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Nov 1, 2005 (Vol. 25, No. 19)

Patent Rights and Pharmaceutical Reimportation

Is the New Law a Panacea or Pandora's Box?

  • The ability of inventors to secure limited monopolies on their technologies through patent protection partly fuels the progress of scientific discovery. This has led to the development of breakthrough drugs that have increased the quality and duration of life for an untold number of Americans.

    Rising costs of prescription drugs however, has become a significant concern for many U.S. consumers. The image of aged U.S. citizens having to choose between buying groceries or much-needed prescription drugs has put a public face on intellectual property rights of pharmaceutical companies.

    Advocates of prescription drug price control are quick to point out that U.S. consumer's pay significantly more for prescription drugs than what citizens of other countries pay for the same drugs, imported from U.S. pharmaceutical companies.

    This has led to a growing cry for the importation of lower-priced drugs from foreign countries back into the U.S. ("reimportation"). The federal government finally listened and, beginning in 2006, a new law will go into effect, permitting the importation of prescription drugs from Canada.

    For pharmaceutical and biotechnology companies, this tolls a period of likely uncertainty about existing patent rights to drugs, which may be reimported into the U.S. under the new law. Regardless of the long-term ramifications of drug reimportation, in the immediate future drug manufacturers should be aware of certain implications of this new era of importation.

    Under the doctrine of patent exhaustion any authorized distribution of patented drugs (either by the patentee or licensee) in the U.S. (i.e., to a U.S. distributor that exports the drugs into Canada) effectively terminates the patent rights with respect to those drugs. Thus, the patent holder has no recourse when those same drugs are reimported into the U.S. and sold at lower prices.

    In contrast, there is no international exhaustion rule. Authorized distribution of a drug by the patentee outside the U.S. (e.g., direct sales to Canada) does not terminate U.S. patent rights to that drug. Therefore, reimporation of that drug into the U.S. would be an act of patent infringement under 35 U.S.C. 271(a).

    Even if patent rights are preserved by avoiding U.S. sales to Canadian importers, on reimportation targets of infringement actions may be limited. While a suit to enjoin importation by a private entity may be available to a drug manufacturer, it is yet unclear how available and extensive a remedy it would be, where the importer is the federal or state government.

  • Drug Importation Laws

    To understand the impact of reimportation of prescription drugs on U.S. patent rights, it is helpful to first consider the state of the law controlling drug importation into the U.S. The Federal Food Drug and Cosmetic Act (FDCA) established that only the manufacturer of an FDA-approved drug may reimport that drug into the U.S. The FDCA also created a so-called "personal use" exception that permits individuals to import a 90-day supply of prescription medication into the U.S.

    The original intent of the exception was to give terminally ill U.S. citizens access to medicines and medical treatments that the FDA had not yet approved. It was not intended to allow reimportation of cheaper versions of FDA-approved drugs. The FDCA is in essence turning a blind-eye to the issue of importation of potentially patented drugs for personal use.

    The increasing discord however, over the rising costs of prescription pharmaceuticals resulted in the passage of the Medicine Equity and Drug Safety Act of 2000 (MEDS act). In addition to regulating drug safety, the MEDS act created an exception to the FDCA, permitting non-manufacturer reimportation of branded drugs into the U.S. Contained in the MEDS act, however, was a significant limitation on the importation of foreign pharmaceuticals. In relevant part, the MEDS act stated that:

    "This section shall become effective only if the Secretary demonstrates to the Congress that the implementation of this section will

    (1) pose no additional risk to the public's health and safety; and

    (2) result in a significant reduction in the cost of covered products, to the American consumer."

    Given the vague language used in the act, and the apparent accountability that it demands, no acting HHS Secretary has made the requisite demonstration.

    The most recent shift in U.S. policy on drug reimportation is found in the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA). The MMA provides that the secretary "shall promulgate regulations permitting pharmacists and wholesalers to import prescription drugs from Canada into the United States."

    Unlike the MEDS act, the MMA does not include a provision requiring the certification of drug safety by the secretary of HHS, but instead requires that "safeguards be in place" to ensure drug safety. The MMA gives HHS broad powers to authorize the importation of prescription drugs and promises a panacea for soaring drug costs.

  • Patent Exhaustion Principal

    Often lost in the din of rhetoric surrounding the reimportation issue however, is the threat reimportation may pose on the U.S. pharmaceutical patentees statutory property rights.

