Paralell trade of patended phamaceutical - a discussion from developing countries persective

PARALLEL TRADE OF PATENTED PHARMACEUTICALS: A DISCUSSION FROM DEVELOPING COUNTRY PERSPECTIVE Nguyen Nhu Quynh* Abstract: Although the legitimacy of parallel trade was established in th

PARALLEL TRADE OF PATENTED PHARMACEUTICALS: A DISCUSSION

FROM DEVELOPING COUNTRY PERSPECTIVE

Nguyen Nhu Quynh*

Abstract: Although the legitimacy of parallel trade was established in the Trade-Related

Intellectual Property Rights Agreement 19941 (TRIPS Agreement) and re-affirmed in the Doha Declaration on TRIPS Agreement and Public Health 2001 (Doha Declaration)2, parallel trade in patented pharmaceuticals has so far been one of the most heatedly debated topics Multi-national pharmaceutical companies complain that parallel trade of patented pharmaceuticals denies them adequate protection of their patent rights and prevents them from recouping the costs of pharmaceutical development including research and development (R&D), regulatory approval and amortization of the cost of unsuccessful drug development In contrast, the developing (and least developed) countries, suffering from the burdens of high disease levels and lack of resources to pay for high priced medicines, support liberalization of the parallel trade in patented pharmaceuticals to fulfil basic human needs In addition, developing countries have a greater focus on consumer interests, social welfare and health care policy concerns The puzzle, therefore, is how to fully understand the differences and how to harmonize the interests of the multi-national pharmaceutical companies with those of developing countries

This article, discusses the rationale of developing countries’ arguments in favour of parallel trade in pharmaceuticals in conjunction with an analysis of international and national legal frameworks of parallel trade in pharmaceuticals and its two-sided effects of

on developing countries The article also compares the counter-arguments of national pharmaceutical companies as well as the applicable legal treatment of parallel trade in developed countries, particularly the United States (US) and the European Union (EU) The article ends with proposals for developing countries to utilize the parallel trade

multi-of pharmaceuticals as a useful tool for access to essential medicines in order to combat the devastation resulting from epidemic diseases, and for building up national pharmaceutical industries In particular, the questions of how to lessen any negative effects of parallel trade in pharmaceuticals and why it should be combined with the compulsory licensing of pharmaceutical-related patents as well as technology transfer in the field of pharmaceuticals are mentioned in the set of proposals

(“TRIPS”) See e.g Art 6

remains a challenge for most people in developing countries (as well as in

2

World Trade Organization Ministerial Declaration adopted on 14 November 2001 at the Ministerial

Conference Fourth Session Doha, 9-14 November 2001 WT/MIN (0)/Dec/1

3

The WHO has defined essential medicines as follows: “Essential medicines are those that satisfy the priority health care needs of the population.” The implementation of the concept of essential medicines is intended to be flexible and adaptable to many different situations; exactly which medicines are regarded as

least developed countries).4 Researchers have found that the reasons for this situation result from the low availability and unaffordable prices of medicines while, at the same time, people in those countries are seriously suffered by devastating diseases.5 In 2008,

an estimated 33.4 million people worldwide were infected with HIV and that year some 2.7 million people became infected with the virus Notably, more than 95% of all HIV-positive people are in low-and middle-income countries.6 In the same year, there were

247 million cases of malaria (resulting in nearly one million deaths) of which most are children living in Africa,7 and an estimated 1.3 million people died from tuberculosis for which the highest number of deaths was in the South-East Asia Region.8 Studies had done by WHO and Health Action International (HAI) show that up to 90% of the population in developing countries purchase pharmaceuticals with out-of-pocket payments making pharmaceuticals the second largest family expenditure item after food.9

As a result, medicines are simply unaffordable for most people in those countries The disparity in pharmaceutical access between developed and developing countries is stark Developing countries make up approximately 80% of the world’s population but represent only approximately 20% of global pharmaceutical consumption.10

