Federal Circuit affirms preemption of D.C.’s Prescription Drug Excessive Pricing Act of 2005August 2, 2007

In a recent decision, the Federal Circuit affirmed the District Court for the District of Columbia's judgment that the federal patent laws preempted the District of Columbia's Prescription Drug Excessive Pricing Act of 2005.

More details of Biotechnology Indus. Org. v. District of Columbia after the jump.

The challenged legislation at issue is the Excessive Pricing Act, enacted by the District of Columbia City Council and which prohibits a patented drug from being sold in the District of Columbia for an excessive price. Under the legislation, "[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% than the comparable price in any high income country in which the product is protected by patents or other exclusive marketing rights." Once a prima facie case of "excessive pricing" is shown, the burden shifts to the defendant to prove that the price is not excessive "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 district court issued an order finding that the Act was preempted by the patent laws and enjoined its enforcement. The case was initially appealed to the United States Court of Appeals for the District of Columbia Circuit, which then granted the District of Columbia's unopposed motion to transfer the case to the Federal Circuit. The Federal Circuit initially found that it had subject matter jurisdiction to hear the case because, while patent law did not "create" the cause of action, it was a necessary element of the case. The court noted that the Act's enforceability depended on whether it was preempted by the patent laws, and thus patent law was a necessary element to resolution of the preemption cause of action. Relying on Shaw v. Delta Air Lines, Inc., 463 U.S. 85 (1983), the court noted that because the plaintiffs were seeking relief from a state regulation on the basis of preemption by a federal statute, the well-pleaded complaints are the complaints filed by the declaratory judgment plaintiffs. Therefore, the court concluded that "the preemption action here 'aris[es] under [an] Act of Congress relating to patents,' the district court had 'jurisdiction based . . . in part[] on section 1338,' and this case falls within our exclusive jurisdiction under § 1295".After concluding that both plaintiff organizations had standing and that thus the court had jurisdiction to hear the appeal, the court addressed the district court's finding that the Act was preempted by federal patent law. The court initially addressed the patent law's incentive structure and found that "[b]y penalizing high prices—and thus limiting the full exercise of the market 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." The court noted that the Act was an attempt to restrain prices, which had the effect of decreasing the reward to the patentee and increased the benefit to the District's drug consumers. This, while it "may be a worthy undertaking on the part of the District government, . . . is contrary to the goals established by Congress in the patent laws. The court also noted that the Act specifically targeted patented drugs and that "[t]he underlying determination about the proper balance between innovators' profit and consumer access to medication, though, is exclusively one for Congress to make." The court thus held that the Act stood as an obstacle to the Congressionally established balance of objectives for federal patent law and thus was preempted by federal patent law. To read the full decision in Biotechnology Indus. Org. v. District of Columbia, click here.