Spotlight

Executive Summary

Payment cards generate significant benefits for both merchants and consumers. Consumers benefit from convenience, security, and rewards. Merchants benefit from enhanced security, as well as higher throughput and larger per-ticket sales.

These benefits are made possible through the interchange fees retained by issuing banks, which fund network infrastructure, fraud prevention, and rewards programs, balancing payment networks’ two-sided markets (consumers and merchants).

Big-box merchants have long pushed for regulations that would limit interchange fees. They still want the benefits from card payments, but without paying their part of the costs associated with maintaining the system. Regulations to impose price controls on interchange fees, such as the Dodd-Frank Act’s Durbin amendment, have benefited these big-box retailers at the expense of consumers and smaller merchants.

The latest ruse by merchants is to demand that issuing banks be prohibited from retaining interchange fees on sales tax (and, in some cases, other items as well). To date, only one state, Illinois, has passed such legislation. Its Interchange Fee Prohibition Act (IFPA) would prevent card issuers from retaining interchange fees on taxes and tips.

The costs to implement the IFPA or similar legislation in other states would be enormous. Specifically:

• Merchants would likely see a fall in card use, resulting in reduced throughput and lower revenue. Smaller merchants would lose out relative to larger merchants.
• Banks and credit unions would lose revenue. Smaller local banks and credit unions would be hit worse due to their relative inability to distribute costs.
• Consumers would likely see reduced card rewards and other benefits, as banks compensate for lost revenue.
• State and local governments might see an increase in the costs of enforcing sales tax and a fall in revenue due to reduced economic activity.

Instead of falling for the big-box merchants’ ruse, state governments should seek ways to improve the efficiency of collecting sales tax.

I. Introduction

Over the past half-century, payment cards have transformed the way we pay for goods and services. The Federal Reserve Board’s 2024 Diary of Consumer Payment Choice found that, in 2023, consumers made roughly 62% of their payments using credit and debit cards, up from 45% as recently as 2016, while their use of cash and checks has halved, falling from 38% to 19% over the same period (Figure 1).[1] Meanwhile, consumers demonstrably prefer to pay by card. A recent Forbes poll found that 70% of Americans use cards most often, while 7% used digital wallets and 1% used buy-now-pay-later schemes.[2]

FIGURE 1: Share of Payment-Instrument Use for All U.S. Payments, 2016-2023

SOURCE: Federal Reserve Board Diary of Consumer Payment Choice

A. The Benefits of Card Payments

This shift in payment choice has been driven by the benefits consumers and merchants derive from cards. For consumers, these include:

• Convenience: Consumers can make purchases, both locally and internationally, without having to carry large amounts of cash on their person. Increasingly, they can “tap-and-go,” making contactless payments quickly and effortlessly with a wide range of devices (cards, phones, watches, rings).[3] Importantly, cards have also enabled consumers to pay online, which has resulted in a revolution in commerce.[4]
• Security: Payment cards offer consumers considerable protection against fraud and theft, leaving them far safer than carrying cash. Contactless (tap) and chip (dip) payments do not share underlying payment-account numbers with merchants, and information is encrypted end-to-end, making it almost impossible to steal usable cardholder information. Meanwhile, if a cardholder loses their card, they can easily freeze or cancel it to prevent unauthorized use.
• Zero Liability: In the unfortunate event that a fraudulent charge is made, issuing banks assume liability for practically all charges that were not expressly authorized by the cardholder.
• Record Keeping: Payment cards automatically keep track of purchases, making it easier to monitor spending, to budget, and to track payments for returns or disputes.
• Rewards, Insurance, and Other Benefits: Many credit cards offer rewards programs that allow consumers to earn cashback, airline miles, or points for purchases. Most rewards cards also provide access to special discounts and promotional offers. Many cards offer purchase-protection insurance, extended warranties on purchases, travel insurance, rental-car insurance, and other benefits.
• Building Credit: Regular and responsible use of credit cards can help consumers build or improve their credit score, making it easier to get loans or better interest rates in the future.
• Consumption Smoothing: Credit cards allow households to defer payment on purchases, enabling them to better manage their cash flow. Credit cards also provide a line of credit that can be useful in emergencies when cash is not immediately available.

For merchants, payment cards offer largely corollary benefits. In particular:

• Ticket Lift: The ability for consumers to make purchases larger than the amount of cash they have in their wallet results in increased spending.
• Increased Throughput: When consumers pay by card or mobile device—especially when “tapping” (e., using contactless systems)—transactions are now generally faster, which means stores are able to process more customers more quickly with fewer staff, resulting in higher throughput.
• Reduced Security Expenditures: Cash payments expose merchants to the risk of theft, both in- store and when moving cash to and from the bank. To reduce this risk, stores must invest in both in-store security systems and in armored-car services to collect cash and take it to the bank. Card payments reduce—and, in the case of cashless systems, eliminate—this expenditure.
• Reduced Skimming: While modern checkout systems often limit opportunities for checkout staff to skim (g., barcode scanners that limit opportunities to input incorrect prices), theft remains a problem in many smaller stores.

As a result of these various benefits, the net cost of card payments (i.e., taking into account the fees charged by acquirers) is generally lower than the net cost of cash.[5] As an example, one year after switching to a fully cashless payment system in 2018, Atlanta’s Mercedes-Benz Stadium reported that average wait times had fallen by 20 to 30 seconds and per-capita food and beverage sales had risen by 16%, while saving more than $350,000 in operating expenses.

B. The Role of Interchange Fees

The ubiquity of card payments makes it easy to take them for granted. But that would be a mistake. The transition from cash and check to electronic payments has been a result of decades of investment by card networks, banks, and other parties in the payments system. It is fair to say that payment networks are a marvel borne of innovation and incentives, both of which have been facilitated largely by the “interchange” fees that issuing banks keep. This subsection explains how interchange fees work and why they are important.

1. Scale economies, network effects, and two-sided markets

Most products only become viable when production reaches a certain scale. Often, this is reinforced by network effects, where one person’s use of a product increases its value for others. Examples include typewriter keyboard layouts (e.g., QWERTY), video-cassette formats (e.g., VHS), and social networks (e.g., Facebook, X, etc.).[6]

In some cases, network effects involve two or more sets of market participants. For example, owners of USB-C chargers and cables are more likely to buy devices with USB-C inputs for power and information; meanwhile, manufacturers are more likely to install USB-C inputs when large numbers of consumers own USB-C cables and charges. This is known as a “cross-side” network effect, because it occurs across two inter-related—or “two-sided”—markets (i.e., the market for devices and the market for chargers and cables).

Payment systems are an example of just such a two-sided market with cross-side network effects. For a payment system to become viable requires scale among both buyers (one side) and merchants (the other side). If there are too few buyers using the payment system or too few merchants accepting it, the system will collapse. By contrast, as the proportion of buyers using a particular system increases, the proportion of sellers accepting it will likewise increase, and vice versa.

To grow and maintain a two-sided market, it is often necessary for one side to subsidize the other. Economic theory predicts that the less price-sensitive side will subsidize the more price-sensitive side.[7] For example, advertisers subsidize the production of newspaper content, resulting in more newspaper readers and more eyeballs for advertisements. Likewise, advertisers subsidize the development of better search-engine algorithms, increasing the number of searches performed on that search engine and the number of impressions for advertisements.

2. Interchange fees and merchant-discount rates

In the case of payment networks, these cross-side subsidies can include collection, payment default, fraud monitoring, various kinds of insurance, and other account-related costs, as well as rewards such as cashback and airline miles. They also include fees to the network operator, which cover not just the operation and maintenance of the network, but also investments in innovations such as the EMV chip, contactless payments, and 3DS, all of which help to reduce fraud.[8]

FIGURE 2: Transactions in a Three-Party Card-Payment System

The mechanism by which these subsidies are applied varies, depending on whether the card network is “three-party” or “four-party.” Three-party card networks like American Express and Discover act as card issuer, merchant acquirer, and network operator. As such, they subsidize cardholders directly via fees charged to merchants. This is shown in Figure 2.

In four-party networks, acquirers subsidize cardholders through the “interchange fee,” which issuers deduct from the amount remitted to the acquiring bank. The merchant’s acquiring bank, in turn, covers both the cost of interchange fees and its own costs by charging merchants a fee known as the merchant discount rate (MDR). These transactions are shown in Figure 3.

FIGURE 3: Transactions in a Four-Party Payment-Card Network

In principle, banks could establish interchange fees with one another. There are, however, roughly 4,000 banks in the United States.[9] For each of those banks to set interchange fees with one another would require more than 8 million separate agreements.[10] That would clearly be enormously time-consuming and costly. Unsurprisingly, a more efficient solution emerged early in the development of card networks, with the network operator setting default multilateral interchange fees.

The merchant fees charged by three-party networks and the interchange fees retained by issuing banks in four-party networks must be set at levels that effectively balance various competing interests. Given the wide variety and frequently varying characteristics of different merchants and consumers, as well as dynamic competition among issuers, the optimal fee level cannot be identified objectively. Rather, fee levels are an emergent property of the system that vary by type of card and merchant, and are set at levels intended to maximize value for all participants.[11] The U.S. Supreme Court put it succinctly in Ohio v Amex:

To optimize sales, the network must find the balance of pricing that encourages the greatest number of matches between cardholders and merchants.[12]

C. The Push for Price Controls on Interchange Fees

Despite the systemic benefits that arise from the payment networks’ interchange fees, larger merchants have persistently sought to reduce those fees. In some cases, they have done this through bilateral agreements.[13] More often, however, they have sought to use political and/or regulatory intervention to impose price controls on interchange fees.[14]

One probable reason for this is that larger merchants benefit from scale economies, which means that interchange represents a larger proportion of their MDR than for smaller merchants. As such, interchange-fee price controls tend to benefit large merchants disproportionately relative to smaller merchants.[15]

This campaign to lower interchange fees has been waged globally and, in many cases, has been successful, with politicians and/or regulators acceding to large merchants’ demands. In the United States, Congress passed an amendment to 2010’s Dodd-Frank Act that called on the Federal Reserve to impose price controls on the debit-card interchange fees retained by large banks.[16]

Over the past few years, representatives of large merchants have sought repeatedly to pass legislation at the state level that would prohibit issuers from retaining interchange fees in connection with the sales-tax portion of a transaction.[17] Until 2024, none of these attempts were successful. But in June 2024, Illinois passed the Interchange Fee Prohibition Act (IFPA), which would prohibit payment-card issuers from retaining interchange fees related to taxes and gratuities.[18] To our knowledge, this is the first time any government anywhere in the world has imposed restrictions on the retention of interchange in relation only to part of the total transaction amount. As such, there is no direct comparison from which to glean evidence of likely effects.

Illinois’ groundbreaking legislation is due to come into effect July 1, 2025, barring a subsequent veto or successful legal challenge.[19] Pennsylvania also recently introduced a law that would prohibit issuers from retaining interchange fees on sales tax.[20] Meanwhile, Georgia, Tennessee, and Florida have established committees to study the potential effects of such a law.[21]

Proponents of the elimination of interchange fees on sales tax typically highlight the amount merchants currently pay in such fees.[22] In so doing, they seek to imply that if interchange fees on sales tax were eliminated, merchant revenue would increase by those amounts. In practice, however, the effects on merchants would vary considerably, depending on the type of acquiring account they have and the mechanism(s) by which the interchange fees are removed or rebated.

Merchants who use a gateway, such as Stripe or Square, currently pay a “blended” MDR that is set nationally, and would therefore not see any MDR reduction. It seems likely that most other acquirers who offer blended MDRs would not reduce their rates either, as they would incur additional costs associated with implementing the interchange-fee carveout, which would be passed through to their merchant customers. Indeed, it is possible that the implementation costs to acquirers would be sufficient that they would increase their blended MDR.

Illinois’ IFPA seems to anticipate this effect and offers merchants an alternative means to recover interchange fees from the issuer: submitting a request for reimbursement to their acquirer within 180 days of the transaction.[23]

By contrast, larger merchants who are on “interchange plus” MDRs would presumably see a reduction in the interchange component of their MDRs. But they would likely also see an increase in the “plus” component that covers the acquirer’s costs. Plausibly, this could come in the form of an increase in fixed per-transaction charges, since the additional administrative cost is not contingent on the size of transaction. Thus, higher-volume, lower-ticket-size merchants could see their MDR costs increase, while lower-volume, higher-ticket-size merchants could see their MDR costs fall. But as discussed in this paper, much will depend on precisely how the law is implemented.

This paper seeks to adduce the likely effects of the IFPA, as well as similar regulations currently being contemplated in other states. To put these regulations into perspective, Section II offers broader context, explaining the increasingly important role that sales taxes play in funding government, the importance of efficient tax collection, and equity issues related to businesses collecting sales and other taxes, before concluding with a brief discussion of compliance cost rebates and some related questions regarding businesses’ collection of other taxes.

Section III describes the nature and mechanics of excluding sales tax (and other items) from interchange, and the likely implications of the various methods. Section IV adumbrates the likely implications of such regulations for merchants, consumers, banks, and government revenue. And the brief concludes in Section V with an alternative policy proposal.

II. Taxes Applied at the Point of Sale: Economic and Equity Considerations

From an economic perspective, sales taxes are generally superior to taxes on income or capital because they are less distortionary. While all taxes reduce the amount of capital available for investment, sales taxes provide incentives for saving over consumption, thereby increasing both current investment and future spending. By contrast, taxes on income and capital disincentivize work and investment. All other things being equal, when governments raise revenue via sales taxes instead of taxes on income or capital, rates of economic growth are likely to be higher.[24]

A 2008 study undertaken by a group of OECD economists offered empirical analysis of the effect of different types of tax, concluding that:

Corporate taxes are found to be most harmful for growth, followed by personal income taxes, and then consumption taxes. Recurrent taxes on immovable property appear to have the least impact. A revenue neutral growth-oriented tax reform would, therefore, be to shift part of the revenue base from income taxes to less distortive taxes such as recurrent taxes on immovable property or consumption.[25]

Over the past 20 years, numerous states have increased their reliance on sales taxes.[26] Currently, 45 states and the District of Columbia apply sales taxes,[27] while 38 states also have local sales taxes.[28] Overall, sales taxes represented 32% of state tax collections and 13% of local tax collections.[29]

In addition to “sales tax,” other forms of taxation are also applied at the point of sale. Most notably, excise tax is applied to certain items, such as alcohol, tobacco, and gasoline. In some cases, these taxes may be intended to discourage certain behaviors, such as smoking or drinking.[30] In other cases, they are intended to cover the costs that given activity imposes on the government; the gas tax, for example, is intended to pay for road construction and maintenance. Moreover, in some cases, the federal government may also levy excise taxes.

Other goods may be eligible for discounts on, or exemptions from, sales tax. These discounts and exemptions are typically intended to reduce the cost of necessities (though, in many cases, they are nonetheless regressive).[31] For example, as of April 2022, 32 states and the District of Columbia did not charge sales tax on groceries (but did have sales tax on other items), while a further six states charged lower rates for groceries.[32] Meanwhile, as of January 2020, 24 states and the District of Columbia taxed candy and/or soda at a different rate than other groceries (Figure 4).

One consequence of these excise taxes (state and federal), discounts, exemptions, and local sales taxes is that they complicate calculations of the amount of tax to be remitted and to whom.

FIGURE 4: Sales-Tax Exemptions & Reduced Rates for Groceries, Plus Exclusions from Exemptions for Soda & Candy

SOURCE: Tax Foundation

A. Efficiency Considerations for Tax Collection at Point of Sale

All tax collection entails both compliance costs for taxpayers and administration costs for government. From an economic perspective, the challenge is to raise the desired tax revenue while minimizing the sum of these costs. As Kyle Logue and Joel Slemrod note:

an optimal tax remittance regime requires that tax liabilities be assigned so as to minimize the overall social costs of compliance and administration, for a given level of achievement of the tax law’s desired distributional and revenue goals. By compliance costs we mean the private costs to the parties (and therefore the social costs) of complying with the law. By administrative costs, we mean the non-private social costs of enforcing compliance with the law.[33]

With respect to taxes at the point of sale (including sales and excise taxes), merchants are generally in the best position to calculate how much tax is owed and to whom, since they know what they are selling, how much charge, and where they are physically located. It would be practically infeasible to implement taxes at the point of sale without the cooperation of—and reporting by—merchants.

Until recently, most merchants kept paper records of transactions and used these to calculate how much tax is owed to which government. Such paper records are, however, time-consuming and expensive to maintain, and are also prone to both error and fraud.

In the past few decades, merchants have increasingly switched to using electronic transaction records, which in the case of retailers are often integrated directly with checkout systems; those checkout systems, in turn, are integrated with inventory systems.[34] By integrating tax reporting, such systems can reduce merchants’ tax-compliance costs.

Regardless which system is used to record transactions, merchants always have incentives to miscode transactions and thereby reduce the amount of tax they must remit. But merchants’ incentive to miscode transactions is reduced significantly when payments are made electronically, because state authorities can easily check their records against acquiring bank records and thereby identify any discrepancies.[35]

In other words, from the perspective of economic efficiency, the combination of electronic payments and electronic reporting likely minimizes the combined costs of merchant compliance and government administration. Perhaps in part reflecting this, several state governments offer tax rebates or discounts to encourage electronic sales-tax reporting.[36]

Arguably, governments could go further to offer incentives not only for electronic reporting but also for electronic payments, and thereby discourage the fraud associated with cash payments. This could be done, for example, by rebating some or all of the transaction costs that merchants incur related to point-of-sale taxes when payments are made electronically.

B. Equity Considerations for Tax Collection at Point of Sale

While there are strong economic arguments for the collection of taxes at the point of sale, there are clearly implications for merchants, who effectively become the tax collectors and incur the costs associated with the calculation, collection, recording, and remittance of such taxes. As such, in addition to the efficiency arguments discussed above, there may be equity reasons for reimbursing these costs.

It should be noted, however, that sales taxes are not the only taxes that businesses collect on behalf of government. Most businesses also collect and remit payroll taxes, for example. So, if there is an equity argument for reimbursing the costs of collecting and remitting sales tax, then conceivably there is also an equity argument to reimburse the costs of collecting and remitting payroll taxes.

III. Mandatory Interchange-Fee Exclusions: Why, What, and How?

This section outlines in broad terms why, what, and how certain components of a transaction would be excluded from interchange.

A. Why: Arguments Proponents Use to Justify Limiting Interchange Fees on Sales Taxes (and Other Items)

Proponents of excluding interchange fees from sales tax (and other items) argue primarily that merchants should not be responsible for the costs of collecting taxes. Moreover, they argue that the retention of interchange by issuing banks imposes an unfair burden on merchants.

To the extent that such “fairness” arguments are considered valid, it is not obvious that excluding interchange fees from taxes on point-of-sale transactions is the fairest or most effective method to redress the alleged iniquity. Meanwhile, extending the rebate to other items—such as gratuities—stretches the logic beyond its breaking point.

Twenty-five states currently permit merchants to obtain a rebate or deduction on some portion of the costs they incur for collecting sales taxes.[37] These rebates are usually intended to encourage timely reporting in a format that reduces the costs of monitoring and enforcing collection by the state. Moreover, many such programs cap the amount that can be deducted or rebated; as such, they are relatively more beneficial to smaller merchants—which, from an equity perspective, makes sense, as smaller merchants have proportionally higher fixed costs of compliance. The following are a few examples:

• Illinois currently permits merchants a discount of $5 or 1.75% of the sales tax paid each year, whichever is greater.[38]
• Florida permits merchants who file and pay electronically to deduct 2.5% of the sales tax remitted on the first $1,200 due (up to a maximum of $30).[39]
• Georgia permits merchants who file electronically to deduct 3% of the first $3,000 due and 0.5% on the remainder.[40]
• Pennsylvania permits merchants to deduct the lesser of $25 or 1% of the tax collected for monthly filers; the lesser of $75 or 1% for quarterly filers; and the lesser of $150 or 1% for semiannual filers.[41]

A recent budget measure in Illinois, however, would cap merchants’ annual discount at $1,000 per-merchant.[42] The Illinois Policy Institute estimates that this will cost retailers $186 million annually.[43] This highlights one clear motivation for Illinois: to transfer liability for the costs of collecting tax from the state to issuing banks.

B. What: Policies that Limit the Retention of Interchange Fees on Sales Taxes and Other Items

Over the past two decades, more than 30 bills have been proposed in state legislatures that would have excluded the retention of interchange by issuers on sales tax and, in some cases, other items. Typically, the bills would have given merchants the right to deductions or rebates of interchange fees if they either notified the issuer at the time of the transaction, or if they requested a rebate subsequently.

To date, however, the only legislation limiting the retention of interchange fees on part of a transaction is Illinois’ recently passed (and not yet implemented) IFPA. As such, it is worth considering that legislation, in particular. Despite its title, the IFPA does not actually “prohibit” interchange fees, per se. Rather, it states that:

An issuer, a payment card network, an acquirer bank, or a processor may not receive or charge a merchant any interchange fee on the tax amount or gratuity of an electronic payment transaction if the merchant informs the acquirer bank or its designee of the tax or gratuity amount as part of the authorization or settlement process for the electronic payment transaction.[44]

Specifically:

The merchant must transmit the tax or gratuity amount data as part of the authorization or settlement process to avoid being charged interchange fees on the tax or gratuity amount of an electronic payment transaction.[45]

Alternatively, merchants:

… may submit tax documentation for the electronic payment transaction to the acquirer bank or its designee no later than 180 days after the date of the electronic payment transaction, and, within 30 days after the merchant submits the necessary tax documentation, the issuer must credit to the merchant the amount of interchange fees charged on the tax or gratuity amount of the electronic payment transaction.[46]

In other words, under the IFPA, it is the merchant who determines whether interchange fees on taxes and gratuities charged at the point of sale are excluded or later rebated.

The IFPA employs an expansive definition of “tax” as “any use and occupation tax or excise tax imposed by the State or a unit of local government in the State.”[47] Meanwhile, it defines gratuity as “a voluntary monetary contribution to an employee from a guest, patron, or customer in connection with services rendered.”[48]

C. How: The Mechanics of Excluding Sales Taxes from Interchange Fees

There are several ways that sales taxes (and other fees, such as service charges) might be excluded from interchange. As noted, the IFPA offers two broad alternatives: merchants would either transmit the tax and gratuity information for each transaction separately while the transaction is in process (option (a)), or they would transmit that information to their acquiring bank within 180 days of the transaction and the bank would seek recovery of the amount from the issuing bank (option (b)).

In practice, option (a) could be achieved either through “dual authorization,” or through the use of “Level 2 & 3 messages,” both of which would entail some reprogramming of POS machines, as well as changes to the messaging systems. Rebates, meanwhile, would have other undesirable consequences. This subsection describes each of these methods.

Before getting into the specifics, however, it is important to understand how payment transactions work. We therefore begin with a brief overview of the two types of payment transaction: single-message (“PIN”) transactions and dual-message (signature) transactions.

1. Single-message (‘PIN’ debit) v dual-message (signature) transactions

Single-message transactions are run over ATM/debit networks and generally rely on the personal identification number (PIN) programmed on the card to authenticate a transaction. As a result, only one message is required: a notification instructing the issuing bank to debit the account of the cardholder in the amount they have authorized and to credit that amount to the account of the merchant, less the discount fee, which is paid to the acquiring bank.

Because of the nature of the transaction, settlement can be effected over banks’ electronic-funds-transfer (EFT) networks, which were initially built to settle transactions at shared ATMs and, subsequently, over networks of ATMs.[49] As with an ATM transaction, single-message debit transactions clear more or less immediately, though settlement (debiting the cardholder’s account and crediting the merchant’s account) can take up to 24 hours.

In a dual-message (“signature”) payment transaction, the first message is a request for authorization. This message is sent to the issuing bank, which confirms the authenticity of the card and checks whether the cardholder has sufficient credit remaining (for a credit transaction) or funds in their account (for a debit transaction). But the message is also parsed by the network, which is able to monitor for fraud. If authorized, the second message contains information confirming the actual amount of the transaction, which is then either added to the cardholders’ credit-card bill or debited from the cardholder’s account during clearing and settlement, as appropriate.

The dual-message settlement process involves a delay in posting and clearing transactions, which has certain advantages. For example, if a customer presents a card at a sit-down restaurant, the check total would be sent for authorization by the card issuer and a hold placed on the account for the stated amount on the bill. If the customer then adds a tip to the bill, it can be included in the second message that authorizes payment of the full amount. Similar “holds” are also often used by online merchants to delay payment (sometimes by as much as several days), thereby reducing the likelihood of fraud and associated chargebacks.[50]

2. Dual authorization

In some respects, the simplest way to separate transactions for which interchange may be withheld from those for which it is prohibited would be for merchants to run two separate transactions: one for the main item, on which interchange would be withheld by the issuer, and a second for the sales tax (and any other exempted items), on which no interchange would be withheld.

For dual authorization to work, merchants would have to update their POS machines’ software to split the transaction and to code the portions separately, so that issuers do not retain the interchange fee on the second transaction. This would also entail a change in the formatting of messages sent from POS machines through the payment stack to issuers, albeit likely a much less significant change than the use of Level 2 & 3 messages (see below).

At a minimum, dual authorization would slow checkout speeds dramatically. Indeed, payment cards would suddenly go from being the fastest form of payment to the slowest, resulting in a negative throughput effect.

A second problem is that, on some occasions, one of the transactions—but not both—would not be authorized. To mitigate such effects, merchants might choose to run all transactions as dual-message, placing a hold on the first transaction until the second has been authorized. That way, if one of the transactions is not authorized, the entire payment can be voided and an alternative payment method requested.

3. Level 2 & 3 data

As the discussion in Subsection 1 indicates, payment-card transactions work by sending messages across networks that authorize specific actions relating to accounts held with various financial organizations. In most cases, these messages are relatively simple (e.g., a debit-card message: Party A authorizes $100 to be debited from Account X at Bank 1 and credited to Account Y held by Party B at Nank 2; a typical credit-card message, meanwhile. is: Party A authorizes $100 of her line of credit at Bank 1 to be credited to Account Y held by Party B at Bank 2).

In practice, additional information is often included in the messages. For example, when transactions involve a party who is not physically present (known as “card not present” transactions), authorization typically requires additional identifiers (such as the address of the cardholder) to be transmitted for purposes of verification.

All the information described thus far is considered “Level 1” data, which typically contain essential information required to authorize a payment, including:

• Cardholder Data: PAN (Primary Account Number), card-expiration date.
• Transaction Amount: The total amount requested for authorization.
• Merchant Data: Basic merchant information, such as the identifier or name.
• Authorization Request: Whether the transaction should be approved or denied based on available funds or credit limits.

Most payment networks also permit additional information to be sent via “Level 2” and “Level 3” data. Level 2 data provide information typically used in business-to-businesses (B2B) corporate-card transactions, primarily to help businesses better track and manage their expenses. This can include:

• Invoice number.
• Sales tax.
• More detailed data about the merchant, such as location or merchant category code (MCC).
• Details regarding what the transaction was for (goods/services).

Level 3 data provide even more detailed information, also primarily for B2B corporate-card purchases, including:

• Line-item details (g., description, quantity, unit price, and total price).
• Freight or shipping costs.
• Any discounts applied to the transaction.
• Any other tax amounts that need to be itemized.
• Shipping or delivery information for physical goods.
• Enhanced merchant details, such as DUNS (Data Universal Numbering System) numbers.

In principle, Level 2 & 3 data could be used to communicate sales tax (a Level 2 item); other taxes, such as excise taxes; and other items, such as gratuities (both Level 3 items). This would, however, amount to a significant change in the way the messaging system functions. As such, it would entail considerable reprogramming by all parties in the payment stack (merchants, gateways, acquirers, other processors, networks, issuers). This would inevitably result in increased cost for those parties.

Smaller merchants with few business clients typically will not have POS machines designed to collect and transmit Level 2 & 3 data. Therefore, for such merchants to adopt this method of reporting would entail replacing existing POS machines with more expensive devices.

In addition, single-message (PIN) debit networks are generally not able to process Level 2 or 3 data. Adding this functionality to single-message debit networks would be an enormous undertaking. Moreover, by increasing the size and complexity of messages, it would slow the message-sending process. That might, in principle, be a worthwhile undertaking for a debit network that primarily operates in a state that has introduced prohibitions on the retention of interchange on certain items. But most single-message debit networks are regional or national in scope and it is unlikely to make economic sense for those networks to undertake such a significant change to their networks, especially if it caused the entire network to operate more slowly, creating frustrations for merchants and consumers.

4. Rebates on past transactions.

The third option is for merchants to maintain records of the various amounts excluded from interchange and then request a rebate from the issuer. While this may sound simple in principle, it would be fiendishly complicated in practice.

To reduce fraud, most card information transmitted to POS machines is converted into cryptograms.[51] Thus, for the acquirer to be able to request the rebate on the merchant’s behalf would require both the merchant and acquirer to retain records of the cryptogram issued by the card, along with details of the amounts eligible for a rebate (in the case of the IFPA, all taxes collected at the point of sale and any gratuities). This would entail reprogramming POS machines and changing how acquirers process and store information.

The rebate is likely to be the only option available to merchants whose acquirer charges a blended MDR, as the rate they pay does not depend on the specific interchange fee charged in relation to any particular card. But at the same time, the fact that the merchant does not know the interchange fee charged for a particular card means that it won’t easily be able to calculate the rebatable amounts. It would thus be forced to rely on either the acquirer or the issuer to calculate the interchange fee charged by correlating the stored cryptogram with the tax and gratuity data submitted by the merchant. The acquirer would then match this against the interchange fee applied in each case and calculate the rebatable amount.

The burden on both acquirers and issuers would be significant. Among other things, both acquirers and issuers would effectively be forced to create and maintain extensive correlated records of transactions and interchange fees charged over lengthy periods (at least seven months, in the case of the IFPA, and likely much longer, given the possibility of disputes).

To make matters worse, in the absence of appropriate surveillance, merchants would have incentives to abuse this system by claiming larger “gratuities” than were, in fact, contributed. Similarly, some merchants might expressly reduce their official prices and “encourage” customers to make large “voluntary” gratuity payments.

On top of plain fraud, there would inevitably be unintentional errors in recording transactions, which would result in under- or over-payment of rebates.

Issuing banks cannot know precisely what proportion of the interchange fee might later be rebated. Just from an accounting perspective, this would create headaches. But if a large proportion of merchants choose the rebate route, it would create a potentially significant contingent liability for issuing banks that might not be realized until six months or more after the transaction.

In the words of Glenn Grossman, “rebates applied to past transactions would be complex, expensive, and open to error and fraud.”[52]

At a high level, all the possible mechanisms for excluding sales tax (and other items, such as gratuities) from the interchange fee would increase the complexity and cost of card payments, with various undesirable consequences for both merchants, consumers, acquirers, and issuers.

IV. The Effects of Excluding Interchange Fees from POS Taxes (and Other Items)

This section outlines the likely broad effects of excluding interchange fees from POS taxes and other items.

A. Effect on Mode of Payment

The introduction of exclusions on the retention of interchange fees by card issuers in relation to tax and other items is likely to result in various changes to the payment methods used by consumers. But these effects will vary depending on the means by which the exclusions are implemented.

1. Dual authorization

Merchants that implement dual authorization will likely see:

• An increase in use of three-party cards (American Express, Discover). These cards do not charge interchange fees, and thus won’t be subject to the exclusions. As such, consumers will prefer them because they will be faster and less prone to fail.
• A shift away from card payments to cash, as some customers who lack a three-party card will once again see cash as a faster and more reliable option, especially for small to medium-sized payments.

2. Level 2 & 3 data

Merchants that use Level 2 & 3 data will likely see somewhat similar effects, although they will be more muted. If dual authorization is widespread, however, consumers may not be able to distinguish which merchants have adopted that method. Its effects could therefore become generalized, leading to a significant shift toward three-party cards and cash.

3. Rebates

The rebate method requires merchants to record transaction data. Depending which method is used, this could slow transactions considerably. Here, it is worth noting the IFPA’s definition of “tax documentation,” which is the term used for information that would be shared by merchants with acquirers to determine the rebate owed:

“Tax documentation” means documentation sufficient for the payment card network to determine the total amount of the electronic payment transaction and the tax or gratuity amount of the transaction. Tax documentation may be related to a single electronic payment transaction or multiple electronic payment transactions aggregated over a period of time. Examples of tax documentation include, but are not limited to, invoices, receipts, journals, ledgers, and tax returns filed with the Department of Revenue or local taxing authorities.[53]

It is difficult to see how “multiple electronic transactions aggregated over a period of time” could be accurately correlated with the specific interchange fees charged. The same is true of “tax returns filed with the Department of Revenue.” Indeed, to the extent that the IFPA legitimizes the use of such data—or other means, such as invoices, receipts, journals, and ledgers not directly linked to individual transaction data—it implicitly invites fraud on a massive scale.

B. Effects on Merchants

While the implementation of the IFPA and similar legislation may ostensibly be intended to benefit merchants, in reality, its effects will vary significantly depending on the type of merchant and how the legislation is implemented. In general, as the following discussion documents, large merchants will benefit relative to small merchants.

1. Dual authorization

Merchants that choose to implement dual authorization will likely see:

• A slowdown in the checkout process due to an increase in “tender time” (e., the amount of time it takes to take payment), reducing throughput. This will particularly harm high-throughput merchants, such as quick-serve restaurants.
• By slowing the shift to payment cards (including, in some cases, encouraging an increase in the use of cash), merchants will likely see a reduction in spending.
• By switching from single- to dual-message authorization, merchants could see an increase in interchange costs for debit.

In many cases, especially for smaller merchants, these negative effects will outweigh any reduction in interchange fees.

2. Level 2 & 3 messages

Merchants who implement Level 2 & 3 data will likely need to invest in upgrades to the software in their POS machines—and, in many cases, to the hardware as well. Larger merchants will be at a competitive advantage, because they will typically already have advanced POS machines and will also be able to spread the cost of software upgrades across all their stores (though some of the programming may be specific to particular localities).

3. Rebates

Merchants who implement rebates on interchange fees should be required to develop secure means to store transaction, tax, and (as appropriate) gratuity data. This would enable them subsequently to submit requests to their acquirer in a manner that enables that acquirer and the cardholder’s issuer to match a request to a specific transaction and associated interchange fee without compromising card or personal information. This would entail developing and implementing new systems. If such systems are integrated with POS machines, they could possibly be operated without significantly increasing tender time.

4. Potential for gratuitous abuse

The IFPA expressly forbids issuers from retaining interchange fees not only on sales tax, but also on gratuities—where “gratuity” means “a voluntary monetary contribution to an employee from a guest, patron, or customer in connection with services rendered.” While merchants would need to be careful to ensure that any “gratuity” is “voluntary,” many will surely restructure their prices so that gratuities become a larger proportion of the total amount charged.

Ironically, Illinois recently passed the “Junk Fee Ban Act,” which would, among other things, make it illegal to “offer, display, or advertise an amount a consumer may pay for merchandise without clearly and conspicuously disclosing the total price,” as well as to “misrepresent the nature and purpose of any amount a consumer may pay.”[54]

5. Broader effects on merchants

As noted in Section 1, when the effect on sales are taken into consideration, the cost of card payments is less than the cost of cash for nearly all merchants. Some of the methods (dual authorization, in particular) proposed to implement the exclusion of interchange fees related to POS taxes would increase the cost of card transactions for both merchant and consumer. This would lead to a reduction in the use of four-party cards. To the extent that this leads to a shift back to cash, or at least a slowing of the transition to electronic payments, it will almost certainly be harmful for merchants, as consumer spending will fall.

While some large merchants may benefit at the expense of smaller merchants, this would be a state-specific effect. The introduction of state-level interchange-fee regulations would mean having to develop and deploy state-specific processes and protocols in order to avail of the interchange-fee exclusions in those states.[55] As such, large merchants with a presence in many states would have to choose between continuing to use an integrated and uniform set of processes and protocols, or availing of the interchange exclusions in the state(s) where these apply.

C. Effects on Consumers

Proponents of interchange-fee exclusions for tax (and other items) argue that merchants will pass on savings to consumers. The experience with other interchange-fee regulations, including the Durbin amendment’s price controls, suggests, however, that any such passthrough is likely to be minimal, at best.[56] Indeed, since most merchants will see little (if any) reduction in total costs, and some are likely to see costs rise, it is simply implausible that most merchants will reduce the amount consumers are charged for goods and services.

In addition, some merchants might encourage buyers to use account-to-account payments, such as Zelle, which are not subject to interchange fees but that offer little protection to consumers (in contrast to credit cards, which offer fraud detection and protection, as well as the ability to execute chargebacks).

D. Effects on and Response by Issuing Banks

In their agreements with consumers, credit-card issuers’ terms include an array of specific commitments, ranging from ubiquitous ones related to fraud protection and zero liability, to more card-specific ones pertaining to things such as purchase-protection insurance and airline rewards. As already noted, the card companies meet those commitments, in large part, by retaining interchange fees on payments made using the cards. But if they are prevented from retaining interchange on some part of each transaction, this will reduce their revenue and hence their ability to meet the terms of their agreements. In response, issuers will either adjust their terms or find alternative sources of revenue.

