The DTI versus TRIPS and Doha

The Department of Trade and Industry (DTI) is pushing ahead with proposals to bypass and undermine patents in the health sector and beyond (see @Liberty, 14/2014). The department claims that its proposals are in keeping with binding multilateral agreements on patent rights and South Africa's own Constitution.  However, this claim overlooks any number of legal barriers to what the DTI proposes.

Introduction

The last issue of @Liberty explained the threat to patent rights in the Draft National Policy on Intellectual Property published by the Department of Trade and Industry (DTI) in September 2013 and soon, it seems, to be enacted into law. The DTI's proposals are often vague and difficult to understand, and so need to be read in the context of an article published last year by the United Nations Development Programme (UNDP).

The changes proposed will make it harder to obtain patent rights, which in itself could deter local innovation and further reduce South Africa's competitiveness. Still more serious are further proposals to:

Bypass patent rights via compulsory licensing in wide-ranging circumstances;

Limit the remedies available to patent holders;  

Replace the present patents court with a new patents tribunal; and

Allow the State to use or take patent rights for little or no compensation.

The DTI and health activists assume that all these changes are in line with binding international agreements, including the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) of 1994, the Doha Declarations of 2001 (dealing with TRIPS and public health), and the 30 August [2003] Decision of the General Council of the World Trade Organisation (WTO) on the exporting of pharmaceuticals made under compulsory licence.

However, many of the changes are in fact inconsistent with the clear wording of TRIPS or these other agreements. The idea that the State should be able to take patents as ‘custodian' for the disadvantaged and without having to pay compensation may also be in breach of the property clause in South Africa's Constitution.

The legal barriers to the DTI's proposals are outlined below, and more fully set out in a policy paper on patent rights soon to be posted on the IRR website. (The ramifications of the proposals for the health sector and the wider economy are outlined in the article which follows.)

Making patents harder to obtain

The TRIPS Agreement is binding on all members of the WTO, South Africa included. It sets down minimum standards for the regulation of patent rights, but is silent on whether countries should adopt a ‘depository' or ‘examination' system for patent applications (see @Liberty, 14/2014).

There is thus no legal barrier to the examination system the DTI proposes to introduce. The real problem is a practical one, for South Africa lacks the skills for an examination system - which even countries such as the United States battle to implement.

The DTI is nevertheless forging ahead with the shift, saying it plans to appoint 20 patent examiners from April 2015. But these individuals will not be able to deal effectively with the 7 500 or so patent applications received each year, almost all of which are likely to be technically complex and difficult to evaluate.

Long delays will inevitably result, which will reduce the period of patent protection (20 years from the time of filing, irrespective of when the patent is granted) and could see ‘the whole patent system falling apart', as a local patent attorney has warned.

Compulsory licences

Compulsory licences are different from voluntary ones because they give outsiders the right to exploit patented products without the consent of the patent holder. South Africa's Patents Act currently allows the granting of compulsory licences: but only in limited circumstances, only at the behest of the patents court, and only in return for royalties sufficient to compensate the patent holder for his research and development (R&D).

By contrast, the DTI proposals would require the granting of a compulsory licence if negotiations on a voluntary agreement have not succeeded within a set period of (say) 60 days, and the patent holder has rejected mooted royalty payments of, say, 3% of the price of the copied product.

The DTI and UNDP documents claim this would be in keeping with the TRIPS Agreement. But what TRIPS says is that member states may ‘provide limited exceptions to the exclusive rights conferred by a patent', provided these exceptions do not ‘unreasonably conflict' with normal patent exploitation or ‘unreasonably prejudice the legitimate interests of the patent owner, taking into account the legitimate interests of third parties'.

The proposals are too skewed against the patent holder to meet these criteria. In addition, the TRIPS Agreement states that the patent holder is entitled to ‘adequate remuneration in the circumstances of each case, taking into account the value of the authorisation' to use the patented product. This wording does not necessarily mean that royalties should be based on the price of the copied products, as the proposals seem to assume. The TRIPS clause could equally mean that royalties must be based on the full market value of the patent the licensee is being allowed to use against the patent holder's will.

The proposals nevertheless urge that compulsory licences, against very limited royalty payments, should be granted in additional and wide-ranging circumstances, as outlined below.

Compulsory licences in situations of national emergency or extreme urgency

Under the proposals, compulsory licences for relevant medicines would have to be granted whenever the minister of health has gazetted a notice stating the existence of a national emergency or situation of ‘extreme urgency'. Moreover, prior negotiations would not be needed and royalty payments could again be limited to, say, 3% of the price of the generic medicines.

