"Takings" by Congress and the Courts

    By Kevin E. Noonan --

In a recent article in the journal Science, Sherry Knowles, the Chief Patent Counsel at GlaxoSmithKline, raises several interesting questions regarding the concept of "takings" of property in the patent context.  In a "Policy Forum" article entitled "Fixing the Legal Framework for Pharmaceutical Research," Ms. Knowles (at right) tackles two aspects of such takings regarding branded drugs.  First, she reviews the provisions of the Hatch-Waxman Act that permit a generic drug maker to use an innovator company's safety and efficacy data to support an Abbreviated New Drug Application (ANDA) (calling these provisions of Hatch-Waxman the "forced data-sharing requirement").  Second, she reviews the effects of several Supreme Court and Federal Circuit cases (including KSR International Co. v. Teleflex, Inc., In re Bilksi, and Ariad Pharmaceuticals, Inc. v. Eli Lilly and Co.) on the validity of patents and the consequences of the retroactive application of these rulings on issued patents.  In each case, Ms. Knowles suggests, companies that have invested substantial sums in developing innovative drugs should be entitled to recompense from the government when their data or their patent protection is taken.

With regard to Hatch-Waxman, Ms. Knowles cites the increased costs of bringing a new drug to market today (approximately $1.2 billion) and in the early 1980's (approximately $230 million), the time when Hatch-Waxman was enacted.  She also sets forth the differences in timeframe that innovators and generic drug manufacturers are burdened with.  For the innovator, this involves "10-15 years of pre-approval R&D after a patent application is filed."  In return, an innovator can recoup up to five years of additional patent protection, capped at 14 years after drug approval.  The generic drug maker is constrained by a much shorter period:  an ANDA filer is prohibited from using an innovator's safety and efficacy data for 5 years after drug approval.  Ms. Knowles characterizes this period as a "political compromise" arrived at during negotiations over the Hatch-Waxman Act, but one that was "without substantial supporting economic analysis."  "This period is vastly inadequate today," she says, "and rarely covers the breakeven point for reimbursement of R&D costs.  Because of this, new drugs are almost never developed without patent protection, which limits the number of new drugs created (as not all useful drugs are patentable)."

In those instances where the Hatch-Waxman regime forces an innovator drug company to share its "expensive clinical research data" with a generic drug company, under circumstances where patent protection does not keep the generic drug off the market, Ms. Knowles asks whether the consequent loss of revenue is a "taking" under the Fifth Amendment?  (While the takings clause of the Fifth Amendment is restricted by its terms to takings by the government, the lines between public and private takings have been blurred by the Supreme Court's decision in Kelo v.  City of New London, where the Court held valid the taking of private property by a public entity for the benefit of another private entity.)  The extent of the taking of private data under Hatch-Waxman having "increased sixfold" over the past twenty years, Ms. Knowles asks whether an increase in the data exclusivity period (which would mitigate the deleterious effects of Hatch-Waxman on return of investment) would not be fair.

Ms. Knowles also criticizes the 14-year cap limitation of Hatch-Waxman on patent term extension.  She notes that patents on inventions such as the "Beerella" (U.S. Patent No. 6,637,447) enjoy a longer term than a patent on a metastatic breast cancer therapy (U.S. Patent No. 6,713,485).  This is hardly a societally-useful outcome.  Increasing the data exclusivity period would mitigate these deficiencies of how Hatch-Waxman has been put into practice (in view of our 26 years of experience with the Act and its consequences).

Turning to court decisions that may constitute a taking, Ms. Knowles notes that "[a] patent application filed today on a pharmaceutical innovation will not be used to defend a marker for about 15 years."  Under these circumstances, the state of the law over that time will have significant effects on the capacity of the patent to protect the innovator drug franchise.  While Congress could enact legislation changing the law, this is generally done prospectively, while court decisions apply retrospectively.  While both actions "change the rules of the game," court decisions have a much more drastic effect, since they may "disrupt well-settled expectations, which can affect the outcome of long-term business decisions."

