Encouraging Innovation in Biotechnology

The Role of the Federal Government from Funding to Antitrust

Term Paper (Advanced seminar) 2003 27 Pages

Law - European and International Law, Intellectual Properties


Encouraging Innovation in Biotechnology:

The Role of the Federal Government from Funding to Antitrust

Article I of the United States Constitution delegates to Congress the power to award limited monopolies for a certain end: “to promote the progress of Science and useful Arts, by securing for limited times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries.”[1] The primary way that Congress has performed this function with regard to science is through the enactment of the Patent Act and the creation of the Patent and Trademark Office (PTO) to administer application of the act.[2]

Recent decades have seen a great expansion in the amount and importance of research in the life sciences and their applied counterparts, biotechnology and pharmaceuticals.[3] Coinciding with this expansion is an expansion of the role of the Federal Government in producing and regulating these areas of research and technology.[4] This expansion has seen both PTO and the Federal Courts develop regulations and standards within the patent system that are focused on the particularities of biotechnology and the development of patent-like awards outside of the patent system. This expansion has also seen the Federal Government become the largest funder of research in the life sciences[5] at the same time as it relinquishes ownership of the resulting intellectual property. More recently, antitrust authorities have begun to impose demands that intellectual property rights in biotechnology be divested in certain mergers.[6] Through all of these policies, the Federal Government has involved regulatory agencies beyond the traditional PTO to further the traditional goal of PTO, to encourage innovation in science, and in biotechnology in particular.

Federal Funding of Research and Transfer of Intellectual Property

The National Institutes of Health (NIH) dominates funding of basic biological research. NIH is the largest source of civilian research money, and usually accounts for at least a third of all federal funding of civilian research.[7] NIH provides around half of the federal funding of research at universities.[8] In the year 2000, NIH allocated $10.1 billion to individual research grants and an additional $1.6 billion in grants to research centers, as well as spending $1.7 billion on research in NIH’s own laboratories.[9] These figures dwarf the amounts spent by private industry, which spent $1.5 billion on life science research in 1994[10] and invested about $670 million a year in biotechnology research from 1990-1999.[11] NIH has also been favored with expanded funding, expected to grow by 80% in the near future from the 2000 level of funding, a rate far greater than inflation and in contrast to decreased federal funding elsewhere.[12]

The NIH is thus a potent force in the lives of 70,000 or so life science researchers employed by academic institutions[13] (industry employs about 24,000 researchers[14] and NIH directly employs 2000 permanent researchers[15] and a few thousand postdoctoral fellows[16] ; these figures include only those with a Ph.D.), providing much of their funds throughout their careers. NIH provides, as noted above, most of this funding through grants to individual researchers, who may spend 30-40% of their time working on such peer-reviewed grant applications.[17] These individual grants average $300,000[18] and major universities expect researchers to provide significant portions of their salaries through these grants (and some also take a cut as ‘overhead’).[19] Some of these funds, and additional direct grants, also pay the salaries of the approximately 50,000 life science graduate students working toward PhDs in academic laboratories.[20] NIH grants are held in prestige and receipt of one early in one’s career is considered a mark of success- the rate of success for an initial grant application is often well below 50%.[21]

Through its dominant position in funding and its individualized approach to such funding, NIH has become the foremost producer of basic life science research worldwide. Legislation over the past two decades though, has mandated that NIH relinquish ownership of the products of this research, transferring intellectual property rights to the researchers and institutions conducting the research.

The early 1980s were a time of change in United States patent policy. In addition to the creation of the Court of Appeals for the Federal Circuit (the Federal Circuit), a specialized court dealing primarily with patent appeals, in 1982,[22] Congress also passed a number of legislative acts designed to transfer intellectual property funded by the government to researchers and universities. This new explicit policy focused on patent rights and was codified in 1980 with the passage of the Bayh-Dole[23] and Stevenson-Wydler acts.[24] The goal of this policy is “to use the patent system to promote the utilization of inventions arising from federally funded research or development.”[25] It was believed that patent rights, permitting patent owners the right to grant exclusive licenses to develop and market inventions, were required to encourage private firms to transform the federally funded academic research into useable commercial products.[26]

The result of this policy has been to greatly increase patenting of university research. Between 1979 and 1997 the number of patents issued to universities rose from 264 to 2436.[27] In comparison, the overall number of patents issued doubled in the same period,[28] and the 10-fold increase in patenting also exceeded the rate of increase of university research spending.[29]

