Introduction

Distribution of pharmaceuticals has long been an area heavily regulated by law in the public interest. In common with other areas of statutory regulation, however, the emergence and rapid growth of the internet has given rise to new challenges as the processes of the law and law reform struggle to keep pace with the rapid development and adoption of technology. In this scenario, the territorial limits of state legal control cease to be effective, and the ‘bricks and mortar’ assumptions which underpin much of our tradition modes of regulation cease to be applicable, in an environment of ‘wired’ (and, for that matter, wireless) and, practically speaking, ‘locationless’ business activity.

The challenges for effective regulation of pharmaceutical distribution are essentially similar (although not as serious, as a physical product is involved) to those presented by the desire to regulate, at a local level, business activities such as banking, insurance and gambling which can now be conducted borderlessly on the internet. The law does not stand still in the face of these new patterns of activity but its processes, whether in the hands of Parliament or judges, certainly operate in reaction to, and more slowly than, the changes in business activity themselves.

This paper considers the current modes of regulation of the distribution of pharmaceutical products in or from New Zealand and indicates some of the areas of uncertainty in the effectiveness of the regulatory regime. It also observes, from the example of a specific recent case, how the both the courts and professional disciplinary bodies have had to come to grips with new activities and the limits of their ability to do so. In the case of the courts, they must interpret statutory provisions drafted before the development and adoption of internet technology which has given rise to these new forms of business activity.

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The changing face of the pharmaceutical industry

The ascent of the internet as a:

• new means of communication;
• new advertising medium; and
• new distribution channel

has inevitably begun to change the face of the pharmaceutical industry. While it has brought changes for all areas of business, it brings special problems for a tightly regulated activity such as pharmaceutical distribution.

Current pricing structures and distribution channels may be undermined and circumvented by internet distribution. In a situation where New Zealand consumers can now purchase pharmaceuticals from other countries, territorial pricing structures begin to collapse. As New Zealand subsidises certain drugs, there is potential for pharmaceuticals to move offshore at a price affected by subsidisation to the benefit of consumers in countries without the same subsidy structures, to the detriment of the New Zealand tax payer.

The old power relationships between patients or consumers and medical practitioners and drug distributors are beginning to change fundamentally. Consumers now have ready access to a vast range of information concerning the diagnosis and treatment of illnesses and, more importantly, are showing an growing tendency to carry out their own research rather than relying principally or entirely on information provided face-to-face by medical practitioners and pharmacists.

According to AltaVista (a leading internet search engine), healthcare websites are among the fastest growing websites on the internet. In 1996, there were 18,000 healthcare web pages. Now there are approximately 13 million pages. The result is a rapidly growing population of consumers who have previously undreamed of access to health information and who may wish to make decisions on health treatments without necessarily having the benefit of a consultation with a doctor. Popular demand for certain drugs and certain treatments has put pressure on prescribers and contributed to the growth of the internet as an alternative distribution channel, further undermining the traditional channels which have been the past focus of regulatory attention.

In the past, drug prescription and distribution was driven by medical practitioners. Even apart from the possibility of internet distribution, changes in consumer attitudes, arising in part from access to information, mean that many consumers visit a doctor in order to obtain a prescription for a drug that they have already decided that they need or want. If it is not prescribed, they will visit other doctors until a prescription is obtained. If the desired drug is available over the internet without a prescription, many may choose to source the drug that way. The growing use of the internet as a source of health information raises additional issues concerning the accuracy and relevance of on-line information, which may be relied upon, but which often cannot be easily verified, by consumers.

From a legal perspective, the major change the internet has brought to our society is the phenomenon of ‘territory-less’ activity. Although accessible from almost anywhere, it is often not possible to know where a website is based (as its owners, operators and serving technology may be in different locations). It is this feature that creates the biggest challenges for the effectiveness of individual nation state legislative regulation and enforcement.

There are very few technical limits on the accessibility of information on the internet, and it can be very difficult to restrict internet-based activities to a particular territory. The lack of effective technical limits gives rise to a major challenge for legal compliance (by those not seeking to take advantage of the difficulties of effective policing and enforcement of territorial regulation). In an area of highly regulated activity (such as pharmaceutical distribution), websites may need to comply with laws of numerous countries in order to operate lawfully. This can create a huge compliance burden on website owners and operators.

A common practice is to display a disclaimer on the website purporting to restrict access or use of the information to those persons who are complying with the laws of their countries in accessing the information. The effectiveness of disclaimers in achieving compliance is doubtful and remains to be resolved on a jurisdiction-by-jurisdiction basis.

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Current regulatory regime

Distribution

The distribution of pharmaceuticals in New Zealand is regulated by:

• the Medicines Act 1981 and its Regulations;
• the Pharmacy Act 1970; and
• the Misuse of Drugs Act 1975.

