Patents and Drug Importation

Prepared for Members and Committees of Congress

Prescription drugs often cost far more in the United States than in other countries. Some
consumers have attempted to import medications from abroad in order to realize cost savings.
The practice of importing prescription drugs outside the distribution channels established by the
brand-name drug company is commonly termed “parallel importation.” Parallel imports are
authentic products that are legitimately distributed abroad and then sold to consumers in the
United States, without the permission of the authorized U.S. dealer.
Parallel importation may raise significant intellectual property issues. Many prescription drugs
are subject to patent rights in the United States. In the Jazz Photo decision, the U.S. Court of
Appeals for the Federal Circuit confirmed that the owner of a U.S. patent may prevent imports of
patented goods, even in circumstances where the patent holder itself sold those goods outside the
United States. The Jazz Photo opinion squarely declined to extend the “exhaustion” doctrine—
under which patent rights in a product are spent upon the patent owner’s first sale of the patented
product—to sales that occurred in foreign countries. The court’s ruling will in some cases allow
brand-name pharmaceutical firms to block the unauthorized parallel importation of prescription
drugs through use of their patent rights.
Several state and local governments are either themselves importing, or encouraging others to
import, patented medications from foreign jurisdictions. The Eleventh Amendment of the U.S.
Constitution provides that a federal court may not adjudicate a lawsuit by a private person against
a state, except under certain limited circumstances. The ability of a private party to obtain a
remedy for patent infringement against a state government is therefore uncertain. Eleventh
Amendment immunity may in some cases extend to political subdivisions of a state as well.
In addition to any patent rights they possess, brand-name drug companies may place label
licenses on their medications. It is possible to draft a label license restricting use of a drug to the
jurisdiction in which it was sold. As a result, in addition to a charge of patent infringement, an
unauthorized parallel importer may potentially face liability for breach of contract.
Legislation introduced before the 110th Congress, S. 1082, addresses the importation of
prescription drugs. Titled the Food and Drug Administration Revitalization Act, this bill would
amend the Patent Act of 1952 to provide that importation into the United States of a regulated
pharmaceutical sold abroad by a patent proprietor or its representative is not a patent
infringement. Introduction of an “international exhaustion” rule restricted to pharmaceuticals
does not appear to be prohibited by the provisions of the so-called TRIPS Agreement, which is
the component of the World Trade Organization (WTO) agreements concerning intellectual
property. Another possible legislative response is the immunization of specific individuals, such
as pharmacies or importers, from patent infringement liability. Alternatively, no legislative action
need be taken if the current possibility of an infringement action against unauthorized importers
of patented pharmaceuticals is deemed satisfactory.

Fundamentals of Pharmaceutical Patents........................................................................................2
Patent Policy..............................................................................................................................2
U.S. Patent Acquisition and Enforcement.................................................................................4
The Exhaustion Doctrine...........................................................................................................5
International Aspects.................................................................................................................6
The Parallel Importation of Patented Pharmaceuticals....................................................................7
Related Issues..................................................................................................................................9
State and Local Governments...................................................................................................9
Label Licenses..........................................................................................................................11
The TRIPS Agreement............................................................................................................12
Legislative Issues and Alternatives...............................................................................................13
Author Contact Information..........................................................................................................15

he pricing of prescription drugs has become a significant concern for many U.S. 1
consumers. As spending on health care has risen in recent years, so too has consumer
interest in purchasing more affordable medications. Overseas markets provide one T

possible source of less costly prescription drugs. Some comparative studies of prescription drug
prices in the United States and foreign nations have concluded that prices for specific drugs may 2
be significantly lower abroad. These price disparities in some instances have encouraged
individuals and firms, as well as state and local governments, to attempt to import comparable 3
medications from abroad in order to realize cost savings.
The practice of importing patented prescription drugs outside the distribution channels 4
established by the brand-name drug company is commonly termed “parallel importation.”
Parallel imports are authentic products that are legitimately distributed abroad and then sold to
consumers in the United States, without the permission of the authorized U.S. dealer. These goods
are legitimate in that they are produced by the brand-name drug company or its authorized
representative. In particular, parallel imports are not generic versions of a brand-name drug
distributed by a different manufacturer, nor are they pirated copies that form part of the “black
market.” Because parallel imports disrupt the marketing arrangements established by the brand-5
name drug company, however, they are sometimes called “grey market goods.”
Current debate surrounding the parallel importation of prescription pharmaceuticals has largely 6
addressed the safety and efficacy of the imported medications. This practice may also raise
significant intellectual property concerns, however. Many prescription drugs are subject to patent
rights in the United States. Indeed, because patented drugs usually have no exact generic 7
equivalent available in the marketplace, economic incentives for parallel importation may be
strongest for patented medications. Among the rights granted by an issued patent is the ability to 8
exclude others from importing the patented product into the United States. As a result, even if a
foreign drug is judged safe and effective for domestic use, brand-name firms may nonetheless be
able to block the unauthorized importation of prescription drugs through use of their patent rights.
Legislation introduced before the 110th Congress, S. 1082, would account for the patent
implications of the parallel importation of pharmaceuticals. In particular, this bill would amend
the Patent Act of 1952 to provide that it is not an act of patent infringement to import into the
United States a drug that was first sold abroad by or under authority of the owner or licensee of

