Archives For truth on the market

The Legatum Institute (Legatum) is “an international think tank based in London and a registered UK charity [that] . . . focuses on understanding, measuring, and explaining the journey from poverty to prosperity for individuals, communities, and nations.”  Legatum’s annual “Legatum Prosperity Index . . . measure[s] and track[s] the performance of 149 countries of the world across multiple categories including health, education, the economy, social capital, and more.”

Among other major Legatum initiatives is a “Special Trade Commission” (STC) created in the wake of the United Kingdom’s (UK) vote to leave the European Union (Brexit).  According to Legatum, “the STC aims to present a roadmap for the many trade negotiations which the UK will need to undertake now.  It seeks to re-focus the public discussion on Brexit to a positive conversation on opportunities, rather than challenges, while presenting empirical evidence of the dangers of not following an expansive trade negotiating path.”  STC Commissioners (I am one of them) include former international trade negotiators and academic experts from Australia, New Zealand, Singapore, Switzerland, Canada, Mexico, the United Kingdom and the United States (see here).  The Commissioners serve in their private capacities, representing their personal viewpoints.  Since last summer, the STC has released (and will continue to release) a variety of papers on the specific legal and economic implications of Brexit negotiations, available on Legatum’s website (see here, here, here, here, and here).

From February 6-8 I participated in the inaugural STC Conference in London, summarized by Legatum as follows:

During the Conference the[] [STC Commissioners] began to outline a vision for Britain’s exit from the European Union and the many trade negotiations that the UK will need to undertake. They discussed the state of transatlantic trade, the likely impact of the Trump administration on those ties as well as the NAFTA [North American Free Trade Agreement among the United States, Canada, and Mexico) renegotiation, the prospects for TTIP [Transatlantic Trade and Investment Partnership negotiations between the United States and the European Union, no longer actively being pursued] and the resurrection of TPP [Trans-Pacific Partnership negotiations between the United States and certain Pacific Rim nations, U.S. participation withdrawn by President Trump] the future of the WTO [World Trade Organization] and the opportunities for Britain to pursue unilateral, plurilateral and multilateral liberalisation. A future Prosperity Zone between like-minded countries was repeatedly highlighted as a key opportunity for post-Brexit Britain to engage in a high-standards, growth-creating trade agreement.

The Commissioners spoke publicly to a joint meeting attended by the House of Commons and the House of Lords as well as the International Trade Committee in the House of Commons and at a public event hosted at the Legatum Institute where they shared their expertise and recommendations for the UK’s exit strategy.

The broad theme of the STC Commissioners’ presentations was that the Brexit process, if handled appropriately, can set the stage for greater economic liberalization, international trade expansion, and heightened economic growth and prosperity, in the United Kingdom and elsewhere.  In particular, the STC recommended that the UK Government pursue four different paths simultaneously over the next several years, in connection with its withdrawal from the European Union:

  1. Work to further lower UK trade barriers beyond the levels set by the UK’s current World Trade Organization (WTO) commitments, by pledging to apply a tariff for some products below its WTO “bound” tariff rate commitments to levels well below the “Common External Tariff” rates the UK currently applies to non-EU imports as an EU member; and by unilaterally liberalizing other aspects of its trade policy, in areas such as government procurement, for example.
  2. Propose plurilateral free trade agreements between the UK and a few like-minded nations that have among the world’s most free and open economies, such as Australia, New Zealand, and Singapore; and work to further liberalize global technical standards through active participation in such organizations as the Basel Convention (cross-boundary hazardous waste disposal) and IOSCO (international securities regulation).
  3. Propose bilateral free trade agreements between the UK and the United States, Switzerland, and perhaps other countries, designed to expand commerce with key UK trading partners, as well as securing a comprehensive free trade agreement with the EU.
  4. Unilaterally reduce UK regulatory burdens without regard to trade negotiations as part of a domestic “competitiveness agenda,” involving procompetitive regulatory reform and the elimination of tariff to the greatest extent feasible; a UK Government productivity commission employing cost-benefit analysis could be established to carry out this program (beginning in the late 1980s, the Australian Government reduced its regulatory burdens and spurred economic growth, with the assistance of a national productivity commission).

These “four pillars” of trade-liberalizing reform are complementary and self-reinforcing.  The reduction of UK trade barriers should encourage other countries to liberalize and consider joining plurilateral free trade agreements already negotiated with the UK, or perhaps consider exploring their own bilateral trade arrangements with the UK.  Furthermore, individual nations’ incentives to gain greater access to the UK market through trade negotiations should be further enhanced by the unilateral reduction of UK regulatory constraints.

