Patent Exhaustion and Its Role in Drug Patent Wars


Ignacio S. Sapalo and Anne Mariae Celeste V. Jumadla of Sapalo Velez Bundang and Bulilan explain the misconceptions that drug companies have fostered as a result of the Cheaper Medicines Act.

Six years have passed since the enactment of the Universally Accessible Cheaper and Quality Medicines Act of 2008 (Cheaper Medicines Act), or Republic Act 9502, and confusion remains among the Philippine public. A number of generic drugs distributors, for example, think that the Cheaper Medicines Act gives an all-incompassing authority to any third party to manufacture, import and sell drugs and medicines patented in the country, without seeking a license from the patentee. In effect, these entities regard the Cheaper Medicines Act as having been created to invalidate, revoke or render ineffective patent rights granted under Philippine patent laws. This misconception stems from a lack of understanding of the basic principles of a patentee’s exclusive rights and limitation of these rights. One of these misunderstood basic principles is the principle of patent exhaustion.

                Before the advent of the Cheaper Medicines Act, the Intellectual Property Code of the Philippines (IP Code), or Republic Act 8293, provided for the national exhaustion of patents. This was later amended by the Cheaper Medicines Act into an international exhaustion regime for drugs and medicines.

Patent exhaustion

Section 72 and subsection 72.1 of the IP Code provide, as a limitation on patent rights, that a patentee has no right to prevent third parties from using a patented product which has been put on the market in the Philippines by the patentee itself or with its express consent, in terms of how such use is performed after that product has been put on the market.

                The Cheaper Medicines Act amended these provisions by extending exhaustion to the international market. The limitation to patent rights, in this regard, now reads:

                Using a patented product which has been put on the market in the Philippines by the owner of the product, or with his express consent, insofar as such use is performed after that product has been so put on the said market: provided that, with regard to drugs and medicines, the limitation on patent rights shall apply after a drug or medicine has been introduced in the Philippines or anywhere else in the world by the patent owner, or by any party authorized to use the invention: provided, further, that the right to import the drugs and medicines contemplated in this section shall be available to any government agency or any private third party.

                The patent exhaustion doctrine is well-established in a number of countries around the world. In the United States, for example, though not codified, jurisprudence has explored the concept. In the 1875, the US Supreme Court ruled the “the patentee or his assignee having in the act of sale received all the royalty or consideration which he claims for the use of his invention in that particular machine or instrument, it is open to the use of the purchaser without further restriction on account of the monopoly of the patentees”. This ruling reflects the principle that a patent’s monopoly or exclusive rights ends with the first sale or disposition, by the patentee or its authorized agents, of an article or product embodying the claimed invention.

In United States v Univis Lens 1942, the US Supreme Court ruled that:

                The patentee may surrender his monopoly in whole by the sale of his patent, or in part by the sale of an article embodying the invention. His monopoly remains so long as he retains the ownership of the patented article. But sale of it exhausts the monopoly in that article, and the patentee may not thereafter, by virtue of his patent, control the use or disposition of the article. Hence, the patentee cannot control the resale price of patented articles which he has sold, (either) by resort to an infringement suit.

Parallel Importation

The “use or disposition” of the patented article, which cannot otherwise be controlled by the patentee after the first sale, includes importation to the country espousing an international exhaustion principle, such as the Philippines, in the case of drugs and medicines.

                There is no Philippine Supreme Court ruling that explains and thoroughly interprets the exhaustion principle reflected in section 72.1 of the IP Code as amended by the Cheaper Medicine Act. The closest case, in which the High Court cited the exhaustion provision, is Roma Drug v the Regional Trial Court of Guagua 2009. In this case, government enforcement authorities, on August 14, 2000, at the request of SmithKline Beecham Research, conducted a raid on Roma Drug (owned by Romeo Rodriguez) and seized several imported medicines, including Augmentin tablets, Orbenin capsules, Amoxil capsules and Ampiclox. The prosecutors charged Rodriguez for violation of Republic Act 8203, known as the Special Law on Counterfeit Drugs (SLCD), which prohibits the sale of any “unregistered imported drug product” considered a counterfeit drug. The term “unregistered” signifies the lack of registration (with the Bureau of Patents, Trademarks & Technology Transfer – BPTTT) of a trademark, tradename, or other identical mark of a drug. The seized drugs are identical in content with the Philippine-registered counterparts; neither are they adulterated nor mislabeled. They are counterfeit because they were imported from abroad and not purchased from Smith Kline Beecham. Rodriguez petitioned the Supreme Court of the Philippines to stop the proceedings and to declare SLCD unconstitutional. In 2008, Republic Act 9502, known as the Universally Accessible Cheaper and Quality Medicines Act of 2008, introduced the principle of international exhaustion as a limitation to patent rights in the Philippines with respect to drugs and medicines and gave the right to import them to any government agency or private party. The Supreme Court ruled:

                It may be that Republic Act 9502 did not expressly repeal any provision of the SLCD. It is clear that SLCD’s classification of “unregistered imported drugs” as “counterfeit drugs” and corresponding criminal penalties therefore are irreconcilable and in conflict with republic Act 9502, since the latter indubitably grants to private third persons the unqualified right to import or use these drugs. Where a statute of a latter date, such as the amendment of Republic Act 9502 clearly reveals an intention on the part of the legislature to abrogate a prior act (SLCD) that intention must be given effect… irreconcilable inconsistency between the two(2) laws embracing the same subject nullifies the reason or purpose of the earlier act, so that the latter loses all meaning and function. Legisposteriors priores contraries abrogant.

