Implementing TRIPS safeguards with particular attention to administrative models for compulsory licensing of patents

Implementing TRIPS safeguards with particular attention to administrative models for compulsory licensing of patents
WHO meeting in Harare, Zimbabwe
August 21, 2001
(with additional references to November Doha declaration)
James Love
Consumer Project on Technology

I. Introduction.

TRIPS obligations raise broad public health concerns. There are controversies regarding patents exceptions for research or experimental use, for the testing and submission of information to regulatory agencies, or to address problems regarding high prices. In the area of trademarks, there are disputes over generic drug substitution, the regulation of cigarette advertising, and parallel trade. Various sui generis regimes are also important, in terms of the right to use or rely upon data used to prove the safety and efficacy of a drug. There are also important issues concerning copyright, such as disputes over the copyright of information used in package inserts that tell consumers how to use drugs.

Countries need to consider the benefits and costs of patent of other IP regimes as mechanisms to create incentives to invest in research and development (R&D), and to develop good models for state practice in implementing the TRIPS. It is especially important for national legislation to address the practical problems in authorizing non-voluntary use of patents and to embrace administrative models for the authorization of use and the setting of adequate compensation. Also, it is essential that countries with the capacity to produce medicines authorize exports, within the framework of the TRIPS provisions on exceptions to patent rights.

In the longer run, countries should develop a new framework for trade agreements that address R&D directly.

II. Problems with IPR regimes

Large pharmaceutical companies often emphasize the benefits of patents in creating incentives for R&D, but it is also important to note the limitations of such systems. Part of the limitations concern market failures for R&D where patents have not been effective as an incentive. Examples of this would be basic research, research on appropriate technologies, research on vaccines or drugs to treat diseases that afflict the poor, to mention only a few. Because of these market failures, governments often fund health care research from public funds, as does the United States through its National Institutes of Health (NIH).

Second, there are many abuses of patents and other intellectual property rights. One abuse is to price products too high, limiting access, particularly among the poor. Another abuse that is quite important takes place in research tools, or in other cases where broad patents can block the development of new products, or where inventions that could be used together are not combined because of failures to resolve differences among patent owners. Examples of this would be blocking patents on stem cell lines that limit R&D in the United States, or the failure of companies to license patents for AIDS medicines that would permit easier-to-use combination medicines, such as the CIPLA products that combine HIV drugs from three different brand name companies (3TC, d4T and Nevirapine) into a single easy to use pill.

A third problem concerns the cost of administering an IP system. The United States spends more than $1 billion annually to run its patent and trademark office, and even then, it frequently issues patents that are ultimately held to be invalid by the courts, and indeed sometimes are the source of ridicule due to the US government’s failure to note prior art or establish novelty or utility. It is also costly to resolve disputes about patents, particularly in cases where disputes are litigated in courts. If governments or competitors cannot afford the costs of challenging bad patents or applying for compulsory licenses, abuses of patent rights will not be curbed. Traditional patent litigation can be very expensive. The costs of the litigation in the AZT patent case was estimated at $100,000 per day, and it is common in the US for parties to spend more than $1 million to litigate a patent dispute. The amounts are lower in some countries, but still present a substantial barrier to obtain timely and just resolutions of disputes over patent validity or abuses of patent rights.

III. Implementing TRIPS consistent compulsory licensing or government use provisions.

Among the most important areas of TRIPS flexibility are the provisions in Article 31 that allow governments to authorize third parties to use patents without the permission of the patent owner. For the most part these provisions are quite broad — countries can issue compulsory licenses or authorize use for any reason, and countries can make decisions through administrative processes, within their own legal traditions.

The primary obligations on countries are twofold. First, countries must provide "adequate compensation" for the use of a patent, according to a country’s own legal standards, and second, it must provide a number of procedural protections, aimed at ensuring fairness.

On the subject of procedures, several other sections of the TRIPS are important, including for example those which do not permit discrimination, and provisions such as Articles 41, 42, 43 and 44, which deal with more general issues of administrative processes. For example, Article 41.2 says:

Procedures concerning the enforcement of intellectual property rights shall be fair and equitable. They shall not be unnecessarily complicated or costly, or entail unreasonable time-limits or unwarranted delays.

