Paralell trade of patended phamaceutical - a discussion from developing countries persective

PARALLEL TRADE OF PATENTED PHARMACEUTICALS: A DISCUSSION FROM DEVELOPING COUNTRY PERSPECTIVE Nguyen Nhu Quynh* Abstract: Although the legitimacy of parallel trade was established in the Trade-Related Intellectual Property Rights Agreement 1994 (TRIPS Agreement) and re-affirmed in the Doha Declaration on TRIPS Agreement and Public Health 2001 (Doha Declaration) 2, parallel trade in patented pharmaceuticals has so far been one of the most heatedly debated topics Multi-national pharmaceutical companies complain that parallel trade of patented pharmaceuticals denies them adequate protection of their patent rights and prevents them from recouping the costs of pharmaceutical development including research and development (R&D), regulatory approval and amortization of the cost of unsuccessful drug development In contrast, the developing (and least developed) countries, suffering from the burdens of high disease levels and lack of resources to pay for high priced medicines, support liberalization of the parallel trade in patented pharmaceuticals to fulfil basic human needs In addition, developing countries have a greater focus on consumer interests, social welfare and health care policy concerns The puzzle, therefore, is how to fully understand the differences and how to harmonize the interests of the multi-national pharmaceutical companies with those of developing countries This article, discusses the rationale of developing countries’ arguments in favour of parallel trade in pharmaceuticals in conjunction with an analysis of international and national legal frameworks of parallel trade in pharmaceuticals and its two-sided effects of on developing countries The article also compares the counter-arguments of multinational pharmaceutical companies as well as the applicable legal treatment of parallel trade in developed countries, particularly the United States (US) and the European Union (EU) The article ends with proposals for developing countries to utilize the parallel trade of pharmaceuticals as a useful tool for access to essential medicines in order to combat the devastation resulting from epidemic diseases, and for building up national pharmaceutical industries In particular, the questions of how to lessen any negative effects of parallel trade in pharmaceuticals and why it should be combined with the compulsory licensing of pharmaceutical-related patents as well as technology transfer in the field of pharmaceuticals are mentioned in the set of proposals Introduction As recently reported by the World Health Organization (WHO), access to essential medicines remains a challenge for most people in developing countries (as well as in The Agreement on Trade-Related Aspects of Intellectual Property Rights, Annex 1C of the Marrakesh Agreement Establishing the World Trade Organization, signed in Marrakesh, Morocco on 15 April 1994 (“TRIPS”) See e.g Art World Trade Organization Ministerial Declaration adopted on 14 November 2001 at the Ministerial Conference Fourth Session Doha, 9-14 November 2001 WT/MIN (0)/Dec/1 The WHO has defined essential medicines as follows: “Essential medicines are those that satisfy the priority health care needs of the population.” The implementation of the concept of essential medicines is intended to be flexible and adaptable to many different situations; exactly which medicines are regarded as least developed countries) Researchers have found that the reasons for this situation result from the low availability and unaffordable prices of medicines while, at the same time, people in those countries are seriously suffered by devastating diseases In 2008, an estimated 33.4 million people worldwide were infected with HIV and that year some 2.7 million people became infected with the virus Notably, more than 95% of all HIVpositive people are in low-and middle-income countries In the same year, there were 247 million cases of malaria (resulting in nearly one million deaths) of which most are children living in Africa, and an estimated 1.3 million people died from tuberculosis for which the highest number of deaths was in the South-East Asia Region Studies had done by WHO and Health Action International (HAI) show that up to 90% of the population in developing countries purchase pharmaceuticals with out-of-pocket payments making pharmaceuticals the second largest family expenditure item after food As a result, medicines are simply unaffordable for most people in those countries The disparity in pharmaceutical access between developed and developing countries is stark Developing countries make up approximately 80% of the world’s population but represent only approximately 20% of global pharmaceutical consumption 10 Parallel trade in pharmaceuticals has not, so far, been the subject of significant legislation at the international level but it remains one of the most controversial trade-related questions Developing and least-developed countries, generally, favour international exhaustion regimes and parallel trade in pharmaceuticals because it represents a good solution for the health problems in these countries in terms of lower price and product availability In a contrast, multi-national pharmaceuticals companies (that are, for the most part, located in developed countries) employ national exhaustion regimes with a ban essential remains a national responsibility See WHO, Equitable access to essential medicines: a framework for collective action, March 2004, http://whqlibdoc.who.int/hq/2004/WHO_EDM_2004.4.pdf p WHO, Essential Medicines: Biennial Report 2008-2009, http://www.who.int/medicines/s16822e.pdf See e.g A Cameron, M Ewen, D Ross-Degnan and D Ball, R Laing, Medicine prices, availability, and affordability in 36 developing and middle-income countries: a secondary analysis, 2008, http://www.who.int/medicines/technical_briefing/tbs/lancetmedprices.pdf; WHO & HAI , Measuring medicine prices, availability, affordability and price components, 2nd edition, 2008, http://www.who.int/medicines/areas/access/OMS_Medicine_prices.pdf WHO, HIV/AIDS Programme: Highlights 2008-09, http://whqlibdoc.who.int/publications/2010/9789241599450_eng.pdf WHO, Malaria Fact Sheet No94, April 2010, http://www.who.int/mediacentre/factsheets/fs094/en/print.html WHO, Tuberculosis Fact Sheet No104, March 2010, WHO/EMP/2010.1, http://www.who.int/mediacentre/factsheets/fs104/en/index.html A Cameron, M Ewen, D Ross-Degnan and D Ball, R Laing, supra note 5; WHO & HAI, 2008 supra note 10 J.C Cohen, M Gyansa-Lutterodt, K Torpey, L.C Esmail and G Kurokawa, TRIPS, the Doha Declaration and increasing access to medicines: policy options for Ghana, Globalization and Health 1:17 (2005), available at http://www.globalizationandhealth.com/content/1/1/17 The situation is even worse in the poorest countries of Africa and Asia, where as much as 50% of the population lacks such access Some 10 million lives a year could be saved by improving access to essential medicines and vaccines About this information, see WHO & HAI, supra note on parallel imports of patented pharmaceutical based on an argument based upon a need for appropriate recoupment of R&D costs 11 Parallel trade in pharmaceuticals consists of the trading of genuine pharmaceuticals that have been placed on the market in another country by, or with the consent of, intellectual property right (IPR) owners into parallel authorized distribution channels in another country Parallel trade includes parallel imports and parallel exports In case of parallel imports, an unauthorized distributor of country B imports the product from country A to country B without permission from the IPR owner and both licensors in countries A and B In this case, A is an exporting country; B is an importing country; the unauthorized distributor is a parallel importer The condition of parallel import is: P1 + T < P2 In particular, P1 is the price in country A; P2 is the price in country B; T is the necessary costs such as transport cost and administrative cost In other words, the price in the importing country is higher than in the exporting country 12 In the case of parallel exports, an unauthorized distributor of country B exports the product from country B to country A without permission from the IPR owner and both licensors in countries A and B In this case, A is an importing country; B is an exporting country; the unauthorized distributor is a parallel exporter The condition of parallel export is P2 + T < P1 In particular, P1 is the price in country A; P2 is the price in country B; T is the necessary costs such as transport cost and administrative cost In other words, the price in exporting country is lower than the in importing country 13 The economic rationale of parallel trade stems from the difference in the price of the product between the country where the parallel trader acquires the product and the country that is the final destination of the product 14 The difference in price for a particular product has at a minimum to be sufficient to compensate for all the costs and expenses borne by the parallel trader The flow of parallel trade is generally directed from countries with a comparably low level of costs to countries with traditionally higher level costs Parallel traders, accordingly, can make a profit by importing or exporting goods in parallel with official channels 11 New York Times, Groups Says Discount AIDS Drugs Endanger Research, 13 February 2001; Karl Wündisch, The Research-Based Pharmaceutical Industry and Society: What is at Stake in the Future”?, 16 Journal of Pharmaceutical Marketing & Management, 2003 12 Christopher Heath (editor), Parallel Imports in Asia, Kluwer Law International, 2004; Christopher Stothers, Parallel Trade in Europe: Intellectual property, Competition and Regulatory Law, Hart Publishing, 