Parallel trade in pharmaceuticals has not, so far, been the subject of significant legislation

at the international level but it remains one of the most controversial trade-related questions Developing and least-developed countries, generally, favour international exhaustion regimes and parallel trade in pharmaceuticals because it represents a good solution for the health problems in these countries in terms of lower price and product availability In a contrast, multi-national pharmaceuticals companies (that are, for the most part, located in developed countries) employ national exhaustion regimes with a ban

essential remains a national responsibility See WHO, Equitable access to essential medicines: a framework

for collective action, March 2004, http://whqlibdoc.who.int/hq/2004/WHO_EDM_2004.4.pdf p 1

4

WHO, Essential Medicines: Biennial Report 2008-2009, http://www.who.int/medicines/s16822e.pdf

5

See e.g A Cameron, M Ewen, D Ross-Degnan and D Ball, R Laing, Medicine prices, availability, and

affordability in 36 developing and middle-income countries: a secondary analysis, 2008,

http://www.who.int/medicines/technical_briefing/tbs/lancetmedprices.pdf; WHO & HAI , Measuring

medicine prices, availability, affordability and price components, 2nd edition, 2008,

J.C Cohen, M Gyansa-Lutterodt, K Torpey, L.C Esmail and G Kurokawa, TRIPS, the Doha

Declaration and increasing access to medicines: policy options for Ghana, Globalization and Health 1:17

(2005), available at http://www.globalizationandhealth.com/content/1/1/17 The situation is even worse in the poorest countries of Africa and Asia, where as much as 50% of the population lacks such access Some

10 million lives a year could be saved by improving access to essential medicines and vaccines About this

information, see WHO & HAI, supra note 5

on parallel imports of patented pharmaceutical based on an argument based upon a need for appropriate recoupment of R&D costs.11

Parallel trade in pharmaceuticals consists of the trading of genuine pharmaceuticals that have been placed on the market in another country by, or with the consent of, intellectual property right (IPR) owners into parallel authorized distribution channels in another country Parallel trade includes parallel imports and parallel exports

1 In case of parallel imports, an unauthorized distributor of country B imports the product from country A to country B without permission from the IPR owner and both licensors in countries A and B In this case, A is an exporting country; B is

an importing country; the unauthorized distributor is a parallel importer The condition of parallel import is: P1 + T < P2 In particular, P1 is the price in country A; P2 is the price in country B; T is the necessary costs such as transport cost and administrative cost In other words, the price in the importing country is higher than in the exporting country.12

2 In the case of parallel exports, an unauthorized distributor of country B exports the product from country B to country A without permission from the IPR owner and both licensors in countries A and B In this case, A is an importing country; B

is an exporting country; the unauthorized distributor is a parallel exporter The condition of parallel export is P2 + T < P1 In particular, P1 is the price in country A; P2 is the price in country B; T is the necessary costs such as transport cost and administrative cost In other words, the price in exporting country is lower than the in importing country

13

The economic rationale of parallel trade stems from the difference in the price of the product between the country where the parallel trader acquires the product and the country that is the final destination of the product.14 The difference in price for a particular product has at a minimum to be sufficient to compensate for all the costs and expenses borne by the parallel trader The flow of parallel trade is generally directed from countries with a comparably low level of costs to countries with traditionally higher level costs Parallel traders, accordingly, can make a profit by importing or exporting goods in parallel with official channels

in Intellectual Property Management in Health and Agricultural Innovation: A Handbook of Best

Practices, A Krattiger, R.T Mahoney, L Nelson, and Davis (eds 2007) available at

www.ipHandbook.org; Frank M Üller-Langer, Does Parallel Trade Freedom Harm Consumers in Small

Countries, 2008, available at

http://www.eizg.hr/AdminLite/FCKeditor/UserFiles/File/CES-2008-muller-langer.pdf

13

Id

14

Regarding economic rationale of parallel trade, see David Flath and Nariu Tatsuhiko, Parallel Imports

and the Economic Welfare, Working Paper No 61, August 2002, available at

http://repository.kulib.kyoto-u.ac.jp/dspace/bitstream/2433/37942/1/61.pdf

It is widely recognized that parallel imports of pharmaceuticals occur more frequently than with other products because third-degree price discrimination for these products (and luxury goods) is the highest There are two rationales for this First, most countries intervene in pharmaceutical markets by their price control policy Second, the possibility

of welfare-enhancing price discrimination is proved by economists “to be higher for goods covered by IPRs that stimulate inventive or creative activities [for example, patented pharmaceuticals] compared with the [goods covered by] other category of IPRs.”15

