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A universal interest in affordable medicine, along with a sizeable price differential between the United States and other countries, continues to fuel the cross-border importation into the United States of prescription drugs. Despite the recent launch of the prescription drug benefit of the Medicare Modernization Act, which provides participants with lower-cost prescription drugs, millions of U.S. residents still frequent the Internet and mail-order pharmacies in order to import drugs from countries such as Canada or Mexico at lower prices. This practice of importing patented prescription drugs outside of the distribution channels established by brand-name drug companies is commonly known as parallel importation. Although in the past, most parallel imports were legitimate products, an increased demand coupled with a static supply of the authentic drug has increased the flow of counterfeit and generic drug products into the supply chain. While seemingly ubiquitous, the parallel importation of prescription drugs remains in violation of federal food and drug laws, as well as U.S. laws governing intellectual property rights. Over the past several years, many states and municipalities along with interest groups have been lobbying Congress to legalize the importation by U.S. citizens of prescription drugs from abroad. While much of the discussion surrounding the importation of drugs from abroad has focused on consumer health and safety, importation also poses a significant threat to innovation and IP rights. For instance, the growing demand for low-cost branded drugs has brought with it an influx of generic versions of patented drugs that threaten the IP rights of drug companies. A recent study has found that a growing number of the reimported drug products, i.e., those obtained by U.S. consumers via Canadian mail order or Internet pharmacies, are actually generic drugs still protected by patents in the United States. Brett J. Skinner, “Price Controls, Patents, and Cross-Border Internet Pharmacies,” Critical Issues Bulletin, February 2006, at 4. (citing analysis by IMS Health Inc.). Specifically, according to the study, 50 generic drugs that accounted for $61.2 million in sales in 2005 did not yet have a generic version available in the United States. Thus, the promotion of legalized cross-border drug sales implicitly encourages the theft of U.S. IP rights. The importation of medicines is regulated at the federal level by the Food and Drug Administration (FDA), under the Federal Food, Drug, and Cosmetic Act (FFDCA), which governs the approval, manufacturing and distribution of prescription drugs. The FFDCA prohibits the importation of prescription drugs by anyone other than the U.S. manufacturer and also contains a number of requirements that make it virtually impossible for prescription drugs made for foreign markets to be in compliance. For instance, drugs must be properly labeled, dispensed with a valid prescription and approved by the FDA. (FDA review includes inspection of manufacturing plants, methods, formulations and active ingredients.) Amendments to the FFDCA, adopted in recent years, such as the Medicine Equity and Drug Safety Act, have included an importation exemption. However, the legislation stipulates that the secretary of Health and Human Services must certify that such a provision would not pose a risk to public health and safety-which no secretary, to date, has done. In addition, many state and local governments have passed legislation that facilitates the importation of drugs by its residents. For instance, a drug importation program known as I-SaveRx provides a Web site for residents of a number of states including Kansas, Minnesota, Missouri, Vermont and Wisconsin, which links its constituents with foreign pharmacies. Although many states have considered passing legislation allowing direct importation of drugs, any such legislation would be in direct conflict with federal law, and thus, pre-empted under the 11th Amendment. While no legal actions have been taken against these states, Minnesota has been warned regarding the FDA position on reimportation and recently has received numerous complaints from its citizens that prescriptions have been confiscated at the border by U.S. Customs. See Mark Brunswick, “Feds seizing Canadian prescription drugs,” Minneapolis Star Tribune, Feb. 6, 2006, at 1A. Pending legislation Many in Congress have sponsored legislation to permit the reimportation from less expensive foreign sources. In the 109th Congress, a number of bills have been introduced to repeal the existing import restrictions on prescription drugs. The legislation currently pending, such as the Pharmaceutical Market Access Act (S. 109, H.R. 328) and the Pharmaceutical Market Access and Drug Safety Act (S. 334, H.R. 700) would allow importation without a safety certification from the secretary of Health and Human Services. While the pending bills differ in approach, in general, each would allow importation of prescription drugs from a number of countries including Canada, Australia and the European Union, with certain required procedures to limit counterfeit drugs, such as track and trace technology. These bills would not only repeal certain sections of the FFDCA, but would also insert a new provision to the Patent and Trademark Act, 35 U.S.C. 271, allowing foreign drugs manufactured under the authority of U.S. patent holders for foreign sale to be imported into the United States without regard to the U.S. patent. A new subsection 271(h) would state that it would not be an act of infringement to use, sell or offer a patented prescription drug under � 804 of FFDCA in the United States if the drug were first sold abroad by or under the authority of the owner or licensee of such patent. The statute would thus reverse the judicial precedent of Jazz Photo Corp. v. U.S. International Trade Commission, 264 F.3d 1094 (Fed. Cir. 2001), in which the U.S. Court of Appeals for the Federal Circuit held that the sale of a patented good outside the United States does not extinguish or “exhaust” the U.S. patent holder’s rights. Under Jazz Photo, a U.S. drug manufacturer could sue a drug importer for patent infringement and block U.S. imports of drugs the company sells abroad. Should these new changes be implemented, patent holders may have to turn to alternative methods to enforce their rights. Licensing restrictions are one option to limit such imports. For instance, if patented drugs are manufactured in the United States or Canada and the U.S. patent holder expressly restricts the sale to Canada by a license, often called a label license, a subsequent importation of drugs from Canada into the United States may be considered an infringement. See Mallinckrodt Inc. v. Medipart Inc., 976 F.2d 700 (Fed. Cir. 1992); Monsanto Co. v. McFarling, 363 F.3d 1336 (Fed. Cir. 2004). One caveat, however, is that the patent holder must demonstrate that the importer or other party subject to the infringement suit knew about the express restriction on resale in order to enforce its right in the courts. Trademark law may provide another means to combat parallel importation, as the Lanham Act may be used to prohibit the unauthorized sale of goods bearing a registered trademark when there is a likelihood of confusion, mistake or deception of purchasers. 