Archives For intellectual property

The patent system is too often caricatured as involving the grant of “monopolies” that may be used to delay entry and retard competition in key sectors of the economy. The accumulation of allegedly “poor-quality” patents into thickets and portfolios held by “patent trolls” is said by critics to spawn excessive royalty-licensing demands and threatened “holdups” of firms that produce innovative products and services. These alleged patent abuses have been characterized as a wasteful “tax” on high-tech implementers of patented technologies, which inefficiently raises price and harms consumer welfare.

Fortunately, solid scholarship has debunked these stories and instead pointed to the key role patents play in enhancing competition and driving innovation. See, for example, here, here, here, here, here, here, and here.

Nevertheless, early indications are that the Biden administration may be adopting a patent-skeptical attitude. Such an attitude was revealed, for example, in the president’s July 9 Executive Order on Competition (which suggested an openness to undermining the Bayh-Dole Act by using march-in rights to set prices; to weakening pharmaceutical patent rights; and to weakening standard essential patents) and in the administration’s inexplicable decision to waive patent protection for COVID-19 vaccines (see here and here).

Before it takes further steps that would undermine patent protections, the administration should consider new research that underscores how patents help to spawn dynamic market growth through “design around” competition and through licensing that promotes new technologies and product markets.

Patents Spawn Welfare-Enhancing ‘Design Around’ Competition

Critics sometimes bemoan the fact that patents covering a new product or technology allegedly retard competition by preventing new firms from entering a market. (Never mind the fact that the market might not have existed but for the patent.) This thinking, which confuses a patent with a product-market monopoly, is badly mistaken. It is belied by the fact that the publicly available patented technology itself (1) provides valuable information to third parties; and (2) thereby incentivizes them to innovate and compete by refining technologies that fall outside the scope of the patent. In short, patents on important new technologies stimulate, rather than retard, competition. They do this by leading third parties to “design around” the patented technology and thus generate competition that features a richer set of technological options realized in new products.

The importance of design around is revealed, for example, in the development of the incandescent light bulb market in the late 19th century, in reaction to Edison’s patent on a long-lived light bulb. In a 2021 article in the Journal of Competition Law and Economics, Ron D. Katznelson and John Howells did an empirical study of this important example of product innovation. The article’s synopsis explains:

Designing around patents is prevalent but not often appreciated as a means by which patents promote economic development through competition. We provide a novel empirical study of the extent and timing of designing around patent claims. We study the filing rate of incandescent lamp-related patents during 1878–1898 and find that the enforcement of Edison’s incandescent lamp patent in 1891–1894 stimulated a surge of patenting. We studied the specific design features of the lamps described in these lamp patents and compared them with Edison’s claimed invention to create a count of noninfringing designs by filing date. Most of these noninfringing designs circumvented Edison’s patent claims by creating substitute technologies to enable participation in the market. Our forward citation analysis of these patents shows that some had introduced pioneering prior art for new fields. This indicates that invention around patents is not duplicative research and contributes to dynamic economic efficiency. We show that the Edison lamp patent did not suppress advance in electric lighting and the market power of the Edison patent owner weakened during this patent’s enforcement. We propose that investigation of the effects of design around patents is essential for establishing the degree of market power conferred by patents.

In a recent commentary, Katznelson highlights the procompetitive consumer welfare benefits of the Edison light bulb design around:

GE’s enforcement of the Edison patent by injunctions did not stifle competition nor did it endow GE with undue market power, let alone a “monopoly.” Instead, it resulted in clear and tangible consumer welfare benefits. Investments in design-arounds resulted in tangible and measurable dynamic economic efficiencies by (a) increased competition, (b) lamp price reductions, (c) larger choice of suppliers, (d) acceleration of downstream development of new electric illumination technologies, and (e) collateral creation of new technologies that would not have been developed for some time but for the need to design around Edison’s patent claims. These are all imparted benefits attributable to patent enforcement.

Katznelson further explains that “the mythical harm to innovation inflicted by enforcers of pioneer patents is not unique to the Edison case.” He cites additional research debunking claims that the Wright brothers’ pioneer airplane patent seriously retarded progress in aviation (“[a]ircraft manufacturing and investments grew at an even faster pace after the assertion of the Wright Brothers’ patent than before”) and debunking similar claims made about the early radio industry and the early automobile industry. He also notes strong research refuting the patent holdup conjecture regarding standard essential patents. He concludes by bemoaning “infringers’ rhetoric” that “suppresses information on the positive aspects of patent enforcement, such as the design-around effects that we study in this article.”

The Bayh-Dole Act: Licensing that Promotes New Technologies and Product Markets

The Bayh-Dole Act of 1980 has played an enormously important role in accelerating American technological innovation by creating a property rights-based incentive to use government labs. As this good summary from the Biotechnology Innovation Organization puts it, it “[e]mpowers universities, small businesses and non-profit institutions to take ownership [through patent rights] of inventions made during federally-funded research, so they can license these basic inventions for further applied research and development and broader public use.”

The act has continued to generate many new welfare-enhancing technologies and related high-tech business opportunities even during the “COVID slowdown year” of 2020, according to a newly released survey by a nonprofit organization representing the technology management community (see here):  

° The number of startup companies launched around academic inventions rose from 1,040 in 2019 to 1,117 in 2020. Almost 70% of these companies locate in the same state as the research institution that licensed them—making Bayh-Dole a critical driver of state and regional economic development;
° Invention disclosures went from 25,392 to 27,112 in 2020;
° New patent applications increased from 15,972 to 17,738;
° Licenses and options went from 9,751 in ’19 to 10,050 in ’20, with 60% of licenses going to small companies; and
° Most impressive of all—new products introduced to the market based on academic inventions jumped from 711 in 2019 to 933 in 2020.

Despite this continued record of success, the Biden Administration has taken actions that create uncertainty about the government’s support for Bayh-Dole.  

As explained by the Congressional Research Service, “march-in rights allow the government, in specified circumstances, to require the contractor or successors in title to the patent to grant a ‘nonexclusive, partially exclusive, or exclusive license’ to a ‘responsible applicant or applicants.’ If the patent owner refuses to do so, the government may grant the license itself.” Government march-in rights thus far have not been invoked, but a serious threat of their routine invocation would greatly disincentivize future use of Bayh-Dole, thereby undermining patent-backed innovation.

Despite this, the president’s July 9 Executive Order on Competition (noted above) instructed the U.S. Commerce Department to defer finalizing a regulation (see here) “that would have ensured that march-in rights under Bayh Dole would not be misused to allow the government to set prices, but utilized for its statutory intent of providing oversight so good faith efforts are being made to turn government-funded innovations into products. But that’s all up in the air now.”

What’s more, a new U.S. Energy Department policy that would more closely scrutinize Bayh-Dole patentees’ licensing transactions and acquisitions (apparently to encourage more domestic manufacturing) has raised questions in the Bayh-Dole community and may discourage licensing transactions (see here and here). Added to this is the fact that “prominent Members of Congress are pressing the Biden Administration to misconstrue the march-in rights clause to control prices of products arising from National Institutes of Health and Department of Defense funding.” All told, therefore, the outlook for continued patent-inspired innovation through Bayh-Dole processes appears to be worse than it has been in many years.

Conclusion

The patent system does far more than provide potential rewards to enhance incentives for particular individuals to invent. The system also creates a means to enhance welfare by facilitating the diffusion of technology through market processes (see here).

But it does even more than that. It actually drives new forms of dynamic competition by inducing third parties to design around new patents, to the benefit of consumers and the overall economy. As revealed by the Bayh-Dole Act, it also has facilitated the more efficient use of federal labs to generate innovation and new products and processes that would not otherwise have seen the light of day. Let us hope that the Biden administration pays heed to these benefits to the American economy and thinks again before taking steps that would further weaken our patent system.     

Over the past decade and a half, virtually every branch of the federal government has taken steps to weaken the patent system. As reflected in President Joe Biden’s July 2021 executive order, these restraints on patent enforcement are now being coupled with antitrust policies that, in large part, adopt a “big is bad” approach in place of decades of economically grounded case law and agency guidelines.

This policy bundle is nothing new. It largely replicates the innovation policies pursued during the late New Deal and the postwar decades. That historical experience suggests that a “weak-patent/strong-antitrust” approach is likely to encourage neither innovation nor competition.

The Overlooked Shortfalls of New Deal Innovation Policy

Starting in the early 1930s, the U.S. Supreme Court issued a sequence of decisions that raised obstacles to patent enforcement. The Franklin Roosevelt administration sought to take this policy a step further, advocating compulsory licensing for all patents. While Congress did not adopt this proposal, it was partially implemented as a de facto matter through antitrust enforcement. Starting in the early 1940s and continuing throughout the postwar decades, the antitrust agencies secured judicial precedents that treated a broad range of licensing practices as per se illegal. Perhaps most dramatically, the U.S. Justice Department (DOJ) secured more than 100 compulsory licensing orders against some of the nation’s largest companies. 

The rationale behind these policies was straightforward. By compelling access to incumbents’ patented technologies, courts and regulators would lower barriers to entry and competition would intensify. The postwar economy declined to comply with policymakers’ expectations. Implementation of a weak-IP/strong-antitrust innovation policy over the course of four decades yielded the opposite of its intended outcome. 

