Appendix: Background on Competitive Licensing

Allowing the HHS Secretary to issue competitive licenses for prescription drugs, as has been proposed recently, rests on existing Federal power to exercise compulsory licensing authority encoded in 28 U.S.C. section 1498, a law establishing government immunity from patent claims in cases where infringement serves the public good, while affirming the right of the patent holder to “reasonable compensation” in exchange.1 In the case of pharmaceuticals, if a drug remains under patent protection, the government can authorize production of an equivalent, lower-priced product provided the patent holder receives royalties from its sales. Section 1498 has not been invoked for pharmaceutical products since the early 1970s, but has been used in other more recent cases, including one in 2009 when the U.S. Treasury exercised its authority under section 1498 to allow banks to use patented check fraud software, and another in 2014 when the Department of Defense invoked section 1498 to obtain patent-violating lead-free bullets.2

Section 1498 originates from a 1910 law waiving total government immunity from liability for patent infringement.3 Until the law was enacted, private patent holders had no legal recourse for government violation of exclusivity rights, and Congress sought to provide a partial remedy by allowing patent holders to pursue reasonable compensation. In other words, a patent holder cannot stop the government from producing (or authorizing the production of) a patented good, but can seek reasonable royalties when this occurs. The law conveyed the government’s willingness to issue just compensation for the appropriation of patented intellectual property while maintaining its sovereign immunity from liability for the same. A congressional report accompanying the bill clearly stipulated the need to maintain government power to override patent protections when necessary for the public good.

The 1910 law from which section 1498 originated was amended at various points between 1910 and 1942 in order to clarify the immunity of contractors and subcontractors acting on behalf of the government when the latter invokes section 1498 in order to produce a patented good or license its production. In amending the law, Congress also made clear that the government’s power to circumvent patent law could be utilized in cases of excessive pricing, and, in fact, section 1498 was invoked multiple times in the 1950s and 1960s in order to obtain reasonably priced generic drugs. Veterans Affairs and the Department of Defense routinely used section 1498 in the 1960s to obtain generic forms of U.S.-patented medications from overseas. Use of section 1498 for pharmaceuticals trailed off in the 1970s, which some attribute to the rising political influence of the drug industry during that time.4

In 2001, former HHS Secretary Tommy Thompson considered invoking section 1498 in order to import generic versions of the antibiotic ciprofloxacin, or Cipro, amidst pressure by some members of Congress and consumer advocacy groups due to the threat of an anthrax epidemic at that time. Faced with a potential override of its exclusivity rights by the federal government, Bayer, Cipro’s manufacturer, agreed to offer the drug at a significantly reduced price.5

Similarly, following the introduction of a group of hepatitis C drugs with high list prices in 2013 and 2014, it was suggested that the federal government should invoke its compulsory licensing power in order to more affordably procure this treatment for a larger number of Medicaid beneficiaries, prisoners, and uninsured individuals with hepatitis C for whom these drugs were unaffordable.6 In 2017, the Secretary of Health for the state of Louisiana urged the federal government to invoke its sovereign immunity under section 1498 in order to treat underserved populations with Hepatitis C.7 In order to qualify for hepatitis C treatment with these first-in-class curative drugs, individuals were required to demonstrate severe liver damage bordering on cirrhosis and imminent need for a transplant. The question of federal intervention into this matter has not been addressed by the current Administration.

Importantly, the government’s compulsory licensing power under section 1498 differs from other patent “march-in rights” outlined in the Bayh-Dole Act of 1980. The latter applies to products invented with federal government support, allowing their patents to be held by private sector contractors in order to incentivize the use of federal research funds for private sector development.8 Under Bayh-Dole, the federal government may invoke “march-in rights” to authorize outside production of a patented good developed with federal funding in certain limited circumstances, including to address public health or safety concerns.

By contrast, section 1498 applies to all patented inventions, regardless of whether or not they were produced with federal funding. Further, march-in rights under Bayh-Dole can be requested by a private enterprise, whereas under section 1498, the federal government must initiate compulsory licensing by producing a product itself or requesting a contractor to do so. Lastly, when march-in rights are bestowed, the recipient must comply with established “reasonable terms” which may include royalties paid to the patent holder. Under section 1498, the patent holder obtains compensation from the licensee by initiating court proceedings.

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