October 2011

October 20, 2011 2:59PM

Wham‐​O! There Go ‘Patent False Marking’ Suits

It’s fun to be on the winning side of a fight, even if someone else gets to land the knockout punch. Yesterday the U.S. Court of Appeals for the Federal Circuit dismissed as moot the case of FLFMC, LLC, v. Wham‐​O, in which I and Cato’s Center for Constitutional Studies had entered an amicus brief on the side of toymaker defendant Wham‐​O. The Western District of Pennsylvania federal court had agreed with our position that the qui tam (bounty‐​hunter) provision of the false marking statute was unconstitutional; the Federal Circuit heard argument on the issue, but before it could rule the U.S. Congress resolved the controversy by wisely acting, as part of its patent reform bill, to do away with the whole cottage legal industry of bounty‐​hunting litigation over false patent marking.

For those who came in late, federal law had long provided that anyone could sue a manufacturer that wrongly claims patent protection for its product, and collect a minor award ($500) so as to help defray the cost of bringing the action. In a 2009 case, a federal court shocked the business world by ruling that the $500 bounty should be construed as per mismarked item sold — meaning that a company that had mismarked a million paper cups or mascara applicators might owe hundreds of millions of dollars. Entrepreneurial lawyers rushed to file more than a thousand lawsuits, most of them aimed at companies that had gone on selling products with a marking after a given patent had expired. (More background here, here, and generally here at my Overlawyered site.) The constitutional issue arose because the overall setup, like the unlamented “independent counsel” scheme, delegated to private attorneys too much of the government’s distinctive law enforcement authority, an authority that in this case is essentially criminal rather than civil in nature, given the Powerball penalties to be applied with no showing of harm to either consumers or competitors.

It would have been nice to get the Federal Circuit on record agreeing with this line of reasoning, which had persuaded a number of lower courts. But what happened instead was in its own way equally satisfying. Congress specified in its patent bill last month that wholly uninjured bystanders do not have standing to pursue false marking cases, and that expired markings, without more, are not “false.” It also explicitly applied these principles to pending cases, generally seen as a choice that is within its discretion to make in cases in which, as here, no one is suing over an privately vested property right.

Around the country, many a manufacturer can now heave a sigh of relief at not having to sign its future over to lawyers. And Cato can move on to more fights over classical liberal principle in its very successful amicus program, about which you can learn more here.

P.S. Almost forgot to thank the real heroes of the adventure, the ones who wrote and edited the Wham‐​O brief: Paul Wolfson and Pamela Bookman at Wilmer Hale, and Ilya Shapiro and Michael Wilt at Cato.

October 20, 2011 2:17PM

Advice to a Free Libya on Turning the Resource Curse Into a Blessing

Former Libyan dictator Moammar Qaddafi is dead. The Transitional National Council can now get on with the challenges ahead, including setting up elections for a future government deemed legitimate by Libyans.

At the heart of Libya’s many problems is the so‐​called natural resource curse. Libya’s economy is based heavily on oil and gas. Yet the abundance of natural resources like oil or minerals has often slowed growth, over‐​expanded the state’s role in society and strengthened authoritarianism in places as diverse Russia and Iraq. In developing countries with weak institutions, such resources tend to be channeled, if not monopolized, through government, which then becomes corrupted, less responsive to the desires of citizens, and less interested in advancing policies and institutions that create wealth.

But not all resource‐​rich countries suffer from the curse. Chile overcame the resource curse while Venezuela has not. A study by the Fraser Institute used measures of economic freedom, including rule of law measures, to find what set successful countries apart from the rest. The difference was the level of economic freedom or institutional quality. On a scale of 0–10, where 10 represents better institutional quality, the paper found a resource curse threshold of about 6.9—the level above which countries broke the so‐​called curse. More economic freedom turns the curse into a blessing.

The graph below shows selected countries and regions with regard to the resource curse threshold.

Media Name: Resource-curse-and-institutional-quality.bmp

For lack of reliable data, the Middle East and North Africa indicator does not include Libya and a number of countries in the region whose scores would surely bring the region’s average down notably. What is clear is that the region is below the point at which countries can take advantage of their riches to also make their people rich. Libya’s new leaders should pay heed to the central role of economic freedom in political and economic progress. After all, as our friends in the region remind us, the Arab spring began when Tunisian street vendor Muhammad Bouazizi set himself on fire after he was prevented from selling his goods, i.e., after being denied his economic freedom.

October 20, 2011 12:58PM

Cato Study: Malpractice Insurance Markets Promote Quality Care, Mandatory Damage Caps Could Undermine Same

Today, the Cato Institute releases a new study:

Could Mandatory Caps on Medical Malpractice Damages Harm Consumers?

by Shirley Svorny

Shirley Svorny is an adjunct scholar at the Cato Institute and professor of economics at California State University, Northridge.

Supporters of capping court awards for medical malpractice argue that caps will make health care more affordable. It may not be that simple. First, caps on awards may result in some patients not receiving adequate compensation for injuries they suffer as a result of physician negligence. Second, because caps limit physician liability, they can also mute incentives for physicians to reduce the risk of negligent injuries. Supporters of caps counter that this deterrent function of medical malpractice liability is not working anyway—that awards do not track actual damages, and medical malpractice insurance carriers do not translate the threat of liability into incentives that reward high‐​quality care or penalize errant physicians.

