Two years ago the District of Columbia inadvertently set in motion a case that potentially expands the rights of patent owners, making them immune from many state and local laws.

The case was the result of legislation the district passed to address the growing problem of skyrocketing prescription drug prices. In recent years, the average cost of prescription drugs jumped more than 10 percent annually. Medicaid and Medicare are supposed to provide a safety net to those who can’t afford prescription drugs, but states are staggering under the programs’ costs. This leaves many individuals with an impossible choice–spend their money on prescription drugs and end up broke, or do without and put their health at risk.

“It is a significant problem for many people,” says Sharon Treat, executive director of the National Legislative Association on Prescription Drug Prices.

D.C. thought it had come up with a good solution. In 2005 it enacted the Excessive Pricing Act, which prohibited drugmakers from selling patented pharmaceuticals in the district at an “excessive price”.

The Biotechnology Industry Organization and Pharmaceutical Research and Manufacturers of America quickly challenged the law, and in December 2005 a federal district court struck it down, ruling it was pre-empted by, among other things, the federal Patent Act. In August 2007 the Federal Circuit affirmed.

The scope of the Federal Circuit’s ruling in Biotechnology Industry Organization v. District of Columbia, however, has created consternation among patent experts, as well as state and local governments, which worry that the ruling gives patent owners immunity from local and state laws.

“The opinion is saying that anything that reduces the returns of a patented product interferes with federal [patent] law,” says Joshua Sarnoff, who teaches patent law at the American University Washington College of Law. If the decision is construed in this manner, he adds, the “case would have extremely broad and harmful results.”

Restricted Pricing
The D.C. law didn’t apply to all prescription drugs, only those that are typically most expensive–patented drugs. And the law didn’t set a clear price cap for these drugs. Instead, it made it illegal for drug manufacturers to sell their patented drugs in the district “for an excessive price.”

The law failed to define “excessive price,” although it provided that a drug’s price in D.C. is prima facie excessive if it is more than 30 percent higher than in Australia, Canada, Germany or the U.K. And if there were prima facie evidence of excessive pricing, the defendant had the burden of proving the drug’s price in D.C. is not excessive. But even without prima facie evidence, a plaintiff could file suit and attempt to show the price in D.C. is excessive. Plaintiffs could seek a range of remedies, including injunctions, fines, treble damages and attorneys’ fees.

For obvious reasons, drug companies weren’t too happy with the law. “Companies would have to prove, case-by-case in expensive litigation, that any price was OK,” says David Ogden, a litigator at Wilmer Cutler Pickering Hale and Dorr, who represented one of the drug industry organizations that challenged the law. “It would have been an expensive, burdensome system that would have done a lot of harm.”

Balancing Act
When the Federal Circuit struck down the law, the court’s decision startled many experts. “Most people expected the Federal Circuit would invalidate the D.C. law … however, the scope of the holding took everyone by surprise,” Sarnoff says.

The decision began by noting that one aim of the Patent Act is to encourage innovation by granting inventors exclusive rights; this allows them to exploit their inventions without competition and so “obtain above-market profits during the patent’s term.” According to the court “enhanced profits” play “the central role” in the incentive structure Congress set up in the patent law.

Ultimately, of course, patent law also is intended to benefit the public by bringing new inventions onto the market and eventually allowing competitors to make and sell these inventions. Patent law thus attempts to balance two contradictory goals, according to the court–”to reward innovators with higher profits and to keep prices reasonable for consumers.”

D.C.’s Excessive Pricing Act upset this delicate balance, the court ruled: “[T]he district has chosen to rebalance the [patent law's] statutory framework of rewards and incentives insofar as it relates to inventive new drugs.”

This was beyond the district’s power, the panel held. “The underlying determination about the proper balance between innovators’ profit and consumer access to medication … is exclusively one for Congress to make,” the court stated. “The act stands as an obstacle to the federal patent law’s balance of objectives as established by Congress. Accordingly, we conclude that it is pre-empted by federal patent law.”

Judicial Interpretation
The decision may have effects far beyond D.C.’s price-control law. “You can read it in a fairly sweeping way–that no [state or local] legislation that impacts on patent rights can stand,” says Michael Gollin, a patent attorney at Venable.

This would cast a shadow over a range of state and local laws. For instance, price-gouging laws–which forbid companies from boosting prices in the wake of a natural disaster–could be pre-empted under the Federal Circuit’s reasoning because they restrict patentees’ ability to fully exercise their market power. State environmental laws, too, could be struck down when they impose restrictions on the manufacture or sale of patented products. All state and local regulations that cut into patentees’ profits appear to be pre-empted, according to Sarnoff. “That would have massive consequences,” he argues.

Because these consequences are so huge, many experts believe the Federal Circuit panel didn’t really mean everything it stated in its opinion. “The idea of a municipality legislating patent rights was so shocking–the judges may not have given this matter full consideration,” Gollin says.

As a result, the courts might read the decision narrowly and only outlaw state and local laws that restrict just patents. If courts interpret the decision in this fashion, it would have a very limited reach. For instance, a law prohibiting excessive prices might pass muster if it applies to all drugs, not merely patented ones.

D.C. is appealing the Federal Circuit’s ruling, asking for reconsideration en banc. Meanwhile, the ramifications of the court’s decision remain unclear. “Time will tell how this is interpreted,” Gollin says.