Presented as part of its effort to lower what it views as excessive prices for prescription drugs, the Biden administration on December 7, 2023, announced the release of a proposed framework to expand the use of government “march-in” authority under the Bayh-Dole Act. The framework would allow federal agencies to consider price as a factor in determining whether a drug or other taxpayer-funded invention is sufficiently accessible to the public. If the proposed construct is adopted, federal agencies could force federal funding recipients to license their inventions to third parties for commercialization. Use of price in connection with “march-in” rights in this manner previously has been requested by consumer groups and suggested by certain political figures, but no federal government agency has adopted this approach with respect to pharmaceuticals or any other type of government-funded invention in the more than 40 years since the Bayh-Dole Act’s passage. This would be the first time march-in rights could be used as a mechanism to regulate drug pricing.
The National Institutes of Science and Technology (NIST) published the Draft Interagency Guidance Framework for Considering the Exercise of March-In Rights (“Draft Framework”) the day after the administration’s announcement. The NIST Federal Register publication was in the form of a Request for Information (RFI), giving interested parties the opportunity to weigh in on the Draft Framework.
This alert summarizes the existing Bayh-Dole Act statutory and regulatory authority, provides a history of the U.S. government’s exercise of march-in rights, describes the implications of the Draft Framework, and outlines next steps for the shaping and finalization of the march-in guidance for federal agencies.
INTRODUCTION
Under the Bayh-Dole, the U.S. government allows small and large businesses, research institutions, and nonprofit organizations that conceive or develop inventions using federal funding to retain title to such inventions, subject to a government license and certain other conditions. One right the government retains is the ability to force a compulsory license to a third party if the inventor does not take steps to commercialize the invention and make it available to the public, or if otherwise deemed necessary for public health or national security reasons. To date, federal agencies never have formally exercised these march-in rights.
The Draft Framework provides a decision tree for agencies considering future assertion of such rights. Before delving into the details of the Draft Framework, some background context is useful.
BACKGROUND
The Bayh-Dole Act and the U.S. Government’s March-In Rights
When inventions are developed in whole or in part with U.S. federal government funding (i.e., under contracts, grants, or other agreements), the U.S. government has certain rights to intellectual property embodied in these inventions pursuant to the Bayh-Dole Act.[1] Under the Bayh-Dole Act, the U.S. government obtains rights in any “subject invention,” defined as “any invention . . . conceived or first actually reduced to practice in the performance of work under a funding agreement.”[2] These rights include a non-exclusive, irrevocable worldwide license to use inventions for any governmental purpose.[3] In addition, the U.S. government retains a right to obtain title if the original funding recipient did not properly follow the Bayh-Dole Act’s invention disclosure requirements[4] or in countries where the funding recipient did not obtain title and file for a patent.[5]
As most relevant here, the U.S. government also has so-called “march-in rights” against the funding recipient, or any assignee or exclusive licensee, pursuant to which the government can force a license to a third party for commercialization purposes. These rights only arise in certain circumstances, specifically, where the government determines that: (i) adequate steps have not been taken to commercialize the invention (i.e., the contractor has not achieved “practical application” of the subject invention in the relevant field of use); (ii) government action is necessary to meet public health or safety needs; (iii) government action is necessary to meet requirements for public use under federal regulations; or (iv) the inventor or an exclusive licensee is not complying with the requirement for U.S. manufacture and is substantially manufacturing the invention outside the United States without the government’s prior approval.[6]
Up until now, these march-in rights, while embedded in statute and regulation, have posed more of a theoretical rather than practical risk to inventors and their assignees and licensees. To date, no federal agency has formally exercised march-in rights, although we are aware of situations where the exercise of march-in rights has been threatened by the government and where, in turn, the inventor/licensor took steps to address the government’s concerns (generally agreeing to license to a third party).[7]
Prior Requests for the Government to Exercise March-In Rights
Historically, there have been multiple petitions filed by third parties requesting the government to intervene and exercise march-in rights. None of these petitions have been granted. For example, in In re Petition of CellPro, that company asked the National Institutes of Health (NIH) to exercise its march-in rights to force commercialization of technology related to a stem cell separation device, because (in its view) availability of essential medical technology was at stake. The NIH denied this claim.
