The Vision Project

Business Is Doing Its Part

Editor’s Note: In this BC Law Magazine “Vision Project” series, we are engaged in a lengthy discussion with Boston College Law School faculty about where the Covid-19 pandemic and its attendant medical, economic, racial, and political consequences may lead us. As New York Times op-ed columnist Timothy Egan so eloquently put it recently, “Every crisis opens a course to the unknown. In an eye-blink, the impossible becomes possible. History in a sprint can mean a dark, lasting turn for the worse, or a new day of enlightened public policy.” There are warnings and worries in these professors’ views, but there are also farsighted ideas and strategies for crafting a better future, a more just society, and a world in which each and every human being is equal under the law.


PROFESSOR DAVID OLSON

Professor Olson is Faculty Director for the Program on Innovation and Entrepreneurship at Boston College Law School. His research and scholarship focus on patent law, copyright law, antitrust, music licensing, and first amendment copyright issues. His writing has been cited in Supreme Court legal opinions, and he has testified before Congress on matters of drug patents, FDA regulation, and antitrust. 


David Olson-square What has the coronavirus pandemic revealed about the shortcomings of the ways that businesses is organized, operates, and is regulated in the US and around the world? I haven’t seen the evidence yet that the coronavirus pandemic has revealed significant shortcomings, in that businesses thus far have responded pretty well and quickly to a crisis that caught almost everyone by surprise. We haven’t had the drastic shortages that were feared. I think that’s partly because people took social distancing and other preventive measures seriously, and partly because the private sector and the global supply chain have adapted rapidly to the pandemic.

There was a lot of fear early on that we would not be able to produce critically needed items such as ventilators and PPE. A number of people argued that President Trump should invoke the Defense Production Act broadly to allow the federal government to take charge of production and distribution of necessary products. Fortunately, that did not happen and the supply problem was largely left to the private sector, which swiftly scrambled to produce needed products. It wasn’t instantaneous, and there were some real shortages for a period of time, but even during a lockdown due to a global pandemic, participants in the free market were able to quickly adapt and produce what we needed. I see no evidence or compelling arguments that the federal government could have taken direct control and done a better job. It’s more likely the shortages would have been protracted in such a scenario.

Something interesting about the pandemic is that, rather than bringing fresh analysis to the situation, we are seeing a lot of people just mapping their prior assumptions onto the current situation. The same people who thought we needed more business regulation in area X, Y, and Z, are still saying that, because of the coronavirus, we need more business regulation in X, Y, and Z. And those on the other side, who said, for example, we need stronger patent laws to incentivize more production of drugs and vaccines, they’re saying that, because of the coronavirus, we need stronger patent laws.

It is true that, at least initially, hospitals and the health care system were short on protective equipment and critical supplies. But, from a business perspective, I don’t know what set of regulations would have improved that situation. Now, had the federal government, and maybe states as well, taken much more seriously having stockpiles, then we’d be in a better position. So, certainly, there are ways that government preparedness could be better, but I don’t see the case for new regulations as of yet.

One way that globalized businesses realize they can be exposed by crises like this pandemic is by not having enough redundancies in the supply chain and not having enough domestic production available if we get something that affects the international flow of goods. A number of businesses are working to diversify their supply chains and build in some redundancies. I think that’s a good thing. What would not be good is if Congress passes one of the proposed bills mandating that businesses not source certain things from China, or that businesses must produce certain things in the US. This would disrupt and then ossify certain parts of the supply chain and make it difficult for businesses to be nimble the next time they need to make sudden adjustments. Outside the limited exception of requiring defense contractors to manufacture in the US, I think that private market incentives are sufficient to encourage businesses to ensure their supply chains are robust.

How have the laws that address competition and financing contributed to business challenges? One interesting area is antitrust law. If you look at the airline industry right now, depending on how you count it, travel is down 80 to 90 percent. Because of this, it’s inefficient for multiple airlines to be covering the same routes. For instance, the Kansas City to Chicago route probably doesn’t need six different air carriers covering that route right now. So, it would be efficient for the carriers to get together and agree, okay, you do that route, we’ll do this route. It’s not really about trying to make a lot of profits; they’re all operating at losses. They’re just trying to make their losses less bad. In this case, cooperating would be more efficient.

But antitrust law prohibits horizontal agreements among competitors to set prices or divide geographic markets. So, airlines can’t collaborate on an agreement to divide up the routes, because they would incur antitrust liability with treble damages. In addition, the $50 billion airline bailout package has a requirement that further compounds airlines inability to cut costs. The aid package requires airlines not to furlough employees and to maintain service to the cities they currently serve. A prohibition on not furloughing employees makes sense as a way to preserve jobs. But the requirement to keep serving all of their cities does not make sense, because it results in wasteful duplication of capacity in the face of minimal demand.

As a result, not only can airlines not collaborate to divide up the market, but under the aid package conditions, they are prohibited from simply dropping routes on their own. This provision was poorly thought out. The result has been that airlines have been petitioning the Transportation Department for exemptions so that they can drop routes. Fortunately, the Transportation Department has been granting these exemptions, such that airlines have suspended service to more than 75 airports, while ensuring that at least one carrier still serves each airport. This is a pretty good result, and it, in effect, allows the Transportation Department to serve as the coordinator for dividing up the geographic market while ensuring sufficient route service remains.

