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The FTC Office of Patent Invalidation

TOTM The Federal Trade Commission (FTC) announced late last month that it had “expanded its campaign against pharmaceutical manufacturers’ improper or inaccurate listing of patents in the Food . . .

The Federal Trade Commission (FTC) announced late last month that it had “expanded its campaign against pharmaceutical manufacturers’ improper or inaccurate listing of patents in the Food and Drug Administration’s (FDA) Orange Book, disputing junk patent listings for diabetes, weight loss, asthma,and COPD drugs, including Novo Nordisk Inc.’s blockbuster weight-loss drug, Ozempic.” Warning letters were sent to 10 manufacturers, including, among others, Teva (identifying 58 listings), Novo Nordisk (36 listings), and Boehringer Ingelheim (10 listings).

The commission “notified the FDA that it disputes the accuracy or relevance of more than 300 Orange Book patent listings across 20 different brand name products.” That expands on the 100-plus patents listed in the November 2023 warning letters that the FTC sent to an overlapping group of manufacturers.

That’s quite a few challenges. Reading through the FTC’s press release and warning letters, it’s not really clear what’s going on here. More frolic and detour on the part of Chair Lina Khan’s FTC, or a legitimate effort to protect competition in pharmaceutical markets?

Read the full piece here.

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Intellectual Property & Licensing

A Competition Law & Economics Analysis of Sherlocking

ICLE White Paper Abstract Sherlocking refers to an online platform’s use of nonpublic third-party business data to improve its own business decisions—for instance, by mimicking the successful products . . .

Abstract

Sherlocking refers to an online platform’s use of nonpublic third-party business data to improve its own business decisions—for instance, by mimicking the successful products and services of edge providers. Such a strategy emerges as a form of self-preferencing and, as with other theories about preferential access to data, it has been targeted by some policymakers and competition authorities due to the perceived competitive risks originating from the dual role played by hybrid platforms (acting as both referees governing their platforms, and players competing with the business they host). This paper investigates the competitive implications of sherlocking, maintaining that an outright ban is unjustified. First, the paper shows that, by aiming to ensure platform neutrality, such a prohibition would cover scenarios (i.e., the use of nonpublic third-party business data to calibrate business decisions in general, rather than to adopt a pure copycat strategy) that should be analyzed separately. Indeed, in these scenarios, sherlocking may affect different forms of competition (inter-platform v. intra-platform competition). Second, the paper argues that, in either case, the practice’s anticompetitive effects are questionable and that the ban is fundamentally driven by a bias against hybrid and vertically integrated players.

I. Introduction

The dual role some large digital platforms play (as both intermediary and trader) has gained prominence among the economic arguments used to justify the recent wave of regulation hitting digital markets around the world. Many policymakers have expressed concern about potential conflicts of interest among companies that have adopted this hybrid model and that also control important gateways for business users. In other words, the argument goes, some online firms act not only as regulators who set their platforms’ rules and as referees who enforce those rules, but also as market players who compete with their business users. This raises the fear that large platforms could reserve preferential treatment for their own services and products, to the detriment of downstream rivals and consumers. That, in turn, has led to calls for platform-neutrality rules.

Toward this aim, essentially all of the legislative initiatives undertaken around the world in recent years to enhance competition in digital markets have included anti-discrimination provisions that target various forms of self-preferencing. Self-preferencing, it has been said, serves as the symbol of the current competition-policy zeitgeist in digital markets.[1] Indeed, this conduct is considered functional to leveraging strategies that would grant gatekeepers the chance to entrench their power in core markets and extend it into associated markets.[2]

Against this background, so-called “sherlocking” has emerged as one form of self-preferencing. The term was coined roughly 20 years ago, after Apple updated its own app Sherlock (a search tool on its desktop-operating system) to mimic a third-party application called Watson, which was created by Karelia Software to complement the Apple tool’s earlier version.[3] According to critics of self-preferencing generally and sherlocking in particular, biased intermediation and related conflicts of interest allow gatekeepers to exploit their preferential access to business users’ data to compete against them by replicating successful products and services. The implied assumption is that this strategy is relevant to competition policy, even where no potential intellectual-property rights (IPRs) are infringed and no slavish imitation sanctionable under unfair-competition laws is detected. Indeed, under such theories, sherlocking would already be prevented by the enforcement of these rules.

To tackle perceived misuse of gatekeepers’ market position, the European Union’s Digital Markets Act (DMA) introduced a ban on sherlocking.[4] Similar concerns have also motivated requests for intervention in the United States,[5] Australia,[6] and Japan.[7] In seeking to address at least two different theories of gatekeepers’ alleged conflicts of interest, these proposed bans on exploiting access to business users’ data are not necessarily limited to the risk of product imitation, but may include any business decision whatsoever that a platform may make while relying on that data.

In parallel with the regulatory initiatives, the conduct at-issue has also been investigated in some antitrust proceedings, which appear to seek the very same twofold goal. In particular, in November 2020, the European Commission sent a statement of objections to Amazon that argued the company had infringed antitrust rules through the systematic use of nonpublic business data from independent retailers who sell on the Amazon online marketplace in order to benefit Amazon’s own retail business, which directly competes with those retailers.[8] A similar investigation was opened by the UK Competition and Markets Authority (CMA) in July 2022.[9]

Further, as part of the investigation opened into Apple’s App Store rule requiring developers to use Apple’s in-app purchase mechanism to distribute paid apps and/or paid digital content, the European Commission also showed interest in evaluating whether Apple’s conduct might disintermediate competing developers from relevant customer data, while Apple obtained valuable data about those activities and its competitors’ offers.[10] The European Commission and UK CMA likewise launched an investigation into Facebook Marketplace, with accusations that Meta used data gathered from advertisers in order to compete with them in markets where the company is active, such as classified ads.[11]

There are two primary reasons these antitrust proceedings are relevant. First, many of the prohibitions envisaged in regulatory interventions (e.g., DMA) clearly took inspiration from the antitrust investigations, thus making it important to explore the insights that competition authorities may provide to support an outright ban. Second, given that regulatory intervention will be implemented alongside competition rules (especially in Europe) rather than displace them,[12] sherlocking can be assessed at both the EU and national level against dominant players that are not eligible for “gatekeeper” designation under the DMA. For those non-gatekeeper firms, the practice may still be investigated by antitrust authorities and assessed before courts, aside from the DMA’s per se prohibition. And, of course, investigations and assessments of sherlocking could also be made even in those jurisdictions where there isn’t an outright ban.

The former sis well-illustrated by the German legislature’s decision to empower its national competition authority with a new tool to tackle abusive practices that are similar and functionally equivalent to the DMA.[13] Indeed, as of January 2021, the Bundeskartellamt may identify positions of particular market relevance (undertakings of “paramount significance for competition across markets”) and assess their possible anticompetitive effects on competition in those areas of digital ecosystems in which individual companies may have a gatekeeper function. Both the initiative’s aims and its list of practices are similar to the DMA. They are distinguished primarily by the fact that the German list is exhaustive, and the practices at-issue are not prohibited per se, but are subject to a reversal of the burden of proof, allowing firms to provide objective justifications. For the sake of this analysis, within the German list, one provision prohibits designated undertakings from “demanding terms and conditions that permit … processing data relevant for competition received from other undertakings for purposes other than those necessary for the provision of its own services to these undertakings without giving these undertakings sufficient choice as to whether, how and for what purpose such data are processed.”[14]

Unfortunately, none of the above-mentioned EU antitrust proceedings have concluded with a final decision that addresses the merits of sherlocking. This precludes evaluating whether the practice would have survived before the courts. Regarding the Apple investigation, the European Commission dropped the case over App Store rules and issued a new statement of objections that no longer mentions sherlocking.[15] Further, the European Commission and the UK CMA accepted the commitments offered by Amazon to close those investigations.[16] The CMA likewise accepted the commitments offered by Meta.[17]

Those outcomes can be explained by the DMA’s recent entry into force. Indeed, because of the need to comply with the new regulation, players designated as gatekeepers likely have lost interest in challenging antitrust investigations that target the very same conduct prohibited by the DMA.[18] After all, given that the DMA does not allow any efficiency defense against the listed prohibitions, even a successful appeal against an antitrust decision would be a pyrrhic victory. From the opposite perspective, the same applies to the European Commission, which may decide to save time, costs, and risks by dropping an ongoing case against a company designated as a gatekeeper under the DMA, knowing that the conduct under investigation will be prohibited in any case.

Nonetheless, despite the lack of any final decision on sherlocking, these antitrust assessments remain relevant. As already mentioned, the DMA does not displace competition law and, in any case, dominant platforms not designated as gatekeepers under the DMA still may face antitrust investigations over sherlocking. This applies even more for jurisdictions, such as the United States, that are evaluating DMA-like legislative initiatives (e.g., the American Innovation and Choice Online Act, or “AICOA”).

Against this background, drawing on recent EU cases, this paper questions the alleged anticompetitive implications of sherlocking, as well as claims that the practice fails to comply with existing antitrust rules.

First, the paper illustrates that prohibitions on the use of nonpublic third-party business data would cover two different theories that should be analyzed separately. Whereas a broader case involves all the business decisions adopted by a dominant platform because of such preferential access (e.g., the launch of new products or services, the development or cessation of existing products or services, the calibration of pricing and management systems), a more specific case deals solely with the adoption of a copycat strategy. By conflating these theories in support of a blanket ban that condemns any use of nonpublic third-party business data, EU antitrust authorities are fundamentally motivated by the same policy goal pursued by the DMA—i.e., to impose a neutrality regime on large online platforms. The competitive implications differ significantly, however, as adopting copycat strategies may only affect intra-brand competition, while using said data to improve other business decisions could also affect inter-platform competition.

Second, the paper shows that, in both of these scenarios, the welfare effects of sherlocking are unclear. Notably, exploiting certain data to better understand the market could help a platform to develop new products and services, to improve existing products and services, or more generally to be more competitive with respect to both business users and other platforms. As such outcomes would benefit consumers in terms of price and quality, any competitive advantage achieved by the hybrid platform could be considered unlawful only if it is not achieved on the merits. In a similar vein, if sherlocking is used by a hybrid platform to deliver replicas of its business users’ products and services, that would likely provide short-term procompetitive effects benefitting consumers with more choice and lower prices. In this case, the only competitive harm that would justify an antitrust intervention resides in (uncertain) negative long-term effects on innovation.

As a result, in any case, an outright ban of sherlocking, such as is enshrined in the DMA, is economically unsound since it would clearly harm consumers.

The paper is structured as follows. Section II describes the recent antitrust investigations of sherlocking, illustrating the various scenarios that might include the use of third-party business data. Section III investigates whether sherlocking may be considered outside the scope of competition on the merits for bringing competitive advantages to platforms solely because of their hybrid business model. Section IV analyzes sherlocking as a copycat strategy by investigating the ambiguous welfare effects of copying in digital markets and providing an antitrust assessment of the practice at issue. Section V concludes.

II. Antitrust Proceedings on Sherlocking: Platform Neutrality and Copycat Competition

Policymakers’ interest in sherlocking is part of a larger debate over potentially unfair strategies that large online platforms may deploy because of their dual role as an unavoidable trading partner for business users and a rival in complementary markets.

In this scenario, as summarized in Table 1, the DMA outlaws sherlocking, establishing that to “prevent gatekeepers from unfairly benefitting from their dual role,”[19] they are restrained from using, in competition with business users, “any data that is not publicly available that is generated or provided by those business users in the context of their use of the relevant core platform services or of the services provided together with, or in support of, the relevant core platform services, including data generated or provided by the customers of those business users.”[20] Recital 46 further clarifies that the “obligation should apply to the gatekeeper as a whole, including but not limited to its business unit that competes with the business users of a core platform service.”

A similar provision was included in the American Innovation and Choice Online Act (AICOA), which was considered, but not ultimately adopted, in the 117th U.S. Congress. AICOA, however, would limit the scope of the ban to the offer of products or services that would compete with those offered by business users.[21] Concerns about copycat strategies were also reported in the U.S. House of Representatives’ investigation of the state of competition in digital markets as supporting the request for structural-separation remedies and line-of-business restrictions to eliminate conflicts of interest where a dominant intermediary enters markets that place it in competition with dependent businesses.[22] Interestingly, however, in the recent complaint filed by the U.S. Federal Trade Commission (FTC) and 17 state attorneys general against Amazon that accuses the company of having deployed an interconnected strategy to block off every major avenue of competition (including price, product selection, quality, and innovation), there is no mention of sherlocking among the numerous unfair practices under investigation.[23]

Evaluating regulatory-reform proposals for digital markets, the Australian Competition and Consumer Commission (ACCC) also highlighted the risk of sherlocking, arguing that it could have an adverse effect on competition, notably on rivals’ ability to compete, when digital platforms exercise their strong market position to utilize nonpublic data to free ride on the innovation efforts of their rivals.[24] Therefore, the ACCC suggested adopting service-specific codes to address self-preferencing by, for instance, imposing data-separation requirements to restrain dominant app-store providers from using commercially sensitive data collected from the app-review process to develop their own apps.[25]

Finally, on a comparative note, it is also useful to mention the proposals advanced by the Japanese Fair Trade Commission (JFTC) in its recent market-study report on mobile ecosystems.[26] In order to ensure equal footing among competitors, the JFTC specified that its suggestion to prevent Google and Apple from using nonpublic data generated by other developers’ apps aims at pursuing two purposes. Such a ban would, indeed, concern not only use of the data for the purpose of developing competing apps, products, and services, but also its use for developing their own apps, products, and services.

TABLE 1: Legislative Initiatives and Proposals to Ban Sherlocking

As previously anticipated, sherlocking recently emerged as an antitrust offense in three investigations launched by the European Commission and the UK CMA.

In the first case, Amazon’s alleged reliance on marketplace sellers’ nonpublic business data has been claimed to distort fair competition on its platform and prevent effective competition. In its preliminary findings, the Commission argued that Amazon takes advantage of its hybrid business model, leveraging its access to nonpublic third-party sellers’ data (e.g., the number of ordered and shipped units of products; sellers’ revenues on the marketplace; the number of visits to sellers’ offers; data relating to shipping, to sellers’ past performance, and to other consumer claims on products, including the activated guarantees) to adjust its retail offers and strategic business decisions to the detriment of third-party sellers, which are direct competitors on the marketplace.[27] In particular, the Commission was concerned that Amazon uses such data for its decision to start and end sales of a product, for its pricing system, for its inventory-planning and management system, and to identify third-party sellers that Amazon’s vendor-recruitment teams should approach to invite them to become direct suppliers to Amazon Retail. To address the data-use concern, Amazon committed not to use nonpublic data relating to, or derived from, independent sellers’ activities on its marketplace for its retail business and not to use such data for the purposes of selling branded goods, as well as its private-label products.[28]

A parallel investigation ended with similar commitments in the UK.[29] According to the UK CMA, Amazon’s access to and use of nonpublic seller data could result in a competitive advantage for Amazon Retail arising from its operation of the marketplace, rather than from competition on the merits, and may lead to relevant adverse effects on competition. Notably, it was alleged this could result in a reduction in the scale and competitiveness of third-party sellers on the Amazon Marketplace; a reduction in the number and range of product offers from third-party sellers on the Amazon Marketplace; and/or less choice for consumers, due to them being offered lower quality goods and/or paying higher prices than would otherwise be the case.

It is also worth mentioning that, by determining that Amazon is an undertaking of paramount significance for competition across markets, the Bundeskartellamt emphasized the competitive advantage deriving from Amazon’s access to nonpublic data, such as Glance Views, sales figures, sale quantities, cost components of products, and reorder status.[30] Among other things, with particular regard to Amazon’s hybrid role, the Bundeskartellamt noted that the preferential access to competitively sensitive data “opens up the possibility for Amazon to optimize its own-brand assortment.”[31]

A second investigation involved Apple and its App Store rule.[32] According to the European Commission, the mandatory use of Apple’s own proprietary in-app purchase system (IAP) would, among other things, grant Apple full control over the relationship its competitors have with customers, thus disintermediating those competitors from customer data and allowing Apple to obtain valuable data about the activities and offers of its competitors.

Finally, Meta faced antitrust proceedings in both the EU and the UK.[33] The focus was on Facebook Marketplace—i.e., an online classified-ads service that allows users to advertise goods for sale. According to the European Commission and the CMA, Meta unilaterally imposes unfair trading conditions on competing online-classified ads services that advertise on Facebook or Instagram. These terms and conditions, which authorize Meta to use ads-related data derived from competitors for the benefit of Facebook Marketplace, are considered unjustified, as they impose an unnecessary burden on competitors and only benefit Facebook Marketplace. The suspicion is that Meta has used advertising data from Facebook Marketplace competitors for the strategic planning, product development, and launch of Facebook Marketplace, as well as for Marketplace’s operation and improvement.

Overall, these investigations share many features. The concerns about third-party business-data use, as well as about other forms of self-preferencing, revolve around the competitive advantages that accrue to a dominant platform because of its dual role. Such advantages are considered unfair, as they are not the result of the merits of a player, but derived purely and simply from its role as an important gateway to reach end users. Moreover, this access to valuable business data is not reciprocal. The feared risk is the marginalization of business users competing with gatekeepers on the gatekeepers’ platforms and, hence, the alleged harm to competition is the foreclosure of rivals in complementary markets (horizontal foreclosure).

The focus of these investigations was well-illustrated by the European Commission’s decision on Amazon’s practice.[34] The Commission’s concern was about the “data delta” that Amazon may exploit, namely the additional data related to third-party sellers’ listings and transactions that are not available to, and cannot be replicated by, the third-party sellers themselves, but are available to and used by Amazon Retail for its own retail operations.[35] Contrary to Amazon Retail—which, according to Commission’s allegations, would have full access to and would use such individual, real-time data of all its third-party sellers to calibrate its own retail decisions—sellers would have access only to their own individual listings and sales data. As a result, the Commission came to the (preliminary) conclusion that real-time access to and use of such volume, variety, and granularity of non-publicly available data from its retail competitors generates a significant competitive advantage for Amazon Retail in each of the different decisional processes that drive its retail operations.[36]

On a closer look, however, while antitrust authorities seem to target the use of nonpublic third-party business data as a single theory of harm, their allegations cover two different scenarios along the lines of what has already been examined with reference to the international legislative initiatives and proposals. Indeed, the Facebook Marketplace case does not involve an allegation of copying, as Meta is accused of gathering data from its business users to launch and improve its ads service, instead of reselling goods and services.

FIGURE 1: Sherlocking in Digital Markets

As illustrated above in Figure 1, while the claim in the latter scenario is that the preferential data use would help dominant players calibrate business decisions in general, the former scenario instead involves the use of such data for a pure copycat strategy of an entire product or service, or some of its specific features.

In both scenarios the aim of the investigations is to ensure platform neutrality. Accordingly, as shown by the accepted commitments, the envisaged solution for antitrust authorities is to impose  data-separation requirements to restrain dominant platforms from using third-party commercially sensitive data. Putting aside that these investigations concluded with commitments from the firms, however, their chances of success before a court differ significantly depending on whether they challenge a product-imitation strategy, or any business decision adopted because of the “data delta.”

A. Sherlocking and Unconventional Theories of Harm for Digital Markets

Before analyzing how existing competition-law rules could be applied to the various scenarios involving the use of third-party business data, it is worth providing a brief overview of the framework in which the assessment of sherlocking is conducted. As competition in the digital economy is increasingly a competition among ecosystems,[37] a lively debate has emerged on the capacity of traditional antitrust analysis to adequately capture the peculiar features of digital markets. Indeed, the combination of strong economies of scale and scope; indirect network effects; data advantages and synergies across markets; and portfolio effects all facilitate ecosystem development all contribute to making digital markets highly concentrated, prone to tipping, and not easily contestable.[38] As a consequence, it’s been suggested that addressing these distinctive features of digital markets requires an overhaul of the antitrust regime.

Such discussions require the antitrust toolkit and theories of harm to illustrate whether and how a particular practice, agreement, or merger is anticompetitive. Notably, at issue is whether traditional antitrust theories of harm are fit for purpose or whether novel theories of harm should be developed in response to the emerging digital ecosystems. The latter requires looking at the competitive impact of expanding, protecting, or strengthening an ecosystem’s position, and particularly whether such expansion serves to exploit a network of capabilities and to control access to key inputs and components.[39]

A significant portion of recent discussions around developing novel theories of harm to better address the characteristics of digital-business models and markets has been devoted to the topic of merger control—in part a result of the impressive number of acquisitions observed in recent years.[40] In particular, the focus has been on analyzing conglomerate mergers that involve acquiring a complementary or unrelated asset, which have traditionally been assumed to raise less-significant competition concerns.

In this regard, an ecosystem-based theory seems to have guided the Bundeskartellamt in its assessment of Meta’s acquisition of Kustomer[41] and by the CMA in Microsoft/Activision.[42] A more recent example is the European Commission’s decision to prohibit the proposed Booking/eTraveli merger, where the Commission explicitly noted that the transaction would have allowed Booking to expand its travel-services ecosystem.[43] The Commission’s concerns were related primarily to the so-called “envelopment” strategy, in which a prominent platform within a specific market broadens its range of services into other markets where there is a significant overlap of customer groups already served by the platform.[44]

Against this background, putative self-preferencing harms represent one of the European Commission’s primary (albeit contentious)[45] attempts to develop new theories of harm built on conglomerate platforms’ ability to bundle services or use data from one market segment to inform product development in another.[46] Originally formulated in the Google Shopping decision,[47] the theory of harm of (leveraging through) self-preferencing has subsequently inspired the DMA, which targets different forms of preferential treatment, including sherlocking.