This response by banks is predictable, in part, because it is similar to their response to other interchange-fee regulations. The Durbin amendment is again instructive. The Federal Reserve imposed price controls on interchange fees retained by banks with assets of more than $10 billion, causing those banks to lose billions of dollars in revenue each year. Covered banks sought to reduce their losses by increasing fees elsewhere. Specifically, they raised fees on checking accounts and increased the minimum deposit amounts required for free checking.[57] Many merchants saw little, if any, savings because of limited acquirer passthrough. In turn, merchants that did see their costs fall passed through little if any of those savings to consumers. Durbin instead primarily benefited big-box merchants at the expense of smaller merchants and, especially, lower-income consumers (many of whom were debanked).

From a consumer perspective, the cost of a product when purchased in a jurisdiction with sales taxes includes those taxes. Thus, consumers would reasonably expect any expenditure-related card benefits, such as rewards, to include the amounts they paid in taxes. But if there is no interchange fee on the tax portion (and possibly other items), the consumer will still pay the same total amounts, but the issuing bank will receive less interchange-fee revenue. Since national issuing banks are unlikely to change card terms for one or a few states, these costs will either be distributed across all cardholders, in the form of lower rewards and/or other card benefits, or issuers will work with payment-card networks to adjust interchange fees in order to recoup the costs from all merchants nationally, or some combination of these. In other words, states that prohibit the collection of interchange fees on taxes will create a significant negative externality for consumers and/or merchants in other states.

1. Differential effects on issuer revenue and response by issuing banks and credit unions

As noted, the exclusion of interchange fees on POS taxes and other items will result in a material reduction to issuer-bank revenue. These reductions will not, however, affect all issuers equally. One way that issuers may seek to compensate for the losses would be to encourage payment networks to increase multilateral interchange fees proportionally. But these interchange fees are set at a national, rather than state level. Moreover, as discussed in Section III, such adjustments would need to be set against the implications for merchant acceptance nationally, and therefore might not cover the full losses.

If the payment networks adjust interchange fees so that the national net losses are minimal, banks and credit unions with only a local or regional presence would experience greater losses. It is perhaps not surprising that credit unions, in particular, are concerned about this legislation.[58]

E. Effect on Government Revenue

As noted, the mandatory exclusion of POS taxes might lead to under-reporting of sales tax by merchants (especially if the sales-tax amount is automatically deducted). Perhaps more significantly, as noted above, by increasing the associated transaction costs, such mandates would discourage merchants from accepting four-party card payments. This would have several adverse consequences for government:

• First, to the extent that it reduces card payments generally, it would reduce throughput and ticket lift. In aggregate, this would reduce total sales, and thereby reduce POS taxes. Meanwhile, by reducing merchants’ profits, as well as those of local suppliers, it would also reduce corporation taxes at both the state and federal level. And it would also likely result in a reduction in wages, thereby reducing income taxes.
• Second, to the extent that it results in a shift to cash payments or reduces the rate of transition to electronic payments, it would cause an effective increase in the administration costs of sales taxes relative to the baseline (since it is, as noted, easier to monitor and enforce sales taxes when there are electronic records of the transactions maintained by merchants and their acquirer banks).

In sum, state legislation prohibiting issuing banks from retaining interchange fees on POS taxes and other elements of a transaction might benefit some large merchants, but these benefits would come at the expense of smaller merchants, consumers, issuing banks (especially smaller banks and credit unions), and governments. Overall, such prohibitions would almost certainly create large net social costs.

V. Conclusions and Policy Recommendations

The foregoing analysis suggests that prohibiting issuing banks from retaining interchange fees on taxes and other elements of a transaction at the point of sale would create significant market distortions. Specifically, it would:

• harm small- and medium-sized merchants at the expense of large merchants;
• result in a net reduction in business activity and profitability;
• reduce the value of four-party payment cards to consumers, which would (and possibly reverse) the transition away from cash and toward electronic payments; and
• reduce revenue to issuing banks and credit unions, especially those whose business is primarily in the state(s) that implements such legislation.

For governments, it would increase the costs of administering sales tax and reduce not only the revenue the comes from sales tax, but also from corporation tax and income tax (in states that charge such taxes).

If states want to increase the net revenue they receive from sales taxes, while also ensuring that merchants are not unduly burdened by the costs of compliance, they might consider ways to reduce monitoring and enforcement costs.

For example, they could offer merchants incentives to use electronic payments and automated electronic reporting. As noted, some states already reimburse merchants for or permit them to deduct some of the cost of collecting and remitting taxes when those taxes are reported electronically. States might enhance compliance further by offering additional discounts or rebates in relation to transactions that are processed fully electronically (e.g., card payments) and are hence more readily auditable.

[1] Berhan Bayeh, Emily Cubides, & Shaun O’Brien, 2024 Findings from the Diary of Consumer Payment Choice, Federal Reserve Financial Services (May 2024), available at https://www.frbservices.org/binaries/content/assets/crsocms/news/research/2024-diary-of-consumer-payment-choice.pdf, (noting that “The category “other” includes payments made with pre-paid [debit], checks, and money orders.”).

[2] Katherine Haan, People Are Twice As Likely To Spend More Money When Using Card Than Cash In 2024, Forbes Advisor (May 16, 2024), https://www.forbes.com/advisor/business/software/people-twice-likely-spend-using-card-than-cash.

[3] One for the Road, Curve, https://www.curve.com/en-gb/wearables (last accessed Nov. 14, 2024).

[4] Among other things, online commerce has improved price transparency and created new markets for “long-tail” products and services. It also played an important rule during the COVID-19 pandemic, enabling consumers to continue to make purchases and thereby reducing harms from lockdowns and the disease itself.

[5] Julian Morris & Ben Sperry, The Cost of Payments: A Review, Int’l Ctr. L. & Econ. (Aug. 28, 2024), available at https://laweconcenter.org/wp-content/uploads/2024/08/cost-of-payments-review-1.pdf.

[6] Stan Liebowitz & Stephen Margolis, Path Dependence, Lock-In and History, 11(1) J.L. Econ. & Org. 205–226 (Apr. 9, 1995); Stan Liebowitz & Stephen Margolis, Winners, Losers, & Microsoft: Competition and Antitrust in High Technology, The Independent Institute (1999); Brian Arthur, Competing Technologies, Increasing Returns, and Lock-In by Historical Events, 99(394) Econ. J. 116–131 (Mar. 1989).

[7] See Todd J. Zywicki, The Economics of Payment Card Interchange Fees and the Limits of Regulation, Int’l Ctr. L. & Econ. (Jun. 2, 2010), at 33, available at https://laweconcenter.org/images/articles/zywicki_interchange.pdf (economists use the term “price elasticity,” where less elastic means more price-sensitive and vice versa); Marc Rysman, The Economics of Two-Sided Markets, 23 J. Econ. Perspect. 125 (2009).

[8] James Cooper & Todd J. Zywicki, A Chip off the Old Block or a New Direction for Payment Card Security: The Law and Economics of the U.S. Transition to EMV, 2018 Mich. St. L. Rev. 869 (Mar. 8, 2017); What Are EMV Chip Cards? How EMV Works and Why It’s So Secure, Stripe (Feb. 2, 2023), https://stripe.com/gb/resources/more/what-are-emv-chip-cards; Visa Reports EMV® 3DS Delivers 35% Less Fraud, More Approvals, Superior Shopping Experience, PYMNTS (Dec. 16, 2021), https://www.pymnts.com/news/security-and-risk/2021/visa-reports-emv-3ds-delivers-less-fraud-more-approvals-shopping-experience.

[9] See FDIC Statistics at a Glance, Federal Deposit Insurance Corporation (Jun. 30, 2024), available at https://www.fdic.gov/system/files/2024-08/fdic-2q2024.pdf (as of June 30, the FDIC listed 3,985 commercial banks and 554 savings institutions.).

[10] The number of agreements required is n(n-1)/2, where n= number of banks.

[11] William F. Baxter, Bank Interchange of Transactional Paper: Legal and Economic Perspectives, 26 J. L. & Econ. 541, 577-78 (1983); Zywicki, supra note 7.

[12] Ohio v. Am. Express Co., 585 U.S. 529, 545 (2018).

[13] For example, in the United States, Costco has a co-branded card issued by Citibank and an exclusive arrangement with Visa. See Robin Sidel, Costco Names Citi, Visa as New Credit Partners, Wall St. J. (Mar. 2, 2015), https://www.wsj.com/articles/costco-names-citi-visa-as-credit-partners-1425302174; Meanwhile, in Canada, Costco has a co-branded card issued by Canadian Imperial Bank of Commerce (CIBC) and an exclusive arrangement with Mastercard. See CIBC Becomes the Exclusive Credit Card Issuer for Costco Mastercards in Canada and Acquires Existing Costco Canadian Credit Card Portfolio, Torys (Mar. 2, 2022), https://www.torys.com/en/work/2021/09/3fae5f0b-5d63-484e-a66e-f27b3b35dd64.

[14] 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. 4, 2022), available at https://laweconcenter.org/wp-content/uploads/2022/03/Payments-2021-Lit-Review.pdf; Eliana Garcés & Brent Lutes, Regulatory Intervention in Card Payment Systems: An Analysis of Regulatory Goals and Impact, SSRN (Sep. 21, 2018), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3346472.

[15] Id.

[16] Dodd-Frank Wall Street Reform and Consumer Protection Act, H.R. 4173, 111th Cong. § 2 (2010);; Regulation II, Debit Card Interchange Fees and Routing, 76 Fed. Reg. 43,393, 43,475 (Jul. 20, 2011), available at https://www.federalreserve.gov/aboutthefed/boardmeetings/frn-reg-ii-20231025.pdf.

[17] Glenn Grossman, The Harmful Impacts of Removing Sales Tax from Interchange Calculations, Cornerstone Advisors (2023), available at https://protectinterchange.com/wp-content/uploads/2024/01/23-Harmful-Effects-Removing-Sales-Tax_Cornerstone.pdf.

[18] Ill. Gen. Assemb., 815 ILCS 151,  Interchange Fee Prohibition Act, 1 et seq. (2024), https://ilga.gov/LEGISLATION/ILCS/ilcs3.asp?ActID=4515&ChapterID=67.

[19] See Illinois Bankers Association et al. v. Kwame Raoul, Case No. 1:24-cv-07307 (N.D. Ill., Aug. 15, 2024), https://www.aba.com/-/media/documents/amicus-briefs/legal-action/20240815-illinois-interchange-complaint-as-filed.pdf?rev=64eea57a872d41a68c93a5ba91c2c38b.

[20] Tom Nawrocki, Pennsylvania Weighs Eliminating the Swipe Fee on Sales Tax, Payments Journal (Jun. 24, 2024), https://www.paymentsjournal.com/pennsylvania-weighs-eliminating-the-swipe-fees-on-sales-tax.

[21] Andrew Gins, Measure to “Study” Manipulating Interchange Fees & Sales Tax Sneaks Into Florida Budget, Americans for Tax Reform (Mar. 14, 2024), https://www.atr.org/measure-to-study-manipulating-interchange-fees-sales-tax-sneaks-into-florida-budget; Ga. Gen. Assemb., HR 1135, House Study Committee on Credit Card Fee on State Sales and Excise Tax and Their Impact on Georgia Merchants and Consumers, Reg. Sess. 2023-2024 (2024), https://www.legis.ga.gov/legislation/67081.

[22] See, e.g., Christian Johnson, How Much Interchange Was Paid on Sales Tax in the U.S.?, CMSPI Blog (Oct. 16, 2024), https://cmspi.com/how-much-interchange-was-paid-on-sales-tax-in-the-us.

[23] See Interchange Fee Prohibition Act § 150-10 (b), supra note 18.

[24] See Robert E. Hall, Consumption Taxes Versus Income Taxes: Implications for Policy, 61 Nat’l Tax Ass’n, (1968), https://www.jstor.org/stable/23407742.

[25] Åsa Johansson, Chistopher Heady, Jens Matthias Arnold, Bert Brys, & Laura Vartiai, Taxation and Economic Growth, OECD Economics Department Working Papers No. 620 (2008), https://doi.org/10.1787/241216205486.

[26] Joe Eleniewski, Doug Nagode, & James P. Trebby, Trends in State Taxation: Consumption Tax Versus Income Tax, Deloitte (2014), available at https://www2.deloitte.com/content/dam/Deloitte/us/Documents/Tax/us-tax-current-trends-in-state-taxation-consumption-tax-versus-income-tax-010915.pdf.

[27] Jared Walczak, State and Local Sales Tax Rates, 2024, Tax Found. (Feb. 6, 2024),  https://taxfoundation.org/data/all/state/2024-sales-taxes.

[28] Id.

[29] Id.

[30] Randy W. Elder et al., The Effectiveness of Tax Policy Interventions for Reducing Excessive Alcohol Consumption and Related Harms, 38(2) Am. J. Prev. Med. 217–229 (Feb. 2010), https://www.ncbi.nlm.nih.gov/pmc/articles/PMC3735171.

[31] Jared Walczak, The Surprising Regressivity of Grocery Tax Exemptions, Tax Found. (Apr. 13, 2022), https://taxfoundation.org/research/all/state/sales-tax-grocery-tax-exemptions.

[32] Id.

[33] Kyle D. Logue & Joel Slemrod, Of Coase, Calabresi, and Optimal Tax Liability, 63(4) Tax L. Rev. 797-866. (2009).

[34] Retail and Point-of-Sale Systems, IBM, https://www.ibm.com/history/point-of-sale (last accessed Nov. 13, 2024).

[35] States typically have authority to subpoena records of the merchant and their bank when there is prima facie evidence of tax fraud. Such subpoenas—e.g., the merchant’s own records—might in some cases be issued directly by tax authorities, while others could be issued only by a judge.

[36] See Sales Tax Rebates by State, Davo by Avalara, https://www.davosalestax.com/sales-tax-rebates-by-states (last accessed Nov. 14, 2024).

[37] Id.

[38] See Ill. Gen. Assemb., 35 ILCS 120/3, Retailers’ Occupation Tax Act (2024), https://www.ilga.gov/legislation/ilcs/ilcs3.asp?ActID=582&ChapterID=8.

[39] See Florida Sales and Use Tax, Fla. Dept. of Revenue, https://floridarevenue.com/taxes/taxesfees/Pages/sales_tax.aspx#:~:text=When%20you%20electronically%20file%20your,due%2C%20not%20to%20exceed%20%2430 (last accessed Nov. 4, 2024).

[40] Enzo Garza, Georgia 2023 Sales Tax Guide, Acct. Prose (May 7, 2023), https://blog.accountingprose.com/georgia-sales-tax-guide#:~:text=Yes.,pay%20their%20sales%20tax%20electronically.

[41] Sales Tax File Upload Specifications, Pa. Dep’t. of Revenue, https://www.pa.gov/en/agencies/revenue/resources/mypath/multi-import/file-upload-specifications/sales-tax-file-upload-specs.html (last accessed Nov. 4, 2024).

[42] See Bryce Hill, Illinois General Assembly Oks $1.1B in Tax Hikes for Record $53.18B Spending, Ill. Pol. Inst. (May 29, 2024), https://www.illinoispolicy.org/illinois-general-assembly-oks-1-1b-in-tax-hikes-for-record-53-1b-spending.

[43] Id.

[44] Interchange Fee Prohibition Act § 150-10 (a), supra note 18.

[45] Id.

[46] Id.

[47] Interchange Fee Prohibition Act § 150/150-5, supra note 18.

[48] Id.

[49] Stan J. Sienkiewicz, The Evolution of EFT Networks from ATMs to New On-Line Debit Payment Products, Fed. Res. Bank of Phila. (Sep. 18, 2006), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=927473.

[50] See Mike Cannon, Credit Card Authorization Hold- How and When to Use, Chargeback Gurus (Dec. 26, 2021), https://www.chargebackgurus.com/blog/credit-card-authorization-holds.

[51] This is true for all contactless transactions, whether chips or mobile devices, as well as for all “dip” transactions in which the chip is inserted into the POS device. If the transaction data is not encrypted (e.g., if it is taken from a magstripe), then storage of the data would likely violate PCIDSS security protocols. A solution would therefore have to be found that takes unencrypted data and encrypts it in a way that ensures that it cannot be stolen, but can be correlated with the transaction data stored by acquirers and issuers. This might be possible by, e.g., using public-key infrastructure, but would entail essentially reinventing much of the architecture already developed by payment networks to establish secure transactions.

[52] Grossman, supra note 17.

[53] Interchange Fee Prohibition Act § 150-10 (a), supra note 18.

[54] Ill. Gen. Assemb., Bill Status of HB4629, 103^rd General Assembly, https://www.ilga.gov/legislation/billstatus.asp?DocNum=4629&GAID=17&GA=103&DocTypeID=HB&LegID=152072&SessionID=112 (last accessed Nov 4. 2024).

[55] As Glenn Grossman notes: “These proposals would create a disjointed set of standards whereas today credit and debit card networks are interoperable at a global level, ensuring common standards regardless of location. These common standards allow a merchant to operate in multiple states with the processes and protocols to provide a reliable payment experience for all customers.” See Grossman, supra note 17.

[56] Morris et al., supra note 14.

[57] Id.

[58] Credit Union, Bank Legal Challenge to New Illinois Interchange Law Underway, America’s Credit Unions, https://www.americascreditunions.org/news-media/news/credit-union-bank-legal-challenge-new-illinois-interchange-law-underway (last accessed Nov. 4, 2024).

Executive Summary

We thank the Japan Fair Trade Commission (JFTC) for this invitation to comment (ITC) on Generative AI and Competition.[1] The International Center for Law & Economics (ICLE) is a nonprofit, nonpartisan global research and policy center founded with the goal of building the intellectual foundations for sensible, economically grounded policy. ICLE promotes the use of law & economics methodologies to inform public-policy debates and has longstanding expertise in the evaluation of competition law and policy. ICLE’s interest is to ensure that competition law remains grounded in clear rules, established precedent, a record of evidence, and sound economic analysis.

The JFTC recently published a discussion paper on “Generative AI and Competition” (“Discussion Paper”)[2] that identifies potential competition issues and asks specific questions for each of them. Those issues are, mainly, connected to potential foreclosure of “essential” inputs for Generative AI production: semiconductors (GPU’s), data, and talent. According to the Discussion Paper, so-called “big tech” companies may have the incentives and ability to foreclose those inputs. The Discussion Papers also refers to possible collusive behavior using Generative AI and the “cornering” of highly skilled talent via partnerships.

In these comments, we express the view that, in general, policymakers’ current concerns about competition in AI industries, including “Generative AI”, may be unwarranted. This is particularly true of the notions that data-network effects shield incumbents in AI markets from competition; that Web 2.0’s most successful platforms will be able to leverage their competitive positions to dominate generative-AI markets; that these same platforms may use strategic partnerships with AI firms to insulate themselves from competition; and that generative-AI services occupy narrow markets that leave firms with significant market power.

In fact, we are still far from understanding the boundaries of antitrust-relevant markets in AI. There are three main things that need to be at the forefront of competition authorities’ minds when they think about market definition in AI products and services. First, understand that the “AI market” is not unitary, but is instead composed of many distinct goods and services. Second, and relatedly, look beyond the AI marketing hype to see how this extremely heterogeneous products landscape intersects with an equally variegated consumer-demand landscape.

In other words: AI products and services may, in many instances, be substitutable for non-AI products, which would mean that, for the purposes of antitrust law, AI and non-AI products contend in the same relevant market. Getting this relevant product-market definition right is important in antitrust because wrong market definitions could lead to wrong inferences about market power. While either an overly broad or overly narrow market definition could lead to both over and underenforcement, we believe the former currently represents the bigger threat.

Third, overenforcement in the field of generative AI could paradoxically engender the very harms that policymakers are seeking to avert. As we explain in greater detail below, preventing so-called “big tech” firms from competing in AI markets (for example, by threatening competition intervention whenever they forge strategic relationships with AI startups, launch their own generative-AI services, or embed such services in their existing platforms) may thwart an important source of competition and continued innovation. In short, competition in AI markets is important,[3] but trying naïvely to hold incumbent (in adjacent markets) tech firms back, out of misguided fears they will come to dominate the AI space, is likely to do more harm than good. It is essential to acknowledge how little we know about these nascent markets and that the most important priority at the moment is simply to ask the right questions that will lead to sound competition policy.

The comments proceed as follows. Section I debunks the notion that incumbent tech platforms can use their allegedly superior datasets to overthrow competitors in markets for generative AI. Section II deals with the risks of possible input foreclosure related to computing power, or GPUs. Section III discusses how policymakers should approach Merger Policy in AI, and specifically, strategic partnerships among tech incumbents and AI startups, including the possible “cornering of specialized talent”. Section IV outlines some of the challenges to defining relevant product markets in AI, and suggests how enforcers could navigate the perils of market definition in the nascent, fast-moving world of AI.

Download English-language comments here.

Download Japanese-language comments here.

[1] Press Release, Requests for Information and Comments Concerning Generative AI and Competition, Japan Fair Trade Commission (Oct. 2, 2024), https://www.jftc.go.jp/en/pressreleases/yearly-2024/October/1002.html.

[2] Japan Fair Trade Commission, Generative AI and Competition (Discussion Paper) (Oct., 2024), https://www.jftc.go.jp/file/241002DiscussionPaperEN.pdf.

[3] Artificial intelligence is, of course, not a market (at least not a relevant antitrust market). Within the realm of what is called “AI,” companies offer myriad products and services, and specific relevant markets would need to be defined before assessing harm to competition in specific cases.

INTEREST OF AMICUS CURIAE

The International Center for Law & Economics (“ICLE”) is a nonprofit, non-partisan global research and policy center that builds intellectual foundations for sensible, economically grounded policy. ICLE promotes the use of law and economics methodologies and economic learning to inform policy debates and has longstanding expertise evaluating law and policy.

ICLE has an interest in ensuring that First Amendment law promotes the public interest by remaining grounded in sensible rules informed by sound economic analysis. ICLE scholars have written extensively on issues related to Internet regulation and free speech, including the interaction of privacy rules and the First Amendment. ICLE filed a version of this amicus brief in the Ninth Circuit Court of Appeals.

SUMMARY OF ARGUMENT

The Ninth Circuit Court of Appeals correctly applied strict scrutiny to the Data Protection Impact Assessment mandates of the Age-Appropriate Design Code (AADC), see NetChoice, LLC v. Bonta, 113 F.4th 1101, 1119-21 (9th Cir. 2024), including finding they would likely fail under strict scrutiny. See id. at 1121-22. The court affirmed the preliminary injunction as to those provisions, but vacated the remainder of the preliminary injunction. This court is now asked, among other things, to consider whether the other challenged provisions should be subject to strict scrutiny. Below we argue that, regardless of whether this action is construed as a facial challenge or as an as-applied challenge, the AADC rules have the effect of restricting the access of minors to lawful speech and should be subject to strict scrutiny. Under strict scrutiny, these limitations on the collection and use of data for the purposes of curation and targeted advertising fail due to the lack of a compelling state interest or narrow tailoring.

The First Amendment protects an open marketplace of ideas. 303 Creative LLC v. Elenis, 600 U.S. 570, 143 S. Ct. 2298, 2311 (2023) (“‘[I]f there is any fixed star in our constitutional constellation,’ it is the principle that the government may not interfere with ‘an uninhibited marketplace of ideas.’”) (quoting West Virginia Bd. of Ed. v. Barnette, 319 U.S. 624, 642 (1943) and McCullen v. Coakley, 573 U.S. 464, 476 (2014)).  In fact, the First Amendment protects speech in this marketplace whether the “government considers… speech sensible and well intentioned or deeply ‘misguided,’ and likely to cause ‘anguish’ or ‘incalculable grief.’”  303 Creative, 143 S. Ct. at 2312 (quoting Hurley v. Irish-American Gay, Lesbian and Bisexual Group of Boston, Inc., 515 U.S. 557, 574 (1995) and Snyder v. Phelps, 562 U.S. 443, 456 (2011)).

The protection of the marketplace of ideas necessarily includes the creation, distribution, purchasing, and receiving of speech. See Brown v. Ent. Merchs. Ass’n, 564 U.S. 786, 792 n.1 (2011) (“Whether government regulation applies to creating distributing or consuming speech makes no difference” for First Amendment purposes). In other words, it protects both the suppliers in the marketplace of ideas (creators and distributors), and the consumers (purchasers and receivers).

No less than other speakers, profit-driven firms involved in the creation or distribution of speech are protected by the First Amendment. See 303 Creative LLC v. Elenis, 600 U.S. 570, 600 (2023) (“[T]he First Amendment extends to all persons engaged in expressive conduct, including those who seek profit.”). This includes Internet firms that provide speech platforms. See Reno v. ACLU, 521 U.S. 844, 870 (1997); NetChoice, LLC v. Moody, 34 F.4th 1196, 1213 (11th Cir. 2022).

Even minors have a right to participate in the marketplace of ideas, including as purchasers and receivers. See Brown, 564 U.S. at 794-95 (government has no “free-floating power to restrict ideas to which children may be exposed”). This includes the use of online speech platforms. See NetChoice, LLC v. Griffin, 2023 WL 5660155, at *17 (W.D. Ark. Aug. 31, 2023) (finding Arkansas’s Act 689 “obviously burdens minors’ First amendment rights” by “bar[ring] minors from opening accounts on a variety of social media platforms”).

This is important because online firms, especially those primarily involved in curating and creating content, are central to the modern marketplace of ideas. See Packingham v. North Carolina, 582 U.S. 98, 107 (2017) (describing the Internet as “the modern public square” where citizens can “explor[e] the vast realms of human thought and knowledge”).

Online firms primarily operate as what economists call “matchmakers” or “multisided platforms.” See David Evans & Richard Schmalensee, Matchmakers: The New Economics of Multisided Platforms 10 (2016).  “[M]atchmakers’ raw materials are the different groups of customers that they help bring together.  And part of the stuff they sell to members of each group is access to members of the other groups.  All of them operate physical or virtual places where members of these different groups get together.  For this reason, they are often called multisided platforms.”  Id.  In this sense, they are very similar to newspapers and cable operators in attempting to attract attention through interesting content so that advertisers can reach them.

Online platforms bring together advertisers and users—including both speakers and listeners—by curating third-party speech as well as by producing their own content. The goal is to keep users engaged so advertisers can reach them. For many online platforms, advertisers cross-subsidize access to content for users, to the point that it is often free. Online platforms are in this sense “attention platforms” which supply content to its users while collecting data for targeted advertisements for businesses who then pay for access to those users. To be successful, online platforms must keep enough—and the right type of—users engaged so as to maintain demand for advertising. But if platforms fail to curate and produce interesting content, it will lead to users using them less or even leaving altogether, making it less likely that advertisers will invest in these platforms.

The First Amendment protects this business model because it allows entities that have legally obtained data to use it for both for the curation of speech for its users and targeted advertising. See Sorrell v. IMS Health, Inc., 564 U.S. 552, 570-71 (2011) (finding that there is a “strong argument” that “information is speech for First Amendment purposes” and striking down a law limiting the ability of marketers to use prescriber-identifying information for pharmaceutical sales). The First Amendment also protects the gathering of information when it is “inherently expressive.” Cf. Project Veritas v. Schmidt, 72 F.4th 1043, 1055 (9th Cir. 2023) (citing cases that have found the act of filming or recording are inherently expressive activity). Gathering of online data for targeted advertising makes it as inherently expressive as the act of filming or recording is for creating media.

Moreover, due to the nature of online speech platforms, the collection and use of data is “inextricably intertwined” with the curation of protected, non-commercial speech. Cf. Riley v. Nat’l Fed’n of the Blind of N.C., 487 U.S. 781, 796 (1988); Dex Media West, Inc. v. City of Seattle, 696 F.3d 952, 958 (9th Cir. 2012).

By restricting use of data, the AADC will prevent online platforms from being able to tailor their products to their users, resulting in less relevant—and in the case of minors, less appropriate—content. Online platforms may also be less likely to effectively monetize through targeted advertisements. Both situations will place platforms in a situation that may require a change in business model, either by switching to subscriptions or by excluding minors. Thus, restrictions on the collection and use of data for the curation of content and targeted advertising should be subject to strict scrutiny, as the result of such restrictions will be to restrict minors’ access to lawful online speech.

Under strict scrutiny, California bears the burden of showing it has a compelling governmental interest and that the restriction on speech is narrowly tailored to that interest. It can do neither.

First, California fails to establish a compelling government interest because it has failed to “identify an ‘actual problem’ in need of solving.” Brown, 564 U.S. at 799 (quoting United States v. Playboy Entertainment Group, Inc., 529 U.S. 803, 822-23 (2000)). There is no more evidence of a direct causal link between the use of online platforms subject to the AADC and harm to minors than there was from the video games at issue in Brown. Cf. id. at 799-801. In fact, the best available data does “not support the conclusion that social media causes changes in adolescent health at the population level.” See Nat’l Acad. Sci. Engineering & Med., Social Media and Adolescent Health at 92 (2023). There is even less evidence that the Internet content as a whole is harmful to minors.

Second, California’s law is not narrowly tailored because the requirements that restrict minors’ access to lawful content are not the least restrictive means for protecting minors from potentially harmful content. Cf. Playboy, 529 U.S. at 823-25 (finding the voluntary use of blocking devices to restrict access to adult channels is less restricting than mandating the times such content may be made available); Ashcroft v. ACLU, 542 U.S. 656, 667-70 (2004) (finding filtering software a less restrictive alternative than age verification). Parents and minors have technological and practical means available to them that could allow them to avoid the putative harms of Internet use without restricting the access of others to lawful speech. Government efforts to promote the creation and use of such tools is a less restrictive way to promote the safety of minors online.

In sum, the AADC is unconstitutional because it would restrict the ability of minors to participate in the marketplace of ideas. The likely effects of the AADC on covered businesses will be to bar or severely restrict minors’ access to lawful content.

ARGUMENT

The Ninth Circuit found that it could reach the facial challenge of the DPIA report requirements because “every application… raises the same First Amendment issues.” NetChoice v. Bonta, 113 F.4th at 1122. The court did not believe a facial challenge was appropriate to the rest of the challenged provisions, noting that “most of those provisions, by their plain language, do not necessarily impact protected speech in all or even most applications. Id. The court also noted, regarding the “dark patterns” prohibition, that “it is far from certain that such a ban should be scrutinized as a content-based restriction, as opposed to a content-neutral regulation of expression.” Id. at 1123. Below, we argue that AADC’s restrictions on data gathering for curation of speech and targeted advertising will inevitably lead to less access to lawful online speech platforms for minors. As such, they should be subject to strict scrutiny, whether the court ultimately analyzes the challenged provisions facially or as-applied to NetChoice’s members.

In Part I we argue that gathering data for the curation of speech and targeted advertising is protected by the First Amendment. In Part II we argue that the collection of data for those purposes is inextricably linked, and thus the AADC’s restrictions on the collection of data for those purposes should be subject to strict scrutiny. In Part III we argue that the AADC fails strict scrutiny, both for a lack of a compelling government interest and because its restrictions are not narrowly tailored.

I. GATHERING DATA FOR THE CURATION OF SPEECH AND TARGETED ADVERTISING IS PROTECTED BY THE FIRST AMENDMENT

Online platforms attract users by curating content and presenting it in an engaging way. To do this effectively requires data. Moreover, that same data is useful for targeted advertising, which is the primary revenue source for most online platforms, which are multisided platforms. This is a protected business model under First Amendment principles.

First, display decisions by communications platforms on how best to present information to its users is protected by the First Amendment. Cf. Miami Herald Pub. Co. v. Tornillo, 418 U.S. 241, 258 (1974) (“The choice of material to go into a newspaper, and the decisions made as to limitations on the size and content of the paper, and treatment of public issues and public officials—whether fair or unfair—constitute the exercise of editorial control and judgment.”). Limitations on the right of a communications platform to curate its own content come only from the marketplace of ideas itself: “The power of a privately owned newspaper to advance its own political, social, and economic views is bounded by… the acceptance of a sufficient number of readers—and hence advertisers—to assure financial success.” Id. at 255 (quoting Columbia Broad. Sys., Inc. v. Democratic Nat’l Comm., 412 U.S. 94, 117 (1973) (plurality)).

Second, the use of data for commercial purposes is protected by the First Amendment. See Sorrell, 564 U.S. at 567 (“While the burdened speech results from an economic motive, so too does a great deal of vital expression.”). No matter how much California wishes it were so, the AADC’s restrictions on the “sales, transfer, and use of” information is not simply regulation of economic activity.  Cf. id. at 750. On the contrary, the Supreme Court “has held the creation and dissemination of information are speech within the meaning of the First Amendment.” Id. Among the protected uses of data is creating tailored content, including marketing. See id. at 557-58 (describing the use of “detailing” where drug salespersons use prescribing history of doctors to present a particular sales message.).

Third, even the collection of information can be protected First Amendment activity. For instance, in Project Veritas, this court found that an audio or video recording “qualifies as speech entitled to the protection of the First Amendment.” See 72 F.4th at 1054. This is because the act of recording itself is “inherently expressive.” Id. at 1055. Recording is necessary to create the speech at issue.

Applying these principles here leads to the conclusion that the targeted advertising-supported business model of online platforms is protected by the First Amendment. Online platforms have a right to determine what to curate and how to display that content on its platform, as they seek to discover whether it serves its users and advertisers in the marketplace of ideas, much like the newspaper in Tornillo. Using data to better curate content to users and to offer them more relevant advertisements is protected, as in Sorrell. And the collection of data to curate speech and offer them targeted advertisements is as “inherently expressive” as the act of recording is for making a video in Project Veritas.

II. STRICT SCRUTINY SHOULD APPLY TO THE AADC’S RESTRICTIONS ON DATA COLLECTION FOR THE CURATION OF SPEECH AND TARGETED ADVERTISING

The question remains what level of scrutiny the AADC’s restrictions on data collection for curation and targeted advertising should face. The Ninth Circuit only considered the standard of scrutiny in dicta about the “dark patterns” prohibition of Cal. Civ. Code § 1798.99.31(b)(7), stating that it was not certain whether it would be subject to strict scrutiny because it is content-based or intermediate scrutiny because it is content-neutral. See NetChoice v. Bonta, 113 F.th at 1123. The Ninth Circuit did not consider the argument that the collection of data that is restricted by the AADC is inextricably intertwined with minors’ free access to protected speech. Here, online multisided platforms must have data both to effectively curate content and to offer targeted advertisements which subsidize users’ access. Targeted advertising is inextricably intertwined with the free or reduced-price access of users to these online platforms.

Over time, courts have gained more knowledge of how multisided platforms work, specifically in the antitrust context. See Ohio v. American Express, 138 S. Ct. 2274, 2280-81 (2018) (describing how credit card networks work). But this also has important relevance in the First Amendment context where advertisements often fund the curation of content.

For instance, in Dex Media West, this court considered yellow page directories and found that the protected speech of the phonebooks (i.e. telephone numbers) was inextricably intertwined with the advertisements that help fund it. See 696 F.3d at 956-65. The court found the “[e]conomic reality” that “yellow pages directories depend financially upon advertising does not make them any less entitled to protection under the First Amendment.” Id. at 963-64. The court rejected the district court’s conclusion that “economic dependence was not sufficient to intertwine commercial and noncommercial elements of the publication,” id. at 964, as the same could be said of television stations or newspapers as well, but they clearly receive full First Amendment protection for their speech. The court concluded that:

Ultimately, we do not see a principled reason to treat telephone directories differently from newspapers, magazines, television programs, radio shows, and similar media that does not turn on an evaluation of their contents. A profit motive and the inclusion or creation of noncommercial content in order to reach a broader audience and attract more advertising is present across all of them. We conclude, therefore, that the yellow pages directories are entitled to full First Amendment protection. Id. at 965.

Here, this means the court should consider the interconnected nature of the free or reduced-price access to online content and targeted advertising that is empowered by data collection. Online platforms are, in this sense, indistinguishable “from newspapers, magazines, television programs, radio shows, and similar media…” that curate “noncommercial content in order to reach a broader audience and attract more advertising.” Id. The only constitutional limits on platforms’ editorial discretion arise from the marketplace of ideas itself. Cf. Tornillo, 418 U.S. at 255.

To find otherwise will lead to detrimental effects on this business model. Without data collection, not only will online platforms serve less relevant content to users but also less relevant advertising. This will make the platforms less lucrative for advertisers and lead to upward pricing pressure on the user-side of online platforms. Online platforms will be forced to change their business models by either charging fees (or raising them) for access or excluding those users subject to the regulation. Excluding minors from accessing lawful speech clearly implicates the First Amendment and is subject to strict scrutiny. Cf. Brown, 564 U.S. at 794-95, 799 (the Act “is invalid unless California can demonstrate that it passes strict scrutiny”).

III. THE AADC FAILS STRICT SCRUTINY

The Ninth Circuit rightfully applied strict scrutiny to the DPIA report provisions of the AADC. The same level of scrutiny should apply to the rest of the challenged restrictions on the collection of data for curation and targeted advertising. Those restrictions fail strict scrutiny much like the DPIA report requirement. There is no compelling state interest due a lack of an actual problem in need of solving. Cf. Brown, U.S. at 799. But even assuming a compelling interest in protecting minors from harms related to data collection for curation and targeted advertising, California “could have easily employed less restrictive means to accomplish its protective goals, such as by (1) incentivizing companies to offer voluntary content filters or application blockers, (2) educating children and parents on the importance of using such tools, and (3) relying on existing … laws that prohibit related unlawful conduct.” Cf. NetChoice v. Bonta, 113 F.4th at 1121.

