The bipartisan Bayh-Dole Act of 1980 which transferred ownership of patents arising from US government funded research to universities has yielded a remarkable return on investment. In its 44 years of existence, Bayh-Dole has led to over $1.3 trillion in U.S. economic growth and over 4.2 million jobs. Products ranging from pharmaceuticals Allegra, Lyrica, and Taxol to consumer products such as high-definition TVs have found their way to consumers through Bayh-Dole licensing and resultant private-sector investment. Universities in turn receive roughly $3 billion in licensing revenue per year to support additional research and technology transfer. Nonetheless, proposals which would fundamentally change the operation of Bayh-Dole are now before us.
The success of Bayh-Dole in moving federally-funded research out of University labs to consumers stands in stark contrast to the pre-Bayh-Dole era where precious few products of federally-funded research reached the market. All of this product delivery has occurred with the Bayh-Dole "march-in rights" provision. Bayh-Dole "march-in rights" allow the government to grant non-exclusive licenses to other parties if the licensee failed to make efforts to commercialize the product, meet public health or safety needs, or meet government requirements. Despite numerous calls for the government to exercise march-in rights, none of the six petitions to the National Institutes of Health (NIH) requesting use of march-in rights for biopharmaceutical products has been successful. The NIH has cited "far-reaching repercussions on many companies' and investors' future willingness to invest in federally funded medical technologies" in rejecting one such petition. As such, companies have continued to exclusively license certain patent rights from universities with a well-settled expectation that the government would not undermine their license as well as their subsequent and significant expenditures on product development by exercising march-in rights. This expectation is especially critical in the pharmaceutical industry where an average of about $2B is spent in out of pocket drug development programs which quite often fail in the late clinical trials which incur the most expense.
The National Institute of Standards and Technology (NIST) has recently proposed a new interpretation of the Bayh-Dole act where the government could exercise march-in rights in cases where "the price or other terms at which the product is currently offered to the public are not reasonable." The Federal Trade Commission (FTC) has subsequently supported the "NIST's expansive and flexible approach to march in" and its application to prescription drug pricing. In support of its position, the FTC provides excerpts of two sections of Bayh-Dole, 35 USC203 (a)(1)) and 35 USC201(f). 35 USC203(a)(1) states in reference to march-in rights that such "action is necessary because the contractor or assignee has not taken, or is not expected to take within a reasonable time, effective steps to achieve practical application of the subject invention in such field of use." 35 USC201(f) states that "practical application" means to manufacture in the case of a composition or product, to practice in the case of a process or method, or to operate in the case of a machine or system; and, in each case, under such conditions as to establish that the invention is being utilized and that its benefits are to the extent permitted by law or Government regulations available to the public on reasonable terms." The FTC's position thus hinges on their interpretation of the terms "practical application" and "reasonable terms" in these sections of Bayh-Dole. As noted elsewhere, Bayh-Dole's "reasonable terms" phrase in Section 201(f) is alternatively interpreted as referring to the obligations of patent owners (e.g., Universities) to offer reasonable licensing terms to business seeking to commercialize the technology rather than a "reasonable pricing" obligation of the business. There is also evidence that Congress excluded pricing as a criteria for invoking march-in rights. Indeed, Senators Dole and Bayh penned an op-ed in the Washington Post over twenty years ago which explicitly stated that the "law makes no reference to a reasonable price that should be dictated by the government" and "(t)hat this omission was intentional."
Government agencies such as the FTC or NIH that exercise march-in rights based on "unreasonable" product pricing will almost certainly be challenged in court. Prior to the Supreme Court's recent decision in Loper Bright Industries v. Raimundo, courts deferred to an agency's interpretation of statutes which were ambiguous or silent on an issue if the agency's interpretation was "based on a permissible construction of the statute" under the Supreme Court's Chevron v. Natural Resources Defense Councildecision. Loper has now overturned Chevron and the courts will exercise their independent judgement in interpreting statutes irrespective of interpretations proffered by agencies of the executive branch. As noted by the majority in Loper, "Chevron's presumption is misguided because agencies have no special competence in resolving statutory ambiguities. Courts do."
Time will tell if the NIST and FTC interpretation of Bayh-Dole march-in rights will pass judicial scrutiny under Loper. In the meanwhile, the government's shift to an "expansive and flexible approach to march in" under Bayh-Dole has understandably alarmed companies who stand to lose exclusive patent rights covering a product that they derisked and brought to market at considerable expense. The National Venture Capital Association has further warned the NIST that its draft guidance on march-in rights "would unavoidably deter VCs from investing in inventions arising from federally funded research" and allow "large, established companies to use march-in petitions to stymie competition from smaller entities who must then either license their patents or expend limited resources responding to and defending against march-in proceedings." For now, the march-in rights question will clearly loom large over every government supported patent containing the Bayh-Dole required statement that the "government has certain rights in the invention."
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