2007; Duncan Matthews and Viviana Munoz-Tellez, Ch 15.4, Parallel Trade: A User’s Guide in Intellectual Property Management in Health and Agricultural Innovation: A Handbook of Best Practices, A Krattiger, R.T Mahoney, L Nelson, and Davis (eds 2007) available at www.ipHandbook.org; Frank MÜller-Langer, Does Parallel Trade Freedom Harm Consumers in Small Countries, 2008, available at http://www.eizg.hr/AdminLite/FCKeditor/UserFiles/File/CES-2008-mullerlanger.pdf 13 Id 14 Regarding economic rationale of parallel trade, see David Flath and Nariu Tatsuhiko, Parallel Imports and the Economic Welfare, Working Paper No 61, August 2002, available at http://repository.kulib.kyotou.ac.jp/dspace/bitstream/2433/37942/1/61.pdf It is widely recognized that parallel imports of pharmaceuticals occur more frequently than with other products because third-degree price discrimination for these products (and luxury goods) is the highest There are two rationales for this First, most countries intervene in pharmaceutical markets by their price control policy Second, the possibility of welfare-enhancing price discrimination is proved by economists “to be higher for goods covered by IPRs that stimulate inventive or creative activities [for example, patented pharmaceuticals] compared with the [goods covered by] other category of IPRs.” 15 The ability of IPR holders to exclude parallel trade depends on the nature of the exhaustion regime that applies to the importing country’s law When a national exhaustion regime is adopted, the IPRs of holders are only extinguished with regard to the right to control further distribution within the national territory In such case no parallel trade is permitted Under a regional exhaustion regime, IPR holders lose their right to control further distribution within the regional territory In this case, parallel trade is permitted within the given region; however, in principle, IPR holders can rely on their rights to prevent parallel traded goods coming from outside the region When an international exhaustion policy is adopted, distribution rights of IPR holders is internationally extinguished when a good or service has been placed on the market anywhere in the world; and parallel trade, is permitted on an international scale The legality of parallel trade in pharmaceuticals under the framework of international law is affirmed in Section below by focusing on the two most important international legal instruments, namely the TRIPS Agreement and the Doha Declaration National laws in several developing and developed countries on parallel trade of patented pharmaceuticals are also discussed in section A complete survey of the issue in all developing and developed countries is beyond the scope of this paper Section summarizes the theoretical and empirical arguments over the effects of parallel trade of patented pharmaceuticals on developing countries A short cost-benefit analysis of parallel trade of patented pharmaceuticals for developing countries is made in Section Finally, Section discusses the implications for developing countries (and least developed countries) of applying a policy of parallel trade in patented pharmaceuticals The conclusion for these countries, is that in the short and medium term, the benefits of pharmaceutical parallel trade outweigh its costs However, measures must be taken against the negative effects of parallel imports of pharmaceuticals and special attention must be paid to domestic demand as well as trade relations in respect of parallel exports of pharmaceuticals Legal framework for parallel trade of pharmaceuticals From an international law aspect, the parallel trade in pharmaceuticals is, in general, no longer a controversial issue after the TRIPS Agreement and the Doha Declaration on the TRIPS Agreement and Public Health Nonetheless, the legal climate on the issue varies among countries There is a lack of a unified approach, even among developed countries or among developing countries 15 Casten Fink and Keith E Maskus (editors), Intellectual Property and Development: Lessons from recent economic research, A co-publication of the World Bank and Oxford University Press, 2005, p 178 (words added) 2.1 International law An international exhaustion regime with recognition of parallel trade is explicitly authorized in the TRIPS Agreement Article TRIPS stipulates that the rules of the Agreement may not be used to address the subject of exhaustion for purposes of WTO dispute settlement It is nevertheless silent with respect to determining a specific regime of exhaustion That stated, the Article per se does not exclude WTO Members from selecting at their discretion their own exhaustion policies Each Member, therefore, has the freedom to define its own laws governing IPR exhaustion by the legislature and/or the courts conditioned upon their not violating the national treatment and most-favoured nation treatment principles of Articles and of the TRIPS Agreement The regime of international exhaustion and the legality of parallel trade is completely consistent with the meaning of Article The argument over the TRIPS flexibility of exhaustion regimes is further supported by the other articles of the Agreement Article 1.1 states that the “method of implementing” the TRIPS provisions can be freely determined within the “own legal system and practice” of each country 16 This provision makes clear that the TRIPS Agreement is not a uniform law but it provides minimum standards for its Members and also grants flexibilities to the Members in many areas Additionally, with the footnote 13 to Article 51, the TRIPS Agreement leaves discretion for WTO Members to decide the legality of parallel trade 17 Parallel trade of patented pharmaceuticals is lawful, in principle, as a consequence of patent exhaustion It is unjustified to rely on Article 28 of the TRIPS Agreement in order to argue that the Agreement mandates patent national exhaustion and prevents parallel trade of patented goods Article 28 TRIPS Agreement must be read in light of its very important footnote which makes it subject to Article of the Agreement Footnote to Article 28 18 implies that the TRIPS Agreement grants exclusive rights to patent holders on one hand but limits their rights in certain contexts on the other hand IPR holders’ exclusive rights including the right to imports are impaired in cases of IPR exhaustion as stated in Article In other words, in principle exhaustion is a national issue, but Members can enact the principle of international exhaustion by referring to Article Furthermore, Article 28 grants patent holders the right to prevent third parties from importing patent protected goods without their consent It does not, however, prescribe a rule defining how their consent is to be determined With Members that have adopted a rule of national exhaustion, consent only exhausts patent rights as to goods placed on the market within the territory of that Member With Members who have adopted a rule of regional exhaustion, consent affects goods placed on the market in any Member within the regional group With Members that 16 See Article 1.1 TRIPS Article 51 Footnote 13 states: It is understood that there shall be no obligation [for Customs Authorities] to apply [the] procedures of [suspension of resale] to imports of goods put on the market in another country by or with the consent of the right holder, or to goods in transit 18 Article 28 Footnote provides: This right, like all other rights conferred under this Agreement in respect of use, sale, importation or other distribution of goods, is subject to the provisions of Article 17 have adopted a rule of international exhaustion, consent affects goods placed on the market anywhere in the world TRIPS does not prescribe a rule regarding the geographical basis on which consent is to be determined 19 Given that, the TRIPS Agreement does not impose any exhaustion principle on WTO Members Simply put, parallel trade in patented pharmaceuticals is one option provided under TRIPS to its Member States The legality of parallel trade in pharmaceuticals was reinforced by the Doha Declaration At the Doha Ministerial Conference in November 2001, WTO member governments stressed that it was important to implement and interpret TRIPS in a way that supported public health by promoting both access to existing medicines and the creation of new medicines They, therefore, adopted a separate declaration on TRIPS and Public Health The adoption of the Doha Declaration reflected the great efforts of the developing countries towards driving the focus of the effect of TRIPS to public health problems By recognizing the gravity of the public health problem in many developing, and leastdeveloped countries, Members agreed that the WTO Agreement on TRIPS “does not and should not prevent Members from taking measures to protect public health,” 20 and “affirm that the agreement can should be interpreted and implemented in a manner supportive of WTO Members’ rights to protect public health and, in particular, to promote access to medicines for all.” 21 The Declaration also affirms “the right of WTO members to use, to the full, the provisions in the TRIPS Agreement, which provide flexibility for this purpose.” 22 The flexibilities include the freedom to implement an exhaustion doctrine The Doha Declaration leaves to WTO members the freedom to decide the issue of parallel trade in pharmaceuticals Paragraph 5(d) of the Declaration states: The effect of the provisions in the TRIPS Agreement that are relevant to the exhaustion of IPRs is to leave each Member free to establish its own regime for such exhaustion without challenge, subject to the MFN and national treatment provisions of Articles and 23 With these statements, the Doha Declaration is regarded as a turning-point in thinking about “IP as a social policy tool for the benefit of society as a whole, rather than [as] a mechanism to protect limited commercial interest.” 