preventing parallel imports

01 December 1999

Trevor Cook

Parallel imports within the European Union (EU) represent a special problem for pharmaceutical companies. This kind of trade is driven by national price controls for pharmaceuticals and the low prices imposed on pharmaceutical companies in some countries if they are to market their products at all.

As a result, third parties acquire cheap, but legitimately obtained, drugs and import them into countries where the same drug commands a higher price. By undercutting that higher price the parallel importers can still make a good profit, while eating into the local market of the rights owner. Attempts to deal with the problem have taken several forms:

  • Intellectual property rights.
  • Regulatory requirements.
  • Contractual obligations.
  • Refusal to put products on the market.

Intellectual property rights

Where the product is protected by intellectual property rights (IPRs) in the country of import, these national rights can in theory be used to prevent dealings in that product. However, the European Court of Justice (ECJ) established as a general principle in its early judgements that such rights could not be used in relation to a product first placed on the market in another EU country by the rights' owner or with his consent (for example, by a licensee). The principle now extends throughout the whole European Economic Area (EEA), although its interpretation has kept the ECJ busy for the last 20 years.

The doctrine of exhaustion of rights. Attempts to use IPRs in the country of import to prevent the parallel import of products first placed on the market elsewhere in the EU have all foundered on the doctrine of exhaustion of rights. The ECJ held that the specific subject matter of the IPR (be it patent, trade mark or copyright) is the right to place the product first on the market in (what is now) the EEA, but not the right to prevent subsequent dealings.

The current status of the law as to the use of patents in this context is set out in the judgment of the ECJ in Merck v Primecrown, concerning the parallel import of pharmaceuticals from Spain and Portugal. The Treaty by which these countries acceded to what was then the European Community expressly suspended the doctrine of exhaustion of rights as a defence to patent infringement actions brought in respect of pharmaceuticals imported from these countries. This is because, at that time, Spain and Portugal did not provide product protection for pharmaceuticals. When the suspension expired, the English High Court asked the ECJ in Merck v Primecrown to consider whether Merck v Stephar was still good law, given the distorted nature of the market in Spain and Portugal and the practical, if not legal, obligation to market drugs in those countries.

Merck v Stephar had established, some 20 years previously, that the principle of exhaustion applied even where the goods were first put on the market in a country which did not provide patent protection, and where there were accordingly no rights to exhaust. The ECJ held that it remained good law but left a slight glimmer of hope for patentees. Namely, if the national court decided that a patentee was legally bound under national law to sell its product, then the product would not have been sold with its consent. This was an application of the same principle as first established in Pharmon v Hoechst, that where a product had been put on the market under a compulsory patent licence, the patentee's rights should not be treated as exhausted.

Use of trade marks. Trade marks have also been used in attempts to impede parallel imports. However, EEA exhaustion is now enshrined in the Trade Mark Harmonisation Directive. The Directive entitles a trade mark proprietor to prohibit the use of the trade mark:

  • In relation to goods placed on the market in the EEA under that mark by it or with its consent.
  • Only where there are legitimate reasons for doing so, such as where the condition of the goods is changed or impaired.

In relation to goods first placed on the market outside the EEA, the ECJ in the Silhouette case held that the Directive entitled a trade mark owner within the EU to use its trade mark to prevent the import of goods into the EU. The ECJ has been of the opinion that the placing of identical products on the market outside the EEA and inside the EEA does not amount to consent to import those products into the EEA (Sebago v Ancienne Maison Dubois). However, the UK High Court has recently held that in relation to any distribution outside of the EEA which is subject to English contract law, restrictions on what can be done with the products in questions, including re-import into the UK, must be express and must pass to each subsequent purchaser (Zino Davidoff SA v A&G Imports Limited, High Court 18th May, 1999). However, these considerations are of little direct relevance in the pharmaceuticals sector, as regulatory constraints in general (discussed further below) preclude the parallel import of pharmaceuticals from outside the EU. In contrast, the sector is concerned primarily with issues of rebranding and repackaging within the EU in a trade mark context.

Repackaging and rebranding. Judgement was given on 12th October, 1999 by the ECJ in Upjohn v Paranova. This is the latest in a long line of cases concerning the extent to which repackaging of parallel imported products within the EU is permitted. This case concerns not only repackaging, which had been the subject of the earlier cases (a common issue as different pack sizes for the same product are common throughout the EU) but also rebranding.

Repackaging of parallel imports occurs when the prescribed pack size in the country of import differs to that in the country of export. The ECJ considered the question of repackaging, taking into account the existing European case law and provision in the Trade Mark Harmonisation Directive in the Paranova cases Bristol-Myers Squibb v Paranova A/S and Boehringer v Paranova A/S. The ECJ held that, save in the circumstances set out in the Directive, a trade mark owner is precluded from preventing parallel imports, even where the product was repackaged or relabelled without the owner's authorisation. The new packaging should only be to the extent necessary to enable the product to be marketed and, where relabelling would be sufficient, the parallel importer should not be entitled to repackage.

However, the Court went on to state that, under the Harmonisation Directive, a trade mark owner may not oppose the marketing of repackaged products to which the trade mark has been reaffixed where all the following conditions have been satisfied:

  • It is shown that reliance on the trade mark to oppose the parallel imports would lead to artificial partitioning of the single market.
  • The repackaging does not, directly or indirectly, affect the original condition of the product.
  • The new packaging clearly indicates the name of the original owner and the repackager.
  • The new packaging is not liable to damage the reputation of the trade mark or its owner.
  • The repackager declares his activity to the original owner and, upon request, presents a sample to him.

In reality, repackaging and re-application of the same brand can only be prevented by the trade mark owner where the pharmaceutical is likely to be damaged as a result of the repackaging or the repackaging is of such a shoddy nature that the reputation of the brand which has been reapplied to the packaging is likely to suffer.

Rebranding takes place where the rights' owner uses different marks in the country of export and of import, and where the parallel importer when repackaging applies the trade mark used for that product in the country of import.

The ECJ Judgment in the Upjohn case is, on its face, not good for the rights’ owners, as it considers that such rebranding may be "necessary" and that where it is so it is permissible. The judgment does not address another option, which would be to obscure the original brand and market the product as a generic. One possible response on the part of the brand owner not yet considered is the extreme scenario of pharmaceutical brand owners marketing products in low price countries as generics, and only using trade marks elsewhere.

Use of copyright. Copyright may not at first sight seem to have much to do with pharmaceuticals, but attempts have been made to use copyright in product information leaflets to prevent parallel imports. This is because parallel importers must often translate leaflets in order to comply with the labelling and patient information requirements. Such an attempt failed in 1998 in the EFTA Advisory Court (which for this purpose also applies Community law) in Norwegian Government v Astra Norge. No other attempts have so far met with success.

Regulatory requirements

Where intellectual property barriers are not adequate, regulatory ones may be available. At first sight European pharmaceuticals law, as set out in directives and regulations, provides no mandate for national authorities to grant marketing authorisations for products imported from another country which are more or less the same as those marketed locally. However, the regulatory authorities are obliged by virtue of longstanding ECJ case law (De Pjieper) to do so where the other product was first placed on the market in the EU.

The use of the regulatory framework to impede parallel imports is well demonstrated in R v MCA, ex parte Rhone Poulenc Rorer, currently before the ECJ on a reference from the English High Court. This concerns differently formulated products available in different parts of the Community. Rhone Poulenc Rorer argues that the parallel importer should be denied a marketing authorisation in the UK for the following reasons:

  • The difference in formulation is such that it should prevent the differently formulated foreign product being granted an authorisation on the basis of the UK marketing authorisation for the UK formulated product.
  • This would be the case even if the product which the parallel importer tried to import was to the same formulation as that formerly available in the UK. This is because the marketing authorsation which related to the prior formulation would have been revoked and doctors would have become used to the new formulation.

This argument seems so far to have seen favour with the Advocate General, whose views the ECJ usually follow.

It is in fact regulatory constraints which have meant that parallel imports from outside Europe are not the problem in the pharmaceuticals area that they are in other sectors (where the recent case law, particularly as to trade marks, has attracted such controversy). However, regulatory constraints such as those argued in the Rhone Poulenc Rorer case are likely to occur less frequently as central marketing authorisations granted by the EMEA become the norm. These central authorisations make parallel distribution easier and restrict the issues which the manufacturer can raise.

Contractual obligations

Next, a company can try to prevent parallel imports by contractual terms on its distributors, or refusing to supply certain distributors. However, these policies run the risk of competition law problems, as outlined below.

Refusal to put products on the market

Finally, a company can refuse to market a product at all in a country which imposes too low a price for that product. This is an extreme and unattractive position. However, it is difficult to criticise it under the law relating to the freedom of movement of goods or under competition law, and it may be the one to which companies find themselves driven in the future.

In contrast, refusing to supply across national borders, or refusing to supply to local wholesalers who are exporting the product, is likely to breach competition law rules.

Although outside the pharmaceutical field, a good example of how seriously the Commission takes such action is the case of Volkswagen, who were fined around £80 million (EUR123.8 million) for instructing their dealers not to supply their cars outside their national boundaries. The Commission found that this was an agreement between parties which would have an effect on trade between member states and therefore fell foul of Article 81 of the EC Treaty.

Refusal to supply a product where the company is in a dominant position in that field is likely to be construed as abuse of a dominant position, within the ambit of Article 82 of the EU Treaty.

The dangers

Attempting to discourage parallel imports has its dangers. An example is provided by the fine levied late in 1995 by the European Commission on Bayer of ECU3 million for infringing Article 81(1) of the EU Treaty by attempting to restrict parallel imports of the cardiovascular drug Adalat ([1996] OH 101/1, C1996 CMLR 416).

Prices for the product varied considerably from member state to member state. The prices in the UK, the largest market, were considerably higher than in Spain and France. Spanish and French wholesalers ordered larger quantities than they required to supply the domestic market, and exported the surplus to other member states, including the UK.

Bayer refused to supply French and Spanish wholesalers with the quantities they ordered. In Spain, Bayer set up a computerised system for identifying parallel exporters, while in France exporting wholesalers were recorded on handwritten lists. Wholesalers tried a number of methods to obtain larger quantities, such as spreading orders between agencies and placing orders through wholesalers not subject to monitoring. When one was found to be exporting, Bayer France and Bayer Spain penalised him by imposing successive reductions in the volumes supplied.

The Commission found that the practices were part of an arrangement which restricted competition, since an export ban effectively formed part of the continuous commercial relations between Bayer and the wholesalers, and the wholesalers had shown by their conduct that they accepted the ban. Bayer argued that, as prices were not set freely but were subject to differing national regulations, the relevant behaviour should not be caught by Article 81. Although the Commission found against Bayer, it did take this into account in calculating the fine to be imposed. The fact that the practices were said to involve a serious infringement of Community law was also taken into account. The Commission's finding has been appealed to the Court of First Instance, which has already suspended the fine pending determination of the appeal, and may be appealed further to the ECJ.

Two tier pricing systems. Almost at the same time Organon modified its pricing policy in the UK for the contraceptive pill Marvelon following Commission intervention. According to the Commission, a Dutch law gave a financial incentive to pharmacies to favour parallel imports when these were less expensive than products sold in the national market. Parallel imports were coming into The Netherlands from the UK where prices were lower. Organon's response was to change its UK sales policy by only giving a 12.5% discount to wholesalers in respect of products delivered in the UK and products which were for resale and consumption in the UK. No discount was available for products not for resale and consumption in the UK. Following complaints in May, June and August of 1994, the Commission intervened, and in October 1995 Organon informed the Commission that the company was abandoning the pricing policy in question.

Most recently, early in 1998, and in the wake of the decision of the ECJ in Merck v Primecrown, Glaxo established a two tier pricing structure in Spain, by which they sold to all, but charged lower prices to those distributors who agreed not to export. Unlike other pharmaceutical companies in the past they were open about what they did, and they took the precaution of notifying their new standard form of agreement in Spain to the Commission. This gave them the right to assert a wider range of competition law arguments in favour of their position than would have been available to those who failed to notify their agreements to the Commission. Moreover, such notification should free Glaxo Wellcome from the risk of fines, and so limit the downside of persevering with their approach pending a final legal determination, although they suspended it in the light of separate Spanish competition law complaints.

The Commission is acting on complaints regarding Glaxo Wellcome's pricing structure in Spain and has stated in July 1999 that "such a system is a restriction of competition and impedes parallel trade; it is therefore contrary to the EU competition rules. At this stage in the proceedings the Commission envisages banning the double prices clauses in Glaxo Wellcome’s Spanish general conditions of sale". Although the Commission has declared itself against the strategy adopted by Glaxo Wellcome, it is likely that this case will go to the ECJ for final determination. There will be therefore some delay before it is known whether this latest attempt to stop middlemen from cashing in on state controlled pricing in the pharmaceuticals sector can work in the pro-parallel import climate currently favoured by the Commission and the ECJ.

First published in Global Life Sciences, 57 on 1/12/99.