" The Compatibility of Patent Law and the Internet ," 78 Fordham Law Review 2783 (2010) Abstract The essay explores how patent law in the U.S. can be structured to support Internet innovation. The theories of the Internet, as put forth by the books "The Future of the Internet--And How to Stop It," by Jonathan Zittrain, and "In Search of Jefferson's Moose: Notes on the State of Cyberspace," by David Post, are discussed. The importance of patents for startup Internet software companies, which prevents larger firms from copying their software, is noted.

"The Compatibility of Patent Law and the Internet," 78 *Fordham Law Review* 2783 (2010)

									Abstract

The essay explores how patent law in the U.S. can be structured to support Internet innovation. The theories of the Internet, as put forth by the books "The Future of the Internet--And How to Stop It," by Jonathan Zittrain, and "In Search of Jefferson's Moose: Notes on the State of Cyberspace," by David Post, are discussed. The importance of patents for startup Internet software companies, which prevents larger firms from copying their software, is noted.

Jeanne C. Fromer, The Compatibility of Patent Law and the Internet, 78 Fordham L. Rev. 2783 (2010)

unanticipated change through unfiltered contributions from broad and varied audiences." ' 7 Zittrain associates five factors with generativity: (1) how extensively a system or technology leverages a set of possible tasks; (2) how well it can be adapted to a range of tasks; (3) how easily new contributors can master it; (4) how accessible it is to those ready and able to build on it; and (5) how transferable any changes are to others. 8 The same generativity, then, that yields for so many the Internet's pleasures of, say, Google Earth, digital music and television episodes on demand, and Wikipedia, also enables hackers to steal these same people's credit cards or other personal details, crash their software, and bring down networks. After colorfully laying out the history of computing and the Internet and how generativity is central to the success of each, 9 Zittrain dedicates the last third of his book to exploring the "How To Stop It" segment of the book's title. What seems to animate Zittrain's proposed solutions is his desire to preserve and foster good generativity, while quashing the bad kind. He is worried about a future in which the good generativity is stamped out along with the bad, with companies providing tethered-but safe-information appliances designed with firmware or software to perform only particular specified functions (such as a digital music player, a GPS system, and even a digital toaster). Tethered appliances, according to Zittrain, would perform their specified function well but would not be generative principally because they would not be adaptable to other tasks and would not easily be built upon.' 0 That is, the music player would not make toast, nor would the toaster be able to give GPS-based directions or be built to toast bread in some new way. General-purpose computers could in theory do all three tasks and then some. In light of general-purpose computers' generativity, Zittrain seeks to offer another way to the future. For example, he suggests that general-purpose computers might have a safe "green" zone to store important data and trustworthy software and a more risky "red" zone on which to experiment with other software." 1 According to his proposal, some "red" zone software might turn out to be harmful but removable before damaging anything in the "green" zone, while some might become reliable and beneficial enough for subsequent inclusion in the "green" zone. 12 Most centrally, Zittrain suggests that Internet users need to be provided with more and better information about which Internet applications and sites are reliable to use without infecting the user's computer with a virus or hacking the user's data.13 7. Id. at 70 (emphasis omitted). 8. Id. at 71. 9. Id. at 7-148. 10. Id. at 101-03. 11. Id. at 154-57. 12. Id. 13. Id. at 157-62. David Post takes a different tack than Zittrain. He writes about the Internet's development in the context of Thomas Jefferson's experiences and thoughts, which at first glance seems near-Mesozoic compared with the contemporary fast-paced growth of the Internet. Post nonetheless establishes the analogy's fit, suggesting that Jefferson's animating republican beliefs-a penchant for self-governing, but interlinked, communities, rather than strong, centralized government-is precisely what has made the Internet such a success thus far and ought to be preserved. As one of many examples of Jefferson's republicanism, Post points to Jefferson's approach to the over 800,000 square miles of land acquired in the Louisiana Purchase: let subterritories within the purchase govern themselves, with the power to petition to become states of the United States down the line. 14 As Jefferson explained, "I have much confidence that we shall proceed successfully for ages to come, and that ... it will be seen that the larger the extent of country, the more firm its republican structure, if founded, not on conquest, but in principles of compact and equality." 15 Post applies these Jeffersonian principles to the story of the Internet's development, indicating how time and time again, the Internet was structured in a decentralized fashion, which allowed for its exponential growth. For example, Post describes the Internet protocol for transferring data over the Internet, TCP/IP. 16 In simplified form, TCP/IP works to transport raw data from users' applications (such as e-mail programs or Web browsers) to their destination. The protocol does not concern itself with what the data represent-be they part of a text message, a picture, sound, or something else-but just carries the bits associated with a particular application. In that sense, TCP/IP is decentralized because it allows for any sort of application--even those developed after the protocol's development-to link up to it for sending data because the protocol does not need to know what the data mean. 17 This protocol is essential to the Internet's notion of end-to-end computing, by which, according to Post, the processing of data through varied applications happens at the endpoints of the Internet-the users' computers-while the shuffling around of uncomprehended bits happens over the network. As Post puts it, Smart machines, connected to a dumb network. Complicated and sophisticated applications, and a network doing nothing more than moving bits around as directed by those applications. That's the Internet. All the interesting stuff is at the edges-the network just gets the bits there, as quickly and efficiently as possible.18 To Post, the Internet-as grounded in end-to-end computing-is very much like Jefferson's notion of a loosely linked community, with self-governing subgroups. Both Zittrain's and Post's books hold out the wondrous promise of the Internet as a tool of communication, knowledge, computation, scientific research, self-governance transcending our physical governmental boundaries, and future applications we cannot begin to imagine today. Each book focuses in great detail on how the Internet came to be and its vision of the guiding principles for the Internet going forward. Zittrain emphasizes generativity as a key aspect of the Internet worth preserving, while Post highlights the Internet's decentralized and self-governing aspects. Each book dedicates a small amount of attention to an essential legal issue affecting the Internet's future, namely, the patent protections available to cover varying aspects of that technology. Depending on how the patent laws are structured, they might grant incentives to innovate with regard to the Internet (if the protections are structured just right), stifle innovation in the area (if the protections are granted too easily or not easily enough), or some mixture of both (if the protections accord just the right incentive to some subsets of innovation in the area, but not to others). Zittrain sets out two competing types of software production: proprietary software, which is often protected by patents, and open-source software, which is not. 19 He relays the concern that, for the former class of software production, perhaps too many software patents issue, and to large firms at that, for the purpose of "extract[ing] royalties from rivals and to defend themselves from their rivals' patents," thereby causing the unfortunate situation of a patent thicket. 20 He expresses worry at this situation for numerous reasons: smaller firms and individuals may not be included in cross-licensing if they do not also have software patents, and infringement can occur even if the software developer did not know of the patented invention and even if the patented invention's specific code is not used, so long as the same abstract concepts are present in each. 2 1 Zittrain suggests that this situation might not be so bad so long as many actual instances of patent infringement-which he thinks will occur quite often-are tolerated. 