24 2.2 National laws There is an abundance of research on parallel trade, particularly on the parallel import of pharmaceuticals Nevertheless, there is no overall survey of national laws on parallel 19 UNCTAD-ICTSD Project on IPRs and Sustainable Development, Resource Book on TRIPS and Development, Cambridge University Press, 2005, p 105 20 Paragraph of the Doha Declaration on TRIPS Agreement and Public Health 21 Id 22 Id 23 Emphasis added 24 Ellen F M ‘t Hoen, The Global Politics of Pharmaceutical Monopoly Power: Drug Patents, Access, Innovation and the Application of WTO Declaration on TRIPS and Public Health, AMB, The Netherland, 2009, p xvi trade of patented pharmaceuticals in all developing countries Some studies have included national legal frameworks of parallel trade of a certain number of developing countries’ (that can help to understand national laws on parallel trade of patented pharmaceuticals in developing countries) 25 Nonetheless, flaws and a low unity among those studies are found 26 The result of my current doctoral research shows that an international regime of exhaustion seems to be a better fit for developing countries Nevertheless, a developing country may apply a national exhaustion regime instead of a regime of international exhaustion based on its socio-economic context and relevant policy 27 Furthermore, a developing country may apply a regime of international exhaustion to only certain categories of IPRs 28 Therefore, it is justified to infer that the regulation of parallel trade in patented pharmaceuticals varies among developing countries The South African Government passed the Medicines and Related Substances Control Amendment Act of 1997 to improve access to essential drugs Parallel trade in patented pharmaceutical is authorized under Article 15(c) of the Act With respect to India, the Doha Declaration had considerable effects on amendments to the Patent Act 2002 toward emphasizing the role of parallel imports in dealing with the question of access to affordable medicines Section 83 of the Act provides that (i) “patents are not granted merely to enable patentee to enjoy a monopoly for the importation of the patented article”, (ii) patents granted not impede protection of public health”, and “patent are granted to make the benefit of the patented invention available at reasonably affordable prices to the public.” Additionally, Section 107 of the 25 The most current studies are: Musungu, S and Oh, C., The Use of Flexibilities in TRIPS by Developing Countries: Can They Promote Access to Medicines?, WHO Study on IPRs, Innovation and Public Health, Geneva: WHO and South Centre, 2006 (cited by Carolyn Deere in Implementation Game: The TRIPS Agreement and the Global Politics of Intellectual Property Reform in Developing Countries, Oxford University Press, 2009, p 76); Frank MÜller-Langer (2008), supra note 12, pp 21-22; WIPO, Committee on Development and IP Fifth Session Geneva April 26 to 30, 2010, Patent Related Flexibilities in the Multilateral Legal Framework and Their Legislative Implementation at the National and Regional Levels CDIP/5/4, available at http://www.wipo.int/meetings/en/doc_details.jsp?doc_id=131629 pp 32-42 26 For example, with respect to Philippines, the country applies a regime of international exhaustion for patents as stated in the WIPO’s report whereas according to Frank MÜller’s research the country adopts a national exhaustion regime (without any note for patents) It should be noted that Philippines amended its Code of Intellectual Property in 2007 marking a turning from a national to an international exhaustion regime for pharmaceutical products And with the case of Malaysia, the WIPO’s report stated that the country applies a national exhaustion regime for patent (Annex II, page 37) whereas it is believed to adopt a regime of international exhaustion regime (without any note for patents) in the researches of Frank MÜller’s and Musungu, S and Oh, C Notably, the a lack of unity is existed in the WIPO’s report Particularly, the country is believed to apply a regime of national exhaustion as wrriten at page 37 of the Annex II However, footnote 63 (page 19) of such a report states that Malaysia adopts a regime of international exhaustion It should be stressed that parallel trade of patented pharmaceuticals is lawful under Section 58A of the Patent Act (modified in 2000) 27 That is the case with Brazil See Article 44.IV on patents and Article 132.III on trademarks, Brazil: Law No 9.279 of May 14 1996 to Regulates Rights and Obligations Relating to Industrial Property, http://www.wipo.int/clea/en/details.jsp?id=515 28 That is the case with India India has applied international exhaustion for patented and trademarked goods but national exhaustion for copyrights due to the strength of its film and software industries See Mattias Ganslandt and Keith E Maskus, IPRs, Parallel Imports and Strategic Behavior, IFN Working Paper No 704, 2007, Research Institute of Industrial Economics, Sweden, p Act recognizes parallel importation by individual and private entitles for commercial purposes “Importation of patented products by any person from a person who is dully authorized under the law to produce and sell or distribute the product does not constitute infringement of the patent.” Countries of the Association of South East Asia Asian Nations (ASEAN) pay significant attention to the policy of allowing pharmaceutical parallel importation 29 Malaysia amended its Patent Act in 2000 with an explicit authorization for pharmaceutical parallel importation at Section 58A Similarly, the Philippines amended its Code of Intellectual Property in 2007 marking a turning from a national to an international exhaustion regime for pharmaceutical products The current Thai Patent Act (No 3) B.E 2542 (1999) adopts an international exhaustion doctrine allowing parallel imports to helps alleviate the issue of obtaining access to essential drugs 30 In regard to Vietnam, parallel importation of pharmaceuticals for the prevention and cure of human diseases is expressly permitted by virtue of a specific legal document In 2004, in order to stabilize the domestic pharmaceutical market and block monopolization by certain foreign pharmaceutical giants, 31 the Ministry of Health issued Decision 1906/2004/QD-BYT 32 which dealt with the parallel import of pharmaceuticals for the prevention and cure of human diseases 33 Most large developing countries with a capacity for exporting pharmaceuticals apply a policy of pharmaceutical parallel trade These include India, China, Thailand, Argentina, Nguyen Nhu Quynh, Pháp luật hết quyền sở hữu trí tuệ nhập song song số nước ASEAN [Exhaustion of IPRs and parallel imports in some ASEAN countries], Jurisprudence, No 12/2009, pp 28-36 See also Steven Anderman, The interface between IPRs and competition policy, Cambridge, 2008 30 WIPO, Collection of Laws for Electronic Access, http://www.wipo.int/clea/en/details.jsp?id=3807 According to the WIPO report, Thailand applies a regime of national exhaustion for patents This is not as provided in Section 36, particularly paragraphs 1, and 7, of the Thai Patent Act Section 36 provides that: No other person except the patentee shall have following rights: (1) where the subject matter of a patent is a product, the right to produce, use, sell, have in the possession for sale, after for sale or import the patented product; (2) where the subject matter of a patent is a process, the right to use the patented process, to produce, use, sell, have in the possession for sale, offer for sale or import the product produced by the patented process The preceding paragraph shall not apply to: […] (7) the use, sale, having in possession for sale, offering for sale or importation of a patented product when it has been produced or sold with the authorization or consent of the patentee.” 31 For many years, the Vietnamese pharmaceutical market has been dominated by three 100% foreign owned companies, namely Diethelm Vietnam, Mega Lifescienses VN Ltd., and Zuellig Pharma Vietnam Ltd See Vietnam’s Competition Administration Department, Ministry of Industrial and Trade, Báo cáo Pháp luật cạnh tranh điều chỉnh hành vi phản cạnh tranh hệ thống phân phối dược phẩm thị trường Việt Nam, [Legal Report on Anti-Competitive Practices in the Distribution Chain of Pharmaceuticals in the Vietnamese Market], 2009, p 127 32 Decision 1906/2004/QD-BYT of Minister of Health dated 28 May 2004 promulgating the Regulation on parallel import of medicines for the prevention and cure of human diseases 33 Parallel imports of medicines was confirmed in the Decision No 110/2005/QD-TTg of the Prime Minister dated May 16, 2005 on Approval to the Plan on “National stock of medicine for the prevention and cure of people’s diseases.” See Section of the Decision 29 and Egypt 34 Nevertheless, it should be stressed that Brazil is one of the largest pharmaceutical exporters to developing countries but parallel trade of patented pharmaceuticals is not accepted in the country 35 In order to increase access to drugs with affordable price and encourage the transfer of technology, the Brazil patent law provides patents for pharmaceuticals, subject to a working requirement This "working requirement" under Article 68, permits the issuance of compulsory licenses in cases where patent holders choose to supply the market through imports rather than through local production Brazil through this measure has put pressure on multinational pharmaceutical companies to produce patented drugs in Brazil instead of importing them 36 Developed countries’ laws regarding parallel trade of patented pharmaceuticals vary extremely In the US, up until now, there is has been no specific statutory or case law allowing parallel importation of