Market concentration did not diminish, turnover in market leadership was slow, and private research and development (R&D) was confined mostly to the research labs of the largest corporations (who often relied on generous infusions of federal defense funding). These tendencies are illustrated by the dramatically unequal allocation of innovation capital in the postwar economy.  As of the late 1950s, small firms represented approximately 7% of all private U.S. R&D expenditures.  Two decades later, that figure had fallen even further. By the late 1970s, patenting rates had plunged, and entrepreneurship and innovation were in a state of widely lamented decline.

Why Weak IP Raises Entry Costs and Promotes Concentration

The decline in entrepreneurial innovation under a weak-IP regime was not accidental. Rather, this outcome can be derived logically from the economics of information markets.

Without secure IP rights to establish exclusivity, engage securely with business partners, and deter imitators, potential innovator-entrepreneurs had little hope to obtain funding from investors. In contrast, incumbents could fund R&D internally (or with federal funds that flowed mostly to the largest computing, communications, and aerospace firms) and, even under a weak-IP regime, were protected by difficult-to-match production and distribution efficiencies. As a result, R&D mostly took place inside the closed ecosystems maintained by incumbents such as AT&T, IBM, and GE.

Paradoxically, the antitrust campaign against patent “monopolies” most likely raised entry barriers and promoted industry concentration by removing a critical tool that smaller firms might have used to challenge incumbents that could outperform on every competitive parameter except innovation. While the large corporate labs of the postwar era are rightly credited with technological breakthroughs, incumbents such as AT&T were often slow in transforming breakthroughs in basic research into commercially viable products and services for consumers. Without an immediate competitive threat, there was no rush to do so. 

Back to the Future: Innovation Policy in the New New Deal

Policymakers are now at work reassembling almost the exact same policy bundle that ended in the innovation malaise of the 1970s, accompanied by a similar reliance on public R&D funding disbursed through administrative processes. However well-intentioned, these processes are inherently exposed to political distortions that are absent in an innovation environment that relies mostly on private R&D funding governed by price signals. 

This policy bundle has emerged incrementally since approximately the mid-2000s, through a sequence of complementary actions by every branch of the federal government.

  • In 2011, Congress enacted the America Invents Act, which enables any party to challenge the validity of an issued patent through the U.S. Patent and Trademark Office’s (USPTO) Patent Trial and Appeals Board (PTAB). Since PTAB’s establishment, large information-technology companies that advocated for the act have been among the leading challengers.
  • In May 2021, the Office of the U.S. Trade Representative (USTR) declared its support for a worldwide suspension of IP protections over Covid-19-related innovations (rather than adopting the more nuanced approach of preserving patent protections and expanding funding to accelerate vaccine distribution).  
  • President Biden’s July 2021 executive order states that “the Attorney General and the Secretary of Commerce are encouraged to consider whether to revise their position on the intersection of the intellectual property and antitrust laws, including by considering whether to revise the Policy Statement on Remedies for Standard-Essential Patents Subject to Voluntary F/RAND Commitments.” This suggests that the administration has already determined to retract or significantly modify the 2019 joint policy statement in which the DOJ, USPTO, and the National Institutes of Standards and Technology (NIST) had rejected the view that standard-essential patent owners posed a high risk of patent holdup, which would therefore justify special limitations on enforcement and licensing activities.

The history of U.S. technology markets and policies casts great doubt on the wisdom of this weak-IP policy trajectory. The repeated devaluation of IP rights is likely to be a “lose-lose” approach that does little to promote competition, while endangering the incentive and transactional structures that sustain robust innovation ecosystems. A weak-IP regime is particularly likely to disadvantage smaller firms in biotech, medical devices, and certain information-technology segments that rely on patents to secure funding from venture capital and to partner with larger firms that can accelerate progress toward market release. The BioNTech/Pfizer alliance in the production and distribution of a Covid-19 vaccine illustrates how patents can enable such partnerships to accelerate market release.  

The innovative contribution of BioNTech is hardly a one-off occurrence. The restoration of robust patent protection in the early 1980s was followed by a sharp increase in the percentage of private R&D expenditures attributable to small firms, which jumped from about 5% as of 1980 to 21% by 1992. This contrasts sharply with the unequal allocation of R&D activities during the postwar period.

Remarkably, the resurgence of small-firm innovation following the strong-IP policy shift, starting in the late 20th century, mimics tendencies observed during the late 19th and early-20th centuries, when U.S. courts provided a hospitable venue for patent enforcement; there were few antitrust constraints on licensing activities; and innovation was often led by small firms in partnership with outside investors. This historical pattern, encompassing more than a century of U.S. technology markets, strongly suggests that strengthening IP rights tends to yield a policy “win-win” that bolsters both innovative and competitive intensity. 

An Alternate Path: ‘Bottom-Up’ Innovation Policy

To be clear, the alternative to the policy bundle of weak-IP/strong antitrust does not consist of a simple reversion to blind enforcement of patents and lax administration of the antitrust laws. A nuanced innovation policy would couple modern antitrust’s commitment to evidence-based enforcement—which, in particular cases, supports vigorous intervention—with a renewed commitment to protecting IP rights for innovator-entrepreneurs. That would promote competition from the “bottom up” by bolstering maverick innovators who are well-positioned to challenge (or sometimes partner with) incumbents and maintaining the self-starting engine of creative disruption that has repeatedly driven entrepreneurial innovation environments. Tellingly, technology incumbents have often been among the leading advocates for limiting patent and copyright protections.  

Advocates of a weak-patent/strong-antitrust policy believe it will enhance competitive and innovative intensity in technology markets. History suggests that this combination is likely to produce the opposite outcome.  

Jonathan M. Barnett is the Torrey H. Webb Professor of Law at the University of Southern California, Gould School of Law. This post is based on the author’s recent publications, Innovators, Firms, and Markets: The Organizational Logic of Intellectual Property (Oxford University Press 2021) and “The Great Patent Grab,” in Battles Over Patents: History and the Politics of Innovation (eds. Stephen H. Haber and Naomi R. Lamoreaux, Oxford University Press 2021).

The Biden Administration’s July 9 Executive Order on Promoting Competition in the American Economy is very much a mixed bag—some positive aspects, but many negative ones.

It will have some positive effects on economic welfare, to the extent it succeeds in lifting artificial barriers to competition that harm consumers and workers—such as allowing direct sales of hearing aids in drug stores—and helping to eliminate unnecessary occupational licensing restrictions, to name just two of several examples.

But it will likely have substantial negative effects on economic welfare as well. Many aspects of the order appear to emphasize new regulation—such as Net Neutrality requirements that may reduce investment in broadband by internet service providers—and imposing new regulatory requirements on airlines, pharmaceutical companies, digital platforms, banks, railways, shipping, and meat packers, among others. Arbitrarily imposing new rules in these areas, without a cost-beneficial appraisal and a showing of a market failure, threatens to reduce innovation and slow economic growth, hurting producers and consumer. (A careful review of specific regulatory proposals may shed greater light on the justifications for particular regulations.)

Antitrust-related proposals to challenge previously cleared mergers, and to impose new antitrust rulemaking, are likely to raise costly business uncertainty, to the detriment of businesses and consumers. They are a recipe for slower economic growth, not for vibrant competition.

An underlying problem with the order is that it is based on the false premise that competition has diminished significantly in recent decades and that “big is bad.” Economic analysis found in the February 2020 Economic Report of the President, and in other economic studies, debunks this flawed assumption.

In short, the order commits the fundamental mistake of proposing intrusive regulatory solutions for a largely nonexistent problem. Competitive issues are best handled through traditional well-accepted antitrust analysis, which centers on promoting consumer welfare and on weighing procompetitive efficiencies against anticompetitive harm on a case-by-case basis. This approach:

  1. Deals effectively with serious competitive problems; while at the same time
  2. Cabining error costs by taking into account all economically relevant considerations on a case-specific basis.

Rather than using an executive order to direct very specific regulatory approaches without a strong economic and factual basis, the Biden administration would have been better served by raising a host of competitive issues that merit possible study and investigation by expert agencies. Such an approach would have avoided imposing the costs of unwarranted regulation that unfortunately are likely to stem from the new order.

Finally, the order’s call for new regulations and the elimination of various existing legal policies will spawn matter-specific legal challenges, and may, in many cases, not succeed in court. This will impose unnecessary business uncertainty in addition to public and private resources wasted on litigation.

Policy discussions about the use of personal data often have “less is more” as a background assumption; that data is overconsumed relative to some hypothetical optimal baseline. This overriding skepticism has been the backdrop for sweeping new privacy regulations, such as the California Consumer Privacy Act (CCPA) and the EU’s General Data Protection Regulation (GDPR).

More recently, as part of the broad pushback against data collection by online firms, some have begun to call for creating property rights in consumers’ personal data or for data to be treated as labor. Prominent backers of the idea include New York City mayoral candidate Andrew Yang and computer scientist Jaron Lanier.