In particular, it is asserting that platform may use self-preferencing to adopt a leveraging strategy with a twofold anticompetitive effect—that is, excluding or impeding rivals from competing with the platform (defensive leveraging) and extending the platform’s market power into associated markets (offensive leveraging). These goals can be pursued because of the unique role that some large digital platforms play. That is, they not only enjoy strategic market status by controlling ecosystems of integrated complementary products and services, which are crucial gateways for business users to reach end users, but they also perform a dual role as both a critical intermediary and a player active in complementors’ markets. Therefore, conflicts of interests may provide incentives for large vertically integrated platforms to favor their own products and services over those of their competitors.[48]

The Google Shopping theory of harm, while not yet validated by the Court of Justice of the European Union (CJEU),[49] has also found its way into merger analysis, as demonstrated by the European Commission’s recent assessment of iRobot/Amazon.[50] In its statement of objections, the Commission argued that the proposed acquisition of iRobot may give Amazon the ability and incentive to foreclose iRobot’s rivals by engaging in several foreclosing strategies to prevent them from selling robot vacuum cleaners (RVCs) on Amazon’s online marketplace and/or at degrading such rivals’ access to that marketplace. In particular, the Commission found that Amazon could deploy such self-preferencing strategies as delisting rival RVCs; reducing rival RVCs’ visibility in both organic and paid results displayed in Amazon’s marketplace; limiting access to certain widgets or commercially attractive labels; and/or raising the costs of iRobot’s rivals to advertise and sell their RVCs on Amazon’s marketplace.[51]

Sherlocking belongs to this framework of analysis and can be considered a form of self-preferencing, specifically because of the lack of reciprocity in accessing sensitive data.[52] Indeed, while gatekeeper platforms have access to relevant nonpublic third-party business data as a result of their role as unavoidable trading partners, they leverage this information exclusively, without sharing it with third-party sellers, thus further exacerbating an already uneven playing field.[53]

III. Sherlocking for Competitive Advantage: Hybrid Business Model, Neutrality Regimes, and Competition on the Merits

Insofar as prohibitions of sherlocking center on the competitive advantages that platforms enjoy because of their dual role—thereby allowing some players to better calibrate their business decisions due to their preferential access to business users’ data—it should be noted that competition law does not impose a general duty to ensure a level playing field.[54] Further, a competitive advantage does not, in itself, amount to anticompetitive foreclosure under antitrust rules. Rather, foreclosure must not only be proved (in terms of actual or potential effects) but also assessed against potential benefits for consumers in terms of price, quality, and choice of new goods and services.[55]

Indeed, not every exclusionary effect is necessarily detrimental to competition.[56] Competition on the merits may, by definition, lead to the departure from the market or the marginalization of competitors that are less efficient and therefore less attractive to consumers from the point of view of, among other things, price, choice, quality or innovation.[57] Automatically classifying any conduct with exclusionary effects were as anticompetitive could well become a means to protect less-capable, less-efficient undertakings and would in no way protect more meritorious undertakings—thereby potentially hindering a market’s competitiveness.[58]

As recently clarified by the CJEU regarding the meaning of “competition on the merits,” any practice that, in its implementation, holds no economic interest for a dominant undertaking except that of eliminating competitors must be regarded as outside the scope of competition on the merits.[59] Referring to the cases of margin squeezes and essential facilities, the CJEU added that the same applies to practices that a hypothetical equally efficient competitor is unable to adopt because that practice relies on using resources or means inherent to the holding of such a dominant position.[60]

Therefore, while antitrust cases on sherlocking set out to ensure a level playing field and platform neutrality, and therefore center on the competitive advantages that a platform enjoys because of its dual role, mere implementing a hybrid business model does not automatically put such practices outside the scope of competition on the merits. The only exception, according to the interpretation provided in Bronner, is the presence of an essential facility—i.e., an input whose access should be considered indispensable, as there are no technical, legal, or economic obstacles capable of making it impossible, or even unreasonably difficult, to duplicate it.[61]

As a result, unless it is proved that the hybrid platform is an essential facility, sherlocking and other forms of self-preferencing cannot be considered prima facie outside the scope of competition on the merits, or otherwise unlawful. Rather, any assessment of sherlocking demands the demonstration of anticompetitive effects, which in turn requires finding an impact on efficient firms’ ability and incentive to compete. In the scenario at-issue, for instance, the access to certain data may allow a platform to deliver new products or services; to improve existing products or services; or more generally to compete more efficiently not only with respect to the platform’s business users, but also against other platforms. Such an increase in both intra-platform and inter-platform competition would benefit consumers in terms of lower prices, better quality, and a wider choice of new or improved goods and services—i.e., competition on the merits.[62]

In Facebook Marketplace, the European Commission and UK CMA challenged the terms and conditions governing the provision of display-advertising and business-tool services to which Meta required its business customers to sign up.[63] In their view, Meta abused its dominant position by imposing unfair trading conditions on its advertising customers, which authorized Meta to use ads-related data derived from the latter in a way that could afford Meta a competitive advantage on Facebook Marketplace that would not have arisen from competition on the merits. Notably, antitrust authorities argued that Meta’s terms and conditions were unjustified, disproportionate, and unnecessary to provide online display-advertising services on Meta’s platforms.

Therefore, rather than directly questioning the platform’s dual role or hybrid business model, the European Commission and UK CMA decided to rely on traditional case law which considers unfair those clauses that are unjustifiably unrelated to the purpose of the contract, unnecessarily limit the parties’ freedom, are disproportionate, or are unilaterally imposed or seriously opaque.[64] This demonstrates that, outside the harm theory of the unfairness of terms and conditions, a hybrid platform’s use of nonpublic third-party business data to improve its own business decisions is generally consistent with antitrust provisions. Hence, an outright ban would be unjustified.

IV. Sherlocking to Mimic Business Users’ Products or Services

The second, and more intriguing, sherlocking scenario is illustrated by the Amazon Marketplace investigations and regards the original meaning of sherlocking—i.e., where a data advantage is used by a hybrid platform to mimic its business users’ products or services.

Where sherlocking charges assert that the practice allows some platforms to use business users’ data to compete against them by replicating their products or services, it should not be overlooked that the welfare effects of such a copying strategy are ambiguous. While the practice could benefit consumers in the short term by lowering prices and increasing choice, it may discourage innovation over the longer term if third parties anticipate being copied whenever they deliver successful products or services. Therefore, the success of an antitrust investigation essentially relies on demonstrating a harm to innovation that would induce business users to leave the market or stop developing their products and services. In other words, antitrust authorities should be able to demonstrate that, by allowing dominant platforms to free ride on their business guests’ innovation efforts, sherlocking would negatively affect rivals’ ability to compete.

A. The Welfare Effects of Copying

The tradeoff between the short- and long-term welfare effects of copying has traditionally been analyzed in the context of the benefits and costs generated by intellectual-property protection.[65] In particular, the economic literature investigating the optimal life of patents[66] and copyrights[67] focuses on the efficient balance between dynamic benefits associated with innovation and the static costs of monopoly power granted by IPRs.

More recently, product imitation has instead been investigated in the different scenario of digital markets, where dominant platforms adopting a hybrid business model may use third-party sellers’ market data to design and promote their own products over their rivals’ offerings. Indeed, some studies report that large online platforms may attempt to protect their market position by creating “kill zones” around themselves—i.e., by acquiring, copying, or eliminating their rivals.[68] In such a novel setting, the welfare effects of copying are assessed regardless of the presence and the potential enforcement of IPRs, but within a strategy aimed at excluding rivals by exploiting the dual role of both umpire and player to get preferential access to sensitive data and free ride on their innovative efforts.[69]

Even in this context, however, a challenging tradeoff should be considered. Indeed, while in the short term, consumers may benefit from the platform’s imitation strategy in terms of lower prices and higher quality, they may be harmed in the longer term if third parties are discouraged from delivering new products and services. As a result, while there is empirical evidence on hybrid platforms successfully entering into third parties’ adjacent market segments, [70] the extant academic literature finds the welfare implications of such moves to be ambiguous.

A first strand of literature attempts to estimate the welfare impact of the hybrid business model. Notably, Andre Hagiu, Tat-How Teh, and Julian Wright elaborated a model to address the potential implications of an outright ban on platforms’ dual mode, finding that such a structural remedy may harm consumer surplus and welfare even where the platform would otherwise engage in product imitation and self-preferencing.[71] According to the authors, banning the dual mode does not restore the third-party seller’s innovation incentives or the effective price competition between products, which are the putative harms caused by imitation and self-preferencing. Therefore, the authors’ evaluation was that interventions specifically targeting product imitation and self-preferencing were preferable.

Germa?n Gutie?rrez suggested that banning the dual model would generate hardly any benefits for consumers, showing that, in the Amazon case, interventions that eliminate either the Prime program or product variety are likely to decrease welfare.[72]

Further, analyzing Amazon’s business model, Federico Etro found that the platform and consumers’ incentives are correctly aligned, and that Amazon’s business model of hosting sellers and charging commissions prevents the company from gaining through systematic self?preferencing for its private-label and first-party products.[73] In the same vein, on looking at its business model and monetization strategy, Patrick Andreoli-Versbach and Joshua Gans argued that Amazon does not have an obvious incentive to self-preference.[74] Indeed, Amazon’s profitability data show that, on average, the company’s operating margin is higher on third-party sales than on first-party retail sales.

Looking at how modeling details may yield different results with regard to the benefits and harms of the hybrid business model, Simon Anderson and O?zlem Bedre-Defoile maintain that the platform’s choice to sell its own products benefits consumers by lowering prices when a monopoly platform hosts competitive fringe sellers, regardless of the platform’s position as a gatekeeper, whether sellers have an alternate channel to reach consumers, or whether alternate channels are perfect or imperfect substitutes for the platform channel.[75] On the other hand, the authors argued that platform product entry might harm consumers when a big seller with market power sells on its own channel and also on the platform. Indeed, in that case, the platform setting a seller fee before the big seller prices its differentiated products introduces double markups on the big seller’s platform-channel price and leaves some revenue to the big seller.

Studying whether Amazon engages in self-preferencing on its marketplace by favoring its own brands in search results, Chiara Farronato, Andrey Fradkin, and Alexander MacKay demonstrate empirically that Amazon brands remain about 30% cheaper and have 68% more reviews than other similar products.[76] The authors acknowledge, however, that their findings do not imply that consumers are hurt by Amazon brands’ position in search results.

Another strand of literature specifically tackles the welfare effects of sherlocking. In particular, Erik Madsen and Nikhil Vellodi developed a theoretical framework to demonstrate that a ban on insider imitation can either stifle or stimulate innovation, depending on the nature of innovation.[77] Specifically, the ban could stimulate innovation for experimental product categories, while reducing innovation in incremental product markets, since the former feature products with a large chance of superstar demand and the latter generate mostly products with middling demand.

Federico Etro maintains that the tradeoffs at-issue are too complex to be solved with simple interventions, such as bans on dual mode, self-preferencing, or copycatting.[78] Indeed, it is difficult to conclude that Amazon entry is biased to expropriate third-party sellers or that bans on dual mode, self-preferencing, or copycatting would benefit consumers, because they either degrade services and product variety or induce higher prices or commissions.

Similar results are provided by Jay Pil Choi, Kyungmin Kim, and Arijit Mukherjee, who developed a tractable model of a platform-run marketplace where the platform charges a referral fee to the sellers for access to the marketplace, and may also subsequently launch its own private-label product by copying a seller.[79] The authors found that a policy to either ban hybrid mode or only prohibit information use for the launch of private-label products may produce negative welfare implications.

Further, Radostina Shopova argues that, when introducing a private label, the marketplace operator does not have incentive to distort competition and foreclose the outside seller, but does have an incentive to lower fees charged to the outside seller and to vertically differentiate its own product in order to protect the seller’s channel.[80] Even when the intermediary is able to perfectly mimic the quality of the outside seller and monopolize its product space, the intermediary prefers to differentiate its offer and chooses a lower quality for the private-label product. Accordingly, as the purpose of private labels is to offer a lower-quality version of products aimed at consumers with a lower willingness to pay, a marketplace operator does not have an incentive to distort competition in favor of its own product and foreclose the seller of the original higher-quality product.

In addition, according to Jean-Pierre Dubé, curbing development of private-label programs would harm consumers and Amazon’s practices amount to textbook retailing, as they follow an off-the-shelf approach to managing private-label products that is standard for many retail chains in the West.[81] As a result, singling out Amazon’s practices would set a double standard.

Interestingly, such findings about predictors and effects of Amazon’s entry in competition with third-party merchants on its own marketplace are confirmed by the only empirical study developed so far. In particular, analyzing the Home & Kitchen department of Germany’s version of Amazon Marketplace between 2016 and 2021, Gregory S. Crawford, Matteo Courthoud, Regina Seibel, and Simon Zuzek’s results suggest that Amazon’s entry strategy was more consistent with making Marketplace more attractive to consumers than expropriating third-party merchants.[82] Notably, the study showed that, comparing Amazon’s entry decisions with those of the largest third-party merchants, Amazon tends to enter low-growth and low-quality products, which is consistent with a strategy that seeks to make Marketplace more attractive by expanding variety, lessening third-party market power, and/or enhancing product availability. The authors therefore found that Amazon’s entry on Amazon Marketplace demonstrated no systematic adverse effects and caused a mild market expansion.

Massimo Motta and Sandro Shelegia explored interactions between copying and acquisitions, finding that the former (or the threat of copying) can modify the outcome of an acquisition negotiation.[83] According to their model, there could be both static and dynamic incentives for an incumbent to introduce a copycat version of a complementary product. The static rationale consists of lowering the price of the complementary product in order to capture more rents from it, while the dynamic incentive consists of harming a potential rival’s prospects of developing a substitute. The latter may, in turn, affect the direction the entrant takes toward innovation. Anticipating the incumbent’s copying strategy, the entrant may shift resources from improvements to compete with the incumbent’s primary product to developing complementary products.

Jingcun Cao, Avery Haviv, and Nan Li analyzed the opposite scenario—i.e., copycats that seek to mimic the design and user experience of incumbents’ successful products.[84] The authors find empirically that, on average, copycat apps do not have a significant effect on the demand for incumbent apps and that, as with traditional counterfeit products, they may generate a positive demand spillover toward authentic apps.

Massimo Motta also investigated the potential foreclosure effects of platforms adopting a copycat strategy committed to non-discriminatory terms of access for third parties (e.g., Apple App Store, Google Play, and Amazon Marketplace).[85] Notably, according to Motta, when a third-party seller is particularly successful and the platform is unable to raise fees and commissions paid by that seller, the platform may prefer to copy its product or service to extract more profits from users, rather than rely solely on third-party sales. The author acknowledged, however, that even though this practice may create an incentive for self-preferencing, it does not necessarily have anticompetitive effects. Indeed, the welfare effects of the copying strategy are a priori ambiguous.[86] While, on the one hand, the platform’s copying of a third-party product benefits consumers by increasing variety and competition among products, on the other hand, copying might be wasteful for society, in that it entails a fixed cost and may discourage innovation if rivals anticipate that they will be systematically copied whenever they have a successful product.[87] Therefore, introducing a copycat version of a product offered by a firm in an adjacent market might be procompetitive.

B. Antitrust Assessment: Competition, Innovation, and Double Standards

The economic literature has demonstrated that the rationale and welfare effects of sherlocking by hybrid platforms are definitively ambiguous. Against concerns about rivals’ foreclosure, some studies provide a different narrative, illustrating that such a strategy is more consistent with making the platform more attractive to consumers (by differentiating the quality and pricing of the offer) than expropriating business users.[88] Furthermore, copies, imitations, and replicas undoubtedly benefit consumers with more choice and lower prices.

Therefore, the only way to consider sherlocking anticompetitive is by demonstrating long-term deterrent effects on innovation (i.e., reducing rivals’ incentives to invest in new products and services) outweigh consumers’ short-term advantages.[89] Moreover, deterrent effects must not be merely hypothetical, as a finding of abuse cannot be based on a mere possibility of harm.[90] In any case, such complex tradeoffs are at odds with a blanket ban.[91]

Moreover, assessments of the potential impact of sherlocking on innovation cannot disregard the role of IPRs—which are, by definition, the main primary to promote innovation. From this perspective, intellectual-property protection is best characterized as another form of tradeoff. Indeed, the economic rationale of IPRs (in particular, of patents and copyrights) involves, among other things, a tradeoff between access and incentives—i.e., between short-term competitive restrictions and long-term innovative benefits.[92]

According to the traditional incentive-based theory of intellectual property, free riding would represent a dangerous threat that justifies the exclusive rights granted by intellectual-property protection. As a consequence, so long as copycat expropriation does not infringe IPRs, it should be presumed legitimate and procompetitive. Indeed, such free riding is more of an intellectual-property issue than a competitive concern.

In addition, to strike a fair balance between restricting competition and providing incentives to innovation, the exclusive rights granted by IPRs are not unlimited in terms of duration, nor in terms of lawful (although not authorized) uses of the protected subject matter. Under the doctrine of fair use, for instance, reverse engineering represents a legitimate way to obtain information about a firm’s product, even if the intended result is to produce a directly competing product that may steer customers away from the initial product and the patented invention.

Outside of reverse engineering, copying is legitimately exercised once IPRs expire, when copycat competitors can reproduce previously protected elements. As a result of the competitive pressure exerted by new rivals, holders of expired IPRs may react by seeking solutions designed to block or at least limit the circulation of rival products. They could, for example, request other IPRs to cover aspects or functionalities different from those previously protected. They could also bring (sometimes specious) legal action for infringement of the new IPR or for unfair competition by slavish imitation. For these reasons, there have been occasions where copycat competitors have received protection from antitrust authorities against sham litigation brought by IPR holders concerned about losing margins due to pricing pressure from copycats.[93]

Finally, within the longstanding debate on the intersection of intellectual-property protection and competition, EU antitrust authorities have traditionally been unsympathetic toward restrictions imposed by IPRs. The success of the essential-facility doctrine (EFD) is the most telling example of this attitude, as its application in the EU has been extended to IPRs. As a matter of fact, the EFD represents the main antitrust tool for overseeing intellectual property in the EU.[94]

After Microsoft, EU courts have substantially dismantled one of the “exceptional circumstances” previously elaborated in Magill and specifically introduced for cases involving IPRs, with the aim of safeguarding a balance between restrictions to access and incentives to innovate. Whereas the CJEU established in Magill that refusal to grant an IP license should be considered anticompetitive if it prevents the emergence of a new product for which there is potential consumer demand, in Microsoft, the General Court considered such a requirement met even when access to an IPR is necessary for rivals to merely develop improved products with added value.

Given this background, recent competition-policy concerns about sherlocking are surprising. To briefly recap, the practice at-issue increases competition in the short term, but may affect incentives to innovate in the long-term. With regard to the latter, however, the practice neither involves products protected by IPRs nor constitutes a slavish imitation that may be caught under unfair-competition laws.

The case of Amazon, which has received considerable media coverage, is illustrative of the relevance of IP protection. Amazon has been accused of cloning batteries, power strips, wool runner shoes, everyday sling bags, camera tripods, and furniture.[95] One may wonder what kind of innovation should be safeguarded in these cases against potential copies. Admittedly, such examples appear consistent with the findings of the already-illustrated empirical study conducted by Crawford et al. indicating that Amazon tends to enter low-quality products in order to expand variety on the Marketplace and to make it more attractive to consumers.

Nonetheless, if an IPR is involved, right holders are provided with proper means to protect their products against infringement. Indeed, one of the alleged targeted companies (Williams-Sonoma) did file a complaint for design and trademark infringement, claiming that Amazon had copied a chair (Orb Dining Chair) sold by its West Elm brand. According to Williams-Sonoma, the Upholstered Orb Office Chair—which Amazon began selling under its Rivet brand in 2018—was so similar that the ordinary observer would be confused by the imitation.[96] If, instead, the copycat strategy does not infringe any IPR, the potential impact on innovation might not be considered particularly worrisome—at least at first glance.

Further, neither the degree to which third-party business data is unavailable nor the degree to which they are relevant in facilitating copying are clear cut. For instance, in the case of Amazon, public product reviews supply a great deal of information[97] and, regardless of the fact that a third party is selling a product on the Marketplace, anyone can obtain an item for the purposes of reverse engineering.[98]

In addition, antitrust authorities are used to intervening against opportunistic behavior by IPR holders. European competition authorities, in particular, have never before seemed particularly responsive to the motives of inventors and creators versus the need to encourage maximum market openness.

It should also be noted that cloning is a common strategy in traditional markets (e.g., food products)[99] and has been the subject of longstanding controversies between high-end fashion brands and fast-fashion brands (e.g., Zara, H&M).[100] Furthermore, brick-and-mortar retailers also introduce private labels and use other brands’ sales records in deciding what to produce.[101]

So, what makes sherlocking so different and dangerous when deployed in digital markets as to push competition authorities to contradict themselves?[102]

The double standard against sherlocking reflects the same concern and pursues the same goal of the various other attempts to forbid any form of self-preferencing in digital markets. Namely, antitrust investigations of sherlocking are fundamentally driven by the bias against hybrid and vertically integrated players. The investigations rely on the assumption that conflicts of interest have anticompetitive implications and that, therefore, platform neutrality should be promoted to ensure the neutrality of the competitive process.[103] Accordingly, hostility toward sherlocking may involve both of the illustrated scenarios—i.e., the use of nonpublic third-party business data either in adopting any business decision, or just copycat strategies, in particular.

As a result, however, competition authorities end up challenging a specific business model, rather than the specific practice at-issue, which brings undisputed competitive benefits in terms of lower prices and wider consumer choice, and which should therefore be balanced against potential exclusionary risks. As the CJEU has pointed out, the concept of competition on the merits:

…covers, in principle, a competitive situation in which consumers benefit from lower prices, better quality and a wider choice of new or improved goods and services. Thus, … conduct which has the effect of broadening consumer choice by putting new goods on the market or by increasing the quantity or quality of the goods already on offer must, inter alia, be considered to come within the scope of competition on the merits.[104]

Further, in light of the “as-efficient competitor” principle, competition on the merits may lead to “the departure from the market, or the marginalization of, competitors that are less efficient and so less attractive to consumers from the point of view of, among other things, price, choice, quality or innovation.”[105]

It has been correctly noted that the “as-efficient competitor” principle is a reminder of what competition law is about and how it differs from regulation.[106] Competition law aims to protect a process, rather than engineering market structures to fulfill a particular vision of how an industry is to operate.[107] In other words, competition law does not target firms on the basis of size or status and does not infer harm from (market or bargaining) power or business model. Therefore, neither the dual role played by some large online platforms nor their preferential access to sensitive business data or their vertical integration, by themselves, create a competition problem. Competitive advantages deriving from size, status, power, or business model cannot be considered per se outside the scope of competition on the merits.

Some policymakers have sought to resolve these tensions in how competition law regards sherlocking by introducing or envisaging an outright ban. These initiatives and proposals have clearly been inspired by antitrust investigations, but they did so for the wrong reasons. Instead of taking stock of the challenging tradeoffs between short-term benefits and long-term risks that an antitrust assessment of sherlocking requires, they blamed competition law for not providing effective tools to achieve the policy goal of platform neutrality.[108] Therefore, the regulatory solution is merely functional to bypass the traditional burden of proof of antitrust analysis and achieve what competition-law enforcement cannot provide.

