Let’s Clear a Few Things Up: On the Subject of Compulsory Licensing in TRIPS

(Also available on Inside US Trade for those with a subscription) 

Recently, it seems like no trade topic inspires as much tension, confusion and passion as the subject of compulsory licensing in the World Trade Organization’s (WTO) Trade Related Aspects of Intellectual Property Rights Agreement (TRIPS). Everyone has an opinion, whether it’s based on deep loyalty to the pharmaceutical research and development process, a strong desire to eradicate infectious diseases in less developed parts of the globe or merely the belief that multinational organizations like the WTO have the international community’s best interests at heart. Unfortunately, many of these opinions are based on a gross misunderstanding of the compulsory license (CL) process as well as an inability to acknowledge the deficiencies inherent therein.

So what exactly is a CL? Essentially, a CL is when a government allows someone else to produce a patented product or process without the consent of the patent owner.  This most often, but not exclusively, applies to pharmaceutical products. The original idea behind the concept of CLs was to enable governments to produce a generic drug for its domestic market, and not for export. Those with deep loyalty to the pharmaceutical development system tend to think issuing a CL amounts to tearing up the patent—but this isn't quite true. Even if a CL is issued, the patent holder still has rights over the patent, including the right to be paid for authorized copies of the products and the right to legal review in the Member country.

Here’s where it gets fuzzy though—the conditions for issuing a CL are ambiguous at best, because the TRIPS agreement doesn't actually list the reasons that might justify it. In fact, the Doha Declaration on TRIPS and Public Health, adopted in 2001, indicates that countries are free to determine the grounds upon which CLs are granted, pursuant to the procedures in Article 31 of TRIPS:

1. The proposed applicant for the license tried to apply for a voluntary license first, but this was not successful within a reasonable amount of time.
2. Applying for a voluntary license can by bypassed if there is a national emergency, other circumstances of extreme urgency, or the patent is intended for public non-commercial use.

In either case, however, the patent holder still has to be paid with, “adequate remuneration taking into account the economic value of the authorization.” But neither TRIPS nor the Doha Declaration define “adequate remuneration” or “economic value” except to say that it is at the discretion of the Member country in which the CL is being issued. In addition, the Doha Declaration also changed the initial purpose behind the CL exception to patents. Instead of mainly producing for the domestic market, a CL now allows generic copies to be exported to countries that lack production capacity. And if you’re one of those people with a strong desire to eradicate infectious diseases, then that provision might seem like a positive step towards increasing global access to medicines.

That’s not quite right either, though. First and foremost, 95% of the medicines on the World Health Organization’s Essential Drug List, those drugs that deal with the most common causes of diseases and fatalities in the developing world, are already off patent. This means that pharmaceutical producers around the world all have the same opportunities to sell these drugs to combat public health disasters. However, the CL provision in TRIPS leaves all decisions about bypassing patents in the hands of the Member country wishing to do so. In practice, this allows transition economies like China or India to benefit at the expense of developed countries. In fact, Australia, Canada, the European Union, Japan, New Zealand, Norway, Switzerland and the United States have all stated they will not use the Doha waiver to import drugs. The spirit of the original CL provision was to facilitate domestic production of generics in situations when bureaucratic red tape prevented it. But in allowing governments to unilaterally decide “adequate remuneration,” and then produce drugs for export, the CL provision is tantamount to stealing. It’d be like if I walked into your house, gave you $1 for your iPhone because I wanted it, and then sold it to your neighbor for $15. Certainly, it’s far less than you would have sold it to your neighbor for, but that doesn't make the exchange any less ludicrous.

And that isn't even the first half of the potential consequences. India and China continue to be the subject of counterfeit drug scandals, related to their low-cost, low-standard production processes. For an agreement that was designed to consider the public health of the world, TRIPS has also unfortunately created several public health crises. Even more concerning, however, is the innovation incentive structure it promotes. Transition economies are essentially free to use the research and development of the developed world with no strings attached. Not only is this undermining innovation in the developed world because it results in less revenue to pay for expensive and risky research, it also undermines the research and development potential in these transition economies because innovation isn't needed if you can just appropriate from others. And when you’re talking about pharmaceutical innovation, the more heads working on finding cures, the better. Unfortunately, under the current system some of newest heads in the game are just dispensing the drugs of yesterday, not creating the drugs for tomorrow. So if you’re one of those people who think that the WTO has the best interests of the international community at heart, you’re a little bit wrong too.

Ultimately, the story about CLs is that in nearly every instance, they are legal within the rules of the WTO. But they are also usually doing more harm than good. Transition economies are choosing short-term welfare over long-term innovation. Not only are they hindering their own economic growth in the process, they’re also inhibiting the potential for bigger, better drug development and public health solutions around the world.  It’s time for the WTO to fix this problem.