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Joint Strategic Plan on Intellectual Property Enforcement in IP enforcement. Still, the collective weight of research and reporting to date establishes that the global scope and costs of counterfeiting, commercial piracy, and trade secret theft are staggering, and continue to threaten substantial national interests. FIG. 1: Annual Est. Max. Value of Counterfeited and Pirated Goods ($ billions). 130.5% INCREASE IN 8 YEARS $461 1. Assessments of the Scale and Economic Impact of Counterfeiting and Commercial Piracy. $200 $250 SECTION 1 One of the most comprehensive attempts to quantify the impact of counterfeiting and pirated goods from the past decade was issued in 2008, and updated in 2009, by the Organization for Economic Cooperation and Development (OECD), an international organization comprised of the United States and 33 other countries from North and South America, Europe, and Asia-Pacific. The OECD report focused on trade involving counterfeit and pirated tangible (hard) goods. In its 2008 Report, the OECD estimated that “international trade in counterfeit and pirated goods could have accounted for up to USD 200 billion in 2005,” and in the 2009 Update, the OECD stated that “counterfeit and pirated goods in international trade could have amounted for up [to] USD 250 billion in 2007.” 13 In 2016, with improved methodologies based on updated data sets and seizure statistics from various customs agencies, the OECD issued a new report revising the global estimate of international trade in counterfeit and pirated goods. The 2016 OECD Report stated that “as much as 2.5% of total world trade in 2013 was in counterfeit and pirated products.” This was “a significant higher volume” than the percentage of counterfeit and pirated goods in 2005 (1.9% of world trade) and in 2007 (1.8% of world trade). And, in some countries, the percentage of counterfeit and pirated products was higher. 14 More specifically, the 2016 OECD Report concluded that “[t]he best estimates of this study, based on the data provided by customs authorities, indicate that counterfeit and pirated products accounted for as much as USD 461 billion in world trade in 2013.” 15 A comparison of the 2008/2009 and 2016 OECD Reports demonstrates that the magnitude of the problem is large and growing. Indeed, as the 2016 OECD Report indicates, trade in counterfeits now represents a significant portion of total international trade. These figures, as significant as they are, represent only a part of a larger problem. As noted above, the 2005 2007 2013 Source: OECD Reports (2008. 2009, and 2016) quantitative estimates in the 2008/2009 and 2016 OECD Reports do not include (1) any domesticallyproduced-and- consumed counterfeit or pirated products, and (2) digital trade in pirated products (online piracy). According to the 2008 OECD Report, if these categories were also included, “the total magnitude of counterfeiting and piracy worldwide could well be several hundred billion dollars more.” 16 Another oft-cited report, published in 2011 by the International Chamber of Commerce (ICC), estimated the total global economic value of counterfeit and pirated products to be as high as $650 billion in 2008, when including the categories that had been excluded in the 2008 OECD report. Furthermore, the 2011 ICC report posited that international trade may account for more than half of the estimated value of counterfeiting and piracy (between $285-$360 billion), with domestic production and consumption adding between $140- $215 billion, and digitally-pirated music, movies, and software adding another $30-$75 billion in losses to the creative and innovative industries. Looking ahead, the 2011 ICC report projected that, in 2015, the total magnitude of counterfeiting and piracy could be between $1.22 trillion and $1.77 trillion. 17 Considering that the 2016 OECD report places the international trade in counterfeit and pirated goods at nearly half a trillion dollars annually (excluding all domestically-produced-and-consumed counterfeit and pirated goods, as well as online piracy), the OECD and ICC estimates together suggest that the total magnitude of counterfeiting and piracy worldwide in all forms appears to be approaching, if not surpassing, the trillion dollar mark. 20
Office of the Intellectual Property Enforcement Coordinator 2. Assessments of the Scale and Economic Impact of Trade Secret Theft. The protection of trade secrets is critical to protecting the fruits of American labor, ensuring that American businesses have an incentive to innovate, and enabling continued economic prosperity in a technology-driven age. 18 Trade secrets are estimated to be worth $5 trillion to American businesses. 19 The magnitude of trade secret theft is substantial, and the frequency appears to be increasing. The Center for Responsible Enterprise and Trade, for example, conducted a study relying on surrogate indicators and leveraged multiple studies on illicit economic activity in an effort to quantify the impact of trade secret theft. It estimated the theft to be in the range of 1 to 3 percent of U.S. GDP. 20 Reports from the National Security Agency (NSA), the Federal Bureau of Investigation (FBI), and the Commission on the Theft of American Intellectual Property have placed the estimated losses to the U.S. economy from trade secret theft at tens to hundreds of billions of dollars annually. 21 According to the U.S. Department of Justice, “billions of U.S. dollars are lost annually to foreign competitors who pursue unlawful commercial short cuts” by stealing U.S. innovation and technology. 22 Notwithstanding the difficulties of criminal and civil prosecution due to the international dimensions often associated with trade secret theft, cases that have been successfully prosecuted to completion (see sidebar as an example) give an insight as to the significant damages to which U.S. businesses may be exposed when their trade secrets are targeted. United States v. Kolon In 2015, Kolon Industries Inc., a South Korean industrial company, pleaded guilty to conspiracy to steal E.I. DuPont de Nemours & Co.’s trade secrets for making Kevlar, a high-strength, paraaramid synthetic fiber that is used for a wide range of commercial applications such as body armor, fiber optic cables, and automotive and industrial products. The defendant was sentenced to pay $360,000,000 in criminal fines and restitution. Source: United States v. Kolon, Case No. 3:12-cr-00137 (E.D. Va) Beyond the direct economic losses that may result to businesses and the economy, cyber-enabled trade secret theft poses a number of additional dangers and accompanying costs. For example, personally identifiable information (PII), payment data, and personal health information (PHI) may be compromised along with intellectual property assets that are targets of cyber-enabled espionage. In these circumstances, a wide range of direct and intangible costs may increase the overall impact of the cyber incident. These may include so-called “above the surface” costs—such as costs associated with technical investigations, customer breach notifications, post-breach customer protection, regulatory compliance, public relations, etc.—to “beneath the surface costs”—such as insurance premium increases, operational disruptions, damage to customer relationships, value of lost contract revenue, increased cost to raise debt, etc. 23 The theft of trade secrets adversely affects entities of all sizes, including small- and medium-sized enterprises (SMEs). In fact, SMEs may rely more heavily on trade secrets than on other forms of intellectual property, as the costs of obtaining and maintaining a patent, coupled with the costs of patent litigation, often make it more financially viable for smaller businesses to depend primarily on trade secrets. 24 B. THE COMPLEX AND SOPHISTICATED NATURE OF COMMERCIAL PIRACY, COUNTERFEITING AND TRADE SECRET THEFT IN THE MODERN ERA. In addition to understanding the economic impact of IP theft, effective IP enforcement policy—for the protection of rights holders and consumers alike— requires an understanding of the schemes and dayto-day tactics used by those who unlawfully exploit copyrighted content, brands, patented inventions, and trade secrets. 1. Schemes Employed for the Unlawful Exploitation of Digital Content. Public reporting offers a window into the various methods entities employ to unlawfully exploit copyrighted content such as movies, music, video games, books, and software in the digital environment to minimize detection and to generate commercial profit. SECTION 1 21
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ACKNOWLEDGEMENTS With thanks to, an
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