The TRIPS Agreement, as clarified by the Doha Declaration on public health, would allow the health minister to gazette such a notice. However, there is nothing in these documents to suggest that the granting of compulsory licences should then be made compulsory, as the DTI wants. In addition, TRIPS requirements for ‘adequate remuneration' and reasonable conduct in relation to the patent holder would still apply.

Compulsory licences for government use

The proposals envisage the Government's being able to use any patented invention, including those falling outside the health sphere, after a ‘fixed period of unsuccessful voluntary negotiations' and subject to ‘adequate royalties'. They add that no additional compensation for expropriation would be payable to the patent holder in these circumstances, as the patent holder would still retain the ownership of its patent.

The TRIPS Agreement does not define ‘public non-commercial use', perhaps because it sees the term as largely self-explanatory. The UNDP article suggests that any governmental use would fit within this term, but this is by no means clear.

Moreover, the proposals seek to empower the Government to acquire compulsory licences over antiretroviral and other medicines and then license their use by a state pharmaceutical company charged with manufacturing generic copies for sale both in South Africa and abroad. It is doubtful whether this would count as ‘non-commercial' use. Outside the health sector, any similar conduct by the State would be even more difficult to bring within the ambit of this TRIPS exception.

Compulsory licences for anti-competitive conduct

The proposals seek to amend the Patents Act to state that any proven anti-competitive conduct will justify the issuing of a compulsory licence. Under these new rules, there would also be no ‘limitations on exports and the need for prior negotiations would not apply'.

The TRIPS Agreement does indeed dispense with export constraints and the need for prior negotiations where anti-competitive conduct is in issue, but the proposals nevertheless go beyond what TRIPS allows. Under TRIPS, ‘appropriate measures' to prevent the ‘abuse' of intellectual property rights must be ‘consistent' with its other requirements. TRIPS also gives a narrower meaning to ‘anti-competitive practices' than the proposals envisage.

As the UNDP article shows, the underlying aim is to use the competition commissioner's rulings in 2003 against GlaxoSmithKline and Boehringer Ingelheim to make findings of anti-competitive conduct against patent holders in extraordinarily wide-ranging circumstances.

In this case, brought by the Treatment Action Campaign (TAC) and others, the competition commissioner, Menzi Simelane, found that the two companies had abused their dominant position through excessive pricing and by denying competitors access to an ‘essential facility' - the patented formulas for their ARVs. However, Mr Simelane's interpretation of the ‘essential facilities' doctrine contradicts relevant rulings in Europe, which caution that an overly broad approach negates patent rights and undermines innovation.

Moreover, the patent holders in this case had already taken account of the ‘legitimate interests of third parties' (as TRIPS requires) by reducing their ARV prices and licensing a local generics manufacturer. Despite this, they were confronted with rulings by the competition commissioner that ‘unreasonably conflicted' with their patent rights and ‘unreasonably prejudiced' their legitimate concerns.

The correct meaning of the TRIPS provisions was not put to the test, as the two pharmaceutical companies decided to settle the dispute to avoid more one-sided and damaging publicity.  Had the matter gone to adjudication - either to South Africa's Competition Tribunal or to the WTO's dispute settlement mechanisms - Mr Simelane's rulings would probably have been overturned for inconsistency with established competition law as well as the TRIPS and Doha agreements.

The TAC seems also to have acknowledged this in 2003, when it hailed the settlement reached (under which the two companies granted ‘voluntary' licences to seven local manufacturers at a royalty of 5% of net sales of the generic copies) as ‘going well beyond what could conceivably have been won by pursuing the prosecution of the complaint'.

Rights to export

TRIPS requires that products made under compulsory licence be ‘used predominantly for the supply of the domestic market'. This does not apply where patent holders are genuinely engaged in anti-competitive conduct, but the existence of such conduct must first be properly ‘determined', as TRIPS makes clear.

The 30 August Decision (made by the General Council of the WTO in 2003) allows the exporting of specified medicines, but solely in the quantities notified to the WTO - and only by countries which lack the capacity to manufacture these pharmaceuticals, yet face major health crises. The UNDP article assumes that these constraints can be overlooked and that South Africa can simply ‘choose' whether to abide by them or not.

However, if South Africa were to follow these recommendations, it would clearly be in breach of both the TRIPS Agreement and the 30 August Decision. These agreements simply do not authorise the untrammelled exporting of medicines produced under compulsory licence - let alone of goods outside the health sphere.  

Limiting the remedies available to patent holders

The proposals seek to limit the remedies available to patent holders by barring them, in many instances, from obtaining either interim or final interdicts (injunctions). Yet an interim interdict - to stop sales of copied products pending a court order confirming the alleged infringement - is often the most effective remedy available to the patent holder.