    Most, if not all, prescription pharmaceuticals produced in this country are protected, in one form or another, by one or more U.S. patents. The holder of a U.S. patent to a pharmaceutical compound possesses, for a limited time, the exclusive right to make, use, sell, offer for sale, or import into the U.S. the patented product. Patent rights thus create a term-limited market exclusivity, whereby the patent holder can block competitors, or anyone else, from practicing the subject matter of their invention.

    While broad, these exclusionary rights are not unlimited. There are several established doctrines that serve to restrict the extent to which U.S. patent rights can be enforced. The most significant of these restrictions, particularly with respect to the issue of reimportation, is the concept of patent exhaustion, also known as the first sale doctrine.

    The patent exhaustion principle stipulates that once a patent owner has made an unconditioned sale of its patented product, the owner's patent rights with respect to that product are exhausted.

    Thus, an authorized sale of a unit of drug by a pharmaceutical company to a U.S. pharmacy, for example, exhausts the pharmaceutical company's patent rights with respect to that unit of drug. The pharmacy is not thereafter restricted in its ability to use, sell, or dispose of that unit of drug, and can resell the drug without facing suit for infringement (whereas, normally, the sale of a patented product would be an act of infringement).

    While it is clear that the principle of patent exhaustion applies to sales of a patented product in the U.S., until recently, there was question as to the effect of a first sale of a U.S. patented product in another country. The authorized sale of a patented drug to a non-U.S. pharmacy, for example, raises the question of whether such a sale exhausts the patent rights to that drug in the U.S.

    One line of reasoning would hold that the exhaustion doctrine is not limited to sales of a patented product in the U.S. It would take effect also upon the sale of a patented product outside the U.S. This rationale, generally known as "international exhaustion", would be in harmony with several foreign countries, including Canada, and would establish that the sale of a U.S. patented product in any country would exhaust internationally the patentee's rights to that product.

    The alternative view is that patent rights within the U.S. are not exhausted by virtue of sales outside the U.S. Since the rights under a U.S. patent exist independent of foreign patents and are only enforceable in the U.S., why should sale outside the U.S. affect the rights under the patent inside the U.S.?

    The U.S. Court of Appeals for the Federal Circuit adopted this latter view in its decision in Jazz Photo Corp. v. United States International Trade Commission. Judge Newmann stated that "United States patent rights are not exhausted by products of foreign provenance. To invoke the protection of the first sale doctrine, the authorized first sale must have occurred under the U.S. patent."

    Whether or not the court's decision in Jazz Photo withstands further judicial scrutiny, the current state of the law of patent exhaustion establishes that foreign sales of a patented pharmaceutical will not exhaust U.S. patent rights.

    The impact of Jazz Photo, with respect to prescription drug reimportation, therefore, is that an authorized sale of a U.S.-patented drug to another country does not exhaust the U.S. patent rights to that drug. Subsequent unauthorized importation of the drug is an act of infringement under 271(a), and creates potentially significant liability for importers of foreign drugs.

  • Patent Infringement Liability

    The extent of liability depends, in large part, on the status of the importer. It is unlikely, for example, that a pharmaceutical company would pursue patent infringement damages from individuals personally importing foreign prescription drugs. For obvious reasons, the image of a large pharmaceutical company dragging someone's grandmother into court would not play well with public opinion.

    While larger corporations engaged in wholesale importation of prescription drugs may provide a potentially more lucrative target for patent infringement suits, it is unclear what percentage of pharmaceutical imports will be attributed to such corporate entities. Thus, the cost benefit analysis for pursuing infringement damages against parties that may ultimately represent a minor share of the importation market may tip in favor of the importers.

    The more likely candidates for the orchestration of large-scale importation of U.S.-originating foreign prescription drugs are the federal and individual state governments. A government entity would face the same liability, potentially, as a private, unauthorized importer. This liability could attach whether the government entity actively engaged in the drug reimportation, or merely facilitated or encouraged the importation by others.

    A number of states have already considered policies to facilitate the reimportation of foreign prescription drugs. Although state governments certainly possess the deep pockets to make a patent infringement litigation worthwhile to the pharmaceutical patent holder, a significant roadblock to this remedy lies in an Eleventh Amendment constitutional prohibition against a private individual bringing a suit against a state in federal court.

