US Supreme Court Adopts International Exhaustion Of Patents (Part II): Addressing the New Competitive Landscape

By Frederick M. Abbott*

The US Supreme Court has created a new competitive landscape with its decision adopting international exhaustion of patents. For the pharmaceutical sector, we can expect an initial period of uncertainty as the US Food and Drug Administration (FDA) assesses the regulatory framework affected by the decision and as competing stakeholders advance their interests. In an earlier Inside Views contribution, I addressed the principal impact of the decision on the US pharmaceuticals market: downward pricing pressure.[1] This follow-on addresses some of the regulatory and access issues affected by the decision, observing that parallel trade in pharmaceutical products is a long-standing practice, that recently introduced US legislative proposals may shape the regulatory framework in the United States, and concluding with ways that access programs in favor of developing countries are protected.

The US Market

The decision by the United States Supreme Court on May 30, 2017 to adopt international exhaustion of patents for the United States in Impression Products v. Lexmark International confirmed the importance of downstream limitations on patent rights. US patent owners may not prosecute infringement actions for products first sold outside the United States under patent-owner authority.[2]

A well-established practice

Parallel trade in patented pharmaceutical products is by no means a new phenomenon. It has been a fixture of the EU pharmaceutical sector since the formation of the European Community. Various aspects of intra-EU parallel trade have been the subject of litigation before the Court of Justice of the European Union (CJEU). See, e.g., Centrafarm v. Sterling Drug, Case 15-74, 31 Oct. 1974; Merck v. Stephar, Case 187/80, 14 July 1981; Merck v. Primecrown, Joined Cases C-267/95 and C-268/95, 5 Dec. 1996. Of course, there is a geographic distinction between intra-EU regional exhaustion and parallel trade, on one hand, and international exhaustion and global parallel trade as enabled for the US by the Impression Products decision, on the other. Nonetheless, regional and international patent exhaustion share common principles and the common objective of facilitating price competition. Pharmaceutical regulatory authorities and courts in Europe are quite accustomed to supervision of parallel trade, a practice that has provided continuing benefits for the European consumer.

More than patents

Eliminating patent barriers is an important part of the parallel imports equation, but there are other elements to consider. US pharmaceutical law without further amendment appears to allow parallel imports of medicines that are approved for commercial marketing in the United States and that are manufactured abroad in FDA inspected and approved plants. Proposals for new legislation recently introduced in the US Congress would direct the FDA to authorize importation of a broader range of pharmaceuticals, including those approved for marketing by authorities in designated foreign countries (beginning with Canada, and potentially extending throughout the OECD), where the subject pharmaceuticals are comparable to those approved for marketing by the FDA.[3] The new legislative proposals include provision for FDA regulatory controls that would cover parallel importers.

Addressing the potential patent barrier

Foreign-approved drugs may well be covered by US patents even though not originally intended for the US market. Prior to the Impression Products decision, parallel exports (e.g., from Canada) to the United States might have been blocked by US patent owners notwithstanding FDA authorization of importation.[4] Members of Congress who introduced import-authorizing legislation contemplated amending US patent law to remove potential impediments, but decided to wait for the Supreme Court’s decision. The Supreme Court ruling eliminates the potential for blocking of parallel imports through patent infringement actions.

Parallel importers must step up

The impact of parallel imports on prices in the United States will depend in substantial measure on whether there are stakeholders prepared to take on the role of parallel importer. Two of the most prominent parallel traders in the United States are Costco and Walmart. Coincidently, each of these companies is a retail seller of pharmaceutical products. There would be multiple advantages of bringing these companies into the patented pharmaceutical parallel import business. Each already operates a vast global supply chain with sophisticated controls. Each understands the complexity of regulatory compliance and the up-front expense that may be entailed in disrupting an existing market structure. Each already has a large consumer base. Other major stakeholders that might take an interest include pharmaceutical benefit plans, HMOs and major pharmaceutical distribution companies that supply them. The Veterans Administration and state health authorities that undertake procurement should take an interest.

Development and Access Issues

International exhaustion is pro-development

As a general matter, international exhaustion of patents should create opportunity for developing country industry. If parallel exports from developing countries lead suppliers from higher income countries (HICs) to raise prices to inhibit parallel trade, this will provide commercial opportunities for substitute developing country suppliers. The era when suppliers from the United States, EU and other HICs could raise prices in developing countries without encouraging entry of developing and emerging markets substitutes is over. Developing country R&D should be encouraged as demand increases for alternative innovative products.

Pharmaceuticals have specific characteristics

The situation for pharmaceuticals is affected by the specific characteristics of medicines, and the potential absence of effective therapeutic substitutes for certain new treatments. Unlike LED televisions and cellphones, where consumers can shift demand, consumers/patients of pharmaceuticals in developing countries are potentially trapped by patent monopolies.[5]

Access through differentially discounted pricing

As early as the mid-1990s representatives of the Pharma originators argued in international forums that parallel trade in patented pharmaceuticals would be an obstacle to their provision of low-priced medicines to developing countries.[6] In those early days there was scant evidence that such discounted medicines were provided. Yet it was less attractive to argue that parallel imports would result in lower prices in higher income markets, something that might seem intuitively appealing for those markets. Today the situation is somewhat different. Principally (though not exclusively) through licensing arrangements with the Medicines Patent Pool, there are programs that supply patent owner-licensed medicines to some developing countries at differentially low prices.

