UPDATE: Research Guide on TRIPS and Compulsory Licensing:

Access to Innovative Pharmaceuticals for Least Developed Countries

 

By Do Hyung Kim

 

Do Hyung Kim is a patent attorney at Core Wireless Licensing, Ltd. Mr. Kim earned his J.D. at the University of Houston Law Center and a B.S. in Electrical Engineering from the University of Texas at Austin. Prior to his matriculation at the University of Houston Law Center, Mr. Kim worked as a business intelligence consultant for PriceWaterhouseCoopers, LLP and IBM Corporation.

 

Published July/August 2016

See the Archive Version!

 

 

1.     Abstract

Innovative pharmaceutical companies have rapidly invented new medicines to fight against chronic conditions and notorious diseases such as AIDS that have plagued the worldwide population. Along with this innovation, however, emerged a lack of accessibility caused by pharmaceutical companies’ ever-rising drug prices that are prohibitive to the poorest countries, which coincidentally have some of the sickest populations.  While there are legitimate arguments to both sides on whether the increase in drug prices is a necessary evil,[1] no one can dispute the burdens it places on poor populations.

 

Even in the United States, many Americans have resorted to filling their prescriptions with drugs from foreign countries.[2]  In fact, prices for prescription medication are continuing to rise above the inflation rate.[3] Seeing as how the U.S. boasts one of the richest economies in the world, it is not surprising that one third of the worldwide population does not have any access to essential medication.[4]

 

This research guide will focus on legal and economic factors surrounding the global problem of gaining access to innovative drugs. The paper will begin with some background history of the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS), leading up to the most recent modification that was adopted in Hong Kong on December 18, 2005. This discussion is necessary to understand the obstacles against providing access to essential drugs despite the compulsory licensing provision that was passed specifically for that purpose: to help provide essential drugs to those that could not otherwise afford them. The analysis will then consider reasons that support and oppose expanding the compulsory licensing provision to hurdle those obstacles. The analysis will show that the benefits of providing essential medication outweigh the risks of lost capital gains and counterfeit drugs. Finally, the research guide will cite several solutions that have been suggested by others and propose further research on their feasibility.

 

2.     Background and History

 

2.1.   How TRIPS Formed a Marriage between Intellectual Property Law and the International Trading System

Prior to 1994, intellectual property law and international trade policies were essentially separate entities that were very limited in force and scope.[5]  The earliest treaties that related to intellectual property, namely the Paris Treaty and Berne Convention, focused primarily on preventing nations from enacting discriminatory intellectual property laws.  Trade negotiations revolved around tariff and trade barrier reductions.[6] In 1994, mounting pressure from the entertainment, pharmaceutical, and high-tech industries culminated in a major shift in international trade policy during the Uruguay Round of the General Agreement of Trades and Tariffs (GATT).[7] At its conclusion, the World Trade Organization (WTO)[8] was established to enforce international trade agreements and the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) was adopted.[9] 

 

So how did TRIPS marry intellectual property law with international trade regulations? Part I of the TRIPS Agreement reiterates adherence to the non-discrimination principles of GATT: “national treatment”[10] and “most-favored-nation.”[11] Under these principles, Part II adopted the following intellectual property agreements: Paris Convention,[12] Berne Convention,[13] Rome Convention[14] and the Treaty on Intellectual Property in Respect of Integrated Circuits.[15]  Parts III-V contained minimum requirements of intellectual property rights (IPRs), procedures, and mechanisms for dispute settlement.[16] 

 

Taking a step back, there are two Articles in Part I of the original TRIPS Agreement that particularly concern the pharmaceutical industry. Article 7 states that protection of intellectual property rights should be for the purpose of promoting innovation “in a manner conducive to social and economic welfare, and to a balance of rights and obligations.”[17]  However, Article 8 opens the door to the controversial issue of suspending intellectual property rights for the purpose of public health and socio-economic need.[18]  Furthermore, Part VI contained provisions that allowed flexible transition periods for lesser developed countries to come into compliance.[19]  Still, the original TRIPS agreement left many ambiguities as to when and how WTO members may circumvent intellectual property rights to gain access to essential drugs or whether holders of intellectual property rights could prevent subsequent import or export of their product once it they have placed it in the market.[20]  TRIPS essentially did three things: (1) required WTO members to subject themselves to a minimum standard of protection for IPRs in order to avail themselves of the benefits of GATT, (2) gave WTO jurisdiction for resolving disputes related to intellectual property, and (3) provided procedures and remedies for dispute resolution.[21]

 

2.2.  Evolution and Trend of TRIPS: The Doha Agenda

The key in evaluating the policy trend of TRIPS in relation to the pharmaceutical industry is to look through the lens of its Article 7 objective to balance two competing interests: promoting innovation of new drugs and providing access to these drugs.[22]  For example, nations with weak economies and public health crises want medication for their people while innovative pharmaceutical companies want to protect their temporary exclusive rights in order to recoup their investment and maximize profits. At that time, the original TRIPS agreement took on a utilitarian posture.  It placed more emphasis on promoting innovation than on providing access to essential drugs, thereby favoring member nations that enjoy the majority of pharmaceutical innovation.[23] Recognizing this inequity, the WTO decided to place more emphasis on public health. 

