Gouging, Monopoly and the Power of Kings: the Unintended Consequences of Distributed Corporate Tyranny

For brief descriptions of and links to recent posts, click here. For an inverse-chronological list with links to all posts after January 23, 2017, click here. For a subject-matter index to posts before that date, click here.

Introduction
Gouging
Monopoly
Power and “Natural” Monopoly
Conclusion
Update on Institutionalized Corporate Racism (12/31/20)

Introduction

When our Founders wrote our Constitution, they focused on a single source of tyranny: the Monarchy of King George III. Even then, the King was hardly a complete tyrant, at least at home. Parliament was already busy wresting political power from the monarchy in domestic affairs. But things were different in England’s “external relations,” including those with us, its then Colonies. There the King was still as much of an absolute ruler as a then-industrializing society permitted.

Our Founders never dreamed that, over two centuries later, the chief threat to individual liberty, personal autonomy and democracy would change. It would no longer come from government, but from the so-called private sector.

Today private corporations own, control or provide all the necessities of our lives. They bring us food, clothing, shelter, and health care. They also provide things our Founders never imagined, like domestic electricity, telephones, radio, TV, motion pictures, personal computers, cell phones, air travel, and electric light. Our Founders likewise never dreamed that corporations would control almost all the information we receive. Yet here we are.

Virtually all of modern life’s considerable benefits come to us from corporations. They make our lives infinitely richer, safer, healthier, more pleasant, and more powerful than our Founders’. In comparison, government brings us various flavors of coercion, including taxes, policing, military service, war and defense, and mask and social-distancing mandates. Government’s direct benefits are few and far between: state- and local-funded education, Social Security, Medicare, interstate commerce and a national commercial and industrial infrastructure that has been crumbling for an entire generation.

Not only do corporations provide nearly all the things that make our lives rich, comfortable, safe and modern. While so doing, they also control them and so control us.

Our Supreme Court has let corporations erase all the “rights of Englishmen” and the “rights of Americans” with the stroke of a click, at least insofar as those rights involve corporations’ goods and services. For them, the “law” is written on take-it-or-leave-it flypaper contracts that corporations themselves write and post on line.

Law schools and jurists universally recognize these flypaper contracts for what they are. They call them “contracts of adhesion,” formed with only implied consent, without any realistic chance of bargaining. Within their scope, those contracts replace all the traditional civil rights of Anglo-Americans—including the right to a jury trial in civil cases—that Anglo-Americans have refined since Magna Carta. They substitute private, secret arbitration based on rules written on flypaper.

Their justification for this sleight of hand is familiar to law students. It arises from the same airy theory of “freedom of contract” that once justified child labor, brutal working conditions and inhumane work hours. Then courts supposed that individual workers, unprotected by law or by labor unions, could really bargain with their powerful corporate employers. Now they assume the same thing about online clickers.

Tim Wu is the only thinker I know who gets it. His penetrating insight has made him something of a celebrity among professors of law. But he’s far more than that. He’s the only pundit in our society who sees in detail how the gears, levers and pulleys of our distributed corporate tyranny work.

Sure, Bernie Sanders, Elizabeth Warren and their disciples have told us that “the system is rigged” against ordinary people. But they don’t tell us precisely how. It’s not just politics, a bought Congress, or a bought-and-paid-for “GOP” puppeteered by a would-be tinpot dictator. Our whole society has morphed from a focus on individual rights to a focus on corporate innovation, profits, and acquisitions. Individuals, as consumers and workers, are but cogs in a vast machine to make money and serve commercial and industrial “progress,” as defined by the oligarchs.

Let me be clear. All this is not the result of some diabolical design. No one decreed our utter domination by corporations. No one wrote a corporate manifesto. There has been no vast, nefarious conspiracy. Distributed corporate tyranny has just crept up on us, an unintended consequence of modern life. But it’s nevertheless real.