A. There Is No Compelling Government Interest

Under strict scrutiny, the government must “specifically identify an ‘actual problem’ in need of solving.” Brown, 564 U.S. at 799 (quoting Playboy, 529 U.S. at 822-23).

In Brown, the Supreme Court found that California’s evidence linking exposure to violent video games and harmful effects on children was “not compelling” because it did “not prove that violent video games cause minors to act aggressively.” Id. at 800 (emphasis in original). At best, there was a limited correlation that was “indistinguishable from effects produced by other media” not subject to the rules. Id. at 800-01.

The same is true here. The literature on the relationship between Internet use and harm to minors simply does not establish causation.

For instance, the National Academies of Science, Engineering, and Medicine has noted that there are both benefits and harms from social media use for adolescents. Nat’l Acad. Sci. Engineering & Med., Social Media and Adolescent Health at 4 (2023) (“[T]he use of social media, like many things in life, may be a constantly shifting calculus of the risky, the beneficial, and the mundane.”). There are some studies that show a very slight correlation between “problematic social media use” and mental health harms for adolescents. See Holly Shannon, et al., Problematic Social Media Use in Adolescents and Young Adults: Systematic Review and Meta-analysis, 9 JMIR Mental Health 1, 2 (2022) (noting “problematic use characterizes individuals who experience addiction-like symptoms as a result of their social media use”). But the “links between social media and health are complex.” Social Media and Adolescent Health at 89.

The reasons for this complexity include the direction of the relationship (i.e., is it because of social media usage that a person is depressed or does someone use social media because they are depressed?), and whether both social media usage and mental health issues are possibly influenced by another variable(s). Moreover, it is nearly impossible to find a control group that has not been exposed to social media. As a result, the National Academies’ extensive review of the literature “did not support the conclusion that social media causes changes in adolescent health at the population level.” Id. at 92.

The AADC applies to far more than just social media, however, extending to any “online service, product, or feature” that is “likely to be accessed by children.” See Cal. Civ. Code § 1798.99.30 (b)(4). There is little evidence that general Internet usage is correlated with harm to minors. According to one survey of the international literature, the prevalence of “Problematic Internet Use” among adolescents ranges anywhere from 4% to 20%. See Juan M. Machimbarrena et al., Profiles of Problematic Internet Use and Its Impact on Adolescents’ Health-Related Quality of Life, 16 Int’l J. Eviron. Res. Public Health 1, 2 (2019). This level of harmful use suggests the AADC’s reach is overinclusive. Cf. Brown, 564 U.S. at 805 (Even when government ends are legitimate, if “they affect First Amendment rights they must be pursued by means that are neither seriously underinclusive nor seriously overinclusive.”).

Moreover, the rules at issue are also underinclusive, even assuming a causal link. The AADC does not extend to the same content offline and also likely to be accessed by children, even if also supported by advertising, would not be subject to those regulations. California has offered no reason to think that accessing the same content while receiving advertising offline would be less harmful to minors. Cf. Brown, 564 U.S. at 801-02 (“California has (wisely) declined to restrict Saturday morning cartoons, the sale of games rated for young children, or the distribution of guns. The consequence is that its regulation is wildly underinclusive when judged against its asserted justification, which in our view is alone enough to defeat it.”).

In sum, California has not established a compelling state interest in protecting minors from harm allegedly associated with Internet usage.

B. The AADC Is Not Narrowly Tailored

Even assuming there is a compelling state interest in protecting minors from harms online, the AADC’s provisions restricting the collection and use of data for curating speech and targeted advertising are not narrowly tailored to that end. They are much more likely to lead to the complete exclusion of minors from online platforms, foregoing the many benefits of Internet usage. See Social Media and Adolescent Health at 4-5 (listing benefits of social media usage for adolescents). A less restrictive alternative would be promoting the use of practical and technological means by parents and minors to avoid the harms associated with Internet usage, or to avoid specifically harmful forms of Internet use.

For instance, the AADC requires covered online platforms to “[e]stimate the age of child users with a reasonable level of certainty appropriate to the risks” or “apply the privacy and data protections afforded to children” under the Act to “all consumers.” Cal. Civ. Code § 1798.99.31(a)(5). These privacy and data protections would severely limit by default the curation of speech and targeted advertising. See Cal. Civ. Code § 1798.99.31(a)(6); (b)(2)-(4). This would reduce the value of the online platforms to all users, who would receive less relevant content and advertisements.

Rather than leading to more privacy protection for minors, such a provision could result in more privacy-invasive practices or the exclusion of minors from the benefits of online platforms altogether. There is simply no foolproof method for estimating a user’s age.

Platforms typically use one of four methods: self-declaration, user-submitted hard identifiers, third-party attestation, and inferential age assurance. See Scott Babwah Brennen & Matt Perault, Keeping Kids Safe Online: How Should Policymakers Approach Age Verification?, at 4 (The Ctr. for Growth and Opportunity at Utah State University and University of North Carolina Ctr. on Tech. Pol’y Paper, Jun. 2023), https://www.thecgo.org/wp-content/uploads/2023/06/Age-Assurance_03.pdf.  Each method comes with tradeoffs. While self-declaration allows users to simply lie about their age, other methods can be quite privacy-invasive. For instance, requiring users to submit hard identifiers, like a driver’s license or passport, may enable platforms to more accurately assess age in some circumstances and may make it more difficult for minors to fabricate their age, but it also poses privacy and security risks. It requires platforms to collect and process sensitive data, requires platforms to develop expertise in ID verification, and may create barriers to access for non-minor users who lack an acceptable form of identification. Courts have consistently found age verification requirements to be an unconstitutional barrier to access to online content. See Ashcroft v. ACLU, 542 U.S. 656 (2004); NetChoice v. Yost, 2024 WL 555904 (S.D. Ohio, Feb. 12, 2024); NetChoice, LLC v. Griffin, 2023 WL 5660155 (W.D. Ark. Aug. 31, 2023).

But even age assurance or age estimation comes with downsides. For instance, an online platform could use AI systems to estimate age based on an assessment of the content and behavior associated with a user. But to develop this estimate, platforms must implement technical systems to collect, review, and process user data, including minors’ data. These methods may also result in false positives, where a platform reaches an inaccurate determination that a user is underage, which would result in a different set of privacy defaults under the AADC. See Cal. Civ. Code § 1798.99.31(a)(6); (b)(2)-(4). Errors are sufficiently common that some platforms have instituted appeals mechanisms so that users can contest an age-related barrier. See, e.g., Minimum age appeals on TikTok, TikTok, https://support.tiktok.com/en/safety-hc/account-and-user-safety/minimum-age-appeals-on-tiktok (last accessed Nov. 4, 2024). Not only is the development of such mechanisms costly to online platforms, but is potentially very costly to those mislabeled as well.

Another possibility previously noted by this court is that online platforms may restrict access by users who they have any reason to believe to be minors to avoid significantly changing their business models predicated on curation and targeted advertising. Cf. NetChoice, LLC v. Bonta, 692 F.Supp.3d 924, 945-46 (N.D. Cal. Sept. 18, 2023) (noting evidence that “age-based regulations would ‘almost certain[ly] [cause] news organizations and others [to] take steps to prevent those under 18 from accessing online news content, features, or services.’”) (quoting Amicus Curiae Br. of New York Times Co. & Student Press Law Ctr. at 6).

The reason why this is likely flows from an understanding of the economics of multisided markets mentioned above. Restricting the already limited expected revenue from minors through limits on the ability to do targeted advertising, combined with strong civil penalties for failure to live up to the provisions of the AADC with respect to minors, will encourage online platforms to simply exclude them altogether. See Cal. Civ. Code § 1798.99.35(a) (authorizing penalties of up to $7,500 per “affected child”).

Much less restrictive alternatives are possible. California could promote online education for both minors and parents which would allow them to take advantage of widely available technological and practical means to avoid online harms. Cf. Ashcroft, 542 U.S. at 666-68 (finding filtering software is a less restrictive alternative than age verification to protect minors from inappropriate content). Investing in educating the youth in media literacy could be beneficial for avoiding harms associated with problematic Internet use. See Social Media and Adolescent Health at 8-10 (arguing for training and education so young people can be empowered to protect themselves).

If anything, there are more technological ways for parents and minors to work together to avoid online harms today. For instance, there are already tools to monitor and limit how minors use the Internet available from cell carriers and broadband providers, on routers and devices, from third-party applications, and even from online platforms themselves. See Ben Sperry, A Coasean Analysis of Online Age-Verification and Parental-Consent Regimes, at 20-21 (ICLE Issue Brief 2023-11-09), https://laweconcenter.org/wp-content/uploads/2023/11/Issue-Brief-Transaction-Costs-of-Protecting-Children-Under-the-First-Amendment-.pdf. Even when it comes to privacy, educating parents and minors on how to protect their information when online would be a less restrictive alternative than restricting the use of data collection for targeted advertising.

CONCLUSION

The free marketplace of ideas is too important to be restricted, even in the name of protecting children. Minors must be able to benefit from the modern public square that is the Internet. This court rightly concluded that the AADC’s restrictions on collecting, selling, and sharing children’s data would “throw[] the baby out with the bathwater.” NetChoice, LLC v. Bonta, 692 F.Supp.3d at 957. The court should grant a preliminary injunction against the provisions restricting the collection of data for the purposes of curation and targeted advertising.

Imagine a world where digital-competition policy was guided by a desire to foster startup activity, competitiveness and, ultimately, growth. Competition policymakers would promote market conditions that enable new digital services to rapidly launch, gain user traction, and achieve greater scale. All of this would improve productivity, drive down prices for existing services, and help to make the world a wealthier place.

This is not entirely different from what former Italian Prime Minister and European Central Bank President Mario Draghi proposed in his recent report calling on Europe to pare back its regulatory overreach. Unfortunately, there are growing signs the European Union is heading in the precise opposite direction with its rules pertaining to digital markets—including the General Data Protection Regulation (GDPR), the Artificial Intelligence (AI) Act, the Digital Markets Act (DMA), and EU competition law more generally.

Read the full piece here.

Donald Trump has promised a renewed push for tariffs when he returns to the White House. The stated goal is to protect American manufacturing jobs, but some approaches would achieve this far more effectively than others.

The historical record shows that, while tariffs can preserve specific manufacturing jobs in the short term, poorly designed trade barriers destroy more American factory jobs than they save. Understanding these trade-offs is crucial for policymakers determined to use tariffs. Trump has said he will impose tariffs of 25 per cent on all imports from Canada and Mexico, and an extra 10 per cent on Chinese goods. But implementation will be key.

Read the full piece here.

Judge Amit Mehta’s recent decision in the U.S. Justice Department’s (DOJ) antitrust case against Google has garnered significant global attention and has been greeted with great fanfare by many. In Japan, where the Japan Fair Trade Commission (JFTC) has been proactively investigating major tech companies and discussing digital markets regulation, this ruling might seem like a potential blueprint for future actions (the case does share similarities with concerns raised by the JFTC). Japanese policymakers, scholars, and enforcers should exercise caution, however. Overestimating the significance of the Google ruling or viewing it as a definitive roadmap for antitrust enforcement in digital markets could lead to misguided policies that may not suit Japan’s unique market dynamics.

From the outset,  it’s crucial to dispel the notion that the Google Search case represents the “first major antitrust ruling against a technology giant.” Such a perspective overlooks a history of antitrust actions against tech firms, both in the U.S. and globally.

While the case may be the most publicized and recent global antitrust action against “big tech,” it is wildly incorrect to claim that only now are “internet companies… accountable under the antitrust laws.” There have been many cases against tech companies in the U.S.—some successful (including a jury finding that “Google willfully acquired or maintained monopoly power by engaging in anticompetitive conduct”), others less so. 

Nor is the U.S. an outlier in this sense. The JFTC, for example, has been actively investigating and regulating the practices of major tech companies. Among other actions, it has investigated (and obtained remedial commitments from) Apple over its App Store payment practices, Amazon over price-party clauses, and Google over the alleged unfair treatment of Yahoo! Japan. Meanwhile, the companies have been subject to countless antitrust investigations, merger challenges, and market studies by antitrust enforcers around the globe.

Nevertheless, some tout the Google Search decision as an “aha!” moment because Google is now an “adjudicated monopoly.” But the truth is that this decision doesn’t change much, and it certainly doesn’t provide a roadmap for other jurisdictions to follow. 

Understanding the Limitations of the Ruling

First, the court’s monopoly finding isn’t surprising—or particularly telling. Google has long held an extremely large share of general search in the United States. But, as a U.S. Court of Appeals held in the watershed 2001 Microsoft decision, “merely possessing monopoly power is not itself an antitrust violation.” Rather, a plaintiff must also prove exclusionary conduct—a much taller order. 

Second, just because a court determined that Google has monopoly power in search doesn’t mean another court will agree it has monopoly power in online advertising or other markets—or that Amazon has monopoly power in retail or Apple has monopoly power in smartphones—particularly in other countries. 

Third, the decision is fundamentally flawed. The U.S. case concerns Google’s agreements to pre-load Google Search as the default search engine in internet browsers and on mobile devices. According to the DOJ, these agreements excluded Microsoft Bing (and other general search engines) from effectively competing because users rarely switch from the default. 

There’s another explanation for Bing’s lack of success, however: maybe it just wasn’t as good. The court doesn’t rule this out or show that Bing would have succeeded without Google’s deals. This is particularly relevant in Japan where Yahoo! Japan has long enjoyed a significant market presence.

The court’s failure to thoroughly consider consumer preference as a factor in Bing’s lack of success raises concerns. As we have discussed extensively elsewhere, the court’s legal conclusion—that the DOJ didn’t need to prove that the agreements were the cause of Google success—rests on a misinterpretation of the Microsoft decision. To prevail, the government should have been required to prove that Google’s default distribution deals genuinely excluded Bing from the market to the detriment of consumers.

Moreover, these default agreements aren’t exclusive, and users can and do switch to other search engines with relative ease. The real question is why users often choose not to switch. Is it due to the so-called “power of defaults,” or is it simply because they prefer Google’s service? Evidence points toward the latter.

In Europe, for instance, where Google has been prohibited from being offered as the default on Android devices since 2020, its market share has remained largely unchanged. On Windows devices, where Bing is the default, the majority of users still opt for Google. These examples indicate that when alternatives are preferable, users are willing and able to change their default settings. 

If consumer preference is indeed the primary reason for Google’s dominance, then the court’s decision may inadvertently hinder users from accessing their preferred services—a counterproductive outcome. This scenario underscores the importance of thoroughly understanding market dynamics before implementing regulatory interventions.

The court’s conclusion seems rooted in a presumption that large tech firms can’t become dominant simply by being better. And this same assumption permeates much of the world’s new-found antipathy to big tech. Efforts to ban similar types of conduct (like Apple integrating iMessage with iPhones or Google “self-preferencing” its maps in its search results) without proof of harm to consumers risk stifling innovation and disregarding consumer preferences.

Implications for Japan’s Regulatory Approach

Thus far, Japan’s forays into digital competition regulation beyond antitrust (like the 2021 Act on Improving Transparency and Fairness of Digital Platforms) have been cautious, particularly relative to the EU’s aggressive Digital Markets Act, which has begun to impose a host of detailed (and problematic) obligations on digital platforms. But this year the National Diet enacted the Act on Promotion of Competition for Specified Smartphone Software, which imposes specific obligations on smartphone operating systems aimed at prohibiting them from discriminating against third-party apps and services in favor of their own. The limited scope of the act and the JFTC’s long history of careful and deliberate enforcement will likely help to curb the act’s ability to harm consumers, but it certainly has the potential to stifle consumer preferences and impede innovation.

By learning from the U.S. while considering its own market dynamics, Japan can develop a nuanced approach that promotes competition, protects consumers, and maintains its status as a global tech innovator. As some have suggested, rather than hastily adopting new ex-ante regulations, a more effective strategy might involve enhancing the JFTC’s capabilities. Investing in specialized personnel—such as IT experts and economists—and refining enforcement powers under the existing Anti-Monopoly Act could provide the flexibility and expertise needed to address any possible competition concerns in the rapidly evolving digital landscape.

While the U.S. Google Search antitrust ruling is significant, it should be interpreted with caution in the Japanese context. The decision’s questionable legal foundation and its potential to misguide policy underscore the need for Japan to chart its own course.

Fast-forward to this past week, and President-elect Donald Trump announced he will appoint Commissioner Brendan Carr chair of the Federal Communications Commission (FCC). It turns out he wrote the Project 2025 chapter on the FCC.

Reading that chapter therefore floated to the top of my to-do list. So, let’s see what soon-to-be Chairman Carr has in store for the FCC.

Read the full piece here.

More than a century ago, the U.S. Supreme Court held that the Sherman Act does not interfere with the “unquestioned right to stop dealing,” but the legacy of the Aspen Skiing is that terminating voluntary cooperation with a rival can give rise to liability. A case now on appeal could determine whether the “right to stop dealing” remains meaningful.

Read the full piece here.

In the aftermath of Hurricane Helene in September, SpaceX provided a masterclass in public relations by handing out thousands of Starlink satellite-broadband kits, waiving monthly fees, and enabling emergency alerts over cellular networks in affected areas. Not only did the effort generate significant goodwill for the company, but it also demonstrated that satellite technology can play a key role in providing broadband to underserved and unserved areas.

Read the full piece here.

We at the International Center for Law & Economics (ICLE) filed an amicus brief earlier this month to the U.S. District Court for the Northern District of California in the NetChoice v. Bonta case. It was an updated version of the brief we filed earlier this year before the 9th U.S. Circuit Court of Appeals.

Read the full piece here.

Politicians have stopped listening to economists. Well, I’m not sure they ever listened, but now they really don’t. The Wall Street Journal even declared this was “The Year Politicians Turned Their Backs on Economics.” As Greg Ip explained, “the candidates haven’t just demoted economic principles this year; they’ve jettisoned them altogether. It’s as if they wanted to flip the bird at the economic establishment.”

Read the full piece here.

With Donald Trump’s victory in the presidential election, the federal government’s approach to the regulation of artificial intelligence stands at a crucial inflection point. While there may be pressure to rush through AI legislation during Congress’ upcoming lame-duck session, such haste could prove counterproductive for U.S. leadership in AI development. Instead, this transition period presents an opportunity to start with a clean slate.

Read the full piece here.

Bell Canada, Canada’s largest communications company, recently announced plans to acquire Ziply Fiber, a fiber-internet provider in the Pacific Northwest. The C$7 billion deal represents Bell’s strategic play to expand its fiber footprint into the United States and to capitalize on growth opportunities in what it sees as an underserved U.S. fiber market.

The proposed acquisition is not, however, without its challenges. As Bell Canada looks to integrate Ziply into its operations, it must first navigate a web of regulatory hurdles that could slow or halt the deal. It must then survive an increasingly competitive landscape.

Read the full piece here.

You’re no doubt aware that we’ve had a presidential election since my last column. Agency news seems pallid, in comparison, but those of you who’ve come here looking for deep insights into what it all means are liable to be disappointed, not to mention zero in number. “The Meaning of Life” is a movie by Monty Python. I recommend it.

Read the full piece here.

With Donald Trump’s victory in this week’s presidential election, the federal government’s approach to the regulation of artificial intelligence (AI) stands at a crucial inflection point. While there may be pressure to rush through AI legislation during Congress’ upcoming lame-duck session, such haste could prove counterproductive for U.S. leadership in AI development. Instead, this transition period presents an opportunity to start with a clean slate and to engage in thoughtful consideration of how the government can establish appropriate guardrails, while promoting innovation and development.

Read the full piece here.

The U.S. Justice Department (DOJ) has initiated an antitrust monopolization case against Visa for various practices related to its debit-card services. The complaint centers on two primary theories of harm. The first is that Visa offers volume discounts in a manner that locks in merchant banks (or “acquirers”) into Visa’s debit-card network, which deprives rival networks of “scale” and reduces the overall level of competition in the debit-card market. The second is that Visa is buying off potential competitors such as Apple with agreements that effectively share Visa’s monopoly profits so that Apple becomes an invested partner, rather than a potential threat.

Read the full piece here.

The European Data Protection Board’s (EDPB) Nov. 5 stakeholder consultation on AI models and data protection—organized to gather input for an upcoming Irish Data Protection Commission opinion under Article 64(2) of the General Data Protection Regulation (GDPR)—showcased significant lingering disagreement on how the GDPR should apply to AI.

While the event was not intended to tell us much about which direction the EDPB will take, it helped to identify some of the relevant positions in the broader debate. Notably, some activists advocate interpreting the GDPR to effectively prohibit some AI research and business applications, including some that are already used daily by millions of Europeans.

Read the full piece here.

INTEREST OF AMICUS CURIAE

The International Center for Law & Economics (“ICLE”) is a nonprofit, non-partisan global research and policy center that builds intellectual foundations for sensible, economically grounded policy. ICLE promotes the use of law and economics methodologies and economic learning to inform policy debates and has longstanding expertise evaluating law and policy.

ICLE has an interest in ensuring that First Amendment law promotes the public interest by remaining grounded in sensible rules informed by sound economic analysis. ICLE scholars have written extensively on issues related to Internet regulation and free speech, including the interaction of privacy rules and the First Amendment. ICLE filed a version of this amicus brief in the Ninth Circuit Court of Appeals.

SUMMARY OF ARGUMENT

The Ninth Circuit Court of Appeals correctly applied strict scrutiny to the Data Protection Impact Assessment mandates of the Age-Appropriate Design Code (AADC), see NetChoice, LLC v. Bonta, 113 F.4th 1101, 1119-21 (9th Cir. 2024), including finding they would likely fail under strict scrutiny. See id. at 1121-22. The court affirmed the preliminary injunction as to those provisions, but vacated the remainder of the preliminary injunction. This court is now asked, among other things, to consider whether the other challenged provisions should be subject to strict scrutiny. Below we argue that, regardless of whether this action is construed as a facial challenge or as an as-applied challenge, the AADC rules have the effect of restricting the access of minors to lawful speech and should be subject to strict scrutiny. Under strict scrutiny, these limitations on the collection and use of data for the purposes of curation and targeted advertising fail due to the lack of a compelling state interest or narrow tailoring.

The First Amendment protects an open marketplace of ideas. 303 Creative LLC v. Elenis, 600 U.S. 570, 143 S. Ct. 2298, 2311 (2023) (“‘[I]f there is any fixed star in our constitutional constellation,’ it is the principle that the government may not interfere with ‘an uninhibited marketplace of ideas.’”) (quoting West Virginia Bd. of Ed. v. Barnette, 319 U.S. 624, 642 (1943) and McCullen v. Coakley, 573 U.S. 464, 476 (2014)).  In fact, the First Amendment protects speech in this marketplace whether the “government considers… speech sensible and well intentioned or deeply ‘misguided,’ and likely to cause ‘anguish’ or ‘incalculable grief.’”  303 Creative, 143 S. Ct. at 2312 (quoting Hurley v. Irish-American Gay, Lesbian and Bisexual Group of Boston, Inc., 515 U.S. 557, 574 (1995) and Snyder v. Phelps, 562 U.S. 443, 456 (2011)).

The protection of the marketplace of ideas necessarily includes the creation, distribution, purchasing, and receiving of speech. See Brown v. Ent. Merchs. Ass’n, 564 U.S. 786, 792 n.1 (2011) (“Whether government regulation applies to creating distributing or consuming speech makes no difference” for First Amendment purposes). In other words, it protects both the suppliers in the marketplace of ideas (creators and distributors), and the consumers (purchasers and receivers).

No less than other speakers, profit-driven firms involved in the creation or distribution of speech are protected by the First Amendment. See 303 Creative LLC v. Elenis, 600 U.S. 570, 600 (2023) (“[T]he First Amendment extends to all persons engaged in expressive conduct, including those who seek profit.”). This includes Internet firms that provide speech platforms. See Reno v. ACLU, 521 U.S. 844, 870 (1997); NetChoice, LLC v. Moody, 34 F.4th 1196, 1213 (11th Cir. 2022).

Even minors have a right to participate in the marketplace of ideas, including as purchasers and receivers. See Brown, 564 U.S. at 794-95 (government has no “free-floating power to restrict ideas to which children may be exposed”). This includes the use of online speech platforms. See NetChoice, LLC v. Griffin, 2023 WL 5660155, at *17 (W.D. Ark. Aug. 31, 2023) (finding Arkansas’s Act 689 “obviously burdens minors’ First amendment rights” by “bar[ring] minors from opening accounts on a variety of social media platforms”).

This is important because online firms, especially those primarily involved in curating and creating content, are central to the modern marketplace of ideas. See Packingham v. North Carolina, 582 U.S. 98, 107 (2017) (describing the Internet as “the modern public square” where citizens can “explor[e] the vast realms of human thought and knowledge”).

Online firms primarily operate as what economists call “matchmakers” or “multisided platforms.” See David Evans & Richard Schmalensee, Matchmakers: The New Economics of Multisided Platforms 10 (2016).  “[M]atchmakers’ raw materials are the different groups of customers that they help bring together.  And part of the stuff they sell to members of each group is access to members of the other groups.  All of them operate physical or virtual places where members of these different groups get together.  For this reason, they are often called multisided platforms.”  Id.  In this sense, they are very similar to newspapers and cable operators in attempting to attract attention through interesting content so that advertisers can reach them.

Online platforms bring together advertisers and users—including both speakers and listeners—by curating third-party speech as well as by producing their own content. The goal is to keep users engaged so advertisers can reach them. For many online platforms, advertisers cross-subsidize access to content for users, to the point that it is often free. Online platforms are in this sense “attention platforms” which supply content to its users while collecting data for targeted advertisements for businesses who then pay for access to those users. To be successful, online platforms must keep enough—and the right type of—users engaged so as to maintain demand for advertising. But if platforms fail to curate and produce interesting content, it will lead to users using them less or even leaving altogether, making it less likely that advertisers will invest in these platforms.

The First Amendment protects this business model because it allows entities that have legally obtained data to use it for both for the curation of speech for its users and targeted advertising. See Sorrell v. IMS Health, Inc., 564 U.S. 552, 570-71 (2011) (finding that there is a “strong argument” that “information is speech for First Amendment purposes” and striking down a law limiting the ability of marketers to use prescriber-identifying information for pharmaceutical sales). The First Amendment also protects the gathering of information when it is “inherently expressive.” Cf. Project Veritas v. Schmidt, 72 F.4th 1043, 1055 (9th Cir. 2023) (citing cases that have found the act of filming or recording are inherently expressive activity). Gathering of online data for targeted advertising makes it as inherently expressive as the act of filming or recording is for creating media.

Moreover, due to the nature of online speech platforms, the collection and use of data is “inextricably intertwined” with the curation of protected, non-commercial speech. Cf. Riley v. Nat’l Fed’n of the Blind of N.C., 487 U.S. 781, 796 (1988); Dex Media West, Inc. v. City of Seattle, 696 F.3d 952, 958 (9th Cir. 2012).

By restricting use of data, the AADC will prevent online platforms from being able to tailor their products to their users, resulting in less relevant—and in the case of minors, less appropriate—content. Online platforms may also be less likely to effectively monetize through targeted advertisements. Both situations will place platforms in a situation that may require a change in business model, either by switching to subscriptions or by excluding minors. Thus, restrictions on the collection and use of data for the curation of content and targeted advertising should be subject to strict scrutiny, as the result of such restrictions will be to restrict minors’ access to lawful online speech.

Under strict scrutiny, California bears the burden of showing it has a compelling governmental interest and that the restriction on speech is narrowly tailored to that interest. It can do neither.

First, California fails to establish a compelling government interest because it has failed to “identify an ‘actual problem’ in need of solving.” Brown, 564 U.S. at 799 (quoting United States v. Playboy Entertainment Group, Inc., 529 U.S. 803, 822-23 (2000)). There is no more evidence of a direct causal link between the use of online platforms subject to the AADC and harm to minors than there was from the video games at issue in Brown. Cf. id. at 799-801. In fact, the best available data does “not support the conclusion that social media causes changes in adolescent health at the population level.” See Nat’l Acad. Sci. Engineering & Med., Social Media and Adolescent Health at 92 (2023). There is even less evidence that the Internet content as a whole is harmful to minors.

Second, California’s law is not narrowly tailored because the requirements that restrict minors’ access to lawful content are not the least restrictive means for protecting minors from potentially harmful content. Cf. Playboy, 529 U.S. at 823-25 (finding the voluntary use of blocking devices to restrict access to adult channels is less restricting than mandating the times such content may be made available); Ashcroft v. ACLU, 542 U.S. 656, 667-70 (2004) (finding filtering software a less restrictive alternative than age verification). Parents and minors have technological and practical means available to them that could allow them to avoid the putative harms of Internet use without restricting the access of others to lawful speech. Government efforts to promote the creation and use of such tools is a less restrictive way to promote the safety of minors online.

In sum, the AADC is unconstitutional because it would restrict the ability of minors to participate in the marketplace of ideas. The likely effects of the AADC on covered businesses will be to bar or severely restrict minors’ access to lawful content.

ARGUMENT

The Ninth Circuit found that it could reach the facial challenge of the DPIA report requirements because “every application… raises the same First Amendment issues.” NetChoice v. Bonta, 113 F.4th at 1122. The court did not believe a facial challenge was appropriate to the rest of the challenged provisions, noting that “most of those provisions, by their plain language, do not necessarily impact protected speech in all or even most applications. Id. The court also noted, regarding the “dark patterns” prohibition, that “it is far from certain that such a ban should be scrutinized as a content-based restriction, as opposed to a content-neutral regulation of expression.” Id. at 1123. Below, we argue that AADC’s restrictions on data gathering for curation of speech and targeted advertising will inevitably lead to less access to lawful online speech platforms for minors. As such, they should be subject to strict scrutiny, whether the court ultimately analyzes the challenged provisions facially or as-applied to NetChoice’s members.

In Part I we argue that gathering data for the curation of speech and targeted advertising is protected by the First Amendment. In Part II we argue that the collection of data for those purposes is inextricably linked, and thus the AADC’s restrictions on the collection of data for those purposes should be subject to strict scrutiny. In Part III we argue that the AADC fails strict scrutiny, both for a lack of a compelling government interest and because its restrictions are not narrowly tailored.

I. GATHERING DATA FOR THE CURATION OF SPEECH AND TARGETED ADVERTISING IS PROTECTED BY THE FIRST AMENDMENT

Online platforms attract users by curating content and presenting it in an engaging way. To do this effectively requires data. Moreover, that same data is useful for targeted advertising, which is the primary revenue source for most online platforms, which are multisided platforms. This is a protected business model under First Amendment principles.

First, display decisions by communications platforms on how best to present information to its users is protected by the First Amendment. Cf. Miami Herald Pub. Co. v. Tornillo, 418 U.S. 241, 258 (1974) (“The choice of material to go into a newspaper, and the decisions made as to limitations on the size and content of the paper, and treatment of public issues and public officials—whether fair or unfair—constitute the exercise of editorial control and judgment.”). Limitations on the right of a communications platform to curate its own content come only from the marketplace of ideas itself: “The power of a privately owned newspaper to advance its own political, social, and economic views is bounded by… the acceptance of a sufficient number of readers—and hence advertisers—to assure financial success.” Id. at 255 (quoting Columbia Broad. Sys., Inc. v. Democratic Nat’l Comm., 412 U.S. 94, 117 (1973) (plurality)).

Second, the use of data for commercial purposes is protected by the First Amendment. See Sorrell, 564 U.S. at 567 (“While the burdened speech results from an economic motive, so too does a great deal of vital expression.”). No matter how much California wishes it were so, the AADC’s restrictions on the “sales, transfer, and use of” information is not simply regulation of economic activity.  Cf. id. at 750. On the contrary, the Supreme Court “has held the creation and dissemination of information are speech within the meaning of the First Amendment.” Id. Among the protected uses of data is creating tailored content, including marketing. See id. at 557-58 (describing the use of “detailing” where drug salespersons use prescribing history of doctors to present a particular sales message.).

Third, even the collection of information can be protected First Amendment activity. For instance, in Project Veritas, this court found that an audio or video recording “qualifies as speech entitled to the protection of the First Amendment.” See 72 F.4th at 1054. This is because the act of recording itself is “inherently expressive.” Id. at 1055. Recording is necessary to create the speech at issue.

Applying these principles here leads to the conclusion that the targeted advertising-supported business model of online platforms is protected by the First Amendment. Online platforms have a right to determine what to curate and how to display that content on its platform, as they seek to discover whether it serves its users and advertisers in the marketplace of ideas, much like the newspaper in Tornillo. Using data to better curate content to users and to offer them more relevant advertisements is protected, as in Sorrell. And the collection of data to curate speech and offer them targeted advertisements is as “inherently expressive” as the act of recording is for making a video in Project Veritas.

II. STRICT SCRUTINY SHOULD APPLY TO THE AADC’S RESTRICTIONS ON DATA COLLECTION FOR THE CURATION OF SPEECH AND TARGETED ADVERTISING

The question remains what level of scrutiny the AADC’s restrictions on data collection for curation and targeted advertising should face. The Ninth Circuit only considered the standard of scrutiny in dicta about the “dark patterns” prohibition of Cal. Civ. Code § 1798.99.31(b)(7), stating that it was not certain whether it would be subject to strict scrutiny because it is content-based or intermediate scrutiny because it is content-neutral. See NetChoice v. Bonta, 113 F.th at 1123. The Ninth Circuit did not consider the argument that the collection of data that is restricted by the AADC is inextricably intertwined with minors’ free access to protected speech. Here, online multisided platforms must have data both to effectively curate content and to offer targeted advertisements which subsidize users’ access. Targeted advertising is inextricably intertwined with the free or reduced-price access of users to these online platforms.

Over time, courts have gained more knowledge of how multisided platforms work, specifically in the antitrust context. See Ohio v. American Express, 138 S. Ct. 2274, 2280-81 (2018) (describing how credit card networks work). But this also has important relevance in the First Amendment context where advertisements often fund the curation of content.

For instance, in Dex Media West, this court considered yellow page directories and found that the protected speech of the phonebooks (i.e. telephone numbers) was inextricably intertwined with the advertisements that help fund it. See 696 F.3d at 956-65. The court found the “[e]conomic reality” that “yellow pages directories depend financially upon advertising does not make them any less entitled to protection under the First Amendment.” Id. at 963-64. The court rejected the district court’s conclusion that “economic dependence was not sufficient to intertwine commercial and noncommercial elements of the publication,” id. at 964, as the same could be said of television stations or newspapers as well, but they clearly receive full First Amendment protection for their speech. The court concluded that:

Ultimately, we do not see a principled reason to treat telephone directories differently from newspapers, magazines, television programs, radio shows, and similar media that does not turn on an evaluation of their contents. A profit motive and the inclusion or creation of noncommercial content in order to reach a broader audience and attract more advertising is present across all of them. We conclude, therefore, that the yellow pages directories are entitled to full First Amendment protection. Id. at 965.

Here, this means the court should consider the interconnected nature of the free or reduced-price access to online content and targeted advertising that is empowered by data collection. Online platforms are, in this sense, indistinguishable “from newspapers, magazines, television programs, radio shows, and similar media…” that curate “noncommercial content in order to reach a broader audience and attract more advertising.” Id. The only constitutional limits on platforms’ editorial discretion arise from the marketplace of ideas itself. Cf. Tornillo, 418 U.S. at 255.

To find otherwise will lead to detrimental effects on this business model. Without data collection, not only will online platforms serve less relevant content to users but also less relevant advertising. This will make the platforms less lucrative for advertisers and lead to upward pricing pressure on the user-side of online platforms. Online platforms will be forced to change their business models by either charging fees (or raising them) for access or excluding those users subject to the regulation. Excluding minors from accessing lawful speech clearly implicates the First Amendment and is subject to strict scrutiny. Cf. Brown, 564 U.S. at 794-95, 799 (the Act “is invalid unless California can demonstrate that it passes strict scrutiny”).

III. THE AADC FAILS STRICT SCRUTINY

The Ninth Circuit rightfully applied strict scrutiny to the DPIA report provisions of the AADC. The same level of scrutiny should apply to the rest of the challenged restrictions on the collection of data for curation and targeted advertising. Those restrictions fail strict scrutiny much like the DPIA report requirement. There is no compelling state interest due a lack of an actual problem in need of solving. Cf. Brown, U.S. at 799. But even assuming a compelling interest in protecting minors from harms related to data collection for curation and targeted advertising, California “could have easily employed less restrictive means to accomplish its protective goals, such as by (1) incentivizing companies to offer voluntary content filters or application blockers, (2) educating children and parents on the importance of using such tools, and (3) relying on existing … laws that prohibit related unlawful conduct.” Cf. NetChoice v. Bonta, 113 F.4th at 1121.

A. There Is No Compelling Government Interest

Under strict scrutiny, the government must “specifically identify an ‘actual problem’ in need of solving.” Brown, 564 U.S. at 799 (quoting Playboy, 529 U.S. at 822-23).

In Brown, the Supreme Court found that California’s evidence linking exposure to violent video games and harmful effects on children was “not compelling” because it did “not prove that violent video games cause minors to act aggressively.” Id. at 800 (emphasis in original). At best, there was a limited correlation that was “indistinguishable from effects produced by other media” not subject to the rules. Id. at 800-01.

