Pirates of the High-IP-Seas: Should The Government Exercise Its Rights To Commandeer Intellectual Property?

Bayh-Dole Act

In 1980, senators Birch Bayh (D) and Bob Dole (R) proposed an amendment to the Patent and Trademark Act that enables universities, research institutions, and small R&D companies to gain title to and commercialize technologies that were developed using grants from federal agencies. The eponymous Bayh-Dole Act was designed to create a uniform policy regarding intellectual property (IP) generated from federally funded research programs and incentivize non-government organizations to invent with the intent of commercializing revolutionary technologies.

The Bayh-Dole Act’s main goal was to ensure that federally funded research programs have a meaningful impact, alleviating concerns related to suppression inventions through shelving the product and refusing to commercialize the technology. To combat potential non-use issues, the Act included a provision to allow the federal government to take ownership of the invention (“march-in rights”) if a reasonable attempt is not made to bring the technology to market.

To comply with the law, company’s must [1]:

• Grant the government a nonexclusive, irrevocable, paid-up license to use the Subject Invention throughout the world.
• Require substantial manufacture in the U.S. for any exclusive licensee.
• Allow the U.S. government to exercise March-In Rights, i.e., the government can require the contractor to license the patent to others on reasonable terms.
• Comply with the administrative components of the law.

Section 35 U.S.C. § 203, entitled, “March-In Rights,” states that “the Federal agency under whose funding agreement the subject invention was made shall have the right ... to require the contractor, an assignee or exclusive licensee of a subject invention to grant a nonexclusive, partially exclusive, or exclusive license in any field of use to a responsible applicant or applicants, upon terms that are reasonable under the circumstances ...”

Several reasons may enable such action to be taken:

1. Failure to take steps to achieve practical application of the subject invention
2. To alleviate pressing health or safety needs
3. To meet requirements for public use specified by federal regulations
4. Failure to substantially manufacture in the United States any products related to the invention

The key administrative provisions require inventors to disclose creation of an invention within a timely manner and patent all inventions prior to commercialization. Non-compliance with disclosure requirements gives the federal agency unlimited time to rescind ownership of the invention.

Proposed Changes

In an effort to update Bayh-Dole regulations to current patent laws and advance the government’s Lab-to-Market (L2M) initiative,[3] the Secretary of Commerce charged NIST to revisit the Bayh-Dole Act to update its regulations. According to NIST, the L2M-driven regulatory actions included improving funding partnerships, increasing compliance by funding recipients, and improving agency access to reported data. This effort resulted in amended and new regulations that were implemented in May 2018:

• The 60-day limit within which the government may seek ownership of an invention where the contractor fails to provide appropriate disclosure or election has been eliminated. Thus, the government now has an unlimited time period within which to assert ownership to an invention following the discovery of the contractor’s non-compliance with the Bayh-Dole Act’s disclosure and election requirements.
• The contractor is obligated to require its employees to assign rights in a subject invention to the contractor.
• Decisions to discontinue patent prosecution must be communicated to the government within 60 days prior to the statutory deadline (an increase from the prior 30-day notice period).
• The deadline to provide notice to convert a provisional patent application to a non-provisional patent application is 10 months from priority in order to give the government 60 days’ notice prior to expiration of the application.

Two weeks before departing office, Trump proposed a rule to block the federal government from exerting march-in rights to commandeer the production of drugs that they deem exorbitantly priced. On January 4, 2021, NIST published in the Federal Register a notice of proposed rulemaking affecting the Bayh-Dole Act regulations.

“The proposed rules follow an April 2019 Green Paper published by NIST that presented strong reasons against the use of march-in rights by the Government as a remedy to lower prescription drug costs and noted the lack of clarity on this point in both the statute and the implementing regulations addressing grounds for march-in rights. The proposed rules follow demands by some public advocacy groups and politicians, at the height of the COVID-19 crisis, that the Government ensure through march-in rights that no excessive profits were made by companies developing and manufacturing testing mechanisms or vaccines that were funded in part or in whole by the Government.”

