Tag: Section 1498

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Copyright Innovation Patents Pharma

IP Industries Step Up in This Time of Crisis

the word "inspiration" typed on a typewriterThe global COVID-19 pandemic has challenged multiple aspects of modern society in a short time. Health and public safety, education, commerce, research, arts, and even basic government functions have had to change dramatically in the space of a couple months. Some good news in all this is the response of many companies in the intellectual property (IP) industries: they are stepping up to make sure crucial information and materials are available to speed research and development (R&D) towards vaccines, therapeutics, and medical devices. This blog post gives a sampling of the current initiatives facilitating the best innovative work the world has to offer.

Bio-pharmaceutical companies

Bio-pharmaceutical (bio-pharma) companies have been leading the charge, collaborating with academic and government partners to advance vaccine and therapy candidates on a fast track. While there have been isolated stories of some IP-related issues for rapid deployment and use of medical devices such as ventilators, the overall message is clear that research, development, and deployment have not been hindered by IP rightsholders. In fact, problems for distribution of medicines, personal protective equipment, and medical devices have little to do with IP rights but rather with hoarding and nationalistic impulses by governments.

Examples of rapid response are abundant. In February, the Department of Health and Human Services and its Biomedical Advanced Research and Development Authority (BARDA) partnered with the Janssen Research & Development unit of Johnson & Johnson to investigate a promising vaccine candidate. Janssen also committed to invest in the scale-up of production and manufacturing capacities to produce the vaccine candidate if it succeeds through clinical trials. By mid-March, 50 drugs that might fight the virus had been identified by collaborations of hundreds of scientists. Research continues apace and 80 clinical trials are proceeding, some on fast track status including a potential vaccine.

Beyond its core R&D, regulatory, manufacturing, and distribution mission, the bio-pharma industry is providing direct support to many places in need. This includes donations of medical supplies and personal protective equipment (PPE), existing treatments and medicines, and monetary and in-kind support.

At the same time, private incentives are more important than ever to get novel vaccines, drugs, and devices out to the world in safe, efficacious form and at scale. Dr. Anthony Fauci, Director of the National Institute of Allergy and Infectious Diseases, has long recognized that exclusive licenses of IP to bio-pharma industry partners are necessary to get innovative vaccines and drugs to the public:

“We always need a pharmaceutical partner,” [Fauci] told CQ Roll Call in October 2017. “I can’t think of a vaccine, even one in which we’ve put substantial intellectual and resource input, that was brought to the goal line without a partnership with industry. So this is a very natural process that we’re doing right now.”

He argued that for vaccines like Zika, which might predominantly be used in low-income countries, drugmakers don’t see a lot of financial incentive to get involved, which is why the NIH needs to grant exclusive licenses. But he argued that the process hasn’t had an impact on vaccine affordability.

“I have not seen in my experience situations in which we were involved in the development of a vaccine, particularly for low- and middle-income countries that really needed it, where the pharmaceutical companies priced it out of their reach,” Fauci said.

Likewise, as noted innovation scholars Daniel J. Hemel and Lisa Larrimore Ouellette point out in a recent article, Innovation Policy Pluralism, multiple vectors of public and private incentives and resources work together to advance pioneering innovation. Even in countries with a national health or single payer system, the government health program does not manufacture vaccines, drugs, or devices. Instead, it relies on private firms that in turn work closely and well with public and academic researchers to identify pressing problems, locate relevant basic science advances, and then translate those into actual vaccines, therapies, or devices.

The myth of patients and the public “paying twice” for bio-pharma innovation arising from public-private partnerships is pernicious. It conflates the distinction between basic science research and drug or vaccine candidates, on the one hand, with compounds that can be produced at scale, distributed safely, and that have passed arduous clinical trials to demonstrate safety and efficacy. In the United States, private companies must foot the entire bill for these clinical trials, which run into hundreds of millions of dollars over three phases that enroll thousands of subjects. Simply stated, publicly funded research does not result in a substance or compound that can be manufactured and distributed as is with no further R&D or clinical trials.