Biomedical research is the source of the majority of these university patenting and particularly licensing revenue: the leading patents at the University of California, Stanford, and Columbia are in biotechnology,[30] with the medical center at Columbia the source of 85% of its licensed inventions.[31] These patents cover not only discoveries of direct commercial potential as well as research tools whose use lies in further development of basic science- a recent study at Columbia states that 50% of its licensed patents cover research tools.[32]

Though the goal of this policy is to encourage the utilization of federally funded research, the acts provide little force to ensure this.[33] Patent owners may severely restrict the use of their patents by refusing to license, by licensing on only on unacceptable terms, or by licensing exclusively to one who will not develop the technology (the licensee may be developing a competing technology and may wish to prevent the development of a rival product). The Bayh-Dole act provides two methods of affecting the patent rights it gives, either before patenting or after.

NIH may restrict patenting of research it funds in “exceptional circumstances” where NIH makes a determination that a restriction on patenting will better serve the purpose of promoting the utilization of research.[34] In doing so, NIH faces an appeals process in the United States Claims Court, which allows the potential patentee the right to appear with counsel, submit documentary evidence, present favorable witnesses, and confront NIH witnesses.[35] NIH also must make a submission to the Commerce Department, which has rule-making authority under the Bayh-Dole act, providing an analysis justifying NIH’s determination that patenting should be restricted in the individual case in question.[36] The Secretary of Commerce must then decide and advise NIH of any permissible actions restricting patent rights.[37] This cumbersome process appears to have only been used once, involving a small National Cancer Institute DNA sequencing project.[38]

NIH may also use statutory “march-in rights” to compel licensing of university patents granted for previously funded research.[39] To do this, NIH must determine that the university or the licensee of the university is not doing enough to promote “practical application of the subject invention.”[40] Alternatively, NIH may make a determination that compelled licensing is required “to alleviate public health or safety needs or requirements for public use specified by Federal regulations.”[41] While there is no need for NIH to make a determination of “exceptional circumstances” in these cases,[42] the decision of NIH is deferred pending the outcome of administrative proceedings and the exhaustion of court appeals.[43] NIH has never exercised these rights.[44] The balance of presumption of Federal policy is therefore highly favorable to patentees and their licensees, effectively allowing them to exercise control over their discoveries without much influence from the provider of the funding for the discovery.

Patenting Biotechnology

Patent owners receive in exchange for their efforts a monopoly on the new invention for a term of 20 years from the date of filing the application. This monopoly allows the patent owner to exclude others from making, using, selling, or importing the patented invention.[45]

Funding and encouragement from NIH aside, an invention must still meet a number of statutory requirements to be patentable. A series of decisions beginning with the Supreme Court’s decision in Diamond v. Chakrabarty[46] further refined the standards for patentability for inventions relating to the life sciences and biotechnology.

Eligibility. An invention must relate to patentable subject matter, defined as “any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof” by statute[47] and held to include “anything under the sun that is made by man” by the Supreme Court.[48] Negatively, the invention must not be considered a “product of nature”.[49]

The contrast between the unpatentable subject matter in Funk Bros. Seed Co. v. Kalo Inoculant Co.[50] and the patentable subject matter in Diamond illustrates this distinction in United States law. In Funk Bros. the patentee discovered a method for growing multiple sub-species of a nitrogen-fixing bacteria in a mixed culture, where previously the different sub-species would inhibit each other’s growth if mixed in the same culture.[51] The Supreme Court decided that the patent was unenforceable because the bacteria did not perform an improved function or a new function, but continued to perform their natural functions that would have occurred independently of the patentee’s work.[52]

In contrast, the patentee in Diamond developed a bacterium containing two exogenous plasmids that encoded functioning enzymes.[53] These bacteria were held to have been given new characteristics from those found naturally.[54] Though the decision in Diamond was made by a bare majority of one, later decisions have followed the rule, allowing for the patenting of genetically modified organisms of more complexity than bacteria. In Ex parte Hibberd, the Patent and Trademark Office’s Board of Patent Appeals held that modified plants were patentable.[55] In Ex parte Allen, polyploid oysters of a kind not known to be found naturally were held patentable.[56] In 1988, this trend was extended to mammals when a patent was awarded for a mouse genetically altered to exhibit disease patterns similar to those leading to cancer in humans.[57]

Products of life sciences research that are not organisms are examined in an analogous fashion to other kinds of chemical compounds.[58] Compounds that exist in nature only in an impure state may be isolated and purified and through this purification process become eligible for patenting.[59] In Amgen, Inc. v. Chugai Pharmaceutical Co., patent protection was awarded for the genomic sequence coding for the blood protein erythropoietin, which stimulates growth of red blood cells.[60] Since 1980, over 5,000 patents have been issued covering human and other animal genes, including genes related to diabetes, tuberculosis, and leukemia and other cancers.[61] Though the basic patentability of artificial organisms and purified organic chemical compounds is well established, any such invention must still meet the remaining requirements for patentability, those of novelty, nonobviousness, utility, enablement, and written description.