~ McCarter & English LLP [2]

Practical Implementation

The government has never exercised their march-in-rights, although they have come close a number of times during the COVID global pandemic. Controversy surrounding the effectiveness and accessibility of Gilead’s remdesivir (also marketed as Veklury) placed the Bayh Dole interpretation back in the spotlight. While there was conclusive evidence that remdesivir reduces hospitalization from 15 to 11 days for COVID patients, there was no clinical evidence suggesting that the drug reduces the probability of mortality due to infection. Priced at $3,120 per course of treatment, patient advocacy groups and Attorneys general from 34 states and pressed the Department of Health and Human Services in August 2020 to exercise “march-in” rights to address supply shortages and exorbitant pricing [3].

A study published in the Journal of Virus Eradication declared that Gilead could break even by charging less than $1 per vial. But is the goal for pharmaceutical companies to merely break even, regardless of government subsidy? How does that spur innovation?

Gilead CEO Daniel O’Day believes that the company is cutting hospitals a good deal, as they could charge more for remdesivir based on the reduction in patient stay times, saving hospitals $12,000 on average.

Gilead disputed the study and pushed back on criticism of its price.

“It is inaccurate to suggest that developing and manufacturing a complicated investigational drug like Veklury, for which we have invested significant resources over the last 10 years, relies on raw materials sourced from around the world, involves multiple chemical reactions and requires sterile manufacturing facilities, is 93 cents”

~ Chris Ridley, Gilead spokesman

There has been considerable debate regarding the interpretation of march-in-rights and the federal government’s unwillingness to assert authority regarding p[ricing control. It is important to keep in mind that the Bayh Dole Act was never intended to control drug pricing.  The Act never mentions reasonable drug pricing determined by the government. This was intentional. Again, the main purpose was to incentivize private corporations to collaborate with government agencies to advance new technologies that the government is interested in rather than focusing on its own agenda.

Outlook

The well-established Bayh-Dole Rule gives the government authority to bypass patent law and grant another manufacturer the rights to produce proprietary drugs if they are not being made accessible to the public on “reasonable terms”. Although the White House has never flexed these powers, drug manufacturers must live in fear that their drug assets may be stolen at a moment’s notice. Trump’s amendment to the Rule would minimize the circumstances under which march-in rights could be invoked. Bayh-Dole is controversial within government agencies – HHS Secretary Xavier Becerra has been an adamant supporter of the march-in rights and went so far as to recommend the government to take control over Gilead’s remdesivir. On the other hand, Francis Collins, leader of the NIH, believes that drug pricing cannot be used to justify march-in authority. Leftist activist groups are currently petitioning the Biden administration to reverse this policy, citing that Bayh-Dole is an important force that curbs exorbitant drug prices. Ultimately, Commerce Secretary Gina Raimondo will make the final decision to overturn Trump’s action or finalize it.

Handicapping Innovation

Taxpayer funded research usually results in basic scientific discoveries, most of which never result in a commercialized drug product. But when scientists do discover a potential therapeutic they license the development rights to private companies, who invest $2-3B to bring a drug to market (accounting for the costs of all the failed trials needed to bring just 12% of experimental drugs to approval). The average government grant is $3M. Clearly the risk falls on the shoulder of the pharmaceutical companies who embark on ambitious drug development programs. The Bayh-Dole Act has played a major role in pharmaceutical innovation in the last 3 decades: growing the U.S. economy by up to $1.7 trillion through the creation of 11,000 technology startups predicated on licensing from federally-funded programs (like universities). If the government chooses to exercise their rights to commandeer intellectual property from these startups then investors would be hesitant to invest in high-risk technology plays. The consequence is less innovation and a risk-averse capital market. When it comes to biotech, this equates to fewer pharmaceuticals and treatment options for patients.

References

[1] https://www.wsgr.com/en/insights/basics-of-the-bayh-dole-act-faqs.html

[2] https://www.lexology.com/library/detail.aspx?g=17804773-8fba-435f-bfce-d7e637b045b8

[3] https://www.washingtonpost.com/business/2020/09/30/remdesivir-drug-coronavirus-gilead/