The Government Patent Market for Public Health Inventions, 4

The NIH’s Institutional Patent Agreement program, then, (i) ignores the distinction in the Kennedy patent policy between inventions made in research directly concerned with public health and inventions made in other research, (ii) expressly authorizes contractors to grant exclusive licenses, (iii) removes the time constraint on contractors to grant such licenses or otherwise use an invention, and (iv) creates the prospect that an exclusive license may run for the life of the patent. Under the Kennedy patent policy, federal agencies were to take ownership of inventions made in research directly concerned with public health and dedicate these inventions to the public domain or, if patented, to license them non-exclusively (if not royalty free) in the United States. Why does this matter? The march-in in the Kennedy patent policy concerns inventions that the policy directs federal agencies to allow to remain with the contractor (provided, of course, the contractor obtains ownership). It’s the contractor’s behavior in the private market that might warrant march-in–and that behavior is not the same scope of behavior that antitrust law applies to.

Kennedy policy march-in has to do with a failure to bring an invention to “the point of practical application” or to license the invention on reasonable terms. These are not, of themselves, antitrust matters. There is no working requirement in federal patent law. A patent owner can sit on an invention and never use it or license it to others to use. The Kennedy patent policy, however, creates a working requirement in the private market–the contractor must develop the invention or make it available to others. If not, then the government has the right to require the contractor to do so–it would not be a “taking” of a private right, it would be a right negotiated for in awarding a federal contract. Thus, what’s now 28 USC 1498 would not matter–the contractor would have no claim on compensation.

The march-in in the Kennedy patent policy has to do with the contractor’s behavior in the private patent marketplace. The government has its royalty-free license to practice and have practiced–to make, use, and sell and authorize others to do so. Thus, in the government patent market, there is no need for march-in. A contractor has already, as a condition of the federal funding, conceded the government patent market to the government.

Now, perhaps, you begin to see the sleight of hand in Bayh-Dole. Here’s the march-in provision in Bayh-Dole again:

With respect to any subject invention… the Federal agency …shall have the right…to require the contractor…to grant a …license…upon terms that are reasonable under the circumstances, and if the contractor, assignee, or exclusive licensee refuses such request, to grant such a license itself, if the Federal agency determines that such—

(1) action is necessary because the contractor or assignee has not taken, or is not expected to take within a reasonable time, effective steps to achieve practical application of the subject invention in such field of use;

So far, so good–we have the working requirement of the Kennedy patent policy, but now with “three years after a patent issues” replaced with the nebulous “within a reasonable time.” But look what follows:

(2) action is necessary to alleviate health or safety needs which are not reasonably satisfied by the contractor, assignee, or their licensees

In the Kennedy patent policy, inventions concerning public health are by default entirely government-side. The IPA ignored the distinction, so any nonprofit contractor could acquire a patent monopoly on a public health-related invention. In Bayh-Dole, public health inventions are another matter for a working requirement. But this working requirement is not that of (1)–that is, there’s nothing here in (2) about practical application; instead, (2) assumes practical application and worries about whether the contractor (and its ilk) have “reasonably satisfied” health needs.

Rather than start with a default that excludes inventions concerning public health from an arbitrary requirement that a contractor may own patents on such inventions (if of course the contractor acquires ownership of the claimed invention), Bayh-Dole not only permits contractor ownership of public health inventions but also limits what a federal agency can do with regard to contractor behaviors regarding such inventions, short of antitrust law. The federal agency has to determine, not “practical application,” but rather that federal action is “necessary” to meet a health need “not reasonably satisfied” by whatever the contractor and its ilk are doing. There’s nothing here in (2) about “benefits available to the public on reasonable terms”–the standard for practical application. Instead, the standard is “not reasonably satisfied” leading to a “necessary” action that will “alleviate” a need that otherwise is not being alleviated.

The march-in under (2) appears to concern production supply or quality control, not price. Not that anyone could possibly make clear the intention here. Again, the march-in provisions were designed not to work–hence all the qualifications in the preamble text, and especially the “in accordance with such procedures as are provided in regulations promulgated hereunder”–which takes the form of 37 CFR 401.6, almost entirely unworkable procedures that make it appear that march-in is just another form of 28 CFR 1498, so that any little slip up by the government in following these convoluted procedures gives rise to a financial claim against the government for the Court of Federal Claims. What (2) accomplishes is the move of public health inventions from the government market to the private market with a government license. Government funding, according to Bayh-Dole, can be used to create private patent monopolies in matters of public health, and the government’s working requirement on such patents is limited to worries about supply or quality of product, not price.

If the Kennedy patent policy had been followed in the drafting of Bayh-Dole, health-related inventions would have been excluded by default from the definition of subject invention. A federal agency would have to declare exceptional circumstances to permit a contractor to acquire and retain ownership of an invention pertaining to public health. Contractors–and in particular, nonprofits–would otherwise have no right to create and trade on patent monopolies on such inventions. There would be no march-in provision concerning such inventions because there would be no private patent market for them, by default.

The Kennedy patent policy does anticipate that a contractor may end up with ownership of “principal rights” in an invention made with federal funding, and includes a similar march-in to that provided by Bayh-Dole:

Where the principal or exclusive (except against the government) rights to an invention are acquired by the contractor, the government shall have the right to require the granting of a license to an applicant royalty free or on terms that are reasonable in the circumstances to the extent that the invention is required for public use by governmental regulations or as may be necessary to fulfill health needs, or for other purposes stipulated in the contract.

Unlike Bayh-Dole, however, in the Kennedy patent policy there is no contorted procedure by which the government must determine that march-in is “necessary” or that the contractor has not “reasonably satisfied” the public need. The government is directed to assert the right as a matter of federal contract. Whatever private patent market there may be in health-related inventions, the government under the Kennedy patent policy asserts (as a matter of contract) the right to direct licensing of any health-related invention that is “necessary to fulfill health needs.” It really does not matter what the contractor-patent-owner does with an invention directed at public health. It is not a matter of performance. The government does not have to consider whether the contractor is attempting to meet health needs or may be judged likely to take effective steps in the future to meet those needs. If the government identifies an invention as necessary to fulfill health needs, then the government can require that invention to be licensed non-exclusively. These are conditions of federal contract that constrain what a patent owner of a federally supported invention can do. The patent owner in such a case is not the owner of an ordinary patent, whose rights might be later curtailed by the federal government marching in. Not at all. Rather, the patent owner as a condition of acquiring the patent from the government agrees that the government already has the right to require non-exclusive licensing for public health reasons.

Any patent a contractor obtains in an area relating to public health comes with this condition built into the contractor’s ownership. Any licensing that the contractor does must recognize this condition–and especially so for deals that preserve the monopoly of the patent. Any exclusive licensee or assignee has to recognize that the term of exclusivity is not that of the patent monopoly but rather the limited term required by the Kennedy patent policy (or, with the NIH workaround, the IPA). The march-in under the Kennedy patent policy simply asserts that the federal government has the right to limit the term of an exclusive license to less than the maximum term allowed, if the invention concerns public health. There should be no shocked faces about this, no huffing and puffing. But of course, there were, and still are.

In Bayh-Dole, march-in stands outside the standard patent rights clause provisions, which are set out in 35 USC 202. March-in is in its own section, 35 USC 203. That is, Bayh-Dole does not make march-in part of the patent rights clause or part of a federal contract. March-in is instead set up in Bayh-Dole as a potential assertion of government rights against the government-issued patent rather than as something that a contractor has already agreed to as a condition of funding. That is, Bayh-Dole march-in looks a lot like a special case of 28 USC 1498 government use, but with the twist that the government can require the contractor to grant the license rather than the government authorizing the use directly. What’s the difference? If the contractor grants the license, then the government does not have to pay the “reasonable and entire” compensation for the use of the invention–the licensee does, with the government approving what is reasonable.

