The National Institute for Standards and Technology (NIST) published a request for information (RFI) in December 2023 on its “Draft Interagency Guidance Framework for Considering the Exercise of March-In Rights.” It’s quite something, if not in a good way.
March-In Rights Provide Very Limited Exceptions to Intellectual-Property Rights
What are “march-in” rights? In brief, they provide for certain very-limited exceptions to patent holders’ (and their licensees’) ability to control the use of their inventions.
Intellectual-property rights (including, but not limited to, patent rights) are supposed to provide incentives to invest, at risk, in the R&D necessary to develop innovative products. Or, as the Patent and Copyright Clause of the U.S. Constitution (Article 1, Section 8, Clause 8) says:
To promote the progress of science and useful arts, by securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries.
On this point, we could also look to the Patents Act of 1790; various subsequent developments in IP law, including contemporary patent law: Title 35 of the U.S. Code; the writings of Joseph Schumpeter; a large body of literature; and, once upon a time, the advocacy of the U.S. Justice Department (DOJ) and the Federal Trade Commission (FTC).
Patent and other IP rights do not guarantee market power or economic profits, but when there is demand for IP-protected products and no close substitutes in the market, they do permit supra-competitive pricing. That’s what they are for. The possibility of those profits is the incentive to invest, at risk, in product development in the first place.
IP rights are not limitless, and the Bayh-Dole Act of 1980 authorizes their suspension under certain limited circumstances. When IP-protected products are developed with the support of federal funding, Bayh-Dole permits government agencies to “march in” on patent holders’ IP rights under special conditions outlined in the statute. But in a break from more than 40 years of precedent, and with no clear statutory authorization, NIST’s new draft guidance framework asserts that where:
the price or other terms at which the product is currently offered to the public are not reasonable, agencies may need to further assess whether march-in is warranted.
Current leadership at the FTC appears to think the framework is a very good idea: “The FTC supports NIST’s expansive and flexible approach to march in.” Expansive indeed.
My International Center for Law & Economics (ICLE) colleague Kristian Stout (rightfully) criticizes both the NIST framework and the FTC’s cheerleading. I would also highlight a critical letter to President Joe Biden from, among others, former secretaries of the U.S. Commerce Department, former heads of the U.S. Patent and Trademark Office (USPTO), and former heads of NIST itself, across both Democratic and Republican administrations. The letter states that the newly proposed criteria under which the government can exercise march-in rights “are all problematic.” As, indeed, they are.
In addition to that letter and Kristian’s post, I would also recommend one by my former FTC colleague (and former FTC general counsel) Alden Abbott. And while we’re at it, comments to NIST from intellectual-property experts (here and here) and additional comments from Alden (here).
Indeed, Alden, Kristian, and nearly everyone not pushing the current NIST/White House agenda are right: the Bayh-Dole Act’s authorization (under specific circumstances) of government march-in rights does not contemplate patent holders’ failure to offer a “reasonable price” as a trigger for those rights. It’s sure as hell not written in the statute itself. And, as the letter from former Commerce, USPTO, and NIST officials reminds us:
That price was never meant to be one of the triggers for march-in rights is not in doubt. In 2002, Senators Bayh and Dole – the original authors – made clear that this omission was purposeful. And earlier, in the late 1990s, Congress rejected amendments that would have added price as a fifth trigger. The repeated, failed attempts clearly demonstrate that even proponents of using march-in rights as price controls recognized that only Congress, not the executive branch, has the authority to amend the Bayh-Dole Act and add price as a trigger.
Before looking at the details, one can understand a certain high-level impetus for highly circumscribed march-in rights. If the American people foot the bill for a product’s development, why leave it to a private party to decide whether to manufacture and distribute the product at all? What if there’s a public emergency that might be ameliorated by production? And why, under such circumstances, leave pricing to a private party?
But given the importance of innovation incentives to drug development and competition, it is crucial to consider and delineate the circumstances under which patent rights are supposed to step aside. What counts as a public “need”? How much federal funding? How much relative to private funding? At what stage of development? And when and how (if ever) should the government intervene?
The FTC’s Comments Fail to Make a Competition Argument
As I said, current FTC leadership supports NIST’s recent frolic and detour into the ancient art of pillaging.
My colleague Kristian was incredulous:
But if NIST takes the FTC’s … contribution seriously, such an expansion could lead to overregulation that would ultimately hurt consumers and destroy the incentives that firms have to develop and commercialize lifesaving medicines.
A few things stand out about the FTC comment. For one, the comments make a mockery of the commission’s once-lauded (if now vastly diminished) competition-advocacy program. In their comments to NIST, the FTC rightly notes its experience in health-care competition matters and interest in the intersection of IP and competition policy.
That’s all fine, as far as it goes. I worked on competition-advocacy matters at the FTC for about 16 years, and I honestly have no idea what they heck they are talking about. Vigorous enforcement of the antitrust laws? Sure, that’s their statutory mission. Disagreement about evidentiary thresholds, burden shifting, etc. Understandable.