A related myth is that governments should use compulsory licenses and similar mechanisms to bypass IP rights holders in an effort to speed research and delivery of drugs and vaccines—when they emerge—to the public at low to no cost. First, there are important distinctions between compulsory licenses, U.S. Bayh-Dole style march-in rights, and government use under statutory provisions like 28 USC 1498, which we have outlined here. But across all of them, IP rights holders must still be compensated at a fair market license rate. Thus, there are no “savings” of IP royalties that could lower the price of vaccines or drugs. This makes sense as we don’t force manufacturers to produce drugs or vaccines for free. Even the Defense Production Act merely directs production, it does not require manufacturers to produce goods for free.

Finally, even if patents could be disregarded, we should be careful about encouraging “open source” or amateur production of regulated devices like ventilators. While the FDA has authorized some limited modifications of approved ventilators to accommodate the exigencies of COVID-19, this does not create a free-for-all in which wholesale changes or entirely new designs of the device or its components can be used. We need to take care that these modifications or new designs are actually safe and efficacious. Thus, while innovation like that of famed inventor James Dyson is most welcome, it does not actually solve the immediate problem of a shortage of ventilators as national regulators must still test and approve these untested devices for medical use. And at any rate, Dyson is not offering their new ventilators for free, even as they are designed to be produced at lower costs and sell at a lower point price in the market.

Thus, we need the bio-pharma industry more than ever to get through this pandemic. Large established firms and nimble start-ups have the resources and expertise to innovate and produce vaccines, drugs, and devices that will pass regulatory muster for safety and efficacy. Now is not the time to attack the patent system and weaken incentives for full-steam-ahead bio-pharma and medical device R&D.

Scientific publishing

Similar to the bio-pharma companies, publishers have been leading the way in making crucial scientific and technological information widely available in order to help fight the global coronavirus pandemic. An open letter from Kelvin Droegemeier, Director of the White House Office of Science and Technology Policy (OSTP) and member of President Trump’s Coronavirus Task Force, issued the call to arms last month (for example, see here, here, and here). Joined by government science leaders from eleven other countries—Australia, Brazil, Canada, Germany, India, Italy, Japan, Republic of Korea, New Zealand, Singapore, and United Kingdom—the letter called for publishers to make all research and data related to the coronavirus available immediately to the public. Publishers were quick to respond positively to the letter, pointing out that many journals had already been opened up to the public in an effort to support the dissemination of important scientific research and data when it is needed the most.

In the letter, the government science leaders stated: “To assist efforts to contain and mitigate the rapidly evolving COVID-19 pandemic, basic science research and innovation will be vital to addressing this global crisis. Given the urgency of the situation, it is particularly important that scientists and the public can access research outcomes as soon as possible.” The leaders asked the publishers to voluntarily agree to make their coronavirus-related publications, and the data supporting them, immediately accessible in PubMed Central and other public repositories. PubMed Central refers to the digital archive of biomedical and life sciences journal literature at the U.S. National Institutes of Health’s National Library of Medicine. The leaders also requested that the information be made available in both human and machine-readable format to allow for text and data mining using artificial intelligence.

The same day that the government science leaders sent their letter, Maria Pallante, President and CEO of the Association of American Publishers (AAP), issued a statement noting that the organization and its members would be happy to continue doing their part in making the research and data available to the public:

Publishers purposefully and continuously contribute to the advancement of science and medicine by investing billions of dollars in producing and disseminating high-quality, peer-reviewed journal articles. In this urgent and serious environment, we are grateful to the many publishers who are doing their part to communicate valuable discoveries, analyses, and data as quickly as possible, including by making their copyrighted articles pertaining to the virus freely available for public use during this crisis, in both text and machine-readable formats. Many publishers – both commercial companies and nonprofit societies – have been doing so for weeks.

 

Likewise, Elsevier, which specializes in publishing global information on science and health, has taken the lead in ensuring that relevant scientific information is available to the public. Back in January, Elsevier set up its Novel Coronavirus Information Center, offering free health and medical research information on the coronavirus and COVID-19, the disease that is causes. The Information Center is updated daily with the latest research information, including links to nearly 20,000 peer-reviewed journal articles on its ScienceDirect platform that are curated by clinicians and other experts. The information is intended for use by practitioners, such as nurses and doctors, as well by patients and their families. In response to the letter from the government science leaders, Elsevier announced in a press release that same day that the information would be made available to PubMed Central and other publicly funded repositories, including in machine-readable format that could be used for full text and data mining.