1 See CRS Report RL31094, Health Care Spending: Past Trends and Projections, by Paulette C. Morgan.
2 See, e.g., Farin Khosravi,Price Discrimination in the United States: Why Are Pharmaceuticals Cheaper in Canada
and Are Americans Seizing the Opportunities Across the Border?, 9 Law and Business Review of the Americas (2003),
3 See, e.g., Shubha Ghosh,Pills, Patents and Power: State Creation of Gray Markets as a Limit on Patent Rights,” 14
Florida Journal of International Law 217 (2002).
4 See, e.g., Warwick A. Rothnie, Parallel Imports (Sweet & Maxwell 1993); Simon Horner, Parallel Imports
(Blackwell Science 1987).
5 See, e.g., Seth E. Lipner, The Legal and Economic Aspects of Gray Market Goods (Quorum Books, Westport,
Connecticut 1990).
6 See CRS Report RL32271, Importation of Prescription Drugs Provisions in P.L. 108-173, the Medicare Prescription
Drug, Improvement, and Modernization Act of 2003, by Susan Thaul and Donna U. Vogt.
7 See, e.g., Melissa K. Davis, “Monopolistic Tendencies of Brand-Name Drug Companies in the Pharmaceutical
Industry,” 15 Journal of Law and Commerce (1995), 357.
8 See 35 U.S.C. § 271(a) (2006) (providing patent proprietors with the right to exclude others from importing patented
inventions into the United States).

such patent. The effect of this bill would be to introduce a doctrine known as “international 9
exhaustion” into the U.S. patent law.
The parallel trade of patented pharmaceuticals involves a fundamental trade-off within the
intellectual property law: encouraging the labors that led to technological innovation, on one
hand, and promoting access to the fruits of those labors, on the other. The patent system is built
upon the premise that patents provide individuals with an incentive to innovate by awarding 10
inventors exclusive rights in their inventions for a limited period of time. Some observers
believe that a diminishment of patent rights will decrease incentives to develop new 11
pharmaceuticals in the future. Yet there is growing concern that drug prices are too high in the
United States as compared to other nations. Some commentators believe that the patent system
should not be used to regulate the movement of legitimate, lawfully purchased products through 12
the global marketplace.
This report explores the intellectual property laws and policies concerning the parallel 13
importation of patented pharmaceuticals into the United States. It begins with a review of patent
policy and procedures. The report then discusses the current legal framework for analyzing the
permissibility of the parallel importation of patented pharmaceuticals, including both the
domestic and international exhaustion doctrines. Special consideration is given to state and local
governments that have either themselves imported, or have encouraged others to import, patented
medications from foreign jurisdictions; the potential use of label licenses on patented drugs; and
the implications of international trade rules established by World Trade Organization. This report
closes with a review of legislative issues and alternatives as they relate to intellectual property
issues and parallel importation.

The patent system is animated by a number of policy objectives designed to promote the
production and dissemination of technological information. Many commentators have argued that 14
the patent system is necessary to encourage individuals to engage in inventive activity.
Proponents of this view reason that, absent a patent system, inventions could easily be duplicated
by free riders, who would have incurred no cost to develop and perfect the technology involved,

9 See Rebecca S. Eisenberg,Patents, Product Exclusivity, and Information Dissemination: How Law Directs
Biopharmaceutical Research and Development,” 72 Fordham Law Review (2003), 477.
10 Bonito Boats, Inc. v. Thunder Craft Boats, Inc., 489 U.S. 141 (1989).
11 Claude E. Barfield & Mark A. Groombridge, “Parallel Trade in the Pharmaceutical Industry: Implications for
Innovation, Consumer Welfare, and Health Policy, 10 Fordham Intellectual Property, Media and Entertainment Law
Journal (1999), 185.
12 William Davis, “The Medicine Equity and Drug Safety Act of 2000: Releasing Grey Market Pharmaceuticals,” 9
Tulane Journal of International and Comparative Law (2001), 483.
13 This report does not address other mechanisms to lower the prices of pharmaceuticals. For one view on whether
allowing the parallel importation of pharmaceuticals would in fact lower prices, see Congressional Budget Office,
Economic and Budget Issue Brief, Would Prescription Drug Importation Reduce U.S. Drug Spending?, by Colin Baker
(April 29, 2004).
14 E.g., Dan L. Burk & Mark A. Lemley, “Policy Levers in Patent Law, 89 Virginia Law Review (2003), 1575.

and who could thus undersell the original inventor. The resulting inability of inventors to
capitalize on their inventions would lead to an environment where too few inventions are made.
By providing individuals with exclusive rights in their inventions for a limited time, the patent
system allows inventors to realize the profits from their inventions. Further, these rights are 15
grounded in the U.S. Constitution, which authorizes Congress to delineate them.
The courts have also suggested that absent a patent law, individuals would favor maintaining their
inventions as trade secrets so that competitors could not exploit them. Trade secrets do not enrich
the collective knowledge of society, however, nor do they discourage others from engaging in
duplicative research. The patent system attempts to avoid these inefficiencies by requiring 16
inventors to consent to the disclosure of their inventions in issued patent instruments.
There are still other explanations for the patent laws. For instance, the Patent Act of 195217 is
thought by supporters to stimulate technological advancement by inducing individuals to “invent
around” patented technology. Issued patent instruments may point the way for others to develop 18
improvements, exploit new markets or discover new applications for the patented technology.
The patent system may encourage patentees to exploit their proprietary technologies during the
term of the patent. Proponents believe the protection provided by a patent’s proprietary rights
increases the likelihood a firm will continue to refine, produce and market the patented 19
technology. Finally, the patent law has been identified as a facilitator of markets. Absent patent
rights, an inventor may have scant tangible assets to sell or license, and even less ability to police
the conduct of a contracting party. By reducing a licensee’s opportunistic possibilities, the patent 20
system lowers transaction costs and makes technology-based transactions more feasible.
The current patent system has a great number of critics. Some assert that the patent system is
unnecessary due to market forces that already suffice to create an optimal level of invention. The
desire to gain a lead time advantage over competitors, as well as the recognition that
technologically backward firms lose out to their rivals, may well provide sufficient inducement to 21
invent without the need for further incentives. Some commentators observe that successful
inventors are sometimes transformed into complacent, established enterprises that use patents to 22
suppress the innovations of others. Others assert that the inventions that have fueled some of our
most dynamic industries, such as early biotechnologies and computer software, arose at a time 23
when patent rights were unavailable or uncertain.

