Drug Import Wave Unlikely After High Court Patent Ruling

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By Peter Leung

Drug companies have lost a tool to stop unauthorized imports of lower cost versions of their drugs from other countries after a U.S. Supreme Court ruling limiting patent rights after a sale, but lawyers say that there are still ways to stop the flow of foreign-market drugs.

Drug companies sometimes charge much lower prices in other countries, and use various means, such as patent laws, to prevent third parties from importing and selling those drugs in the U.S.

The Supreme Court May 30 ruled that U.S. patent rights don’t live on after an product is sold for the first time, even if that sale took place abroad ( Impression Prods. Inc. v. Lexmark Int’l Inc. , U.S., No. 15-1189, 5/30/17 ).

Pharmaceutical companies worry that the outcome could lead to imports of drugs from countries where market forces or government mandates keep prices lower than in the U.S. However, drugmakers now need to focus on contracts to control where and to whom licensees or buyers in foreign markets sell products and at what price, lawyers told Bloomberg BNA.

The case began after Lexmark International Inc. tried to use its patent rights to stop Impressions Products Inc. from selling refilled Lexmark printer cartridges. Impression was refilling empty cartridges it bought from Lexmark customers abroad and reselling them. Lexmark unsuccessfully argued that it still had patent rights over those empty cartridges because foreign sales can’t exhaust U.S. patents, but the Supreme Court disagreed.

Drug companies and trade groups, such as the Biotechnology Innovation Organization (BIO) and the Pharmaceutical Research and Manufacturers of America, sided with Lexmark in friend-of-the-court briefs, arguing in favor of allowing drug makers to use patent rights to block imports of their products sold overseas.

Contracts, Not Patents

Though the Supreme Court said that patent rights exhaust after the first sale, Case Collard, patent partner with Dorsey & Whitney LLP in Denver, told Bloomberg BNA that the court made clear that contract law, rather than patent law, is the way to try to limit unauthorized importation of drugs intended for a foreign market.

For example, a contract between a drug company and a foreign wholesaler may require the wholesaler to take steps to ensure that it is not selling to large-scale exporters, Isaac S. Ashkenazi, patent partner with Paul Hastings LLP in New York, told Bloomberg BNA.

Nick E. Williamson, patent partner with Bryan Cave in St. Louis, told Bloomberg BNA that in markets where the risk is too substantial, drug companies may also consider taking over distribution themselves.

Hans Sauer, deputy general counsel at BIO, told Bloomberg BNA that even if contracts are available, the Supreme Court decision has upset decades of settled expectations that a sale outside the U.S. would not void U.S. patent rights. “This ruling means that thousands of existing contracts with distributors may have to be renegotiated,” he said.

Easier to Enforce

Contracts may also be more effective in controlling distribution in the pharmaceutical industry, than the printer cartridges that were at issue in the Lexmark case . Lexmark had contracts requiring its customers to return empty cartridges rather than selling them to refillers, but enforcement was difficult because Lexmark contracts with large numbers of individual consumers. By contrast, pharmaceutical companies generally deal with a limited number of large companies or government entities, making enforcement more feasible.

The pharmaceutical companies’ business model may be more conducive to contractual control than Lexmark’s, Collard said. The issue of privity, where one can only bring a breach of contract claim against a party to a contract, or someone related to a party to the contract, may easier to establish, because a drug company can deal with one large company rather than thousands of end users, he said.

FDA Regulations

Even without patent rights, FDA regulations are a big obstacle for unauthorized drug importation, Kevin M. Nelson, a patent partner with Schiff Hardin LLP in Chicago, told Bloomberg BNA.

An overseas version of a drug is treated differently from its U.S. counterpart, for the purposes of FDA market approval, Nelson said. This is true for both standard “small molecule” drugs, as well as biologics, which are drugs made from biologics processes, he said.

Williamson also said he expects the FDA drug approval process will provide a barrier to widespread importation of drugs into the U.S.

Sauer of BIO said that the decision will affect consumers worldwide. He warned that drugs sold for a lower price in a less affluent country may be diverted to other places where they can fetch a high price.

There will likely be unforeseen outcomes that affect in every industry, Sauer said. “For example, if you’re a smartphone manufacturer, you can quite easily make products sold abroad not work on U.S. networks,” he said. “We can also expect foreign markets to react as well.”

To contact the reporter on this story: Peter Leung in Washington at pleung@bna.com

To contact the editor responsible for this story: Mike Wilczek at mwilczek@bna.com

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