[Ip-health] BIO v. DC and the New Need to Eliminate Federal Patent Law Preemption of State and Local Price and Product Regulation

[Mike Palmedo]

http://www.wcl.american.edu/pijip/documents/sarnoff08022007.doc

BIO v. DC and the New Need to Eliminate Federal Patent Law Preemption of
State and Local Price and Product Regulation

Joshua D. Sarnoff

Program on Information Justice and Intellectual Property
American University, Washington College of Law
August 2, 2007

In Biotechnology Industry Organization v. District of Columbia, the U.S.
Court of Appeals for the Federal Circuit took another big step toward
assuring that a granted patent conveys immunity from market regulation.
The Federal Circuit affirmed a lower-court injunction against
enforcement of DC's excessive pricing prohibition for patented
pharmaceuticals, holding that the DC law's pricing constraint conflicts
with accomplishing the purposes and objectives of the patent law in
general and of the Hatch-Waxman Act in particular, and thus is preempted
by the Supremacy Clause of the U.S. Constitution (notwithstanding DC's
status as a federal entity).

According to the Federal Circuit, "[i]nventors are impelled to invest in
creative effort by the expectation that, through procurement of a
patent, they will obtain a federally protected 'exclusive right' to
exclude others from making, using, or selling embodiments of their
invention. Patentees value the right to exclude in part because =85 [the
right to exclude] may allow them an opportunity to obtain above-market
profits during the patent's term." Significantly, the Court referenced
its previous statement that "'[u]pon grant of the patent, the only
limitation on the size of the carrot should be the dictates of the
marketplace.'" The Court also cited Congressional reports explaining
that under the Hatch Waxman Act, "'[p]atents are designed to promote
innovation by providing the right to exclude others from making, using,
or selling an invention. They enable innovators to obtain greater
profits than could have been obtained if direct competition existed.
These profits act as incentives for innovative activities.'"

The Federal Circuit concluded that the DC law impermissibly interfered
with the identified federal legislative objectives, given that DC had
"[b]y penalizing high prices =85 chosen to re-balance the statutory
framework of rewards and incentives insofar as it relates to inventive
new drugs. In the District's judgment, patents enable pharmaceutical
companies to wield too much exclusive power, charging prices that are
'excessive' for patented drugs. The Act is a clear attempt to restrain
those excessive prices, in effect diminishing the reward to patentees in
order to provide greater benefit to District drug consumers." Thus, the
DC law was held to conflict with federal patent law even though the DC
law addressed only an issue federal law does not directly regulates -
the marketplace pricing of patented medicines - and notwithstanding the
Federal Circuit's recognition in its opinion that the sale of patented
goods is not protected by any right conveyed by the federal patent law.

The Court's decision contains language focusing on the DC law being
specifically "targeted at the patent right" in an alleged effort to
alter "the proper balance between innovators' profit and consumer
access" in regard to patented medicines. But the Court's decision wholly
fails to address considerations actually relevant for "purposes and
objectives" preemption analysis. These include whether "[t]he nature of
the power exerted by Congress, the object sought to be attained, and the
character of the obligations imposed by the law =85 preclude enforcement
of state laws on the same subject," and whether the state law
"substantially impedes" accomplishing the federal purpose. The DC law
does not address the same subject, and the Federal Circuit's decision
does not actually evaluate the extent of any interference that might
occur with the federal objectives of providing incentives. Instead, the
Court held, in the context of determining that organizational standing
existed for the plaintiffs to bring their facial challenge to the DC
law, only that enforcement was likely to be initiated against some of
the plaintiffs' members (given legislative findings that pharmaceutical
prices in the District were presumptively excessive).

The Court's holding also did not address a state or local price or
product regulatory law of general application, and its decision did not
expressly include or exclude such laws. Potentially affected laws
include not only the myriad state laws having the object of restraining
excessive prices for pharmaceutical products (e.g., state formulary
"preferred drug lists"), but also laws having wholly different purposes
and objectives, such as bans or restrictions on patented products and
their uses or unconscionable-pricing and price-gouging laws of general
application that may be applied to patented products or components.
States and localities will certainly seek to distinguish the wide range
of price and product regulating laws on the basis of their more general
application and on the lack of any intent to recalibrate the patent
law's innovation-reward balance. But given the broad dicta in the
Court's decision, a flood of new litigation is likely to challenge
existing and new laws that restrict the profits that can be made on any
and all patented products, brought by well-funded pharmaceutical,
biotechnology, and other industrial interests.