The ability of IPR holders to exclude parallel trade depends on the nature of the exhaustion regime that applies to the importing country’s law When a national exhaustion regime is adopted, the IPRs of holders are only extinguished with regard to the right to control further distribution within the national territory In such case no parallel trade is permitted Under a regional exhaustion regime, IPR holders lose their right to control further distribution within the regional territory In this case, parallel trade

is permitted within the given region; however, in principle, IPR holders can rely on their rights to prevent parallel traded goods coming from outside the region When an international exhaustion policy is adopted, distribution rights of IPR holders is internationally extinguished when a good or service has been placed on the market anywhere in the world; and parallel trade, is permitted on an international scale

The legality of parallel trade in pharmaceuticals under the framework of international law

is affirmed in Section 2 below by focusing on the two most important international legal instruments, namely the TRIPS Agreement and the Doha Declaration National laws in several developing and developed countries on parallel trade of patented pharmaceuticals are also discussed in section 2 A complete survey of the issue in all developing and developed countries is beyond the scope of this paper Section 3 summarizes the theoretical and empirical arguments over the effects of parallel trade of patented pharmaceuticals on developing countries A short cost-benefit analysis of parallel trade of patented pharmaceuticals for developing countries is made in Section 4 Finally, Section

5 discusses the implications for developing countries (and least developed countries) of applying a policy of parallel trade in patented pharmaceuticals The conclusion for these countries, is that in the short and medium term, the benefits of pharmaceutical parallel trade outweigh its costs However, measures must be taken against the negative effects of parallel imports of pharmaceuticals and special attention must be paid to domestic demand as well as trade relations in respect of parallel exports of pharmaceuticals

2 Legal framework for parallel trade of pharmaceuticals

From an international law aspect, the parallel trade in pharmaceuticals is, in general, no longer a controversial issue after the TRIPS Agreement and the Doha Declaration on the TRIPS Agreement and Public Health Nonetheless, the legal climate on the issue varies among countries There is a lack of a unified approach, even among developed countries

or among developing countries

15

Casten Fink and Keith E Maskus (editors), Intellectual Property and Development: Lessons from recent

economic research, A co-publication of the World Bank and Oxford University Press, 2005, p 178 (words

added)

2.1 International law

An international exhaustion regime with recognition of parallel trade is explicitly authorized in the TRIPS Agreement Article 6 TRIPS stipulates that the rules of the Agreement may not be used to address the subject of exhaustion for purposes of WTO dispute settlement It is nevertheless silent with respect to determining a specific regime

of exhaustion That stated, the Article per se does not exclude WTO Members from

selecting at their discretion their own exhaustion policies Each Member, therefore, has the freedom to define its own laws governing IPR exhaustion by the legislature and/or the courts conditioned upon their not violating the national treatment and most-favoured nation treatment principles of Articles 3 and 4 of the TRIPS Agreement The regime of international exhaustion and the legality of parallel trade is completely consistent with the meaning of Article 6

The argument over the TRIPS flexibility of exhaustion regimes is further supported by the other articles of the Agreement Article 1.1 states that the “method of implementing” the TRIPS provisions can be freely determined within the “own legal system and practice” of each country.16 This provision makes clear that the TRIPS Agreement is not

a uniform law but it provides minimum standards for its Members and also grants flexibilities to the Members in many areas Additionally, with the footnote 13 to Article

51, the TRIPS Agreement leaves discretion for WTO Members to decide the legality of parallel trade.17 Parallel trade of patented pharmaceuticals is lawful, in principle, as a consequence of patent exhaustion

It is unjustified to rely on Article 28 of the TRIPS Agreement in order to argue that the Agreement mandates patent national exhaustion and prevents parallel trade of patented goods Article 28 TRIPS Agreement must be read in light of its very important footnote 6 which makes it subject to Article 6 of the Agreement Footnote 6 to Article 2818

