A recent decree on compulsory licenses issued by the President of Ecuador, Rafael Correa, has generated some interest in a few IP-related fora (e.g., Patently-O). Since this is related to my research area, and I've already incorporated it into a paper I'm writing on the topic, I thought it would be useful to write a short post.
The gist of the story is that, in October 2009, Ecuador stated in broad terms that it intended to issue compulsory licenses on pharmaceutical patents to obtain low-cost generic versions of certain drugs (summary here). According to a press release from the government, licenses will issue for pharmaceuticals first, and them move on to agrochemicals because "knowledge is a public good that cannot be privatized" (that's a rough, and possibly not entirely accurate, Internet translation).
Ecuador's move is reminiscent of the compulsory licenses issued by Thailand and Brazil a few years ago (detailed in an article I wrote at the time). Notably, those countries are somewhere in the middle in terms of economic development. Similarly, Ecuador is considered a developing country by the UN, but not a "Least Developed Country" (LDC). And it is classified as a "lower middle income" country by the World Bank, as opposed to low income. Given its middle-development status, one could argue that Ecuador does not fall into the category of countries that were the true focus of a 2003 international agreement to facilitate the export of generic pharmaceuticals by relaxing patent rules (see the special provisions accorded to LDC in the agreement). That said, Ecuador is clearly still eligible to import generic pharmaceuticals under the 2003 agreement, as well as domestically manufacture under the broader provisions of TRIPS -- its decree is in no way illegal or contrary to international law.
In addition to the proposed breadth of Ecuador's licenses, there are a few interesting points that are worth mentioning. Reportedly, the branded pharmaceutical industry, speaking through its local association, has conceded Ecuador's right to issue the licenses. This is in contrast to Thailand's and Brazil's experiences, in which some expressed doubt that the licenses were TRIPS-compliant (I happen to believe they were). In addition, this appears to be an overt negotiation tactic. Ecuador is willing to discuss the royalties due on the licenses with the respective patent owners. No such requirement exists in international law. Ecuadorian government officials have even pointed to past cases of brinkmanship in compulsory licensing that have resulted in voluntarily lower prices by the pharmaceutical industry.
What will be the result of Ecuador's decree? Will it result in more licenses by similarly-situated countries? Will pharmaceutical companies respond by trying to recoup losses through higher prices in countries that don't possess the political strength of Ecuador? Will it expand to other technology areas, like climate change? It is hard to say for sure. But it is a question that must be considered in designing an coherent compulsory licensing regime, which is the subject of my current research.
The gist of the story is that, in October 2009, Ecuador stated in broad terms that it intended to issue compulsory licenses on pharmaceutical patents to obtain low-cost generic versions of certain drugs (summary here). According to a press release from the government, licenses will issue for pharmaceuticals first, and them move on to agrochemicals because "knowledge is a public good that cannot be privatized" (that's a rough, and possibly not entirely accurate, Internet translation).
Ecuador's move is reminiscent of the compulsory licenses issued by Thailand and Brazil a few years ago (detailed in an article I wrote at the time). Notably, those countries are somewhere in the middle in terms of economic development. Similarly, Ecuador is considered a developing country by the UN, but not a "Least Developed Country" (LDC). And it is classified as a "lower middle income" country by the World Bank, as opposed to low income. Given its middle-development status, one could argue that Ecuador does not fall into the category of countries that were the true focus of a 2003 international agreement to facilitate the export of generic pharmaceuticals by relaxing patent rules (see the special provisions accorded to LDC in the agreement). That said, Ecuador is clearly still eligible to import generic pharmaceuticals under the 2003 agreement, as well as domestically manufacture under the broader provisions of TRIPS -- its decree is in no way illegal or contrary to international law.
