Tag: innovation

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IPPI Cautions that Pharmaceutical Tariffs Would Harm Patients and U.S. Innovation Leadership

IPPI has submitted formal comments to the U.S. Department of Commerce regarding its Section 232 investigation of pharmaceutical imports, cautioning against imposing tariffs on medicines and their ingredients.

In our submission, IPPI scholars Mark Schultz, Emily Michiko Morris, and Joshua Kresh explain that imposing such tariffs would have severe negative consequences for American patients, healthcare affordability, and U.S. pharmaceutical innovation leadership.

Drawing on extensive research, particularly Geneva Network’s 2021 study modeling the effects of a 25% pharmaceutical tariff, our comments highlight five critical concerns:

  1. Higher Drug Prices for Patients: Research demonstrates that pharmaceutical tariffs create a “compounding effect” as each link in the supply chain adds markup to the tariff-inflated price, potentially increasing final costs by up to 80% for consumers.
  2. Drug Shortages Risk: With over 90% of U.S. prescriptions being for generic drugs and 83% of top generics having no domestic source, tariffs would disrupt existing supply chains and potentially force manufacturers to exit certain market segments.
  3. Ineffective for Boosting Domestic Manufacturing: Building pharmaceutical manufacturing facilities in the U.S. requires billions of dollars and 5-10 years to accomplish—making tariffs ineffective for addressing immediate or even medium-term supply concerns.
  4. International Retaliation Threats: Our comments note that major trading partners including China, Brazil, and the EU are already considering pharmaceutical IP rights suspensions and other countermeasures in response to U.S. tariff actions.
  5. Government Cost Implications: Paradoxically, the U.S. government could end up paying 2-6 times more through Medicare and Medicaid for tariff-inflated drugs than it collects in tariff revenue.

“Imposing tariffs on medicines would be counterproductive to U.S. interests,” said Mark Schultz, Faculty Chair of IPPI. “Such measures would ultimately undermine, rather than enhance, American healthcare security while threatening our position as the world leader in pharmaceutical innovation.”

The full text of IPPI’s comments is available here.

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Biotech Healthcare Patents Pharma

Professors Erika Lietzan and Kristina Acri Argue That Current Data Do Not Support Evergreening Allegations

By Jack Ring

Overlaid images of pills, a gloved hand of someone expecting a pill, and an eyedropperIn their forthcoming paper, Solutions Still Searching for a Problem: A Call for Relevant Data to Support “Evergreening” Allegations,[1] C-IP2 Senior Scholars Erika Lietzan of Mizzou Law and Kristina Acri of Colorado College call for relevant data to support evergreening allegations and accompanying policy proposals. “Evergreening” is often described as brand drug companies securing additional patents and FDA exclusivities, which grant greater market exclusivity than the initial exclusivities.[2] Evergreening has long been the subject of criticism and policy reform.

The article evaluates empirical data commonly offered to substantiate evergreening and explains that the data, while largely accurate, does not support proposed policy changes. The authors argue that the most relevant data points for policymakers are (1) when brands face competition and (2) what drives the timing of that competition. The authors indicate that no empirical studies answer these questions, so this article concludes by proposing a study designed to properly consider these factors.

I.              Background

Evergreening allegations stem from protections on brand drugs that advocates view as too many patents or FDA exclusivities, which, they claim, improperly extend the drug’s exclusivity.[3] FDA exclusivities include exclusive periods of approval or markets as well as processes for bringing generic drugs to market. Under the Federal Food, Drug, and Cosmetic Act (FDCA), the FDA approves all new drugs before they are sold.[4] However, the FDCA does not define “drug” or “new drug,” which may refer to an active ingredient, a finished product, or both.[5] While the FDCA does not specify, the FDA in practice approves products (finished medicines as they are sold in the market), not active ingredients (active molecules and components of finished products).[6]

The FDCA controls the processes of bringing a generic drug to market.[7] As critics point out, some statutory processes bar generic drugs from entering the market until the patents expire. However, this is not always the true.[8] Moreover, the FDCA provides different forms and lengths of exclusive approval as a reward for drug makers performing the preclinical and clinical research needed to bring a drug to market. These range from six months for performing pediatric studies[9] to seven years for “orphan” drugs intended to treat a rare disease or condition.[10]

Much of the evergreening allegations and outcry focus on exclusivities stemming from continuing innovation. Continuing innovation is common because developing new molecular entities is time- and cash-consuming. Therefore, brand companies benefit from identifying new uses for new molecular entities. Moreover, those new medical uses (indications) may be eligible for new patents and statutory exclusivities. Protections for continuing innovation, however, are narrow and only prevent the approval of generic drugs for that new, specific use.[11]

II.            The Hastings Project and Current Data for Policymakers

The University of California Hastings College of Law hosts a database that (1) identifies the earliest and latest expiring patent or exclusivity for new drugs and (2) calculates the number of months between those dates.[12] The authors undertook a large audit of the Hastings Database. Like the Hastings Database, major empirical studies offered to support the allegation of “evergreening” focused on counting patents and exclusivities.[13] The Hastings Database utilizes three counting metrics: earliest protection end date, latest protection end date, and delta between the two called “months added.” The authors’ audit raised questions regarding the inferences drawn about competition from patent and exclusivity counts generally.

The authors argue that the Hastings Database is insufficient to inform policy debate because it does not provide the most relevant piece of information for policymakers: when new drugs face competition and why. The Hastings Database estimates new drug entry and competition based on the latest protection date for a drug’s applicable exclusivities. However, the exclusivities used to calculate that date do not prohibit all new drug entry. Therefore, because new drugs could enter the market before the latest protection date, that data point does not serve as a relevant data point for policymakers seeking to drive timely generic competition. In the authors’ own data review, every new chemical examined had a generic drug available before the latest expiry date listed in the Hastings Database. The authors’ audit confirmed their skepticism of the “latest protection end date” as a proxy for the likely generic entry date. Actual generic competition date will likely launch at least five years earlier, with nearly 18% launching more than ten years sooner.[14]

III.          Takeaways and the Call for Relevant Data

While the authors audited the Hastings Database and analyzed their own dataset, they recognized their research still did not provide the answers to the most important questions: (1) when do generic drugs reach the market and (2) what drives that timing? A study designed to consider the market entry date of the first generic drug based on any brand product containing a particular new active ingredient would determine the factors driving that market entry date.

