The pricing of prescription drugs has become a significant concern for many U.S. consumers. As spending on health care has risen in recent years, so too has consumer interest in purchasing more affordable medications. Overseas markets provide one possible source of less costly prescription drugs. Some comparative studies of prescription drug prices in the United States and foreign nations have concluded that prices for specific drugs may be significantly lower abroad. These price disparities in some instances have encouraged individuals and firms, as well as state and local governments, to attempt to import comparable medications from abroad in order to realize cost savings. The practice of importing patented prescription drugs outside the distribution channels established by the brand-name drug company is commonly termed "parallel importation." Parallel imports are authentic products that are legitimately distributed abroad and then sold to consumers in the United States, without the permission of the authorized U.S. dealer. These goods are legitimate in that they are produced by the brand-name drug company or its authorized representative. In particular, parallel imports are not generic versions of a brand-name drug distributed by a different manufacturer, nor are they pirated copies that form part of the "black market." Because parallel imports disrupt the marketing arrangements established by the brand-name drug company, however, they are sometimes called "grey market goods." Current debate surrounding the parallel importation of prescription pharmaceuticals has largely addressed the safety and efficacy of the imported medications. This practice may also raise significant intellectual property concerns, however. Many prescription drugs are subject to patent rights in the United States. Indeed, because patented drugs usually have no exact generic equivalent available in the marketplace, economic incentives for parallel importation may be strongest for patented medications. Among the rights granted by an issued patent is the ability to exclude others from importing the patented product into the United States. As a result, even if a foreign drug is judged safe and effective for domestic use, brand-name firms may nonetheless be able to block the unauthorized importation of prescription drugs through use of their patent rights. Legislation introduced before the 110 th Congress, S. 1082 , would account for the patent implications of the parallel importation of pharmaceuticals. In particular, this bill would amend the Patent Act of 1952 to provide that it is not an act of patent infringement to import into the United States a drug that was first sold abroad by or under authority of the owner or licensee of such patent. The effect of this bill would be to introduce a doctrine known as "international exhaustion" into the U.S. patent law. The parallel trade of patented pharmaceuticals involves a fundamental trade-off within the intellectual property law: encouraging the labors that led to technological innovation, on one hand, and promoting access to the fruits of those labors, on the other. The patent system is built upon the premise that patents provide individuals with an incentive to innovate by awarding inventors exclusive rights in their inventions for a limited period of time. Some observers believe that a diminishment of patent rights will decrease incentives to develop new pharmaceuticals in the future. Yet there is growing concern that drug prices are too high in the United States as compared to other nations. Some commentators believe that the patent system should not be used to regulate the movement of legitimate, lawfully purchased products through the global marketplace. This report explores the intellectual property laws and policies concerning the parallel importation of patented pharmaceuticals into the United States. It begins with a review of patent policy and procedures. The report then discusses the current legal framework for analyzing the permissibility of the parallel importation of patented pharmaceuticals, including both the domestic and international exhaustion doctrines. Special consideration is given to state and local governments that have either themselves imported, or have encouraged others to import, patented medications from foreign jurisdictions; the potential use of label licenses on patented drugs; and the implications of international trade rules established by World Trade Organization. This report closes with a review of legislative issues and alternatives as they relate to intellectual property issues and parallel importation. The patent system is animated by a number of policy objectives designed to promote the production and dissemination of technological information. Many commentators have argued that the patent system is necessary to encourage individuals to engage in inventive activity. Proponents of this view reason that, absent a patent system, inventions could easily be duplicated by free riders, who would have incurred no cost to develop and perfect the technology involved, and who could thus undersell the original inventor. The resulting inability of inventors to capitalize on their inventions would lead to an environment where too few inventions are made. By providing individuals with exclusive rights in their inventions for a limited time, the patent system allows inventors to realize the profits from their inventions. Further, these rights are grounded in the U.S. Constitution, which authorizes Congress to delineate them. The courts have also suggested that absent a patent