentioned where the fellow had his free app not only stolen,
but then he is getting charged for every one of its uses and
the thief is getting the advertising revenue as well?
Mr. REED. Well, I think there are a couple of things. And I
want to take a piece of what Frank just opened with. We always
tell the story when we talk to our small business members about
IP and we say it this way, if I walk up to you and I say, who
in your office handles your intellectual property? I always get
a shrug or I am not sure. And if I say to the business owner,
who in your office is in charge of birthdays, they always know
who is in charge of birthdays. And what we say is your IP needs
to be at least as important as who is in charge of birthdays on
the calendar. So build a binder, start collecting everything.
Your employee agreements. Anything else that you are doing.
What are your vendor agreements?
One of the stories we have is one of our members lost $3
million because one of his vendor agreements said that any work
that he did for them was owned by the company that he was doing
the work for. It is a completely reasonable thing. He did not
know it was in his agreement. It cost him $3 million on
acquisition.
So at a minimum, the way I would address your question is
make IP at least as important as birthdays. Know who handles
it, know who is in charge of it, and how you are collecting it.
On to your larger question, on what do we do to protect. We
have actually seen that there have been some real market
improvements by the platforms here in the United States. Apple,
in particular, has done a really good job of allowing our
members to contact them and let them know about an application
that is stolen or pirated or contains pirated content and get
on top of it.
Globally, we still have a larger problem. We see that as an
area of real concern. Around the world, jailbreaking phones or
side loading applications is much more common than it is in the
United States, and that is a real avenue. Unfortunately, it is
also an avenue for 97 percent of the malware that is out there
on mobile devices as well.
So quick answer, platforms are doing a fairly good job.
They can get better. We also work with TAG on the advertising
revenue. The acronym escapes me. It is the group for the
advertisers that works on presenting click fraud and
advertising fraud, but it is a problem that we are all working
on and we are working on together because it is costing us
millions of dollars.
Chairman CHABOT. Thank you very much.
Mr. Mohr, I will turn to you next. How important is it for
software companies to have intellectual property protections?
And which protections would you consider to be the most
important for your members?
Mr. MOHR. It is critical. There are two, I think, that are
most important. And that would be copyright and patent. And we
have been historically extremely involved in enforcing our
members' rights against pirates. And I think to riff off of
what my friend just got into, there is another angle to piracy
now because a lot of what happens sometimes is that your
relationship with the software company is far more interactive
than it used to be say 15 years ago. It is no longer the case
where you load a CD into your computer and then never think
about it again until you need something better.
Instead, what happens is there is an ongoing relationship
with the software provider. When that software is altered and
pirated, what happens then is the creation of consumer
protection problems. There is intellectual property harm, of
course, when if you are trying to sell copies and someone is
ripping them off, then you have a revenue problem but that
problem is internal to you. There is an external problem now
with people whose data or other information could be
compromised.
The second thing is with respect to patent protection. Our
members have patents. They have many, many, many patents. Their
primary concern is that the system from a defensive standpoint
prevents bad patents from being enforced. And that has two
components, at least, maybe more.
The first component is on the front-end to ensure that
applications are properly examined and good patents are issued.
The second is after issuance, if the PTO makes a mistake that
there would be a procedure by which those patents can be
officially challenged. We believe that procedure exists under
the AIA.
Chairman CHABOT. Thank you. I think I am going to have to
cut you off there because my time has expired. And I apologize
for not getting to you, Mr. Israel.
The gentleman, the Ranking Member, the gentleman from
Pennsylvania is recognized for 5 minutes.
Mr. EVANS. Thank you, Mr. Chairman.
Mr. Israel, women, racial minorities, and low-income
individuals seem to be significantly underrepresented in the
innovation ecosystem. This is extraordinarily alarming as these
individuals will face challenges in other areas of business
capital. What steps should Congress take to help narrow the
gaps?
Mr. ISRAEL. Thank you, Mr. Evans. It is a great question,
and we would look forward to and welcome any opportunity to
work with you and your colleagues to address it. We have got
some really groundbreaking women members of our organization
who have spent years and years building and creating companies.
So there certainly is a huge opportunity for progress here.
You know, we think, just kind of fundamentally getting back
to the first principal of ensuring that the patent system and
the IP system, we are removing as many barriers as we can to
get as many creative entrepreneurs into the system as possible.
