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Drug company's use of trade mark rights to restrict rival imports legitimate, rules Court of Appeal

Out-Law News | 06 Apr 2017 | 12:04 pm | 4 min. read

A drug company was entitled to rely on its trade mark rights to stop two businesses from importing into the UK the same product as it sold on the basis that the rivals' product would be sold under the drug company's name, the Court of Appeal in London has ruled.

The ruling provides guidance on how future cases that concern the tension between the enforcement of trade mark rights and EU laws on free trade should be assessed.

The dispute ruled on by the Court of Appeal was between drugs company Flynn Pharma and two businesses which buy drugs in one country and import them into another to sell there, DrugsRus and Tenolol, and concerned the sale of anti-epileptic drug phenytoin sodium in the UK. Pinsent Masons, the law firm behind Out-Law.com, represented Flynn in the case.

Flynn had obtained the UK marketing authorisations for phenytoin sodium in 2012 from US pharmaceuticals giant Pfizer. Pfizer continued to manufacture the drug and supply it to Flynn. Flynn subsequently applied to change the name under which the drug could be marketed in the UK, from Epanutin, which had been the name of Pfizer's branded drug, to a more generic term, but was prevented from doing so by the UK's Medicines and Healthcare products Regulatory Agency (MHRA) on patient safety grounds.

The MHRA said patients needed to know that the drugs they were taking were the same as previously prescribed and required Flynn to include the company's name in the name of the product and to market the drug under the name 'Phenytoin Sodium Flynn' to distinguish it from rival products from different sources.

DrugsRus and Tenolol imported phenytoin sodium under the brand name Epanutin from Spain. They argued that in order to get effective access to the UK healthcare market and to allow the free movement of goods which came from the same manufacturer they, like Flynn, should be allowed to use the name Phenytoin Sodium Flynn. However, Flynn objected to DrugsRus and Tenolol rebranding Epanutin as Phenytoin Sodium Flynn on trade mark grounds. Flynn owns trade mark rights in the Flynn brand.

DrugsRus and Tenolol claimed that the exercise of those trade mark rights breached EU competition rules. Specifically, it argued that it constituted a disguised restriction on trade between EU member states, in breach of EU competition rules.

However, Flynn argued that its actions did not preclude DrugsRus and Tenolol from competing in the market for phenytoin sodium in the UK; only that it prevented them from using the trade mark, Flynn.

The Court of Appeal's ruling centred on the test to apply when weighing the rights of trade mark holders to assert their trade mark rights against the rights of businesses to compete freely within the EU single market without restrictions being placed on goods already put on the market in one jurisdiction and their exportation to another.

In the EU, businesses that hold trade mark rights are able to exercise control over how their brand is exploited. However, to promote the free movement of goods and competition within the EU single market, the rules prevent trade mark holders from controlling subsequent sales of goods which have been put on the market by, or with the consent, of the trade mark owner.

These rules are relevant to the parallel importing of drugs, which is where a business buys branded drugs in one EU country and imports them into another to sell them there at a profit.

Despite the 'first-sale' doctrine, however, trade mark holders can "oppose further commercialisation of the goods" if there are "legitimate reasons" to do so. According to EU trade mark law, this includes, for example, "where the condition of the goods is changed or impaired after they have been put on the market".

However, the exercise of trade mark rights can run into tension with aspects of the Treaty on the Functioning of the EU (TFEU), which generally bars quantitative restrictions on imports between EU countries, and all measures having equivalent effect. Restrictions on imports on the grounds of protection of "industrial and commercial property", such as trade marks, can be applied, though, as long as they do not "constitute a means of arbitrary discrimination or a disguised restriction on trade between member states".

The Court of Appeal said it is necessary for courts to conduct a "dual enquiry" when assessing the competing trade mark and free trade rights.

According to the Court, the first stage of the 'dual enquiry' is for courts to determine if goods that a business wishes to import have already been placed on the market by the trade mark owner or with their consent. The second stage of the assessment involves considering whether the business that did place the goods onto the market is in "effective control of the trade mark", it said.

If the assessment finds that goods have neither been placed on the market by a trade mark holder or with their consent, nor by a business in 'effective control' of the mark, then trade mark owners can legitimately enforce their trade mark rights against parallel importers to safeguard the "origin function" of their mark, other than in "some extreme case", the Court said.

In considering Flynn's actions in the context of the 'dual enquiry' test, the Court looked at the agreements Flynn had in place with Pfizer and assessed whether Flynn had exercised control over the sale of Epanutin by Pfizer elsewhere in the EU which DrugsRus and Tenolol wished to import to the UK.

Lord Justice Floyd said, though, that Flynn "had no power to control the quality of those products which were put on the market by Pfizer in other member states" and said Flynn and Pfizer were separate businesses "with no corporate links that would enable Flynn to have a say in what product Pfizer put on the market in other member states".

In dismissing the appeal brought by DrugsRus and Tenolol against the earlier decision which had stopped the importation, the judge said: "It is … inherently unlikely that a UK importer of a product would have any control over the quality of the product of a foreign manufacturer other than that which is actually sold to him. Flynn certainly has control of the product which Pfizer sells to Flynn, but that is another question."

"The fact that the goods which the appellants seek to import are from the same source as Flynn’s own product is not equivalent to Flynn giving consent to their marketing or Flynn having control over their quality. Pfizer places those goods on the market and controls their quality quite independently of Flynn," he said.

The second stage of the assessment found that Pfizer, which placed Epanutin on the Spanish market, had no control over the Flynn trade mark being enforced in the UK and therefore Flynn was entitled to rely on its trade mark to stop the importation and sale of Epanutin as Phenytoin Sodium Flynn.

Lord Justice Floyd's remarks were endorsed by fellow Court of Appeal judges Lord Justice Kitchin and Chancellor of the High Court Sir Geoffrey Vos.