Regulation by Market or Government?

Postmodern “trust busters” resent that most people “Google it” when looking for something online. And that Google’s free search tools are supported by advertisers willing to pay for access to users.

Not to worry. The neo-Brandeisian savants, namely Liz Warren acolyte and Chairwoman Lina Khan of the Federal Trade Commission and Assistant Attorney General for Antitrust Jonathan Kanter at the Justice Department, know what’s best for those poor, exploited folks who keep selecting Google for their online searches.

Among many federal antitrust lawsuits, DOJ sued Google, alleging monopolization. DOJ won in court. The judge said, “Google is a monopolist, and it has acted as one to maintain its monopoly.” The company has paid digital device makers and web browsers to make Google its featured search engine.

Meanwhile, in the free market, competitors in Internet search are gaining ground on Google in the search advertising market. Currently, Google holds 90 percent of global online search and 50.5 percent of the U.S. market. The firm’s lead has slid about 10 percentage points in U.S. market share since 2018. Amazon, Microsoft, Apple and Chinese spy tool TikTok count among the competition eating into Google’s erstwhile search-ad “monopoly.”

In other words, the government is expending massive amounts of taxpayer money on litigation (losing most of their cases because of outlandish legal theories that lack an empirical basis grounded in economics and consumers' welfare) — not to mention weaponizing antitrust laws, pursuing extreme remedies and erecting huge regulatory hurdles against even routine mergers and acquisitions — to force what the free market is accomplishing on its own in the search business.

To be clear, I’m no fan of Big Tech. But not because the firms are large corporations. And I do admire their technological innovation.

But I detest their left-wing, woke “values” they continually force-feed down America’s throat. I despise their heavy-handed viewpoint discrimination, acting like a journalistic enterprise in controlling content while hiding behind Section 230’s treating them as a disinterested, evenhanded marketplace of ideas (instead of the ideological censors they are).

And then there’s their antipatent behavior. Big Tech firms, including Google, are among the most frequent litigants at the Patent Trial and Appeal Board (AKA patent death panels) and some of the most devoted practitioners of predatory patent infringement.

There are several pro-IP bills that would counter the Infringers’ Lobby’s ability to game the patent system they have weakened over the past few decades. This legislation is the PREVAIL Act (S. 2220/H.R. 4370), the Patent Eligibility Restoration Act (S. 2140/H.R. 9474), the RESTORE Patent Rights Act (S. 4840/H.R. 9221) and the Restoring America’s Leadership in Innovation Act (H.R. 8134).

You’d expect Big Tech companies — at least those like Google, whose patented search algorithm secured the firm’s founders the patent exclusivity to commercialize a novel invention discovered at and the technology licensed out of Stanford — to respect patent rights and the integrity of intellectual property.

However, Big Tech companies and Chinese national tech champions exhibit disrespect for private property rights and short-circuit the exclusivity of reliable, enforceable patent terms that would enable innovators to emerge as competitors with a better mousetrap. Big Tech entities assault patents and IP in order to chop-block would-be small competitors and keep them from leapfrogging the existing competitive environment. Otherwise, the technological innovations of IP-centered startups — like Google once upon a time — could use patents to attract investors, create new products and markets, and spark dynamic competition.

University of Southern California law professor Jonathan Barnett explains how reliable IP benefits innovative entrants and poses a threat to incumbent large firms. “[W]eak-IP environments are hospitable for large, integrated firms that maintain internal markets for financing and conducting R&D and then embed the resulting intellectual output in goods and services for the end-user market. By contrast, strong-IP environments enable entry by smaller firms that specialize in R&D and monetize the resulting intellectual outputs through external relationships with third parties. This organizational distortion matters because larger firms tend to excel in incremental and process-related innovation that refines existing technologies while smaller firms tend to excel in product innovation that challenges existing technologies.”

This returns us to the detriments that government actions based on fringe antitrust theories (i.e., a heavy regulatory hand big on sticks and slim on carrots) cause. Strong, ill-founded antitrust policy serves to weaken intellectual property and reduce IP rights, whose natural outcomes in an unfettered marketplace would be dynamic competition, innovative advancement, and wealth and job creation.

