By Kevin E. Noonan —

The economic and political realities (both at home and abroad) are beginning to be felt with regard to intellectual property protections for Western companies in poor and developing nations, as evidenced by changes to American trade policies announced recently (see "Worldwide Drug Pricing Regime in Chaos").  Specifically, the Bush administration has agreed with Congressional negotiators to reduce the extent to which the U.S. government uses its influence in international trade to encourage (some would say coerce) foreign governments to enforce patent protection for drugs protected by patents in their home countries.

The new agreement is limited at present to three CAFTA countries: Peru, Panama, and Columbia.  However, industry experts are concerned that this is the beginning of a trend, as reported by Sarah Lueck in The Wall Street Journal today (see "In Trade Deal, a Shift on Generics"; full article only available to
subscribers).  Billy Tauzin (at left), president of the Pharmaceutical Research and Manufacturers of America (PhARMA), was quoted in The Journal as accusing the administration of "permit[ing] the weakening of intellectual-property protections in these agreements."  Mr. Tauzin attributed this turn of events to the administration’s desire to maintain continuing trade authority from the Democratic Congress, and being thus willing to capitulate to the less pharma-friendly environment existing since the November elections that swept the Democrats to their majority.

The changes in the administration’s approach are subtle but meaningful.  One is that the administration will leave to individual pharmaceutical companies the responsibility for preventing marketing of patent-infringing drug products in these countries.  Another is loosening the requirement for countries to extend patent protection to make up for delays in regulatory approval (similar to the patent term extension provisions of the Hatch-Waxman Act, codified at 35 U.S.C. § 156, in the U.S.); now countries "may," not "shall," afford such patent term extensions.

These changes signal that the administration is willing to adopt as formal policy what it has practiced informally for years:  accommodation to the realities that high drug prices are not sustainable in poor and developing countries.  Indeed, attempts to do so have led to affirmative actions, both at the national and international level, that have reduced the extent of patent protection for Western pharmaceuticals (see "The Law of Unintended Consequences Arises in Applying TRIPS to Patent Drug Protection in Developing Countries").  These developments are applauded by groups in the U.S., such as the Center for Policy Analysis on Trade and Health (CPATH) in San Francisco, which opposes "high" drug prices in poor and developing countries as well as for the poor and senior citizens in the U.S.  What neither these groups nor the administration have fully addressed is the balance that must be struck between providing affordable drugs to citizens and providing sufficient return on investment to fund the research, development, and regulatory vetting required to bring a new drug to market.  Solutions to this problem will be much more difficult, but it is clear that a continued patchwork approach will ultimately be unsatisfactory for drug companies and consumers alike.  Unfortunately, it is not likely that there will be the political will necessary to tackle these issues until after the current occupant of the White House leaves office.

    By Kevin E. Noonan —

James Surowiecki, who writes a weekly column called "The Financial Page" in The New Yorker magazine and is the author of "The Wisdom of Crowds," doesn’t like patents.  He complained about business method patents in his column in the July 14, 2003 edition of the magazine (see "Patent Bending"), and the Blackberry litigation in the December 26, 2005 issue (see "Blackberry Picking").  Once again last week (ironically, in the Innovators issue), Mr. Surowiecki voiced his displeasure with the current patent regime (see "Exporting I.P."), this time with regard to the intellectual property provisions of the Uruguay Round of the General Agreement on Tariffs and Trade (GATT), which resulted in the creation of the World Trade Organization (WTO).  This time, Mr. Surowiecki gets it about half right, but misses the current parlous state of affairs between Western demands for patent protection and the developing world’s capacity, both economic and political, to thwart these demands.

Mr. Surowiecki (at left) complains that the West has used membership in the WTO to coerce changes in national intellectual property laws in countries such as Korea for patents and copyrights (the two types of intellectual property relevant to drugs and entertainment products, respectively), and related provisions of more regional "free trade" agreements such as CAFTA (the Central American Free Trade Agreement).  The culprit:  American drug, software, and media companies at whose behest, according to Mr. Surowiecki, the American government has pushed for these international agreements.  Adopting the conventional wisdom (and its accompanying rhetoric), the "bad guys" are the greedy Western corporations and the innocent victims are the citizens of the poor and developing countries exploited by them.  Mr. Surowiecki acknowledges (as he must) that "some" intellectual property protection is necessary, but opines that "too much" stifles competition and limits "incremental innovation" (which he, like the U.S. Supreme Court in KSR Int’l Co. v. Teleflex Inc., fails to recognize as a valuable, patentable, and increasingly more important form of innovation).  He appears shocked that patent holding companies can use patents as "tools" to keep competitors from entering new markets, which is one of the principle uses of patents.  He also seems unhappy that consumers’ access is limited to new products by patents; although he recognizes that without patents such products would not exist in the first place, he is troubled that high prices can limit access to these drugs in poor and developing countries.

