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The South African Medicines and Related Substances Control Amendment Bill and TRIPS

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Kara M. Bombach

excerpted from: Kara M. Bombach, Can South Africa Fight Aids? Reconciling the South African Medicines And Related Substances Act with the Trips Agreement, 19 Boston University International Law Journal 273-306, 276-280, 288-295 (Fall 2001)(166 Footnotes)

II. Analysis of the South African Medicines and Related Substances Control Amendment Bill.

A. The Purpose of the Bill

In response to the plague-like proportions of the HIV and AIDS epidemic in Africa, the South African government drafted The Medicines and Related Substances Bill of 1997. The Bill provides for several methods to improve access to HIV/AIDS drugs. The Bill's preamble sets forth the Bill's aim ". . .to provide for measures for the supply of more affordable medicines in certain circumstances . . ." Specifically, the Bill enunciates the Minister of Health's authority to issue compulsory licenses and to allow parallel imports. The Health Department has stated that by adopting the Bill, "the government aimed to provide a transparent and legal framework that would enable it to pursue its obligation to ensure access to affordable medicines while at the same time respecting its international obligations to honour intellectual property rights."

1. Compulsory Licensing

Section 15C of the Bill provides for compulsory licensing. Compulsory licensing is a method to override existing intellectual property protection by compelling the holder of a patent to grant licenses to local manufacturers who will in turn charge lower prices. Compulsory licensing would allow South Africa to manufacture its own AIDS drugs and to distribute them within South Africa at affordable prices. Through the use of compulsory licensing it is possible to reduce the price of a drug by ninety percent. This would be a substantial step forward for South Africa, the country subject to the highest-priced pharmaceuticals in the world. The WHO has stated, "compulsory licenses are the easiest and most effective way to increase the supply of products . . ."

2. Parallel Imports

Under Section 15(C)(b) the Minister of Health can prescribe parallel imports on medicines already registered in South Africa. Parallel importation is the importation of pharmaceuticals from third parties not authorized by the patent-holding companies. It allows South Africa to import a drug manufactured and sold at a lower cost elsewhere. In turn, the government is able to fulfill the supply that cannot be met under current pricing schemes. For example, if the South African government were to purchase Fluconazole (Diflucan) from the patent-holding pharmaceutical company it would cost approximately $4.10 per dose. On the other hand, the South African government could purchase the same drug from generic drug manufacturers in Thailand for $0.60 per dose. In a situation like this where prices vary greatly from country to country, parallel imports allow South Africa to lower drug prices, permitting more consumers to afford the medication they need to survive.

Parallel importation is closely linked to the principle of international exhaustion. The principle of exhaustion limits the patent holder's ability to recoup profits on a patented pharmaceutical to the first sale of that product. If a company sells a drug at a lower price to Thailand than to South Africa, Thailand can resell the drug to South Africa at that lower price. Because the patent holder's exclusive rights have been exhausted in the sale to Thailand, its interests would not be damaged. This can be a helpful tool for a developing nation's health policy. The government can decide to allow importation of the lower-priced products into its national market in order to increase access to drugs by providing them at more affordable prices.

B. The Bill and its Effect on Patent Rights in South Africa

The Bill gives the Minister of Health broad power. It essentially grants the Minister of Health authority to act outside the boundaries of existing South African patent law. For example, the existing law precludes parallel importation. The Bill seemingly reverses this provision by stating that "notwithstanding anything to the contrary contained in the Patents Act, 1978 . . . a medicine, which is imported by a person other than the person who is the holder of the registration certificate . . . may be imported."

Moreover, the allowance for parallel imports eliminates the requirement that a medicine be separately registered. Essentially, a competing drug produced by a generic manufacturer in another country can enter the South African market without going through the South African patent registration system. In other words, a medicine may be imported from another country and sold in competition with a locally registered product. The language of this provision is broad and could conceivably allow importation that would otherwise violate South African patent law. Drug manufacturers whose drugs comprise the parallel imports may reap the benefits of competing in the South African market without having to apply for patent registration there.

In spite of the apparent preemption of some provisions of South African patent law, it will be shown in Part IV that the Bill does not, as demonstrated, violate any international intellectual property commitments under the TRIPS Agreement or under customary international law norms.