On the antitrust side, an important part of the solution is the One Agency Act (H.R. 7737). This legislation would place all antitrust enforcement authority and resources in the Department of Justice. The FTC, the antitrust agency more biased against IP, would yield to DOJ in these matters and focus its attention on such things as consumer protection. These changes would bring greater efficiency, fairness and accountability to antitrust. As a cabinet department, DOJ is more accountable to Congress and speaks for the United States.

The U.S. House Judiciary Committee passed the One Agency Act last spring. Hopefully, the House will approve H.R. 7737 this year.

In short, we need a reset: Strengthen the patent system and private IP rights, curb antitrust’s excesses, and free up the free market by reducing the regulatory state that’s led to a strong-antitrust, weak-patents regime.

As it now stands, America's economic freedom is constrained, property rights are diminished and government systematically commits regulatory takings of private property as a matter of Biden-Harris policy. And Big Tech is both the U.S. government’s target and its pawn.

More SEP Foolishness from the EU

The European Union is demonstrating how big-government bureaucracy by nature goes off the rails. Both procedurally and substantively, the EU is headed toward wasting taxpayer money as well as effecting a government takeover of what belongs only in private market negotiations between private parties. The action is regional, but its damage will be global.

Recently, the EU requested proposals for a study on details of specific provisions of a regulation that’s barely off the starting line. This study is way too premature to be worth a hoot should some version of the regulation be adopted.

And it’s not like the regulation is inconsequential, substantively. The proposed rule would displace private-sector, market-based negotiation of licensing standard-essential patents with a government regime of bureaucrats determining fair and reasonable SEP licensing rates.

As Ed Martin and I discuss in a recent op-ed on U.S. innovation and security: “Last year, the EU proposed a government program to determine which patents are essential to a technological standard and to set an aggregate royalty rate that would supplant market-based rates. The EU’s plan would harm all innovators, including European firms such as Ericsson and Nokia. Some European Commissioners have urged China to set up a patent price regulation program.“

The EU Parliament has passed the regulation. That’s it. Next comes a decision from the EU Council of Member States. If the EU Council approves the regulation, then begins a process to reconcile the European Commission’s, the Parliament’s and the Council’s versions of the regulation.

Plainly, the regulation is far from adoption. And if it eventually is, the final version is likely to differ from the EU Parliament's version. That’s because the Commission, the EU Council and the Parliament don’t understand to what this regulation would apply, how it would apply or its effects.

The EU request for proposals to conduct the study solicits methodologies for determining to which standards the EU SEP regulation should apply and methodologies for testing the essentiality of certain patents to a given standard developed by a standards-development organization. The essentiality checks would assess SEPs registered under the regulation.

However, the first topic for the study (i.e., which standards the regulation should cover) indicates that the EC and the Parliament don’t understand what it is this regulation would apply to. Worse, the solicitation asks potentially interested parties to answer this question!

Notably, an IP publication is closely following this mess. IP Fray writes, “SEP enforcement in the EU continues to expose the SEP Regulation’s flaws that are due to an insufficient understanding of reality (July 4, 2024 ip fray article), and the proposal is also controversial on the international stage (June 27, 2024 ip fray article). All this is compounded by the fact that the Parliament does not understand what the impact of the regulation is likely to be as indicated by their amendments to the regulation’s text.”

When pushing result-based, rather than evidence-based policy, the fact that just such a regulation stands at marked variance from reality and has sparked widespread international criticism might ought to be taken as a caution sign.

The EU threatens to screw up SEP license rate-setting by stripping it from the private parties (innovators and implementers) and handing it to government bureaucrats who have little knowledge and no stake in a prospective deal. It would harm private property rights, the incentives to innovate, economic and practical benefits of new innovations, and Western competitiveness with China.

The EU proposal is so ill-conceived it would ensure that China captures the lead in critical and emerging technologies—and thus reduce the free world’s security and innovation edge for decades to come. The wisest course is to ditch the fatally flawed regulation.

