Striking a balance

JulyAug17pg32-33[2017] EWCA Civ 226, Flynn Pharma Ltd v DrugsRus Ltd and Another, Court of Appeal, 6th April 2017

A parallel importer of pharmaceuticals was on the wrong side of the tipping point, writes Joel Smith

Key points

• Trade mark enforcement can be used to prevent parallel imports, so long as this is not a disguised restriction on interstate trade

• Trade mark owners can enforce their marks against imported goods that they did not place on the market and over which they have no control, even where the imported goods are identical goods produced by the same manufacturer

How should a balance be struck between a trade mark owner’s ability to enforce its rights and the fundamental principle of free movement of goods? This recent case touched on how such important, yet seemingly contradictory, provisions can coexist and applied the law in detail to an unusual pharmaceutical fact pattern.

The case concerned the import of phenytoin sodium, an anti-epileptic drug, into the UK. Before 2012, phenytoin sodium was supplied in the UK by Pfizer under its brand name, Epanutin. In early 2012, Pfizer transferred its UK marketing authorisations for phenytoin sodium to Flynn Pharma Ltd, the Respondent. Flynn had no prior connection with Epanutin, and its intention was to “genericise” phenytoin sodium, removing the brand name Epanutin to escape the strict pricing controls that applied to Pfizer’s product.

The Medicines and Healthcare Products Regulatory Agency (MHRA) told Flynn that it should call its product “Phenytoin Sodium Flynn”. The MHRA preferred this name to “phenytoin sodium” (Flynn’s initial suggestion), because the latter would make it difficult to distinguish between products from different sources. Epilepsy patients stabilised on one product are recommended to continue using exactly the same product, because phenytoin sodium only works within a narrow range of blood levels (outside which it is ineffective or toxic).

After the MHRA’s decision, Flynn applied for Community and UK registered trade marks for FLYNN. It then launched Phenytoin Sodium Flynn in September 2012, and Pfizer stopped selling Epanutin capsules in the UK shortly afterwards. The drug’s price then rose more than twentyfold.

The Appellants, DrugsRus and Tenolol (collectively, DrugsRus) started importing phenytoin sodium from Spain, from the same ultimate source as Flynn, under the brand name Epanutin. However, this was problematic – pharmacists could not use Epanutin to fill prescriptions written for Phenytoin Sodium Flynn, which accounted for between seven and nine per cent of the market. DrugsRus therefore applied to market its product as “phenytoin sodium”. For the same reasons as before, the MHRA objected, saying that DrugsRus should market its product as Phenytoin Sodium Flynn or Epanutin.

Appeal basis

In this appeal, DrugsRus was contesting a first-instance decision that selling parallel imports of the Epanutin product under the name “Phenytoin Sodium Flynn” amounted to trade mark infringement. DrugsRus argued that this was contrary to the provisions allowing for free movement of goods between EU Member States. The fact that both Flynn and DrugsRus were primarily seeking to use the mark to indicate that their products were the same as Epanutin (the so-called “Epanutin connection”) was an unusual and potentially complicating factor.

Free movement

Article 34 of the Treaty on the Functioning of the European Union (TFEU) provides for the free movement of goods between EU Member States. However, Article 36 says that prohibitions or restrictions on imports can be justified on the grounds of protecting industrial and commercial property (including trade marks), so long as they do not constitute a means of arbitrary discrimination or a disguised restriction on trade between Member States. In other words, trade mark enforcement can be used to prevent parallel imports, so long as this is not a disguised restriction on interstate trade.

But what is a disguised restriction, and how can it be distinguished from justified trade mark enforcement? The Court of Appeal said that resolving these questions involves a dual enquiry:

1. Were the goods that the parallel importer wished to import placed on the market by the trade mark owner, or with its consent, or in such a way that the trade mark owner had the opportunity to control their quality?

2. If the answer is “no”, was the party that placed the goods on the market under a trade mark also the party in effective control of the trade mark being enforced? If the answer to this question is also “no”, the Court of Appeal said it would find it difficult to see how the enforcement of the trade mark is anything other than justified (though it would not entirely rule it out).

In this case, the answer to both questions was “no”. Therefore, the enforcement of the trade mark by Flynn against DrugsRus did not amount to a disguised restriction on trade between Member States.

Court reasoning

The Court of Appeal reasoned as follows:

1. The goods were placed on the market by Pfizer, not Flynn. The commercial agreements between Flynn and Pfizer did not give Flynn power to control the quality of the goods placed on the market by Pfizer. The fact that the DrugsRus and Flynn products were from the same ultimate source did not mean that Flynn had given its consent to Pfizer’s marketing, nor that Flynn had control over quality.

2. Pfizer was not in effective control of Flynn’s use of the trade mark. Flynn’s use of the trade mark was constrained (in that Flynn could not alter the product or use an alternative supplied without considerable effort and expenditure), but this was not significant. Flynn was ultimately free to use an alternative source or manufacture the drug in-house if it chose to.

If the answer to either of the questions above had been “yes”, free movement (and DrugsRus) may have prevailed. Striking the right balance would then have come down to whether DrugsRus complied with the five “BMS conditions”. In this case, the question would have been whether it was necessary for DrugsRus to rebrand its product to gain effective access to the market. It was here that the Epanutin connection may have been relevant. However, DrugsRus’s attempt to rely on the Epanutin connection to establish a prima facie right to import the goods was, in the Court of Appeal’s judgment, “to put the cart before the horse”.

Although Flynn’s pricing strategy was hovering above this case, the Court of Appeal did not consider it relevant to whether the trade mark was being used to create a disguised restriction. Flynn’s pricing strategy was the subject of separate proceedings involving the Competition and Markets Authority and the Competition Appeals Tribunal.

Confirmation

This case presented a detailed analysis of the scope of Article 36 TFEU and a very useful summary of the case law in this area. It confirmed that trade mark owners can enforce their marks against imported goods that they did not place on the market and over which they have no control, even where the imported goods are identical goods produced by the same manufacturer. However, DrugsRus has indicated that it intends to seek permission to appeal to the Supreme Court – so watch this space.

Joel Smith is Head of IP, UK and a Partner at Herbert Smith Freehills

Emily Bottle, an Associate at Herbert Smith Freehills, co-authored this article.