CAFC Finds Washington DC Drug Price Law to be Unconstitutional

BIO and PhRMA v. District of Columbia (Fed. Cir. 2007).

Earlier in 2007, the CAFC found a the District of Columbia’s new Drug Price Law to be unconstitutional as preempted by the patent laws. The law would have prohibited a manufacturer from enforcing a minimum retail price restriction or from charging “excessive prices” for patented drugs. (I.e., not more than 30% more than is charged in Canada or the UK). The appellate panel found that those limits conflicted with the incentive goals of the patent laws because they would limit the “full exercise of market power.”  In October 2007, the CAFC also denied a rehearing en banc. That denial includes two interesting opinions:

Judge Dyk in Favor of Rehearing: Judge Dyk recognizes the broad holding of the original CAFC opinion — that “any state law regulating the prices of patented pharmaceutical products would likely be preempted as a result of the panel’s holding.”  In Judge Dyk’s opinion, a rehearing is not necessary to change the outcome — but rather to change misguided language in the decision.  In particular, Judge Dyk notes that the majority’s discussion of the “full exercise of market power” is overly broad:

“A patent grant is designed not to allow the patent holder to exploit the grant for the maximum profit that the market will bear, but merely to confer a right of exclusivity.”

There are many proper state activities that limit a patentee’s market power. These include:

• Taxing the sale of patented products;
• Regulating the sale of patented products (such as tobacco formulations and unsafe lamp oil);
• Prohibiting the sale of patented products (such as casino games); and
• Prohibiting price-fixing agreements on patented products.

Judge Dyk argues that like these, price regulation — especially the prohibition on international price discrimination — are not preempted by the Patent Act (even though they may be bad policy).

Judge Gajarsa argued against Judge Dyk’s position — In the process, however, Judge Gajarsa essentially rewrote the panel decision. Arguing that the decision is not based on a requirement that a patentee have full market power but rather, that the DC act is preempted because it upsets the careful balance of rights and incentives created by the US Government in the area of pharmaceutical development.

This case could easily go to the Supreme Court.