As trade barriers drop, UK consumers (including poorer consumers) should perceive a direct benefit from economic liberalization, providing political support for continued liberalization.  And the economic growth and innovation spurred by this virtuous cycle should encourage the European Union and its member states to “join the club” by paring back common external tariffs and by loosening regulatory impediments to international competition, such as restrictive standards and licensing schemes.  In short, the four paths provide the outlines for a “win-win” strategy that would be beneficial to the UK and its trading partners, both within and outside of the EU.

Admittedly, the STC’s proposals may have to overcome opposition from well-organized interest groups who would be harmed by liberalization, and may be viewed with some skepticism by some risk averse government officials and politicians.  The task of the STC will be to continue to work with the UK Government and outside stakeholders to convince them that Brexit strategies centered on bilateral and plurilateral trade liberalization, in tandem with regulatory relief, provide a way forward that will prove mutually beneficial to producers and consumers in the UK – and in other nations as well.

Stay tuned.

 

 

 

The American Bar Association Antitrust Section’s Presidential Transition Report (“Report”), released on January 24, provides a helpful practitioners’ perspective on the state of federal antitrust and consumer protection enforcement, and propounds a variety of useful recommendations for marginal improvements in agency practices, particularly with respect to improving enforcement transparency and reducing enforcement-related costs.  It also makes several good observations on the interplay of antitrust and regulation, and commendably notes the importance of promoting U.S. leadership in international antitrust policy.  This is all well and good.  Nevertheless, the Report’s discussion of various substantive topics poses a number of concerns that seriously detract from its utility, which I summarize below.  Accordingly, I recommend that the new Administration accord respectful attention to the Report’s discussion of process improvements, and international developments, but ignore the Report’s discussion of novel substantive antitrust theories, vertical restraints, and intellectual property.

1.  The Big Picture: Too Much Attention Paid to Antitrust “Possibility Theorems”

In discussing substance, the Report trots out all the theoretical stories of possible anticompetitive harm raised over the last decade or so, such as “product hopping” (“minor” pharmaceutical improvements based on new patents that are portrayed as exclusionary devices), “contracts that reference rivals” (discount schemes that purportedly harm competition by limiting sourcing from a supplier’s rivals), “hold-ups” by patentees (demands by patentees for “overly high” royalties on their legitimate property rights), and so forth.  What the Report ignores is the costs that these new theories impose on the competitive system, and, in particular, on incentives to innovate.  These new theories often are directed at innovative novel business practices that may have the potential to confer substantial efficiency benefits – including enhanced innovation and economic growth – on the American economy.  Unproven theories of harm may disincentivize such practices and impose a hidden drag on the economy.  (One is reminded of Nobel Laureate Ronald Coase’s lament (see here) that “[i]f an economist finds something . . . that he does not understand, he looks for a monopoly explanation. And as in this field we are rather ignorant, the number of ununderstandable practices tends to be rather large, and the reliance on monopoly explanations frequent.”)  Although the Report generally avoids taking a position on these novel theories, the lip service it gives implicitly encourages federal antitrust agency investigations designed to deploy these shiny new antitrust toys.  This in turn leads to a misallocation of resources (unequivocally harmful activity, especially hard core cartel conduct, merits the highest priority) and generates potentially high error and administrative costs, at odds with a sensible decision-theoretic approach to antitrust administration (see here and here).  In sum, the Trump Administration should pay no attention to the Report’s commentary on new substantive antitrust theories.

2.  Vertical Contractual Restraints

The Report inappropriately (and, in my view, amazingly) suggests that antitrust enforcers should give serious attention to vertical contractual restraints:

Recognizing that the current state of RPM law in both minimum and maximum price contexts requires sophisticated balancing of pro- and anti-competitive tendencies, the dearth of guidance from the Agencies in the form of either guidelines or litigated cases leaves open important questions in an area of law that can have a direct and substantial impact on consumers. For example, it would be beneficial for the Agencies to provide guidance on how they think about balancing asserted quality and service benefits that can flow from maintaining minimum prices for certain types of products against the potential that RPM reduces competition to the detriment of consumers. Perhaps equally important, the Agencies should provide guidance on how they would analyze the vigor of interbrand competition in markets where some producers have restricted intrabrand competition among distributors of their products.    

The U.S. Justice Department (DOJ) and Federal Trade Commission (FTC) largely have avoided bringing pure contractual vertical restraints cases in recent decades, and for good reason.  Although vertical restraints theoretically might be used to facilitate horizontal collusion (say, to enforce a distributors’ cartel) or anticompetitive exclusion (say, to enable a dominant manufacturer to deny rivals access to efficient distribution), such cases appear exceedingly rare.  Real world empirical research suggests vertical restraints generally are procompetitive (see, for example, here).  What’s more, a robust theoretical literature supports efficiency-based explanations for vertical restraints (see, for example, here), as recognized by the U.S. Supreme Court in its 2007 Leegin decision.  An aggressive approach to vertical restraints enforcement would ignore this economic learning, likely yield high error costs, and dissuade businesses from considering efficient vertical contracts, to the detriment of social welfare.  Moreover, antitrust prosecutorial resources are limited, and optimal policy indicates they should be directed to the most serious competitive problems.  The Report’s references to “open important questions” and the need for “guidance” on vertical restraints appears oblivious to these realities.  Furthermore, the Report’s mention of “balancing” interbrand versus intrabrand effects reflects a legalistic approach to vertical contracts that is at odds with modern economic analysis.