16

See Article 1.1 TRIPS

implies that the TRIPS Agreement grants exclusive rights to patent holders on one hand but limits their rights in certain contexts on the other hand IPR holders’ exclusive rights including the right to imports are impaired in cases of IPR exhaustion as stated in Article 6 In other words, in principle exhaustion is a national issue, but Members can enact the principle of international exhaustion by referring to Article 6 Furthermore, Article 28 grants patent holders the right to prevent third parties from importing patent protected goods without their consent It does not, however, prescribe a rule defining how their consent is to be determined With Members that have adopted a rule of national exhaustion, consent only exhausts patent rights as to goods placed on the market within the territory of that Member With Members who have adopted a rule of regional exhaustion, consent affects goods placed on the market in any Member within the regional group With Members that

17

Article 51 Footnote 13 states:

It is understood that there shall be no obligation [for Customs Authorities] to apply [the] procedures of [suspension of resale] to imports of goods put on the market in another country by

or with the consent of the right holder, or to goods in transit

18

Article 28 Footnote provides:

This right, like all other rights conferred under this Agreement in respect of use, sale, importation

or other distribution of goods, is subject to the provisions of Article 6

have adopted a rule of international exhaustion, consent affects goods placed on the market anywhere in the world TRIPS does not prescribe a rule regarding the geographical basis on which consent is to be determined.19 Given that, the TRIPS Agreement does not impose any exhaustion principle on WTO Members Simply put, parallel trade in patented pharmaceuticals is one option provided under TRIPS to its Member States

The legality of parallel trade in pharmaceuticals was reinforced by the Doha Declaration

At the Doha Ministerial Conference in November 2001, WTO member governments stressed that it was important to implement and interpret TRIPS in a way that supported public health by promoting both access to existing medicines and the creation of new medicines They, therefore, adopted a separate declaration on TRIPS and Public Health The adoption of the Doha Declaration reflected the great efforts of the developing countries towards driving the focus of the effect of TRIPS to public health problems By recognizing the gravity of the public health problem in many developing, and least-developed countries, Members agreed that the WTO Agreement on TRIPS “does not and should not prevent Members from taking measures to protect public health,”20 and

“affirm that the agreement can should be interpreted and implemented in a manner supportive of WTO Members’ rights to protect public health and, in particular, to promote access to medicines for all.”21 The Declaration also affirms “the right of WTO members to use, to the full, the provisions in the TRIPS Agreement, which provide flexibility for this purpose.”22

The effect of the provisions in the TRIPS Agreement that are relevant to the exhaustion of IPRs is to leave each Member free to establish its own regime for

such exhaustion without challenge, subject to the MFN and national treatment

provisions of Articles 3 and 4

The flexibilities include the freedom to implement an exhaustion doctrine The Doha Declaration leaves to WTO members the freedom to decide the issue of parallel trade in pharmaceuticals Paragraph 5(d) of the Declaration states:

23

With these statements, the Doha Declaration is regarded as a turning-point in thinking about “IP as a social policy tool for the benefit of society as a whole, rather than [as] a mechanism to protect limited commercial interest.”24

UNCTAD-ICTSD Project on IPRs and Sustainable Development, Resource Book on TRIPS and

Development, Cambridge University Press, 2005, p 105

Ellen F M ‘t Hoen, The Global Politics of Pharmaceutical Monopoly Power: Drug Patents, Access,

Innovation and the Application of WTO Declaration on TRIPS and Public Health, AMB, The Netherland,

2009, p xvi

trade of patented pharmaceuticals in all developing countries Some studies have included national legal frameworks of parallel trade of a certain number of developing countries’ (that can help to understand national laws on parallel trade of patented pharmaceuticals in developing countries).25 Nonetheless, flaws and a low unity among those studies are found.26 The result of my current doctoral research shows that an international regime of exhaustion seems to be a better fit for developing countries Nevertheless, a developing country may apply a national exhaustion regime instead of a regime of international exhaustion based on its socio-economic context and relevant policy.27 Furthermore, a developing country may apply a regime of international exhaustion to only certain categories of IPRs.28 Therefore, it is justified to infer that the regulation of parallel trade

in patented pharmaceuticals varies among developing countries

The South African Government passed the Medicines and Related Substances Control Amendment Act of 1997 to improve access to essential drugs Parallel trade in patented pharmaceutical is authorized under Article 15(c) of the Act

With respect to India, the Doha Declaration had considerable effects on amendments to the Patent Act 2002 toward emphasizing the role of parallel imports in dealing with the question of access to affordable medicines Section 83 of the Act provides that (i)