pharmaceuticals into the US Before the Supreme Court’s ruling in Quanta Computer, Inc v LG Electronics, Inc., (Quanta) in 2008, 37 34 Warren Kaplan and Richard Laing, Local Production of Pharmaceuticals: Industrial Policy and Access to Medicines: An Overview of Key Concepts, Issues and Opportunities for Future Research, Health, Nutrition, and Population Family (HNP) Discussion Paper of the World Bank’s Human Development Network, January 2005, http://www.who.int/medicines/technical_briefing/tbs/KaplanLocalProductionFinal5b15d.pdf; Keith E Maskus, Parallel Imports in Pharmaceuticals: Implications for competition and price in Developing Countries, Final Report to WIPO under the terms of Special Service Agreement, (April 2001), http://www.wipo.int/about-ip/en/studies/pdf/ssa_maskus_pi.pdf According to the India Brand Equity Foundation, as of July 2010 India tops the world in exporting generic medicines; India's pharmaceutical industry is now the third largest in the world in terms of volume and stands 14th in terms of value See IBEF, Pharmaceuticals, http://www.ibef.org/industry/pharmaceuticals.aspx Article 63 of the Chinese Patent Act, modified in 2009, provides a legal basic for parallel trade of patented pharmaceutical China is predicted to become the third largest pharmaceutical market by 2011 See IMS press release March 16, 2010 IMS Announces 17 Countries Now Rank as High-Growth ‘Pharmerging’ Markets; Forecast to Contribute Nearly Half of Industry Growth by 2013- China to Become World’s ThirdLargest Pharmaceutical Market Next Year http://www.imshealth.com/portal/site/imshealth/menuitem.a46c6d4df3db4b3d88f611019418c22a/?vgnexto id=01624605b5367210VgnVCM100000ed152ca2RCRD&vgnextfmt=default 35 See Article 43 IV of the Industrial Property Law No 9.279 of 14/05/1996 as last amended by Law No 10.196 of 14/02/2001 Amongst developing countries, Mexico is one of largest pharmaceutical exporter in developing countries Similarly to Brazil, parallel trade of patented pharmaceuticals is not legally allowed under the Mexican Industrial Property Law of 1991 and last amended in 2005 (Article 22) 36 Articles 68 (1), (2) and (4) of the Industrial Property Law No 9.279 of 14/05/1996 as last amended by Law No 10.196 of 14/02/ See WIPO, Collection of Laws for Electronic http://www.wipo.int/clea/en/details.jsp?id=515 37 Quanta Computer, Inc v LG Electronics, Inc., 128 S Ct 2109 (2008) Quanta involved computer technology patents held by LG Electronics, Inc (LGE) LGE licensed some patents to Intel Corporation (Intel) The License Agreement between LGE and Intel authorized Intel to manufacture and sell microprocessors and chipsets that practiced the LGE patents However, the License Agreement also provided that no license was granted to Intel’s customers to combine Intel products with non-Intel products At the same time, the License Agreement purported not to alter the usual rules of patent exhaustion In a separate agreement (the Master Agreement) between LGE and Intel, Intel agreed to give its customers written notice informing them that Intel’s license from LGE did not extend to any products they made by combining an Intel product with a non-Intel product This Master Agreement also provided that its breach would not be grounds for termination of the patent license from LGE to Intel Quanta, a computer manufacturer, purchased microprocessors and chipsets from Intel and received the notice required by the Master Agreement In spice of this notice, Quanta manufactured computers using Intel parts in combination parallel importation of patented pharmaceuticals into the US is strictly prevented since the country applies a national exhaustion regime without any exception to patents 38 Parallel importation of trademarked pharmaceuticals is permitted except when there is a material difference between the imported pharmaceuticals and domestic pharmaceuticals 39 The difference in exhaustion regimes for trademarks and patents, however, have made parallel importation of pharmaceuticals into the US infeasible when such pharmaceuticals have been protected by both trademark and patents laws Nevertheless, the opportunity for parallel imports of patented pharmaceuticals into the US is preparing to be opened after the Supreme Court’s ruling in Quanta, particularly LG Electronics v Hitachi LTD in 2009 (Hitachi) 40 In the landmark case, Quanta, the Supreme Court held that method patent is exhausted by sale of item that embodies the method and “[e]xhaustion is triggered only by a sale of authorized by the patent holder.” 41 By this ruling, the Court reaffirmed the importance of the exhaustion doctrine that was previously weakened by Federal Circuits 42 and limited patentee’s ability to implement activities that are not sufficiently connected with their patent rights 43 Notably, in Hitachi, 44 patent exhaustion was extended to foreign sale based on the precedent of Quanta In this case, the Judge Claudia Wilken of the Northern District of California held that the Quanta ruling applied to authorized foreign sale as well as authorized domestic with non-Intel memory and buses in ways that practiced the LGE patents LGE, thus, filed suit against Quanta, alleging that Quanta’s conduct infringed the LGE patents.37 38 In Jazz Photo, the Federal Circuit Court of Appeals clearly stated: “[o]ur decision applies only to LFFPs for which the United States patent right has been exhausted by first sale in the United States Imported LFFPs of solely foreign provenance are not immunized from infringement of United States patents.” See Jazz Photo Corp v Int’l Trade Comm’n, 264 F 3d 1094, 1105 (Fed.Cir.2001) 264 F.3d 1094, 1105 (emphasis added) 39 The rationale of this argument is under the US trademark exhaustion law, parallel imports of trademarked goods are prevented when there is a material difference between parallel imported goods and US trademarked goods bearing the same mark See Lever Bros Co v U.S., 981 F 2d 1330 (D.C Cir 1993); Martins Herend Imports, Inc v Diamond & Gem Trading USA Co., 112 F.3d 1296 (5th Cir 1997) appeal from remand 195 F.3d 765 (5th Cir 1999); Societe Des Produits Nestle, S.A v Casa Helvetia, Inc., 982 F.2d 633 (1st Cir 1992); Ahava (USA), Inc v J.W.G., Ltd., 250 F Supp 2d 366 (S.D.N.Y 2003) 40 In 2009, four cases were decided in light of Quanta: (i) TransCore, LP and TC License, Ltd., v Electronic Transaction Consultants Corporation, United States Court of Appeals for the Federal Circuit, 2008-1430, decided April 8, 2009; (ii) Static Control Components, Inc v Lexmark International, Inc, Eastern District Court of Kentucky, Filed March 31 2009, Memorandum Opinion and Order; (iii) Monsanto v Scruggs, No 3:00CV-161-P-D, 2009 U.S Dist LEXIS 20829 (N.D Miss Mar 3, 2009); (iv) LG Electronics v Hitachi LTD, No C 07-6511 CW, 2009 U.S Dist LEXIS 20457 (N.D.Cal Mar 13, 2009) 41 Quanta, supra note 37, para 2121, citing United States v Univis Lens Co., 316 U.S 241, 249 (1942) 42 See Mallinckrodt, Inc v Medipart, Inc., 976 F.2d 700 (Fed Cir 1992); Monsanto v McFarling, 363 F.3d 1336 (Fed Cir 2004) 43 Concerning this argument, see Saami Zain, Quanta leaf or much ado about nothing? An analysis on the effect of Quanta vs LG Electronics, Albany Law Journal of Science and Technology, 20 Alb L.J Sci & Tech 67, 2010 ; Richard H Stern, Quanta Computer Inc v LG Electronics Inc – comments on the reaffirmation of the exhaustion doctrine in the US, European Intellectual Review, E.I.P.R 2008, 30(12), 528-535 44 LG Electronics v Hitachi LTD, No C 07-6511 CW, 2009 U.S Dist LEXIS 20457 (N.D.Cal Mar 13, 2009) 10 sale 45 If upheld on higher courts, patentee’s rights to prevent parallel imports (including parallel imports of pharmaceuticals) may be deprived 46 Not only parallel importation of pharmaceuticals are strictly barred, importation of pharmaceuticals into the US is also restricted Any prescription drug imported into the US are required to meet the same requirements as one made domestically including approval procedure of a new drug application (NDA) by the Food and Drug Administration (FDA) 47 Notably, several states have passed legislation that facilitates the importation of drugs 48 Re-importation is acceptable if the re-importer is also the manufacturer Section 801(d)(1) [21 USC 381] of the Federal Food, Drug, and Cosmetic Act (amended in 2004) provides that “[N]o drug subject…which is manufactured in a State and exported may be imported into the US unless the drug is imported by the manufacturer of the drug.” Nevertheless, FDA has permitted one broad exemption to this general rule, which is re-importation in case “if the drug is required for emergency medical care” provided for in section 801(d) (2) The Secretary of Health and Human Services has the right to authorize this exemption 49 Due to restrictions on importation, parallel importation and no imposition of pharmaceutical price control, prices in the US for “on-patent” pharmaceuticals are significantly higher than those of other countries 50 The country, thus, has a high potential market for parallel trade 51 Nonetheless, a number of bills repealing the existing restrictions on parallel importations of pharmaceuticals into the US being vetoed or still pending 52 45 Ib at *31 Regarding this argument, see ALSTON + BIRD LLP, LG Electronics v Hitachi LTD: Exhausting Patent Rights Through Foreign Sale, Intellectual Property ADVISORY, April 20, 2009, available at http://www.alston.com/files/Publication/b2fe4ab8-4e6f-4537-9f86a8dd07d0024d/Presentation/PublicationAttachment/5be8bc54-cd67-468f-9242a9a85fdfe6b5/LG%20v%20Hitachi.pdf 47 Each NDA contains: pre-clinical and clinical safety, effectiveness data, extensive descriptions of the manufacturing process and controls See New Drug Application Process, available at http://www.fda.gov/CDER/REGULATORY/applications/nda.htm 48 For instance, the states of Kansas, Minnesota, Missouri, Vermont and Wisconsin