US Department of State report


United States Department of State

Washington, D. C. 20520

                                February 5, 1999


 Dear Mr. XXXXXXX:
 On behalf of the Secretary, I am herewith submitting a revised
 report on steps taken by the United States Government to work with
 the Government of the Republic of South Africa to negotiate the
 repeal, suspension, or termination of section 15(C) of South Africa s
 Medicines and Related Substances Control Amendment Act No. 90 of 1997
 required by the Omnibus Consolidated and Emergency Supplemental
 Appropriations Act, 1999 (P.L. 105 277)
 I hope you find this report useful to you. If I can be of
 further assistance, please do not hesitate to contact me.
                                   Barbara Larkin
                                   Assistant Secretary
                                   Legislative Affairs
  As Stated
 The Honorable
                 Committee on XXXXXXXXX XXXXXXXX,
                    House of Representatives.

The intellectual property rights protection issue surrounding
Article 15(c) of the December 1997 amendments to the South African
Medicines and Related Substances Act of 1965 ("Medicines Act") is a top
priority for the United States Government s (USG s) economic relations
with the Republic of South Africa. Resolving this bilateral trade
conflict has been and remains a vital component of our bilateral
commercial relationship. All relevant agencies of the U.S. Government --
the Department of State together with the Department of Commerce, its
U.S. Patent and Trademark Office (USPTO), the Office of the United
States Trade Representative (USTR), the National Security Council (NSC)
and the Office of the Vice President (OVP)  - have been engaged in an
assiduous, concerted campaign to persuade the Government of South
Africa (SAG) to withdraw or modify the provisions of Article 15(c) that
we believe are inconsistent with South Africa s obligations and
commitments under the WTO Agreement on Trade Related Aspects of
Intellectual Property Rights (TRIPS)

The Administration understands the South African Government s wish
to fulfill its commitment to make medicines more affordable for its
people. Although Article 15(c), as it now stands, would authorize
abrogation of pharmaceutical patents and would permit parallel imports,
both WTO inconsistent actions, the South African Government to date has
not allowed parallel importation of a U.S.  patented pharmaceutical nor
has it suspended any patents or other intellectual property rights held
by U.S. pharmaceutical producers. The U.S. Government has nonetheless
made clear that it will defend the legitimate interests and rights of
U.S. pharmaceutical firms. In our multi level, broad based discussions
with the SAG, USG officials have explained that abrogating intellectual
property rights of pharmaceutical firms is not a viable means of
accomplishing SAG objectives to make medicines more affordable for
South Africans. We have often reiterated that such action on the SAG s
part will have a long term deleterious impact on the development of
new, critically important drugs and on the availability of these drugs
in South Africa. Until and unless the South African

Government addresses our concerns, our efforts will
continue on several fronts.

Preempting Adoption of the Amendments

Even before the South African parliament adopted the 1997
amendments, the State Department with the full support of USTR,
Commerce/USPTO and pharmaceutical industry representatives, instructed
the Embassy in Pretoria to deliver strong demarches opposing the
undermining of patent protection and potential abrogation of South
Africa s international commitments and obligations.

In June 1997, the Embassy in Pretoria, echoing testimony by U.S.
pharmaceutical companies operating in South Africa, presented USG views
at a parliamentary hearing on the proposed amendments to the Medicines
Act. Embassy officials stressed the position that the USG would never
abide abrogation of patent protection or acquiesce in parallel
importation of patented medicines. U.S. Ambassador James Joseph has
made frequent public statements and multiple private demarches to high-
ranking South African officials against the legalization of parallel
imports since mid 1997. Ambassador Joseph met with the members of the
parliamentary Health Committee during their consideration of this draft
of the amendments to the Medicines Act. The parliamentarians listened
intently to his arguments for why the bill would be problematic. As a
result, the legislators withdrew the proposed amendments from
parliamentary consideration with the intent of modifying them.

During the July 1997 U.S.-South Africa Binational Commission
meeting, Secretary of Commerce Daley again voiced opposition to the
proposed amendments to South African Trade and Industry Minister Erwin.
Minister Erwin assured Secretary Daley that U.S. concerns would be
alleviated by a "revision" of the bill that would be presented to
parliament later in 1997. They agreed to establish an ad hoc working
group on intellectual property issues to resolve the controversy raised
by the proposed amendments to the Medicines Act and obligations set
forth TRIPS Article 39.

