We are accustomed to the idea that the decision to relax (or more inaccurately, "break") medical product patents through compulsory licenses almost always addresses a specific health care emergency or remedies a violation of competition laws. But a recent dispute (see WSJ, FT) involving the U.S. and Brazil highlights the fact that the desire to access patented drug information can be purely economic.
The dispute involved improper U.S. subsidies to domestic cotton growers that inhibited free trade. Brazil brought a complaint before the WTO, and the dispute settlement procedure was utilized to determine the outcome. In its complaint, Brazil argued for countermeasures in the amount of $2.5 Billion. Significantly, one of the measures it requested was the ability to suspend its intellectual property obligations under TRIPS. Although specific products are not identified in the WTO filings, reports indicate that Brazil intended to take compensation by suspending the enforcement of patents held by U.S. companies -- essentially, a compulsory license outside of the TRIPS regime:
The dispute involved improper U.S. subsidies to domestic cotton growers that inhibited free trade. Brazil brought a complaint before the WTO, and the dispute settlement procedure was utilized to determine the outcome. In its complaint, Brazil argued for countermeasures in the amount of $2.5 Billion. Significantly, one of the measures it requested was the ability to suspend its intellectual property obligations under TRIPS. Although specific products are not identified in the WTO filings, reports indicate that Brazil intended to take compensation by suspending the enforcement of patents held by U.S. companies -- essentially, a compulsory license outside of the TRIPS regime:
According to a report in a Brazilian newspaper the government has prepared a "provisional measure" - a presidential decree that takes immediate effect, although it must later be ratified by Congress - to allow Brazilian pharmaceuticals companies to copy medicines protected by US patents. (FT).The WTO ultimately denied Brazil's request regarding TRIPS, stating that the amount of compensation due at this time ($295 million) was insufficient to justify such a countermeasure. But the case stands as an example that all patent compulsory licenses are not necessarily related to human rights goals. They can be based on a purely economic motive.
I recently read an interesting article by David Goldhill in the Atlantic. It's a discussion of the wildly misaligned incentives in the U.S. health care system. Essentially, the article asserts that a lack of transparency in costs and reimbursement have allowed costs to skyrocket while providing generally poor care. In view of my previous post on the huge market for cancer treatments, one should question whether that market size is due to actual need or a dysfunctional funding system. In other words, the existence of a market may not always indicate great medical need, particularly if the market is artificially inflated. This means that the massive investment in research may not necessarily provide a great benefit to the public, as I suggested in the post.
On the topic of health care markets, the underlying conclusion of the article is that many health care costs (at the very least, routine costs) should be paid directly by consumers who can exercise choice and encourage competition. According the the author, this would solve existing incentive misalignment through a traditional market approach. The market for LASIK surgery, which is generally not reimbursed by insurance, is used as an example, where costs have significantly decreased since the procedure was introduced.
Total consumer control may not be as attractive as it sounds, as basic health care is not like other markets. The most important difference is that in many cases we do not want people to choose to forgo treatment, and this may happen if they had to completely internalize the costs. LASIK is clearly an optional procedure, and people who could benefit from it (like me) lead perfectly happy and healthy lives without it (like me). But prenatal care, hypertension treatments, cancer screening and the like can be demonstrated to positively impact the quality of life and should not be promoted as optional. Many consumers may not be sophisticated enough to make decisions on heath care spending in every case (like me). In truth, we want a system that encourages people to attain some preventative care and treatments that they might not pay for themselves. A pure market approach in this context may lead to some undesirable outcomes.
On the topic of health care markets, the underlying conclusion of the article is that many health care costs (at the very least, routine costs) should be paid directly by consumers who can exercise choice and encourage competition. According the the author, this would solve existing incentive misalignment through a traditional market approach. The market for LASIK surgery, which is generally not reimbursed by insurance, is used as an example, where costs have significantly decreased since the procedure was introduced.