Ms. Knowles then discusses the changes in the law occasioned by the KSR (obviousness), Bilski (patentable subject matter), and Ariad (written description) cases.  Each one of these decisions (or the prospect of these decisions, since the piece was written before the Federal Circuit decided Ariad en banc, and the Supreme Court has yet to decide Bilski) has had the effect of reducing the certainty or expectation of patent protection ex post facto.  She then summarizes the effects of retroactive application of these (and other) judicial decisions:  "[t]hey can facilitate the increase of challenges by generic producers under Hatch-Waxman, . . . stop R&D investment decisions that have already been made and could prevent a product from reaching the market because of patentability issues."  Ms. Knowles also mentions the potential to prevent R&D to take place at all.

These effects can constitute a taking, and the effects of such decisions should be analyzed according to takings law:

An issued patent is property just like a piece of land or a house (citing Consolidated Fruit-Jar Co. v. Wright, 84 U.S. 92, 96 (1872) and Patlex Corp. v. Mossinghoff, 758 F.2d 594, 599 (Fed. Cir. 1985)).  When a federal judicial decision dramatically changes the law, such that a valid patent becomes invalid, has the federal government taken private property in violation of the federal Constitution?  Application of the Fifth Amendment is not clearly limited to legislative and executive action; nothing in its text bars extension of the takings clause to judicial action.

"The time has come," Ms. Knowles contends, "to rethink the right legal framework to promote and protect investment in pharmaceutical research and development."  This rethinking involves increasing the term of data exclusivity under Hatch-Waxman from 5 to 14 years, and for Congress to give appellate courts discretion to have a decision have prospective effect only, should it overrule prior interpretation of patent law.  The benefit of these changes would be to "substantially increase the number of drugs in the R&D pipeline, which would greatly benefit patients and ultimately benefit generic drug companies."

Before wags jump to mention that these changes would also benefit pharmaceutical companies like GSK, it would be well to consider where novel therapies will come from without companies with experience in obtaining (and financing) regulatory approval of such drugs, protecting them with patents, and having the business resources to bring such drugs to market.  It is certainly the case that these companies are for-profit (it's capitalism, after all), but the costs of R&D and regulatory approval, as well as scale-up, production, and distribution are realities that cannot be ignored.  It would be well to remember that, whatever other criticisms may be raised against the pharmaceutical industry, there is no other way for consumers to get new drugs.  It is also good to remember that innovation is not what generic drug companies do (generally), and that without innovator biotechnology and pharmaceutical companies, generic drug makers would have nothing to copy or sell.

Comments

[Baltazar]

Dear Kevin,

The paper by Bernard Munos (Nature Reviews (Dec 2009) Vol.8, pp959) makes the argument that "the drug industry produces no more NMEs today than 60 years ago." It also makes the argument that US pharmaceutical companies have outperformed their international competitors even with the increased regulation in the US. The paper also argues that the share of NMEs for large pharmaceutical companies has decreased from about 75% (1980) to about 35% (to the 1950 level). Small biotech and pharma companies have gone the opposite: increased from about 23% to about 70%.

While it is true that without innovation there is no generic (by definition), it does not seem quite logical to conclude that innovation has decreased because of more regulation and Hatch-Waxman.

Whatever decline in innovation is there, its cause my be more complex and harder to decipher than just blaming regulation. Regulation and generic competition may be factors to some extent. The Munos paper suggests a number of alternative causes.

As always, I enjoy reading your articles.

[Skeptical]

I apologize to Kevin et al. for being slow (once again), but I struggle with the notion that somehow patent term is different. I find such statements as "patents on inventions such as the 'Beerella' enjoy a longer term than a patent on a metastatic breast cancer therapy" to be highly misleading. If you want to say "effective" or "business-useful adjusted" patent term, then I can buy that.

Patent term is patent term.

Unfortunately, I still struggle with the item "possessed" that is the object of the patent to begin with - if you want a patent for something later refined or developed (to suit FDA requirements), then it appears that what you are patenting are two different things (the first patent in order to beat the competition to the "idea" and the second "patent" which is the idea developed to the appropriate level to pass the FDA requirements). If passing the FDA requirements costs so much money and takes so long, how can anyone truly argue that the item that is requiring so much additional time and money is actually "possessed" by the inventor and the first patent?

Either you have something or you do not. It does not appear fair (or accurate) to say that there are unequal patent terms, but when you are really talking about items having two different levels of development (and in essence are actually two different things).

