Pharmaceutical Companies Have Rights if the Federal Government Seized their Patents | Sheppard Mullin Richter & Hampton LLP
The Biden administration recently determined that it has the right to seize patents covering certain high-priced medicines, in an apparent effort to take a more aggressive approach to lowering drug prices. See Targeting costly meds, Biden admin asserts authority to seize certain drug patents – POLITICO. Pursuant to this plan, the Commerce Department announced it plans to issue a framework that lists the factors the government should consider in determining whether to seize drug patents. Id. The department will seek public feedback and comment on the framework. Id.
Drug companies who may be at risk of having their patents seized should be aware that they have the right to sue the government for patent infringement in such an event. Pursuant to 28 U.S.C. § 1498, the government has the right to “take” privately held patents. Unlike in cases involving infringement by private entities, patentees do not have the right to enjoin the federal government from making or using their claimed inventions. 28 U.S.C. § 1498. However, § 1498 also strips the government of sovereign immunity, allowing patent owners to sue the government for uncompensated patent infringement. Zoltek Corp. v. United States, 672 F.3d 1309, 1319 (Fed. Cir. 2012) (“§ 1498(a) waives the Government’s sovereign immunity from suit when (1) an invention claimed in a United States patent; (2) is ‘used or manufactured by or for the United States,’ meaning each limitation is present in the accused product or process; and (3) the United States has no license or would be liable for direct infringement of the patent right for such use or manufacture if the United States was a private party”). Under § 1498, patent owners have the right to obtain “reasonable and entire” compensation from the government for unauthorized patent use. Patent owners must bring cases against the government for uncompensated patent use in the United States Court of Federal Claims, and there is no right to a jury trial. 28 U.S.C. § 1498; 28 U.S.C. § 174(a).
In determining “reasonable and entire compensation,” the Court of Federal Claims generally determines a reasonable royalty rate “by constructing a hypothetical negotiation between a willing licensor and licensee using factors spelled out in Georgia Pacific.” SecurityPoint Holdings, Inc. v. United States, 156 Fed. Cl. 750, 777 (Fed. Cl. 2021) (citing Georgia Pacific Corp. v. U.S. Plywood Corp., 318 F. Supp. 1116, 1120 (S.D.N.Y. 1970), modified and aff’d, 446 F.2d 295 (2d Cir. 1971)); see also Rite-Hite Corp. v. Kelley Co., 56 F.3d 1538, 1544 (Fed. Cir. 1995) (en banc) (citing Hanson v. Alpine Valley Ski Area, Inc., 718 F.2d 1075, 1078 (Fed. Cir. 1983)). “Plaintiff bears the burden of proof.” SecurityPoint, 156 Fed. Cl. at 777. The Georgia Pacific case provides “a list of evidentiary factors relevant to the determination of the amount of a reasonable royalty for a patent license.” Id. “The parties are not required to address all the factors because there is no formula by which these factors can be rated precisely in the order of their relative importance or by which their economic significance can be automatically transduced into their pecuniary equivalent.” Id. at 781-82.
While not a pharmaceutical case, in the SecurityPoint case the Court of Federal Claims set forth the above framework for determining a reasonable royalty rate. In that case, the asserted patent claimed a method of using carts to manage and move trays at security screening checkpoints at airports. SecurityPoint,156 Fed. Cl. at 753-54. After determining the patent is valid and infringed by the government, the court considered the following Georgia-Pacific factors in determining a royalty rate:
1. the current, established royalty rates under the patent at issue;
2. the royalty rates for comparable technology;
7. the duration of patent and license terms;
8. the profitability and commercial success of the invention;
9. the utility and advantages of the invention over prior art;
10. the nature, character, and benefits of use;
11. the extent and value of infringing use;
13. the portion of realizable profits creditable to the invention alone;
14. expert testimony on royalty rates; and
15. the totality of other intangibles impacting a hypothetical negotiation between a willing licensor and licensee.
Id. at 782. After considering these factors, the court determined that SecurityPoint and the government would have agreed to a two cents per passenger royalty rate. Id. at 791. When this rate was applied to the appropriate royalty base, the court found base damages in the amount of more than $103 million. Id. at 793-94. The court also held SecurityPoint is entitled to delay damages, making this case one of the largest, if not the largest, patent infringement damages awards against the United States of America. Id. at 794-95. And SecurityPoint is also entitled to its attorneys’ fees under the statute because of its size and the length of time the case has been pending. 28 U.S.C. § 1498.
Pharmaceutical companies who are concerned their patents may be taken should consider the following:
- monitor the Commerce Department’s announcement of the factors the government may consider in determining whether to seize drug patents;
- provide commentary on the list of factors; and
- retain counsel experienced in both pharmaceutical patent litigation and § 1498 cases.
