09 January 2002

Lorna Brazell

Patent law as an incentive to innovate

According to the consideration theory, a patent is the grant by a state of a monopoly to an inventor in return for a written disclosure of the invention. The disclosure by the inventor is "the price the individual should pay the people for his monopoly". In return, the state gets two benefits: of encouraging innovation, and of encouraging the commercial exploitation of the innovation in that state leading to increased employment and trade.

The reality is not that simple, of course.

Governments have always attempted to find a balance between the strength of the monopoly to be granted under a patent, which determines the patent's value and hence effectiveness as an incentive to innovate, and the public interest. Compulsory licences originated as a mechanism states deployed to ensure they got both of the anticipated benefits. For example, national laws commonly permitted compulsory licensing where the inventor failed to exploit the invention in the territory. Other exceptions included the right for the government itself to use the invention without requiring the patentee's prior permission.

IPRs in developing countries

Patents are both a product and a requirement of the increasing industrialisation of society. A substantially agrarian society, or one which places slight value on technological improvement over the status quo, has only a limited need for such a system. The system a state implements reflects the level of industrial development it has achieved or is presently aiming for. Thus, although the patent system has been moving slowly toward international harmonisation for well over a century now, and compared to other areas of commercial law is strikingly harmonised, developing countries have, unsurprisingly, tended to implement lower standards of protection than the more developed world. However, a country's failure to join or, having joined, failure to comply with the Paris Convention has never been something for which any foreign entity had a remedy.

The Agreement on Trade Related Aspects of Intellectual Property ("TRIPs"), concluded in 1994 as part of the Uraguay Round of GATT, overturned the normal process: it required basically agrarian developing countries to legislate for and attempt to implement systems with a sophistication comparable to those of the developed countries. Most countries which wanted the benefits of the world trade system signed up to it - and many which did not at the time have done so since. Although India and Brazil acted as spokespeople for the developing world, in many instances the negotiators who agreed to the standards to be implemented had little understanding of the practical requirements for an effective system of intellectual property protection. Their administrators have since struggled with the process of making such a system a reality - and some are still a very long way from achieving it. For example, in Bangladesh, cases still pending in the courts in 1998 dated from the country's declaration of independence from Pakistan. Trying to bring such systems in just 10 years to the stage of being able to adjudicate meaningfully a dispute over suspected pharmaceutical patent infringement is a serious challenge.

The World Trade Organisation ("WTO") system requires precisely that. In principle all members of the WTO agreed to have in place from 2006 a patent system complying with the minimum standards TRIPs laid down. For defaulters, the WTO's Dispute Resolution Panels represent an effective enforcement mechanism. Although as ponderous as any inter-governmental procedure, the bottom line is that a state found not to be complying with any WTO rule can face the legal imposition of trade sanctions from one or more other members. This is a tremendously effective threat.

TRIPS and the backlash against TRIPS

The minimum standards required by TRIPS are:

  • Patent protection for products as well as for processes, and for the products obtained directly by use of a process;
  • A common minimum patent term - 20 years from filing;
  • Limitations on the scope for imposing compulsory licences;
  • A reversed burden of proof where infringement of a process patent asserted, such that the alleged infringer has to show that the accused products were made by some process other than the patented one;
  • Courts to have authority to - award damages for infringement and costs

- impose interim injunctions and orders for the preservation of evidence

However, various subjects of considerable interest to the pharmaceutical industry in particular are not explicitly addressed by TRIPs:

  • Whether "experimental use" is excepted from patent infringement.

The original text of TRIPs did not get down to this level of detail - probably because there was no clear consensus as to how such provisions should work.

  • Parallel imports.

The question of exhaustion of intellectual property rights - whether a rights owner can use local rights to prevent the import of goods first placed on the market in another country by that rights owner or with his consent - is much debated. Different countries have different approaches. Article 6 of TRIPs simply states, under the heading "Exhaustion" - "For the purposes of dispute settlement under this Agreement, subject to the provisions of Article 3 and 4, nothing in this Agreement shall be used to address the issue of the exhaustion of intellectual property rights." Article 3 and 4 deal with National Treatment and Most Favoured Nation Treatment respectively. Thus Article 6 has generally been taken to be neutral on the question of whether or not countries must apply a doctrine of "international exhaustion of rights".

Exceptions under TRIPS

The exception which has been the focus of recent debate is that set out in Article 31. This lays down a list of conditions for use of the subject matter of a patent without the authorisation of the right-holder, including government use. The use must be permitted only on a case by case basis, not ordered in respect of categories of patented product. Ordinarily, use can be authorised only if the prospective user has made an attempt to negotiate reasonable commercial terms for the use with the right holder over a reasonable period of time, and has been unable to reach agreement. However, this latter requirement can be waived in situations of "national emergency or other circumstances of extreme urgency or in cases of public non-commercial use". The authorisation can also permit some exportation of the product, although the working of the invention is intended to be "predominantly" for the supply of the domestic market.

