Prescription Drug Importation: A Legal Overview
Released: 2008-12-01T00:00:00

This report explores the legal issues raised by prescription drug importation. Although this report is intended to focus on legal analysis, policy issues are also addressed because they are closely linked. For a more complete analysis of policy issues, see CRS Report RL32511, Importing Prescription Drugs: Objectives, Options, and Outlook , by [author name scrubbed]. Issues associated with the risks posed by some online pharmacies and prescription drug sales over the Internet will no longer be addressed in this report, but are rather addressed in CRS Report RS21711, Legal Issues Related to Prescription Drug Sales on the Internet , by [author name scrubbed].

I. Introduction

High prescription drug prices have increased consumer interest in purchasing less costly medications abroad by means of either commercial or personal (consumer) imports. Meanwhile, congressional legislators have been exploring a variety of legislative solutions to the problems posed by rising drug costs. During the 108 th Congress, the Medicare prescription drug benefits bill, H.R. 1 , modified a provision of existing law that authorizes the FDA to allow the importation of prescription drugs if the Secretary of HHS certifies that implementing such a program is safe and reduces costs, a determination that no Secretary has made in the years since a similar certification requirement was established in 2000.

Congress has used the appropriations process to insert provisions prohibiting the use of funds to restrict prescription drug importation. Most recently, P.L. 110 - 329 , the Consolidated Security, Disaster Assistance, and Continuing Appropriations Act, 2009, prohibited the U.S. Customs and Border Protection (CBP) from using funds to prevent individuals from transporting on their person a 90-day supply of Canadian prescription drugs that comply with the Federal Food, Drug, and Cosmetic Act (FFDCA). However, few, if any, prescription drugs from Canada will comply with the requirements of the FFDCA because such drugs are likely to be unapproved, mislabeled, or improperly dispensed. As a result, the provisions in these appropriations bills and the final Medicare bill appear to have limited effect and ultimately did not change the law with respect to the prohibition against importing prescription drugs from Canada and other foreign countries.

The debate about drug importation continues. On the one hand, some policymakers remain opposed to allowing prescription drugs to be imported from foreign countries. Worried about the risk to consumers, these critics argue that, with its current resources and authority, the FDA cannot guarantee the safety or effectiveness of such drugs, which they contend are more susceptible to being mishandled, mislabeled, unapproved, or counterfeited than drugs sold domestically. Legislators and others have also expressed concerns about the safety of imports in general and the ability of the FDA to inspect increasing amounts of imported products entering the United States. In addition, drug manufacturers and other opponents argue that allowing the importation of prescription drugs would stifle investment in the research and development of new drugs. On the other hand, importation proponents, who claim that importation would result in an increased supply of prescription drugs that could result in significantly lower prices for U.S. consumers, say that safety concerns are overblown and would recede if additional precautions were implemented. Arguing that drug manufacturers are concerned only about their profits, proponents of importation contend that U.S. consumers should not subsidize the cost of research and development and that consumers in other countries should share the burden.

Linked to the issue of prescription drug importation is a debate about drug costs. While some comparisons of U.S. and Canadian drug prices conclude that U.S. prices are higher than their Canadian counterparts, other studies do not find such discrepancies. In part, studies may vary depending on which drugs are selected for comparison and whether or not U.S. generic drugs, which tend to be cheaper than Canadian brand-name and generic drugs, are considered.

In addition, there is an unresolved debate about whether allowing drug imports would affect drug prices. Supporters argue that drug prices would drop due to competition if imports were allowed, while opponents argue that increased demand for imported drugs and moves by manufacturers to limit supplies of cheaper drugs would cause prices to rise both in the U.S. and abroad and would increase the risk of counterfeit drugs being introduced into the system. According to a study by the Congressional Budget Office (CBO), "the reduction in drug spending from importation would be small," in part because of new costs associated with ensuring the safety of imported drugs and because of the likelihood that manufacturers would alter drug formulations or reduce foreign supplies. Furthermore, there are questions about how much it would cost to implement a safe drug importation program. The FDA has estimated that such a program would cost at least $100 million but that the figure could rise as high as several hundred million dollars, especially if there was an increase in the volume of imported drugs.

In response to concerns about prescription drug imports, a number of congressional legislators have introduced bills that would make changes to existing law in these areas. Bills introduced in the 110 th Congress include H.R. 194 , H.R. 380 , H.R. 1218 , H.R. 2638 , H.R. 2900 , H.R. 3161 , H.R. 3580 , S. 242 , S. 251 , S. 554 , and S. 1082 .

Current regulation of prescription drug importation consists of a patchwork of federal and state laws in an array of areas. At the federal level, the FDA regulates prescription drugs under the FFDCA, which governs, among other things, the safety and efficacy of prescription medications, including the approval, manufacturing, and distribution of such drugs. It is the FFDCA that prohibits the importation—sometimes referred to as "reimportation"—of certain prescription drugs by anyone other than the manufacturer and that requires that prescription drugs may be dispensed only with a valid prescription. After a change in enforcement policy by CBP, the FDA assumed the primary responsibility for determining whether foreign drug imports may legally enter the country. In addition, the Drug Enforcement Agency (DEA) administers the Controlled Substances Act, which is a federal statute that establishes criminal and civil sanctions for the unlawful possession, manufacturing, or distribution of certain addictive or dangerous substances, including certain prescription drugs that share these properties, such as narcotics and opiates. At the state level, state boards of pharmacy regulate pharmacy practice, and state medical boards oversee the practice of medicine. Thus, some of the laws that govern pharmacies and doctors vary from state to state.

Finally, although foreign laws are beyond the scope of this report, it is important to note that such laws may also affect the importation of drugs from those countries.

II. Prescription Drug Importation: Legal Regulation

At the federal level, the FDA regulates prescription drugs under the Federal Food, Drug, and Cosmetic Act (FFDCA), which governs, among other things, the safety and efficacy of prescription medications, including the approval, manufacturing, and distribution of such drugs. Although many states also have their own laws that regulate drug safety, the FDA maintains primary responsibility for the premarket approval of prescription drugs, while the DEA and CBP have somewhat more limited regulatory authority over such drugs.

The FFDCA contains several provisions that apply to prescription drug imports. First, the statute contains an outright prohibition that forbids anyone other than the manufacturer from importing prescription drugs. This prohibition affects drugs originally made in the United States. Second, the FFDCA contains a number of other provisions relating to drug approvals and labeling that make it nearly impossible for prescription drugs made for foreign markets to comply with the extensive statutory requirements, in part because the FDA considers any drugs not made on an FDA-inspected production line to be unapproved and therefore illegal. These provisions generally affect foreign versions of drugs that are approved for domestic sale.

Importation of both U.S.-manufactured prescription drugs and unapproved foreign versions of U.S.-approved prescription drugs are discussed in this next section. That section also discusses the change in CBP policy with regard to the seizure of mail order prescription drugs, the penalties under the FFDCA, the FDA's personal importation procedures, state plans to import prescription drugs, and businesses that facilitate the importation of prescription drugs. In addition, this section contains a discussion of other legal areas that may affect prescription drug importation, including antitrust law, trade law, and patent law.

Importation of U.S.-Manufactured Prescription Drugs

Currently, the FFDCA prohibits anyone other than the manufacturer of a prescription drug from importing that drug into the United States. Thus, it is technically a violation of the statute for individual consumers or online pharmacies to import a prescription drug back into the country, even though the drug was, prior to export, originally manufactured in any U.S. state or territory, the District of Columbia, or Puerto Rico and even if the drug otherwise complies with the FFDCA. Although critics of this law argue that there is no rational justification for forbidding the importation of a drug that is theoretically identical to its counterpart sold in the United States, the FDA contends that the agency can no longer guarantee the safety of a prescription drug once it has left the country and the agency's regulatory control. According to the agency, the FDA "cannot provide adequate assurance to the American public that the drug products delivered to consumers in the United States from foreign countries are the same products approved by the FDA."

In response to concerns about the rising costs of prescription drugs, however, Congress adopted importation amendments to the FFDCA in 2000. Under the Medicine Equity and Drug Safety (MEDS) Act, the FDA was authorized to allow pharmacists and wholesalers to import prescription drugs from Canada if certain safety precautions were followed. The act, however, stipulated that the importation provision would not become effective until and unless the Secretary of HHS determined that the implementation of the provision would "pose no additional risk to the public's health and safety; and [would] result in a significant reduction in the cost of covered products to the American consumer." Citing safety concerns, both the current and former Secretaries declined to implement this provision.