V. Conclusion

The bias against self-preferencing strikes again. Concerns about hybrid platforms’ potential conflicts of interest have led policymakers to seek prohibitions to curb different forms of self-preferencing, making the latter the symbol of the competition-policy zeitgeist in digital markets. Sherlocking shares this fate. Indeed, the DMA outlaws any use of business users’ nonpublic data and similar proposals have been advanced in the United States, Australia, and Japan. Further, like other forms of self-preferencing, such regulatory initiatives against sherlocking have been inspired by previous antitrust proceedings.

Drawing on these antitrust investigations, the present research shows the extent to which an outright ban on sherlocking is unjustified. Notably, the practice at-issue includes two different scenarios: the broad case in which a gatekeeper exploits its preferential access to business users’ data to better calibrate all of its business decisions and the narrow case in which such data is used to adopt a copycat strategy. In either scenario, the welfare effects and competitive implications of sherlocking are unclear.

Indeed, the use of certain data by a hybrid platform to improve business decisions generally should be classified as competition on the merits, and may yield an increase in both intra-platform (with respect to business users) and inter-platform (with respect to other platforms) competition. This would benefit consumers in terms of lower prices, better quality, and a wider choice of new or improved goods and services. In a similar vein, if sherlocking is used to deliver replicas of business users’ products or services, the anti-competitiveness of such a strategy may only result from a cumbersome tradeoff between short-term benefits (i.e., lower prices and wider choice) and negative long-term effects on innovation.

An implicit confirmation of the difficulties encountered in demonstrating the anti-competitiveness of sherlocking comes from the recent complaint issued by the FTC against Amazon.[109] Current FTC Chairwoman Lina Khan devoted a significant portion of her previous academic career to questioning Amazon’s practices (including the decision to introduce its own private labels inspired by third-party products)[110] and to supporting the adoption of structural-separation remedies to tackle platforms’ conflicts of interest that induce them to exploit their “systemic informational advantage (gleaned from competitors)” to thwart rivals and strengthen their own position by introducing replica products.[111] Despite these premises and although the FTC’s complaint targets numerous practices belonging to what has been described as an interconnected strategy to block off every major avenue of competition, however, sherlocking is surprisingly off the radar.

Regulatory initiatives to ban sherlocking in order to ensure platform neutrality with respect to business users and a level playing field among rivals would sacrifice undisputed procompetitive benefits on the altar of policy goals that competition rules are not meant to pursue. Sherlocking therefore appears to be a perfect case study of the side effects of unwarranted interventions in digital markets.

[1] Giuseppe Colangelo, Antitrust Unchained: The EU’s Case Against Self-Preferencing, 72 GRUR International 538 (2023).

[2] Jacques Cre?mer, Yves-Alexandre de Montjoye, & Heike Schweitzer, Competition Policy for the Digital Era (2019), 7, https://op.europa.eu/en/publication-detail/-/publication/21dc175c-7b76-11e9-9f05-01aa75ed71a1/language-en (all links last accessed 3 Jan. 2024); UK Digital Competition Expert Panel, Unlocking Digital Competition, (2019) 58, available at https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/785547/unlocking_digital_competition_furman_review_web.pdf.

[3] You’ve Been Sherlocked, The Economist (2012), https://www.economist.com/babbage/2012/07/13/youve-been-sherlocked.

[4] Regulation (EU) 2022/1925 on contestable and fair markets in the digital sector and amending Directives (EU) 2019/1937 and (EU) 2020/1828 (Digital Markets Act) (2022), OJ L 265/1, Article 6(2).

[5] U.S. S. 2992, American Innovation and Choice Online Act (AICOA) (2022), Section 3(a)(6), available at https://www.klobuchar.senate.gov/public/_cache/files/b/9/b90b9806-cecf-4796-89fb-561e5322531c/B1F51354E81BEFF3EB96956A7A5E1D6A.sil22713.pdf. See also U.S. House of Representatives, Subcommittee on Antitrust, Commercial, and Administrative Law, Investigation of Competition in Digital Markets, Majority Staff Reports and Recommendations (2020), 164, 362-364, 378, available at https://democrats-judiciary.house.gov/uploadedfiles/competition_in_digital_markets.pdf.

[6] Australian Competition and Consumer Commission, Digital Platform Services Inquiry Report on Regulatory Reform (2022), 125, https://www.accc.gov.au/about-us/publications/serial-publications/digital-platform-services-inquiry-2020-2025/digital-platform-services-inquiry-september-2022-interim-report-regulatory-reform.

[7] Japan Fair Trade Commission, Market Study Report on Mobile OS and Mobile App Distribution (2023), https://www.jftc.go.jp/en/pressreleases/yearly-2023/February/230209.html.

[8] European Commission, 10 Nov. 2020, Case AT.40462, Amazon Marketplace; see Press Release, Commission Sends Statement of Objections to Amazon for the Use of Non-Public Independent Seller Data and Opens Second Investigation into Its E-Commerce Business Practices, European Commission (2020), https://ec.europa.eu/commission/presscorner/detail/en/ip_20_2077.

[9] Press Release, CMA Investigates Amazon Over Suspected Anti-Competitive Practices, UK Competition and Markets Authority (2022), https://www.gov.uk/government/news/cma-investigates-amazon-over-suspected-anti-competitive-practices.

[10] European Commission, 16 Jun. 2020, Case AT.40716, Apple – App Store Practices.

[11] Press Release, Commission Sends Statement of Objections to Meta over Abusive Practices Benefiting Facebook Marketplace, European Commission (2022), https://ec.europa.eu/commission/presscorner/detail/en/ip_22_7728; Press Release, CMA Investigates Facebook’s Use of Ad Data, UK Competition and Markets Authority (2021), https://www.gov.uk/government/news/cma-investigates-facebook-s-use-of-ad-data.

[12] DMA, supra note 4, Recital 10 and Article 1(6).

[13] GWB Digitalization Act, 18 Jan. 2021, Section 19a. On risks of overlaps between the DMA and the competition law enforcement, see Giuseppe Colangelo, The European Digital Markets Act and Antitrust Enforcement: A Liaison Dangereuse, 47 European Law Review 597.

[14] GWB, supra note 13, Section 19a (2)(4)(b).

[15] Press Release, Commission Sends Statement of Objections to Apple Clarifying Concerns over App Store Rules for Music Streaming Providers, European Commission (2023), https://ec.europa.eu/commission/presscorner/detail/en/ip_23_1217.

[16] European Commission, 20 Dec. 2022, Case AT.40462; Press Release, Commission Accepts Commitments by Amazon Barring It from Using Marketplace Seller Data, and Ensuring Equal Access to Buy Box and Prime, European Commission (2022), https://ec.europa.eu/commission/presscorner/detail/en/ip_22_7777; UK Competition and Markets Authority, 3 Nov. 2023, Case No. 51184, https://www.gov.uk/cma-cases/investigation-into-amazons-marketplace.

[17] UK Competition and Markets Authority, 3 Nov. 2023, Case AT.51013, https://www.gov.uk/cma-cases/investigation-into-facebooks-use-of-data.

[18] See, e.g., Gil Tono & Lewis Crofts (2022), Amazon Data Commitments Match DMA Obligations, EU’s Vestager Say, mLex (2022), https://mlexmarketinsight.com/news/insight/amazon-data-commitments-match-dma-obligation-eu-s-vestager-says (reporting that Commissioner Vestager stated that Amazon’s data commitments definitively appear to match what would be asked within the DMA).

[19] DMA, supra note 4, Recital 46.

[20] Id., Article 6(2) (also stating that, for the purposes of the prohibition, non-publicly available data shall include any aggregated and non-aggregated data generated by business users that can be inferred from, or collected through, the commercial activities of business users or their customers, including click, search, view, and voice data, on the relevant core platform services or on services provided together with, or in support of, the relevant core platform services of the gatekeeper).

[21] AICOA, supra note 5.

[22] U.S. House of Representatives, supra note 5; see also Lina M. Khan, The Separation of Platforms and Commerce, 119 Columbia Law Review 973 (2019).

[23] U.S. Federal Trade Commission, et al. v. Amazon.com, Inc., Case No. 2:23-cv-01495 (W.D. Wash., 2023).

[24] Australian Competition and Consumer Commission, supra note 6, 125.

[25] Id., 124.

[26] Japan Fair Trade Commission, supra note 7, 144.

[27] European Commission, supra note 8. But see also Amazon, Supporting Sellers with Tools, Insights, and Data (2021), https://www.aboutamazon.eu/news/policy/supporting-sellers-with-tools-insights-and-data (claiming that the company is just using aggregate (rather than individual) data: “Just like our third-party sellers and other retailers across the world, Amazon also uses data to run our business. We use aggregated data about customers’ experience across the store to continuously improve it for everyone, such as by ensuring that the store has popular items in stock, customers are finding the products they want to purchase, or connecting customers to great new products through automated merchandising.”)

[28] European Commission, supra note 16.

[29] UK Competition and Markets Authority, supra notes 9 and 16.

[30] Bundeskartellamt, 5 Jul. 2022, Case B2-55/21, paras. 493, 504, and 518.

[31] Id., para. 536.

[32] European Commission, supra note 10.

[33] European Commission, supra note 11; UK Competition and Markets Authority, supra note 11.

[34] European Commission, supra note 16. In a similar vein, see also UK Competition and Markets Authority, supra note 16, paras. 4.2-4.7.

[35] European Commission, supra note 16, para. 111.

[36] Id., para. 123.

[37] Cre?mer, de Montjoye, & Schweitzer, supra note 2, 33-34.

[38] See, e.g., Marc Bourreau, Some Economics of Digital Ecosystems, OECD Hearing on Competition Economics of Digital Ecosystems (2020), https://www.oecd.org/daf/competition/competition-economics-of-digital-ecosystems.htm; Amelia Fletcher, Digital Competition Policy: Are Ecosystems Different?, OECD Hearing on Competition Economics of Digital Ecosystems (2020).

[39] See, e.g., Cristina Caffarra, Matthew Elliott, & Andrea Galeotti, ‘Ecosystem’ Theories of Harm in Digital Mergers: New Insights from Network Economics, VoxEU (2023), https://cepr.org/voxeu/columns/ecosystem-theories-harm-digital-mergers-new-insights-network-economics-part-1 (arguing that, in merger control, the implementation of an ecosystem theory of harm would require assessing how a conglomerate acquisition can change the network of capabilities (e.g., proprietary software, brand, customer-base, data) in order to evaluate how easily competitors can obtain alternative assets to those being acquired); for a different view, see Geoffrey A. Manne & Dirk Auer, Antitrust Dystopia and Antitrust Nostalgia: Alarmist Theories of Harm in Digital Markets and Their Origins, 28 George Mason Law Review 1281(2021).

[40] See, e.g., Viktoria H.S.E. Robertson, Digital merger control: adapting theories of harm, (forthcoming) European Competition Journal; Caffarra, Elliott, & Galeotti, supra note 39; OECD, Theories of Harm for Digital Mergers (2023), available at www.oecd.org/daf/competition/theories-of-harm-for-digital-mergers-2023.pdf; Bundeskartellamt, Merger Control in the Digital Age – Challenges and Development Perspectives (2022), available at https://www.bundeskartellamt.de/SharedDocs/Publikation/EN/Diskussions_Hintergrundpapiere/2022/Working_Group_on_Competition_Law_2022.pdf?__blob=publicationFile&v=2; Elena Argentesi, Paolo Buccirossi, Emilio Calvano, Tomaso Duso, Alessia Marrazzo, & Salvatore Nava, Merger Policy in Digital Markets: An Ex Post Assessment, 17 Journal of Competition Law & Economics 95 (2021); Marc Bourreau & Alexandre de Streel, Digital Conglomerates and EU Competition Policy (2019), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3350512.

[41] Bundeskartellamt, 11 Feb. 2022, Case B6-21/22, https://www.bundeskartellamt.de/SharedDocs/Entscheidung/EN/Fallberichte/Fusionskontrolle/2022/B6-21-22.html;jsessionid=C0837BD430A8C9C8E04D133B0441EB95.1_cid362?nn=4136442.

[42] UK Competition and Markets Authority, Microsoft / Activision Blizzard Merger Inquiry (2023), https://www.gov.uk/cma-cases/microsoft-slash-activision-blizzard-merger-inquiry.

[43] See European Commission, Commission Prohibits Proposed Acquisition of eTraveli by Booking (2023), https://ec.europa.eu/commission/presscorner/detail/en/ip_23_4573 (finding that a flight product is a crucial growth avenue in Booking’s ecosystem, which revolves around its hotel online-travel-agency (OTA) business, as it would generate significant additional traffic to the platform, thus allowing Booking to benefit from existing customer inertia and making it more difficult for competitors to contest Booking’s position in the hotel OTA market).

[44] Thomas Eisenmann, Geoffrey Parker, & Marshall Van Alstyne, Platform Envelopment, 32 Strategic Management Journal 1270 (2011).

[45] See, e.g., Colangelo, supra note 1, and Pablo Iba?n?ez Colomo, Self-Preferencing: Yet Another Epithet in Need of Limiting Principles, 43 World Competition 417 (2020) (investigating whether and to what extent self-preferencing could be considered a new standalone offense in EU competition law); see also European Commission, Digital Markets Act – Impact Assessment Support Study (2020), 294, https://op.europa.eu/en/publication-detail/-/publication/0a9a636a-3e83-11eb-b27b-01aa75ed71a1/language-en (raising doubts about the novelty of this new theory of harm, which seems similar to the well-established leveraging theories of harm of tying and bundling, and margin squeeze).

[46] European Commission, supra note 45, 16.

[47] European Commission, 27 Jun. 2017, Case AT.39740, Google Search (Shopping).

[48] See General Court, 10 Nov. 2021, Case T-612/17, Google LLC and Alphabet Inc. v. European Commission, ECLI:EU:T:2021:763, para. 155 (stating that the general principle of equal treatment obligates vertically integrated platforms to refrain from favoring their own services as opposed to rival ones; nonetheless, the ruling framed self-preferencing as discriminatory abuse).

[49] In the meantime, however, see Opinion of the Advocate General Kokott, 11 Jan. 2024, Case C-48/22 P, Google v. European Commission, ECLI:EU:C:2024:14, paras. 90 and 95 (arguing that the self-preferencing of which Google is accused constitutes an independent form of abuse, albeit one that exhibits some proximity to cases involving margin squeezing).

[50] European Commission, Commission Sends Amazon Statement of Objections over Proposed Acquisition of iRobot (2023), https://ec.europa.eu/commission/presscorner/detail/en/IP_23_5990.

[51] The same concerns and approach have been shared by the CMA, although it reached a different conclusion, finding that the new merged entity would not have incentive to self-preference its own branded RVCs: see UK Competition and Markets Authority, Amazon / iRobot Merger Inquiry – Clearance Decision (2023), paras. 160, 188, and 231, https://www.gov.uk/cma-cases/amazon-slash-irobot-merger-inquiry.

[52] See European Commission, supra note 45, 304.

[53] Id., 313-314 (envisaging, among potential remedies, the imposition of a duty to make all data used by the platform for strategic decisions available to third parties); see also Désirée Klinger, Jonathan Bokemeyer, Benjamin Della Rocca, & Rafael Bezerra Nunes, Amazon’s Theory of Harm, Yale University Thurman Arnold Project (2020), 19, available at https://som.yale.edu/sites/default/files/2022-01/DTH-Amazon.pdf.

[54] Colangelo, supra note 1; see also Oscar Borgogno & Giuseppe Colangelo, Platform and Device Neutrality Regime: The New Competition Rulebook for App Stores?, 67 Antitrust Bulletin 451 (2022).

[55] See Court of Justice of the European Union (CJEU), 12 May 2022, Case C-377/20, Servizio Elettrico Nazionale SpA v. Autorità Garante della Concorrenza e del Mercato, ECLI:EU:C:2022:379; 19 Apr. 2018, Case C-525/16, MEO v. Autoridade da Concorrência, ECLI:EU:C:2018:270; 6 Sep. 2017, Case C-413/14 P, Intel v. Commission, ECLI:EU:C:2017:632; 6 Oct. 2015, Case C-23/14, Post Danmark A/S v. Konkurrencerådet (Post Danmark II), ECLI:EU:C:2015:651; 27 Mar. 2012, Case C-209/10, Post Danmark A/S v Konkurrencera?det (Post Danmark I), ECLI: EU:C:2012:172; for a recent overview of the EU case law, see also Pablo Iba?n?ez Colomo, The (Second) Modernisation of Article 102 TFEU: Reconciling Effective Enforcement, Legal Certainty and Meaningful Judicial Review, SSRN (2023), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4598161.

[56] CJEU, Intel, supra note 55, paras. 133-134.

[57] CJEU, Servizio Elettrico Nazionale, supra note 55, para. 73.

[58] Opinion of Advocate General Rantos, 9 Dec. 2021, Case C?377/20, Servizio Elettrico Nazionale SpA v. Autorità Garante della Concorrenza e del Mercato, ECLI:EU:C:2021:998, para. 45.

[59] CJEU, Servizio Elettrico Nazionale, supra note 55, para. 77.

[60] Id., paras. 77, 80, and 83.

[61] CJEU, 26 Nov.1998, Case C-7/97, Oscar Bronner GmbH & Co. KG v. Mediaprint Zeitungs- und Zeitschriftenverlag GmbH & Co. KG, Mediaprint Zeitungsvertriebsgesellschaft mbH & Co. KG and Mediaprint Anzeigengesellschaft mbH & Co. KG, ECLI:EU:C:1998:569.

[62] CJEU, Servizio Elettrico Nazionale, supra note 55, para. 85.

[63] European Commission, supra note 11; UK Competition and Markets Authority, supra note 17, paras. 2.6, 4.3, and 4.7.

[64] See, e.g., European Commission, Case COMP D3/34493, DSD, para. 112 (2001) OJ L166/1; affirmed in GC, 24 May 2007, Case T-151/01, DerGru?nePunkt – Duales System DeutschlandGmbH v. European Commission, ECLI:EU:T:2007:154 and CJEU, 16 Jul. 2009, Case C-385/07 P, ECLI:EU:C:2009:456; European Commission, Case IV/31.043, Tetra Pak II, paras. 105–08, (1992) OJ L72/1; European Commission, Case IV/29.971, GEMA III, (1982) OJ L94/12; CJUE, 27 Mar. 1974, Case 127/73, Belgische Radio en Televisie e socie?te? belge des auteurs, compositeurs et e?diteurs v. SV SABAM and NV Fonior, ECLI:EU:C:1974:25, para. 15; European Commission, Case IV/26.760, GEMA II, (1972) OJ L166/22; European Commission, Case IV/26.760, GEMA I, (1971) OJ L134/15.

[65] See, e.g., Richard A. Posner, Intellectual Property: The Law and Economics Approach, 19 The Journal of Economic Perspectives 57 (2005).

[66] See, e.g., Richard Gilbert & Carl Shapiro, Optimal Patent Length and Breadth, 21 The RAND Journal of Economics 106 (1990); Pankaj Tandon, Optimal Patents with Compulsory Licensing, 90 Journal of Political Economy 470 (1982); Frederic M. Scherer, Nordhaus’ Theory of Optimal Patent Life: A Geometric Reinterpretation, 62 American Economic Review 422 (1972); William D. Nordhaus, Invention, Growth, and Welfare: A Theoretical Treatment of Technological Change, Cambridge, MIT Press (1969).

[67] See, e.g., Hal R. Varian, Copying and Copyright, 19 The Journal of Economic Perspectives 121 (2005); William R. Johnson, The Economics of Copying, 93 Journal of Political Economy 158 (1985); Stephen Breyer, The Uneasy Case for Copyright: A Study of Copyright in Books, Photocopies, and Computer Programs, 84 Harvard Law Review 281 (1970).

[68] Sai Krishna Kamepalli, Raghuram Rajan, & Luigi Zingales, Kill Zone, NBER Working Paper No. 27146 (2022), http://www.nber.org/papers/w27146; Massimo Motta & Sandro Shelegia, The “Kill Zone”: Copying, Acquisition and Start-Ups’ Direction of Innovation, Barcelona GSE Working Paper Series Working Paper No. 1253 (2021), https://bse.eu/research/working-papers/kill-zone-copying-acquisition-and-start-ups-direction-innovation; U.S. House of Representatives, Subcommittee on Antitrust, Commercial, and Administrative Law, supra note 8, 164; Stigler Committee for the Study of Digital Platforms, Market Structure and Antitrust Subcommittee (2019) 54, https://research.chicagobooth.edu/stigler/events/single-events/antitrust-competition-conference/digital-platforms-committee; contra, see Geoffrey A. Manne, Samuel Bowman, & Dirk Auer, Technology Mergers and the Market for Corporate Control, 86 Missouri Law Review 1047 (2022).

[69] See also Howard A. Shelanski, Information, Innovation, and Competition Policy for the Internet, 161 University of Pennsylvania Law Review 1663 (2013), 1999 (describing as “forced free riding” the situation occurring when a platform appropriates innovation by other firms that depend on the platform for access to consumers).

[70] See Feng Zhu & Qihong Liu, Competing with Complementors: An Empirical Look at Amazon.com, 39 Strategic Management Journal 2618 (2018).

[71] Andrei Hagiu, Tat-How Teh, and Julian Wright, Should Platforms Be Allowed to Sell on Their Own Marketplaces?, 53 RAND Journal of Economics 297 (2022), (the model assumes that there is a platform that can function as a seller and/or a marketplace, a fringe of small third-party sellers that all sell an identical product, and an innovative seller that has a better product in the same category as the fringe sellers and can invest more in making its product even better; further, the model allows the different channels (on-platform or direct) and the different sellers to offer different values to consumers; therefore, third-party sellers (including the innovative seller) can choose whether to participate on the platform’s marketplace, and whenever they do, can price discriminate between consumers that come to it through the marketplace and consumers that come to it through the direct channel).

[72] See Germa?n Gutie?rrez, The Welfare Consequences of Regulating Amazon (2022), available at http://germangutierrezg.com/Gutierrez2021_AMZ_welfare.pdf (building an equilibrium model where consumers choose products on the Amazon platform, while third-party sellers and Amazon endogenously set prices of products and platform fees).

[73] See Federico Etro, Product Selection in Online Marketplaces, 30 Journal of Economics & Management Strategy 614 (2021), (relying on a model where a marketplace such as Amazon provides a variety of products and can decide, for each product, whether to monetize sales by third-party sellers through a commission or become a seller on its platform, either by commercializing a private label version or by purchasing from a vendor and resell as a first party retailer; as acknowledged by the author, a limitation of the model is that it assumes that the marketplace can set the profit?maximizing commission on each product; if this is not the case, third-party sales would be imperfectly monetized, which would increase the relative profitability of entry).

