The NIST Proposes Clarifications to Bayh-Dole March-in Rights Regulations

Proposed changes to rules governing the commercialization of technologies developed with federal funding prompts significant stakeholder feedback.

On Jan. 4, 2021, the National Institute of Standards and Technology (NIST) published for notice and comment proposed rulemaking regarding “Rights to Federally Funded Inventions and Licensing of Government Owned Inventions (1).” These regulations relate to the operation of the Bayh-Dole Act, which encourages technology transfer and commercialization of inventions made under research grants from the federal government. The law has always had its detractors, but the COVID-19 pandemic has raised the temperature on the issues of drug pricing, compulsory licensing, patent waivers, and federal march-in rights. These considerations are relevant to the changes NIST is proposing, and the comments—estimated to be more than 1800—reflect the passions the topic has engendered.

The Bayh-Dole Act and march-in rights

The Bayh-Dole Act was enacted as the University and Small Business Patent Procedures Act of 1980, Public Law 96-517 (as amended), and codified at Title 35 of the United States Code (U.S.C.) §200 et seq. The law specifies the policies Congress intended to encourage “utilization” (i.e., commercialization) of inventions by small businesses, non-profit organizations, and universities supported in whole or part by grants from the federal government (§200). It permits each such entities (“contractors”) to elect to retain title to inventions made as a result of the funded work (§202), subject to disclosure and notification to the funding agency and to provisions that in exceptional circumstances permit the federal government to retain title; the federal government in all cases retains “a nonexclusive, nontransferable, irrevocable, paid-up license to practice or have practiced for or on behalf of the United States any subject invention throughout the world.” In the event that the contractor elects not to retain title, it may pass to the inventors. There is an express preference for US industry for any license from the contractor to entities capable of commercialization, except under conditions where no US company is willing to enter into a license (§204) (2).

Section 203, regarding march-in rights, is the source of recent, albeit recurrent, controversy. This provision states that under circumstances set forth by regulation the federal granting agency has the right 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, and if the contractor, assignee, or exclusive licensee refuses such request, to grant such a license itself.” These “march-in” rights are limited to circumstances where the contractor fails to take “effective steps” for achieving a “practical application” of the invention; or there are health or safety concerns not satisfied by the contractor; or there is a needed public use not satisfied by the contractor; or the provisions of Section 204 preferring U.S. industry have not been met or have been breached. Objections to the assertion of march-in rights by the federal government are heard exclusively before the U.S. Court of Federal Claims.

Role of NIST in regulating the operation of the Bayh-Dole Act

The Secretary of Commerce, pursuant to the provisions of Section §201 of the Act, has delegated to the director of NIST the authority to promulgate implementing regulations under the Bayh-Dole Act. These regulations are codified in 37 Code of Federal Regulations (CFR) §400 et seq. and march-in rights regulations are found in §401.6. The relevant provisions include a requirement for notice to the contractor and time for response (§401.6b); the mechanics of march-in involving licensing third parties, including a statement of reasons (§401.6c) to be given to the contractor and the field or fields where a license is contemplated by the agency and the timing thereof and an opportunity for the contractor to rebut (§401.6d); factfinding in support of or rebutting the reasons the agency is contemplating third-party licensing (§401.6e), provisions for those findings to be provided in writing (§401.6f); and a determination by the head of the granting agency to license third parties (§401.6g) (3).

The NIST proposal regarding march-in rights

The proposed rulemaking (1) is the result of a nearly three-year effort by NIST to improve federal technology transfer and the commercialization of federally funded inventions. These efforts included four public hearings, a summit hosted by NIST, and as described in the Federal Register notice “extensive consultations with interagency working groups responsible for technology transfer issues, and multiple stakeholder engagement sessions.” The agency issued in April 2019 a comprehensive assessment, NIST Special Publication No. 1234 entitled “Return on Investment Initiative to Advance the President's Management Agenda” (4). This document reviewed federal research efforts and made detailed recommendations to maximize the taxpayers’ return on investment.

This NIST Green Paper outlined 15 findings related to “unleashing” American innovation, seven of which related to Bayh-Dole and were directed to “improve compliance, enhance a contractor's ability to commercialize subject inventions, and increase the return on investment of federal funding through new goods and services to the public.” Of these findings, four are involved in the current rulemaking. Many of these involved with updating regulations to be consistent with electronic filing and other formalities. The most relevant to this discussion is the following:

“Clarify § 401.6 to include a provision that march-in rights shall not be exercised by an agency exclusively on the basis of business decisions of a contractor regarding the pricing of commercial goods and services arising from the practical application of the invention” (4).

Comments on proposed changes

The comments received by NIST during the 90-day comment period suggest that the proposal raises more issues than it clarifies. The agency also held a public meeting on Feb. 25, 2021, to hear testimony regarding the proposal.

