Introduction

There has been a heated debate among developed and developing countries concerning the harmonization of patent protection of pharmaceutical products since the drafting of the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) (1). For some countries, Acquired Immune Deficiency Syndrome (AIDS) has become a big public health challenge. At the end of 2000, approximately 31.6 million people worldwide were infected with HIV, 90% of whom live in developing countries (2). South Africa alone is believed to have one in five adults infected with the HIV virus. It is also estimated that over 91,000 babies were infected with HIV during 2002 alone (3). Besides the attack of HIV/AIDS, epidemics such as malaria and tuberculosis are also public health crisis worldwide. To combat the global health threatens, pharmaceutical companies, most of them are based on developed countries, have been invested to research and develop new medicines and utilized international patent regime to protect their benefit. However, new medicines, especially the medicines to combat the HIV virus are very expensive. Often the patented or “designer” versions of these medicines can cost an individual around $15,000 to $20,000 per annual treatment in the United States; comparatively, the per capita income in South Africa is only $6,800 (4). Another problem is that most developing countries have no technology and infrastructure to manufacture the medicines internally. In order to address the domestic health issue, some developing countries have resorted to compulsory license under Article 31 of the TRIPS to ensure an adequate medicine supply during epidemics and other periods of national emergency. 

Background of Article 31 of TRIPS agreement

TRIPS agreement is nearly the most controversial component of the World Trade Organization’s (WTO) “package deal” struck in 1994 (5). TRIPS is intended to reverse worldwide thinking regarding trade from an anti-protectionist philosophy to one global competition and aims to facilitate stronger protection for intellectual property rights, investments in regulatory agencies to enforce these rights and more consistent regimes of protection across international borders (5). TRIPS agreement outlines a framework for minimum intellectual property standards that bind all member countries.

Although TRIPS agreement creates a minimum standard for patent rights to provide a temporary monopoly to patent holder, it also creates several exceptions member countries may rely on in certain circumstance. Under Article 31 of the TRIPS, compulsory license vitiates this monopolistic right by allowing member countries to issue licenses to produce patented products without the patent holder’s consent. 

Article 31 does not expressly refer to the term “compulsory license”, but when read along with Article 2(1) of TRIPS and Article 5(A)(2) of the Paris Convention; the  allowance of compulsory license is implied (5). Thus, developing countries have interpreted Article 31 as allow member counties to grant compulsory license to third party so as to manufacture the necessary medicine that would be able to address domestic public health issues. 

In particularly, Article 31 is read as: 

Where the law of a Member allows for other use of the subject matter of a patent without the authorization of the right holder, including use by the government or third parties authorized by the government, the following provisions shall be respected:

  1. authorization of such use shall be considered on its individual merits;
  2. such use may only be permitted if, prior to such use, the proposed user has made efforts to obtain authorization from the right holder on reasonable commercial terms and conditions and that such efforts have not been successful within a reasonable period of time. This requirement may be waived by a Member in the case of a national emergency or other circumstances of extreme urgency or in cases of public non‑commercial use. In situations of national emergency or other circumstances of extreme urgency, the right holder shall, nevertheless, be notified as soon as reasonably practicable. In the case of public non‑commercial use, where the government or contractor, without making a patent search, knows or has demonstrable grounds to know that a valid patent is or will be used by or for the government, the right holder shall be informed promptly;

(f) any such use shall be authorized predominantly for the supply of the domestic market of the Member authorizing such use;

(h) the right holder shall be paid adequate remuneration in the circumstances of each case, taking into account the economic value of the authorization;

Article 31(b) provides that compulsory license is proper when “the proposed user has made efforts to obtain authorization from the patent holder on reasonable commercial terms” and “that such efforts have been unsuccessful within a reasonable period of time.” However, this good faith effort requirements of Article 31(b) can be waived under the condition of “national emergency, in circumstances of extreme urgency, or in cases of public non-commercial use.”. The problem with the “national emergency” exception under this Article is that there is no definition in TRIPS that specifies what a national emergency is and reading the other Articles of TRIPS do not shed any light on the subject (5). 

Another controversial aspect of Article 31 is subsection (f) which requires the compulsory license to be “authorized predominately for the supply of the domestic market of the Member state authorizing such use.” It is not entirely clear whether Article 31(f) requires countries to manufacture the product domestically, or whether they may have a foreign third party manufacture the product to be imported. The opponents of the latter interpretation argue that the third party is not privy to the circumstances giving rise to the compulsory license and, therefore, should not be allowed to manufacture the patented product (6).

