An Open Letter to Senator Warren Regarding Xtandi

Dear Senator Warren:

You have called repeatedly for the federal government to use regulatory tools available to it to address the high prices charged for drugs. Your attention to this matter is much appreciated!

I write with specific reference to the present situation involving the prostate cancer drug enzalutamide, which is sold under the brand name Xtandi. Xtandi’s price in the United States is more than ten times the price for which a generic drug manufacturer has offered to produce enzalutamide. The University of California first identified enzalutamide under federal grants from the NIH and the Department of Defense, which are cited in three patents (7,709,517, 8,183,724, and 9,126,941). UCLA exclusively licensed rights in these subject inventions to Medivation, which having developed the compound as a prescription medicine with its business partners, then merged with a subsidiary of Pfizer. At about the same time, UCLA sold its rights to future royalties to Royalty Pharma.

The Bayh-Dole Act sets out its policy and objectives at 35 USC 200. Among these are the use of the patent system “to promote free competition and enterprise.” Attention to free competition lies at the heart of Bayh-Dole’s requirements pertaining to exploitation of patent property rights in inventions within the scope of Bayh-Dole’s patent rights clauses. I will explain, and show you how there is a third regulatory tool in Bayh-Dole by which to achieve reasonable prices for medicines developed from inventions made in work receiving federal support.

Under the Bayh-Dole Act, patentable inventions made in federally supported work and acquired by a federal contractor are not ordinary inventions, and the patent rights available in those inventions are not ordinary patent rights. Bayh-Dole, as part of federal patent law, places restrictions on the patent property rights available for inventions subject to Bayh-Dole’s patent rights clauses. The fewest restrictions are made on inventions owned by inventors who have been made party to a federal funding agreement under 35 USC 201(b), including 37 CFR 401.14(f)(2). Next are the restrictions on small business concerns under 37 CFR 401.14 excluding paragraph (k). Finally, the most restrictions are placed on nonprofit contractors under 37 CFR 401.14 including paragraph (k), which is expressly directed at nonprofits.

The basic bargain in Bayh-Dole is set forth at 35 USC 202(a): federal contractors, if they acquire ownership of a patentable invention made under a federal contract, may choose to retain that ownership against any claim that a federal agency may otherwise make for government ownership, provided that the federal contractor comply with the requirements of the patent rights clause that applies to them (inventor-contractor, small company, or nonprofit).

To address “free competition” (and with that competition, competitive pricing) the organizational patent rights clause at 37 CFR 401.14 makes two limitations on patent property rights for all contractors, and makes an additional limitation specific to nonprofits. The first two substantive requirements you already know well: the government license and march-in for nonuse, unreasonable terms, or failure to satisfy public health or safety needs.

Here is a letter of yours from last year, along with a letter signed by “over 25 legal and public health experts.” This letter emphasizes that the federal government already has the authority to take action to deal with drug prices:

The experts describe three legal tools that the Biden administration can use to obtain fair prices for prescription drugs, without the need for any congressional action: the “government patent power” codified at 28 U.S.C. § 1498 and the Bayh-Dole Act’s “royalty free-license” and “march-in rights.”

The Government License 

Bayh-Dole’s royalty-free government license is a broad license to practice and have practiced. The wording comes from the 1963 Kennedy patent policy by way of the NIH’s 1968 Institutional Patent Agreement master agreement, where to practice and have practiced is defined to mean “(made or have made, used or have used, sold or have sold) throughout the world by or on behalf of the Government of the United States.” This license in effect divides up any patent on inventions made in work receiving federal funding so that while the “principal” rights are with the contractor, the federal government can do as it pleases, but for granting an exclusive license or suing for infringement. Any practice of a subject invention “for or on behalf of the United States” is authorized by 35 USC 202(c)(4) and incorporated in to the patent rights clause for nonprofits at 37 CFR 401.14(b). Importantly, federal government use of this royalty free license does not require any procedures, notices, or hearings. A federal agency, or any organization authorized by the federal government, may practice the invention without notice to, or consultation with, a federal contractor holding principal rights in the invention.

