United States: TRIPS: How Far Did the WTO Go?

On August 30, 2003, the General Council of the World Trade Organization (WTO) adopted a landmark interpretation of the Trade Related Aspects of Intellectual Property Rights (TRIPS) Agreement regulating the compulsory licensing patents covering pharmaceutical products destined for countries lacking the ability to make their own.

The genesis of this development is the WTOs Declaration on the TRIPS Agreement and Public Health issued in November 2001. Paragraph 6 of the declaration specifically recognized that members with "insufficient or no manufacturing capacities in the pharmaceutical sector," would not be able to make effective use of the compulsory licensing provision of TRIPS, which requires that countries who manufacture goods under a compulsory license ensure that such goods are supplied "predominantly" to their "domestic market[s]."

The concern was that a drug producing country, such as India, would not be able issue a compulsory license to make a patented drug to address a public health issue in a second country lacking the ability to make its own supply, such as the Sudan. In other words, under the existing protocol, any patented drugs produced in, e.g., India, would need to be "predominantly" for the Indian market and not for export to a target market, e.g., the Sudan. However, notwithstanding the Sudan’s right to grant its own TRIPS-compliant compulsory license for the production of a patented drug within its borders, it would not have the physical ability carry out drug production.

This conundrum potentially left countries lacking a pharmaceutical manufacturing capability without an economically rational mechanism to procure needed drugs from countries having the ability to make them. The TRIPS Council was directed to find an expeditious solution and to report to the General Council before the end of 2002.

A bit late and following months of political wrangling, on August 30, 2003, the General Council finally issued its solution.

Intellectual property rights are valuable only insofar as they are enforceable. As such, Article 31 is a critical provision of TRIPS because it provides a detailed mechanism for governing the circumstances under which a member state may grant use of the patented subject matter without authorization of the right holder, i.e. a compulsory license. Article 31 requires that decisions on compulsory licensing be made on a case-by-case basis. Except in cases of national emergency, urgent circumstance, or of government noncommercial use, the potential licensee must first attempt to negotiate a voluntary license with the patentee. Furthermore, the compulsory license must be non-exclusive and clearly spell out its terms and conditions. Additionally, when conditions justifying a compulsory license cease, the license must expire and the patentee be paid "adequate remuneration."

To prevent the importation of goods produced under compulsory license in one country from importation to an alternate market where the conditions warranting that license do not exist, Article 31(f) specifically protects patentees against parallel importation of patented items, i.e., by those holding a compulsory license. It is unclear, however, as to what quantity of goods might slip into an export stream without running afoul of TRIPS.

The Article 31(f) safeguards balance the patentee’s need for the legal security required to mitigate the financial risk of developing new drugs with the flexibility a member state might need to access potentially life-saving technology. Were a member state able to capriciously grant a compulsory licenses on an ad hoc basis, the global intellectual property system set up under TRIPS would be substantially disabled.

The new system is intended to overcome the Paragraph 6 problem discussed above, yet maintain an adequate degree of legal certainty for patentees. Consistent with the statement by the General Council that the August 30 decision must only be used in good faith for public health purposes and not as "an instrument to pursue industrial or commercial policy objectives," all members are obliged to ensure that their internal, i.e., national, systems provide means to prevent the re-importation of drugs produced under the system into markets other than the target market.

The General Council assistance to developing countries to establish and maintain an administrative infrastructure to comply with the export/import obligations and has indicated its intention to amend the TRIPS Agreement by sometime in mid-2004 to textually incorporate the new system.

Mechanistically, the system explicitly waives members’ obligations under the export restriction of Article 31(f), if and only if, certain criteria are fulfilled by importing and exporting members.

Pharmaceutical products are defined as those needed to address the public health problems recognized in the November 2001 Declaration, i.e. "the public health problems afflicting many developing and least-developed countries, especially those resulting from HIV/AIDS, tuberculosis, malaria and other epidemics." Of primary concern to patentees is the scope of the Declaration’s recitation "public health problems" in defining "pharmaceutical products"
in the context of this system. Although, the United States Trade Representative argued strenuously that the new system be limited to medications for "HIV/AIDS, tuberculosis, malaria and other epidemics," it ultimately dropped this demand. Therefore it remains to be seen whether drugs treating chronic ailments such as diabetes, obesity, mental illness, or even allergies and impotence, could be considered "pharmaceutical products" under the new system.

An "eligible importing member" is defined in the system as any least developed member country or any other member that notifies the TRIPS Council of its intention to make use of the system as an importer. If the pharmaceutical product is patented in its territory, the eligible importer must notify the TRIPS Council of its intention to grant a compulsory license in accordance with Article 31. Eligible importing members must certify to the TRIPS Council that they lack sufficient pharmaceutical manufacturing capabilities for the product they are interested in importing. Least developed countries are presumed to lack such an infrastructure. However, those members having at least some capacity may, upon self-examination, certify the insufficiency of their means to the TRIPS Council. However, the system states that "[w]hen it is established that such capacity has become sufficient to meet the member’s needs, the system shall no longer apply," i.e., the importing member is no longer eligible to be a target market. However, the system provides no guidance as to how such a determination is to be made, nor does it provide any incentive for an importing member to regularly self-examine its production capacity.