[74] Patrick Andreoli-Versbach & Joshua Gans, Interplay Between Amazon Store and Logistics, SSRN (2023) https://ssrn.com/abstract=4568024.

[75] Simon Anderson & O?zlem Bedre-Defolie, Online Trade Platforms: Hosting, Selling, or Both?, 84 International Journal of Industrial Organization 102861 (2022).

[76] Chiara Farronato, Andrey Fradkin, & Alexander MacKay, Self-Preferencing at Amazon: Evidence From Search Rankings, NBER Working Paper No. 30894 (2023), http://www.nber.org/papers/w30894.

[77] See Erik Madsen & Nikhil Vellodi, Insider Imitation, SSRN (2023) https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3832712 (introducing a two-stage model where the platform publicly commits to an imitation policy and the entrepreneur observes this policy and chooses whether to innovate: if she chooses not to, the game ends and both players earn profits normalized to zero; otherwise, the entrepreneur pays a fixed innovation cost to develop the product, which she then sells on a marketplace owned by the platform).

[78] Federico Etro, The Economics of Amazon, SSRN (2022), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4307213.

[79] Jay Pil Choi, Kyungmin Kim, & Arijit Mukherjee, “Sherlocking” and Information Design by Hybrid Platforms, SSRN (2023), https://ssrn.com/abstract=4332558 (the model assumes that the platform chooses its referral fee at the beginning of the game and that the cost of entry is the same for both the seller and the platform).

[80] Radostina Shopova, Private Labels in Marketplaces, 89 International Journal of Industrial Organization 102949 (2023), (the model assumes that the market structure is given exogenously and that the quality of the seller’s product is also exogenous; therefore, the paper does not investigate how entry by a platform affects the innovation incentives of third-party sellers).

[81] Jean-Pierre Dube?, Amazon Private Brands: Self-Preferencing vs Traditional Retailing, SSRN (2022) https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4205988.

[82] Gregory S. Crawford, Matteo Courthoud, Regina Seibel, & Simon Zuzek, Amazon Entry on Amazon Marketplace, CEPR Discussion Paper No. 17531 (2022), https://cepr.org/publications/dp17531.

[83] Motta & Shelegia, supra note 68.

[84] Jingcun Cao, Avery Haviv, & Nan Li, The Spillover Effects of Copycat Apps and App Platform Governance, SSRN (2023), https://ssrn.com/abstract=4250292.

[85] Massimo Motta, Self-Preferencing and Foreclosure in Digital Markets: Theories of Harm for Abuse Cases, 90 International Journal of Industrial Organization 102974 (2023).

[86] Id.

[87] Id.

[88] See, e.g., Crawford, Courthoud, Seibel, & Zuzek, supra note 82; Etro, supra note 78; Shopova, supra note 80.

[89] Motta, supra note 85.

[90] Servizio Elettrico Nazionale, supra note 55, paras. 53-54; Post Danmark II, supra note 55, para. 65.

[91] Etro, supra note 78; see also Herbert Hovenkamp, The Looming Crisis in Antitrust Economics, 101 Boston University Law Review 489 (2021), 543, (arguing that: “Amazon’s practice of selling both its own products and those of rivals in close juxtaposition almost certainly benefits consumers by permitting close price comparisons. When Amazon introduces a product such as AmazonBasics AAA batteries in competition with Duracell, prices will go down. There is no evidence to suggest that the practice is so prone to abuse or so likely to harm consumers in other ways that it should be categorically condemned. Rather, it is an act of partial vertical integration similar to other practices that the antitrust laws have confronted and allowed in the past.”)

[92] On the more complex economic rationale of intellectual property, see, e.g., William M. Landes & Richard A. Posner, The Economic Structure of Intellectual Property Law, Cambridge, Harvard University Press (2003).

[93] See, e.g., Italian Competition Authority, 18 Jul. 2023 No. 30737, Case A538 – Sistemi di sigillatura multidiametro per cavi e tubi, (2023) Bulletin No. 31.

[94] See CJEU, 6 Apr. 1995, Joined Cases C-241/91 P and 242/91 P, RTE and ITP v. Commission, ECLI:EU:C:1995:98; 29 Apr. 2004, Case C-418/01, IMS Health GmbH & Co. OHG v. NDC Health GmbH & Co. GH, ECLI:EU:C:2004:257; General Court, 17 Sep. 2007, Case T-201/04, Microsoft v. Commission, ECLI:EU:T:2007:289; CJEU, 16 Jul. 2015, Case C-170/13, Huawei Technologies Co. Ltd v. ZTE Corp., ECLI:EU:C:2015:477.

[95] See, e.g., Dana Mattioli, How Amazon Wins: By Steamrolling Rivals and Partners, Wall Street Journal (2022), https://www.wsj.com/articles/amazon-competition-shopify-wayfair-allbirds-antitrust-11608235127; Aditya Kalra & Steve Stecklow, Amazon Copied Products and Rigged Search Results to Promote Its Own Brands, Documents Show, Reuters (2021), https://www.reuters.com/investigates/special-report/amazon-india-rigging.

[96] Williams-Sonoma, Inc. v. Amazon.Com, Inc., Case No. 18-cv-07548 (N.D. Cal., 2018). The suit was eventually dismissed, as the parties entered into a settlement agreement: Williams-Sonoma, Inc. v. Amazon.Com, Inc., Case No. 18-cv-07548-AGT (N.D. Cal., 2020).

[97] Amazon Best Sellers, https://www.amazon.com/Best-Sellers/zgbs.

[98] Hovenkamp, supra note 91, 2015-2016.

[99] Nicolas Petit, Big Tech and the Digital Economy, Oxford, Oxford University Press (2020), 224-225.

[100] For a recent analysis, see Zijun (June) Shi, Xiao Liu, Dokyun Lee, & Kannan Srinivasan, How Do Fast-Fashion Copycats Affect the Popularity of Premium Brands? Evidence from Social Media, 60 Journal of Marketing Research 1027 (2023).

[101] Lina M. Khan, Amazon’s Antitrust Paradox, 126 Yale Law Journal 710 (2017), 782.

[102] See Massimo Motta &Martin Peitz, Intervention Triggers and Underlying Theories of Harm, in Market Investigations. A New Competition Tool for Europe? (M. Motta, M. Peitz, & H. Schweitzer, eds.), Cambridge, Cambridge University Press (2022), 16, 59 (arguing that, while it is unclear to what extent products or ideas are worth protecting and/or can be protected from sherlocking and whether such cloning is really harmful to consumers, this is clearly an area where an antitrust investigation for abuse of dominant position would not help).

[103] Khan, supra note 101, 780 and 783 (arguing that Amazon’s conflicts of interest tarnish the neutrality of the competitive process and that the competitive implications are clear, as Amazon is exploiting the fact that some of its customers are also its rivals).

[104] Servizio Elettrico Nazionale, supra note 55, para. 85.

[105] Post Danmark I, supra note 55, para. 22.

[106] Iba?n?ez Colomo, supra note 55, 21-22.

[107] Id.

[108] See, e.g., DMA, supra note 4, Recital 5 (complaining that the scope of antitrust provisions is “limited to certain instances of market power, for example dominance on specific markets and of anti-competitive behaviour, and enforcement occurs ex post and requires an extensive investigation of often very complex facts on a case by case basis.”).

[109] U.S. Federal Trade Commission, et al. v. Amazon.com, Inc., supra note 23.

[110] Khan, supra note 101.

[111] Khan, supra note 22, 1003, referring to Amazon, Google, and Meta.

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Antitrust & Consumer Protection

Can You Keep a Secret? Banning Noncompetes Does Not Increase Trade Secret Litigation

Scholarship Abstract As bans on noncompete agreements (NCAs) become more frequent, commentators are increasingly concerned that costly trade secret litigation will rise. The logic underlying this . . .

Abstract

As bans on noncompete agreements (NCAs) become more frequent, commentators are increasingly concerned that costly trade secret litigation will rise. The logic underlying this claim is that bans on NCAs will spur worker mobility, resulting in more secret sharing, and thus opportunities for trade secret litigation. We test this claim leveraging the many state-level NCA bans for high- and low-wage workers, alongside data from Westlaw and the Courthouse News Service on trade secret filings. We find that the number of trade secret claims filed falls in the long run after NCAs are banned, even as mobility rises. This long-term drop in the number of filed trade secret claims is not driven by a decline in dual NCA and trade secret filings. It is also not driven by a decline in reliance on trade secrecy by firms. Instead, it appears firms rely more on trade secrets after NCAs are banned. Finally, we find that endorsing the inevitable disclosure doctrine causes a rise in both NCA and trade secret claims. Taken in sum, this evidence suggests that NCA and trade secret litigation are complements, and not substitute approaches to protecting valuable firm knowledge.

Read at SSRN.

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Intellectual Property & Licensing

SEPs: The West Need Not Cede to China

TL;DR TL;DR Background: Policymakers on both sides of the Atlantic are contemplating new regulations on standard-essential patents (SEPs). While the European Union (EU) is attempting to . . .

TL;DR

Background: Policymakers on both sides of the Atlantic are contemplating new regulations on standard-essential patents (SEPs). While the European Union (EU) is attempting to pass legislation toward that end, U.S. authorities like the Department of Commerce and U.S. Patent and Trademark Office are examining the issues and potentially contemplating their own reforms to counteract changes made by the EU.

But… These efforts would ultimately hand an easy geopolitical win to rivals like China. Not only do the expected changes risk harming U.S. and EU innovators and the standardization procedures upon which they rely, but they lend legitimacy to concerning Chinese regulatory responses that clearly and intentionally place a thumb on the scale in favor of domestic firms. The SEP ecosystem is extremely complex, and knee-jerk regulations may create a global race to the bottom that ultimately harms the very firms and consumers they purport to protect.

KEY TAKEAWAYS

EUROPEAN LEGISLATION, GLOBAL REACH

In April 2023, the EU published its “Proposal for a Regulation on Standard Essential Patents.” The proposal seeks to improve transparency by creating a register of SEPs (and accompanying essentiality checks), and to accelerate the diffusion of these technologies by, among other things, implementing a system of nonbinding arbitration of aggregate royalties and “fair, reasonable, and non-discriminatory” (FRAND) terms. 

But while the proposal nominally applies only to European patents, its effects would be far broader. Notably, the opinions on aggregate royalties and FRAND terms would apply worldwide. European policymakers would thus rule (albeit in nonbinding fashion) on the appropriate royalties to be charged around the globe. This would further embolden foreign jurisdictions to respond in kind, often without the guardrails and independence that have traditionally served to cabin policymakers in the West.

CHINA’S EFFORTS TO BECOME A ‘CYBER GREAT POWER’

Chinese policymakers have long considered the SEPs to be of vital strategic importance, and have taken active steps to protect Chinese interests in this space. The latest move came from the Chongqing First Intermediate People’s Court in a dispute between Chinese firm Oppo and Finland’s Nokia. In a controversial December 2023 ruling, the court limited the maximum FRAND royalties that Nokia could charge Oppo for use of Nokia’s SEPs pertaining to the 5G standard.

Unfortunately, the ruling appears obviously biased toward Chinese interests. In calculating the royalties that Nokia could charge Oppo, the court applied a sizable discount in China. It’s been reported that, in reaching its conclusion, the court defined an aggregate royalty rate for all 5G patents, and divided the proceeds by the number of patents each firm held—a widely discredited metric.

The court’s ruling has widely been seen as a protectionist move, which has elicited concern from western policymakers. It appears to set a dangerous precedent in which geopolitical considerations will begin to play an increasingly large role in the otherwise highly complex and technical field of SEP policy.

TRANSPARENCY, AGGREGATE ROYALTY MANDATES, AND FRAND DETERMINATIONS

Leaving aside how China may respond, the EU’s draft regulation will likely be detrimental to innovators. The regulation would create a system of government-run essentiality checks and nonbinding royalty arbitrations. The goal would be to improve transparency and verify that patents declared “standard essential” truly qualify for that designation.

This system would, however, be both costly and difficult to operate. It would require such a large number of qualified experts to serve as evaluators and conciliators that it may prove exceedingly difficult (or impossible) to find them. The sheer volume of work required for these experts would likely be insurmountable, with the costs borne by industry players. Inventors would also be precluded from seeking out injunctions while arbitration is ongoing. Ultimately, while nonbinding, the system may lead to a de facto royalty cap that lowers innovation.

Finally, it’s unclear whether this form of coordinated information sharing and collective royalty setting may give rise to collusion at various points in the value chain. This threatens both to harm consumers and to deter firms from commercializing standardized technologies. 

In short, these kinds of top-down initiatives likely fail to capture the nuances of individualized patents and standards. They may also add confusion and undermine the incentives that drive affordable innovation.

WESTERN POLICYMAKERS MUST RESIST CHINA’S INDUSTRIAL POLICY

The bottom line is that the kinds of changes under consideration by both U.S. and EU policymakers may undermine innovation in the West. SEP entrepreneurs have been successful because they have been able to monetize their innovations. If authorities take steps that needlessly imbalance the negotiation process between innovators and implementers—as Chinese courts have started to do and Europe’s draft regulation may unintendedly achieve—it will harm both U.S. and EU leadership in intellectual-property-intensive industries. In turn, this would accelerate China’s goal of becoming “a cyber great power.”

For more on this issue, see the ICLE issue brief “FRAND Determinations Under the EU SEP Proposal: Discarding the Huawei Framework,” as well as the “ICLE Comments to USPTO on Issues at the Intersection of Standards and Intellectual Property.”

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Intellectual Property & Licensing

March-Right-on-In Rights?

TOTM The National Institute for Standards and Technology (NIST) published a request for information (RFI) in December 2023 on its “Draft Interagency Guidance Framework for Considering . . .

The National Institute for Standards and Technology (NIST) published a request for information (RFI) in December 2023 on its “Draft Interagency Guidance Framework for Considering the Exercise of March-In Rights.” It’s quite something, if not in a good way.

Read the full piece here.

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Intellectual Property & Licensing

Using Bayh-Dole March-in to Set Patent Price Controls: An Assault on American Innovation

TOTM Under the Bayh-Dole Act, the federal government has the right to “march in” on patents on inventions created using taxpayer funds—to require the patentholder to . . .

Under the Bayh-Dole Act, the federal government has the right to “march in” on patents on inventions created using taxpayer funds—to require the patentholder to license the federally funded patent to other applicants. The terms of the license must be “reasonable under the circumstances.” The act limits the exercise of march-in to specific circumstances related to accessibility of the invention, as well as national health and safety (35 U.S.C. 203).

The law does not list the pricing of a license as a grounds justifying march-in.

Read the full piece here.

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Intellectual Property & Licensing

The FTC’s Misguided Campaign to Expand Bayh-Dole ‘March-In’ Rights

TOTM The Federal Trade Commission (FTC) has now gone on record in comments to the National Institute of Standards and Technology (NIST) that it supports expanded “march-in rights” . . .

The Federal Trade Commission (FTC) has now gone on record in comments to the National Institute of Standards and Technology (NIST) that it supports expanded “march-in rights” under the Bayh-Dole Act (Act). But if NIST takes the FTC’s (unexpected, but ultimately unsurprising) contribution seriously, such an expansion could lead to overregulation that would ultimately hurt consumers and destroy the incentives that firms have to develop and commercialize lifesaving medicines.

Read the full piece here.

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Intellectual Property & Licensing

Comments of Patent-Law Experts in NIST ROI on Exercise of March-In Rights

Regulatory Comments As scholars, former judges, and former government officials who are experts in patent law, patent licensing, and innovation policy, we respectfully submit this comment in . . .

As scholars, former judges, and former government officials who are experts in patent law, patent licensing, and innovation policy, we respectfully submit this comment in response to the Request for Information (RFI) by the National Institute of Standards and Technology (NIST) on the Draft Interagency Guidance Framework for Considering the Exercise of March-in Rights (Guidance Framework).[1] In the RFI, NIST states that it seeks “to ensure that [the Guidance Framework] is clear, and its application will both fulfill the purpose of march-in rights and uphold the policy and objectives of the Bayh-Dole Act.”[2] We believe that the Guidance Framework contradicts both the text and purpose of the Bayh-Dole Act, and thus it should be withdrawn by NIST.

For the first time since the enactment of the Bayh-Dole Act in 1980, NIST proposes a Guidance Framework for the four march-in powers in 35 U.S.C. § 203 that provides that “march-in is warranted” and thus an agency may issue licenses without authorization by the patent owner if “the price or other terms at which the product is currently offered to the public are not reasonable.”[3] The RFI expressly states that agencies that provided funding for subject inventions under the Bayh-Dole Act may “include consideration of factors that unreasonably limit availability of the invention to the public [as triggers of the march-in powers under § 203], including the reasonableness of the price and other terms at which the product is made available to end-users.”[4]

The Guidance Framework’s inclusion of “the reasonableness of the price [paid by] end-users” as a new criterion for any agency exercising the march-in powers in § 203 represents unprecedented and unauthorized regulatory authority. It lacks statutory authorization in the Bayh-Dole Act, as confirmed by its text, its purpose, and by other sources of statutory interpretation long relied on by courts and agencies, such as past interpretations of a statute by government officials. In fact, § 203 of the Bayh-Dole Act never mentions “price” as a criterion for the exercise of the four specified march-in powers, as contrasted with the RFI’s reference to “price” twenty-six (26) times.

Congress knows how to enact a price-control statute and to state clearly in a statute’s text that federal officials or agencies may consider “reasonable price” or even merely “price” as a condition for authorizing direct or indirect price controls on products produced and sold by private companies to consumers. One example is the Emergency Price Control Act of 1942,[5] among many others. The Bayh-Dole Act does not authorize this administrative power to control directly or indirectly prices, neither generally nor specifically in the four march-in conditions in § 203.

Other organizations and individuals with direct experience and knowledge in research and development in companies and universities, patent licensing under the Bayh-Dole Act, and in other related commercial activities in the U.S. innovation economy have submitted comments on these matters about which they have expertise. As legal experts, our comment explains why the Bayh-Dole Act does not authorize an agency to issue march-in licenses for the purpose of lowering prices on any product or service embodying a patent covered by this statute. First, it describes the evidence of the proven success of the patent system as a driver of innovation and economic growth. This is the necessary legal and policy framework for evaluating any proposed regulatory alterations to patent rights, especially unprecedented proposals like the Guidance Framework that would weaken or eliminate these patent rights. Second, it explains why the Guidance Framework lacks authorization in the Bayh-Dole Act according to its plain text, its statutory function, and its consistent implementation by agencies over several decades by bipartisan administrations. Third, it identifies how Senators Birch Bayh and Robert Dole expressly rejected claims by professors over two decades ago that the Bayh-Dole Act authorized agencies to use the march-in powers to control market prices of products and services. NIST should withdraw the proposed Guidance Framework.

The Success of the Patent System as a Driver of Economic Growth and Innovation

The patent system has been a key driver of the U.S. innovation economy for over 200 years, as economists, historians, and legal scholars have repeatedly demonstrated.[6] The patent system was central to the successes of the Industrial Revolution in the nineteenth century, the pharmaceutical and computer revolutions in the twentieth century, and the biotech and mobile telecommunications revolutions in the twenty-first century.[7] Patent systems that secure reliable and effective property rights to inventors consistently and strongly correlate with successful innovation economies.[8]

Dr. Zorina Khan, an award-winning economist, has demonstrated that reliable and effective property rights in innovation—patents—were a key factor in thriving markets for technology in the United States in the nineteenth century.[9] Other economists have also identified features of these robust nineteenth-century innovation markets—such as an increase in “venture capital” investment in patent owners, the rise of a secondary market in the sale of patents as assets, and the embrace of specialization via licensing business models—as indicators of value-maximizing economic activity made possible by reliable and effective patents.[10] This remains true today: a twenty-first-century startup with a patent more than doubles its chances of securing venture capital financing compared to a startup without a patent, and this patent-based startup has statistically-significant increased chances of success in the marketplace as well.[11]

These general economic insights and historical facts are especially evident in the biopharmaceutical sector. Historically, the U.S. has been a global leader in first securing innovations in new drugs, diagnostics, and other biotech innovations in healthcare.[12] As a result, the U.S. is a global leader in biomedical innovation. More than one-half of new drugs worldwide are invented in the U.S., improving the quality and duration of human life here and abroad.[13] For this reason, the U.S. patent system was identified as the “gold standard” in securing reliable and effective property rights in the fruits of innovative labors—patents.[14]

The real-world results of reliable and effective property rights—whether in real property or in patents—is extensive private investments, development of new products and services, and the creation and growth of new commercial markets. Just as in the high-tech sector and in the mobile revolution,[15] these same economic consequences are manifest in modern healthcare. The annual private investment in research and development (R&D) of new pharmaceutical and biotech innovations is approximately $129 billion (as of 2018).[16] This is almost triple the total amount of total public funding of $43 billion of R&D in healthcare innovations (as of 2018).[17] Medical diagnoses that once were either death sentences or led to a greatly diminished quality of life—cancer, hepatitis, and diabetes—are now treatable and manageable medical conditions within a relatively normal lifespan. This data is relevant in assessing the Guidance Framework because the Biden Administration has argued that it serves the purpose of lowering drug prices,[18] although the Guidance Framework does not state this nor does it limit the proposed “reasonable price” criterion to patented drugs and other inventions resulting from some upstream research funding in the life sciences by the federal government.

The evidence of the historical, economic, and empirical success of the U.S. patent system in driving innovation and economic growth is the baseline by which NIST should consider new regulatory proposals that ultimately weaken or restrict reliable and effective patents on new innovations throughout all sectors of the U.S. innovation economy. This includes the Guidance Framework, which includes an unprecedented power to issue nonexclusive licenses for the purpose of controlling prices on any patented product or service because a funding agency may deem it to be sold at “unreasonable prices.” The eight scenarios and examples in the Guidance Framework make clear that consideration of “reasonable price” as a condition for exercising the march-in power applies to every sector of the U.S. innovation economy, from manufacturing of highway signage to the 5G communication technologies implemented in connected cars.[19]

The evidentiary burden is on any official or agency proposing wide-ranging regulatory restrictions, additional costs, and additional legal uncertainties on patent owners. First, they must explain that proposed regulations are legally authorized. Second, they must explain, even if legally authorized, that there is reliable and robust data that supports this proposal as evidence-based policymaking. As will now be explained the Guidance Framework fails on both of these necessary conditions for an agency adopting new regulations, especially those that authorize unprecedented powers such as the Guidance Framework’s authorization of an agency to impose price controls under a “reasonable price” criterion for issuing nonexclusive licenses under § 203 of the Bayh-Dole Act. § 1498. These arguments are equally incorrect, as detailed below.