The government’s use of its rights under the Bayh-Dole license allows the immediate production of enzalutamide as a generic drug for all United States purposes, what the Kennedy patent policy identified as the governmental market. If the federal government were to do this–purchasing the drug at a generic price under a production and procurement contract, the brand name Xtandi version of the drug could be priced however Pfizer chose, but it would have to compete with generic drug manufacturers authorized by the federal government for any part of the federal government’s business in providing enzalutamide to those within the government’s health care reach. The government license, then, is Bayh-Dole’s first way of creating “free competition”–in this case, the government is by statute free to compete with the holder of any patent on a subject invention, where that holder might attempt to exploit that patent to suppress competition and demand that the federal government pay a non-competitive–unreasonable–price, which under present rules, the government is not allowed to negotiate. Bayh-Dole provides means for free competition, and competition is its mechanism to address unreasonable terms, including unreasonable pricing.

March-in

Let’s turn to march-in. Here is another letter, dated January 10, 2023, signed by 25 senators and representatives, calling out Xtandi pricing. The NIH is clearly dragging its feet on march-in:

Over a year has passed since the petition to exercise march-in rights for Xtandi was first submitted to HHS, and despite numerous commitments from HHS that the Department would give such petitions “due consideration,”16 the petition has not been fully reviewed.

But it has been seven years since Knowledge Ecology International first petitioned the NIH and DoD to march in on Xtandi.

March-in involves requiring a contractor (or its assignees and such) to change how it receives compensation for the practice of inventions. If a subject invention has not timely achieved practical application or even if it has but the contractor has not reasonably satisfied public health needs, then the government can require the contractor (or assignee, or exclusive licensee–let’s call them the “ilk”) to grant licenses, effectively creating competition. March-in does not “revoke” patents or “confiscate” them, nor does march-in void existing licenses or require the primary patent rights holder (contractor, or its ilk) to change its pricing of products covered by the patent. March-in anticipates creating competition. Competition addresses pricing. If competition does not address price, then Bayh-Dole indicates that the government should look to antitrust law (35 USC 211).

At the heart of Bayh-Dole march-in is the definition of “practical application.” Bayh-Dole defines practical application to be the use of a subject invention so that the benefits of that use are available to the public on reasonable terms. Here’s the whole thing (35 USC 201(f)) (my emphasis):

The term “practical application” means to manufacture in the case of a composition or product, to practice in the case of a process or method, or to operate in the case of a machine or system; and, in each case, under such conditions as to establish that the invention is being utilized and that its benefits are to the extent permitted by law or Government regulations available to the public on reasonable terms.

“On reasonable terms” is an essential part of the definition. It’s not that there’s a product, or use, or a financially successful product. None of that. What matters is that when there is a product, it must be offered to the public on reasonable terms–not any terms that the contractor thinks reasonable, but terms that are reasonable in the context of what Bayh-Dole requires–reasonable to the public, or a reasonable representative of the public.

Given that Bayh-Dole’s remedy for unreasonable terms is to require licensing to create competition, the meaning of “reasonable terms” is along the lines of “terms that would be on offer if there were free competition even if you use the patent that Bayh-Dole allows you to have to suppress that competition.” Either license others to practice, even in competition with you, or price as if there were that competition, even if you use your patent to suppress that competition.

In short, for new drugs: price as if the drug were generic, even if it is not. If a drug company does not price its product based on a Bayh-Dole invention as a generic, then fine, the company may price however it wants, but the company then cannot sue others for infringement–the company must grant those infringers licenses on reasonable terms. The company may get a royalty from each of those licenses, and in this way receives compensation for the use of its patent.

The company, however, does not get to use its Bayh-Dole-limited patent to suppress competition and set a non-competitive price. A company that does so has abused its Bayh-Dole patent. If a company that has abused its Bayh-Dole patent does not grant licenses, then the federal government can grant licenses and then the company gives up its  royalties. Having chosen to price unreasonably, the company must accept the consequences of its choice.

