Changes To March-In Rights Under Bayh-Dole And More?

Summary

Since its enactment in 1980, the Bayh-Dole Act has been credited with promoting the development of over 10,000 startup companies and at least 200 pharmaceutical drugs and vaccines, while contributing more than $500 billion or, by some estimates, over $1 trillion to the economy. While the attention of Washington was elsewhere in early January 2021, a notice of proposed rulemaking was published that would change the current regulations implementing the Act. Two of the most noteworthy changes are directed to march-in rights and conveyance of title to patent rights to the government.

More specifically, the National Institution of Science and Technology (NIST), which oversees implementation of the Bayh-Dole Act, proposed to reorganize sections, remove redundancies, clarify certain features, and add new provisions to the Bayh-Dole regulations. Two noteworthy changes in the proposed rulemaking are (i) a clarification of the government’s reasons for exercising march-in rights, and (ii) permitting federal agencies, at their discretion, to waive the requirement to transfer ownership of patent rights to the federal agency for not meeting the deadlines of certain actions. For the former, a new provision would prevent cost concerns from providing the sole basis to exercise march-in rights. For the latter, a new provision would permit a federal agency to waive the requirement for a funding recipient to convey title to the federal agency for late disclosure, election of title, or filing of patent applications.

Both provisions, if adopted, could provide more certainty to ownership of patent rights and consequently, increase their value and attractiveness to investment in and commercialization of the respective technologies. NIST has invited the public to provide comments.^[1]

Background

The Bayh-Dole Act facilitates the commercialization of federally funded research and development by providing reliable patent rights to the funding recipients. After the enactment of the Bayh-Dole Act, funding recipients, or “contractors,” were finally able to take advantage of and monetize such patent rights. As reported to Congress, “[o]ne of the major factors in the reported success of the Bayh-Dole Act is the certainty it conveys concerning ownership of intellectual property.”^[2]

In an effort to update Bayh-Dole regulations to current patent laws and advance the government’s Lab-to-Market (L2M) initiative,^[3] the Secretary of Commerce charged NIST to revisit the Bayh-Dole Act to update its regulations. According to NIST, the L2M-driven regulatory actions included improving funding partnerships, increasing compliance by funding recipients, and improving agency access to reported data. This effort resulted in amended and new regulations that were implemented in May 2018.

Under Bayh-Dole, any business entity or nonprofit organization that receives federal government funding, and has inventions and patent applications made with such funding – even in part – is required to timely disclose and elect title (i.e., secure ownership) to such inventions and patent applications from the federal agency that is providing funding. Under the current regulations, a federal agency can demand title to subject inventions and associated patent rights at any time during the life of patent rights after learning of non-compliance with those actions, e.g., an untimely disclosure or election of title. Non-compliance effectively gives the federal agency unlimited time to take title, placing a cloud over the ownership of the worldwide patent rights for their duration.

Another feature of the Bayh-Dole Act is march-in rights. March-in rights were included to prevent big business from licensing federally funded technologies from universities and small businesses, only to shelve the technologies and not commercialize them, contrary to the purpose of the Act. March-in rights are a vehicle for a federal agency to investigate and, if certain requirements are met, to license third parties to practice the technology.

On January 4, 2021, NIST published in the Federal Register a notice of proposed rulemaking affecting the Bayh-Dole Act regulations.

March-In Rights

To protect against the non-use or suppression of federally funded inventions, for example, a large corporation licensing and not using technology from a university, the Bayh-Dole Act included “march-in” provisions, i.e., the ability of the federal agency to investigate and, if warranted, to force the contractor or their licensee to license the inventions on reasonable terms to a third party. 