15 U.S. Constitution, Article I, § 8, cl. 8.
16 See, e.g., Grant v. Raymond, 31 U.S. 218, 247 (1832).
17 P.L. 82-593, 66 Stat. 792 (codified at Title 35 United States Code).
18 R. Polk Wagner, “Information Wants to Be Free: Intellectual Property and the Mythology of Control, 103 Columbia
Law Review (2003), 995.
19 F. Scott Kieff,Property Rights and Property Rules for Commercializing Inventions, 85 Minnesota Law Review
(2000), 697.
20 See Robert P. Merges, “Intellectual Property and the Costs of Commercial Exchange: A Review Essay,” 93
Michigan Law Review (1995), 1570.
21 See Frederic M. Scherer & David Ross, Industrial Market Structure and Economic Performance (Rand McNally &
Co., 3d ed. 1990).
22 See Robert P. Merges and Richard R. Nelson, On the Complex Economics of Patent Scope, 90 Columbia Law Review
(1990), 839.
23 See, e.g., Pamela Samuelson, Benson Revisited: The Case Against Patent Protection for Algorithms and Other
Computer Program—Related Inventions, 39 Emory Law Journal (1990), 1025.

While these various justifications and criticisms have differing degrees of intuitive appeal, none
of them has been empirically validated. No conclusive study broadly demonstrates that we get
more useful inventive activity with patents than we would without them. The justifications and
criticisms of the patent system therefore remain open to challenge by those who are unpersuaded 24
by their internal logic.
As mandated by the Patent Act of 1952,25 U.S. patent rights do not arise automatically. Inventors
must prepare and submit applications to the U.S. Patent and Trademark Office (“USPTO”) if they 26
wish to obtain patent protection. USPTO officials, known as examiners, then assess whether the 27
application merits the award of a patent. The patent acquisition process is commonly known as 28
In deciding whether to approve a patent application, an USPTO examiner will consider whether 29
the submitted application fully discloses and distinctly claims the invention. In addition, the
application must disclose the “best mode,” or preferred way, that the applicant knows to practice 30
the invention. The examiner will also determine whether the invention itself fulfills certain
substantive standards set by the patent statute. To be patentable, an invention must be useful,
novel and nonobvious. The requirement of usefulness, or utility, is satisfied if the invention is 31
operable and provides a tangible benefit. To be judged novel, the invention must not be fully 32
anticipated by a prior patent, publication or other knowledge within the public domain. A
nonobvious invention must not have been readily within the ordinary skills of a competent artisan 33
at the time the invention was made.
If the USPTO allows the patent to issue, the patent proprietor obtains the right to exclude others
from making, using, selling, offering to sell or importing into the United States the patented 34
invention. The term of the patent is ordinarily set at twenty years from the date the patent 35
application was filed. Patent title therefore provides inventors with limited periods of
exclusivity in which they may practice their inventions, or license others to do so. The grant of a
patent permits the inventor to receive a return on the expenditure of resources leading to the
discovery, often by charging a higher price than would prevail in a competitive market.

24 See CRS Report RL31951, Innovation, Intellectual Property, and Industry Standards, by John R. Thomas.
25 P.L. 82-593, 66 Stat. 792 (codified at Title 35 United States Code).
26 35 U.S.C. § 111 (2006).
27 35 U.S.C. § 131 (2006).
28 John R. Thomas, “On Preparatory Texts and Proprietary Technologies: The Place of Prosecution Histories in Patent
Claim Interpretation,” 47 UCLA Law Review (1999), 183.
29 35 U.S.C. § 112 (2006).
30 Ibid.
31 35 U.S.C. § 101 (2006).
32 35 U.S.C. § 102 (2006).
33 35 U.S.C. § 103 (2006).
34 35 U.S.C. § 271(a) (2006).
35 35 U.S.C. § 154(a)(2) (2006).

Patent rights are not self-enforcing. A patentee bears responsibility for monitoring its competitors
to determine whether they are using the patented invention or not. Patent owners who wish to
compel others to observe their intellectual property rights must usually commence litigation in the
federal district courts. The U.S. Court of Appeals for the Federal Circuit (“Federal Circuit”) 36
possesses exclusive national jurisdiction over all patent appeals from the district courts, while
the U.S. Supreme Court possesses discretionary authority to review cases decided by the Federal 37
Pharmaceutical patents are subject to special provisions created by the Drug Price Competition 38
and Patent Restoration Act of 1984. This legislation, which was subject to significant legislative 3940
revisions in 2003, is commonly known as the Hatch-Waxman Act. This statute establishes
special rules for enforcement of certain patents on certain drugs and medical devices by brand-
name firms against generic competitors. The Hatch-Waxman Act includes provisions extending
the term of a patent to reflect regulatory delays encountered in obtaining marketing approval by 41
the Food and Drug Administration (FDA); exempting from patent infringement certain activities 42
associated with regulatory marketing approval; establishing mechanisms to challenge the 43
validity of a pharmaceutical patent; and creating a reward for disputing the validity, 44
enforceability, or infringement of a patented and approved drug. The 1984 Act also provides the
FDA with certain authorities to offer periods of marketing exclusivity for a pharmaceutical 45
independent of the rights conferred by patents.
Patent rights are subject to a significant restriction that is termed the “exhaustion” doctrine. Under
the exhaustion doctrine, an authorized, unrestricted sale of a patented product depletes the patent 46
right with respect to that physical object. As a result of this doctrine, the purchaser of a patented
good ordinarily may use, charge others to use, or resell the good without further regard to the
patentee. The courts have reasoned that when a patentee sells a product without restriction, it 47
impliedly promises its customer that it will not interfere with the full enjoyment of that product.
The result is that the lawful purchasers of patented goods may use or resell these goods free of the 48
patent. Because it is the first sale of a patented product that extinguishes patent rights with

36 28 U.S.C. § 1295(a)(1) (2006).
37 28 U.S.C. §1254(1) (2006).
38 P.L. 98-417, 98 Stat. 1585 (1984).
39 The Medicare Prescription Drug and Modernization Act of 2003, P.L. 108-173, Title XI (December 8, 2003). See
CRS Report RL32377, The Hatch-Waxman Act: Legislative Changes Affecting Pharmaceutical Patents, by Wendy H.
Schacht and John R. Thomas.
40 See CRS Report RL30756, Patent Law and Its Application to the Pharmaceutical Industry: An Examination of the
Drug Price Competition and Patent Term Restoration Act of 1984 (“The Hatch-Waxman Act”), by Wendy H. Schacht
and John R. Thomas.
41 35 U.S.C. § 156 (2006).
42 35 U.S.C. § 271(e)(1) (2006).
43 21 U.S.C. § 355(j) (2006).
44 21 U.S.C. § 355(j)(5)(B)(iv) (2006).
45 21 U.S.C. § 355(j)(4)(D) (2006).
46 See Intel Corp. v. ULSI System Technology, 995 F.2d 1566, 1568 (Fed. Cir.1993).
47 See B. Braun Medical, Inc. v. Abbott Laboratories, 124 F.3d 1419, 1426, (Fed. Cir.1997).
48 See Intel Corp. v. ULSI System Technology, 995 F.2d 1566 (Fed. Cir.1993).

respect to the item that is sold, some authorities refer to the exhaustion doctrine as the “first sale 49
For example, suppose that a consumer purchases an appliance at a hardware store. The appliance
is subject to a patent that is owned by the manufacturer. Later, the consumer sells the appliance to
a neighbor at a garage sale. Ordinarily, the patent laws provide the manufacturer with the ability 50
to prevent others from selling an appliance that uses its patented design. In this case, however,
the patent right in that particular appliance was exhausted when the manufacturer made its first
sale to the consumer. That consumer, as well as any subsequent purchasers of that individual 51
appliance, may freely sell it without concern for the manufacturer’s patent.
U.S. patents provide their owners with rights only within the United States.52 The grant of a U.S.
patent provides its owner with no legal rights in any foreign nation. If inventors desire intellectual
property protection in another country, they must specifically procure a patent in that jurisdiction.
Ordinarily the foreign patent acquisition process begins with the submission of a patent 53
application to a foreign patent office.
As a practical matter, multinational corporations often obtain a set of corresponding national
patents for each of their significant inventions. Although these patents concern the same
invention—for example, the same chemical compound that possesses pharmacological
properties—they often do not have precisely the same legal effect in each jurisdiction. Divergent
wordings of the patents’ claims, translations into various languages, and distinctions between 54
national patent laws and practice are among the factors that lead to these differences.
Under an important international agreement concerning patents, the Convention of Paris for the 55
Protection of Industrial Property (“Paris Convention”), each issued national patent is an
independent legal instrument. One significant consequence of the independence of national 56
patents is that they must be enforced individually. For example, suppose that an inventor owns
patents directed towards the same invention in both the United States and Canada. Following
litigation in Canada, a court rules that the Canadian patent is invalid. Even though the Canadian
patent may be similar or identical to the U.S. patent, the U.S. patent may still be freely enforced.
Although a U.S. court may find the reasoning of the Canadian court persuasive as it reaches its

49 See, e.g., Alan O. Sykes, “TRIPS, Pharmaceuticals, Developing Countries, and the Doha ‘Solution’, 3 Chicago
Journal of International Law (2002), 47.
50 35 U.S.C. § 271(a) (2006).
51 See Roger E. Schechter & John R. Thomas, Intellectual Property: The Law of Copyrights, Patents and Trademarks §
1.2.3 (2003).
52 Quality Tubing, Inc. v. Precision Tube Holdings Co., 75 F.Supp.2d 613, 619 (S.D. Tex. 1999).
53 See CRS Report RL31132, Multinational Patent Acquisition and Enforcement: Public Policy Challenges and
Opportunities for Innovative Firms, by John R. Thomas.
54 See Margaret A. Boulware et al., “An Overview of Intellectual Property Rights Abroad, 16 Houston Journal of
International Law (1994), 441.t
55 13 U.S.T. 25 (1962).
56 See John R. Thomas, “Litigation Beyond the Technological Frontier: Comparative Approaches to Multinational
Patent Enforcement,” 27 Law & Policy in International Business (1996), 277.

own judgment regarding the validity of the U.S. patent, the Canadian court decision has no direct 57
effect upon the validity or enforceability of the U.S. patent.

In some circumstances, widely divergent drug prices between the United States and other nations
have encouraged parallel importation. Price disparities between the United States and other
nations create incentives for individuals to purchase medications from abroad, and import them 58
into the United States, in order to lower health care costs or undercut the U.S. distributor. In this
context, the term “parallel imports” refers to patented products that are legitimately distributed
abroad, and then sold to consumers in the United States without the permission of the authorized
U.S. dealer. Although these “grey market goods” are authentic products that were sold under the
authorization of the brand-name drug company, they entered the U.S. market outside the usual
distribution channels for that drug.
The legal situation regarding the parallel importation of patented pharmaceuticals remains
somewhat clouded. In such circumstances, the U.S. patent proprietor may be able to use its patent
rights to block the importation of grey market pharmaceuticals. Because this scenario involves the
distribution of a patented product that initially sold under the authorization of the patent 59
proprietor, it raises issues concerning the exhaustion doctrine.
One position, favorable to the patent proprietor, is that the U.S. patent is fully enforceable against
imports despite the exhaustion doctrine. Under this line of reasoning, the fact that the sale by the
patent proprietor or its representative took place outside the United States is significant. This line 60
of reasoning relies on the fact that U.S. patents exist independently of foreign patents, and that 61
U.S. patents are effective only within the United States. As a result, this reasoning continues, a
foreign sale cannot result in exhaustion of a U.S. patent. This legal doctrine—which restricts the
exhaustion doctrine to domestic sales only—allows the U.S. patent to be used to block 62
unauthorized imports of a patented pharmaceutical.
A competing view is that the exhaustion doctrine is not limited to domestic sales by the patentee
or its representative, but to all sales regardless of their location. This position is commonly 63
referred to as “international exhaustion.” Under this view, because the importer lawfully
purchased authentic goods from the patent holder or its representative, the U.S. patent right is

57 Ibid.
58 See, e.g., Shubha Ghosh,Pills, Patents and Power: State Creation of Gray Markets as a Limit on Patent Rights,” 14
Florida Journal of International Law 217 (2002).
59 Nanao Naoko et al.,Decisions on Parallel Imports of Patented Goods,” 36 IDEA: The Journal of Law and
Technology (1996), 567.
60 See supra notes 56-58 and accompanying text.
61 See supra footnote 53 and accompanying text.
62 35 U.S.C. § 271(a) (2006).
63 See Bruce A. Lehman, “Intellectual Property Rights as a Trade, Health, and Economic Development Issue,” 17 St.
John’s Journal of Legal Commentary (Spring 2003), 417.

subject to “international exhaustion” due to the sale, despite the fact that the sale technically took 64
place under a foreign patent.
In its 2001 decision in Jazz Photo Corp. v. United States International Trade Commission,65 the
U.S. Court of Appeals for the Federal Circuit (“Federal Circuit”) rejected the “international
exhaustion” position and instead limited the exhaustion doctrine to sales that occur within the
United States. There the Federal Circuit issued a succinct statement explaining:
United States patent rights are not exhausted by patent rights of foreign provenance. To
invoke the protection of the first sale doctrine, the authorized first sale must have occurred
under the United States patent. See Boesch v. Graff, 133 U.S. 697, 10 S.Ct. 378, 33 L.Ed. 66
787 (1890).
Some commentators have criticized the Federal Circuit’s reasoning in the Jazz Photo case, and in 67
particular the court’s reliance on the Boesch v. Graff decision. In Boesch v. Graff, the plaintiff
owned a U.S. patent for a lamp burner. An individual named Hecht, who was not a party to the
litigation, enjoyed a “prior user right” pertaining to the lamp burners under German law. The
German patent statute allowed individuals who had used an invention prior to the date of
another’s patent application the privilege of continuing to exploit the invention commercially,
without regard to the patent. Hecht had met the conditions for this prior user right to apply, and as
a result could sell the burners in Germany. Hecht eventually sold some burners to the defendants,
who in turn imported them into the United States and commenced sales. The plaintiff brought suit
to enjoin the sale of the imported burners in the United States. In opposing the injunction, the
defendants argued that they had lawfully purchased the burners and that the U.S. patent should be
subject to the exhaustion doctrine. The Supreme Court rejected the defendant’s arguments,
The right which Hecht had to make and sell the burners in Germany was allowed him under
the laws of that country, and purchasers from him could not be thereby authorized to sell the
articles in the United States in defiance of rights of patentees under a United States patent. ...
The sale of articles in the United States under a United States patent cannot be controlled by 68
foreign laws.
The facts and holding of Boesch have suggested to some commentators that its precedential reach
is quite limited. In Boesch, it was a prior user, rather than the patentee or its licensee, which made
the foreign sale. The patentee neither consented to the sale of the invention nor received
compensation for that sale. According to some observers, this is a much different state of affairs
than the typical parallel importation case, where either the patentee or an authorized overseas 69
distributor makes a sale as part of an arm’s-length commercial transaction.

64 See Jamie S. Gorelick & Rory K. Little, “The Case for Parallel Importation,” 11 North Carolina Journal of
International Law and Commercial Regulation (1986), 205.
65 264 F.3d 1094 (Fed. Cir. 2001).
66 264 F.3d at 1105.
67 Daniel Erlikhman, “Jazz Photo and the Doctrine of Patent Exhaustion: Implications to TRIPS and the International
Harmonization of Patent Protection,” 25 Hastings Communications and Entertainment Law Journal (2003), 307.
68 133 U.S. at 703.
69 Erlikhman, supra footnote 68.

Given this precedential foundation, as well as the limited consideration of the issue in Jazz Photo,
some legal commentators have questioned whether this apparent absolute ban on parallel 70
importation will survive further judicial scrutiny. The Federal Circuit has maintained this 71
holding in subsequent case law, however, so the Federal Circuit’s statement in the Jazz Photo
case remains the controlling patent law precedent. In particular, the federal district courts are 72
bound by the Jazz Photo decision unless the Federal Circuit or Supreme Court alters the rule.
To summarize current law, the Federal Circuit has taken the position that patent exhaustion
applies only to sales that occurred in the United States. This rule squarely rejects the principle of
“international exhaustion.” As a result, brand-name drug companies may potentially block
imports of patented medications into the United States even if the imported good is the patent 73
owner’s own product, legitimately sold to a customer in a foreign jurisdiction.