22 In addition, he proposes that more infringing uses (or close questions of such) be tolerated by making it harder for patentees to sue for infringement, in part by modifying the statute of limitations and by reinvigorating the doctrine of laches. 23 Post has a different take on the role of patent law in the Internet's development. He focuses on Jefferson's central role in American patent law, as author of the first national patent law, first Commissioner of Patents, and inventor of such varied items as a weather vane, folding chair, automated calendar, and plow. 24 Post relays Jefferson's skepticism about strong patent protection: That ideas should freely spread from one to another over the globe seems to have been peculiarly and benevolently designed by nature when she made them, like the air we breathe, incapable of confinement or exclusive appropriation, and, like fire, expansible over all space without lessening their density in any point. 25 Post recognizes that intellectual property protection is about trade-offs between the benefits the protection can bring, in the form of increased innovation, and the costs the protection imposes on society, in terms of higher costs and decreased competition. 26 Like Jefferson, Post is skeptical about many patent grants, in that people often feel the need to create valuable inventions regardless of the availability of patent protection. 27 Post indicates, without much more detail, that patent law ought to be about drawing the line so that the benefits of patent protection outweigh the costs. 28 He speculates that so much Internet-related innovation, such as open-source software, happened without intellectual property protection, 29 intimating that the law ought to be cautious and not make patent protection for Intemet-related innovation too strong. Zittrain and Post, then, both appear to be skeptical of applying patent law to Internet-related innovation, even while they suggest that it might serve some beneficial role. This essay picks up their ruminations on patent protection for Internet-based inventions and explores whether patent law is compatible with the Internet's central goals, as suggested by Zittrain and Post. I conclude that they can be compatible if care is taken to tailor the application of patent law to encourage the sort of software innovation underlying much of the Internet's success. Before turning to that, I provide some background on patent law in the next part. The principal goal of the U.S. patent system is to stimulate innovation, 30 as manifested in the Constitution's articulation of Congress's power "[t]o promote the Progress of... useful Arts, by securing for limited Times to... Inventors the exclusive Right to their ... Writings and Discoveries." 3 1 In theory, this stimulation occurs by rewarding inventors with a time-limited, exclusive patent right for taking two steps they likely would not otherwise take: to invent in the first instance 32 and to reveal information to the public about these inventions, 33 thereby enriching society with the invention and the ability to build on the invention. 34 An inventor can obtain a patent so long as he demonstrates that his invention or discovery is patentable subject matter-a "new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof" 35 -and is novel, 36 useful, 37 and nonobvious. 38 Patents are granted after successfully undergoing examination by the Patent and Trademark Office to ascertain that an invention meets patentability conditions and its description in the patent application satisfies specified disclosure requirements 39 of a written description, enablement, and best mode. 4 0 The written description requirement ensures that the inventor is in possession of the claimed invention. 4 1 To enable the invention, the patent applicant must demonstrate in the specification to "any person skilled in the [relevant] art [how] ... to make and use the [invention]," 42 without "'undue experimentation."' 4 3 Also, the patent applicant must set out "the best mode contemplated by the inventor of carrying out his invention. '44 The bestmode requirement is met so long as the patent document objectively discloses the best mode that the inventor subjectively conceived by the time the inventor files the patent application. 4 5 Once granted, the patent right permits the patentee to exclude others from practicing the invention claimed in his patent for a term of approximately twenty years. 46 Neither Congress nor the U.S. Supreme Court has issued the definitive word on the preliminary question of whether software inventions, such as those at the heart of the Internet's success, constitute patentable subject matter. In 1972, in Gottschalk v. Benson, 47 the Supreme Court ruled that a method for converting binary-coded decimal numbers into pure binary numbers is unpatentable. 48 The Court invoked its long-standing rule that "[p]henomena of nature, though just discovered, mental processes, and abstract intellectual concepts are not patentable, as they are the basic tools of scientific and technological work. ' ' 49 The rule's asserted justification is that certain basic building blocks of science and technology ought not to be patentable because they are central to further innovation and ought to be freely available. Applying this rule, the Court concluded that the method was not patentable because it was an abstract concept as well as a basic building block and because a patent on the method would wholly preempt any use of the concept, useful only in computers. 50 Benson's rule led to a next wave of software patents-for inventions of classic patentable classes of matter-most pertinently industrial processes in which software played a role and machines containing software as an integral part. In 1982, in Diamond v. Diehr, 51 the Supreme Court approved of the patentability of a process of the former type to calculate the optimal time for curing rubber, using in part a computer employing Arrhenius's equation. 52 The Court noted that the patentee was not seeking to preempt all uses of the equation, but rather to embed the algorithm as a component in an industrial process just to cure synthetic rubber. 53 In 1996, the U.S. Court of Appeals for the Federal Circuit-the appellate court with exclusive jurisdiction over almost all patent appeals54-held that software inventions claimed as parts of a general-purpose computer constituted patentable subject matter as well, because they produce "'a useful, concrete and tangible result.' 5 5 The Federal Circuit revisited this decision in 2009 in In re Bilski, 56 stating that the proper test for deciding whether a process is patentable is based on the Supreme Court's prior case law in Benson and Diehr, which asked whether the process is tied to a machine or "transforms [an] article into a different state." 57 This test leaves open whether software claimed as part of a general-purpose computer is patentable because the court did not answer whether a general-purpose computer programmed to run particular software is a new machine. 58 Though the Supreme Court has granted certiorari in Bilski, 59 it can decide the case without speaking to software's patentability, as the invention at issue does not involve software. The patentability of software running on a general-purpose computer is thus currently up in the judicial air. The question of whether such software inventions-often, the sort of innovation related to the Internet--constitute patentable subject matter is addressed to how worthwhile it is to test software inventions on an individualized basis for novelty, nonobviousness, utility, and adequate disclosure, rather than to make a class-based decision that almost all such inventions would not be patentable. In the next part, I explore whether software invention as a whole ought to be outside patentability and, if not, whether software inventions can fulfill the other patentability criteria. I wade into that discussion through the context of Zittrain's and Post's books. In his book, Zittrain highlights generativity as being at the core of the Internet's success and worries in some part that patent law's valuable incentives to innovate may be overshadowed by extensive infringement liabilities, impliedly impeding the Internet's generativity. Post emphasizes decentralization and end-to-end computing as key to the Internet's success and worries that patent law might exact too many costs to be worth its general availability for software inventions. In so doing, each author picks up on some significant scholarly strands on software patentability. I argue herein that general patentability for software inventions, however, can promote generativity and end-to-end computing, so long as the law accounts for worries akin to those of Zittrain and Post. Zittrain properly recognizes that the promises and dangers of the Internet lie in its generativity. Finding solutions to prevent the dangers without stamping out generativity is something at which he takes some honorable stabs. One such example is the StopBadware project, started at the Harvard University Berkman Center, which provides information to help users avoid harmful software. 