The march-in appearance created by Bayh-Dole is one of government taking rather than of a negotiated, conditional right under a federal contract. Once this appearance was established, march-in was all but useless as a governmental action. Once the universities and Latker got done with the march-in procedures in the implementing regulations, march-in was nothing more than a sugar dusting on a baked turd. Not worth a lick. What’s odd is that despite Bayh-Dole placing march-in outside the standard patent rights clause, the standard patent rights clause was drafted to include march-in anyway (see 37 CFR 401.14(a)(j)). There’s really no point to adding march-in to the standard patent rights clause, as march-in is a matter of statute that applies to any subject invention, regardless of what a contractor might agree to. Again, this points to the utter lack of discipline in the development of the standard patent rights clause and surrounding regulations.

What do we get to from working through this history of federal patent policy? First, the government anticipates participation not only in discovery research but also in development, at least to the point of practical application–that is, to the point that commercial exploitation without development is practicable. At that point, there is no reason to allow a single company to have a monopoly on the invention–or the base form of the product. If there are going to be proprietary rights, they will be to improvements and special applications derived from the base form of the product. That is, there will be competition not only to sell the product but also to improve and adapt it. That’s the vision. Fuss about it if you like.

Second, the government calls out health-related inventions for special treatment, along with inventions for public safety (perhaps an euphemism for military-related inventions) and inventions required to be used to meet regulatory requirements. For these inventions, the government policy was that the government does not support research and issue patents on discoveries arising from that research for the purpose of preventing citizens from having access to the inventions. The remnants of this health-related invention policy are still found in Bayh-Dole’s march-in provisions, even those provisions are designed not to operate.

Third, if the government is going to support discovery research in health-related areas, then we might ask why it is that the government does not then go ahead and also support development of important inventions in these areas. Previously, the government sought to develop cures for diseases. Now, apparently, the government operates a research subsidy program for the pharmaceutical industry and the biotech venture community. In any number of areas of public interest, the government could withdraw its support and leave the area to private companies. We might do this with fire departments, say. But even if the government withdrew, why would anyone think it appropriate to replace the government presence with a corporate monopoly?

Finally, Bayh-Dole continues the distinction between private patent markets and government patent markets. The federal government obtains for each subject invention a royalty-free license to practice and have practiced by and on behalf of the United States. The government patent market for these inventions is a broad as the government has authority to make it. What is the point of the government holding a broad license under patents on subject inventions and never exercising those rights? March-in under Bayh-Dole pertains only to the contractor’s behavior in private patent markets. The government’s own license is sufficiently broad that the government can authorize companies to sell generic versions of drugs developed with federal support by private industry. Exercising that license has nothing to do with march-in or determining that health needs have not been “reasonably satisfied” by nonprofits and their exclusive licensees operating in the private patent marketplace.

The NIH spends a great deal on research and not so much on development. Changing the emphasis to focus on development in areas determined to be priorities for public health would lead to an alternative pathway by which research discoveries directed at public health could be developed for medical use without having to pass for two decades through the hands of companies that insist on holding monopolies. We might also see more effective clinical testing, collaborative development, and much lower prices for resulting products. Bayh-Dole is a creature of the NIH’s view that private monopolies are the engine to develop therapeutic products based on federally supported research. There are other pathways available to the federal government.

It’s time for the monopoly-based pharmaceutical industry to have some competition, and it should be a mandate for the federal government to provide opportunities for competing approaches to drug development. And for that, it is necessary to return to the Kennedy patent policy: (1) limit patent monopolies on inventions made with federal support in the area of public health; (2) limit the term of exclusive licenses on subject inventions in health care, even if to three years after the date of first commercial sale or eight years from the date of exclusivity, as in the IPA program; (3) get the federal government back into development of cures and preventive measures, using the government’s license to practice and have practiced, as well as 28 USC 1498 as necessary to ensure that the public gets needed therapies on reasonable, not monopolistic, terms.

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