The same is true here. The literature on the relationship between Internet use and harm to minors simply does not establish causation.

For instance, the National Academies of Science, Engineering, and Medicine has noted that there are both benefits and harms from social media use for adolescents. Nat’l Acad. Sci. Engineering & Med., Social Media and Adolescent Health at 4 (2023) (“[T]he use of social media, like many things in life, may be a constantly shifting calculus of the risky, the beneficial, and the mundane.”). There are some studies that show a very slight correlation between “problematic social media use” and mental health harms for adolescents. See Holly Shannon, et al., Problematic Social Media Use in Adolescents and Young Adults: Systematic Review and Meta-analysis, 9 JMIR Mental Health 1, 2 (2022) (noting “problematic use characterizes individuals who experience addiction-like symptoms as a result of their social media use”). But the “links between social media and health are complex.” Social Media and Adolescent Health at 89.

The reasons for this complexity include the direction of the relationship (i.e., is it because of social media usage that a person is depressed or does someone use social media because they are depressed?), and whether both social media usage and mental health issues are possibly influenced by another variable(s). Moreover, it is nearly impossible to find a control group that has not been exposed to social media. As a result, the National Academies’ extensive review of the literature “did not support the conclusion that social media causes changes in adolescent health at the population level.” Id. at 92.

The AADC applies to far more than just social media, however, extending to any “online service, product, or feature” that is “likely to be accessed by children.” See Cal. Civ. Code § 1798.99.30 (b)(4). There is little evidence that general Internet usage is correlated with harm to minors. According to one survey of the international literature, the prevalence of “Problematic Internet Use” among adolescents ranges anywhere from 4% to 20%. See Juan M. Machimbarrena et al., Profiles of Problematic Internet Use and Its Impact on Adolescents’ Health-Related Quality of Life, 16 Int’l J. Eviron. Res. Public Health 1, 2 (2019). This level of harmful use suggests the AADC’s reach is overinclusive. Cf. Brown, 564 U.S. at 805 (Even when government ends are legitimate, if “they affect First Amendment rights they must be pursued by means that are neither seriously underinclusive nor seriously overinclusive.”).

Moreover, the rules at issue are also underinclusive, even assuming a causal link. The AADC does not extend to the same content offline and also likely to be accessed by children, even if also supported by advertising, would not be subject to those regulations. California has offered no reason to think that accessing the same content while receiving advertising offline would be less harmful to minors. Cf. Brown, 564 U.S. at 801-02 (“California has (wisely) declined to restrict Saturday morning cartoons, the sale of games rated for young children, or the distribution of guns. The consequence is that its regulation is wildly underinclusive when judged against its asserted justification, which in our view is alone enough to defeat it.”).

In sum, California has not established a compelling state interest in protecting minors from harm allegedly associated with Internet usage.

B. The AADC Is Not Narrowly Tailored

Even assuming there is a compelling state interest in protecting minors from harms online, the AADC’s provisions restricting the collection and use of data for curating speech and targeted advertising are not narrowly tailored to that end. They are much more likely to lead to the complete exclusion of minors from online platforms, foregoing the many benefits of Internet usage. See Social Media and Adolescent Health at 4-5 (listing benefits of social media usage for adolescents). A less restrictive alternative would be promoting the use of practical and technological means by parents and minors to avoid the harms associated with Internet usage, or to avoid specifically harmful forms of Internet use.

For instance, the AADC requires covered online platforms to “[e]stimate the age of child users with a reasonable level of certainty appropriate to the risks” or “apply the privacy and data protections afforded to children” under the Act to “all consumers.” Cal. Civ. Code § 1798.99.31(a)(5). These privacy and data protections would severely limit by default the curation of speech and targeted advertising. See Cal. Civ. Code § 1798.99.31(a)(6); (b)(2)-(4). This would reduce the value of the online platforms to all users, who would receive less relevant content and advertisements.

Rather than leading to more privacy protection for minors, such a provision could result in more privacy-invasive practices or the exclusion of minors from the benefits of online platforms altogether. There is simply no foolproof method for estimating a user’s age.

Platforms typically use one of four methods: self-declaration, user-submitted hard identifiers, third-party attestation, and inferential age assurance. See Scott Babwah Brennen & Matt Perault, Keeping Kids Safe Online: How Should Policymakers Approach Age Verification?, at 4 (The Ctr. for Growth and Opportunity at Utah State University and University of North Carolina Ctr. on Tech. Pol’y Paper, Jun. 2023), https://www.thecgo.org/wp-content/uploads/2023/06/Age-Assurance_03.pdf.  Each method comes with tradeoffs. While self-declaration allows users to simply lie about their age, other methods can be quite privacy-invasive. For instance, requiring users to submit hard identifiers, like a driver’s license or passport, may enable platforms to more accurately assess age in some circumstances and may make it more difficult for minors to fabricate their age, but it also poses privacy and security risks. It requires platforms to collect and process sensitive data, requires platforms to develop expertise in ID verification, and may create barriers to access for non-minor users who lack an acceptable form of identification. Courts have consistently found age verification requirements to be an unconstitutional barrier to access to online content. See Ashcroft v. ACLU, 542 U.S. 656 (2004); NetChoice v. Yost, 2024 WL 555904 (S.D. Ohio, Feb. 12, 2024); NetChoice, LLC v. Griffin, 2023 WL 5660155 (W.D. Ark. Aug. 31, 2023).

But even age assurance or age estimation comes with downsides. For instance, an online platform could use AI systems to estimate age based on an assessment of the content and behavior associated with a user. But to develop this estimate, platforms must implement technical systems to collect, review, and process user data, including minors’ data. These methods may also result in false positives, where a platform reaches an inaccurate determination that a user is underage, which would result in a different set of privacy defaults under the AADC. See Cal. Civ. Code § 1798.99.31(a)(6); (b)(2)-(4). Errors are sufficiently common that some platforms have instituted appeals mechanisms so that users can contest an age-related barrier. See, e.g., Minimum age appeals on TikTok, TikTok, https://support.tiktok.com/en/safety-hc/account-and-user-safety/minimum-age-appeals-on-tiktok (last accessed Nov. 4, 2024). Not only is the development of such mechanisms costly to online platforms, but is potentially very costly to those mislabeled as well.

Another possibility previously noted by this court is that online platforms may restrict access by users who they have any reason to believe to be minors to avoid significantly changing their business models predicated on curation and targeted advertising. Cf. NetChoice, LLC v. Bonta, 692 F.Supp.3d 924, 945-46 (N.D. Cal. Sept. 18, 2023) (noting evidence that “age-based regulations would ‘almost certain[ly] [cause] news organizations and others [to] take steps to prevent those under 18 from accessing online news content, features, or services.’”) (quoting Amicus Curiae Br. of New York Times Co. & Student Press Law Ctr. at 6).

The reason why this is likely flows from an understanding of the economics of multisided markets mentioned above. Restricting the already limited expected revenue from minors through limits on the ability to do targeted advertising, combined with strong civil penalties for failure to live up to the provisions of the AADC with respect to minors, will encourage online platforms to simply exclude them altogether. See Cal. Civ. Code § 1798.99.35(a) (authorizing penalties of up to $7,500 per “affected child”).

Much less restrictive alternatives are possible. California could promote online education for both minors and parents which would allow them to take advantage of widely available technological and practical means to avoid online harms. Cf. Ashcroft, 542 U.S. at 666-68 (finding filtering software is a less restrictive alternative than age verification to protect minors from inappropriate content). Investing in educating the youth in media literacy could be beneficial for avoiding harms associated with problematic Internet use. See Social Media and Adolescent Health at 8-10 (arguing for training and education so young people can be empowered to protect themselves).

If anything, there are more technological ways for parents and minors to work together to avoid online harms today. For instance, there are already tools to monitor and limit how minors use the Internet available from cell carriers and broadband providers, on routers and devices, from third-party applications, and even from online platforms themselves. See Ben Sperry, A Coasean Analysis of Online Age-Verification and Parental-Consent Regimes, at 20-21 (ICLE Issue Brief 2023-11-09), https://laweconcenter.org/wp-content/uploads/2023/11/Issue-Brief-Transaction-Costs-of-Protecting-Children-Under-the-First-Amendment-.pdf. Even when it comes to privacy, educating parents and minors on how to protect their information when online would be a less restrictive alternative than restricting the use of data collection for targeted advertising.

CONCLUSION

The free marketplace of ideas is too important to be restricted, even in the name of protecting children. Minors must be able to benefit from the modern public square that is the Internet. This court rightly concluded that the AADC’s restrictions on collecting, selling, and sharing children’s data would “throw[] the baby out with the bathwater.” NetChoice, LLC v. Bonta, 692 F.Supp.3d at 957. The court should grant a preliminary injunction against the provisions restricting the collection of data for the purposes of curation and targeted advertising.

I. INTRODUCTION 

This case presents a pivotal question that could fundamentally reshape product liability law and significantly impact product innovation. At its core, this case asks whether a pharmaceutical company should be held liable for purported injuries resulting from a FDA-approved medication, not because the medication itself was defective, but because the company allegedly failed to develop and market a potentially safer alternative drug sooner. 

The Court of Appeal’s decision to recognize such a duty represents a dramatic departure from established principles of product liability law. It effectively creates a new form of liability that does not require proof of a product defect – a cornerstone of product liability jurisprudence for nearly a century. The central legal question before this Court is whether pharmaceutical companies should bear a duty to develop and bring to market a purportedly safer drug sooner, even when their existing product is not defective and complies with all regulatory requirements. 

The importance of this case extends far beyond the immediate parties and industry involved. It has profound implications for innovation, legal precedent, and the fundamental structure of product liability law. If upheld, the Court of Appeal’s decision could chill innovation in the pharmaceutical industry (and beyond) by exposing companies to potentially unlimited liability for their research and development decisions. It would allow juries to second-guess complex scientific and business judgments made in the face of significant uncertainty, potentially deterring companies from investing in the development of new products. 

Moreover, this case challenges the long-standing requirement that plaintiffs in product liability cases must prove a defect in the product that caused a cognizable harm. Eliminating this requirement would not only upend decades of legal precedent but also remove a crucial safeguard that balances consumer protection with the need to promote innovation and ensure the availability of beneficial products. 

We urge the Court to consider carefully the potentially drastic consequences of expanding liability in this manner against the established principles of product liability law and the broader public interest in promoting pharmaceutical innovation and access to life-saving medications. 

 II. LEGAL DISCUSSION 

This Court should reject the Court of Appeal’s unprecedented expansion of tort liability for two fundamental reasons. First, the ruling dramatically departs from established product liability principles by eliminating the crucial requirement that plaintiffs prove a product defect—a cornerstone of product liability law for nearly a century. Second, the ruling rests on a fundamental misunderstanding of pharmaceutical development, incorrectly assuming that manufacturers can “know” a drug candidate is superior before completing the extensive FDA approval process. This flawed reasoning would create perverse incentives that would ultimately harm the very patients the tort system aims to protect by deterring innovation and delaying access to beneficial treatments. Such an outcome would run contrary to the public interest of the citizens of California. 

A. The Court of Appeal’s Rule Imposes Unlimited Liability 

The Court of Appeal’s ruling represents a significant and troubling departure from traditional products-liability law. In Brown v. Superior Court, (44 Cal.3d 1049 (1988)), this Court recognized the unique challenges and public health implications of pharmaceutical development. This Court explicitly rejected a standard that would hold drug manufacturers liable for failing to develop an alternative, purportedly safer product. (Id.) This decision was rooted in the understanding that such liability could discourage the development and distribution of beneficial drugs, ultimately harming public health. 

Expanding liability to products never even sold is an unprecedented, unprincipled, and dangerous approach to product liability. California Civil Code § 1714 does not impose liability for “fail[ing] to take positive steps to benefit others,” (Brown v. USA Taekwondo (2021) 11 Cal.5th 204, 215), and Respondents abandoned any theory that the medicine they received was defective. Respondents also abandoned any theory that the TDF medicines were not accompanied by adequate warnings under federal or state law. Thus, Respondents’ case—as accepted by the Court of Appeal—is that they consumed a product authorized by the FDA, that they were fully aware of its potential side effects, but maybe they would have experienced fewer side effects had Petitioner made the decision to accelerate (against some indefinite baseline) the development of an alternative medicine. To call this a speculative harm is an understatement, and to dismiss Petitioner’s conduct as unreasonable because allegedly motivated by profit, (Op. 32), not only flatly misrepresents the record but also elides the complex nature of product-development decisions in which profit is always a factor.  

Practically speaking, there are two fundamental problems with this approach to products liability law: it does not require a “defective” product, and it fundamentally misunderstands the empirical realities of creating innovative pharmaceutical products.  

1. Products Liability Law Requires a “Defective” Product 

For nearly a century, California courts have adhered to a fundamental principle: a plaintiff alleging injury from a product must prove a defect in that product. (Kalash v. Los Angeles Ladder Co. (1934) 1 Cal.2d 229, 233). This requirement is, logically, a critical component in a products liability case. After all, how can one bring a suit for a defective product that is not actually “defective”? 

This Court has repeatedly affirmed this principle, stating that manufacturers “are liable in tort only when ‘defects’ in their products cause injury” (Soule v. General Motors Corp. (1994) 8 Cal.4th 548, 568 fn.5). The defect requirement serves as a crucial limitation on manufacturer liability, ensuring that companies are not held responsible for injuries unless their products fall below an acceptable standard of safety. 

Even Respondents do not maintain that the risks of TDF outweigh its risks, and indeed admit that it has been a hugely beneficial drug that should not be removed from the market. The safety and efficacy of highly regulated pharmaceuticals are determined in large part by the FDA in a process that takes many years, if not decades, and is more than sufficiently protective of patient safety. (See Gail A. Van Norman, Drugs, Devices, and the FDA: Part 1: An Overview of Approval Processes for Drugs, (2016), 1 JACC: Basic to Translational Science 3 , https://doi.org/10.1016/j.jacbts.2016.03.002). After a comprehensive set of testing phases, and a thorough review of relevant scientific results related to the pharmaceutical, the FDA approves a new drug application. (See Peter Grossi & Daphne O’Connor,  FDA Preemption of Conflicting State Drug Regulation and the Looming Battle Over Abortion Medications, J. L. & Biosciences,?10(1), https://doi.org/10.1093/jlb/lsad005 at 5 ?(2023)). Even after this review period, the FDA requires drug manufacturers to perform post-approval testing to ensure that the product is in fact safe and effective. (Id.) “The depth and breadth of this regulatory regime make clear that FDA’s control over pharmaceuticals is not a one-time, binary choice between approval or prohibition, but rather requires the Agency to impose nuanced regulation, which is revised on a continual basis to take account of new data.” (Id. at 6.) This last point is particularly relevant here, as the record is clear that FDA has never sought to reverse the approval of any of the TDF medicines, nor have the TDF medicines been recalled.  

The pharmaceutical industry is characterized by inherent uncertainty. Drug development is a complex, time-consuming process where the ultimate safety and efficacy of a compound cannot be reasonably known until extensive clinical trials are completed. This uncertainty is a fundamental aspect of the scientific process, not a flaw to be penalized. The FDA’s rigorous approval process is designed to navigate this uncertainty. It involves multiple phases of clinical trials, each building upon the last to establish safety and efficacy. This process can take years and cost billions of dollars, with no guarantee of success. The FDA’s role is to evaluate the totality of evidence and make informed decisions about the benefits and risks of new drugs. A product that passes through the regulatory overview of the FDA is thoroughly tested to reasonably ensure it is not “defective.” To require more is to impose an impossible standard. By contrast, the decision below is predicated on a standard that would second-guess the FDA’s careful process, designed to navigate uncertainty, with the hindsight process of jury evaluation, which is necessarily biased by the certainty of events that have actually come to pass. 

Respondents conceded that they are not claiming that TDF is defective. But, practically speaking, Respondents’ framing of their claim as one of negligent timing in bringing TAF to market rather than as a defect in TDF is an attempt to circumvent the fundamental defect requirement in products liability law through alternative pleading. While Respondents expressly disclaim any allegation that TDF was defective, their argument necessarily implies that the TDF medicines are insufficiently safe. By contending that TAF is less harmful compared to TDF, Plaintiffs inherently suggest that TDF’s risk-benefit profile was suboptimal—in other words, that it was “defective” relative to TAF. 

This argument goes directly to TDF’s core characteristics: its particular combination of efficacy and side effects. Even while acknowledging that “the benefits of TDF use for hundreds of thousands of HIV/AIDS sufferers have vastly exceeded the harm from its side effects” (Op. 32), the Court of Appeal and Respondents essentially argue that TDF was deficient because Petitioner might have provided patients with a better alternative had they accelerated TAF’s development. This is merely a recharacterization of a traditional products liability claim, attempting to achieve the same result while avoiding the required showing of defect. 

Respondents’ effort to subvert the defect requirement by recharacterizing their claim should not be countenanced by this Court.  The defect requirement is a key, longstanding element of products liability law that properly balances burdens on manufacturers with protections for patients. Accordingly, California courts have consistently required proof of defect across the spectrum of product liability cases. (See, e.g., Merrill v. Navegar, Inc. (2001) 26 Cal.4th 465; Jiminez v. Superior Court (2002) 29 Cal.4th 473, 478; Cronin v. J.B.E. Olson Corp. (1972) 8 Cal.3d 121, 133; Garrett v. Howmedica Osteonics Corp. (2013) 214 Cal.App.4th 173, 182; Artiglio v. Superior Court (1994) 22 Cal.App.4th 1388, 1393.) This requirement reflects courts’ implicit understanding that when a plaintiff sues a pharmaceutical manufacturer over injuries allegedly caused by its product, the claim fundamentally reduces to an assertion that the manufacturer, either negligently or otherwise, produced a defective drug. Allowing Respondents to bypass this requirement through creative pleading would undermine this carefully developed body of law. 

Removing the defect requirement would destabilize tort law and the pharmaceutical market in profound ways. It would expose manufacturers to potentially unlimited liability for products that are reasonably safe and defect-free. This shift would create unprecedented uncertainty in the legal landscape, making it difficult for companies to predict their liability exposure and plan their operations accordingly. 

Moreover, the defect requirement is essential to striking a balance between consumer protection and innovation. It provides a clear, objective criterion for assessing product safety while allowing manufacturers the flexibility to innovate and improve their products.  

2. The Opinion Below is Out of Phase with the Empirical Realities of Creating Innovative Pharmaceutical Products  

Respondents and the Court of Appeal placed great weight on the allegation that Petitioner’s profit motive distorted its interests in bringing innovative pharmaceuticals to market. (Op. at 2, 28). But a focus on the narrow question of profits for a particular drug misunderstands the inordinate complexity of pharmaceutical development and risks seriously impeding the rate of drug development overall. A pharmaceutical medicine is priced not only to recoup the substantial costs of its particular development, but also to account for the numerous failures and mediocre successes that make up the company’s drug development portfolio overall.  (See, e.g., F. M. Scherer, Pricing, Profits, and Technological Progress in the Pharmaceutical Industry, 7 J. Econ. Persp. 97, 113 (1993)). 

Drug companies invest massive amounts of money into research, and most of these attempts fail. What makes this huge investment worthwhile is the rare success story when they discover a drug that works better than what is currently available. When they do find such a breakthrough drug, companies are eager to get it to market as quickly as possible. Profit incentives play a large role in moving this process along.  

Indeed, Respondents’ claim on this ground is essentially self-refuting. If the “superior” product they claim was withheld for “profit” reasons was indeed superior, then Petitioner could have expected to make a superior return on that product. (See Armen A. Alchian & William R. Allen, Exchange & Production: Competition, Coordination, & Control (1983), at 292) (Noting that companies will adopt superior technologies in order to recoup greater profit opportunities). Thus, Respondents claim they were allegedly “harmed” by not having access to a product that was still many years and many millions of dollars away from commercialization, even though Petitioner had every incentive to release a potentially successful alternative as soon as possible, subject to a complex host of scientific and business considerations affecting the timing of that decision. Indeed, Petitioner explicitly considered releasing TAF if it proved to be superior to TDF because, in such a case, it expected to realize over $1 billion in additional revenue. (Petitioner’s Opening Brief at 18). That is to say, Petitioner would have had much greater gain from releasing TAF earlier if it believed it was likely to be more effective and safer and likely to make it through FDA review. Sitting on TAF, had Petitioner truly believed it to be safer and more effective, would have inexplicably left a tremendous amount of profit on the table.  

Relatedly, the Court of Appeal’s decision rests on the unfounded assumption that Petitioner “knew” TAF was safer than TDF after completing a limited Phase I and Phase II trial. This ignores the realities of the drug development process and the inherent uncertainty of obtaining FDA approval, even after promising early results. Passing Phase I trials, which typically involve a small number of healthy volunteers, is a far cry from having a marketable drug. According to the Biotechnology Innovation Organization, only 7.9% of drugs that enter Phase I trials ultimately obtain FDA approval.1 (Biotechnology Innovation Organization, Clinical Development Success Rates and Contributing Factors 2011-2020, Fig. 8b (2021), available at https://perma.cc/D7EY-P22Q.) Even after Phase II trials, which assess efficacy and side effects in a larger patient population, the success rate is only about 15.1%. (Id.) Thus, at the time Petitioner decided to pause TAF development, it faced significant uncertainty about whether TAF would ever reach the market, let alone ultimately prove safer than TDF. 

Moreover, the clock on Petitioner’s patent exclusivity for TAF was ticking throughout the development process. Patent protection for new drugs officially lasts 20 years from the filing date (FDA, Patents and Exclusivity, (May 2015), FDA/CDER SBIA CHRONICLES, https://www.fda.gov/media/92548/download) but, due to the lengthy development process and other regulatory factors, pharmaceutical companies typically enjoy only about 12 years of actual market exclusivity. (See Aaron S. Kesselheim, Determinants of Market Exclusivity for Prescription Drugs in the United States, The Commonwealth Fund, https://www.commonwealthfund.org/publications/journal-article/2017/sep/determinants-market-exclusivity-prescription-drugs-united; see also Dean G. Brown, et al., Clinical Development Times for Innovative Drugs, 21(11) Nat Rev Drug Discov. 793, 794 (2022), https://pmc.ncbi.nlm.nih.gov/articles/PMC9869766/ (Noting that the pre-release period of a pharmaceutical averages 10 years, about half the life of the statutory patent term) ). Exactly how much market exclusivity a manufacturer has for a given drug will depend in large part on how quickly it successfully navigates the regulatory process.  Had Petitioner “known” that TAF was a safer and more effective drug, it would have had every incentive to bring it to market as soon as possible to maximize the period of patent protection and the potential to recoup its investment.  The fact that Petitioner instead chose to focus on TDF strongly suggests that it did not have the level of certainty the Court of Appeal attributed to it.  

Notwithstanding popular (mis)perception, economists generally dispute that companies have an incentive to unilaterally suppress innovation for economic gain, because “it is rare to uncover cases where a worthwhile technology has been suppressed altogether.” (John J. Flynn, Antitrust Policy, Innovation Efficiencies, and the Suppression of Technology, 66 Antitrust L.J. 487, 490 (1998)). 

Calling such claims “folklore,” the economists Armen Alchian and William Allen note that, “if such a [technology] did exist, it could be made and sold at a price reflecting the value of [the new technology], a net profit to the owner.” (Alchian & Allen, supra, at 292). Indeed, “even a monopolist typically will have an incentive to adopt an unambiguously superior technology.” (Joel M. Cohen and Arthur J. Burke, An Overview of the Antitrust Analysis of Suppression of Technology, 66 Antitrust L.J. 421, 429 n. 28 (1998)). While nominal suppression of technology can occur for a multitude of commercial and technological reasons, there is scant evidence that doing so coincides with harm to consumers, except where doing so affirmatively interferes with market competition under the antitrust laws—a claim not advanced here.  

One reason the tort system is inapt for second-guessing commercial development and marketing decisions is that those decisions may be made for myriad reasons that do not map onto the specific safety concern of a products-liability action. For example, in the 1930s, AT&T abandoned the commercial development of magnetic recording “for ideological reasons. . . . Management feared that availability of recording devices would make customers less willing to use the telephone system and so undermine the concept of universal service.” (Mark Clark, Suppressing Innovation: Bell Laboratories and Magnetic Recording, 34 Tech. & Culture 516, 520-24 (1993)). One could easily imagine arguments that coupling telephones and recording devices would promote safety. For instance, a domestic abuse victim could claim that she would have had sufficient evidence to seek a restraining order against her abuser had she been able to produce recordings of harassing phone calls. And a failure of AT&T to bring to market technology it knew could be used for such beneficial purposes represented a negligent failure to market (or innovate) in line with the Court of Appeal’s holding. But the determination of whether safety or universal service (and the avoidance of privacy invasion) was a “better” basis for deciding whether to pursue the innovation is not within the ambit of tort law (nor the capability of a products-liability jury). And yet, it would necessarily become so if the Court of Appeal’s decision were to stand. 

 B. Public Policy Considerations 

Even if California law did not clearly require proof of a product defect to advance the suit in question, the weight of public policy considerations is strongly against the holding below. As this Court has observed, “[F]oreseeability alone is not sufficient to create an independent tort duty. ‘“ . . . [The] existence [of a duty] depends upon the foreseeability of the risk and a weighing of policy considerations for and against imposition of liability.”’” (Erlich v. Menezes (1999) 21 Cal.4th 543, 552.)  It is appropriate, therefore, to avoid assigning liability where the undesirable consequences of assigning liability outweigh the perceived benefits. (Cabral v. Ralphs Grocery Co. (2011) 51 Cal.4th 764, 781; see also Merrill, supra, 26 Cal.4th at 502.) Even if this Court were inclined to accept Respondents’ arguments on whether a manufacturer may be held liable for injury from a non-defective product, the downstream chilling effects on innovation of finding liability here would be disastrous to pharmaceutical development in particular, and product development in general.  

Although our purpose here is not to engage in a full discussion of the Rowland factors for analyzing a duty of care under Civil Code section 1714, (Rowland v. Christian (1968) 69 Cal.2d 108, 113-16), here, three of the factors directly bear on a main argument of this amicus brief: public policy strongly cautions against extending a capacious duty of care to pharmaceutical manufacturers contemplating alternative drug development. In particular, the aim of preventing future harm, the extent of burden to the defendant, and the consequences of the decision to the community.  (Kesner v. Superior Court (2016) 1 Cal.5th 1132, 1145). 

The Court of Appeal notes that “a duty that placed manufacturers ‘under an endless obligation to pursue ever-better new products or improvements to existing products’ would be unworkable and unwarranted,” (Op. 10), yet avers that “plaintiffs are not asking us to recognize such a duty” because “their negligence claim is premised on Gilead’s possession of such an alternative in TAF; they complain of Gilead’s knowing and intentionally withholding such a treatment….” (Id).  

From an economic standpoint, this is a distinction without a difference.  

Both a “duty to invent” and a “duty to market” what is already invented would increase the cost of bringing any innovative product to market by saddling the developer with an expected additional (and unavoidable) obligation as a function of introducing the initial product. In both cases, it disincentives investigations into developing products.2 

This Court in Brown v. Superior Court, (44 Cal. 3d 1049 (1988)), worried explicitly about the “[p]ublic policy” implications of excessive liability rules for the provision of lifesaving drugs. (Id. at 1063-65). As the Court in Brown explained, drug manufacturers “might be reluctant to undertake research programs to develop some pharmaceuticals that would prove beneficial or to distribute others that are available to be marketed, because of the fear of large adverse monetary judgments.” (Id. at 1063). The Court of Appeal agreed, noting that “the court’s decision [in Brown] was grounded in public policy concerns. Subjecting prescription drug manufacturers to strict liability for design defects, the court worried, might discourage drug development or inflate the cost of otherwise affordable drugs.” (Op. 29). 

In rejecting the relevance of the argument here, however, the Court of Appeal (very briefly) argued a) that Brown espoused only a policy against burdening pharmaceutical companies with a duty stemming from unforeseeable harms, (Op. 49-50), and b) that the relevant cost here might be “some failed or wasted efforts,” but not a reduction in safety. (Op. 51). Related, the Court of Appeal also makes the mistaken justification that the new duty will be unlikely to have negative effects, because it will be difficult to establish breach.  (Op. at 52-3).  

All of these claims are erroneous.  

On the first, the legalistic distinction between foreseeable and unforeseeable harm was not, in fact, the determinative distinction in Brown. Rather, that distinction was relevant only because it maps onto the issue of incentives. In the face of unforeseeable, and thus unavoidable, harms, the risk of liability would be so great that pharmaceutical companies would have severely diminished incentives to develop and market beneficial new drugs.  For that reason, Brown disapproved of imposing strict liability for injuries arising from prescription medicines.  As for foreseeable harms, the Court in Brown determined that incentives to innovate would be best furthered by constraining liability for pharmaceutical manufacturers to (1) negligent design defect claims; (2) manufacturing defect claims; and (3) failure to warn claims. (Brown, 44 Cal.3d at 1069 fn.12.)  To be sure, the Court wanted to ensure that the beneficial, risk-reduction effects of the tort system were not entirely removed from pharmaceutical companies. But the Court in Brown made clear that the pharmaceutical industry presents significant countervailing considerations that warranted a more limited scope of liability:  

“Perhaps a drug might be made safer if it was withheld from the market until scientific skill and knowledge advanced to the point at which additional dangerous side effects would be revealed. But in most cases such a delay in marketing new drugs — added to the delay required to obtain approval for release of the product from the Food and Drug Administration — would not serve the public welfare. Public policy favors the development and marketing of beneficial new drugs, even though some risks, perhaps serious ones, might accompany their introduction, because drugs can save lives and reduce pain and suffering.” (Id. at 1063). 

That same calculus applies here, and it is this consideration, not a superficial question of foreseeability, that animated the Court in Brown. 

On the second, the Court of Appeal inexplicably fails to acknowledge that the true cost of the imposition of excessive liability risk from a “duty to market” (or “duty to innovate”) is not limited to the expenditure of wasted resources, but the non-expenditure of any resources. The court’s contention appears to contemplate that such a duty would not remove a firm’s incentive to innovate entirely, although it might deter it slightly by increasing its expected cost. But economic incentives operate at the margin. Even if there remains some profit incentive to continue to innovate, the imposition of liability risk simply for the act of doing so would necessarily reduce the amount of innovation (in some cases, and especially for some smaller companies less able to bear the additional cost, to the point of deterring innovation entirely). But even this reduction in incentive is a harm. The fact that some innovation may still occur despite the imposition of considerable liability risk is not a defense of the imposition of that risk; rather, it is a reason to question its desirability, exactly as this Court did in Brown.   

This fact is particularly relevant in light of the public policy of California to not extend a duty of care where the costs of imposing a duty outstrip the benefits and where the consequences to the community would be detrimental. (Cabral, supra, 51 Cal.4th at p. 781-82). In considering this point the Court of Appeal assumed away the impacts of judicial second guessing on the incentives to innovate in the pharmaceutical industry, in part by crediting Respondents’ argument that drug makers have an incentive to forego larger profits on potential blockbuster drugs by extending the patent term on inferior medicines. (Op. 49-50). But, as noted above, there is no serious evidence that suggests that firms forego greater profit opportunities when a superior product is available.  (Alchian & Allen, supra, at 292). Because there is no harm to be mitigated by the new duty, all it does is disincentivize innovation, resulting in net negative policy consequences 

1. The Court of Appeal’s Decision Would Create Perverse Incentives that Stifle Pharmaceutical Innovation 

Innovation is a long-term, iterative process fraught with uncertainty. During the research and development process, it is impossible to know whether a potential new drug will ultimately prove superior to existing drugs. Most attempts at innovation fail to yield a marketable product, let alone one that is safer or more effective than its predecessors. Deciding whether to pursue a particular line of research depends on weighing myriad factors, including the anticipated benefits of the new drug, the time and expense required to develop it, and its financial viability relative to existing products. Sometimes, potentially promising drug candidates are not pursued fully, even if theoretically “better” than existing drugs to some degree, because the expected benefits are not sufficient to justify the substantial costs and risks of development and commercialization. And all of this occurs against the backdrop of the clock running down on the length of available patent protection.   

If left to stand, the Court of Appeal’s decision would mean that whenever this stage of development is reached for a drug that may offer any safety improvement, the manufacturer will face potential liability for failing to bring that drug to market, regardless of the costs and risks involved in its development or the extent of the potential benefit. Such a rule would have severe unintended consequences that would stifle innovation. 

First, by exposing manufacturers to liability on the basis of early-stage research that has not yet established a drug candidate’s safety and efficacy, the Court of Appeal’s rule would deter manufacturers from pursuing innovations in the first place. Drug research involves constant iteration, with most efforts failing and the potential benefits of success highly uncertain until late in the process. If any improvement, no matter how small or tentative, could trigger liability for failing to develop the new drug, manufacturers will be deterred from trying to innovate at all. 

Second, such a rule would force manufacturers to direct scarce resources to developing and commercializing drugs that offer only small or incremental benefits because failing to do so would invite litigation. This would necessarily divert funds away from research into other potential drugs that could yield greater advancements. Further, as each small improvement is made, it reduces the relative potential benefit from, and therefore the incentive to undertake, further improvements. Rather than promoting innovation, the Court of Appeal’s decision would create incentives that favor small, incremental changes over larger, riskier leaps with the greatest potential to significantly advance patient welfare. 

Third, and conversely, the Court of Appeal’s decision would set an unrealistic and dangerous standard of perfection for drug development. Requiring pharmaceutical companies to market only the theoretically “safest” version of a drug would create an impossible standard, as it would force them to exhaustively test every potential alternative compound before release. This would not only drastically delay patient access to effective treatments, but it also ignores the reality that drug safety varies from person to person. Instead, companies should be permitted to market drugs that meet established safety thresholds, even if safer versions might hypothetically be developed in the future. 

Fourth, the threat of liability would lead to inefficient and costly distortions in how businesses organize their research and development efforts. To minimize the risk of liability, manufacturers may avoid integrating ongoing research into existing product lines, instead keeping the processes separate unless and until a potential new technology is developed that offers benefits so substantial as to clearly warrant the costs and liability exposure of its development in the context of an existing drug line. Such an incentive would prevent potentially beneficial innovations from being pursued and would increase the costs of drug development. 

Finally, the ruling would create perverse incentives that could actually discourage drug companies from developing and introducing safer alternative drugs. If bringing a safer drug to market later could be used as evidence that the first-generation drug was not safe enough, companies may choose not to invest in developing improved versions at all in order to avoid exposing themselves to liability. This would, of course, directly undermine the goal of increasing drug safety overall. 

2. The Court of Appeal’s Decision Would Delay Initial Drug Releases 

The Court of Appeal’s ruling would create an additional, potentially deadly consequence: delaying the initial release of life-saving medications. Pharmaceutical companies often discover multiple promising formulations simultaneously during drug development. Under the Court of Appeal’s new liability framework, when a company identifies multiple potential formulations, it would face strong incentives to delay releasing any formulation until all variants complete FDA trials. This is because once a company has knowledge of multiple formulations, it could face liability for releasing anything but the safest version—even if that “safest” version is years away from FDA approval. 

The HIV treatment context illustrates the potentially devastating human cost of such delays. When Petitioner initially brought TDF to market, it had already identified TAF as another promising formulation. Under the Court of Appeal’s ruling, Petitioner would have faced pressure to delay releasing TDF until TAF completed FDA trials to avoid potential liability. This would have meant years of delay before any effective HIV treatment reached patients. 

The empirical evidence suggests such delays would have had devastating consequences. Before TDF’s introduction, HIV mortality rates were significantly higher.  For example, World Health Organization data shows the U.S. HIV mortality rate standing at 5.38 per 100,000 people in 2000, the year before TDF was introduced. In 2021, that rate had fallen to 1.51 per 100,000.?(Death rate from HIV/AIDS, Our World In Data, available at https://ourworldindata.org/grapher/death-rate-from-hivaids-who?tab=table (last visited Nov. 4, 2024) ). A 2017 report detailed the importance of the introduction to TDF in combatting AIDS, noting that it “showed superior viral load suppression and tolerability as compared to [other ART regimens].” (Tegene Legese Dadi, et al., Efficacy and Tolerability of Tenofovir Disoproxil Fumarate Based Regimen as Compared to Zidovudine Based Regimens: A Systematic Review and Meta-Analysis, AIDS Research and Treatment (2017), https://doi.org/10.1155/2017/5792925). 

By bringing TDF to market when it did, rather than waiting for TAF’s development, Petitioner provided earlier access to life-saving treatment for HIV patients. The Court of Appeal’s ruling would create incentives that work against such prompt deployment of beneficial treatments. For patients suffering from life-threatening conditions, such delays could prove fatal. This Court should not adopt a rule that would incentivize pharmaceutical companies to withhold beneficial treatments while pursuing perfect ones. 

