December 5, 2014

Most Americans think about property as something they own personally or would like to own, such as a home.  They protect their valuables and usually have a good idea of how much their investments and businesses are worth.  But few people realize that the products and services they use are almost always the result of someone’s idea, or intellectual property; nor are they likely to know the value of IP to the economy.  And based on the number of people who merrily and illegally download music and movies or buy knockoffs of brand-name products on the street, many Americans either do not care or do not know the impact of IP theft on either the creative process or the tens of millions of ordinary individuals who participate in that process. 

As legislators, you are all used to numbers, so I would like to mention a few:  Between $8.1 and $9.2 trillion.  Between 55 to 62.5 percent.  Eighty percent.  Fifty-five million.  These numbers are, respectively, the value of intellectual property to the U.S. economy; the percentage of GDP represented by that figure; the percentage of IP in relation to the value of a company’s assets, and the number of IP-related jobs in the states.

When the Founding Fathers included the protection of intellectual property in Article 1, Section 8 of the Constitution, they understood the significance of this critical individual right.  James Madison wrote in Federalist Paper 43 that inventions belong to inventors; copyright of authors is a right of common law, and that the public good is served by the claims of such individuals.

Indeed, IP is the only property right enshrined in the Constitution; personal property is protected in the Bill of Rights.  There is a Patent and Trademark Office and a Copyright Office, but there is no Department of Personal Property. Following the Revolutionary War, every state had its own patent law and every state except Delaware had its own copyright law.  As Madison noted, the states could not separately cover these rights; they had to be addressed by Congress.

While the rights are constitutional, the jobs are state and local.  The Global Intellectual Property Center at the U.S. Chamber of Commerce published a chart of the 55 million IP-related jobs in the states.  Soon after the chart was released, several governors touted the impact of IP jobs.  Kansas Governor Sam Brownback proudly noted that Kansas ranked first in the nation in the overall percentage of private sector jobs supported by intellectual property, with more than 50 percent of the workforce directly or indirectly by IP industries.  Iowa Governor Terry Branstad noted that nearly half of his state’s private sector workers had IP-related jobs.

The importance of IP to the states has also been noted in relation to specific industries.  In 2012, movie and television production companies spent $717 million filming in Louisiana, which is the number one location in the world for those industries.  In 2014, 158 feature film and television productions are being shot in Georgia, the fifth largest location for such activities, generating an economic impact of $5.1 billion to the state.  The Motion Picture Association of America estimates that the motion picture industry alone supports 78,000 jobs that pay a total of $3.8 billion in the state.  In Ohio, the production of Captain America: The First Avenger generated $31 million for 750 vendors.  The MPAA estimates that the film and television industry generates $46 billion in wages and supports 1.9 million jobs around the country.

While the value of IP to the U.S and global economy is clear, it could be even greater if IP rights received greater protection.  According to Frontier Economics, digital piracy costs the global economy $75 billion annually and the G20 governments alone lose about $125 billion annually to counterfeiting and piracy.
 
Unlike the pirates of old who plied their trade on the open seas, today’s pirates operate in the hidden sea of the Internet behind seemingly innocuous websites and hack into computer systems to capture trade secrets in order to produce counterfeit goods or make available stolen material.  Sometimes the thieves are nameless and faceless groups or individuals.  On the other hand, some are well-known or even official, such as the governments of China, Russia, and now North Korea after its apparent hacking of Sony Pictures, supposedly in response to “The Interview,” a movie that portrays two Americans plotting to assassinate Kim Jong Un.
 
Unfortunately, many people who illegally download or share movies, television shows, and music agree with Hana Beshera, one of the founders of Ninja Video, who served 16 months in jail for violating copyright laws.  Even after she got out of jail, Beshera believed that “the movie business is so large that skimming a little off the top doesn’t hurt anybody.”
 
Let’s test that theory.  There were about 4.4 billion illegal downloads of TV shows and movies in the first half of 2014 from peer-to-peer sites.  According to Tru Optik, a media analytics company, that represents more than $12.5 billion in unmonetized demand.  Since the renewal of a television series or a sequel to a movie depends on the number of people who can be counted as viewers, there are serious consequences to this type of IP theft.
 
For example, Netflix’ “The Killing” was renewed twice after fans legally downloaded the program in sufficient numbers to keep it on the air.  One of the show’s producers said that the two extra seasons provided hundreds of jobs, paid for people’s health insurance and pensions, and provided 18 more hours of creative content.  On the other hand, the movie “Kick-Ass 2” was the number one pirated movie of 2013, causing the demise of any additional sequels.  The movie and music industries are fighting back by creating websites that provide links to hundreds of legal outlets to download content.  Law enforcement at the federal, state and local level is also fighting IP theft.  