In such circumstances the patent holder has the right to be informed of the use, and to receive "adequate" compensation taking into account the economic value of the authorisation. Licence negotiations do not cease simply because the government has opted to impose a compulsory licence; but one party's bargaining power is eviscerated.

The existence of this exception, and the proper interpretation of the conditions, are at the heart of the debate now being carried on at the WTO on the political issue of access to medicines in developing countries. The problem is framed as being that the developing countries are among those hardest hit by pandemics such as AIDS and malaria, while also those least able to afford to provide health care for their citizens. In reality the issues are more complicated: for example, even if the drugs to which access is demanded were free, many of the countries affected have no healthcare infrastructure able to diagnose, prescribe and monitor treatment. Patient compliance is a recurring issue even in countries with high standards of average education, and the AIDS treatment available in particular requires a complex cocktail of drugs in changing doses over the long term. Cheap versions of existing drugs do not necessarily solve the problem, and there is of course room for suspicion that access to patent-free drugs is required not for the patients but for the local generic manufacturing companies, particularly in view of the developing countries' stance in the exhaustion of rights argument, discussed below. But the prices demanded by pharma companies as a proper reflection of the costs of research and development have provided a sharp focus for the political debate.

Global IP after the South African case

The South African case

In 1998 a group of 39 pharmaceutical companies brought proceedings against the government of South Africa over its Medicines and Related Substances Act. The main issue was proposed Amendment 15(c) which would allow TRIPS-compliant compulsory licensing and parallel imports of medicines into South Africa. The claimants wanted the court to rule this unconstitutional.

The case settled on 19 April 2001 after two years of increasingly acrimonious outcry from charities and campaign groups, and intense embarrassment for the claimants. The terms of the settlement included the South African Government's agreement to consult with the industry on the regulations regarding implementation of the Act, and the recognition in principle of patent rights by South Africa. Accordingly, the settlement was greeted by the opposing groups as an unconditional surrender.

The case achieved practically nothing for the pharmaceutical industry, which has not so far been consulted over the drafting process now in progress despite repeated reminders. It did, however, provoke the coalescence and organisation of a vocal and effective opposition, which successfully raised public awareness globally of the issue of pharmaceutical pricing in developing countries. As a result, the industry's discussions with the governments of other developing countries are now carried on against a changed balance of power.

The case was one of several factors which led to calls for re-examination of the TRIPS provisions. Even before the case had settled, a group of countries led by Zimbabwe had called for a special meeting of the WTO's TRIPS Council to address the problems arising.

The WTO council debates on TRIPS and access to medicines

On 20 June 2001 the TRIPS Council met for the first time for the purpose of discussing access to medicines. The occasion was surrounded by conflicting anxieties - the anger of the developing countries over their impotence in the face of an escalating health crisis, and the concern of the research-based pharmaceutical companies and their governments that their industry should not be undermined by a 'quick fix' political solution.

Many delegations said that the TRIPS Agreement could provide sufficient flexibility to enable public health needs to be met, if it is properly interpreted and applied. There were concerns that that countries come under undue pressure not to make full use of the flexibility that the TRIPS Agreement provides. Some delegations suggested that members should refrain altogether from using the WTO dispute settlement procedure in cases related to TRIPS and public health. Apparently, important reassurances in recognizing the rights of countries to use these provisions to the full were given. Others called for transition periods for the implementation of TRIPs to be extended in this area.

The Council was left with the major task of seeking - or attempting to negotiate - some common understandings of the "flexibility" in the TRIPS Agreement, to ensure that all members have the necessary sense of security and legal certainty to use these provisions. At a further meeting of the TRIPs Council on this issue in September, drafts towards a possible Ministerial Declaration on the interpretation of TRIPs were put forward by each side.

The developed countries' draft consisted solely of proposed recitals, without any substantive text. The draft recitals gave reasons why removing patent protection would not be sufficient to overcome the cited health crises, promised technical assistance in implementing and developing appropriate patent systems and pledged to work with the private sector to facilitate the broadest possible provision of drugs in an affordable, medically effective and WTO-consistent manner.

The developing countries' draft, on the other hand, clearly set an agenda for a sea-change in the way intellectual property is treated at global level. It included the reminder that Article 7 of TRIPs, setting out the objectives of the Agreement, includes the promotion of technology transfer and dissemination. The draft's fundamental position was that public health is an overriding priority, such that health officials should have a say in the formulation of IPR rules.

