The WTO: Areas of Concern, and What We Are Doing

The global minimum standard for patents and other forms of intellectual property is set by the World Trade Organization (WTO). Members of the WTO, which include every significant economy in the world except Russia, must provide at least the monopoly protections mandated by the Agreement on Trade-Related Aspects of Intellectual Property (TRIPS); they may provide longer or more robust monopolies, if they choose.

In the patent arena, the basic standard is for countries to provide U.S.-style patents, extending 20 years on all categories of inventions that meet the standards of patentability (new, useful and non-obvious).

TRIPS, however, also permits countries to make use of important flexibilities, most importantly the right to compulsory license — to authorize generic competition for products or processes while they rmain on patent.

A quirky provision in the TRIPS Agreement limits the ability of countries to export under a compulsory license (no more than half of production may be exported). This inhibits generic producers from achieving price-lowering economies of scale, and poses a serious problem for smaller and poorer countries, which have little choice but to rely on imports.

The WTO has adopted a purported solution to this problem, but it is riddled with problems. Essential Action is working to advance best practices for implementing this solution, but is especially promoting a TRIPS-compatible alternative: issuing compulsory licenses under anti-trust/competition rules.

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Here’s a more detailed discussion of the issue:

Despite the success of the access to medicines campaign’s effort to defend TRIPS flexibilities, including the right to issue compulsory licenses, one serious problem remains in the agreement. This is known as the Article 31(f) problem. Article 31(f) is a provision requiring compulsory licenses to be predominantly for supply of the domestic market, meaning 50 percent or more of sales of compulsorily licensed products must be in the domestic market.

This Article 31(f) limitation on exports poses a more complex problem than is immediately obvious, but the core problem is straightforward: countries issuing a compulsory license and seeking to import generic versions of a medicine will have difficulty finding suppliers.

Once a country has made a decision to issue a compulsory license for a pharmaceutical, it must locate a supplier who can provide a lower-priced version of the licensed product. Ideally, it will be able to rely on multiple suppliers, who will compete among each other to lower prices. But in many cases, countries will conclude that domestic sources are inadequate. There may be no domestic firm with the capacity to make a product; domestic firms may lack needed technology to operate efficiently; domestic firms may not be able to supply a product cheaply enough; or there may be too few domestic suppliers to generate competition. This problem is particularly severe for many developing countries and small market economies, but depending on the product, it may be true even for industrialized nations. It is also a particularly severe problem for the raw materials that make up pharmaceuticals; while many countries are able to formulate medicines, the raw material market is geographically concentrated, with Chinese, Indian and Korean firms dominating the world market.

Under the TRIPS Agreement, countries have absolute rights to issue a compulsory license to authorize imports of generic products, and can import the totality of the product to be put on the market pursuant to the compulsory license.

But if the product is on patent in the export market, the importing country faces two TRIPS-related problems. First, a compulsory license must be issued in the exporting country; and second, most of what is produced under the compulsory license in the exporting country must normally be for domestic consumption. But what if the potential exporting country does not choose to issue a license for the domestic market? Or what if domestic sales of the potential exporter aren’t large enough to enable significant exports (since under Article 31(f) exports cannot exceed domestic sales)?

In these scenarios, a potentially importing country will not be able to find a supplier.

Because one of the most important low-cost pharmaceutical manufacturers, India, effectively did not provide patent protection for pharmaceuticals until 2005, importing countries had a willing supplier. But Indian suppliers will now be constrained by patents, at least on new products, unless compulsory licenses are issued domestically.

Developing countries raised this issue in the negotiations leading up to the Doha Declaration, and the declaration promised that the issue would be addressed by 2002. It was ultimately addressed in 2003 (via the “Paragraph Six Solution,” referring to the paragraph in the Doha Declaration that promised the problem of exports would be resolved), with a convoluted and bureaucratic approach on which rich countries insisted, and which will not be adopted as a permanent amendment to TRIPS.

Nonetheless, the Paragraph Six Solution is not impossible to use. Developing countries, however, have not sought to utilize it. There might arguably be a political strategy underlying this decision, but if so, it is not bearing fruit. And a much better way of highlighting the problems of using the Paragraph Six Solution, if that is one’s goal, is to attempt to use it, and thereby show its flaws.

For potential exporters, there is an underutilized way to circumvent the limitation on exports of compulsory licensed products: Compulsory licenses issued to remedy anti-competitive conduct are not required under TRIPS to be predominantly for the domestic market. So invocation of competition rules as the basis for issuing a compulsory license can avoid the export problem, and the complication of the Paragraph Six Solution, altogether.