Tag: Fifth Amendment

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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
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.