[Congressional Record (Bound Edition), Volume 147 (2001), Part 19]
[Extensions of Remarks]
[Pages 26221-26222]
[From the U.S. Government Publishing Office, www.gpo.gov]



                  ANALYSIS OF SECTION II OF H.R. 2887

                                 ______
                                 

                        HON. SHEILA JACKSON-LEE

                                of texas

                    in the house of representatives

                      Wednesday, December 12, 2001

  Ms. JACKSON-LEE of Texas. Mr. Speaker, on October 11, 2001, the 
Committee on Energy and Commerce favorably reported H.R. 2887, the 
``Best Pharmaceuticals for Children Act.'' I commend the Committee for 
its great work to reauthorize legislation to promote labeling of 
prescription drugs for use in children. However, I am concerned that a 
section of this legislation may violate the Takings Clause of the 
United States Constitution. As a member of the Committee on the 
Judiciary, I have vigorously sought to protect private property rights 
and to pursue just compensation for those whose property rights are 
violated. My analysis of section 11 of H.R. 2887, brings me to the 
conclusion that it would violate current exclusive rights of 
manufacturers and in turn expose the U.S. government to substantial 
claims for just compensation. Attached are legal memoranda by Professor 
Laurence Tribe of Harvard University that validate my concerns:

 Memorandum to the United States Congress--Constitutional Analysis of 
 H.R. 2887's Proposed Amendment to Hatch-Waxman Act Eliminating Three-
                Year clinical Studies Exclusivity Period

                         (By Laurence H. Tribe)

       I have been asked to address the implications under the 
     Fifth Amendment Just Compensation Clause (sometimes called 
     the Takings Clause) of H.R. 2887, which proposes to eliminate 
     the three-year clinical studies exclusivity period under the 
     Hatch-Waxman Act. Section 11(a) of the reported version of 
     H.R. 2887 provides that a generic drug may be approved under 
     the Federal Food, Drug and Cosmetic Act (``FDCA'') even when 
     its labeling omits a pediatric use that is protected by 
     patent or marketing exclusivity under Section 
     505(j)(5)(D)(iii) and (iv). Section 11(b) of H.R. 2887 
     implies that Section 11(a) applies to already running three-
     year exclusivity periods.
       The FDCA establishes a quid pro quo that H.R. 2887 would 
     retroactively abrogate. In order to gain regulatory approval 
     from the FDA, a pharmaceutical company must invest enormous 
     time, money, and human resources to develop extensive 
     clinical data regarding its drug. At the end of a three-year 
     period, the protected data is opened to the public and may be 
     used by competitors. In exchange, Section 505(j)(5)(D)(iii) 
     and (iv) provide that the FDA ``may not make the approval of 
     [a competitor application]. . .for three years.'' H.R. 2887 
     now proposes to undo the bargain struck by current law.
       Under the Supreme Court's decision in Ruckelshaus v. 
     Monsanto Co., 467 U.S. 986 (1984), and related precedent, the 
     retroactive elimination of the exclusivity period qualifies 
     as a taking of private property for public use and therefore 
     triggers the right to just compensation.