Although Article 31 allows member countries to grant compulsory license subject to certain procedures and conditions, developing countries have made limited use of this article. Studies indicate that developing countries have not used the compulsory license as a tool to address public health issues for a number of reasons, including that the effective implementation of compulsory license requires that certain preconditions relating to administrative, financial and technical capacities be met, and these conditions are often not met in developing countries (7). The licensee must have the know-how to reverse engineer and manufacture the medicine without the cooperation of the patent holder, and must also foresee a sufficiently large market to justify the costs of investment and manufacture and adequate remuneration to the patentee (7). 

In summary, Article 31 would help developing countries that have the ability to produce pharmaceuticals in the case of a “national emergency,” but makes pharmaceuticals unobtainable for the countries that would need to import them to address their national emergency (5). If a developing country has insufficient or no manufacturing capabilities in the pharmaceutical sector, it will face difficulties in making effective use of compulsory license under Article 31 to manufacture pharmaceuticals internally. If a predominant part of compulsory-licensed production must supply the local market, the quantity of available exports will be limited (7).

The Doha Declaration

On November 14, 2001, the fourth Ministerial Conference of the WTO, meeting in Doha, Qatar, adopted the Declaration on the TRIPS Agreement and Public Health (Doha Declaration). One purpose of this Conference is to reduce the ambiguity relating to the compulsory license provision in TRIPS (8). 

The Declaration affirms that the TRIPS “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”. The Declaration mandated further negotiations on one important subject, providing in paragraph 6: “We recognize that WTO Members with insufficient or no manufacturing capacities in the pharmaceutical sector could face difficulties in making effective use of compulsory licensing under the TRIPS Agreement. We instruct the Council for TRIPS to find an expeditious solution to this problem ....” (8). 

On August 30, 2003, the WTO General Council adopted the Decision on Implementation of Paragraph 6 of the Doha Declaration on the TRIPS Agreement and Public Health (Decision). The Decision allows any member country to export pharmaceuticals made under compulsory licenses as long as the export to an eligible importing member satisfies the requirements of Paragraph 2 of the Decision (9). While the Decision allows all member countries to take advantage of the waiver, 23 countries stated in the Decision that they will not import pharmaceuticals under the Decision, and another 11 countries stated they would only use the waiver provision if an emergency or extremely urgent situation arose (5).

The leadership of the WTO hailed the Decision as evidence that the organization could deal effectively with important issues of social concern. However, Nongovernmental organizations (NGOs) concerned about access to medicines were disappointed by the complexity of the arrangement, arguing that it would be unworkable in practice (9). Similar misgivings were expressed by developing country’s producers of generic pharmaceuticals. Spokespersons for the group of pharmaceutical companies that engage in substantial research and development said they welcomed the Decision as finally resolving an open issue, but these companies later lobbied actively in Canada to restrict implementing legislation (8). The United States accepted the Decision as a problematic compromise, but has since sought to limit its scope of application (9).

From the standpoint of some commentators, the Decision adopted by the WTO is not a solution to the HIV/AIDS pandemic or the myriad other public health problems confronting developing and developed countries. The global response to HIV/AIDS remains a continuing catastrophe and, more generally, billions continue to live with inadequate health care. Nonetheless, the Decision constitutes one helpful piece of a much larger public health puzzle (9). 

Further some scholars raised a number of recommendations to the Decision, such as issue an official interpretation on public health, designate WHO as the official organization to provide technical assistance on TRIPS-related health issue, amend term “third party” in Article 31 of TRIPS to include foreign entities, provide an exemption to Article 30, issue a formal interpretative statement clarifying Article 31 exceptions, and safeguards against abuse must be implemented (10). 

Impact on Drug Development

Although developing countries argue that strict enforcement of pharmaceutical patent holder’s rights has resulted in high prices and render unaffordable to these countries medicines to the treatment of epidemics, the pharmaceutical companies in developed countries insists that they are in a tough predicament if they denote or severely discount the cost of medication exported to countries in need (6). Patent law is designed to encourage innovation by providing incentives to inventors. Among these incentives, patent protection allows the inventors to recoup costs associated with the creation of an invention (11). In the case of pharmaceuticals, these costs include research, testing, clinical trials, and obtaining governmental regulatory approval. Costs average in the hundreds of millions of dollars (12). Even after expending an exorbitant amount of money, a drug may ultimately prove unmarketable for various reasons. In reality, revenues of even the largest of pharmaceutical companies precariously rely on only a few drugs (10). Therefore, pharmaceutical companies seek the protection of patent law as a means of ensuring their investments.