The draft also underlined that TRIPs allows compulsory licensing and, controversially, asserted that Article 31 permits the issue of licences by one Member for manufacture in another: so-called Cross-border Compulsory Licences. It required the dispute resolution procedure to be invoked only with "the utmost restraint". Finally, it specified that the transitional period for developing countries to implement TRIPs should be extended by at least five more years.

The Ministerial Conference at Doha in November 2001 was left the task of bridging a significant divide.

Doha Declaration

The Ministerial Conference took place in the aftermath of the events of September 11th 2001, and the subsequent disputes over the patent on Bayer's anti-anthrax drug Cipro. For the first time the governments of the developed countries, in particular the USA and Canada, came face to face with a patent acting as a barrier to an action perceived as politically essential: the need to obtain at a reasonable cost large supplies of a drug to tackle a national emergency. Whether as a result of this or not, the Declaration which emerged represents a significant backing down by the developed countries from their previous position.

The Declaration states that TRIPs should be interpreted and implemented in a manner supportive of WTO Members' right to protect public health and, in particular, to promote access to medicines for all. Importantly, each Member has the right to determine what constitutes a national emergency or other circumstances of extreme urgency - but public health crises are definitely within the scope. This leaves a wide discretion to developing countries' governments to define the conditions under which they may invoke Article 31. The wish for an extension to the transitional period was granted handsomely: least-developed countries will not be obliged, with respect to pharmaceutical products, to implement the TRIPs Agreement or to enforce rights provided for until 1 January 2016, exceeding even the extension originally requested. This may have been a trade-off to maintain the neutrality of TRIPs with respect to parallel imports - apparently one of the more hotly debated issues at Doha. The developed countries took the view that a compulsory licence could not exhaust an intellectual property right; and the developing countries argued that it certainly could and did. Possibly, the underlying economics of the debate over access to medicines starts to show through. However, the Declaration merely reiterates that each country can formulate its own laws without determining any position on international exhaustion of rights.

No statement was included on the question of Cross-border Compulsory Licences, but the question was remitted to a working group, which has been mandated to come up with a solution by the end of 2002.

Although it is possible for new areas to be introduced in the course of the Doha Round, it is currently unlikely that there will be any further developments on other areas, such as the experimental use exception, at global level in the next few years.

Effect of the Doha Declaration

The Declaration does not of itself change anything in binding legal terms. However, both TRIPs and the Declaration are creatures of public international law where legally binding terms are the exception rather than the norm. Many of the agreements reached between governments are 'soft', but that has not diminished their effectiveness: the 'judgement of peers' effect, one of the significant advantages of a multilateral system, encourages compliance. Accordingly, the conciliatory tone of the Doha Declaration should be seen as a definite indication that the long-overlooked language of Article 31 of TRIPs is indeed to be taken at face value, and the developed countries' governments will not readily condemn the use of compulsory licences in the developing world.

The effect of the ten year extension which least developed countries have won is not likely to be great - in reality, they were never going to implement TRIPs compliant systems by 2006 anyway. (The new deadline may, of course, be the subject of another round of discussions as 2016 draws closer.) Further, the exceptions in Article 31 do not provide the governments of member countries with carte blanche to impose compulsory licences on a whim. Although the right exists, it cannot be interpreted so broadly as to exclude any requirement for extenuating circumstances, such as the scale of and economic disruption being caused by the AIDS and TB pandemics. Drugs not for use in treating indications such as these are unlikely to be affected significantly or at all by the exercise of the newly found powers, at least in the short term.

The real battleground is the measures developed countries may take in order to prevent the output of generic manufacturers based in the developing world reaching the high priced, protected markets which underpin the research companies' viability in their present form. Quality issues may provide the fence, and other mechanisms will certainly be searched out.

In those areas where some form of crisis is identifiable, however, the value of drug patent holders rights has been materially diminished, for the duration of the crisis. By invoking Article 31 and arranging for a drug to be manufactured by a public laboratory and distributed at cost, governments can leave the patent holder to petition for its "adequate" compensation after the event. And there is a possibility that should the new deal prove effective in halting the spread of the major diseases in developing countries, the temptation to extend the treatment to patents over drugs for other disease areas, may beckon. The question is, whether the additional level of uncertainty leaves commercial researchers with any real incentive to do research in areas where their patents may be at risk. Even before the latest crisis it was noticeable that diseases affecting the developing world received less research investment than conditions suffered by the affluent. Ultimately, the new international Health Fund may be left trying to solve the health problems of the poor on its own.

Also published in the March 2002 edition of Patent World.