Lexmark: The Supreme Court’s patent exhaustion case and parallel trade in drugs

Lexmark: The Supreme Court’s patent exhaustion case and parallel trade in drugs
KEI Briefing Note 2017:2. James Love. Revised 31 May 2017.

The Supreme Court’s decision in IMPRESSION PRODUCTS, INC. v. LEXMARK INTERNATIONAL, INC. has clarified that the United States has world wide exhaustion of patent rights. According to Professor Fred Abbott, who knows a lot about this issue, and has been one of the leading experts on patent exhaustion for decades (for example, he represented South Africa on the issue during the Pharma v Nelson Mandela/South Africa trial in 2001), the US had long recognized international exhaustion for patents, although more recently, there has been more ambiguity on this issue, particularly in the circuits, a topic that Fred and others can explain better than me. (His IP-Watch blog on the case is here)

Recent efforts by Senator Sanders and others to authorize parallel trade in pharmaceuticals have been complicated over questions about exhaustion issue. Sanders and others were willing to amend the US patent law if needed, on this issue, something that is not necessary now.

PhRMA, Rachel Sachs and several others have seen the exhaustion case as one that can undermine lower prices in lower income countries, a topic that is important, and one that KEI has consistently addressed in various fora when exhaustion is considered. But for now, its sufficient to note that the FDA effectively regulates commercial parallel trade, without relying upon patents or other intellectual property rights. The FDA already has the authority authorize parallel trade, and has been urged to so since President Bill Clinton’s tenure, always finding a way to avoid setting up a legitimate pathway for importing legitimate parallel imports.

The Sanders bill would effective force the FDA to liberalize parallel trade, beginning with Canada and gradually expanding imports to other OECD countries. KEI has asked the Senate sponsors to limit parallel imports to OECD countries that have per capita incomes of at least 50 percent of the United States, in order to prevent the imports from OECD countries like Poland, Greece or Mexico, where incomes are quite a bit lower than the US.

Countries that are the potential source of parallel traded drugs, like New Zealand and Greece, often try to find ways to make it hard to source the parallel exports the US would import, and the US has a huge market, much larger than Canada, of course, but also big relative to the countries that would likely be approved as suppliers by the FDA, even under the Sanders bill without amendment.

It is worth noting that at the end of the day, you can get a more efficient result by just using reference pricing, and an even better solution is to implement the delinkage of R&D incentives from drug prices, so drugs are commodities regulated for quality, and moving in international trade.

Finally, some of my earliest experiences in IP and trade disputes involved efforts by the United States to block international exhaustion in Argentina, South Africa and New Zealand, and the U.S. has a long standing policy of trying to block parallel trade in everything from pharmaceuticals to used cars (on the grounds that the cars were protected by copyright). The two recent US Supreme Court decisions on exhaustion, one for copyright and now for patents, does contribute to a trend to recognize international exhaustion.

One more thing. Cases like this are one more reason for the US to avoid signing trade agreements with ISDS clauses that extend to drug prices and/or patents. I doubt a drug company could win one, but why risk the litigation time, cost and exposure?

Opinion here: