[Ip-health] Fred Abbott in IP-Watch: US Supreme Court Adopts International Exhaustion For Patents: Paving the way for parallel imports to exert downward pressure on domestic pharmaceutical (and other) prices

Jamie Love james.love at keionline.org
Wed May 31 15:21:00 PDT 2017


US Supreme Court Adopts International Exhaustion For Patents: Paving the
way for parallel imports to exert downward pressure on domestic
pharmaceutical (and other) prices

By Frederick M Abbott*

The Supreme Court of the United States on May 30, 2017 adopted a rule of
international exhaustion of patent rights for the United States in
Impression Products v. Lexmark International, No. 15-1189. The
near-unanimous decision authored by Chief Justice Roberts is unambiguous
and unequivocal.[1] The Court paid short shrift to contrary decisions of
the Court of Appeals for the Federal Circuit in Jazz Photo Corp. v.
International Trade Commission, 264 F. 3d 1094 (Fed. Cir. 2001) and in this
case on certiorari, Lexmark International v. Impression Products, 816 F.3d
721 (Fed. Cir. 2016).

In addition to adopting international exhaustion, the Supreme Court ruled
firmly against enforcement of post-sale restrictions through infringement
actions based on patent. The Court allowed for enforcement under contract
law of limitations that may be included in patent licenses.

Only Justice Ginsberg dissented, and only as to the international
exhaustion issue. (Justice Gorsuch did not take part.) It is noteworthy
that the decision by Chief Justice Roberts is written in “plain English”
without efforts to mystify the judgment, or to keep its meaning obscure to
the non-lawyer.

The Supreme Court decision applies across the subject matter spectrum with
respect to patents in the United States, and affects all industry sectors.
Computer and electronics equipment manufacturers, major retailers and
others expressed their views in amicus briefs. The issue of international
exhaustion of patents and parallel importation is of particular interest
for the pharmaceutical sector. Advocates of parallel importation — this
author included — have pointed to the pro-competitive effects inherent in
cross-border trade in pharmaceutical products once patent rights have been
exhausted.[2] Pharmaceutical originators have argued that anything that
decreases their profits hurts R&D, a position which taken to its logical
conclusion justifies unlimited price increases.

The United States has the highest originator pharmaceutical prices in the
world and contributes the largest share of originator industry revenues.
The US public stands to gain from the downward pricing pressure that may
come from parallel imports of patented pharmaceuticals. The beneficial
effects should not be overestimated. There are constraints on the potential
available supply of parallel import products that will moderate the impact
within the US market, but almost any downward pricing pressure will be a
step in the right direction.

In the decision on appeal, the Federal Circuit’s main argument against
international exhaustion was that a US patent owner should be entitled to a
first sale in the United States so that it can secure a US territorial
price that is likely to be higher than a foreign price for the same
product. The Federal Circuit viewed this as a patent entitlement flowing
from its (mistaken) understanding of independence of patents and
corresponding territorial limitations.

In rejecting the Federal Circuit’s reasoning, the Supreme Court said that
the principal issue under US law is whether the patent owner has authorized
a sale; either in the United States or abroad. The Court said that US
exhaustion doctrine makes no geographical distinction regarding the place
of sale. The Court noted that it was deciding against the backdrop of
long-standing common-law doctrine disfavoring restraints on alienation. It
said that the US Congress was aware of the common-law environment in which
it legislates, and that Congress chose not to adopt a rule limiting
exhaustion of patents to first sales in the United States.

The Court rejected a suggestion to distinguish its holding in Kirtsaeng v.
Wiley, 133 S Ct. 1351 (2013) in favor of international exhaustion for
copyright. The Court observed that products marketed in the United States
may contain thousands of patents, and that its concerns about downstream
restrictions on foreign sales are as serious in respect to patents as they
are in respect to copyrights.

The Supreme Court distinguished Boesch v. Graff, 133 U.S. 697 (1890), the
decision the Federal Circuit had improvidently relied on in Jazz Photo, on
grounds that the German first seller in Boesch was not the US patentee, but
rather an independent German firm. The US patent owner had not authorized
the first sale abroad, and had not exhausted its right to sue an importer
for infringement.

The Supreme Court decision does not specifically address itself to
pharmaceuticals, though the decision applies across patent subject matter,
and thus to pharmaceuticals. The Federal Circuit addressed the
pharmaceutical sector in its decision (and in oral argument before the en
banc Federal Circuit), and the Supreme Court was doubtless aware of the
sectoral implications.

Members of Congress introduced legislation to authorize importation of
prescription medicines in advance of the Supreme Court decision. They
avoided addressing the patent question, preferring to let the Supreme Court
speak first. The Supreme Court has now cleared away potential patent
obstacles to parallel importation of medicines first sold outside the
United States. Further US legislation may not be required before parallel
importers begin bringing patented medicines into the United States if such
medicines are produced in FDA-inspected and approved facilities abroad, the
medicines have been approved for sale in the United States and chain of
custody records are satisfactory. Other circumstances may (or may not)
require additional legislation. The FDA may in any case propose additional
measures directed toward regulating parallel importers.

The originator industry will not sit idly by as its pricing power is
diminished. If past is prologue, every argument against parallel imports
that can be made will be made, and more. Quite a few members of Congress
have promised to take steps to reduce pharmaceutical prices. We will see
whether these promises can withstand the traditional pharmaceutical
industry lobbying pressure. On a more upbeat note, members of Congress
might realize they can use the decision of the Supreme Court for “cover”.
With the Supreme Court favoring price competition to constrain patent
monopolists, perhaps this will not be such a stretch for the Congress.

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

[1] Although further vindication was hardly necessary following adoption by
WTO Members of the Doha Declaration on the TRIPS Agreement and Public
Health, the decision of the US Supreme Court affirms the position taken by
the government of South Africa in its defense of international exhaustion
of patents in the Medicines and Related Substances Control Amendment Act of

[2] This author filed an amicus brief with the Supreme Court addressing
issues surrounding pharmaceutical patents, and supporting international
exhaustion. PhRMA, BIO and other pharmaceutical industry groups filed
amicus briefs to contrary effect

James Love.  Knowledge Ecology International
KEI DC tel: +1.202.332.2670, US Mobile: +1.202.361.3040, Geneva Mobile:
+41.76.413.6584, twitter.com/jamie_love

More information about the Ip-health mailing list