The need to protect IP and educate taxpayers, consumers, and policy makers about its significant impact on the economy were among the many reasons that Citizens Against Government Waste published “Intellectual Property: Making it Personal” on November 18.  The book includes many examples of how IP theft adversely impacts individual creators and how IPrelated jobs positively impact state and local economies.  

There are two particular individuals who are worth mentioning.  Liz Fields, who attended George Washington University before working for several costume designers, launched her own line of wedding and bridesmaids dresses in 2010.  Before long, counterfeit designs or her products were being sold at a deep discount on unapproved websites.  Over the following three years, she made more than 1,500 requests to take down these fakes dresses; but as soon as one website complied, many others popped up.  By the end of 2013, the cost of attempting to stop the counterfeit sales overwhelmed her business and she was forced to close and license her designs to a large company. 

Ellen Seidler, a Harvard-educated filmmaker and journalism teacher, decided in 2006 to make her own film with a friend, titled “Then Came Lola.”  Seidler maxed out her credit cards and spent $250,000 to make the movie.  She did not have a studio or production company to screen or distribute the film, so she showed it at numerous film festivals to sold-out audiences.  When the DVD of the movie was released in 2010, it was immediately pirated on numerous illegal websites.  Seidler sent more than 56,000 takedown notices, and as a result of the illegal downloads, has made less than a quarter of the revenue she anticipated from the film.  In addition to copyright infringement, there are other ways that intellectual property is being either degraded or stolen. 

For example, in 2012, Australia became the first country to require plain packaging for tobacco products.  As a result, the trademark for the manufacturer does not appear on the side of the package, and the name of the product is significantly smaller than it would normally appear.  The biggest words on the plain-colored package bear stark warnings, such as “Smoking Causes Blindness.”  While the intent of the law was to reduce the number of smokers, it has not had such an impact.  In fact, after plain packaging was implemented, counterfeiting and smuggling increased by 40 percent.  Even worse, the law substantially degrades the trademark. 

Other countries are considering similar laws, not just for tobacco products, but also for alcohol.  One can only imagine what might come next:  candy, salty foods, trucks and SUVs.  While trademarks are obvious and copyrights are easy to understand, the third and perhaps most important area of intellectual property discussed in CAGW’s book is patents.  The first U.S. patent was issued on July 31, 1790, before the U.S. Patent and Trademark Office was established.  It was signed by President George Washington, Attorney General Edmund Randolph, and Secretary of State Thomas Jefferson.  They also signed the other two patents issued in that year.   
 
Since those first three patents were issued, 5.1 million patents have been approved by the U.S. government, including a record 302,948 patents in 2013.  Once a patent is granted, the  owner can use it actively, hold it inactively, license the patent, or use it to pursue claims of infringement against unauthorized users of the patent.  

Licensing patents is a long-established method of deriving value from an invention.  The process is often used by small inventors, research labs, and universities, which may not have the wherewithal to make a product from the invention.  Even large companies have patents that they license rather than develop.  

There are about 2.3 million patents that are considered to be active.  But 95 percent of those patents do not produce a single dollar of licensing revenue.  The potential value of these patents is estimated to be about $1 trillion.  Therefore, unlocking these tangible assets would create added value to the economy and increase innovation.  

While some patent holders have tried to license portfolios of their own patents, these efforts have met with mixed success.  Government-subsidized technology transfer has also failed to produce sufficient results.  In an effort to improve the ability of patent holders to license their patents, several private sector companies have been working on new methods to offer patent licenses at disruptively low prices.  These companies have proprietary formulas that assess the value of a group of related patents and establish a price for licensing them together.  The system is completely voluntary.  It is estimated that increased licensing could add up to $200 billion annually to the economy.  

Finally, while federal agencies generally do a good job of enforcing IP rights, certain decisions by the Federal Trade Commission and practices of the Department of Justice may be giving cover to China and other countries that do not meet international standards of intellectual property rights protection.  For example, China is using its anti-monopoly and antitrust laws to curtail IP rights, citing the FTC and DOJ to help justify such policies.  

The United States must continue to lead the way in promoting and defending IP around the world; of special importance will be its efforts to persuade other nations to adopt strong patent laws.  Every state should continue its own efforts to create and support IP-related jobs, which pay an average wage of more than $50,000 and lead to additional research, development, and innovation.  

As Mark Twain aptly noted in “A Connecticut Yankee in King Arthur’s Court”: “That reminds me to remark, in passing, that the very first official thing I did, in my administration – and it was on the first day of it too – was to start a patent office; for I knew that a country without a patent office and good patents was just a crab, and couldn’t travel any way but sideways or backways.”