The publication closes by describing this better study and calling for this data. At a high level, the study would focus on each new molecular entity approved since 1983 with the relevant dates being the “Initial Protection End Date” and the “NCE Competition Date.” Initial Protection End Date would start with the first approved brand product containing the NCE. NCE Competition Date would be the commercial launch date for the first product, approved on the basis of an abbreviated application (relying on the brand company’s research), to contain that same NCE for the same indication(s). They recommend a database covering all new molecular entities since 1984 to allow policymakers to study these trends. The database would allow policymakers to see exactly how long brand companies with new chemical entities enjoy a market without competition from another company marketing the same chemical entity for the same use on the basis of the brand company’s own research. Where the Generic Competition Date (actual commercial launch date) is later than the Initial Protection End Date, one would need to investigate the reason for its timing. Perhaps the generic company had difficulty making a bioequivalent, the market is too small, or the generic company faced manufacturing issues.

IV.          Policy Implications

As the authors make clear, policymaking based on latest expiration date (the Hastings Database approach) before consideration of actual market entry (the authors’ proposed study) would be premature. The number of patents and exclusivities, and the difference between the earliest and latest expiration date of patents and exclusivities, do not illustrate evergreening. Yet, current policy proposals rely on this counting method used by the Hastings Database to support reforms. This is reliance on data to with no correlation to the purported issue. This article, rather, provides a sketch of how a proper database could be built and a study could be conducted to measure evergreening. Evergreening claims can only be substantiated with proper empirical data. Unless empirical data shows that evergreening is a problem, policy solutions are unnecessary.

[1] Erika Lietzan and Kristina Acri née Lybecker, Solutions Still Searching for a Problem: a Call for Relevant Data to Support “Evergreening” Allegations, 33 Fordham Intell. Prop., Medifa & Ent. L.J. (forthcoming 2023), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4230310#.

[2] For an overview of arguments that drug companies obtain too many patents and too much exclusivity, which raises prices, see Erika Lietzan, The “Evergreening” Metaphor in Intellectual Property Scholarship, 53 Akron L. Rev. 805, 848-851 (2020); see also Erika Lietzan, The Evergreening Myth, Regulation 24, 25 (Fall 2020).

[3] E.g., Robin Feldman & Evan Frondorf, Drug Wars: A New Generation of Generic Pharmaceutical Delay, 53 Harv. J. on Legis. 499, 510 (2016); Michael A. Carrier, A Real-World Analysis of Pharmaceutical Settlements: The Missing Dimension of Product Hopping, 62 Fla. L. Rev. 1009, 1016 (2010).

[4] 21 U.S.C. § 355(a).

[5] The term “drug” is ambiguous at FDA. The FDA approves brand products, not active ingredients, and those products are copied by generic companies. As a result, a brand’s active ingredient may be spread over multiple products. 21 U.S.C. § 321(g).

[6] FDA defines “active ingredient” as “any component that is intended to furnish pharmacological activity or other direct effect in the diagnosis, cure, mitigation, treatment, or prevention of disease, or to affect the structure or any function of the body of man or other animals.” 21 C.F.R. § 314.3(b). The active ingredient includes the ester, salt, or other noncovalent derivative of the molecule responsible for the physiological or pharmacological action of the drug substance. 21 C.F.R. § 314.3(b). That molecule, in turn, is the “active moiety.”

[7] See 21 U.S.C. §§ 355(j)(2)(A)(vii)–(viii), 355(j)(2)(B)(i).

[8] These circumstances include when (1) the patent claims a method of use for which the generic company does not seek approval, or (2) the brand company does not sue for patent infringement after a paragraph IV certification. 21 U.S.C. §§ 355(j)(2)(A)(vii)(IV); id. § 355(j)(2)(B)(i).

[9] 21 U.S.C. § 355a. Pediatric exclusivity is awarded after the research is complete, when the brand company submits a report to the agency that “fairly” responds to the written request. Id. § 355a(d)(4).

[10] Id. § 360bb(a)(2).

[11] Moreover, generic companies seeking to enter the market can choose not to seek approval for the new indication. 21 C.F.R. § 314.127(a)(7). For example, if a brand drug treats conditions A, B, and C and condition C is still subject to a patent or statutory exclusivity, a generic drug company could still receive approval to sell their drug to treat condition A and B.

[12] See Evergreen Drug Patent Search, https://sites.uchastings.edu/evergreensearch.

[13] This includes pieces by Robin Feldman, a Hastings professor. Robin Feldman, May Your Drug Price be Evergreen, 5 J.L. & Biosci. 590, 590 (2018); Amy Kapczynski et al., Polymorphs and Prodrugs and Salts (Oh My!): An Empirical Analysis of “Secondary” Pharmaceutical Patents, 7 PLOS Online 12 (2012).

[14] Lietzan & Acri, supra note 1, at 44–46.

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Uncategorized

From Great Ideas to Global Impact – A Talk with Andrew Byrnes

The following post comes from Tuan Tran, a rising 3L at Scalia Law and a Research Assistant at C-IP2.

2022 Andrew Byrnes event flyer
Click on image for full-size PDF flyer.

Small ideas can lead to big changes, which in turn can make a significant impact on the world, but—as technology executive, attorney, and investor Andrew Byrnes knows well—this is no easy task.

On May 4, 2022, Mr. Byrnes gave a talk co-hosted by the Center for Intellectual Property x Innovation Policy (C-IP2) at George Mason University, Antonin Scalia Law School, and Business for a Better World Center, School of Business, George Mason University. With his background and experiences in both the legal and technology industries, Mr. Byrnes shared his knowledge about how just a single idea can be transformed to make a great impact on society. His talk focused on two main points: how ideas are developed, and the framework he has used to implement and transform those ideas into something impactful.