While there are too many comments to discuss comprehensively, certain commentators made relevant and informative presentations and submissions (5).

Joe Allen provided a unique perspective as a member of Senator Bayh’s staff during drafting and enactment of the Bayh-Dole Act (and later director of the Office of Technology Commercialization at the Department of Commerce during implementation of the provisions of the Act). Allen explained in the comments that there is a common misunderstanding regarding the march-in rights provision, which was intended to be employed in “instances where there is a lack of good-faith effort to develop a federally funded invention for public use” and not as a mechanism for the government to set prices of patented goods (particularly drugs).

With regard to the NIST proposal intended to be a clarification that march-in rights are not meant to be a way of imposing price controls, Allen noted in his comments:

“March-in rights shall not be exercised exclusively based on the business decisions of the contractor regarding the pricing of commercial goods and services arising from practical application of the invention.”

Mr. Allen recommended in his comments that the two boldface phrases be deleted for further clarity. He characterized these changes as “two potential loopholes” that could be exploited by what he called “opponents” of the law. He asserted that it is most important that the word "exclusively" be removed because “it implies that while pricing may not be the only factor in triggering the march in provision, it could be a factor”, which he contends “is not sanctioned under the law” because “[i]f a product is successfully commercialized, the government has no authority under Bayh-Dole to second guess pricing decisions.” He proposed the other change, regarding removing the words "of the contractor" because business decisions regarding patented products are made by licensees not the contractor when, as is common, the contractor is a university.

Other commentators echoed these concerns, including Eagle Forum Education and Legal Defense Fund (terming the proposed clarification regarding the “exclusivity” term to be “counterproductive”) and Conservatives for Property Rights (CPR) (6), which adopted Allen’s critique in its entirety. In addition, CPR’s comment noted that having the granting agency interfere with product pricing has been tried before and failed. In one specific instance, the National Institutes of Health included a “reasonable pricing” term in licenses under Cooperative Research and Development Agreements (CRADA) in the late 1980s. According to their statistics, which were affirmed in other comments, university technology transfer under these agreements decreased for six years until the requirement was lifted, going from 32 licensing agreements to 153 a few years after the change.

Several other commentators’ submissions were outcome oriented (in favor or against the proposed changes depending on the desired outcome). The Association of University Technology Managers (AUTM) (PDF) submitted comments (7) heavily fact-laden in favor of maintaining the status quo wherein march-in rights were not exercised or available to influence product pricing protected by patents for inventions made with federal funding. According to AUTM, “US universities, hospitals, research institutes and government labs developed over 25,000 inventions, closed almost 10,000 deals with commercialization partners to bring them to market, and resulted in over 700 products in 2019 alone—many funded by the federal government.” Citing their own studies (8) AUTM further asserted that “[a]nother 2019 economic report found that over a 22-year period, inventions arising from universities or hospitals or other public sector research institutions have accounted for up to 5.9 million jobs and added up to $865 billion to the US [gross domestic product] GDP—much of it catalyzed by the Bayh-Dole Act.” This group also asserted these specific arguments in its comments to the NIST proposal:

  • “If potential licensees and their investors determine that the risks involved in further developing and commercializing federally funded inventions is too great, then price of the end-user product becomes a moot point because there will be no product to price.”
  • “If price is a basis for exercising march-in rights, private-sector entities will shun licensing of federally funded [intellectual property] IP from universities and will avoid collaborating with universities. The private sector will no longer view its robust partnerships with universities as mutually beneficial, but rather as a poison pill that could endanger their broader IP portfolios.”
  • “Fewer licenses will result in fewer new products, a less competitive marketplace and, as a result, higher, not lower, prices.”

The Alliance for US Startups and Inventors for Jobs endorsed AUTM’s position in full in its Federal Register comments, stating that the “hard reality—allowing a government agency to control the price of a new drug or a new device after a private company has invested millions of dollars and years of human effort would be the death knell of our pharmaceutical and medical device industries as we have come to know them.” This group makes the further point that the products AUTM mentions as evidence of the success of the Bayh-Dole Act in supporting innovation, “although based on federally funded initial research, did not come about purely as a result of the research funded by the government, as some assert; these products would never have reached the market at all without the investment of vast amounts of human effort and capital by private organizations and their investors.”

