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Patents, Pharma, Government: The Unholy Alliance

Patents, Pharma, Government: The Unholy Alliance 


The Problem with Intellectual Property

The unholy alliance between Big Pharma and the FDA and Federal Government is truly breathtaking to behold. Unfortunately, its nature is so arcane and obscure that only a few notice this, other than those who benefit from it and keep their lips shut. To unpack this we must explore a few separate but interrelated issues.

First, intellectual property, or IP, which includes, most prominently, patent and copyright law. I’ve argued for three decades that patent and copyright law are fundamentally destructive of human life and liberty and should be abolished. This is despite—or perhaps because of—the fact that I have been a practicing patent attorney for…also about thirty years. Nothing I’ve seen in my decades of practice has indicated otherwise. Far from it, my experience with the actual IP system only confirms my take. 

As I have explained in my writing, copyright law literally censors speech and the press, distorts culture, and threatens freedom on the Internet, while patent law distorts and impedes innovation and thus human wealth and prosperity. Patent law is essentially protectionist: it protects some inventors from competition for about 17 years. This blocks others from innovating and improving, and it also reduces the need for the original inventor to keep innovating. Innovation and consumer choice is reduced and prices are higher, under a patent system.

In addition to these utilitarian or consequentialist considerations, patent and copyright are essentially unjust since they prevent others from using their own property as they see fit. Copyright prevents people from printing certain books, for example, in clear violation of the First Amendment. Patent law prevents people from using their factories and raw materials to make certain widgets, in violation of their natural property rights.

Defenders of the patent system essentially believe that in a purely free market, there is “market failure,” and that state interventions can fix this failure. In short, that there would be an “underproduction” of inventions because it is just “too easy” for competitors to copy or imitate successful new products, like the iPhone, making it impossible for the first inventor to ever “recoup his costs.”

Without the patent monopoly allowing the first inventor to stop competitors and thus charge monopoly prices for a decade or two, he won’t be able to “recoup his costs” and thus he won’t bother inventing in the first place. Society would thus be poorer in a pure free market since it fails and needs state intervention to get it closer to the optimal or ideal utopian state of optimal innovation. Anyone who believes that the government can identify real market failures and improve on the market has never seriously studied the way the government works.

In any case, this is the common narrative given in defense of the patent system. But in the 230 years since we have had modern patent law, no one has been able to prove this contention. They have never shown that the patent system stimulates innovation, or that any net innovation stimulated is worth the cost of the system. In fact, studies indicate otherwise: that, as common sense would suggest, patents distort and slow down innovation. As economist Fritz Machlup concluded, in an exhaustive 1958 study prepared for the US Senate Subcommittee On Patents, Trademarks & Copyrights:

No economist, on the basis of present knowledge, could possibly state with certainty that the patent system, as it now operates, confers a net benefit or a net loss upon society. The best he can do is to state assumptions and make guesses about the extent to which reality corresponds to these assumptions…If we did not have a patent system, it would be irresponsible, on the basis of our present knowledge of its economic consequences, to recommend instituting one.

In a more recent paper, economists Michele Boldrin and David Levine conclude that “The case against patents can be summarized briefly: there is no empirical evidence that they serve to increase innovation and productivity…there is strong evidence, instead, that patents have many negative consequences.” Other studies in fact indicate that the patent system imposes annually hundreds of billions of dollars of costs on the US economy alone, or more, from the lost and distorted innovation, higher prices resulting from reduced competition and huge payments made to attorneys in lawsuits and so on.

Sensing some of these increasingly obvious problems that result from the patent system, there has gradually emerged a loose consensus that there is something wrong with it. Now, it is often said that the patent system is “broken” and in need of drastic reform. But they do not want to abolish it. They want to tweak it. For example, even some ostensible supporters of the free market, who admit problems with the patent system, say things like this: “Copyright and patent protections have existed since the beginning of the republic, and if properly calibrated they can (as the Founders put it) promote the progress of science and the useful arts.” (Cato’s Tim Lee; my emphasis.)

Writing for the libertarian Independent Institute, allegedly free market economist William Shughart explicitly admits that we need IP law to “slow down the diffusion of new ideas”—in order to incentivize the creation of new ideas, ‘natch. Here we have a free market economist advocating state policy that slows down the diffusion of new ideas! In other cases, thinkers associated with the Cato Institute have advocated blocking reimportation of foreign drugs—that is, in limiting free trade—in the name of helping US pharma companies maintain their local monopoly prices.