Specifically, 35 U.S.C. § 203, entitled, “March-In Rights,” states, in relevant part, that “the Federal agency under whose funding agreement the subject invention was made shall have the right ... to require the contractor, an assignee or exclusive licensee of a subject invention to grant a nonexclusive, partially exclusive, or exclusive license in any field of use to a responsible applicant or applicants, upon terms that are reasonable under the circumstances ...” The section enumerates reasons for when such action can be taken:

1. Failure to take, within a reasonable time, effective steps to achieve practical application of the subject invention;
2. To alleviate health or safety needs which are not reasonably satisfied;
3. To meet requirements for public use specified by federal regulations and such requirements are not reasonably satisfied; or
4. Failure to substantially manufacture in the United States any products embodying the subject invention that are intended for U.S. commerce, unless this requirement has been waived.^[4]

Since the enactment of the Bayh-Dole Act, there has been considerable debate surrounding the interpretation and perceived lack of assertion of march-in rights. In 2001, two professors published a theory that march-in rights were applicable when the price of goods or services were not provided on reasonable terms to the public, which funded the invention through their taxes.^[5]  This reading of the law was embraced by critics of high drug prices, who began petitioning the federal agencies, such as the National Institutes of Health (NIH), to exercise this alleged price-control provision.

Soon after this publication, Birch Bayh and Bob Dole published a counter op-ed piece in The Washington Post denouncing the use of Bayh-Dole to control the price of drugs. In particular, they wrote:

Bayh-Dole did not intend that government set prices on resulting products. The law makes no reference to a reasonable price that should be dictated by the government. This omission was intentional; the primary purpose of the act was to entice the private sector to seek public-private research collaboration rather than focusing on its own proprietary technology.^[6]

Despite all the petitions filed over the years, not once have march-in rights been exercised by a federal agency. However, with ever increasing drug prices in the United States, which can limit drug access by lower income classes, activist groups and now state attorneys general continue to petition the federal government and federal agencies^[7] to use march-in rights to force federally funded drug developers to provide their drugs at reasonable prices. To date, at least eight petitions to exercise march-in rights have been filed with the NIH, including, most recently, a petition with respect to a potential COVID-19 treatment.^[8],[9] Only one time did the NIH believe it was justified in exercising march-in rights; however, they deemed that action would not have solved the manufacturing problem of the patent owner any sooner than a licensee could. Thus, the NIH declined to march in.

While the access to affordable drugs in the United States is a valid and ever-increasing concern, the exercise of march-in rights would likely have a chilling effect on the investment community, universities, and research institutes, among others.  Commercialization of technology made with federal funding would likely be negatively impacted, which may be a source of federal agencies’ repeated reluctance to exercise march-in rights.^[10]

The proposed rulemaking would clarify the march-in rights regulations by adding a provision that march-in rights shall not be exercised by an agency exclusively on the basis of pricing of commercial goods and services arising from the practical application of the invention.  That is, price control cannot be the sole reason for exercising march-in rights. If this proposed provision is enacted, the related unease and disputes about the certainty of patent rights and associated product cost control should abate.

Conditions When the Government Can Take Title

Any entity that receives federal government funding, and has inventions and patent rights made with such funding, is required to timely disclose and elect title to such inventions and patent rights from the funding federal agency. NIST changed the consequences for untimely disclosure or election of title in May 2018. Previously, a contractor had the ability to retroactively correct such a defect in title. After learning of a contractor’s untimely disclosure or election of title, the federal agency had a 60-day period within which it could take title. If the federal agency did not request title during that period, the ownership of the subject invention and patent rights would vest in the contractor. 

Now, importantly, for funding agreements or renewals after May 2018, this 60-day period has been eliminated. Under the new regulations, after learning of the untimely disclosure or election of title, the federal agency can require the contractor to transfer title to the agency at any time during the life of the patents. Without the ability of a contractor to cure the non-compliance, a permanent cloud over the ownership of the associated patent rights is present, thereby removing that which made the Bayh-Dole Act successful – the certainty of ownership of the patent rights resulting from federally funded research and development.

The risk that ownership rights to a patent can be taken away at any time can become a deterrent to investment and licensing of the subject invention. Consequently, following such non-compliance, the federally funded technologies may never achieve their full potential value, contrary to the intended purpose and what helped Bayh-Dole achieve such success.