The requirement in Article 41.2 that countries adopt procedures that are not unnecessarily complicated or costly should be examined also in terms of procedures for curbing abuses of patent rights, since this too is part of the overall framework for enforcement of rights. Here the paucity of compulsory licensing cases in poor countries suggests a need to develop new procedures that allow governments, competitors and public health groups to make the TRIPS exceptions and compulsory licensing sections actually work. One example of where efforts have been made to address Article 41.2 concerns the new "Uniform Dispute Resolution Procedure" (UDRP) created by World Intellectual Property Organization (WIPO) and now required by the Internet Corporation for Assigned Names and Numbers (ICANN) for resolution of disputes over trademarks used in Internet domain names. This is a quick and very cheap online method for trademark owners to enforce trademark rights in domain names, and it was created to make the system work faster and at less expense, not only for the trademark owners, but also for the persons accused of infringement. The UDRP is actually run by WIPO and various other non-government bodies, and recently WIPO and ICANN have given approval to a regional group in Asia to resolve domain name disputes. There is no reason why WIPO should not work with regional African patent or public health organizations to create an alternative dispute mechanism that is quick and inexpensive and to address such issues as compulsory licensing or the re-examination of poor quality patents.

Another particularly important provision in the TRIPS relating to compulsory licensing is Article 44.2, which concerns injunctions. Article 44.2 states that when TRIPS provisions regarding use by governments or by third parties authorized by a government without the authorization of the right holder are complied with:

Members may limit the remedies available against such use to payment of remuneration in accordance with subparagraph (h) of Article 31.

The ability to eliminate injunctive relief for government use or compulsory licensing disputes is quite important, and is something included in some national laws, including the United States (28 USC 1498).

Also important are the provisions in Articles 31.i and 31.j which say that countries may choose either judicial or "other independent review" for appeals of decisions regarding compulsory licensing. This gives a country the flexibility of keeping the decision-making process entirely out of the judicial system.

Likewise, Article 31.k allows countries to choose either "judicial or administrative processes" to determine if a compulsory license is needed to remedy an anticompetitive practice. This is an important provision because such licenses can be used to export medicines. The finding that the license is needed to remedy an anticompetitive practice can be made by a government employee, such by staff members at the Ministry of Health.

There are also a number of other areas where the government can effectively streamline the procedures. The TRIPS says that normally a compulsory license cannot be issued before a third party first seeks a voluntary license on "reasonable commercial terms and conditions and that such efforts have not been successful within a reasonable period of time." While this is not a difficult requirement, it can be waived in three cases, including:

  1. Public non-commercial use (31.b). In the United States this provision is used for any goods used or manufactured for the US government, under 28 USC 1498. The US law is quite broad, and extends to virtually anyone who provides goods or services to the US government:

    "For the purposes of this section, the use or manufacture of an invention described in and covered by a patent of the United States by a contractor, a subcontractor, or any person, firm, or corporation for the Government and with the authorization or consent of the Government, shall be construed as use or manufacture for the United States."

    Note also that the US does not even issue licenses or have an obligation to make a finding that the use is in the public interest. It simply has the absolute right to authorize third parties to use patents.

  2. Situations of national emergency or other circumstances of extreme urgency (31.b). This provision is separate from the provision regarding public non-commercial use, and thus can extend even to entirely commercial transactions. According to the Doha Declaration on TRIPS, countries can use this provision even for public health issues where the emergency or urgent situation is to treat longstanding public health problems that can last for decades. According to paragraph 5(c) of the Doha declaration:

    "Each Member has the right to determine what constitutes a national emergency or other circumstances of extreme urgency, it being understood that public health crises, including those relating to HIV/AIDS, tuberculosis, malaria and other epidemics, can represent a national emergency or other circumstances of extreme urgency."

  3. To remedy anticompetitive practices (31.k). As noted earlier, Article 31.k of the TRIPS allows countries to determine, even by administrative procedures, that a compulsory license may be issued to remedy anticompetitive practice. Not only may countries waive the requirement for prior negotiation for a voluntary license, but under this provision countries can also authorize the exports of medicines.

Governments need to find simple ways of addressing the compensation issue. In theory, governments might want to undertake highly sophisticated studies of the pharmo-economic benefits of various medicines, and develop shadow prices based upon domestic budget constraints. In practice, few countries realistically have the time and resources to undertake complex valuation procedures. More appropriate are systems which apply more or less standard rules for compensation, based in most cases upon a system of royalty guidelines. Royalty guidelines have been used by Japan, Germany, the Philippines and a number of other countries to provide a quick notion of the range of royalties that would normally be considered reasonable. Attached is one model for royalty guidelines.