law, individuals would favor maintaining their inventions as trade secrets so that competitors could not exploit them. Trade secrets do not enrich the collective knowledge of society, however, nor do they discourage others from engaging in duplicative research. The patent system attempts to avoid these inefficiencies by requiring inventors to consent to the disclosure of their inventions in issued patent instruments. There are still other explanations for the patent laws. For instance, the Patent Act of 1952 is thought by supporters to stimulate technological advancement by inducing individuals to "invent around" patented technology. Issued patent instruments may point the way for others to develop improvements, exploit new markets or discover new applications for the patented technology. The patent system may encourage patentees to exploit their proprietary technologies during the term of the patent. Proponents believe the protection provided by a patent's proprietary rights increases the likelihood a firm will continue to refine, produce and market the patented technology. Finally, the patent law has been identified as a facilitator of markets. Absent patent rights, an inventor may have scant tangible assets to sell or license, and even less ability to police the conduct of a contracting party. By reducing a licensee's opportunistic possibilities, the patent system lowers transaction costs and makes technology-based transactions more feasible. The current patent system has a great number of critics. Some assert that the patent system is unnecessary due to market forces that already suffice to create an optimal level of invention. The desire to gain a lead time advantage over competitors, as well as the recognition that technologically backward firms lose out to their rivals, may well provide sufficient inducement to invent without the need for further incentives. Some commentators observe that successful inventors are sometimes transformed into complacent, established enterprises that use patents to suppress the innovations of others. Others assert that the inventions that have fueled some of our most dynamic industries, such as early biotechnologies and computer software, arose at a time when patent rights were unavailable or uncertain. While these various justifications and criticisms have differing degrees of intuitive appeal, none of them has been empirically validated. No conclusive study broadly demonstrates that we get more useful inventive activity with patents than we would without them. The justifications and criticisms of the patent system therefore remain open to challenge by those who are unpersuaded by their internal logic. As mandated by the Patent Act of 1952, U.S. patent rights do not arise automatically. Inventors must prepare and submit applications to the U.S. Patent and Trademark Office ("USPTO") if they wish to obtain patent protection. USPTO officials, known as examiners, then assess whether the application merits the award of a patent. The patent acquisition process is commonly known as "prosecution." In deciding whether to approve a patent application, an USPTO examiner will consider whether the submitted application fully discloses and distinctly claims the invention. In addition, the application must disclose the "best mode," or preferred way, that the applicant knows to practice the invention. The examiner will also determine whether the invention itself fulfills certain substantive standards set by the patent statute. To be patentable, an invention must be useful, novel and nonobvious. The requirement of usefulness, or utility, is satisfied if the invention is operable and provides a tangible benefit. To be judged novel, the invention must not be fully anticipated by a prior patent, publication or other knowledge within the public domain. A nonobvious invention must not have been readily within the ordinary skills of a competent artisan at the time the invention was made. If the USPTO allows the patent to issue, the patent proprietor obtains the right to exclude others from making, using, selling, offering to sell or importing into the United States the patented invention. The term of the patent is ordinarily set at twenty years from the date the patent application was filed. Patent title therefore provides inventors with limited periods of exclusivity in which they may practice their inventions, or license others to do so. The grant of a patent permits the inventor to receive a return on the expenditure of resources leading to the discovery, often by charging a higher price than would prevail in a competitive market. Patent rights are not self-enforcing. A patentee bears responsibility for monitoring its competitors to determine whether they are using the patented invention or not. Patent owners who wish to compel others to observe their intellectual property rights must usually commence litigation in the federal district courts. The U.S. Court of Appeals for the Federal Circuit ("Federal Circuit") possesses exclusive national jurisdiction over all patent appeals from the district courts, while the U.S. Supreme Court possesses discretionary authority to review cases decided by the Federal Circuit. Pharmaceutical patents are subject to special provisions created by the Drug Price Competition and Patent Restoration Act of 1984. This legislation, which was subject to significant legislative revisions in 2003, is commonly known as the Hatch-Waxman Act. This statute establishes special rules for enforcement of certain patents on certain drugs and medical devices by brand-name firms against generic competitors.