The end of parallel trade with patented pharmaceuticals?

Table of contents

1. Introduction

2. Special characteristics of the pharmaceutical market

3. Tension between Patent law and Competition law
3.1. Patent law
3.1.1. Purpose of a patent
3.1.2. The principle of exhaustion and parallel trade
3.2. Competition Law
3.2.1. Art. 81 EC
3.2.2. Art. 82 EC
3.3. Intermediary result

4. The Lelos case
4.1. Facts of the case
4.2. Opinion of AG Colomer
4.3. The ECJ’s decision

5. Consequences of the Lelos case

6. Conclusion

7. Bibliography

1. Introduction

„Free competition exists inside shelters of law, custom, insurance, political approval, and carefully protected status”. Mason Cooley (1927-2002), U.S. aphorist.^[1]

The pharmaceutical sector is recently in the focus of the academic literature, as it becomes more and more an important topic on the European level.^[2] Especially the relationship between patent and competition law can lead to problems and is consistently discussed. In September 2008 the ECJ had to make a decision in a case between a pharmaceutical manufacturer and his distributors, in which both fields of law played an important role.^[3] Because of these recent developments the objective of this thesis is to analyse the current relation between patent and competition law by laying the emphasis on the phenomenon of parallel trade. This work will focus on the abovementioned Lelos Case and its implications for the principle of exhaustion.

It does not deal with patent or competition law in detail, but contains the most important aspects in order to explain the consequences of the ECJ’s decision. Furthermore, the aspect of costs for research and development cannot be described extensively, but will be mentioned with regard to Lelos. The reason for that is the predetermined length of the thesis and the specific question, which the author has developed as a result of the Lelos Case.

At first the relevant conditions on the pharmaceutical market will be briefly shown (2.) in order to explain why especially in this sector parallel trade is such an important issue. Then, the general tension between patent and competition law will be described, by depicting the most important characteristics and jurisprudence in both fields of law (3.). The next chapter deals with the Lelos Case (4.). The decision to illustrate AG Colomer’s opinion is the result of his different approach to the case in comparison to the point of view of the defendant (i.e. GlaxoSmithKline). After that, a result regarding the impact of the ECJ’s decision on parallel trade and the principle of exhaustion will be given (5.). In this chapter it will be shown how legal writers estimate the consequences and evolutions of the Lelos Case in practice.

There is a lot of literature concerning the pharmaceutical market in general. Especially research costs and art. 81 EC are often discussed topics, which played so far a great role in the relationship between manufacturers, distributors and consumers. The Lelos case is also an issue in the latest legal magazines, because it was the first time that the ECJ had to judge the pharmaceuticals manufacturer’s restriction of supplies on the basis of art. 82 EC.

This thesis shall show how the ECJ has influenced parallel trade in patented pharmaceuticals in the future and what this means for the so far in EC law highly protected principle of exhaustion.

2. Special characteristics of the pharmaceutical market

Parallel trade means that products are bought in states, in which the price is low, in order to market them in states, in which the price level is higher.^[4] The occurrence of parallel trade is not limited to medicines, but arises with regard to different products. However, there are two reasons why it is such an attractive business in the pharmaceutical sector and why manufacturers regard it as particularly unpleasant.

On the one hand, there are huge differences concerning the prices of pharmaceuticals in the different member states. The reason for that is the nonexistent harmonization of the pharmaceutical market^[5] and the strong and extensive regulation by the member states. There are diverse systems, which vary from the control over the pharmaceutical manufacturer’s profits to a determination of the price of the pharmaceuticals or to a regulation of the price through rules of restitution.^[6] Because of this situation Britton and Karet, for example, approve the idea of “average E.U. prices”.^[7] But until now such proposals have not become reality. One should nevertheless bear in mind that the prices for medicines are not completely independent from the manufacturer’s influence. They are the result of negotiations between him and the government.^[8] However, parallel traders have the attractive possibility to buy medicines in member states, in which the prices are relatively low, and to sell them in member states, in which the prices are considerably higher.

On the other hand, patents for pharmaceuticals have to be registered earlier than patents for other products.^[9] Otherwise, there is the risk that another manufacturer is faster with the development of the pharmaceutical.^[10] This would lead to a loss of money, which has been invested into research and development (R&D), without having the possibility to get it back through the marketing of the pharmaceutical. The consequence of the early registration is that during a big part of the time, in which the medicine is under patent protection, the manufacturer does not get profits, as the medicine is not yet placed on the market. So the actual period of patent protection is considerably shorter.^[11] In order to catch up this effect the European legislator has introduced a supplementary protection certificate.^[12] Because of the abovementioned circumstances many authors stress the importance of patent protection for pharmaceutical products.^[13]

As a result the period, in which the manufacturer can gain high prices, because competitors may not produce cheaper generics, is not as long as for other products. That’s why many companies criticize parallel trade of their pharmaceuticals, as their own products can be bought to a lower price in certain member states. This leads to pressure and a general reduction of the prices. So, the possibility of making enough profits in the period of patent protection seems to some extent to be distorted. The next chapter will show how manufacturers try to limit parallel trade and in how far this is permitted.

3. Tension between Patent law and Competition law

3.1. Patent law

3.1.1. Purpose of a patent

If a person got a patent for his invention, he has an exclusive right et al. to produce and sell the patented product.^[14] This means nobody is allowed to do that, unless he got a license from the patent holder. Thus, he is able to exclude other people. Moreover, one has to bear in mind that an important characteristic of a patent is the fact that it will only be granted for a limited period of time.^[15]

Some authors equate “having a patent” with “having a monopoly”.^[16] One can say that the effect of both, patent and monopoly, is quite the same, as the manufacturer has no competitors, who fabricate and sell the same products. Consequently, he is able to charge higher prices, because the consumers have no choice to switch to substitutes. But, the objectives of and reasons for patents and monopolies are definitely different. A patent is a right, which is granted by an official document and limited to a certain period of time.^[17] In contrast to that a monopoly is created because of different circumstances, like e.g. technical factors, market forces, access to important information and technological advantage.^[18] Therefore, it should be supported that a patent is not equal with a monopoly. According to Kraßer this is also the general view in legal literature today.^[19]

During the period of patent protection there are no competitors and consequently free competition is not possible. As many people criticize such a restriction of competition, one has to legitimize the existence and maintenance of patents. Different theories developed in the course of time. In this thesis only the incentive theory will be briefly described, as GSK’s argument in the Lelos case seems to be influenced by it.^[20] This theory assumes that the possibility and prospect of high prices during the period of patent protection work as a motor for innovations.^[21] Conversely, without this prospect companies would not invest into R&D, as they would not be sure that they could recoup the investments. In the Lelos case GSK has also stressed the importance of recovering the money, which it has put into research.^[22]

The general tension between patent and competition law is obvious. The purpose of competition law is to promote free competition and prevent respectively punish all actions, which are not compatible with this aim. But commonly during the period of patent protection there is no competition. In the following it will be shown how EC Law has dealt with this conflict. It is especially interesting to see how the interest of the patent holder and the general interest in free competition are balanced against each other.

3.1.2. The principle of exhaustion and parallel trade

The principle of exhaustion means that the patent holder cannot rely on his patent and cannot prohibit a further distribution of his product, if he himself or someone with his permission has put it into circulation.^[23] Legal literature differentiates primarily two approaches concerning the principle of exhaustion. There is a national and international point of view.^[24] Many member states, e.g. Germany, used national exhaustion rules.^[25] This meant that the patent holder had no influence regarding the further distribution of the product in Germany, if he had put it into circulation there. The importation from another state into Germany was not possible. However, as a result of the jurisprudence of the ECJ, today the member states have a mixed point of view. This will be explained on page 7. For completeness, the international perspective of exhaustion shall also be briefly described. It comprises that the importation of patented products, which the patent holder has put into circulation, is allowed. It does not matter where he has marketed them. Consequently, importation from a foreign country is generally possible.^[26]

The main idea behind the principle of exhaustion is that the patent holder has already gained a reward with putting the patented product into circulation.^[27] Thus, one should not have any further claims than the patent actually wants to grant. Furthermore, it would not be practicable and a threat to legal certainty, if every distributor would be dependent on a permission from the patent holder.^[28] Parallel trade is a direct consequence of the principle. Or as Lieck describes it, the principle of exhaustion is the basis for parallel trade.^[29] In EC law the patent holder cannot prohibit the further distribution of the patented product after he has put it into circulation in a member state. The distributor is allowed to deliver and sell it to all other member states. This is called Community exhaustion. In general the principle has an important status in EC law, as the following case law will show.