We are ruled in large measure by corporations precisely because they have given us enormous benefits. They allow the third of our species that has Internet access to communicate, one-to-one and many-to-many, in ways never before possible. They allow us to fly to the opposite side of the globe in less than a day and for less than an average month’s salary. (Compare that with seven years of indentured servitude to cross the Atlantic in our Founders’ day.) They let doctors peer into our innards to see what’s wrong with us, while we are awake and conscious. They let us develop vaccines against a new pandemic in less than a year.

We let corporations dominate and control us not because they are some satanic power, but because they do us so much wondrous good. Their distributed tyranny is an unintended consequence of vast human progress.

But precisely for that reason, growing corporate tyranny requires acute focus and attention, lest it subvert us unawares. There is no reason why we can’t have most or all of the benefits that corporations bring us without so much unintended subordination and domination of our individual lives, and without giving up our precious individual liberties.

At the end of the day, being tyrannized by a hundred private entities separately is not much better than subordination to a single government tyrant. It could even be worse, as the corporate threat comes in so many different forms and from so many different directions.

This essay catalogues just a few of the real ways that distributed corporate tyranny has crept up on us. It proposes a few solutions. More will have to await further essays and the penetrating insight of great thinkers like Wu. It was he, after all, who outlined on a single page just how much of our democracy’s recent escape from oblivion we owe to things unwritten and mostly unseen.

Gouging

One of my last bits of academic writing was, as it turned out, a recipe for price gouging. As a professor of intellectual property law, I got interested in the pricing of pharmaceuticals monopolized by dominant patents.

With a simple mathematical equation and some numerical tables, I proved a stark proposition. Any drug maker with an economically dominant patent can command, at its corporate whim, whatever rate of return it chooses on its drug-development investment. The only numerical limits, even in theory, are the number of patients who need the drug and the maximum amount each (or insurance) will pay to stay alive or stop their suffering.

With suffering or death at stake, the individual’s payment can be high indeed. To stay alive or stop suffering, wouldn’t each of us pay all we have? In dealing with healthy, overworked doctors, let alone their business bosses, individuals have negative leverage in “negotiating” payment. Isn’t extracting payment while holding all the cards the essence of gouging?

Unfortunately, my paper was not just academic. Mere years after it appeared, a man named Martin Shkreli raised the price of an old antibiotic for parasites over 55 times. There was no proportionate increase in the cost of raw materials or production. Shkreli gouged just because he could, and because doing so promised to make him rich. I have a dark fantasy (but no proof yet) of my paper being taught in business schools as a means of getting rich quick, or of better serving our modern ultimate goal of economic “good,” namely profit.

Shkreli is now in jail for other reasons, but he started a minor epidemic of price gouging in drugs. Drug patents, as it turned out, are not always necessary. Besides patents on the drugs themselves, there can be patents on delivery devices, such as Epi-Pens. Some drugs enjoy sleepy markets with a “weak” monopoly unprotected by patents. But any monopoly can be strong enough to permit price gouging.

As I have argued more generally, there is no “market” in health care. You may shop around for the best doctor, but you do not “bargain” over price, not when your life, health or freedom from pain is at stake. That’s why every developed nation but ours has a health system run by the government, or government-run insurance that pays the bills and negotiates pricing on behalf of patients.

That’s precisely what my more limited paper on patented new drugs concluded. I could see no “solution” to gouging in patent-dominated health-care markets but politics. I still can’t.

Monopoly

Gouging is easier for a seller who has a monopoly. If no one else sells the same thing, then the seller can charge more at whim, without constraint by rival sellers. When the item sold is non-discretionary—something needed for life or health—the gouging can be both highly effective and monstrous. That was Shkreli’s infamous example.

Economic theory tells us that when Shkreli arbitrarily raised the price of his antibiotic by over 55 times, he gave others a chance to enter his “market” under his “price umbrella.” But he could lower or close that “umbrella” at will. So who would undertake the investment to challenge him, let alone in a small market? In practice, hit-and-run monopolies like Shkreli’s can confer just as big (and just as undeserved) benefits as more durable ones. No law requires even a temporary monopolist to return the high prices he has gouged.

