Commission on Intellectual Property Rights Study Paper 2a WTO TRIPS Agreement and Its Implications for Access to Medicines in Developing Countries Frederick M. Abbott Edward Ball Eminent Scholar Professor of International Law Florida State University College of Law This report has been commissioned by the IPR Commission as a background paper. The views expressed are those of the author and do not necessarily represent those of the Commission. Table of Contents I. Industrial Policy and Public Health II. The World Market for Pharmaceuticals, TRIPS and Technology Rents A. Patent Holder Concentration B. Developing Country Markets C. Patent Rents and R & D D. Dynamic Offsets E. OECD Effects F. Infrastructure and Non-Patenting III. The TRIPS Agreement A. The Doha Declaration B. Changing Circumstances 1. Present situation 2. Developing countries in 2005 3. Extension of LDC transition period C. Compulsory Licensing 1. Capacity to exploit 2. Need to exploit 3. The pharmaceutical sector 4. Post transition period 5. A multidimensional problem set 6. Article 31(f) a. Implementation by importation b. Legal mechanisms for non-infringement in the country of export c. Potential infringement in the country of export 7. Article 31-based solutions a. Parallel compulsory licensing b. Regional market arrangements c. The legal fiction of the pharmaceutical production export zone (PPEZ) d. Anticompetitive practices remediation e. Article 31(f) conclusion 8. Article 30-based solutions a. Interpretation of express text i. "Limited exceptions" ii. "provided that such exceptions do not unreasonably conflict with a normal exploitation of the patent" iii. "and do not unreasonably prejudice the legitimate interests of the patent owner, taking account of the legitimate interests of third parties" iv. The significance of footnote 7 b. Application of interpretation based on express text i. Normal exploitation of the patent rights (a) Right to export (b) Higher income market conditions (c) Lower income market conditions (d) Developing country requirements as criteria ii. Unreasonable prejudice to the interests of the patent holder, taking into account third party interests c. Additional interpretative factors i. The Vienna Convention on the Law of Treaties ii. The Doha Declaration iii. Negotiating history iv. The Canada-Generics panel report 9. Compulsory license in importing countries 10. The issue of remuneration a. Compulsory licensing b. Exceptions 11. Application of Article 27:1 of the TRIPS Agreement 12. Amendment and waiver 13. Formal interpretation D. Parallel Trade 1. The Doha Declaration 2. By another authorized party 3. Parallel importation, tiered pricing and safety E. Objectives F. TRIPS Article 8:1 ("Principles") 1. Interpreting the present text 2. Amending Article 8:1 G. Granting of Patents 1. Discretion within the present terms 2. Providing a subject matter exception H. Trademarks and Copyrights 1. Trademarks 2. Copyright 3. Summary I. Data Protection IV. Government and Private Operators A. Invoking Private Rights B. The South Africa Medicines Amendment Act V. Ciprofloxacin and TRIPS A. The Balance of Power B. Threat to the United States C. Foreign Sanctions VI. The Human Rights Dimension VII. Competition Law and Developing Countries VIII. Outside the WTO IX. The Supply of Medicines and Vaccines A. Existing Medicines 1. Private donation programs 2. Public funding 3. The role of generics B. New Medicines and Vaccines 1. Research and development X. Executive Summary Redux Sources Annex 1 - Profit approximation methodology Annex 2 - Compulsory licensing remuneration Executive Summary This study accepts the consensus of experts that developing countries should make use of policy options such as compulsory licensing and parallel importation to increase the supply of low-price medicines and vaccines. The interests of the OECD and its consumers will not be undermined by such action since, inter alia, Pharma is not significantly dependent on profits from developing countries to pursue its research mission. The Doha Declaration on the TRIPS Agreement and Public Health mandates that the agreement be interpreted in a manner that supports public health interests and promotes access to medicines for all. This study analyzes the TRIPS Agreement in light of that mandate. As of January 1, 2005, developing countries (excluding least developed) will be required to implement and enforce pharmaceutical product patent protection and operationalize patents based on mailbox applications that were submitted during the TRIPS transition period. At that time, the world supply of low-price off patent medicines will decrease. Not only will supplies of low-price medicines within developing countries decrease, but supplies available for export by these countries will gradually diminish. The Doha Declaration provides to least developed countries (LDCs) an extension until January 1, 2016, to implement or enforce pharmaceutical product patent protection. That extension will have a limited effect on supplies since LDCs will remain dependent on low price imports from developing countries that may no longer be available. LDCs might best take advantage of the transition period by increasing their intra-LDC capacities to make and trade medicines and vaccines, but there are practical obstacles to accomplishing this. When the developing country transition period ends, the restriction imposed by Article 31(f) of the TRIPS Agreement on exports under compulsory license is likely to have a significant effect on the world supply of low price medicines and vaccines. If a predominant part of compulsory licensed production must supply the local market, the quantity of available exports will be limited. To remedy this problem, the TRIPS Agreement should be amended to delete Article 31(f). If Article 31(f) is not deleted, Article 30 of the TRIPS Agreement regarding exceptions to patent rights must be interpreted so as to permit making and export of pharmaceutical products and other public health related inventions to meet public health needs. The adoption of a formal interpretation by the WTO Ministerial Conference or General Council would provide legal security for countries following this approach. This study provides a detailed analysis of Article 30 indicating that such exception from the rights of patent holders is permitted, and suggests criteria on which implementation of this exception may be evaluated. Article 8:1 of the TRIPS Agreement authorizes the adoption of necessary public health measures provided they are "consistent" with the terms of the TRIPS Agreement. There is no justification for the TRIPS safeguard to be more restrictive than the safeguards applicable to goods and services. Article 8:1 should be amended to permit the adoption of necessary public health measures inconsistent with the TRIPS Agreement. Developing countries may consider revisiting the position many of them advocated during the GATT Uruguay Round, and propose amendment of Article 27:3(a) of the TRIPS Agreement to allow exception from patenting of public health related inventions, including medicines and vaccines. Developing countries should implement the TRIPS Agreement recognizing that its provisions do not demand excessive levels of protection promoted by only a few OECD countries. Knowledgeable observers agree that meeting the public health needs of developing countries requires substantial subsidization from OECD countries and international organizations such as the IMF and World Bank. The Global Fund does not to date evidence that it will be adequately funded so as to address urgent developing country needs for public health supplies. Developing countries must be prepared for self-reliance, and this self-reliance requires increased capacity to produce low price medicines and vaccines, whether or not such products are under patent by Pharma enterprises. This intensifies the importance of interpreting and amending the TRIPS Agreement to reinforce developing country capacity to act in their own best interests. Increasing attention must be devoted to research and development on medicines and vaccines of particular relevance to developing countries. Neither the market nor the TRIPS Agreement provides a solution for the lack of attention to this R & D. An option to be further explored is increasing the level of funding for publicly undertaken R & D. Study Paper for the British Commission on Intellectual Property Rights on the WTO TRIPS Agreement and Its Implications for Access to Medicines in Developing Countries Frederick M. Abbott* February 14, 2002 I. Industrial Policy and Public Health The WTO Agreement on Trade Related Aspects of Intellectual Property Rights ("TRIPS Agreement") provisions relating to medicines resulted from the pursuit of an industrial policy directed toward maintaining and increasing the dominance of OECD-based pharmaceutical companies in the world market for innovative drugs. There is little mystery surrounding the GATT Uruguay negotiations on TRIPS during which this industrial policy was pressed upon developing countries. The most seasoned participants and observers in the negotiating process are in accord that developing countries were essentially given no choice but to accept the terms on TRIPS demanded by the EU-Japan-US negotiating block.1 The use by governments of industrial policy instruments to secure and maintain trade and investment advantages is a factor today in many sectors of the international economy. Europe subsidizes Airbus Industries2 while the United States funds defense procurement programs that enhance aircraft R & D.3 Japan invests in supercomputers4 while Korea invests in the steel export sector.5 In each case, the exercise of an industrial policy option has an effect on the international economy. In each case, the strengthening of a sector in one country may have adverse effects in other countries, resulting in shifts in patterns of employment, perhaps with a social effect adverse to some citizens in the affected countries. While industrial policy measures are not always consistent with the ideal of a liberal world economy, they are a fact of economic and political life that governments and policy planners must accommodate. The question to be addressed by this Commission is whether, in the particular case of the WTO TRIPS Agreement, OECD industrial policy is likely to cause harm to other important international interests and objectives sufficient such as to recommend amendment or redirection of its implementation. A review of the currently available literature by independent researchers on the TRIPS Agreement and access to medicines, including vaccines, in developing countries reveals a striking level of agreement on the essentials. These are: 1. Present TRIPS Agreement standards will principally benefit commercial pharmaceutical enterprises located in the OECD countries, and more specifically in the United States, Japan, Switzerland, Germany and the United Kingdom.6 2. Increased developing country R & D on medicines and vaccines brought about by adoption of strong patent protection is highly unlikely for the foreseeable future to yield the development of new pharmaceutical products, the income from which would offset increased patent rents that will flow from the developing to the developed countries based on the introduction of such protection.7 3. Developing countries should take advantage of the policy options afforded by the TRIPS Agreement including the granting of compulsory licenses and authorization of parallel importation.8 Price controls may be effective in specific contexts.9 Restrictions on exports of tiered-priced drugs may be useful in specific contexts.10 4. Substantial subsidization of developing country purchases of medicines is necessary if highly active antiretroviral (ARV) treatment (HAART) is to be provided to address the HIV/AIDS pandemic.11 5. Funding for R & D on medicines and vaccines of particular relevance to developing countries is inadequate. Private enterprise will not undertake such research as a consequence of lack of perceived market incentives. Mechanisms to facilitate R & D on medicines and vaccines of particular relevance to developing countries should urgently be developed and put into operation.12 This study principally focuses on the third area of consensus: that is, that developing countries should take advantage of policy options available under the terms of the TRIPS Agreement to address public health needs. The preliminary draft of this study was written prior to the WTO Doha Ministerial Conference. The study has been revised to take into account the adoption of the Doha Declaration on the TRIPS Agreement and Public Health. One aspect of the Doha Declaration concerned a future work program for the WTO Council for TRIPS ("TRIPS Council"). This study analyzes the subject matter of that work program, and makes certain recommendations. This study recommends that developing countries use the policy options of granting compulsory licensing and authorizing parallel trade. To improve the effectiveness of the compulsory licensing option, this study recommends that Article 31(f) of the TRIPS Agreement that limits exports of licensed products be deleted. If Article 31(f) is not deleted, a formal interpretation of Article 30 should be adopted to make clear that WTO Members may authorize an exception to the rights of patent holders to make and export medicines and vaccines to countries that need them. The TRIPS Agreement should be amended to make its basic safeguard provision, Article 8:1, compatible with the safeguard provisions of the GATT 1994 and GATS, and allow acts inconsistent with the TRIPS Agreement necessary to protect public health. There is no valid reason why intellectual property should be accorded a higher level of protection in the WTO hierarchy of norms than goods and services, particularly since IPRs rules may be the most likely to have an adverse effect on public health. Developing Members of the WTO should take particular care not to accept at face value the claims by pharmaceutical enterprise IPRs holders that the TRIPS Agreement requires the application of exceedingly restrictive rules regarding the marketing and sale of drugs. The TRIPS Agreement does not require harmonization at the most restrictive level of protection. Developing Members may wish to consider revisiting the position many of them took during the GATT Uruguay Round negotiations: namely, that public health related inventions may be excluded from the scope of patent protection. This could be accomplished by amending Article 27:3(a) of the TRIPS Agreement. While there is consensus that meeting the immediate public health needs of developing countries requires substantial subsidization, there is little present evidence that such subsidization will be forthcoming. This study examines the apparent impasse, and offers a few suggestions regarding how funding for purchases of medicines and R & D on diseases of relevance to developing countries might be improved. Nonetheless, present evidence strongly suggests that developing countries may need to rely on their own efforts and resources to deal with their public health needs, and increasing capacity to make and distribute generic medicines and vaccines may be their only and best way to accomplish this. This conclusion is highly relevant to an analysis of the TRIPS Agreement because it emphasizes the importance of assuring that the agreement does not inhibit the use of IPRs-related policy options. II. The World Market for Pharmaceuticals, TRIPS, and Technology Rents A. Patent Holder Concentration The world pharmaceutical sector is divided among a small number of research-based producers based in a few OECD countries (hereinafter referred to as "Pharma"), and a fairly large number of generic drug manufacturers located in the OECD countries and in a number of developing countries.13 Pharma is concentrated in the United States, Japan, Switzerland, Germany and the United Kingdom.14 Pharma and other research institutions based in the OECD hold the vast preponderance of patents on pharmaceutical products.15 U.S.