While the objectionable language contained in the original
proposed amendments was removed as promised, the
South African Government s revised amendments, which
parliament ultimately passed in October 1997 and President Mandela
signed into law in December 1997, contained a new provision, Article
15(c), that is so ambiguous as to make the new bill worse than the
earlier version. Article 15(c) seems to permit the South African
Minister of Health to abrogate pharmaceutical patent rights and/or
permit parallel importation of patented pharmaceutical products.

Introduction of "New" Amendment

When U.S. Government officials in Washington and Embassy staff
repeatedly requested clarification on the impact of Article 15(c),
during early 1998, South African Government officials gave their
assurances that there was no intention to use the authority of 15(c) to
abrogate patents. South African Health Minister Zuma and her senior
staff have stated repeatedly that the SAG has no intention of using the
powers conferred by the bill to abrogate patent rights. Nevertheless,
U.S. Government experts determined that provisions of 15(c) authorize
action clearly inconsistent with South Africa s obligations under TRIPS.
At the State Department s instruction, the Embassy in Pretoria has, over
the past year, disseminated widely within the South African Government
the U.S. Government view that 15(c) authorizes conduct that would
violate TRIPS. On the parallel import issue, however, U.S. Government
attorneys note that under the terms of the TRIPS agreement, disputes
related to parallel importation are not subject to WTO dispute
settlement procedures.

Since the passage of the offending amendments in December 1997,
U.S. Government agencies have been engaged in a full court press with
South African officials from the Departments of Trade and Industry,
Foreign Affairs, and Health, to convince the South African Government
to withdraw or amend the offending provisions of the law, or at the
very least, to ensure that the law is implemented in a manner fully
consistent with South Africa s TRIPS obligations.

During early 1998, Embassy officials and the Assistant U.S. Trade
Representative for African Affairs made repeated requests to review the
implementing regulations for Article 15(c) in order to ensure that
application of the amendment would be consistent with South Africa s
TRIPS obligations
and commitments. However, the regulations for 15(c) have
never been shared with the U.S. Government, nor have they ever been
formally published and implemented. South African officials said a
pending legal challenge of the amendments by pharmaceutical
manufacturers precludes them from providing the USG with documents
which could prejudice the case.

An International Effort

In early 1998, the Embassy in Pretoria approached the Swiss and
EU member embassies in South Africa to suggest a joint effort to
protest the provisions of Article 15(c) since European pharmaceutical
companies could be adversely affected by the amendments, and some are
party to the pending litigation. Although European Governments
preferred to let the U.S. Government take the lead in demarching the
South African Government on pharmaceutical patent protection, French
President Chirac raised France s concerns during his July 1998 state
visit to South Africa and the Swiss and German presidents also raised
the issue privately with Deputy President Mbeki.

The United States Government Makes its Case

Assistant U.S. Trade Representative for Africa Rosa Whitaker
traveled to South Africa in the Spring of 1998 and raised U.S.
Government concerns with both the Minister of Health and the Minister
of Trade and Industry. She reiterated our request to review the draft
implementing regulations. Her personal intervention reinforced the
Embassy s clear message to the South African Government that the United
States would not abide actions inconsistent with WTO obligations.

The ad hoc working group on intellectual property created at the
July 1997 BNC held its first meeting in March 1998. The two hour
conference call meeting did allow the U.S. delegation -  including
representatives of the Departments of State, Commerce, the U.S. Patent
and Trademark Office and the Office of the U.S. Trade Representative --
to eliminate several lingering misunderstandings and clarify once more
U.S. Government views. However, since only officials of the South
African Department of Trade and Industry attended the conference
   call, the South African delegation was not in a position to
answer questions on the Medicines Act authoritatively nor were they
empowered to negotiate on matters related to the amendments to the Act,
since the Medicines Act is the bailiwick of the South African
Department of Health.

Special 301 Watch List

On April 30, 1998, with the full endorsement and support of the
Department of State, the United States Trade Representative designated
South Africa a Special 301 "Watch List" country during USTR s annual
worldwide review of intellectual property rights protection. This
designation was based largely on the potential impact of Article 15(c),
not only in the South African market but also due to its global
precedent and the undermining of WTO principles. The State Department
joined with other USG agencies with trade responsibility to insist on
this designation in the hope that this special attention would spur
South Africa to change or withdraw Article 15(c)

Withholding GSP

The Department of State, USTR, and the Department of Commerce
developed an Administration decision to withhold preferential tariff
treatment from certain South African exports in the early summer of
1998. On June 30, the White House announced that four items, for which
South Africa had requested preferential tariff treatment under the
Generalized System of Preferences (GSP) program, would be held in
abeyance pending adequate progress on intellectual property rights
protection in South Africa. This action was widely reported in the
South African press, but SAG reaction was muted.

