Biotechnology Industry Organization v. District of Columbia , 496 F.3d 1362 ( 2007 )

United States Court of Appeals for the Federal Circuit
2006-1593
BIOTECHNOLOGY INDUSTRY ORGANIZATION,
Plaintiff-Appellee,
and
PHARMACEUTICAL RESEARCH AND MANUFACTURERS OF AMERICA,
Plaintiff-Appellee,
v.
DISTRICT OF COLUMBIA,
Adrian M. Fenty, MAYOR OF THE DISTRICT OF COLUMBIA,
OFFICE OF THE ATTORNEY GENERAL FOR THE DISTRICT OF COLUMBIA,
Robert Spagnoletti, ATTORNEY GENERAL OF THE DISTRICT OF COLUMBIA,
OFFICE OF DOCUMENTS AND ADMINISTRATIVE ISSUANCES
OF THE DISTRICT OF COLUMBIA,
Arnold R. Finlayson, ADMINISTRATOR, OFFICE OF DOCUMENTS AND
ADMINISTRATIVE ISSUANCES OF THE DISTRICT OF COLUMBIA,
Defendants-Appellants.
David W. Ogden, Wilmer Cutler Pickering Hale and Dorr LLP, of Washington,
DC, argued for all plaintiffs-appellees. With him on the brief for Pharmaceutical
Research and Manufacturers of America were Randolph D. Moss, Anne K. Small,
Catherine M.A. Carroll, and Thomas G. Saunders. On the brief for Biotechnology
Industry Organization were Daniel E. Troy and Eric A. Shumsky, Sidley Austin LLP, of
Washington, DC.
William J. Earl, Assistant Attorney General, Office of Attorney General for the
District of Columbia, of Washington, DC, argued for defendants-appellants. With him on
the brief were Linda Singer, Acting Attorney General, District of Columbia, Todd S. Kim,
Solicitor General, and Edward E. Schwab, Deputy Solicitor General.
Sean M. Fiil-Flynn, Program on Information Justice and Intellectual Property,
Washington College of Law, American University, of Washington, DC, for amici curiae,
National Legislative Association on Prescription Drug Prices, et al. With him on the
brief was Joshua D. Sarnoff, Glushko-Samuelson Intellectual Property Law Clinic.
Jeffrey L. Handwerker, Arnold & Porter LLP, of Washington, DC, for amicus
curiae The AIDS Institute. With him on the brief was Matthew H. Solomson.
Richard A. Samp, Washington Legal Foundation, of Washington, DC, for amici
curiae Washington Legal Foundation, et al. With him on the brief was Daniel J. Popeo.
Appealed from: United States District Court for the District of Columbia
Judge Richard J. Leon
United States Court of Appeals for the Federal Circuit
2006-1593
BIOTECHNOLOGY INDUSTRY ORGANIZATION,
Plaintiff-Appellee,
and
PHARMACEUTICAL RESEARCH AND MANUFACTURERS OF AMERICA,
Plaintiff-Appellee,
v.
DISTRICT OF COLUMBIA,
Adrian M. Fenty, MAYOR OF THE DISTRICT OF COLUMBIA,
OFFICE OF THE ATTORNEY GENERAL FOR THE DISTRICT OF COLUMBIA,
Robert Spagnoletti, ATTORNEY GENERAL OF THE DISTRICT OF COLUMBIA,
OFFICE OF DOCUMENTS AND ADMINISTRATIVE ISSUANCES
OF THE DISTRICT OF COLUMBIA,
Arnold R. Finlayson, ADMINISTRATOR, OFFICE OF DOCUMENTS AND
ADMINISTRATIVE ISSUANCES OF THE DISTRICT OF COLUMBIA,
Defendants-Appellants.
__________________________
DECIDED: August 1, 2007
__________________________
Before BRYSON, Circuit Judge, PLAGER, Senior Circuit Judge, and GAJARSA, Circuit
Judge.
GAJARSA, Circuit Judge.
This is a pre-enforcement challenge to a statute of the District of Columbia,
before this court after transfer from the United States Court of Appeals for the District of
Columbia Circuit. Defendants, the District of Columbia and various of its departments
and officers (collectively, “the District” or “D.C.”), appeal from a judgment of the United
States District Court for the District of Columbia declaring the District’s Prescription
Drug Excessive Pricing Act of 2005, codified at D.C. Code § 28-4551 to 28-4555 (“the
Act”), preempted by the federal patent laws and enjoining its enforcement. We affirm
the judgment of the district court and the injunction.
I. BACKGROUND
A. The challenged legislation
The D.C. City Council has adopted specific legislation which prohibits any
patented drug from being sold in the District for an excessive price. The operative
section of the Excessive Pricing Act reads:
It shall be unlawful for any drug manufacturer or licensee thereof,
excluding a point of sale retail seller, to sell or supply for sale or impose
minimum resale requirements for a patented prescription drug that results
in the prescription drug being sold in the District for an excessive price.
D.C. Code § 28-4553. The legislation was adopted after the Council determined that:
The excessive prices of prescription drugs in the District of Columbia is
threatening the health and welfare of the residents of the District as well
as the District government’s ability to ensure that all residents receive the
health care they need, and these excessive prices directly and indirectly
cause economic harm to the District and damage the health and safety of
its residents. . . . [I]t is incumbent on the government of the District of
Columbia to take action to restrain the excessive prices of prescription
drugs.
Id. § 28-4551. The Council’s response to that finding was passage of the challenged
legislation. Following signature by the Mayor and the expiration of the statutorily
prescribed period for Congress to review D.C. statutes, see D.C. Code § 1-206.02(c)(1),
the Act took effect on December 10, 2005. The statutory term “excessive price” is not
specifically defined. The statute states that “[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% higher than the comparable price in any high income country in
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which the product is protected by patents or other exclusive marketing rights.” Id.§ 28-4554(a). If such prima facie excessive pricing is shown, the burden shifts to the
defendant to prove:
that a given prescription drug is not excessively priced 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.
Id. § 28-4554(b). A “high income countr[y]” is defined as one of “the United Kingdom,
Germany, Canada, or Australia.” Id. § 28-4552(2). The Act provides for both public and
private enforcement: “Any affected party, including the District of Columbia, shall have
standing to file a civil suit in a court of competent jurisdiction for a violation of this
chapter and to seek a remedy, including declaratory and injunctive relief.”
Id. § 28-4555(a). The term “affected party” is itself broadly defined as “any person
directly or indirectly affected by excessive prices of patented prescription drugs,
including any organization representing such persons or any person or organization
representing the public interest.” Id. § 28-4552(1). The Act provides for a wide array of
remedies:
(1) Temporary, preliminary, or permanent injunctions to enjoin the sales of
prescription drugs in the District at excessive prices;
(2) Appropriate fines for each violation;
(3) Damages, including treble damages;
(4) Reasonable attorney’s fees;
(5) The cost of litigation; or
(6) Any other relief the court deems proper.
Id. § 28-4555(b).
2006-1593 3
B. Procedural history
On October 12, 2005, plaintiff Pharmaceutical Research and Manufacturers of
America (“PhRMA”) filed suit in the United States District Court for the District of
Columbia, alleging that the Act was invalid in light of the Commerce Clause of the
Constitution and that it was preempted by the federal patent laws. Fifteen days later,
plaintiff Biotechnology Industry Organization (“BIO”) filed a similar suit. Both plaintiffs
are industry organizations whose membership includes manufacturers of patented
pharmaceuticals. The district court consolidated the two actions, heard oral argument,
and on December 22, 2005 issued an opinion and order finding the Act to be preempted
by the patent laws and enjoining its enforcement. Pharm. Research & Mfrs. of Am. v.
District of Columbia, 406 F. Supp. 2d 56 (D.D.C. 2005).
The district court concluded that the plaintiffs had established their standing since
they represented members who complained of “realistic and imminent” injuries. Id. at
62-63. Noting that “Congress’ regulation of our nation’s pharmaceutical industry is
grounded in large part in a complex balance of economic forces and regulatory
exclusivity designed to encourage and reward the innovation, research, and
development of new drugs,” id. at 65, the district court concluded that the Act did not
“square with the congressional purpose and objectives” of the patent laws, id. at 66.
Accordingly, the district court found that “the D.C. Act is preempted and therefore
facially unconstitutional.” Id. at 67. It also found that the Commerce Clause of the
Constitution invalidated the Act as applied to transactions between parties not located
within the District’s borders, id. at 71, a conclusion which the District does not appeal.
Finally, the district court rejected the plaintiffs’ claim that the Foreign Commerce Clause
2006-1593 4
of the Constitution facially preempted the Act as a whole, finding it valid only “to the
extent that future plaintiffs are able to establish a prima facie case to the satisfaction of
a Superior Court judge without any reference to the wholesale price of the same drug in
any foreign country.” Id. at 72.
The District timely appealed to the United States Court of Appeals for the District
of Columbia Circuit. On August 23, 2006, that court granted the District’s unopposed
motion to transfer the case to the Federal Circuit.
II. DISCUSSION
A. Statutory subject matter jurisdiction
Any appeal taken to a federal appeals court must be within its jurisdiction.
Because this case does not pose the typical questions of patent law—infringement,
validity, enforceability, and the like—which this court normally reviews under our
jurisdictional statute (28 U.S.C. § 1295), and because the parties’ briefing on our
jurisdiction was limited, we raised the issue of whether our statutory grant of jurisdiction
encompasses this case sua sponte at oral argument. See Bender v. Williamsport Area
Sch. Dist., 475 U.S. 534, 541 (1986) (“Federal courts are not courts of general
jurisdiction; they have only the power that is authorized by Article III of the Constitution
and the statutes enacted by Congress pursuant thereto. For that reason, every federal
appellate court has a special obligation to satisfy itself . . . of its own jurisdiction.”
(citation omitted)).
This court has exclusive jurisdiction to review cases which arise under the patent
laws. Christianson v. Colt Indus. Operating Corp., 486 U.S. 800, 807 (1988). Our
jurisdiction is created and constrained by statute. Congress has granted this court
2006-1593 5
“exclusive jurisdiction . . . of an appeal from a final decision of a district court of the
United States . . . if the jurisdiction of that court was based, in whole or in part, on [28
U.S.C. § 1338],” with exceptions not applicable here. 28 U.S.C. § 1295(a)(1). Section
1338 vests district courts with “original jurisdiction of any civil action arising under any
Act of Congress relating to patents.” Thus, we have jurisdiction if and only if the
plaintiffs’ preemption claim is one “arising under” the patent laws, under the meaning of
that phrase in § 1338.
The Supreme Court, resolving a jurisdictional dispute between this court and a
sister Circuit, has held that:
[Section] 1338(a) jurisdiction . . . extend[s] only to those cases in which a
well-pleaded complaint establishes either that federal patent law creates
the cause of action or that the plaintiff’s right to relief necessarily depends
on resolution of a substantial question of federal patent law, in that patent
law is a necessary element of one of the well-pleaded claims.
Christianson, 486 U.S. at 808-09. Patent law does not “create” the plaintiffs’ cause of
action here, because there is no language in the patent statute explicitly authorizing
preemption claims. The absence of lawsuit-enabling language does not end the
jurisdictional inquiry, though, since patent law may be a “necessary element” of an
action authorized under some other provision.
Patent law is indeed a necessary element of the claim here. If the plaintiffs are
able to show that the patent laws preempt the Act, the Act will be declared
unenforceable and enjoined, but if they cannot, their preemption claim will fail and their
members may be required to defend against suits under the Act. In other words, “some
right or privilege will be defeated by one construction, or sustained by the opposite
construction of [the patent] laws.” Id. at 807-08 (quoting Pratt v. Paris Gas Light & Coke
Co., 168 U.S. 255, 259 (1897)).
2006-1593 6
Two prior cases of this court confirm that in certain circumstances patent law
may be a “necessary element” of an otherwise nonpatent claim. In Hunter Douglas,
Inc. v. Harmonic Design, Inc., 153 F.3d 1318 (1998), overruled en banc on other
grounds, Midwest Indus., Inc. v. Karavan Trailers, Inc., 175 F.3d 1356, 1358-59 (Fed.
Cir. 1999), we addressed our jurisdiction over a California state-law claim for injurious
falsehood. The plaintiff alleged that the defendant patentee had claimed to hold
exclusive rights in certain patents with “willful and wanton disregard” for the fact that the
patent claims at issue were invalid and unenforceable. Id. at 1322. Since proof of a
false statement was a necessary element of the state-law tort and in this case the
statement’s truth or falsity turned on the resolution of a patent issue, we held the claim
to arise under the patent laws. Id. at 1329. Likewise, in Additive Controls &
Measurement Systems, Inc. v. Flowdata, Inc., 986 F.2d 476, 478 (Fed. Cir. 1993), we
held that a Texas business disparagement claim arose under the patent laws where the
alleged false statement was the defendant’s claim that the plaintiff infringed its patent.
In Hunter Douglas and Additive Controls, state tort law created the cause of action, but
the pleadings at issue required patent-law questions to be resolved. The same analysis
applies here: though the plaintiffs’ claim is created by principles of supremacy law, its
resolution necessarily requires us to construe the patent statutes.
In an “arising under” analysis, the focus must remain on the well-pleaded
complaint. A claim does not arise under the patent laws merely if a patent issue
appears in a defense to that claim, Thompson v. Microsoft Corp., 471 F.3d 1288, 1292
(Fed. Cir. 2006), or if the claim is asserted in the defendant’s answer as a counterclaim,
Holmes Group, Inc. v. Vornado Air Circulation Sys., 535 U.S. 826, 831 (2002). Here,
2006-1593 7
the preemption issue is raised in the plaintiffs’ complaint. However, we noted in
Speedco, Inc. v. Estes that “we determine whether federal court jurisdiction exists in a
case seeking a declaratory judgment by applying the well-pleaded complaint rule not to
the declaratory judgment complaint, but to the action that the declaratory defendant
would have brought.” 853 F.2d 909, 912 (Fed. Cir. 1988). Speedco cited to the
Supreme Court’s decision in Franchise Tax Board v. Construction Laborers Vacation
Trust for Southern California, 463 U.S. 1, 16 (1983), for the proposition that “if, but for
the availability of the declaratory judgment procedure, the federal claim would arise only
as a defense to a state created action, jurisdiction is lacking.” (internal citations omitted).
If we were to follow the mirroring rule laid down in Speedco and consider the
hypothetical action that might be brought by the District against one or more of the
plaintiffs’ members, the relevant complaint would be one requesting relief under the
challenged Act. The issue of preemption by the patent laws would appear, if at all, only
as a defense in the answer to that complaint. Such an action would not arise under the
patent laws, and this court would not be the correct forum to decide this appeal.
However, the Supreme Court has expressly distinguished Franchise Tax Board
as to cases where the plaintiff seeks to enjoin enforcement of the allegedly preempted
provision:
The Court's decision today in Franchise Tax Board . . . does not call into
question the lower [federal] courts’ jurisdiction to decide these cases. . . .
A plaintiff who seeks injunctive relief from state regulation, on the ground
that such regulation is pre-empted by a federal statute which, by virtue of
the Supremacy Clause of the Constitution, must prevail, thus presents a
federal question which the federal courts have jurisdiction under 28 U.S.C.
§ 1331 to resolve.
Shaw v. Delta Air Lines, Inc., 463 U.S. 85, 96 n.14 (1983). The phrase “arising under”
has the same meaning in § 1338 as it does in § 1331, the general federal-question
2006-1593 8
provision. Vornado, 535 U.S. at 829-30 (citing Christianson, 486 U.S. at 808-09). Since
this case presents a request for injunction of the Act’s enforcement in addition to a
declaratory judgment, it is controlled by Shaw, not Franchise Tax Board and Speedco.
Accordingly, the mirroring rule does not apply and the relevant well-pleaded complaints
are the ones actually filed by plaintiffs BIO and PhRMA. As noted above, construction
of the patent laws is a necessary element of the preemption cause of action appearing
in those complaints. Therefore, 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. We
conclude that this appeal is properly before us and should not be transferred back to the
D.C. Circuit. 1
B. Standing
Resolution of the statutory issue above does not end our jurisdictional inquiry,
since the District also alleges that the two plaintiff organizations lacked standing to bring
this action. Standing is, of course, a constitutional prerequisite for our own jurisdiction
and that of the district court:
Article III of the Constitution limits the federal judicial power to “Cases” or
“Controversies,” thereby entailing as an irreducible minimum that there be
(1) an injury in fact, (2) a causal relationship between the injury and the
challenged conduct, and (3) a likelihood that the injury will be redressed
by a favorable decision.
1
We acknowledge that Christianson directs appellate courts to apply the
law of the case doctrine and defer to sister Circuits’ jurisdictional determinations upon a
transfer. 486 U.S. 816. However, we note that the transfer order here was issued by
the D.C. Circuit’s Clerk after an unopposed motion and without a decision by the judges
of that court. Because we independently agree that jurisdiction properly lies in this
court, we do not decide whether a clerk-signed transfer order has “decided upon a rule
of law,” id. at 817, and therefore merits deference under Christianson.
2006-1593 9
United Food & Commercial Workers Union Local 751 v. Brown Group, Inc., 517 U.S.
544, 550 (1996) (“United Food”) (internal quotations omitted). We decide questions
implicating this court’s jurisdiction under our own circuit law. Pause Tech. LLC v. TiVo
Inc., 401 F.3d 1290, 1293 (Fed. Cir. 2005) (“On matters relating to this court’s
jurisdiction, we apply Federal Circuit law, not that of the regional circuit from which the
case arose.”); Nystrom v. TREX Co., 339 F.3d 1347, 1349-50 (Fed. Cir. 2003); State
Contracting & Eng’g Group v. Florida, 258 F.3d 1329, 1334 (Fed. Cir. 2001); Woodard
v. Sage Prods., 818 F.2d 841, 844 (Fed. Cir. 1987) (en banc).
Neither plaintiff here manufactures patented prescription drugs itself or otherwise
engages in activities likely to fall within the ambit of the Act. However, “an organization
may sue to redress its members’ injuries, even without a showing of injury to the
association itself.” United Food, 517 U.S. at 552.
[A]n association has standing to bring suit on behalf of its members when:
(a) its members would otherwise have standing to sue in their own right;
(b) the interests it seeks to protect are germane to the organization's
purpose; and (c) neither the claim asserted nor the relief requested
requires the participation of individual members in the lawsuit.
Id. at 553 (quoting Hunt v. Wash. State Apple Adver. Comm’n, 432 U.S. 333, 343
(1977)); see also Inv. Co. Inst. v. Camp, 401 U.S. 617, 620-21 (1971) (finding that
association of investment companies had standing to challenge federal regulation which
harmed its members). The two plaintiffs here are both industry organizations who seek
to shape policy in a manner favorable to member pharmaceutical and biotechnology
companies, so the subject matter of this case is highly germane to their respective
purposes. For the purposes of this facial challenge seeking only an injunction against a
generally applicable statute, none of the plaintiffs’ members need be joined directly in
the action. The standing question therefore collapses into an inquiry as to whether
2006-1593 10
some member of each organization would have standing to bring a similar action itself.
One such member will suffice. See United Food, 517 U.S. at 552 (“The association
must allege that its members, or any one of them, are suffering immediate or threatened
injury as a result of the challenged action of the sort that would make out a justiciable
case had the members themselves brought suit.” (emphasis added) (quoting Warth v.
Seldin, 422 U.S. 490, 511 (1975)).
Standing requires “at an irreducible minimum an injury in fact; that is, there must
be some threatened or actual injury resulting from the putatively illegal action.” Virginia
v. Am. Booksellers Ass’n, 484 U.S. 383, 392 (1988). That injury must be “(a) concrete
and particularized and (b) actual or imminent, not conjectural or hypothetical.” Friends
of the Earth, Inc. v. Laidlaw Envtl. Servs. (TOC), Inc., 528 U.S. 167, 180 (2000) (citing
Lujan v. Defenders of Wildlife, 504 U.S. 555, 560-61 (1992)). The injury need not have
been already manifested. “A plaintiff who challenges a statute must demonstrate a
realistic danger of sustaining a direct injury as a result of the statute's operation or
enforcement. But one does not have to await the consummation of threatened injury to
obtain preventive relief. If the injury is certainly impending that is enough.” Babbitt v.
United Farm Workers Nat’l Union, 442 U.S. 289, 298 (1979) (internal citations and
quotations omitted).
The findings and legislative history of the Act demonstrate a strong likelihood that
the District is imminently likely to enforce it against plaintiffs’ members. The Act itself
contains a finding that the prices of prescription drugs in the District of Columbia are
presently “excessive,” the same word as the standard for an illegal price. D.C. Code
§ 28-4551(a). The findings section also declares that “it is incumbent on the
2006-1593 11
government of the District of Columbia to take action to restrain the excessive prices of
prescription drugs.” Id. § 28-4551(c). When the Act was debated in the D.C. City
Council, its sponsor singled out two companies by name:
Once a lawsuit is filed the prescription drug manufacturer will be afforded
an opportunity to explain why its prices are not excessive. . . . For
instance, under the new law Merck may have the opportunity to explain
why District residents pay 166 percent more for the cholesterol drug Zocor
than the citizens of Germany. Or Pfizer could defend its reasoning for
charging District residents 323 percent more for its arthritis drug Celebrex
than the residents of Australia.
Remarks of D.C. Councilmember Catania, Sept. 20, 2005. Merck and Pfizer are
members of both BIO and PhRMA. The District “has not suggested that the newly
enacted law will not be enforced, and we see no reason to assume otherwise. We
conclude that plaintiffs[’ members] have alleged an actual and well-founded fear that the
law will be enforced against them.” Am. Booksellers, 484 U.S. at 393.
Whether the Act is enforced or not, its presence is highly likely to cause
pharmaceutical manufacturers, including plaintiffs’ members, to incur costs in an effort
to avoid running afoul of its broadly-worded provisions. The Act does not directly
regulate manufacturers’ wholesale prices—instead, liability attaches if the
pharmaceutical seller’s activity “results in the prescription drug being sold in the District
for an excessive price.” D.C. Code § 28-4553. If the prices in the District exceed the
price in any “high income country” by over 30 percent, the manufacturer is presumed to
be in violation. Id. § 28-4554(a). The Act provides that the presumption is rebuttable,
but other than listing a variety of factors to be considered, does not explain how that
rebuttal might occur. Id. § 28-4554(b). Prudent pharmaceutical manufacturers seeking
to comply with the Act must therefore monitor the retail prices of their drugs in the
District, and correlate those with the prices in four foreign countries designated as “high
2006-1593 12
income” benchmarks for the Act’s prima facie analysis. One member of plaintiff
PhRMA, Valeant Pharmaceuticals International, has declared that if the Act is not
enjoined, it will forgo selling one of its drugs in the Canadian and Australian markets
rather than risk having the presumption of excessiveness attach. Wyeth
Pharmaceuticals, a member of both BIO and PhRMA, has declared that in light of the
Act it “will need to consider the impact of its decisions as to the timing and pricing of
launches in [the four benchmark] markets on domestic prices.” Even if Wyeth and other
similarly situated pharmaceutical manufacturers ultimately choose not to change their
global pricing structure, the need to monitor and consider that structure in light of the
Act will necessarily impose upon them actual administrative costs.
Members of both plaintiff organizations have therefore demonstrated that the Act
threatens them with a concrete, imminent injury, since they have shown “a realistic
danger of sustaining a direct injury as a result of the statute's operation or enforcement.”
United Farm Workers, 442 U.S. at 298. The remaining elements of standing are
causation (“the injury is fairly traceable to the challenged action of the defendant,”
Friends of the Earth, 528 U.S. at 180) and redressability (“it is likely, as opposed to
merely speculative, that the injury will be redressed by a favorable decision,” id. at 181).
In light of our discussion above, both of those elements are satisfied, because the injury
flows directly from the Act, and if the Act is enjoined, the injury will not occur. All of the
elements of standing are satisfied. Accordingly, we have jurisdiction to hear this appeal,
and turn now to the merits of the plaintiffs’ preemption case.
2006-1593 13
C. Preemption
The plaintiffs argue that the Act cannot stand because it is preempted by superior
federal law. While this case implicates supremacy principles, we note that it does not
deal with an alleged conflict between a state regulation and a federal law requiring the
application of the Constitution’s Supremacy Clause. See U.S. Const. art. VI, § 2;
Kewanee Oil Co. v. Bicron Corp., 416 U.S. 470, 479 (1974). The District of Columbia is
federal territory whose self-governance is authorized by Congress, so the Act is in some
sense a form of federal regulation. Nevertheless, as between District statutes and
superior enactments by Congress, the general principles of preemption from
Supremacy Clause law apply. See Don’t Tear It Down, Inc. v. Pa. Ave. Dev. Corp., 642
F.2d 527, 534 n.65 (D.C. Cir. 1980) (“We need not undertake precise definition of the
governmental status of the District of Columbia . . . for surely the preemption doctrine
[a]ffects District of Columbia legislation no less than state enactments.”). Accordingly,
references in our discussion to states, state law, or the like apply to the District law at
issue here.
There is no express provision in the patent statute that prohibits states from
regulating the price of patented goods; indeed, “the federal patent laws do not create
any affirmative right to make, use, or sell anything.” Leatherman Tool Group, Inc. v.
Cooper Indus., Inc., 131 F.3d 1011, 1015 (Fed. Cir. 1997). Nevertheless, state law
must yield to congressional enactments if it “stands as an obstacle to the
accomplishment and execution of the full purposes and objectives of Congress.” Hines
v. Davidowitz, 312 U.S. 52, 67 (1941). The plaintiffs urge that the Act conflicts with
2006-1593 14
Congress’s intention to provide their members and other pharmaceutical patent holders
with the pecuniary reward that follows from the right to exclude granted by a patent.
Our conflict inquiry is a searching one that ranges beyond the literal text of the
statute. “What is a sufficient obstacle is a matter of judgment, to be informed by
examining the federal statute as a whole and identifying its purpose and intended
effects.” Crosby v. Nat’l Foreign Trade Council, 530 U.S. 363, 373 (2000). “[T]he entire
scheme of the statute must of course be considered and that which needs must be
implied is of no less force than that which is expressed.” Id. (quoting Savage v. Jones,
225 U.S. 501, 533 (1912)). We analyze this question under our own circuit law.
Midwest Indus., Inc. v. Karavan Trailers, Inc. 175 F.3d 1356, 1358-59 (Fed. Cir. 1999)
(en banc in relevant part).
We have noted that “the essential criteria” for determining whether a state law is
preempted are “the objectives of the federal patent laws.” Hunter Douglas, Inc. v.
Harmonic Design, Inc., 153 F.3d 1318, 1333 (1998). The fundamental goal of the
patent law is spelled out in the Constitution: “To promote the Progress of Science and
useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to
their respective Writings and Discoveries.” U.S. Const. art. I, § 8, cl. 8. Inventors are
impelled to invest in creative effort by the expectation that, through procurement of a
patent, they will obtain a federally protected “exclusive right” to exclude others from
making, using, or selling embodiments of their invention. Patentees value the right to
exclude in part because the ability to foreclose competitors from making, using, and
selling the invention may allow them an opportunity to obtain above-market profits
during the patent’s term.
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This court has repeatedly recognized as important the pecuniary rewards
stemming from the patent right:
We have long acknowledged the importance of the patent system in
encouraging innovation. Indeed, “the encouragement of investment-
based risk is the fundamental purpose of the patent grant, and is based
directly on the right to exclude.” . . . Importantly, the patent system
provides incentive to the innovative drug companies to continue costly
development efforts.
Sanofi-Synthelabo v. Apotex, Inc., 470 F.3d 1368, 1383 (Fed. Cir. 2006) (quoting Patlex
Corp. v. Mossinghoff, 758 F.2d 594, 599 (Fed. Cir. 1985)).
[T]he Patent Act creates an incentive for innovation. The economic
rewards during the period of exclusivity are the carrot. The patent owner
expends resources in expectation of receiving this reward. Upon grant of
the patent, the only limitation on the size of the carrot should be the
dictates of the marketplace.
King Instruments Corp. v. Perego, 65 F.3d 941, 950 (Fed. Cir. 1995).
This court’s past statements about the patent law’s incentive structure are
illuminating, but our inquiry must be focused on Congress’s purposes. Congress, too,
has acknowledged the central role of enhanced profits in the statutory incentive scheme
it has developed. In the legislative history of the Drug Price Competition and Patent
Term Restoration Act of 1984 (popularly known as the “Hatch-Waxman Act”), the House
Committee on Energy and Commerce observed:
Patents are designed to promote innovation by providing the right to
exclude others from making, using, or selling an invention. They enable
innovators to obtain greater profits than could have been obtained if direct
competition existed. These profits act as incentives for innovative
activities.
H.R. Rep. No. 98-857, at 17 (1984); see also id. at 15 (“The purpose of Title II of the bill
is to create a new incentive for increased expenditures for research and development.”).
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Of course, the patent laws are not intended merely to shift wealth from the public
to inventors. Their purpose is to “promote the Progress of . . . useful Arts,” U.S. Const.
art. I, § 8, cl. 8, ultimately providing the public with the benefit of lower price through
unfettered competition. That goal is underscored by the Constitutional command that
periods of exclusivity be for “limited Times.” Id. Once the patent expires and the
inventor’s exclusive rights terminate, others may enter the market with products based
on the teachings of the patent, which must “enable any person skilled in the art . . . to
make and use the [invention].” 35 U.S.C. § 112 ¶ 1. If the market functions properly,
this new participation will bring down the formerly elevated price of the patented product
to competitive levels. These two objectives—to reward innovators with higher profits
and to keep prices reasonable for consumers—are in dialectic tension. The Supreme
Court has noted that “[t]he tension between the desire to freely exploit the full potential
of our inventive resources and the need to create an incentive to deploy those
resources is constant.” Bonito Boats, Inc. v. Thunder Craft Boats, Inc., 489 U.S. 141,
152 (1989); see also Hunter Douglas, 153 F.3d at 1333 (“[T]he objectives of the federal
patent laws . . . . are in some tension with one another, and Congress struck a balance
between them.”). Congress, as the promulgator of patent policy, is charged with
balancing these disparate goals. The present patent system reflects the result of
Congress’s deliberations. Congress has decided that patentees’ present amount of
exclusionary power, the present length of patent terms, and the present conditions for
patentability represent the best balance between exclusion and free use.
It is unquestioned that the District has general police power within its borders and
that “[w]hatever rights are secured to inventors must be enjoyed in subordination to this
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general authority of the State over all property within its limits,” Webber v. Virginia, 103
U.S. 344, 348 (1880). But general state power must yield to specific Congressional
enactment: “any state law, however clearly within a State’s acknowledged power, which
interferes with or is contrary to federal law, must yield.” Felder v. Casey, 487 U.S. 131,
138 (1988) (quoting Free v. Bland, 369 U.S. 663, 666 (1962)). Furthermore, this Act is
in no way general, affecting only patented products. The Act’s operation stands
largely—indeed, exclusively—within the scope of the patent laws, and its effect is to
shift the benefits of a patented invention from inventors to consumers.
By 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. In the
District’s judgment, patents enable pharmaceutical companies to wield too much market
power, charging prices that are “excessive” for patented drugs. 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 District drug consumers. This may be a worthy
undertaking on the part of the District government, but it is contrary to the goals
established by Congress in the patent laws. The fact that the Act is targeted at the
patent right is apparent on its face. It applies only to patented drugs. D.C. Code
§ 28-4553. The District has thus seen fit to change federal patent policy within its
borders. The underlying determination about the proper balance between innovators’
profit and consumer access to medication, though, is exclusively one for Congress to
make. As the Supreme Court has noted, “[w]here it is clear how the patent laws strike
that balance in a particular circumstance, that is not a judgment the States may second-
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guess.” Bonito Boats, 489 U.S. at 152; see also Webber, 103 U.S. at 347 (noting that
sale of patented articles “cannot be forbidden by the State, nor can the sale of the
article or machine produced be restricted except as the production and sale of other
articles, for the manufacture of which no invention or discovery is patented or claimed,
may be forbidden or restricted”).
The Act stands as an obstacle to the federal patent law’s balance of objectives
as established by Congress. Accordingly, we conclude that it is preempted by federal
patent law.
III. CONCLUSION
Because the federal patent laws preempt the Act, we affirm the district court’s
injunction against the Act’s enforcement. Since patent-law preemption invalidates the
Act entirely, we do not need to consider the Foreign Commerce Clause argument
advanced by plaintiffs as an alternative ground for affirmance.
AFFIRMED
Each party shall bear its own costs.
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