A new proposed regulation removes the uncertainty of ownership of the patent rights due to untimely disclosure or election of title by permitting the federal agency to waive its ability to convey title to the patent rights.

Although the federal agency can waive its right to request title to the patent rights to a subject invention, it is not under an obligation to do so, nor are there guidelines as to when such a waiver is appropriate. Thus, even if adopted, the new provision might not be applied uniformly by the different federal agencies. Nevertheless, the new provision would provide an avenue for a contractor to begin a dialogue with a federal agency to clear title to the patent rights.

Takeaways

In sum, the proposed rulemaking with respect to the Bayh-Dole Act has positive implications in connection with its intended purpose and success, namely, to provide certainty of ownership of the patent rights to inventions developed using federal funding. By expressly including in the regulations that cost alone cannot be used to exercise march-in rights and that a federal agency can waive its ability to require transfer of title to it after non-compliance by the funding recipient, these new provisions can help to achieve ownership and control over the patent rights to attract investment for commercialization, to benefit Americans and society everywhere.

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^[1] NIST has invited the public to provide written comments on the proposed changes by April 5, 2021. Learn more here.
^[2] Congressional Research Service Report for Congress, “The Bayh-Dole Act:  Selected Issues in Patent Policy and the Commercialization of Technology,” by W. Schacht (December 3, 2012); House Small Business Committee Testimony by Bryan Lord, Vice President for Finance and Licensing and General Counsel of AmberWave Systems Corporation, Patent Issues and Small Business (March 29, 2007); and Senate Small Business and Entrepreneurship Committee Testimony by Neil Veloso, Executive Director for Technology Transfer of John Hopkins Technology Ventures (February 25, 2016).
^[3] The government’s Lab-to-Market (L2M) initiative, more specifically referred to as the Lab-to-Market (L2M) Cross Agency Priority (CAP) goal, was part of the 2018 President’s Management Agenda and was introduced to accelerate the transfer of new technologies from laboratories to the commercial marketplace. It was intended to maximize the economic and developmental return on the estimated $150 billion that the federal government invests in research and development at universities, Federal laboratories, and companies. The L2M CAP goal is co-led by the Department of Commerce via NIST and the White House Office of Science & Technology Policy (OSTP).
^[4] 35 U.S.C. § 203.
^[5] Peter S. Arno and Michael H. Davis, “Why Don’t We Enforce Existing Drug Price Controls? The Unrecognized and Unenforced Reasonable Pricing Requirements Imposed Upon Patents Deriving in Whole or in Part from Federally Funded Research,” 75 Tulane Law Review (2001), p. 631.
^[6] B. Bayh and B. Dole, “Our Law Helps Patients Get New Drugs Sooner,” The Washington Post, April 11, 2002.
^[7] In addition to the Director of the NIH, the Secretary of the U.S. Department of Health and Human Services (HHS) and the Commissioner of the U.S. Food and Drug Administration (FDA) are recipients of some of such petitions.
^[8] https://www.jdsupra.com/legalnews/what-could-a-dhhs-secretary-becerra-18334/
^[9] Recently, 34 state attorneys general requested that the NIH exercise march-in rights on Gilead’s remdesivir, a promising treatment for COVID-19. See https://www.oag.ca.gov/system/files/attachments/press-docs/Remdesivir%20Letter%2020200804.pdf.
^[10] The NIH stated that “because the market dynamics for all products developed pursuant to licensing rights under the Bayh-Dole Act could be altered if prices on such products were directed in any way by NIH… the extraordinary remedy of march-in is not an appropriate means of controlling prices. The issue of drug pricing has global implications and, thus, is appropriately left for Congress to address legislatively. See Elias A. Zerhouni, Director, NIH, In the Case of Norvir Manufactured by Abbott Laboratories, Inc., July 29, 2004, http://www.ott.nih.gov/sites/default/files/documents/policy/March-In-Norvir.pdf.