CANTECHNOLOGICALINNOVATION

SURVIVEGOVERNMENTREGULATION?
RICHARDA.EPSTEIN*

InthisArticle,Iwillofferafewobservationsonthetrouble
some relationship between technological innovation and gov
ernment regulation. That relationship is neither simple nor
linear. In many instances, regulation is strictly necessary be
cause the alternativea form of casebycaselitigationcan
easilyprovetobeworse.1Inothercases,regulationisnecessary
tosecurethecreationofpropertyrightsinindividualsthatare
good against the rest of the worlda state of affairs that no
system of voluntary contracts can hope to create.2 In other

*Richard A. Epstein is the inaugural Laurence A. Tisch Professor of Law at

NYULawSchool.Priortohisjoiningthefaculty,hewasavisitinglawprofessor
at NYU from 2007 through 2009, when he was the James Parker Hall
Distinguished Service Professor of Law at the University of Chicago. Professor
Epstein also has served as the Peter and Kirstin Bedford Senior Fellow at the
Hoover Institution since 2000. His initial law school appointment was at the
UniversityofSouthernCaliforniafrom1968to1972.ProfessorEpsteinreceivedan
LL.D., h.c. from the University of Ghent, 2003. He has been a member of the
AmericanAcademyofArtsandSciencessince1985andhasbeenaSeniorFellow
of the Center for Clinical Medical Ethics at the University of Chicago Medical
Schoolsince1983.HeservedaseditoroftheJournalofLegalStudiesfrom1981to
1991,andaseditoroftheJournalofLawandEconomicsfrom1991to2001.From
2001to2010hewasadirectoroftheJohnM.OlinPrograminLawandEconomics
attheUniversityofChicago.
Thisessaywasadaptedfrompanelremarksgivenatthe2012FederalistSociety
AnnualStudentSymposiumheldMarch3,2012,atStanfordLawSchoolinPalo
Alto,California.Foranaudioandvideorecordingofthecompletepanel,please
visit the Federalist Societys website. Technology and Regulation, THE FEDERALIST
SOCIETY, http://www.fedsoc.org/publications/detail/technologyandregulation
eventaudiovideo(lastvisitedNov.7,2012).
1.Edward L. Glaeser & Andrei Shleifer, The Rise of the Regulatory State, 41 J.
ECON. LITERATURE 401, 40203 (2003) (positing market regulation as response to
dissatisfactionoflitigation).
2.SIMEON DJANKOV, THE WORLD BANK, DOING BUSINESS IN 2004:
UNDERSTANDING REGULATION 111 (2004), available at http://www.doing
business.org/~/media/FPDKM/Doing%20Business/Documents/AnnualReports/
English/DB04FullReport.pdf. See also Glaeser & Shleifer, supra note 1, at 419
(explaininghowincreasedgovernmentregulationledtosignificantsocialpro
gressbetween1887and1917);MargaretJaneRadin,PropertyandPersonhood,34

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situations,thesecurityofvarioustransactionsmaydependon
regularizing contractual relations by creating state registries.3
Every system of law needs a system of regulation. Even in
purely competitive markets, a system of property rights must
be established. Systems of recordation and a statute of frauds
areneededtomakethesystemoperateproperly,andtaxesand
otherincomestreamsarerequiredtosupportthepublicactivi
tiesthatareneededtomakethesystemwork.Thebeliefthata
disembodied free market, one which does not rest upon gov
ernmentforce,willfunctioneffectivelyiscertainlyamistakeof
epic proportions, if not an anarchist myth. At bottom, the
proper inquiry never poses the stark choice of regulation ver
sus no regulation. Instead, the inquiry is much more modu
lated;itseekstofindwhatkindsofregulationaredesirabledue
tothepositiveconsequencestheybringaboutand,conversely,
whatkindsofregulationsaregenerallydubiousbecauseofthe
negativeconsequencestheybringabout.
So we need to find some test that allows us to sort regula
tions into those which should be welcome and those which
should be opposed. For the business activities at issue in this
discussion,Iproposeonetestthatshouldgoalongwaytoor
ganize this inquiry. In virtually every case, desirable regula
tions are those that are designed to fortify a system of
competitive marketsthroughreverseengineering.Robust(but
neverpure)competitioniswhatisdesired.Whichregulations,
then,willmovetheoveralloperationofthelegalsysteminthat
direction?Strongpropertyrightsprotectedbyregulation,stat
utesoffraudsonformalitiesofcontract,preventionofinduce
ment to breach of contract, and the use of force against
contractingpartiesallfortifyacompetitivemarketsystem.No
onecanquarrelwiththeneedforregulationintheseareasnor
treat such regulation as part of a vast regulatory state that
shouldbetheobjectofourcollectivewrath.
ThisArticlediscussestwoimportantfieldswithintechnology.
Eachfieldrequiresatleastsomedeviationfrom,oratleastsome
modificationof,thekindsofsolutionsthatarewelcomeincom
petitivemarketsinvolvingstandardgoodsandservices.Thefirst
of these two fields is the intellectual property system, which

STAN. L. REV. 957, 1013 (1982) (discussing the importance of the right to per
sonalproperty,particularlythehome,asasignificantpartofasociety).
3.JuanBoteroetal.,TheRegulationofLabor2(NatlBureauofEconomicResearch,
WorkingPaperNo.9756,2003),availableathttp://www.nber.org/papers/w9756.

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chieflycomprisescopyrights,patents,trademarks,andtradese
crets. The other field is the network industry system, which
deals with railroads, telecommunications, and other related
technologies. What makes these two areas unique? What kinds
ofregulationsoughtwetowelcomeinthem?Andwhatkindsof
regulationshouldberejectedasexcessiveorcounterproductive?
I.