In the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (Medicare Act), Congress revisited the issue of prescription drug importation. Like the MEDS Act it superseded, the Medicare legislation directs the FDA to allow pharmacists and wholesalers to import prescription drugs if certain safety precautions are followed. Unlike the MEDS Act, which covered prescription drugs from a specified group of foreign countries, the Medicare Act allows imports from Canada only. In addition, the Medicare Act, unlike the MEDS Act, also authorizes the FDA to allow, by regulatory waiver, individuals to import prescription drugs for personal use under certain circumstances. Despite these new importation provisions, the Medicare Act, like the MEDS Act, stipulates that the importation provisions will not become effective until and unless the Secretary certifies that the implementation of the provision would "pose no additional risk to the public's health and safety; and [would] result in a significant reduction in the cost of covered products to the American consumer." As noted above, the Secretary of HHS has thus far declined to provide such certification. Absent such certification, the ban on the importation of prescription drugs remains in effect.

Importation of Foreign Versions of Prescription Drugs

Even if the FFDCA did not contain an explicit prohibition against drug importation, the FDA maintains that consumer imports of prescription drugs from foreign countries would almost certainly violate other provisions of the act. For example, such drugs are likely to be unapproved, mislabeled, or improperly dispensed. According to the FDA:

The reason that Canadian or other foreign versions of U.S.-approved drugs are generally considered unapproved in the U.S. is that FDA approvals are manufacturer-specific, product-specific, and include many requirements relating to the product, such as manufacturing location, formulation, source and specifications of active ingredients, processing methods, manufacturing controls, container/closure system, and appearance ... Moreover, even if the manufacturer has FDA approval for a drug, the version produced for foreign markets usually does not meet all of the requirements of the U.S. approval, and thus it is considered to be unapproved. Virtually all shipments of prescription drugs imported from a Canadian pharmacy will run afoul of the Act, although it is a theoretical possibility that an occasional shipment will not do so. Put differently, in order to ensure compliance with the Act when they are involved in shipping prescription drugs to consumers in the U.S., businesses and individuals must ensure, among other things, that they only sell FDA-approved drugs that are made outside of the U.S. and that comply with the FDA approval in all respects.

The difficulty in determining whether a drug is FDA-approved is demonstrated by the agency's response to a letter from Representative Edward Markey. On October 11, 2006, he asked the agency how a consumer would know if a product is FDA-approved or unapproved. The agency responded with a recommendation that consumers

access the FDA site to search for the active ingredient or name of drug. The names of approved companies for a drug will be listed ... If the manufacturer of a consumer drug is not listed, the drug may be unapproved or there may be data errors. The drug may also be an approved drug, but distributed under the name of another company. Consumers are also advised to check with the drug manufacturer.

In addition to complying with the requirements regarding FDA approvals, imported drugs must also meet FDA requirements regarding labeling and dispensing. For example, mislabeling a drug is a violation of the FFDCA, as is the act of introducing or receiving a mislabeled drug in interstate commerce. In order to be properly labeled, prescription drugs must be labeled in accordance with the FDA's extensive labeling requirements. Furthermore, the FFDCA requires that prescription drugs may be dispensed only with a valid prescription. Therefore, it is a violation of the act to import prescription drugs without a legitimate U.S. prescription.

According to the FDA, an inspection of prescription drug shipments by CBP found that 1,728 of 1,982 drug shipments from foreign countries violated the FFDCA because they contained "unapproved drugs" that could pose safety problems. Although the reason for the violation varied depending on the shipment, the FDA and CBP found shipments of drugs that, among other things, had never been approved by the FDA, were inadequately labeled (e.g., lacked instructions or were labeled in a foreign language), had been withdrawn from the U.S. market due to safety concerns, could cause dangerous interactions, required monitoring by a doctor, or were controlled substances. For example, in February 2007, the FDA alerted consumers that Americans who had ordered the prescription drugs Ambien, Xanax, Lexapro, and Ativan online instead received a product with haloperidol, the active ingredient in an anti-psychotic drug used to treat schizophrenia. A separate FDA investigation found that approximately 43 percent of the imported drugs that the agency intercepted from four countries—India, Israel, Costa Rica, and Vanuatu—were shipped to fill orders that consumers believed they were placing with Canadian pharmacies. Of the products believed to be Canadian, FDA reported that only 15 percent actually originated in Canada, while the remaining 85 percent were manufactured in 27 different countries.

Canadian Prescription Drug Importation After the FY2007 Homeland Security Appropriations Bill

Until recently, the Department of Homeland Security, via the U.S. Customs and Border Protection agency (CBP), was responsible for examining imported prescription drugs at the nation's international mail centers and borders and for detaining and destroying any FDA-regulated prescription drugs that did not meet statutory or regulatory requirements. Prior to November 17, 2005, CBP officials tolerated prescription drug mail orders from Canada of up to 90 days worth of medication, "generally interpreting U.S. laws against the importation of drugs as applying to wholesalers and distributors." However, the CBP began strictly enforcing importation laws on November 17, 2005, two days after the beginning of open enrollment for the Medicare prescription drug program. This policy change lead consumer groups and Canadian pharmacies to complain that CBP's policy was intended to encourage seniors to enroll in the Medicare plan and decrease competition for often costly prescription drugs. CBP officials denied this charge, noting that the new enforcement policy was designed "to protect consumers from potentially dangerous drugs manufactured abroad." For the next eleven months, CBP agents confiscated mail packages with foreign prescription drugs and often destroyed the drugs, then mailed letters about the violation to consumers attempting to import the drugs. An estimated 37,000 to 40,000 packages were detained by CBP during this period.

In past years, the House Committee on Appropriations had added provisions to appropriations bills that would have prohibited the FDA from using monies to prevent drug importation from foreign countries. Such provisions were always removed during conferences between the House and the Senate. Representative Emerson added a similar provision to the FY2007 Homeland Security appropriations bill prohibiting CBP from using funds to prevent importation of "FDA-approved" drugs. Opponents labeled the provision "an inappropriate way to address the issue of drug affordability" and expressed concerns that the United States would be more exposed to harmful counterfeit drugs or that terrorists would take advantage of the provision. Additionally, some Canadian pharmacist associations and other importation opponents worried that their country would encounter shortages as a result of the provision. Supporters noted that the provision was "aimed at forcing FDA to assess prescriptions from foreign countries for safety instead of simply blocking all reimported drugs."

The Senate Committee on Appropriations subsequently stripped the Homeland Security appropriations bill of the importation provision, but Senators Vitter and Nelson introduced the CBP funding prohibition for certain seizures of Canadian drug imports in an amendment that passed 68-32. As passed on September 25, 2006, Section 535 reads as follows:

None of the funds made available in this Act for United States Customs and Border Protection may be used to prevent an individual not in the business of importing a prescription drug (within the meaning of section 801(g) of the Federal Food, Drug, and Cosmetic Act) from importing a prescription drug from Canada that complies with the Federal Food, Drug, and Cosmetic Act: Provided, That this section shall apply only to individuals transporting on their person a personal-use quantity of the prescription drug, not to exceed a 90-day supply: Provided further, That the prescription drug may not be—(1) a controlled substance, as defined in section 102 of the Controlled Substances Act (21 U.S.C. 802); or (2) a biological product, as defined in section 351 of the Public Health Service Act (42 U.S.C. 262).

The provision excludes narcotics, biologics, Internet sales, and importations of Canadian prescription drugs by mail order. Most importantly, the bill appears to allow individuals to transport a 90-day supply of prescription drugs from Canada across the border by foot or vehicle. However, the provision ultimately appears to have limited effect because it states that individuals may personally import Canadian prescription drugs that comply with the FFDCA. By definition, most prescription drugs from Canada do not comply with the FFDCA. As the previous section explained, drugs that comply with the FFDCA must be approved by the FDA, be dispensed with a valid prescription by a U.S. doctor, and meet, among other possible requirements, mandates that are manufacturer and product specific, manufacturing controls and processing methods, extensive labeling requirements, and source and active ingredient specifications. While it is possible that a prescription drug could meet FDA requirements and therefore obtain FDA approval, in almost all cases, imported prescription drugs will not comply with the FFDCA. Thus, the provision does not change the current illegal status of most drugs imported from Canada, and it appears that CBP may still legally use funds to detain Canadian drug imports that do not comply with the FFDCA.