Total consumer control may not be as attractive as it sounds, as basic health care is not like other markets. The most important difference is that in many cases we do not want people to choose to forgo treatment, and this may happen if they had to completely internalize the costs. LASIK is clearly an optional procedure, and people who could benefit from it (like me) lead perfectly happy and healthy lives without it (like me). But prenatal care, hypertension treatments, cancer screening and the like can be demonstrated to positively impact the quality of life and should not be promoted as optional. Many consumers may not be sophisticated enough to make decisions on heath care spending in every case (like me). In truth, we want a system that encourages people to attain some preventative care and treatments that they might not pay for themselves. A pure market approach in this context may lead to some undesirable outcomes.
One of the best examples of how the patent system is supposed to work is provided implicitly by a story in today's New York Times. The article discusses the efforts of pharmaceutical companies to develop new treatments for cancer. According to the article, there is a huge market for cancer treatments that provide even a small increase in life expectancy. As a result (and also due to the declining market in other treatment areas), pharmaceutical companies are engaging in a massive research effort to discover new drugs. All are hoping to find a blockbuster treatment, which may command $50,000 a year or more from patients in need. The ability to maintain these prices will be provided by patents.
But the effort is very hard because cancer is such a tricky disease. There is a huge risk involved, and truthfully only a small chance of reward. One quoted oncologist describes this effort negatively as a bubble -- a massive dedication of cash that will likely produce few winners and result in great losses for the others. This may be true from the company's perspective. But from the public's perspective, it's a good thing. In the end, we will benefit from whatever drugs are discovered, and we don't have to entirely fund the effort. Conversely, if this effort were entirely funded by the public, we would suffer all of the research loses, and likely would be much more conservative in what paths are investigated.
Doesn't such a massive investment result in higher drug prices? Not if the market is working efficiently. Price should be dictated by the treatment's benefits. If it doesn't do much (and that information is understood by physicians, patients and insurers, which is another issue entirely), people will not pay for it. The amount of sunk research costs are irrelevant.
And that's the point of the patent system. You encourage private actors to invest and take risks when there is a market interest in the information. If they are successful, they win and get to take advantage of the right to exclude others from the invention for a limited time. After that, the public shares in the invention.
I should add that some would argue that a massive private investment toward the same inventive goal is inefficient from a public perspective as well as private (it's often termed a patent race in the economic literature). But I think it's easier to make that conclusion in hindsight. In the context of the effort to find new cancer drugs, it's hard to identify a more efficient research path that doesn't risk missing a hard-to-find treatment that ends up being very important.
But the effort is very hard because cancer is such a tricky disease. There is a huge risk involved, and truthfully only a small chance of reward. One quoted oncologist describes this effort negatively as a bubble -- a massive dedication of cash that will likely produce few winners and result in great losses for the others. This may be true from the company's perspective. But from the public's perspective, it's a good thing. In the end, we will benefit from whatever drugs are discovered, and we don't have to entirely fund the effort. Conversely, if this effort were entirely funded by the public, we would suffer all of the research loses, and likely would be much more conservative in what paths are investigated.
Doesn't such a massive investment result in higher drug prices? Not if the market is working efficiently. Price should be dictated by the treatment's benefits. If it doesn't do much (and that information is understood by physicians, patients and insurers, which is another issue entirely), people will not pay for it. The amount of sunk research costs are irrelevant.
And that's the point of the patent system. You encourage private actors to invest and take risks when there is a market interest in the information. If they are successful, they win and get to take advantage of the right to exclude others from the invention for a limited time. After that, the public shares in the invention.
I should add that some would argue that a massive private investment toward the same inventive goal is inefficient from a public perspective as well as private (it's often termed a patent race in the economic literature). But I think it's easier to make that conclusion in hindsight. In the context of the effort to find new cancer drugs, it's hard to identify a more efficient research path that doesn't risk missing a hard-to-find treatment that ends up being very important.