Crisis This Constitution Day

This Constitution Day, the Democratic presidential candidate is committed to government price controls and to marching in on the patents of products developed from the findings of federally supported basic research.

She said so in 2019, and the Biden-Harris administration she is part of has set up a price controls regime for drug price-setting and proposed a technology-neutral price-based patent heist scheme.

Thus, this Constitution Day holds special import for our nation’s future, given these and other recent assaults on our form of government. Court-packing threats. Attacks on the Senate filibuster. Regulations designed to destroy established energy industries. An Administrative State that snubs the rule of law, due process, fairness and individual rights. Bureaucracies abrogating the separation of powers.

The Founding Fathers would be shocked to see how little regard Americans seem to have for the democratic republic they carefully crafted. The Founders expressed awareness of, and devoted attention to fashioning, a federal structure that would constrain the new government. States, branches of government and separated powers were intended to prevent any “long train of abuses” like that endured at the hands of the British Parliament and King George III.

To achieve success, Constitutional Convention delegates had to reach many compromises on issues, many of which were contentious or complicated. For instance, in balancing large-state and small-state equities, the solution provided states representation in the House based on population, while each state has equal representation in the Senate.

One of the noncontroversial matters considered was James Madison’s and Charles Pinckney’s proposal to include among Congress’s powers the authority to write federal patent and copyright laws. This power became Clause 8 of Article I, Section 8. The measure “secures” the private property rights of authors and inventors in their creative and inventive works.

The intellectual property clause specifies these IP rights as “exclusive” and “for limited times.” This combination of exclusivity and limited duration facilitates achieving the Founders’ stated purpose for the clause: “[t]o promote the progress of science and useful arts.”

Madison’s and Pinckney’s IP proposal was adopted 12 days before the Constitution was approved. There was no debate and no opposition to it. Yet George Mason law professor Adam Mossoff notes how unique was the IP clause in Article I Section 8: “No country’s founding document had done this before.”

When the new Constitution went to the states for ratification, the “father of the Constitution” James Madison, John Jay and Alexander Hamilton explained its contents in a series of essays, the Federalist Papers. Madison briefly discussed the IP clause in Federalist 43.

“The utility of this power will scarcely be questioned,” Madison wrote. In other words, secure, exclusive property rights to the fruits of one’s intellectual labor would surely achieve the goal of incentivizing pursuits that advance knowledge and practical inventions.

Moreover, he pointed out, “The public good fully coincides in both cases with the claims of individuals.” That is, the newly formed nation and its citizens benefit from the new knowledge and the inventions that expand America’s economy, improve the standard of living, and create wealth and new industries.

For a limited duration, creators and inventors enjoy exclusive ownership rights to the new property they have created. Meanwhile, the public derives benefits from these fruits of ingenuity.

The brilliance of this win-win model is lost on those who would distort core features of the U.S. Constitution.

Government price controls, such as those enacted in the Inflation Reduction Act, create imbalance in the IP clause’s promise of secure private property rights. Price controls and extortionary taxes undermine the constitutional IP framework, which over more than two centuries has proven extraordinarily fruitful.

Likewise, misuse of the Bayh-Dole Act’s “march-in” rights to “snatch” patents throws IP rights into uncertainty. The reckless Biden-Harris plan to misuse march-in rights based on product price—which is not one of the four narrow, specified grounds—throws licensing federally funded inventions into turmoil. Already this proposal is causing inventions tied to federally funded basic lab research to be regarded as toxic, tainted, too great a risk to assume.

On the promise of exclusivity and the free market, decisions are made about private investment, research and development, years before there’s a product, a price or a market.

In fact, most inventions never get to market or earn enough revenue to cover their costs. The most successful inventions and creative works are often the most valuable.

This Constitution Day, we should consider how the Constitution’s IP framework has served our nation extremely well. We must enter the fray against the live threats to the successful U.S. innovation model. If these threats take root, we have much at stake to lose. And the loss will take generations to recover from.