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MoFo Tech A blog dedicated to information, trend spotting & analysis for science- & tech-based companies

Here Come the Feds

What President Obama’s second term means for the tech industry

As the first president to appoint a chief technology officer, President Obama has worked hard to portray himself as a friend to the tech industry. He’s supported the expansion of broadband access, development of a fourth-generation wireless network, new healthcare IT initiatives, and a modernized electrical grid. In April, he called for reversing recent spending cuts to several federal government R&D budgets and boosting 2014 civilian R&D spending by 9 percent over 2012. (Defense R&D would decline by 6 percent.) It is far from certain his budget will make it through a divided Congress, however.

The tech industry has been paying a lot of attention to Washington. Legislators and regulators have woken up to the increasing influence of high technology on ordinary citizens’ lives. And for better or worse, they have become increasingly interested in shaping that influence. At the same time, tech executives have learned how a vote or ruling can mean the difference between a profit and a loss.

As President Obama’s second term takes shape, here’s a rundown of some areas of federal policy that tech industry representatives in Washington will be talking about. Like it or not, the outcome of these discussions could have a big influence on your company’s marketing, hiring, finances, and more.

Federal lobbying by the tech industry rose 140% from 2000 to 2012 —Center for Responsive Politics

Cybersecurity: Framework Ahead

Last October Defense Secretary Leon Panetta warned that the United States faced the possibility of a “cyber-Pearl Harbor,” raising the specter of an aggressor nation or extremist group derailing trains, contaminating water supplies, or crippling power grids. Also last year, Gen. Keith Alexander, chief of the U.S. Cyber Command, claimed that intrusions against computers that run essential infrastructure increased seventeen-fold from 2009 to 2011. He has called the loss of intellectual property and industrial secrets from cybercrime “the greatest transfer of wealth in history.”

Panetta urged Congress to take action, but efforts to pass cybersecurity legislation last year were sunk in partisan discord. A bill co-sponsored by Independent Sen. Joseph Lieberman and Republican Sen. Susan Collins would have required minimum cybersecurity standards on computer systems controlling critical infrastructure. The bill was redrafted to make those standards voluntary in an effort to garner votes, but the bill was blocked via filibuster by Republicans led by Sen. John McCain.

In February, President Obama issued an executive order that promotes information sharing about cyberthreats between the government and private companies. The order directs federal agencies to provide timely notification to companies that operate critical infrastructure of any cyber threats that identify the company, and it expedites the processing of clearances for company personnel to enable the government to share classified threat information. Meanwhile, the National Institute of Standards and Technology will develop a framework to reduce cyber risks and “work with industry to identify existing voluntary consensus standards and industry best practices to incorporate into the framework,” in the words of the president’s cybersecurity coordinator, Michael Daniel. Adoption of those best practices and standards will be voluntary.

“All indications are that the work on this framework will be a fairly open process,” says Nathan Taylor, Of Counsel at Morrison & Foerster in Washington D.C. “The tech sector will have the ability to comment on and impact what those best practices should be and what the ultimate standards are.”

It’s an open question, however, exactly how computer systems and networks will be defined as “critical infrastructure” by the federal government, and therefore which companies will be affected by the order, says Taylor, a privacy and information security specialist who has worked with financial services clients on their lobbying efforts related to cybersecurity matters. The order defines critical infrastructure as being so vital that its destruction “would have a debilitating impact on security, national economic security, national public health or safety.” A recent Presidential Policy Directive describes 16 “critical infrastructure sectors,” including information technology, financial services, communications, and energy. But the order specifies that the Department of Homeland Security cannot include “any commercial information technology products or consumer information technology services” in its inventory of “critical infrastructure at greatest risk.”

That clause suggests that tech companies have succeeded in lobbying the Obama administration to limit the order’s impact, Taylor says. Indeed, while some tech companies have favored stronger federal action—and companies that provide data security solutions stand to benefit from federal mandates—others have feared that regulation could create an expensive and ultimately ineffective burden. Data security technologies—and the nature of cyber threats—are evolving so rapidly that there is a risk that any mandated technology or strategy could become outdated before the regulation’s ink is dry, Taylor says. It could even thwart cyber-defense innovation, as companies focus on complying with regulations rather than responding to threats.

Privacy: Pushing The Ball Forward

The preservation of consumer privacy in the face of web browser cookies, GPS tracking, and Big Data remains a hot topic in the media. A split Congress means that a comprehensive data privacy bill is unlikely, says Reed Freeman, a Morrison & Foerster partner focused on consumer protection. But Obama’s re-election suggests that he and his party will continue to encourage (or oversee) industry efforts to self-police—and will push targeted legislation if those standards fail to make an impact.

For example, the Department of Commerce’s National Telecommunications and Information Administration is attempting to develop a code of conduct around consumer privacy involving companies, academics, and privacy advocates. (Adoption of the code would be voluntary, but companies like Facebook and Google that have failed to live up to their stated privacy policies have faced disciplinary action from the Federal Trade Commission.) The administration’s group has met for nearly a year and is still working on its first issue, involving the mobile environment. “The administration is likely to try to speed up the process,” Freeman says. The dialogue is still important to track for companies that advertise or deliver advertising on the Internet.

Under Democratic control, the Federal Trade Commission has expanded its interests beyond fraud and misuse of data to more intangible harms that could be caused by data use, like an “affront to dignity.” “They’re looking into issues that could result in fairly dramatic policy changes,” such as data brokering, Freeman says.

A group formed by the Worldwide Web Consortium, or W3C, has been working for over a year with companies, advocates, trade associations, and officials to develop standards around “do not track.” If that effort stalls, the chair of the Senate Commerce committee, Senator Jay Rockefeller, may push through “do not track” legislation that would give the FTC the right to define and regulate data tracking.

Tech companies that have been hit by onerous official requests for personal data as part of criminal investigations have united to push for reform of the 1986 Electronic Communications Privacy Act. That reform has a good chance of becoming law, Freeman says.

Taxes: Good News, Bad News

As much as tech executives like to focus on their product and their customers, taxes have a big impact on the bottom line. The tax legislation that averted the fiscal cliff on Jan. 1 included some good news for tech firms, notes Michelle Jewett, a senior tax associate at Morrison & Foerster. This includes the extension of a provision that allows businesses to immediately deduct 50 percent of the adjusted cost basis for many types of property. Taxpayers may also continue excluding 100 percent of the capital gains from sales of so-called Qualified Small Business Stock acquired in 2012 and 2013. The exclusion is a valuable incentive for the purchase of stock from tech and biotech start-ups, Jewett says.

There were also some pleasant surprises for companies focused on renewable energy and energy efficiency, says Robert Cudd, a Morrison & Foerster partner with more than 30 years of tax experience. These include extensions of some important production tax credits and investment tax credits. But many of these programs have their limits in terms of which investors and producers can qualify. And they come during a challenging period for cleantech companies. Most notably, the Department of Energy’s Section 1705 loan guarantee program that expired in the fall of 2011 has not been replaced by anything of comparable size, and the highly effective Section 1603 cash grant program for renewable projects was not extended to apply to projects that begin construction after 2012.

The debate over the “fiscal cliff” brought the long-discussed need for comprehensive corporate tax reform to the front burner. Both Republicans and the administration have opened the door to an overall reduction in the corporate tax rate—the highest in the developed world—and the elimination of a range of deductions. Tech companies will keep a close eye on the deduction relating to the amortization of goodwill, Jewett says. That’s because much of the value of many tech companies is derived from intangible assets such as patents and licenses, known in accounting parlance as goodwill.

It’s unknown what form comprehensive tax reform might take. There has been significant attention paid to structures used by U.S.-based multinational corporations to avoid subjecting income earned by foreign affiliates offshore to U.S. taxes. But smaller efforts to boost tax revenue collection might also make a big impact. The Department of Justice may start more aggressively pursuing companies it believes are abusing foreign tax credits, Cudd says. And the tax holiday for Internet purchases may soon be over. As MoFo Tech went to press, a bipartisan bill, the Marketplace Fairness Act, that would allow states to collect unpaid online sales taxes, had passed the Senate and was under consideration by the House.

Tech Worker Immigration: Easing A Labor Shortage

Tech industry leaders have long complained about the challenges of finding highly skilled engineers and programmers in the United States. The New Year saw the potential for a breakthrough on this front when Democrats and Republicans came together to call for comprehensive immigration reform. While most of the news about the President and Senate’s proposals has been around border security and a path to citizenship for illegal immigrants, the Senate has also introduced a proposal to greatly expand the three-year visa program for highly skilled foreign workers known as H-1B. With bipartisan sponsorship, the Immigration Innovation Act would lift the annual quota of these visas from 65,000 to 115,000. The cap would grow each year if demand outstrips supply, potentially up to 300,000 visas.

The H-1B program promotes economic growth in the United States, not only in the tech sector but everywhere in the country, contends Chris Ford, chair of Morrison & Foerster’s Global Sourcing Group. That’s because the alternative to having IT work done in the U.S. by H-1B workers is often having it done overseas. And if the work is done here, then at least some of the money earned gets spent here and is taxed by the U.S. government.

Over the last two decades, many American companies have shrunk their in-house IT departments, keeping core personnel and outsourcing the rest. While many of these companies would like to bring in skilled personnel for onsite projects, they’re stymied by the limitations in the current H-1B program, Ford says. This project-based labor shortage is especially acute for non-tech companies outside the major tech hubs. Ford gives the example of a Southeastern client in the transportation industry that sought onsite help with IT projects. But because it couldn’t get the visas, the projects are on the back burner, which is potentially hindering its ability to implement necessary improvements. Such hindrances, across all affected companies, can have a negative impact on the nation’s productivity.

The domestic labor shortage won’t end, Ford says, until the U.S. trains more people in the so-called STEM skills: science, technology, engineering, and mathematics. One indication of the education gap: 95 percent of American high schools do not offer advanced-placement computer-science courses, notes the Seattle Times. To that end, the Senate bill would charge employers who apply for H-1B an extra $1,000 for each visa and use the money to bolster STEM education for American students.

As a Democratic administration, the Obama administration and its congressional allies appear to have a hands-on approach to problem-solving. They’re happy to work with the tech industry to formulate voluntary solutions–and willing to impose mandates if those solutions don’t suit them.

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