March-in Rights
By Stephen P. Rothman

Under the Bayh-Dole Act, a federal agency that funded an invention may require the patent holder to grant a license to a responsible applicant on reasonable terms. If the patent holder refuses, then the federal agency can grant a license itself. ³ This retained federal power, referred to as "march-in rights," is initially worrisome to investors' counsel if they have not dealt with university spin-outs before, but it need not be. The concern is that the spin-out company that exclusively licenses a federally funded invention from a university will not get the real patent monopoly that an exclusive license ordinarily implies. But solidly established precedent makes it extremely unlikely that march-in rights would ever be exercised in a manner that would trouble an investor. In fact, march-in rights have never been exercised by the government in the 26 years since the Bayh-Dole Act was passed.

Criteria for Marching In. The law directs federal agencies not to exercise march-in rights unless the action is necessary:

• Because the patent holder is not taking effective steps to achieve practical application of the invention,
• To alleviate health or safety needs which are not reasonably satisfied by the patent holder,
• To meet requirements for public use specified by federal regulations not reasonably satisfied by the patent holder; or
• Because an exclusive licensee has failed to give preference to U.S. manufacturing where that would be required.⁴

The National Institutes of Health ("NIH") have been called on to apply these criteria. Written decisions of the NIH, discussed below, display a keen awareness that exercise of march-in rights could disrupt the incentive for commercialization of federally funded research, and thereby undermine attainment of the principal purpose of the Bayh-Dole Act.

CellPro 1997 Petition to NIH. The first published decision regarding march-in rights was rendered by NIH in the CellPro case. In 1984, Dr. Curt Civin, in the course of research funded by NIH at Johns Hopkins University, devised a technology for isolation of stem cells. The technique involved taking an antibody that targets stem cells that can generate blood cells, and attaching it to a magnetic substance. The technology had both therapeutic and diagnostic applications. Baxter Healthcare obtained an exclusive license to the patent. Another company, CellPro, developed a competing stem cell selection device and obtained FDA approval for use of its product. Baxter sued CellPro for patent infringement and won. Baxter refused to grant CellPro a license. CellPro asked NIH to invoke march-in rights. CellPro's argument was that it had the only FDA-licensed product, since Baxter's product had not yet been approved. CellPro's petition stated that if it were not allowed to sell its product, patients would suffer. CellPro asked NIH to require Baxter to grant a license to CellPro.

The NIH refused to grant CellPro's petition. The thoughtfully written decision gives several reasons for this. First, Baxter was not sitting on the technology. They were working on getting FDA approval for their own product. Second, the Baxter product was in fact widely available to patients through clinical trials. Baxter had also pledged that where the Baxter product was not yet available, Baxter would allow CellPro to sell the CellPro product until the Baxter product was available. Third, Baxter had offered CellPro a license prior to the lawsuit. CellPro had declined to pay for the license, instead taking the position that it did not infringe and did not require a license and rolling the dice in litigation. NIH was reluctant to intervene in what it perceived as a commercial dispute.

Most importantly, NIH understood that to intervene would threaten future investments in new university inventions. The decision stated:

"We are wary, however, of forced attempts to influence the marketplace for the benefit of a single company, particularly when such actions may have far-reaching repercussions on many companies' and investors' future willingness to invest in federally funded medical technologies. The patent system, with its resultant predictability for investment and commercial development, is the means chosen by Congress for ensuring the development and dissemination of new and useful technologies. It has proven to be an effective means for the development of health care technologies. In exercising its authorities under the Bayh-Dole Act, NIH is mindful of the broader public health implications of a march-in proceeding, including the potential loss of new health care products yet to be developed from federally funded research."⁵

NIH Director Letter to Nader. Consistent NIH decisions subsequent to the CellPro case have now firmly entrenched the principle that the federal government is very reluctant to exercise march-in rights. In 1999, NIH Director Harold Varmus wrote to Ralph Nader, rejecting a request for NIH to license the World Health Organization to use U.S. government funded medical inventions. In the letter, he stated:

"As a practical matter, it is reasonable to assume that companies will not undertake the development costs of these inventions if they believe the Government will readily allow third parties to practice the inventions."⁶

Abbott Labs / Norvir. In 2004, the NIH rendered another march-in decision, this one pertaining to an HIV / AIDS drug called Norvir, for which a patent was held by Abbott Laboratories. Abbott had developed the drug partially with federal funds.

As noted above, one basis for exercise of march-in rights under the Bayh-Dole Act would be failure of the patent holder to take effective steps to achieve practical application of the invention. Practical application is defined in the law to mean that the invention is utilized and its benefits available to the public on reasonable terms. ⁷

The drug Norvir was approved by the FDA and widely prescribed. The issue in that case was the price. The drug was patented, and expensive, so the issue in the case was whether the benefits were available to the public "on reasonable terms." Members of Congress and the public petitioned NIH to exercise march-in rights. The NIH ruled that "because the market dynamics for all products developed pursuant to licensing rights under the Bayh-Dole Act could be altered if prices on such products were directed in any way by NIH . . . the extraordinary remedy of march-in is not an appropriate means of controlling prices." ⁸

Pfizer / Xalatan. The Xalatan case involved a glaucoma treatment developed jointly by Columbia University and Pharmacia, which was later bought by Pfizer. This product was FDA approved, and covered by a patent exclusively licensed by Columbia University to Pfizer. The price of the drug was higher in the United States than in Canada or Europe. Members of the public expressed concern over that pricing and petitioned the NIH to exercise march-in rights. In a written decision very similar to the Norvir case, the NIH declined to intervene.⁹

Conclusion. The CellPro, Norvir and Xalatan cases, together with the Nader letter and public NIH pronouncements, firmly establish a precedent of extreme caution, if not outright hostility, regarding the exercise of march-in rights. The U.S. government has never exercised march-in rights. One can imagine exercise of march-in rights consistent with established precedent only in extreme circumstances. Perhaps, if a company licensed a useful medical product, but then deliberately refused to make it available, thereby depriving the public of its benefits, exercise of march-in rights could be justified under existing precedent. Similarly, one can imagine that if a company developed a useful defense technology with federal funds, and then refused to (or was unable to) make it available to the United States military, that would be a scenario in which the Defense Department might exercise march-in rights. But companies that license a technology normally do so with the intention of making it available for sale, so these outlying scenarios do not pose a practical threat. Investors contemplating financing a university spin-out have generally concluded that they can do so without concern that the federal government would exercise march-in rights in a way that would interfere with their expectations.

Endnotes

³ 35 U.S.C. 203

⁴ Ibid.

⁵ NIH, Office of the Director, "Determination in the Case of Petition of CellPro, Inc.," August, 1997.

⁶ October 19, 1999 letter from NIH Director, Harold Varmus, to Ralph Nader et al.

⁷ 15 U.S.C. Sections 201(f) and 203(a).

⁸ NIH Decision of July 29, 2004

⁹ NIH Decision of Sept. 17, 2004

Reprinted with permission of the author.

Stephen P. Rothman
Thelen Reid Brown Raysman & Steiner LLP
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