The Wall Street Journal recently reported that the FedEx Corp. pleaded not guilty in a San Francisco federal court “on 15 charges related to transporting painkillers and other prescription drugs that had been sold illegally.”
The “illegal drugs” do not refer to cocaine or meth but to generic medications people can buy from online pharmacies for far less than brand name ones produced by pharmaceutical corporations (Big Pharma). As part of a crackdown on prescription drug abuse, a number of companies—including competitor UPS—agreed to pay civil fines over claims that they sold or delivered medications they knew were not for legitimate medical use. FedEx refused and the Department of Justice (DOJ) is seeking a massive punitive settlement. Prosecutors claim FedEx earned “at least $820 million, and if the company is found guilty, it faces a potential maximum fine of twice that, or about $1.6 billion.”
People arguably have the right to determine their own medical treatments, including what drugs they use. And one can argue about whether a parcel delivery company should be responsible for what gets delivered. But the criminal case against FedEx raises a separate issue: crony capitalism.
Beyond the legality of drugs
Crony capitalism refers to the political dynamic in which commercial success depends upon the relationship a business has with government. Businesses that support a political faction, perhaps through campaign donations, receive favors such as tax exemptions or laws restricting their competitors.
Big Pharma contributed nearly $10 million to various political campaigns during the 2011–2012 presidential elections. Hedging their bets, the major manufacturers funded both Democrat incumbent Barack Obama (just over $1 million) and Republican challenger Mitt Romney (approx. $699,000). So far, in 2014, the top two contributors in Big Pharma have made political donations of $1,242,991 and $1,031,695, respectively; there are at least 18 other contributors from the industry. The total expended in lobbying during 2014 is $8,870,000.
Politically speaking, the money is a good investment. On May 5, 2013, a Forbes headline announced, “Obamacare Will Bring Drug Industry $35 Billion In Profits.” The article explained that “the U.S. pharmaceutical industry’s market value will mushroom by 33 percent to $476 billion in 2020 from $359 billion last year.” The increase comes despite “expiring patents on blockbuster drugs” such as Lipitor.
Profits-on-paper (rents) can be secured and increased if Big Pharma drives its competitors out of business. This is particularly important as online and foreign competitors offer dramatically lower prices and the convenience of home delivery.
Crony capitalism on the sly
The federal government began pressuring FedEx in 2012. At about the same time, Big Pharma’s price inflation became public, causing a scandal. ABC News reported on an Arizona woman who received an anti-venom drug for a scorpion sting. “The bill that arrived ... came out to $83,046, or $39,652” per vial, or “about 10 times what the hospital paid for each vial.” Even the $4,000 per vial charged to the hospital is outrageous. The article went on to note that the drug “costs about $100 per dose” in Mexico and the woman would have saved “$39,552 a dose if she had ordered the drug from a licensed Mexican pharmacy.” No wonder the federal government moved quickly to protect Big Pharma. Every time someone buys from an online source, they lose their monopoly rents.
The Obama administration excels at imposing agendas on the sly. For example, the DOJ initiative called Operation Choke Point pressures banks to refuse financial transactions from businesses that are allegedly a “high risk” for fraud. They are actually businesses of which the government disapproves. The list includes ammunition and firearms companies as well as online pharmaceutical retailers. Rather than take the controversial step of banning these legal businesses, the federal government makes it ever more difficult for them to function. The lawsuit against FedEx continues this federal strategy, as a bit of background illustrates.
A 2012 article in the Wall Street Journal reported, “The Drug Enforcement Administration has been probing whether the companies [FedEx and UPS] aided and abetted illegal drug sales from online pharmacies for several years, according to company filings, although the investigation has gone largely unnoticed. Both companies were served with subpoenas starting more than four years ago.”
The aiding and abetting consisted of delivering orders to customers; without access to the two giant shipping companies, it is not clear how many online pharmacies could remain in business.
UPS quickly entered into discussions with the DOJ about paying fines and cooperating. Ultimately, in March 2013, UPS paid a $40 million fine for the privilege of signing a non-prosecution agreement with the DOJ. FedEx balked. There were several points of contention:
1. FedEx repeatedly requested a list of online pharmacies that the Drug Enforcement Administration considered illegal. In a written statement, Patrick Fitzgerald, senior vice president for marketing and communications, explained, "Whenever DEA provides us a list ... we will turn off shipping for those companies immediately. So far the government has declined to provide such a list."
2. The DOJ wanted all packages from online pharmacies to be opened and the contents noted, whether or not there was reason to suspect a package contained illegal goods. Fitzgerald countered, “sealed packages ... are being sent by, as far as we can tell, licensed pharmacies. These are medicines with legal prescriptions written by licensed physicians.” Moreover, FedEx is “a transportation company that picks up and delivers close to 10 million packages every day. They are sealed packages, so we have no way of knowing specifically what’s inside and we have no interest in violating the privacy rights of our customers.”
3. FedEx refused to be “deputized” as a law enforcement agency and preferred to remain a private business.
Big Pharma obviously benefits if online competitors are choked out, but turning FedEx into an arm of law enforcement has advantages for the federal government as well. If federal agents searched private mail without warrants or probable cause, people would cry “Fourth Amendment!” This is the constitutional guarantee that people will be “secure in their persons, houses, papers, and effects, against unreasonable searches and seizures” by the federal government.
But private shippers are not bound by constitutional restraints. The “right” to check packages can be written into the business agreement that customers sign. If a customer objects, then he is free to go elsewhere. By controlling FedEx policy, the DOJ would be able to search packages in absentia and make targeted arrests if illegal contents are found.
FedEx is determined to fight the lawsuit. The criminal trial will test how much secondary responsibility shippers must legally assume for the contents of shipments. (You can read the full indictment here.)
In a recent interview with Bloomberg, Larry Cote, a former chief counsel at the DEA, referred to the trial as an “unprecedented escalation of a federal crackdown on organizations and individuals” in order “to combat prescription drug abuse.” Making messengers liable for the messages transmitted has dangerous implications for all communications, including personal ones. As TechDirt observed, “We often talk about secondary liability on the internet, but it's the same basic principal [sic] here. The company that's merely acting as the conduit shouldn't be liable for what's traversing over its system. The implications of changing that, and holding a company liable are very serious. It's going to create massive incentives for shipping companies to not just open up and look at what's in our packages, but to also make on-the-fly determinations of whether or not they think it's legal.”
If the federal government can order private shippers to open all packages in order to fight “illegal drugs,” how long will it be before all financial mailings are opened in order to fight tax evasion or money laundering? Privacy of email and telephone calls is already nonexistent in America. The criminal case against FedEx is an important step toward destroying what remains of mail privacy and expanding the police powers of the State.