Licenciamento em termos FRAND dos dois lados do Atlântico: uma avaliação comparativa da jurisprudência dos EUA e do Reino Unido sobre disputas globais na indústria de telecomunicações

[An Engllsh-language version of this issue brief is available here.]

I. Introdução

A disseminação de tecnologias de telecomunicação ao redor do globo, notadamente a tecnologia 5G, ampliou a interconectividade entre redes, fronteiras e fornecedores de produtos e serviços de alta tecnologia. Sua confiabilidade e velocidade aprimoram a banda larga móvel e avançam aplicações envolvendo a Internet das Coisas (IoT), automação de processos robóticos, inteligência artificial, veículos autônomos, entre outros. Tais aplicações catalisam ganhos econômicos em diversas indústrias, estimados em cerca de USD 13,2 trilhões até o presente ano de 2025[1].

Tendo em vista seu valor econômico, um número crescente de litígios judiciais tem ocorrido em várias jurisdições envolvendo Patentes Essenciais para Padrões (SEPs), voltadas a padrões técnicos (como o 5G) no setor de telecomunicações, e seu licenciamento em termos FRAND (Justos, Razoáveis e Não Discriminatórios).

As organizações de padronização (SSOs) em geral exigem que seus membros, representantes de indústrias de determinados setores, divulguem quaisquer patentes que possuam e que possam ser consideradas essenciais para um determinado padrão – as chamadas patentes essenciais para padrões (SEPs). Em troca da ampla adoção dessas patentes, o detentor da SEP frequentemente assume o compromisso, perante uma SSO, de licenciá-la em termos FRAND.

Embora tais termos de licenciamento idealmente sejam estabelecidos através de negociações amigáveis entre detentores de SEPs e implementadores, eles frequentemente manifestam entendimentos divergentes em relação à determinação da base e metodologia para o cálculo de royalties, valoração do portfólio de patentes, duração da licença, escopo geográfico, interpretação de requisitos de não discriminação e reciprocidade em licenciamento cruzado, para citar somente alguns temas. Disputas sobre FRAND sobre estas e outras questões tornaram-se globais, com as partes promovendo fórum shopping em várias jurisdições simultaneamente de modo a buscar decisões que lhes sejam mais favoráveis, de acordo com o posicionamento dos diferentes tribunais[2].

Uma área importante de desacordo entre detentores de SEPs e implementadores é o escopo geográfico do licenciamento FRAND. Enquanto detentores de SEPs tipicamente pressionam por licenças globais de portfólio que abranjam todas as suas famílias de patentes em âmbito global, implementadores frequentemente preferem licenças territorialmente limitadas, que incluam apenas os países específicos onde eles enfrentam litígios. Esta tensão tornou-se uma questão central em disputas FRAND de escopo global, embora recentemente as decisões judiciais e as próprias posições das partes reflitam cada vez mais que uma licença global é FRAND. Outro grande tema que gera controvérsia refere-se à interação entre a natureza contratual dos compromissos FRAND e a aplicação do direito da concorrência. Enquanto os compromissos FRAND são considerados como obrigações contratuais assumidas pelos detentores de SEPs em relação às SSOs, esses compromissos também servem ao propósito mais amplo de prevenir potenciais efeitos anticompetitivos que possam surgir de qualquer poder de mercado obtido por meio da padronização. Esta natureza dual levanta questões complexas sobre se violações dos compromissos FRAND devem ser abordadas principalmente através de remédios do direito contratual ou se o direito da concorrência deve desempenhar um papel mais proeminente na regulação das práticas de licenciamento FRAND, particularmente quando detentores de SEPs possuem poder de mercado significativo após suas tecnologias se tornarem parte dos padrões da indústria.

Este artigo apresenta uma análise comparativa sobre como duas das jurisdições relevantes na jurisprudência FRAND—o Reino Unido (UK) e os Estados Unidos (EUA)[3]—têm abordado estas questões-chave que surgem em disputas complexas. O artigo se concentra nos principais aspectos mencionados acima, a saber, o licenciamento FRAND em âmbito global e a natureza dos compromissos FRAND, revelando nuances pelos tribunais em cada jurisdição na interpretação dessas perspectivas, apesar delas serem por ambos compartilhadas de forma similar até certo ponto.

Neste sentido, ambas as jurisdições reconhecem a eficiência do licenciamento de portfólio mundial como prática padrão da indústria, com tribunais em ambos os países reconhecendo que licenças globais podem estar em conformidade com FRAND, e que o licenciamento negociado separadamente em cada país seria ineficiente. Enquanto os tribunais do Reino Unido, seguindo a sentença histórica Unwired Planet v. Huawei, estabeleceram sua própria competência para, em certas circunstâncias, determinar taxas FRAND globais sem a necessidade de consentimento específico das partes envolvidas em uma disputa, os tribunais dos EUA também estabelecem taxas FRAND em nível mundial, mas tipicamente em contextos onde as partes concordaram com a adjudicação judicial de tais termos.

O artigo avaliará, ainda, como a implementação de compromissos FRAND na forma de obrigação contratual entre detentores de SEPs e as SSOs é efetuada por cada uma dessas jurisdições, destacando as diferenças de graduação entre os tribunais no Reino Unido e dos EUA no entendimento sobre a análise de termos FRAND à luz do direito da concorrência. Enquanto ambas as jurisdições predominantemente conceitualizam compromissos FRAND como possuindo natureza contratual, os tribunais do Reino Unido mantiveram um papel limitado, embora presente, do direito da concorrência sob o Artigo 102 TFEU para a análise de compromissos FRAND. Por sua vez, os tribunais dos EUA estabeleceram limites mais restritivos para a aplicação do direito da concorrência, enfatizando que disputas sobre termos FRAND devem ser resolvidas através dos direitos contratual e de patentes, afastando-se assim de remédios junto ao direito antitruste.

Ao examinar os entendimentos adotados por essas relevantes jurisdições para licenciamento FRAND em âmbito global e a natureza contratual dos compromissos FRAND, este artigo visa identificar práticas emergentes e potenciais áreas de convergência que poderiam proporcionar maior grau de certeza, tanto para detentores de SEPs quanto para implementadores, em um ecossistema de telecomunicações cada vez mais interconectado a nível global. À medida que o valor econômico das tecnologias padronizadas continua a crescer e as disputas sobre seu licenciamento prosseguem, compreender essas diferentes perspectivas pode contribuir para informar possíveis alternativas para a resolução de disputas FRAND de forma mais eficaz.

II. Licenciamento FRAND de portfolios globais de SEPs

Uma área importante de desacordo entre detentores de SEPs e implementadores, no âmbito de disputas FRAND globais, é o escopo geográfico do licenciamento FRAND. Enquanto os detentores de SEPs tipicamente são a favor licenças globais de seus portfólios, os implementadores frequentemente preferem licenças territorialmente limitadas, relativas apenas aos países específicos aonde enfrentam litígios. Esta tensão tornou-se uma questão central em disputas FRAND e leva a batalhas legais globais. Estas disputas envolvem as mesmas partes em litígios paralelos na Europa, Ásia e América do Norte[4], e têm sido objeto de propostas sobre como abordar a questão, seja por parte da doutrina[5] [6], dos formuladores de políticas públicas [7] ou dos tribunais.

Os tribunais têm se mostrado os principais árbitros na resolução de disputas complexas entre detentores de SEPs e implementadores em relação aos termos FRAND. O caso emblemático Unwired Planet v. Huawei[8][9] influenciou decisões subsequentes globalmente, impactando as avaliações de outros tribunais sobre o tema no Reino Unido, EUA, Europa continental e China, para citar alguns.

Em relação aos fatos, no momento em que a Unwired Planet ofereceu para licenciar seu portfólio global de SEPs para a Huawei, esta insistiu em licenciar apenas as patentes da Unwired no Reino Unido. O Juiz Birss do Tribunal Superior do Reino Unido, reconhecendo que ambas as partes operavam como multinacionais, sustentou que a prática da indústria na “vasta maioria” dos casos favorecia licenças de âmbito mundial. Ele rejeitou o argumento de licenciamento segmentado por país defendido pela Huawei, considerando-o impraticável e ineficiente, citando não apenas a mobilidade transfronteiriça dos dispositivos de telecomunicações, mas também as ineficiências transacionais significativas em se negociar múltiplas licenças e manter “muitos cálculos e pagamentos de royalties diferentes”. Mais ainda, no contexto da Unwired Planet ter reivindicado suas patentes essenciais padrão (SEPs) britânicas contra a Huawei no Tribunal Superior do Reino Unido, o Juiz Birss afirmou a autoridade do tribunal para determinar taxas FRAND globais apesar da natureza territorial dos direitos de patente—um entendimento que foi mantido tanto pelo Tribunal de Apelação quanto pela Suprema Corte do Reino Unido neste caso.

Esta sentença estabeleceu vários princípios fundamentais posteriormente adotados por outros tribunais. Inicialmente, que FRAND representa uma gama de possibilidades a serem analisadas caso a caso, e não um único conjunto de termos pré-definidos e rígidos. Este princípio reconhece a complexidade das negociações de licenciamento FRAND e à necessidade de se permitir flexibilidade em sua análise, reconhecendo que uma variedade de combinações distintas podem potencialmente satisfazer os requisitos FRAND. Em segundo lugar, que a obrigação de não-discriminação não exige a negociação de termos idênticos para todos os licenciados, mas sim impede desvantagens competitivas entre licenciados em situações semelhantes. Como tal, o Juiz Birss preferiu adotar uma perspectiva flexível, em que diferentes termos FRAND poderiam ser ofertados a diferentes licenciados em potencial com base em fatores tais como tamanho, posição no mercado ou volume de produtos e serviços comercializados por cada um deles. Terceiro, a sentença estabeleceu que os tribunais podem definir taxas específicas de royalties FRAND em caráter global em tal situação. Finalmente, determinou que uma medida cautelar no Reino Unido por parte dos detentores de SEPs, visando coibir o uso de suas SEPs ainda não licenciadas por terceiros, é apropriada quando os implementadores recusam os termos FRAND determinados pelo tribunal. Assim, é fornecido aos detentores de SEPs um mecanismo de implementação de seus direitos, equilibrando-se o direito do implementador de acesso a tecnologias padronizadas com o direito do detentor da patente de receber uma compensação justa, abordando-se assim o problema do “hold-out”.

Após Unwired Planet v. Huawei, vários casos relevantes julgados no Reino Unido continuaram a desenvolver a jurisprudência sobre licenciamento FRAND em âmbito global. Assim, em Optis v. Apple[10], o Tribunal Superior do Reino Unido reforçou o precedente de estabelecer taxas FRAND globais, determinando que a Apple teria que optar ou por aceitar uma licença global para o portfólio de SEPs da Optis ou enfrentar o risco de concessão de medida cautelar a detentores de SEPs, visando coibir o uso de suas SEPs ainda não licenciadas no Reino Unido[11] – o que em prática implicaria na exclusão dos produtos da Apple do mercado do Reino Unido por violação das patentes da Optis no Reino Unido. O tribunal utilizou metodologias tanto “top-down” quanto de licenças comparáveis para estabelecer uma taxa FRAND em âmbito global, exigindo que a Apple pagasse US$5,13 milhões à Optis anualmente[12].

Em InterDigital v. Lenovo[13], em que a InterDigital processou a Lenovo por violação de patentes no Reino Unido, o tribunal do Reino Unido consolidou ainda mais sua posição como fórum para determinações FRAND globais, ao estabelecer uma taxa FRAND em âmbito global para o portfólio de SEPs de 3G, 4G e 5G da InterDigital. O tribunal empregou uma perspectiva “top-down” e rejeitou os argumentos da Lenovo em prol de um licenciamento limitado territorialmente a cada país.

Estes casos demonstram a inclinação e a constância com que os tribunais do Reino Unido estabelecem termos FRAND em âmbito global em tais situações, as metodologias por eles empregadas para a determinação de taxas FRAND e a perspectiva por eles utilizada para equilibrar os interesses dos detentores de SEPs e implementadores, sedimentando, assim, os princípios estabelecidos em Unwired Planet.

Da mesma forma, a Comissão Europeia, em sua “Comunicação de 2017 esclarecendo o entendimento da União Europeia (UE) para SEPs”, também incorporou a perspectiva de eficiência de Unwired Planet, apoiando o licenciamento FRAND em âmbito global. A Comissão “considera que os mesmos princípios de eficiência apoiam a prática de licenciamento de portfólio de SEP para produtos com circulação global. Como observado em uma decisão recente, um enfoque de licenciamento por país pode não ser eficiente e pode não estar alinhada com uma prática comercial reconhecida no setor”.[14]

Do outro lado do Atlântico, a jurisprudência dos tribunais norte-americanos sobre licenciamento FRAND em âmbito global revela tanto pontos de convergência quanto de divergência com suas contrapartes do Reino Unido. No caso Microsoft v. Motorola[15], anterior ao julgado britânico Unwired Planet, os tribunais dos EUA demonstraram disposição para afirmar sua jurisdição sobre disputas FRAND de âmbito global, embora com um enfoque mais restrito para a determinação de taxas globais do que aquele observado em Unwired Planet. O litígio se originou com o processo da Microsoft contra a Motorola no Distrito de Washington, no qual a primeira alegou violação de compromissos FRAND relacionados a SEPs de codificação de vídeo e Wi-Fi pertencentes à Motorola, argumentando que esta exigia royalties excessivamente altos por suas SEPs. Em sua sentença, o Juiz Robart estabeleceu que compromissos FRAND constituem contratos executáveis entre os detentores de SEPs e as SSOs, sendo os implementadores terceiros beneficiários. O tribunal estabeleceu, ainda, uma metodologia para calcular royalties FRAND apropriados para o portfólio global de SEPs de propriedade da Motorola.

Tanto Microsoft v. Motorola quanto Unwired Planet v. Huawei abordaram a determinação de taxas de royalties FRAND para SEPs, estabelecendo metodologias e critérios judiciais para calcular taxas apropriadas. No entanto, o entendimento em Microsoft v. Motorola diferiu de Unwired Planet v. Huawei em aspectos específicos: enquanto os tribunais dos EUA também afirmam jurisdição sobre disputas FRAND globais e reconhecem a natureza global dessas tecnologias, eles tipicamente se abstêm de impor termos de licenciamento mundial em caráter obrigatório. Ao invés disso, eles determinam taxas FRAND apropriadas como parte de remédios para violação de contrato, com essas taxas servindo como estrutura para a negociação de licenças globais entre as partes, sem que sejam impostas pelo tribunal. Este entendimento, subsequentemente afirmado pelo Nono Circuito[16], reflete a preferência dos tribunais norte-americanos pelo estabelecimento de princípios para orientar as partes em direção a soluções negociadas sobre termos FRAND globais, evitando impor a elas termos diretamente vinculantes. Uma possível explicação para essa diferença é que, ao contrário do caso Unwired Planet v Huawei, a Motorola não procurou impor suas patentes nos EUA contra a Microsoft no caso Microsoft v. Motorola e, portanto, a Microsoft não teve a opção de aderir aos termos globais da FRAND definidos pelo tribunal ou enfrentar uma liminar nos EUA. Em comparação, em cada um dos casos do Reino Unido analisados acima, o implementador teve que escolher entre uma liminar no Reino Unido ou aceitar os termos globais da FRAND estabelecidos pelo tribunal, já que os detentores de SEP tentaram impor suas patentes do Reino Unido nos tribunais do Reino Unido

Optando por acompanhar, de maneira ainda mais próxima, o entendimento dos tribunais em Unwired Planet, em TCL v. Ericsson[17] o Juiz Selna do Distrito Central da Califórnia adotou uma sentença similar à do Juiz Birss do Reino Unido, estabelecendo taxas FRAND específicas (incidindo estas sobre o portfólio de SEPs da Ericsson em âmbito global) em caráter obrigatório ao potencial licenciado (TCL). No entanto, o Circuito Federal posteriormente anulou esta sentença por motivos processuais[18], destacando uma diferença fundamental presente no sistema judicial norte-americano: o direito a julgamento por júri (ao invés de juízo monocrático) para a determinação de taxas FRAND globais.

Após esta sentença, os tribunais dos EUA retornaram em grande parte ao entendimento do tribunal em Microsoft v. Motorola. Casos recentes como HTC v. Ericsson[19] e Lenovo v. InterDigital[20] dedicaram-se a estabelecer princípios de conformidade com termos FRAND em âmbito global e a interpretar obrigações contratuais, ao invés de tentar estabelecer taxas globais específicas.

Quando os tribunais dos EUA abordam o licenciamento global de portfólios, eles tipicamente o fazem através da ótica da interpretação contratual e indenizações por quebra de contrato, em vez de impor termos de licenciamento mundial obrigatórios às partes, possivelmente pela razão explorada acima. Como resultado, a autonomia das partes nas negociações é preservada e soluções orientadas pela dinâmica de mercado são incentivadas.

III. Perspectivas contratuais relativas a compromissos FRAND adotadas pelos tribunais do Reino Unido e dos EUA

Os compromissos FRAND têm origem nas SSOs, quando seus membros votam a favor da incorporação de tecnologias patenteadas em padrões utilizados pela indústria relevante. Em troca da padronização, os titulares de SEP concordam em disponibilizar licenças para suas patentes essenciais em termos justos, razoáveis e não discriminatórios.

Como a maioria das SSOs não especifica, nem interpreta em suas políticas internas, em que consistem os compromissos FRAND em casos concretos[21], os detentores de SEPs e os implementadores enfrentam desafios durante suas negociações de licenciamento para alcançar um acordo comum, tendo em vista seus interesses econômicos opostos. No entanto, a grande maioria das negociações de licenciamento FRAND é resolvida através de acordos mútuos privados entre detentores de SEPs e implementadores.

Quando disputas FRAND chegam aos tribunais, entretanto, pode-se suscitar o debate sobre se o direito da concorrência deve intervir em disputas FRAND e em que medida, ou se essas questões devem ser deixadas exclusivamente para o direito contratual e de patentes. Encontrar o equilíbrio entre essas áreas e determinar qual delas deve ser enfatizada é crucial para garantir compensação justa pela inovação e acesso a tecnologias padronizadas.

Tanto os tribunais do Reino Unido como aqueles dos EUA têm predominantemente definido os compromissos FRAND como obrigações contratuais entre detentores de SEPs e SSOs, sendo os implementadores considerados como terceiros beneficiários[22]. Assim, os compromissos FRAND funcionam como salvaguardas contra comportamentos anticompetitivos, limitando a capacidade dos detentores de SEPs de alavancar poder de mercado decorrente de suas patentes quando as tecnologias que elas incorporam são integradas em padrões técnicos.

O Tribunal Superior do Reino Unido, em Unwired Planet v. Huawei, avaliou as preocupações concorrenciais e concluiu que o licenciamento em âmbito global oferecido pela Unwired Planet não são contrárias ao Art. 102(a) do Tratado sobre o Funcionamento da União Europeia (TFEU), que proíbe comportamento abusivo por empresas que detêm posição dominante no mercado relevante[23]. O Juiz Birss considerou que não houve violação do Artigo 102, esclarecendo que o Tribunal de Justiça da União Europeia (TJUE), na sentença Huawei v. ZTE[24], definiu uma lista de atos a serem adotados pelo detentor de SEPs que indicam conformidade com o direito concorrencial; contudo, ele considerou que o não-cumprimento estrito dessa lista não implica automaticamente em violação do direito da concorrência da UE[25]. O Tribunal rejeitou, assim, todas as alegações de violação do direito da concorrência apresentadas pela Huawei – inclusive o argumento de que a Unwired Planet não atuou em conformidade com os princípios estabelecidos na sentença de Huawei v. ZTE – afirmando que o descumprimento desses princípios por um titular de SEP não implica necessariamente na ocorrência de abuso nos termos do Art. 102 TJUE.

Na sentença final de Unwired Planet v. Huawei[26], a Suprema Corte do Reino Unido reforçou a posição do tribunal inferior no sentido de que os detentores de SEPs, ao buscarem tutela inibitória contra o uso de suas SEPs ainda não licenciadas, não violam o direito da concorrência da UE, mesmo quando se desviam da estrutura precisa estabelecida na sentença anterior pelo TJUE na disputa FRAND Huawei v. ZTE. Mais especificamente, apoiou a interpretação do Juiz Birss de que o fato de que o processo foi apresentado pela Unwired Planet antes de oferecer termos FRAND à Huawei não constituía uma violação do direito da concorrência da UE[27]. Este entendimento busca aumentar a eficiência para as partes que conduzem negociações FRAND, pois estabelece limites claros para a aplicação cautelosa do direito da concorrência, preservando a capacidade do tribunal de determinar termos FRAND quando as negociações falham e a situação exige, equilibrando assim os interesses dos detentores de SEPs e implementadores.

A ênfase contratual foi reforçada em Optis Cellular Technology LLC v. Apple Retail UK Ltd[28], onde o Tribunal Superior enfatizou que a obrigação de um implementador de aceitar uma licença FRAND surge da natureza contratual do compromisso FRAND, e não de preocupações do direito da concorrência sobre abuso de posição dominante. O tribunal afirmou que não havia nem dominância nem abuso. Ao avaliar estes, considerou a alegação do implementador como um disfarçado “ataque à liberdade de uma parte para negociar preço”[29].

Por sua vez, os tribunais dos EUA têm predominantemente tratado compromissos FRAND como obrigações puramente contratuais que, portanto, não integram a análise antitruste em casos relativos a FRAND. Isso contrasta com o entendimento dos tribunais do Reino Unido descrito acima, mesmo que estes últimos ainda apliquem uma interpretação muito restrita sobre a caracterização de dominância e abuso sob o Art. 102 TFEU em disputas FRAND. Como resultado, os tribunais dos EUA criaram um patamar ainda mais alto para que se estabeleça uma análise sobre a ótica do direito da concorrência em disputas FRAND sob sua jurisdição.

Em Microsoft v. Motorola[30], o Tribunal Distrital afirmou que os compromissos FRAND da Motorola com SSOs criaram contratos executáveis entre estas partes, sendo os implementadores, tais como a Microsoft, terceiros beneficiários dos mesmos. Em julgamento liminar, o tribunal sustentou que “Microsoft estabeleceu compromissos contratuais vinculantes com o IEEE e a ITU, comprometendo-se a licenciar suas patentes declaradas essenciais em termos e condições RAND”[31]. Posteriormente, o Tribunal Distrital concentrou-se em determinar taxas de royalties contratualmente razoáveis em vez de abordar potenciais violações antitruste[32].

A análise sob a ótica do direito contratual foi ainda reforçada em HTC Corp. v. Telefonaktiebolaget LM Ericsson[33], onde o Tribunal de Apelações do Quinto Circuito sustentou que o “compromisso FRAND está incorporado na Cláusula 6.1. da Política de IPR [Direitos de Propriedade Intelectual] da ETSI e é regido pelo direito contratual francês”[34], criando assim uma obrigação contratual para a Ericsson oferecer licenças em termos FRAND. Apesar das alegações antitruste originalmente apresentadas pela HTC contra a Ericsson, alegando que esta última se envolveu em conduta anticompetitiva ao não oferecer “royalties à HTC sob taxas razoáveis”[35], o Tribunal Distrital não aplicou diretamente as leis antitruste para resolver essas alegações. Ao invés disso, ele concluiu que as alegações antitruste da HTC estavam sujeitas a arbitragem sob acordos de licença anteriores[36].

Mais recentemente, a sentença do Tribunal de Apelações do Nono Circuito em FTC v. Qualcomm Inc.[37] reforçou ainda mais a distinção entre obrigações contratuais FRAND e responsabilidade antitruste. O Tribunal de Apelações do Nono Circuito reverteu o julgado do Tribunal Distrital que constatou a existência de violações antitruste, elevando assim o patamar para o estabelecimento de violações do direito da concorrência em contextos FRAND. O Tribunal de Apelações considerou que o mercado em que a Qualcomm operava e aquele em que se alegava que o dano havia ocorrido eram distintos. Segundo ele, o dano alegado afetaria apenas clientes da Qualcomm, que operam fora dos mercados relevantes em que a Qualcomm compete. Portanto, tal alegado dano estaria situado “além do escopo do direito antitruste”[38]. Além disso, o tribunal aconselhou “cautela sobre o uso das leis antitruste para remediar o que são essencialmente disputas contratuais entre partes privadas engajadas na busca de inovação tecnológica”[39]. Ele refutou, ainda, o entendimento do tribunal inferior a respeito de que royalties eram anticompetitivos sob a ótica do direito antitruste, argumentando que o valor justo dos portfólios de SEP deveria ser avaliado sob o direito de patentes[40], e estabeleceu que quaisquer potenciais violações de compromissos FRAND deveriam ser remediadas pelo direito de patentes e contratual[41].

IV. Conclusão

A partir da análise comparada realizada nesse artigo, é possível observar que os entendimento dos tribunais dos EUA e do Reino Unido para o licenciamento FRAND em nível global compartilham semelhanças fundamentais, tanto no que diz respeito ao seu reconhecimento da natureza global das disputas de licenciamento SEP como às ineficiências práticas do licenciamento FRAND efetuadas de país em país. Os tribunais em ambas as jurisdições reconheceram sua jurisdição para estabelecer taxas FRAND globais em determinadas circunstâncias e reconhecem compromissos FRAND como geradores de obrigações contratuais executáveis. As diferenças entre tais entendimentos são mais sutis do que usualmente retratadas: desde o caso Unwired Planet, os tribunais britânicos têm intervido de forma mais direta, calculando taxas FRAND globais para os casos específicos e forçando implementadores a aceitá-las sob o risco de medidas cautelares que impediriam o uso das patentes não licenciadas. Por sua vez, os tribunais americanos, seguindo o precedente de Microsoft v. Motorola, também reconhecem sua autoridade sobre disputas FRAND globais, mas parecem estabelecer princípios orientadores que moldam as negociações, em vez de impor termos obrigatórios nas circunstâncias desses casos. A divergência entre as abordagens das duas jurisdições reside principalmente nos mecanismos específicos através dos quais os tribunais exercem influência sobre as negociações de licenciamento—com tribunais do Reino Unido favorecendo a definição direta de taxas e execução por meio de tutela inibitória, enquanto os tribunais dos EUA preferem estabelecer os critérios, metodologias analíticas e princípios orientadores para avaliar taxas justas de royalties que as partes podem aplicar em suas negociações—e não em seu objetivo final comum, o de facilitar o licenciamento global de tecnologias padronizadas de maneira e. Na prática, ambas as perspectivas reconhecem que, na prática, a maior parte das licenças FRAND são negociadas globalmente, com a grande maioria das disputas sendo resolvidas por acordo ao invés de sentença judicial. A divergência entre as abordagens dessas duas jurisdições está principalmente nos mecanismos específicos por meio dos quais os tribunais exercem influência sobre as negociações de licenciamento FRAND – com os tribunais do Reino Unido favorecendo a definição direta da taxa FRAND no contexto da aplicação das patentes do titular da SEP no Reino Unido, enquanto os tribunais dos EUA, nas circunstâncias dos casos que surgiram, estabeleceram os critérios, as metodologias analíticas e os princípios orientadores para avaliar as taxas de royalties FRAND que as partes podem aplicar em suas negociações – em vez de seu objetivo final compartilhado por ambas jurisdições, qual seja, o de facilitar o licenciamento global eficiente de tecnologias padronizadas

A análise dos entendimentos judiciais relativos a compromissos FRAND revela, ainda, uma clara preferência por estruturas de direito contratual e de patentes vis-à-vis intervenções do direito da concorrência tanto pelos tribunais do Reino Unido como dos EUA, embora com diferentes níveis de ênfase. Os tribunais do Reino Unido, embora reconhecendo a potencial relevância do direito da concorrência em disputas FRAND, estabeleceram um limiar alto para encontrar dominância ou abuso sob o Artigo 102 TFEU, como evidenciado nos litígios Unwired Planet v. Huawei e Optis v. Apple. Os tribunais dos EUA foram além, criando um padrão ainda mais rigoroso para aplicação do direito da concorrência em contextos FRAND, como demonstrado em FTC v. Qualcomm, onde o Nono Circuito explicitamente advertiu contra o uso do direito antitruste para resolver o que considera como disputas fundamentalmente contratuais.

Esta convergência judicial rumo à interpretação contratual dos compromissos FRAND evidencia uma abordagem pragmática ao delicado equilíbrio almejado entre dois imperativos: fomentar a inovação tecnológica mediante remuneração justa aos detentores de SEPs e democratizar o acesso dos implementadores às tecnologias padronizadas. Ao enquadrar os compromissos da FRAND como obrigações contratuais perante SSOs e implementadores como terceiros beneficiários, os tribunais do Reino Unido e dos E.U.A. estabeleceram um enquadramento jurídico focado na primazia da ordem privada nos mercados de tecnologia, ao mesmo tempo em que mantêm a supervisão judicial quando as negociações fracassam.

[1] IHS Markit, The 5G Economy: How 5G will contribute to the global economy, 2019. Disponível em https://www.qualcomm.com/content/dam/qcomm-martech/dm-assets/documents/the_ihs_5g_economy_-_2019.pdf.

[2] Contreras, Jorge L., The Global Standards Wars: Patent and Competition Disputes in North America, Europe and Asia (January 20, 2018). Keio University Journal of Law, Politics and Sociology (Mar. 2018). Disponível em: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3106090.

[3] Outras jurisdições relevantes a que as partes recorrem para resolver disputas FRAND são Alemanha, China, Japão, França, Países Baixos e Índia. Espera-se que o Tribunal Unificado de Patentes (UPC), que se tornou operacional em 1º de junho de 2023 na União Européia, adquira relevância e se torne uma referência autoritária adicional em disputas FRAND ao longo do tempo.

[4] Supra nota 2.

[5] Exemplos de pesquisa jurídica afirmando que a maioria das disputas FRAND tem uma dimensão global e idealmente deveria resultar em licenciamento em nível global incluem, entre outros, Jorge L. Contreras, Thomas Cottier et. al., The Effect of FRAND Commitments on Patent Remedies ((Univ. of Utah Coll. of Law, Research Paper No. 286, 2018), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3248726, p. 184: “A condução contínua de múltiplos processos paralelos não é eficiente em termos de custo ou tempo, apesar do fato de que muitas, se não todas, as disputas FRAND são globais (e idealmente se materializariam em transações de licenciamento FRAND globais”; e Garry A. Gabison, Worldwide FRAND Licensing Standard, 8 Am. U. Bus. L. Rev. 217 (2019), https://digitalcommons.wcl.american.edu/cgi/viewcontent.cgi?article=1118&context=aublr.

[6] Contreras, Jorge L., Global Rate Setting: A Solution for Standards-Essential Patents?, 94 Wash.L. Rev. 701 (2019). Disponível em: https://digitalcommons.law.uw.edu/wlr/vol94/iss2/5.

[7] A Comissão Europeia propôs um regulamento sobre SEPs COM((2023)232, (disponível em: https://single-market-economy.ec.europa.eu/publications/com2023232-proposal-regulation-standard-essential-patents_en), com o objetivo de aumentar a transparência, reduzir a assimetria de informações e facilitar acordos sobre licenças FRAND. A proposta suscitou preocupações das partes interessadas e foi retirada pela Comissão em fevereiro de 2025, “devido à ausência de acordo previsível”. Disponível em: https://ec.europa.eu/newsroom/eismea/items/871191/en.

[8] 2017] EWHC 711 (Pat). Disponível em: https://www.judiciary.uk/wp-content/uploads/2017/04/unwired-planet-v-huawei-20170405.pdf.

[9] Resumos de decisões judiciais sobre disputas FRAND emitidas pelos tribunais do Reino Unido, o Tribunal de Justiça da União Europeia e os tribunais nacionais de vários estados-membros da UE estão disponíveis em https://caselaw.4ipcouncil.com. Uma lista com casos relevantes do Reino Unido sobre SEPs com hiperlinks está disponível no site do governo do Reino Unido, em https://www.gov.uk/guidance/uk-seps-case-law.

[10] Optis Cellular Technology LLC & Ors v. Apple Retail UK Ltd & Ors, [2021] EWHC 2564 (Pat). Disponível em: https://www.bailii.org/cgi-bin/format.cgi?doc=/ew/cases/EWHC/Patents/2021/2564.html&query=(Optis)+AND+(Cellular)+AND+(Technology).

[11] Id., par. 336-341.

[12] Optis Cellular Technology LLC & Ors v. Apple Retail UK Ltd & Ors, [2023] EWHC 1095 (Ch), par. 497. Disponível em: https://www.judiciary.uk/wp-content/uploads/2024/02/Optis-Cellular-Technology-v-Apple-Retail-UK-10.05.23-Redacted-version.pdf.

[13] InterDigital Technology Corporation & Ors v. Lenovo Group Ltd & Ors, [2023] EWHC 539 (Pat). Disponível em: https://www.wipo.int/wipolex/en/judgments/details/2187.

[14] COMUNICAÇÃO DA COMISSÃO AO PARLAMENTO EUROPEU, AO CONSELHO E AO COMITÊ ECONÔMICO E SOCIAL EUROPEU Estabelecendo o entendimento da UE para Patentes Essenciais para Padrões, COM/2017/0712 final, p. 7.

[15] Microsoft Corp. v. Motorola, Inc., No. C10-1823JLR (W.D. Wash. 2013). Disponível em: https://www.wipo.int/wipolex/en/judgments/details/2218.

[16] Microsoft Corp. v. Motorola Inc., 696 F.3d 872 (9th Cir. 2012). Disponível em: https://www.wipo.int/wipolex/en/judgments/details/2224.

[17]  TCL Communication Technology Holdings, Ltd. v. Telefonaktiebolaget LM Ericsson, consolidated cases Nos. 8:14-CV-00341 JVS-DFMx and 2:15-CV-02370 JVS-DFMx (C.D. Cal. 2018). Disponível em: https://www.wipo.int/wipolex/en/text/591444.

[18] TCL Communication Technology Holdings, Ltd. v. Telefonaktiebolaget LM Ericsson, 943 F.3d 1360 (Fed. Cir. 2019). Disponível em: https://www.wipo.int/wipolex/en/text/591372.

[19] HTC Corp. v. Telefonaktiebolaget LM Ericsson, 18-cv-00243, Dkt. No. 376 (E.D. Tex. Jan. 7, 2019). Disponível em: https://ipwatchdog.com/wp-content/uploads/2024/02/HTC-v.-Ericsson-Memorandum-Opinion-and-Final-Judgment-3.pdf.

[20] InterDigital Technology Corporation & Ors v. Lenovo Group Ltd & Ors, [2023] EWHC 539 (Pat). Disponível em: https://www.wipo.int/wipolex/en/judgments/details/2187.

[21] Thumm, N., editor(s), Pentheroudakis, C. and Baron, J., Licensing Terms of Standard Essential Patents: A Comprehensive Analysis of Cases, Joint Research Center, Publications Office of the European Union, Luxembourg, 2017, p. 166. Disponível em: https://publications.jrc.ec.europa.eu/repository/handle/JRC104068.

[22] Esta visão também foi apoiada por pesquisa especializada. Veja Lemley, Mark A., Intellectual Property Rights and Standard-Setting Organizations (April 1, 2002). 90 California Law Review 1889 (2002), UC Berkeley Public Law Research Paper No. 84, Disponível em: https://ssrn.com/abstract=310122 ou http://dx.doi.org/10.2139/ssrn.310122. Veja também Teece, David J., Restoring and Revitalizing Technology Markets for Mobile Wireless: Geopolitical Dimensions of Patented Technology Embedded in Standards. In: 5G and Beyond: Intellectual Property and Competition Policy in the Internet of Things, Cambridge University Press; 2023:1-50. Disponível em: https://www.cambridge.org/core/books/5g-and-beyond/intellectual-property-and-competition-policy-in-global-wireless-markets/D3B7792D751E5AE28B4F565317F9A6F3#FN-fn-29.

[23] Juiz Birss concluiu que “a worldwide license would not be contrary to competition law. Willing and reasonable parties would agree on a worldwide license. It is the FRAND license for a portfolio like Unwired Planet’s and an implementer like Huawei. Therefore, Unwired Planet are entitled to insist on it. It follows that an insistence by Huawei on a license with a UK only scope is not FRAND”. [2017] EWHC 711 (Pat). Disponível em: https://www.judiciary.uk/wp-content/uploads/2017/04/unwired-planet-v-huawei-20170405.pdf, par. 572.

[24] A sentença do Tribunal de Justiça Europeu em Huawei v. ZTE (Caso C-170/13, 2015) estabeleceu diretrizes para avaliar potenciais abusos de poder de mercado sob o Artigo 102 TFEU quando proprietários de SEPs buscam medidas cautelares. A sentença delineou uma perspectiva do ponto de vista processual, exigindo que os detentores de SEPs i) notifiquem o potencial licenciado sobre a infração específica da patente; ii) forneçam uma proposta concreta de licenciamento FRAND uma vez que o implementador demonstre interesse; e iii) deem ao implementador tempo razoável para responder significativamente. O TJUE posicionou essas medidas não como requisitos obrigatórios ou rígidos, mas sim como medidas protetivas que, uma vez adotadas, protegem os detentores de SEPs da responsabilidade do direito da concorrência. O Tribunal buscou equilibrar interesses concorrentes—protegendo a propriedade intelectual e o acesso aos tribunais de um lado, enquanto previne comportamento anticompetitivo do outro. Disponível em: https://curia.europa.eu/juris/liste.jsf?num=C-170%2F13.

[25] Supra nota 19.

[26] Unwired Planet International Ltd and another (Respondents) v Huawei Technologies (UK) Co Ltd and another (Appellants), [2020] UKSC 37. Disponível em: https://www.supremecourt.uk/cases/uksc-2018-0214.

[27] Id., par. 146.

[28] [2021] EWHC 2564 (Pat). Disponível em: https://www.judiciary.uk/wp-content/uploads/2024/02/Optis-Cellular-Technology-v-Apple-Retail-UK-10.05.23-Redacted-version.pdf.

[29] Id., par. 385.

[30] Microsoft Corp. v. Motorola, Inc., 854 F. Supp. 2d 993 (W.D. Wash. 2012). Disponível em: https://www.wipo.int/wipolex/en/text/591394.

