Bayh-Dole march-in won’t change drug prices but other things might–2

Now let’s look at alternatives to Bayh-Dole’s march-in procedures to address competition, public access, and prevention of unreasonable use, including price gouging. We will consider two within Bayh-Dole and two outside Bayh-Dole. The Bayh-Dole alternatives are: use the government license (35 USC 202(c)(4)) and enforce the nonprofit invention assignment clause (35 USC 202(c)(7)(A)).Those outside Bayh-Dole: use the broad limitation on government infringement at 28 USC 1498 and modify federal patent law at 35 USC 287(a)(2) to remove the exception that permits patent holders to have the right to a remedy for infringement of compositions of matter or processes used in medical treatments. Bayh-Dole first. If people are going to bother with such a broken, mismanaged law, uncomplied with, unenforced law as Bayh-Dole, then at least they ought to go after the parts that might have immediate effect.

Bayh-Dole requires the use of a standard patent rights clause in each federal funding agreement. Bayh-Dole specifies what must be in this clause at 35 USC 202(c). The default clause stipulates that the federal government receives a non-exclusive, royalty-free license to practice and have practiced each subject invention. This license is based on the wording of established executive branch patent policy in place since 1963, where “practice” means “make, use, and sell.” The government (and in executive branch patent policy, government includes state and municipal governments) thus has the right to make, use, and sell any subject invention under Bayh-Dole, without the need for any march-in, no compulsory licensing, no waiting around for years of procedural wrangling to take their course. The government has a license to make, use, and sell upfront as a condition of a contractor electing to retain title to inventions the contractor has acquired and which have been made in federally supported work. And the government has the right under this license to authorize others to make, use, and sell product based on or using the invention for or on behalf of the government. Everywhere that the federal government has the authority to address the public welfare–and everywhere the federal government is presently paying for the drugs and methods based on such inventions–the federal government has the licensed right to make, use, and sell and choose others to make, use, and sell.

If the NIH finds march-in not appealing, then just use the royalty-free license to practice and have practiced that Bayh-Dole provides to the NIH.

What’s the upshot? Bayh-Dole divides the opportunity for use of an invention into a private market and a governmental market. A private market involves non-governmental business–development, sales, and the like. A governmental market is one in which the government controls research, development, and use, and pays, generally, for these things. In a government market, companies sell services and products to the government, and the government then decides how to dispose of these assets. This division of markets, too, is based in executive branch patent policy dating from 1963. March-in addresses problems in the private market. The Bayh-Dole license addresses the government’s freedom to act in government markets. To the extent that the provision of drugs to the public is a matter of public health–of government concern and action–then there is a government market for drugs in which the government’s Bayh-Dole license operates. The NIH could–and should–use the government license to contract for the development, manufacture, and sale of drugs on its behalf, for at least those drugs based on inventions made in federally supported work. The NIH should do this regardless of the private development of drugs based on the same inventions. If Congress were to make this obligation clear, it would change the allocation of NIH funding to specify a significant portion to go to development and manufacture of federally supported inventions in medicinal chemistry (and the like). If private speculative investors and companies cannot make drugs faster and better and less expensively than can the government contracting with companies to do so, then why on earth does the NIH defer to those private speculators and companies, forcing federal and state governments to pay hundreds of billions of dollars more than they otherwise would if the federal government acting on its rights in the governmental market?

For variation on this argument, see economist Dean Baker’s recent publications.

