Merck misconstrues patent law in its recent Takings Clause challenge to Medicare’s price negotiation program.
Last month, the pharmaceutical company Merck filed a lawsuit that alleges that the Medicare price negotiation program created by the Inflation Reduction Act will lead to an unconstitutional taking of its patented medicines. To support that argument, Merck’s complaint seems to misconstrue the rights that patents confer. This misstatement has significant implications for both Merck’s takings claim and policy debates about access to medicines.
In its complaint, Merck states that because it has patents, Medicare “cannot just manufacture its own versions of Merck’s drugs for beneficiaries; it must procure them from Merck.” Patents, however, do not bar Medicare from making its own versions of Merck’s drugs. Merck might be able to use its patents to keep private parties off the market. But that changes when the government gets involved. Patents do not give Merck—or any other patent holder—the power to stop the government from making patented medicines.
It makes sense that patent holders cannot use patents to stop government actions. The government is the entity that gives out patents in the first place. Just as Congress made the decision to allow private parties to obtain patents, it also made the decision to allow the government to make and use any patented inventions it wants.
Congress made this choice by declining to allow courts to order injunctions when the government infringes a patent. When a private party infringes a patent, the patent holder can seek an injunction, which can legally compel the party to stop taking certain actions. In the pharmaceutical context, for example, an injunction could stop a generic competitor from producing patented medicines. Yet when the government infringes a patent, recovery is limited to monetary damages.
And even monetary damages have not always been available. In the late 1800s, for example, the Supreme Court held that the government was immune from patent infringement lawsuits under a legal doctrine called sovereign immunity. In 1910, Congress passed a law that waived the federal government’s sovereign immunity for patent infringement claims. This law, commonly referred to as Section 1498, allows patent holders to sue the United States to recover “reasonable and entire compensation” for patent infringement. Significantly, Section 1498 does not allow patent holders to seek injunctions.
As a result, if the government chose to manufacture patented medicines, a patent holder would not be able to stop those actions. The patent holder may be able to recover damages, which could increase the cost for the government to produce the drugs. But the patent itself would not allow the patent holder to obtain an injunction to halt government production.
Beyond producing medicine itself, the government could also contract with third parties to produce patented medicines. In 1918, Congress expanded Section 1498 to cover actions by government contractors. Courts have held that Section 1498 provides the exclusive remedy for acts of patent infringement by government contractors when the contractors act for the government with its “authorization or consent.”
The federal government has contracted with third parties to produce patented medicines before. In the 1960s, the U.S. Department of Defense purchased patented drugs from unlicensed manufacturers to obtain lower prices on the drugs. And more recently, lawmakers and commentators have urged the government to use Section 1498 to introduce generic drugs into the market as a strategy to lower prices of patented medicines.
The option of public production reveals a weakness in Merck’s claim that Medicare’s price negotiation program will result in a taking of its patent rights. By merely limiting the price the government is willing to pay for Merck’s patented medicines, the government is not limiting Merck’s right to exclude others from the market. The price negotiation program allows Merck to remain the exclusive manufacturer of its patented products. If the government got into the manufacturing business, on the other hand, Merck could face competition on the market.
This distinction could be significant for the constitutional analysis of the price negotiation program. A patent merely confers a right to exclude. It does not give the patent holder the right to sell the patented product, nor does it give the patent holder the right to sell products at any particular price. The price negotiation program therefore does not infringe Merck’s right to exclude others from making, using, or selling its patented medicines. It simply places a cap on the price that Medicare is willing to pay.
Any takings claim based on patent rights would need to be based not on a claim that the program directly takes away Merck’s patent rights, but instead on a claim that the regulation decreased the value of Merck’s patents. Such regulatory takings claims based on the value of patent rights have not fared well in the Federal Circuit thus far. And it remains unsettled whether patents are even protected by the Takings Clause.
Beyond Merck’s lawsuit, public production is an option in the government’s regulatory toolkit to address high prices of patented drugs. Obstacles beyond patents, though, may limit its use in practice. Generic medicine producers may need to navigate other regulatory barriers with the U.S. Food and Drug Administration, and manufacturers must secure distribution networks to get drugs to pharmacies and patients. And reasonable royalties owed to patent holders could also increase costs of publicly produced pharmaceuticals.
But as a legal matter, patents do not bar public pharma production.
In the Inflation Reduction Act, the federal government chose a different strategy to combat high drug prices. Instead of public production, Congress instructed the U.S. Department of Health and Human Services to negotiate the price of a narrow set of single source drugs that Medicare reimburses. Congress did not choose this path because it had to. The Medicare price negotiation program was a policy choice. If it does not lead to the desired results, the government can consider other options. Merck might want to keep that in mind.