[6]

"and the consequences of the retroactive application of these rulings on issued patents. "

Some patent attorneys have egg on their face because they didn't understand the law and some patent owners who were duped by those lawyers are left without a patent? Sounds like a private matter between patent holder and their counsel to me.

Alternatively, they could just dump their old counsel and hire someone younger who predicted all the big wins of late, like me.

"In each case, Ms. Knowles suggests, companies that have invested substantial sums in developing innovative drugs should be entitled to recompense from the government when their data or their patent protection is taken."

Except for the small fact that nothing was "taken". Imaginary property rights that never should have existed are invalidated.

"Under these circumstances, the state of the law over that time will have significant effects on the capacity of the patent to protect the innovator drug franchise."

The state of the law is practically the same today as it was in 1952. Learn to read the law, and understand the law and you're golden. If you find yourself bogged down in "precedent" then learn to argue better.

"The benefit of these changes would be to "substantially increase the number of drugs in the R&D pipeline, which would greatly benefit patients and ultimately benefit generic drug companies."
"

And benefit the big drug makers first? Hmmm, don't leave that one out sweetie.

"An issued patent is property just like a piece of land or a house (citing Consolidated Fruit-Jar Co. v. Wright, 84 U.S. 92, 96 (1872)"

Look guys, I've been trying to tell you this for a long time now. Someone on a bench saying something doesn't make what they say overrule the written law. I know, I know, it's hard to understand. But that's the way it is.

"it would be well to consider where novel therapies will come from without companies with experience in obtaining (and financing) regulatory approval of such drugs, protecting them with patents, and having the business resources to bring such drugs to market."

They might come from me and Kev if we make a company. Or, gasp, somebody else's new company omg omg omg!!!!

"but the costs of R&D and regulatory approval, as well as scale-up, production, and distribution are realities that cannot be ignored"

I agree, maybe congress should fund start ups in this area.

"It would be well to remember that, whatever other criticisms may be raised against the pharmaceutical industry, there is no other way for consumers to get new drugs."

The government couldn't do research? Hmmm, I don't know about your logic here...

Loved the article Ms. Knowles, loved poking fun at ya, good day.

[Law Student]

While the cost of bringing a new branded drug to market has increased manyfold since Hatch-Waxman, I would like to see the corresponding increase in revenue and sales due to increased sales, prices, and inflation. I imagine that they are quite parallel, and I wouldn't be surprised if branded companies are bringing in even higher profits now than they did in the early '80s.

This article provides only one side of the story; its not like branded drug companies are now outlaying 500%+ more in R&D but bringing in the same gross revenue as the early '80s.

[Inviting Body Punches]

Ms. Knowles states:

"When a federal judicial decision dramatically changes the law..."

Judicial decisions do not "change the law"--they interpret statutes, rules, and regulations when and where appropriate.

The courts aren't writing laws--what their decisions say is that "this is what this law means", which is a timeless statement.

It is equivalent to saying that "this is what the law has always meant".

Thus, the law under which the patent exists today, and the law under which it was granted, are the same--hence there can be no taking.

Effectively, there was no "giving" in the first instance of what is argued by Ms. Knowles to now be the subject of a "taking".

[Anon]

"Alternatively, they could just dump their old counsel and hire someone younger who predicted all the big wins of late, like me."

Especially someone who advertises as such to perform "law" without the proper standing and credentials.

Are you really saying what it appears that you are saying, 6?

[patent attorney]

I agree with Ms. Knowles that retroactive application of new interpretations of the law does amount to an unjust taking. A case in point is the evolution of the application of 35 USC Section 112 and 101 to the patenting of isolated DNA molecules. 15 years ago, functional language adequately described the invention, including fragments. In the 1990's the law changed requiring a "real world" utility to the patenting of fragments and entire coding sequences. Soon thereafter, a claim would only satisfy 112 if it recited a sequence. Now with the ACLU v. Myriad decision, ....

[6]

"Especially someone who advertises as such to perform "law" without the proper standing and credentials.

Are you really saying what it appears that you are saying, 6?"

Not at all sir, all these folks would have to do is put me through a few years of law school before I came onboard. GW law if they don't mind :)

[6]

"15 years ago, functional language adequately described the invention, including fragments."

Nobody calling you on your shinanigans (i.e. by persuasively arguing to a court) doesn't mean that functional language ever adequately described the invention.

