New York Times Recycles Discredited Positions on Government Patent Rights over Pharmaceuticals

By Sean O’Connor

The New York Times is at it again. A year after its Editorial Board promoted flawed research on government rights to patented drugs as part of a price control plan, the Board floated the idea again, together with misinformation about the Bayh-Dole Act. Advocates looking for a magic bullet to reduce drug prices are continually tempted by “obscure” provisions in federal patent law that can be misread as giving government price control powers. Others who have studied and been involved with the vital technology transfer ecosystem know this to be incorrect.

As a preliminary matter, the government has no rights to “seize patents” as the Times frames it. While the three relevant statutory provisions give the government some constrained licensing rights, none of them allow the government to take title to the patents as in a real property eminent domain action. Two provisions allow the government to practice the patents for constitutionally appropriate government operations; the other permits it to authorize another manufacturer to produce the patented invention for the regular commercial market when the patentee or its original licensee have failed to do so.

Section 1498

As this blog explained last year, Section 1498 was put in place to give patent and copyright owners a clear legal pathway to sue the federal government for infringement, not to give the government rights to private property. The general doctrine of sovereign immunity prevents citizens from suing the government in many cases. In the late 1800s, patent owners were frustrated that they could not sue the federal government for infringement in federal courts—because of sovereign immunity—or in state courts because patent law was solely the province of federal law.

When some work-arounds through injunctions against individual government officials and damages based on quasi contract emerged by the early 1900s, Congress finally enacted the precursor to Section 1498. It gave express authority to patent (and copyright) owners to sue the government for damages in the Court of Federal Claims. This is why the statute is in Title 28, governing federal courts, and not in Title 35 where patents are covered in the U.S. Code.

Aggrieved patentees are entitled to full market compensation for unauthorized use under Section 1498. Thus, the Times comment that this statute allows the government to produce the patented invention “at cost” is wrong. While the government may be able to convince the court to award compensation on the low end of market license analyses, the awards will be unpredictable and almost certainly not “at cost.” Whether this allows some de facto pressure on private market drug prices is unclear.

Bayh-Dole

The Bayh Dole Act of 1980 was targeted largely towards universities and research institutions that received federal funding, although it also included small businesses. President Reagan extended its rules to all businesses shortly after and no president has rescinded this Executive Order. The idea was to switch the default of government ownership of federally funded research results to contractor ownership as the latter was closer to industry and likely more motivated to commercialize the inventions.

However, contractor ownership was also meant to operate in the private market with limited exceptions to ensure commercialization actually happened. This was because part of the impetus for the statute was the tens of thousands of patents owned by the federal government that were not being commercialized. Thus, if contractors held the patents instead, they would have to do a better job getting “practical applications”—goods and services embodying the inventions—out to market. In no way was Bayh-Dole intended or written to give price or other market controls over the commercialization process to the government.

The New York Times conflates two separate provisions within Bayh-Dole under the name of “march-in rights.” One is march-in rights proper, which is a form of compulsory licensing power in the market given to the federal funding agency. The other is a non-exclusive license to the government for its own operations.

Bayh-Dole march-in rights

Congress anticipated that a contractor could fail to exercise diligent efforts to commercialize an invention arising from federal funding. It also anticipated that even where good efforts were being made, the market might not be supplied with enough of a product or service to meet an unexpected health or safety emergency. In all these cases, the federal funding agency could grant a non-exclusive license to a private firm to produce the good or service. However, such a compulsory license neither took the patent away from the contractor nor terminated any licenses the contractor may have already granted.

March-in rights were neither intended nor written to grant price control authority to the funding agency. While the statutory phrase “on reasonable terms” can be tempting to read as such power, it was instead directed to the contractor’s licenses to private production firms. The idea was to prevent contractors from de facto “sitting on” the federally funded invention patents they owned by refusing to license for commercialization except under unreasonable terms that no licensee would take. So long as the contractor was offering licenses at reasonable terms, then it qualified as engaging in sufficient commercialization efforts.

Additionally, just granting a march-in rights license does not mean low cost drugs will immediately—or ever—appear in the market. The licensed company will have to get FDA approval to produce the drug, not to mention develop the capacity to do so. It may also be that proprietary know-how is required to successfully produce the drug in commercially viable ways. The compulsory license to patents alone will not necessarily convey this know-how. And march-in rights do not authorize the government to force the contractor or manufacturing licensees to disclose such know-how.

Bayh-Dole government license

Distinct from the march-in rights provisions, Bayh-Dole also includes a provision for an automatic non-exclusive license to the government for its own use. The core operational mechanism of Bayh-Dole is the funding agreement between government agencies and contractors. In other words, much of Bayh-Dole governs federally funded research results indirectly by mandating clauses on funding contracts and not directly by operation of law. If the funding agency fails to include certain provisions in the agreement, the Bayh-Dole statute does not necessarily impose them by law anyway. One of these clauses is the government license.

Different from march-in rights, the government license requires no procedure to assess and them exercise. It is simply a patent license written in anticipation of inventions arising from the funded research. Once such inventions appear, the government has its license to use them. Different from Section 1498, the Bayh-Dole government license is royalty free. But this is because it is effectively in exchange for the initial federal funding. Section 1498 is generally used for inventions that involved no federal funding and so the government has contributed nothing warranting a cost-free license.

While the government license is tempting for some advocates as an avenue for de facto price controls on at least inventions arising from federal funding, it is limited to constitutionally appropriate government operations. It could conceivably be used to produce goods or services embodying the inventions for government employees. But it could not be used for producing drugs for the public marketplace until and unless the country approves a nationalized health system. Its effectiveness might also be limited to the degree proprietary know-how is required for commercialization as with march-in rights. Much of this know-how—and in some cases further patents—are developed by private firms without government funding after the initial federally funded research concluded. For example, clinical trials in most cases are supported solely by pharmaceutical firms.

Conclusion

The New York Times’ Editorial Board does not understand the way these crucial patent laws work. It is also relying on flawed sources to position the laws as solutions for a perceived problem of excessive drug prices. Attempts to use Section 1498 as a low-cost eminent domain or compulsory license will fail because the patentee will likely be awarded damages in line with what a market license would have cost. This will hardly be producing drugs “at cost.” Bayh-Dole march-in rights will also be ineffective because they can only be used to mitigate a complete commercialization failure or as a temporary assist to a health or safety emergency. In other words, they cannot be used for ongoing general price control. Finally, the Bayh Dole government license could be used to produce drugs at cost for constitutionally appropriate government purposes. But, just as in other government procurement, don’t expect “at cost” production there either—look at military spending contracts. At any rate, without a nationalized health system any drugs produced would not be authorized for distribution to the general public.