“patents are not granted merely to enable patentee to enjoy a monopoly for the importation of the patented article”, (ii) patents granted do not impede protection of public health”, and “patent are granted to make the benefit of the patented invention available at reasonably affordable prices to the public.” Additionally, Section 107 of the

25

The most current studies are: Musungu, S and Oh, C., The Use of Flexibilities in TRIPS by Developing

Countries: Can They Promote Access to Medicines?, WHO Study on IPRs, Innovation and Public Health,

Geneva: WHO and South Centre, 2006 (cited by Carolyn Deere in Implementation Game: The TRIPS

Agreement and the Global Politics of Intellectual Property Reform in Developing Countries, Oxford

University Press, 2009, p 76); Frank M Üller-Langer (2008), supra note 12, pp 21-22; WIPO, Committee

on Development and IP Fifth Session Geneva April 26 to 30, 2010, Patent Related Flexibilities in the

Multilateral Legal Framework and Their Legislative Implementation at the National and Regional Levels CDIP/5/4, available at http://www.wipo.int/meetings/en/doc_details.jsp?doc_id=131629 pp 32-42

26

For example, with respect to Philippines, the country applies a regime of international exhaustion for patents as stated in the WIPO’s report whereas according to Frank M Ü ller’s research the country adopts a national exhaustion regime (without any note for patents) It should be noted that Philippines amended its Code of Intellectual Property in 2007 marking a turning from a national to an international exhaustion regime for pharmaceutical products And with the case of Malaysia, the WIPO’s report stated that the country applies a national exhaustion regime for patent (Annex II, page 37) whereas it is believed to adopt

a regime of international exhaustion regime (without any note for patents) in the researches of Frank

M Ü ller’s and Musungu, S and Oh, C Notably, the a lack of unity is existed in the WIPO’s report

Particularly, the country is believed to apply a regime of national exhaustion as wrriten at page 37 of the Annex II However, footnote 63 (page 19) of such a report states that Malaysia adopts a regime of

international exhaustion It should be stressed that parallel trade of patented pharmaceuticals is lawful under Section 58A of the Patent Act (modified in 2000)

27

That is the case with Brazil See Article 44.IV on patents and Article 132.III on trademarks, Brazil: Law

No 9.279 of May 14 1996 to Regulates Rights and Obligations Relating to Industrial Property, http://www.wipo.int/clea/en/details.jsp?id=515

28

That is the case with India India has applied international exhaustion for patented and trademarked

goods but national exhaustion for copyrights due to the strength of its film and software industries See Mattias Ganslandt and Keith E Maskus, IPRs, Parallel Imports and Strategic Behavior, IFN Working

Paper No 704, 2007, Research Institute of Industrial Economics, Sweden, p 9

Act recognizes parallel importation by individual and private entitles for commercial purposes “Importation of patented products by any person from a person who is dully authorized under the law to produce and sell or distribute the product does not constitute infringement of the patent.”

Countries of the Association of South East Asia Asian Nations (ASEAN) pay significant attention to the policy of allowing pharmaceutical parallel importation.29 Malaysia amended its Patent Act in 2000 with an explicit authorization for pharmaceutical parallel importation at Section 58A Similarly, the Philippines amended its Code of Intellectual Property in 2007 marking a turning from a national to an international exhaustion regime for pharmaceutical products The current Thai Patent Act (No 3) B.E 2542 (1999) adopts an international exhaustion doctrine allowing parallel imports to helps alleviate the issue of obtaining access to essential drugs.30 In regard to Vietnam, parallel importation

of pharmaceuticals for the prevention and cure of human diseases is expressly permitted

by virtue of a specific legal document In 2004, in order to stabilize the domestic pharmaceutical market and block monopolization by certain foreign pharmaceutical giants,31 the Ministry of Health issued Decision 1906/2004/QD-BYT32 which dealt with the parallel import of pharmaceuticals for the prevention and cure of human diseases.33

Most large developing countries with a capacity for exporting pharmaceuticals apply a policy of pharmaceutical parallel trade These include India, China, Thailand, Argentina,

WIPO, Collection of Laws for Electronic Access, http://www.wipo.int/clea/en/details.jsp?id=3807