Despite the limited effect of the importation provision, CBP announced a change in its enforcement policy, effective October 9, 2006. CBP agents now "focus on intercepting only counterfeit medicines, narcotics, and illegal drugs." As a result, the FDA assumed the primary responsibility for determining whether Canadian and other international drug imports may legally enter the United States. In most cases, prescription drugs are illegal to import into the United States. The FDA has the authority to seize "[a]ny article of food, drug, or cosmetic that is adulterated or misbranded when introduced into or while in interstate commerce . . . ." However, the FDA's ability to "thoroughly inspect and handle confiscated imports" is questioned by some, given the agency's shortage of resources and staff.

In December 2006, Senators Grassley and Baucus attempted to alter the Homeland Security importation provision. Their modification would have only allowed importation from Canada of prescription drugs "with at least two generic competitors" and would have excluded certain drugs and biologics from the those that the Homeland Security appropriations bill intended to allow individuals to personally carry across the Canadian border in a 90-day supply.

The House FY2008 Agriculture Appropriations Bill

Members of Congress have also attempted to use the agriculture appropriations bill to attach language to FDA funding that would allow prescription drug importation in various forms. The House FY2008 agriculture appropriations bill, H.R. 3161 , included a provision that purported to expand the types of persons who may import prescription drugs. An amendment to strike the provision failed by a vote of 146-283. The Senate bill, S. 1859 , did not contain a similar provision. As passed by the House on August 2, 2007, §726 of H.R. 3161 read as follows:

None of the funds appropriated or otherwise made available by this Act for the Food and Drug Administration may be used under section 801 of the Federal Food, Drug, and Cosmetic Act to prevent an individual not in the business of importing a prescription drug within the meaning of section 801(g) of such Act, wholesalers, or pharmacists from importing a prescription drug which complies with sections 501, 502, and 505.

The provision would have prohibited the FDA from using appropriated funds to prevent wholesalers, individuals not in the business of importing prescription drugs, and pharmacists from importing prescription drugs that—among other FFDCA conditions—obtain FDA approval; comply with good manufacturing practices; meet strength, quality, and purity requirements; do not contain other mixtures or substitutions for other substances; are labeled in accordance with FFDCA requirements; and were manufactured in establishments registered with the Secretary of HHS. It appears unlikely that any prescription drug manufactured for a foreign market would have met these and other requirements of FFDCA §§501, 502, and 505. In a statement of administration policy, the White House remarked: "While the provision theoretically limits importation to only FDA-approved prescription drugs, it would be impossible for FDA to verify at the border that they are not counterfeit."

The provision would not have "legalized" importation for wholesalers, pharmacists, or other individuals not in the business of importing prescription drugs. Under FFDCA §801(d)(1), only manufacturers are allowed to import prescription drugs into the United States. Thus, while H.R. 3161 would not have provided funding to the FDA to prevent those such as wholesalers or pharmacists from importing prescription drugs that comply with parts of the FFDCA, the bill's provision would not have legalized importation by those persons. Failure to comply with the FFDCA may have exposed such individuals to criminal and civil liability. Additionally, drug manufacturers may not have allowed individuals not in the business of importing prescription drugs, wholesalers, or pharmacists to import such drugs into the United States. As a result, it appears that the provision would have had limited effect.

The FY2008 agriculture appropriations bill was included in P.L. 110 - 161 , the Consolidated Appropriations Act, 2008. However, the provision in H.R. 3161 was not included. Rather, §558 of the act included the same language as the FY2007 homeland security appropriations bill. Please see above for a discussion of that provision.

The FY2008 Homeland Security Appropriations Bill/2009 Consolidated Appropriations Act69

Senators Vitter and Stabenow cosponsored an amendment to the FY2008 Homeland Security Appropriations bill that appeared to expand upon the prescription drug importation amendment passed the previous fiscal year:

None of the funds made available in this Act for U.S. Customs and Border Protection or any agency or office within the Department of Homeland Security may be used to prevent an individual from importing a prescription drug from Canada if—(1) such individual is not in the business of importing a prescription drug (within the meaning of section 801(g) of the Federal Food, Drug, and Cosmetic Act (21 U.S.C. 381(g))); and (2) such drug—(A) complies with sections 501, 502, and 505 of the Federal Food, Drug, and Cosmetic Act (21 U.S.C. 351, 352, and 355); and (B) is not—(i) a controlled substance, as defined in section 102 of the Controlled Substances Act (21 U.S.C. 802); or (ii) a biological product, as defined in section 351 of the Public Health Service Act (42 U.S.C. 262).

The provision excluded narcotics and biologics. By preventing CBP from using funds to prevent certain individuals from importing Canadian prescription drugs, the amendment would have appeared to allow an unlimited supply of importations—by mail order, Internet sales, or physical transportation across the border—of Canadian prescription drugs that comply with parts of the FFDCA. However, like the provision in the previous fiscal year's bill, the amendment ultimately would likely have had limited effect because it stated that the imported Canadian prescription drugs must comply with three sections of the FFDCA that address adulteration, misbranding, and new drug applications. These three FDA provisions require, among other things, that drugs obtain FDA approval; comply with good manufacturing practices; meet strength, quality, and purity requirements; do not contain other mixtures or substitutions of other substances; are labeled in accordance with FFDCA requirements; and were manufactured in establishments registered with the Secretary of HHS. It appears unlikely that prescription drugs manufactured for the Canadian market would meet these and other requirements of FFDCA §§501, 502, and 505. While it is possible that a prescription drug could meet FDA requirements and therefore obtain FDA approval, in almost all cases, imported prescription drugs will not comply with the FFDCA. Thus, the provision would not have changed the current illegal status of most drugs imported from Canada, and it appears that CBP would still have been able to use appropriated funds to detain Canadian drug imports that did not comply with the selected sections of the FFDCA mentioned in the amendment.

As passed on September 30, 2008, §535 of P.L. 110 - 329 , the Consolidated Security, Disaster Assistance, and Continuing Appropriations Act, 2009, did not include the amended provision. The Consolidated Act contained the same text as the FY2007 Homeland Security Appropriations bill. Please see above for a discussion of that provision. The Department of Homeland Security had proposed deleting the section from the FY2007 appropriations bill in its Performance Budget Overview for FY2008, "because prohibiting CBP from exercising its authority to assist the FDA in enforcing current laws designed to protect the health and safety of American consumers is not the best way to address drug affordability."

Penalties Under the FFDCA and Other Federal Laws

If a business or consumer violates the FFDCA by importing unapproved or misbranded prescription drugs, there are a number of criminal and civil penalties that may apply. As set forth in the act, penalties vary depending on the offense. Violations of the act's general prohibitions are a misdemeanor offense punishable by up to a year in prison or a fine of up to $1,000, or both. A violation of a general FFDCA prohibition that occurs after a prior conviction for violating the act or that is committed with the intent to defraud or mislead is a felony offense punishable by up to three years of imprisonment or up to a $10,000 fine, or both. Penalties for violations of the FFDCA's importation provisions are stricter. If a business or consumer knowingly imports a drug in violation of these provisions, then the violation is a felony offense punishable by up to 10 years in prison or up to $250,000 in fines, or both.

Despite these designated penalties, individuals and corporations that violate the act may face monetary fines far greater than those specified in the FFDCA because those sanctions are superceded by general fines set forth in the Sentencing Reform Act of 1984, which applies across the board to all federal crimes. That statute raised the limit on the maximum penalties that apply to federal crimes. As a result, misdemeanor violations of the FFDCA are actually punishable by a fine of up to $100,000 for individuals and up to $200,000 for organizations, and felony violations of the act are punishable by up to $250,000 for individuals and up to $500,000 for corporations. In addition, federal courts are authorized to issue injunctions in order to enjoin violations of the act, and any drug that is adulterated or misbranded is subject to seizure under the act.

It is important to note that "[t]hose who aid and abet a criminal violation of the act, or conspire to violate the act, can also be found criminally liable." Federal criminal law generally makes it a separate crime to aid or abet any criminal offense against the United States or to conspire to commit a criminal offense against the United States, so illegal importers could potentially be charged with these offenses as well as other general federal crimes, such as mail or wire fraud or making false statements. In addition, the FFDCA explicitly forbids certain acts, as well as the causing of such prohibited acts. Thus, businesses that facilitate the importation of unapproved prescription drugs or U.S.-manufactured prescription drugs may be liable if they are deemed to be "causing" violations of the act. In addition to penalties under the FFDCA and other federal criminal statutes, individuals or businesses that illegally import prescription drugs that are also controlled substances may be subject to penalties under the Controlled Substances Act.

