Month: November 2018

Categories
Patent Theory

Flawed Marginal Cost Theory Should Not Be Applied to Intellectual Property

a lit lightbulb hanging next to unlit bulbsRecent calls for the government to lower prescription drug prices by overriding patent rights include proposals for the establishment of a marginal cost pricing system in the pharmaceutical industry (and in patent-based markets in general). As a previous article in this series details, some academics and advocates are now suggesting that the government use a federal law (known as § 1498) to force companies to sell patented drugs at the amount it costs to produce one unit of the drug—also known as the marginal cost. But while providing cheap prescription drugs for all sounds like a noble endeavor, the proposal ignores economists’ near complete rejection of the marginal cost theory and threatens to disrupt the development of potentially life-saving medicines.

Marginal Cost Theory Fails Economic Scrutiny

Proposed 80 years ago by American economist Harold Hotelling, traditional marginal cost pricing theory maintains that maximum societal benefit is realized when products are sold at a price that corresponds to the cost to produce one additional unit of a good. Not included in marginal cost are any “fixed” costs incurred prior to the production of that additional unit, such as rents, property taxes, salaries, or any other overhead costs not dependent on the amount of goods produced. To arrive at a balance that would maximize general welfare, Hotelling proposed that government revenues be used to cover fixed costs in industries where these costs were significant, such as power plants, railroads, and other public utilities. With the fixed costs of these industries subsidized by the government, companies could then offer consumers goods and services at the reduced marginal cost of production.

Despite some initial acclaim, it wasn’t long before Hotelling’s proposal was systematically challenged and repudiated by a number of preeminent economists. As detailed in a 1946 article by Ronald Coase, the key problem with Hotelling’s marginal cost proposal was that it assumed the government has very good information on the marketplace and consumer demand. Without good information and the will to use it, Coase explained that a system of government subsidies would result in a “maldistribution” of resources and income that would ultimately result in losses similar to those the system was aimed at alleviating. This critical problem of a less-than-omniscient government was echoed by others over the years, and now, as Professor John Duffy explains, “[t]he rejection of the Hotelling thesis is so complete that reputable economics encompasses the very opposite of Hotelling’s view.”

New Proposals Disregard Parallel Shortcomings 

Notwithstanding the widespread dismissal of Hotelling’s marginal cost theory, proponents of expansive and unprecedented use of § 1498 insist that that because intellectual property and innovative products are different from the public utilities referenced in Hotelling’s work, they will benefit from a government-run marginal cost pricing scheme. In a 2016 article calling for § 1498 to be used to lower drug prices, proponents argue that allowing the government to impose prices that reflect the marginal or “generic” cost of production will maximize social benefit. Their argument is based on the theory that intellectual property and information are non-rivalrous goods with a marginal cost of zero and that any “supra-marginal” costs result in inefficient deadweight loss.

But proposals for using significant government subsidies to address pricing in innovative industries ignore the fact that the critical problems with marginal cost pricing in public utilities are just as, if not more, apparent in intellectual property. Responding to arguments in favor of a system of public subsidies to cover fixed costs in a broad range of innovative and creative industries, Professor Duffy’s 2008 article on marginal cost controversy identifies four basic problems that, while originally raised to refute Hotelling’s proposal, directly apply to intellectual property.

The first and most obvious problem Professor Duffy confronts is the distortionary effects of taxes the government would need to impose on the general public to fund the subsidies marginal cost pricing requires. Proposals to implement government subsidies often assume, with little-to-no evidence, that tax distortions would be smaller than any distortions flowing from IP rights and non-marginal pricing. Professor Duffy contends that because there is no evidence that IP rights result in a price divergence any greater than other areas of the economy, they may actually be small in comparison to the taxes that would be required in a subsidy scheme.

The second problem is Coase’s aforementioned issue of government ignorance and the misallocation of resources that would result from a lack of information. Essential to government implementation of a successful marginal cost scheme is sufficient information about the demand for intellectual property—specifically whether consumers would have demanded the good if they had to pay the total cost. As Professor Duffy explains, gathering data in an attempt to answer this question would be impossible “because consumers are not paying full costs and never expected to do so.” Inaccurate assumptions that attempt to fill gaps in the data will inevitably lead to inefficiencies and the misallocation of resources.

Professor Duffy then challenges the notion that a marginal cost scheme would redistribute income in favor of those consuming the goods targeted by the price controls while using taxes to spread the cost of the subsidies to the general public. After questioning the fairness of this type of distribution, Professor Duffy moves on to an in-depth critique of the efficiency of such a system and a warning of the rent-seeking behavior likely to follow. He explains that this type of wealth transfer will result in inefficiencies when individuals are likely to expend resources to bring about the transfer. Professor Duffy describes a pricing scheme that promises far cheaper costs to consumers:

That regime will appeal most strongly to those who currently consume those goods, for they will obtain the largest benefit. But the economic efficiency of a reward system comes exclusively from increasing consumption among those consumers who value the good (or some units of the good) below the price that would be charged by the right holder under the current IP system.

A system that targets certain areas for subsidies invites consumers of those products to expend resources in attempt to secure the subsidies, thereby opening the door for rent-seeking behavior and increased inefficiencies.

Finally, Professor Duffy emphasizes Coase’s criticism that marginal cost proposals incorrectly compare marginal cost pricing to single-pricing schemes. Coase explained that the industries identified by Hotelling are free to rely on “multi-part” pricing, or price discrimination in which no deadweight loss occurs. Professor Duffy applies Coase’s argument to intellectual property and stresses that rights owners have a true incentive to minimize deadweight loss in an attempt to capture the resulting gains. Because rights owners have this incentive, have the power to charge different prices to different categories of consumers, and have potential constraints of competition from other innovative technology, Professor Duffy concludes that “it is by no means clear that the IP right holder will cause greater distortions than the government’s revenue agents.”

Incentives to Innovate Must be Preserved

While it may be true that costs associated with providing intellectual property to consumers are low or close to zero, the fixed costs of innovation are often very high. Creators and innovators rely on intellectual property rights to commercialize their products and recoup the massive fixed costs required to develop innovative products and creative works. Government mandated marginal cost pricing schemes implemented through § 1498 would threaten innovators’ ability to both recoup past losses and to fund the development of new technology. In a 2005 article on economics and IP law, Richard Posner warns of this dilemma:

Marginal-cost pricing would maximize access to existing intellectual property and deter or expel inefficient entrants, but it would reduce, indeed often eliminate, the incentive to create the property in the first place.

Recent calls for the government to impose marginal cost pricing in the innovative industries gloss over the serious flaws that have led to the widespread dismissal of such proposals in the past. While those advocating for § 1498 do suggest a type of risk-adjusted compensation for companies subject to the marginal cost scheme, they couch the proposal in highly abstract terms and fail to consider that appropriate compensation would be impossible to accurately calculate. Additionally, as Professor Duffy notes, the literature upon which these proposals rely “treats the marginal cost pricing problem of intellectual property as a unique phenomenon” without thoroughly examining whether IP is distinguishable enough from Hotelling’s public utilities that it would benefit from government price control.

The delivery of affordable drugs to people in need should be something that innovative companies and the government work together to ensure, but flawed mechanisms and unsound economic theories should not be the foundation of such an important endeavor. Before rushing to implement a marginal cost pricing system, proponents would be wise to consider the drastic effects it could have on incentives to innovate—and ultimately the development of the next ground-breaking drugs.

Categories
Copyright

Arts & Entertainment Advocacy Clinic Students File Amicus Brief in Brammer v. Violent Hues

a gavel lying on a desk in front of booksBy Rachelle Mortimer & Grant Ossler*

The Arts & Entertainment Advocacy Clinic at Antonin Scalia Law School recently filed an amicus brief in the Brammer v. Violent Hues case that is on appeal in the Fourth Circuit. The Clinic provides a unique opportunity for students interested in intellectual property and entertainment law. Each semester, students participating in the Clinic are able to gain practical experience working with clients and industry professionals on various projects related to copyright law and policy.

One organization that the Clinic often works with is Washington Area Lawyers for the Arts (WALA), which helps to provide legal services for local artists through volunteer attorneys who take on cases pro bono or at a reduced rate. By working with WALA to hold legal intake Clinics and take on pro bono cases, Clinic students are able to understand how copyright law affects individual artists. It is this understanding that led the Clinic to file the amicus brief in order to protect the rights of artists and prevent a dangerous expansion of the fair use defense to infringement.

Working with local attorneys from Protorae Law, students from the Clinic drafted portions of the amicus brief to explain how the U.S. District Court for the Eastern District of Virginia eviscerated the meaning and analysis of fair use under the Copyright Act.

Case Background

In 2016, the owner of defendant Violent Hues found a photograph online, copied it, cropped it, and posted it on a website that his organization created for its annual film festival. The photo in question was first posted to the photographer’s personal website, as well as to several online image-sharing websites. Violent Hues created the website to guide festival goers and provide information about the local area for filmmakers and festival attendees.

The owner of Violent Hues claimed he did not see a copyright notice on the photo when he used it, believing the photo was “a publicly available photograph.” Plaintiff Russell Brammer sent a demand letter, and upon receipt of the letter, Violent Hues removed the photo from its website. Brammer brought suit against Violent Hues claiming two causes of action: (1) copyright infringement under 17 U.S.C. § 504(b), and (2) removal and alteration of copyright management information under 17 U.S.C. § 1202.

District Court Decision

Brammer did not respond to arguments regarding count two, therefore the district court considered that claim abandoned. The district court granted summary judgment in favor of Violent Hues on count one, deeming the use of the photo was fair use per the Copyright Act. Fair use is codified in the Copyright Act and guides us through four factors of consideration when conducting an analysis to determine whether a use is a fair use. These factors are:

(1) The purpose and character of the use, including whether such use is of a commercial nature …; (2) the nature of the copyrighted work; (3) the amount and substantiality of the portion used in relation to the copyrighted work as a whole; and (4) the effect of the use upon the potential market for or value of the copyrighted work.

17 U.S.C.§ 107.

Unfortunately, the district court eviscerated any meaning to fair use under copyright law. In its examination of purpose and character, the district court determined Violent Hues’ use was “transformative in function and purpose” because Violent Hues’ use of the photo was informational: “to provide festival attendees with information regarding the local area.” The district court distinguished this from Brammer’s use, which was “promotional and expressive.” Additionally, the district court determined the use was non-commercial because the photo was not used for advertising or to generate revenue. Regrettably, this is as far as the transformative analysis went.

In the district court’s analysis of the second factor, fair use weighed in favor of Violent Hues again because the photo was factual in nature and “fair use is more likely to be found in factual works than in fictional works.” The district court acknowledged that Brammer incorporated creative elements in his photo (e.g., lighting and shutter speed), but ultimately held that because it was a “factual depiction of a real-world location,” it was purely factual content. The district court determined this without regard to creativity, though. The photo itself is a time-lapse photo of the Adams Morgan neighborhood of Washington, D.C.

In examining the third factor of fair use, the district court determined that Violent Hues did not use any more of the photo than was necessary, and therefore this factor substantiality weighed in favor of Violent Hues. Keep in mind, though, that the photo in question was merely cropped.

Lastly, the district court concluded that because there was no evidence that Violent Hues’ use had any effect on the potential market for the photo, the fourth factor also weighed in favor of Violent Hues. To support its decision, the district court stated: “The Court’s task is to determine whether the defendant’s use of the plaintiff’s works would materially impair the marketability of the works and whether it would act as a market substitute.” The district court arrived at this decision despite Brammer testifying he had been compensated for the photo six times—two times after Violent Hues’ infringement.

And thus, we have summary judgment for Violent Hues under a non-comprehensive fair use analysis.

Amicus Brief Summary and Commentary

The purpose of the Clinic’s amicus brief is to assist the court with regard to a proper, comprehensive fair use analysis, and to prevent the possible harm that an overly broad interpretation of the fair use defense could bring.

In examining the first factor of fair use, “purpose and character”, the district court unfortunately dedicated approximately two sentences to the analysis of why Violent Hues’ use was transformative in “function and purpose.” The district court simply stated that because the use was “informational,” and not “expressive” like Brammer’s use, the use was thus transformative. The proper examination requires looking at whether the new use adds something new “with a further purpose or different character.” As Judge Leval stated in his seminal article, Toward a Fair Use Standard, a different purpose or character, constituting a transformative use, is one that “alter[s] the first with new expression, meaning, or message,” and “employs the quoted matter in a different manner or for a different purpose from the original, thus transforming it.”

The district court failed to understand that Violent Hues’ use merely superseded Brammer’s. Violent Hues cropped the top and bottom of Brammer’s photo then posted it to its website with the purpose of showing the Adams Morgan neighborhood. A “wholesale taking” of the heart of the work, without adding additional value or meaning, is not transformative. The erroneous conclusion reached on this first factor destroys any meaning to transformative use and effectively erodes the exclusive rights held by copyright owners. To further illustrate this point, if the district court’s analysis is upheld, an author who writes a book regarding his life as president and his controversial pardon of a former political figure would have no recourse against a film producer who takes the author’s content verbatim and makes it into a movie. Why? Because the book is merely “informational,” while the film is “expressive” and thus transformative in function and purpose.