[31] Id., pg. 17.

[32] Microsoft Corp. v. Motorola, Inc., No. C10-1823JLR (W.D. Wash. 2013). Disponível em: https://www.wipo.int/wipolex/en/text/591387. Veja também Maldonado, Kassandra, Breaching RAND and Reaching for Reasonable: Microsoft v. Motorola and Standard-Essential Patent Litigation, Berkeley Technology Law Journal 29 (2014): 4. Disponível em: https://lawcat.berkeley.edu/record/1126231?ln=en&v=pdf.

[33] HTC Corp. v. Telefonaktiebolaget LM Ericsson, 12 F.4th 476 (5th Cir. 2021). Disponível em: https://www.wipo.int/wipolex/en/judgments/details/2199.

[34] Id., p. 12.

[35] HTC Corp. v. Telefonaktiebolaget LM Ericsson, 18-cv-00243, Dkt. No. 376 (E.D. Tex. Jan. 7, 2019), p. 2. Disponível em: https://ipwatchdog.com/wp-content/uploads/2024/02/HTC-v.-Ericsson-Memorandum-Opinion-and-Final-Judgment-3.pdf.

[36] Id.

[37] Federal Trade Commission v. Qualcomm Inc., 969 F.3d 974 (9th Cir. 2020). Disponível em: https://cdn.ca9.uscourts.gov/datastore/opinions/2020/08/11/19-16122.pdf.

[38] Id., pp. 30-31.

[39] Id., p. 39.

[40] Id., p. 44.

[41] Id., p. 56.

[A Portuguese-language version of this issue brief is available here.]

I. Introduction

The global dissemination of telecommunication technologies, notably 5G, has enhanced interconnectivity across networks, borders, and suppliers of high-tech products and services. The reliability and speed of these advanced technologies have served to enhance mobile broadband and improve applications used in the Internet of Things (IoT), robotic automation, artificial intelligence (AI), and autonomous vehicles, among others. Across many industries, they have yielded economic gains that are estimated to reach US$13.2 trillion by 2025[1].

Given the telecommunications sector’s economic value, a growing number of legal disputes across various jurisdictions have centred on standard-essential patents (SEPs) for telecom technologies, and their licensing on fair, reasonable and non-discriminatory (FRAND) terms. Standard-setting organizations (SSOs) typically require members to disclose their SEPs—that is, patents deemed essential for a given technical standard. In exchange for the broad adoption of those patents, the SEP holder will often commit to the SSO to license it on FRAND terms.

While such licensing terms would ideally be set through amicable negotiations between SEP holders and implementers, the parties may hold diverging views on such issues as the base determination, methodologies to calculate royalties, patent portfolio valuation, license duration, geographical scope, interpretation of non-discrimination requirements, and reciprocity in cross-licensing. FRAND disputes have also gone global, with parties engaged in forum shopping to find jurisdictions whose approach would be more favourable to them[2].

One major source of disagreement between SEP holders and implementers concerns the geographic scope of FRAND licensing. While SEP holders typically push for global portfolio licenses to cover their entire patent families worldwide, implementers often prefer territorially limited licenses covering only the specific countries where they face litigation. This tension has been a central issue in FRAND disputes worldwide, although recent court decisions and the parties’ own positions increasingly reflect that global licenses are FRAND-compliant.

Another significant point of contention is the interplay between the contractual nature of FRAND commitments and the application of competition law. While FRAND commitments are considered contractual obligations undertaken by SEP holders toward SSOs, these commitments also serve the broader purpose of preventing potential anticompetitive effects that might arise from any market power gained through standardization. This dual nature raises complex questions about whether breaches of FRAND commitments should be addressed primarily through contract-law remedies, or whether competition law should play a more prominent role in regulating FRAND-licensing practices—particularly when SEP holders gain significant market power after their technologies become part of industry standards.

This issue brief offers a comparative analysis of how two of the most important jurisdictions for FRAND jurisprudence—the United Kingdom (UK) and the United States (U.S.)[3]—have addressed key issues arising in these complex disputes. It focuses on global FRAND licensing and the nature of FRAND commitments, and the nuanced differences and similarities in how the courts in each jurisdiction have interpreted these doctrines.

Both jurisdictions recognize the efficiency of global portfolio licensing as standard industry practice, with courts in both countries acknowledging that global licenses can be FRAND-compliant, and that country-by-country licensing would be inefficient. The UK courts, following the landmark Unwired Planet v. Huawei decision, have in certain circumstances established clear authority to determine global FRAND rates without requiring specific consent from the parties. While U.S. courts have similarly set worldwide rates, this has typically only been done in contexts where the parties have agreed to court adjudication of global terms.

This brief will also assess how enforcement of FRAND commitments as a contractual obligation between SEP holders and the SSOs is carried out in each of these jurisdictions, highlighting the varying degrees to which courts in the UK and U.S. incorporate competition-law considerations. While both jurisdictions predominantly conceptualize FRAND commitments as contractual in nature, UK courts have maintained a narrow but present role for competition-law analysis under Article 102 TFEU. By contrast, U.S. courts have established a higher threshold for competition-law intervention, emphasizing that disputes over FRAND terms should be resolved through contract and patent-law frameworks, and shying away from antitrust remedies.

By examining the approaches adopted by these two influential jurisdictions to global FRAND licensing and the contractual nature of FRAND commitments, this piece aims to identify emerging practices and potential areas of convergence that could provide greater certainty for both SEP holders and implementers in an increasingly interconnected global telecommunications ecosystem. As the economic value of standardized technologies continues to grow and disputes over patent licensing continue, understanding these differing approaches can inform possible alternatives to resolve FRAND disputes more effectively.

II. Global FRAND Licensing

One major area of disagreement between SEP holders and implementers, which has led to numerous disputes, is the geographic scope of FRAND licensing. While SEP holders typically favour global licenses that encompass their entire patent portfolios, implementers often prefer territorially limited licenses covering only the specific countries where they face litigation. This tension has become a central issue in FRAND disputes and has led to legal battles involving the same parties concomitantly in Europe, Asia, and North America[4]. The prevalence of such disputes has sparked various proposals to address the issue, coming from academia[5] [6], policymakers[7], and the courts.

Courts have emerged as the principal arbiters to resolve the complex tensions between SEP holders and implementers regarding FRAND terms. The landmark case Unwired Planet v. Huawei[8][9] has served as precedent for subsequent decisions globally, influencing assessments by courts in the UK, U.S., continental Europe, and China, among others.

When Unwired Planet offered to license its global SEP portfolio to Huawei, the latter insisted on only licensing Unwired’s UK patents. Justice Colin Birss of the UK High Court, recognizing that both parties operated as multinationals, held that industry practice in “the vast majority” of cases favored worldwide licenses. He rejected Huawei’s country-by-country approach as impractical and inefficient, citing not only the cross-border mobility of telecommunications devices but also the substantial transactional inefficiencies of negotiating multiple licenses and maintaining “many different royalty calculations and payments”. Most significantly, in the context of Unwired Planet having asserted its UK SEPs against Huawei in the UK High Court, Justice Birss asserted the court’s authority to determine global FRAND rates, despite the territorial nature of patent rights. That understanding was subsequently upheld by both the UK Court of Appeal and Supreme Court in this case.

The Unwired Planet decision established several key principles. First, that FRAND encompasses a range of terms, rather than a single set. Acknowledging the complexity of licensing negotiations and the need for flexibility, the decision recognized that multiple different arrangements could all potentially satisfy FRAND requirements. Second, that the non-discrimination obligation does not require identical terms for all licensees but rather exists to prevent competitive disadvantages between similarly situated licensees. As such, Justice Birss favored a flexible approach where different terms could be offered to different licensees based on factors like their size, market position, or volume. Third, it established that courts could set specific, global FRAND royalty rates in this situation. Finally, it determined that injunctive relief is appropriate in the UK when implementers refuse court-determined FRAND terms. This provides an enforcement mechanism for SEP holders, balancing the implementer’s right to access standardized technology with the patent holder’s right to receive fair compensation, addressing the “hold-out” problem.

Following Unwired Planet v. Huawei, several significant UK cases have further developed the jurisprudence on global FRAND licensing. In Optis v. Apple[10], the UK High Court reinforced the precedent of setting global FRAND rates, with Justice Richard Meade determining that Apple had to accept a global license for Optis’ SEP portfolio or face a UK injunction[11]. This would mean that Apple could effectively have its products excluded from the UK market on grounds of infringing Optis’ UK patents. The court ultimately set a global FRAND rate, requiring Apple to pay US$5.13 million annually[12].

Similarly, in InterDigital v. Lenovo[13], where InterDigital sued Lenovo for patent infringement in the UK, the UK court further cemented its position as a forum for global FRAND determinations. Justice James Mellor set a global FRAND rate for InterDigital’s 3G, 4G, and 5G SEP portfolio and the court rejected Lenovo’s arguments for country-by-country licensing. These cases illustrate the UK courts’ consistent willingness to set global FRAND terms in such situations, their evolving methodologies to determine rates, and how they seek to balance the interests of SEP holders and implementers—further solidifying the principles established in Unwired Planet.

In its 2017 communication clarifying the European Union’s (EU) approach to SEPs, the European Commission also incorporated the efficiency approach of Unwired Planet in support of global FRAND licensing. Accordingly, the Commission “considers that the same principles of efficiency support the practice of SEP portfolio licensing for products with global circulation. As noted in a recent ruling, a country-by-country licensing approach may not be efficient and may not be in line with a recognised commercial practice in the sector”[14].

On the other side of the Atlantic, U.S. courts’ jurisprudence on global FRAND licensing reveals both points of convergence and divergence with their UK counterparts. Prior to Unwired Planet, the U.S. courts demonstrated in Microsoft v. Motorola[15] a willingness to assert jurisdiction over FRAND disputes, albeit with a more restrained approach to global rate-setting than seen in Unwired Planet. The case began when Microsoft sued Motorola in the U.S. District Court for the Western District of Washington, alleging breach of FRAND commitments related to video coding and Wi-Fi SEPs belonging to Motorola. Microsoft argued that Motorola demanded unreasonably high royalties for its SEPs. In his decision, Judge James Robart found that FRAND commitments constitute enforceable contracts between SEP holders and SSOs, with implementers as third-party beneficiaries. He further established a methodology to calculate appropriate FRAND royalties for the global SEP portfolio owned by Motorola.

Both Microsoft v. Motorola and Unwired Planet v. Huawei addressed the determination of FRAND royalty rates for SEPs, establishing judicial frameworks for calculating appropriate rates. But the approach in Microsoft v. Motorola also differed from Unwired Planet v. Huawei in certain key respects: while U.S. courts also assert jurisdiction over global FRAND disputes and recognize the global nature of these technologies, they typically stop short of imposing mandatory worldwide licensing terms. Instead, they determine appropriate FRAND rates as part of breach-of-contract remedies, with these rates serving as a framework for negotiation, rather than as court-mandated global licenses. This approach, subsequently affirmed by the 9^th U.S. Circuit Court of Appeals[16], reflects U.S. courts’ preference for establishing principles to guide parties toward negotiated solutions on global FRAND terms, while exercising more restraint in directly setting binding terms.

One possible explanation for this difference is that, unlike in Unwired Planet v Huawei, Motorola did not seek to enforce its U.S. patents against Microsoft in Microsoft v. Motorola. Microsoft therefore did not have the choice to either adhere to global FRAND terms set by the court or face an injunction in the U.S. By comparison, in each of the UK cases analyzed above, the implementer faced a choice of a UK injunction or accepting global FRAND terms set by the court, as the SEP holders had sought to enforce their UK patents in UK courts.

Following an approach similar to the UK courts in Unwired Planet, Judge James Selna of the U.S. District Court for the Central District of California decided in TCL v. Ericsson[17] to directly set global FRAND rates for Ericsson’s SEP portfolio. However, the U.S. Court of Appeals for the Federal Circuit later vacated Selna’s decision on procedural grounds[18], highlighting a key procedural difference in the U.S. system: the right to jury trial, rather than a single judge, to determine global FRAND rates.

Following the Federal Circuit’s decision, U.S. courts have largely returned to the more restrained Microsoft v. Motorola framework. Recent cases such as HTC v. Ericsson[19] and Lenovo v. InterDigital[20] have focused on establishing principles for global FRAND compliance and interpreting contractual obligations, rather than attempting to set specific global rates.

When U.S. courts address global portfolio licensing, they typically approach it through the lens of contractual interpretation and damages for breach, rather than imposing mandatory worldwide licensing terms to the parties. As a result, the parties’ autonomy in negotiations is preserved and market-oriented solutions are encouraged.

III. UK and US Contractual Approaches to FRAND Commitments

FRAND commitments emerge from standard-setting organizations (SSOs) when those SSOs’ members vote to incorporate patented technologies into industry standards. In exchange for standardization, SEP holders agree to make licenses to their essential patents available on fair, reasonable, and non-discriminatory terms.

Since most SSOs do not specify or interpret in their policies what comprises FRAND commitments[21], SEP holders and implementers face inherent challenges to reaching common ground in licensing negotiations, given their opposing economic interests. Nevertheless, the vast majority of FRAND licensing negotiations are resolved through private mutual agreements between SEP holders and implementers, rather than through court decisions.

When FRAND disputes do reach the courts, however, the disputes sometimes implicate the question of whether and to what extent competition law should play a role in FRAND disputes, or whether these issues should be left solely to contract and patent law. Finding the proper balance in such debates and determining which legal principles should be emphasized is crucial to ensuring both fair compensation for innovation and access to standardized technologies.

Both UK and U.S. courts have predominantly conceptualized FRAND commitments as contractual obligations between SEP holders and SSOs, with implementers considered third-party beneficiaries[22]. As such, FRAND commitments function as safeguards against anticompetitive behaviour, effectively limiting SEP holders’ ability to leverage market power arising from their patents once they are incorporated into technical standards.

The UK High Court considered competition concerns in Unwired Planet v. Huawei, concluding that Unwired Planet’s offers were not contrary to Art. 102(a) of the Treaty on the Functioning of the European Union (TFEU), which prohibits abusive behaviour by companies holding a dominant position[23]. Justice Birss held that there had been no breach of Article 102, clarifying that while the Court of Justice of the European Union (CJEU) had defined a clear safe harbour in Huawei v. ZTE[24], falling outside that harbour did not automatically entail a breach of EU competition law[25]. The Court dismissed all of Huawei’s competition-law counterclaims, including its argument that Unwired Planet was in breach of the Huawei v. ZTE principles, finding that failure by the patentee to comply with those principles does not necessarily mean an abuse has occurred.

In its final judgment in Unwired Planet v. Huawei[26], the UK Supreme Court reiterated the position that SEP holders seeking injunctive relief do not necessarily violate EU competition law when they deviate from the precise framework established in Huawei v. ZTE. More specifically, the Supreme Court agreed with Justice Birss that the fact that Unwired Planet filed the lawsuit before it had offered FRAND terms to Huawei did not constitute a violation of EU competition law[27]. This interpretation seeks to enhance efficiency for parties conducting FRAND negotiations, as it establishes clear boundaries for the application of competition law, while preserving the court’s ability to determine FRAND terms when negotiations fail.

The contractual framing was reinforced in Optis Cellular Technology LLC v. Apple Retail UK Ltd[28], where the UK High Court emphasized that an implementer’s obligation to accept a FRAND license arises from the contractual nature of the FRAND commitment, rather than from competition-law concerns about abuse of dominant position. The High Court ruled that there was neither dominance nor abuse and argued the implementer’s contention that they had been abuse of dominance was a disguised “attack on a party’s freedom to negotiate price”[29].

For their part, U.S. courts have primarily treated FRAND commitments as purely contractual obligations and hence have not integrated antitrust analysis in related cases. This contrasts with the approach of UK courts, even if the latter have applied only a very narrow interpretation of dominance and abuse under Art. 102 TFEU in FRAND disputes. As a result, U.S. courts have erected an even higher threshold for competition-law intervention in FRAND disputes under their jurisdiction.

In Microsoft v. Motorola[30], the district court affirmed that Motorola’s FRAND commitments to SSOs created an enforceable contract, with implementers like Microsoft serving as third-party beneficiaries. On summary judgment, the court held that “Microsoft entered into binding contractual commitments with the IEEE and the ITU, committing to license its declared-essential patents on RAND terms and conditions”[31]. At a later stage, the district court focused on determining contractually reasonable royalty rates, rather than addressing potential antitrust violations[32].

The contractual approach was further reinforced in HTC Corp. v. Telefonaktiebolaget LM Ericsson[33], where the 5th U.S. Circuit Court of Appeals held that the “FRAND commitment is embodied in Clause 6.1. of ETSI’s IPR [Intellectual Property Rights] Policy and is governed by French contract law”[34], thereby creating a contractual obligation for Ericsson to offer licenses on FRAND terms. Despite HTC’s original antitrust claims against Ericsson that alleged the latter engaged in anticompetitive conduct by not offering “royalties to HTC under reasonable rates”[35], the district court did not directly apply antitrust laws to resolve these claims. Instead, it found that HTC’s antitrust claims were subject to arbitration under prior license agreements[36].

More recently, the 9th U.S. Circuit Court of Appeals’ decision in FTC v. Qualcomm Inc.[37] further reinforced the distinction between contractual FRAND obligations and antitrust liability. The appeals court reversed the lower court’s finding of antitrust violations, raising the threshold to establish competition-law violations in FRAND contexts. The 9th Circuit found that the market in which Qualcomm operated and where harm was alleged to have taken place were distinct. In fact, the alleged harm would only affect Qualcomm customers, who operate outside the relevant markets where Qualcomm competes. Therefore, such alleged harm would be situated “beyond the scope of antitrust law”[38]. In addition, the court urged “caution about using the antitrust laws to remedy what are essentially contractual disputes between private parties engaged in the pursuit of technological innovation”[39]. It further rebutted the lower court’s assumption that royalties are anticompetitive in the antitrust sense, arguing that the fair value of SEP portfolios is to be assessed under patent law[40], and any potential breaches of FRAND commitments should be remedied by patent and contract law[41].

IV. Conclusion

Based on the comparative analysis offered here, one observes that the U.S. and UK approaches to global FRAND licensing share certain fundamental similarities in recognizing the global nature of SEP licensing and the practical inefficiencies of country-by-country FRAND licensing. Courts in both jurisdictions have asserted their jurisdiction to set global FRAND rates in certain cases and found that FRAND commitments create enforceable obligations.

The differences between the UK and U.S. approaches are more nuanced than is often appreciated: while UK courts have since Unwired Planet been more direct in setting specific global rates backed by injunctive relief, U.S. courts following Microsoft v. Motorola do assert jurisdiction over global disputes, but tend to establish guiding principles to shape negotiations, rather than imposing mandatory terms. This distinction reflects different judicial philosophies regarding the appropriate level of court intervention, rather than fundamentally incompatible views on global licensing. In practice, both approaches acknowledge the reality that most FRAND licenses are negotiated globally, with the vast majority of disputes resolved via settlement, rather than final judgment.

Where the jurisdictions’ approaches diverge is primarily in the specific mechanisms through which courts exert influence on FRAND-licensing negotiations. UK courts favor direct FRAND rate-setting in the context of enforcing the SEP holder’s UK patents, while U.S. courts prefer to establish analytical methodologies and guiding principles for assessing FRAND royalty rates that the parties can apply in their negotiations. But both UK and U.S. courts have a shared ultimate objective of facilitating efficient global licensing of standardized technologies.

This examination of judicial approaches to FRAND commitments reveals a clear preference for contractual and patent-law frameworks over competition-law interventions in both UK and U.S. jurisdictions, albeit with varying degrees of emphasis. The UK courts, while acknowledging the potential relevance of competition law in FRAND disputes, have established a high threshold for finding dominance or abuse under Article 102 TFEU, as evidenced in the seminal cases of Unwired Planet v. Huawei and Optis v. Apple. U.S. courts have gone further still, creating an even more stringent standard for the application of antitrust in FRAND contexts, as demonstrated in FTC v. Qualcomm, where the 9th Circuit explicitly cautioned against using antitrust law to resolve what it considers fundamentally contractual disputes.

This convergence toward a contractual interpretation of FRAND commitments demonstrates a pragmatic approach to the delicate balance sought between two imperatives: fostering technological innovation through fair remuneration to SEP holders and democratizing access to standardized technologies for implementers. By predominantly framing FRAND commitments as contractual obligations with implementers as third-party beneficiaries, both UK and U.S. courts have established a legal framework focused on the primacy of private ordering in technology markets, while maintaining judicial oversight when negotiations fail.

[1] The 5G Economy: How 5G Will Contribute to the Global Economy, IHS Markit (2019), available at https://www.qualcomm.com/content/dam/qcomm-martech/dm-assets/documents/the_ihs_5g_economy_-_2019.pdf.

[2] Jorge L. Contreras, The Global Standards Wars: Patent and Competition Disputes in North America, Europe and Asia 1 (University of Utah, College of Law Research Paper No. 353, 2018),353), available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3106090.

[3] Other relevant jurisdictions that parties resort to for resolving FRAND disputes include Germany, China, Japan, France, the Netherlands, and India. The European Union’s Unified Patent Court (UPC), which became operational 1 June 2023, is expected to acquire relevance and become an additional authoritative reference in FRAND disputes over time.

[4] Contreras, supra note 2.

[5] Examples of legal scholarship stating that most FRAND disputes have a global dimension and ideally should result in licensing at a global level include, among others, Jorge L. Contreras et al., The Effect of FRAND Commitments on Patent Remedies, in PATENT REMEDIES AND COMPLEX PRODUCTS: TOWARD A GLOBAL CONSENSUS, 184 (Brad Biddle, Jorge L. Contreras, Brian J. Love, & Norman V. Siebrasse, eds.,  2019), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3248726. (“The continuing conduct of multiple parallel proceedings is not cost efficient or time efficient, in spite of the fact that many if not all FRAND disputes are global (and would ideally materialize in global FRAND licensing transactions”); Garry A. Gabison, Worldwide FRAND Licensing Standard, 8 AM. U. BUS. L. REV. 217 (2019), https://digitalcommons.wcl.american.edu/cgi/viewcontent.cgi?article=1118&context=aublr.

[6] Jorge L. Contreras, Global Rate Setting: A Solution for Standards-Essential Patents?, 94 Wash. L. Rev. 701 (2019), https://digitalcommons.law.uw.edu/wlr/vol94/iss2/5.

[7] The European Commission has proposed a regulation on SEPs (COM((2023)232, https://single-market-economy.ec.europa.eu/publications/com2023232-proposal-regulation-standard-essential-patents_en), with the goal of enhancing transparency, reducing information asymmetry and facilitating agreements on FRAND licenses. The proposal raised concerns by stakeholders, and it was withdrawn by the Commission in Feb. 2025 “due to no foreseeable agreement.” Available at: https://ec.europa.eu/newsroom/eismea/items/871191/en.

[8] Unwired Planet Int’l Ltd v. Huawei Technologies & Ors. [2017] EWHC 711 (Pat), available at https://www.judiciary.uk/wp-content/uploads/2017/04/unwired-planet-v-huawei-20170405.pdf.

[9] Summaries of court rulings on FRAND disputes issued by the UK courts, the Court of Justice of the European Union, and the national courts of several EU member states are available at https://caselaw.4ipcouncil.com. A list with relevant UK cases on SEPs is available on the UK government website at https://www.gov.uk/guidance/uk-seps-case-law.

[10] Optis Cellular Technology LLC & Ors v. Apple Retail UK Ltd & Ors, [2021] EWHC 2564 (Pat).

[11] Id., par. 336-341.

[12] Optis Cellular Technology LLC & Ors v. Apple Retail UK Ltd & Ors, [2023] EWHC 1095 (Ch), par. 497, available at https://www.judiciary.uk/wp-content/uploads/2024/02/Optis-Cellular-Technology-v-Apple-Retail-UK-10.05.23-Redacted-version.pdf.

[13] InterDigital Technology Corporation & Ors v. Lenovo Group Ltd & Ors, [2023] EWHC 539 (Pat), https://www.wipo.int/wipolex/en/judgments/details/2187.

[14] Communication from the Commission to the European Parliament, the Council and the European Economic and Social Committee Setting Out the EU Approach to Standard Essential Patents, COM/2017/0712 final (2017), p. 7, https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=celex:52017DC0712.

[15] Microsoft Corp. v. Motorola, Inc., No. C10-1823JLR (W.D. Wash. 2013), https://www.wipo.int/wipolex/en/judgments/details/2218.

[16] Microsoft Corp. v. Motorola Inc., 696 F.3d 872 (9th Cir. 2012), https://www.wipo.int/wipolex/en/judgments/details/2224.

[17] TCL Communication Technology Holdings, Ltd. v. Telefonaktiebolaget LM Ericsson, consolidated cases Nos. 8:14-CV-00341 JVS-DFMx and 2:15-CV-02370 JVS-DFMx (C.D. Cal. 2018), https://www.wipo.int/wipolex/en/text/591444.

[18] TCL Communication Technology Holdings, Ltd. v. Telefonaktiebolaget LM Ericsson, 943 F.3d 1360 (Fed. Cir. 2019), https://www.wipo.int/wipolex/en/text/591372.

[19] HTC Corp. v. Telefonaktiebolaget LM Ericsson, 18-cv-00243, Dkt. No. 376 (E.D. Tex. 7 Jan. 2019), available at https://ipwatchdog.com/wp-content/uploads/2024/02/HTC-v.-Ericsson-Memorandum-Opinion-and-Final-Judgment-3.pdf.

[20] InterDigital Technology Corporation & Ors v. Lenovo Group Ltd & Ors, [2023] EWHC 539 (Pat), https://www.wipo.int/wipolex/en/judgments/details/2187.

[21] Chryssoula Pentheroudakis & Justus A. Baron, Licensing Terms of Standard Essential Patents: A Comprehensive Analysis of Cases, Jt. Res. Cent. (2017), at 166, https://publications.jrc.ec.europa.eu/repository/handle/JRC104068.

[22] This view has also been supported in the literature. See Mark A. Lemley, Intellectual Property Rights and Standard-Setting Organizations, 90 Calif. Law Rev. 1889 (2002), https://ssrn.com/abstract=310122; see also David J. Teece, Restoring and Revitalizing Technology Markets for Mobile Wireless: Geopolitical Dimensions of Patented Technology Embedded in Standards, in 5G and Beyond: Intellectual Property and Competition Policy in the Internet of Things (Cambridge University Press, 2023), at 1-50, available at https://www.cambridge.org/core/books/5g-and-beyond/intellectual-property-and-competition-policy-in-global-wireless-markets/D3B7792D751E5AE28B4F565317F9A6F3#FN-fn-29.

[23] Justice Birss concluded that “a worldwide licence would not be contrary to competition law. Willing and reasonable parties would agree on a worldwide license. It is the FRAND licence for a portfolio like Unwired Planet’s and an implementer like Huawei. Therefore, Unwired Planet are entitled to insist on it. It follows that an insistence by Huawei on a licence with a UK only scope is not FRAND”. [2017] EWHC 711 (Pat), par. 572, available at https://www.judiciary.uk/wp-content/uploads/2017/04/unwired-planet-v-huawei-20170405.pdf.

[24] The European Court of Justice’s decision in Huawei v. ZTE (Case C-170/13, 2015, https://curia.europa.eu/juris/liste.jsf?num=C-170%2F13) established guidelines to evaluate potential market power abuses under Article 102 TFEU when SEP owners pursue injunctions. The decision outlined a procedural approach that requires SEP holders to notify the potential licensee about the specific patent infringement; provide a concrete FRAND-licensing proposal once the implementer shows interest; and give the implementer reasonable time to respond meaningfully. The ECJ positioned these steps not as rigid requirements, but as protective measures that, when followed, shield SEP holders from competition-law liability. The ECJ sought to balance competing interests of protecting intellectual property and access to courts on one hand, while preventing anticompetitive behaviour on the other.

[25] HTC Corp., supra note 19.

[26] Unwired Planet International Ltd. and Another (Respondents) v Huawei Technologies (UK) Co. Ltd. and Another (Appellants), [2020] UKSC 37, https://www.supremecourt.uk/cases/uksc-2018-0214.

[27] Id., par. 146.

[28] [2021] EWHC 2564 (Pat), available at https://www.judiciary.uk/wp-content/uploads/2024/02/Optis-Cellular-Technology-v-Apple-Retail-UK-10.05.23-Redacted-version.pdf.

[29] Id., par. 385.

[30] Microsoft Corp. v. Motorola, Inc., 854 F. Supp. 2d 993 (W.D. Wash. 2012), https://www.wipo.int/wipolex/en/text/591394.

[31] Id., at 17.

[32] Microsoft Corp. v. Motorola, Inc., No. C10-1823JLR (W.D. Wash. 2013), https://www.wipo.int/wipolex/en/text/591387; see also Kassandra Maldonado, Breaching RAND and Reaching for Reasonable: Microsoft v. Motorola and Standard-Essential Patent Litigation, 29 Berkeley Technol. Law J. 419 (2014), available at https://lawcat.berkeley.edu/record/1126231?ln=en&v=pdf.

[33] HTC Corp. v. Telefonaktiebolaget LM Ericsson, 12 F.4th 476 (5th Cir. 2021), https://www.wipo.int/wipolex/en/judgments/details/2199.

[34] Id., at 12.

[35] HTC Corp. v. Telefonaktiebolaget LM Ericsson, 18-cv-00243, Dkt. No. 376 (E.D. Tex. 7 Jan. 2019), at 2, available at https://ipwatchdog.com/wp-content/uploads/2024/02/HTC-v.-Ericsson-Memorandum-Opinion-and-Final-Judgment-3.pdf.

[36] Id.

[37] Federal Trade Commission v. Qualcomm Inc., 969 F.3d 974 (9th Cir. 2020), available at https://cdn.ca9.uscourts.gov/datastore/opinions/2020/08/11/19-16122.pdf.

[38] Id., at 30-31.

[39] Id., at 39.

[40] Id., at 44.

[41] Id., at 56.

I. Introduction

The common carrier obligation (“CCO”) requires railroads to provide transportation or service to any shipper on reasonable request.[1] Rooted in 19th-century common law, this duty historically ensured that railroads—once the dominant shipping carriers—served the public interest by hauling all manner of freight at fair rates. While the industry was partially deregulated with the Staggers Rail Act of 1980, Congress left the CCO duty intact (now codified at 49 U.S.C. § 11101 et seq.).[2]

Railroads have thrived in the decades since deregulation, as evidenced by the industry’s improved productivity and lower rates, both of which have been largely due to competitive pressures from other transportation modes. Real average rail-freight rates have dropped by roughly 44% since 1980 (inflation-adjusted), even as productivity and volumes have surged.[3] By the late 1990s, the Staggers Act had succeeded in creating a more innovative and financially stronger rail industry that could better compete with trucks and better meet shippers’ needs.[4]

But trucking was also deregulated in 1980. And unlike railroads, today’s motor carriers can generally choose what loads to carry and on what terms, without a statutory duty to serve all comers. This imbalance leaves railroads bearing unique burdens.

While trucking, barges, and pipelines have flourished in a deregulated environment, today’s freight market is radically different from what prevailed in the era when the CCO evolved. Further, many of the approaches taken to apply the CCO in order to regulate rail explicitly have proven counterproductive, given the dynamic nature of today’s shipping market.

Policymakers and industry stakeholders are currently debating whether the CCO, which the U.S. Surface Transportation Board (“STB”) has called “a pillar of the railroads’ obligations,”[5] should be updated or reinterpreted to reflect competitive realities in the modern freight market. The overarching question is how to protect shippers’ access to rail service without stifling railroads’ efficiency or their ability to compete with other modes of transportation.

This issue brief examines the CCO’s legal foundations and how it has been interpreted; the challenges it poses in the modern era; and the ways that intermodal competition has evolved under deregulation. It also explores why certain regulatory approaches have been counterproductive. It concludes by arguing for specific reforms to the CCO and rail regulations that would effect more market-oriented outcomes.

II. The Common Carrier Obligation

The CCO originates in common-law principles that required railroads (and other public carriers) to serve the public upon reasonable request. The Interstate Commerce Act of 1887 effectively codified these duties in broad terms.[6] Today, 49 U.S.C. §11101(a) provides that a rail carrier “shall provide the transportation or service on reasonable request,” encapsulating the duty to serve shippers at reasonable rates and with reasonable service. Notably, the U.S. Supreme Court has observed that the Interstate Commerce Act “codified the common-law obligations of railroads as common carriers,” and that it did so “in the most general terms.”[7] In other words, Congress set forth the obligation but left the specifics of what is “reasonable” to be fleshed out by regulators and courts over time.

Thus, given the lack of specificity in the statutory language, the precise scope of railroads’ obligations has been defined case-by-case. The STB (and, before it, the Interstate Commerce Commission  (“ICC”)) and courts have long recognized that, while a railroad must furnish service upon reasonable request, a common carrier’s obligation is not unlimited and does not require the carrier to fulfill every request without discretion.[8] Rather, the carrier is only required to act reasonably in its dealings with its customers.[9]

Moreover, the standard of what constitutes “reasonable service” is not especially rigid; it is contingent on the specific conditions and circumstances at the time.[10] This flexible approach ensures that, while railroads must provide service when warranted, they are not compelled to allocate unlimited resources in a manner that could jeopardize efficient operations. The CCO’s practical limits therefore allow railroads to tailor how they fulfill requests, so long as they do not flatly deny service without good cause.

At the same time, railroads cannot arbitrarily refuse to haul certain commodities, or arbitrarily preference certain customers.[11] Instead, the common-carrier duty imposes on railroads a baseline obligation to carry all goods within their common-carriage scope, barring a valid exception. Disputes have arisen at the extremes over whether railroads can even decline carriage for hazardous shipments, a matter discussed further, infra.

In short, the CCO is a real and enforceable duty, but one whose exact contours—whether a request and/or a service is “reasonable,” how far the duty extends in special cases—are often decided through regulatory judgment.

For example, BNSF Railway, the largest U.S. freight railroad, was recently found to have breached its common-carrier duty by curtailing service to a coal shipper below “reasonable” levels.[12] In that decision, the STB issued an injunction compelling BNSF to transport millions of tons of coal that the railroad had not planned to move, citing the railroad’s statutory obligation to provide “adequate” service upon reasonable request. Such interventions underscore the continued force of the CCO: regulators will step in when a railroad’s business-driven service modifications are perceived to collide with the duty to serve the public on reasonable terms.[13]

The CCO’s legal framework establishes a baseline duty to serve shippers, but with room for interpretation. Railroads cannot flatly refuse traffic tendered in the usual course of business (especially if the shipper has no alternative), but they retain some discretion in how to meet requests, and can seek relief from truly impossible demands. The tension between carriers’ commercial interests and shippers’ reliance on rail service is built into the CCO’s general language. As discussed in the next section, this tension has only grown in the modern era, as railroads operate in a competitive and largely deregulated marketplace.

A. The CCO in the Modern Era

The governing law allows shippers and carriers to negotiate mutually agreeable terms in contracts; this has been one of the enduring benefits of the deregulatory actions of the 1970s and 1980s, even as the CCO has been preserved as a failsafe for shippers to obtain rail service where no contract has been struck. But railroads have been concerned that the recent BNSF decision may allow shippers to invoke the CCO to extract historically abnormal terms from carriers, such as by requesting the STB to set requirements about service frequency, investments for surge demand, and traffic prioritization.

Large railroads and many of their customers sometimes disagree sharply about what the CCO requires, and there is cause to be concerned about such disagreements. An expansive interpretation of the CCO might hamstring railroads’ ability to run an efficient and profitable operation. Some recent operational innovations in rail service can reduce service frequency or flexibility for some shippers, even as they serve to increase overall reliability. Such changes should largely be encouraged, as they yield much more efficient operations that benefit shippers and carriers alike.[14]

Indeed, the CCO should be understood as a flexible framework that encourages innovation and adaptability, rather than a rigid mandate that preserves outdated service models. It ought to empower carriers to modify or discontinue unprofitable offerings and to experiment with new technologies that improve overall efficiency, even if this means that some shippers may not receive their preferred service mix at all times. The CCO should foster an environment in which market forces and competition drive service improvements, ensuring that carriers can adjust operations to meet evolving economic realities while still providing service on reasonable terms.

This has proven all the more important in the modern freight market, as intermodal competition for shipping has become more intense. A core premise behind the common carrier obligation, as it operates today, is that market competition among transportation modes can often protect shipper interests better than regulatory mandates. The Staggers Rail Act itself was predicated on this idea: Congress explicitly sought “to ensure effective intermodal competition” in freight transport.[15] Furthermore, in its statement of policy, Congress affirmed that regulation should be minimized to allow railroads to “rely on competition and the demand for services” to set rates and service terms, with a fallback to protect against abuse of market power.[16]

In 1980, railroads were struggling; bankruptcies were common, and rigid regulation prevented them from adapting. Staggers dramatically rolled back economic controls, allowing rail carriers to set rates more freely, enter into confidential contracts with shippers, and shed unproductive routes.^[17] The act retained a regulatory “backstop” for captive shippers (e.g., maximum rate relief in cases where no competition exists and rates exceed a certain threshold).[18] But fundamentally, it shifted policy toward letting competition and market demand—rather than blanket obligations—govern rail-service levels.

Four and a half decades later, the results of rail deregulation have been studied extensively. Virtually all analyses conclude that rail deregulation led to lower costs, lower shipping rates, and improved service innovation, benefiting both the industry and many of its customers. Since 1980, rail productivity has skyrocketed, while average real freight rates have fallen by more than 40%.[19] Railroads’ unit costs declined, and those efficiency gains were largely passed on to shippers in the form of more affordable rates.

By one estimate, rail shippers in 2019 paid about 44% less per ton-mile (inflation-adjusted) than they would have in 1980, reflecting the intense competitive pressure from trucks and other transportation modes in most markets.[20] The railroads’ financial health also improved markedly: from a position of near collapse in the 1970s, the industry is now revenue-adequate and able to invest billions annually in maintenance and capacity.[21] This turnaround is widely credited to the more flexible, market-driven environment post-Staggers.

