Patents, Parallel Imports and Local Production

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Patents, Parallel Imports and Local Production

• Intellectual Property Rights and Trade
  Facilitation, 14 May 2003
• Christopher Heath, Max-Planck-Institute, Munich

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Topics

• The Function of Patents
• Exhaustion and Parallel Imports
• Pharmaceuticals and Parallel Imports
• Principle of Territoriality
• TRIPs, Doha and Parallel Imports
• Territoriality, Local Use and Tech Transfer
• TRIPs and the Local Use Requirement
• Patents, Free Trade, Developing Countries

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The Function of Patents

• Patents confer a monopoly on the patentee in
  order to exclude others from using the patented
  invention.
• The inventors reward is the possibility of
  making a one-time profit for each item sold under
  the patented technology.
• Patents do not confer rights over distribution
  channels.

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Exhaustion and Parallel Imports

• Once a patented product has been marketed under
  monopolistic conditions, the patentee has
  received his due award.
• Because of this, the patentees rights do not
  extend to further acts or marketing This is the
  doctrine of exhaustion or first sale.
• Common law countries apply contractual rules to
  reach a similar result.

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Exhaustion and Parallel Imports II

• It is disputed to what extent the exhaustion
  doctrine applies in the international context.
• Parallel Imports refer to original goods imported
  through channels other than those stipulated by
  the manufacturer.
• International exhaustion is a prerecquisite for
  the lawfulness of parallel imports of patented
  products.

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Exhaustion and Parallel Imports III

• Some Common Law allow parallel imports of
  patented products if the manufactuer has not
  placed any restrictions on the goods (implied
  licence). Easy to verify.
• Other countries allow parallel imports where the
  goods have been marketed by the patentee in the
  exporting country. Relatively easy to verify.

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Exhaustion and Parallel Imports IV

• Many industrialised countries do not allow for
  parallel importation of patented goods on
  arguments that are not very convincing.
• In this authors view, parallel imports should be
  allowed where the patentee could market the goods
  in the exporting countries under monopolistic
  conditions of a free market (i.e. a patent right
  and no price control).

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Pharmaceuticals and Parallel Imports

• Permitting parallel imports of pharmaceuticals in
  meant to secure the products at lowest world
  prices.
• Pharmaceutical companies favour a separation of
  markets and argue that otherwise, products could
  not be offered more cheaply ín developing than
  developed countries.

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Pharmaceuticals and Parallel Imports II

• The above argument implies that products sold to
  developing countries are cheaper, which is not
  always the case (e.g. S. Africa)
• Seperating markets contravenes the spirit of free
  trade unless there are convincing reasons to the
  contrary.
• In the case of patents, these can be price
  controls, compulsory licences or the absence of a
  patent right in the exporting country.

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Parallel Imports and Pharmaceuticals III

• Some argue that donating drugs to developing
  countries at cheap prices should be equalled to
  cases of compulsory licenses.
• Instead of lamenting exportation of cheap ph.
  From developing countries, producers should
  secure distribution chains that bring drugs to
  those in need. This effectively prevents
  exportation.

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The Principle of Territoriality

• The principle of territoriality in Art. 4bis
  Paris Convention has sometimes been invoked to
  argue against international exhaustion.
• Art. 4bis concerns the existence of a right,
  rather than its exercise for certain, specific
  products. Exhaustion refers to the right in a
  certain product, not the patent as such.

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TRIPS, Doha and Parallel Imports

• Surprisingly enough for a free trade agreement,
  TRIPS has left the issue of exhaustion and
  parallel imports open.
• The November 2001 Doha Declaration confirms that
  countries are free to pursue whatever policy they
  want regarding exhaustion regimes.

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Territoriality and Local Use

• Historically, some countries required the
  patentee to domestically work the patent lest
  it be forfeited (e.g. France). Even importation
  had that consequence.
• The Paris Convention in Art. 5A(1) makes
  forfeiture the exception, but acknowledges the
  local working requirement and the right to grant
  compulsory licenses otherwise.

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The Justification of Local Use

• The German academic Josef Kohler justified the
  use requirement as follows
• One may not use a monopoly to suppress others
  without having the public benefit from the fruits
  of such economic gains.
• Compulsory licences, while often discussed, are
  rarely applied and act more as a threat than a
  source of supply.

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Local Use and Technology Transfer

• Particularly developing countries resent the idea
  of having to grant patents to foreign applicants
  without the patent being domestically worked.
  Only local use leads to an importation of the
  necessary know how to actually benefit from the
  invention. Thus, local use acts as an incentive
  to the transfer of technolgy.

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TRIPS and Local Use

• The TRIPS Agreement in Art. 25 equals local use
  and importation. Thus, rather than use the patent
  domestically, the patentee may as well supply the
  market by imported products.
• For reasons as explained above, developing
  countries resent this rule, and some (Brasil,
  India) explicitly provide the contrary.

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Patents, Free Trade and Developing Countries

• In order to be acceptable to developing
  countries, the patent system needs to be
  supportive of domestic industry and economy in
  general.
• Of the about 103.000 PCT filings in 2001, only
  3.000 originated from developing countries,
  calling into question the benefits of a patent
  system for developing countries.

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Patents, Free Trade and Developing Countries II

• Developing countries have become members to
  WTO/TRIPS in order to obtain export opportunities
  to developed countries.
• International exhaustion applied world-wide would
  be the logical consequence in order to pursue the
  above interests.
• Side-effects should be countered by
  co-operation with pharmaceutical companies rather
  than by calling the principle as such into
  question.

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Patents, Free Trade and Developing Countries III

• The working requirement as such is not called
  into question by international agreements.
• Equalling importation to local working is
  consequent for a free-trade agreement, yet
  dis-regards the fundamental principle that patent
  mopolies should be beneficial to the economy that
  grants such rights.

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Patents, Free Trade and Developing Countries IV

• In order to strengthen the use requirement, the
  possibility of granting compulsory licences
  should be extended to third parties in other
  countries even though the requirements of such
  licenses may not be present there. CH