In short, the Report’s discussion of vertical restraints should be accorded no weight by new enforcers, and antitrust prosecutors would be well advised not to include vertical restraints investigations on their list of priorities.

3.  IP Issues

The Report recommends that the DOJ and FTC (“Agencies”) devote substantial attention to issues related to the unilateral exercise of patent rights, “holdup” and “holdout”:

We . . . recommend that the Agencies gather reliable and credible information on—and propose a framework for evaluating—holdup and holdout, and the circumstances in which either may be anticompetitive. The Agencies are particularly well-suited to gather evidence and assess competitive implications of such practices, which could then inform policymaking, advocacy, and potential cases. The Agencies’ perspectives could contribute valuable insights to the larger antitrust community.

Gathering information with an eye to bringing potential antitrust cases involving the unilateral exercise of patent rights through straightforward patent licensing involves a misapplication of resources.  As Professor Josh Wright and Judge Douglas Ginsburg, among others, have pointed out, antitrust is not well-suited to dealing with disputes between patentees and licensees over licensing rates – private law remedies are best designed to handle such contractual controversies (see, for example, here).  Furthermore, using antitrust law to depress returns to unilateral patent licenses threatens to reduce dynamic efficiency and create disincentives for innovation (see FTC Commissioner (and currently Acting Chairman) Maureen Ohlhausen’s thoughtful article, here).  The Report regrettably ignores this important research.  The Report instead should have called upon the FTC and DOJ to drop their ill-conceived recent emphasis on unilateral patent exploitation, and to focus instead on problems of collusion among holders of competing patented technologies.

That is not all.  The Report’s “suggest[ion] that the [federal antitrust] Agencies consider offering guidance to the ITC [International Trade Commission] about potential SEP holdup and holdout” is a recipe for weakening legitimate U.S. patent rights that are threatened by foreign infringers.  American patentees already face challenges from over a decade’s worth of Supreme Court decisions that have constrained the value of their holdings.  As I have explained elsewhere, efforts to limit the ability of the ITC to issue exclusion orders in the face of infringement overseas further diminishes the value of American patents and disincentivizes innovation (see here).  What’s worse, the Report is not only oblivious of this reality, it goes out of its way to “put a heavy thumb on the scale” in favor of patent infringers, stating (footnote omitted):

If the ITC were to issue exclusion orders to SEP owners under circumstances in which injunctions would not be appropriate under the [Supreme Court’s] eBay standard [for patent litigation], the inconsistency could induce SEP owners to strategically use the ITC in an effort to achieve settlements of patent disputes on terms that might require payment of supracompetitive royalties.  Though it is not likely how likely this is or whether the risk has led to supracompetitive prices in the past, this dynamic could lead to holdup by SEP owners and unconscionably higher royalties.

This commentary on the possibility of “unconscionable” royalties reads like a press release authored by patent infringers.  In fact, there is a dearth of evidence of hold-up, let alone hold-up-related “unconscionable” royalties.  Moreover, it is most decidedly not the role of antitrust enforcers to rule on the “unconscionability” of the unilateral pricing decision of a patent holder (apparently the Report writers forgot to consult Justice Scalia’s Trinko opinion, which emphasizes the right of a monopolist to charge a monopoly price).  Furthermore, not only is this discussion wrong-headed, it flies in the face of concerns expressed elsewhere in the Report regarding ill-advised mandates imposed by foreign antitrust enforcement authorities.  (Recently certain foreign enforcers have shown themselves all too willing to countenance “excessive” patent royalty claims in cases involving American companies).

Finally, other IP-related references in the Report similarly show a lack of regulatory humility.  Theoretical harms from the disaggregation of complementary patents, and from “product hopping” patents (see above), among other novel practices, implicitly encourage the FTC and DOJ (not to mention private parties) to consider bringing cases based on expansive theories of liability, without regard to the costs of the antitrust system as a whole (including the chilling of innovative business activity).  Such cases might benefit the antitrust bar, but prioritizing them would be at odds with the key policy objective of antitrust, the promotion of consumer welfare.

 

So I’ve just finished writing a book (hence my long hiatus from Truth on the Market).  Now that the draft is out of my hands and with the publisher (Cambridge University Press), I figured it’s a good time to rejoin my colleagues here at TOTM.  To get back into the swing of things, I’m planning to produce a series of posts describing my new book, which may be of interest to a number of TOTM readers.  I’ll get things started today with a brief overview of the project.