The district court’s opinion also addressed the role of “good faith” in a fair use defense and concluded that Violent Hues had acted in good faith when it found Brammer’s photo online because a copyright notice was not attached. This is not the law. Copyright protection under U.S. law is automatic from the moment of creation and notice need not be affixed to the published work for that protection to adhere. The good faith of alleged infringers is not frequently considered in fair use cases because “good faith” is not a statutory factor in the fair use analysis, and this has led to a lack of clear precedent on this point.

We proposed in our brief that if an alleged infringer acts in good faith, the court should neither weigh this factor for or against a finding of fair use. However, if an alleged infringer is shown to have acted in bad faith, using an artist’s work with the purpose of usurping the exclusive rights under 17 U.S.C. § 106, it should be weighed against a finding of fair use. Good faith should not weigh in favor of fair use because the purpose of the fair use defense is to protect First Amendment rights and allow limited uses of copyrighted works. On the other hand, bad faith should be weighed against a finding of fair use because trying to usurp an artist’s rights or using a work without paying for it does not align with the important purposes of the fair use defense.

Violent Hues did not act in good faith, but it also did not act in bad faith. Thus, the good faith factor should not have been considered at all in this case. A copyright notice is not required for a photograph to be protected. If the court allows Violent Hues’ lack of education on copyright law to be considered good faith, this would encourage internet users to remain ignorant of copyright law and infringe upon works more frequently. For these reasons, we asked the Fourth Circuit to clarify the role of the good faith factor in a fair use analysis.

The other factor our amicus brief addressed was the second factor of the fair use analysis. Digging into this factor, we asked that the court to clarify the analytical framework for evaluating the nature of the copyrighted work. In clarifying this framework, parties and other courts will be better able to determine when factual elements of copyrighted works are outweighed by the creative elements of such works. Brammer’s photo, specifically, is an appropriate vehicle for this since it combines creative and factual elements. Our brief articulates that a court can borrow from more familiar concepts of trademark’s nominative fair use and the defense of necessity to the tort of trespass on real property (noting that the prevailing theory of copyright is a property). Such theories provide for a defense on the basis of “necessity.”

In this analysis of necessity, one would believe that content in the factual lexicon would lean strongly toward a finding of fair use for the alleged infringer. However, where the use of the copyrighted work is not necessary to convey the same factual content, the motivation behind copyright law should be preserved—rewarding and protecting creativity. Brammer’s photo was a time-lapse photo of the Adams Morgan neighborhood; it was creative and depicted a factual setting. However, the mere fact that an original, creative work is factual does not imply that others may freely copy it.

The district court improperly analyzed this second factor in light of Violent Hues’ use of the photo, and not the intended use of the content creator, giving greater weight to the fact that the photo depicted a real-world location. We argued that this analysis “sanctions abuse of the fair use defense to appropriate copyrighted material so long as the user can claim that a factual element within the whole was the reason for their unauthorized appropriation.” The appropriate analysis centers on the concept of protecting creative elements while simultaneously not limiting the public’s use of facts. In the case at hand, Violent Hues’ use of Brammer’s photo to convey factual information about Adams Morgan was unnecessary because to convey the same message, and arguably in a more factual manner, Violent Hues could have driven to Adams Morgan to take its own snapshot of the neighborhood.

Finally, the district court’s determination that prior publication weighs in favor of a fair use is erroneous. As Patry on Fair Use provides: “The fact that a work is published does not mean that the scope of fair use is broader.” To state that publishing a copyrighted work broadens the scope of fair use renders the exclusive rights afforded to copyright owners null. Such a holding undermines the “special reward” of copyright protection and discourages creation of works—in stark contrast to the affirmative statements on copyright in the U.S. Constitution. Publication should be viewed as neutral until it can be considered under the fourth factor of the fair use analysis, wherein a court examines the impact of the alleged infringing use on the market for the copyrighted work. The district court’s simplistic approach to its analysis allows for parties to undermine the core purposes of copyright protection and, again, eviscerates a proper fair use analysis.

It is our hope that our amicus brief will help guide the Fourth Circuit as it assesses the extent of the fair use doctrine in the digital age. We are especially thankful to Antigone Peyton and David Johnson of Protorae Law, Terrica Carrington of the Copyright Alliance, and Professor Sandra Aistars of the Arts & Entertainment Advocacy Clinic for the opportunity to work on this important issue. To read our amicus brief, please click here.

*Rachelle Mortimer and Grant Ossler are students at Antonin Scalia Law School, where they study under Professor Sandra Aistars in the Arts & Entertainment Advocacy Clinic.

Categories
Innovation Patent Law Pharma

A Cure Worse Than the Disease? Proposed Changes to European Patent Law are Threatening Pharmaceutical Innovation

a hand reaching for a hanging, shining keyInnovation is all around us. We love and appreciate the latest video games, software apps, and smartphones. We await the integration of self-driving cars and other forms of artificial intelligence. Beyond the gadgets and luxuries we think we can’t live without, there are even more essential products that affect the lives of millions around the world on a daily basis. Patented medicines are at the top of the list of innovations that save lives and preserve the quality of life. Unfortunately, some proposed changes to European patent law are jeopardizing the development and delivery of safe and effective drugs, threatening jobs and innovation, and putting global public health at risk.

Policy-makers and the public acknowledge that balance is critical in the legal regimes governing essential medicines. Our generation is the beneficiary of patent protections which strike a balance. European regulators have long acknowledged that the benefits of new cures (e.g., arising from the research and development of therapies) require a societal investment in the form of intensive capital resources and strong intellectual property protection. In turn, a balanced system includes a reasonable patent term as a quid pro quo for the public disclosure of knowledge and the follow-on generic industry.

The medicines sector highlights the need for that careful balance, as well as the success of the current legal regime. New drug research and the development of new cures is extremely capital intensive. Legions of European scientists, engineers, and clinicians can work for years on a new drug’s development and regulatory review. A recent Tufts University center study reports that, on average, more than $2.6 billion is spent on R&D for a new prescription drug that gains market approval; the life-cycle cost rises to $2.9 billion when other post-approval development costs are included.[1] This is a 145% increase, correcting for inflation, over the estimate the center made in 2003.

