Sarnoff: Granting Patents Immunity from Market Regulation is Neither Warranted Nor Sensible

ScreenShot009In the most recent Patent Law Journal article, Professor Joshua Sarnoff discusses implications of BIO v. DC. He opens with the following:

In Biotechnology Industry Organization v. District of Columbia,  the U.S. Court of Appeals for the Federal Circuit took another big step toward assuring that a granted patent conveys immunity from market regulation. 

Professor Sarnoff then explains why granting such immunity is “neither warranted nor sensible.”

26 thoughts on “Sarnoff: Granting Patents Immunity from Market Regulation is Neither Warranted Nor Sensible

  1. 26

    As I noted in the comments to the original post on the case – I believe this case go to far, market inentive is important to patent protection but it is not unlimited. I also believe the patent laws do not preclude the making of these via the Patent Act. Substantively, I disagree with both sides and think there is a middle ground where the law should be – you can regulate pricing but you cannot take away all profit because of the market incentive to the patent grant.

    Does anyone think you couldn’t take away a lot of value by limiting patent term? No, then why can’t you do it directly.

  2. 25

    Thanks, professor. I think I disagree with the main points in your article, but I don’t doubt for a moment your sincerity. I’m with those who predict that this decision will simply be about not targeting patented products.

    As for the decorum issues, I think everyone here has thick skin. We wouldn’t be lawyers or inventors if we didn’t. I’m just trying to persuade others that these discussions will be much more enjoyable if we maintain civility.

  3. 24

    Suffice it to say I have made — and expect to make — no money whatsoever from the case, having contributed my limited assistance pro bono, baseed on my belief in the correctness of the position argued by the amici. I leave it to the readers to determine if that precludes me from making an unbiased analysis. (For what it is worth, it would have made greater “political” sense to argue that the case is trivial because it is clearly limited to laws that target patented products and thus will not affect any other laws and DC can easily pass a revision that will pass constitutional muster. And I also fully expect that this case will be deployed in a wide range of new cases challenging laws that do not specifically target patented inventions by arguing that the holding is not so limited.)

    Substantively, my point (as clearly indicated in the article) is that the language on which the Court actually makes its judgment (in my opinion) relates to the effects of the DC law on patentee incentives based on the reduction of potential market returns. That rationale is entirely applicable to state laws of general effect, such as product bans (including all of the examples mentioned in prior comments, some of which would deprive patentees of much more percentage value than the reduction in price from an “excessive” level to a reasonable one as accomplished by the DC pharmaceutical law). As I also said, the Court cannot reasonably have meant this, even though that is what (I believe) the decision actually says. In contrast, if targetting regulation of patented products was the determinative factor for the decision, the Court’s discussion of reduction of incentives for patentees and of legislative intent to assure monopoly profits would have been unnecessary. It appears that the only differences of my position from some of the comments relates to what is the actual basis for the holding. As to that, it appears from the comments that two basic arguments exist for a different view of the actual holding. These are: (1) that the Court would not have discussed targetting if that were not the basis for its holding and (2) the Court cannot have intended such draconian consequences and thus did not so hold. I have already explained why I think the first point is wrong, but I hope that courts will nevertheless refuse to follow what I think is the correct analysis. In contrast, the second point is not very different from my own comment in the article, excepte that I believe it possible that the judges might have been intentional in issuing an unreasonable holding (although I hope they did not and thus might withdraw and revise the decision if this was not their intent).

    Finally, I would like to thank Mr. Dhuey for encouraging politeness in comments, although I have a sufficiently thick skin that I don’t need drinks to ease the (lack of) pain.


  4. 23

    I’m sure the cognescenti already knew this, but it may be appropriate, Dennis, to mention up front when an author (perhaps especially an academic author) has also been a participant, e.g. by writing an amicus brief in favor of an interested party. Justified or not, the academic label usually indicates a more disinterested, objective approach, and regardles of whether Professor Sarnoff was being objective as he sees things, by “taking sides” he doesn’t deserve the benefit of the doubt.

  5. 22

    How nice, anon — the professor must have been bribed.

    Dennis, I hope you’ll consider requiring posters here to register and post their real names with their comments. You just know that these anonymous posters are more reserved and respectful in the real world.

  6. 21

    Professor Sarnoff cannot be serious — I hate to suggest that his clients have bribed him to write a hit piece but I can’t think of any other reason. This is about as easy a case of Federal preemption as there comes. I should note initially that the Federal Circuit did note the fact that D.C. is a federal territory and not strictly subject to the Supremacy clause, and despite insinuating to the contrary, Professor Sarnoff is forced to acknowledge this in a footnote.

