Amir Attaran's note on parallel imports and the GATT

[James Love <love@cptech.org>]

Subject: LEGAL NOTE: very important if you care about tiered pricing and parallel imports!
   Date: Thu, 16 Dec 1999 01:17:33 -0500 (EST)
  From: "Amir Attaran" <aattaran@essential.org>
    To: Multiple recipients of list IP-HEALTH <ip-health@essential.org>

Dear all,

At Jamie Love's invitation, I am writing to raise a serious trade law
question about parallel imports and tiered pricing.  Those of you advocating
tiered pricing, please read this carefully.

Let me begin with some definitions and a short view of the economics.
Tiered pricing (or market segmentation as it is sometimes called) is simply
the selling of the same drug, by the same manufacturer, at different prices
in different markets.  Parallel imports are imports of the same drug, by the
same manufacturer, from a low-price country into a high-price country, where
the parallel import undercuts the usual sale price.

When companies discuss tiered pricing as a potential solution to drug access
issues, they usually do so with the underlying assumption that parallel
imports must be banned.  The reason is obvious:  no company wants to
discount a drug in a poor country if this cheap drug can be parallel
imported into Europe or North America.  This could cost the companies a lot
more than the value of the discount in the poor country market.  Therefore,
companies will probably insist that countries make parallel importing
illegal before they throw their weight behind tiered pricing.

But can countries do this?  Can a country legally ban parallel imports?  The
answer to this is "maybe yes, maybe no", because there are two possible
interpretations of trade law.  Interpretation number one says that countries
MAY BAN parallel imports; interpretation number two says that they MUST
ALLOW parallel imports.  Incredibly, nobody knows for sure which
interpretation is "right" and which is "wrong".

This confusion arises because there is a conflict between two different WTO
agreements: the TRIPS, which you all know about, and the GATT, or "General
Agreement on Tariffs and Trade".

According to Article 6 of the TRIPS agreement, nothing in the agreement
affects what is called "exhaustion of rights" in a TRIPS dispute.
"Exhaustion of rights" is simply lawyer-talk for "a country's right to allow
or forbid parallel imports".  That right is assured, but only in the context
of a TRIPS dispute resolution.  Translated into simple English, then,
Article 6 means that IN A TRIPS DISPUTE, nothing turns on whether a country
has chosen to allow or forbid parallel imports.

I put the the words "TRIPS DISPUTE" in all caps because they are important.
They are a limitation on when a country may make a free choice to allow or
forbid paralell imports.  Query, then, what if the same issue of allowing or
forbidding parallel imports arises in a different kind of dispute, for
instance a GATT dispute?  Then perhaps Article 6 does not apply.

According to Articles 3 and 13 of the GATT, a country generally may not set
up a quota, whether explicit of couched in the form of a regulation, as a
trade barrier (I oversimplify a little).  An import ban is tantamount to a
quota.  Therefore, a country appears to not have a right to prohibit
parallel imports under the GATT, and if it does so, it hauled into GATT (not
TRIPS) dispute resolution where Article 6 of TRIPS is perhaps of no help.

So how do we square the TRIPS and the GATT?  Both are law, and both are
equally binding on countries.  The TRIPS says a country has the choice to
parallel import or not, as it wishes; the GATT says it must allow parallel
imports, whether it wants to or not.

At this writing, we do not know whether the TRIPS or the GATT is more
"correct".  We do not know because there has been no WTO dispute has yet
dealt with this conflict.  Until that happens, lawyers can only guess at
what the law really is.  The danger for us drug access campaigners is clear:
if we make it our strategy to push companies for tiered pricing, and in a
few years the WTO decides parallel imports are mandatory under the GATT, the
tiered pricing system we have fought for will fall like a house of cards!
This is a risk we better consider, BEFORE we invest heavily in the tiered
pricing strategy.

If you get the feeling that the WTO only works against campaigners, think
again, because it causes worry for the pharmaceutical companies too.  One of
their favorite pieces of corporate welfare is the "patent extension", to
give them market exclusivity beyond the usual 20 years of patent life.  A
patent extension on a blockbuster drug like Claritin can be worth billions
to a company!  However, a recent WTO challenge by Canada against the EU
argues that pharmaceutical patent extensions violate TRIPS because they give
special, and illegal, preference to the pharmaceutical industry (see
European Communities - Patent Protection for Pharmaceutical and Agricultural
Products, complaint WT/DS153/1).  If Canada is successful, as I think it
will be, then we will not be seeing large corporations grovel for patent
extensions any longer.  I imagine the WTO will hand down its decision in
2000 sometime.

That is enough law for today.  I hope this explanation has been clear and
helpful to all.

All the best,
Amir

=========================================================
Dr. Amir Attaran, LL.B.
Director, The Malaria Project
Center for Study of Responsive Law

CANADA (please try this first; time is GMT -8h):
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Tel and fax: (604) 258-7333

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Tel: (202) 387-8030   Fax: (202) 234-5176


-- 
James Love / Director, Consumer Project on Technology
http://www.cptech.org / love@cptech.org
P.O. Box 19367, Washington, DC 20036
voice 202.387.8030 / fax 202.234.5176