But this is not that.
As for the rest of it: if you can find a competition argument in the FTC’s comments, you should win a pony (or, if not a pony, some prize you actually value). According to the FTC, the Bayh-Dole Act is “a statute designed to safeguard public health needs against patent holders’ private interests.” Perhaps, after a fashion, under certain limited and congressionally specified circumstances.
But patent rights are granted by Congress. And the antitrust laws are not public-health laws, exceptions to IP law, or tools for regulatory price regulation. Proper enforcement of IP and antitrust laws can facilitate both innovation and competition, to the benefit of health-care consumers. But IP and competition policy do not guarantee low prices for costly products or convenient supply in emergency circumstances. Bayh-Dole provides for special-case exceptions to established IP and competition policy; and the FTC comments do not even attempt to explain how Bayh-Dole solves a competition problem.
Advocating for “an expansive and flexible approach to march-in rights, including providing that agencies can march in on the basis of high prices” has nothing recognizable to do with established antitrust law or the FTC’s expertise and experience. What is the pro-competition argument for the ad hoc suspension of property rights, or for price regulation?
The FTC suggests that its comments to NIST:
draws on its experience in promoting competition and combatting anticompetitive practices in the pharmaceuticals industry. Lack of competition in pharmaceutical markets can lead to inflated pricing, rendering some lifesaving treatments out of reach for many Americans. Nearly three in 10 Americans report rationing or skipping their medications due to high costs. Contrary to industry claims that high drug prices are necessary to fund research and development (R&D), drug prices often depend more on whether the drug faces competition than the drug’s R&D costs. At the same time, pharmaceutical firms enjoy hundreds of billions of dollars of taxpayer investment in R&D. March-in rights are an essential check to ensure that taxpayer-funded inventions are affordable and accessible to the public.
What’s wrong with that? First, the NIST framework has nothing to do with enforcing the federal antitrust laws to combat anticompetitive mergers and practices in the pharmaceutical industry. As the comments rightly note, the FTC (and DOJ, and state enforcers, and sometimes private plaintiffs) already enforce the antitrust laws in the pharmaceutical sector.
Second, the economic argument is something of an embarrassment: yes, prices are subject to competitive pressures, but IP policy (whether optimal or a kludge) is not an ex post reward for successful investments; it’s an ex ante incentive for firms to make billions of dollars of investments, at risk, in R&D that might or might not lead to successful drug products. Is it the socially optimal reward? We don’t know, partly because we don’t have a neat consensus model of the optimal tradeoffs. But, as explained below, it is eminently clear that Congress has recognized and balanced incentives for both innovation and present competition across a complex set of express statutory provisions in drug and patent law.
Third, yes, federal research funding related to drug development is considerable. On the other hand, private investment in drug development is considerably greater. According to a 2018 Proceedings of the National Academy of Sciences of the United States of America (PNAS) report, National Institutes of Health (NIH) funding contributed to research related to “every one of the 210 new drugs approved by the Food and Drug administration from 2010-2016,” with roughly $115 billion spent on research over that period. That’s real money, even in Washington.
On the other hand, the same report notes that most of the funding (more than 90% of it) “represents basic research related to the biological targets for drug action rather than the drugs themselves.” Such basic research is important to drug development, but it serves diverse research interests. Studies fitting the PNAS report’s criteria were conducted from 1985-2016, and were not at all just about treatment or drug therapies, much less about specific drugs approved during the period studied.
By contrast, according to the Congressional Budget Office (CBO), R&D spending by pharmaceutical companies on actual drug development (not just research on biological targets somehow related to disease development) was considerably greater: about $83 billion in 2018 alone (for those who don’t like doing sums in their heads, 7 x $83 billion = $581 billion). Moreover, those investments are made at risk; that is, the 210 approved products were hardly the only ones investigated. As the CBO report also notes:
Developing new drugs is a costly and uncertain process, and many potential drugs never make it to market. Only about 12 percent of drugs entering clinical trials are ultimately approved for introduction by the FDA.
Studies of drug-development costs provide varying estimates, partly depending on sample selection. Median per-drug estimates vary according to therapeutic area, from $0.8-2.8 billion per new drug. Consistent with CBO observations that pharmaceutical industry R&D investment has risen more than tenfold, adjusted for inflation, from the 1980s to 2019, more recent studies tend to suggest higher average costs (here and here).
Neither the NIST framework nor the FTC comments consider the question of what incentives would be necessary to create the socially desirable level of drug development. Or the costs—including risks to public health—likely to attend frequent and unpredictable suspension of IP protections.
One suspects that no economists were harmed (or even mildly inconvenienced) in drafting the FTC comment. And it’s hard to see a competition argument there, besides an argument for actually enforcing the antitrust laws (which don’t depend on the NIST framework at all).
