The bottom line: China aims to overtake the United States’ global innovation lead, by hook or by crook.

China has for some time pursued a “military-civil fusion” strategy. This concerted effort is gradually strengthening China’s technological prowess and economic competitiveness in emerging, strategic technologies, including semiconductors and 5G wireless connectivity.

State-owned, -backed or -controlled companies such as Huawei and ZTE have rightly spurred Washington’s concerns. Lawmakers and the Trump and Biden administrations have increased scrutiny of and tools for blocking Chinese acquisition of U.S. innovations. Indeed, dual-use technologies raise valid national security concerns.

However, the U.S. government’s approach has sometimes failed to take into account important distinctions and aspects of the situation. This threatens U.S. innovators’ leadership, risking ceding the contest to China.

As the Center for Strategic and International Studies’ William A. Reinsch has noted, “the challenge is . . . to navigate the fine line between too little control, where technology leaks out to our adversaries, and too much control, which undermines U.S. industries’ ability to innovate and ‘run faster’ than the competition.”

Several proposals in Congress would bar U.S. companies from licensing chips to Chinese end-user device companies and restrict U.S. R&D firms from involvement in global standards-development organizations where China’s state-run companies also participate. Although intended to cripple China’s strategic microchip gains, they would actually cripple U.S. leadership in the most critical part of the chip space.

Fifth-generation wireless connectivity is in the middle of implementation and standards development. It would be disastrous if private-sector U.S. technological leaders were barred from engaging in standards-development organizations.

That would yield the field for Huawei and other nefarious Chinese actors to politicize the standards process in favor of adopting Chinese technology as industry standards, rather than the highest quality technology—usually American.

In 5G, two companies outpace the rest: Qualcomm and Huawei. The U.S. contender holds the global lead in foundational R&D.

Understanding the nuances and details matters here. In 5G wireless, semiconductor technology has two main pillars: foundational technology and semiconductor design.

Foundational technology involves discovering and developing scientific and mathematical solutions to fundamental, complex problems related to wireless Internet and telecom connectivity. This type of R&D is arduous, riskier, expensive and longer-term.

Research and development apply those solutions to form the system on which end-user devices operate. These key inventions lay the foundation of a new technological ecosystem, such as 5G itself in wireless connectivity.

For instance, Qualcomm engineers invented a way of successfully reaching 5G mobile browsing speed of almost 1.5 Gbps using millimeter wave. That’s a whole lot faster than 4G’s average downloads of between 14.5 Mbps and 21.5 Mbps.

Using mmWave in itself is a real feat. Qualcomm spent a decade inventing foundational means of using these high-band radio waves, which until now have been largely unused. This breakthrough enables faster data transmission and accommodates many more connected devices.

Leading American innovators license their patents, which include standard-essential patents. The licensing revenue funds their R&D. These foundational inventions end up in broadband infrastructure, such as cell tower and base station equipment, to which iPhones and Surface tablets connect.

Chinese favored companies’ such as Huawei’s R&D isn’t market-based. The Chinese government funds its national champions. And China would love to capture the lead in foundational wireless technology R&D.

By contrast, semiconductor design relates to chips that go into consumer or end-user mobile and wireless devices. A mobile phone contains about 200 microchips.

These chips don’t present a national security threat. American firms don’t typically face forced technology transfer for consumer devices. They license their technologies to Chinese device producers, who use them in cell phones, tablets, etc. These Chinese device makers pay U.S. chip companies, representing U.S. exports on the trade ledger.

This constructive model keeps Huawei at bay. It would be ruined if the most innovative U.S firms cannot engage competitively in licensing and participate in SDOs on equal terms with Chinese companies.

To avoid a self-inflicted disaster for U.S. innovation, Congress should stick with incentives-based, patent-respecting approaches: the CHIPS for America Act; S. 1260, the U.S. Innovation and Competition Act; H.R. 4792, the Countering Communist China Act; and H.R. 5649, the BEAT CHINA Act; while rejecting proposals that prohibit U.S. companies from licensing and standards activities with Chinese companies.

The public comment period on the Justice Department’s “Draft Policy Statement [DPS] on Licensing Negotiations and Remedies for Standards-Essential Patents Subject to F/RAND Commitments” has ended, and quite a number of conservatives and center-right groups filed comments. This post highlights some of the main points these comments register.

These commenters cite the draft’s imbalance disfavoring patent owners and the 2019 joint policy statement's, or JPS's, superiority that’s based on the New Madison Approach.

Not lost is the connection between U.S. intellectual property rights and U.S. national security. The DPS misses this consideration altogether.

On all counts, these commenters find the 2021 draft fails and the 2019 statement wins.

Imbalance Against Innovators

Eagle Forum Education & Legal Defense Fund cites the inherent imbalance, as the DPS “would tilt the playing field in favor of implementers and against innovators.”