 

In 2001, the WTO Ministerial Conference officially initiated the Doha Agenda with a declaration [hereinafter Doha Declaration] that acknowledged the need to recognize a sovereign nation’s right to protect public health, even at the expense of intellectual property rights.[24]  Namely, the Doha Declaration affirmed a sovereign nation’s authority to grant compulsory licenses during national emergencies and to define what constitutes a national emergency.[25]  A country that was suffering a major epidemic could compel licensure for domestic production of patented medication that they could not otherwise afford.

 

Still, the Doha Declaration fell short of its objective to “promote access to medicines for all.”[26]  Even with a compulsory license, many countries with severe health epidemics did not have the means or capacity to manufacture drugs.[27]  Nonetheless, TRIPS required that the majority of manufacture and sales resulting from compulsory licensing must be limited within the domestic market.[28]  Furthermore, the license was non-assignable; a country in dire straits could not assign a compulsory license to a nearby country that had adequate capacity to manufacture and sell generic versions of the drug at an affordable price.[29]  Recognizing these shortcomings, the WTO met again in 2003 to continue negotiating on the Doha Agenda at the Fifth Ministerial Conference in Cancun.[30]  There, they passed the Implementation Decision which extended compulsory licensing provisions by temporarily removing limitations on exports of drugs under a compulsory license to countries that could not manufacture drugs themselves. [31]  This decision was adopted by the General Council in consideration of the Chairperson’s statement, in which he reassured the members that compulsory licensing is to be used in good faith and stressed the need to prevent diversion of supplied drugs.[32] 

 

In 2005, during a ministerial conference in Hong Kong [hereinafter Hong Kong Declaration], the General Council agreed to make the Implementation Decision permanent by amending TRIPS.[33]  Now, a country that is eligible for compulsory licensing but lacks sufficient drug manufacturing capacity can import drugs from an exporting member that is also operating under a compulsory license, subject to certain conditions.[34]  That is, the TRIPS Council must be notified before a cross-border compulsory license can be issued, but approval is not required. However, remedial measures to resolve conflicts from alleged abuse of the system remain vague.[35]  Thus, the TRIPS Council’s sentiment, with respect to their goal of striking a balance between the competing Article 7 interests, has shifted from favoring IPRs to favoring wider access to drugs for the benefit of public health.[36]  There are, however, uncertainties as to whether the amendment will achieve its purpose.

 

3.     Discussion Topics Under TRIPS and Compulsory Licensing

Despite the WTO’s tremendous efforts to create a diplomatic compulsory licensing system that improve access to prescription medicine, the latest TRIPS amendment did not resolve several existing issues and even created some new concerns.  Particularly troublesome are the lack of specific requirements in determining eligibility for compulsory licensing, risks of arbitrage and production of counterfeit drugs, and whether TRIPS, in its current construction, will actually help developing countries gain accessory to essential drugs.

 

3.1.   Ambiguities of Compulsory Licensing Requirements

On its face, the compulsory licensing provisions contain a number of vague terms that are intended to broaden the scope, but instead will most likely increase the transaction costs of assigning a valid compulsory license.  These ambiguities have been articulated by Vishal Gupta, who suggests some objective approaches in determining valid circumstances for compulsory licensing.[37] 

 

The problem is that the scope of eligible diseases, drugs, and nations are undefined.[38]  The lack of specificity was intended to give least developed countries flexibility to decide for themselves what constitutes a public health emergency and minimize delay in accessing essential drugs.[39]  However, it may actually create more controversy because any nation can, in theory, declare a public health emergency for questionable reasons to assign compulsory licensing for any patented drug.[40]  Furthermore, TRIPS requires countries utilizing compulsory licensing to pay “adequate remuneration” without specifying a method of calculation.[41]  Perhaps, lists of valid diseases, drugs, and nations that are calculated and updated annually by a nonpartisan body can prevent such tension.[42] 

 

3.2.  Risks of Arbitrage and Counterfeit Drugs

Arbitrage, also called “parallel trading” and “diversion” within the context of international trade, is a problem that manifests when a buyer purchases products at below market price and subsequently exports the products to another market where they are priced higher.[43]  In terms of economics theory, arbitrage essentially shifts surplus from the producer to the consumer. A good example of this practice occurs between Canada and the United States.[44] 

 

The general consensus is that pharmaceutical arbitrage poses a danger to innovation because it undermines already-existing efforts to provide affordable drugs through differential pricing and reduces the revenue needed to keep pharmaceutical research and development a profitable investment.[45] However, Kevin Outterson, J.D., has written a fantastic article suggesting that arbitrage in the pharmaceutical industry is not a serious threat to innovation, and may even benefit society by making drugs more affordable.[46] Unlike many articles that limit the scope of analysis to economics principles when discussing the effects of arbitrage, Outterson consistently weighs his economic analyses against social welfare.