Fairness, IP Incentives, and March-In Rights
Bayh-Dole’s statutory language does provide that march-in rights might be triggered when “action is necessary to alleviate health or safety needs” that are not being met by the rights holder, but it establishes a high threshold for such intervention. As the letter from former NIST and IP officials notes:
Previously, the bar for whether something constituted a “health or safety need” was universally recognized to be extremely high. For instance, the government briefly considered invoking march-in rights on Cipro, an antibiotic capable of counteracting anthrax, in the aftermath of 9/11 and the ensuing anthrax scare, when the prospect of a terrorist attack using the deadly pathogen loomed large and necessitated building a stockpile of millions of doses quickly. However, the government was ultimately able to secure sufficient quantities of the drug without resorting to such an extraordinary measure.
The NIST framework isn’t just about drug products, but while they’re on the topic of Cipro, let’s talk about drugs. The development and marketing of pharmaceutical and biological drugs are subject to complex federal laws and regulations, including IP provisions beyond those generally provided under federal patent law. The federal Food, Drug, and Cosmetic Act (FDCA) and its implementing regulations governs drug testing and approval based on safety and effectiveness, and the labeling and marketing of drug products, but it does more than that. Under the Hatch-Waxman Act’s amendments to the FDCA and patent laws, Congress created a complex set of incentives for both generic entry (facilitating immediate competition) and the IP rights needed to encourage investment in new products.
These incentives include, among other things, an abbreviated (and lower-cost) approval pathway for generic drugs (21 U.S.C. §355(j)(1)); a statutory exemption from patent-law limitations on generic-drug studies (35 U.S.C. §271(e)(1)); and a 180-day generic exclusivity period for the first generic applicant (21 U.S.C. §355(j)(5)(B)(iv)) to test an innovator firm’s claimed IP rights.
To further encourage innovation, beyond the incentives provided by patent protection, Hatch-Waxman provides for the possibility of patent-term extensions of up to five years to make up for the considerable time and expense required for regulatory approval of a new drug (35 U.S.C. §156)); a five-year exclusivity period for new drugs that are “new chemical entities,” (21 U.S.C. §355(j)(5)(F)(ii)); a three-year new-clinical-study exclusivity period (21 U.S.C. §355(j)(5)(F)(iii, iv)); and a 30-month stay of approval of a generic application if the patent holder sues for infringement (pushing back against the generic applicant’s challenge).
There are other provisions. For example, a couple of years prior to Hatch-Waxman, Congress enacted the Orphan Drug Act, which provides additional incentives (both streamlined approval and seven years of exclusivity) to foster further development of drugs to treat rare diseases. Add to that, among other pieces of legislation, the Biologics Price Competition and Innovation Act of 2007.
In brief, Congress enacted very specific provisions governing the IP rights—and limitations to those rights—available for new drugs. These rights provide considerable incentives to innovators above and beyond those provided under the general patent laws. Congress also recognized the importance of drug-price competition by providing both cover and IP incentives for generic entrants. That is, express statutory provisions provide for a complex balancing of incentives for innovation and competition.
So what about fairness? First, it’s complicated by many factors. Among others, there’s the question of how to balance our interest in new drug development with our interest in vigorous present competition and low prices, and to do that under conditions of uncertainty (which face Congress, as well as pharmaceutical firms and patients). That is, it’s not really an issue of being fair to pharmaceutical companies at all. It’s about the IP policy that best serves society’s interests, including those of both present and future patients.
Second is a question of expertise. I worked at the FTC for some 16 years. I collaborated—off and on, in various ways—with the U.S. Department of Health and Human Services (HHS) and other government agencies. In earlier days, I was also a guest researcher at NIH and a faculty member at a medical school. In these roles, I worked with some very fine people, some of whom are still in government.
But I’d be hard-pressed to argue either that the politically appointed commissioners of the FTC or anyone at NIST has any special expertise in deciding fundamental issues of fairness. By “hard pressed” I mean “there’s no way I would.” And no, inclusion of the word “unfair” twice in Section 5(a) of the FTC Act doesn’t suggest otherwise. At all.
Conclusion
Congress has created a detailed set of countervailing incentives regarding drug development and competition, and Congress has expressly specified certain limited circumstances under which those incentives might be set aside. But Congress has not expressly included “price” among those circumstances.
An expansive notion of march-in rights is simply at odds with the idea of a limited, special-case stopgap exception to IP policy. If Congress has specified both the general policy and the stopgap, administrative agencies should be cautious and disciplined, not “expansive and flexible,” when it comes to suspending negotiated pricing and the congressionally established complex of IP rights (and limitations).
Given all the detail in the Bayh-Dole statute, and in IP rights, and limitations in the drug and patent statutes, the FTC’s support for “an expansive and flexible approach to march-in rights, including on price” (and while we’re at it, expansive and flexible notions of health and safety needs and public needs) is anomalous. Whatever else it is, it’s not competition advocacy, or IP advocacy.
What could possibly go wrong? Well, nothing, if we don’t care about any future investments in drug development or what Congress might have to say about them. But don’t we?