The book is titled How to Regulate: A Guide for Policy Makers.  A topic of that enormity could obviously fill many volumes.  I sought to address the matter in a single, non-technical book because I think law schools often do a poor job teaching their students, many of whom are future regulators, the substance of sound regulation.  Law schools regularly teach administrative law, the procedures that must be followed to ensure that rules have the force of law.  Rarely, however, do law schools teach students how to craft the substance of a policy to address a new perceived problem (e.g., What tools are available? What are the pros and cons of each?).

Economists study that matter, of course.  But economists are often naïve about the difficulty of transforming their textbook models into concrete rules that can be easily administered by business planners and adjudicators.  Many economists also pay little attention to the high information requirements of the policies they propose (i.e., the Hayekian knowledge problem) and the susceptibility of those policies to political manipulation by well-organized interest groups (i.e., public choice concerns).

How to Regulate endeavors to provide both economic training to lawyers and law students and a sense of the “limits of law” to the economists and other policy wonks who tend to be involved in crafting regulations.  Below the fold, I’ll give a brief overview of the book.  In later posts, I’ll describe some of the book’s specific chapters. Continue Reading…

The Federal Trade Commission’s (FTC) regrettable January 17 filing of a federal court injunctive action against Qualcomm, in the waning days of the Obama Administration, is a blow to its institutional integrity and well-earned reputation as a top notch competition agency.

Stripping away the semantic gloss, the heart of the FTC’s complaint is that Qualcomm is charging smartphone makers “too much” for licenses needed to practice standardized cellular communications technologies – technologies that Qualcomm developed. This complaint flies in the face of the Supreme Court’s teaching in Verizon v. Trinko that a monopolist has every right to charge monopoly prices and thereby enjoy the full fruits of its legitimately obtained monopoly. But Qualcomm is more than one exceptionally ill-advised example of prosecutorial overreach, that (hopefully) will fail and end up on the scrapheap of unsound federal antitrust initiatives. The Qualcomm complaint undoubtedly will be cited by aggressive foreign competition authorities as showing that American antitrust enforcement now recognizes mere “excessive pricing” as a form of “monopoly abuse” – therefore justifying “excessive pricing” cases that are growing like topsy abroad, especially in East Asia.

Particularly unfortunate is the fact that the Commission chose to authorize the filing by a 2-1 vote, which ignored Commissioner Maureen Ohlhausen’s pithy dissent – a rarity in cases involving the filing of federal lawsuits. Commissioner Ohlhausen’s analysis skewers the legal and economic basis for the FTC’s complaint, and her summary, which includes an outstanding statement of basic antitrust enforcement principles, is well worth noting (footnote omitted):

My practice is not to write dissenting statements when the Commission, against my vote, authorizes litigation. That policy reflects several principles. It preserves the integrity of the agency’s mission, recognizes that reasonable minds can differ, and supports the FTC’s staff, who litigate demanding cases for consumers’ benefit. On the rare occasion when I do write, it has been to avoid implying that I disagree with the complaint’s theory of liability.

I do not depart from that policy lightly. Yet, in the Commission’s 2-1 decision to sue Qualcomm, I face an extraordinary situation: an enforcement action based on a flawed legal theory (including a standalone Section 5 count) that lacks economic and evidentiary support, that was brought on the eve of a new presidential administration, and that, by its mere issuance, will undermine U.S. intellectual property rights in Asia and worldwide. These extreme circumstances compel me to voice my objections.

Let us hope that President Trump makes it an early and high priority to name Commissioner Ohlhausen Acting Chairman of the FTC. The FTC simply cannot afford any more embarrassing and ill-reasoned antitrust initiatives that undermine basic principles of American antitrust enforcement and may be used by foreign competition authorities to justify unwarranted actions against American firms. Maureen Ohlhausen can be counted upon to provide needed leadership in moving the Commission in a sounder direction.

P.S. I have previously published a commentary at this site regarding an unwarranted competition law Statement of Objections directed at Google by the European Commission, a matter which did not involve patent licensing. And for a more general critique of European competition policy along these lines, see here.

In a weekend interview with the Washington Post, Donald Trump vowed to force drug companies to negotiate directly with the government on prices in Medicare and Medicaid.  It’s unclear what, if anything, Trump intends for Medicaid; drug makers are already required to sell drugs to Medicaid at the lowest price they negotiate with any other buyer.  For Medicare, Trump didn’t offer any more details about the intended negotiations, but he’s referring to his campaign proposals to allow the Department of Health and Human Services (HHS) to negotiate directly with manufacturers the prices of drugs covered under Medicare Part D.