Kumsal Bayazit, the CEO of Elsevier, also released a statement that day underscoring Elsevier’s continued leadership on this front and concluding:

In working with the White House to improve the discoverability and utility of this important body of knowledge, we are now making it available to PubMed Central and other publicly funded repositories such as the WHO COVID database for full text and data mining and without any limitations for as long as needed while the public health emergency is ongoing. Through this partnership we hope to help researchers to keep up with the rapidly growing body of literature and identify trends as countries around the world address this global health crisis.

 

Numerous other publishers have stepped up as well. Wiley announced that it “is making all current and future research content and data on the COVID-19 Resource Site available to PubMed Central” and “other publicly funded repositories, such as the World Health Organization (WHO) COVID-19 database and Wellcome Trust.” The Resource Site was set up by Wiley in February in order to ensure rapid, public access to COVID-19 research, and in response to the request of the government science leaders, Wiley is now inputting that information into PubMed Central and other publicly-accessible databases. Likewise, Springer Nature stated: “We have made available, for free, all relevant research we have published and continue to publish, [and] are strongly urging our authors submitting articles related to this emergency to share underlying datasets relating to the outbreak as rapidly and widely as possible.” Other publishers, such as American Chemical Society, PLOS, STM Publishing, IOP Publishing, Emerald Group Publishing, F1000 Research, and eLife Research, have committed themselves to the cause of making their coronavirus research and data available publicly.

It is not just scientific research that is being freely shared by publishers. Textbooks for students affected by the pandemic have been made available as well. Wiley recognized the need “to ensure instructors who need to teach remotely have the necessary tools to help their students,” and it opened up its online textbooks so that instructors “can receive free access for their students for the remainder of the Spring 2020 term.” Barnes & Noble announced that it was joining VitalSource and other leading publishers to provide free online textbooks for students at schools where it operates a campus bookstore. Michael P. Huseby, CEO and Chairman of Barnes & Noble Education, said: “Our top priority remains providing schools and students with solutions during this time of unprecedented disruption, while simultaneously protecting the health and safety of our employees and customers.” Other textbook publishers, including Cengage, Gale, Cambridge University Press, among many others, have done the same in order to make the transition to online learning as smooth as possible by ensuring that students have online access to the textbooks that they need.

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Patent Law Pharma

Recognizing the Limits of Government Procurement in the Pharmaceutical Industries

pharmaceuticalsWhile recent headlines claim that rising drug prices can be easily addressed through government intervention, the procedures involved with government use of patented technologies are complex and often misunderstood. In addition to owning and practicing a vast portfolio of patents, the government has the power to procure and use patented technologies—including pharmaceutical medicines—in limited circumstances without specific authorization, license, or consent. But despite established mechanisms for government use of intellectual property, some advocates are now promoting an unprecedented and expansive interpretation of procurement that would deprive patent owners of their rights and threaten pharmaceutical innovation.

Today, escalating health care costs raise concerns from lawmakers on both sides of the political aisle. The U.S. pharmaceutical market alone was $333 billion in 2014.[1] Critics cite the escalating cost of certain specialty drugs as a leading cause of the high cost of health care, and some argue that price disparities have a disproportionate effect on certain groups. Accordingly, it has been argued that the federal government already has a responsibility and the necessary legal tools to combat the high price of drugs, e.g., through its procurement procedures. Yet combating disproportionate drug prices through government procurement should be a carefully considered process and not one based on misrepresentations of the history and rationale behind federal procurement procedures.

Federal Government Procurement Overview

The U.S. government oversees a vast and complex procurement system, including the General Services Administration (e.g., real estate, property, and services), the Federal Acquisition Regulation (FAR) system, and vast federal contracting. In sum, the annual federal budget will exceed $4.4 trillion in 2019.[2] Advocates note that the federal government spent nearly $1.1 trillion on health care alone in 2018.[3] In the health care sector, the federal government’s role is also exemplified by the following categories of activity: the direct purchasing of pharmaceutical through federal agency programs including, the Veterans Health Administration, Department of Defense, Indian Health Service, and Federal Bureau of Prisons; indirectly through other federally sponsored health insurance programs, notably Medicare and Medicaid; and, more broadly through its oversight and other involvement with private sector health insurance plans.