In addition, refusing to grant a final interdict (after infringement has been established by the patents court) ‘amounts to granting the infringer a compulsory licence', notes Judge Louis Harms, a retired deputy president of the Supreme Court of Appeal. The proposals also seek to deter patent holders from enforcing their rights by entitling defendants in infringement proceedings to counterclaim for compulsory licences on all the new grounds envisaged.

However, the TRIPS Agreement requires member states to ensure ‘effective action' against any infringement of intellectual property rights. It also stresses the need for ‘remedies which constitute a deterrent to further infringements'. TRIPS further provides that ‘the judicial authorities [in a member state] shall have the authority to order prompt and effective provisional measures'; and that such authorities ‘shall have the authority to order a party to desist from an infringement'. The use of the word ‘shall' is peremptory, not permissive. (As an exception, TRIPS allows royalties instead of a final interdict in the context of public non-commercial use, but only if its provisions on such use have been upheld.)

In addition, attempting to deter patent holders from enforcing their rights is contrary to a TRIPS provision stating that ‘procedures' for the enforcement of intellectual property rights must be ‘fair and equitable'. Penalising patent holders for trying to enforce their rights would hardly satisfy this requirement.

Replacing the patents court with a patents tribunal

The proposals seek to replace the current patents court with a new patents tribunal that would operate outside the high court system, would not be ‘dominated by lawyers' and would not be subject to the ‘technical and legalistic' high court rules of civil procedure.

However, this contradicts another provision in the TRIPS Agreement, which states: ‘Members shall make available to rights holders civil judicial procedures concerning the enforcement of any [patent] right... Parties shall be allowed to be represented by independent legal counsel,...and all parties to such proceedings shall be duly entitled to substantiate their claims and to present relevant evidence.'

Expropriation and other ‘takings' by the State

The UNDP article urges that the Government be empowered to take patents in return for ‘just' compensation to the patent holder. It adds that the State must also be entitled to expropriate patents in the ‘rare and extreme cases' where this would be appropriate - and hints that compensation might not be payable in these instances.

The DTI goes further, effectively proposing (under the Promotion and Protection of Investment Bill of 2013), that no compensation will be payable where the Government takes a patent as ‘custodian' for the disadvantaged and then licenses its use by others. Under the Bill, the State will not acquire ownership of the patent in such circumstances and so there will no ‘act of expropriation' to require the payment of compensation (see @Liberty 3/2014, 11/2014, and 14/2014).

However, there is nothing in the TRIPS Agreement to authorise such ‘takings' of patents by member states. In addition, the relevant clause in the Investment Bill is based on the Constitutional Court ruling (in the Agri SA case in 2013), which said that no expropriation had occurred when the State took an unused mining right as custodian for the disadvantaged.

However, an unused mining right is often an unearned windfall and thus differs from a patent over an invention, which may have required years of costly R&D to develop. This suggests that the Agri SA ruling may not provide sufficient judicial authority for the uncompensated taking of patents by the State (see @Liberty 11/2014).

The limits of the Doha documents

The proposals assume that the Doha Declaration on ‘The TRIPS agreement and public health' largely negates the content of the TRIPS Agreement for all countries confronting major public health problems resulting from HIV/AIDS, tuberculosis, malaria, and other epidemics. However, this is not so.

The Declaration does, of course, state that ‘the TRIPS Agreement does not and should not prevent members from taking measures to protect public health'. It also ‘reaffirms the right' of WTO members to use all relevant TRIPS flexibilities ‘to the full'; and adds that ‘each member has the right to grant compulsory licences and the freedom to determine the grounds upon which such licences are granted'.

However, the Doha Declaration also emphasises the importance of ‘the development of new medicines'. Though it stresses a country's right to use the TRIPS flexibilities, it does not alter the wording of TRIPS or remove its many clauses requiring reasonable treatment for patent holders. In addition, the Doha ministerial conference where the document was adopted was careful to state that support for public health requires ‘both access to existing medicines and the creation of new medicines'.

Overall, the Doha documents seek to strike a balance between upholding patent rights over medicines and allowing exceptions to them. They therefore do not authorise the widespread derogations from patent rights proposed by the DTI. In addition, they apply solely in the context of epidemics such as AIDS and cannot sanction the bypassing of patent rights outside the health sector - a factor which the DTI proposals also overlook.

Apart from these legal barriers, there are many practical reasons the DTI proposals are unlikely to improve access to health care. In addition, there are compelling economic arguments against deterring the local innovation often vital to investment, growth, and jobs in an economy increasingly centred around technology. These additional reasons for rejecting the DTI proposals are summarised in the article that follows.

Anthea Jeffery is Head of Policy Research at the Institute of Race Relations.

This article first appeared in @Liberty, the policy bulletin of the IRR.

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