In addition to the issue of patent infringement, the parallel importation of patented
pharmaceuticals potentially raises a number of other complex issues. This report next considers
three of these issues: the status of state and local governments that have either themselves
imported, or have encouraged others to import, patented medications from foreign jurisdictions;
the potential use of label licenses on patented drugs; and the implications of international trade
rules established by World Trade Organization (WTO).
Several state governments are currently considering plans to import or facilitate the importation
of prescription drugs. California, Illinois, Iowa, Minnesota, New Hampshire, North Dakota, 74
Vermont and Wisconsin are among those that have considered importation programs. If a state
government or agency of a state encourages the importation of a patented medication in a manner
that would infringe a patent, then the patentee’s ability to obtain relief is at present time uncertain.
Observers have questioned whether the states should be subject to the patent rights of private 75
parties. The U.S. Constitution places a significant jurisdictional hurdle before a patentee seeking
to vindicate its rights against a state. The Eleventh Amendment provides that a federal court is
without power to entertain a suit by a private person against a state, except under certain limited

70 Ibid.
71 See Fuji Photo Film Co. v. Jazz Photo Corp., 394 F.3d 1368, 1376-77 (Fed. Cir. 2005).
72 See Matthew F. Weil & William C. Rooklidge, “State Un-Decisis: The Sometimes Rough Treatment of Precedent in
Federal Circuit Decision-Making, 80 Journal of the Patent and Trademark Office Society (1998), 791.
73 See Catalin Cosovanu,Piracy, Price Discrimination, and Development: The Software Sector in Eastern Europe and
Other Emerging Markets, 31 American Intellectual Property Law Association Quarterly Journal (2003), 165.
74 See CRS Report RL32191, Prescription Drug Importation and Internet Sales: A Legal Overview, by Vanessa K.
75 See, e.g., Jennifer Polse,Holding the Sovereign’s Universities Accountable for Patent Infringement After Florida
Prepaid and College Savings Bank,” 89 California Law Review (2001), 507; Kenneth S. Weitzman, “Copyright and
Patent Clause of the Constitution: Does Congress Have the Authority to Abrogate State Eleventh Amendment
Sovereign Immunity After Pennsylvania v. Union Gas Co.?,” 2 Seton Hall Constitutional Law Journal (1991), 297.

circumstances.76 Because the federal courts possess exclusive jurisdiction over patent 77
infringement litigation, this situation creates a dilemma for patentees—the only statutorily
authorized forum is constitutionally unavailable, and the only constitutional forum is statutorily
unavailable, at least for the assertion of a conventional patent infringement claim. This means that
a patentee’s only option would be a state court suit charging the state government with a taking, 78
or asserting general unfair competition principles, in order to vindicate its patent rights.
The Supreme Court established one notable exception to the Eleventh Amendment prohibition 79
against federal court litigation against a state. In Ex parte Young, the Court allowed private
citizens to petition a federal court to enjoin state officials acting in their official capacity from
engaging in future conduct that would violate the Constitution or a federal statute. The doctrine is
based on a premise that state officers who violate federal law in the course of discharging the
duties of their positions are acting outside the authority of their office, and therefore do not 80
qualify as the state or its agent for Eleventh Amendment purposes. The only remedy available
under the Ex parte Young ruling is prospective injunctive relief, however, rather than a monetary 81
judgment that would compensate for past harms. Further, some uncertainty exists over the
application of the Young exception to patents. Although the federal patent statute establishes the
conditions under which inventors may obtain patents, an individual patent is effectively the grant
of a private right, not a federal law.
Congress attempted to abrogate the Eleventh Amendment immunity of states to patent
infringement suits in 1992. The Patent and Plant Variety Protection Remedy Clarification Act 82
introduced section 271(h) into the Patent Act of 1952. That provision specified not only that the
states were subject to patent infringement suits in the federal courts, but that they were liable for 83
any remedies that could be had against a private party. However, the 1999 opinion of the
Supreme Court in Florida Prepaid Postsecondary Education Expense Board v. College Savings
Bank found that Congress had not properly abrogated state immunity to patent infringement 84
litigation in the federal courts in keeping with the requirements of the Eleventh Amendment.
In Florida Prepaid and other opinions, the Supreme Court did leave open the possibility that a 85
state could waive its Eleventh Amendment immunity by submitting to federal jurisdiction. In
addition, Congress may in some cases overcome state Eleventh Amendment immunity through 86
legislation pursuant to another constitutional authority, such as the Fourteenth Amendment.

76 The Eleventh Amendment to the U.S Constitution stipulates: “The judicial power of the United States shall not be
construed to extend to any suit in law or equity, commenced or prosecuted against one of the United States by citizens
of another state, or by citizens or subjects of any foreign state.
77 28 U.S.C. § 1338(a) (2006) (The district courts shall have original jurisdiction of any civil action arising under any
Act of Congress relating to patents . . . . Such jurisdiction shall be exclusive of the courts of the states in patent . . .
78 See, e.g., Jacobs Wind Electric Co. v. Florida Dep’t of Transportation, 919 F.2d 726 (Fed. Cir. 1990).
79 209 U.S. 123 (1908).
80 Cardenas v. Anzai, 311 F.2d 929, 935 (9th Cir. 2002).
81 See Edelman v. Jordan, 415 U.S. 651, 667-69 (1974).
82 P.L. 102-560, 106 Stat. 4230 (October 28, 1992).
83 35 U.S.C. § 271(h) (2006).
84 527 U.S. 627, 119 S.Ct. 2199, 144 L.Ed.2d 575 (1999).
85 Atascadero State Hospital v. Scanlon, 473 U.S. 234, 238 (1985).
86 Welch v. Department of Highways and Public Transportation, 483 U.S. 468, 477 (1987).

Several bills have been introduced before Congress since the Supreme Court issued the Florida 87
Prepaid decision that would take this approach, but none has been enacted.
The immunity to federal suit provided by the Eleventh Amendment is restricted to state 88
governments, and does not ordinarily apply to local governments. As a result, a city or county
government is generally not entitled to claim Eleventh Amendment immunity and avoid a suit for
patent infringement in a federal court. However, some judicial opinions have reasoned that a
political subdivision of a state can qualify for Eleventh Amendment immunity where the locality 89
is only nominally the actor, and the state itself is the real party in interest in the litigation. This
determination depends on the precise relationship between the state and its political subdivision 90
under the circumstances of a particular case.
As noted previously, the theory behind the exhaustion doctrine is that when a patent proprietor
makes an unrestricted sale of a product to a consumer, the proprietor impliedly promises its 91
customer that it will not use its patent rights to interfere with the full enjoyment of that product.
As a result, lawful purchasers of patented goods should be able to use or resell these goods free of 92
the patent.
In some circumstances, however, the patent owner may attempt to restrict a customer’s use of a
good. Sales contracts are the typical mechanism for imposing such limitations. Contractual
provisions that are placed on the product or its packaging are sometimes termed “label licenses” 93
or “bag tags.” A commonly observed label license is “Single Use Only,” as applied to printer 94
cartridges or other goods that the manufacturer does not intend for consumers to reuse. Other
patent proprietors have attempted to impose geographical limitations upon the use of their
products. A label stating “For Use in Canada Only” is representative of such a restriction.
Whether such label licenses are enforceable, or are instead nullified by the exhaustion principle,
is a complex legal issue. However, the prevailing view of the Court of Appeals for the Federal
Circuit is that absent exceptional circumstances—such as an antitrust violation or misuse of the 95
patent by its proprietor—these restrictions will be upheld. The legal theory is that the patent

87 Jeffrey W. Childers, “State Sovereign Immunity and the Protection of Intellectual Property: Do Recent
Congressional Attempts to ‘Level the Playing Field’ Run Afoul of Current Eleventh Amendment Jurisprudence and
Other Constitutional Doctrines?,” 82 North Carolina Law Review (2004), 1067.
88 See, e.g. Mount Healthy School District v. Doyle, 429 U.S. 274 (1977). See also Melvyn R. Durschlag,Should
Political Subdivisions Be Accorded Eleventh Amendment Immunity?, 43 DePaul Law Review (1994), 577; Anthony
J. Harwood, “A Narrow Eleventh Amendment Immunity for Political Subdivisions: Reconciling the Arm of State
Doctrine with Federalism Principles,” 55 Fordham Law Review (1986), 101.
89 See, e.g., Belanger v. Madera Unified School District, 963 F.2d 248, 254 (9th Cir. 1992).
90 Donald L. Boren,Congressional Power to Grant Federal Courts Jurisdiction Over States: The Impact of
Pennsylvania v. Union Gas,” 24 Akron Law Review (1990), 13.
91 See B. Braun Medical, Inc. v. Abbott Laboratories, 124 F.3d 1419, 1426 (Fed. Cir.1997).
92 See Intel Corp. v. ULSI System Technology, 995 F.2d 1566 (Fed. Cir. 1993).
93 See, e.g., Daniel R. Cahoy, “Oasis or Mirage? Efficient Breach as a Relief to the Burden of Contractual Recapture of
Patent and Copyright Limitations,” 17 Harvard Journal of Law and Technology (2003), 135; Michael J. Madison,
“Reconstructing the Software License,” 35 Loyola University of Chicago Law Journal (2003), 275.
94 See Mallinckrodt, Inc. v. Medipart, Inc., 976 F.2d 700 (Fed. Cir. 1992).
95 See Monsanto Co. v. McFarling, 363 F.3d 1336 (Fed. Cir. 2004); Bowers v. Baystate Technologies, Inc., 320 F.3d

right gives proprietors the ability to exclude others from using the patented product, they may 96
also impose lesser restrictions when they choose to sell the patented product. In addition,
customers are presumed to have entered into binding sales contracts that are presumptively 97
valid. As the law currently stands, then, a customer who violates a label license could be liable 98
both for breach of contract and for patent infringement.
As a member of the World Trade Organization (WTO), the United States is a signatory to the so-
called TRIPS Agreement, or Agreement on Trade-Related Aspects of Intellectual Property 99
Rights. Under Part III of the TRIPS Agreement, all member countries agreed to enact patent
statutes that include certain substantive provisions. In particular, Article 27 stipulates that “patents
shall be available and patent rights enjoyable without discrimination as to the place of invention, 100
the field of technology and whether products are imported or locally prevented.” Article 27
ordinarily requires that all classes of invention receive the same treatment under the patent laws,
subject to certain minor exceptions. It would generally be impermissible under Article 27, for
example, for a country to accord patents on pharmaceuticals a lesser set of proprietary rights than 101
is available for patents on automobile engines, computers, or other kinds of inventions.
The TRIPS Agreement places lesser obligations upon signatory states with regard to the 102
exhaustion doctrine, however. Article 6 of the TRIPS Agreement states:
For the purposes of dispute settlement under this Agreement, subject to the provisions of
Articles 3 and 4 above nothing in this Agreement shall be used to address the issue of the 103
exhaustion of intellectual property rights.
The referenced Articles 3 and 4 of the TRIPS Agreement impose obligations of national treatment
and most-favored-nation status respectively. As a result, a TRIPS Agreement signatory may not
permissibly establish more favorable exhaustion rules for its own citizens than for citizens of 104
other WTO countries. In addition, if a TRIPS Agreement signatory provides for favorable

1317 (Fed. Cir. 2003).
96 See Richard Stern,Post-Sale Restrictions After Mallinckrodt—An Idea in Search of a Definition, 5 Albany Law
Journal of Science and Technology (1994), 1.
97 See Merritt A. Gardiner, “Bowers v. Baystate Technologies: Using the Shrinkwrap License to Circumvent the
Copyright Act and Escape Federal Preemption,” 11 University of Miami Business Law Review (Winter/Spring 2003),
98 See Raymond Nimmer, “Issues in Software Licensing,” 576 Practising Law Institute/Pat. (1999), 399.
99 See Agreement on Trade-Related Aspects of Intellectual Property Rights, April 15, 1994, Annex 1C, 33 I.L.M. 1197
(1994) [hereinafter “TRIPS Agreement].
100 TRIPS Agreement, Article 27(1).
101 See J.H. Reichman, “Universal Minimum Standards of Protection Under the TRIPS Component of the WTO
Agreement,” 29 International Lawyer (1995), 345.
102 See Lana Kraus, “Medication Misadventures: The Interaction of International Reference Pricing and Parallel Trade
in the Pharmaceutical Industry, 37 Vanderbilt Journal of Transnational Law (2004), 527.
103 TRIPS Agreement, Article 6.
104 See, e.g., Shubha Ghosh,Pills, Patents and Power: State Creation of Gray Markets as a Limit on Patent Rights,” 14
Florida Journal of International Law 217 (2002).