There is no denying that the federal government is a significant participant in the health care system. In the aforementioned contexts, the government generally seeks the legal right to use a patented product (e.g., a medicine or medical device) at a specified purchase price. But federal law provides a mechanism for the government to procure patented products and services without a specific authorization, license, or consent. Further, federal law allows it to use patents without prior consent (this is the quintessential definition of infringement), under limited circumstances, in exchange for compensation to the patent holder. Advocates argue that the federal government should now broadly and unprecedentedly employ this procurement power to combat high drug prices.

Congress’ Enactment of Section 1498(a)

In the early 1900s, Congress enacted legislation permitting the federal government to use patented products without the permission of the rights holder in exchange for some compensation. The statute, § 1498, states:

Whenever an invention described in and covered by a patent of the United States is used or manufactured by or for the United States without license of the owner thereof or lawful right to use or manufacture the same, the owner’s remedy shall be by action against the United States in the United States Court of Federal Claims for the recovery of his reasonable and entire compensation for such use and manufacture.

28 U.S.C. § 1498(a) (emphasis added).

Congress enacted this law (and its subsequent amendments) in response to a number of war time and national security needs, which required the government and its federal contractors to use the inventions of recalcitrant patent owners. In essence, § 1498(a) is a waiver of the federal government’s historic sovereign immunity (hence allowing for lawsuits against the government) while ensuring that the patent owners receive fair compensation. As the statute currently reads, this government intervention is offset by promising “reasonable and entire compensation for such use and manufacture.”

Section 1498 emerged as a solution to a technical standing problem that was preventing IP owners from suing the government for infringement (going back into the 1800s) without reverting to legal fictions such as implied contract. It did not arise simply as strong-arm takings power to benefit the government and contractors. Rather, it is a careful compromise to provide a clear path forward for IP owners while freeing the government from the threats of litigation, such as injunctive relief. While any government intervention in the marketplace must be viewed with some suspicion, the statute ensures that the government will recognize the contribution of innovators through some form of compensation (e.g., an ex post facto royalty).

Scholars conclude that that the statute’s original purpose was to allow the federal government and contractors more flexibility in activities during war time efforts[4]—for example, the government’s procurement of the parts necessary for military equipment or naval ship building. The statute has been used in very few other categories. The Supreme Court observed:

The intention and purpose of Congress in the Act of 1918 was to stimulate contractors to furnish what was needed for the War, without fear of becoming liable themselves for infringements to inventors or the owners or assignees of patents. The letter of the Assistant Secretary of the Navy, upon which the Act of 1918 was passed, leaves no doubt that this was the occasion for it.

Richmond Screw Anchor Co. v. United States, 275 U.S. 331, 345 (1928).

The law and literature reveals two important aspects about § 1498(a). First, it was intended for the government’s limited use of a certain category of patented inventors while respecting their innovative contribution with compensation for their efforts. Rather than civilian inventions, the § 1498(a) case law presents a theme: a series of military, war time, and post-war research related inventions, including weapons, communications equipment involving the Signal Corps of the Army, to stealth airplane carbon fiber fighter plane panels.[5] Second, it was intended as a war time safety valve against recalcitrant inventors – essentially, as a national defense provision. It has been used rarely and in limited contexts. Even when the nation faced an anthrax attack scare, its use was threatened by then HHS Secretary Tommy Thompson, but never actually used.[6] Moreover, it is not a price control mechanism. Nowhere in the text of the statute, the legislative history, nor Supreme Court case law endorses § 1498 as a discount federal procurement mechanism. In other words, § 1498(a) is not a “Groupon” for discounted federal shopping sprees.

Even those advocating for the use § 1498 as a discount procurement tool note a number of potential problems, which include the likelihood of undercompensating innovators and undermining pharmaceutical firms’ incentives to innovate, the potential overuse by the federal government, and giving too much responsibility and discretion to courts to make decisions in this category. Critics of the statute’s use in this context observe that as with any government intervention in the marketplace, consequently, it has a number of negative effects—e.g., chilling innovation, more uncertainty around R&D. The issue about preserving the incentives for R&D for new cutting-edge medicines is not abstract. A 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 develop costs are included.[7] In practice, for every drug that is successfully developed, reviewed, and made available to patients, many dozens more fail.[8] Due to this high failure rate and the 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—patients’ lives.