I recently had personal experience with just such a temporary monopoly. For years I’ve used N-95 masks for gardening, leaf blowing, sanding, other dust-producing household chores—even spraying aerosol lubricants and other chemicals. I know that N-95s are the best commonly available respiratory masks because they make breathing a bit hard. (The easier it is to breathe, the less a mask is working to protect your lungs or, in a pandemic, others’.)

But at the pandemic’s outset I was hospitalized for an appendectomy. So I didn’t have a chance to replenish my normal supplies of N-95 masks. As the pandemic wore on, those masks were (quite rightly) commandeered for health-care personnel and first responders. So I recently paid about $157 to a company called Clinical Supplies USA for a box of twenty N-95 masks advertised as made by 3M in the US. Before the pandemic, the same box cost about $24.

That was close to a seven-fold price increase. Had my vendor cornered the market in “free” N-95 masks not commandeered for doctors, nurses and first responders? Did it buy up supplies before the orders came down? Were the masks counterfeit? The 3M box and logo looked genuine to me, but I had no sure way of knowing. Maybe the high price was just a matter of high demand and low non-commandeered supply. But I’ll bet that 3M hadn’t raised its wholesale prices by a factor of seven, if only because masks are a tiny part of its huge product line.

So was my vendor taking advantage of a temporary monopoly resulting from unfortunate conditions? You decide. But it sure felt like price gouging to me.

Further examples of health-care gouging are open for any Medicare beneficiary to see. Take any “Medicare Summary Notice” of a claim. Usually beginning on page 3, it has four columns: (1) the “Amount Provider Charged” (2) the “Medicare Approved Amount,” (3) The “Amount Medicare Paid”, and (4) the “Maximum You May Be Billed.” Sometimes the charge (1) for service is the same as the approved amount (2). But mostly it exceeds the approved amount by various factors, ranging from two to multiples of four or even more.

What does this mean? Apparently it means that patients who don’t have Medicare or comparable private insurance can pay four or more times as much as those who do. Does that mean there is a real “market” for medical services? No, it means that patients without insurance, from Arab sheikhs to unfortunate Americans, are subject to price gouging by doctors, hospitals and medical groups. Only the shield of government price negotiation, or similar negotiation by private insurers, protects us favored ones with insurance. (Similar logic applies to the so-called “surprise medical bills,” mostly from emergency rooms, that the now-pending pandemic relief bill is supposed to control.)

The point of these stories is simple. The ideal of markets first proposed by Adam Smith is just an abstract, theoretical “model.” Even in his time, it often bore little or no relationship to practical reality.

Smith’s Wealth of Nations first came out around our Founding, in 1776. Today, his simple model of a “market” composed of numerous sellers of identical (“fungible”) things like carrots or potatoes is grossly inadequate to describe our infinitely more complex commerce, even in theory.

Every big supermarket has thousands of products on sale. Amazon offers infinitely more. They differ not just in brand name, but in ingredients, shape, features, methods of manufacture, shipping, availability and price. Every substantive difference creates an opportunity, and often the reality, of a mini, partial or temporary monopoly that permits price gouging, especially in hard times like now. And today a mere rumor on the Internet— whether true or false—can create a temporary market advantage that goes viral. Recall hydroxychloroquine after our president touted it as a cure for Covid-19. (And please don’t even get me started on toilet paper.)

Does this mean that the government should control the pricing of everything? No, of course not. The Soviet Russians and the “Red” Chinese once tried that approach. Both abandoned it of their own free will because it didn’t work. But equally inoperative is our national superstition that the “invisible hand” of unregulated private markets invariably determines a just and reasonable price in this “best of all possible worlds.”

In any event, modern regulatory bodies are, as compared to the old Soviet Commissars, like modern organic chemistry to ancient alchemy. They don’t regulate price directly; they regulate profit. They allow for all reasonable cost increases and the risk of innovation. They even permit regulated utilities to incur and depreciate the cost of more efficient facilities.