See The National Law Journal, Protecting against parallel importation, Monday, July 10, 2006 49 Moreover, to combat counterfeit drugs, the FDA and pharmaceutical companies are collaborating to identify new and effective anti-counterfeiting technologies, which are undoubtedly costly to implement For instance, overt technologies such as holograms, color-shifting inks and watermarks may help identify the real drug to consumers See The National Law Journal, supra note 48 50 See Section 2, The Bill to amend the Federal Food, Drug, and Cosmetic Act with respect to the importation of prescription drugs, and for other purposes, 1st Session, 110th Congress, 2007 (Introduced by the Senator Dorgan) 51 See Jacob Arfwedson, Re-importation (Parallel Trade) in Pharmaceuticals, Policy Report 182, Institute for Policy Innovation, July 2004, pp 16-17, http://www.ipi.org/ipi/IPIPublications.nsf/0/4A9821E11C0B539086256ED60072AB13/$File/PR182ParallelTrade.pdf?OpenElement 52 The pending legislation are the Pharmaceutical Market Access Act of 2009 S.80 (last introduced January 6, 2009) and the Pharmaceutical Market Access and Drug Safety Act of 2009 H.R 1298 (last introduced March 4, 2009) The statute of these bills is found at http://www.govtrack.us 46 11 In contrast to the US, the EU has been the region where parallel trade of pharmaceuticals has flourished due to the variations in the product price between Member States 53 The reasons are found in the significant differences between the Member States of the EU both in general macro-economic conditions and in their respective health systems 54 and in the policy of price control The European Commission affirms that “[p]arallel importation of a medicinal product is a lawful form of trade within the Internal Market based on article 28 of the EC Treaty.” 55 The underlying reasons for these differences are their policies on parallel imports of pharmaceuticals With respect to the EU, the adoption of parallel trade in general and parallel imports of pharmaceuticals in particular is aimed at achieving the goal of a single internal market The US policy on pharmaceuticals, where there are not issues concerning an internal market between the 50 states, is to compete, to create and develop new products and to protect the domestic pharmaceutical industry However, these differences between the EU and the US regarding parallel imports of pharmaceuticals would not exist if the EU were considered to be a unified nation without any border among its Member States Japan, Australia and New Zealand, differently from both the US and EU, have adopted regimes of international exhaustion to patent rights However, all of these countries make exceptions for products which are subject to price controls abroad, which is typically the case in pharmaceuticals 56 Impacts of parallel trade of patented pharmaceuticals on developing countries Parallel trade in patented pharmaceuticals, to a certain extent, has had an impact on the price of pharmaceuticals; the availability of pharmaceuticals; patent holders’ profits and investment in R&D; foreign direct investment, and technology transfer in the health area; competition; counterfeiting and the quality of pharmaceuticals; and trade relations In other words, it may have effects on patent holders’ interests, consumers’ interests, the development of local pharmaceutical industry, and the flow of pharmaceuticals crossing borders First, the impacts on prices: Generally, developing countries have relied on parallel importation as a good solution to the problems of high prices of pharmaceuticals in their 53 In the U.S the Commerce Clause of the Constitution forbids states from prohibiting imports from other states In fact, one can purchase the same FDA authorized drug which is cheaper than it is in the importing state by pharmacies and middle-men In the EU each Member State is a sovereign nation 54 According to Commission Dec 2001/791 Glaxo Wellcome [2001] OJ L302/1, para 162: Austria, Denmark, Finland, Ireland, Sweden and United Kingdom are high price countries; Belgium, France, Greece, Italy, Portugal and Spain are “countries with relatively lower prices” About the European pharmaceutical market, see Commission Communication on the Single Market in Pharmaceuticals, COM (98)588 final, Brussels, 25 November 1998 55 COM(2003) 839 final, the Commission Communication on parallel imports of proprietary medicinal products for which marketing authorizations have already been granted, Brussels, 30.12.2003 Parallel trade in pharmaceuticals has been ruled lawful in many decisions by the European Court of Justice (ECJ) See e.g., Joined Cases C-468/06 to C-478/06 Sot Lelos kai Sia EE v GlaxoSmithKline AEVE [2008] ECR I7139, Bristol-Myers Squibb v Paranova A/S, Case C-247/93, 1996 ECR 3457; Peak Holding v AxolinElinor, Case C-16/03, 2004 ECR 11 13 56 Margaret K Kyle, Parallel Trade in Pharmaceuticals: Firm Responses and Competition Policy, in International Antitrust Law and Policy: Fordham Competition Law 2009, (Ed Barry Hawk) (Jurist Publishing, New York, 2009), p 344 12 domestic markets 57 Parallel trade of pharmaceuticals is believed to lead to a reduction in the average price of the goods in importing countries owing to the rise in intra-brand competition 58 Frederick M Abbott argues that in theory, the retailer usually maintains a high price and earns more profit, but in a competitive market (where other retailers have access to the same low-cost distributors), this would not be the case He assumes that parallel trade “allows the retailer to charge a lower price to the consumer, and to better compete with other retailers.” 59 In a report to World Intellectual Property Organization (WIPO) on parallel imports in pharmaceuticals and implications for developing countries, Keith E Maskus recognizes the benefits of price reduction in parallel importation of pharmaceutical He concludes that: By permitting pharmacists, hospitals, and insurance services to procure drugs from cheaper international sources, prices of brand-name drugs are directly reduced Presumably this reduction is passed on to final consumers (patients) in some degree 60 In addition, parallel trade reduces the price gap among markets and can put pressure on the price regulations of different countries, tending toward policy harmonization 61 Nonetheless, not a few scholars oppose price harmonization 62 In an article on parallel trade in the pharmaceutical industry, Barfield and Groomberg assume that the ability to discriminate based on price is a common and economically justified practice 63 For arguing against parallel trade of pharmaceuticals, Singham maintains that: The economic reality is that price discrimination in the setting of drug prices in different markets, through market segmentation, can have significant positive effects for both producers and consumers 64 Furthermore, although Keith E Maskus recommends parallel imports of pharmaceuticals for developing countries, he also believes in the benefits of price discrimination in 57 See Xiang Yu, The Regime of Exhaustion and Parallel Imports in China: A Study Based on the Newly Amended Chinese Laws and Related Cases, [2004] E.I.P.R, p 110 58 See e.g WHO, International Trade and Health: A Reference Guide, 2009, http://www.searo.who.int/LinkFiles/IPT_ITH.pdf; Frederick M Abbott, Parallel Importation: Economic and social welfare dimensions, the International Institute of Sustainable Development, (June 2007), http://www.iisd.org/pdf/2007/parallel_importation.pdf; David Flath, Nariu Tatsuhiko supra note 14; Keith E Maskus (2005), supra note 34; Cheri Grace, The Effect of Changing Intellectual Property on Pharmaceutical Industry Prospect in India and China, (June 2004), http://www.who.int/hiv/amds/Grace2China.pdf; Kouanpoth, J., Patents and Access to Antiretrovial Medicines in Vietnam After World Trade Orgnization Accession, Journal of World Intellectual Property, 10(3-4), 2007, p 204 59 Frederick M Abbott (2007), Id 60 Keith E Maskus (2005), supra note 34, p 41 61 Mattias Ganslandt and Keith E Maskus (2008), supra note 28, p 32 62 See e.g Claude E Barfield and Mark A Groomberg, Parallel Trade in the Pharmaceutical Industry: Implications for Innovation, Consumer Welfare and Health Policy, 10 Fordham Intell Prop Media & Ent L.J 185, 203 (1999); Shanker A Singham, Competition Policy and the Stimulation of Innovation: TRIPS and the Interface between Competition and Patent Protection in the Pharmaceutical Industry, 26 Brook J.Intern.L 363 (2000); Keith E Maskus (2005), supra note 34 63 Claude E Barfiled and Mark A Groomberg, Id, p 224 64 Shanker A Singham, supra note 62 13 competitive markets as a reason to support a restraint of parallel trade 65 Perceiving the importance of pharmaceutical price discrimination, Andreas Seiter advices governments to apply differential pricing as a likely trend in pharmaceutical pricing policy between 2010 and 2020 66 Second, the impact on availability of pharmaceuticals: it is widely assumed that an international exhaustion rule which recognizes parallel trading would result in the increase of a variety of IPR-embodied goods and services and consumers would more easily have access to the products of the creative processes of human beings throughout the world 67 Thus, parallel trade of pharmaceutical is believed by many researcher to increase access to pharmaceuticals in developing countries The WHO advocates parallel imports of pharmaceuticals It states that: Parallel importing can be an important tool enabling access to affordable medicines because there are substantial price differences between the same pharmaceutical products sold in different markets 68 Third, the impact on patent protection and R&D: As already mentioned infra, multinational pharmaceutical companies’ main argument against parallel trade in pharmaceuticals is that it will result in a