C. The Current Status of the Bill

In May 1997 the South African Parliament tabled the Bill. This occurred shortly after the South African Pharmaceutical Manufacturers Association and forty-one pharmaceutical companies, including South African companies as well as subsidiaries of European and United States companies filed a suit against the South African government in the Pretoria High Court. After the suit was filed, the government passed the South African Medicines and Medical Devices Regulated Authority Act ("SAMMDRA"). The lawsuit was stayed after the government passed SAMMDRA.

SAMMDRA repealed the disputed language of Section 15C of the Medicines and Related Substances Bill. SAMMDRA has since been rescinded on the basis of being "unworkable" under the auspices of former President Nelson Mandela. The South African courts have ruled Mandela exceeded his authority in rescinding SAMMDRA. Additionally, parts of the law itself were criticized by the Constitutional Court, which sent the law back to the Health Department for revision. In addition to resurrecting the Bill by dismissing SAMMDRA, the South African government is examining the Patent Act of 1978 as a replacement for section 15C of the Bill. The Patent Act permits compulsory licensing under certain circumstances. Whether the provision for compulsory licensing comes under the Bill or the Patent Act, however, does not affect South Africa's international obligations. Although the pharmaceutical industry appears to favor the Patent Act in place of Section 15(C), the ramifications of compulsory licensing are identical under TRIPS. TRIPS allows compulsory licensing under certain circumstances, regardless of either South African legislative embodiment.

(Pages 280-287 omitted)

IV. The Bill and its Extraterritorial Effects

A. The TRIPS Agreement of the World Trade Organization Uruguay Round

TRIPS embodies an effort to harmonize globally the intellectual property systems of WTO Member States. Some critics argue that, because TRIPS provides for worldwide patent protection, drugs become more expensive in developing countries.

At present there are 142 Member States of the WTO. Of the 142 WTO member states, approximately 100 are considered developing countries. Many of these countries did not provide patent protection for pharmaceuticals prior to accession to the WTO and adoption of TRIPS. Some developing countries, most notably India, provided protection only covering drug production processes while not covering protection of pharmaceutical products. Both of these approaches allowed developing countries to keep drug prices low.

TRIPS requires protection of pharmaceutical products as well as processes. It contains several provisions available to all Member States, which developing countries may utilize in order to obtain less expensive pharmaceuticals. Article XXXI allows member countries to participate in compulsory licensing. This licensing will be permitted only if the proposed user makes reasonable efforts to obtain authorization from the right holder of the patent. The proposed user must satisfy several other conditions, including making a showing that the authorization will only be used to supply the country's domestic market.

Article VI allows Member States to engage in parallel importation by specifically abstaining from the issue of exhaustion, thus allowing them to adopt whatever national policy on the issue of exhaustion they deem appropriate. By permitting Member States to adopt the principle of international exhaustion of patent rights, Member States' governments could allow parallel imports.

1. National Emergency or Extreme Urgency

The Article XXXI requirement for gaining right holder authorization may be waived "in the case of a national emergency or . . . extreme urgency." South Africa has not officially declared the AIDS crisis a national emergency. It is not evident, however, that TRIPS requires a legal declaration of a "state of national emergency." Specifically, TRIPS provides for waiver "in the case of a national emergency or . . . extreme urgency." Moreover, this waiver need only be invoked if the country does not make "efforts to obtain authorization from the right holder on reasonable commercial terms" and that such efforts are not "successful within a reasonable period of time." South Africa could participate in negotiations with the patent-holding pharmaceutical companies, which, up until this point, it has been hesitant to do. If no terms can be agreed upon, the South African government may still invoke Article XXXI in the absence of a declaration of national emergency.

The pandemic in South Africa may constitute a national emergency for purposes of TRIPS. The South African national economy will continue to shrink by one percent each year due to a disintegrating workforce. The life expectancy will drop from what would have been 70 years to below 50 years by 2010. These threats to the economy and population growth may even satisfy the threat to "peace and order" requirements for purposes of South African law.

If "national emergency" for purposes of TRIPS requires that the Member State declare a state of national emergency, then this case could at least qualify for the broader "circumstance of extreme urgency" language of Article XXXI. The rapid rate of infection and death in South Africa is recognized internationally as a case of extreme urgency.

2. Pharmaceuticals and TRIPS

Interestingly, the pharmaceutical industry played a large role in the drafting of TRIPS. In this regard, the intellectual property and policy concerns and perspectives of Member States were not necessarily accurately reflected in TRIPS. However, in the larger scheme, developing countries may have been willing to concede to these provisions, taking into account the benefits they hoped to garner from WTO membership.