INTELLECTUALPROPERTY

I begin with intellectual property, a field in which the first

possession ruleinvariably used to acquire title in land, chat
telsandanimalscannotdothejob.4Itissimplynotenoughto
allow people to take first physical possession of property and
thenannouncethattheyownit.Recognizingthisfundamental
point, Congress in 1790 passed the Patent5 and the Copyright
Acts.6 What makes these statutes, at least in large measure, a
longtermsuccess?First,neitherstatuteismeanttobetechno
logicallycoercivewithinitsrespectivedomain.ThePatentAct
provides a system in which priority goes either to the first to
investforthefirsttofilethereisadisputeastowhichofthese
two is more importantthe law will furnish an examiner,
through the Patent and Trademark Office (PTO),7 who makes
an initial determination as to whether or not the patent is
valid.8Ifthepatentisprotected,itfallsintothesphereofordi
nary property rights that should be protected by injunctions
and damages in the event of infringement.9 This protection
against infringement is the intellectual property analog to the
ordinary tort of trespass, and it provides the institutional
frameworkthatallowspatenteestosellorlicenseaninvention.
Because the Patent Act creates a decentralized system that al

4.See,e.g.,AnupamChander,TheNew,NewProperty,81TEX.L.REV.715,73336
(2003)(discussingthetendencyofafirstpossessionruleforintellectualproperty
to exacerbate distributional inequalities by providing windfalls to established
actors);seealsoRichardA.Epstein,AddisonC.HarrisLectureNov.9,2000,76IND.
L.J.803,815(2001)(discussingdifficultiesinherentinapplyingafirstpossession
ruletopatents).
5.PatentActof1790,ch.7,1Stat.10912(1790).
6.CopyrightActof1790,ch.15,1Stat.124(1790)(Westlaw2012).
7.35U.S.C.3(b)(3)(2012)(allowingtheDirectoroftheUSPTOtoappointex
aminers).
8.35U.S.C.131(2002)(prescribingexaminationofpatentapplications).
9.35U.S.C.A.28384(2012).

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lows anyone to participate,10 the only real questions involve

finetuningthatsystemtomakeitasefficaciousaspossible.
In dealing with this question, the Patent Act of 195211the
governing statute before the America Invents Act of 2011
(AIA)12wasreasonablyeffectiveatdeterminingwhichtypeof
advances in particular subject matters were eligible for patent
protection.The1952PatentActalsospecifiedwhatlevelofad
vancement over previous inventions was required to obtain
protection,amongitsrequirements.13Ofcourse,somefeatures
ofthissystemwerecontroversialandresulted insystemsthat
tended to drive a wedge between the ordinary rules of prop
ertyandthoseforpatents.Twonotabledecisionsillustratethis
tension. First, eBay Inc. v. Mercexchange, L.L.C.14 weakened the
ability of patentees to obtain injunctive relief as a matter of
course and thus emboldened infringers to engage in activities
for which monetary damage is hard to determine. Second,
Quanta Computer, Inc. v. LG Electronics, Inc.15 undermined the
efficacy of the licensing system by imposing unnecessary re
straints on the principle of freedom of contract.16 Unfortu
nately,thepatentsystemhasonlybeenweakenedfurtherwith
thepassageoftheAIA,17whoseelaborateandcomplicatedre
examinationprovisionsarelikelytoincreasethelevelofuncer
tainty about patent validity.18 In addition, the AIA has the
further demerit of fragmenting patents by hiving off business

10.See, e.g., B. Zorina Khan, Innovations in Intellectual Property Systems and

Economic Development 19 (Jan. 2002) (unpublished manuscript) (on file with au
thor),availableathttp://www.econ.yale.edu/seminars/echist/eh02/khan020328.pdf.
11.PatentActof1952,ch.950,66Stat.792(currentversionat35U.S.C.(2006)).
12.LeahySmithAmericaInventsAct,Pub.L.No.11229,125Stat.284(2011).
13.35U.S.C.103(2006);seealsoDanHoang,PrometheusLaboratoriesv.Mayo
ClinicsGifttotheBiotechIndustry:AStudyofPatentEligibilityofMedicalTreatment
andDiagnosisMethodsafterBilski,9NW.J.TECH.&INTELL.PROP.457,459(2011).
14.547U.S.388,388(2005)(holdingthatcourtsofequityshouldapplythesame
standard for granting permanent injunctive relief in a patent case as they do in
othertypesofdisputes).
15.553U.S.617(2008).
16.Formyviewsonthesecases,seeRichardA.Epstein,TheDisintegrationofIn
tellectualProperty?AClassicalLiberalResponsetoaPrematureObituary,62STAN. L.
REV.455,48895,50810(2010).
17.LeahySmithAmericaInventsAct,Pub.L.No.11229,125Stat.284(2011).
18.JasonRantanen&LeePetherbridge,Commentary,TowardaSystemofInven
tionRegistration:TheLeahySmithAmericaInventsAct,110MICH. L. REV. FIRST IM
PRESSIONS24,2427(2011).

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method patents for special treatment.19 The simplicity and ro

bustnessoftheoldersystemunderthe1952Actwassuperior.
Thecurrentlevelofdissatisfactionwiththesystemhasledto
callsforawholesalereorientationofthepatentsystem,includ
ing the sharp truncation or even abolition of software and
businessmethodpatents,whicharesaidtohaveablockingpo
tentialthatexceedstheirusevalue.20Itendtobeverycautious
aboutacceptingmajorchangesofthissort.Onesensibleincre
mentalchangewouldbetoincreasetheresourcesavailableto
thePTOtodealwiththeonslaughtofpatents,bothtoweedout
weakpatentsandtospeedproductionunderstrongprotection
tomarket.Anotherresponseistogiveinfringersmoretimeto
bargain with patent holders or to invent around patents. Yet
another response is to hit frivolous law suits (some of which
surelyexist)withhardersanctionsindiscoveryandaftertrial.
But large changes could easily prove counterproductive, for
despitealltheantipatentangst,thesoftwareindustry,whichis
thesubjectofmuchwrath,hasdonewellinspiteofitsexten
sivelitigationburden,whichinmyviewhasbeenaggravated
by the weakening of the property rights regime. Moreover, at
most only some of thislitigation has been farfetched andun
sound.Myfearisthatanysystematicefforttochangetheshape
ofthepatentsystemwillhaveafairmeasureofnegativeunin
tended consequences. Any changes will upset settled expecta
tions with regard to existing patents, including the many
patents that have led useful if uneventful lives that never
reachedthelevelofurbanlegend.
The issue with copyrights is quite different. Copyrights also
needsomesystemofregistration,buttheydonotrequireinten
siveexaminationakintothatgivenpatentsbeforethePTO.21The