weak patent protection and reduction of R&D investment The concept that parallel trade in pharmaceuticals will undermine patent rights and reduce incentives for investment in R&D for new pharmaceuticals has been regarded as “the orthodox view.” 69 Valletti and Szymanski (2005) 70 analyse the policy implications of parallel trade in a model of vertical product differentiation with endogenous product quality They conclude that parallel trade destroys incentives to invest in R&D for new products if the national government of a foreign country issues a compulsory license and unilaterally sets a fixed price equal to marginal cost to be paid to the IPR holder Afterward, Valletti and Szymanski (2006) 71 considered a model of product innovation in which a higher investment in R&D enabled the manufacture to discover products with higher quality Similarly, Singham assumes that without market differentiation which would be the result of parallel trade, pharmaceutical companies will not be able to recoup the costs of innovative drugs during the life of their patent right 72 Developing and least-developed countries are cautioned that if drug manufacturers have 65 Keith E Maskus (2005), supra note 34 Andreas Seiter, A Practical Approach to Pharmaceutical Policy, The International Bank for Reconstruction and Development/The World Bank, 2010, p 159 67 Ross Jones, Parallel Imports & Intellectual Property Restraints, The Australian Competition & Consumer – Commission’s Perspective, reported within the Regional Seminar on Competition Law and Policy for Asia Pacific, United Nations, 2000; Frederick M Abbott (2007), supra note 58; and Nguyen Nhu Quynh, Exhaustion of IPRs under Vietnamese Law, IP Community, Japan, No.11, pp 43-56 68 WHO, The Doha Declaration on TRIPS Agreement and Public Health, http://www.who.int/medicines/areas/policy/doha_declaration/en/index.html 69 Rafael Pinho Senra de Morais , Compulsory Licensing of Drugs, Parallel Imports and Price Controls, Toulouse School of Economics, 2009, http://www.econ.puc-rio.br/pdf/seminario/2009/article3.pdf 70 Tommaso Valleti and Stefan Szymanski, Parallel Trade, International Exhaustion and IPRs: A Welfare Analysis, CEPR Discussion Paper No 5022, Centre for Economic Policy Research, (London, April 2005) 71 Tommaso Valetti and Stefan Szymanski, Parallel Trade, International Exhaustion and IPRs: A welfare Analysis, Journal of Industrial Economics, December 2006, 54: 499-526 72 Shanker A Singham, supra note 62 66 14 no economic incentive to work on the R&D of tropical disease remedies, then it will be the poor of the developing world who will suffer 73 International Federation of Pharmaceutical Manufacturers and Associations (IFPMA) also claims that “without patent protection, the world would have been deprived of the innovative medicines which have saved countless of live (2008)” 74 In a contrast, Frederick M Abbott who supports application of international exhaustion regimes opposes the above argument 75 He takes the pharmaceutical industry as an example of an R&D heavily-based sector and states that “the originator companies on average invest about 15% of their gross income on R&D The industry spends a substantially higher percentage of income on advertising, promotion and administration Much of the advertising and promotion costs are spent on “lifestyle” drugs such as Viagra.” 76 In a discussion on evidence on parallel import and R&D performance, Keith E Maskus concludes that “[o]verall, there is no detectable relationship between R&D in the pharmaceuticals sector and the permission or extent of parallel imports, at least by country.” 77 Presently, some researchers have argued that patents are not necessary for pharmaceutical R&D and even lead to a reduction in the capacity of pharmaceutical industry to create new products 78 Fourth, the impact on foreign direct investment and technology transfer: There is an argument that to some extent, parallel trade of pharmaceuticals may constitute a barrier to foreign direct investment and transfer of technology in the pharmaceutical area The reason is the investors, the licensor, and the licensee in technology transfer agreements fear that they will not obtain their business purposes due to effects of parallel trade 79 Interestingly, parallel trade of pharmaceuticals is also regarded as positive effect to build up local pharmaceutical industry Keith E Maskus assumes that parallel imports may be a source of technology transfer in that it can make products available on markets where firms could reverse engineer their composition 80 Fifth, the impact on competition: International exhaustion gives rise to intra-brand competition in the pharmaceutical area Restrictions on parallel trade prevent intra-brand 73 Id Ellen F M ‘t Hoen, (2009), supra note 24, p 79 75 Fredrick M Abbott, First Report (Final) to the Committee on International Trade of the International Law Association on the Subject of Parallel Importation, Journal of International Economic Law 1: 607-36, 1998 See also G Grossman, G and E Lai, Parallel Imports and Price Controls, RAND Journal of Economic, 2008, Vol 39, issue 2, pp 378-402 76 Frederick M Abbott, (2007), supra note 58 77 Keith E Maskus (2005), supra note 34 78 Smith, R D., Correa, C and Oh, C., Trade, TRIPS, and Pharmaceuticals’, Lancet, 373, 2009, p 686 (cited in Poku Adusei, Exploiting Patent Regulatory “Flexibilities” to Promote Access to Antiretroviral Medicines in Sub-Saharan Africa, The Journal World Intellectual Property, August 4, 2010, p.11); Heller, M., The Gridlock Economy: How too Much Ownership Wrecks Markets, Stops Innovation, and Costs Lives, Basic Books, New York, p 59 79 See Nuno Pires de Carvalho, The TRIPs Regime of Trademarks and Designs, (Kluwer Law International 2006) p 163; See also NERA Study, The Economic Consequences of the Choice of a Regime of Exhaustion in the Area of Trademarks, (1999) commissioned by DGXV of the European Commission 80 Keith E Maskus (2005), supra note 34 74 15 competition by conferring on patent owners the right to vertical control over the distribution system of their patented pharmaceuticals 81 Parallel trade helps prevent abusive price discrimination and collusive behaviour based on private territorial restraints Nonetheless, opponents of parallel trade counter-argue that “intra-brand competition ought to be prohibited as it detracts from the more appropriate inter-brand competition.” 82 Inter-brand competition is competition among competitors of different brands From an economic perspective, both intra-brand competition and inter-brand competition have costs and benefits If intra-brand competition is reduced, both retailers and consumers will receive more benefits More specifically, it lowers the cost of investing in pre- and after-sale services for retailers Accordingly, these retailers can reduce the prices of the products and consumers receive benefits as a result Inter-brand competition creates a wide range of choice available to consumers Economists believe that “where inter-brand competition is healthy, concerns about the effects on consumers of reduced intra-brand competition can generally be dismissed.” 83 Sixth, the impact on counterfeit goods and quality: Theoretically, parallel trade in patented pharmaceuticals leads to weak vertical control by patent holders As a result, counterfeit and low quality pharmaceuticals have greater access to the market in parallel trade accepting countries The existence of these goods may put pressure on incipient local industry, affect decisions on investment by foreign patent holders, and cause deleterious impacts on public health as well as social security Varieties of alternative pharmaceuticals create consumer confusion between genuine pharmaceuticals and counterfeit and low quality pharmaceuticals With regard to developing countries, the problem may be more serious where laws governing IPR enforcement are unperfected, the capacity of IPR enforcement authorities is inadequate to the requirement of policing the system, and the control over importation of goods is relatively weak 84 Moreover, the quality control of imported goods may also be questionable Quality control agencies will not find it simple to prevent importation of counterfeit and low quality goods because less-well developed mechanisms for quality control and the limited working capacity of 81 In a very recent, preliminary study, Keith E Maskus and Frank Stähler conclude that “[parallel trade] will not occur without vertical control In other words, parallel trade only cause a reduction of vertical control See Keith E Maskus and Frank Stähler, Parallel trade without vertical control, March 2010, http://www.vwl.uniwuerzburg.de/fileadmin/12010200/user_upload/Docs_Allgemein/Paper_ATW_2010.pdf p 26 82 George R Stewart, Myra J Tawjik, Maureen Irish (editors), International Trade & Intellectual Property: The Research for a Balanced System, (Westview Press, 1994), p.21; Kerrin M Vautier has the same view on stimulus of vertical control to inter-brand competition, see Christopher Heath, supra note 12, p 83 Derek Ridyard, Intra-and Inter-brand competition – the public policy debate, http://www.bristishbrandsgroup.org.uk 84 Regarding IPR enforcement in Vietnam, see Thực thi quyền sở hữu trí tuệ [IPR Enforcement, in Giáo trình Luật dân (Textbook on Civil Law), Phan Huu Thu (ed.)], the Public Security Publishing House, 2007; Nguyen Nhu Quynh, Bảo vệ quyền sở hữu trí tuệ [IPR Protection, in Giáo trình Luật Sở hữu trí tuệ (Textbook on Intellectual Property Law), Phung Trung Tap (ed.)], The Public Security Publishing House, 2009, Public Security Publishing House, 2009, pp 241-269; Nguyen Nhu Quynh, The Law on Intellectual Property: An important milestone in the development of Vietnam’s intellectual property legal system, IP Community, Japan, No 10, 2007 16 quality control staff This requires