 

Still, this is currently the hottest topic for economists regarding whether providing access to drugs through compulsory licensing will have a detrimental effect on the market, and consequently hinder innovation–perhaps because the U.S. Congress recently passed the Pharmaceutical Market Access and Drug Safety Act in 2004.[47]  There is a wide range of opinions that speak to how the new law will affect the pharmaceutical market. At the extreme is the view that legalizing re-importation of drugs into the U.S. will severely damage not only the pharmaceutical market in the U.S., but also the global market.[48] Another view predicts that the law will not significantly improve access to cheaper drugs because rational pharmaceutical companies will respond by not selling their products in markets from which Americans are allowed to re-import.[49] And yet another opinion reasons that re-importation should not significantly harm the drug market because pharmaceutical companies will just ramp up their marketing efforts to sell higher quantities; after all, they have a history of successful marketing such that consumers prefer to buy designer brand drugs over generic equivalents.[50] 

 

Adding to the controversy is the lack of uniform rules for protecting the rights of patent holders.  That is, TRIPS does not address whether patent rights are exhausted once patented products are sold into the market stream.[51]  In fact, TRIPS does not currently mandate its members to adopt any specific measures to prevent arbitrage as a pre-condition to compulsory licensing.[52]  There is, however, a provision requiring drugs made under compulsory licenses to be designated by distinctive packing, colors and shapes to help quickly detect acts of arbitrage and identify the source of production or export.[53]  The distinctive look requirement can also help the WTO adopt a uniform rule of exhaustion for pharmaceutical products that are manufactured under a compulsory license.  For now, the WTO requires members who import and export pharmaceutical products under a compulsory license to send notice of the details of the transaction, such as name of the drug, name and address of the manufacturer, name and address of the importer, quantity, and duration.[54]  However, importers are only expected to take “reasonable measures” to prevent re-exportation.[55]

 

A similar risk to arbitrage that is frequently included in compulsory licensing discussions is the production and export of counterfeit drugs with no therapeutic value.  This is perhaps the most severe threat to public health as people will not be able distinguish a counterfeit drug by its physical appearance.  Pharmaceutical companies argue that compulsory licensing with no clear standards against arbitrage will increase the probability that consumers in developed countries will inadvertently purchase dangerous substitutes in efforts to purchase cheaper drugs.[56] 

 

According to Outterson, however, empirical evidence tends to show that the threat of counterfeit drugs is overstated for several reasons.[57]  First, he points out that counterfeit drugs should be distinguished from functional, generic copies of patented drugs.[58]  Narrowing counterfeit drugs to non-functional copies that lack the active ingredient, he then cites authority claiming that the majority of the non-functional counterfeit drugs are produced domestically.[59]  Furthermore, he reasons that as drug prices fall, there will be less incentive for criminals to produce counterfeit drugs because the of the unattractive profit margin.[60]  Moreover, patented drugs, not cheap generics, are the target of counterfeiters, so increased availability of low-cost generic drugs would actually dissuade counterfeiting.[61]

 

3.3.  Will There Be Enough Exporting Members?

TRIPS now extends compulsory licensing privileges so that nations without manufacturing capacity can import drugs.  However, evidence suggests that this provision will fail in its efforts to improve access to patented drugs.  Amir Attaran, an immunologist and lawyer, makes this argument based on history of compulsory licenses.[62]  According to history, compulsory licensing has rarely been used for any reason.[63]  The explanation for the under-use, or rather lack of use, lies in international politics.  Many developing countries want to attract future investment and technology; therefore, they choose not to issue compulsory licenses because it might show a lack of respect for intellectual property rights and consequently decay trade relations or scare off investors.[64]

 

Furthermore, if countries are reluctant to issue compulsory licenses for the benefit of their own people, it is even less likely that they will use this measure to assist another country that lacks manufacturing capacity.[65]  In other words, the Hong Kong Declaration permanently amended TRIPS so that countries with limited manufacturing capabilities could import drugs because nations that issue compulsory licenses no longer have to manufacture drugs for a predominantly domestic use.[66]  The problem in achieving that purpose is that it relies on countries with manufacturing capacity to first issue compulsory licenses.

 

Perhaps now that the Hong Kong Declaration permanently amended the compulsory licensing provisions, these concerns will become moot.[67]  It will be interesting to see whether the number of compulsory licenses issued will increase.

 

3.4.  Are We Seeing Improved Access To Drugs?

In order to maximize their profits, companies across industries utilize differential pricing schemes, sometimes more generally referred as price discrimination.[68]  The pharmaceutical industry is no exception and has engaged in differential pricing by segmenting the market based on political borders and income classes.[69]  Under this practice, the poorest countries were offered the lowest prices within the range but failed to successfully deliver essential drugs to the people.[70] 

 

Since the Implementation Decision was adopted in 2003, the potential threat of compulsory licenses has moved companies to voluntarily make proactive efforts to realistically make their drugs accessible.  Some have dramatically lowered prices while others have offered voluntary, royalty-free licenses.[71]  And while governments have not yet issued compulsory licenses, Brazil, a middle-income country, has actively used it as a threat to negotiate lower prices for AIDS drugs.[72] 

 

In contrast, many still argue that the compulsory licensing provisions have not helped bring drugs to those in need.  Some low-income nations like Thailand, Colombia, and South Africa have been pressured by powerful nations like the U.S. to adopt more rigorous intellectual property laws during free trade negotiations.[73] Other countries simply lack coordinated efforts within the government or found the application process to onerous.[74]  In 2011, a research study collected all public instances of compulsory licenses being contemplated and found a drastic decline in compulsory licensing activity since 2006.[75]

 

The emerging pattern tends to show that the leveraging capacity of compulsory licensing depends on the relative political strength of the licensing country. Considering the fact that most poor countries do not have political pull, it looks as though compulsory licensing and differential pricing negotiations in the near future will not make significant impact in improving access to medicine.

 

4.     Potential Solutions

The following subsections explore potential solutions to the issues with the current TRIPS amendment. Each solution was proposed prior to the Hong Kong Declaration. While time may prove that some of these solutions are unnecessary, others deserve consideration despite the recent amendment.

