Tuesday, February 12, 2019

IP and the Right to Repair

I ran across an interesting article last week that I thought I would share. It's called Intellectual Property Law and the Right to Repair, by Leah Chan Grinvald (Suffolk Law) and Ofer Tur-Sinai (Ono Academic College). A draft is on SSRN and the abstract is here:
In recent years, there has been a growing push in different U.S. states towards legislation that would provide consumers with a “right to repair” their products. Currently 18 states have pending legislation that would require product manufacturers to make available replacement parts and repair manuals. This grassroots movement has been triggered by a combination of related factors. One such factor is the ubiquity of microchips and software in an increasing number of consumer products, from smartphones to cars, which makes the repair of such products more complicated and dependent upon the availability of information supplied by the manufacturers. Another factor is the unscrupulous practices of large, multinational corporations designed to force consumers to repair their products only through their own offered services, and ultimately, to manipulate consumers into buying newer products instead of repairing them. These factors have rallied repair shops, e-recyclers, and other do-it-yourselfers to push forward, demanding a right to repair.
Unfortunately, though, this legislation has stalled in many of the states. Manufacturers have been lobbying the legislatures to stop the enactment of the right to repair laws based on different concerns, including how these laws may impinge on their intellectual property rights. Indeed, a right to repair may not be easily reconcilable with the United States’ far-reaching intellectual property rights regime. For example, requiring manufacturers to release repair manuals could implicate a whole host of intellectual property laws, including trade secret. Similarly, employing measures undercutting a manufacturer's control of the market for replacement parts might conflict with patent exclusivity. Nonetheless, this Article’s thesis holds that intellectual property laws should not be used to inhibit the right to repair from being fully implemented.
In support of this claim, this Article develops a theoretical framework that enables justifying the right to repair in a manner that is consistent with intellectual property protection. In short, the analysis demonstrates that a right to repair can be justified by the very same rationales that have been used traditionally to justify intellectual property rights. Based on this theoretical foundation, this Article then explores, for the first time, the various intellectual property rules and doctrines that may be implicated in the context of the current repair movement. As part of this overview, this Article identifies those areas where intellectual property rights could prevent repair laws from being fully realized, even if some of the states pass the legislation, and recommends certain reforms that are necessary to accommodate the need for a right to repair and enable it to take hold.
I thought this was an interesting and provocative paper, even if I am skeptical of the central thesis. I should note that the first half of the paper or so makes the normative case, and the authors do a good job of laying out the case.

Many of the topics are those you see in the news, like how laws that forbid breaking DRM stop others from repairing their stuff (which now all has a computer) or how patent law can make it difficult to make patented repair parts.

The treatment of trade secrets, in particular, was a useful addition to the literature. As I wrote on the economics of trade secret many years ago, my view is that trade secrecy doesn't serve as an independent driver of innovation because people will keep their information secret anyway. Thus, any innovation effects are secondary, in the sense that savings made from not having to protect secrets so carefully can be channeled to R&D. But there was always a big caveat: this assumes that firms can "keep their information secret anyway," and that there's no forced disclosure rule.

So, when this article's hypothesized right to repair extended to disclosure of manuals, schematics, and other information necessary to repair, it caught my eye. On the one hand, as someone who has been frustrated by lack of manuals and reverse engineered repair of certain things, I love it. On the other hand, I wonder how requiring disclosure of such information would change the incentive to dynamics. With respect to schematics, companies would probably continue to create them, but perhaps they might make a second, less detailed schematic. Or, maybe nothing would happen because that information is required anyway. But with respect to manuals, I wonder whether companies would lose the incentive to keep detailed records of customer service incidents if they could not profit from it. Keeping such records is costly, and if repairs are charged to customers, it might be better to reinvent the wheel every time than to pay to maintain an information system that others will use. I doubt it, though, as there is still value in having others repair your goods, and if people can repair their own, then the market becomes even more competitive.

While the paper discusses the effect on the incentive to innovate with respect to other forms of IP, it does not do so for trade secrets.