Novelty. To a degree, the basic standards for patentability described above deal with the requirement of novelty. To be patentable, though, an invention must also be novel with respect to previous knowledge as well as with respect to nature.[62] Under § 102 of the patent act, an invention must not have been previously disclosed to the public before the application for a patent.[63] Negatively, a patent may not function to remove knowledge from the public domain or restrict access to knowledge or materials already freely available.[64] This requirement has been lessened in the United States to promote scientific publication– such a public disclosure is permitted so long as the same parties making the disclosure also file a patent application within a year of the public disclosure.[65]

Obviousness. An invention may be novel but obvious, and so unpatentable. The standard for determining obviousness under § 103 of the patent act is determined in relationship to one skill in the relevant art at the time of the invention.[66] If the invention would have been obvious to such a person at the time of the invention, the invention is not patentable.[67] This determination involves an examination of the prior art upon which the invention is based, to decide whether the prior art suggests or gives incentive to make the invention.[68] The invention may also be compared to similar known structures and compounds. In spite of similarity or even identity with previously known material, the discovery of an unexpected property or use may make an otherwise obvious invention no longer so.[69] Obviousness may also be defeated by great commercial success, through the reasoning that if the invention really was obvious and had great commercial potential, someone else would have developed the invention before the current patentee.[70]

This standard has been further developed for inventions in biotechnology. In In re Vaeck, the Federal Circuit articulated a two-factor test: an invention is obvious if the prior art suggested to those skilled in the art that they should make the invention and whether the prior art suggests to those skilled in the art that their attempt to make the invention would meet with a reasonable chance of success.[71]


[1]. U.S. Const. art. I, 8, cl. 8.

[2]. See 35 U.S.C.A. 1-376 (West 2001).

[3]. See, e.g., John M. Golden, Biotechnology, Technology Policy, and Patentability: Natural Products and Invention in the American System, 50 Emory L.J. 101, 113-119 (2001).

[4]. Id. 119-122.

[5]. See American Assoc. for the Advancement of Science, AAAS R&D Funding Update (Feb. 10, 2000), www.aaas.org/spp/dspp/rd/prel01p.htm.

[6]. See David A. Balto & James F. Mongoven, Antitrust Enforcement in Pharmaceutical Industry Mergers, 54 Food Drug L.J. 255 (1999).

[7]. See David Malakoff, Balancing the Science Budget, 287 Science 952-5 (2000).

[8]. See National Science Board, Science and Engineering Indicators-1996 at 5-13.

[9]. See National Institutes of Health, Press Briefing, FY 2001 President’s Budget, www4.od.nih.gov/ofm/budget/fy2001Pressbriefing.htm.

[10]. See David Blumenthal et al., Relationships Between Academic Institutions and Industry in the Life Sciences- An Industry Survey, 334 New Eng. J. Med. 368, 369 (1996).

[11]. See Putting a Human Face on Biotechnology: Hearing Before the Senate Joint Econ. Comm., 106th Cong. 87-88 (1999).

[12]. See Clinton Targets $1 Billion Extra for Biomedical Research, CNN.com (Jan. 16, 2000), www.cnn.com/2000/HEALTH/01/16/biomed.research/index.html.

[13]. See National Research Council, Trends in the Early Careers of Life Scientists at 13.

[14]. Id.

[15]. See National Institutes of Health, NIH Almanac 1999, Professional Staff by Type of Doctoral Degree (1999).

[16]. See National Research Council, supra note 13, at 27.

[17]. See Martin Kenney, Biotechnology: The University-Industrial Complex at 18 (1986).

[18]. See Elliot Marshall, Plan to Reduce Number of New Grants Tempers Enthusiasm for NIH Budget Hike, 287 Science 953 (2000).

[19]. See National Research Council, supra note 13, at 18.

[20]. Id. at 21-22.

[21]. Id. at 17.

[22]. See Federal Courts Improvement Act of 1982, Pub.L.No. 97-164, 96 Stat. 25 (codified as amended at 28 U.S.C. §§ 41 et seq. (1982)).

[23]. Act of Dec. 12, 1980, Pub.L.No. 96-517, Section 6(a), 94 Stat. 3015, 3019-28 (1980) (codified as amended at 35 U.S.C. §§ 200-212 (1994)).