According to the WIPO report, Thailand applies a regime of national exhaustion for patents This is not as provided in Section 36, particularly paragraphs 1, 2 and 7, of the Thai Patent Act Section 36 provides that:

No other person except the patentee shall have following rights:

(1) where the subject matter of a patent is a product, the right to produce, use, sell, have in the possession for sale, after for sale or import the patented product;

(2) where the subject matter of a patent is a process, the right to use the patented process, to produce, use, sell, have in the possession for sale, offer for sale or import the product produced by the patented process The preceding paragraph shall not apply to:

[…]

(7) the use, sale, having in possession for sale, offering for sale or importation of a patented product when it

has been produced or sold with the authorization or consent of the patentee.”

31

For many years, the Vietnamese pharmaceutical market has been dominated by three 100% foreign owned companies, namely Diethelm Vietnam, Mega Lifescienses VN Ltd., and Zuellig Pharma Vietnam

Ltd See Vietnam’s Competition Administration Department, Ministry of Industrial and Trade, Báo cáo

Pháp lu ật cạnh tranh điều chỉnh hành vi phản cạnh tranh trong hệ thống phân phối dược phẩm tại thị trường Việt Nam, [Legal Report on Anti-Competitive Practices in the Distribution Chain of

Pharmaceuticals in the Vietnamese Market], 2009, p 127

and Egypt.34 Nevertheless, it should be stressed that Brazil is one of the largest pharmaceutical exporters to developing countries but parallel trade of patented pharmaceuticals is not accepted in the country.35 In order to increase access to drugs with affordable price and encourage the transfer of technology, the Brazil patent law provides patents for pharmaceuticals, subject to a working requirement This "working requirement" under Article 68, permits the issuance of compulsory licenses in cases where patent holders choose to supply the market through imports rather than through local production Brazil through this measure has put pressure on multinational pharmaceutical companies to produce patented drugs in Brazil instead of importing them.36

Developed countries’ laws regarding parallel trade of patented pharmaceuticals vary extremely In the US, up until now, there is has been no specific statutory or case law allowing parallel importation of pharmaceuticals into the US Before the Supreme

Court’s ruling in Quanta Computer, Inc v LG Electronics, Inc., (Quanta) in 2008,37

34

Warren Kaplan and Richard Laing, Local Production of Pharmaceuticals: Industrial Policy and Access

to Medicines: An Overview of Key Concepts, Issues and Opportunities for Future Research, Health,

Nutrition, and Population Family (HNP) Discussion Paper of the World Bank’s Human Development Network, January 2005,

http://www.who.int/medicines/technical_briefing/tbs/KaplanLocalProductionFinal5b15d.pdf; Keith E

Maskus, Parallel Imports in Pharmaceuticals: Implications for competition and price in Developing

Countries, Final Report to WIPO under the terms of Special Service Agreement, (April 2001),

http://www.wipo.int/about-ip/en/studies/pdf/ssa_maskus_pi.pdf According to the India Brand Equity Foundation, as of July 2010 India tops the world in exporting generic medicines; India's pharmaceutical industry is now the third largest in the world in terms of volume and stands 14th in terms of value See IBEF, Pharmaceuticals, http://www.ibef.org/industry/pharmaceuticals.aspx

Article 63 of the Chinese Patent Act, modified in 2009, provides a legal basic for parallel trade of patented pharmaceutical China is predicted to become the third largest pharmaceutical market by 2011 See IMS press release March 16, 2010 IMS Announces 17 Countries Now Rank as High-Growth ‘Pharmerging’ Markets; Forecast to Contribute Nearly Half of Industry Growth by 2013- China to Become World’s Third- Largest Pharmaceutical Market Next Year

http://www.imshealth.com/portal/site/imshealth/menuitem.a46c6d4df3db4b3d88f611019418c22a/?vgnexto id=01624605b5367210VgnVCM100000ed152ca2RCRD&vgnextfmt=default

35

See Article 43 IV of the Industrial Property Law No 9.279 of 14/05/1996 as last amended by Law No 10.196 of 14/02/2001 Amongst developing countries, Mexico is one of largest pharmaceutical exporter in developing countries Similarly to Brazil, parallel trade of patented pharmaceuticals is not legally allowed under the Mexican Industrial Property Law of 1991 and last amended in 2005 (Article 22)

