The Federal Circuit has held that federal patent law preempts state and local legislation intended to regulate the sale price of patented drugs. The court made it clear that the patent system is intended to create a market-based set of rewards for patent holders to promote innovation. State or local price regulation alters this system and therefore conflicts with federal law. While the decision dealt directly with drug patents, the principles established may give companies holding other patents additional protection from efforts by state or local governments to legislate how their products can be sold.
The District of Columbia City Council adopted legislation prohibiting any patented drug from being sold in the District for an excessive price. The operative section of the District’s Excessive Pricing Act states that “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.” While not defining what constituted an “excessive price,” the legislation included a statement that a prima facie case of excessive pricing could be established by proving that the wholesale price of the drug was 30% higher than the comparable price in any high income country [defined as the United Kingdom, Germany, Canada, or Australia] where the product is protected by patents or other exclusive marketing rights. The law was challenged by the Pharmaceutical Research and Manufacturers of America and the Biotechnology Industry Organization, which contended that it was preempted by federal patent laws.
In Biotechnology Industry Organization v. Dist. of Columbia, 2007 WL 2189156 (Fed. Cir. 2007), the court held that the District’s law was preempted by federal patent law. The court first noted that while the District of Columbia is a federal territory, the general principles of preemption govern any conflict between District statutes and Congressional enactments. The court also indicated that there is no express provision in the federal patent statute that prohibits states from regulating the price of patented goods. In fact, the Federal Circuit has previously held that “the federal patent laws do not create any affirmative right to make, use, or sell anything.” Leatherman Tool Group, Inc. v. Cooper Indus., Inc., 131 F.3d 1011, 1015 (Fed.Cir.1997).
Nevertheless, the court concluded that a state or local law must yield to congressional enactments if it “stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress.” The patent laws are intended to create an incentive for innovation, and the court concluded that the District’s legislation effectively changes federal patent policy within its borders. “By penalizing high prices – and thus limiting the full exercise of the exclusionary power that derives from a patent – the District has chosen to re-balance the statutory framework of rewards and incentives insofar as it relates to inventive new drugs.” The court held that because Congress intended a market-based framework to reward innovation, the District’s price regulation scheme would distort this framework and therefore conflicted with federal patent law.
The holding only applied to patented drugs. Nevertheless, the decision may provide a mechanism for other businesses holding patents to challenge state and local regulation that alters the market-based reward system that, according to the Federal Circuit, underlies federal patent law.
Full Opinion
Text: http://www.fedcir.gov/opinions/06-1593.pdf