Regulating Secrecy
Abstract:
Regulation interacts with intellectual-property exclusivity in socially problematic ways by encouraging secrecy at the expense of innovation, efficiency, and competition. In the extensive scholarship on intellectual property and innovation, the role of regulation has gone largely unexplored. This Article is the first to theorize how regulation empowers intellectual property generally, to explain why this strengthening is problematic for trade secrecy but not for patents, and to offer the solution of regulator-enforced disclosure.
When a regulator defines a product or a process, it becomes much harder to invent around that product or process. Any associated intellectual-property exclusivity thus gets much more powerful. When the FDA approves a new drug, patents covering that chemical become much costlier to invent around because similar but non-identical chemicals lack the tremendous benefit of FDA approval. This patent/regulation interaction, however, can be noted and explicitly addressed by policy, as in the case of the Hatch-Waxman Act, which facilitates generic drug entry once drug patents expire. Regulation strengthens trade secrecy too, but more problematically. Biologics, which comprise the most innovative and expensive drugs today, are the path-dependent result of complex, secret manufacturing processes. Meeting the FDA’s definition of a biologic requires reverse-engineering its complex, secret process, making trade secrecy much more valuable and stifling competition and innovation. In such situations, regulation can push firms to choose secrecy over patents in precisely those socially important industries, like drugs, medical devices, and pesticides, where disclosure is most important.
Where regulation creates problems, however, it also offers the hope of a solution. Regulators are in a strong position to require disclosure directly: regulated firms have strong incentives for candor, regulators have the necessary expertise, and regulatory incentives can offset the costs of disclosure. More effective regulator-mediated disclosure would increase oversight and enable cumulative innovation, while retaining incentives for invention in regulated industries.