The discussion has escaped the halls of academia and made its way into popular media. During a recent discussion with Tesla founder Elon Musk, comedian and podcast host Joe Rogan argued that Facebook is “one gigantic information-gathering business that’s decided to take all of the data that people didn’t know was valuable and sell it and make f***ing billions of dollars.” Musk appeared to agree.

The animosity exhibited toward data collection might come as a surprise to anyone who has taken Econ 101. Goods ideally end up with those who value them most. A firm finding profitable ways to repurpose unwanted scraps is just the efficient reallocation of resources. This applies as much to personal data as to literal trash.

Unfortunately, in the policy sphere, few are willing to recognize the inherent trade-off between the value of privacy, on the one hand, and the value of various goods and services that rely on consumer data, on the other. Ideally, policymakers would look to markets to find the right balance, which they often can. When the transfer of data is hardwired into an underlying transaction, parties have ample room to bargain.

But this is not always possible. In some cases, transaction costs will prevent parties from bargaining over the use of data. The question is whether such situations are so widespread as to justify the creation of data property rights, with all of the allocative inefficiencies they entail. Critics wrongly assume the solution is both to create data property rights and to allocate them to consumers. But there is no evidence to suggest that, at the margin, heightened user privacy necessarily outweighs the social benefits that new data-reliant goods and services would generate. Recent experience in the worlds of personalized medicine and the fight against COVID-19 help to illustrate this point.

Data Property Rights and Personalized Medicine

The world is on the cusp of a revolution in personalized medicine. Advances such as the improved identification of biomarkers, CRISPR genome editing, and machine learning, could usher a new wave of treatments to markedly improve health outcomes.

Personalized medicine uses information about a person’s own genes or proteins to prevent, diagnose, or treat disease. Genetic-testing companies like 23andMe or Family Tree DNA, with the large troves of genetic information they collect, could play a significant role in helping the scientific community to further medical progress in this area.

However, despite the obvious potential of personalized medicine, many of its real-world applications are still very much hypothetical. While governments could act in any number of ways to accelerate the movement’s progress, recent policy debates have instead focused more on whether to create a system of property rights covering personal genetic data.

Some raise concerns that it is pharmaceutical companies, not consumers, who will reap the monetary benefits of the personalized medicine revolution, and that advances are achieved at the expense of consumers’ and patients’ privacy. They contend that data property rights would ensure that patients earn their “fair” share of personalized medicine’s future profits.

But it’s worth examining the other side of the coin. There are few things people value more than their health. U.S. governmental agencies place the value of a single life at somewhere between $1 million and $10 million. The commonly used quality-adjusted life year metric offers valuations that range from $50,000 to upward of $300,000 per incremental year of life.

It therefore follows that the trivial sums users of genetic-testing kits might derive from a system of data property rights would likely be dwarfed by the value they would enjoy from improved medical treatments. A strong case can be made that policymakers should prioritize advancing the emergence of new treatments, rather than attempting to ensure that consumers share in the profits generated by those potential advances.

These debates drew increased attention last year, when 23andMe signed a strategic agreement with the pharmaceutical company Almirall to license the rights related to an antibody Almirall had developed. Critics pointed out that 23andMe’s customers, whose data had presumably been used to discover the potential treatment, received no monetary benefits from the deal. Journalist Laura Spinney wrote in The Guardian newspaper:

23andMe, for example, asks its customers to waive all claims to a share of the profits arising from such research. But given those profits could be substantial—as evidenced by the interest of big pharma—shouldn’t the company be paying us for our data, rather than charging us to be tested?

In the deal’s wake, some argued that personal health data should be covered by property rights. A cardiologist quoted in Fortune magazine opined: “I strongly believe that everyone should own their medical data—and they have a right to that.” But this strong belief, however widely shared, ignores important lessons that law and economics has to teach about property rights and the role of contractual freedom.

Why Do We Have Property Rights?

Among the many important features of property rights is that they create “excludability,” the ability of economic agents to prevent third parties from using a given item. In the words of law professor Richard Epstein:

[P]roperty is not an individual conception, but is at root a social conception. The social conception is fairly and accurately portrayed, not by what it is I can do with the thing in question, but by who it is that I am entitled to exclude by virtue of my right. Possession becomes exclusive possession against the rest of the world…

Excludability helps to facilitate the trade of goods, offers incentives to create those goods in the first place, and promotes specialization throughout the economy. In short, property rights create a system of exclusion that supports creating and maintaining valuable goods, services, and ideas.

But property rights are not without drawbacks. Physical or intellectual property can lead to a suboptimal allocation of resources, namely market power (though this effect is often outweighed by increased ex ante incentives to create and innovate). Similarly, property rights can give rise to thickets that significantly increase the cost of amassing complementary pieces of property. Often cited are the historic (but contested) examples of tolling on the Rhine River or the airplane patent thicket of the early 20th century. Finally, strong property rights might also lead to holdout behavior, which can be addressed through top-down tools, like eminent domain, or private mechanisms, like contingent contracts.

In short, though property rights—whether they cover physical or information goods—can offer vast benefits, there are cases where they might be counterproductive. This is probably why, throughout history, property laws have evolved to achieve a reasonable balance between incentives to create goods and to ensure their efficient allocation and use.

Personal Health Data: What Are We Trying to Incentivize?

There are at least three critical questions we should ask about proposals to create property rights over personal health data.

  1. What goods or behaviors would these rights incentivize or disincentivize that are currently over- or undersupplied by the market?
  2. Are goods over- or undersupplied because of insufficient excludability?
  3. Could these rights undermine the efficient use of personal health data?

Much of the current debate centers on data obtained from direct-to-consumer genetic-testing kits. In this context, almost by definition, firms only obtain consumers’ genetic data with their consent. In western democracies, the rights to bodily integrity and to privacy generally make it illegal to administer genetic tests against a consumer or patient’s will. This makes genetic information naturally excludable, so consumers already benefit from what is effectively a property right.

When consumers decide to use a genetic-testing kit, the terms set by the testing firm generally stipulate how their personal data will be used. 23andMe has a detailed policy to this effect, as does Family Tree DNA. In the case of 23andMe, consumers can decide whether their personal information can be used for the purpose of scientific research:

You have the choice to participate in 23andMe Research by providing your consent. … 23andMe Research may study a specific group or population, identify potential areas or targets for therapeutics development, conduct or support the development of drugs, diagnostics or devices to diagnose, predict or treat medical or other health conditions, work with public, private and/or nonprofit entities on genetic research initiatives, or otherwise create, commercialize, and apply this new knowledge to improve health care.

Because this transfer of personal information is hardwired into the provision of genetic-testing services, there is space for contractual bargaining over the allocation of this information. The right to use personal health data will go toward the party that values it most, especially if information asymmetries are weeded out by existing regulations or business practices.

Regardless of data property rights, consumers have a choice: they can purchase genetic-testing services and agree to the provider’s data policy, or they can forgo the services. The service provider cannot obtain the data without entering into an agreement with the consumer. While competition between providers will affect parties’ bargaining positions, and thus the price and terms on which these services are provided, data property rights likely will not.

So, why do consumers transfer control over their genetic data? The main reason is that genetic information is inaccessible and worthless without the addition of genetic-testing services. Consumers must pass through the bottleneck of genetic testing for their genetic data to be revealed and transformed into usable information. It therefore makes sense to transfer the information to the service provider, who is in a much stronger position to draw insights from it. From the consumer’s perspective, the data is not even truly “transferred,” as the consumer had no access to it before the genetic-testing service revealed it. The value of this genetic information is then netted out in the price consumers pay for testing kits.

If personal health data were undersupplied by consumers and patients, testing firms could sweeten the deal and offer them more in return for their data. U.S. copyright law covers original compilations of data, while EU law gives 15 years of exclusive protection to the creators of original databases. Legal protections for trade secrets could also play some role. Thus, firms have some incentives to amass valuable health datasets.

But some critics argue that health data is, in fact, oversupplied. Generally, such arguments assert that agents do not account for the negative privacy externalities suffered by third-parties, such as adverse-selection problems in insurance markets. For example, Jay Pil Choi, Doh Shin Jeon, and Byung Cheol Kim argue:

Genetic tests are another example of privacy concerns due to informational externalities. Researchers have found that some subjects’ genetic information can be used to make predictions of others’ genetic disposition among the same racial or ethnic category.  … Because of practical concerns about privacy and/or invidious discrimination based on genetic information, the U.S. federal government has prohibited insurance companies and employers from any misuse of information from genetic tests under the Genetic Information Nondiscrimination Act (GINA).

But if these externalities exist (most of the examples cited by scholars are hypothetical), they are likely dwarfed by the tremendous benefits that could flow from the use of personal health data. Put differently, the assertion that “excessive” data collection may create privacy harms should be weighed against the possibility that the same collection may also lead to socially valuable goods and services that produce positive externalities.

In any case, data property rights would do little to limit these potential negative externalities. Consumers and patients are already free to agree to terms that allow or prevent their data from being resold to insurers. It is not clear how data property rights would alter the picture.

Proponents of data property rights often claim they should be associated with some form of collective bargaining. The idea is that consumers might otherwise fail to receive their “fair share” of genetic-testing firms’ revenue. But what critics portray as asymmetric bargaining power might simply be the market signaling that genetic-testing services are in high demand, with room for competitors to enter the market. Shifting rents from genetic-testing services to consumers would undermine this valuable price signal and, ultimately, diminish the quality of the services.