 

4.1.   More Determinate Terms in Compulsory Licensing Provisions

As mentioned in the prior section, the Hong Kong Declaration has left significant ambiguities that, though well intended, may impede efficient use of compulsory licensing. Clarifying these ambiguities will not only improve efficiency in utilizing compulsory licenses but may also encourage nations to issue compulsory licenses without concerns of political backlash. 

 

The most common suggestion is to develop and maintain a set of lists that universally recognize diseases that can be considered a threat to public health and drugs that are automatically eligible for compulsory licenses.[76]  This reduces tension between countries and time for governments to deliberate on whether granting compulsory licenses for certain drugs would be diplomatic.

 

Another suggestion is for WTO to adopt a uniform socio-economic model to determine whether a nation is eligible to grant compulsory licenses.  Adopting a model prevents abuse and ensures that not just any nation can use compulsory licensing to gain cheaper access to drugs. One method is to conduct a benefit-detriment analysis that compares the monetary loss suffered by the pharmaceutical company with the aggregate social benefit.[77] The WHO also periodically compiles and updates a comprehensive data set of socio-economic indicators relevant to the pharmaceutical sector that can be used to identify nations, drugs, and diseases that qualify for compulsory licensing.[78]

 

Finally, the ambiguity concerning when patent rights are exhausted should be clarified.  This is one area where ambiguity may be the lesser of two evils because penalizing rogue individuals or governments for engaging in arbitrage ultimately punishes the greater mass population that is in need of essential drugs.  By requiring nations to take “reasonable measures” to prevent arbitrage, TRIPS implies that, at least in the international domain, patent rights are not exhausted by sales made through compulsory licensing.[79]  Still, the WTO should explicitly establish a default standard for countries that do not have a rule of exhaustion or at least define what can be considered an arbitrage violation with equitable remedies.

 

4.2.  Patent Buy-Outs

Another solution, proposed in a recent article by Outterson, is to establish a systematic buy-out mechanism for the patent rights to identified essential drugs with limitations to a particular geographic market.[80]  This would not only circumvent the controversial issue of granting compulsory licenses and provide drugs at production cost. Approximately 80% to 90% of the global sales of patented pharmaceutical products are made in 30 wealthy countries who are all members of the Organization for Economic Cooperation and Development (OECD).[81]  Conversely, the vast majority of the world population that suffers from chronic and infectious diseases lives in non-OECD countries, comprising greater than 84 % of the population.[82]  By selling drugs to non-OECD countries at production cost or generic prices, the public health benefit would substantially outweigh the lost revenue so as not to reduce incentives for pharmaceutical innovation.[83] 

 

In his recent article, Outterson outlines a three-step process for this buy-out mechanism.[84]  An eligible purchaser could be any entity from a government, to an inter-governmental organization (such as the WHO or WTO), to a philanthropic foundation (e.g., Gates Foundation).  In many ways this mechanism is similar to compulsory licensing in that they are both forms of compensated takings, but there are a few key differences.  First, unlike a compulsory license, a single patent buy-out does not have to be limited to a one drug and a specific country.  Instead, one patent buy-out can be negotiated for a class of drugs (albeit for a single pharmaceutical company) that can be manufactured and sold a number of countries, thereby resulting in lower transaction costs than would occur for each compulsory license.  Second, the purchaser would have exclusive rights to market and license the drug(s) in the negotiated region.  In contrast to pharmaceutic2al companies whose objective is to maximize profits, the new owner of exclusive marketing and licensing rights can offer multiple non-exclusive, no-royalty licenses to generic drug manufacturers in order to generate a competitive market. Third, unlike compulsory licensing under TRIPS which requires royalty payments to the patent holder, the patent-buyout price would be determined by the net present value of expected future profits.[85]  This adds flexibility in financing the buy-out and is more attractive to pharmaceutical companies who, under compulsory licensing, would have had to later reconcile the number of drugs actually manufactured and sold in order to verify royalty payments.

 

The drawbacks to this proposal are loss of profit to pharmaceutical companies, increased risks of arbitrage to OECD nations, and potential for counterfeit drug manufacture under the guise of a generic.  While it is irrefutable that market loss decreases incentives for innovation, careful design of patent buy-outs, safeguards against arbitrage as mentioned in II(B), and reduced burdens of compulsory licensing should provide adequate incentives for pharmaceutical companies to engage in negotiations.  As also mentioned in II(B), the incentive for counterfeiting generic drugs is negligible.  Patent buy-outs seem to be one of the most diplomatic alternatives to compulsory licensing, but more research should be conducted on availability of financing and buy-out terms that would attract innovative pharmaceutical companies.

 

4.3.  Financing Pharmaceutical Research for the Public Domain

One obvious method for improving access to patented drugs is to finance public pharmaceutical research.  This way, patented drugs can directly enter the public domain.  One proposal, by U.S. Representative Dennis Kucinich, is to finance pharmaceutical research through a set of competing publicly supported research centers and offer prize money for breakthroughs.[86]  Granted that this proposal was intended for application in the U.S. only, it still has merit.[87]  The notion is that as more patented drugs are directly placed in the public domain, pharmaceutical companies would be forced to compete with similar drugs that are already being sold in the market as generics, thereby driving down prices.[88]  

 

Applying the solution in a global setting, the key sponsors would be similar to those for patent buy-outs: individual governments, intergovernmental entities like the WHO, and philanthropic foundations.  The best scenario would be funding through an intergovernmental entity so that research expenses can be shared equitably.  Potential problems arise with sustained financing and for governments and intergovernmental entities, political interference. 