With respect to other IP, the paper seems to take two primary positions on the effect of immunizing IP infringement for repair. The first is that the right to repair can also promote the progress, and thus it should be considered as part of the entire system. While I agree with the premise from a utilitarian point of view, I was not terribly convinced that the right to repair would somehow create incentives for more development that would outweigh initial design IP rights. It might, of course, but there's not a lot of nuanced argument (or evidence) in either direction.

The second position is that loosening IP rights will not weaken "core" incentives to develop the product in the first place, because manufacturers will still want to make the best/most innovative products possible. I think this argument is incomplete in two ways. Primarily, it assumes that manufacturers are monolithic. But the reality is that multiple companies design parts, and their incentive to do so (and frankly their ability to stay in business) may well depend on the ability to protect designs/copyright/etc. At the very least, it will affect pricing. For example, if a company charged for manuals, it may be because it had to pay a third party for each copy distributed. Knowing that such fees are not going to be paid, the original manual author will charge more up front, increasing the price of the product (indeed, the paper seems to assume very little effect on original prices to make up for lost repair revenue). Secondarily, downstream repairs may drive innovation in component parts. For example, how repairs are done might cause manufacturers to not improve parts for easy repair. The paper doesn't seem to grapple with this nuance.

This was an interesting paper, and worth a read. It's a long article - the authors worked hard to cover a large number of bases, and it certainly made me think harder about the right to repair.

Wednesday, February 6, 2019

Using Antitrust to Fix Broken Markets

The prescription drug market is a real mess, in my view. At the very least, it is complicated, and prices for drugs seem to be higher in the U.S. than elsewhere (though teasing that out is hard, since very few pay sticker price and insurance companies negotiate deals). But I don't know what the solution is, and I'm not convinced anyone else does, either. The recent article that triggers my thoughts on this is: A Non-Coercive Approach to Product Hopping, 33 Antitrust 102 (2018), by Michael Carrier (Rutgers) and Steve Shadowen (Hilliard & Shadowen LLP). Their paper is on SSRN, and the abstract is here:
The antitrust analysis of product hopping is nuanced. The conduct, which consists of a drug company’s reformulation of its product and encouragement of doctors to switch prescriptions to the reformulated product, sits at the intersection of antitrust law, patent law, the Hatch-Waxman Act, and state substitution laws, and involves uniquely complicated markets with different buyers (insurance companies, patients) and decision-makers (physicians).
In Doryx, Namenda, and Coercion, Jack E. Pace III and Kevin C. Adam applaud some courts’ use of a product-hopping analysis that finds liability only where there is an element of coercion. In this response, we explain that the unique characteristics of pharmaceutical markets render such a coercion-based approach misguided. We also show that excessively deferential analyses would give brand-name drug firms free rein to evade generic-promoting regulatory regimes. Finally, we offer a conservative framework for analyzing product hopping rooted in the economics and realities of the pharmaceutical industry.
This very brief response essay does a good job of highlighting some of the difficult nuances associated with product hopping (something I'll describe more in a minute) in the prescription drug market. I don't necessarily agree with it - I actually disagree with the final proposal. I share this here because it prompted me to think more closely about an issue I had mostly ignored, and I respect Mike Carrier and think that he does about as good a job at presenting this particular viewpoint as anyone.

Still, I'm troubled by the use of the blunt weapon of antitrust against product hopping, even as I have misgivings about other areas of this market. Product hopping occurs when a name brand (read, patented) drug is pulled from the market in favor of a "new and improved" product (that is also patented). The concern is that the removal of the old brand from the market just as generics are arriving will fail to trigger mandatory generic substitution rules, because doctors can't prescribe the old name brand. Instead, the fear is that doctors will only fill prescriptions for the new, improved (though the parties debate the improved point) drug, for which there is no generic to substitute. Further, they won't ever prescribe the generic once the name brand is off the market.