According to Mr. Byrnes, the first step is “finding the idea.” There are three principles involved in the process: be curious, look at intersections, and be passionate. The first principle is to be open to the possibility of having a great idea that can either address a challenge or take advantage of an opportunity. It is important to listen and be observant, because the more one talks with new people about new topics in different contexts, the more one will be likely to come up with interesting and powerful new ideas. One of the key things to keep in mind is to not waste time looking for a perfect idea, because a big idea is usually not presented initially in its complete form. Instead, it is usually presented as smaller ideas that are eventually brought together. Second, “looking at intersections between disciplines and industries” means to be curious and examine known things and combine them “in ways that they haven’t been combined before.” For example, with patents, “most inventions are combinations of known elements.” The third principle stands out as the most important one: being passionate about the pursuit of the idea. Without passion, it is extremely difficult to go from that great idea to real-world impact.

Mr. Byrnes has laid out a framework that involves the most crucial aspects of how to accomplish the goal of transforming ideas into impactful innovation. The framework has “five pillars” in a “hub-and-spoke” formation: legal clearance, intellectual property (IP) protection, market validation, operationalization, and user adoption. As Mr. Byrnes explained, “The reason why I have this hub-and-spoke model is it’s not remotely linear. You . . .  have to do all of these things in sequence and at once, and once you’ve gone through all of them, you have to go back and do them all again, because the world is dynamic, your idea is dynamic, and the operationalization of the idea will require you to . . .  adjust over time.” Following is the discussion of the five pillars.

Legal Clearance

This pillar begins by “evaluating the existing law.” It is essential to understand the related law and how it could impact what will be done with the ideas, including any legal barriers that prevent the implementation of an idea. When as is common the law is unclear, there are two choices, both with costs and opportunities. Putting a hold on the idea can help avoid potential legal problems, but that might result in being left behind when the competitors decide to engage in similar markets or to produce similar products. It may be difficult to enter the market later. On the other hand, proceeding with the idea when the law is unclear might be costly later after the regulators or courts say that the implementer cannot do what they have been doing. Therefore, a company needs legal advice to understand all aspects of the related law before implementing any ideas so that the company can come up with the most suitable strategy. Lawyers are a helpful source, and—for any startups in the Northern Virginia area—so is the Innovation Law Clinic at George Mason University Antonin Scalia Law School.

IP

Mr. Byrnes pointed out that there are “many facets” involved in IP, the second pillar. Important forms of IP for protecting one’s inventions and businesses are patents and trademarks. In short, a patent is “the grant of a property right to an inventor by the government” that can “exclude anyone [else] from making, selling, or using the invention for a [specific] period of time.” Not every idea or invention can be patented, because there are some legal requirements for patent protection; trade secrets may be able to provide protection where patents cannot. However, where applicable, patent protection can be valuable for limiting competition during the life of the patent, raising the valuation of a company, and potentially for licensing purposes. When it comes to patent protection, filing as soon as possible is important because the first inventor to file a patent application will have priority. Also, it is advisable to keep documentation and to have written agreements with employees and collaborators, if any, to ensure the ownership of our idea. Trademarks are also important. A great idea may not succeed if the consumers or clients cannot find the product or service or associate it with your company. Ideally, select a trademark “that is as strong as possible” at an early stage to ensure maximum brand protection.

Market Validation

After legal clearance and protecting IP, the third pillar is market validation. Even “a legal and protected idea” is not impactful when people do not need it. As mentioned earlier, the world changes at a fast pace, so what people needed in the past might not be what they find important in the present. Thus, to build a sustainable business from great ideas, it is vital to “(re)visit demand,” “assess the model,” and “engage prospects directly.” When revisiting demand, implementers should ask themselves whether their ideas are solving any problems or providing solutions to “pain point[s]” they envisioned at the beginning or some other problems they have developed over time. In terms of economics, business models should be assessed for their sustainability. Obtain feedback from clients and consumers using a variety of methods, both traditional, e.g., customer surveys, and creative. For example, Arctop utilizes neuroscience technology to develop an app that can evaluate a user’s experience with a product based on the user’s brain activity. This method can be a better representation of customer satisfaction than what is available through a rating system or survey.

Operationalization

As Mr. Byrnes says, it is exciting to confirm that people still love and want our ideas, “but we actually have to get it done.” The operationalization area or fourth pillar is the “get-stuff-done” (the “GSD”) stage. There are three main tasks involved in this stage: “building the right GSD team, . . . focusing on execution, and then prioritizing efficiency and viability.” Building the GSD team is the most important task. Mr. Byrnes lists being emotionally intelligent, curious, diverse in perspective, synergy-seeking, resilient, and confident as important characteristics for team members. The more people in the team who have these characteristics, the more effectively and efficiently the team members can collaborate to accomplish mutual goals. Second, “ideas alone are not good enough”; the focus needs to be on execution. Avoid “mak[ing] the perfect enemy of the good.” For example, a team may wait to act if their vision of the ways things will occur is not realized, but the result may be that, “if you wait that long, … the world’s going to pass you by.” Therefore, implementers need to be confident in the team they have built and the accomplishments they have achieved in earlier stages. As Mr. Byrnes states, “be biased to action, and that’s most likely the best risk-minimizing approach.” In addition, “prioritizing efficiency and viability” is crucial. By “spend[ing] no more money than you’re making,” the team does not “hav[e] to seek as much outside investment and engagement over time.”

User Adoption

The last pillar of the framework is about conveying to the world what you are doing. To be successful at this stage, Mr. Byrnes states, it is important to have “widespread visibility,” “a compelling narrative,” and “third-party validation.” There are several tools to help in achieving widespread visibility: “earned media,” paid advertisements, or “owned” media, such as social media. Although all of these tools helping reach as many customers as possible, the most suitable tool should be chosen carefully depending on the situation. The tools are most useful only when there is a compelling narrative to deliver to the target audience. It takes effort to come up with a unique narrative, but in general, a compelling narrative should convey a key benefit of the products directly and concisely. Finally, products and services will garner more trust and credibility when potential customers see others whom they know and trust approving or using those products or services. Thus, start-up companies are highly encouraged to seek third-party validation, whether from other companies, non-profit organizations, governments, or others.

A small idea can make significant impact on society, but the path from forming an idea to making the impact is challenging. Many companies have struggled to make impactful innovations because of the lack of relevant knowledge and experiences. During the talk, Mr. Byrnes pointed out several unique problems and a sophisticated framework of five pillars to overcome those problems. Although following the five-pillars model might not guarantee success, it significantly improves any company’s chances of creating impactful innovations quickly and effectively.