 

Sustained financing is the first issue because projects such as these are not profit-making machines, and so their longevity is heavily dependent on their success.  Without a stable source of funding, these research efforts run the risk of being run into the ground due to mismanagement or getting beat by a private institution on the way to filing a patent.  This risk is especially high with government funded research as some may be required regular disclosures of incremental research findings. 

 

Political interference will also be a risk in terms of management and direction of research.  For example, some governments will forbid funding for research in certain areas such as stem cell research. Also, performance assessments are not measured by profit, so there is anger that research grants awarded to a research group may not always be based purely on merit.  Notwithstanding these issues, a public international effort to compete with the pharmaceutical industry will send a positive message to the global community and may compel pharmaceutical companies to negotiate patent buy-outs.  More research should be conducted on past experiences with publicly funded biomedical research.

 

5.     Conclusion

Progress towards providing equal access for drugs has been slow.  It is not yet certain whether more education and assistance in filing for compulsory licenses or whether TRIPS provisions can even help developing countries overcome the intimidation factors of powerful governments.  Because cross-border compulsory licensing rights have been in effect for only three years, more observations need to be made before any assessment can be deemed accurate. I encourage those who are interested in this topic to either track the progress and new game strategies employed by developing countries under TRIPS or explore some of the concerns and potential solutions mentioned in this research guide. 

 

6.     Research Bibliography

 

6.1.   Background Information on Access to Drugs

 

 

 

 

 

 

 

 

 

 

6.2.  World Trade Organization (WTO): Background

 

 

 

 

6.3.  WTO: Agreement on Trade-Related Aspects of Intellectual Property (TRIPS)

 

 

·       Michael A. Santoro, Human Rights and Human Needs: Diverse Moral Principles Justifying third World Access to Affordable HIV/AIDS Drugs, 31 N.C.J. Int’l L. & Com. Reg. 923, 925 (2006). This article is a discussion of the moral discourse and economic considerations that led to the integration of intellectual property into the WTO, and eventually, the Doha Declaration.  The author chronicles the change in attitude within the WTO from a utilitarian view during the Uruguay Round to a humanistic view during the Doha Agenda.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6.4.  Compulsory Licensing and Related Effects

 

 

 

 

 

 

 

 

 

 

 

 

 

6.5.  Arbitrage / Parallel Trading / Diversion / Re-importation

 

 

 

 

 

 

6.6.  Counterfeit Drugs

 

 

 

6.7.  Differential Pricing / Price Discrimination

 

 

 

6.8.  Other Online Sources

 

 

 

 

 

 

 

 

 



[1] See, e.g., Marcia Angell, The Truth About Drug Companies, N.Y. Rev. Books, July 15, 2004 (claiming that a substantial amount of revenue generated by pharmaceutical companies through drug sales goes into aggressive marketing rather than research and development); but see, e.g., Pharmaceutical Research and Manufacturers of America, PhRMA Statement: AARP Allegations Inaccurate, Flawed (2006) (disputing allegations of drug inflations by referring to a recent decrease in the rate of drug price inflation).

[2] Some examples are Americans going to Canada to purchase prescription drugs at lower prices, making Internet purchases for prescription medication from foreign pharmaceuticals and in some cases, going to a Pharmacy located at a local pharmacy that sells imported drugs.  Chad D. Silker, America’s New War on Drugs: Should the United States Legalize Prescription Drug Reimportation?, 31 J. Legis. 379, 379 (2005).

[3] See Robert Longly, Are Rising Drug Prices Inflationary or Justified?, http://usgovinfo.about.com/b/a/217351.htm (last visited Oct. 31, 2006).  The article states that although the 6.3% increase in prescription drug spending from 2004 to 2005 in the U.S. was at a decade-low, it was still higher than the 3.8% inflation rate.

[4] WHO – World Health Organization Policy Perspectives on Medicines, Equitable Access to Essential Medicines: A Framework For Collective Action 1 (March 2004), at http://apps.who.int/iris/bitstream/10665/68571/1/WHO_EDM_2004.4_eng.pdf.

[5] Michael A. Santoro, Human Rights and Human Needs: Diverse Moral Principles Justifying third World Access to Affordable HIV/AIDS Drugs, 31 N.C.J. Int’l L. & Com. Reg. 923, 925 (2006).

[6] Id.

[7] Originally created in 1947 as part of an effort towards economic recovery from World War II, GATT’s objective is to reduce tariffs and other international trade barriers.  See Wikipedia.org, General Agreement on Tariffs and Trade, http://wikipedia.org/wiki/GATT (last visited Oct. 31, 2006). GATT governed international trade policies and its Articles were modified periodically until January, 1, 1995, when the World Trade Organization (WTO) was formed during the Uruguay Round of talks that commenced in 1986 and concluded in 1994.  Id. 

[8] The WTO is comprised of 149 member states and its mission as an organization is to liberalize trade by providing a forum for states to negotiate rules and settle disputes.  World Trade Organization, Understanding the WTO–What is the World Trade Organization?, http://www.wto.org/english/thewto_e/whatis_e/tif_e/fact1_e.htm (last visited Oct. 9, 2006).

[9] Agreement on Trade-Related Aspects of Intellectual Property Rights, Including Trade in Counterfeit Goods, 33 I.L.M. 81 (1994) [Hereinafter TRIPS]. 