Despite the range of penalties that FDA has available to punish those who import prescription drugs in violation of the act, the agency has clarified that its "highest enforcement priority would not be actions against consumers." Indeed, the FDA exercises its enforcement discretion leniently in this regard by allowing consumers to import certain otherwise illegal prescription drugs under certain circumstances. These enforcement procedures, known as the FDA's personal importation procedures, are described in detail below.

The FDA's Personal Importation Procedures

Because importing unapproved prescription drugs is a violation of the FFDCA, the FDA is responsible for determining whether pharmaceuticals should be admitted into the United States. To determine whether to allow or refuse entry to imported drugs, the FDA developed its personal importation procedures. Under the procedures, the FDA exercises its enforcement discretion to permit consumers to import otherwise illegal prescription drugs for purposes of personal use. Recognizing that the agency's limited enforcement resources are best directed at commercial shipments of imported drugs rather than personal imports, the FDA may, at its discretion, refrain from taking legal action against illegally imported drugs under the following circumstances:

a) the intended use is unapproved and for a serious condition for which effective treatment may not be available domestically either through commercial or clinical means;

b) there is no known commercialization or promotion to persons residing in the U.S. by those involved in the distribution of the product at issue;

c) the product is considered not to represent an unreasonable risk; and

d) the individual seeking to import the product affirms in writing that it is for the patient's own use (generally not more than three month supply) and provides the name and address of the doctor licensed in the U.S. responsible for his or her treatment with the product, or provides evidence that the product is for the continuation of a treatment begun in a foreign country.

Ultimately, the personal importation procedures detail the FDA's enforcement priorities for imported drugs, but are not intended to grant a license to consumers to import unapproved prescription drugs into the United States. Indeed, the FDA emphasizes that even if all of the factors above are met, "the drugs remain illegal and FDA may decide that such drugs should be refused entry or seized." Furthermore, these procedures do not apply to commercial shipments of unapproved prescription drugs, nor are they intended to permit the importation of foreign versions of drugs that are already approved in the United States. Thus, it appears that personal importations of cheaper versions of prescription drugs that are already available in the U.S. do not conform to the FDA's personal importation procedures. Nevertheless, U.S. consumers continue to import drugs from abroad, and one Canadian group claims that Canadian pharmacies supply two million people in the U.S., or roughly one percent of the U.S. market for prescription drugs.

Meanwhile, in the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, Congress authorized the FDA to allow individuals to import prescription drugs for personal use under certain circumstances, provided that the Secretary has certified that importation is safe and cost-effective. Specifically, the act, subject to certification, requires the Secretary of HHS to allow individuals to import prescription drugs from Canada if the drug:

a) is imported from a licensed pharmacy for personal use by an individual, not for resale, in quantities that do not exceed a 90-day supply;

b) is accompanied by a copy of a valid prescription;

c) is imported from Canada, from a seller registered with the Secretary;

d) is a prescription drug approved by the Secretary ...

e) is in the form of a final finished dosage that was manufactured in [a registered] establishment ...

f) is imported under such other conditions as the Secretary determines to be necessary to ensure public safety.

Although the new individual importation provisions in the Medicare Act appear similar to the FDA's personal importation procedures, the legislation differs significantly because it contains the certification requirement. The current Secretary of HHS, however, has declined to provide such certification in the past, and it is unclear what direction the agency will take in the future. Thus, the new individual importation provisions do not appear to represent a codification of the FDA's personal importation procedures.

Although the FDA exercises its enforcement discretion to permit personal importation, such importation remains illegal. However, an elderly couple from Chicago challenged the FFDCA's prohibition on personal importation. In Andrews v. United States Department of Health and Human Services , the court rejected the plaintiffs' claim that the statutory prohibition on personal drug importation violated their substantive due process rights under the Fifth Amendment of the Constitution. The standard of review that courts use when reviewing substantive due process claims depends on whether or not the statute in question affects a fundamental right. If a statute affects a fundamental right, then strict judicial scrutiny is required; if the statute does not affect a fundamental right, then a court applies rational basis review. In the Andrews case, the court determined that there is no fundamental right "to purchase drugs from a preferred source at a preferred price." As a result, the court, applying the rational basis test, upheld the ban on personal importation because it is rationally related to a legitimate governmental interest in ensuring the safety of prescription medications.

State and Local Importation of Prescription Drugs: Violation of Federal Law?

Just as individual consumers have sought to buy cheaper prescription drugs from foreign sources, several state and local governments have in place or have considered plans to import or facilitate the importation of prescription drugs in order to save themselves or their residents money on medicines. Contending that carefully structured state programs will provide a sufficient degree of safety, states and cities continue to argue that they have a duty to explore innovative methods for providing more affordable prescription drugs to their residents, even at the risk of violating federal law. Currently, several states and the District of Columbia have online prescription drug importation programs, and several localities, including Boston, Massachusetts, are importing prescription drugs from Canada. Interest in importing Canadian prescription drugs may be beginning to wane due to factors including the Medicare Part D prescription drug program, a temporary increase in seizures by the CBP, declining currency-exchange rates, and a greater use of generic drugs. For example, the first city to import Canadian prescription drugs, Springfield, Massachusetts, reported no problems with its Canadian prescription drug importation program; however, it later switched to a state health benefits program that does not import Canadian prescription drugs.

Each state and local importation plan varies somewhat in the details. Illinois, for example, has implemented a drug importation program known as I-SaveRx. Under the program, the state has established a website that offers information regarding pharmacies in Canada, Ireland, and the United Kingdom that the state has inspected and determined to be reliable sources for prescription drugs. The state, however, does not import drugs directly, but rather provides users with information on available drugs, prices, and order forms. Currently, Kansas, Missouri, Vermont, and Wisconsin also participate in I-SaveRx. In addition, Rhode Island legislators passed a law that allows the state to license Canadian pharmacies. Many other states and localities have considered and/or implemented importation plans of their own.

In addition, several states, including Vermont, have petitioned the FDA in hope that the agency would, as it has done with regard to personal drug importation, exercise its enforcement discretion and allow states to establish prescription drug importation pilot plans. The Medicare Act authorized the FDA to provide waivers for individual importation, and some lawmakers have argued that the individual importation waiver authority extends to state importation plans because such plans are intended to provide prescription drugs to individual state residents. The FDA, however, responded that the waiver provisions in the Medicare Act become effective only upon certification by the Secretary that drug importation is safe and reduces costs. If the Secretary would grant a waiver or if federal law would otherwise allow such a program, Maine would provide access to foreign prescription drugs.

Ultimately, Vermont, whose petition for a pilot program was rejected by the FDA, sued the agency, claiming that the FDA's failure to implement regulations that authorize waivers and subsequent denial of Vermont's petition violated the Administrative Procedure Act (APA). The Vermont lawsuit also claimed that the importation provisions in the Medicare Act constitute an unconstitutional delegation of legislative authority to the Secretary of HHS. Vermont's claims, however, were rejected by a federal district court. In the case, Vermont v. Leavitt , the court held that the FDA did not act arbitrarily and capriciously in violation of the APA because Vermont's petition asked the agency to approve a program that was illegal. The court based its ruling, in part, on its determination that, as the FDA had argued, the FFDCA provision authorizing waivers for personal importation becomes effective only upon certification by the Secretary that drug importation is safe and reduces costs. Likewise, the court rejected Vermont's claim that the certification provision constitutes an unconstitutional delegation of legislative authority, holding that the provision "provides clear guidance to the Secretary of HHS by directing the Secretary to consider safety and cost-effectiveness." Vermont did not appeal the decision.

Montgomery County in Maryland petitioned the FDA for a waiver to allow its residents and employees to import prescription drugs from Canada. The FDA rejected the petition, citing the Leavitt case. In response, Montgomery County filed a lawsuit alleging that the FDA's denial of its petition was arbitrary and capricious and violated the APA. Specifically, the County argued that the FDA's action was arbitrary because the agency has tacitly allowed numerous other states and localities to import prescription drugs in violation of the FFDCA but nonetheless refuses to assist jurisdictions that attempt to import drugs legally under a waiver program. Furthermore, the County contended that the FDA's failure to act with respect to illegal importation programs indicates that the agency does not believe that importation poses a safety risk, despite the agency's statements to the contrary. The federal district court granted the FDA's motion to dismiss the case. The court held that the FDA complied with the FFDCA and the Medicare Act when it denied the County's waiver request and found the FDA's denial did not violate the APA because it was not arbitrary or capricious. In response to the County's argument that the FDA failed to act with respect to importation programs, the court held that "the FDA's failure to enforce the FFDCA in some situations does not constitute de facto certification by the Secretary" of HHS, because the statute gives the Secretary discretion to issue such certification that Canadian prescription drug importation programs are safe and cost-effective. The court could not review the Secretary's failure to certify importation programs, nor could the court grant the County any relief, because certification is discretionary.