19.SeeLeahySmithAmericaInventsAct,Pub.L.No.11229,18,125Stat.284,
32931(2011).
20.Foroneoutspokenantipatentpiece,seeCharlesDuhiggandSteveLohr,The
Patent, Used as a Sword, N.Y. TIMES, Oct. 8, 2012, at A1, available at
http://www.nytimes.com/2012/10/08/technology/patentwarsamongtechgiants
canstiflecompetition.html?nl=todaysheadlines&emc=edit_th_20121008. For one
recentscholarlycritique,seeROBINFELDMAN,RETHINKINGPATENTLAW(2012).
21.Under 17 U.S.C. 408(a) (2006), registration of works is not a condition of
copyrightprotection.Thecopyrightattachesassoonastheauthorfixesthework
inatangiblemediumofexpression,aslongastheotherrequirementsforcopy
rightauthorship and a modicum of originalityare met. See 17 U.S.C. 102
(2006).Under17U.S.C.411(2006),however,inordertocommenceaninfringe
ment suit, copyright owners must register their work by depositing a copyright
claimintheCopyrightOffice.

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copyright and patent systems have widely parted company in

thatregard.22Thedurabilityofcopyrightsdoesnotlenditselfto
onesimplesolution.Ingeneral,copyrightsforsoftware(likeall
patents) are shortlived, but the protection afforded literary
works such as Shakespearean sonnets should be substantially
longer, for they are far more unique than any scientific inven
tion.23Butanygratuitousextensions ofthelengthofthepatent
shouldbeconsideredverycautiously.Therefore,theCopyright
Term Extension Act24 was, and remains, a major policy mis
take.25Throughouthistory,copyrightsandpatentshavehewed
closelytotheprivatizedmodel.Themorecloselythatcopyright
andpatentlawtracktraditionalformsofpropertycanbemade,
thebetteroffsocietywillbe.26
II.

NETWORKINDUSTRIES

Incontrasttointellectualproperty,theregulationofnetwork
industries technology should be modeled on the traditional
rulesforcommoncarriers.Thismodelallowsallpartiestogain
access to a single integrated network, such that any user any
where on the network can directly communicate with any
otheruser.27Pickingtherightsolutioncanmakeahugediffer

22.Under1ofthe1790PatentAct,patentapplicationswereexaminedbythe
AttorneyGeneral,theSecretaryofState,andtheSecretaryofWar.PatentActof
1790,ch.7,1,1Stat.109,10910(1790).Thissystemquicklyprovedunworkable.
Forthesubsequentevolution,seeAndrewP.Morriss&CraigAllenNard,Institu
tionalChoice&InterestGroupsintheDevelopmentofAmericanPatentLaw:17901865,
19SUP. CT. ECON. REV.143,14951(2011).From1793to1836,patentslikecopy
rightsoperated under a registration system, which did not screen patents, but
leftthedeterminationoftheirvaliditytoafterthefactbythedistrictcourts.Id.at
15261.ThePatentOfficereinstitutedtheearlierpatentexaminationsystemunder
thePatentActof1836,ch.357,1,5Stat.117,11718(1836).
23.Under 17 U.S.C. 302(a) (2006), the term of copyright protection for most
workspublishedafter1977isgenerallythelifeoftheauthorplusseventyyears.
Under35U.S.C.154(a)(2)(2006),patentsareprotectedfortwentyyearsfromthe
dateonwhichthepatentapplicationwasfiled.
24.SonnyBonoCopyrightTermExtensionAct,Pub.L.No.105298,102,112
Stat.2827,282728(1998)(codifiedas17U.S.C.302)(extendingthedurationof
copyrighttermsfromfiftyyearstoseventyyears).
25.SeegenerallyRichardA.Epstein,TheDubiousConstitutionalityoftheCopyright
TermExtensionAct,36LOY.L.A.L.REV.123(2002).
26.Epstein, supra note 16, at 456 (explaining that intellectual property is best
treatedasacoherentsubsetofalargerbodyofpropertylaw).
27.RichardA.Epstein,BeforeCyberspace:LegalTransitionsinPropertyRightsRe
gimes,73CHI.KENT L. REV.1137,114547(1998)(explainingthatregulationmay

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ence. For example, the Telecommunications Act of 199628 was

passedabittoosoonandcausedtrillionsofdollarsinlosses29
because it adopted the wrong solution. It incorrectly assumed
asitsfundamentalpostulatethatlocalexchangecarrierswould
retaintheirmonopolypowerforalongperiodoftime.TheAct
thereforedesignedacomplexsystemthatsoughttojumpstart
competition by allowing the formation of new companies,
Competitive Local Exchange Carriers (CLECs), that were al
lowed to buy network elements from one another on what
turnedouttobehighlyfavorableterms.30TheTelecommunica
tions Act successfully reflected the elements of the basic tech
nology as it existed in 1996. But by 1998, the Acts implicit
assumptionthedominanceoftheexclusivepowerofthelocal
exchange carriers (LECs)was clearly wrong. Allowing the
governmenttoforcethesaleofparticularnetworkelementsat
bargain prices created distortions in that market, which ulti
matelyhelpednobody.31TheCLECscompetedawaythesubsi