I think working with major universities and research
institutions are such a great source of diversity and
tremendous ideas and entrepreneurs, so I think we have talked
about and would look forward to developing some ideas. Maybe
working with larger research institutions and universities in
every state in the country to help accelerate some of that
integration of women and minority entrepreneurs and match them
up with the venture capital and the support that they need to
build great companies.
Mr. EVANS. To you, Mr. Reed or Mr. Cullen, specifically,
what can Congress do? Tell me what you think Congress can do.
Mr. REED. I will give you a couple of examples. As I said
in my opening testimony, we have 500,000 unfilled jobs.
Unfilled. Not prospective, not hopeful, jobs that we do not
have people for. So specifically, we see there are two items
that we have been working on. One is we have got to get the K-
12 education around this area earlier on. We would love to see
a grant program, even a low dollar one, that helps to open the
door so that when my members who want to donate time to educate
students have a pathway into a school--right now when you knock
on the door to say, hi, I am here to teach computer science,
there is not even a person to talk to. You talk to the vice
principal and they say, well, we do not even have any way to
even incorporate you into our curriculum. So there is the
potential for a small, low dollar grant from the Department of
Education to help those schools bring in the entrepreneurs, my
members, and Chris's, into those schools.
The second area is my membership, we recently had 50 CEOs
come to D.C. Many of them visited you. And I did a survey of
the room and I said, how many of you are currently employing
people who do not work in your office? One hundred percent. We
had 100 percent of my members currently have employees that are
not in their main office. And so that gets into issues around
broadband access and how do we better utilize spectrum, like TV
white spaces so that we can actually have people in other
places.
I testified in another hearing with a gentleman from
Mississippi where he was training coders in Mississippi. And I
said to him then and I would say it now, if you train the
people and give them the talent, if they have got broadband, I
will employ them.
So when you ask the question of what Congress can do, we
need better help on the education side and we need to make sure
that spectrum is available for broadband in places that do not
naturally have it. They are either rural or low income, and
let's make that change.
Mr. EVANS. Mr. Cullen?
Mr. CULLEN. Thank you, Mr. Evans. And as my colleague said,
it is a great question.
Certainly, I echo what my colleagues have said on the
panel. Education is key, and we certainly commend the Committee
for its work in passing important legislation this week which
provides resources to USPTO and more resources to agencies such
as the SBA and others to develop programs that can reach out to
undeserved individuals who are trying to start businesses and
really have the opportunity to employ Americans. So from our
standpoint, we very strongly support legislation that provides
those resources, whether it is in education or it is at
agencies such as the USPTO or Small Business Committee, and we
think we need to see more of that.
Mr. EVANS. I am going to stop with you real quick. I have
only got like 51 seconds and this is for the panel.
We have heard conflicting information regarding the health
of our Nation's existing patent system. How do we reconcile
these views and balance the needs of truly innovative firms on
both sides of the issue?
Mr. CULLEN. Well, we believe that innovation is driven when
you have a strong IP system. It helps support it and drive it.
And clearly, you need to have clarity in the patent system and
you need to have a patent system that really is going to work
for the inventors and the folks who really have to be able to
assert those rights. From our standpoint, we think that
predictability and a clear patent system is the most important.
Mr. MOHR. I think given the 9 seconds, 8 seconds left, as I
said in my opening testimony, we want to make sure that the
standard system is preserved and the intellectual property
within the standard system both correctly rewards the people
who invent it but also makes it a pathway to be used by
everyone.
Mr. EVANS. Thank you, Mr. Chairman.
Chairman CHABOT. Thank you very much.
The gentleman's time has expired.
The gentleman from Missouri, Mr. Luetkemeyer, who is Vice
Chairman of this Committee, is recognized for 5 minutes.
Mr. LUETKEMEYER. Thank you, Mr. Chairman.
Mr. Reed, I appreciate the shout out to CSPI. I actually
know those gentleman personally. We actually are a customer of
theirs. They are a true American dream story. They are three
guys who started out as Burrows Repair, office repairmen, and
Burrows decided to contract out the repair work and they became
their own little company to contract with Burrows and then they
went off and developed this product and now they are nationwide
and mega, mega, mega millionaires. So I am in the wrong
business, obviously. But thank you for that.
One of the questions I have got is with regard to, you
know, the administration is concerned right now with trade, and
one of the things that is involved in trade is protection of
intellectual property. I know Mr. Reed, you talked about it a
little bit, and then Mr. Cullen, you talked about it a little
bit in your testimony, what are other countries doing to
protect their inventors, their copyright stuff that is
different from ours that we could use to help us, help our
people? And how do we protect our people here from what is
going on in the international little world of espionage here to
go take our intellectual property where we--I do not know what
the percentage is but I am sure we do most of it here in this
country versus everybody else?
