Price Controls, Antitrust, and Patents

by Stephan Kinsella on July 10, 2011

Some older posts on when price controls and antitrust law are almost tolerable:

Patents, Prescription Drugs, and Price Controls

Posted by Stephan Kinsella on January 5, 2004 01:20 PM

As a libertarian, of course, I’m opposed in general to price controls. But a limited case can be made for a version of price controls in the case of prescription drugs. Hear me out.

Medicare is of course an unjust, unlibertarian program that amounts to wealth transfer from taxpayers to Medicare recipients. Expanding Medicare to include prescription drugs exacerbates the amount of theft. What makes the additional theft even worse are the artificially high prices charged by pharmaceutical companies for their drugs–artifically high due to the patent monopoly and FDA regulatory process.

What this means is that the federal government is spending billions of taxpayer dollars on prices inflated by federal government laws. It’s ridiculous. If the feds insist on stealing out money to purchase drugs for seniors, the least it can do is buy them at the cheapest possible price. One way to do this would be to simply issue compulsory licenses to generic drug manufacturers for any patented drug covered by Medicare. (The feds can license third parties to manufacture patented articles, without patent infringement liability; this was threatened in the Cipro anthrax drug a couple years ago. Yes, the feds have to pay “compensation” to the patent holder, but the level of compensation is bound to be less than the monopoly profits normally reaped by Big Pharma.)

This could be done selectively, for patented drugs for which an “exhorbitant” price is being charged. In short, Big Pharma would be told: “Lower your price or we will short-circuit your patent.”

Unfair, some might argue. Why? Drug companies are not entitled to the patent monopoly in the first place. So how is it a violation of their property rights for the government to threaten to take it away unless prices are lowered? Any drug company would be free to ignore the threat and compete on the free market (i.e. without patent protection).Couple other comments: There is no reason to restrict this “price control” technique to drugs purchased by Medicare–it could be used to de-inflated patent-monopoly-inflated prices across the board–Medicare, and other drug customers, would all benefit.

Second, even if there is a utilitarian case for patents, there is no reason for a one-size-fits-all policy–the “reward” need not be so high in all cases. So, there could be a a commission or board which looks at each patented drug and determines a “fair” rate of return and limits profits to that amount–on pain of losing the patent.

Also, of course, all FDA barriers to drug reimportation should be removed; and abolishing the FDA would also help lower drug prices.

Yet another approach would be to lower the patent term from approximately 17 years to 5 or so years for pharmaceuticals (and/or adopt a “utility model” type of patent system used in some other countries, where the patent term is shorter than the normal “utility patent” but it’s easier to obtain the patent–for the utility patent, both novelty and non-obviousness (“inventive step”) must be present; for the utility model, the invention need only be novel.)

Or as a patent attorney friend writes, “If you have to deal with the patents I’d rather see a bidding process. For example a person seeking a patent could disclose their invention subject to a confidentiality provision. Then the govt. and the inventor could bid for patent term. Govt could say “I’ll give you a 2 year monopoly for that stupid idea.” Drug co. could say “What, no way. I can’t live on that I need at least 20 years.” Then they meet in the middle, or not as the case may be. The same process could be used for all inventions not just drugs.”

 

As I noted in The Schizo Feds: Patent Monopolies and the FTC, the state grants patent monopolies and then uses antitrust law to attack the beneficiaries of those monopolies. As one commentator noted in a related thread, “It is amusing, watching one agency of government applying a system whose entire purpose is the creation of monopolies, and then another agency tasked with preventing monopolies turning up and trying to do something about it.” A case in point is the flack about the Cipro drug where the state whines about the prices charged for Cipro during the anthrax scare a few years back and threatened to choke back on the patent monopoly it had granted for it. The state is schizo in many other ways too, of course–it foisted MTBE (a gasoline additive) on the country and then, years later, after fears of groundwater contamination, mandated that MTBE be phased out (I’m sure that the lobbying of ADM for ethanol to be used instead had nothing to do with that).I previously noted the Rambus v. FTC case. Rambus was part of a standards-setting organization “working on standardization of DRAM chips.” As a court later summarized this,

After lengthy proceedings, the Federal Trade Commission determined that Rambus, while participating in the standard-setting process, deceptively failed to disclose to the [standards-setting organization] SSO the patent interests it held in four technologies that were standardized. Those interests ranged from issued patents, to pending patent applications, to plans to amend those patent applications to add new claims…. Finding this conduct monopolistic and in violation of § 2 of the Sherman Act, … the Commission went on to hold that Rambus had engaged in an unfair method of competition and unfair or deceptive acts or practices prohibited by § 5(a) of the Federal Trade Commission Act.

The FTC then sought to compel Rambus to license its patents at “reasonable royalty rates.” Rambus appealed to the U.S. Court of Appeals for the DC Circuit and, in April, won its appeal, clearing the way for Rambus to try to extract maximum royalties from its former partners.

The FTC has filed a petition for rehearingSkip Oliva has filed an amicus brief opposing the FTC’s petition. Now I agree with Oliva that it’s troubling when the state formulates new theories of antitrust liability. But from the libertarian view, the patent system and the FTC are all just internal parts of the state. So under the result favored by the FTC, what we really have is the state granting a slightly more limited patent monopoly to Rambus (that is, a patent for which only state-approved “reasonable royalty” rates may be charged) than is normally granted. I don’t see what all the hubbub is about. What the state giveth, the state taketh away.

My view is that anything that chokes back the state-granted patent monopoly is, ceteris paribus, to be favored. And I agree with the general idea that it is detestable for a company to secretly seek patents on the technology of the SSO the company is part of, and that these patents should not be enforceable. The default contractual rule should be that if you work with others to adopt a technological standard, you implicitly agree not to use state-granted patent monopolies on that technology to block or extract royalties from use of that standard. I would say that derogation from this default rule should be explicitly spelled out. Imagine what response you would get from other SSO members if you try to add a clause saying that you may secretly apply for patents and enforce them against other members or companies using the standard.

See also:  IP vs. AntitrustState Antitrust (anti-monopoly) law versus state IP (pro-monopoly) law;  The Schizo Feds: Patent Monopolies and the FTCThe Schizophrenic StateIntel v. AMD: More patent and antitrust waste.

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