IV. Exports of Medicines under Article 30

One area where the TRIPS presents problems concerns the exports of generic versions of a drug, when produced without the permission of the patent owner. If the good is produced under a compulsory license issued under the Article 31 rules of the TRIPS, there is a general restriction in 31.f, which says:

"any such use shall be authorized predominantly for the supply of the domestic market of the Member authorizing such use;"

As noted above, Article 31.f is waived when licenses are issued as a remedy to anticompetitive practices under Article 31.k. Countries have considerable discretion in designing either judicial or administrative processes to do so. In the United States, many government agencies have administrative processes that that address competition policy objectives, including for example the U. S. Department of Health and Human Resources (DHHS). The DHHS has an administrative process to determine whether or not an exclusive license to a government owned patent lessens competition.

There are also other mechanisms within the TRIPS to authorize exports of medicines without the permission of the patent owner. One, of course, is that the TRIPS allows some exports even under Article 31.f. The definition of predominantly under Article 31.f could be more expansive than 49 percent of production. For example, some European Union officials have discussed whether or not this could be understood to include members of a trade union, such as the EU. Another approach involves Article 6 of the TRIPS, dealing with exhaustion of rights, particularly if the importing country determines that the rights of the patent owner were exhausted when a compulsory license was issued in another country. The Article 6 approach is controversial because some contend that exhaustion can only take place when goods are voluntarily put on the market, but may be legal under the strong language of Article 6 in the TRIPS, which was reaffirmed in the Doha declaration paragraph 5(d):

The effect of the provisions in the TRIPS Agreement that are relevant to the exhaustion of intellectual property rights is to leave each Member free to establish its own regime for such exhaustion without challenge, subject to the MFN and national treatment provisions of Articles 3 and 4.

Also, the Association Internationale pour la Protection de la Propriete Industrielle (AIPPI) Congress in Melbourne 2001 reported in question 156 concerning the International Exhaustion of Industrial Property Rights that policies on the exhaustion of rights under a compulsory license differ from country to country.

Another proposal would have two countries agree to give effect to its compulsory licenses. The developing country proposal for Doha addressed this as follows:

A compulsory license issued by a Member may be given effect by another Member. Such other Member may authorize a supplier within its territory to make and export the product covered by the license predominantly for the supply of the domestic market of the Member granting the license. Production and export under these conditions do not infringe the rights of the patent holder.

This approach is controversial, because some do not believe one country can issue a compulsory license to a right in another country. Here it is interesting to note that the US government sometimes does issue compulsory licenses in foreign countries, most recently in the case of U.S. v. 3D Systems, where the US government issued licenses to patents in Mexico and Canada.

Finally, a different approach, one endorsed by CPTech, MSF, Health Action International, the Trans Atlantic Consumer Dialogue (TACD) as well as endorsed by several developing countries in the recent negotiations over the Doha declaration, would use Article 30 of the TRIPS to provide a limited exception to patent rights when medicines are produced for the export market. There are a number of different proposals that one might consider under Article 30. Examples of narrow approaches are the UK and French non-proposals for the Doha declaration, or recent legislation pending before the US Congress:

Section (c) of HR 3235
”(c) EXPORT OF HEALTH CARE PRODUCTS IN PUBLIC HEALTH EMERGENCIES.-The Secretary may authorize the use of a patent, without authorization of the patent holder or any licensees of the patent holder, to export medicines or other health care products that are needed to address global public health emergencies, when the legitimate rights of the patent holder are protected in the export market.

A more open-ended approach was proposed by a developing country non-paper for Doha, which suggested the following language for the Doha declaration:

9. Under Article 30 of the TRIPS Agreement, Members may, among others, authorize the production and export of medicines by persons other than holders of patents on those medicines to address public health needs in importing Members.

Many public health groups favor the more open-ended approach. In any case, an Article 30 exception would have to be embodied in the national legislation of the exporting country, and would be subject to review by the WTO, as are all Article 30 exceptions. The fact that like other Article exceptions to patent rights (Bolar exceptions, experimental use, personal use, etc.), it can be implemented without licenses, if a government determines the act of manufacturing for the export market is not considered infringement, makes a broad Article 30 approach attractive. It is envisioned that under an Article 30 approach, compensation for the patent owner, if any, would be paid in the market where the product was consumed, according to the compensation determined to be adequate in the importing country (for cases where there was a patent in the importing country).

