[House Hearing, 115 Congress]
[From the U.S. Government Publishing Office]


   INNOVATION NATION: HOW SMALL BUSINESSES IN THE DIGITAL TECHNOLOGY 
                   INDUSTRY USE INTELLECTUAL PROPERTY

=======================================================================

                                HEARING

                               BEFORE THE

                      COMMITTEE ON SMALL BUSINESS
                             UNITED STATES
                        HOUSE OF REPRESENTATIVES

                     ONE HUNDRED FIFTEENTH CONGRESS

                             SECOND SESSION

                               __________

                              HEARING HELD
                             JULY 11, 2018

                               __________

[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]                               
                               

            Small Business Committee Document Number 115-083
             Available via the GPO Website: www.govinfo.gov
             
             
                               __________
                               

                    U.S. GOVERNMENT PUBLISHING OFFICE                    
30-697 PDF                  WASHINGTON : 2019                     
          
-----------------------------------------------------------------------------------
For sale by the Superintendent of Documents, U.S. Government Publishing Office, 
http://bookstore.gpo.gov. For more information, contact the GPO Customer Contact Center, 
U.S. Government Publishing Office. Phone 202-512-1800, or 866-512-1800 (toll-free).
E-mail, [email protected]. 
            
             
             
             
             
                   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

                              ----------                              


                        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.]
                            
                            A P P E N D I X

[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

                                 [all]