{"id":7181,"date":"2018-11-05T17:36:49","date_gmt":"2018-11-05T17:36:49","guid":{"rendered":"https:\/\/cpip.gmu.edu\/?p=7181"},"modified":"2026-04-07T20:38:57","modified_gmt":"2026-04-07T20:38:57","slug":"proposal-for-drug-price-controls-is-legally-unprecedented-and-threatens-medical-innovation","status":"publish","type":"post","link":"https:\/\/blogs.uakron.edu\/ualawip\/2018\/11\/05\/proposal-for-drug-price-controls-is-legally-unprecedented-and-threatens-medical-innovation\/","title":{"rendered":"[Archived Post] Proposal for Drug Price Controls is Legally Unprecedented and Threatens Medical Innovation"},"content":{"rendered":"

By Adam Mossoff<\/a>, Sean O’Connor<\/a>, & Evan Moore*<\/em><\/strong><\/p>\n

The price of the miracle drugs everyone uses today is cause for concern among people today. The President has commented<\/a> on it. Some academics<\/a>, lawyers<\/a>, and policymakers<\/a> have routinely called for the government to \u201cdo something\u201d to lower prices.\u00a0The high prices are unsurprising: cutting-edge medical treatments are the result of billions of dollars<\/a> spent by pharmaceutical companies over decades of research and development with additional lengthy testing trials required by the Food & Drug Administration.\u00a0Earlier this year, though, the New York Times<\/em> called for the government<\/a> 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.<\/p>\n

The New York Times <\/em>proposal was prompted by an article<\/a> in the Yale Journal of Law and Technology<\/em>, which asserts that this law (known as \u00a7 1498<\/a>) has been used by the federal government in the past to provide the public with lower-cost drugs. This claim\u2014repeated as allegedly undisputed by the New York Times<\/em>\u2014is false. In fact, the proposal to use \u00a7 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.<\/p>\n

Let\u2019s first get clear on the law that the New York Times <\/em>has invoked as the centerpiece of its proposal: \u00a7 1498 was first passed by Congress over a hundred years ago.\u00a0It was a solution to a highly technical legal issue of how patent owners could overcome the government\u2019s immunity from lawsuits when the government used their property without authorization. What ultimately became today\u2019s \u00a7 1498 waived the federal government\u2019s sovereign immunity against lawsuits, securing to patent owners the right to sue in federal court for reasonable compensation for unauthorized uses of their property.<\/p>\n

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 \u201ctaking\u201d of their property by the government under the Fifth Amendment as all other property owners. This short summary makes clear that \u00a7 1498 is solely to provide compensation for government use <\/em>of patented invention; it is neither a price control statute nor a general license for government agencies to intervene in private markets.<\/p>\n

This is confirmed by the text of \u00a7 1498<\/a>, which provides that when a patented invention is \u201cused or manufactured by\u201d the government, the patent owner is owed a \u201creasonable and entire compensation.\u201d Thus, \u00a7 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.<\/p>\n

Just as the initial statute precluded an injunction against the government\u2014providing only for \u201creasonable and entire compensation\u201d as the sole remedy\u2014the amended statute further shielded government contractors by placing the sole remedy for the latter\u2019s 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 \u201cauthorization and consent\u201d of the government. And, just as for the government\u2019s direct infringement, the contractor\u2019s 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.<\/p>\n

The article published in the student-edited law journal that precipitated the New York Times <\/em>proposal misconstrues \u00a7 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<\/a> in R&D spent by innovative pharmaceutical companies in creating a new drug.<\/p>\n

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 \u201cexcessive\u201d 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\u2019s 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.<\/p>\n

If the article authors and the New York Times<\/em> 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 \u00a7 1498, claiming that these companies are essentially contractors acting at the behest of the government. Under the legal rules governing payment of \u201creasonable compensation\u201d under \u00a7 1498 and payment of \u201cjust compensation\u201d under the Fifth Amendment, the property owner receives the \u201cfair market value\u201d for the unauthorized use.<\/p>\n

To the article authors and the New York Times<\/em> 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 <\/em>covered by a patent (like a generic). But instead, \u00a7 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 \u201ccompulsory license\u201d even for appropriate government use. The article authors and the New York Times <\/em>would like to ignore the innovating pharmaceutical company\u2019s R&D expenditures incurred beforehand and have the government compensate the company at significantly less than what it would receive under normal circumstances.<\/p>\n