The first important case, which dealt with the topic of exhaustion on the European level, is Centrafarm/Sterling Drug.^[30] This case was about a patent holder, who had parallel patents in two member states and who wanted to prohibit parallel imports from one state to the other. The ECJ emphasized that art. 28 EC is applicable. This article says “Quantitative restrictions on imports and all measures having equivalent effect shall be prohibited between Member States”. Thus, it supports the free movement of goods throughout the Union. Art. 30 EC is an exception to this rule, as it allows a restriction justified on grounds of et al. the “protection of industrial and commercial property”. The court stated that patent rights fall under this term, but made also a further distinction. It differentiated between the existence of the right and the exercise of it.^[31] Only the protection of the specific subject matter of the patent right could justify a restriction under art. 30 EC.^[32] In the following the ECJ also defined the specific subject matter of a patent right as “the guarantee that the patentee […] has the exclusive right to use an invention with a view to manufacturing industrial products and putting them into circulation for the first time […], as well as the right to oppose infringements”.^[33] As a result the ECJ concluded that the patent holder could not prevent the importation of his products from another member state, if he has marketed them there in a legal manner.^[34] This means that parallel imports of patented products are possible. The patent holder cannot invoke his patent right in order to foreclose trade between member states. The principle of exhaustion cannot be limited to a national level, but applies for the whole Union. This case can be described as the basis for Community exhaustion and parallel trade in the field of patent law.

[...]

^[1] Quoted in www.bartleby.com/66/70/14670.html (available on 01.06.09).

^[2] See the preliminary report of the European Commission under http://ec.europa.eu/competition/sectors/pharmaceuticals/inquiry/preliminary_report.pdf (available on 01.06.09).

^[3] ECJ, judgment of 16.09.2008, Sot. Lelos kai Sia EE and others/GlaxoSmithKline AEVE Farmakeftikon Proionton (C-468 – 478/06), in Slg 2008, p.I-0000; also known in the legal literature as Syfait II.

^[4] Koenig/Engelmann/Sander, 2001, p. 920.

^[5] Kiehl, 2009, p. 240.

^[6] Roth, 2007, p. 31.

^[7] Britton/Karet, 1997, p. 209.

^[8] Case Associates, 2008, p. 4 f.

^[9] Lieck, 2008, p. 68.

^[10] Lieck, 2008, p. 68.

^[11] Müller, 2003, p. 110.

^[12] Council Regulation (EEC) No 1768/92 of 18 June1992 concerning the creation of a supplementary protection certificate for medicinal products, OJ L 182, 2.7.1992, p. 1.

^[13] See e.g. Douglas, 2005, p. 328; Kramer, 2007, p. 179.

^[14] Mes, 2005, § 9 Fn.1; Benkard, 2006, § 9 Fn. 4.

^[15] According to Douglas the maximum is 20 years, Douglas, 2005, p. 302.

^[16] See e.g. Barsuglia, 2007, p. 49; Osterrieth, 2007, Fn. 327.

^[17] Harte-Bavendamm, 2008, Fn. 8.

^[18] Lübbig, 2005, Art. 82 EGV, Fn. 100.

^[19] Kraßer, 2009, p. § 3 V.

^[20] For an enumeration and description of the different theories see Kraßer, 2009, p. 36 f.

^[21] Kraßer, 2009, p. 36; Osterrieth, 2007, Fn. 8.

^[22] See p. 16.

^[23] Lieck, 2008, p. 70.

^[24] Barsuglia, 2007, p. 31.

^[25] See e.g. BGH, 03.06.1976 – X ZR 57/73, Tylosin, in GRUR 1976, Heft 10, p. 579 – 585.

^[26] Barsuglia, 2007, p. 31.

^[27] Douglas, 2005, p. 306.

^[28] Lieck, 2008, p. 70 f.

^[29] Lieck, 2008, p. 71.

^[30] ECJ, judgment of 31.11.1974, Centrafarm BV et Adriaan Peijper/Sterling Drug Inc. (C-15/74), in Slg. 1974, p. 01147.

^[31] Centrafarm/Sterling Drug, Fn. 7.

^[32] Centrafarm/Sterling Drug, Fn. 8.

^[33] Centrafarm/Sterling Drug, Fn. 9.

^[34] Centrafarm/Sterling Drug, Fn. 11 f.