60 Zittrain's proffered solutions, however, seem like preliminary thoughts requiring more robust development. This critique is in effect not of Zittrain, but is rather a celebration of the generativity and decentralized developments critical to the Internet's successes. That is, perhaps the seeds of the robust solutions to the Internet's worries are being sowed right now in varied-perhaps complementary-ways in Beijing, Boise, and Bilbao. Certain solutions could come from a computer science graduate student experiencing a "Eureka!" moment or from a researcher working on a project at a large, established software company. What shape these solutions would take cannot now be known, but it is nearly a certainty that many attempts will come, just as Google's search engine, Wikipedia, online shopping, and many other forms of Internet software were developed in varied ways to create what we now consider to be the Internet. This much can be appreciated by Post's tale of end-to-end computing, with intelligence at the level of individual machines, which can then be distributed all over the Internet. Certainly only a minimal fraction of contributions will be made by wellfunded and nonprofit organizations like the Berkman Center and the StopBadware project, which underscores how important the availability of intellectual-property protection is. Evidence shows-as Post suggeststhat creatively inclined individuals feel compelled to create, regardless of whether there is intellectual property protection available at the end of the creation rainbow. 6 1 Moreover, psychologists emphasize that "[p]eople will be most creative when they feel motivated primarily by the interest, enjoyment, satisfaction, and challenge of the work itself-not by external pressures. ' 62 Nonetheless, even an individual who feels compelled to create would nearly always have insufficient time and attention to do so if the person's work could be freely copied. Without the chance of intellectual property protection, the creator cannot typically earn a living being creative. Moreover, the individual's work does not publicize and distribute itself, even in the age of the Internet. It is therefore essential that organizations and individuals provide creators with support for professional success by paying for, promoting, marketing, and distributing their works. These vital institutional mechanisms will arise around creative people only if there is a proper economic motivation for them to do so, as with the possibility of intellectual property protection to reward successful creativity by preventing copying of the protected works. 63 Moreover, numerous conditions in the current software industry suggest that patent protection would frequently be welcome and not harmful. Despite Post's emphasis on the fact that many key aspects of the Internet's development happened without patent seeking, the software industry has changed since its early days. There are increasing barriers to entry, like network effects diminishing the ease of innovation in the industry. 64 Moreover, Ronald Mann indicates that "direct evidence of high R&D spending in the software industry undermines claims that software patents cause firms to reduce R&D spending. ''6 5 Finally, based on extensive interviews with those in the industry, Mann also shows that the existence of extensive software patent portfolios in the hands of large, incumbent firms does not significantly constrain the development of newer software firms, as software patents can be difficult to appropriate and infringement hard to detect. The foregoing analysis suggests that preserving the potential for generativity requires creating a legal environment that maximizes the varieties of creativity in software contributions and contributors. I argue that a carefully calibrated patent law is a good fit for encouraging a considerable subset of these possible contributions. As an initial matter, software inventions as a class ought to be considered patentable subject matter. Software inventions fit in the mainstream of the classes of inventions protected by patent law. 67 As Pamela Samuelson, Randall Davis, Mitchell Kapor, and Jerry Reichman demonstrate, software inventions are-like patentable subject matter more generally-principally directed to their functionality. 68 the law is to structure a sector of the economy so that those who participate in the chain that stretches from the origination to the dissemination of expressive works-be they creative or purely informational, high authorship or low-can reap the rewards of their toil."). 64 68. Samuelson, Davis, Kapor & Reichman, supra note 64, at 2312 (arguing, nonetheless, against the patentability of software and in favor of sui generis protection for software to guard against the fact that "behavior and other industrial design elements of [software] programs are often expensive to develop and inexpensive to copy"). Samuelson et al. rightly reject the centrality of copyright law in protecting software innovation, as copyright law is directed to protection of expression, which software code is, but "the most important property of programs is their behavior (i.e., the set of results brought about when program instructions are executed)." Id. at 2314. John Allison, Abe Dunn, and Ronald Mann show further that a significant number of types of software creators-such as firms making software products as opposed to services and many start-up companieshave good cause to seek patents as a return for their functional creations. After working through empirical data of patenting by firms in Software Magazine's "Software 500" from 1998-2002, they suggest that "the ability to obtain patents on software always has been important to some of the industry incumbents, while others have exhibited little need for patents and displayed, in some cases, strenuous opposition to the patentability of software." 69 Their data reveal that firms offering off-the-shelf, noncustomized software programs rely more heavily on patent protection than do firms offering customized software services. 70 Patent protection can be crucial for the former type of firm, as software is "often expensive to develop and inexpensive to copy." 7 1 They explain how patents are less important for the latter: Patents seem likely to be a relatively more effective tool for protecting innovation in products than in services. To the extent a firm can provide a unique level of skilled services, it may be feasible to maintain much of the differentiating knowledge in a tacit form, bound up with the skills of the individual employees. Conversely, a products firm that sends its product out into the marketplace in many instances will be vulnerable to appropriation by competitors. 72 Patents can also be valuable for startup software companies to prevent larger firms from copying their software and to signal to potential investors that they are financially and technologically worthy of venture funding. 73 Relatedly, many independent inventors are poorly placed to package their software inventions and to transact with larger incumbent firms over their software contributions, which is in part why a number of technology ). Allison, Dunn, and Mann recognize the "ambiguity of causation" in the finding, in that it is unclear whether product firms patent more frequently because they make software products or whether the fact that they sought patents allowed them to survive as software product firms. Id. at 1603. They also show that those areas with the fewest software firms-that is, those lacking industry concentration-correlate significantly with propensity to patent, perhaps because it is plausible for them to stake out their territory and repel would-be competitors. Id. at 1606 & fig. 8. 73. Id. at 1609-11; Robert P. Merges, Software and Patent Scope: A Report from the Middle Innings, 85 TEX. L. REv. 1627, 1657 (2007). These patents are, perhaps surprisingly, not typically used in litigation against larger companies so as not to poison potential future business associations, but instead used as bargaining chips in cross-licensing one another's patents. Allison, Dunn & Mann, supra note 69, at 1610-11. licensing companies, often "labeled pejoratively as 'trolls,"' have arisen to act as middlemen between these independent inventors and large firms. 