                                Analysis

       1. The Ruckelshaus Decision.
       Fifth Amendment analysis must begin with the text of the 
     Clause: ``nor shall private property be taken for public use, 
     without just compensation.'' The meaning of that text as most 
     authoritatively set forth in the Supreme Court's decision in 
     Ruckelshaus v. Monsanto Co., 467 U.S. 986 (1984), which held 
     that the government's use of private proprietary research 
     data for public regulatory purposes constituted a compensable 
     taking. Ruckelshaus is highly instructive because the 
     statutory change at issue in that case was the elimination of 
     an exclusive pesticide marketing scheme, closely analogous to 
     the change effected by H.R. 2887. The fact that Ruckelshaus 
     concerned pesticides, while the instant controversy involves 
     pharmaceuticals, obviously is not material to the 
     constitutional analysis.
       The Federal Insecticide, Fungicide, and Rodenticide Act 
     (``FIFRA'') at issue in Ruckelshaus originally limited an 
     agency's use of studies submitted by an initial applicant to 
     support later applicants' efforts to obtain approval of 
     similar formulations. In 1978, FIFRA was amended to weaken 
     that restriction. The 1978 amendments were then challenged in 
     court, and the Supreme Court held in Ruckelshaus that they 
     worked a taking and triggered the right to just compensation.
       The Supreme Court noted that, with respect to trade secrets 
     submitted by Monsanto under FIFRA between 1972 and 1978, 
     ``the Federal Government had explicitly guaranteed to 
     Monsanto and other registration applicants an extensive 
     measure of confidentiality and exclusive use. This explicit 
     governmental guarantee formed the basis of a reasonable 
     investment-backed expectation.'' 467 U.S. at 1011 (emphasis 
     added). The Court then explained that ``[i]f EPA, consistent 
     with the authority granted it by the 1978 FIFRA amendments, 
     were now . . . to consider those data in evaluating the 
     application of a subsequent applicant in a manner not 
     authorized by the version of FIFRA in effect between 1972 and 
     1978, EPA's actions would frustrate Monsanto's reasonable 
     investment-backed expectation with respect to its control 
     over the use and dissemination of the data it had 
     submitted.'' Id.
       Plainly, the Supreme Court's decision in Ruckelshaus 
     provides strong support for the conclusion that the 
     elimination of the three-year clinical studies exclusivity 
     period would effect a compensable taking.
       2. There is a Protectable Property Right.
       I understand that proponents of H.R. 2887 take the position 
     that the elimination of the three-year clinical studies 
     exclusivity period does not work a taking because it does not 
     implicate any property rights at all. I find this surprising, 
     to say the least, because the Government did not even dispute 
     in the Ruckelshaus case that ``Monsanto has certain property 
     rights in its information, research and test data that it has 
     submitted under FIFRA to EPA and its predecessor agencies 
     which may be protected by the Fifth Amendment to the 
     Constitution.'' 467 U.S. at 1001.
       Indeed, in Tri-BiO Laboratories, Inc. v. United States, 836 
     F.2d 135 (3d Cir. 1987), the court upheld the refusal of the 
     FDA to allow a generic animal drug manufacturer to 
     incorporate in its application the research and testing data 
     submitted by another manufacturer which had earlier obtained 
     approval to market the predecessor brand name drug. The FDA 
     insisted that such testing data was proprietary and 
     confidential and that its use ``to review generic drug 
     applications would constitute expropriation.'' Id. At 138. 
     The court agreed that the FDA's rules ``provided pioneer 
     animal drug manufacturers with [a] reasonable investment-
     backed expectation that the FDA would refrain from 
     nonconsensual use of research material.'' Id. at 140-41. 
     ``Use of that material in processing the [competitor's] 
     application, therefore, would constitute a Fifth Amendment 
     taking, requiring payment of compensation by the 
     government.'' Id. at 141.
       The Supreme Court has long held that intangible property 
     rights are protected under the Fifth Amendment's Just 
     Compensation Clause. See. e.g., Armstrong v. United States, 
     364 U.S. 40, 44 (1960) (materialman's lien protected); 
     Louisville Joint Stock Land Bank v. Radford, 295 U.S. 555, 
     596-602 (1935) (real estate lien protected); Lynch v. United 
     States, 292 U.S. 571, 579 (1934) (contracts protected). See 
     also Laurence H. Tribe, American Constitutional Law Sec. 9-2, 
     p. 591 n.11 (2d ed. 1988) (observing that the Supreme Court 
     has tended toward ``a broadened conception of `property' in 
     takings analysis,'' ``incorporating wholly intangible forms 
     of property'').
       By the same token, the Court has also opened that the 
     retroactive alteration of the terms on which a patent is 
     granted would work a compensable taking of private property. 
     See, e.g., Richmond Screw Anchor Co. v. United States, 275 
     U.S.C 331, 345 (1928) (elimination of patent infringement 
     action ``is an attempt to take away from a private citizen 
     his lawful claim for damage to his property by another 
     private person, which but for this act he would have against 
     the private wrongdoer. This result . . . would seem to raise 
     a serious question . . . under the fifth Amendment to the 
     Federal Constitution.''); William Cramp & Sons Ship & Engine 
     Bldg C. v. International Curtis Marine Turbine Co., 246 U.S. 
     28, 39-40 (1918) (``rights secured under the grant of letters 
     patent by the United States [a]re property and protected by 
     the guarantees of the Constitution and not subject therefore 
     to be appropriated even for public use without adequate 
     compensation'').

[[Page 26222]]

