Brook K. Baker
May 25, 2001

The issue of TRIPS reform/revolution pops up consistently in activist discussions and often involves a tension between politically correct exhortations against global hegemony and pragmatic cautions about mini-reforms and their effectiveness, tradeoffs, and consequences. Without attempting to address more global attack on TRIPS, I would like to address a few “pragmatic” issues that might inform our campaign.


Some activists have argued that the drug companies should grant unconditional voluntary licenses, possibly to international, multi-lateral organizations like the WHO which would thereafter subcontract with existing generic manufacturers or to individual nations like South Africa which might jump start their own pharmaceutical capacity. Voluntary licenses require royalty payments to the patent holders which are likely to be relatively negligible, e.g., 5% or less. However, patent holders might be able to impose limitations or conditions on voluntary licenses, subject to anti-competition rules and principles. For example, in the HIV/AIDS context, the pharmaceutical company might convincingly argue that exportation should be regional only and under no circumstances should export be permitted back to developed markets in the North even under parallel importation/international exhaustion rules.


The advantages of voluntary licenses held by WHO or another similar entity is that WHO could subcontract production and distribution of lowest priced generic medicines produced most cheaply pursuant to massive economies of scale. In essence, bulk procurement would be accomplished via a generic subsidiary, presumably in the present context, an Asian manufacturer. Over the long term, the bargaining power of the generic subsidiary might increase to the extent that it was the only large-scale producer of HIV/AIDS medicines. This single source solution would inevitably discourage development of pharmaceutical capacity in multiple developing countries.


The advantages of voluntary licenses for developing countries are: (1) they could be negotiated quickly without reliance on expensive and time-consuming administrative or judicial procedures, (2) they are premised on demands against the industry, (3) they could support transfer of technology and local economic development/diversification, (4) they could result in more sustainable supply, and (5) they could permit exportation to developing countries. (Of course, the failure of a patent holder to grant a voluntary license on commercially reasonable terms is a necessary step in the issuance of compulsory licenses except those taken for governmental, non-commercial use, for emergencies or matters of extreme urgency, or for anti-competitive abuse of patent.)

The disadvantages of voluntary licenses to developing countries are: (1) the patent holder is under no compulsion to grant a voluntary licenses, though the possibility of a compulsory license does exert some pressure, (2) the developing country will have to develop pharmaceutical and human capacity with the risk of delay and burden of capital and educational outlays, (3) the local industry is likely to become monopolistic which exerts upwards pressure on prices in the long run in the absence of price controls, and (4) politically, the costs of delay, interrupted supply, and mismanagement fall on the country licensee.

Voluntary licensing actually has some benefit for the patent holder, assuming that it can impose conditions against parallel importation or export to First World markets. Voluntary licenses keep ownership in the hands of the patent-holder. Voluntary licenses also exempt the patent holder from some of the negative publicity associated with discounted prices, tax-subsidized give-aways, etc. Essentially, the patent holder keeps its lucrative First World market, makes a minor royalty off developing country sales, and is relieved of the burden of being targeted as a roadblock to more affordable medicines.

As a pragmatic solution, voluntary licenses have some appeal, especially since they are not as threatening to Big Pharma. Although widespread reliance on voluntary licenses reduces market expansion into developing markets to some degree, a voluntary license regime does not undermine the intellectual property regime writ large nor does it prohibit market exploitation vis a vis non HIV/AIDS, TB, and malaria medicines. Activists might like this campaign as well because it targets pharmaceutical companies which have learned hard lessons about being the bad guy and thus victories are possible. Activists could pursue voluntary license campaigns through divestment/shareholder activist campaigns and through direct action at drug companies.

Although voluntary licenses are certainly authorized by TRIPS, TRIPS could be amended to encourage voluntary licenses and to provide market protection against exportation back to First World markets. Thus, there could be a provision in the Public Health rule, Article 8, for example, that “Patent holders are encouraged to grant voluntary licenses to address public health concerns in developing countries; such licenses may be conditioned to prohibit exportation to developed countries under exhaustion of rights rules or otherwise.”


No African country has yet issued a compulsory license for pharmaceuticals. Many African countries do not yet have national legislation even authorizing TRIPS compliant compulsory licenses, though South Africa is an exception. Few African countries could tolerate the delay and costs of litigating compulsory licenses in court and even administrative procedures could be time-consuming and onerous. Despite these realities, most activists persist in commending compulsory licenses in the hope that some developing countries, perhaps Brazil?, will have the political fortitude and determination to take or issue compulsory licenses.

As previously discussed on the HealthGap list and elsewhere, TRIPS compliant compulsory licenses are a relatively limited public policy tool. They will work well, for a while, for pre-1995 first generation HIV/AIDS medicines where a process-patent-only country is legally producing generic medicines. In these circumstances, a country issuing a compulsory license might be able to immediately import significant quantities of medicine. However, for second generation, post-1995 HIV/AIDS medicines and for medicines produced under a compulsory license issued in another country (and thus subject to “predominantly for domestic use” rules), a local compulsory license will be relatively unavailing unless the country has some significant pharmaceutical capacity.