74 Given how significant the presence of these patent-seeking classes of software producers are in the industry, there is a strong argument for making available protection for at least some aspects of functionality, as patent law does. Otherwise, these contributions might never have been made. Contrary to Zittrain's worries, patent availability gives small firms and individuals a way to play in the big leagues by enabling them to secure patents, which they could use to cross-license and gain access to all sorts of technology developed by other entities. 75 That is, patents can give smaller and newer software players the leverage they need to secure entr6e to important mainstream technologies on which to build and connect. 76 Patent law, if effectuated properly, could thus help democratize the playing field in the software industry by minimizing barriers to entry. Moreover, the tethered appliances Zittrain so fears are more likely to proliferate in the absence of patent protection. In a world without patents, firms that would otherwise prefer patenting would tend to favor tethered appliances over general software applications, as they-and their oftspecialized hardware-would be more costly and difficult to copy or appropriate than software executed on general-purpose computers, with its readily available decompilers to reverse engineer software. Nonetheless, patent protection is not necessary for all Internet software producers. Many companies providing open-source software products, a structure that has been politically antithetical to software patenting, have the capability to offer services structured in such a way that patent protection is principally inessential. 77 Allison, Dunn, and Mann explain why. They indicate that the commercially successful open-source programs share the salient characteristic that they benefit from extensive financial support from large incumbent firms [like IBM]. The firms making those investments have done so as part of a "value-chain" strategy, in which the firms seek to commoditize a part of a value chain in which they are unlikely to dominate (like the operating system), hoping to extract value at some other part of a value chain (like the servers on which the operating system runs, the middleware that runs on the stack above the operating system, or the services necessary to assemble all of those pieces into a well-designed "solution"). 78 Moreover, many of the successful open-source finns offer customizable software services and thus have less need for patents, as they can retain tacit know-how as a form of protection. Throwing open to patenting the software that is instrumental to the generativity and end-to-end computing of the Internet raises significant concerns that a robust patent law must address. Most notably, patent protection might seem to run counter to the Internet's principal goals of inclusivity by offering up a right to exclude others from patented software inventions. This exclusion might impede the incremental advancements in applications and services characterizing the software industry. In fact, this worry brings Samuelson, Davis, Kapor, Reichman, and others to argue that software ought not to be patented. 80 There are a number of ways to tailor patent law to ameliorate this and other concerns. 8 1 For one thing, patent law ought to require more sufficient disclosure of patented software inventions. There is systemic inadequate disclosure in software patents, 82 given that the Federal Circuit seems to think erroneously that minimal disclosure of software's functionality is sufficient to enable those skilled in the art to encode the invention. 8 3 Disclosure of a software invention's functionality is not enough to ease incremental development of software. Disclosing actual source code--or at least detailed flow charts and the like-would more readily contribute to the database of knowledge of software solutions to various problems. 8 interested parties would have free access in the patent itself to review the code. They could then freely appropriate the code's unprotected components, license code reflecting protected elements, or use the code as a basis to conceptualize other ways of creating particular software functionality, thereby avoiding wasteful efforts to reinvent the digital wheel time and time again. Moreover, antitrust law and related principles in patent law would have an important role to play in ensuring that patent law would not operate to keep would-be competitors out of areas in which software-based standards have emerged or are emerging on which patents are held. 8 5 Relatedly, Julie Cohen and Mark Lemley suggest a limited right to reverse engineer patented software inventions in order to study and copy their unprotected elements, which would help ensure interoperability in a world where network effects and standards take hold. 86 Had software patents been more clearly allowed at the Internet's infancy, such legal principles ought to have prevented the patentability of, or at least the enforceability of patents on, the Internet's basic protocols. 87 In addition, patent law ought to open up examination and postexamination to third-party challenges, particularly as to the novelty and nonobviousness of software inventions. Glynn S. Lunney, Jr., suggests that there currently may be undetected obviousness in many a patented software invention, in that the relevant prior art often exists only in other software code or informal documents, making it nearly impossible for patent examiners to find and causing patents to issue erroneously. 8 8 For that reason, allowing third parties to suggest prior-art references relevant to an invention's novelty and nonobviousness would be helpful to ensure that software patents issue only for those inventions that are sufficiently innovative, thereby invigorating competition in the software industry. Moreover, patent examiners with relevant expertise in software would be particularly critical to evaluating the effect of this prior art on an invention's novelty and nonobviousness, as well as how straightforward it was to take patentable at the time, the protocols at the heart of the Internet likely would not have been patented, as many were developed by the government or collaboratively among many educational institutions). what was oftentimes a real world business model and encode it in software. Ensuring the courts' discretion to mold patent law's general requirements to the specifics and context of any particular software patent would also help. As one example, Cohen and Lemley propose that because of software reuse and incremental innovation, infringement liability ought to be narrowly limited to those cases in which other software falls within the literal language of the patent's claims, not under patent law's broader doctrine of equivalents. 90 As another example, district courts have the discretion whether to enjoin infringers from using a patented invention or merely to require payments of damages. 9 1 If courts choose just to require damages, they are effectively awarding a compulsory license to the infringer: infringe again if you must, but you will have to pay. The more essential that incremental development is to a particular area of software, the more courts ought to feel compelled to deny injunctive relief, effectively implementing a scheme akin to compulsory licensing. Additionally, damages could decrease as patent duration wears on to reflect the combination of incremental software innovation and the fast pace of advancement in the field. Courts should have similar authority to tailor the novelty, nonobviousness, utility, and disclosure requirements to the particulars of software innovation as it unfolds and the industry evolves. 92 None of these suggestions is exhaustive; rather, these suggestions are meant to indicate how the capacious patent law created by Congress can be tailored to the software industry's specifics, particularly in light of the Internet's key goals of generativity and end-to-end computing. In that sense, patent law is not that different from the Internet itself. Patent law itself is decentralized, in the sense that instantiations of patent law can often look very different as different firms build up varied patenting practices, whether through cross-licensing, low patenting rates, or patents as signals for funding. And patent law is highly generative, in the sense of being adaptable to the particulars of a myriad of technologies. 93 IT (2009) (suggesting that courts ought to employ their discretion to tailor patent law to various technologies and industries, depending on their salient characteristics). 27. Id. at 200. 28. Id. at 200-01. 29. Id. at 203.