Aside from the flawed economic and legal argument underlying this price-control proposal, it represents an unprecedented use of \u00a7 1498, despite the claims by the article authors to the contrary. In the article, the authors assert that \u00a7 1498 was used exactly in this way in the 1950s and 1960s. But this is false: the federal government has never used \u00a7 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 (\u201cDoD\u201d) relied on \u00a7 1498 to purchase military medical supplies from drug companies that infringed patents. Statements from agency heads<\/a> during congressional hearings at the time confirm that the DoD, NASA, and the Comptroller General all understood the law as applying to procurement<\/em> of goods for government use<\/em>.<\/p>\n

In other words, the government has never relied on or argued that \u00a7 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: \u00a7 1498 shields a contractor\u2019s 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 \u00a7 1498, and it can be sued as a matter of private right directly for patent infringement under the patent laws.<\/p>\n

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<\/em>) claim otherwise. The New York Times<\/em>, for instance, asserts that \u201cIn the late 1950s and 1960s, the federal government routinely used 1498 to obtain vital medications at a discount.\u201d The New York Times <\/em>further asserts that \u00a7 1498 \u201cfell out of use\u201d 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 \u00a7 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.<\/p>\n

The question then becomes whether \u00a7 1498 permits the federal government to simply declare certain patented products to be \u201ctoo expensive\u201d 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<\/em> claim they \u201crecover this history and show how \u00a7 1498 can once again be used to increase access to life-saving medicines.\u201d But \u00a7 1498 was never used in this way historically\u2014the 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.<\/p>\n

Perhaps the most surprising aspect of the New York Times<\/em> proposal is that it refers to \u00a7 1498 as an \u201cobscure\u201d 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 \u00a7 1498 was merely a technical fix to an unintended loophole existing since the 19th century<\/a> that prevented, or at least complicated, patent owners suing the government for unauthorized uses by officials or agencies\u2014even as the courts routinely opined that patents are property and that government should have to pay for their use<\/a>. Second, while \u00a7 1498 may be \u201cobscure\u201d 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.<\/p>\n

As the courts have long recognized, \u00a7 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 <\/em>to use \u00a7 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.<\/p>\n

\n

*Evan Moore is a 2L at Antonin Scalia Law School, and he works as a Research Assistant at CPIP.<\/p>\n","protected":false},"excerpt":{"rendered":"

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 \u201cdo something\u201d to lower prices.\u00a0The high prices are unsurprising: cutting-edge medical treatments are […]<\/p>\n","protected":false},"author":3627,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_monsterinsights_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[26,35],"tags":[83,313,467,527,557,1009,1132,1133,1295,1315,1426,1582],"class_list":["post-7181","post","type-post","status-publish","format-standard","hentry","category-innovation-2","category-patent-law","tag-adam-mossoff","tag-compulsory-license","tag-due-process-clause","tag-evan-moore","tag-fifth-amendment","tag-new-york-times","tag-pharma","tag-pharmaceutical-patents","tag-sean-oconnor","tag-section-1498","tag-taking","tag-yale-journal-of-law-and-technology"],"jetpack_featured_media_url":"","jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/blogs.uakron.edu\/ualawip\/wp-json\/wp\/v2\/posts\/7181","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/blogs.uakron.edu\/ualawip\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/blogs.uakron.edu\/ualawip\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/blogs.uakron.edu\/ualawip\/wp-json\/wp\/v2\/users\/3627"}],"replies":[{"embeddable":true,"href":"https:\/\/blogs.uakron.edu\/ualawip\/wp-json\/wp\/v2\/comments?post=7181"}],"version-history":[{"count":3,"href":"https:\/\/blogs.uakron.edu\/ualawip\/wp-json\/wp\/v2\/posts\/7181\/revisions"}],"predecessor-version":[{"id":16600,"href":"https:\/\/blogs.uakron.edu\/ualawip\/wp-json\/wp\/v2\/posts\/7181\/revisions\/16600"}],"wp:attachment":[{"href":"https:\/\/blogs.uakron.edu\/ualawip\/wp-json\/wp\/v2\/media?parent=7181"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/blogs.uakron.edu\/ualawip\/wp-json\/wp\/v2\/categories?post=7181"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/blogs.uakron.edu\/ualawip\/wp-json\/wp\/v2\/tags?post=7181"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}