The Maladministrative State and Property Theft

This summer, U.S. Attorney General William Barr gave a very direct speech at the Gerald Ford Presidential Museum. Mr. Barr aimed to expose how China is gaining dominance in major sectors of the world economy. But his main audience was American business leaders.

“‘For American companies in the global marketplace, free and fair competition with China has long been a fantasy,” Mr. Barr said. “To tilt the playing field to its advantage, China’s communist government has perfected a wide array of predatory and often unlawful tactics: currency manipulation, tariffs, quotas, state-led strategic investment and acquisitions, theft and forced transfer of intellectual property, state subsidies, dumping, cyberattacks and espionage. About 80% of all federal economic espionage prosecutions have alleged conduct that would benefit the Chinese state, and about 60% of all trade secret theft cases have had a nexus to China.” (emphasis added) As an inventor, I’m not surprised that IP theft is a major part of this.

Mr. Barr warned American businesses to stop giving away America’s ingenuity and technology to China to their own companies’ and our country’s detriment. Every U.S. innovation that China begs, borrows or steals reduces the size of our economic pie and steals the fruits of some inventor’s labor. This happens domestically as our patent system becomes part of the Administrative State.

In an age where the Administrative State has come to dominate the economic lives and fortunes of American citizens, American government operates less like a representative republic and more like a banana republic. I recently discussed this on a webinar with NYU Law Prof. Richard Epstein, NCLA’s Peggy Little and George Mason Law Prof. Adam Mossoff.

“Judges” employed by the patent agency adjudicate administrative matters, having irregular rules, broad discretion and clear conflicts of interest. This favors deep-pocketed corporations and wipes out the IP of independent inventors and entrepreneurs.

Congress grew the Administrative State in the “America Invents Act” in 2011. My invention, a self-sealing water balloon inflation device called Bunch O Balloons, was granted patents. But a large company whose business model is infringing patents flooded the market with knockoffs. I fought it in court, but the infringer challenged the validity of my patents in the newly created Patent Trial & Appeal Board.

I faced the big infringer in both federal court and in PTAB. There was a night-and-day contrast. Federal court operates with clear rules and procedures; PTAB (like other administrative adjudicatory bodies) has great discretion and loosey-goosey rules. Courts model fairness and due process; PTAB models bias and a tilted playing field. In short, courts upheld my patents and held the infringing company accountable; PTAB cancelled my patents and sided with the patent infringer.

This experience hardly differs from that of countless Americans who get hauled before unfair, biased administrative proceedings and find themselves in a Kafkaesque maze that robs them of their livelihoods, their property, their reputation and worse. It’s so bad that government agencies win at least 80% of these actions, and in some agencies it is 100%.

What’s this have to do with China’s systemic stealing of American innovation? The Administrative State, where arbitrary rules, regulations and procedures can cost you everything, robs not only American citizens but shrinks our national competitiveness.

PTAB steals IP from the sources of game-changing inventions, which otherwise check incumbent corporations’ dominance and benefit consumers. Meanwhile, Chinese IP thieves can corner the new markets using the details of inventions described in published U.S. patents, without facing competition from the Administrative State’s victims: American inventors.

If we want to stand against China, then we must stop giving away our innovation. That includes curbing the Administrative State and restoring fairness, due process and the rule of law.

A Victory for Dynamic Competition

The Ninth Circuit handed the Federal Trade Commission its head in its unanimous reversal of the FTC’s “antitrust adventurism” against wireless technology innovator Qualcomm. This ruling not only corrects the district court’s multiple errors that threatened to disrupt fundamental antitrust and intellectual property principles, it puts down a bright marker for property rights and the rule of law.

The appeals court decision in FTC v. Qualcomm strikes a victory for dynamic competition. This kind of competition comes from the exercise of one’s patent exclusivity.

This may sound counterintuitive because antitrust promotes competition judged by consumer welfare. The court quotes former FTC Commissioner Joshua Wright: “Because innovation involves new products and business practices, courts[’] and economists’ initial understanding of these practices will skew initial likelihoods that innovation is anticompetitive and the proper subject of antitrust scrutiny.”

But the period of IP exclusivity gives its owner the runway to create a new market. That initially solo-market dynamism sparks competition, both direct competitors who learn from the dynamic invention and implementers who come up with new applications for the foundational technology.

R&D companies invest heavily in science and engineering and, once identified, on product and market development for their viable invention. Qualcomm has done this, including for third-generation, fourth-generation and now fifth-generation wireless connectivity.