[24]. Stevenson-Wydler Technology Innovation Act of 1980, Pub.L.No. 96-480, 94 Stat. 2311-2320 (codified as amended at 15 U.S.C. §§ 3701-3714).

[25]. 35 U.S.C. § 200 (1994).

[26]. See Arti K. Rai and Rebecca S. Eisenberg, Bayh-Dole Reform and the Progress of Biomedicine, 66 Law and Contemporary Problems, in press, at 3 (available at ssrn.com/abstract_id=348343).

[27]. See D.C. Mowrey et al., The Growth of Patenting and Licensing by U.S. Universities: An Assessment of the Effects of the Bayh-Dole Act of 1980, 30 Research Policy 99, 104 (2001).

[28]. See U.S. Patent Statistics, Calendar Years, 1963-2000.

[29]. See Mowrey, supra note 27, at 104.

[30]. Id. at 117.

[31]. See A.C. Geljins & S.O. Thier, Medical Innovation and Institutional Interdependence: Rethinking University-Industry Connections, 287 JAMA 72, 72 (2002).

[32]. Id. at 74.

[33]. See Rai & Eisenberg, supra note 26, at 7.

[34]. 35 U.S.C. § 202(a)(i), (ii).

[35]. 35 U.S.C. § 203(2) and 37 C.F.R. § 401.4(b)(3).

[36]. 35 U.S.C. § 202(b)(1).

[37]. Id.

[38] [38]. See NCI Solicitation, Molecular Target Laboratories, reprinted in Com. Bus. Daily, Feb. 24, 2000, available at 2000 WL 8961813.

[39]. 35 U.S.C. § 203(1).

[40]. 35 U.S.C. §§ 203(1)(a), (b).

[41]. 35 U.S.C. §§ 203(1)(b), (c).

[42]. See Rai & Eisenberg, supra note 26, at 8.

[43]. 35 U.S.C. § 203(2).

[44]. See U.S. Gen. Accounting Office, GAO/RCED-98-06, Technology Transfer: Administration of the Bayh="Dole" act by Research Universities 2 (1998).

[45]. See 35 U.S.C.A. §§ 1-376, especially 154 and 271.

[46]. See Diamond v. Chakrabarty, 447 U.S. 303 (1980).

[47]. See 35 U.S.C. § 101.

[48]. See Diamond v. Chakrabarty, supra note 46, at 309 (citing S. Rep. No. 82-1979, at 5 (1952)).

[49]. See Diamond v. Chakrabarty, supra note 46, at 309.

[50]. See Funk Bros. Seed Co. v. Kalo Inoculant Co., 333 U.S. 127 (1948).

[51]. Id. at 128-130.

[52]. Id. at 130-132

[53]. See Diamond v. Chakrabarty, supra note 46, at 303.

[54]. Id. at 309-310.

[55]. See Ex parte Hibberd, 227 U.S.P.Q. 443 (B.P.A. & Int. 1985).

[56]. See Ex parte Allen, 2 U.S.P.Q.2d 1425 (B.P.A. & Int. 1987).

[57]. See Lisa J. Raines, The Mouse that Roared: Patent Protection for Genetically Engineered Animals Makes Legal, Moral, and Economic Sense, Issues Sci. Tech., Summer 1988, at 64-66.

[58]. Utility Examination Guidelines, 66 Fed. Reg. 1092, 1095 (2001).

[59]. See Amgen, Inc. v. Chugai Pharmaceutical Co., 13 U.S.P.Q.2d (BNA) 1737, 1959 (D. Mass. 1990).

[60]. Id.

[61]. See Byron V. Olsen, The Biotechnology Balancing Act: Patents for Gene Fragments and Licensing the “Useful Arts”, 7 Alb. L.J. Sci & Tech. 295, at 319-320.

[62]. See Diversitech Corp. v. Century Steps, Inc., 850 F.2d 675.677 (Fed. Cir. 1988).

[63]. 35 U.S.C. 102.

[64]. Id.

[65]. See R.S. Crespi, Patents: A Basic Guide to Patenting in Biotechnology 62 (1988).

[66]. 35 U.S.C. 103.

[67]. Id.

[68]. See Graham v. John Deere Co., 383 U.S. 1, 17-18 (1966).

[69]. See In re Papesch, 315 F.2d 381, 386 (C.C.P.A. 1963).

[70]. See Graham v. John Deere Co., supra note 68, at 17.

[71]. See In re Vaeck, 947 F.2d 488 (Fed. Cir. 1991).


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Title: Encouraging Innovation in Biotechnology