He cites a study by Josh Lerner of the Harvard Business School (co-author of the controversial anti-patent tract "Innovation and Its Discontents") that, over a 150 year period, strengthening patent laws had "little" effect on innovation (see "150 Years of Patent Protection").  This is a comforting soundbite, but on closer scrutiny it is meaningless without identifying which 150 year period was the basis for the data (and, by averaging over so long a period, may miss significant shorter-term occurrences that run contrary to his conclusions).  It also runs contrary to both anecdotal and empirical evidence regarding the importance of strengthening patent law over the past 25 years in the U.S. (see "The Continuing Value of Biotech Patenting").  During this period, the impending decline of the United States into second-class statehood of the mid-1980’s was converted to the economic lion of the 1990’s (until dashed by a combination of poor domestic and foreign policies and the terrorist attacks of September 11, 2001).

But Mr. Surowiecki is onto something when he criticizes the "one-size-fits-all" approach of Western governments towards the world intellectual property regime (see "A Modest Proposal Regarding Drug Pricing in Developing Countries").  His solution is to confer shorter-term patents in developing countries, something he justifies by analogy to the U.S. policy on labor standards in these countries (without attempting to explain the relevance of one to the other).  While this suggestion might have some merit,
Mr. Surowiecki has underestimated the capacity of poor and developing countries to overcome whatever predations Western intellectual property law concepts might have had on them.  They have done this, as discussed before in this space, by changing the rules using the very structure (the WTO) created to protect intellectual property worldwide.  Using a combination of national laws permitting either compulsory licensing, parallel importing, or both (at least with regard to patented pharmaceuticals), and changing WTO regulations by enacting the Doha Declaration of 2004 (which provided that any country having a "national medical emergency" was justified in granting compulsory licenses and leaving it up to member states to permit parallel importing), poor and developing countries are in a position both to enjoy whatever benefits are provided by WTO membership and to avoid the high drug prices that Mr. Surowiecki objects to.  Indeed, in many ways the circumstances of Western drug companies today are far worse than they were prior to the formation of the WTO more than ten years ago.  Then, countries that did not permit patenting pharmaceuticals (such as India and Brasil) also did not protect their local nascent generic pharmaceutical industries.  Now, thanks to the impetus provided by WTO membership, such countries have robust national generic pharmaceutical industries while still avoiding the costs associated with patent-protected Western drugs.

Having completely missed this important aspect of the politics and economics of worldwide intellectual property protection (at least for pharmaceuticals), Mr. Surowiecki reminds us that earlier in our history we were not so concerned with intellectual property protection, citing Alexander Hamilton‘s exhortations in his "Report on Manufactures" in favor of the theft of foreign technology.  While this certainly provides an ironic counterpoint to the situation prevailing around the world today, it also ignores that other famous founding father, Thomas Jefferson, who was the first Commissioner of Patents and whose support for the U.S. patent system is well known.  One would think
that if Mr. Surowiecki was going to hark back to the founding fathers in support of his arguments, he would at least have chosen the one about whom President Kennedy said (at a White House gathering of Nobel Prize laureates), "I think this is the most extraordinary collection of talent, of human knowledge, that has ever been gathered together at the White House, with the possible exception of when Thomas Jefferson dined alone."

For additional information regarding this and other related topics, please see:

• "Worldwide Drug Pricing Regime in Chaos," May 9, 2007
• "Not Getting It about Patented Drug Prices at The Wall Street Journal," May 6, 2007
• "A Modest Proposal Regarding Drug Pricing in Developing Countries," May 2, 2007
• "The Law of Unintended Consequences Arises in Applying TRIPS to Patented Drug Protection in Developing Countries," May 1, 2007
• "Abbott Agrees to Offer AIDS Drug at Reduced Price," April 12, 2007
• "No New Abbott Medicines for Thailand," March 14, 2007
• "More Compulsory Licensing in Thailand," February 1, 2007
• "Thailand Compulsory License Still in the News," December 18, 2006
• "Thailand Issues Compulsory License for AIDS Drug," December 6, 2006