3. The Court of Appeal Assumed a Very Superficial Level of Evidence Was Required for a Manufacturer to “Know” that a Drug Candidate is Superior 

The Court of Appeal gave insufficient consideration to these severe policy consequences of the duty it recognized. Indeed, the Court of Appeal came very close to understanding these public policy arguments but ultimately missed them when it noted that “[b]ecause plaintiffs assert that Gilead knew TAF was safer than TDF, we also conduct the Rowland analysis under the assumption that the drug manufacturer knows that the alternative drug is safer than (and at least as effective as) the current drug.” (Op. 39.) (emphasis added). One more step of analysis reveals how unworkable this superficially reasonable statement becomes. What does it mean to “know” that a drug is at least as effective and has less side effects than a current medicine that has been through rigorous testing and FDA approval and is actually a known quantity? When looking at its drug development pipeline, the most that could be said is that Petitioner hoped that TAF would ultimately be a more successful drug, but that given TAF’s equivocal early testing results, the long approval process, and the need for much more extensive testing there was no way it could know such information.  

The Court of Appeal merely glosses over this epistemic uncertainty and asserts there would not be net harm to the community because the duty it created “does not apply generally to “improved” products, but only to products that the manufacturer knows will avoid significant side effects of a manufacturer’s existing product.” (Op. 52) (emphasis added). Again, the Court of Appeal assumes away the fact that demonstrating what a manufacturer knows with a relatively undeveloped product in comparison to one that is ready to market is an extremely complicated question. Every alternative drug of any promise will be able to form the basis of expensive litigation that distracts drug makers away from the task of discovering, testing, and marketing pharmaceuticals. This is why the extensive process the FDA oversees is so critical in this context. In an imperfect world of uncertainty, it gives us a pathway upon which to depend that pharmaceuticals will be net beneficial. The notion that a jury without any expert training and operating with hindsight bias could determine that a manufacturer knew (or even “should have known”) that a developmental drug was safer than an existing one is absurd. Second guessing that process will only chill incentives for research and development.  

Indeed, as Petitioner notes in its brief, the undisputed facts around drug development demonstrate that “knowing” a drug is safer and more effective is extraordinarily difficult to determine, particularly early on in the process. (Petitioner’s Opening Brief at 60-61) (Noting the exorbitant cost of developing drugs, the high failure rate of drug candidates overall, and the high failure rate of drugs that make it to Phase III clinical trials). In short, in a legal and economic sense, to “know” something about the efficacy and safety of a drug candidate is only possible once the regulatory process is all-but-completed before the FDA—and potentially not until after FDA approval, once there have been large-scale head-to-head comparative studies. The Court of Appeal’s position on Petitioner’s “knowing” that TAF was safer or more effective puts drug developers in a bind. On the one hand the Court of Appeal wants the law to presume some hidden knowledge with which to create a binding obligation on drug developers. But on the other, the FDA itself treats claims about safety and efficacy of unapproved drugs as false or misleading advertisements. (21 U.S.C. §§ 331, 352; 21 C.F.R. § 202.1(e)(6)(i)-(ii), (xvi)). Petitioner is eminently reasonable in pointing to the necessity of completing Phase III and head-to-head clinical trials before we can say there is anything approaching “knowing” that a drug is superior.   

And this is the very core of problem: The Court of Appeal believes that courts and attorneys can more readily second guess the expensive and uncertain drug R&D process. The Court of Appeal expects that this second-guessing will not end up with pharmaceutical firms becoming much more conservative in exactly how much they put into researching new treatments. This completely misunderstands the drug development process. In short, a manufacturer’s decision when to bring a potentially safer and more effective drug to market involves complex trade-offs that courts and juries are ill-equipped to second-guess—particularly in the limited context of a products liability determination. 

III. CONCLUSION 

The Court of Appeal’s novel duty to develop and market any potentially less-harmful alternative to an existing non-defective product would deter innovation to the detriment of consumers. The Court of Appeal failed to adequately consider how its decision would distort incentives in a way that harms the very patients the tort system is meant to protect. This Court should reverse the Court of Appeal’s decision to prevent this unprecedented expansion of tort liability from distorting manufacturers’ incentives to develop new and better products  

Executive Summary

We thank the Japan Fair Trade Commission (JFTC) for this invitation to comment (ITC) on Generative AI and Competition.[1] The International Center for Law & Economics (ICLE) is a nonprofit, nonpartisan global research and policy center founded with the goal of building the intellectual foundations for sensible, economically grounded policy. ICLE promotes the use of law & economics methodologies to inform public-policy debates and has longstanding expertise in the evaluation of competition law and policy. ICLE’s interest is to ensure that competition law remains grounded in clear rules, established precedent, a record of evidence, and sound economic analysis.

The JFTC recently published a discussion paper on “Generative AI and Competition” (“Discussion Paper”)[2] that identifies potential competition issues and asks specific questions for each of them. Those issues are, mainly, connected to potential foreclosure of “essential” inputs for Generative AI production: semiconductors (GPU’s), data, and talent. According to the Discussion Paper, so-called “big tech” companies may have the incentives and ability to foreclose those inputs. The Discussion Papers also refers to possible collusive behavior using Generative AI and the “cornering” of highly skilled talent via partnerships.

In these comments, we express the view that, in general, policymakers’ current concerns about competition in AI industries, including “Generative AI”, may be unwarranted. This is particularly true of the notions that data-network effects shield incumbents in AI markets from competition; that Web 2.0’s most successful platforms will be able to leverage their competitive positions to dominate generative-AI markets; that these same platforms may use strategic partnerships with AI firms to insulate themselves from competition; and that generative-AI services occupy narrow markets that leave firms with significant market power.

In fact, we are still far from understanding the boundaries of antitrust-relevant markets in AI. There are three main things that need to be at the forefront of competition authorities’ minds when they think about market definition in AI products and services. First, understand that the “AI market” is not unitary, but is instead composed of many distinct goods and services. Second, and relatedly, look beyond the AI marketing hype to see how this extremely heterogeneous products landscape intersects with an equally variegated consumer-demand landscape.

In other words: AI products and services may, in many instances, be substitutable for non-AI products, which would mean that, for the purposes of antitrust law, AI and non-AI products contend in the same relevant market. Getting this relevant product-market definition right is important in antitrust because wrong market definitions could lead to wrong inferences about market power. While either an overly broad or overly narrow market definition could lead to both over and underenforcement, we believe the former currently represents the bigger threat.

Third, overenforcement in the field of generative AI could paradoxically engender the very harms that policymakers are seeking to avert. As we explain in greater detail below, preventing so-called “big tech” firms from competing in AI markets (for example, by threatening competition intervention whenever they forge strategic relationships with AI startups, launch their own generative-AI services, or embed such services in their existing platforms) may thwart an important source of competition and continued innovation. In short, competition in AI markets is important,[3] but trying naïvely to hold incumbent (in adjacent markets) tech firms back, out of misguided fears they will come to dominate the AI space, is likely to do more harm than good. It is essential to acknowledge how little we know about these nascent markets and that the most important priority at the moment is simply to ask the right questions that will lead to sound competition policy.

The comments proceed as follows. Section I debunks the notion that incumbent tech platforms can use their allegedly superior datasets to overthrow competitors in markets for generative AI. Section II deals with the risks of possible input foreclosure related to computing power, or GPUs. Section III discusses how policymakers should approach Merger Policy in AI, and specifically, strategic partnerships among tech incumbents and AI startups, including the possible “cornering of specialized talent”. Section IV outlines some of the challenges to defining relevant product markets in AI, and suggests how enforcers could navigate the perils of market definition in the nascent, fast-moving world of AI.

Download English-language comments here.

Download Japanese-language comments here.

[1] Press Release, Requests for Information and Comments Concerning Generative AI and Competition, Japan Fair Trade Commission (Oct. 2, 2024), https://www.jftc.go.jp/en/pressreleases/yearly-2024/October/1002.html.

[2] Japan Fair Trade Commission, Generative AI and Competition (Discussion Paper) (Oct., 2024), https://www.jftc.go.jp/file/241002DiscussionPaperEN.pdf.

[3] Artificial intelligence is, of course, not a market (at least not a relevant antitrust market). Within the realm of what is called “AI,” companies offer myriad products and services, and specific relevant markets would need to be defined before assessing harm to competition in specific cases.

Foreword^*

Martin Cullip and Roger Bate’s thoughtful and important piece provides compelling arguments about whether the World Health Organization (WHO) can be trusted with a pandemic treaty. I compliment their work by going beyond trust to highlight several realities that make a future effective pandemic treaty unlikely to be delivered.

Since its founding, there has been a tension between WHO addressing national needs with direct impact, and the development of international norms and standards. Two of the best examples of each from past eras are the eradication of smallpox and the adoption of the WHO Framework Convention on Tobacco Control. Their attainment led WHO to pursue polio eradication and development of a pandemic treaty. I highlight several macro realities that made the FCTC possible and several weaknesses of the FCTC process that hint at future failure of a pandemic treaty.

Polio eradication is slipping away; the initial completion date was 2000. The costs have exceeded $18 billion, with almost $5 billion required by 2026. This has made polio eradication the single costliest program in WHO history, by far. Failed eradication would be a global-health catastrophe. If WHO is unable to mobilize support and show leadership on polio, it is very unlikely it will succeed in other areas demanding more complex global partnerships.

A. Lessons from the FCTC

1. Macro realities

Geopolitics was “simpler” and more predictable during the period of negotiations (1998-2003) than today. Members of the United Nations Security Council rarely used vetoes. The G20 was starting to emerge as a political force. The political entity known as BRICS (Brazil, Russia, India, China, South Africa) had not yet formed. This all made multilateral negotiations easier than the fraught geopolitical reality we have today.

Global health was on the ascendency across the board, driven by the urgency to address HIV/AIDS. There was an exceptional alignment between the U.S. presidency, the World Bank, and WHO, as Director-General Gro Harlem Brundtland was highly respected as a political leader and as head of WHO. She drew on her leadership position to “encourage” political leaders to take the FCTC seriously. Optimism for progress in global health was also propelled by the creation of the Bill and Melinda Gates Foundation. Funding was not an impediment to progress.

Today, WHO’s budget is under pressure from two sides: greater support for humanitarian issues and a shift by many leading countries away from supporting multilateral organizations. There is no political traction for additional funding requests for a new treaty. Enthusiasm for international norms in an era of “enlightened self-interest” led to development of the environmental treaties that form the basis of climate-change efforts. The FCTC capitalized on this. That era, however, has passed.

2. FCTC specifics that point to pandemic-treaty impediments

Member states and WHO ignored innovation, patent ownership, and technological progress during FCTC negotiations, despite intense debates on these topics at World Trade Organization regarding access to AIDS treatments. WHO leadership never anticipated the development of harm-reduction products (THR) by the tobacco industry. Any pandemic treaty will similarly require deep WHO expertise in new areas of innovation that straddle biosciences, digital and AI developments, and their applications in lower-middle-income countries (LMICs).

The FCTC has failed to address equity issues related to basic financial support and national science capacity in LMICs. The anti-THR philanthropist and former New York City Mayor Michael Bloomberg has been able to “capture” WHO policy by stepping into this vacuum with his views unopposed. This equity failure is being reflected in the pandemic treaty negotiations and may well be a future treaty dealbreaker.

WHO had an explicit policy aimed at demonizing the tobacco industry and has expanded this through their “commercial determinants” work to include pharmaceutical and other sectors. This undermines the need for complex discussions required to address policies that improve access to medications, vaccines, and diagnostics so critical to any successful future pandemic treaty.

During the FCTC negotiations, WHO had strong senior leadership, highly competent international legal expertise on tap, the support of nonprofits committed to push governments to act for better health, and the support of the UN system. It is unclear which of these needed elements are in place today to ensure rapid development of a pandemic treaty.

3.  One final comment

The International Health Regulations were recently strengthened following the COVID-19 pandemic. Many countries and experts rightfully ask whether a weak and ineffective pandemic treaty is really needed, given the harsh realities of costs, the risks of watered-down text, and growing antagonism between negotiating parties.

Executive Summary

The World Health Organization (WHO) was formed after World War II to reduce disease and generally improve global public health. Early successes came from “vertical programs” that addressed specific diseases, such as malaria, yaws, leprosy, and smallpox. From 1979, WHO switched focus to help nations build domestic health systems, but for myriad reasons, this approach failed, and donor fatigue set in.

Beginning in 1998, under the leadership of Gro Harlem Brundtland, the WHO shifted focus again, developing new programs to address noncommunicable diseases. A signature program from this era was the Tobacco Free Initiative, under the auspices of which the WHO established its only global treaty, the Framework Convention on Tobacco Control (FCTC).

The FCTC’s primary aim was to lower the burden of disease from smoking, the largest preventable cause of death worldwide. But a combination of ideological opposition to tobacco consumption in any form and pressure from vested interests has led the FCTC to oppose technologies used by tens of millions of smokers to help them quit, such as snus and e-cigarettes, even though these technologies are far less harmful than smoking. By spreading misinformation and promoting prohibition and excessive regulation of harm-reducing technologies, the FCTC is now likely having the opposite effect to its stated intention of reducing smoking.

During the COVID-19 pandemic, the WHO followed a similar pattern, impeding the open sharing of information and promoting harmful interventions, including lockdowns. It ignored evidence from nations such as Sweden that did not follow lockdowns and other mandates, and joined in attacks on scientists who sought the truth. It also conspired with former Chief Medical Advisor to the President of United States Anthony Fauci and others to hide the true origins of COVID.

Yet despite its failings and its baroque (if not opaque) funding, the WHO is now pushing for an even greater say in how society should combat future pandemics. Specifically, it is attempting to push through a new pandemic treaty by the end of 2024. Society needs a vaccine to protect it from this sort of misbehavior.

I. What Is the WHO For?

The United Nations’ (UN) World Health Organization (WHO) has a unique role to play in fostering better global health by coordinating action among member nations. It could, for example, facilitate the sharing of information on dangerous, rapidly transmitted infectious diseases, such as avian flu, severe acute respiratory syndrome (SARS), Ebola, and COVID-19. It could also call attention to global health problems and help to establish standards to address those problems.[1]

In practice, while the WHO has attempted to perform these roles and has sometimes been successful, it has also often fallen short. In part, its failures have been a result of mission creep. In greater part, they have been the result of the short-run priorities of funders, who increasingly are not nation-states but unaccountable—if well-meaning—non-governmental organizations (NGOs).

This chapter traces the development of the WHO, with its initial focus on “vertical” health-care interventions, the shift in focus to primary health care following the Alma Ata Declaration in 1978, and the subsequent growing focus on special programs and reliance on voluntary contributions.

A. The WHO’s Constitution and Early Operation

The WHO’s Constitution defines its objective as, “the attainment by all peoples of the highest possible level of health.”[2] This is to be achieved by undertaking “all necessary action to attain the objective of the Organization,” including “to propose conventions, agreements and regulations, and make recommendations with respect to international health matters and to perform such duties as may be assigned thereby to the Organization and are consistent with its objective.”

Broad oversight of the WHO was granted to the World Health Assembly (WHA), a gathering of representatives of UN member nations that takes place each May in Geneva. The WHA decides budgetary and other matters. Meanwhile, management of the WHO was placed in the hands of a permanent secretariat based in Geneva.

1. The vertical model of health-care delivery

Initially, the WHO’s focus was on combatting infectious diseases and, for its first 30 years of existence and with varying degrees of success, it assisted in combatting leprosy, yaws, onchocerciasis, malaria, tuberculosis, and smallpox. The WHO’s modus operandi during this period has been described as a “vertical model” of health-care delivery, wherein doctors and nurses from relatively wealthy countries travelled to poor countries to vaccinate or treat specific diseases.[3]

Originally, the WHO was funded by core donations from nation states and allocated resources based on disease burden and country requests. But in the 1970s, the WHO began to develop “special programs” that would attract specific funding from donors. The first of these was the Special Programme of Research, Development and Research Training in Human Reproduction, established in 1972, which was essentially a population-control program.[4] This was followed in 1974 by the Special Programme for Immunization (a vertical program for immunizations) and, in 1975, by the Special Programme for Research and Training in Tropical Diseases (a multi-agency program to improve understanding of “tropical diseases” and their treatment).[5]

2. The failed shift to primary health care

By the late 1970s, vertical programs had become unpopular, especially among the political elites in poorer countries, who wanted a greater say in how WHO budgets were spent and, specifically, that a greater proportion should be spent on their health-care systems. This led to the Alma Ata Declaration of December 1977, which called on governments to spend fewer resources on armaments and more on health care in order to achieve “an acceptable level of health for all the people of the world by the year 2000.” This more “horizontal” approach became the core construct of the WHO’s Health for All Initiative.

Unsurprisingly, this attempt to fund the health-care systems of poorer countries through a central global system run by WHO was not a resounding success. By the late 1980s, it had become apparent that Health for All was not delivering health care to all, and public-health experts were beginning to argue for a return to the vertical model.[6] In 1987 and 1988, the WHO established two new special programs:

• The Global Programme on AIDS (1987), which was established to coordinate the global response to the AIDS crisis (replaced in 1996 by UNAIDS).[7]
• The Polio Eradication Initiative (1988), launched in collaboration with Rotary International.[8]

Since then, WHO special programs have gradually grown in importance, such that they now comprise the vast majority of the WHO’s funding and expenditure. [9] In 2022-23, only about 13% of WHO’s total budget of $7.8 billion came from assessed contributions.[10] The remaining $6.8 billion, or 87%, came from “voluntary contributions,” often given to support special programs.

The four largest contributors—responsible for a combined 45% of WHO funding—were the United States (15.6%), the Gates Foundation (12.7%), Germany (11%), and the Global Alliance for Vaccines (7.4%). Nearly 8% is provided by other intergovernmental organizations, such as the World Bank and the United Nations Children’s Fund (UNICEF). And roughly 30% is provided in small amounts (under 1% each) by other corporations, NGOs, and dozens of nations.

Former WHO scientist David Bell describes how this funding model distorts the organization’s priorities:

The WHO is an organization that receives roughly a quarter of its funding from the pharmaceutical industry and major pharmaceutical investors. These same sponsors have profited greatly from the Covid-19 response and are strongly aligned with the WHO’s current pandemic preparation and response proposals. The largest country-based funders are the USA and Germany, also heavily invested in Pharma. German public money backed BioNtech, the developer of the Pfizer mRNA Covid vaccine.

Most of the WHO’s funding is ‘specified,’ meaning that it does what the funder specifies. The WHO has now become a tool of vested interests for much of its work. Approximately 75% of its total funding works this way. This is a completely different type of organization than the WHO of 75 years ago. When originally set up, its budget was based on ‘core’ funding from countries, and the WHO decided its priorities based on disease burden and country requests.[11]

This increasingly heavy reliance on voluntary contributions has undermined the WHO’s financial independence. Speaking last year, WHO Collaborating Center on National and Global Health Director Lawrence Gostin noted that “[c]urrently, WHO has full control over only about a quarter of its budget.”[12] Significantly, Gostin observed that “WHO therefore can’t set the global health agenda and has had to do the bidding of rich donors, not only rich nations in Europe and North America, but also rich philanthropies such as the Gates Foundation.”

Gostin’s remarks raise important questions and cast doubt on whether the WHO is setting global health priorities, rather than decisions being guided in the interests of private agendas, especially considering some of the WHO’s recent activities.

II. NCDs and the FCTC

During her stint as director general of the WHO from 1998 to 2003, former Norwegian Prime Minister Gro Harlem Brundtland re-energized the organization. An enthusiastic proponent of special programs, Brundtland oversaw the establishment of the Roll Back Malaria partnership; the Global Alliance on Vaccines; and the Global Strategy for Non-Communicable Diseases (NCDs).[13] She also oversaw the development of the WHO’s first (and, for now, only) treaty, the Framework Convention on Tobacco Control (FCTC).

A. The WHO’s Work on NCDs and Tobacco

The WHO had a long history of work on noncommunicable diseases (NCDs), with work coordinating research into NCDs such as cancer starting in the 1970s.[14] It also played a leading role in defining addiction to tobacco as a disease.[15] Indeed, it had long advocated for the view that, since tobacco consumption is inherently addictive, tobacco consumption itself is a disease and widespread tobacco consumption is thus an epidemic.[16] As discussed below, while its intentions were honorable, by framing the genuine problems associated with tobacco consumption in this monochromatic way, the WHO effectively painted itself into a policy corner from which it has not been easily extracted.

B. Origins of the FCTC

While the FCTC can be traced back to these earlier efforts, work really got going in 1999 when Brundtland established the Tobacco Free Initiative (TFI) and appointed as its head Derek Yach, a South African public-health expert and early advocate for international collaboration to tackle tobacco use.

Following a 1999 WHA resolution, the TFI coordinated negotiations among the WHO’s 193 member governments. This work resulted in a draft treaty presented to and unanimously adopted by the WHA in May 2003.[17] The FCTC formally entered into force Feb. 27, 2005, making it the world’s first health treaty and the WHO’s only international treaty to date.[18]

C. The FCTC’s Purpose and Modus Operandi

The objective of the FCTC, as set out in Article 3:

… is to protect present and future generations from the devastating health, social, environmental and economic consequences of tobacco consumption and exposure to tobacco smoke by providing a framework for tobacco control measures to be implemented by the Parties at the national, regional and international levels in order to reduce continually and substantially the prevalence of tobacco use and exposure to tobacco smoke.[19]

Meanwhile, by “tobacco control” it means:

a range of supply, demand and harm reduction strategies that aim to improve the health of a population by eliminating or reducing their consumption of tobacco products and exposure to tobacco smoke.[20]

Administration of the treaty is overseen via biennial Conferences of the Parties (COPs) and a permanent convention secretariat, who is assisted by the FCTC Bureau.[21]

D. Implementation and Effectiveness of the FCTC

The treaty was rapidly ratified by the vast majority of WHO member states.[22] There are currently 183 member-state parties to the treaty, with only 14 nonparties.[23] The United States notably remains a nonparty, in that it has signed but not ratified the treaty.

While there is some evidence that the FCTC helped to drive implementation of certain tobacco-control policies in member states, it is difficult to quantify what practical effect these have had, or how much, if any, reduction in smoking and other harmful tobacco use can be directly attributable to the FCTC.[24] When the FCTC went into effect in 2005, there were 1.1 billion tobacco users in the world; there are now 1.25 billion.[25]

A 2019 British Medical Journal study from a team led by Steven Hoffman, then at Harvard University’s School of Public Health, found “no evidence to indicate that global progress in reducing cigarette consumption has been accelerated by the FCTC treaty mechanism.”[26] In 2022, two former senior WHO officials wrote an op-ed in The Lancet arguing that “globally, the overall number of tobacco users has barely changed,” and that “The FCTC is no longer fit for purpose, especially for low-income countries.”[27] In January 2024, a panel of 15 international experts analyzed the Global Progress Report the WHO had released ahead of the 10th FCTC Conference of the Parties (COP10) and declared the treaty, “an abject failure.”[28]

E. What Went Wrong?

Given the broad enthusiasm among public-health advocates for establishing the FCTC, and the common belief that it would help dramatically reduce the burden of disease from tobacco consumption, it seems reasonable to ask: what went wrong?

A significant part of the problem can be traced to the initial conceptualization of the problem as related to tobacco consumption per se, rather than harmful tobacco use (i.e., primarily smoking, but also some harmful forms of smokeless tobacco). This has led the FCTC secretariat and its allies to attempt to eliminate all tobacco use, regardless of harm. This is perplexing, not least because, by 2003, studies had already established that lower-risk tobacco products were contributing to dramatic reductions in smoking.[29]

1.  Snus and the tobacco-harm-reduction revolution

Snus is a form of oral tobacco that is pasteurized and kept refrigerated, thereby dramatically reducing levels of harmful chemicals relative to most other forms of oral tobacco.^[1] In 2002, the Journal of Internal Medicine published a study that evaluated data on rates of smoking and snus use among men and women in Northern Sweden, derived from a series of WHO surveys, which found:

Amongst men ever-tobacco use was stable in all survey years at about 65%, but the prevalence of smoking declined from 23% in 1986 to 14% in 1999, whilst snus use increased from 22% to 30%. In women the prevalence of smoking was more stable in the first three surveys (approximately 27%) but was 22% in 1999, when snus use was 6%. In all years men showed higher prevalence of ex-smoking than women. A dominant factor was a history of snus (PR = 6.18, CI = 4.96-7.70), which was more prevalent at younger ages.[30]

The following year (2003), Tobacco Control published a study led by Jonathan Foulds, then at the Tobacco Dependence Institute of the University of Medicine and Dentistry of New Jersey, and three coauthors. The researchers reviewed the effect of snus use in Sweden and concluded that:

Snus …is dependence forming, but does not appear to cause cancer or respiratory diseases. It may cause a slight increase in cardiovascular risks and is likely to be harmful to the unborn fetus, although these risks are lower than those caused by smoking.[31]

Moreover, Foulds et al. noted that, as a result of increased use of snus in Sweden:

There has been a larger drop in male daily smoking (from 40% in 1976 to 15% in 2002) than female daily smoking (34% in 1976 to 20% in 2002) in Sweden, with a substantial proportion (around 30%) of male ex-smokers using snus when quitting smoking. Over the same time period, rates of lung cancer and myocardial infarction have dropped significantly faster among Swedish men than women and remain at low levels as compared with other developed countries with a long history of tobacco use.][32]

2.  WHO and the precautionary principle

While the WHO has been strongly supportive of harm reduction in other contexts—e.g., advocating methadone substitution and the use of condoms to reduce HIV transmission—it has been far less supportive of tobacco harm reduction.^[33] Indeed, over the course of the past two decades it has consistently opposed THR through its publications, advocacy work, and policies. For example:

• In 2006, the WHO released a document titled “Tobacco: Deadly in Any Form or Disguise,” which as the title implies failed to differentiate among the harms of different tobacco products.^[34]
• In 2012, the secretariat of the FCTC published a report on smokeless tobacco in which it raised concerns that snus could be a gateway to smoking, even though the evidence showed the exact opposite effect.[35]

More generally, the WHO has applied a version of the precautionary principle to THR, asserting in “Tobacco: Deadly in Any Form or Disguise”:

For new products and for those under development, additional research is needed to understand more precisely whether their risks are the same as the products they would replace. Such research will take years, or even decades. Until such research is completed, the most prudent course is to assume that their health risks are extraordinarily high compared with any ordinary consumer product and to make every effort to prevent their use along with all other tobacco products.[36]

Given that decades of data were already available on the effects of snus by the time of the document’s publication, one wonders if any amount of data would ever be sufficient to persuade the WHO of the merits of harm-reduction products. The WHO has also applied this same approach to vape products. For example, the organization tweeted in 2013 that: “Until e-cigarettes are deemed safe, approved by competent national regulatory body, consumers should be strongly advised not to use them.”[37]

Two years later, in 2015, Public Health England—the body then empowered to advise the UK National Health Service on matters relating to public health—published an extensive report on e-cigarettes that concluded “the current best estimate” is that vaping is “around 95% safer than smoking.”[38] Similar reports have been produced by numerous other organizations, and Public Health England and its successor body has frequently updated its analysis, always coming to similar conclusions.[39] Thus, e-cigarettes have repeatedly been deemed safe and approved by a competent national regulatory body. And yet, in a section of its website devoted to e-cigarettes, the WHO answers the question, “Are e-cigarettes more or less dangerous than conventional tobacco cigarettes?”[40] with the following mealy-mouthed assertions:

Both tobacco products and ENDS pose risks to health. The safest approach is not to use either.

The levels of risk associated with using ENDS or tobacco products are likely to depend on a range of factors, some relating to the products used and some to the individual user. Factors include product type and characteristics, how the products are used, including frequency of use, how the products are manufactured, who is using the product, user behaviour – user’s puffing style – and whether product characteristics are manipulated post-sale.[41]

Indeed, the WHO remains steadfastly opposed to smokers switching to these products and congratulates[42] countries[43] that choose to ban them.[44]

More generally, since commercially viable low-risk nicotine-containing alternatives to combustible tobacco emerged as a viable route for smokers to quit, the WHO has worked hard to dismiss their potential benefits and criticize countries that allow them to be sold. FCTC reports suppress the scientific evidence on such products by ensuring that only opposing views are represented in official documents considered for the COP. Emblematic of this tendency is the latest WHO Study Group on Tobacco Product Regulation (TobReg) report,[45] which recommends that all alternatives be treated in the same manner as cigarettes and excludes any reference to these products’ harm-reduction potential.

In December 2023, the WHO issued a bizarre press release that attempted to gaslight governments into banning vaping products (but not cigarettes) by peddling demonstrably false claims about their use.[46] The technical note to which the WHO referred contained heroic cherry-picking of research, including claims that “e-cigarettes are harmful,” which failed to recognize that vapor products are orders of magnitude less harmful than combustible tobacco.[47]

The WHO also claims that “electronic cigarettes as actually used in the population as consumer products have not been proven to be effective for cessation at the population level,” which is simply untrue. But the Cochrane Review, considered the gold standard in systematic reviews of evidence, “found the strongest evidence yet that e-cigarettes, also known as ‘vapes’, help people to quit smoking better than traditional nicotine replacement therapies, such as patches and chewing gums.”[48]

Perhaps the most extreme example of this anti-THR campaign came in the form of a June 2024 WHO post on X.com asserting that e-cigarettes are “designed to kill.”[49] And this was not the first time the WHO had made bizarre false assertions about e-cigarettes. In January 2020, even as COVID-19 cases began to appear around the world, the WHO spent its time publishing a thread of 14 tweets about the dangers of vaping.[50] The many blatant falsehoods in that thread included claims that e-cigarette liquid is highly flammable (it is non-flammable) and that second-hand vapor is lethal to bystanders (there is no evidence that it is at all harmful to users, let alone others).

F. Hostage to Fortune

This opposition to THR can be traced to the WHO’s initial conceptualization of the problem—namely, that tobacco use is addictive and hence a disease in itself, which can only be cured through the elimination of tobacco use. But that overly simplistic view might have been open to change had it not been reinforced by three other agents: “civil society,” vested interests, and outside donors.

1. Uncivil society

Common conceptions of “civil society” usually include the broad swath of organizations and individuals who create the invisible glue that underpins societies’ institutions. It is the companies and individuals who provide us with goods and services. It is the charities that provide food, temporary shelter, and medical care for the poor. It is the nonprofits that help those with mental and physical disabilities. It is the pro-bono lawyers who defend indigents against criminal charges. It is the philanthropists who offer prizes to those who solve intractable problems.

But that is not how the United Nations thinks of civil society. To become a UN-affiliated civil-society organization, it is necessary to register with the body’s Economic and Social Council (ECOSOC), which takes about two years. Moreover, the registration process is only open to NGOs that meet specific criteria, including that they “must have a democratic decision-making mechanism.” That clearly excludes the vast majority of actual civil-society organizations (and, obviously, individuals).

But the WHO takes an even narrower view of civil society. In the context of the FCTC, it is a single organization: the Global Alliance for Tobacco Control (GATC). Originally named the Framework Convention Alliance (FCA), GATC was formed in 1999, when FCTC negotiations began, as a confederation of nearly 500 organizations from more than 100 countries that banded together to support negotiation, ratification, and implementation of the proposed treaty.

This led to the drafting of Article 4 (7) of the FCTC, which declares: “The participation of civil society is essential in achieving the objective of the Convention and its protocols.” In practice, this actually means the participation of GATC. NGO membership of GATC is only ever granted to those organizations that agree with every aspect of the WHO’s ideological stance on tobacco control. Disagreement or dissent is ruthlessly stifled.

2. The anti-Big Tobacco smokescreen

To those who believe that all tobacco use is a disease, the primary vector of that disease is the tobacco industry. To be fair, for decades, tobacco companies did their best to reinforce this view by claiming that smoking is not harmful. But in recent years, some of those companies have attempted to reform, and to provide less-harmful products to their consumers.

Many in the tobacco-control movement are nonetheless unable to move past tobacco-company executives’ historic misbehavior and continue to believe that tobacco companies have nefarious motives, even when those companies are seeking to offer harm-reduction products. This opposition to industry blinds many to the potential for THR.

Concerns about the potential for the tobacco industry to influence policy led to the inclusion of Article 5.3 of the FCTC, which states:

In setting and implementing their public health policies with respect to tobacco control, Parties shall act to protect these policies from commercial and other vested interests of the tobacco industry in accordance with national law.

Taken at face value, this seems like a reasonable conflict-of-interest policy. Derek Yach—who had been a key early advocate for a global tobacco-control treaty and who, as head of the WHO’s TFI, was arguably the lead architect of the FCTC—has noted that, in the FCTC’s early years, Brundtland recognized the need for collaborative stakeholder input, including from the tobacco industry:

Despite our concerns about these clear differences in position, we are committed to hearing how the tobacco companies do propose to reduce the harm that their products cause. […]. We have invited tobacco company scientists to provide their views on product modification to this Committee…[51]

But the FCTC secretariat, various member states, and the FCA/GATC have used Article 5.3 as a smokescreen (pun intended) to stifle debate. For example, starting with the FCTC’s fourth Conference of the Parties (COP4), the secretariat closed the public gallery during the opening session, excluding the media and the public from participation,[52] ostensibly to prevent undue industry influence. This is unlike the process for any other meetings under the auspices of the United Nations.

NGOs affiliated with the GATC cite Article 5.3 as justification for prohibiting participation by groups whose opinions differ from their own. For example, the STOP: Expose Tobacco[53] organization, which sends observers to FCTC COP meetings, bans the public from participating in their events if they have links with industry to the “4th degree of consanguinity.” This is despite the fact that Article 5.3 does not apply to GATC or any NGOs and that, even if it did, it would not logically prohibit even Big Tobacco from participating.

While the decisionmakers in the FCTC process are the parties (national governments), the GATC has considerable influence over them. Delegates to COP are subject to regular intimidation through daily GATC bulletins. The organization also hands out “Orchid” and “Dirty Ashtray” awards to countries it deems to be behaving well or badly, respectively, with the aim of pressuring delegations to agree with the FCTC secretariat’s wishes and not to show dissent or disagreement. For example, in 2012, the then-FCA gave an Orchid Award to the Philippines “for excluding the National Tobacco Administration (NTA) from the official delegation to the 5th Conference of Parties (COP5).”[54] But at COP10 in January 2024, the GATC gave a Dirty Ashtray award to the Philippines, “for its brazen use of tobacco industry tactics of obstinate dispute and delay throughout the COP.”[55] Its putative crime was support tobacco harm reduction.

Due to this McCarthyite dismissal of open debate, there is little appetite for pushing back against the excesses of the WHO FCTC administration. Those who do are routinely smeared as being in league with the tobacco industry, without any supporting evidence; are excluded from public health events; denied grants; and, on occasion, hounded out of their careers. There is no ombudsman to evaluate this treatment, leaving the WHO, FCTC secretariat, and their allies in the GATC effectively unaccountable.

3. Misunderstanding conflicts of interest

The WHO in general and FCTC in particular seem deeply confused about the notion of conflicts of interest. On the one hand, they apply exclusions relating to manufacturers of tobacco products far too broadly. For example, at COP5, the FCTC denied observer status to Interpol, the international crime agency, for having the temerity to deal with the tobacco industry for a global initiative to combat trans-border crime and the elimination of all forms of illicit trade in tobacco products.  Even more absurdly, in 2022, the WHO refused[56] to accept a Canadian COVID vaccine into the COVID-19 Vaccines Global Access (COVAX) program simply because Philip Morris International owned a minority share in the company that developed it.

On the other hand, they appear overly willing to embrace other vested interests, including those who raise funds on the back of their opposition to THR (i.e., members of the GATC) and those who sell products that compete with THR (i.e., the pharmaceutical industry). As former WHO Directors Robert Beaglehole and Ruth Bonita note, the WHO, “is unduly influenced by vested interests who promote nicotine abstinence.”[57]

For example, the Tobacco Free Europe campaign was funded in part by grants from three pharmaceutical companies with a direct interest in selling smoking-cessation products: Pfizer, Johnson & Johnson, and Novartis.[58] Pfizer was also the primary sponsor of the 2003 World Conference on Tobacco and Health. At the time, Pfizer was the holder of the patent on varenicline, a blockbuster drug that works by reducing the pleasure that users derive from nicotine.[59] As such, varenicline use is incompatible with THR-based solutions that rely on consumers switching to less-harmful nicotine-containing products.

During the World Health Summit in 2022, where the WHO launched the Tobacco Cessation Consortium,[60] WHO Director-General Tedros Adhanom Ghebreyesus shared the stage with executives from a host of strategic partners,[61] including Pfizer, Roche, Sanofi, and Johnson & Johnson Worldwide Chairman for Consumer Health Thibaut Mongon.

The consortium’s literature, more reminiscent of a business-development plan than a health initiative,[62] seeks to engage “multi-sectoral partners” to help “expand the market for cessation services” and to “drive consumer behavior.” It speaks of “easing regulatory barriers to expand markets,” “getting great products and pharmacotherapies into the hands of tobacco users,” and “market shaping of nicotine replacement therapies.” In return, the WHO has promised funding for “[t]he costs of convening of working groups” that help the WHO to deliver “best buy” interventions, and the “delivery of grants to NGOs and governments contributing to these workstreams.”

In fact, some of the WHO’s largest private funders are pharmaceutical companies. This is a clear conflict of interest, considering that many stand to profit considerably if smokers are driven toward an abstinence-only approach and prevented from adopting alternative nicotine-delivery systems, such as e-cigarettes, heat-not-burn products, and nicotine pouches.

