While 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\u2014including pharmaceutical medicines\u2014in 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.<\/p>\n
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]<\/a> 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.<\/em>, 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.<\/p>\n The U.S. government oversees a vast and complex procurement system, including the General Services Administration (e.g.<\/em>, 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]<\/a>\u00a0Advocates note that the federal government spent nearly $1.1 trillion on health care alone in 2018.[3]<\/a>\u00a0In the health care sector, the federal government\u2019s 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.<\/p>\n There is no denying that the federal government is a significant participant in the health care system.\u00a0In the aforementioned contexts, the government generally seeks the legal right to use a patented product (e.g.<\/em>, a medicine or medical device) at a specified purchase price.\u00a0But federal law provides a mechanism for the government to procure patented products and services without a specific authorization, license, or consent.\u00a0Further, 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.\u00a0Advocates argue that the federal government should now broadly and unprecedentedly employ this procurement power to combat high drug prices.<\/p>\n 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.\u00a0The statute, \u00a7 1498, states:<\/p>\n 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<\/u> for such use and manufacture.<\/p><\/blockquote>\n<\/div>\n 28 U.S.C. \u00a7 1498(a) (emphasis added).<\/p>\n 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.\u00a0In essence, \u00a7 1498(a) is a waiver of the federal government\u2019s historic sovereign immunity (hence allowing for lawsuits against the government) while ensuring that the patent owners receive fair compensation.\u00a0As the statute currently reads, this government intervention is offset by promising \u201creasonable and entire compensation for such use and manufacture.\u201d<\/p>\n 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.\u00a0While 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.<\/em>, an ex post facto<\/em> royalty).<\/p>\n Scholars conclude that that the statute\u2019s original purpose was to allow the federal government and contractors more flexibility in activities during war time efforts[4]<\/a>\u2014for example, the government\u2019s procurement of the parts necessary for military equipment or naval ship building.\u00a0The statute has been used in very few other categories.\u00a0The Supreme Court observed:<\/p>\n 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.\u00a0The 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.<\/p><\/blockquote>\n<\/div>\n Richmond Screw Anchor Co. v. United States, 275 U.S. 331, 345 (1928).<\/p>\n The law and literature reveals two important aspects about \u00a7 1498(a). First, it was intended for the government\u2019s limited use of a certain category of patented inventors while respecting their innovative contribution with compensation for their efforts. Rather than civilian inventions, the \u00a7 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]<\/a> Second, it was intended as a war time safety valve against recalcitrant inventors \u2013 essentially, as a national defense provision. It has been used rarely and in limited contexts.\u00a0Even when the nation faced an anthrax attack scare, its use was threatened by then HHS Secretary Tommy Thompson, but never actually used.[6]<\/a>\u00a0Moreover, it is not a price control<\/em> mechanism.\u00a0Nowhere in the text of the statute, the legislative history, nor Supreme Court case law endorses \u00a7 1498 as a discount federal procurement mechanism.\u00a0In other words, \u00a7 1498(a) is not a \u201cGroupon\u201d for discounted federal shopping sprees.<\/p>\n Even those advocating for the use \u00a7 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.\u00a0Critics of the statute\u2019s use in this context observe that as with any government intervention in the marketplace, consequently, it has a number of negative effects\u2014e.g.<\/em>, chilling innovation, more uncertainty around R&D.\u00a0The issue about preserving the incentives for R&D for new cutting-edge medicines is not abstract.\u00a0A 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]<\/a>\u00a0In practice, for every drug that is successfully developed, reviewed, and made available to patients, many dozens more fail.[8]<\/a> 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\u2014or even save\u2014patients\u2019 lives.<\/p>\n In practice, the use of \u00a7 1498(a) raises a number of other challenges. The application of a \u201creasonable royalty\u201d itself leads to uncertainty and lengthy dispute settlement time frames.\u00a0Ultimately, the retroactive decision of whatever truly is a \u201creasonable royalty\u201d requires a heightened reliance on the courts to determine its \u201creasonableness.\u201d The opponents note that this undermines certainty and chills the incentives for innovation.\u00a0Also, the limited scope of the government\u2019s direct applicability (e.g.<\/em>, 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.<\/p>\n Notwithstanding its poor legal mooring for this purpose, in the end, \u00a7 1498 is an impractical tool for lowering drug pricing nationwide, vis-\u00e0-vis<\/em>, 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\u2019s property\u2014house, livestock, vehicles\u2014for free.\u00a0Nor can the government use patented inventions (IP) for free.<\/p>\n 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.\u00a0As the cost of drugs sharply rises, outpacing the rate of inflation, policy-makers consider a range of public policy options.\u00a0The use of a compulsory license or the \u00a7 1498 statute offers a superficial false hope\/promise to reduce health care spending.\u00a0Hence, it is na\u00efve to suggest that the government procurement process is designed to give short shrift to inventors by depriving them of just compensation.<\/p>\n Nothing in the \u00a7 1498 statute\u2019s 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.\u00a0In this context, the consequences are ultimately harmful, e.g.<\/em>, threatening to harm future medical innovation by reducing the incentives for R&D and creating uncertainty in the marketplace.\u00a0While the goals at the heart of this debate are quite worthy (i.e.<\/em>, 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.\u00a0In sum, \u00a7 1498 was never contemplated to be a general procurement discount vehicle\u2014hence the federal government should not begin mistakenly prescribing it.<\/p>\n [1]<\/a> https:\/\/www.trade.gov\/topmarkets\/pdf\/Pharmaceuticals_Executive_Summary.pdf<\/a>.<\/p>\n [2]<\/a> The federal government purchases hundreds of billions of dollars of goods and services annually through an array of intricate procurement procedures and systems.\u00a0These systems are based on willing sellers who work within the government framework (e.g.<\/em>, 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.\u00a0See generally<\/em>\u00a0https:\/\/www.gsa.gov\/buying-selling\/purchasing-programs\/gsa-schedules<\/a>.<\/p>\n [3]<\/a> https:\/\/www.taxpolicycenter.org\/briefing-book\/how-much-does-federal-government-spend-health-care<\/a> (The break down includes spending Medicare ($583 billion), the Medicaid and Children\u2019s Health Insurance Program (CHIP) ($399 billion), and veteran\u2019s medical ($70 billion)).<\/p>\n [4]<\/a> Sean M. O\u2019Connor, Taking, Tort, or Crown Right? The Confused Early History of Government Patent Policy<\/em>, 12 J. Marshall Rev. Intell. Prop. L. 145-204 (2012).<\/p>\n [5]<\/a> Id.<\/em> at 190.<\/p>\n [6]<\/a> \u201cThompson Negotiating With Drug Companies to Purchase Anthrax Antibiotics; Sees No Need to Override Cipro Patent,\u201d June 11, 2009<\/em> (\u201cTony 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\/<\/a>.<\/p>\n [7]<\/a> https:\/\/www.scientificamerican.com\/article\/cost-to-develop-new-pharmaceutical-drug-now-exceeds-2-5b\/<\/a>.<\/p>\nFederal Government Procurement Overview<\/strong><\/h2>\n
Congress\u2019 Enactment of Section 1498(a)<\/strong><\/h2>\n
Conclusion<\/strong><\/h2>\n
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