Of course, some African countries do have this capacity, especially South Africa, and it already has a major generic producer, Aspen, which has announced that it is going to apply for compulsory licenses. And other African countries can presumably develop some pharmaceutical capacity, if not to manufacture therapeutic base ingredients then at least to manufacture/assemble finished products. In this context, it is important to note that local production is not desirable just from an economic development point of view, though this should be sufficient given the structural HIV prevention benefits of poverty reduction, it is also important in terms of sustainability of supply.

It is for these reasons that HealthGap’s bulk procurement policy should not be read as precluding reimbursement for generics produced locally under a compulsory license. Skeptics of local production are right to point out that in some instances delay would be significant and that there are capital and human capacity barriers that are problematic. South Africa, however, has previously had a relatively robust pharmaceutical industry that is being gradually dismantled in the post-TRIPS era; this industry could conceivably be rejuvenated relatively quickly.

Despite some guarded optimism about compulsory licenses, it is clear that TRIPS imposes barriers which must be addressed, even though many African countries do not have patents on HIV/AIDS medicines. First and foremost, the “predominantly for domestic use” rule must be modified to permit export/import to developing and highly HIV impacted countries. (Since many African countries have no pharmaceutical capacity whatsoever, the compulsory license regime is relatively meaningless if it requires local production.) This could be accomplished via an amendment to Article 8, the Public Health rule, by language to the effect: “In response to a public health need in a developing or highly impacted country, medicines produced under a compulsory license in one country may be exported to such country or countries regardless of Article 31f.”

An even broader reform would be one that abandons the pretense of a uniform international intellectual property regime and that instead recognizes the legitimate differences between developing and developed countries at least with respect to medicines essential to treat the pandemic diseases of the South. This proposal would essentially eliminate the requirement of compulsory licenses for developing countries during public health crises. This proposal too could be accomplished via an amendment to Article 8: “In the case of a[n urgent] public health need, a developing or country may manufacture or import an essential pharmaceutical or medical product, regardless of its patent status, for as long as the need persists, but may not export said product to developed countries where the product is patented.”

No such modification of the compulsory license regime is likely to be accomplished if due deference is not given to the avoidance of product/price competition back in developed countries. Pharmaceutical companies and First World trade representatives would at a minimum demand assurances that compulsory license liberalization/elimination would be limited the developing countries and that there would be explicit barriers against gray and black market competition in developed countries. This assurance could certainly occur, as recommended in the language of Article 8, but the industry might also want clarifications/concessions on the parallel importation/exhaustion of rights rules in Article 6 as discussed further below.


The future of parallel importation looks dim to me, especially to the extent that voluntary licenses and compulsory licenses are pursued. At the very least pharmaceutical companies and First World trade representatives are going to seek protection from parallel importation into First World markets of (1) price-discounted or concessionary drugs, (2) low-priced drugs produced under voluntary licenses granted to developing countries re HIV/AIDS and other pandemic diseases, and (3) low-priced drugs produced under compulsory licenses.

Activists started urging parallel importation when there were unconscionable price disparities in different markets and when certain medicines were more costly in some developing countries than they were in some First World countries. Tolerance of exhaustion of rights under Article 6 of TRIPS encouraged activists to demand that countries and consumers be able to comparison shop for patented medicines wherever they were sold most cheaply.

However, activists have recently succeeded in forcing partial price discounts for certain HIV/AIDS medicines and in addition licensing schemes may become more widely used. In this new context, to continue to demand universal rights of parallel importation risks preempting these other gains. The pharmaceutical industry and their governmental proxies in developed countries are simply not going to tolerate grey market importation of cheaper medicines into Big Pharma’s lucrative First World markets (even though there is some tolerance for parallel importation within the EU). At the very least, public health TRIPS reform may require a tightening of parallel importation rules vis a vis importation back to developed countries even if it continues to permit parallel importation into developing countries.


Article 30 is a basically incoherent compromise between the need for some limited exceptions to TRIPS and the need for such exceptions to be TRIPS compliant. What this compromise means in fact is that decision-makers have incredible discretion to interpret the existing language in a way that permits the kinds of public health exceptions discussed above or to interpret the language to require relatively stringent adherence to the interests of patent holders. How this discretion gets exercised is one of the great debates of jurisprudence. Clearly, who the decision-makers are and their social allegiances make a difference. Similarly, it is clear that decision-makers are influenced by social and political movements. It is customary to think that tighter language limit discretion, but it does so imperfectly. Even plain language is rarely clear to a determined contrarian decision-maker. Nonetheless, my suspicion is that we would be better off demanding limited but clear public health exceptions than we would be in adjudicating open-text disputes under Article 30.


Given the analysis above, it may be desirable to reenergize demands for voluntary licenses. Likewise, there are good reasons for continuing to promote compulsory licenses, particularly licenses that permit export/import. This relaxation of the “domestic use rule” could be accomplished with relatively minor changes to Article 8. On the other hand, parallel importation seems to be a shrinking strategy, especially in an era of price discounts and voluntary and compulsory licenses.


CPT Home IP and Healthcare CPT Page on Compulsory Licensing