In practice, the use of § 1498(a) raises a number of other challenges. The application of a “reasonable royalty” itself leads to uncertainty and lengthy dispute settlement time frames. Ultimately, the retroactive decision of whatever truly is a “reasonable royalty” requires a heightened reliance on the courts to determine its “reasonableness.” The opponents note that this undermines certainty and chills the incentives for innovation. Also, the limited scope of the government’s direct applicability (e.g., prisons, Indian tribes) questions whether this makes its use either an ineffective solution for the public at-large or it will distort markets further by the misallocation of costs on different communities.

Notwithstanding its poor legal mooring for this purpose, in the end, § 1498 is an impractical tool for lowering drug pricing nationwide, vis-à-vis, the widespread government procurement of medicines in the national health care marketplace. As a general proposition, every fundamental understanding of government and liberty informs us that the federal government cannot just seize one’s property—house, livestock, vehicles—for free. Nor can the government use patented inventions (IP) for free.

Conclusion

Today, the Nation faces an increasing populist hue and cry surrounding a number of public health challenges, including the availability and affordability of patented pharmaceuticals. As the cost of drugs sharply rises, outpacing the rate of inflation, policy-makers consider a range of public policy options. The use of a compulsory license or the § 1498 statute offers a superficial false hope/promise to reduce health care spending. Hence, it is naïve to suggest that the government procurement process is designed to give short shrift to inventors by depriving them of just compensation.

Nothing in the § 1498 statute’s wording, history, nor congressionally-mandated purpose supports its role as either a general procurement or price control tool. As with all government interventions into the market place, it has potential consequences. In this context, the consequences are ultimately harmful, e.g., threatening to harm future medical innovation by reducing the incentives for R&D and creating uncertainty in the marketplace. While the goals at the heart of this debate are quite worthy (i.e., increased drug availability and affordability), policy-makers should consider other measures that avoid the inevitable negative consequences. The federal government has an alternate, powerful array of tools at its disposal to improve the access and quality for health care. In sum, § 1498 was never contemplated to be a general procurement discount vehicle—hence the federal government should not begin mistakenly prescribing it.

[1] https://www.trade.gov/topmarkets/pdf/Pharmaceuticals_Executive_Summary.pdf.

[2] The federal government purchases hundreds of billions of dollars of goods and services annually through an array of intricate procurement procedures and systems. These systems are based on willing sellers who work within the government framework (e.g., the schedules also known as Federal Supply Schedules and the Multiple Award Schedules (MAS)) to ensure fairness and a level playing field with pre-negotiated prices rather than letting the federal government use patented products without compensation. See generally https://www.gsa.gov/buying-selling/purchasing-programs/gsa-schedules.

[3] https://www.taxpolicycenter.org/briefing-book/how-much-does-federal-government-spend-health-care (The break down includes spending Medicare ($583 billion), the Medicaid and Children’s Health Insurance Program (CHIP) ($399 billion), and veteran’s medical ($70 billion)).

[4] Sean M. O’Connor, Taking, Tort, or Crown Right? The Confused Early History of Government Patent Policy, 12 J. Marshall Rev. Intell. Prop. L. 145-204 (2012).

[5] Id. at 190.

[6] “Thompson Negotiating With Drug Companies to Purchase Anthrax Antibiotics; Sees No Need to Override Cipro Patent,” June 11, 2009 (“Tony Jewell, an HHS spokesperson, said that agency officials ‘do not believe’ that breaking the patent is necessary, adding, ‘It would not save money to break the patent.'” https://khn.org/morning-breakout/dr00007586/.

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

[8] “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.” Erika Lietzan, The Drug Innovation Paradox, 83 Missouri Law Review 39 at 78-79 (2018) (describing the U.S. regime).

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Patent Law

CPIP Scholars Join Amicus Brief Arguing that the Government Cannot Petition for CBM Review

U.S. Supreme Court buildingOn December 17, 2018, CPIP Senior Scholars Adam Mossoff and Kristen Osenga joined an amicus brief written on behalf of seven law professors by Professor Adam MacLeod, a CPIP Thomas Edison Innovation Fellow for 2017 and 2018 and a member of CPIP’s growing community of scholars. The brief, which was filed in Return Mail Inc. v. United States Postal Service, asks the Supreme Court to reverse the Federal Circuit’s determination that the federal government has standing to challenge the validity of an issued patent in a covered business method (CBM) review before the Patent Trial and Appeal Board (PTAB).