They make sure that corporations’ grand schemes make sense for customers and the general public. That is, they require proof of some discernible, rational public benefit, so that corporations’ plans are not just ways of building empires or increasing prices. They also reduce unintended harms like pollution, unnecessary depletion of scarce materials and global warming. What they don’t do is permit private firms to gouge the public like Martin Shkreli, just because market forces are too weak or non-existent to stop them.

Price gouging, both temporary and durable, is no paranoid fantasy. When markets fail, there is no alternative but a political solution.

Antitrust law is supposed to provide a corrective by keeping private firms from enabling price gouging by suppressing competition or refusing to compete. But sometimes antitrust law fails because the law alone cannot force private firms to compete. Sometimes markets fail all by themselves, without any nefarious intent on the part of corporations.

That’s an essential truth that Tim Wu has helped re-discover. It’s the central economic dilemma of our time. How can we avoid corporate oppression just by requiring competition when private firms don’t or won’t compete? We can prohibit certain types of anticompetitive behavior, such as exclusive dealing or buying up competitors, but we can’t force corporations to compete. We also can’t force markets to exist where there are none, as in most of health care.

Power and “Natural” Monopoly

A seller of anything in a market resembling a monopoly has tremendous power. Unrestrained power is the essence of both domination and oppression. That leads us to a central syllogism of modern life. The conclusion follows easily: as corporate monopoly power increases, corporate infringement of individual liberties and suppression of long-standing national values begins to supplant tyranny by government. Might this be why our corporate masters are trying so hard to get citizens to fear tyranny by government, even when it’s hamstrung by partisan gridlock?

This dismal syllogism is also part of the Internet’s central paradox. The domination of search, online sales, and social media—each by a single firm—makes our individual lives so much richer. But it also gives the three domineers—Google, Amazon and Facebook, respectively—unparalleled power over our commerce, economy, communication, society and politics. Tim Wu has made his reputation, quite rightly, by pointing out that this power and resulting oppression have little or nothing to do with Adam Smith’s primitive conceptions of economic markets.

Let’s start with Google and search. It would be easy, in theory, to break Google up by subject matter. You might, for example, have Google-A for science and technology, Google-B for recipes, Google-C for political news, Google-D for fashion and entertainment, and Google-E for instructions on home appliances.

But how would that feel to users? More like a bane than a boon. Google’s value lies in letting you search for literally everything on its single engine. In a single search, you can scan products and services for sale, obscure points of history, videos of how to grease or fix your automatic garage-door opener, or useful explanations of how unbidden updates to your software work.

I use Google for all these things and more. For me, it’s a modern answer to the ancient Greeks’ Oracle at Delphi. It’s even more: as far as we know, Delphi didn’t let its users check alternative, competing sources of information at the same time.

So Google is what economists call a “natural” monopoly. Just as you wouldn’t want alternative suppliers of water and electricity building redundant water- and electric-supply lines to your home, you don’t want to consult multiple different search sites to look up different things. Google is uniquely valuable precisely because it covers everything.

Similar analysis applies to Facebook, albeit less strongly. Would you rather have different social media for your friends’ and relatives’ personal announcements, your professional life, your purchases and sales, and your political views? I’ve deleted Facebook for a different reason: I think it’s inadvertently destroying our democracy, and I already had unsubscribed to anything related to Fox. But even I can see the convenience and efficiency of having all aspects of social media, all fields and subjects, under one figurative roof.

Yet modern economics also recognizes another essential truth. Monopoly is no less dangerous merely because it’s “natural,” i.e., because artificially building competition would be wasteful and inefficient. Monopoly produces the same dismal market effects—higher prices, lower output, less helpful service, slower innovation and less product variety—regardless of whether it is “natural” or contrived. That’s why natural monopolies are either government owned or government regulated, at least in the fields of public utilities (water, power, sewage disposal, other public works, and now even cable communication, both TV and Internet).

That, in my view, is just where we are today in addressing the distributed tyrannies of the four great online monopolists, Amazon, Apple, Facebook and Google.

