This report was published on behalf of The Commission on the Theft of American Intellectual Property by The National Bureau of Asian Research. Published May 2013. © 2013 by The National Bureau of Asian Research. Printed in the United States of America. TABLE OF CONTENTS Acknowledgments iii Dennis C. Blair and Jon M. Huntsman, Jr. Executive Summary 1 Chapter 1 9 The Nature of the Problem Chapter 2 23 Measuring the Scale and Scope of the Loss of Intellectual Property Chapter 3 31 Types of IP Theft Chapter 4 33 Patent Violations Chapter 5 39 Trade-Secret Theft Chapter 6 47 Trademark Violations Chapter 7 51 Copyright Infringement Chapter 8 55 U.S. Government Responses Chapter 9 59 Developments in China Chapter 10 63 Short-term Solutions: Agile Administration Executive Action Chapter 11 73 Medium-term Solutions: Legislative and Legal Reform Chapter 12 77 Long-term Solutions: Capacity-building Chapter 13 79 Cyber Solutions Chapter 14 83 Potential Future Measures 85 About the Commissioners 89 List of Common Abbreviations ii THE IP COMMISSION REPORT ACKNOWLEDGMENTS We present this report to the American people for their consideration. The Commission on the Theft of American Intellectual Property reached consensus on its insights and recommendations after a thorough and independent investigation of one of the most pressing issues of economic and national security facing our country. We investigated the scale and complexities of international intellectual property (IP) theft, the driving forces behind it, and its consequences for Americans. We collected the evidence, formed assessments, and developed a set of policy recommendations for Congress and the Administration. This Commission is composed of extraordinary members. We are indebted to our fellow Commissioners for their contributions. They have brought to the Commission diligence, selfless bipartisanship, and tremendous expertise and wisdom. Coming from industry, defense, advanced education, and politics, and with senior-level diplomatic, national security, legal, and other public policy experience, they span the spectrum of American professional life that has huge stakes in IP rights. They have our deepest appreciation. The Commission reached out to many remarkable specialists and leaders who shared their experiences and perspectives as we developed an understanding of the problem and a very rich set of policy recommendations. Business leaders with whom we spoke provided inputs anonymously; they represent a cross-section of companies that deal with the problem of IP theft, as well as trade associations with major interests in the problem and its solutions. Other interlocutors were officials from Republican and Democratic administrations, policy analysts, lawyers, economists, international trade experts, and international relations and area specialists. We benefited from the efforts of those in the U.S. government who have been working hard on these issues for years. We thank them for their work and hope that our shining the spotlight on the facts and recommending strong policy make their goals more achievable. The Commission’s staff was exemplary. It includes Director Richard Ellings, Deputy Director Roy Kamphausen, Casey Bruner, John Graham, Creigh Agnew, Meredith Miller, Clara Gillispie, Sonia Luthra, Amanda Keverkamp, Deborah Cooper, Karolos Karnikis, Joshua Ziemkowski, and Jonathan Walton. The Commission is grateful to The National Bureau of Asian Research (NBR) and its Slade Gorton International Policy Center, which provided the unrestricted support that underwrote the Commission’s work and complete independence. Leading an effort that attempts to define and prescribe a focus as complex as IP protection is truly daunting. Given the subject of this report, it comes as no surprise that the People’s Republic of China figures prominently throughout. It should be noted that we co-chairs have spent a considerable part of our professional lives building and managing important aspects of the U.S.-China relationship. We have participated in and observed the development—whether diplomatic, military, economic, or cultural—of the most critical bilateral relationship of the 21st century, one that will have a significant impact on the security and prosperity of the entire world. Ensuring its viability and success in part gave rise to this Commission and our participation in it. We recognize as well the historic reform efforts that continue to be undertaken in China and offer this report as a step toward solutions and pragmatic problem solving that have characterized the interaction of both countries for over four decades. Dennis C. Blair Jon M. Huntsman, Jr. Co-chair Co-chair iii EXECUTIVE SUMMARY The Commission on the Theft of American Intellectual Property is an independent and bipartisan initiative of leading Americans from the private sector, public service in national security and foreign affairs, academe, and politics. The members are: • Dennis C. Blair (co-chair), former Director of National Intelligence and Commander in Chief of the U.S. Pacific Command • Jon M. Huntsman, Jr. (co-chair), former Ambassador to China, Governor of the state of Utah, and Deputy U.S. Trade Representative • Craig R. Barrett, former Chairman and CEO of Intel Corporation • Slade Gorton, former U.S. Senator from the state of Washington, Washington Attorney General, and member of the 9-11 Commission • William J. Lynn III, CEO of DRS Technologies and former Deputy Secretary of Defense • Deborah Wince-Smith, President and CEO of the Council on Competitiveness • Michael K. Young, President of the University of Washington and former Deputy Under Secretary of State The three purposes of the Commission are to: 1. Document and assess the causes, scale, and other major dimensions of international intellectual property theft as they affect the United States 2. Document and assess the role of China in international intellectual property theft 3. Propose appropriate U.S. policy responses that would mitigate ongoing and future damage and obtain greater enforcement of intellectual property rights by China and other infringers Introduction The scale of international theft of American intellectual property (IP) is unprecedented—hundreds of billions of dollars per year, on the order of the size of U.S. exports to Asia. The effects of this theft are twofold. The first is the tremendous loss of revenue and reward for those who made the inventions or who have purchased licenses to provide goods and services based on them, as well as of the jobs associated with those losses. American companies of all sizes are victimized. The second and even more pernicious effect is that illegal theft of intellectual property is undermining both the means and the incentive for entrepreneurs to innovate, which will slow the development of new inventions and industries that can further expand the world economy and continue to raise the prosperity and quality of life for everyone. Unless current trends are reversed, there is a risk of stifling innovation, with adverse consequences for both developed and still developing countries. The American response to date of hectoring governments and prosecuting individuals has been utterly inadequate to deal with the problem. China has been the principal focus of U.S. intellectual property rights (IPR) policy for many years. As its economy developed, China built a sophisticated body of law that includes IPR protection. It has a vibrant, although flawed, patent system. For a variety of historical reasons, however, as well as because of economic and commercial practices and official policies aimed to favor Chinese entities EXECUTIVE SUMMARY 1 and spur economic growth and technological advancement, China is the world’s largest source of IP theft. The evidence presented here is a compilation of the best governmental and private studies undertaken to date, interviews, individual cases, assessments of the impact of IP theft on the American economy, and examinations of PRC policies. There is now enough information, in our view, to warrant urgent consideration of the findings and recommendations that follow. The IP Commission has met numerous times over the course of an eleven-month period; heard from experts and specialists on international law, the American legal system, cybersecurity, and the economy, as well as from industry representatives and many others; and conducted research on a range of topics. The Commission has also reviewed the current actions being taken by the U.S. government and international organizations like the World Trade Organization (WTO) and the recommendations of official and private studies of the problem. Both current and proposed actions generally emphasize more intensive government-to-government communication requesting foreign governments to rein in their companies and other actors. The Commission judges that the scope of the problem requires stronger action, involving swifter and more stringent penalties for IP theft. The Commission believes that over the long term, as their companies mature and have trade secrets to protect, China and other leading infringers will develop adequate legal regimes to protect the intellectual property of international companies as well as domestic companies. The United States cannot afford to wait for that process, however, and needs to take action in the near term to protect its own economic interests. The Commissioners unanimously advocate the recommendations contained within this report. Key Findings The Impact of International IP Theft on the