In practice, for every drug that is successfully developed, reviewed, and made available to patients, many dozens more fail. CPIP Senior Scholar Erika Lietzan has observed:

The overall attrition rate for new drugs remains high—‘horrendously high’ according to [U.S.] NIH Director Francis Collins—and may be increasing. Recent estimates place the phase 2 failure rate at sixty-five to seventy percent and even higher for drugs with new mechanisms of action.[2]

Due to this high failure rate and costly investment in R&D, well-balanced intellectual property rights are essential for innovators to commercialize the products that do make it to market and improve—or even save—consumers’ lives.

Medicines must be safe and effective, and while regulatory review is essential, it is a time-consuming and highly expensive process. The reality is that the essential patent term is eaten away by years of regulatory review delay.[3] This extra review process is what makes the investment and research questions in the bio-pharmaceutical space so different from a smartphone or the latest virtual reality entertainment software. Professor Lietzan christened this the “innovation paradox.” She explains:

In medicine today, we face an innovation paradox. Companies that develop new medicines depend on a period of exclusive marketing after approval, to fund their research and development programs. This period is made possible by patent protection and regulatory data exclusivity.[4]

Likewise, it is the reason that there needs to be some supplementary legal protection to raise new capital and investments for cures and therapies.

The practical effect is that the necessary regulatory review results in the loss of years of effective patent term protection, warranting special treatment for innovative pharmaceutical products that come to market with little time to realize the benefits of exclusivity. In the 1990s, European policy-makers successfully restored the balance between innovation and the public interest by establishing the Supplementary Protection Certificate (SPC), which provides limited exclusive legal protection after a patent’s expiry.

Supplemental Protection Certificates Ensure a Necessary Balance

Supplementary Protection Certificates (SPCs) reinforce the balance between the rights of innovators and the public by extending the exclusive term for a variety of compounds, e.g., human and veterinary medicines and plant products. SPCs provide a limited extension of legal protections (e.g., exclusivity capped at five-and-one-half years) to compensate for the patent term effectively lost during the regulatory review process to ensure safety and efficacy.

Since SPCs were established, it is estimated that more than 20,000 SPCs for patented products have been filed in Europe during the period 1991–2016.[5] Despite the SPC’s twenty-plus-year track record of success, it, and the balance it preserves, is coming under pressure due to special interest lobbying by the generic drug industry.

The European Commission (EC) recently proposed waiving the SPC for pharmaceuticals and biosimilars[6] and permitting limited generic drug protection via the following two provisions prior to the SPC’s expiration:

(1) The “Manufacturing Provision.” This proposal would “allow EU generic or biosimilar manufacturers to develop and store generic or biosimilar manufacturers in Europe . . . with the goal of enabling immediate generic or biosimilar market entry following the expiration of intellectual property protections . . . .”

(2) The “Export Provision.” This proposal would “allow generic or biosimilar manufacturers to export products to countries where no intellectual property protection for the products is in place.”

While these two proposals are touted as limited in scope, their impact would be significant and detrimental on many fronts across Europe, including for the public health, innovation, jobs, and trade.

The Dangerous Impact of SPC Waiver

The overall impact of the SPC waiver threatens the balance that has worked so well for twenty-plus years, plain and simple. Specifically, the negative impact and risks are evidenced through the inherent complexity of a medicine’s regulatory review process, undermining the public health via counterfeit medicines, and harming Europe’s economy and jobs.

a. Risks of Limiting Innovation for a Variety of Important New Compounds and Cures

 

The most important reason to preserve the current balance is that it is a proven path to develop new medicines for the public’s health. Recently, a commentator highlighted two critical medicines that would not be available to patients, but for the opportunity afforded by the SPC process: (1) Fingolimod (a drug to treat renal failure after a kidney transplant that was subsequently brought to the market for the treatment of multiple sclerosis (MS)); and, (2) Secukinumab (a treatment of psoriasis, psoriatic arthritis, and ankylosing spondylitis (a type of spinal arthritis) that required an extended, more complicated clinical trial review period).[7] In both cases, the benefits of the additional period of exclusivity under the SPC provided the necessary time and resources for the follow-on clinical trials and research for the medicine’s safety and efficacy review.

Ultimately, SPCs benefit capital intensive pursuits, such as new drug discovery and development, by yielding new drugs or new applications for such drugs. More importantly, the patients who need these drugs clearly benefit. As Europe looks to an aging population and increasing health care costs, there is an ever growing need for effective cures for diseases such as HIV/AIDS, Alzheimer’s, multiple sclerosis (MS), cancers, and others requiring orphan drugs.[8] The SPC system is an important part of how the next generation of pioneering life-saving medicines will come into being.

b. Risk to the Public Health and Safety Through Counterfeit Medicines

 

Another key concern for stakeholders and the public at-large resulting from the current proposals is the inevitable increase of piracy and counterfeiting of these medicines. Global piracy and counterfeiting of medicines is big business. A 2016 study estimated that drug piracy costs Europe more than €10 billion each year, may result in the loss of up to 40,000 direct jobs, and may have a total direct and indirect negative impact of over €17 billion and 90,000 job losses.[9]

In addition to the significant financial impact, piracy and counterfeiting is a matter of public health and safety. It is often the case that the counterfeit medicines are manufactured without sufficient quality controls, or worse, with unsafe or dangerous substitute ingredients. The SPC Export Provision waiver heightens the risk that poor quality or unsafe counterfeits will be diverted across borders. Counterfeit drugs are a massive public health risk throughout Europe and big business for criminal enterprises that either ship fake, unsafe medicine or divert counterfeits across borders trying to profit on the product demand and price differentials among nations.

The SPC Export Provision waiver will ultimately increase medicines piracy and counterfeiting on many grounds, including making it difficult to distinguish between medicines produced legally in one country and other jurisdictions without adequate IP protection, making it difficult to prevent product diversion, and diminishing quality control due to infringement.

c. The European Economic Case: Jobs and Trade

 

Europe boasts a first-class research-based pharmaceutical industry which is estimated to have invested €31.5 billion in R&D in 2015 alone.[10] The leading European countries which contribute to this annual R&D investment include Germany, France, Italy, Spain, and the U.K. The research industry trade association, EFPIA, explains some of the economic benefits of the SPC regime:

The SPC is part of an incentives framework that helps to generate the 35 billion in investment in R&D in Europe by the research-based industry. . . . It helps to safeguard over 750,000 jobs directly employed by biopharmaceutical companies and critically facilitates, research into unmet medical needs, finding treatments and cures for patients across Europe and beyond.[11]

R&D Investment in Europe (2016). Germany, 19%. France, 15%. Italy, 4%. Spain, 3%. U.K., 16%. Rest of Europe, 43%.