All but perhaps Apple are really natural monopolies: they serve us better by being the sole or only source of what they do. We really don’t want each house or apartment to have multiple trunk lines for electricity and information, any more than we covet redundant water-supply lines and sewers. But to avoid the unfavorable natural consequences of “natural” monopolies, we must consider the only alternatives that two centuries of economic progress have conceived: (1) government ownership or (2) government regulation of privately-owned businesses.

Instead of doing this, we have let the monopoly firms themselves, in effect, dictate public policy. This they have done mostly by inattention and negligence, like Facebook trying vainly to control massive, repeated and inescapable lies on its platform.

In the process, these firms have accumulated unprecedented economic, political and social power. Amazon has virtually devoured online commerce—a process that the pandemic has shifted into high gear. Facebook, with the help of Fox, has made it impossible for about half of our population to distinguish lies and propaganda from reality. And Google and Facebook together have so hidden the economic value of private personal information, and the cost of its nearly unregulated commercial use, as to bring Big Brother a giant step closer.

In this respect, Google Facebook and also Apple have accomplished something new. They have partly replaced government-mandated monetary currency with an entirely new source of value: the unforeseen use of once-private personal information.

This unprecedented step has partially displaced the Greenback as a token of value. Private data’s rampant and mostly unregulated use is why lots of monopolists’ Internet services are “free.” Yet free use of private data also has facilitated the growth of mostly secret business, with unfathomable secret algorithms, to “mine” that value. This, too, has vastly increased our modern monopolies’ influence over not just commerce, but privacy, autonomy and personal liberty as well.

Remember those flypaper contracts? Virtually every online corporation uses them to wipe out the entire Anglo-American legal system in dealing with consumers. Among the things wiped out are class-action lawsuits, which make suing for small swindles and injustices economically feasible. Today, flypaper “click here” agreements replace class actions, as well as ordinary lawsuits, with secret, forced arbitration under terms and rules set by corporations’ lawyers.

All this, of course, gets worse when author of the flypaper contract is a monopolist. If there is a real market and real competition, the consumer has the option of seeking another purveyor with a different flypaper contact, at least in theory. But who in his or her right mind would choose a “competitor” to Google, for example, with its global market share of 88.14%?

It bears repeating that all this is not the fault of some vast conspiracy of the oligarchs. Corporations just took advantage of the Federal Arbitration Act and courts’ sympathy for the “efficiency“ of online “click here” agreements. But in the process, the rights of consumers to access the Anglo-American legal system, including class actions, virtually vanished on the Internet. Those rights died as thoroughly as if Congress had actually deliberated, and had agreed with our courts, that destroying the rights of free citizens handed down since Magna Carta is each individual consumer’s will.

At the bottom of it all is the profit motive. Notwithstanding the Business Roundtable’s recent recognition that there’s more to life than profit, the profit motive dominates most of the ways that corporations unintentionally subvert the liberties of citizens. The final ignominy is an assault on America’s most sacred value: free speech.

Unbeknownst to most Americans, our First Amendment simply does not apply to private entities. As every first-year student in constitutional law knows, our Constitution constrains only “state action,” i.e., acts of federal, state or local government. (California’s state-constitutional protection of privacy, which applies to the private sector, is the only significant exception of which I’m aware.) So private persons and firms, unlike government, are free to censor, slant, distort and lie to their hearts’ content, constrained only by the laws of defamation, which Communications Decency Act § 230(c)(1) wipes out for Internet platforms publishing others’ lies.

Have Rupert Murdoch and Mark Zuckerberg set out to destroy American democracy and extinguish the Enlightenment? As much as I believe that their actions may yet help cause those tragic results, my reason won’t let me believe they are doing so intentionally. Both men just wanted to build empires and make money.

Murdoch found bully-pundits spewing nonsense like this immensely profitable, the more so as Trump’s lies caught on among forgotten workers. Zuckerberg was too busy expanding his social-media monopoly and “monetizing” users’ supposedly private data to spend enough money or time to keep foreign and domestic spooks, trolls, agents provocateurs and propagandists off his platform.

The dismal results seem to be mere unintended consequences of the profit motive. But their unintentional character in no way dilutes their devastation of the practical rights of consumers, civilized politics, our foreign policy, our ability to function as a society and, in the end, our national sanity.