The Ninth Circuit carefully examined the company’s crucial role as innovator and the dominant market share in CDMA and LTE (3G and 4G, respectively) of its patents, several of which are essential to implementing universal industry standards. As the circuit panel explained, certain Qualcomm patents relate to “the way cellular devices communicate with the 3G and 4G cellular networks—while others relate to other cellular and noncellular applications and technologies, such as multimedia, cameras, location detecting, user interfaces, and more.” Standard-essential patents especially are highly valuable.

In Qualcomm’s case, the appellate court found its high-value patents prompted hypercompetitive behavior — which the FTC and district court mistook for anticompetitive.

It was downhill from there for the misguided FTC and the district judge from “efficient infringement’s” hometown. Overlooking how dynamic competition and IP exclusivity work in milestone innovation, they ignored that SEP commitments are contractual, not antitrust, matters. They missed the fact that patent portfolio licensing and modem chip sales are two separate things; Qualcomm engages in both while its competitors are in one or the other market.

The Ninth Circuit’s de novo analysis clarified critical facts and law for the FTC, the Silicon Valley court and the antipatent cadre: cell phone makers are Qualcomm’s customers, not its competitors — the company doesn’t have a “duty to deal,” sell its modem chips to rival modem chip firms — basing royalty rates on the price of the end product, a “no license-no chips” practice that’s chip supplier neutral and no longer agreeing to obsolete terms are all permissible under antitrust law, rightly construed, because such conduct is actually procompetitive. The appellate court even cited how dynamic competition in Qualcomm’s experience led to its slipping from sole source to reducing its rates and seeing market share slide as the market matured.

Those such as Qualcomm who invent and innovate plow new ground, relying on property rights in their inventions, their IP exclusivity and their freedom to be enterprising. Thanks to the Ninth Circuit, inventors, implementers and consumers alike will continue to benefit from property rights-based dynamic competition.

State AGs Threaten to Steal Remdesivir

Start with the fact that remdesivir, the investigational antiviral treatment for COVID-19, has only been authorized for emergency use for the small subset of COVID patients hospitalized for a severe case of the virus who require supplemental oxygen. The new medicine is administered intravenously in hospital.

There’s no evidence that these patients can’t get remdesivir today in American hospitals. And Gilead Sciences continues to expand its manufacturing capacity. “This will enable Gilead to manufacture two million courses of therapy this year, and we expect to meet and exceed actual projected patient demand for remdesivir globally in October,” the company says.

Importantly, Gilead invented remdesivir and its chemical compound on its own over a decade ago. Company scientists are the named inventors, the firm owns the patents, and private investment, not federal monies, underwrote the drug’s discovery. So, it’s not subject to the Bayh-Dole Act.

All this exposes the absurd demand by 30-odd state and territorial attorneys general that the federal government misuse march-in rights under the Bayh-Dole Act. It’s nothing more than a naked power play. These lawless demands must be rejected if remarkable COVID and other medical innovation is to continue apace.

Gilead is making rapid progress toward an approved COVID therapy thanks to its years of research and development in the coronaviral space. Remdesivir stems from the company’s drug development platform used for SARS and Ebola. The earlier viral work — and significant private investment, including plowing back revenue from the company’s current drug products into R&D — enables remdesivir’s head start and quick pace on fighting COVID.

The state AGs falsely assert that federal agencies have funded remdesivir’s development. This is one of their pretexts for expropriation of Gilead’s patents. In fact, federal support is in the $30-70 million range, while Gilead put $50 million into remdesivir R&D in the first quarter 2020 alone. The firm expects to invest another $1 billion on remdesivir by the end of the year.

The Bayh-Dole Act employs patents and secure, private IP rights in the hands of research institutions as the means for driving commercialization of federally supported research discoveries. Bayh-Dole has amassed a 40-year record of success. Before Bayh-Dole, less than 5 percent of federally owned inventions were commercialized because of nonexclusive, insecure IP rights.

The law’s march-in provisions allow only very narrow grounds for usage. An invention’s price isn’t one of them. To suggest abusing march-in over drug price, as the AGs do, is entirely illegitimate, not to mention counterproductive.

Nor is march-in a quick fix. Were the government to move on it, the patent owner has the right to challenge the march-in order and fight it in court. The legal issues would drag on years after a pandemic that prompted march-in has subsided.

The AGs’ publicity stunt, abuse of power or whatever else their demands represent demonstrate a dangerous willingness to twist the law and use government force to deprive private property owners their property rights. If this involved government theft of another form of property, instead of a highly promising medicine treating a pandemic virus and that drug’s patents, the opportunistic politicians probably wouldn’t have made a peep. Their doing so here should worry every American citizen and every innovative company.