01 July 2012

Pharma Licensing

'Questioning the Frequency and Wisdom of Compulsory Licensing for Pharmaceutical Patents' [PDF] by Richard Epstein & F. Scott Kieff in 78(2) University of Chicago Law Review (2011) 71-93 comment that -
Many advocates for using compulsory licensing (CL) for pharmaceutical patents in developing countries like Thailand rest their case in part on the purported use of CL in the United States. In this Article we take issue with that proposition on several grounds. As a textual matter, the “commercially reasonable terms” language in Article 31 of TRIPS, even when qualified by the Doha declaration, prevents any host nation from using whatever royalties it wants in its CL arrangements, especially those that are below marginal cost. As a theoretical matter, we argue that the basic presumption in favor of voluntary licenses for intellectual property (IP) should apply in the international arena, in addition to the domestic one. In the international context, voluntary licenses are of special importance because they strengthen the supply chain for distributing pharmaceuticals and ease the government enforcement of safety standards. Next, this Article analyzes several of the key illustrations of purported CL for drug patents in the United States and shows that the use of CL elsewhere deviates in material ways from the standard US practices. These are the compulsory copyright licenses for music, the limited statutory exemptions for pharmaceuticals and medical procedures, the award of damages instead of injunctions after eBay Inc v MercExchange, LLC, government takings, and the use of compulsory licenses in antitrust settlements. Whatever the ultimate desirability of these American doctrines, none of them seeks to reduce the payment on licenses to the marginal cost of the licensed goods. Any need to help poor people gain access to vital drugs should not rely on CL, but instead should rely on tools precisely aimed at that purpose, including direct government purchases of patented drugs from their manufacturers at negotiated prices.
In criticising the "frequency of purported CL now in use in the United States" Epstein & Kieff question claims that US compulsory licensing falls into five categories -
  • broadcast licenses, 
  • limited statutory exemptions for pharmaceuticals and medical procedures, 
  • federal court cases that deny injunctive relief, 
  • federal or state sovereign immunity and associated takings, and 
  • antitrust enforcement proceedings. 
They argue that  "these practices should not be viewed as instances of CL" and that "the purported CL now being conducted in the United States is distinguishable in key respects from the CL used in Thailand for pharmaceutical products" -
A. Broadcast Licensing 
The US regime of compulsory licensing of copyrighted songs (which has its own problems) is worlds apart from pharmaceutical CL. It is also important to note that this system is not intended to displace a successful system of voluntary licenses because of unhappiness with the prices charged. Rather, this use of CL is a response to the need to compensate holders of songs that many parties use in the ordinary course of business. Each infringement is small, but the sum of all infringements is large. CL thus functions as a transaction cost–saving device that permits the rapid dissemination of copyrighted material. The prices of these licenses are, moreover, not determined by the fiat of an interested government party, but rather are subject to elaborate industry-wide negotiation systems that are intended, in part, to secure a fair return for the holder of the IP. Expropriation and governmentally coerced wealth transfer are not part of this system. With that said, a CL framework may not be efficient so long as copyright holders can pool their resources for sale. At that point, antitrust issues can emerge, but these can be partly obviated by allowing all parties in the pools to license outside of the pools — an option, of course, that is never available in CL systems. 
B. Limited Statutory Exemptions for Pharmaceuticals and Medical Procedures 
The application of CL in the context of pharmaceuticals and medical devices also needs some attention. On the negative side, CL systems often block the creation of efficient modes of voluntary sale, such as the reagent freezer programs that private firms have long used to supply patented biological reagents to basic research scientists. This approach has resulted in transaction costs for the scientists that are lower than those of purchasing a can of soda from a vending machine. Pharmaceutical products simply do not present the high-volume and low-value settings where US copyright CLs make their appearance. 
On the positive side, CL supplements market efficiency when, to use Joseph Sax’s useful distinction, the government acts as an arbitrator of private disputes and not an entrepreneur acting for its own benefit, in which case its motives should be treated as more suspect. For example, the Hatch-Waxman Act excludes from liability the use of medical devices reasonably related to obtaining FDA approval. The Hatch-Waxman Act also implements a carefully wrought quid pro quo whereby generic pharmaceutical manufacturers receive the benefit of a limited experimental-use exception to ordinary patent liability in exchange for which the original patentee, usually a branded pharmaceutical manufacturer, gains an extension of up to five years in patent life to offset the time that the patented pharmaceutical is subject to regulatory review before the FDA. This tradeoff ushered in huge new investments in pharmaceuticals, by both major companies and new boutique firms. In contrast, the Thai CL approach offers no benefit at all to those who invested in commercializing the patented drugs. 
The Medical Procedures Act of 1996 (MPA) is similarly distinguishable from the Thai CL approach. The MPA removed all remedies by way of damages, injunctions, and attorneys’ fees “with respect to a medical practitioner’s performance of a medical activity” against both the medical practitioner and any related health care entity. The MPA is both general and prospective. It does not apply to a single patent whose validity had already been judicially upheld. Nor does it bar all remedies against all possible defendants. Instead, the MPA explicitly reserves ordinary damages actions against the various firms (who are not health provider–related entities) that actively promote these remedies for use by surgeons, in order to secure substantial profits for themselves. Thus, the MPA rests on an efficiency justification not available to the Thai CL, concentrating litigation against those few institutional promoters who consciously violate the patents while knocking out infringement actions against isolated physicians who might not even know that any patented procedure was involved at all. The Thai CL approach lacks this saving grace, as it eliminates all remedies against all defendants. 