In practice, the vast majority of rail freight today is inherently competitive. For many commodities and routes, shippers can choose between rail and truck transport (and sometimes waterways or pipelines). For example, most manufactured goods, consumer products, and food items can ship by either rail intermodal or by truck. Even bulk commodities like grain or coal often have alternatives: a grain elevator might have access to barge transport or employ trucks to a different rail line; a power plant might be served by two railroads or able to switch to natural gas (delivered by pipeline) if coal delivery falters.

In a major competition study, the STB found in 2009 that, while some shippers remain “captive” to a single railroad, the overall extent of captivity had been declining, as more short-line railroads and transload options emerged and as trucking became more efficient for longer distances.[22] In its study of the same subject, the Government Accountability Office (“GAO”) reached a similar conclusion.[23] Thus, driven by market competition, a significant majority of rail traffic now moves at rates that indicate effective competition, while truly captive traffic (paying very high rates relative to cost) is a small and somewhat shrinking portion of the whole.[24]

This context is vital when considering the common carrier obligation. Back in the early 1900s, if a railroad didn’t serve a town or discriminated against a shipper, that customer might have had no alternative means to ship goods. Today, that scenario is far less common. Freed from route and commodity restrictions since the Motor Carrier Act of 1980, motor carriers now provide ubiquitous competition, often able to serve even remote areas by road.[25] For many freight categories, railroads compete not only with one another, but trucks as well.

The playing field is uneven, however, when it comes to obligations: a trucking company can generally refuse a load (perhaps it’s too dangerous, unprofitable, or inconvenient) without legal penalty, whereas a railroad refusing a similar shipment could face STB enforcement under the CCO. This disparity can distort competition. As the Supreme Court has noted, “the Interstate Commerce Act codified the common-law obligations” of rail carriers,[26] but modern motor carriers and barges are not saddled with equivalent duties.

Deregulation holds the potential to harness market discipline in order to achieve efficient outcomes. In the rail context, this means allowing railroads to rationalize routes and services according to demand, which in turn lowers overall logistics costs. Indeed, one observed effect of Staggers was that railroads shed unprofitable lines.[27] While painful for some local shippers, this “right-sizing” of the network eliminated huge inefficiencies and enabled rail carriers to focus their investments on core routes—improving service for the majority of traffic.[28] By the late 1990s, rail carriers were “able to compete with trucks, invest in capacity, and respond flexibly to shippers’ needs,” thanks to the freedom granted by deregulation.[29] In other words, giving railroads more commercial freedom ultimately benefited shippers broadly through more competitive rates and a financially viable rail system.

The common carrier obligation was, however, one piece left largely untouched by deregulation. As discussed further below, railroads are still required to obtain agency approval to discontinue service on a line (or abandon it), and they still must quote common-carriage rates and serve traffic at those rates if requested (even though most large shippers now use confidential contracts). In a competitive environment, there is arguably less need for a broad mandatory-service obligation. In many markets, intermodal rivalry constrains railroads from behaving monopolistically; if they try, shippers will simply switch modes.

III. Specific Problems with the STB’s Interpretation of the CCO

The Surface Transportation Board’s interpretation of the common carrier obligation has created several significant tensions between the goals of regulatory policy and railroads’ need to operate viable businesses in a competitive marketplace. While the STB aims to protect shipper interests and ensure broad access to rail service, its expansive reading of the CCO often fails to adequately account for operational realities and the market conditions that rail carriers face. In particular, the board’s interpretations frequently result in mandates that can impair railroads’ ability to optimize their networks, manage risk effectively, or respond to changing market conditions.

Critically, the board’s approach often loses sight of the fundamental economic principle that should guide CCO interpretation: maximizing welfare for end consumers—the ultimate beneficiaries of freight transportation. While shippers may attempt to leverage the regulatory process for competitive advantage, the proper focus should be to ensure that CCO interpretations enhance market efficiency and ultimately benefit final consumers through lower prices and better service.

The current interpretative framework, by contrast, frequently devolves into arbitrating disputes between shippers and carriers without adequately considering whether the outcomes actually benefit end consumers, rather than simply granting advantages to particular market participants. This misaligned focus not only creates operational difficulties for railroads but potentially undermines the very consumer benefits that the CCO was intended to protect.

In several key areas, the board’s decisions have created operational challenges for carriers, while potentially undermining the efficiency gains that were achieved by partial deregulation. The following sections examine four specific areas where the STB’s interpretation of the CCO has produced particularly problematic outcomes: hazardous-waste transport obligations; challenges in discontinuing service on low-density lines; emergency-service orders that override private contracts; and rate-review procedures that can threaten carriers’ revenue adequacy. Each of these areas illustrates ways that overly rigid or expansive interpretations of the CCO may conflict with sound business practices and market-based decision making.

A. Hazardous-Waste Transport Obligations

Under 49 U.S.C. § 11101(a), U.S. rail carriers have a CCO to transport hazardous materials upon reasonable request. They cannot pick and choose their cargo based on risk. In Riffin v. Surface Transportation Board, the U.S. Circuit Court of Appeals for the D.C. Circuit upheld a decision that a rail carrier may not exclude classes of dangerous shipments (such as toxic-inhalation hazards) from its services.[30] In that case, an applicant sought to operate a short rail line but attempted to carve out an exception to refuse chlorine and similar hazardous chemicals, citing high insurance costs and liability concerns. The STB rejected the proposal, and the court affirmed, holding that railroads have a “statutory common carrier obligation to transport hazardous materials” so long as federal safety regulations permit their movement.[31] In other words, the duty to serve covers even extremely hazardous commodities, and this statutory mandate overrides any common-law right a carrier might claim to avoid particular cargo. The D.C. Circuit upheld the board’s authority to compel hazmat carriage as a valid interpretation of the law.[32]

This obligation, however, puts railroads in a difficult bind. Hauling chemicals like chlorine, anhydrous ammonia, or other highly toxic or flammable substances entails the risk of catastrophic accidents. The potential liability from a major release—whether caused by accident or sabotage—can be enormous, and only limited insurance coverage is available in the market for such worst-case scenarios. While rail carriers must carry expensive liability insurance, they remain exposed to uninsured risks because “there is no market for insurance that would fully protect railroads” in the event of a truly catastrophic hazardous release.[33] Accordingly, railroads incur significant costs to handle hazmat safely: higher insurance premiums, specialized safety procedures, and capital investments in tank-car safety and route-risk management.[34] These costs can far exceed those of ordinary freight service.

Critically, railroads have only limited ability to recoup the heightened cost of bearing such risks. By law, common-carrier rates must be “reasonable,”[35] and the STB polices rate reasonableness. In practice, this constrains railroads from simply charging sufficient rates on dangerous shipments to cover their potential liability.

By necessity, this makes it difficult, if not impossible, to accurately price risk into the service rates charged to shippers. Railroads cannot unilaterally set rates adequate to offset worst-case risks. If challenged, such rates are likely to be struck down as unreasonable, and in competitive markets, shippers would balk. The result is a cost-recovery gap: rail carriers effectively subsidize a portion of the risk associated with mandatory hazmat service, bearing uncompensated exposure. For example, a catastrophic toxic release could theoretically bankrupt even a major railroad, yet rates for transporting such materials do not fully account for that possibility.[36]

The CCO to haul hazardous cargo thus exemplifies the modern tension between public-service requirements and market-based risk management: railroads must shoulder outsized risks that their trucking competitors can often avoid, which in turn affects how carriers price services and insure their operations in the hazmat sector.

B. STB’s Emergency Powers and Overrides of Private Contracts

The Surface Transportation Board has broad emergency powers under 49 U.S.C. § 11123 to intervene when service disruptions threaten the public interest. In emergency situations—generally defined as circumstances like sudden network failures, severe congestion, or other failures of traffic movement—the board can issue service orders that direct railroads to take specific actions in order to alleviate the crisis. These orders can require one carrier to handle traffic for another, to prioritize certain shipments, or to temporarily reroute or share lines, even “without regard” to the normal operating arrangements.

Crucially, the STB’s emergency directives can also override private contractual arrangements between carriers and their shippers (or between connecting carriers). In effect, the board may mandate service levels or routes that differ from what the railroad originally agreed to, if the STB deems it necessary to address an urgent service shortfall.

Although such directives are meant for true emergencies (such as natural disasters or carrier shutdowns), the STB has shown in recent years that it is willing to use § 11123 powers in less extraordinary (but still serious) service crises. A prominent example came in late 2022, when severe railroad-service problems left a California poultry producer (Foster Farms) without sufficient animal-feed deliveries. Foster Farms petitioned the STB for relief, and the board issued an emergency-service order directing Union Pacific Railroad to supply and prioritize the needed grain-unit trains and to adhere to a specified delivery schedule.[37]

The order, issued under § 11123, essentially compelled the railroad, on pain of regulatory sanction, to provide capacity and service beyond what its private arrangements had guaranteed. Similarly, the board in 2023 took the unprecedented step of issuing a preliminary injunction requiring BNSF Railway to haul millions of tons of export coal for Navajo Transitional Energy Co. (NTEC) after finding that BNSF had been inadequately servicing that mine. BNSF was directed to transport 4.2 million tons of coal and, if capacity permitted, an extra 1 million tons to meet NTEC’s needs.[38] This mandate went well beyond BNSF’s own operating plan, effectively overriding the railroad’s allocation of locomotives, crews, and network capacity.

Such interventions create significant legal and operational uncertainty.[39] When there is always the potential for an emergency-service order to drop from above, a carrier cannot be sure that its privately negotiated contracts (which might limit volumes or specify transit times) will define its actual obligations. Instead, the railroad may be unexpectedly forced by regulators to furnish extra trains or to give priority to certain traffic, potentially at the expense of other customers or its broader operating plan.

In the NTEC coal case, for instance, BNSF argued on appeal that the board’s order compelled it to “stand ready to move billions of pounds of coal, never mind the effects on its network and the diversion of resources away from serving other shippers.”[40] Ultimately, the parties in that dispute settled, but the STB’s intervention nonetheless illustrates the rather extreme disruption that second guessing contracts can present. Because common-carrier service is provided on reasonable request, rather than guaranteed contract volumes, BNSF pointed out that NTEC itself had no firm obligation to ship the full 4 million tons, even though BNSF had to devote capacity as if it would, straining its system.[41]

Likewise, while the Foster Farms order was narrower in scope, it set a precedent that the board might micromanage individual supply chains whenever it perceives a looming crisis. This effectively serves to insert the regulator into the railroad’s day-to-day operations and nullify the normal contract or tariff terms during the emergency period.

These emergency powers risk undermining carriers’ ability to manage their own operations and capacity. Railroads carefully balance their resources among many customers; an unexpected order to prioritize one shipper can ripple throughout the network. To be sure, the statute tries to guard against abuse; for example, § 11123 instructs that the board should not issue an order that “substantially impairs” a carrier’s ability to serve its other customers or to fulfill its obligations.[42] In practice, however, these judgments are subjective.

The broader policy concern is that heavy-handed use of emergency orders could discourage private investment and planning. If railroads fear that carefully laid schedules and contracts can be upended by regulatory fiat, they may be more cautious about making capacity commitments or efficiency-driven changes (such as precision-scheduled-railroading techniques) that reduce operational slack. In short, while the STB’s emergency powers may be a necessary safety valve to protect the public in dire situations, their recent use in service-quality cases has prompted debate about the proper limits of intervention, and the need for clearer standards to avoid sowing uncertainty in the rail marketplace.

C. Final-Offer Rate Review and Its Impact on Rail Carriers

Final-offer rate review (FORR), a recently introduced STB procedure to adjudicate certain rail rate disputes, has become a flashpoint for the policy debate about fairness and the STB’s statutory authority. Under the CCO, rates must be reasonable; if a shipper believes they are not reasonable, they can bring a rate case. Traditionally, when a shipper believes a common-carrier rate is unreasonably high, the STB must determine a maximum reasonable rate under 49 U.S.C. §§ 10701 and 10704. In large rate cases, this has meant complex, data-intensive litigation, often employing the stand-alone-cost (SAC) test.[43]

The FORR process was modeled loosely on the arbitration process used in Major League Baseball contract disputes. FORR allows each party to submit its final offer for what the reasonable rate should be, and the board then selects one offer or the other, without modification, as the resolution.[44] The idea was to streamline decisionmaking by forgoing exhaustive economic analysis; rather than painstakingly calculating the best rate, the board would instead choose whichever side’s proposal it found more reasonable.

Rail carriers criticized this approach on both legal and practical grounds. They argued that FORR exceeds the STB’s authority under the Interstate Commerce Act, which requires the agency to determine and impose only reasonable rates.[45] Simply picking one of two proposals, the railroads contended, is an abdication of the board’s duty to conduct a reasoned analysis. In short, the FORR rule “flatly exceeds the agency’s authority” because the board would do “no independent analysis” and would abandon “sound economic principles” in favor of an arbitrary up-or-down choice.[46]

This critique found a receptive ear in the courts: in 2024, the 8th U.S. Circuit Court of Appeals vacated the STB’s FORR rule, holding that the process improperly prevented the board from giving due consideration to the statutory factors for rate reasonableness.[47] The court noted that the statute directs the STB to “review” challenged rates based on multiple factors (e.g., the carrier’s revenues, the transport conditions, etc.) per 49 U.S.C. § 10701(d)(2)), and that simply choosing between the shipper’s or railroad’s final offer without adjustment failed to meet that mandate.[48] In essence, the vacatur confirmed the rail industry’s view that FORR short-circuits the legal standard for rate review.

Further, from a policy perspective, the FORR unfairly limits carriers’ ability to defend their pricing and threatens their revenue adequacy. At the very least, traditional rate cases allow carriers to present detailed evidence of their costs, investment needs, and the rationale behind a challenged rate. The final-offer approach, by contrast, forces a binary choice and often comes with tight timelines and page limits that constrain evidence. In the STB’s initial proposal, small rate cases could be decided under FORR in as little as 135 days from start to finish, with each side’s submission limited in length and complexity.

Such uncertainty and one-way risk (since a railroad’s high final offer might simply be rejected in favor of the shipper’s lower figure) can serve to chill the railroads’ pricing flexibility. Carriers might preemptively restrain rate increases for fear that any aggressive pricing will be knocked down in a fast-track FORR case that they have scant ability to defend.

There is also the broader concern of revenue adequacy—the principle that rail regulation should allow carriers to earn sufficient revenue to attract investment and maintain their networks.[49] If shippers can routinely leverage FORR to win rate reductions, it will erode carriers’ earnings on traffic, which is often used to cross-subsidize infrastructure and service improvements systemwide.

For now, the FORR has been nullified. Going forward, the board may revisit how to craft a simplified rate review that survives legal scrutiny, perhaps by incorporating some independent analysis or making the program truly voluntary (the STB had also proposed a voluntary arbitration program alongside FORR). The risk of this sort of arbitrary intervention remains high. The FORR episode highlights the friction between expeditious shipper relief and robust procedural protection for carriers.

After decades of productive deregulation, mechanisms like FORR represent a step backward toward intrusive regulation that could hamstring pricing for the sake of a minority of disputes. The challenge for policymakers is to find a balanced solution that resolves smaller rate complaints efficiently, without undermining the economic foundation that has allowed the rail industry to achieve financial stability since deregulation.

D. Challenges in Discontinuing or Reducing Service on Low-Density Lines

Another challenge for U.S. rail carriers is the difficulty of shedding or scaling back service on lightly used, low-density branch lines. Under 49 U.S.C. § 10903, a railroad may not abandon a line (or discontinue service) without prior approval from the STB.[50] The law requires the STB to determine that an abandonment is consistent with the “public convenience and necessity” before allowing a carrier to exit a line.

Moreover, existing regulations promulgated under this law are a labyrinth of procedural requirements.[51] The process is often contentious and protracted, involving detailed filings, environmental reviews, possible offers of financial assistance from interested buyers, and the opportunity for protests by shippers and communities. Railroads facing dwindling traffic on a branch cannot simply halt service; they must continue to maintain the track and operate trains (even at a loss) until they receive regulatory permission to abandon the line.[52]

In many cases, local shippers or elected officials will oppose an abandonment out of concern for losing rail access, leading the STB to scrutinize the railroad’s profitability claims and sometimes to delay or deny the request.[53] The railroad’s common-carrier obligation thus endures unless and until the STB grants relief—effectively compelling carriers to serve “paper traffic” for public-interest reasons, even when a line is no longer economically viable.

The legal and regulatory framework governing line abandonments was somewhat liberalized by the Staggers Rail Act of 1980, but it still requires balancing career and public interests. The STB weighs such factors as the line’s current and prospective traffic, the revenue inadequacy or losses in maintaining the line, the availability of alternative transportation for shippers, and the broader regional impacts.[54] If an abandonment is approved, interested parties may invoke 49 U.S.C. § 10904 to force the carrier to sell the line for continued operation (often at its salvage value) rather than scrap it—another mechanism that can compel continuation of service under new ownership.

From the carrier’s perspective, these protections for low-density lines can impose serious economic burdens. Maintaining a stretch of track that sees only a handful of railcars (or none at all) can cost tens of thousands of dollars per-mile annually in maintenance, inspections, and taxes, with little or no revenue to offset it. Studies have found that the lowest-density rail lines face “formidable costs” to maintain or rehabilitate, far out of proportion to their traffic levels.[55]

This is one reason that Class I railroads have shed so many branch lines in the past: a short line or regional operator with lower overhead might keep them marginally profitable, but for a large railroad, these light routes undermine efficiency. By one estimate, the track-maintenance cost per-car-mile on small railroads (which operate many light-density lines) is more than three times higher than on Class I mainlines.[56]

STB proceedings illustrate the difficulties for carriers. In one noteworthy case, CSX Transportation sought to abandon an essentially defunct 122-mile line in West Virginia that had produced no freight revenue for more than a year.[57] The ICC (predecessor to the STB) initially denied the abandonment, relying on speculative hopes of future traffic and community opposition. The D.C. Circuit reversed that decision as unsupported by substantial evidence, noting it was undisputed that keeping the line would force the railroad to incur substantial losses with no realistic prospect of new business.[58] The court instructed that the carrier’s request be granted, emphasizing that regulators cannot shackle a railroad to a dead line based solely on hypotheticals.[59]

In many other situations, however, railroads end up negotiating compromises—such as selling the line to a short-line operator or agreeing to provide minimal “skeleton” service—rather than endlessly hemorrhaging money under forced operation. The economic impact of prolonged service mandates can be significant: capital and manpower tied up servicing a marginal line cannot be reallocated to more productive uses.

From a policy standpoint, this raises the question of whether the public benefits of preserving rural and low-volume rail service (and preventing “rail deserts”) justifies the costs imposed on carriers. The current framework tends to err on the side of preservation, sometimes at the expense of railroads’ financial health, and remains a point of contention among rail companies, shippers, and regulators.

IV. Proposals for Reform: Toward a Targeted, Deregulatory CCO

Given the dramatic evolution of freight markets and increased intermodal competition since 1980, several targeted reforms to the common carrier obligation could better align rail regulation with the deregulatory goals of the Staggers Act. While the CCO remains important as a backstop protection for shippers, its implementation should be modernized to reflect today’s competitive realities.

The following proposals aim to preserve essential shipper protections, while giving railroads greater flexibility to operate efficiently in a multi-modal marketplace. These reforms would reduce regulatory burdens where competitive alternatives exist, streamline dispute resolution, and foster better incentives for both carriers and shippers—all while maintaining the CCO’s core purpose of ensuring reasonable access to rail service.

A fundamental challenge in modernizing the CCO is ensuring that regulatory obligations align with market realities. Nowhere is this misalignment more evident than in the transportation of hazardous materials. Railroads face an absolute service mandate without corresponding market mechanisms to manage the associated risks and costs efficiently. While trucking companies can decline hazmat shipments that they cannot handle safely or economically, railroads must accept such traffic regardless of their risk-management capabilities or insurance costs.

One option to address this dilemma might be a federal reinsurance program to backstop hazmat transportation risks. Similar to models in nuclear power (Price-Anderson) and terrorism insurance (the Terrorism Risk Insurance Program), such a program would allow carriers to maintain primary coverage through private markets, with a federal reinsurance pool could share costs for catastrophic losses, either with the industry directly or with insurers that take on the industry’s risks. Another alternative would be to cap the industry’s liability and have the federal government absorb losses above a certain threshold, or simply to provide carriers with vouchers to offset the cost of insurance for hazmat risks they are forced to ship unwillingly. Any of these approaches would preserve the public interest in reliable hazmat transportation, while creating more predictable economics for carriers. They would maintain essential-service requirements while employing market forces to improve efficiency and cost allocation.

Another deregulatory reform would be to make it easier for railroads to discontinue or reduce service on low-density lines or lanes, provided that shippers have intermodal alternatives. Currently, formal abandonment of a rail line requires STB approval and can be contentious. Simplifying this—especially where a trucking option exists for the affected shippers—would acknowledge that the CCO’s purpose is not to trap railroads into serving every mile of track forever.

One mechanism could be to expand the use of “offer of financial assistance”[60] processes to allow other operators or interested entities to take over service if the incumbent railroad wishes to exit. If no one is willing to operate the service at a given subsidy or acquisition price, that’s strong evidence that continued operation is not economically reasonable, and the obligation could be lifted. Essentially, this pushes the market to reveal if a service is truly needed. If it is, then perhaps a local government or short line will step in. If not, the railroad can bow out without undue delay. By relieving railroads from prolonged forced operations where there is insufficient demand, resources can be reallocated to where they are most useful—improving overall efficiency in the freight network.

One quiet revolution of the Staggers Act was allowing confidential rail-shipper contracts, which now dominate freight-rail business. Under such contracts, the common-carrier rules (including tariff-rate availability and some service obligations) largely do not apply—the terms are privately negotiated. As of 2004, approximately 60% of rail traffic by revenue moved under contracts, not common-carrier tariffs, and that number is likely higher now.[61] Encouraging even greater use of contracts could effectively bypass CCO disputes, because the parties can specify service commitments, penalties for non-performance, and escape clauses as they see fit.

One reform, therefore, would be for the STB to limit the use of its own emergency powers or service orders when a contract exists, on the logic that the contract’s terms should govern instead. This would signal that, except in dire public emergencies, negotiated agreements are preferable to regulatory mandates. It also would encourage shippers to enter into contracts with realistic service requirements, rather than relying on the vague promise of CCO protection. The common-carrier tariff service could be viewed as service of last resort—available to truly small or ad-hoc shippers who cannot get a contract—rather than the primary regime. This is largely already the case, but formalizing it would be in line with the goals of deregulation. In regulatory parlance, this reform would maximize the domain of commercial contracts and minimize the domain of common carriage. Relatedly, the STB should make clear that it will not use evidence of contract negotiations as part of its examination of rates under the CCO.

With these guardrails in place, final-offer procedures could help to resolve service disputes more efficiently than traditional litigation, while still respecting market principles. The goal should be to create focused incentives for reasonable positions, while avoiding the coercive pressure that would force railroads to abandon legitimate defenses or accept below-market rates. This reformed approach would complement other CCO updates by providing a structured-but-fair process in cases where regulatory intervention is necessary.

The key is designing the system to achieve faster resolutions without sacrificing the economic principles that have guided rail regulation since Staggers. A careful balance must be struck between procedural efficiency and substantive protections for both carriers and shippers.

These proposals, individually and together, aim to update the common carrier obligation for the 21st century. They do not eliminate the duty outright; after all, railroads do remain important infrastructure and some check on their conduct is warranted. But the reforms would move the needle decidedly toward deregulation, relying more on competition and commercial negotiation, and less on blanket mandates. The result would be a CCO that is targeted, clear, and even-handed: it would kick in firmly where a railroad’s market power is unchecked (preventing abuse) but relax where competitive market forces suffice to discipline behavior.

V. Conclusion

Railroads’ common carrier obligation has long been a double-edged sword: a guardian of the public interest in freight transportation, but also a potential fetter on railroads’ ability to adapt and compete. In the current era of robust intermodal competition, preserving an expansive CCO that vests enormous discretion in the STB’s hands is simply neither necessary nor efficient. The spirit of deregulation that rescued the U.S. rail industry in 1980 can be extended to this last bastion of the old regulatory regime. By introducing further targeted rail reforms, we can ensure that railroads remain accountable without being overburdened.

For policymakers, the imperative is to promote a rational market. Trucks, barges, and pipelines do not operate under sweeping common-carrier duties today, yet shippers generally receive good service from those transportation modes due to competition and contract law. Rail can be governed by similar dynamics. A rebalanced CCO would let railroads say “no” or “not now” to certain traffic in certain situations, trusting that competition or alternatives will fill the gap—much as a trucking firm can decline a load and the market finds another carrier or mode to move it.

In cases where no alternative exists, a reformed CCO would ensure that the shipper is not abandoned: the railroad must still serve, but likely with greater compensation or under clearer rules that also take account of the railroad’s constraints. This approach would preserve the fundamental social contract of common carriage (access to essential services at fair terms) without clinging to one-size-fits-all mandates from a bygone era.

Ultimately, aligning the common carrier obligation with deregulatory principles will strengthen intermodal competition. Unshackled from obsolete requirements, railroads will be more agile competitors to trucking—investing in service improvements, pursuing new traffic, and pricing dynamically, secure in the knowledge that they won’t be penalized for rational business decisions. Shippers, in turn, would benefit from a healthier rail industry and more choices, as well as from a more transparent understanding of what service they can count on by right, and when they need to arrange alternatives.

[1] Shippers Committee, OT-5 v. I.C.C, 968 F.2d 75, 76 (D.C. Cir. 1992), https://casetext.com/case/shippers-committee-ot-5-v-icc.

[2] See Jack Novak et al., Railroads’ Common Carrier Obligation (Summary), U.S. Dep’t. of Agric. (Jun. 2020), available at https://www.ams.usda.gov/sites/default/files/media/RailroadsCommonCarrierObligation.pdf.

[3] See Matthew Jinoo Buck, How America’s Supply Chains Got Railroaded, The Am. Prospect (Feb. 4, 2022), https://prospect.org/economy/how-americas-supply-chains-got-railroaded.

[4] See TRB Special Report 318: Modernizing Freight Rail Regulation, TRB Transp. Rsch. Bd. of the Nat’l Acad., available at https://onlinepubs.trb.org/onlinepubs/sr/sr318highlights.pdf (last visited Feb. 26, 2025).

[5] Marybeth Luczak, AAR Backs BNSF, Calls STB Common Carrier Obligation Decision ‘Disastrous’, Ry. Age (Sep. 5, 2023), https://www.railwayage.com/freight/class-i/aar-backs-bnsf-calls-stb-common-carrier-obligation-decision-disastrous.

[6] Riffin v. Surface Transportation Board., No. 11-1480 (D.C. Cir. Oct. 25, 2013), https://cases.justia.com/federal/appellate-courts/cadc/11-1480/11-1480-2013-10-25.pdf?ts=1411135459.

[7] Am. Trucking Ass’ns v. A., T. & S. F. Ry. Co., 387 U.S. 397 (1967), at 406.

[8] Livestock, South, Southwest, Central and Western Territories, 346 I.C.C. 418 (1974), at 435.

[9] See Pa. R.R. Co. v. Puritan Coal Mining Co., 237 U.S. (1915), at 133.

[10] See B.J. Alan Co. Inc. v. I.C.C., 897 F.2d 561 (D.C. Cir. 1990).

[11] Louisville & Nashville R. Co. v. United States, 282 U.S. 740 (1931).

[12] See STB Grants Preliminary Injunction; Orders BNSF Railway Company to Transport 4.2 Million Tons of Coal for Navajo Transitional Energy Company, LLC, Surface Transp. Bd., (Jun. 23, 2022), available at https://www.stb.gov/wp-content/uploads/PR-23-11.pdf.

[13] A further problematic aspect of this case was that the board effectively used service levels proposed during private-contract negotiations to establish what constituted “adequate” service under the CCO. See, e.g., STB Decision Navajo Transitional Energy Company LLC, Docket No. NOR 42178 (2023), at 6-7. This blurred the traditional distinction between contract service (which typically provides premium service in exchange for volume commitments and is outside the board’s jurisdiction) and common-carrier service (wherein shippers make no volume commitments but receive basic tariff service). By establishing contract-level service as the required CCO standard, without requiring corresponding shipper commitments, the board significantly expanded the scope of the common-carrier obligation beyond its historical application.

[14] Id.

[15] See Gene C. Griffin, Synopsis of Staggers Rail Act of 1980, Bureau of Transp. Stat. (1981), at 1, available at https://rosap.ntl.bts.gov/view/dot/60546/dot_60546_DS1.pdf.

[16] Railroad Regulation: Economic and Financial Impacts of the Staggers Rail Act of 1980 (U.S. Gen. Acct. Off., GAO/RCED-90-80, May 1990), at 2, available at https://www.gao.gov/assets/rced-90-80.pdf.

[17] See B. Kelly Eakin et al., Railroad Performance Under the Staggers Act, Regulation (Dec. 2010), at 32, available at https://www.cato.org/sites/cato.org/files/serials/files/regulation/2010/12/regv33n4-6.pdf.

[18] Id. at 33

[19] Id. at 33; Buck, supra note 3, at 2.

[20] Buck, supra note 3.

[21] Eakin, supra note 17, at 34-35.

[22] A Study of Competition in the U.S. Freight Railroad Industry and Analysis of Proposals that Might Enhance Competition, Surface Transp. Bd. (2009), at 10-11, available at https://www.stb.gov/wp-content/uploads/files/docs/competitionStudy/Executive%20Summary.pdf.

[23] Id.

[24] Id.

[25] See Motor Carrier Reform Act of 1980, Pub. L. No. 96-296, 94 Stat. 793.

[26] American Trucking Assns., supra note 7, at 406.

[27] Eakin, supra note 17, at 33.

[28] Id.

[29] See TRB, supra note 4.

[30] Shippers Committee, supra note 1.

[31] Id.

[32] See Riffin v. STB, 733 F.3d 340 (D.C. Cir. 2013), at 344.

[33] See Freight Rail & Common Carrier Obligation, Ass’n of Am. R.R., https://www.aar.org/issue/common-carrier-obligation (last visited Mar. 24, 2025).

[34] Id.

[35] 49 U.S.C. §§ 10701(c), 10702.

[36] See Common Carrier Obligation: Why Freight Railroads Must Transport Hazmat, Ass’n of Am. R.R. (May 2023), available at https://www.aar.org/wp-content/uploads/2023/05/AAR-Hazmat-Common-Carrier-Obligiation-Fact-Sheet.pdf.

[37] See STB Directs Up to Deliver Trains to Foster Farms, Surface Transp. Bd. (Dec. 30, 2022), https://www.stb.gov/news-communications/latest-news/pr-22-56. A significant concern in this case was the board’s failure to clearly articulate the legal basis for its emergency-service order. Some board members expressed discomfort with what appeared to be an extension of regulatory authority without properly identifying the specific statutory grounds that empowered such intervention. This lack of clear legal foundation raised questions about the scope and limits of the STB’s emergency powers, potentially creating regulatory uncertainty for railroads operating in similar circumstances.

[38] See STB Grants Preliminary Injunction; Orders BNSF Railway Company to Transport 4.2 Million Tons of Coal for Navajo Transitional Energy Company, LLC, Surface Transp. Bd. (Jun. 23, 2022), available at https://www.stb.gov/wp-content/uploads/PR-23-11.pdf.

[39] Note also that the board has left the application of emergency-service order to contracts ambiguous. See Expedited Service, EP 628 (1998), at 10 (“However, where no transportation is being provided, we do not believe that the mere existence of a contract precludes us from providing for temporary emergency service, upon a proper showing, so that traffic can move while any contract-related issues are being litigated in the courts.”); see also Expedited Relief for Service Emergencies EP 762 (“The NPRM did not make any new proposal regarding the application of section 11123 to contract traffic. In Expedited Relief, EP 628, the Board concluded that any advance rejection of all authority to address situations where a contract exists in an emergency would be inappropriate and declined to include any bright-line   prohibition. Expedited Relief, EP 628, slip op. at 10. In the NPRM, the Board made no proposals changing the status of existing law on this issue and sees no reason to revisit that position here.”)

[40] Luczak, supra note 5.

[41] Luczak, supra note 5.

[42] 49 U.S.C. § 11123 (c) (2).

[43] See Union Pacific R.R. Co. v. Surface Transp. Bd., No. 22-3648, Slip op. (8^th Cir. Aug. 20, 2024), available at https://11f458b2-df01-4ad9-ae57-300f05b7cea3.usrfiles.com/ugd/11f458_18e19593646f4491a54f708c7597b93f.pdf.

[44] Id.

[45] Id.

[46] AAR Preliminary Statement on STB’s Final Offer Rate Review and ADR Decisions, Ass’n of Am. R.R. (Dec. 19, 2022), https://www.aar.org/news/aar-preliminary-statement-on-stbs-final-offer-rate-review-and-adr-decisions/#:~:text=FORR%2C%20the%20rule%20modeled%20on,shipper%20or%20by%20the%20railroad.

[47] Union Pacific R.R. Co., supra note 43.

[48] Union Pacific R.R. Co., supra note 43.

[49] 49 U.S.C. § 10704 (a) (2).

[50] While abandonment procedures can be burdensome, the STB does provide streamlined alternatives. Railroads may use an exemption proceeding under 49 C.F.R. § 1152.60, which involves fewer procedural hurdles than standard abandonment. Additionally, a special class exemption exists for out-of-service lines under 49 C.F.R. § 1152.50. Despite these options, the abandonment process still represents a regulatory constraint on railroads’ operational flexibility that their intermodal competitors do not face.

[51] 47 C.F.R. pt. 1152, https://www.ecfr.gov/current/title-49/subtitle-B/chapter-X/subchapter-B/part-1152.

[52]  See STB to Review Small Roads’ Line-Abandonment Rules, Progress. Railr. (Aug. 18, 2003), https://www.progressiverailroading.com/rail_industry_trends/news/STB-to-review-small-roads-line-abandonment-rules–5421.

[53] Railroad Ventures Inc. v. Surface Transp. Bd., 299 F.3d 523 (6th Cir. 2002).

[54] CSX Transportation Inc. v. Surface Transportation Board, 96 F.3d 1528 (D.C. Cir. 1996).

[55] See Deferred Maintenance and Delayed Capital Improvements on Class II and Class III Railroads, U.S. Dep’t of Transp. (1989), https://railroads.dot.gov/sites/fra.dot.gov/files/fra_net/14975/Deferred_Maintenace_and_Delayed.pdf#:~:text=concentration%20and%20magnitude%20of%20those,railroads%2C%20and%20assistance%20from%20communities; Testimony of Chuck Baker, President, American Short Line and Regional Railroad Association, Bd. the Surface Transp. Bd., Docket No. EP 711 (Sub-No.1), Reciprocal Switching (Feb. 14, 2022), https://www.aar.org/wp-content/uploads/2022/02/ASLRRA.pdf#:~:text=•%20Small%20railroads%20average%20%243,of%20their%20light%20density%20track.

[56] Id.

[57] CSX Transportation Inc., supra note 54.

[58] Id.

[59] Id., at 3, 4.

[60] 49 U.S.C. § 10904 (b).

[61] See Rail Freight Competition Study as Provided by Montana Senate Bill (SB) 315, R.R Industry Inc. (2004), available at https://www.mdt.mt.gov/publications/docs/brochures/railways/railcomp-study.pdf.

Introduction

The United States currently stands at a critical strategic crossroads regarding its policy on advanced semiconductor exports to China, particularly those used for artificial-intelligence (AI) systems. The Biden administration implemented unprecedented restrictions on chip exports and semiconductor manufacturing equipment in October 2022,^[1] which were subsequently expanded and refined in October 2023^[2] and December 2024.^[3] These decisions have significantly shaped the technological landscape and set the stage for what may become a defining issue for the new Trump administration.

At the heart of this policy debate is a fundamental question about timelines and predictions: how quickly will transformative AI capabilities develop, and what will China’s indigenous semiconductor capacity look like when they do? The answer to these questions profoundly affect whether current export-control policies will achieve their strategic objectives or potentially backfire.

The case for maintaining or strengthening chip export controls, championed by figures like Anthropic CEO Dario Amodei,^[4] rests on the prediction that transformative AI capabilities will emerge relatively soon (within two-to-three years). If this “short-term advancement” scenario holds true, then denying China access to cutting-edge chips could meaningfully diminish their ability to deploy advanced AI systems at-scale, even if they were to be successful in either developing or copying the models. As Nathan Lambert notes, “a large part of export controls, if they work, is just that the amount of AI that can be run in China is going to be much lower.”^[5]

Conversely, skeptics of chip-export controls, like Ben Thompson, question the long-term efficacy of such restrictions.^[6] If truly significant AI advancements take longer (perhaps 10 or more years), China will likely develop its own chip-manufacturing capabilities during that timeframe. Under this “long-term independence” scenario, the primary effect of existing controls may be to deny revenue to U.S. firms like Nvidia Corp., while accelerating China’s push for technological self-sufficiency. As Dylan Patel observes: “China will win because of these restrictions long-term, unless AI does something in the short-term.”^[7] Notably, some observers combine skepticism of export controls on chips with support for strengthening export controls on the equipment needed to manufacture chips.^[8]

From a law & economics perspective, the question turns both on what the United States aims to accomplish by restricting chip exports and AI tools, and which future scenario is most likely.

This issue brief does not advocate for a specific approach to export controls. Instead, it aims to illuminate the assumptions, tradeoffs, and considerations that should inform this critical policy choice. By clarifying how differing forecasts about AI development and China’s technological trajectory recommend different optimal policies, we hope to provide the new administration with a framework to align its export-control strategy with its broader technological and geopolitical objectives.

I. Background: The Current Landscape

In recent, competition between the United States and China to develop their respective capacities for AI deployment and semiconductor manufacturing has intensified dramatically. This has been marked by several major developments that illustrated both the potential value of current U.S. export controls, and the limits of that strategy.