It is little wonder then that the stances taken by the WHO and the FCTC secretariat toward safer nicotine alternatives aligns closely with the interests of Big Pharma companies, and heavily against new nicotine-delivery systems that evidence suggests, in some cases,[63] are more effective in helping smokers to quit cigarettes than traditional cessation products.

For example, in 2021,[64] the WHO’s annual World No Tobacco Day (WNTD) campaign moved beyond the use of tobacco products and toward also demonizing nicotine pouches. Likewise, WNTD in 2024[65] included a heavier emphasis on discouraging use of vapes than it did on combustible tobacco.

In 2021, the FCTC secretariat issued a report[66] on “new and emerging” tobacco and nicotine product use that encouraged countries to adopt harsh anti-vaping and anti-harm-reduction positions. The report was funded by the U.S. philanthropist Michael Bloomberg, who is personally opposed to reduced-risk nicotine products such as vapes and heated tobacco. At COP10 in Panama in February 2024, more of the agenda was devoted to discussing “new and emerging” nicotine products than to combustible tobacco, which causes the vast majority of tobacco-related death and disease, and which is the explicit focus of the text of the FCTC treaty.

In December 2023, the WHO issued a press release[67] urging national governments to ban e-cigarettes or, failing that, to only regulate them as medicines, a policy that has failed disastrously in Australia. Also, newly produced WHO guidance[68] calls for widespread use of pharmaceutical-industry products for smoking cessation, while completely ignoring the success of vaping and other nicotine alternatives.

While pharmaceutical products and THR both undoubtedly have a role to play in reducing smoking, it seems fundamentally misconceived to privilege one at the expense of another. In July 2024, the WHO released new guidelines[69] on smoking cessation that conspicuously exclude the use of e-cigarettes, smokeless, and heated tobacco products, despite their significant success in reducing smoking rates in countries where they are allowed to compete with cigarettes. Instead, the new guidance recommends varenicline as a first-line product for cessation practitioners.

Sadly, as Beaglehole and Bonita note: “This opposition [to THR] privileges the most harmful products— cigarettes.”[70]

G. Opaque Funding

The FCTC secretariat is responsible for arranging funding for the treaty’s goals. It does so through a combination of assessed contributions (ACs) paid by countries as a financial commitment to the convention (each party is assessed based on the country’s wealth and population, and dues are calculated accordingly), as well as extrabudgetary contributions (ECs), which are voluntary donations to finance activities adopted at Conference of the Parties meetings, such as expert and working groups on various articles of the treaty.

The FCTC’s overall budget for 2024-25 is $19,498,888, but only $8,801,093 of that is covered by ACs.[71] The rest comes from ECs. The ACs are fully transparent and published online.[72] The ECs, by contrast, are kept largely secret.[73]

H. Implications for Future WHO Treaties

This brief history of the FCTC clearly bodes ill for any future WHO treaty. The WHO can be captured by special interests with an agenda that may be not only unhelpful, but actively harmful to the group it allegedly wants to help. The WHO’s Orwellian approach to the FCTC has included deployment of incomplete and even false science; knowingly ignoring data that run counter to its desired positions; and completely ignoring its own conflicts of interests, while decrying all other stakeholders as biased vested interests.

The WHO happily relies on a compliant media that assumes the best of a health agency and continues to distrust anything associated with market-driven personal choice as a method of smoking cessation.

III. WHO, COVID, and the Pandemic Treaty

Unfortunately, the WHO’s behavior during the COVID-19 pandemic reinforces concerns that it is not well-suited to develop and implement a pandemic treaty.

A. Failure to Identify and Share Accurate Information in a Timely Manner

The WHO’s first and arguably deadliest misstep during COVID was its delayed response to identifying and sharing information about the existence of a novel pathogen that might pose a global threat. This is acknowledged in the WHO’s own review.[74]

The WHO has acknowledged that health misinformation can cost lives. Yet during COVID, it inhibited the free flow of information and contributed to the dissemination of misinformation. Taiwan first alerted the WHO[75] to the threat coming out of Wuhan, yet the WHO backed Beijing’s claims[76] that it could contain the virus. In this case, the problem resulted from the fact that Taiwan is not a member of the United Nations or any of its agencies, including the WHO. The WHO therefore does not recognize its statements, due to the UN’s “One China” policy. The unfortunate result was that the WHO provided misinformation. Unless the WHO becomes more inclusive, it cannot be trusted to function as an information coordinator in a pandemic.

Worryingly, the WHO remains remarkably incurious regarding the source of the COVID pandemic, which is rather disconcerting given that early identification of the source of any new pathogen is likely to be important in reducing its spread.[77]

B. Inappropriate Application of One-Size-Fits All Approach

The WHO has failed to acknowledge valid approaches taken by jurisdictions that did not follow its advice. A good example is Sweden, which never “locked down,” allowed schools and business to stay open, relied on the good sense of the Swedish people to socially distance and quarantine where required.[78] Since Sweden has had among the lowest mortality rates in the world over the past four years, perhaps it has lessons for the rest of us.

If the WHO wants to play the role of information coordinator in a future pandemic, it should be more open to evidence of effectiveness—not only from Sweden, but from other countries that took heterodox approaches during COVID. Evidence from Taiwan, Germany, Iceland, and South Korea, also show that there is no single rulebook for effectiveness.[79] Rather, the most effective approach is contingent on many factors, some of which are geographically and culturally specific.

The divergent paths taken by these countries demonstrate that pandemic policies are not “one size fits all,” that mandates rarely work, and that the tradeoffs in shuttering schools and business might ultimately cause more harm than good. When mandates are under consideration, nations should, at a bare minimum, assess whether their costs outweigh their benefits. The WHO should acknowledge this reality and use its position to provide a comprehensive picture of the various ways that countries responded successfully to the exigencies of the pandemic.

C. Arrogance Compounds Ignorance and Is Anti-Scientific

WHO officials seem rather too certain of the best ways to combat a future pandemic, which are essentially a repeat of its COVID playbook: lockdowns, mask mandates, testing mandates, and vaccine mandates. Yet according to a recent analysis by the Cochrane Review—the gold standard for evaluating health interventions—mask mandates are simply ineffective.[80] And according to a comprehensive meta-analysis, while lockdowns may have prevented deaths from COVID (at least, in the initial phase of the pandemic), they increased deaths from other diseases and imposed enormous social and economic costs.[81]

The WHO says we should “follow the science.” But science is a process, not an outcome. Science requires the kind of robust debate that the WHO sought to shut down. During the early phases of the pandemic, public-health officials assessed the infection fatality rate (IFR, or how many people die when infected) by using data from hospitalizations. But these data inaccurately biased the IFR upward, as most of the infected were either asymptomatic or not severe enough to need a hospital. The falsely high IFR led to even greater calls for lockdowns.

D. Decentralized Approaches to the Identification of Treatments Are More Successful

Around the world, physicians tried many drugs to combat COVID-19 infections and associated symptoms. Rapid identification and sharing of information regarding successes and failures saved countless lives. For example, an off-patent corticosteroid (dexamethasone) proved so effective in a UK trial that the trial was halted, and dexamethasone’s use was recommended for severe cases.[82] But the WHO played essentially no role in this process. Indeed, the WHO’s highly centralized approach is directly contrary to the decentralized discovery processes that were so important to the several successful massively distributed trials.

For example, the UK-based Platform Randomised Trial of Interventions Against COVID-19 in Older People (PRINCIPLE) was a highly effective decentralized system for evaluating potential therapies in community settings that helped to identify one highly effective treatment, one moderately effective treatment, and four ineffective treatments.[83] Another notable and prize-winning trial process—the Platform Adaptive Trial of Novel Antivirals for Early Treatment of COVID-19 in the Community (PANORAMIC)—identified the following five lessons for future pandemic response:

1. Prioritise Primary Care Studies: Future pandemic research should position primary care at the forefront, enabling earlier intervention to prevent symptom worsening and reduce hospital admissions.

2. Adopt Platform Study Models: The success of PANORAMIC’s platform study approach suggests this should be the blueprint for future pandemic research in primary care.

3. Enhance Care Home Participation: Efforts should be made to increase recruitment from care homes, addressing barriers such as complex contracting requirements.

4. Improve Medicine Delivery: Further evaluation of methods to deliver medicine directly to participants at home is recommended.

5. Build Community Trust: Prioritise relationships with community leaders to enhance research inclusivity and reach underserved populations.[84]

E. Resist the Rise of the Pandemic-Industrial Complex

The success of vaccine development during COVID is testament to the effectiveness of the private-sector drug-discovery process and of incentives created by government procurement. Arguably, the most successful such program was the U.S. government’s Operation Warp Speed, which used taxpayer funds to support research, development, and production of COVID vaccines so that they could be distributed free to users around the nation and oversees.[85] Companies such as Pfizer and Moderna were paid billions of taxpayer dollars to deliver these potentially lifesaving COVID vaccines.

But there is a grave danger that the mechanisms established to produce the COVID vaccines could be abused if they were to become a perpetual feature of pandemic response. In his January 1961 farewell address, President Dwight Eisenhower made a powerful plea for caution against the rise of the military-industrial complex:

A vital element in keeping the peace is our military establishment. Our arms must be mighty, ready for instant action, so that no potential aggressor may be tempted to risk his own destruction. . .  American makers of plowshares could, with time and as required, make swords as well. But now we can no longer risk emergency improvisation of national defense; we have been compelled to create a permanent armaments industry of vast proportions. . . This conjunction of an immense military establishment and a large arms industry is new in the American experience. . . Yet we must not fail to comprehend its grave implications. . .  In the councils of government, we must guard against the acquisition of unwarranted influence, whether sought or unsought, by the military-industrial complex. The potential for the disastrous rise of misplaced power exists and will persist.[86]

Just as keeping the peace may justify military expenditure, so too may prevention of pandemics justify pandemic expenditure. But despite Eisenhower’s warning, the military-industrial complex has resulted in misplaced power, leading to excessive spending on military hardware and unjust enrichment of the shareholders of a small number of well-connected companies, not to mention the manufacturing of conflicts that have resulted in the loss of millions of lives. We are now at risk of repeating the same mistakes with the creation of a pandemic-industrial complex.

David Bell, a former WHO scientist, notes that pharmaceutical companies and their investors “have profited greatly from the COVID-19 response and are strongly aligned with the WHO’s current pandemic preparation and response proposals.”[87] These include not only the vaccine makers, but also the scientists and science managers at U.S. National Institutes of Health (NIH) and elsewhere who benefit financially from vaccine sales because they own intellectual property in aspects of vaccine development. It also includes the industries involved in vaccine distribution and other related health interventions, the health authorities who get to decide on mandates and dictate policy, and the media machine that promotes vaccines and suppresses “misinformation” on potential vaccine risks. No doubt there are others, but the tens of thousands of players who would benefit financially from a new pandemic seem happy to push for mass-vaccine schemes for the latest risk, as we are already seeing with monkeypox.[88]

F. How a WHO Pandemic Treaty Would Reinforce the Pandemic-Industrial Complex

Under a WHO pandemic treaty, the WHO and its allies would undertake “surveillance” that is effectively guaranteed to find new virus variants (e.g., bat research in caves in rural China). They would then claim that these variants could cause “Disease X” that has “the potential” to strike in a manner similar to COVID. The media, already primed, would amplify this message, especially once a target is identified.

Members of the OECD and G20 have demonstrated support for mandatory lockdowns and border closures in response to announcements of a significant threat. They are, after all, blame-avoiding bureaucrats who might lose their job if they were to permit another COVID. And once a vaccine is ready, they could mandate that, too. Pharma companies have production lines open and are ready to profit from the market a new scare would create.

The WHO, various health authorities, and pharmaceutical companies would sponsor disease modelers, who are encouraged to provide worst-case scenarios like those invented by Imperial College London’s Neil Ferguson.[89] The WHO would then advise member nations to impose lockdowns and demand vaccinations, lest citizens lose the ability to work or travel. Governments not only purchase the vaccines, but also derisk their manufacture by removing liability for harm to users, despite abbreviated trials. Finally, governments squash any inconvenient facts and dissenting opinions as “misinformation.”

As David Bell puts it: “It amounts to perhaps the most infallible wealth concentration scheme in history. The general model proved itself during Covid-19, orchestrating the largest wealth transfer on a global scale, from poor to rich, the world has seen.”[90] It is ironic that the political left, which offers copious critiques of imperialism past, are rarely heard today on the subject of the Western-led mandate imperialism. Indeed, left-leaning academics and media appear happy with WHO-driven demands, epitomized by the proposed pandemic treaty.

G. What Is in the Proposed Pandemic Treaty?

The aim of the proposed treaty is to improve political leadership and coordination across nations, with the WHO at the center. It calls for significant increases in funding for the WHO; for perpetuating financing mechanisms to fund global disease surveillance; and for strengthening international health regulations, which could include limits on travel and demands for mechanisms like vaccine passports.

A large portion of the treaty seeks to address inequities and how to combat them. What is really at stake is more funding for the WHO “to act as the directing and coordinating authority on international health.” None of this is binding on member nations. And experts pushing the treaty even cite “national sovereignty” as a limitation on the treaty.[91]

Of all the proposals, the most worrying are the plans to strengthen “approaches to and capacities for information and infodemic management… in order to build public trust in data, scientific evidence and public health measures and to counter inaccurate information and unsubstantiated rumours.”[92] As explained above, the danger is that the WHO was a major purveyor of misinformation. Allowing it to control and censor information is a problem.

H. How the FCTC and WHO’s History Is Relevant to a Pandemic Treaty

Given the WHO’s history, its contributors, their aims, and consequent WHO budget allocations, the way WHO has run the FCTC, and its actions over the course of the COVID-19 pandemic, lead us to conclude that the WHO is not capable of promulgating a pandemic treaty fairly, usefully, or to the benefit of public health.

As we have seen with the FCTC and during the COVID-19 pandemic, the WHO engages in censorship of those who disagree with its ideological stance.[93] The solution to misinformation is more information and debate, not censorship. Yet the WHO has no interest in views outside its favored policies. Sweden’s response to COVID and UK policies on tobacco harm reduction should provide valuable lessons, yet the WHO shows no interest in such lessons. This alone should disqualify the WHO from a central role in coordinating pandemic response.

The WHO also appear incapable of, and probably uninterested in, standing up to powerful nations like China. After all, the WHO’s COVID policies were watered-down versions of the lockdowns and other mandates that China employed. If another pandemic were to originate in China, we cannot expect the WHO’s response to be any better than before.

The WHO also allows certain NGOs too much power to influence its policies even when overwhelming scientific evidence shows their advice to be incorrect.[94] Despite its claim to “follow the science,” when put to the test with the FCTC and COVID, the WHO has spectacularly failed to do so. Its responses were dogmatic—based on ideology and not science.

The WHO is beholden to its donors, who increasingly are unrepresentative of the global population and who have specific agendas. As David Bell has asserted, there is now something approaching a pandemic-industrial complex, in which drug companies and NGOs support WHO to enact policies (notably vaccine mandates and accompanying research to support mandates) that benefit the very groups that provide WHO with support. In essence, NGOs are buying the WHO’s image for enhancing global public health to achieve their private aims.

That the WHO has allowed its brand to be used in this manner is yet another reason it should be disqualified from taking the lead on pandemic responses. NGO efforts to discredit THR and promote virus research will probably worsen public health. Refusing to debate a wide variety of public-health responses in favor of a one-size-fits-all approach is dangerous for public health, especially when their one approach is so often wrong. After all, the WHO is supposed to provide technical assistance to poorer nations; if its advice is incorrect, it will worsen public health.

Virus research and mandates can arguably be effective and important, and public discussion of those topics makes sense. But the WHO operates a blind top-down approach that fails to seek crucial input from those most affected by its policies. Without debate, poor policies will sustain. In the end, the WHO refuses to recognize when it is failing and to change its approach accordingly.

IV. Conclusion

For 30 years, the WHO operated successful programs to combat infectious diseases. But after the Alma Ata Declaration, it attempted unsuccessfully to help nations develop their own health systems. Donor fatigue set in, and the WHO shifted both its operations and funding toward “special programs.” Some of these were successful and, when Director-General Brundtland sought to apply the model to tobacco, there was considerable enthusiasm.

Unfortunately, the WHO in general and the FCTC in particular has succumbed to ideological positions that deny the best science and policies. The organization’s attack on vaping and other forms of THR have stalled efforts to lower smoking, the greatest preventable threat to health. The WHO’s response to COVID was likewise weak, also not based in science, and highly political. Its advice is often contradictory and counterproductive.

The WHO is today once again pushing to establish and govern a pandemic treaty. But given the experience of COVID and the FCTC, it would be unwise to entrust WHO with such an endeavor.[95] Should there be any role for WHO in pandemic preparedness? Perhaps, but giving it more power to direct responses without significant changes in the way it operates would be premature.

Oversight of UN bodies, including the WHO, is very weak, and the only real constraint is the threat to withhold funds. With a growing share of WHO funds coming from private actors like the Gates Foundation to fund specific projects, however, governmental threats of withholding general funds are becoming weaker. As such, the U.S. government should only agree to grant the WHO new powers when it is sure the WHO is the correct body to have those powers, and equally sure it can execute said powers fairly and effectively. At the moment, neither of those conditions has been satisfied.

It is tempting to just move on from COVID, and even to assume that a WHO treaty could help to prevent a future pandemic. But doing so would invite a new pandemic and could lead to even more draconian policies, which will once again harm our economy, our health, and our children’s education.

* This foreword is written by Derek Yach (MBChB MPH), who has spent four decades addressing tobacco control and actions to end the health toll caused by tobacco. He started this work in South Africa, where he led development of the epidemiological and economic base for regulatory action; continued this work at the World Health Organization, where he played a major role in the conceptualization, development, and adoption of the WHO Framework Convention on Tobacco Control; before leading global health at Yale University and then the Rockefeller Foundation, PepsiCo, and Vitality. He has striven for the past decade striven to promote the development of the science base to support tobacco harm reduction as the fastest way to end adult smoking. This includes the formation and leadership of the Foundation for a Smoke Free World for five years and, since then, deep engagement with private, public, and philanthropic groups seeking to strengthen their research in ways that could end tobacco use. He lives in Connecticut and is a keen open-water swimmer.

* Martin Cullip is an international fellow at the Taxpayers Protection Alliance’s Consumer Center, based in South London, England. Roger Bate is a nonresident scholar with the International Center for Law & Economics (ICLE). ICLE has received financial support from numerous foundations, individuals, and companies, including firms with interests both supportive of and in opposition to the ideas expressed in this and other ICLE-supported works. Unless otherwise noted, all ICLE support is in the form of unrestricted, general support. The ideas expressed here are the authors’ own and do not necessarily reflect the views of ICLE’s advisors, affiliates, or supporters.

[1]  See Roger Bate, Curing the International Health System, Am. Enter. Inst. (Sep. 1, 2009), https://www.aei.org/articles/curing-the-international-health-system.

[2] Constitution of the World Health Organization, World Health Organ. (1946), available at https://treaties.un.org/doc/Treaties/1948/04/19480407%2010-51%20PM/Ch_IX_01p.pdf.

[3] See Brett D. Schaefer, ConUNdrum: The Limits of the United Nations and the Search for Alternatives (2009), at 297-300.

[4] Michael T Mbizvo et al., 40 Years of Innovation in Sexual and Reproductive Health, 380(9843) The Lancet 705-706 (2012).

[5] Public Health Milestones Through the Years, World Health Organ., https://www.who.int/campaigns/75-years-of-improving-public-health/milestones#year-1946 (last visited Nov. 11, 2024).

[6] Donald Henderson, Principles and Lessons From the Smallpox Eradication Programme, 65(4) Bull. World Health Organ. 535-546 (1987), at 539.

[7] Global Programme on AIDS 1987-1995: Final Report, World Health Organ. (1997).

[8] Who We Are, Polio Glob. Eradication Initiative, https://polioeradication.org/who-we-are (last visited Nov. 10, 2024).

[9] Contributors, World Health Organ., https://open.who.int/2022-23/contributors/contributor (last visited Nov. 6, 2024).

[10] Id. at 10.

[11] David Bell, Pandemics: A Business Opportunity, Brownstone Inst. (Apr. 2, 2024), https://brownstone.org/articles/pandemics-a-business-opportunity.

[12] See Giulia Carbonaro, How Is the World Health Organization Funded, and Why Does It Rely So Much on Bill Gates?, Eur. News (Mar. 2, 2023), https://www.euronews.com/health/2023/02/03/how-is-the-world-health-organization-funded-and-why-does-it-rely-so-much-on-bill-gates.

[13] Speech to the Fifty-first Health Assembly Geneva, World Health Organ. (May 13, 1998), A.51(4), available at https://apps.who.int/gb/ebwha/pdf_files/WHA51/eadiv6.pdf (Brundtland announced the establishment of the Roll Back Malaria partnership during her acceptance speech to the World Health Assembly).

[14] See WHA Res. 28.85, Off. Rec. WHO No. 226, Twenty-Eighth World Health Assembly, World Health Organ. (1975), available at https://iris.who.int/bitstream/handle/10665/86022/Official_record226_eng.pdf (Resolution WHA28.85 from the 1975 World Health Assembly called for international collaboration on research into cancer.)

[15] See WHO Tech. Rep. Ser. No. 568, Smoking and its Effects on Health: Report of a WHO Expert Committee World Health Organ. (1975), available at https://iris.who.int/bitstream/handle/10665/41157/WHO_TRS_568_eng.pdf.

[16] See WHO Tech. Rep. Ser. No. 636, Controlling the Smoking Epidemic, World Health Organ. (1979), available at https://iris.who.int/bitstream/handle/10665/41351/WHO_TRS_636.pdf.

[17] See WHA Res. 56.1, WHO Framework Convention on Tobacco Control, World Health Organ. (2003), available at https://apps.who.int/gb/archive/pdf_files/WHA56/ea56r1.pdf (last visited Nov. 6, 2024).

[18] Framework Convention on Tobacco Control., World Health Organ., https://www.who.int/europe/teams/tobacco/who-framework-convention-on-tobacco-control-(who-fctc) (last visited Nov. 10, 2024).

[19] World Health Organ., supra note 17, Art 3.

[20] Id. at 19 Art 1(d).

[21] Bureau of the COP, World Health Organ. Framework Convention on Tobacco Control, https://fctc.who.int/who-fctc/governance/bureau-of-the-cop (last visited Nov. 6, 2024), (The bureau’s role is to make proposals that are then circulated to regional coordinators and distributed to member governments).

[22] Full List of Signatories and Parties to the WHO Framework Convention on Tobacco Control, World Health Org. Framework Convention on Tobacco Control, https://web.archive.org/web/20090113054050/http:/www.who.int/fctc/signatories_parties/en (archived Jan. 13, 2009).

[23] Treaty Status of the Convention on the Prevention and Punishment of the Crime of Genocide, United Nations (May 21, 2003), https://treaties.un.org/pages/ViewDetails.aspx?src=TREATY&mtdsg_no=IX-4&chapter=9&clang=_en.

[24] See Janet Chung-Hall et al., Impact of the WHO FCTC Over the First Decade: A Global Evidence Review Prepared for the Impact Assessment Expert Group, Tobacco Control (2019), https://tobaccocontrol.bmj.com/content/28/Suppl_2/s119.

[25] WHO Global Report on Trends in Prevalence of Tobacco Use 2000-2030, World Health Organ. (2024), https://www.who.int/publications/i/item/9789240088283.

[26] Steven J Hoffman et al., Impact of the WHO Framework Convention on Tobacco Control on Global Cigarette Consumption: Quasi-Experimental Evaluations Using Interrupted Time Series Analysis and In-Sample Forecast Event Modelling, 365 BMJ I2287 (2019), https://www.bmj.com/content/365/bmj.l2287.

[27] Robert Beaglehole & Ruth Bonita, Tobacco Control: Getting to the Finish Line, The Lancet (May 14, 2022), https://www.thelancet.com/journals/lancet/article/PIIS0140-6736(22)00835-2/fulltext.

[28] Derek Yach, Scorecard Exposes WHO’s Big Fall in Curbing Tobacco Use, TobaccoHarmReduction.net (Jan. 31, 2024), https://www.tobaccoharmreduction.net/article/scorecard-exposes-whos-big-fail-in-curbing-tobacco-use.

[29] See Jonathan Foulds et al., Effects of Smokeless Tobacco (Snus) on Smoking and Public Health in Sweden, 12 Tobacco Control 349-359 (2003), https://pmc.ncbi.nlm.nih.gov/articles/PMC1747791.

[30] Brad Rodu et al., Evolving Patterns of Tobacco Use in Northern Sweden, 253 J. Intern. Med. 660-665 (2002), available at https://onlinelibrary.wiley.com/doi/pdf/10.1046/j.1365-2796.2002.01057.x.

[31] Foulds, supra note 29.

[32] Id.

[33] Priority HIV and Sexual Health Interventions in the Health Sector for Men Who Have Sex With Men and Transgender People in the Asia-Pacific Region, World Health Organ. (2010), https://iris.who.int/bitstream/handle/10665/205675/B4537.pdf?sequence=1&isAllowed=y.

[34] Tobacco: Deadly in Any Form or Disguise, World Health Organ. (2006), at 27, available at https://www.emro.who.int/images/stories/tfi/documents/wntd-2006/kit.pdf.

[35] See WHO Doc. FCTC/COP5/12, Control and Prevention of Smokeless Tobacco Products, World Health Organ. Framework Convention on Tobacco Control (2012), available at https://apps.who.int/gb/fctc/PDF/cop5/FCTC_COP5_12-en.pdf.

[36] Id. at 37–38.

[37] @WHO, Twitter (Jul. 9, 2013, 6:14 am) https://x.com/WHO/status/354559151889842176?lang=ar-x-fm.

[38] Ann McNeill et al., E-cigarettes: An Evidence Update A Report Commissioned by Public Health England, Pub. Health Eng. (2015).

[39] PHE’s successor, the Office for Health Improvement and Disparities (OHID), published an eighth and final report in September 2022 (It was the final report because the authors felt they had reviewed all possible evidence and there was nothing left to study). Running 1,468 pages and studying all potential health risks of vaping, it concluded that “[b]ased on the reviewed evidence, we believe that the ‘at least 95% less harmful’ estimate remains broadly accurate.”

[40] Tobacco: E-Cigarettes, World Health Organ. (2024), https://www.who.int/news-room/questions-and-answers/item/tobacco-e-cigarettes.

[41] Id. at 39.

[42] See EB Doc. EB153/10, Matters for Information: Report on Meetings of Expert Committees and Study Groups, World Health Organ. (2023), available at https://apps.who.int/gb/ebwha/pdf_files/EB153/B153_10-en.pdf.

[43] See Kerry Cullinan, E-Cigarettes Are a ‘Trap’ to Recruit Children Not Harm Reduction – Tedros, Health Pol’y Watch Indep. Glob. Health Reporting (Feb. 6, 2023), https://healthpolicy-watch.news/e-cigarettes-are-a-trap-to-recruit-children-not-harm-reduction-tedros.

[44] See Press Release, Dr Harsh Vardhan Conferred WHO Award for Leadership in Tobacco Control, World Health Organ. (Jun. 2, 2021), https://www.who.int/india/news/detail/02-06-2021-dr-harsh-vardhan-conferred-who-award-for-leadership-in-tobacco-control.

[45] Id. at 41

[46] Press Release, Urgent Action Needed to Protect Children and Prevent the Uptake of E-cigarettes, World Health Organ. (Dec. 14, 2023), https://www.who.int/news/item/14-12-2023-urgent-action-needed-to-protect-children-and-prevent-the-uptake-of-e-cigarettes.

[47] Technical Note on the Call to Action on Electronic Cigarettes, World Health Organ. (Dec. 14, 2023), https://www.who.int/publications/m/item/technical-note-on-call-to-action-on-electronic-cigarettes.

[48] Press Release, Latest Cochrane Review Finds High Certainty Evidence that Nicotine E-cigarettes Are More Effective than Traditional Nicotine-Replacement Therapy (NRT) in Helping People Quit Smoking, Cochrane (Nov. 17, 2022), https://www.cochrane.org/news/latest-cochrane-review-finds-high-certainty-evidence-nicotine-e-cigarettes-are-more-effective.

[49] @WHO, Twitter (Jun. 11, 2024, 12:20 pm), https://x.com/WHO/status/1800563699255529698.

[50] @WHO, Twitter (Jan. 21, 2020, 8:49 am), https://x.com/WHO/status/1219618083645595650.

[51] Derek Yach, The Origins, Development, Effects, and Future of the WHO Framework Convention on Tobacco Control: a Personal Perspective, The Lancet (May 17, 2014), https://www.thelancet.com/journals/lancet/article/PIIS0140-6736(13)62155-8/fulltext.

[52] See Drew Johnson, Johnson: The UN’s Health Agency Works on a Global Tobacco Tax in Secret, The Wash. Times (Oct. 13, 2014), https://www.washingtontimes.com/news/2014/oct/13/johnson-uns-health-agency-works-global-tobacco-tax.

[53] See Driving Addiction: A Race for Future Generations, STOP: A Global Tobacco Industry Watchdog, https://exposetobacco.org (last visited Nov. 11, 2024).

[54] Press Release, Philippines Given International Award For Excluding National Tobacco Administration From COP Delegation, Health Justice (Nov. 13, 2012), https://healthjustice.ph/philippines-given-international-award-for-excluding-national-tobacco-administration-from-cop-delegation.

[55] COP10 Bulletin Day 6, Glob. All. for Tobacco Control (Feb. 10, 2024), https://gatc-cop10-bulletin.my.canva.site/day6.

[56] See Sabrina Jonas, WHO Refuses to Accept Quebec’s Medicago COVID-19 Vaccine Over Company’s Tobacco Ties, Can. Broad. Corp. (Mar. 25, 2022), https://www.cbc.ca/news/canada/montreal/who-rejects-medicago-covid-vaccine-1.6397153.

[57] Beaglehole & Bonita, supra note 27.

[58] Setting the EU Tobacco Control Agenda and Celebrating the ‘Pledge’, Smoke Free Partnership (May 31, 2010), https://www.smokefreepartnership.eu/our-policy-work/events/setting-the-eu-tobacco-control-agenda-and-celebrating-the-pledge.

[59] Chloe J. Jordan & Zheng-Xiong Xi, Discovery and Development of Varenicline for Smoking Cessation, 13(7) Expert Opin. Drug Discov. 671–683 (2018).

[60] Press Release, Pharma, Tech and Social Media Companies Join Forces with WHO to Launch the Tobacco Cessation Consortium During World Health Summit in Berlin, Germany, World Health Organ. (2022), https://www.who.int/news/item/20-10-2022-pharma–tech-and-social-media-companies-join-forces-with-who-to-launch-the-tobacco-cessation-consortium-during-world-health-summit-in-berlin–germany.

[61] World Health Summit 2022, October 16-18 Berlin, Germany & Digital, World Health Summit,  https://www.worldhealthsummit.org/whs-2022/partners.html (last visited Nov. 9, 2024).

[62] Tobacco Cessation Consortium: The Latest Innovation in Tobacco Control, World Health Organ., https://www.who.int/initiatives/tobacco-cessation-consortium (last visited Nov. 9, 2024).

[63] Can Electronic Cigarettes Help People Stop Smoking, and Do They Have Any Unwanted Effects When Used for this Purpose?, Cochrane (Jan. 8, 2024), https://www.cochrane.org/CD010216/TOBACCO_can-electronic-cigarettes-help-people-stop-smoking-and-do-they-have-any-unwanted-effects-when-used.

[64] See Tiziana Cauli, Nicotine Pouches Don’t Escape WHO’s World No Tobacco Day Campaign Debate, Tobacco Intelligence (Jun. 3, 2022), https://tobaccointelligence.com/nicotine-pouches-dont-escape-whos-world-no-tobacco-day-campaign-debate.

[65] World No Tobacco Day 2024, World Health Organ., https://www.who.int/campaigns/world-no-tobacco-day/2024 (last visited Nov. 9, 2024).

[66] WHO Report on the Global Tobacco Epidemic 2021: Addressing New and Emerging Products, World Health Organ. (2021), https://www.who.int/teams/health-promotion/tobacco-control/global-tobacco-report-2021.

[67] Urgent Action Needed to Protect Children and Prevent the Uptake of E-cigarettes, World Health Organ. (2023), https://www.who.int/news/item/14-12-2023-urgent-action-needed-to-protect-children-and-prevent-the-uptake-of-e-cigarettes.

[68] WHO Clinical Treatment Guideline for Tobacco Cessation in Adults, World Health Organ. (2024), https://www.who.int/publications/i/item/9789240096431.

[69] Id. at 67

[70] Glob. All. for Tobacco Control, supra note 55.

[71] FCTC/COP10(25) Workplan and Budget for the Financial Period 2024–2025, World Health Organ. Framework Convention on Tobacco Control (2023), https://fctc.who.int/news-and-resources/publications/i/item/fctc-cop10(25)-workplan-and-budget-for-the-financial-period-2024-2025.

[72] Status of Payments of Assessed Contributions (VAC) as of 30 September 2024, World Health Organ. Framework Convention on Tobacco Control, https://fctc.who.int/news-and-resources/publications/m/item/status-of-payments-of-assessed-contributions-(vac)-as-of-4-february-2024 (last visited Nov. 9, 2024).

[73] Donors and Partners, World Health Organ. Framework Convention on Tobacco Control, https://fctc.who.int/secretariat/donors-and-partners (last visited Nov. 6, 2024). The FCTC website does list the names of the parties and some other organizations that have provided additional funds on top of their obligations as FCTC signatories (including the UK, European Commission, Germany, Russian Federation, and the U.S. Centers for Disease Control) but it does not state categorically that these are the only sources of additional support, nor does it say how much they support they provided.

[74] COVID-19: Make It the Last Pandemic, The Independent Panel for Pandemic Preparedness & Response (2021), available at https://theindependentpanel.org/wp-content/uploads/2021/05/COVID-19-Make-it-the-Last-Pandemic_final.pdf.

[75] Yimou Lee & Ben Blanchard, Taiwan Says WHO Ignored Its Coronavirus Questions at Start of Outbreak, Reuters (Mar. 24, 2020), https://www.reuters.com/article/us-health-coronavirus-taiwan/taiwan-says-who-ignored-its-coronavirus-questions-at-start-of-outbreak-idUSKBN21B160.

[76] See Matt Ridley & Alina Chan, The Search for the Origin of Covid-19 (2022).

[77] Id. at 75; Katie Bo Williams et al., Exclusive: Intel Agencies Scour Reams of Genetic Data from Wuhan Lab in Covid Origins Hunt, CNN Pol. (Aug. 5, 2021), https://www.cnn.com/2021/08/05/politics/covid-origins-genetic-data-wuhan-lab/index.html; Ross Pomeroy, Why Do New Disease Outbreaks Always Seem to Start in China?, RealClear Sci (Feb. 18, 2020), https://www.realclearscience.com/blog/2020/02/18/why_do_new_disease_outbreaks_always_seem_to_start_in_china.html; Patrick Berche, Gain-of-Function and Origin of Covid19, 52 Nat’l Libr. of Med. (2023), https://pmc.ncbi.nlm.nih.gov/articles/PMC10234839; Matt Ridley, There Is Now Very Little Doubt that Covid Leaked from a Lab, Spiked (Sep. 10, 2024), https://www.spiked-online.com/2024/09/10/there-is-now-no-doubt-that-covid-leaked-from-a-lab.

[78] Witness Statement of Professor Anders Tegnell, UK COVID-19 Inquiry (Oct. 2, 2023), https://covid19.public-inquiry.uk/wp-content/uploads/2023/12/18145343/INQ000283502.pdf.

[79] See Julian Morris & Marc Joffe, COVID-19 Lessons from the Past and Other Jurisdictions, Reason Found. (2020), available at https://reason.org/wp-content/uploads/coronavirus-response-2-lessons-from-jurisdictions.pdf

[80] See Tom Jefferson et al., Physical Interventions to Interrupt or Reduce the Spread of Respiratory Viruses, Cochrane (Jan. 30, 2023), https://www.cochranelibrary.com/cdsr/doi/10.1002/14651858.CD006207.pub6/full.  

[81] See Jonas Herby et al., Did Lockdowns Work? The Verdict on COVID Restrictions, Inst. of Econ. Affs. (Jun. 5, 2023), https://iea.org.uk/publications/did-lockdowns-work-the-verdict-on-covid-restrictions.

[82] Press Release, Dexamethasone Reduces Death in Hospitalised Patients with Severe Respiratory Complications of Covid-19, U. of Oxford (Jun. 16, 2020), https://www.ox.ac.uk/news/2020-06-16-dexamethasone-reduces-death-hospitalised-patients-severe-respiratory-complications.

[83] Favipiravir, Principle, https://www.principletrial.org/results, (last visited Nov. 6, 2024).

[84] See PANORAMIC Trial Learnings: Shaping Future Pandemic Research, Nuffield Dept. of Primary Care Health Scis. Med. Scis. Div., Aug. 8, 2024, https://www.phc.ox.ac.uk/news/nihr-report-panoramic-trial-primary-care-pandemic-research-learnings.

[85] Operation Warp Speed: Accelerated COVID-19 Vaccine Development Status and Efforts to Address Manufacturing Challenges, U.S. Gov’t Accountability Off. (Feb. 11, 2021), https://www.gao.gov/products/gao-21-319.