At Doha, the entire issue of exports was deferred for action until 2002. Paragraph 6 of the Doha declaration says:

6. We recognize that WTO Members with insufficient or no manufacturing capacities in the pharmaceutical sector could face difficulties in making effective use of compulsory licensing under the TRIPS Agreement. We instruct the Council for TRIPS to find an expeditious solution to this problem and to report to the General Council before the end of 2002.

V. The trading system needs to focus on more effective methods of funding R&D.

The TRIPS is a response to trade-related commercial disputes, but it is a narrow and highly imperfect instrument to address the trade-related problems of R&D. It does not deal with R&D on diseases for poor populations, it does not deal with the global supply of basic research, and it does not address technology transfer or the need to build capacity in R&D in developing countries. In the long run, developing countries need to develop new models for the trade-related aspects of R&D, which can then be offered as alternatives to the narrow approach taken in the TRIPS.

Ideally such approaches should (1) increase transparency in R&D investment flows, (2) increase resources for R&D on public health priorities, including technologies that are appropriate for diseases that concern poor populations, (3) address ethical concerns regarding pricing of technologies, and (4) provide for technology transfer and capacity-building in developing countries.

For additional discussion see:

Attachment 1


  1. In countries where the cost of litigation is an important barrier to the use of compulsory licensing, the system should be based upon an administrative process, to the extent permitted under the national legal system. This is permitted under Articles 31h, 31j, 31k, and 44.2.

  2. Governments should have strong rights to authorize use of patents for public purposes. This should include, as permitted by Article 31.b and 44.2, the right to use any patent, and to authorize any third party to use any patent, for any government purpose, without a hearing, without a finding, without a license, without the patent owner having recourse to injunction, and subject only to the payment of compensation.

  3. In any Article 31 case, the government can eliminate the patent owner’s right to enjoin the government or a private party from acting. This no-injunction policy is permitted under Article 44.2 of the TRIPS.

  4. Compensation should be determined by an administrative process, and should be guided by royalty guidelines, which set out recommended royalty rates, based upon net sales of the generic product. The royalty guidelines should be a range of possible royalties. CPT has recommended 0 to 8 percent, depending upon a range of factors (see attachment below). The fact that the government has to choose the rate satisfies the case-by-case requirement in Article 31.a of the TRIPS.

  5. Compensation decisions should be forward looking, including revisions based upon appeals, to lower the risks by third parties using non-voluntary authorizations. The compensation system should permit the consolidation of multiple patents on the same product, in such a way that the generic company pays into a single fund, and the various patent owners have to resolve, at their own expense, who gets what share of the proceeds. Arbitration can settle intra-patent owner disputes.

  6. For non-voluntary licenses that are for the commercial market, and require prior negotiation, the procedure should have as a guideline no more than six months to negotiate a voluntary license. This period ought not to be binding on either party, however, and with good cause, a generic company should be able to proceed with a request before the period ends.

  7. Where the government determines there is an urgent public health crisis and the patents address a public health concern, the government should have the right to waive requirements for prior negotiation for even commercial uses, as is permitted under 31.b.

Attachment 2

Proposed Royalty Guidelines

`(x) ROYALTY GUIDELINES. In order to provide guidance to patent owners, investors and competitive suppliers of health care inventions, regarding the range of royalties on licenses for patents on medicines that would normally be considered reasonable, and are also consistent with adequate access to medicines, the Minister shall publish royalty guidelines. Such guidelines should include recommendations for compensation as a percentage of net sales of products. The initial guidelines, which may be modified by the Minister as needed, are as follows:

`(1) two to three percent for a product that does not represent a significant advance in therapeutic benefits,

`(2) five percent for an innovative product that provides a significant advance in therapeutic benefits;

`(3) for products that are particularly innovative, based upon therapeutic evidence, or for which there was a significantly higher than average investment in R&D, based upon economic evidence, an additional royalty premium or up to three percent.

`(4) one percent or less for patents that represent minor contributions to a product, such as a formulation patent,

`(5) in cases of multiple patents on the same product, the amounts in (1) through (4) are the combined compensation for all patents, allocated fairly among the various patent owners in accordance with the relative significance and benefits of the inventions.