In January 2025, the Chinese AI firm Hangzhou DeepSeek Artificial Intelligence Basic Technology Research Co. (DeepSeek) released its R1 reasoning model, which appeared to demonstrate capabilities that were competitive with the U.S.-based OpenAI’s o1.^[9] What made this announcement particularly significant was that DeepSeek claimed to have accomplished this with substantially less computational resources than American companies typically employ—reportedly training the model for approximately $5-6 million, rather than the billions that some had assumed necessary. While some questioned these figures—noting they excluded research costs, distillation from other models, and human labor—the development nonetheless demonstrated China’s ability to innovate within existing constraints.^[10]

This followed the 2023 revelation that Huawei, despite being subject to some of the strictest U.S. controls, had produced its Mate 60 Pro smartphone featuring a domestically manufactured 7nm processor made by SMIC.^[11] While this doesn’t match Taiwan’s most advanced nodes (currently at 3nm), it represented a significant achievement for a company operating under significant restrictions. As Ben Thompson observed: “The existence of this chip wasn’t a surprise for those paying close attention: SMIC had made a 7nm chip a year earlier.” Nonetheless, the announcement triggered “overwrought reaction in Washington D.C.,” which led to further restrictions.^[12]

The current U.S. export-control regime, established during the Biden administration, operates through several mechanisms. Fundamentally, it restricts the export to China of cutting-edge graphics processing units (GPUs) used for AI applications. The initial controls focused on controlling both interconnection bandwidth and computing performance, as measured by floating-point operations per-second (FLOPS). Later iterations primarily targeted computing performance. Alternate versions of the same chips (such as Nvidia’s H800 and H200) were created specifically for the Chinese market with reduced capabilities (so-called “nerfed” chips) in order to comply with these restrictions.

Beyond chip exports, the controls also restrict semiconductor-manufacturing equipment (SME) needed to produce advanced nodes, with particularly tight controls on extreme-ultraviolet (EUV) lithography machines produced solely by Dutch firm ASML Holding. The restrictions also limit the ability of “U.S. persons” to support or service advanced semiconductor-manufacturing facilities in China, with rules that target both hardware and knowledge transfer.

The export controls invoke the Foreign Direct Product Rule (FDPR) to extend U.S. jurisdiction over foreign-made items that incorporate U.S. technology, or that were manufactured using U.S. equipment. As Gregory Allen notes, the December 2024 update to the U.S. export controls even created “new FDPRs and updated de minimis provisions” that expanded unilateral U.S. authority, potentially capturing “all of the SME made by any company on Earth.”^[13]

These restrictions have created a complex set of responses and adaptations. While they have slowed China’s advancement at the cutting edge, they haven’t stopped it entirely. As Allen noted, “SMIC was already producing and selling 7nm chips no later than July 2022 and potentially as early as July 2021, despite having no EUV machines.”^[14] But the controls have “dramatically constrained SMIC’s ability to scale up 7nm production,” limiting output to the “low tens of thousands” of wafers monthly, instead of the “hundreds of thousands” originally planned.^[15]

The restrictions have also spurred efficiency innovations. DeepSeek, for example, developed advanced techniques to overcome bandwidth limitations in the H800 chips they could legally access, programming “20 of the 132 processing units on each H800 specifically to manage cross-chip communications” by working at a lower programming level than Nvidia’s CUDA (for “Compute Unified Device Architecture”) parallel-computing platform.^[16] Such adaptations reflect China’s determination to progress in AI development, despite the constraints imposed by U.S. export controls.

Meanwhile, the global semiconductor landscape remains dominated by Taiwan Semiconductor Manufacturing Co. (TSMC), which produces the most advanced chips worldwide. As Ben Thompson notes, Taiwan’s proximity to mainland China, and China’s longstanding claims on the territory, contribute to a precarious geopolitical situation in which “TSMC’s foundries — and Samsung’s — are within easy reach of Chinese missiles,” which in turn presents “a major issue if you are a U.S. military planner.”^[17] This dependence on Taiwan has motivated both U.S. political efforts to onshore chip manufacturing and Chinese ambitions for AI self-sufficiency.

It is against this complex backdrop that it now falls to the Trump administration to reassess U.S. export-control policy, weighing both the existing controls’ demonstrated effects and the potential trajectories for both AI development and Chinese semiconductor capacity in the coming years.

II. Key Decision Factors

A. Timeline Considerations

The most crucial factor in determining optimal export-control policy is predicting the timeline for transformative AI development. These predictions shape whether export controls will secure a meaningful advantage, or simply accelerate China’s push for independence.

1.  The short-term AI-advancement scenario

Proponents of the short-term AI-advancement scenario argue that truly transformative AI capabilities are imminent. Anthropic CEO Dario Amodei has suggested that “super powerful AI” could emerge by 2026-27, providing whichever nation possesses it with significant military advantages.^[18] This prediction is used to justify maintaining strong export controls to ensure the United States and its democratic allies maintain their lead during this critical window.

Under this scenario, denying China access to cutting-edge chips would effectively limit that nation’s ability to deploy advanced AI models at-scale, even if the underlying technology could be developed or copied. As Dylan Patel notes:

To some extent, training a model does effectively nothing… The thing that Dario [Amodei is] (…) speaking to is the implementation of that model, once trained to then create huge economic growth, huge increases in military capabilities… But that requires a significant amount of compute.^[19]

This argument is bolstered by accounts from Chinese AI firms themselves. DeepSeek CEO Liang Wenfeng has admitted that “money has never been the problem for us; bans on shipments of advanced chips are the problem.”^[20]

2. Long-term AI-advancement scenario

Those who foresee a longer timeline for transformative AI argue that export controls could be counterproductive. Ben Thompson contends that denying China access to advanced chips primarily serves to sew “the seeds for competition in an industry — chips and semiconductor equipment — over which the U.S. has a dominant position.”^[21] In other words, if significant AI breakthroughs take a decade or more, the current restrictions may simply motivate and accelerate China’s development of indigenous chipmaking capabilities.

The timeline debate reflects fundamental uncertainty about the pace and trajectory of AI progress. As Nathan Lambert observes:

if you’re making me give a year, I’m going to be like, “Okay, I have AI CEOs saying this. They’ve been saying two years for a while. (…) I need to take their word seriously, but also understand that they have different incentives.” So I would (…) add a few years to that. Which is how you get something similar to 2030 or a little after 2030..^[22]

B. Technical Realities

In addition to the importance of predictions about AI timelines, U.S. export-control policy must also take account of practical technical considerations.

1. Training versus inference compute

Export controls must distinguish between computational power (commonly referred to as “compute”) used for training new AI models and for inference (deploying existing models). While training frontier models requires enormous compute resources, inference (running those models) also demands significant hardware, especially for advanced reasoning capabilities. Nathan Lambert points out that reasoning models like OpenAI’s o1 require especially significant amounts of computational power.^[23]

2. China’s optimization innovations

One counterargument to export controls comes from China’s demonstrated ability to optimize AI systems under hardware constraints. DeepSeek’s R1 model achieved capabilities competitive with OpenAI’s o1 despite being forced by U.S. sanctions to use less-powerful H800 GPUs with constrained memory bandwidth.^[24] AI investor Nat Friedman poses the question:

is it in fact the case that, if you impose sanctions on China so that they can’t get as much compute, then all you do is give them this constraint to optimize against, which says, ‘How can we squeeze every little bit of IQ out of every flop that we’ve got?’, and they just find clever ways of doing a lot more with a lot less.^[25]

But optimization of this kind also produces tradeoffs; a company that focuses on optimization does so at the expense of putting their scarce top engineers on other tasks. It is at least possible that U.S. researchers who do not face such constraints will use their time to develop even better AI applications.

3. Manufacturing challenges beyond EUV

While export controls on EUV-lithography equipment have successfully prevented China from producing the most advanced logic chips, Chinese manufacturers have demonstrated the ability to produce 7nm chips using older deep ultraviolet (DUV) lithography through techniques like multi-patterning. As Gregory Allen notes: “SMIC was already producing and selling 7 nm chips no later than July 2022 and potentially as early as July 2021, despite having no EUV machines.”¹⁴ This raises questions about the long-term effectiveness of equipment-focused export controls.

In response, Ben Thompson has argued that “it’s reasonable to assume that [SMIC’s] fab won’t progress further without a Chinese supplier developing” EUV.^[26] Thompson advocates strengthening export controls on equipment that would allow China to make state-of-the-art chips, while abandoning export controls on finished chips.^[27]

C. Economic Impacts

Export-control decisions carry significant economic consequences that must be weighed against potential security benefits.

1. Effects on US semiconductor companies

The impact of export controls on U.S. semiconductor companies has been debated extensively. Wafer-fabrication-equipment (WFE) suppliers have argued that export controls threaten their business model, with some politicians claiming that the companies face a “death spiral.”^[28] The industry-research firm SemiAnalysis counters, however, that “[d]espite a short-term shock or loss of business, the slack is taken up by customers ex-China within a few quarters” and that “the 24 months under export controls have been among the best in history for American WFE suppliers.”^[29]

For AI-chip manufacturers like Nvidia, the picture is more complex. Export controls harm Nvidia directly by reducing demand for their chips, but potentially help Nvidia indirectly by making it more difficult for Chinese competitors to develop products that perform as well. As Gregory Allen notes, Nvidia would likely prefer not to be bound by export controls.^[30] On the other hand, however, “there are some elements of the new export control package that actually help Nvidia by hurting its Chinese competitors.”^[31]

2. Taiwan’s economic security

The semiconductor industry, particularly TSMC, is critically important for Taiwan. As home to the world’s leading advanced-chip manufacturer, Taiwan has historically occupied a unique strategic niche, with its economic value serving as a potential deterrent against Chinese military aggression. U.S. export controls that look to hinder China’s technological advancement thus may paradoxically erode this carefully balanced deterrence mechanism. This shift could fundamentally alter the calculus of potential conflict by making Taiwan less economically indispensable to China, and thereby increasing the risk of military action.

As Ben Thompson notes:

… both China and the U.S. need access to the best chip maker in the world, along with a host of other high-precision pieces of the global electronics supply chain. That means that a hot war, which would almost certainly result in some amount of destruction to these capabilities, would be devastating…one of the risks of cutting China off from TSMC is that the deterrent value of TSMC’s operations is diminished.^[32]

There are two mechanisms at play. First, to the extent that Chinese businesses cannot buy TSMC’s products, then a disruption due to war would not worsen their situation. Second, export controls serve to encourage the development of domestic manufacturing capacity in China for state-of-the-art chips. When Chinese manufacturers achieve this goal, then it may no longer be possible to  reinstate Chinese economic dependence on Taiwan.

3. Effects on US economy beyond semiconductor manufacturing

The short-term effects of chip export controls on the U.S. economy may be small beyond companies like WFE suppliers and Nvidia. But to the extent that they serve to reduce China’s dependence on Taiwanese manufacturing, the controls may increase the likelihood of a war over Taiwan. A hot war, disrupting all semiconductor manufacturing in Taiwan, would likely have very significant consequences for the U.S. economy. Taiwan manufactures not only the state-of-the-art (leading-edge) semiconductors used in iPhones and Nvidia’s top AI-focused products, but also other commodity (trailing-edge) chips that are indispensable for vast swaths of the modern economy, used in “everything from cars to stereos to refrigerators.”^[33]

D. Geopolitical Dimensions

Export controls function within a broader geopolitical context that shapes their implementation and consequences.

1. Allied cooperation challenges

Effective export controls require cooperation from key allies, particularly Japan and the Netherlands, which host critical semiconductor-equipment manufacturers. Gregory Allen notes that: “White House officials have been discussing restrictions on capital equipment with counterparts in the Hague and Tokyo since Biden’s inauguration,” but that “the Netherlands apparently does not yet see eye-to-eye with U.S. assessments on the need to set the threshold at 16/14 nm or smaller for logic chips.”^[34]

This cooperation challenge reflects differing economic interests and threat perceptions. In 2023, 29% of Dutch firm ASML’s sales were to customers in China, creating a strong disincentive to further restrict exports.^[35]

2. Taiwan’s vulnerability

As noted in the previous section on economic impacts, Taiwan’s geopolitical vulnerability represents perhaps the most critical consideration in export-control policy. If export controls reduce China’s dependence on Taiwan, while maintaining Taiwan’s importance to the United States, this could create dangerous incentives for Chinese action. With broad and effective U.S.-imposed export controls on chips, China doesn’t risk disrupting their semiconductor supply chain by attacking Taiwan. On the other hand, a war in Taiwan would likely create massive disruptions for the U.S. economy due to the level of U.S. dependence on Taiwan-made chips.

III. Conclusion

The debate surrounding AI-related U.S. export controls reflects a fundamental uncertainty about technological trajectories. While the actual pace of AI advancement will ultimately determine policy efficacy, decisionmakers must act based on incomplete information. This brief has outlined two plausible scenarios—one in which transformative AI capabilities emerge rapidly and another in which they develop more gradually—and described how each suggests different optimal approaches to export controls.

For policymakers navigating this uncertainty, several principles warrant consideration, regardless which scenario materializes. First, export controls should be designed with sufficient flexibility to adapt as the technological landscape evolves. Static policies risk becoming either irrelevant or counterproductive as conditions change. Second, policy effectiveness depends heavily on multilateral cooperation. Unilateral actions by the United States face significant limitations, as demonstrated by China’s ability to procure restricted technologies through third-party countries. Third, the economic impacts of export controls extend beyond immediate revenue considerations to long-term market positioning and technological leadership. This includes the possibility that they will make it likelier that China will attack Taiwan, and the disruption to the U.S. economy that would entail.

Ultimately, the export-control decisions made in 2025 will reflect implicit forecasts about AI development trajectories. By acknowledging these forecasts explicitly and establishing clear metrics to evaluate them, policymakers can create more resilient policies capable of adaptation as technological realities unfold. Whichever approach the administration pursues, it should be implemented with clear objectives, regular reassessment mechanisms, and recognition of the inherent uncertainties in predicting technological futures.

^[1] Martijn Rasser & Kevin Wolf, The Right Time for Chip Export Controls, Lawfare (Dec. 13, 2022), https://www.lawfaremedia.org/article/right-time-chip-export-controls.

^[2] Gregory Allen, Understanding the Biden Administration’s Updated Export Controls, Cent. Strateg. Int. Stud. (Dec. 11, 2024), https://www.csis.org/analysis/understanding-biden-administrations-updated-export-controls.

^[3] Id.

^[4] Dario Amodei, On DeepSeek and Export Controls, Dario Amodei (Jan. 2025), https://darioamodei.com/on-deepseek-and-export-controls.

^[5] Lex Fridman, Dylan Patel, & Nathan Lambert, DeepSeek, China, OpenAI, NVIDIA, xAI, TSMC, Stargate, and AI Megaclusters, Lex Fridman Podcast (Feb. 3, 2025), https://lexfridman.com/deepseek-dylan-patel-nathan-lambert-transcript.

^[6] See, e.g., Ben Thompson, DeepSeek FAQ, Stratechery (Jan. 27, 2025), https://stratechery.com/2025/deepseek-faq.

^[7] Fridman, Patel, & Lambert, supra note 5.

^[8] Ben Thompson, AI Promise and Chip Precariousness, Stratechery (Feb. 25, 2025), https://stratechery.com/2025/ai-promise-and-chip-precariousness.

^[9] Thompson, supra note 6.

^[10] Id.

^[11] Id.

^[12] Id.

^[13] Allen, supra note 2.

^[14] Id.

^[15] Id.

^[16] Thompson, supra note 6.

^[17] Ben Thompson, Chips and Geopolitics, Stratechery (May 19, 2020), https://stratechery.com/2020/chips-and-geopolitics.

^[18] Amodei, supra note 4.

^[19] Fridman, Patel, & Lambert, supra note 5.

^[20] Jordan Schneider et al., Deepseek: The Quiet Giant Leading China’s AI Race, ChinaTalk (Nov. 27, 2024),  https://www.chinatalk.media/p/deepseek-ceo-interview-with-chinas; see also Allen, supra note 2.

^[21] Thompson, supra note 6.

^[22] Fridman, Patel, & Lambert, supra note 5.

^[23] Id.

^[24] Thompson, supra note 6.

^[25] Ben Thompson, An Interview with Daniel Gross and Nat Friedman About Models, Margins, and Moats, Stratechery (Jan. 23, 2025), https://stratechery.com/2025/an-interview-with-daniel-gross-and-nat-friedman-about-models-margins-and-moats.

^[26] Thompson, supra note 8.

^[27] Id.

^[28] Dylan Patel, Jeff Koch, & Sravan Kundojjala, Fab Whack-A-Mole: Chinese Companies Are Evading U.S. Sanctions, SemiAnalysis (Oct. 28, 2024), https://www.semianalysis.com/p/fab-whack-a-mole-chinese-companies.

^[29] Id.

^[30] Allen, supra note 2.

^[31] Id.

^[32] Ben Thompson, Taiwan and Tech’s Geopolitical Realities, ARM on Mac?, TSMC’s Choice, Stratechery (May 11, 2020), https://stratechery.com/2020/taiwan-and-techs-geopolitical-realities-arm-on-mac-tsmcs-choice.

^[33] See Thompson, supra note 8.

^[34] Allen, supra note 2.

^[35] Toby Sterling, ASML Expects US, Dutch Export Rules to Hit China Sales by 10-15%, Reuters (Jan. 24, 2024), https://www.reuters.com/technology/asml-expects-us-dutch-export-rules-hit-china-sales-by-10-15-2024-01-24.

Introduction

President Donald Trump signed an executive order (EO) on Inauguration Day initiating the withdrawal of the United States from the World Health Organization (WHO).[1] This action quickly provoked consternation among some public health experts; one was quoted in The New York Times claiming it “will undermine the nation’s standing as a global health leader and make it harder to fight the next pandemic.”[2] This brief offers some background on both the EO and the WHO itself, outlines the order’s likely implications, and offers some tentative suggestions for next steps.

I. Reasons the Executive Order Was Issued

President Trump’s EO offered several reasons for his decision to withdraw from the WHO, including:[3]

• The WHO’s mishandling of the COVID-19 pandemic and other global health crises;
• its failure to adopt urgently needed reforms;
• its inability to demonstrate independence from certain WHO member states; and
• its demands for payments from the United States that are disproportionate to the size of the U.S. population

The first three of these reasons are the very same ones President Trump used to justify his notification to withdraw the United States from the WHO on July 6, 2020—an order that was later revoked by President Joe Biden on his Inauguration Day in 2021.

Of note, the EO also seeks to:[4]

• pause U.S. funding for the WHO;
• withdraw U.S. government personnel and contractors working for the WHO;
• “identify credible and transparent United States and international partners to assume necessary activities previously undertaken by the WHO”; and
• cease negotiation on the WHO Pandemic Agreement and amendments to the International Health Regulations.

In other words, the EO is motivated by the WHO’s poor performance during the COVID pandemic, including, especially, its promotion of economically and socially disastrous lockdowns; a fear that this failure would be repeated through the development of a new pandemic treaty modeled, at least in part, on the response to COVID; a concern that the WHO is beholden to certain foreign powers; and a view that the U.S. funds spent on the WHO could better be deployed elsewhere.[5]

II. What Is the WHO?

Founded in 1948, the WHO comprises a permanent United Nations secretariat based in Geneva, Switzerland, which oversees public-health projects around the globe. The WHO’s constitution defines its objective as “the attainment by all peoples of the highest possible level of health.”[6] Initially, it sought to achieve this objective by combatting such widespread infectious diseases as cholera, plague, and smallpox.

In 1951, the WHO introduced the International Sanitary Regulations, which subsequently evolved into the International Health Regulations (IHR), to standardize disease reporting globally. Through standardized reporting and coordination of responses, the WHO played an important role in containing numerous pandemics, including the 1957 Asian Flu, the 1968 Hong Kong Flu, and the 2003 severe acute respiratory syndrome (SARS) outbreak. Similar techniques were used in its successful campaign to eradicate smallpox.

Over time, however, the WHO has sought to address a wider range of health problems. To do so, it changed its funding model. Originally funded by core donations from member nations, the WHO began to develop “Special Programmes,” starting in the 1970s, that would attract specific funding from donors. Over time, these grew in importance and now comprise the vast majority of the WHO’s funding and expenditure.[7]

In 2022-23, only about 13% of the WHO’s total $7.8 billion budget came from assessed contributions.[8] The remainder—fully 87%, or $6.8 billion—came from “voluntary contributions,” often given to support special programs. This increasingly heavy reliance on voluntary contributions has cast doubt on whether the WHO is setting global health priorities or reflecting the interests of private agendas, especially in light of some of the WHO’s recent activities.

Of equal concern, whereas the WHO’s funding originally came entirely from individual governments, this has been increasingly replaced over time by intergovernmental bodies and private philanthropy. In 2023, the four largest contributors, responsible for around 45% of WHO’s funding, were the United States (15.6%), the Gates Foundation (12.7%), Germany (11%), and the Global Alliance for Vaccines (7.4%).

III. What Would a United States Exit from the WHO Mean?

A U.S. exit from the WHO would have many ramifications. Here, we adumbrate a few of the most significant: the effects on pandemic management, the effects of funding cuts on the WHO, the effects on WHO reform, and the implications for the currently stalled pandemic treaty.

A. Implications for Pandemic Management

Pandemics do not respect the often-arbitrary geographical borders established by nation states. It is almost impossible for a large nation with many border-crossing points, such as the United States, to isolate itself completely from a pandemic. As such, some degree of coordination will inevitably be required if nations are to limit the harm of future pandemics.

Pandemic prevention and management have been core functions of the WHO since the body’s inception. While there are other organizations that perform some important related activities, the WHO plays a dominant role, especially with regard to the standardization of disease reporting through the International Health Regulations (IHR) and international coordination of responses.

The recent White House EO called on the secretary of state to “identify credible and transparent United States and international partners to assume necessary activities previously undertaken by the WHO.” It also called for an end to negotiations on the WHO Pandemic Treaty.

It is possible that a new group of likeminded nations working collaboratively would be considerably more effective at preventing, identifying, and responding to future pandemics than the WHO has shown itself to be. There is, however, a risk that the United States choosing to leave the WHO before such a group is established could mean that most, if not all, of the organization’s other 193 nations remain members and negotiate a pandemic treaty (however ineffectual, or even counterproductive) on which the United States will have no input. Worse still, the United States may be excluded from access to important information about disease outbreaks, making it more difficult to respond to future pandemics.

B. Loss of US Funding Is Unlikely to Kill the WHO

As noted above, while the United States has been the largest single funder of the WHO, it still only represents about 16% of total funds.[9] While the loss of such a large sum may require WHO to cut some activities, it would not likely end the organization. Indeed, the withdrawal of the United States from WHO and the termination of U.S. government funding might lead nations like China or nonprofit organizations like the Gates Foundation to increase funding, both to continue programs they favor and to curry favor with WHO leadership, possibly worsening the very outcomes that motivate the U.S. withdrawal.

C. Hindering Needed WHO Reforms

The WHO’s failures during the COVID-19 pandemic are increasingly apparent. The organization promoted deeply harmful lockdown policies that were contrary to its own guidelines, and that will arguably exacerbate global inequality and ill health for generations. It then compounded these harms by colluding with the Chinese government to obscure the disease’s origins.[10] These failures were underpinned by malignant political leadership. Under the leadership of Tedros Adhanom Ghebreyesus, the organization has consistently misled nations about the risk of future pandemics.[11]

But the WHO also employs many excellent and honorable physicians and scientists who would probably welcome change, including change in leadership. Since the WHO is unlikely to vanish, the solution must be to reform.

Exiting the WHO would prevent the United States from using its funding and participation as leverage to force through that reform. While it is difficult to change large organizations, it is possible. The WHO previously was revitalized under the leadership of former Norwegian Prime Minister Gro Harlem Brundtland from 1998 to 2003. Under new leadership—which the United States could push for if it were to remain a member—a similar beneficial change could occur.

President Trump will leave office in January 2029 and the new president could seek to rejoin the WHO. This could mean financing an organization perhaps even more beholden to corrupting private and geopolitical interests than it is today.

D. Likelihood of a Misguided Pandemic Treaty

Given the WHO’s recent history of project failure and capture by vested interests, it should not be in charge of a pandemic treaty for the entire world. Its only previous treaty—the Framework Convention on Tobacco Control—has been an expensive mess that has likely delayed the transition away from smoking.[12]

Perhaps a reformed WHO could oversee the development and implementation of an effective pandemic treaty, but today’s WHO cannot. Treaty negotiations have stalled because of opposition, including from U.S. interests. But the continued desire of WHO leadership to push for a treaty is not an argument in favor of a U.S. withdrawal from WHO. The opposite is more nearly the case: U.S. membership of the WHO is far more likely to ensure that the WHO does not pursue its pandemic-treaty fantasy.

IV. Where to Next?

Whether or not the United States exits the WHO, there is an urgent need to address the issues raised in the White House EO—including, but not limited to, the failures of the U.S. and other health-care systems to address the threat of COVID in a reasonable manner; reforming the WHO; and building a “coalition of the willing” to address future pandemic threats (with or without the WHO).

A. Understanding the Real COVID Failures and Rebuilding Trust

It is easy to blame the WHO for the policy disasters that led to and were enacted during the COVID-19 pandemic. And while the WHO certainly deserves some blame, many of those policies would have looked much the same had WHO not been involved.

The WHO did not initiate the gain-of-function research at the Wuhan Institute of Virology or the lab’s lack of appropriate biosafety controls—which in combination probably led to the pandemic.[13] Nor did the WHO claim that vaccines completely prevent transmission of COVID. Nor, for that matter, was it the WHO that first suggested lockdowns and other mandates.

In the United States, many state governments and the federal government made mistakes. In the case of the federal government, this was in no small part the result of state actors funding dangerous research, knowingly giving bad advice, and repeatedly lying to Congress about the mistakes and prior lies.[14]

But governments had willing allies in other members of the “pandemic industrial complex,” including companies that manufacture COVID tests and personal protective equipment (PPE), as well as those pharmaceutical firms that have profited from vaccine drives that have continued long after the end of the pandemic—at great expense, but little to no benefit.[15] While the WHO was a useful tool in these efforts, supported by the vested interests that funded it, it was not an essential one, nor was it the root of the problem.

Unfortunately, these mistakes have had serious consequences, including a loss of trust in governments’ advice regarding vaccines and health care more generally. Distrust of the public-health establishment is at an all-time high: a recent academic survey found that two-thirds of Americans do not trust their health-care system.[16] My own research has demonstrated massive increases in vaccine hesitancy.[17]

To earn back the trust of the American people, the Trump administration should commission a full, independent analysis of COVID, from its origins to the many policy failures, including those that came under his first administration.

B. The WHO Must Be Reformed

The White House EO does not immediately withdraw the United States from the WHO. Rather, it begins the process. It is still possible that other members of the WHO could persuade its leadership to offer concessions sufficient to keep the United States in the fold. But regardless of what drives it, the WHO urgently requires radical reform so that it can operate effectively as a coordinating body to address global health challenges.

At a minimum, the WHO should be required to refocus on activities that genuinely require global coordination. This might be achieved, in part, by changing the organization’s governance structure so that it is more directly accountable to member states. Currently, WHO programs are agreed to an annual basis at the World Health Assembly, and then implementation is left mostly in the hands of the appointed secretariat. Giving those member states more regular and direct say in the WHO’s actions could potentially reduce the influence of a few powerful multilateral and non-state donors.

Secondly, the WHO’s members could cap or prohibit contributions from non-members. While partnerships can be valuable, these should be expressly approved by members and funds should not flow via the WHO secretariat. They should instead be structured through separate, transparent, and accountable entities. Such caps would have the effect of significantly reducing the WHO’s budget, forcing it to focus on areas of critical global importance.

A reformed WHO could be an important agency. It is, after all, the only international health agency constitutionally governed by member states alone.[18] While it has been corrupted by vested interests and the inevitable self-serving decay that afflicts large unaccountable bureaucracies, a substantially reformed WHO could be useful. It would need to be less than half its current size and focused on what it is uniquely positioned to deliver, free from private influence. It can then go back to shaping the coordination standards for management of diseases like tuberculosis and malaria, and exposing the deadly international criminal industry of fake drugs. Focused on building technical capacity within countries that request such help, it could remove the need for such aid (and therefore the WHO itself) in the years to come.

C. A Coalition of the Willing

If the United States does exit WHO, one hopes it will have identified “credible and transparent … international partners to assume necessary activities previously undertaken by the WHO.” Such a coalition of the willing is sorely needed, especially to share information about new outbreaks and other emergent threats; to coordinate access to virus (and other pathogen) information (including rapid dissemination of genetic sequences); and to provide appropriate incentives for the development and delivery of suitable vaccines and treatments.[19]

[1] See Withdrawing the United States from the World Health Organization, White House (Jan. 20, 2025), https://www.whitehouse.gov/presidential-actions/2025/01/withdrawing-the-united-states-from-the-worldhealth-organization.

[2] Sheryl Gay Stolberg, Trump Withdraws U.S. from World Health Organization, N.Y. Times (Jan. 20, 2025), https://www.nytimes.com/2025/01/20/us/politics/trump-world-health-organization.html.

[3] White House, supra note 1, § 1.

[4] Id. at 2(d), 4.

[5] See Roger Bate, A Pandemic Treaty Will Double Down on all the Bad Ideas from COVID-19, Int’l Ctr. L. Econ. (Feb. 2, 2024), https://laweconcenter.org/resources/a-pandemic-treaty-will-double-down-on-all-the-bad-ideas-from-covid-19; Kevin Bardosh & Jay Bhattarcharya, The World Health Organization’s Pandemic Treaty Ignores Covid Policy Mistakes, RealClear Policy (Apr. 30, 2024), https://www.realclearpolicy.com/articles/2024/04/30/the_world_health_organizations_pandemic_treaty_ignores_covid_policy_mistakes_1028504.html; David Bell, Pandemic Preparedness and the Road to International Fascism, 82(5) Am. J. Econ. & Socio. 395 (2023), https://onlinelibrary.wiley.com/doi/10.1111/ajes.12531?msockid=3815d67b9a696639042fc67b9b0b6713.

[6] Constitution of the World Health Organization, 1 U.N.T.S. 9, (Jul. 22, 1946), available at https://treaties.un.org/doc/Treaties/1948/04/19480407%2010-51%20PM/Ch_IX_01p.pdf.

[7] See Contributor, World Health Org., https://open.who.int/2022-23/contributors/contributor (last visited Jan. 27, 2025).

[8] Id.

[9] World Health Organization, supra note 7.

[10] After Action Review of the COVID-19 Pandemic: The Lessons Learned and a Path Forward, U.S. House of Representatives, Select Subcommittee on the Coronavirus Pandemic, 118^th Cong. (Dec. 4, 2024), available at https://oversight.house.gov/wp-content/uploads/2024/12/12.04.2024-SSCP-FINAL-REPORT.pdf.

[11] See Rational Policy Over Panic: Re-evaluating Pandemic Risk Within the Global Pandemic Prevention, Preparedness and Response Agenda, U. Leeds, https://essl.leeds.ac.uk/downloads/download/228/rational-policy-over-panic (last visited Jan. 27, 2025).

[12] See Martin Cullip & Roger Bate, Lessons from the WHO Framework Convention on Tobacco Control for the WHO Pandemic Treaty, Int’l Ctr. L. & Econ. (Nov. 26, 2024), https://laweconcenter.org/resources/lessons-from-the-who-framework-convention-on-tobacco-control-for-the-who-pandemic-treaty.

[13] See Jocelyn Kaiser, NIH Says Grantee Failed to Report Experiment in Wuhan that Created a Bat Virus that Made Mice Sicker, Science (Oct. 21, 2021), https://www.science.org/content/article/nih-says-grantee-failed-report-experiment-wuhan-created-bat-virus-made-mice-sicker; Ed Browne, Fauci Was ‘Untruthful’ to Congress About Wuhan Lab Research, New Documents Appear to Show, Newsweek (Dec. 1, 2021), available at https://www.congress.gov/117/meeting/house/114270/documents/HHRG-117-GO24-20211201-SD004.pdf.

[14] See Executive Grant of Clemency: Joseph R. Biden, JR. President of the United States of America, U.S. Dep’t of Just., Off of the Pardon Att’y (Jan. 19, 2025), https://www.justice.gov/pardon/media/1385746/dl?inline.

[15] See What Next for China’s Covid-industrial Complex?, The Economist (Dec. 8, 2022), https://www.economist.com/business/2022/12/08/what-next-for-chinas-covid-industrial-complex; Bell supra note 5.

[16] See Do You Trust the American Health Care System? Can Policymakers Help you Trust It More?, Johns Hopkins Carey Bus. Sch. (Sep. 12, 2024), https://carey.jhu.edu/articles/american-health-care-policymakers-help-trust.

[17] See Roger Bate, Vaccine Hesitancy and the Pandemic: Physician Survey Responses, Int’l Ctr. L. & Econ. (Feb. 23, 2024), https://laweconcenter.org/resources/vaccine-hesitancy-and-the-pandemic-physician-survey-responses.

[18] See World Health Org., supra note 6.

[19] In addition, it may be necessary to use other methods to persuade undemocratic nations to share data and warn of impending disaster—e.g., by agreeing to send them money and vaccines quickly when problems hit.

Executive Summary

The proposed transaction between T-Mobile US Inc. (T-Mobile) and United States Cellular Corporation (UScellular) does not appear to present any significant competitive harms and carries the potential of significant consumer benefits via increased competition among wireless providers. Thus, based on current publicly available information, the Federal Communications Commission (FCC) and the U.S. Justice Department (DOJ) should approve the transaction in its entirety for the following reasons:

• UScellular is a struggling regional carrier with significant structural disadvantages compared to national carriers like AT&T, Verizon, and T-Mobile. UScellular currently covers approximately 10% of the U.S. population and accounts for about 1% of wireless connections nationwide. Its disadvantages include a lack of economies of scale and density, high operational costs, and limited resources to keep up with the capital expenditures required for 5G deployment and other critical network upgrades. As a result of these disadvantages, UScellular has experienced declining subscriber numbers, share of subscribers, and revenue.
• UScellular provides no meaningful competitive constraints on T-Mobile. T-Mobile sets its plan prices nationally and does not adjust them based on local competition, including UScellular’s presence, pricing, or service offerings and quality. Given its small size, limited footprint, and uncompetitive pricing, UScellular plays no role as a “maverick” disrupting the market and is unlikely to do so in the foreseeable future.
• Post-transaction, T-Mobile will continue to face robust competition from national wireless carriers and cable providers. T-Mobile is currently in a heated race with national wireless providers AT&T, Verizon, and EchoStar, along with cable wireless providers for subscribers across the United States. In addition, the rapid growth of cable-wireless providers—particularly Xfinity Mobile and Spectrum Mobile—is expected to exert significant competitive pressure on “traditional” wireless carriers. Cable-wireless providers leverage their existing cable infrastructure and bundled service offerings to attract customers, often at lower prices.

I. Introduction

T-Mobile in May 2024 announced its intention to enter into a transaction with UScellular.[1] The deal would include the acquisition of UScellular’s wireless operations, including its wireless customers and stores, as well as select spectrum assets.[2] As part of the deal, T-Mobile would enter into a long-term agreement to lease space on more than 2,000 UScellular towers. The transaction is valued at approximately $4.4 billion in cash and assumed debt.

The transaction would combine the assets of one of the three largest national wireless carriers (T-Mobile) with a regional provider (UScellular) that has faced challenges due to its lack of scale and density. UScellular currently covers approximately 10% of the U.S. population and accounts for about 1% of wireless connections nationwide. The parties claim the transaction would strengthen T-Mobile’s position in the rural and less densely populated areas where UScellular has focused its operations. After the transaction, T-Mobile will acquire about 30% of UScellular’s spectrum holdings in the 600 MHz, 700 MHz A Block, PCS, AWS, and 2.5 GHz bands, which could help to improve T-Mobile’s network capacity and coverage in certain areas.

The transaction will require approval from regulatory bodies, including the Federal Communications Commission (FCC) and the U.S. Justice Department (DOJ), who will assess its potential impact on competition in the wireless market. While there has been limited public opposition to the transaction, a July 2024 letter from several U.S. senators to the DOJ and FCC urged the regulators to scrutinize the acquisition in light of previous wireless mergers.[3] The letter argued that the acquisition would further consolidate an already highly concentrated market, reducing competition and potentially leading to higher prices and fewer choices for consumers.

The senators pointed to negative effects following T-Mobile’s previous acquisition of Sprint, including allegedly slower price declines and some recent price increases after the expiration of several merger commitments. The letter claims the transaction would eliminate potential competition between T-Mobile and UScellular in rural markets, where network expansion was anticipated. In addition, the letter claims the transaction would further concentrate spectrum holdings among the largest carriers, potentially hindering competition from smaller firms.

The senators’ letter, however, overlooks a major factor driving both T-Mobile’s previous acquisition of Sprint, which was cleared by the courts in 2020, and its proposed transaction of UScellular. Much as with Sprint, T-Mobile is seeking to acquire certain assets of a “weakened competitor”[4] in order to employ its assets in a more productive manner.

In a sense, this is a potential example of what the late Henry Manne called the “market for corporate control.”[5] T-Mobile believes it can take over a subset of UScellular’s assets and use them more efficiently. Indeed, UScellular appears to be in an even worse competitive position than Sprint, as UScellular is only a regional competitor with a very small market share and few competitive prospects outside of this proposed transaction.[6] T-Mobile has shown itself to be an innovator in the wireless space and could continue to enhance its ability to compete with Verizon and AT&T in rural markets with the addition of UScellular’s spectrum and its presence in those markets.

While the transaction will eliminate UScellular from some aspects of the wireless services market, it has the potential to generate significant consumer benefits and, contrary to the concerns raised in the senators’ letter, enhance competition in the mobile wireless market.

This issue brief evaluates some of the key issues surrounding the transaction from the perspective of law and economics. It is crucial to consider the current dynamics of the mobile-wireless market. Criticisms of the deal to date have overlooked the growing competition that market leaders face from EchoStar, cable/cable wireless, and other wireless providers. The transaction would allow T-Mobile to better compete against these new entrants and other large incumbents, potentially driving innovation and improved services.