Such proposals have been around for quite a while.  As soon as the Medicare Modernization Act (MMA) of 2003 was enacted, creating the Medicare Part D prescription drug benefit, many lawmakers began advocating for government negotiation of drug prices. Both Hillary Clinton and Bernie Sanders favored this approach during their campaigns, and the Obama Administration’s proposed budget for fiscal years 2016 and 2017 included a provision that would have allowed the HHS to negotiate prices for a subset of drugs: biologics and certain high-cost prescription drugs.

However, federal law would have to change if there is to be any government negotiation of drug prices under Medicare Part D. Congress explicitly included a “noninterference” clause in the MMA that stipulates that HHS “may not interfere with the negotiations between drug manufacturers and pharmacies and PDP sponsors, and may not require a particular formulary or institute a price structure for the reimbursement of covered part D drugs.”

Most people don’t understand what it means for the government to “negotiate” drug prices and the implications of the various options.  Some proposals would simply eliminate the MMA’s noninterference clause and allow HHS to negotiate prices for a broad set of drugs on behalf of Medicare beneficiaries.  However, the Congressional Budget Office has already concluded that such a plan would have “a negligible effect on federal spending” because it is unlikely that HHS could achieve deeper discounts than the current private Part D plans (there are 746 such plans in 2017).  The private plans are currently able to negotiate significant discounts from drug manufacturers by offering preferred formulary status for their drugs and channeling enrollees to the formulary drugs with lower cost-sharing incentives. In most drug classes, manufacturers compete intensely for formulary status and offer considerable discounts to be included.

The private Part D plans are required to provide only two drugs in each of several drug classes, giving the plans significant bargaining power over manufacturers by threatening to exclude their drugs.  However, in six protected classes (immunosuppressant, anti-cancer, anti-retroviral, antidepressant, antipsychotic and anticonvulsant drugs), private Part D plans must include “all or substantially all” drugs, thereby eliminating their bargaining power and ability to achieve significant discounts.  Although the purpose of the limitation is to prevent plans from cherry-picking customers by denying coverage of certain high cost drugs, giving the private Part D plans more ability to exclude drugs in the protected classes should increase competition among manufacturers for formulary status and, in turn, lower prices.  And it’s important to note that these price reductions would not involve any government negotiation or intervention in Medicare Part D.  However, as discussed below, excluding more drugs in the protected classes would reduce the value of the Part D plans to many patients by limiting access to preferred drugs.

For government negotiation to make any real difference on Medicare drug prices, HHS must have the ability to not only negotiate prices, but also to put some pressure on drug makers to secure price concessions.  This could be achieved by allowing HHS to also establish a formulary, set prices administratively, or take other regulatory actions against manufacturers that don’t offer price reductions.  Setting prices administratively or penalizing manufacturers that don’t offer satisfactory reductions would be tantamount to a price control.  I’ve previously explained that price controls—whether direct or indirect—are a bad idea for prescription drugs for several reasons. Evidence shows that price controls lead to higher initial launch prices for drugs, increased drug prices for consumers with private insurance coverage,  drug shortages in certain markets, and reduced incentives for innovation.

Giving HHS the authority to establish a formulary for Medicare Part D coverage would provide leverage to obtain discounts from manufacturers, but it would produce other negative consequences.  Currently, private Medicare Part D plans cover an average of 85% of the 200 most popular drugs, with some plans covering as much as 93%.  In contrast, the drug benefit offered by the Department of Veterans Affairs (VA), one government program that is able to set its own formulary to achieve leverage over drug companies, covers only 59% of the 200 most popular drugs.  The VA’s ability to exclude drugs from the formulary has generated significant price reductions. Indeed, estimates suggest that if the Medicare Part D formulary was restricted to the VA offerings and obtained similar price reductions, it would save Medicare Part D $510 per beneficiary.  However, the loss of access to so many popular drugs would reduce the value of the Part D plans by $405 per enrollee, greatly narrowing the net gains.

History has shown that consumers don’t like their access to drugs reduced.  In 2014, Medicare proposed to take antidepressants, antipsychotic and immunosuppressant drugs off the protected list, thereby allowing the private Part D plans to reduce offerings of these drugs on the formulary and, in turn, reduce prices.  However, patients and their advocates were outraged at the possibility of losing access to their preferred drugs, and the proposal was quickly withdrawn.

Thus, allowing the government to negotiate prices under Medicare Part D could carry important negative consequences.  Policy-makers must fully understand what it means for government to negotiate directly with drug makers, and what the potential consequences are for price reductions, access to popular drugs, drug innovation, and drug prices for other consumers.

During 2016 it became fashionable in certain circles to decry “lax” merger enforcement and to call for a more aggressive merger enforcement policy (see, for example, the American Antitrust Institute’s September 2016 paper on competition policy, critiqued by me in this blog post).  Interventionists promoting “tougher” merger enforcement have cited Professor John Kwoka’s 2015 book, Mergers, Merger Control, and Remedies in support of the proposition that U.S. antitrust enforcers have been “excessively tolerant” in analyzing proposed mergers.