Mr. CULLEN. Well, thank you again for the question. It is
an excellent one. Obviously, more needs to be done across the
board and globally. American does lead. Our IP that the Chamber
releases shows quite clearly the benefits of a strong IP
system.
Now, you have seen different types of IP protections in
different types of countries. Some of the things we do here in
the United States vary a little bit. We have in the past looked
at different ways to protect copyright in the online
environment. Other countries have taken stronger measures to
protect copyright in the online environment, such as in Great
Britain and in other markets.
Mr. LUETKEMEYER. Should we not be taking a lead like that
or are they off the charts with the way they are doing it?
Mr. CULLEN. Yeah. We are not advocating legislation. What
we are saying is that there is still a significant problem that
needs to be addressed. Some of this can be addressed through
voluntary agreements between businesses and some of this can be
addressed through simply educating consumers about what other
legal choices are available to them. But when it comes to
actual IP protections, one of the things we stress is that in
our index you will see the clear benefit to having an overall
strong IP system that covers the broad range of IP, and we
would suggest that countries that have that type of system in
place will be the most innovative.
Mr. LUETKEMEYER. Mr. Reed?
Mr. REED. I will echo mostly what Frank said. I think one
of the interesting parts that you saw all of us look at each
other when you asked that question, because it is an
interesting formation of a question we had not really thought
about. Because the United States is such a leader on
intellectual property, on trade, we tend to be the people in
the room saying how do we do the most for Americans, and the
rest of the world tends to be saying, well, you know, let's
find some soft edges.
Now, that is not always true as Frank pointed out. In
Europe, we see that there are some systems there where they are
definitely adopting a stronger position. I think the part that
makes it really interesting is how do we execute on what you
described but make sure that we are not running into a
situation where we create barriers. Because the reality is that
the one place the United States has a trade surplus with every
Nation in the world is in IP. And so we are always tentative
about adopting the ideas of other countries if they are only
adopting that kind of protection in order to squeeze out
American competition.
So we sit in an interesting catbird seat when it comes to
IP. We are better than everyone else at it and we want to stay
that way, and so figuring out, how do we continue to innovative
is going to be a critical part of it. And let's not make sure
we fall into a case where they squeeze us out of opportunity.
Mr. LUETKEMEYER. Yes?
Mr. CULLEN. Just one last point. Free trade agreements can
also play a significant role with strong IP chapters in terms
of aligning IP protections.
Mr. LUETKEMEYER. I think that is one of the reasons the
administration is looking at these trade agreements, you know,
especially with China trying to steal everything, and also, for
them to actually come in the back door of other countries, I
mean, that is one of the reasons we are trying to get the EU
and Canada and all those other countries at the table to be
able to talk to them about, hey, you know, we need to have you
help us protect our industries and our IP. And it seems to be
that that is a big part of it.
I am about out of time here so I will yield back the
balance of my time, Mr. Chairman.
Chairman CHABOT. Thank you. The gentleman yields back.
The gentlelady from North Carolina, Ms. Adams, who is the
Ranking Member of the Subcommittee on Investigations,
Oversight, and Regulations is recognized for 5 minutes.
Ms. ADAMS. Thank you, Mr. Chairman. And thank you,
gentlemen, for your testimony, and being here today.
Mr. Cullen, as we seek to strengthen the patent system to
better protect our inventors in the global marketplace, I
believe it is equally important that we also strive to
eliminate the gender, racial, and income gaps that currently
exist here in the U.S.
As a first step to address the gender and race gap in
patenting, would it be helpful for the SBA, USPTO, or other
relevant Federal agencies to examine the gender, race, and
income gaps in patenting and their impact on the American
economy, small business development, and entrepreneurship?
Mr. CULLEN. Thank you, Congresswoman, for that important
question. I agree wholeheartedly that anything we can do to
help quantify that situation would be beneficial not only to
those who are seeking opportunity but also to our economy at
large.
I can tell you without reservation that the new director of
the USPTO, Andrei Iancu has embraced, I think, a lot of novel
approaches to strengthening both the USPTO and the patent
system, and I am confident that if you brought that idea to his
staff and his team that he would be willing to take a look at
that, and I think it is a very important initiative.
Ms. ADAMS. All right. Thank you very much.