benecessarytoensurethatallpersons...[have]accesstothenetwork,andthat
noclassofusers...berequiredtosubsidizeanother.).
28.Pub.L.No.104104,110Stat.56(1996).
29.SeeCOMMON CAUSE EDUC. FUND, THE FALLOUT FROMTHE TELECOMMUNI
CATIONS ACTOF 1996: UNINTENDED CONSEQUENCESAND LESSONS LEARNED35
(2005), http://www.commoncause.org/atf/cf/%7BFB3C17E2CDD14DF692BE
BD4429893665%7D/FALLOUT_FROM_THE_TELECOMM_ACT_5905.PDF.
30.The Act was structured on the assumption that local exchange carriers
(LECs)wouldcontinuetodominatethetelecommunicationsindustry.Itfailedto
anticipate the transformative impact of cellular technology. See Richard A. Ep
stein, The AT&T Consent Decree: In Praise of Interconnection Only, 61 FED. COMM.
L.J.149,15456(2008);seealsoRichardA.Epstein,Takings,Commons,andAssocia
tions:WhytheTelecommunicationsActof1996Misfired,22YALEJ.ONREG.315,319
20(2005);PressRelease,MediamarkResearchInc.,TelecomMilestone:MoreCell
phoneOnly Than LandlineOnly Households (Sept. 12, 2007), available at
http://www.gfkmri.com/PDF/Telecom%20Milestone%20More%20Cell%20Phone%
20Only%20Than%20Landline%20Only%20Households.pdf (showing that, by
mid2007,householdswithonlycellphoneconnectionsoutnumberedthosewith
onlylandlineconnections).
31.47U.S.C.251(c)(3)(requiringlocalexchangecarrierstoselloffunbundlednet
work elements to competing entrants on rates, terms, and conditions that are just,
reasonable,andnondiscriminatoryandinamannerthatallowsrequestingcarriers
to combine such elements in order to provide such telecommunications service);
JulianEpstein,ALiteTouchonBroadband:AchievingtheOptimalRegulatoryEfficiencyin
theInternetBroadbandMarket,38HARV.J.ONLEGIS.37,5760(2001);Epstein,TheAT&T
ConsentDecree,supranote30,at162(explainingthatSection251(c)(3)oftheTelecom
municationsActof1996frequentlyforcedincumbentcarrierstosellcomponentsata
pricetoolowforthemtorecoverthecostoftheirinvestment).

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dies and could not survive.32 The LECs were forced to enter
into credit transactions with the CLECs, draining the LECs of
valuable resources.33 Here, the mistake was to have the gov
ernment create a system of forced exchanges rather than su
pervise interconnection agreements, which it could have done
relativelyeasily.34
In todays new age, entry into thetelecommunications mar
kethasbecomerelativelyeasybecauseofthedeclineofthelo
cal monopolies under the LECs.35 Instead of trying to force
peopletointerconnect,thebetterplan,asitturnedout,would
have been for the government to allow private investors to
build and strengthen other kinds of networks, and, in the
course of using those networks, enter into competition with
oneanother.36Inmanycasesinterconnectionmaybenecessary;
but in many other cases, it will notfor instance, the many
networks designed to transmit huge amounts of data that do
notrequireuniversalconnectivity,whichcaneasilyimpairthe
sensitivetaskofdataprotection.
What principles determine the appropriate system of regula
tion? If new technology facilitates the creation of competitive
networks, the established firm or firms should no longer be
treatedasholdingthemonopolypowernormallyattributedtoa
single supplier or a dominant firm in a particular market. In
stead,theindustryasawholeshouldbetreatedascompetitive.

32.SeeRonHubert,TheCLECTrainWreck,CONNECTEDPLANETONLINE,Oct.10,
2001,http://connectedplanetonline.com/news/telecom_clec_train_wreck/.
33.See STEPHEN POCIASK, TELESCAM: HOW TELECOM REGULATIONS HARM
CALIFORNIA CONSUMERS 11 (2003), available at http://special.pacificresearch.org/
pub/sab/techno/telescam/Telescam%20Oct.pdf(notingthat[a]crossallstatesand
theDistrictofColumbia,ILECs[incumbentlocalexchangecarriers,alsoknownas
LECs]standtolose$38billioninrevenuesiftheyareforcedtosellalltheirretail
servicesatbargainwholesalerates).
34.Epstein, The AT&T Consent Decree, supra note 30, at 163 (interconnection
agreementswouldbesuperiortoforcedsalesbecause[t]hekeydecisionsonhow
to expand the network would be made by market players rather than through
theadministrativeprocess,whichisfilledwithmajoruncertaintiesandlengthy
delays.).
35.SeePressRelease,MediamarkResearchInc.,supranote30.
36.See Jeffrey A Eisenach & Thomas M. Lenard, The Progress & Freedom
Fund, Telecom Deregulation and the Economy: The Impact of UNEP on Jobs, In
vestment and Growth, PROGRESS ON POINT, Jan. 2003, at 4, available at
http://ssrn.com/abstract=1260407 (predicting that immediate elimination of
obligations toprovideunbundlednetwork elements atbelow cost rates would
raiseGDPgrowthbybetween$14and$34billionthisyear,andcreate282,000
to669,000jobsoverthenextthreeyears.).

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Therefore, government actors should let market players deter

mineboththecompositionofthetrafficthatrunsovertheirnet
works and the prices they charge for the traffic they agree to
carry.Ineffect,wheneveralternativenetworksareavailable,the
last thing government regulators should attempt is to impose
any kind of network neutrality requirement on these systems.
Thistypeofrequirementbecomesanewformofwealthtransfer
fromthosewhobuilttheinfrastructuretocontentproviders.37
Thedangersofnetworkneutralitydependinlargemeasure
on the structure of the information market. If the information
sentoverthenetworkisrelativelyhomogenous,andthecostof
providing it is relatively low, the losses of running a pro rata
systemthatgivesallcontentprovidersequalaccessislikelyto
be small. Indeed, in many cases, firms in voluntary markets
employaproratasystemwhenitisnotworthwhileforthemto
engage in any form of discrimination.38 But once the amount,
type,orvalueofinformationthatissentovernetworksbegins
tovary,theprohibitivecostsoftheproratapolicymakeaccess
and pricing essential for maintaining sound network opera
tions.39 AT&Ts decision to limit the amount of data that any
one customer could access or send through the network illus
trates this trend.40 Unless other telecommunications providers