In addition, the transaction would likely yield substantial consumer benefits, particularly in those rural areas where UScellular has a strong consumer presence but lags competitors in deploying the latest technology. Notably, T-Mobile’s resources and technology could accelerate the deployment of 5G networks in these underserved regions, helping to bridge the digital divide. Moreover, the transaction could also lead to more efficient use of scarce spectrum resources. T-Mobile’s expertise in network optimization could enhance the use of the acquired spectrum holdings, improving overall network capacity and performance.

II. Market Definition and Competitive Landscape

Today’s U.S. wireless markets are competitive and dynamic. In recent years, more consumers have obtained a mobile device and have more options for carriers, and they have experienced vast improvements in performance.

Pew reports that 98% of Americans now have mobile phones and 91% have smartphones.[7] Just five years earlier, only 77% of Americans had a smartphone.[8] As of 2017, “cable wireless” (mobile service offered by cable providers) was virtually unknown.[9] Today, cable wireless accounts for nearly 4% of subscribers (Table 1). 5G technology was first rolled out in 2018; today, 77% of operator locations have 5G.[10] Consumers in nearly every local market in the country can choose from among three or more providers as of 2022.[11]

Table 1: Mobile Subscribers by Provider

Source: Companies; Statista[12]

In comments to the FCC regarding the T-Mobile/Sprint merger, ICLE concluded:

[T]he merger of T-Mobile and Sprint would plausibly create a third truly national competitor in this market. In other words, in the market for nationwide 5G networks, this transaction amounts to a 2-to-3 merger, resulting in the creation of a viable, new market entrant….[13]

That conclusion was correct. Today, T-Mobile operates in all 50 states, has approximately 79,300 towers (owned and leased),[14] and about 120,000 cell sites.[15] Because of its coverage, the FCC characterizes T-Mobile as one of the three “nationwide service providers” in the United States with a network that is “truly ubiquitous.”[16]

UScellular operates in parts of 21 states, owns 4,388 towers, and operates 6,990 cell sites in service.[17] Because its coverage does not span the entire country and is not contiguous (Figure 1), the FCC has characterized UScellular as a “multi-regional service provider,” rather than a “nationwide service provider.”[18]

FIGURE 1: T-Mobile and UScellular Coverage

Note: Red circles indicate areas where UScellular has coverage, but T-Mobile does not.
Source: Compare Cellular[19]

The population across UScellular’s coverage footprint totals 32 million people or less than 10% of the U.S. population. At 4.5 million subscribers, the company accounts for approximately 1% of U.S. wireless subscribers (Table 1). In 2021, UScellular President and CEO Laurent Therivel indicated the company had a market share of “high 30% to low 40%” in Iowa and Wisconsin and “around the teens” across the rest of its footprint.[20]

Despite T-Mobile’s nationwide coverage, some spots served by UScellular are not well served by T-Mobile, as shown in Figure 1. These include much of Nebraska; portions of Wisconsin, Iowa, Kansas, Oklahoma; and much of Appalachia. These are areas in which the transaction would not reduce the number of competing firms, as T-Mobile would simply replace UScellular in areas where T-Mobile lacks coverage or combine assets to create even more effective competition against other providers.

T-Mobile’s network performance across the UScellular footprint generally lags behind T-Mobile’s national averages. T-Mobile claims these limitations have inhibited its ability to deliver a customer experience in these areas comparable to that enjoyed in the rest of the nation. Due in part to these shortcomings, T-Mobile estimates the postpaid customer share within UScellular’s footprint is well below its share nationwide.

A. Cable Wireless as a Competitive Alternative

Any antitrust review by regulators must first define the acquisition’s relevant product market. There are several compelling reasons why cable wireless providers such as Xfinity Mobile and Spectrum Mobile should be included within the market defined as relevant to the T-Mobile/UScellular transaction.

In less than a decade, cable-wireless providers have rapidly evolved from nascent entrants to significant competitive forces in the mobile-telecommunications market (Table 1). Their market share has grown substantially, with recent estimates indicating they’ve captured more than half of new subscribers.^[21] This growth demonstrates that consumers view cable-wireless offerings as viable substitutes for traditional wireless services. Moreover, cable-wireless providers now cover a significant portion of the population, including within UScellular’s footprint.^[22] This indicates that their services are widely available, and they compete directly with traditional carriers in many local markets.

Cable-wireless providers exhibit unique competitive characteristics that exert substantial pressure on traditional carriers. This includes their ability to bundle wireless services with home internet and television-channel packages;^[23] leverage extensive Wi-Fi networks for traffic offloading;[24] and market to existing customer bases[25] in ways that grant them distinct advantages in pricing and service offerings. These providers have demonstrated the capacity to influence market prices and force traditional carriers to respond competitively.[26]

Including cable-wireless providers in the relevant market would offer a more accurate picture of the competitive landscape that the entity would face after the transaction. It would reflect the reality that consumers have an expanding array of choices for their wireless services beyond just traditional national carriers. Their inclusion would also likely result in a more nuanced assessment of market concentration and competitive effects. Further, regulators should consider not only the current market shares of cable-wireless providers, but also their trajectory and potential for future growth.

B. UScellular’s Competitive Disadvantages

UScellular suffers from numerous competitive disadvantages, as summarized by the company’s CEO:

Nationwide wireless providers enjoy scale, density, and cost advantages that UScellular lacks, enabling them to realize lower per-subscriber operating expenditures, amortize greater capital investments over their covered populations, and achieve higher profitability despite sometimes offering lower prices. The structural disadvantages we face manifest across every part of our business, ranging from spectrum and network costs to non-network expenses like advertising and distribution.[27]

Some of UScellular’s disadvantages stem from fundamental factors, such as the company’s relatively small and discontinuous network. These disadvantages inhibit UScellular’s ability to achieve scale economies, leading to higher operating costs and reduced quality of service. Combined, these factors have negatively affected the company’s financial condition, further hindering UScellular’s competitiveness.

1. A mostly rural footprint is a fundamental disadvantage

Approximately 40% of UScellular’s covered population is rural.[28] The company’s CEO identifies several factors that increase the costs of deploying to rural and other less-densely populated areas, such as:[29]

• Longer distances between populated locations;
• More hills, mountains, and stone-covered areas, requiring more extensive surveys, as well as deeper and more robust tower foundations and trenching for power and backhaul; and
• Fewer highways and easy access points to preferred tower locations, requiring construction of longer access roads.

Because of these higher costs, establishing cell towers in rural and less-densely populated areas may be unprofitable, thus leading to lower cell-tower density.[30] As a result, consumers are more likely to experience inconsistent cell reception and less-reliable cell-phone signals.[31] Therivel has indicated that UScellular’s network quality is “falling behind” its competitors and that “customers often leave because of poor network performance.”[32]

2. Insufficient size and footprint to achieve economies of scale

UScellular operates in parts of 21 states (Figure 1) and accounts for about 1% of U.S. wireless subscribers (Table 1). It has about one-third fewer subscribers than each of the next three largest providers—Spectrum Mobile, Xfinity Mobile, and DISH Boost. Since 2020, UScellular has lost 10% of its subscribers (500,000) and is expected to continue to lose market share into the foreseeable future.[33] With its smaller size, UScellular does not benefit from the economies of scale that its larger competitors have.

Economies of scale are a well-known phenomenon that occur when the average cost of production (e.g., cost per-subscriber) decreases as output (e.g., number of subscribers) increases.[34] One source of economies of scale is fixed costs that do not vary with output. As output expands, these fixed costs are spread across more units of production and the average fixed cost per-unit declines. The FCC’s notes “[r]elatively high fixed costs in relation to the number of customers may limit the number of firms that can enter and survive in a market.”[35]

Figure 2: Illustration of Economies of Scale in Wireless Subscribers

SOURCE: Therivel Declaration

Volume discounts on inputs are another source of economies of scale. Therivel explained that UScellular’s relatively small size does not allow the company to achieve the same economies of scale as its competitors (Figure 2):

It costs UScellular more to operate our network and create network capacity compared to the nationwide wireless providers. For example, UScellular’s average cost of service per subscriber per month ($13.53) is nearly twice that of T-Mobile’s ($7.39 when excluding Sprint merger-related costs). In addition, our fixed costs are spread across 4.5 million subscribers compared to the 100 million-plus subscribers for each of the larger nationwide carriers. … We also cannot negotiate at scale to get lower prices for some products like equipment. And our rural and more sparsely populated footprint is costlier to serve than denser areas (because costs are averaged across geographies, we have a disadvantageous average relative to our rivals).[36]

UScellular appears to be stuck in a vicious circle in which its inability to benefit from scale economies hinders its ability to attract and retain customers which, in turn, further stifles its ability to achieve scale economies, as noted in a letter from T-Mobile and UScellular to the FCC:

In other words, fewer subscribers mean less revenue to spend on network improvements and the customer experience; that spend is further decreased by the need to pay back debt; and the resulting network experience in turn leads to even fewer subscribers.[37]

UScellular identifies several consequences of its limited scale:

• Reduced ability to make footprint-wide fixed-cost investments, such as building the network core or a digital-services platform;[38]
• Reduced ability to obtain volume discounts on inputs;[39]
• Reduced ability to acquire additional spectrum;[40]
• Reduced ability to compete on price;[41]
• Limited ability to partner with mobile virtual-network operators (MVNOs);[42]
• More costly and less-effective provision of customer care and staffing of call centers;[43]
• Reduced retail distribution through company-owned stores, agents, and national retailers;[44] and
• Reduced cost-effectiveness of advertising.[45]

3. Insufficient resources to invest in deployment and improvements

UScellular’s scale disadvantage extends from its inability to attract and retain customers due to its diminished financial condition. For example, in its effort to compete by modernizing its network, UScellular acquired C-band spectrum in 2021 and 3.45 GHz spectrum in 2022. To finance these acquisitions, the company’s long-term debt doubled from $1.5 billion to $3.0 billion.[46] In 2023, the interest expense of that additional debt amounted to $130 million, or about 3% of the company’s revenue.[47]

Because of its higher costs and shrinking revenues, UScellular’s operating cash flows are “considerably below” the margins of nationwide carriers.[48] This limits its ability either to invest in its network or to compete on price.[49]

III. Efficiencies and Consumer Benefits

The U.S. Supreme Court has repeatedly cautioned that “[t]he antitrust laws … were enacted for the ‘protection of competition, not competitors.’”[50] Across decades of decisions, the Court has consistently recognized that this is the very “purpose of the antitrust laws.”[51] The 9th U.S. Circuit Court of Appeals recently observed that there is a difference “between anticompetitive behavior, which is illegal under federal antitrust law, and hypercompetitive behavior, which is not.”[52] The 9^th Circuit also noted that a firm that exercises “market dominance” may, nevertheless, “play[] a powerful and disruptive role in those markets.”[53]

For more than a decade, T-Mobile has positioned itself in just such a disruptive role with its “Un-carrier” approach.[54] T-Mobile’s transaction with UScellular will generate efficiencies that can be translated to consumer benefits through lower prices, expanded coverage, and improved services.

A. Potential for Improved Rural-Broadband Access

T-Mobile’s transaction with UScellular would improve rural-broadband access by providing the combined firm with more resources and infrastructure to bolster its network in rural areas. The acquired UScellular spectrum would also provide T-Mobile with a substantial increase in low-band spectrum, a critical component to deliver broadband services in rural areas. T-Mobile’s current low-band spectrum holdings in UScellular’s footprint are reportedly 20% lower than in other areas.^[55] The transaction would allow T-Mobile to address this deficiency by acquiring spectrum in the 600 MHz and 700 MHz A Block bands.^[56]

The added spectrum would also help T-Mobile to improve network speeds and capacity, particularly in areas where its network is currently weak.^[57] Under the deal, T-Mobile would lease space on more than 2,000 UScellular towers, enabling it to densify its network in rural areas.^[58] This increased density would result in enhanced coverage, improved signal strength, and faster data speeds for consumers in these areas.^[59]

T-Mobile plans to leverage the increased capacity from the acquired spectrum and network densification to expand its 5G Home Internet service in UScellular’s footprint.^[60] This expansion would provide a competitive alternative to traditional broadband providers in rural areas. The transaction would allow T-Mobile to expand the number of households eligible for its Home Internet service by more than 1 million, and would support a significantly larger number of households than UScellular currently can.^[61]

Following the transaction, T-Mobile has expressed plans to prioritize network improvements in rural areas.^[62] They aim to rapidly operationalize network enhancements and bring benefits like lower prices and value-added services to customers in these regions.^[63] Additionally, T-Mobile will inherit UScellular’s existing rural-customer base, increasing the economic incentive for them to invest in network coverage and quality in these less-densely populated locations.^[64]

B. Synergies in Spectrum Utilization and Network Deployment

The transaction is primarily motivated by a strategic objective to enhance its network capabilities, particularly in areas where UScellular currently holds a stronger position. The transaction would provide T-Mobile with access to UScellular’s spectrum assets, allowing for aggregation and more efficient spectrum utilization.^[65] UScellular currently faces limitations in spectrum aggregation due to its holding fewer contiguous blocks of spectrum.^[66] This fragmentation reduces spectral efficiency (i.e., the optimal use of spectrum such that the maximum amount of data can be transmitted with the fewest transmission errors), requiring a denser network deployment to achieve comparable download speeds. By acquiring and combining certain of these fragmented blocks with their existing holdings, T-Mobile could create larger contiguous channels, enhancing spectral efficiency and enabling higher data-transmission rates using the same amount of spectrum.^[67]

The acquired UScellular spectrum holdings would be a complement T-Mobile’s holdings. UScellular possesses valuable low-band spectrum in the 600 MHz and 700 MHz A Block bands, which are essential for wider coverage, particularly in rural areas.^[68] T-Mobile’s existing network would be significantly strengthened by incorporating these low-band assets. Additionally, UScellular’s mid-band spectrum in the PCS, AWS, and 2.5 GHz bands would further bolster T-Mobile’s 5G-deployment capabilities.^[69]

As noted above, the transaction would also grant T-Mobile access to lease space on more than 2,000 UScellular towers. This access is crucial for T-Mobile to densify its network, particularly in areas where its infrastructure is currently limited.^[70] By using UScellular’s existing towers, T-Mobile could expand its coverage and capacity without incurring the costs of building new cell sites.

The integration of UScellular’s spectrum assets into T-Mobile’s network is anticipated to be a swift and cost-effective process.^[71] Since the acquired spectrum falls within bands already supported by T-Mobile’s existing network equipment, activation can be achieved through software reconfiguration.^[72] This method allows for almost-instantaneous deployment in most cases, leading to a near-immediate realization of network synergies.

The network integration process would be accelerated through T-Mobile’s planned deployment of Multi-Operator Core Network (MOCN) technology immediately following the transaction’s close.[73] MOCN would enable seamless interoperability between T-Mobile and UScellular networks, allowing customers of both carriers to automatically connect to whichever network provides superior service.[74] This integration approach is particularly efficient since nearly all UScellular consumer devices are already compatible with T-Mobile’s network infrastructure, enabling migration through over-the-air software updates without requiring hardware replacements.[75] The MOCN implementation would permit immediate unification of the radio access networks, ensuring uninterrupted service for UScellular customers during the transition period while facilitating rapid realization of network synergies.[76]

By leveraging UScellular’s existing infrastructure and readily integrable spectrum assets, T-Mobile could significantly reduce its capital expenditure on network deployment.^[77] The cost savings would stem from using UScellular’s existing towers, efficient spectrum integration through software reconfiguration, and the ability to deploy a larger, more efficient network.

T-Mobile has a demonstrated history of successfully integrating acquired companies and quickly realizing network synergies. Following its combination with MetroPCS in 2013, T-Mobile completed network integration and realized target synergies a year ahead of schedule, also achieving 40 percent higher synergies than initially planned.^[78] This integration involved a market-by-market refarming of spectrum from MetroPCS’s CDMA network to T-Mobile’s LTE network.[79] T-Mobile’s 2020 merger with Sprint also resulted in a greatly improved network.^[80] T-Mobile’s network strategy is to rapidly implement improved network performance to further its “Un-carrier” approach.[81] The company expects that most UScellular customers will be able to migrate to the T-Mobile network via an over-the-air software update, with no need for new handsets or SIM cards.^[82]

As noted above, the integration of the UScellular network will use the T-Mobile network as the anchor, with increased density and coverage achieved by integrating UScellular base stations and spectrum. The spectrum acquired from UScellular is in bands already supported on the T-Mobile network, allowing for rapid deployment via software reconfiguration. The integration of leased UScellular base stations with T-Mobile radios is projected to be completed within 18 to 24 months, with some geographies completed within the first few months after closing. This experience with integrating networks, particularly the rapid integration after the MetroPCS transaction, indicates that T-Mobile has the capability to swiftly realize the network synergies expected from the UScellular transaction.

C. Increased Investment

We reviewed the empirical literature on the effects of wireless mergers and market concentration on pricing, investment, and innovation.[83] The literature indicates that increased concentration—particularly in markets with three facilities-based operators—is associated with higher levels of long-term investment and potentially greater dynamic benefits. These benefits include faster and more reliable cellular service, reflecting improvements in dynamic-welfare effects. The evidence also suggests that mergers resulting in markets with more symmetrical structures (i.e., where providers have roughly equal market shares) may further strengthen these positive investment effects.

A recently published retrospective of T-Mobile’s acquisition Sprint found that both the merged companies and overall industry investment increased relative to pre-merger investment:

The 2018–2021 investment profile for US mobile networks shows that T-Mobile more than offset any decline in reported capital spending from the elimination of Sprint: the national US wireless carriers invested $63.5 billion in the two-year period 2020–2021, up from $58.9 billion in the two-year period 2018–2019. T-Mobile, alone, increased its capital spending from $5.9 billion in 2019 to $12.1 billion in 2021 (following the merger). The wireless industry’s share of total U.S. corporate capital expenditure (adjusting for inflation as well as other macroeconomic trends) did not decline, but rather rose slightly, from 0.66 percent in 2018–2019 to 0.68 percent in 2020–2021, according to UBS Investment Research.[84]

As discussed above, as a small regional carrier, UScellular faces significant financial and structural disadvantages relative to national carriers like T-Mobile. These disadvantages include a lack of scale and density in its footprint, higher operational costs, and an inability to keep pace with the capital expenditures required for network upgrades and 5G deployment. Indeed, much of UScellular’s current network is 3G or 4G LTE, rather than 5G, as noted by one analyst:

Essentially, folks in Iowa and Wisconsin have a decent chance of finding U.S. Cellular 5G coverage in their backyard; meanwhile, folks in Nebraska, Illinois, and Missouri will just have to cross their fingers and hope that they live in a 5G-covered zone. Other than that, U.S. Cellular has small, dot-sized pockets of 5G coverage in the other states.[85]

UScellular Chief Technology Officer Michael Irizarry reports that the company’s “5G deployment has lagged behind that of our competitors due to limited capital, which… places us at a competitive disadvantage in terms of network quality.”[86]

UScellular’s inability to maintain or increase its investments has led to a decline in the company’s network quality relative to national carriers, which has resulted in reduced customer satisfaction. The company’s reduced revenues combined with its higher cost structure has forced it to prioritize short-term cost-cutting measures over long-term investments.[87] The transaction would effectively address these investment constraints by integrating the acquired UScellular assets into its financially stronger and more scalable national operations.

T-Mobile’s network performance within UScellular’s footprint generally lags its national averages, hindering its ability to compete effectively in those areas. This lag is primarily attributed to T-Mobile’s lack of spectrum depth and less-dense network infrastructure relative to competitors like AT&T and Verizon. Recognizing this weakness, T-Mobile sees the transaction as an opportunity to bolster its investment in these underserved areas. By acquiring certain UScellular spectrum assets and leveraging its existing tower infrastructure, T-Mobile can cost-effectively enhance its network capacity, coverage, and service quality in these regions.

The enhanced network capacity and 5G capabilities resulting from the transaction would create opportunities for innovation and service improvements. For instance, T-Mobile plans to expand its 5G Home Internet service within UScellular’s footprint, particularly in rural areas.[88] This expansion aligns with T-Mobile’s strategic objective of leveraging its 5G network to disrupt the in-home broadband market and offer a competitive alternative to traditional fixed-line providers, in line with the company’s “Un-carrier” approach.[89]

[1] Press Release, T-Mobile to Acquire UScellular Wireless Operations and Deliver Exceptional Value, a Superior 5G Experience and Unparalleled Benefits to Millions of Customers, T-Mobile (May 28, 2024), https://www.t-mobile.com/news/business/uscellular-acquisition-operations-assets.

[2] Applications of T-Mobile US Inc. and United States Cellular Corporation for Consent to Transfer Control of Licenses and Authorizations, GN Docket No. 24-286 ¶ 31 (Sep. 13, 2024), https://www.fcc.gov/ecfs/search/search-filings/filing/109132166915081 [hereinafter “Applications”].

[3] Letter from Elizabeth Warren, Amy Klobuchar, Christopher Murphy & Bernard Sanders, U.S. Senators to Jonathan Kanter, Assistant Attorney General, Dept. of Justice & Jessica Rosenworcel, Chair, FCC (Jul. 22, 2024), available at https://www.warren.senate.gov/imo/media/doc/final_-_warren_letter_to_doj_and_fcc_re_t-mobile_uscellular_merger.pdf.

[4] Cf. New York v. Deutsche Telekom AG, 439 F. Supp. 3d 179, 224 (S.D.N.Y. 2020) (finding that the “weight of the evidence at trial establishes that Sprint is caught in a vicious cycle caused by its inability to finance meaningful network investment, which perpetuates a low-quality network that drives away customers and limits Sprint’s ability to generate the cash necessary to reduce its financial constraints… and Sprint’s ability to improve that product is hindered by substantial hurdles in financing network development.”)

[5] Henry Manne, Mergers and the Market for Corporate Control, 73 J. Pol. Econ. 110 (1965).

[6] See Notice of Ex Parte Presentation, Applications of T-Mobile US Inc. and United States Cellular Corporation for Consent to Transfer Control of Licenses and Authorizations, GN Docket No. 24-286, at 2-3 (Oct. 3, 2024), available at https://www.fcc.gov/ecfs/document/100352474704/1.

[7] Mobile Fact Sheet, Pew Research Ctr. (Nov. 13, 2024), https://www.pewresearch.org/internet/fact-sheet/mobile/.

[8] Id.

[9] Press Release, Comcast Introduces Xfinity Mobile, Comcast (Apr. 6, 2017), https://corporate.comcast.com/news-information/news-feed/comcast-xfinity-mobile.

[10] 5G in America, CTIA (2024), https://www.ctia.org/the-wireless-industry/5g-in-america; 5G in the U.S.—Additional Mid-band Spectrum Driving Performance Gains, Ookla (Jun. 24, 2024), https://www.ookla.com/articles/5g-in-the-us-q1-2024.

[11] 2022 Communications Marketplace Report, In the Matter of Communications Marketplace Report, GN Docket No. 22-203 (Dec. 30, 2022) ¶ 64 [hereinafter 2022 Communications Marketplace Report].

[12] Number of T-Mobile Customers in the United States from 2010 to 2024, by Quarter and Contract Type, Statista (Apr. 2024), https://www.statista.com/statistics/219564/total-contract-customers-of-t-mobile-usa-by-quarter; AT&T Wireless Subscribers and Connections from 1st Quarter 2017 to 1st Quarter 2024, Statista (Jul. 2024), https://www.statista.com/statistics/1125140/total-mobility-subscribers-connections; Financial and Operating Information as of June 30, 2024, Verizon (Jul. 20, 2024), https://www.verizon.com/about/file/71961/download?token=zvOuCYvo; Who We Are, Charter Communications (2024), https://corporate.charter.com/about-charter; EchoStar Resets Boost Mobile Brand, Mobile World Live (Jul. 18, 2024), https://www.mobileworldlive.com/dish-network/echostar-resets-boost-mobile-brand; Press Release, Xfinity Mobile & Comcast Business Mobile Surpass 7 Million Lines, Comcast (Sep. 9, 2024), https://corporate.comcast.com/stories/xfinity-mobile-seven-million; Press Release, UScellular Reports First Quarter 2024 Results, UScellular (May 3, 2024), https://investors.uscellular.com/news/news-details/2024/UScellular-reports-first-quarter-2024-results/default.aspx.

[13] Comments of the International Center for Law and Economics in Opposition to Petitions to Deny, In the Matter of Applications of T-Mobile US, Inc. and Sprint Corporation for Consent to Transfer Control of Licenses and Authorizations, WT Docket No. 18-197 (Sep. 17, 2018), available at https://laweconcenter.org/wp-content/uploads/2018/09/ICLE-Comments-TMobile-Sprint-Merger.pdf.

[14] Ex Parte Presentation, Applications for the Transfer of Control of Mint Mobile, LLC and UVNV, Inc. from Ka’ena Corporation to T-Mobile US, Inc., GN Docket No. 23-171 (May 17, 2024), 31, https://www.fcc.gov/ecfs/document/105200428121304/2.

[15] What Is a Cell Site? How Do Cell Sites Work?, Tower Genius (May 2024), https://www.towergenius.com/cell-site.

[16] 2022 Communications Marketplace Report, supra note 11, ¶ 64.

[17] Quarterly Report (Form 10-Q), UScellular (Aug. 2, 2024), available at https://d18rn0p25nwr6d.cloudfront.net/CIK-0000821130/7ec3a639-4d10-468b-b1d0-cc66357b1746.pdf.

[18] 2022 Communications Marketplace Report, supra note 11, ¶ 64.

[19] Marisa Crane, U.S. Cellular Coverage Map: How U.S. Cellular Compares to AT&T, Verizon, T-Mobile, and Sprint, Compare Cellular (Mar. 20, 2020), https://www.comparecellular.com/coverage-maps/us-cellular-coverage-map.

[20] Bevin Fletcher, UScellular Expects to Nab Market Share in 2021, Fierce Network (Jan. 8, 2021), https://www.fierce-network.com/operators/uscellular-ceo-expect-pivot-to-growth-2021.

[21] Jeff Baumgartner, Cable’s Wireless Blitz Picks up More Steam, LightReading (Aug. 16, 2024), https://www.lightreading.com/wireless/cable-s-wireless-blitz-picks-up-more-steam.

[22] Decl. of Laurent Therivel, Applications of T-Mobile US, Inc. and United States Cellular Corporation for Consent to Transfer Control of Licenses and Authorizations, GN Docket No. 24-286 ¶ 31 (Sep. 13, 2024), https://www.fcc.gov/ecfs/document/109132166915081/5 [hereinafter “Therivel Declaration”] (reporting cable wireless has more than 1.3 million handset subscribers in UScellular’s footprint); see also, Mike Dano, Cable MVNOs Are Beginning to Hurt U.S. Cellular, LightReading (Aug. 6, 2019), https://www.lightreading.com/mobile-core/cable-mvnos-are-beginning-to-hurt-u-s-cellular (reporting about 45% of UScellular’s footprint overlapped with Charter, Comcast, or Altice in 2019).

[23] Therivel Declaration, supra note 22, ¶ 19.

[24] Id. ¶ 18 (“According to their own data, cable wireless providers offload approximately 90 percent of their traffic to Wi-Fi, versus up to 80 percent for wireless providers like UScellular. In other words, cable wireless customers use a full 50 percent less cellular network capacity than our customers do.”); see also, Jack Reid, Comcast and Charter Are in a Better Position Than Smaller Cable Companies To Resist Fixed Wireless Competition, S&P Global Ratings Says, Yahoo Finance (Jun. 5, 2024), https://finance.yahoo.com/news/comcast-charter-better-position-smaller-212413329.html.

[25] Decl. of Jonathan Orszag, Applications of T-Mobile US, Inc. and United States Cellular Corporation for Consent to Transfer Control of Licenses and Authorizations, GN Docket No. 24-286 ¶ 90 (Sep. 13, 2024), https://www.fcc.gov/ecfs/document/109132166915081/7 [hereinafter “Orszag Declaration”].

[26] Decl. of Michael Katz, Applications of T-Mobile US, Inc. and United States Cellular Corporation for Consent to Transfer Control of Licenses and Authorizations, GN Docket No. 24-286 ¶17 (Sep. 13, 2024), https://www.fcc.gov/ecfs/document/109132166915081/3 [hereinafter “Katz Declaration].

[27] Therivel Declaration, supra note 22, ¶ 6.

[28] Decl. of Michael S. Irizarry, Applications of T-Mobile US, Inc. and United States Cellular Corporation for Consent to Transfer Control of Licenses and Authorizations, GN Docket No. 24-286 ¶ 17 (Sep. 13, 2024), https://www.fcc.gov/ecfs/document/109132166915081/6 [hereinafter “Irizarry Declaration”].

[29] Therivel Declaration, supra note 22, ¶ 24.

[30] Rural Area Cell Phone Booster: A Comprehensive Guide, KING (Jul. 10, 2023), https://kingconnect.com/blog/rural-area-cell-phone-booster-a-comprehensive-guide.

[31] Id.

[32] Therivel Declaration, supra note 22, ¶ 10.

[33] Irizarry Declaration, supra note 28, ¶ 19.

[34] See Paul Krugman & Robin Wells, Economics (4^th ed., 2015) 348.

[35] Twentieth Report, In the Matter of Implementation of Section 6002(b) of the Omnibus Budget Reconciliation Act of 1993 Annual Report and Analysis of Competitive Market Conditions With Respect to Mobile Wireless, Including Commercial Mobile Services, WT Docket No. 17-69 (Sep. 27, 2017), at 22, available at https://docs.fcc.gov/public/attachments/FCC-17-126A1.pdf, citing John Sutton, Sunk Costs and Market Structure (1991); Luis Cabral, Introduction to Industrial Organization, Ch. 14 (2000); Dennis W. Carlton & Jeffrey M. Perloff, Modern Industrial Organization (4th ed., 2005), at 41 (2005); George S. Ford, Thomas M. Koutsky, & Lawerence J. Spiwak, Competition after Unbundling: Entry, Industry Structure, and Convergence, 59 Fed. Comm. L. J. 331 (Mar. 2007), at 332, 337.

[36] Therivel Declaration, supra note 22, ¶ 9.

[37] Notice of Ex Parte Presentation, Applications of T-Mobile US, Inc. and United States Cellular Corporation for Consent to Transfer Control of Licenses and Authorizations, GN Docket No. 24-286 (Oct. 3, 2024), https://www.fcc.gov/ecfs/document/100352474704/1.

[38] Id. (“[F]ootprint-wide fixed-cost investments, such as building the network core or a digital service platform, must meet higher return thresholds for us to consider them.”).

[39] Id. (“We also cannot negotiate at scale to get lower prices for some products like equipment.”); Irizarry Declaration, supra note 28, ¶ 16 (Sep. 13, 2024), (“We purchase smaller volumes of equipment and services than our nationwide competitors, which I expect leads to our paying higher prices as a result.”).

[40] Irizarry Declaration, supra note 28, ¶ 22 (“[W]e face disadvantages acquiring spectrum relative to our competitors. Our footprint often only covers parts of a FCC spectrum licensed area (e.g., a Partial Economic Area), making the purchase of spectrum economically inefficient for us relative to our nationwide competitors. For example, in recent auctions that involve geographic licensing based on PEAs—which are smaller auction regions than the FCC has used in other auctions—portions of Northern California (specifically, Alpine, Inyo, Lassen, Mono, Plumas, and Sierra counties) are included in PEA 76 (Reno, NV), which also includes most of Nevada. We operate in Northern California, and therefore having a spectrum license there is desirable. But because we do not operate in Nevada, that spectrum license is too costly for us. Indeed, we did not bid on this PEA in recent spectrum auctions. Rather, our competitors, who could utilize it more broadly and spread the cost among more subscribers, ultimately won licenses for this PEA in these auctions.”).

[41] Therivel Declaration, supra note 22, ¶ 33 (“However, given that our operating cash flow (“OCF”) margins are already considerably below the large nationwide carriers due to our relative cost position and lack of scale … coupled with the advantaged economics of cable wireless, that differentiator can’t be a low-price strategy. A low- price strategy would not overcome these challenges or create the necessary cash flows required for investment in the network. Indeed, while we engaged in aggressive device and service discounts in 2022, those efforts were not successful and we continued to lose subscribers….”).

[42] Id. ¶ 15 (“[U]nlike nationwide wireless providers, UScellular’s limited footprint means that it cannot offer a comprehensive nationwide network at wholesale, meaning that an MVNO or cable provider using UScellular’s network must either be limited to the UScellular footprint or partner with one or more additional carriers.”).

[43] Id. ¶ 13 (“Our smaller scale also affects our cost to operate call centers. For example, to cover hours of operation in queues with lower call volume, we need to staff not to volume but to ensure resource coverage for the hours the call center is open.”).

[44] Id. ¶ 12 (“Scale also challenges us when it comes to attracting third-party agents and national retail partners to market and sell our services. … Our nationwide competitors also have the scale to attract multiple national retailers to distribute their services, whereas we only work with Walmart and are not invited to do so in every store located in our footprint. Other national retailers will not work with us because we do not cover enough of their footprint—whereas having the ability to partner with another national retailer could be valuable to us because there are some rural areas where we cannot attract an agent or locate a company-owned store because it is not profitable.”).

[45] Id. ¶ 11 (“Due to the geographically dispersed nature of our footprint covering portions of 21 states, it is impractical and not cost- effective to make use of the cheapest forms of advertising in terms of cost per impressions served: national and mass market print, radio, or television advertising. For example, advertising spots are sold nationally per Designated Market Area (“DMA”). .. [I]n at least out of 62 DMAs, our footprint only partially overlaps with DMA boundaries. As a result, UScellular cannot realistically buy the kind of advertising that nationwide carriers are able to employ for less cost and with substantially greater efficiency, which makes us less competitive and increases the cost of customer acquisition.”).

[46] Irizarry Declaration, supra note 28, ¶ 12.

[47] Therivel Declaration, supra note 22, ¶ 22; Orszag Declaration, supra note 25, Fig. 7.

[48] Irizarry Declaration, supra note 28, ¶ 33; see also Orszag Declaration, supra note 25, ¶ 64.

[49] Therivel Declaration, supra note 22, ¶¶ 22, 33, 42, 47.

[50] Brunswick Corp. v. Pueblo Bowl-O-Mat Inc., 429 U.S. 477, 488 (1977) (quoting Brown Shoe Co. v. United States, 370 U.S. 294, 320 (1962)).

[51] Leegin Creative Leather Prods. Inc. v. PSKS Inc., 551 U.S. 877, 906 (2007). See also United States v. Phila. Nat’l Bank, 374 U.S. 321, 367 n.43 (1963) (quoting Brown Shoe, 370 U.S. at 320); Copperweld Corp. v. Indep. Tube Corp., 467 U.S. 752, 767, n.14 (1984), (quoting Brunswick, 429 U.S. at 488); Cargill Inc. v. Monfort of Colo. Inc., 479 U.S. 104, 110 (1986), (quoting Brunswick, 429 U.S. at 488); Atl. Richfield Co. v. USA Petroleum Co., 495 U.S. 328, 338 (1990), (quoting Brown Shoe, 370 U.S. at 320); Brooke Grp. Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209, 224 (1993) (quoting Brown Shoe, 370 U.S. at 320).

[52] FTC v. Qualcomm Inc., 969 F.3d 974, 982 (9th Cir. 2020).

[53] Id. at 1005.

[54] Alexandra Withrow, T-Mobile: Becoming the Un-carrier Case Study Application and Teaching Note, (W. Wash. U., May 15, 2015), https://cedar.wwu.edu/scholwk/2015/Day_two/22/ (“In late 2012, T-Mobile and newly appointed CEO John Legere found a new way to play the game, and set out to change T-Mobile’s reputation as a second-rate phone carrier and become the Un-Carrier. This meant no service contracts, inexpensive upgrades and flexible plans.”).

[55] Decl. of Ankur Kapoor, Applications of T-Mobile US, Inc. and United States Cellular Corporation for Consent to Transfer Control of Licenses and Authorizations, GN Docket No. 24-286 ¶ 3 (Sep. 13, 2024), https://www.fcc.gov/ecfs/document/109132166915081/4 [hereinafter “Kapoor Declaration”].

[56] Id. ¶ 6.

[57] Id. ¶ 3.

[58] Id. ¶ 2.

[59] Id. ¶¶ 6-7.

[60] Id. ¶ 19; Katz Declaration, supra note 26, ¶ 9.

[61] Kapoor Declaration, supra note 55, ¶ 19 (“T-Mobile estimates that we will be able to increase the number of households eligible for Home Internet services in the Footprint by over [redacted] million and increase the number of households that can be supported by the service by [redacted].”).

[62] Katz Declaration, supra note 26, ¶ 12.

[63] Id. ¶ 10.

[64] Kapoor Declaration, supra note 55, ¶¶ 21-22.

[65] Id. ¶¶ 6, 10.

[66] Therivel Declaration, supra note 22, ¶ 8.

[67] Kapoor Declaration, supra note 55, ¶ 12.

[68] Id. ¶¶ 6-7.

[69] Id.

[70] Id. ¶¶ 2-3, 13.

[71] Id. ¶¶ 25-26.

[72] Id. ¶ 24.

[73] Applications, supra note 2 at 29-30.

[74] Id.

[75] Id.

[76] Id.

[77] Id. ¶ 17.

[78] Kapoor Declaration, supra note 55, ¶ 28.

[79] Id.

[80] Katz Declaration, supra note 26, ¶¶ 5, 10.

[81] Id.

[82] Kapoor Declaration, supra note 55, ¶ 24.

[83] Eric Fruits, Justin (Gus) Hurwitz, Geoffrey A. Manne, Julian Morris, & Alec Stapp, Static and Dynamic Effects of Mergers: A Review of the Empirical Evidence in the Wireless Telecommunications Industry, OECD, DAF/COMP/GF(2019)13 (Sep. 4, 2020), available at https://one.oecd.org/document/DAF/COMP/GF(2019)13/en/pdf.

[84] Thomas W. Hazlett & Robert W. Crandall, No “Cozy Triopoly,” 47 Regulation 8, 11 (Sum. 2024), available at https://laweconcenter.org/wp-content/uploads/2024/07/regulation-v47n2-2.pdf.

[85] Tyler Abbott, U.S. Cellular Coverage Map: How It Compares to The Big 3, WhistleOut (Jun. 18, 2024), https://www.whistleout.com/CellPhones/Guides/us-cellular-coverage-map.