Securing South African Assurances

In March 1998, Secretary of Commerce Daley met with South African
Health Minister Zuma to underline USG resolve to ensure South Africa
would not use the provisions in 15(c) to undermine pharmaceutical
patent rights or allow parallel imports.
        Dr. Ian Roberts, a senior official from the South
African Department of Health, visited Washington in May 1998 and met
with U.S. Government patent experts and congressional staff, and
attended a USTR-chaired U.S. Government interagency meeting attended by
State Department officials. At this meeting, U.S. Government officials
reiterated the U.S. demand that South Africa comply with its
international obligations to ensure adequate and effective protection
to pharmaceutical patents. Dr. Roberts repeated South African Health
Minister Zuma s pledge that it was not the SAG s intention to use
Article 15(c) to abrogate patents or open the floodgates to parallel

Repeated Efforts to Resolve the Issue

An Embassy official traveled to Midrand, South Africa to speak at
the June 1998 "Pharmecon SA  98" pharmaceutical industry conference.
The official s remarks reinforced in a public forum the strong negative
U.S. views on Article 15(c) and made clear the possible ramifications
of the Article s implementation, including trade sanctions.

In July 1998, Assistant U.S. Trade Representative for African
Affairs Rosa Whitaker met with the South African Charge d Affaires in
Washington to stress once again the U.S. Government s concerns about
pharmaceutical patent protection and parallel importation in South
Africa. She also repeated the U.S. Government s position that South
Africa s requests for preferential tariff treatment on four key exports
would be held in abeyance pending adequate progress on intellectual
property rights protection.

During his September 1998 trip to South Africa, Commerce
Secretary Daley made pharmaceutical patent protection a key item in his
discussions with South African Trade and Industry Minister Alec Erwin.
Daley reemphasized the U.S. Government position on Article 15(c) and
reminded Minister Erwin of South Africa's s obligations under the TRIPS

The Vice President s Plan for a Negotiated Solution

During the August 1998 U.S.-South Africa Binational Commission
meetings in Washington, Vice President Gore made the issue of
intellectual property rights protection, and
   pharmaceutical patents in particular, a central focus of
      his discussions with Deputy President Mbeki. They agreed on a basis
   for a mutually satisfactory, Government-to-Government negotiated
   solution to the impasse. Suspended GSP benefits would be restored
   as progress was made in these negotiations. This basis was
   developed and unanimously supported by all interested U.S.
   Government agencies. USTR was identified to lead the U.S.
   Government s negotiation efforts.
   Initial discussion between the Assistant U.S. Trade
   Representative for Services, Investment and Intellectual Property
   and the Deputy President s legal advisor took place in September
   1998 and follow-on talks were conducted in November. During these
   discussions, the South African officials attempted to persuade the
   U.S. Government to intervene with the U.S. pharmaceutical industry
   to suspend or terminate its pending legal challenge to the
   offending provisions of the South African Medicines Act. The State
   Department, together with the Commerce Department and USTR, decided
   that such an action might undermine the leverage that U.S.
   companies were exerting through their legal challenge. U.S.
   officials told the South Africans that since the U.S. Government is
   not a party to the litigation, the USG was unable to agree to this
   request. A subsequent round of face-to-face negotiations between
   USTR officials and Deputy President Mbeki s advisors is tentatively
   scheduled to be held in Cape Town just prior to the February 1999
   Binational Commission meeting.

   A "New" Medicines Law
   Meanwhile, during the fall of 1998, the South African
   parliament drafted and considered a new medicines law that would
   replace the existing Medicines Act, including the offending
   amendments. The State Department s Economic Minister Counselor in
   Pretoria met with a key Mbeki advisor in September 1998 to advocate
   the removal of Article 15(c) provisions from the new proposed law.
   In October 1998, at the State Department s suggestion, the Embassy
   dispatched an economic officer to Cape Town to monitor the
   committee and full chamber debates. He forcefully advocated the
   U.S. position and advised parliamentarians that the new law should
   not include provisions that jeopardize patent rights. Despite these
   strenuous efforts, a new medicines
   bill was passed including provisions identical to Article
      15(c), in November 1998.