Has the pandemic showed up any issues in the intellectual property area that ought to be addressed? Yes. Something that we’ve known for a while is that there is not adequate research and development when it comes to vaccines or antibiotics. Typically, both for vaccines and antibiotics, the profit margin isn’t that great compared to the research and development costs, so we have an underinvestment in development of these drugs. The question is, how do we incentivize more R & D in vaccines and antibiotics? One way is to give a longer term of market exclusivity. For instance, in addition to patent protection for twenty years–which ends up only being about fourteen years for your average drug because it takes so many years to get through FDA approval—you might give an additional exclusivity period to the drugmaker of a successful vaccine or antibiotic, which would allow the drug maker to be the only seller of the drug for a longer period of time, and thus recoup more profits. That would be one way to address the incentive problem.

There are other ways to address incentives. You could have more direct government subsidies for research and production. You could offer more tax credits.

There’s another issue, though. When the Patent Office grants a patent, the patent owner typically will then charge a price that’s well above the cost of making the drug. The drugmaker has to do that to make back the R & D cost, compensate for risk, and also to make a profit for its investors, who will otherwise invest their money elsewhere. That above-cost price prevents some patients from affording the drug. That is a terrible thing with a vaccine when you need everyone to get it so that we can stop the spread of the virus.

So, what do we do with distribution? One answer is to just have governments pay the above-cost price and buy lots of the drug for widespread distribution. This approach would keep incentives high for drug production. Another option is for countries to use compulsory licensing. The Trade-Related Aspects of Intellectual Property Rights Agreement allows all World Trade Organization member countries to make exceptions to the protection of IP for the purpose of public health or national emergency. That means that any government can announce compulsory licensing for a vaccine or other medication and allow any drug manufacturer to make and sell it so long as the manufacturer pays the patent owner a royalty set by the government, which might be as low as 1.0 percent of revenues. This approach solves the widespread distribution problem, but it could undermine incentives for future vaccine and drug production, which is why compulsory licensing has been very rarely used worldwide, and hasn’t been used in the US in the last fifty years.

What role do you think business could have in helping to address racial, social, and economic disparities and help make the United States a stronger and more just nation? In one way, the private sector is already helping by working on understanding the coronavirus and coming up with treatments. If the government would subsidize the production of antibiotics and vaccines, that would be helpful to all citizens and, therefore, helpful to the most vulnerable citizens who are going to have the most health issues.

As far as an intellectual property or antitrust law regulatory fix, I don’t know what that would be, and I wouldn’t know what to recommend.

The unfortunate reality of inequality is that those who have less money and power, and those who are treated discriminatorily, are affected in more negative ways when crises happen. We have seen that in the fact that African Americans are being killed by Covid-19 at rates far higher than whites. This is due to a number of confounding problems, including legacies of discrimination that result in African Americans, on average, having less money, more health problems, and less trust in doctors and health care systems. The question is what can be done to make that better? I can think of three things, including one specific to my area of expertise.

First, there’s a role for the government to help out those who are vulnerable and most in need. It is time to invest in the health and wellness of poor and minority populations. It is also time to increase institutional trust by reforming policing in this country and reducing discriminatory treatment. We can also do more to help those who are vulnerable. If you look at South Korea, for example, there the government is paying the housing costs to remove people who test positive for Covid-19 from their households so that during their quarantine the vulnerable members of their families don’t get sick. We could take more steps along these lines. We could also make sure that compensation and incentives are there for people to stay home when they are sick rather than going to work.

Second, there’s always a role for private charitable action to help. You see that being done across the US with donations to food pantries, PPE, and to help the most vulnerable. That’s a wonderful thing.

Third, an important way to make poor and vulnerable people better off is to help them become less poor. While social spending can help with this, the biggest driver of improved material conditions in the US and around the world has been innovation, entrepreneurship, and economic growth. For example, part of the reason that China has been able to do as much as it has to stop the spread of coronavirus is because a massive portion of its population moved from abject poverty into a level of economic security in the last thirty years due to an embrace of capitalism and economic growth. With improved income and material possessions comes a better ability to handle crises, including lockdowns, without facing grinding poverty or starvation.

In the US, a robust ecosystem for innovation and entrepreneurship has done more than just provide economic growth and accompanying increases in wages and standards of living. The opportunities to start one’s own business and to innovate have provided pathways for those who are excluded from traditional paths to success to chart their own courses, making themselves and the world better off along the way. Many immigrants, persons of color, and those without college degrees have built businesses, invented new products, or created new markets. And while the ecosystem for innovation and entrepreneurship in the US is the best in the world, more can be done to make access to capital, markets, and opportunities available for all. By keeping patent fees for small inventors low, subsidizing lending to small businesses, and removing rules and regulations that make innovation and entrepreneurship slower or more costly, we can help people find paths to success even if they do not start with financial capital and connections.

At BC Law we understand how important this is, which is why three years ago we started the Program on Innovation and Entrepreneurship, of which I’m faculty director. I’m also proud of the two BC Law clinics where our students work to give entrepreneurs the legal help they need to start and grow their businesses—the Innovation and Entrepreneurship Clinic and the Community Enterprise Clinic. Not only does this increase opportunity and reduce inequality, it also facilitates the creation of products and businesses that make the world better, more comfortable, and more fun.

I believe that continued focus on innovation, entrepreneurship, and economic growth is especially important now in the face of a global pandemic and renewed attention to racial justice. Excessive regulations can act as a tax on business that advantages large businesses who can absorb the compliance costs over small businesses for whom the costs can be prohibitive. Accordingly, we need to be careful with recommending new regulations that increase compliance burdens and often have unintended consequences. Before engaging in significant regulatory changes, the case needs to be made that there is a significant failure in the market that needs to be cured by new regulation.As of now, I don’t see it. I do think that focusing on streamlining regulatory burdens, and helping nontraditional entrepreneurs get started and grow should be an important priority.

Read all faculty Vision Project interviews here.

 

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