Pharmaceutical companies have the dual goals of earning a profit and developing new drug entities that improve health and save lives. While many critics point to the dangerous intersection of profits and improving health and saving lives, the evidence overwhelmingly indicates it is a successful marriage of goals (10). 

Until now, pharmaceutical companies have not relied on developing countries’ patent rents for their research budgets (9). In addition, developing countries have little voice in the direction of pharmaceutical research, which tends to focus on diseases prevalent in the developed countries (5). 

The compulsory license under Article 31 of TRIPS utilized by developing countries may undermine pharmaceutical company's mission to develop new medicines. Pharmaceutical companies argue that it is unfair and illegal to force them to lose profits from the patented invention due to compulsory license. If the expense for developing new medicine was not recoupable, pharmaceutical companies will be unwilling and unable to make an initial investment. 

From the standpoint of pharmaceutical companies, incremental patent revenues are used for research that results in new medicines. Stronger patent protection in developing countries will increase total research and development (12). Moreover, the price of newer patented medicine is only one factor in the total health care package of developing countries, action that would reduce patent revenues to pharmaceutical companies would have the negative effect of reducing the pool of funds for research and development, and inhibiting the development of new medicines that benefit all countries and individuals (9).

Developing Country, Developed Country and Compulsory License

-South Africa

As stated previously in the introduction, South Africa is suffering from the HIV epidemic heavily. However, the population of South Africa is so poor that they cannot afford the proper medicine. In an attempt to combat HIV, the government of South Africa enacted the Medicines and Related Substances Act of 1997 and subsequent Medicines and Related Substances Amendment Act of 2003, in order to grant the South African Minister of Health the power to “prescribe conditions for the supply of more affordable medicines in certain circumstances so as to protect the health of the public.”(13) This Act provoked a strong response from the world's pharmaceutical industry, causing thirty nine pharmaceutical manufacturers to bring suit against South Africa in 1998 (14). The plaintiffs claimed that South Africa violated the TRIPS agreement when the country changed its law (adopting the Medicines Amendment Act of 1997) and that Article 31 of TRIPS does not actually allow for compulsory license to be included in domestic legislation (15). In 1998 and 1999, the USTR placed South Africa on a watch list in response to the enactment of this Medicine Act (16).

Opponents of this Act mainly argue that the Act grants the Minister of Health very broad powers relating to patent rights. For example, section 15(C)(a) prescribes that the Minister of Health may truncate the patent holder's rights of a medicine already placed into the South African market; section 15(C)(b) which pertains to both compulsory licensing and the importation of generic versions of patented medicines grants the Minister power to “prescribe the conditions for importation of a medicine”, but fails to address other qualifications for compulsory licenses outlined in Article 31 of TRIPS such as adequate compensation, or good faith negotiations; section §22(C)(b) grants the Council power to issue a license to manufacture, sell, import, export or distribute medicines or medical devices, but does not contain language requiring a manufacturer, wholesaler or distributor to be domestic and it is not clear whether a foreign manufacturer, wholesaler or distributor would suffice or whether a domestic manufacturer, wholesaler or distributor would be allowed to export out of the country (6).

In order to achieve South Africa’s goal to get affordable medicine and also address the debated compliance with TRIPS, some scholars suggest the solution may be found within other articles of the TRIPS such as Article 6 (Parallel Importation) or Article 8 (adopting complaint domestic law) (6). Other scholars also propose to the government of South Africa some alternatives to compulsory license such as price discrimination, voluntary donation schemes, bulk procurement programs and orphan drug production (16). 

- Brazil 

Prior to 1996, Brazilian law granted no patent protection for pharmaceuticals. Upon joining the WTO, Brazil had to change their law to comply with TRIPS. Brazil reworked their domestic patent law to meet the minimum requirements under TRIPS, but created a loophole for pharmaceuticals under Article 8 of TRIPS (6). Under Brazilian patent law, a drug is patentable “only if the product has not been marketed anywhere and if no serious and effective preparations for exploitation of the corresponding product have been carried out by third parties in Brazil.” Due to the intelligent drafting of their intellectual property laws, Brazil was able to force prices of patented drugs competing in their market down 79% (6).