37.Robert E. Litan & Hal J. Singer, Unintended Consequences of Net Neutrality

Regulation, 5 J. TELECOMM. & HIGH TECH. L. 533, 55860 (2007) (imposing a one
sizefitsallpricingpolicyonISPswouldlikelyresultinhigherpricesfortheaver
age consumer, who would be forced to subsidize heavy users); Dennis L. Weis
man&RobertB.Kulick,PriceDiscrimination,TwoSidedMarkets,andNetNeutrality
Regulation,13TUL. J. TECH. & INTELL. PROP.81,95(2010)(observingthatallowing
Internet service providers (ISPs) to charge differential prices is efficient and en
couragesISPstoinvestcapitalintheirnetwork:[P]rotectinglessefficientcontent
providers by prohibiting accesstiering would harm society by impeding more
efficientcontentprovidersandlimitingthechoicesavailabletotheInternetsub
scriberstheyserve.Thisoutcomewouldinvolveanarbitrarytransferofeconomic
wealthtolessefficientcontentproviders.).
38.This has not, however, been the case in network industries: [I]n the tele
communications industry, regulated carriers have long been permitted to offer
their customers a variety of service options for both longdistance and local ser
vice.Extendedareaservice,localmeasuredservice,flatrateservice,andflatrate
calling plans are all examples in which regulators have permitted customers to
choosebetweendifferentpricequalitycombinationsfortheirtelecommunications
services.Weisman&Kulick,supranote37,at96.
39.William D. Rahm, Watching over the Web: A Substantive Equality Regime for
BroadbandApplications,24YALEJ.ONREG.1,1720(2007).
40.JeffryBartash,AT&Ttoendunlimitedplansforwirelessdata,WALL ST. J. MAR
KETWATCH, June 2, 2010, http://articles.marketwatch.com/20100602/markets/
30722124_1_heavydataattcustomersdatausage (noting that on June 7, 2010,

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adoptthatstrategy,seriousnegativeexternalitieswillattachas
overall network capacity increases: as a telecommunications
providerenlargesthepipe,itscustomerswillbeable,atnoin
crease in cost, to send larger quantities of data over the net
work.41In1990nobodywouldhavetriedtosendhundredsof
movies over the networks; the capacity was simply not avail
able.42Butnowthatthenetworksarelargeenough,43anetwork
usermightattempttodojustthat.
Atthispoint,tieredaccessandpacinginotherwords,adif
ferentiation in rateshas this key effect: more valuable infor
mationwillcometotheheadofthenetworkqueue,increasing
theoverallvalueoftheinformationsentthroughthenetwork.44
Therefore, once two or three carriers are willing to participate
inagivenmarket,thatmarketshouldbetreatedascompetitive
andthusnotwellsuitedtopriceregulation.Butifonlyoneor
twocarriersparticipateinagivenmarket,themarketisnotyet
competitive;inthiscase,someregulationmaybeappropriate.
Buteveninadynamicmarket,cautionshouldbetherule,soas
to encourage new entrants to join the market and reduce the
instancesof,andneedfor,anysystemofdirectregulatorycon
trol.Theriskhereisthatheavyhandedgovernmentregulation,
whichsetspricesandmandatesservice,willmakethetechnol
ogyindustrylooklikethehealthcareindustrywithitsmanda

AT&Treplaceditsunlimited$30permonthdataplanforcellulardatausagewith
a$25DataProplan,whichcappeddatausageat2gigabytespermonth,because
[h]eavydatausagebyatinypercentageofcustomers[had]occasionallyclogged
networksandreducedthequalityofwirelessserviceforothersubscribers).
41.Rahm,supranote39,at1718(observingthatheavyusageofbandwidthby
a small set of users imposes negative externalities on other users); see also
Dionne Searcey, Consumers Could See New Web Rates: Use More, Pay More, WALL
ST. J., Mar. 2, 2006, at B1, available at http://online.wsj.com/article/
SB114126093188287053.html (relating a statement from BellSouth Chief Technol
ogyOfficerWilliamSmith,whoclaimsthatatBellSouth,1%ofbroadbandcus
tomersdrive40%ofInternettraffic).
42.See BRET SWANSON & GEORGE GILDER, DISCOVERY INST., ESTIMATING THE
EXAFLOOD:THEIMPACTOFVIDEOANDRICHMEDIAONTHEINTERNET45(2008),avail
able at http://www.discovery.org/scripts/viewDB/filesDBdownload.php?command
=download&id=1475(notingthattheexplosionininternetusageinthemid1990swas
caused,inpart,bydramaticadvancesinfiberopticcommunicationsinthecoreofthe
network,bothofwhichsuppliedunprecedentedphysicalconnectivity).
43.Id.at3(positingthat,accordingtoonestudy,[t]heU.S.Internetof2015will
...be [at least] 50 times larger than it was in 2006, in large part because of the
proliferationofonlinevideoandofpracticessuchasmultimediastreaming).
44.Weisman&Kulick,supranote37,at9698(discussingbenefitsofpricedis
criminationinthecontextoftelecommunications).

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tory service requirements, and of course its highly controver

sialindividualmandate.
The adjudication with respect our telecommunications sys
tems in the next generation will determine, for better or for
worse,whetherornotthisnation,orothernations,willmain
tain itsenergetic drive. Every time tough regulations apply to
networks, content providers will benefit to some extent in the
shortrunbutatthecostofretardingadditionalinvestmentin
the network itself.45 Voluntary arrangements are still the best
waytodeterminetheoptimalwaytostructureinteractionsbe
tweencontentprovidersandcarriersoutsidethecontrolofthe
regulatorystate.46Intheshortterm,thebattleovertheInternet
may well look like some form of secondbest monopolistic
competition.Nonetheless,inthelongrun,allowingtechnology
to be free from regulation will make the system both more
competitive and more efficient. The weight of the evidence
supportslighthandedregulation.
III.