       Under these principles, the exclusivity guaranteed by 
     Section 505(j)(5)(D) (iii) and (iv), which is mirrored in FDA 
     regulations, see 21 CFR Sec. 314.127(a)(7), is a prototypical 
     property right. As the Supreme Court has explained, the right 
     to exclude ``is central to the very definition of the 
     property interest,'' Ruckelshaus, 467 U.S. at 1011, for it is 
     ``one of the most essential sticks in the bundle of rights 
     that are commonly characterized as property.'' Kaiser Aetna 
     v. United Sates, 444 U.S. 164, 176 (1979); see also Nollan v. 
     California Coastal Comm'n, 483 U.S. 825, 830-32 (1987) 
     (same); Loretto v. Teleprompter Manhattan CATV Corp., 458 
     U.S. 419, 435 (1982) (``The power to exclude has 
     traditionally been considered one of the most treasured 
     strands in an owner's bundle of property rights.''). See 
     generally Thomas W. Merrill & Henry E. Smith, What Happened 
     to Property in Law & Economics?, 111 Yale L.J. 357, 360 (Nov. 
     2001) (``property rights attach to persons insofar as they 
     have a particular relationship to some thing and confer on 
     those persons the right to exclude a large and indefinite 
     class of other persons (`the world') from the thing'').
       As the Court explained in Ruckelshaus, ``[W]ith respect to 
     a trade secret, the right to exclude others is central to the 
     very definition of the property interest. Once . . . others 
     are allowed to use those data, the holder of the trade secret 
     has lost his property interest in the data.'' 467 U.S. at 
     1011. ``[T]he value of a trade secret lies in the competitive 
     advantage it gives its owner over competitors. Thus, it is 
     the fact that operation of the [statutory change] will allow 
     a competitor to register more easily its product or to use 
     the disclosed data to improve its own technology that may 
     constitute a taking.` Id. at 1011 n.15.
       The three-year exclusively period is enforceable by means 
     of a suit against the FDA under 21 C.F.R. Sec. Sec. 10.30, 
     10.35. It is also transferable. See 59 Fed. Reg. 50338, 50339 
     (Oct. 3, 1994) (``an applicant may purchase an application or 
     rights of data and information in an application (i.e., 
     exclusive rights to a new clinical investigation), from which 
     exclusively would flow'').
       Thus, the three-year exclusivity period--acquired at great 
     expense and heretofore protected by law--is the very essence 
     of an ``investment-backed expectation'' that is fully 
     protected by the Fifth Amendment from any taking without just 
     compensation. Penn Central Transp. Co. v. City of New York, 
     438 U.S. 104, 124 (1978).
       Moreover, the confidential and proprietary research 
     submitted by drug manufacturers--which under H.R. 2887 would 
     be used by the FDA in order to approve generic versions of 
     the same pharmaceuticals--also qualifies as a ``trade 
     secret'' under applicable state law. ``A trade secret is any 
     information that canbe used in the operation of a business or 
     other enterprise and that is sufficiently valuable and secret 
     to afford an actual or potential economic advantage over 
     others.'' Restatement (Third) of Unfair Competition Sec. 39 
     (1995). The Uniform Trade Secrets Act, Sec. 1(4), promulgated 
     in 1979 by the National Conference of Commissioners on 
     Uniform State Laws, contains the equivalent definition of 
     ``trade secret.'' Tellingly, confidential information 
     regarding the production of pharmaceuticals is the very first 
     illustrative example of a trade secret provided by the 
     Restatement. See Restatement (Third) of Unfair Competition at 
     Sec. 39, Illustration 1. See also MILGRIM On Trade Secrets 
     Sec. 1.09 (2001) (providing numerous examples where 
     pharmaceutical information has been classified as a trade 
     secret).


                               Conclusion

       The retroactive elimination of the three-year clinical 
     studies exclusivity period would undoubtedly effect a 
     ``taking'' of ``private property'' within the meaning of the 
     Fifth Amendment. Any public purposes that may be advanced in 
     favor of H.R. 2887 bear only on whether the taking is 
     altogether void--which it is if the property is not put to a 
     ``public use,'' equated by the Supreme Court with ``public 
     purpose.'' See Hawaii Housing Auth. v. Midkiff, 465 U.S. 229, 
     239-41 (1984). If property is taken for a ``private use''--
     i.e., a purely private purpose--then the taking violates 
     substantive due process and cannot be saved by an amount of 
     compensation. See, e.g., Thompson v. Consolidated Gas 
     Utilities Corp., 300 U.S. 55, 77-79 (1937).
       A ``purpose purpose,'' however compelling, has no bearing 
     whatsover on whether just compensation is required in order 
     to make the taking valid. Compensation for a taking of 
     private property is invariably required precisely when that 
     taking is for a public purpose or use. See, e.g., Jed 
     Rubenfeld, Usings, 102 Yale L.J. 1077 (1993). The Just 
     Compensation Clause is concerned not with the question 
     whether a given taking was substantially justifiable but 
     solely with the question of who should pay for presumptively 
     justifiable takings. As the Supreme Court has often put it, 
     one of the principal purposes of the Just Compensation Clause 
     is `` `to bar Government from forcing some people alone to 
     bear public burdens which, in all fairness and justice, 
     should be borne by the public as a whole,' '' Dolan v. City 
     of Tigard, 512 U.S. 374, 384 (1994) (quoting Armstrong v. 
     United States, 364 U.S. 40, 49 (1960)).
       From the fact that just compensation would be required, and 
     the further fact that the Just Compensation Clause is self-
     executing, see First English Evangelical Lutheran Church of 
     Glendale v. County of Los Angeles, 482 U.S. 304, 315, 316 n.9 
     (1987), it follows that H.R. 2887 would represent an enormous 
     tax lien automatically levied by the measure's proponents 
     upon the rest of the nation. It would, despite protestations 
     of its proponents that no tax expenditure would be required 
     and thus that no added appropriation or tax levy would be 
     needed, have to be funded either by new or higher taxes or by 
     an equivalent cut in spending on military or other 
     discretionary budget items. H.R. 2887, therefore, cannot be 
     evaluated as though it would provide some sort of 
     pharmaceutical free lunch. Someone's ox, to mix metaphors 
     just a bit, would plainly have to be gored to pay for 
     whatever public benefits the measure might provide. That the 
     cost could quietly and painlessly be laid at the feet of 
     private investors in pharmaceutical companies is a pure 
     mirage. Those investors know their rights, and they know the 
     address of the U.S. Court of Federal Claims.

     

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