On December 8, the Biden administration unveiled a proposal to override patent rights tied to government contracts and grants, under the much-publicized “march-in rights” provision found in Section 203 of Title 35 of the U.S. Code. Under the statute, if a patented invention was developed with any amount of government support, the government may force the patent owner to grant a license to a third party to commercialize the invention under specific circumstances. Past administrations (both Democratic and Republican) had decided that offering an invention at a very high price did not justify using march-in rights. In a pivotal shift from precedent, the administration has now proposed that the government should use march-in rights if the invention is unduly expensive or offered under terms that are unreasonable. While the immediate focus is on enabling the sale of more affordable generic drugs, this proposal’s scope is not limited to pharmaceuticals, potentially impacting any product.

The proposal was published by the National Institute of Standards and Technology (NIST) in the Federal Register on December 8 (88 Fed. Reg. 85593). NIST is accepting public comments through 5 PM Eastern time on February 6, 2024.

Understanding March-In Rights

March-in rights have been the subject of public debate for many years. Under the Bayh-Dole Act, when a small business or nonprofit accepts federal support (whether a contract or a grant), patent rights for resulting inventions are owned by the recipient of the support. However, the government retains several rights over the invention.

One such right is the ability of the funding agency to grant a license to a third party without consent from the owner (a “compulsory license”). This may be done at the request of a third party, or on the agency’s own initiative. The agency cannot wield this authority arbitrarily; there are several conditions that must be met. First, the terms of the compulsory license must be “reasonable under the circumstances.” The agency must find that at least one of four conditions are met in order to use march-in rights: (1) the patent owner is not doing enough to “achieve practical application” of the invention in at least one area of use; (2) the license is necessary to alleviate health or safety needs that are not being addressed by the patent owner; (3) the patent owner is not doing enough to accomplish public use of the invention; or (4) the patent owner is not doing enough to ensure that the invention is being manufactured in the United States.

March-in rights are not a “quick fix” for the agency, even when it decides to grant a license. The patent owner has due process rights to contest the legality of the decision. Specifically, the patent owner has a right to an administrative appeal of the agency’s decision, and then may appeal to the U.S. Court of Federal Claims, and then to the U.S. Court of Appeals for the Federal Circuit. This means that it will usually take years before a march-in license can be granted if the patent owner takes advantage of all available appeals.

To date, the United States has never granted a request for march-in rights. There have been at least six requests made to NIH to use its march-in rights against drug patents (enzalutamide, latanoprost, agalsidase beta, anti-CD34 antibodies, and twice against ritonavir), all arguing that the drugs are too expensive. In each case NIH found that lowering prices was not an appropriate use of march-in rights.

The Proposed Framework

Past requests for march-in rights were all based on the common argument that, although the drugs were being sold to the public, their high price made them effectively unavailable to many people. In all cases, the agency disagreed that march-in rights could legally be used as a form of price control.

The recent proposed framework for applying march-in rights reverses this position, instead asserting that march-in rights might be warranted to make an invention available at lower prices.

The proposed framework creates a decision tree to be followed by the agency in deciding whether to exercise march-in rights: determining if the invention was made with federal funding, deciding if any of the four conditions described above apply, and assessing whether march-in rights will adequately address the applicable condition(s).

The framework says in several places that the price of a publicly available invention must be considered in deciding when the four conditions apply. For example, it says that there might not be “public use” if the price or “other terms” are “not reasonable.” It also says that the product’s price can be used to invoke march-in rights under the condition that there is a health and safety need. The agency must consider whether the patent owner is “exploiting a health or safety need in order to set a product price that is extreme and unjustified.” The agency is instructed to consider any changes in price, as well as the initial price, in deciding whether the price is “extreme” or “unjustified.”

Seven hypothetical examples are included (“scenarios”) to illustrate the proper approach to march-in rights. In two scenarios, march-in rights would be justified by a surge in prices, even if the products are being made available to the public. It is worth noting that in every listed scenario, the proposal says march-in rights could be justified.

How Will This Effect Government Supported Research?

Since this is a proposed rule, its final version may differ. If enacted in its current form, the rule would heighten the risk of loss of patent exclusivity for any government-funded invention, especially drugs.

Historically, the risk of march-in rights being granted has been tantamount to zero, because the government has never received a request for march-in rights it considered to be worth granting. The proposed rulemaking indicates the present administration has a specific interest in using march-in rights. It is reasonable to infer that the government will begin granting compulsory licenses if the proposed rule is enacted.

This is particularly the case for drug patents. The administration said that the proposal was part of a suite of policies intended to reduce prescription drug costs in a press release dated December 7. Based on this stated intent, it should be expected that the government will try to grant compulsory licenses for high-priced drugs.

This risk would be difficult to mitigate, because the guidelines themselves contain no bright-line rules as to when march-in rights should be invoked. There is no clear guidance as to what constitutes “high pricing,” “extreme and unjustified” pricing, or “unreasonable” conditions. This creates uncertainty for patent owners, making it challenging to preemptively avoid becoming targets for march-in rights.

On the other hand, anyone targeted by march-in rights has the right to an administrative proceeding, including multiple layers of administrative and judicial review. The law requires the terms of the compulsory license to be “reasonable,” and other protections for the patent owner are built into the law. Although it may be difficult to avoid being targeted for march-in rights, ample legal recourse is available to affected parties.

Summing up, the Biden administration’s proposal creates a situation where patent rights for any invention developed with federal funds may become the subject of an compulsory license. This will reduce the commercial value of federally funded inventions, making them less likely to be developed into viable products. Of course, it is possible that the final rule will be different, or that no rule will be enacted at all.