III. THE COMPATIBILITY OF PATENT LAW AND THE INTERNET


" The Constitutionality of Medicare Drug-Price Negotiation Under the Takings Clause ," 51 The Journal of Law, Medicine and Ethics 961 (2023) (with Raj Bhargava, Nathan Brown, Amy Kapczynski, Aaron S. Kesselheim et al.)

"The Constitutionality of Medicare Drug-Price Negotiation Under the Takings Clause," 51 *The Journal of Law, Medicine and Ethics* 961 (2023) (with Raj Bhargava, Nathan Brown, Amy Kapczynski, Aaron S. Kesselheim et al.)

Raj Bhargava et al., The Constitutionality of Medicare Drug-Price Negotiation Under the Takings Clause, 51 J.L. Med. & Ethics 961 (2023)

Raj Bhargava
Nathan Brown
Amy Kapczynski
Christopher J. Morten
Aaron S. Kesselheim et al.

The Inflation Reduction Act (IRA) of 2022 empowers the Centers for Medicare & Medicaid Services to negotiate the prices Medicare will pay for a small number of top-selling brandname prescription drugs, a process that is expected to save patients and taxpayers billions of dollars every year. Yet this significant achievement is now threatened by at least 10 different lawsuits brought by the brandname pharmaceutical industry and associated trade organizations. These cases allege a slew of constitutional violations, including that drug-price negotiation works an unconstitutional "taking" of private property. The taking argument is one of the most consequential claims brought against the IRA's drug-price negotiation program, as it would put a great many government programs at risk, from critical healthcare programs like Medicaid to the Emergency Medical Treatment and Labor Act (EMTALA). In this review, we evaluate the takings claim made in litigation against the IRA and conclude that it is without merit. 1 It should fail in court and the challenged portions of the IRA should not be struck down on these grounds. We show, based on original analysis of case law, policy precedents, and other sources, first, that price negotiation and price controls by the US government have long been held constitutional under the Constitution's Takings Clause; and second, that the fact that brand-name drugs are commonly covered by patents does not convert price negotiation on those drugs into a taking. As part of the Inflation Reduction Act (IRA), Congress for the first time empowered the Department of Health and Human Services (HHS) to negotiate with drug-makers the prices of a small number of drugs that the Medicare program purchases. The IRA requires the HHS Secretary, acting through the Centers for Medicare & Medicaid Services (CMS), to negotiate the prices Medicare pays for a certain set of drugs meeting a number of key criteria, such as that they are responsible for the highest Medicare Parts B and D spending, have been marketable for at least seven years, and lack bona fide generic or biosimilar competitors. 2 In so doing, the IRA's drug-price negotiation program modifies the Medicare non-interference provision in the Medicare Modernization Act of 2003. That provision, a victory of extensive pharmaceutical lobbying, 3 prevented CMS from negotiating prices for drugs it buys through its Part D program. 4 The Medicare non-interference provision has been anomalous since its inception: the federal government negotiates prices and receives discounts on most contracts it enters, including for drugs it purchases for patients covered by the Veterans Health Administration and the Medicaid program for low-income patients. The IRA's Medicare drugprice negotiation program thus begins to bring Medicare in line with these other government-sponsored health insurance programs, if only for a limited number of high-revenue drugs and only many years after marketing. Failing to defeat the drug-price negotiation program in Congress, a host of drugmakers have brought suits to challenge the new law. They assert that the law violates a variety of constitutional provisions. A key claim is that the price negotiation program "takes" their property without just compensation in violation of the Takings Clause of the Fifth Amendment. 5 The Fifth Amendment prevents the government from taking private property unless for public use and requires that the government provide just compensation when it does so. The scope of the Takings Clause has expanded over time: until the twentieth century, the Takings Clause only protected against physical appropriations of property by the government. 6 The Supreme Court extended the reach of the Takings Clause to "regulatory takings" in Pennsylvania Coal Co. v. Mahon, holding that "while property may be regulated to a certain extent, if regulation goes too far it will be recognized as a taking." 7 In assessing whether a regulatory taking has occurred, courts apply three factors: the economic impact of the regulation on the claimant, the extent to which the regulation has interfered with distinct investment-backed expectations, and the character of the governmental action. 8 The standard for what constitutes a "public use" for which the government may take property is broad. 9 As such, the constitutional question at the heart of most takings claims -as here -is whether a regulation interferes with "property" in the relevant sense. In the classic scenario, where government condemns land for public use, as when building a railroad, the standard is easily satisfied. But more difficult cases arise, particularly where regulations are involved. If property is "taken," courts must evaluate the compensation to determine if it is "just;" if the government provides "just" compensation to the property owner, then the court will award no further remedy. Of course, judicial monitoring of just compensation may add substantial costs and complexity to government programs, especially because formulations of just compensation are unsettled and context-dependent. 10 The Takings Clause applies not just to real estate but to personal property -cars, crops, and more. The Takings Clause requires just compensation when regulations effect a government seizure of personal property. 11 This much is settled doctrine. In their lawsuits, drugmakers advance a novel argument: allowing the government to negotiate the prices of a prescription drug constitutes a taking that deprives a drugmaker of its property. 12 As one drug-maker contends, "a Government-imposed 50% discount on forced transfers of Eliquis is no different than if the Government were to seize 50% of BMS's inventory." 13 Because no drugmaker is forced to surrender its medications to the government, the drugmakers -which are not protesting the sale itself but the government's opportunity to reduce the sale price -appear to be asking courts to confer constitutional protection to their profits. As the following sections show, and as we have described in amicus briefs The standard for what constitutes a "public use" for which the government may take property is broad. As such, the constitutional question at the heart of most takings claims -as here -is whether a regulation interferes with "property" in the relevant sense. In the classic scenario, where government condemns land for public use, as when building a railroad, the standard is easily satisfied. But more difficult cases arise, particularly where regulations are involved. filed in several courts, the companies' takings arguments are unsound as a matter of law. We also show that they are dangerous; indeed, if accepted by courts, their claims would radically rewrite takings doctrine and jeopardize a range of government healthcare programs. Price negotiation and price regulation are ubiquitous economic tools available to, and regularly used by, the federal government. The voluntariness of prescription drug market participation disqualifies a takings claim. This alone should end this argument against the IRA's Medicare drug-price negotiation program. Companies also argue that the government is coercing their participation in the program because a great deal of profit is at stake. We show that this is irrelevant to the voluntariness of the program. Finally, even if the government were to introduce an industry-wide program extending beyond Medicare, this would not "take" property in the relevant sense. In highly regulated industries that receive substantial government privileges -as the pharmaceutical industry clearly does -Congress may set regulatory conditions such as these without running afoul of the takings clause. 14 As a purchaser of goods and services, the government regularly engages in price negotiation without raising any kind of takings issue. In 2022, the government spent $694 billion on contracts. 15 Many of these contracts were fixed-price vehicles that do not guarantee profit. 16 Courts have consistently held that no one is constitutionally entitled to sell to the government. 17 Rather, the government, like any other purchaser, is allowed to select its commercial partners, 18 adjust the terms and conditions of its sales contracts, 19 and negotiate the prices it will pay. 20 The federal government contracts like any other commercial party bargaining for sale, as opposed to when it seizes posses-sion of goods as a sovereign entity. 