Federal Government Releases Proposed Guidance for Exercising “March-In” Rights Under the Bayh-Dole Act: Q & A | Goodwin
On December 8, 2023, the National Institute of Standards and Technology (NIST) published a draft guidance document regarding the government’s exercise of “march-in” rights under the Bayh-Dole Act. The following Q&A, in connection with our previously published Client Alert, illuminates the details of the Proposed Framework.
Q: If my company takes SBIR/STTR funding from a federal agency, does the Bayh-Dole Act apply?
A: Yes. A company that receives Small Business Innovation Research (SBIR) or Small Business Technology Transfer (STTR) funding is considered a “contractor” under the Bayh-Dole Act. As such, inventions conceived of or first actually reduced to practice using SBIR or STTR funds will be subject to the Bayh-Dole Act. This applies even if the funds are used only to develop confirmatory data for an invention conceived of without the use of SBIR or STTR funds.
Q: Does the exercise of march-in rights mean the funding agency has taken ownership of a subject invention?
A: No. March-in rights enable the funding agency to require the contractor to grant a license to a responsible applicant or applicants, upon terms that are reasonable under the circumstances. If the contractor refuses to do so, the funding agency may grant the license itself.
Q: Under what circumstances can a funding agency exercise march-in rights?
A: A funding agency can exercise march-in rights if the agency determines that action is necessary:
(a) Because the contractor has not taken, or is not expected to take within a reasonable time, effective steps to achieve practical application of the subject invention in such field of use;
(b) To alleviate health or safety needs that are not reasonably satisfied by the contractor;
(c) To meet requirements for public use specified by federal regulations, and such requirements are not reasonably satisfied by the contractor; or
(d) Because the “manufactured substantially in the United States” requirement has been breached by an exclusive licensee.
Q: Does the Proposed Framework solely apply to the biotech/pharmaceutical industry?
A: No. The Proposed Framework applies to all technology sectors and products at any stage of development.
Q: Has the federal government ever exercised its march-in rights?
A: No.
Q: What steps must the funding agency take when seeking to utilize march-in rights?
A: Under the Proposed Framework:
(a) The funding agency must notify the contractor in writing of its rationale and request an informal consultation and information so that the agency and the contractor may consider possible alternatives;
(b) The funding agency must provide written notice to the contractor of its decision whether to continue with formal march-in procedures;
(c) If opting to proceed with march-in, the funding agency must enable the contractor to submit information and an argument opposing use of march-in;
(d) If the contractor’s arguments against march-in raise a genuine dispute over material facts upon which the march-in is based, the head of the funding agency or his or her designee must undertake fact-finding. During the fact-finding, the contractor will be allowed to appear with counsel, submit evidence, present witnesses, and confront witnesses or experts presented by the funding agency. The fact finder will then prepare or adopt written findings of fact, which will be sent to the contractor. The contractor will be given the opportunity to submit arguments or, if requested, present oral arguments before the agency head or designee makes a decision; and
(e) The funding agency must provide an appeal procedure for the contractor to challenge the agency’s determination.
Q: If a company disagrees with the outcome of a funding agency’s determination, can the contractor appeal the decision?
A: Yes. The Proposed Framework provides that a contractor may appeal that decision in the United States Court of Federal Claims.
Q: Does march-in pertain to a particular product?
A: No. March-in pertains only to specific inventions developed with federal funding, i.e., subject inventions, and the patents and patent applications that claim those specific inventions. The Proposed Framework notes that
if only one of several patents necessary to produce a product is subject to march-in, that likely weighs against march-in, since other licensees would need separate permission to use several other patents before they could make the product. On the other hand, if all the intellectual property needed to produce the product is a subject invention(s), that might result in a different licensee being able to produce product quickly or efficiently.
Q: Who can use march-in rights?
A: Only the funding agency can assert march-in rights. However, nongovernmental entities may submit requests to a funding agency that it utilize march-in.
Q: Can march-in rights be used solely based on pricing of a product?
