To address the shortage of equipment needed in connection with treatment of COVID-19, President Trump recently invoked his authorities to ramp up production of this equipment under the Defense Production Act (DPA) of 1950 by issuing an Executive Order.1 For example, under the DPA, General Motors Company was ordered to produce ventilators.2 In requiring manufacturers to boost production of critical supplies and equipment, some patent rights might be infringed. Two statutory provisions permit this: (1) the government may take, through exercise of its power of eminent domain, a license to the patent under 35 U.S.C. § 14983, and (2) for federally funded patented technology, the government may use its march-in rights under 35 U.S.C. § 203. While the government has never used its march-in rights, it is hard to imagine more exigent circumstances than the nation is dealing with now.
Because a patent is a public franchise4, the government has an eminent domain type power that enables it to use or manufacture any patented product.5 If the government exercises its power and bypasses a patent owner’s rights, 28 U.S.C. § 1498(a) outlines the patent owner’s remedy. Under 28 U.S.C. § 1498(a), the government has expressly waived its sovereign immunity and consented to be sued for patent infringement. So, if the government uses or manufactures a patented product without a license, the patent holder may later bring an action against the U.S. Government in the U.S. Court of Federal Claims to recover “reasonable” costs. In appraising the value of a patent license taken by the government, when the patentee has previously licensed the patent, the court will “virtually without exception” apply a reasonable royalty valuation”6 Government contractors, however, are immune from suit, with U.S.C. § 1498(a) stating that the government is the responsible party.7
The government manufacturing or using patented technology is nothing new.8 During Operation Desert Storm, the government developed night-vision goggles that were covered by a third party’s patent. The patentee later sued the U.S. Government for patent infringement.9 In another example, the U.S. government was sued for infringing surveillance systems patents.10 The government has also used the threat of § 1498 to convince companies to supply products. Faced with the threat of anthrax being used as a chemical weapon in 2001, the government organized a generic stockpiling of the antidote. This antidote was manufactured by Bayer AG and was under patent protection at the time. The government threatened to invoke § 1498, and Bayer AG is reported to have cut its prices in response.11 While not limited to times of national emergency, the government has invoked § 1498 to use or manufacture patented products in pressing circumstances and times of crisis.
Another option that the government may use to ramp up production is to invoke what are termed its “march-in” rights for patented inventions developed with federal funding.12 For example, many life science technologies, pharmaceuticals, and therapeutics are developed, at least in part, with government funding, and would therefore be subject to the reservation of march-in rights. If a patented invention is developed at an institution using federal funds, that institution is normally entitled to an exclusive license to commercialize that patent. But the government can revoke that exclusive license and “march-in” if the patent owner does not make the patented technology available to the public on reasonable terms. By marching in, the government may grant an open license to the patent to allow other commercial entities to develop and market the product. The concept of march-in rights is not unique to the U.S., with other countries, including WTO member countries, having provisions for compulsory licensing “in the case of a national emergency or other circumstances of extreme urgency or in cases of public non-commercial use.”13
The government may invoke its march-in rights in somewhat limited circumstances. 35 U.S.C. § 203 outlines four specific circumstances, including if “action is necessary to alleviate health or safety needs which are not reasonably satisfied by the contractor, assignee, or their licensees.”14 If one of these four circumstances is met, the funding agency, on its own initiative or at the request of a third party, can submit a march-in request to the appropriate U.S. government agency. In the case of health care products, this agency is the National Institutes of Health (NIH). The agency will then review the petition and consider whether to initiate the march-in proceedings. The process begins by officially notifying the patent holder or licensee, who then has 30 days to respond. If the response includes a dispute over the charges, a fact-finding process is conducted.15 The patent holder or licensee has the right to appeal a decision to exercise march-in rights to the federal courts. By contrast, petitioners do not have the right to appeal the decision to not exercise march-in rights.16
The government has been reluctant to exercise its march-in rights in the past. In fact, it has never exercised these rights. The NIH has reviewed less than ten third-party petitions to invoke governmental march-in rights. Most of these petitions asked the government to interfere in the case of high prices. In rejecting petitions based on high prices, the NIH stated that the march-in process should not be a means of controlling prices—“the extraordinary remedy of march-in is not an appropriate means of controlling prices . . . [that should be] left for Congress to address legislatively.”17
Because the nation is facing shortages of drugs and equipment needed for treatment of COVID-19, and it is not simply a matter of high prices, the government may be more willing to use its march-in rights than in the past. However, even in prior cases involving product shortages, the government has declined to interfere because, even if another party was given a license to begin making the patented product, the time for FDA approval would take too long. In a 2010 petition18 involving a company who lacked the ability to produce enough of a drug to meet demand, the petitioner argued that the drug manufacturer could not reasonably satisfy the health and safety needs of the patients. But the NIH denied the petition, reasoning that invoking its march-in rights and granting an open license would not increase the supply in the short term because other manufacturers were unlikely to obtain FDA approval before the problems were addressed.