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Innovation Patents

Professor Tabrez Ebrahim on Clean and Sustainable Technological Innovation

The following post comes from Associate Professor of Law Tabrez Ebrahim of California Western School of Law in San Diego, California.

one lit lightbulb hanging near unlit bulbsBy Tabrez Ebrahim

What role should patent law have in promoting environmentally friendly, clean, and sustainable technology innovation? Does patent law provide adequate incentives for inventions and innovation that address environmental problems?

Clean technology refers to measures, products, or services that reduce or eliminate pollution or waste. Sustainable technology refers to the design of products that offer environmentally friendly alternatives that prevent waste, are less toxic, use renewable feedstock, use safer solvents and reaction conditions, or increase energy efficiency. In my new paper, Clean and Sustainable Technology Innovation, I provide a narrative review of various environmental innovation approaches and incentives for technology development and diffusion. Scholars and commentators have analyzed the role of patents in facilitating technological development to mitigate climate change, including an eco-patent commons, a fast track program, a patent rewards system, and a collaborative and cooperative platform.

I analyze the literature to show that patent law offers certain underutilized opportunities to promote technological innovation that has environmental benefits. I conducted a semi-systematic review on academic papers concerning clean and sustainable technologies and various patent law-related innovation proposals. In so doing, I provide a synthesis of law and policy papers to identify and understand scholarly views of patents in inducing environmental innovation.

The importance of developing clean and sustainable technologies has included government-driven initiatives to accelerate patenting procedures and expediting of patent application examination of such technologies. The United States Patent & Trademark Office (USPTO) had a fast-track program, the Green Technology Pilot Program, which had reduced the time to attaining a patent for environmental innovations, but this program ended in 2012. Other proposals have included international initiatives that foster a collaborative and cooperative platform to make clean and sustainable technologies more freely available through the sharing of patents that were involved or created during the cooperation and through mechanism to promote mutually agreeable terms. The deployment of clean and sustainable technologies could depend on whether these technologies are patented, licensed, or shared in a pool, and on what technological substitutes are available.

The theoretical underpinning of clean and sustainable inventions is their ability to produce positive externalities, a term which refers to the producing of environmental benefits beyond the implementing firm. Environmental-centric inventions and innovations could generate salutary effects for members of society far beyond the inventor or firm that implements the invention. As a result, more investors may be interested in startups that develop environmental solutions, and business activity in this sector should multiply. While the time and cost of clean and sustainable deployment and climate change mitigation can be an important consideration, the opportunities to provide environmental benefits should be of greater importance. There are a number of innovation policy issues for incentivizing inventors, innovators, and businesses to continue to develop environmental solutions.

I discuss more about these issues in my paper, which was selected by a faculty editorial board and was part of a faculty-edited blind peer review process. This paper is published in Current Opinion in Environmental Sustainability and can be downloaded here.

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Antitrust Patents

Jonathan Barnett on Competition Regulators and Standard-Essential Patents

The following post comes from Connor Sherman, a 2L at Scalia Law and a Research Assistant at CPIP.

circuit boardBy Connor Sherman

The field of intellectual property (IP) can sometimes be wrong in its approach towards promoting economic health, especially when that approach overlaps with antitrust law. An example of this is laid out in a new article by CPIP Senior Fellow for Innovation Policy Jonathan Barnett at Competition Policy International’s Antitrust Chronical entitled How and Why Almost Every Competition Regulator Was Wrong About Standard-Essential Patents. In the article, Prof. Barnett explains how antitrust regulators discourage investment and limit innovation when they take enforcement actions without first gathering rigorous evidence of market harm.

A standard-essential patent (SEP) is a core innovation that entire industries build upon—in other words, an innovation that is necessary to include in a product in order to comply with an industry specific standard. A business cannot just slap Wi-Fi or Bluetooth onto its new smart lightbulb without including the functions associated with those standards. This protects consumers from false advertising, but it also protects the goodwill or quality assured by those standards.

For many years, the consensus among academics, courts, and general opinion has been that the owners of these SEPs will, if given the chance, engage in a form of economic harm called a “patent holdup.” As used in the article, a holdup can be understood as raising the cost of using a patent once it has been identified as a standard innovation. In response to this consensus, regulators have attempted to use antitrust law to prevent patent holdup from occurring.

However, Prof. Barnett encourages skepticism of this premise for several reasons. Most prominently, claims of patent holdup often will fail to meet the basic antitrust injury standard of causing competitive harm. In fact, more often than not, legal issues relating to the licensing of SEPs are resolved under exactly the fields of law one would expect—that is, under patent law with regard to the validity of the patent and under contract law with regard to the validity of the licensing agreement. Another reason presented by Prof. Barnett is the lack of empirical evidence of the expected harm to justify the intervention. Without sound evidence of anticompetitive harm, it makes little sense to employ policies aimed at preventing the nonexistent harm from occurring.

Both the 1995 and 2017 Antitrust Guidelines, issued by the Department of Justice and the Federal Trade Commission, view IP licensing as having procompetitive effects, yet the actions of regulatory agencies have been inconsistent with that understanding. Prof. Barnett states that the rush to include antitrust considerations may reflect an ongoing failure to appreciate the functionality of patent licensing agreements. After all, if a patented innovation demonstrably harms competition in an already established industry, one can presume that the innovation was either so obvious as to be improperly issued or so revolutionary as to deserve the benefits provided by the patent. In the former situation, that patent will likely be invalidated, and in the latter, the patent owner deserves the reward for creating a useful innovation.

Prof. Barnett states that a strong indictment of the current policy is reflected in the Ninth Circuit’s opinion in FTC v. Qualcomm, which overturned the lower court’s imposition of an antitrust penalty based on an erroneous view of SEPs. The lower court’s position was that Qualcomm would continue to invest in innovation under the same licensing-based business model while receiving lower rewards. Prof. Barnett argues that the more likely outcome would have been for Qualcomm to begin vertical integration, freeing it from the duty to deal with obligations of antitrust law. He then explains that the hypothetical harm of patent holdup would be minor compared to the harm that would occur from encouraging the consolidation of businesses around closely guarded, industry-changing innovations.

