[Ip-health] Penn State Study Urges 'Compensation-Based' Approach to Drug Patent Compulsory Licensing

[Mike Palmedo]

The author used to be a lawyer for Pfizer and BMS. Here's his bio:
http://java.smeal.psu.edu/peopleSearch/displayBio/display.jsp?tUserID=drc13

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http://www.eurekalert.org/pub_releases/2007-07/ps-suc071007.php

Contact: Wyatt DuBois
wdubois@psu.edu
814-863-3798
Penn State

Study urges compensation-based approach to drug patent compulsory licensing

A Penn State researcher argues that ambiguous international rules
outlining when and how governments may "break" pharmaceutical patents
may end up significantly reducing incentives for innovation while at the
same time failing to increase access to medicines.

In a new paper "Confronting Myths and Myopia on the Road from Doha,"
Daniel Cahoy, associate professor of business law at Penn State's Smeal
College of Business, argues that the problem is a lack of clarity in
compensation for patent owners. He suggests that a three-tiered approach
to compulsory license remuneration based on a country's individual
ability to pay would do much to resolve the predicament.

Current international law "has few limitations on which countries can
'break' patents simply to control costs, what circumstances create a
necessary condition, or even what level of remuneration is required,"
Cahoy writes. As a result, relatively wealthy nations may receive
unintended windfalls while least developed countries may continue to
struggle for access.

Under complex World Trade Organization rules, governments are permitted
to issue patent compulsory licenses, which allow countries to
manufacture cheaper versions of patented pharmaceuticals for
non-commercial use or in cases of health care emergencies. Just
recently, Brazil and Thailand have invoked these rules simply to lower
the cost of expensive AIDS and heart medications-a strategy that Cahoy
argues should be more controlled. In his paper, Cahoy identifies three
myths that have typically obscured workable remuneration rules:

Myth No. 1: Equitable compulsory licenses must offer savings from the
market. Cahoy argues that it is possible for patent holders to be
compensated at market prices even when compulsory licenses are invoked.
At the very least, he writes, market compensation should be integrated
into the debate.

Myth No. 2: Pharmaceutical companies should be indifferent to compulsory
licensing so long as "reasonable" remuneration is available. Compulsory
licensing supporters say that pharmaceutical companies should be
satisfied with payments that allow them to break even or turn a small
profit, but Cahoy argues that the equity in such a payment scheme is far
more elusive than many suggest.

Myth No. 3: Antitrust compulsory licenses provide a reliable royalty
benchmark. Cahoy argues that the low royalties attached to remedial
compulsory licenses for antitrust violations should not be used to set
remuneration levels in non-punitive cases in which the patentee has done
nothing wrong.

Taking these myths into account, Cahoy's proposed licensing regime keeps
innovation incentives intact, but also ensures that developing countries
have access to pharmaceuticals.

During public health crises, he argues for a three-tiered arrangement,
in which remuneration is based on the economic status of the country
issuing the compulsory license. Industrialized nations will be required
to pay full market price, even during a pandemic. Developing countries
would be allowed a limited free ride, with royalties based on the
individual country's ability pay. Finally, the world's least developed
countries would be granted the ability to issue royalty-free compulsory
licenses during health emergencies.

In cases outside of a public health crisis or antitrust violations,
Cahoy's approach establishes full market compensation as the default
policy for every country. He also identifies the adoption of a national
exhaustion rule, which would limit importation into non-licensing
countries, and manufacturing limits as important elements to any new
compensation system.

But, regardless of the approach that is ultimately adopted, Cahoy argues
that "a revision of essential international law is required to both
better enable access and shore up innovation incentives.

"Considering the problem in terms of remuneration rather than the legal
right to license, one can arrive at clearer, more equitable solutions,"
he concludes.

###

Cahoy is a patent attorney licensed to practice before the U.S. Patent
and Trademark Office and is admitted to the New York State Bar and
several federal courts. He has published numerous articles in academic
law journals on topics such as pharmaceutical importation and the
optimal policy for reforming the U.S. patent system, among others.

At Smeal, Cahoy specializes in the teaching and study of intellectual
property law, as well as related issues in technology law and general
business law concepts.

"Confronting Myths and Myopia on the Road from Doha" is forthcoming in
the Georgia Law Review. A draft is available online at
http://ssrn.com/abstract=989817.

--
Mike Palmedo
Research Coordinator
Program on Information Justice and Intellectual Property
American University, Washington College of Law
4910 Massachutsetts Ave., NW Washington, DC 20016
T - 202-274-4442 | F 202-274-0659
mpalmedo@wcl.american.edu