[authors: Michael Hinrichsen* and Anthony D. Sabatelli**]

On May 30th, the Supreme Court ruled in Impression Products, Inc. v. Lexmark International, Inc. that all patent rights are automatically exhausted upon the sale of a product irrespective of contract stipulations and regardless of whether the sale is made domestically or internationally.  While the dispute in this case involved articles of manufacture, the decision has strong implications for the biotechnology and pharmaceutical Industry, and may make it easier for drugs sold legally overseas to make their way back to the U.S. market.

Lexmark, a manufacturer of laser printers, holds multiple patents on the toner ink cartridges used in their laser printer products.  To protect their market position, Lexmark had U.S. customers sign a contract when they bought a toner cartridge, agreeing to neither reuse nor resell the purchased cartridge.  Despite the contract, many of these customers subsequently sold their spent cartridges to outside companies, called remanufacturers, who then refilled the empty cartridges with new toner for resale.  Remanufacturers also purchased and resold spent cartridges from customers outside the U.S.  Lexmark sued Impression Products on the grounds of patent infringement, asserting that they still held patent rights on the resold cartridges because of the contracts signed by U.S. customers, and because rights cannot be exhausted on products that are sold outside the U.S.

Agreeing in part with both sides, the District Court initially ruled that while all patent rights are immediately exhausted when a product is sold domestically, patent rights are not exhausted for international sales.  The Federal Circuit agreed with regard to international sales, but reversed the domestic portion, ruling that patent rights can be retained so long as the seller specifies which rights are being retained.  The Supreme Court reversed the Federal Circuit ruling on both counts, finding that all patent rights are automatically exhausted wherever a sale is made, regardless of a signed contract.

Impact on the pharmaceutical industry

The Lexmark decision has implications for any industry that sets different prices for the same product, and makes it easier for customers charged a relatively low price to resell the product at a profit to customers being charged more.  In the pharmaceutical industry, this kind of price differential is common between countries, with prices in the U.S. often being higher.  This situation is due in part to strong governmental price controls present in other developed nations, and the steep discounts, patent exceptions and donations granted in developing countries.

It might appear at first blush that there are a few avenues for drugs sold overseas to make their way to the U.S. market.  Drugs could be resold by customers, either directly to customers in the United States, or to a third party company, who would then import the drugs in bulk to the U.S. for resale.  Alternatively, drug wholesalers or pharmacies in other countries could sell directly to U.S. wholesalers, or pharmacies, or customers.  What currently blocks these importations is not patent law but FDA regulations.  To sell a prescription drug in the U.S., the drug must be approved by the FDA in order to ensure that it is safe, effective, labelled properly, and manufactured and tested using approved protocols.  Although drugs manufactured overseas can be sold in the U.S., all production facilities must be registered with the FDA and undergo regular inspection.  Since the FDA cannot verify that all drugs sold overseas pass these stringent safety requirements, the agency currently prevents the resale of drugs across U.S. borders.

Given the safety risks, it seems unlikely that the FDA would allow drugs purchased from individual consumers in other countries to be resold in the U.S.  In the current political environment, however, restrictions on all drug imports are by no means guaranteed.  Several congressional bills have been proposed in recent years that would allow U.S. citizens to buy drugs from pharmacies in countries with similar safety standards to our own [1], and a recent survey found that a majority of Americans support these proposals [2].  Should such legislation pass, the Lexmark decision could prove critical, as it removes patent law as a means to exclude such drug imports.  Assessing the exact impact that foreign drug imports would have on U.S. drug prices is difficult.  Should these bills achieve their intended goal and cause drug prices to drop significantly, a potential unintended consequence could be a reduction in research and development spending, as has occurred in European and other countries after employing strong price controls [3].

Another possible effect of the Lexmark decision is a decrease in drug donations from pharmaceutical companies to developing nations, out of concern that these drugs could be potentially resold in the U.S.  This concern has basis in the Federal Circuit's decision in Lifescan v. Shasta, which found that compensation is not necessary in a transaction for patent rights to be exhausted.

Are there any legal recourses left to pharmaceutical companies?

As Chief Justice Roberts notes in the Court's decision, the Lexmark ruling does not prevent companies from placing post-sale restrictions on a product.  Rather, it only prevents the use of patent law to enforce these restrictions.  Pharmaceutical companies could have overseas pharmacies and wholesalers enter contracts with provisions against reselling drugs in the U.S. market.

[1] The Affordable and Safe Prescription Drug Importation Act. S. 469, 115th Cong. (2017).
[2] The Henry J. Kaiser Family Foundation (2017). Kaiser Health Tracking Poll (April, 2017)., "The Future of the ACA and Health Care & the Budget."
[3] Eger, S. and J.C. Mahlich. Pharmaceutical regulation in Europe and its impact on corporate R&D. Health economics review, 2014. 4(1): p. 23.

* Mike Hinrichsen is a Ph.D. Candidate in the Molecular Biophysics and Biochemistry department at Yale University.  His thesis research is focused on using protein design to develop novel methods for imaging proteins and genomic loci in living cells.
** Dr. Sabatelli is a Partner with Dilworth IP