Still, there is a growing realization that the patent system needs serious reform. Most of these reformers, however, do not understand the problem thoroughly or deeply enough to realize the patent system needs to be completely abolished. As Burke said, “The Thing! The Thing itself is the Abuse!” It is not that the patent system used to work and now has been broken; it is not that the real problem is “abuse” of the system, or incompetent patent examiners, and that we only need to “tweak” things to “get back to” some halcyon golden age where patents really worked and really were compatible with liberty and property rights and the free market. It was never thus. 

The Pharma Exception

Now let’s turn to Big Pharma and pharmaceutical patents. Even among those who have grown increasingly skeptical of the patent system, it is very common for someone to trot out the pharmaceutical argument. They say that even if we should abolish or scale back most patents, the case for pharmaceuticals is different, it is unique, it is the best case for patents. Why? Because of the extremely high costs of developing new drugs and because of how allegedly easy it would be for competitors to simply copy the formula and make a competing generic. In other words, the argument essentially is: Okay, get rid of the patent system, except for pharmaceuticals, the most important case in favor of patents.

This argument is understandable, but it’s wrong. If anything, the case against pharmaceutical patents is even stronger than the case against other types of patents (say, on electronics, mechanical devices, medical devices, chemicals, and so on). The problem is that it’s difficult for most people to see this clearly because of the confusing and arcane way the patent system has been folded into a heavily distorted healthcare market and other state regulations, policies, and systems.

Let’s try to unpack some of this. First, it is true that costs of coming up with a new drug are high because of the FDA approval process. But if this is the case, why not address the problem by abolishing or reducing the FDA? That is, instead of giving the drug companies a patent monopoly to allow them to charge monopoly prices to recoup the FDA-imposed costs, why not reduce the costs directly by attacking the real problem: the FDA? Second, contrary to propaganda of the patent proponents, it is in fact not so easy to set up a factory and production process to emulate someone else’s drug. It takes lots of know-how and resources. Without the FDA regulatory process, and without a patent system, the “first mover” who invents a new drug would have a natural advantage for many years before competitors would be able to sell a substitute product. Why couldn’t they “recoup their costs” in an unhampered free market?

Moreover, it is the FDA’s drug-approval process itself that makes it easier for competitors to make generics: the approval process takes years, and requires applicants to publicly release many details about their new drug’s formulation and production process—details they would probably be able to keep secret absent the FDA requirements. By the time a new drug is finally approved, the competitors have had years to study this and are ready to go. This reduces the natural “head start” advantage any innovator would have in a free market and of itself makes it harder for the first mover to recoup the costs. So the FDA imposes costs, and then makes it harder to recoup them.

The Patent-Pharma Complex

We now have a system of healthcare, innovation, R&D, and so on, completely dominated by state policies and systems such as patents, subsidies, a hybrid socialist healthcare system, and other laws, plus the unholy alliance or revolving door between industry and Big Pharma and other sectors and the state. This muddies the entire case, which is of course in the interest of the state and its cronies. The average person is naturally in favor of innovation and free markets and property rights. So when the state says innovation is good! Property rights, including intellectual property rights, are good!, the normal person shrugs and puts up with the consequences of this system—reduced innovation, reduced consumer choice, reduced prosperity, and higher prices.

But consider the factors that are in play here. First, as noted above, we have the FDA imposing drastic costs to developers of new pharmaceuticals. At the same time, it grants 17-year patent monopolies to these same companies to allow them to charge monopoly prices. And it sometimes in effect extends this monopoly by years, by having the FDA refuse to authorize generics for some period of time—even after the patent has expired. Thus, the FDA acts as a sort of secondary type of patent grant that protects Big Pharma players from competition. This raises prices and distorts innovation. It leads some even free market advocates to oppose free trade, as noted above.

Second, because doctors are naturally concerned about liability, and also because our hybrid/partially socialized healthcare system is run by insurance companies, patients must have permission of a doctor to take the drug they want, via the prescription/pharmacy process, and also, doctors have an incentive to simply recommend what the establishment tells them to recommend. This way they avoid liability and, after all, their patients usually don’t pay the full cost—insurance companies do. (Not to mention that many patients are on Medicare or Medicaid and thus essentially “insured” by the taxpayer.)