The Biotechnology Innovation Organization (BIO) filed comments that emphasized restriction of march-in rights for the reasons set forth in the statute: to require agency factfinding to support need for third-party licenses; and conduct limited to the contractor/assignee (because it is their rights that are at issue). BIO cites its own statistics, including that “prior to the enactment of the Bayh-Dole Act, less than 5% of the federal government’s nearly 30,000 patents had been licensed for commercial development” (9). While citing AUTM’s statistics (10), BIO also asserts that “[o]ur review of FDA data indicate that more than 60% of new FDA approved drugs now originate from small emerging biopharma companies” and “[as] a result, biopharmaceutical companies invested nearly $165 billion in research and development compared with the [National Institutes of Health] NIH budget of just $33 billion.” Moreover, BIO states in their comments that “between 1996 and 2017, [technology transfer under the Bayh-Dole Act] led to the development of more than 200 new drugs and vaccines, $865 billion in added GDP, 5.9 million jobs, and more than 13,000 startups.” Like AUTM, BIO has three specific recommendations for the final rule:

  • “First, the proposed rule at new CFR §401.6.(a)(2) should make clear that the initiation of march-in proceedings will be based specifically and exclusively on one or more of the four enumerated grounds under 35 USC §203(a)(1)-(4).”
  • “Second, the proposed rule should make clear that the requisite agency determination under one or more of paragraphs (1)-(4) of 35 USC §203(a) shall include fact-findings sufficient to establish that a third-party license is necessary to achieve the objective of the applicable paragraph.”
  • “Third, the proposed rule should make clear that a march-in determination under 35 USC §203(a)(1) may be based only on conduct that is attributable to the contractor or assignee, whereas a determination under 35 USC §203(a)(2)-(3) may additionally be based on conduct that is attributable to the licensee.”

Many of the comments to the contrary recognize the march-in rights provisions of the Bayh-Dole Act as an avenue to address increasing drug pricing. For example, 35 congressmen and senators wrote a letter (11) to NIST opposing the proposed rule by equating reasonable licensing terms with “reasonable” prices. The letter sets forth many of the arguments made by other opponents of the law, including that “[b]y financing pharmaceutical research, taxpayers earn the right to obtain affordable access to the resulting medication” and “[m]anufacturers are enabled to earn billions exploiting the sick and dying with sky-high prices on taxpayer-funded inventions.” The letter equates (inaccurately) Bayh-Dole march-in rights to compulsory licensing, and the fantasy that “[t]he patentholder receives a fair royalty and consumers receive fair access to essential medicines.”

Conclusion

NIST’s final rule will depend not only on the persuasiveness of the comments but also on any policy differences that may result from the proclivities of the Biden Administration compared with the Trump Administration (both the Green Paper and the current proposals being the product of the latter). Drug pricing issues have been extant for many years and were at least putatively of a concern during the Trump years, but then President Trump’s rhetoric did not match his administration’s proposals. There is certainly a penchant under the current regime for government intervention on drug prices, but as can be discerned by the comments the issue is not the regulatory language per se but how those regulations are applied. Moreover, the proposed regulations are not limited to drug prices, which has prompted other groups (like the US Chamber of Commerce) to oppose any changes that would facilitate application of the march-in rights provisions of the Bayh-Dole Act to permit the Federal government to use these provisions to impose price controls (by way of compulsory or other third-party licenses) on patented products. While the majority of the comments oppose this use of march-in rights, the political pressure caused by drug prices may result in at least some steps at price control using the threat of government intervention being attempted, no matter how ill-advised this action may appear.

References

1. NIST, “Rights to Federally Funded Inventions and Licensing of Government Owned Inventions,” Notice of Proposed Rulemaking, Federal Register, 86 FR 35, 35–44.
2. USC, Title 35, Chapter 18 –Patent Rights in Inventions Made with Federal Assistance.
3. CFR Title 37, Parts 400 et seq.
4. NIST, Return on Investment Initiative to Advance the President’s Management Agenda, Green Paper, April 2019.
5. NIST, “Rights to Federally Funded Inventions and Licensing of Government Owned Inventions,” regulations.gov, accessed Aug. 11, 2021.
6. Conservatives for Property Rights, “Comments of the Conservatives for Property Rights coalition regarding Notice of Proposed Rulemaking “Rights to Federally Funded Inventions and Licensing of Government Owned Inventions,” regulations.gov, accessed Aug. 11, 2021.
7. AUTM, “AUTM’s Comments on 37 CFR Parts 401 and 404 (Docket ID Number: 201207-0327),” autm.net, accessed Aug. 17, 2021.
8. BIO and AUTM, The Economic Contribution of University/Nonprofit Inventions in the United States: 1996–2017, Report (June 5, 2019).
9. GAO, Administration of the Bayh-Dole Act by Research Universities, Report (May 1998).
10. AUTM, Driving the Innovation Economy, Infographic (2018).
11. Congressman Lloyd Doggett, “Bicameral Effort to Stop Proposed Rule Undermining Long-Standing Tool to Restrain Price Gouging for Taxpayer-Funded Drugs,” Press Release (March 29, 202).

About the author

Kevin E. Noonan is a partner with McDonnell Boehnen Hulbert & Berghoff LLP and co-chair of the firm’s Biotechnology & Pharmaceuticals Practice Group.