Despite the efforts of such state and local governments, the FDA continues to maintain that importing unapproved prescription drugs is unsafe and illegal. Indeed, FDA representatives have met with and sought to convince state officials to change their minds about importing drugs in apparent violation of federal law. At the same time, the agency has notified certain states of its legal position regarding drug imports. For example, according to the FDA's response to an inquiry from California officials, "if an entity or person within the State of California (including any state, county, or city program, any public pension, or any Indian Reservation) were to import prescription drugs into the State of California from Canada [or any other foreign country], it would violate FFDCA in virtually every instance."

The FDA provides several legal arguments for reaching its conclusion that state and local drug importation is a violation of the FFDCA. First, the statute prohibits anyone other than the manufacturer from importing drugs that were originally manufactured in the United States. Second, even if an FDA-approved drug is manufactured outside the U.S., the imported version of the drug will likely violate statutory requirements regarding drug approvals, labeling, and dispensing. These first two arguments are identical to the arguments that FDA has made when explaining why the agency views business and consumer imports of prescription drugs to be statutory violations. Therefore, the FDA considers virtually any imports of prescription drugs, as well as virtually any act that causes such imports, to be illegal, regardless of whether such imports are conducted by businesses, consumers, or governmental entities.

In addition, the FDA contends that any effort by states to enact legislation authorizing prescription drug imports would be preempted by federal law. Although the FDA sets forth several legal arguments for its position, preemption of a state act's importation provisions does not appear to have been tested in court, and there are several instances in which other prescription drug provisions in the FFDCA have been held not to preempt state law. Finally, the agency has warned some states that they could be subject to lawsuits for injuries to consumers who relied on the state's endorsement when purchasing prescription drugs from Canada. For example, in a letter to Minnesota state officials, the FDA warned of "the potential tort liability that a state could be subject to if a citizen purchases an unapproved, illegal drug on your advice, and suffers an injury as a result."

Despite the FDA's position regarding state and local imports of prescription drugs, it appears that the agency is currently refraining from taking legal action against state and local governments that have established drug importation programs. Indeed, in a warning letter to Minnesota, which established a website that provides information about accessing less costly prescription drugs from Canada, the agency notably refrained from asserting that the state's program violated the FFDCA and did not describe any potential enforcement action that the FDA might take. Likewise, the FDA has indicated that it is unlikely to sue the state of Illinois, which has implemented a plan to import drugs from Canada and certain European countries, despite the agency's earlier pronouncement that it would refrain from suing states and localities as long as those entities imported drugs from Canada and not from other countries. One possibility is that the agency is "simply waiting for a state to actually buy foreign drugs for their residents, which would constitute direct commercial importation, before taking legal action." Although several localities are importing drugs directly, "the FDA has not gone after these cities because they are too small." Previously, the FDA had indicated that it had not yet sued states or localities because "the agency wants to first win its case against Rx Depot, giving FDA bargaining power for the more difficult task of taking formal action against states and local governments." However, in the Rx Depot case, which involved a private company that helped individual consumers import prescription drugs, the FDA successfully concluded its lawsuit when Rx Depot agreed to enter into a consent decree that permanently enjoins the company from the importation of unapproved prescription drugs. The Rx Depot case is discussed in detail in the following section.

Businesses That Facilitate Importation of Prescription Drugs

Although the FDA has refrained thus far from taking legal action against both states and individual consumers who import prescription drugs in violation of the FFDCA, the agency has pursued legal action against businesses that facilitate the importation of such drugs. Unlike pharmacies, which receive orders from consumers and dispense drugs directly, some businesses facilitate drug sales without dispensing drugs directly. Rather, these companies, many of which are online, act as middlemen between consumers, who provide medical and payment information, and foreign (typically Canadian) pharmacies, which then ship drugs directly to consumers. The FDA has pursued legal action against at least one such business. That case is discussed in detail in this section, while separate but related issues involving online pharmacies are discussed in CRS Report RS21711, Legal Issues Related to Prescription Drug Sales on the Internet .

In United States v. Rx Depot , the Department of Justice (DOJ), acting on behalf of the FDA, filed suit against Rx Depot, a storefront operation that helped U.S. consumers obtain prescription drugs from Canada. In the suit, DOJ contended that Rx Depot was violating two provisions of the FFDCA, namely the provision prohibiting importation and the provision prohibiting the introduction into interstate commerce of any drug that violates the act's approval requirements. Although Rx Depot was not directly importing drugs, the company admitted that it was "engaged in the business of causing the shipment of U.S.-manufactured and unapproved, foreign-manufactured prescription drugs from Canadian pharmacies to U.S. citizens."

Rx Depot countered that the FDA was not actually concerned about the safety of imported drugs because the agency had never tested the drugs it bought from Rx Depot as part of a sting operation against the company. Similar complaints have been voiced by other businesses that facilitate the importation of prescription drugs. Critics of FDA's importation stance also argue that it "fails to protect the public health because it allows individuals to import drugs, while prohibiting 'commercial' operations that are in the best position to develop safeguards," and allege that the FDA's importation procedures may violate international trade agreements. Ultimately, critics argue that the FDA's procedures protect the profits of drug manufacturers at the expense of consumer pocketbooks.

Despite these arguments, the district court held against Rx Depot during a preliminary ruling in the case. Concluding that "Rx Depot's importation of prescription drugs clearly violates the law," the district court issued a preliminary injunction enjoining Rx Depot from facilitating the importation of prescription drugs. While the court's order was not actually a final order on the merits of the case, it did indicate that DOJ had a substantial likelihood of prevailing in the lawsuit. Indeed, the court appeared particularly concerned with the safety of imported drugs:

[U]napproved prescription drugs and drugs imported from foreign countries by someone other than the U.S.-manufacturer do not have the same assurance of safety and efficacy as drugs regulated by the Food and Drug Administration. ... Because the drugs are not subject to FDA oversight and are not continuously under the custody of a U.S. manufacturer or authorized distributor, their quality is less predictable than drugs obtained in the United States. For instance, the drugs may be contaminated, counterfeit, or contain erratic amounts of the active ingredient or different excipients. Also, the drugs may have been held under uncertain storage conditions, and therefore be outdated or subpotent.

With regard to Rx Depot, the court specifically noted that drugs ordered through the company were often dispensed in quantities greater than prescribed and did not contain the required package inserts. Although the court acknowledged that the cost of prescription drugs in the U.S. is high and that there are no known cases of an individual who has suffered harm from drugs imported through Rx Depot, the court nevertheless concluded that the FDA has legitimate safety concerns and that Congress is in the best position to resolve the tension between prescription drug safety and cost.

Shortly after the court issued the preliminary injunction, Rx Depot agreed to enter into a consent decree with the FDA. Under the terms of the consent decree, Rx Depot "admitted liability for causing the importation of unapproved new drugs and U.S.-manufactured drugs in violation of the act and agreed to permanently cease such activities." In the wake of the consent decree, the legal battle continued, as the U.S. requested disgorgement of Rx Depot's profits. The federal court of appeals found that disgorgement was an appropriate remedy under the FFDCA because disgorgement "furthers the purposes of the FDCA by deterring future violations of the Act which may put the public health and safety at risk." Many companies like Rx Depot remain in business, and a number of states and localities have contemplated or implemented their own importation programs. In response, several drug manufacturers have begun limiting sales of their drugs to Canadian pharmacies in an effort to prevent the drugs from being resold in the U.S. at cheaper prices. These actions have raised questions about whether such behavior violates federal antitrust laws, a topic that is discussed in the following section.

