The U.S. government has several options at its disposal to intervene―if necessary―to ensure a low priced treatment is rapidly made available to those in need.
As the COVID-19 pandemic continues to disrupt our lives, wreak havoc on our economy and force millions to social distance, shelter at home or even quarantine, scientists across the globe have turned their focus and expertise to developing new treatments and vaccines aimed at containing the effects of this virus.
The need for this life-saving work has never been more apparent or more urgent. We owe them a sincere debt of gratitude as our lives may literally depend on their success. And as the hard work of these scientists starts to bear fruit, the demand for these treatments will be so urgent and of such magnitude that no single company will likely be able to scale up, manufacture and distribute the treatment to all those in need.
The U.S. government has several options at its disposal to intervene―if necessary―to ensure a low priced treatment is rapidly made available to those in need. First, for inventions created with the help of federal funding, including any of the $3 billon allocated under the Coronavirus Preparedness and Response Supplemental Appropriations Act, the U.S. government has what are known as “march-in rights.” These rights, which arise under the Bayh-Dole Act, allow the U.S. government to require a patent holder to grant others a “compulsory license” to the invention when, inter alia, a funded company has not or is not expected to take “effective steps to achieve practical application of the subject invention” or the public “health or safety needs” are not being “reasonably satisfied.” 35 U.S.C. § 203(a)(1) and (2). Under Bayh-Dole, the U.S. government also retains for itself a worldwide “nonexclusive, nontransferrable, irrevocable, paid-up license to practice or have practiced for or on behalf of the United States” any invention developed using government funds. 35 U.S.C. § 202(c)(4).
Second, for inventions not funded with federal money, the U.S. government has at its disposal eminent domain powers under 28 U.S.C. §1498. Section 1498 allows the U.S. government to make or use any invention, or authorize another party to do so on its behalf, without the patentee’s permission so long as it provides the owner “reasonable and entire compensation” for the taking. The law does not specify what “reasonable and entire” means, and in view of this unprecedented situation, analogous facts to liken the analysis to will be difficult to find.
So with the U.S. government poised to take your invention regardless of whether your company accepts federal funding or not, it may not be possible to fully escape the long-arm of the government’s reach. But here are a few steps to consider when “socially distancing” your ideas.
Be Prepared to Move Quickly
The U.S. government has recently demonstrated a willingness to rely on the private sector to address the country’s needs during this crisis, including securing much-needed medical supplies and equipment. But to fully fend off government intervention, companies will need to demonstrate that they are capable of partnering with others in the private sector to meet what will be an unprecedented surge for new therapeutics without the government’s assistance (recall that the government has also shown a willingness to step in through declaration of war-act provisions if sufficient progress is not being made). Demonstrating the ability to move quickly to meet the acute public demands of this crisis will be key. This includes taking actions early to identify potential business partners across all steps in the sourcing, manufacturing, distribution and sales chains. As the results of your new therapeutic start to show promise, begin to anticipate the needs of a full-scale production. Where will you get your material supplies? What type of equipment will be needed for large-batch production? Where is the equipment located and who owns it? And once your product is made, how will you get it distributed?
Identifying one company that can address all of these issues―and on such a compressed time schedule―is difficult to imagine no matter what their size. And redundancy in the supply chain will be an important stopgap. Thus, your company may need to identify several different partners for each step in order to meet demand, and be prepared to quickly enter into partnerships with potentially dozens of different companies. Ironing out the logistics involved with any one of these steps alone can be overwhelming. Given the urgency and complexity of these transactions, taking steps early to put a plan in place may be your best defense to fend off government intervention.
Keep Price “Fair and Reasonable”
The second major trigger for government intervention is perceived abusive pricing practices. If the government believes the patent owner is seeking excessive profits or to unreasonably benefit from a solution to the current situation, it has the authority under either the Bayh-Dole Act or 28 U.S.C. § 1498 to authorize others to manufacture the patented therapy. And of course government intervention is not the only risk. Public opinion of what may be seen as corporate greed in a time of national crisis will surely be swift and damaging to your company.