Prof. Barnett reasons that where patents are weak and antitrust laws are strict, the monetization structure of firms will be internal—even if funding for innovations remains robust. In the inverse situation, however, the range of feasible monetization structures are expanded to include third party firms. Thus, Prof. Barnett argues that in such a situation, an IP owner will be encouraged to license out its patents to all interested users at a modest rate in order to encourage widespread adoption of the invention.

It remains to be settled whether the long-held skepticism of SEP licensing is counterproductive, as Prof. Barnett claims. However, if Prof. Barnett is correct, this period of SEP uncertainty will perhaps provide an excellent lesson about enacting antitrust policy without the empirical evidence to back it up.

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Antitrust Innovation Patent Licensing

Jonathan Barnett on the “License as Tax” Fallacy and the Real-World Benefits of Licensing

The following post comes from David Ward, a rising 2L at Scalia Law and a Research Assistant at CPIP.

the dictionary entry for the word "innovate"By David Ward

“Casual metaphors can have dangerous consequences.” CPIP Senior Fellow for Innovation Policy Jonathan Barnett’s new paper, The ‘License as Tax’ Fallacy, seeks to undo what he considers to be a dangerous, casual metaphor, namely, that intellectual property is a “state-granted monopoly” and therefore licensing is a “monopolistic tax” on consumers. Instead, Prof. Barnett explains that licensing is a tool that creates value for consumers and producers alike.

Historical Roller Coaster

This “IP = monopoly” metaphor has seen a bit of a jurisprudential roller coaster over the past century. Its origin is tied to monopoly-busting antitrust cases, as one might expect, starting around the end of the New Deal era of the late 1930s. Many of the battles were over the practice of “tying” patented products to other products in bundles. For those unaware, in antitrust, “tying” is essentially an arrangement that requires the buyer of one product to buy something else as well, and this often can be viewed as anticompetitive. These patent-tying cases led to the Supreme Court making a hard-and-fast rule in the 1962 case United States v. Loews. The Loews case effectively outlawed tying arrangements in patent licenses as anticompetitive, without having to prove any actual anticompetitive consequences.

This pivotal case cemented a metaphorical assumption that intellectual property is a state-granted monopoly. Further evolution of this mindset led to an effective halt of many licensing transaction options that were once available to sellers in the IP market. Prof. Barnett points out that this ended up harming consumers rather than protecting them. Sellers wishing to license their intellectual property, but restrict how it was used, would often not sell rather than risk getting hit with an antitrust lawsuit under the not-so-IP-friendly antitrust rules in the courts. And those that did license charged higher prices since they could not enforce value-saving restrictions.

The roller coaster didn’t stop there, though, as the late 1970s Supreme Court moved away from the stifling hard-and-fast rules in two new decisions, U.S. Steel and Sylvania. Instead of assuming that many IP license provisions (such as tying) were anticompetitive on their face, the Court began requiring proof that the provision in question was actually anticompetitive—just as in nearly every other antitrust case. This more license-friendly trend toward requiring proof of anticompetitive IP practices culminated in the 1995 U.S. Department of Justice Antitrust Guidelines for Licensing of Intellectual Property, which concluded that antitrust challenges to licensing transactions have to provide evidence of harm to the market. The bright line licensing rules of the past were effectively gone.

Recent Years: The Lexmark Case

But the coaster did not stop there either, as the mid-2000s and recent years have seen a resurgence of more hard-and-fast IP licensing rules. A great example of the resurgence of these rules is the 2017 case Impression Products v. Lexmark International, which involved the oft-dreaded purchasing of printer ink cartridges. Lexmark sold two types of ink cartridges: expensive ones that users could refill, and cheap ones that users were not allowed to refill. The cheap cartridges included a licensing provision that did not allow users to refill the cartridge in exchange for the lower cost. Impression Products, however, bought the empty, cheap cartridges from third party resellers, refilled them, and sold them for a profit, despite being aware of this license provision that prohibited refilling them.

Impression Products leaned on what is called the “patent exhaustion doctrine” to win the case. This doctrine can end a patent owner’s right to control a product once it has been sold, much in the same way that used bookstores don’t have to get a copyright license to sell a used book. However, the Court overturned a long-standing, fact-specific rule that required examining the market impact of such provisions in patent reseller cases. Instead, it adopted a hard-line rule that does not allow patent owners to enforce their licensing provisions on products that have already been sold, without any analysis on the market impact.

This illustrative example of a return to the hard-and-fast rules of the past is exactly what Prof. Barnett warns against. In the instance of printer ink cartridges, companies now provide fewer options at a higher price since they can’t enforce a provision that allows them to offer a lower-value, lower-cost alternative. But the anticompetitive implications of the Lexmark decision can have far-reaching effects on intellectual property as a whole; hard-line rules that prohibit the enforcement of licensing provisions without any analysis of the impact on the market creates less choice and higher cost for consumers. This, of course, is exactly the opposite of the aim of the antitrust laws.

The Need for Evidence

It’s important to note that Prof. Barnett acknowledges that intellectual property can cause anticompetitive practices that harm consumers. But he contends that there needs to be evidence showing that specific intellectual property licenses have anti-consumer implications, as there is in most other antitrust cases. The theoretical fear of intellectual property licensing clogging up markets with exorbitant rates (the “licensing tax”), if it has any merit, should be backed up by evidence.

A great case study for this issue comes from the smartphone market. In the smartphone industry, there are countless “standards” for wireless signals and products, such as 4G, that are required for our many devices to interact in a uniform manner. The inventors of these standards have what are called “standard essential patents,” or SEPs. There is a great fear that these patents, being quite literally essential to smartphone manufacturers, will allow their owners to exploit markets and charge anticompetitive pricing.

The great mystery is that, despite this, there isn’t evidence that this hypothetical scenario exists. Prof. Barnett examines three decades of market performance in this industry and shows that SEP licensing royalties account for a modest three to five percent of global handset revenues. This is in stark contrast to the hypothetical models that anticipated double-digit royalty percentages because of the “IP licensing tax.”

Prof. Barnett attributes this disconnect to several factors, but most importantly he points to the fact that regulators, legislatures, and judges should be focusing on real-world impacts from actual evidence and data when contemplating new rules and regulations.