On the other hand, TRIPS more closely approximates the stringent United States patent system. For instance, pharmaceutical processes and products were patentable in the United States prior to the TRIPS Agreement. The United States, under its more rigid patent regime, actually engages in practices such as compulsory licensing. In this sense, it is less likely that allowing these practices was a United States concession, since the United States already engages in these practices. However, in general, the United States would prefer a stricter set of rules in the WTO and may have conceded to lower standards. In fact, the WTO even proclaims that TRIPS is merely a "minimum standard" for intellectual property protection. TRIPS leaves a Member State free to set its national patent protection standards higher than the standards announced in TRIPS, and to enforce those standards in its territory. TRIPS does not, however, provide for States to demand higher national standards from other States, as the United States has done in this case.

3. Analysis of "Adequate Remuneration" under TRIPS

Article XXXI(f) of the TRIPS Agreement provides "the right holder of a patent shall be paid adequate remuneration in the circumstances of each case [such as compulsory licensing or parallel importing], taking into account the economic value of the authorization." The determination of remuneration will be subject to "judicial review or other independent review by a distinct higher authority in [the country engaged in compulsory licensing or parallel importing]." This language is broad.

One proposal for calculating adequate remuneration to be paid to the patent holder would be to determine the profits from a particular drug in South Africa that the company makes in a given year. This would reflect the normal amount of business done in South Africa. The South African government could then implement a system of compulsory licensing and parallel importing and pay the pharmaceutical companies their pre-system profits from sales in South Africa. In fact, South Africa currently faces the highest priced pharmaceuticals in the world. Therefore, it is conceivable that the government could actually pay less than the pre-system profits particularly in light of the fact that South Africa comprises two percent of the global profits but only one percent of the global market. Perhaps the remuneration could reflect South Africa's market standing at one percent of the global market as opposed to two percent, in effect, giving South Africa a fifty percent reduction.

B. Treaty Interpretation of TRIPS

The Vienna Convention on the Law of Treaties establishes that "[a] treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose." Therefore, in interpreting the TRIPS agreement, it is relevant to examine the text, the context and the object and purpose of the agreement.

1. The Text

The text of TRIPS Article VI explains that the agreement does not address the issue of exhaustion. Consequently, the text of TRIPS does not specifically address parallel importation. Rather, it leaves Member States to formulate their own national laws regarding exhaustion principles, and hence, parallel importation.

The text of TRIPS Articles XXX and XXXI explicitly allows for exceptions to patent rights, provided that "such exceptions do not unreasonably conflict with a normal exploitation of the patent and do not unreasonably prejudice the legitimate interests of the patent owner . . . ."

2. The Context

The context of TRIPS includes other WTO agreements, such as the General Agreement on Tariffs and Trade ("GATT"), which provides the legal framework for removing barriers to international commerce in goods and services.

The anti-protectionist measures of GATT do not directly apply to South Africa's effort to increase access to HIV/AIDS medicines. South Africa is not attempting to put tariffs on, or limit imports of, foreign-produced pharmaceuticals. In fact, the government would like to be able to import less expensive generics from countries like India. South Africa would actually like to increase imports of these drugs. Even if South Africa were to begin domestic production of generic equivalents of drugs, it is not clear that such production would hinder the importation of foreign-produced drugs. This is simply because there is currently very little importation. Since very few South African citizens can afford the foreign-produced drugs at the current high prices, overall demand for the foreign drugs is not likely to change.

As context for TRIPS, however, GATT includes language, which lends credibility to South Africa's attempt to implement the Bill to increase access to essential medicines. The relevant provisions would undermine any arguments by other countries or the pharmaceutical companies that South Africa is acting inconsistently with the provisions of GATT. Article XX provides for General Exceptions to the Agreement. Article XX(b) states that nothing in GATT "shall be construed to prevent the adoption or enforcement by any contracting party of measures: necessary to protect human, animal or plant life or health." Additionally, Article XX(j) states that nothing in GATT "shall be construed to prevent the adoption or enforcement by any contracting party of measures: essential to the acquisition or distribution of products in general or local short supply . . . ."