And consider the case of the Covid vaccines. They were developed based on technology that came from taxpayer subsidized research, such as mRNA research. And yet private companies are still able to get a patent to charge monopoly prices for their incremental “innovations,” even though it’s based on taxpayer-subsidized research. And then, because of the 1980 Bayh-Dole Act, government scientists—whose salaries are already paid by the taxpayer—can get a cut of the patent royalties charged by the “private” Big Pharma companies, from patents granted by their employer, the Federal Government. And on top of this, now the pharma companies charge inflated prices for these vaccines—since they can outlaw competition, thanks to their state-granted patents—and then the taxpayers pay for this too. (Who reading this knows anyone who paid a cent for their Covid vaccine shots? Someone paid for it!) 

And by the way, the Covid vaccines were approved on an emergency authorization on some fast track process; so what billions of dollars of regulatory costs were there in this case that needed the patent system to be “recouped?” And not to mention: on top of all this, the Federal Government partially exempted vaccine manufacturers from normal tort liability, under the PREP Act of 2005. Even though the federal government has no constitutionally authorized authority to regulate state tort law.

The alliance between Big Pharma and the FDA and Federal Government mentioned above is real. As Robert F. Kennedy, Jr. writes in The Real Anthony Fauci: Bill Gates, Big Pharma, and the Global War on Democracy and Public Health (from the Introduction (citations omitted):

From the moment of my reluctant entrance into the vaccine debate in 2005, I was astonished to realize that the pervasive web of deep financial entanglements between Pharma and the government health agencies had put regulatory capture on steroids. The CDC, for example, owns 57 vaccine patents and spends $4.9 of its $12.0 billion-dollar annual budget (as of 2019) buying and distributing vaccines. NIH owns hundreds of vaccine patents and often profits from the sale of products it supposedly regulates. High level officials, including Dr. Fauci, receive yearly emoluments of up to $150,000 in royalty payments on products that they help develop and then usher through the approval process. The FDA receives 45 percent of its budget from the pharmaceutical industry, through what are euphemistically called “user fees.”

Or as he writes in Chapter 7: “The 1980 Bayh–Dole Act allowed NIAID—and Dr. Fauci personally—to file patents on the hundreds of new drugs that his agency-funded PIs [principal investigators] were incubating, and then to license those drugs to pharmaceutical companies and collect royalties on their sales.” 

So: don’t say we need patents because costs are high. Repeal the FDA. Don’t support patents that raise the price of vaccines, just because the price is paid by tax dollars going to R&D or to Moderna et al. to pay them for their patent-monopoly-price inflated vaccines. And so on.

One of the worst consequences of this unholy alliance is that almost no one in the public really understands any of this and thinks this is all science, innovation, property rights, “capitalism,” and the free market in action! The solution to our current situation is obvious, though a bitter pill for many to swallow:

  • Repeal all IP law, especially patent law
  • Repeal or radically curtail the FDA’s regulatory process
  • Repeal the medical monopoly over prescribing prescriptions, so that individuals do not need doctor approval for treating their health as they see fit
  • Reform medical tort liability for doctors so that they do not reflexively approve institution-mandated treatments, like new, untested vaccines
  • Reform the WWII-era laws and others like the Affordable Care Act/Obamacare that have distorted the entire US healthcare system and extended “medical insurance” to areas it should not touch
  • Repeal federal laws such as the PREP Act 2005 which unconstitutionally interfere with local state tort law on liability for negligently selling harmful products such as vaccines
  • Repeal the Bayh-Dole Act and do not permit government employees to get a share of royalties reaped by “private” companies from patents granted by the federal government for “innovations” built on tax-funded research.

All these illiberal policies combine to result in the Frankenstein’s Monster of pharmaceutical and vaccine policies we suffer from now. The only way to escape is to radically reevaluate existing institutions and laws.

Published under a Creative Commons Attribution 4.0 International License
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  • Stephan Kinsella

    Stephan Kinsella is a writer and patent attorney in Houston. Formerly a partner in the Intellectual Property Department with Duane Morris, LLP, General Counsel and VP-Intellectual Property for Applied Optoelectronics, Inc., his publications include Legal Foundations of a Free Society (Houston, Texas: Papinian Press, 2023), Against Intellectual Property (Auburn, Ala.: Mises Institute, 2008, You Can’t Own Ideas: Essays on Intellectual Property (Papinian Press, 2023), The Anti-IP Reader: Free Market Critiques of Intellectual Property (Papinian Press, 2023), Trademark Practice and Forms (Thomson Reuters, 2001–2013); and International Investment, Political Risk, and Dispute Resolution: A Practitioner’s Guide, 2nd ed. (Oxford University Press, 2020).

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