In that regard, a recent paper by two outstanding FTC economists (Michael Vita and David Osinski) is well worth noting.  It makes a strong (and, in my view, persuasive) case that Kwoka’s research is fatally flawed.  The following excerpt, drawn from the introduction and conclusion of the paper (Mergers, Merger Control, and Remedies:  A Critical Review), merits close attention:

John Kwoka’s recently published Mergers, Merger Control, and Remedies (2015) has received considerable attention from both antitrust practitioners and academics. The book features a meta-analysis of retrospective studies of consummated mergers, joint ventures, and other horizontal arrangements. Based on summary statistics derived from these studies, Kwoka concludes that domestic antitrust agencies are excessively tolerant in their merger enforcement; that merger remedies are ineffective at mitigating market power; and that merger enforcement has become increasingly lax over time. We review both his evidence and his empirical methods, and conclude that serious deficiencies in both undermine the basis for these conclusions. . . .

We sympathize with the goal of using retrospective analyses to assess the performance of the antitrust agencies and to identify possible improvements. Unfortunately, Kwoka has drawn inferences and reached conclusions about contemporary merger enforcement policy that are unjustified by his data and his methods. His critique of negotiated remedies in merger cases relies on a small number of transactions; a close reading reveals that a number of them are silent on the effectiveness of the associated remedies. His data sample lacks diversity, relying heavily on a small number of studies conducted on a small and unrepresentative set of industries. His statistical methodology departs from well-established techniques for conducting meta-analyses, making it impossible for readers to assess the strength of his evidence using standard statistical tools. His conclusions about the growing permissiveness of enforcement policies lack substantiation. Overall, we are unpersuaded that his evidence can support such broad and general policy conclusions.

Hopefully, the new leadership at the Federal Trade Commission and at the Justice Department’s Antitrust Division will carefully scrutinize this and other recent research on mergers in devising their merger enforcement policy.  Additional research on the effects of mergers, including an evaluation of their static and dynamic efficiencies, is highly warranted.  Enforcers should not lose sight of the fact that disincentivizing efficient mergers could undermine a vibrant market for corporate control in general, as well as precluding the net creation of economic surplus in specific cases.

During a presidential transition, it is an old Washington parlor game to discuss public policy tweaks and personnel changes, with speculation often focusing on former political appointees who are linked to the new President.  But with the election of Donald Trump, who has not previously served in government, many pundits’ crystal balls may be a bit cloudier than normal.  Well, help is on the way – at least for antitrust policy mavens.

On January 24, the Heritage Foundation will bring together an all-star cast of current and former top government officials to try and burn away the mists of uncertainty as it hosts its third annual antitrust policy conference (moderated by me).  The all-star cast, which includes former antitrust chiefs at the Justice Department and Federal Trade Commission and a current FTC Commissioner, will turn its attention to both domestic and international antitrust matters.  Antitrust is now a matter of global economic policy concern, and the Trump Administration’s reaction to antitrust developments around the world (including concerns about due process and industrial policy abuses overseas) may prove particularly important for American firms and the U.S. economy.

All antitrust fans are urged to attend the conference, which will be held at Heritage’s Lehrman Auditorium from 10 a.m. to 4:30 p.m. on the 24th.  You can register online to attend in person, or follow the conference’s webcast at Heritage.org.

I hope to see you there!

On December 6 the U.S. Supreme Court handed down its much anticipated decision in Samsung Electronic Co. v. Apple Inc.  The opinion deferred for another day clarification of key policy questions raised by the design patent system.

Writing for a unanimous Court, Justice Sonia Sotomayor reversed and remanded a Federal Circuit decision upholding a $399 million damages award to Apple for infringement of its design patents by smartphone manufacturers.  Section 289 of the Patent Act  makes it unlawful to manufacture or sell an “article of manufacture” to which a patented design or a colorable imitation thereof has been applied and makes an infringer liable to the patent holder “to the extent of his total profit.”  A jury found that various smartphones manufactured by Samsung and other companies infringed design patents owned by Apple that covered a rectangular front face with rounded edges and a grid of colorful icons on a black screen.  Apple was awarded $399 million in damages—Samsung’s entire profit from the sale of its infringing smartphones. The Federal Circuit affirmed the damages award, rejecting Samsung’s argument that damages should be limited because the relevant articles of manufacture were the front face or screen rather than the entire smartphone.  The court reasoned that such a limit was not required because the components of Samsung’s smartphones were not sold separately to ordinary consumers and thus were not distinct articles of manufacture.  The Supreme Court rejected the Federal Circuit’s statutory interpretation, holding that an “article of manufacture,” which is simply a thing made by hand or machine, encompasses both a product sold to a consumer and a component of that product.  Because the term “article of manufacture” is broad enough to embrace both a product sold to a consumer and a component of that product, whether sold separately or not, the Court opined that the Federal Circuit’s narrower reading could not be squared with Section 289’s text.