Antitrust Laws142

As noted above, several major prescription drug manufacturers have responded to the rise in the number of businesses and consumers that are importing cheaper drugs into the U.S. by reducing the supply of such drugs to distributors and pharmacies in Canada, where most of the imported drugs originate. Although some manufacturers argue that restrictions on sales are designed to prevent drug shortages in Canada, such moves may instead be intended to limit Canadian distributors and pharmacies to selling prescription drugs to Canadian consumers only, rather than selling excess supplies of prescription drugs to U.S. consumers at cheaper prices than such consumers would pay for similar drugs in the United States. As a result, several members of Congress have questioned whether these drug manufacturers are violating federal antitrust laws. Several bills introduced in the 109 th Congress would have prohibited such sales tactics, and similar legislation was introduced in the 110 th Congress. Furthermore, a federal district court issued what appears to be the first ruling regarding antitrust allegations against several drug manufacturers and the decision was affirmed on appeal. In addition, at least one state has launched an investigation into whether the drug manufacturer GlaxoSmithKline (GSK) has violated state antitrust laws. This section discusses the potential federal and state antitrust issues raised by the decision of certain drug manufacturers to limit the supply of drugs to Canadian distributors and pharmacies.

Federal Antitrust Law

Federal antitrust law is concerned with the competitiveness of markets (competition), and not with the competitors—unless they have suffered an injury as a result of an actionable wrong under the antitrust laws. Similarly, the achievement or implementation of specific programs or goals is not a concern of the federal antitrust laws. It is not a given, therefore, that existing federal antitrust laws could be successfully employed to challenge pharmaceutical manufacturers whose actions appear either to reduce the U.S. supply of imported prescription drugs or to make it more difficult for Americans to purchase prescription drugs from other countries, including Canada.

First, neither current antitrust statutes nor doctrine make unlawful the market-oriented activities of individual entities, unless, under certain circumstances, the entity is a monopolist. Section 1 of the Sherman Act makes illegal "[e]very contract, combination ... or conspiracy, in restraint of trade or commerce ..." That provision, by its terms, may only be violated by multiple parties engaged in concerted, or joint action. Thus, it would not currently be applicable to, for example, a drug manufacturer who, on his own, and not in agreement with another drug manufacturer or other person, refuses to supply, or reduces supplies to, a Canadian or other non-U.S. pharmacy.

The Sherman Act [15 U.S.C. §§1-7] contains a 'basic distinction between concerted and independent action.' The conduct of a single firm is governed by § 2 [of the Sherman Act, 15 U.S.C. §2] alone and is unlawful only when it threatens actual monopolization . It is not enough that a single firm appears to 'restrain trade' unreasonably, for even a vigorous competitor may leave that impression.... Section 1 of the Sherman Act [15 U.S.C. §1], in contrast, reaches unreasonable restraints of trade effected by a 'contract, combination . . . or conspiracy' between separate entities. It does not reach conduct that is 'wholly unilateral.'"

Moreover, the Court long ago noted in United States v. Colgate that

the [Sherman] act does not restrict the long recognized right of [a] trader or manufacturer engaged in an entirely private business, freely to exercise his own independent discretion as to parties with whom he will deal; and, of course, he may announce in advance the circumstances under which he will refuse to sell.

The U.S. Court of Appeals for the Federal Circuit added that the fundamental Colgate precept of seller choice set out above is not altered by the applicability of either the patent or copyright law to the item(s) in question, unless it is judicially determined that the patent or copyright in question was fraudulently procured.

Second, whether certain joint activity is unlawful and therefore violates the antitrust statutes is not always susceptible of proof. Although the Supreme Court has indicated several times that a formal contract may not be necessary to establish the collective action required by section 1, an antitrust violation may be found if the unlawful agreement can be inferred from the totality of surrounding circumstances.

In 1984, in Monsanto Co. v. Spray-Rite Service Corp. , the Court said:

The correct standard is that there must be evidence that tends to exclude the possibility of independent action by the [parties]. That is, there must be direct or circumstantial evidence that reasonably tends to prove that the [parties] had a conscious commitment to a common scheme designed to achieve an unlawful objective.

"Conscious parallelism" is the term often given to uniform or synchronous business behavior, which, while prima face evidence of concerted behavior, is not proof of unlawful agreement. In an early case, for example, the Court held that the circumstances surrounding imposition by eight motions picture distributors of nearly identical restraints concerning the licensing of first-run "feature" films were sufficient to create a valid inference that the distributors had acted in concert, in violation of section 1 of the Sherman Act.

It is elementary that an unlawful conspiracy may be and often is formed without simultaneous action or agreement on the part of the conspirators. Acceptance by competitors, without previous agreement, of an invitation to participate in a plan, the necessary consequence of which, if carried out, is restraint of interstate commerce, is sufficient to establish an unlawful conspiracy under the Sherman Act.

In Theatre Enterprises v. Paramount Film Distributing Corp. , the Court continued to state that parallel behavior by itself is not necessarily proof of a conspiracy:

The crucial question is whether respondents' conduct toward petitioner stemmed from independent decision or from an agreement, tacit or express. To be sure, business behavior is admissible circumstantial evidence from which the fact finder may find agreement. But this Court has never held that proof of parallel business behavior conclusively establishes agreement or, phrased differently, that such behavior itself constitutes a Sherman Act offense. Circumstantial evidence of consciously parallel behavior may have made heavy inroads into the traditional judicial attitude toward conspiracy; but "conscious parallelism" has not yet read conspiracy out of the Sherman Act entirely.

Although the Supreme Court has stated, and lower court decisions have continued to illustrate, that an unlawful agreement or conspiracy in restraint of trade may be proved by consciously parallel behavior that is accompanied by any of several "plus" factors—"the additional facts or factors required to be proved as a prerequisite to finding that parallel action amounts to a conspiracy" —there has not been much agreement or standardization concerning exactly which "plus" factors are to be given what, if any, evidentiary weight. The "plus" factors courts have considered favorably include artificial standardization of products and raising prices in time of surplus. Less persuasive is evidence that indicates merely that the parties had an opportunity to collude. That the parties communicated with one another is, at best, ambiguous evidence of conspiracy. The bottom line appears to be whether the parties acted in their own self-interest: where there is no direct evidence of a conspiracy, behavior as consistent with a desire to maintain profitability or to remain in business at all as with any participation in injurious or unlawful conduct does not constitute sufficient indirect evidence of an alleged conspiracy; similarly, where a defendant would have little or no motive to enter a conspiracy, his actions will be considered unilateral and independent.

Based upon these cases and assuming that there is no evidence that the drug manufacturers in question conspired or colluded when reducing drug supplies to Canadian distributors and pharmacies, it would appear difficult to sustain a charge that the drug companies that limit sales to Canada have violated the Sherman Act. Indeed, there may be lawful reasons for their actions. For example, the manufacturers may be capable of supplying only the United States market and to a lesser extent foreign markets because of limited production capacity. They may also need to recoup research and development costs by obtaining a profit margin through sales primarily in the United States. However, if one were able to show that the drug companies did in fact conspire or collude or that they engaged in parallel behavior accompanied by other factors, a case might be made for a Sherman Act violation.

In the first federal court case on the question, In Re: Canadian Import Antitrust Litigation , a group of consumers and organizations from Minnesota who purchased prescription drugs in the U.S. from American drug companies challenged the defendant drug companies. The plaintiffs claimed that the defendants violated federal antitrust laws "by engaging in a course of conduct designed to suppress the importation of prescription drugs purchased from Canadian pharmacies for personal use in the United States." The district court held that prescription drugs imported from Canada are misbranded and that "the transport of drugs for personal use into the United States constitutes an 'introduction into interstate commerce.'" The introduction of misbranded drugs into interstate commerce violates the FFDCA. Noting that the plaintiffs lacked standing "to challenge Defendants' allegedly anti-competitive behavior because the importation of these drugs is unlawful and, therefore, not the type of activity which federal antitrust laws were designed to protect," the district court dismissed the case. The district court also dismissed the state and common law claims, which were ancillary to the federal antitrust claim, after deciding not to exercise supplemental jurisdiction over them.

On appeal, the United States Court of Appeals for the Eighth Circuit affirmed the district court judgment, finding that the importation of prescription drugs from Canada is illegal and that the plaintiffs did not have standing under antitrust laws to maintain the suit. Even if importation were legal, according to the court, the antitrust injury that the plaintiffs encountered—"an absence of competition from Canadian sources in the domestic prescription drug market"—was not a result of the defendants' behavior and was not an injury that the antitrust laws were designed to prevent. Rather, the injury to the plaintiffs was "caused by the federal statutory and regulatory scheme adopted by the United States government." Although this decision is not binding on courts in other jurisdictions, it provides an initial glimpse of how the antitrust issue may play out in the courts.