    Does this mean that the patentee is without recourse? Not necessarily. While the Eleventh Amendment precludes federal jurisdiction over a state in an infringement action, the Supreme Court made an exception to Eleventh Amendment immunity in its decision in Ex parte Young. It held that state officials could be enjoined from acting in their official capacity (i.e., carrying out drug reimportation) for future activity.

    In addition, while states are currently immune from private action for patent infringement, the immunity does not extend to local governments. The result is that individual city or county governments are generally not entitled to Eleventh Amendment immunity from federal suit, and may be a promising target for patent infringement litigation by pharmaceutical patentees.

    Given the uncertainty surrounding the recourse for a patentee faced with infringement of its patent by reimportation of branded drugs, some have suggested that Congress, if it truly wishes to affect an efficient reimportation process, should appropriately legislate to clarify the outcome of reimportation. Congress could affirm the property right held by the patentee and make necessary changes to permit a pharmaceutical patentee to enforce the full scope of its intellectual property rights against unauthorized reimporters.

    Alternatively, Congress could legislate to effectively impose an international exhaustion doctrine with respect to pharmaceuticals. In fact, several bills introduced in the 109th Congress aim to do just that. One such proposal, sponsored by Minnesota Representative Gil Gutknecht, is the Pharmaceutical Market Access Act of 2005 (H.R. 328). Congressman Gutknecht's bill, and others like it, would serve to legislatively reverse the Federal Circuit's decision in Jazz Photo by making an amendment to 35 U.S.C. 271 to include the following section:

    (h) It shall not be an act of infringement to use, offer to sell, or sell within the United States or to import into the United States any patented invention under section 804 (21 U.S.C. 384) of the Federal Food, Drug, and Cosmetic Act that was first sold abroad by or under authority of the owner or licensee of such patent.

    While the enactment of such legislation would certainly clarify the respective rights and liabilities of patent holders and prescription drug importers, it would also serve to partially divest the patent holder of a property right whose origins reach back to the original drafting of the U.S. Constitution. In addition, if enacted, a revision of section 271 of Title 35 faces possible judicial scrutiny and certain constitutional challenge by patent holders as an unconstitutional legislative taking of property, and violation of the Fifth Amendment.

    If such a statute does not provide a means for giving the patentee just compensation for the property rights taken by the legislature, then it is likely that such a law would be deemed to be, at least in part, unconstitutional.

    The tension between reigning in the soaring costs of prescription medication and simultaneously protecting the property rights of drug manufacturers as well as providing incentive for the development of new drugs, is inherent in the question of how to properly implement drug reimportation policies in the U.S.

  • Cost/Benefit Calculus

    While establishing an international exhaustion policy in the U.S. may, for the short term, bring down the cost of prescription drugs, it could also potentially destabilize the cost/benefit calculus of the pharmaceutical industry. If it becomes more difficult for pharmaceutical companies to recoup the costs of research and development, not only for successful drugs, but also for the large number of drugs which never make it to market, as well as the financial burden of the FDA-approval process, then the risk is that the incentive to continue to develop the next blockbuster drug will be decreased.

    Moreover, statutory reform, which eliminates the threat of infringement liability by truncating the patent rights of drug manufacturers, in essence, reduces patent rights, at least with respect to pharmaceuticals, to a second class property right.

    It is clear at this point, however, that to preserve at least some patent rights on reimported drugs in view of the current statutory scheme, drug manufacturers that supply drugs to foreign countries should make sure those transactions occur outside the U.S. This will avoid triggering patent exhaustion and preserve patent rights to the reimported drugs.While establishing an international exhaustion policy in the U.S. may, for the short term, bring down the cost of prescription drugs, it could also potentially destabilize the cost/benefit calculus of the pharmaceutical industry. If it becomes more difficult for pharmaceutical companies to recoup the costs of research and development, not only for successful drugs, but also for the large number of drugs which never make it to market, as well as the financial burden of the FDA-approval process, then the risk is that the incentive to continue to develop the next blockbuster drug will be decreased.

    Moreover, statutory reform, which eliminates the threat of infringement liability by truncating the patent rights of drug manufacturers, in essence, reduces patent rights, at least with respect to pharmaceuticals, to a second class property right.

    It is clear at this point, however, that to preserve at least some patent rights on reimported drugs in view of the current statutory scheme, drug manufacturers that supply drugs to foreign countries should make sure those transactions occur outside the U.S. This will avoid triggering patent exhaustion and preserve patent rights to the reimported drugs.



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