European Pharmaceutical Industry: Recent Trends and Statistics[12]

Evaluating the economic factors around an industrial policy proposal—new manufactured units, SMEs, direct and indirect jobs—is a legitimate part of the policy debate. In the public health context, it is one of several factors for policy-makers. Both sides of the debate have offered competing economic analyses of the impact of the waiver.[13] However, the past is prologue, and Europe has 20-plus years of a positive economic experience with the SPC regime.

Today’s debate over the SPC waiver is reminiscent to biotechnology patentability debates in the 1980s that weakened intellectual property rights and drove innovative activity out of Europe. As a recent article explains, the legal choices made by Europe during that crucial era led to an irreparable loss of its technological global leadership in the biotech and health care arena:

Europe lost the competitive and commercial edge in biotechnology to the U.S., which had the foresight to protect a new and innovative industry. This new industry both revolutionized modern medical research and healthcare treatments and brought economic growth to the many U.S. cities in which these new companies sprouted and flourished.[14]

Likewise, additional commentators warn that an SPC waiver poses a threat to Europe’s global competiveness: “Europe is becoming an innovation backwater, easily outspent on R&D by peer nations such as the United States, Japan, South Korea and Australia, according to the 2017 European Innovation Scorecard.”[15] While there are allegations that the SPC waiver would be beneficial for European jobs and its economy, this has been debunked for their flawed methodology or extreme overstatement of the facts.[16]

Conclusion

The EC’s proposed SPC waiver provisions are a cure far worse than the disease. The policy debate around this subject boils down to whether Europe wants a strong or a weak health care system for its citizens. The purported goals advanced by special interest tactics certainly sound noble: more competition, lower prices. In fact, the opposite ignoble result is an inevitable undermining of the incentives for the discovery and development new medicines.

The EC should reconsider the proposed waiver for many reasons. The current SPC system offers a successful twenty-year-plus track record. It respects the balance between patients and the medicines innovation ecosystem. The waiver will directly stifle innovation in the guise of fostering competition, as well as dampen the future of innovative medicines and harm the European economy. One must conclude that the SPC waiver should be reconsidered for the sake of the public health and future well-being of the European citizenry.

[1] https://www.scientificamerican.com/article/cost-to-develop-new-pharmaceutical-drug-now-exceeds-2-5b/.

[2] Erika Lietzan, The Drug Innovation Paradox, 83 Missouri Law Review 39 at 78-79 (2018) (describing the U.S. regime), available at https://ssrn.com/abstract=2948604.

[3] Id. at 59 (“Through the 1970s, as the modern new drug premarket paradigm took shape, scholars and policymakers became aware of diminishing effective patent life. Because inventors typically file active ingredient patent applications before clinical testing starts, these patents tend to issue before or during the trials. At the time, a patent lasted for seventeen years from issuance. Today, it generally lasts for twenty years from the filing of the patent application. In either case, a significant portion of the term of an active ingredient patent may lapse before FDA approves the marketing application. This shortens the period of time that the drug sponsor may exploit the invention in the market while enjoying patent rights.”).

[4] Id.

[5] Malwina Mejer, 25 years of SPC protection for medicinal products in Europe: Insights and challenges (May 2017), available at https://ec.europa.eu/info/publications/25-years-spc-protection-medicinal-products-europe-insights-and-challenges_en.

[6] The European Medicines Agency (EMA) explains that “[a] biosimilar is a biological medicine highly similar to another already approved biological medicine (the ‘reference medicine’). Biosimilars are approved according to the same standards of pharmaceutical quality, safety and efficacy that apply to all biological medicines. The European Medicines Agency (EMA) is responsible for evaluating the majority of applications to market biosimilars in the European Union (EU). Biological medicines offer treatment options for patients with chronic and often disabling conditions such as diabetes, autoimmune disease and cancers.” Available at https://www.ema.europa.eu/en/human-regulatory/overview/biosimilar-medicines-overview.

[7] Nathalie Moll, Betting on innovation, the case for the SPC, available at https://www.efpia.eu/news-events/the-efpia-view/blog-articles/betting-on-innovation-the-case-for-the-spc/.

[8] The European Medicines Agency (EMA) notes that “[a]bout 30 million people living in the European Union (EU) suffer from a rare disease. The [EMA] plays a central role in facilitating the development and authorization of medicines for rare diseases, which are termed ‘orphan medicines’ in the medical world.” Available at https://www.ema.europa.eu/en/human-regulatory/overview/orphan-designation.

[9] http://www.pharmexec.com/counterfeit-drugs-cost-europe-more-10-billion-year.

[10] https://www.ihealthcareanalyst.com/european-pharmaceutical-industry-recent-trends-statistics/.

[11] https://efpia.eu/news-events/the-efpia-view/statements-press-releases/efpia-statement-on-the-implementation-of-the-spc-manufacturing-waiver/.

[12] https://www.ihealthcareanalyst.com/european-pharmaceutical-industry-recent-trends-statistics/.

[13] http://ecipe.org/blog/ec-spc/; https://www.medicinesforeurope.com/newsroom/.

[14] Kevin Madigan & Adam Mossoff, Turning Gold Into Lead: How Patent Eligibility Doctrine is Undermining U.S. Leadership in Innovation, 24 Geo. Mason L. Rev. 939 (2017) (“We believe these are sensible provisions to avoid weakening Europe’s IP framework further, particularly in today’s context of intense global competition for pharmaceutical research and development investment.”), available https://ssrn.com/abstract=2943431.

[15] See, e.g., Philip Stevens, The European Commission’s pharmaceutical innovation incentives review is at risk of serious overreach, available at http://ecipe.org/blog/ec-spc/.

[16] Sussell et al, Reconsidering the economic impact of the EU manufacturing and export provisions, J. of Generic Medicines, 1-17. (citing arithmetic error and providing a counter factual analysis of the unit, job, SME, and economic benefits in a recent generic industry study praising the SPC waiver proposal).

Categories
Patent Law Patent Theory

Proposed Misuse of Section 1498 Relies on the False Claim that Patents Are Not Property

hand under a lightbulb drawn on a chalkboardBy Kathleen Wills*

The question whether patents are property rights is a continuing and hotly debated topic in IP law. Despite an abundance of scholarship (see here, here, here, here, and here) detailing how intellectual property (“IP”) rights have long been equated with property rights in land and other tangible assets, critics often claim that this “propertarian” view of IP is a recent development. Misconceptions and false claims about patents as property rights have been perpetuated in an echo chamber of recent scholarship, despite a lack of evidentiary support.

Unfortunately, these misleading arguments are now influencing important pharmaceutical patent debates. Specifically, a new push to devalue patent rights through the misapplication of an allegedly obscure and misunderstood statute, Section 1498 in Title 28 of the U.S. Code (“Section 1498”), is now being used to promote price controls. Arguments for this push have gained traction through a recent article whose flawed analysis has subsequently been promoted by popular media outposts. A better understanding of the nature of patents as property reveals the problems in this argument.

The history of Section 1498 clearly contemplates that patents are property subject to the Takings Clause, which reflects a long-standing foundation of patent law as a whole: Patents are private property. In an influential paper, Professor Adam Mossoff established that from the founding of the United States, patents have been grounded in property law theories. While some scholars today argue that the perception of patents began as monopoly privileges, this is only partially correct.

The arguments usually revolve around certain stated views of Thomas Jefferson, but they ignore that his position was actually a minority view at the time. Even when the term “privilege” was used, it reflected the natural rights theory of property that a person owns those things in which he invests labor to create, including labors of the mind. The term did not reflect a discretionary grant revocable at the will of the government. Thus, an issued patent was a person’s property, as good against the government as against anyone else.

To understand the majority perspective of courts in the nineteenth century, it is important to note that James Madison, the author of the Takings Clause, wrote that the “[g]overnment is instituted to protect property of every sort.” What types of property? Courts often used real property rhetoric in patent infringement cases, as seen in Gray v. James. By 1831, the Supreme Court believed that patent rights were protected just like real property in land was protected. In Festo Corp. v. Shoketsu Kinzoku Kogyo Kabushiki Co., the Court established that patent rights represent legitimate expectations similar to property rights in land, which, in turn, are rights secured under the Takings Clause of the Constitution.

This understanding of patents reflected a stark break from the traditions in English law from which American law developed. In England, the “crown-right” granted the government the right to practice a patented invention wherever and however it pleased. In 1843, the Supreme Court in McClurg v. Kingsland explained that while England viewed a patent as “a grant” issued as a “royal favor,” which could not be excluded from the Crown’s use, the American system was intentionally different and patent rights were good against the government. This meant that Congress had to treat patents as vested property rights in the patent owner.

Justice Bradley enumerated this difference between the United States and England in James v. Campbell:

The United States has no such prerogative as that which is claimed by the sovereigns of England, by which it can reserve to itself, either expressly or by implication, a superior dominion and use in that which it grants by letters-patent to those who entitle themselves to such grants. The government of the United States, as well as the citizen, is subject to the Constitution; and when it grants a patent the grantee is entitled to it as a matter of right, and does not receive it, as was originally supposed to be the case in England, as a matter of grace and favor.

As an article by Professor Sean O’Connor explains, this change occasionally caused confusion in American courts when it came to patent owners seeking redress against unauthorized government use. The problem was that there was no single clear mechanism for suing the federal government for injunctive or monetary relief—in fact under sovereign immunity principles, in many cases the plaintiff could not sue the government. Various mechanisms such as implied or quasi contracts were used, but the varying nature of patentees—had they received some government funding leading to their invention or developed it purely outside of government support—complicated things further.

To provide a venue where citizens could sue the government for patent infringement and other claims, Congress created the Court of Claims in 1855. In 1878, the Court of Claims in McKeever v. United States explained that in the United States, patent rights secured the “mind-work which we term inventions,” authorized under the Copyright and Patent Clause in the Constitution. By explaining that patent rights derived from Article I in the Constitution, the Court of Claims suggested that patents were as important as other property rights and thus different from grants. Prof. O’Connor shows that the status of patents as property, and the recognition of this fact by the courts, solved much of the confusion over the history of American patent law.

The Supreme Court went on to affirm the Court of Claims’ decision to award damages to a patentee for an unauthorized governmental use of his patented invention. In United States v. Burns, the Court said that “[t]he government cannot, after the patent is issued, make use of the improvement any more than a private individual, without license of the inventor or making compensation to him.” In James v. Campbell, the Supreme Court echoed this idea when it held that patents confer owners an exclusive property in their invention, and that the government cannot use such an invention without just compensation any more than the government could appropriate land without compensation.

By 1881, it was clear that the courts recognized patents as property rights under constitutional protection from government takings, just like real property. With a strong historical record showing that the Supreme Court equated patents as protected property rights, a question remains: Where does the confusion today stem from?

As Prof. Mossoff explains, the confusion could come from misconstrued inferences of legislative intent regarding the Tucker Act (“Act”). The 1887 version of the Act did not address patents when giving the Court of Claims jurisdiction to hear claims arising from Constitution. This was used by the Federal Circuit in Zoltek Corp. v. United States to deny patents security under the Takings Clause. The Federal Circuit reasoned that patents weren’t constitutional private property. Judge Newman, however, dissented from the petition for rehearing en banc. She highlighted that “[a]lmost a century of precedent has implemented the right of patentees to the remedies afforded to private property taken for public use. There is no basis today to reject this principle.” (The Takings Clause analysis was subsequently vacated when the Federal Circuit eventually took the case en banc.)

An investigation of the Act’s legislative history also leads to a 1910 committee report (H.R. Rep. No. 61-1288), stating that the government’s unauthorized use of patents qualified as a taking. A few years after, the 1918 amendment adjusted the Act’s language to specifically allow patentees to sue the government for unauthorized uses of their property. Thus, the Tucker Act included patent claims in the kind of suits where the government’s unauthorized use was a constitutional issue, appropriately within the Court of Claims’ jurisdiction. Towards the end of the twentieth century, courts continued to hold that patents were constitutionally protected private property.

Modern cases have also confirmed that patents are property protected by the Takings Clause. Chief Justice Roberts, in Horne v. Department of Agriculture, used a patent case for the proposition that the Takings Clause extends to all forms of property, not just real property. Even in Oil States v Greene’s Energy, Justice Thomas went out of his way to assert that the Takings Clause still applies to patents, citing the same case cited by the Chief Justice in Horne.

There has always been a continuous understanding that patents are property, and thus, that Section 1498 is the eminent domain mechanism for the use of patents for the government’s own purposes. Popular media has recently misunderstood Section 1498, but the statute is not a price control statute as detailed in a previous post in this series. Additionally, forthcoming posts in this series will address other such misconceptions surrounding Section 1498.

*Kathleen Wills is a 2L at Antonin Scalia Law School, and she works as a Research Assistant at CPIP

Categories
Copyright Innovation Patent Law

VIDEOS: Panel Presentations from the CPIP 2018 Fall Conference

2018 Fall Conference flyerOn October 11-12, 2018, CPIP hosted its Sixth Annual Fall Conference, IP for the Next Generation of Technology, at Antonin Scalia Law School, George Mason University, in Arlington, Virginia.