Despite the apparent lack of violation of federal antitrust law, drug manufacturers that limit sales of prescription drugs to Canadian distributors and pharmacies may still violate state antitrust laws. Because antitrust laws vary from state to state, this section does not provide an exhaustive analysis of state antitrust laws, but rather describes the legal dispute between GlaxoSmithKline (GSK) and the state of Minnesota as an example of potential liability under state antitrust statutes.

State Antitrust Law

Even if drug manufacturers that limit sales of prescription drugs to certain Canadian distributors and pharmacies are found not to have violated federal antitrust laws, they may still be in violation of state antitrust law. Antitrust laws exist in all fifty states and the District of Columbia, but their scope and enforcement differ from state to state. Most state antitrust laws mirror the federal statutes or are interpreted to reflect case law interpreting these federal statutes, although there are a small number of states in which a restraint of trade violation includes a unilateral act. This section describes the recent legal dispute between the state of Minnesota and GlaxoSmithKline (GSK) over state antitrust law and its effect on prescription drug importation.

In 2003, the Minnesota Attorney General (AG), who is investigating whether GSK violated Minnesota antitrust laws, filed a court motion seeking to compel GSK to release information located in Canada and the United Kingdom about the company's decision to stop selling drugs to Canadian pharmacies that then sell the drugs to U.S. consumers. According to the AG, GSK conspired to limit drug sales to Canada, and "GSK's refusal to supply prescription drugs to Canadian pharmacies that sell drugs to Minnesota buyers violates state laws." In reply, GSK argued that "importing drugs from Canada is illegal and a drug company can take steps to stop illegal sales of its products;" and also that federal law preempts Minnesota's antitrust laws. Ultimately, the district court of Hennepin County, Minnesota, ordered GSK to produce the records and information sought by the AG. The court ruled that even if GSK's position that "the importation of non-approved drugs from Canada is illegal under the FDCA, and there cannot be a conspiracy in violation of the antitrust laws to restrain trade in illegal goods" were correct, which the court questioned, "[e]nforcement of federal law is the responsibility of the FDA, not of GSK," especially since "the FDA has never even reviewed GSK's boycott," much less specifically approved it. The district court judge obliquely addressed the preemption argument, finding sufficient authority for the Minnesota AG's investigation and the document request in pursuit of that investigation under the Minnesota statute that mandates that the Attorney General "investigate violations of the business and trade laws of this state.... "

Based on information revealed in the GSK documents that were turned over, the Minnesota AG filed a lawsuit against GSK in 2004, alleging that the company had violated state antitrust laws. GSK and the Minnesota AG are mired in fighting over the public release of over 40 documents turned over by GSK. The Minnesota Supreme Court recently remanded the case regarding public disclosure of the documents to the district court with a framework to apply to determine whether to issue a protective order for each document in order to protect a person's association rights or to publicly disclose the document's information. Minnesota's case against GSK may have been harmed by a federal court decision in In re: Canadian Import Antitrust Litigation , which determined that drug manufacturers had not violated federal antitrust law by attempting to halt the importation of prescription drugs.

International Trade Law189

As with antitrust law, international trade obligations may also impact the feasibility of prescription drug importation. On the one hand, permitting some importation of prescription drugs may be seen as removing an existing barrier to trade or trade liberalizing; on the other hand, the United States' international trade obligations may present obstacles to prescription drug importation. Furthermore, legislative and/or regulatory proposals regarding importation may be inconsistent with provisions of various international trade agreements including, but not limited to, the General Agreement on Tariffs and Trade 1994 (GATT 1994), the Agreement on Technical Barriers to Trade (TBT) and the General Agreement on Trade in Services (GATS), all of which are a part of the World Trade Organization (WTO) Agreement to which the United States is a signatory member. At the same time, however, these agreements contain exceptions that may be used to justify some of the potential inconsistencies that may arise.

General Agreement on Tariffs and Trade

Under the GATT 1994, Articles III:4, I:1 and XI:1 contain provisions that may affect prescription drug imports. Generally, Article III governs the application of domestic regulatory measures requiring that "laws, regulations and requirements affecting the internal sale, offering for sale, purchase, transportation, distribution or use of products ... should not be applied to domestic products so as to afford protection to domestic production." Article III:4 specifically obligates Member countries, with respect to all such domestic measures, to provide national treatment to imported products from other WTO Member countries. Simply put, national treatment requires that Member countries not discriminate against imported goods relative to like domestic products. In addition to the national treatment obligation, internal regulatory measures are also required to comply with Article I:1, the most-favored-nation (MFN) clause. MFN requires that "any advantage, favor, privilege or immunity granted by any contracting party to any product originating in or destined for any other country shall be accorded immediately and unconditionally to the like product originating in or destined for the territories of all other contracting parties." The inclusion of Article III measures within the Article I:1 MFN obligation was intended to extend the obligation to them "regardless of whether national treatment is provided with respect to these matters."

To the extent that any legislative or regulatory proposal contains requirements affecting the internal sale, offering for sale, purchase, transportation, distribution, or use of prescription drugs in the United States, it could be viewed as falling within the purview of Article III. The provisions of Article III have been interpreted broadly, with the use of the word "affecting" having been interpreted as implying that the drafters of the Article intended it to apply to "not only the laws and regulations which directly govern[] the conditions of sale or purchase, but also in any law or regulations which might adversely modify the conditions of competition between the domestic and imported products in the international market." Given this broad interpretation, it appears that any proposals containing provisions affecting the labeling of imported drugs, or requiring that prescription drugs produced in foreign countries for importation be destined only for the United States may be interpreted by the WTO as inconsistent with our national treatment and MFN obligations.

In addition to potential conflicts with Articles III:4 and I:1, GATT Article XI:1 prohibits a Member country from instituting or maintaining quantitative prohibitions or restrictions "on the importation of any product of the territory of any other contracting party." The language of Article XI has been interpreted to be comprehensive, applying to "all measures instituted or maintained by a contracting party prohibiting or restricting the importation, exportation ... of the products other than measures that take the form of taxes duties and charges." Measures may fall within the scope of Article XI:1 if they "prevent the importation of goods as such," or "affect the right of importation as such." Furthermore, Article XI:1 requires that any quantitative restrictions that are imposed be instituted on a non-discriminatory basis, in other words, that all exports of like products to and imports of like products of, third countries be similarly restricted or prohibited. Therefore, to the extent that any legislative or regulatory proposal appears to prohibit, or authorize prohibitions, on the importation of prescription drugs under specific circumstances, there is a possibility that the proposals may constitute or result in a measure affecting importation "as such," and thus, may be challenged under Article XI:1.

Article XX contains the general exceptions to the GATT. These general exceptions permit Members to impose otherwise GATT-inconsistent measures to fulfill certain enumerated public policy objectives, provided that the measures are not "applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination between countries where the same conditions prevail or a disguised restriction on international trade." Specifically relevant to legislation involving prescription drugs is Article XX(b), which exempts measures "necessary to protect human, animal or plant life and health."

To determine whether a measure is eligible for the Article XX(b) exception a three-part test, as established by the WTO Appellate Body (AB) must be applied. First, the policy must fall within the range of policies designed to protect life or health. Second, the country invoking the exception must show that any GATT/WTO inconsistent measures are "necessary" to fulfill the policy objective. Third, the measures must be applied in conformity with the introductory clause, or "chapeau," of Article XX. Finally, should the United States invoke Article XX(b) in defense of the import restrictions, the United States would bear the burden of demonstrating that the measures satisfy all three parts of the test.

In addition to Article XX(b), another possibly relevant GATT exception is Article XX(d), which may be invoked where an allegedly GATT-inconsistent measure can be shown to be "necessary to secure compliance with laws or regulations that are not inconsistent with the provisions of the Agreement, including those related to customs enforcement, ... the protection of patents, trade marks and copyrights, and the prevention of deceptive practices."

WTO Agreement on Technical Barriers to Trade

According to its preamble, the WTO Agreement on Technical Barriers to Trade (TBT Agreement) expands upon the GATT Article III obligations with respect to internal regulations and is intended to promote the general aims of the GATT. The TBT Agreement applies to all products, including industrial and agricultural products, but does not apply to measures covered by the WTO Agreement on Sanitary and Phytosanitary Measures, nor to government purchasing specifications for production or consumption of governmental bodies.

The three categories of measures covered by the TBT Agreement are: (1) technical regulations; (2) standards; and (3) conformity assessment procedures. Of particular relevance to prescription drug importation are technical regulations and conformity assessment procedures.