In In the Case of NORVIR, the NIH received requests from a consumer advocacy group, and from members of Congress acting on behalf of their constituents, to exercise march-in rights for patents covering the AIDS treatment drug ritonavir (brand name, Norvir). According to the applicants, in 2003 Abbott raised the price of Norvir 400% for U.S. customers (but not for consumers in any other country), and refused to license ritonavir to another company. The NIH denied the petition, finding no grounds to exercise its march-in rights and also stating that “NIH agrees with the public testimony that suggests that the extraordinary remedy of march-in is not an appropriate means of controlling prices,” and “the issue of drug pricing has global implications and, thus, is appropriately left for Congress to address legislatively.”
Earlier this year, the U.S. government resisted calls for it to force Pfizer and Astellas Pharma to lower the price of their prostate cancer drug Xtandi. In the NIH decision letter, the agency stated its view that the drug had been made widely available in the marketplace because it had been used by over 200,000 patients over the course of a decade. As such, the NIH determined, the University of California, which was the original inventor, had met its obligation under the Bayh-Dole Act to ensure the invention was reasonably available to the public. This decision was consistent with all prior responses by NIH to march-in petitions related to pharmaceutical prices.[8]
The notion of the U.S. government using march-in rights to reign in high drug prices has been raised multiple times by politicians in recent years, including by candidate Elizabeth Warren while campaigning for the 2020 Democratic presidential nomination. Warren, Bernie Sanders, and other members of Congress have also discussed the possibility of amending Bayh-Dole to specifically permit march-in rights for the purpose of reigning in drug prices, but no such legislation has been successful.
As noted above, the NIH previously has gone on record as saying it does not have the ability to use march-in rights to control pharmaceutical pricing. Many legal commentators have agreed. Previously, and in the context of the Draft Framework, organizations such as the U.S. Chamber of Commerce and the Pharmaceutical Research and Manufacturers of America (PhRMA) have also noted that expansion and exercise of march-in rights could discourage research and innovation.
Prior Biden Administration Activity Related to the Bayh-Dole Act
The Draft Framework follows a 2021 notice of proposed rulemaking that requested public comments on several proposed changes to the Bayh-Dole Act, including a provision related to march-in rights that stated march-in “shall not be exercised exclusively based on the business decisions of the contractor regarding the pricing of commercial goods and services arising from the practical application of the invention.” NIST ultimately was directed through Executive Order 14036 to reconsider this provision, and NIH ultimately did not include it in the March 24, 2023 final rule. Instead, NIST stated its intent to engage with stakeholders to develop a comprehensive framework for agencies considering the use of march-in.
In July of this year, President Biden issued an “Executive Order on Federal Research and Development in Support of Domestic Manufacturing and United States Jobs.” This Executive Order was focused on the domestic manufacturing elements of Bayh-Dole. Non-compliance with these requirements is one of the bases upon which the government can exercise march-in rights. A complete discussion of this Executive Order is available here.
THE DRAFT FRAMEWORK
Preliminary Matters
The Draft Framework begins with a set of definitions and a summary of the Bayh-Dole Act, including the four specific circumstances in which the government can exercise march-in rights.
The Draft Framework also reiterates the policy objectives of the Bayh-Dole Act, including, as is most relevant here, “to promote the utilization of inventions arising from federally supported research or development” and “to ensure that the Government obtains sufficient rights in federally supported inventions to meet the needs of the Government and protect the public against nonuse or unreasonable use of inventions.”[9]
NIST follows by explaining the administrative process that an agency needs to follow to initiate march-in procedures, the procedure for appeal within the agency, and the process for legal review with the Court of Federal Claims.