Perhaps more importantly, to the extent that they limit the supply of genetic information—for example, because firms are forced to pay higher prices for data and thus acquire less of it—data property rights might hinder the emergence of new treatments. If genetic data is a key input to develop personalized medicines, adopting policies that, in effect, ration the supply of that data is likely misguided.

Even if policymakers do not directly put their thumb on the scale, data property rights could still harm pharmaceutical innovation. If existing privacy regulations are any guide—notably, the previously mentioned GDPR and CCPA, as well as the federal Health Insurance Portability and Accountability Act (HIPAA)—such rights might increase red tape for pharmaceutical innovators. Privacy regulations routinely limit firms’ ability to put collected data to new and previously unforeseen uses. They also limit parties’ contractual freedom when it comes to gathering consumers’ consent.

At the margin, data property rights would make it more costly for firms to amass socially valuable datasets. This would effectively move the personalized medicine space further away from a world of permissionless innovation, thus slowing down medical progress.

In short, there is little reason to believe health-care data is misallocated. Proposals to reallocate rights to such data based on idiosyncratic distributional preferences threaten to stifle innovation in the name of privacy harms that remain mostly hypothetical.

Data Property Rights and COVID-19

The trade-off between users’ privacy and the efficient use of data also has important implications for the fight against COVID-19. Since the beginning of the pandemic, several promising initiatives have been thwarted by privacy regulations and concerns about the use of personal data. This has potentially prevented policymakers, firms, and consumers from putting information to its optimal social use. High-profile issues have included:

Each of these cases may involve genuine privacy risks. But to the extent that they do, those risks must be balanced against the potential benefits to society. If privacy concerns prevent us from deploying contact tracing or green passes at scale, we should question whether the privacy benefits are worth the cost. The same is true for rules that prohibit amassing more data than is strictly necessary, as is required by data-minimization obligations included in regulations such as the GDPR.

If our initial question was instead whether the benefits of a given data-collection scheme outweighed its potential costs to privacy, incentives could be set such that competition between firms would reduce the amount of data collected—at least, where minimized data collection is, indeed, valuable to users. Yet these considerations are almost completely absent in the COVID-19-related privacy debates, as they are in the broader privacy debate. Against this backdrop, the case for personal data property rights is dubious.

Conclusion

The key question is whether policymakers should make it easier or harder for firms and public bodies to amass large sets of personal data. This requires asking whether personal data is currently under- or over-provided, and whether the additional excludability that would be created by data property rights would offset their detrimental effect on innovation.

Swaths of personal data currently lie untapped. With the proper incentive mechanisms in place, this idle data could be mobilized to develop personalized medicines and to fight the COVID-19 outbreak, among many other valuable uses. By making such data more onerous to acquire, property rights in personal data might stifle the assembly of novel datasets that could be used to build innovative products and services.

On the other hand, when dealing with diffuse and complementary data sources, transaction costs become a real issue and the initial allocation of rights can matter a great deal. In such cases, unlike the genetic-testing kits example, it is not certain that users will be able to bargain with firms, especially where their personal information is exchanged by third parties.

If optimal reallocation is unlikely, should property rights go to the person covered by the data or to the collectors (potentially subject to user opt-outs)? Proponents of data property rights assume the first option is superior. But if the goal is to produce groundbreaking new goods and services, granting rights to data collectors might be a superior solution. Ultimately, this is an empirical question.

As Richard Epstein puts it, the goal is to “minimize the sum of errors that arise from expropriation and undercompensation, where the two are inversely related.” Rather than approach the problem with the preconceived notion that initial rights should go to users, policymakers should ensure that data flows to those economic agents who can best extract information and knowledge from it.

As things stand, there is little to suggest that the trade-offs favor creating data property rights. This is not an argument for requisitioning personal information or preventing parties from transferring data as they see fit, but simply for letting markets function, unfettered by misguided public policies.

Critics of big tech companies like Google and Amazon are increasingly focused on the supposed evils of “self-preferencing.” This refers to when digital platforms like Amazon Marketplace or Google Search, which connect competing services with potential customers or users, also offer (and sometimes prioritize) their own in-house products and services. 

The objection, raised by several members and witnesses during a Feb. 25 hearing of the House Judiciary Committee’s antitrust subcommittee, is that it is unfair to third parties that use those sites to allow the site’s owner special competitive advantages. Is it fair, for example, for Amazon to use the data it gathers from its service to design new products if third-party merchants can’t access the same data? This seemingly intuitive complaint was the basis for the European Commission’s landmark case against Google

But we cannot assume that something is bad for competition just because it is bad for certain competitors. A lot of unambiguously procompetitive behavior, like cutting prices, also tends to make life difficult for competitors. The same is true when a digital platform provides a service that is better than alternatives provided by the site’s third-party sellers. 

It’s probably true that Amazon’s access to customer search and purchase data can help it spot products it can undercut with its own versions, driving down prices. But that’s not unusual; most retailers do this, many to a much greater extent than Amazon. For example, you can buy AmazonBasics batteries for less than half the price of branded alternatives, and they’re pretty good.

There’s no doubt this is unpleasant for merchants that have to compete with these offerings. But it is also no different from having to compete with more efficient rivals who have lower costs or better insight into consumer demand. Copying products and seeking ways to offer them with better features or at a lower price, which critics of self-preferencing highlight as a particular concern, has always been a fundamental part of market competition—indeed, it is the primary way competition occurs in most markets. 

Store-branded versions of iPhone cables and Nespresso pods are certainly inconvenient for those companies, but they offer consumers cheaper alternatives. Where such copying may be problematic (say, by deterring investments in product innovations), the law awards and enforces patents and copyrights to reward novel discoveries and creative works, and trademarks to protect brand identity. But in the absence of those cases where a company has intellectual property, this is simply how competition works. 

The fundamental question is “what benefits consumers?” Services like Yelp object that they cannot compete with Google when Google embeds its Google Maps box in Google Search results, while Yelp cannot do the same. But for users, the Maps box adds valuable information to the results page, making it easier to get what they want. Google is not making Yelp worse by making its own product better. Should it have to refrain from offering services that benefit its users because doing so might make competing products comparatively less attractive?

Self-preferencing also enables platforms to promote their offerings in other markets, which is often how large tech companies compete with each other. Amazon has a photo-hosting app that competes with Google Photos and Apple’s iCloud. It recently emailed its customers to promote it. That is undoubtedly self-preferencing, since other services cannot market themselves to Amazon’s customers like this, but if it makes customers aware of an alternative they might not have otherwise considered, that is good for competition. 

This kind of behavior also allows companies to invest in offering services inexpensively, or for free, that they intend to monetize by preferencing their other, more profitable products. For example, Google invests in Android’s operating system and gives much of it away for free precisely because it can encourage Android customers to use the profitable Google Search service. Despite claims to the contrary, it is difficult to see this sort of cross-subsidy as harmful to consumers.

Self-preferencing can even be good for competing services, including third-party merchants. In many cases, it expands the size of their potential customer base. For example, blockbuster video games released by Sony and Microsoft increase demand for games by other publishers because they increase the total number of people who buy Playstations and Xboxes. This effect is clear on Amazon’s Marketplace, which has grown enormously for third-party merchants even as Amazon has increased the number of its own store-brand products on the site. By making the Amazon Marketplace more attractive, third-party sellers also benefit.

All platforms are open or closed to varying degrees. Retail “platforms,” for example, exist on a spectrum on which Craigslist is more open and neutral than eBay, which is more so than Amazon, which is itself relatively more so than, say, Walmart.com. Each position on this spectrum offers its own benefits and trade-offs for consumers. Indeed, some customers’ biggest complaint against Amazon is that it is too open, filled with third parties who leave fake reviews, offer counterfeit products, or have shoddy returns policies. Part of the role of the site is to try to correct those problems by making better rules, excluding certain sellers, or just by offering similar options directly. 

Regulators and legislators often act as if the more open and neutral, the better, but customers have repeatedly shown that they often prefer less open, less neutral options. And critics of self-preferencing frequently find themselves arguing against behavior that improves consumer outcomes, because it hurts competitors. But that is the nature of competition: what’s good for consumers is frequently bad for competitors. If we have to choose, it’s consumers who should always come first.

The slew of recent antitrust cases in the digital, tech, and pharmaceutical industries has brought significant attention to the investments many firms in these industries make in “intangibles,” such as software and research and development (R&D).

Intangibles are recognized to have an important effect on a company’s (and the economy’s) performance. For example, Jonathan Haskel and Stian Westlake (2017) highlight the increasingly large investments companies have been making in things like programming in-house software, organizational structures, and, yes, a firm’s stock of knowledge obtained through R&D. They also note the considerable difficulties associated with valuing both those investments and the outcomes (such as new operational procedures, a new piece of software, or a new patent) of those investments.