21 As a result, government contracting does not implicate the Takings Clause, 22 even when price negotiations reduce the profit amount that a contracting party hoped to net. Prescription drugs are no different. In fact, the government already negotiates drug prices and sets parameters on the prices it will pay for drugs across several federal programs, including the Veterans Health Administration, the Medicaid program, and the 340B program (a special program through which safety net hospitals can acquire medications at prices far lower than commercial purchasers'). Under each of these programs, the government contracts with a manufacturer to provide prescription drugs. 23 Each program ensures a baseline statutory discount for drug price, with options for the federal government or seller (e.g., a hospital) to negotiate further discounts. 24 Drugmakers do not have to supply medicines to the government. However, if they opt not to sell to the Veterans Health Administration or the 340B program, the government can limit the drug maker's access to Medicaid and Medicare Part B. 25 In essence, these programs offer manufacturers the opportunity to negotiate drug prices in exchange for access to various government markets. Courts have routinely and uniformly held that the structures and requirements of these programs do not violate the Takings Clause. In facts, courts have expressly distinguished the "economic hardship" that these programs may impose on drugmakers from the kind of compulsion that triggers the Takings Clause. 26 For example, courts have emphasized that the 340B program is voluntary, even if withdrawal from one program means the drug company will be prohibited from selling its drugs to another government program. 27 Indeed, one court described as borderline nonsensical the argument that 340B negotiated discounts amounted to the government physically taking a company's prescription drugs. 28 Drug manufacturers have revived similar claims here. They claim that the IRA's Medicare drug-price negotiation program is a "taking" of their patented drugs but can point to no reassignment of patent rights or physical seizure of their tablets or injections. Instead, their true argument is that curbing Medicare spending interferes with the enormous profits they expect from this program, 29 constituting a "taking" of their property. But courts have consistently, and properly, rejected similar claims. The breadth of health care price negotiation programs already approved by courts underscores the extent of disruption that a takings holding here would engender. The IRA's Medicare drug-price negotiation program sets up a structure similar to the existing drug purchasing programs under 340B, Medicaid, and the Veterans Health Administration. 30 If a court were to accept drug-makers' argument that price negotiations constitute a taking, the door would open for nearly all government contract negotiations to be challenged as takings under the Fifth Amendment. 31 Such a holding would undermine settled contract law involving voluntary, bargainedfor exchanges. This view would also upend a vast array of government contracts, not just limited to health care, whenever a company was displeased with a contracted-for rate. The government's leverage to secure favorable rates for its myriad social service programs would in turn diminish. Even as to health care alone, a loss would be devastating. A determination that price negotiation effects a taking would jeopardize altogether the viability of federal and state health care programs. Government health care programs provide a key safety net for more than one in three Americans. 32 Due to their reach, these programs often strain state and federal budgets. In 2021, Medicare alone accounted for 21% of all US healthcare spending and 10% of the federal budget. 33 Medicare's costs are predicted to rise to 18% of the federal budget by 2032. 34 Excluding administrative costs, the Medicaid program cost $728 billion in fiscal year 2021, 35 or about 17% of national health expenditures that year. 36 Without negotiated discounts, the combination of exclusive rights and coverage mandates afforded by these programs would confer almost limitless pricing power to drug manufacturers. Government price negotiation for these health care services enables federal and state health care programs to offer coverage to millions of Americans. A ruling that these programs' statutory discounts constitute takings would imperil these programs' continued operation. For patients, this would translate into reduced access to health care, especially for our country's elderly and low-income populations. For courts, it would mean a flood of litigation over the level of payment necessary to compensate takings by longstanding programs. The Medicare, Medicaid, and Veteran Health Administration programs would not be the only areas of healthcare affected. For example, the federal Emergency Medical Treatment and Labor Act (EMTALA) entitles all Americans to emergency room treatment irrespective of insurance status. This law requires hospitals with emergency departments that receive Medicare funding to accept all patients in critical condition, regardless of their ability to pay. 37 Takings challenges to EMTALA by hospitals have failed on the grounds that participation in Medicare (and by extension in EMTALA) is voluntary. 38 A holding that the IRA's Medicare drug-price negotiations effect a taking could reopen the door to a similar holding with respect to EMTALA. Every unpaid emergency room visit could be grounds for a takings lawsuit in which a court would have to evaluate the necessary extent of government compensation -no small feat considering the byzantine systems of medical billing and government reimbursement rates. Companies do not directly argue that price regulations themselves "take" property, perhaps because they are aware that, historically, price regula-tion was widespread and violated no constitutional rights. Still, they argue they are somehow "coerced" to accept the government's prices. This argument is belied by the fact that price regulations have only very rarely been understood to interfere with "property" at all. History shows us that price controls were commonplace in the early US. At least eight of the thirteen colonies adopted "expansive" price controls affecting "substantially everything in use at the time." 39 Price controls extended even to patented products. Borrowing from English common law and statutory obligations that a patentee would not use their exclusivity to "be 'mischievous to the State' by raising the prices of commodities," 40 some colonies granted patents with "working clauses" that stipulated price as a condition. 41 Courts have consistently rejected claims that price controls violate constitutional rights. Early cases were litigated under the Due Process Clause. During this era, the Supreme Court constructed the so-called Lochner doctrine, a controversial constitutional doctrine prioritizing and protecting the right to contractual freedom. Under this doctrine, the Court struck down many economic regulations, including labor laws, eventually generating the constitutional crisis that led Franklin Roosevelt to threaten to pack the court. The Lochner doctrine was abandoned in the late 1930s, paving the way for the modern rule that Congress is free to enact social and economic legislation without judicial interference. 42 But even while the laissez faire Lochner doctrine stood, courts repeatedly upheld price regulations against challengers who claimed they interfered with the right to contractual freedom. In the "pioneer" 43 case of Munn v. Illinois, 44 the Supreme Court held that property "used in a manner to make it of public consequence" was "clothed with a public interest." 45 The purveyors of such goods and services -a categorization encompassing public utilities and transportationhad to "submit to be controlled by the public for the common good" through price regulation. 46 Post-Munn, the federal government and nearly every state established public service commissions that set utility rates. 47 Congress also passed antitrust legislation, including the Sherman Antitrust Act, to restrain unchecked monopoly prices. 48 Later, in Nebbia v. New York, the Court extended the scope of regulable businesses, 49 pronouncing it "clear that there is no closed class or category of businesses affected with a public interest." 50 Nebbia clarified that Congress may regulate the price of commodities sold by private businesses, such as milk, if the "conditions or practices of an industry … produce[d] waste harmful to the public [or] threaten[ed] … to cut off the supply of a commodity needed by the public." 51 After the Court stood down and abandoned its effort to overturn economic regulations in areas it determined were not "clothed in the public interest," it affirmed a general presumption that price regulation was constitutional. 