[86] Irizarry Declaration, supra note 28, ¶ 6.

[87] Therivel Declaration, supra note 22, ¶ 47.

[88] Katz Declaration, supra note 26, ¶ 9; Kapoor Declaration, supra note 55, ¶ 19.

[89] Katz Declaration, supra note 26, ¶ 5.

 

Executive Summary

Privately run digital-payments systems are helping to bring informal market transactions and unbanked people into the formal economies of many countries—in the process, improving livelihoods and fostering innovation and economic growth.

The success these private systems experienced in expanding financial inclusion has led some governments to create their own systems for digital payments. “India Stack,” for example, combines a national ID and associated database (Aadhaar), an interoperability framework for real-time payments (UPI), and a set of standards for sharing financial data (DEPA). Brazil, meanwhile, has focused on the middle part of that stack, with the nation’s central bank, BCB, creating its own real-time payment system (Pix).

The results of these interventions have been mixed. Where they have supported natural market developments (as is largely the case with Aadhaar), they have had a positive impact. But where they have competed directly with market actors, they have created distortions that may inhibit more effective market solutions. For example:

• Restrictions on interchange fees imposed by UPI have favored market participants who are able to monetize the operation of payment networks in other ways, such as Google (which monetizes primarily through search advertising) and Walmart (which monetizes through the sale of goods).
• Similarly, subsidies from the BCB and Pix’s restrictions on interchange fees crowd out private-sector competition and undermine innovations that might lead to increased financial inclusion.

In some cases, governmental attempts to force a shift toward digital money have impeded financial inclusion. India’s “demonetization” in 2016 harmed M-Pesa, contributing to greater financial exclusion. Arbitrary governmental regulations, including restrictions on the number of WhatsApp Pay users, have also likely inhibited both competition and financial inclusion.

The key lesson is that the private sector is well-placed to identify opportunities for digital payments and to implement solutions appropriate to local consumer culture and other contingent facts. Meanwhile, governments should focus on delivering genuine public goods, such as identity verification, and avoid the temptation to participate in digital-payments infrastructure.

I. Introduction

Digital-payment systems are expanding access to financial services around the world. In many countries, they are helping to bring the previously unbanked into the formal economy. In so doing, they undoubtedly improve livelihoods and foster innovation and economic growth. But not all digital-payment systems are alike.

Early digital-payment systems were largely private-sector initiatives. Notable among these are: M-Pesa in Kenya; Venmo in the United States; AliPay and WeChat Pay in China; and MobiKwik and Paytm in India. These emerged as bottom-up responses to the felt needs of consumers and merchants.

The success these private systems experienced in expanding financial inclusion has led some governments to create their own systems for digital payments. “India Stack,” for example, combines a national ID and associated database (Aadhaar), an interoperability framework for real-time payments (UPI), and a set of standards for sharing financial data (DEPA). Brazil, meanwhile, has focused on the middle part of that stack, with the nation’s central bank, BCB, creating its own real-time payment system (Pix).

To better understand the costs and benefits of government interventions, this brief investigates the economics of mobile digital payments, their effects on financial inclusion, and the consequences of specific government interventions. Section II begins with a discussion of the core problems that payment systems must address, providing a law & economics framing. Section III describes the development of digital-payment platforms in Kenya, China, India, and Brazil. Section IV puts the evidence presented in section III into broader context and draws conclusions for policymakers.

II. The Economics of Mobile Digital Payments and Financial Inclusion

This section briefly considers the economics of payments, focusing on the two core problems that all payments systems must address: counterparty risk and the two-sided nature of the payments markets.

A. Trust and Counterparty Risk

In all transactions, there is a risk that a counterparty will not perform the promised action. For example, in the sale of any good, the seller may fail to deliver that good; the good may not function as described; or the buyer may fail to make payment. This is particularly problematic in the context of transactions among parties who are unknown to one another, or who are separated by time and space, as is the case in many online transactions.

One way to address counterparty risk is through the law of contract. In common-law jurisdictions, buyers may bring breach-of-contract actions against sellers if the goods purchased are damaged, defective, or otherwise not fit for purpose (or some equivalent term). Meanwhile, sellers may bring breach-of-contract actions against buyers who fail to make payment as agreed in a timely manner.

Often, however, the cost of legal action is large relative to the value of a transaction. As such, while contract law may function as a backstop, it is usually more efficient to resolve such disputes through alternative means. In the online marketplace, entrepreneurs have developed several important technologies that serve to facilitate trust and otherwise address counterparty risk; these include user ratings, security protocols and fraud-detection systems, payment gateways, and online escrow systems. The digital-payment systems discussed in Section III typically rely on some or all of these technologies. (The Appendix includes a more detailed discussion of the various ways counterparty risk has been addressed in the context of online transactions.)

B. Two-Sided Markets

Payment systems are an example of what economists call “two-sided markets”: buyers are on one side, sellers on the other, and the payment system itself acts as the platform that facilitates interactions between them.[1] The primary challenge faced by any two-sided market is to ensure that there are sufficient participants on both sides for it to be self-sustaining. Conceptually, this is known as a cross-side network effect.

In the case of payment systems, if too few sellers accept a particular form of payment, buyers will have little reason to adopt it. Likewise, if too few buyers hold a particular form of payment, sellers will have little reason to accept it. This applies equally to other two-sided markets, such as shopping malls. For customers to want to go to a mall, there must be stores that they want to visit. And for stores to want to locate in a mall, they need to know that there will be customers who will visit.

Two-sided markets also must cover the operational costs. In the case of shopping malls, this means the costs of building and operating the mall, including ongoing maintenance, lighting and heating/cooling of common areas, and various services, usually including security. In the case of payment networks, it includes the development and maintenance of technology needed to facilitate secure transactions, verify identity, and deter fraud.

Platforms typically address these problems simultaneously by charging differential fees and offering incentives. Thus, malls typically charge store owners (one side of the market) rent and service fees sufficient to cover both capital and operational costs. Those store owners thus effectively subsidize access to the mall for customers (the other side of the market), who are generally free to walk around enjoying the mall’s climate and security even if they do not ultimately make any purchases. This highlights a feature common to most two-sided markets: it is usually efficient for one side to subsidize the other, thereby maximizing the value to all participants. Typically, the side that provides the subsidy has a lower price elasticity of demand (i.e., it is less sensitive to changes in the cost of platform services).[2]

Meanwhile, to encourage popular retailers to locate in the mall in the first place, mall owners may offer discounted rent to early occupants and/or specific retailers who are especially likely to attract customers (such as hotels and restaurants with a loyal following).[3] This highlights another feature of two-sided markets: it may also be efficient for some participants on one side to subsidize other participants on the same side, again in order to maximize the value to all participants.

Like malls, payment networks typically facilitate cross-network subsidies. Merchants typically place a higher value on the ability to accept a specific payment type than consumers place on the ability to use that payment type. In other words, merchants have lower price elasticity of demand for the payment network. Because of this, the subsidy typically flows from the merchant to the consumer.

In some cases, payment networks also exhibit own-side subsidies. For example, smaller-ticket items may be subject to proportionally lower fees—a merchant-side subsidy. Meanwhile, some consumers may receive an initial rewards bonus and/or pay a lower fee for the first year they use a certain payment type (such as a credit card)—a consumer-side subsidy.

III. Mobile Digital-Payment Platforms

While Venmo and Zelle may be better known in the United States, the first cellphone-based payment networks first emerged informally in Tanzania and some other sub-Saharan African countries in the early 2000s, allowing users to send cellphone airtime minutes from one phone to another.[4] These informal networks inspired the development of more formal systems, such as M-Pesa. In China, meanwhile, mobile payments emerged from two different sources: an online payment system (Alipay) and a cellphone-messaging service (WeChat). India’s early leader in mobile payments, Paytm, grew out of a cellphone-charging platform.

A. M-Pesa and the Mobile-Payments Revolution in Africa

In 2006, Kenya had 41 retail banks with 400 branches and 600 automated-teller machines (ATMs) for a population of 36 million.[5] By comparison, the United States at the time had 7,523 banks with 72,958 branches and 400,000 ATMs for a population of 296 million. On a per-capita bases, that’s nearly 20 times the number of banks and branches, and 80 times as many ATMs.[6]

Unsurprisingly, Kenyans—especially those in rural areas—were not major users of the banking system. A survey undertaken in 2006 found that just 18.9% of Kenyan adults had access to a bank account or other formal financial-services provider, such as insurance, while a further 7.5% had accounts with semi-formal savings and credit organizations and/or a microfinance institution. Thus, no more than about a quarter of the adult population had access to a formal or even semiformal financial-services provider.[7] Of the remainder, slightly less than half of the population (35.2% of those surveyed) had access to informal financial services, while the rest (38.4%) were considered “financially excluded.” The proportion of adults with access to electronic payments was even smaller, with less than 10% having a credit card.[8]

Three years before that survey was undertaken, Nick Hughes, then head of social enterprises at Vodafone, learned of the use of air-time credits as an informal currency in Tanzania, and believed it should be possible to create a more formal system to facilitate microcredit and microinsurance—services that were popular among development groups at the time. [9] Hughes put together a proposal to do just that and submitted it to the UK government’s Department for International Development (DFID). The DFID awarded Vodafone £1 million for a pilot program, which Vodafone matched with a combination of cash and personnel time.

For the pilot project, which launched in October 2005, Hughes selected Commercial Bank of Africa (CBA), which would hold customer funds in a trust account; Faulu Kenya, a microfinance institution that would provide loans; and Vodafone’s 40% owned subsidiary Safaricom.[10]

Hughes called the system M-Pesa: “pesa” is Swahili for money and M stands for mobile, so M-Pesa is “mobile money.” The pilot project proved to be a wild hit, though not primarily for microfinance loans. It was mainly used to send money from one person to another, including people who were not part of the pilot. For example, it was used for business transactions, for remittances, and to store money overnight.[11]

In 2007, Safaricom formally launched M-Pesa at-scale. That meant onboarding thousands of agents, who receive funds deposits from accountholders, and whose identity they verify using a national ID card or passport. The agents add those funds to the system, as well as pay-out funds that are withdrawn. By 2012, there were more than 30,000 M-Pesa agents. As of October 2023, there were 160,000 M-Pesa agents in Kenya alone, and 500,000 across all the markets in which M-Pesa operates.[12]

M-Pesa began as a text-based system with limited functionality. As smartphones became more prevalent, it expanded to include a wider range of financial services. In 2011, Safaricom partnered with CBA to enable users to create a linked bank account, called M-Shwari, that enables M-Pesa users to save and borrow.[13] By 2015, more than 10 million Kenyans had opened M-Shwari bank accounts; for many, this represented their first such formal bank account.[14] CBA also launched similar products in Tanzania, Uganda, Rwanda, and Cote d’Ivoire.[15]

Using a mobile app or web interface, it is also now possible to pay money into M-Pesa electronically by linking to a bank account.[16] Since 2022, M-Pesa has had a partnership with Visa, which enables M-Pesa accountholders to establish a virtual account that can then be used to make international purchases online.[17]

According to the most recent FinAccess report, M-Pesa helped to expand financial inclusion in Kenya from 26% of the population in 2006 to 84% in 2021.[18] It has also facilitated economic growth and, according to a study published in Science by MIT economists Tavneet Suri and William Jack, has helped to lift hundreds of thousands out of poverty.[19]

M-Pesa has been so successful that it has expanded to the Democratic Republic of Congo (DRC), Egypt, Ghana, Lesotho, Mozambique, and Tanzania. It now boasts more than 51 million users and $314 billion in annual transactions.[20] Other mobile operators have also followed suit, both in Kenya and across Africa, with Orange providing its “Orange Money” service to more than 80 million customers in 17 countries in Africa and the Middle East.[21]

B. China

The success of mobile-payments systems in Africa has been much vaunted. But by some metrics (e.g., rate of adoption, value of transactions, and broad economic effects), it pales in comparison with the success of the two primary mobile-payments systems that have developed in China: Alipay and WeChat Pay.

1.  AliPay

In 2003, there were only 3 million credit cards issued in China, implying that less than 5% of adults had a card.[22] Meanwhile, China had around 20 million internet-connected computers and 60 million internet accounts.[23] The vast majority of Chinese internet users thus lacked a reliable means to make online purchases. This posed significant problems for online auctions and other consumer-to-consumer marketplaces, where there is an inherent trust deficit between buyer and seller—and associated counterparty risk.[24]

To address this problem, in 2003, online retailer Alibaba introduced an escrow service, called Alipay, for its consumer-to-consumer subsidiary Taobao.[25] When making a payment, funds are initially deposited in Alipay’s escrow account and only released to the seller once both parties are satisfied that the transaction is complete.[26] Initially, users would fund their Alipay personal digital wallet by linking it to their bank account.[27] Over time, Alipay has expanded the ways in which wallets can be funded to include debit cards, credit cards, bank transfers, and other digital wallets.[28]

Alipay’s mobile wallet, launched in 2008, had grown to roughly 100 million users by 2013. Today, it has more than 900 million users in China and about 1.3 billion users around the world.[29]

2. WeChat Pay

WeChat Pay (officially “Weixin Pay”) is a mobile wallet and payments system launched in 2014 with the express intention of enabling users of the WeChat messaging app to send money to one another.[30] To drive adoption, WeChat introduced the ability to share virtual “red envelopes” with family and friends over the Lunar New Year holiday—replicating an ancient tradition.[31] This proved enormously popular, with 20 million red envelopes sent in the first year, and 3.2 billion sent in the following year. Over time, WeChat’s owner Tencent has built an ecosystem around WeChat Pay, including mini-programs that enable the user to hail rides or pay for movie tickets.[32] As of 2022, about 60% of WeChat users use these mini-programs.[33]

Unlike AliPay, WeChat Pay does not provide escrow services, and is thus less well-suited to certain kinds of online transactions. It works well, however, both for in-person payments to merchants and transfers to other individuals (including gift giving). WeChat Pay has approximately 1.1 billion users worldwide.[34]

3. Discussion

AliPay and WeChat Pay’s precursor (TenPay) both began life as mechanisms to enable payments within existing ecosystems of products and services. AliPay’s pivot to mobile payments proved an enormous success, motivating Tencent to create its own mobile-payments system. Over time, both systems have gradually expanded to provide payment services outside their own ecosystems. Payments using either platform can be made at an increasingly large number of merchants using a range of technologies, including quick-response (QR) codes for in-store or peer-to-peer (P2P) payments.[35]

For nearly a decade, AliPay and WeChat Pay have been engaged in fierce competition. As access to credit cards in China has grown, this competition has expanded to include China Union Pay. As of 2022, AliPay and WeChat Pay were by far the most used means of making online payments (see Figure 1).

FIGURE 1: Most Used Online-Payment Services in China (2022)

SOURCE: Daxue Consulting[36]

In 2015, Tencent and Alibaba established banks associated with their payment networks. WeBank (Tencent) and MyBank (Alibaba, now part of Ant Financial) have since grown rapidly. Ant Financial reports that, as of June 2022, MyBank had provided loans to more than 49 million small and medium-sized enterprise (SMEs), of which 80% had not previously had a bank loan.[37] WeBank, meanwhile, reports having more than 370 million individual clients and more than 4 million micro-small-and-medium-sized-enterprise (MSME) clients.[38]

In July 2023, the Chinese authorities permitted AliPay and WeChat Pay to integrate payments made using Mastercard, Visa, American Express, and Discover.[39] This, combined with increasing adoption of China Union Pay cards domestically, has led to an increase in the use of AliPay and WeChat Pay as mobile-payment gateways, in contrast to their role as digital wallets.

The emergence and expansion of digital payments in China has undoubtedly resulted in improvements in access to financial services, both directly (since payments are a financial service) and indirectly, by enabling tens of millions of businesses and hundreds of millions of individuals to hold bank accounts and thereby access related services, including loans.

C. India

India’s mobile-payment system has grown rapidly over the past decade. The market’s key players are MobiKwik, Paytm, PhonePe, and Google Pay. This section discusses those services, as well as WhatsApp Pay and M-Pesa, which have been less successful in India.

A major factor affecting the development of mobile payments in India has been the national digital ID (Aadhaar) and the Unified Payment Interface (UPI), both part of what is now referred to as “India Stack.”[40] I plan to look at India Stack in more detail in a future piece, but it is worth noting the following:

1. Aadhaar was developed by the Unique Identification Authority of India (UIDAI), a government authority established in 2009, in order to enable every resident of India to have a unique digital identity that could be instantaneously verified. The goal was to thereby reduce identity theft and related fraud, and facilitate more rapid onboarding to banks and other financial entities that require proof of identity for know-your-customer (KYC) purposes.[41] UIDAI began enrolling Indian residents in Aadhaar in 2010 and, by the end of 2015, had enrolled more than 800 million people.[42] As of February 2023, 1.38 billion Indian residents are enrolled—about 96% of the population.[43]
2. UPI was developed in 2016 by the National Payments Corporation of India (NPCI), a public-private partnership, as an open-source interoperable application programming interface (API) that facilitates real-time transfers between individuals with accounts at participating banks who have integrated the API into their smartphone apps.[44]

1. MobiKwik

Among the first mobile-payments systems in India, MobiKwik was initially established in 2009 by husband-and-wife team Bipin Preet Singh and Upasana Taku.[45] In 2012, it launched a digital wallet feature and, in 2013, the Reserve Bank of India awarded it a license for that wallet.[46] MobiKwik grew organically, aided by significant investments from Bajaj Capital and Sequoia, and signed up 1.5 million merchants and 55 million registered users by 2015.[47] It has continued to grow in the nearly decade since, albeit at a slower rate, recording around 4 million merchants, 140 million registered users, and 35 million active monthly users in 2023.[48]

MobiKwik generates revenue from commissions and advertisements from its Zaak payment-gateway franchise subsidiary,[49] as well as loans—including short-term credit, buy-now-pay-later, and personal loans—and investment advice.[50]

2. Paytm

Paytm began life in 2010 as a prepaid mobile-charging platform, but pivoted to payments in 2014 with the introduction of a mobile wallet. Paytm now generates revenue from three main sources: payment services, financial services, and “commerce and cloud.” Payment services—the core of its business, contributing 58% of its revenue in Q3 2023[51]—arise from users making payments from mobile wallets, debit cards, and credit cards, for which Paytm charges merchants a fee (merchant-discount rate) that ranges from 0.4% to 2.99% of the transaction amount, depending on the payment type (for small to medium-size businesses).[52] Financial services—including loans, investments, and insurance—accounted for 22% of Paytm’s revenue in the most recent quarter, while “commerce and cloud” services—Paytm’s marketplace that features more than 100,000 merchants—accounted for 20% of revenue.

This combination of offerings has allowed Paytm to become a highly effective multisided market. A year after launching its mobile wallet, Paytm had 100 million registered accounts, making it the early leader in the field in India.[53] The user base grew by 50% in 2016,[54] likely in part as a result of the government’s decision to cancel the majority of its banknotes.[55] It now has approximately 100 million active users.[56] While Paytm’s wallet remains the most popular digital wallet in India, its share of the mobile-payments market has declined as a result of competition from PhonePe and Google Pay.

In addition to offering payments, Paytm provides a range of financial services, including personal and business loans. It also operates its own ecommerce platform.

3. PhonePe

Created in 2015 by former Flipkart executives Sameer Nagim and Rahul Chari, PhonePe is India’s market-leading mobile-payments platform and was acquired by Flipkart in 2016 prior to its launch.[57] Flipkart itself—founded in Bengaluru in 2007—was purchased by Walmart in 2018.[58] In December 2022, PhonePe was separated from Flipkart, though both remain majority owned by Walmart.[59]

By launching as a wholly owned subsidiary of Flipkart, India’s largest online marketplace, PhonePe was able to leverage the marketplace’s then 100 million users (it has since grown to 400 million),[60] enabling it rapidly to acquire customers. PhonePe also differentiated itself from Paytm by primarily targeting middle-class consumers and associated merchants in second-tier cities.[61] PhonePe was also an early adopter of the Unified Payments Interface (UPI), a real-time payments solution that facilitates account-to-account transfers at no cost to either party.

Since separating from Flipkart, PhonePe’s offerings are now remarkably similar to those of Paytm. It does, however, have a larger user base (approximately 200 million monthly active users, double Paytm’s 100 million) its historic connection to Flipkart enables it more effectively profit from low-margin, high-volume activities.

4. Google Pay

Google Pay, which launched in India in 2017 (originally under the brand Tez), is now the second most popular mobile-payments system in India.[62] Google Pay does not act as a wallet in India, but is essentially a payment gateway that works exclusively with UPI.[63]  Google Pay has built a large Indian customer base due largely to brand recognition. Google is able to monetize Google Pay through advertising and its local online marketplace.[64] Google has also been granted a license to operate as a payment aggregator.[65]

5. WhatsApp Pay

Meta launched a pilot program for WhatsApp Pay in India in 2017, but did not fully launch until 2020 and has been subject to limits on its number of users.[66] Despite operating the most popular messaging service in the country, with more than 400 million users, WhatsApp Pay has not taken off. Indeed, its peak market share was about 0.4%, and it has since fallen to about 0.1%.[67]

WhatsApp Pay’s failure in India is likely due in no small part to regulatory delays in launching and the NPCI-imposed limits on the number of users—initially 40 million, but increased to 100 million in 2022.[68] The delay in launching meant that PhonePe and Google Pay were able to gain the upper hand on WhatsApp, becoming the predominant UPI-based wallet and payment gateways, respectively. The limit on signups, meanwhile, has forced WhatsApp to impose arbitrary restrictions on which customers can adopt its payment service, which effectively undermines the self-organization that underpins P2P-transaction networks.

6. M-Pesa

M-Pesa entered the Indian market in 2011, hoping to repeat its success in Kenya. Despite attracting more than 400 million Indian subscribers, many of them in rural areas, Vodafone was only able to onboard 8.4 million subscribers and eventually shut down the operation in 2019.[69] In an interview in 2020, the former head of M-Pesa, Michael Joseph, identified four factors that explained the failure:[70]

• Difficulty recruiting agents: In Kenya, Safaricom had invested heavily in building a large network of M-Pesa agents across the country, including in remote villages. This allowed easy cash deposits and withdrawals. But in India, Vodafone struggled to find shops and merchants to serve as last-mile M-Pesa agents in rural areas.
• Lack of understanding among consumers: In contrast to Kenya, poor and unbanked Indian consumers needed more handholding and awareness-building to adopt M-Pesa, which required significant time, money, and labor from Vodafone.
• Competition from well-funded startups targeting more profitable market segments: Meanwhile, mobile-payment startups such as Paytm targeted urban middle-class and affluent consumers. They could link to bank accounts, unlike M-Pesa, which dealt in cash for the unbanked. Paytm also had significant investor backing.
• Demonetization: The 2016 Indian demonetization benefited digital payments that were linked to bank accounts, but it harmed M-Pesa, which focused primarily on the unbanked.

7. Discussion

The veritable explosion in mobile payments in India over the past decade has undoubtedly contributed to improvements in financial inclusion. India’s primary mobile-payments apps—MobiKwik, Paytm, PhonePe, and Google Pay—have sought to leverage their platforms to maximize value for both sides of the market (merchants and consumers) in different ways:

• MobiKwik (Zaakpay), Paytm, PhonePe, and Google Pay provide payment-gateway and/or aggregator services.[71]
• MobiKwik, Paytm, and PhonePe offer users wallet features and seek to supply additional financial services, such as insurance and investment.
• Paytm, PhonePe, and Google Pay generate revenue through online marketplaces.
• All the apps (but especially Google Pay) generate revenue from advertising.

As noted in the introduction to this section and throughout, UPI likely contributed to the rapid adoption of mobile payments, especially for PhonePe and Google Pay, which were built around it. The fact that UPI requires parties to have a bank account has likely created incentives to open such account, thereby increasing financial inclusion. The provision of welfare support through e-RUPI vouchers that are delivered over UPI also likely increases financial inclusion.[72]

Some aspects of UPI, however, may also have hindered more widespread adoption of mobile digital payments and inhibited financial inclusion. For example, NPCI currently prohibits card and app operators from charging merchants for most transactions made using UPI (fees of up to 1% are permitted only for prepaid debit cards and pre-funded mobile wallets). Those card issuers and app operators who lack existing means to monetize their relationships with customers are therefore likely to find it difficult to break into the market using UPI, as they cannot easily offer rewards and other inducements to customers to on-board and use their card or app.

The Payments Council of India estimates that its members lose 55 billion rupees ($660 million) annually as a result of the zero MDR on UPI and RuPay transactions.[73] This is effectively a transfer from banks to the companies whose apps monetize UPI transactions. India’s government partly offsets this loss through a subsidy to UPI participants of between 15 and 25 billion rupees.[74] But experience with other systems that impose restrictions on payment-transaction fees suggests that banks will seek to recover these losses from other fees.[75] To the extent that such additional fees fall on lower-income accountholders, the effect on financial inclusion is likely negative. (I plan to explore this and related issues in more detail in a future brief on India Stack.)

D. Brazil

The first mobile-payments system in Brazil appears to have been Oi Paggo, a closed-loop short-messaging-service (SMS) “credit card” system founded in 2004 and formally launched in 2006 as an app on the Oi mobile-phone service (it was subsequently purchased by Oi).[76] In 2008, Oi Paggo reportedly had around 1 million users, but does not appear to have achieved mass adoption.[77]

Over the course of the past dozen years, several other entrants have built successful digital mobile-payments systems. According to a recent Survey by Statista, the top five most-used mobile-payments systems in Brazil at the end of 2023, based on proportion of respondents who had used the payment online or in stores in the previous year, were: PicPay (50%), PayPal (46%), Mercado Pago (44%), PagBank (31%), and Google Pay (25%).[78]

Before discussing these mobile-payment solutions, it is worth briefly noting that, in 2021, the Central Bank of Brazil (BCB) introduced its own real-time payment system, Pix, and required all of Brazil’s larger banks to implement it for all accountholders. As a result, Pix has had a significant effect on mobile digital payments in Brazil.

1. PicPay

PicPay was founded in 2012 as a digital wallet and initially launched in the city of Vitória, where it has gained significant traction, with approximately 75% of the population using it.[79] It subsequently launched in Rio de Janeiro and São Paulo. In 2022, PicPay—owned by closely held J&F Investments—obtained a banking license via J&F’s bank, Banco Original, enabling it to expand its offerings and lower its funding cost.[80] PicPay has more than 30 million active users and is accepted at more than 10 million merchants.[81] It generates revenue from a range of product lines, including loans, credit cards, investments, insurance, and a crypto-currency exchange.[82]

2. PayPal

Originally conceived as a payment system in its own right, PayPal functions both as a payment gateway—processing card payments—and as a wallet. In Brazil, PayPal also has a Pix integration, which allows users to send and receive payments to their PayPal account using their Pix keys.[83]

3. Mercado Pago

A subsidiary of the online marketplace Mercado Libre, Mercado Pago is able to leverage the customer base of that market, offering a full range of payments and banking services, including checking accounts, deposit accounts, loans, debit cards, and credit cards.[84] Mercado Pago operates in several countries and reported having nearly 65 million accountholders in 2023.[85]

4. PagBank and PagSeguro

PagSeguro was founded in 2006 as an online payment system by Universo Online (UOL), Brazil’s largest internet-content and services provider.[86] In 2013, PagSeguro diversified into point-of-sale (POS) payments and then into banking, offering a range of services. PagBank now has around 15 million active Brazilian users and 7.7 million merchants.[87]

5. Google Pay

In Brazil, Google Pay operates primarily as a payment gateway, facilitating transactions made using debit and credit cards whose (tokenized) information is stored on a user’s phone and transmitted to POS machines using radio-frequency identification (RFID).[88]

6. Discussion

The above-mentioned survey suggests that there is considerable multi-homing for mobile digital payments in Brazil, with the same consumers using several different mobile-payments apps. It also seems plausible that these apps have contributed to financial inclusion. As Figure 2 shows, in the five years from 2017 to 2022, there was a dramatic shift away from the use of cash toward a combination of card and digital mobile payments.

FIGURE 2: POS Payments in Brazil by Method

SOURCE: Statista

Meanwhile, the proportion of Brazilians with accounts at a financial institution rose from 70% in 2017 to 84% in 2021. Some have suggested that this was the result of Pix’s introduction, but that appears unlikely, as Pix was only introduced at the end of 2020. Two other factors seem better candidates: first, the growing use of digital payments and associated onboarding by financial-technology firms (fintechs), such as PagBank; second, some government subsidies offered in response to the COVID-19 pandemic required Brazilians to open bank accounts.

A study by Americas Market Intelligence (commissioned by Mastercard) found that, during the COVID-19 pandemic: “Brazil reduced its unbanked population by an astounding 73%.”[89] The study was based on research conducted between June and August 2020 and was published in October 2020, the month before Pix launched. It described the implementation of state and federal programs that Brazil launched in response to the pandemic:

• The “Coronavoucher” program distributed emergency funds to low-income informal workers exclusively via the state-owned bank Caixa Econômica Federal (CEF). Applications for funds could only be made via CEF’s Caixa Tem smartphone app, and funds were distributed using the same app. As of Aug. 5, 2020, 66 million people had received Coronavouchers via the Caixa Tem app. Of those, 36 million were previously unbanked.
• Merenda em Casa (“snack at home”), a program run by state governments, distributed funds to low-income families with children at public schools to help pay for food while schools were closed due to COVID-19. The program distributed funds via PicPay and PagBank’s PagSeguro, both private-sector payment apps.[90]

Following the launch of Pix, the BCB-run RTP program was made available to clients of Caixa Tem, PicPay, and PagBank.[91] As a result, previously unbanked individuals who had become banked because of the Coronavoucher and Merenda em Casa programs were able to obtain and use Pix keys to send and receive payments.

IV. Conclusions and Policy Implications

At one level, every successful payment system solves the same set of problems—in essence: creating a self-sustaining network that facilitates the transfer of funds, while limiting counterparty risk. But as this study shows, each system does so in ways that are economically, legally, and culturally contingent.

In Kenya—and, subsequently, many other countries—M-Pesa provided a means for millions of people without ready access to banks to send and receive money over long distances. To do so, it created a network of tens of thousands of agents providing on- and off-ramps for cash. Over time, this has gradually transformed into a broader ecosystem that includes banking and other financial services.

In China, AliPay provided a solution to counterparty risk for internet-based transactions in an economy where alternative solutions, such as credit cards, were not widely available. AliPay was able to leverage its reputation for reliable and secure payments to facilitate transactions using increasingly widely available smartphones. Meanwhile, WeChat Pay was able to leverage its network of hundreds of millions of chat users to establish an effective mobile-payments ecosystem and associated markets for goods and services.

In India, MobiKwik and Paytm both offered digital wallets as an alternative to card payments for middle-class consumers in an economy where credit cards were tightly regulated. But over time, and especially with the introduction of UPI, all of the mobile-payment systems’ business models have converged around offering a range of financial products and markets.

In Brazil, an early attempt to introduce a mobile digital platform predicated on the credit-card model seems to have foundered, but later entrants—notably PicPay, PayPal, Mercado Pago, PagSeguro and other players—have been able to build and monetize payment networks by offering payment-gateway services and a range of adjacent products.

Public policy has played a substantial role in the development of all these mobile-payments ecosystems. In some cases, the effects have likely been positive. For example, India’s Aadhaar digital ID has dramatically reduced the cost of proving the identity of hundreds of millions of people, thereby facilitating quicker and less expensive access to bank accounts. The distribution of welfare payments via payment apps in India and Brazil also likely increased adoption at the margin.

On the other hand, restrictions on transaction fees in India (zero MDR on UPI and RuPay) and Brazil (extremely low interchange fees permitted on Pix) have almost certainly made it more difficult to reach some potential users. In the absence of adequate merchant-transaction fees, the only way to monetize mobile-payments systems is through advertising or by selling other products. Operators of mobile-payments systems might encourage some participants to use their platform by offering discounts on certain products and services. For example, in India, Google offered cashback incentives for use on apps within its own (Android) ecosystem.[92] While there is nothing wrong with this, it is less likely to attract marginal users who are not significant consumers of Android’s app-based services than would simply offering unencumbered cashback rewards.

It is also worth noting that limiting MDR fees on UPI and interchange fees on Pix does not necessarily grant merchants a free ride. They will often have to pay hefty per-transaction fees to participate in online markets, with those fees paid to the parent company (e.g., Google) rather than the payment-service provider (in this example, Google Pay). Moreover, since mobile-payments-system operators have incentives to keep customers within their ecosystem through internal rewards programs, brick-and-mortar merchants may find that they lose customers.

At base, these policy failures stem from the fact that payments markets do not cease being two-sided simply because governments choose to intervene in them. The operators of digital mobile-payments systems are highly aware of this fact. Consider this note from PayPal:

PayPal began with a vision of an online world where consumers could safely, securely, and easily use digital payments to buy what they need and want from businesses. Over the past 24 years, our two-sided network has grown significantly, seamlessly connecting shoppers and retailers across the globe.

Our platform now connects businesses, who look to us to help them navigate the digital economy, with shoppers, individuals who increasingly value flexibility and ease in where and how they shop and manage their daily financial lives. [93]

Meanwhile, PicPay notes:

We now have a more comprehensive portfolio of products and services, further enhancing our value proposition beyond the digital wallet and day to day payments services, becoming a much broader two-sided financial ecosystem.[94]

Interventions in two-sided markets change the participants’ incentives. For example, when MDR or IF rates are subject to price controls, system participants look for other ways to monetize their products (or exit). Fintech companies that operate mobile digital payments have found ways to monetize consumers through advertising and/or online marketplaces. But for banks that don’t also operate mobile digital-payments systems, participating in payment apps for which they cannot charge fees on most transactions, such as UPI and Pix, is often both unavoidable and unfortunate. It is unavoidable because accountholders now expect to be able to use these apps for payments. It is unfortunate because it adds cost, while bringing in minimal IF revenue at best. Banks therefore look for other ways to monetize those accounts, which can include increasing account-maintenance fees or hiking borrower interest rates and/or other fees. Such actions typically harm the poorest consumers, who are least able to afford additional account fees.

Following enactment in the United States of the so-called “Durbin amendment,” which imposed price controls on debit-card IFs, covered banks raised account fees and increased the minimum balance required to maintain an account. In response, it appears that many lower-income consumers closed their bank accounts.[95] In other words, in this and likely other cases, price controls on payment-network fees appear to have had negative effects on financial inclusion.

Furthermore, it is unclear whether the systems established by Brazil and India are sustainable in their current form. One problem is that both rely on government subsidies. In the case of UPI, these come from the central government and must be financed by taxpayers. In the case of Pix, they come from the central bank (BCB), and are thus presumably paid, in part, out of fees from the banks and other organizations that are licensed by BCB. Because such subsidies are not directly related to the system’s performance, the system operator’s incentives are not necessarily aligned with users’ incentives (banks, fintechs, consumers). This may result in underinvestment in security (as arguably has been the case with Pix) and in other necessary ongoing upgrades.

Finally, potential conflicts of interest arise when a payment system’s operator is also the regulator of other payment systems, especially when there are no apparent mechanisms to address this conflict. For example, BCB both operates Pix and regulates payment-service providers, but does not appear to even acknowledge that this may be a conflict.[96] Such concerns were evident Brazil when WhatsApp proposed to introduce a payment app in the country, but the BCB prevented it from doing so until after it had launched Pix.[97]

Looking at changes in the proportion of adults with an account at a financial institution from 2011 to 2021 (Figure 3), the clear winners out of the four countries studied here are China and Kenya. While India and Brazil have also seen significant improvements, the growth has been less dramatic. In part, this is likely because both Brazil and India started from a higher base, but policy also likely played a role. It is probably too soon to see an effect from Pix in the data (Brazil only launch that system at the end of 2020) but UPI and demonetization appear to have had a detrimental effect on financial inclusion in India, with the proportion of adults having an account at a financial institution falling slightly after 2016

FIGURE 3: Share of Adults with an Account at a Financial Institution (2011 to 2021)

SOURCE: World Bank

Governments should not distort the market in these ways. Quite the opposite: they should be as neutral as possible. And they should limit themselves to the production of genuine public goods, such as courts and identity registers. Doing so will enable participation, competition, and innovation, which will drive financial inclusion.

Appendix: Trust and Counterparty Risk in Online-Payment Systems

As noted in Section I, entrepreneurs have developed several important technologies to improve trust and otherwise address counterparty risk in the online world, including user ratings, security protocols and fraud-detection systems, payment gateways, and online escrow systems. The following subsections discuss these technologies.

A. User Ratings as a Means to Enhance Trust

In February 1996, eBay founder Pierre Omidyar introduced the “feedback forum” on the site in order to encourage buyers and sellers to provide constructive feedback to one another. Accompanying the forum’s launch, he included the following note:

Most people are honest. And they mean well. Some people go out of their way to make things right. I’ve heard great stories about the honesty of people here. But some people are dishonest. Or deceptive. This is true here, in the newsgroups, in the classifieds, and right next door. It’s a fact of life. But here, those people can’t hide. We’ll drive them away. Protect others from them. This grand hope depends on your active participation. Become a registered user. Use our feedback forum. Give praise where it is due; make complaints where appropriate. [98]

The forum became extremely popular and Omidyar credits it with much of eBay’s subsequent success, because it enabled users to generate trust with one another.[99]

Such ratings systems have now become a common feature of e-commerce sites; indeed, they are a more-or-less ubiquitous and expected feature of larger sites. Moreover, the granularity of such ratings arguably makes them superior to other forms of regulation.[100]

B. SSL and Credit-Card-Security Protocols

From the perspective of merchants, one of the advantages of accepting credit-card payments is the credible commitment made by card issuers (embedded in the agreement those issuers make with the networks) that they will pay the merchant (via the acquiring bank, in the case of bank-issued cards) as long as the merchant has undertaken the necessary authentication.

Early internet-based transactions, however, posed some novel problems for card networks. In particular, there were security concerns on both sides of the market: issuers and cardholders were concerned about the risk that card details would be stolen and used fraudulently, while merchants and acquirers were concerned that they would be presented with stolen card details that, if used, would result in liability through chargebacks. For online payments to work required the development of solutions that would enhance security and trust on both sides.