C. Denial of Injunctive Relief 
The next purported example of CL in the United States relates to the 2006 Supreme Court decision in eBay Inc v MercExchange, LLC. This case displaced the traditional rule for patent disputes, under which “courts will issue permanent injunctions against patent in- fringement absent exceptional circumstances.” In its place, the Supreme Court substituted a four-factor test to decide between damages and injunctive relief: 
A plaintiff must demonstrate: (1) that it has suffered an irreparable injury; (2) that remedies available at law, such as monetary damages, are inadequate to compensate for that injury; (3) that, considering the balance of hardships between the plaintiff and defendant, a remedy in equity is warranted; and (4) that the public interest would not be disserved by a permanent injunction.
In practice, this new test is both more complex and less protective of property than the earlier rule. Indeed, we jointly argued against its adoption for just those reasons. We urged that the clear boundary lines secured by relief facilitated the voluntary transactions needed to commercialize patented technologies. Only such strong protection prevents potential customers from taking an end run around the contract system by first violating a patent and then daring the IP holder to initiate a costly action to recoup damages, which are always difficult to value. We also noted that any systematic decline of injunctions would make it difficult for IP holders to enter into exclusive contracts with preferred trading partners. Recent lower court cases have partly cut back on eBay in response to these concerns, typically by awarding injunctions to parties that practice or license their IP technologies.  To be sure, injunctive relief always poses the risk that a single pat- ent holder can dominate an entire technology. But the denial of injunctive relief poses far greater risks. Patents are always issued for limited times. Their subject matter is properly confined to a particular product or process. It does not extend to an entire area of human endeavor. The telegraph was patented, but not total control over the electromagnetic spectrum. In addition, the Hatch-Waxman Act creates a narrowly crafted privilege for experimental use. 
For all its weaknesses, however, the eBay rule bears no resemblance to the Thai CL regime, which depends solely on government discretion. Here are the key differences. 
First, nothing in the eBay synthesis requires national governments that use CL to rely solely on the four eBay factors, or indeed even take them into account. For example, these governments need not abandon CL upon a showing that awarding only monetary dam- ages will cause a patentee irreparable injury. Nor must such a government consider the relative hardship facing the patentee. Nor need the government show how the CL advances the public interest—that is, the concerns of outsiders to the immediate dispute. In particular, CL may be imposed on a patent holder who is willing to commercial- ize the patented technology, either directly or through intermediates in the local economy or government. 
The relative hardship factor also points against injunctive relief for several reasons. National governments have powerful alternatives if CL is denied, while foreign corporations have no choice but to capitulate. Even withdrawing from a country does not preclude the local use of CL. And exercising that withdrawal option could require a patentee to forego lucrative sales of products not subject to CL. In contrast, the option of state purchase at bulk discounts, followed by resale at below-market costs to citizens in need, is always available. As a result, the four-part eBay test offers no justification for CL. 
In addition, CL has nothing to do with the specter of patent trolls that influenced the eBay decision (even though it was not presented on the facts of the case). Patent “trolls” are defined “as individual inventors who do not commercialize or manufacture their inven- tions.” Even that formulation excludes from the class of “trolls” any parties who are actively engaged in licensing negotiations, even if their first voluntary license has not been completed at the time of the defendant’s patent infringement. Every patent is a wasting asset, so few patent holders prefer to lurk around the weeds waiting to pounce on infringers when they could license their products today for a fee. It is foolhardy to require a patentee to rush into an unwise agreement solely to preserve its right of injunctive relief against third parties. What is more, in the high-profile cases of CL for pharmaceutical pat- ents, the patentees are never nonpracticing “trolls.” Instead, they are large companies producing and selling large quantities of the patented drugs. Since all new entrants need to receive state licenses to market their goods, the class of inadvertent infringers is likely to be empty. The distinctive features of strong pharmaceutical patents drive the risk of “trolls” in this area to zero and strengthen the case for injunctive relief. We know of no instances in which nations have used CL because foreign pharmaceutical companies refused to license, directly or through intermediates, their products in the host country. The sole source of dispute in CL cases is price. Ironically, any buying nation with monopolistic buying power undermines all conceivable claims of hardship that exist on the eBay scales. eBay brings the entire CL movement to a crashing halt.
They conclude that -
The efforts to justify CL for pharmaceutical patents are simply not tenable. The defenders of CL fail, first, to understand the power of the background presumption against CL. They then compound their initial mistake by ignoring the adverse effects that CL has even in the countries in which it is used. Last, they wrongly seek to bolster their tenuous case by appealing to established US practices for copyrighted songs, limited exemptions for pharmaceuticals and medical procedures, injunctive relief, government immunity and takings, and antitrust, all of which are driven by profoundly different concerns. CL for songs is an effort to make markets work in high-transaction settings that are nowhere to be found in pharmaceutics. Similarly, CL through the limited statutory exemptions for pharmaceuticals and medical procedures brings improvements to the set of market actors — patentees and users alike. Both the denial of injunctive relief for patents and the use of government takings are far from universal, and are backstopped everywhere by extensive damages that allow the patentee to recover some portion of its fixed costs. In contrast, the Thai CL is intended to drive prices as close to marginal cost as possible, if not lower. Finally, antitrust remedies presuppose an abuse of a dominant market position that the mere possession of a patent establishes. 
It is possible to have serious reservations about some aspects of the American legal synthesis and to still recognize that its breaches in the property wall pose none of the dangers associated with the use of CL in developing countries. The Thai CL was a matter of political fiat, unrestrained by law. It sets a dangerous precedent that other nations should avoid, given that they have other sensible methods, in the form of direct and bulk purchases, to help their own vulnerable populations. Perhaps these reasons are now persuasive even to the Thai government, which has not extended its dubious CL approach beyond a few patents.