    The heart of Professor Sarnoff’s analysis is that the Federal Circuit’s reasoning would prove too much: that non-discriminatory regulations that burden patent rights would also be invalid. Of course, this would have to ignore the Federal Circuit’s not-inconsiderable emphasis on the fact that the D.C. law applied specifically to “patented” prescription drugs. And it fails to lead to the good professor’s ultimate conclusion that Congress needs to go all the other way to his client’s preferred outcome, that the Federal patent laws have *no* preemptive power at all even against an explicit law targeting — specifically — “patented” prescription drugs.

    Finally, Professor Sarnoff really should know better than to argue that the D.C. law doesn’t contravene Federal patent policy. Yes, the patent confers a right to exclude and not a right to make. But super-competitive profits are clearly part of the regime. Not only is this economic effect recognized throughout the legislative history of the 1952 Patent Act, it is also an indispensible part of the damages regime: the patentee is entitled to recover “lost profits” for the products that he would have sold at super-competitive prices. For Professor Sarnoff to take one isolated quote from Judge Rich out-of-context and argue that there is nothing contrary to patent policy for states to impose price caps on patented goods is disingenuous.

    Finally, I should note that a holding for D.C. would be disasterous. Every state has an incentive to limit prescription drug prices in *their* state and shift the cost of research to *other* states. Because the marginal cost of selling drugs is pretty low, that kind of price cap works to lower price to marginal cost without diminishing supply (assuming we can effectively prevent arbitrage by, e.g., controlling prescriptions from doctors). Of course, this will essentially confiscate the entire monopoly profit as every state will enact a price control law in a race to the bottom. And without monopoly profits, we can be assured that the patent system will be dead-letter.

  7. 20

    @ Mr. Dhuey –

    I meant no offense and respect this forum greatly.

    Professor Sarnoff, Sub silentio, and Mr. Dhuey – drinks on me…!

    Viva La Cocktails!!!

  8. 19

    ip-esq, I agree that the professor probably experienced no heartbreak. It’s more a matter of keeping Patently-O a friendly, professional place. Think Friday post-work cocktails with colleagues.

  9. 18

    It seems to me the Federal Circuit saw it exactly my way — the law targeting patented products but not others was invalid. It’s just that your way and my way predict the same result in this case.

  10. 17

    In Joshua Sarnoff’s article on “BIO v. DC and the New Need to Eliminate Federal Patent Law Preemption of State and Local Price and Product Regulation” the author confuses bargaining rights of consumers of patented goods and the rights of States to regulate prices in the market or the rights of the state to regulate use of harmful materials.

    Mr. Sarnoff argues that the CAFC decision is preemptively broad and he gives examples as follows: “the [CAFC’s] reasoning in BIO v. DC would invalidate the “Maine Rx” law requiring drug makers to provide discounts to the uninsured in order to participate in preferential purchasing programs for Medicaid that was recently upheld against a preliminary injunction by the Supreme Court. Similarly, the Court’s reasoning would preempt state environmental regulations banning methods of using patented chemicals.”

    It is clear that Mr. Sarnoff is unable to distinguish between the bargaining right of organized consumers to obtain certain concessions from vendor patentees in exchange for agreeing to purchase their patented products and the States’ outright attempt to set price limits in the market for *all* consumers in the state. His example requiring drug makers to provide discounts to the uninsured in order to *participate in preferential purchasing programs* for Medicaid is NOT an example of state price regulation. Rather, it is an example of a bargaining position of a certain consumer group (Medicaid users represented by the State) as a consideration for that group’s agreement to extend preferential purchasing terms to the drug makers. This provision does not preclude the drug maker from declining to participate in the Medicaid purchasing program while selling drugs at higher prices to other non-Medicaid consumers in the State. In contrast, DC tried to cap prices of patented drugs for all consumers in the district, making price control of a patented item the central purpose of the regulation.

    Similarly, Mr. Sarnoff’s conclusion that the CAFC reasoning would preempt state environmental regulations banning methods of using patented chemicals is also baseless because such regulations are not directed to control patented products per se but are rather directed to control use of *harmful* materials, whether patented or not. Mr Sarnoff’s logic would lead to the ridiculous conclusion that the CAFC’s decision implies the preemption of any states’ compelling rights. That conclusion could not be read in this CAFC decision.

    Mr. Sarnoff’s logic in analyzing the alleged implications of the CAFC decision is unavailing and he will be well advised to learn more about the simple economic and legal distinctions between his examples and the case addressed by the CAFC in BIO v. DC. He should also take notice what was NOT written into the CAFC decision to put his mind at ease.

    – The Patentee

  11. 16

    @ sub silentio –

    Fortunately, the Fed. Cir. didn’t see it your way.