There’s a second Bayh-Dole requirement that the NIH refuses to enforce that would have an effect on the price of drugs in the private market. This is a requirement on the assignment of subject inventions owned by nonprofits. Bayh-Dole requires the standard patent rights clause in every federal funding agreement to require that when a nonprofit assigns a subject invention–one made in work receiving federal support and acquired by the nonprofit–the nonprofit’s patent rights clause must go with the assignment. The nonprofit patent rights clause in turn requires that the nonprofit use all income earned with respect to the subject invention to support scientific research or education, deducting only expenses incidental to the administration of subject inventions. If a nonprofit assigns such a subject invention to a for-profit company, the for-profit company, for everything involved with that invention, must commit to using any income earned for what amount to charitable purposes–scientific research, education. Not company headquarters, executive salaries, shareholder dividends, or even more drug development. If a company wants to use income for any of those kinds of things, then it must insist on a license that does not convey all substantial rights in the invention–such as a non-exclusive license, or an exclusive license to use or to sell.

Nonprofits routinely grant (when they grant at all) exclusive licenses to make, use, and sell, with the right to sublicense and the right to enforce patents. These are all indications that the exclusive license is an assignment of the invention (even if the license insists that it is not the assignment of any patent on the invention). Thus, if the NIH were to decide to protect the public from nonuse or unreasonable use of inventions by nonprofits and made in work receiving federal support, the NIH would insist that nonprofits comply with 35 USC 202(c)(7)(A) in their exclusive licenses, and would audit those licenses to determine if they were indeed assignments, and if so, then would audit the assignees for an accounting of any income earned with respect to the assigned inventions.

The outcome? Companies looking to exploit subject inventions for profit would insist on taking non-exclusive licenses or licenses that did not involve all substantial rights in such inventions. Doing so would open up the opportunity for free competition and the encouragement of maximal involvement of small companies in the development of products based on or using these inventions. If the NIH did not want such free competition and maximal participation by small companies, then it would divert its funding to for-profit companies, which, under Bayh-Dole, have no such constraints when exploiting inventions made in work with federal support. Again, Bayh-Dole’s policy is clear: nonprofit-acquired inventions are to be exploited for specified public interest purposes–income goes to public purposes–while for-profit acquired inventions are free of such a requirement (though subject to the government’s license for government market activity). The NIH, however, does not have the freedom to simply ignore Bayh-Dole’s restriction on non-profit assignment of subject inventions. Or, at least, it would not have such freedom if rule of law mattered.

There’s one other mechanism available to the federal government to deal with drug prices, and one place to modify present patent law to open things up.

The mechanism involves the government’s right to manufacture and use any patented invention–28 USC 1498. A patent holder has the right in such case to seek “reasonable and entire compensation” for such use by filing a claim in the Court of Federal Claims. In essence, a patent issued by the government cannot be used to prevent the government from using or manufacturing an invention, and the government has no obligation to negotiate compensation for using or manufacturing the invention–that is left up to the Court of Federal Claims. What constitutes “reasonable” compensation then may have nothing much at all to do with what a company might set as its market price for a patented drug. That market price is not compensation for use of a patent but rather what the company thinks it can gain for its product in the absence of competition. But the government has the right to compete under 28 USC 1498, so the “reasonable” compensation cannot be based on giving the government this right provided to it already by statute. So “reasonable” will be necessarily, in general, a much lower figure than that which a company might price a drug product, and especially a drug product protected from competition by a patent.

The advantage of 28 USC 1498 is that it involves all patented drugs, not merely those arising from inventions made in federally supported work. The downside is that even 28 USC 1498 deals only with patents and drugs and does not get at the physician, clinical, and laboratory costs of delivering and monitoring these drugs. Even so, the savings ought to run to the hundreds of billions of dollars per year. Or, from the perspective of the pharmaceutical company lobby, removing hundreds of billions of dollars of income from the industry. Or, from the perspective of speculation, bursting a speculative bubble that serves profit-seeking and volatility at the expense of people suffering from disease and injury being wiped out financially in seeking treatment.

And finally, a change in patent law. 35 USC 287 addresses restrictions on the right of a patent holder to enforce its patent against infringers. There, at 287(c), is a limitation of those rights in the case of medical treatment.

With respect to a medical practitioner’s performance of a medical activity that constitutes an infringement under section 271(a) or (b), the provisions of sections 281, 283, 284, and 285 shall not apply against the medical practitioner or against a related health care entity with respect to such medical activity.

The general idea is that no patent can be used to interfere with the provision of medical treatments. That would be enough to provide physicians and companies supplying physicians with relief from patent infringement claims. But the news is not good. There’s a broad exception to the restriction, built into the definitions used by the restriction, so that it does not read as it appears to read.

Without getting deep into it, here’s an example (35 USC 287(c)(2)(A)):

the term “medical activity” means the performance of a medical or surgical procedure on a body, but shall not include (i) the use of a patented machine, manufacture, or composition of matter in violation of such patent, (ii) the practice of a patented use of a composition of matter in violation of such patent, or (iii) the practice of a process in violation of a biotechnology patent.

The first part of the definition works–limiting procedures to those involving “a body” as distinct from what, a soul or a mind or talisman? But the rest of the definition excludes much of what the patent-reliant parts of the biomedical “industry” wants to exploit as patent monopolies–and thus, removes from the general restriction on the enforcement of patents in medicine nearly everything that would matter for such a general restriction, which then becomes an empty gesture.

It has been pointed out that early in the history of pharmaceutical patents, German patent law excluded patent rights on compounds. One could patent improvements on making those compounds, but not the compounds themselves. Once a compound proved important for some purpose, then finding better ways to make that compound then became financially interesting. American patent law, however, allowed patents on compounds. Thus, once a patent has issued, there is little incentive to find better ways to make any of the potentially thousands of compounds claimed by any one patent. One gets to a standoff with the patent owner, with no freedom to compete with a better process. Thus, the American approach attracts patenting but stymies competitive, independent use and development of improvements.

Here in 35 USC 287, however, is the place where the change could be made to address drugs–or any compositions of matter that might be used in medical treatments. Just delete references to “compositions of matter” and “process” from 35 USC 287(c)(2)(A). That leaves intact remedies for infringement of machine and manufacture patents, and for processes for making machines and compositions of matter, but not for the delivery of any compounds as a matter of medical treatment.

The argument is that any such change would send a chill through the pharmaceutical industry and that in turn would lead to a catastrophic loss in innovation, new medicines, and an increase in untold suffering. Certainly, the portion of the pharmaceutical industry that depends on monopoly positions for outsized profits from suffering would feel a chill. But a wide swath of the biomedical industry operates on a standard profit model–contract provision of goods or services–and until prevention and cures dominate, that swath would not expect to see much adverse change at all.

We might also posit that the primary driver to find medical treatments at all has never been outsized profits based on monopolizing treatments for acute suffering, but rather a determination to alleviate suffering, and this driver still operates, and will continue to operate. While those who wish to speculate with money for outsized profits might seek some other venue for their funds–sports betting, say, or operating suborbital space adventures, or driverless cars–there are still substantial sources of funding that seek the outcome of reduced suffering, of prevention and cures and restoration of function. Those sources include nonprofits, governments, and the public through charitable donations and the payment of reasonable–not outlandish–fees for services. Even insurance companies have in interest in prevention and cure as opposed to payment for medicines that make a condition chronic for a lifetime–even if the cost of such a medicine is 10x or 100x lower than now (the clinical service costs of administering the medicine remain). We have plenty of motivation to treat, prevent, cure, and restore, and plenty of funding to explore, discover, and develop new medical interventions. We do not need an added “incentive” of a speculative profitable upside nor the involvement of people who insist on such profits as their condition to participate.

So, cut away the exception at 35 USC 287(c) to the restriction on the right of a patent holder to have a remedy for infringement of patents on composition of matter or processes used in medical treatment. Yes, that will cut out the speculators and that will re-orient biomedical industries. And yes, it will cut out some money that presently gets used. But we don’t need that money, and we don’t need those monopoly positions, and we don’t need the prospect of outsized profits to motivate high quality, effective, compassionate medical treatment and improvements. We just don’t.

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