[Ip-health] U.S. jurisdiction in Gilead licensing matter

[Sean Flynn]

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U.S. Jurisdiction to Prosecute Anticompetitive Licensing Practices that
Impact Foreign Aid Programs



Sean Flynn and Swati Rawani

Program on Information Justice and Intellectual Property

April 3, 2007



One of the key legal issues raised by KEI's recent complaint to the FTC
regarding Gilead's restrictive licensing terms,

see http://www.keionline.org/misc-docs/ftcgilead12feb07.pdf, is whether
Sherman Act antitrust liability can extend to foreign practices where
the main U.S. impact is to taxpayers through government foreign aid
programs, rather than to U.S. consumers directly.  Specifically, the
main U.S. impact alleged in the KEI complaint is that the practice
"imposes higher costs for AIDS drugs in more than 150 developing country
markets" and the "United States government is the largest purchaser of
AIDS drugs in the developing world, and is harmed by this
anticompetitive practice."



Anticompetitive conduct that affects U.S. domestic or foreign commerce
may violate the U.S. antitrust laws regardless of where such conduct
occurs or the nationality of the parties involved.  With respect to
foreign import commerce, "the Sherman Act applies to foreign conduct
that was meant to produce and did in fact produce some substantial
effect in the United States."   With respect to foreign commerce other
than imports, the Foreign Trade Antitrust Improvements Act of 1982
("FTAIA") applies to foreign conduct that has a direct, substantial, and
reasonably foreseeable effect on U.S. commerce.



Case law and U.S. enforcement agency practice indicates that the U.S.
impact test for Sherman Act application may be met by U.S. taxpayer
purchases through foreign aid programs.



In the lead case, United States v. Concentrated Phosphate Export Ass'n,
393 U.S. 199, 208 (1968), Supreme Court upheld an action to enjoin price
fixing and business allocation activities with regard to sales through
USAID to the Republic of Korea.  The Court held that sales to USAID
bound for Korea were not "exports" within the meaning of the
Webb-Pomerene Act, which makes the antitrust laws inapplicable to export
trade.  The Court explained:



"We must look at the economic reality of the relevant transactions.
Here, although the fertilizer shipments were consigned to Korea and
although in most cases Korea formally let the contracts, American
participation was the overwhelmingly dominant feature. The burden of
noncompetitive pricing fell, not on any foreign purchaser, but on the
American taxpayer. The United States was, in essence, furnishing
fertilizer to Korea. AID selected the commodity, determined the amount
to be purchased, controlled the contracting process, and paid the bill.
The foreign elements in the transaction, were, by comparison,
insignificant."



U.S. antitrust enforcement agencies have used the logic of Concentrated
Phosphate in several cases involving anticompetitive practices in
foreign sales to and through the U.S. government.



In United States v. Standard Tallow Corp., 1988-1 Trade Cas. (CCH)
67,913 (S.D.N.Y. 1988) (consent decree) the U.S. obtained an injunction
against fixing prices or rigging bids for the sale of tallow financed in
whole or in part through grants or loans by the U.S. Government.



In United States v. Anthracite Export Ass'n, 1970 Trade Cas. (CCH)
73,348 (M.D. Pa. 1970) (consent decree), the government received a
consent decree banning price-fixing, bid- rigging, and market allocation
in a Army foreign aid program.



This line of cases clearly shows that U.S. enforcement agencies can and
do prosecute anticompetitive activity when the primary or only U.S.
impact is to government purchasing agencies.  Accordingly, it appears
that there is no jurisdictional barrier to the FTC bringing an
enforcement action against Gilead for its allegedly anticompetitive
practices that raise the price of drugs purchased through the U.S.
government for foreign consumption.