International Trade In Pharmaceuticals — Is Online Out Of Line?

Article by Jack Quinn and Prakash Narayanan, ©2006, Blake, Cassels & Graydon LLP

Originally published in Blakes Bulletin on International Trade

The global market for pharmaceuticals is estimated to be in the range of USD 650 billion in 2006, of which the U.S. market alone accounts for about 47% (USD 300 billion). It is no surprise, then, that companies are adopting a new method of entering this market. One recent phenomenon has been the rise of online cross-border pharmacies. Online cross-border pharmacies accept pharmaceutical orders from U.S. customers over the Internet, fill out the orders with drugs sourced in Canada and mail the drugs to the recipient in the U.S. Such sales reached about CAD 507 million as of June 2005.

Online cross-border pharmacies have given rise to a number of legal issues relating to international trade, competition/antitrust law and intellectual property law. Their development has given rise to some ethical issues as well. This article provides a brief overview of the controversy surrounding online cross-border pharmacies and focuses on some of the international trade law issues that arise.

Online cross-border pharmacies fulfill the demand in the U.S. for lower-priced drugs. This opportunity for arbitrage arises from the fundamental difference in how the health care system operates in the U.S. and Canada. As a result of the differences in the health system and other factors, such as the greater ability of U.S. consumers to pay higher prices, prices for the top-selling brand name drugs are on average 43% lower in Canada than in the U.S. and comprise a significant portion of the online pharmaceutical imports from Canada. At the same time, prices for top-selling generic drugs are 78% higher in Canada than in the U.S. This suggests that there should not be any sales from Canada to the U.S. of generic drugs. However, this component of the online cross-border sales of pharmaceuticals has been rising, and can be attributed to a number of drugs, still protected by patents in the U.S., already available in the generic market in Canada. Different stakeholders from both sides of the border have their own approaches. For instance, the Canadian government’s main concern has been that increased diversion of Canada’s drug supply to the U.S. may leave Canada with drug shortages. This is also the position adopted by Canada’s brand name drug manufacturers. The Canadian pharmaceutical industry has advocated both public regulations and privately-imposed restrictions on online cross-border trade in pharmaceutical products.

On the other side of the border, the U.S. federal government, through the Food and Drug Administration (FDA) opposes the cross-border trade in pharmaceuticals, arguing that the practice is both unsafe and illegal. The FDA’s position is that drugs imported from Canada violate the Food, Drug and Cosmetic Act (FDCA) because they are unapproved new drugs, labelled incorrectly or dispensed without a valid prescription. At the same time, a number of local governments have made repeated attempts to import pharmaceuticals from Canada by seeking a waiver under the Medicare Prescription Drug Improvement and Modernization Act (MMA). The MMA, which was signed into law in December 2003, among other things, amends the FDCA to require that regulations be issued to permit wholesalers and pharmacists to import prescription drugs from Canada into the U.S.

Most recently, the FDA denied the State of Washington’s application requesting a waiver under the MMA to allow licensure of Canadian pharmacies and wholesalers by the Washington State Board of Pharmacy. Currently, both the brand name pharmaceutical companies and the generic manufacturers in the U.S. oppose the importation of drugs from Canada.

The WTO agreements of relevance here are the General Agreement on Tariffs and Trade (GATT), the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) and the Agreement on Technical Barriers to Trade (TBT). Two of the key principles reflected in the WTO agreements are:

• Most-favoured-nation (MFN) obligation – any benefit afforded by a country to one trading partner must be extended to all other trading partners.

• National treatment obligation – countries must treat imported and locally-produced goods equally in terms of competitive opportunities in the importing country.

These principles indicate that the U.S. cannot impose restrictions or conditions targeted to imports of pharmaceutical products from Canada. However, these WTO obligations are subject to certain specific exemptions that permit countries to impose measures for the protection of human, animal or plant health. Measures imposed by the U.S. against pharmaceutical products imported from Canada could be justified under these exemptions.

Another aspect to consider is whether the Canadian government can be required to prevent the export of pharmaceuticals to the U.S. TRIPS requires countries to provide patent protection that confers on the patent owner the exclusive right to prevent third parties from importing patented products without the permission of the patent owner. This means that the U.S. has the right to exclude imports of products that infringe U.S. patent laws. However, TRIPS does not require the exporting country (Canada) to enact laws that prevent exportation of products that might infringe U.S. intellectual property (IP) laws.

Canada and the U.S. are also parties to the North American Free Trade Agreement (NAFTA) which incorporates the principle of "national treatment" in relation to patent rights. However, similar to the WTO agreements, NAFTA also provides for exceptions when necessary to protect human health. NAFTA requires contracting parties to provide patent protection that confers on the patent owner the right to prevent others from making, using or selling the subject matter of the patent without the patent owner’s consent. Based on this provision, while NAFTA permits the U.S. to adopt measures to prevent the importation of infringing products, it does not require Canada to adopt measures to prevent the exportation of products that may infringe U.S. IP laws.

However, there are other trade treaty provisions that could be invoked to argue that Canada has an obligation to prevent the export of prescription drugs when it is aware that importation of these pharmaceuticals into the U.S. violates U.S. laws. For instance, under Art. 1714 of NAFTA, it could be argued that Canada’s failure to prevent such exports denies U.S. pharmaceutical companies "effective action" against infringement of U.S. IP laws and also, under Annex 2004, that it results in the benefits that the U.S. could reasonably have expected to accrue being "nullified or impaired". One counter argument to consider is whether Canada’s policy of inaction amounts to the "application of a measure that is not inconsistent with this Agreement".

Similarly, the WTO agreements contain provisions which permit a contracting party who considers that any benefit accruing to it directly or indirectly under those treaties is being nullified or impaired to commence dispute settlement actions (see Art. 23, GATT; Art. 64, TRIPS; Art. 14.1, TBT; Art. 3(B), DSU). In fact, these WTO agreements arguably go further than NAFTA in this regard since they also cover situations where a contracting party has been prevented from the "attainment of any objective" of the relevant agreement.

A case could be made under international trade law that Canada is obliged to take some action to regulate online cross-border pharmacies. At the same time, there are serious arguments that there is no legal obligation to do so. Cross-border online pharmacies that supply U.S. customers with cheaper pharmaceuticals are likely to continue to operate and remain popular while there remains some political support in the U.S. for their activities from state and city governments and until the legal regimes on both sides of the border are harmonized. The differing stand-points of the various players and the varied legal issues that arise make this an interesting aspect of cross-border trade to watch.

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