PHARMACEUTICALINNOVATION

I also disagree with the huge expansion of federal power in

the health sector, and I will relate a specific story as to why.
When it was founded in 1906, the Food and Drug Administra
tion (FDA) lacked the authority to regulate the manufacture of
drugs within the states.47 Congress granted that power to the
FDA in 1938 in the aftermath of the 1937 constitutional trans
formationofthefederalcommercepower.48Oneofthemostno
table advances in medicine in the years between those two
legislativelandmarkswastheisolationandpurificationofinsu
linasaviabletreatmentfordiabetes.Atthattime,diabeteswas
always fatal to those it afflicted.49 The story of this great event
couldnotberepeatedtoday.From19211922,attheUniversity
of Toronto in Canada, Frederick Grant Banting, working with
theassistanceofmedicalstudentCharlesBest,figuredouthow

45.Id.at9596.
46.Id.at9498.
47.A History of the FDA and Drug Regulation in the United States, FDA,
http://www.fda.gov/downloads/Drugs/ResourcesForYou/Consumers/BuyingUsin
gMedicineSafely/UnderstandingOvertheCounterMedicines/ucm093550.pdf (last
visitedNov.10,2012).
48.Id.
49.SeeRichardA.Epstein,TheTaleofHowInsulinCametoMarket,HOOVERINST.
(Jan.2,2011),http://www.hoover.org/publications/definingideas/article/61436.

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toisolateandpurifyinsulin.50Initially,manyofthedogswhom
Banting and Best injected with insulin died.51 Moreover, once
Banting and Best unlocked the original formula, they managed
toforgetkeyelementsoftheirprocess,whichtheyregainedonly
afterfranticefforts.52Nonetheless,progresswasrapid,especially
onceBantingobtainedthebackingofEliLillyandCompany,a
greatAmericanpharmaceuticalcompany.53By1923,EliLillyas
able to bring insulin to the entire North American market.54
Banting and Bestdespite being regarded as unqualified to
conduct serious research55made the requisite technological
breakthoughbyacombinationofkeeninsightanddumbluck.56
Despitethedifficulties,ittooklessthanthreeyearsforinsulinto
gofromanideahatchedinoneofBantingsdreams57tobeinga
marketableproduct.58Thekeytransformationtookbetweentwo
andthreeyearstoaccomplish.
Thegainfromthisinventionwasenormous.Before1921,the
treatmentfordiabeteswasslowstarvation.59Essentially,doctors
slowedthemetabolicprocesses,andpatientswereforcedtoen
dure a starvation diet.60 The case of Elizabeth Hughes, the
daughter of the great Charles Evans Hughes, illustrates the
breakthrough that the introduction of insulin into the market
accomplished. Diagnosed with diabetes in 1919 at age eleven,61
she weighed only fortyeight pounds in 1922, having survived
untiltheageoffifteen.62When,inthenickoftime,hercaretakers

50.FrederickGrantBanting(18911941):CodiscovererofInsulin,198JAMA660,660
(1966); The Discovery of Insulin, NOBELPRIZE.ORG: THE OFFICIAL WEB SITE OF THE
NOBEL PRIZE,http://www.nobelprize.org/educational/medicine/insulin/discovery
insulin.html(lastvisitedNov.10,2012).
51.See Louis Rosenfeld, Insulin: Discovery and Controversy, 48 CLINICAL
CHEMISTRY2270,2274(2002).
52.Id.at2279.
53.Id.at227980.
54.Id.at2280.
55.Seeid.at2277.
56.Seeid.at2271.
57.Seeid.at2271.
58.Id.at2271,2280.
59.LEWIS WEBB HILL & RENA S. ECKMAN, THE STARVATION TREATMENTOF DIA
BETES 913 (1915); see also Robert Tattersall, Pancreatic Organotherapy for Diabetes,
18891921,39MED.HIST.288,31011(1995).
60.Tattersall,supranote59,at289.
61.THEACOOPER&ARTHURAINSBERG,BREAKTHROUGH:ELIZABETHHUGHES,THE
DISCOVERYOFINSULIN,ANDTHEMAKINGOFAMEDICALMIRACLE2023(2010).
62.Id.at185.

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administered insulin, it was like Lazarus rising from the dead.

Shestartedtogainweight,63marriedatagetwentythree,64bore
severalchildren,65managedtoselfadministerinsulinandlived
untiltheageofseventythree.66Thegovernmentplayedonlyone
role in this story, and that role was a near tragic byproduct of
prohibition.WhenBantingsworkwascontinuedintheUnited
States,researchershaddifficultyobtainingthepureethanolnec
essarytoisolateinsulin:Federalofficialssoughttoblocktheuse
ofethanolonthegroundsthatmethanolcoulddoasmuchgood
forpatientsasinsulin.67TheRockefellerfamilyhadtowieldits
sizableinfluencetoobtainpermissiontousetheethanolneeded
fortheprocesstogoforward.68By1924,insulinwasingeneral
productionand,by1930,itspricehaddroppedtwentyfold,orby
ninetyfivepercent.69
Thisepisodepresentssomeclearlessonsaboutthedynamics
ofproduction.Onelessonisthattheinventionanddiscoveryof
insulin, which went from ideato commercialization ina mere
three years, contributed more to human beings and their wel
fare than every single other advance, taken together, with re
spect to diabetes in the following ninety years, perhaps by an
orderofmagnitude.Similarly,intechnology,thefirstroundof
innovationresultsinhugegains,whereastentimestheamount
of effort and money is required for the next advancement, re
sultinginonetenththeimprovement.TheFDAhasdampened
theinnovationcycle,becauseofitsbeliefthataggressiveregu
lations will protect people from abuse and crackpot medi
cines.70 The fate of insulin would have been uncertain if the

63.Id.at206.
64.Id.at239.
65.Id.at244.
66.Seeid.
67.SeeEpstein,HowInsulinCametoMarket,supranote49.
68.Id.
69.SeeChristopherJ.Rutty,CouldntLiveWithoutIt:Diabetes,theCostofInnova
tionandthePriceofInsulininCanada,19221984,25CAN. BULLETINOF MED. HIST.
407,418(2008).
70.See JOSH MAKOWER, FDA IMPACT ON U.S. MEDICAL TECHNOLOGY INNOVA
TION: A SURVEY OF OVER 200 MEDICAL TECHNOLOGY COMPANIES 5 (2010),
http://www.nvca.org/index.php?option=com_docman&task=doc_download&gid=
668&Itemid=93 (noting that independent analysis has demonstrated that the
current system does an exceptional job at protecting patients...[but] that, with
regard to the agencys objective of promotingthe public health through new in
novations,thereareincreasingconcernsfrompatients,physicians,andinnovators
thattheFDAisfallingshort).