   Health Minister Opens Negotiations with Industry
Shortly after the new law was passed, South African Health
Minister Zuma began discussions with pharmaceutical industry
executives. Their dialogue has offered hope for an eventual settlement
of the pending litigation and satisfactory resolution of the
pharmaceutical patent protection issue. On December 4, 1998, the
Assistant U.S. Trade Representative for Services, Investment, and
Intellectual Property sent a letter to Deputy President Mbeki s legal
advisor Mojanku Gumbi noting the USG s interest that the discussions
lead to a mutually agreeable settlement. As a way of spurring the
discussions, he informed Gumbi that the USC would be prepared to
release a significant portion of the withheld GSP benefits should such
a settlement be reached. Progress has been slow, but we understand
talks are continuing.

In November 1998, the State Department s Economic Minister
Counselor in Pretoria met with South African Department of Foreign
Affairs officials to discuss resolution of the pharmaceutical patent
controversy. The South Africans were eager to find a satisfactory
solution to the ongoing dispute before the upcoming February 1999
Binational Commission meeting. Embassy officials reiterated the U.S.
position and noted that USTR officials  talks with Mbeki advisors were
the appropriate venue for seeking a negotiated settlement.

Secretary Daley paid a return visit to South Africa in December
1998. In his meetings with Deputy President Mbeki and Trade and
Industry Minister Erwin during that visit, pharmaceutical patent
protection was the most important bilateral issue under discussion.
Deputy President Mbeki was hopeful that recent discussions between the
pharmaceutical manufacturers and the South African Minister of Health
would yield a solution. Secretary Daley noted the possibility of
negative consequences should progress on resolving this most important
issue stall.

The Embassy closely monitored the Zuma-pharmaceutical industry
discussions, which continued through December 1998. Pharmaceutical
industry officials have indicated
   that these talks have reached a sensitive stage and that
      further U.S. Government efforts at this time could be
   counterproductive. The Embassy and Washington agencies have
   therefore deferred to the U.S. pharmaceutical industry to take the
   lead. In mid January, the Assistant U.S. Trade Representative for
   Services, Investment and Intellectual Property sent a letter to
   Legal Advisor Gumbi suggesting that specific discussion of
   pharmaceutical patents and Article 15(c) be put aside while Health
   Minister Zuma negotiates with the interested pharmaceutical
   manufacturers. The pharmaceutical companies' discussions with
   Minister Zuma continue and their constitutional court challenge in
   South Africa remains pending. USTR officials and Mbeki s advisors
   plan to meet in February 1999.

    Latest Efforts
   In January 1999, in the context of preparing for the February
   1999 U.S.-South Africa Binational Commission, the State Department s
   Economic Minister Counselor in Pretoria raised the pharmaceutical
   patent protection issue with Deputy President Mbeki s economic
   advisor. Despite the Minister Counselor s reiteration of the U.S.
   position, as well as a description of the ramifications of the
   suspension of aid to South Africa in the USG s FY 1999
   appropriations law, Mbeki s advisor said the SAG was not considering
   repeal of the offending language in the either the Medicines Act or
   the new bill.
   As indicated in previous sections, several adversely affected
   U.S. pharmaceutical manufacturers have filed a constitutional court
   challenge to the amendments to the Medicines Act in South African
   courts. While the case remains pending, the South African
   Government is adamant that government-to-government discussions not
   prejudice the outcome. U.S. Government attorneys share this view.
   Thus, our efforts are, in part, circumscribed by the ongoing
   litigation as well as a desire to be responsive to U.S. industry s
   request to allow its current efforts time and opportunity to be
   effective. We hope the State Department s and other agencies 
   efforts to convince the South African Government to fulfill its
   international obligations and commitments on intellectual property
   rights together with a domestic legal challenge will provide
   sufficient incentive to achieve the suspension or removal of
   Article 15(c).
   Next Steps
The State Department, its Embassy in Pretoria, the Commerce
Department and USTR will monitor closely the ongoing discussions
between the pharmaceutical industry and the South African Minister of
Health. We will continue our unflagging efforts to convince the South
African Government to either repeal Article 15(c) or make it consistent
with the TRIPS agreement, and thus eliminate the possibility that any
abrogation of U.S. pharmaceutical patent rights in South Africa. Should
there be an actual violation of any U.S. pharmaceutical patent right
(e.g., patent abrogation) this Administration will respond forcefully
in accordance with appropriate trade remedy legislation.

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