[10] The principle of “national treatment” requires each member state to provide citizens of other member states the same legal protection given to their citizens.  Id. art 3.

[11] The principle of “most-favored-nation” mandates equal treatment for citizens of all member states in the WTO.  Id. art. 4

[12] Paris Convention for the Protection of Industrial Property, Mar. 20, 1883, 828 U.N.T.S. 305.

[13] Berne Convention for the Protection of Literary and Artistic Works, done on September 9, 1886, 12 Martens Nouveau Recueil (ser. 12) 173, Additional Act and Declaration of Paris, done on May 4, 1896, 24 Martens Nouveau Recueil (ser. 12) 758, Berlin Revision, done on November 13, 1908, 1 L.N.T.S. 243, Rome Revision, done on June 2, 1928, 123 L.N.T.S. 233, Brussels Revision, done on June 26, 1948, 331 U.N.T.S. 217, Stockholm Revision, done on July 14, 1967, 828 U.N.T.S. 221, Paris Revision, done on July 24, 1971, 4 M. NIMMER & D. NIMMER, NIMMER ON COPYRIGHT app. 27 (1987).

[14] International Convention for the Protection of Performers, Producers of Phonograms and Broadcasting Organizations, Oct. 26, 1961, 496 U.N.T.S. 43.

[15] Treaty on Intellectual Property in Respect of Integrated Circuits, opened for signature May 26, 1989, 28 I.L.M. 1477.

[16] See TRIPS, supra note 9, Pts. III-V.

[17] Id., art. 7.

[18] See id., art. 8.

[19] See id., arts. 65-67.

[20] See Frederick M. Abbott, First Report (Final) to the Committee on International Trade Law of the International Law Association on the Subject of Parallel Importation, 1 J. Int'l Econ. L. 607 (1998).  This practice is also known as “diversion” or “parallel trade.”

[21] See Adrian Otten and Hannu Wager, Compliance with TRIPS: The Emerging World View, 29 Vand. J. Transnat’l L. 391 (1996).

[22] See Kevin Outterson, Pharmaceutical Arbitrage: Balancing Access and Innovation in International Prescription Drug Markets, 5 Yale J. Health Pol’y, L. & Ethics 193 (2005).

[23] The original TRIPS agreement did not address parallel trading and explicitly dodged the issue concerning exhaustion of IPRs.  See TRIPS, supra note 9, art. 6.  Furthermore, only one article vaguely addressed how less developed countries can gain access to patented drugs that they could not afford.  See supra note 9, art. 8:1-2.  On the other hand, there are twenty-four articles that concerning enforcement and remedial measures for alleged violations.  TRIPS, supra note 9, arts. 41-64.

[24] “We affirm that the Agreement can and should be interpreted and implemented in a manner supportive of WTO members’ right to protect public health and, in particular, to promote access to medicines for all.”  WTO Ministerial Conference, Declaration on the TRIPS Agreement and Public Health, WT/MIN(01)/DEC/2, para. 4 (Nov. 14, 2001), at http://www.wto.org/english/thewto_e/minist_e/min01_e/mindecl_trips_e.htm [hereinafter Doha Declaration].

[25] Id. at para. 5.

[26] Id. at para. 4. 

[27] The WTO recognized this when drafting the Doha Declaration but deferred discussion to a later round of negotiations. Id. at para. 6.

[28] TRIPS, supra note 9, art. 31(f).

[29] Id, art. 31(e).

[30] The accounts of day-to-day discussions and negotiations can be found on the WTO website.  WTO Ministerial Conferences, Cancun 5th Ministerial, at http://www.wto.org/english/thewto_e/minist_e/min03_e/min03_e.htm (last visited Oct. 15, 2006).

[31] See WTO General Council Decision, Implementation of Paragraph 6 of the Doha Declaration on the TRIPS Agreement and Public Health, WT/L/540, (Aug. 30, 2003), at http://www.wto.org/english/tratop_e/trips_e/implem_para6_e.htm [hereinafter Implementation Decision].

[32] An excerpt of the General Council Chairperson’s statement can be found on the WTO website.  WTO Intellectual Property, General Council Chairperson’s Statement (30 August 2003), at http://www.wto.org/english/tratop_e/trips_e/gc_stat_30aug03_e.htm (last visited Oct. 15, 2006).

[33] See WTO Ministerial Conference, Doha Work Programme, WT/MIN(05)/DEC, (Dec. 18, 2005), at http://www.wto.org/english/thewto_e/minist_e/min05_e/final_text_e.htm#public_health [hereinafter Hong Kong Declaration].  The Hong Kong Ministerial Declaration merely adopted as permanent the textual provisions that were originally composed in the Implementation Decision. 

[34] The Hong Kong Declaration defined an “exporting member” as a WTO member nation that manufactures drugs under a compulsory license to export to nations that require a compulsory license but lack the capacity to produce drugs domestically.  See id., para.1(c).

[35] “If any Member has concerns that the terms of the amendment have not been fully complied with, the Member may also utilize the good offices the Director-General or Chair of the TRIPS Council, with a view to finding a mutually acceptable solution.”  WTO News Items, Chairperson’s Statement 2005, at http://www.wto.org/english/news_e/news05_e/trips_319_e.htm (last viewed Oct. 20, 2006).