Additionally, the GATT Preamble reads: "Recognizing that their relations in the field of trade and economic endeavour should be conducted with a view to raising standards of living, ensuring full employment and a large and steadily growing volume of real income and effective demand, developing the full use of the resources of the world and expanding the production and exchange of goods . . . ." This language demonstrates the intention of GATT drafters to discourage protectionist behavior in order to maximize efficiency in the international marketplace. The twenty-year patent rights regime covering HIV/AIDS drugs looks more and more like an incidental protectionist mechanism. It is preventing public benefit of the drugs. At the same time, it is not clear that patent monopoly protection is actually driving the incentive for development within pharmaceutical companies, as the intellectual property system justification would require.

3. The Object and Purpose

Article VII and Article VIII of TRIPS enunciate the objectives and principles of the TRIPS agreement. The objectives outlined in Article VII call for the protection and enforcement of intellectual property rights to contribute to the "promotion of technological innovation . . . to the mutual advantage of producers and users . . . and in a manner conducive to social and economic welfare, and to a balance of rights and obligations." The Bill can be viewed as a mechanism to ensure intellectual property rights are protected and enforced in a manner conducive to social and economic welfare. Article VIII explains that Member States "may . . . adopt measures necessary to protect public health and nutrition . . . provided that such measures are consistent with the provisions of this Agreement." The Bill also represents a measure necessary to protect public health, in light of South Africa's public health crisis. Article VIII also highlights the potential need for appropriate measures, consistent with TRIPS, "to prevent the abuse of intellectual property rights by right holders." It is not impossible, given the present epidemic conditions in South Africa, that pharmaceutical company patent rights holders may be abusing their intellectual property rights in South Africa. The limited supply of drugs produced or imported into South Africa, and the exorbitant South African prices on HIV/AIDS drugs demonstrate abuse of intellectual property rights under present conditions.

C. Additional Problems with the United States Treatment of South Africa's Bill under Norms of Customary International Law

The United States position against South Africa, additionally, has no foundation in customary international law. Customary international law norms are generally inferred from state practice together with opinio juris, a state's sense of legal obligation. It is possible to infer from the collective state practice of interested states, accompanied by their sense of legal obligation that a customary international law norm has emerged. Moreover, treaties can play a role in the development of customary international law. Ratification of, or accession to, a treaty may be accepted as state practice. Finding opinio juris in such cases may be the more difficult inquiry.

The International Court of Justice has recognized three ways in which multilateral treaties can contribute to the development of customary international law norms. First, a treaty may codify already existing customary international law norms. Next, the treaty negotiation process itself may "crystallize" an emerging rule that has not yet attained the status of customary international law norm. Finally, states' behavior after conclusion of the treaty may evince state practice out of a sense of legal obligation.

Both the United States and South Africa are Member States of the WTO. Both countries were party to the treaty negotiations underlying TRIPS. Therefore, both states will be seen as bound by the terms of the treaty in the absence of treaty reservations or persistent objection. Similarly, the acts of both countries may shed light on the perceived legal obligations of WTO Member States.

A WTO Member State, the United States itself regularly issues compulsory licenses. Other countries have uncontroversial codified provisions allowing for compulsory licenses. The United States has not objected to such statutes in other WTO Member States such as France. This may evince United States acceptance of the practice. Also, the Paris Convention, which is incorporated by reference into TRIPS, provides: "Each country of the Union shall have the right to take legislative measures providing for the grant of compulsory licenses to prevent the abuses which might result from the exercise of the exclusive rights conferred by the patent . . . ." The incorporation of the Paris Convention may demonstrate that TRIPS is a codification of this preexisting customary international law norm. On the other hand, if, at the time of the Paris Convention, the rule was just emerging, state practice subsequent to the Paris Convention and prior to TRIPS along with negotiation of TRIPS may demonstrate the "crystallization" of this customary international law norm.

Another international organization, the WHO, a source of international consensus on public health issues, promotes compulsory licensing and the production of generic equivalents in the case of essential pharmaceuticals.

Likewise, the U.K. and other E.U. countries have extensive trade in parallel imports, a practice that is affirmed by the European Court of Justice. The United States and European countries, home to the largest pharmaceutical firms, are likely the WTO Member States with the greatest interest in protecting pharmaceutical profits.

The United States protest against compulsory licensing and parallel imports is not supported by past United States behavior, which has heretofore accepted these practices. Compulsory licensing and parallel importation in certain circumstances appear to have emerged as customary international law norms. For this reason, the United States cannot argue that these practices violate South Africa's customary international law obligations.

(Pages 295-306omitted)

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