treatment with respect to the exhaustion doctrine to one WTO member state, then the same 105
treatment must be extended to all WTO member states. Other than these basic national
treatment and most-favored-nation obligations, the TRIPS Agreement does not impose other
restrictions regarding the exhaustion doctrine. In particular, the TRIPS Agreement does not
appear to require that all types of inventions be treated equally with regard to the exhaustion 106

Should congressional interest continue in this area, a variety of options are available. If the
possibility of an infringement action against unauthorized importers of patented pharmaceuticals
is deemed sound, then no action need be taken. Alternatively, Congress could confirm the Federal
Circuit’s decision in Jazz Photo, which rejects the doctrine of international exhaustion and 107
confines the exhaustion principle to sales that occurred within the United States.
If legislative activity is deemed appropriate, however, another possibility is the introduction of
some form of international exhaustion doctrine into U.S. patent law. The TRIPS Agreement does
not seem to require that a country adopt the international exhaustion doctrine as an all-or-nothing 108
proposition, applying either to all patented products or to none. As a result, if Congress chose
to limit application of the international exhaustion doctrine to patented pharmaceuticals, or some
other specific type of invention, then no ramifications appear to arise with respect to the TRIPS
Agreement obligations of the United States. It should be noted, however, that there appears to be
no precedent, either domestically or abroad, for establishing an international exhaustion doctrine
that is specific to pharmaceuticals.
At least two statutory mechanisms exist for implementing the international exhaustion doctrine
into U.S. patent law. One possible approach would be to declare that importation into the United
States of goods sold abroad by a patent proprietor or its representative is not a patent th
infringement. Legislation introduced before the 110 Congress, S. 1082, takes this approach with
respect to patented pharmaceuticals, specifying that:
It shall not be an act of infringement to use, offer to sell, or sell within the United States or to
import into the United States any patented invention under section 804 of the Federal Food,
Drug, and Cosmetic Act that was first sold abroad by or under authority of the owner or 109
licensee of such patent.
In addition to codifying the international exhaustion doctrine with respect to pharmaceuticals, the
amendment proposed in S. 1082 may conversely led to the implication that the international
exhaustion doctrine does not apply to patented inventions other than pharmaceuticals. This

105 Ibid.
106 The United States has also entered into Free Trade Agreements with certain of its trading partners. Certain of these
agreements may also bear upon the parallel importation of patented pharmaceuticals. For further discussion of this
issue, see CRS Report RL33205, Intellectual Property and the Free Trade Agreements: Innovation Policy Issues, by
John R. Thomas.
107 See notes 66-73 and accompanying text.
108 See supra notes 99-05 and accompanying text.
109 S. 1082, § 804(d).

provision could potentially fortify the ruling in the Jazz Photo case for inventions outside of the
pharmaceutical field.
Another statutory mechanism for promoting the importation of patented drugs is to immunize
specific individuals from infringement liability. The Patent Act takes this approach in the area of
patented medical methods, exempting licensed medical practitioners and certain health care 110
entities from patent infringement in certain circumstances. In the case of drug importation,
potential patent infringers include importers, distributors, wholesalers, pharmacies, and individual
consumers. Should Congress wish to promote parallel trade in patented pharmaceuticals, an
explicit statutory infringement exemption could encourage individuals to engage in drug
In considering these or other legal changes to the patent laws, the possibility of label licenses
should be kept in mind. Even if Congress exempted drug importation practices or practitioners
from patent infringement liability, firms may still be able to stipulate through the contract law that 111
a drug sold in a foreign jurisdiction is for use exclusively within that jurisdiction. If a purchaser
instead imported that medication into the United States, then the seller may have a cause of action
for breach of contract. As a result, any legal changes may need to account for the ability of firms
to use contractual provisions as something of a substitute for patent protection in the area of
prescription drug importation.
In addition, the issue of drug importation may provide an impetus for clarification of the patent 112
infringement liability of state governments. Some states, as well as political subdivisions of the
states, have either seriously considered or commenced the practice of drug importation. To the
extent that these authorities continue this trend, their potential Eleventh Amendment immunity to
a patent infringement case in federal court may present another significant issue concerning
patents and drug importation.
Controlling the costs of prescription drug spending, on one hand, and encouraging the
development of new drugs, on the other, are both significant goals. These aspirations may
potentially conflict, however. Although introducing international exhaustion into U.S. patent law
may initially lower the price of patented drugs, it might also decrease the incentive of firms to
engage in the research and development of new pharmaceuticals, as well as to shepherd new
drugs through time-consuming and costly marketing approval procedures. Consideration of patent
law reforms would likely be put into the larger context of drug costs, which may be influenced by
the pricing policies of foreign nations, profits earned by wholesalers and other intermediaries, the 113
physical costs of shipment into the United States, and other diverse factors. Striking a balance
between increasing access to medications and ensuring the continued development of new drugs
by our nation’s pharmaceutical firms is a central concern of the current drug importation debate.

110 35 U.S.C. § 287(c) (2006).
111 See supra notes 91-98 and accompanying text.
112 See supra notes 74-90 and accompanying text.
113 See Congressional Budget Office, Economic and Budget Issue Brief, Would Prescription Drug Importation Reduce
U.S. Drug Spending?, by Colin Baker (April 29, 2004).

John R. Thomas