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Federal Patent Laws Preempt District of Columbia Statute That Imposes Limits on “Excessive” Prices for Patented Drugs

August 01, 2007
Ferguson Ph.D., Mary K.

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Last Month at the Federal Circuit - September 2007

Judges: Bryson, Plager, Gajarsa (author)

[Appealed from: D.D.C., Judge Leon]

In Biotechnology Industry Organization v. District of Columbia, No. 06-1593 (Fed. Cir. Aug. 1, 2007), the Federal Circuit affirmed the district court’s ruling that the District of Columbia’s (“the District” or “D.C.”) Prescription Drug Excessive Price Act of 2005, codified at D.C. Code § 28-4551 to 28-4555 (“the Act”), is preempted by federal patent laws, and affirmed an injunction that prevents its enforcement.

This case arises from an industry challenge to D.C. City Council legislation that prohibits selling any patented drug in the District for an excessive price. While the term “excessive price” is not expressly defined in the Act, the statute provides that a prima facie case of excessive pricing exists when “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). The United Kingdom, Germany, Canada, and Australia are, by definition, high income countries.

Shortly after the legislation was approved, the Pharmaceutical Research and Manufacturers of America (“PhRMA”) and the Biotechnology Industry Organization (“BIO”) filed separate DJ lawsuits in the U.S. District Court for the District of Columbia to challenge the legality of the statute. The plaintiffs alleged that the Act is preempted by the patent laws, invalid in light of the Commerce Clause, and preempted by the Foreign Commerce Clause. After consolidating the actions, the district court determined that the plaintiffs represent members who complained of “realistic and imminent injuries,” establishing their standing to sue. The district court then held that the Act is preempted by the patent laws and that it is invalidated by the Commerce Clause to the extent that the price limitation applies to transactions between parties not located within the District’s borders. The district court also held that while the Foreign Commerce Clause does not preempt the Act, it prevents establishing an “excessive price” based on the price of the same drug in a foreign country. The district court therefore enjoined enforcement of the Act. The District appealed the patent law and Foreign Commerce Clause rulings to the U.S. Court of Appeals for the District of Columbia Circuit, but did not challenge the Commerce Clause ruling. On an unopposed motion by the District, the appeal was transferred to the Federal Circuit.

Before reaching the questions on appeal, the Federal Circuit sua sponte raised the issue of whether the Federal Circuit, rather than the District of Columbia Circuit, has jurisdiction to decide the case. Summarizing the law on its subject matter jurisdiction, the Federal Circuit noted that a well-pleaded complaint must state a claim arising under the patent laws to establish Federal Circuit jurisdiction. The complaint must include a claim, not merely a defense to a claim, that is created by the patent laws or for which a party’s right to relief necessarily depends on resolution of a substantial question of federal patent law. In this instance, the plaintiffs sought an injunction to prevent enforcement of the Act.

The Federal Circuit determined that a claim to enjoin enforcement of a state or local statute on the ground that it is preempted by the federal patent laws presents a claim arising under the patent laws. Specifically, the Federal Circuit found that the plaintiffs had pleaded a claim in which interpretation of a patent law will decide their right to relief and that patent law is a necessary element of the claim. It therefore found that the patent law preemption claim brought the case within Federal Circuit jurisdiction.

To complete the jurisdictional analysis, the Federal Circuit next considered whether PhRMA and BIO had standing to challenge the Act. Applying the standard articulated in United Food & Commercial Workers Union Local 751 v. Brown Group, Inc., 517 U.S. 544, 553 (1996), the Federal Circuit first determined that the claims seek to address interests related to the associations’ purpose and that member participation is not required to decide the claims or to grant relief. Further, the Federal Circuit determined that the associations each represent at least one member that has standing in its own right, i.e., the member is suffering immediate or threatened redressable injury that is caused by the Act. In reaching this conclusion, the Federal Circuit noted that the findings and legislative history of the Act indicate that current prices of specific patented drugs do not meet a codified standard for a prima facie “excessive price,” indicating that association members are at imminent risk for enforcement. Because this imminent injury flows directly from the Act and an injunction would prevent the injury from occurring, the Federal Circuit found that PhRMA and BIO have standing to bring suit.

The Federal Circuit then turned to the question of whether the patent laws preempt the District’s attempt to regulate the price of patented goods. Preemption is decided under Federal Circuit law by evaluating the objectives of the federal patent laws, which are defined in Article I, Section 8, Clause 8 of the Constitution (“To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries.”). The Federal Circuit reasoned that Congress has established a statutory scheme in the patent laws that is consistent with the constitutional objectives, and that enhanced profits are central to Congress’s statutory incentives. As part of its mandate to promulgate patent policy, Congress is charged with balancing disparate goals “to reward innovators with higher profits and to keep prices reasonable for consumers,” the Federal Circuit explained. Slip op. at 17. Thus, the Federal Circuit concluded that the District’s Act is an attempt to rebalance the statutory framework of incentives and rewards by limiting the prices of new prescription drugs. Finding that this is contrary to the goals established by Congress in enacting the patent laws, the Federal Circuit held that the patent laws preempt the Act. The Federal Circuit declined to reach the alternative argument for preemption under the Foreign Commerce Clause, and affirmed the district court’s injunction against the Act’s enforcement.