This difficulty in valuing intangibles has gone somewhat under the radar until relatively recently. There has been progress in valuing them at the aggregate level (see Ellen R. McGrattan and Edward C. Prescott (2008)) and in examining their effects at the level of individual sectors (see McGrattan (2020)). It remains difficult, however, to ascertain the value of the entire stock of intangibles held by an individual firm.

There is a method to estimate the value of one component of a firm’s stock of intangibles. Specifically, the “stock of knowledge obtained through research and development” is likely to form a large proportion of most firms’ intangibles. Treating R&D as a “stock” might not be the most common way to frame the subject, but it does have an intuitive appeal.

What a firm knows (i.e., its intellectual property) is an input to its production process, just like physical capital. The most direct way for firms to acquire knowledge is to conduct R&D, which adds to its “stock of knowledge,” as represented by its accumulated stock of R&D. In this way, a firm’s accumulated investment in R&D then becomes a stock of R&D that it can use in production of whatever goods and services it wants. Thankfully, there is a relatively straightforward (albeit imperfect) method to measure a firm’s stock of R&D that relies on information obtained from a company’s accounts, along with a few relatively benign assumptions.

This method (set out by Bronwyn Hall (1990, 1993)) uses a firm’s annual expenditures on R&D (a separate line item in most company accounts) in the “perpetual inventory” method to calculate a firm’s stock of R&D in any particular year. This perpetual inventory method is commonly used to estimate a firm’s stock of physical capital, so applying it to obtain an estimate of a firm’s stock of knowledge—i.e., their stock of R&D—should not be controversial.

All this method requires to obtain a firm’s stock of R&D for this year is knowledge of a firm’s R&D stock and its investment in R&D (i.e., its R&D expenditures) last year. This year’s R&D stock is then the sum of those R&D expenditures and its undepreciated R&D stock that is carried forward into this year.

As some R&D expenditure datasets include, for example, wages paid to scientists and research workers, this is not exactly the same as calculating a firm’s physical capital stock, which would only use a firm’s expenditures on physical capital. But given that paying people to perform R&D also adds to a firm’s stock of R&D through the increased knowledge and expertise of their employees, it seems reasonable to include this in a firm’s stock of R&D.

As mentioned previously, this method requires making certain assumptions. In particular, it is necessary to assume a rate of depreciation of the stock of R&D each period. Hall suggests a depreciation of 15% per year (compared to the roughly 7% per year for physical capital), and estimates presented by Hall, along with Wendy Li (2018), suggest that, in some industries, the figure can be as high as 50%, albeit with a wide range across industries.

The other assumption required for this method is an estimate of the firm’s initial level of stock. To see why such an assumption is necessary, suppose that you have data on a firm’s R&D expenditure running from 1990-2016. This means that you can calculate a firm’s stock of R&D for each year once you have their R&D stock in the previous year via the formula above.

When calculating the firm’s R&D stock for 2016, you need to know what their R&D stock was in 2015, while to calculate their R&D stock for 2015 you need to know their R&D stock in 2014, and so on backward until you reach the first year for which you have data: in this, case 1990.

However, working out the firm’s R&D stock in 1990 requires data on the firm’s R&D stock in 1989. The dataset does not contain any information about 1989, nor the firm’s actual stock of R&D in 1990. Hence, it is necessary to make an assumption regarding the firm’s stock of R&D in 1990.

There are several different assumptions one can make regarding this “starting value.” You could assume it is just a very small number. Or you can assume, as per Hall, that it is the firm’s R&D expenditure in 1990 divided by the sum of the R&D depreciation and average growth rates (the latter being taken as 8% per year by Hall). Note that, given the high depreciation rates for the stock of R&D, it turns out that the exact starting value does not matter significantly (particularly in years toward the end of the dataset) if you have a sufficiently long data series. At a 15% depreciation rate, more than 50% of the initial value disappears after five years.

Although there are other methods to measure a firm’s stock of R&D, these tend to provide less information or rely on stronger assumptions than the approach described above does. For example, sometimes a firm’s stock of R&D is measured using a simple count of the number of patents they hold. However, this approach does not take into account the “value” of a patent. Since, by definition, each patent is unique (with differing number of years to run, levels of quality, ability to be challenged or worked around, and so on), it is unlikely to be appropriate to use an “average value of patents sold recently” to value it. At least with the perpetual inventory method described above, a monetary value for a firm’s stock of R&D can be obtained.

The perpetual inventory method also provides a way to calculate market shares of R&D in R&D-intensive industries, which can be used alongside current measures. This would be akin to looking at capacity shares in some manufacturing industries. Of course, using market shares in R&D industries can be fraught with issues, such as whether it is appropriate to use a backward-looking measure to assess competitive constraints in a forward-looking industry. This is why any investigation into such industries should also look, for example, at a firm’s research pipeline.

Naturally, this only provides for the valuation of the R&D stock and says nothing about valuing other intangibles that are likely to play an important role in a much wider range of industries. Nonetheless, this method could provide another means for competition authorities to assess the current and historical state of R&D stocks in industries in which R&D plays an important part. It would be interesting to see what firms’ shares of R&D stocks look like, for example, in the pharmaceutical and tech industries.

In a constructive development, the Federal Trade Commission has joined its British counterpart in investigating Nvidia’s proposed $40 billion acquisition of chip designer Arm, a subsidiary of Softbank. Arm provides the technological blueprints for wireless communications devices and, subject to a royalty fee, makes those crown-jewel assets available to all interested firms. Notwithstanding Nvidia’s stated commitment to keep the existing policy in place, there is an obvious risk that the new parent, one of the world’s leading chip makers, would at some time modify this policy with adverse competitive effects.

Ironically, the FTC is likely part of the reason that the Nvidia-Arm transaction is taking place.

Since the mid-2000s, the FTC and other leading competition regulators (except for the U.S. Department of Justice’s Antitrust Division under the leadership of former Assistant Attorney General Makan Delrahim) have intervened extensively in licensing arrangements in wireless device markets, culminating in the FTC’s recent failed suit against Qualcomm. The Nvidia-Arm transaction suggests that these actions may simply lead chip designers to abandon the licensing model and shift toward structures that monetize chip-design R&D through integrated hardware and software ecosystems. Amazon and Apple are already undertaking chip innovation through this model. Antitrust action that accelerates this movement toward in-house chip design is likely to have adverse effects for the competitive health of the wireless ecosystem.

How IP Licensing Promotes Market Access

Since its inception, the wireless communications market has relied on a handful of IP licensors to supply device producers and other intermediate users with a common suite of technology inputs. The result has been an efficient division of labor between firms that specialize in upstream innovation and firms that specialize in production and other downstream functions. Contrary to the standard assumption that IP rights limit access, this licensing-based model ensures technology access to any firm willing to pay the royalty fee.

Efforts by regulators to reengineer existing relationships between innovators and implementers endanger this market structure by inducing innovators to abandon licensing-based business models, which now operate under a cloud of legal insecurity, for integrated business models in which returns on R&D investments are captured internally through hardware and software products. Rather than expanding technology access and intensifying competition, antitrust restraints on licensing freedom are liable to limit technology access and increase market concentration.

Regulatory Intervention and Market Distortion

This interventionist approach has relied on the assertion that innovators can “lock in” producers and extract a disproportionate fee in exchange for access. This prediction has never found support in fact. Contrary to theoretical arguments that patent owners can impose double-digit “royalty stacks” on device producers, empirical researchers have repeatedly found that the estimated range of aggregate rates lies in the single digits. These findings are unsurprising given market performance over more than two decades: adoption has accelerated as quality-adjusted prices have fallen and innovation has never ceased. If rates were exorbitant, market growth would have been slow, and the smartphone would be a luxury for the rich.

Despite these empirical infirmities, the FTC and other competition regulators have persisted in taking action to mitigate “holdup risk” through policy statements and enforcement actions designed to preclude IP licensors from seeking injunctive relief. The result is a one-sided legal environment in which the world’s largest device producers can effectively infringe patents at will, knowing that the worst-case scenario is a “reasonable royalty” award determined by a court, plus attorneys’ fees. Without any credible threat to deny access even after a favorable adjudication on the merits, any IP licensor’s ability to negotiate a royalty rate that reflects the value of its technology contribution is constrained.

Assuming no change in IP licensing policy on the horizon, it is therefore not surprising that an IP licensor would seek to shift toward an integrated business model in which IP is not licensed but embedded within an integrated suite of products and services. Or alternatively, an IP licensor entity might seek to be acquired by a firm that already has such a model in place. Hence, FTC v. Qualcomm leads Arm to Nvidia.

The Error Costs of Non-Evidence-Based Antitrust

These counterproductive effects of antitrust intervention demonstrate the error costs that arise when regulators act based on unverified assertions of impending market failure. Relying on the somewhat improbable assumption that chip suppliers can dictate licensing terms to device producers that are among the world’s largest companies, competition regulators have placed at risk the legal predicates of IP rights and enforceable contracts that have made the wireless-device market an economic success. As antitrust risk intensifies, the return on licensing strategies falls and competitive advantage shifts toward integrated firms that can monetize R&D internally through stand-alone product and service ecosystems.

Far from increasing competitiveness, regulators’ current approach toward IP licensing in wireless markets is likely to reduce it.

