Spurring Innovation: Lessons from the FTC

Today the FTC (Federal Trade Commission), under Lina Khan’s leadership, announced its proposal to remove non-compete clauses from employment contracts. This is a important step towards increasing worker power and agency.

There are cross-industry implications of this. This proposal fits in perfectly with recent commentary around 2 industries: the pharmaceutical industry, and tech.

The calls to reform predatory pharmaceutical IP laws, as well as the call to make social media platforms interoperable are both about the same principle — they are both efforts to create anti-monopolistic laws, to put power back in the hands of consumers and users instead of with corporations and platforms.

That such proposals are anti-innovation is a myth—in fact, the opposite is true. These proposed laws will make the ecosystem more competitive, more innovative, and lead to higher quality experiences for all involved.

When asked about how companies can protect valuable trade secrets and IP if non-competes are removed, Lina Khan pointed out that there are already many alternate routes companies have to do this — including non-disclosure clauses, and mechanisms that do not lock in talent or have negative economic effects.

Similarly, pharma IP law—the way it is presently structured—stifles competition and innovation instead of spurring it. The manner in which pharma IP laws have been executed in the last 30 years has been instrumental in creating drug monopolies. It is a system that incentivizes development of ‘me-too’ drugs that offer little therapeutic advance and primarily serve to prolong patent protection. In this context, IP has been harmful, not helpful, to innovation.

The fact that patents have been made: (1) increasingly hard to license, (2) much broader and more encompassing than the downstream area of innovation, and (3) too easy to extend — has led to patents blocking learning, diffusion and dynamic collaborations.

One striking example of how innovation in the pharma industry is at odds with the perception of the same is this: From 2007 to 2016, the 19 pharmaceutical companies included in the S&P 500 Index in January 2017 spent US$297 billion repurchasing their own shares, equivalent to 61% of their combined R&D expenditures over this period. Additionally, 50% of new medicines reaching the market not representing any added therapeutic advance for patients. In other words, the incentives are misaligned—executive compensation is tied not to the delivery of therapeutic advances but to stock price increases, with a non-demonstrable correlation between the two. Over-reach of IP laws exacerbates this issue.

Similarly, in the social media world, lack of interoperability is at the heart of the monopolistic power of platforms. These systems are closed, walled-garden architectures, by conscious design. Facebook is among the biggest offenders here, having killed off competition by disallowing users from cross-posting data, links and even de-ranking content where keywords such as names of other platforms are spotted.

These are examples of how we manufacture monopolies in the name of innovation.

Changing this requires regulation. Companies that have grown to be monopolistic will not do this of their own accord. Even in the example of telephones, the Telecommunication Act of 1996 is what changed the telecom industry.

This is why the work that Lina Khan and her team at the FTC are doing is so crucial and commendable.