By Kevin E. Noonan --
The cost of prescription drugs, and the proper apportionment of these costs between innovator drug companies (who frequently possess patent protection of their products) and consumers (who have access to political and other sources of resistance to increased drug costs) poses a policy problem that has been brewing for a generation. In the U.S., the Federal government has acted to promote the development of a generic drug industry (for example, through the Hatch-Waxman Act, 35 U.S.C. §§ 156 and 271(e)(1)) and to require pharmaceutical companies to comply with formulary and rebate programs under the auspices of Medicaid (42 U.S.C. § 1396 et seq.). States (including most notably Florida, Michigan, and Maine) have enacted additional measures, including using "prior authorization" requirements for drugs not listed in a formulary, and expanding the beneficiaries to include "medically needy" and, in Maine, all state residents. Although pharmaceutical companies have resisted states' efforts to impose rebates and other financial penalties directed at reducing drug costs (through their trade group, the Pharmaceutical Research and Manufacturers of America, PhRMA), for example, in Pharmaceutical Research and Manufacturers of America v. Walsh, 538 U.S. 644 (2003); Pharm. Research & Mfrs. of Am. v. Meadows, 304 F.3d 1197(11th Cir. 2003); and Pharm. Research & Mfrs. of Am. v. Thompson, 362 F.3d 817 (D.C. Cir. 2004), they have been unavailing. Specifically, courts have rejected PhRMA's arguments focusing on theories of pre-emption (under Federal Medicaid law) and Commerce clause violations.
The District of Columbia is the latest government entity to attempt to institute regulations directed towards reducing drug costs. The city ordinance, the Excessive Pricing Act, reads as follows:
It shall be unlawful for any drug manufacturer or licensee thereof, excluding a point of sale retail seller, to sell or supply for sale or impose minimum resale requirements for a patented prescription drug that results in the prescription drug being sold in the District for an excessive price.
D.C. Code § 28-4553 (emphasis added).
The statute does not explicitly define what constitutes "an excessive price," but does provide a formula: "[a] prima facie case of excessive pricing shall be established where the wholesale price of a patented prescription drug in the District is over 30% higher than the comparable price in any high income country in which the product is protected by patents or other exclusive marketing rights," D.C. Code § 28-4554(a), where a "high income country" was defined as one of "the United Kingdom, Germany, Canada, or Australia." § 28-4552(2).
The legislative intent behind this ordinance was clear:
The excessive prices of prescription drugs in the District of Columbia is threatening the health and welfare of the residents of the District as well as the District government's ability to ensure that all residents receive the health care they need, and these excessive prices directly and indirectly cause economic harm to the District and damage the health and safety of its residents. . . . [I]t is incumbent on the government of the District of Columbia to take action to restrain the excessive prices of prescription drugs.
§ 28-4551.
And the penalties were significant:
(1) Temporary, preliminary, or permanent injunctions to enjoin the sales of prescription drugs in the District at excessive prices;
(2) Appropriate fines for each violation;
(3) Damages, including treble damages;
(4) Reasonable attorney's fees;
(5) The cost of litigation; or
(6) Any other relief the court deems proper, § 28-4555(b),
and were available as a remedy for any "affected party," including "any person directly or indirectly affected by excessive prices of patented prescription drugs, including any organization representing such persons or any person or organization representing the public interest." § 28-4552(1).
PhRMA, joined by the Biotechnology Industry Organization (BIO) sued in Federal District Court in D.C. In this case, PhRMA had a new argument with regard to pre-emption: instead of focusing their attack on Medicaid or other Federal laws directed to drug pricing per se, they argued that the laws being pre-empted were the nation's patent laws, 
which granted exclusivity to a patentee to prevent others from "making, using, selling, offering to sell or importing" a patented drug, 35 U.S.C. §271(a). The District Court found for plaintiffs, holding that the ordinance to be pre-empted by U.S. patent law and issuing an injunction preventing the District from enforcing the law. 406 F. Supp. 2d 56 (D.D.C. 2005).