Admirers of the late Supreme Court Justice Louis Brandeis and other antitrust populists often trace the history of American anti-monopoly sentiments from the Founding Era through the Progressive Era’s passage of laws to fight the scourge of 19th century monopolists. For example, Matt Stoller of the American Economic Liberties Project, both in his book Goliath and in other writings, frames the story of America essentially as a battle between monopolists and anti-monopolists.

According to this reading, it was in the late 20th century that powerful corporations and monied interests ultimately succeeded in winning the battle in favor of monopoly power against antitrust authorities, aided by the scholarship of the “ideological” Chicago school of economics and more moderate law & economics scholars like Herbert Hovenkamp of the University of Pennsylvania Law School.

It is a framing that leaves little room for disagreements about economic theory or evidence. One is either anti-monopoly or pro-monopoly, anti-corporate power or pro-corporate power.

What this story muddles is that the dominant anti-monopoly strain from English common law, which continued well into the late 19th century, was opposed specifically to government-granted monopoly. In contrast, today’s “anti-monopolists” focus myopically on alleged monopolies that often benefit consumers, while largely ignoring monopoly power granted by government. The real monopoly problem antitrust law fails to solve is its immunization of anticompetitive government policies. Recovering the older anti-monopoly tradition would better focus activists today.

Common Law Anti-Monopoly Tradition

Scholars like Timothy Sandefur of the Goldwater Institute have written about the right to earn a living that arose out of English common law and was inherited by the United States. This anti-monopoly stance was aimed at government-granted privileges, not at successful business ventures that gained significant size or scale.

For instance, 1602’s Darcy v. Allein, better known as the “Case of Monopolies,” dealt with a “patent” originally granted by Queen Elizabeth I in 1576 to Ralph Bowes, and later bought by Edward Darcy, to make and sell playing cards. Darcy did not innovate playing cards; he merely had permission to be the sole purveyor. Thomas Allein, who attempted to sell playing cards he created, was sued for violating Darcy’s exclusive rights. Darcy’s monopoly ultimately was held to be invalid by the court, which refused to convict Allein.

Edward Coke, who actually argued on behalf of the patent in Darcy v. Allen, wrote that the case stood for the proposition that:

All trades, as well mechanical as others, which prevent idleness (the bane of the commonwealth) and exercise men and youth in labour, for the maintenance of themselves and their families, and for the increase of their substance, to serve the Queen when occasion shall require, are profitable for the commonwealth, and therefore the grant to the plaintiff to have the sole making of them is against the common law, and the benefit and liberty of the subject. (emphasis added)

In essence, Coke’s argument was more closely linked to a “right to work” than to market structures, business efficiency, or firm conduct.

The courts largely resisted royal monopolies in 17th century England, finding such grants to violate the common law. For instance, in The Case of the Tailors of Ipswich, the court cited Darcy and found:

…at the common law, no man could be prohibited from working in any lawful trade, for the law abhors idleness, the mother of all evil… especially in young men, who ought in their youth, (which is their seed time) to learn lawful sciences and trades, which are profitable to the commonwealth, and whereof they might reap the fruit in their old age, for idle in youth, poor in age; and therefore the common law abhors all monopolies, which prohibit any from working in any lawful trade. (emphasis added)

The principles enunciated in these cases were eventually codified in the Statute of Monopolies, which prohibited the crown from granting monopolies in most circumstances. This was especially the case when the monopoly prevented the right to otherwise lawful work.

This common-law tradition also had disdain for private contracts that created monopoly by restraining the right to work. For instance, the famous Dyer’s case of 1414 held that a contract in which John Dyer promised not to practice his trade in the same town as the plaintiff was void for being an unreasonable restraint on trade.The judge is supposed to have said in response to the plaintiff’s complaint that he would have imprisoned anyone who had claimed such a monopoly on his own authority.

Over time, the common law developed analysis that looked at the reasonableness of restraints on trade, such as the extent to which they were limited in geographic reach and duration, as well as the consideration given in return. This part of the anti-monopoly tradition would later constitute the thread pulled on by the populists and progressives who created the earliest American antitrust laws.

Early American Anti-Monopoly Tradition

American law largely inherited the English common law system. It also inherited the anti-monopoly tradition the common law embodied. The founding generation of American lawyers were trained on Edward Coke’s commentary in “The Institutes of the Laws of England,” wherein he strongly opposed government-granted monopolies.

This sentiment can be found in the 1641 Massachusetts Body of Liberties, which stated: “No monopolies shall be granted or allowed amongst us, but of such new Inventions that are profitable to the Countrie, and that for a short time.” In fact, the Boston Tea Party itself was in part a protest of the monopoly granted to the East India Company, which included a special refund from duties by Parliament that no other tea importers enjoyed.

This anti-monopoly tradition also can be seen in the debates at the Constitutional Convention. A proposal to give the federal government power to grant “charters of incorporation” was voted down on fears it could lead to monopolies. Thomas Jefferson, George Mason, and several Antifederalists expressed concerns about the new national government’s ability to grant monopolies, arguing that an anti-monopoly clause should be added to the Constitution. Six states wanted to include provisions that would ban monopolies and the granting of special privileges in the Constitution.

The American anti-monopoly tradition remained largely an anti-government tradition throughout much of the 19th century, rearing its head in debates about the Bank of the United States, publicly-funded internal improvements, and government-granted monopolies over bridges and seas. Pamphleteer Lysander Spooner even tried to start a rival to the Post Office by appealing to the strong American impulse against monopoly.

Coinciding with the Industrial Revolution, liberalization of corporate law made it easier for private persons to organize firms that were not simply grants of exclusive monopoly. But discontent with industrialization and other social changes contributed to the birth of a populist movement, and later to progressives like Brandeis, who focused on private combinations and corporate power rather than government-granted privileges. This is the strand of anti-monopoly sentiment that continues to dominate the rhetoric today.

What This Means for Today

Modern anti-monopoly advocates have largely forgotten the lessons of the long Anglo-American tradition that found government is often the source of monopoly power. Indeed, American law privileges government’s ability to grant favors to businesses through licensing, the tax code, subsidies, and even regulation. The state action doctrine from Parker v. Brown exempts state and municipal authorities from antitrust lawsuits even where their policies have anticompetitive effects. And the Noerr-Pennington doctrine protects the rights of industry groups to lobby the government to pass anticompetitive laws.

As a result, government is often used to harm competition, with no remedy outside of the political process that created the monopoly. Antitrust law is used instead to target businesses built by serving consumers well in the marketplace.

Recovering this older anti-monopoly tradition would help focus the anti-monopoly movement on a serious problem modern antitrust misses. While the consumer-welfare standard that modern antitrust advocates often decry has helped to focus the law on actual harms to consumers, antitrust more broadly continues to encourage rent-seeking by immunizing state action and lobbying behavior.

With the COVID-19 vaccine made by Moderna joining the one from Pfizer and BioNTech in gaining approval from the U.S. Food and Drug Administration, it should be time to celebrate the U.S. system of pharmaceutical development. The system’s incentives—notably granting patent rights to firms that invest in new and novel discoveries—have worked to an astonishing degree, producing not just one but as many as three or four effective approaches to end a viral pandemic that, just a year ago, was completely unknown.

Alas, it appears not all observers agree. Now that we have the vaccines, some advocate suspending or limiting patent rights—for example, by imposing a compulsory licensing scheme—with the argument that this is the only way for the vaccines to be produced in mass quantities worldwide. Some critics even assert that abolishing or diminishing property rights in pharmaceuticals is needed to end the pandemic.

In truth, we can effectively and efficiently distribute the vaccines while still maintaining the integrity of our patent system. 

What the false framing ignores are the important commercialization and distribution functions that patents provide, as well as the deep, long-term incentives the patent system provides to create medical innovations and develop a robust pharmaceutical supply chain. Unless we are sure this is the last pandemic we will ever face, repealing intellectual property rights now would be a catastrophic mistake.

The supply chains necessary to adequately scale drug production are incredibly complex, and do not appear overnight. The coordination and technical expertise needed to support worldwide distribution of medicines depends on an ongoing pipeline of a wide variety of pharmaceuticals to keep the entire operation viable. Public-spirited officials may in some cases be able to piece together facilities sufficient to produce and distribute a single medicine in the short term, but over the long term, global health depends on profit motives to guarantee the commercialization pipeline remains healthy. 

But the real challenge is in maintaining proper incentives to develop new drugs. It has long been understood that information goods like intellectual property will be undersupplied without sufficient legal protections. Innovators and those that commercialize innovations—like researchers and pharmaceutical companies—have less incentive to discover and market new medicines as the likelihood that they will be able to realize a return for their efforts diminishes. Without those returns, it’s far less certain the COVID vaccines would have been produced so quickly, or at all. The same holds for the vaccines we will need for the next crisis or badly needed treatments for other deadly diseases.

Patents are not the only way to structure incentives, as can be seen with the current vaccines. Pharmaceutical companies also took financial incentives from various governments in the form of direct payment or in purchase guarantees. But this enhances, rather than diminishes, the larger argument. There needs to be adequate returns for those who engage in large, risky undertakings like creating a new drug. 

Some critics would prefer to limit pharmaceutical companies’ returns solely to those early government investments, but there are problems with this approach. It is difficult for governments to know beforehand what level of profit is needed to properly incentivize firms to engage in producing these innovations.  To the extent that direct government investment is useful, it often will be as an additional inducement that encourages new entry by multiple firms who might each pursue different technologies. 

Thus, in the case of coronavirus vaccines, government subsidies may have enticed more competitors to enter more quickly, or not to drop out as quickly, in hopes that they would still realize a profit, notwithstanding the risks. Where there might have been only one or two vaccines produced in the United States, it appears likely we will see as many as four.

But there will always be necessary trade-offs. Governments cannot know how to set proper incentives to encourage development of every possible medicine for every possible condition by every possible producer.  Not only do we not know which diseases and which firms to prioritize, but we have no idea how to determine which treatment approaches to encourage. 

The COVID-19 vaccines provide a clear illustration of this problem. We have seen development of both traditional vaccines and experimental mRNA treatments to combat the virus. Thankfully, both have shown positive results, but there was no way to know that in March. In this perennial state of ignorance,t markets generally have provided the best—though still imperfect—way to make decisions. 

The patent system’s critics sometimes claim that prizes would offer a better way to encourage discovery. But if we relied solely on government-directed prizes, we might never have had the needed research into the technology that underlies mRNA. As one recent report put it, “before messenger RNA was a multibillion-dollar idea, it was a scientific backwater.” Simply put, without patent rights as the backstop to purely academic or government-led innovation and commercialization, it is far less likely that we would have seen successful COVID vaccines developed as quickly.

It is difficult for governments to be prepared for the unknown. Abolishing or diminishing pharmaceutical patents would leave us even less prepared for the next medical crisis. That would only add to the lasting damage that the COVID-19 pandemic has already wrought on the world.

The European Court of Justice issued its long-awaited ruling Dec. 9 in the Groupe Canal+ case. The case centered on licensing agreements in which Paramount Pictures granted absolute territorial exclusivity to several European broadcasters, including Canal+.

Back in 2015, the European Commission charged six U.S. film studios, including Paramount,  as well as British broadcaster Sky UK Ltd., with illegally limiting access to content. The crux of the EC’s complaint was that the contractual agreements to limit cross-border competition for content distribution ran afoul of European Union competition law. Paramount ultimately settled its case with the commission and agreed to remove the problematic clauses from its contracts. This affected third parties like Canal+, who lost valuable contractual protections. 

While the ECJ ultimately upheld the agreements on what amounts to procedural grounds (Canal+ was unduly affected by a decision to which it was not a party), the case provides yet another example of the European Commission’s misguided stance on absolute territorial licensing, sometimes referred to as “geo-blocking.”

The EC’s long-running efforts to restrict geo-blocking emerge from its attempts to harmonize trade across the EU. Notably, in its Digital Single Market initiative, the Commission envisioned

[A] Digital Single Market is one in which the free movement of goods, persons, services and capital is ensured and where individuals and businesses can s​eamlessly access and exercise online activities under conditions of f​air competition,​ and a high level of consumer and personal data protection, irrespective of their nationality or place of residence.

This policy stance has been endorsed consistently by the European Court of Justice. In the 2011 Murphy decision, for example, the court held that agreements between rights holders and broadcasters infringe European competition when they categorically prevent the latter from supplying “decoding devices” to consumers located in other member states. More precisely, while rights holders can license their content on a territorial basis, they cannot restrict so-called “passive sales”; broadcasters can be prevented from actively chasing consumers in other member states, but not from serving them altogether. If this sounds Kafkaesque, it’s because it is.

The problem with the ECJ’s vision is that it elides the complex factors that underlie a healthy free-trade zone. Geo-blocking frequently is misunderstood or derided by consumers as an unwarranted restriction on their consumption preferences. It doesn’t feel “fair” or “seamless” when a rights holder can decide who can access their content and on what terms. But that doesn’t mean geo-blocking is a nefarious or socially harmful practice. Quite the contrary: allowing creators to create different sets of distribution options offers both a return to the creators as well as more choice in general to consumers. 

In economic terms, geo-blocking allows rights holders to engage in third-degree price discrimination; that is, they have the ability to charge different prices for different sets of consumers. This type of pricing will increase total welfare so long as it increases output. As Hal Varian puts it:

If a new market is opened up because of price discrimination—a market that was not previously being served under the ordinary monopoly—then we will typically have a Pareto improving welfare enhancement.

Another benefit of third-degree price discrimination is that, by shifting some economic surplus from consumers to firms, it can stimulate investment in much the same way copyright and patents do. Put simply, the prospect of greater economic rents increases the maximum investment firms will be willing to make in content creation and distribution.

For these reasons, respecting parties’ freedom to license content as they see fit is likely to produce much more efficient outcomes than annulling those agreements through government-imposed “seamless access” and “fair competition” rules. Part of the value of copyright law is in creating space to contract by protecting creators’ property rights. Without geo-blocking, the enforcement of licensing agreements would become much more difficult. Laws restricting copyright owners’ ability to contract freely reduce allocational efficiency, as well as the incentives to create in the first place. Further, when individual creators have commercial and creative autonomy, they gain a degree of predictability that can ensure they will continue to produce content in the future. 

The European Union would do well to adopt a more nuanced understanding of the contractual relationships between producers and distributors. 

More than two decades after Congress sought to strike a balance between the interests of creators and service providers with the Digital Millennium Copyright Act (DMCA), it is clear that Section 512 of the Copyright Act has failed to create the right incentives to curb online copyright infringement. Indeed, as a May report from the U.S. Copyright Office concluded, the “original intended balance has been tilted askew.”

As laid out in the DMCA, Section 512’s goal was to “preserve strong incentives for service providers and copyright owners to cooperate to detect and deal with copyright infringements” while simultaneously providing “greater certainty to service providers concerning their legal exposure for infringements.” While the law has certainly accomplished the latter, it has been at the expense of the former.

The good news is that Congress has taken notice. Sens. Thom Tillis (R-N.C.) and Chris Coons (D-Del.)—the chair and ranking member, respectively, of the Senate Judiciary Subcommittee on Intellectual Property—have held a series of hearings on potential reforms to the Copyright Act, with another scheduled for Dec. 15. Tillis also recently solicited feedback to guide a discussion draft of reform legislation he intends to make public shortly after the hearing. (Our answers to Tillis’ questionnaire can be found here.) 

The problem

Back in 1998, there were reasons for lawmakers to believe Section 512 would help Internet users, copyright holders and online service providers (OSPs) alike. Holding OSPs culpable for any misuse of copyrighted material in the vast amount of user-generated content they carry would create unreasonable litigation risk and hinder development of online distribution services. That would be bad for Internet users, for copyright holders who benefit from the lawful dissemination of their content and for the OSPs themselves. In that sense, providing OSPs limited liability protection for collaborating to curb piracy was seen as a way to create a healthier online ecosystem to everyone’s advantage.

But as Section 512 has been applied by the courts, OSPs need do little more than respond to takedown notices from copyright holders. At that point, the copyrighted content has already been unlawfully disseminated and damage has already been done. Moreover, in the interim, service providers can continue to monetize the infringing content through ad placement or other mechanisms. In essence, Section 512 has in practice given OSPs an economic incentive to do as little as possible to prevent infringement for as long as possible so that they can avoid costs and continue to generate revenue. That is antithetical to the copyright system, which is supposed to give copyright holders the ability to determine how their content is disseminated and to negotiate compensation.

Such concerns are compounded by the fact that a single unauthorized version of a copyrighted work on one Internet site may quickly be replicated into hundreds of versions at hundreds of sites across the globe. Copyright holders must scour the entire Internet for unauthorized versions of their content in a constant state of notice-sending, only to have the content continue to pop up. That is a costly and time-consuming burden for any copyright holder. The burden is even greater for independent creators who do not have their own content-protection departments. The hours and days they lose policing the Internet for their copyrighted material is time they could be spending on their craft.

Potential solutions

Proper safe harbors should encourage OSPs to help prevent copyrighted content from being improperly disseminated. Ideally, such rules could also encourage OSPs to license content. That would enable them and their users to benefit from the content without litigation risk, but while respecting copyright holders’ rights. One of the benefits of intermediaries is that they can more efficiently negotiate such agreements with copyright holders than the copyright holders could with each of the service providers’ many users.