In 1996, the Brazilian government began producing generic equivalents of eight HIV/AIDS medications in state laboratories to address the growing public health crisis by offering free drugs to HIV/AIDS patients within its borders (17). Brazil requires patent holder to manufacture the product in question within Brazil and if this so-called “local working” requirement is not met within 3 years the product shall be subject to compulsory license (18). Also under the Brazilian Patent Law, a company trying to escape the compulsory license provision by importing instead of manufacturing in Brazil would not be subject to the compulsory license provision, but would then subject its product to parallel importing by others (18). 

To achieve its goal of providing HIV/AIDS drugs for its infected citizens, the Brazilian government used a three-prong attack (5). The first prong was to manufacture locally HIV/AIDS drugs that were not subject to patent protection within Brazil. Next, for those drugs that were patented in Brazil, the government would attempt to negotiate a deal with the patent holder to obtain the drugs at a price that would allow the Brazilian government to provide them to its citizens for free. When Brazil and the patent holder could not reach an acceptable deal, Brazil would take a hard-line approach and threaten to issue a compulsory license unless the drug in question was discounted by 50% (5). To further support the first two prongs of its attack on high-priced HIV/AIDS drugs, Brazil used the argument that producing generic versions of these HIV/AIDS medications fell within the TRIPS national emergency exemption which allows the government to override patents in urgent circumstances (17). 

In January 8, 2001, the U.S. requested the WTO Dispute Resolution Panel to convene in order to investigate the legality of Article 68 of the Brazilian Patent Law and claimed that the Brazilian law lessening a patent holder's rights violated Article 27.1 and 28.1 of TRIPS by discriminating against U.S. owners of Brazilian Patents (5). In June 23, 2001, Brazil and the U.S. issued a joint statement announcing that the U.S. would withdraw request of the WTO panel against Brazil. In withdrawing its request for a panel, Brazil agreed to give advance notice to U.S. officials before invoking the “local working” requirement that was implemented in its Patent Law (5).

- United States

The United States is home to the largest concentration of pharmaceutical patent holder and generates the most revenue from this sector. Thus the United States is the leading advocate of patent holder interests. Regarding the international patent protection and compulsory license to pharmaceutical products, the United States insist that a strong patent regime would produce benefits for all countries, while acknowledging the interests of developing countries in access to essential pharmaceutical products (18)

The events of September 11, 2001 and the subsequent bio-terrorism scare in the United States, not only changed the face of the world, but also placed the United States in an awkward position in terms of their trade policy (5). The anthrax scare forced the United States to consider issuing a compulsory license on Ciproflaxin, the antibiotic used to treat anthrax and its patent holder is Bayer AG Corporation, if the disease turned out to be more wide-spread than it did. The U.S. Secretary of Health and Human Services threatened the Bayer AG Corporation that the U.S. government would issue a compulsory license unless Bayer lowered its selling price to the U.S. government (10). The disadvantage stems from the U.S. almost declaring a “national emergency” for the anthrax scare when in the past the U.S. has questioned countries declaring a national emergency where thousands of people die everyday from treatable diseases (5). The United States eventually negotiated with Bayer to obtain Ciproflaxin at a reduced price. This also put the United States in an awkward position since this was exactly the tactic the U.S. criticized and prosecuted when Brazil used the threat of granting a compulsory license to obtain cheaper HIV/AIDS drugs (5). In view of the powerful effect of United States on the international trade, it is not believed that developing countries would have same power to force pharmaceutical companies which are majorly based on developed countries to concede and reduce the price of patented drugs.

The problem of international access to medicines is a real and pressing concern. However, compulsory license under Article 31 of TRIPS is apparently not the sole way to resolve the problem of public health threaten in developing countries. Patent right is not the major barrier to access to essential medicines, rather inaccessibility to critical medications resulted from inadequate infrastructure, absence of an effective drug distribution system and poverty. Patent law, at its very cores, seeks to promote the creation of new and innovative products and processes for the benefit of the public. In the field of pharmaceuticals, patented products represent some of the most significant advances in science and medicine. In stead of utilizing compulsory license rashly, developing countries may resort to other measurements to access to essential medicines by negotiating with the pharmaceutical companies. Even if the negotiation has broken down and compulsory license is inevitable, it also should be reminded that the developing countries should implement the obligation under Article 31 (h) for paying reasonable remuneration to the patent holder so that the latter has sustaining motivation to invest research and development of new drugs.