This paper reviews an existing body of work that shows that medical malpractice awards do track actual damages. Furthermore, this paper provides evidence that medical malpractice insurance carriers use various tools to reduce the risk of patient injury, including experience rating of physicians’ malpractice premiums. High‐​risk physicians face higher malpractice insurance premiums than their less‐​risky peers. In addition, carriers offer other incentives for physicians to reduce the risk of negligent care: they disseminate information to guide riskmanagement efforts, oversee high‐​risk practitioners, and monitor providers who offer new procedures where experience is not sufficient to assess risk. On rare occasions, carriers will even deny coverage, which cuts the physician off from an affiliation with most hospitals and health maintenance organizations, and precludes practice entirely in some states.

If the medical malpractice liability insurance industry does indeed protect consumers, then policies that reduce liability or shield physicians from oversight by carriers may harm consumers. In particular, caps on damages would reduce physicians’ and carriers’ incentives to keep track of and reduce practice risk. Laws that shield government‐ employed physicians from malpractice liability eliminate insurance company oversight of physicians working for government agencies. State‐​run insurance pools that insure risky practitioners at subsidized prices protect substandard physicians from the discipline that medical malpractice insurers otherwise would impose.

This study’s findings suggest that supporters of market‐​based health care reform should ditch their support of mandatory damage caps, and embrace better med mal reforms. It also suggests that government should abandon direct regulation of health care quality, such as through medical licensing.

October 20, 2011 12:33PM

State Legislators: Just Say No to Obamacare ‘Exchanges’

The American Legislative Exchange Council, a group of conservative state legislators, has approved a resolution encouraging all states to refuse to create a health insurance “exchange” and to end the Obamacare grants the federal government is sending to states for the purpose of creating Exchanges:

State‐​created PPACA exchanges put states in the position of ceding their resources and sovereignty to the service of the federal government, sacrificing their ability to flexibly serve their own citizens…

Twenty‐​six states are suing to have PPACA struck down partly due to the arguable unconstitutionality of the individual mandate, and briefs submitted by the federal government in Florida v. U.S. Department of Health and Human Services make clear that exchanges are a key part of the individual mandate…

[A]s states continue to plan exchanges in preparation for PPACA implementation…it [becomes] less likely the PPACA will ultimately be declared unconstitutional…

[T]hese exchanges would be completely artificial devices offering insurance products regulated in their essential characteristics by the federal government, making exchanges anything but free markets [that instead] will continue to be subject to the arbitrary whims of the federal bureaucracy…

There is no penalty for a state in allowing the federal government to implement an exchange…

NOW THEREFORE BE IT RESOLVED THAT…it is not in the best interest of [a] state for any state official to participate in planning or establishing health insurance exchanges as provided for in the federal Patient Protection and Affordable Care Act; and…Congress [should] defund planning grants to states for the establishment of PPACA health insurance exchanges by the states.

State officials who refuse to create Obamacare Exchanges and who send back related federal grants will now do so with the backing of both the Heritage Foundation and the nation’s largest organization of conservative state legislators.

As I explained in my testimony before the Missouri legislature, states should refuse to create any type of Exchange or similar government bureaucracy. But this is welcome progress.

October 20, 2011 11:12AM

Fannie Mae Loan Limits: The Empire Strikes Back

Perhaps it was naive of me to believe that the public good, the taxpayer, might actually win one over the special interests. As I’ve previously noted, on Oct 1st, the maximum loan size that Fannie Mae and Freddie Mac could purchase declined. But it seems the special interests in the real estate‐​industrial complex were not willing to let that go. Currently on the floor of the Senate is the annual appropriations bill for HUD. Pending to that bill is an amendment by Senator Menendez that would extend the existing loan limit until December 2013.

First lets start with some basic facts. The decline would impact at most 10 percent of the mortgage market, maybe around $140 billion in mortgages. Given that banks have about a trillion in cash on their balance sheets and would only need about $20 billion in capital to support this level of mortgage lending, it should be crystal clear that there is more than sufficient capacity in the banking industry to absorb this segment of the mortgage market.

While I am open to any suggestions to reduce the role of Fannie Mae and Freddie Mac, lowering the loan limits appears a reasonable start. The burden of that decline would fall on the rich and upper middle class, those most able to afford it. If we can’t start ending housing subsidies for those that are well‐​off, how can we ever expect to get the real estate‐​mortgage industry out of the pocket of the taxpayers? Haven’t we allowed the banks to pass enough of their risk onto the backs of the taxpayers?

October 20, 2011 10:58AM

Qaddafi’s Death Does Not Legitimize U.S. Intervention in Libya

The death of Muammar Qaddafi is good news in that it should enable the United States to immediately terminate all military operations in Libya, and to turn over responsibility for security in the country to the recognized leaders of the new government.

Qaddafi’s death does not validate the original decision to launch military operations without authorization from Congress. The Libyan operation did not advance a vital national security interest, a point that former secretary of defense Robert Gates stressed at the time. Qaddafi could have been brought down by the Libyan people, but the Obama administration’s decision to overthrow him may now implicate the United States in the behavior of the post‐​Qaddafi regime. That is unfair to the American people, and to the Libyan people who can and must be held responsible for fashioning a new political order.

As we ponder the welcome news of Qaddafi’s capture, we should also recall the lessons from Iraq, and as they have played out in Libya. The fall of Baghdad in April 2003 did not signal the end of the Iraq war; likewise, the capture of Tripoli by anti‐​Qaddafi forces in August 2011 didn’t end the fighting there. I worry, too, that just as the capture of Saddam Hussein in December 2003 didn’t end the Iraq War that pro‐​Qaddafi forces will continue to resist the new government there.

All Americans hope that that is not the case, that the fighting will cease immediately, and that the new leaders in Libya can quickly set about to reconcile the differences between the many Libyan factions, and U.S. military personnel can turn their attention to matters of vital concern to U.S. national security.