Part of the solution came with the development in 1994 of the “secure sockets layer” (SSL) by Marc Andreessen and his team at Mosaic/Netscape.[101] SSL allowed for encrypted information to be sent between a web browser and the host server, preventing that information from being stolen. It was the precursor to modern online browsers, which use transport layer security (TLS) to transmit encrypted information. The incorporation of a padlock sign in a browser’s uniform resource locator (URL) helped to reassure users that their connection was secure, and information could be transmitted without fear of theft.

Another part of the solution came with card networks’ introduction of additional security protocols. Initially, individual payment networks developed their own standards, but these were superseded in 2004 with the development and implementation of an initiative known as the Payment Card Industry Data Security Standard (PCI DSS), which since 2006 has been an independent entity that includes all the major card networks.[102]

C. Credit-Card Guarantees and Chargebacks

Another important mechanism by which credit cards increase trust is card issuers’ commitment (as part of their agreement with networks, in the case of four-party cards) to guarantee payment to merchants on the condition that the merchants themselves meet certain criteria, including undertaking authentication checks. Meanwhile, card issuers may initiate a chargeback against a merchant on behalf of a cardholder in cases of fraud or theft (e.g., the cardholder’s information was stolen) or if the merchant failed to meet a cardholder’s legitimate expectations (e.g., it failed to provide goods or services in a timely fashion; the goods were damaged, defective, or missing parts; or the cardholder was charged an incorrect amount).[103]

D. Online-Payment Gateways as Trusted Intermediaries

Another important piece of the two-sided-market puzzle for online markets was solved in 1999 with the launch of PayPal. Originally conceived as a payment system in its own right, PayPal’s most important function (at least, until recently) has been as a payment gateway—a trusted intermediary that processes card payments.[104] PayPal is itself also a two-sided market, with merchants on one side and consumers on the other.[105] But it’s more complicated: in 2009, it partially opened up its APIs to third parties, thereby enabling others to build interoperable payments systems that would permit true peer-to-peer payments.[106]

E. Escrow and ‘Holds’

Parties to transactions frequently use trusted intermediaries to hold funds until specific conditions have been met, as documented in an escrow agreement. In the United States, escrow had traditionally been used mainly for transactions involving high-value idiosyncratic items, such as real-estate properties and paintings. This also appears to be the case thus far with online escrow services, such as those offered by escrow.com. The likely explanation is that escrow adds complexity and delays to a transaction; where financial remedies are adequate in the event of nonperformance, it is not an efficient solution.

Another reason escrow has not been used more widely for online purchases is that payment networks’ dual-message systems perform a similar function at much lower cost, enabling payments to be put on hold by the merchant until they are satisfied that the client will not issue a chargeback.[107] Some online payment gateways have similar “hold” systems that are very similar to escrow.[108]

But escrow has emerged as an important means to facilitate online commerce in China, where simple financial remedies facilitated by credit-card companies were not available to the majority of consumers. Within that context, online marketplace Alibaba established Alipay in 2003, which was initially an escrow-based system in which a purchaser’s funds were held by Alibaba until the purchase was delivered. As explored in Section 3, this proved to be a phenomenally successful strategy.

[1] Todd J. Zywicki, The Economics of Payment Card Interchange Fees and the Limits of Regulation, Int’l. Ctr. L. & Econ. (Jun. 2, 2010), available at https://laweconcenter.org/images/articles/zywicki_interchange.pdf.

[2] Marc Rysman, The Economics of Two-Sided Markets, 23  J. ECON. PERSP. 125, 130 (2009).

[3] See, e.g., Philip Moore, The State of the American Mall: Competitive, Attractive and Here To Stay, CORESIGHT RESEARCH (Jun. 27, 2023), https://coresight.com/research/the-state-of-the-american-mall-competitive-attractive-and-here-to-stay (noting that a new mall in Atlanta features a Nobu hotel and restaurant).

[4] Gunnar Camner, Emil Sjöblom, & Caroline Pulver, What Makes a Successful Mobile Money Implementation? Learnings from M-PESA in Kenya and Tanzania, GSMA (2009), available at https://www.gsma.com/mobilefordevelopment/wp-content/uploads/2012/06/mpesa_case_study9983.pdf (noting that airtime sharing was not observed in Kenya).

[5] See TONNY K. OMWANSA & NICHOLAS P. SULLIVAN, MONEY REAL QUICK: THE STORY OF M-PESA (Guardian Books, 2012); See also Enabling Mobile Money Transfer: The Central Bank of Kenya’s Treatment of M-Pesa, Alliance for Financial Inclusion (2010), available at afi_casestudy_mpesa_en.pdf.

[6] Banks Find Suite: Find Annual Historical Bank Data, FEDERAL DEPOSIT INSURANCE CORPORATION, https://banks.data.fdic.gov/explore/historical?displayFields=STNAME%2CTOTAL%2CBRANCHES%2CNew_Char&selectedEndDate=2022&selectedReport=CBS&selectedStartDate=1934&selectedStates=0&sortField=YEAR&sortOrder=desc (last visited Jun. 19, 2024); Geographical Outreach: Number of Automated Teller Machines (ATMs), Country Wide for United States, FED. RES. BANK ST. LOUIS (2016), https://fred.stlouisfed.org/series/USAFCACNUM (retrieved from FRED).

[7] Financial Access in Kenya: Results of the 2006 National Survey, Nairobi, Kenya: The Steadman Group Res. Div. (2007).

[8] Id.

[9] Omwansa & Sullivan, supra note 6.

[10] Id.

[11] Id.

[12] Experience M-PESA, Safaricom, https://www.safaricom.co.ke/personal/m-pesa/getting-started/experience-m-pesa (last visited Jun. 13, 2024); Driven by Purpose: 15 Years of M‑Pesa’s Evolution, McKinsey & Co. (Jun. 29, 2022), https://www.mckinsey.com/industries/financial-services/our-insights/driven-by-purpose-15-years-of-m-pesas-evolution.

[13] M-Shwari FAQs, SAFARICOM, https://www.safaricom.co.ke/personal/m-pesa/credit-and-savings/m-shwari (last visited June 13, 2024)

[14] Tavneet Suri, Mobile Money, 9 Ann. Rev. Econ. 497, 515 (2017).

[15] Id.

[16] M-Pesa and Your Bank, SAFARICOM, https://www.safaricom.co.ke/personal/m-pesa/do-more-with-m-pesa/m-pesa-and-your-bank (last visited Jun. 13, 2024)

[17] M-Pesa Partners with Visa for Virtual Card Payments in Africa, PYMNTS (Jun. 2, 2022), https://www.pymnts.com/digital-payments/2022/m-pesa-partners-with-visa-for-virtual-card-payments-in-africa; About the M-PESA Globalpay Virtual VISA Card, Safaricon, https://www.safaricom.co.ke/mpesaglobalpay/about (last visited Jun. 13, 2024).

[18] 2021 FinAccess Household Survey, Cent. Bank of Kenya, Kenya Bureau of Nat’l Stat., & FSD Kenya (Dec. 2021), available at https://www.centralbank.go.ke/wp-content/uploads/2022/08/2021-Finaccesss-Survey-Report.pdf.

[19] Suri Tavneet & Jack William, The Long-Run Poverty and Gender Impacts of Mobile Money, 354 SCI. 1288 (2016),  https://www.science.org/doi/10.1126/science.aah5309.

[20] M-Pesa, VODAFONE, https://www.vodafone.com/about-vodafone/what-we-do/consumer-products-and-services/m-pesa (last visited Jun. 13, 2024).

[21] Improving People’s Everyday Financial Experience, Orange (Aug. 28, 2020), https://www.orange.com/en/groupe/nous-connaitre/linnovation-utile-et-source-de-progres-pour-tous/improving-peoples-everyday.

[22] Don Lee, China Charges into Credit Cards, L.A. Times (Oct. 22, 2008), https://www.latimes.com/archives/la-xpm-2008-oct-22-fi-chinacredit22-story.html; The card penetration rate was considerably higher in cities—around 18%, according to a contemporaneous Nielsen survey (rising to 22% the following year). See Survey: China Steps into Credit Card Era, CHINA DAILY (Aug. 9, 2004), https://www.chinadaily.com.cn/english/doc/2004-08/09/content_363531.htm.

[23] The Internet Timeline of China 1986~2003, CHINA INTERNET NETWORK INFO. CTR. (Jun. 28, 2012), https://www.cnnic.com.cn/IDR/hlwfzdsj/201306/t20130628_40563.htm#:~:text=On%20January%2016%2C%202003%2C%20China,to%20the%20Internet%20in%20China.

[24] Infra Section II.A and Appendix

[25] China: A Digital Payments Revolution, Consultative Group to Assist the Poor (Sep. 2019), https://www.cgap.org/research/publication/china-digital-payments-revolution.

[26] What Is Alipay?, CHECKOUT.COM (May 18, 2023), https://www.checkout.com/blog/what-is-alipay.

[27] Yichen Zhu & Sarah Hui Li, A Hangzhou Story: The Development of China’s Mobile Payment Revolution (Lee Kuan Yew Sch. Pub. Pol’y, Nat’l Univ. Sing., 2018), available at a-hangzhou-story.pdf.

[28] Payment Methods, ANTOM DOCS (Apr. 24, 2024), https://global.alipay.com/docs/ac/cashierpay/payment_method.

[29] Barry Elad, Alipay Statistics 2023 – Market Share, Facts and Marketing Trends, ENTERPRISE APPS TODAY (last updated Oct. 10, 2023), https://www.enterpriseappstoday.com/stats/alipay-statistics.html.

[30] WeChat Now Supports Payments Between Users and One-Click Payments, Finance Magnates (Jun. 24, 2014), https://www.financemagnates.com/fintech/payments/wechat-now-supports-payments-between-users-and-one-click-payments (Tencent, the owner of WeChat, established a payment system called TenPay in 2005. That failed to take off, but it remains the official licensed payment provider underpinning Weixin Pay).

[31] Eveline Chao, How WeChat Became China’s App for Everything, Fast Company (Feb. 1, 2017), https://www.fastcompany.com/3065255/china-wechat-tencent-red-envelopes-and-social-money.

[32] Matthew Fulco, The WeChat Economy, From Messaging to Payments and More, CKGSB Knowledge (Aug. 28, 2017), https://english.ckgsb.edu.cn/knowledge/article/the-wechat-economy-from-messaging-to-payments-and-more/#:~:text=Matthew%20Fulco%20Authors,August%2028%2C%202017.

[33] All You Need to Know About WeChat Mini-Programs, GOCLICK CHINA (Jun. 28, 2022), https://www.goclickchina.com/blog/wechat-mini-programs-all-you-need-know.

[34] Shubham Singh, 18 WeChat Statistics — Users & Revenue Data, DEMANDSAGE (May 27, 2024), https://www.demandsage.com/wechat-statistics.

[35]  Multiple Payment Methods, WECHAT PAY, https://pay.weixin.qq.com/wechatpay_guide/intro_method.shtml (last visited Jun. 19, 2024); In-Store Payment, ANTOM DOCS, https://global.alipay.com/docs/instorepayment (last visited Jun. 19, 2024).

[36] Payment Methods in China: How China Became a Mobile-First Nation, Daxue Consulting (Jan. 29, 2024), https://daxueconsulting.com/payment-methods-in-china.

[37] ANTGROUP, https://www.antgroup.com/en/business-development/digital-finance-tab-details/mybank (last visited Jun. 18, 2024).

[38] WEBANK, https://www.webank.com/en/characteristic (last visited Jun. 18, 2024).

[39] Laura He, Visa and Mastercard Can Now be Used on China’s Biggest Payment Apps, CNN (Jul. 21, 2023), https://edition.cnn.com/2023/07/21/tech/china-alipay-wechat-pay-international-credit-cards-intl-hnk/index.html.

[40] INDIA STACK, www.indiastack.org (last visited Jun. 18, 2024)

[41] Vision and Mission, UNIQUE IDENTIFICATION AUTH. INDIA, https://uidai.gov.in/en/about-uidai/unique-identification-authority-of-india/vision-mission.html (last visited Jun. 18, 2024).

[42] Aadhaar Verification API: Innovation in Identity Verification, PERFIOS (Dec. 5, 2024), https://www.perfios.com/post/aadhaar-verification-api-innovation-in-identity-verification; India Population 1950–2024, MACROTRENDS, https://www.macrotrends.net/countries/IND/india/population (last visited June 18, 2024).

[43] Enrolment Dashboard, UNIQUE IDENTIFICATION AUTH. INDIA, https://uidai.gov.in/aadhaar_dashboard/india.php (last visited Jun. 18, 2024).

[44] Unified Payment Interface (UPI), NPCI, https://www.npci.org.in/what-we-do/upi/product-overview (last visited Jun. 18, 2024); UPI Live Members, NPCI, https://www.npci.org.in/what-we-do/upi/live-members (last visited Jun. 18, 2024).

[45] MOBIKWIK, https://www.mobikwik.com/about (last visited Jun. 18, 2024).

[46] Mahesh Sharma, Payments Startup MobiKwik Launches Mobile Wallet As India’s Central Bank Acts To End Country’s Cash Dependence, TechCrunch (Sep. 27, 2013), https://techcrunch.com/2013/09/27/payments-startup-mobikwik-launches-mobile-wallet-as-indias-central-bank-acts-to-end-countrys-cash-dependence.

[47] Jon Russell, Indian Payments Startup MobiKwik Nabs $25M From Tree Line, Cisco, AmEx and Sequoia, TechCrunch (Apr. 7, 2015), https://techcrunch.com/2015/04/07/mobikwik-series-b.

[48] MobiKwik Continues Profitable Streak for Second Quarter in a Row, ECONOMIC TIMES (Oct. 5, 2023), https://economictimes.indiatimes.com/tech/technology/mobikwik-continues-profitable-streak-for-second-quarter-in-a-row/articleshow/104183594.cms?from=mdr.

[49] MobiKwik Consolidated Financial Statement, MOBIKWIK (2023), available at https://documents.mobikwik.com/files/investor-relations/statements/zaakpay/zaakpay-financials-sept2023.pdf; financial statements of other subsidiaries available at https://www.mobikwik.com/ir/subsidiary-financials; RBI notice of “in-principle authorization” available at https://www.rbi.org.in/Scripts/bs_viewcontent.aspx?Id=4236; Report on the Audit of Special Purpose Interim Financial Statements, TATTVAM & CO. (Dec. 31, 2023), available at https://documents.mobikwik.com/files/investor-relations/statements/zaakpay/zaakpay-financials-sept2023.pdf; Subsidiary Financials, MOBIKWIK,  https://www.mobikwik.com/ir/subsidiary-financials (last visited Jun. 19, 2024); Status of Applications Received from Online Payment Aggregators (PAs) under Payment and Settlement Systems Act, 2007, RES. BANK OF INDIA, https://www.rbi.org.in/Scripts/bs_viewcontent.aspx?Id=4236 (last updated Jun. 16, 2024).

[50] Id., Res. Bank of India.

[51] Press Release, Paytm’s Earning’s Release for Quarter and Year Ending March 2024, Paytm (May 22, 2024), available at https://paytm.com/document/ir/financial-results/Paytm_Earnings-Release_INR_Q4_FY24.pdf.

[52] Paytm’s Pricing, Paytm, https://business.paytm.com/pricing (last visited Jun. 19, 2024).

[53] Paytm Reaches 100 Million Users, Business World (Aug. 11, 2015), https://www.businessworld.in/article/Paytm-Reaches-100-Million-Users-/11-08-2015-84698.

[54] Patrick Jenkins, Paytm and Transmit Security Win FT Fintech Awards, FINANCIAL TIMES (Nov. 16, 2016), https://www.ft.com/content/1a92d762-ac1b-11e6-ba7d-76378e4fef24.

[55] Justin Rowlatt, Why India Wiped Out 86% Of Its Cash Overnight, BBC NEWS (Nov. 14, 2016), https://www.bbc.co.uk/news/world-asia-india-37974423.

[56] Paytm Surpasses 100 Million Monthly Transacting Users for the First Time in Q3 FY24, Livemint (Jan. 22, 2024), https://www.livemint.com/companies/news/paytm-surpasses-100-million-monthly-transacting-users-for-the-first-time-in-q3-fy24-11705932856486.html.

[57] PHONEPE, https://www.phonepe.com/about-us (last visited Jun. 19, 2024); Charlie Graham, PhonePe, CONTRARY RESEARCH (last updated Dec. 1, 2023), https://research.contrary.com/reports/phonepe.

[58] Press Release, Walmart to Invest in Flipkart Group, India’s Innovative eCommerce Company, Walmart (May 9, 2018), https://corporate.walmart.com/news/2018/05/09/walmart-to-invest-in-flipkart-group-indias-innovative-ecommerce-company.

[59] Sri Deepti, Flipkart Completes Separation from PhonePe, TECH IN ASIA (Dec. 23, 2022), https://www.techinasia.com/flipkart-completes-separation-phonepe.

[60] Alnoor Peermohamed, Flipkart Grows User Base to 100 million, Business Standard (Sep. 22, 2016), https://www.business-standard.com/article/companies/flipkart-grows-user-base-to-100-million-116092100216_1.html; FLIPKART CATAPULT, https://brands.flipkart.com/catapult-about (last visited Jun. 19, 2024).

[61] Graham, supra note 58.

[62] Ingrid Lunden, Google Debuts Tez, A Mobile Payments App for India that Uses Audio QR to Transfer Money, TECHCRUNCH (Sep. 17, 2017), https://techcrunch.com/2017/09/17/google-debuts-tez-a-mobile-wallet-and-payments-app-for-india.

[63] Google Pay API for India & Google Pay & Wallet Console, GOOGLE, https://support.google.com/google-pay-and-wallet-console/answer/10945206?hl=en#:~:text=Google%20Pay%20API%20for%20India%20operates%20on%20a%20unique%20India,used%20as%20your%20UPI%20ID (last visited Jun. 19, 2024). The version of Google Pay implemented in India is thus quite different to the version implemented in the United States and other markets.

[64] Manish Singh, Google Paves Way to Monetize Pay Users’ Data in India, TECHCRUNCH (Mar. 11, 2021), https://techcrunch.com/2021/03/11/google-pay-paves-way-to-tap-pay-users-data-in-india.

[65] Certificates of Authorisation Issued by the Reserve Bank of India Under the Payment and Settlement Systems Act, 2007 for Setting Up and Operating Payment System in India, RES. BANK OF INDIA, https://rbi.org.in/Scripts/PublicationsView.aspx?id=12043 (last updated Jun. 18, 2024).

[66] Manish Singh, WhatsApp Permitted to Extend Payments Service to 100 Million Users in India, TECHCRUNCH, (Apr. 13, 2022), https://techcrunch.com/2022/04/13/whatsapp-permitted-to-extend-payments-service-to-100-million-users-in-india.

[67] Id.

[68] Id.

[69] Press Release, Vodafone India Launches M-Pesa Pay for Merchants and Retailers, Vodafone (Jan. 5, 2017), https://www.vodafone.com/news/inclusion/m-pesa-pay-india; Aman Rawat, Vodafone Winds Up M-Pesa in India After Huge Losses, INC 42 (Jan. 22, 2020) https://inc42.com/buzz/vodafone-winds-up-m-pesa-in-india-after-huge-losses.

[70] Jackson Lott & Mona Sinha, M-Pesa’s Failure in India: Why Couldn’t Vodafone Replicate its Kenyan Success? An International Marketing Case Study, 6 KENNESAW J. UNDERGRADUATE RES. 1, 12-13 (2019), available at https://digitalcommons.kennesaw.edu/cgi/viewcontent.cgi?article=1160&context=kjur (“In Kenya, Safaricom had invested considerable effort and money over the years to build a critical mass of M-Pesa agents. These were essentially small shop owners across the country, including in villages, who could also serve as M-Pesa agents, available to sell mobile airtime as well as enable M-Pesa wallet top-ups and withdrawals, as needed. However, when Vodafone went to villages in India where most migrant workers came from, they did not find much economic activity. Unable to find small shop keepers who could serve as agents, they could not create as good a network of last-mile agents crucial to the service. Moreover, unlike Kenya, poor, unbanked, or underbanked consumers struggled to adopt self-service technologies and needed assistance. Creating awareness and driving behavior change amongst this segment of the population required tremendous resources in terms of time, money, and human capital that Vodafone would have to divert from its core business in India, i.e., cell phone service. Meanwhile, a slew of mobile payment upstarts entered the Indian market. Unlike Vodafone that aimed to service the unbanked and underbanked, these new entrants, like Paytm, reached out to middle class and affluent consumers who wanted the convenience and lived in urban and semiurban areas where agents could be easily appointed. Given the income profile of their target consumers, their technologies could be based on linking their app to the customers’ bank accounts. This demographic was markedly different from the unbanked/underbanked consumers that M-Pesa serviced who used feature/basic phones and dealt in cash to top-up or withdraw cash from their M-Pesa wallets. Moreover, Paytm had the backing of large investors like Soft Bank and Alibaba. One key trigger event for spurring adoption of digital payments in India was the demonetization announcement by the Prime Minister of India. However, a shortage of cash at that time due to high-value currencies being declared defunct meant that a cash dependent system like M-Pesa did not benefit from the surge of mobile payment adopters.”)

[71] Zaakpay and PhonePe have “in principle approval,” see supra note 47; Google has full approval, see supra note 63; Paytm has been asked to revise and resubmit its application, see Press Release, Update on PA License: Paytm Payments Services Receives Extension From RBI for Resubmission of Application & Remains Hopeful of Getting Necessary Approvals, Paytm (Mar. 27, 2023), https://paytm.com/blog/investor-relations/update-on-pa-license-paytm-payments-services-receives-extension-from-rbi-for-resubmission-of-application-remains-hopeful-of-getting-necessary-approvals.

[72] Hiral Thanawala, e-Rupi Vouchers Get a Boost from RBI Monetary Policy, MONEY CONTROL (Jun. 8, 2023), https://www.moneycontrol.com/news/business/personal-finance/e-rupi-vouchers-get-a-boost-from-rbi-monetary-policy-10766151.html.

[73] Roll Back Zero Merchant Discount Rate on UPI, RuPay Debit Card Payments, Industry Body Payments Council of India Writes to Finance Ministry, INDIAN EXPRESS (Jan. 23, 2022),  https://indianexpress.com/article/business/banking-and-finance/merchant-discount-rate-rollback-on-upi-rupay-debit-cards-7737229.

[74] Pratik Bhakta, Fintechs Await Government Word on MDR Subsidy Allocation, ECONOMIC TIMES (Feb. 22, 2024), https://economictimes.indiatimes.com/tech/technology/fintechs-await-government-support-for-promoting-digital-payments-for-current-fiscal/articleshow/107891943.cms?from=mdr.

[75] Julian Morris, Todd J. Zywicki, & Geoffrey A. Manne, The Effects of Price Controls on Payment-Card Interchange Fees: A Review and Update, Int’l. Ctr. L. & Econ. (Mar. 3, 2022), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4063914.

 

[76] Oi Paggo, LINKEDIN, https://www.linkedin.com/company/paggo/about (last visited Jun. 19, 2024); Paggo, WIKIPEDIA, https://pt.wikipedia.org/wiki/Paggo (last visited Jun. 19, 2024), (information unverified because the links are broken).

[77] Oi Paggo: A Disruptive Brasileiro Credit Play, STL PARTNERS (Jun. 2008), https://stlpartners.com/insights/oi_paggo_a_disruptive_brasilei.

[78] Umair Bashir, Most Used Mobile Payments by Brand in Brazil 2023, Statista (Feb 13, 2024), https://www.statista.com/forecasts/1226566/most-used-mobile-payments-by-brand-in-brazil#:~:text=We%20asked%20Brazilian%20consumers%20about,in%20our%20Consumer%20Insights%20tool.

[79] Crescimento do PicPay: 34 Milhões Usam o App No Dia a Dia, PICPAY (Dec. 14, 2021), https://blog.picpay.com/picpay-crescimento/?utm_source=iupana&utm_medium=web&utm_campaign=010822EN.

[80] Fabiane Z. Menezes, PicPay, Latin America‘s Largest Digital Wallet, Is Now A Bank, THE BRAZILIAN REP. (Jul. 13, 2022), https://brazilian.report/liveblog/2022/07/13/picpay-digital-wallet-bank; PicPay 1H23 Earnings Release, PICPAY (Aug. 2023), at 11, https://api.mziq.com/mzfilemanager/v2/d/f4269298-97ef-427d-ac29-04f9d6a6054a/765c070b-b1ca-b07b-d699-b6a7eb7be191?origin=1.

[81] PicPay, supra note 79, at 2.

[82] Id., at 4.

[83] PayPal User Agreement, PAYPAL, https://www.paypalobjects.com/marketing/ua/pdf/BR/en/ua-032122.pdf?locale.x=en_BR (last visited Jun. 19, 2024).

[84] Mercado Libre SEC Proxy Statement (2023), at 6, https://api.mziq.com/mzfilemanager/v2/d/098a2d95-0ea8-4ed5-a340-d9ef6a2b0053/bfba3d21-84f6-7263-8abc-f32f54dc122d?origin=1.

[85] Id., at 7.

[86] Our History, PAGBANK, https://investors.pagbank.com/about-us/our-history (last visited Jun. 19, 2024).

[87] Our History, PAGSEGURO, https://international.pagseguro.com/about-us (last visited Jun. 19, 2024).

[88] Google Wallet Help, GOOGLE, https://support.google.com/wallet/answer/12059326?hl=en-GB&co=GENIE.CountryCode%3DBR (last visited Jun. 19, 2024).

[89] The Acceleration of Financial Inclusion During the COVID-19 Pandemic: Bringing Hidden Opportunities to Light, MasterCard (Oct. 12, 2020), available at https://www.mastercard.us/content/dam/public/mastercardcom/na/us/en/banks-and-credit-unions/other/mastercard-financial-inclusion-during-covid-whitepaper-20201012.pdf.

[90] Vinicius Colares, Bolsa Merenda PagBank 2021: CADASTRO, VALOR e como RECEBER o BENEFÍCIO…, PRONATEC (Apr. 11, 2021), https://pronatec.pro.br/bolsa-merenda-pagbank-2021-cadastro.

[91] Eduarda Andrade, CAIXA Tem Libera Transferência do Auxílio e Bolsa Família por PIX e TED, FDR (Aug. 18, 2021), https://fdr.com.br/2021/08/18/caixa-tem-libera-transferencia-do-auxilio-e-bolsa-familia-por-pix-e-ted; PICPAY, https://picpay.com/pix (last visited Jun. 19, 2024); Pix, PAGBANK, https://faq.pagseguro.uol.com.br/pix/408#rmclgBank (last visited Jun. 19, 2024).

[92] Manish Singh, Google‘s New Plan to Push Google Pay in India: Cashback Incentives in Android Apps, TECHCRUNCH (May 16, 2019), https://techcrunch.com/2019/05/16/google-pay-india-android-cashback.

[93] A Peek Inside PayPal’s Two-Sided Network of Consumers and Businesses, PayPal (Oct. 27, 2022), https://newsroom.paypal-corp.com/2022-10-27-A-Peek-Inside-PayPals-Two-Sided-Network-of-Consumers-and-Businesses.

[94] PicPay, supra note 79, at 3.

[95] Vladimir Mukharlyamov & Natasha Sarin, Price Regulation in Two-Sided Markets: Empirical Evidence from Debit Cards, SSRN (Nov. 24, 2022), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3328579.

[96] Julian Morris, Central Banks and Real-Time Payments: Lessons from Brazil’s Pix, Int‘l. Ctr. L. & Econ. (Jun. 1, 2022), available at https://laweconcenter.org/wp-content/uploads/2022/06/Lessons-from-Brazils-Pix.pdf.

[97] Julian Morris, Pixtopia Is Not Real, TRUTH ON THE MARKET (Jun. 2, 2022), https://truthonthemarket.com/2022/06/02/pixtopia-is-not-real.

[98] Pierre Omidyar, Founder’s Letter, eBay (Feb. 26, 1996), https://pages.ebay.co.uk/services/forum/feedback-foundersnote.html.

[99] Pierre Omidyar – On Innovation, The Henry Ford (Apr. 29, 2010), https://www.youtube.com/watch?v=RKVmsifohgM&t=295s.

[100] Julian Morris, Consumer Protection in the 21st Century, Int‘l. Ctr. L. & Econ. (Feb. 24, 2023), https://laweconcenter.org/resources/consumer-protection-in-the-21st-century.

[101] The original version of SSL was easily hacked, and thus was not launched publicly. Version 2.0, which was more secure, was included in releases of Netscape in late 1994. See Huzaifa Sidhpurwala, Evolution of the SSL and TLS protocols, RED HAT (Nov. 16, 2016), https://access.redhat.com/blogs/766093/posts/2758801; Phillip Hallam-Baker, Crypto Standards vs. Engineering Habits – Was: NIST About to Weaken SHA3?, ianG.org (Oct. 4, 2013), https://www.metzdowd.com/pipermail/cryptography/2013-October/018041.html.

[102] PCI SECURITY STANDARDS COUNCIL, https://www.pcisecuritystandards.org (last visited Jun. 19, 2024).

[103] Troy Segal, What Is a Chargeback? Definition, How to Dispute, and Example, Investopedia (Dec. 15, 2023), https://www.investopedia.com/terms/c/chargeback.asp.

[104] There are now many other online-payment gateways, including Worldpay, Stripe, and Square/Block.

[105] The company even talks about itself as a “two-sided network,” see PayPal, supra note 93.

[106] Sebastian Rupley, PayPal’s (Partially) Open Platform to Usher in New Payment Models & Apps, GIGAOM (Nov. 3, 2009),  https://web.archive.org/web/20110102142203/http://gigaom.com/2009/11/03/paypals-partially-open-platform-to-usher-in-new-payment-models-apps.

[107] Credit/Debit Authorisation Holds Explained, GOCARDLESS (last updated Mar. 2022), https://gocardless.com/guides/posts/credit-debit-authorisation-holds-explained.

[108] How to Resolve Payment on Hold or Unavailable Funds, PAYPAL (Oct. 10, 2023),  https://www.paypal.com/uk/brc/article/funds-availability.

Executive Summary

Smoking kills hundreds of Americans every day. Transitioning to vaping is one of best methods to stop smoking. While the risk from vaping is not zero, it is negligible for those who use well-made products. The U.K. government sends vaping kits to smokers to encourage them to quit, and permits the sale of vapes from vending machines. By contrast, U.S. public-health policy toward vaping is equivocal, and bogged down by concerns that children might start the habit. U.S. regulators have only approved a few vaping products, and they largely are not the ones that consumers most want. Nonetheless, the market does supply the products that adult consumers demand, regardless of their legal status. This paper describes a survey of a small subset of the legal market: 14 gas stations in the Philadelphia suburbs that sell large quantities of unapproved vaping products every day. It then reviews recent court decisions regarding the U.S. Food and Drug Administration’s (FDA) actions relevant to the sector, and suggests that U.S. policymakers should replace the FDA’s current arbitrary and capricious approach to vaping regulation with objective and reasonable quality standards.

I. Background

Burning tobacco releases hundreds of substances that contribute to more than 480,000 premature deaths annually in the United States from a range of causes, including cancer and cardiovascular disease.[1] While nicotine is the primary substance in cigarettes that creates physiological dependence, it is not dangerous in normal doses.[2] Nicotine patches and gum were developed to provide smokers with nicotine without the dangers of tobacco combustion. But while helping some smokers to quit, patches fail to meet the ritual, social habit, and other needs of most smokers.

Independent researchers and entrepreneurs understood this and developed alternatives to combustible products that better met smokers’ needs in the form of nicotine vaping products. Independent companies like NJoy and Pax Labs were among those that drove the early U.S. vaping market, with products such as the latter’s Juul pod-based e-cigarette, which used patented nicotine salts. Some users have preferred traditional tobacco flavors, but most report they enjoy alternate flavors, such vanilla, blueberry, and mango. Some vapes even contain no nicotine at all.[3]

Dating back to the 1980s, the major tobacco companies brought noncombustible “heat-not-burn” tobacco products to the market in markets like the U.K. and Japan.[4] Some also invested their capital to buy the more successful vaping-product companies, including Altria’s notable $13 billion partial acquisition of Juul in 2018, after it was spun off from Pax Labs.[5]

Vaping and heat-not-burn tobacco products have been shown to satisfy some of the ritual, sensory, pharmacokinetic, and social aspects that many smokers enjoy, while lowering the risks for the user. Vaping products are not riskless,[6] but they are substantially safer than smoking; the U.K. government suggests they are at least 95% safer, based on the available evidence.[7]

U.K. health authorities are sufficiently convinced of the relative safety of vaping that they encourage it as an alternative to patches and gum where those have not proved effective. Hospitals hand out free vaping starter kits to recruit smokers into a cessation program.[8] And in April 2023, the U.K. government decided to send vaping kits to roughly 1 million people—20% of the nation’s identified smokers.[9] U.K. health officials’ aim is for the U.K. to be a smoke-free society (that is, one with less than 5% regular smokers) by 2030. The U.K.’s support of vaping as an alternative to smoking is such that it even allows the products to be sold through vending machines.

A recent study by the MUSC Hollings Cancer Center found that smokers given vaping tools will reduce the amount they smoke, even if they are neither encouraged to use the tools nor even shown how to use them.[10] With 638 smoker participants, this was the largest study of its type concluded in the United States. Of the 638 smokers, 427 actively participated (211 in the control group did not receive vaping products). While some participants stated that they wanted to quit smoking and others stated that they did not, the reduction and even cessation in smoking was universal, including among those who had no intention of quitting.

This study adds to the weight of evidence that vaping options can reduce smoking.[11] It also answers a concern raised by vaping critics that vaping only works effectively in smoking cessation in an artificial study setting with smokers who say they want to quit.

Yet U.S. government policy remains equivocal about the relative benefits of vaping. The U.S. Food and Drug Administration (FDA) has approved a few vaping products,[12] but FDA communications (along with communications from other relevant federal agencies) focus more on the potential risks of vaping, especially to youth, rather than its role in smoking cessation in adults.[13]

As leading tobacco-regulation analyst Clive Bates has put it, the FDA has created “almost insurmountable regulatory hurdles and barriers to entry for vapes.”[14] The strict legal sanctions the FDA levied in 2019 against U.S. vape pioneer and previous market leader Juul,[15] preventing it from selling flavored products, have not been followed up with further significant action against manufacturers or retailers selling similar products from companies based outside the United States. The FDA has instead effectively left a legal void by denying approval to thousands of products, but failing to prevent those and similar products from reaching the market.[16]

There was also a period during which products manufactured using synthetic nicotine seemed to be able to circumvent the FDA’s rules. This ended in April 2022, when Congress passed legislation effectively deeming synthetic nicotine to be a “tobacco product” and thereby authorizing the FDA to regulate vapes that contained it.[17] Most producers, retailers, and consumers are, unsurprisingly, unsure of what is legal.

In a recent analysis of discarded vaping packs conducted across several states by the market-research group WSPM,[18] an astonishing more than 97% were not legal in the United States. This suggests that vast numbers of imported vaping products are brought into the country illegally. But are these products available only on the black market, or are they available in major retail outlets?

This issue brief aims to look closely at one subset of retailers: gas stations in several suburbs of Philadelphia. The gas stations are legal businesses that sell fuel and other quick-serve products, including drinks, food, cigarettes, and vaping products. Additionally, a more anecdotal analysis of three illicit markets, which primarily sell illegal drugs, is undertaken to observe what vaping products are available.

II. The Market for Vaping Products

When the field research for this project was undertaken, from December 2023 through June 2024, only 23 vaping products were approved for sale by the FDA. All of the approved products were tobacco-flavored.[19] By contrast, in the WSPM discarded-pack analysis, more than 98% of the recovered products were non-tobacco flavors. In other words, consumer demand appears to strongly favor non-tobacco-flavored vaping products, even though the FDA has not approved any such products for sale in the United States.

With such obvious demand for non-approved products, one would obviously expect a black market to emerge. Many food stores, gas stations, tobacco outlets, and other “convenience” locations, which have sold cigarettes for decades, now sell vaping products. While they do sell the FDA-approved products, I decided to investigate whether, and how many non-approved products are sold through these legal outlets.

Through personal contacts in the suburbs of Northeast Philadelphia, I examined the vaping products and sales over the previous year at 14 gas stations, some within city limits and some outside. Two of these gas stations, owned by the father of a friend, provided me with more than a decade of sales information, dating back to before these locations sold vaping products at all. This sample of convenience was not randomly created and is not intended to be representative of either this region of the country, nor even of Southeast Pennsylvania, specifically. It may contain unknown biases and may not reflect other locations within this geographic zone.

Over the six-month period that the survey was conducted, a total of 459 brand-name products were found across the 14 gas stations, with one station selling 169 individual brands. Two brands (Elf Bar and Lost Mary) dominated half the market, each with dozens of branded products. More than 30 different Elf Bar and Lost Mary flavors were identified, including myriad fruit flavors (blueberry, kiwi, watermelon, cherry, etc.), as well as flavors like bubble gum.

Figure 1 demonstrates the most popular brand groups. Note that Vuse, at 2% of the market, is the only brand with products (tobacco- or menthol-flavored) approved by FDA. Juul, also at 2%, has not been approved by the FDA, but its status remains in a kind of legal limbo.[20] Of the 459 identified branded products, only three were approved by the FDA. Therefore, more than 99% of the market is either illegal, or exists in a legal grey area.

FIGURE 1: Market Share of Most Popular Vapor Brands (%)

A. Are These Findings Unusual?

Over the past two years, on various visits to Washington, D.C., and New York City, I have visited gas stations up and down the I-95 corridor. These locations appear to sell similar products to those in the Philadelphia suburbs, often with different brands from within the same brand group. The most dominant product was Geek Bar in Maryland and D.C., while it was Elf Bar in Pennsylvania and Lost Mary in the New York metro area. These brands were also identified in the discarded-pack analysis, which noted that Geek Bar was the most discarded product group in Washington, D.C. All of these products are made by the same manufacturer: the China-based Shenzhen iMiracle, whose products are not approved for sale in the United States.