Significantly, the Court's logic and the decision's language have no
clear limits. Thus, the Federal Circuit also stated that "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." Any state or local regulation of market behaviors (including price
regulation but also product bans and prior market approvals,
anticompetitive conduct regulation, etc.) will affect the "free use" of
a product by the patent holder within the marketplace, and thus will
alter the commercial rewards alleged by the Court to have been
contemplated by Congress as part of the federal patent law bargain. For
example, the Court's reasoning in BIO v. DC would invalidate the "Maine
Rx" law requiring drug makers to provide discounts to the uninsured in
order to participate in preferential purchasing programs for Medicaid
that was recently upheld against a preliminary injunction by the Supreme
Court. Similarly, the Court's reasoning would preempt state
environmental regulations banning methods of using patented chemicals.
After all, such regulations limit the profits that such products or
services might otherwise generate in the market and thus the incentives
purportedly assured through the patent grant. These examples demonstrate
that the Court cannot reasonably have intended to mean what its decision
in BIO v. DC actually says.

The Federal Circuit's decision, moreover, is neither warranted nor
sensible. The grant of a patent obviously does not convey any right to
sell (much less the right to obtain any particular level of commercial
reward from the sale of) any patented invention. Nor does the Hatch
Waxman Act convey such a right for pharmaceuticals for which regulatory
approval must also be obtained from the Food and Drug Administration. As
earlier-Federal Circuit Judge Giles Rich went to excruciating lengths to
explain, patents convey only the negative right to exclude and not any
affirmative rights (including rights to a return on investments in
creating patented inventions). "No law was required to enable [the
inventor] to [construct the invention]=85. He sells at the highest price
he can get. Still he needs no law=85. It is the 'natural right' of man=85.
'The franchise which the patent grants consists altogether in the right
to exclude every one from making, using, or vending the thing patented
without the permission of the patentee. This is all that he obtains by
the patent.'" Supreme Court precedent also makes clear that "the use of
the tangible property which comes into existence by the application of
the discovery is not beyond the control of State legislation, simply
because the patentee acquires a monopoly in his discovery." Nor did the
Hatch-Waxman Act guarantee any protected expectation of commercial
returns from monopoly prices. It was directed only to term extension,
and not market protection: the Act intended "to create a new incentive
for increased expenditures for research and development of certain
products which are subject to premarket government approval. The
incentive is the restoration of some of the time lost on patent life
while the product is awaiting pre-market approval."

In summary, the Federal Circuit decision creates a wholly new
affirmative right from the negative right conveyed by the patent grant
(at least by finding a conflict with federal legislative purpose),
providing patent holders with a guarantee of commercial returns on
embodiments of patented inventions wholly unrestricted by traditional
state or local market regulation. In doing so, the Federal Circuit has
extended immunity from market regulation to the pricing of patented
products or components outside the scope of the exclusive patent right,
as the Court did earlier for anti-competitive conduct within the scope
of the exclusive patent right. The Bio v. DC decision thus may add
further impetus to efforts to harmonize federal antitrust and
competition laws with patent laws by favoring patent holders at the
expense of citizens, competitors, and sequential innovators. And the
Federal Circuit's decision wholly ignores recent Supreme Court guidance
reiterating "the presumption against federal pre-emption of a state
statute designed to foster public health."

Although it might be hoped that the Federal Circuit's reasoning will not
be followed by other courts, absent rehearing en banc or that grant of
certiorari the BIO v. DC decision will now be the law of the land. This
is because the Federal Circuit also held that such facial patent law
preemption challenges to state and local laws are within its exclusive
appellate jurisdiction. Thus, unless the panel itself withdraws its
opinion, or the Federal Circuit en banc or the Supreme Court reverse it,
legislation will be needed to prevent the flood of litigation that will
attack state and local price and product regulations that limit the
excessive profits to be made from patented products and services, and
(worse yet) may successfully prevent states and localities from
protecting their citizens. Interested parties, particularly state and
local governments that wield substantial power in federal legislative
processes, should act now to turn the patent legislative reform
bandwagon to this important issue. Reversing the Bio v. DC decision and
protecting state and local regulation from patent law preemption should
be the first of the many needed (but currently missing) public-interest
reforms included in the patent law bills that are taken up by the
Congress when it returns from its August recess.


--
Mike Palmedo
Research Coordinator
Program on Information Justice and Intellectual Property
American University, Washington College of Law
4910 Massachutsetts Ave., NW Washington, DC 20016
T - 202-274-4442 | F 202-274-0659
mpalmedo@wcl.american.edu