 United States Court of Appeals for the Federal Circuit

                                      2006-1593

                  BIOTECHNOLOGY INDUSTRY ORGANIZATION,

                                                      Plaintiff-Appellee,

                                          and

      PHARMACEUTICAL RESEARCH AND MANUFACTURERS OF AMERICA,

                                                      Plaintiff-Appellee,

                                           v.

                            DISTRICT OF COLUMBIA,
           Adrian M. Fenty, MAYOR OF THE DISTRICT OF COLUMBIA,
   OFFICE OF THE ATTORNEY GENERAL FOR THE DISTRICT OF COLUMBIA,
   Robert Spagnoletti, ATTORNEY GENERAL OF THE DISTRICT OF COLUMBIA,
          OFFICE OF DOCUMENTS AND ADMINISTRATIVE ISSUANCES
                        OF THE DISTRICT OF COLUMBIA,
     Arnold R. Finlayson, ADMINISTRATOR, OFFICE OF DOCUMENTS AND
       ADMINISTRATIVE ISSUANCES OF THE DISTRICT OF COLUMBIA,

                                                      Defendants-Appellants.

       David W. Ogden, Wilmer Cutler Pickering Hale and Dorr LLP, of Washington,
DC, argued for all plaintiffs-appellees. With him on the brief for Pharmaceutical
Research and Manufacturers of America were Randolph D. Moss, Anne K. Small,
Catherine M.A. Carroll, and Thomas G. Saunders. On the brief for Biotechnology
Industry Organization were Daniel E. Troy and Eric A. Shumsky, Sidley Austin LLP, of
Washington, DC.

        William J. Earl, Assistant Attorney General, Office of Attorney General for the
District of Columbia, of Washington, DC, argued for defendants-appellants. With him on
the brief were Linda Singer, Acting Attorney General, District of Columbia, Todd S. Kim,
Solicitor General, and Edward E. Schwab, Deputy Solicitor General.

       Sean M. Fiil-Flynn, Program on Information Justice and Intellectual Property,
Washington College of Law, American University, of Washington, DC, for amici curiae,
National Legislative Association on Prescription Drug Prices, et al. With him on the
brief was Joshua D. Sarnoff, Glushko-Samuelson Intellectual Property Law Clinic.
       Jeffrey L. Handwerker, Arnold & Porter LLP, of Washington, DC, for amicus
curiae The AIDS Institute. With him on the brief was Matthew H. Solomson.

       Richard A. Samp, Washington Legal Foundation, of Washington, DC, for amici
curiae Washington Legal Foundation, et al. With him on the brief was Daniel J. Popeo.

Appealed from: United States District Court for the District of Columbia

Judge Richard J. Leon
 United States Court of Appeals for the Federal Circuit

                                        2006-1593

                   BIOTECHNOLOGY INDUSTRY ORGANIZATION,

                                                        Plaintiff-Appellee,

                                            and

      PHARMACEUTICAL RESEARCH AND MANUFACTURERS OF AMERICA,

                                                        Plaintiff-Appellee,

                                             v.

                             DISTRICT OF COLUMBIA,
            Adrian M. Fenty, MAYOR OF THE DISTRICT OF COLUMBIA,
    OFFICE OF THE ATTORNEY GENERAL FOR THE DISTRICT OF COLUMBIA,
    Robert Spagnoletti, ATTORNEY GENERAL OF THE DISTRICT OF COLUMBIA,
           OFFICE OF DOCUMENTS AND ADMINISTRATIVE ISSUANCES
                         OF THE DISTRICT OF COLUMBIA,
      Arnold R. Finlayson, ADMINISTRATOR, OFFICE OF DOCUMENTS AND
        ADMINISTRATIVE ISSUANCES OF THE DISTRICT OF COLUMBIA,

                                                        Defendants-Appellants.

                            __________________________

                              DECIDED: August 1, 2007
                            __________________________

Before BRYSON, Circuit Judge, PLAGER, Senior Circuit Judge, and GAJARSA, Circuit
Judge.

GAJARSA, Circuit Judge.

       This is a pre-enforcement challenge to a statute of the District of Columbia,

before this court after transfer from the United States Court of Appeals for the District of

Columbia Circuit. Defendants, the District of Columbia and various of its departments

and officers (collectively, “the District” or “D.C.”), appeal from a judgment of the United
States District Court for the District of Columbia declaring the District’s Prescription

Drug Excessive Pricing Act of 2005, codified at D.C. Code § 28-4551 to 28-4555 (“the

Act”), preempted by the federal patent laws and enjoining its enforcement. We affirm

the judgment of the district court and the injunction.

                                  I.     BACKGROUND

A.     The challenged legislation

       The D.C. City Council has adopted specific legislation which prohibits any

patented drug from being sold in the District for an excessive price. The operative

section of the Excessive Pricing Act reads:

       It shall be unlawful for any drug manufacturer or licensee thereof,
       excluding a point of sale retail seller, to sell or supply for sale or impose
       minimum resale requirements for a patented prescription drug that results
       in the prescription drug being sold in the District for an excessive price.

D.C. Code § 28-4553. The legislation was adopted after the Council determined that:

       The excessive prices of prescription drugs in the District of Columbia is
       threatening the health and welfare of the residents of the District as well
       as the District government’s ability to ensure that all residents receive the
       health care they need, and these excessive prices directly and indirectly
       cause economic harm to the District and damage the health and safety of
       its residents. . . . [I]t is incumbent on the government of the District of
       Columbia to take action to restrain the excessive prices of prescription
       drugs.

Id. § 28-4551. The Council’s response to that finding was passage of the challenged

legislation.   Following signature by the Mayor and the expiration of the statutorily

prescribed period for Congress to review D.C. statutes, see D.C. Code § 1-206.02(c)(1),

the Act took effect on December 10, 2005. The statutory term “excessive price” is not

specifically defined. The statute states that “[a] prima facie case of excessive pricing

shall be established where the wholesale price of a patented prescription drug in the

District is over 30% higher than the comparable price in any high income country in


2006-1593                                     2
which the product is protected by patents or other exclusive marketing rights.”        Id.

§ 28-4554(a). If such prima facie excessive pricing is shown, the burden shifts to the

defendant to prove:

      that a given prescription drug is not excessively priced given
      demonstrated costs of invention, development and production of the
      prescription drug, global sales and profits to date, consideration of any
      government funded research that supported the development of the drug,
      and the impact of price on access to the prescription drug by residents
      and the government of the District of Columbia.

Id. § 28-4554(b). A “high income countr[y]” is defined as one of “the United Kingdom,

Germany, Canada, or Australia.” Id. § 28-4552(2). The Act provides for both public and

private enforcement: “Any affected party, including the District of Columbia, shall have

standing to file a civil suit in a court of competent jurisdiction for a violation of this

chapter and to seek a remedy, including declaratory and injunctive relief.”

Id. § 28-4555(a).   The term “affected party” is itself broadly defined as “any person

directly or indirectly affected by excessive prices of patented prescription drugs,

including any organization representing such persons or any person or organization

representing the public interest.” Id. § 28-4552(1). The Act provides for a wide array of

remedies:

      (1) Temporary, preliminary, or permanent injunctions to enjoin the sales of
      prescription drugs in the District at excessive prices;
      (2) Appropriate fines for each violation;
      (3) Damages, including treble damages;
      (4) Reasonable attorney’s fees;
      (5) The cost of litigation; or
      (6) Any other relief the court deems proper.

Id. § 28-4555(b).




2006-1593                                   3
B.       Procedural history

         On October 12, 2005, plaintiff Pharmaceutical Research and Manufacturers of

America (“PhRMA”) filed suit in the United States District Court for the District of

Columbia, alleging that the Act was invalid in light of the Commerce Clause of the

Constitution and that it was preempted by the federal patent laws. Fifteen days later,

plaintiff Biotechnology Industry Organization (“BIO”) filed a similar suit. Both plaintiffs

are industry organizations whose membership includes manufacturers of patented

pharmaceuticals. The district court consolidated the two actions, heard oral argument,

and on December 22, 2005 issued an opinion and order finding the Act to be preempted

by the patent laws and enjoining its enforcement. Pharm. Research & Mfrs. of Am. v.

District of Columbia, 406 F. Supp. 2d 56 (D.D.C. 2005).

         The district court concluded that the plaintiffs had established their standing since

they represented members who complained of “realistic and imminent” injuries. Id. at

62-63.     Noting that “Congress’ regulation of our nation’s pharmaceutical industry is

grounded in large part in a complex balance of economic forces and regulatory

exclusivity designed to encourage and reward the innovation, research, and

development of new drugs,” id. at 65, the district court concluded that the Act did not

“square with the congressional purpose and objectives” of the patent laws, id. at 66.

Accordingly, the district court found that “the D.C. Act is preempted and therefore

facially unconstitutional.” Id. at 67. It also found that the Commerce Clause of the

Constitution invalidated the Act as applied to transactions between parties not located

within the District’s borders, id. at 71, a conclusion which the District does not appeal.

Finally, the district court rejected the plaintiffs’ claim that the Foreign Commerce Clause




2006-1593                                      4
of the Constitution facially preempted the Act as a whole, finding it valid only “to the

extent that future plaintiffs are able to establish a prima facie case to the satisfaction of

a Superior Court judge without any reference to the wholesale price of the same drug in

any foreign country.” Id. at 72.

       The District timely appealed to the United States Court of Appeals for the District

of Columbia Circuit. On August 23, 2006, that court granted the District’s unopposed

motion to transfer the case to the Federal Circuit.

                                   II.    DISCUSSION

A.     Statutory subject matter jurisdiction

       Any appeal taken to a federal appeals court must be within its jurisdiction.

Because this case does not pose the typical questions of patent law—infringement,

validity, enforceability, and the like—which this court normally reviews under our

jurisdictional statute (28 U.S.C. § 1295), and because the parties’ briefing on our

jurisdiction was limited, we raised the issue of whether our statutory grant of jurisdiction

encompasses this case sua sponte at oral argument. See Bender v. Williamsport Area

Sch. Dist., 475 U.S. 534, 541 (1986) (“Federal courts are not courts of general

jurisdiction; they have only the power that is authorized by Article III of the Constitution

and the statutes enacted by Congress pursuant thereto. For that reason, every federal

appellate court has a special obligation to satisfy itself . . . of its own jurisdiction.”

(citation omitted)).

       This court has exclusive jurisdiction to review cases which arise under the patent

laws. Christianson v. Colt Indus. Operating Corp., 486 U.S. 800, 807 (1988). Our

jurisdiction is created and constrained by statute.      Congress has granted this court




2006-1593                                      5
“exclusive jurisdiction . . . of an appeal from a final decision of a district court of the

United States . . . if the jurisdiction of that court was based, in whole or in part, on [28

U.S.C. § 1338],” with exceptions not applicable here. 28 U.S.C. § 1295(a)(1). Section

1338 vests district courts with “original jurisdiction of any civil action arising under any

Act of Congress relating to patents.”      Thus, we have jurisdiction if and only if the

plaintiffs’ preemption claim is one “arising under” the patent laws, under the meaning of

that phrase in § 1338.

       The Supreme Court, resolving a jurisdictional dispute between this court and a

sister Circuit, has held that:

       [Section] 1338(a) jurisdiction . . . extend[s] only to those cases in which a
       well-pleaded complaint establishes either that federal patent law creates
       the cause of action or that the plaintiff’s right to relief necessarily depends
       on resolution of a substantial question of federal patent law, in that patent
       law is a necessary element of one of the well-pleaded claims.

Christianson, 486 U.S. at 808-09. Patent law does not “create” the plaintiffs’ cause of

action here, because there is no language in the patent statute explicitly authorizing

preemption claims.       The absence of lawsuit-enabling language does not end the

jurisdictional inquiry, though, since patent law may be a “necessary element” of an

action authorized under some other provision.

       Patent law is indeed a necessary element of the claim here. If the plaintiffs are

able to show that the patent laws preempt the Act, the Act will be declared

unenforceable and enjoined, but if they cannot, their preemption claim will fail and their

members may be required to defend against suits under the Act. In other words, “some

right or privilege will be defeated by one construction, or sustained by the opposite

construction of [the patent] laws.” Id. at 807-08 (quoting Pratt v. Paris Gas Light & Coke

Co., 168 U.S. 255, 259 (1897)).


2006-1593                                    6
       Two prior cases of this court confirm that in certain circumstances patent law

may be a “necessary element” of an otherwise nonpatent claim. In Hunter Douglas,

Inc. v. Harmonic Design, Inc., 153 F.3d 1318 (1998), overruled en banc on other

grounds, Midwest Indus., Inc. v. Karavan Trailers, Inc., 175 F.3d 1356, 1358-59 (Fed.

Cir. 1999), we addressed our jurisdiction over a California state-law claim for injurious

falsehood.   The plaintiff alleged that the defendant patentee had claimed to hold

exclusive rights in certain patents with “willful and wanton disregard” for the fact that the

patent claims at issue were invalid and unenforceable. Id. at 1322. Since proof of a

false statement was a necessary element of the state-law tort and in this case the

statement’s truth or falsity turned on the resolution of a patent issue, we held the claim

to arise under the patent laws.        Id. at 1329.     Likewise, in Additive Controls &

Measurement Systems, Inc. v. Flowdata, Inc., 986 F.2d 476, 478 (Fed. Cir. 1993), we

held that a Texas business disparagement claim arose under the patent laws where the

alleged false statement was the defendant’s claim that the plaintiff infringed its patent.

In Hunter Douglas and Additive Controls, state tort law created the cause of action, but

the pleadings at issue required patent-law questions to be resolved. The same analysis

applies here: though the plaintiffs’ claim is created by principles of supremacy law, its

resolution necessarily requires us to construe the patent statutes.

       In an “arising under” analysis, the focus must remain on the well-pleaded

complaint.   A claim does not arise under the patent laws merely if a patent issue

appears in a defense to that claim, Thompson v. Microsoft Corp., 471 F.3d 1288, 1292

(Fed. Cir. 2006), or if the claim is asserted in the defendant’s answer as a counterclaim,

Holmes Group, Inc. v. Vornado Air Circulation Sys., 535 U.S. 826, 831 (2002). Here,




2006-1593                                    7
the preemption issue is raised in the plaintiffs’ complaint.         However, we noted in

Speedco, Inc. v. Estes that “we determine whether federal court jurisdiction exists in a

case seeking a declaratory judgment by applying the well-pleaded complaint rule not to

the declaratory judgment complaint, but to the action that the declaratory defendant

would have brought.”      853 F.2d 909, 912 (Fed. Cir. 1988).         Speedco cited to the

Supreme Court’s decision in Franchise Tax Board v. Construction Laborers Vacation

Trust for Southern California, 463 U.S. 1, 16 (1983), for the proposition that “if, but for

the availability of the declaratory judgment procedure, the federal claim would arise only

as a defense to a state created action, jurisdiction is lacking.” (internal citations omitted).

If we were to follow the mirroring rule laid down in Speedco and consider the

hypothetical action that might be brought by the District against one or more of the

plaintiffs’ members, the relevant complaint would be one requesting relief under the

challenged Act. The issue of preemption by the patent laws would appear, if at all, only

as a defense in the answer to that complaint. Such an action would not arise under the

patent laws, and this court would not be the correct forum to decide this appeal.

       However, the Supreme Court has expressly distinguished Franchise Tax Board

as to cases where the plaintiff seeks to enjoin enforcement of the allegedly preempted

provision:

       The Court's decision today in Franchise Tax Board . . . does not call into
       question the lower [federal] courts’ jurisdiction to decide these cases. . . .
       A plaintiff who seeks injunctive relief from state regulation, on the ground
       that such regulation is pre-empted by a federal statute which, by virtue of
       the Supremacy Clause of the Constitution, must prevail, thus presents a
       federal question which the federal courts have jurisdiction under 28 U.S.C.
       § 1331 to resolve.

Shaw v. Delta Air Lines, Inc., 463 U.S. 85, 96 n.14 (1983). The phrase “arising under”

has the same meaning in § 1338 as it does in § 1331, the general federal-question


2006-1593                                     8
provision. Vornado, 535 U.S. at 829-30 (citing Christianson, 486 U.S. at 808-09). Since

this case presents a request for injunction of the Act’s enforcement in addition to a

declaratory judgment, it is controlled by Shaw, not Franchise Tax Board and Speedco.

Accordingly, the mirroring rule does not apply and the relevant well-pleaded complaints

are the ones actually filed by plaintiffs BIO and PhRMA. As noted above, construction

of the patent laws is a necessary element of the preemption cause of action appearing

in those complaints. Therefore, the preemption action here “aris[es] under [an] Act of

Congress relating to patents,” the district court had “jurisdiction based . . . in part[] on

section 1338,” and this case falls within our exclusive jurisdiction under § 1295. We

conclude that this appeal is properly before us and should not be transferred back to the

D.C. Circuit. 1

B.     Standing

       Resolution of the statutory issue above does not end our jurisdictional inquiry,

since the District also alleges that the two plaintiff organizations lacked standing to bring

this action. Standing is, of course, a constitutional prerequisite for our own jurisdiction

and that of the district court:

       Article III of the Constitution limits the federal judicial power to “Cases” or
       “Controversies,” thereby entailing as an irreducible minimum that there be
       (1) an injury in fact, (2) a causal relationship between the injury and the
       challenged conduct, and (3) a likelihood that the injury will be redressed
       by a favorable decision.



       1
                We acknowledge that Christianson directs appellate courts to apply the
law of the case doctrine and defer to sister Circuits’ jurisdictional determinations upon a
transfer. 486 U.S. 816. However, we note that the transfer order here was issued by
the D.C. Circuit’s Clerk after an unopposed motion and without a decision by the judges
of that court. Because we independently agree that jurisdiction properly lies in this
court, we do not decide whether a clerk-signed transfer order has “decided upon a rule
of law,” id. at 817, and therefore merits deference under Christianson.


2006-1593                                    9
United Food & Commercial Workers Union Local 751 v. Brown Group, Inc., 517 U.S.

544, 550 (1996) (“United Food”) (internal quotations omitted). We decide questions

implicating this court’s jurisdiction under our own circuit law. Pause Tech. LLC v. TiVo

Inc., 401 F.3d 1290, 1293 (Fed. Cir. 2005) (“On matters relating to this court’s

jurisdiction, we apply Federal Circuit law, not that of the regional circuit from which the

case arose.”); Nystrom v. TREX Co., 339 F.3d 1347, 1349-50 (Fed. Cir. 2003); State

Contracting & Eng’g Group v. Florida, 258 F.3d 1329, 1334 (Fed. Cir. 2001); Woodard

v. Sage Prods., 818 F.2d 841, 844 (Fed. Cir. 1987) (en banc).

       Neither plaintiff here manufactures patented prescription drugs itself or otherwise

engages in activities likely to fall within the ambit of the Act. However, “an organization

may sue to redress its members’ injuries, even without a showing of injury to the

association itself.” United Food, 517 U.S. at 552.

       [A]n association has standing to bring suit on behalf of its members when:
       (a) its members would otherwise have standing to sue in their own right;
       (b) the interests it seeks to protect are germane to the organization's
       purpose; and (c) neither the claim asserted nor the relief requested
       requires the participation of individual members in the lawsuit.

Id. at 553 (quoting Hunt v. Wash. State Apple Adver. Comm’n, 432 U.S. 333, 343

(1977)); see also Inv. Co. Inst. v. Camp, 401 U.S. 617, 620-21 (1971) (finding that

association of investment companies had standing to challenge federal regulation which

harmed its members). The two plaintiffs here are both industry organizations who seek

to shape policy in a manner favorable to member pharmaceutical and biotechnology

companies, so the subject matter of this case is highly germane to their respective

purposes. For the purposes of this facial challenge seeking only an injunction against a

generally applicable statute, none of the plaintiffs’ members need be joined directly in

the action. The standing question therefore collapses into an inquiry as to whether


2006-1593                                   10
some member of each organization would have standing to bring a similar action itself.

One such member will suffice. See United Food, 517 U.S. at 552 (“The association

must allege that its members, or any one of them, are suffering immediate or threatened

injury as a result of the challenged action of the sort that would make out a justiciable

case had the members themselves brought suit.” (emphasis added) (quoting Warth v.

Seldin, 422 U.S. 490, 511 (1975)).

       Standing requires “at an irreducible minimum an injury in fact; that is, there must

be some threatened or actual injury resulting from the putatively illegal action.” Virginia

v. Am. Booksellers Ass’n, 484 U.S. 383, 392 (1988). That injury must be “(a) concrete

and particularized and (b) actual or imminent, not conjectural or hypothetical.” Friends

of the Earth, Inc. v. Laidlaw Envtl. Servs. (TOC), Inc., 528 U.S. 167, 180 (2000) (citing

Lujan v. Defenders of Wildlife, 504 U.S. 555, 560-61 (1992)). The injury need not have

been already manifested. “A plaintiff who challenges a statute must demonstrate a

realistic danger of sustaining a direct injury as a result of the statute's operation or

enforcement. But one does not have to await the consummation of threatened injury to

obtain preventive relief. If the injury is certainly impending that is enough.” Babbitt v.

United Farm Workers Nat’l Union, 442 U.S. 289, 298 (1979) (internal citations and

quotations omitted).

       The findings and legislative history of the Act demonstrate a strong likelihood that

the District is imminently likely to enforce it against plaintiffs’ members. The Act itself

contains a finding that the prices of prescription drugs in the District of Columbia are

presently “excessive,” the same word as the standard for an illegal price. D.C. Code

§ 28-4551(a).    The findings section also declares that “it is incumbent on the




2006-1593                                   11
government of the District of Columbia to take action to restrain the excessive prices of

prescription drugs.” Id. § 28-4551(c).    When the Act was debated in the D.C. City

Council, its sponsor singled out two companies by name:

       Once a lawsuit is filed the prescription drug manufacturer will be afforded
       an opportunity to explain why its prices are not excessive. . . . For
       instance, under the new law Merck may have the opportunity to explain
       why District residents pay 166 percent more for the cholesterol drug Zocor
       than the citizens of Germany. Or Pfizer could defend its reasoning for
       charging District residents 323 percent more for its arthritis drug Celebrex
       than the residents of Australia.

Remarks of D.C. Councilmember Catania, Sept. 20, 2005.               Merck and Pfizer are

members of both BIO and PhRMA. The District “has not suggested that the newly

enacted law will not be enforced, and we see no reason to assume otherwise. We

conclude that plaintiffs[’ members] have alleged an actual and well-founded fear that the

law will be enforced against them.” Am. Booksellers, 484 U.S. at 393.

       Whether the Act is enforced or not, its presence is highly likely to cause

pharmaceutical manufacturers, including plaintiffs’ members, to incur costs in an effort

to avoid running afoul of its broadly-worded provisions.        The Act does not directly

regulate    manufacturers’    wholesale    prices—instead,     liability   attaches   if   the

pharmaceutical seller’s activity “results in the prescription drug being sold in the District

for an excessive price.” D.C. Code § 28-4553. If the prices in the District exceed the

price in any “high income country” by over 30 percent, the manufacturer is presumed to

be in violation. Id. § 28-4554(a). The Act provides that the presumption is rebuttable,

but other than listing a variety of factors to be considered, does not explain how that

rebuttal might occur. Id. § 28-4554(b). Prudent pharmaceutical manufacturers seeking

to comply with the Act must therefore monitor the retail prices of their drugs in the

District, and correlate those with the prices in four foreign countries designated as “high


2006-1593                                    12
income” benchmarks for the Act’s prima facie analysis.            One member of plaintiff

PhRMA, Valeant Pharmaceuticals International, has declared that if the Act is not

enjoined, it will forgo selling one of its drugs in the Canadian and Australian markets

rather than risk having the presumption of excessiveness attach.                       Wyeth

Pharmaceuticals, a member of both BIO and PhRMA, has declared that in light of the

Act it “will need to consider the impact of its decisions as to the timing and pricing of

launches in [the four benchmark] markets on domestic prices.” Even if Wyeth and other

similarly situated pharmaceutical manufacturers ultimately choose not to change their

global pricing structure, the need to monitor and consider that structure in light of the

Act will necessarily impose upon them actual administrative costs.

       Members of both plaintiff organizations have therefore demonstrated that the Act

threatens them with a concrete, imminent injury, since they have shown “a realistic

danger of sustaining a direct injury as a result of the statute's operation or enforcement.”

United Farm Workers, 442 U.S. at 298.           The remaining elements of standing are

causation (“the injury is fairly traceable to the challenged action of the defendant,”

Friends of the Earth, 528 U.S. at 180) and redressability (“it is likely, as opposed to

merely speculative, that the injury will be redressed by a favorable decision,” id. at 181).

In light of our discussion above, both of those elements are satisfied, because the injury

flows directly from the Act, and if the Act is enjoined, the injury will not occur. All of the

elements of standing are satisfied. Accordingly, we have jurisdiction to hear this appeal,

and turn now to the merits of the plaintiffs’ preemption case.




2006-1593                                    13
C.    Preemption

       The plaintiffs argue that the Act cannot stand because it is preempted by superior

federal law. While this case implicates supremacy principles, we note that it does not

deal with an alleged conflict between a state regulation and a federal law requiring the

application of the Constitution’s Supremacy Clause.       See U.S. Const. art. VI, § 2;

Kewanee Oil Co. v. Bicron Corp., 416 U.S. 470, 479 (1974). The District of Columbia is

federal territory whose self-governance is authorized by Congress, so the Act is in some

sense a form of federal regulation.     Nevertheless, as between District statutes and

superior enactments by Congress, the general principles of preemption from

Supremacy Clause law apply. See Don’t Tear It Down, Inc. v. Pa. Ave. Dev. Corp., 642

F.2d 527, 534 n.65 (D.C. Cir. 1980) (“We need not undertake precise definition of the

governmental status of the District of Columbia . . . for surely the preemption doctrine

[a]ffects District of Columbia legislation no less than state enactments.”). Accordingly,

references in our discussion to states, state law, or the like apply to the District law at

issue here.

      There is no express provision in the patent statute that prohibits states from

regulating the price of patented goods; indeed, “the federal patent laws do not create

any affirmative right to make, use, or sell anything.” Leatherman Tool Group, Inc. v.

Cooper Indus., Inc., 131 F.3d 1011, 1015 (Fed. Cir. 1997). Nevertheless, state law

must yield to congressional enactments if it “stands as an obstacle to the

accomplishment and execution of the full purposes and objectives of Congress.” Hines

v. Davidowitz, 312 U.S. 52, 67 (1941). The plaintiffs urge that the Act conflicts with




2006-1593                                   14
Congress’s intention to provide their members and other pharmaceutical patent holders

with the pecuniary reward that follows from the right to exclude granted by a patent.

       Our conflict inquiry is a searching one that ranges beyond the literal text of the

statute.   “What is a sufficient obstacle is a matter of judgment, to be informed by

examining the federal statute as a whole and identifying its purpose and intended

effects.” Crosby v. Nat’l Foreign Trade Council, 530 U.S. 363, 373 (2000). “[T]he entire

scheme of the statute must of course be considered and that which needs must be

implied is of no less force than that which is expressed.” Id. (quoting Savage v. Jones,

225 U.S. 501, 533 (1912)).      We analyze this question under our own circuit law.

Midwest Indus., Inc. v. Karavan Trailers, Inc. 175 F.3d 1356, 1358-59 (Fed. Cir. 1999)

(en banc in relevant part).

       We have noted that “the essential criteria” for determining whether a state law is

preempted are “the objectives of the federal patent laws.”      Hunter Douglas, Inc. v.

Harmonic Design, Inc., 153 F.3d 1318, 1333 (1998).         The fundamental goal of the

patent law is spelled out in the Constitution: “To promote the Progress of Science and

useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to

their respective Writings and Discoveries.” U.S. Const. art. I, § 8, cl. 8. Inventors are

impelled to invest in creative effort by the expectation that, through procurement of a

patent, they will obtain a federally protected “exclusive right” to exclude others from

making, using, or selling embodiments of their invention. Patentees value the right to

exclude in part because the ability to foreclose competitors from making, using, and

selling the invention may allow them an opportunity to obtain above-market profits

during the patent’s term.




2006-1593                                  15
       This court has repeatedly recognized as important the pecuniary rewards

stemming from the patent right:

       We have long acknowledged the importance of the patent system in
       encouraging innovation. Indeed, “the encouragement of investment-
       based risk is the fundamental purpose of the patent grant, and is based
       directly on the right to exclude.” . . . Importantly, the patent system
       provides incentive to the innovative drug companies to continue costly
       development efforts.

Sanofi-Synthelabo v. Apotex, Inc., 470 F.3d 1368, 1383 (Fed. Cir. 2006) (quoting Patlex

Corp. v. Mossinghoff, 758 F.2d 594, 599 (Fed. Cir. 1985)).

       [T]he Patent Act creates an incentive for innovation. The economic
       rewards during the period of exclusivity are the carrot. The patent owner
       expends resources in expectation of receiving this reward. Upon grant of
       the patent, the only limitation on the size of the carrot should be the
       dictates of the marketplace.

King Instruments Corp. v. Perego, 65 F.3d 941, 950 (Fed. Cir. 1995).

       This court’s past statements about the patent law’s incentive structure are

illuminating, but our inquiry must be focused on Congress’s purposes. Congress, too,

has acknowledged the central role of enhanced profits in the statutory incentive scheme

it has developed. In the legislative history of the Drug Price Competition and Patent

Term Restoration Act of 1984 (popularly known as the “Hatch-Waxman Act”), the House

Committee on Energy and Commerce observed:

       Patents are designed to promote innovation by providing the right to
       exclude others from making, using, or selling an invention. They enable
       innovators to obtain greater profits than could have been obtained if direct
       competition existed. These profits act as incentives for innovative
       activities.

H.R. Rep. No. 98-857, at 17 (1984); see also id. at 15 (“The purpose of Title II of the bill

is to create a new incentive for increased expenditures for research and development.”).




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       Of course, the patent laws are not intended merely to shift wealth from the public

to inventors. Their purpose is to “promote the Progress of . . . useful Arts,” U.S. Const.

art. I, § 8, cl. 8, ultimately providing the public with the benefit of lower price through

unfettered competition. That goal is underscored by the Constitutional command that

periods of exclusivity be for “limited Times.”    Id.   Once the patent expires and the

inventor’s exclusive rights terminate, others may enter the market with products based

on the teachings of the patent, which must “enable any person skilled in the art . . . to

make and use the [invention].” 35 U.S.C. § 112 ¶ 1. If the market functions properly,

this new participation will bring down the formerly elevated price of the patented product

to competitive levels. These two objectives—to reward innovators with higher profits

and to keep prices reasonable for consumers—are in dialectic tension. The Supreme

Court has noted that “[t]he tension between the desire to freely exploit the full potential

of our inventive resources and the need to create an incentive to deploy those

resources is constant.” Bonito Boats, Inc. v. Thunder Craft Boats, Inc., 489 U.S. 141,

152 (1989); see also Hunter Douglas, 153 F.3d at 1333 (“[T]he objectives of the federal

patent laws . . . . are in some tension with one another, and Congress struck a balance

between them.”).    Congress, as the promulgator of patent policy, is charged with

balancing these disparate goals.     The present patent system reflects the result of

Congress’s deliberations. Congress has decided that patentees’ present amount of

exclusionary power, the present length of patent terms, and the present conditions for

patentability represent the best balance between exclusion and free use.

       It is unquestioned that the District has general police power within its borders and

that “[w]hatever rights are secured to inventors must be enjoyed in subordination to this




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general authority of the State over all property within its limits,” Webber v. Virginia, 103

U.S. 344, 348 (1880). But general state power must yield to specific Congressional

enactment: “any state law, however clearly within a State’s acknowledged power, which

interferes with or is contrary to federal law, must yield.” Felder v. Casey, 487 U.S. 131,

138 (1988) (quoting Free v. Bland, 369 U.S. 663, 666 (1962)). Furthermore, this Act is

in no way general, affecting only patented products.         The Act’s operation stands

largely—indeed, exclusively—within the scope of the patent laws, and its effect is to

shift the benefits of a patented invention from inventors to consumers.

       By penalizing high prices—and thus limiting the full exercise of the market power

that derives from a patent—the District has chosen to re-balance the statutory

framework of rewards and incentives insofar as it relates to inventive new drugs. In the

District’s judgment, patents enable pharmaceutical companies to wield too much market

power, charging prices that are “excessive” for patented drugs. The Act is a clear

attempt to restrain those excessive prices, in effect diminishing the reward to patentees

in order to provide greater benefit to District drug consumers. This may be a worthy

undertaking on the part of the District government, but it is contrary to the goals

established by Congress in the patent laws. The fact that the Act is targeted at the

patent right is apparent on its face. It applies only to patented drugs. D.C. Code

§ 28-4553. The District has thus seen fit to change federal patent policy within its

borders. The underlying determination about the proper balance between innovators’

profit and consumer access to medication, though, is exclusively one for Congress to

make. As the Supreme Court has noted, “[w]here it is clear how the patent laws strike

that balance in a particular circumstance, that is not a judgment the States may second-




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guess.” Bonito Boats, 489 U.S. at 152; see also Webber, 103 U.S. at 347 (noting that

sale of patented articles “cannot be forbidden by the State, nor can the sale of the

article or machine produced be restricted except as the production and sale of other

articles, for the manufacture of which no invention or discovery is patented or claimed,

may be forbidden or restricted”).

      The Act stands as an obstacle to the federal patent law’s balance of objectives

as established by Congress. Accordingly, we conclude that it is preempted by federal

patent law.

                                    III.    CONCLUSION

      Because the federal patent laws preempt the Act, we affirm the district court’s

injunction against the Act’s enforcement. Since patent-law preemption invalidates the

Act entirely, we do not need to consider the Foreign Commerce Clause argument

advanced by plaintiffs as an alternative ground for affirmance.

                                           AFFIRMED

Each party shall bear its own costs.




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