The Court, however, declined to resolve the “big question” in this case, which had been discussed during oral argument – namely, whether the relevant article of manufacture for each design patent at issue here was the smartphone or a particular smartphone component.  In leaving resolution of this “and any other issues” to the Federal Circuit on remand, the Court in effect “punted.”  (The Justice Department suggested an inherently malleable and vague “four consideration test” to this question in its Samsung v. Apple amicus brief.)  Expert commentators have highlighted this issue (see, for example, here), which, because of the plain language of Section 289 (“extent of the total profit”), bears directly on the quantum of damages for which a design patent infringer may be held liable.  How the Federal Circuit deals with the “article of manufacture” question may have significant implications for incentives to obtain and protect design patents.

An even bigger unanswered question is the appropriateness of the federal legal structure for the protection of designs.  Design patents are fairly readily obtained – they do not have to satisfy the multiple requirements for patentability (centered on inventiveness, novelty, and advance over prior art) that must be met by utility patents (hurdles that have become even harder to surmount over the last decade due to a host of Supreme Court decisions that have made it harder to obtain and defend utility patents).  Moreover, unlike utility patents, other federal intellectual property laws, covering trade dress and copyright, offer protections similar in kind (albeit not exact substitutes) to that offered by the design patent system.  Accordingly, whether existing federal legal measures covering designs are suboptimal and merit being “redesigned” merits further study.  Stay tuned.

The Senate should not reconfirm Jessica Rosenworcel to the Federal Communications Commission (FCC), in order to allow the Trump Administration to usher in needed reforms in the critical area of communications policy.

As documented by the Free State Foundation (FSF) and other supporters of free markets, the Obama Administration’s FCC has done a dismal job in overseeing communications regulation, both as a matter of law and economics (see, for example, the abuses documented in FSF publications).  The FCC’s proposal to impose common carrier-like regulations on the Internet is just one example of what constitutes not merely flawed policy, but a failure to adhere to the rule of law, as I explain in an October 2016 Heritage Foundation Legal Memorandum (citations omitted):

[T]he rule of law involves “a system of binding rules” that have been adopted and applied by a valid government authority and that embody “clarity, predictability, and equal applicability.”

 Practices employed by government agencies that undermine the rule of law ignore a fundamental duty that the government owes its citizens and thereby undermine America’s constitutional system. Federal courts, however, will not review a federal administrative action unless an actual litigated “case or controversy” is presented to them, and they generally are reluctant to invoke constitutional “first principles” to strike down federal agency initiatives. Judicial intervention is thus a poor check on an agency’s tendency to flout the rule of law—or merely give it lip service—by acting in an unpredictable and inequitable manner.

It follows, therefore, that close scrutiny of federal administrative agencies’ activities is particularly important in helping to achieve public accountability for an agency’s failure to honor the rule of law standard. Applying such scrutiny to the FCC reveals that it does a poor job of adhering to rule of law principles. Accordingly, specific legislative reforms to rectify that shortcoming warrant serious consideration by Congress. . . .

The FCC has fallen short in meeting rule of law standards, both in its procedural practices and in various substantive actions that it has taken. . . .

[FCC Procedural failures include] delays, lack of transparency, and inefficiencies in agency proceedings (including “voting on secret texts and delaying the publication of orders”; excessive cost burdens on regulated parties; outdated rules; and problems in agency interactions with the public. . . .

Substantive agency actions also undermine the rule of law if they fall outside the scope of the agency’s constitutional, statutory, or regulatory authority.  By their nature, such actions indicate that an agency does not view itself as bound by the law and is unwilling to clarify how the government’s coercive powers will be applied.  Significant FCC initiatives in recent years have involved such derogations from rule of law principles and have proved to be far more serious than mere procedural imperfections. 

Specific FCC abuses of the rule of law, documented in my Heritage Legal Memorandum, include the imposition of arbitrary conditions on merging parties having nothing to do with the actual effects of a merger.  They also involve regulatory initiatives that exceed the FCC’s statutory authority, such as (1) an attempt to repeal state municipal broadband regulation (struck down in court), (2) the “Open Internet Order” which seeks to regulate the Internet under the guise of “net neutrality,” (3) the unauthorized extension of FCC rules covering joint sales agreements by broadcast stations (struck down in court), and (4) the unauthorized regulation of video “set top box” equipment.

The FCC has also brought a variety of public enforcement actions against private parties that could not reasonably have known that they were violating a legal norm as defined by the FCC, thereby violating principles of clarity, predictability, and equal treatment in law enforcement.

