On January 4, 2021, the National Institute of Standards and Technology (NIST) published proposed rules for comment changing regulations promulgated under the Bayh-Dole Act (35 U.S.C. §§ 200-204), which allow businesses and nonprofit institutions, in most circumstances, to take title to inventions made under federally funded projects (subject inventions) and to freely commercialize items, and methods used to produce items, embodying subject inventions.
Principal among the changes proposed is a reboot of 37 C.F.R. § 401.6, titled “Exercise of march-in rights,” where NIST proposes additional processes and instructions for the consideration and exercise of such rights by an agency. Over 18,000 comments were received by NIST (the deadline was April 5, 2021), the majority of which addressed NIST’s attempt to clarify that the Government’s ability to “march in” and wrest control of a patented invention cannot be predicated on concerns or disagreements with the pricing strategies used by the recipients, assignees and licensees for goods and services which embody the subject invention. The proposed rules follow an April 2019 Green Paper published by NIST that presented strong reasons against the use of march-in rights by the Government as a remedy to lower prescription drug costs and noted the lack of clarity on this point in both the statute and the implementing regulations addressing grounds for march-in rights. The proposed rules follow demands by some public advocacy groups and politicians, at the height of the COVID-19 crisis, that the Government ensure through march-in rights that no excessive profits were made by companies developing and manufacturing testing mechanisms or vaccines that were funded in part or in whole by the Government.
Both the statute and regulations (now codified at 37 C.F.R. Part 401), since inception, have allowed the Government agency the ability to exercise “march-in rights” embedded in the mandatory clause for funding recipients (for grants and cooperative agreements: 37 C.F.R. 401.14(j); for federal contracts: Clauses 52.227-11 and 252.227-7038 in, respectively, the Federal Acquisition Regulation and its Department of Defense Supplement), by which the Government can force the recipient, its assignee or exclusive licensee to grant a license (ranging from non-exclusive to exclusive, in one or more fields of use) in the subject invention. March-in rights are permitted under the statute and the regulations for four enumerated reasons, the following two of which are most pertinent here: (1) effective steps have not been taken, or are not expected to be taken, by the contractor or assignee, within a reasonable time to achieve “practical application” of the subject invention; and (2) health and safety needs are not being “reasonably satisfied by the contractor, assignee, or licensees.” “Practical application” is defined by the Bayh-Dole statute and is predicated on the benefits of the invention being “available to the public on reasonable terms.” As of the time of the publication of the Green Paper, petitions had been filed by public interest groups and competing companies in twelve instances to the National Institutes for Health (NIH). In ten of the twelve petitions, the agency was asked to march-in and permit parties to make use of the patented subject inventions on the basis that U.S. citizens were being denied prescription drugs because of their high price, i.e., that because of the high price, the contractor was not offering “reasonable terms” and/or was not “reasonably satisfying” the health and safety needs of the public. Not one of these petitions was acted upon by NIH.
As stated, the 2019 NIST Green Paper collected the views of a number of “stakeholders” which presented reasons, both rooted in the statute and based on policy, against Government use of march-in rights to lower drug costs. Principal among those stakeholders were the sponsors of the statute itself – Senators Birch Bayh and Bob Dole. In a 2002 statement, both senators categorically stated that the “Bayh-Dole [Act] did not intend that government set prices on resulting products. The law makes no reference to reasonable price that should be dictated by the government. . . . The ability of the government to revoke a license granted under the [Act] is not contingent on the price of the resulting product or tied to the profitability of a company that has commercialized a product. . . .” The NIST Green Paper noted that both Senators Bayh and Dole and the NIH since the enactment of the statute have interpreted “reasonable terms” to mean reasonable licensing terms and not reasonable prices. Other stakeholders complained that allowing march-in rights as a price control mechanism would impede the creation of new drugs and discourage university and medical school licensees from making the necessary and substantial investments to develop and commercialize new drugs.
Following up on its observations in the Green Paper, NIST’s proposed rule adds a new paragraph (e) to 37 C.F.R. Section 401.6 specifically stating: “March-in rights shall not be exercised by an agency exclusively on the basis of business decisions of a contractor regarding the pricing of commercial goods and services arising from the practical application of the invention.” (Emphasis added). Associations representing university tech transfer offices, pharma, and biotechnology, among others, have praised the language suggested by NIST. However, that praise has not come without some criticism. The use of the word “exclusively” has come under criticism in that it implicitly allows pricing to be used as one of several grounds justifying the exercise of march-in rights. Moreover, suggestions have been made that the any relevant language be extended not only to contractors but to licensees, as the statute, at least with respect to “health and safety needs” grounds, expressly permits the use of march-in rights against contractors and their licensees. Other commentors requested regulatory clarification that the words “reasonable terms” in the definition of “practical application” in 35 U.S.C. § 203(a)(1) specifically refer to the terms of the license agreement between the contractor/assignee and the licensee, and that the end-user price of a successfully commercialized product may not be used as a basis for exercising march-in rights.
Both the Green Paper and the Proposed Rule were products of the Trump administration’s “Lab-to-Market Cross Agency Priority” goal, embedded in the 2018 President’s Management Agenda, the purpose of which (as stated in the Proposed Rule) was to, among other things, “improve the transition of federally funded innovations from the laboratory to the marketplace by reducing the administrative and regulatory burdens for technology transfer and increasing private sector investment in later stage research and development (R&D).” It remains to be seen whether the new administration reconsiders or even reverses course on the proposed rule, siding with some public advocacy groups, academics, and politicians who argue that march-in rights are the appropriate vehicle for reining in drug prices. We will continue to monitor and update you with any new developments.