Are patents monopolies or not? Part II: Residual Biases and Misnomers

Despite the basic principles that a patent does not assume market power and actually establishes full legality within the issued scope, as we learned in Part I of this two-part series, the Federal Trade Commission can and does use threats of antitrust investigations to force patent owners to voluntarily abandon certain activities under patent law to be excluded.

In particular, the Hatch-Waxman Act of 1984 uses the ingenious “Orange Book” technique to notify a product’s regulatory status with the Food and Drug Administration (FDA), thereby facilitating lawful entry into the generic drug market. The 1984 Act requires patent owners to list the patents covering a drug or active substance or method of using those protected drugs. The FTC questioned as “improper” more than 400 Orange Book entries between November 2023 and May 2024, particularly those listing devices for administering important medications without administering a specific drug, such as pens or inhalers.

To date, neither FDA nor Congress has declared that these administrative devices do not meet the requirements of the Orange Book listing. Therefore, patent owners protect the list of their proprietary rights. At this point, regardless of any legal ambiguity, the FTC steps in and threatens antitrust action because an exchange listing could trigger Hatch-Waxman Act protections – again, exclusive-right legal protections. Because the costs and potential stigma of antitrust litigation hinge on a vague allegation of “improper” listing, patent owners must face accusations that these listings are intended to improperly extend patent rights (with market power?) in pursuit of an anticompetitive agenda. Therefore, the unclear parameters of both antitrust standards and the FDA Orange Book policy allow for a form of administrative threat that may turn into complex and lengthy court proceedings with an unspecified outcome. Is this an echo of a residual bias against patents – a form of ownership that should be encouraged because it invariably promotes greater competition?

Patents as “beneficial monopolies”

In this article, we again raise the question: is a patent an antitrust monopoly? Careful analysis shows that calling a patent a “monopoly” is misleading. Nevertheless, one point of similarity suggests the value of a new perspective: in some sense, a patent may qualify as an “advantageous or natural monopoly.”

There is a favorable monopoly in the utilities sector. A natural or advantageous monopoly operates to provide essential services that require the construction and maintenance of extensive infrastructure, such as a power grid. According to standard economic reasoning, the marginal cost of adding one more house to the existing electrical grid is minimal—maybe a few dollars. However, a beneficial monopoly will empower a single provider (without competition) to charge that single new grid connector hundreds of dollars per month in service fees. These increased monopoly prices are necessary to rebuild and maintain the vast infrastructure of dams, nuclear power plants, and pumping stations over time to the benefit of utilities and society. Additionally, increased pricing ensures future investment in new and improved facilities.

Although, for reasons discussed earlier, the concept of antitrust monopoly does not fit patents, the patent system can be justified as a beneficial monopoly for economic skeptics who commonly share the wisdom of natural utility monopolies. See, Duffy, John, Rethinking patent prospect theory, 71 U. Chi. LR 439 (2004). Applying the beneficial monopoly model to patents, the marginal cost of one more cure for cancer or arthritis is minimal once the treatment is invented, perfected, and tested. Nevertheless, the market will allow the drug’s owner to charge higher prices during the limited patent life to offset the billions of dollars needed to invent, test, produce and deliver the drug. Moreover, current drugs can help invest in the invention and production of future health care improvements.

Indeed, because the limited term of a patent often does not cover the full bill of inventing, refining, and distributing inventions, U.S. and world policy has allowed term extensions to ensure the operation of a “natural monopoly.” Just as society would not have electricity without dams and distribution networks, it would not have access to fewer treatments, delays, or any other technology without protecting investment in invention and encouraging the transformation of scientific theory into useful and accessible technology. Once again, this clarification does not mean that a patent is an antitrust monopoly, but it does give the patent skeptic additional certainty about the validity of the exclusive right created by the U.S. Constitution.

We must abandon prejudice and restore the value of patents

To sum up, the Constitution, and specifically Art. 1 section 8 section 8, expressly grants Congress the power to create exclusive laws “to promote the progress of science and useful arts.” Antitrust laws—the Sherman Act of 1890 and the Clayton Act and the Federal Trade Commission of 1914—cannot rest on the same claim of express constitutional authority. Indeed, as noted earlier, patents predate the antitrust system by a century or more. The Honorable Judge Giles Rich encapsulated the relationship between patent law and antitrust law in one sentence: “The patent system, which predated the Sherman Act by a century, is not an “exception” to the antitrust laws, and patent laws do not constitute legal monopolies in the antitrust sense of the word. “American Hoist v. Owl, 725 F.2d 1350 (Fed. Cir. 1984).

Indeed, a patent is not an antitrust monopoly. In addition to learning proper etiquette, modern antitrust authorities would be wise to abandon any residual prejudice against the exclusive rights guaranteed by the U.S. Constitution. In addition to abandoning bias, antitrust authorities should recognize the value of encouraging patents as a complementary, pro-competitive legal regime.

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Author: artursz
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