Key FCC actions that flout the rule of law have been enacted by partisan three-to-two FCC votes, with the three Democratic Commissioners (Chairman Tom Wheeler, Mignon Clyburn, and Jessica Rosenworcel) voting in favor of such measures and the two Republican Commissioners (Ajit Pai and Michael O’Rielly) voting in opposition.  Without Commissioner Rosenworcel’s votes, the FCC’s ability to undermine the rule of law in those instances would have been thwarted.

Commissioner Rosenworcel’s term expired in June 2015, but she remained on the Commission.  In 2015 President Obama nominated her for a new five-year term as FCC Commissioner, and, as explained by the Senate Commerce Committee, “[s]he may remain in her current role as commissioner until December 31, 2016 while awaiting Senate confirmation for a second term.”

Rosenworcel’s remomination has not yet been taken up by the Senate, giving President-Elect Trump the opportunity to select a new Commissioner (and Chairman) who can steer the FCC in a market-oriented direction that respects the rule of law.  On December 2nd, however, it was reported that “[Senate Minority Leader] Harry Reid and President Obama are circulating a petition to remove the hold on FCC Commissioner Jessica Rosenworcel so that she can be reconfirmed before Congress recesses next week.”

This is troublesome news.  Confirmation of Rosenworcel would deny the new President the ability to reshape communications policy, with serious negative effects on Internet freedom and innovation in the economically vital communications sector.  Senate Republicans should stand firm and deny confirmation to Ms. Rosenworcel, in order to ensure that the new President has the opportunity to reform the FCC.

On November 9, pharmaceutical stocks soared as Donald Trump’s election victory eased concerns about government intervention in drug pricing. Shares of Pfizer rose 8.5%, Allergan PLC was up 8%, and biotech Celgene jumped 10.4%. Drug distributors also gained, with McKesson up 6.4% and Express Scripts climbing 3.4%. Throughout the campaign, Clinton had vowed to take on the pharmaceutical industry and proposed various reforms to reign in drug prices, from levying fines on drug companies that imposed unjustified price increases to capping patients’ annual expenditures on drugs. Pharmaceutical stocks had generally underperformed this year as the market, like much of America, awaited a Clinton victory.

In contrast, Trump generally had less to say on the subject of drug pricing, hence the market’s favorable response to his unexpected victory. Yet, as the end of the first post-election month draws near, we are still uncertain whether Trump is friend or foe to the pharmaceutical industry. Trump’s only proposal that directly impacts the industry would allow the government to negotiate the prices of Medicare Part D drugs with drug makers. Although this proposal would likely have little impact on prices because existing Part D plans already negotiate prices with drug makers, there is a risk that this “negotiation” could ultimately lead to price controls imposed on the industry. And as I have previously discussed, price controls—whether direct or indirect—are a bad idea for prescription drugs: they lead to higher initial launch prices for drugs, increased drug prices for consumers with private insurance coverage, drug shortages in certain markets, and reduced incentives for innovation.

Several of Trump’s other health proposals have mixed implications for the industry. For example, a repeal or overhaul of the Affordable Care Act could eliminate the current tax on drug makers and loosen requirements for Medicaid drug rebates and Medicare part D discounts. On the other hand, if repealing the ACA reduces the number of people insured, spending on pharmaceuticals would fall. Similarly, if Trump renegotiates international trade deals, pharmaceutical firms could benefit from stronger markets or longer patent exclusivity rights, or they could suffer if foreign countries abandon trade agreements altogether or retaliate with disadvantageous terms.

Yet, with drug spending up 8.5 percent last year and recent pricing scandals launched by 500+ percentage increases in individual drugs (i.e., Martin Shkreli, Valeant Pharmaceuticals, Mylan), the current debate over drug pricing is unlikely to fade. Even a Republican-led Congress and White House is likely to heed the public outcry and do something about drug prices.

Drug makers would be wise to stave off any government-imposed price restrictions by voluntarily limiting price increases on important drugs. Major pharmaceutical company Allergan has recently done just this by issuing a “social contract with patients” that made several drug pricing commitments to its customers. Among other assurances, Allergan has promised to limit price increases to single-digit percentage increases and no longer engage in the common industry tactic of dramatically increasing prices for branded drugs nearing patent expiry. Last year throughout the pharmaceutical industry, the prices of the most commonly-used brand drugs increased by over 16 percent and, in the last two years before patent expiry, drug makers increased the list prices of drugs by an average of 35 percent. Thus, Allergan’s commitment will produce significant savings over the life of a product, creating hundreds of millions of dollars in savings to health plans, patients, and the health care system.

If Allergan can make this commitment for its entire drug inventory—over 80+ drugs—why haven’t other companies done the same? Similar commitments by other drug makers might be enough to prevent lawmakers from turning to market-distorting reforms, such as price controls, that could end up doing more harm than good for consumers, the pharmaceutical industry, and long-term innovation.