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FDA had oversight of the discovery process back in the early

1920s.TheunfortunateresultoftheFDAsmodernincarnation
istocutpeopleofffromtheverymedicationsandmedicalde
vices that might be able save them. The FDA begins with the
viewthat,unlesstheapplicantcanprovetotheagencyssatis
factionthatitsproductordeviceissafe,noindividualacting
alone or with the aid of a physicianis able to make sound
judgments,evenonmatterssoclosetohispersonalwelfare.71
TheclashbetweentheFDAandtherightofanindividualto
make healthcare decisions came to a head in the well known
caseofAbigailAlliancev.VonEschenbach,72whichraisedasus
tainedchallengetotheFDAspowertocontroltheuseofdrugs
bypatients.Thatclaimwasacceptedbytheinitialpanel,bya
twotoone majority. Judge Judith Rogers and Judge Douglas
Ginsburg found a constitutional right to use potentially life
savinginvestigationalnewdrugsthathadgonethroughPhase
I trials.73 The majority rested its holding on the autonomy
based rationale that people are entitled to control their own
health care destinies.74 Judge Thomas Griffith dissented.75
Whenthecasewasheardenbanc,JudgeGriffithsdissentbe
came the majority opinion, and the Alliances constitutional
claimwasdenied.76Therighttorefusemedicaltreatmentdoes
todayhaveconstitutionalstatus,buttheconverserighttoaccept
treatmentdecidedlydoesnot.77
In dealing with the general issue of health care regulation,
theU.S.SupremeCourtheldinUnitedStatesv.Rutherford78that
the Federal Food, Drug, and Cosmetic Actoffers no exception
fromcompliancewiththeFDArequirementsforterminallyill
patients. The drug involved in that case was Laetrile,79 which

71.See, e.g., Federal Food, Drug, and Cosmetic Act of 1938, Pub. L. 75717,
505(b), 52 Stat. 10, 1052 (19371938) (requiring manufacturer to demonstrate a
newdrugissafeforitsproposedusedbeforetheFDAmaygiveitsapproval).
72.445F.3d470(D.C.Cir.2006),revdenbanc,495F.3d695(D.C.Cir.2007).
73.AbigailAlliance,445F.3dat486.AsexplainedbytheAbigailAllianceCourt,
FDAPhaseItrialsdetermineonlythatadrugissufficientlysafetobetestedon
humansbutnotthatthedrugisreadyforcommercialdistribution.Id.at473.
74.Id.at486.
75.Id.at486500.
76.AbigailAlliance,495F.3dat697.
77.Fordiscussion,seeRichardA.Epstein,TheErosionofIndividualAutonomyin
MedicalDecisionmaking:OftheFDAandIRBs,96GEO.L.J.559(2008).
78.442U.S.544,544(1979).
79.Id.at546.

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had a long history of failure.80 But Rutherford surely extends

much further, for it applies to many therapies where private
initiative can advance the scope of medical progress. My late
motherinlaw, who suffered from Myasthenia Gravis, pro
videsanexample.Thediseaseeventuallykilledher,butinthe
yearsthatshesufferedfromthedisease,sheacquiredmorein
timateknowledgeaboutitspeculiaritiesthanmostofthephy
sicianswhotreatedher.Herknowledgehelpedherphysicians
develop protocols for treating other patients. Preventing indi
vidualsfromobtaining,andphysiciansandscientistsfromact
ing, on this kind of information is wrong. Hayekian
knowledgedecentralized knowledge that comes from many
disparateplacesatonce81isstifledinfavoroftopdownregu
lation that is cut off from nourishment that can enter into the
system,only,asitwere,throughtheroots.
The decision to accept the FDAs control over drug usage
depends in part on the uneasy judicial attitudes toward as
sistedsuicide.InWashingtonv.Glucksberg,82theSupremeCourt
held (correctly in my view83) that terminallyill individuals do
nothavetheconstitutionalrighttoassistedsuicide.ButAbigail
Alliance involves people who were trying desperately to live,
not to die. In dealing with this thorny issue, Judge Griffiths
elegantopinioninAbigailAlliance,whichstatesthatpeopledo
nothavearighttouseadrugthatpassesaPhaseItrial,carried
the day in the en banc hearing.84 Judge Griffith reached that
conclusionbystitchingtogetherthesetwolinesofauthority
Rutherford and Glucksbergto deny terminally ill persons ac
cesstocancerdrugs,evenwhensuchdrugshavebeenrecom
mended by preeminent physicians.85 Under current law, his
decision is, most regrettably, correctif only because of the
huge deference the courts show to federal officials on matters
that so manifestly relate to the core police power issues of

80.See generally DEPT OF HEALTH, EDUC., & WELFARE, FOOD & DRUG
ADMINISTRATION,HEWPUB.NO.773056,LAETRILE:THECOMISSIONERSDECISION
(1977).
81.SeeWilliamN.Butos,KnowledgeQuestions:Hayek,KeynesandBeyond,16REV.
OFAUSTRIANECON.291,298(2003).
82.Washingtonv.Glucksberg,521U.S.702(1997).
83.See RICHARD A. EPSTEIN, MORTAL PERIL: OUR INALIENABLE RIGHT TO
HEALTHCARE?299311(1997).
84.445F.3dat48699;495F.3dat3138.
85.445F.3dat49197.