A Price-Control Power Contradicts the Text and Statutory Purpose of the Bayh-Dole Act

Congress enacted the Bayh-Dole Act in 1980 to provide an incentive for private parties to make the significant, risky investments in new product development, in creating manufacturing capabilities, and in setting up supply and distribution chains that bring new innovations to consumers. These are necessary investments in translating original discoveries into useful commercial products.[20] Before 1980, the government effectively claimed ownership in inventions resulting from government-funded research, offering nonexclusive licenses to anyone requesting one; this undermined the commercialization of these inventions given the absence of property rights that are the legal platform for contracts and other commercial activities.[21] The Bayh-Dole Act corrected this mistaken policy by establishing that innovators can obtain patents for inventions arising from some government-funded research and retain ownership in these patents, which facilitates licensing and other commercial activities in the marketplace.[22]

Section 203 in the Patent Act, as enacted in the Bayh-Dole Act, creates the limited exception to this core function of the Bayh-Dole Act by creating the “march in right.”[23] To ensure commercialization of inventions arising from research funded by government agencies, § 203 authorizes a federal agency that has funded research that resulted in a patented invention “to grant a nonexclusive, partially exclusive, or exclusive license” under four specified conditions.[24] A federal agency may grant these licenses “to a responsible applicant” without authorization from the patent owner in four delimited circumstances: (1) if “the contractor or assignee has not taken, or is not expected to take within a reasonable time, effective steps to achieve practical application of the subject invention in such field of use,” (2) “to alleviate health or safety needs which are not reasonably satisfied,” (3) “requirements for public use specified by Federal regulations . . . are not reasonably satisfied,” or (4) “a licensee of the exclusive right to use or sell any subject invention in the United States is in breach of its agreement.”[25]

The statutory text of § 203 does not support the unprecedented inclusion of “reasonable price” as a criterion for any agency in imposing price controls on patented products or services produced by private companies and sold to private consumers in the marketplace. The four march-in conditions, set forth in § 203(a) in the disjunctive, constitute the only authorizations in this exemption in the Bayh-Dole Act for a federal agency to exercise the march-in power. Notably, there is no mention of “reasonable price” in the four authorizing conditions for a federal agency to invoke the march-in power to issue licenses without approval from a patent owner.

Congress would have expressly enacted text conferring a price-control power in § 203 if it intended a “reasonable price” to trigger use of the march-in power under § 203. Congress has enacted numerous statutes that have authorized officials or agencies to impose price controls on transactions in the marketplace.[26] The Emergency Price Control Act of 1942 is one such example.[27] Similarly, rate-regulation statutes enacted by the states according to their police powers expressly authorize legislators or regulators to set “prices” or determine “rates.”[28] Contrary to these price-control or rate-regulation statutes, § 203 is devoid of any archetypical pricing terms, such as “price,” “prices charged by an assignee or licensee,” “market price,” or “reasonable price.” According to the “the ordinary meaning of the words used” in § 203 and § 201(f) in the Bayh-Dole Act, the march-in power does not authorize licenses for the purpose of imposing price controls.[29]

Moreover, there is no catch-all clause in § 203 authorizing the march-in power for anything not already covered by the four specific march-in conditions. This is significant for at least two reasons. First, Congress knows how to create broadly framed and expansive authorizations for agency action, if this is its purpose. For example, Congress has expressly created broadly-framed authorizations of general administrative powers in other statutes, such as the well-known language in the Federal Communications Act of 1934 authorizing the Federal Communications Commission to grant radio transmission licenses according to whether the “public convenience, interest, or necessity will be served thereby.”[30] Second, the canon of statutory construction of expressio unius est exclusio alterius establishes that, without a catch-all clause, the march-in power is delimited to only these four express exemptions from the longstanding rights of patent owners covered by the Bayh-Dole Act to freely assign or license their property in the marketplace.[31] In sum, Congress chose not to create an open-ended grant of authority in § 203 in listing only four specific march-in conditions that strictly specify the narrow scope and application of the march-in power exemption in the Bayh-Dole Act, which comports with the general function of the Bayh-Dole Act in promoting private commercialization of patented innovations in the marketplace.

The inclusion of “reasonable price” as a criterion in the Guidance Framework follows the work of activists and academics who have argued for over two decades that the first condition in the march-in provision that specifies the failure “to achieve practical application” of an invention as a trigger for the march-in power means that that prices can prevent this “practical application” with consumers.[32] As is typical of modern legislation, the Bayh-Dole Act has a lengthy definition of “practical application” in which these advocates for this price-control theory of § 203 have focused on a single phrase (“available to the public on reasonable terms”).[33] These activists and academics have spun an entire theory of unprecedented and vast regulatory power to control prices in the marketplace of patented products and services based on only two general phrases in two separate sections of the Bayh-Dole Act—“practical application” and “reasonable terms.”

This price-control theory of § 203 is wrong as a matter of law and statutory interpretation. First, their argument creates vast administrative powers based on an out-of-context, laser-like focus on phrases that have been isolated from lengthy and complex statutory provisions. This commits the classic interpretative error of wooden textualism.[34] For example, these activists and academics do not acknowledge that “terms” is often a distinct legal concept from “price,” as these distinct words have been used in many legal instruments. In fact, statutes often distinguish between “price” and “terms” by listing these two words separately.[35]

These advocates for the price-control theory of § 203 also do not acknowledge that the partial definition of “practical application” in § 203(a)(1) as “reasonable terms” in § 201(f) in the Bayh-Dole Act follows past usage of “practical application,” which was understood to refer to the “successful development and terms of the license, not with a product’s price.”[36] For example, President John F. Kennedy issued a statement on patent policy in 1963 in which he proposed mandating licensing of government-owned inventions in order to achieve “practical application” of an invention and to “guard against failure to practice the invention.”[37]

Second, in interpreting a specific statutory provision or a specific clause within a statutory provision, the advocates for the price-control theory of § 203 violate fundamental legal rules governing the interpretation and application of statutes. Courts always inquire into “the specific context in which that language is used, and the broader context of the statute as a whole.”[38] The Supreme Court has bluntly stated in far too many cases to cite or quote: “We do not . . . construe statutory phrases in isolation; we read statutes as a whole.”[39] “Courts have a ‘duty to construe statutes, not isolated provisions.’”[40]

Congress stated its express intent in the Bayh-Dole Act: “It is the policy and objective of the Congress to use the patent system to promote the utilization of inventions arising from federally supported research or development.”[41] The march-in power is an exemption from the function of the Bayh-Dole Act to stimulate universities and other researchers receiving federal research funds to obtain patents to utilize licenses in commercializing their inventions. In fact, this exemption was included in the Bayh-Dole Act precisely because it advanced this primary commercialization function of the statute: if a patented invention is not licensed or made available in the marketplace by its owner or licensees, then an agency is authorized to act to achieve this goal. Thus, § 203(a)(1)-(4) specifies four conditions in which the march-in power is justified, and these conditions identify situations in which inventions are not sold or commercialized in the marketplace.[42]

Lastly, the Guidance Framework’s lack of legal authorization in the Bayh-Dole Act is confirmed by Supreme Court precedent that agencies may not arrogate powers to themselves that are not specifically granted in statutes. An unprecedented power to impose price controls on all patented products or services produced and sold in the marketplace that were created from upstream research supported by some federal funding requires more than vague or generalized statutory terms like “effective steps to achieve practical application.” This is especially true given that Congress has consistently and repeatedly rejected bills that would impose compulsory licensing on U.S. patent owners, from the First Congress in 1790 up through the twentieth century.[43]

The Supreme Court has consistently instructed agencies that “Congress, we have held, does not alter the fundamental details of a regulatory scheme in vague terms or ancillary provisions— it does not, one might say, hide elephants in mouseholes.”[44] The Supreme Court has rejected other agencies’ claims to regulatory authority under similarly vague and generalized terminology as the statutory phrase “practice application” in § 203, which has been the justification of the price-control power that the Guidance Framework implements. In these many other legal cases, the Supreme Court has stated bluntly that “‘Congress could not have intended to delegate’ such a sweeping and consequential authority ‘in so cryptic a fashion.’”[45] The Supreme Court again stated last year that it repeatedly “requires Congress to enact exceedingly clear language if it wishes to significantly alter . . . the power of the Government over private property.”[46] The Guidance Framework lacks a clear authorization in § 203 to justify its unprecedented inclusion of “reasonable price” as a criterion for authorizing the march-in power.

Agency Interpretations of § 203 Confirm It Does Not Authorize a Price-Control Power

The plain text of § 203 and its function within the Bayh-Dole Act as a whole explains why federal agencies—spanning bipartisan administrations over several decades—have repeatedly rejected numerous petitions to use the march-in power to impose price controls on drug patents. In 2016, the Congressional Research Service identified six petitions submitted to the NIH requesting it to exercise its march-in power solely for the purpose of lowering prices of patented drugs sold in the healthcare market.[47] The NIH denied all six petitions on the grounds that § 203, as confirmed by the NIH’s prior interpretation of this statutory provision, did not permit the march-in power to be used for the purpose of lowering drug prices.[48] By 2019, four more petitions had been filed with the NIH by policy organizations and activists, each requesting again that the NIH invoke the march-in power for the sole purpose of lowering drug prices.[49] As with the prior six petitions reaching back to the 1990s, the NIH rejected these petitions on the statutory ground that “the use of march-in to control drug prices was not within the scope and intent of its authority.”[50]

In 1997, for example, the NIH was petitioned to invoke the march-in power for the Isolex 300, a patented medical device used in organ transplant procedures.[51] The NIH rejected the petition for failing to meet the burden of proof that any of the four march-in conditions specified in § 203 had been triggered, authorizing the NIH to march in and license other companies to make and sell this medical device in the healthcare market. The NIH found that the Isolex 300 was being commercialized in the marketplace: the patent owner was actively licensing the patented device, seeking regulatory approval, and meeting research demands.[52] These facts precluded the triggering of the march-in power under the four authorizing conditions in § 203.

In rejecting this march-in petition, the NIH further explained why lowering prices on a medical device like the Isolex 300—imposing price controls on the healthcare market—was not justified by the plain text of § 203 and the function of the Bayh-Dole Act in promoting the commercialization of patented inventions. The NIH stated that, even if the petitioner proved that there would be greater accessibility and lower prices given additional licenses from the NIH invoking the march-in power, this rationale lacked authorization under § 203.[53] The NIH stated bluntly that the march-in power in § 203 did not exist for the purpose of “forced attempts to influence the marketplace.”[54] It acknowledged the contradiction between the Bayh-Dole Act’s primary function in promoting the commercialization of new innovations in the marketplace and adopting a march-in power for the purpose of imposing price controls, observing that “such actions may have far-reaching repercussions on many companies’ and investors’ future willingness to invest in federally funded medical technologies.”[55] This was not merely a freestanding policy assessment by the NIH of this petition; it derived this conclusion from the plain meaning of § 203 within the context of the Bayh-Dole Act and its commercialization function.

Another petition in 2004 again requested that the NIH invoke the march-in power in § 203 to license a patent specifically to lower the price for Norvir, a drug used to treat AIDS. Again, the NIH rejected the petition.[56] The NIH explained that “the extraordinary remedy of march-in is not an appropriate means of controlling prices,” and that “[t]he issue of drug pricing has global implications and, thus, is appropriately left for Congress to address legislatively.”[57] The NIH again rejected another march-in petition seeking to lower the price of Norvir in 2013, again stating that the imposition of price controls on drug patents was not a statutorily authorized march-in power in § 203 of the Bayh-Dole Act.[58] The NIH bluntly concluded: “As stated in previous march-in considerations the general issue of drug pricing is appropriately addressed through legislative and other remedies, not through the use of the NIH’s march-in authorities.”[59] The frustration by NIH officials with the serial petitions seeking to impose price controls on drug patents via the march-in provision in the Bayh-Dole Act is palpable.

Lastly, on March 21, 2023, the NIH rejected the latest petition (filed again) for this agency to invoke the march-in power solely to lower the price of Xtandi, a cancer drug covered by patent.[60] In its latest rejection of the price-control theory of the Bayh-Dole Act, the NIH reiterated that the “purpose of the Bayh-Dole Act is to promote commercialization and public availability of government-funded inventions.”[61] With this statutory framework and purpose in mind, the NIH expressly “found Xtandi to be widely available to the public on the market” and “[t]herefore, the patent owner, the University of California, does not fail the requirement of bringing Xtandi to practical application.”[62] The NIH further pointed out that this decision about Xtandi is consistent with its prior multiple rejections of march-in petitions also seeking to lower drug prices.[63] It also recognized that the administrative processes and delays, especially in light of Xtandi’s remaining patent term, led it to conclude that “NIH does not believe that use of the march-in authority would be an effective means of lowering the price of the drug.”[64]

The NIH’s multiple decisions over several decades in interpreting the scope of the march-in power granted to it under § 203 is significant evidence that the Bayh-Dole Act does not authorize NIST to include “reasonable price” as a criterion for agencies like the NIH to use the march-in power under § 203. The eleven or more decisions ranging from the 1990s through 2023 in which the NIH has consistently rejected march-in petitions requesting it impose price controls on drug patents under § 203 constitute “the well-reasoned views of the agencies implementing a statute [that] ‘constitute a body of experience and informed judgment to which courts and litigants may properly resort for guidance.’”[65]

Original Sponsors of the Bayh-Dole Act Stated Their Law Did Not Authorize Price Controls

The Guidance Framework’s inclusion of “reasonable price” as a criterion for applying the march-in power under § 203 is a statutory power that was allegedly discovered and argued for by two professors in a law journal article published more than two decades after the enactment of the Bayh-Dole Act.[66] When they later published an op-ed advancing their article’s argument, Senator Birch Bayh and Senator Robert Dole responded by expressly rejecting their theory that the Bayh-Dole Act authorized price controls as an essential tool of the march-in power in § 203.

Professors Peter Arno and Michael Davis published an op-ed in the Washington Post in 2002 restating their argument from their law journal article the year before that the Bayh-Dole Act mandates that patented inventions resulting from “federal funds will be made available to the public at a reasonable price.”[67] Professors Arno and Davis’ op-ed prompted a response from Senators Bayh and Dole, published as a letter to the editor in the Washington Post two weeks later:

Bayh-Dole did not intend that government set prices on resulting products. The law makes no reference to a reasonable price that should be dictated by the government. . . . The [Arno and Davis] article also mischaracterizes the rights retained by the government under Bayh-Dole. The ability of the government to revoke a license granted under the act is not contingent on the pricing of the resulting product or tied to the profitability of a company that has commercialized a product that results in part from government-funded research. The law instructs the government to revoke such licenses only when the private industry collaborator has not successfully commercialized the invention as a product.[68]

Although this letter does not have the same legal status as the canons of statutory interpretation and official interpretation and application of a statute, Senators Bayh and Dole make clear that the inclusion of “reasonable price” as a criterion authorizing the march-in power is unconnected to the text or purpose of their statute. The proposed Guidance Framework, ultimately born of the price-control theory spawned by Professors Arno and Davis, is an unprecedented assertion of agency power to control prices in private market transactions without a legal basis in the Bayh-Dole Act.

Conclusion

The Guidance Framework proposes the addition of “reasonable price” as an unprecedented criterion for exercising the march-in powers specified in § 203 of the Bayh-Dole Act. This is a legally unjustified and unauthorized arrogation of power by NIST. The Bay-Dole Act does not state in its plain text a congressional authorization for federal agencies to consider “reasonable price” as a criterion for imposing price controls on all Bayh-Dole patented products or services that are commercialized in the marketplace. In addition to lack of authorization in the plain text of § 203, the Guidance Framework’s inclusion of “reasonable price” as a march-in criterion contradicts the function of Bayh-Dole in promoting the commercialization of inventions by patent owners in the marketplace. The NIH has consistently and repeatedly confirmed this lack of statutory authorization in § 203 to impose price controls across bipartisan administrations over several decades in rejecting all march-in petitions seeking to impose price controls.

NIST states in its RFI, “[t]o date, no agency has exercised its right to march-in,” but it fails to acknowledge the numerous, repeated rejections by the NIH of march-in petitions seeking to impose price controls on drug patents. NIST should follow these repeated actions by the NIH, including in its most recent rejection of the Xtandi march-in petition less than a year ago, in applying the clear text and function of the Bayh-Dole Act. Thus, NIST should withdraw the proposed Guidance Framework and permit the Bayh-Dole Act to function according to its intended function in promoting the commercialization of innumerable innovations in the marketplace.

[1] See National Institute of Standards and Technology, Request for Information Regarding the Draft Interagency Guidance Framework for Considering the Exercise of March-In Rights, 88 Fed. Reg. 85593 (Dec. 7, 2023).

[2] 88 Fed. Reg. 85593.

[3] Id. at 85598.

[4] Id. (emphasis added).

[5] See Pub. L. No. 77-421, 56 Stat. 23 (1942); see also Economic Stabilization Act of 1970, Pub. L. No. 91-379, § 202, 84 Stat. 799, 799-800 (“The President is authorized to issue such orders and regulations as he may deem appropriate to stabilize prices, rents, wages, and salaries at levels not less than those prevailing on May 25, 1970.”); Housing and Rent Act of 1947, Pub. L. No. 129, 61 Stat. 193, 198 (imposing rent controls on existing structures set at levels permitted to be charged under the Economic Price Control Act of 1942).

[6] See, e.g., ROBERT P. MERGES, AMERICAN PATENT LAW: A BUSINESS AND ECONOMIC HISTORY (2023); JONATHAN M. BARNETT, INNOVATORS, FIRMS, AND MARKETS: THE ORGANIZATIONAL LOGIC OF INTELLECTUAL PROPERTY (2021); DANIEL SPULBER, THE CASE FOR PATENTS (2021); B. ZORINA KHAN, INVENTING IDEAS: PATENTS, PRIZES, AND THE KNOWLEDGE ECONOMY (2020); Stephen Haber, Innovation, Not Manna from Heaven (Hoover Institution, Sep. 15, 2020); B. Zorina Khan, Trolls and Other Patent Inventions: Economic History and the Patent Controversy in the Twenty-First Century, 21 GEO. MASON L. REV. 825, 837-39 (2014); Naomi R. Lamoreaux, Kenneth L. Sokoloff & Dhanoos Sutthiphisal, Patent Alchemy: The Market for Technology in US History, 87 BUS. HIST. REV. 3 (Spring 2013); RONALD A. CASS & KEITH N. HYLTON, LAWS OF CREATION: PROPERTY RIGHTS IN THE WORLD OF IDEAS (2013).

[7] See generally MERGES, supra note 6; BARNETT, supra note 6; KHAN, supra note 6.

[8] See, e.g., Stephen Haber, Patents and the Wealth of Nations, 23 GEO. MASON L. REV. 811 (2016); Jonathan M. Barnett, Patent Tigers: The New Geography of Global Innovation, 2 CRITERION J. INNOVATION 429 (2017).

[9] See B. ZORINA KHAN, THE DEMOCRATIZATION OF INVENTION: PATENTS AND COPYRIGHTS IN AMERICAN ECONOMIC DEVELOPMENT, 1790–1920, at 9-10 (2005) (“[P]atents and . . . intellectual property rights facilitated market exchange, a process that assigned value, helped to mobilize capital, and improved the allocation of resources. . . . Extensive markets in patent rights allowed inventors to extract returns from their activities through licensing and assigning or selling their rights.”).

[10] See, e.g., Naomi R. Lamoreaux, Kenneth L. Sokoloff & Dhanoos Sutthiphisal, Patent Alchemy: The Market for Technology in US History, 87 BUS. HIST. REV. 3, 4–5 (2013).

[11] See Joan Farre-Mensa, et al., What Is a Patent Worth? Evidence from the U.S. Patent “Lottery,” 75 J. Finance 639 (2019), https://doi.org/10.1111/jofi.12867.

[12] See Kevin Madigan & Adam Mossoff, Turning Gold to Lead: How Patent Eligibility Doctrine Is Undermining U.S. Leadership in Innovation, 24 Geo. Mason L. Rev. 939, 942-44 (2017).

[13] See Ross C. DeVol, Armen Bedroussian & Benjamin Yeo, The Global Biomedical Industry: Preserving U.S. Leadership 5 (Sep. 2011), http://www.ncnano.org/CAMIExecSum.pdf.

[14] Madigan & Mossoff, supra note 12, at 940-41.

[15] See Letter from Alden Abbott, Kristina M.L. Acri, et al. to Assistant Attorney General Jonathan Kanter, Nov. 30, 2022, https://s3.amazonaws.com/media.hudson.org/Letter+to+AAG+Kanter+re+SEPs+and+Patent+Pools+10.30.22.pdf, at 1-2 (detailing economic evidence); see also Alexander Galetovic, Stephen H. Haber & Ross Levine, An Empirical Examination of Patent Holdup, 11 J. COMP. L. & ECON. 549, 564-69 (2015), https://papers.ssrn.com/abstract=2588169 (finding quality-adjusted prices for devices and other products in the patent-intensive telecommunications market to have fallen at a faster rate as compared to other sectors of the innovation economy).

[16] See U.S. Investments in Medical and Health Research and Development 2013–2018, at 7 (Research America, 2019), https://www.researchamerica.org/wp-content/uploads/2022/09/InvestmentReport2019_Fnl.pdf (estimating total private investment in biopharmaceutical R&D in 2018 is estimated to be $129 billion). For each drug approved by the FDA for use by patients, there is on average $2.6 billion in R&D expenditures incurred over 10–15 years. See Joseph A. DiMasi, Henry G. Grabowski, & Ronald W. Hansen, Innovation in the Pharmaceutical Industry: New Estimates of R&D Costs, 47 J. Health Econ. 20 (2016).

[17] See U.S. Investments in Medical and Health Research and Development 2013–2018, supra note 17, at 8.

[18] See FACT SHEET: Biden-?Harris Administration Announces New Actions to Lower Health Care and Prescription Drug Costs by Promoting Competition (Dec. 7, 2023), https://www.whitehouse.gov/briefing-room/statements-releases/2023/12/07/fact-sheet-biden-harris-administration-announces-new-actions-to-lower-health-care-and-prescription-drug-costs-by-promoting-competition/ (“Today, the Biden-Harris Administration is announcing new actions to promote competition in health care and support lowering prescription drug costs for American families, including the release of a proposed framework for agencies on the exercise of march-in rights on taxpayer-funded drugs and other inventions, which specifies that price can be a factor in considering whether a drug is accessible to the public.”).

[19] See 88 Fed. Reg. 85601-85605 (detailing the eight scenarios in which the march-in power may be used by an agency).

[20] See generally BARNETT, supra note 6.

[21] See, e.g., S. Rep. No. 480, 96th Cong., 1st Sess., at 2 (1979) (explaining that the government’s policy of owning patents on inventions arising from government-funded research and offering nonexclusive licenses “has proven to be an ineffective policy” and that “the private sector simply needs more protection for the time and effort needed to develop and commercialize new products than is afforded by a nonexclusive license”).

[22] See id., at 28 (“It is essentially a waste of public money to have good inventions gathering dust on agencies’ shelves because of unattractiveness of nonexclusive licenses.”).

[23] See 35 U.S.C. § 203 (2011).

[24] § 203(a).

[25] § 203(a)(1)-(4).

[26] See, e.g., Economic Stabilization Act of 1970, Pub. L. No. 91-379, § 202, 84 Stat. 799, 799-800 (“The President is authorized to issue such orders and regulations as he may deem appropriate to stabilize prices, rents, wages, and salaries at levels not less than those prevailing on May 25, 1970.”); Housing and Rent Act of 1947, Pub. L. No. 129, 61 Stat. 193, 198 (imposing rent controls on existing structures set at levels permitted to be charged under the Economic Price Control Act of 1942).

[27] See Pub. L. No. 77-421, 56 Stat. 23 (1942).

[28] See, e.g., Nebbia v. People of New York, 291 U.S. 502, 515 (1934) (“The Legislature of New York established by chapter 158 of the Laws of 1933, a Milk Control Board with power, among other things to ‘fix minimum and maximum … retail prices to be charged by … stores to consumers for consumption off the premises where sold.’”); Stone v. Farmers’ Loan & Trust Co., 116 U.S. 307, 308 (1886) (reviewing “the statute of Mississippi passed March 11, 1884, entitled ‘An act to provide for the regulation of freight and passenger rates on railroads in this state, and to create a commission to supervise the same, and for other purposes’”).

[29] INS v. Phinpathya, 464 U.S. 183, 189 (1984) (stating that “in all cases involving statutory construction, our starting point must be the language employed by Congress, . . . and we assume that the legislative purpose is expressed by the ordinary meaning of the words used”) (quotations and citations omitted).

[30] 47 U.S.C. § 307(a) (“The Commission, if public convenience, interest, or necessity will be served thereby, subject to the limitations of this Act, shall grant to any applicant therefor a station license provided for by this Act.”).

[31] See Tennessee Valley Authority v. Hill, 437 U.S. 153, 188 (1976) (“In passing the Endangered Species Act of 1973, Congress was also aware of certain instances in which exceptions to the statute’s broad sweep would be necessary. Thus, § 10, 16 U.S.C. § 1539 (1976 ed.), creates a number of limited ‘hardship exemptions,’ . . . . meaning that under the maxim expressio unius est exclusio alterius, we must presume that these were the only ‘hardship cases’ Congress intended to exempt.”); see also 73 Am. Jur. 2d Statutes § 129 (2002) (describing the statutory canon of interpretation, expressio unius est exclusio alterius).

[32] See, e.g., Letter from Amy Kapczynski, Aaron S. Kesselheim, et al. to Senator Elizabeth Warren, at 6-7 (Apr. 20, 2022), https://tinyurl.com/yt62wt4t; Fran Quigley & Jennifer Penman, Better Late than Never: How the U.S. Government Can and Should Use Bayh-Dole March-In Rights to Respond to the Medicines Access Crisis, 54 WILLAMETTE L. REV. 171 (2017); Peter S. Arno & Michael H Davis, Why Don’t We Enforce Existing Drug Price Controls? The Unrecognized and Unenforced Reasonable Pricing Requirements Imposed upon Patents Deriving in Whole or in Part from Federally Funded Research, 75 TULANE L. REV. 631 (2001).

[33] See 35 U.S.C. § 201(f) (defining “practical application” to mean “to manufacture in the case of a composition or product, to practice in the case of a process or method, or to operate in the case of a machine or system; and, in each case, under such conditions as to establish that the invention is being utilized and that its benefits are to the extent permitted by law or Government regulations available to the public on reasonable terms”).

[34] See Sackett v. Environmental Protection Agency, 143 S. Ct. 1322, 1340 (2023) (“construing statutory language is not merely an exercise in ascertaining ‘the outer limits of a word’s definitional possibilities’”) (quoting FCC v. AT&T, 562 U.S. 397, 407 (2011)); cf. Antonin Scalia, Common-Law Courts in a Civil Law System: The Role of the United States Federal Courts in Interpreting the Constitution and Law, in A MATTER OF INTERPRETATION: FEDERAL COURTS AND THE LAW 23-24 (Amy Gutmann, ed., 1997) (critiquing out-of-context linguistic construction of statutory terms because a “good textualist is not a literalist”).

[35] See, e.g., 47 U.S.C. § 335(b)(3) (“A provider of direct broadcast satellite service shall meet the requirements of this subsection by making channel capacity available to national educational programming suppliers, upon reasonable prices, terms, and conditions, as determined by the Commission . . . .”) (emphasis added); 42 U.S.C. § 2375 (“The charges and terms for the transfer of any utility may be established by advertising and competitive bid, or by negotiated sale or other transfer at such prices, terms, and conditions as the Commission shall determine to be fair and equitable.”) (emphases added); 10 U.S.C. § 3372(a)(1) (“A contracting officer of the Department of Defense may not enter into an undefinitized contractual action unless the contractual action provides for agreement upon contractual terms, specifications, and price . . . .”) (emphasis added); 43 U.S.C. § 375c (“The Secretary is authorized to sell such land to resident farm owners or resident entrymen, on the project upon which such land is located, at prices not less than that fixed by independent appraisal approved by the Secretary, and upon such terms and at private sale or at public auction as he may prescribe . . . .”) (emphases added); 2 U.S.C. § 4103 (“[I]n any contract which is entered into by any person and either the Administrator of General Services or a contracting officer of any executive agency and under which such person agrees to sell or lease to the Federal Government (or any one or more entities thereof) any unit of property, supplies, or services at a specified price or under specified terms and conditions (or both), such person may sell or lease to the Congress the same type of such property, supplies, or services at a unit price or under terms and conditions (or both) . . . .”) (emphases added).

[36] Joseph Allen, New Study Shows Bayh-Dole is Working as Intended—and the Critics Howl, IPWATCHDOG (March 12, 2019), https://www.ipwatchdog.com/2019/03/12/new-study-shows-bayh-dole-working-intended/id=107225/.

[37] Government Patent Policy, Memorandum of Oct. 10, 1963, Fed. Reg. 10943 (Oct. 12, 1963).

[38] Robinson v. Shell Oil Co., 519 U.S. 337, 340 (1997).

[39] Samantar v. Yousuf, 560 U.S. 305, 319 (2010) (quoting United States v. Morton, 467 U.S. 822, 828, (1984)).

[40] Graham Cty. Soil & Water Conservation Dist. v. U.S. ex rel. Wilson, 559 U.S. 280, 290 (2010) (quoting Gustafson v. Alloyd Co., 513 U.S. 561, 568 (1995)); see also Gonzales v. Oregon, 546 U.S. 243, 273 (2006) (stating that “statutes ‘should not be read as a series of unrelated and isolated provisions.’”) (quoting Gustafson v. Alloyd Co., 513 U.S. 561, 570, (1995)); Food & Drug Admin. v. Brown & Williamson Tobacco Corp., 529 U.S. 120, 133 (2000) (“It is a ‘fundamental canon of statutory construction that the words of a statute must be read in their context and with a view to their place in the overall statutory scheme.’”) (quoting Davis v. Michigan Dept. of Treasury, 489 U.S. 803, 809 (1989)); Louisville & N.R. Co. v. Gaines, 3 F. 266, 276 (C.C.M.D. Tenn. 1880) (“Where the language [of a statute] is clear and explicit the court is bound . . . . It must be construed as a whole. The office of a good expositor, says My Lord Coke, ‘is to make construction on all its parts together.’”).

[41] 35 U.S.C. § 200.

[42] See supra notes 23-31, and accompanying text.

[43] See, e.g., Bruce W. Bugbee, Genesis of American Patent and Copyright Law 143-44 (1967) (discussing the rejection of a Senate proposal for a compulsory licensing requirement in the bill that eventually became the Patent Act of 1790); Kali Murray, Constitutional Patent Law: Principles and Institutions, 93 Nebraska Law Review 901, 935-37 (2015) (discussing 1912 bill that imposed compulsory licensing on patent owners who are not manufacturing a patented invention, which received twenty-seven days of hearings, but was not enacted into law).

[44] Whitman v. Am. Trucking Associations, 531 U.S. 457, 468 (2001).

[45] See West Virginia v. Environmental Protection Agency, 142 S. Ct. 2587, 2608 (2022) (quoting Food & Drug Admin. v. Brown & Williamson Tobacco Corp., 529 U.S. 120, 159 (2000)). See also MCI Telecommunications Corp. v. American Tel. & Tel. Co., 512 U.S. 218, 231 (1994) (“It is highly unlikely that Congress would leave the determination of whether an industry will be entirely, or even substantially, rate-regulated to agency discretion—and even more unlikely that it would achieve that through such a subtle device as permission to ‘modify’ rate-filing requirements.”).

[46] Sackett, 143 S. Ct. at 1341 (quoting United States Forest Service v. Cowpasture River Preservation Ass’n, 140 S. Ct. 1837, 1849-50 (2020)).

[47] See John R. Thomas, March-In Rights Under the Bayh-Dole Act 8-10 (Congressional Research Service, Aug. 22, 2016).

[48] Id.

[49] See Return on Investment Initiative for Unleashing American Innovation 29 (NIST Special Publication 1234, April 2019) (identifying 10 petitions to break patents through the march-in power in § 203 solely for the purpose of imposing price controls on drug patents).

[50] Id.

[51] See, e.g., NIH Office of the Director, Determination in the Case of Petition of CellPro, Inc. (Aug. 1, 1997), https://www.ott.nih.gov/sites/default/files/documents/policy/cellpro-marchin.pdf (rejecting petition in part to invoke march-in power given argument that company was too slow in bringing a medical device to market).

[52] Id.

[53] Id.

[54] Id. at 7.

[55] Id. at 7.

[56] See NIH Office of the Director, In the Case of Norvir Manufactured by Abbott Laboratories, Inc. (July 29, 2004), http://www.ott.nih.gov/sites/default/files/documents/policy/March-In-Norvir.pdf.

[57] Dr. Elias A. Zerhouni, Nat’l Institute of Health, Determination in the Case of Norvir I, at 5-6 (July 2, 2004).

[58] NIH Office of the Director, In the Case of Norvir Manufactured by AbbVie (Nov. 1, 2013), https://www.ott.nih.gov/sites/default/files/documents/policy/March-In-Norvir2013.pdf.

[59] Id.

[60] See Letter from Lawrence A. Tabak, Performing the Duties of the NIH Director, to Robert Sachs and Clare Love (Mar. 23, 2023), https://www.keionline.org/wp-content/uploads/NIH-rejection-Xtandi-marchin-12march2023.pdf (rejecting petition to impose price controls on Xtandi).

[61] Id. at 2.

[62] Id.

[63] Id.

[64] Id.

[65] See United States v. Mead Corp., 533 U.S. 218, 227 (2001) (quoting Bragdon v. Abbott, 524 U.S. 624, 642 (1998) (quoting Skidmore v. Swift & Co., 323 U.S. 134, 140 (1944)))

[66] See Arno & Davis, supra note 32.

[67] See Peter Arno & Michael Davis, Paying Twice for the Same Drugs, Washington Post (March 27, 2002), https://www.washingtonpost.com/archive/opinions/2002/03/27/paying-twice-for-the-same-drugs/c031aa41-caaf-450d-a95f-c072f6998931/ (emphasis added).

[68] Birch Bayh and Robert Dole, Our Law Helps Patients Get New Drugs Sooner, Wash. Post (Apr. 11, 2002), https://www.washingtonpost.com/archive/opinions/2002/04/11/our-law-helps-patients-get-new-drugs-sooner/d814d22a-6e63-4f06-8da3-d9698552fa24/.

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Intellectual Property & Licensing

ROI Regarding the Draft Interagency Guidance Framework for Considering the Exercise of March-In Rights

Regulatory Comments I. Introduction This comment is submitted in response to the National Institute of Standards and Technology’s (NIST) request for information (RFI) on the Draft Interagency . . .

I. Introduction

This comment is submitted in response to the National Institute of Standards and Technology’s (NIST) request for information (RFI) on the Draft Interagency Guidance Framework for Considering the Exercise of March-In Rights.[1]

The U.S. patent system has been a major driver of innovation, and provides an important foundation for the nation’s technological leadership around the world. Undoubtedly, there are cases at the margins where one could find some invention has not been optimally commercialized. But the measure of the system’s success is not in isolated anecdotes, but rather, in data demonstrating it has been a major driver of economic growth and consumer welfare—both in general and particularly in the consistent development of lifesaving and life-enhancing medicines and medical devices.

This suggests that the integrity of the current patent rights framework under the Bayh-Dole Act is crucial for sustaining innovation, promoting commercialization, and ultimately enhancing consumer welfare. As such, any proposal to expand “march-in rights” must be treated with caution.

Further, while the administration’s focus in this draft guidance appears to be centered primarily on the pharmaceutical sector,[2] the proposed modifications have the potential to trigger extensive spillover effects across various other patent-reliant industries. For instance, industries such as biotechnology, software development, and advanced manufacturing—which rely fundamentally on strong patent protections to secure investments for research and development—could face unforeseen challenges. These sectors are driven by innovation underpinned by intellectual property. Increased uncertainty regarding the longevity and security of patent rights could lead them to experience a slowdown in the pace of that innovation, as venture capitalists may become more reluctant to fund new ventures. Of particular concern is that march-in petitions brought under a more liberal standard may become a useful tool for firms looking to stymie their competition.

The proposed changes are clearly unnecessary, given the history of success that characterizes the post-Bayh-Dole era. Indeed, these suggested modifications threaten to undermine a substantial portion of the U.S. economy and to harm both consumer health and general welfare. Apart from being ill-advised from an economic perspective, the proposed changes also appear to be at odds with the Bayh-Dole Act’s very legal and policy basis. As Adam Mossoff has observed, “the text of the Bayh-Dole Act and its consistent interpretation by federal officials militates against” the view that it authorizes imposing price controls on patented inventions produced with support from federal funding.[3]

In summary, the ongoing debate about modifying march-in rights under the Bayh-Dole Act touches on fundamental aspects of innovation, economic growth, and public welfare. This is not merely about adjusting a legislative framework; it is about preserving the delicate balance that has propelled the United States to the forefront of global innovation, particularly in life-saving pharmaceuticals and technologies. Any alterations to the Act’s implementation risk distorting this balance, potentially stifling innovation and undermining the economic and health benefits that have been realized. As such, it is imperative to carefully consider any proposed modifications to ensure that they support, rather than hinder, the Act’s foundational goal of fostering innovation and delivering tangible benefits to society.

II. Success of the Bayh-Dole Act and the Importance of Patent Rights

The Bayh-Dole Act, formally known as the University and Small Business Patent Procedures Act of 1980 (Act),[4] is a landmark piece of intellectual-property legislation. The Act allows universities, small businesses, and nonprofit organizations to retain and exercise patent rights to inventions developed under federally funded research programs. This legislative framework was designed to:

  • Facilitate the transfer of federally funded research from academic and research institutions to the private sector for further development and commercialization;
  • Encourage the practical application of these inventions for public benefit;
  • Stimulate collaboration between public research entities and the private sector; and
  • Enhance the contribution of federally funded inventions to the market, thereby boosting economic growth and public welfare.[5]

The Act has been a pivotal catalyst in advancing U.S. technological innovation, primarily by establishing a property-rights framework that creates incentives for the commercialization of scientific developments that received some degree of government funding. These property rights empower entities to license their inventions for more extensive applied research and development, thereby enhancing their accessibility and application for the broader public good.

The Act has been paying dividends since its inception in 1980. One important effect has been that, by enabling private companies to benefit from R&D that they (co-)fund at publicly supported universities, it has led to a dramatic increase in private-sector sponsorship of R&D at such universities. A report from the General Accounting Office (now known as the U.S. Government Accountability Office) found that, between 1980 and 1985 alone:

total business sponsorship of university research grew 74 percent, from $277 million in fiscal year 1980 to $482 million in fiscal year 1985 (in constant 1982 dollars). For 23 of the 25 universities we surveyed… industrial sponsorship of research more than doubled from $70 million in fiscal year 1980 to $160 million in fiscal year 1985 (in constant 1982 dollars).[6]

The Association of University Technology Managers (AUTM) estimates that, between 1996 and 2010, academic licensors contributed between $86 billion and $338 billion to U.S. gross domestic product (in 2005 dollars), in addition to supporting between 900,000 and 3 million person-years of employment over that that period.[7] In a survey of the 2019-2020 period, AUTM found that innovations of the sort that are at the core of the Bayh-Dole Act’s focus led to a 7% increase in startups; a 7% increase in invention disclosures; an 11% increase in net patent applications; a 3% increase in licenses executed; and a 31% increase in new products introduced to market based on academic research.[8]

Along with many other pro-innovation policies enacted over the last several decades, one of the Act’s enduring legacies is the fundamental shift it initiated in relocating innovative activity from Europe and Asia to the United States, with the latter now firmly established as the most important locale for producing new medicines:

In the last decade, while the U.S. had 111 [new chemical entities] discovered, Switzerland-headquartered companies were second with 26. This means that actual [new chemical entities] discovered that had a significant U.S. nexus for research and development is much higher than the 57 percent of total [new chemical entities] discovered, perhaps closer to 65 percent. One other point worth noting… is the reduction in overall [new chemical entities] discovered from the decade of the 1980s to now. The U.S. has the vast majority of clinical trials. A similar trend has taken place for medical devices.[9]

The United States has continued to develop a large number of new chemical entities in absolute terms, and in relative terms, has come to completely dominate the field.[10] This boom of patented innovations has also given rise to numerous transformative products we now consider commonplace, such as various cancer treatments,[11] prosthetics and medical devices,[12] a variety of web technologies, and improved foods.[13]

Nevertheless, the Act and the patent system are not without critics. Some have challenged the idea that the patent system does not sufficiently stimulate the production of inventions at universities,[14] or that, when such inventions occur, “large portion of those royalties… are derived from a few sizeable inventions at a handful of academic institutions.”[15] Thus, according to these critics, the Act does not promote widespread welfare gains, so much as enable large gains to a small number of parties.

Proposed changes to federal policy have also threatened to pare back the gains the Act has helped to facilitate. In addition to this draft guidance, which would introduce de facto price controls on any industry substantially reliant on patented invention, the U.S. Energy Department has been imposing more stringent domestic-manufacturing requirements on licensees—an obligation that makes little sense in our globalized economy and that is more likely to impose red tape without substantially improving domestic production.[16] In a 2021 letter to the Pentagon, Sen. Elizabeth Warren (D-Mass.) and Rep. Lloyd Doggett (D-Texas) noted that “[r]ecognizing the high prices of medical products developed, in part, with DOD funding, the Senate Armed Services Committee directed DOD to utilize march-in rights to lower prices.”[17] That is to say, at least some members of Congress have called explicitly for diminution of property rights and imposition of price controls.

But critics of the current patent system take far too dim a view of the Bayh-Dole Act’s legacy. Both the patent system and the Act provide important incentives not just to spur invention, but also to encourage commercialization. As noted above, the Act has performed remarkably well at opening opportunities for the commercialization of inventions, and it is this commercialization function that helps to ensure that crucial discoveries are not left to gather dust. Indeed, one of the main drivers of the Act’s success is its harmony with the economic theory of patent rights.

A. The Centrality of Strong Patent Protections

The biotechnology sector historically has depended on patents as a means to organize collaboration among universities, startups, and larger corporations. The costly and complex process of moving a discovery from the laboratory to the marketplace depends heavily on the temporary exclusivity granted by patent rights, as well as the data-protection rights of biologics subject to regulatory approval.[18] Such property rights are fundamental for attracting investors to commit resources to these ventures, which are fraught with high risks and significant costs.

Nobel laureate Kenneth Arrow observed that the product of inventive activity is knowledge.[19] This distinguishes knowledge from other goods or services, in that knowledge is costly to produce, but nearly costless to distribute.[20] In addition, information is often indivisible.[21] Indivisibility means that the information cannot be divided or allocated across producers, products, or outputs—e.g., once a drug’s chemical structure is known, this knowledge does not vary with how many doses are produced, or who produces them.[22] In addition, unlike most products and services, once knowledge is obtained, it is known forever. Those in possession of it can often utilize it with relatively little or no further expenditure. While a bicyclist may need to buy a new bicycle, his knowledge of how to ride will, once acquired, remain with him throughout his life. Likewise, once one knows how to produce a new drug, copies can often be reproduced at relatively low cost.

Another feature of knowledge is that consumers may not know its value until considerable resources have been expended to uncover it.[23] Consumers of a new drug do not know its safety and efficacy of until investigations have established how it performs biologically, which requires extensive modeling, as well as animal and human trials—the latter of which is especially costly.[24]

All these factors place drugs in the category of goods that are expensive to research, develop, and bring to market, but relatively cheap to imitate, as explained by Kip Viscusi and his co-authors:

Suppose the inventor discovers an important drug, Panacea. The inventor could keep the chemical structure secret and try selling the drug as a cure for certain diseases. But a rival could easily buy a few pills, hire a chemist to figure out the structure, and begin selling exact copies at a lower price.[25]

These rivals would benefit from the inventor’s investment in researching the new discovery at little expense of their own. In what is likely the most-cited empirical research on imitation costs, Edwin Mansfield et al. find that 6o% of the patented innovations in their sample were imitated much more quickly and at much lower cost than the initial innovation:

In the ethical drug industry [i.e., the part of the industry involved in researching, developing and bringing drugs to market with regulatory approvals], patents had a bigger impact on imitation costs than in the other industries, which helps to account for survey results indicating that patents are regarded as more important in ethical drugs than elsewhere. … Without patent protection, it frequently would have been relatively cheap (and quick) for an imitator to determine the composition of a new drug and to begin producing it. However, for many of these electronics and machinery innovations, it would have been quite difficult for imitators to determine from the new product how it is produced, and patents would not add a great deal to imitation cost (or time).[26]

If the benefits of the costly investment can be easily appropriated by rivals, then the incentives for invention evaporate. This leads to reduced investment, as explained in a section titled “Imitation Discourages Research” in Dennis Carlton and Jeffrey Perloff’s textbook:

Without a patent, anyone could use new information and imitations of new inventions could be sold legally. Suppose you discovered a cure for AIDS. You could sell your new drug for large sums of money if a patent gave you exclusive rights. Without a patent, other companies could duplicate your drug, and competition would drive the price to the competitive level. You would incur all the research costs, but not all the private benefit.[27]

Commenting on a 1990s-era proposal to regulate the pricing of “breakthrough” drugs, Viscusi et al. conclude that the proposal would ripple through companies’ R&D portfolios:

If one regards R&D investment as somewhat like a lottery—with low probabilities of achieving huge returns—top decile regulation changes completely the nature of the game. Winning the lottery now provides only a reasonable or breakeven return, with other outcomes worse![28]

Not only would such regulations affect companies’ expected returns, but they would also increase the variation in those returns. The added regulatory uncertainty would reduce firms’ confidence in the reliability of their return-on-investment projections. Because of the well-known and widely accepted risk-return tradeoff, firms that face increased uncertainty in investment returns will demand higher expected returns from the investments they pursue.[29] In other words, policies such as the proposed “march-in” rights simultaneously reduce expected investment returns and increase the required rate of return to invest in R&D, thereby reducing investment.