Nor does a profit motive invariably advance our national values—even in the still (so far) competitive business of video streaming. Netflix, Amazon Video and Disney+ all reportedly won’t touch an award-winning producer’s documentary about Jamal Khashoggi’s gruesome murder. The reason? Apparently they all covet Saudi Arabia’s business. In a society governed by private profit, human rights, facts, and common sense, let alone social cohesion, can get left behind.

Conclusion

Antitrust law is not just about competition, as conventional legal wisdom now proclaims. If you read the background of the 1890 Sherman Act and the progressive movement that pushed it, a much broader theme pops out. That theme was not hidden; it was quite overt. It was the crushing power of extreme and concentrated private wealth. It was the sheer economic power over workers and consumers that makes each industrial “baron,” at least within the scope of his business, a King.

The Sherman (Antitrust) Act hoped to keep the rich and powerful from dominating and destroying what purported to be a political democracy by accumulating and abusing economic power. The law was not—and was never intended to be—about something so narrow and technical as the mechanics of competition in an ever-changing economy. Regulating specific ways of competing (or refusing to compete) was only a means to an end: the people’s freedom from economic tyranny.

Yet for decades, so-called “conservative” ideologues of the “Chicago School” have sought to confine antitrust law to narrow and technical concerns. These are the same folks who argued, as did Alan Greenspan, that free markets always and automatically correct their own excesses. At least Greenspan was an honest man, if not always too bright: he publicly renounced that view after his adopting it as Fed policy helped cause the Crash of 2008.

Antitrust law was always about curtailing excessive real-world power gleaned from great wealth. It is today. It’s about the rich not just making money, enough so that eight men own half the world’s wealth. It’s about their exercising their power, like tyrants of old, to mold our society to their whim and at their pleasure. For examples, you need look no further than the Koch Brothers (one now deceased) and Sheldon Adelson’s fawning support of our would-be tyrant now soundly defeated in fair elections.

In comparison to the nineteenth and twentieth centuries, our new century has private power more widely distributed. There are no longer just two huge monopolies that threaten democracy: railroads and oil. There are at least four, and (in niches) maybe many more.

But this difference merely reflects the ever-increasing diversity and specialization of our industry and commerce. The dangers to our civil rights and our democracy are similar and the solutions much the same.

We must break up the big combines so they do not govern us while claiming only to buy and sell. Where they are “natural” monopolies whose breakup would be inefficient, we must control or regulate them for the public good, just as we learned to do with public utilities in the last century.

At very least, we must find some way to control “natural” monopolies that allow lies, propaganda, paranoid fantasies and made-up conspiracies to capture the public imagination, leading many voters to beg for tyranny. We cannot begin to rein those monopolies in by eliminating all liability for propagating lies, as does Communications Decency Act § 230(c)(1), thereby giving trolls and foreign spooks a global echo chamber without regard to truth, falsity or motive.

Tim Wu gets this. That’s why he should run our Antitrust Division. But it will take many more like him, who also understand our age, to bring us around. Today we face threats far more serious than the nineteenth century’s monopolies on rail transport, steel and oil. We face monopolies that influence, if not control, what we “know,” what is “truth,” and how we think. The fact that they do this mostly inadvertently nowise belies the catastrophic effects of their inattention and negligence as they drive for profit above all.

Endnote: the “bible” on regulation and natural monopoly. Supreme Court Justice Stephen Breyer is one of a minority of surviving justices not appointed for having a reputation as a “conservative” ideologue. He literally wrote the book on natural monopoly. (Ironically, its current price on Amazon—$49.50 for a new paperback and $47.02 for a digital Kindle version—appears to be an example of gouging.)

The book bears the title Regulation and its Reform. It’s a thorough, exquisitely impartial, and eminently scientific review of the theory and rationale for regulating natural monopolies.