[36] See Doha Declaration, supra note 23, para. 4 (stating that [TRIPS] should be interpreted and implemented in a manner supportive of WTO members’ right to protect public health and, in particular, to promote access to medicines for all”) [emphasis added]; see also WTO Ministerial Conference, Statement from General Council Chairperson at the Hong Kong Declaration, at http://www.wto.org/english/news_e/news05_e/trips_319_e.htm (Dec.6, 2005) (emphasizing that the amendment to TRIPS should first “protect public health and … not be an instrument to pursue industrial or commercial policy objectives”).

[37] See Vishal Gupta, A Mathematical Approach To Benefit-Detriment Analysis As a Solution To Compulsory Licensing of Pharmaceuticals Under the TRIPS Agreement, 13 Cardozo J. Int’l & Comp. L. 631 (2005).

[38] See Implementation Decision, supra note 30.

[39] See id.

[40] “In the present state, a nation could feasibly identify depression as a public health problem and issue a compulsory license on Prozac…”  Gupta, supra note 37, at 647.

[41] See Implementation Decision, supra note 30, at para. 3(“adequate remuneration… shall be paid… taking into account the economic value to the importing Member…”); see also Bryan C. Mercurio, TRIPS, Patents, and Access To Life-Saving Drugs in the Developing World, 8 Marq. Intell. Prop. L. Rev. 211, 242-44 (Reasoning that the ambiguous provision for “adequate remuneration” invites future disputes).

[42] See Gupta, supra note 37, at 649-59 (proposing a socio-economic analysis that balances detriment to developed countries against the aggregate health benefit).  The World Health Organization (WHO) has also gathered and organized an enormous amount of world health statistics for the purpose of assisting policymakers.  See also World Health Organization, Using Indicators To Measure Country Pharmaceutical Situations, WHO/TCM/2006.2 (2006), at http://www.who.int/entity/medicines/publications/WHOTCM2006.2A.pdf [hereinafter Health Indicators].

[43] Mercurio, supra note 41 at 245.  Technically, arbitrage is the more general term, and parallel trade is the narrower term used to describe arbitrage involving intellectual property.  For this discussion, arbitrage will be considered synonymous to parallel trading.

[44] See Outterson, supra note 22.

[45] Mercurio, supra note 41 at 245-46. 

[46] Kevin Outterson, in a heuristic approach, argues that (1) a system dependent on voluntary differential pricing to deliver affordable drugs to poor populations is likely to fail and (2) the vast majority of pharmaceutical innovation takes place in a handful of countries, thus making it nonrival.  Furthermore, he asserts that pharmaceutical arbitrage will not harm innovative pharmaceutical companies because the market is supra-optimal and challenges those who oppose this view to support their claims with transparency and allow the public domain to evaluate pricing and production costs.  See Outterson, supra note 22.

[47] Pharmaceutical Market Access and Drug Safety Act of 2005, S. 334 109th Cong. (2005).

[48] See Brianna Carignan, Legalizing Importation of Prescription Drugs: The Economic Implications of The Pharmaceutical Market Access and Drug Safety Act of 2005, 12 New Eng. J. Int’l & Comp. L. 161 (2005). 

[49] See John A. Vernon, Joseph H. Golec., & W. Keener Hughen, The Economics of Pharmaceutical Price Regulation and Importation: Refocusing the Debate, 32 Am. J. L. and Med. 175 (2006).

[50] See Outterson, supra note 22.

[51] See TRIPS, supra note 9 at art. 6 (("For the purposes of dispute settlement under this Agreement, subject to the provisions of [National Treatment] and [Most-Favoured-Nation Treatment] nothing in this Agreement shall be used to address the issue of the exhaustion of intellectual property rights."). 

[52] See Implementation Decision, supra note 30, paras. 4-5 (Requiring importing Members to take “reasonable measures within their means” to prevent re-exportation; however, developed countries must provide financial and technical support if requested).

[53] See id., para. 2(b)(ii).

[54] See id..

[55] In fact, developed countries must lend technical and financial assistance, upon request from those countries who cannot ensure adequate protection.  See id., para. 4.

[56] See Jim Hilboldt, Counterfeit Medicines Outside the United States: Challenges and Responses, 878 PLI/Pat 869 (2006).

[57] See Outterson, supra note 22 at 268-71. 

[58] Id. at 268-69.

[59] Id. at 269-70.

[60] See id. at 270-71.

[61] Id.

[62] See Amir Attaran, Assessing and Answering Paragraph 6 of the Doha Declaration on the TRIPS Agreement and Public Health: The Case for Greater Flexibility and a Non-Justiciability Solution, 17 Emory Int’l L. Rev. 743 (2003).

[63] See id. at 746-47. In fact, Canada was the last country to issue a compulsory license for pharmaceuticals and has since stopped.  Jessica J. Fayerman, The Spirit of TRIPS and the Importation of Medicines Made Under Compulsory License After the August 2003 TRIPS Council Agreement, 25 NW. J. Int’l L. & Bus. 257, 265 (2004).

[64] Id.

[65] Attaran, supra note 62 at 748.

[66] See Implementation Decision, supra note 30.

[67] The articles that suggest compulsory licensing will be ineffective in providing access to innovative drugs were written prior to the Hong Kong Declaration.