36

Articles 68 (1), (2) and (4) of the Industrial Property Law No 9.279 of 14/05/1996 as last amended by

Law No 10.196 of 14/02/ See WIPO, Collection of Laws for Electronic

http://www.wipo.int/clea/en/details.jsp?id=515

37

Quanta Computer, Inc v LG Electronics, Inc., 128 S Ct 2109 (2008) Quanta involved computer

technology patents held by LG Electronics, Inc (LGE) LGE licensed some patents to Intel Corporation (Intel) The License Agreement between LGE and Intel authorized Intel to manufacture and sell microprocessors and chipsets that practiced the LGE patents However, the License Agreement also provided that no license was granted to Intel’s customers to combine Intel products with non-Intel products

At the same time, the License Agreement purported not to alter the usual rules of patent exhaustion In a separate agreement (the Master Agreement) between LGE and Intel, Intel agreed to give its customers written notice informing them that Intel’s license from LGE did not extend to any products they made by combining an Intel product with a non-Intel product This Master Agreement also provided that its breach would not be grounds for termination of the patent license from LGE to Intel Quanta, a computer manufacturer, purchased microprocessors and chipsets from Intel and received the notice required by the Master Agreement In spice of this notice, Quanta manufactured computers using Intel parts in combination

parallel importation of patented pharmaceuticals into the US is strictly prevented since the country applies a national exhaustion regime without any exception to patents.38Parallel importation of trademarked pharmaceuticals is permitted except when there is a material difference between the imported pharmaceuticals and domestic pharmaceuticals.39 The difference in exhaustion regimes for trademarks and patents, however, have made parallel importation of pharmaceuticals into the US infeasible when such pharmaceuticals have been protected by both trademark and patents laws

Nevertheless, the opportunity for parallel imports of patented pharmaceuticals into the

US is preparing to be opened after the Supreme Court’s ruling in Quanta, particularly LG

Electronics v Hitachi LTD in 2009 (Hitachi).40 In the landmark case, Quanta, the

Supreme Court held that method patent is exhausted by sale of item that embodies the method and “[e]xhaustion is triggered only by a sale of authorized by the patent holder.”41 By this ruling, the Court reaffirmed the importance of the exhaustion doctrine that was previously weakened by Federal Circuits42 and limited patentee’s ability to implement activities that are not sufficiently connected with their patent rights.43 Notably,

in Hitachi, 44

with non-Intel memory and buses in ways that practiced the LGE patents LGE, thus, filed suit against Quanta, alleging that Quanta’s conduct infringed the LGE patents.37

patent exhaustion was extended to foreign sale based on the precedent of

Quanta In this case, the Judge Claudia Wilken of the Northern District of California held

that the Quanta ruling applied to authorized foreign sale as well as authorized domestic

38

In Jazz Photo, the Federal Circuit Court of Appeals clearly stated: “[o]ur decision applies only to LFFPs for which the United States patent right has been exhausted by first sale in the United States Imported LFFPs of solely foreign provenance are not immunized from infringement of United States patents.” See

Jazz Photo Corp v Int’l Trade Comm’n, 264 F 3d 1094, 1105 (Fed.Cir.2001) 264 F.3d 1094, 1105

(emphasis added)

39

The rationale of this argument is under the US trademark exhaustion law, parallel imports of trademarked goods are prevented when there is a material difference between parallel imported goods and US

trademarked goods bearing the same mark See Lever Bros Co v U.S., 981 F 2d 1330 (D.C Cir 1993);

Martins Herend Imports, Inc v Diamond & Gem Trading USA Co., 112 F.3d 1296 (5th Cir 1997) appeal from remand 195 F.3d 765 (5th Cir 1999); Societe Des Produits Nestle, S.A v Casa Helvetia, Inc., 982

F.2d 633 (1st Cir 1992); Ahava (USA), Inc v J.W.G., Ltd., 250 F Supp 2d 366 (S.D.N.Y 2003)

40

In 2009, four cases were decided in light of Quanta: (i) TransCore, LP and TC License, Ltd., v

Electronic Transaction Consultants Corporation, United States Court of Appeals for the Federal Circuit,

2008-1430, decided April 8, 2009; (ii) Static Control Components, Inc v Lexmark International, Inc, Eastern District Court of Kentucky, Filed March 31 2009, Memorandum Opinion and Order; (iii) Monsanto

v Scruggs, No 3:00CV-161-P-D, 2009 U.S Dist LEXIS 20829 (N.D Miss Mar 3, 2009); (iv) LG Electronics v Hitachi LTD, No C 07-6511 CW, 2009 U.S Dist LEXIS 20457 (N.D.Cal Mar 13, 2009).