B. Market Value

Figure 2 demonstrates the growth in average monthly per-store revenues from vapor products. (For 2023, this is across all 14 gas stations; for 2016-2022, revenue was averaged across just the two stations for which data was available.)

The vast majority of this revenue comes from products that are not approved by the FDA. The much smaller revenue streams from approved vapes did also grow over time, but not at the same rates as for the non-approved products.

As demonstrated in Figure 2, average monthly sales have grown from a few hundred dollars to more than $10,000. The number of products sold has also grown from less than a dozen to hundreds. Every outlet in the survey sold more than 100 vape products. Non-approved products represented more than 99% of sales volume and 98% of revenue.

FIGURE 2: Average Monthly Vaping Revenue ($)

The two stations within Philadelphia city limits had slightly lower sales, presumably because their tax rates are slightly higher, although sample sizes were not sufficiently large to rule out other causes (e.g., lower average income in those locations).

III. Why Legal Businesses Sell Non-Approved Products

Five store managers/owners agreed to be interviewed on condition of anonymity. Of the five, none were entirely sure which, if any, products they sold were illegal. They reported that they assumed their suppliers operated legally and that they sell a wide variety of products. In short, they follow what customers buy, and rely on their suppliers to undertake legal due diligence.

One store owner commented that they might advertise vaping products more by displaying them more prominently in future, but were aware of the “legal limbo” of some products and that they “still made far more money from cigarette sales.” Cigarette (and cigar) sales were, on average, about 14 times larger than vaping-product sales in 2023 and 2024. One proprietor noted, however, that cigarette sales had been roughly 20 times more than vape sales only a few years ago, suggesting that vape sales are growing faster than cigarette sales.

Another owner reported that, while he obviously did not want to “break the law,” he has found that demand for vaping products is significant; that there is no “strong guidance on illegality”; and that there is “absolutely no enforcement.” Therefore, he said: “I’ll keep selling them until I’m told not to and that is enforced.”

A. How the Vaping Market Got to This Point

While distributors and retailers both are bound by the law, a significant amount of the blame for so many non-approved products being sold in the putatively legal market can be attributed to U.S. health policy and product regulation. While the FDA has denied application after application for useful vaping products, it takes no action against the sale of non-approved products.

One obvious concern is that the non-approved products currently available on the market are not required to meet any quality or safety standards. In denying approval to the vast majority of vapor products, the FDA has not only limited consumer choice, but it has induced many of those consumers to purchase products that may be of lower quality.

Vape manufacturers and importers want repeat business. They therefore have incentive not to harm users. But the FDA’s nominal claim of regulatory oversight for vaping products may have the effect of crowding out other means by which consumers might obtain information about the quality of vaping products. These could include, for example, industry standards or online vendors applying their own quality controls—both of which existed prior to the FDA deeming vapes to be tobacco products.[21]

Meanwhile, in evading its responsibility as an enforcer, the FDA has effectively misled consumers. Of course, the agency’s record in ensuring quality manufacturing processes contains other blemishes, including in its oversight of generic pharmaceuticals.[22] The potential for unnecessary harms from unauthorized vaping products (e.g., due to adulteration) is not negligible. While it is possible that these problems are magnified by the fact that most vapes are made in China, most authorized vapes are also manufactured in China. The more fundamental problem is that unauthorized vapes, by their nature, evade any regulatory approval. After all, domestically manufactured illegal cannabis vapes adulterated with e-acetate caused the death of 68 Americans in 2019 and 2020.[23]

On a more positive note, many of the larger manufacturers, including Shenzhen iMiracle, produce versions of their products that have been approved for sale by the U.K. government and therefore have cleared U.K. quality rules.[24] Indeed, Lost Mary appears to be the most ubiquitous brand in London, as it is on much of the Eastern seaboard of the United States. But the versions of these products marketed in the United States have higher levels of nicotine and may have been produced using different standards. Moreover, many other products sold in United States do not have equivalents that are currently approved in the U.K., or possibly anywhere.[25]

B. Attempts to Comply with FDA Guidance

While manufacturers have tried to comply with FDA rules, in the absence of clear guidance and objective standards, they have been faced with a nearly impossible task. For its part, the FDA has shown little interest in approving its backlog of product applications, leaving manufacturers to resort to litigation. In a recent decision, the 5^th U.S. Circuit Court of Appeals found that the FDA’s decisionmaking processes for approving vaping products were “arbitrary and capricious.”[26] The agency has also repeatedly changed its mind regarding what it would require from manufacturers. As the court found:

FDA refused to review petitioners’ marketing restrictions, which it had repeatedly stated were key to discouraging youthful use of the products and were thus critical components of [applications]. FDA repeatedly counselled applicants that long term studies were likely unnecessary and it said nothing about comparative efficacy studies—until the PMTA deadline was long gone; and then it refused petitioners the opportunity to conduct such studies. Finally, FDA’s defense against petitioners on the merits of their applications is loaded with post hoc rationalizations. Any of these errors is a “fatal flaw.” Taken together, they are mortal wounds.[27]

The FDA has appealed the 5^th Circuit’s ruling to the U.S. Supreme Court, which granted certiorari in July 2024.[28] This has left the legal limbo in place. David Spross of the National Association of Tobacco Outlets testified at a June 2024 hearing of the U.S. Senate Judiciary Committee about his members’ desire to sell legal vape products, and encouraged the FDA to authorize more, but most other witnesses and committee members were much more focused on the potential risks of vaping to youth.[29]

As Clive Bates has explained:

The technical, scientific, creative, and legal resources of American vape businesses are mired in endless, exhausting efforts to prove the acceptability of products that are already 8-10 years old to the satisfaction of the unyielding, never-satisfied FDA. In contrast, the Shenzhen innovation system is tirelessly focused on the consumer – what the consumer wants today and what they need to get around pointless regulation….FDA is nurturing demand for illicitly supplied Chinese products.[30]

C. Illicit Sellers of Illicit Products

Through previous work on opioids,[31] I have come to know several drug dealers whose primary market is selling products such as oxycodone, fentanyl and, occasionally, heroin. None sell vaping products to any scale, primarily because they are so easy to buy through ordinary retail outlets. When these drug dealers have sold vapes, it has only been flavored disposable vapes—products similar, if not identical, to those sold in convenience stores. The consensus they reported to me is that if there were a police crackdown on legal sales, they might sell more illicit vapes, but for now it remains a tiny market for them.

This is quite a telling finding. In a market for illegal products, illicit sellers with active buyers barely engage in the market because legal sellers dominate sales of non-approved products.

IV. Conclusion

It is hard to think of a public-health policy more poorly managed in the United States than vaping. Given that the alternative to vaping is often a far deadlier smoking habit, public policy should encourage vaping products manufactured to a high standard, and marketed and sold exclusively to adults. That means establishing and enforcing clear, objective, and reasonable quality standards that apply to all vapes on the market, as the U.K. has done,[32] not imposing arbitrary and capricious requirements on vape manufacturers and importers, as the FDA has done.

Thousands of U.S. outlets currently sell vaping products of unknown quality. While the FDA has threatened action against retailers with warning letters,[33] there has been little follow-through on enforcement. This failure undermines not only the rule of law, but also public health.

[1] See, Adult Data on Smoking, Ctr. for Disease Control and Prevention, https://www.cdc.gov/tobacco/data_statistics/fact_sheets/adult_data/cig_smoking/index.htm#references (last visited May 5, 2023)

[2] See Nicotine Dosage, Drugs.com, https://www.drugs.com/dosage/nicotine.html (last visited Aug. 16, 2023).

[3] Average Revenue Per Unit (ARPU) in the E-cigarettes Segment of the Tobacco Products Market Worldwide from 2019 to 2029, statista, https://www.statista.com/forecasts/1438523/average-revenue-per-unit-arpu-e-cigarettes-tobacco-products-market-worldwide (last visited Aug. 30, 2024).

[4] See Tax Treatment of Heated Tobacco Products, HM Treas., https://www.gov.uk/guidance/e-cigarettes-regulations-for-consumer-products (last updated Mar. 13, 2018).

[5] David Goldman, The Biggest American Cigarette Company Buys a $13 billion Stake in the Biggest E-cigarette Startup, CNN Bus. (Dec. 20, 2018), https://www.cnn.com/2018/12/19/business/altria-juul/index.html.

[6] Akihiro Kishimoto et al., Forecasting Vaping Health Risks Through Neural Network Model Prediction of Flavour Pyrolysis Reactions, 14 Sci. Rep. 9591, 10 (2024), https://www.nature.com/articles/s41598-024-59619-x.

[7] See Ann McNeill et al., Vaping in England: Evid. Update Feb. 2021, Public Health England (2021), https://www.gov.uk/government/publications/vaping-in-england-evidence-update-february-2021.

[8] See, Starter Vape Packs to be Handed Out in Hospitals, U.E. Anglia (Apr. 29, 2021), https://www.uea.ac.uk/about/news/article/starter-vape-packs-to-be-handed-out-in-hospitals.

[9] Neil O’Brien, Smokers Urged to Swap Cigarettes for Vapes in World First Scheme, Dep’t Health & Soc. Care (Apr. 11, 2023), https://www.gov.uk/government/news/smokers-urged-to-swap-cigarettes-for-vapes-in-world-first-scheme.

[10] See Leslie Cantu, Largest U.S. Study of E-cigarettes Shows Their Value as Smoking Cessation Aid, M.U.S.C. Health, https://muschealth.org/health-professionals/progressnotes/2023/fall/e-cigarettes-study (last visited Aug. 22, 2024).

[11] See Jeremy Y. Levett et al., Efficacy and Safety of E-cigarette Use for Smoking Cessation: A Systematic Review and Meta-analysis of Randomized Controlled Trails, 136 Am. J. Med. 802, 802-805 (2024), https://www.amjmed.com/article/S0002-9343%2823%2900295-4/fulltext#:~:text=io%2F26fkq).-,Results,CI%2C%201.29%2D2.44.

[12] See, FDA Permits Marketing of E-Cigarette Products, Marking the First Authorization of Its Kind by the Agency, U.S. Food & Drug Admin. (Oct. 12, 2021), https://www.fda.gov/news-events/press-announcements/fda-permits-marketing-e-cigarette-products-marking-first-authorization-its-kind-agency.

[13] Clive Bates, Fixing U.S. Vape Regulation- Twelve Proposals, The Counterfactual (Jun. 12, 2024), https://clivebates.com/fixing-u-s-vape-regulation-twelve-proposals.

[14] Id. at 11.

[15]  James Ducharme, How Juul Got Vaporized, Time (May 17, 2021), https://time.com/6048234/juul-downfall.

[16] Matthew Perrone, Thousands of Unauthorized Vapes Are Pouring Into the US Despite the FDA Crackdown On Fruity Flavors, Associated Press (Jun. 26, 2023), https://apnews.com/article/fda-vapes-vaping-elf-bar-juul-80b2680a874d89b8d651c5e909e39e8f.

[17]  See Requirements for Products Made With Non-tobacco Nicotine Take Effect Apr. 4, U.S. Food & Drug Admin. (Apr. 13, 2022), https://www.fda.gov/tobacco-products/ctp-newsroom/requirements-products-made-non-tobacco-nicotine-take-effect-april-14.

[18] See Cami Mondeaux, Majority of Disposed Vapes in D.C. Exported from China Despite Bad: Study, Wash. Exam’r (May 29, 2024), https://www.washingtonexaminer.com/policy/healthcare/3020885/majority-disposed-vapes-dc-exported-china-study.

[19] E-Cigarettes, Vapes, and other Electronic Nicotine Delivery Systems (ENDS), U.S. Food & Drug Admin., https://www.fda.gov/tobacco-products/products-ingredients-components/e-cigarettes-vapes-and-other-electronic-nicotine-delivery-systems-ends (last visited Aug. 30, 2024).

[20] Update on FDA’s Scientific Review of Juul Product Applications, U.S. Food & Drug Admin. (Jun. 6, 2024), https://www.fda.gov/tobacco-products/ctp-newsroom/update-fdas-scientific-review-juul-product-applications.

 

[21] Guy Bentley & Julian Morris, The FDA Has Decimated the E-cigarette Market, Reason Foundation (Sep. 22, 2021), https://reason.org/commentary/the-fda-has-decimated-the-e-cigarette-market.

[22] David Dobbs, A New Book Argues That Generic Drugs Are Poisoning Us, N.Y. Times (May 13, 2019), https://www.nytimes.com/2019/05/13/books/review/bottle-of-lies-katherine-eban.html.

[23] See, Severe Lung Disease Associated With Using E-cigarette Products, Ctr. for Disease Control & Prevention, https://archive.cdc.gov/www_cdc_gov/tobacco/basic_information/e-cigarettes/severe-lung-disease.html (last updated Feb. 18, 2020).

[24] See E-cigarettes: Regulations for Consumer Products, Med. & Healthcare Products Regul. Agency (Feb. 29, 2016), https://www.gov.uk/guidance/e-cigarettes-regulations-for-consumer-products (last updated Aug. 16, 2024).

[25] Russ Ware, Vaping and the FDA: An Updated Timeline, Versed Vaper (Jul. 26, 2024), https://versedvaper.com/vaping-and-the-fda-an-updated-timeline.

[26] See Jonathan H. Adler, En Banc Fifth Circuit Rejects FDA’s Vaping Regulation “Surprise Switcheroo”, Reason (Mar. 1, 2024), https://reason.com/volokh/2024/01/03/en-banc-fifth-circuit-rejects-fdas-vaping-regulation-surprise-switcheroo.

[27] Wages & White Lion Invs. v. Food & Drug Admin., 90 F.4th 357, 362 (5th Cir. 2024).

[28] Jessie Hellmann, Fight Over Flavored Vapes Lands at Supreme Court, Roll Call (Jul. 2, 2024), https://rollcall.com/2024/07/02/fight-over-flavored-vapes-lands-at-supreme-court.

[29] See, Combatting the Youth Vaping Epidemic by Enhancing Enforcement Against Illegal E-cigarettes, U.S. S. Comm on the Judiciary, 118^th Cong. (2024), https://www.judiciary.senate.gov/committee-activity/hearings/combatting-the-youth-vaping-epidemic-by-enhancing-enforcement-against-illegal-e-cigarettes.

[30] Id. at 11.

[31]  See Roger Bate, A Field Study of the Opioid Market: Authenticity and Price from Pharmacy to Street, AEI, available at https://www.aei.org/wp-content/uploads/2018/10/Bate-final-wp.pdf (last visited Aug. 23, 2024).

[32] Id. at 19.

[33] David Spross, FDA Steps Up Enforcement Actions Against Tobacco Manufacturers, Wholesalers and Retailers, CSP (Feb. 7, 2024), https://www.cspdailynews.com/tobacco/fda-steps-enforcement-actions-against-tobacco-manufacturers-wholesalers-retailers.

Executive Summary

In the 36 years since California voters moved to overhaul the state’s insurance regulatory system with Proposition 103, the state’s insurance market has struggled to keep pace with national trends and product innovations. As we have previously detailed, the rate-intervenor system created by Prop 103 has been among the most significant impediments to the efficient and effective functioning of the insurance market.

In practice, the intervenor process has proven both costly and time-consuming, with a five-year average filing delay of 236 days for homeowners insurance and 226 days for auto insurance. Such delays in rate filings make it more difficult for companies to change rates. Indeed, from 2018 to 2022, California ranked 49th in the number of homeowners-insurance rates filed, and 50th in the number of auto-insurance rates filed.

In addition, the state and the California Department of Insurance has for too long failed to exercise proper oversight of rate intervenors. The process has been dominated by a small handful of consumer groups—with the most significant participating organization founded by Prop 103’s author—that have rarely been called to task to prove that they are making the “substantial contribution” to the process required under the text of the law.

This issue brief details the form, function, and questionable value proposition of the rate-intervenor system and how it has served to render the Prop 103 rating system slow, imprecise, and inflexible. It also examines recent reform proposals to make the intervenor system more transparent and functional.

I. Prop 103 and the Intervenor System

California voters in November 1988 approved Proposition 103, the “Insurance Rate Reduction and Reform Act.” Authored by Harvey Rosenfield of the Santa Monica-based Foundation for Taxpayer and Consumer Rights (now known as Consumer Watchdog) and sponsored by Rosenfield’s organization Voter Revolt, Prop 103 carried narrowly with 51.1% yes votes to 48.9% against.[1]

Prop 103’s stated purpose was “to protect consumers from arbitrary insurance rates and practices, to encourage a competitive insurance marketplace.”[2] Rate increases and decreases became subject to the prior approval of the elected insurance commissioner, replacing the “open competition” system that had previously prevailed for 40 years under the McBride-Grunsky Insurance Regulatory Act of 1947, which required only that insurers submit rate manuals to the California Department of Insurance (CDI).[3]

Under Prop 103, public hearings are mandatory for personal lines increases of more than 6.9% and commercial lines increases of more than 14.9%, while others are at CDI’s discretion. The law created a role at these hearings for “public intervenors,” who are empowered to file objections on behalf of consumers, with fees to be paid by the applicant insurance company. Intervenors are granted petitions to intervene, as a matter of right, on any rate filing.

A. Intervenor Compensation and Transparency

Prop 103 authorizes intervenors who participate in rate filings to recover costs, expenses, and attorneys’ fees from insurers, who in turn can pass those costs on to consumers.[4] Individuals or organizations seeking to participate in the intervenor process must first apply for a finding of eligibility to seek compensation with the Office of the Public Advisor.[5] Applications for eligibility must include detailed corporate records, an accounting of consumer-protection activities, and disclosure of funding sources.

A finding of eligibility grants the individual or organization authority to petition to intervene in rate applications or investigatory or regulatory hearings involving property/casualty insurance, pending a ruling from CDI granting intervention. To obtain such a ruling, the intervenor must demonstrate that it can present relevant issues, evidence, or arguments that are separate and distinct from those already known by CDI. When a proceeding has completed, the intervenor submits a request for an award of compensation demonstrating that its participation yielded relevant, credible, and nonfrivolous information that the department would not otherwise have.[6] Compensation may not exceed “the prevailing rate for comparable services in the private sector in the Los Angeles and San Francisco Bay Areas … for attorney advocates, non-attorney advocates, or experts with similar experience, skill and ability.”[7]

The intervenor process has proven both costly and time-consuming. According to CDI data, since 2003, intervenors have been paid $23,267,698.72, or just over $1 million annually, for successfully challenging 177 filings.[8] CDI currently publishes quantitative data concerning intervenor compensation and rate differentiation in intervenor proceedings.[9] But while this is helpful in conveying the scope of intervenor efforts, the data arguably fail to capture the value actually provided by intervenors in the ratemaking process.

A major reason that the intervenor system has been so disruptive is that CDI has not historically enforced Prop 103’s “sufficient” pleading requirements. For instance, intervenors can use generic criticisms of a carrier’s trend and loss development copied and pasted from previous petitions, without any requirement to plead application-specific arguments based upon the intervenor’s review of the data. The carrier instead bears the burden of proof to justify what’s in a filing, leaving the intervenor with no pleading burdens at all.

Since its inception, the intervenor program has been dominated by Consumer Watchdog, whose founder Harvey Rosenfield authored Prop 103. But the degree to which other organizations have taken part in the process has ebbed and flowed over time. As Daniel Schwarcz noted in 2012:

Until about 2004, a diverse range of organizations intervened in rulemaking and rate hearings, including organizations like the Southern Christian Leadership Conference, Public Advocates Group, Consumer Union, Voter Revolt, and a handful of private citizens and attorneys. In recent years, however, a single organization – Consumer Watchdog (“CW”) – has become the sole significant user of the intervention process, particularly with respect to rate hearings. In fact, CW is the sole recipient of forty-two of the sixty-six awards made since 2003, and the only organization to receive any reimbursement since 2007. During that period, CW is also, with a single exception, the only party to receive compensation for intervening in rate applications.[10]

During the five-year period from 2007-2012 when Consumer Watchdog was the only organization to participate in the intervenor program, it collected more than $6.2 million in fees.^[11] In July 2012, in response to concerns raised by lawmakers that Consumer Watchdog was dominating the process, then-Insurance Commissioner Dave Jones appointed enforcement attorney Ed Wu to serve as a public advisor to groups seeking to participate in the intervenor process.[12]

Between 2013 and today, CDI deemed four consumer organizations (Consumer Watchdog, the Consumer Federation of  California Education Foundation, the National Asian-American Coalition, and United Policyholders) eligible for compensation as intervenors.[13] In addition, four individuals (Anthony Manzo, Andrea Stevenson, Donald P. Hilla, and John Metz) and a trio of plaintiffs in a lawsuit against Farmers Insurance (Roger Harris, Duane Brown, and Brian Lindsey) have also been found eligible for compensation as rate intervenors;[14] to date, however, none of the individual intervenors has been awarded compensation by CDI.

Table 1 details annual compensation totals for the four eligible consumer organizations from 2013 to 2023.

Table I: Total Compensation Awarded to Intervenors, 2013-2023 ($000)

SOURCE: California Department of Insurance[15]

As is obvious from Table 1, Consumer Watchdog remains by far the most active intervenor, taking 87% of the $12.2 million in compensation awarded over the past decade.

B. Rate Delays and the Death of the ‘Deemer’

The intervenor process has also contributed to California having the second-most time-consuming rate-approval system in the country, behind only Colorado, with a five-year average filing delay of 236 days for homeowners insurance and 226 days for auto insurance.[16]

As originally presented to California voters, Prop 103 proposed that insurers’ rate filings would be deemed accepted if no action were taken by the CDI for 60 or 180 days.[17] Indeed, Prop 103 included this “deemer” provision because a reasonable speed-to-market for insurance products also protects consumers.

The law’s deemer provision has been effectively rendered moot in practice because, as a matter of course, the CDI requests that firms waive the deemer. If the deemer is not waived, the CDI has two options: approve the rate or issue a formal notice of hearing on the rate proposal. Because the CDI is unable to complete timely review of filings within the deemer period, it always elects to move to a rate hearing. In effect, CDI has turned every rate filing without a deemer waiver into an “extraordinary circumstance.”[18]

In practice, it has proven exceedingly challenging for petitioners to navigate the manner in which rate hearings—the nominal guarantors of due process—are conducted. The administrative law judges (ALJs) that oversee these proceedings are housed within the CDI. The hearings themselves take a broad view of relevance that drive up the cost of participation. Upon ALJ resolution, the commissioner can accept, reject, or modify the ALJ’s finding. There is little practical upside for an insurer to move to a hearing against the CDI.

Insurers are therefore faced with a starkly practical choice. One option is to waive their right to timely review of rates, and hope that they gain approval in, on average, six months. The alternative is to move to a formal hearing and reconcile themselves with the fact that approval, if forthcoming, will take at least a year. The system of due process originally contemplated by Prop 103 simply bears no relationship with the system as it operates today.

II. Proposed Reforms

In recent months, an accelerating insurance-availability crisis and the announced exits of several of the state’s largest homeowners insurers have forced California leaders to rethink the ossified Prop 103 system. The proximate cause of the crisis has primarily been historically costly wildfires, and Prop 103’s inflexibility to allow insurers to adjust rates appropriately. In 2017 and 2018 alone, for example, California homeowners insurers posted a combined underwriting loss of $20 billion, more than double the total combined underwriting profit of $10 billion that the state’s homeowners insurers had generated from 1991 to 2016.[19]

While the highest-profile of the proposed reforms would address longstanding regulatory interpretations of Prop 103 that barred insurers from considering the cost of reinsurance in their rate filings or from using the output of catastrophe models to craft forward-looking loss estimates, policymakers have also turned their attention to ways to reform the intervenor process.

A. Expedited Rate Filings

In September 2023, Gov. Gavin Newsom announced an emergency executive order to stabilize the state’s rapidly deteriorating market for property insurance. The order directed Insurance Commissioner Ricardo Lara to take “swift regulatory action to strengthen and stabilize California’s marketplace,” including by implementing changes to “[i]mprove the efficiency, speed, and transparency of the rate approval process.”[20]

For his part, Commissioner Lara announced an emergency response plan that called for:

Improving rate filing procedures and timelines by enforcing the requirement for insurance companies to submit a complete rate filing, hiring additional Department staff to review rate applications and inform regulatory changes, and enacting intervenor reform to increase transparency and public participation in the process …[21]

In May 2024, Newsom followed up with a “trailer” bill attached to the state’s 2024-2025 budget that would require the California Department of Insurance to respond to rate requests from insurers within 120 days and, if an insurer requests an average rate hike of more than 7%, to provide insurers with a suggested rate within that same time period.[22]

In essence, the proposal would amount to restoring the “dead letter” deemer provisions of Prop 103. Such reforms are crucial, as California’s sluggish regulatory system appears to be getting slower over time. The annual average number of days between filing and resolution of rate changes for homeowners insurance in California was 157 days from 2013 to 2019; from 2020 to 2022, the average delay increased to 293 days.[23]

These reforms are welcome. CDI could bolster them by committing, as a matter of administrative policy, to exercise its discretion not to convene public hearings on filed rate changes of less than 7% for personal lines or 15% for commercial lines. Such hearings add expense, administrative burden, and delays to very modest changes in product offerings. In particular, if a filing is made on the basis of least-inflationary or least-aggressive loss-development assumptions, CDI should undertake a light-touch review focused on rate sufficiency to expedite the approval process. This approach would have the benefit of increasing both the predictability and speed of the ratemaking process.

B. Improved Intervenor Transparency

Questions long have been raised about the degree to which Consumer Watchdog has abided regulatory mandates that intervenors’ compensation and attorney and advisor fees are reasonable. Indeed, circa 2012, the group inspired a website called ConsumerWatchdogWatch.com, launched by a former chief of staff to then-Assembly Speaker Fabian Nunez and former press secretary to then-Gov. Gray Davis, that accused it of being “a ‘pay to play’ organization that generates millions of dollars for itself in fundraising schemes without revealing its special interest donors.”[24]

Of particular interest is the degree to which a significant portion of the 501(c)3 organization’s revenues flow to just a handful of contractors. According to the organization’s Form 990 filings with the Internal Revenue Service, over the 15 years from 2008 to 2022, Consumer Watchdog paid Rosenfield $6.8 million for legal and professional services, and an additional $3.9 million to Freehold, N.J.-based actuarial firm AIS Risk Consultants Inc.[25] Over that same period, Consumer Watchdog President Jamie Court earned $4.7 million.[26] Together, Rosenfield, Court, and AIS took about 28% of the $54 million in total revenue the organization received over those 15 years.[27]

The department and its ALJs have at times questioned the quality of Consumer Watchdog’s contributions to the process. As Schwarcz has noted:

CW’s scattershot approach has its costs. ALJs often regard its positions with skepticism – and occasionally, with hostility. For example, one ALJ dismissed the organization’s actuarial work as being “without merit,” saying that its arguments were “deficient and not credible.” Another said that CW’s testimony “at the least, is careless, and may be dodgier than that.”[28]

The organization had nonetheless enjoyed a lengthy streak of being renewed for eligibility to participate as a rate intervenor. In October 2023, however, Commissioner Lara denied a Consumer Watchdog petition to intervene in a rate filing by Liberty Insurance Corp., citing that the organization had submitted a “conclusory” finding that Liberty’s filed rate indication was inflationary and that the group “failed to meet its burden of proof with respect to the actuarial soundness of the selected trend factors and trend data period used.”[29] Moreover, Lara contended on separate contentions in the filing that Consumer Watchdog did “not plead any specific issue, but instead, holds open the possibility that an issue might arise in the future.”[30]

That denial would not be the last. In June 2024, Lara denied a pair of Consumer Watchdog petitions to intervene—in filings by USAA and State Farm in which the group sought $245,175 and $227,175 of compensation, respectively—with the commissioner declaring in both orders that the group’s proposed budget was “not supported by any documentation, exhibits, an attestation or even a mere statement that the hourly rates it contained did not exceed market rates.”[31]

Also in June, Lara delayed approval of Consumer Watchdog’s eligibility petition to continue to serve as an intervenor, on grounds that he could not yet determine whether its submission of documentation about its members, board of directors, and funding sources, and its required showing that it “represents the interests of consumers” were complete.[32] Given the delay, Consumer Watchdog’s existing eligibility determination expired July 12, 2024. Lara noted in his order that he would issue a decision in the matter no earlier than Aug. 2, 2024.[33]

The department’s recent posture of enhanced skepticism toward the value provided by rate intervenors has not been limited to Consumer Watchdog. In April 2024, the department initially denied a petition to intervene filed by the Consumer Federation of California Education Foundation on grounds that it cited “no specific issues to be raised or positions to be taken on any issue” in a proceeding concerning the department’s proposed regulatory action regarding complete property/casualty rate applications.[34]

These recent developments raise hope that the department might exercise its discretion to reduce and sometimes reject fee submissions due to the lack of significant or substantial contribution. The department has long rubber-stamped fee requests, thereby creating incentives for unnecessary and costly delays in reviews and in actuarially justified rate increases.

But while this recent posture is to be welcomed, the concern is that it could be limited to ad hoc interventions that fall by the wayside when the current crisis abates. More lasting change in regulatory procedure is essential if California is to better understand the value that intervenors offer, and to ensure that intervenor engagement is both efficient and effective.

One way to change the system for the better would be to find that a carrier’s compliance with the complete-rate-application requirements shifts the burden to the intervenor for why an actuarial selection is wrong. That would require the intervenor to actually perform analysis in the first 45 days and present their data and calculations. The requirements to demonstrate a “substantial contribution” should also be tightened. To be eligible for compensation, petitioners should be required to show nonduplicative contributions or novel arguments that the CDI wouldn’t otherwise make. Where the intervenor merely repeats the same critiques as CDI, it should not trigger payments.

Another useful change would be to return to the pre-2006 definition of when a “proceeding” begins. Under the original iteration of intervenor regulations, it commenced upon appointment of an ALJ for an adversarial proceeding. Intervenors were not permitted to participate in pre-hearing discussions between an insurer and the CDI; they could only earn compensation for disputes that proceeded to a hearing. Returning to that original definition would reduce disruptions that hold up filings.

Similarly, CDI and the Legislature should examine how the definition of “market rate” is applied to intervenor compensation.[35] The state code currently requires that compensation may not exceed “the prevailing rate for comparable services in the private sector in the Los Angeles and San Francisco Bay Areas … for attorney advocates, non-attorney advocates, or experts with similar experience, skill and ability.” But given that the Santa Monica-based Consumer Watchdog has long been effectively the only provider of “comparable services” in this space, the question must be raised whether it is effectively setting the very billing benchmark against which its own compensation requests are judged. Moreover, given that Consumer Watchdog’s single-largest outside contractor is based in New Jersey, CDI should interrogate whether the out-of-state rates AIS charges Consumer Watchdog for its actuarial services actually comport with prevailing in-state rates.

The qualitative contributions made by intervenors are also obscured by the fact that none of their filings appear publicly on the National Association of Insurance Commissioners’ (NAIC) System For Electronic Rates and Forms Filing (SERFF). Not only is this an aberration relative to other proceedings before the CDI, but there could be significant value in getting greater transparency from the intervenor process, given the delays and direct costs related to intervention.

The CDI has in the past year established a webpage that posts some information on intervenors’ filings and participation, but this requires observers to perform manual checks, rather than the far simpler option of checking SERFF. Allowing the Legislature and the public to assess the substantive value of intervenor contributions would ensure not only substantial due-process protections for filing entities, but would also guarantee that consumers are afforded a high level of representation in proceedings. For instance, such transparency would function as a guarantor that intervenor filings are not otherwise duplicative of CDI efforts. It would therefore allow the public to assess whether intervenors are diligent in efforts putatively made on their behalf.

[1] Steve Geissinger, Californians Approve Auto Insurance Cuts, Insurer Files Lawsuit, Associated Press (Nov. 9, 1988).

[2] Text of Proposition 103, Consumer Watchdog (Jan. 1, 2008), https://consumerwatchdog.org/insurance/text-proposition-103.

[3] Cal. Ins. Code §1850-1860.3.

[4] Cal. Ins. Code §1861.01-1861.16.

[5] Cal. Code of Regulations, Title 10, Ch. 5, §2623.2.

[6] Cal. Code of Regulations, Title 10, Ch. 5, §2623.5.

[7] Cal. Code of Regulations, Title 10, Ch. 5, Art. 13, §2661.1(b).

[8] Data are drawn from Informational Report on the CDI Intervenor Program, California Department of Insurance, available at https://www.insurance.ca.gov/01-consumers/150-other-prog/01-intervenor/report-on-intervenor-program.cfm (last visited Jul. 17, 2024).

[9] Informational Report on the CDI Intervenor Program, California Department of Insurance, https://www.insurance.ca.gov/01-consumers/150-other-prog/01-intervenor/report-on-intervenor-program.cfm (last accessed Aug. 16, 2023)

[10] Daniel Schwarcz, Preventing Capture Through Consumer Empowerment Programs: Some Evidence from Insurance Regulation, Minnesota Legal Studies Research Paper No. 12-06 (Jan. 11, 2012).

[11] Don Jergler, California Legislator Calls for Hearing on Intervenor Fees, Insurance Journal (May 17, 2012), https://www.insurancejournal.com/news/west/2012/05/17/247939.htm#.

[12] Jones Names New Public Advisor To Would be Intervenors, Insurance Journal (Jul. 18, 2012), https://www.insurancejournal.com/news/west/2012/07/18/256128.htm#.

[13] Requests for and Findings of Eligibility to Seek Compensation, Received Since January 1, 2013, California Department of Insurance, available at https://www.insurance.ca.gov/01-consumers/150-other-prog/01-intervenor/upload/Requests-for-and-Findings-of-Eligibility-7-11-24.pdf (last updated Jul. 11, 2024)

[14] Id.

[15] Total Compensation Awarded to Intervenor, California Department of Insurance, available at https://www.insurance.ca.gov/01-consumers/150-other-prog/01-intervenor/upload/Total-Compensation-2013-2023_7-16-24.pdf (last updated Jul. 16, 2024).

[16] Lawrence Powell, R.J. Lehmann, & Ian Adams, Rethinking Prop 103’s Approach to Insurance Regulation, Connecticut Insurance Law Journal (forthcoming), available at https://laweconcenter.org/wp-content/uploads/2023/11/Rethinking-Prop-103s-Approach-to-Insurance-Regulation-2.pdf.

[17] Cal. Ins. Code §1861.05.

[18] Cal. Ins. Code §1861.065(d).

[19] Eric J. Xu, Cody Webb, & David D. Evans, Wildfire Catastrophe Models Could Spark the Change California Needs, Milliman (Oct. 2019), available at https://fr.milliman.com/-/media/milliman/importedfiles/uploadedfiles/wildfire_catastrophe_models_could_spark_the_changes_california_needs.ashx.

[20] Press Release, Governor Newsom Signs Executive Order to Strengthen Property Insurance Market, Office of Gov. Gavin Newsom (Sep. 21, 2023), https://www.gov.ca.gov/2023/09/21/governor-newsom-signs-executive-order-to-strengthen-property-insurance-market.

[21] Press Release, Commissioner Lara Announces Sustainable Insurance Strategy to Improve State’s Market Conditions for Consumers, California Department of Insurance (Sep. 21, 2023), https://www.insurance.ca.gov/0400-news/0100-press-releases/2023/release051-2023.cfm.

[22] 2024-25 Budget – Streamlined Review of Pending Insurance Filings, California Department of Finance, available at https://esd.dof.ca.gov/trailer-bill/public/trailerBill/pdf/1140 (last updated May 28, 2024).

[23] Powell, Lehmann, & Adams, supra note 16.

[24] Press Release, ConsumerWatchdogWatch.com Launched to Expose ConsumerWatchdog.org, ConsumerWatchdogWatch.com (Feb. 8, 2012), https://www.prnewswire.com/news-releases/consumerwatchdogwatchcom-launched-to-expose-consumerwatchdogorg-138926074.html.

[25] Consumer Watchdog, OMB No. 1545-0047, Form 990 Return of Organization Exempt from Income Tax (2008-2022).

[26] Id.

[27] Id.

[28] Schwarcz, supra note 10 (citations omitted).

[29] Ricardo Lara, Order Denying Consumer Watchdog’s Petition to Intervene with Leave to Amend, California Department of Insurance (Oct. 3, 2023), available at https://www.insurance.ca.gov/01-consumers/150-other-prog/01-intervenor/upload/Order-Denying-CW-Petition-to-Intervene_Liberty-Insurance-Petition_10-2023.pdf.

[30] Id.

[31] Ricardo Lara, Amended Order Denying Consumer Watchdog’s Petition to Intervene, California Department of Insurance (Jun. 25, 2024), available at https://www.insurance.ca.gov/01-consumers/150-other-prog/01-intervenor/upload/AMENDED-ORDER-DENYING-CW-S-PETITION-TO-INTERVENE-RE-SFMAIC-RULE-FILE-NO-24-788.pdf; Ricardo Lara, Order Denying Consumer Watchdog’s Petition to Intervene, California Department of Insurance (Jun. 18, 2024), available at https://www.insurance.ca.gov/01-consumers/150-other-prog/01-intervenor/upload/Order-Denying-CW-Petition-to-Intervene-in-United-Services-Auto-Association-Garrison-and-USAA-Casualty-24-722-723-744.pdf.

[32] Ricardo Lara, Order Concerning Consumer Watchdog’s Request for Finding of Eligibility to Seek Compensation, California Department of Insurance (Jun. 19, 2024), available at https://www.insurance.ca.gov/01-consumers/150-other-prog/01-intervenor/upload/ORDER-CONCERNING-CW-REQUEST-FOR-FINDING-OF-ELIGIBILITY-TO-SEEK-COMPENSATION-IE-2024-0002.pdf.

[33] Id.

[34] Ricardo Lara, Order Denying Consumer Federation of California Education Foundation’s Petition to Participate in the Proposed Regulatory Action Regarding Complete Property and Casualty Rate Applications, California Department of Insurance (Apr. 10, 2024), available at https://www.insurance.ca.gov/01-consumers/150-other-prog/01-intervenor/upload/ORDER-DENYING-CFCEF-S-PETITION-TO-PARTICIPATE-IN-THE-PROPOSED-REGULATORY-ACTION-REG-2019-00025.pdf.

[35] Supra note 7.