In addition to the proposed breadth of Ecuador's licenses, there are a few interesting points that are worth mentioning. Reportedly, the branded pharmaceutical industry, speaking through its local association, has conceded Ecuador's right to issue the licenses. This is in contrast to Thailand's and Brazil's experiences, in which some expressed doubt that the licenses were TRIPS-compliant (I happen to believe they were). In addition, this appears to be an overt negotiation tactic. Ecuador is willing to discuss the royalties due on the licenses with the respective patent owners. No such requirement exists in international law. Ecuadorian government officials have even pointed to past cases of brinkmanship in compulsory licensing that have resulted in voluntarily lower prices by the pharmaceutical industry.
What will be the result of Ecuador's decree? Will it result in more licenses by similarly-situated countries? Will pharmaceutical companies respond by trying to recoup losses through higher prices in countries that don't possess the political strength of Ecuador? Will it expand to other technology areas, like climate change? It is hard to say for sure. But it is a question that must be considered in designing an coherent compulsory licensing regime, which is the subject of my current research.
Earlier this semester, I had the privilege of hearing a presentation at the uOttawa law school by the well-known author and "copyleft" advocate Cory Doctorow. The topic of the discussion concerned information dissemination and the role of copyright.
Throughout much of his talk, Cory assailed digital rights management (DRM) technology as creating unnecessary barriers to accessing information. In addition to being generally ineffective against all but the honest, circumventing DRM can lead to serious liability in the U.S. under the Digital Millennium Copyright Act (analogous provisions are, interestingly, still under consideration in Canada). Cory's examples made a lot of sense, and he was able to communicate a very effective case for the over-extension of copyright power through DRM. It's easy to conclude that a DRM-free world would the optimum state, and any legal regime that seeks to preserve DRM it is merely a means of holding onto outdated business models. But this may be taking Doctorow's point too far. I wondered: can one make a positive case for DRM that can be reconciled with the recent, negative experiences?
I believe that the key to making a positive case for DRM (as for copyright power in general) is to imagine cases where more information is shared or accessible than in its absence. But how can a means for locking up information lead to greater access? When that information would not be shared in a particular format without content protection. For example, if you wanted a particular textbook in electronic format for increased ease in transport and searching, and a publisher was only willing to make it available if it included DRM, wouldn't having the textbook with DRM be better than only having a paper copy? In that scenario, the use of DRM increases the availability of information.
That said, it's important to note that articulating a case for DRM is not necessarily an argument that current policies and rules, such as the DMCA, are necessary. While some DRM may arguably be a net positive, a separate legal regime to protect the measures might leave us worse off.
At any rate, what about the point that DRM often protects industries that are relying on outdated business models? Even if you agree that DRM can enable more information dissemination from otherwise reluctant industries, perhaps such industries would be better left to disappear. I think it depends on the industry. One can make a case that moving music away from large labels may be a positive, given the fact that the investment necessary to create music is now so low given technologies like Apple's Garage Band. On the other hand, one could argue that there is no substitute for the large investment that global newspaper reporting entails, and there is not likely to be an equivalent alternative that will arise from a dispersed, blog-like environment. It seems that the benefit of DRM is a question without a single, obvious conclusion.
Throughout much of his talk, Cory assailed digital rights management (DRM) technology as creating unnecessary barriers to accessing information. In addition to being generally ineffective against all but the honest, circumventing DRM can lead to serious liability in the U.S. under the Digital Millennium Copyright Act (analogous provisions are, interestingly, still under consideration in Canada). Cory's examples made a lot of sense, and he was able to communicate a very effective case for the over-extension of copyright power through DRM. It's easy to conclude that a DRM-free world would the optimum state, and any legal regime that seeks to preserve DRM it is merely a means of holding onto outdated business models. But this may be taking Doctorow's point too far. I wondered: can one make a positive case for DRM that can be reconciled with the recent, negative experiences?
I believe that the key to making a positive case for DRM (as for copyright power in general) is to imagine cases where more information is shared or accessible than in its absence. But how can a means for locking up information lead to greater access? When that information would not be shared in a particular format without content protection. For example, if you wanted a particular textbook in electronic format for increased ease in transport and searching, and a publisher was only willing to make it available if it included DRM, wouldn't having the textbook with DRM be better than only having a paper copy? In that scenario, the use of DRM increases the availability of information.