[Kevin E. Noonan]

Dear Balthazar:

I will look into this article - it is good to get all sides of this issue.

Hope you are well. Thanks for the comment.

[Kevin E. Noonan]

Dear Skeptical:

It isn't that what is approved by the FDA is different - it can be (usually is) the same molecule; it's just that the requirements for regulatory approval and patenting are different and have different time-lines. The problem is that when a compound gets regulatory approval is difficult to predict - even if the innovator does everything "right," the FDA may require additional tests etc. that take more time, all while the patent term is ticking away. This is as it should be - you don't want to rush a drug onto the market if the FDA isn't sure it is safe, effective, etc.

But Ms. Knowles' article just points out the consequences (intended or otherwise) of the interplay between the patent and regulatory regimes, and we need to consider these consequences if we want to get the best outcome - for the companies and the public - in developing new drugs.

Thanks for the comment.

[Kevin E. Noonan]

Dear Law Student:

I would welcome a study along these lines.

Thanks for the comment.

[Kevin E. Noonan]

Dear Inviting:

Well, I'm not sure I agree. Congress legislates, courts interpret, and occasionally Congress has to amend the law to make their intention clear (i.e., when the law is misinterpreted by the courts, where "misinterpretation" means "not following the will of Congress").

Occasionally there are constitutional issues, but not always - In re Portolo Packaging is an example. So the law does sometimes change.

When courts change their interpretation of the law, there is an argument that the court has changed the law (at least insofar as it has been reinterpreted) and in that way I think Ms. Knowles has a point.

Thanks for the comment.

[Inviting Body Punches]

Yes, the law does sometimes change, but it is not changed by the courts.

Statutory interpretation is performed within the temporal context of the passing of the legislation. There is no such thing as "misinterpretation" as determined by Congress, as it is the judiciary that decides which interpretation is correct. At best, only in a dissenting opinion could a particular majority interpretation be labeled a "misinterpretation", and then only by a fellow justice.

Congress may feel that a judicial interpretation is unfavorable given current conditions. However, the action taken by Congress is to amend the law, not to vacate the decision of the court. It is only Congress that can change the law, in response to a judicial interpretation.

Kevin, you opine that "When courts change their interpretation of the law, there is an argument that the court has changed the law..."

Exactly what is this argument?

When interpreting a statutory provision, a court never says "The statute meant X in 1980, but means Y today." They say what they believe it to mean. They say what they believe it to always have meant--including at whatever point in history a relevant patent was granted.

Thus, under a current interpretation, there was no grant of rights in the first place, and no valid argument that such rights were ever "taken" by government action.

If it were any other way, any decision having an interpretation that affects some patents in a deleterious way vis a vis some earlier interpretation could be challenged as a taking. And that wouldn't apply to only patents.

I don't think that she has a leg to stand on, but I would be interested in hearing what EXACTLY you believe her argument to be--how can a current interpretation of a law be considered synonymous with a change to that law, that is clearly constitutionally within the sole purview of Congress?

[Skeptical]

Kevin,

"all while the patent term is ticking away. This is as it should be"

I think I agree with what you are saying if you are saying that the patent term is the same and it ticks away while the person holding that patent is proving what he actually says in the patent is true.

But that is NOT what the article leads me to believe. So, as I understand you, the patent terms ARE the same and the article is misleading when it says that the terms are different?

As to having the same molecule - in the instances where all that time and money after application submission results in the government NOT giving approval, is the applicant wrong about what he is claiming (incorrect utility)? Did the applicant "jump the gun" in trying to claim some "thing" that cannot do what he claims it can do? All this government approval stuff seems to me to be the necessary actual development that separates the discovery from the commercialization that the Ariad case exemplifies to a certain degree. The early patent on a molecule is based on a guess that that particular molecule is effective for doing a certain something. The non-patent regulatory government body says you need more than simply stating that is the case - you need to prove it. Thus more time and money is spent actually showing that what the utility claimed is what the utility actually is. It strikes me as the early patent is a "reduction to practice" of writing down a guess and the true "reduction to practice" is the confirmation that the guess is actually correct.

I have a hard time "extending" any protection to anybody if they want exclusiveness for BOTH the "guess" reduction to practice AND the "proven" reduction to practice.