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Does your medical invention consulting contract comply with U.S. laws?

on August 10, 2011

Medical device and drug companies often contract with independent physicians to assist with product development. In the ideal situation, such physicians become external members of a product development team tasked with developing the next blockbuster product. When all goes according to plan, the team develops a safe and effective product, the company applies for and obtains patent protection on the product, and the company launches the product. Then the physician-consultant often promotes the use of the product, which is not compensable, and receives a royalty when it is sold.

What physician-consultants and their partner companies often don’t realize is that failure to draft a tight physician-consultant contract could result in violations of federal laws and criminal and civil penalties. For example, the federal Anti-Kickback Statute is a criminal statute that prohibits the giving, accepting, soliciting or arranging items of value in any form (gifts, discounts, cross-referrals), either directly or indirectly, for the purpose of inducing or rewarding another for referrals of services paid for by a federal government health care program. The federal Stark Law prohibits a physician from referring Medicare or Medicaid program patients for certain “designated health services” (DHS) to an entity with which the physician or an immediate family member has a “financial relationship.” The entity furnishing DHS is prohibited from presenting a claim to Medicare or Medicaid for DHS furnished pursuant to a prohibited referral. Like the Anti-Kickback Statute, there are exceptions to the Stark Law.

Invention consulting contracts must be carefully crafted agreements under which physician-consultants will only receive reasonable compensation for the use of their inventions. If, on the other hand, physician-consultant contracts reward the physician merely for being an effective promoter of a product, the contract may not pass regulatory scrutiny. Medical device and drug companies working with physician-consultants should regularly seek advice of patent counsel to ensure that such consulting contracts comply with law.

Compliance requirements for consulting physicians involve consideration and analysis of patent law issues.

First, any compensation to the physician must be based on the physician’s contribution to a patented invention. Under the U.S. patent laws, this means that the physician must qualify as a joint inventor of at least one claim of a granted patent. A joint inventor is one who collaborates with at least one other joint inventor to conceive an invention. The consulting contract should reflect this law so as to avoid providing for compensation to the physician without this required contribution.

Second, inventorship determinations are fact intensive and often second guessed. Involving patent counsel early to assist with regulatory compliance during the product development and patenting processes will reduce the chances of running afoul of requirements. Patent counsel, in preparing a patent application, should investigate whether the physician-consultant made a patentable contribution to the claims based on discussions with and review of design and development documents. Even if the physician has contributed materially to the product development efforts, no patent protection may be available. If no patent is available, there is no basis in patent law to compensate the physician. Similarly, even if properly named as a joint inventor on an application for a patent, the consulting physician may need to be removed as a joint inventor if the application needs to be narrowed. The bottom line is that a physician-consultant should only receive royalty remuneration for a material contribution to a patented invention — one that affords a right to exclude others from commercializing the same invention during the period of exclusivity.

Third, when the product is commercialized, things may change so as to affect the payment to the consulting physician from a regulatory compliance perspective. Patent counsel should be involved when the product is commercialized so that payments to the consulting physician do not run afoul of the law. Here is how that could happen. Not infrequently, the features and functions of the product ultimately commercialized vary from the product for which patent protection was sought. If that variation affects the portion of the product to which the physician-consultant contributed such that the contribution is no longer covered by the patent obtained, it may be inappropriate to pay the consulting physician a royalty based on sales of the commercialized product. Similarly, as patents can be declared invalid or unenforceable, a declaration that a patent on which a physician-consultant is named a joint inventor is invalid or unenforceable may require withholding further royalty payments for sales of products covered by patent claims invented by the physician.

Given the legal complexities involved when physicians sell their expertise to medical device and drug companies, patent counsel, consulted at the beginning of that relationship through the final commercialization of a product, can help physicians and companies stay out of trouble.

Steven M. Auvil is a partner and Chair of Benesch's Intellectual Property Practice Group.

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