the countries that adopt parallel importation of pharmaceuticals to be vigilant in combating counterfeit pharmaceuticals and to adequately control repackaged pharmaceuticals Finally, the impact on trade relations: Developing countries that allow parallel trade in pharmaceuticals may be confronted with unreasonable pressure and reciprocal conditions by multi-national pharmaceutical companies located in developed countries A typical example is the three-year campaign against parallel imports (and compulsory licensing) of pharmaceuticals in South Africa court, claiming that the South African 1997 Medicines and Related Substances Control Amendment Act violated the TRIPS Agreement and would destroy patent protections by giving the health minister overly broad powers to produce, or import more cheaply, versions of drugs still under patent 85 The EU shared the burden of developing countries in coping with their health crises by adopting new rules on the tiered pricing of pharmaceuticals, with Council Regulation (EC) No 953/2003 of 26 May 2003 to avoid trade diversion into the EU of certain key medicine 86 Under Regulation 593/2003, key pharmaceuticals were supplied to developing countries “at heavily reduced prices” in order to help those countries cope with “urgent need of access to affordable essential medicines for treatment of communicable diseases.” In return, recipient countries are required to ensure that “these products remain on the market.” Re-exports of tiered priced products to Community markets are prohibited under Article 2.1 of the Regulation The objective the Regulation is reflected in its title: “to avoid trade diversion into the EU” and emphasized by the European Commission as follows: The European Commission announced, amongst other things, that it would work toward introduction the of tiered pricing as the norm for essential medicines destined for the poorest developing countries while at the same time seeking to prevent re-importation of the same product to the EC market 87 Furthermore, developing (and least developed) countries are burdened with other additional pressures from developed countries, particularly the US and EU, that impede access to affordable pharmaceuticals in the former Those are, for instance, threatening toward compulsory licensing-granting countries 88 and TRIPS-plus obligations from 85 WHO, Essential Drug in Brief No 004-2001, http://apps.who.int/medicinedocs/en/d/Js2229e/1.html; Gumisai Mutame, Health and ‘intellectual property’: Poor nations and drugs firms tussle over WTO patent provisions, 2001, http://www.un.org/ecosocdev/geninfo/afrec/vol15no1/15no1pdf/151aids8.pdf; Krithpaka Boonfueng, , Parallel Imports in Pharmaceuticals: Increase Access to HIV Drugs, Thailand Law Forum, http://www.thailawforum.com/articles/hivdrugs1.html 86 OJ L 135, 3.6 2003, pp 5-11 87 EU Commission, Working Document: Tiered Pricing for Medicines exported to developing countries, measures to prevent their re-importation into the EC market and tariffs in developing countries, 22 April, 2002 88 The US Government threatened South Africa and Brazil with trade sanctions since these countries grant compulsory licensing For more details, see Hans Henrik Lidgard and Jeffery Atik, Facilitating Compulsory Licensing under TRIPS in Response to the AIDS Crisis in Developing Countries, Legal Studies Paper No 2005-18, Loyola Law School, August 2005, pp 7-9, available at SSRN: http://ssrn.com/abstract=794228 17 developed countries through bilateral and multilateral agreements 89 As Smith stated, the former is sometimes invited to receive increased investment and other supports from the latter on the stipulation that the former accepts a strict patent protection 90 The above-summary of arguments reflects the endless controversy over the effects of parallel trade in pharmaceuticals Still, the following conclusions may be made: To some extent, a consensus is found on some questions: (i) parallel imports of pharmaceuticals may lead to a reduction in average prices for the goods in importing countries; (ii) parallel trade in pharmaceuticals may reduce the incentive for investment in R&D for new products; and (iii) counterfeit and low quality pharmaceuticals have greater market access in parallel trade accepting countries Adoption of parallel trade in pharmaceuticals leads to two-sided effects Besides its benefits, countries that adopt parallel trade of pharmaceuticals may receive some detriments at the same time by virtue of this option Parallel trade in patented pharmaceuticals in developing countries: Do the benefits outweigh the costs? In order to assess accurately and sufficiently the impact of parallel trade in patented pharmaceuticals, we must consider the very specific social and economic context that the policy applies to The answer to this extremely challenging question can only be arrived at by acknowledging that high prices and low availability are the most widely recognized characteristics of pharmaceuticals in developing countries The answer is two sided: in the short or/and medium run, the benefits countries obtain from parallel trade in pharmaceuticals exceeds the costs they may pay for the application of the policy 91 However, in the long run consumer welfare tends to be lower First, parallel imports of patented pharmaceuticals help to solve the most serious health concerns of developing countries They are: reducing the price of pharmaceuticals; increasing the availability of pharmaceuticals; fostering imports in order to sever goals of export; fostering parallel exports; increasing the capacity of domestic manufacturers; and improving the population’s material and spiritual life Parallel imports can be used by domestic producers to access basic inputs at lower prices than those charged locally by IPR holders 92 Potentially, consumers may gain much from parallel imports of pharmaceuticals By increasing the options for alternative supplies of products, parallel imports permit consumers access to the products they need from different 89 Two typical examples are the trade agreements between the US and Southern African Custom Union (SACU) and the European Partnership Agreements (EPAs) with African, Caribbean, and Pacific (ACP) countries For more details, see Ellen F M ‘t Hoen (2009), supra note 24, p 71; Abbott, Fredrick M and Reichman, J H., Access to Essential Medicines: Lessons learned since the Doha Declaration on the TRIPS Agreement and Public Heath, and Policy Options for the European Union, Report to the DirectorateGeneral/External Policies for the European Union, 2007 90 Smith, R D., Correa, C and Oh, C., supra note 78, p 688 91 Matthew D Adler and Eric A Posner (editors), Cost-Benefit Analysis: Legal, Economic, and Philosophical Perspectives, (The University of Chicago Press, 2001), p 17 92 Duncan Matthews and Viviana Munoz-Tellez, supra note 12 18 markets at lower prices than those charged in the local market 93 Hospitals, pharmacies, and health insurance companies can potentially lower the price at which they can acquire pharmaceuticals as a result of the lower prices from parallel import sources Regarding retailers, wholesalers, and traders, parallel imports allow them to obtain IPR protected pharmaceuticals directly from multiple overseas sources This may offer better prices to consumers than the prices charged by the local authorized distributors Second, parallel trade in patented pharmaceuticals has advantages in comparison with other solutions As aforementioned, TRIPS provides several options 94 to countries to solve the questions of high pirce and low availability of pharmaceuticals such as compulsory licensing, 95 parallel imports, 96 and production of generic drugs under “Bolar” provisions 97 Benefits from these solutions vary for countries dependent upon their technological development and the capacity of their domestic pharmaceutical industry However, generally speaking, parallel trade in pharmaceuticals demonstrates benefits for many countries as a good alternative In order to apply the solution of compulsory licensing, countries must meet the strict conditions listed in TRIPS Article 31 and have a pharmaceutical production capability 98 Most developing countries have trouble coping with the difficulties of insufficient capacity of technology and raw materials used for producing drugs when compulsory licensing is authorised and production of generic drugs is allowed Many developing and least developed countries not have a generic drug industry and thus, may have to rely on imports Furthermore, almost all countries in the world regulate the prices of pharmaceuticals particularly of patented pharmaceuticals, through review mechanisms or cost-reimbursement limitations or through administratively fixed cost-plus prices 99 This policy instrument is not prohibited under TRIPS India, for example, has established a cumbersome, and relatively inefficient, system of administrative price controls However, the cost of effectively administering 93 “Econometric analysis finds that parallel imports significantly reduced manufacturing prices, by from 12 to 19 percent.” Mattias Ganslandt and Keith E Maskus, Parallel Imports and the Pricing of Pharmaceutical Products: Evidence from the European Union, The Research Institute of Industrial Economics (Sweden), Working Paper No 622, 2004, Abstract See also Human Rights Council - United Nations, Promotion and Protection of All Human rights, Civil, Political, Economic, Social and Cultural Rights, Including the Rights to Development, A/HRC/11/12, 31 March 2009, p 16 94 These options based on TRIPS provisions on exceptions and limitations to patent rights See WIPO, Standing Committee on the Law of Patents (13th Session, March 23-27, 2009), Exclusions from Patentable Subject Matter and Exceptions and Limitations to the rights, SCP/13/3, available at