52 Such regulation continued to play a prominent role in American history. For example, to limit profiteering and price gouging during the wartime and economic crises of the mid-twentieth century, the government imposed systemic price freezes and price maximums on nearly all commodities, services, rents, and wages; 53 these broad mandates all survived constitutional challenges. 54 Congress's price-setting authority was so well-established that the Supreme Court upheld price regulations affecting a broad range of industries and services, including essential 55 and recreational commodities, 56 public utilities, 57 rent, 58 and labor; 59 prices that have the potential to limit 60 or deny a seller's profits, 61 or reduce the value of the regulated good; 62 price regulations that have differential effects on members of a regulated class; 63 retroactive price regulations to recover excessive profits; 64 and the prevention of economic waste as a permissible justification for price regulation. 65 In 1987, the Supreme Court declared the constitutionality of state and federal price regulation to be "settled beyond dispute." 66 The one area where the Supreme Court has found price regulation subject to some constitutional oversight is in industries for which market participation is legally mandated -namely, public utilities. 67 To compensate for public utilities' compulsory service at fixed rates, courts have exercised some judicial oversight over those rates. But even the modicum of oversight applied in the utility context is the exception, not the rule. 68 The reason it applies at all is that utilities have a legal mandate to supply their services. In their suits, the pharmaceutical companies have not argued that they should be treated like public utilities, perhaps because courts have done relatively little to regulate rates even for utilities and have not deemed such companies entitled to any particular level of profit. 69 For industries that are highly regulated and sell potentially dangerous products, such as prescription drugs, Congress has great freedom to set conditions on market entry without implicating the Takings Clause. 70 Courts have seen such regulations as not implicating property rights but rather establishing the conditions for market entry. Even a regulation covering the entire pharmaceutical market, in other words, would merely establish a legitimate condition for market entry which companies voluntarily accept in exchange for enormous privileges. A price regulation convering the entire industry would complement existing federal regulations, including the Food and Drug Administration's review of safety and efficacy and the patent and other exclusive rights that allow drugmakers to establish high prices, that benefit the pharmaceutical industry enormously -and that generate the possibility of price gouging which the IRA seeks to combat. Of course, the IRA does not affect the whole industry. It merely enables the government to negotiate as one purchaser for one portion of the market: Medicare. As such, courts need not traverse this broader issue. They can hold simply that the drug manufacturers at hand voluntarily choose to sell their drugs to Medicare, and as such cannot argue that their medicines are "taken" without their consent. That Medicines Are Patented Does Not Alter the Takings Analysis Some of the pharmaceutical industry's court challenges to the IRA's drug-price negotiation program have suggested that the fact that many brand-name drugs are protected by government-granted patents should somehow alter the takings analysis. For example, in its lawsuit, BMS declares that "patented medicines are protected by the Takings Clause." 71 The fact that drugs are patentprotected does not strengthen the pharmaceutical industry's takings claims. The IRA works no interference with constitutionally protected patent rights. No Supreme Court case has ever held that patents are private property protected by the Takings Clause. Even if a court were to conclude this, it would not help companies here, because courts see property as a bundle of rights, not all of which have to be granted together. Since Congress has never given companies the specific right to prevent the federal government from interfering with their patents, this "right" cannot now be taken away. The Supreme Court and the Federal Circuit have never directly addressed the question of whether patented drugs are personal property eligible for protection under the Takings Clause. The most recent Supreme Court analysis of the fundamental nature of patent rights suggests strongly -but does not hold outright -that patents are not private property in the relevant sense. In its 2018 Oil States decision, a 7-2 majority of the Supreme Court concluded that patents are not private rights, but are public rights, akin to government franchises: a right the government takes from the public and grants to a private party. 72 As the Court explained, a patent is a "creature of statute" 73 and thus "can con-fer only the rights that 'the statute prescribes'" 74 -the right "to exclude others from making, using, offering for sale, or selling the invention throughout the United States." 75 The Court observed that, as creatures of statute, patents are not personal property per se; instead, "[t]he Patent Act provides that, '[s]ubject to the provisions of this title, patents shall have the attributes of personal property.'" 76 All this language and reasoning in Oil States strongly suggests that patents are not private property for purposes of the Takings Clause. There is no reason for patent rights to be considered public for the purposes of Article III, but private for the Fifth Amendment. In a recent article, intellectual property law professor Robin Feldman summarizes Oil States as follows: "the Court made absolutely clear its view that there is a strict, categorical difference between land/ chattels as 'core' private property rights and patents as public rights." 77 Feldman also argues more broadly, based on history, the text and structure of the Fifth Amendment, and many decades of case law, that patents simply should not be protected by the Takings Clause. 78 Although the Oil States majority cautioned that it was not formally deciding that "patents are not property for purposes of the Due Process Clause or the Takings Clause," 79 a lower court responded by taking Oil States to its logical conclusion. In 2019, shortly after Oil States, the Court of Federal Claims held in Christy, Inc. that "patents are public franchises, not private property," and therefore that "patent rights are not cognizable property interests for Takings Clause purposes." 80 In so holding, the court echoed Oil States and reasoned that because "patent rights derive wholly from federal law, Congress is free to define those rights (and any attendant remedies for an intrusion on those rights) as it sees fit." 81 Highlighting the Court's discussion of the public nature of patent rights, the Court of Federal Claims concluded that the Court's reasoning in Oil States could not "be dismissed as dicta. The Court of Federal Claims is so far the only court to directly tackle the question of whether patents are personal property subject to the Taking Clause. As noted above, Oil States declined to hold that patents are not protected by the Takings Clause. 83 Although language from a nineteenth-century Supreme Court decision may appear to describe patents as constitutional property, 84 scholars note both that this language is dicta (or non-binding commentary) and that it refers not to patents but to the distinct English property law construct of "letters-patents." 85 The Federal Circuit has similarly avoided answering this question directly, including in its review of the Christy decision (a decision it affirmed on narrower grounds). 86 As a result, no court has ever held that patents are private property protected by the Takings Clause. Even if patents were property subject to the Fifth Amendment's Takings Clause, no individual or company has ever had the right to enjoin the federal government from making, procuring, or using a product covered by a patent -even without the patent holder's consent. 87 Put another way, there is no property right to exclude the federal government in the "bundle of sticks" that a patent confers. Until the twentieth century, the US government's sovereign immunity completely shielded it from lawsuits brought by patent holders for government use of their patents. 88 In 1894, in Schillinger v. United States, the Supreme Court confirmed as much, holding that a patent holder could not bring a takings claim against the government in the event of government patent use. 89 The Court explained that Congress had not waived the government's sovereign immunity as to "claims founded upon torts." 90 Because a patent infringement action "is one sounding in tort[,]" Schillinger held that government patent use did not expose the government to liability. 