As
a consistent libertarian, there are few values that I hold in greater
esteem than free trade, in domestic and foreign markets alike. As a
matter of principle, we should be deeply suspicious of any competitor
who portrays himself as the victim of predatory pricing or, in the
international arena, of the "dumping" of cheap imports in domestic
markets.
But
all sales are not created equal -- or beneficial. Fraud in the
marketplace is inconsistent with the principle of mutual advantage, and
the sale or importation of dangerous or misrepresented goods poses
hidden health threats to innocent parties.
There are
Even
if we assume the reimported goods are identical to domestic goods,
parallel importation still counts as a perversion of the basic
principle of free trade.
There is a critical distinction between restrictions imposed by contract with the initial sale of the drug and restrictions imposed by law
upon the resale of goods. Quite simply, if restrictions on parallel
importation were statutory devices designed to thwart international
competition, then they should be rejected -- but they aren't.
Patented
goods are subject to a lawful monopoly created by the state in order to
induce their creation. No one thinks that new pharmaceutical drugs will
be invented by private firms that cannot receive a rate of return
sufficient to recover not just the cost of fabricating and selling each
pill, but also the huge front-end costs that reach (when dead ends are
taken into account) under anyone's estimate in the hundreds of millions
of dollars for each new product that reaches the market.
The
legal monopoly granted by the patent is the only mechanism that allows
the producer to recover those fixed costs, for without it new
competitors could produce the same generic compound at a fraction of
the price, driving the first drug out of the marketplace.
Once
the patent monopoly is granted, the question arises how the patented
product should be priced? The state could insist that the fairest thing
is to charge the same price to all, which is usually lower than the
highest price otherwise would be. Under that approach, people who want
the drug and are willing and able to pay for it will get a discounted
price, while those with less means will have to pay more or might not
be able to purchase it at all.
By
contrast, allowing price discrimination (i.e., variation in prices)
means the low-demanders can pay a lower price -- but only because the
high-demanders are charged a higher price.
In
the international context, this practice allows American firms to sell
cheaply or even give away their AIDS drugs to struggling African
nations, but only if those countries are prohibited from reselling the drugs for a nifty profit in the
Price
discrimination (and contractually banning resale) increases the
potential gains from the patent, which in turn should result in greater
efforts to find more patentable drugs -- a win for the poor, a win for
patients and a win for the drug companies.
American
companies must preserve their ability to price discriminate and seek by
contract to limit the resale of the goods back in the
All
too often, these contractual restrictions are worthless because it is
hard to trace drugs that pass through several vendors. Thus imposing
statutory restrictions on reimportation of patented products is an
effective substitute for a valid, if ineffective, contractual
restraint.
To
eliminate the ban on parallel imports will have at least two
undesirable consequences. First, it will restrict needed export sales:
if fewer drugs are exported to
Second,
it will sap the incentive to innovate at home, for reimportation is
just a costly way (two shipments, not one) to avoid a price
discrimination regime that is legal and proper under domestic law. It
will not do for American law to let foreign pricing practices dictate
our own pricing strategies.
Banning
parallel imports, alas, fixes the persistent problem of foreign
free-riding on American innovation, but the only way to counter that
misguided effort is through tough negotiations in which the American
government (which shamelessly sponsors export cartels for goods that
can be competitively priced at home) should use some of its political
power for more sensible ends.
It
would be most unwise to imitate the practices of foreign nations in
order to undo the domestic patent monopolies that have spurred a level
of investment that make this nation the dominant, if unloved, force in
pharmaceutical innovation.
Richard
A. Epstein is James Parker Hall Distinguished Service Professor of Law,
the University of Chicago, and Peter and Kirstin Bedford Senior Fellow,
the