Biden Administration’s Proposal Under Bayh-Dole Act Signals Enhanced Focus on Use of March-In Rights and Lower Drug Pricing

In connection with the Biden-Harris Administration’s recent announcement of various actions to lower health care and prescription drug costs,¹ on December 8, 2023, the National Institute of Standards and Technology (“NIST”) released for public comment a Draft Interagency Guidance Framework for Considering the Exercise of March-In Rights (the “Draft Framework”).² The Draft Framework sets forth the factors that an agency may consider when deciding whether to exercise march-in rights pursuant to the Bayh-Dole Act (“Bayh-Dole”), and includes a first-ever specification that price can be a factor in determining that a drug or other taxpayer-funded invention is not accessible to the public. This specification stands in contrast to the Trump Administration’s unsuccessful attempt to amend the federal march-in regulations to prohibit the exercise of march-in rights on the basis of price alone.³ The potential inclusion of price as a factor in a march-in determination is likely to draw extensive criticism; indeed, some argue that consideration of price in decisions to exercise march-in-rights cuts against the very point of Bayh-Dole given the statute’s core purpose of promoting commercialization of inventions arising from federally supported research or development.

NIST is seeking public comments on the Draft Framework, particularly on how clear the Draft Framework is and whether it addresses concerns about the use of march-in rights. Comments are due on or before February 6, 2024.⁴

This Alert provides an overview of march-in rights, the Draft Framework, and key considerations for universities, pharmaceutical companies, and other stakeholders given the signal that federal agencies may more aggressively use march-in rights.

The Bayh-Dole Act and March-In Rights

The Bayh-Dole Act was enacted in 1980 “to use the patent system to promote the utilization of inventions arising from federally supported research or development . . . [and] to ensure that inventions made by nonprofit organizations . . . are used in a manner to promote free competition and enterprise.”⁵ Bayh-Dole permits individuals and entities (collectively, “contractors”) to retain title to inventions derived from federally funded research and development. It also sets forth specific rights and obligations of the contractors, as well as rights retained by the federal government.

One right retained by the federal government under Bayh-Dole is the funding agency’s right to require the contractor, an assignee, or exclusive licensee of a “subject invention”⁶ to grant a license to such invention on reasonable terms to a responsible applicant.⁷ If the contractor refuses to grant the applicant a license, the federal agency itself may elect to grant a license to the applicant (referred to as “march-in rights”). March-in can only be exercised if the federal agency determines, after investigation, that action is necessary to address one of four statutory circumstances:

1. To ensure effective steps are taken to achieve practical application of the subject invention;
2. To alleviate health or safety needs that are not reasonably satisfied by the contractor, assignee, or their licensees;
3. To meet requirements for public use specified by any federal regulations; or
4. To address domestic manufacturing requirements under 35 U.S.C. § 204.⁸

Bayh-Dole’s implementing regulations set forth a process that an agency must follow in exercising march-in rights, and this process may include written notification to the contractor, informal consultation, written submissions, fact finding, arguments, and appeals.⁹ While the statutory criteria appear to grant broad discretion to federal agencies to march in, to date, no federal agency has exercised its right to march-in.¹⁰

At the end of the Trump Administration, NIST suggested, through a proposed rulemaking, amending the authority of federal agencies to prohibit marching-in based on the pricing of commercial goods and services alone.¹¹ In response, President Biden issued Executive Order 14036, which in part directed NIST to consider not finalizing the march-in provision in the proposed rule.¹² In the March 2023 final rule, NIST did not finalize the march-in provision, but instead stated an intent to engage with stakeholders to develop a framework for agencies considering whether to exercise march-in rights.¹³

Summary of the Draft Framework

The Draft Framework released by NIST on December 8, 2023 was informed by an Interagency Working Group for Bayh-Dole. The Draft Framework has several objectives:

• To provide clear guidance to an agency on the prerequisites for exercising march-in;
• To ensure that decisions to exercise march-in support the policy and objectives of Bayh-Dole;
• To encourage the consistent and predictable application of Bayh-Dole’s march-in authority; and
• To balance the need to incentivize industry investment with the need to promote public utilization of subject inventions.¹⁴

The Draft Framework addresses three questions that an agency would need to consider in deciding to exercise march-in rights and provides eight illustrative scenarios applying the analytical framework.