Here's what gives me a bit of trouble about this. While I am a big fan of automatic generic substitution laws, I am skeptical that they should be used as innovation policy, to the point where the inability of a generic to take advantage of it creates an antitrust injury and also forces a company to make a product that it may or may not want to make for profit or other reasons. In other words, a system that requires a company to make a product so that other companies can sell a substitute product that sellers are required by law to sell is a broken system indeed.

The question is, where is the system broken? Some will, no doubt say that it is the patent system and exclusivity. Surely that plays a role. But I'd like to point to three other points of market failure that drug makers point to. None of these are really new, but I'm taking the blogger's prerogative to talk about them.

1. I think it is a huge assumption that doctors will only prescribe the new drug and won't prescribe the generic once it hits the market. The argument in the article above is that because doctors don't have to pay for it, they have no incentive to cost minimize. Which the incentive is certainly diminished in theory, this is not my experience with (many) doctors at all. I have had many doctors prescribe me (or my wife) "older" generic versions of drugs because they were cheaper. One funny thing is that often times those older versions were awful - like a drug my wife had to take as an awful tasting liquid because the pill version cost 3 or 4 times as much and wasn't covered by the (generally good) insurer, or a blood pressure medication I had to take because it was the standards--until I could show that I had a rare side effect.

2. I think insurance companies can regulate much of this through formularies. If you make the new drug non-formulary (or even brand cost), people will migrate to the cheaper generic substitute, even if there is no prescription available. Even if doctors don't pay, insurers sure do, and they have every incentive to make sure that generic substitutes are used if the new drug is not really an improvement.

3. I bristle a bit at the notion that generic companies must rely on substitution laws to get doctors to prescribe. I realize that's how it is done now, and while substitution laws are a good thing, there is nothing stopping generics from telling doctors why the new-fangled drug is no better than the one that was just removed from the market for the same money. We make every other industry do this. I suspect that litigation is cheaper than advertising, and while I am happy to give the industry a leg up, I am wary of giving it a pass on basic business requirements, and I am wary to taking something that's a regulatory windfall to generics (even if it is good for consumers) and making it an affirmative innovation policy. .

4. Taking this last point further, from an innovation standpoint, is there any reason why generics can't innovate their own product hopping drug? Knowing that a deadline is coming, why can't they innovate (or license) their own extended relief version in addition? Indeed, I take an extended release version of a generic drug. It costs a fortune (before insurance), and the generic is benefiting from having created/licensed it. I suppose a more salient example is Mylan's Epi-Pen, which uses a protected delivery system for a generic drug. While most people are not thrilled with Mylan's pricing strategy, it illustrates the basic point I'm trying to make: generic manufacturers are not helpless victims of the system stacked against them, they are active, rent-seeking participants willing to exploit systematic flaws in their favor.

Finally, I will say that all of my arguments are empirically testable, as are the arguments on the other side. If folks can point to studies that have demonstrated actual physician, consumer, and insurer behavior in product hopping cases, I will be happy to post here and assess!

Sunday, February 3, 2019

AOC on Pharma & Public Funding

Congresswoman Alexandria Ocasio-Cortez has already gotten Americans to start teaching each other about marginal taxation, and now she has started a dialog about the role of public funding in public sector research:
In these short videos (which email subscribers to this blog need to click through to see), Ocasio-Cortez and Ro Khanna are seen asking questions during a Jan. 29 House Oversight and Reform Committee hearing, "Examining the Actions of Drug Companies in Raising Prescription Drug Prices." So far, @AOC's three tweets about this issue have generated over 7,000 comments, 58,000 retweets, and 190,000 likes.

Privatization of publicly funded research through patents is one of my main areas of research, so I love to see it in the spotlight. There are enough concerns with the current system that the government should be paying attention. But as I explain below, condensing Ocasio-Cortez and Khanna's questions into a headline like "The Public, Not Pharma, Funds Drug Research" is misleading. Highlighting the role of public R&D funding is important, but I hope this attention will spur more people to learn about how that public funding interacts with private funding, and why improving the drug development ecosystem involves a lot of difficult and uncertain policy questions. This post attempts to explain some key points that I hope will be part of this conversation.