Recently in Fulbright Category
Given the Smeal College's commitment to sustainability, it seems appropriate to expand on a recent story that I cited in a post yesterday, but did not discuss. The story, reported in EurActiv, is that China and India are leading a group of 77 developing nations in a push for compulsory licensing on green technology (see also Patent Baristas post). This means that they are exploring the possibility of "breaking" the patents that are likely to issue on important technology solutions to climate change. By breaking the patents, such countries are hoping to avoid paying high prices that can be charged by a patentee due to market exclusivity provided by the right.
Obviously, this event is interesting because it involves something other than pharmaceuticals, which are usually the focus of developing country licensing. In fact, licenses on green technology are an outcome that I have previously suggested might happen, so the report doesn't really surprise me. It may represent an expansion of the concept of essential technology and the more active use of compulsory licensing. The EurActiv story goes a bit far in suggesting that prior compulsory licenses have only concerned pharmaceuticals -- in fact, many countries have utilized their rights to break patent monopolies for a variety of reasons, such as accessing military technology in the US (see history in a prior paper). But this kind of multinational coordination outside of drugs is pretty usual.
When technology that may improve health or welfare can be accessed for a lower price by limiting patent rights, it is natural for countries to consider this option. The right to enact such licenses is currently well protected under article 31 of the international agreement known as TRIPS. Although some countries may face retribution for compulsory licenses in the form of reduced foreign direct investment (FDI), my frequent co-author, Robert Bird, and I have shown that others are relatively immune from this punishment. They can take advantage of this protection and fully utilize compulsory licensing as a cost-saving measure or negotiation tool.
According to the EurActiv article, the licensing proposal was to be discussed in upcoming climate talks, but has been tabled for now. Still it is worth considering whether there is a hazard associated with patent breaking of this type. For example, it's hard to say that compulsory licensing has had any discernible innovation impacts so far, so maybe concerns are exaggerated. But I do believe that, if the notion of avoiding patent rights becomes an established, widespread strategy to be used in non-emergency situations, there could be innovation effects. Namely, companies that invest in green technologies may have to consider the fact that the developing world market may be substantially less profitable. In turn, that may impact the kind or amount of innovation that occurs in this field. We may see a preference for R&D that primarily benefits industrialized nations where costs can be recouped. And just as important, we may be witnessing the beginnings of a future trade dispute between developed and developing world on this issue.
Obviously, this event is interesting because it involves something other than pharmaceuticals, which are usually the focus of developing country licensing. In fact, licenses on green technology are an outcome that I have previously suggested might happen, so the report doesn't really surprise me. It may represent an expansion of the concept of essential technology and the more active use of compulsory licensing. The EurActiv story goes a bit far in suggesting that prior compulsory licenses have only concerned pharmaceuticals -- in fact, many countries have utilized their rights to break patent monopolies for a variety of reasons, such as accessing military technology in the US (see history in a prior paper). But this kind of multinational coordination outside of drugs is pretty usual.
When technology that may improve health or welfare can be accessed for a lower price by limiting patent rights, it is natural for countries to consider this option. The right to enact such licenses is currently well protected under article 31 of the international agreement known as TRIPS. Although some countries may face retribution for compulsory licenses in the form of reduced foreign direct investment (FDI), my frequent co-author, Robert Bird, and I have shown that others are relatively immune from this punishment. They can take advantage of this protection and fully utilize compulsory licensing as a cost-saving measure or negotiation tool.
According to the EurActiv article, the licensing proposal was to be discussed in upcoming climate talks, but has been tabled for now. Still it is worth considering whether there is a hazard associated with patent breaking of this type. For example, it's hard to say that compulsory licensing has had any discernible innovation impacts so far, so maybe concerns are exaggerated. But I do believe that, if the notion of avoiding patent rights becomes an established, widespread strategy to be used in non-emergency situations, there could be innovation effects. Namely, companies that invest in green technologies may have to consider the fact that the developing world market may be substantially less profitable. In turn, that may impact the kind or amount of innovation that occurs in this field. We may see a preference for R&D that primarily benefits industrialized nations where costs can be recouped. And just as important, we may be witnessing the beginnings of a future trade dispute between developed and developing world on this issue.
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.
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.
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.
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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