Mr. Israel, a recent study found that obtaining a first
patent plays a huge role in helping startups secure venture
capital and other financial investments. In fact, startups that
obtain their first patent are 33 percent more likely to obtain
venture capital funding than startups that do not receive a
patent at all. It is especially true for startups that had not
already attracted significant investment prior to receiving the
patent and companies with experienced founders and startups
located outside of the geographic areas that traditionally
attract investors like Silicon Valley. So can you comment on
these findings and give us your opinion about what Congress can
do to ensure that the patent system is accessible to
underserved populations of entrepreneurs?
Mr. ISRAEL. Thank you, Ms. Adams. It is a great question
and those statistics are well known and borne out in reality,
and we can certainly provide specific examples of them. It is,
as you say, a key indicator of the ability of a young company,
particularly in a research and development intensive sector,
life sciences, heavy technology, whether or not they are going
to be able to secure the type of funding they need if they have
got a strong patent portfolio. The types of companies that we
work with and we see close up are the types that need anywhere
from $100 to $250 million sometimes of venture funding to see
their way through that initial idea all the way through to
getting it to market and becoming a viable company.
So if we are as a Nation in the business of leading in
these big areas that require a lot of heavy research and
development, we need a strong patent system that maps up to it
and that allows those inventors to get the resources they need.
So as I noted in my testimony, I believe we are actually
falling short in a few key areas. When we have seen it in the
trend lines in venture capital and where it is going and the
inability of companies to get the patents that they need and
secure the funding that they need. So we think it is essential
that Congress step in and take up the question of
patentability. Under section 101 under the Patent Act in areas
like software and life sciences, the courts in some recent
decisions have created some uncertainty there. We think it is
critical that the Patent and Trademark Office, and I know
Director Iancu is considering a number of reforms, look at some
changes to correct how easy it is frankly for patents to be
challenged, particularly by large companies against small
startups who have patent portfolios, so this post-grant system
at PTO we believe has become slanted towards and much more easy
for large companies to target small companies and frankly take
their intellectual property out and mitigate its impact in the
marketplace.
So the trend lines are there. The evidence is very clear
that if you have a strong patent portfolio, you have to have
that if you are going to address investors and expect them to
put a risk and take a risk with you in your company. That is a
very true thing. And we think it is also true that
unfortunately we have slipped in some of the areas that allow
those small companies and startups to protect their
intellectual property to give those assurances to the investors
that they are working with.
Ms. ADAMS. Thank you, sir.
Mr. Chair, I yield back.
Chairman CHABOT. Thank you very much. The gentlelady yields
back.
And the gentleman from Virginia, Mr. Brat, who is the
Chairman of the Subcommittee on Economic Growth, Tax, and
Capital Access is recognized for 5 minutes.
Mr. BRAT. Thank you, Mr. Chairman. Thank you all for being
here with us today.
I had a breakfast meeting today on China and North Korea,
and had an expert speaker come to us. You know, we are all
debating playing eight-dimensional chess with many complex
issues at the global level. And I said, what is the most
serious? Right? The South Sea Islands, the military buildup,
the tariff piece from China or intellectual property? He said,
intellectual property. Most significant issue. And he said,
look at what we are exporting to China. And we are losing our
competitive advantage in intellectual property, relatively
speaking, not absolutely.
And so I just want your take. Today we are discussing sort
of micro-level issues on theft, privacy, et cetera. But if you
can each just weigh very briefly in on the connections you see
between the global economic competitive environment and the
micro issues. I mean, are they related? How are they related in
your minds? I would just love to hear the experts weigh in on
the relationship between the Chinese stealing intellectual
property. Does that manifest itself in what we are talking
about today? And if so, how do you see that?
We can start with Mr. Cullen and work on down.
Mr. CULLEN. Thank you, Congressman. I appreciate the
question.
It has a huge impact. It has a huge impact on small
businesses who are having their products counterfeited, or
folks, songwriters who are having their music pirated. So from
our standpoint, we certainly have concerns about what is
happening with the theft of intellectual property. Almost 90
percent of counterfeited goods come out of China and Hong Kong.
So this has a huge impact, not only on all these companies but
on the jobs they create. So we are deeply concerned.
GIPC has a dedicated program working with China. I would
like to point out that one of the things we have to look at is
the overall situation in China, not just how it is impacting
us, and how we can help them move from essentially a
counterfeit economy to a different type of model. And so from
our standpoint, we are going to continue to work with our
counterparts in China. There are some successes in law
enforcement and other areas, but it is very tough sledding.