That said, it's important to note that articulating a case for DRM is not necessarily an argument that current policies and rules, such as the DMCA, are necessary. While some DRM may arguably be a net positive, a separate legal regime to protect the measures might leave us worse off.
At any rate, what about the point that DRM often protects industries that are relying on outdated business models? Even if you agree that DRM can enable more information dissemination from otherwise reluctant industries, perhaps such industries would be better left to disappear. I think it depends on the industry. One can make a case that moving music away from large labels may be a positive, given the fact that the investment necessary to create music is now so low given technologies like Apple's Garage Band. On the other hand, one could argue that there is no substitute for the large investment that global newspaper reporting entails, and there is not likely to be an equivalent alternative that will arise from a dispersed, blog-like environment. It seems that the benefit of DRM is a question without a single, obvious conclusion.
We are accustomed to the idea that the decision to relax (or more inaccurately, "break") medical product patents through compulsory licenses almost always addresses a specific health care emergency or remedies a violation of competition laws. But a recent dispute (see WSJ, FT) involving the U.S. and Brazil highlights the fact that the desire to access patented drug information can be purely economic.
The dispute involved improper U.S. subsidies to domestic cotton growers that inhibited free trade. Brazil brought a complaint before the WTO, and the dispute settlement procedure was utilized to determine the outcome. In its complaint, Brazil argued for countermeasures in the amount of $2.5 Billion. Significantly, one of the measures it requested was the ability to suspend its intellectual property obligations under TRIPS. Although specific products are not identified in the WTO filings, reports indicate that Brazil intended to take compensation by suspending the enforcement of patents held by U.S. companies -- essentially, a compulsory license outside of the TRIPS regime:
The dispute involved improper U.S. subsidies to domestic cotton growers that inhibited free trade. Brazil brought a complaint before the WTO, and the dispute settlement procedure was utilized to determine the outcome. In its complaint, Brazil argued for countermeasures in the amount of $2.5 Billion. Significantly, one of the measures it requested was the ability to suspend its intellectual property obligations under TRIPS. Although specific products are not identified in the WTO filings, reports indicate that Brazil intended to take compensation by suspending the enforcement of patents held by U.S. companies -- essentially, a compulsory license outside of the TRIPS regime:
According to a report in a Brazilian newspaper the government has prepared a "provisional measure" - a presidential decree that takes immediate effect, although it must later be ratified by Congress - to allow Brazilian pharmaceuticals companies to copy medicines protected by US patents. (FT).The WTO ultimately denied Brazil's request regarding TRIPS, stating that the amount of compensation due at this time ($295 million) was insufficient to justify such a countermeasure. But the case stands as an example that all patent compulsory licenses are not necessarily related to human rights goals. They can be based on a purely economic motive.
I recently read an interesting article by David Goldhill in the Atlantic. It's a discussion of the wildly misaligned incentives in the U.S. health care system. Essentially, the article asserts that a lack of transparency in costs and reimbursement have allowed costs to skyrocket while providing generally poor care. In view of my previous post on the huge market for cancer treatments, one should question whether that market size is due to actual need or a dysfunctional funding system. In other words, the existence of a market may not always indicate great medical need, particularly if the market is artificially inflated. This means that the massive investment in research may not necessarily provide a great benefit to the public, as I suggested in the post.
On the topic of health care markets, the underlying conclusion of the article is that many health care costs (at the very least, routine costs) should be paid directly by consumers who can exercise choice and encourage competition. According the the author, this would solve existing incentive misalignment through a traditional market approach. The market for LASIK surgery, which is generally not reimbursed by insurance, is used as an example, where costs have significantly decreased since the procedure was introduced.
Total consumer control may not be as attractive as it sounds, as basic health care is not like other markets. The most important difference is that in many cases we do not want people to choose to forgo treatment, and this may happen if they had to completely internalize the costs. LASIK is clearly an optional procedure, and people who could benefit from it (like me) lead perfectly happy and healthy lives without it (like me). But prenatal care, hypertension treatments, cancer screening and the like can be demonstrated to positively impact the quality of life and should not be promoted as optional. Many consumers may not be sophisticated enough to make decisions on heath care spending in every case (like me). In truth, we want a system that encourages people to attain some preventative care and treatments that they might not pay for themselves. A pure market approach in this context may lead to some undesirable outcomes.
On the topic of health care markets, the underlying conclusion of the article is that many health care costs (at the very least, routine costs) should be paid directly by consumers who can exercise choice and encourage competition. According the the author, this would solve existing incentive misalignment through a traditional market approach. The market for LASIK surgery, which is generally not reimbursed by insurance, is used as an example, where costs have significantly decreased since the procedure was introduced.
Total consumer control may not be as attractive as it sounds, as basic health care is not like other markets. The most important difference is that in many cases we do not want people to choose to forgo treatment, and this may happen if they had to completely internalize the costs. LASIK is clearly an optional procedure, and people who could benefit from it (like me) lead perfectly happy and healthy lives without it (like me). But prenatal care, hypertension treatments, cancer screening and the like can be demonstrated to positively impact the quality of life and should not be promoted as optional. Many consumers may not be sophisticated enough to make decisions on heath care spending in every case (like me). In truth, we want a system that encourages people to attain some preventative care and treatments that they might not pay for themselves. A pure market approach in this context may lead to some undesirable outcomes.
One of the best examples of how the patent system is supposed to work is provided implicitly by a story in today's New York Times. The article discusses the efforts of pharmaceutical companies to develop new treatments for cancer. According to the article, there is a huge market for cancer treatments that provide even a small increase in life expectancy. As a result (and also due to the declining market in other treatment areas), pharmaceutical companies are engaging in a massive research effort to discover new drugs. All are hoping to find a blockbuster treatment, which may command $50,000 a year or more from patients in need. The ability to maintain these prices will be provided by patents.
But the effort is very hard because cancer is such a tricky disease. There is a huge risk involved, and truthfully only a small chance of reward. One quoted oncologist describes this effort negatively as a bubble -- a massive dedication of cash that will likely produce few winners and result in great losses for the others. This may be true from the company's perspective. But from the public's perspective, it's a good thing. In the end, we will benefit from whatever drugs are discovered, and we don't have to entirely fund the effort. Conversely, if this effort were entirely funded by the public, we would suffer all of the research loses, and likely would be much more conservative in what paths are investigated.
Doesn't such a massive investment result in higher drug prices? Not if the market is working efficiently. Price should be dictated by the treatment's benefits. If it doesn't do much (and that information is understood by physicians, patients and insurers, which is another issue entirely), people will not pay for it. The amount of sunk research costs are irrelevant.
And that's the point of the patent system. You encourage private actors to invest and take risks when there is a market interest in the information. If they are successful, they win and get to take advantage of the right to exclude others from the invention for a limited time. After that, the public shares in the invention.
I should add that some would argue that a massive private investment toward the same inventive goal is inefficient from a public perspective as well as private (it's often termed a patent race in the economic literature). But I think it's easier to make that conclusion in hindsight. In the context of the effort to find new cancer drugs, it's hard to identify a more efficient research path that doesn't risk missing a hard-to-find treatment that ends up being very important.
But the effort is very hard because cancer is such a tricky disease. There is a huge risk involved, and truthfully only a small chance of reward. One quoted oncologist describes this effort negatively as a bubble -- a massive dedication of cash that will likely produce few winners and result in great losses for the others. This may be true from the company's perspective. But from the public's perspective, it's a good thing. In the end, we will benefit from whatever drugs are discovered, and we don't have to entirely fund the effort. Conversely, if this effort were entirely funded by the public, we would suffer all of the research loses, and likely would be much more conservative in what paths are investigated.
Doesn't such a massive investment result in higher drug prices? Not if the market is working efficiently. Price should be dictated by the treatment's benefits. If it doesn't do much (and that information is understood by physicians, patients and insurers, which is another issue entirely), people will not pay for it. The amount of sunk research costs are irrelevant.
And that's the point of the patent system. You encourage private actors to invest and take risks when there is a market interest in the information. If they are successful, they win and get to take advantage of the right to exclude others from the invention for a limited time. After that, the public shares in the invention.
I should add that some would argue that a massive private investment toward the same inventive goal is inefficient from a public perspective as well as private (it's often termed a patent race in the economic literature). But I think it's easier to make that conclusion in hindsight. In the context of the effort to find new cancer drugs, it's hard to identify a more efficient research path that doesn't risk missing a hard-to-find treatment that ends up being very important.
The excellent media relations group at Smeal put together a nice overview of my Fulbright project, complete with a textual summary as well as a very professional video. (thanks, Wyatt, Nicole and Andrew!). You can see the video here:
Although I'm a little stumbling in my presentation (and I wish the video still didn't make me look like I'm about to blow out some birthday candles), you can get the gist of what I'm doing while in Canada and why it interests me.
Facebook has agreed to revise several of its privacy policies in response to an investigation by the Canadian government's Privacy Commissioner. Several news sources (e.g., NYT, Ottawa Citizen) report that the Commissioner and Facebook reached an agreement in which Facebook will provide more disclosure about what it does with personal information and how users may control that use. Interestingly, the Canadian government's inquiry was initiated by the University of Ottawa's Canadian Internet Policy and Public Interest Clinic's (CIPPIC) complaint about Facebook's privacy practices.
There continues to be a robust debate about how much government intervention is necessary to ensure the security of private information on the web (see, e.g., the recent FTC Report on the self-regulation of online behavioral advertising). Some favor less regulation and suggest that consumer choice should be the most important question -- a market based approach, essentially. Notably, my spouse, who has an expertise on college students' use of web resources including social networking sites, has explained that more computer savvy users are actually pretty good at protecting their private information. But she is quick to add that this is true when users are aware of how information is being used.
That last point is probably what makes a more market-based approach difficult in a case like this. Consumers cannot make rational choices if they don't have all of the information. While some may argue that users who ignore privacy policies and never read click-wrap contracts deserve any negative consequences they incur, when the information is not reasonably available, government intervention may be the only way to level the playing field.
As an aside, I would argue that there appears to be a growing tension between divergent privacy needs at different phases of one's life. For example, my students tell me that they often make informed choices about disclosing a great amount of information to their online peer groups. This seems appropriate in college, when creating relationships and discovering one's identity is a big part of the experience. But these students are occasionally caught by surprise when the business community expects them to historically conform to different privacy and personal behavior norms (which seem to be progressively more conservative). In particular, one of my upper level business law students told me that he was required to produce his Facebook profile in the course of interviewing for a job. It hadn't occurred to him that this information would be shared in a business environment. It seems that a more open social networking environment is clashing with a more conservative business climate. In view of this, better disclosure of how web sites use private information is even more important.
Of course, rules that limit Facebook won't provide protection to those who migrate to other sites.
There continues to be a robust debate about how much government intervention is necessary to ensure the security of private information on the web (see, e.g., the recent FTC Report on the self-regulation of online behavioral advertising). Some favor less regulation and suggest that consumer choice should be the most important question -- a market based approach, essentially. Notably, my spouse, who has an expertise on college students' use of web resources including social networking sites, has explained that more computer savvy users are actually pretty good at protecting their private information. But she is quick to add that this is true when users are aware of how information is being used.
That last point is probably what makes a more market-based approach difficult in a case like this. Consumers cannot make rational choices if they don't have all of the information. While some may argue that users who ignore privacy policies and never read click-wrap contracts deserve any negative consequences they incur, when the information is not reasonably available, government intervention may be the only way to level the playing field.
As an aside, I would argue that there appears to be a growing tension between divergent privacy needs at different phases of one's life. For example, my students tell me that they often make informed choices about disclosing a great amount of information to their online peer groups. This seems appropriate in college, when creating relationships and discovering one's identity is a big part of the experience. But these students are occasionally caught by surprise when the business community expects them to historically conform to different privacy and personal behavior norms (which seem to be progressively more conservative). In particular, one of my upper level business law students told me that he was required to produce his Facebook profile in the course of interviewing for a job. It hadn't occurred to him that this information would be shared in a business environment. It seems that a more open social networking environment is clashing with a more conservative business climate. In view of this, better disclosure of how web sites use private information is even more important.
Of course, rules that limit Facebook won't provide protection to those who migrate to other sites.
I'm on sabbatical during the fall 2009 semester serving as the Fulbright Chair in International Humanitarian Law at the University of Ottawa in Canada. My project will encompass a comparative analysis of mechanisms for balancing human rights with intellectual property incentives. A primary focus will be Canada's Access to Medicines Regime, which is a patent compulsory licensing system that facilitates the export of low-cost generic drugs to least-developed countries.
After a protracted absence, due to a number of factors not worth detailing, I'm once again working to create new entries on the Incentivize! blog. My hope is that these entries will be useful to my current classes as well as those who share my research interests.
Recently, several news sources (Patently-O, WaPo) have reported on a little noticed amendment in the Senate version of the patent reform bill (S. 1145). It would grant immunity to banks for patent infringement of digital check scanning and archiving technology. Apparently, the bill is directed at the patents of one particular company -- DataTreasury -- which have been recently upheld in a PTO reexamination proceeding. According to the Congressional Budget Office, the federal government could be on the hook for $1 billion dollars if this immunity is interpreted as a taking of private property
In my opinion, there should be very little question that this move would require full compensation by the federal government. Although some continue to debate whether patents are property under the 5th Amendment for takings purposes, law professor Adam Mossoff has provided some compelling evidence that this has long been the case in U.S. law. And, in the context of pharmaceutical importation legislation, I have written about the fact that how Congress eliminates patent rights -- either prospectively or retrospectively -- is significant in determining whether a taking occurs. But in this case, the retroactive effect is clear. It would certainly undermine the purpose of designating patents as personal property (35 U.S.C. 261) if Congress were permitted to render them unenforceable without compensation.
So, the real issue in this case is whether taxpayers should be forced to bear the burden of the bank's infringement. While $1 billion isn't enormous in the context of the federal budget, it's the principle of the move that is concerning. If banks deserve this bailout (rather than being forced to negotiate and license like every other infringer), who else is similarly deserving? And what metric do we use to determine the payout order (does priority go to lifesaving technology, industrial innovation, etc.)? It could be a slippery slope.
In my opinion, there should be very little question that this move would require full compensation by the federal government. Although some continue to debate whether patents are property under the 5th Amendment for takings purposes, law professor Adam Mossoff has provided some compelling evidence that this has long been the case in U.S. law. And, in the context of pharmaceutical importation legislation, I have written about the fact that how Congress eliminates patent rights -- either prospectively or retrospectively -- is significant in determining whether a taking occurs. But in this case, the retroactive effect is clear. It would certainly undermine the purpose of designating patents as personal property (35 U.S.C. 261) if Congress were permitted to render them unenforceable without compensation.
So, the real issue in this case is whether taxpayers should be forced to bear the burden of the bank's infringement. While $1 billion isn't enormous in the context of the federal budget, it's the principle of the move that is concerning. If banks deserve this bailout (rather than being forced to negotiate and license like every other infringer), who else is similarly deserving? And what metric do we use to determine the payout order (does priority go to lifesaving technology, industrial innovation, etc.)? It could be a slippery slope.
About the Author
Dan Cahoy is Associate Professor of Business Law at Penn State's Smeal College of Business. He is also a registered patent attorney. For more information, take a look at Dan's CV, Web bio or Research Page.
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