White House’s Drug Patent Plan Undercuts Research and Innovation

On Dec. 7, the White House announced a plan it claims will lower prescription drug costs.

It centers on using a 43-year-old law—the Bayh-Dole Act—to let government officials force patent owners to cancel existing licenses, and instead license their patents to generic companies so they can make and sell cheaper copies. That amounts to seizing private patent rights.

The proposal is legally unsupportable. Nowhere does the Bayh-Dole Act permit so-called march-in rights for price control. And from a policy standpoint, the proposed rule is ill-conceived.

The Bayh-Dole Act catalyzed decades of US innovation by decentralizing the licensing process for the results of federally funded research. Upending the law over opposition to some drug prices is short-sighted—and threatens to choke off investment into tomorrow’s life-changing and lifesaving technologies.

Congress passed the Bayh-Dole Act in 1980 because tens of thousands of inventions and discoveries, backed by government research funding, were gathering dust at research universities and federal laboratories. By and large, private-sector partners—those that could commercialize technologies and bring them to the marketplace—were uninterested in this work because the government laid claim to the patents and declined to license them exclusively.

The Bayh-Dole Act replaced this ineffective system by allowing institutions outside the government, such as universities and non-profit research labs, to hold patents arising from public funding. Institutions can then license these patents to a private firm that will develop the product.

To help get promising discoveries off the shelf and to consumers, Bayh-Dole’s authors included a “march-in” clause allowing the government to re-license patents for research that isn’t being commercialized. This provision is at the center of the new White House proposal. Under the plan, federal officials could use march-in to re-license patents behind successful consumer products if they determine the price is too high.

But march-in was never meant to function as a price control. If setting prices were the law’s purpose, Congress would have said so. But Sens. Birch Bayh (D-Ind.) and Bob Dole (R-Kan.) explicitly wrote the opposite in 2002—that their statute “did not intend that government set prices on resulting products.”

Legal minutiae aside, allowing the government to void exclusive patent licensing agreements would prove economically devastating. Patents incentivize companies to make risky investments on promising technologies, and property rights are the legal incentive to sell these innovations in the marketplace.

This is precisely what Bayh-Dole sought to promote, and it has succeeded brilliantly. Since its enactment, the legislation has led to the development of over 200 drugs and vaccines, and contributed almost $2 trillion to US gross industrial output.

If President Joe Biden succeeds in changing the law to permit unlimited violations of private patent rights, countless promising medicines and other technologies will never reach the public.

The administration’s attempts to creatively reinterpret laws may not stop with the Bayh-Dole Act. A handful of law professors from Harvard, Yale, and Columbia are pressuring the Biden administration to misuse yet another statute seeking unilaterally to slash drug prices.

The professors’ target is an eminent domain statute codified in Section 1498 of the US Code. Most people familiar with the concept of eminent domain understand it within the context of private property. For the government to expropriate private property for public use, such as when it builds a highway or power plant, it must fairly compensate the property owner.

Section 1498 applies this same principle to intellectual property. It recognizes the US government may use patented inventions without permission from the owner, provided that the invention is used “by or for the United States” and authorizes a court to compensate the patent owner.

That “by or for the United States” stipulation is crucial. It means this rule only applies in limited circumstances, when the patent in question is used directly by the federal government or a product is made for the government.

The academics argue, however, that Section 1498 allows the federal government to infringe on any US patent if doing so could broadly “benefit the government.”

According to them, a government agency could use Section 1498 to authorize a generic drug company to create and sell cheaper, copycat versions of a medicine that is still under patent. That would “benefit” the government by reducing costs for federal programs such as Medicare.

Contrary to what the academics argue, the government would be forced to pay drug innovators their lost profits as compensation for infringing their IP. Taxpayers would ultimately foot that astronomical bill, eliminating any potential savings.

Most experts reject such an application of Section 1498. A group of over two-dozen law professors, former judges (including us), and former top-ranking government officials recently penned a letter urging lawmakers to reject calls to misuse the Bayh-Dole Act and Section 1498 to achieve political aims.

Biden administration officials and some academics may think the federal government has a magic wand it can wave to lower prescription drug prices. But their theories lack legal merit and simply make for bad policy.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Paul Michel is board member of the Council for Innovation Promotion, served on the US Court of Appeals for the Federal Circuit, and as its chief judge.

Kathleen O’Malley is board member of the Council for Innovation Promotion, served on the US Court of Appeals for the Federal Circuit, and the US District Court for the Northern District of Ohio.

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