[86] President Dwight D. Eisenhower’s Farewell Address, Nat’l Archives (Jan. 17, 1961), https://www.archives.gov/milestone-documents/president-dwight-d-eisenhowers-farewell-address.

[87] Bell, supra note 11.

[88] See David Bell, What’s Really Happening with Mpox, Brownstone Inst. (Aug. 18, 2024), https://brownstone.org/articles/whats-really-happening-with-mpox.

[89] See Phil Magness, The Failure of Imperial College Modeling Is Far Worse than We Knew, The Daily Econ. (Apr. 22, 2021), https://thedailyeconomy.org/article/the-failure-of-imperial-college-modeling-is-far-worse-than-we-knew.

[90] See David Bell & Thi Thuy Van Dinh, The WHO Pandemic Agreement: A Guide, Brownstone Inst. (Mar. 22, 2024), https://brownstone.org/articles/the-who-pandemic-agreement-a-guide.

[91] What to Know About an International Pandemic Agreement, Found. for the Nat’l Inst. of Health (Jan. 30, 2021), available at https://fnih.org/sites/default/files/2021-11/What%20to%20Know%20About%20an%20International%20Pandemic%20Agreement%2011.30.21.pdf.

[92] A Potential Framework Convention for Pandemic Preparedness and Response: Member States Briefing, World Health Organ. (Mar. 18, 2021), https://apps.who.int/gb/COVID-19/pdf_files/2021/18_03/Item2.pdf.

[93] See Kevin Bardosh, Why Is the WHO Calling Critics ‘Conspiracy Theorists’?, Collateral Glob. (Jan. 26, 2024), https://collateralglobal.org/article/why-is-the-who-calling-critics-conspiracy-theorists.

[94] E-Cigarettes, Bloomberg Philanthropies, https://www.bloomberg.org/public-health/reducing-tobacco-use/e-cigarettes (last visited Nov. 11, 2024).

[95] Priti Patnaik, Renewed Push for a December Deadline to Conclude the Pandemic Agreement, Geneva Health Files (Oct. 24, 2024), https://genevahealthfiles.substack.com/p/renewed-push-for-december-deadline-pandemic-agreement-world-health-organization-inb-geneva-2024-tedros-africa-group-pabs-ip-tech-transfer-world-health-assembky-special-session.

Executive Summary

Payment cards generate significant benefits for both merchants and consumers. Consumers benefit from convenience, security, and rewards. Merchants benefit from enhanced security, as well as higher throughput and larger per-ticket sales.

These benefits are made possible through the interchange fees retained by issuing banks, which fund network infrastructure, fraud prevention, and rewards programs, balancing payment networks’ two-sided markets (consumers and merchants).

Big-box merchants have long pushed for regulations that would limit interchange fees. They still want the benefits from card payments, but without paying their part of the costs associated with maintaining the system. Regulations to impose price controls on interchange fees, such as the Dodd-Frank Act’s Durbin amendment, have benefited these big-box retailers at the expense of consumers and smaller merchants.

The latest ruse by merchants is to demand that issuing banks be prohibited from retaining interchange fees on sales tax (and, in some cases, other items as well). To date, only one state, Illinois, has passed such legislation. Its Interchange Fee Prohibition Act (IFPA) would prevent card issuers from retaining interchange fees on taxes and tips.

The costs to implement the IFPA or similar legislation in other states would be enormous. Specifically:

• Merchants would likely see a fall in card use, resulting in reduced throughput and lower revenue. Smaller merchants would lose out relative to larger merchants.
• Banks and credit unions would lose revenue. Smaller local banks and credit unions would be hit worse due to their relative inability to distribute costs.
• Consumers would likely see reduced card rewards and other benefits, as banks compensate for lost revenue.
• State and local governments might see an increase in the costs of enforcing sales tax and a fall in revenue due to reduced economic activity.

Instead of falling for the big-box merchants’ ruse, state governments should seek ways to improve the efficiency of collecting sales tax.

I. Introduction

Over the past half-century, payment cards have transformed the way we pay for goods and services. The Federal Reserve Board’s 2024 Diary of Consumer Payment Choice found that, in 2023, consumers made roughly 62% of their payments using credit and debit cards, up from 45% as recently as 2016, while their use of cash and checks has halved, falling from 38% to 19% over the same period (Figure 1).[1] Meanwhile, consumers demonstrably prefer to pay by card. A recent Forbes poll found that 70% of Americans use cards most often, while 7% used digital wallets and 1% used buy-now-pay-later schemes.[2]

FIGURE 1: Share of Payment-Instrument Use for All U.S. Payments, 2016-2023

SOURCE: Federal Reserve Board Diary of Consumer Payment Choice

A. The Benefits of Card Payments

This shift in payment choice has been driven by the benefits consumers and merchants derive from cards. For consumers, these include:

• Convenience: Consumers can make purchases, both locally and internationally, without having to carry large amounts of cash on their person. Increasingly, they can “tap-and-go,” making contactless payments quickly and effortlessly with a wide range of devices (cards, phones, watches, rings).[3] Importantly, cards have also enabled consumers to pay online, which has resulted in a revolution in commerce.[4]
• Security: Payment cards offer consumers considerable protection against fraud and theft, leaving them far safer than carrying cash. Contactless (tap) and chip (dip) payments do not share underlying payment-account numbers with merchants, and information is encrypted end-to-end, making it almost impossible to steal usable cardholder information. Meanwhile, if a cardholder loses their card, they can easily freeze or cancel it to prevent unauthorized use.
• Zero Liability: In the unfortunate event that a fraudulent charge is made, issuing banks assume liability for practically all charges that were not expressly authorized by the cardholder.
• Record Keeping: Payment cards automatically keep track of purchases, making it easier to monitor spending, to budget, and to track payments for returns or disputes.
• Rewards, Insurance, and Other Benefits: Many credit cards offer rewards programs that allow consumers to earn cashback, airline miles, or points for purchases. Most rewards cards also provide access to special discounts and promotional offers. Many cards offer purchase-protection insurance, extended warranties on purchases, travel insurance, rental-car insurance, and other benefits.
• Building Credit: Regular and responsible use of credit cards can help consumers build or improve their credit score, making it easier to get loans or better interest rates in the future.
• Consumption Smoothing: Credit cards allow households to defer payment on purchases, enabling them to better manage their cash flow. Credit cards also provide a line of credit that can be useful in emergencies when cash is not immediately available.

For merchants, payment cards offer largely corollary benefits. In particular:

• Ticket Lift: The ability for consumers to make purchases larger than the amount of cash they have in their wallet results in increased spending.
• Increased Throughput: When consumers pay by card or mobile device—especially when “tapping” (e., using contactless systems)—transactions are now generally faster, which means stores are able to process more customers more quickly with fewer staff, resulting in higher throughput.
• Reduced Security Expenditures: Cash payments expose merchants to the risk of theft, both in- store and when moving cash to and from the bank. To reduce this risk, stores must invest in both in-store security systems and in armored-car services to collect cash and take it to the bank. Card payments reduce—and, in the case of cashless systems, eliminate—this expenditure.
• Reduced Skimming: While modern checkout systems often limit opportunities for checkout staff to skim (g., barcode scanners that limit opportunities to input incorrect prices), theft remains a problem in many smaller stores.

As a result of these various benefits, the net cost of card payments (i.e., taking into account the fees charged by acquirers) is generally lower than the net cost of cash.[5] As an example, one year after switching to a fully cashless payment system in 2018, Atlanta’s Mercedes-Benz Stadium reported that average wait times had fallen by 20 to 30 seconds and per-capita food and beverage sales had risen by 16%, while saving more than $350,000 in operating expenses.

B. The Role of Interchange Fees

The ubiquity of card payments makes it easy to take them for granted. But that would be a mistake. The transition from cash and check to electronic payments has been a result of decades of investment by card networks, banks, and other parties in the payments system. It is fair to say that payment networks are a marvel borne of innovation and incentives, both of which have been facilitated largely by the “interchange” fees that issuing banks keep. This subsection explains how interchange fees work and why they are important.

1. Scale economies, network effects, and two-sided markets

Most products only become viable when production reaches a certain scale. Often, this is reinforced by network effects, where one person’s use of a product increases its value for others. Examples include typewriter keyboard layouts (e.g., QWERTY), video-cassette formats (e.g., VHS), and social networks (e.g., Facebook, X, etc.).[6]

In some cases, network effects involve two or more sets of market participants. For example, owners of USB-C chargers and cables are more likely to buy devices with USB-C inputs for power and information; meanwhile, manufacturers are more likely to install USB-C inputs when large numbers of consumers own USB-C cables and charges. This is known as a “cross-side” network effect, because it occurs across two inter-related—or “two-sided”—markets (i.e., the market for devices and the market for chargers and cables).

Payment systems are an example of just such a two-sided market with cross-side network effects. For a payment system to become viable requires scale among both buyers (one side) and merchants (the other side). If there are too few buyers using the payment system or too few merchants accepting it, the system will collapse. By contrast, as the proportion of buyers using a particular system increases, the proportion of sellers accepting it will likewise increase, and vice versa.

To grow and maintain a two-sided market, it is often necessary for one side to subsidize the other. Economic theory predicts that the less price-sensitive side will subsidize the more price-sensitive side.[7] For example, advertisers subsidize the production of newspaper content, resulting in more newspaper readers and more eyeballs for advertisements. Likewise, advertisers subsidize the development of better search-engine algorithms, increasing the number of searches performed on that search engine and the number of impressions for advertisements.

2. Interchange fees and merchant-discount rates

In the case of payment networks, these cross-side subsidies can include collection, payment default, fraud monitoring, various kinds of insurance, and other account-related costs, as well as rewards such as cashback and airline miles. They also include fees to the network operator, which cover not just the operation and maintenance of the network, but also investments in innovations such as the EMV chip, contactless payments, and 3DS, all of which help to reduce fraud.[8]

FIGURE 2: Transactions in a Three-Party Card-Payment System

The mechanism by which these subsidies are applied varies, depending on whether the card network is “three-party” or “four-party.” Three-party card networks like American Express and Discover act as card issuer, merchant acquirer, and network operator. As such, they subsidize cardholders directly via fees charged to merchants. This is shown in Figure 2.

In four-party networks, acquirers subsidize cardholders through the “interchange fee,” which issuers deduct from the amount remitted to the acquiring bank. The merchant’s acquiring bank, in turn, covers both the cost of interchange fees and its own costs by charging merchants a fee known as the merchant discount rate (MDR). These transactions are shown in Figure 3.

FIGURE 3: Transactions in a Four-Party Payment-Card Network

In principle, banks could establish interchange fees with one another. There are, however, roughly 4,000 banks in the United States.[9] For each of those banks to set interchange fees with one another would require more than 8 million separate agreements.[10] That would clearly be enormously time-consuming and costly. Unsurprisingly, a more efficient solution emerged early in the development of card networks, with the network operator setting default multilateral interchange fees.

The merchant fees charged by three-party networks and the interchange fees retained by issuing banks in four-party networks must be set at levels that effectively balance various competing interests. Given the wide variety and frequently varying characteristics of different merchants and consumers, as well as dynamic competition among issuers, the optimal fee level cannot be identified objectively. Rather, fee levels are an emergent property of the system that vary by type of card and merchant, and are set at levels intended to maximize value for all participants.[11] The U.S. Supreme Court put it succinctly in Ohio v Amex:

To optimize sales, the network must find the balance of pricing that encourages the greatest number of matches between cardholders and merchants.[12]

C. The Push for Price Controls on Interchange Fees

Despite the systemic benefits that arise from the payment networks’ interchange fees, larger merchants have persistently sought to reduce those fees. In some cases, they have done this through bilateral agreements.[13] More often, however, they have sought to use political and/or regulatory intervention to impose price controls on interchange fees.[14]

One probable reason for this is that larger merchants benefit from scale economies, which means that interchange represents a larger proportion of their MDR than for smaller merchants. As such, interchange-fee price controls tend to benefit large merchants disproportionately relative to smaller merchants.[15]

This campaign to lower interchange fees has been waged globally and, in many cases, has been successful, with politicians and/or regulators acceding to large merchants’ demands. In the United States, Congress passed an amendment to 2010’s Dodd-Frank Act that called on the Federal Reserve to impose price controls on the debit-card interchange fees retained by large banks.[16]

Over the past few years, representatives of large merchants have sought repeatedly to pass legislation at the state level that would prohibit issuers from retaining interchange fees in connection with the sales-tax portion of a transaction.[17] Until 2024, none of these attempts were successful. But in June 2024, Illinois passed the Interchange Fee Prohibition Act (IFPA), which would prohibit payment-card issuers from retaining interchange fees related to taxes and gratuities.[18] To our knowledge, this is the first time any government anywhere in the world has imposed restrictions on the retention of interchange in relation only to part of the total transaction amount. As such, there is no direct comparison from which to glean evidence of likely effects.

Illinois’ groundbreaking legislation is due to come into effect July 1, 2025, barring a subsequent veto or successful legal challenge.[19] Pennsylvania also recently introduced a law that would prohibit issuers from retaining interchange fees on sales tax.[20] Meanwhile, Georgia, Tennessee, and Florida have established committees to study the potential effects of such a law.[21]

Proponents of the elimination of interchange fees on sales tax typically highlight the amount merchants currently pay in such fees.[22] In so doing, they seek to imply that if interchange fees on sales tax were eliminated, merchant revenue would increase by those amounts. In practice, however, the effects on merchants would vary considerably, depending on the type of acquiring account they have and the mechanism(s) by which the interchange fees are removed or rebated.

Merchants who use a gateway, such as Stripe or Square, currently pay a “blended” MDR that is set nationally, and would therefore not see any MDR reduction. It seems likely that most other acquirers who offer blended MDRs would not reduce their rates either, as they would incur additional costs associated with implementing the interchange-fee carveout, which would be passed through to their merchant customers. Indeed, it is possible that the implementation costs to acquirers would be sufficient that they would increase their blended MDR.

Illinois’ IFPA seems to anticipate this effect and offers merchants an alternative means to recover interchange fees from the issuer: submitting a request for reimbursement to their acquirer within 180 days of the transaction.[23]

By contrast, larger merchants who are on “interchange plus” MDRs would presumably see a reduction in the interchange component of their MDRs. But they would likely also see an increase in the “plus” component that covers the acquirer’s costs. Plausibly, this could come in the form of an increase in fixed per-transaction charges, since the additional administrative cost is not contingent on the size of transaction. Thus, higher-volume, lower-ticket-size merchants could see their MDR costs increase, while lower-volume, higher-ticket-size merchants could see their MDR costs fall. But as discussed in this paper, much will depend on precisely how the law is implemented.

This paper seeks to adduce the likely effects of the IFPA, as well as similar regulations currently being contemplated in other states. To put these regulations into perspective, Section II offers broader context, explaining the increasingly important role that sales taxes play in funding government, the importance of efficient tax collection, and equity issues related to businesses collecting sales and other taxes, before concluding with a brief discussion of compliance cost rebates and some related questions regarding businesses’ collection of other taxes.

Section III describes the nature and mechanics of excluding sales tax (and other items) from interchange, and the likely implications of the various methods. Section IV adumbrates the likely implications of such regulations for merchants, consumers, banks, and government revenue. And the brief concludes in Section V with an alternative policy proposal.

II. Taxes Applied at the Point of Sale: Economic and Equity Considerations

From an economic perspective, sales taxes are generally superior to taxes on income or capital because they are less distortionary. While all taxes reduce the amount of capital available for investment, sales taxes provide incentives for saving over consumption, thereby increasing both current investment and future spending. By contrast, taxes on income and capital disincentivize work and investment. All other things being equal, when governments raise revenue via sales taxes instead of taxes on income or capital, rates of economic growth are likely to be higher.[24]

A 2008 study undertaken by a group of OECD economists offered empirical analysis of the effect of different types of tax, concluding that:

Corporate taxes are found to be most harmful for growth, followed by personal income taxes, and then consumption taxes. Recurrent taxes on immovable property appear to have the least impact. A revenue neutral growth-oriented tax reform would, therefore, be to shift part of the revenue base from income taxes to less distortive taxes such as recurrent taxes on immovable property or consumption.[25]

Over the past 20 years, numerous states have increased their reliance on sales taxes.[26] Currently, 45 states and the District of Columbia apply sales taxes,[27] while 38 states also have local sales taxes.[28] Overall, sales taxes represented 32% of state tax collections and 13% of local tax collections.[29]

In addition to “sales tax,” other forms of taxation are also applied at the point of sale. Most notably, excise tax is applied to certain items, such as alcohol, tobacco, and gasoline. In some cases, these taxes may be intended to discourage certain behaviors, such as smoking or drinking.[30] In other cases, they are intended to cover the costs that given activity imposes on the government; the gas tax, for example, is intended to pay for road construction and maintenance. Moreover, in some cases, the federal government may also levy excise taxes.

Other goods may be eligible for discounts on, or exemptions from, sales tax. These discounts and exemptions are typically intended to reduce the cost of necessities (though, in many cases, they are nonetheless regressive).[31] For example, as of April 2022, 32 states and the District of Columbia did not charge sales tax on groceries (but did have sales tax on other items), while a further six states charged lower rates for groceries.[32] Meanwhile, as of January 2020, 24 states and the District of Columbia taxed candy and/or soda at a different rate than other groceries (Figure 4).

One consequence of these excise taxes (state and federal), discounts, exemptions, and local sales taxes is that they complicate calculations of the amount of tax to be remitted and to whom.

FIGURE 4: Sales-Tax Exemptions & Reduced Rates for Groceries, Plus Exclusions from Exemptions for Soda & Candy

SOURCE: Tax Foundation

A. Efficiency Considerations for Tax Collection at Point of Sale

All tax collection entails both compliance costs for taxpayers and administration costs for government. From an economic perspective, the challenge is to raise the desired tax revenue while minimizing the sum of these costs. As Kyle Logue and Joel Slemrod note:

an optimal tax remittance regime requires that tax liabilities be assigned so as to minimize the overall social costs of compliance and administration, for a given level of achievement of the tax law’s desired distributional and revenue goals. By compliance costs we mean the private costs to the parties (and therefore the social costs) of complying with the law. By administrative costs, we mean the non-private social costs of enforcing compliance with the law.[33]

With respect to taxes at the point of sale (including sales and excise taxes), merchants are generally in the best position to calculate how much tax is owed and to whom, since they know what they are selling, how much charge, and where they are physically located. It would be practically infeasible to implement taxes at the point of sale without the cooperation of—and reporting by—merchants.

Until recently, most merchants kept paper records of transactions and used these to calculate how much tax is owed to which government. Such paper records are, however, time-consuming and expensive to maintain, and are also prone to both error and fraud.

In the past few decades, merchants have increasingly switched to using electronic transaction records, which in the case of retailers are often integrated directly with checkout systems; those checkout systems, in turn, are integrated with inventory systems.[34] By integrating tax reporting, such systems can reduce merchants’ tax-compliance costs.

Regardless which system is used to record transactions, merchants always have incentives to miscode transactions and thereby reduce the amount of tax they must remit. But merchants’ incentive to miscode transactions is reduced significantly when payments are made electronically, because state authorities can easily check their records against acquiring bank records and thereby identify any discrepancies.[35]

In other words, from the perspective of economic efficiency, the combination of electronic payments and electronic reporting likely minimizes the combined costs of merchant compliance and government administration. Perhaps in part reflecting this, several state governments offer tax rebates or discounts to encourage electronic sales-tax reporting.[36]

Arguably, governments could go further to offer incentives not only for electronic reporting but also for electronic payments, and thereby discourage the fraud associated with cash payments. This could be done, for example, by rebating some or all of the transaction costs that merchants incur related to point-of-sale taxes when payments are made electronically.

B. Equity Considerations for Tax Collection at Point of Sale

While there are strong economic arguments for the collection of taxes at the point of sale, there are clearly implications for merchants, who effectively become the tax collectors and incur the costs associated with the calculation, collection, recording, and remittance of such taxes. As such, in addition to the efficiency arguments discussed above, there may be equity reasons for reimbursing these costs.

It should be noted, however, that sales taxes are not the only taxes that businesses collect on behalf of government. Most businesses also collect and remit payroll taxes, for example. So, if there is an equity argument for reimbursing the costs of collecting and remitting sales tax, then conceivably there is also an equity argument to reimburse the costs of collecting and remitting payroll taxes.

III. Mandatory Interchange-Fee Exclusions: Why, What, and How?

This section outlines in broad terms why, what, and how certain components of a transaction would be excluded from interchange.

A. Why: Arguments Proponents Use to Justify Limiting Interchange Fees on Sales Taxes (and Other Items)

Proponents of excluding interchange fees from sales tax (and other items) argue primarily that merchants should not be responsible for the costs of collecting taxes. Moreover, they argue that the retention of interchange by issuing banks imposes an unfair burden on merchants.

To the extent that such “fairness” arguments are considered valid, it is not obvious that excluding interchange fees from taxes on point-of-sale transactions is the fairest or most effective method to redress the alleged iniquity. Meanwhile, extending the rebate to other items—such as gratuities—stretches the logic beyond its breaking point.

Twenty-five states currently permit merchants to obtain a rebate or deduction on some portion of the costs they incur for collecting sales taxes.[37] These rebates are usually intended to encourage timely reporting in a format that reduces the costs of monitoring and enforcing collection by the state. Moreover, many such programs cap the amount that can be deducted or rebated; as such, they are relatively more beneficial to smaller merchants—which, from an equity perspective, makes sense, as smaller merchants have proportionally higher fixed costs of compliance. The following are a few examples:

• Illinois currently permits merchants a discount of $5 or 1.75% of the sales tax paid each year, whichever is greater.[38]
• Florida permits merchants who file and pay electronically to deduct 2.5% of the sales tax remitted on the first $1,200 due (up to a maximum of $30).[39]
• Georgia permits merchants who file electronically to deduct 3% of the first $3,000 due and 0.5% on the remainder.[40]
• Pennsylvania permits merchants to deduct the lesser of $25 or 1% of the tax collected for monthly filers; the lesser of $75 or 1% for quarterly filers; and the lesser of $150 or 1% for semiannual filers.[41]

A recent budget measure in Illinois, however, would cap merchants’ annual discount at $1,000 per-merchant.[42] The Illinois Policy Institute estimates that this will cost retailers $186 million annually.[43] This highlights one clear motivation for Illinois: to transfer liability for the costs of collecting tax from the state to issuing banks.

B. What: Policies that Limit the Retention of Interchange Fees on Sales Taxes and Other Items

Over the past two decades, more than 30 bills have been proposed in state legislatures that would have excluded the retention of interchange by issuers on sales tax and, in some cases, other items. Typically, the bills would have given merchants the right to deductions or rebates of interchange fees if they either notified the issuer at the time of the transaction, or if they requested a rebate subsequently.

To date, however, the only legislation limiting the retention of interchange fees on part of a transaction is Illinois’ recently passed (and not yet implemented) IFPA. As such, it is worth considering that legislation, in particular. Despite its title, the IFPA does not actually “prohibit” interchange fees, per se. Rather, it states that:

An issuer, a payment card network, an acquirer bank, or a processor may not receive or charge a merchant any interchange fee on the tax amount or gratuity of an electronic payment transaction if the merchant informs the acquirer bank or its designee of the tax or gratuity amount as part of the authorization or settlement process for the electronic payment transaction.[44]

Specifically:

The merchant must transmit the tax or gratuity amount data as part of the authorization or settlement process to avoid being charged interchange fees on the tax or gratuity amount of an electronic payment transaction.[45]

Alternatively, merchants:

… may submit tax documentation for the electronic payment transaction to the acquirer bank or its designee no later than 180 days after the date of the electronic payment transaction, and, within 30 days after the merchant submits the necessary tax documentation, the issuer must credit to the merchant the amount of interchange fees charged on the tax or gratuity amount of the electronic payment transaction.[46]

In other words, under the IFPA, it is the merchant who determines whether interchange fees on taxes and gratuities charged at the point of sale are excluded or later rebated.

The IFPA employs an expansive definition of “tax” as “any use and occupation tax or excise tax imposed by the State or a unit of local government in the State.”[47] Meanwhile, it defines gratuity as “a voluntary monetary contribution to an employee from a guest, patron, or customer in connection with services rendered.”[48]

C. How: The Mechanics of Excluding Sales Taxes from Interchange Fees

There are several ways that sales taxes (and other fees, such as service charges) might be excluded from interchange. As noted, the IFPA offers two broad alternatives: merchants would either transmit the tax and gratuity information for each transaction separately while the transaction is in process (option (a)), or they would transmit that information to their acquiring bank within 180 days of the transaction and the bank would seek recovery of the amount from the issuing bank (option (b)).

In practice, option (a) could be achieved either through “dual authorization,” or through the use of “Level 2 & 3 messages,” both of which would entail some reprogramming of POS machines, as well as changes to the messaging systems. Rebates, meanwhile, would have other undesirable consequences. This subsection describes each of these methods.

Before getting into the specifics, however, it is important to understand how payment transactions work. We therefore begin with a brief overview of the two types of payment transaction: single-message (“PIN”) transactions and dual-message (signature) transactions.

1. Single-message (‘PIN’ debit) v dual-message (signature) transactions

Single-message transactions are run over ATM/debit networks and generally rely on the personal identification number (PIN) programmed on the card to authenticate a transaction. As a result, only one message is required: a notification instructing the issuing bank to debit the account of the cardholder in the amount they have authorized and to credit that amount to the account of the merchant, less the discount fee, which is paid to the acquiring bank.

Because of the nature of the transaction, settlement can be effected over banks’ electronic-funds-transfer (EFT) networks, which were initially built to settle transactions at shared ATMs and, subsequently, over networks of ATMs.[49] As with an ATM transaction, single-message debit transactions clear more or less immediately, though settlement (debiting the cardholder’s account and crediting the merchant’s account) can take up to 24 hours.

In a dual-message (“signature”) payment transaction, the first message is a request for authorization. This message is sent to the issuing bank, which confirms the authenticity of the card and checks whether the cardholder has sufficient credit remaining (for a credit transaction) or funds in their account (for a debit transaction). But the message is also parsed by the network, which is able to monitor for fraud. If authorized, the second message contains information confirming the actual amount of the transaction, which is then either added to the cardholders’ credit-card bill or debited from the cardholder’s account during clearing and settlement, as appropriate.

The dual-message settlement process involves a delay in posting and clearing transactions, which has certain advantages. For example, if a customer presents a card at a sit-down restaurant, the check total would be sent for authorization by the card issuer and a hold placed on the account for the stated amount on the bill. If the customer then adds a tip to the bill, it can be included in the second message that authorizes payment of the full amount. Similar “holds” are also often used by online merchants to delay payment (sometimes by as much as several days), thereby reducing the likelihood of fraud and associated chargebacks.[50]

2. Dual authorization

In some respects, the simplest way to separate transactions for which interchange may be withheld from those for which it is prohibited would be for merchants to run two separate transactions: one for the main item, on which interchange would be withheld by the issuer, and a second for the sales tax (and any other exempted items), on which no interchange would be withheld.

For dual authorization to work, merchants would have to update their POS machines’ software to split the transaction and to code the portions separately, so that issuers do not retain the interchange fee on the second transaction. This would also entail a change in the formatting of messages sent from POS machines through the payment stack to issuers, albeit likely a much less significant change than the use of Level 2 & 3 messages (see below).

At a minimum, dual authorization would slow checkout speeds dramatically. Indeed, payment cards would suddenly go from being the fastest form of payment to the slowest, resulting in a negative throughput effect.

A second problem is that, on some occasions, one of the transactions—but not both—would not be authorized. To mitigate such effects, merchants might choose to run all transactions as dual-message, placing a hold on the first transaction until the second has been authorized. That way, if one of the transactions is not authorized, the entire payment can be voided and an alternative payment method requested.

3. Level 2 & 3 data

As the discussion in Subsection 1 indicates, payment-card transactions work by sending messages across networks that authorize specific actions relating to accounts held with various financial organizations. In most cases, these messages are relatively simple (e.g., a debit-card message: Party A authorizes $100 to be debited from Account X at Bank 1 and credited to Account Y held by Party B at Nank 2; a typical credit-card message, meanwhile. is: Party A authorizes $100 of her line of credit at Bank 1 to be credited to Account Y held by Party B at Bank 2).

In practice, additional information is often included in the messages. For example, when transactions involve a party who is not physically present (known as “card not present” transactions), authorization typically requires additional identifiers (such as the address of the cardholder) to be transmitted for purposes of verification.

All the information described thus far is considered “Level 1” data, which typically contain essential information required to authorize a payment, including:

• Cardholder Data: PAN (Primary Account Number), card-expiration date.
• Transaction Amount: The total amount requested for authorization.
• Merchant Data: Basic merchant information, such as the identifier or name.
• Authorization Request: Whether the transaction should be approved or denied based on available funds or credit limits.

Most payment networks also permit additional information to be sent via “Level 2” and “Level 3” data. Level 2 data provide information typically used in business-to-businesses (B2B) corporate-card transactions, primarily to help businesses better track and manage their expenses. This can include:

• Invoice number.
• Sales tax.
• More detailed data about the merchant, such as location or merchant category code (MCC).
• Details regarding what the transaction was for (goods/services).

Level 3 data provide even more detailed information, also primarily for B2B corporate-card purchases, including:

• Line-item details (g., description, quantity, unit price, and total price).
• Freight or shipping costs.
• Any discounts applied to the transaction.
• Any other tax amounts that need to be itemized.
• Shipping or delivery information for physical goods.
• Enhanced merchant details, such as DUNS (Data Universal Numbering System) numbers.

In principle, Level 2 & 3 data could be used to communicate sales tax (a Level 2 item); other taxes, such as excise taxes; and other items, such as gratuities (both Level 3 items). This would, however, amount to a significant change in the way the messaging system functions. As such, it would entail considerable reprogramming by all parties in the payment stack (merchants, gateways, acquirers, other processors, networks, issuers). This would inevitably result in increased cost for those parties.

Smaller merchants with few business clients typically will not have POS machines designed to collect and transmit Level 2 & 3 data. Therefore, for such merchants to adopt this method of reporting would entail replacing existing POS machines with more expensive devices.

In addition, single-message (PIN) debit networks are generally not able to process Level 2 or 3 data. Adding this functionality to single-message debit networks would be an enormous undertaking. Moreover, by increasing the size and complexity of messages, it would slow the message-sending process. That might, in principle, be a worthwhile undertaking for a debit network that primarily operates in a state that has introduced prohibitions on the retention of interchange on certain items. But most single-message debit networks are regional or national in scope and it is unlikely to make economic sense for those networks to undertake such a significant change to their networks, especially if it caused the entire network to operate more slowly, creating frustrations for merchants and consumers.

4. Rebates on past transactions.

The third option is for merchants to maintain records of the various amounts excluded from interchange and then request a rebate from the issuer. While this may sound simple in principle, it would be fiendishly complicated in practice.

To reduce fraud, most card information transmitted to POS machines is converted into cryptograms.[51] Thus, for the acquirer to be able to request the rebate on the merchant’s behalf would require both the merchant and acquirer to retain records of the cryptogram issued by the card, along with details of the amounts eligible for a rebate (in the case of the IFPA, all taxes collected at the point of sale and any gratuities). This would entail reprogramming POS machines and changing how acquirers process and store information.

The rebate is likely to be the only option available to merchants whose acquirer charges a blended MDR, as the rate they pay does not depend on the specific interchange fee charged in relation to any particular card. But at the same time, the fact that the merchant does not know the interchange fee charged for a particular card means that it won’t easily be able to calculate the rebatable amounts. It would thus be forced to rely on either the acquirer or the issuer to calculate the interchange fee charged by correlating the stored cryptogram with the tax and gratuity data submitted by the merchant. The acquirer would then match this against the interchange fee applied in each case and calculate the rebatable amount.

The burden on both acquirers and issuers would be significant. Among other things, both acquirers and issuers would effectively be forced to create and maintain extensive correlated records of transactions and interchange fees charged over lengthy periods (at least seven months, in the case of the IFPA, and likely much longer, given the possibility of disputes).

To make matters worse, in the absence of appropriate surveillance, merchants would have incentives to abuse this system by claiming larger “gratuities” than were, in fact, contributed. Similarly, some merchants might expressly reduce their official prices and “encourage” customers to make large “voluntary” gratuity payments.

On top of plain fraud, there would inevitably be unintentional errors in recording transactions, which would result in under- or over-payment of rebates.

Issuing banks cannot know precisely what proportion of the interchange fee might later be rebated. Just from an accounting perspective, this would create headaches. But if a large proportion of merchants choose the rebate route, it would create a potentially significant contingent liability for issuing banks that might not be realized until six months or more after the transaction.

In the words of Glenn Grossman, “rebates applied to past transactions would be complex, expensive, and open to error and fraud.”[52]

At a high level, all the possible mechanisms for excluding sales tax (and other items, such as gratuities) from the interchange fee would increase the complexity and cost of card payments, with various undesirable consequences for both merchants, consumers, acquirers, and issuers.

IV. The Effects of Excluding Interchange Fees from POS Taxes (and Other Items)

This section outlines the likely broad effects of excluding interchange fees from POS taxes and other items.

A. Effect on Mode of Payment

The introduction of exclusions on the retention of interchange fees by card issuers in relation to tax and other items is likely to result in various changes to the payment methods used by consumers. But these effects will vary depending on the means by which the exclusions are implemented.

1. Dual authorization

Merchants that implement dual authorization will likely see:

• An increase in use of three-party cards (American Express, Discover). These cards do not charge interchange fees, and thus won’t be subject to the exclusions. As such, consumers will prefer them because they will be faster and less prone to fail.
• A shift away from card payments to cash, as some customers who lack a three-party card will once again see cash as a faster and more reliable option, especially for small to medium-sized payments.

2. Level 2 & 3 data

Merchants that use Level 2 & 3 data will likely see somewhat similar effects, although they will be more muted. If dual authorization is widespread, however, consumers may not be able to distinguish which merchants have adopted that method. Its effects could therefore become generalized, leading to a significant shift toward three-party cards and cash.

3. Rebates

The rebate method requires merchants to record transaction data. Depending which method is used, this could slow transactions considerably. Here, it is worth noting the IFPA’s definition of “tax documentation,” which is the term used for information that would be shared by merchants with acquirers to determine the rebate owed:

“Tax documentation” means documentation sufficient for the payment card network to determine the total amount of the electronic payment transaction and the tax or gratuity amount of the transaction. Tax documentation may be related to a single electronic payment transaction or multiple electronic payment transactions aggregated over a period of time. Examples of tax documentation include, but are not limited to, invoices, receipts, journals, ledgers, and tax returns filed with the Department of Revenue or local taxing authorities.[53]

It is difficult to see how “multiple electronic transactions aggregated over a period of time” could be accurately correlated with the specific interchange fees charged. The same is true of “tax returns filed with the Department of Revenue.” Indeed, to the extent that the IFPA legitimizes the use of such data—or other means, such as invoices, receipts, journals, and ledgers not directly linked to individual transaction data—it implicitly invites fraud on a massive scale.

B. Effects on Merchants

While the implementation of the IFPA and similar legislation may ostensibly be intended to benefit merchants, in reality, its effects will vary significantly depending on the type of merchant and how the legislation is implemented. In general, as the following discussion documents, large merchants will benefit relative to small merchants.

1. Dual authorization

Merchants that choose to implement dual authorization will likely see:

• A slowdown in the checkout process due to an increase in “tender time” (e., the amount of time it takes to take payment), reducing throughput. This will particularly harm high-throughput merchants, such as quick-serve restaurants.
• By slowing the shift to payment cards (including, in some cases, encouraging an increase in the use of cash), merchants will likely see a reduction in spending.
• By switching from single- to dual-message authorization, merchants could see an increase in interchange costs for debit.

In many cases, especially for smaller merchants, these negative effects will outweigh any reduction in interchange fees.

2. Level 2 & 3 messages

Merchants who implement Level 2 & 3 data will likely need to invest in upgrades to the software in their POS machines—and, in many cases, to the hardware as well. Larger merchants will be at a competitive advantage, because they will typically already have advanced POS machines and will also be able to spread the cost of software upgrades across all their stores (though some of the programming may be specific to particular localities).

3. Rebates

Merchants who implement rebates on interchange fees should be required to develop secure means to store transaction, tax, and (as appropriate) gratuity data. This would enable them subsequently to submit requests to their acquirer in a manner that enables that acquirer and the cardholder’s issuer to match a request to a specific transaction and associated interchange fee without compromising card or personal information. This would entail developing and implementing new systems. If such systems are integrated with POS machines, they could possibly be operated without significantly increasing tender time.

4. Potential for gratuitous abuse

The IFPA expressly forbids issuers from retaining interchange fees not only on sales tax, but also on gratuities—where “gratuity” means “a voluntary monetary contribution to an employee from a guest, patron, or customer in connection with services rendered.” While merchants would need to be careful to ensure that any “gratuity” is “voluntary,” many will surely restructure their prices so that gratuities become a larger proportion of the total amount charged.