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healthandsafety.86But,ironically,currentlawdoesnotseemto
distinguish between an individual patient who asserts her
autonomyrighttotrytosaveherlifeorwhoassertsherauton
omyrighttoendit.
Nonetheless, that constitutional determination does not an
swer the policy challenge to the FDAs hegemony. The chal
lenge asks why the FDA should be allowed to exercise a veto
onceroutinePhaseItrialshavebeencompleted,eventhougha
huge network of private voluntary organizationsindividual
physicians and their own expert organizationshave vastly
greateraccesstothereliableinformationneededtomakerele
vant treatment decisions on a patientbypatient basis. As a
matter of institutional design, the FDA representsa longterm
regulatory misadventure whose tardy decisions create bottle
necksforinnovationandbringaboutlargeamountsofgratui
tous suffering.87 Its grip is so strong that the companies that
mightprotesttheagencysactionsremainsilent,lesttheyface
retaliationfromtheFDAonothermattersthattheyhavepend
ingbeforetheagency.Inpractice,therefore,theburdenofdeal
ingwiththeFDAfallsonpatientadvocacygroupslikeAbigail
Alliance, which often must lead the challenge against an en
trenched FDA, which all too often does not understand state
ofthearttechniquesinareasinwhichitalonehasthefinalsay.
Whatisatstakeinthisareaisnothinglessthanthequestion
ofhowtopreservetechnicalinnovationinthefaceofwallto
wallregulation.Theprognosisisgrim.Unlesswereformagen
cies like the FDA and their procedures and operations, this
country will suffer from a longterm drag on innovation that
could,ifthetrendisnotabated,leadtolongtermmediocrity,
as inventors and scientists flee our shores for friendlier envi
ronments.Thepaceofregulationisoneofthecentralissuesof
our time. One of the sad consequences of our courts broad
reading of the Commerce Clause in cases such as Wickard v.

86.See,e.g.,Hecklerv.Chaney,470U.S.821(1985)(grantingtheFDAprosecu
torial discretion in determining which parties it would target with enforcement
actions); Weinberger v. Hynson, Westcott & Dunning, Inc., 412 U.S. 609 (1973)
(grantingbroaddeferencetotheFDAtodeterminewhetherornotaproductwas
anewdrugwithinthemeaningoftheFederalFood,DrugandCosmeticActof
1938); Natl Engg & Contracting Co. v. OSHA, 928 F.2d 762, 764 (6th Cir. 1991)
(permittingwarrantlessworkplaceinspectionsbyOSHAofficials,indeferenceto
theagencysinterpretationof5U.S.C.706(2)(A)).
87.SeegenerallyMAKOWER,supranote70.

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Filburn88 is that it has broadened the scope of federal regula

tions in a way that has catalyzed these unfortunate results. In
dealing with the longterm future of health care, the constitu
tionaldisputesovertheindividualmandateareasideshowin
the search for medical progress. What really matters is ensur
ingthelongtermflowoftechnology,andthatiswhatregula
tioniscurrentlystifling.
The question remains how both private and public sources
can cooperate in medical and technological advances. Right
now, government funding is largely misplaced. Interestingly,
theoriginalbiosciencegrantswerequitesmall.89Sincethegov
ernmentgrantswerefirstintroduced,publicexpenditureshave
largelyshiftedfromthoseinbasicinfrastructureandscientific
researchtotransferpayments,90anotherdangeroustrend.That
longtermchangehasthrownyetfurtherobstaclesinthepath
ofscientificinnovation.ThedamagedonebytheNewDealon
structuralissuescontinuestomanifestitselfandevenmultiply.
Asanation,weneedtogetbackontrackinthewayinwhich
we organize research in the medical, pharmaceutical, biotech,
andalternativeenergyfields.Weneedtomakesurethatsuch
research is free of endless regulatory impediments. Vannevar
Bushwasbasicallycorrectinhisproposalthatthegovernment
subsidizeresearchuptothepointofproofofprinciple,butaf
terthat,leaveinventionstothepatentsystem.91
Lastly,weshouldaskwhetherthegovernmentcould,onits
own initiative, make intelligent decisions regarding invest
mentsinscienceandtechnology.Theanswer:notunlessitcan
find ways to delegate these decisions to people who know
what they are doing. The 535 members in the United States
House and Senate do not. Therefore, they cannot be the ideal

88.317U.S.111(1942).
89.SeeCOOPER & AINSBERG,supranote61,at223(describinghowBantingwas
awardedanannuallifetimestipendof$10,000bytheCanadiangovernment,and
howtheRockefellerFoundationprovidedagrantof$150,000tofifteenhospitals
topromotetheuseofinsulin).
90.SeeProfilingPublicExpenditures,RANDResearchBriefRB2500(Apr.1995),
availableathttp://www.rand.org/pubs/research_briefs/RB2500/index1.html.
91.See VANNEVAR BUSH, SCIENCE: THE ENDLESS FRONTIER, A REPORT TO THE
PRESIDENT ON A PROGRAM FOR POSTWAR SCIENTIFIC RESEARCH 21, 3133, 38
(1945), http://www.nsf.gov/od/lpa/nsf50/vbush1945.htm. Bush also suggests that
thegovernmentsrepaymentshouldbeanonexclusivelicenseofanytechnology
thatisusedwithgovernmentfunds;otherwise,thepatenteecandowithitsinven
tionwhatitwill.Id.at38.

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group to decide whether to subsidize a wind technology that

shuts down in calm weather and solar power that does not
work at night. No lawyerdominated institution can answer
thesequestions,butbythesametokenthescientistsandtech
nocratsneededtomakeintelligentdecisionsatthecentermust
understand the degree of intellectual freedom needed for sci
enceandtechnologytoadvance.Findingandsupportingthose
peopleisdifficultinthebestofcircumstances.Butitwillprove
impossiblesolongasweoperateinaworldinwhichoursys
tems of both subsidies and regulation are misguided. On the
one hand, subsidizing new technologies that cannot pay their
wayinthemarketisdangerous.Ontheotherhand,riskaver
sion cannot be the dominant mindset of regulators. Unfortu
nately, both these tendencies are deeply ingrained in the
regulatorymindsettoday.Wemustchangetheintellectualcli
mateinorderforinnovationandgrowthtoregaintheirfooting
intheUnitedStates.