The Medicines Act prohibits the distribution in New Zealand of medicines without ministerial consent, and places conditions on the distribution of different categories of medicines. For example, prescription only medicines may only be dispensed pursuant to a prescription; pharmacy only medicines may only be dispensed from a pharmacy. The general thrust of the Act is to prohibit the manufacture, wholesaling or packing of medicine without a licence (section 17). The key point of retail sale and supply of medicine to consumers is controlled by allowing only certain classes of person to dispense medicines. Those persons are, in turn, subjected to strict regulatory control of their conduct in numerous respects. The Pharmacy Act specifically provides for the registration of pharmacists and the establishment of the Pharmaceutical Society as the key to policing dispensing activity in New Zealand.

There are only very limited exceptions to the general requirements for statutory consent or licensing prior to distribution, for example:

• Authorised prescribers and medical practitioners may supply drugs to patients in their own care.
• There is an exception for the export of medicines. Any person may export any medicine that may lawfully be sold in New Zealand by a pharmacist, whether pursuant to a prescription or otherwise (section 33). The ambit of this statutory exception has recently been restricted by regulation.

The key weakness of this method of regulation is its understandable focus on onshore dispensing activity and its assumption that a supply of medicine to a New Zealand consumer would involve a supplier physically present In New Zealand and accordingly subject to the Act.

The Misuse of Drugs Act renders unlawful (subject to express exceptions) possession of certain drugs in New Zealand, a different and more effective mode of regulating their use than attempting to regulate the point of acquisition. The Medicines Act contains similar provisions but control efforts to date have focussed on the more predominant licensing provisions.

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Advertising

A second set of legislative provisions controls the advertising and marketing of pharmaceuticals. As well as distribution, the Medicines Act also controls labelling and claims made about pharmaceuticals, while the Fair Trading Act and Advertising Standards Codes of Practice are part of a body of general consumer protection legislation, and essentially prohibit misleading claims. In addition, there are several codes of practice in relation to therapeutic goods advertising, in particular the Ministry of Health’s Code for Direct to Consumer Drug Advertising.

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Private claims

In addition to direct forms of statutory regulation, pharmaceutical distribution is also ‘regulated’, like other forms of business activity, by the possibility of private legal action under the general law. This possibility includes claims for such things as breach of contract or of a common law duty in tort and claims under statutory rights such as the Consumer Guarantees Act. However, in cases of physical harm, the overlay of New Zealand’s statutory accident compensation scheme limits the extent of private law remedies.

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Applicability of New Zealand law to the internet environment

It is clear already that conduct involving the internet may be subject to New Zealand legal intervention, early examples already including the Medicines Act (the Bell case discussed below) and the Fair Trading Act. There have been several successful Fair Trading Act convictions in New Zealand already for conduct on websites. For example, Michael Hill Jeweller Limited was prosecuted recently for failing to keep information on its website up to date (advertising for sale items of which it had sold out), in breach of the Fair Trading Act.

The prohibition on misleading conduct in the Fair Trading Act aims to control both external conduct directed at New Zealand consumers and local conduct aimed overseas:

• Section 3 expressly extends the Act to conduct overseas by persons resident in or conducting business in New Zealand to the extent that the conduct relates to New Zealand business activities.
• The Fair Trading Act has been held to apply to conduct in New Zealand (mislabelling) relating to goods which were intended solely for export sale (Douglas Pharmaceuticals v Nutripharm New Zealand , High Court, Auckland CP 515/97, 23 December 1997, Randerson J).

The concept of ‘carrying on business’ has been the subject of consideration by the Courts in New Zealand and influential jurisdictions for more than 100 years. The issue is essentially one of fact in each case but, from the case law, a list of possible factors has emerged:

• Does the foreign company employ any New Zealand resident agents to act on its behalf or manage, administer or deal with property in New Zealand?
• Is any part of management of the business in New Zealand? Is the ‘brain power’ in New Zealand?
• Is there a place of business, staff or infrastructure in New Zealand?
• Has business been solicited in New Zealand?
• Have contracts been entered into with New Zealand resident entities for the supply of services to those entities?
• Have contracts been entered into, wholly or in part, in New Zealand? Have contracts been executed in New Zealand?
• Have negotiations leading to the transaction been conducted in New Zealand?
• Is there a degree of ‘system’ involved in New Zealand?
• Is there a degree of regularity involved in the transactions in New Zealand? Is there a series of repeated transactions in New Zealand?
• Is there an element of continuity in New Zealand? Or was the transaction an isolated occurrence?
• Is there a ‘permanence’ in New Zealand?
• Can a motive of profit be attributed to the undertaking?
• Have bank accounts been opened in New Zealand?
• Have expenses been incurred in New Zealand?
• Will the goods or services be delivered in New Zealand?
• Will the contract be performed in New Zealand?