    Viva La Judicial Branch!

  12. 15

    @ Mr. Dhuey –

    Noted – However, I doubt the fine professor is heartbroken. Frankly, I would make that argument if the NLAPDP was paying.

    However, if an academic is involved with a case, I think the objectivity of writing about it subsequently is lost.

    If they would have won; I’m sure he would have written about how right they were.

    Viva la Feelings!!!!

  13. 14

    Your distinction doesn’t make sense. The patent is typically only on the one ingredient of what is sold: the active ingredient, or the pharmaceutically acceptable salt thereof. The rest of the pill — the filler — isn’t patented. So there’s really no meaningful difference. Milk might not be patentable, but a new enzyme that you invent to preserve it longer could be patentable (and could lead to a sustainable price margin if patented absent price controls). There’s really no difference. Business methods can be patented too.

    The flaw in your key point is that the state isn’t telling the federal government that it no longer recognizes the right to exclude. PhMRA members can still prevent others from making, using, or selling their patented invention in D.C. Rather, the D.C. law just limits the patentees’ own right to exclude, which is not a federal patent right but rather a natural right. So there is nothing per se wrong with something that limits that natural right (explaining why handgun laws are okay). What is unconstitutional is when that natural right is limited for patented products and not for others.

  14. 12

    ip-esq, why include with your reasonable critique of Professor Sarnoff’s article the suggestion that he “go back to school and take some IP classes”? This may the typical of online discussions, but I respectfully suggest it has no place here.

  15. 11

    @ sub silentio –

    Firstly, you are fun to debate with.

    Second, I think your argument can be distinguished in that – Handguns are not the subject to patents (In the product sense. Meaning the actual handgun isn’t patented; but there maybe patented components; maybe…can someone clarify?) Similarly, milk isn’t patented, oil is patented, rent isn’t patented, insruance isn’t patented, etc.)

    But – Drugs are.

    Here is my key point. The patent laws grant a right to exclude. If the drug has that right attached to it; it is a matter of Federal law. A state cannot later come in and tell the Federal law it doesn’t recognize the grant. That is fundamental CON Law. It would put too much power in the States hand.

    So, the regs are shot down. If D.C. is worried about the cost of healthcare it should socialize healthcare within its border. Then it wouldn’t matter if the drugs were patented or not.

    I think Sarnoff and the D.C. lawmakers really liked “Sicko”

    Viva la Right to Exclude!!!!!!

  16. 10

    I think I get the whole picture. But there are many types of of state laws that reduce the value of a patent to zero in the state (in the realizing income sense). Consider the state handgun ban, for example. States have a general power to act to protect the safety and welfare of their citizens.

    Another long-accepted state power is to regulate prices of goods sold within the state. States don’t do it alot, but it’s been done for a long time (consider: crude oil, milk, rent, insurance). Those state price controls can limit the profit to be made from a federal right to exclude, but the common understanding is that the state regulations are not preempted because they aim to achieve a purpose (citizen health) not in conflict with the purpose of the federal patent scheme. If we allow price controls for that reason, I think an appropriately crafted drug price control law would survive a preemption attack as well.

    I don’t think you were making a descriptive claim in your post, so nothing I’ve said contradicts what you’ve said. And Professor Sarnoff’s article wasn’t a law review article, it was an article for this blog. No doubt it will get listed on his CV as a publication though! 🙂

    I plan to write on this.

  17. 9

    Stoopit question: suppose the law was upheld. Would not the patentee just stop selling in DC?

    Then if you want XYZ patented drug, you gotta go to MD or VA and pay full price.

  18. 8

    @ sub silentio –

    Your comments are well taken. Although, I think you have been staring at the tree so long, you forget you are standing in a forest.

    The primary point of the D.C. regs was to lower prices on drugs so more people can afford them. Realizing that generics cannot really be blamed, D.C. chose to go after the innovators (i.e. for all intents and purposes; patented drugs).

    At which point, Pharma and BIO and the innovators took notice and said wait… “that is why we spend hundreds of millions a year; so we can make our money back via the patent laws”

    If the D.C. regs took effect it would esentially reduce patent value on drugs to zero (in effect); but only in D.C. (not in CA, or FL, etc.)

    The District Court case came down; then the Appeal; here we are. At the end of the day, the Court’s were right.

    The point I was making was that Professor Sarnoff (who was on Amicus Brief with National Legislative Association on Prescription Drug Prices) lost on fundamental constitutional grounds and patent law grounds. The he writes a law review article about it asserting it was neither warranted or sensible.

    I doubt D.C. will try v.2 on the regs. It would be a different chapter in the same book.

    In my opinion, I think this was a good case for the patent laws and the concept of patenting in general. Cases like KSR, MedImmune, etc. have recently attempted to compromise these principles.