After the breakthrough technology that gave us the mobile technology revolution of the past fifteen years, another leap forward in technology is about to break out into consumer products and services. Our panelists addressed how IP rights and institutions can foster and support this technological advance and considered how IP helps creators, inventors, the creative industries, and the innovation industries move forward.

We are grateful for the panelists, moderators, and audience members who made our Sixth Annual Fall Conference such a huge success, and we hope you will enjoy the videos!

PANEL 1: NEW TECHNOLOGIES, BUSINESS MODELS, AND STANDARDS

  • Jim Harlan, Senior Director, Standards and Competition Policy, InterDigital
  • Anne Layne-Farrar, Vice President, Charles River Associates
  • Robert Sachs, President, Robert R. Sachs PC
  • Prof. Ted Sichelman, University of San Diego School of Law, Senior Scholar, Center for the Protection of Intellectual Property
  • Moderator: Prof. Kristen Osenga, University of Richmond School of Law, Senior Scholar, Center for the Protection of Intellectual Property

PANEL 2: NEW/SHIFTING BUSINESS MODELS FOR THE CREATIVE INDUSTRIES

  • Troy Dow, Vice President & Counsel, The Walt Disney Company
  • Prof. Eric Priest, University of Oregon School of Law, Senior Scholar, Center for the Protection of Intellectual Property
  • Jessica Richard, Vice President, Federal Public Policy, Recording Industry Association of America
  • Nicola Searle, Digital Economy Fellow & Senior Lecturer, Goldsmiths, University of London
  • Moderator: Prof. Sandra Aistars, Antonin Scalia Law School, George Mason University, Director of Copyright Research and Policy & Senior Scholar, Center for the Protection of Intellectual Property

PANEL 3: NEW/SHIFTING BUSINESS MODELS FOR THE INNOVATION INDUSTRIES

  • Prof. Jonathan Barnett, USC Gould School of Law, Senior Scholar, Center for the Protection of Intellectual Property
  • Henry Hadad, Senior Vice President & Deputy General Counsel, Bristol-Myers Squibb
  • Prof. Erika Lietzan, University of Missouri School of Law, Senior Scholar, Center for the Protection of Intellectual Property
  • Jake Mace, Vice President of Licensing, Dominion Harbor
  • Moderator: Prof. Christopher Holman, University of Missouri-Kansas City School of Law, Senior Scholar, Center for the Protection of Intellectual Property

PANEL 4: A DIFFERENT PERSPECTIVE ON BIG DATA

  • Prof. Ryan Abbott, School of Law, University of Surrey
  • Robert Atkinson, Founder & President, Information Technology and Innovation Foundation
  • Prof. Michael Smith, Heinz College, Carnegie Mellon University
  • Marian Underweiser, Senior Counsel, IBM Research
  • Moderator: Prof. Robert Ledig, Antonin Scalia Law School, George Mason University

PANEL 5: THE FUTURE OF STANDARD SETTING, 5G, AND WHERE IT’S ALL HEADED

  • Kirti Gupta, Senior Director of Economic Strategy, Qualcomm
  • Prof. Adam Mossoff, Antonin Scalia Law School, George Mason University, Founder, Executive Director, & Senior Scholar, Center for the Protection of Intellectual Property
  • Richard Taffet, Partner, Morgan Lewis & Bockius LLP
  • Gregory Werden, Senior Economic Counsel, Antitrust Division, U.S. Department of Justice
  • Moderator: Prof. Sean O’Connor, Antonin Scalia Law School, George Mason University, Director of International Innovation Policy & Senior Scholar, Center for the Protection of Intellectual Property

PANEL 6: THE HISTORY OF IP AND TECHNOLOGICAL SHIFTS: LESSONS FROM THE ANCIENT HISTORY OF THE 1990S AND BEFORE

  • Prof. Bruce Boyden, Marquette University Law School
  • Prof. Joseph Gabriel, Florida State University College of Medicine
  • Prof. Justin Hughes, Loyola Law School, Los Angeles
  • Ron Katznelson, Founder & President, Bi-Level Technologies
  • Moderator: Prof. Ross Davies, Antonin Scalia Law School, George Mason University

Categories
Innovation Patent Law

Proposal for Drug Price Controls is Legally Unprecedented and Threatens Medical Innovation

dictionary entry for the word "innovate"By Adam Mossoff, Sean O’Connor, & Evan Moore*

The price of the miracle drugs everyone uses today is cause for concern among people today. The President has commented on it. Some academics, lawyers, and policymakers have routinely called for the government to “do something” to lower prices. The high prices are unsurprising: cutting-edge medical treatments are the result of billions of dollars spent by pharmaceutical companies over decades of research and development with additional lengthy testing trials required by the Food & Drug Administration. Earlier this year, though, the New York Times called for the government to use a federal law in forcing the sale of patented drugs by any private company to consumers in the healthcare market, effectively creating government-set prices for these drugs.

The New York Times proposal was prompted by an article in the Yale Journal of Law and Technology, which asserts that this law (known as § 1498) has been used by the federal government in the past to provide the public with lower-cost drugs. This claim—repeated as allegedly undisputed by the New York Times—is false. In fact, the proposal to use § 1498 for the government to set drug prices charged by private companies in the healthcare market would represent an unprecedented use of a law that was not written for this purpose.

Let’s first get clear on the law that the New York Times has invoked as the centerpiece of its proposal: § 1498 was first passed by Congress over a hundred years ago. It was a solution to a highly technical legal issue of how patent owners could overcome the government’s immunity from lawsuits when the government used their property without authorization. What ultimately became today’s § 1498 waived the federal government’s sovereign immunity against lawsuits, securing to patent owners the right to sue in federal court for reasonable compensation for unauthorized uses of their property.

This law resolved vexing legal questions about standing and jurisdiction, securing to patent owners the same right to constitutional protection of their property from a “taking” of their property by the government under the Fifth Amendment as all other property owners. This short summary makes clear that § 1498 is solely to provide compensation for government use of patented invention; it is neither a price control statute nor a general license for government agencies to intervene in private markets.

This is confirmed by the text of § 1498, which provides that when a patented invention is “used or manufactured by” the government, the patent owner is owed a “reasonable and entire compensation.” Thus, § 1498 acknowledges that the government has the power to use a patent for government use as long as it pays reasonable compensation to the patent owner. The predecessor statute was initially limited to direct government use of the invention. But in 1918 it was amended to cover government contractors as well. The issue was that patentees were suing and obtaining injunctions for infringement by private contractors, which slowed important production of war materials during World War One.