The excellent media relations group at Smeal put together a nice overview of my Fulbright project, complete with a textual summary as well as a very professional video. (thanks, Wyatt, Nicole and Andrew!). You can see the video here:
Although I'm a little stumbling in my presentation (and I wish the video still didn't make me look like I'm about to blow out some birthday candles), you can get the gist of what I'm doing while in Canada and why it interests me.
Facebook has agreed to revise several of its privacy policies in response to an investigation by the Canadian government's Privacy Commissioner. Several news sources (e.g., NYT, Ottawa Citizen) report that the Commissioner and Facebook reached an agreement in which Facebook will provide more disclosure about what it does with personal information and how users may control that use. Interestingly, the Canadian government's inquiry was initiated by the University of Ottawa's Canadian Internet Policy and Public Interest Clinic's (CIPPIC) complaint about Facebook's privacy practices.
There continues to be a robust debate about how much government intervention is necessary to ensure the security of private information on the web (see, e.g., the recent FTC Report on the self-regulation of online behavioral advertising). Some favor less regulation and suggest that consumer choice should be the most important question -- a market based approach, essentially. Notably, my spouse, who has an expertise on college students' use of web resources including social networking sites, has explained that more computer savvy users are actually pretty good at protecting their private information. But she is quick to add that this is true when users are aware of how information is being used.
That last point is probably what makes a more market-based approach difficult in a case like this. Consumers cannot make rational choices if they don't have all of the information. While some may argue that users who ignore privacy policies and never read click-wrap contracts deserve any negative consequences they incur, when the information is not reasonably available, government intervention may be the only way to level the playing field.
As an aside, I would argue that there appears to be a growing tension between divergent privacy needs at different phases of one's life. For example, my students tell me that they often make informed choices about disclosing a great amount of information to their online peer groups. This seems appropriate in college, when creating relationships and discovering one's identity is a big part of the experience. But these students are occasionally caught by surprise when the business community expects them to historically conform to different privacy and personal behavior norms (which seem to be progressively more conservative). In particular, one of my upper level business law students told me that he was required to produce his Facebook profile in the course of interviewing for a job. It hadn't occurred to him that this information would be shared in a business environment. It seems that a more open social networking environment is clashing with a more conservative business climate. In view of this, better disclosure of how web sites use private information is even more important.
Of course, rules that limit Facebook won't provide protection to those who migrate to other sites.
There continues to be a robust debate about how much government intervention is necessary to ensure the security of private information on the web (see, e.g., the recent FTC Report on the self-regulation of online behavioral advertising). Some favor less regulation and suggest that consumer choice should be the most important question -- a market based approach, essentially. Notably, my spouse, who has an expertise on college students' use of web resources including social networking sites, has explained that more computer savvy users are actually pretty good at protecting their private information. But she is quick to add that this is true when users are aware of how information is being used.
That last point is probably what makes a more market-based approach difficult in a case like this. Consumers cannot make rational choices if they don't have all of the information. While some may argue that users who ignore privacy policies and never read click-wrap contracts deserve any negative consequences they incur, when the information is not reasonably available, government intervention may be the only way to level the playing field.
As an aside, I would argue that there appears to be a growing tension between divergent privacy needs at different phases of one's life. For example, my students tell me that they often make informed choices about disclosing a great amount of information to their online peer groups. This seems appropriate in college, when creating relationships and discovering one's identity is a big part of the experience. But these students are occasionally caught by surprise when the business community expects them to historically conform to different privacy and personal behavior norms (which seem to be progressively more conservative). In particular, one of my upper level business law students told me that he was required to produce his Facebook profile in the course of interviewing for a job. It hadn't occurred to him that this information would be shared in a business environment. It seems that a more open social networking environment is clashing with a more conservative business climate. In view of this, better disclosure of how web sites use private information is even more important.
Of course, rules that limit Facebook won't provide protection to those who migrate to other sites.