91 In response, Congress enacted a limited waiver of the US government's sovereign immunity. This law provided patent holders with a claim for "limited relief " 92 for government patent use. 93 The committee notes accompanying the bill clarified that the law not only covered inadvertent use by the government, but also covered the government's intentional use of patents when such actions benefited the public. 94 This provision only allowed patent holders to seek "reasonable and entire compensation" for government use of their patents; it foreclosed injunctive relief. 95 The law is now codified as 28 U.S.C. § 1498. 96 In relevant part, it reads: "Whenever an invention described in and covered by a patent of the United States is used or manufactured by or for the United States without license of the owner thereof or lawful right to use or manufacture the same, the owner's remedy shall be by action against the United States in the United States Court of Federal Claims for the recovery of his reasonable and entire compensation for such use and manufacture." 97 As a panel of the Federal Circuit noted during a subsequent discussion of Schillinger, "[h]ad Congress intended to clarify the dimensions of the patent rights as property interests under the Fifth Amendment, there would have been no need for the new and limited sovereign immunity waiver" that § 1498 effects today. 98 Put more directly, if the Constitution ensured that patent holders were entitled to compensation when the government uses their patents, Congress would not have had to so provide. Today, § 1498 offers a more extreme -and yet entirely constitutional -remedy to the problem of high prices than the IRA's Medicare drug-price negotiation program. Some of the authors' past scholarship has documented the government's "routine[]" use of § 1498 to procure everything from "electronic passports to genetically mutated mice." 99 The government relies on § 1498 "not only when the patent holder is unwilling or unable to negotiate a license with the federal government and infringement is the only way for the government to use the patented technology, but also when the patent holder is willing and able to negotiate." 100 For example, in the 1960s, the Department of Defense negotiated purchase of the antibiotic tetracy-The drug-makers' takings challenge may well end up before the Supreme Court, and their argument has implications for far more than the IRA's pricenegotiation program. Robust government healthcare programs depend on negotiated discounts to offer essential services for our most vulnerable populations, including the low-income, those with disabilities, veterans, and the elderly. A successful takings challenge to the IRA's price negotiation provisions would threaten these and other government programs involving price negotiations. Courts should reject the takings arguments as they have always done, and affirm the constitutionality of price negotiation. cline from an Italian maker instead of the US-based patent-holder, Pfizer, even though Pfizer was able to supply the government's purchase order, because the Italian version was 72% cheaper. 101 According to one source, the Department of Defense relied on § 1498 to procure approximately fifty drugs in a three-year period during the 1960s. 102 The federal government has continued to rely on this statute into the twenty-first century. During the post-9/11 anthrax scare, the Bush Administration, through then-HHS Secretary Tommy Thompson, publicly discussed bypassing Bayer's patent to amass a stockpile of the antibiotic ciprofloxacin (Cipro). 103 At the time, Bayer held the patents on this drug, controlled its sale in the US, and refused to lower its prices to supply a purchase order for the government to use in response to a potential biological threat. 104 In response, Secretary Thompson suggested that the government could invoke § 1498 to lawfully use Bayer's patents and import cheaper versions of the medication. 105 The mere specter of this action led Bayer to slash its prices: Bayer agreed to sell ciprofloxacin for $0.95 or less per pill, half of what the government had been paying ($1.83) and about a fifth of Bayer's list price ($4.67). 106 In contrast to the IRA's Medicare price negotiations, Bayer's price concession -made under threat of government patent use -did not result in any lawsuit. Section 1498's real bite, in comparison to the IRA, springs from its compensation provision. Under § 1498, the government typically pays the patent holder only a reasonable royalty -in practice rarely exceeding 10% of the price of the generic 107 -as compensation for its infringement. 108 Importantly, the § 1498 case law does not interpret "reasonable and entire compensation" to mean the entirety of the patent holder's lost profits. Although the precise royalty rate is a case-specific determination, the Court of Federal Claims (where all claims for compensation under § 1498 must be litigated) 109 examines "mixed considerations of logic, common sense, justice, policy and prec-edent" when setting compensation under § 1498. 110 The best measure for "reasonable and entire" compensation under § 1498 is the rate the patent holder agreed to in any prior or existing licensing agreements. 111 When the Court of Federal Claims lacks evidence of prior licensing agreements, it typically applies the "willing buyer-willing seller" rule to arrive at a royalty rate. 112 Because "reasonable and entire compensation" does not mean lost profits, pharmaceutical companies would not, under § 1498, be guaranteed profits on sales to or for the federal government. 113 This interpretation makes sense: because the government is not obligated to purchase from the patent holder, the patent holder has no right to any profitsneither the profits the patent holder lost nor those the contractor gained through the government invocation of § 1498. Finally, government patent use doctrine undermines pharmaceutical companies' suggestion that the drug price negotiations coerce the sale of medications the government would otherwise be unable to procure. 114 The government has legal authority to purchase other drugmakers' copies of pharmaceutical companies' drugs should the patent-holding companies decline to participate in the price negotiations. The government has chosen a more generous approach, negotiating prices with patentholding companies instead. This too shows that companies' constitutional arguments are without merit. Last year, Congress took an important step to address the US drugprice crisis by bringing Medicare in line with other government healthcare programs that negotiate drug prices with their manufacturers. In response, drug-makers advanced the radical argument that these negotiations are a constitutional taking of their profits, likening the government's mere ability to negotiate prices to a forcible seizure of their private property. But as this article has illustrated, decades of Supreme Court precedent upholding govern-ment price negotiations and regulations -an analysis unchanged by the fact that patents cover the negotiated drugs -demonstrate the incorrectness of the drug-makers' claims. In fact, the government is constitutionally empowered to procure patented drugs at below-market cost even without the manufacturer's consent, a tool that would likely reduce pharmaceutical companies' profits more than mere price negotiation. The drug-makers' takings challenge may well end up before the Supreme Court, and their argument has implications for far more than the IRA's price-negotiation program. Robust government healthcare programs depend on negotiated discounts to offer essential services for our most vulnerable populations, including the low-income, those with disabilities, veterans, and the elderly. A successful takings challenge to the IRA's price negotiation provisions would threaten these and other government programs involving price negotiations. Courts should reject the takings arguments as they have always done, and affirm the constitutionality of price negotiation. The Journal of Law, Medicine & Ethics, 51 (2023): 961-971. © 2024 The Author(s) https://doi.org/10.1017/jme.2024.10 Published online by Cambridge University Press S. 299, 307 (1989) ("[P]ublic utilities … are under a state statutory duty to serve the public."); Hegeman Farms Corp. v. Baldwin, 259 U.S. 188, 190 (1922) ("A public utility...has no journal of law, medicine & ethics JLME COLUMN The Journal of Law, Medicine & Ethics, 51 (2023): 961-971. © 2024 The Author(s)

Drug Manufacturers' Challenges to the Medicare Drug-Price Negotiation Program

Government Price Negotiation and Price Regulation in the US

Government Price Negotiation Does Not Create a Takings Violation

Price Regulations Are Common, and Generally Not Constitutionally Suspect

Patents Are Not Private Property Eligible for the Protection of the Takings Clause

No Right To Exclude the Federal Government from Patented Products