-based inventors hold about 45% of these patents, and 18.5% are held by Japan-based inventors.16 B. Developing Country Markets The TRIPS Agreement is structured such that pharmaceutical product patent protection will be mandatory for all developing countries as of January 1, 2005.17 As discussed later in this study, least developed countries have now been granted an extension until January 1, 2016 (from the previous deadline of January 1, 2006) to implement and enforce patent protection with respect to pharmaceutical products. At least for developing countries, under the "mailbox" provisions, patent protection will be provided following the transition period with respect to applications submitted during the period, and exclusive marketing rights will be available during the transition period.18 Although developing countries were entitled to take advantage of transition periods, largely as the result of pressure from OECD trade policy officials, many have already implemented pharmaceutical product patent protection. Patents are used to restrict competition and sustain prices higher than would be available in a competitive market.19 On a static economic basis, the introduction of pharmaceutical patent protection in countries where such protection formerly was not available will (a) redirect production and sales from generic producers to on-patent producers (b) increase prices of pharmaceuticals to consumers, and (c) result in transfers of patent rents to OECD-based producers.20 This is the explicit purpose of introducing patent protection. The introduction of generic versions of patented products is delayed, and trade in generic pharmaceuticals is reduced. The aggregate effects on developing countries might be calculated by examining price differentials between patented and off-patented versions of the same drugs, examining present rates of consumption and the ways in which demand patterns shift upon transition to reliance on patented drugs, examining the effects of reduced drug demand (resulting from higher prices) on various aspects of local health care systems, and a variety of other factors.21 While estimates of the overall effects of the TRIPS Agreement on developing countries have been made,22 there is yet to be a comprehensive systematic investigation of the overall effects in economic terms on developing country access to medicines and health care.23 Access to essential medicines has been substantially inhibited by patent protection. The most striking evidence is from sub-Saharan Africa where prices of patented antiretroviral medicines (ARVs) were maintained at OECD levels until large scale international pressure forced Pharma to move toward approximating prices offered by generic producers in India and Brazil.24 OECD-based pharmaceutical manufacturers have actively opposed introduction of generic ARVs in South Africa,25 Kenya,26 Uganda27 and elsewhere.28 The world political situation has most recently made it more difficult for Pharma to aggressively attack sub-Saharan African plans to market generic versions of HIV-related medicines, but current political circumstances are not an appropriate basis upon which to base multilateral trade and IPRs policy. Moreover, the political pressure pertaining to actions in sub-Saharan Africa does not necessarily pertain in other parts of the world. Reliance on voluntary restraint by Pharma is not an adequate basis upon which to analyze and frame TRIPS Agreement rules. C. Patent Rents and R & D To analyze the role of Pharma patents in developing countries it would be useful to be able to identify the extent to which Pharma profits derive from patent rents from these countries, whether from direct or indirect sales of patented pharmaceutical products, from patent licensing royalties and otherwise. If reasonably objective approximations of these profits at an aggregate level are publicly available, this author has not yet discovered the source. 29 Inquiries have been made to leading economists, and a request was made in the preliminary draft of this study for information that might be available among those participating in its review (including industry participants). For present purposes, the author assumes that hard aggregate data is either confidential or unassembled, and has made some informal calculations based on publicly available data to suggest some "order of magnitude" approximations.30 Pharma appears to earn profits in the range of several billion dollars per year from its operations in and sales to developing countries. If those profits are in the range of $5-7 billion, and half of those profits derive from sales of patent-protected products,31 Pharma may earn in the range of $2.5 - $3.5 billion from developing country patent-based operations. Pharma enterprises appear to spend one-third to one-half the amount of their net profits on R & D. This suggests that perhaps $1.25 to $1.75 billion per year in OECD research and development (R & D) expenditures might be at risk on an aggregate worldwide basis if profits based on patent protection in developing countries were foregone. All profits would obviously not be lost if patent protection were foregone, and it seems reasonable to conclude that less than $1 billion per year in OECD R & D might be affected by the loss of patent protection in developing countries. Available data raises questions regarding Pharma's contention that lower standards of patent protection in developing countries will impede the "research mission" of its members. It seems unlikely that a shortfall of less than one billion dollars in R & D finding would undermine the basic mission of an industry with an aggregate market size of $337.2 billion in 1999,32 and OECD company R & D expenditures of ECU 22 billion in 1995.33 A concern expressed by Pharma is that exports of drugs by developing countries to OECD markets would seriously affect Pharma's profitability, research mission, and so forth. This concern might be more realistic than concern over loss of profits within developing country markets. However, OECD patent laws generally prevent the importation of drugs produced without the consent of patent holders. If developing country generic producers that are not operated by Pharma seek to export to OECD markets, the firms are able to block imports of those drugs under existing patent legislation. D. Dynamic Offsets The dynamic effects of introducing patent protection on pharmaceutical products are difficult to predict. There is no substantial evidence to suggest that introduction of patent protection will result in a substantial increase in pharmaceutical product R & D in the developing countries.34 Assuming that there is some dynamic movement to researched-based industries in the developing countries,35 it is highly unlikely that for the foreseeable future the rents accruing to local developing country pharmaceutical companies will offset the increased rents flowing to OECD-based companies.36 E. OECD Effects Pharma's most serious concern appears to be that consumers in OECD markets will rebel against paying high prices for patented pharmaceuticals if they are aware that developing country consumers pay substantially less for the same products. Of course, it has long been the case that OECD consumers effectively subsidize R & D on medicines and vaccines sold and used in developing countries. Up until now that has not been a problem. Presumably, OECD consumers that were aware of price differentials attributed this to differences in standards of living and purchasing power, and did not regard it as troubling that distinctions between rich and poor markets were made. The social disruption caused by the TRIPS Agreement in developing countries has widely publicized the effects of patents on price, and the means by which consumers support Pharma R & D. The reaction by Pharma so far has been to insist on maintaining the position initially staked out in the TRIPS Agreement, regardless of evidence that the effects may be counterproductive to developing country consumers and to the industry itself. It is not beyond peradventure that Pharma could elect to change tactics and instead focus public relations efforts on why there may be price differences between developed and developing country markets, and why OECD consumers should continue to subsidize globally useful pharmaceutical R & D. Increasing emphasis on publicly supported research in the OECD might be effective in generating new medicines and vaccines, thereby reducing the importance of protecting Pharma profits to support R & D. Many of the new chemical entities marketed by Pharma are initially discovered in university or hospital research laboratories operating with substantial government funding. This is evident in the United States.37 The European Commission-backed study of EU competitiveness in the pharmaceutical sector attributes much of the success of the U.S.-based pharmaceutical companies to close cooperation between the federal government, public institutions such as university research laboratories, and the private sector.38 Since much of today's research is performed at universities and in research hospitals under government subsidy, what is mainly at issue is the mix of research mechanisms. The clinical trial sub-industry may still be employed by additional public research entities. However, assuming that Pharma will continue to serve its current role in the OECD, it is a matter for that industry to educate the public regarding the necessity for paying higher prices to fund R & D. It may indeed be a paradox of the TRIPS Agreement process that its imposition on developing countries to extract patent rents generates a backlash against pharmaceutical patent protection in the OECD. F. Infrastructure and Non-Patenting Pharma spokespersons frequently suggest that patents are not impeding access to medicines in developing and least developed countries, and that the principal impediments to access are in the area of health care infrastructure and medical personnel. Public health and IPRs experts have not questioned the importance of improved infrastructure, personnel recruitment and training, and related factors in addressing disease burdens.39 However, the fact that there are important additional considerations in effectively addressing disease does not diminish the importance of addressing the fundamental element of pharmaceutical costs. Most patented products are dependent for their usefulness on additional elements of infrastructure.40 The price of medicines directly affects the ability of prospective consumers to obtain them, and this is especially true in the case of life-saving medicines for which demand is highly price elastic among poorer populations (in the sense that lowering prices substantially enhances effective demand).41 Pharma has also suggested that because potentially patentable medicines have not always been patented in certain African countries, this demonstrates that patenting is not a significant obstacle to access.42 Yet inventing enterprises have always patented selectively, strategically targeting those countries with the greatest sales potential, and those countries where they are most likely to confront competitive production capacity and other commercial threats.43 The patenting pattern in Africa represents strategic planning that was deemed appropriate by Pharma in its specific time-frame, emphasizing South Africa as the principal potential source of competitive production, and countries such as Kenya, Nigeria and Zimbabwe as markets with comparatively high income. Major new commercial threats from generic producers in Brazil and India form the backdrop of Pharma's aggressive efforts toward accelerated implementation of the TRIPS Agreement. II. The TRIPS Agreement A. The Doha Declaration The WTO Council for TRIPS held sessions in June and September 2001 specifically devoted to issues concerning access to medicines. A substantial group of developing countries submitted a detailed proposal for a Declaration on TRIPS and Public Health to be adopted at the Doha Ministerial.44 The United States and a small group of like-minded countries submitted an alternate proposal. Following extensive negotiations based on a compromise text prepared by the WTO Secretariat, Ministers in Doha adopted a Declaration on the TRIPS Agreement and Public Health.45 The Doha Declaration on the TRIPS Agreement and Public Health is comprised of 7 paragraphs. Three of these are preambular, and indicate the importance that WTO Members ascribe to effectively addressing public health concerns, especially epidemic disease. The fourth paragraph includes a strong decision in support of Member's rights to take measures to protect public health and provide affordable access to medicines. The fifth paragraph clarifies provisions on compulsory licensing and exhaustion of IPRs. It affirms, inter alia, that the TRIPS Agreement does not limit the grounds on which Members may grant compulsory licenses, that each Member has discretion to determine the existence of a public health emergency, and that the TRIPS Agreement permits each Member to adopt its own policies and rules regarding the exhaustion of IPRs and parallel trade. The sixth paragraph places the issue of compulsory licensing for export on the agenda of the TRIPS Council, requiring that a proposal be furnished to the General Council by the end of 2002. The seventh paragraph extends until 1 January 2016, the transition period for least developed Members to provide or enforce pharmaceutical product patent protection. The Doha Declaration on the TRIPS Agreement and Public Health states: "4. We agree that the TRIPS Agreement does not and should not prevent Members from taking measures to protect public health. Accordingly, while reiterating our commitment to the TRIPS Agreement, we affirm that the Agreement can and 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. In this connection, we reaffirm the right of WTO Members to use, to the full, the provisions in the TRIPS Agreement, which provide flexibility for this purpose." Paragraph 4 is stated in terms of an agreement among WTO Ministers acting on behalf of Members. This agreement is most reasonably considered a "decision" of WTO Members under Article IX:1 of the WTO Agreement.46 This decision of WTO Members would appear to constitute an agreement on the method of application of the agreement within the meaning of Article 31(3)(a) of the Vienna Convention on the Law of Treaties ("VCLT"), and to be the substantive equivalent of an interpretation of the TRIPS Agreement. Ministers in Doha should be assumed to have acted with a purpose. The only apparent purpose for agreeing on a method of application of the TRIPS Agreement is to have an effect on the way in which the agreement is implemented by WTO Members. Notwithstanding the political and legal success it represents for developing WTO Members, the Doha Declaration did not address and resolve many of the significant obstacles the TRIPS Agreement creates regarding access to medicines and vaccines. The following part of this study examines the provisions of the TRIPS Agreement and, where relevant, discusses the impact of the Doha Declaration. B. Changing Circumstances 1. Present situation In partial recognition of the social and economic adjustments that developing Members would face as they provided patent protection for pharmaceutical products, the TRIPS Agreement allows those Members that did not provide such protection until January 1, 2005 to implement it. In the interim, under the so-called "mailbox" rule, developing countries are required to establish mechanisms for receiving and preserving priority in regard to pharmaceutical patent applications, and to allowing for the grant of exclusive distribution rights when prescribed conditions are satisfied. Absent extension, least developed Members had until January 1, 2006 to provide patent protection. As a consequence of the Doha Declaration, the transition period will be extended regarding pharmaceutical products until January 1, 2016. At present, producers with the capacity and willingness to supply the world market with low-price medicines under patent in developed countries are principally located in developing countries such as Brazil and India. Producers in these countries are able to manufacture under local law in compliance with TRIPS because pharmaceuticals were not patentable until recently (e.g., in the case of Brazil47) or are not yet patentable (e.g., in the case of India48). Developing and least developed countries that do not provide patent protection for pharmaceutical products are currently permitted under TRIPS to import low-price medicines from Brazil and India because there is no TRIPS-mandated export or import restriction, unless exclusive marketing rights under Article 70:9 are granted. 