The petitioner, Return Mail, owns a patent for a method of processing mail that is returned as undeliverable. After the Postal Service refused to take a license, Return Mail sued it for “reasonable and entire compensation” in the Court of Federal Claims under Section 1498(a). Thereafter, the Postal Service filed a petition at the PTAB seeking CBM review, arguing that several claims were unpatentable. Return Mail contested the ability of the Postal Service to petition for CBM review, arguing that it is not a “person” who has been “sued for infringement” within the meaning of Section 18(a)(1)(B) of the Leahy-Smith America Invents Act of 2011 (AIA). Over a forceful dissent by Judge Newman, the Federal Circuit upheld the PTAB’s determination that the Postal Service has standing to challenge Return Mail’s patent before the PTAB.

The amicus brief written by Prof. MacLeod argues that the Federal Circuit was wrong to hold that the federal government could be treated as a “person” who has been charged with infringement. The brief points out that the federal government cannot be liable for patent infringement since it has sovereign immunity. Instead, the government has the authority to take a license whenever it pleases under its eminent domain power—so long as it pays just compensation to the patentee. The Federal Circuit classified the Postal Service’s appropriation as infringement, thus bringing it within Section 18(a)(1)(B) of the AIA. But, as the amicus brief notes, an infringement is an unlawful exercise of the exclusive rights granted to a patentee. The government may have exercised Return Mail’s patent rights, but it did not do so unlawfully, and as such it is not in the same position as a private party who has been charged with infringement.

The Summary of Argument is copied below, and the amicus brief is available here.

SUMMARY OF ARGUMENT

The United States Postal Service (“Postal Service”) wants to be a sovereign power. It also wants not to be a sovereign power. It exercises the right of sovereignty to take patent rights by the power of eminent domain. But it wants to stray beyond the inherent limitations on sovereign power so it can contest the validity of patent rights in multiple venues and avoid the duty to pay just compensation for a license it appropriates.

At the same time, the Postal Service asserts the private rights of an accused infringer to initiate a covered business method review (“CBM”) proceeding though it is immune from the duties and liabilities of an infringer. In other words, the Postal Service is trying to have it both ways, twice. It wants the powers of sovereignty without its disadvantages, and the rights of a private party without exposure to liability.

The United States Court of Appeals for the Federal Circuit erroneously ruled that the Postal Service can exercise both the sovereign power to initiate an administrative patent review, which is entrusted to the Patent Office, and the sovereign power to appropriate patent rights by eminent domain, which is delegated to federal agencies that may exercise patent rights. Congress separated those powers and delegated them to different agencies for important constitutional and jurisprudential reasons. Furthermore, the Federal Circuit ruled that the Postal Service can be both immune from liability for infringement and vested with the powers of an accused infringer. It did this by misstating what a “person” is within the meaning of United States law and by reading unlawfulness out the definition of “infringement,” as the Petitioner explained in its Petition.

In the Leahy-Smith America Invents Act of 2011 (“AIA”), Pub. L. No. 112-29, 125 Stat. 284, Congress created alternatives to Article III litigation concerning patent validity—inter partes review (“IPR”), post-grant review (“PGR”), and covered business method proceedings (“CBM”). IPR, PGR, and CBM proceedings are intended as alternatives to inter alia infringement actions in which an accused infringer might challenge patent validity. This suggests that the Government, which is immune from liability for infringement, is not a “person” with power to initiate an IPR, PGR, or CBM proceeding.

In jurisprudential terms, the Postal Service claims the powers and immunities of the legislative sovereign, who possesses the inherent power of eminent domain and is immune from liability for infringement. At the same time, the Postal Service tries to claim the powers of an accused infringer and so disavow the legal disadvantages of the sovereign. It cannot have both.

In fact, the Postal Service cannot infringe and cannot be charged with infringement. The sovereign who exercises the power of eminent domain and pays just compensation has acted lawfully, not unlawfully, and therefore has not trespassed against the patent. And the Postal Service must pay compensation when it appropriates a license to practice a patented invention. Vested patents are property for Fifth Amendment purposes, and the Government must pay for licenses taken from them, just as it pays for real and personal property that it appropriates.

To read the amicus brief, please click here.

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
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.