Concerning this argument, see Saami Zain, Quanta leaf or much ado about nothing? An analysis on the

effect of Quanta vs LG Electronics, Albany Law Journal of Science and Technology, 20 Alb L.J Sci &

Tech 67, 2010 ; Richard H Stern, Quanta Computer Inc v LG Electronics Inc – comments on the

reaffirmation of the exhaustion doctrine in the US, European Intellectual Review, E.I.P.R 2008, 30(12),

528-535

44

LG Electronics v Hitachi LTD, No C 07-6511 CW, 2009 U.S Dist LEXIS 20457 (N.D.Cal Mar 13,

2009)

sale.45 If upheld on higher courts, patentee’s rights to prevent parallel imports (including parallel imports of pharmaceuticals) may be deprived.46

Not only parallel importation of pharmaceuticals are strictly barred, importation of pharmaceuticals into the US is also restricted Any prescription drug imported into the

US are required to meet the same requirements as one made domestically including approval procedure of a new drug application (NDA) by the Food and Drug Administration (FDA).47 Notably, several states have passed legislation that facilitates the importation of drugs.48 Re-importation is acceptable if the re-importer is also the manufacturer Section 801(d)(1) [21 USC 381] of the Federal Food, Drug, and Cosmetic Act (amended in 2004) provides that “[N]o drug subject…which is manufactured in a State and exported may be imported into the US unless the drug is imported by the manufacturer of the drug.” Nevertheless, FDA has permitted one broad exemption to this general rule, which is re-importation in case “if the drug is required for emergency medical care” provided for in section 801(d) (2) The Secretary of Health and Human Services has the right to authorize this exemption.49

Due to restrictions on importation, parallel importation and no imposition of pharmaceutical price control, prices in the US for “on-patent” pharmaceuticals are significantly higher than those of other countries.50 The country, thus, has a high potential market for parallel trade.51 Nonetheless, a number of bills repealing the existing restrictions on parallel importations of pharmaceuticals into the US being vetoed or still pending.52

45

Ib at *31

46

Regarding this argument, see ALSTON + BIRD LLP, LG Electronics v Hitachi LTD: Exhausting Patent

Rights Through Foreign Sale, Intellectual Property ADVISORY, April 20, 2009, available at

http://www.alston.com/files/Publication/b2fe4ab8-4e6f-4537-9f86-

a8dd07d0024d/Presentation/PublicationAttachment/5be8bc54-cd67-468f-9242-a9a85fdfe6b5/LG%20v%20Hitachi.pdf

47

Each NDA contains: pre-clinical and clinical safety, effectiveness data, extensive descriptions of the

manufacturing process and controls See New Drug Application Process, available at

real drug to consumers See The National Law Journal, supra note 48

50

See Section 2, The Bill to amend the Federal Food, Drug, and Cosmetic Act with respect to the

importation of prescription drugs, and for other purposes, 1st Session, 110th Congress, 2007 (Introduced by the Senator Dorgan)

51

See Jacob Arfwedson, Re-importation (Parallel Trade) in Pharmaceuticals, Policy Report 182, Institute

for Policy Innovation, July 2004, pp 16-17,

http://www.ipi.org/ipi/IPIPublications.nsf/0/4A9821E11C0B539086256ED60072AB13/$File/PR182-ParallelTrade.pdf?OpenElement

52 The pending legislation are the Pharmaceutical Market Access Act of 2009 S.80 (last introduced January

6, 2009) and the Pharmaceutical Market Access and Drug Safety Act of 2009 H.R 1298 (last introduced March 4, 2009) The statute of these bills is found at http://www.govtrack.us