To be carrying on business in New Zealand the company does not need to have a place of business in New Zealand nor have its central management and control in New Zealand.

Both forms of extraterritorial jurisdiction require a degree of presence in New Zealand, either in the form of residence or conduct taking place in New Zealand. Quite apart from any practical enforcement issues, New Zealand consumer law does not claim jurisdiction over foreign parties without a physical presence in New Zealand.

Both the Medical Council and the Pharmaceutical Society recognise the inevitability of the distribution of pharmaceuticals using the internet. Both the Council and the Society have released guidelines suggesting appropriate ways to conduct business as a medical practitioner or pharmacist over the internet but these guidelines deal essentially with ethical issues.

The current regulatory restrictions on, or impediments to, internet pharmaceutical practice are principally as follows:


Prescription drugs must be dispensed in New Zealand in accordance with a prescription issued by a New Zealand authorised prescriber. Prescriptions must be in writing and signed by the prescriber (regulation 40 and 41 of the Medicines Regulations).

The preparation and despatch of medicines within New Zealand must be done under the control and supervision of a pharmacist, and the premises must be a registered pharmacy.

The current control mechanism of a signed prescription in writing will be modified by the Electronic Transactions Bill (when it becomes law) as it will be sufficient for a prescription to be generated electronically, and signed with a digital signature. The law change will open the way to pure online prescription and dispensing without the requirement for paper-based records.

Finally, as indicated above, jurisdiction and enforcement issues arise with any area of internet activity. The New Zealand courts have formulated the following test for determining when jurisdiction exists. There must be:

1. a website;
2. conduct directed at New Zealand; and
3. knowledge that harm will be caused in New Zealand.

While this may provide a theoretical legal basis for the application of New Zealand law, there is still the practical matter of locating a defendant and bringing a non-resident before a New Zealand court whether for criminal or civil action or remedy. However, to date, the cases where jurisdiction has been exercised in respect of internet activity have been obvious or easy ones in which the defendant was resident in New Zealand.

A major enforcement problem is that it is often not possible to identify satisfactorily defendants or their locations. The proliferation of new registrars for domain names can make determination of the correct identity of a website registrant difficult in some instances.

 

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Case study

A recent case in New Zealand demonstrates the applicability of the current medical regulatory environment to the conduct of business over the internet.

From about 1993, Mr Bell, a pharmacist in Kingsland in Auckland, sold prescription medicines without prescription for export using the internet. With the increase in the internet as a consumer distribution channel, the volume of his business increased substantially over time and he began to sell significant volumes of Xenical (an obesity treatment), Viagra (an impotence treatment), Prozac (a treatment for depression) and Propecia (a male hair regrowth remedy) to overseas consumers. These popular drugs were sought by consumers overseas who would otherwise have had to obtain a prescription for the drugs in their own countries. According to media reports of evidence from the Ministry of Health presented at the disciplinary hearing mentioned below, for periods in 1999, the Kingsland pharmacy accounted for 11.4% of Viagra sales, 24% of Propecia sales and 31.9% of Xenical sales in New Zealand.

Section 18 of the Medicines Act prohibits the sale of prescription medicines without a prescription. Medsafe seized prescription medicines from Mr Bell’s pharmacy under s63 of the Act as Medsafe considered that the sales of the medicines to overseas customers without a prescription was unlawful. Mr Bell received legal advice that his business did not breach the Act and, as he was entitled to do, he applied to the District Court for orders that the seizure be disallowed and that the medicines be returned.

In order for the seizure to be lawful, the officers who made the seizure had to have had a reasonable belief that the medicines seized were held for the purpose of sale in contravention of the Act. The Court held that it was reasonable for Medsafe officers to believe that Mr Bell’s internet business was contrary to the Act, so that the seizure itself was lawful.

That still left the application under s65 of the Medicines Act for the return of the medicines. The Court could not return the medicines if their return would probably result in the commission of an offence against the Act. The key issue was therefore whether Mr Bell’s practice of selling medicines to overseas persons over the internet without prescription contravened the Medicines Act. If it did, the medicines would not be returned to him.

Although s18 of the Act prohibits the sale of prescription medicines without a prescription, s33 provides an express exception for export sales. The section allows any person to:

‘…export, in the course or for the purpose of sale, any medicine that, at the time when it is exported, might lawfully be sold by a pharmacist to a person in New Zealand, whether pursuant to a prescription or otherwise.’

