Helping Small Business Better Protect IP

By SBE Council at 21 March, 2014, 9:57 am

by Raymond J. Keating-

I had the opportunity to join a Capitol Hill panel on March 19 that addressed the issue of intellectual property (IP) – specifically, the importance of protecting IP for small business. The briefing underscored the immense and growing challenges that entrepreneurs face in protecting their IP.

The U.S. House Small Business Committee hosted a March 19 briefing on intellectual property (IP) and small business. SBE Council chief economist Ray Keating (seated on far right) was a panelist, along with entrepreneurs and other industry representatives who spoke about the economic damage that counterfeiters, patent trolls and IP theft in general poses for small firms.

The briefing for congressional staff was organized by the U.S. House Committee on Small Business, chaired by U.S. Rep. Sam Graves (R-MO). The other panelists were Liz Fields, co-owner and head designer for Liz Fields, LLC, Daniel Zadoff, co-founder and CEO of Nutritionix, and Michael McDonald, manager of government relations for the American Apparel & Footwear Association. And the moderator was Frank Cullen, executive director of U.S. intellectual property policy for the U.S. Chamber of Commerce’s Global Intellectual Property Center.

The two entrepreneurs brought firsthand experiences of their battles in trying to protect IP.

Overseas counterfeiters leech off U.S. brands and quality. Ms. Fields, whose business grossed $2 million in revenues last year, relayed how she is forced to expend enormous amounts of time against online counterfeiters of her wedding and bridesmaid dresses. She warns on her website: “Every year, more than 600,000 fake wedding dresses are bought online. Brides think they’re getting the real deal for the big day, but what they’re getting is a big fake.”  Field’s estimates that her company loses about 8 percent in business annually to online counterfeiters who use her brand to sell dresses.

Patent trolls leech off, and exploit, innovative businesses through the legal system. Mr. Zadoff, whose company (two employees) has “built the world’s largest open database of nutritional information, with over 320K unique foods, and growing” – told of the fight against patent trolls. That is, bad actors who abuse the patent litigation system by bringing frivolous lawsuits to extract unfair settlements from assorted targets who cannot undertake the often-back-breaking costs of fighting back. The innovative small businesses and entrepreneurs who get hit with lawsuits and “demand letters” simply close up shop, as fighting these legal battles requires significant financial resources.

Protecting IP is a multi-front battle. Meanwhile, the American Apparel & Footwear Association is fighting on all fronts against unscrupulous patent trolls, design piracy and rogue websites. Regarding design piracy, the association says, “Since 2006, Congress has been working to pass legislation to stop the narrow problem of design piracy, or the direct copying of an original artistic design in apparel, footwear, or other fashion accessories.  The main congressional proponents of design piracy legislation have been Congressmen Bob Goodlatte (R-VA) in the House and Senators Chuck Schumer (D-NY) and Orrin Hatch (R-UT), in the Senate.” So, there is solid bipartisanship on the issue of advancing legislative solutions to protect IP.  Of course, SBE Council has been highly engaged in many of these efforts to protect and strengthen IP at home and abroad.

Entrepreneurs and small businesses play major role in IP industries: I highlighted the importance of IP to the economy overall – for example, pointing to a 2012 Commerce Department report that conservatively estimated that “IP-intensive industries” account for 35 percent of GDP and 28 percent of all jobs – and the role that small businesses play in some high-profile IP industries.

Patent troll activity is exploding. The White House estimates that 100,000 “demand letters” were sent in 2012. Demand letters threaten “everyone from Fortune 500 companies to corner coffee shops and even regular consumers to pay a settlement or face a day in court,” according to the White House. (Chart courtesy of WhiteHouse.gov)

For example, employer firms with less than 20 employees make up 71 percent of software publishers, 92 percent in the motion picture and video industries, 58 percent in the pharmaceutical and medicine manufacturing industry, 94 percent of music publishers, 96 percent of sound recording industries, and 84 percent of book publishers.

As for policy remedies, among the necessary actions, our elected officials need to be advancing free trade agreements that provide for stronger IP protection around the global. Legislation that passed the U.S. House to ward off patent trolls is being considered by the U.S. Senate.  Senator Claire McCaskill (D-MO) has also offered legislation.  Last year, the White House announced measures the Administration is supporting to protect innovators, and in his State of the Union address President Obama called upon Congress to pass legislation to remedy the patent troll scourge. (For additional information about the status of patent troll legislation see this recent article in The Hill.)

In terms of frivolous, opportunistic patent trolls, asymmetry exists in terms of costs. Plaintiffs can incur little costs while defendants (as noted above) can face crushing costs for their businesses. Therefore, as with tort reform in general, instituting a substantive loser pays requirement would be a positive reform.

I summed up the importance of strong IP protections in a recent SBE Council book  –  Unleashing Small Business Through IP: Protecting Intellectual Property, Driving Entrepreneurship – this way:

“The entire entrepreneurial process is dependent upon strong property rights and protections, including intellectual property. Without strong IP rights, entrepreneurs, innovators and investors simply would be far less likely to undertake the tremendous risks involved with creating and bringing a new or improved good or service to the marketplace. In turn, of course, consumers wind up with fewer choices and benefits, economic growth falters, and workers face reduced job opportunities and lower incomes.”

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Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.

Keating’s new book, published by SBE Council, is titled Unleashing Small Business Through IP: Protecting Intellectual Property, Driving Entrepreneurship. It’s available from Amazon.com here.