Court Finds D.C. Law Prohibiting Patented Drugs from Being Sold for an Excessive Price Preempted by Federal Patent Law

On August 1, 2007, the U.S. Court of Appeals for the Federal Circuit affirmed (errata) the U.S. District Court for the District of Columbia’s December 2005 ruling declaring that the District of Columbia’s Prescription Drug Excessive Pricing Act of 2005 (the “Act”) is preempted by the federal patent laws and enjoining its enforcement.  The Act prohibited sales activities that result in a patented prescription drug being sold in the District of Columbia for an “excessive price.”  If the wholesale price of a patented prescription drug in the District exceeded the price in any “high income country” (defined in the Act as the U.K., Germany, Canada, and Australia), the manufacturer was presumed to be in violation of the law.  The burden would then shift to the manufacturer to prove that the price of its drug is not “excessive,” in light of the “demonstrated costs of invention, development and production of the prescription drug, global sales and profits to date, consideration of any government funded research that supported the development of the drug, and the impact of price on access to the prescription drug by residents and the [D.C.] government.”  Specifically, the Act stated:

(a) A prima facie case of excessive pricing shall be established where the wholesale price of a patented prescription drug in the District is over 30 percent higher than the comparable price in any high income country in which the product is protected by patents or other exclusive marketing rights.

(b) [If a prima facie case is made, a defense is to show that the] given prescription drug is not excessively priced given demonstrated costs of invention, development and production of the prescription drug, global sales and profits to date, consideration of any government funded research that supported the development of the drug, and the impact of price on access to the prescription drug by residents and the government of the District of Columbia.

The case is an appeal of consolidated actions brought by the Pharmaceutical Research and Manufacturers of America (“PhRMA”) and the Biotechnology Industry Organization (“BIO”).  PhRMA and BIO argued that the Act is preempted by federal patent laws because it conflicts with Congress’s intention to provide such manufacturers with the monetary reward that derives from the right to exclude competitors from making, using, and selling the invention during the patent’s term. 

The District Court and the Federal Circuit agreed with the plaintiffs that Congress expressed that intention in the statutory incentive scheme it developed in the Drug Price Competition and Patent Term Restoration Act of 1984 (the “Hatch-Waxman Act”).  The Federal Circuit reasoned that “[b]y penalizing high prices—and thus limiting the full exercise of the exclusionary power that derives from a patent—the District has chosen to re-balance the statutory framework of rewards and incentives insofar as it relates to inventive new drugs.”  In short, the court found that the “Act stands as an obstacle to the federal patent law’s balance of objectives as established by Congress” and is thus preempted by federal patent law.

By Brian J. Wesoloski