The Real-World Benefits of Licensing

Although some assume that licensing will create anticompetitive environments, there is ample evidence to show that licensing enables competition and diverse markets. Prof. Barnett uses several real-life models to demonstrate this point.

The first model is the “Hub-and-Spoke” structure, where several smaller intellectual property owners license their IP to large companies with commercial power and reach. The best example of this is in the movie business, where outside production companies license their works to large studios. Each party specializes in something different, and a mutually beneficial relationship occurs. If IP licensing agreements cannot be enforced, such as in Impression Products, then content production would consolidate vertically to larger in-house organizations as firms look to protect their creative property. Essentially, not allowing licensing enforcement in this setting actually consolidates the market, rather than diversifying it.

The second model is the reverse of this, where large, usually research-based, firms license their innovations to many different commercialized entities. A prime example of this is Qualcomm, which licenses its wireless communications technology to many smartphone device manufacturers. Rather than hoard their technologies, these firms want to use licensing mechanisms to reach as many users as possible; more users equal more royalties, so there is an incentive to license to many manufacturers at affordable rates. This creates a positive feedback for more R&D and innovation, rather than an “IP = monopoly” hypothetical scenario where innovators gouge licensees.

The third model involves hybrid pooling and anti-licenses. Patent pools and other aggregate entities like music performing rights organizations create ecosystems of mutual benefit to help navigate dense “thickets” of intellectual property. For instance, rather than needing to get a license for every song played at a music venue, the venue can simply get one “blanket license” from a performing rights organization that licenses thousands of songs from the organization’s musicians at once. And somewhat more surprising is the complete lack of licenses at all. Many IT companies give away licenses for free to build a consumer base of users as an early adoption strategy. Contrary to the license-as-tax view, there is no necessary basis to even assume licenses are always used or even the best option for an owner.

Licenses Aren’t Taxes

The theoretical boogeyman of IP licensing creating monopolistic “taxes” has not held up to the intense scrutiny of the evidence, Prof. Barnett concludes. Any restrictions of IP licensing should be based in evidence and not be a knee-jerk reaction to hypothetical scenarios that have not come to pass, such as in the smartphone industry. There is far more evidence to show that licensing creates value for the market than there is evidence to show it “taxes” the market. And thus, this dangerous, common metaphor of “IP = monopoly” should be put to rest.

Categories
Biotech Patents Pharma

“No Combination Drug Patents Act” Stalls, but Threats to Innovation Remain

superimposed images from a chemistry labBy Kevin Madigan & Sean O’Connor

This week, the Senate Judiciary Committee was to mark up a bill limiting patent eligibility for combination drug patents—new forms, uses, and administrations of FDA approved medicines. While the impetus was to curb so-called “evergreening” of drug patents, the effect would have been to stifle life-saving therapeutic innovations. Though the “No Combination Drug Patents Act”—reportedly to be introduced by Senator Lindsey Graham (R-SC)—was wisely withdrawn at the last minute, it’s likely not the last time that such a misconceived legislative effort will be introduced.

An Exaggerated Response to a Disputed Theory

The bill would have established a presumption of obviousness for drug or biologic patent applications whose invention was a new: dosing regimen, method of delivery, method of treatment, or formulation. While there was a rebuttal provision where the claim covered a new treatment for a new indication or “increase[d] . . . efficacy,” the latter was almost certain to introduce years of uncertainty and litigation. Further, the bill would have covered a broader class than true combination drug patents, in which one active ingredient is combined with another or with a non-drug.

Like many recent legislative efforts, the amendment sought to address a perceived lack of affordability of prescription drugs. After praising the America Invents Act of 2011 and subsequent Supreme Court rulings for strengthening the US patent system, the bill claimed that rising drug prices have outpaced “spending on research and development with respect to those drugs.” In addition to applauding Supreme Court decisions that have injected unquestionable uncertainty into patentable subject matter standards, the amendment went on to blame high drug prices on continually overstated issues related to advanced drug patents.

According to critics, combination drug patents have granted drug makers unearned and extended protection over existing drugs or biological products. But, quite simply, when properly issued by the USPTO under existing patentability standards, these are new patents for new products or processes.

Combination patents have been maligned as anticompetitive, resulting in a “thicket” of patents that impedes innovation through transaction costs and other inefficiencies. Unfortunately, notwithstanding a lack of empirical evidence validating the harm of follow-on innovation patents, patent thicket rhetoric is now being echoed by the media, the academy, courts, and policy makers in a fraught attempt to fix drug pricing.

Reports (see here, here, here, and here) from leading antitrust experts and intellectual property scholars have detailed the value of incremental innovation and challenged the notion that patent thickets are a true threat to competition and innovation. These studies have exposed patent thicket claims—much like the “troll” narrative that for years infected patent law debates—as an empty strawman theory, the repetition of which has led to undue confidence in its accuracy. The reality is that what critics point to as problematic cases of combination patents are in fact infrequent outliers, strategically highlighted to discount evidence of the value of new and innovative drug uses and administrations.

A similar claim by those promoting the patent thicket narrative is that combination patents extend exclusivity on a drug for years beyond an initial patent term, thereby blocking generic entry in the market. But if an underlying drug has gone off patent, no follow-on or combination patent will prevent a generic drug company from producing the underlying formulation—it’s only the new formulation, use, or administration that is protected.

Vague, Yet Oddly Familiar Standards

The language of the Graham amendment asserted that because “numerous” combination patents “contain obvious product developments,” a restructuring of 35 USC 103 is necessary to combat patent thickets and achieve optimal drug pricing. Suggesting that 103 obvious standards for advanced drug development should include a presumption that the covered claimed invention and the prior art to which it relates would have been obvious, the legislation would have undermined a unitary system of patent law in favor of different standards for different fields of technology. It was a bold proposal, and it’s one that ignored the proven value of new drug formulations and methods of treatment.

While the amendment provided for a rebuttal to the presumption of obviousness, the language was ambiguous and likely to render the patent system even more unreliable than it already is. The proposed statute said that an applicant may rebut the presumption of obviousness if the covered claimed invention “results in a statistically significant increase in the efficacy of the drug or biological product that the covered claimed invention contains or uses.” It is unclear what would qualify as “statistically significant,” and proving this vague standard would be nearly impossible.