New Framework Considerations
The focus of the Draft Framework is to provide additional guidance to agencies for use in deciding whether to exercise march-in rights. At a high level, the decision boils down to three overarching questions:
- Does Bayh-Dole apply to the invention?
- Do any of the four statutory criteria for exercise of march-in rights apply?
- Would exercising march-in rights support the policy and objectives of Bayh-Dole?
The Draft Framework notes that to answer these questions, factual information will need to be collected from the agency’s own records (including, for example, the iEdison invention reporting platform) and from contractors and other sources. It also emphasizes that each march-in decision is entirely dependent on the relevant facts and circumstances.
Does Bayh-Dole apply?
In addressing the first question of whether the Bayh-Dole Act applies, the primary inquiry is whether the invention at issue is a “subject invention,” i.e., an invention that was “conceived or first actually reduced to practice in the performance of work under a funding agreement.” Under Bayh-Dole, subject inventions are required to be reported to the funding agency, but it is also possible that a subject invention could have gone unreported.
Where products are involved, the agency must assess whether the product embodies a subject invention or is produced or performed through use of a subject invention. Additionally, the manufacturing and licensing history of a product will allow the agency to understand the scope of activities undertaken to practice the subject invention.
Are any of the four statutory criteria met?
To exercise march-in rights, an agency must determine that at least one of the four statutorily defined circumstances (from 35 U.S.C. § 203(a)) applies. Below we discuss considerations for each condition, as set forth in the Draft Framework.
- 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
This criterion emphasizes the actions undertaken by contractors to advance and achieve practical application of the subject invention. The factors that should be considered depend on the current stage of development for the subject inventions. In evaluating this condition, agencies should assess if subject inventions are licensed and whether there is a product embodying the subject invention on the market.
The Draft Framework notes that if a contractor has ceased development of a subject invention and declined to recommence work or to entertain licensing requests, this could signify limited prospects for commercialization.
NIST also describes a potential march-in situation where a contractor or licensee has successfully brought a product embodying a subject invention to market “but the price or other terms at which the product is currently offered to the public are not reasonable.” This example reflects the new position that high prices can have the effect of limiting public access and therefore may be a basis for march-in.
- action is necessary to alleviate health or safety needs which are not reasonably satisfied by the contractor, assignee, or their licensees
The Draft Framework encourages agencies to consider how the subject invention or the product at issue may address unmet public health or safety needs and if exercise of march-in rights could resolve these needs, such as by increasing the quantity or quality of a specific product, or by creating different or additional ways to access the product.
The Draft Framework suggests agencies should consider whether the contractor is “exploiting a health or safety need in order to set a product price that is extreme and unjustified.” This could be based on initial pricing or arise if, for example, a contractor has implemented a sudden price increase in response to a disaster that is putting people’s health at risk. NIST suggests that high prices or price increases may justify the exercise of march-in rights based on an agency’s need to prioritize public health or safety. That said, NIST also recommends that agencies consider other options, short of march-in, to address health or safety concerns. In our experience, actions short of march-in often can be used to achieve desired health and safety benefits.
- action is necessary to meet requirements for public use specified by Federal regulations and such requirements are not reasonably satisfied by the contractor, assignee, or licensees
The Draft Framework provides that agencies should evaluate whether any federal regulations relate to the use of products commercialized from the subject invention. If so, the agency should assess whether the contractors and/or its licensees have taken reasonable steps to address federal regulatory requirements.
- action is necessary because the agreement required by section 204 [pertaining to U.S. manufacturing requirements] has not been obtained or waived or because a licensee of the exclusive right to use or sell any subject invention in the United States is in breach of its agreement obtained pursuant to section 204
Under 35 U.S.C. § 204, exclusive licensees to subject inventions who wish to use or sell products embodying subject inventions in the United States must agree to manufacture such products substantially in the United States or obtain a waiver of this requirement from the relevant funding agency. March-in may be appropriate where such substantial U.S. manufacture is not taking place and a waiver has not been granted. Federal agencies have never exercised march-in rights on this basis, nor is there any regulatory guidance as to what constitutes substantial U.S. manufacture. The Draft Framework does not provide any additional direction or parameters.