Medsafe argued that the provision required the export sale to be the same as a lawful sale in New Zealand; in other words, any medicine lawfully sold in New Zealand could only be exported on the same conditions as the sale in New Zealand. If the argument succeeded, it would mean that, if a medicine required a prescription in New Zealand, it would require a prescription prior to export.

Mr Bell argued that the section should be interpreted according to its plain words. In addition, he argued that the construction of the section should be influenced by:

• the section’s penal nature (i.e. as it provided for a punitive result, it should be narrowly interpreted); and
• the section’s status as an exemption.

In the latter instance, Mr Bell argued that, as the section was clearly intended to create an exemption, it must be an exception to the general rule that prescription medicines cannot be sold without a prescription.

The District Court agreed with Mr Bell and held that, on its correct construction, the exception applied to any medicine that a pharmacist might legally sell in New Zealand including prescription medicines. The words ‘might lawfully be sold’ governed the nature of the medicine not the nature of the sale. If a pharmacist could lawfully sell a medicine in New Zealand, that medicine could be exported by any person without obtaining a prescription first. As a result, Mr Bell had not committed an offence under the Act by his export sales activities and the Court ordered the return of the goods to him.

Subsequently the Ministry of Health promulgated a new regulation (regulation 44C, Medicines Regulations) prohibiting retail export sales of prescription medicines without a prescription and expressly noting its intention to limit the effect of section 33 of the Medicines Act.

Regulations are a form of subordinate legislation and are generally not regarded as capable of prevailing over primary legislation to contrary effect. The decision to endeavor to effect the change in the law by regulation appears to have been motivated by the desire for speed. The normal period of notice was waived and the regulation came into effect immediately. Doubts about the legal effectiveness of the new regulation can only be resolved by a court decision or an amendment to section 33 itself.

The matter of Mr Bell’s activities did not end with a determination of the legal position by the District Court. The Pharmaceutical Society investigated his internet activities and charged him with breaching his professional ethical obligations. Mr Bell was subsequently fined and suspended from practicing as a pharmacist for 3 years. Subsequently, according to press reports, the website business changed form and gave rise to a different concern. As operated by Mr Bell, the internet business had been conducted from New Zealand by a New Zealand pharmacist despatching orders to overseas consumers. Following Mr Bell’s suspension, the websites remained operational, apparently on the basis that ownership and control of them had changed hands. At that point public concern turned to the possibility of prescription medicines finding their way into the hands of New Zealand consumers.

As a result, the Bell case has elements of all of the challenges faced by New Zealand law arising from the borderless nature of internet activity:

1. The internet dispensing activity arose from unmet consumer demand. Access to information about new medicines had resulted in consumers making decisions to acquire them in advance of, or possibly against, medical advice. One of the sources of information to consumers concerning medicines is the internet.
2. The initial concern of the action taken against Mr Bell was the use of the internet by a New Zealand resident to circumvent overseas controls on access to medicines by overseas consumers. There was no suggestion, at that stage, that prescription medicines were reaching New Zealand consumers as a result of the internet business.
3. Effective legal and professional disciplinary action could be taken because the drugs themselves and Mr Bell were in New Zealand. New Zealand law could regulate New Zealand sales activity even for export and the Pharmaceutical Society could take disciplinary action against one of its members. The result of the latter, in combination with the Medicines Act, affects the ability of Mr Bell to dispense prescription medicines in New Zealand.
4. The ability of a form of business to reconstitute itself using the internet is also exemplified. It appears that at least one of the websites may simply have undergone changes to circumvent the new restrictions. It now appears to be operated by foreign parties and undertakes sales of prescriptions to foreign consumers. Mr Bell’s suspension from practice in New Zealand does not affect his ability to be a consultant to a foreign supplier.

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Summary

Jurisdiction over, and enforcement of, internet activity proceed along a continuum:

1. Sales of prescription medicines by a New Zealand resident supplier to New Zealand consumers over the internet (irrespective of the location of the server) are undoubtedly subject to the Medicines Act and the jurisdiction of the New Zealand courts. The presence of a New Zealand resident defendant means that the legal controls should be practically enforceable.
2. Export retail sales of prescription medicines by a New Zealand resident supplier to overseas consumers over the internet are also subject to the Medicines Act and the jurisdiction of the New Zealand courts. The effectiveness of subordinate legislation following the Bell decision may be doubtful but the presence of a New Zealand resident defendant means that the issue could practically come before a New Zealand court.
3. Sales of prescription medicines by overseas suppliers to New Zealand consumers appear to be subject to neither effective legal jurisdiction nor effective enforcement. Even theoretically, New Zealand law has a limited reach to overseas parties. Practically speaking, activity of this kind can only be controlled effectively by border controls (the interception of prescription medicines shipped to New Zealand consumers).

 

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