In order to show a “statistically significant increase in efficacy,” long and costly head-to-head clinical trials would be necessary. To be clear, this is not a standard required by the FDA for new drug approval, let alone patentability.

As if that wasn’t enough reason to reject the Graham amendment, the language was alarmingly similar to that of an Indian patent law statute that has been recognized by the US Trade Representative as a “major obstacle to innovators.” In 2005, in order to comply with the WTO’s Trade-Related Aspects of Intellectual Property Rights (TRIPS) agreement, India adopted for the first time patent protection for pharmaceuticals. Despite its recognition of IP rights in pharmaceuticals, India’s Act contains a troubling ambiguity in its Section 3(d), which requires an “enhanced efficacy” for known drugs in addition to the standard novelty, inventive step, and industrial applicability requirements.

India’s Section 3(d) has been invoked to reject patent protection for life-saving drug innovations, including Novartis’ landmark leukemia drug, Gleevec. Drug companies, government agencies, and policy makers have all recognized the threat to innovation that India’s patent law poses. In 2013, not long after the Novartis ruling, a bipartisan group of 40 Senators signed a letter to then Secretary of State John Kerry urging the state department to take action against India’s “deteriorating IP environment,” citing its willingness to “break or revoke patents for nearly a dozen lifesaving medications.”

Despite the widespread condemnation of India’s Section 3(d), the Graham amendment proposed adopting similarly indefinable standards to US patent law. While the language differed slightly—replacing “enhanced efficacy” with “increase in the efficacy”—it was no clearer, and implementation of this type of standard would only cause more confusion.

Protecting and Incentivizing Medical Innovation

Like most forms of innovation, the development of medicines and therapeutics is a process by which one builds and improves upon previous discoveries and breakthroughs. Sometimes those improvements are major advancements, but often they are incremental steps forward. In the pharmaceutical field, incremental or follow-on innovation frequently results in new therapeutic uses for existing drugs, which address serious challenges related to adverse effects, delivery systems, and dosing schedules. While they might not sound like medical breakthroughs on par with the discovery of penicillin, these advancements in the administration and use of pharmaceuticals improve public health and save lives.

Additionally, follow-on innovations are—and should remain—subject to the same patentability standards as any other technologies. Patents reward advancements that are novel, useful, and nonobvious, and our patent system has long recognized that patent claims are to be presumed patentable and nonobvious. The Graham amendment would have turned this established standard on its head, creating a separate and ill-defined hurdle for certain advancements in medicine.

The benefits of incremental innovation to public health and patients cannot be overstated. New formulations of malaria drugs, dosing regimens and delivery systems for AIDS patients, more efficient administrations of insulin for the treatment of diabetes, and developments in the treatment of cognitive heart disease have all been possible because of incremental innovation.

Imposing unjustified restrictions on the patentability of advancements like these would be disastrous for drug development, as the incentives that come with patent protection would be all but eliminated. Without the assurance that their innovative labor would be supported by intellectual property protection, pioneering drug developers would shift resources away from improving drug formulations and uses. The development of more effective treatments of some of the most devastating diseases would stall, as innovators would be unable to commercialize their products, recoup losses, or fund future research and development.

As critics continue to target myopically the patent system for a broader issue of drug prices in the American health care system, it’s likely not the last time that language like this will be proposed. In order to avoid the implementation of such ill-conceived standards into our patent laws, understanding what’s at stake is critical. The future of medical innovation depends on it.

Categories
FTC Healthcare

CPIP Scholars Join Comments to FTC on How Antitrust Overreach is Threatening Healthcare Innovation

dictionary entry for the word "innovate"On December 21, 2018, CPIP Senior Scholars Adam Mossoff and Kristen Osenga joined former Federal Circuit Chief Judge Randall Rader and SIU Law’s Mark Schultz in comments submitted to the FTC as part of its ongoing Competition and Consumer Protection in the 21st Century Hearings. Through the hearings, the FTC is examining whether recent economic or technological changes warrant adjustments to competition or consumer protection laws. The comments submitted to the FTC explain how the FTC itself is harming innovation in the health sciences by meddling in patent disputes between branded and generic drug companies.

The introduction is copied below, and the comments can be downloaded here.

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How Antitrust Overreach is Threatening Healthcare Innovation

Imagine passing a rigorous test with flying colors, only to be told that you need to start over because you weren’t wearing the right clothing or you wrote your answers in the wrong color. Does that sound silly? Unfair? That scenario is happening to the American pharmaceutical industry thanks to regulators at the Federal Trade Commission who aren’t content to let the Food & Drug Administration (the experts in pharmaceutical safety and regulation) and federal courts (which referee disputes between branded and generic drug companies) decide when new drugs are ready to come to market. The consequences of these regulatory actions impact people’s lives.

The development and widespread availability of safe and effective pharmaceutical products has helped people live longer and better lives. The pharmaceutical industry invests billions each year in research and infrastructure and employs millions of Americans. The industry is closely regulated by many agencies, most notably the FDA, which requires extensive testing for safety and effectiveness before new drugs enter the market. Many thoughtful proposals have been advanced to improve and modernize the FDA’s review and approval of new drugs, but there is broad agreement that the FDA’s basic role in drug approval serves valid ends.

In recent years, however, other government agencies have played an increasingly intrusive role in deciding whether and when new drugs can enter the market. One such agency is the Federal Trade Commission, which has recently taken steps to block branded drug companies from settling patent litigation with generic drug makers. The FTC substitutes its own judgment for the business judgment of sophisticated parties, simultaneously weakening the patent rights of branded drug companies that spend billions in drug discovery and development and delaying generic drug companies from bringing consumers low cost alternatives to branded drugs. This example of government agencies picking winners and losers—indeed, deciding there should be no winners and losers—harms consumers in the short run by slowing access to drugs and in the long run by weakening innovation.

This paper describes the role of patents in protecting drugs and the special patent litigation regime Congress enacted in the 1980s to carefully balance the needs of branded drug companies, generic competitors, and consumers. Although these systems are not perfect, the FTC’s overreach in its regulatory powers in this area of the innovation economy results in a net loss for American consumers, as described below.

To read the comments, please click here.