The march-in threshold is not “high” prices or “unaffordable” price but rather an unreasonable price (or other unreasonable term, but price is often the key term), a price that is not what a reasonable person would expect if there were competition. We may then restate the essential public bargain made by Bayh-Dole:

Federal contractors agree to price products resulting from inventions made in federally funded work “reasonably”–as if there were competition even when there’s not because they have used a Bayh-Dole-limited patent to suppress that competition. 35 USC 201(f), 203(a)(1).

To put it bluntly: each new product will be priced as if generic, or others granted a license to compete.

But it has been seven years since Knowledge Ecology International first petitioned the NIH and DoD to march in on Xtandi. Your most recent letter ends with a set of questions, for which answers won’t necessarily move the march-in process forward. Everything can come to a halt until the HHS responds carefully, thoughtfully, slowly to each of these questions. Even with march-in, the procedures provide plenty of opportunities for UCLA and Pfizer to delay with hearings and appeals a final decision for months if not for years.

Nonprofit Requirements on Assignment

There is another way to get action, however, or at least to restore some portion of the public benefit expected by Bayh-Dole. Bayh-Dole has special requirements for nonprofit organizations that acquire title to subject inventions, as UCLA has done with the series of compounds from which Xtandi has been developed. The first of these requirements is that if the nonprofit assigns a subject invention, the assignee must comply with the requirements of the nonprofit’s patent rights clause. 35 USC 202(c)(7)(A), implemented as 37 CFR 401.14(k)(1). Here’s Bayh-Dole:

a prohibition upon the assignment of rights to a subject invention in the United States without the approval of the Federal agency, except where such assignment is made to an organization which has as one of its primary functions the management of inventions (provided that such assignee shall be subject to the same provisions as the contractor)

Here’s the nonprofit patent rights clause (37 CFR 401.14(k)(1)):

Rights to a subject invention in the United States may not be assigned without the approval of the Federal agency, except where such assignment is made to an organization which has as one of its primary functions the management of inventions, provided that such assignee will be subject to the same provisions as the contractor;

Now, here’s the thing. Title to an invention may be conveyed by an instrument identified as an “assignment” that expressly assigns title in the invention to another, or title may be conveyed implicitly by an exclusive license that grants all substantial rights in the invention (to make, to use, to sell, along with the right to enforce, for all or substantially all of the term of the patent). Courts have consistently held exclusive licenses to all substantial rights in an invention to act as assignments. Here is the U.S. Supreme Court, in Waterman v Mackenzie (my emphasis):

The patentee or his assigns may, by instrument in writing, assign, grant, and convey, either, 1st, the whole patent, comprising the exclusive right to make, use, and vend the invention throughout the United States, or, 2d, an undivided part or share of that exclusive right, or, 3d, the exclusive right under the patent within and throughout a specified part of the United States. Rev.Stat. § 4898. A transfer of either of these three kinds of interests is an assignment, properly speaking, 

Bayh-Dole’s requirement on nonprofit assignments of subject inventions applies regardless of whether an invention is assigned (using a document labeled “assignment”) or exclusively licensed (using a document labeled “exclusive license”). It cannot possibly matter which form of assignment is used. If the form of assignment did matter, then the requirement would be merely one of a policy endorsing a particular kind of paperwork (limitations if you use assignment, but avoid the limitations if you label the paperwork “exclusive license”). There’s nothing in Bayh-Dole that suggests that Congress was concerned about a preference for exclusive licensing of all substantial rights in an invention over assignment of the invention, and how exclusive licensing would somehow better promote utilization of subject inventions. It doesn’t matter which form is used. If a nonprofit assigns a subject invention, even by the dodge of calling the transaction an exclusive license, the nonprofit patent rights clause comes with the assignment. An exclusive patent license may also include an assignment of the underlying invention. Bayh-Dole is specifically concerned with nonprofit assignment of subject inventions, not assignment of title to patents.

Why is it important that the nonprofit patent rights clause follows any assignment made by the contractor? The nonprofit patent rights clause places restrictions on the use of “income earned with respect to the subject invention” and from “royalties” (which would be characterized as sublicensing income if the primary deal was presented as an exclusive license). Here’s the requirement (from 37 CFR 401.14(k)(3):

The balance of any royalties or income earned by the contractor with respect to subject inventions, after payment of expenses (including payments to inventors) incidential [sic] to the administration of subject inventions, will be utilized for the support of scientific research or education; and

The key point is that the assignee, now also the contractor for  the purpose of (k)(3), must use any net income “for the support of scientific research or education.” That money is not “profit” to be used anyhow a company wants. Bayh-Dole’s policy on free competition pushes nonprofits to license less than all substantial rights in subject inventions.  An assignee, by contrast, comply with the patent rights clause as if it were the nonprofit contractor and dedicate income and royalties after the cost of administrating subject inventions to scientific research or education.

Initiating an audit for compliance with 35 USC 202(c)(7)(A) does not require the Secretary of HHS to take any action. The audit may be conducted by the Office of Audit Services in the Office of the Inspector General. Consider, then, requiring a compliance audit while you wait for the Secretary of HHS to work slowly away at your most recent questions regarding march-in. It may be that an audit would lead Pfizer to open up enzalutamide without the need for march-in. If so, then Pfizer may keep its pricing–but it cannot interfere with the pricing that other companies choose to set for enzalutamide. Regardless, Pfizer is on the hook as it were for how it spends income earned from Xtandi. If Pfizer does not want to be exposed to such an audit, then it will give up its exclusivity, so that UCLA may grant additional licenses–again, introducing competition to address unreasonable, non-competitive pricing.

Summary

So here’s a third point of enforcement. Legislators should order up an audit for compliance with the nonprofit patent rights clause–did each organization in the nonprofit assignment chain from UCLA to Medivation to Pfizer share royalties with the inventors? Have they properly allocated the money they have received? These are questions to put to Pfizer, and to an audit of Pfizer’s books.

The fundamental bargain in Bayh-Dole is that a contractor or its assignee or exclusive licensee may patents on subject inventions to suppress competition only if the contractor (and its ilk) offer the benefits of using that subject invention to the public at a price that would be expected by a reasonable person if there were competition–that is, a “reasonable” price.

Bayh-Dole provides that the federal government has a license to practice and practiced any subject invention, including the right to sell and have sold product based on such inventions. The federal government, then, is always authorized to “compete” with any of its contractors, in the sense that the government does not concede its mandate to provide for the general welfare simply because it has issued a patent to a nonprofit for an invention made in work that the nonprofit petitioned the government to support. Clearly, if a contractor provides a product at a price that’s lower than what the federal government might develop itself or authorize companies to do on its behalf, then the government has less need to act on its license.

Bayh-Dole also provides that if a contractor does not offer benefits of an invention on reasonable terms, including reasonable price, then the federal agency that provided the funding can initiate a march-in to require the contractor (or its ilk) to license the invention, thereby creating the prospect of competition. Competition then addresses unreasonable terms, including non-competitive, unreasonable price. But march-in can take years, and requires an agency to act. Under 37 CFR 401.6(h), a federal agency is authorized to walk away from march-in, even if it has determined that march-in is indicated for unreasonable terms.

For nonprofits, Bayh-Dole’s bargain has an additional regulatory tool to promote free competition. When a nonprofit assigns a subject invention, the assignee must comply with the nonprofit patent rights clause. This limitation prevents nonprofits from using assignment as a way to avoid the public policy requirements of sharing royalties with inventors and using royalties and income earned with respect to a subject invention for scientific research or education.

If a company does not comply with the fundamental bargain in Bayh-Dole–in exchange for patent exclusivity, sell at a price that would be expected if there were competition, even if a patent on a subject invention is used to suppress competition–then that company can be required to open its books to audit and account for the proper use of its income. In this way, Bayh-Dole’s policy objective to promote free competition is satisfied.

If you would like to learn more, have your people get in contact with me.

Sincerely,

Gerald Barnett

 

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