1. Does Bayh-Dole Apply?

A federal agency considering march-in must first determine whether the invention in question is a subject invention under Bayh-Dole (i.e., whether it was conceived of, or first actually reduced to practice, in the performance of work under a funding agreement to which Bayh-Dole applies). The Draft Framework sets forth a series of questions to assist agencies in that fact-intensive determination.¹⁵

2. Is a Statutory Criterion Met?

If an agency determines that the technology in question is a subject invention, the Draft Framework directs agencies to assess whether one of the four statutory criteria is met. For each criterion, the Draft Framework provides key questions that may be considered, which include consideration of the owners’ and licensees’ conduct with respect to the subject invention.¹⁶

• Practical Application. The first criterion permits the exercise of march-in rights if the contractor has not taken (or is not expected to take within a reasonable time) effective steps to achieve practical application of the invention.¹⁷
  • For subject inventions that are not licensed and that the contractor has no plans to develop or commercialize, key questions under the Draft Framework would be whether the product is viable, and whether the lack of licensing or development is due to a lack of diligence by the contractor. The latter would weigh in favor of the agency exercising march-in rights.¹⁸
  • For subject inventions that are being developed with the intent to be commercialized, the Draft Framework directs agencies to evaluate the diligence efforts of the contractor and the licensee and states that “[t]he mere fact that a competitor may be able to bring a subject invention to market more quickly than that contractor does not mean the contractor is impermissibly shelving a subject invention.”¹⁹
  • For subject inventions that are being commercialized, the Draft Framework directs the agency to understand why the contractor’s current commercialization efforts have not resulted in practical application of the invention, focusing specifically on availability of the product to the public. Importantly, the Draft Framework explicitly acknowledges that an agency is permitted to assess whether the price at which the product is currently offered is reasonable and whether only a narrow set of customers may access a product due to its high price in its determination of whether march-in is warranted.²⁰
• Health and Safety Needs. The second criterion permits the exercise of march-in rights if health or safety needs are not being reasonably satisfied by a contractor. The Draft Framework directs agencies to identify the scope and duration of the health or safety issues and assess whether march-in can timely address the issue.²¹ The agency is also directed to consider how the product at issue can address the health or safety need, or whether alternative products can be used to address need instead, as well as what is actually needed to address the health or safety need (e.g., a greater quantity of a specific product). Here, too, the agency is permitted to consider price in making its decision, such as whether an initial price or any price increase appears to be extreme, unjustified, or exploitative of the health or safety need.²²
• Public Use Requirements. The third criterion permits the exercise of march-in rights if a federal regulation requires public use of a product commercialized from a subject invention, and that requirement is not being reasonably satisfied.²³ The Draft Framework directs agencies to consider how much time is required to meet the public use requirement, given that march-in cannot be used to quickly remediate an identified issue.
• Manufacturing Requirements. The fourth criterion permits the exercise of march-in rights for violations of 35 U.S.C. § 204, which relates to domestic manufacturing requirements for products from the subject invention. Considerations for exercising march-in include whether a license agreement contains a requirement for compliance with section 204; if not, whether such a license can be amended; and whether a waiver has been sought.²⁴

3. Would March-In Support the Policy and Objectives of Bayh-Dole?²⁵

Assuming that a product or invention is subject to Bayh-Dole and that one of the four statutory criteria is met, the Draft Framework directs agencies to consider whether the use of march-in rights would support the policy and objectives of Bayh-Dole:

• How marching-in will address the issue identified in the statutory criteria. The Draft Framework directs agencies to consider the practical effect marching-in would have on, for example, an existing health and safety need. The inquiry aims to identify how a new license would improve access to products by considering, e.g., whether the license for the subject invention is sufficient to manufacture the product at issue (or whether the product relies on numerous patented inventions), and patent expiration dates.
• Whether an alternative to marching-in can be used to address the identified issue. The Draft Framework directs agencies to consider whether there are alternatives that address the underlying problem without the negative consequences of an exercise of march-in rights.
• The wider implications for the use of march-in. The Draft Framework acknowledges that using march-in would have potential negative effects such as chilling innovation and discouraging businesses from licensing technology from universities and directs agencies to consider those potential broader impacts when assessing specific cases.

Looking Ahead

The Draft Framework, in conjunction with the Biden-Harris Administration statement on December 7, signals an enhanced focus on the use of march-in rights, although it remains to be seen whether the Draft Framework will ultimately be finalized and/or result in the actual exercise of march-in rights. Nonetheless, several parts of the Draft Framework are noteworthy, including but not limited to the following:

Considerations Related to Drug Pricing

While the Draft Framework is designed to address all subject inventions, a key area of focus for the Biden-Harris Administration in this initiative and others remains drug pricing. As has been the case in other recent federal drug pricing policy initiatives, the Draft Framework appears to afford the executive branch broad latitude to interpret its rights under Bayh-Dole using highly subjective criteria and considerations.²⁶ Further, while the Draft Framework emphasizes that prices can be a relevant march-in consideration, and highlights several examples of the same, the Draft Framework does not clearly state which prices should be considered in evaluating whether a price is “reasonable.” Specifically, the Draft Framework fails to distinguish whether it will consider reasonableness by reference to list prices or net prices. List prices are publicly available but may bear little to no resemblance to what a patient or payor actually pays for a drug given the role of rebates, other price concessions, and various supply chain intermediaries in the drug pricing ecosystem. By contrast, net prices vary by payor segment and are, in most instances, confidential and highly proprietary, but may more accurately capture actual drug costs from the perspective of a payor. Patient pricing in the form of cost-sharing may be disconnected from both list and net prices.

Considerations for Licensing and Collaboration

If adopted, the Draft Framework’s approach to march-in rights could significantly impact licensing and collaboration arrangements between universities, biotech companies, and other parties. University inventions are, by and large, early-stage and high-risk, and a greater likelihood of federal government march-in adds additional uncertainty, which may discourage companies from taking a license to university technology. The Draft Framework would also impact terms in license and other arrangements, including diligence commitments, termination rights, exclusivity, and even financial consideration. It is important for universities to understand that having licensed a subject invention does not remove the university contractor from these obligations, and it could be drawn into onerous march-in proceedings (as detailed above) that would require significant time, energy, and expense.²⁷ Contractors, including universities and licensees can take certain steps now to reduce the risk of agencies using march-in rights, with potential benefits even under a somewhat altered, final framework for march-in, including paying close attention to milestones, diligence, and termination provisions to forestall an allegation of unreasonable development progress. Universities can also pay close attention to the designation of “subject inventions” and to documenting efforts to seek commercialization partners.

Conclusion

The Biden-Harris Administration’s announcement concerning march-in rights, in combination with NIST’s Draft Framework for evaluating the exercise of march-in rights, reflects yet another example of this Administration’s concerted focus on drug pricing and its apparent willingness to use a broad range of executive tools to address prices that are viewed as unreasonable. It also represents another example of a drug pricing policy that may significantly undercut research and development of next-generation therapies. It remains to be seen, however, whether there will be a march forward toward the federal government pursuing march-in rights, or instead, whether this is only a reflection of the Administration’s policy objectives on the eve of an election year.

If you have any questions concerning the Draft Framework, please do not hesitate to contact one of the authors or your regular Ropes & Gray advisor.