15 U.S.C. 1114, 1125. Even though the Lanham Act does not explicitly bar parallel imports or “gray market goods,” it precludes unauthorized importation of goods bearing a registered trademark when there is some “material difference” between the foreign gray goods and the authorized domestic goods that may confuse consumers, and thus injure the goodwill developed by the trademark owner. Gamut Trading Co. v. Int’l Trade Commission, 200 F.3d 775 (Fed. Cir. 1999). Drug manufacturers may look to the material-differences test to block the importation of gray market drug products should there be any differences in the package inserts or the like. See Novartis Animal Health U.S. v. LM Connelly & Sons, No. 04 Civ. 10213, 2005 U.S. Dist. Lexis 18062 (S.D.N.Y. June 14, 2005). In Novartis, the manufacturer of veterinary drugs sold under a number of trademarks in the United States and abroad, successfully enjoined an Australian drug distributor and Internet company from selling its pet medicines made for the Australian market to U.S. consumers. The district court found that differences in the Australian labeling and package inserts, which relied upon metric weights of animals rather than pounds and emergency customer case information that was valid only in Australia, as well as different formulations, some unapproved by the FDA, were material under the Lanham Act. For similar cases, see Novartis Animal Health U.S. Inc. v. Abbeyvet Export Ltd., No. 05 Civ. 4688, 2005 U.S. Dist. Lexis 14264 (S.D.N.Y. July 8, 2005); Bayer Corp. v. Custom School Frames LLC, 258 F. Supp. 2d 503 (E.D. La. 2003). Further, under the recent Federal Circuit decision, SKF USA Inc. v. Int’l Trade Commission, 423 F.3d 1307 (Fed. Cir. 2005), the material-difference test includes not only physical differences between goods, such as appearance, quality and labeling, but also nonphysical, such as customer service. Increased counterfeiting risk The increase in demand for limited low-cost drugs has also forced Canadian Internet pharmacies to fill their supply with drugs from other countries. This has led to increased flow of counterfeits and substandard products-believed by consumers to be the very same branded drugs available from their local pharmacist. The FDA recently reported that the majority of prescription drugs ordered online from purported Canadian pharmacies actually come from other countries. During a recent search of packages entering the United States, 85% of the drugs were found to be manufactured in 27 different countries, with a number of packages found to be counterfeit. See Jennifer Corbett Dooren, “Canadian Online Drugs Probed,” Wall St. J., Dec. 20, 2005, at D5. Counterfeits are often cleverly produced and packaged to look like the genuine article, i.e., imitating design, colors and other visible features of the original branded drugs, yet may contain no active ingredients or the wrong dosage strength or formulation. High-profile examples of counterfeit prescription drugs circulating in the United States, such as Procrit, Zyprexa and Viagra from Canadian Internet pharmacies, abound. Should Congress pass legislation allowing parallel importation, the risk that counterfeit drugs will enter the U.S. market could increase, not only jeopardizing health and safety, but also the consumer perception of the brand and source of the product. To combat counterfeit drugs, the FDA and pharmaceutical companies are collaborating to identify new and effective anti-counterfeiting technologies, which are undoubtedly costly to implement. For instance, overt technologies such as holograms, color-shifting inks and watermarks may help identify the real drug to consumers. The FDA has also endorsed radio-frequency identification (RFID) as a track and trace technology and urges that all drug companies implement such technology as soon as possible. See FDA’s Counterfeit Drug Force Interim Report, October 2003. RFID involves the placement of an electromagnetic tag containing product-specific information onto cartons, pallets and individual products. The RFID system is fairly sophisticated, including antennae affixed to the tags, readers to receive the data in the tags and a database utilized to track the product as it moves through the system. As an alternative or complement to RFID, many pharmaceutical companies utilize serialized bar code systems containing electronic product information to track and authenticate drugs. For instance, in response to the seizure of 5 million counterfeit Viagra pills in the United States, mostly of Chinese origin, Viagra packaging now includes an RFID tag located under the label, a two-dimensional bar code that includes an electronic product code (identical to that included on the RFID tag) and a large color-shifting ink bar to supplement the color-shifting logo. Although much of the focus concerning importation of drugs has been on innovator pharmaceutical companies, legalizing such reimportation will also affect generic pharmaceutical companies, as it will likely undermine the incentives provided to generics under the Drug Price Competition and Patent Term Restoration Act of 1984, commonly known as the Hatch-Waxman Act. The purpose in adopting the Hatch-Waxman Act was to strike a balance between the pioneer manufacturers, which conduct research and development of new drug therapies and prove safety and effectiveness to the FDA, and generic manufacturers, which manufacture equivalent drugs and market them to consumers at lower prices. The increased parallel importation of low-cost foreign drug products will likely undermine the incentive for generic companies to seek U.S. approval pursuant to the Hatch-Waxman Act. Generic drug companies have less of an incentive to invest the time and money required to obtain FDA approval and to challenge the patents of branded drug products. Clearly, with or without the adoption of legislation legalizing importation of foreign drugs, importation continues to grow as consumers seek low-cost alternatives to their prescription drugs, and U.S. pharmaceutical companies must look to intellectual property rights in safeguarding their U.S. markets. Dennis J. Mondolino and Lisa M. Ferri are trial partners in the intellectual property, media & technology group at McDermott, Will & Emery’s New York office. Christine A. Pepe is an associate in the group.

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