    Viva la Patents!!!!!

  19. 7

    Actually, upon a moment’s reflection, if I were D.C. I might not even draft version two of the law to reference “foreign prices,” since that arguably is too obviously an attempt to tie the excessiveness inquiry to the prices absent the same patent right prevalent in the U.S. Instead, I’d tie the prices to “unaffordability for the average citizen” or something of the like, and have some official issue a list of those prices, taking into account things like R&D costs, production costs, and citizen-income statistics. Yeah, that sounds like something that really does have to do with public safety concerns and not so much with weakening the effects of that darn U.S. patent right.

  20. 6

    @ip-esq: In defense of Professor Sarnoff, I think he understands patent law fine. Rather, I think he’s off base on his Fed Courts fundamentals.

    The holding of the case is the reasoning the court uses to reach its result. The dicta is the rest of the stuff the court says. Here, one of the factors used by the Federal Circuit was the explicit targeting of patented products only. In a case where that factor is not present, B.I.O.’s holding just won’t apply. The court may be persuaded that the second case is close enough to B.I.O., but to claim that B.I.O. will control the second case is what I objected to.

    And to be fair, Professor Sarnoff hedged with “may” in the article, although he unequivocally dismissed the explicit-targeting factor as dicta in his comment.

  21. 5

    Thanks, Professor Sarnoff. I would bet my house that the Federal Circuit will not read this case to invalidate state laws of general applicability, such as handgun bans or the like. I think the jurisprudence here will evolve into something like discrimination jurisprudence: As long as there is no targeting of the benefits of the patent right the law will be fine.

    The tricky question will be how to determine when patents are targeted. If the law mentions patents, it’s an easy case. But if the effect of a general law is felt largely by patented products, it’s a tougher case.

    For example, if I were D.C., I’d re-enact the law to provide that any medication must not be sold for prices in excess of the foreign prices. So, technically, the law prohibits high priced sales of both generic unpatented aspirin and patented Lipitor. Practically, the law’s effect will be felt largely by the patented products, as they will usually be the ones selling in excess of foreign prices.

    On those facts, I’d bet that with proper legislative findings about the importance of the rule to the public health, D.C. could make a winning case that because its regulation is now rationally related to its purpose (“fit and proportional” in City of Boerne speak), the purpose of the law does not conflict with the purpose of federal patent law.

    But PhMRA would have a good argument otherwise, pointing to the disproportionate effect on patented medications (and D.C.’s previous failed attempt to regulate just patented medications — D.C. kind of shot itself in the foot by doing that). D.C.’s answer would have to be that PhMRA’s argument is overbroad because any state price-control regulation will have a disproportionate effect on more expensive goods, which in the sustained marketplace will tend to be patented goods, and a state can surely constitutionally enact price control legislation (citing the long history of state laws). I think that’s a winning response, but it’s a close issue. That sort of case might go up to the Supremes.

  22. 4

    Professor Sarnoff is using his ability as an academic to try to make absurd arguments in the hope that someone will listen to him. If they do he becomes a genius. If not, well good try.

    BIO v. D.C. was an easy case. The Court got it right. No doubt Sarnoff and the non-profit will appeal. And, it will be sustained (although, I doubt it even gets heard).

    I suggest Professor Sarnoff go back to school and take some IP classes. The arguments he makes is neither “warranted or sensible”

  23. 3

    I agree – I think Professor Sarnoff has gone overboard in suggesting that this decision might apply to laws which are “patent neutral” (e.g., a law that applies to all products, not just those covered by a patent).

  24. 2

    Sub silentio: I hope you are right, and that lower courts (and the Federal Circuit itself) read the discussion of targetting of patented products as the holding of the case rather than (as I believe it is) dicta unnecessary for and unrelated to the holding. Although time will tell, I would (and I think you would also) much prefer to avoid the possibility that I am right. Josh

  25. 1

    Professor Sarnoff’s central argument is pretty plainly wrong. His bottom line is that the court’s holding may invalidate “myriad” laws, such as general bans or restrictions as applied to patented products or price-gouging laws as applied to patented products.

    That result is pretty clearly not the law under the court’s opinion. Does Professor Sarnoff really think a court would strike down a general handgun-sale prohibition as applied to patented goods? Of course not. Same for a general price-gouging law. Same for a general tax. They would all be fine.

    Of course, if the state began to tax or prohibit the sales of only patented products, the holding in this case would apply, but the opinion can only logically stand for a “no targeting patents” rule. So long as the regulation is general — and thus admits of some other purpose, such as protecting citizens’ safety or limiting sale of a type of product — the regulation has to be fine.

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