Legal: State Compulsory Licenses

November 1, 2005
Tamsen Valoir

Pharmaceutical Executive

Pharmaceutical Executive, Pharmaceutical Executive-11-01-2005, Volume 0, Issue 0

Under one bill, states could license patented drugs to generics companies, paying patent holders a royalty.

Back in June, the City of New London, Connecticut, condemned a working-class neighborhood near the Thames River, citing the need for "urban revitalization." The city then sold the land to a private developer, who wanted to turn the waterfront property into office buildings, upscale housing, and a marina. Susette Kelo, refusing to give up her little pink dream house with a view, protested, taking the case to the Supreme Court. However, the Court ruled that the action was legal under the eminent domain law.

Tamsen Valoir

Eminent domain was intended to give the government power to take private property for the public good to build roads and schools, or to redevelop blighted neighborhoods. But Kelo's community was never blighted. Kelo v. City of New London illustrates the growing sweep of eminent domain law. Now, states hope to apply this law to control drug prices.

The Latest Legislation

Vermont and the District of Columbia have proposed legislation that would allow them to issue compulsory drug licenses to patent holders under the eminent domain process. Under these bills, states would then contract with a generic manufacturer to produce the drug, paying the drug company a "reasonable royalty"—a proposed four percent—on each sale. The competition would facilitate the "public good" by offering state residents cheaper drugs.

Legislators have also drafted the "Model State Pharmaceutical Eminent Domain Act" to help other states considering a similar move. The act calls for compulsory licenses in instances where state officials declare that the public health and safety would be improved—but doesn't specify guidelines for determining that standard. The Vermont bill has some guidelines, like whether the drug is "essential for maintaining health or life," the cost of the drug in relation to the cost in other countries and to average resident-income levels, as well as unspecified "extenuating circumstances." However, the bills are vague, and the threshold for allowing a compulsory license seems startlingly low.

Some say these bills are intended simply to pressure drug companies to address cost disparities on their own. Think back to the anthrax scare, when the US government threatened Bayer with compulsory licensing of Cipro (ciprofloxacin)—as the Canadian government had done—if it didn't lower the price. It worked: Bayer kept its exclusive license but halved the price. That said, companies must heed the warnings for compulsory licensing that are already in the environment.

There's precedent Under US federal law, compulsory patent licenses are available for "reasonable and entire compensation," and are also available for inventions made using federal funds. The Federal Trade Commission's (FTC) decision concerning the 1997 merger between Ciba-Geigy and Sandoz into Novartis illustrates this point. FTC required Novartis to grant all requesters a non-exclusive license to their intellectual property of patented technologies for gene therapy drugs—and in some cases, mandated maximum royalties—to protect competition in that area.

States can regulate Some industry observers say compulsory licensing conflicts with the commerce clause, which gives the federal government an exclusive right to regulate commerce between states. However, where the federal government has not acted, states can regulate. Even if state-issued compulsory licenses have difficulty passing constitutional muster, the state could probably act as a market participant—for example, it could buy drugs at reduced cost for all state employees—which would effectively lower the price as shown in Reeves v. William Stake (1980).

TRIPS compliant Some suggest the Trade-Related Intellectual Property Rights (TRIPS) agreement prevents states from enacting compulsory drug licenses. However, TRIPS does allow such licenses under certain conditions, a as the Doha Declaration in 2001 confirmed, stating: "We recognize that under WTO rules no country should be prevented from taking measures for the protection of human, animal, or plant life or health..."

The current legislative proposals do not meet the TRIPS conditions because they fail to require prior efforts to obtain reasonable terms, among other requirements. However, by closely tracking the language in TRIPS, it should be possible to draft legislation that allows use without authorization of the patent holder.

States are considering ways to cope with high prices. It might be wise not to dismiss compulsory drug legislation too quickly, but to consider its effect on public opinion, an area where the pharma industry is losing ground.

Tamsen Valoir is a partner in the Houston office of Baker & McKenzie. She can be reached at tamsen.valoir@bakernet.com