Categories
Inventors Patent Law

Qualcomm Founder Dr. Irwin M. Jacobs Delights Attendees at CPIP’s Sixth Annual Fall Conference

2018 Fall Conference flyerBy Kathleen Wills*

On October 11-12, 2018, the Center for the Protection of Intellectual Property (CPIP) hosted its Sixth Annual Fall Conference at Antonin Scalia Law School in Arlington, Virginia. The theme of the conference was IP for the Next Generation of Technology, and it featured a number of panel discussions and presentations on how IP rights and institutions can foster the next great technological advances.

In addition to the many renowned scholars and industry professionals who lent their expertise to the event, the conference’s keynote address was delivered by Dr. Irwin M. Jacobs, founder of Qualcomm Inc. and inventor of the digital transmission technology for cell phones that gave birth to the smartphone revolution. The video of Dr. Jacobs’ keynote address, embedded just below, is also available here, and the transcript is available here.

After beginning his career as an electrical engineer and professor at the Massachusetts Institute of Technology (MIT), Dr. Jacobs’ vision for the future of wireless communications drove him to found his first company, Linkabit, in the late 1960s. In the years that followed, Dr. Jacobs led teams that developed the first microprocessor-based satellite modem and scrambling systems for video and TV transmissions. In 1985, Dr. Jacobs founded Qualcomm, which pioneered the development of mobile satellite communications and digital wireless telephony on the national and international stage.

Dr. Jacobs’ keynote address focused on intellectual property’s role in the development of technology throughout his 50-year career. He began his speech by discussing his background in electrical engineering and academia at MIT and at the University of California, San Diego (UCSD). After publishing a textbook on digital communications, Dr. Jacobs explained that he then transitioned into consulting and started Linkabit, where he learned the importance of intellectual property.

Dr. Jacobs recounted how he later sold the company to start Qualcomm with the “mobile situation” of satellite communications on his mind. At Qualcomm, Dr. Jacobs wanted to break from the standard technology in favor of code-division multiple access (CDMA). CDMA had the potential to attract more users with a system that limited the total amount of interference affecting each channel, and it wasn’t long before Qualcomm was assigned the first patent on the new technology.

Qualcomm’s first product was Omnitracs, a small satellite terminal designed for communicating with dishes that led to the creation of a GPS system. Qualcomm’s patented GPS device used antenna technology to calculate locations based on information about the terrain, and it was very valuable to the company.

Using that source of income, Dr. Jacobs revisited CDMA at a time when the industry pursued time-division multiple access (TDMA) for supporting the shift to second-generation digital cellular technology. However, Dr. Jacobs knew that CDMA had the potential to support 10 to 20 times more subscribers in a given frequency band per antenna than TDMA. Within one year, Qualcomm built a demonstration of CDMA. At that time, the size of the mobile phone was large enough to need a van to drive it around!

Dr. Jacobs explained that commercializing the technology required an investment for chips, and it wasn’t long before AT&T, Motorola, and some other companies signed up for a license. Qualcomm decided to license every patent for the next “n” years to avoid future licensing issues and collect a small royalty. The industry eventually set up a meeting comparing TDMA to CDMA, and CDMA’s successful demonstration convinced the Cellular Telephone Industry Association to allow a second standard. A standards-setting process took place and, a year and a half later, the first standard issuance was completed in July of 1993.

Speaking on the push for CDMA, Dr. Jacob’s explained that there were “religious wars” in Europe because governments had agreed to only use an alternate type of technology. Nevertheless, CDMA continued to spread to other countries and rose to the international stage during talks about the third generation of cellular technology involving simultaneous voice and data transmissions. Dr. Jacobs visited the European Commissioner for Competition and eventually arranged an agreement with Ericsson around 1999 based on a strategic decision: instead of manufacturing CDMA phones in San Diego, there would be manufacturers everywhere in the world.

Selling the infrastructure to Ericsson, Qualcomm dove into the technology, funded by the licenses. The strategic decision to embed technology in chips in order to sell the software broadly has been Qualcomm’s business model ever since. Dr. Jacobs explained that since “we felt we had well-protected patents,” and had a steady income from the licenses, the team could do additional R&D. With that support, they were the first to put GPS technology into a chip and into a phone, developed the first application downloadable for the phone, and looked ahead at the next generation of technology.

Dr. Jacobs said that he’s often asked, “Did you anticipate where all of this might go?” To that question he replies, “Every so often.” Qualcomm was able to move the industry forward because of the returns generated through its intellectual property. Dr. Jacobs early realized that the devices people were carrying around everywhere were going to be very powerful computers, and that “it’s probably going to be the only computer most of us need several years from now.”

“Protecting intellectual property, having that available, is very critical for what was then a very small company being able to grow,” Dr. Jacobs said. Because Dr. Jacobs relied on secure intellectual property rights to commercialize and license innovative products, and in turn used income from licensing patents for R&D, Qualcomm was—and continues to be—able to prioritize high performance computing and to keep the cellular technology industry moving forward.

To watch the video of Dr. Jacobs’ keynote address, please click here, and to read the transcript, please click here.

*Kathleen Wills is a 2L at Antonin Scalia Law School, and she works as a Research Assistant at CPIP

Categories
Innovation

VIDEO: Dr. Irwin M. Jacobs Delivers Keynote Address at CPIP 2018 Fall Conference

On October 11-12, 2018, CPIP hosted its Sixth Annual Fall Conference, IP for the Next Generation of Technology, at Antonin Scalia Law School, George Mason University, in Arlington, Virginia. Our conference addressed how IP rights and institutions can foster and support the next leap forward in technology that is about to break out into consumer products and services.

Dr. Irwin M. Jacobs with CPIP Founder Adam Mossoff
Dr. Irwin M. Jacobs with CPIP Founder Adam Mossoff

Without doubt, the highlight of our conference was the keynote address by Dr. Irwin M. Jacobs—the inventor of the digital transmission technology for cell phones that gave birth to the smartphone revolution and the founder of Qualcomm. Dr. Jacobs has been a luminary in the telecommunications industry for many years, and he delighted conference attendees with endearing stories and wonderful insights from his inventive and commercial activities over the years.

We hope you will enjoy Dr. Jacobs’ keynote address as much as we do!

The video is available here, and it is embedded below: