Parallel Imports - Flynn Pharma Ltd v Drugsrus Ltd

One of the fundamental principles of the European Union is that it "shall comprise a customs union which shall cover all trade in goods and which shall involve the prohibition between Member States of customs duties on imports and exports and of all charges having equivalent effect, and the adoption of a common customs tariff in their relations with third countries" (art 28 (1) of the Treaty on the Functioning of the European Union ("TFEU"). Art 34 of the TFEU further provides:

"Quantitative restrictions on imports and all measures having equivalent effect shall be prohibited between Member States."

However, this is subject to the following exception provided by art 36:

"The provisions of Articles 34 and 35 shall not preclude prohibitions or restrictions on imports, exports or goods in transit justified on grounds of public morality, public policy or public security; the protection of health and life of humans, animals or plants; the protection of national treasures possessing artistic, historic or archaeological value; or the protection of industrial and commercial property. Such prohibitions or restrictions shall not, however, constitute a means of arbitrary discrimination or a disguised restriction on trade between Member States."

These articles have been considered by the Court of Justice of the European Union and its predecessor the European Court of Justice in numerous cases.

In conjoined Cases C-427-93, C-429/93 and C-436/93 Bristol-Myers Squibb v Paranova A/S [1996] ETMR 1, [1997] 1 CMLR 1151, [1996] ECR I-3457, [1996] EUECJ C-427/93, [2003] Ch 75, [1997] FSR 102, [2002] 3 WLR 1746, (1997) 34 BMLR 59, [1996] CEC 716, the Court held:

"it is established that reliance on trade mark rights by the owner in order to oppose the marketing of repackaged products under that trade mark would contribute to the artificial partitioning of the markets between Member States; such is the case, in particular, where the owner has put an identical pharmaceutical product on the market in several Member States in various forms of packaging, and the repackaging carried out by the importer is necessary in order to market the product in the Member State of importation, and is carried out in such conditions that the original condition of the product cannot be affected by it; that condition does not, however, imply that it must be established that the trade mark owner deliberately sought to partition the markets between Member States; "

So far so good. But what happens when the Medicines and Healthcare Products Regulatory Agency ('MHRA'), the medicines licensing authority for the United Kingdom, insists on the use of a brand name as a condition the sale of a generic pharmaceutical product in the UK even though the product is sold in the rest of the European Union under a different name? That was the issue that Mrs Justice Rose had to decide in Flynn Pharma Ltd v Drugsrus Ltd and another [2015] EWHC 2759 (Ch) (6 Oct 2015).

In that action the claimant Flynn Pharma Ltd. ("Flynn") sought an injunction to restrain Drugsrus Ltd. ("Drugsrus") and Tenolol Ltd. ("Tenelol") from importing from Ireland a drug used in the treatment of epilepsy and other disorders that had previously been marketed by Pfizer in the UK under the mark Epanutin and was still marketed in the rest of the EU under that sign and selling it in the UK under the mark 'Phenytoin Sodium Flynn' which was the sign that the MHRA required Flynn to use as a condition of its licence to sell Epanutin in the UK. Flynn's cause of action was infringement of the trade mark FLYNN which that company applied to register for pharmaceutical and medical preparations and substances etc. on 3 Aug 2012 - approximately the time that Flynn was concluding negotiations with Pfizer and the MHRA for the right to sell Epanutin in the UK.

To understand this case it is necessary to know that Flynn is a speciality pharmaceutical company trading in both generic medicines and speciality brands that has never operated as a research-based pharmaceutical company but works at the 'mature end' of the market, selling branded products once the patent on the product has expired. It acquires the rights to branded products from research-based pharmaceutical companies and promotes and sells them under the Flynn brand. One of its directors described its business as follows:

"Flynn has traditionally looked to 'rescue' such product lines. They are the tail end products that the major pharmaceutical companies no longer have in their focus; they are not core to their business. There is still a role for these products though and doctors and patients will still be relying on them. They do not want that product to disappear from the market, so that is really our role. We look for products that we can acquire the rights to, or enter into some kind of commercial deal, to ensure continuity of supply into the market. Obviously as part of that we make a margin."

One of these tail end products was Epanutin (also known as phenytoin sodium). It was described by one of the claimant's witnesses as

"never the drug of choice for all epilepsies but it was a preferred agent for some epilepsies in the past. However, as newer agents have come to the market with improved efficacy, fewer contra-indications (side effects) and/or better safety profiles, the place for Phenytoin Sodium in therapy has declined such that it is no longer the drug of first choice for any seizure type - it is not even the drug of second choice. It is considered as a tertiary or an adjunctive agent in some patients in whom perhaps the initial first approach and backup approach do not provide adequate control. One can look at the sales data by volume over the last five or ten years and generally you will see a decline in the sales of phenytoin sodium of approximately 5% per year."

Because of an agreement between The Association of the British Pharmaceutical Industry and the Department of Health there are limits to the price at which branded products can be sold in the UK. However, there are no controls on the price of generic products.  Because of that agreement Pfizer could not make much money out of selling Epanutin in the UK. One of the bizarre consequences of the expiry of the patent was that the price of the drug rocketed from £3 per bottle of 84 100 mg capsules to £66.50. After a lot of complaints and adverse comment Flynn eventually agreed to reduce the price of the bottle to £54.

In 2012 Flynn obtained a licence from Pfizer to sell such capsules in 2012 and applied to the MHRA for the right to sell them as phenytoin sodium. The MHRA refused to allow Flynn to use that description but offered to let that company sell the product as Phenytoin Sodium Flynn. The reason for the MHRA's insistence on the insertion of the word FLYNN was that phenytoin sodium is available in several forms. The addition of that word was intended to ensure precision in the writing of prescriptions by doctors and the supply of the right version  of the medicine by pharmacists.

The defendants were established in about 1997 by one Naresh Shah and his wife to trade in parallel imported pharmaceutical products. Tenelol applies for, holds and maintains product licences for parallel imports. Drugsrus is as a wholesaler of pharmaceutical products which imports and sells parallel imported drugs using licences held by Tenolol. Drugsrus has a wholesale dealer's licence and has satisfied the stringent criteria applicable in relation to the storage, distribution, tracking and management of pharmaceutical products. The defendants employ about 80 people including four pharmacists and three regulatory staff responsible for parallel import licence applications and for maintaining the product licences. Tenelol holds about 900 licences making it one of the bigger parallel import licence holders in the UK market. Parallel imports account about 80 per cent of the defendants' turnover.

Drugsrus and Tenelol found a supply of Epautin that had been manufactured by Pfizer in Ireland but the decision of the MHRA to require Flynn to market phenytoin sodium capsules as Phenytoin Sodium Flynn presented them with two problems which the judge acknowledged at paragraph [32] of her judgment:

"The first was that pharmacists would not be able to use that product to fulfil prescriptions written for 'Phenytoin Sodium Flynn' but only where prescriptions were written for 'Epanutin' or for the INN 'phenytoin sodium'. The second problem was that the Defendants could not, as parallel importers, guarantee the continued supply of Epanutin capsules. If customers were to source Epanutin from them (or Epanutin described by some other brand name of their choosing) there would be a danger that on any given day they would not have any available. Apart from other parallel importers (who may also have no supply on any particular day), there is no source of Epanutin capsules in the UK. That is why they want to be able to label their product Phenytoin Sodium Flynn when they import it into the UK."

Flynn responded by bringing these proceedings.

Flynn sued Drugsrus and Tenelol for trade mark infringement under s.10 (1) of the Trade Marks Act 1994. The defendants relied on s.11 (2) (b) and art 34 of the TFEU citing Bristol-Myers-Squibb in support. Her Ladyship held that neither defence availed the defendants and found for the claimants.

In her view, the problem with the s.11 (2) (b) defence was that:

"The use of the word 'FLYNN' is not a description of the goods. It is not a word associated with medicines or ingredients or otherwise denoting the qualities or characteristics of the medicine. It will be perceived by consumers as a mark of origin because there is no evidence that consumers will interpret the sign in the way the Defendants suggest, namely as an indication of the source of the API or the site of the manufacture of the product. They will interpret it as being an indication of the holder of the marketing authorisation of the product and therefore as indicating that the product originates with Flynn Pharma as being the entity responsible for the quality of the goods. That is clearly a trade mark use of the sign."

She continued that the difficulty could not be cured by a disclaimer partly because the disclaimer was not strictly accurate but also because the European Court had rejected that defence in  Case 206/01 Arsenal Football Club v Matthew Reed [2002] ECR I-10099.

As for the art 34 point the judge analysed Bristol-Myers-Squibb and subsequent cases on parallel imports in considerable detail and concluded that the exhaustion of rights defence is available only when the same or a connected entity markets the same goods under the same or similar trade mark in different member states of the EU. She said at paragraph [78]:

"Having considered the agreements between Pfizer and Flynn Pharma, it would not be right to say that the owner of the right in the importing State is, directly or indirectly, able to determine the products to which the trade mark may be affixed in the exporting State and to control their quality. I therefore hold that Flynn Pharma's trade mark rights in the name Phenytoin Sodium Flynn are not exhausted in respect of packages of Epanutin placed on the market in other Member States. Flynn Pharma is therefore entitled to prevent the relabelling of the parallel imported product by the Defendants."

The upshot of Mrs Justice Rose's decision is that a distributor of generic medicines now enjoys  a tighter monopoly in perpetuity of the supply of a "tertiary or an adjunctive agent" than was ever enjoyed by the patentee which developed the drug in the first place. Moreover, because the drug is treated as a generic rather than a branded product Flynn can now sell that product at 18 times the price that Pfizer could have sold it. The decision may well be right but intellectual property and competition law were never intended to work like that. Perhaps there will be an appeal. Perhaps not. But whatever the happens there needs to be a change in the law whether brought about by the courts or legislature.

Should anyone wish to discuss this fascinating case with me or trade mark law, competition law or parallel imports in general, he or she should call me on 020 7404 5252 during office hours or send me a message through my contact form.