Copyrighted in 1982, Breyer’s tour de force came fourteen years before the Internet’s birth and long before the advent of mobile devices. So it doesn’t directly address the Big Four’s natural monopolies today. Yet it does analyze the results of actual regulation in industries as varied as airlines, telephones, trucking, natural gas and rental dwellings. While Breyer’s thorough analysis debunks regulation as a panacea, it also reveals helpful examples of regulation ameliorating the unintended consequences of market failure.

I can’t say the book reads like a novel. But it comes as close as possible in treating such a dry and intricate subject, for which precision of language and expression is indispensable. All it requires for complete comprehension is a college-level course in basic economics or (in my case) familiarity with economics gleaned from studying and teaching antitrust law. To verify this claim, you can read—for free using Amazon’s “Look Inside” feature—a summary of the theory of natural monopoly, its application, and academic cavils against it in Breyer’s introductory chapter on pages 15-20.

Economics may be a “dismal” science. But it’s still a science. As such, it’s light-years ahead of the typical bumper-sticker thinking that passes for analysis in politics today.

Breyer’s book is the closest thing I’ve yet read to applying theoretical and observational science to social and economic problems at the highest level of our government. Every public servant with an interest in the social and economic impacts of the Internet, with its network effects and “winner take all” tendencies, should read it. Because the book long predated the Internet, readers will have to apply its lessons by analogy. But isn’t that what people trained in the law are supposed to do?

Update on Institutionalized Corporate Racism (12/31/20)

Among the many mostly-inadvertent evils of business corporations is institutionalized racism. What if some are unfairly milking Black and Hispanic communities for extra profit?

No one knew that the City of Ferguson, Missouri was doing that, with excessive policing and fines, until Eric Holder, as AG, proved as much with diligent fact-finding. If a whole city does it, with its government supposedly in the sunshine, why not a corporation that can hide its activity under the umbrella of trade secrecy?

That’s precisely what a recent story in the New York Times accused some home-insurance firms of doing in minority communities: systematically stiffing minority customers in adjusting claims and thereby increasing profit margins with institutionally racist policies.

Some workers in the industry believe the practice of discrimination is widespread, a sort of industry “culture” that harms both Black and Hispanic communities. But the evidence is mostly anecdotal. Why? Insurance firms hide their practices under claims of “proprietary” commercial strategy, i.e., trade secrecy.

Of course the law of trade secrets (which I taught for decades) was never meant to cover up institutionalized discrimination. Its purpose is to enhance competition among business firms by allowing them to keep their business strategies secret and so to complete better.

But what happens when an insurance firm tries to hide its statistics on milking minority communities for extra revenue through systematic discrimination? Is that practice a proper “trade secret”? Is it a proper “trade secret” if doctors and hospitals hide statistics on their below-par medical records in order to stay competitive?

As it turns out, that second question was something my selfsame paper on price gouging for patented pharmaceuticals, discussed above, later asked and tried to answer. (The paper has two parts.)

Of course there’s only one way for any just and proper society to answer both questions. Hiding evidence of wrongdoing for profit by claiming the wrongdoing as “proprietary” commercial strategy is simply wrong. Courts should not honor the wrongdoing by calling it a trade secret and letting corporations hide it.

I doubt the old common-law courts that developed the notion of trade secrecy would have done so. They kept their eyes on the ball of justice. But today a detailed statute—the Uniform Trade Secrets Act—governs the law of commercial secrets in nearly all of our 50 states. Highly skilled and highly paid corporate lawyers often get judges lost in the intricacies of the statutory language, so they lose the thread of justice.

Again, the harms are mostly inadvertent. Home insurers didn’t set out to harm minority communities any more than doctors and hospitals set out to harm future patients by depriving them of statistics needed to locate better care. They just wanted to make more money. Yet the end results were indeed harms that any just and rational society would avoid.

The crux of the matter is just common sense. If home insurers, doctors and hospitals have legitimate reasons for commercial secrecy, courts can accommodate them with finely tailored sealing of records or gag orders. But the wheels of justice must grind on. They cannot be diverted as excuses for hiding things like systematic discrimination or inferior medical-success records that future patients ought to know. In a society that valued justice over profit, those conclusions would be glaringly obvious.

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