The District appealed, first to the Court of Appeals for the D.C. Circuit, which Court transferred the appeal to the Federal Circuit as being within the Court's exclusive jurisdiction. In its unanimous opinion (by Judge Gajarsa) affirming the District Court's decision, the Federal Circuit first addressed the questions of its own jurisdiction and the parties' standing. In finding in favor of its own jurisdiction the Federal Circuit applied the Supreme Court jurisdictional standards enunciated in Shaw v. Delta Air Lines, Inc., 463 U.S. 85, 96 (1983) (rather than the "mirroring" standard of Franchise Tax Board v. Construction Laborers Vacation Trust for Southern California, 463 U.S. 1, 16 (1983)), finding that the plaintiffs' "well-pleaded complaint" was founded in patent law. The two organizational plaintiffs satisfied the standing requirements, since their members (specifically, at least one member) would have standing to bring the lawsuit. The Federal Circuit found that there existed "some threatened or actual injury resulting from the putatively illegal action" for at least one member of these organizations, and that this was sufficient.
Turning to the substantive question, the Federal Circuit noted an important distinction with cases dealing with pre-emption of state law by Federal law: the District is not a state, but rather it is a "federal territory whose self-governance is authorized by Congress"; however, the Federal Circuit stated that Federal supremacy principles still applied, when a conflict arose between a District law and laws enacted by Congress. Don't Tear It Down, Inc. v. Pa. Ave. Dev. Corp., 642 F.2d 527, 534 n.65 (D.C. Cir. 1980). Despite the characteristically "negative" nature of the patent right (i.e., it does not confer on a patentee any affirmative right to practice an invention), the Federal Circuit analyzed the statute "as a whole" in light of the objectives of the patent laws. The CAFC first cited the Constitutional mandate "to promote the progress of science and the useful arts," and the importance of the patent laws to protect the pecuniary interests of inventors which provided an incentive for their inventive activities. The Federal Circuit found support for the proposition that these principles formed the basis of Congressional objectives for the patent statutes, inter alia, in the legislative history of the Hatch-Waxman Act (1984). Although this objective (providing investment incentive for invention) was in "dialectic tension" with the ultimate purpose of the patent system to promote progress by encouraging disclosure, the Federal Circuit found that the provisions of the patent law reflected a balance by Congress of these competing objectives:
Congress, as the promulgator of patent policy, is charged with balancing these disparate goals. The present patent system reflects the result of Congress's deliberations. Congress has decided that patentees' present amount of exclusionary power, the present length of patent terms, and the present conditions for patentability represent the best balance between exclusion and free use.
Congressional supremacy extends even in instances, such as here implicating the police power of the District, because the Federal Circuit understood the District to be rebalancing "the statutory framework of rewards and incentives insofar as it relates to inventive new drugs." The CAFC found this to be impermissible.
The political urgency regarding patented drug prices exists worldwide and is the source and motivation for governmental and international activities directed at alleviating the problem, usually to the detriment of the patent holder (see "The Law of Unintended Consequences Arises in Applying TRIPS to Patented Drug Protection in Developing Countries"). Although there have been various proposals for addressing these issues with regard to poor and developing countries (see "A Modest Proposal Regarding Drug Pricing in Developing Countries"), "excessive pricing" is relative, and political pressure against rising drug prices is also felt in the relatively prosperous U.S. (because that prosperity is not evenly distributed). While the Federal Circuit's decision striking down the District of Columbia ordinance suggests a more fruitful approach to be taken when countering analogous actions by the States, sorely needed is a way to strike an acceptable balance between the costs of developing new drugs and the costs of benefiting from them.
Biotechnology Indus. Org. v. District of Columbia (Fed. Cir. 2007)
Panel: Senior Circuit Judge Plager and Circuit Judges Bryson and Gajarsa
Opinion by Circuit Judge GajarsaAdditional information regarding this case can be found at Patently-O.
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