Senior Research Fellow Alden Abbott of the Mercatus Center writes that the draft statement’s “analysis of [SEP] licensing . . . , though purporting to be balanced, in reality strongly favors the interests of [standards] implementers at the expense of the sources of innovation, the SEP holders.”

Conservatives for Property Rights notes the DPS “tilts the government’s interpretation of FRAND commitments in favor of implementers and against innovators, who bore the risks. Further, the DPS dictates what licensing negotiations may and may not entail, approached through a distorted lens.”

Abbott, former Federal Trade Commission general counsel, finds the draft policy “errs badly in opining that SEP holders almost never should be able to obtain injunctive relief” and “errs in propounding a framework for bargaining over SEP license terms.”

The Global Antitrust Institute observes, “Despite its gloss of balancing the interests of SEP holders and implementers, the DPS proposes what appears to be an extreme antitrust enforcement posture” thus “setting up a sharp conflict with existing case law.”

Eagle Forum ELDF warns that the DPS “would exacerbate the state of [injunctions] jurisprudence that has followed eBay, where the tail of Justice Kennedy’s concurring opinion has wagged the dog of the [Supreme] Court’s unanimous opinion.”

Abbott states that “the [DPS’s] highly defective treatment of injunctions . . . merits total repudiation.” It “distorts bargaining between SEP holders and implementers and thereby disincentivizes economically beneficial investment in standards-related patenting.”

CPR notes that the draft’s “heightened antitrust exposure [against SEPs] puts a thumb on the scales for implementers.”

Abbott also dismisses the DPS’s highly prescriptive licensing negotiating framework: “government's efforts to micromanage the steps of private licensing negotiations” will “generate outcomes that are economic welfare-inferior.”

After making a similar point, Eagle Forum ELDF notes that the DPS “would jeopardize the dynamic competition that proceeds from a balanced playing field, broader [private party] discretion, and fact-based private negotiations primarily subject to contract law.“

GAI warns how the DPS “would tend to undermine the functioning of good-faith negotiations as traditionally understood.” Its enforcement stance “is troubling on at least two grounds. First, it runs counter to the antitrust wisdom that the focus of antitrust inquiry be on the effects of conduct on final consumers. . . .

"Second, . . . the DPS implicates antitrust as properly mediating bargaining disputes . . . without adequately specifying what types of negotiating strategies might be condemned as conferring undue leverage. This lack of clarity injects considerable uncertainty into the bargaining process ex post, and likewise into ex ante decisions on R&D investment. Even a minor chilling of innovation incentives could have outsized cumulative effects on consumers.”

Well-Founded New Madison Approach

Assistant Attorney General for Antitrust Makan Delrahim developed the New Madison Approach to IP and antitrust. New Madison underpins the 2019 Joint Policy Statement the DPS would replace.

Conservatives for Property Rights writes that “the 2019 JPS and the New Madison Approach strike a wise, prudent balance that shows due respect for both innovators and implementers in their complementary roles. They reflect a neutrality that promotes appropriate application of intellectual property, antitrust, and contract jurisprudence where the important interests of innovation policy and competition policy cross paths.”

Abbott discusses how the NMA strikes an appropriate balance between innovators and standards implementers regarding SEP licensing. “The NMA was a badly needed antidote to a set of public policies and judicial decisions that regrettably undermined incentives to develop economically beneficial SEPs.”

Eagle Forum ELDF says, “The ‘New Madison Approach’ takes a constructive approach to antitrust enforcement where patent rights are being exercised, FRAND-involved patents included.”

CPR praises how “the 2019 JPS states that a FRAND commitment does not amount to a compulsory licensing commitment by a SEP owner, which had been the effect under the 2013 JPS.”

Abbott urges that “the 2021 DPS should be scrapped, and the federal government should strongly reaffirm in all respects the 2019 [SEP policy statement] and the New Madison Approach.”

Economic Security Is National Security

Thirty center-right groups joined a coalition letter focused on the dangers to U.S. national security the DPS poses. This letter, whose signers include CPR, the American Conservative Union, Americans for Tax Reform and FreedomWorks, says “the joint policy statement gives China a tremendous gift that harms U.S. national security.” The DPS “provides Chinese and other rogue nations’ state-owned or state-backed firms, as well as Big Tech, a powerful opening to infringe SEPs with, at best, delayed and partial accountability. They will surely take the ball the statement hands them and run with it. They will infringe first and pay a pittance later.

“Meanwhile, competitive adversaries will have had months or even years to make commercial use of the stolen SEP technology that is central to making cutting-edge technological devices interoperate on the newly standardized foundation for a new technology. That translates into national champions of our adversaries, such as Huawei and ZTE in wireless technology, commanding lucrative earnings for their products and devices, while displacing the true American inventors and stealing their deserved financial returns on R&D investments.”

Eagle Forum ELDF calls the New Madison Approach important “for America’s industrial competitiveness against Chinese national champions that increasingly engage in standards-development organizations.”

* * * * *

Clearly, the DPS forebodes serious dangers at the antitrust-IP intersection. Not the least of its harms is jeopardizing our national security and innovation.

Key takeaways from these insightful comments:

  • The 2019 Joint Policy Statement on SEPs rests on a firm legal, philosophical and constitutional foundation, correcting earlier imbalance against SEPs;

  • The New Madison Approach undergirding the 2019 policy statement strikes the appropriate balance between innovators and implementers, while placing antitrust in its proper place in relation to IP and contract law;

  • The proposed policy statement returns with a vengeance to the infringer-implementer-biased imbalance, deprives SEP innovators of fundamental patent rights and remedies, and assaults the consumer welfare standard;

  • The tempestuous proposal’s one-sided, overly prescriptive course will disrupt standardization, quash U.S. innovation, reduce American wealth creation and R&D and jeopardize U.S. national security.

Generally, these commenters say DOJ should pull the DPS, and the 2019 JPS and the New Madison Approach should be reaffirmed.

One thing that remains on the table for many in Congress and the White House is certain to damage some treasures of America’s health system. In the name of “lowering drug prices,” government price controls will wreck the mechanisms that spark U.S. biopharma innovation.

There’s nothing “moderate” or “reasonable” about any of the government price controls Washington’s considering. They snatch private property and deny property rights. They open the door to socialized medicine.

Even after “Build Back Better” stalled, the kind of government-imposed market disruptions that characterize socialized medical systems could well become part of comparatively smaller social spending legislation.

Don’t miss the fact that, along with child care and eco-extremism, BBB drug pricing retreads still threaten the discovery and development of many new medicines.

The proposed price controls rest on a flimsy foundation. It isn’t pharma innovators that collect all the money spent on pharmaceuticals. Half of “drug spending” goes to payers, providers and middlemen. And the generic drugs that comprise 90 percent of prescriptions don’t get developed without novel brand drugs and their time of exclusivity.

On the table: Putting bureaucrats into direct price “negotiations” with biopharma companies, just as socialized medical systems have. There, the government sets artificially low prices for drugs, and drugmakers must take it or leave it.

The government-set prices will apply to government programs like Medicare as well as to private health plans. A pharma innovator that declines the “negotiated” price could get slapped with a 95 percent excise tax on the drug.

Confiscatory taxation of medicines drains the incentive and the R&D money essential to creating new drugs to fight diseases.

They will drastically change Medicare Part D, the highly popular, market-based drug benefit, and spill over into private coverage. Sucking the profits out of top brand drugs forces the reduction of drugs Part D plans could cover.

Part D plans will probably start looking a lot more alike—erasing the consumer choice and competitive nature of this program. The same shrinkage will happen in private insurance.

Thus, government price-fixing on leading brand medicines, a 95 percent punitive tax and fewer new treatments in the pipeline and on insurers’ formularies—with those that are on the list at the dictated price returning far less research funding—will harm health plans and Part D, seniors and other patients who need cutting-edge drugs to stay out of the hospital.

This isn’t conjecture. It isn’t scare-talking. It’s a cautionary tale because these kinds of harms have happened in Europe and socialized medicine countries.

Where governments have imposed price controls on medicines, it’s resulted in reducing innovation and limiting access to medicines. A new report finds that for each 10 percent reduction in drug prices in Europe, there is an 8 percent delay in access to medicines.

That is, government price controls delay drugs’ market entry. And they’re usually accompanied by rationing of prescription drugs.

If you like the jobs and economic contribution of the biopharma sector, then be careful what you wish for with drug price controls. Such European price controls cause venture funding in drug R&D to fall 14 percent. Drug price controls of that magnitude reduce biotech startup funding by 9 percent and biotech patents by 7 percent.

Biopharma is an IP-intensive sector. IP-centric industries devote more resources to R&D. They outperform non-IP-intensive industries across key economic metrics, including higher wages and job creation.

If you like how U.S. biopharma firms could quickly marshal their decades of research and drug innovation amidst the COVID-19 pandemic and deploy three highly effective and safe vaccines, then know Congress’s drug price control plans threaten future miraculous performances. IP exclusivity and comparatively more market elements in our health system benefited Americans and the world with this scientific success.

The COVID vaccines have benefited our economy. These medicines contributed to the generation of $438 billion that without the vaccines would have been lost. That’s 2.3 percent of 2021’s real gross domestic product.

Drug price controls would slow drug development, foreclose exploration of many promising new molecules and leave more people exposed to infection and illness—time away from working, lost productivity, more spent on avoidable medical costs. Costly, indeed.

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