Would exercise of march-in rights support Bayh-Dole policy goals?
In determining whether the objectives of Bayh-Dole have been met, the agency should consider whether march-in would achieve the desired objective, if there are better alternative solutions, and whether there are any wider implications that may conflict with the Bayh-Dole objectives.
The Bayh-Dole Act emphasizes “utilization of inventions arising from federally funded research and development” and the “commercialization and public availability of” those inventions. Part of an agency’s decision-making process prior to exercising march-in rights should include examination of facts and circumstances to determine whether a contractor or licensee of a subject invention is promoting the development of new products and ensuring availability to end-users or consumers in the United States.
Agencies also should weigh how an individual march-in decision could impact the broader policy objectives for U.S. competitiveness and innovation. In other words, would exercise of march-in rights address any access problems? And, particularly important for prospective recipients of federal funding, would expanded exercise of march-in rights discourage future research and innovation? Potential unintended consequences have previously been flagged as a reason not to expand government exercise of march-in rights.
Also relevant are practical considerations, such as whether there are capable and willing licensees that could manufacture a product following march-in, how long such licensees would take to produce and market the covered product, and at what price would such licensee be able to make the product available to the public. Present patent and IP rights also need to be examined. For example, would the licensee need additional licenses to produce the product that is a subject invention, or are relevant patents about to expire, thus changing the IP landscape? Another practical factor that will need to be considered is regulatory exclusivity, such as that provided by the U.S. Food and Drug Administration.
Draft Framework Scenarios
The last section of the Draft Framework presents eight hypothetical scenarios involving subject inventions where march-in could be considered and outlines the relevant factors that agencies might consider in each scenario.
Of these hypotheticals, three involve the biotech and pharmaceutical industries and two others discuss increases in pricing of products embodying subject inventions. As relevant to the price-related scenarios, NIST discusses supply and demand considerations and also the need to assess whether the “contractor is in fact exploiting the health or safety need to set a product price that is egregious within the U.S. market and unjustified given the totality of circumstances.” If the evidence suggests that the price increase was “an intentional act by the company to cash-in on this newly discovered health and safety need,” a march-in would be more justified. NIST also explains that actions by a contractor that tend to “promote nonuse or unreasonable use of the subject invention,” such as threatening other manufacturers with litigation during an urgent public health need, suggest that the contractor is focused on keeping prices unusually high while not satisfying demand, which could weigh in favor of a march-in.
In short, these hypotheticals illustrate the Biden administration’s willingness to consider the prices of products incorporating subject inventions as a factor in determining whether such products are accessible to the public and whether a march-in may be justified under the circumstances.
NEXT STEPS
The NIST RFI and Opportunity for Stakeholder Comment
In its RFI, NIST asked interested parties to specifically address the following questions:
- After reading through the framework and example scenarios, if needed, how could the guidance about when an agency might want to exercise march-in and the factors that an agency might consider be made clearer?
- The framework contains many terms which have specific meanings under Bayh-Dole or in technology development and commercialization. Are the definitions provided at the beginning of the framework easy to understand? Do they aid in your ability to interpret the framework?
- How could the framework be improved to be easier to follow and comprehend?
- Does this framework sufficiently address concerns about public utilization of products developed from subject inventions, taking into account the fact that encouraging development and commercialization is a central objective of the Bayh-Dole Act?
- The framework is not meant to apply to just one type of technology or product or to subject inventions at a specific stage of development. Does the framework ask questions and capture scenarios applicable across all technology sectors and different stages of development? How could any gaps in technology sectors or stages of development be better addressed?