At first blush, the issue of establishing a “fair and reasonable” price seems simple enough. It’s not only a matter of good business, but good corporate citizenship―particularly in a time of extreme national need. But in reality, determining what constitutes a “fair and reasonable price” is far from simple. These are unprecedented times. And while it may not be possible to predict the costs associated with such rapid development, scale up and eventual sale of massive volumes of the therapeutics, keeping good cost accounting will help position your company to justify the pricing demand. This includes tracking all research and development costs, material supply costs, licensing fees and distribution expenses, among a host of other costs incurred in bringing a successful treatment to market. And beyond costs, having a firm understanding of the risks of overpricing such a therapeutic should help temper the inclination to overestimate what profit should fairly and reasonably flow from your development efforts.
Do Not Forget Business Fundamentals
While times of national crisis spawn a wonderful sense of national pride and selflessness that no doubt motivates many great scientists to feverishly work towards a solution, there is nothing wrong with concomitantly protecting the ideas you discover. To do so effectively, however, requires good business fundamentals. From an intellectual property perspective, protecting your ideas means filing early for patent rights, properly protecting know-how and trade secrets, and paying close attention to licensing terms. It is only by properly executing these business fundamentals will your company be able to expeditiously complete the dozens of licensing agreements that will be required to fully meet the demand for your COVID-19 treatment and subvert government intervention.
Securing patent rights early is a critical step to protecting your inventions and entering into those critical licensing agreements. With President Obama’s signing of the America Invents Act on September 16, 2011, the U.S. transitioned from a first-to-invent system to a first-inventor-to-file system for patent applications filed on or after March 16, 2013. The new first-to-file system has elevated the importance of early patent filings. Thus, thought must be given earlier in the process to securing broad patent coverage for all novel aspects of the compound, methods of manufacture, methods of purification, methods of treatment or scale-up methods.
In view of the global impact of the COVID-19 virus, foreign patents will also play a critical role in protecting the full scope of your patent rights. It is important to keep in mind that while inventors have up to one year from their earliest date of public disclosure of their invention to file a U.S. patent application, most foreign jurisdictions follow strict “absolute novelty” rules that preclude or limit protection after an invention is publically disclosed. Thus, taking proper steps to file for foreign patents―before public disclosure―will be more important than ever to protecting the full scope of your patent rights and to negotiating those critical licensing agreements.
And even if the government does exercise its rights under either Bayh-Dole or Section 1498, having solid patent protection in place will give your expert another arrow in her quiver during a litigation over what “reasonable and entire compensation” should be.
Know-how and trade secrets can be equally important and valuable as patents. In broad strokes, a trade secret can be any material or information whose value arises from not being generally known. Secrecy is the lynchpin of trade secrets; without it the trade secret ceases to exist. Thus, having a thoughtfully drafted nondisclosure agreement (NDA) in place before sharing any trade secrets or know-how with a would-be licensor or partner is critical. In view of the government’s powers to essentially confiscate patents if deemed necessary, however, being ready to draft and execute proper NDAs rapidly in order to avoid delay becomes even more important.
Finally, with patent rights on file and NDAs in place, the next step will include a critical review of your potential licensing terms. Among the many key terms in these agreements include ownership rights and especially reversion rights and rights to future development. While the immediacy of the current pandemic and the government’s watchful eye on pricing could potentially result in a lower-than-expected price for effective therapies in the near term, no doubt future generations will soon require new vaccinations and immunizations to keep the virus at bay. These future generations represent a long-term opportunity to recoup costs and ensure an additional future royalty stream, provided that proper care is taken today to protect those future rights.
About Duane Morris
Duane Morris has created a COVID-19 Strategy Team to help organizations plan, respond to and address this fast-moving situation. Contact your Duane Morris attorney for more information. Prior Alerts on the topic are available on the team’s webpage.
For More Information
If you have any questions about this Alert, please contact Christopher S. Kroon, Patrick C. Gallagher, Ph.D., Sandra G. Stoneman, any of the attorneys in our Life Sciences and Medical Technologies Industry Group, any member of the COVID-19 Strategy Team or the attorney in the firm with whom you are regularly in contact.
Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.