In a landmark judgment1 rendered on June 15, 2016, the Supreme Court allowed an appeal filed by The Manufacturers Association of Israel ("the Association"), but denied that filed by Merck Sharp & Dohme Corp. ("MSD"), thereby determining that MSD's patent term extension ("PTE") for ezetimibe (EZETROL®, marketed in the US under the name ZETIA®), has expired. The judgment has significant importance, both with respect to the constitutionality, as well as to the purposive interpretation of the amendment of the Israeli Patents Law, 1967 back in 2006. Furthermore, the judgment contains important observations concerning the essence of the intellectual property right and its limitations, as well as classifying the pertinent legislation as retroactive, and the implications of such classification.
Since 1998, the Israeli Patents Law allows for extension of the term of certain basic patents for an additional term not exceeding five years beyond the basic 20 year period. However, the mechanism that applies in Israel for calculating PTE is unique. In essence, PTE in Israel is linked to that granted in other reference countries (currently the U.S., Italy, the United Kingdom, Germany, Spain and France) and comprises of the shortest possible term, based on the following principles:
- Shortest Period Principle — calculation of PTE in Israel (in terms of number of days) shall be based on the shortest extension term granted in any of the reference countries; and
- First to Expire Principle — PTE in Israel will expire as soon as the first reference PTE or patent in another reference country expires.
It is further provided in the Patents Law that the overall period of the basic patent and the PTE granted in respect thereof shall terminate no later than 14 years from the date the first registration for marketing purposes is received in a "recognized country". As aforesaid, the additional term will not exceed five years.
In 2005, MSD (then operating as Schering Corporation) obtained a PTE for an Israeli issued patent (IL110956) covering the active substance ezetimibe (EZETROL®/ZETIA®) ("the Israeli PTE"). At that time, the Israel Patent Office ("the ILPTO") did not adhere to the principle of adapting the shortest possible term for PTEs and, therefore, granted dozens of PTEs whose terms were longer than those intended by the legislator.
In 2006, due to this misinterpretation guiding the ILPTO, the legislator amended the Patents Law (Amendment No. 7) and included, among others, a clarification that the shortest possible term must always be selected ("the Amendment"). According to the transitional provision of the Amendment, most of its provisions equally applied to a group of about 50 PTEs that had already been granted prior to enactment of the Amendment, provided that the basic patent on which such PTEs were granted was still in force (hence the relevant PTEs had not yet become operable at that time). In the years following the Amendment, and although its provisions applied to newly-granted PTEs, nothing was done—either by the ILPTO or by the PTE holders themselves—to curtail those 50 odd PTEs.
Based on the Amendment, in 2013, the Association filed motions with the Registrar of Patents ("the Registrar") to curtail the term of a number of Israeli PTEs, which, as noted above, were also subject to the Amendment, including the PTE covering ezetimibe. In its motion, the Association demonstrated that the reference PTE in the U.S. (US RE 37721) had been extended by 497 days and thus, in reliance on the Amendment, asserted that the Israeli PTE, if duly extended by the same period, would expire in January 2016 and not June 2017, as originally granted.
MSD argued in response that the transitional provision of the Amendment is a retrospective denial of property rights, and therefore must be construed as applying only to procedural aspects, without this affecting the term of the Israeli PTE. Alternatively, MSD asserted that the transitional provision must be declared as void, due to its incompatibility with Israel's basic law protecting property rights (i.e., that the transitional provision is unconstitutional). As a further alternative, MSD asserted that the PTE in the U.S. cannot serve as a reference, since it was granted after the grant of the Israeli PTE, and that the term of the Israeli PTE should be calculated accordingly. As a result, MSD argued that the Israeli PTE should expire only in October 2016, based on the first marketing authorization which was obtained in Germany, in October 2002.
In a decision rendered in September 2014, the Registrar rejected all of MSD's arguments and accepted the Association's motion. In essence, the Registrar held that the transitional provision of the Amendment is balanced and accords with the pertinent basic law. The Registrar refused to ignore the U.S. PTE, despite it being granted after the Israeli PTE and, therefore, ruled that the Israeli PTE will expire in January 2016.
In November 2014, MSD appealed the Registrar's decision to the District Court of Jerusalem. In November 2015, the District Court rendered its judgment, dismissing the majority of the appeal (with respect to the construction and constitutionality of the transitional provision of the Amendment), but allowed the appeal with respect to the alternative argument. In its ruling, the District Court noted that taking into account the fact that the reference PTE was granted after grant of the Israeli PTE, curtailing the Israeli PTE on that basis will go against the principle of certainty. Accordingly, the term of the Israeli PTE was once again extended to October 2016.
Both parties filed leaves to appeal the District Court's judgment to the Supreme Court, essentially reiterating their previous positions. The Court allowed the Attorney General to join the proceedings and submit his opinion, which supported reinstatement of the Registrar's decision, i.e., accepting and adopting the Association's position.
After holding an oral hearing, the Supreme Court has now rendered its written judgment, allowing the Association's appeal and denying that filed by MSD. The Court did not find any basis to MSD's assertion that the legislator intended not to consider PTEs granted after grant of the Israeli PTE, inter alia, where the cause for curtailment is based on the "shortest period principle". The Court emphasized the aspects of public health affected by the expiry of patent protection in the pharmaceutical field, as well as the incentives aimed to encourage research and development in said field. The Court also noted that the public interest supports refraining from awarding compensation which exceeds that required to preserve the incentive that was provided prior to enactment of the Amendment. The conclusion in the circumstances of the case is that maintaining the balance between public health and incentivising research and development requires that reference PTEs should be taken into account, regardless of their date of grant.
In this context, the Court found irrelevant MSD's assertion that the principle of "co-termination" must apply, i.e., that the Israeli PTE should expire only at, and no earlier than, the time when the market in a recognized country has opened for competition. Specifically, MSD asserted that adhering to the principle of "co-termination" will provide patentees with a certain amount of certainty with respect to the expected expiry of the patent protection. The Court nonetheless held that although an Israeli PTE will never remain in force after the expiry of the first reference PTE in a recognized country, it is certainly possible that the Israeli PTE will expire before any other reference PTE. In a broader sense, it was explained by the Supreme Court that the principle of certainty—which constituted the ground for the District Court's ruling—was "sacrificed" by the legislator when it balanced the various competing interests. This was done in order to protect the public interest, and not to over-compensate the originator drug manufacturers at the expense of free competition, which is necessary in order to significantly reduce the prices of drugs.
The Supreme Court found that a PTE, whose term is based on the shortest reference PTE amounts, in the eyes of the legislator, to reasonable compensation for the patent holder. Such compensation would therefore encompass both the time invested for getting a specific drug approved by the health authorities, as well as the de facto monopoly term which has been lost due to the availability of a "Bolar" exemption under Israeli law.
With respect to MSD's appeal, it was held that the transitional provision of the Amendment cannot be defined as retroactive or retrospective. The court was uncertain if the financial implications of legislation would be considered as harming one's constitutional property rights. In any event, it was held that even if the transitional provision denies MSD's property rights, such harm was not unlawful.
The Supreme Court analysed the differences between traditional property (i.e., tangible assets), where (unlawful) use of the property by others denies the owner from making use thereof and intellectual property, where unlawful use does not deny the owner the same use but mostly hinders the ability of the proprietor of the IP right to reap and maximise the economic benefits stemming from his right (to exclude others from using his invention, for example).
The Court further noted that, given the fact that patent laws stand in the frontline of technology, those laws must respond promptly to various events and developments, more so than in other intellectual property legislation fields. The Court then stated that the limits of patent rights should therefore be correspondingly dynamic. In light of the above, the Court found that regularization of PTEs is flexible. As opposed to creating a strict irrevocable right, it creates a dynamic right, predisposed to befit certain changes.
The Supreme Court was once again faced with the need to balance between the principle of public health in the sense of access to affordable drugs, and incentivising research and development. The balance was expressed, in this case, in determining the line to be drawn between PTE protection and free competition. The Israeli legislator has been consistent in applying the principle of minimal protection under PTEs, which translates into the guiding rule that the shortest possible term for PTEs must always be selected. The Supreme Court chose to adhere to the principles laid down by the legislator and emphasized that even if the consequence of applying the rule leads to a certain amount of uncertainty among PTE holders, the balance still leans more favourably towards allowing free competition, whose ultimate aim is to improve public health.
As transpires from the important ruling, this landmark decision is expected to have significant implications on both the constitutionality of amendments to the Patents Law, as well as the purposive interpretation of patent legislation in general, and PTEs in particular.
In a broader sense, since the Supreme Court noted that the public interest supports refraining from over-compensating research and development in the pharmaceutical field, it is believed that aspects of public health, affected by the expiry of patent protection in said field, may be given more weight in future cases.
Adv. Tal Band represented The Manufacturers Association of Israel in these proceedings.
 LCA 8127/15, 8263/15 The Manufacturers Association of Israel v. Merck Sharp & Dohme Corp. et al. (15.6.2016).
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