Pharmaceutical companies are among the most profitable in the world thanks to a lack of competition: In the U.S., drugmakers are given the exclusive right to sell a prescription drug for up to twelve years before generic knock-offs come to market, allowing them to jack up prices for patients with no alternatives. It’s such a lucrative business model, in fact, that automakers are trying to replicate it. Over the past decade, car companies have increasingly patented replacement parts for their vehicles, from fenders to headlights to mirrors. Instead of having a choice of generic parts after an accident, auto repair shops must use patented parts from the manufacturer—and consumers pay the price for it.
A bipartisan coalition has built around the issue on Capitol Hill. Many conservatives don’t like patent protections distorting the market and stifling innovation; many liberals don’t like hidden monopolies intent on gouging people. In between those two views lies opportunity, though it must overcome the powerful automaker lobby.
Design patents, which are somewhat easier to obtain than traditional patents for inventions, are supposed to be limited to “ornamental” items with a specific appearance. Allowing component parts to be patented—the hood of a Camry, for instance, or the grille of a Ford Focus—stretches this definition, especially because it creates a profitable patent-enforced monopoly in aftermarket replacement parts, with no choice for the consumer after an accident. Design patents last for 14 years, which encompasses the life cycle of most cars.
The case that opened the floodgates for auto parts patents came in 2008. Ford obtained patents for several collision repair parts for their 2004 F-150, including the head and tail lamps, grille, side view mirror and bumpers. When Keystone Automotive Industries and several other suppliers attempted to import alternative F-150 parts from overseas factories, Ford filed a complaint with the International Trade Commission (ITC), alleging patent infringement. In 2008, the ITC found for Ford on seven of the patents, barring importation of competing replacements into the United States.
The parties ended up reaching a settlement in the matter, but it showed the auto industry that their patents would hold up to official scrutiny. Since 2005, design patents issued on collision repair parts have more than doubled, per data from the Quality Parts Coalition, a group of auto repair and insurance associations. Ford, Toyota and Honda have sought the most patents by a wide margin. The auto industry now generates the third-most patent filings of any business sector, behind only telecommunications and computing.
Generic car parts are far cheaper than those from the Original Equipment Manufacturer (OEM). The American Insurance Association estimates that generic parts save consumers up to $2.4 billion every year. A study comparing individual parts by the Quality Parts Coalition showed variances between OEM and alternatives as high as 50 percent, for a Nissan Altima front bumper cover, or 41 percent on a front air dam for a Dodge Pickup. Consumers don’t always recognize this, as their insurers pick up the tab, but they feel it eventually in higher premiums. The Property Casualty Insurers Association of America estimates that this patenting practice, if applied to every car part, would cost insurers an extra $1.5 billion a year.
The auto industry claims that OEM aftermarket parts are more reliable. Opponents disagree. “There are plenty of studies on each side,” said Ian Adams, Western region director of the R Street Institute, a free market think tank. “But it’s telling that a lot of the parts come off the same assembly line, and one’s labeled OEM and the other is not.”
Independent suppliers manufacture the vast majority of a car’s internal systems and parts today, as the automakers outsource development work on their vehicles. And the supplier market is quite concentrated; the top ten suppliers capture 60 percent of the total revenue. So Ford or Toyota don’t typically create these allegedly “OEM” parts; they just hold profitable patents on parts which are all coming out of the same plants and are virtually indistinguishable.
Concentrated suppliers are becoming as lucrative as the carmakers themselves, so the patents represent an additional revenue stream. It’s part of a continuing effort to generate more money from every car over its lifespan. “Companies are increasingly able to spread the cost of a car over the usual lifetime in very creative ways that actually hide the real cost,” said Barry Lynn of the New America Foundation. “They can, for instance, engineer a couple key components to fail in year five, just after the warranty fails.” This allows makers to sell cars for less, knowing they will pick up the revenue when parts fail or are damaged in an accident.
Planned obsolescence of car parts has long been a suspicion for motorists, but automakers monopolizing the aftermarket ranks as a new concern. Due in part to patent protections, automakers control 73 percent of the market for replacement parts, according to the Consumer Federation of America. Automakers have even tried to use the Digital Millennium Copyright Act to bar owners from modifying their own cars.
A bipartisan coalition has proposed legislation to deal with restrictive auto design patents. The Promoting Automotive Repair, Trade and Sales (PARTS) Act, from California Representatives Zoe Lofgren and Darrell Issa, along with senators Sheldon Whitehouse and Orrin Hatch, would reduce design patents on collision repair parts to 30 months, during which time alternative suppliers could test and develop their parts before bringing them to market. “There is no reason why Americans should have to pay unreasonably high prices just to repair their cars,” Hatch said in a statement upon releasing the legislation.
The PARTS Act would still preclude carmakers from copying another company’s design models, but encourage competition in the parts aftermarket. Similar regulations are in effect in the United Kingdom, Australia, and the European Union.
Versions of the PARTS Act haven’t gone very far since first being introduced in 2013. The Quality Parts Coalition, which includes consumer, automotive repair and insurance groups, recently expanded their outreach campaign, and have been contacting offices on Capitol Hill.
Having moneyed interests like auto insurers on its side gives the PARTS Act at least a chance. But the bigger opportunity comes from the bipartisan coalition on the Hill.
“There’s a clear free market rationale for patent reform, and a consumer protection rationale,” said Ian Adams of the R Street Institute. “It’s a place where we can all meet. In such a partisan period, any opportunity to find common ground, both sides relish it.”