http://www.wipo.int/edocs/mdocs/scp/en/scp_13/scp_13_3.pdf Regarding use of TRIPS provisions on exceptions and limitations to patent rights in pharmaceutical sector (namely compulsory licensing, parallel imports, and generic drugs), see WHO, supra note 58, pp 29-33 95 TRIPS Article 31 permits WTO Members to issue compulsory licensing “in the case of a national emergency or other circumstances of extreme urgency or in cases of public non-commercial use” with a series of conditions must be satisfied listed in this article 96 TRIPS Article 97 “Bolar” provisions (See Roche Prods Inc v Bolar Pharmaceutical Co., 733 F.2d 858 (Fed Cir), cert denied, 469 U.S 856 (1984), permit the manufacturers of generic pharmaceuticals to use the technology of a patented pharmaceutical to perform work that would assist in the marketing or regulatory approval of the generic product, while the patent is in force This helps the generic producer to market and manufacture their goods as soon as possible after the patent expires 98 WHO, supra note 58, p 31 99 One major exception is the US 19 such a system may well outweigh the benefits Reference pricing systems may lead to uniformly higher global prices and strictly enforced regulation could lead to shortfalls in the availability of essential medicines 100 It should be stressed that parallel imports only cannot help to address the concerns, but these solutions should be combined for the best benefits 101 Third, negative effects of parallel trade of patented pharmaceuticals may be lessened Admittedly, parallel trade of pharmaceuticals contains costs to developing countries, particularly the problems of counterfeit, low quality of pharmaceuticals, a shortage of pharmaceuticals in case of parallel exports, and pressures on unreasonable pressure and reciprocal conditions from developed countries Nevertheless, these effects may be limited by using the tools of policy, law, and technology recommended in the next section Fourth, adoption of parallel trade of patented pharmaceuticals is to obtain benefits by parallel exports of the products The rationales of parallel exports of pharmaceuticals in developing countries are: (i) although most developing countries are unable to lunch any systematic pharmaceutical export system, a handful of them with capacity to produce the goods for export (e.g., China, India, Thailand, Egypt, Brazil, Mexico, and Argentina); 102 (ii) other developing countries as importing countries benefit from parallel exports from larger developing countries (recently, India is proved as an important source of low-cost drugs for other developing countries) 103; and (iii) the exporters of developing countries still “require imports of finished product, intermediates or API(s) [active product ingredients] to provide this export base.” 104 Finally but yet significantly, parallel trade in pharmaceuticals benefits the entire global community Increasing access to essential pharmaceuticals for communicable diseases, such as drugs for the treatment of HIV/AIDS, tuberculosis, and malaria, benefits not only developing countries but also the rest of the world Undoubtedly, “[t]he more available affordable drug treatments are the less risk of infection world-wide.” 105 Conclusion and implications for developing countries The recent trend of parallel trade of patented pharmaceuticals shows a non-stop activity and an ongoing debate While parallel trade in patented pharmaceuticals has advantages for developing (and least developed) countries, it is strongly opposed by pharmaceutical 100 J Watal, Access to Essential Medicines in Developing Countries: Does the WTO TRIPS Agreement Hinder It? Science, Technology and Innovation Discussion Paper No.8, Center for International Development, (Harvard University, Cambridge, MA, 2000) 101 Regarding this argument, see JC Cohen, M Gyansa-Lutterodt, K Torpey, LC Esmail, and G Kurohawa, supra note 10 102 Warren Kaplan and Richard Laing (2005), supra note 34; Keith E Maskus (2005), supra note 34 103 See Bhaven N Sampat, Accumulation of Capabilities in India Pharmaceuticals and Sofware (in Hiroyuki Odagiri, Akira Goto, Atsushi Sunami, and Richard r Nelson, Intellectual Property Rights, Development, and Catch-up: An International Comparative Study, Oxford University Press, 2010), pp 366-369 104 Warren Kaplan and Richard Laing (2005), supra note 34 105 Krithpaka Boonfueng, supra note 85 20 multinationals that are, for the most part, located in developed countries Therefore, the most critical task currently facing the world is to work to solve the urgent health care needs of poor countries while continuing to boost costly and risky investments for R&D for innovative drugs for epidemic diseases as stated in a very recent report on pharmaceutical policy: Policy markers […] have to balace pressures from the public health side to ensure low-cost supplies of high-quality drugs against the industry side, which wants to ensure profitable growth 106 In such a situation, solutions may only be obtained from compromises between developing and developed countries 107 Following from the approach of compromise, the following proposals should be taken into consideration by both developing (and least developed) countries in order to utilize parallel trade in pharmaceuticals as a useful tool for access to essential medicines, combating epidemic diseases and encouraging the establishment of national pharmaceutical industries Fostering parallel imports of pharmaceuticals for short or/and medium terms Reducing the negative effects of parallel imports by improving: (i) law and enforcement mechanisms against counterfeit pharmaceuticals (interagency cooperation, training, and bilateral meetings with trade groups should be taken into account); 108 (ii) law and technical systems for quality management of parallel imported pharmaceuticals; and capacity building to aid officials and agencies in combating counterfeit and low quality pharmaceuticals Preventing parallel imported pharmaceuticals from being re-exported to countries of origin Using the advantages of parallel imports to build up local pharmaceutical industries, particularly by use of raw materials to produce medicines and reverse engineering pharmaceuticals Fostering, while controlling parallel exports in order to avoid shortages of domestic pharmaceutical supplies Encouraging bilateral agreements to avoid and eliminate unreasonable pressure and conditions from other trading partners arising from an adoption of parallel trading in pharmaceuticals 106 Andreas Seiter, A Practical Approach to Pharmaceutical Policy, The International Bank for Reconstruction and Development/The World Bank, 2010, p 71 (words omitted) 107 Moreover, some signals of concessions have presently seen from pharmaceutical companies “[They] are beginning to accept the reality that patent protectionism and continued confrontation with proponents of pro-access policies will not work [Therefore, they are making] “concession to promote access to medicines [in developing countries].”107 These are good signs for developing countries to open further negotiations See Poku Adusei, Exploiting Patent Regulatory “Flexibilities” to Promote Access to Antiretroviral Medicines in Sub-Saharan Africa, The Journal World Intellectual Property, August 4, 2010, p (words added) Examples of the concession are listed in Boseley, S., Drug Giant GlaxoSmithKline Pledges Cheap Medicines for World’s Poor, The Guardian, 2009, available at http://www.guardian.co.uk/business/2009/feb/13/glaxo-smith-kline-cheap-medicine 108 Solutions for combating counterfeit pharmaceuticals may be learnt from the efforts of the USPTO in fighting piracy and counterfeiting in China See Robert Jameson, James Chin, Frank Peo, Luis Gonzales and Daniel Lorence, Using IP Law as a medical patient safety tool : efforts from the US and China, Intellectual Property Management, Vol 3, No 2, 2009, pp 155-168 21 Combining parallel trade with other alternatives that comply with TRIPS (such as compulsory licensing and the production of generic products) and national technological development as well as capacity of domestic pharmaceutical industry, in order to obtain the short and medium term objectives of lowering pharmaceutical prices, increasing access to essential medicines, combating epidemic diseases and a long term strategy of establishing a developed domestic pharmaceutical industry For this long term goal, “transfer of know-how and technology from the industrialized world is required.” 109 * Nguyen Nhu Quynh, LL.B (Hanoi Law University, Vietnam), LL.M (Lund University, Sweden), is a lecturer in Intellectual Property Law and Civil Law of Hanoi Law University, and a PhD candidate of Law Doctoral Joint Training Program between Sweden and Vietnam This article is partially excerpted from her dissertation titled “Trademark exhaustion and Proposals for an Improvement of Vietnamese Trademark law.” ** I would like to emphasize my special thanks to Prof Hans Henrik Lidgard (Faculty of Law, Lund University, Sweden) and Dr Nuno Pires de Carvalho (Acting Director of Intellectual Property and Competition Division, World Intellectual Property Organization, Switzerland) for their contribution to this article 109 Hans Henrik Lidgard and Jeffery Atik, supra note 88, p 10 22 23 ... effects of parallel trade of patented pharmaceuticals on developing countries A short cost-benefit analysis of parallel trade of patented pharmaceuticals for developing countries is made in Section... pharmaceuticals and special attention must be paid to domestic demand as well as trade relations in respect of parallel exports of pharmaceuticals Legal framework for parallel trade of pharmaceuticals From. .. developing countries Parallel trade in patented pharmaceuticals, to a certain extent, has had an impact on the price of pharmaceuticals; the availability of pharmaceuticals; patent holders’ profits and