The system defines an "exporting member" as one using the system to produce pharmaceutical products. In order to avoid the consequences of violating Article 31(f) and avail itself of the safe-harbor embodied in this system, an exporting member issuing a compulsory license must fulfill several requirements. First, the exporting member may only produce the amount needed by an eligible importer’s market and must export the entirety of the production run to that target market.

Secondly, the exporting member must take measures to ensure that the exported pharmaceutical product is labeled or marked in such a way as to distinguish it from the same pharmaceutical product produced and sold on the open market under the patentee’s authority. The General Council chairman’s statement provides examples of altered pharmaceutical packaging and labeling that distinguishes products donated to aid programs for the developing world from their counterparts on the open market.

Finally, exporting members must make certain reports to the TRIPS Council and the public. They must notify the TRIPS Council of the granting of a compulsory license as well as the scope of production foreseen and the target market. This information, as well as differential product labeling information, must be made publicly available on the internet.

Article 31(h) requires that patentees be paid adequate remuneration for goods produced and sold under a compulsory license, taking into account the economic value of the products to the importing member. In other words, something akin to a reasonable royalty will be calculated based on sales of the drug in the importing, and presumably less developed, member. It is safe to assume that remuneration will be substantially less than if it were to be calculated based on the patented drug’s price as sold in the exporting member’s market or in other markets where the patented drug is sold under terms set by the patentee.

When a given pharmaceutical product is patented in both the importing and exporting countries, a compulsory licenses must be issued in each. As such, the Paragraph 6 problem was ambiguous with respect to the country from whom the patentee could demand adequate remuneration. The new system waives the importing members’ obligations to pay the patentee in lieu of the exporting members’ duty to pay based on a reasonable royalty, calculated based on sales
of the drug in the importing country.

One of the most striking results of the General Council’s decision is the lack of attention paid to the proponents of an Article 30-based solution of the Paragraph 6 problem and the affirmation of Article 31 as the only legitimate mechanism for compulsory licensing.

It was suggested that the Paragraph 6 problem was merely a symptom of the underlying fact that Article 31 as a whole lacked the flexibility to adequately address public health needs. Using the Paragraph 6 problem as a pretext, those critical of the global intellectual property regime argued for a mechanism by which governments could grant sweeping industry-wide compulsory licenses.

Proponents of an Article 30-based solution see it as a more efficient vehicle for compulsory licensing because it does not contain the strict requirements and limitations of Article 31. Under TRIPS, Article 30-based exceptions to patent rights must be limited, not unreasonably conflict with the normal exploitation of the patent, and not unreasonably prejudice the legitimate interests of the patent owner, taking account of the legitimate interests of third parties. However, Article 30 was drafted to constitute an exception to infringement in a manner similar to the fair-use of copyrighted material. Moreover, TRIPS explicitly indicates that Article 30 exceptions are for situations mutually exclusive from those requiring a compulsory license under Article 31, e.g., academic research. Therefore, with respect to statutory construction alone, the use of Article 30 as an alternate compulsory licensing mechanism appears to be legally tenuous.

Article 30 was interpreted with respect to pharmaceutical compulsory licensing
in a recent non-binding opinion wherein the Dispute Settlement Body of the WTO very narrowly construed the applicability of Article 30. As a result, the Panel Report did not find Article 30 to be an additional mechanism for the granting of compulsory licenses on public health grounds.

The system as adopted by the General Council, affirms the primacy of Article 31 as the sole mechanism for compulsory patent licensing. By providing a system to specifically address compulsory licensing of politically sensitive pharmaceutical products in the context of Article 31, the decision attenuates the need for further debate as to whether Article 30 constitutes an alternate mechanism for the granting of compulsory licenses on public health grounds.

PRACTICE NOTE: The General Council has adopted a pragmatic system to address the needs of countries lacking pharmaceutical manufacturing base to efficiently import needed medications. Whether the system can be translated into practice in a way that provides adequate protection to patentees against parallel importation remains to be seen. Moreover, it is still not clear which drugs will fall under the system’s definition of "pharmaceutical products," and which drugs are found to treat conditions not deemed urgent enough to be considered a "public health problem."

The compulsory licensing solutions advocated by the developing countries and those critical of the global intellectual property regime would have led to the over issuance of licenses and provided patentees with little or no legal security, thus, drastically devaluing their intellectual property. However, the consensus reflected in the decision should put to rest any concerns that a sweeping Article 30-based mechanism will supplant Article 31 for compulsory licensing.