2. Developing countries in 2005 A substantial change to the TRIPS-imposed legal conditions in developing countries (excluding the least developed) will occur on January 1, 2005. On that date, developing countries that did not have patent protection for pharmaceutical products in place when the TRIPS Agreement became effective will be required to have such protection in place. Also on January 1, 2005, "mailbox" applications that were submitted during the transition periods will be operationalized such that patent protection will become effective for those applications as to which the relevant criteria of patentability are met.49 Just as Brazil, India and other developing countries presently manufacture medicines that are not under patent because they were not subject to patent protection in those countries when invented, so many medicines will remain off-patent when the situation changes in 2005. Just as producers of off-patent drugs produce and export them (to countries where there is no patent protection) today, they will be able to do so in 2005. The change will affect medicines already in the mailbox application pipeline, and those medicines invented on or after 2005. Among the important consequences of this changed situation will be that developing countries with the present capacity to export off-patent medicines (including ARVs) will lose that capacity in regard to drugs in the mailbox pipeline and newly-developed patented drugs. These consequences will be addressed in the sections following that deal with compulsory licensing and parallel trade. 3. Extension of LDC transition period The Doha Declaration at paragraph 7 directed the TRIPS Council to authorize the extension until January 1, 2016 of the transition period for least developed Members (hereinafter "LDCs") to implement or enforce pharmaceutical patent protection. The terms of this extension are somewhat ambiguous in that it is not clear from the express text whether LDCs are required to implement mailbox and exclusive marketing rights provisions prior to the end of the transition deadline.50 There is some indication that paragraph 7 was understood by negotiators in Doha not to require that mailbox and exclusive marketing rights requirements be implemented or enforced. If an LDC is required to implement mailbox protection, it must establish a procedure under which it will accept for filing pharmaceutical product patent applications filed abroad. Until the LDC establishes patent protection, the patent application remains dormant. However, during the period of dormancy, the LDC is required to grant exclusive marketing rights to the patent holder for a maximum period of five years following marketing approval of its drug.51 For almost all intents and purposes, the grant of exclusive marketing rights will be as effective as granting a patent in preventing generic drugs from entering the LDC market. Beyond that, however, when the dormancy period of the mailbox application ends, the drug covered by the application will be patented (assuming it meets relevant criteria). An entire "pool" of drugs that may be generic in an LDC during the mailbox transition period will come under patent at the end of the period. If, however, there is no mailbox system in place, holders of patents outside the LDC will not be able to obtain patents after the transition period has ended because the inventions covered by the patents will no longer be novel in the patenting sense. Thus, if there is no mailbox system in place, drugs that are generic (off-patent) during the transition period will remain generic after the transition period ends. The issue whether mailbox and exclusive marketing rights requirements are applicable to LDCs during the extended transition period is of considerable importance and should be addressed by the TRIPS Council in connection with operationalizing the extension envisaged by paragraph 7. In a limited set of circumstances, the transition period extension in favor of LDCs will allow them additional access to generic medicines. This is when a medicine is off patent in a developing Member such as India (and may be exported), but prior to the extension would be on patent in the LDC. The transition period extension relieves the LDC from the obligation to enforce local patents, so the LDC will be able to import the drug for so long as it remains off-patent in India.52 For drugs that go on-patent in India (and other developing Members) after January 1, 2005, either because applications filed during mailbox period are converted to patents, or because of newly-filed applications, no relief will be provided for LDCs that otherwise wish to import drugs. Those drugs will be on-patent in the country of export and more expensive. LDCs that are not required to implement or enforce pharmaceutical patent protection until 2016 will have a certain added measure of flexibility even as to drugs that are covered by patent in non-LDC Members. LDCs will be free to increase their own capacity to manufacture generic drugs, and export and import those drugs among themselves, without contravening the TRIPS Agreement. Since there are fourteen (14) years until patent protection will be mandated, there is a reasonable amount of time if plans are initiated soon to bring manufacturing facilities within LDCs on-line and recover investment capital prior to the end of the transition period. If the LDCs are not required to implement mailbox protection, drugs for which production is commenced during the transition period will be available indefinitely as generics. If mailbox protection is required, the end of the transition period will also mark the end of access to low priced drugs made available as a consequence of the extension, until such time as patents issued on the basis of mailbox applications expire. The value of this added flexibility is highly dependent on the capacity of the LDCs to increase manufacturing capacity, and this will depend on factors such as the availability of World Bank grants or loans to provide working capital, and the availability of technical assistance. Also, paragraph 7 of the Doha Declaration is somewhat ambiguous regarding whether LDCs are relieved from implementing and enforcing pharmaceutical process patent protection during the extended transition period.53 If LDCs are not so relieved, then under TRIPS Agreement Article 66:1, pharmaceutical process patent coverage must be implemented by January 1, 2006. This may limit the capacity of LDCs to initiate production. In giving effect to paragraph 7, the TRIPS Council should clarify that it extends to pharmaceutical process patents. C. Compulsory Licensing Compulsory licensing has long been recognized as the most important tool for addressing the adverse effects of the patent grant on public welfare.54 Exploiting compulsory licensing may involve the actual grant and implementation of a license. It may also involve the threat of a license that results in a patent holder revising its own pricing or supply strategy. Developing countries that provide patent protection for pharmaceuticals may obtain low-price drugs by authorizing their local manufacture or importation under compulsory license. A compulsory license may be issued on any grounds, including to address public health needs. There is a requirement that adequate compensation under the circumstances be paid to the patent holder, but this is a flexible standard that would allow a royalty to be based on the local wholesale selling price, which should result in a manageable amount. The Doha Declaration expressly recognizes that Article 31 of the TRIPS Agreement does not limit the grounds upon which compulsory licenses may be issued (para. 5(b)), and that each Member has the right to determine the circumstances constituting national emergency or other circumstances of extreme urgency. Although it is helpful that clarity has been added to these elements of the compulsory licensing regime under the TRIPS Agreement, these provisions of the Doha Declaration merely confirm previously unambiguous text. 1. Capacity to exploit The effective use of compulsory licensing as a tool of public policy presupposes that certain conditions are met: * There must be a party within the country granting the license that is able to exploit it, either by manufacturing the subject invention or importing it. This requires, inter alia, technical expertise and financial capital; * If local manufacturing is to be undertaken, there must be sufficient purchasing power among the population to justify investments undertaken by the party exploiting the license (or export opportunities must be available). If the local population is small and/or poor, there may not be a consumer base adequate to provide an adequate return on investment; * The government may act as the party exploiting the compulsory license (e.g., for government use), and/or it may act as purchasing agent on behalf of the population acquiring the exploited invention. In either case, the government will require technical expertise and financial resources. * Legal and political infrastructure must be in place to permit the granting and supervision of the license. As a general proposition, developed country Members of the WTO are able to satisfy the foregoing conditions, and are therefore able to effectively exploit compulsory licensing. Developing countries and LDCs are situated along a spectrum of capacity to exploit compulsory licensing. 2. Need to exploit Countries are in substantially different circumstances regarding the extent to which they may need to use compulsory licensing as a policy instrument. Countries in the OECD with high levels of purchasing power maintain strong production bases that are distributed among member countries, and rely on production from developing countries. Countries with high levels of purchasing power and strong industrial bases are unlikely to require the use of compulsory licensing except in exceptional circumstances, such as for remedial purposes when producers are found to be engaged in anticompetitive behaviors, or to address supply emergencies. The recent Anthrax episode in the United States (discussed infra) illustrates that developed countries may confront supply emergencies that require the threat and/or grant of compulsory licenses. Countries with lower levels of purchasing power and weaker industrial bases are more likely to require the use of compulsory licensing as a tool to address public policy objectives. * The price of goods is a more significant determinant of market demand in low-income countries because consumers have fewer resources to allocate among goods. Compulsory licensing is an instrument for obtaining lower prices on goods protected by patent. * Although countries are at substantially different stages of technology capacity development, in general there is a wide disparity between the research and development capacities of developing and developed countries. The vast preponderance of patented technology is owned and controlled by enterprises based in developed countries. Developing countries on the whole are in a position of reliance on technological development in the developed countries, and are in the position of systemic net payers for technology. For a variety of reasons, the technology needs of developing countries often may not be met by acquisition of technology licenses on voluntary terms. Compulsory licensing provides a means for developing countries to obtain technology necessary for development and social welfare. * A weak industrial base implies dependence on imports for goods. Suppliers based outside the territory of a country are less sensitive than local suppliers to internal economic and political pressures to provide goods at prices affordable within the country. 3. The pharmaceutical sector There is substantial evidence that the availability of generic (off-patent) drugs, especially from multiple sources, substantially reduces prices. A report from the WHO indicates: "Very different degrees of competition characterise different sub-components of the pharmaceuticals market. Some drugs which are available over the counter, such as cough syrup, and many generics (such as aspirin) are produced in conditions which resemble those of a perfectly competitive market - multiple producers and purchasers, minimally differentiated products, information asymmetries unimportant, low barriers to entry. Each firm in such a market tends to be a price taker, and price will be close to marginal cost. "At the other end of the pharmaceuticals market, a relatively small number of firms have limited monopolies (limited in time and subject to therapeutic competition) for complex drugs (such as anti-retrovirals), available only on prescription. This sub-market is characterised by information problems, and legal barriers to entry posed by patent protection. Here price is commonly several times the marginal cost of production, particularly in the early years of patent life. Profits generated under patent protection are a reward for risk-taking and innovation - in the form of research and development expenditures - by the patent-holding company. "Competition is perhaps the most powerful policy instrument to bring down drug prices for off-patent drugs. In the United States, when a patent expires the average wholesale price falls to 60% of the branded drug's price when there is just one generic competitor, and to 29% with 10 competitors. The concept of marginal cost is important because it reveals the value of resources used in making a product. In a competitive environment, marginal cost is close to the market price of the product. However, determining marginal cost is difficult. So other approaches to determining a price for a particular drug, including using the price of unpatented therapeutic equivalent drugs, and pharmacoeconomic analysis, have been proposed. With price at, or close to marginal costs, some essential drugs may still remain unaffordable to poor people. In these instances additional international financing should be considered." [footnotes omitted]55 Compulsory licensing is a means for reducing the adverse effects of patents on price and availability. It is essential to many developing countries that sources of generic or low-cost drugs be made available. However, it is difficult for many of these countries to manufacture drugs, and it is particularly difficult for them to manufacture a variety of drugs such as may reasonably be necessary to meet the demands of the local market. As such, the problem is two-fold: (1) establishing manufacturing capacity and (2) establishing a network of low-cost suppliers. 4. Post transition period As noted earlier, a substantial change to the TRIPS-imposed legal conditions in developing and least developed countries will occur on January 1, 2005 and January 1, 2016. Among the important consequences of this changed situation will be that developing countries with the present capacity to export off-patent drugs will lose that capacity in regards to newly-developed patented drugs (and drugs in the mailbox pipeline that come under patent). At this juncture, affordable access to on-patent medicines in developing and least developed countries will become increasingly dependent on compulsory licensing. If the prices of medicines offered by patent holders are too high, or if sustainable access is otherwise restricted or threatened, relief will be sought through the issuance of compulsory licenses.56 Certain developing countries will have capacity to manufacture under compulsory license, but there will certainly be developing and least developed countries without that capacity. Moreover, developing countries will require a variety of medicines, and it may be important that production of different medicines be allocated among countries. Finally, it may well be that certain developed countries will wish to aid developing and least developed countries by producing under compulsory license to satisfy import requirements. In the foregoing circumstances, it is foreseeable that developed and developing WTO Members may wish to grant compulsory licenses for export, and this raises legal issues under the TRIPS Agreement. 5. A multi-dimensional problem set Article 31 of the TRIPS Agreement permits all WTO Members to grant compulsory licenses regarding, inter alia, pharmaceutical products and processes. The terms of Article 31 are in general permissive and flexible. As confirmed by paragraphs 5(b) and (c) of the Doha Declaration, Article 31 does not limit the grounds upon which licenses may be granted, and it permits each Member to determine in its own discretion what constitutes a national emergency or circumstances of extreme urgency (thereby establishing an exception from pre-grant negotiation). There is substantial flexibility in terms of the administrative processes that may be adopted to implement a compulsory licensing regime. To date, developing countries have made limited use of compulsory licensing as a tool to address public health issues.57 This stems from a number of causes: (1) the TRIPS Agreement has only recently begun to increase the incidence of patent protection: (2) use has been opposed by developed country WTO Members and interested industry groups within them, and a strong political commitment to act in the face of this opposition is required; (3) some developing countries have expressed concern regarding a potential backlash from foreign direct investors (4) developing country enterprises may find it easier to reach accommodation with foreign patent holders than to challenge them through the compulsory licensing process for various economic and administrative reasons and, as noted earlier; (5) effectively implementing compulsory licensing requires that certain preconditions relating to administrative, financial and technical capacity be met, and these conditions are often not met in developing countries. Addressing the limited use by developing countries of the compulsory licensing tool will require that substantial attention be paid to putting into place appropriate legal infrastructure. In this regard, developing countries will need to seek advice and assistance from sources such as UNCTAD, WHO and non-governmental organizations (NGOs) attentive to their interests. Addressing the problem of limited use will also require access to and coordination of financial and technical resources. The solution to the limited use of compulsory licensing by developing countries requires addressing a number of important elements. 6. Article 31(f) Recognizing the multi-dimensional nature of the problem, the TRIPS Agreement nevertheless establishes certain obstacles to effectively addressing access to medicines through compulsory licensing. The most widely noted of these potential obstacles is Article 31(f), which provides: "(f) any such use shall be authorized predominantly for the supply of the domestic market of the Member authorizing such use;" Article 31(f) establishes a limitation: the terms of the compulsory license should include the condition that the licensee uses the patented invention predominantly to supply the domestic market of the Member granting the license. The word "predominantly" would generally appear to refer to the major part or majority,58 and would generally suggest that more than fifty percent of the production by a compulsory licensee should be intended for supply of the domestic market of the Member granting the license. It might be suggested that "predominantly" also refers to a situation in which the domestic market of the Member granting the compulsory license takes the greatest share of supply as among those Members receiving supplies. To illustrate: the granting Member may receive forty percent (40%) of the supply, while three other Members each individually receive twenty percent (20%). In that context, supply of the domestic market of the granting Member would predominate over the supply of any other individual WTO Member. The difficulty with this interpretation is that it potentially reduces the term "predominantly" to a nullity, for example, if there were 80 Members receiving supplies under compulsory license, perhaps only two percent (2%) might need to be supplied to the market of the Member granting the license to maintain its predominance. The limitation imposed by Article 31(f) creates two inter-linked problems: 1. By restricting the availability of export drugs made under compulsory license, it limits countries that are not in a position to support manufacturing under compulsory license (or where patent protection is not in force) in the availability of supply of generic import drugs, and; 2. By requiring compulsory licensees to supply a predominant part of their production to the domestic market, it limits the flexibility of countries to authorize the export of compulsory-licensed drugs and thereby to exploit economies of scale. Article 31(f) creates difficulties on the demand and supply side of the generic drug pipeline. The demand side problem is self-evident. If a developing Member lacks manufacturing capacity for a particular drug, and there are no Members that are able to supply it by export under compulsory license (or exception), there may be no affordable supply of the drug. The supply side problem is identified because there are WTO Members, including developing Members, with the capacity to address the drug import needs of a wide range of developing Members under compulsory license, but that may be inhibited from undertaking this role because of the Article 31(f) limitation. a. Implementation by importation Neither Article 31 in general, nor Article 31(f) in particular, state or imply that a compulsory licensee must produce the invention within the territory of the Member granting the license. Under Article 31, a compulsory licensee may import products in the implementation of its license.59 The ability of a compulsory licensee to satisfy a domestic market by importation depends upon the availability of off-patent products in exporting countries, or upon some legal mechanism under which the potential rights of patent holders in exporting countries will not be infringed. When pharmaceutical patent protection is not implemented or enforced in a WTO Member (such as an LDC subject to an extended transition period), that Member will not be required to issue a compulsory license to satisfy its import requirements in a TRIPS-consistent manner. b. Legal mechanisms for non-infringement in the country of export If no patent has been granted in the country of export, or if a patent in that country has expired, there will be no infringement by a party exporting in fulfillment of the compulsory license in the country of import. The patent holder in the country of export may consent to the exportation, perhaps because that patent holder is different than the patent holder in the country of import.60 There would be no infringement in either country if the importer also acted under compulsory license. The producer in the country of export may itself be implementing a compulsory license, and would be entitled to export a non-predominant part of its production. In this case, there would be no infringement in either country. Both the exporter and importer would act under compulsory license (or, there would be no patent protection in the importing country). If the producer in the country of export is implementing a compulsory license issued as a remedy for anticompetitive conduct, the restriction regarding predominant part established by Article 31(f) does not apply, pursuant to Article 31(k). c. Potential infringement in the country of export If (a) the drug is under patent in the country of export (b) the patent holder does not consent to the export (c) no compulsory license has been issued, or has been issued but cannot be used for export because of a "predominant part" problem, then the importing country that has issued the compulsory license may not be able to satisfy its requirements without a potential infringement of patent holder's rights in the country of export. From the standpoint of TRIPS Agreement obligation, the issuance of a compulsory license in the country of import does not constitute non-compliance with TRIPS obligations, even if prospective imported products are under patent in a country of export.61 If exports originate in another Member in a manner inconsistent with the exporting country's obligations under Article 28 of the TRIPS Agreement, it is the obligation of the exporting country to take steps in regard to its obligations. 7. Article 31-based solutions As noted above, Article 31(f) limits the grant of compulsory licenses for export to cases in which export supply does not represent the predominant part of the licensed activity. In this section, several possible means for addressing supply requirements of importing countries within the express text of article 31(f) are examined. There are a number of "creative" alternatives, though each presents difficulties either in the sense of (a) operational challenges, or (b) pressing the boundaries of interpretation. The overall conclusion is that the text of Article 31(f) presents serious obstacles to compulsory licensing to satisfy the requirements of export markets. a. Parallel compulsory licensing A country of export might choose to recognize the grant of a compulsory license issued by an importing country. In principle, this could be accomplished through the parallel grant of a compulsory license in the country of export. This procedure has three potential drawbacks. First, the granting mechanisms foreseen by Article 31 are procedurally cumbersome, although the use of national emergency/extreme urgency determinations to avoid pre-grant negotiations with the patent holder might accelerate the process. Second, the exporting country faces the limitation imposed by Article 31(f) regarding predominance of the domestic market. Third, establishing this type of arrangement presupposes implementing legislation in the country of export to adapt its compulsory licensing rules. Administrative burdens of parallel compulsory licensing might be mitigated in countries of export by the establishment of streamlined procedures. For example: 1. A request for issuance of a parallel compulsory license might be triggered by a request from a country that had previously issued a compulsory license. 2. If the license request is based on a national emergency in the importing country, that might result in the prompt issuance of the parallel license to fulfill import requirements without negotiations with the patent holder, with compensation in the exporting country presumptively based on established guidelines. (a) Article 31(b) of the TRIPS Agreement provides that a Member may grant a compulsory license absent prior negotiation with patent holders "in the case of a national emergency or other circumstances of extreme urgency or in cases of public non-commercial use". There is nothing in the express text that limits an emergency to the territory of the Member that is issuing the compulsory license. 3. If the license request is not based on a national emergency in the importing country, the request might initiate a time period during which negotiations on a commercial license would be undertaken with the local patent holder. If such negotiations are unsuccessful within a set period, a license might issue based on the grounds for grant in the requesting country. (a) As noted in a prior report, the concept of "comity" provides a basis for one WTO Member to recognize the grounds of grant of a compulsory license in another Member as the basis for its own grant of a parallel license.62 The determination of the first Member would not be "binding" on the second Member, but would rather provide the basis for voluntary recognition. (b) As an alternative to comity, a WTO Member requested to supply exports might be considered an agent acting on behalf of the requesting (importing) Member. The separate legal identity of the exporting Member might be ignored. The compulsory license issued in the importing Member might be deemed satisfied within its domestic market. (c) Article1 31(a) of the TRIPS Agreement requires that each authorization be considered on its own merits, but this does not imply that parallel authorizations could not be based on the same set of underlying facts. 4. The patent holder would hold administrative rights under Article 31 in each Member. There are, in short, legal and administrative mechanisms that might be used to reduce the expense and delays generally associated with compulsory licensing procedures, yet remaining within the interpretative parameters of Article 31. These administrative solutions would not, however, eliminate the problem that a country of export would be required to supply a predominant part of the compulsory license production to its domestic market (unless the agency concept is adopted and the distinct legal identity of the exporting country is ignored). b. Regional market arrangements One important potential solution to the Article 31(f) problem is the creation of integrated regional patent regimes that would allow for the grant of regional compulsory licenses. The European Union is a regional organization Member of the WTO and would presumably be entitled to consider its member states to constitute a single domestic market from the standpoint of Article 31(f). Although neither the European Patent Convention (in force, though not a Union legal instrument) nor the Community Patent Convention (not in force), provide for the grant of a Union-wide compulsory license, it is difficult to see an objection as a matter of legal principle to such a mechanism.63 The WTO legal instruments foresee and allow the formation of customs unions and free trade areas (GATT Article XXIV), and regional services arrangements (GATS Article V). The WTO legal instruments do not generally impose restrictions on the capacity of such arrangements to jointly adopt and implement regional legislation. 64 It would not appear necessary for such an arrangement to be a Member of the WTO (as is the European Union) in order to be considered a single domestic market in the sense of Article 31(f) of the TRIPS Agreement. The EU, it should be recalled, was traditionally considered a Contracting Party to the GATT 1947 even though not formally a party to the agreement. The TRIPS Agreement might be constructively interpreted to contemplate that a group of countries establishing a common patent regime would be entitled to issue a common compulsory license with effect in all states of the arrangement, with the further understanding that supply of the group market under such arrangement constituted domestic supply within the meaning of TRIPS Article 31(f). c. The legal fiction of the pharmaceutical production export zone (PPEZ) A country issuing a compulsory license may request that a country with export capacity recognize and give effect to its license by authorizing the supply from its territory of drugs that will fulfil the terms of the license. The physical location of manufacture may be the exporting country, but there is the possibility of establishing a legal fiction that would avoid legal issues otherwise associated with potential infringement of patent rights in the country of export. One such legal fiction would be to permit the creation of analogues to "foreign trade zones" within the territory of exporting countries in which acts may be undertaken without implicating the otherwise applicable local rights of patent holders. Under existing GATT rules, foreign trade zones have been tolerated as areas within the territory of a Member that are considered outside the customs territory of the Member for tariff assessment purposes,65 with the consequence that goods may be imported into and worked upon in the zone without being subject to the payment of customs duties. In the United States, for example, the foreign trade zone (FTZ) concept is used quite extensively.66 Imported goods may be brought into an FTZ, worked into a product in a different tariff classification, and exported with no tariff consequences, or imported into the U.S. at the lowest applicable tariff rate. The FTZ is within the physical geographic boundaries of the United States. From the standpoint of non-application of tariffs, the FTZ is a legal fiction.67 A potential country of export that wished to recognize and give effect to a compulsory license granted by another Member could designate a particular manufacturing site a "pharmaceutical production export zone" (PPEZ) and authorize a manufacturer to produce there without incurring domestic legal consequences from the patent holder. The designated manufacturer could be prohibited from importing the products into the country where production is undertaken, or to other countries that had not issued corresponding compulsory licenses. The acceptance of a legal fiction such as the PPEZ would provide a relatively uncomplicated solution to the obstacle potentially raised by Article 31(f) of the TRIPS Agreement. Since the PPEZ plant would not legally be within the country of export, no local compulsory license would be needed to authorize production. The supply would be for the domestic market of the Member granting the compulsory license. Moreover, no reliance on Article 30 would be required in the country of export since there would be no exception to the rights of the patent holder that are not recognized in the PPEZ. The rights of the patent holder to remuneration and administrative protections would remain in the country that had granted the compulsory license. To make this system genuinely effective, it might be necessary to allow production facilities in countries of export to serve dual purposes; that is, to produce at some times for general purposes, and some times for PPEZ purposes. If it is necessary to construct special facilities solely to serve as PPEZ facilities, the expense might be an obstacle to use of the legal fiction. In addition, the legal fiction would depend on a determination that PPEZ exports are not considered subsidized by virtue of non-recognition of patent holder rights within the zone. Although a claim of subsidization would not arise from an importing Member that authorized the compulsory license, such a claim might arise from a third Member that objected to potential interference with its export trade. A key issue regarding the concept of the PPEZ is whether the legal fiction may be established without reliance on Article 30 (discussed in the Section VIII), or the adoption of a waiver. The principal grounds for suggesting that neither an Article 30 exception nor a waiver may be required is that FTZs are in use by WTO Members to authorize importing, working and exporting goods without payment of tariffs, and this common practice is accepted among Members. By operating FTZs, WTO Members provide preferential tariff treatment to certain manufactured goods, namely those destined for export markets. This acts as a subsidy of exports (reducing the cost of exports by the extent of the waived customs duties). It may also result in differential treatment of imports and exports of like products, and constitute derogation from MFN tariff obligations. WTO Members may at least implicitly have removed certain duty drawback or remission schemes (including those manifested in FTZs) from challenge as export subsidies by reference in Annexes to the Subsidies Agreement. 68 If this is so, it may be more the result of recognition of the need to tolerate a widely used practice than a neutral policy determination that such schemes do not constitute export subsidies. Members might, by the same token, decide that PPEZs should be tolerated even if to do so requires the acceptance of a legal fiction. d. Anticompetitive practices remediation Article 31(k) of the TRIPS Agreement69 exempts compulsory licenses issued to remedy anticompetitive practices from the Article 31(f) requirement. A WTO Member that determined the existence of anticompetitive conduct on the part of a patent-holding pharmaceutical company might well grant one or more licenses regarding that company's patents that could be used to supply the markets of any number of developing Members. Whether the grant of a parallel compulsory license would be required in importing Members would depend on the presence or absence of local patent protection, and the rule of international exhaustion followed in the importing Member. The latter issue is discussed in Section XII of this study. Since major research-based pharmaceutical companies have recently been found by OECD country authorities to have engaged in systematic anticompetitive conduct,70 there is reason for developing countries to explore joint investigation into the business practices of these companies. e. Article 31(f) conclusion There are approaches to interpretation of Article 31(f) that may provide flexibility in the authorization of compulsory licensing for export. These include establishing expedited mechanisms for the parallel grant of compulsory licenses, creating regional patent systems allowing for joint compulsory licensing, the creation of pharmaceutical production export zones (PPEZs), and using compulsory licenses to remedy anticompetitive conduct. The use of compulsory licensing in the export context as a remedy for anticompetitive conduct requires no interpretative clarification. However, a threshold finding of anticompetitive conduct is required under Article 31(k). It might be difficult to establish such conduct in all cases in which compulsory licensing for export would be sought. Moreover, it seems doubtful that as a policy matter developed Members of the WTO would wish to point to competition law proceedings as the only viable option for granting necessary licenses. Some other potential approaches raise serious operational issues (e.g., parallel and regional licensing), suggesting that they may not become meaningful alternatives for some time. Other potential approaches (e.g., PPEZs) involve strained interpretations of the WTO agreements that, even though perhaps customarily accepted in other contexts, may nevertheless be subject to successful challenge in dispute settlement unless formally approved by interpretation, waiver or amendment. The restrictions imposed by Article 31(f) will limit the available supply of generic drugs for developing countries, a condition that will be increasingly problematic, as developing countries are required to implement pharmaceutical patent protection in 2005. Interpreting the express text of Article 31(f) in a way that relaxes its restrictions presents serious difficulties. Alternative approaches should be considered. 8. Article 30-based solutions Authorization of the export of public health related inventions without the consent of the patent holder is not dependent on Article 31(f). Article 30 of the TRIPS Agreement expressly authorizes Members to provide limited exceptions to patent rights under certain conditions. Members should be able to authorize exports of products under patent in their territories as an exception to the rights of patent holders when local producers are able to provide low price products, and when such products are needed by importing Members. Use of the Article 30 exception for exports would be most consistent with implementing the TRIPS Agreement in a manner supporting public health and promoting access to medicines for all as decided by Ministers in paragraph 4 of the Doha Declaration. Use of the Article 30 exception may or may not be dependent in the country of import on the issuance of a compulsory license that overcomes potential objection to importation from a local patent holder. This will depend on whether there is patent protection provided in the country of import (which might, for example, be an LDC that is not enforcing such protection), and on whether the patent holder in the country of import is considered to have a right to consent to importation. It is generally accepted that a compulsory license may be satisfied by importation if products are lawfully available from countries of export. No formal interpretation of Article 31 would be needed to allow compulsory licenses for import to be used in connection with exports undertaken under Article 30. It is important to note that the decision whether to authorize an Article 30 exception resides in the country from which exports are undertaken. A WTO Member authorizing an Article 30 exception makes the determination whether a potential conflict with rights of the patent holder will be unreasonable. If a Member considers that to authorize an exception would undermine its interests in attracting research and development investment, or foreign direct investment, it might refuse to authorize an exception. Members may choose to balance the interests of patent holders and social welfare interests in access to medicines by using the flexibility in Article 30 to establish exceptions. The application of the balancing will be within the good faith discretion of the Member making the determination. a. Interpretation of express text Article 30 of the TRIPS Agreement provides: "Exceptions to Rights Conferred Members may provide limited exceptions to the exclusive rights conferred by a patent, provided that such exceptions do not unreasonably conflict with a normal exploitation of the patent and do not unreasonably prejudice the legitimate interests of the patent owner, taking account of the legitimate interests of third parties." The express text of Article 30 establishes three basic criteria for establishing exceptions to the Article 28 enumerated rights of patent holders.71 i. "Limited exceptions" Article 30 of the TRIPS Agreement states that Members may provide "limited exceptions to the exclusive rights conferred by a patent". The common meaning of "limited" is that the subject matter is bounded by constraints.72 Standing alone, the term "limited" does not indicate that the established boundaries should be narrow. Subject matter that is "limited" is differentiated from subject matter that is "unlimited", or not subject to boundaries. An "exception" is a deviation or derogation from a rule or principle.73 As with the term "limited", the term "exception" standing alone does not connote a particular degree. Exceptions to rules may be infrequent and minor, or they may be frequent and substantial. "Limited exceptions" to rights are deviations from rules that are constrained within boundaries. Based on this element of the express text of Article 30, the General Council of the WTO may render an interpretation of Article 30 that establishes deviations from the rights of patent holders set out in Article 28 that are constrained by boundaries. ii. "provided that such exceptions do not unreasonably conflict with a normal exploitation of the patent" The term "unreasonably" is flexible.74 The term combines the root "reasonable", with the prefix "un". Something that is "reasonable" appeals to logic or is equitable. Something that is "un-reasonable" does not appeal to logic, or is inequitable. A party or subject matter acts "unreasonably" if it acts in a way that does not appeal to logic, or inequitably. "Conflict" means to stand in opposition.75 "Normal" means to be within the generally accepted parameters of conduct.76 "Exploitation" means use.77 The plain meaning of the phrase "provided that such exceptions do not unreasonably conflict with the normal exploitation of the patent" is that deviations from the enumerated rights of patent holders should not operate inequitably in the context that patents are ordinarily used. iii. "and do not unreasonably prejudice the legitimate interests of the patent owner, taking account of the legitimate interests of third parties" "Unreasonably" is defined above. "Prejudice" means to act adversely in relation to the subject matter.78 "Legitimate" means within the expectations of law or social custom.79 "Interests" refer to that which a party considers themselves affected by, or in some circumstances to that which a person is entitled.80 "Taking account of" means considering within the framework of analysis or concern. "Third parties" are those persons or enterprises that are not directly part of the referenced relation.81 As a matter of ordinary meaning, exceptions that "do not unreasonably prejudice the legitimate interest of the patent owner, taking account of the legitimate interests of third parties" means that subject deviations should not inequitably affect expected entitlements of the patent holder, considering the effect on persons that are not directly within the government-patent holder relation. iv. The significance of footnote 7 Footnote 7 to Article 31 of the TRIPS Agreement states that "'Other use' refers to use other than that allowed under Article 30." Article 31 establishes rules and procedures regarding the grant of compulsory licenses. The plain meaning of footnote 7 is that an exception under Article 30 and a compulsory license under Article 31 are different legal mechanisms to which different rules and procedures apply. Article 31 sets forth relatively detailed steps regarding the granting and administration of compulsory licenses, including a requirement that adequate remuneration in the circumstances of the case is paid, and that a predominant part of licensed products be for the supply of the local market. Article 30, by way of contrast, does not specify procedures for the authorizing of exceptions, does not address the issue of remuneration, and does not include geographic limitations. The text of Article 31(f) indicates that compulsory licensing is not intended for use predominantly for supply of export markets. It cannot be said that an interpretation of Article 30 that authorizes the supply of export markets under specified conditions is a compulsory license within the meaning of Article 31. It is a legal mechanism not contemplated by Article 31. It is a use allowed under Article 30, and not under Article 31. Footnote 7 does not say that if a compulsory license may not be issued within Article 31 rules and procedures, there can be no exception under Article 30. Article 30 provides for "exceptions" to patent holder rights, including rights under Article 31. Article 30 is not by its terms limited regarding the potential subject matter of exceptions. b. Application of interpretation based on express text Based on the express text of Article 30, the concept of "limited exception" does not significantly constrain the possible interpretations that may be decided upon by the General Council. The exceptions must include defined boundary(ies). The main issue is what is the "normal exploitation" of the patent, and what type of deviation from that normal exploitation would be "unreasonable" as a matter of treaty interpretation. i. Normal exploitation of the patent right (a) Right to export It must first be observed that a right to consent to "export" is not an enumerated right of patent holders under Article 28 of the TRIPS Agreement. There is an enumerated right of "import", making evident that TRIPS negotiators considered the movement of patented articles in international trade. This author is not aware of national or regional patent laws that specifically enumerate a right of "export" (although the U.S. Patent Act addresses this subject indirectly).82 Patent holders within a country may ordinarily be in a position to claim infringement based on exports because exporters have "made" or "sold" the subject invention within the territory of the exporting country. This will not always be the case. A product covered by patent made abroad, and merely transiting territory, would not be covered by an enumerated patent right. Because Article 28 does not enumerate a right of export, there is no "normal" right under the TRIPS Agreement to export a patented drug. There is, however, a normal right to "make" and "sell" a patented drug. (b) Higher income market conditions A patent grant confers rights within the territory of the country granting the patent. The patent serves several purposes from the standpoint of the patent holder. It precludes potential competitors from selling an infringing product on the market covered by the patent. It also precludes potential competitors from manufacturing infringing products within the market covered by the patent. In light of the integration of world markets, a significant portion of products manufactured within a country may be exported. The right to prevent potential competitors from establishing competing manufacturing facilities within a particular country that engage in exportation may confer an advantage on the patent holder in the sense that potential competitors are forced to locate their facilities where there is no patent protection and, if a patent is in force worldwide, not to manufacture for export at all. The right to prevent others from manufacturing for export may be a valuable commercial right in some contexts. (c) Lower income market conditions In other contexts, the right to manufacture for export may have very limited commercial value. One such context is export to countries with low income and limited effective demand for the potentially exported products. If there is no effective market for the products of a patent holder, the right to export to a market, or to prevent others from manufacturing and exporting to that market, will have a minimal value. Although patent holders may regard unexploited patents as having a certain value in their capacity to block commercial activities of others, unexploited blocking patents do not serve a socially useful purpose. Patents are granted to encourage inventors and investors to undertake socially useful activities. When patents are not exploited, the bargain between society and the inventor/investor is broken. There is no justification for allowing an inventor/investor to block manufacture and export to markets where patented products are required and where there is minimal interference with the commercial value of the patent to the inventor/investor. An interpretation of Article 30 that would authorize the making and export of patented pharmaceutical products to low income markets would not interfere with "normal" exploitation, and would not in any event constitute an "unreasonable" conflict with such exploitation. (d) Developing country requirements as criteria Recall that paragraph 4 of the Doha Declaration states: "Accordingly, while reiterating our commitment to the TRIPS Agreement, we affirm that the Agreement can and 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." Article 30 should be interpreted in a manner that promotes access to medicines for all. The appropriate base criterion for an Article 30 exception is whether it would address a legitimate need in the importing country, not whether there is manufacturing capacity in that country, or whether it would desirable to create manufacturing capacity in that country. This suggests criteria such as: 1. Whether the importing country is confronting an unaddressed health need; 2. Whether the importing country has the financial resources to pay for on-patent drugs or other public health related inventions, whether locally produced or imported, to supply the needs of "all" those in need of treatment; 3. Whether the exporting country has the capacity to supply low-price pharmaceuticals or other public health related inventions. When addressing public health and pharmaceuticals, the issue for developing countries is: what solution will bring disease-fighting remedies to the market in the shortest time at the lowest cost? If a drug can be manufactured at a low-cost facility in any WTO Member, and it would be feasible for a plant to supply a low-income country, it would be economically inefficient to require a prospective importing Member to gear up its own manufacturing facility for the same drug. ii. Unreasonable prejudice to the interests of the patent holder, taking into account third party interests An authorization to make and export under certain conditions might unreasonably prejudice the interests of the patent holder. An authorization to supply a high-income market might under some circumstances unreasonably conflict with the normal exploitation of the patent, and unreasonably prejudice the interests of the patent holder. An authorization regarding a low-income market might unreasonably prejudice the interests of the patent holder if the exports were systematically diverted to high-income markets, thereby undermining the commercial return on the patent. The interests of the public in obtaining affordable access to medicines and other public health related inventions must always be taken into account in evaluating the effect on patent holders. c. Additional interpretative factors i. The Vienna Convention on the Law of Treaties As discussed above, the VCLT provides that treaties are to be interpreted "in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose" (Article 31(1)). The context includes the text, preambles and annexes (Article 31(2)). Further, "3. There shall be taken into account, together with the context: (a) any subsequent agreement between the parties regarding the interpretation of the treaty or the application of its provisions; (b) any subsequent practice in the application of the treaty which establishes the agreement of the parties regarding its interpretation;" (Article 31). Article 32 of VCLT provides, in relevant part: "Supplementary means of interpretation Recourse may be had to supplementary means of interpretation, including the preparatory work of the treaty and the circumstances of its conclusion, in order to confirm the meaning resulting from the application of article 31, or to determine the meaning when the interpretation according to article 31: (a) leaves the meaning ambiguous or obscure; or (b) leads to a result which is manifestly absurd or unreasonable." The two previous subsections of this report considered the ordinary meaning of the express text of Article 30 and its implementation in respect to authorization of making and export of pharmaceuticals under patent. It is important also to consider whether there is additional "context and in light of the object and purpose" in relation to Article 30 of the TRIPS Agreement acting as a material constraint on interpretation. As an initial matter, it should be noted that the preparatory work or negotiating history of a treaty or international agreement is optionally examined under Article 32, VCLT, only as a secondary source to confirm an interpretation or resolve an ambiguity. ii. The Doha Declaration The Doha Declaration on the TRIPS Agreement and Public Health states: "4. We agree that the TRIPS Agreement does not and should not prevent Members from taking measures to protect public health. Accordingly, while reiterating our commitment to the TRIPS Agreement, we affirm that the Agreement can and 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. In this connection, we reaffirm the right of WTO Members to use, to the full, the provisions in the TRIPS Agreement, which provide flexibility for this purpose." As noted earlier, Ministers in Doha should be assumed to have acted with a purpose. The only apparent purpose for agreeing on a method of application of the TRIPS Agreement is to have an effect on the way in which the agreement is implemented by WTO Members. Article 30 of the TRIPS Agreement "can and 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." Interpreting Article 30 to allow for exceptions to make and export pharmaceutical and other public health related products when needed by developing countries would be most consistent with the decision of WTO Ministers. iii. Negotiating history Under Article 32 of the VCLT, the use of supplementary sources of interpretation such as preparatory work is discretionary. The treaty interpreter "may" refer to supplemental sources. Recourse may confirm an interpretation arrived at consistently with Article 31, VCLT. A Member in the implementation of the TRIPS Agreement, or the Ministerial Conference or General Council deciding on an interpretation under Article IX:2 of the WTO Agreement, may refer to supplemental sources to confirm the interpretation, or may not. There is nothing in VCLT rules suggesting that the negotiating history of an agreement would limit an interpretation within the express text, context, and object and purpose of the agreement. Article 30 of the TRIPS Agreement was adopted as a compromise solution following the inability of negotiators during the Uruguay Round to agree on a list of exceptions to patent holder rights that might be recognized by Members.83 Negotiations concerning such a list proceeded contemporaneously at WIPO, and no agreement was reached in that forum.84 The most that may be said about the negotiating history of Article 30 is that it does not resolve uncertainty regarding the meaning of the express text. The draft on exceptions in the 1990 Anell text is wholly different than the final text that emerged as Article 30 in the Dunkel Draft text in late 1991.85 There was no agreement on the Anell text. The list of exceptions set out in the Anell text included several that would have significant economic consequences, including a right in favor of prior users and a right of experimental use.86 The extent of an exception and the conflict with normal exploitation of the patent is a matter of degree. iv. The Canada-Generics panel report To date, there has been one DSU panel report regarding interpretation of Article 30, the decision in Canada-Generic Pharmaceuticals. 87 As this author has discussed in depth in a related paper, the General Council and Ministerial Conference are not bound to follow the jurisprudence of a panel report in the adoption of an interpretation of the TRIPS Agreement.88 While Members that are parties to a specific dispute are obligated to comply with a decision of the DSB, that decision does not bind other Members in their development of TRIPS-compatible interpretations. Moreover, the Appellate Body (AB) has yet to address interpretation of Article 30. The history of WTO DSU proceedings so far is that the AB often disagrees with legal analysis by panels, and it cannot be assumed that the analysis in Canada-Generics would be sustained at the AB level.89 The panel in Canada-Generics interpreted the phrase "limited exception": "7.30 The Panel agreed with the EC that, as used in this context, the word 'limited' has a narrower connotation than the rather broad definitions cited by Canada. Although the word itself can have both broad and narrow definitions, the narrower being indicated by examples such as 'a mail train taking only a limited number of passengers', the narrower definition is the more appropriate when the word 'limited' is used as part of the phrase 'limited exception'. The word 'exception' by itself connotes a limited derogation, one that does not undercut the body of rules from which it is made. When a treaty uses the term 'limited exception', the word 'limited' must be given a meaning separate from the limitation implicit in the word 'exception' itself. The term 'limited exception' must therefore be read to connote a narrow exception - one which makes only a small diminution of the rights in question. 7.31 The Panel agreed with the EC interpretation that 'limited' is to be measured by the extent to which the exclusive rights of the patent owner have been curtailed. The full text of Article 30 refers to 'limited exceptions to the exclusive rights conferred by a patent'. In the absence of other indications, the Panel concluded that it would be justified in reading the text literally, focusing on the extent to which legal rights have been curtailed, rather than the size or extent of the economic impact. In support of this conclusion, the Panel noted that the following two conditions of Article 30 ask more particularly about the economic impact of the exception, and provide two sets of standards by which such impact may be judged. The term 'limited exceptions' is the only one of the three conditions in Article 30 under which the extent of the curtailment of rights as such is dealt with." The panel interpreted "normal exploitation" of the patent right: "7.54 The Panel considered that 'exploitation' refers to the commercial activity by which patent owners employ their exclusive patent rights to extract economic value from their patent. The term 'normal' defines the kind of commercial activity Article 30 seeks to protect. The ordinary meaning of the word 'normal' is found in the dictionary definition: 'regular, usual, typical, ordinary, conventional'. As so defined, the term can be understood to refer either to an empirical conclusion about what is common within a relevant community, or to a normative standard of entitlement. The Panel concluded that the word 'normal' was being used in Article 30 in a sense that combined the two meanings. 7.55 The normal practice of exploitation by patent owners, as with owners of any other intellectual property right, is to exclude all forms of competition that could detract significantly from the economic returns anticipated from a patent's grant of market exclusivity. The specific forms of patent exploitation are not static, of course, for to be effective exploitation must adapt to changing forms of competition due to technological development and the evolution of marketing practices. Protection of all normal exploitation practices is a key element of the policy reflected in all patent laws. Patent laws establish a carefully defined period of market exclusivity as an inducement to innovation, and the policy of those laws cannot be achieved unless patent owners are permitted to take effective advantage of that inducement once it has been defined." The panel interpreted "legitimate interests" in relation to the patent holder and to third parties: "7.68 ... Although the European Communities' definition equating 'legitimate interests' with a full respect of legal interests pursuant to Article 28.1 is within at least some of these definitions, the EC definition makes it difficult to make sense of the rest of the third condition of Article 30, in at least three respects. First, since by that definition every exception under Article 30 will be causing 'prejudice' to some legal rights provided by Article 28 of the Agreement, that definition would reduce the first part of the third condition to a simple requirement that the proposed exception must not be 'unreasonable'. Such a requirement could certainly have been expressed more directly if that was what was meant. Second, a definition equating 'legitimate interests' with legal interests makes no sense at all when applied to the final phrase of Article 30 referring to the 'legitimate interests' of third parties. Third parties are by definition parties who have no legal right at all in being able to perform the tasks excluded by Article 28 patent rights. An exceptions clause permitting governments to take account of such third party legal interests would be permitting them to take account of nothing. And third, reading the third condition as a further protection of legal rights would render it essentially redundant in light of the very similar protection of legal rights in the first condition of Article 30 ('limited exception'). 7.69 To make sense of the term 'legitimate interests' in this context, that term must be defined in the way that it is often used in legal discourse - as a normative claim calling for protection of interests that are 'justifiable' in the sense that they are supported by relevant public policies or other social norms. This is the sense of the word that often appears in statements such as 'X has no legitimate interest in being able to do Y'. ..." The panel's interpretation of "limited exception" is somewhat more restrictive than that suggested by this author on the basis of the express text. In the panel's view, a limited exception should be narrow and result in a small diminution of the rights in question. The panel rejected Canada's stockpiling exception as not sufficiently limited because it imposed no restraint on the quantity of drugs that could be produced before expiration of the patent term. The panel allowed Canada's regulatory review exception. The panel stressed in each case that the "limited exception" test did not address economic impact, but rather the apparent extent of the exception in legal terms. The panel indicated that economic impact would be evaluated in the context of "normal exploitation". There is room for an Article 30 "limited exception" for making and export to developing countries even within the parameters of the panel's interpretation of those terms. "Export" is not an enumerated right of patent holders, and there is no express conflict with patent holder rights if others are permitted to export. "Making for export to developing countries needing low-cost pharmaceuticals and other public health related products" is limited within specified boundaries, and involves only a small part of the patent holder's rights. The panel indicated that "normal exploitation" of patent rights meant that the capacity to earn ordinary commercial returns should not suffer significant detraction. Limitation of the right to consent to export to low-income developing countries should not significantly detract from the returns ordinarily earned by pharmaceutical industry patent holders, for example. Of some interest in the Canada-Generics case is that the regulatory approval exception approved by the panel is far more economically significant to the pharmaceutical sector than the stockpiling exception disapproved by the panel. The panel indicated that "legitimate interests" should be understood in a social welfare sense, and that the interests of patent holders in earning commercial returns are subject to balancing with other interests, including social welfare interests of third parties. In that sense, an Article 30 exception for making and export to developing countries would not unreasonably prejudice the legitimate interests of patent holders. 9. Compulsory license in importing countries The use by one WTO Member of an Article 30 exception for making and export is not dependent on the issuance of a compulsory license authorizing importation in another WTO Member. If a product is under patent in the country of import, the patent holder in that country would ordinarily be able to assert an infringement claim regarding prospective imports.90 This situation will not pertain in certain important circumstances. LDCs that are not required to implement or enforce patent protection until 2016 will not be required to issue compulsory licenses for imports of drugs produced under export exception in developed and developing countries, provided that the LDCs are not required to provide exclusive marketing rights. If such rights are provided, then the issuance of compulsory licenses directed at exclusive marketing rights may be required. Pharmaceutical inventors may or may not widely patent their inventions, and there may be importing countries where patent protection, even if potentially available, has not been secured. There may be cases in which a patent has been ruled invalid in a potential importing country, and yet remain valid and enforceable in a potential exporting country. The use of an Article 30 exception for making and export to developing countries may be undertaken in a variety of circumstances, a number of which will not involve the grant of a compulsory license in the importing country. 10. The issue of remuneration a. Compulsory licensing Article 31(h) of the TRIPS Agreement provides: "the right holder shall be paid adequate remuneration in the circumstances of each case, taking into account the economic value of the authorization;" Attached as Annex 2 to this report is a general analysis of the remuneration requirement of Article 31(h) authored by the writer of this report. Some of the key points made in regard to the remuneration requirement are: * The level of remuneration depends on the particular circumstances of the case and may take into account various factors, including (but not limited to) the economic value of the authorization; * "Adequate" refers to a sufficient amount meeting minimum standards; * Commercial market royalty rates are one possible benchmark for remuneration, but may be difficult to ascertain or be unreflective of the value of the license for a variety of reasons. Detailed analysis of underlying costs is an alternative, as are government-established guidelines. Factors such as government subsidization of research and development (R & D) and tax treatment are relevant. Royalties may be based on wholesale selling prices, net of tax liabilities. * Public welfare interests may be taken into account in establishing remuneration. For example, distinction might be drawn between licenses issued to further industrial policy objectives and licenses issued to supply needed medicines; * Article 31(k) expressly recognizes that "The need to correct anti-competitive practices may be taken into account in determining the amount of remuneration in such cases." If a compulsory license is issued to remedy a situation in which the patent holder has unfairly benefited, the remuneration may be correspondingly diminished. If a developing WTO Member issues a compulsory license that is satisfied by importation of products not protected by patent in the export market, the level of royalty will be entirely dependent on the importing country's remuneration determination. If a developing Member issues a compulsory license that is satisfied by the issuance of a parallel compulsory license in an exporting Member, there will be remuneration obligations arising in both the exporting and importing Members. In such circumstances, compensation in the importing Member should generally be adequate to satisfy the interests of the patent holder since the importing Member is the primary locus of exploitation of the patent. In any case, cooperation in determining the level of remuneration between authorities in the importing and exporting Members would be foreseen. The patent holder is not entitled to a double-benefit because there are licenses granted in the importing and exporting markets. Rather, a single adequate return based on the production and sale of the subject pharmaceutical would be foreseen. In circumstances such as the grant of a regional compulsory license, it may be reasonable to determine the level of remuneration based on the regional market. If a pharmaceutical production export zone (PPEZ) is established in the exporting country, there should be no remuneration obligation arising in the territory of export since that territory will not form part of the area in which the patent holder exercises rights. Remuneration would be calculated based on factors in the country of import that grants the compulsory license. As noted above, a compulsory license granted in a country of export to remedy anticompetitive practices may be adjusted to take into account the remedial nature of the license. b. Exceptions Article 30 is silent on the issue of compensation or remuneration. It provides that Members may provide "limited exceptions" to patent holder rights that do not unreasonably conflict with normal exploitation or unreasonably prejudice the patent holder, taking into account third party interests. WTO Members have taken into account economic effects on patent holders in the establishment of some exceptions. For example, a number of governments that have established regulatory review exceptions have also adopted patent term extensions.91 In the Canada-Generics proceeding, a number of these Members argued that patent holders would be treated unfairly if subject to effective shortening of the patent term based on their own regulatory review obligations, if second comers to the regulatory review process would be able to enter the market immediately upon expiration of the patent term. Extending the patent term based on the patent holder's regulatory review was said to redress the economic effects of the exception. The panel in the Canada-Generics case rejected the argument that a regulatory review exception would fail to meet the requirements of not conflicting with normal exploitation of the patent (or prejudicing legitimate interests) if it did not include a compensatory patent term extension. The panel found that the patent holder did not have a normal expectation of relief from the effects of regulatory review. A regulatory review exception could be granted under Article 30 without a compensatory patent term extension adjustment. Article 30 neither compels nor prohibits WTO Members from establishing some form of compensatory adjustment in the establishment of exceptions. An exception without any compensatory adjustment will reflect a governmental determination that the patent holder is not inhibited in the normal exploitation of the patent or unfairly prejudiced. Whether an adjustment is incorporated with an exception might influence a DSU panel in rendering a determination whether the rights of the patent holder are unreasonably prejudiced. Unlike the compulsory license in which remuneration ordinarily flows from the licensee to the patent holder, a compensatory adjustment in the Article 30 exception context might ordinarily be in the form of government policies in countries of export that benefit pharmaceutical patent holders without direct involvement by enterprises exploiting the exception. For example, a WTO Member that provides R & D tax incentives to pharmaceutical enterprises may well consider that it is adequately compensating those enterprises for use that might be made of patents by other enterprises in the context of supplying developing countries. Similarly, a WTO Member that permits private enterprises to make use of publicly funded R & D without compensation might well consider that exceptions to patent rights based on the authorization of exports would offset any economic diminution resulting from exploitation of the exception. There is nothing in the text of Article 30 that would preclude the General Council or Ministerial Conference from rendering an interpretation regarding the balancing of economic interests in the authorization of compulsory licensing for making and export of pharmaceuticals. For example, a formal interpretation may be adopted to provide that WTO Members authorizing production and export within certain parameters would be deemed to be within the scope of a permissible Article 30 exception without compensatory adjustment in respect to patent holders. This would in effect establish a "safe harbor" for Members choosing to establish an exception. Entitlement to the safe harbor might be based on an evaluation of the factors justifying the grant of the exception as enumerated above. As a general rule, exceptions granted to satisfy the import requirements of low-income countries with unmet health needs would not be expected to require compensatory adjustments in countries of export. In some circumstances in which an Article 30 exception is used, a compulsory license will be issued in the country of import. This will provide remuneration to the patent holder based on exploitation of the invention in the relevant consumer market. Under such circumstances, there would be no apparent basis for contemplating a compensatory adjustment in the country of export. 11. Application of Article 27:1 of the TRIPS Agreement Article 27:1 of the TRIPS Agreement provides in relevant part: "patents shall be available and patent rights enjoyable without discrimination as to the place of invention, the field of technology and whether products are imported or locally produced." The issue may arise in TRIPS Council discussion whether rules regarding compulsory license for export or Article 30 exceptions may be addressed to pharmaceutical product and process patents, or to public health related patents, and not other patents. Based on the express text of the TRIPS Agreement, some have argued that Article 31 (addressing compulsory licensing) is subject to Article 27:1 prohibiting discrimination as to field of technology.92 Article 70:6 stipulates the date prior to which Article 27:1 is not applicable to compulsory licensing, and the suggestion is that by implication Article 31 is subject to Article 27:1 after that date. Notwithstanding the decision of the panel in the Canada-Generics case, there are inadequate grounds to conclude that Article 30 (addressing exceptions) is subject to Article 27:1 on the basis of the express text. The panel determined that Article 30 is subject to Article 27:1 on grounds that there was no reason to distinguish the situation of Article 31. In this respect, the panel substantially downplayed the plain language of Article 30 that is to authorize "exceptions" from the rights otherwise afforded to patent holders. An exception that otherwise meets the criteria of Article 30 should not be subject to a particular patent holder right enumerated in Article 27:1 any more that it should by definition remain subject to other patent holder rights. Article 31, by way of contrast to Article 30, is not framed in terms of "exception" to patent holder rights. Even if Articles 30 and 31 are subject to Article 27:1, the express text of Article 27:1 nonetheless permits an interpretation of Articles 30 and 31 that is directed only to the field of pharmaceutical or public health related technology. Article 27:1 provides that patent rights shall be enjoyable "without discrimination". Discrimination refers to unfair or unjustifiably adverse treatment. It is a pejorative term. If specific rules applicable to pharmaceutical or public health patents are necessary to address important public interests, this does not constitute "discrimination" against the field of pharmaceutical technology. It constitutes recognition of legitimate public interests in differential treatment. Such determinations would be fully consistent with paragraph 4 of the Doha Declaration that expressly acknowledges the need to support access to medicines "for all". In adopting paragraphs 6 and 7 of the Doha Declaration, Ministers have clearly acknowledged that the pharmaceutical sector may be treated differently than other sectors regarding the enjoyment of patent protection. Paragraph 6 specifically addresses insufficient manufacturing capacity in the pharmaceutical sector, and finding a solution to this particular problem regarding compulsory licensing. Paragraph 7 provides for the grant of an extension of the general LDC transition time period solely in respect to pharmaceutical products. The practice of WTO Members is to permit legitimate distinctions among fields of technology. 12. Amendment and waiver A detailed analysis of the options open to developing countries under Articles 30 and 31 of the TRIPS Agreement reveals that interpreting the existing text in a manner favorable to addressing public health concerns is problematic. In respect to Article 31(f), the operational and legal difficulties are such that, absent reliance on an Article 30 exception, the legal risks in working with the present text are great. Particularly in light of Paragraph 4 of the Doha Declaration, Article 30 may provide a reasonable degree of flexibility, but the ambiguities inherent in the three-factor test (analyzed earlier in this study) also create a situation of uncertainty that developing countries in particular may find inhibiting. In the final analysis, the interests of developing countries may be best addressed by amending the TRIPS Agreement. As a temporary measure pending formal amendment, a waiver might be adopted to implement the options that may be used in amendment. 13. Formal interpretation In anticipation of the Doha Ministerial Conference, developing Members prepared a set of specific recommendations intended to address the problems associated with the restriction on compulsory licensing established by Article 31(f) of the TRIPS Agreement. Those recommendations included that: "5. 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. ... 7. 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."93 The analysis in this paper supports the foregoing proposals made in advance of the Doha Ministerial. In effect, Article 30 must be interpreted so as to allow the making, sale and export of patented products to address public health needs in importing countries as a way to operationalize the capacity of Members to produce for export to meet the compulsory licensing requirements of importing Members. A formal interpretation adopted by the Ministerial Conference or General Council would be useful in providing legal security for Members following this approach. If an interpretation authorizing production for export is adopted, there is no need to adopt an additional specific interpretation of Article 31, unless some Member(s) elects to place in doubt whether a compulsory license may ordinarily be fulfilled by importation. If doubt is expressed on this issue, it may also be prudent to adopt an interpretation of Article 31 making clear that Members may fulfill compulsory licenses granted within their territories by importation. The decision whether to authorize an Article 30 exception should be understood to be in the hands of the Member making that determination. For the purpose of providing guidance to Members and the Dispute Settlement Body, it may be useful to indicate that: 1. Authorization to make, sell and export patented public health related products is a limited exception to the rights of patent holders; 2. Such authorization does not conflict with the normal exploitation of the patent when: a. Undertaken to address unmet public health needs in countries of import, and; b. Financial constraints in countries of import restrict attention to the public health requirements of all individuals; 3. Such authorization does not prejudice the legitimate interests of patent holders, taking into account the legitimate interests of third parties when: a. The authorization is not directed to supplying a developed importing Member; b. Without prejudgment as to the form such mechanism may take, the country of import accepts to provide the patent holder in the country of export with a reasonable opportunity to prevent the systematic diversion to developed Members of products supplied under exception. 4. Nothing in the foregoing precludes Members from authorizing exceptions regarding developed Members as circumstances justify. Whether there is manufacturing capacity in a prospective importing Member is a factor that may be taken into account when determining whether that Member has unmet public health needs. Paragraph 6 of the Doha Declaration refers to addressing the situation of "WTO Members with insufficient or no manufacturing capacities in the pharmaceutical sector" that may face difficulties in making effective use of compulsory licensing. By its terms, paragraph 6 implies that if an importing Member has insufficient manufacturing capacity to address its public health requirements by issuing compulsory licenses, an exporting Member would be entitled to rely on that insufficiency as the basis for authorizing a limited export exception to patent holder rights within the meaning of Article 30. There may be some LDCs with literally no pharmaceutical manufacturing capacities, and in such case that fact without more may appear to justify invocation of an Article 30 exception to supply exports to those countries. Most countries, whether developing or developed, are not in a position to supply all of their needs for patented pharmaceuticals. All countries rely on imports to satisfy some of their requirements for patented pharmaceuticals. There may be various obstacles to granting compulsory licenses for supply of the local market that range from lack of adequate manufacturing facilities present within the country, to the absence of potential licensees that are willing and /or capable of manufacturing locally. In some countries capacity to manufacture pharmaceuticals may be owned or controlled by the same companies that hold local patents, and there will be no enterprises willing to take on the role of compulsory license supplier. This suggests that insufficiency of manufacturing capacity should not be the principal criteria for determining whether a country may obtain imported public health related products. Instead, the state of manufacturing capacity might be one factor relevant to determining whether there are unmet health needs within that country. The interpretative conditions should not be understood to exclude developed countries from obtaining imports that rely on an Article 30 exception authorization by an exporting Member. There are situations that may arise in which a developed Member urgently requires public health related products within its territory, and may need to rely on exports from persons other than the patent holder to meet its needs. D. Parallel trade Legislation authorizing parallel importation of patented pharmaceuticals permits developing country consumers to obtain the lowest cost supplies of such products. Important recent economic studies of differential pricing have noted that prices for patented pharmaceuticals do not necessarily reflect the purchasing power of consumers, and that developing countries may benefit from access to parallel imports.94 In the preparations for the Doha Ministerial, the United States and Switzerland initially resisted the consensus of WTO Members that the TRIPS Agreement permits each Member to establish its own policy and rules on this subject. Eventually even these two Members reluctantly conceded this point. 1. The Doha Declaration Paragraph 5(d) of the Doha Declaration provides: "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." The exhaustion of a patent holder's rights to control the sale, use, and importation of products may be based on its consent to the first sale or marketing of the product. It may also be based on a sale or marketing of the product authorized by a government under compulsory licensing or otherwise. The EU and US each proposed to incorporate in the Declaration on the TRIPS Agreement and Public Health a limit on international exhaustion to marketing with the consent of the patent holder.95 Such limitation was not included in the Doha Declaration. Instead, paragraph 5(d) leaves each Member "free to establish its own regime for such exhaustion without challenge." This appears to leave each Member with the discretion to determine whether it will recognize compulsory-licensed marketing or sale of a product in a country of export as exhausting the patent holder's rights in the country of import to consent to importation and resale. 2. By another authorized party Although the Doha Declaration appears to resolve the issue of exhaustion based on marketing under compulsory license, it may be useful to consider the legal issues in more detail since they are likely to be further discussed by Members. There are circumstances under which patented products may be first sold or put onto the market under compulsion of government authority. This is typically through the grant to the government itself, or to a third party, of a compulsory license to make and dispose of the product. Such licenses may be authorized because the government determines that public interests will be met by the grants (see analysis of TRIPS compulsory licensing rules above), including as a remedy for anticompetitive practices by patent holders.96 When patent holders are required to license third parties to produce and dispose of patented drugs, and the licensees put the drugs on the market, buyers are entitled to use or dispose of those drugs just as if the drugs had been put onto the market by the patent holders. In other words, first sales by the licensees have the same effects (in the local market) as first sales by patent holders. The right of the patent holders to control subsequent sales or transfers is extinguished or exhausted by the licensees' acts. The question has been raised whether drugs (or other patented products) put onto the market under compulsory license in one country may be parallel imported into another country without the consent of the patent holder in that other country. Two textual bases in the TRIPS Agreement suggest a basis for authorizing parallel importation in this context. The first is article 6, TRIPS Agreement, providing that the exhaustion issue may not be subject to dispute settlement. Since "exhaustion" is not a specifically defined term, it would appear that each WTO Member is permitted to adopt the definition it reasonably considers appropriate. This definition might include exhaustion by first sale under compulsory license. The second textual basis is article 31(f), providing that compulsory licenses "shall be authorized predominantly for the supply of the domestic market of the Member authorizing such use". If some drugs produced by compulsory licensees may be exported (i.e. the non-predominant portion), then logically they may imported somewhere, and parallel importation is a mechanism for allowing this without the consent of the patent holder.97 The Appellate Body has emphasized that the express language of the WTO Agreement (including the TRIPS Agreement) is its principal source for interpretative guidance, giving terms their ordinary meaning in their context, and in light of the object and purpose of the agreement.98 Only if the text is unclear does the Appellate Body resort to supplementary means of interpretation. If "exhaustion" can reasonably be interpreted to take place upon the first sale by a compulsory licensee, then the Appellate Body might well determine that a WTO Member is not subject to WTO dispute settlement for authorizing parallel importation based on sales made by compulsory licensees. In addition, although (as noted below) there is case law in the developed country WTO Members holding that exhaustion of patent rights is based on the "consent" of the patent holder to placement of goods on the market, the Appellate Body is not under an international legal obligation to interpret the TRIPS Agreement to reflect the traditional practices of developed country Members. Practice in developing Members may well evolve in an alternative direction, provided that such practice is not inconsistent with the express terms of the TRIPS Agreement. There are, however, arguments that run counter to the suggestion that Members may authorize parallel importation based on the acts of compulsory licensees: * Though the exhaustion issue is not subject to dispute settlement, the question what constitutes exhaustion might be determined by dispute settlement since there are limits to how the term may be interpreted.99 * Article 28, TRIPS Agreement, expressly establishes the rights of patent holders to "consent" to the enumerated acts, including importation. "Consent" to placement on the market anywhere in the world may exhaust the import right under Article 28.100 * There is a body of case law in the EU, Japan, Switzerland and the United States holding that the notion of patent right exhaustion is based on the consent of the patent holder to first sale. There is a specific holding by the European Court of Justice that intra-Union exhaustion of pharmaceutical patent holder rights does not occur on the basis of a compulsory licensee's placement of drugs on the market. Although international exhaustion of patent rights is accepted in the United States, the U.S. Supreme Court has barred imports of goods lawfully produced under patent abroad without the consent of the U.S. patent holder (under a so-called prior users' right).101 * Although article 31(f) allows export of the non-predominant portion of compulsory licensee production, there are at least two contexts in which corresponding importation does not require consent of the patent holder: (a) where the drug is not patented in the country of import,102 and; (b) where the country of import has issued a compulsory license for importation. From a practical standpoint, why is the question whether international exhaustion may take place under compulsory license important? Developing countries that provide patent protection for medicines have limited potential supply of those drugs. They may be purchased locally at on-patent prices, or they may be purchased following placement on the market abroad by the patent holder (or its agent). Although parallel importation may allow price savings, these savings are not likely to be on the order of magnitude seen in the relationship between on-patent versus off-patent medicines. A drug produced under compulsory license is effectively an off-patent drug (though payment of an adequate royalty will add to the price). If parallel importation of compulsory licensed drugs is accepted, then in principle a single compulsory licensee in a major market (e.g. Brazil or India) could export a substantial (though "non-predominant") quantity of low-price drugs, and no action would be required by importing developing countries other than to recognize a broad doctrine of exhaustion and parallel importation. Provided that one or two major market Members were willing to grant compulsory licenses, a worldwide solution to the problem of low-price medicines might be found. It is clear that WTO Members may authorize parallel importation of patented medicines placed on the market by or with the consent of the patent holder. It is not clear whether the Appellate Body will construe exhaustion doctrine to authorize parallel importation of medicines placed on the market by compulsory licensees. It is likely that developed Members such as the U.S., EU and Switzerland will resist an interpretation of exhaustion doctrine that is not based on the consent of the patent holder. Paragraphs 4 and 5(d) of the Doha Declaration, however, support an interpretation that advances the interests of developing Members in obtaining low cost access to pharmaceutical supplies. 3. Parallel importation, tiered pricing and safety Parallel importation plays an extremely important role in assuring price competition among world markets, and in the pharmaceuticals context in assuring that WTO Members