Ironically, Illinois recently passed the “Junk Fee Ban Act,” which would, among other things, make it illegal to “offer, display, or advertise an amount a consumer may pay for merchandise without clearly and conspicuously disclosing the total price,” as well as to “misrepresent the nature and purpose of any amount a consumer may pay.”[54]

5. Broader effects on merchants

As noted in Section 1, when the effect on sales are taken into consideration, the cost of card payments is less than the cost of cash for nearly all merchants. Some of the methods (dual authorization, in particular) proposed to implement the exclusion of interchange fees related to POS taxes would increase the cost of card transactions for both merchant and consumer. This would lead to a reduction in the use of four-party cards. To the extent that this leads to a shift back to cash, or at least a slowing of the transition to electronic payments, it will almost certainly be harmful for merchants, as consumer spending will fall.

While some large merchants may benefit at the expense of smaller merchants, this would be a state-specific effect. The introduction of state-level interchange-fee regulations would mean having to develop and deploy state-specific processes and protocols in order to avail of the interchange-fee exclusions in those states.[55] As such, large merchants with a presence in many states would have to choose between continuing to use an integrated and uniform set of processes and protocols, or availing of the interchange exclusions in the state(s) where these apply.

C. Effects on Consumers

Proponents of interchange-fee exclusions for tax (and other items) argue that merchants will pass on savings to consumers. The experience with other interchange-fee regulations, including the Durbin amendment’s price controls, suggests, however, that any such passthrough is likely to be minimal, at best.[56] Indeed, since most merchants will see little (if any) reduction in total costs, and some are likely to see costs rise, it is simply implausible that most merchants will reduce the amount consumers are charged for goods and services.

In addition, some merchants might encourage buyers to use account-to-account payments, such as Zelle, which are not subject to interchange fees but that offer little protection to consumers (in contrast to credit cards, which offer fraud detection and protection, as well as the ability to execute chargebacks).

D. Effects on and Response by Issuing Banks

In their agreements with consumers, credit-card issuers’ terms include an array of specific commitments, ranging from ubiquitous ones related to fraud protection and zero liability, to more card-specific ones pertaining to things such as purchase-protection insurance and airline rewards. As already noted, the card companies meet those commitments, in large part, by retaining interchange fees on payments made using the cards. But if they are prevented from retaining interchange on some part of each transaction, this will reduce their revenue and hence their ability to meet the terms of their agreements. In response, issuers will either adjust their terms or find alternative sources of revenue.

This response by banks is predictable, in part, because it is similar to their response to other interchange-fee regulations. The Durbin amendment is again instructive. The Federal Reserve imposed price controls on interchange fees retained by banks with assets of more than $10 billion, causing those banks to lose billions of dollars in revenue each year. Covered banks sought to reduce their losses by increasing fees elsewhere. Specifically, they raised fees on checking accounts and increased the minimum deposit amounts required for free checking.[57] Many merchants saw little, if any, savings because of limited acquirer passthrough. In turn, merchants that did see their costs fall passed through little if any of those savings to consumers. Durbin instead primarily benefited big-box merchants at the expense of smaller merchants and, especially, lower-income consumers (many of whom were debanked).

From a consumer perspective, the cost of a product when purchased in a jurisdiction with sales taxes includes those taxes. Thus, consumers would reasonably expect any expenditure-related card benefits, such as rewards, to include the amounts they paid in taxes. But if there is no interchange fee on the tax portion (and possibly other items), the consumer will still pay the same total amounts, but the issuing bank will receive less interchange-fee revenue. Since national issuing banks are unlikely to change card terms for one or a few states, these costs will either be distributed across all cardholders, in the form of lower rewards and/or other card benefits, or issuers will work with payment-card networks to adjust interchange fees in order to recoup the costs from all merchants nationally, or some combination of these. In other words, states that prohibit the collection of interchange fees on taxes will create a significant negative externality for consumers and/or merchants in other states.

1. Differential effects on issuer revenue and response by issuing banks and credit unions

As noted, the exclusion of interchange fees on POS taxes and other items will result in a material reduction to issuer-bank revenue. These reductions will not, however, affect all issuers equally. One way that issuers may seek to compensate for the losses would be to encourage payment networks to increase multilateral interchange fees proportionally. But these interchange fees are set at a national, rather than state level. Moreover, as discussed in Section III, such adjustments would need to be set against the implications for merchant acceptance nationally, and therefore might not cover the full losses.

If the payment networks adjust interchange fees so that the national net losses are minimal, banks and credit unions with only a local or regional presence would experience greater losses. It is perhaps not surprising that credit unions, in particular, are concerned about this legislation.[58]

E. Effect on Government Revenue

As noted, the mandatory exclusion of POS taxes might lead to under-reporting of sales tax by merchants (especially if the sales-tax amount is automatically deducted). Perhaps more significantly, as noted above, by increasing the associated transaction costs, such mandates would discourage merchants from accepting four-party card payments. This would have several adverse consequences for government:

• First, to the extent that it reduces card payments generally, it would reduce throughput and ticket lift. In aggregate, this would reduce total sales, and thereby reduce POS taxes. Meanwhile, by reducing merchants’ profits, as well as those of local suppliers, it would also reduce corporation taxes at both the state and federal level. And it would also likely result in a reduction in wages, thereby reducing income taxes.
• Second, to the extent that it results in a shift to cash payments or reduces the rate of transition to electronic payments, it would cause an effective increase in the administration costs of sales taxes relative to the baseline (since it is, as noted, easier to monitor and enforce sales taxes when there are electronic records of the transactions maintained by merchants and their acquirer banks).

In sum, state legislation prohibiting issuing banks from retaining interchange fees on POS taxes and other elements of a transaction might benefit some large merchants, but these benefits would come at the expense of smaller merchants, consumers, issuing banks (especially smaller banks and credit unions), and governments. Overall, such prohibitions would almost certainly create large net social costs.

V. Conclusions and Policy Recommendations

The foregoing analysis suggests that prohibiting issuing banks from retaining interchange fees on taxes and other elements of a transaction at the point of sale would create significant market distortions. Specifically, it would:

• harm small- and medium-sized merchants at the expense of large merchants;
• result in a net reduction in business activity and profitability;
• reduce the value of four-party payment cards to consumers, which would (and possibly reverse) the transition away from cash and toward electronic payments; and
• reduce revenue to issuing banks and credit unions, especially those whose business is primarily in the state(s) that implements such legislation.

For governments, it would increase the costs of administering sales tax and reduce not only the revenue the comes from sales tax, but also from corporation tax and income tax (in states that charge such taxes).

If states want to increase the net revenue they receive from sales taxes, while also ensuring that merchants are not unduly burdened by the costs of compliance, they might consider ways to reduce monitoring and enforcement costs.

For example, they could offer merchants incentives to use electronic payments and automated electronic reporting. As noted, some states already reimburse merchants for or permit them to deduct some of the cost of collecting and remitting taxes when those taxes are reported electronically. States might enhance compliance further by offering additional discounts or rebates in relation to transactions that are processed fully electronically (e.g., card payments) and are hence more readily auditable.

[1] Berhan Bayeh, Emily Cubides, & Shaun O’Brien, 2024 Findings from the Diary of Consumer Payment Choice, Federal Reserve Financial Services (May 2024), available at https://www.frbservices.org/binaries/content/assets/crsocms/news/research/2024-diary-of-consumer-payment-choice.pdf, (noting that “The category “other” includes payments made with pre-paid [debit], checks, and money orders.”).

[2] Katherine Haan, People Are Twice As Likely To Spend More Money When Using Card Than Cash In 2024, Forbes Advisor (May 16, 2024), https://www.forbes.com/advisor/business/software/people-twice-likely-spend-using-card-than-cash.

[3] One for the Road, Curve, https://www.curve.com/en-gb/wearables (last accessed Nov. 14, 2024).

[4] Among other things, online commerce has improved price transparency and created new markets for “long-tail” products and services. It also played an important rule during the COVID-19 pandemic, enabling consumers to continue to make purchases and thereby reducing harms from lockdowns and the disease itself.

[5] Julian Morris & Ben Sperry, The Cost of Payments: A Review, Int’l Ctr. L. & Econ. (Aug. 28, 2024), available at https://laweconcenter.org/wp-content/uploads/2024/08/cost-of-payments-review-1.pdf.

[6] Stan Liebowitz & Stephen Margolis, Path Dependence, Lock-In and History, 11(1) J.L. Econ. & Org. 205–226 (Apr. 9, 1995); Stan Liebowitz & Stephen Margolis, Winners, Losers, & Microsoft: Competition and Antitrust in High Technology, The Independent Institute (1999); Brian Arthur, Competing Technologies, Increasing Returns, and Lock-In by Historical Events, 99(394) Econ. J. 116–131 (Mar. 1989).

[7] See Todd J. Zywicki, The Economics of Payment Card Interchange Fees and the Limits of Regulation, Int’l Ctr. L. & Econ. (Jun. 2, 2010), at 33, available at https://laweconcenter.org/images/articles/zywicki_interchange.pdf (economists use the term “price elasticity,” where less elastic means more price-sensitive and vice versa); Marc Rysman, The Economics of Two-Sided Markets, 23 J. Econ. Perspect. 125 (2009).

[8] James Cooper & Todd J. Zywicki, A Chip off the Old Block or a New Direction for Payment Card Security: The Law and Economics of the U.S. Transition to EMV, 2018 Mich. St. L. Rev. 869 (Mar. 8, 2017); What Are EMV Chip Cards? How EMV Works and Why It’s So Secure, Stripe (Feb. 2, 2023), https://stripe.com/gb/resources/more/what-are-emv-chip-cards; Visa Reports EMV® 3DS Delivers 35% Less Fraud, More Approvals, Superior Shopping Experience, PYMNTS (Dec. 16, 2021), https://www.pymnts.com/news/security-and-risk/2021/visa-reports-emv-3ds-delivers-less-fraud-more-approvals-shopping-experience.

[9] See FDIC Statistics at a Glance, Federal Deposit Insurance Corporation (Jun. 30, 2024), available at https://www.fdic.gov/system/files/2024-08/fdic-2q2024.pdf (as of June 30, the FDIC listed 3,985 commercial banks and 554 savings institutions.).

[10] The number of agreements required is n(n-1)/2, where n= number of banks.

[11] William F. Baxter, Bank Interchange of Transactional Paper: Legal and Economic Perspectives, 26 J. L. & Econ. 541, 577-78 (1983); Zywicki, supra note 7.

[12] Ohio v. Am. Express Co., 585 U.S. 529, 545 (2018).

[13] For example, in the United States, Costco has a co-branded card issued by Citibank and an exclusive arrangement with Visa. See Robin Sidel, Costco Names Citi, Visa as New Credit Partners, Wall St. J. (Mar. 2, 2015), https://www.wsj.com/articles/costco-names-citi-visa-as-credit-partners-1425302174; Meanwhile, in Canada, Costco has a co-branded card issued by Canadian Imperial Bank of Commerce (CIBC) and an exclusive arrangement with Mastercard. See CIBC Becomes the Exclusive Credit Card Issuer for Costco Mastercards in Canada and Acquires Existing Costco Canadian Credit Card Portfolio, Torys (Mar. 2, 2022), https://www.torys.com/en/work/2021/09/3fae5f0b-5d63-484e-a66e-f27b3b35dd64.

[14] 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. 4, 2022), available at https://laweconcenter.org/wp-content/uploads/2022/03/Payments-2021-Lit-Review.pdf; Eliana Garcés & Brent Lutes, Regulatory Intervention in Card Payment Systems: An Analysis of Regulatory Goals and Impact, SSRN (Sep. 21, 2018), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3346472.

[15] Id.

[16] Dodd-Frank Wall Street Reform and Consumer Protection Act, H.R. 4173, 111th Cong. § 2 (2010);; Regulation II, Debit Card Interchange Fees and Routing, 76 Fed. Reg. 43,393, 43,475 (Jul. 20, 2011), available at https://www.federalreserve.gov/aboutthefed/boardmeetings/frn-reg-ii-20231025.pdf.

[17] Glenn Grossman, The Harmful Impacts of Removing Sales Tax from Interchange Calculations, Cornerstone Advisors (2023), available at https://protectinterchange.com/wp-content/uploads/2024/01/23-Harmful-Effects-Removing-Sales-Tax_Cornerstone.pdf.

[18] Ill. Gen. Assemb., 815 ILCS 151,  Interchange Fee Prohibition Act, 1 et seq. (2024), https://ilga.gov/LEGISLATION/ILCS/ilcs3.asp?ActID=4515&ChapterID=67.

[19] See Illinois Bankers Association et al. v. Kwame Raoul, Case No. 1:24-cv-07307 (N.D. Ill., Aug. 15, 2024), https://www.aba.com/-/media/documents/amicus-briefs/legal-action/20240815-illinois-interchange-complaint-as-filed.pdf?rev=64eea57a872d41a68c93a5ba91c2c38b.

[20] Tom Nawrocki, Pennsylvania Weighs Eliminating the Swipe Fee on Sales Tax, Payments Journal (Jun. 24, 2024), https://www.paymentsjournal.com/pennsylvania-weighs-eliminating-the-swipe-fees-on-sales-tax.

[21] Andrew Gins, Measure to “Study” Manipulating Interchange Fees & Sales Tax Sneaks Into Florida Budget, Americans for Tax Reform (Mar. 14, 2024), https://www.atr.org/measure-to-study-manipulating-interchange-fees-sales-tax-sneaks-into-florida-budget; Ga. Gen. Assemb., HR 1135, House Study Committee on Credit Card Fee on State Sales and Excise Tax and Their Impact on Georgia Merchants and Consumers, Reg. Sess. 2023-2024 (2024), https://www.legis.ga.gov/legislation/67081.

[22] See, e.g., Christian Johnson, How Much Interchange Was Paid on Sales Tax in the U.S.?, CMSPI Blog (Oct. 16, 2024), https://cmspi.com/how-much-interchange-was-paid-on-sales-tax-in-the-us.

[23] See Interchange Fee Prohibition Act § 150-10 (b), supra note 18.

[24] See Robert E. Hall, Consumption Taxes Versus Income Taxes: Implications for Policy, 61 Nat’l Tax Ass’n, (1968), https://www.jstor.org/stable/23407742.

[25] Åsa Johansson, Chistopher Heady, Jens Matthias Arnold, Bert Brys, & Laura Vartiai, Taxation and Economic Growth, OECD Economics Department Working Papers No. 620 (2008), https://doi.org/10.1787/241216205486.

[26] Joe Eleniewski, Doug Nagode, & James P. Trebby, Trends in State Taxation: Consumption Tax Versus Income Tax, Deloitte (2014), available at https://www2.deloitte.com/content/dam/Deloitte/us/Documents/Tax/us-tax-current-trends-in-state-taxation-consumption-tax-versus-income-tax-010915.pdf.

[27] Jared Walczak, State and Local Sales Tax Rates, 2024, Tax Found. (Feb. 6, 2024),  https://taxfoundation.org/data/all/state/2024-sales-taxes.

[28] Id.

[29] Id.

[30] Randy W. Elder et al., The Effectiveness of Tax Policy Interventions for Reducing Excessive Alcohol Consumption and Related Harms, 38(2) Am. J. Prev. Med. 217–229 (Feb. 2010), https://www.ncbi.nlm.nih.gov/pmc/articles/PMC3735171.

[31] Jared Walczak, The Surprising Regressivity of Grocery Tax Exemptions, Tax Found. (Apr. 13, 2022), https://taxfoundation.org/research/all/state/sales-tax-grocery-tax-exemptions.

[32] Id.

[33] Kyle D. Logue & Joel Slemrod, Of Coase, Calabresi, and Optimal Tax Liability, 63(4) Tax L. Rev. 797-866. (2009).

[34] Retail and Point-of-Sale Systems, IBM, https://www.ibm.com/history/point-of-sale (last accessed Nov. 13, 2024).

[35] States typically have authority to subpoena records of the merchant and their bank when there is prima facie evidence of tax fraud. Such subpoenas—e.g., the merchant’s own records—might in some cases be issued directly by tax authorities, while others could be issued only by a judge.

[36] See Sales Tax Rebates by State, Davo by Avalara, https://www.davosalestax.com/sales-tax-rebates-by-states (last accessed Nov. 14, 2024).

[37] Id.

[38] See Ill. Gen. Assemb., 35 ILCS 120/3, Retailers’ Occupation Tax Act (2024), https://www.ilga.gov/legislation/ilcs/ilcs3.asp?ActID=582&ChapterID=8.

[39] See Florida Sales and Use Tax, Fla. Dept. of Revenue, https://floridarevenue.com/taxes/taxesfees/Pages/sales_tax.aspx#:~:text=When%20you%20electronically%20file%20your,due%2C%20not%20to%20exceed%20%2430 (last accessed Nov. 4, 2024).

[40] Enzo Garza, Georgia 2023 Sales Tax Guide, Acct. Prose (May 7, 2023), https://blog.accountingprose.com/georgia-sales-tax-guide#:~:text=Yes.,pay%20their%20sales%20tax%20electronically.

[41] Sales Tax File Upload Specifications, Pa. Dep’t. of Revenue, https://www.pa.gov/en/agencies/revenue/resources/mypath/multi-import/file-upload-specifications/sales-tax-file-upload-specs.html (last accessed Nov. 4, 2024).

[42] See Bryce Hill, Illinois General Assembly Oks $1.1B in Tax Hikes for Record $53.18B Spending, Ill. Pol. Inst. (May 29, 2024), https://www.illinoispolicy.org/illinois-general-assembly-oks-1-1b-in-tax-hikes-for-record-53-1b-spending.

[43] Id.

[44] Interchange Fee Prohibition Act § 150-10 (a), supra note 18.

[45] Id.

[46] Id.

[47] Interchange Fee Prohibition Act § 150/150-5, supra note 18.

[48] Id.

[49] Stan J. Sienkiewicz, The Evolution of EFT Networks from ATMs to New On-Line Debit Payment Products, Fed. Res. Bank of Phila. (Sep. 18, 2006), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=927473.

[50] See Mike Cannon, Credit Card Authorization Hold- How and When to Use, Chargeback Gurus (Dec. 26, 2021), https://www.chargebackgurus.com/blog/credit-card-authorization-holds.

[51] This is true for all contactless transactions, whether chips or mobile devices, as well as for all “dip” transactions in which the chip is inserted into the POS device. If the transaction data is not encrypted (e.g., if it is taken from a magstripe), then storage of the data would likely violate PCIDSS security protocols. A solution would therefore have to be found that takes unencrypted data and encrypts it in a way that ensures that it cannot be stolen, but can be correlated with the transaction data stored by acquirers and issuers. This might be possible by, e.g., using public-key infrastructure, but would entail essentially reinventing much of the architecture already developed by payment networks to establish secure transactions.

[52] Grossman, supra note 17.

[53] Interchange Fee Prohibition Act § 150-10 (a), supra note 18.

[54] Ill. Gen. Assemb., Bill Status of HB4629, 103^rd General Assembly, https://www.ilga.gov/legislation/billstatus.asp?DocNum=4629&GAID=17&GA=103&DocTypeID=HB&LegID=152072&SessionID=112 (last accessed Nov 4. 2024).

[55] As Glenn Grossman notes: “These proposals would create a disjointed set of standards whereas today credit and debit card networks are interoperable at a global level, ensuring common standards regardless of location. These common standards allow a merchant to operate in multiple states with the processes and protocols to provide a reliable payment experience for all customers.” See Grossman, supra note 17.

[56] Morris et al., supra note 14.

[57] Id.

[58] Credit Union, Bank Legal Challenge to New Illinois Interchange Law Underway, America’s Credit Unions, https://www.americascreditunions.org/news-media/news/credit-union-bank-legal-challenge-new-illinois-interchange-law-underway (last accessed Nov. 4, 2024).

ICLE President Geoffrey A. Manne was a guest on the Tech Policy Podcast to discuss the U.S. Justice Department’s (DOJ) antitrust lawsuit against Apple. The full episode is embedded below.

ICLE Nonresident Scholar Todd Zywicki took part in a recent Federalist Society discussion of the Credit Card Competition Act and Capital One’s proposed acquisition of Discover. Video of the full event is embedded below.

ICLE Senior Scholar Julian Morris was quoted by Digital Transactions in a story about a recent ICLE white paper on state-level rules on interchange fees. You can read the full piece here.

If the Illinois Interchange Fee Prohibition Act survives the legal challenges it faces, the law would “create significant market distortions,” says a recent report from the International Center for Law & Economics, a Portland, Ore.-based nonprofit research and policy center.

ICLE Senior Scholar Lazar Radic was quoted by Pirate Wires in a story about recent moves by the UK government toward more intense regulatory scrutiny of so-called “Big Tech” firms. You can read the full piece here.

“These regulations have been designed to short circuit competition laws in the sense that they institutionalize the enforcer’s preferred outcome,” says Lazar Radic, senior scholar for competition policy at the International Center for Law and Economics. That outcome might be that major platforms, like Apple and Google, should be open, not closed (one of the major stipulations by regulators acting under the DMA). Whatever the product decision might be, the underlying principle remains the same. As Radic puts it, “Here we have regulators saying, ‘We make the choice.’”

…“There’s a huge fear in Europe that the continent’s lagging behind is due in no small part to US companies buying European startups and unicorns,” Radic says. The idea is that as soon as a company becomes interesting, some Silicon Valley behemoth snaps it up before it can grow. After dozens of such acquisitions, the result (in this view, at least) is a stunted tech market.

…“This is a story about power — private versus public power, the state versus private enterprise,” Radic says. “Of course, it’s easier when the private companies happen to be American and you don’t have any of your own Big Tech companies that will be regulated.”

…“A lot of people are talking about how neoliberalism is over, and how the Washington Consensus failed,” says Radic. “As a result, a lot of this new regulatory movement is about subjecting private companies to the control of the state. This is a shift in political economy concerning the role of the state versus the role of the market and the permissible limits of state power.”

ICLE Director of Law & Economics Programs Gus Hurwitz was quoted in a Business Times story about how President-elect Donald Trump could approach the U.S. Justice Department’s antitrust case against Google. You can read the full piece here.

Further complicating matters is the incoming Trump administration, which could influence the case’s trajectory. While Trump’s first administration initiated the antitrust case against Google, he has since expressed concerns about breaking up American tech giants, citing competition with China. “Trump’s stance on the case remains unclear, but his pro-business approach could impact the DOJ’s push for remedies,” said legal analyst Gus Hurwitz.

ICLE Chief Economist Brian Albrecht was quoted by Courthouse News in a story about the role of two-sided markets in the U.S. Justice Department’s antitrust case against Google. You can read the full piece here.

“In a two-sided market, there’s no way to have one side without the other,” said Brian Albrecht, chief economist at the International Center for Law and Economics. “What you’re selling is a service that matches the two sides.”

…”These cases are going to set the landscape going forward on what we do about antitrust in tech companies,” Albrecht, of the International Center for Law and Economics, said. “They are especially important because of how big a role tech is playing right now and how big a role we expect it to play in the future.”

ICLE Director of Law & Economics Programs Gus Hurwitz was quoted by Reuters in a story about the U.S. Justice Department’s proposed breakup of Google. You can read the full piece here.

“DOJ will face substantial headwinds with this remedy,” because Chrome can run search engines other than Google, said Gus Hurwitz, senior fellow and academic director at University of Pennsylvania Carey Law School. “Courts expect any remedy to have a causal connection to the underlying antitrust concern. Divesting Chrome does absolutely nothing to address this concern.”

…Given Google Search’s popularity, Apple is likely to continue with Google as the default search engine even without any agreement or payments, Hurwitz said.

ICLE Chief Economist Brian Albrecht and Director of Law & Economics Programs Gus Hurwitz were both quoted by The Dispatch in an item about the U.S. Justice Department seeking the breakup of Google and Chrome as part of its antitrust case against the company. You can read the full piece here.

As part of the antitrust case it won against Google, the Department of Justice is calling for Google to sell off its Chrome browser. I wrote about the case in August. I think the DOJ’s move is a foolhardy one and agree with law professor Gus Hurwitz, who said, “This is the sort of remedy that lawyers who don’t know, or particularly care, about the complexities of running a business or encouraging innovation think is easy to implement.” The DOJ, in part, won its case against Google because behavioral economics has shown that “defaults have a powerful impact on consumer decisions.” But in the past couple of years, a steady stream of research has been altering that consensus. This thread by economist Brian Albrecht explores that shifting perspective.

ICLE Chief Economist Brian Albrecht was cited by the Foundation for Economic Education in a blog post about Nobel Prize winners Daron Acemoglu, Simon Johnson, and James A. Robinson. You can read the full piece here.

While AJR’s work has been criticized (as Brian Albrecht points out at the end of this text), their approach remains valuable for understanding how institutions that promote economic freedom are essential to prosperity.

ICLE Director of Innovation Policy Kristian Stout was quoted by Townhall in a story about Senate Majority Leader Chuck Schumer’s proposal to regulate artificial intelligence. You can read the full piece here.

 “Initially created as a standards-setting body…the institute could be poised to become a de-facto regulatory authority,” argues Kristian Stout, the director of innovation policy at the International Center of Law and Economics. Experience has shown the propensity of jawboning and soft law to harden, bending industry to regulators’ will without the trouble of navigating traditional legislative or rulemaking channels. “This could create an avenue for AI safety alarmists to shape restrictive policies through ‘voluntary’ standards and guidelines that effectively become mandatory through market pressure, government contracting, and judicial deference,” Stout continues. The power of “suggestion,” when the state does the suggesting, is the looming threat of coercion.

Stout also worries that federally endorsed datasets might exert a gravitational force on developers, prompting industry to abandon other options. “Instead of fostering a diverse ecosystem of AI research and development, it could result in homogenization, where every AI model is trained on the same narrow datasets, limiting breakthroughs that might arise from alternative approaches,” he argues. It is impossible to avoid the fact that a regulator’s endorsement of one practice ineluctably discriminates against competing practices.

ICLE Director of Competition Policy Dirk Auer was quoted by The Pinnacle Gazette in a story about the European Commission’s decision against Meta for using data advertisers give to Facebook Marketplace. You can read the full piece here.

Yet, on the flip side, Dirk Auer, director of competition policy at the International Center of Law and Economics, has raised concerns about the relevance of the Commission’s case. Not only has Meta been penalized, but Auer suggests this fine may overlook the fact competitors within the classified ad market are performing adequately, as they have distinct business models and product segments which allow room for growth outside of Facebook Marketplace’s reach.

ICLE Director of Competition Policy Dirk Auer was quoted by Reason in a story about the European Commission’s decision against Meta for using data advertisers give to Facebook Marketplace. You can read the full piece here.

In any event, those competitors are generally doing fine. Dirk Auer, director of competition policy at the International Center of Law and Economics, points out that each classified ad service provider has different product segments and different means of accessing users. Thanks to this differentiation, Auer says, “rivals have thrived…while Facebook’s marketplace remains a secondary player.”

Auer wonders why the commission has prosecuted “this shaky case of limited policy importance.” One possible answer: The commission’s antitrust fines are paid into the general European Union (E.U.) budget. As the commission notes, “Member States’ contributions to the E.U. budget for the following year are reduced accordingly.”

ICLE President Geoffrey A. Manne was quoted by The Dispatch in an item about the Federal Trade Commission’s antitrust case against Meta. You can read the full piece here.

From my former boss, legal scholar Geoffrey Manne: “The judge’s full opinion in FTC v. Meta is now available, and it doesn’t bode well for the FTC. I highlight the court’s distinct skepticism in this thread.”

ICLE Director of Innovation Policy Kristian Stout was quoted by Tech Brew in a story about how artificial intelligence issues might be approach in the upcoming Trump administration. You can read the full piece here.

Kristian Stout, director of innovation policy at the International Center for Law & Economics, said he’s encouraged by the fact that AI policy discussions aren’t as fiercely partisan as some other issues. Bipartisan-sponsored bills addressing specific AI issues like media rights and nonconsensual adult imagery are currently working through Congress, for instance. The so-called “AI Gang”—four senators who have positioned themselves as leaders of the legislative push—are two Democrats and two Republicans.

PORTLAND, Ore. (Nov. 13, 2024) – The International Center for Law & Economics (ICLE) offers the following statement on today’s order by the U.S. District Court for the District of Columbia denying motions for summary judgment made by both Meta Platforms and the Federal Trade Commission (FTC) in the FTC’s monopolization case against Meta concerning its acquisitions of Instagram and WhatsApp.

The following quote can be attributed to ICLE Director of Competition Policy Dirk Auer:

U.S. District Court Judge James Boasberg’s rejection of Meta’s and the FTC’s motions for summary judgment was expected. Plaintiffs face a low bar for cases to proceed to trial, and the antitrust agencies have a good track record in this respect. But that does not mean the FTC is likely to prevail on the merits. The FTC will, indeed, have a hard time showing the success of Instagram and WhatsApp was bad for consumers. Both services only became truly successful after their purchase by Facebook, while rivals like Path and Foursquare largely failed in the marketplace. These opposite fortunes appear to have little to do with monopolization by Meta and everything to do with how the company improved the services it purchased—which is precisely what the antitrust laws were designed to protect. Facebook also faces significant competition from services like TikTok, X, and Snapchat, which further undermines the FTC’s case.

To schedule an interview with Dirk or other ICLE scholars about the case, contact ICLE Media and Communications Manager Elizabeth Lincicome at (919) 744-8087 or [email protected].

ICLE Senior Scholar Daniel J. Gilman was quoted by MedPage Today in a story about the future of the Federal Trade Commission’s proposed premerger rules for pharmacy benefit managers. You can read the full piece here.

As for the finalized pre-merger guidelines announced in October, which the FTC said will help “determine which deals require an in-depth antitrust investigation,” Daniel Gilman, PhD, of the International Center for Law & Economics and a former attorney advisor in the FTC’s Office of Policy Planning, said that they are likely to be revised, withdrawn, or replaced, since “they blur distinctions between types of mergers,” and “attempt to stretch the law considerably.”

…Gilman said that he anticipates that there will be problems if the case reaches federal court, but he also does not expect a new administration to “keep pushing this if it runs into trouble.”

…Gilman said he expects the noncompete ban to “fold,” adding that it’s uncertain whether the FTC has competition rule-making authority to address the matter.

ICLE Chief Economist Brian Albrecht was quoted by S&P Global Market Intelligence in a story about the prospects for renewed mergers and acquisitions under a future Trump administration’s antitrust agencies. You can read the full piece here.

That said, Trump may exercise his regulatory pressures, said Brian Albrecht, chief economist at the International Center for Law & Economics. Specifically, Trump could attempt to exercise “soft power” and potentially pressure US companies not to acquire Chinese firms, Albrecht said.

ICLE Nonresident Scholar Todd Zywicki was quoted by Law.com in a story citing his recent ICLE white paper on the proposed merger between Capital One and Discover. You can read the full piece here.

“Any potential countervailing adverse effect on competition would likely be minor, if noticeable at all,” Zywicki and two other deal advocates wrote this summer in a white paper for the International Center for Law & Economics.

ICLE Director of Innovation Policy Kristian Stout was quoted by Communications Daily on what to expect from the Federal Communications Commission under the forthcoming Trump administration. You can read the full piece here.

Kristian Stout, director-innovation policy at the International Center for Law & Economics, told us the FCC could be relatively stable, similar to the first Trump administration under Ajit Pai. Carr worked for Pai as an aide and then general counsel before being nominated to the commission.

“Carr has consistently demonstrated a strong interest in working across the aisle, which could provide a stabilizing influence on the FCC’s direction,” Stout said. “His ability to balance priorities and navigate FCC issues with a collaborative mindset could be instrumental in ensuring continuity and productive governance, especially during a period that may otherwise bring significant regulatory shifts.” Stout also noted that Chairwoman Jessica Rosenworcel has done “commendable work, especially given the complexities she has faced on several high-stakes issues.”

ICLE Director of Law & Economics Programs Gus Hurwitz was quoted by The Information in a story about TikTok’s legal prospects under a Donald Trump presidency. You can read the full piece here.

“He could very well come in and double down on” the TikTok ban to show China he’s a “strong leader,” said Gus Hurwitz, senior fellow and academic director of the Center for Technology, Innovation & Competition at the University of Pennsylvania Carey Law.

ICLE Editor-in-Chief R.J. Lehmann was quoted by ProMarket in a story about a “neo-Jeffersonian” approach to antitrust. You can read the full piece here.

Some consolidation in the debit card market is likely beneficial to the creation of the sorts of citizens that Jefferson hoped for. According to R.J. Lehmann, senior fellow at the International Center for Law and Economics, extensive payment networks operated by Discover and Visa, to name two, may “expand access to free checking accounts with no minimum balance requirements to a wider range of low-income consumers.” He adds that such networks “could offer debit cards with cashback to lower-income consumers who would not qualify for credit cards. The benefits for this important underserved community could be enormous.” In other words, some consolidation in the debit card market may empower those American citizens who are least well off and enhance their economic independence.

Threads from ICLE scholars on trending issues for the month of November 2024.

? New blog post ?@EU_Competition recently fined Meta almost €800 million for tying its secondhand marketplace to the Facebook social network.

The decision is part of a broader push that is degrading internet services and diminishing tech investments in the EU.

A? pic.twitter.com/LIDuJVouuJ

— Dirk Auer (@AuerDirk) December 2, 2024

Here's the thing about the DOJ's proposed remedies in Google Search: You don't get to "remedy" conduct that you didn't prove in the first place was anticompetitive by claiming you have the right to ensure "there remain no practices likely to result in [future harm]." That's not… pic.twitter.com/o17uV80hY5

— Geoffrey Manne (@geoffmanne) November 21, 2024

The DOJ wants Google to sell Chrome.

Instead of getting into the weeds of this case, let's take a step back talk about why these breakups are SO hard to pull off in practice. ? https://t.co/e0ud4UrKpm

— Brian Albrecht (@BrianCAlbrecht) November 18, 2024

Is anyone else getting the warm fuzzies over satellite spectrum sharing? ? 1/7 pic.twitter.com/U5P8n4FsWB

— Eric Fruits, Ph.D. (@ericfruits) November 18, 2024

A little over a week ago, @LawEconCenter filed a brief in NetChoice v. Bonta in front of the District Court for the Northern District Court of California. Today @TOTMblog, I expanded upon the underlying law & econ argument in that brief (a short ?):https://t.co/gySUmDLPds

— Ben Sperry (@RBenSperry) November 18, 2024

Congratulations to @BrendanCarrFCC on being appointed @FCC chair. He's starting with a huge "to do" list. ? 1/5 https://t.co/3fda6FofMK pic.twitter.com/MtLNjYNAMF

— Eric Fruits, Ph.D. (@ericfruits) November 18, 2024

The European Commission just announced it was fining Meta €797 million for tying its marketplace to the Facebook platform.

As far as I can tell, the decision raises more questions than it answers.

Here are a couple of them.

A? https://t.co/u3VtGn5OKh

— Dirk Auer (@AuerDirk) November 14, 2024

The judge's full opinion in FTC v. Meta is now available, and it doesn't bode well for the FTC. I highlight the court's distinct skepticism in this thread. ? 1/

— Geoffrey Manne (@geoffmanne) November 14, 2024

Judge Boasberg just dismissed Meta and the FTC's motions for summary judgment in the Instagram/WhatsApp proceedings: The case is going to trial.

Does this mean the FTC is likely to win its case?

The short answer is no.

A? pic.twitter.com/QsfG4f6mFj

— Dirk Auer (@AuerDirk) November 13, 2024

Most people outside the Pacific Northwest have never heard of Ziply Fiber.

Well, it turns out Bell Canada's first foray into the U.S. broadband market will be its proposed purchase of Ziply. 1/5 pic.twitter.com/JjyCSxy2CG

— Eric Fruits, Ph.D. (@ericfruits) November 12, 2024

1/ Meta is rolling out changes in the EU for Facebook and Instagram users, offering a choice between reduced-price ad-free subscriptions or a free option with either personalized or “less personalized” but unskippable ads. https://t.co/hWSejkp4zI

— Lazar Radic (@laz_radic) November 12, 2024

On Friday, @LawEconCenter filed an amicus brief in @NetChoice v. Bonta, this time in the federal District Court for the Northern District Court of California:https://t.co/g8uE5l3CgK

— Ben Sperry (@RBenSperry) November 11, 2024

Nice piece from George Mason's John Yun on the DOJ's antitrust complaint against Visa. pic.twitter.com/FIkqgUZNZv

— Eric Fruits, Ph.D. (@ericfruits) November 7, 2024

What does Trump's election mean for the next 4 years of US antitrust? Lots of big questions.

As with everything from Trump, we really don't know details. But I have a few thoughts on possible changes. pic.twitter.com/peGh0eTUl1

— Brian Albrecht (@BrianCAlbrecht) November 6, 2024

Big questions about what the FCC will look like in the next administration. Chair Rosenworcel's term is up at the end of June.

I can't imagine President Trump re-appointing her. There's even a possibility she loses her chair to @BrendanCarrFCC. pic.twitter.com/LhbrOIFTfD

— Eric Fruits, Ph.D. (@ericfruits) November 6, 2024

? My opinionated takeaways from today's EDPB (the "parliament" of EU privacy authorities) stakeholder consultation on AI & GDPR – an important debate that could shape the future of AI development in Europe. /1

— Miko?aj Barczentewicz (@MBarczentewicz) November 5, 2024

A recent report suggests China adapted an open-source AI model for military use. As we hurtle toward potentially destructive AI regulation, its important to put this in perspective. 1/12 pic.twitter.com/gvROqDKhYN

— kristian stout (@kristianstout) November 1, 2024