Bayh-Dole, Competition, Reasonable Terms, and March-in (Short Version)

How are competition, reasonable terms, and march-in related in Bayh-Dole? Here is the short version.

Bayh-Dole stipulates that a contractor must timely achieve practical application of a subject invention and must reasonably satisfy public health needs in doing so. 35 USC 200, 201(f), 202(a), 203(a). Bayh-Dole defines practical application (35 USC 201(f)) as the utilization of a subject invention such that the benefits are available to the public on reasonable terms.

If the terms on offer are not reasonable, then the federal agency has a mandate to “march-in” and require the contractor to grant licenses (35 USC 203(a)(1)). The effect of such “march-in” is to introduce competition, and competition in turn, is to address the unreasonable terms.

What then are “reasonable terms”? Bayh-Dole’s framework makes clear that reasonable terms are those terms that would be on offer if there were competition, even if there is not competition due to the right of the holder of a patent on a subject invention to exclude all others. If terms offered to the public are unreasonable–that is, not what would be expected if there were competition–then federal agencies are to require licensing.

There is nothing in Bayh-Dole about dictating to patent holders the terms on offer to the public, including price. There’s nothing about “affordability.” Competition dictates the terms. If competition does not result in reasonable terms–such as a competitive price, a price under the pressure of “free competition” (35 USC 200)–then federal agencies are to look to antitrust law (35 USC 211).

When it comes to making offers to the public, such as for a new medicine, price is clearly a material term. If a price is not reasonable–that is comparable to the price under competition–then Bayh-Dole requires federal agencies to require licensing, and that licensing introduces competition. Since the terms of any new licenses must be “reasonable,” the patent holder may receive royalties from these new licensee(s), and thus continues to receive “reasonable” compensation for the practice of the invention covered by the patent.

The point of the march-in procedures set forth in Bayh-Dole is not to contest march-in but rather to appeal the federal agency’s determination that the conditions exist that authorize the federal agency to use its march-in right. 35 USC 203(b). That is, the contractor may appeal “the determination on the record” of information on which the federal agency has based its action.

Thus, if a federal agency establishes that for similar medicines, the price when competition has been introduced is 1/50th (say) of the price on offer without competition, then there is not much for the contractor to appeal. In the case of ordinary brand-name medications, the price of a generic version once the medication is no longer covered by patents may be as little as 1% or 2% of the branded price. In the case of Xtandi, generic manufacturers with FDA approval (but who cannot sell because of the patents) have indicated they could sell an Xtandi pill, with a profit, at $3, while Astellas and Prizer price one pill at about $80. For Xtandi, the terms on offer, as far as Bayh-Dole is concerned, are not reasonable. Federal agencies have a statutory mandate to march-in and introduce competition through licensing.

At issue in Bayh-Dole is not whether a price charged for a product or service is “high” or even “affordable” but whether the price is reasonable in the context of competition, even if there isn’t any competition because of the use of the patent system to exclude all others.

Bayh-Dole, then, requires a contractor (or an assignee) to offer the benefits of using an invention to the public at a price (and on other terms) that would pertain if there were competition, even if there is not. If a contractor does not price accordingly, then the federal agency has the right, and a mandate to use that right, to introduce competition by requiring licensing on reasonable terms so that others may utilize the invention and offer benefits to the public. Competition–or pricing as if there were competition–is therefore a fundamental element of the public bargain that allows contractors to use patents on health-directed inventions made in federally supported work.

Bayh-Dole’s “incentive” in the use of the patent system, then, is not the opportunity for contractors and their exclusive business partners to price-gouge patients, but rather to reap a reasonable profit from sales over the life of the patent (or the duration of an exclusive license) from the entire market for the new medicine. Even with required new licenses, the patent holder receives compensation across this same entire market for the practice of the invention for the life of the patent. Under Bayh-Dole, the public pays a reasonable, competitive price.

If this Bayh-Dole “incentive” is not sufficient, Bayh-Dole does not authorize price-gouging or other unreasonable terms to sweeten the incentive, nor does it authorize federal agencies to turn a blind eye and not enforce Bayh-Dole’s patent rights clause with regard to such reasonable terms.

If you don’t like that outcome–if you argue that universities can’t do the exclusive licenses that they have become accustomed to hope to do (even if they aren’t very good at it), if you argue that without such licenses Bayh-Dole fails and innovation in American will come crashing to a halt–too bad for you. Cry. You are wrong about it all–the law, what will happen if the law is enforced, and what’s important in life–your administrative convenience and money-making or patients obtaining the benefit of federal research on what Bayh-Dole sets out as reasonable terms. That’s one of the many limitations of Bayh-Dole as federal patent policy. But there it is.


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