I'm on sabbatical during the fall 2009 semester serving as the Fulbright Chair in International Humanitarian Law at the University of Ottawa in Canada. My project will encompass a comparative analysis of mechanisms for balancing human rights with intellectual property incentives. A primary focus will be Canada's Access to Medicines Regime, which is a patent compulsory licensing system that facilitates the export of low-cost generic drugs to least-developed countries.
After a protracted absence, due to a number of factors not worth detailing, I'm once again working to create new entries on the Incentivize! blog. My hope is that these entries will be useful to my current classes as well as those who share my research interests.
Recently, several news sources (Patently-O, WaPo) have reported on a little noticed amendment in the Senate version of the patent reform bill (S. 1145). It would grant immunity to banks for patent infringement of digital check scanning and archiving technology. Apparently, the bill is directed at the patents of one particular company -- DataTreasury -- which have been recently upheld in a PTO reexamination proceeding. According to the Congressional Budget Office, the federal government could be on the hook for $1 billion dollars if this immunity is interpreted as a taking of private property
In my opinion, there should be very little question that this move would require full compensation by the federal government. Although some continue to debate whether patents are property under the 5th Amendment for takings purposes, law professor Adam Mossoff has provided some compelling evidence that this has long been the case in U.S. law. And, in the context of pharmaceutical importation legislation, I have written about the fact that how Congress eliminates patent rights -- either prospectively or retrospectively -- is significant in determining whether a taking occurs. But in this case, the retroactive effect is clear. It would certainly undermine the purpose of designating patents as personal property (35 U.S.C. 261) if Congress were permitted to render them unenforceable without compensation.
So, the real issue in this case is whether taxpayers should be forced to bear the burden of the bank's infringement. While $1 billion isn't enormous in the context of the federal budget, it's the principle of the move that is concerning. If banks deserve this bailout (rather than being forced to negotiate and license like every other infringer), who else is similarly deserving? And what metric do we use to determine the payout order (does priority go to lifesaving technology, industrial innovation, etc.)? It could be a slippery slope.
In my opinion, there should be very little question that this move would require full compensation by the federal government. Although some continue to debate whether patents are property under the 5th Amendment for takings purposes, law professor Adam Mossoff has provided some compelling evidence that this has long been the case in U.S. law. And, in the context of pharmaceutical importation legislation, I have written about the fact that how Congress eliminates patent rights -- either prospectively or retrospectively -- is significant in determining whether a taking occurs. But in this case, the retroactive effect is clear. It would certainly undermine the purpose of designating patents as personal property (35 U.S.C. 261) if Congress were permitted to render them unenforceable without compensation.
So, the real issue in this case is whether taxpayers should be forced to bear the burden of the bank's infringement. While $1 billion isn't enormous in the context of the federal budget, it's the principle of the move that is concerning. If banks deserve this bailout (rather than being forced to negotiate and license like every other infringer), who else is similarly deserving? And what metric do we use to determine the payout order (does priority go to lifesaving technology, industrial innovation, etc.)? It could be a slippery slope.
Yesterday, radiologist Bruce Saffran won a $431 million patent suit against Boston Scientific (NYT, LawBlog). The patent (5,653,760) claims porous sheets that control delivery of drugs to damaged tissue, and a Texas jury concluded that it covered Bo-Sci's taxus-coated cardiac stents. Apparently, it's the sixth largest award in patent litigation history, and certainly one of the largest recent awards. An interesting fact about Saffran is that he is a practicing physician and independent inventor (as far as I can tell). He doesn't manufacture and sell stents or other devices related to his patent. In the eyes of some, that makes Dr. Saffran a patent troll (see, e.g., Patent Troll Tracker -- who also posts the verdict form). Dr. Saffran has lost no profit or sales from Bo-Sci's actions. Indeed, the entire award is a "reasonable royalty" to compensate for the infringement.