A "technical regulation" is defined as a "[d]ocument which lays down product characteristics or their related processing and production methods, including their administrative provisions, with which compliance is mandatory." A technical regulation may also include or deal exclusively with terminology, symbols, packaging, marking or labeling requirements as they apply to a product, process or production method." To qualify as a "technical regulation," a measure must fulfill three criteria, derived from the above-cited definition:

First , the document must apply to an identifiable product or group of products. The identifiable product or group of products need not, however, be expressly identified in the document. Second , the document must lay down one or more characteristics of the product. These product characteristics may be intrinsic, or they may be related to the product. They may be prescribed or imposed in either a positive or negative form. Third , compliance with the product characteristic must be mandatory.

The TBT Agreement's primary obligations require that the central governments of WTO Members provide national treatment with respect to technical regulations. In addition, WTO Members must also "ensure that technical regulations are not prepared, adopted or applied with a view to or with the effect of creating unnecessary obstacles to international trade." This means that "technical regulations shall be no more trade-restrictive than necessary to fulfil a legitimate objective, taking account of the risks non-fulfillment would create. Such legitimate objectives [include] ... the prevention of deceptive practices; [and] protection of human health or safety ..." Moreover, Members are obligated not to maintain technical regulations "if the circumstances or objectives giving rise to their adoption no longer exist or if the changed circumstances or objectives can be addressed in a less trade-restrictive manner."

A conformity assessment procedure is "[a]ny procedure used, directly or indirectly, to determine that relevant requirements in technical regulations or standards are fulfilled." Such procedures may include, among other things, "procedures for sampling, testing and inspection; evaluation, verification and assurance of conformity; registration, accreditation and approval as well as their combinations."

Obligations concerning conformity assessment procedures are primarily contained in Article 5 of the TBT Agreement, which requires WTO Members to ensure that a number of specific requirements are met "where a positive assurance of conformity with technical regulations is required." These include a requirement that the procedures be prepared, adopted and applied in accordance with the principles of national treatment. The TBT Agreement further provides that "access entails suppliers' right to an assessment of conformity under the rules of the procedure." In addition, conformity assessment procedures may not be "prepared, adopted or applied with a view to or with the effect of creating unnecessary obstacles to international trade," meaning, among other things, that "conformity assessment procedures shall not be more strict or be applied more strictly than is necessary to give the importing Member adequate confidence that products conform with the applicable technical regulations ... , taking account of the risks non-conformity would create."

Application of the TBT Agreement will depend on the details of any prescription drug importation program that might be enacted. The AB has speculated that a measure consisting " only of a prohibition on ... [a product] ... might not constitute a 'technical regulation,'" thereby placing it outside the scope of the TBT Agreement. On the other hand, a measure that has both "prohibitive and permissive elements" may potentially be covered by the Agreement. If a legislative or regulatory proposal were to be considered solely in light of provisions that would allow importation of drugs from a limited set of approved countries, the proposal could potentially be viewed as constituting solely a prohibition (albeit implied) on importing prescription drugs from countries other than those named or designated as such. One might thus be able to argue, based on the above-quoted AB statement, that there are no issues under the TBT Agreement. On the other hand, were any such proposal to be viewed more broadly—that is, as having both prohibitive and permissive elements—TBT obligations may come into play.

While the TBT Agreement does not contain a separate Article with general exceptions, there is language within the Agreement that appears to provide for something similar to an Article XX(b) exception. Specifically, the Preamble to the TBT Agreement states that "no country should be prevented from taking measures necessary ... for the protection of human, animal or plant life or health ..." Given that there has been no WTO panel or AB ruling to date with respect to this language, it remains unclear as to what, if any, weight or interpretation this language would be given, especially considering it appears only in the Preamble and is not within the body of the agreement.

General Agreement on Trade in Services

The General Agreement on Trade in Services (GATS) applies to "measures by Members affecting trade in services." The Agreement defines trade in services as the supply of a service through four modes, two of which would appear to be most relevant to the issue of prescription drug importation: cross-border supply, or supply "from the territory of one Member into the territory of any other Member" (Mode 1) and consumption abroad, or supply "in the territory of one Member to the service consumer of any other Member" (Mode 2).

For purposes of the GATS, the phrase "measures by Members affecting trade in services" has been interpreted broadly, encompassing "any measure of a Member to the extent it affects the supply of a service regardless of whether such measure directly governs the supply of a service or whether it regulates other matters but nevertheless affects trade in services."

A basic obligation of the GATS is the unconditional most-favored-nation (MFN) obligation set forth at Article II:1. The obligation applies to "any" GATS-covered measure, though Members are allowed to exempt specific national measures pursuant to Article II:1 and the Annex on Article II Exemptions and may accord preferential treatment to countries that are members of regional trade agreements ( see GATS, Arts. V and V bis ). The other fundamental GATS obligations are the market access and national treatment obligations made with respect to a Member's specific scheduled sectoral commitments. These are set forth, with any limitations, in the Member's Schedule of Specific Commitments by mode of service supply. As with the TBT Agreement, application of the GATS will depend on the details of any specific prescription drug importation that might be enacted. For example, in the event that a legislative or regulatory proposal affects the wholesale distribution of prescription drugs, the measure may be subject to a WTO challenge as inconsistent with our specific GATS commitments.

GATS obligations are also subject to various general exceptions at Article XIV, including one for measures "necessary to protect human, animal, or plant life or health." General exceptions are subject to a requirement that such measures "are not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination between countries where like conditions prevail, or a disguised restriction on trade in services." While there does not appear to be any WTO jurisprudence on this exception to date, it would seem that the same or similar test as the GATT Article XX(b) exception would also be applicable with respect to the GATS Article XIV. It should be noted, however, that the GATS contains the phrase "like conditions" as opposed to the phrase "same conditions" found in the GATT. In the absence of any WTO jurisprudence, it remains unclear whether this change in language would have any effect on the application of the exception.

Patent Law

In addition to raising questions about antitrust law and trade law, the issue of prescription drug imports has also prompted inquiries regarding whether or not a drug importation program would violate patent rights. In particular, a federal court case, Jazz Photo Corp. v. ITC , has raised the prospect that a drug manufacturer could, under certain circumstances, sue a drug importer for patent infringement and block U.S. imports of drugs the company sells abroad. Under patent law, the first sale of a patented product in a given market extinguishes, or "exhausts," the patent holder's rights in the product. Prior to the Jazz Photo decision, some legal commentators believed that this exhaustion doctrine extended internationally, meaning that the sale of a patented product abroad would exhaust the patent rights in the U.S. and elsewhere, thereby allowing the purchaser of the product to use, sell, or otherwise do as he pleases with the product without regard to the patent holder, unless the purchaser is contractually restricted from importing into the U.S.

In Jazz Photo , however, the court, which addressed the exhaustion doctrine question only briefly, stated: "United States patent rights are not exhausted by products of foreign provenance. To invoke the protection of the first sale doctrine, the authorized first sale must have occurred under the United States patent." Under this ruling, because the U.S. patent is not exhausted by the foreign sale, the patent holder retains its patent rights. Thus, a drug manufacturer could exercise these rights to block imports of its patented drug products into the U.S. It is important to note, however, that some legal commentators have questioned the validity of the ruling in the Jazz Photo case, and bills proposed in the 109 th and 110 th Congresses would have overturned the ruling with respect to patent exhaustion for pharmaceutical imports. For further information on the subject, see CRS Report RL32400, Patents and Drug Importation , by [author name scrubbed].

III. Conclusion

The debate about importing prescription drugs continues. Although the FDA maintains that it cannot guarantee the safety or effectiveness of imported drugs, many U.S. consumers, in search of affordable prices, continue to purchase and import such drugs. As a result, legislators and interest groups have suggested a variety of changes to current law, including encouraging the development of more generic drugs; negotiating lower drug prices through bulk purchase programs; increasing prescription drug insurance coverage; lowering co-pays; allowing drug imports but restricting ports of entry; establishing state pilot programs; allowing only certain drugs to be imported; educating consumers about the dangers of imported drugs; allowing drug imports from approved Canadian pharmacies only; regulating credit card companies, search engines, and shipping companies that enable rogue online pharmacy sites to do business; increasing the number of inspections of foreign drug manufacturers; and utilizing anti-counterfeiting technologies, such as radio frequency identification technology (RFID), for shipments of prescription drugs.