A Changing Gray Market Post Lexmark

Marvin Morazan
Associate Editor
Loyola University Chicago School of Law, JD 2019

On May 30, 2017, the Supreme Court issued a decision in Impression Prods., Inc. v. Lexmark Int’l, Inc. finding 8-0 to disallow post-sale restrictions on goods, and 7-1 on the matter of international exhaustion. The Court’s holding reinforced the doctrine of international exhaustion for patents, finding that the first authorized sale exhausts the patent holder’s rights to block importation. In theory, one could now legally purchase pharmaceuticals overseas at cheaper prices and import them to the United States.

International exhaustion & patent law

The United States Patent and Trademark Office issues patents that come with a variety of property rights for the holder of the patent. The patent holder may prevent the import of their patented material into the United States. This can apply in a variety of ways – the two most common means being: 1) preventing the sale of “copy-cat” products or products that illegally use a patent, and 2) preventing companies other than the manufacturer from importing the patented products.

Prior to the Court’s ruling, one couldn’t drive up to Canada, buy cheap pharmaceuticals in bulk, and bring them back to the United States to resell. These types of imports are commonly referred to as the “gray market” because the importer wasn’t bringing in a counterfeit, but was instead importing the very same product made by the same manufacturer, simply bought at a cheaper price.

Gray market pharmaceuticals

One of the largest gray market imports, and arguably the industry most impacted by this ruling, is pharmaceuticals. Gray market pharmaceuticals are often purchased from authorized distributors, only to later be resold at a significant markup. Now though with the Court’s ruling that the first authorized sale exhausts the patent holder’s right to block imports this could mean a rise in gray market pharmaceuticals, only this time the price may actually decrease.

Imagine a pill costing $1000 in the United States selling for only $4.00 abroad. Previously, patients would either have to travel to the foreign country, or risk a lawsuit for patent infringement if they tried to import the drug. It’s important to note that the drug sold abroad is the exact same drug, produced and sold by the same company – the only change in the supply chain of the drug is who the actual importer/supplier that brings the drug to the United States is.

Rising Costs Abroad

Unfortunately, there is a down-side to cheaper pharmaceuticals in the United States through these gray market imports, but not one that may be immediately obvious. In an effort to protect their profits, pharmaceutical manufacturers may inflate prices overseas (where permitted; some countries artificially control the price of certain drugs), especially in countries that are commonly visited to for cheap pharmaceuticals (India, Mexico, etc.).

These countries often have cheaper drug prices in order to provide adequate healthcare to their citizens who may not otherwise be able to afford life-saving medications. Typically, this low price is reflected in more developed a country by charging a premium that “subsidizes” the lesser-developed country.

Import Implications

Prior to the Court’s ruling it was illegal to travel overseas, purchase cheap pharmaceuticals, and reimport them to the United States – even for personal use. Now the Supreme Court has said that once the first authorized sale has occurred that not only are individuals legally permitted to do just that, but also would seemingly allow for a corporation to import pharmaceuticals for resale. The Court’s ruling would seem to pave the way for these companies to form and operate without fear of violating patent laws, but with so much money at stake for Big Pharma it’s only a matter of time before they devise a solution to their international exhaustion problem.

It’s important to note that while the focus has been on pharmaceuticals, the Court did not limit its decision in scope and the implications of international exhaustion will certainly be felt in every sector. However, many products are covered not only by patent law, but also by various international treaties and trade agreements. Though gray market imports may be legal in terms of patent law, it’s still possible that goods may be restricted if they are covered by another treaty or agreement.

While the effect of this ruling won’t be felt overnight, it places significant pressure on pharmaceutical manufacturers to decrease domestic prices to more reasonable levels, or risk customers traveling to other countries and buying the same drugs at a significantly lower price. Ultimately any pressure on pharmaceuticals to lower their prices, and thus lower the cost of health care in the United States, is likely beneficial.

 

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