But the near-complete absence of intermediary liability means OSPs have little incentive to curb piracy or license content. As a condition of receiving safe harbor protection, OSPs should be required to take reasonable steps: 1) to prevent infringement and 2) to stop, upon notice, infringement that has already occurred. Such steps would include:

  • Authentication of Identities. Ensuring online service providers know their users’ true identities would discourage those users from engaging in piracy, while also making it harder for users to simply change account names once caught. It would also help copyright holders to seek redress, including in cases where all they want is to ask users to cease unintentional infringement. Identities could generally remain confidential, disclosed to third parties only when needed to resolve a case of infringement.
  • Education Measures. Unintentional infringement might be avoided if OSPs briefly explained to users the principles of copyright and fair use and asked whether they were transmitting content that contained someone else’s copyrighted work. Such explanations and inquiries should be provided at the point a user seeks to disseminate content. Links could be included pointing to more detailed information on the Copyright Office’s site.
  • Revisions to the Knowledge Standard. According to the text of Section 512, to be protected by the safe harbors, OSPs must not have either “actual knowledge” of infringement or be “aware of facts or circumstances from which infringing activity is apparent.” This awareness of facts or circumstances is often referred to as “red flag” knowledge. But courts have all but read this standard out of the statute. The statute should be revised to make clear that OSPs are required to act when infringement is apparent, even if they have not been alerted to a specific instance of infringement by a copyright holder.
  • Preservation of Rights Management Information. Digital works often have embedded data indicating who the copyright holders are and how the content may be used. OSPs should be held culpable if they negligently, recklessly or knowingly remove that data. Copyright holders should not be required, as is the case today, to demonstrate that the online service provider acted with an intent to facilitate infringement. The lack of accurate rights-management information makes it harder for copyright holders to enforce their rights, as well as for individuals willing to license content to determine who to approach to do so. OSPs should thus have an obligation to ensure that rights-management information included by a copyright holder remains intact, especially since OSPs often monetize that content through advertising or other means.
  • Filtering and Staydown: Allowing all copyright holders to provide “fingerprints” of their content would enable OSPs to prevent copyrighted content from being unlawfully uploaded or otherwise disseminated. It could also help ensure that any copyrighted content that slips through and is subsequently taken down manages to stay down. Preventing unauthorized dissemination through filtering could also reduce the number of takedown notices copyright holders would need to send and OSPs would need to process—saving everyone time, hassle and money. Filtering technologies, such as Google’s Content ID, already exist, although Google does not make it available to all copyright holders. The EU has recently adopted filtering requirements. A U.S. filtering requirement would help to foster a market for the creation of additional filtering solutions.
  • Adoption of Standard Technical Measures. Section 512(i) requires OSPs to accommodate standard technical measures for preventing piracy that have been developed through a voluntary, consensus process. The immunity from liability that the safe harbors provide, however, reduces OSPs’ incentive to collaborate to develop standard technical measures. The Copyright Office should be authorized to certify certain solutions as standard technical measures, and even to commission the creation of additional ones. This would help foster a market for such measures.
  • Improving the Takedown Process. The statute allows copyright holders to provide representative lists in their notices for takedown, rather than require them to itemize every URL for takedown. Yet OSPs often impose technicalities before they will act on a representative list. The Copyright Office should be authorized to create model forms deemed to provide adequate notice, as well as to specify what kind of information is both necessary and sufficient to require takedown.
  • Effective Repeat Infringer Policies. The statute already requires OSPs to have policies to terminate service to repeat infringers, and to reasonably implement those policies. Courts have historically interpreted those requirements rather laxly. The Copyright Office should be authorized to create a model repeat-infringer policy deemed to comply with the requirement.

In addition to creating baseline requirements such as the ones listed above, the Copyright Act should be revised to provide additional tools to resolve disputes. Creating a small claims process, as provided in the CASE Act, could alleviate the burdens of litigation for smaller copyright holders, smaller OSPs and individual users. Also, courts ordinarily have authority to issue no-fault injunctions to third parties when doing so is necessary to effectuate their rulings. In the copyright context, even when U.S. courts have ruled that websites have willfully engaged in infringement, ceasing the infringement can be difficult, especially when the parties and their facilities are located outside the United States. Courts should be clearly authorized to issue no-fault injunctions requiring OSPs to block access to sites that the courts have ruled are willfully engaged in mass infringement. Such orders are already available to courts in many other countries and have not, as some hyperbolically predict, “broken the Internet.”

Revising the Copyright Act as described above would encourage OSPs both to prevent the initial infringement and to more effectively curtail continued infringement that has slipped through. OSPs could decline to implement these content-protection requirements, but they would lose the safe harbors and be subject to the ordinary standards of copyright liability. OSPs also might more widely choose to license copyrighted works that are likely to appear on their platforms. That would benefit copyright holders and Internet consumers alike. The providers themselves might even find it leads to increased use of their service—as well as increased profits.

This blog post summarizes the findings of a paper published in Volume 21 of the Federalist Society Review. The paper was co-authored by Dirk Auer, Geoffrey A. Manne, Julian Morris, & Kristian Stout. It uses the analytical framework of law and economics to discuss recent patent law reforms in the US, and their negative ramifications for inventors. The full paper can be found on the Federalist Society’s website, here.

Property rights are a pillar of the free market. As Harold Demsetz famously argued, they spur specialization, investment and competition throughout the economy. And the same holds true for intellectual property rights (IPRs). 

However, despite the many social benefits that have been attributed to intellectual property protection, the past decades have witnessed the birth and growth of an powerful intellectual movement seeking to reduce the legal protections offered to inventors by patent law.

These critics argue that excessive patent protection is holding back western economies. For instance, they posit that the owners of the standard essential patents (“SEPs”) are charging their commercial partners too much for the rights to use their patents (this is referred to as patent holdup and royalty stacking). Furthermore, they argue that so-called patent trolls (“patent-assertion entities” or “PAEs”) are deterring innovation by small startups by employing “extortionate” litigation tactics.

Unfortunately, this movement has led to a deterioration of appropriate remedies in patent disputes.

The many benefits of patent protection

While patents likely play an important role in providing inventors with incentives to innovate, their role in enabling the commercialization of ideas is probably even more important.

By creating a system of clearly defined property rights, patents empower market players to coordinate their efforts in order to collectively produce innovations. In other words, patents greatly reduce the cost of concluding mutually-advantageous deals, whereby firms specialize in various aspects of the innovation process. Critically, these deals occur in the shadow of patent litigation and injunctive relief. The threat of these ensures that all parties have an incentive to take a seat at the negotiating table.

This is arguably nowhere more apparent than in the standardization space. Many of the most high-profile modern technologies are the fruit of large-scale collaboration coordinated through standards developing organizations (SDOs). These include technologies such as Wi-Fi, 3G, 4G, 5G, Blu-Ray, USB-C, and Thunderbolt 3. The coordination necessary to produce technologies of this sort is hard to imagine without some form of enforceable property right in the resulting inventions.

The shift away from injunctive relief

Of the many recent reforms to patent law, the most significant has arguably been a significant limitation of patent holders’ availability to obtain permanent injunctions. This is particularly true in the case of so-called standard essential patents (SEPs). 

However, intellectual property laws are meaningless without the ability to enforce them and remedy breaches. And injunctions are almost certainly the most powerful, and important, of these remedies.

The significance of injunctions is perhaps best understood by highlighting the weakness of damages awards when applied to intangible assets. Indeed, it is often difficult to establish the appropriate size of an award of damages when intangible property—such as invention and innovation in the case of patents—is the core property being protected. This is because these assets are almost always highly idiosyncratic. By blocking all infringing uses of an invention, injunctions thus prevent courts from having to act as price regulators. In doing so, they also ensure that innovators are adequately rewarded for their technological contributions.

Unfortunately, the Supreme Court’s 2006 ruling in eBay Inc. v. MercExchange, LLC significantly narrowed the circumstances under which patent holders could obtain permanent injunctions. This predictably led lower courts to grant fewer permanent injunctions in patent litigation suits. 

But while critics of injunctions had hoped that reducing their availability would spur innovation, empirical evidence suggests that this has not been the case so far. 

Other reforms

And injunctions are not the only area of patent law that have witnessed a gradual shift against the interests of patent holders. Much of the same could be said about damages awards, revised fee shifting standards, and the introduction of Inter Partes Review.

Critically, the intellectual movement to soften patent protection has also had ramifications outside of the judicial sphere. It is notably behind several legislative reforms, particularly the America Invents Act. Moreover, it has led numerous private parties – most notably Standard Developing Organizations (SDOs) – to adopt stances that have advanced the interests of technology implementers at the expense of inventors.

For instance, one of the most noteworthy reforms has been IEEE’s sweeping reforms to its IP policy, in 2015. The new rules notably prevented SEP holders from seeking permanent injunctions against so-called “willing licensees”. They also mandated that royalties pertaining to SEPs should be based upon the value of the smallest saleable component that practices the patented technology. Both of these measures ultimately sought to tilt the bargaining range in license negotiations in favor of implementers.

Concluding remarks

The developments discussed in this article might seem like small details, but they are part of a wider trend whereby U.S. patent law is becoming increasingly inhospitable for inventors. This is particularly true when it comes to the enforcement of SEPs by means of injunction.

While the short-term effect of these various reforms has yet to be quantified, there is a real risk that, by decreasing the value of patents and increasing transaction costs, these changes may ultimately limit the diffusion of innovations and harm incentives to invent.

This likely explains why some legislators have recently put forward bills that seek to reinforce the U.S. patent system (here and here).

Despite these initiatives, the fact remains that there is today a strong undercurrent pushing for weaker or less certain patent protection. If left unchecked, this threatens to undermine the utility of patents in facilitating the efficient allocation of resources for innovation and its commercialization. Policymakers should thus pay careful attention to the changes this trend may bring about and move swiftly to recalibrate the patent system where needed in order to better protect the property rights of inventors and yield more innovation overall.