The history of patent commercialization supports the economic theory above. Prior to enactment of the Bayh-Dole Act, the federal government had a patchwork of often-stringent requirements on patenting and licensing agreements for projects it had funded.[30] The result was that many firms were hesitant to make large investments in the basic discoveries that were necessary to create commercial products.[31] Indeed, this makes sense, as a key feature of the patent system is that it can ensure the stability needed to attract investment and the large-scale diffusion of innovations across the market.

The evidence abundantly demonstrates that robust property-rights systems have been crucial to economic growth and prosperity.[32] These rights facilitate specialization and trade, which lead to innovation and growth. Intellectual property plays a crucial role in this dynamic. While there may be debates over the exact parameters of any patent-protection regime, strong evidence supports the idea that robust patent protection is vital for economic growth. Stephen Haber highlights that enforceable patent rights correlate with significant GDP increases.[33] Patricia Schneider’s research indicates that intellectual property substantially fosters innovation in developed countries.[34] Similarly, Yee Kyoung Kim and colleagues conclude that intellectual property boosts innovation.[35] Theoretical work by Daron Acemoglu and Ufuk Akcigit underscores the importance of patents, especially where inventors are significantly advanced technologically.[36] Yum Kwan and Edwin Lai suggest that inadequate intellectual-property protection causes greater welfare losses than does overprotection.[37]

Relatedly, Nobel laureate economist William Nordhaus has found that, even with patented discoveries, only a tiny fraction of the social returns from technological advancements is captured by producers, while the majority of benefits accrue to consumers.[38]

Patents are particularly important for startups, whose ability to exercise enforceable patent rights is key to market entry. There are three primary reasons for this: 1) injunctions protect startups from being copied by established firms, who might otherwise copy startups’ discoveries and pay court-set royalties; 2) patents serve as collateral to secure startup funding; and 3) patents attract venture-capital investment.

Diminishing patent rights by removing exclusion rights would allow larger firms to imitate startup innovations, reinforcing their market dominance. Without the threat of copying, established companies are forced to either innovate independently or acquire innovative startups. This aspect is particularly crucial for startups, as it protects their inventions from being misappropriated by larger rivals. The literature on firms’ strategies to prevent rivals from copying their inventions suggests that, while patents are not the only method, they are crucial in certain industries, most notably in pharmaceuticals and chemicals. [39]

Another key aspect of strong intellectual property rights is that they can allow firms to raise funds through the process of collateralization. This is particularly relevant for startups that lack tangible assets, as they can offer patents as security for funding.[40] As Gaétan de Rassenfosse puts it:

SMEs can leverage their IP to facilitate R&D financing…. [P]atents materialize the value of knowledge stock: they codify the knowledge and make it tradable, such that they can be used as collaterals. Recent theoretical evidence by Amable et al. (2010) suggests that a systematic use of patents as collateral would allow a high growth rate of innovations despite financial constraints.[41]

But the complexity in valuing patents,[42] particularly in the face of infringement risks, underscores why reliable IP rights are so important to maintaining patents’ value as collateral. As Jayan Kumar observes (in the parallel context of copyright):

Infringement action (most obviously music piracy) can seriously erode revenue streams and plans for combating infringement through litigation must be in place in order to protect the value of IP. Given the above risks and complexities, due diligence on IP before securitization is more expensive than with traditionally securitized assets.[43]

This last point becomes crucial to consider for the draft guidance, given that liberalizing march-in rights will almost certainly lead to increased litigation exposure across all industries that rely on patented technologies.

Lastly, as suggested above, intellectual-property protection influences venture-capital activity significantly. Patents impede imitation, can be used as collateral, and can help facilitate specialization, thereby fostering the entry of new specialized firms. Additionally, patents often signal to investors a company’s potential success and value. Empirical studies show that patent filings have significant positive effects on investor valuations, especially for early-stage companies, and play an important role as a “commitment device,” protecting entrepreneurs from investor expropriation.  For example, David Hsu and Rosemarie Ziedonis find:

a statistically significant and economically large effect of patent filings on investor estimates of start-up value…. A doubling in the patent application stock of a new venture [in] this sector is associated with a 28 percent increase in valuation, representing an upward funding-round adjustment of approximately $16.8 million for the average start-up in our sample.[44]

They also note that the effect is more pronounced in earlier financing rounds, when uncertainty surrounding the value of the underlying company is greater.[45]  Along similar lines, Carolin Häussler, Dietmar Harhoff, and Elisabeth Mueller show that “companies’ patenting activities have consistent and cogent effects on the timing of VC financing. Having at least one patent application reduces the time to the first VC investment by 76%.”[46] Other authors argue that patents may serve as a commitment device to protect entrepreneurs from the risk of expropriation by their early investors.[47]

The conclusion is clear: intellectual property is a significant contributor to innovation and should be a central element of growth strategies. This view is widely accepted among economists, particularly in industries with very large upfront costs and steeply declining marginal costs of production—of which, pharmaceuticals is perhaps the most extreme example.

Having said that, it would be naïve to think that U.S. intellectual-property law has reached a state of perfection. Intellectual-property protection must strike a delicate balance between guarding knowledge that could otherwise be replicated at minimal cost—thereby encouraging the creation of such knowledge—and ensuring that the knowledge is disseminated to the public. Even a minor shift in that balance toward dissemination and away from protection could have disproportionate effects, making copying (i.e., free-riding on the innovations of others) a more attractive strategy. This could lead to underinvestment and economic stagnation. Thus, when thinking about making changes to the status quo, policymakers should proceed with utmost care. The world preeminence that the current U.S. patent system has helped bring to fruition could easily be destroyed.

III.    March-In Rights and the Danger to Innovation

The proposed changes to the Bayh-Dole Act’s march-in rights[48] pose serious threats to the successful innovation regime that has propelled the United States to the forefront of global innovation.  In particular, the proposed revisions would expand the criteria for federal agencies to exercise march-in rights, potentially allowing for broader interpretation and application. Most concerning is that the proposed framework would allow agencies to consider such factors as the pricing of commercial goods and services arising from federally funded inventions.[49] Tellingly, the proposed framework would grant agency regulators authority to determine when a price is “extreme and unjustified given the totality of circumstances” and to decide, on that basis, whether to exercise march-in rights.[50]

These proposed changes raise concerns about their potential impact on the incentives for private-sector investment in the commercialization of federally funded research. Such changes threaten to disrupt the delicate balance of incentives that the Bayh-Dole Act has successfully established for more than four decades, potentially hindering innovation and diminishing consumer welfare in the long run.

But more importantly, one fundamental flaw in the draft framework would return us to a pre-1980 status quo ante. One of the primary questions that needs to be brought into focus in this proceeding is: what method of price discovery leads to the optimal commercialization of new patented inventions? Since much of this proceeding is focused on pharmaceutical products, we will restrict our discussion to the pricing of these products. Much of the economics of pricing patented medicines, however, transfers well to other contexts involving patent protections. As we discuss below, regulators are fundamentally incapable of matching, on average, the market’s efficiency in setting prices.

To understand the pricing of new pharmaceuticals, it’s helpful to begin with standard neoclassical price theory. The most basic model assumes that patented pharmaceuticals establish a monopoly, and that the monopolist sets different prices for different consumers based on their willingness to pay. In principle, such a “price-discriminating monopolist” will charge each consumer a different price and the lowest price paid will be equal to the drug’s marginal cost of production. In other words, those consumers least willing to pay will pay the same price as in a “perfectly competitive” market. Moreover, the amount of the drug produced will be the same as under perfect competition. The big difference is that the producer receives all the consumer surplus. In practice, pharmaceutical companies are not perfectly discriminating monopolists, but they do typically set different prices in different countries and for different patient groups.[51]

In reality, very few—if any—new pharmaceuticals actually enjoy a monopoly. At best, they represent a new class of drug for treating a condition. Even in such cases, they typically compete with older products that are either less effective or have more side effects for some proportion of patients.[52] This competition introduces a dynamic interplay between the new and old products, influencing the innovator’s pricing strategy.

The neoclassical model shows that even a profit-maximizing monopolist has incentives to offer products at a range of prices to different consumers. But when the “monopolist” assumption is relaxed—reflecting the reality of competitive dynamics both within and between classes of drugs for any particular condition­–it becomes even more difficult, if not impossible, to determine whether a particular drug price is “extreme and unjustified.” There is thus a high likelihood that any such intervention would be arbitrary and capricious.

Unfortunately, if given such a mandate, regulators are likely to have incentives to intervene for political reasons. In essence, regulators gain little by declining to intervene in the presence of an alleged “extreme and unjustified” drug price.[53] Meanwhile, the consequences of (practically ubiquitous) improper intervention would not be borne by the regulator, but by the innovators and patients.

When a private firm misjudges demand and sets its prices incorrectly, it faces punishment by the market. This, in turn, leads the firm to correct its pricing strategy. Liberalized march-in rights, by contrast, create incentives for a one-way ratchet, whereby regulators—themselves insulated from market discipline—are driven by political pressures to demand price reductions, regardless of the effect on firms’ incentives to develop new medicines.

A.      Intrinsic Complexities

The economics of drug development and pricing in the pharmaceutical industry present unique challenges that set it apart from many other sectors. While the fundamental principles of the price system apply to patented inventions in this field, the intricacies of pharmaceutical development necessitate more complex pricing strategies.

One of the defining characteristics of pharmaceutical R&D is the very long time it takes to bring a drug to market. From initial discovery to market launch, the process of developing a new drug typically takes between 12 and 15 years.[54] This extended timeframe is due largely to the rigorous clinical trials and associated regulatory approvals that each new drug must undergo to ensure safety and efficacy. This prolonged development period represents a significant commitment of time and resources, often with no guarantee of success.[55]

Many potential drugs that enter the development pipeline do not make it to market, either due to inefficacy, safety concerns, or other factors discovered during the development process.[56] This high attrition rate means that successful drugs must not only cover their own development costs but also compensate for the expenses incurred by those that failed.[57] A 2016 study found that the likelihood of a molecule selected for clinical trials successfully concluding all three phases of trials and going to market is around 12%.[58] Taking into account this low success rate, the authors estimate the average cost of developing a new approved drug to be $2.8 billion.[59]

Given these unique challenges­—long development times, substantial upfront investments, and a high rate of failure—pharmaceutical pricing must be carefully calibrated. Pricing strategies must account for recouping large investments while also considering the competitive market landscape, regulatory environment, and patient access.

B.      Regulatory Complexities

The challenge is magnified when one considers the complex regulatory environment that exerts significant distortionary pressures on drug pricing. For example, there are several federal programs—including Medicaid,[60] the 340B Drug Pricing Program,[61] and the regulations for the coverage gap for Medicare Part D[62]—that impose price controls on pharmaceuticals. While these controls aim to make medications more affordable for certain groups, the challenges they inadvertently create for pharmaceutical companies include potential distortions of downstream pricing for drugs outside of these programs.

For example, among these policies’ unintended consequences is to penalize companies that offer drugs at lower prices. The mandated discounts and rebates for government programs often mean that pharmaceutical companies receive less revenue for the same product, relative to the open market.[63] To compensate for revenue losses incurred in these programs, pharmaceutical companies are often compelled to raise prices for patients not covered by these federal programs.[64] This situation creates a disparity in drug pricing, where the burden of subsidizing the cost for government programs falls indirectly on other consumers, often resulting in higher overall healthcare costs.

Furthermore, this regulatory thicket complicates drugmakers’ pricing strategies. Instead of pricing based strictly on market demand or research and development costs (which is complicated enough on its own), companies must navigate a maze of regulations and mandatory discounts. This distorts natural market dynamics, often leading to higher prices for some consumers to balance the reduced revenue from government-mandated pricing. This approach can also stifle innovation, as pharmaceutical companies may redirect resources from research and development to regulatory compliance and strategic-pricing management.

C.      The Fraught Nature of Intervening in Market-Based Drug Pricing

It’s worth noting that march-in rights have not, to date, been exercised. This fact serves as an implicit acknowledgment of the pharmaceutical industry’s effective functioning within the constraints noted above. Moreover, it reflects regulators’ prudent reluctance to intervene in a complex and delicately balanced ecosystem. Indeed, any intervention in such a nuanced sector runs the risk of arbitrariness, given the intricacies involved in drug development and pricing. The restraint regulators have shown underlines their understanding of the unique economic dynamics of the pharmaceutical industry and the potential unintended consequences of intervention.

Further, the economics of the pharmaceutical industry also reveal the role that successful, high-revenue drugs have played in cross-subsidizing those discoveries that generate lower revenues.[65] This interplay between different segments of a pharmaceutical company’s portfolio is another crucial factor that militates against pricing interventions. The inherent support that successful patented medicines offer to the research and development of less profitable drugs (and total failures) is a vital component of the industry’s ecosystem.

So-called “blockbuster” drugs are a boon not just for the pharmaceutical companies, but also for the broader healthcare system. Some of the profits from these successful drugs are reinvested into further research and development, fueling the discovery and production of new medications.[66] This cycle of profit and reinvestment is critical to sustain the development of drugs that may have a smaller absolute market but are vital for treating rarer conditions. In this way, the big winners in a pharmaceutical company’s portfolio underpin the development and continued availability of lower revenue drugs and experiments with seemingly promising, but ultimately unfruitful, lines of research.

Therefore, any intervention in pharmaceutical pricing must be approached with caution. The cross-subsidization model represents a delicate balance essential not just for pharmaceutical firms’ financial health, but also to ensure the availability of a wide range of medications that meet diverse health-care needs. Unfortunately, this balance has already been weakened by price controls both in the United States and internationally, and could be substantially harmed by new price controls or other regulatory interventions.

Intervening in the pharmaceutical industry’s complex, carefully balanced, intricate, and multifaceted domain of drug development and commercialization risks creating an environment in which outcomes are dictated by centralized agencies, rather than by decentralized, bottom-up processes. In such a system, regulators’ necessarily limited knowledge will inevitably result in inferior outcomes. Moreover, it will lead to picking winners and losers in an arbitrary and capricious manner.

The issue’s complexity is compounded by the fact that the vast majority of drugs that are developed receive some federal funding.[67] While it is impossible to know whether the same drugs would be developed without such funding, the fact is that such funding crowds out private investment in basic R&D. Moreover, it means that the proposed expansion of march-in rights would apply to nearly every patented drug currently on the market and in development. Therefore, such interventions would not only be arbitrary and capricious, in ways that raise constitutional questions, but also ominous and all-encompassing.

Moreover, the error costs associated with such interventions cannot be overlooked. In the pharmaceutical industry, the journey from lab to market is fraught with uncertainties and high failure rates. For instance, only a quarter of drugs that complete Phase 3 clinical trials proceed to Phase 4.[68] Reasons for this can include a lack of efficacy in larger populations or commercial non-viability.[69] A regulatory body attempting to override these decisions would need to possess better knowledge than the compound’s own developers and commercializers regarding what will ultimately prove viable in the market. This prospect is clearly absurd and would lead to misallocation of resources, with companies being perversely encouraged to chase a higher number of unsuccessful endeavors.

Thus, any regulatory intervention in this space must be undertaken with a deep understanding of the inherent complexities and uncertainties of drug development. A regulator’s decision to intervene in the commercialization process could result in significant wasted resources and could potentially impede the development of truly effective and needed medicines. The challenge lies in striking the right balance between encouraging innovation and ensuring access to effective and affordable medications, without falling into the trap of overregulation that could stifle progress in this vital field.

IV.    Conclusion

In short, the narrative that drives the conversation around altering march-in rights is deeply flawed. The Bayh-Dole Act does not unjustly deprive taxpayers of the innovations they partially funded through their contributions to the federal government. In fact, the Act has fostered an explosion of innovative activity that yields enormous benefits, both seen and unseen, to American consumers. The observable benefits are evident in the ever-expanding access to new medicines and devices that improve health outcomes for consumers.[70] The unseen—or rather, the easy to miss—benefits include the economic growth that has resulted from the United States serving as a major hub for innovative research and development.[71] The status quo is wildly successful and any perceived failures should be addressed with targeted solutions, not with a wholesale alteration to the framework that has been responsible for driving these changes.

Further, it’s crucial to understand the effects that expanding march-in rights to address instances of “extreme” pricing could have on the nature of the Act itself. Originally designed as a pro-innovation policy, the Bayh-Dole Act could inadvertently transform into a regulatory tool for market manipulation.

Regulations are often complex and challenging to navigate. This complexity creates opportunities for incumbent firms to leverage regulations to their advantage, and to the detriment of competition and consumer welfare.  In the context of the Bayh-Dole Act, expanding march-in rights to tackle “extreme” pricing could lead to just such a perverse outcome. Such a scenario would mark a significant shift from the Bayh-Dole Act original intent of fostering innovation toward a landscape where regulatory manipulation becomes a key competitive strategy. This potential transformation underscores the need for careful consideration and a balanced approach in any amendments to the Act. Addressing the issue of pricing should not compromise the Act’s ability to stimulate innovation and healthy market competition.

Finally, expanding march-in rights under the Bayh-Dole Act, although primarily targeted at pharmaceutical producers, sets a precedent with far-reaching implications for all patent-reliant industries, including computers, biotech, and manufacturing. Industries that thrive on intellectual property to develop and safeguard their innovations will be watching this development closely. This potential for regulatory and legal manipulation could alter the competitive landscape, where gaining an upper hand might no longer depend solely on innovation and market strategies, but increasingly on the ability to navigate and exploit expanded march-in rights.

[1] Request for Information Regarding the Draft Interagency Guidance Framework for Considering the Exercise of March-In Rights, 88 FR 85593 (Dec. 8, 2023), https://www.federalregister.gov/documents/2023/12/08/2023-26930/request-for-information-regarding-the-draft-interagency-guidance-framework-for-considering-the [hereinafter “RFI”]

[2] For example, five of the eight “scenarios” presented in the RFI focus on biotechnology.

[3]  Adam Mossoff, The False Promise of Breaking Patents to Lower Drug Prices, 97 St. John’s L. Rev. (forthcoming 2023) (manuscript at 18), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4348499.

[4] 35 U.S.C. § 200, et seq. (2011).

[5] Id. at § 202.

[6] U.S. General Accounting Office, Patent Policy Recent Changes in Federal Law Considered Beneficial, GAO Report No. RCED-87-44 (1987), available at https://www.gao.gov/products/rced-87-44.

[7] Lori Pressman et al., The Economic Contribution of University/Nonprofit Inventions in the United States: 1996–2010, Biotechnology Industry Organization (Jun. 20, 2012) at 13,  available at https://archive.bio.org/sites/default/files/Pressman%2520BIO%25202012%2520Final%2520r1%2520w%2520cover%2520sheet_0.pdf.

[8] Joseph Allen, A Pandemic Can’t Stop Bayh-Dole—But Politicians Might, IPWatchdog (Aug. 31, 2021), https://ipwatchdog.com/2021/08/31/pandemic-cant-stop-bayh-dole-politicians-might/id=137235.

[9] Shanker Singham, Improving U.S. Competitiveness; Eliminating Anti-Competitive Market Distortions, at 12 (Int’l Roundtable Trade & Competition Pol’y., Nov. 15, 2011), available at https://shankersingham.com/2019/10/05/on-improving-us-competitiveness.

[10] Id.

[11] See, e.g., Molecular Biomarkers Improve Treatment of Colorectal Cancers, AUTM (2008), https://autm.net/about-tech-transfer/better-world-project/bwp-stories/medical-diagnostic-predictors-of-therapy-response (last visited Feb. 1, 2024); 3-D Virtual Colonoscopies: Changing Attitudes, Reducing Cancer, AUTM, https://autm.net/about-tech-transfer/better-world-project/bwp-stories/3-d-virtual-colonoscopy (last visited Feb. 1, 2024).

[12] See, e.g., Increasing Mobility for Amputees, AUTM (2016), https://autm.net/about-tech-transfer/better-world-project/bwp-stories/all-terrain-knee-(1) (last visited Feb. 1, 2024); Innovative Bandage Saves Lives, AUTM (2008), https://autm.net/about-tech-transfer/better-world-project/bwp-stories/alphabandage (last visited Feb. 1, 2024); Cochlear Implant Brings Sound and Language to Thousands, AUTM (2006), https://autm.net/about-tech-transfer/better-world-project/bwp-stories/cochlear-implant (last visited Feb. 1, 2024).

[13] Honeycrisp: The Apple of Minnesota’s Eye, AUTM (2018), https://autm.net/about-tech-transfer/better-world-project/bwp-stories/honeycrisp-apple (last visited Feb. 1, 2024).

[14] See, e.g., Lisa Larrimore Oullette & Andrew Tutt, How Do Patent Incentives Affect University Researchers?, 61 Int’l Rev. L. & Econ. 1 (2020), https://doi.org/10.1016/j.irle.2019.105883.

[15] David Orozco, Assessing the Efficacy of the Bayh-Dole Act Through the Lens of University Technology Transfer Offices (ITOS), 21 N.C. J.L. & Tech. 115, 142 (2019)

[16] See Frequently Asked Questions (FAQs) for Applicants and Awardees of DOE Financial Assistance and R&D Contracts Regarding the Department’s Determination of Exceptional Circumstances (DEC) for DOE Science and Energy Technologies Issued in June of 2021, U.S. Department of Energy (2021), available at https://www.energy.gov/sites/default/files/2022-03/FAQs_03092022.pdf; see also Joseph Allen, DOE’s Misuse of Bayh-Dole’s ‘Exceptional Circumstances’ Provision: How Uniform Patent Policies Slip Away, IPWatchdog (May 26, 2022), https://ipwatchdog.com/2022/05/26/misuse-bayh-doles-exceptional-circumstances-provision-uniform-patent-policies-slip-away/id=149275.