Mr. REED. I am going to take a page, since he said a lot of
the key things, I think one of the things that is important for
everyone here to understand is that my smallest member is an
international player. If I think about Ann Adair, in Tampa,
Florida, she is a tiny developer shop, and yet she has tens of
thousands, and even hundreds of thousands of customers around
the world, including in China.
So one of the key elements that plays in this, all of what
Frank said is critical, but we have to remember that what we
are really looking for is, how do small businesses have access
to that market? How do we help China get to the point where we
are selling in to them? Because they want our apps. We know
they want our apps because they are stealing them when it
happens. But the point is there is demand, there is value,
there is creation that exists there. And so I think what we are
really looking for is how do we move to the state where the
United States and our innovators and our small businesses are
able to compete and provide products? Because that is the real
growth possibility.
Mr. MOHR. Just quickly, trying not to repeat what everybody
else said because I think we would be in agreement with all of
it, I think what you see is if you have particular economies or
particular cultures in which those property rights are not
respected on a micro level, on a macro level you are going to
have problems. And that is exactly what is happening. There are
many tools that you have to use to change that perception. But
that is a big problem with a lot of moving parts let's say.
Mr. BRAT. And if you guys want to help give us input on
those tools----
Chairman CHABOT. Could you turn your mic on, please?
Mr. BRAT. Sorry, guys.
The gentleman this morning said we are not pushing hard
enough. China is also using our banking system to launder money
through; right? And we punched them a couple time, small banks.
And we have tremendous leverage there.
Some of the tariff legislation right now is actually
written through the section having to do with intellectual
property. It is not just a tariff policy. It is through
intellectual property, and I do not think that has gotten out.
So if you all can weigh in and give us some input as a
Committee in writing following this, what the levers that will
be most effective to help the industry and help American
workers, that would be great.
And finally, Mr. Israel, sorry.
Mr. ISRAEL. Congressman, appreciate that. And having spent
some time with the U.S. government working on this issue, I
welcome the chance to work with you.
I think two fundamental things are true at a very high
level. I think, as I have stated, I think over the past decade
or so we have in a number of ways systemically weakened the
U.S. patent system. Some of it has been in pursuit of wringing
out litigation abuses and patent trolls, but the reality is we
have a weaker patent system today than we did a decade ago.
I also believe at a very fundamental level, the Chinese
through their China 2025 strategy, which you probably spoke
quite a bit about this morning, are strategically and
tactically targeting dominance in the most critical technology
sectors that exist today--artificial intelligence, robotics,
life sciences. You go down the list. Computer networking,
wireless. Those are exactly the sectors that the United States
needs to have a very strong patent system in order to
incentivize the best and brightest entrepreneurs we are going
to need, the type of investments we are going to need, and the
type of strong companies that we are going to have to create to
compete with the Chinese who are coming at us with everything
they have got. Not all the good ideas and not all the best
breakthroughs are going to come from big, large, multinational
corporations. A lot of them, most of them, are going to come
from small companies with creative ideas that need a lot of
resources and need strong patents.
Chairman CHABOT. The gentleman's time has expired.
The gentleman from Iowa, Mr. King, is recognized for 5
minutes.
Mr. KING. Thank you, Mr. Chairman. I appreciate this
hearing and the witnesses' testimony.
I would first turn to Mr. Israel. You said that our patent
system protection is less than it was 10 years ago, and I
agree. Could you identify why that is the case?
Mr. ISRAEL. Thank you, Congressman.
We have talked about a few of them this morning. As I
noted, there have been some court cases that have made it
extremely difficult and very unpredictable to get patents, for
instance, in the software sector and the life sciences sector,
and there is some work going on to examine that.
Mr. KING. If I could, I am particularly interested in your
view on the change that was made in patent law to shift from
first to invent to first to file. How has that impacted our
patent protection?
Mr. ISRAEL. Well, I mean, it has brought us in line with
global norms, but it has certainly put more pressure on small
inventors to demonstrate to the patent office the validity and
the strength of their patent. I would say in addition to that,
a very big burden and challenge and obstacle that has been
placed on small companies in particular is the post-grant
review, so kind of the after-the-fact challenge system that
exists at PTO that once you have a valid patent, as a company
or as an inventor, you are pretty much--there is an open-ended
ability to for anyone to come forward from anywhere in the
world, really, and challenge those patents almost endlessly.