A: The Proposed Framework notes:
If the contractor or licensee has commercialized the product, but the price or other terms at which the product is currently offered to the public are not reasonable, agencies may need to further assess whether march-in is warranted. Whether action may be needed to meet the needs of the Government or protect the public against nonuse or unreasonable use of the subject invention may include consideration of factors that unreasonably limit availability of the invention to the public, including the reasonableness of the price and other terms at which the product is made available to end-users. (Emphasis added.)
The Proposed Framework provides a series of questions a funding agency should ask regarding pricing, including whether there is justification for the product’s price.
Scenario 6 describes a situation where there was a 400% increase in the price of face masks during the outbreak of a respiratory disease. The Proposed Framework notes that the agency would likely need more information to assess whether the contractor is exploiting the health or safety need in setting a product price that is egregious within the U.S. market and unjustified given the totality of circumstances and/or whether the masks are available on reasonable terms … . By rapidly increasing the price of masks and threatening other manufacturers with litigation during an urgent public health need, the contractor seems focused on keeping prices unusually high while not satisfying demand. This could weigh in favor of march-in.
Q: Can march-in rights be based on the speed of development? Can a funding agency use march-in solely because another party could develop a product faster?
A: The Proposed Framework singles out situations where a contractor has without justification shelved development and has not itself licensed the subject invention to a third party. For example, the Proposed Framework notes that march-in may be asserted if “Action is necessary because the contractor or assignee has not taken, or is not expected to take within a reasonable time, effective steps to achieve practical application of the subject invention in such field of use.” (Emphasis added.)
In scenario 1 of the Proposed Framework, development of the covered product was shelved by the contractor in favor of a product developed without government support.
In scenario 2 of the Proposed Framework, a third party requests the funding agency to march in when a product has not yet been marketed. The scenario notes that the contractor seems to be actively developing a product, and that the contractor has recently raised additional funds to support further development. The scenario specifically notes that “the mere fact that a potential competitor might be able to bring a subject invention to market more quickly than the contractor does not mean the contractor is impermissibly shelving a subject invention.”
Q: Can difficulty manufacturing a product be a basis for march-in?
A: Potentially. Scenario 4 of the Proposed Framework describes a situation in which a pharmaceutical company’s manufacturing facility has been compromised due to flooding, and that company is the sole manufacturer of the only treatment for a rare disease. Per the Proposed Framework,
it appears there may be health needs that are not being reasonably satisfied by the contractor (Statutory Criterion 2). The agency would first ask the contractor for information to confirm the basic facts … The agency would continue its inquiry to assess whether march-in would alleviate the unmet health need, … In this scenario, more treatment for this rare disease is needed … .
From there, the agency would likely need more information to assess whether march-in could feasibly address the problem. For example, does the contractor have a back-up plan for manufacturing, and if so, how long would it be before the contractor can start delivering treatment …? If there’s no back-up plan, that could weigh in favor of march-in. Likewise, the lack of clarity about if and when the contractor will resume manufacturing suggests a potentially prolonged unmet health need, which could also weigh in favor of march-in … .
Q: Can the site of manufacturing be a basis for march-in?
A: Yes. The Bayh-Dole Act provides that an exclusive licensee must substantially manufacture any product embodying the subject invention in the US for sale and use in the US. Waivers to this requirement may be granted based on manufacturing needs. (Note that this provision applies only to exclusive licensees.)
If the march-in analysis is based on the site of manufacturing, the Proposed Framework provides that the funding agency should determine whether “the contractor [is] willing to submit a request to waive the preference for U.S. industry.” The funding agency should also look at whether it “would grant a waiver, if requested.”
Scenario 8 describes a new compound developed at a US university, licensed to a Swiss company, and being manufactured in Switzerland. It further notes that the licensee does not have US manufacturing facilities. Per the Proposed Framework,
…the licensee intends to manufacture only in Switzerland, [and] has no U.S. manufacturing facilities … . Finally, the scenario provides that the contractor has not requested a waiver of the preference for U.S. industry … . These facts, without more and if not remedied, would collectively weigh in favor of march-in.
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