[17] See Elizabeth Warren & Lloyd Doggett, Letter to the Secretary of Defense Regarding Reducing Drug Prices (Jul. 22, 2021), available at https://www.warren.senate.gov/imo/media/doc/Letter%20to%20DOD%20about%20Reducing%20Drug%20Prices%20Final%207.22.21.pdf.

[18] Dana P. Goldman, Darius N. Lakdawalla, & Tomas Philipson, The Benefits From Giving Makers Of Conventional ‘Small Molecule’ Drugs Longer Exclusivity Over Clinical Trial Data, 30 Health Affairs 1, 84-90 (2011), available at https://www.ncbi.nlm.nih.gov/pmc/articles/PMC3804334.

[19] Kenneth J. Arrow, Economic Welfare and the Allocation of Resources for Invention, at 609, in The Rate and Direction of Inventive Activity (R. R. Nelson, ed., 1962).

[20] See id. at 614 (“The cost of transmitting a given body of information is frequently very low.”).

[21] See id.. at 615.

[22] See id. (“[T]he use of information about production possibilities, for example, need not depend on the rate of production.”)

[23] Id.

[24] Joseph A. DiMasi, Henry G. Grabowski, & Ronald W. Hansen, Innovation in the Pharmaceutical Industry: New Estimates of R&D Costs, 47 J. Health Econ. 20 (2016), https://pubmed.ncbi.nlm.nih.gov/26928437.

[25] W. Kip Viscusi, John M. Vernon & Joseph E. Harrington, Jr., Economics of Regulation and Antitrust (2d ed., 1995) at 832.

[26] Edwin Mansfield, Mark Schwartz, & Samuel Wagner, Imitation Costs and Patents: An Empirical Study, 91 Econ. J. 907, 913 (1981). [emphasis added]

[27] Dennis W. Carlton & Jeffrey M. Perloff, Modern Industrial Organization (4th ed., 2005) at 532. For a numerical example, see, Richard A. Posner, Economic Analysis of Law (4th ed., 1992) at 38.

[28] Viscusi, Vernon &  Harrington, Jr., supra n. 25, at 863.

[29] See Edwin J. Elton & Martin J. Gruber, Modern Portfolio Theory and Investment Analysis (4th ed, 1991).

[30]  See, e.g., Jonathan Barnett, The Great Patent Grab, in The Battle Over Patents: History and Politics of Innovation (Stephen H. Haber & Naomi R. Lamoreaux eds., Oxford University Press 2021), available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3909528; Mossoff, supra n. 3, at 18-20 (“Government ownership of patents proved to stifle, rather than to promote distribution of new innovations.”)

[31] Id.

[32] Stephen Haber, Patents and the Wealth of Nations, 23 Geo. Mason L. Rev. 811, 811 (2016) (“There is abundant evidence from economics and history that the world’s wealthy countries grew rich because they had well-developed systems of private property”); see also, Zorina Khan & Kenneth L. Sokoloff, Institutions and Democratic Invention in 19th-Century America: Evidence from “Great Inventors” 1790-1930, 94 Am. Econ. Rev. 400 (2004); Josh Lerner, The Economics of Technology and Innovation: 150 Years of Patent Protection, 92 Am. Econ. Rev. 221 (2002); Albert G.Z. Hu & Ivan P.L. Png, Patent Rights and Economic Growth: Evidence from Cross-Country Panels of Manufacturing Industries, 65 Oxford Econ. Papers 675 (2013) (finding faster growth and higher value in patent-intensive industries in countries that improve the strength of patents); Bronwyn H. Hall & Rosemarie Ham Ziedonis, The Patent Paradox Revisited: An Empirical Study of Patenting in the US Semiconductor Industry, 1979-1995, 32 RAND J. Econ. 101, 125 (2001) (identifying “two ways in which the pro-patent shift in the U.S. legal environment appears to be causally related to the otherwise perplexing surge in U.S. patenting rates, at least in the semiconductor industry”); Nikos C. Varsakelis, The Impact of Patent Protection, Economy Openness and National Culture on R&D Investment: A Cross-country Empirical Investigation, 30 Res. Pol’y 1059, 1067 (2001) (“Patent protection is a strong determinant of the R&D intensity, and countries with a strong patent protection framework invest more in R&D.”); David M. Gould & William C. Gruben, The Role of Intellectual Property Rights in Economic Growth, in Dynamics Of Globalization & Development 209 (Satya Dev Gupta & Nanda K. Choudhry eds., 1997) (“The evidence suggests that intellectual property protection is a significant determinant of economic growth. These effects appear to be slightly stronger in relatively open economies and are robust to both the measure of openness used and to other alternative model specifications.”)

[33] Haber, supra note 32, at 816. (“Figure 1 therefore presents a graph of the strength of enforceable patent rights and levels of economic development for all non-petro states in 2010. There is nothing ambiguous about the resulting pattern: there are no wealthy countries with weak patent rights, and there are no poor countries with strong patent rights. Indeed… as patent rights increase, GDP per capita increases with it. Roughly speaking, for every one-unit increase in patent rights (measured from zero to fifty) per capita income increases by $780. A simple regression of patent rights and patent rights squared on GDP indicates that roughly three-quarters of the cross-sectional variance in per capita GDP around the world is explained by the strength of patent rights.”) (emphasis added); see also Ronald A. Cass & Keith N. Hylton, Laws Of Creation: Property Rights In The World Of Ideas 45-46 (2013) (discussing results of regression analysis providing evidence that “countries with stronger intellectual property rights tend to grow economically more than those with weak intellectual property rights.”)

[34] Patricia Higino Schneider, International Trade, Economic Growth and Intellectual Property Rights: A Panel Data Study of Developed and Developing Countries, 78 J. Dev. Econ. 529, 539 (2005) (“The results suggest that IPRs have a stronger impact on domestic innovation for developed countries. This variable is positive and statistically significant in all OLS regressions in Table 4 (developed countries).”)

[35] Yee Kyoung Kim, Keun Lee, Walter G. Park, & Kineung Choo, Appropriate Intellectual Property Protection and Economic Growth in Countries at Different Levels of Development, 41 Res. Pol’y 358, 367 (2012) (“[T]he impact of patenting intensity on growth is much larger in high income countries, as can be seen from the positive coefficient of the interaction term between the high income country dummy and patenting intensity – this coefficient being statistically significant at the 1% level of statistical significance. From column 6, the measured net effect of patent intensity on growth in high income countries is 0.0683 (=−0.027 + 0.953, where the former is the coefficient of the patenting intensity of middle-to-low-income countries and the latter the coefficient of the interaction term between the high income country dummy and patenting intensity).”)

[36] Daron Acemoglu & Ufuk Akcigit, Intellectual Property Rights Policy, Competition and Innovation, 10 J. Eur. Econ. Ass’n. 1, 1 (2012) (“[O]ptimal policy involves state-dependent IPR protection, providing greater protection to technology leaders that are further ahead than those that are close to their followers.”)

[37] Yum K. Kwan & Edwin L-C Lai, Intellectual Property Rights Protection and Endogenous Economic Growth, 27 J. Econ. Dynamics & Control 853, 854 (2003) (“The calibration results indicate that there is under-protection of IPR (relative to the optimal level) within plausible range of parameter values, and that under-protection of IPR is much more likely than over-protection. More complete computation indicates that in the case of over-protection, the welfare losses are trivial; whereas in the case of under-protection, the welfare losses can be substantial. One interpretation of this result is that the US should protect IPR much more than it currently does.”)

[38] William D. Nordhaus, Schumpeterian Profits in the American Economy: Theory and Measurement at 1 (Nat’l Bureau of Econ. Res. Working Paper No. 10433 Apr. 2004), http://www.nber.org/papers/w10433.

[39] See, e.g., Edwin Mansfield, Patents and Innovation: An Empirical Study, 32 Mgmt. Sci. 173, 175-176 (1986) (Mansfield shows through surveys that patent protection only had a limited impact on innovation in industries other than the pharmaceutical industry and, to a lesser extent, the chemical industry. Mansfield argues that this is because the effectiveness of patents depends on the extent to which they increase imitation costs; and that this increase is more substantial in the chemical and pharmaceutical industries). Note that this study largely predates standard-reliant industries, such as mobile-communications technology, where patents likely play a very important role in creating appropriability. See also Richard C. Levin, Alvin K. Klevorick, Richard R. Nelson, Sidney G. Winter, Richard Gilbert, & Zvi Griliches, Appropriating the Returns from Industrial Research and Development, 3 Brookings Papers On Econ. Activity 783, 797 (1987). Levin et al.’s findings are broadly in line with Mansfield’s. More recently, these findings were supported by Cohen et al. See Wesley M. Cohen, Richard R. Nelson, & John P. Walsh, Protecting Their Intellectual Assets: Appropriability Conditions and Why US Manufacturing Firms Patent (or Not) (Nat’l Bureau of Econ. Res. Working Paper 7552, Feb. 2000), https://www.nber.org/papers/w7552.

[40] See, e.g., Mario Calderini & Maria Cristina Odasso, Intellectual Property Portfolio Securitization: An Evidence Based Analysis, Innovation Studies Working Paper (ISWOP), NO. 1/08, at 33 (2008) (“[I]t seems that patent securitization should be more suitable for small and medium companies with a consistent IP portfolio but that have not easy access to capital market or have a higher financial risk and few possibility to raise unsecured financing.”); see also Dov Solomon & Miriam Bitton, Intellectual Property Securitization, 33 Cardozo Arts & Ent. L.J. 125, 171-73 (2015) (“Among the famous securitization transactions in the field of IP rights are the securitizations of the copyrights of the singer David Bowie, the trademark of the Domino’s Pizza chain, and the patent on the HIV drug developed by Yale University.”); Nishad Deshpande & Asha Nagendra, Patents as Collateral for Securitization, 35 Nature Biotechnology 514, 514 (2017) (“Patents are important assets for biotech organizations, not only for protecting inventions but also as assets to raise monies.”); Tahir M. Nisar, Intellectual Property Securitization and Growth Capital in Retail Franchising, 87 J. Retailing 393, 393 (2011) (“A method of raising finance particularly suited to retail franchisors is intellectual property (IP) securitization that allows companies to account for intangible assets such as intellectual property, royalty and brands and realize their full value. In recent years, a number of large restaurant franchisors have securitized their brands to raise funds, including Dunkin Brands and Domino’s Pizza (Domino’s). We use property rights approach to show that IP securitization provides mechanisms that explicitly define ownership of intangible assets within the securitization structure and thus enables a company to raise funds against these assets.”)

[41] Gaétan De Rassenfosse, How SMEs Exploit Their Intellectual Property Assets: Evidence from Survey Data, 39 Small Bus. Econ. 437, 439 (2012).

[42] See Solomon & Bitton, supra note 40 (discussing the difficulties in evaluating patents as a barrier to securitization); see also Aleksandar Nikolic, Securitization of Patents and Its Continued Viability in Light of the Current Economic Conditions, 19 Albany L.J. Sci. & Tech. 393, 491 (2009) (“Anyone attempting to accurately assess the value of a patent portfolio faces numerous challenges including potential invalidity proceedings, potential infringement and infringement proceedings, obsolescence, or lack of demand for a license or the invention itself.”)

[43] Jayant Kumar, Intellectual Property Securitization: How Far Possible and Effective, 11 J. Intellectual Prop. Rights 98, 98 (2006).

[44] David H. Hsu & Rosemarie H. Ziedonis, Patents as Quality Signals for Entrepreneurial Ventures, Acad. Mgmt. Proceedings, Vol. 1, at 6 (2008), available at https://faculty.wharton.upenn.edu/wp-content/uploads/2015/07/11.pdf.

[45] Id.

[46] Carolin Häussler, Dietmar Harhoff & Elisabeth Müller, To Be Financed or Not… — The Role of Patents for Venture Capital-Financing, at 3 (ZEW-Centre for European Economic Research Discussion Paper 09-003, Mar. 28, 2013), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1393725; see also De Rassenfosse, supra note 41, at 441.

[47] See Ronald J. Mann & Thomas W. Sager, Patents, Venture Capital, and Software Start-Ups, 36 Research Pol’y 193, 207 (2007). (“We note one additional possibility suggested by the data, that portfolio firms obtain the patents not because they increase the value of the firm to its investors, but because they protect the contributions of the firm from expropriation by the investors. The idea here is that by giving the portfolio firm a cognizable property right in its technology, the patents increase the value of the firm by decreasing the costs of moral hazard and hold-up in the relations between the entrepreneurs and their investors. Shane (2002) proposes a similar mechanism to explain patterns in licensing of patents assigned to MIT.”)

[48] 35 U.S.C. 203 allows for a limited number of conditions under which federal agencies can grant licenses to inventions at least partially funded by federal money. These conditions include when a contractor or assignee is not expected to commercialize an invention in a reasonable amount of time, or when health or safety concerns are not expected to be reasonably satisfied by a contractor or assignee. Id. at (a)(1)-(2). To date, march-in rights have never been exercised. It should also be noted that “price” is not mentioned anywhere in § 203 as a basis for “march in,” which could lead to the possibility of a valid Supreme Court challenge to such a change under the “major questions doctrine.” See, e.g., The Major Questions Doctrine, CRS Report No. IF12077 (Nov. 2, 2022), https://crsreports.congress.gov/product/pdf/IF/IF12077. (“Under the major questions doctrine, the Supreme Court has rejected agency claims of regulatory authority when (1) the underlying claim of authority concerns an issue of “vast ‘economic and political significance,’” and (2) Congress has not clearly empowered the agency with authority over the issue.”) Moreover, the claim that the act was intended to be used to impose price controls is, at best, a stretch of statutory interpretation and, more realistically, a completely ill-fated enterprise that depends on taking statutory terms out of context. See Mossoff, supra n. 3, at 22-33.

[49] RFI at 85599.

[50] Id.

[51] See Paul Krugman & Robin Wells, Economics (4th ed., 2015) at 391 (Regarding pricing of patent-protected drugs, “A monopolist will maximize profits by charging a higher price in the country with a lower price elasticity (the rich country) and a lower price in the country with a higher price elasticity (the poor country). Interestingly, however, drug prices can differ substantially even among countries with comparable income levels.”)

[52] For example, the H2 antagonist Tagamet (cimetidine) was developed by Smith, Kline & French to prevent and treat gastroesophageal reflux disease (GERD) and gastric ulcers. In response, Glaxo developed a similar but more effective H2 antagonist, Zantac (ranitidine) (See Viscusi et al., supra note 25 at 851-852). This within-class competition was followed by the development of a new, more-effective, and longer-lasting class of anti-GERD drugs known as proton-pump inhibitors (PPI), starting with omeprazole and soon followed by a slew of others, including lansoprazole and pantoprazole. See Daniel S. Strand, Daejin Kim, & David A. Peura1, 25 Years of Proton Pump Inhibitors: A Comprehensive Review, 15 Gut Liver. 11(1), 27-37 (2017), available at https://www.ncbi.nlm.nih.gov/pmc/articles/PMC5221858. The development of treatments for Alzheimer’s has followed a similar trajectory. Biogen’s Aduhelm (aducanumab), was recently retired, but the drug, which works by clearing the amyloid plaques that block neurotransmission in people with Alzheimer’s, has been hailed as a “groundbreaking discovery that paved the way for a new class of drugs and reinvigorated investments in the field.” See Editorial Board, Requiem for an Alzheimer’s Drug, Wall St. J. (Jan. 31, 2024), https://www.wsj.com/articles/aduhelm-biogen-alzheimers-treatment-drug-development-pharma-fda-1d866bd7. The development of Aduhelm thus served as both a foundation for other drugs in the same class of anti-amyloid monoclonal antibody treatments, such as Leqembi (lecanemab) (see Christopher H. Van Dyck et al., Lecanemab in Early Alzheimer’s Disease, 388 N. Engl. J. Med. 9-21 (2023), https://www.nejm.org/doi/full/10.1056/NEJMoa2212948) as well as continued within-class competition for those later drugs, until its retirement. Similarly, Cognex (tacrine)—the first in an earlier class of ameliorative drugs for Alzheimer’s (acetylcholineesterase inhibitors, AChEIs), which work by preventing the breakdown of the neurotransmitter acetylcholine—was, like Aduhelm, ultimately deemed relatively ineffective and withdrawn (See Nawab Qizilbash et al., WITHDRAWN: Tacrine for Alzheimer’s Disease, 18 Cochrane Database Sys. Rev. 3 (2007), https://pubmed.ncbi.nlm.nih.gov/17636619) because it had been superseded by other AChEIs, such as Aricept (donepezil). See Sharon L. Rogers et al., Donepezil Improves Cognition and Global Function in Alzheimer Disease, 158(9) Arch Intern Med. 1021-1031 (1998), available at https://jamanetwork.com/journals/jamainternalmedicine/fullarticle/205223.

[53] See, e.g., Eric Fruits, The Oregon Health Plan: A “Bold Experiment” That Failed (Cascade Policy Institute, Sep. 2010), https://ssrn.com/abstract=1680047 (describing how covered treatments under Oregon’s Medicaid program was originally based on objective “cost-effectiveness” criteria, but quickly transitioned to subjective criteria based on public pressure).

[54] AI’s Potential to Accelerate Drug Discovery Needs a Reality Check, Nature (Oct. 10, 2023), https://www.nature.com/articles/d41586-023-03172-6.

[55] Duxin Sun, Wei Gao, Hongxiang Hu, & Simon Zhou, Why 90% of Clinical Drug Development Fails and How to Improve It?, 12 Acta Pharm. Sin. B 3049 (Jul. 2022); see also, Krugman & Wells, supra note 51 at 264 (“there is a huge failure rate along the way, as only one in five drugs tested on humans ever makes it to market.”)

[56] Sun et al., supra note 55.

[57] Research and Development in the Pharmaceutical Industry, Congressional Budget Office (Apr. 2021), https://www.cbo.gov/publication/57126 (“For established drug companies, current revenue streams from existing products also provide an important source of financing for their R&D projects.”)

[58] DiMasi, Grabowski, & Hansen, supra n. 24.

[59] Id.; see also, CBO, supra note 57 (“average R&D expenditures per new drug range from less than $1 billion to more than $2 billion”).

[60] See The Medicaid Prescription Drug Rebate Program, established by the Omnibus Budget Reconciliation Act (OBRA) of 1990, 42 U.S.C. 1396r-8 (c)(1)(C). This program requires drug manufacturers to provide rebates for medications dispensed to Medicaid patients. The amount of rebate is determined by a formula that takes into account the average manufacturer price (AMP) and the best price (or lowest price) offered to any other buyer; see also Ramsey Baghdadi, Medicaid Best Price, Health Affairs (Aug. 10, 2017), https://www.healthaffairs.org/do/10.1377/hpb20171008.000173 (“Program participation by drug manufacturers is essentially mandatory; companies declining to participate are excluded from all federal programs, including Medicare.”).

[61] The 340B Drug Pricing Program, established by the Veterans Health Care Act of 1992, requires drug manufacturers to provide outpatient drugs to eligible healthcare organizations and covered entities at significantly reduced prices. 42 U.S.C. § 256b (1993).

[62] Under the Affordable Care Act, a significant provision was introduced that directly affects the Medicare Part D coverage gap, commonly known as the “donut hole.” See 42 U.S.C. § 1395w-114a (2018). This provision mandates pharmaceutical manufacturers to offer a 50% discount on drugs for beneficiaries during this coverage gap. Id.

[63] See, e.g., Mark Duggan & Fiona M. Scott Morton, The Distortionary Effects of Government Procurement: Evidence from Medicaid Prescription Drug Purchasing (Nat’l Bureau of Econ. Res. Working Paper w10930, Feb. 2000), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=622874 (demonstrating that Medicaid pricing pressure on pharmaceuticals leads to downstream distortions in the price of pharmaceuticals purchased outside of the Medicaid program).

[64] Id.

[65] See, e.g., Sun et al., supra note 55. (discussing the fact that 90% of clinical trials fail, which means that the 10% of successful candidates effectively fund the experiments with the other 90%). As the authors note: Drug discovery and development is a long, costly, and high-risk process that takes over 10–15 years with an average cost of over $1–2 billion for each new drug to be approved for clinical use. For any pharmaceutical company or academic institution, it is a big achievement to advance a drug candidate to phase I clinical trial after drug candidates are rigorously optimized at preclinical stage. However, nine out of ten drug candidates after they have entered clinical studies would fail during phase I, II, III clinical trials and drug approval. It is also worth noting that the 90% failure rate is for the drug candidates that are already advanced to phase I clinical trial, which does not include the drug candidates in the preclinical stages. If drug candidates in the preclinical stage are also counted, the failure rate of drug discovery/development is even higher than 90%.

[66] John LaMattina, Pharma R&D Investments Moderating, But Still High, Forbes (Jun. 12, 2018), https://www.forbes.com/sites/johnlamattina/2018/06/12/pharma-rd-investments-moderating-but-still-high (Noting that R&D investment has typically been at 15% for the pharmaceutical industry).

[67] See Ekaterina Galkina Cleary, Matthew J. Jackson, Edward W. Zhou, & Fred D. Ledley, Comparison of Research Spending on New Drug Approvals by the National Institutes of Health vs the Pharmaceutical Industry, 2010-2019, 4(4) JAMA Health Forum (2023), https://www.ncbi.nlm.nih.gov/pmc/articles/PMC10148199. (“Funding from the NIH was contributed to 354 of 356 drugs (99.4%) approved from 2010 to 2019 totaling $187 billion, with a mean (SD) $1344.6 ($1433.1) million per target for basic research on drug targets and $51.8 ($96.8) million per drug for applied research on products.”)

[68] FDA, Step 3: Clinical Research (Jan. 4, 2018), https://www.fda.gov/patients/drug-development-process/step-3-clinical-research.

[69] Id.

[70] See, e.g., What’s Driving the Improvement in U.S. Cancer Survival Rates?, City of Hope (Jan. 26, 2023), https://www.cancercenter.com/community/blog/2023/01/cancer-survival-rates-are-improving Cancer death rates are down 33% since 1991. This is, in large part, due to the development of increasingly effective means of treating cancer and improving survivability odds.

[71] See supra notes 5-8 and accompanying text.

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