District of Columbia residents can't sue for high drug costs

An August federal appeals court decision striking down a Washington, D.C., law aimed at controlling prescription drug prices could spark questions about similar state efforts, some legal experts say.

The U.S. Court of Appeals for the Federal Circuit ruled unanimously that the District of Columbia's Excessive Pricing Act violates federal patent laws and is unconstitutional.

The statute would let residents sue a drug manufacturer if a judge determines the wholesale cost of a patented medication in the district to be "excessive." The measure generally defines "excessive" as 30% higher than the drug's comparable price in the United Kingdom, Canada, Germany or Australia. The legislation passed in 2005, but a legal challenge filed by the Pharmaceutical Research and Manufacturers of America and Biotechnology Industry Organization halted it.

Although the court called the measure a "worthy undertaking," judges said it did not square with the goals of federal patent laws designed to encourage research and innovation of new drugs with monetary incentives.

"In [D.C.'s] judgment, patents enable pharmaceutical companies to wield too much market power, charging prices that are 'excessive' for patented drugs," the opinion states. But "the act is a clear attempt to restrain those excessive prices, in effect diminishing the reward to patentees in order to provide greater benefit to [D.C.] drug consumers."

Marjorie Powell, PhRMA's senior assistant general counsel, called the ruling "a victory for patients." She said patent protections are intended to promote investment in new drug development so that doctors and patients have more treatment options.

Drug manufacturers are just one part of the drug-pricing process, which also involves wholesalers, distributors, retail pharmacies, state programs and commercial health plans, Powell added. The district's law, on the other hand, put the burden solely on pharmaceutical companies with no rational basis for what constituted unreasonable prices.

"We hope [the ruling] will convince state legislatures that they shouldn't target patented drugs and try to impose price controls on prescription medicines," Powell said.

BIO President and CEO James C. Greenwood said the law would have discouraged new therapies.

David A. Catania, a D.C. council member who pushed for the law, called the ruling "extreme." The district is considering an appeal. "It implies that state and local governments are prohibited from enacting legislation that interferes in any way with the profits of patented goods," he said. The opinion "defies logic and privileges patent holders at the direct expense of the public welfare."

Impact on other state efforts

The decision comes at a time when many states and physicians are struggling to find ways to help patients afford their medications.

At least 20 states in 2007 introduced cost-containment measures, according to the National Conference of State Legislatures. Some examples include setting maximum wholesale prices, creating discount or rebate programs, collecting and publishing retail price information and letting states negotiate with drug companies.

Legal experts say the recent court decision could stifle some of those efforts or force states to chart a different course.

Clark G. Sullivan, an Atlanta lawyer who specializes in drug patent law, said the district's statute faced heavy scrutiny because it singled out patented drugs. The court's reasoning could extend to other similar state price controls, he said.

"If [states] are trying to control drug prices, are [they] going to be trying to control generic drug prices? Most likely not," said Sullivan, a partner with Arnall Golden Gregory LLP. "It's a bit more tenuous, because states are not coming out and saying [a price-control measure] applies to patented drugs, but that's essentially what they are doing."

Washington, D.C.-based lawyer Kelly N. Reeves, who counsels pharmaceutical companies on regulatory issues, said states are likely to be more successful with measures that allow them to negotiate drug costs or rebates within state programs, instead of putting restrictions on what drug companies can charge.

Not only did the court find that the district's law violated patent laws, but a lower court also said it violated the U.S. Constitution's commerce clause by regulating drug prices outside its borders, said Reeves, a partner at King & Spalding LLP.

She noted that the U.S. Supreme Court in 2003 upheld Maine's prescription program, which requires drug manufacturers to offer all qualified residents discounts that roughly equal the rebates available to Medicaid participants. If a company refuses the rebate agreement, the state can subject its Medicaid prescription sales to prior authorization. PhRMA sued to block the law, saying it violated the Medicaid Act and the federal commerce clause, but the high court rejected those claims.

In his statement, Catania said the ruling on Maine's program puts the district on "sound legal footing" should it decide to appeal the Federal Circuit's decision on its law.

The Medical Society of the District of Columbia did not take a position on the local law. MSDC Executive Vice President K. Edward Shanbacker said the high cost of medications is a "complex issue" for doctors and patients. But addressing it on a state-by-state basis could have the unintended consequence of reducing patients' access to necessary treatments, he said.