[68] In an idealistic economic model, goods are sold at near production cost.  However, businesses recognize that consumers are willing to pay more for products that have greater demand.  Thus, companies use various analyses to determine the highest price that a customer is willing to pay.  What results is the same product being sold at different prices to different buyers.  This is a very crude description of differential pricing.  For more information, please economics references.  See Wikipedia.org, Price Discrimination, at http://en.wikipedia.org/wiki/Price_discrimination (last visited Oct. 30, 2006).  See also Outterson, supra note 22 at 203-06 (explaining the different types of differential pricing); Aidan Hollis & Peter Ibbott, How Parallel Trade Affects Drug Policies and Prices in Canada and the United States, 32 Am. J. L. & Med. 193, 198-204 (2006) (differential pricing in the pharmaceutical industry).

[69] See Outterson, supra note 22 at 205.

[70] There are several reasons why differential pricing fails to provide access to patented drugs.  First, transaction costs are high when prices are negotiated on a case-by-case basis.  Second, pharmaceutical companies seldom, if ever, offered drugs at or below production cost. Id. at 227.

[71] There have been many dramatic price cuts since 2001, when the Doha Declaration first proposed cross-border compulsory licensing.  However, these price cuts have not significantly increased access to drugs.  In 2004, Merck granted a voluntary, royalty-free license to a South African drug manufacturer, perhaps to prevent South Africa from beginning the trend of exercising the right to issue a compulsory license.  See Outterson, supra note 22 at 226-27.

[72] The Brazilian government was the first to aggressively (and successfully) use compulsory licensing threats in their negotiations with several U.S. Pharmaceutical companies for affordable AIDS drug imports.  Roger Bate, Threats to Patents, Threats to Health, TCS Daily (Jul. 21, 2005) at http://www.techcentralstation.com/072105H.html.

[73] These additional protections, collectively called “TRIPS Plus” require things such as prohibiting generic manufacturers from using data generated by innovator companies in their licensing applications for five years after marketing approval and providing protections for new formulations of existing drugs in countries that traditionally do not recognize slight changes as innovation.  See Keith Alcorn, 2001 Doha Trade Agreement Failing to Improve Access to Medicines, Oxfam Says, Aidsmap (Nov. 14, 2006), at http://www.aidsmap.com/en/news/32E9675E-B18A-4841-8947-BDDC37AD42DD.asp (last visited Nov. 22, 2006). See also Oxfam, Patents Versus Patients: Five Years After the Doha Declaration, (November 14, 2006), at http://oxfam.intelli-direct.com/e/d.dll?m=234&url=http://www.oxfam.org.uk/what_we_do/issues/health/downloads/bp95_patents.pdf (last visited Nov. 22, 2006) (stating that despite the European Commission’s declared support of compulsory licensing, they have remained apathetic). 

[74] See Ben Krohmal, Noah Novogrodsky on “Compulsory Licensing in Ghana – the Continuing Barriers to Affordable Medicines”, Consumer Project on Technology (Nov. 9, 2006), at http://www.cptech.org/blogs/drugdevelopment/2006/11/noah-novogrodsky-on-compulsory.html

[75] See Reed Beall & Randall Kuhn, Trends in Compulsory Licensing of Pharmaceuticals Since the Doha Declaration: A Database Analysis. PLoS Med 9(1): e1001154. Doi: 10.1371/journal.pmed. 1001154 (2012) at http://journals.plos.org/plosmedicine/article?id=10.1371/journal.pmed.1001154.

[76] See Gupta, supra note 37.

[77] See id.  In his article, Vishal Gupta represents this analysis in a mathematic model, D < H x C, where D is the monetary loss, H is an individual’s health benefit, and C is the number of beneficiaries.  More details on possible methods of calculating each component can be found in the article.

[78] See Health Indicators, supra note 42.

[79] See Implementation Decision, supra note 30, para. 4.

[80] Kevin Outterson, Patent Buy-Outs for Global Disease Innovations for Low- and Middle-Income Countries, 32 Am. J.L. & Med. 159 (2006).

[81] OECD is an international organization that promotes democratic government and a globalized economy. Member countries include Australia, Austria, Belgium, Canada, Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Japan, Korea, Luxembourg, Mexico, Netherlands, New Zealand, Norway, Poland, Portugal, Slovak Republic, Spain, Sweden, Switzerland, Turkey, United Kingdom, and United States. OECD, About OECD, at http://www.oecd.org/about/0,2337,en_2649_201185_1_1_1_1_1,00.html (last visited Nov. 10, 2006).

[82] See Outterson, supra note 80 at 160.

[83] Id. at 160-61.

[84] “[1.] The purchaser acquires the patent and exclusive marketing rights [in a limited geographic area] for a patented global medicine from a patent owner … [2.]  The purchaser offers an open, non-exclusive, no-royalty license to any legitimate generic manufacturer [subject to limited geographic area]…[3.] Patent owner is compensated under a buy-out formula which mimics the lost R&D cost recovery from the foregone sales.”  Id. at 171.

[85] Kevin Outterson suggests the following formula for calculating the buy-out price: BOP=NPV[t(d)](U * M)p, where BOP is buy-out price, NPV is the net present value over the patent period t at discount rate d, U is the expected number of until sold during time t, M is the marginal cost of producing each unit, and p is a profit adjustor.  More details can be found in his article. Id. at 173.

[86] See Dean Baker, Financing Drug Research: What Are the Issues?, Center for Economic and Policy Research (September 22, 2004), at http://cepr.net/publications/reports/financing-drug-research-what-are-the-issues (PDF of the report is available for download along with the press release).

[87] “[This proposal is] designed…to support pharmaceutical research domestically, without explicitly providing for the sharing of research obligations across countries. Id. at 24.

[88] Id. at 16-17.