Just as the initial statute precluded an injunction against the government—providing only for “reasonable and entire compensation” as the sole remedy—the amended statute further shielded government contractors by placing the sole remedy for the latter’s infringement on the government as well. This makes sense given that the private company was working at the behest of the government itself. Thus, central to any such defense was that the contractor needed to show that it was infringing the patent on the “authorization and consent” of the government. And, just as for the government’s direct infringement, the contractor’s infringement was covered only to the extent it was for legitimate government use. Any private market use by the private company placed its infringing uses outside the statute and thus the company was fully liable for regular patent remedies, including injunctive relief.

The article published in the student-edited law journal that precipitated the New York Times proposal misconstrues § 1498 because it engages in an economic sleight of hand, characterizing pharmaceutical patents as an unwarranted tax paid by the public. The underlying argument is that drugs are expensive due to monopoly pricing and any drug sold above its basic cost of production represents economic deadweight loss. This argument ignores one of the key economic functions of the patent system, which is to secure the opportunity for innovators to recoup extensive costs in R&D expenditures and which are not reflected in costs of production themselves, such as the more than $2 billion in R&D spent by innovative pharmaceutical companies in creating a new drug.

The argument by the journal article thus applies to any patent (and has been made against all patents by other critics of the patent system), but the authors limit their proposal to cases of “excessive” prices for certain drugs, such as the cutting-edge, groundbreaking Hepatitis C treatment that ranges from $20,000-$90,000 for a 12-week treatment plan. Section 1498, they argue, should be used not just for the government’s own use of patented drugs for military personnel or other public employees, but for any infringement of the patent approved by the government in the name of providing lower prices to the public.

If the article authors and the New York Times had their way, the federal government would simply declare that a drug is too expensive and thus it would preemptively authorize any private company to make and sell the drug more cheaply. The pharmaceutical company would sue the companies for patent infringement, and the government would intervene under § 1498, claiming that these companies are essentially contractors acting at the behest of the government. Under the legal rules governing payment of “reasonable compensation” under § 1498 and payment of “just compensation” under the Fifth Amendment, the property owner receives the “fair market value” for the unauthorized use.

To the article authors and the New York Times this means a minimal royalty based off the mistaken premise that the price comparison would be retail price of the drug if it were not covered by a patent (like a generic). But instead, § 1498 procedures routinely rule that the government must compensate the patent owner the full measure of patent damages as would have been awarded in a regular patent infringement trial. Section 1498 does not provide a back door, cheaper “compulsory license” even for appropriate government use. The article authors and the New York Times would like to ignore the innovating pharmaceutical company’s R&D expenditures incurred beforehand and have the government compensate the company at significantly less than what it would receive under normal circumstances.

Aside from the flawed economic and legal argument underlying this price-control proposal, it represents an unprecedented use of § 1498, despite the claims by the article authors to the contrary. In the article, the authors assert that § 1498 was used exactly in this way in the 1950s and 1960s. But this is false: the federal government has never used § 1498 to authorize private companies to sell drugs to private consumers in the healthcare market in the United States. In these cases, the Department of Defense (“DoD”) relied on § 1498 to purchase military medical supplies from drug companies that infringed patents. Statements from agency heads during congressional hearings at the time confirm that the DoD, NASA, and the Comptroller General all understood the law as applying to procurement of goods for government use.

In other words, the government has never relied on or argued that § 1498 applies outside of the federal government procuring patented goods and services for its own use by its own agencies or officials. This is also true for government contractors: § 1498 shields a contractor’s infringement only while it is working directly for the federal government, and thus the private company cannot deliver the goods or services directly to private markets. If the contractor does this, its infringement falls outside the scope of § 1498, and it can be sued as a matter of private right directly for patent infringement under the patent laws.

Despite this significant commercial and legal difference between private companies working as contractors for the federal government and private companies selling products in the marketplace, the article authors (and thus the New York Times) claim otherwise. The New York Times, for instance, asserts that “In the late 1950s and 1960s, the federal government routinely used 1498 to obtain vital medications at a discount.” The New York Times further asserts that § 1498 “fell out of use” due mainly to the lobbying efforts of pharmaceutical companies. This is false. The historical record is absolutely clear that government agencies and courts have all applied § 1498 only to situations of government procurement and its own direct use. It has never been used to authorize private companies infringing patents for the sole purpose of selling the patented innovation to consumers in the free market.

The question then becomes whether § 1498 permits the federal government to simply declare certain patented products to be “too expensive” and this then justifies the government to indemnify private companies under its sovereign immunity to infringe the patent in selling the drug in the private healthcare market on the basis of this allegedly public purpose. Section 1498 has never been used in this way before, including when the government purchased drugs in the 1950s and 1960s. The authors of the article in the Yale Journal of Law and Technology claim they “recover this history and show how § 1498 can once again be used to increase access to life-saving medicines.” But § 1498 was never used in this way historically—the federal government has never used this law to permit private companies to sell drugs to private consumers in the private healthcare market. This proposal is an unprecedented use of a law in direct contradiction to its text and its 100+ years of application by federal agencies and courts.

Perhaps the most surprising aspect of the New York Times proposal is that it refers to § 1498 as an “obscure” provision of the patent law. First, it is not a statutory provision in the Patent Act, but rather is part of the federal statutes authorizing the judiciary to hear lawsuits. This underscores the early point that § 1498 was merely a technical fix to an unintended loophole existing since the 19th century that prevented, or at least complicated, patent owners suing the government for unauthorized uses by officials or agencies—even as the courts routinely opined that patents are property and that government should have to pay for their use. Second, while § 1498 may be “obscure” to the public at large, patent lawyers and government lawyers know this law very well. It is the bread and butter of government contract work and the legal basis of hundreds, if not thousands, of lawsuits against the federal government for over a century.

As the courts have long recognized, § 1498 is an eminent domain law. It provides a court with the authority to hear a lawsuit and award just compensation when the federal government or a person acting directly at its behest as its agent or contractor uses a patent without authorization. Section 1498 does not grant the government a new power to authorize infringement of a patent for the sole purpose of a company selling a product at a lower price in the market, effectively imposing de facto government price controls on drugs. The proposal in an academic journal and repeated by the New York Times to use § 1498 in this way is unprecedented. Even worse, it threatens the legal foundation of the incredible medical innovation in this country created by the promise to pharmaceutical companies of reliable and effective patent rights as a way to secure to them the fruits of their innovative labors.

*Evan Moore is a 2L at Antonin Scalia Law School, and he works as a Research Assistant at CPIP.