Continuity of access programs

There are various mechanisms that can be used to facilitate provision of differentially-priced medicines to developing countries while maintaining a basic rule of international exhaustion of patents.[7]

First, much of the supply of discounted pharmaceuticals in developing countries takes place through government procurement, often financed by international institutions. Purchasers under these programs do not have incentive to export the products intended for use by local patients. Accounts are subject to audit. Though the possibility for misadventure may be present, since the actors in this area are repeat players, the instances of misbehavior are likely to be constrained.[8]

Second, a developing country government can adopt legislation precluding exports of medicines supplied under differential pricing programs. While WTO-GATT rules generally preclude use of export quotas, there is no doubt that the GATT Article XX(b) exception for measures to protect public health would authorize such restriction. In support, Article 31bis, Annex para. 3, of the amended TRIPS Agreement requires WTO members that are importers of products supplied under compulsory license to take reasonable measures to prevent re-exports, and Annex, para. 4, obligates prospective importing countries to provide mechanisms to prevent imports of such products.[9] The objectives that motivate these provisions, i.e. facilitating low-priced supply, will more generally allow developing countries to enact restrictions on exports of differentially priced products.

Third, as noted earlier, the proposals before the US Congress authorizing imports would limit the source countries. An import arrangement adopted by Congress and implemented by the FDA may preclude imports from groups of countries and/or supplied under discount pricing programs. Authorization of parallel imports into the United States should not interfere with the use of differential pricing in favor of developing countries.

Parallel trade is important and manageable

The pharmaceutical sector at every stage involves a complex legal and regulatory environment. There is a long history of parallel trade in pharmaceuticals that includes regulation of parallel traders. Opponents of parallel trade have always raised objections based on differences in legal and regulatory systems, attitudes toward price controls, quality and safety, packaging and so forth. Yet most of the medicines consumed around the world are the subject of supply chains that span national borders. Regulation of pharmaceutical imports and exports is a fundamental element of the global public health system. Parallel trade is a manageable element of that system.

* Edward Ball Eminent Scholar Prof. of International Law, Florida State University College of Law, USA.

[1] Frederick M. Abbott, Inside Views: US Supreme Court Adopts International Exhaustion For Patents: Paving the way for parallel imports to exert downward pressure on domestic pharmaceutical (and other) prices, IP-Watch, May 31, 2017.

[2] The decision has wide-ranging effect. Importers of computers and cellphones that are produced with components lawfully sourced outside the United States no longer must be concerned about attempts to block resales through patent-owner infringement actions. In Quanta Computer, Inc. v. LG Electronics, Inc., 553 U.S. 617 (2008), the Supreme Court already addressed one mechanism by which US patent owners might attempt to circumvent the ruling, i.e. by precluding the use of method claims to attempt a continuing bar against exhaustion.

[3] The proposed Congressional import legislation generally refers to “prescription” medicines, and not expressly to “patented” medicines. See, e.g., S.469 – Affordable and Safe Prescription Drug Importation Act, introduced by Senator Sanders and others, Feb. 28, 2017, and; S.771 – Improving Access To Affordable Prescription Drugs Act, introduced by Senator Franken and others, Mar. 29, 2017.

[4] The US drug regulatory and patent systems are largely separate. They are linked through the Hatch-Waxman Act that addresses pathways for introduction of generic products, but that is not directly relevant to the exhaustion issue.

[5] Not addressed further here, there are mechanisms that lower income countries can employ to overcome problematic situations created by patents, including government use and compulsory licensing.

[6] See, e.g., Harvey E. Bale, Jr., The Conflicts Between Parallel Trade and Product Access and Innovation: The Case of Pharmaceuticals, 1 Journal of International Economic Law 637 (1999).

[7]This was addressed in my brief to the US Supreme Court in the Impression Products case. Brief of Amicus Curiae (Frederick M. Abbott) in Support of Petitioner in Impression Products v. Lexmark International, US Supreme Court, No. 15-1189, filed January 20, 2017 (January 20, 2017). Available at SSRN: https://ssrn.com/abstract=2906967.

[8] The US Supreme Court in Impression Products did not rule out terms that lawfully limit resales of products under contract law (not enforceable as patent infringement). While competition law precludes abuse of certain restraints, in the specific case of discounted products for public health programs in developing countries, this should not raise a concern.

[9] Article 31bis, Annex, provides:

3. In order to ensure that the products imported under the system are used for the public health purposes underlying their importation, eligible importing Members shall take reasonable measures within their means, proportionate to their administrative capacities and to the risk of trade diversion to prevent re-exportation of the products that have actually been imported into their territories under the system. In the event that an eligible importing Member that is a developing country Member or a least-developed country Member experiences difficulty in implementing this provision, developed country Members shall provide, on request and on mutually agreed terms and conditions, technical and financial cooperation in order to facilitate its implementation.
4. Members shall ensure the availability of effective legal means to prevent the importation into, and sale in, their territories of products produced under the system and diverted to their markets inconsistently with its provisions, using the means already required to be available under this Agreement. If any Member considers that such measures are proving insufficient for this purpose, the matter may be reviewed in the Council for TRIPS at the request of that Member.

 

Image Credits: patentlawcenter.pli.edu