Howerer, that the “unqualified right to import or otherwise use such drugs” does not cover the importation of drugs and medicines which are put out in the market by entities other than the patentee or authorized agents, such as generic-drugs companies that manufacture and distribute drugs with the same active ingredients or bio-equivalents of innovator drugs and carry different brand names to those owned or registered by the patentee or its authorized agents for use on those patented innovator drugs. This circumstance has not been explored in the Roma drug case. However, generic drug distributors inappropriately cite the Roma drug case to legitimize what are otherwise patent-infringing acts, as they are beyond the leeway granted by patent exhaustion.

Patents v Generic Drugs

Since the enactment of the Generics Act of 1988 (Generics Act), or Republic Act 6675, generic drugs distribution had taken a major role in the pharmaceutical industry in the Philippines. This was boosted further by the Cheaper Medicines Act, which allows parallel importation of drugs and medicines as a result of the internationalization of patent exhaustion.

However, a number of drug companies have not limited their importation of drugs and medicines to those which are manufactured and sold abroad by Philippine patent owners, but also to generic drug versions, or those drugs that are manufactured and sold abroad without authorization from Philippine patentees. Therefore, when these drugs enter the Philippine market, the importers and distributors are exposed to patent infringement actions.

Unsurprisingly, the most common defence used for this type of action is based on the patent exhaustion provision of the Cheaper Medicine Act, amending the IP Code. Clearly, however, the patent exhaustion principle does not apply to a product which is not put out in the market by the patentee.

Among common defence is that the alleged infringing drug is a generic drug. The Generics Act defines generic drugs as “drugs not covered by patent protection and which are labeled solely by their international non-proprietary or generic name”. under this same Act, manufacturers, importers, re-packers and distributors of drugs and medicines are required to indicate prominently the generic name of the product. The prevalent misconception is that when a drug or active drug ingredient is named by its international non-proprietary or generic name, the drug is already a generic drug. However, most often in the Philippines, these drugs have existing Philippine patents, and technically, are not yet generic drugs by definition of law. This situation then gives rise to drug-patent wars in the country.

Patents v Drug Registration

To give a guise of legitimacy to otherwise patent-infringing drugs, some generic drugs importers and distributors obtain registration of their drugs with the Philippine Food and Drug Administration (FDA). The latter’s mandate, under the Food and Drug Administration Act of 2009 (FDA Act), or Republic Act 9711, is to establish and maintain an effective health products regulatory system in the country.

 The other hand, the grant and maintenance of patents lie within the authority of the Intellectual Property Office of the Philippines (IPOPHL), under the IP Code. Patent issues are then outside the jurisdiction of the FDA. Due to this jurisdictional gap, drug product registration with the FDA has no relation to patent grants with the IPOPHL, and the FDA registers drugs without consideration of patent issues.

Thus, contrary to the public’s general impression, the registration of a drug with the FDA, as a generic drug, is independent of the existence or status of the patents of the innovator drug. Generic drug versions are registered with the FDA as generic drugs, even if the patents for the active ingredient or innovator drug are still in force and effect. This is legitimate but subject to the regulatory exception, or Bolar provision.

The Bolar provision allows manufacturers of generic drugs to use the patented active ingredient or innovator drug to obtain regulatory approval, without the patentee’s consent, before the expiration of the patent. Section 72.4 of the Cheaper Medicine Act restricts the allowed acts to:

                Testing, using, making or selling the invention including any data related thereto, solely for purposes reasonably related to the development and submission of the information and issuance of approvals by government regulatory agencies.

                The Bolar provision envisions the allowed acts as preparatory steps for the generic drug companies, to enable them to market their generic drug versions immediately upon the expiration of the innovator drug’s patents. It does not contemplate the mass manufacture and distribution of these generic drug version (whose active ingredients or innovator drugs are still protected by existing patents) for profit.

A Fine Balance

Patent law and practice in the Philippines is still in its infancy. It is faced with maintaining a balancing act to preserve the integrity of its patent system, as well as the original intent of Congress in passing the Cheaper Medicine Act: that is, to provide its citizens with access to cheaper and quality medicines. The misconceptions, if not abuses, by drug distributors are tipping the balance from one side to the other, by sowing more confusion among the public. This needs to be corrected by insightful decisions from the courts.

 Source: Managing Intellectual Property Asia-Pacific IP Focus

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