Comments on the RFI are due February 6, 2024. Subsequent to that date, NIST will work together with the Interagency Working Group for Bayh-Dole to develop a final framework document for agencies’ consideration in determining whether to exercise march-in rights. NIST has stated that it will also hold at least one informational webinar regarding the Draft Framework.[10]
Anticipated Organized Comments and Resistance
Pharmaceutical companies and industry trade organizations are especially interested in the current proposal and have a vested interest in shaping the final framework. Based on our review, the Draft Framework represents a more nuanced approach to consideration of march-in decisions and does not necessarily reflect an affirmative decision that would require federal agencies to exercise march-in rights to lower drug prices. In this way, the Draft Framework does not necessarily require a determination consistent the specific policy objectives advanced in the administration’s December 7, 2023 Fact Sheet and announcement of the Draft Framework. That said, the aim is clearly to open a door to the consideration of high prices as a basis for march-in, which has never been done before.
To the extent that federal agencies do attempt to exercise march-in rights to achieve the administration’s policy goals of lowering prices on certain pharmaceuticals, we would expect these decisions to be met by legal challenges. Ultimately, courts may determine that the current Bayh-Dole Act cannot be interpreted to permit march-in as a mechanism for regulation of drug pricing (a position NIH previously agreed with) and that additional legislation is required to achieve the policy aims of the administration.
Companies, research institutions, and other parties interested in submitting comments on the Draft Framework or understanding the potential impact of this policy shift on their businesses should contact us for further guidance.
[1] Bayh-Dole Act, as amended, 35 U.S.C. §§ 200 et seq. Its implementing regulations are found at 37 C.F.R. Part 401.
[2] 35 U.S.C. § 201(e); 37 C.F.R. § 401.14(a)(2).
[3] 35 U.S.C. § 202(c)(4); 37 C.F.R. § 401.14(b).
[4] The Bayh-Dole Act has several requirements and deadlines by which companies must provide notice of invention, elect title, and file a patent application. Historically, if a contractor failed to disclose a subject invention or to elect title to that invention within the timeframes specified under the Bayh-Dole regulations, the government had 60 days, upon discovery of the error, to object to the procedural error and seek title for itself. In practice, this meant that even where it had mistakenly failed to disclose an invention or to elect title, a contractor could rectify the mistake by filing a notice and/or election of title and then waiting 60 days for the government’s objection period to expire. A 2018 revision to the Bayh-Dole regulations eliminated the government’s 60-day objection period and instead makes the objection period indefinite. 37 C.F.R. § 401.14(d)(1). This means a contractor’s failure to timely notify the funding agency of a subject invention, or to elect title to that invention, could allow the government to request title at any point in the future.
[5] See 35 U.S.C. §§ 202(c)(1)-(3); 37 C.F.R. § 401.14(d).
[6] See 35 U.S.C. § 203; 37 C.F.R. § 401.14(j).
[7] This primarily has occurred in situations where the inventor and subsequent licensees were failing to commercialize inventions that would be of benefit to the general public or that were needed by the government itself. Nearly all of the situations of which we are aware involved pharmaceuticals or other medical products developed with the National Institutes of Health (NIH), Department of Health and Human Services (HHS), or Department of Defense (DoD) funding, although one instance with which we are familiar involved a necessary replacement part for a piece of military equipment.
[8] A non-pharmaceutical example of a third party trying to force march-in rights involved the U.S. Department of Energy (DoE). Ventana Medical Systems, Inc. (later a division of Roche Diagnostics) petitioned the DoE to use the government’s rights in patents held by the University of California related to fluorescent in situ hybridization tests for chromosomal DNA that had been developed by researchers working at the Lawrence Livermore National Laboratory, which was operated by the University. Ultimately, the dispute was settled by the University agreeing to grant a license to Ventana. More information is available here.
[9] 35 U.S.C. § 202.
[10] Interested parties can obtain details about the informational webinar(s) here.
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