And we see----
Mr. KING. Well, the scenario works out like this. If you
are a garage or a home shop inventor, you generate the idea and
then you do not have a very good system to go ahead and apply
for the patent, and so the chance of a leak or a theft of that
intellectual property being filed by a larger company that has
got the network to do that happens more often than it did
before. And then, even if you file, you are still subject to
the litigation coming back at you from the other way. So, it
advantages the large operations that have the administrative
network and the skillsets and disadvantages the small. Would
that be a fair analysis?
Mr. ISRAEL. We believe that to be true. That oftentimes you
will see small companies that have breakthrough technologies,
as soon as they are ready to go to market, they are targeted by
larger competitors in the post-grant review process at the PTO.
Mr. KING. Thank you, Mr. Israel.
And I turn to Mr. Cullen. I noted that you said we needed
help to help China in particular move from the counterfeit
economy. I like the phrase ``counterfeit economy.'' They have a
substantial counterfeit economy. And then a lot of small things
along the way as I listened to this. But I did not hear any big
ideas. I heard a little law enforcement here. I have been over
there to beat on the Chinese and talk to them about what are
you actually doing? And they assure us that they are bringing
civil actions against the IP pirates that are active over
there. And I say, hey, that is fine. What happens? Well, we
fine them. And then once you fine them, who collects the money?
Well, the government does. And they put it in their other
pocket, because a lot of those are government-owned companies.
And I said, is anybody getting any criminal charges against
them? Well, one. Is he in jail yet? No. Or maybe not was more
like the answer. It was not a straight answer.
So I will bring it to this. Sitting there in the third city
meeting in China--it happened to have been in Beijing--it
occurred to me that each one of those meetings was exactly the
same script. And sometimes it is not that inscrutable. It came
to me that their business model was we are going to steal your
intellectual property. And then as a cost of doing business,
part of their overhead is to wine and dine Americans that come
over there to complain. But they never intend to do anything
about it because they are getting rich off of the theft of our
IP. In fact, it is a multibillion dollar strategic effort to
steal the creativity of America. And those numbers range
someplace between $250 billion a year and up to $600 billion a
year, depending on whose estimates are there.
So from that meeting sitting over there, I am sure the
Chinese hacked my email off my BlackBerry, but I wrote it
sitting at the table and it was this: Draft a bill that directs
a U.S. trade representative to conduct a study to determine the
value of intellectual property theft stolen by the Chinese and
apply a duty to all Chinese products coming to America in an
amount equivalent to recover that loss, plus an administrative
fee, and then distribute those proceeds to the rightful
property rights owners. That is H.R. 1048.
Now, I want to ask you, Mr. Cullen, do you believe your
organization could support a bill, such a bill?
Mr. CULLEN. I appreciate that question, Congressman. And
creative approaches to these problems are what we need. I
certainly cannot commit that we will support the bill. I am
more than happy to take a look at it. You know, we have a lot
of engagement with China, and I agree with you. This problem is
so vast that we need to see some tangible results. Our
companies, as Morgan referenced, want to do business and access
that market, but if we are having our intellectual property
stolen, it puts our companies at great risk. So I appreciate
the creative approach but I cannot say we will support the
bill.
Mr. KING. I would like to ask you and Mr. Reed to take this
idea back to your people.
Mr. CULLEN. We shall.
Mr. KING. And contact me with a response on this. And I am
happy to have a meeting and have a discussion to expand this
further because it has gone too far, and Hollywood and
Nashville did not want to touch it 10 years ago but now the
president has this in his hand, so we need to get behind him
and solve this problem. There is too much theft going on of IP
and it is time to do something about it.
So if I asked you to do that, would you say yes, each of
you gentlemen?
Mr. CULLEN. We appreciate the opportunity to commit to it.
Mr. KING. Thank you. And let the record show that Mr. Reed
did as well. He nodded his head and he smiled. I think he
smiled.
Mr. REED. Yes.
Mr. KING. Thank you very much, gentlemen.
Mr. Chairman, I yield back.
Chairman CHABOT. Thank you very much, Mr. King.
Rather than go through the closing statement that I had I
will just conclude with a real short one. Put me on that bill.
Very good. Thank you very much.
And we want to thank the witnesses for their excellent
testimony here today and the great questions from both sides of
the aisle, I think, on all this. It has been very helpful.
I would ask unanimous consent that members have 5
legislative days to submit statements and supporting materials
for the record.
Without objection, so ordered.
And if there is no further business to come before the
Committee, we are adjourned. Thank you very much.
[Whereupon, at 12:07 p.m., the Committee was adjourned.]
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