Of course, Dr. Saffran is not a typical patent troll as that character has been portrayed in the media and literature. He did not purchase his patent from another and he did not try to obtain an injunction against Bo-Sci (or a correspondingly out-sized award). In fact, Dr. Saffran is the archetypal small, independent inventor that the U.S. patent system was intended to support. I think most people would agree that we want the Dr. Saffrans of the world to have the incentive to keep inventing. So, now that the patent reform effort finally seems to be making headway in Congress, it's important to consider how the proposed changes would impact inventors like Dr. Saffran as well as large corporations.
Oh, and one other interesting note: a few publications, including WSJ's Law Blog, state that Dr. Saffran's case was handled on a contingency basis by DC law firm, Dickstein Shapiro. That's significant not only because it stands to net D-S a huge fee, but also because contingency fees are extraordinarily rare in patent cases. Maybe this case will pave the way for more in the future?
Of course, Dr. Saffran is not a typical patent troll as that character has been portrayed in the media and literature. He did not purchase his patent from another and he did not try to obtain an injunction against Bo-Sci (or a correspondingly out-sized award). In fact, Dr. Saffran is the archetypal small, independent inventor that the U.S. patent system was intended to support. I think most people would agree that we want the Dr. Saffrans of the world to have the incentive to keep inventing. So, now that the patent reform effort finally seems to be making headway in Congress, it's important to consider how the proposed changes would impact inventors like Dr. Saffran as well as large corporations.
Oh, and one other interesting note: a few publications, including WSJ's Law Blog, state that Dr. Saffran's case was handled on a contingency basis by DC law firm, Dickstein Shapiro. That's significant not only because it stands to net D-S a huge fee, but also because contingency fees are extraordinarily rare in patent cases. Maybe this case will pave the way for more in the future?
The NYT carried an article yesterday commenting on how difficult it is to remove one's identity from Facebook. In short, it's extremely difficult -- perhaps impossible -- to remove all vestiges of one's participation. Apparently, people are surprised by this. The truth is, the permanency of one's on-line presence has been a fact of life for quite some time. For example, a fascinating site known as the "Wayback Machine" on the "Internet Archive" has silently logged the web for years (try searching for a page you posted years ago, but thought was removed or permanently changed -- it's startling in its comprehensiveness).
Permanency may be the new reality, but I would imagine that most of us are not prepared to face it. There's a duplicity in our Internet interactions. We engage in ever more prolific posting, with the notion that some unwritten code of ethics will prevent it from surfacing in an unexpected context in the future. But most would have no qualms about running a Google search on an acquaintance or prospective employee, perusing all that appears, personal or not. It has been argued that this is a temporary problem because younger people are entirely accustomed to having embarrassing information on the Internet. Perhaps it will become so common place as to be ignored. I'm not so sure. When America's youth graduates to positions of power, I believe concerns about corporate image and personal judgment pose the same issues no matter what one's age or experience. Maybe there will be some increased flexibility on what is acceptable, but it is obviously better to be cautious.
Permanency may be the new reality, but I would imagine that most of us are not prepared to face it. There's a duplicity in our Internet interactions. We engage in ever more prolific posting, with the notion that some unwritten code of ethics will prevent it from surfacing in an unexpected context in the future. But most would have no qualms about running a Google search on an acquaintance or prospective employee, perusing all that appears, personal or not. It has been argued that this is a temporary problem because younger people are entirely accustomed to having embarrassing information on the Internet. Perhaps it will become so common place as to be ignored. I'm not so sure. When America's youth graduates to positions of power, I believe concerns about corporate image and personal judgment pose the same issues no matter what one's age or experience. Maybe there will be some increased flexibility on what is acceptable, but it is obviously better to be cautious.
About the Author
Dan Cahoy is Associate Professor of Business Law at Penn State's Smeal College of Business. He is also a registered patent attorney. For more information, take a look at Dan's CV, Web bio or Research Page.
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