In deciding whether to invoke its march-in rights, the policy appears to have been that the government will not use march-in rights as a tool to promote competition or address short-term shortages, but it will reserve these rights for situations where the technology is not made available at all. However, the government has yet to receive a petition asking it to invoke march-in rights to help respond to a pandemic. And, the production of some parts and equipment might not be subject to long FDA approval timelines, distinguishing this situation from past petitions.
Faced with shortages of critical supplies and equipment, including personal protective equipment, ventilators, respirator masks, drugs, and other parts and equipment, the government may soon require manufacturers to boost production of critical supplies and equipment, potentially bypassing patent protections. The government could also choose to “march in” and grant a compulsory license to try to up production. If you are a patent owner wondering how these actions may affect your rights, now is a good time to familiarize yourself with your options.
1 Executive Order on Prioritizing and Allocating Health and Medical Resources to Respond to the Spread of COVID-19, (Mar. 18, 2020), https://www.whitehouse.gov/presidential-actions/executive-order-prioritizing-allocating-health-medical-resources-respond-spread-covid-19/.
2 Memorandum on Order Under the Defense Production Act Regarding General Motors Company, (March 27, 2020), https://www.whitehouse.gov/presidential-actions/memorandum-order-defense-production-act-regarding-general-motors-company/.
3 See Decca Ltd. v. U. S., 640 F.2d 1156, 1166 (Ct. Cl. 1980) (“Section 1498 of 28 U.S.C. (1976)12 authorizes the Government to take, through exercise of its power of eminent domain, a license in any United States patent.”)
4 See Oil States Energy Services, LLC v. Greene’s Energy Group, LLC, 138 S. Ct. 1365, 1374 (2018).
5 See, e.g., Zoltek Corp. v. United States, 442 F.3d 1345, 1353 (Fed. Cir. 2006), opinion vacated on other grounds reh’g en banc, 672 F. 3d 1309 (Fed. Cir. 2012) (comparing patent infringement by the government to eminent domain); Leesona Corp. v. U.S., 599 F.2d 958, 964 (Ct. Cl. 1979) (“When the government has infringed, it is deemed to have ‘taken’ the patent license under an eminent domain theory, and compensation is the just compensation required by the fifth amendment.”).
6 See Decca Ltd, 640 F.2d at 1167.
7 Case law also supports that the U.S. Government, not a government contractor, is the proper defendant. See, e.g., Astornet Techs. Inc. v. BAE Sys., Inc., 802 F.3d 1271, 1277 (Fed. Cir. 2015) (granting a motion to dismiss against a government contractor because 35 U.S.C. §1498(a) “makes the remedy against the United States exclusive.”); Decca Ltd, 640 F.2d at 1167 (“the contractor’s activity is deemed under section 1498 to be for the Government”).
8 See, e.g., Decca Ltd. v. U. S.; Astornet Techs. Inc. v. BAE Sys., Inc.; Gargoyles, Inc. v. U.S., 113 F.3d 1572 (Fed. Cir. 1997); 3rd Eye Surveillance, LLC v. U.S., 124 Fed. Cl. 438, 440 (Fed. Cl. 2015).
9 See Gargoyles, Inc. v. U.S.
10 See 3rd Eye Surveillance, LLC v. U.S.
11 James Love, Nonvoluntary use of patents for drugs to treat the Hepatitis C Virus in the United States: Mechanisms available to the Federal Government, State Governments and Private Actors (2014), https://www.keionline.org/sites/default/files/Non-voluntary_use_HCV_patents_USA.pdf.
12 These rights are outlined in the Bayh-Dole Act of 1980, 35 U.S.C. §§ 200-212.
13 TRIPS 31(b).
14 The four circumstances under 35 U.S.C. § 203 are: (1) 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; (2) action is necessary to alleviate health or safety needs which are not reasonably satisfied by the contractor, assignee, or their licensees; (3) 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; or (4) action is necessary because the agreement required by section 204 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.
15 37 C.F.R. § 401.6(e).
16 35 U.S.C.A. § 203 (West).
17 Carolyn L. Treasure, Jerry Avorn & Aaron S. Kesselheim, Do March-In Rights Ensure Access to Medical Products Arising From Federally Funded Research? A Qualitative Study, 93 The Milbank Quarterly 761–787 (2015).
18 Petition to Use Authority under the Bayh-Dole Act to Promote Access to Fabryzyme (Agalsidase Beta), an Invention Supported by and Licensed by The National Institutes of Health under Grant NO. DK-34045.
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